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MUMBAI APPEAL NO. 29/2001 In the matter of: 1.
Mr. Shankar Sharma
Vs. Securities & Exchange Board of India Respondent APPEARANCE Mr.Aspi
Chinoy
Mr.
Sunip Sen
Mr.Nusrat
Huassan
Mr.Prasad
Dhande
Mr.
Rohit Kapadia
Mr.Kumar
Desai
Mr.K.R.C.V.Seshachalam
(In the matter of appeal arising out of the order dated 25.5.2001 made by the Chairman, Securities and Exchange Board of India) ORDER The present
appeal is directed against the order dated 25.5.2001 made by the Chairman,
Securities & Exchange Board of India (Respondent herein). The order
is made under sections 11 and 11B of the Securities and Exchange Board
of India Act, 1992 (the Act). By the said order the Appellants (First Global
Group) have been debarred from undertaking any fresh business as stock
broker, merchant banker, or portfolio manager, pending enquiry. An enquiry
has been ordered into certain alleged violations of the Act, Rules and
Regulations by the Appellants. The order provides for appointment of an
enquiry officer for the purpose in a week�s time, and requires the enquiry
officer to complete the enquiry expeditiously by following the prescribed
procedure and taking into consideration the existing material and material
which may be further supplemented. It has also been stated in the order
that on receipt of the inquiry report a view will be taken by the Respondent
as to whether the Appellants should be permitted or debarred from carrying
on their business activities.
The sequence
of events leading to the filing of the present appeal, briefly are as follows.
In the wake of the unexpected price fall in the securities market and apprehending
possible attempts by certain entities to manipulate the market, investigations
were undertaken by the Respondent with a view to take preventive / corrective
steps to protect the interests of the investors and the market. Several
entities were subjected to preliminary investigations. The Appellants were
one among them. As per the Respondent�s version preliminary investigation
revealed that Appellant Nos 3 and 4 indulged in large trading transactions
in the scrips of Global Telesystems, HFCL, DSQ Software, Zee Telefilms,
Wipro, Satyam Computers, MTNL, SBI, Infosys Technologies and Sterlite Opticals
(the select scrips). According to the Respondent, these transactions prima
facie appeared to have carried out to artificially depress the prices of
the said scrips. Based on its assessment, the Respondent passed an interim
order on 18.4.2001 debarring the Appellants from undertaking any fresh
business as stock broker or merchant banker or portfolio manager until
further orders. Since the order dated 18.4.2001 was made without hearing
the Appellants, they were given a post decisional hearing on 30.4.2001.
Meanwhile the Appellants filed a Writ Petition No.1129/2001 before the
Honourable Bombay High Court challenging the said order of 18.4.2001. The
Writ Petition was disposed of by the Honourable High Court vide order dated
4.5.2001, inter alia directing the Respondent to pass a reasoned order
within the time frame specified therein. The Appellants on their own agreed
not to undertake any fresh business as stock broker or merchant banker
or portfolio manager until the Respondent passed the order. While disposing
the Writ Petition it was also stated in the order that in view of the self
restraint made by the Writ Petitioners, the directions contained in the
SEBI�s order dated 18.4.2001 do not survive and for the purpose of enquiry
the said order and the SEBI�s affidavit will be treated as a Show Cause
Notice. The Appellants made written and oral submissions before the Respondent,
denying all the allegations. However, after inquiry the Respondent concluded
that the Appellants� business activities during the relevant period resulted
in market manipulation and artificially depressing the prices of certain
scrips, impacting the market as a whole during mid February to mid March
2001 and these activities were not in consonance with the right standards
of integrity and professionalism of a stock broker and a portfolio manager,
that this was also detrimental to the interests of investors and securities
market. Based on the conclusion so arrived at, the Respondent made the
impugned order on 25.5.2001.
Being
aggrieved by the said order, the Appellants filed the present appeal on
6.6.2001, inter alia praying to set aside the order debarring them from
undertaking any fresh business as stock broker, merchant banker or portfolio
manager.
The charges against the Appellants and the findings thereon have been grouped and stated under three heads in the impugned order. For ready reference the relevant portion from the order is extracted below. "Issue No.1 Whether
the activities of First Global Group led to artificial depression of prices
and market manipulation and that the conduct of Mr.Shankar Sharma and Mrs.
Devina Mehra are in consonance with the highest standards of integrity,
fairness and professionalism expected from a stock broker and portfolio
manager.
Trading
by FGSB was examined during investigations in certain scrips such as Global
Telesystems, HFCL, DSQ Software, Zee Telefilms, Wipro, Satyam Computers,
MTNL, SBI, Infosys and Sterlite Opticals. These were for the specific settlement
periods forming part of the period mid February to mid March 2001, (dates
on which the market exhibited a decline) and also during specific time
slots. The records of First Global Group indicate substantial short selling
and unwinding of previously built long position in these scrips. It is
observed that FGSB made heavy net sales in the aforementioned scrips as
compared to the total net sales at BSE/NSE during the above period. For
instance, the net sales by FGSB were 14% of the net sales in Wipro and
10% of the net sales in HFCL during settlement No.48 at BSE, 14.5% of the
net sales in Wipro on March 1 and 10% of net sales in DSQ on March 2, at
NSE. Even the cumulative trading by the FGSB in all scrips at BSE showed
a pattern of significant net selling during this period and the aggregate
trading at BSE and NSE also showed substantial net sales on certain dates.
For instance there were net sales of approximately Rs.30 crores on 13.2.2001,
Rs.15 crores on 16.2.2001, Rs.20 crores each on 19.2.2001, 23.2.2001 and
7.3.2001 at BSE and NSE taken together.
It has
been contended that to draw inferences based on "net sales" metric is flawed.
However, the examination of trading by the FGSB was not restricted to end-settlement
or end-day net positions alone, but also included trading during specific
time slots on a given day to preclude possibilities of any distorted analysis.
It was
also found that the FGSB made significant net sales in certain scrips during
specific time slots, which show that its trading contributed to the fall
in scrip prices during these time slots. Instances of significant net sale
by the FGSB during specific time slots include almost 45% of net scales
in Wipro at BSE during 10.40 � 10.58 hours on February 23 and almost 20%
of net sales in Satyam at BSE during 10.44 � 10.52 hours on February 23,
etc. when the scrip price fell by Rs. 50/- and Rs. 6/- respectively. The
First Global Group has contended that the selection of specific time slots
is arbitrary. I find that the time slots have been selected in a systematic
manner for scrips, which either form part of the stock index and contributed
substantially to the fall in the index or for those momentum scrip which
could have impacted the trading sentiment on those days. The time slots
pertain to specific periods of substantial fall in prices of the scrips
and therefore cannot be construed as arbitrary or selective as contended.
It has
been contended by First Global Group that the data relied upon by SEBI
has certain purchases having been considered as sales. After examining
the details available with SEBI, an opportunity to clarify/explain these
issues was given to First Global Group on 23.5.01. SEBI received a reply
on behalf of First Global Group on 23.5.2001 and 24.5.2001 stating that
they would not appear before SEBI as part of the hearing, but they were
prepared to clarify the issues dehors the hearing. This hearing was in
pursuance to the orders of the Hon�ble High Court and therefore, there
can be no question of arriving at an "understanding" whereby the clarifications
can be discussed without they being a part of the hearing. This order is
therefore being passed in the absence of further clarifications. For instance,
I find that in SEBI�s data there are mistakes regarding four cases of purchases
being construed as sales, and one transaction relating to sale of 9411
shares of Wipro on March 1, 2001 actually pertaining to NSE, having been
erroneously shown at BSE. These could possibly have occurred due to typographical
errors. In any view of the matter, this does not in any way change the
present finding.
An examination
of the records of the FGSB shows that it also made naked short sales. For
instance, a peak naked short sales of 50,000 shares (valued at Rs. 13 crores
approximately) of Wipro was carried forward from settlement No. 47 to 50
and another 55, 000 shares of Software Solutions (valued at Rs.6 crores
approximately) was carried forward from settlement 47 to 49. Assuming that
these trades were within the SEBI prescribed limit and even if naked short
sales were not prohibited, the fact remains that such a quantum of naked
short sales would contribute to a depression in the scrip prices. Even
the pattern of order placement and particularly cancellation of large sell
orders shows an attempt to influence the scrip prices.
The manipulative
intent of these trades becomes serious as it is observed that most of these
trades were executed on behalf of VCIP. An analysis of the trading data
of VCIP furnished by First Global Group shows that it had major mandi Badla/sales
deferral positions in various scrips at both BSE and NSE during the settlements
forming part of the period January-March, 2001. The average aggregate value
of carry forward sale in the scrips of Wipro, SSI, Sterlite Optical, during
Settlement No. 45 - 49 was approximately Rs. 13 crores. Further, it is
also built naked short sales in several scrips as its Demat Statement furnished
by First Global Group does not show any holding in such scrips. The value
of naked short sales on certain dates by VCIP ranged between Rs. 2 to 15
crores in the scrips of Satyam, Infosys, DSQ, Wipro, HFCL, etc., during
this period.
It has
been contended by First Global Group that the data relied upon by SEBI
regarding proprietary trading by VCIP is factually inaccurate, I find that
the trading data was submitted to SEBI by FGSB itself and therefore it
does not lie with them to say that SEBI�s data is inaccurate. Also, to
respond to the submissions relating to inaccurate data, an opportunity
to explain/clarify was given to them on 23. 5. 2000, as discussed earlier,
which they chose not to avail. Since the data was given by First Global
Group and they chose not to come for a hearing, it is now not open to them
to dispute the authenticity of the data.
First
Global Group has admitted that they cancelled some orders. They have submitted
that this was done in the normal course of business. I find that the FGSB
entered orders at prices much beyond the prevailing traded prices. Placing
orders on the exchange at different prices than the prevailing price and
thereafter canceling the orders affects the Order Book and can be a factor
which could result in creation of artificial market.
Shankar
Sharma and VCIP of First Global group routed some of their proprietary
trades through Palombe Securities. FGSB is holding membership of both NSE
and BSE. Shankar Sharma, a Director of FGSB traded heavily through third
party broking concern, M/s. Bang Equity Broking Ltd (Bang Equity) Shankar
Sharma was ostensibly introduced to the broker by M/s.Palombe Securities
and one CSL Securities, entailing payment of brokerage of approximately
Rs.60 lakhs to the said Bang Equity during 2000 - 2001 (on a volume of
approx. Rs. 600 crores), of which 50% was passed on to the said Palombe.
