BEFORE
THE SECURITIES APPELLATE TRIBUNAL
MUMBAI APPEAL NO.47/2002In the matter of: Prakash K. Shah Shares &
Securities Pvt. Ltd.������������������ Appellant
Vs. Securities and Exchange
Board of India����������������������������� Respondent
Appearance: Shri. P. K. Samdani Advocate Shri. S. J. Purohit Advocate Shri. A.W. A.H. Mukri Advocate I/b M/s Purohit & Co.����������������������������������������������������������� for
Appellant � Shri Kumar Desai, Advocate Ms. Rita Shivalkar, Advocate I/b Maneksha & Sethna Shri. Sandeep Deore Dy. Legal Adviser,SEBI������������������������������������������������������� For
Respondent ORDERThe present appeal is directed against the Respondent�s order dated 22.7.2002.� By the said order the certificate of registration granted to Shri Prakash K. Shah, Member Bombay Stock Exchange (BSE) was suspended for a period of 3 months with effect from 12.8.2002.� Shri Pravin
Samdani, learned Counsel appearing for the Appellant submitted that Shri
Prakash K. Shah, a proprietary concern, was carrying on stock broking business
as a member of BSE, that the membership right of Shri Shah was corporatised
with effect from 31.12.1997 and as a result the card was transferred to the
corporate entity namely M/s. Prakash K. Shah Shares and Securities Pvt.
Ltd.� He submitted that as on the date of
the impugned order it was the said company which was carrying on the stock
broking business and not Shri Shah as mentioned in the order, that therefore
the order need be viewed as one directed to the said company and accordingly
the appeal also be considered as the one filed�
by the company.� He submitted that
he is not taking any technical stand holding that since Shri Shah is no longer
holding a certificate of registration and as such there is no question of
suspending the same, that he is ready to accept that the order is directed to
the corporate entity and requested to modify the title of the appeal by
substituting the Appellant�s name as �Prakash K. Shah Shares and Securities
Pvt. Ltd.�� in the place of �Prakash K.
Shah�.� It is noted that the Respondent
has also filed an application dated 21.1.2003 in this regard requesting to take
on record the correct factual position as stated therein that: �����. in the impugned order the name of Shri Prakash K. Shah was inadvertently mentioned instead of Prakash K. Shah Shares and Securities Pvt. Ltd., a corporate member of The Stock Exchange, Mumbai, whose certificate of registration has been suspended for a period of 3 months and not against Shri Prakash K. Shah.� The above mistake was submitted (admitted ?) before this Hon�ble Tribunal on January 08, 2003, at the time of hearing the appeal.� Accordingly� as directed, SEBI issued a corrigendum dated January 11, 2003 to inform all those concerned that the name of Shri Prakash K. Shah was inadvertently mentioned instead of Prakash K. Shah Shares and Securities Pvt. Ltd.,� The Respondent has filed alongwith the application a copy of the said corrigendum dated 11.1.2003 stating the factual position mentioned in its application.� Taking into consideration the position admitted by the parties, the prayer to amend the title of the appeal is granted.� The title of the appeal stands modified by substituting the Appellant�s name �Shri Prakash K. Shah� by �Prakash K. Shah Shares and Securities Pvt. Ltd�. ����������� The background in which the impugned order was issued is as follows : ����������� Market witnessed abnormal price and volume movement in the shares of Amara Raja Batteries Ltd (ARBL) traded on Bombay Stock exchange (BSE)and National Stock Exchange (NSE), in February � March, 2001. The Respondent received complaints alleging market manipulation/ irregularities in the trading of ARBL�s� shares.� In that context the Respondent ordered investigation to ascertain the role played by various persons/intermediaries, and violations, if any, of the regulatory provisions by them.� The investigation is stated to have revealed that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the dominant traders in the ARBL�s shares� during the period August 2000 to March 2001, that some of the members of BSE and NSE had aided and abetted Shri Harinarayan Bajaj in creating a false market in ARBL�s scrips and also that they had failed to exercise due care and skill in their dealings.� The Appellant was one of the members whose involvement in the matter was subjected to investigation.� In the light of the information collected during the course of investigation, the Respondent decided to conduct a detailed enquiry into the role and conduct of the Appellant in trading in the scrip.� Accordingly an enquiry officer was appointed on 18.6.2001 to enquire into the affairs of the Appellant in its dealings in the scrip of ARBL and the possible violations of the rules, bye laws and regulations of the Stock Exchanges, provisions of the� Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (the FUTP Regulations) and the Securities and Exchange Board of India (Stock-brokers and Sub-brokers) Regulations, 1992 (the Stock Broker Regulations).� The enquiry officer on concluding the enquiry came to the conclusion that the Appellant had failed to exercise due care and skill in its dealings with Shri Bajaj as required by clause A(2) of the code of conduct� prescribed for the stock-brokers in the Stock Broker Regulations. He recommended 3 months� suspension of the certificate of� registration granted to the Appellant. The� Respondent vide show cause notice dated 13.3.2002communicated the findings of the enquiry officer to the Appellant and asked� to show cause as to why the penalty as recommended by the enquiry officer should not be imposed against it.� The Appellant responded to the same by filing written explanation and also by making oral submissions before the Respondent.(the Chairman)� The Chairman adjudicated the show cause notice. By his order dated 22.7. 2002 the certificate of registration granted to the Appellant was suspended for a period of� 3 months from 12.8.2002. � ����������� Claiming to be aggrieved by the said
order, the Appellant preferred the present appeal.� The substantive prayer in the appeal is to
set aside the Respondent�s order.� But it
has also prayed to stay the operation of the order� pending disposal of the appeal.� The prayer for stay of the order pending
disposal of the appeal was allowed by the Tribunal after hearing the counsel
for the parties. Shri Samdani submitted that the Appellant is owned and controlled by Shri Prakash K. Shah (Shri Shah) who along with his wife holds 100% of the Appellant�s share capital.� He submitted that Shri Shah was admitted as a member of BSE in May 1982.� His membership right was corporatised in December 1997 in the name of the Appellant.� In this context he submitted that Shri Shah enjoys a very high reputation and recognition in the market circle, that he belongs to the 3rd generation of a well known stock broker family.� He submitted that a partnership firm namely Khandwala Shah & Associates (the sub broker), registered as sub broker with the Respondent was acting as sub brokers of the Appellant since 1996, that the Appellant had allotted two BOLT/Terminal to the said sub broker.� He submitted that the said sub broker had never committed any default on their part, and always observed all their contractual obligations, including the pay in obligation and margin money obligation, that the Appellant had never received any complaint of any nature whatsoever against them, that they had built up confidence in the mind of the Appellant over several years and the Appellant believed that the sub brokers were taking all appropriate measures and exercising due care and diligence as required in the business and they never gave rise to any suspicion regarding bonafides of trades effected� by them through the BOLT installed at their office.