INDIA CEMENTS INVESTMENT SERVICES LTD AND CHONA FINANCIAL SERVICES P LTD Vs. SECURITIES AND EXCHANGE BOARD OF INDIA
SECURITIES APPELLATE TRIBUNAL
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(1.) BOTH the Appellants are members of National Stock Exchange (NSE). They are registered with the Securities and Exchange Board of India (the Respondent) as Share Brokers. Maruti Organics Ltd. (MOL) is a public limited company. The said company's shares are listed on the stock exchanges at Mumbai, Hyderabad and Banglore and also on NSE.
(2.) NSE had received complaints from several brokers who had huge buy positions in the scrip of MOL in Settlement 27 of 1996, alleging that some of their clients had created huge buy positions in MOL's scrip on 3rd and 4th July 1996 and had absconded without meeting their commitments and that the dealings were carried out in an organised way to defraud the public. Complainants had requested for annulment of those trades.
Nse conducted investigations and submitted a report to the Respondent. As per the report "The trades in MOL in St.27 of 1996 were not executed in the normal course. The trades were not genuine and a fraud has been perpetrated to enable the sellers to offload the shares by creating a false market. A large false market was created by the large sellers by ensuring adequate buying interest through planting buying clients across the country- Hyderabad, Madras, Mumbai, Banglore, Ahmedabad and Delhi. These buying clients with huge net buy position had vanished from different cities. This suggest that there was an organised fraudulent attempt to defraud the buying members." In the light of the information received from Nse in its report, the Respondent conducted investigation into the alleged price manipulation in the scrip of MOL. Investigations revealed market manipulation. It was found that the Appellants had transacted business for one Madhav Chalsani and the said Madhav Chalsani had absconded without paying huge amounts towards the purchases he made. The Respondent decided to conduct an enquiry into the conduct the Appellants in this regard. An enquiry officer was appointed as per the requirement in SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (the Regulations). The enquiry officer issued show cause notices to the Appellants based entirely on the findings of the investigation, leveling the following charges..
"(i) The client was allowed to build up huge position, especially on 3rd and 4th July, 1996 and without having enough margins allowed to increase the position.
(ii) The member allowed a new unknown client, whose address/bank account had not been verified, to build up huge position in a volatile scrip.
(iii) The member did not take enough precaution to safeguard the market position. It was prominent that the member acted in haste to enroll the client and allowed them to build up huge position.
Thus the member was not careful and diligent and allowed the new client to build up huge position without having enough margin and without satisfying about their genuineness, thus exposing the market to a high risk. The member did not adhere to or follow the market convention of entering into agreement with their constituent. Hence the member violated clauses A(1-5)and B (4a) of Schedule II of regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992."
(3.) THE Appellants answered the charges. THE enquiry officer on completion of the enquiry came to the following conclusions:
"I find that the member had not ensured that the Member Constituent agreement was signed with the client before commencing the trading. However, as pointed out by NSE the "Know Your Client" concept was made mandatory only in February 1997 and was not in existence at the time of Sett. No. ,27 of 1996, but the requirement of executing Member-Constituent Agreement was in place. THE member had not defaulted in the payment of margin to the exchange. THE member has only to collect money from the absconding client.
Taking all factors into consideration, I find that there has been a fraud committed on the member by the absconding client and the member has been cheated by the clients. However, I entirely agree with the findings of NSE that the member by not following this practice, has put the settlement system at risk while accepting new business without taking proper precautions and due diligence. Had the member exercised due diligence and care the problem would not have arisen to such magnitude.
Thus by not obtaining the Member - Client Agreement, the member has violated Regulation 4.3.1 of Part: A of THE National Stock Exchange (Capital Market) Trading Regulations, 1994 which resulted in violation of clause A(5) of Code of Conduct for Stock Brokers, compliance of which is mandatory in terms of Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.";
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