Partly allowed

Anand Rathi v. SEBI

SAT28 Feb 2002

Case brief

AI extract

What is this about?

A three-member Tribunal bench reviewed SEBI's order restraining an exchange President from holding directorship and suspending his two broking firms. It quashed the suspension but partially allowed the restraint, reducing the ban from two years to one.

What did the court decide?

Restraint on the appellant President modified to one year; suspension of registration of the two appellant companies set aside.

What the court decided

AI extract

Outcome

Restraint on the appellant President modified to one year; suspension of registration of the two appellant companies set aside.

Issue for consideration

Whether SEBI could issue a direction under Section 11B restraining an individual from holding directorship in capital market entities as a preventive measure. +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.

¶1

BEFORE THE SECURITIES APPELLATE TRIBUNAL

¶2

MUMBAI

¶3

In the matter of: Appeal No.52/2001 Anand Rathi Appellant Vs. Securities & Exchange Board of India Respondent Appeal No.53/2001 Anand Rathi Securities Pvt.Ltd Appellant Vs. Securities & Exchange Board of India Respondent Appeal No.54/2001 Anand Rathi Direct (India) Pvt.Ltd Appellant Vs. Securities and Exchange Board of India Respondent

¶4

APPEARANCE: Mr. Aspi Chinoy Sr.Counsel Mr.Daksheesh Dhru Advocate Mr. Ahmed Sayed Advocate I/b. M/s.Dhru & Co. Mr. Anand Rathi Mr. Amit Rathi for Appellants Mr. Goolam Vahanvati Advocate General of Maharashtra Ms Rameeza Hakeem Advocate Mr. Kumar Desai Advocate I/b. Maneksha & Sethna

¶5

Mr. Ananta Barua Jt.Legal Adviser, SEBI for Respondent

¶6

(Appeals arising out of the order dated 9.11.2001 made by the Securities and Exchange Board of India)

¶7

ORDER

¶8

These three appeals are directed against the Securities and Exchange Board of India’s common order dated November 9, 2001, whereby Shri Anand Rathi (Shri Rathi) (Appellant in Appeal No.52/2001) was restrained from holding any position of director or trustee of any capital market related institutions /entities for a period of two years from March 12, 2001 and the registration granted to Anand Rathi Securities P. Ltd (Appellant in appeal No. 53/2001) and Anand Rathi Direct (India) P. Ltd (Appellant in appeal No. 54/2001), allowing to undertake stock broking business was suspended for a period of nine months. In Shri Rathi’s case the order has been made under sections 11 and 11B of the Securities & Exchange Board of India Act, 1992 (the Act) and in the case of the two Appellant companies, it is under regulation 26 of the Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992 (the Stock Brokers Regulations). While the order against Shri Rathi has the approval of all the three members including the Chairman of the Securities and Exchange Board of India (the SEBI), who heard the matter, the order against the two Appellant companies has the approval of only two members, as one member i.e., the Chairman, did not agree to the conclusion arrived at and the decision taken by the other two members. He has viewed that these two companies are not liable for the penalty of suspension under regulation 26. In terms of section 7(3) of the Act, decision of the majority prevails and therefore the order in force against the two companies is the one made by the two members, being the majority order.

Anand Rathi Vs. SEBI — Securities and Capital Markets | SAT (2002)

Partly allowed

Anand Rathi v. SEBI

SAT28 Feb 2002

Download

Case brief

AI extract

What is this about?

What did the court decide?

Restraint on the appellant President modified to one year; suspension of registration of the two appellant companies set aside.

What the court decided

AI extract

Outcome

Restraint on the appellant President modified to one year; suspension of registration of the two appellant companies set aside.

Issue for consideration

Whether SEBI could issue a direction under Section 11B restraining an individual from holding directorship in capital market entities as a preventive measure. +2 more

A compact analysis

¶1

BEFORE THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Mr. Ananta Barua Jt.Legal Adviser, SEBI for Respondent

¶6

(Appeals arising out of the order dated 9.11.2001 made by the Securities and Exchange Board of India)

¶7

ORDER

¶8

¶9

On February 28, 2001, the Hon’ble Finance Minister presented what was widely perceived as an "Investor Friendly" Budget. The general expectation was that the Stock Markets in the country would be encouraged by such a budget, and true to such expectation on February 28 to March 1, the sensex rose by 201 points. However, this rising trend did not continue. On the next day, i.e. on March 2, the sensex dropped by 176 points. There was a lot of consternation and concern as to the cause of such steep fall, which was unusual and exceptional, especially in the light of such a budget. The Respondent initiated investigation into the matter. In that context the Respondent came to know that Shri Anand Rathi, the then President of the Stock Exchange, Mumbai (BSE), had sought some information, at about 1510 hours on March 2, in respect of the position of some brokers / FIIS in certain scrips from the Surveillance Department of BSE. The Respondent decided to investigate the conduct of Shri Rathi also in the said context. As an emergent measure, the Chairman of the Respondent on March 2, by an ex parte Interim Order, restrained Shri Rathi from acting as director-member of BSE and also directed Shri Rathi and his four associate entities (viz. Anand Rathi Securities Pvt. Ltd., Rathi Global Finance Ltd., Rathi Capital & Securities Pvt. Ltd. and Navaratan Capital Securities Ltd.) not to undertake any fresh business as brokers till further orders were passed by SEBI. The order was made under section 11/11B of the Act. Subsequently, a postdecisional hearing was given by the Respondent to Shri Rathi and his associate companies. Three out of the four members who heard the matter, confirmed the order of March 12, Prof.J.R.Verma, the other member though endorsed the majority view in regard to the restraint order on Shri Rathi holding any managerial positions, deferred on the exercise of powers under section 11B to direct Shri Rathi and his concerns not to undertake any fresh business as a broker, interalia, observing that section 11B is a provision, not for punishing intermediaries, but for protecting investors and the market and felt that proceedings must be initiated under regulation 28 of the Stock Broker Regulations for possible imposition of penalties. Subsequently, on the basis of the preliminary investigation report, the order was reviewed and the majority decision was confirmed by the Board on April 23, 2001 and also ordered that an Enquiry Officer be appointed for conducting an enquiry into the matter.

