Religare Securities Limited vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of Decision: 12.01.2016

Appeal No. 433 of 2014

Religare Securities Limited Plot No. A-3,4,5, GYS Global, Sector- 125, Noida U. P. 201 301 ...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. Paras Parekh and Ms. Neeraja Balakrishnan, Advocates i/b J. Sagar Associates for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Tomu Francis, Advocate for the Respondent.

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

Per: Justice J.P. Devadhar (Oral)

1.

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

and Exchange Board of India ("SEBI" for short) by his order dated

August 27, 2014 is justified in imposing penalty of ` 8 lac and ` 2 lac on

the appellant under Section 15HA and Section 15HB of the Securities

and Exchange Board of India Act, 1992 ("SEBI Act" for short)

respectively is the question raised in this appeal.

2. It is relevant to note that the impugned order is a common order

passed against the appellant and its client Shri. Jai Kishan Lakhmani

("said client" for short). In the impugned order, while penalty of ` 8 lac

and ` 2 lac is imposed against the appellant under Section 15HA and 2 15HB of the SEBI Act respectively, penalty of ` 10 lac is imposed on the

said client under Section 15HA of the SEBI Act. Appellant has filed the

present appeal to challenge the penalty imposed against the appellant,

whereas, the said client has not filed any appeal against the said decision.

3. Appellant is a stock-broker registered with SEBI and is a member

of the National Stock Exchange Limited ("NSE" for short), the Bombay

Stock Exchange ("BSE" for short) and MCX Stock Exchange Limited

("MCX-SX" for short). Apart from providing offline and online platform

for its clients to trade in securities, appellant offers broking services in

equity, currency and commodity market through its subsidiary.

Depository participant services are also rendered by the appellant.

4. During the course of its business, appellant had provided internet

based trading facility to various clients including the said client. The said

client had dealt in 119 scrips during the years 2009-2010 with an

approximate total turnover of ` 1.20 crore, out of which, the turnover in

the scrip of Veritas (India) Limited ("VIL" for short) was 1.51% of the

total turnover.

5. SEBI conducted investigation relating to the dealings in the scrip

of VIL for the period from May 26, 2008 to October 30, 2009 and

November 03, 2009 to February 06, 2010. During the said investigation

it was noticed that the price of the scrip of VIL had increased from ` 100

as on April 06, 2009 to ` 825.63/- as on May 10, 2010. The investigation

revealed that the said client through the internet facility provided by the

appellant had sold 72 shares of VIL in 44 trades during October 23, 2009

to March 10, 2010 and purchased 107 shares of VIL in 25 trades during 3

March 23, 2009 to March 02, 2010 and contributed to the increase over

the Last Traded Price ("LTP" for short) by ` 506.45. It was also noticed

that the said client had placed self trades in 9 instances and traded 9

shares of VIL during January 19, 2010 to March 02, 2010 through the

appellant. It was also noticed that out of the nine trades, trades executed

on three days were first trades which were higher than the LTP.

6. According to SEBI, the trades in VIL executed by the said client of

the appellant were fraudulent and manipulative trades and therefore show

cause notices were issued to the said client as also the appellant calling

upon them to show cause as to why action should not be taken against

them for violating the provisions contained in 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).

7. In its reply to the show cause notice, the appellant denied the

allegations made against the appellant in the show cause notice. During

the course of personal hearing the appellant reiterated the submissions

made in the affidavit in reply. However, the said client neither replied to

the show cause notice nor participated in the personal hearing offered by

SEBI.

