Achintya Securities Pvt. Ltd. vs Sebi

Date of Decision: 25.02.2016

Appeal No. 13 of 2016

Guiness Securities Limited Guiness House, 18, Deshapriya Park Road, Kolkata- 700 026 ...Appellant

Versus

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

Mr. Janak Dwarkadas, Senior Advocate with Mr. Joby Mathew, Mr. Deepak Dhane and Mr. Ramesh Goggawat, Advocates for the Appellant.

Mr. J. P. Sen, Senior Advocate with Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

WITH Appeal No. 11 of 2016

Achintya Securities Pvt. Ltd. 7/118-E, First Floor, Swaroop Nagar, Kanpur- 208 002 ...Appellant

Versus

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

Mr. P.N. Modi, Senior Advocate with Mr. Neville Lashkari, Advocate i/b Mr. Prakash Shah, Advocate for the Appellant.

Mr. J. P. Sen, Senior Advocate with Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent. 2

WITH Appeal No. 12 of 2016

Basan Equity Broking Ltd. 3-6-196/197, Prime Plaza, 2nd Floor, Himayat Nagar Road, Above KFC Hyderabad- 500 029 ...Appellant

Versus

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

Mr. Prakash Shah, Advocate for the Appellant.

Mr. J. P. Sen, Senior Advocate with Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

WITH Appeal No. 14 of 2016

Abans Securities Private Limited 36/37/38A, 3rd Floor, 227, Nariman Bhavan, Backbay Reclamation, Nariman Point Mumbai- 400 021 ...Appellant Versus Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051 ...Respondent

Mr. Somasekhar Sundaresan, Advocate with Mr. Joby Mathew, Mr. Deepak Dhane and Mr. Ramesh Goggawat, Advocates for the Appellant.

Mr. J. P. Sen, Senior Advocate with Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

WITH Appeal No. 15 of 2016

R. K. StockHolding Private Limited A-7, Block B1, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi- 110 044 ...Appellant 3

Versus

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

Mrs. Poonam Gadkari, Advocate i/b Juris Matrix Advocates & Solicitors for the Appellant.

Mr. J. P. Sen, Senior Advocate with Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

WITH Appeal No. 16 of 2016

Skung Tradelink Ltd. Shop No. 63/2, 3rd Floor, RN Chambers, The Mall Road, Kanpur, Uttar Pradesh- 208 001 ...Appellant

Versus

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

Mr. Amit Dey, Advocate with Mr. Ankit Lohia, Advocate i/b Mindspright Legal for the Appellant.

Mr. J. P. Sen, Senior Advocate with Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

WITH Appeal No. 17 of 2016

Sunstar Securities 56/33 Site-4, Sahibabad Industrial Area, Ghaziabad, Uttar Pradesh- 201 010 ...Appellant

Versus

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

Mr. Amit Dey, Advocate with Mr. Ankit Lohia, Advocate i/b Mindspright Legal for the Appellant. 4

Mr. J. P. Sen, Senior Advocate with Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

AND Appeal No. 18 of 2016

MSB E-Trade Securities Ltd. C-619, Ground Floor, Saraswati Vihar, Pitampura, Delhi- 110 034 ...Appellant

Versus

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

Mr. Prakash Shah, Advocate for the Appellant.

Mr. J. P. Sen, Senior Advocate with Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Jog Singh, Member

Per: Justice J.P. Devadhar (Oral)

1.

Appellants in all these appeals are aggrieved by the ex-parte ad-

interim order passed by the Whole Time Member ("WTM" for short) of

Securities and Exchange Board of India ("SEBI" for short) on

17.02.2016. By the said order 22 stock brokers including the appellants

herein are restrained with effect from 17.02.2016 from buying, selling or

dealing in the securities market, either directly or indirectly, in any

manner, except as a stock broker for their existing clients in the cash

segment. The said 22 stock brokers including the appellants herein are

also restrained from accepting registration of any new client. Since the

order impugned in all these appeals is a common order, all these appeals 5

are heard together primarily to consider the plea as to whether the

impugned order which is passed ex-parte deserves to be stayed forthwith

or not.

2. Appellants are members of Bombay Stock Exchange Ltd. ("BSE"

for short)/ National Stock Exchange of India ("NSE" for short) and are

duly registered with SEBI as Stock Brokers.