¶26

Shri Chinoy stated that on March 2, the Appellant reached his office at the exchange about 2.00 p.m. for a prescheduled meeting that on that day by 3 p.m. senesex was down by 190 points from its previous close, that as the President of BSE, the Appellant was concerned by the said disconcerting drop in the sensex in the background of an investor friendly budget presented in the Parliament on February 28, 2001, and that too the market having responded positively on the previous two days. Learned Senior Counsel submitted that in the light of Shri Rathi’s position as the President of BSE it was his duty to monitor and be aware of the causes for abnormal trends in the market, that accordingly he sought to ascertain the broad reasons for such drop in the sensex and also to see whether any remedial steps are to be pressed into service, that at about 3 p.m. Shri Rathi attempted to ascertain the cause for the fall in the sensex from his immediate subordinate and for this purpose he asked his Secretary to connect him on phone to the Executive Director and the General Manager, (Surveillance Department) and that since both were unavailable, the next available person in charge of the Surveillance Department was asked to be connected on phone and the Secretary connected Shri Arun Dhanwade, who was quite new to the working of the Surveillance Department. Shri Chinoy further submitted that upon being connected with Mr. Dhanwade, the Appellant wanted to enquire the broad reasons for such a fall and to ascertain whether there was institutional selling in the 3-4 index stock that had fallen, but Shri Dhanawade being new to the job and also nervous was unable to understand the question and started giving unrelated and unsolicited information, that at no point of time did the Appellant seek any information regarding the prices, volumes or timings of particular transactions or the outstanding position either with regard to any stock or with regard to any broker, that all the information that was given by Shri Dhanawade contained only the names of few selling brokers in a few scrips. Learned Senior Counsel submitted that the bonafide of the Appellant’s action is evident from the fact that the telephone call was connected by the Appellant’s Secretary at a time when he was in a prearranged meeting with six others, including three members of the Governing Board, that this meeting which had commenced sometime around 2.00 p.m. went on till 4.00 p.m. stretching beyond the market closure time of 3.30 p.m., that he had first asked for the Executive Director and General Manager and only in their absence talked to Shri Dahanwade, in an emergent situation. Shri Chinoy further stated that the Appellant himself had requested the Respondent vide letter dated March 7, 2001 to initiate an enquiry to ascertain the facts on the allegations appeared in the news papers of March 7, that the Appellant had sought details of the positions of a leading bull operator and pressed heavy short sales which depressed the market and that on the same day the Appellant on his own stepped down as the President of BSE.

¶30

Shri Chinoy submitted that the Appellant has been held guilty of breach of three circulars dated August 8, 1995, December 6,1995 and May 25, 2000 issued by the Respondent. He referred to the said three circulars and submitted that as per the circular dated August 8, 1995 it is the responsibility of the management of the stock exchange to detect market manipulations like price rigging etc., and to monitor abnormal price and volume movements, and brokers position, margin, trading limits etc. He submitted that the circular requires immediate and effective action by the Governing Board in an abnormal situation, that the monitoring function assigned to the Governing Board in the circular is not for historical purpose, it means immediate action, that it is in this context and the objectives in view, the exchanges were required to set up separate department- called Surveillance Department. According to him the setting up of the Surveillance Department was clearly to impart administrative efficiency and to assist the management of the stock exchange in its surveillance function. Shri Chinoy further submitted that the circulars clearly envisage regular reporting by Surveillance Department to the Governing Board and that at every Board meeting the functioning of the Surveillance Department is to be reviewed. He stated that the circular dated May 25, 2000 seeks to advise the individual Directors not to interfere or to seek information from the Surveillance Department, that there is no such restriction imposed on the President, which is not accidental but is designed to enable the President to take action in an emergent situation. He pointed out that the stock exchange is required to take remedial measures which can either be taken by the Governing Board or the President alone, and that is why the requirement that if the Surveillance Department observes any abnormality in price movement or in the volume of the scrips traded to immediately report the same to the exchange management. He stated that the subsequent two circulars only re-iterate the position covered in the first circular. Shri Chinoy pointed out that vide circular dated May 25, 2000 the Respondent has clarified that there is no ambiguity as regards the role of the Governing Board with regard to surveillance functioning and has re-iterated that Governing Board would always over see the surveillance functioning in the exchange. Shri Chinoy submitted that the Respondent itself presupposes instances of office bearers coming to possession of confidential and sensitive information as stated in the Respondent’s Press release dated January 17, 2001, and hence directed that Directors and functionaries shall refrain from acquiring information other than as may be necessary for discharge of their duties. He stated that the Governing Board is vested with vast powers and as such it does not stand to reason to say that it should not call for information which are required to discharge its duties. In this context he cited the powers of the Governing Board under the bye-laws 71, 72 and 73(a) of the BSE’s Bye-laws. He also referred to the special powers of the President under rule 152 of the BSE’s Rules, which empowers the President and the Chairman and in the absence of the one, the other to exercise any or all of the powers exercisable by the Governing Board whenever they or he be of the opinion that immediate action is necessary subject to such action being confirmed by the Governing Board within 24 hours. Shri Chinoy also cited the provisions of rule 154 and stated that the special powers of the President under rule 152 does not stand transferred to the Executive Director. In this context Shri Chinoy referred to Shri Rathi’s statement of 11^th and 12^th April 2001, recorded by the investigating officer, elaborately explaining the powers of the President. Shri Chinoy submitted that the Respondent has chosen to ignore the very purpose of the said rules and has interpreted the rules in a manner defying all the reasons, that it is clear from the rules that the Governing Board has to do crisis management and it cannot be expected to do so without the material information before it. According to Shri Chinoy, Shri Rathi had also stated that in the past the Finance Ministry and the Respondent had contacted the President for information relating to market trend and if in the perception of the Government and the Respondent the President was not to have access to the information, then they would not have contacted him. Shri Chinoy submitted that the current theory propounded by the Respondent is not at all tenable in the light of the rule provision read with the ground realities. He said that calling for information from the Surveillance Department which the President is entitled to, is not interference in the functioning of the Department as has been alleged, that on the contrary had the Appellant not acted in the manner as he did on March 2, 2001 he would have been hauled up for being not vigilant. He submitted that the President of BSE was always privy to the matters relating to the Surveillance Department, that all circulars/press releases regarding surveillance have been addressed to the President/Executive directors of the exchange, that

