Order against M/S. OHM Stock Broker Private Limited (SEBI Registration No. INB 011057339), In The Matter Of M/S. Colour Chips India Ltd
- Order No.WTM/TCN/55/ID3/08/2007
Ratio decidendi
The rule this decision rests on
A stock broker is not liable under Regulation 4(a), (b) and (c) of the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 1995, or under the Code of Conduct in Schedule II read with Regulation 7 of the Stock Brokers and Sub-brokers Regulations, 1992, where there is no record that it was a party to the manipulation alleged against others, no corroborative evidence of unjust gain to it, and no material showing that it was responsible for the price movement in the scrip. An order placed by a broker's client at a price well below the prevailing market price does not by itself make the broker a party to fraud or establish a breach of the Code of Conduct, where the broker was involved only in two transactions with institutional buyers, could not have been expected to gauge its client's purpose, and did not ensure delivery of the shares in advance and payment by cheque, and no personal benefit accrued to it. Where the broker has obtained the information required of it from its client, has ensured completion of the transaction through delivery and payment, and there is a change in beneficial ownership for consideration, these circumstances are material in finding that it has not violated the regulations, and a recommendation of no penalty by the Enquiry Officer may be accepted as just and equitable and adopted by the adjudicating authority.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
1) M/s Colour Chips India Limited was initially incorporated as M/s. Rusoday Mutual Fund Limited on 19.03.90 and obtained the certificate of commencement of business on 23.03.90. It changed its name to M/s. Rusoday Finance Limited on 04.06.96, M/s. Global Fiscals Limited on 06.06.96 and M/s. Arham Fiscals Limited on 28.04.97. M/s. Arham Fiscals Limited was taken over by a private limited company M/s. Colour Chips Animation Park Limited (CCAPL) and consequently, the name of M/s. Arham Fiscals Limited was changed to M/s. Color Chips India Limited (CCIL) on 05.01.00.
2) The shares of CCIL (erstwhile M/s. Arham Fiscals Limited) were permitted for being listed in the Hyderabad Stock Exchange on 25.08.97, at the Stock Exchange, Mumbai (BSE) on 01.09.97 and at the National Stock Exchange (NSE) ON 03.09.97. Despite being listed in these exchanges since 1997, no substantial trading was witnessed in the scrip post listing. The scrip was traded only at BSE and that too on 20.01.00 for the first time (the day an announcement of open offer was made).
3) The Securities and Exchange Board of India (SEBI) conducted an investigation into the trading in the scrip of CCIL based on the inputs received from the exchanges wherein the scrip was being traded. During the course of investigation, it was found that M/s. Ohm Stock Broker Private Limited (OSBPL), a member of BSE, had placed an order on behalf of its client, M/s. Kruthika Portfolio Ltd. (KPL), in the scrip of CCIL at a price of Rs.50/- per share when the market price of that scrip was above Rs.80/- per share. The orders were placed by one Shri. B. K. Sharma on behalf of KPL, who was found to be a major perpetrator of fraudulent activities in the scrip of CCIL.
4) In view of the nature of transactions entered into by OSBPL for its client, an enquiry was initiated against it for alleged violations of:
? Regulation 4 (a), (b) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and ? Code of Conduct prescribed in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.
ENQUIRY PROCEEDINGS
5) In accordance with the above, an Enquiry Officer was appointed by SEBI vide an order dated 12.04.04. Subsequently, SEBI vide an order dated 28.12.04, appointed another Enquiry Officer to conduct the inquiry in accordance with the provisions of the Act and other relevant regulations made there under.
6) A Show Cause Notice dated 24.06.04, in terms of Regulation 6 of SEBI (Procedure for Holding Inquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, was issued to OSBPL, enclosing a copy of the order appointing the Enquiry Officer, the findings of the investigation and copies of the documents relied upon during the investigation. The said notice stated therein the alleged contravention of provisions of the Code of Conduct for stock brokers as specified in Schedule II read with Regulation 7 of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 and Regulation 4 (a), (b) and (c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995, by OSBPL while dealing in the scrip of CCIL. The notice also mentioned that OSBPL may submit its reply to the Enquiry Officer and also to specify whether it desires to be heard in person before the Enquiry Officer.
