BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI

Appeal No.108 of 2012

Date of Decision: 12.11.2012

M/s. Prashant J. Patel
21-28, Gokul Arcade, S.N. Road,
Vile Parle (East), Mumbai – 400 057.

         …… Appell   

Versus

Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.

         …… R   

Mr. P.N. Modi, Advocate with Mr. Anant Upadhyay and Mr. Ranjit Bhonsale, Advocates
for the Appellant.

Dr. (Mrs.) Poornima Advani, Advocate with Ms. Rachita Romani, Advocate for the
Respondent.

CORAM : P. K. Malhotra, Member & Presiding Officer ( Offg.)
S.S.N. Moorthy, Member

Per : S.S.N. Moorthy

The appellant is a stock broker carrying on business on the National Stock

Exchange of India Limited (NSE) and is also registered with the Securities and Exchange

Board of India (the Board). In the present appeal, the appellant challenges an order

passed by the whole time member of the Board acting under section 19 of the Securities

and Exchange Board of India Act, 1992 by which the certificate of registration of the

appellant was suspended for a period of one week. The appellant was found to have

contravened the provisions of section 4 of the Securities and Exchange Board of India

(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)

Regulations, 1995 (FUTP Regulations) and clauses A(1) and (4) of the code of conduct

prescribed for stock brokers as specified in Schedule II read with regulation 7 of the

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Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations,

1992 (Brokers Regulations).

2. The Board conducted investigation in the dealings in the scrip of M/s. Roofit

Industries Limited (the company) for the period November 8, 2000 to February 6, 2001

and February 7, 2001 to May 8, 2001. The investigation revealed that certain entities

that were connected among themselves and to the promoters/directors of the company

traded in the shares of the company through a set of stock brokers by entering into

structured/synchronized deals with each other. It was noticed that the appellant was one

of the stock brokers in the network. The Board initiated proceedings against the

appellant for violation of regulation 4 of the FUTP Regulations since the structured deals

among the brokers was found to be manipulative in nature. An enquiry was conducted

by the designated authority and a report was filed on June 30, 2009. One, Mr. Deven

Mehta, director of one of the group companies, Amgis Holdings Pvt. Limited (Amgis),

acted as a kingpin for the operations among the group companies and the brokers and the

shares of the company were sold in spot transactions through synchronized/matched

trades to the promoters/promoter related entities. In turn, the promoters/promoter related

entities got back their shares and the cycle of such transactions continued through various

settlements. The appellant was found to have executed synchronized trades with another

stock broker Amgis and such trades were preplanned and entered with prior

understanding among the brokers. After examining the report of the designated

authority, a show cause notice was issued to the appellant on July 2, 2009. In between,

the appellant went in for consent proceedings which were rejected. Immediately

thereafter, the appellant filed reply to the show cause notice which was followed by a

personal hearing by the whole time member. After due consideration of the explanation

offered by the appellant and the submissions made in defense of his stand, the whole

time member passed the impugned order. The appellant challenges the above order

before us.

3. We have heard Shri P.N. Modi, learned counsel for the appellant and Dr. (Mrs.)

Poornima Advani, learned counsel for the respondent Board.

4. Accordinto appelllearned the trades were executed on the

instructions of the client and there was no proprietary trades of the appellant. The trades

3

got matched on account of the trading mechanism of the stock exchange and the

appellant had no manipulative intent. The shares were sold as per directions of the client

and as a broker, the appellant did not question the wisdom of the clients and so there was

no chance to foresee any instance of manipulation. All the sale transactions were

executed at the market rate and the appellant had not deliberately entered into any

transaction to create artificial volumes in the scrip. It is the stand of the appellant that the

clients were related to each other and they were placing contra orders through counter

party brokers without the knowledge of the appellant. Since shares were delivered

upfront there was no case to suspect the intention of the clients. The trades might have

been structured when viewed in hindsight but at the relevant time there was no material

to suspect the transactions. The ant’s es stated be nimin ,

namely, 18 trades, consisting of 11 orders and no action was taken against the clients

involin transacti appelllearncounsel y gued th

appellant, a broker, cannot be hauled up for structured deals when the corresponding

clients have been exonerated. A reference is made to the order no.WTM/PS/37/IVD/ID-

04/FEB/10 dated February 1, 2010 of the whole time member of the Board in the matter

of Sunearth Ceramics Ltd. wherein identical facts and same enquiry report are

considered.