¶31

SEBI does not preclude the President of the stock exchange from participating in surveillance related issues, that in fact the President is a member and Chairman of the surveillance committee of BSE, that the Respondent has also acknowledged the fact that the management of the stock exchange, which includes the Governing Board and the President, has complete supervision over the Surveillance Department. In this context he cited the provisions of Byelaw 4,6 and 73(a), rule 118, rule 148, rule 152 and stated that on a careful reading of these provisions it is clear that the President of the exchange is vested with wide and extensive powers for taking vital decisions or actions, for which information is necessary. Mr. Chinoy submitted that though the President is normally a titular head of the Governing Board, under the Rules, Regulations and Byelaws of the exchange an additional responsibility is enjoined upon him whereby he is authorised to take necessary decision with regard to remedial measures, in given circumstances. He submitted that by giving a restrictive interpretation to the circulars and holding that the Appellant fell under the category of individual directors and vested interests and thereby becomes ineligible to obtain information from the Surveillance Department is untenable in the light of the fact that the Appellant was acting in his capacity as President and the action was not meant to obtain any information to his personal benefit, that the fact is that he was required to discharge certain official duties and for the purpose he had to obtain the information. Shri Chinoy, with reference to the Respondent’s version that under rule 154 of the BSE rules, the President cannot exercise some of the powers when the Chairman or the Executive Director has been appointed by the exchange, and on the reliance on rule 98 and rule 154 to contend that the President is powerless, stated that the said view is contrary to the settled and established practice which is not only well accepted in the stock exchange but also by the regulating agencies as well as the governmental agencies, that in any event, a proper and harmonious reading of the Rules, Byelaws and Regulations of BSE would show that in case where the Chairman/Executive Director is appointed certain powers of the President of the exchange can be concurrently exercised by the Chairman / Executive Director and the President, that by no stretch of imagination can it be construed that when the Chairman / Executive Director is appointed the President is deprived of his powers and the specified powers solely vest in the Chairman/Executive Director. According to Shri Chinoy, the Executive Director appointed by the exchange, reports to the Governing Board of the exchange with whom the overall management of the affairs of the BSE is vested that the Surveillance Department is only a delegated arm of the exchange. Shri Chinoy submitted that the Respondent holding Shri Rathi guilty of having violated the circular by viewing that he could have contacted the Executive Director, that he did not get his action ratified by the Governing Board, and that he did not take any steps with reference to the market situation even after obtaining the information from the Surveillance Department, is untenable as the President had asked for the Executive Director/General Manager but they were not available and it was even otherwise well within his powers to obtain information in such a crisis ridden atmosphere. Shri Chinoy submitted that since it was felt that no further action was required in this regard, as the Respondent itself had seized of the matter, he did not take any action and since no action was taken by him, there was no need for seeking ratification from the Governing Board.