� Learned Counsel submitted that the said sub broker had effected all their transactions through the said two BOLT terminals, that the office staff of the Appellant used to take stock of the trades effected by the sub broker and report to Shri Shah who used to verify the position of all the clients and sub brokers at the end of every settlement. Learned Counsel submitted that in January 2001, BSE had made certain routine queries to all the members of BSE including the Appellant, who had dealings in the scrip of ARBL, and the same was responded to by furnishing the details called for, that thereafter there was no further communication from BSE in the matter.� Shri Samdani submitted that the Appellant received a show cause notice dated 6.7.2002 from the enquiry officer appointed by the Respondent, inter alia stating that he has been appointed to enquire into the affairs of Shri Shah in his dealings in the scrip of ARBL.� The charges in the said show cause notice were broadly under two heads i.e. the Appellant (a) failed to exercise due skill and care in his dealings in the scrip of ARBL and (b) aided and abetted Shri Harinarayan Bajaj in creating a false market and misleading the market, that this notice was responded to by the Appellant vide its reply dated 11.8.2001 followed by oral submission before the enquiry officer and the enquiry officer reportedly submitted his report dated 8.3.2002 to the Respondent.� The enquiry officer held the Appellant guilty of violating clause A(2) of the Code of Conduct holding that it failed to exercise due care and skill, though he exonerated the Appellant of the charge of aiding and abetting Shri Bajaj.� In this context, learned Counsel referred to the following core portion of the finding in the enquiry report relating to the said two charges. (a)
failure to exercise due care and skill �It is an admitted fact that Shri Shah had executed trades in the scrip of ARBL amounting to a total volume of 19,50,160 shares (purchases) and 18,98,460 shares (sales) from Settlement No.A 30 to A 50.� Shri Shah had taken delivery of 21,700 shares during the aforementioned period.� During the oral hearing, it was indicated� by Shri Shah that all the transactions are executed through its registered sub-broker Khandwala Shah and Associates. Shri Shah had entered into an agreement with the sub-broker in the prescribed format.� As per the same, the registered sub-broker has to take the individual client registration form and enter into an agreement with the client.� Further, the sub-broker is also responsible for scrip level and client level position monitoring.� Therefore, the main broker is not normally aware of the identity of the ultimate client.� In this case, there was no evidence that Shri Shah was aware that the trades executed by Khandwala Shah and Associates was for Mr. Harinarayan Bajaj and his family.� It is� noted that he has not dealt with Shri Bajaj in the past.� However, as mentioned above, the quantity traded by his sub-broker was huge and the member should have cautioned not to take such huge exposure. Further, Shri Shah had admitted in his sworn statement during the investigation that he came to know in the last week of February, 2001, Shri Harinarayan Bajaj was trading in the scrip of ARBL.� But Shri Shah had executed huge quantity of shares even after knowing the above, which shows that he had not exercised care in his dealings with the sub-broker. During the oral hearing Shri Shah submitted that he will not allow the sub-broker to cross a limit of Rs.3.5 crores.� However, no logical explanation was submitted as to how the cap of Rs.3.5 crores was fixed.� This shows that Shri Shah had given high exposure to the sub-broker, in one scrip, by executing trades with buy position ranging from 13,742 to 2,05,273 shares per settlement.� It should be noted that there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudential risk management norms of the Stock Broker within the framework of law.� Such a huge exposure to his sub-broker is certainly not indicative of any prudential risk management norms adopted by Shri Shah.� Shri Shah should have exercised more caution in giving exposure to his sub broker particularly in one scrip and that too at times when the market price of the scrip was ruling high. With regard to the allegation that Shri Shah has allowed the client to take position which is beyond the clients� financial position, it is found that Shri Shah has traded mainly through his sub-broker and is not aware of the identity of the clients and hence the said allegation may not sustain. On the allegation that Shri Shah had traded in the scrip of ARBL beyond his sub-brokers financial capability, it is found that Shri Shah had given high exposure in one scrip and ultimately he was forced to take delivery of shares at the end of final settlement of his trading with the sub-broker, which shows that he had traded in the scrip beyond the sub-brokers� financial capability. From the aforesaid, it is clear that Shri Shah had failed to exercise due care and skill in his dealing with his sub-broker in ARBL, as mandated by the said clause A(2) of the Code of Conduct prescribed for the stock brokers.�� I, therefore, find that Shri Shah is guilty of violating Clause A(2) of Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations 1992.� (b)
on aiding and abetting Shri Bajaj: �Shri Shah had done few transactions that too through his sub-broker Khandawala Shah and Associates.� Shri Shah had not traded himself in the scrip of ARBL.� From the material available it is not possible to draw any inference that Shri Shah had the intention to artificially raise or depress the price of the scrip of ARBL.� There is no proof that Shri Shah was aware that the ultimate client of his sub-broker was Mr. Bajaj.� Further Shri Shah did not have the information that Mr. Bajaj is indulging in creating a false market in the scrip of ARBL.�� What Shri Shah did was a normal broking transaction through his sub-broker.� In view of this, it can not be held that Shah has aided and abetted Mr. Harinarayan Bajaj and his family in creating a false market in the scrip of ARBL.� Therefore, I find that Shri Shah is not guilty of violating Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulation 1995.� Shri Samdani also referred to the recommendation made by the enquiry officer: �On� the basis of finding given on Allegation/Charge I, I find that the conduct of Shri Shah in its dealings with his sub-broker in the scrip of ARBL warrants imposition of penalty of suspension of registration, in terms of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.� I, therefore, in terms of Regulation 28(7) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 recommend that the Certificate of Registration granted to Shri Shah as a stock broker may be suspended for a period of 3 months.� Learned Counsel submitted that the Respondent issued a notice to the Appellant on 13.3.2002 forwarding therewith a copy of the enquiry report asking to show cause as to why action should� not be taken against it as recommended by the enquiry officer, that this notice was answered by the Appellant by sending a reply on 25.4.2002 and making oral submissions on 3.7.2002.� He submitted that the Respondent passed the impugned order on 22.7.2002 ignoring most of the submissions made by the Appellant.� He referred to the conclusion recorded by the Responded in the order: �I have perused the extracts
of the investigation report, the enquiry report, the reply filed by the broker
member and the submissions made on behalf of the broker member at the time of
the personal hearing.� It is observed
that due to the transactions of Shri Harinarayan Bajaj and his son Rahul Bajaj,
the volumes in the scrip of ARBL went up to around 8-15 lakhs shares per day in
the month of February & first week of March 2001 from 50,000-60,000 shares
per day in Oct, 2000.� It is also
observed that the broker member had started dealing in the scrip of ARBL since
October 2000. It is observed that the
broker member transacted in the scrip of ARBL through its sub broker M/s.
