SEBI Vs. ANAND RATHI SECURITIES PVT LTD
LAWS(SB)-2003-8-21
SECURITIES APPELLATE TRIBUNAL
Decided on August 14,2003

Appellant
VERSUS
Respondents

JUDGEMENT

G.N.Bajpai, - (1.) 0 M/s. Anand Rathi Securities Pvt. Ltd. (hereinafter referred to as ARSPL) is a member of The Stock Exchange, Mumbai (BSE). ARSPL is also registered as a stock broker with The Securities and Exchange Board of India (hereinafter referred to as "SEBI") and holds a certificate of registration bearing number INB 11121754.
(2.) 0 M/s. Amara Raja Batteries Ltd. (hereinafter referred to as ARBL), a public limited company came out with a public issue in January 1991. Thereafter, the share of ARBL was listed on BSE, National Stock Exchange of (I) Ltd. (NSE), Hyderabad Stock Exchange Ltd.(HSE) and Calcutta Stock Exchange Association Ltd. (CSE). During August 2000 to March 2001 severe fluctuation in the price of the scrip of ARBL was observed and certain complaints were received by SEBI regarding market manipulation /irregularities in the scrip of ARBL. 2.1 Based on the above, SEBI conducted a detailed investigation into the trading in the scrip of ARBL. The investigations revealed that Shri Harinarayan Bajaj and Shri Rahul Bajaj were the predominant traders in the scrip of ARBL during the period August 2000 to March 2001 and that Shri Harinarayan Bajaj and Shri Rahul Bajaj were responsible for creating a false market in the scrip of ARBL. Investigations further revealed that various members of NSE and BSE aided and abetted Shri Harinarayan Bajaj and Shri Rahul Bajaj in creating a false market in the scrip of ARBL. Therefore, vide an order dated 25.6.2003, Shri Harinarayan Bajaj and Rahul Bajaj were directed to disassociate themselves from the capital market for period of 5 years and prohibited from dealing in securities for a period of 10 years. 2.2 In the course of investigation, it was also observed that M/s. Bid Securities Pvt. Ltd., (hereinafter referred to as "BSPL"), a sub broker of ARSPL, had traded in the scrip of ARBL on behalf of Shri Harinarayan Bajaj. In view of the above, Chairman, SEBI, vide his order dated 18.6.2001 appointed Shri Piyoosh Gupta as Enquiry Officer to enquire into the dealing by ARSPL and its sub brokers in the scrip of ARBL. Thereafter, vide his order dated 5.12.2001, Shri Piyoosh Gupta was replaced by Shri J. Ranganayakulu as Enquiry Officer. He Enquiry Officer conducted an enquiry as per tHe provisions of Regulation 28 of tHe SEBI (Stock Broker & Sub Broker) Regulations, 1992 and after tHe said Regulations were amended i.e. 27.9.2002 by tHe SEBI (Procedure for holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2003 (Hereinafter referred to as "Enquiry Regulations") tHe Enquiry Officer conducted furtHer enquiry proceedings as per tHe Enquiry Regulations and submitted his report to SEBI on 17.7.2003. In his report, tHe Enquiry Officer has found that it could not be Held that ARSPL had aided and abetted Shri Harinarayan Bajaj and his family in creating a false market in tHe scrip of ARBL and that it could not be Held that ARSPL had failed to exercise due skill and care in its dealing through its sub broker and tHerefore found that it was not a fit case for imposition of penalty on ARSPL. However, in view of tHe findings with regard to tHe dealings of its sub broker, BSPL, tHe Enquiry Officer recommended that ARSPL may be directed to be more cautious in future. 3.1 Pursuant to tHe submission of report by Enquiry Officer, a showcause notice was issued to ARSPL on 18.7.2003. ARSPL submitted tHeir reply to tHe said showcause notice vide tHeir letter dated 28.7.2003. In tHe said reply, tHey have made tHe following quotes from tHe report of tHe Enquiry Officer : a. "From tHe material available it is not possible to draw any inference that ARSPL is guilty of artificially raising or depressing tHe price of tHe scrip of ARBL. THere is no proof that ARSPL was aware that tHe ultimate client of its sub broker was indulging in creating a false market in tHe scrip of ARBL by dealing with several brokers." b. "In view of tHe above, it can not be Held that ARSPL has aided and abetted Mr. Harinarayan Bajaj and his family in creating a false market in tHe scrip of ARBL." c. "On appreciation of tHe facts and circumstances as aforesaid, I do not find any fit case for imposition of penalty on ARSPL." In view of tHe above, ARSPL has submitted that as recommended by tHe Enquiry Officer tHey would be more cautious in future. THey also submitted that in view of tHe above, tHey do not want to make any submissions in person before tHe Chairman.
