MADHUKAR SHETH Vs. SECURITIES AND EXCHANGE BOARD OF INDIA
LAWS(SB)-2003-9-46
SECURITIES APPELLATE TRIBUNAL
Decided on September 18,2003

Appellant
VERSUS
Respondents

JUDGEMENT

C.Achuthan, - (1.) THE present appeal is directed against the order passed by the Respondent on 12.6.2002. By the said order the certificate of registration granted to the Appellant, a member of the Bombay Stock Exchange, (BSE) was suspended for a period of 2 years with effect from 27.6.2002.
(2.) Amara Raja Batteries Ltd., (ARBL) is a public limited company with its registered office in the State of Andhra Pradesh. It is mainly engaged in the manufacture of sealed lead acid batteries for industrial purposes. It's shares are listed on BSE, National Stock Exchange (NSE), Hyderabad Stock Exchange and Calcutta Stock Exchange Ltd. The price of ARBL's share at BSE was Rs. 91/- in the first week of October 2000. It went upto Rs. 205/- on January 1, 2001 and reached a high of Rs. 320/- on March 8, 2001. On March 9, 2001, BSE closed the normal trading at 2 p.m. to facilitate the Badla session. At that point of time price of ARBL scrip was Rs. 308.40. Same day NSE was functioning till 4.30 p.m. and the price of the scrip fell to Rs. 266.75 by the time NSE was closed. It was Friday. Market was closed on Saturday and Sunday. On Monday i.e. March 12, 2001 when the market opened BSE adjusted the price of various scrips to that of NSE including that of ARBL. The price fall continued on 12th March and thereafter by March 19, 2001 it touched a low of Rs. 78.50. Abnormal changes were not only in the price but were noticed in the volume also. The volumes in the scrip of ARBL traded were approximately 50, 000 to 60, 000 per day in October 2000. It went upto about 8-15 lakh shares per day in the month of February and first of week of March 2001 at both BSE & NSE. The average trading in the scrip of ARBL from January to March 2001 were to the extent of 10-15 lakh shares per day i.e. approximately 30% of the free floating stock of ARBL. In the wake of such abnormal price and volume movement in the ARBL scrip traded on BSE & NSE, the Respondent received complaints alleging market manipulation/irregularities in the trading of the scrip. In that context the Respondent ordered investigation to ascertain the role played by various persons/intermediaries, and violations, if any, of the regulatory provisions by them. The Appellant was one of the members whose involvement in the matter was subjected to investigation. The investigation is stated to have revealed that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the dominant traders in the ARBL's shares during the period August 2000 to March 2001, and some of the members of BSE and NSE had failed to exercise due care and skill in their dealings and also aided and abetted Shri Harinarayan Bajaj in creating a false market in ARBL's scrips. In the light of the information collected during the course of investigation, it was noticed that the Appellant had failed to exercise due diligence and aided and abetted Shri Bajaj. In that context the Respondent decided to conduct a detailed inquiry into the role and conduct of the Appellant in trading in the said scrip. Accordingly an Inquiry Officer was appointed on 18th June, 2001 to inquire into the affairs of the Appellant in his dealings in the scrip of ARBL and the possible violations of the rules, bye-laws and regulations of the Stock Exchanges, provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (the FUTP Regulations) and the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (the Stock Broker Regulations). The Inquiry Officer on concluding the inquiry came to the conclusion that the Appellant had failed to exercise due care and skill in his dealings with Shri Bajaj in the scrip of ARBL as mandated by clause A(2) of the Code of Conduct applicable to the Stock Brokers and also, that the Appellant had aided and abetted Shri Harinarayan Bajaj and his family members in creating a false and misleading market in the scrip of ARBL violating the provisions of the FUTP Regulations, that the Appellant enabled Shri Bajaj to build huge positions in the scrip of ARBL which ultimately resulted into the creation of false market in the scrip of ARBL. He also viewed that the Appellant had executed 39.39% of total trades in the scrip of ARBL for Shri Bjaj in BSE and the same can not be treated as a normal brokerage transaction. He recommended suspension of the certificate of registration granted to the Appellant for a period of two years. The Respondent vide notice dated 20th February, 2002 communicated the findings arrived at by the Inquiry Officer along with the recommendation of the Inquiry Officer to the Appellant and asked him to show cause as to why the penalty as recommended by the Inquiry Officer should not be imposed against him. The Appellant responded to the same by filing written explanation and also by making oral submissions before the Respondent's Chairman. The Appellant denied the charges and stated inter alia that he was not involved in the price manipulation of the scrip of ARBL and that he did not aid and abet Shri Bajaj. The Chairman of the Respondent adjudicated the show cause notice. He accepted the recommendations of the Inquiry Officer and passed an order on 12.6.2002 suspending the certificate of registration granted to the Appellant, for a period of two years with effect from 27.6.2002. Claiming to be aggrieved by the said order, the Appellant preferred the present appeal. The substantive prayers in the appeal are that (i) the Respondent's order dated 12.6.2002 be set aside (ii)that in case the suspension is to be sustained the period of suspension be deemed to have commenced from 16.3.2001.