¶35

Shri Chinoy stated that in the context of such a sharp fall in the market, in order to understand the probable causes, the first question that would come to the mind of any prudent person is to find out whether it was due to institutional sales or on account of speculative sales, that institutional sales would normally be backed by physical delivery of securities and the risk management measures would be different than if there was excessively speculative selling, that it was in these circumstances that the Appellant enquired whether there was institutional selling. Shri Arun Dhanawade, to whom the Appellant was connected on phone, in the absence of the Executive Director and the General Manager (Surveillance), was not familiar with the function of the Surveillance Department as he was posted to the said department from some other department just 15 days before the event. Shri Chinoy said that it could be seen from the transcript that Shri Dhanwade was not in a position to correctly understand the information which the Appellant was asking, and as such the Appellant tried asking Shri Dhanawade in other ways in order to understand whether there had been institutional selling and being unable to understand as to what the Appellant was asking, Shri Dhanawade on his own started referring to scrips of Himachal, Reliance, Wipro and Global. Shri Chinoy referred extensively to the transcript of the conversation to show that the Appellant had not asked for any broker wise or scrip wise information from Shri Dhanawade. He also stated that the Appellant had asked Shri Dhanawade to ask Shri Reddy (General Manager (Surveillance) to call him up as soon as he came back. Shri Chinoy referred to Shri Tirodkar’s statement and said that Shri Tirodkar being the then Director of the Surveillance Department himself in his statement before the Respondent on March 29, 2001 in reply to a question (No.5) had stated that "Shri Rathi has several times asked me about the status of the market particularly when the market were volatile or when there were strong rumours in the market. I have never given any scrip specific or broker specific information to Shri Anand Rathi. To another question (No.7) he had stated that Shri Anand Rathi has not asked any specific information during his term as President". Thus it is clear that in the past also for discharging his duties the President used to call for information from the Surveillance Department and the incident of March 2, 2001 is in no way different. Shri Chinoy reiterated that Shri Rathi obtained the information in the normal course in exercise of his powers as President to discharge his duties, which in no way is in violation of the norms set in the circulars. He said that to hold that the President has no power to elicit requisite information would in effect be to hold that the President has no role in the effective management of the exchanges and such a view cannot sustain in the light of the governing Rules, Byelaws and Regulations of the exchange.

¶45

Shri Chinoy submitted that the Respondent has penalised Shri Rathi in the guise of a direction under section 11B of the Act. In this context he referred to the word "penalty" used in the show cause notice. Shri Chinoy extensively quoted from the Tribunal’s order in Sterlite case on the test of evidence required for imposing penalties and also on the scope of section 11B. He submitted that the instant order is neither preventive nor remedial but punitive. He submitted that by preventing the Appellant holding any position as a director or trustee in a market entity, the order is not rectifying or remedying anything. Shri Rathi’s conduct as a broker or having bearing on broking activity has not been questioned in the order, that the charge against him is that he had violated the requirements of certain circulars. Shri Chinoy stated that the various offences referred to in section 15A to 15H does not cover violation of any circulars as an offence. He also referred to the provisions of section 15J required to be followed while imposing penalties. Re-iterating his view that the Respondent has imposed penalty on the Appellants, he referred to the principles laid down by the Hon’ble Supreme Court in Hindustan Steels v. State of Orissa (AIR 1970 SC 253) and stated that none of the factors warranting imposition of penalty stated in the said case is available in the Appellant’s case as it is evident from the evidence that the Appellant had acted openly and bonafidely and did not violate any of the legal provisions. He cited Khemka and Co. (Agencies) v.State of Maharashtra (AIR 1975 SC 1549) to show that an offence cannot be created by a circular, that on the contrary the law casts a duty on the President of the exchange to discharge certain duties and he has only discharged those duties and proper discharge of duties should not be considered as an offence or failure. He stated that on the contrary if the Appellant had failed to discharge the statutory duties cast on him, he would have faced the charge of dereliction of duty and the attendant consequences. Shri Chinoy cited decisions of the Hon’ble Supreme Court in support of his contention that it is necessary to establish mens rea for imposition of penalty – Akbar Badruddin Jiwani v. Collector of Customs (1990 (47) ELT 161 SC) and also the decision of the Hon’ble Calcutta High Court in Extrusion v. Collector of Customs (1994 (70) ELT 52 (cal).

¶49

Shri Chinoy submitted that the Respondent inflicted penalty on the Appellant for the alleged breach of circulars and there is no charge of misuse of information. He referred to the observation in the enquiry report that "the conduct of Shri Rathi in seeking information and denial of allegation etc. shows that he had sought information in relation to his broking activity. Seeking of such information per se is in violation of SEBI circulars. Procuring of such information amounts to interference in the working of surveillance department which reflects adversely on the fairness, transparency and impartial working of stock exchanges and also undermines confidence of investors in securities market". He referred to the further observation in the enquiry report that Shri Rathi "has not explained the purpose for which he took the information. The nature of information procured by him and his subsequent conduct such as not disclosing the fact of conversation on his own and denial of reports in the news papers in respect of conversation shows that the information was actually taken for the benefit of his broking entities". Shri Chinoy submitted that the said view is contrary to the facts before the Respondent as Shri Rathi had clearly explained the back ground and purpose of seeking information and that he did not deny that he had not spoken to the Surveillance Department, that the rejoinder to the report in the newspaper was with reference to his alleged conversation with Shri Garella.He stated that in the same enquiry report it has been stated that the preliminary investigation establishes that Shri Rathi had obtained price sensitive information from the exchange, he was an insider and that the entities associated with Shri Rathi have traded in some scrips on March 2, 2001 and on March 5, 2001, details of which has been given in the show cause notice dated June 6, 2001. However it is not clear whether the said trading in those scrips was done on the basis of information obtained by Shri Rathi from Shri Dhanawade. Therefore it cannot be said with certainty that the said trading by Shri Rathi and noticees had been done on the basis of said information. I am therefore giving them a benefit of doubt in regard to violation of regulation 4 of the SEBI (Insider Trading) Regulations, 1992. It may however be mentioned that SEBI is appointing an independent agency to examine whether the trading by the noticees was based on the said information". Shri Chinoy further referred to the report wherein the Enquiry Officer had stated that "In view of the finding in above paras I am of the considered view that Shri Rathi obtained price sensitive information which was unpublished. This information if used for trading in a substantial manner would result in artificially raising or depressing the prices of securities thereby inducing common investors to sell or purchase the securities. The same would have been in violation of the Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations 1995. The preliminary investigation shows that the associate entities of Shri Rathi traded in some scrips. However, there is inadequate material to show that this particular unpublished price sensitive information was used for the said trading. Further the preliminary investigation also does not throw much light on the direct effect of the said trading in depressing or increasing the price in a significant manner. I therefore give benefit of doubt to Shri Rathi and the noticees in respect of charges for violation of Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices in the Securities Market) Regulations, 1995. It may however be mentioned that SEBI is appointing an independent agency to examine the use of the information and its effect on the price". In this context Shri Chinoy stated that the observation made in the order is contrary to the factual position revealed in the enquiry report. He stated that in para 12.9 of the order it has been stated that "the Enquiry Officer concluded that the information sought by Shri Rathi was in relation to or for the benefit of his associate concerns or for trading. As the fall continued there was perhaps, no necessity for taking any further position by his associate concerns". Shri Chinoy submitted that it is, thus evident that this is a conjuncture and a person cannot be penalised on the basis of conjunctures and surmises.