Khandwala Shah & Associates.� The
broker member had executed� trades in the
scrip of ARBL and purchased 19,50,160 shares and sold 18,98,460 shares from
Settlement No. A 30 to A-50. In this regard I feel that, by executing such a huge transactions especially when the price of the scrip of ARBL which was ruling at very high price during the said period, the broker member had failed to exercise due skill and care in the conduct of his business.� The broker should not have given such a huge exposure when the market price of the scrip of ARBL was very high.� The broker member had taken delivery of 21,700 shares during the relevant period.� It is pertinent to note that the broker member had given such huge exposure to his sub broker particularly in the scrip of ARBL at the time when the market price of the scrip was ruling very high.� It is observed that the broker member had executed trades with buy position ranging from 13,742 to 2,05,273 shares per settlement.� Such a big exposure to the sub broker is not indicative of any prudential risk management norms adopted by broker member. The above mentioned acts of
the broker member clearly indicates that he had traded in the scrip beyond his
sub broker�s financial capability and thereby the broker member violated Clause
A (2) of the Code of Conduct.� ����������� Shri Samdani submitted that the
Respondent has passed the order in a mere mechanical way without application of
mind.� In support he referred to several
instances such as deposition dated 11..5.2001 of Shri Shah recorded in his
capacity as a director of the Appellant and not in his individual capacity,
show cause notice dated 6.7.2001 addressed to Shri Shah in his individual
capacity, the Respondent�s order directing enquiry with reference to Shri Shah,
the enquiry report describing that it is in the case of Shri Shah, but enquiry
officer in his report under the head �Role of Shri Shah� describes the status
of the Appellant (not that of Shri Shah) that the recommendation is to suspend
the certificate granted to Shri Shah, and the Respondent also accepted the
said� recommendation and suspended the
certificate granted to Shri Shah.� He
submitted that the Respondent was fully aware of the change in the status of
the broker from proprietory concern to corporate entity and the certificate to
this effect was issued by none other than the Respondent in 1997, i.e. much
before the enquiry proceedings were initiated.�
He submitted that the Respondent has not bothered to apply its attention
to the facts specific to the case that the approach was routine and casual is
evidenced from the fact that during the questioning of Shri Shah he was asked
to state as to �who are the other Directors of Crown Consultants and who
is the major shareholder of the said company��
He further submitted that the enquiry officer has prepared a report by
following �cut� and �paste� method and the Respondent has also adopted the same
method and in support referred to the exactly identical portions in the enquiry
report and in the impugned order. ����������� Shri Samdani referred to the factual
position with reference to the findings reached at by the Respondent.� He submitted that Shri Shah in answer to the
queries put to him by the Respondent�s officers on 11.5.2001 had clearly stated
that Khandwalas are the Appellant�s sub brokers since December 1996 and that
during the relevant period (transactions covered in the investigation) the
Appellant had given them two live terminals to trade on behalf of the clients,
that though the gross exposure was not fixed at any point of time as such, the
Appellant allowed them to carry out transactions of Rs.2 crores in carry
forward and Rs.3 crores for daily transactions, that since they were the sub
brokers of the Appellants for the past several years and the Appellant was dealing
in many scrips in the settlement, no separate �margin in ARBL was asked but there was always
sufficient margin deposit from their side and referred to the copy of the
relevant ledger account filed in the proceedings to strengthen the said
contention.� Shri Samdani submitted that
in any case the enquiry officer in his report has� not dealt with the adequacy or otherwise of
the margin and therefore it is also not a charge covered in the show cause
notice adjudicated by the Respondent.� He
submitted that the Appellant started dealing in the shares of ARBL sometime in
the last week of October 2000, that the average trading in ARBL�s scrip per
settlement was in the range of 60,000 to 80,000 shares, which by no standard
can be considered as a dominant part of the high volume transacted in the
shares of the said company during the relevant period.� Shri Samdani submitted that the enquiry
officer in his report has charged the Appellant of giving �huge exposure to his
sub broker� and has viewed this as indicative of the Appellant�s failure to
adopt prudential risk management norms.�
In this context he referred to the show cause notice dated 6.7.2001 and
the extract of the investigation report forming part of the same and submitted
that the enquiry officer had not levelled any such charge that the Appellant
had allowed huge position to Shri Bajaj and the finding thereon has been
recorded without giving an opportunity to the Appellant to rebut the same.� He submitted that the Appellant had informed
the enquiry officer that during the period October 2000 to March 2001 the
Appellant had executed trades in ARBL for a total volume of 19,50,160 shares on
the purchase side and 18,98,360 on the sales side with total deliveries
constituting 21,700 shares that in addition, the carried forward position with
30,000 shares were squared off in the last settlement, that except for the
volume of 30,000 shares the Appellant executed the trades through its sub
broker only, and the sub broker maintained client registration� form and the Appellant was not aware of the
identity of the clients for whom the sub broker has done trades.� He submitted that the Appellant came to know
of the involvement of Shri Harinarayan Bajaj only in February 2001 and immediately
on knowing so, cautioned the sub broker against dealing for Shri Bajaj.� He submitted that the Respondent has not
disputed these facts. ����������� Learned Counsel submitted that in the show cause notice dated 6.7.2001 issued by the enquiry officer the Appellant was required to answer only two charges i.e. (i) failure to exercise due skill and care in his dealings in the scrip of ARBL and (ii) aiding and abetting Shri Harinarayan Bajaj in creating a false market and misleading market in the scrip, but the impugned order refers to four charges. �He stated that the charges framed by the Respondent against the Appellant as per para 4 of the impugned order are: �I.� (a) Shri� Shah by virtue of his trading in the scrip of ARBL on behalf of Shri Harinarayn Bajaj has failed to exercise due skill and care in his dealings; ����� (b) Shri Shah has allowed the client to take� position which is ��������� beyond his financial capacity; ������ (c) Shri Shah had traded in the scrip of ARBL beyond the sub ������ broker�s financial capacity; And therefore, violated the code of conduct under Regulation 7, Schedule II and II. Shri Shah has aided and abetted Shri Harinayaran Bajaj and his family members in creating a false and misleading market in the scrip of ARBL and therefore, guilty of violating the provisions of regulation 4 of FUTP regulations.� Learned Counsel submitted that the enquiry officer absolved the Appellant of the charge of violating regulation 4 of the FUTP Regulations but held it guilty of violating the code of conduct, that the enquiry officer has viewed that the Appellant had executed trade for huge quantity of shares even after knowing that Shri Harinarayan Bajaj was trading and the Appellant therefore failed to exercise due care and skill and as a result it was forced to take delivery of shares, indicating that it had traded in the scrip beyond the sub broker�s financial capability. He further submitted that finally the charge against the Appellant as recorded in the order is that the Appellant gave high exposure to sub broker beyond the sub brokers financial capability which is not indicative of any prudential risk management norms adopted by broker member. ����������� With reference to the enquiry officer�s observation relied on by the Respondent that the quantity traded by the sub broker was� huge, Shri Samdani submitted that in a rising market, even if the quantity remains the same, the value goes up, that the Appellant had certainly gauged the sub broker�s capacity, and the allegation that the Appellant ignored sub broker�s trade transaction level is not correct.� He further submitted that the allegation that the Appellant� despite knowing that Shri Harinarayan Bajaj was trading in the scrip of ARBL executed huge quantity of shares, is baseless as it has been made without taking into consideration the Appellant�s statement on record that by the end of February 2001 on knowing that Shri Harinarayan Bajaj was trading, the sub broker was informed that it was not safe to trade with Shri Bajaj and asked them to reduce/square off the position, that on the morning of 5.3.2001 the Appellant reduced the purchase limit of its terminal to 5000 shares for the day and also informed the sub broker that it did not want to deal in ARBL shares any more. ����������� Learned Counsel submitted that since the Respondent itself has admitted that there are no quantitative restrictions laid down by it with regard to execution of each trade and the same is left to the prudential risk management norms of the stock broker, the Appellant can not be blamed for allowing the sub broker to trade upto Rs.3.5 crores, as the said ceiling was decided on the basis of the Appellant�s satisfaction based on its assessment of the sub broker�s capacity.� In this context he referred to the observation made by the Tribunal� in LKP Securities Ltd. V SEBI (2003) 41 SCL 1 (SAT) that �The Respondent has admitted that it has not set any prudential norms and as such the Appellant allowing Bajaj to trade taking adequate margin and putting the cap at Rs.2 crores based on its judgement can not be said to be a failure to exercise due skill and care.�� He submitted that the same view is in equal force applicable to the Appellant�s case� also.� With reference to the enquiry officer�s finding that �as the Appellant had given high exposure in one scrip, ultimately he was forced to take� delivery of shares at the end of the final settlement of the trading with the sub broker and this showed that the Appellant had traded in the scrip beyond sub broker�s financial capability�, it was submitted by the learned Counsel that the said finding is wholly baseless that the Appellant had not taken delivery of shares at all.� In this context he submitted that the Respondent has stated that the Appellant had taken delivery of 21,700 shares during the relevant period, without disclosing as to from where it got the said magical number of 21,700.� He submitted that the Respondent has misunderstood the position, that the trading/delivery position shown in the Table in Respondent�s order is the same that was prepared by the enquiry officer and the last column therein showing �delivery� under which 21,700 shares appear actually is the total number of shares delivered by the Appellant during the transaction period and not the delivery taken by the Appellant that the said 21,700 shares were delivered by the Appellant in Settlement No.A41, A 42 , A43 and A45 i.e. 10.990 shares, 10 shares, 5000 shares and 5700 shares respectively, that on wrong premises it was viewed by the Respondent that the Appellant was �forced to take delivery of shares� and concluded that the �Appellant had traded in the scrip beyond the sub broker�s financial capability�.� He said that the said finding can not be sustained as it is based on factually wrong information.� Shri Samdani referred to the trading details tabulated in the order and submitted that from the purchase and sale figures stated therein it is clear that these were normal transactions and submitted that 30,000 shares carried forwarded from A 50 was sold in the next settlement, that this fact also has been ignored by the Respondent. ����������� Learned Counsel submitted that despite the finding of the enquiry officer that �what the Appellant did was normal broking transactions through the sub broker�, the Respondent has punished the Appellant alleging that it had failed to exercise due skill and care. He submitted that exercising due skill and care is a part of the normal broking transactions.� Shri Samdani referred to the letter dated 25.4.2002, from the Appellant in reply to the show cause notice issued by the Respondent on 13.3.2002 and submitted that the Appellant had clearly explained the factual position, which the Respondent has not bothered to deal with in its order.� In this context he referred particularly to the following portion in its reply: �Please note that M/s.