(3.) 0 I have considered the facts and circumstances of the case, report of the Enquiry Officer, reply of ARSPL and other material on record. The following issues arise for consideration : 4.1 Whether ARSPL aided and abetted M/s. Harinarayan Bajaj and Rahul Bajaj in creating a false market in the scrip of ARBL. 4.1.1 I note that the settlement wise trading of ARSPL for Shri Harinarayan Bajaj through its sub broker BSPL is as under : Trading, Delivery and Carry forward (Badla) position of Amara Raja Batteries Ltd. From Aug 00 to March 01 JUDGEMENT_454_TLSB0_20030.htm 4.1.2 In addition to the above, I note that ARSPL had taken delivery of 40,650 shares of ARBL in Settlement No. A 50 of BSE. However, the total quantity of shares of ARBL traded by ARSPL through various sub brokers including Bid Securities during the period was approximately 15 lakhs. Moreover, during the hearing before the Enquiry Officer, ARSPL indicated that they had also done arbitrage transactions to the tune of 43,61,133 shares for five clients during the period October 2000 to March 2001. It is also noted that ARSPL had given a large exposure to BSPL in Settlement No. A-37 of BSE whereas such large exposure was not granted in respect of other brokers. 4.1.3 In this regard, I note that ARSPL has submitted before the Enquiry Officer that they had not made any proprietary trades in the scrip of ARBL and that the trades executed by it through BSPL represent only 1.5 %(approx) of the market value in ARBL. 4.1.4 I further note that, ARSPL in their reply dated 17.8.2001 and further submissions during the hearing before the Enquiry Officer on 21.12.2001 have submitted that : a. ARBL was an A group scrip and fairly liquid. Even at a price of Rs. 300, the scrip was trading at 10 to 15 P/E which was normal and therefore there was no reason to suspect any manipulation. b. Shri Harinarayan Bajaj did not disclose the fact of his dealings with other brokers and there is no way for them to know that he was trying to rig the prices by dealing through 30 odd brokers. c. Arbitrage is a price neutral activity undertaken by investors to earn a risk free return on funds - a function of the price of a scrip on two different exchanges. Arbitrageurs are not concerned with any particular scrip but with the price differences available in scrips in which they can trade in desired quantities. Also the trading system in the Exchanges makes the counter party anonymous and there is no way for an arbitrageur to know with whom he is trading. Further, given that theirs was a fairly large organisation with over 150 people, the functions of arbitrage and dealings with sub brokers were handled by totally different people who would have no interaction in the course of their work. d. As the activity for these two settlements was slightly on the higher side, we had in exercise of due diligence care and skill and as a part of our internal surveillance mechanism advised Bid Securities Pvt. Ltd. To bring down its activity in the said scrip of Amara Raja Batteries Ltd. At such time, and as per the practice followed in our company, we also requested Bid Securities Pvt. Ltd. to confirm that genuine investors were doing the said dealings and that there was no price manipulation etc. In that behalf, Bid Securities Pvt. Ltd had issued their letter dated December 11, 2000, recording, inter alia, that its clients who were trading in the securities of Amara Raja Batteries Ltd are genuine clients and that neither Bid Securities Pvt. Ltd. nor its clients were associated with the promoters of Amara Raja Batteries ltd; that the client registration forms were complete in all respects and that the trading in the scrip of Amara Raja Batteries Ltd by the clients of Bid Securities Pvt. Ltd. did not tantamount to any unfair trade practice. e. Additionally, it is seen that during Settlement No. 31 through Settlement No. 51, the total purchases (of the shares of Amara Raja batteries Ltd) effected by Bid Securities Pvt. Ltd. was 5,64,137 against a total sale of 4,96,562. This shows that more than 88% of the transactions had been squared off. f. There was no occasion or possibility for us to know that Bid Securities Pvt. Ltd. was trading on behalf of Shri Harinarayan Bajaj as alleged or at all. Assuming whilst denying that we were aware of the fact that Shri Harinarayan Bajaj was trading in the scrip of Amara Raja Batteries Ltd through Bid Securities Pvt. Ltd., there was no compelling reason requiring us to stop Bid Securities Pvt. Ltd from trading in the scrip of Amara Raja Batteries Ltd on behalf of Shri Harinarayan Bajaj as alleged or at all. We had exercised due care, diligence and promptitude as per the normal practice and there was nothing abnormal in the trading volumes of Bid Securities Pvt. Ltd. 4.1.5 I note that there were no proprietary dealings by ARSPL in the scrip of ARBL. Moreover, the trades executed in the scrip amounted to only 1.5% of the market value and also more than 88% of the trades were squared off. In view of the above, I agree with the findings of the Enquiry Officer that from the material available, it is not possible to draw any inference that ARSPL indulged in any activity intended at creating a false market in the scrip of ARBL. I also do not find any material on record to suggest that ARSPL had aided and abetted Shri Harinarayan Bajaj in the creating of a false market in the scrip. 