Integrated Master Securities Private ... vs Sebi

Date of Decision : 06.06.2017

Appeal No. 131 of 2017

Integrated Master Securities Private Limited 303, 3rd Floor, New Delhi House, 27, Barakhamba Road, New Delhi - 110 001. .....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. J.J. Bhatt, Senior Advocate with Mr. Saurabh Bachhawat, Mr. Amit B. Dey and Ms. Nirali Mehta, Advocates i/b Mindspright Legal for the Appellant.

Mr. J.P. Cama, Senior Advocate with Mr. Shantanu Mitra and Mr. Anubhav Ghosh, Advocates i/b Desai and Diwanji for the Respondent.

CORAM : Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per : Dr. C.K.G. Nair, Member (Oral)

1.

The appellant is aggrieved by the impugned order dated May 15,

2017 passed by the Whole Time Member ('WTM' for short) of Securities

and Exchange Board of India ('SEBI' for short). By the said order the

appellant, as a stock broker, has been prohibited from accepting fresh clients

for a period of two months from the date of the order. 2

2. Facts relevant to the matter are the following:-

(a) The appellant is a private limited company incorporated under

the Companies Act, 1956 and has been functioning as a stock

broker since 1993.

(b) SEBI conducted an investigation relating to buying, selling

and dealing in the shares of Gangotri Textiles Limited

('Gangotri' for short) during April 07, 2006 to May 31, 2006.

Based on the price / volume movement in the scrip of

Gangotri, it was observed that a group of related entities

namely 'Vishvas Group' was actively involved in voluminous

trading of the scrip of Gangotri, which impacted its price.

Accordingly, a Designated Authority was appointed by SEBI

on November 8, 2013 who submitted the Investigation Report

on July 31, 2014. In the investigation report, inter alia, it was

observed that two clients of the appellant, namely, Cosmo

Corporate Services Limited ('Cosmo' for short) and Master

Finlease Limited ('Master' for short) traded in the scrip of

Gangotri in substantive volumes in Bombay Stock Exchange

('BSE for short) and National Stock Exchange of India Ltd.

('NSE' for short) through the appellant as a broker. This

violated SEBI (Prohibition of Fraudulent and Unfair trade

Practices relating to Securities Market) Regulations, 2003

('PFUTP Regulations' for short) and provisions relating to the

Code of Conduct for Stock Brokers under SEBI (Stock-

Brokers and Sub-Brokers) Regulations, 1992.

3

(c) The impugned order has held that evidence relating to the

appellant as a stock broker of Cosmo and Master as an active

party to market manipulation by the Vishvas Group has not

been adequate. In fact, para 21 of the impugned order

categorically states that the appellant does not appear to be

part of the group indulging in manipulative transactions in

connivance with its clients. The impugned order also stated

that the delay in the proceedings may have caused prejudice to

the appellant since the violations pertain to the year 2006 and

show cause notice was issued only in 2014. However, relying

on the order of the Hon'ble Supreme Court in the case of

Securities and Exchange Board of India vs Kishore R. Ajmera

reported in 2016 SCC OnLine SC 179, the impugned order has

held that the substantive volumes of transactions for its clients

executed by the appellant should have alerted the appellant as

a broker. Failure of which is tantamount to negligence and

therefore violative of the Code of Conduct. Thus, though the

impugned order exonerates the appellant from violation of the

provisions of PFUTP Regulations, it is held that the appellant

has violated the provisions of the Code of Conduct as given in

Schedule-II of the SEBI (Stock-Brokers and Sub-Brokers)

Regulations, 1992 and therefore prohibited the appellant from

admitting fresh clients for a period of two months from the

date of the impugned order.

3. Shri J.J. Bhatt, Senior Counsel for the appellant argued that the

appellant is not part of the so-called Vishvas Group; the impugned order has

exonerated the appellant from PFUTP violations; the appellant is not aware

of any cross-connection between his clients and other members of the so- 4

called Vishvas Group; the trade executed by the appellant for his two clients

were not substantial even as percentage of the total trading of the Vishvas

Group (Master contributed 0.73% and 0.39% of shares bought and sold on

BSE, respectively and 0.52% and 0.32% of shares bought and sold on NSE,

respectively. Cosmo contributed 8.57% and 6.80% of shares bought and

sold on BSE, respectively and 10.35% and 13.11% of shares bought and

sold on NSE, respectively). It was further argued that in respect of another

broker in the Vishvas Group, namely, Shri Parasram Holdings Private

Limited ('Parasram Holdings' for short) whose client also traded in similar

range (6.58% to 7.27% of shares bought and sold on BSE), SEBI let off the

broker with only a warning vide its order dated May 16, 2017. Accordingly,

the learned Senior Counsel argued that the appellant is not party to the fraud

nor violated any provisions of PFUTP Regulations and the volume of trade

conducted by his clients is similar to that of the client of other brokers in the

Vishvas Group and as such the punishment is too harsh and

disproportionate. Since May 15, 2017, the date of the impugned order, the

appellant is not admitting / taking up any fresh clients. On a specific

question from the Bench as to whether there is any other punishment on the

appellant prior to or subsequent to the impugned order, it was stated in the

negative by both the counsel.

4. Mr. J.P. Cama, Learned Senior Counsel for the respondent SEBI

stated that the magnitude of the offence in the case of Parasram Holdings

and in respect of the appellant herein are different in terms of the number of

clients, number of synchronized trades executed by the client(s) of both the

brokers, the volume of transactions of the client(s) and the contribution to

price change. These are much higher in the case of the present appellant. It

was further stated that while in the case of Parasram Holdings only a

warning was given, there are other matters belonging to the same Vishvas 5

Group wherein the brokers involved were given serious punishments. In

respect of two matters higher punishments of 4 months and 6 months

prohibition on accepting fresh clients and in one matter 6 months suspension

of certificate of registration were ordered. Accordingly, in the present matter

punishment of 2 months suspension of accepting fresh clients is

proportionate to the offence. It was also argued by counsel for the

respondent that this Tribunal has upheld the order of SEBI whereby both the

clients of the appellant herein, namely, Cosmo and Master were found to be

guilty of circular / synchronized trading and thereby violated the provisions

of PFUTP Regulations.

5. We agree with the findings recorded in the impugned order that there

has been lack of due care and attention on part of the appellant. As a broker

the appellant should have taken due care and diligence while executing the

orders of its clients including possibilities of the clients indulging in

manipulative practices. However, as stated in the impugned order there is no

evidence to show that the appellant himself was party to any of the

manipulative practices and as such has not violated the PFUTP Regulations.

Therefore, the relevant question is what should be the punishment on the

appellant in not discharging his functions with due diligence and care. From

the orders produced on record by both the sides it is clear that varying

punishments had been ordered in respect of similar offences. In some cases

the accused are let off with a warning; in some other cases they are

restrained from accepting fresh clients for a period ranging from one month

to six months and in some extreme cases, particularly, where the brokers

were involved in self trades on proprietary account, suspension of the

license for six months were ordered. We also note that the magnitude of

trade involved in cases where the accused were let off with warning was

rather limited compared to the magnitude of trading in the present matter. 6

It is also an admitted fact that the appellant herein has not been found to

have committed any such violations in all these years. Taking all these

factors into account while upholding the impugned order on merit, we limit

the period of restraint imposed on the appellant in admitting fresh clients to

one month from the date of the impugned order, i.e. upto and including June

14, 2017.

6. Appeal is disposed of in the aforesaid terms with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 06.06.2017 Prepared and compared by:

msb