Khandwala Shah & Associates are our registered Sub-brokers since 1997.� We have entered into the concerned Agreement
for their registration as our Sub-Brokers.�
As per the said Agreement the registered Sub-Broker is supposed to take
individual client Registration Form and also to enter into an Agreement with
the client.� As our Registered Sub-broker
they were allotted BOLT in their Office and were effecting transactions through
the said BOLT.� From the time since they
are registered as our Sub-broker till late February 2001, their working with
respect to margin, deliveries, payments etc., have been always regular and that
they have given no opportunity for any complaint or dispute. As per the said Agreement
with our Sub-Broker, it is their responsibility to monitor scrip level and
client level.� Accordingly the main
Broker is normally not expected to be aware of the identity of the ultimate
client. The Enquiry Officer also
observed that there was no evidence for us supporting that the trade executed
by our said Sub-Brokers were for Mr. Harinarayan Bajaj and his family.� He has also observed that we have never dealt
with Mr. Bajaj in the past. As informed to you by our
Director Mr. P.K.Shah, during his personal interrogation that when the volume
has increased abnormally, we, in normal course made enquiries regarding the
volume of the scrip of ARBL.� We are then
informed in late February, 2001, by Mr. Sanjay Shah, Partner of our said
Sub-broker that they were trading for and on behalf of their client Mr.
Bajaj.� They also assured us that the
trade were executed after taking due care and after taking the required margin
from their clients.� We reiterate that we
immediately warned the said Sub-broker to clear the position without any delay
of any nature.� Accordingly in Valan Nos.
50 and 51 they cleared the position, the details whereof are already furnished
to you earlier. The resultant effect at the
end of Valan No. 50 and 51 indicates not only our genuinity and straight
forwardness in our business dealings but also of our honesty in respect of
taking corrective action soon after we detected the probability of irregularity
in dealings of our Sub-Brokers. Please note that based on the untarnished market reputation, their family background and their personal financial strength and also their clean dealings since beginning, we used to allow our Sub-Brokers M/s. Khandwala Shah & Associates the daily volume of about Rs.1.00 crore in ordinary course of business.� In respect of the business from our this Sub-Brokers, we have collected from them the Margin in the range of Rs.35.00 Lacs to Rs.80.00 Lacs and that the same was in turn deposited by us with the Stock Exchange, Mumbai .� Further, during the most slack market period during end of year 2000 and beginning of year 2001, such good volume of business from our such an esteemed Sub-Broker was taken by us as a welcomed business opportunity.� We once again repeat that the clean past track record of our said Sub-brokers has not created any doubts in our mind for probability of any irregularity in respect of these trades by our said Sub-brokers.� In spite of these facts, the said sub-brokers have been always regular and within the required limits of margin payments, deliveries, etc. We also wish to state here
that in light of the continuous rise in the price of the scrip under reference,
The Stock Exchange, Mumbai has been asking for various data, facts and figures
from time to time in respect of the said scrip which we were furnishing without
any delay at our end.� However, we have
never been informed in any way by the Stock Exchange, Mumbai about any probable
mal-practice suspected by them in that regard.�
Needless to add that the information available with the Stock Exchange
upon enquiry was expected to be far more complete and dependable than the
information available with any individual Broker or a Sub-Broker.� Moreover, when a particular scrip is listed
in �A� Group and the Margins are imposed by the Stock Exchange, there is no
justification for further safeguards as Margins are fixed by the Stock Exchange
from time to time keeping in view the volatility of the particular scrip.� Thus there was no room for us to doubt about
any such probable mal-practice in or about the scrip under reference. However, as stated herein
before, as soon as we noticed the increase in the volume of business executed
by our Sub-broker in respect of the script under reference, we immediately made
enquiries with our said Sub-broker to know the correct fact.� In response thereto when we were informed by
their partner Mr. Sanjay Shah that the trades were for their one client Mr.
Bajaj, we instructed them to square off the position immediately.� As informed to you by our Director Mr. P.K.
