Remanded

Suresh Kabra v. SEBI

SAT6 Oct 2000

Case brief

AI extract

What is this about?

The SAT allowed an appeal filed by shareholders against SEBI for issuing only a warning to a broker instead of suspension, as the matter involved an unresolved dispute requiring further factual inquiry.

What did the court decide?

The impugned order was set aside and the matter remanded to SEBI for disposal after receiving the Stock Exchange's report and necessary information from the appellants.

What the court decided

AI extract

Outcome

The impugned order was set aside and the matter remanded to SEBI for disposal after receiving the Stock Exchange's report and necessary information from the appellants.

Issue for consideration

Whether the appellants were entitled to prefer an appeal under section 15T of the Act despite the order being directed against the respondent broker. +2 more

A compact analysis

This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.

Suresh Kabra Vs. SEBI — Securities and Capital Markets | SAT (2000)

Remanded

Suresh Kabra v. SEBI

SAT6 Oct 2000

Download

Case brief

AI extract

What is this about?

What did the court decide?

The impugned order was set aside and the matter remanded to SEBI for disposal after receiving the Stock Exchange's report and necessary information from the appellants.

What the court decided

AI extract

Outcome

The impugned order was set aside and the matter remanded to SEBI for disposal after receiving the Stock Exchange's report and necessary information from the appellants.

Issue for consideration

Whether the appellants were entitled to prefer an appeal under section 15T of the Act despite the order being directed against the respondent broker. +2 more

A compact analysis

¶10

turn on receipt of the copy of the complaint, vide their letter dated 9.4.1997 requested Respondent No.3 to examine the matter and take expeditious steps to redress the grievances of the Appellants. A copy of this communication was endorsed to the Appellants also. The Respondent No.2 refuted the claim and denied the charges. They claimed that since the shares were not sold to them as alleged, there was no question of making payment to the Appellants. Respondent No.3 vide their letter dated 10.1.1998 informed Respondent No.1 that the matter was placed before the Investors Grievances Redressal Committee (IGRC) on 3.10.1997 and the Committee viewed that the matter involved a dispute, and therefore advised the Appellants to "refer the matter to Arbitration under the Rules, Bye-laws and Regulations of the Exchange". In view of the divergent versions on the issue coming from the parties involved, Respondent No.1 decided to conduct an enquiry in the matter. The enquiry officer appointed for the purpose, after concluding the enquiry stated that the scope of the enquiry cannot be extended to find out the facts regarding the merit of the Appellants' claims, as the Respondent was not the proper authority to adjudge the claims under dispute between a client and a broker. However, the enquiry officer concluded that Respondent No.2 had not issued contract notes to the Appellants as required and in that context he recommended suspension of the certificate of registration of the said Respondent for a period of two months. Thereafter, Chairman of Respondent No.1, considering the recommendations of the enquiry officer and the version of the parties involved, concluded that there was no evidence to show that Respondent No.2 had failed to issue contract notes. However, he held that the action of the said Respondent in putting their stamp on tile transfer deed and actively extending their co operation to the Appellants by resorting to arbitration, filing of FIR with the police against Mahesh Kothari, etc. raised suspicion as to the conduct of the Respondent in the ling. In that context it was decided by him to issue a warning to the said respondent to be careful in future and to refrain from involving in any activity which is un-business like and might lead to interference with the smooth functioning of the market and to strictly abide by the statutory requirements. By said order Respondent No.3 was directed to look into the role of Respondent .2 in affixing their stamp on the transfer deeds and raising bills etc. and submit a thereon. In the said order the conduct of the appellants during the enquiry has also been subjected to adverse criticism.