¶52

Learned Advocate General stated that the very purpose for which the Surveillance Department was set up and the reasons for its being immunised from the invasion of trading interests who run the exchanges like BSE, can be found in the circular issued by the Respondent requiring the exchanges to set up separate and independent Surveillance Department. He submitted that it is the duty of the exchanges to protect the interests of all concerned dealing in securities and not the interests of the broking community alone, that the stock exchange is not a private club of the brokers. He explained the role of the Surveillance Department and the reason as to why the information available therein are not made available to any traders, that if a particular trader, be a director / President of the exchange, allowed access to the Surveillance Department he would be in a better position with information over others in the market and that information could be used to his betterment, thus for providing a "level playing ground" to all the persons, the access to Surveillance Department is restricted only to the few designated officers having no personal trading interests. Learned Advocate General stated that any attempt to procure information from the Surveillance Department is unacceptable irrespective of the fact whether such an action could be termed interference or not. In this context he referred to the circular dated August 8, 1995 issued by the Respondent to the exchange authorities on setting up of market Surveillance Department in stock exchanges and stated that in the said letter it has been stated that "one of the important issues discussed during the meeting of the Executive Directors of Stock Exchanges with SEBI on 19^th July, 1995was regarding requirement of market surveillance of stock exchanges". Learned Advocate General stated that from day one, it was the Executive Director, not the President, who was put in position in the matters relating to setting up of the Surveillance Department. In support of his contention that the President was out of picture, he read out the portions from the said circular that "During the discussions it was emphasised by the Chairman that it is the responsibility of the stock exchanges to detect market manipulations like price rigging etc., and to monitor abnormal price and volume movements which are non-consistent with normal trading pattern. It is also the responsibility of stock exchanges to monitor brokers position, margins, trading limits etc., to ensure that the brokers do not commit default adversely affecting the market and the interest of the investors."Learned Advocate General stated that the object of setting up the Surveillance Department is thus clear that it is to ensure that the brokers do not commit default to the detriment of the market and the investors. He further referred to para 1.3 of the circular and stated that to achieve the said objective and to ensure proper and orderly functioning of the markets, the circular directed that "Each of the Stock Exchanges shall have separate surveillance department entirely devoted to carry out the functions indicated in the circular". These functions are (1) monitor price movement of scrips including price rigging, other market manipulations etc. and immediately highlight any abnormality therein to enable the stock exchange management to take effective measures like applying of circuit breaker, suspension of trading and / or investigation if necessary, (2) monitor volumes of scrips traded and immediately highlight any abnormality therein to enable the stock exchange management to take effective action of the types mentioned in (1) above, (3) monitor any abnormal changes in brokers position compared to normal trading pattern of the broker, (4) monitor evasion of margin payment by brokers, (5) monitor violations of trading restrictions and limits by brokers, (6) monitor any other abnormality which is detrimental to the integrity of the markets and the interest of the investors". The circular also specifically directed that "Surveillance Department shall not be saddled with any other responsibility and that the department will be directly under the Executive Director of the stock exchange or senior most officer of the stock exchange in his absence". Learned Advocate General stated that it is thus very clear that the Surveillance Department is as forbidden territory for brokers and vested interests to enter, that a broker director / office bearer of the exchange is not an exception. He submitted that on a perusal of the circular it is very clear that the obligation is cast on the Surveillance Department and not on any particular office bearer like director / President to monitor the development, that the circular itself empowered the Surveillance Department to take corrective measures in a crisis independent of intervention by anybody else. He also submitted that the reference to stock exchange management in the circular should be understood in the context of the purpose for which the Surveillance Department is set up and the powers vested in the Executive Director in terms of the rules and the bye-laws of the exchange.

¶55

Learned Advocate General also referred to the subsequent circular of May 25, 2000 and stated that the said circular also reiterated that the Surveillance Department is independent and separate. He read out the following portion from the circular in this regard " The issue of the role of the Governing Board with regard to surveillance functioning of the exchange was discussed and it was clarified that there is no ambiguity as far as the overall role of the Governing Boards. In this context reference was drawn to earlier SEBI circular No.SMD/3953/96 dated August 17, 1995 and wherein SEBI had directed the Governing Boards of the exchanges to review the functioning of their surveillance department at every Board meetings. As regards the responsibility of the Executive Director, since surveillance is a very important and sensitive area, it was stipulated that this would be under the direct responsibility of the Executive Director who is the senior most executive of the exchange. It was also advised earlier that there should be no interference in the functioning of the Surveillance Department, which should be done in a very professional and objective manner. The spirit behind such stipulation was that there should be no interference from individual directors, member brokers or any other vested interest and there was never any doubt that the Board as a whole would oversee and give policy directive to the surveillance functioning in the exchange". He stated that the circular thus clearly bans member brokers and vested interests interfering in the functioning of the Surveillance Department. Learned Advocate General submitted that it is clear that nobody is entitled or empowered to call for information from the Surveillance Department and the word interference should not be interpreted in the technical sense but in a realistic sense in the context in which it is used. The purpose of setting up of the Surveillance Department would be defeated if the confidentiality of the data is not preserved by making the same available to the trading interests.