As per information from First Global Group itself, there are financial
dealings between FGSB and Palombe securities also. For instance, an amount
of Rs. 20 lakhs was received by FGSB from Palombe Securities in January
2001. FGSB has impliedly denied any relationship with Palombe and sought
to justify the relation ship between Palombe and Bang Equity stating that
Bang Equity have paid remissier charges to Palombe.
Remissier
charges can be paid only to a Registered Remissier. It may be mentioned
that the issue of payment of remissier charges has been raised by First
Global Group for the first time. If they had responded to the request to
appear on the 24th instant the contrary contention made by Palombe
(describing these payments as introductory fees) and Bang Equity (describing
these payment and finder�s fees) could have been shown to First Global
Group.
FGSB is
a registered Merchant Banker and deemed FII and has established offices
in UK and obtained membership of London Stock Exchange. It has 70 institutional
clients including some of the largest investors in India and global markets.
First Global Group also claims to be a Global analyst and has published
more than 450 reports. It has been represented to SEBI that First Global
Group is the Sachin Tendulkar of the Securities market. Shri Shankar Sharma
hardly needs any introduction for trading through another fellow FGSB and
that too on the introduction of a non descript entity like Palome Securities,
who was the recipient of 50% of the brokerage paid by Shankar Sharma for
no role or responsibility in the execution of such huge trades.
First
Global Group contended that it conducted trading through Bang Equity when
its carry forward limits based on capital adequacy deposit with the exchange
got exhausted. An issue has been raised regarding the correctness of the
data relied upon by SEBI in framing its findings. I find that the entire
findings of SEBI are based on data either submitted by First Global Group
or obtained from the exchanges. Even on the basis of the data now furnished
by First Global Group, I find that trading had been done by FGSB through
Bang Equity even on dates when adequate exposure limits were available
with First Global Group. First Global Group has submitted that SEBI has
arrived at a conclusion of negative exposure limits, which is unheard of.
It is true that there cannot be negative exposures as BSE and NSE have
an in built system of deactivation of trading terminals in the event of
trading exposures reaching limits based on available capital deposits.
I find that the reference to the exposure limits in the SEBI affidavit
was only to the effect that trading had been conducted through Bang Equity
on dates when exposure limits were available with FGSB. No other adverse
inference was drawn.
First
Global Group has justified the opposite trades at FGSB and Bang Equity
as being due to shifting of positions so as to free exposure limits in
their broking concern or create new positions or shift positions at Bang
Equity to First Global. They have tacitly admitted having synchronised
the order timing for specific scrips, quantity and rate, which is contrary
to the accepted principles of screen based trading where anonymity of the
counter party is sought to be maintained. These orders are necessarily
in the nature of structured transactions, which vitiates the transparency
and fairness of the working of the market. Further, I also do not agree
with the contention of First Global that circular trading can never take
place in liquid scrips.
It is
observed that the FGSB collected about 25 crores from its various constituents
including RNA group, Anil Chanana and others for the avowed purpose of
conducting arbitrage trading. Investigations showed that the FGSB conducted
portfolio operations in the garb of arbitrage trading. The decision about
the security, quantity and timing of purchase/sale was left to the discretion
of the broker and more significantly losses arising out of arbitrage were
absorbed by FGSB who used to give average return of upto 27% to 33% on
an annualised basis. Under the SEBI Portfolio Managers Regulations, the
Portfolio Manager cannot use the funds of its clients for arbitrage trading
or for its own operation and can charge only fixed fee and cannot give
such returns. The above activity shows that there is a prima facie violation
of SEBI (Stockbroker and Sub Broker) Regulations, Portfolio Manager�s Regulations
and SEBI guidelines on Broker and Client Relationship.
While
considering the above activities of First Global Group, the market scenario
of considerable volatility during mid February � mid March 2001 has to
be kept in mind. The pattern inter alia of significant sales, unwinding
of previously built long positions, order placement particularly in the
time slots when the scrip prices registered substantial fall, portfolio
operations disguised as structured arrangement in the garb of arbitrage
trades, routing of the proprietary orders through non-descript unregistered
sub-broker, all indicate a concerted attempt to manipulate the prices of
the scrips and artificially depress the prices.
From the
above, it is clear that there is enough material on record to conclude
that activities of First Global Group resulted in market manipulation and
artificially depressing the prices of certain scrips which could have impacted
the market as a whole during mid February to mid March, 2001 and these
activities were not in consonance with the high standards of integrity
and professionalism of a stock broker and a portfolio manager. This was
also detrimental to the interests of investors and securities market.
Issue No. 2 Whether any orders are required to be passed? Considering
the above facts and circumstances of the case in their entirety, I am of
the view that First Global Stock Broking Pvt.Ltd, Vrudhi Confirment India
Pvt.Ltd and First Global Finance Pvt.Ltd, Mr.Shankar Sharma and Mrs. Devina
Mehra should be debarred from undertaking any fresh business as stock brokers,
merchant banker or portfolio manager.
Issue No. 3 Whether SEBI has powers to pass such orders? Under
section 11 of the SEBI Act, to protect the interests of investors in securities
and to promote the development of and to regulate the securities market
SEBI can take such measures, as it thinks fit. Under section 11B of the
said Act, SEBI has the power to issue directions in the interest of investors
or orderly development of securities market or to prevent the affairs of
any intermediary or other persons connected with the securities market
being conducted in a manner detrimental to the interest of investors or
securities market. SEBI has invoked the powers under 11B in the past on
several occasions in order to safeguard the interest of the investors.
It has been held by various High Courts that SEBI has the powers to pass
appropriate orders under section 11B.
With regard
to the contention of First Global that the order is punitive in nature
and that SEBI has no powers to pass such orders, it has to be noted that
there is well-settled distinction in law between suspensions which are
made pending enquiry and suspension by way of punishment. In an urgent
situation the regulators are empowered to issue orders of suspension, such
orders are not by way of punishment or penalty. Having been faced with
serious situation of erosion of investors confidence in the market, SEBI
passed the said order. Creation of market manipulation erodes confidence
of investor in the securities market. As capital markets are dynamic and
fast changing, the regulatory agency must have the capacity to move quickly
to protect the capital market and the interest of the investors.
The order
is in the nature of a direction debarring the First Global Group from undertaking
any fresh business as stock brokers. The same has been passed pending further
investigation into manipulations. It has also been passed in the interest
of investors and in the interest of the securities market. Such action
does not amount to punishment or penalty particularly as this action is
of interim nature.
The market
expertise available with some of the players may enable them to erase the
footprints and destroy the tracks so as to disable the investigators of
the regulator to find out the truth unless emergent steps are taken".
The Appellants
had prayed for an interim order staying the operation of the impugned order,
pending disposal of the appeal. The request for interim stay was rejected
by the Tribunal vide its order dated 25.6.2001.
Shri Aspi
Chinoy, learned Senior Counsel, appearing for the Appellants explained
the background in which the Respondent made the impugned order. In this
context he refered to the order dated 4.5.2001 of the Hon�ble Bombay High
Court in the Writ Petition (Lodg No. 1129 of 2001) filed by the Appellants
and stated that the Court had directed the Respondent to make full disclosure
of the material relied upon by it to the Appellants, grant personal hearing
to them and pass a reasoned order within 7 days after conclusion of the
hearing. Shri Chinoy submitted that none of these requirements has been
complied with by the Respondent.
Shri Chinoy
referred to the provisions of Section 15T and 15Z of the Act and submitted
that the jurisdiction of the Tribunal in deciding an appeal is wider than
the supervisory jurisdiction under articles 226 and 227 of the Constitution.
He stated that the Act provides for a two-tier appeal system - first to
the Tribunal and against the Tribunal�s order to the High Court. He pointed
out that even the 2nd appeal can be on any question of fact
or law arising out of the order. The learned Senior Counsel submitted that
the legislature has consciously provided for such two tier plenary appellate
provision to protect the persons aggrieved by an order made by SEBI. According
to him appellate review by the Tribunal is a plenary review that the Appellate
Tribunal sits like trial Court, it should look at the material, consider
the law and decide these facts based on which such an order can be passed.
He submitted that the Wednesbury test, referred to by the Respondent has
no application to an appeal before the Tribunal. In support of the proposition
that the scope of appellate powers and judicial review are not identical,
Shri Chinoy referred to the following decisions of the Hon�ble Supreme
Court.
Nagendra
Nath Bora & Anr. V.Commissioner of Hills Division and Appeal, Assam
& Ors (AIR 1958 SC 398)
In this
context Shri Chinoy specifically referred to the Hon�ble Bombay High Court�s
decision in Anand Rathi v. SEBI ((2001) 43 CLA 312) and stated that the
Hon�ble Court was deciding Writ Petition filed by Rathi under article 226
and not dealing with an appeal under section 15Z of the Act. Therefore
the Wednesbury test followed by the Hon�ble Court should not be extended
to the present appeal as the Tribunal is exercising the power of a plenary
appellate forum. He submitted that the appellate remedy provided in the
statute under section 15T to be meaningful, the Appellate Tribunal should
consider the entire matter on merits by re-appraising the facts and the
applicable law.
Shri Chinoy
describing the profile of the Appellants stated that the First Global Group
is one of the largest securities groups in the country with 17 branches
in India, in addition to offices in London and New York with business spread
all over the world. He stated that they have 70 substantial institutional
accounts/constituents and more than 1200 clients; there are about 250 qualified
people in the direct employment of the Group; the turn over of the Group
during the year 1999-2000 was to the tune of Rs. 7432 crores, the Group
is the only non Japanese Asian Group holding membership in London Stock
Exchange, that their application for membership in NASDAQ is pending. Further,
Appellant No.3 is one of the very few Indian firms to whom the Respondent
granted the coveted deemed foreign institutional investor status. Shri
Chinoy stated that the research done by the Group commands the highest
credibility among major F11s and as a result the Appellants have been garnering
a significant share of F11 flows into the Indian market. Learned Senior
Counsel submitted that such a well recognised, well established group has
been all of a sudden branded a villain and without any tangible reason
debarred from carrying on its legitimate business. As a result of the impugned
order the Appellants� standing and reputation have been considerably affected.