3. Facts relevant for the purpose of these appeals as set out in the

impugned order are as follows:-

a) As a part of ongoing surveillance, SEBI came across

several instances wherein it was noticed that a set of

entities were consistently seen incurring trading loss

by executing reversal trades in options on individual

stocks ('stock options' for convenience) in the Equity

Derivative Segment. Hence, examination of trades in

the stock options segment was carried out for the

period from 01.04.2014 to 31.03.2015.

b) On receipt of examination report, the WTM of SEBI

deemed it fit to pass an ex-parte ad-interim order on

20.08.2015 whereby 59 clients who on account of

reversal trades executed during the period from

01.04.2014 to 31.03.2015 had made loss or profit of

more than ` 5 crore were restrained from buying,

selling or dealing in the securities market, either

directly or indirectly, in any manner, till further 6

directions. In that order it was held that repeated sale

of illiquid stock options by the loss making entities to

a set of entities at a price far lower than the theoretical

price/intrinsic value and subsequent reversal trades

with the same set of entities within a short span of

time with a significant difference in buy and sell value

of stock options, in itself, exhibits abnormal market

behavior and defies economic rationality, especially

when there is absolutely no corresponding change in

the underlying price of the scrip. It was further held

that the acts of the aforesaid 59 loss making entities/

profit making entities prima facie show a scheme,

plan, device and artifice on their part for some ulterior

motive and the said non-genuine and deceptive

transactions are, prima facie covered under the

expression 'fraud'/ 'fraudulent' as defined under the

Securities and Exchange Board of India (Prohibition

of Fraudulent and Unfair Trade Practices relating to

Securities Market) Regulations, 2003 ("PFUTP"

Regulations" for short). Accordingly, pending further

investigation, the said 59 clients who had executed

non-genuine trades were restrained from buying,

selling or dealing in the securities market, either

directly or indirectly, in any manner, till further order. 7

c) After passing the ex-parte ad-interim order against 59

clients on 20.08.2015, SEBI undertook preliminary

examination of the stock brokers through whom the

loss making entities and profit making entities were

executing reversal trades during the period from

01.04.2014 to 30.09.2015.

d) The examination conducted by SEBI revealed (one)

that significant proportion of the turnover done by the

22 stock brokers, (including the appellants herein) is

attributed to the reversal transactions in stock option

segment carried out by them on behalf of their clients

(two) with reference to the total number of trades

executed by the 22 stock brokers for their clients,

there are not many trades which are not part of

reversal trades (three) for majority of the 22 trading

members, the reversal transactions resulted in

consistent trading profit (in terms of number of

instances) for one set of clients and consistent trading

loss (in terms of number of instances) for another set

of clients (four) majority of 22 stock brokers reversed

significant proportion of the trades within minutes of

entering the original trade and the very same trades

resulted in significant profit for one set of entities and

significant loss to another set of entities. (Five) in

majority of instances, the client and the counterparty

orders forming part of reversal trades were entered 8

within few seconds of each other. (Six) the 22 stock

brokers through reversal trades have generated a total

loss to the tune of ` 1272.8 crore and total profit to the

tune of ` 1303.1 crore to their clients.

4. On the basis of aforesaid facts, the WTM of SEBI arrived at a

prima facie conclusion that the 22 stock brokers had connived with their

clients to a scheme or device so as to make loss or profit as desired by

their clients. Since the 22 stock brokers (including the appellants) have,

prima-facie, facilitated their clients to use and employ a pre-meditated

manipulative device or contrivance while dealing in securities market and

indulged in non-genuine and deceptive transactions, it is held by the

WTM of SEBI that the act of these 22 stock brokers is, prima facie

covered by the expression 'fraud'/'fraudulent' as defined under the

PFUTP Regulations and accordingly pending further investigation, the 22

stock brokers (including the appellants) have been restrained from

buying, selling or dealing in the securities market, either directly or

indirectly, in any manner, except as a stock broker for their existing

clients in the cash segment. By the impugned order, the concerned stock

exchanges have been directed to conduct a focussed inspection of the 22

stock brokers, take corrective, if any, action and submit a report to SEBI

within 6 months from 17.02.2016.