¶11

Respondent No. 1 had raised certain preliminary objections on the maintainability of the appeal. According to them the impugned order has been passed against Respondent No.2 and not against the Appellants and as such they are not aggrieved persons entitled to prefer an appeal under section 15T of the Act. In this connection it is pertinent to mention that the enquiry was carried out by Respondent No. 1 taking cognizance of the grievances filed with them by the Appellants, that the Appellants were a party before Respondent No. 1 and also they were heard in the enquiry. Having taken cognizance of the grievances of the Appellants and allowed them to actively participate in the proceedings to pursue their grievances, in case they felt aggrieved by the finding/decision of the Respondent, in all fairness they cannot be denied the right of appeal against the order. In the light of the facts and circumstances peculiar to the present case, it cannot be said that the Appellants are not entitled to prefer the present appeal. The Respondent had also submitted that the appeal is barred by limitation as it was filed after 30 days from the date of the order. This is not correct. Section 15T of the Act permits an aggrieved person to file an appeal within a period of 45 days from the date on which a copy of the order is received by him. In the present case, by the Respondent's own version, the order was sent to the Appellants on 1.3.2000 and the appeal was filed on 17.4.2000. Assuming that the order was served on the Appellants on 1.3.2000 itself the Appellants had time upto 14.4.2000 to file the appeal. Since 14^th , 15^th , and 16^th April were closed holidays for the Tribunal, filing of appeal on the 17^th April i.e. the next working day following the due date, cannot be considered as delayed filing so as to be hit by the statutory limitation. Respondent No.2 had also raised certain preliminary objections in paras 1 to 10 of their reply. Most of them are in the nature of observations or submissions relatable to the merits of the case and not in the nature of objections as such having any direct bearing on the legal factum of the maintainability of the appeal. I have carefully considered these objections also. But I do not find them sound enough to persuade me to view that the appeal is not maintainable.

¶13

Shri. Suresh Kabra, appearing in person and also representing Shri Dilip Kabra the co appellant submitted that they had sold 5 lakhs shares of Rhutu Bearings and Estates (India) Limited to respondent no. 2 on 1.8.1996 @ Rs. 20 per share and respondent no. 2 in turn delivered those shares to the counter party broker one Shri. Mahesh Kothari. According to Shri. Kabra the appellants have the acknowledgements from Respondent no.2 in regard to the said delivery of shares. He also submitted that Respondent No.2 had raised two bills on the said Mahesh Kothari for Rs. 1 crore towards these 5 lakhs shares. Shri Kabra also submitted that Shri Mahesh Kothari had issued contract notes to Respondent No.2 confirming the transaction. But Respondent No.2 did not issue the requisite contract notes, and bills in regard to the said transaction to the Appellants. According to Shri Kabra Respondent No. 2 did not even report the transaction to Respondent No.3 which they were bound to do under the regulations and by not doing so they contravened the statutory requirements and deserved to be punished. Since Respondent No.2 did not make payment to the Appellants despite repeated requests, they approached the Investor Service Cell of Respondent No.3. Sliri Kabra said that Respondent No. 2 cannot disown the receipt of the shares, in view of the fact that they had endorsed the shares by affixing their stamp on the share transfer forms, that they had raised bills against Shri Kothari, that since Kothari did not pay the sale price the said Respondent had approached the Investors Service Cell and that they had resorted to in house arbitration against the said Mahesh Kothari and also filed an appeal against the arbitration order, before the Full Bench of the Arbitration Committee. They failed in the arbitration for want of effective prosecution of the matter from their side. Shri Kabra had cited the relevant dates and materials / correspondence in support of his contentions as stated in the Appeal Memorandum. He was emphatic in his submission that the Appellants had sold the shares to Respondent No.2 and Respondent No.2 had acknowledged the same and their further conduct also established beyond doubt the fact of the transaction. The Appellants' representation to Respondent No.3 seeking payment and action against Respondent No.2 was referred to IGRC. The said IGRC felt that since it was riot possible to reconcile the matter, as parties materially differed, the Appellants were advised to take recourse to arbitration. Shri Kabra submitted that the Committee consisted only one member acid not two as required, and the single member did not appreciate the full facts of the case and recommended arbitration though it was not a subject matter fit for arbitration. There was no dispute between the parties to refer the matter to arbitration as Respondent No.2 had already admitted receipt of the shares. An artificial dispute was raised so as to justify reference to ration to help the said Respondent. Shri Kabra submitted that issuing contract notes against the receipt of shares was the duty of Respondent No.2. Reporting the transaction to BOLT was also the duty of the Respondent. Having accepted shares making payment to the seller was also the duty of the respondent. But the respondent did not comply with any of this requirement. Even after bringing the conduct of the respondent to the notice of respondent no. 1 and Respondent No.3 they did not take any punitive action against the Respondent. Shri Kabra alleged that Respondent No. 3 was protecting Respondent No. 2 and Respondent No. 1 was guided by the version of Respondent No.3. He stated that Respondent No. 1 had directed Respondent No.3 to look into the conduct of the Respondent and take action against them, as far back in 1998. However, Respondent No. 3 did not heed to this advise. Because of the inaction of Respondent No.3 in the matter Respondent No. 1 had again asked Respondent No.3 vide the impugned order to look into the conduct of Respondent No.2 and report the matter to them. According to Shri Kabra, the Appellants' submissions both written and oral, before the officers of Respondent No. 1 and Respondent No.3 have been ignored and viewed the matter in such way so as to favour Respondent No.2. He denied the contention of Respondent No.2 that they were not parties to the transaction, that it was a direct transaction between the Appellants and Shri Mahesh Kothari.

