Monarch Networth Capital ... vs Sebi

DATE : 16.01.2018

Misc. Application No. 79 of 2017 And Appeal No. 72 of 2017

Monarch Networth Capital Ltd. (Formerly known as Monarch Research & Brokerage Pvt. Ltd.) 901/902, 9th Floor, Atlanta Center, Opp. Udhyog Bhavan, Sonawala Road, Goregaon (E), Mumbai 400063. ..... Appellant

Versus

Securities and Exchange Board of India SEBI Bhavan, C-4A, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051 ...... Respondent

Mr. Vinay Chauhan, Advocate with Mr. K. C. Jacob, Ms. Neha Garg, Advocates i/b Corporate Law Chambers India for the Appellant. Mr. Kumar Desai, Advocate with Mr. Pulkit Sukhramani, Ms. Vidhi Jhawar, Advocates i/b The Law Point for the Respondent.

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

Per : Jog Singh, Member (Oral)

1.

The appellant, namely - Monarch Networth Capital Limited, is a

company duly certified by the Securities and Exchange Board of India [for

short 'SEBI'] to act as a Stock Broker on the Bombay Stock Exchange. The

appellant claims to have more than two lakh clients, who deal in various scrips

of several companies through the appellant. It is submitted by the appellant that

it executes thousands of orders on instructions from its clients every day. The 2

appellant neither advises these clients nor does he challenge their wisdom and it

simply transacts on their behalf.

2. The appellant has challenged impugned order dated July 31, 2015 by

which a penalty of Rs. 35 Lac (Rupees Thirty Five Lac only) has been imposed

on it for violating clause A(2) of Code of Conduct for Stock Brokers as

specified under Schedule II read with Regulation 7 of SEBI (Stock Brokers and

Sub Brokers) Regulations, 1992. Vide show cause notice (for short 'SCN')

dated May 15, 2013 it has been alleged by SEBI that the appellant failed to

observe due skill, care and diligence in the matter of trades undertaken for his

clients, namely - Mr. Vijay Vora and his wife Ms. Hina Vora, while transacting

in the shares of M/s. Sky Industries Limited.

3. The case of the respondent is that during the investigation conducted by

SEBI in the scrip of M/s. Sky Industries Limited for the period from January

01, 2009 to May 10, 2010 it was noticed that-

a) Mr. Vijay Vora bought 95,945 shares from his wife Ms. Hina Vora and

sold 59,302 shares of SIL to her.

b) In respect of 47,670 shares the appellant has acted as both broker and

counterparty broker and out of these 6500 shares were synchronized.

c) Some of the aforesaid trades were also executed from the same terminal.

d) Mr. Vijay Vora executed self trades for 18,358 shares wherein the

appellant acted as both broker and counterparty broker for 5,087 shares

and in some instances both buy orders and sell orders were executed

from the same terminal.

4. On the basis of the above said, it is alleged in the SCN dated May 15,

2013 that the appellant failed to exercise due skill, care and diligence in the

conduct of his business. After seeking reply of the appellant on the above SCN

and affording him an opportunity of personal hearing thereafter, it has been 3

held by the Ld. Adjudicating Officer of SEBI in the impugned order dated July

31, 2015 as follows:

"48. In the instant case, I find that Monarch allowed its client to execute fictitious trades through it. Out of 95,945 shares Mr. Vijay Vora bought from his wife Ms. Hina Vora (one side), Monarch acted as both Broker and counter party Broker for 5,902 shares traded between Mr. Vijay Vora and Ms. Hina Vora. Out of 59,302 shares Vijay Vora sold to Ms. Hina Vora during the investigation period, Monarch acted as both Broker and Counterparty Broker for 41,768 shares traded between Mr. Vijay Vora and Hina Vora. Thus, Monarch executed cross deals which accounted for 6% of Vijay Vora's buy and Ms. Hina Vora's sell and 70% of Vijay Vora's sell and Ms. Hina Vora's buy of trades between Ms. Hina Vora and Vijay Vora. Such trades for 47,670 shares between Mr. Vijay Vora and Ms. Hina Vora, wherein the Noticee acted as both Broker and Counterparty Broker, were observed to have been executed on 38 days during the investigation period and involved 86 trades. Further, 6500 shares i.e. 13% out of the total of 47,670 shares, where Monarch acted as a broker and counterparty broker to the trades of Ms. Hina Vora and Mr. Vijay Vora, were synchronized. I note that the Noticee also acted as both Broker and Counterparty broker in respect of self trades for 5,087 shares executed on 23 days, involving 37 trades during the investigation period, out of total self trades for 18,358 shares of Mr. Vijay Vora. Thus, the noticee was the broker and counterparty broker in respect of more than one-fourth of the self trades of Mr. Vijay Vora in SIL Scrip during the investigation period."

5. A penalty of Rs. 35 Lac has, therefore, been considered appropriate by the

Ld. Adjudicating Officer to be imposed on the appellant under Section 15 HB

of the SEBI Act, 1992 for the aforesaid violation.

6. Learned Counsel for the appellant, Shri Vinay Chauhan, submits that Shri

Vijay Vora and Mrs. Hina Vora had been regular clients of the appellant since

2007 with a good track record. They also dealt in other scrips of various other

companies, therefore, no suspicion ever arose in the mind of the appellant in

respect of such self trades. The Learned Counsel further submits that the

appellant had traded on behalf of about 35000 clients during the investigation

period, i.e., 01.01.2009 to 10.05.2010. Even otherwise, Mr. Vijay Vora had

been a regular client and out of total of 6,80,540 shares bought through the

appellant, the shares bought by Mr. Vijay Vora from his wife Ms. Hina Vora

only amounted to 5902 shares. Similarly, out of the total self trades for 18,358 4

shares executed by Mr. Vijay Vora, the appellant has acted as broker and

counterparty broker for only 5087 shares. Keeping in view the large volume of

trades undertaken by Mr. Vijay Vora during the relevant period, the percentage

of self trades is 0.03%, which is very minuscule and not 27% as incorrectly

contended by SEBI. Alternatively, Shri Vinay Chauhan, the Learned Counsel

for the appellant submits that the penalty of Rs. 35 Lacs for such a menial and

insignificant violation is unjustified as the same is disproportionate.

7. Per contra, Shri Kumar Desai, submits that the Ld. Adjudicating Officer

has applied his mind to the facts and circumstances of the case and has

considered imposition of monetary penalty of Rs. 35 Lac as appropriate.

8. Heard Shri Vijay Chauhan, Learned Counsel for the appellant and Shri

Kumar Desai, Learned Counsel for the respondent at length. We have also

perused the pleadings and documents annexed therewith.

9. We have considered the submissions of the parties. It is true that the

applicant has got lakhs of clients and thousands of them trade every day. It is

true that the appellant traded in the scrips of many companies but it is also

equally true that Mr. Vijay Vora and Ms. Hina Vora undertook repeated trades

between January 01, 2009 and May 10, 2010 and, admittedly, dealt in about

5000 shares of M/s. Sky Industries Limited, which amounted to self trades

being totally synchronized between Mr. Vijay Vora and Ms. Hina Vora. Thus,

the charge in question stands established against the appellant in terms of

Clause A(2) of Code of Conduct for Stock Brokers as specified under Schedule

II read with Regulation 7 of SEBI (Stock Brokers and sub Brokers)

Regulations, 1992 which mandates that every broker shall exercise due skill,

care and diligence in the conduct of his business. The appellant has,

undoubtedly, transacted on behalf of Mr. Vijay Vora and out of 13,24,344

shares which were undertaken by the appellant on behalf of Mr. Vijay Vora, 5

5087 shares amounted to self-trades. In fact, such self-trades are very harmful

in the capital market inasmuch as the buyer and seller both are essentially the

same person and there is no change of ownership. This hits at the very

foundation of the capital market, as a result of which the respondent is bound to

deal with such violations strictly.