5. Learned counsel appearing for the Board drew our attention to the order of this

Tribunal in the case of Amgis Holdings Private Limited, [Appeal no.114 of 2007 decided

on 27.12.2010] and submitted that the facts of the present case are in pari materia with

the facts in the above decision of the Tribunal and so the order of the whole time member

does not call for any interference. It is an admitted fact that the shares got matched in the

trades with Amgis. When the action taken against Amgis has been sustained, it should

be held so in the case of the appellant too. According to the learned counsel for the

Board, number of shares transacted, duration of trades, relationship of the parties and the

circulation of the shares within the group remain undisputed. The scrip in question is

illiquid and Deven Mehta and the companies in the promoter group wanted to raise funds

through the impugned transactions. The group of brokers, the appellant being one of

them, came handy in circulating the shares among the group entities in a structured

fashion so as to satisfy the requirement of funds of the entities involved therein. Large

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transaction of shares in an illiquid scrip among connected entities generated the suspicion

of the Board and the analysis of the trades revealed synchronization and resultant

manipulation of shares. It is emphasized that the manipulative activities of a few brokers

is proved beyond doubt in the impugned transactions and so action taken against them

cannot be faulted.

6. We have considered the rival submissions. The whole time member, after

considering the enquiry report and the recommendations of the designated authority,

concluded that suspension of the certificate of registration for a period of one week is

called for in this case. On a perusal of the records we find that there was matching

between the orders placed by the appellant and the counter party, namely, Amgis. The

repetition of such orders naturally lends credence to the theory of synchronization. In the

present case, the appellant placed 11 orders relating to 18 trades consisting of 3,53,175

shares. The same number of trades was the subject matter of consideration in the case of

Amgis as well. The contention of the appellant that he was acting merely as per the

dictates of the clients and he could not suspect the intention of the clients cannot be

accepted in the background of the fact that substantially large transactions took place in

an illiquid scrip within a short interval of time (less than 30 seconds) among connected

entities. The analysis of the trades establishes the fact that there was matching of trades

with Amgis and the shares remained within the group entities as a result of the calculated

efforts of a group of brokers. Admittedly, the appellant was one among them. The

ultimate object of the manipulative transactions was to artificially jack up the value of

the shares and move the same within the connected group so as to benefit Deven Mehta

and the connected companies.

7. The transactions involved in this case have been considered in detail by this

Tribunal in the order of Amgis mentioned supra.

“ If the broker knows at the time of executing the trade what the client was
up to, then obviously he is party to the mischief. Since the trading system
maintains complete anonymity, brokers, as in the present case, plead that
they were ignorant about the counter party or his broker at the time of
executing the trade. In such a situation one has to look to the trading pattern
and if the trades match too often or if the matching of the trades is noticed
day after day and trade after trade, one can infer that the matching was done
not by the system but by manipulating the same. In the absence of prior
meeting of minds and knowing the mechanism of the trading system,
matching trades as aforesaid cannot be too frequent an occurrence and can
lead to only one conclusion that the trades had been manipulated by

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misusing the system. Normally, no direct evidence would be available to
find out whether a broker was aware of the matching trades. The intention
of the parties and the brokers will have to be gathered from the surrounding
circumstances looking at the trading pattern, the frequency of trades and
other related circumstances.
………………………………..

It is not in dispute that the aforesaid five clients of the appellant were in
need of funds and they were introduced by the appellant to counter party
brokers namely, Goldcrest, Patel and some others for the purpose. Having
raised funds from Goldcrest and Patel by executing spot transactions, the
clients used those funds and purchased shares of the company through the
appellant and the selling brokers were again Goldcrest and Patel. This
cannot be a mere coincidence unless it was so planned. ”

8. Since the impugned transactions have been considered in the order of this

Tribunal in the case of Amgis mentioned above we do not consider it necessary to refer

to the order of the whole time member in the matter of Sunearth mentioned above even

though the facts are stated to be similar in nature.

9. We, therefore, uphold the finding of the whole time member that the appellant is

guilty of violating regulation 4 of the FUTP Regulations and Stock Brokers Regulations.

