BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Order Reserved On: 07.08.2019 Date of Decision : 06.11.2019 Misc. Application No. 179 of 2017 And Appeal No. 127 of 2017 SIC Stocks & Services Pvt. Ltd. 501, Prestige Meridian II, 29/ 30, M G Road, Bangalore560 001 …Appellant Versus Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai400 051 …Respondent Mr. Prakash Shah, Advocate with Mr. Chinmay Paradkar, Advocate and Mr. Meit Shah, Authorised Representative i/b Prakash Shah & Associates for the Appellant. Mr. Kumar Desai, Advocate with Mr. Kaushal Parsekar, Advocate i/b Legasis Partners for the Respondent. CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M. T. Joshi, Judicial Member Per: Justice M. T. Joshi

1. The Whole Time Member (“WTM” for convenience) of

the Securities and Exchange Board of India (“SEBI” for convenience) vide impugned order dated April 28, 2017 has directed for suspension of certificate of registration of the appellant as a stock broker for a period of three months for violation of the provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 read with regulations 3, 4(1), 4(2)(a), (e) and (g) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market) Regulations, 2003 (“PFUTP Regulations” for convenience) and regulation 7 read with Clauses A and B(2) of Schedule II (Code of Conduct for Stock Brokers) of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (“Stock Brokers Regulations” for convenience).

2. From the impugned order it appears that, SEBI had

conducted investigation into the suspected fraudulent tradings in the shares of Gangotri Textiles Limited (“Gangotri” for convenience) during the period from April 07, 2006 to May 31,

2006. Some of the transactions were entered into by

Mr. Purshottam Khandelwal, the client who traded through the present appellant. The investigation found that the said Purshottam Khandelwal as a part of group termed as Vishvas Group by the respondent SEBI, had executed synchronized trades, circular trades and reversal trades amongst themselves and traded in significant variation to the Last Traded Price (“LTP” for convenience) in order to manipulate price of the same. The investigation shows that while pre-investigation period the price of Gangotri was between ` 52.25 to ` 40.55, during the above investigation period it arose to ` 70.95 on BSE platform and ` 71.05 on NSE platform. The average daily volume also increased to phenomenal extent during the said period. Various proceedings were initiated against the members of Vishvas Group as well as their traders. So far as Purshottam Khandelwal is concerned, who has traded through the present applicant, SEBI had already found that he had engaged in the fraudulent trade and therefore a prohibitory order was already passed by respondent SEBI. The present proceeding was lodged to make inquiry into the acts of the present appellant for violation as quoted above.

3. The investigation had revealed that Purshottam

Khandelwal had traded in largest quantity compared to other members of the group. In paragraph number 9.3 of the impugned order, the details of the trades of Purshottam Khandelwal are given. It would show that Purshottam Khandelwal had indulged in 133 synchronized trades, 138 circular trades within the Vishvas Group. It was found that in price manipulation Purshottam Khandelwal was highest and significant contributor to both positive LTP and negative LTP. So far as the present appellant is concerned, the allegation is that it has allowed these fraudulent trades in the above manner. It was found that on May 02, 05, 10 and 12 of 2016 there were 8,7,13 and 9 synchronized trades respectively executed through the appellant by Purshottam Khandelwal. Similarly, 711 self trades in 65,025 shares were also executed through the present appellant. Price manipulation was also evident in this trade. It was therefore held that the present appellant is also liable for allowing these manipulative trades. Additionally, it was found that the appellant has shown the bank account of Purshottam Khandelwal as Punjab National Bank (PNB), Tonk Road Branch with Account No.

4064000100084502. However, the ledger account of

Purshottam Khandelwal did not reveal any transactions from the said bank account. The enquiry with the PNB revealed that the aforesaid account was opened by Purshottam Khandelwal on July 13, 2006 and the same was not operative at the relevant period i.e. on March 31, 2006.

4. Another violation was found that while the contract notes

are to be issued to the client according to the regulations within 24 hours of a trade, the appellant had not delivered the contract notes to Purshottam Khandelwal within the same period. Therefore, on these three grounds the impugned order was passed.