¶15

sufficient opportunities to explain their case. Shri Kabra submitted that he had raised several points to be considered by Respondent No. 1 in the inquiry, but none of them has been dealt with in the order. On the contrary the Appellants have been blamed for non-submission of information called for by Respondent No. 1 and criticised for not co-operating with them in the inquiry. Both these charges are baseless, he said. According to him the Appellants had in no way obstructed the proceedings so as to delay the inquiry that whatever particulars required for the purpose of the inquiry were readily furnished. Since some of the particulars called for were not even remotely connected with the subject matter of the inquiry, which was confined to the conduct of Respondent No.2, the Appellants sought the views of Respondent No.1 as to the very purpose of calling for such information, as for compliance of such a request more time was required and that would have caused further delay in concluding the enquiry. Respondent No. 1 never explained the purpose, but insisted on demanding those particulars, which had no relevance at all to the matter under inquiry. The Appellants had fully complied with the order of the Bombay High Court in the writ petition filed by them. He submitted that there was no basis at all for Respondent No.1 to suspect the genuineness of the transactions in the light of the material facts placed before them. Further, Respondent No.1, merely issued a warning to Respondent No.2 ignoring the enquiry officer's recommendation based on evidence, for suspending the registration certificate. He re-iterated that the inquiry was conducted in a partisan manner denying the Appellants, the minutes of the proceedings and inspection of the documents relied on, and also ignoring their request for a full hearing to substantiate their grievances. The order does not refer to any of the submissions made by the Appellants but quotes lavishly the version put forth by Respondent No.2 and Respondent No.3. Shri Kabra submitted that though Respondent No.2 had not only failed and neglected to discharge their duties and obligations as a registered broker to pay the sale proceeds to the client, but also indulged in flagrant violation of the Rules, Regulations and Bye-laws in not reporting the transactions to the Exchange, in not recording the transactions on BOLT, and in not issuing the requisite contract notes/bills to the Appellants. Despite these omissions and commissions having brought to the notice of Respondent No.1 and Respondent No.3, they did not take any action worth mentioning against the said Respondent. He cited the provisions of section I5F of the Act, providing monetary penalties to meet with such defaults by brokers and submitted that Respondent No.1 did not want to penalise Respondent No.2 by resorting to adjudication proceedings under the said section I5F.