4.2 Whether ARSPL by virtue of its trading in the scrip of ARBL on behalf of Shri Harinarayan Bajaj through a sub broker has failed to exercise due skill and care in its dealings; and therefore, violated the Code of Conduct under Regulation 7, Schedule II of Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992. 4.2.1 I note that in their reply to the show cause notice issued by the Enquiry Officer, ARSPL has submitted that: a. Sub broker would deal with his clients separately and independently and the details of the individual clients of the respective sub brokers are available only with the respective sub broker. As the broker, their control is only at the sub broker level and not at any individual investor or client level - which is the common market practice. Besides, a sub broker is also registered with SEBI, with the obligations of the sub broker seperately defined by SEBI. b. Under the SEBI regulations and Schedule II (of the Regulations) as also under the model agreement between broker and sub broker, the primary responsibility of a direct client is of the sub broker. It is therefore neither the requirements of law nor the prevailing market practice only that the broker is required to either know or monitor the trading / details of every client of a sub-broker. c. Being a professionally managed company, as a part of the due diligence and care maintained by them and with a view to keep a check and control over exposure limits and margins etc at the sub broker level, they have devised, installed and implemented an integrated internal control system. Under that control system, different limits regarding the permissible volumes of trade are set up with regard to different sub brokers. If any sub broker, on a given date or any given settlement, exceeds his limit they are automatically informed of the same and the concerned sub broker would then not be able to enter trades in the scrips where the limits have been crossed. d. As the activity for the two settlements under scrutiny was slightly on the higher side, they had in exercise of due diligence care and skill and as a part of their internal surveillance mechanism advised BSPL to bring down their activity in the scrip of ARBL. At such time, and as per the practice followed in their company, they also requested BSPL to confirm that genuine investors were doing the said dealings and that there was no price manipulation etc. In this regard, BSPL had issued their letter dated December 11, 2000, recording, interalia, that their clients who were trading in the securities of ARBL were genuine clients and that neither BSPL nor its clients were associated with the promoters of ARBL; that the client registration forms were complete in all respects and that the trading in the scrip of ARBL by the clients of BSPL did not tantamount to any unfair trade practice. e. There was no occasion or possibility for us to know that BSPL was trading on behalf of Shri Harinarayan Bajaj as alleged or at all. They denied that they were well aware of the fact that Shri Harinarayan Bajaj was trading through our sub broker as alleged or at all. Assuming whilst denying that they were aware of the fact that Shri Harinarayan Bajaj was trading in the scrip of ARBL through BSPL, there was no compelling reason requiring us to stop BSPL from trading in the scrip of ARBL on behalf of Shri Harinarayan Bajaj as alleged or at all. They had exercised due care, diligence and promptitude as per the normal market practice and there was nothing abnormal in the trading volumes of BSPL. 4.2.2 I find that ARSPL has taken all necessary precautions to ensure that their sub brokers do not indulge in, or aid and abet others in creating a false market or in manipulation of the price of a scrip. Therefore, I agree with the findings of the Enquiry Officer that it cannot be concluded from the material on record that ARSPL failed to execute due skill and care in its dealings through the sub broker BSPL. 4.2.3 However, I also note that ARSPL had ended up with a debit balance with BSPL. I further note that, Settlement No. A-37 of BSE, ARSPL had given a large exposure in ARBL to BSPL. They have admitted this fact in their oral submissions and also stated that upon noting the higher volumes, advised BSPL to reduce exposure in ARBL. It is also noted that although they operate through several sub brokers, ARSPL had permitted the large exposure only to BSPL. In view of the above, I find that ARSPL needs to be more cautious in its dealings with sub brokers.;


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