Shah during his personal representation that we immediately reduced their level
to 5000 only.� However, on the personal
requests of Mr. Sanjay Shah, the limit was then lifted.� ����������� Learned Counsel submitted that the Respondent has not met any of the said submissions in its order that it has mechanically gone by the version of the enquiry officer who in turn� also did not apply his mind and reached at the conclusions not only without taking into consideration the material facts and the submissions of the Appellant, but also on the basis of erroneous data. ����������� Shri Samdani referred to the decision of the Respondent dated 29.6.2002 against Khandwala Shah and Associates, referred to by the Respondent�s Counsel and submitted that the said firm was stated to have committed serious omissions and commissions and for which it was penalised by suspending its certificate for a period of one year, that the seriousness of the charge against the said firm is evident from the following observation by the Respondent in the said order: ����������� �I observed that the sub-broker had executed trades in the scrip of ARBL for �� Shri Harinarayan Bajaj amounting to a total volume of 19,50,160 shares ������ (purchases) and 18,98,460 shares (sales) in settlement Nos. A-30 to A-50 ����������� through M/s. Prakash K. Shah, member BSE.� The sub-broker also acted as ��� an unregistered sub-broker to M/s. Alba Capital Markets Pvt. Ltd., member ��������� NSE and traded a total volume of 16,65,818 shares (purchases) & 16,65,818 ������ shares (sales) in Settlement No.N-44 to N-10.� I further find that the sub-�������� broker has also traded with Orbis Securities Pvt. Ltd., for 40,000 shares ��� on ������ NSE on March 9, 2001 for its client Shri Harinarayan Bajaj.� All these �� transactions were executed for Shri Harinarayan Bajaj and thereby enabled ����� Shri Harinarayan Bajaj to build up huge position in the market in the scrip of ��������� ARBL.� In this regard, I observed that even an ordinary and prudent sub-����������� broker should have understood the repurcussions/implications of giving such ���� an abnormal exposure to Shri Harinarayan Bajaj.� Further Shri Harinarayan ��� Bajaj had defaulted in committing his financial obligation to the sub-broker ����������� and due to which sub-broker suffered an abnormal loss.� The exposure given ��� by the sub-broker to Shri Harinarayan Bajaj was at a time when the price of ������� the scrip of ARBL was ruling very high.� The aforesaid actions of the sub-���� broker is in violation of Regulation 7 read with Schedule II of the said �� Regulations. ����������� The sub-broker also submitted that they are doing sub-broker business with ���� M/s. Alba Capital Markets Pvt. Ltd. since its inception in the year 1996.� It is ���������� also found that sub-broker is not registered with SEBI as a sub-broker to M/s. ��� Alba Capital Markets Pvt. Ltd. and thereby violated Section 12 of SEBI Act, �� 1992.� ����������� ����������� Shri Samdani cited extensively from the observation made by this Tribunal in LKP Securities Ltd�s case (supra) and submitted� that in the said case the charges levelled against LKP was far more serious which included violation of regulation 4 of the FUTP Regulations, that despite such serious charges its certificate was suspended for just 15 days where as in the case of the Appellant its certificate of registration was suspended for 3 months even though there was no failure on the part of the Appellant in any manner.� He also cited orders passed by the Respondent in the case of SMK Shares and Stock Brokers P. Ltd. (Member BSE) and Seshank Securities Pvt. Ltd., (Member NSE) and submitted that despite the finding that the said companies had failed to exercise due skill and care in their dealings with Shri Bajaj they were let off by the Respondent with a mere warning.� Learned Counsel submitted that the Respondent has arbitrarily reached at certain conclusions and has chosen to impose a penalty without any justification.� In this context he referred to this Tribunal�s decision in MJ Patel Vs SEBI (2002) 38 SCL 889) (quoted in the LKPSL�s case) that: �Suspension or cancellation of the certificate granted to carry on broking business is not a matter which could be treated lightly.� In the absence of sufficient justification supported with reasonable evidence, such a penal action cannot be sustained.� In this connection one should not ignore the requirements of sub regulation 4 of regulation 29.� As per the said regulation �every order passed under sub regulation (3) shall be self contained and give reasons for the conclusions stated therein including justification of the penalty imposed by that order�.� It is also to be noted that in terms of regulation 32 a person aggrieved by the order of the Board is entitled to prefer an appeal to the Tribunal.� The regulation requires a speaking order to be passed by the Board.� A non speaking order would certainly negate the Appellate remedy available to the person aggrieved by the order.� Learned Counsel submitted that the Respondent has come to conclusions in the Appellant�s case unsupported with evidence that the order has also failed to deal with submissions made by the Appellant countering the charges, that the order is not a speaking order at all. Shri Kumar Desai, learned Counsel appearing for the Respondent submitted that the Appellant�s version that the order has been passed without� any application of mind, that the Respondent has prepared the order on a cut and paste basis etc. are baseless.� He submitted that the Appellant is wholly owned and controlled by Shri Shah, that it was Shri Shah�s proprietory concern which was corporatised and the corporatised entity continued to carry on the business of Shri Shah, that it is in the said context the Shri Shah and the Appellant has been referred to as if it is one in the report/order, that� the fact that for the practical they are one and the same has been admitted by the Appellant� also by agreeing to accept that the impugned order as directed to the Appellant company.� He submitted that in fact the investigation report, which formed the basis of the show cause notice issued by the enquiry officer, clearly refers to �Prakash K. Shah Shares & Securities Pvt.� Ltd. a member of the Stock Exchange, Mumbai�, as the entity� which was subjected to investigation and the report also states that �the investigating authority summoned Shri Prakash K. Shah, Director of the firm �and his statement was recorded�.� It is therefore clear that inadvertent reference to Shri Shah in few places in the enquiry report/order is not a serious lapse, so as to attribute to non application of mind by the Respondent.� He submitted that the Respondent had ordered enquiry into the trading activities of several brokers who had traded for Shri Bajaj in ARBL scrips at the relevant period and the findings were identical in many cases and therefore the enquiry reports also contained identical observations in certain cases and this does not mean that the enquiry officer adopted cut and paste method without applying his mind.� He submitted that the well reasoned enquiry report and impugned order clearly demolish the said allegation. �������� Shri Desai submitted that the enquiry officer did not enlarge the charges as alleged by the Appellant, that the charges were only two i.e. (i) failure to exercise due skill and care and (ii) violation of regulation 4 of the FUTP Regulation, that the Appellant was absolved of the second charge i.e. violation of regulation 4 of FUTP Regulations, by the enquiry officer and as such the only serving charge which the Respondent dealt with in its order is the Appellant�ss failure to exercise due skill and care, that as the said charge was proved, by way of penalty its certificate of registration was suspended. With reference to the Appellant�s contention that the moment it knew that Shri Bajaj was involved in the trade, it had cautioned the sub broker is baseless as is evident from Shri Shah�s� statement dated 11.5.2001, that Shri Shah to a query from the investigating officer had stated that: �By the end of February 2001, upon enquiry with Sanjay C. Shah about the client in Amara Raja Batteries Ltd., we were informed that one Shri Shailesh Bajaj was trading in the scrip.� We told our sub-broker that it is not safe to trade with Shri Bajaj as he has already� been declared defaulter for his trading in Sesa Goa� by BSE and asked them to reduce/square off the position.� On the morning of March 5, 2001 I reduced my purchase limit of his terminal to 5,000 shares for the day and also informed Shishir Khandwala that I do not want to deal in this share anymore.� Thereafter, Shri Sanjay Shah spoke to me over the phone and requested to increase the limit for the day as he had already committed his client.� In this context Shri Desai also referred to the observation made by the Respondent in the impugned order that: �It was admitted by the broker member before the investigating authority that on enquiring with his sub broker and other market participants in the last week of February, they came to know that Shri Shailesh Bajaj, a defaulter member of BSE was involved in the trading of the scrip.