10. Another radvanbthappelllecounsel delay in

finaliatiof in s ing the ant’s counsel

there has been inordinate delay in the finalization of proceedings which has affected the

appellant prejudicially. It is submitted that the transactions related to 2001. The enquiry

proceedings started in 2005 and notice was given to the appellant on August 9, 2005

outlng discrepy the ansactiancallfor appant’s acti

thereto. Replies were filed in March 2006. An enquiry report by the designated

authority was finalized and submitted on June 30, 2009. A show cause notice

incorporating the enquiry report was issued on July 2, 2009. Immediately the appellant

filed an application for consent proceedings. When the application for consent

proceedings was rejected, the appellant furnished replies to the show cause notice.

Written submissions were finally filed on January 17, 2012. The impugned order was

passed on April 24, 2012. With a reference to the interval between the period of

investigation and the period of issue of show cause notice, it is submitted that there has

been inordinate delay and on this ground the order of the whole time member deserves to

be vacated. A reference was made to the decision of this Tribunal in the case of

Subhkam Securities Private Limited vs. Securities and Exchange Board of India, [Appeal

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no.73 of 2012 decided on July 25, 2012] and Ms. Aditi Dalal vs. Securities and Exchange

Board of India, [Appeal no.143 of 2011 decided on November 28, 2011].

11. The learned counsel for the respondent Board defended the order of the whole

time member observing that the appellant took considerable time to file replies to the

show cause notice.

12. We have considered the contentions of the parties. Admittedly, there is no

convincing explanation for the delay in finalization of proceedings in the present case.

Even if the period covered in the conclusion of consent proceedings is given due

consideration, the finalization has taken a considerably long period of time which has

caused prejudice to the appellant in the form of uncertainty. It remains to be explained

why the enquiry proceedings relating to transactions which took place in 2001 were

commenced only in 2005. Moreover, the completion of enquiry proceedings and

submission of report thereon dragged on till 2009. It is an admitted fact that delay denies

justice. If a person has committed a wrong and it has an impact on the securities market

immediate action is called for to prevent the involvement of the said person in the

market. A mere suspension of the certificate of registration in 2012 for a wrong doing

committed in 2001 may not set an exemplary market regulation. Even though there is no

statutory time limit for finalization of proceedings as per the Act, it is incumbent upon

the competent authority to finalise the proceedings within a reasonable time in the

interest of justice and fair play. This Tribunal has held in the case of Subhkam Securities

Private Limited, mentioned supra, that enquiry proceeding against market manipulators

require to be completed expeditiously.

“dy conng ries inpunisthe nque
not only permits market manipulator to operate in the market, it also has
demoralizing effect on the mark et yewho ultatel‘not d
guily’ damoclessword inquiy hg them yers
together from the date of starting investigation by the Board to the date of
completion of inquiry proceedings. Precisely for this reason, regulation
28(2) of the intermediary regulations also provides that the designated
member should pass appropriate order after considering reply as
expeditiously as possible and endeavour shall be made to pass order within
one hundred and twenty days from the date of receipt of reply of the notice
or hearing. A market player has a right that if proceedings are initiated
against him by the Board for violation of any rules and regulations, the
proceedings against him, are also concluded expeditiously and he is not
made to undergo mental agony when these are unnecessarily prolonged
without any fault on his part in delaying the proceedings. ”

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13. An identical situation arose in the case of Mrs. Aditi Dalal mentioned above. The

alleged transactions related to 1999-2000 and an order came to be passed in 2011.

Interestingly, in the case of Aditi Dalal also there was investigation related to Roofit

Industries Limited, the company referred to in the present case.

14. We have held hereinabove that the finding of the whole time member with regard

to the wrong doing of the appellant is upheld. However, considering the significant

mitigating factor of delay in finalisation of proceedings, we find that suspension of

certificate of registration of the appellant belatedly for a period of one week is not

justifiable. Considering the facts on record, we are of the view that a warning to the

appellant to be cautious in future would meet the ends of justice. The order of the whole

time member is modified to the extent mentioned above.

The appeal is disposed of as above. No costs.

                             Sd/-  
                      P.K. Malhotra  
                   Member &  
  Presiding Officer ( Off g.)  





                      Sd/-  

S.S.N. Moorthy
Member

12.11.2012
Prepared and compared by
RHN