5. Shri Prakash Shah, learned counsel for the appellant took

us through the reply of the appellant to the show cause notice, the copies of the various judgements delivered by WTM in this regard against other members of alleged group, trading in the Gangotri. He submitted that since the new Bank account of Purshottam Khandelwal was opened the same was entered into old account but the old Know Your Customer/Client (KYC) continued as on date of account opening. When the information during the inspection was sought by SEBI, after 5 to 6 years of the incident, copy of the new KYC was provided. The copy of the old KYC was kept in godown however the same could not be traced. Therefore, for the clerical mistake as detailed above the appellant came to be punished. As regard the contract notes, he submitted that on demand of the client-Purshottam Khandelwal a consolidated statement of contract notes for the period was issued. The same cannot be termed as a serious offence. He further relied on certain other orders of WTM for seeking lesser penalty in the alternative.

6. On the other hand, learned counsel for the respondent

Shri Kumar Desai, SEBI submitted that the appellant was not slapped with the penalty merely for above two derelictions but also for allowing Purshottam Khandelwal to indulge in fraudulent trades as detailed above. He highlighted the observation of WTM to show that the fraudulent activities could not have gone un-noticed by the appellant, since there were large number of circular trades and even self trades by Purshottam Khandelwal within a short period of time. He, therefore, submitted that no interference is warranted in the impugned order.

7. Upon hearing both the sides, in our opinion the trades

executed by Purshottam Khandelwal during the short period to such a large extent could not have gone un-noticed by the present appellant. Large number of self trades i.e. 711 in 65,025 shares are rightly been held as abnormally large by WTM. It was further highlighted by WTM that within the 24 days large number of synchronized trades as detailed above were entered into by Purshottam Khandelwal through the appellant.

8. In paragraph number 19 of the impugned order the WTM

has observed that the present case goes beyond the realm of lack of due diligence, and quite clearly is an instance of aiding the commission of fraudulent and manipulative trades. Considering the nature of the transactions, we agree with the said observations.

9. In rejoinder, Shri Shah relied on the ratio of Securities

and Exchange Board of India vs. Rakhi Trading Private Ltd. (2018 (2) Scale 156) and Securities and Exchange Board of India vs. Bhavesh Pabari (2019 (4) Scale 58), wherein for want of material, traders were absolved. However, in the present case, sufficient material is available. The order of the WTM for these facts therefore needs no interference. As regard the penalty, we find that a different yardstick is adopted by the WTM in this regard. At “Exhibit-L” page 401 of the Memorandum of the Appeal we have the order of the WTM dated April 13, 2017 in respect of ISF Securities Limited (“ISF”) in the same issue of trading in the share of Gangotri. The broker therein was found to have executed proprietary trades in the scrip of Gangotri both in BSE and NSE in fraudulent manner. In paragraph number 18 of the order the WTM has concluded that the said trader i.e. ISF is liable for having indulged in manipulative, deceptive and fraudulent transactions in the securities market. In the said case the designated authority in its report had recommended for suspension of the license of the said entity. In paragraph number 20 of the said order the WTM observed that the proceedings were commenced eight years after the violation and the entity was under a different management at the time of the violation. Therefore, the recommendation of suspension of certificate was not accepted and instead the WTM directed that the said entity would be prohibited from accepting any fresh clients for a period of six months. As regards the Mefcom Securities Limited (Mefcom) (order dated May 05, 2017 “Exhibit-M”), another trader involved in the same violation, designated authority had recommended suspension of certificate of registration as a stock broker for a period of four months. WTM however, noted that the period of ten years had elapsed from the date of violation and though the large number of transactions in question were carried out by trader Mefcom, it was directed that said entity shall be prohibited from the accepting fresh clients, for a period of four months from the date of the order.

10. In the present case, there are no allegations that the

appellant had indulged in proprietary trades. What is alleged is that the entity was grossly negligent and allowed fraudulent transactions to be carried out by Purshottam Khandelwal and two other violations already noted above. Considering all these facts, in our view, the order of the WTM of SEBI directing the suspension of the license of the appellant for a period of three months needs to be set aside and in its place it is hereby directed that the appellant shall not accept any fresh clients for a period of six months from the date of this order.

11. The appeal accordingly stands partly allowed in terms of

above paragraphs. Consequently, Misc. Application No. 179 of 2017 seeking stay has become infructuous and the same is also disposed of. No orders on costs. Sd/- Justice Tarun Agarwala Presiding Officer Sd/- Dr. C.K.G. Nair Member Sd/- Justice M. T. Joshi Judicial Member 06.11.2019 Prepared & Compared By: PK