8. By the impugned order dated August 27, 2014 it is held by the AO

of SEBI that the trades in the shares of VIL executed by the said client

during the period in question were fictitious transactions carried out in

violation of PFUTP Regulations. Accordingly, penalty of ` 10 lac is 4

imposed against the said client under Section 15HA of the SEBI Act for

violating the provisions contained in PFUTP Regulations. By the said

impugned order it is held that the appellant by assisting the said client in

executing fictitious trades has violated regulation 3(a),(b),(c),(d) and

regulation 4(1), 4(2)(a) of the PFUTP Regulations and Clauses

A(1),A(3),A(4) and A(5) of the code of conduct as specified in Schedule

II under Regulation 7 of Brokers Regulations. Accordingly, penalty of

` 8 lac and ` 2 lac is imposed against the appellant under Section 15HA

and Section 15HB of the SEBI Act respectively for violating the PFUTP

Regulations and Brokers Regulations. In this appeal, we are only

concerned with the penalty imposed against the appellant.

9. Mr. Somasekhar Sundaresan learned counsel appearing on behalf

of the appellant submitted as follows:

a) The appellant has neither directly nor indirectly

entered into any transactions relating to purchase or

sale of VIL shares and therefore, the appellant cannot

be held guilty of violating the provisions contained in

the PFUTP Regulations.

b) Assuming that the said client of the appellant had

indulged in manipulative trades, there is not an iota of

evidence to establish that the appellant had connived

with the said client in executing the manipulative

trades. Apart from providing internet based trading

platform to the said client in accordance with law, the

appellant had neither aided nor abetted the said client

in executing the manipulative trades. In the absence of 5

any evidence, the AO is not justified in holding that

the appellant had aided and abetted the said client in

executing fraudulent transactions in violation of

PFUTP Regulations. In the present case, the appellant

had permitted the said client to trade on the internet

based trading platform of the appellant, in the

ordinary course of business without there being any

other connection or relationship between the appellant

and the said client.

c) The trades in question were entered into by the said

client through his online trading account with

absolutely no involvement of the appellant. In the

online trading mechanism the order is placed by the

client on the website of the broker and the website of

the broker routes the trade to the exchange platform

for execution. Thus, in the internet based trading

system, the question of the involvement of the broker

does not arise. The entire process is automated and

software driven with no human involvement at all.

Hence AO is not justified in holding that the appellant

was aiding and abetting the said client in executing

fictitious trades. Consequently, penalty imposed under

Section 15HA of SEBI Act for allegedly violating the

PFUTP Regulations is unjustified.

6

d) The value and volume of the trades in question were

so low that they did not raise any suspicion. Appellant

had put in place automated software for surveillance

and control over the activities of its clients. The

appellant's surveillance system provided for alerts to

be generated, where the percentage of trades was

more than 20% of the market value or where the value

of such transactions was more than ` 10,000/-. As the

quantity of the trades executed by the client in the

scrip of VIL was so low that no alerts could be

generated.

e) It is not the case of SEBI that the systems put in place

by the appellant were not in accordance with the

requirements prescribed in that regard. Since the

appellant had installed appropriate mechanism to

detect any suspicious or irregular trading activity by

its clients, it could not be said that the appellant had

violated the Brokers Regulations.

f) The said client had traded in approximately 119 scrips

during the year 2009-2010 resulting in an aggregate

turnover of around ` 1.20 crore. Since, the turnover of

the impugned trades in the scrip of VIL constituted

only 1.51% of the total turnover of the said client

during the investigation period stretched over a period

of 3.3 years, it cannot be said t hat on bare perusal of

the said trades, the appellant-broker ought to have 7

visualized that the said client was executing

fraudulent trades and accordingly taken remedial

measures.

g) Appellant in discharge of its duties as a stock broker

had always taken due precaution by implementing

systems of checks and balances as safeguards

employed in order to prevent any untoward

occurrences in relation to the trades being executed by

it on behalf of its clients. Only because, the trades

executed by the said client in the instant case resulted

in self trades, it cannot be assumed that there was

manipulative intent underlying such trades by the

client and that the appellant was hand in glove with

the said client.

h) On coming to know about the fraudulent transactions

carried out by the client, the appellant immediately

suspended the trading facility provided to the said

client and also withheld the positive closeout

difference of ` 82,987/- from the client's account of

the said client which is still lying with the appellant.

i) In the case of Arcadia Share and Stock Brokers Pvt.