Shri Chinoy
submitted that the impugned order has been made malafide and for extraneous
reasons. In support of the said allegation he referred to the chronology
of events narrated in para 5A10 of the appeal, that on the 2nd
of March, 2001 there was a substantial fall in the prices of shares on
the Bombay Stock Exchange (BSE), resulting in the down fall of the sensitive
Index, that on 2nd March, 2001 itself BSE and the National Stock
Exchange (NSE) commenced an investigation into the reason of the downfall
and issued notices to about seventeen entities covering a number of large
brokers including the Appellants, the Appellants furnished every information
sought for, and the particulars so furnished established that the Appellants
had not done anything illegal or improper to warrant any further investigation
in the matter. According to the learned Senior Counsel, with the �Tehelka
expose� on 13.3.2001 the attitude of Respondent changed. Shri Chinoy stated
that First Global Group holds 14.5% stocks in Buffalo Network P. Ltd.,
the owner of Tehelka.com On 27.3.2001 Respondent�s officers visited the
Appellants office and served a summons to produce records etc. The Appellants
fully co - operated with the officers. The learned Senior Counsel stated
that on 27.3.2001 and there after the significant focus of the investigation
was shifted to find out the association of Appellant No.1 with Buffalo
Net Work, its balance sheets, financial statements etc., though it had
nothing to do with the so called market crash.
He also
referred to income tax raid on the Appellants, arrest of Appellant No.1,
etc., to support the submission that Government had turned hostile towards
the Appellants. Shri Chinoy submitted that even though the particulars
called for were unrelated to the inquiry, the Appellants unhesitatingly
furnished every bit of information called for by the officers. However,
on 19th April the Respondent served a copy of its order dated18.4.2001
debarring the Appellants from undertaking any fresh business as a stock
broker or merchant banker or portfolio manager, that this order was passed
even without giving the Appellants an opportunity of being heard. The Appellants
in that context filed a Writ Petition in the Hon�ble Bombay High Court.
The said Writ Petition was disposed of by the Hon�ble Court on 4.5.2001
by an order, interalia directing that the order dated 18.4.2001 and the
Respondent�s affidavit before the Hon�ble High Court be treated as show
cause notice to the Appellants, and disclose to the Appellants all the
materials relied on by the Respondent and pass a reasoned order after providing
the Appellants an opportunity to present their case. The entire exercise
was required to be completed in a time frame provided in the said order.
The Respondent passed the impugned order on 25.5.2001 which the learned
Senior Counsel stated is ex-facie without and/or in excess of jurisdiction,
bad in law, perverse and discloses non application of mind. Shri Chinoy
submitted that even factual inaccuracies in the material relied on by the
Respondent, as pointed out by the Appellants were ignored and a tailor
made order in tune with its pre conceived notion was made.
Shri Chinoy
submitted that the impugned order is ultra vires the section 11 read with
SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations
1995 (the 1995 Regulations). According to him in view of the express statutory
restriction stipulated in the opening words of section 11B, "save as other
wise provided in section 11" the power to issue executive /administrative
directions under section 11B is excluded in respect of matters covered
by section 11(1) and the Regulations framed thereunder including prohibiting
fraudulent and unfair trade practices relating to securities market. Shri
Chinoy submitted that the 1995 Regulations were notified after the addition
of section 11B in the Act. He stated that in regulation 4 read with regulations
7 & 8 contain detailed provisions as to the manner and circumstances
in which investigation may be carried out, regulations 11 & 12 provide
for the procedure and circumstances in which "directions" may be issued
by the Respondent in cases of "market manipulation" and these regulations
also defines and limits the purposes for which such directions can be issued.
Shri Chinoy submitted that section 11 (1) read with the 1995 Regulations
necessarily excludes the powers of the Respondent to pass directions in
cases of alleged market manipulation except in the manner/procedure stipulated
in the said 1995 Regulations and only for the purposes stipulated in the
said Regulations. He submitted that the impugned order which has been made
for alleged "market manipulation" without complying with the requirements
of the 1995 Regulations is therefore not in order.
Shri Chinouy
further submitted that the impugned order is ultra vires sections 11 &
12 read with the SEBI (Stock Brokers & Sub Brokers) Regulations, 1992
(1992 Regulations) for the same reasons stated with reference to section
11 and 1995 Regulations. Sections 11 & 12 of the SEBI Act read with
the 1992 Regulations and in particular regulation 26(1)(v) and regulation
26(1)(ii) read with Clause (A)(3) and A (4) of the Code of Conduct stipulated
in Schedule II to the said 1992 Regulations, provide that a penalty of
suspension of registration of a stock broker can be imposed if he "indulges
in manipulating or price rigging" in the market or indulges in "deceptive
transactions" with a view to "creating a false market" and Regulation 30
provides that on such suspension the stock broker "shall cease to buy,
sell or deal in securities as a stock broker", that no such order of penalty
of suspension can be imposed except after holding an enquiry in accordance
with Regulation 28. Shri Chinoy submitted that the impugned order which
in effect is a penalty has been imposed without following the procedure
set out in the 1992 Regulations.
Learned
Senior Counsel submitted that having regard to the scheme of the Act and
Regulations� "directions" to a stock broker to stop trading can be issued
under section 11(B) only by way of immediate preventive/remedial action
in emergent circumstances and not by way of penalty, that having regard
to the admitted facts of the present case, the order debarring the Appellants
from undertaking fresh business as Stock Brokers, Merchant Bankers, Portfolio
Manager, is ex facie punitive and not preventive and is consequently ultra
vires section 11B. He stated that the order has been made more than 80
days after the investigation/inquiry commenced on 2nd March,
2001, that the order while stating that " in an urgent situation regulators
are empowered to issue orders of suspension"- i.e preventive/ remedial
orders, does not state what urgent situation allegedly existed on 25th
May, 2001 which required such drastic action as a preventive/remedial measure,
that by the time the impugned order was made in May, the Respondent had
banned all short sales and by April itself the market had stabilized and
had even moved upwards on a number of occasions. Shri Chinoy stated that
the Appellants� case is not comparable to Anand Rathi�s case (Anand Rathi
v. SEBI ((2001) 43 CLA 312) relied on by the Respondent as in the said
case action was taken immediately and not after 80 days of the so called
market fall.
Shri Chinoy referring to the Respondent�s attempt to justify the impugned order by differentiating between suspensions by way of penalty/ punishment and suspensions which are made in urgent situations pending enquiry and which are not by way of punishment or penalty, that such non punitive suspensions are imposed pending enquiry to ensure that the person being investigated does not frustrate/obstruct the enquiry, in the absence of such circumstances an order debarring the Appellants from carrying on their lawful and established trade and business are clearly punitive in nature, even though made pending enquiry. Shri Chinoy submitted that in the impugned order itself the Respondent has stated that "the activities of First Global Group resulted in market manipulation and artificially depressing the prices of certain scrips which could have impacted the market as a whole during mid February to mid March, 2001 and these directions were not in consonance with the high standard of integrity and professionalism of a stock broker and a portfolio manager. The direction debarring the Appellants from doing business is based on such a finding of fault and in that context the Respondents argument that the order is not penal� cannot hold good. Shir Chinoy pointed out that such a finding and decision thereon by the market regulator has been given wide publicity through its press releases and as a result the Appellants have suffered immensely. Such a stigmatic order of serious adverse consequences cannot be considered in any way as a preventive or remedial order as is being claimed by the Respondent. In this context he referred to the following observation of the Hon�ble Supreme Court in the Institute of Chartered Accountants of India v. L.K. Ratna (1986) 4 SCC 537): Shri Chinoy
submitted that the impugned direction has been issued in total disregard
to the procedure required to be followed, and as a result the painfully
built reputation of the Appellants during the last 6 years have been destroyed.
Learned
Senior Counsel referred to the Respondent�s stand as stated in para 42
of its reply that "SEBI cannot and ought not at this stage deal with the
facts alleged by the Appellants in paragraph 5B 9(i) to 5 (B)(ix) of the
said Appeal since the inquiry officer would be the proper person to deal
with this aspect of the matter. Shri Chinoy submitted that in para 5B.9,
of the appeal the Appellants have provided factual details to knock off
the allegation that Appellants� undertaken "substantial short selling and
unwinding of previously built up long position" in the select scrips resulting
in market manipulation and artificially depressing prices of the said scrips.
He pointed out that the Respondent has taken similar evasive stand with
reference to paragraphs 5(B) 10 to 5(B) 15 and from 5(B) 17 to 5(B) 22
of the appeal stating that since the Respondent has only arrived at a prima
facie conclusion it cannot and ought not at this stage deal with the facts
alleged by the Appellants in paragraph 5B 10(1) to 5(B) 15 of the said
appeal. Shri Chinoy submitted that in para 5B 10 in the appeal the Appellants
have contested the facts, figures and analysis based on which the Respondents
stated that the Appellants had indulged in substantial short selling, that
the Appellants have demolished the core charge against them in these paras
with evidence and the Respondent is skirting the issue, for the obvious
reason that it has no material to counter the Appellant�s submission. The
learned Senior Counsel pointed out that having passed a penal order, the
Respondent is duty bound to defend its order. He stated that the inference
in the context is that the Respondent has no material in its possession
to prove its case and accordingly the findings need be set aside. Shri
Chinoy submitted, if the Respondent�s views are accepted, it would be in
effect a negation of the appeal remedy available to the Appellants under
the Act. Learned Senior Counsel submitted that the Respondent cannot pass
such a drastic order debarring the Appellants from carrying on their business
or stigmatize them as market manipulators, without holding any proper enquiry
and at the same time decline to justify/defend its action on the ground
that it has subsequently appointed an inquiry officer. According to Shri
Chinoy if the Respondent chooses to pass orders debarring the Appellants,
without holding an inquiry and without waiting for the report of the enquiry
officer, it must be liable to defend such action independent of any such
enquiry that it may subsequently order. He submitted that the Respondent
cannot on the one hand take action against the Appellants which has the
effect of totally stopping their business and stigmatizing and damaging
the Appellants� hitherto unblemished reputation without holding an enquiry
as required under the rules and regulations and at the same time refuse
to deal with facts which establish that the order is vitiated by non application
of mind and total absence of relevant material, that to permit such conduct
would be totally destructive of the Appellant�s statutory right to impugn
the Respondent�s order before the Tribunal, that if the Respondent is not
in a position to defend and sustain its order within the settled legal
parameters, the same must be set aside. Shri Chinoy submitted that since
the Respondent has opted not to putforth any material in defense, the Tribunal
has to go by what is before it and decide the appeal.
