P. J. Chaudhary vs Sebi

Order Reserved On: 20.03.2019 Date of Decision : 26.04.2019

Appeal No. 378 of 2018

P. J. Chaudhary B-1401, 14th Floor, HDIL Metropolis, Near Four Bunglow, J. P. Road, Opp: Gurudwara, Andheri (W), Mumbai- 400 053 ...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, Advocate with Ms. Rinku Valanju, Advocate i/b R.V. Legal for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Abhiraj Arora, Ms. Misbah Dada and Mr. Vivek Shah, Advocates for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M. T. Joshi, Judicial Member

Per: Dr. C.K.G. Nair

1.

This appeal has been filed challenging the order of the

Adjudicating Officer ("AO" for short) of the Securities and

Exchange Board of India ("SEBI" for short) passed on June 01, 2

2018. By the said order a penalty of ` 16 lakh has been

imposed under Section 15HA of the Securities and Exchange

Board of India Act, 1992 ("SEBI Act" for short) and ` 6 lakh

under Section 15HB of the SEBI Act for violation of the

Securities and Exchange Board of India (Prohibition of

Fraudulent and Unfair Trade Practices relating to Securities

Market) Regulations, 2003 ("PFUTP" Regulations" for short)

and the SEBI (Stock Brokers and Sub-Brokers) Regulations,

1992 ("Brokers Regulations" for short).

2. The appellant is a broker having trading rights of BSE

Limited. He stopped his business since April 13, 2011 prior to

which he was doing proprietary trading. SEBI conducted an

investigation into certain alleged irregularities of trading in the

shares of M/s SKS Logistics Limited ("SKS" for short) during

the period June 01, 2004 to October 29, 2004. The investigation

revealed certain irregularities in the form of circular/

synchronized trading by the appellant in connivance with

certain clients and brokers/ sub-brokers and created artificial

volumes in the scrip of SKS. A show cause notice dated

December 15, 2009 was issued directing the appellant to show

cause as to why an inquiry should not be held and penalty not

imposed under Section 15HA and 15HB of the SEBI Act for 3

alleged violation of the provisions of Regulation 4(1), 4(2)(a)

and 4(2)(g) of PFUTP Regulations and Regulation 7 read with

Clauses A(1), A(2), A(3), A(4) and A(5) of Code of Conduct for

stock-brokers specified under Schedule II for the SEBI (Stock

Brokers and Sub-Brokers) Regulations, 1992.

3. Subsequently, after providing personal hearing etc. an

order was passed on August 28, 2014 by which a total penalty

of ` 22 lakh was imposed on the appellant. An appeal was filed

against this order before this Tribunal. Vide order dated March

29, 2016 this Tribunal set aside the order impugned therein and

remanded the matter back to the AO of SEBI for passing afresh

order on merits and in accordance with law. After providing a

fresh opportunity of hearing and considering the matter afresh

the order dated June 01, 2018 impugned in this appeal was

passed by the AO for violating provisions of PFUTP

Regulations and Code of Conduct for stock brokers.

4. The relevant provisions of the PFUTP Regulations, 2003

and Code of Conduct are reproduced as below for convenience.

"PFUTP Regulations

4. Prohibition of manipulative, fraudulent and unfair trade practices 4

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:-

(a) indulging in an act which creates false or misleading appearance of trading in the securities market;

(b) ........

(c) ........

(d) ........

(e) ........

(f) ........

(g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security;"

"CODE OF CONDUCT FOR STOCK BROKERS- Regulation 7

A. General.

(1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business.

(2) Exercise of due skill and care:

A stock-broker shall act with due skill, care and diligence in the conduct of all his business.

(3) Manipulation: A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread 5

rumours with a view to distorting market equilibrium or making personal gains.

(4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investor's interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness."

(5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.

5. The learned counsel Shri J. J. Bhatt appearing on behalf of

the appellant submitted that the AO has not reconsidered the

facts of the matter as directed by this Tribunal, because, the

same amount of penalty of ` 22 lakh has been imposed again;

the fact that the penalty imposed on the clients involved in the

same violation was only ` 1 lakh each has not been considered;

the appellant is only a small, individual broker; the appellant

does not know any of the counter- parties to the trades as

alleged in the impugned order; no proof of any connection has

been provided in the impugned order; the appellant has not in 6

any way violated any regulations or Code of Conduct as alleged

in the impugned order.