(3.) SHRI Madhukar Seth/ Counsel made the following submissions. The Appellant is a member of BSE since 1994 without ever defaulting on payment and was always taking due care and caution in his business, that the Appellant came across with SHRI Harinarayan Bajaj and accepted him as a client after taking "know your client" form and executing an agreement, in August 2000. SHRI Bajaj was mostly dealing in the shares of ARBL, that the margins and payments were regularly collected from him, as also the delivery of shares. On 12.3.2001 the price of the ARBL scrip crashed and SHRI Bajaj failed to honour his payment commitment and his cheques were dishououred. The whole period covered under the impugned order can be divided into two parts (1) August 2000 to 9th March 2001 and (2) 12th March 2001 onwards. As far as the 1st part is concerned there was no problem, that BSE conducted inspection of the records of the Appellant and nothing adverse had been noticed, that BSE had not viewed that the Appellant was not collecting adequate margins or was found wanting in any other matter. It was submitted that the steep fall in price of the ARBL scrip on 12th March 2001 and thereafter was not the creation of the Appellant and that the Respondent itself has attributed the cause to SHRI Harinarayan Bajaj as the Inquiry Officer in his report has stated that "it is clear from the above that SHRI Harinarayan Bajaj and his son SHRI Rahul Bajaj were responsible for the creation of a false market in the scrip of ARBL". If the price of ARBL scrip had not crashed, the crisis would not have occurred. The Appellant had taken due skill and care together with caution in his dealings because he had taken client agreement, collected client a/c opening form, taken deposits and margins from the client from time to time, collected payment on time for pay-in to the Exchange and deliveries were collected in time for sale of shares, that it was SHRI Bajaj's dishonesty that put all those dealing with him in trouble. The Appellant had enquired about the financial position of SHRI Bajaj and based on the available information there was no reason to believe that he was financially unsound not to deal with. According to the Respondent about 30 brokers were trading for SHRI Bajaj, that it does not stand to reason to say that all the 30 brokers were lacking care, and there was no such charge also against the brokers. At no time there was any criticism by the Surveillance Department of BSE or NSE of adequacy of care or lack of care on the part of the Appellant or any other broker who traded for SHRI Bajaj and this shows that the Brokers were careful till the going was good. The Appellant has not done any transaction on his account and he has not artificially raised any price, that he acted only as broker and he was not aware that SHRI Bajaj was acting through many brokers and that SHRI Bajaj was jacking up the scrip price, that he came to know that other brokers were also trading for SHRI Bajaj only on receipt of the investigation report from the Respondent. The Appellant had obeyed every rule/regulation of BSE/and the Respondent applicable in handling the client. Trading in BSE is done on online and there is an online surveillance system in BSE and through this system BSE had access to the details of the transactions and the persons from/for whom the transactions were effected, that the identity of client was not available to others except to BSE, that BSE very well knew that Bajaj was trading in the shares of ARBL through 30 brokers. Knowing thus the role of SHRI Bajaj neither BSE nor SEBI did anything to stop him from manipulating the market. At no stage the Surveillance Department of BSE had imposed any special margin and/or ad-hoc margin so as to suspect anything wrong in respect of the trading in ARBL scrip, that since the Surveillance Department had all the data including the price variations in the scrip, it was its duty to make inquiry and inform/caution the Brokers or adopt other measures to prevent the manipulations. The Surveillance Deptt. only was knowing about the Brokers who were carrying out transactions in the matter and could have found out as to who were the persons behind the market manipulation. Though the Surveillance Department was well aware of the upward movement of the price of the scrip from Rs. 80 to Rs. 308 it did nothing to stop the crisis. In the circumstances finding fault in a broker is wrong and the Respondent ought to have found fault in the Surveillance Department, for its failure. The Appellant was not aware of any position as there was huge trading in ARBL's scrip and his volume was hardly 15% thereof. The Appellant did not aid SHRI Bajaj, to manipulate the market, that he only acted as Broker. He is a victim of the circumstances and also because of the short sale made by certain operators in market from 2.3.2001. He lost heavily on