Shri Chinoy
submitted that the order proceeds on the patently incorrect and unsustainable
basis that selling of previously acquired shares (unwinding of long positions
and short selling), which is a perfectly legitimate and normal part of
trading in securities market, constitutes market manipulation and that
if prices of a scrip fall pursuant to such trading, the depression in the
price of the scrip would be �artificial�. Undertaking genuine trade transactions
is part of normal business activity in the stock market and can never constitute
market manipulation or be said to artificially raise or depress prices
of shares. According to him the charge of market manipulation or artificially
raising or depressing prices can only be established if it is shown that
the trader has sought to create a false or misleading appearance of trading
or has indulged in non genuine trade transactions which are intended to
operate only as a device to inflate or depress the prices of securities.
According to the learned Senior Counsel, short selling essentially involves
selling without actual delivery of the shares, that the Respondent itself
has set limits on the value of scrips that can be "carried forward on a
card either in the form of carry forward sales or purchase". Shri Chinoy
submitted that short selling is a normal trading activity in the securities
market, that short selling was permitted by the Respondent and the various
exchanges, that the Respondent had infact imposed a temporary ban on short
selling on 8.3.2001. Referring to the "Unwinding of previously built up
long positions" Shri Chinoy submitted that selling shares which had been
previously purchased, is a normal trading activity that nobody could be
expected to hold long positions in falling market at loss to itself. He
further stated that even if it is assumed that the Appellants transactions
had been large enough, that could not result in their trading activity
being termed as market manipulation or be said to have artificially depressed
the prices of the shares. Shri Chinoy pointed out that sales and purchases
by Institutional Investors are always Netsales/Purchases and these are
almost always large trades and specifically on 1.3.2001, FIIS had gross
sales of over Rs.950 crores, that by applying the logic of the Respondent,
even these sales/purchases by institutional investors would constitute
market maipulation.
In this
context the Learned Senior Counsel cited U.S. Supreme Court decision in
Ernest & Ernest Vs. Hochfeldev(http://caselaw.lp.findlaw.com/scripts/g�y=search
&Court: US case =us/425/185.html) to explain the scope of the expression
manipulation. The Court was examining the scope of rule 10b-5 of the Securities
Exchange Commission Rules, which referred to "employment of manipulative
and deceptive devices". The Court had observed that " the argument simply
ignores the use of the words �manipulative�, �device�, � contrivance� -
terms that make unmistakable a congressional intent to prescribe a type
of conduct quite different from negligence. Use of the word �manipulative�
is specially significant. It is and was virtually a terms of art when used
in connection with securities markets. It connotes intentional or willful
conduct designed to deceive or defraud investors by controlling or artificially
affecting the price of securities". Websters International Dictionary
defines �manipulate� as � to manage or treat artfully or fraudulently ;
as to manipulate accounts. To force (prices) up or down, as by matched
orders, wash sales, fictitious reports �� , to rig" . Learned Senior Counsel
submitted that thus the genuine commercial trading cannot be considered
manipulative.
Referring
to the Respondent�s statement in its reply that it is possible to manipulate
the market by various acts put together which otherwise may be within the
regulatory frame work and possibly these acts if seen isolated may be legally
permissible but when put together with connected circumstances may show
an intention to create artificial market and such manipulation is done
under the garb of normal trading, the learned Senior Counsel submitted
that this statement is a conjuncture, and not based on real facts. He pointed
out that there is no reference to any "connected circumstances" anywhere
in the order that in any case charge of fraudulent trading was not leveled
against the Appellants in the show cause notice issued by the Respondent.
With reference
to the allegation that the Appellants had undertaken substantial short
selling in the selected 10 scrips Shri Chinoy referred to the factual position
explained in para 5B .10 of the Memorandum of Appeal and stated that the
Respondent�s version is contrary to the factual position. Shri Chinoy quoted
the observation of the US Court of Appeal in Sullivan & LongInce v.
Scattered Corporation (Kentlaw.edu/7 circuit/1995/94-20/5.html) that "
A short sale is a sale at a price fixed now for delivery later. A trader
sells stock short when he thinks the price of the stock is going to fall,
so that when the time for delivery arrives he can buy it at a lower price
and pocket the difference". The learned Counsel submitted that the charge
that the Appellants had undertaken substantial short selling it is baseless
as is evident from the fact that they had undertaken no proprietary short
sales at least in two of the scrips i.e. Global Telesystems & HFCL
and had in fact held long purchase delivery position in the said scrip,
that even in Zee Telefilms the Appellants held no short proprietary position,
except for a small position for 2-3 days created by a dealer error, that
infact in HFCL the Appellants held proprietary purchase delivery position
that the Appellants had also held as to a delivery purchase position of
72,000 shares from mid February and they ultimately suffered a loss of
Rs.5.5 crore, that in Global Telesystem the Appellants held proprietary
Purchase Delivery Position, the Appellants also had a long position of
12,000 shares in the said company during the period. Shri Chinoy submitted
that it would be totally irrational to suggest that a person who is holding
long position in a share would try to depress the price thereof as such
an action will increase ones own losses. He further submitted that the
sales carried out by the Appellants in the said scrips constituted a very
small proportion, say far less than 1% of the total sales/volumes of transactions
in the said scrips. According to him the Appellants transactions in the
remaining seven scrips never exceed 1-2% of the total volume of trading
in such shares during this period that in fact on a number of days during
this period the Appellants ( on their proprietary account) were net buyers
that their pattern of transactions during this period did not depart from
their pattern of trading in the past few months.
Referring
to the allegation that Appellants made heavy net sales in the said scrips
as compared to the total net sales at BSE/NSE during the period, learned
Senior Counsel stated that the criterion of net sales as sought to be defined
by the Respondent is flawed as the relevant criterion for determining the
impact of the Appellants trading volumes on the price of a stock is to
compute these trading volume as a percentage of the stocks daily traded
volume at BSE/NSE, that the Respondent had deliberately chosen not to even
explain or justify its concept of net sales and total net sales as a relevant
touch stone/analysis method.
Shri Chinoy
also rebutted the Appellants version that even the cumulative trading by
the Appellants in all scrips of BSE showed a pattern of significant net
selling during this period and the aggregate trading at BSE and NSE also
showed substantial net sales on certain dates, citing factual position
stated in para 5B.12 and 5B.13 of the appeal. Shri Chinoy referring to
the Respondent�s finding that the Appellants� aggregate trading at BSE/NSE
also showed substantial net sales on certain dates, stated that the Respondent
has failed to consider the fact that the Appellant was a net buyer on other
days in the same period. According to him out of the total 22 trading days
in the period, the Appellant was a net buyer in 11 days; that the Respondent
has deliberately and selectively relied on certain data to support a pattern,
which it is fully aware does not exist. The observation that the cumulative
trading by Appellant No. 3 showed a pattern of significant selling during
this period, according to the learned Senior Counsel, is false as the Appellant
had net sales and purchases on an equal number of days in this period of
11 days of net purchase and 11 days of net sales from 13.2.01 to 15.3.01,
that even the size of the net purchases are high on certain days. He cited
figures in support of this. He also submitted that there is no co-relation
between the days when Appellant No.3 had the alleged significant net selling
and the market movement on those days, that for example, 19.2.01 and 7.3.01
are mentioned in the impugned order as days on which the Appellants had
substantial net sales but actually the market went up on those days. In
this context the learned Senior Counsel referred to the statement on p.48
of the Memorandum of Appeal and pointed out the stock index movement to
substantiate his point of view.
Shri Chinoy
referred the statement of "daily combined BSE and NSE Turnover Position
of the Appellants and the changes in the BSE sensex" furnished in the appeal
and pointed out that there was no correlation in the index movement vis-à-vis
the Appellants� trading.
Learned
Senior Counsel submitted that reference/reliance by the Respondent of significant
net sales made by the Appellants during arbitrarily selected time slots
ranging from 8 to 18 minutes to show that the Appellants trading contributed
to the fall in scrip prices is contrary to the factual position. He submitted
that the Respondent had arbitrarily chosen the time slots in which it could
fit its hypothesis , that the contention that the selection of time slots
pertains to specific periods of substantial price fall in scrips is incorrect.
By way of example he stated that the sale trade of Wipro in the time slot
10.09-10.13 on February 23 of 1699 shares (as against 5000 shares contented
by the Respondent) saw the price of Wipro go up by Rs.6.35 during the period.
Learned Counsel referred to the data relied on by the Respondent that the
sale of 5000 shares of Wipro by the Appellants constituted 41.6% of the
net sales in Wipro during the period 10:09-10:13 on February 23.
However,
the same quantity of 5000 shares of Wipro only constituted 7.79% of the
net sales in Wipro on the same date for the time period 15:07-15:23. Shri
Chinoy stated that the very figure of 5000 shares sale by Appellant 3 in
the time period of 10:09-10:13 is itself incorrect as the Appellants had
actually sold only 1699 shares of Wipro during the period. According to
the learned Senior Counsel in the material provided to the Appellants by
the Respondent pursuant to the High Court�s order there was no mention
of the net sales of Satyam in the time slot of 10:44-10:52 on February
23, that on 8th May the Respondent had only referred to net
sales of Satyam during the time slot 10:35-10:57, that, as there was no
significant fall in Satyam�s price during that time slot, the Respondent
has in the impugned order sought to rely upon another time slot in which
it could fit its hypothesis.
With reference
to the charge that the Appellants created an artificial market by placing
orders at prices beyond the prevalent traded prices and thereafter canceling
the same, the learned Senior Counsel stated that orders were put in at
prices different from the prevailing market prices, that limit orders always
have to be put in a price different from the prevailing market price as
that is the very definition of a limit order. A sell limit order is always
placed at a price higher than the prevailing market price and a buy limit
order at a price lower than the prevailing market price, that is what exactly
the Appellants have done. He further stated that the fact that 90% of all
the orders above 1000 shares transferred by the Appellants were through
disclosed offers negates the charge of attempting to influence/depress
the market prices by making large sale offers.