¶20

She submitted that from the conduct of the Appellants and the tone of their correspondence one gets an impression that the Respondent was to carry out the enquiry at the pleasure of the Appellants that through out the enquiry the Appellants had adopted such a posture. The Appellants conduct, according to her, was suggestive of the fact that they were not interested in a proper and prompt inquiry in the matter, but relished delaying the inquiry proceedings indefinitely. She submitted, in an inquiry like the present one, there is no statutory requirement to issue a show cause notice to the complainant. Inquiry was not against the complainant. The complaint served as a source of information and once the enquiry get started, it is for the enquiry officer to decide the course of enquiry and not for the complainant to compel the enquiry officer to pursue the enquiry on the line of the complainant's liking. Since the hearing before Respondent No. 1 being in the nature of quasi-judicial proceeding it is not required to reply to each and every communication of the complainants and the question of making available the minutes of the proceedings to them did not arise. If the Appellants had been genuinely interested in recovering the money allegedly due from Respondent No.2 they should have focussed on pursuing the course of arbitration as suggested by Respondent No.3. Surprisingly they were not at all interested in filing a reference for arbitration till the due date prescribed for the same.. Further, they opted to file a complaint with Respondent No.3 after a lapse of nearly 7 months of the alleged transaction. Even when the enquiry proceedings were on, they filed a Writ petition before the Bombay High Court, but did not follow the directions given by the Bombay High Court in the said Writ Petition. According to her the Appellants were adopting dilatory tactics to delay the inquiry proceedings for reasons best known to them. She submitted that the Appellants had not substantiated their complaint at any point of time before Respondent No. 1, The Appellants did not furnish tile information called for by the Respondent obviously for the reasons that the specific information would have exposed the falsity of their complaint. The information sought during the enquiry was relevant for determining the Appellants' title to the impugned shares because from the facts and circumstances of the case, a doubt had arisen about the genuineness of tile transactions. It was absolutely necessary in the context to know the as to how the Appellants, who are stock brokers, could enter into a sale transaction of such a huge quantity of shares without asking for contract notes, that how the Appellants came into possession of such a huge quantity of shares. Why the Appellants had kept quiet for a period of about 8 months to prefer a complaint and never insisted Respondent No.2 to issue contract notes and why the Appellants who knew the market system entered into a transaction outside stock exchange? She submitted that answer to these questions were crucial in deciding the genuineness of the transaction and to decide the attendant follow up. She stated that if the transaction had been a clean and genuine one, the appellants would not have refused to furnish the information called for by the Respondent. She further submitted that the Appellants were attempting to enforce the alleged claim through Respondent No. 1, knowing very well that the Respondent is not the agency for that purpose. However, the Appellants, though belatedly did accept the fact that arbitration is the proper course to get their claim settled and accordingly an arbitration application has been filed for the purpose on 30.7.1999, before the Arbitration Committee. She submitted that the impugned order was passed after taking into consideration all the relevant facts and submissions made by the parties. Since it was not proved beyond doubt that there had been a genuine transaction of

