SMC GLOBAL SECURITIES LIMITED Vs. ADJUDICATING OFFICER,
LAWS(SB)-2011-11-4
SECURITIES APPELLATE TRIBUNAL
Decided on November 25,2011

Smc Global Securities Limited Appellant
VERSUS
Adjudicating Officer, Respondents

JUDGEMENT

P.K.Malhotra, Member - (1.) CHALLENGE in this appeal is to the order dated July 29, 2011 passed by the adjudicating officer of the Securities and Exchange Board of India (for short Sebi) imposing a monetary penalty of Rs. 50,000/ - under section 15HB of the Securities and Exchange Board of India Act, 1992 (for short the Act) on the appellant for violating Clause A(2) of the Code of Conduct for stock brokers prescribed in Schedule II under regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub -brokers) Regulations, 1992 (for short the Regulations).
(2.) THE appellant is a company registered under the Companies Act, 1956 and is into the broking business since 1995. It claims to have Pan India presence rendering service to more than 2 lac investors and on an average handling over 3.5 lac trades per day. In the course of its share broking activity, it had opened share trading account of one Ms. Abhilash Sharma (Abhilash) on October 4, 2007 and of one Mr. Aditya Kumar Sharma (Aditya) on January 19, 2008. It is claimed by the appellant that it had taken all reasonable steps to assess the background, genuineness, financial soundness and trading cum investment objectives of the said clients. These clients were introduced to the appellant by Mr. Bhagwati Prasad Lohia, one of its sub -brokers, who is also registered with Sebi.
(3.) SEBI conducted investigations in respect of trading activities of Aditya and Abhilash during the period from January 1, 2008 to May 31, 2008. It was noted that both of them had traded through Mr. Bhagwati Prasad Lohia, sub -broker of the appellant. Investigations also revealed that Aditya and Abhilash were trading consistently with three investment companies namely Amar Investments Limited, Rishra Investments Limited and Shibir India Limited and a related entity, namely, Ms. Shakuntala D. Wadhwa Sharma. Aditya and Abhilash had dealt in the securities through their sub -broker on the Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). It was alleged that Aditya and Abhilash had executed large value transactions in the securities market at BSE and NSE which were not commensurate with their income level as disclosed in the KYC details. According to Sebi, the broker and the sub -broker had allowed these clients to take large positions in the market which were not consistent with their financial position. Sebi observed that trades of these clients resulted in artificial volumes and price manipulation in the various scrips dealt with by them. The broker and sub -broker exhibited negligence and lack of due diligence as they allowed these clients to take large positions resulting into artificial volumes and price manipulation of the scrip. Sebi came to a prima facie conclusion that as a broker, the appellant had violated provisions of Clause A(1) to A(5) of the Code of Conduct specified in Schedule II of the Regulations. Accordingly, it issued a show cause notice dated May 10, 2011 calling upon the appellant to show cause as to why an enquiry should not be held against it under the Securities and Exchange Board of India (Procedure for Holding Enquiry and Imposing a Penalty by the Adjudicating Officer) Rules, 1995. The appellant replied to the show cause notice denying the allegations levelled against it. After affording an opportunity of personal hearing, the adjudicating officer held that though there is no nexus established between the broker and the clients, the fact remains that the clients executed trades from the terminal of the broker and the responsibility of fair conduct in the market is on all the participants to the trade including the broker. The adjudicating officer further observed that although intention of the broker is not apparent vis - -vis the trades of the clients, the broker cannot escape responsibility for the manipulative trades that have been executed through its terminal on behalf of both the clients. He has, therefore, come to the conclusion that the appellant has failed to exercise due care and diligence in discharging its duties and found it guilty of violating Clause A(2) of the Code of Conduct as specified in Schedule II of the Regulations and imposed a penalty of Rs.50,000/ -. Hence this appeal. We have heard the learned counsel for the parties who have taken us through the record and the impugned order. On a query made by us, we were told by the learned counsel for the respondent that Sebi initiated separate proceedings against the two clients for manipulative trades executed by them as also against the sub -broker through whom the trades were executed. We are not concerned with those proceedings in this appeal. The charge levelled against the broker in the show cause notice is that it has exhibited negligence and lack of due diligence as it has allowed the clients to take large positions which are beyond their declared income. As per KYC details, the annual income of Aditya was reported to be in the range of Rs. 5 -10 lacs and that of Abhilash was Rs.1 -5 lacs. However, the clients have taken large positions in the market running into lacs of rupees which were not consistent with their financial standing. The adjudicating officer has observed that both the clients had never defaulted in their pay in and delivery obligations and that there is no nexus between the broker and the clients and also the intention of the broker is not apparent vis -a -vis the trades executed by these clients. Having said so, he goes on to hold that the broker cannot escape responsibility for the manipulative trades that have been executed through its terminal on behalf of its clients.;


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