6. The learned counsel also relied on the order of this

Tribunal in the matter of Kapil Chatrabhuj Bhuptani V/s

Securities and Exchange Board of India (Appeal No. 95 of

2013 decided on 10.10.2013) wherein it was held that

synchronized trading is itself would not tantamount to any

wrongdoing unless mischievous meeting of minds amongst

certain parties is proved.

7. Shri Gaurav Joshi learned senior counsel appearing for

respondent SEBI submitted that it is a clear case of market

manipulation as is evident from the order. The price of the scrip

of SKS increased from ` 19.9 on August 05, 2004 to ` 39.10 on

August 20, 2004. On 7 out of these 12 trading days the SKS

reached the upper circuit limited. Further from September 20,

2004 the price increased from ` 34.75 to ` 68.40 on October 12,

2004. The daily volumes increased from around 9000 shares

during the first period to around 31000 shares during the second

period. Similarly, the quantity traded in a circular fashion by

the parties involved was in the range of 11% to 71% of the total

quantity traded in the market during September-October 2004. 7

The entire scheme was executed by a group of brokers and

clients and the trading was done in a circular and synchronized

manner. In respect of the appellant the instances of such

circular/ synchronized trading on 6 days is clearly brought out at

pages 8 and 9 of the impugned order. It is through proprietary

trading, not even by clients, that the appellant helped in

manipulation. Further, since as a broker the appellant was

expected to follow the Regulations and Code of Conduct in

letter and spirit a higher penalty is imposed on the appellant viz

a-viz that of the clients in the matter.

8. We find no merit in the submissions of the learned counsel

for the appellant that he had no role in the matter. There is

enough evidence to support the contention in the impugned

order that the appellant was part of the group who manipulated

the market in the scrip of SKS. Timing, synchronization and the

circular nature of his trading is evidenced at pages 8 and 9 of the

impugned order. Manipulation in the scrip to raise the price

from around ` 34.75 to ` 68.40 in a matter of 6 trading days

during September- October 2004 is clear and cannot be

considered as an automatic market movement. However, we

find some merit in his submission that the penalty imposed on

the client involved in the same matter is only ` 1 lakh while that 8

on the appellant under PFUTP Regulations is ` 16 lakhs. This

Tribunal while remanding the earlier appeal filed by the

appellant in P. J. Chaudhary V/s SEBI (Appeal No. 22 of 2015

decided on 29.03.2016) citing the order of this Tribunal in the

matter of Vijay J. Thakkar V/s SEBI (Appeal No. 381 of 2014

decided on February 09, 2016), held that the inordinate delay in

passing the order impugned therein has caused serious prejudice

to the appellant because the said order did not take into

consideration the orders passed on April 13, 2012 in respect of

the clients who indulged in synchronized/ circular trades and

where only an amount of ` 1 lakh each has been imposed as

penalty. Though, the detailed arguments relating to the merit of

each appeal were not heard, prima-facie, it was held that if the

Adjudicating Officer had to impose differential penalty on the

various entities involved in the same violation the reasons for

imposing such differential penalty have to be explicitly stated.

Though, some of the reasons are now forthcoming, we are of the

view that an amount of ` 16 lakh imposed on the appellant is

harsh particularly when a separate penalty of ` 6 lakh is

imposed for violation of the Code of Conduct under the Stock

Brokers Regulations, 1992. At the same time, we cannot accept

the submissions of the appellant that the penalty has to be on par

with that of what was imposed on the clients in the same matter 9

particularly when the appellant in this appeal is a broker who

was doing proprietary trading and while doing so violated the

PFUTP Regulations. The due diligence required from a broker

and that too while doing proprietary trading is that of a much

higher order than that of a client and equating the two for

imposition of penalty even for the same violation, is not

justifiable. However, some degree of parity between the two

needs to be brought in particularly when the alleged charges are

based on similar facts in the same matter. Moreover, a separate

amount of penalty of ` 6 lakh has also been imposed on the

appellant for violation of Code of Conduct for stock-brokers.

Accordingly, while upholding the impugned order on merit, we

hold that this is an appropriate case of reducing the amount of

penalty imposed on the appellant given the facts of the matter.

9. Therefore, considering all the relevant factors we reduce

the quantum of penalty imposed under Section 15HA of SEBI

Act from ` 16 lakh to that of ` 8 lakh and retain the amount of

penalty of ` 6 lakh imposed under Section 15HB of SEBI Act.

The appellant is directed to pay the total amount of ` 14 lakh

within four weeks from today.

10

10. Appeal is partially allowed with no order on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 26.04.2019 Prepared & Compared By: PK