SEBI Vs. DOOGAR AND ASSOCIATE SECURITIES LTD
LAWS(SB)-2003-10-1
SECURITIES APPELLATE TRIBUNAL
Decided on October 10,2003

Appellant
VERSUS
Respondents

JUDGEMENT

A.K.Batra, - (1.) 1 M/S Doogar And Associate Securities Ltd, (hereinafter referred to as DASL ) is a member of the National Stock Exchange (for brevity's sake referred to as the NSE) and registered with the Securities and Exchange Board of India, 1992 (hereinafter referred to as the SEBI) as a stock broker. The SEBI registration number of the said broker is INB 230876132. DASL is also a registered sub-broker of BSE since November 17, 2000. 1.2 A sudden spurt in the price of the scrip of M/s Munga Holdings Ltd. (hereinafter called 'Munga') which is listed only at the Delhi Stock Exchange (for brevity's sake referred to as the DSE ), from Rs. 3.50 on January 1, 2001 to Rs. 43/- on August 31, 2001, was noted. As the rise amounted to 1130% in the price of the scrip in only 52 trading days, and it was found that in the above mentioned period, only 6 brokers viz. Securities Brokers of India Ltd., Mukesh Gupta & Co., SKG Stock and Share Brokers Ltd., SRG Global Capital Pvt. Ltd., D B (India) Securities Ltd and SMC Share Brokers Ltd. were trading in the scrip, an investigation was carried out by the DSE, which subsequently forwarded a report to SEBI. 1.3 Based on the investigation report submitted by DSE, a preliminary investigation was carried out by SEBI where after the Chairman, SEBI vide his order dated August 08, 2002 ordered a detailed investigation into the possible violations of the SEBI (Stock Brokers and Sub-brokers) Rules and Regulations, 1992 (hereinafter referred to as the Broker Regulations) and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the FUTP Regulations) by various persons while trading in the scrip of Munga. The investigations found that DASL among others, dealt in the scrip of Munga, as a sub broker through a member of DSE, called SKG Stock and Share Broker Ltd. (hereinafter referred to as 'SKG') without obtaining registration as a sub broker from SEBI, resulting in the possible violation of clause A (5) of the code of conduct under Regulation 7 of the Broker Regulations and hence recommended that enquiry proceedings be initiated against DASL under the provisions of the SEBI (Procedure for holding Enquiry by the Enquiry Officer and Imposing Penalty), Regulations, 2002 (for brevity's sake referred to as the said Regulations). 1.4 Accordingly, an Enquiry Officer was appointed by the Chairman, SEBI vide an order dated January 28, 2003, under Section 4(3) of SEBI Act, 1992 (hereinafter referred to as the Act) read with Regulation 5(1) of the said Regulations to enquire into the possible violations of the Broker Regulations and the FUTP Regulations. Thereupon the enquiry officer issued a show cause notice dated February 4, 2003, under Regulation 6 of the said Regulations, upon DASL, in terms of which the broker was called upon to show cause as to why an appropriate order /orders under Regulation 13 of the Regulations, should not be passed against them for the said violations. 1.5 In reply to the same, DASL vide their letter dated February 27, 2003 while denying that they had indulged in any price manipulation or had acted without being registered with SEBI, inter-alia submitted that the total value of the shares transacted by them was a meagre Rs. 32, 785/- during the entire period of two months for a total number of 3600 shares and that they earned a small brokerage of Rs. 400/- from the client. Since DASL also requested for a copy of investigation report to enable them to reply to the show cause notice, a copy of the extract of the relevant portion of the investigation report was forwarded to them vide letter dated February 28, 2003. Thereupon, although DASL vide their letter dated March 07, 2003 inter-alia requested that their Director, Mr. M K Doogar, be permitted to appear before the enquiry officer on March 05, 2003, Mr. Doogar failed to appear on the said date. Thereafter the enquiry officer granted an opportunity to DASL to inspect certain documents on March 20, 2003. Shri Balveer Chowdhary, the authorized representative of DASL appeared before the enquiry officer on March 20, 2003 for the said purpose. 1.6 Thereafter, DASL sent a letter dated March 26, 2003, in which they inter-alia, denied committing any breach of any of the terms and conditions and / or provisions of SEBI Act and / or the Rules, Regulations or Guidelines framed by SEBI Act. They denied that they had violated Clause A (5) of Code of Conduct read with Regulation 7 of the Broker Regulations, Section 12 of SEBI Act and / or Rule 3 of SEBI (Stock Brokers and Sub Brokers) Rules, 1992. They further contended that they had traded on behalf of their client in the normal course of business without suspicion of any unwarranted movement in the price of the scrip and that the client for whom the transactions were undertaken had been dealing with them for several years and in view of the same, there was no reason to believe any wrong dealings on his part. It was submitted that they had not been engaged in any manipulative, fraudulent or other offensive activities ever since they started acting as a stock broker. They stated that they were already registered as a stock broker with SEBI and were a member of NSE (Regd. No. INB 230876132) prior to their dealings in the shares of Munga and therefore a separate registration as sub broker was not sought. It was further contended that SKG as the main member of DSE, was primarily responsible to get them registered as a sub broker under them, before introducing a third party to the physical shares in the market. They further denied that they had acted as an unregistered sub-broker.