Learned
Senior Counsel stated that to substantiate its claim of a large number
of cancellation of large sell orders, the Respondent had provided a list
of 7 order cancellations as material relied upon by it. According to Shri
Chinoy, to say that the cancellation of 100 shares sale order of Wipro
and a 1000 shares sale order of Global Tele systems and a 6000 shares order
of Satyam Computer had impact on the stock price movement is untenable.
These stocks are traded in lakhs and crores in the market every day. He
further stated that the list of cancellations provided by the Respondent
show that each of the offered prices is higher than the price at the time
of cancellation. He further stated that an equal number of buy orders were
placed by the Appellants at below market prices on a disclosed basis and
should the price move up, they are cancelled. According to him, the Respondent
has ignored such buy orders as it would have inherently incompatible with
its finding.
The learned
Senior Counsel submitted that the Respondent�s data on Appellants� exposure
limit is wrong as is evident from the fact that on many dates the limit
is shown to be negative, that infact the Respondent has admitted that these
exposure figures relied on by it is incorrect as there cannot be any such
negative exposure, that the Respondent still asserts on the basis of such
incorrect data regarding exposure limits that trading was undertaken through
Bang when limits were available with the Appellants. Though the Appellants
had furnished to the Respondent a day by day explanation for all transactions
done with Bang, it has been ignored by the Respondent.
Shri Chinoy
submitted that shifting positions between the Appellants and Bang are not
structured transactions as alleged. He stated that even though the trades
are undertaken simultaneously with a view to minimising/eliminating losses,
it does not in any way detract from the fact that they are genuine transactions
undertaken through the stock exchange and both orders/transactions are
matched off against the total limit order book of the market. All such
shift transactions are at identical prices and therefore do not affect
prices and are not intended to affect prices, and that such shift transactions
are undertaken at prevalent market prices and cannot be said to be structured
transactions.
Learned
Senior Counsel submitted that the finding that the Appellants carried out
portfolio operation in the garb of arbitrage trading and thereby prima-facie
violated the stock broker regulations is unfounded. He submitted that even
though the Appellants have been granted registration as portfolio managers,
they never acted as portfolio managers. He submitted that arbitrage is
the judicious use of price differences in different stock exchanges, that
arbitrage is officially permitted and arbitrage opportunities are quoted
in leading financial publications, and it is done by literally hundred
of brokers; that such arbitrage transactions have no effect on prices except
eliminating inter exchange short term mispricing and do not have any connection
with the market crash. In this context Shri Chinoy referred to the observation
by United States Court of Appeals in Sullivan and Long Inc. v. Scattered
Corporation (http://www.kentlaw.edu/7circuit/1995/94-2015html)
that "The plaintiffs call what Scattered did "market manipulation", a term
that refers to tactics by which traders, like monopolists, create artificially
high or low prices, prices that do not reflect the underlying conditions
of supply and demand (Ernst & Ernst v. Hochfelder, supra, 425 U.S.
at 199). The only artificial prices, however, were the price at which LTV
stock sold between the confirmation of the plan and the expiration of the
old stock. They were artificially high because they so greatly exceeded
the stock�s true value, which was only 3 to 4 cents. Far from launching
a balloon, Scattered�s short sales punctured a balloon, bringing prices
down to earth where they belonged.
The name
for what Scattered did is not market manipulation, but arbitrage. Arbitrageurs
are traders who identify and eliminate disparities between prices and value,
or as in this case between today�s price and tomorrow�s price where the
difference cannot be attributed to any prospective change in value. See
Falco v. Donner Foundation, Inc., 208 F.2d 600 (2d Cir. 1953) . By doing
this, arbitrageurs promote the convergence of market and economic values
that we suggested was the central objective of securities regulation. Consider
a case in which the identical stock is selling for different prices on
two exchanges at the same time. Since the value is the same, the prices
should be the same. By buying stock on the exchange where the price is
lower and reselling it on the other exchange, the arbitrageur brings about
a convergence of price with value".
Shri Chinoy
denied the allegation that Appellants have routed some of its transactions
through Palombe Securities, an unregistered broking entity. He stated that
the Appellants did not route any of their trade through Palombe Securities
or any other unregistered broker entity, that the Respondent has not disclosed
any material in support of its allegation in this regard. He stated that
some proprietary trades were undertaken by Appellant No.1 , a regular constituent�s
agreement was executed between him and Bang, that contract notes were duly
received and brokerage for such transactions was paid by him to Bang .
Shri Chinoy submitted that the Appellants have specific limits on their
exposure, that when such limits were exhausted, or when it appeared that
limits should be made available for expected constituents transactions,
proprietary positions were temporarily shifted to Bang, that these positions
were either squared off, or shifted back to Appellant No.3 as and when
limits became available with the Appellant. The amount of such trade Rs.600
crores is less than 2% of the Appellants total trades in F.Y. 2000-01.
About the payment made by Bang to Palombe Securities, the learned Senior
Counsel submitted that the Appellants are in no way concerned with or even
aware of the same. With reference to Rs.20 lakhs received from Palombe
Securities referred to in the order, the learned Senior Counsel stated
that it was a short term loan, which had been duly reflected in the books
of accounts of the Appellants and had duly returned the amount within 12
days.
Referring
to the allegation that the shifting of positions between the Appellant
No.3 and Bang are in the nature of structured transactions and that they
vitiate the transparency and working of the market, Shri Chinoy referred
to the reply filed by the Respondent wherein it has been stated that the
Appellants knew the counter party even before executing the trade that
the so called shifting of positions is nothing but deals negotiated in
advance which frustrated the transparency trading and stated that the trades
at Bang were primarily undertaken to shift positions from Appellant No.3
, so as to free exposure limits on the Appellants� cards or to create new
position or to shift positions at Bang back to the Appellants. He submitted
that all such shift transactions are at identical prices and therefore
do not effect prices and are not intended to affect prices, further that
all such shifts are undertaken at prevalent market prices and cannot be
said to be structured transactions.
Referring
to the Respondent�s allegation of the Appellants having indulged in negotiated
deal made in its reply, Shri Chinoy submitted that the issue is raised
for the first time and that was not covered by the Show Cause Notice or
the impugned order and cannot be taken cognizance of at this stage. He
denied that shifting trades as stated by him constituted deals negotiated
in advance.
Shri Chinoy
stated that the observation in the impugned order that the Respondent do
not agree with the contention of FGSB that circular trading can never take
place in liquid scrips is only an opinion and not a charge, that such a
general observation regarding circular trading in the order is totally
irrelevant as the shifting position from Appellant No.3 to Bang does not
constitute circular trading and the Respondent has not so held in its impugned
order. He stated that the two are totally dissimilar as in circular trading
an illiquid stock is traded between different persons at different prices
in a circular manner so that there are generally no outstanding delivery
obligations, but shift transactions are undertaken to shift/create positions
in liquid heavily traded scrips, that in the case of a shift, both opposite
transactions are undertaken for/by the same party at the same price and
result in outstanding delivery obligations.
Shri Chinoy
submitted that the finding in the order that the material disclosed/on
record justified a conclusion that the Appellants had manipulated the price
of the scrips and artificially depressed prices and that the Appellants�
activities were not in consonance with the high standards of integrity
and professionalism of a stock broker and portfolio manager and they were
detrimental to the interests of investors on the securities market is not
supported by any material, contrary to the record and vitiated by patent
non application of mind. He submitted that the Respondent has failed to
demolish the factual position put in support of the Appellants� case and
on a flimsy alibi of pending inquiry it has chosen to keep quite. The fact
that the Respondent has not come forward with the facts to defend its order,
itself should be a ground to set aside the order. Shri Chinoy submitted
that the impugned order is a final order and not an interim order and is
being made out by the Respondent to buy time to harm the Appellants. Shri
Chinoy in this context cited Hon�ble Supreme Court�s decision in Re- An
Advocate(AIR 1989 SC 245 )that an authority " empowered to conduct the
inquiry and to inflict the punishment on behalf of the body, in forming
an opinion must be guided by the doctrine of benefit of doubt and is under
an obligation to record a finding of guilt only upon being satisfied beyond
reasonable doubt. It would be impermissible to reach a conclusion on the
basis of preponderance of evidence or on the basis of surmise conjuncture
or suspicion" and submitted that the Respondent, has not followed the said
principle while arriving at the conclusions and inflicting the penalty
on the Appellants that according to him it is not the intent of the authority,
but the effect of the action on the persons concerned is important.
Shri Rohit
Kapadia, learned Senior Counsel appearing for the Respondent explained
the background of the case and submitted that the impugned order is nothing
but an interim order passed by the Respondent in exercise of the powers
vested in it and that a full fledged enquiry is going on and that at this
stage it may not be proper to disclose each and every material available
with the Respondent as that may impair or jeopardize the main inquiry itself.