¶67

Learned Advocate General stated that an impression is being made that the Appellants have been penalised by invoking the provisions of section 11B of the Act, against the view taken by this Tribunal on the scope of Section 11B in the Sterlite case. He stated that in the case of Shri Rathi the direction is that he be restrained from holding any position of Director or trustee of any capital market related institution/entities for a limited period of 2years. Such a restraint order by any standard cannot be treated as a penalty. In the case of the two Appellant companies, their registration as stock brokers was suspended in terms of section 12(3) of the Act read with regulation 29(3) of the Regulations following the prescribed procedure, that in terms of the provisions of regulation 26 the Respondent is empowered to impose a penalty of suspension of stock broker. Learned Advocate General pointed out that the "reference to penalty as recommended by the Enquiry Officer" in the show cause notice dated September 27, 2001 should be read in the context of the recommendations of the Enquiry officer, that the Enquiry Officer did not recommend any penalty against Shri Rathi but only recommended that "Shri Rathi be restrained under section 11 and 11B of the SEBI Act, 1992 from being associated with any of the capital market related institutions / entities", and he recommended "a penalty of suspension of registration" in respect of the other two Appellants, that it is also to be noted that the notice was not addressed to Shri Rathi alone, but it was a combined one addressed to 5 other broking entities. The learned Advocate General submitted that the restraint orders made against Shri Rathi is a measure in terms of section 11 / 11B and not a penalty, that he is not debarred from doing business, that the debarment is only on Shri Rathi participating in the management of capital market related institutions as a director or trustee. He also stated that various High Courts have upheld the Respondent’s power under section 11 and 11B to take appropriate measures for the purpose of the Act, and he particularly referred to Anand Rathi v. SEBI (2001) 43 CLA 312 decided by the Hon’ble Bombay High Court. Learned Advocate General also pointed out that in the case of J.C.Parekh, a former President of BSE the direction issued in the light of the conclusion arrived at by the Respondent that Shri Parekh had been acting in a manner unbecoming of the post of President of BSE, and in that context Shri Parekh was held ineligible to hold any public position as member of the Governing Board or the office bearer of the exchange as well as capital market related public institutions for a period of three years and the said direction was upheld by the

¶74

The controversy in the present case centers around the telephone call made by Shri Rathi, the then President of BSE, to Shri Dhanawade in the Surveillance Department of BSE on March 2, 2001. The said March 2, is not just an ordinary date, it was a day of mayhem as far as BSE was concerned. The capital market, true to the expectation was responding positively to the Union Budget 2001, presented to the Parliament on February 28. Though the market was buoyant on February 28 and March 1, and the sensex rose by 201 points, to everybody’s dismay it took a reverse turn on March 2. Sensex dropped by 176 points. Bear hammering by few was one of the causes attributed to the market casuality. Innocent investors suffered heavily. Credibility of the market lost. The Respondent mandated to protect the interests of the investors and responsible for regulating the securities market, smelt a rat and decided to investigate into the matter. In that surcharged atmosphere some news papers carried out stories alleging that Shri Rathi had illegally obtained some price sensitive information from an officer of the Surveillance Department in the presence of some brokers. Since Shri Rathi himself had trading outfits in the market, the Respondent felt that the allegation merited investigation. Investigation started. The Respondent obtained the taped conversation Shri Rathi had with the official of the Surveillance Department. The transcript of the telephonic conversation established that Shri Rathi had talked to one of the junior officials in the Surveillance Department and it also revealed that he had obtained from him information in respect of certain specific scrips and brokers. The Respondent after detailed investigation and enquiry came to the conclusion that Shri Rathi had collected price sensitive information from the Surveillance Department of BSE in breach of the governing norms and considered him as "not a fit and proper person" to be associated with the management of the exchange etc. In that context not only Shri Rathi was restrained from participating in the management of the capital market related institutions and entities as a director or trustee but two of his companies were penalised by suspending their registration for nine months. The said nine-month period is already over and the suspension order is no more in operation. Thus the sting is no longer there, but the stink still continues as the finding of guilt continues. That is why the Appellant companies are seeking relief.