(2.) 1 Upon being referred to a statement made by Shri Balveer S Chaudary, on September 9, 2002, before the investigating authority to the effect that DASL had acted as a sub broker for the trades executed for their client M/s Poddar & Co., in the scrip of M/s Munga Holdings and that DASL was not registered as a sub-broker with SEBI, and that as they are the member of NSE and Shri Poddar was dealing with them for a long period, the said deal had been executed to render the service to Shri Poddar, DASL stated that Mr. Balveer Choudhary had misunderstood their position vis-�-vis SKG's position. DASL insisted that they had complied with all the provisions relating to sub brokers regulations, such as maintenance of specified books of accounts, carrying out client verification / registration and had even executed the client agreement DASL assured that as they were registered as a broker and were a member of NSE, they would be more responsible in trading with clients / complying with rules / regulations. It was further submitted that in their course of carrying out business as a stock broker, they always entered into transactions on behalf of their clients on their instructions and that as long as the dealings of a client was fair i.e. he was fulfilling his obligations in a timely manner, they had no reason to believe that a particular order out of a number of other orders of such a client, would result in any kind of price manipulation as alleged. 2.2 DASL submitted that not only during the period covered under the investigation, but for the period prior and subsequent to that period also, they had not entered into any transaction in the scrip of Munga, either on their own account or any of their directors' account. The transactions were carried on behalf of the client as per their instructions, for no personal gain or benefit except with a view to earn brokerage and that they were not aware that the said transactions were carried out for some ulterior purposes. It was stated that the said transactions were carried out bonafide, believing their client with whom they had long dealings in the past. In view of the same, they felt that they should not be held responsible for the alleged manipulations of the share price of Munga and hence requested for being granted a personal hearing. 2.3 Accordingly, DASL was asked to appear for a personal hearing before the enquiry officer on April 25, 2003, which was rescheduled to April 22, 2003. On the said date Shri M K Doogar, Chartered Accountant and Director, DASL, appeared before the enquiry officer and reiterated the submissions made earlier. He requested that the enquiry proceedings should be dropped against DASL. Ased on the submissions made on behalf of DASL, the enquiry officer submitted his report dated May 23, 2003, in which it was inter-alia noted that although there were certain lapses on the part of DASL, due to insufficient evidence to show that their actions had contributed to the market manipulation in the scrip of Munga Holdings Ltd, DASL would have to be given a benefit of doubt. As regards the charge on them having acted as a sub broker without registration, the enquiry officer concluded that DASL had dealt as a sub broker for 3600 shares of Munga during the relevant period, the value of which, at that point of time was Rs. 32, 795, thereby earning a brokerage of Rs. 400/-. The Enquiry Officer recommended that the registration of DASL, Member of NSE be suspended for a period of one month on the ground that DASL had violated Clause A(5) of Code of Conduct read with Regulation 7 of the SEBI Brokers Regulations and Section 12 of the Act as well as Rule 3 of the SEBI (Stock Brokers and Sub Brokers) Rules, 1992. 3.2 Thereafter, a notice dated June 16, 2003 was issued to DASL calling upon them to show cause in terms of Regulation 13 (2) of the said Regulations as to why penalty as recommended by the enquiry officer should not be imposed upon them and to reply to the said notice within 15 days of the receipt of the notice failing with SEBI would proceed ex parte. DASL was also asked to indicate whether they desired a personal hearing. In reply to the same, DASL vide their letter dated July 03, 2003 requested for a personal hearing and indicated that their reply if any, to the show cause notice would be given at the time of such hearing. Pursuant to the same, DASL was granted a hearing which though scheduled for August 27, 2003 was on their request, adjourned to September 08, 2003. Same was and later rescheduled to September 12, 2003. 3.3 On September 12, 2003, Shri Dinesh Agwani, Advocate, Shri M.K. Doogar and Shri Balveer Chowdhary appeared on behalf of DASL before me and reiterated the submissions made earlier and further submitted as follows : 1. A corrigendum dated May 20, 2003 was issued by the enquiry officer upon the conclusion of the hearing, whereupon, the original show cause notice was modified and instead of regulation 16 of the Regulations, Regulation 13 was relied upon. Hence DASL was called upon by the enquiry officer to file a further reply to the show cause notice, within 10 days from the date of receipt of the notice. However, while the said corrigendum was received by DASL on or around May 23, 2003 and a reply as desired, was filed on June 3, 2003, no personal hearing was granted. Instead a notice dated June, 16, 2003 was received by them which called upon them to show cause in terms of Regulation 13(2) of SEBI Regulations 2002 as to why the penalty as considered appropriate should not be imposed. However, the enquiry officer enclosed along with the said show cause notice, his report dated May, 23, 2003 without even waiting for their reply. In view of the same, the report of the Enquiry Officer was bad in law. 2. The show cause notice issued under Regulation 6 of the SEBI (Procedure for holding enquiry by enquiry officer and imposing penalty) Regulations, 2002 was itself bad in law in as much as the Board has travelled beyond the investigation report while issuing the show cause notice dated February 4, 2003. The investigating authority had held that DASL had violated clause A(5) under Regulation 7 of SEBI (Stock Broker & Sub-Broker) Regulation 1992, while in the show cause notice, besides alleging violation of the said regulations, the SEBI has increAsed the jurisdiction by alleging that DASL has violated Section 12 of the SEBI Act and Rule 3 of SEBI (Stock brokers and sub-brokers) Rules, also. 3. The enquiry report was liable to be quashed and no penalty as proposed was to be imposed due to the fact that while SKG was admittedly the main broker under whom DASL was allegedly acting as sub-broker, no action has been taken against the main broker. Further, since DASL was a member of NSE, there was no need to get itself registered once again as a sub-broker. If at all, the registration of DASL as a sub broker was required, then the onus was upon the broker with whom the alleged sub broker was affiliated. (To support their stand, DASL referred to Regulation 11 and Form-C and Rule 5 of the SEBI (Stock brokers and sub brokers) Rules, 1992 ).
(3.) THE circular dated January 16, 1998 relied upon by the enquiry officer was not mandatory and only advisory in nature. In view of Regulation 11, the said circular was contrary to the Broker Regulations.;


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