Shri Kapadia submitted that almost all the legal issues raised by the Appellants have been answered by the Hon�ble Bombay High Court in Anand Rathi�s case (supra), there is nothing left undecided on the issues raised by the Appellants, to be decided by the Tribunal. He extensively quoted from the said case to meet Shri Chinoy�s argument and to show that the Respondent has adequate powers to issue such an order. In this context on the relevance of SEBI�s role he draw the attention to para 15 of the order as under: "15:The main issue raised in this petition is concerning the limits of powers of the SEBI Board which regulates capital market of the country. The capital market had acquired a status of the system as a part and parcel of the national economy where companies seek to raise funds for different types of transactions in the course of their business and individuals invest their savings. Previously there was Securities Contracts (Regulation) Act 1956 to prevent undesirable transactions in securities by regulating business or dealings therein and providing for certain other matters connected therewith. This Act provided for recognised stock exchanges and the control of the Central Government on such recognised stock exchanges. With the passage of time the Government felt more concerned with the healthy growth of the securities market and taking into consideration the relevant factors influencing the growth of the capital market it realised the necessity to pass a comprehensive legislation for setting up a statutory apex board to promote orderly and healthy growth of the securities market. SEBI was constituted vide Resolution dated 12.4.1998 of the Ministry of Finance, Department of Economic Affairs (Investment Division). On 30.1.1992 the Securities and Exchange Board of India Ordinance 1992 was promulgate by the President and ultimately the securities and Exchange Board of India Act 1992 was enacted and notified on 12.4.1992. It was deemed to have come into force on 30.1.1992 in terms of section 1(3) of the said Act. The statement of Objects and Reasons appended to the Bill when the enactment was made stated thatOn the powers of the Respondent under section 11 and 11B which has been questioned by the Appellants, Shri Kapadia cited the following observations by the Hon�ble High Court:"The capital market has witnessed tremendous growth in recent times, characterised particularly by the increasing participation of the public. Investers confidence in the capital market can be sustained largly by investors protection. With this end in view, the Government decided to vest SEBI immediately with statutory powers required to deal effectively with all matters relating to capital market". "17: The plain reading of section 11 itself shows that SEBI has to protect interest of investors in securities and to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-sec.(2) of section 11 and in due discharge of its duty cast upon SEBI as part of its statutory functions, it has been invested with the powers to issue directions under sec.11B. Section 12 deals with registration of stock Brokers, sub-brokers, share transfer agents etc. Sub-sec.(3) empowers the Board by passing an order to suspend or cancel a certificate of registration in such manner as may be determined by regulations. Proviso to sub-sec.(3) of section 12 reads as under:
While
considering the question as to whether the SEBI has authority of law under
sections 11 and 11B to order interim suspension, we have to bear in mind
that SEBI is invested with statutory powers to regulate securities market
with the object of ensuring investors protection, orderly and healthy growth
of securities market so as to make SEBI 's control over the capital market
to be effective and meaningful. It cannot be gain said that SEBI has to
regulate speculative market and in case of speculative market varied situations
may arise and looking into the exigencies and requirements, it has been
entrusted with the duty and functions to take such measures as it thinks
fit. Section 11B is an enabling provision enacted to empower the SEBI Board
to regulate securities market in order to protect the interests of the
investors. Such an enabling provision must be so construed as to subserve
the purpose for which it has been enacted. It is well settled principle
of statutory construction that it is the duty of the Court to further Parliament's
aim of providing of a remedy for the mischief against which enactment is
directed and the Court should prefer construction which will supress the
mischief and advance remedy and avoid evasions for the continuance of the
mischief. We may quote the words of Denning, L.J. in Seaford Court Estates,
Ltd. V. Asher (1949) 2 All E.R.155, at page 164, namely:- "..............
when a defect appears, a Judge cannot simply fold his hands and blame the
draftsmen. He must set to work on the constructive tasks of finding the
intention of Parliament, and he must do this, not only from the language
of the statute, but also from a consideration of the social conditions
which give rise to it, and of the mischief which it was passed to remedy,
and then he must supplement the written word so as to give force and life
to the intention of the Legislature." We have, therefore, to adopt the
construction that gives force and life to the legislative intention rather
than the one which would defeat the same and render the protection illusory.
In the matter of construction of enabling statute, the principle applicable
is that if the legislature enables something to be done, it gives power
at the same time, by necessary implication, to do everything which is indispensable
for the purpose of carrying out the purpose in view. We thus find that
the SEBI has ample authority in law to take the action under sec. 11B as
has been taken by it.
We may
also mention that the issue as to the power of the SEBI, to order interim
suspension in pending investigation is no more res integra. In Ramrakh
Bohra's case (supra) the Division Bench has considered this issue and categorically
held that SEBI has power under sec.11 read with sec.11B to issue order
of suspension by way of interim measure. Speaking for the Bench, Agarwal
J. (as he then was) observed thus:
"20. Having regard to the aforesaid provisions, it is straneously contended on behalf of the petitioners that the impugned order has virtually put a death-knell on the business of the petitioners. The same has undoubtedly stopped their entire business. It is, therefore, virtually an order passed under section 12 and this can be done only after affording the petitioners a reasonable opportunity of being heard. In our, prima facie, view the impugned order cannot be said to have been passed under section 12 as contended but the same has been passed under section 11B. It is in the nature of a direction restraining the petitioners from carrying on their business of dealing in shares. The same has been passed pending the inquiry into the manipulations. The same has been passed in the interests of investors and in the interest of the securities market.Section 11B is an enabling provision enacted to empower SEBI to protect interest of investors and to promote the development of and to regulate the securities market and to prevent malpractices and manipulations inter alia by brokers. Such an enabling provision must be construed so as to subserve the purpose for which it is enacted. It would be the duty of the court to further the legislative object of providing a remedy for the mischief. A construction which advances this object should be preferred rather than one which attempts to find a way to circumvent it. In the case of Reserve Bank of India V. Peerless General Finance & Investment Co. Ltd. AIR 1996 SC 646 the Supreme Court has observed as under: "22 It would thus appear that Section 45-K (3) is an enabling provision enacted to empower the Bank to regulate the conditions on which deposits may be accepted by non-banking companies or institutions and (the) to prevent malpractices in the matter of acceptance of such deposits. Such an enabling provision must be construed as to subserve the purpose for which it has been enacted. It is a well accepted canon of statutory construction that "it is duty of the Court to further Parliament's aim of providing a remedy for the mischief against which the enactment is directed and the Court should prefer a construction which advances this object rather than one which attempts to find some way of circumventing it...." 23. In the case of ITO V.M.K. Mohammed Kunhi AIR 1969 SC 430 it has been observed, as under: "4......... It is firmly established rule that an express grant of statutory power carries with it by necessary implication the authority to use all reasonable means to make such grant effective......"
In the light of the above decisions and also in the light of the fact that the SEBI as regulator of securities market is empowered to take all necessary measures to protect the interest of the investors and the capital market, we have no hesitation in holding that the SEBI is fully competent and is empowered by sections 11 and 11B to pass interim order in aid of the final orders �����. SEBI is
charged with duty to protect the public and the integrity of the capital
markets and as a Regulator, it is certainly empowered to order suspension
as an interim measure pending investigation into serious allegations of
manipulations and insider trading. We, therefore, over rule the submission
that the SEBI had no power to pass the impugned order.
Shri Kapadia submitted that the legal position regarding the Respondent�s power to issue directions under section 11B is now well settled in the light of the view held by the Hon�ble Court in Anand Rathi�s case. Shri Kapadia explained the similarity in the sequence of events in Anand Rathi�s case and the Appellants� case preceding filing of the appeal. He submitted that the Respondent has started a full fledged inquiry based on the prima-facie findings arrived on the basis of the material available before it and at this interim stage the Tribunal�s interference would adversely affect the very inquiry itself, that it may even become redundant. He submitted that in Anand Rathi�s case, the Hon�ble High Court had held that the interim order passed by the Respondent should be allowed to operate pending inquiry and the inquiry be allowed to be concluded smoothly to reach at a final conclusion, that the Respondent is ready to complete the inquiry as expeditiously as possible and within a time frame if so fixed by the Tribunal. Shri Kapadia reiterated that the impugned order is by way of interim measure and not a penal order. In this context he cited the following observations of the Hon�ble Court in Anand Rathi�s case and submitted that the present case is in no way different as far as this aspect is concerned. "28: In the instant case the impugned order has been passed not by way of punishment or penalty but only by way of an interim measure, pending enquiry into the manipulations. There is a well settled distinction in law between the suspensions which are made as holding operation pending enquiry and suspensions by way of punishment. As observed by Lord Denning in Lewis Vs. Heffer (supra), (cited with approval by the Supreme Court in Liberty Oil Mills) there is a distinction between the suspensions which are inflicted by way of punishment, as for instance, when a member of the Bar is suspended for six months or when a solicitor is suspended from practice. He said (All E.R.page 364 para 13)"But they do not apply to suspensions which are made, as a holding operation, pending enquiries. Very often irregularities are disclosed in a government department or in a business house; and a man may be suspended on full pay pending enquiries. Suspicion may rest on him; and so he is suspended until he is cleared of it. No one, so far as I know, has every questioned such a suspension on the ground that it could not be done unless he is given notice of the charge and an opportunity of defending himself and so forth. The suspension in such a case is merely done by way of good administration. A situation has arisen in which something must be done at once is being affected by rumours and suspicions. The others will not trust the man. In order to get back to proper work, the man is suspended. At that stage the rules of natural justice do not apply, see Furnell v. Whangarei High Schools Board".
"34: Dr. Singhvi then contended that there was absolutely no valid ground for passing the restraint order. It was urged that the SEBI�s order is based on no material. It was emphasised that the information sought was not price sensitive and in any event the petitioners have not used the information nor passed the same to any other person. It was contended that the Circulars relied upon by SEBI do not in any manner preclude the President of the Exchange from making bona fide enquiries into the causes of the downfall of the market. And, the fact that such inquiries were made is not sufficient to infer any possible role of the President in the alleged manipulations. Dr. Singhvi took us through the transcripts sentence by sentence analysing each word with a view to show that the information sought by the President was of a general nature in discharge of his duty. The learned Advocate General on the other hand placed an entirely different interpretation on the two transcripts. SEBI by its impugned orders has also analysed parts of the transcripts. Regarding these portions of the transcripts discussing specific scrips and brokers Dr.Singhvi submitted that the same were volunteered by Arun Dhanawade and were not solicited by the 1st petitioners. He also submitted that the information collected by him on 2.3.2001 could not be used in future and therefore there was no purpose in issuing the impugned order. Dr. Singhvi submitted that the information obtained by him was available to anyone at any time. The learned Advocate General on the other hand submitted that this price sensitive information would not have been available to anyone at anytime. We decline the invitation to assess the material including an analysis of the transcripts. It is not for the Courts, especially while exercising powers under Art 226, to analyse the evidence in detail and come to conclusion on the merits of the case. The operation of Stock markets and the functioning of brokers is not only highly technical but very complex. The exercise to be carried out will invoke not merely the interpretation of the above circulars and the parameters of the authority of the President of the BSE but also the collection of the material relating to innumerable transactions, the corelation of the same various factors such as the time, and rate at which they were entered into and also the relationship between the conflicting entries thereto. It is the SEBI and not the Court that must carry out this analysis.
"37: The question is not whether the petitioners should be permitted to trade in any particular scrip but whether in public interest they should be permitted to trade at all pending investigation into the allegations. Secondly, this very question would involve weighing the nature of the allegations the extent of the petitioners involvement and, most importantly the element of public interest. But there are all matters for the consideration of the authority making the order which in this case is SEBI. In the facts of this case it cannot be said that SEBI�s orders are unwarranted in law or without any justification. The SEBI is charged with the duty to protect the public. What will protect the public must involve an exercise of discretionary powers. And so the question of the appropriate remedy is necessarily a matter of administrative competence."
