In the matter of Latin Manharlal Securities Ltd

Nov 21, 2006

Orders : Orders of SAT

IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Appeal No. 146 of 2003

Date of Decision 21.11.2006

Latin Manharlal Securities Ltd.

……

Appellant

Versus

Securities & Exchange Board of India

……

Respondent

Present : Mr. N.H. Seervai, Advocate for the appellant

Mr. Kumar Desai, Advocate for the respondent

Coram:

Justice N.K. Sodhi, Presiding Officer

C. Bhattacharya, Member

Per: Justice N.K. Sodhi, Presiding Officer

Latin Manharlal Securities Ltd. is the appellant before us. It is a member of the Bombay Stock Exchange (BSE) and is registered with the Securities and Exchange Board of India (for short the Board) as a stock broker.

2. The Board conducted investigations into the market manipulation of various scrips by one Ketan Parekh and entities connected/associated with him. Investigations inter alia revealed that the appellant had facilitated the price manipulation and distortion of the price discovery of the scrips of Aftek Infosys Ltd., Global Trust Bank and Shonkh Technologies Ltd. (for short Aftek, GTB and Shonkh respectively) by aiding, abetting and/or assisting the entities associated with Ketan Parekh in the price manipulation of the shares of these three companies. An enquiry officer was appointed to enquire into the alleged contravention by the appellant. He issued a notice dated 26.11.2001 calling upon the appellant to show cause why action be not taken on the basis of the findings of the investigation in respect of its dealings in GTB and Aftek. Subsequently, another show cause notice was issued on 2.4.2004 in respect of the dealings of the appellant in the scrip of Shonkh. Copies of the findings of the investigations were sent along with the notice. The appellant filed its reply denying the allegations. The stand taken by the appellant was that it had acted as a broker for the transactions mentioned in the show cause notice dated 26.11.2001 which were executed on behalf of its clients as per their instructions and that it did not facilitate any price manipulation for distorting the price in the scrip of GTB and/or Aftek nor did it violate any regulations/rules or circular(s). It was also submitted by the appellant that the orders placed on behalf of Panther Fincap and Management Services Ltd. and Classic Credit Ltd. (hereinafter referred to as Panther and Classic respectively) were modified/deleted as regards quantity or price as per their instructions. The appellant also pleaded that during the period of investigation it had purchased a total of 4,33,000 shares of GTB on behalf of Panther and these transactions were settled for which the clients made the payment and delivery was given to them in their demat account. The categoric stand taken of the appellant is that it had purchased the shares of GTB and Aftek at the specified rates and it acted as per the instructions of the clients (Panther and Classic). As regards the show cause notice dated 2.4.2002 the appellant stated that it had effected only four trades of purchases on behalf of Panther the details of which were mentioned in the reply and that all these trades were made at the then prevailing market rates for which uniform brokerage was charged from the client. The payment was received within time and deliveries were given as per the stock exchange mechanism. The appellant further stated that it acted only as a broker and had not indulged in any unfair activities nor did it breach or violate any of the rules, regulations or statutory provisions.

3. On a consideration of the submissions made by the appellant the enquiry officer submitted his report on 14.2.2003 in which he found that the appellant appeared to have facilitated the price manipulation and distortion of the price discovery in the scrips of GTB, Aftek and Shonkh and had violated Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent & Unfair Trade Practices relating to Securities Market) Regulations, 1995 and also the code of conduct prescribed by Regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. He accordingly recommended that the certificate of registration of the appellant as a broker be suspended for a period of 6 months by way of penalty. On receipt of this report, the Board issued a notice dated 11.3.2003 to the appellant calling upon it to show cause why penalty as recommended by the enquiry officer be not imposed on it. The appellant filed its reply reiterating the submissions made earlier and denied the charges levelled against it. The appellant stated in its reply that it had transacted only 3.42 lac shares of GTB on behalf of its clients as compared to the total volume on BSE and National Stock Exchange (NSE) which was 422.86 lac shares and, therefore, its share was barely 0.8% of the total market volume. Same was the position in the case of Aftek and hence the question of manipulating the price or distorting the price discovery did not arise. The appellant further stated in its reply that in order to obtain the requisite quantity of shares as per the clients instructions it had to increase the price so as to match the price demanded by the available seller and it was wrong on the part of the enquiry officer to observe that the appellant had been increasing the price of the scrip with a view to manipulate the same. The appellant also denied having any link with Ketan Parekh or any of his entities. The appellant also stated that it was not aware of the identity of the selling broker at the time of the execution of the transactions nor was it aware of the identity of their clients. According to the appellant the online screen based trading does not permit the brokers to know the counter parties at the time of executing the transactions and that the appellant acted purely as a broker on behalf of its clients without knowing that they were indulging in any synchronised/fictitious trades as was subsequently found by the Board. The Board considered the reply filed by the appellant and on the basis of the material available with it upheld the findings of the enquiry officer and came to the conclusion that the appellant had violated Regulation 4 of the FUTP Regulations and also the code of conduct and suspended the registration certificate of the appellant for a period of 6 months. It is against this order that the present appeal has been filed under Section 15T of the Securities and Exchange Board of India Act.