5. Mr. Dwarkadas, Mr. Modi learned Senior Advocates,

Mr. Sundaresan, Mr. Ankit Lohia, Mrs. Gadkari and Mr. Prakash Shah

learned Advocates appearing on behalf of their respective clients

submitted that the ex-parte order passed by the WTM of SEBI without 9

giving an opportunity of hearing to the appellants is in gross violation of

the principles of natural justice and has caused grave prejudiced to the

appellants and hence the impugned order must be quashed and set aside.

It is submitted that the clients of the appellants who have executed non-

genuine trades through the appellants have neither been restrained from

buying, selling or dealing in the securities market nor the said trades have

been cancelled. Moreover, the alleged non-genuine trades which are not

disclosed to the appellants even in the impugned order constitute a very

small percentage of the total turnover and, in any event, the said trades do

not establish that the appellants were privy to the alleged non-genuine

trades executed by the clients. Accordingly, it is submitted that the

impugned order be quashed and set aside.

6. Mr. Sen, learned Senior Advocate appearing on behalf of SEBI, on

the other hand, submitted that in view of the findings recorded in para 20

of the impugned order, the prima facie view of the WTM of SEBI that

the 22 stock brokers (including the appellants) have connived with their

clients in executing the non-genuine trades can not be faulted. 22 stock

brokers through their reversal trades have generated a total loss to the

tune of ` 1272.8 crore and total profit to the tune of ` 1303.1 crore to

their clients which prima facie establishes that the 22 stock brokers had

connived with their clients in executing the non-genuine trades.

Accordingly, counsel for SEBI submitted that there is no merit in these

appeals and the appellants are not entitled to any relief in these appeals.

7. We have carefully considered rival submissions. 10

8. At the outset, it may be noted that it is not the case of the

appellants that under section 11(1), 11(4) and 11(B) of SEBI Act, SEBI

can not pass ex-parte ad-interim order. What is contended by the

appellants is that in the facts of present case, the WTM of SEBI is not

justified in passing the ex-parte ad-interim order against the appellants on

17.02.2016.

9. We see merit in the above contentions of the appellants for the

following reasons:-

a) By ex-parte ad-interim order dated 20.08.2015 the

WTM of SEBI had passed restraint order against 59

clients who were found to have executed non-genuine

trades in the stock options segment during the period

from 01.04.2014 to 31.03.2015. The said 59 clients

had traded through 18 stock brokers (including some

of the appellants herein). In the said ex-parte order

dated 20.08.2015, it was held that 59 clients had

devised a fraudulent plan to execute non-genuine

trades and nothing was imputed against the 18 stock

brokers through whom 59 clients had traded.

Accordingly, the said 18 stock brokers (including

some of the appellants herein) carried on trading

activities in accordance with law even after the ex-

parte ad-interim order was passed against the 59

clients on 20.08.2015. Therefore, the WTM of SEBI

having recorded in the order dated 20.08.2015 that 11

only 59 clients had devised a fraudulent plan to

execute non-genuine trades, could not have arrived at

a conclusion that the stock brokers (including some of

the appellants herein) were parties to the fraudulent

transactions merely because large number of reversal

trades were executed by the said clients through the

18 stock brokers (including the appellants).

b) It is interesting to note that all the 18 stock brokers

who had executed trades on behalf of 59 clients are

not restrained by the impugned order dated

17.02.2016. It is only 11 stock brokers out of 18 stock

brokers are sought to be restrained by the impugned

order. Thus, in respect of 7 stock brokers whose

clients by executing reversal trades in the stock

options segment had made profits exceeding ` 5 crore

are permitted to carry on trade without any restraint

order. The Calcutta Stock Exchange Ltd. is one such

stock broker (Trading Member) whose client viz.

Umang Nemani was restrained by ex-parte ad-interim

order dated 20.08.2015. However, the Calcutta Stock

Exchange Ltd. has not been restrained by either of the

orders. In such a case, if SEBI considers that the stock

broker viz. the Calcutta Stock Exchange Ltd. need not

be restrained on account of its client viz. Umang

Nemani making unlawful gains by resorting to non-

genuine trades, then there is no reason to restrain 12

the appellants for the acts of their clients, that too by

passing ex-parte ad-interim order on 17.02.2016.