¶22

The learned Counsel, Shri Girish B Kedia, appearing for Respondent No.2 submitted that the Appellants had not sold the shares through the Respondent at any point of time and they had not received any brokerage in this regard. He submitted that since there was no client broker relationship between the Appellants and the Respondent, there was no question of issuing any contract note. Respondent No. 3 had carried out an independent enquiry on the Appellants' complaint and nothing has been established in support of the allegations. He submitted that the Appellants' sole intention in agitating the matter before Respondent No. 1 was to harass the Respondent and to prolong the harassment by dragging on the enquiry by raising frivolous issues. Defying the directions of Respondent No. 1 to furnish information relevant to the enquiry was intended to achieve the said objective. According to the learned Counsel, the Respondent had transactions with a company called JAICO and the Appellants being the Directors of the said JAICO developed good relations with them. The Appellants approached the Respondent on or about 2, d August, 1996 and represented that they had concluded a deal with one Deepak Pathak of M/s. Mahesh Kothari, a member of Respondent No.3 and that Mahesli Kothari was insisting on for affixing the stamp of a broker on the transfer deed of the shares delivered by them and also requested to issue bills against the said broker to meet with the requirements of the said broker for record purpose. The Respondent was told that this would fasten any financial or other liability on them. Believing it to be true and in view of the existing goodwill established through JAICO, the Respondent obliged the Appellants little realising that this goodwill measure would be used to harass them. But the Appellants' transaction with Mahesh Kothari did not come through due to certain disputes between them, and that with a view to help the Appellants and at their behest and request, without owning any responsibility in the alleged deal, the Respondent filed an arbitration proceeding against the said Mahesh Kothari. The arbitration proceedings ended up holding that there was no claim, which was recoverable. Again at the instance of the Appellants and on their persuasion, the Respondent solely with a view to help them filed an appeal against the arbitration order which was also dismissed. The Respondent vide letter dated 30^th November 1996 informed the Appellants, of the position and requested them to follow up the matter on their own. It goes to prove that the Appellants were fully aware of the facts and only when they came to know that Mahesh Kothari was not ready to pay them, they started the process of harassing the Respondent. He submitted that a complaint in this regard was filed with Respondent No.3 only on 26.3.1997, making allegations against the Respondent. It is unimaginable that a party would have kept quiet for 9 months to recover an amount of Rs. 1 crore from the broker, to whom they claimed to have sold the shares. According to the learned Counsel tile Appellants with ill designed motives adopted the course of pressurising the Respondent seeking payment of Rs. 1 crore. With a view to achieve this objective, the Appellants lodged false complaint against the Respondent with Respondent No.3 and Respondent No.1 and with a view to pressurise even these two institutions, started making allegations against them. He re-iterated the version that the Respondent in good faith, on the representations made by the Appellants, assisted them by placing their rubber stamp on the reverse side of the Transfer deeds and raising two bills on the said Mahesh Kothari at the behest of the Appellants. The Respondent also took some steps against Mahesh Kothari purely to assist the Appellants without owning any responsibility or liability of any nature qua the alleged transaction by filing arbitration proceedings and police complaint. According to the learned Counsel, the complaint against the Respondent was initiated solely with a view to pressurise and blackmail them for the recovery of huge amount which was not due or payable by the Respondent. The learned Counsel submitted that the Appellants were not bonafide owners of the shares involved in the transaction, that the alleged deal was not entered on the BOLT system of the Exchange, that Appellants deliberately and intentionally withheld from Respondent No.1, the information as to the source of the title to the

¶23

shares stated to have been sold by them. The Respondent having no deal or transaction with the Appellants or with the said Mahesh Kothari was not required to issue any contract note and that is why they did not issue any contract note to the Appellants. He further pointed out that the Appellants, one of whom was a sub broker, are directors of a corporate member of National Stock Exchange. Therefore, they should be well versed with the procedure relating to transactions on the Exchanges. In a normal transaction contract note is required to be issued within 48 hours of the transaction with the broker. Since there was no transaction in the instant case by or through the Respondent no contract note was issued and the Appellants also did not demand the same for the said reason. The learned Counsel submitted that the transaction under reference could be a financial deal between the Appellants and the said Mahesh Kothari as could be safely concluded from the data furnished in Exhibit 2 to the reply filed by the Respondent. He further stated that 5 lakhs shares of Rhutu Bearing and Estates (India) Ltd. being 9.5% of the total issued capital that company and 26% of the public issue, the transaction needed to be report to Respondent No. 1. Since it was not done, it can be safely concluded that there was no genuine transaction between the Appellants and the said Kothari and the deal appeared to be in the nature of some kind of a collateral transaction. Tile learned Counsel denied the Appellants' version of having delivered 5 lakhs shares of Rhutu Bearings & Estates (India) Ltd., to the Respondent. He also denied tha.t the said shares were delivered vide Delivery Memo No.451 and 452, as alleged and also denied acknowledgement of receipt of those shares. The learned Counsel also denied the Appellants version of raising bill Nos. 159 and 160 dated 2.8.1996 pursuant to sale as alleged, as those bills were raised at the behest of the Appellants in the circumstances already explained and not against any sale. He further submitted that the Appellants had deliberately not arrayed Mahesh Kothari as a party to the appeal though he had participated in the enquiry before Respondent No. 1 and was also a key player in the transaction, with a view to suppress facts before the Tribunal. He also cited the full bench order of the Arbitration Committee endorsing the views of Mahesh Kothari, that the shares were received on the basis of placement by one Deepak Pathak who is an employee of his Baroda Branch. The version also suggested that the Appellants had done the deal directly with Mahesh Kothari. He stated that the Appellants never wrote to the Respondent asking for contract notes or bills, but only preferred to write to Respondent No.1 and Respondent No.3 regularly hurling allegations. The fact that they had not approached Respondent No.2 seeking contract notes indicates that the Appellants had not sold shares to them.