4. We have heard Mr. N.H. Seervai, learned senior counsel on behalf of the appellant and also Mr. Kumar Desai on behalf of the Board and perused the record. At the outset it may be mentioned that the Board by its order dated 12.12.2003 had held that, amongst others, Ketan Parekh, Classic and Panther had executed circular trades in a synchronised manner through different brokers which resulted in fictitious trades and that those transactions were non-genuine and had been executed to create artificial volumes in the scrips in which they traded. By the same order the Board had held that Classic and Panther were entities controlled by Ketan Parekh who along with some others had rigged the securities market in a big way. They were prohibited from buying, selling or dealing in securities in any manner directly or indirectly and also debarred from associating with the securities market for a period of 14 years. Those findings have been upheld by this Tribunal by its order dated 14.7.2006. The transactions which are now in question in this case are a part of those very transactions which were held to be circular, synchronised and fictitious creating artificial volumes. In the instant case in the transactions executed on behalf of Classic and Panther, the appellant has acted as a broker. The short question that arises for our consideration in this appeal is whether the appellant was a party to the synchronised and non genuine trades executed by Panther and Classic while trading in the scrips of GTB, Aftek and Shonkh in which trades it acted as a broker. We will first deal with the buy orders executed by the appellant as a broker on behalf of Panther while purchasing the shares of GTB. There is on record the order log of 3.11.2000. The appellant placed an order for the purchase of 25000 shares of GTB at the rate of Rs. 80 per share. This order was placed at 12.05.52 hrs. The order was updated and the price of the share was raised to Rs. 81/- It appears that even by raising the price the appellant could not buy the entire quantity and the order regarding 12691 shares was deleted. A few seconds later the appellant placed an order for the purchase of the remaining 12691 shares at the rate of Rs. 82 which was again updated to Rs. 83. An order for the purchase of another 25000 shares was placed at 12.07.51 hrs. at the rate of Rs. 83 which order was updated and the price was raised to Rs. 84/- per share and then to Rs. 85/- per share. From this order log the Board has inferred that the appellant on behalf of its client Panther constantly increased the price of the scrip and was aiding, abetting and facilitating price manipulation by Panther in the scrip of GTB. We cannot subscribe to this view. It is true that the price was being marginally increased and this could well be because the buy order was for a large quantity. It is very common that investors who purchase shares in large quantities quite often increase the price marginally to attract all the sellers in the market or else they will not be able to procure the desired quantity of shares. It cannot, therefore, be said that merely because the price was being marginally increased the object of the broker was to manipulate the price. This by itself does not indicate any price manipulation. Moreover, the stand of the appellant is that these orders were being placed and altered on the instructions of its clients. In other words, it was Panther which was directing the appellant to place the orders at a given time and was also modifying those orders as regards quantity or price. On the basis of the aforesaid facts the Board concluded in paragraph 4.3 of the impugned order that “I agree with the findings of the Enquiry Officer that the pattern of placing orders at increasingly higher prices by the broker shows the complicity involved in the matter.” We cannot agree with this finding. Merely because a person acts as a broker in a trade executed between the buyer and the seller which later turns out to be manipulative and non-genuine will not by itself lead us to the conclusion that the broker was a party to the game plan. It is possible that he may be a party but to establish this fact there has to be some more material/evidence on the record. His acting as a broker by itself is not enough. It has to be understood that in the online screen based system of trading there is no way that a broker while executing the trade (buy or sell order) can come to know of the counter party. A unique feature of the stock exchange is that unlike other moveable properties, shares are generally traded between the unknowns through their brokers and the parties never get to meet. It is not the case of the respondent that the appellant at the time of executing the trade was aware of the counter party. This inference is being drawn only because the appellant acted as a broker. We cannot uphold this finding. As regards the complicity of the appellant there is no material on the record to prove the same except that the appellant acted as a broker in the buy orders placed by Panther for the scrip of GTB. It is true that the transactions which Panther was executing through the appellant have been held to be synchronised and manipulative but the role of the appellant in those transactions was only that of a broker. As already observed, this by itself is not enough to conclude that the appellant was a party to the synchronisation and price manipulation. In order to establish the complicity of the appellant there should have been some additional material. The Board should have examined the representatives of the various entities to find out whether the appellant was a party to the game plan or not. The representative of Panther on whose behalf the appellant was executing the trades could have been examined and he could have disclosed what instructions had been issued to the broker (appellant). As already observed the stand of the appellant that it acted merely as a broker in these transactions and that it did not know at the time of executing the trades that these were being manipulated by its client (Panther). Admittedly, the transactions were executed on the screen and it is not the case of the Board that these transactions were off market. It can safely be presumed that the appellant at the time of executing the transactions did not know who the counter party was, even if it were to be assumed that the appellant knew that Panther was controlled by Ketan Parekh. As already observed, there is not even an iota of evidence to indicate that the appellant knew at the time of executing the trades that the counter party was an entity of Ketan Parekh or that the buyer and the seller were manipulating the trades. The Board should have had some material with it before it concluded that the appellant had aided, abetted or facilitated the synchronised trades by the Ketan Parekh entities.