¶129

It is necessary to understand the whole purpose of setting up the Surveillance Department and to see whose activities are required to be monitored. For this, one need not have to go beyond the circulars issued by the Respondent cited above. In para 1.1 of the circular dated August 8, 1995 it has been clearly stated that it is the responsibility of the stock exchanges to detect market manipulation like price rigging etc., and to monitor abnormal price and volume movements which are non-consistent with normal trading pattern. The circular further states that it is also the responsibility of the stock exchanges to monitor broker positions, margins, trading limits etc. to ensure that the brokers do not commit defaults adversely affecting the market and the interest of the investors. It has been further stated in para 1.3 that the Surveillance Department should be a separate department entirely devoted to carry out the functions specified in the circular and that the department shall not be saddled with any other responsibility and the department will be directly under the Executive Director of the stock exchange or senior most official of the stock exchange in his absence. Thus on a perusal of the said circular it is clear that surveillance is on the trading activities of the brokers to detect market manipulations so as to take immediate corrective remedial measures. The fact that the department has been carved out and kept as a separate department and put directly under the Executive Director is meant to immunise the department from the reach of the brokers. As the Governing Board of the exchanges have a very large representation of the Brokers and the President is elected from the elected representatives of the brokers, it appears to be a deliberate decision by the Respondent to keep the President and the Governing Board away from the Surveillance Department, and to put the department directly under the Executive Director. An executive Director is a "neutral character" as he is barred from engaging himself in any business during his tenure. Rule 98 is very clear in this regard stating that "the person appointed as Executive Director shall not engage himself in any business directly or indirectly during his tenure of office and if he is a member of the exchange at the time of appointment he shall resign his membership forthwith". The rule further states that "The Executive Director shall be an ex-officio member of the Governing Board and of any committee appointed by the Governing Board of the exchange. Subject to the over all management of the affairs of the exchange being vested in the Board as provided in these Rules, Bye-laws and Regulations the Executive Director shall be vested with the executive powers of the exchange to run the day to day administration and to enforce the Rules, Bye laws and Regulations of the exchange……". In the light of the rule position as stated above and the provisions of Bye-laws 71 to 73 already extracted above, it is clear that the Governing Board or the President is not entitled to contact the Surveillance Department as it is out of their boundary, for the well stated reasons. The fact, that President himself has trading interest and that he is a broker should not be forgotten. Precisely it is for the said reasons that the Surveillance Department is immunised and structured independent of the control of the Governing Board. As the rule 98 clearly states, the Surveillance Department being an outfit in the stock exchange comes under the overall management of the Governing Board, but it is the Executive Director who is vested with the power to run the day to day administration of the said department. In this context it is also to be noted in para 1.4 of the circular under reference timely reporting is to be made to SEBI. The circular does not talk of any such reporting to the Governing Board. It is to be further noted that in terms of clause 13 (b) (i) & (ii), the Surveillance Department is required to monitor price movement of scrips and volume traded and in the event of any abnormalities highlight such abnormality to enable the stock exchange management to take effective action. In the light of rules / provisions explained above, it is clear that the stock exchange management referred to herein is the Executive Director and not the Governing Board or the President. In this context it is also to be noted that in the 2^nd circular dated December 6, 1995 also the Respondent had re-iterated that the Surveillance Department should be independent and the Executive Director would be directly responsible for the proper and independent functioning of the department. The word independent used therein is of significance. The role of the Governing Board vis-à-vis surveillance functioning has been well explained in paras 2 and 3 of the third circular of March 25, 2000 leaving no scope for any doubt. It has been stated therein that "there is no ambiguity as regards the overall role of the Governing Boards", that in its circular dated August 17, 1995 the Respondent" had in fact directed the Governing Bard to review the functioning of their surveillance department at every board meeting". "Reviewing the functioning" is an assessment process and not an access process. The circular in the following words has clearly set out the position, that "as regards the responsibility of the Executive Director, since surveillance is a very important and sensitive area it was stipulated that this would be under the direct responsibility of the Executive Director who is the senior most executive of the exchange. It was also advised earlier that there should be no interference in the functioning of the surveillance department, which should be done in a very professional and objective manner. The spirit behind such stipulation was that there should be no interference from individual directors, member brokers or any other vested interests and there was never any doubt that Board as a whole

¶131

Shri Chinoy had referred to a press release issued by the Respondent on January 17, 2001 reporting the decisions taken during the SEBI convened meeting of all the stock exchanges on January 17, that one of the decisions taken therein was that "the directors and the functionaries shall refrain from acquiring information other than as may be necessary for discharging their duties. Proper audit trail, prescribed channels and confidentiality of information would be maintained at all point of times". He stated that Shri Rathi had obtained the information for discharging his duties. In this context the requirement of collecting the information through prescribed channel cannot be glossed over. If any action is required to be taken at the Board level the requisite information would be supplied by the Executive Director and he in turn is expected to filter the information and hold back the information which are likely to be used by someone to his advantage or to the detriment of others and the market. There is not even a suggestion in the said press release referred to by Shri Chinoy that a broker director who by virtue of his official position is entitled to obtain information having bearing on the trading, over others. In fact Shri Joshi, the Executive Director of BSE in his statement before the investigating officer had stated that "there is no interaction with Shri Rathi on daily basis on surveillance matters, which are discussed in the sub group appointed by the Governing Board". This is the normal practice. He had also stated that "I also enquire if there is a sudden spurt or dip in the sensex and the reasons thereof. In case of abnormal situation I call up the officer concerned, who monitors the broker positions to know if there are any abnormal positions of any member in any scrip. I approve all surveillance issues pertaining to reduction of circuit filters, imposition of special margins". Shri Rathi cannot be unaware of this practice. Shri Rathi in his deposition before the investigating officer had also stated that "the Governing Board has the over all responsibility of overseeing the functioning of the surveillance department. I am not aware of any decisions of the Governing Board prohibiting access of any information from surveillance department by the President. In fact as mentioned earlier when the surveillance committee meetings are held, lot of information is presented and given by Executive Director, General manager (surveillance) and other surveillance staff in respect of the matters, which are discussed in such meetings and based on such information and discussions decisions are taken in the surveillance meetings. It may please be noted that for taking any decision, policy or otherwise the flow of information is a prerequisite". What Shri Rathi stated is the correct procedure. His statement shows that the Board was getting those particulars required for taking policy decisions from the proper channel and not directly from the Surveillance Department. He had further stated that "such information is also required in exceptional circumstances such as those existed on March 2, 2001. The information and relevant feed back is usually made available in such circumstances by the Executive Director or senior executives of the exchange.

