Case: Securities &amp; Exchange Board Of India Vs. Kishore R.Ajmera

screen based trading system keeps the identity of the parties anonymous it will be too naive to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. Direct proof of such meeting of minds elsewhere would rarely be forthcoming. The test, in our considered view, is one of preponderance of probabilities so far as adjudication of civil liability arising out of violation of the Act or the provisions of the Regulations framed thereunder is concerned. Prosecution under Section 24 of the Act for violation of the provisions of any of the Regulations, of course, has to be on the basis of proof beyond reasonable doubt. The conclusion has to be gathered from various circumstances like that volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors. The fact that the broker himself has initiated the sale of a particular quantity of the scrip on any particular day and at the end of the day approximately equal number of the same scrip has come back to him; that trading has gone on without settlement of accounts i.e. without any payment and the volume of trading in the illiquid scrips, all, should raise a serious doubt in a reasonable man as to whether the trades are genuine. The failure of the brokers/sub-brokers to alert themselves to this minimum requirement and their persistence in trading in the particular scrip either over a long period of time or in respect of huge volumes thereof, in our considered view, would not only disclose negligence and lack of due care and caution but would also demonstrate a deliberate intention to indulge in trading beyond the forbidden limits thereby attracting the provisions of the FUTP Regulations. The difference between violation of the Code of Conduct Regulations and the FUTP Regulations would depend on the extent of the persistence on the part of the broker in indulging with transactions of the kind that has occurred in the present cases. Upto an extent such conduct on the part of the brokers/sub-brokers can be attributed to negligence occasioned by lack of due care and caution.Beyond the same, persistent trading would show a deliberate intention to play the market. The dividing line has to be drawn on the basis of the volume of the transactions and the period of time that the same were indulged in. In the present cases it is clear from all these surrounding facts and circumstances that there has been transgressions by the respondents beyond the permissible dividing line between negligence and deliberate intention.27. Insofar as the plea of violation of principles of natural justice, as raised on behalf of the respondent in C.A.No.282/2014 (Monarch Networth Capital Ltd.) is concerned, we do not think the same to be justified in any manner. The relevant extracts of the trade log which have been perused by us, in view of the clear picture disclosed with regard to the particulars of the offending transactions, must be held to be sufficient compliance of the requirement of furnishing adverse materials to the affected party. It is not the case of the respondents that such trading in the scrips in question had been a regular feature all along. Insofar as the statement of Indumati Gowda is concerned, it is the stand of the SEBI that the same was not relied upon to come to the impugned conclusions and findings. The statement of Shirish Shah, who admittedly was behind the manipulative practices in question through the brokers, was definitely not the foundation of the impugned findings recorded by the Whole Time Member of SEBI. The statement of Shirish Shah, even if not furnished to the respondent brokers, would not materially alter the situation inasmuch as it is the liability of the respondent-brokers, on account of their failure to correct the huge irregularities that were going on through their terminals, that was the subject matter of consideration of the Whole Time Member.28. The fact that on behalf of the client Indumati Gowda similar transactions were entered into in respect of other illiquid scrips which did not disclose any irregularities can hardly be a ground to overlook what has happened in case of the scrip involved in which the respondent Monarch Networth Capital Limited had indulged in.29. There is yet another argument advanced on behalf of the respondent -Monarch Networth Capital Limited, namely, that two of the brokers who were allegedly involved in circular trading were let off with monetary penalty. It is also argued that in case of M/s Ess Ess Intermediaries Pvt. Ltd., M/s Rajesh N. Jhaveri and M/s Rajendra Jayantilal Shah [second category] monetary penalty has been imposed for indulging in manipulative trading under the FUTP Regulations. On the said basis, it is submitted that a lesser penalty of monetary compensation would be justified.30. We disagree with the above contention. The stage at which the monetary penalty was imposed on the two other brokers indulging in circular trading is prior to any determination of liability of the said two brokers who did not contest the charges. In the case of M/s Monarch Networth Capital Limited the stage has advanced far beyond the above and had culminated in operative findings against the said sub-broker. The imposition of monetary penalty in the case of M/s. Ess Ess Intermediaries Pvt. Ltd., M/s. Rajesh N. Jhaveri and M/s. Rajendra Jayantilal Shah [second category] for violation of the FUTP Regulations cannot be a basis for alteration of the punishment of suspension imposed on M/s. Monarch Networth Capital Limited to one of monetary penalty. In this regard, provisions of Section 15J of the SEBI Act has to be kept in mind and if the primary authority had thought it proper to impose different penalties in different cases involving different set of facts, we do not see how and why interference should be made in present appeals.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]24. Insofar as first case (C.A. No.2818 of 2008 SEBI Vs. Kishore R. Ajmera) is concerned the proved facts are asBoth the clients are known to each other and were related entities.(ii) This fact was also known to the sub-broker and the respondent – broker.(iii) The clients through the sub-broker had engaged in mutual buy and sell trades in the scrip in question, volume of which trade was significant, keeping in mind that the scrip was an illiquidfrom the above there is no other material to hold either lack of vigilance or bona fides on the part of the sub-broker so as to make respondent-broker liable. An irresistible or irreversible inference of negligence/lack of due care etc., in our considered view, is not established even on proof of the primary facts alleged so as to make respondent-broker liable under the Conduct Regulations, 1992 as has been held in the order of the Whole Time Member, SEBI which, according to us, was rightly reversed in appeal by the Securities Appellate Tribunal.25. This will take us to the second and third category of cases i.e. M/s Ess Ess Intermediaries Pvt. Ltd., M/s Rajesh N. Jhaveri and M/s Rajendra Jayantilal Shah [second category] and M/s Monarch Networth Capital Limited (earlier known as Networth Stock Broking Limited) [third category]. In these cases the volume of trading in the illiquid scrips in question was huge, the extent being set out hereinabove. Coupled with the aforesaid fact, what has been alleged and reasonably established, is that buy and sell orders in respect of the transactions were made within a span of 0 to 60 seconds. While the said fact by itself i.e. proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume of trading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the broker/sub-broker may be between the broker/sub-broker and the client or it could be between the two brokers/sub-brokers engaged in the buy and sell transactions. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a conclusion can be reasonably reached that there is a concerted effort on the part of the concerned brokers to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural rise in hiking the price/value of the scrip(s). It must be specifically taken note of herein that the trades in question were noted in accordance with the terms of theCirculars issued from time to time. A negotiated trade, it is clarified, invokes consensual bargaining involving synchronizing of buy and sell orders which will result in matching thereof but only as per permissible parameters which are programmed accordingly.26. It has been vehemently argued before us that on a screen based trading the identity of the 2nd party be it the client or the broker is not known to the first party/client or broker. According to us, knowledge of who the 2nd party/ client or the broker is, is not relevant at all. While the screen based trading system keeps the identity of the parties anonymous it will be too naive to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. Direct proof of such meeting of minds elsewhere would rarely be forthcoming. The test, in our considered view, is one of preponderance of probabilities so far as adjudication of civil liability arising out of violation of the Act or the provisions of the Regulations framed thereunder is concerned. Prosecution under Section 24 of the Act for violation of the provisions of any of the Regulations, of course, has to be on the basis of proof beyond reasonable doubt. The conclusion has to be gathered from various circumstances like that volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors. The fact that the broker himself has initiated the sale of a particular quantity of the scrip on any particular day and at the end of the day approximately equal number of the same scrip has come back to him; that trading has gone on without settlement of accounts i.e. without any payment and the volume of trading in the illiquid scrips, all, should raise a serious doubt in a reasonable man as to whether the trades are genuine. The failure of the brokers/sub-brokers to alert themselves to this minimum requirement and their persistence in trading in the particular scrip either over a long period of time or in respect of huge volumes thereof, in our considered view, would not only disclose negligence and lack of due care and caution but would also demonstrate a deliberate intention to indulge in trading beyond the forbidden limits thereby attracting the provisions of the FUTP Regulations. The difference between violation of the Code of Conduct Regulations and the FUTP Regulations would depend on the extent of the persistence on the part of the broker in indulging with transactions of the kind that has occurred in the present cases. Upto an extent such conduct on the part of the brokers/sub-brokers can be attributed to negligence occasioned by lack of due care and caution.Beyond the same, persistent trading would show a deliberate intention to play the market. The dividing line has to be drawn on the basis of the volume of the transactions and the period of time that the same were indulged in. In the present cases it is clear from all these surrounding facts and circumstances that there has been transgressions by the respondents beyond the permissible dividing line between negligence and deliberate intention.27. Insofar as the plea of violation of principles of natural justice, as raised on behalf of the respondent in C.A.No.282/2014 (Monarch Networth Capital Ltd.) is concerned, we do not think the same to be justified in any manner. The relevant extracts of the trade log which have been perused by us, in view of the clear picture disclosed with regard to the particulars of the offending transactions, must be held to be sufficient compliance of the requirement of furnishing adverse materials to the affected party. It is not the case of the respondents that such trading in the scrips in question had been a regular feature all along. Insofar as the statement of Indumati Gowda is concerned, it is the stand of the SEBI that the same was not relied upon to come to the impugned conclusions and findings. The statement of Shirish Shah, who admittedly was behind the manipulative practices in question through the brokers, was definitely not the foundation of the impugned findings recorded by the Whole Time Member of SEBI. The statement of Shirish Shah, even if not furnished to the respondent brokers, would not materially alter the situation inasmuch as it is the liability of the respondent-brokers, on account of their failure to correct the huge irregularities that were going on through their terminals, that was the subject matter of consideration of the Whole Time Member.28. The fact that on behalf of the client Indumati Gowda similar transactions were entered into in respect of other illiquid scrips which did not disclose any irregularities can hardly be a ground to overlook what has happened in case of the scrip involved in which the respondent Monarch Networth Capital Limited had indulged in.29. There is yet another argument advanced on behalf of the respondent -Monarch Networth Capital Limited, namely, that two of the brokers who were allegedly involved in circular trading were let off with monetary penalty. It is also argued that in case of M/s Ess Ess Intermediaries Pvt. Ltd., M/s Rajesh N. Jhaveri and M/s Rajendra Jayantilal Shah [second category] monetary penalty has been imposed for indulging in manipulative trading under the FUTP Regulations. On the said basis, it is submitted that a lesser penalty of monetary compensation would be justified.30. We disagree with the above contention. The stage at which the monetary penalty was imposed on the two other brokers indulging in circular trading is prior to any determination of liability of the said two brokers who did not contest the charges. In the case of M/s Monarch Networth Capital Limited the stage has advanced far beyond the above and had culminated in operative findings against the said sub-broker. The imposition of monetary penalty in the case of M/s. Ess Ess Intermediaries Pvt. Ltd., M/s. Rajesh N. Jhaveri and M/s. Rajendra Jayantilal Shah [second category] for violation of the FUTP Regulations cannot be a basis for alteration of the punishment of suspension imposed on M/s. Monarch Networth Capital Limited to one of monetary penalty. In this regard, provisions of Section 15J of the SEBI Act has to be kept in mind and if the primary authority had thought it proper to impose different penalties in different cases involving different set of facts, we do not see how and why interference should be made in present appeals.