Shri Kapadia
submitted that there is no dispute about the scope of judicial inquiry
in an appeal and judicial review. He submitted that when an authority is
already examining the matter, during the pendency of such examination,
the Tribunal or the Court is not expected to interfere and create problem
for the authority exercising its statutory powers in the normal manner.
He said that the Respondent has now embarked on an elaborate enquiry following
the procedure laid down by the law and as such the Tribunal should restrain
from making any order on the basis of the preliminary finding arrived at
by the Respondent preceding the inquiry. In this context he again referred
to the observation made by the Hon�ble Bombay High Court and urged to follow
the same principle by the Tribunal in this case. He stated that a detailed
Show Cause Notice has already been served on the Appellants on 18.7.2001
giving them one month time to reply thereto, that it is for the Appellants
to co-operate in the inquiry and get the matter decided early, and that
in any case the Tribunal should not interfere and unsettle an order which
is in effect in force from April, 2001.
The learned
Senior Counsel referred to this Tribunals interim order dated 25.6.2001
in the appeal and stated that even if there is a prima facie case in favour
of the Appellants, the Tribunal cannot go further ahead with the adjudication,
as such a step would mean preempting the full fledged on going fact finding
inquiry by the Respondent. He also pointed out that in the said order the
Tribunal had held that the balance of convenience was not in favour of
the Appellants, that having come to such conclusion, it is not proper or
possible for the tribunal to ignore the said finding and proceed further
in the matter as there are no two stages for the balance of convenience,
that the balance of convenience has not shifted after issuance of the said
order by the Tribunal on 25.6.2001. In this context Shri Kapadia cited
the decision of the Hon�be Supreme Court in The Printers Mysore P.Ltd v.
Pothen Joseph (AIR 1960 SC 1156), therein the Court had held that the power
of the appeal Court to grant stay is discretionary and the discretion vested
in the Court must be properly and judicially exercised. He also cited the
Supreme Court decision in U.P Co.operative Federation Ltd v. Sunder Bros
(AIR 1967 SC 249) in this regard. He also cited the decision of the Hon�ble
Calcutta High Court in Haridas Mondal v. Sahadeb Mondal (AIR 1980 Cal.
140) following the above cases.
Referring
to the Appellants version that short selling was permitted under law and
that the market transaction undertaken in accordance with the legal provisions
cannot be said to be in violation of the law to attract the penal consequences,
Shri Kapadia stated that even if they had traded in accordance with the
law, the action still can result in market manipulation resulting in artificial
share price movement . In support of the said contention he cited Hon�ble
Supreme Court decision in Needle Industries India Ltd v. Needle Industries
Newly (Indias)Holding Ltd (1981) 51 co.cases 743, where the Hon�ble Court
while dealing with the case of oppression and mismanagement had observed
that "every action in contravention of law may not per se be oppressive
for the purpose of section 397 of the Companies Act; a resolution passed
by the directors may be perfectly legal and yet oppressive and conversely
a resolution which is in contravention of the law may be in the interest
of the shareholders and the company. An isolated act, which is contrary
to law may not necessarily and by itself support the inference that the
law was violated with a malafide intention or that such violation was burdensome,
harsh and wrongful. . But a series of legal acts following upon one another
can, in the context lead justifiably to the conclusion that they are part
of the same transaction, of which the object is to cause or commit the
oppression of persons against whom those acts are directed." Learned Senior
Counsel submitted that even if the action is legal if the intention is
bad, it can be considered as manipulation. Shri Kapadia submitted that
the market transactions alone by the Appellants had the manipulative effect.
He submitted that the Respondent has come to a primafacie conclusion that
the Appellants action had resulted in market manipulation, and this finding
cannot be overturned at this stage. He said that it is not necessary at
this stage to rebut the Appellants version on every aspect specifically,
as the inquiry is still in progress. But there are broad indications that
they had indulged in market manipulation by resorting to practices like
�limit sale�, �shifting�,�matching transactions�, etc. He said matching
transaction is one of the methods of market manipulation which requires
detailed investigation, that the share market transactions and the activities
of the market players are complicated and deeper investigation alone will
bring tangible evidence, and that process is already on. The interim order
is based on prima facie evidence which cannot be considered to have hundred
percent evidence, that if the entire material had been available at the
time of making the impugned order, there was no need for ordering a further
detailed inquiry.
Shri Kapadia
also relied on the U.S. Supreme Court decision in Ernest & Ernest (supra)
and referred to the following paragraphs:
"The legislative reports do not address the scope of 10(b) or its catchall function directly. In considering specific manipulative practices left to Commission regulation, however, the reports indicate that liability would not attach absent scienter, supporting the conclusion that Congress intended no lesser standard under 10(b). The Senate Report of S.3420 discusses generally the various abuses that precipitated the need for the legislation and the inadequacy of self regulation by the stock exchanges. The Report then analyses the component provisions of the statute, but does not parse 10. The only specific reference to 10 is the following: "In addition to the discretionary and elastic powers conferred on the administrative authority, effective regulation must include several clear statutory provisions reinforced by penal and civil sanctions, aimed at those manipulative and deceptive practices which have been demonstrated to fulfill no useful {425 U.S.185, 205} functions . These sanctioned are found in sections 9,10 and 16." S.Rep. 792, 73d Cong. 2d Sess., 6 (1934)"
"If an investor has suffered loss by reason of illicit practices, it is equitable that he should be allowed to recover damages from the guilty party�� [T]he bill provides that any person who unlawfully [425 U.S 185, 206] manipulates the price of a security, or who induces transactions in a security by means of false or misleading statements, or who makes a false of misleading statement in the report of a corporation, shall be liable to in damages to those who have bought or sold the security at prices affected by such violation or statement. In such case the burden is on the plaintiff to show the violation or the fact that the statement was false or misleading, and that he relied thereon his damage. The defendant may escape liability by showing that the statement was made in good faith. " S.Rep. No.792 supra, at 12-13 (emphasis supplied)
"Footnote 20: Webstors International Dictionary (2d).ed.1934) defines "device" as " [t]hat which is devised, or formed by design; a contrivance ; an invention; project; scheme; often, scheme to deceive; a stratagem; an artifice", and " contrivance" in pertinent part as "[a]thing contrived or used in contriving ; a scheme, plan, or artifice". In turn, "contrive" in pertinent part is defined as "[t]o devise; to plan; to plot��. [t]o fabricate�.. design; invent�� to scheme���" The commission also ignores the use of the terms [t]o use or employ", language that is supportive of the view that Congress did not intend 10(b) to embrace negligent conduct."
The learned
Senior Counsel referred to the trading figures furnished by the Appellants
in compilation I to the appeal at p 41 to 51 and stated that the Appellants�
carry forward sale position in total carry forward position is significant
and not trivial as is being made by the Appellants and the Respondent is
further inquiring into the matter. He pointed out that even on the basis
of the data furnished by the Appellants a prima facie view can be drawn
against the Appellants.
The learned
Senior Counsel submitted that the practice regarding shifting, transactions
with Bang and payment of remessier fee/ finding charge and the transactions
with Palombe etc. are now under detailed enquiry.
Shri Kapadia
submitted that it is totally incorrect to say that there is no primafacie
evidence to support the charges, such as substantial short selling, unwinding
of long purchase position, heavy /significant sales in certain scrips,
naked short sales, pattern of placement and cancellations of large carry
forward sale, Mandi Badla, routine trade effected through Palombe etc.,
that one has to go by the totality of the circumstances and come to the
conclusion as to whether the Appellants had any role in manipulating the
market and anyone or all of the activities of the Appellants over a period
of time had resulted in bringing grief to the ordinary investors. He submitted
that he is not making any item by item rebuttal of the submissions made
by the Appellants at this stage as it is not considered necessary also
at this interim stage of the proceeding. Shri Kapadia submitted that the
Appellants are facing serious charges and their action had a telling impact
on the Indian economy as a whole, and as such it is necessary that the
impugned order be left undisturbed till the ongoing inquiry is completed.
Shri Chinoy�s
submission that this Tribunal being the plenary appellate forum is empowered
to go into the question of fact and law is of no dispute. In support of
the said submission the learned Senior Counsel had cited a number of authorities.
In view of the settled legal position in this regard, I do not propose
to discuss those decisions again here, except to cite a recent decision
of the Hon�ble Supreme Court on the subject, in Madhukar and Others v.