� However,� after few days the broker member submitted an affidavit stating that in fact Shri Harinarayan Bajaj was trading in the scrip and that he had wrongly mentioned the name of Shri Shailesh Bajaj.� Shri Desai submitted that in the statement of Shri Shah and in the affidavit referred to in the order there is no indication that the Appellant had cautioned the sub broker against dealing with Shri Harinarayan Bajaj, that the objection was dealing with Shri Shailesh Bajaj and therefore, the Appellant�s submission that by notifying the sub broker the Appellant had exercised due skill and care is not tenable. ����������� Shri Desai submitted that the Appellant was transacting in the ARBL shares for Bajaj from October 2000 to March 2001.� He submitted that by the Appellants own admission by February 2001 it knew that the sub broker was trading for Bajaj, that despite such knowledge the sub broker was allowed to buy 1,20,000 shares for Shri Bajaj on 5.3.2001 i.e. in Settlement No.50 and out of the said purchase 30,000 shares were carried forward, that it is also a fact that on 9.3.2001 the said 30,000 shares devolved on the Appellant and the Appellant had to take delivery of the same and the Appellant has not challenged the said position.� Learned Counsel submitted that it is on record that the Appellant was buying and selling in huge quantities of shares of ARBL but took delivery of only small quantity of shares, that as per the enquiry report �the Appellant executed trades in the scrip of ARBL amounting to a total volume of 1950160 (purchases) and 11898460 (sales) from Settlements 30 to 50, that the Appellant had taken delivery of 21,700 shares during the aforementioned period�, that it is also on record that 95% of the trade in ARBL scrip was carried out through its sub broker. ����������� Shri Desai submitted that the enquiry officer has reported that the entire trade, which was huge, was transacted through one sub broker thereby giving high exposure to the sub broker which was really risky.� In this context he further submitted that the surviving charge against the Appellant is that it had given high exposure to the sub broker that even the� transaction made on 5.3.2001 was for 1.20 lakh shares.� Countering the Appellants version that the Appellant has not specified any prudential norms for trading, the learned Counsel submitted that a standardized norm is not possible as due care and skill to be exercised by a broker and the risk management measures to be adopted would depend on the circumstances and the same would vary from case to case depending on the attendant factors. ����������� Learned Counsel referred to the finding by the enquiry officer that �the Appellant had given high exposure in one scrip and as a result ultimately he was forced to take delivery of shares at the end of final settlement of the trading by the sub broker, submitted that the Appellant had admitted� its failure in its letter dated 11.7.2002 addressed to the Respondent that �As the Principal for our sub brokers M/s. Khandwala Shah and Associates, do attract the fiduciary responsibility.� However, the gravity� of the default always differs if the default is directly committed or the default is a consequential default.� In the present case I am not the direct defaulter and I am a deemed defaulter on account of the consequential effect of default on the part of my sub brokers�.� Shri Desai submitted that the Appellant having owned the responsibility for the omissions and commissions of its sub broker, is not entitled to say that for such omissions and commissions it cannot be penalised. ����������� Shri Desai submitted that the observation in the impugned order that giving �such exposure to the sub broker is not indicative of any prudential risk management norms adopted by broker member� and that �the above mentioned acts of the broker member clearly indicates that he had traded in the scrip beyond his sub broker�s financial capacity� is evidenced from the fact that the Appellant had to take delivery of 21,700 shares.� He submitted that the observation that the Appellant was forced to take delivery refers to carry forward of the shares by the Appellant.� Shri Desai tendered a copy of the order dated 29.6.2002 passed by the Respondent against Khandwala Shah & Associates and submitted that the said sub broker who was the sub broker of the Appellant was suspended for a period of one year. ����������� Shri Desai submitted that the impugned order is a reasoned order, that the charge against the Appellant has been established, as could be seen from the enquiry report and the impugned order, that� there is enough evidence to show that the Appellant had failed to take appropriate risk management measures, that the defense putforth by the Appellant is only an after thought.� With reference to the Appellant�s heavy reliance on the observation of the enquiry officer that �What the Appellant did was normal broking transaction� in support of its contention that every thing was normal, learned Counsel submitted that the said �quote� has been picked out of context from the report, as the same was in the context of the specific finding against the charge of violation of regulation 4 of� FUTP Regulations and it can not be viewed as a certification of good conduct of the Appellant in respect of its conduct as broker vis-a-vis compliance of the code of conduct. ����������� Shri Desai, referring to the order passed by the Tribunal in LKP Securities case and the two orders passed by the Respondent in the case of SMK Shares and Stock Brokers P. Ltd. and Seshank Securities P. Ltd. relied on by the Appellant, submitted that the facts of those cases are entirely different from the facts of the Appellant�s case and as such the decision in those cases can not have application to the present case. ����������� Shri Desai submitted that since the charge has been established, the Tribunal should not interfere with the nature/quantum of penalty imposed by the Respondent, that the impugned order deserves to be sustained. ����������� I have carefully considered the pleadings and the submissions made by the Counsel for the parties and the material on record and my views are as follows: The impugned order is in the context of the market behaviour in terms of price and volume, witnessed in trading in the shares of ARBL, particularly in February � March, 2001.� It is seen that the price of the scrip which was hovering around Rs.91 in the 1st week of October 2000, reached Rs. 205/- on January 1, 2001 and further touched a high of Rs.320/- on March 8, 2001.� But the same crashed to Rs.78.50 by March 19, 2001.� Further the volumes traded in the scrips around 50,000 � 60,000 shares per day in October 2000 went up to the extent of 8-15 lacs shares per day in January � March, 2001.� The Respondent�s investigation prima facie revealed one Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the predominant traders in the scrip of ARBL during the period August 2000 to March, 2001 and held them responsible for the creation of false market.� The investigation carried out by the Respondent indicated that various members of both NSE and BSE had aided and abetted Shri Harinarayan Bajaj in creating a false market, in the scrip of ARBL and they were also found to have not exercised due care in their dealings.� The Appellant was one among those brokers who were investigated in the said context.� Though after the investigation and enquiry, the Appellant was absolved of the charge of aiding and abetting Bajajs, it was found wanting in exercising due skill and care in its dealings, as required in terms of Clause A(2) of the Code of Conduct prescribed in the 1992 Regulations. ����������� The core finding of the Respondent is confined to few� paragraphs in the impugned order.� Since these findings have a bearing on the� issues raised in the appeal, the following portion relevant for the purpose, is extracted for quick reference: �I have perused the extracts of the investigation report, the Enquiry Report, the reply filed by the broker member and the submissions made on behalf of the broker member at the time of the personal hearing.� It is observed that due to the transactions of Shri Harinarayan Bajaj and his son Rahul Bajaj, the volumes in the scrip of ARBL went up to around 8-15 lakhs shares per day in the month of February & first week of March 2001 from 50,000 � 60,000 shares per day in Oct, 2000.� It is also observed that the broker member had started dealing in the scrip of ARBL since October 2000. It is observed that the broker member transacted in the scrip of ARBL through its sub broker M/s. Khandwala Shah & Associates.� The broker member had executed trades in the scrip of ARBL and purchased 19,50,160 shares and sold 18,98,460 shares from Settlement No. A 30 to A-50. In this regard I feel that, by executing such a huge transactions especially when the price of the scrip of ARBL which was ruling at very high price during the said period, the broker member had failed to exercise due skill and care in the conduct of his business.� The broker should not have given such a huge exposure when the market price of the scrip of ARBL was very high.� The broker member had taken delivery of 21,700 shares during the relevant period.� It is pertinent to note that the broker member had given such huge exposure to his sub broker particularly in the scrip of ARBL at a time when the market price of the scrip was ruling very high.� It is observed that the broker member had executed trades with buy position ranging from 13,742 to 2,05,273 shares per settlement.� Such a big exposure to the sub broker is not indicative of any prudential risk management norms adopted by broker member. The above mentioned acts of the broker member clearly indicates that he had traded in the scrip beyond his sub broker�s financial capability and thereby the broker member violated Clause A (2) of the Code of Conduct prescribed under regulation 7 of the said regulation which state as follows: Schedule II A General 1)� �����.. 2) Exercise of due skill and care: A stock Broker, shall act with due skill, care and diligence in the conduct of all his business. ������. ����������� It is
