Sic Stocks & Services Pvt. Ltd vs Sebi

Order Reserved On: 07.08.2019 Date of Decision : 06.11.2019

Misc. Application No. 179 of 2017 And Appeal No. 127 of 2017

SIC Stocks & Services Pvt. Ltd. 501, Prestige Meridian II, 29/ 30, M G Road, Bangalore- 560 001 ...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. Prakash Shah, Advocate with Mr. Chinmay Paradkar, Advocate and Mr. Meit Shah, Authorised Representative i/b Prakash Shah & Associates for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Kaushal Parsekar, Advocate i/b Legasis Partners for the Respondent.

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

Per: Justice M. T. Joshi

1.

The Whole Time Member ("WTM" for convenience) of

the Securities and Exchange Board of India ("SEBI" for

convenience) vide impugned order dated April 28, 2017 has 2

directed for suspension of certificate of registration of the

appellant as a stock broker for a period of three months for

violation of the provisions of Sections 12A(a), (b) and (c) of the

SEBI Act, 1992 read with regulations 3, 4(1), 4(2)(a), (e) and

(g) of the SEBI (Prohibition of Fraudulent and Unfair Trade

Practice relating to Securities Market) Regulations, 2003

("PFUTP Regulations" for convenience) and regulation 7 read

with Clauses A and B(2) of Schedule II (Code of Conduct for

Stock Brokers) of the SEBI (Stock Brokers and Sub-brokers)

Regulations, 1992 ("Stock Brokers Regulations" for

convenience).

2. From the impugned order it appears that, SEBI had

conducted investigation into the suspected fraudulent tradings in

the shares of Gangotri Textiles Limited ("Gangotri" for

convenience) during the period from April 07, 2006 to May 31,

2006. Some of the transactions were entered into by

Mr. Purshottam Khandelwal, the client who traded through the

present appellant. The investigation found that the said

Purshottam Khandelwal as a part of group termed as Vishvas

Group by the respondent SEBI, had executed synchronized

trades, circular trades and reversal trades amongst themselves

and traded in significant variation to the Last Traded Price 3

("LTP" for convenience) in order to manipulate price of the

same. The investigation shows that while pre-investigation

period the price of Gangotri was between ` 52.25 to ` 40.55,

during the above investigation period it arose to ` 70.95 on BSE

platform and ` 71.05 on NSE platform. The average daily

volume also increased to phenomenal extent during the said

period. Various proceedings were initiated against the members

of Vishvas Group as well as their traders.

So far as Purshottam Khandelwal is concerned, who has

traded through the present applicant, SEBI had already found

that he had engaged in the fraudulent trade and therefore a

prohibitory order was already passed by respondent SEBI. The

present proceeding was lodged to make inquiry into the acts of

the present appellant for violation as quoted above.

3. The investigation had revealed that Purshottam

Khandelwal had traded in largest quantity compared to other

members of the group. In paragraph number 9.3 of the

impugned order, the details of the trades of Purshottam

Khandelwal are given. It would show that Purshottam

Khandelwal had indulged in 133 synchronized trades, 138

circular trades within the Vishvas Group. It was found that in 4

price manipulation Purshottam Khandelwal was highest and

significant contributor to both positive LTP and negative LTP.

So far as the present appellant is concerned, the allegation

is that it has allowed these fraudulent trades in the above

manner. It was found that on May 02, 05, 10 and 12 of 2016

there were 8,7,13 and 9 synchronized trades respectively

executed through the appellant by Purshottam Khandelwal.

Similarly, 711 self trades in 65,025 shares were also executed

through the present appellant. Price manipulation was also

evident in this trade. It was therefore held that the present

appellant is also liable for allowing these manipulative trades.

Additionally, it was found that the appellant has shown the

bank account of Purshottam Khandelwal as Punjab National

Bank (PNB), Tonk Road Branch with Account No.

4064000100084502. However, the ledger account of

Purshottam Khandelwal did not reveal any transactions from the

said bank account. The enquiry with the PNB revealed that the

aforesaid account was opened by Purshottam Khandelwal on

July 13, 2006 and the same was not operative at the relevant

period i.e. on March 31, 2006.

5

4. Another violation was found that while the contract notes

are to be issued to the client according to the regulations within

24 hours of a trade, the appellant had not delivered the contract

notes to Purshottam Khandelwal within the same period.

Therefore, on these three grounds the impugned order was

passed.