SHRI Bajaj alone, that if he had colluded with SHRI Bajaj he also would have earned, like SHRI Bajaj, a lot of money. He did not know till the SEBI report disclosed, that 90% of BSE's trading volume in ARBL's scrip was for SHRI Bajaj. The charge of aiding and abetting has been brought in without any basis, that behind "aiding and abetting" there should be an intention that the Inquiry Officer has not established any such intention of the Appellant, that it is also not the allegations that the Appellant had beneficial interest in the transactions, that the charge of aiding and abetting is based only on the inference by the Inquiry Officer. The Appellant reiterated that as the investigation by the Respondent revealed that SHRI Harinarayan Bajaj and his son SHRI Rahul Bajaj were the predominant traders in the ARBL's scrip during the period August 2000 to March 2001, that their trading accounted for approximately 30% of the total trading on BSE and NSE, and they had absorbed most of the deliveries in the scrip by purchasing and carrying forward their position on BSE. This itself proves that due care and skill was exercised by the Appellant at all times by taking proper margins from Bajajs for their carry forward positions and taking deliveries after making due payments only, that only when the ARBL's scrip price crashed on 9.3.2001 and downward trend continued. It was in the context that the margin cheques collected from SHRI Bajaj for Rs. 19 lakhs and RS. 35 lakhs got bounced and the pay order for Rs. 50 lakhs taken in faovur of Sheth Securities P. Ltd. (sister concern) was not handed over to the Appellant, the problem surfaced. On seeing the price of the scrip nose diving, SHRI Bajaj decided to back out from his commitments and did not hand over the pay order of Rs. 50 lakhs and also gave instructions to stop the payment of 2 cheques i.e. for Rs. 19 lakhs and Rs. 35 lakhs, which could have actually taken care of Rs. 1, 04, 00, 000 liability. There were consecutive 8 downward circuits to the scrip immediately on the opening of the trading session on 12th March and nobody had any exit route and the things went beyond everybody's control only due to faulty circuit system imposed by the Respondent, that the Respondent subsequently realised its folly and removed the circuit system from ARBL scrip and all other Group A scrips, that had the faulty circuit system not been there, the Appellant and other Brokers would have been saved. The different settlement days followed by NSE & BSE had also contributed to the crisis. He had taken all care prescribed by the Respondent, that even the ledger of SHRI Bajaj shows very smooth working of the client with credit balance even after paying all margins demanded by BSE, but the price cashed beyond the margins, that as the BSE's margin system was unscientific and adhoc, brokers suffered losses. The brokers took due care and skill, and still the Respondent punished brokers, the real victiMs. The Appellant has been charged on two counts i.e. (1) not taking due care and skill (ii) aiding and abetting SHRI Bajaj. These two charges can not stick together as due care not taken means the Appellant was honest and tried to take care but failed to take due care or sufficient care, while the charge of aiding and abetting a criminal implies that the concerned person was dishonest and hence aided the person in doing wrong things, that if the Appellant was dishonest there was no question of taking due skill and care, that thus the charge of "lack of due care" applies only if the Appellant was honest and the second charge of aiding applies only if the Appellant was dishonest, that the Appellant can not be both honest and dishonest at the same time, so atleast one charge has to be dropped. The Appellant's business was stopped from 16.3.2001 by BSE at the behest of the Respondent due to ARBL scrip fiasco. During the investigation period his business was stopped, and the Respondent passed the order awarding penalty of suspension for 2 years with effect from 27.6.2002. It was submitted that, even if it is assumed, without admitting that the imposition of penalty of two years' suspension by the Respondent is tenable, the suspension should be considered to have commenced from 16.3.2001, that he can not be deprived of his business from 16.3.2001 till 27.6.2002 for nothing. In this context he referred to the approach of the courts in criminal cases taking into consideration the days spent in jail by the accused for the purpose of computing the period of imprisonment awarded after trial. The Appellant referred to the arbitration award in AM No - M - 070/2001 in Seth Securities P. Ltd. v. Harinarayan Bajaj passed by the Arbitrators (NSE) in favour of the Appellant's sister concern to show that SHRI Bajaj had defaulted in making the payments due to the Appellant.;


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