Ltd. which is similar to the case of the appellant, the

AO of SEBI has passed an order on November 21,

2013 wherein it is held that in the absence of any

evidence on record to suggest that the broker was in

any manner involved with its clients in executing the 8

self trades, it is difficult to hold that the broker has

violated the Brokers Regulations. Similarly, in the

case of J.V. Stock Broking Pvt. Ltd the same AO of

SEBI has passed an order on April 30, 2014 holding

that where the percentage of self trades executed by

the client are negligible when compared to the day's

total market volume, the charges leveled against the

broker that the Brokers Regulations have been

violated do not stand established. In the present case,

the percentage of self trades executed by the said

client being negligible, the AO is not justified in

holding that the appellant by failing to stop execution

of such trades has failed to perform duties as

contemplated under the Brokers Regulations.

j) Any occurrence of self trade is not per se illegal.

Since the trades get executed at the level of exchange,

it is not possible for a broker to prevent self trades

being executed by its clients. In fact the BSE and NSE

by their respective circulars dated February 11, 2015

have introduced a functionality in its trading systems

which prevent self trades at the level of the exchange.

This factor establishes that at the relevant time it was

not possible for brokers such as the appellant to

prevent self trades being executed by its client. In

these circumstances, the AO is not justified in holding

that the appellant has violated the Brokers Regulations 9

and consequently not justified in imposing penalty

against the appellant.

10. Mr. Kumar Desai, learned counsel appearing on behalf of SEBI, on

the other hand submitted as follows:-

a) Admittedly, nine self trades executed by the said

client of the appellant were one share trades. It is not

in dispute that each of the nine self trades resulted in

the price rise of the scrip by about 2%. Thus the total

price rise by the nine self trades was to the tune of

about 18%. Bare look at these abnormal transactions

would have alerted any broker who is vigilant.

Admittedly, the appellant-broker failed to notice these

abnormal trades executed on the internet based trading

platform of the appellant. Therefore, the AO was

justified in holding that the appellant-broker being not

vigilant, is guilty of violating Brokers Regulations.

b) Admittedly, shares of VIL was an illiquid scrip. Three

out of nine single share trades were first trades and the

buy orders placed by the said client in those three

trades were higher by about 2% from the last traded

price (LTP) on the previous day. If the appellant had

glanced through the trades executed on those days, the

appellant could have easily detected the abnormal

transactions and thereupon taken remedial steps.

Having failed to exercise reasonable care and caution, 10

appellant cannot plead that there is no violation of

Brokers Regulations.

c) Apart from the above, the finding recorded in the

impugned order is that the fictitious trades executed

by the client of the appellant were responsible for

increase in the price of VIL from LTP by ` 506.45. It

is further recorded in the impugned order that in 22

other trades, the said client of the appellant had traded

above the last traded price. It is also recorded in the

impugned order that 14 trades of the said client were

found to establish new high price. Moreover, out of

the 9 trades, 3 trades were first trades wherein the said

client of the appellant had placed buy orders above the

last traded price i.e. the last trade executed on the

previous day. Since the appellant failed to notice these

glaring facts, it is apparent that the appellant by being

guilty of gross negligence or otherwise has permitted

fictitious trades to be executed by the said client

through the internet based trading platform provided

by the appellant. Thus, the appellant by its conduct

aided and abetted the said client in executing the

fictitious transactions and hence the appellant is guilty

of violating the provisions contained in the PFUTP

Regulations as well as Brokers Regulations.