¶24

Shri Nihar Mody, learned counsel appearing for Respondent No. 3 explained the role of the Respondent and submitted that the Exchange is governed by a set of Rules, Regulations and Bye-Laws having statutory force. The Rules / Regulations / Bye-Laws provide for matters relating to brokers interest, broker and non broker dealings, etc. in detail, Rules governing member broker-client relationship are clear. In respect of disputes whether between brokers or between broker and investor, there is a recognised settlement mechanism by way of arbitration. Learned Counsel submitted that the senior functionaries of the Exchange viz. General Manager, Executive Director, IGRC and the investor Services Cell had duly considered the Appellants' complaint and came to the conclusion that the disputes between the Appellants and Respondent No.2 are the subject matter for arbitration under the Exchange rules. The Appellants version that there was no dispute between them and Respondent No.2 was not correct as is evident from the facts stated by the parties. While Appellants were claiming a sum of Rs. 1 crore from Respondent No.2, that Respondent was denying the said claim. It cannot be said that this is not a dispute. In terms of bye-law 248 of the Exchange all claims whether admitted or not can be an issue for arbitration. He submitted that even if there was no dispute as claimed by the Appellants, still all claims are referable to arbitration under the said bye law 248. The purpose of bye law 248 is to settle quickly the disputes and difference between the parties transacting business through the Exchange. This provision is well made use of by the parties. He further submitted that the Exchange is not the arbitrator. Arbitrators are appointed by the disputants from a lengthy panel available for the purpose. The Exchange appoints only the 3 rd Arbitrator, as the arbitration board should be of members in even number. The panel includes not only members of the Exchange but also dignitaries like retired High Court Judges. He pointed out that the Appellants had already resorted to arbitration and they had nominated their arbitrator and the proceedings have also been commenced, before the Committee consisting of 3 members, which included a retired High Court Judge, nominated by the Exchange. From the

¶55

The conduct of the Appellants, particularly questioning the wisdom of Respondent No.1 asking for information and the tenor of the correspondence cannot be appreciated. The fact that the Respondent No. 1 of their own had taken up the Appellants' grievances, though it was addressed to Respondent No.3 indicates fairness on their part and also the anxiety to protect the interests of the Appellants. The Appellants cannot and should not assume the role of a super authority and. dictate terms to Respondent No. 1 which is a statutory authority mandated with the onerous task of protecting the interests of investors. All those concerned are expected to assist them in their efforts to protect the investors' interests rather than creating hurdles in their efforts. In the instant case it was in the interest of the Appellants that the information was called for by the Respondent No. 1. Since the impugned order is found deficient for the reasons stated above its is felt that the same need consideration after getting the said report and information. Since Respondent No.3 have already submitted that the report is under preparation for submission they are directed to furnish the same to Respondent No. 1 without any undue delay. However, if they feel that the outcome of the arbitration would enable them to furnish more useful information, they are at liberty to wait for the disposal of the arbitration as the whole purpose of the Respondent calling for the report is to have factually correct information, to enable them to reach at a correct conclusion. Since the Appellants have not furnished full information called for by the Respondent No. 1 they are directed to furnish the same within the time frame which the said Respondent will communicate. Respondent No.1 on receipt of the said report and information will consider the same and make suitable order. In case the Appellants do not furnish the information called for and/or fail to co-operate in the enquiry, or the report from Respondent No.3 is unduly delayed, Respondent No.1 is at liberty to make such order, as is deemed fit in the light of the facts and circumstances of the case. Since the matter requires to be remanded for the reasons stated above, the impugned order requires to be set aside. I do so.

Suresh Kabra v. SEBI

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Statutes considered

Parties & counsel

Case details

Similar cases

Suresh Kabra v. SEBI

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Statutes considered

Parties & counsel

Case details

Similar cases

Coram