5. Similarly, the appellant acted as a broker on behalf of Panther and Classic while dealing in the scrips of Aftek and Shonkh. Undoubtedly Panther and Classic are the entities of Ketan Parekh and they had entered into synchronised/manipulative trades and in those trades appellant acted as a broker. Here again we cannot attribute knowledge to the appellant that it knew that the trades were synchronised or manipulative at the time when they were executed merely because it acted as a broker. In the case of these scrips as well, there is no material with the Board and none has been referred to in the impugned order to show how knowledge of wrong doing could be attributed to the appellant. An identical matter came up before us in Kasat Securities Pvt. Ltd. vs. Securities and Exchange Board of India Appeal no. 27 of 2006 decided on 20.6.2006 wherein we observed as under:

“We do not think that the same shares could be bought and sold by the same person. The trades, on the face of it, appear to be fictitious and we shall proceed on that assumption. It is obvious that these trades were executed by the clients and the appellant acted only as a broker. If the appellant knew that the trades were fictitious then there would be no hesitation in upholding the finding of the Board that it aided and abetted the parties to execute fraudulent transactions. Having heard the learned counsel for the parties and after going through the record we are satisfied that this link is missing. There is no material on record to show that the appellant as a broker knew that the trades were fictitious or that the buyer and the seller were the same persons. Trading was through the exchange mechanism and was online where the code number of the broker alone is known and the learned counsel for the parties are agreed that it is not possible for anyone to ascertain from the screen as to who the clients were. This is really a unique feature of the stock exchange where, unlike other moveable properties, securities are bought and sold between the unknowns through the exchange mechanism without the buyer or the seller ever getting to meet. Therefore, it is not possible for the broker to know who the parties were. Merely because the appellant acted as a broker cannot lead us to the conclusion that it must have known about the nature of the transaction. There has to be some other material on the record to prove this fact. The Board could have examined someone from KIL to find out whether the appellant knew about the nature of the transactions but it did not do so. As a broker, the appellant would welcome any person who comes to buy or sell shares.”

The aforesaid observations apply with full force to the present case. In this view of the matter the impugned order cannot be sustained. In view of our findings, it is not necessary to deal with the case law cited by the learned counsel on both sides.

6. In the result the appeal is allowed and the impugned order set aside with no order as to costs.

Sd/-

Justice N.K. Sodhi
Presiding Officer

Sd/-

C. Bhattacharya
Member