10. The appellant submits that the turnover of the appellant company from

the impugned trades is small and insignificant in comparison with the massive

turnover of the appellant company in general, and should therefore not lead to

any penalty being imposed upon the appellant company. This argument, in our

opinion, does not hold water because of the simple reason that imposition of

penalty for violating provisions of SEBI Act and any regulations made

thereunder does not relate to the total turnover of the company in any manner.

In synchronized trading, the buy and sell order quantities are identical and are

put through at exactly the same time on the trading platform which hurts the

substratum of the securities market and affects the prices of scrips illegally.

This, in turn, leads to many variables in the securities market being affected

artificially through self trades.

11. In Chander Kanta Bansal Vs. Rajinder Singh Anand [2008 (5) SCC

117] it was held that due diligence means reasonable diligence, it means such

diligence as a prudent man would exercise in the conduct of his own affairs.

Therefore, the stock broker's responsibility of due diligence is such that any

other reasonable person would apply in his/her own affairs. Applying this to the

facts of the present case, it is evident that a reasonable person exercising due

diligence would not have ignored the self trades being conducted by the Voras

right under the appellant's nose. It is the duty of the stock broker under the

Brokers Regulations to constantly monitor the trades executed by the client

through the internet based trading platforms so as to ensure that the trades are

executed in accordance with law and do not disturb the market equilibrium. 6

12. In the case of Madhukar Sheth Vs. Securities and Exchange Board

of India [Appeal No. 46/2002 decided on 18.09.2003] the following was held

in para 24 -

"It is true that a broker cannot act of his own against the instructions of the client. But no one can compel him to be a party to manipulate the market. No doubt the broker is supposed to protect the interest of his client but he is also expected to protect the interest of the securities market in which he operates. It is his duty to ensure not to be a party to any market manipulation and that the market in which he operates is run on a healthy and non manipulative basis."

On a perusal of the abovementioned paragraph it is borne out that even though a

stock broker acts on the instructions of his clients, the former cannot be forced

to act in ways which contributes to the manipulation of the market. In the

present case, therefore, it is clear that acting on the instructions of Shri Vora,

the appellant ought not to have allowed the self trades to occur.

13. In the case of Anita Dalal Vs. SEBI [Appeal No. 211 of 2012 decided

on 3.12.2012], this Tribunal held in para 7 as follows :

"Self trades admittedly are illegal. This Tribunal has held in several cases that self trades call for punitive action since they are illegal in nature."

It follows, therefore, that the act of indulging in self trades is itself a

straightforward violation which calls for a penalty.

14. Having said so, we now turn to the contention of the appellant that the

penalty in question is disproportionate. We have minutely gone through the

SCN and the impugned order. It is true that there is no allegation of any

connivance by the appellant with said Shri Vijay Vora who undertook self

trades with his wife but it is also true that the appellant company, being a stock

broker, is a responsible player in the capital market and must conform to the

norms laid down by the Regulator in his conduct. The appellant has, thus, not 7

been vigilant enough to detect such self trades in about 5000 shares in a span of

less than 40 days. Therefore, the penalty of Rs. 35 Lacs imposed under Section

15HB of SEBI Act as against maximum imposable penalty of Rs. One crore

under the said Section is not disproportionate in the facts and circumstances of

the case. For invoking the doctrine of disproportionality, one has to prove that

the penalty imposed in a particular case is highly disproportionate to the

violation committed by a party in a given case. In the present situation we do

not find any unwarranted penalty being imposed on the appellant. Due diligence

is one of the most important responsibilities of a stock broker and cannot be

taken for granted. This being the position, the impugned order is, therefore,

upheld and the appeal is hereby dismissed, however, with no order as to costs.

15. Accordingly Misc. Application No. 79/2017 also stands disposed of.

Sd/-

Justice J. P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C. K. G. Nair Member 16.01.2018 Prepared & Compared by PTM