concluded that the broker member failed to exercise due skill and care and was
not diligent in the conduct of his business by giving high exposure to his sub
broker in one scrip, i.e. in ARBL and by executing trades with buy position
ranging from 13,742 to 2,05,273 shares per settlement at a time when the market
price of the scrip of ARBL was ruling very high.� In view of the above circumstances, it is concluded that the broker member had failed to exercise due care and skill in his dealing with his sub broker, M/s. Khandwala Shah & Associates and thereby violated Clause A(2) of the Code of Conduct prescribed regulation 7 of SEBI (Stock brokers & sub brokers) Regulations, 1992. Therefore by considering the above facts and circumstances, I agree with the recommendations given by the Enquiry Officer and therefore under the provisions conferred upon me under Section 4(3) of SEBI Act, 1992 and under Regulation 29(3) of SEBI (Stock Brokers & Sub Brokers) Regulations, 1992, I, hereby suspend the certificate of registration granted to Shri Prakash K. Shah, Member, Mumbai Stock Exchange for a period of 3 months w.e.f. August 12, 2002� (emphasis supplied) ����������� It is noticed from the impugned order that the suspension of the certificate of registration granted to the Appellant is based on the Respondent�s findings that the Appellant had violated Clause A(2) of the Code of Conduct under the Stock Broker Regulations.� The Respondent has relied on the reasoning and findings given by the enquiry officer in his report holding the Appellant guilty of not following clause A(2)� of the Code of Conduct.� The Respondent has also accepted the quantum of penalty as recommended by the enquiry officer. ����������� The Appellant�s argument that the impugned order has been passed mechanically without application of mind that it has been prepared by blindly� adapting portions from the enquiry report on a cut and paste basis, that the order is not reasoned one etc., in my view is not very sound.�� It is true that the Respondent has relied on the material brought out, and the findings recorded,� by the enquiry officer.�� But then there is no prohibition on relying on the material / reasoning given by the enquiry officer, provided the same is acceptable to the Respondent.� In fact the whole purpose of conducting enquiry is to collect the requisite material for the purpose of taking appropriate decision by the Respondent.�� As� the learned Counsel for the Respondent pointed out, in a situation where the Respondent had ordered enquiry into the trading for Shri Bajaj in the shares of ARBL by several� other brokers, and if there are certain common features and findings, adapting a common� text on the finding/observation, in my view cannot be considered as illustrative of non application of mind.� I do not find anything wrong in following such an approach.�� The order by and large deals with the relevant issues and gives reasoning and therefore in my view, the same� cannot be said to be one short of reasons, as alleged. ����������� The Appellant is a Stock broker.� It has a membership to trade in securities on BSE. It has a sub broker viz. Khandawala Shah & Associates.� The broad regulatory regime applicable to Stock brokers and Sub brokers under the Securities and Exchange Board of India Act 1992 (the Act) is the Stock Broker Regulations.� According to regulation 7 of the said Stock Broker Regulations �the Stock brokers holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II�.� Schedule II enumerates the Code for Stock brokers.� It also prescribes the Code of Conduct for Sub brokers. (in terms of regulation 15)� Clause A(2) of the Code of Conduct, which the Appellant is stated to have violated is as follows: ����������� �(2) Exercise of due skill and care: A Stock broker shall act with due skill, care and diligence in the conduct of all his business� ����������� As far as Sub broker is concerned he is also required to exercise due skill and care.� Code of conduct prescribed in clause A(2) for Sub broker is also substantially the same� as in clause A(2) prescribed for the Stock brokers. ����������� The Appellant was trading through its Sub broker.� The Appellant was originally charged for failure to exercise due skill and care on three grounds, and also for aiding and abetting Shri Harinarayan Bajaj and his family members in creating a false and misleading market in� violation of regulation 4 of the FUTP Regulations.� Since the Respondent had absolved the Appellant of the charge of violation of FUTP Regulations, I do not consider it necessary to go into the details of the said charge and the merits of the Respondent�s decision thereon.� As stated earlier the charge that the Appellant� failed to exercise due skill and care is based on the following three grounds as has been stated� in the impugned order: �(i) trading in the scrip ARBL on behalf of Shri Harinarayan Bajaj. (ii) allowing� the client to take position which is beyond his financial position. (iii) trading in the scrip of ARBL beyond his Sub brokers financial capacity. ����������� It is noted that the grounds at (i) and (ii) above were also given up after enquiry and the only ground based on which the Respondent has come to the conclusion that the Appellant �had failed to exercise due skill and care and was not diligent in conduct of its business�� is that it gave �high exposure� to its Sub broker in one scrip.� It is not the Respondent�s case that the Appellant had chosen Khandwala Shah and Associates, without proper verification and without exercising due skill and care.� It is on record that the said Sub broker was appointed after following all the procedures including clearance from BSE, as required by the Stock Broker Regulations.� It is also on record that the said Sub broker was carrying on trade as� an affiliated Sub broker of the Appellant, since 1997 and the Appellant was satisfied with the conduct of the said Sub broker in its delings with them, since then. ����������� The allegation against the Appellant, as already stated, is of giving high exposure to the said Sub broker beyond their financial capacity. However, I do not find any indication in the order that as per the perception of the Respondent as to what was the financial capacity of the said sub broker, though the Respondent is stated to have enquired into the affairs of the said sub broker also.� A finding on this aspect would have helped the Respondent to find out as to whether the Appellant had high exposure unrelated to the financial capacity of the sub broker.� It has been stated in the order that �due to the transactions of Shri Harinarayan Bajaj and his son Shri Rahul Baja the volumes in the scrip of ARBL went up to around 8-15 lakhs shares per day in the month of February and first week of March, 2001 for 50,000-60,000 shares per day in October 2000.� The broker member had started dealing in the scrip of ARBL since October, 2000�.� It has been further stated that �the broker member had executed trades in the scrip of ARBL and purchased 19,50,160 shares and sold 18,98,460 shares from settlement No. A 30 to A-50�..�.�� According to the Respondent, �by executing such huge transactions especially when the price of the scrip of ARBL which was ruling at very high� during the said period, the broker member had failed to exercise due skill and care in the conduct of his business.� The broker should not have given such exposure when the market price of the scrip of ARBL was very high.� The broker member had taken delivery of 21,700 shares during the relevant period.� It is pertinent to note that the broker member had given such huge exposure to his Sub broker particularly in the scrip of ARBL at a time when the market price of the scrip was ruling very high.� It is observed that the broker member had executed trades with buy position ranging from 13,742 to 2,05,273 shares per Settlement.� Such a big exposure to the Sub broker is not indicative of any prudential risk management norms adopted by broker member.�� In the light of the said observation it is considered necessary to have a look at the details of �Trading, delivery, carry forward position of the Appellant in ARBL from August 2000 to March 2001� furnished in the report.� The data gives a fair idea of the trading pattern in ARBL shares by the Appellant.