d) A broker is required to put in place adequate systems

or mechanism to detect all illegal and manipulative 11

trades including self trades and especially one share

self trades. Internet trading does not absolve the

broker of its responsibility to detect artificial, illegal

and manipulative trades. Since the said client was

permitted to enter the buy or sell orders on the internet

platform provided by the broker i.e. the appellant, the

appellant-broker was required to be far more vigilant

and monitor the trades regularly either by manual

verification or by installing stringent system in place

that would detect execution of self trades. The fact

that the appellant had not put in place any system or

mechanism to detect self trades especially one share

self trades clearly shows that the appellant had not

exercised due care and skill in discharge of its duties

as contemplated under the Brokers Regulations.

e) Relying on the decisions of this Tribunal in case of

Angel Broking Pvt. Ltd. vs SEBI (Appeal No. 46 of

2014 decided on 01.10.2014), M/s Jayantilal

Khandwala & Sons Pvt. Ltd. vs SEBI (Appeal No. 24

of 2011 decided on 08.06.2011), Systematix Shares &

Stocks (India) Limited vs SEBI (Appeal No. 21 of

2012 decided on 23.04.2012), M/s Marwadi Shares

and Finance Limited vs SEBI (Appeal No. 85 of 2011

decided on 26.07.2012), Anita Dalal vs SEBI (Appeal

No. 211 of 2012 decided on 03.12.2012), H.J.

Securities Pvt. Ltd. vs SEBI (Appeal No. 76 of 2012 12

decided on 11.05.2012), Smt. Krupa Sanjay Soni vs

SEBI (Appeal No. 32 of 2013 decided on 24.01.2014)

and Balwinder Singh, Prop. of Gogia Investments vs

SEBI (Appeal No. 103 of 2013 decided on

11.02.2014), it is submitted that since the appellant

permitted fictitious trades to be executed on the

internet based trading platform of the appellant, in the

facts of present case it is apparent that by being guilty

of not being vigilant, the appellant has aided and

abetted the said client in violating the PFUTP

Regulations and Brokers Regulations. Although the

penalty imposable against the appellant runs into

crores of rupees, after taking into consideration all

mitigating factors, the AO has imposed nominal

penalty of ` 8 lac and ` 2 lac under Section 15HA and

15HB of SEBI Act which cannot be said to be

unreasonable or excessively harsh. Accordingly, it is

submitted that the appeal being devoid of any merit is

liable to be dismissed with costs.

11. We have carefully considered the rival submissions.

12. First question that is to be considered in this appeal is, whether the

AO is justified in holding that the appellant has violated the Brokers

Regulations and consequently justified in imposing penalty of ` 2 lac

under Section 15HB of SEBI Act.

13

13. In the impugned order, the AO has recorded the submission of the

appellant that the surveillance system put in place by the appellant did

not generate alerts and therefore, the fictitious trades executed by the said

client were not noticed by the appellant. The AO has further recorded

that the appellant as a registered stock broker was under an obligation to

perform its duties with due care and by failing to exercise due care the

appellant has violated the Brokers Regulations.

14. Providing internet based trading platform is not akin providing

STD Booth facility to a customer. In the STD Booth facility, the service

provider is not expected to know the purpose for which the STD facility

is being used by the customer. However, in case of internet based trading

platform, inspite of the fact that the trades are executed by the client

directly, the stock broker is required to monitor the trades and ensure that

the trades executed by the client through the internet based trading

platform are in conformity with the rules and regulations framed by

SEBI.

15. Fact that the stock broker has installed requisite parameters in the

surveillance system cannot be a ground for the stock broker to be

complacent. 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 platform so as to ensure that the trades

are executed in accordance with law and do not disturb the market

equilibrium.

16. In the present case, even if the appellant had glanced through the

trades executed by the said client it would have revealed that the said 14

client had time and again indulged in unusual trades by trading in single

share trades and each of such trades contributed price rise by about 2%

from the LTP. It is relevant to note that, such unusual trades were

executed on nine different dates in the scrip of VIL which was illiquid. If

the appellant was vigilant, in monitoring these trades then, certainly the

appellant could have noticed the anomaly. Fact that in the past the said

client had traded through the internet based trading platform provided by

the appellant for crores of rupees in accordance with law cannot be a

ground for the appellant to take it easy and wait for the alerts to be

generated by the surveillance system put in place by the appellant.