Sangram and Ors. (2001) 4 SCC 756. In the said case the Hon.ble Court was
considering an appeal against the dismissal of a suit in a first appeal
by the High Court. While deciding the matter the Hon�ble Court observed:
"We have carefully perused the judgement and decree of the High Court in the first appeal. We find that substantial documentary evidence had been placed before the trial court including certified copies of certain public records besides copy of the judgement and decree of the earlier suit (OS No. 93 of 1971). Oral evidence had also been led by the parties before the trial court which was noticed and appreciated by the trial court. However, the impugned judgement in the first appeal is singularly silent of any discussion either of documentary evidence or oral evidence. Not only that, we find that though the trial court had dismissed the suit on the ground of limitation as also on the ground that the decision in the earlier suit (OS No.93 of 1971) operated as res judicata against Defendant 1 only, the High Court has not even considered, much less discussed the correctness of either of the two grounds on which the trial court had dismissed the suit. Sitting as a court of first appeal, it was the duty of the High Court to deal with all the issues and the evidence led by the parties before recording its findings. It has failed to discharge the obligation placed on a first appellate court. The judgement under appeal is so cryptic that none of the relevant aspects have even been noticed, The appeal has been decided in a very unsatisfactory manner. First appeal is a valuable right and the parties have a right to be heard both on questions of law and on facts and the judgement in the first appeal must address itself to all the issues of law and fact and decide it by giving reasons in support of the findings.(emphasis supplied)
"The appellate court has jurisdiction to reverse or affirm the findings of the trial court. First appeal is a valuable right of the parties and unless restricted by law, the whole case is therein open for rehearing both on questions of fact and law. The judgement of the appellate court must, therefore, reflect its conscious application of mind and record findings supported by reasons, on all the issues arising alongwith the contentions put forth, and pressed by the parties for decision of the appellate court�.. while reversing a finding of fact the appellate court must come into close quarters with the reasoning assigned by the trial court and then assign its own reasons for arriving at a different finding. This would satisfy the court hearing a further appeal that the first appellate court had discharged the duty expected of it"Though there is no doubt about the powers of the Tribunal to examine the facts of the case afresh, evaluate the evidence and test the impugned decision with reference to the applicable law, the question is as to at what appropriate stage such power is exercisable. In all the cases cited by the learned Senior Counsel, the appeal was against final order passed by the authority down below. In the instant case that is not the case. The present appeal is against an interim order passed by the Respondent pending a full fledged enquiry. Ofcourse, Shri Chinoy had argued forcefully to establish that the impugned order is nothing but a final order. However, I am not prepared to accept the said argument for the simple reason that from the tenor of the order itself it is clear that it is an interim order. This is evident from the following extract from the order that " In view of the above, it is stated Mr. Shankar Sharma, Ms. Devina Mehta, First Global Stock Broking Pvt.Ltd., Virudhi Confirment India Pvt.Ltd and First Global Finance P.Ltd be debarred from undertaking any fresh business as stock broker, Merchant banker or Portfolio Manager pending inquiry. It is further directed that an order appointing an enquiry officer to enquire into the violations by First Global group of the provisions of the SEBI Act, Rules and Regulations be passed within a week. The enquiry officer after considering the material available on the basis of investigations conducted so far and the material, which may be further supplemented, will expeditiously complete the proceedings, after following the procedures as laid down in the regulations. On receipt of the enquiry officers� findings a view will be taken as to whether the entities above named should be permitted or debarred from carrying on activities as stated above" (emphasis supplied). If the order is a final order as stated by the learned Senior Counsel, there was no need to restrain the Appellants from undertaking business pending inquiry and to appoint an inquiry officer. In this context it is relevant to note that the Hon�ble Bombay High Court in Anand Rathi�s case, had considered a similar order passed by the Respondent and treated it as an interim order. I do not see any reason to treat the impugned order differently for the purpose. A look at the background in which SEBI had passed the order under section 11/11B of the Act in Anand Rathi�s case would show the striking comparison of both the cases. Background of the order in Anand Rathi�s case briefly is as follows: On 28.2.2001
Union Budget was presented. The Budget was widely seen as " an investor
friendly budget" and the general expectation was that the stock markets
in the country would respond positively, that in fact between 28.2.2001
and 1.3.2001 sensex rose by 201 points. But on 2.3.2001 strangely, the
sensex dropped by 176 points. In the wake of such a drastic and unexpected
fall in the market and apprehending possible attempts to manipulate the
market, investigations were undertaken by the Respondent. Several stories
were out attributing the cause to several factors and characters. Some
news papers carried reports alleging that Shri Anand Rathi, who was the
President of the Bombay Stock Exchange, had illegally obtained some price/market
sensitive information from the surveillance department of the exchange
in the presence of certain other brokers. Investigation by SEBI revealed
that Shri Rathi had obtained information in respect of certain specific
scrips and brokers from the exchange�s surveillance department. In the
aftermath, Shri Rathi resigned from the post of President (on 7.3.2001).
Chairman, SEBI in exercise of powers under section 11 read with section
11B of the Act passed an order inter alia directing that Shri Rathi and
his concerns not to undertake any fresh business as a broker until further
orders .Though the order was passed without hearing Shri Rathi subsequently
on 21.3.2001 he was given a post decisional hearing. The said order was
challenged by Shri Rathi in a writ petition in the Hon�ble Bombay High
Court. However, Shri Rathi was heard by SEBI during the pendency of the
Writ Petition and thereafter on 30.3.2001, the Board passed an order confirming
the earlier order dated 12.3.2001. In the said writ petition the Hon�ble
High Court had examined in detail, the nature of the order, its sustainability,
the Respondent�s powers to issue such an order, etc. in detail. The writ
petition was dismissed inter alia directing SEBI to complete the inquiry
ordered by it, within the time frame stipulated by the Court. But the order
debarring Shri Rathi and others undertaking fresh business was left untouched
pending the inquiry.
From the
sequence of events it could be seen that in the present case also an order
was passed by the Respondent on 18.4.2001, the Appellants challenged the
order in a writ petition. Subsequently the Respondent heard the Appellants
and passed an order debarring them from undertaking fresh business, pending
enquiry; ordered an enquiry and decided to appoint an inquiry officer for
the purpose. Since the portion from the Hon�ble High Court�s order in Anand
Rathi�s case relevant to the issues before us have already been extracted
elsewhere in this order, I am not repeating the same here. The extracts
are available at pages 32 to 43 of this order. As already stated above
the impugned order is only an interim order and not a final order as claimed
by the Appellants. Since it is an interim order and that an enquiry is
in progress I do not consider it proper for the Tribunal to embark on an
inquiry by itself into the facts of the case at this stage, but leave it
to the enquiry officer concerned.
The Appellants�
contention that the order has been made malafide and for extraneous reasons,
remains unsubstantiated. I do not find any force in linking the inquiry
with "tehelka expose" as alleged. By the Appellants� own version the enquiry
started on 2.3.2001 with NSE/BSE asking for various information relating
to the transactions. It was a preliminary data collection exercise at that
point of time. The Respondent entered the scene only subsequently on examining
those materials and realising the need to pursue the matter further. In
the meantime "tehelka expose" happened. The enquiry was already on, even
before the tehelka expose. Therefore, it is not correct to link the enquiry
with the tehelka expose. The Respondent�s alleged request to provide the
details of the shareholding pattern of Buffalo Networks P.Ltd, the owner
of Tehelka.com, its financial statements, etc. does not establish any nexus
between the inquiry and the expose. The Appellants had admitted that they
held 14.5% stake in the said Buffalo Net work and in that context there
is nothing unusual, if in an inquiry the details of the ownership, management
and financial position of the said investee company are sought. Further,
no reason or any motive on the part of the Respondent to act in any vindictive
manner against the Appellants has been even suggested. The Respondent,
which is an independent statutory authority is not a person directly or
indirectly mentioned in the expose. Further it is also to be noted that
the Appellants are not the only persons subjected to investigations by
the Respondent. Activities of several market intermediaries, not in any
way connected with tehelka.com were also taken up for investigation. In
the absence of sufficient material before me substantiating that the impugned
order is malafide, the Appellants� allegation fails.
Now coming
to the Respondent�s power to issue such an order restraining the Appellants
from undertaking business, there is nothing much left to be decided by
the Tribunal, for the time being in view of the legal position set out
by the Hon�ble High Court in Anand Rathi�s case referred to above. In the
said case Shri Rathi was also governed by the 1992 Regulations, like the
Appellants herein and still the Hon�ble Court had held that an order under
section 11/11B would be sustained . Following the said view I hold that
the Respondent is competent to issue the impugned order, in terms of section
11/11B of the Act.
Shri Chinoy�s
submission that since the Respondent is not ready to explain the factual
position relating to the Appellants� case stated in paras 5B.9 to 5B.22
in the appeal the Tribunal should go by the information available before
it, is difficult to accept in the facts and circumstances of this case.
If the impugned order had been a final order and not an interim one, I
would have unhesitatingly accepted the said submission. Here that is not
the case. The impugned order as already held, is an interim order pending
enquiry and the inquiry is in full swing. I find enough force in the Respondent�s
unwillingness to disclose certain materials at this juncture fearing that
disclosure of the same would hamper the inquiry in progress. In any case,
sustainability of the final order would depend on the material facts that
would be produced by the Respondent in support of its findings. At that
point of time the Respondent will have to clearly state in its order the
facts in support of each charge. I do not think that it is proper for the
Tribunal at this stage to ask the Respondent to disclose the full material
in view of the fact that inquiry is still going on . It is not that there
is no material at all in the impugned order to hold that the order is totally
baseless. The interim order is based on the primafacie findings arrived
at by the Respondent.
As stated
above since an inquiry is already in progress, it is felt that it will
not be in order for the Tribunal to finally adjudicate the matter in the
appeal now, as a finding of fact by the Tribunal on the charges leveled
against the Appellants would in effect preempt the inquiry itself. Even
though the factual position putforth by the parties have been stated in
this order in detail I restrain from drawing any conclusion based on these
facts, so as to enable the inquiry officer to hold a purposeful inquiry
and the Respondent to pass an appropriate order.
In the
light of the facts and circumstances of the case and also the legal position
set out by the Hon�ble Bombay High Court in Anand Rathi�s case, I do not
consider it proper to interfere with the impugned order at present . Therefore
the order is left undisturbed. It is upheld.
It is
seen from the order that since April, 2001, the Appellants have been deprived
of carrying on their business activities., The impugned order passed on
25.5.2001 states that the ban on the Appellants undertaking fresh business
would continue pending inquiry, meaning thereby that if the inquiry is
prolonged the ban on the Appellants taking fresh business also would continue.
It may not be fair and proper to allow the inquiry to continue indefinitely
and thereby subject the Appellants to undue hardship. But at the same time,
it will be also unfair to deny reasonable time to the Respondent to complete
such a complicated inquiry. According to the information furnished by the
Respondent an enquiry officer has been appointed on 31.5.2001. A Show Cause
Notice has been served on the Appellants on 18.7.2001. It is felt that
in all fairness the inquiry be completed as expeditiously as possible.
Shri Kapadia on a query from the Tribunal had stated the Respondent�s readiness
to conclude the inquiry early. Taking into consideration all the relevant
aspects involved, it is felt that the inquiry and final order therein,
need be expedited. In this context the Respondent is directed to complete
the inquiry and pass final orders with detailed reasons within 10 weeks
from today. It should not be a problem as the enquiry officer was appointed
as far back as on 31.5.2001. In case the Respondent fails to complete the
inquiry and pass final orders within the stipulated time, the order restraining
the Appellants undertaking fresh business as Stock Brokers or Merchant
Bankers or Portfolio Managers would cease to operate from the date of expiry
of the said time limit, enabling the Appellants to undertake fresh business
as Stock Brokers, Merchant Bankers and Portfolio Managers. The Appellants
are directed to extend full co-operation in the inquiry, so as to enable
the Respondent to complete the process within the time stipulated above.
All contentions of the parties are expressly kept open. Respondent shall
decide the matter without being influenced in any manner by the observations
made in this order.
The appeal is disposed of in the above lines. (C.ACHUTHAN)
Place:
Mumbai
PRESIDING OFFICER Date: 25th June 2001 |
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