����������� On a perusal of the above data it is noted� that the trades were carried out in varying quantities, that the shares purchased were invariably sold and the carry forward quantum was not that high vis-�-vis the trade effected.� In any case the ARBL scrip being in �A� group, it was permissible to carry forward the trade, subject to the availability of sufficient margin deposit.� So carrying forward the trade from one Settlement to another by itself is not against the regulations to attract any penalty.� It is seen that in the Settlements 45-50, when the price was at its peak, the trade was not carried forward and the Appellant had ensured to minimise its risk.� The Respondent had specifically referred to the transaction involving 2,05,273 shares.� It is noted that� 2,05,273 shares were purchased in the Settlement A-42 and the same quantity of shares were also sold in the same Settlement.� It is also seen that in A-46 the Appellant had purchased/sold one lakh shares and thereafter the quantum of transaction was reduced to 75,000 in A-47 and A-48 and increased to 95,000 in A-49, that shares so purchased were sold in the same settlement.� It is noted that in February � March, 2001� the daily transaction was to the tune of� 8-15 lac shares per day.� Even in October it was 60,000 to 80,000 per day.� The number of shares stated to have been transacted by the Appellant in each settlement compared to the total quantum traded in the scrip cannot be considered as that huge to impact the market. The Appellant is stated to have collected margin money to the extent of 35 lacs to 80 lacs from the Sub broker and� the Sub broker was allowed� to trade only within the limit. The Respondent has not disputed this version.�� The Appellant�s argument that in the absence of any prudential norm prescribed by the Respondent, it was for the Appellant to decide the trading limit backed up with sufficient margin and accordingly the Appellant had fixed the trading� limit and that by allowing the Sub broker to do business within the said limit� the Appellant did not suffer in any way, can not be ignored.� It is also on record that by the end of February,2001 on the Appellant knowing that it was Shri Harinarayan Bajaj who was trading in ARBL shares, it had warned its Sub broker trading for Shri Bajaj and ensured that the trading limit is� reduced substantially.� Even the purchase of one lakh and twenty thousand shares, allowed to be made on 5.3.2001at the behest of the sub broker for the reason of the reported commitment made earlier was through, without any default.�� In this context it is noted that in the statement recorded on 11.5.2001 by the Investigation Officer,� under section 11(3) of the Act, Shri Shah� on oath had stated that �by the end of February 2001, upon enquiry with Shri Sanjay C. Shah about the client in Amara Raja Batteries Ltd, we were informed that one Shri Shailesh Bajaj was trading in the scrip.� We told our Sub broker that it is not safe to trade with Shri Bajaj as he has already been declared defaulter for his trading in Sesa Goa by BSE and asked them to reduce/square off the position.� On the morning on March 5, 2001, I reduced my purchase limit of his terminal to 5000 shares for the day and also informed Shri Shishir Khandwala that I do not want to deal in this share any more.� Thereafter Shri Sanjay Shah spoke to me over the phone and requested to increase the limit for the day as he had already committed his client.�� It is also� on record that Shri Shah subsequently corrected the name of the client to Shri Harinarayan Bajaj instead of Shri Shailesh Bajaj, referred to in his statement through an affidavit.� In the said context Shri Desai�s� argument that the Appellants direction to the Sub broker was with reference to Shri Shailesh Bajaj and not with Shri Harinarayan Bajaj is difficult to accept.� In fact there is no such inference in the enquiry report or in the impugned order.� It is also noted that out of the 1,20,000 shares purchased on 5.3.2001, 50,000 shares were sold on 7.3.2001 and 40,000 shares� sold on 9.3.2001 and the remaining� 30,000 shares were carried forward� to the next Settlement and was squared off.� The Respondents� contention that as a result of allowing huge exposure to the Sub broker the Appellant had to take delivery of 21,700 shares is factually incorrect.� In fact 21,700 shares are the shares given in delivery by the Appellant during the entire transaction and not delivery taken by the Appellant.� It is to be noted that giving deliviery of shares and taking delivery of shares are entirely different.� The Respondent had viewed that the broker had taken delivery of 21,700 shares which was the result of giving high exposure to the Sub broker.� It also appears that 30,000 shares carried forward from A-50 squared off in the following Settlement, has not been noted by the Respondent. ����������� According to the Respondent� the �Appellant had given high exposure to Shri Bajaj and� that there was no convincing defense from the Appellant that how it had given such a high exposure to Shri Bajaj�.� But it is� noted that� the Respondent itself had admitted that �there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudent risk management norms of the Stock broker within the framework of law�.� The Respondent has not prescribed any yardstick in regard to the nature of prudence to be exercised by a Stock broker.� It is left to an extent to the judgment of the Stock broker.� It is not the Respondents case that the Appellant allowed its Sub broker to do trading without securing sufficient margin and thereby exposed to risk.� It is on record that the Appellant had collected from the Sub broker margin in the range of Rs.35 lakhs to 80 lakhs and there was no default at any point of time on the part of the Sub broker in meeting their obligations.� The Appellant has gone on record that �the clean past track record of our said Sub brokers has not created any doubts in our mind for probability of any irregularity in respect of these trades by our said Sub brokers.� In spite of these facts, the said Sub brokers have been always regular and within the required limits of margin payments, deliveries etc.� On an analysis of the trading data available in the order, it is seen that the Appellant�s assessment had not gone wrong, when it was trading with the said sub broker, as the Appellant had not suffered any loss.�� In my view the Respondent�s view that the Appellant had given huge exposure to its Sub broker and that is indicative of the failure on the part of the Appellant to exercise due skill and care is unsupported with� evidence. The Respondent seems to have gone by certain obsolute trading figures without correlating the same with the actual quantum of the total� trade in the scrip carried out in the market and ignoring the evaluation of the financial capacity of the Sub broker made by the Appellant and the risk contaianing� measures followed by the Appellant i.e.� collecting sufficient margin before allowing� trading by the Sub broker. It is clear that the risk management was left to the prudence of the Appellant and the Appellant adopted such� measure which it considered necessary.� According to the Appellant it had to cover the risk by collecting adequate margins and accordingly it collected margins and allowed the Sub broker to trade within the permissible volumes vis-�-vis margin� collected.� Infact the enquiry officer in the context of the Appellant�s conduct� with reference to the trading transactions� has observed that �what Shri Shah did was a normal transaction through his Sub broker�.� It is true,� as Shri Desai pointed out, that the said observation was made by the enquiry officer while dealing with the charge of violation of regulation 4 of the FUTP Regulations.� But, the observation has a� bearing on the other charges also as the conclusion is with reference to broking transaction made through the Sub broker.� In this context the following finding recorded by the enquiry officer is also considered relevant, that �Shri Shah had entered into an agreement with Sub broker in the prescribed format.� As per the same, the registered Sub broker has to take the individual client registration form and enter into an agreement with the client.� Further, the Sub broker is also responsible for scrip level and client level position monitoring.� Therefore the main broker is not normally aware of the identity of the ultimate client.� In this case there was no evidence that Shri Shah was aware that the trades executed by Khandwala shah and Associates was for Shri Harinarayan Bajaj and his family.� It is noted that he has not dealt with Shri Bajaj in the past.� However, as mentioned above, the quantity traded by his Sub broker was huge and the member should have cautioned his Sub broker not to take such huge exposure.� Further, Shri Shah had admitted that in his sworn� statement during the investigation that he came to know in the last week of February, 2001, Shri Harinarayan Bajaj was trading in the scrip of ARBL (Enquiry Officer has rightly understood that this reference is to Shri Harinarayan Bajaj and not to Shri Shailesh Bajaj).� But Shri Shah had executed huge quantity of shares even after knowing the above, which shows that he had not exercised care in his dealings with the Sub brokers.� The enquiry officer, has viewed that the Sub broker had traded in huge quantity.� In the absence of any specific guidelines on the quantum of trade to be carried out through the Sub broker, the Appellant can not be balmed for allowing the Sub broker to trade within certaian limits, which the Appellant had considered safe.� It is to be noted that the Resp ondent had admitted that it has not fixed any trading limit and the trading limit was left to the broker. In my view there is not enough� supporting evidence in the order� to hold that the Appellant had failed to exercise due skill and care in its dealings in the scrip of ARBL for Shri Bajaj.� The order passed by the Respondent on 29.6.2002 against the Sub broker, relied on by the Respondent�s Counsel, is of no use to the Respondent to support its case as there is nothing to show therein that the Appellant had failed to exercise due skill and care.� I do not consider it necessary to go into the stand taken by the Respondent regarding imposition of penalty� in the case of Seshank Securities and SMK Shares and Stockbrokers,� as the charges against the Appellant has not been established warranting� imposition of penalty, and in that context considering the nature of the penalty and its reasonableness does not arise. Shri Kumar Desai�s submission that the Appellant had admitted the failure of its Sub broker and therefore penalty is justified is not acceptable.� The charge against the Appellant in the order is that it had allowed the Sub broker to do trading in huge quantities of ARBL shares. It is pointedly� directed to the Appellant�s failure and therefore Shri Desai�s argument in this regard is not of relevance to the issue under consideration. In the light of the facts and circumstances of the case discussed above, I am not inclined to agree with the conclusion arrived at by the Respondent that the Appellant had failed to comply with the requirements of regulation 7 read with clause A(2) in Schedule II of the Stock Brokers Regulations so as to warrant imposition of penalty of� suspension of the certificate of registration. Therefore the order cannot be sustained. Appeal allowed. ����������������������������������������������������������������������� (C. ACHUTHAN) ����������������������������������������������������������� ������� PRESIDING OFFICER Place: Mumbai Date: April�
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