Similarly, fact that the appellant took prompt remedial steps after the

fictitious trades executed by the said client were brought to the notice of

the appellant by the stock exchange cannot be a mitigating factor in

favour of the appellant for falling to monitor the trades executed by the

said client.

17. Decisions of SEBI in case of Arcadia Shares and Stock Brokers

Pvt. Ltd. (supra) and J.V. Stock Broking Pvt. Ltd. (supra) relied upon by

the counsel for SEBI do not support the case of the appellant. No doubt

that in those cases also self trades were executed. However, in the

present case, it is relevant to note that nine self trades were single share

trades which could be easily detected on perusal of day's trade. This

factor distinguishes the present case, from the aforesaid two decisions.

18. For all the aforesaid reasons, it is difficult to hold that the appellant

was vigilant in monitoring the trades executed by the said client through

the internet based trading facility provided by the appellant. Therefore, 15

the decision of AO that by not being vigilant, the appellant has violated

the Brokers Regulations cannot be faulted. Consequently, as against the

penalty of Rupees one crore imposable under Section 15HB of SEBI Act

for violating Brokers Regulations, imposition of ` 2 lac penalty against

the appellant cannot be said to be unreasonable or excessively harsh.

19. Second question to be considered in this appeal is, whether the AO

is justified in holding that the appellant is guilty of violating the PFUTP

Regulations and consequently imposing penalty of ` 8 lac under Section

15HA of SEBI Act.

20. On perusal of the impugned order it is seen that the AO has arrived

at the conclusion that the appellant is guilty of violating the PFUTP

Regulations, because, the fictitious trades were executed by the said

client through the internet based trading facility provided by the

appellant.

21. There is nothing in the impugned order to suggest that apart from

providing the trading platform to trade in the ordinary course of business,

the appellant was party to the manipulative, fraudulent and unfair trade

practices executed by the said client of the appellant. There is no finding

recorded in the impugned order to the effect that the appellant was in

complicity or connected with the said client in executing the fictitious

trades in question. Fact that the appellant was not vigilant in monitoring

the trades executed by the said client through the trading platform

provided by the appellant cannot be a ipso-facto ground to hold, that the

appellant was aiding and abetting the said client in executing fictitious

trades in violation of PFUTP Regulations.

16

22. Various decisions relied upon by the counsel for SEBI are

distinguishable on facts, in as much as in all those cases, self trades were

executed by stock broker on behalf of the client, whereas, in the present

case the trades are executed by the said client directly through the

internet based trading facility provided by the appellant. Fact that the

stock brokers in those cases who had executed fictitious trades on behalf

of their clients have been held guilty of violating PFUTP Regulations

cannot be a ground to hold that in the present case, the appellant has

violated PFUTP Regulations especially when the fictitious trades are

executed by the said client directly through the internet based trading

facility provided by the appellant. In the present case, fact that the

appellant is found to be not vigilant in monitoring the trades of the said

client cannot be a ground presume that the appellant was not vigilant with

a view to aid and abet the said client in executing the fictitious trades in

violation of PFUTP Regulations.

23. For all the aforesaid reasons, decision of AO in holding that the

appellant has violated the PFUTP Regulations cannot be sustained.

Consequently penalty of ` 8 lac imposed under Section 15HA of the

SEBI Act cannot be sustained.

24. In the result, the appeal is partly allowed by deleting the penalty of

` 8 lac imposed under Section 15HA of SEBI Act and by sustaining the

penalty of ` 2 lac imposed under Section 15HB of the SEBI Act.

25. Appeal is disposed of in the above terms with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer Sd/-

Jog Singh 12.01.2016 Prepared & Compared By: PK Member