There is no intelligible criteria employed while

passing the ex-parte ad-interim order on 17.02.2016.

c) Argument of SEBI that by the ex-parte ad-interim

order dated 20.08.2015 only the clients who had made

profits or loss exceeding ` 5 crore under the reversal

trades carried out during the period from 01.04.2014

to 31.03.2015 were considered and the role of stock

brokers has been examined thereafter by enhancing

the examination period from 01.04.2014 till

30.09.2015 is not convincing, because, firstly, as

noted earlier all stock brokers whose 59 clients were

investigated and restrained from entering the

securities market by ex-parte order dated 20.08.2015,

have not been restrained from entering the securities

market by impugned order dated 17.02.2016, even

though the trades executed by those stock brokers on

behalf of their clients resulted in loss or profit

exceeding ` 5 crore.

d) Secondly, as per Table-2 set out in the impugned

order, in all 12584 clients had traded through 22 stock

brokers (including some of the appellants herein)

during the period from 01.04.2014 till 30.09.2015 and

out of 12584 clients, 11228 clients of the 22 stock 13

brokers did reversal trades in the stock options

segment whereby abnormal trading profit has been

caused to one set of clients and abnormal loss has

been caused to another set of clients. If 11228 clients

of 22 stock brokers (including some of the appellants

herein) have indulged in abnormal trades which are

detrimental to the interests of the securities market

then the WTM of SEBI ought to have passed restraint

order against those clients first and then proceed

against the stock brokers to find out as to whether

they were parties to the objectional trades carried out

by the clients. In the present case, we are informed

that investigation against the 11228 clients (of 22

stock brokers) who are supposed to have indulged in

objectional trades are in progress and on completion

of investigation appropriate action would be taken

against those clients. If SEBI finds it difficult to take

action against 11228 clients who are alleged to have

indulged in non-genuine trades without carrying out

further investigation, then, by applying the same yard

stick, SEBI could not have passed ex-parte order

against the stock brokers when the investigation is

still in progress.

e) In the impugned order, the 22 stock brokers (including

the appellants herein) are prima facie found guilty of

colluding with their clients in executing fraudulent 14

trades mainly on the ground that the percentage of

reversal trades carried out by the stock brokers on

behalf of their clients range between 60% to 100%

and in majority of instances, the clients and the

counterparty orders forming part of reversal trades

were entered within few seconds of each other. As

noted earlier, if the WTM of SEBI finds it difficult to

take a prima facie view that the 11228 clients have

indulged in trades which are fraudulent in nature and

accordingly deems it fit not to take any action against

those clients, then, in respect of the very same trades,

the WTM of SEBI could not have formed a contrary

view and proceed to pass ex-parte order against the

stock brokers who have traded on behalf of the

clients.

f) If the prima facie view is that the trades of the 11228

clients were not genuine, then to take action against

22 stock brokers but not against the 11228 clients

amounts to applying double standard i.e. one standard

for the stock brokers and another standard for clients,

which is not proper.

g) Taking a prima facie view, only against the stock

brokers that the trades in question are not genuine

would amounts to promoting execution of non-

genuine trades, because, the said 11228 clients would 15

be emboldened to execute such trades through some

other stock broker which would be detrimental to the

interests of the securities market. Moreover, while

permitting the appellants to trade in the cash segment,

prohibiting the appellants from accepting registration

of any new client is also illogical because, there is no

basis to presume that the new clients would be

indulging in non-genuine trades.

10. For all the aforesaid reasons we find it difficult to sustain the ex-

parte ad-interim order passed by the WTM of SEBI against the

appellants. No doubt that the appeals were heard at the stage of

admission only for grant of interim relief. However, as we are inclined to

grant interim relief, nothing would be left there after in the appeals once

the interim relief is granted. In this view of the matter, we dispose of the

appeals by holding that the WTM of SEBI was not justified in passing

the ex-parte ad-interim order against the appellants on the basis of the

trades, the genuiness of which qua the 11228 clients who had executed

those trades are still under investigation and the WTM of SEBI has

deemed it fit not to take any action against those 11228 clients.

11. In the result, we quash and set aside the impugned ex-parte ad-

interim order dated 17.02.2016 qua the appellants herein.

12. We make it clear that we have not expressed any opinion on the

merits of the case. All contentions on both sides are kept open. 16

13. We make it further clear, that quashing the impugned order qua the

appellants would not come in the way of SEBI to initiate proceedings

against them in accordance with law and pass orders as it deems fit.

14. All the appeals are disposed of in the above terms with no order as

to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member 25.02.2016 Prepared & Compared By: PK