5. Shri Prakash Shah, learned counsel for the appellant took

us through the reply of the appellant to the show cause notice,

the copies of the various judgements delivered by WTM in this

regard against other members of alleged group, trading in the

Gangotri. He submitted that since the new Bank account of

Purshottam Khandelwal was opened the same was entered into

old account but the old Know Your Customer/Client (KYC)

continued as on date of account opening. When the information

during the inspection was sought by SEBI, after 5 to 6 years of

the incident, copy of the new KYC was provided. The copy of

the old KYC was kept in godown however the same could not

be traced. Therefore, for the clerical mistake as detailed above

the appellant came to be punished. As regard the contract notes,

he submitted that on demand of the client-Purshottam

Khandelwal a consolidated statement of contract notes for the

period was issued. The same cannot be termed as a serious 6

offence. He further relied on certain other orders of WTM for

seeking lesser penalty in the alternative.

6. On the other hand, learned counsel for the respondent

Shri Kumar Desai, SEBI submitted that the appellant was not

slapped with the penalty merely for above two derelictions but

also for allowing Purshottam Khandelwal to indulge in

fraudulent trades as detailed above. He highlighted the

observation of WTM to show that the fraudulent activities could

not have gone un-noticed by the appellant, since there were

large number of circular trades and even self trades by

Purshottam Khandelwal within a short period of time. He,

therefore, submitted that no interference is warranted in the

impugned order.

7. Upon hearing both the sides, in our opinion the trades

executed by Purshottam Khandelwal during the short period to

such a large extent could not have gone un-noticed by the

present appellant. Large number of self trades i.e. 711 in 65,025

shares are rightly been held as abnormally large by WTM. It

was further highlighted by WTM that within the 24 days large

number of synchronized trades as detailed above were entered

into by Purshottam Khandelwal through the appellant. 7

8. In paragraph number 19 of the impugned order the WTM

has observed that the present case goes beyond the realm of lack

of due diligence, and quite clearly is an instance of aiding the

commission of fraudulent and manipulative trades. Considering

the nature of the transactions, we agree with the said

observations.

9. In rejoinder, Shri Shah relied on the ratio of Securities

and Exchange Board of India vs. Rakhi Trading Private Ltd.

(2018 (2) Scale 156) and Securities and Exchange Board of

India vs. Bhavesh Pabari (2019 (4) Scale 58), wherein for want

of material, traders were absolved. However, in the present

case, sufficient material is available. The order of the WTM for

these facts therefore needs no interference.

As regard the penalty, we find that a different yardstick is

adopted by the WTM in this regard. At "Exhibit-L" page 401 of

the Memorandum of the Appeal we have the order of the WTM

dated April 13, 2017 in respect of ISF Securities Limited

("ISF") in the same issue of trading in the share of Gangotri.

The broker therein was found to have executed proprietary

trades in the scrip of Gangotri both in BSE and NSE in

fraudulent manner. In paragraph number 18 of the order the

WTM has concluded that the said trader i.e. ISF is liable for 8

having indulged in manipulative, deceptive and fraudulent

transactions in the securities market. In the said case the

designated authority in its report had recommended for

suspension of the license of the said entity. In paragraph

number 20 of the said order the WTM observed that the

proceedings were commenced eight years after the violation and

the entity was under a different management at the time of the

violation. Therefore, the recommendation of suspension of

certificate was not accepted and instead the WTM directed that

the said entity would be prohibited from accepting any fresh

clients for a period of six months. As regards the Mefcom

Securities Limited (Mefcom) (order dated May 05, 2017

"Exhibit-M"), another trader involved in the same violation,

designated authority had recommended suspension of certificate

of registration as a stock broker for a period of four months.

WTM however, noted that the period of ten years had elapsed

from the date of violation and though the large number of

transactions in question were carried out by trader Mefcom, it

was directed that said entity shall be prohibited from the

accepting fresh clients, for a period of four months from the

date of the order.

9

10. In the present case, there are no allegations that the

appellant had indulged in proprietary trades. What is alleged is

that the entity was grossly negligent and allowed fraudulent

transactions to be carried out by Purshottam Khandelwal and

two other violations already noted above.

Considering all these facts, in our view, the order of the

WTM of SEBI directing the suspension of the license of the

appellant for a period of three months needs to be set aside and

in its place it is hereby directed that the appellant shall not

accept any fresh clients for a period of six months from the date

of this order.

11. The appeal accordingly stands partly allowed in terms of

above paragraphs. Consequently, Misc. Application No. 179 of

2017 seeking stay has become infructuous and the same is also

disposed of. No orders on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 06.11.2019 Prepared & Compared By: PK