7) The said notice was served on OSBPL and the stock broker had submitted its reply on 30.07.04 to the Enquiry Officer.
8) The allegation against OSBPL was that it had placed quotes for sale of two lakh shares at Rs.50/- on behalf of KPL on January 20, 2000, when the quotes displayed on the screen were higher than Rs.50/- and that OSBPL in connivance with Shri. B. K. Sharma, who was linked with the management of CCIL, had acted in an unprofessional manner thereby tried to defraud the common investor. As per the notice, the above said sale of around 2 lakh shares was a synchronized deal executed at the instance of Shri. B. K. Sharma for KPL and two mutual funds, one being Sundaram Mutual Fund (as evident from the statement given by the fund manager of Sundaram MF who had placed a buy order of 1 lakh shares of CCIL as per advise of Shri. B. K. Sharma).
9) The Enquiry Officer has relied on all the submissions made by the parties and the material on hand. Based on the evidence and submissions, the Enquiry Officer came to a conclusion that there is no record to show that OSBPL was a party to the manipulations alleged to have been committed by the directors of CCIL and its associates. It is further observed by the Enquiry Officer that there was no corroborative evidence to show the unjust gains made by OSBPL. The Enquiry Officer has also observed that OSBPL was not responsible for the huge fluctuation in the market price of CCIL and that the transactions were for a consideration and there was change in the beneficial ownership of the shares. Further, OSBPL had obtained the required information from its client, KPL as prescribed. The Enquiry Officer has further observed that there was no material to show that the stock broker has violated the Code of Conduct prescribed for stock brokers.
10) In view of the findings brought out by the Enquiry Officer in his report as above, no penalty has been recommended against OSBPL.
FINDING:
11) I have considered the charges made out by the investigation, the allegations specified in the show cause notice issued to OSBPL, the reply of OSBPL to the said charges/ allegations and findings/ recommendations in the Enquiry Report. The issue to be considered in the instant case is whether OSBPL is guilty of violating provisions 4(a), (b) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 and the provisions of Code of Conduct prescribed for stock brokers as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.
12) The show cause notice mentioned that the stock broker is alleged to have violated Regulations 4(a), (b) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 1995 and Code of Conduct specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.
13) I have been that OSBPL had placed an order at Rs.50/- for two lakh shares for its client KPL through Shri. B. K. Sharma. The shares have been sold to two mutual funds, one being Sundaram Mutual Fund. The only brow raising point about this sale, which otherwise appears normal, is that the order was placed at Rs.50/- when the prevailing market price of the scrip was Rs.80/-. This has led to the allegation of OSBPL being a party to the fraud played by the other entities.
14) I have also seen that the OSBPL has submitted before the Enquiry Officer that it was not possible for it to gauge the reasoning behind such order placed by its client and also to advice its client to push/ tow the price. It is noticed that OSBPL was in picture only for two transactions for a total of two lakh shares, that too, to institutional buyers. This could not have raised any alarm in its mind. OSBPL, in its part, had ensured compliance of the requisite procedures and also the completion of the transaction appropriately by obtaining delivery of the shares to be sold in advance from its client, and making the payment in favour of KPL by cheque. Also, there has been no personal benefit that accrued to OSBPL out of the transactions for its client and no such allegation has also been made against it, to this effect.
15) In view of the aforesaid observations and findings, I feel the recommendation for no penalty made by the Enquiry Officer is just and equitable. Therefore, I do not wish to differ from the recommendations made by the Enquiry Officer.
ORDER
16) In view of the aforesaid findings and conclusions and in exercise of the powers conferred upon me under Section 19 of the SEBI Act, 1992 and Regulation 13(4) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations,
2002, I hereby direct that no penalty be levied against the broker, M/s. Ohm Stock Brokers Pvt. Ltd., Member, the Stock Exchange, Mumbai (SEBI Registration No. INB 011057339) for their dealing in the scrip of M/s. Color Chips India Limited.
Place : Mumbai T C Nair Date : 23.08.2007 Whole Time Member Securities and Exchange Board of India
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