N.K. Sodhi, J. (Presiding Officer) -
(1.) THIS order will dispose of two Appeals No. 125 and 152 of 2010 both of which are directed against the common order dated June 30, 2010 passed by the Securities and Exchange Board of India (for short the Board) declaring Yogesh Babulal Mehta (Respondent No. 2 in Appeal No. 125 of 2010 and the Appellant in the other appeal and hereinafter referred to as the broker) entitled to receive from Bombay Stock Exchange Limited (BSE) a sum of Rs. 12,71,556/ - together with interest on account of the trades executed by him on behalf of Smita Nagra, Atul J. Patira, Rita Patira and Deepak Sheth who shall collectively be referred to hereinafter as the clients. Before we deal with the issues involved in these appeals, it is necessary to refer to the background in which the dispute has risen between the parties.
(2.) ON receiving complaints and other information from the stock exchanges regarding the unusual price movement in the shares of Amit International Limited (hereinafter called the company) from Rs. 25/ - on December 18, 1995 to Rs. 280/ - on February 14, 1996, the Board investigated the trading in the scrip. Investigations revealed that abnormal volumes and price rise were created by a group of persons acting in concert who violated the provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. Pursuant to the enquiries conducted by the Board, certain persons/entities were found to have rigged the price of the scrip and they were debarred from dealing in the securities market. Pending investigations, the Board had suspended on February 12, 1996 the trading in the scrip of the company with a view to check the unusual price rise. By order dated March 27, 1996 the Board directed the stock exchanges including BSE to freeze the proceeds which were received by them from auctions/closing out of the transactions and this was done to ensure that if there was any market manipulation, the manipulators should not be in a position to receive the ill -gotten profits arising out of the manipulation. Monies, therefore, remained frozen with the exchanges during the investigations. On July 4, 1996 the Board directed BSE that from the auction proceeds withheld by it, difference between the auction price and the standard rate and the difference between the close -out price and the standard rate should not be given to the auction offerors in case of auction process and the receiving members (stockbrokers) in the case of close -out process and instead, those amounts be impounded. BSE was further directed to credit the impounded monies to its Investor Protection Fund. The Board also pointed out that an opportunity of hearing be granted to all those who were affected by the impounding of the auction proceeds and the aggrieved persons were advised to make written representations to the Board which representations would be dealt with by a committee constituted by it. BSE issued a notice on July 8, 1996 inviting written representations. The broker purchased 26,500 shares of the company on behalf of the clients and it is common ground between the parties that these trades were to be settled in settlement No. 23 of 1996. In this settlement 1800 shares were delivered to the broker and there is No. dispute between the parties in regard to these shares. The remaining 24,700 shares were pending delivery and the seller(s) defaulted since the price of the scrip of the company had been rigged as found by the Board and trading suspended and the normal procedure for settling the trades could not be adopted and it transpired that the auction price also did not reflect the true market price of the scrip. The broker did not get delivery of the shares. Since the price of the scrip had been rigged and trading suspended, the Board, as already noticed above, had directed that the difference between the auction price and the standard rate and the difference between the close -out price and the standard rate be impounded and credited to the Investor Protection Fund. In response to the notice issued by BSE on July 8, 1996, the clients made a claim stating that they had received the standard rate and were entitled to the difference of the standard price and close -out/auction price. This claim was made on the basis that the trades had been executed by them through the broker and that they were entitled to the amount. This claim of the clients was considered by the Board and by order dated May 16, 1998 (hereinafter referred to as the 1998 order) the same was allowed and the amount ordered to be released to them. Subsequent to the passing of this order, the broker also made a representation dated August 29, 1998 before the Board stating that he had traded on behalf of the clients in settlements No. 22 and 23 of 1996 and requested that the payments made by him towards the close -out in the settlements should be refunded to him. In other words, the amount that was ordered to be released in favour of the clients was being claimed by the broker as well on the plea that he had made the payment from his own funds and was entitled to the refund and the same could not be given to the clients. His claim was also considered by the Board and since the broker had a purchase position of 28,700 shares in settlement No. 23 of 1996, BSE was directed by order dated June 15, 1999 (hereinafter referred to as the 1999 order) to release the difference between the purchase price and the standard rate to him. This order and the 1998 order are contradictory. The 1998 order required BSE to release the amount in favour of the clients whereas the 1999 order directed the exchange to release the amount to the broker. Despite the 1999 order passed in favour of the broker, the disputed amount was released to the clients on the basis of the 1998 order. Payment was made to three clients on July 26, 2000 and to one of them on January 1, 2001. Feeling aggrieved by the 1998 order, the broker filed Appeal No. 45 of 2008 before this Tribunal which came up for hearing on September 16, 2008. Noticing the two contradictory orders, the appeal was allowed and the case remanded to the Board with the following observations:
We have heard the learned Counsel for the parties and perused the two orders dated 16.5.1998 and 15.6.1999. When the order dated 16.5.1998 was passed, the Appellant was not heard and since the two are contradictory, we set aside both of them insofar as they relate to the Appellant and Respondents 3 to 6. The case is remanded to the Board to pass a fresh order in accordance with law after affording an opportunity of hearing to all the parties. Since the order dated 16.5.1998 insofar as it relates to Respondents 3 to 6 has been set aside, the necessary consequence is that these Respondents must deposit with BSE the money received by them under the order and the Board will then decide the rights of the parties by passing a fresh order in accordance with law. The Appellant and Respondents 3 to 6 are both claiming to be entitled to the said amount. It is needless to mention that it shall be open to the Board to call for such additional records and information from the parties as it may deem necessary for deciding the dispute between them. Since the matter is quite old we shall appreciate if the Board decides the issue expeditiously and preferably before the end of the current financial year. There is No. order as to costs.
In pursuance to the remand order, the Board has now passed a fresh order dated June 30, 2010 holding that the broker is entitled to receive from BSE the disputed amount of Rs. 12,71,556/ - together with interest thereon and the latter has been directed to release the amount within two weeks from the date of the order. BSE has filed Appeal No. 125 of 2010 challenging this order whereas the broker has filed the other appeal claiming an enhanced amount of Rs. 15,56,100/ - and in the alternative a sum of Rs. 13,64,000/ - alongwith compound interest at the rate of 24 per cent.
(3.) BEFORE we deal with the merits of the dispute, it is necessary to refer to the settlement process of a stock exchange in so far as it is relevant to the facts of the case. Every trade executed through the trading system of an exchange is required to be settled which means payment has to be made by all who have made purchases and shares have to be delivered by those who have made sales. This process of settlement of shares and money is managed by stock exchanges through their respective clearing houses. Stock exchanges do not deal with investors/clients directly and they deal with them only through their brokers who are their members and registered intermediaries with the Board. In every market transaction for the purchase of shares, the client gives money (margin/deposit) to the stockbroker for buying shares on his behalf and it is the stockbroker who accordingly places the order and makes the purchase. It is he who receives the shares from the stock exchange and passes them on to the client. In other words, every trade is settled through the stockbrokers and investors have No. access to the stock exchange except for the purpose of dispute resolution through arbitration. It is pertinent to mention that according to the normal stock exchange procedure when there is No. rigging of the scrip and there is default by the seller in delivering the securities and the exchange purchases those securities in auction, monies are taken from the buyer to the extent of the transaction/standard price and from the seller to the extent of the difference between the transaction/standard price and the auction price and given to those who offer their securities in auction proceedings.;