¶133

responsibility of overseeing the functioning of the Surveillance Department". He could have very well waited for the Executive Director and General Manager to be back in office, or should have contacted them on their mobile phone, but still he ventured to obtain information in breach of the Respondent’s directions. In this context, his another submission is also noteworthy. He had told the investigating officer that "I have not obtained any information directly from the surveillance department in the past. However, in case of any unusual movements in the market I had received queries from Finance Ministry and Regulators to find out broad reasons for unusual movements and particularly the behaviour of the Financial Institutions, etc. Normally such calls were received by the President only. Such unusual movements in the markets require initiation of action for the purpose of risk management, safety and integrity of the market. In such unusual circumstances communications were made with the Administration". Thus shri Rathi admits that in the past to find out broad reasons for unusual movements, he, in discharge of his duties used to communicate with the "administration" and not directly with the Surveillance Department as he did on March 2. The statement of Shri Rathi that he had not contacted the Surveillance Department in the past is corroborated by Shri P.S.Reddy, General Manager (Surveillance) before SEBI.. To the question that "do you know / have any other sound recording except that of March 2, 2001 in which the President of the stock exchange, Mumbai Shri Anand Rathi is seeking information pertaining to scrips and the position of various members in particular scrips? Please confirm the same and comment"; Shri Reddy in answer stated that "to the best of my knowledge Shri Anand Rathi have never asked me for any such information till date. I listen to voice recording system approximately once in two months and listen to few calls randomly. I have never come across any call made by Shri Anand Rathi asking for any of the aforesaid information. Further none of the employees have also informed me the happening of any such incidence in my absence as they did on March 2, 2001". He had reiterated this view to another question by saying that "Shri Anand Rathi has never asked information which includes scrip specific and member specific". To another question as to what is his level of interaction with the President (Shri Rathi) in matters relating to surveillance Shri Reddy had stated that "the Governing Board has constituted a committee comprising of the Executive Director, the RBI nominee, Public Representative and Shri Himanshu Kazi. The said committee is headed by Shri Anand Rathi in his capacity as President of the exchange. The committee takes only decisions pertaining to policy issues involved in the matter of surveillance at the exchange. No specific individual or case to case decisions are taken, or discussed at the meeting". This statement clearly indicates how the exchange did really understand its role and the manner in which the Governing Board was overseeing and giving policy directives to the Surveillance Department in terms of the circular. Shri Joshi’s reaction after listening to the tape was that "I was shocked that such conversation has taken place". There is nothing on record to show that Shri Rathi had discussed about any measures with the Executive Director or General Manager on their return to the exchange. The response of the Executive Director on hearing that "the President was enquiring about few index counters and the positions of brokers in scrips I immediately expressed my deep displeasure with Shri Dhanawade", indicates the wrong doing by the President. Shri Tirodkar, Director in charge of the Surveillance Department has gone on record before the investigating officer stating that " Shri Rathi has not asked any specific information during his term as President". But on March 2, 2001 it was not so.

¶287

entities owe their success and development to Shri Rathi. Further the contention that the entities (that is the companies) can not be held responsible for any acts of misdemeanor of its director is not acceptable in this case for another reason. The areas of activity of the entities and Shri Rathi’s functions as the President of the Stock Exchange are the same i.e. activities related to the stock Market. These are so closely intertwined that it is difficult to draw a dividing line between the activities of the entities and Shri Rathi. We also find that in case if corporate broking entity, as is in the present case, it is one of the requirements that the whole time directors should have requisite qualifications and experience in dealing in securities. Further, they need to have atleast 40% share holding in such broking entities. This clearly reflects the heavy dependence of the entities on the directors. Therefore, in this case, the argument that the broking entities can not be held responsible for the action of Shri Rathi as President is difficult to accept. If his entity, Anand Rathi Securities Pvt. Ltd. had not been a broking entity, Shri Rathi could not have become the President of BSE. Shri Rathi undoubtedly acts on behalf of the companies. When the counsel for Shri Rathi was confronted with a query on the issue of whether the company could not be penalised for the acts of its directors even in the cases where there were findings of actual misuse of information by the broking entities, the counsel admitted that in such a case the broking entities could be penalised. We find that the Enquiry Officer has come to the conclusion that the information was obtained in relation to or for the benefit of his broking entities even though there was no occasion or necessity to use such information. As regards the earlier case involving former BSE President we find that the facts of the case were different. In that case, there was no instance of trading by his broking entities when the trading facility was opened after the trading hours. However, in this case there are some instances of trading by his associate entities but the Enquiry officer has given them the benefit of doubt as the preliminary investigation could not prove whether the said trading was done on the basis of information obtained by Shri Rathi.

¶303

In respect of the restraint order passed against Shri Rathi I am of the view that in the light of the nature of the direction issued by the Respondent in the case of Shri R. K. Aggarwal and Shri J. C. Parekh who were allegedly found interfering with Surveillance Department rather more intensely, the restraint order in the case of Shri Rathi also in all fairness be confined to "holding any public position as a member of the Governing Board or the office bearer of the exchange or any capital market related public institutions" and not to extend to holding directorship or trusteeship in any other entities. It is to be noted that the only charge finally held against Shri Rathi in the impugned order as against several serious charges like violation of Insider Trading Regulations, UTP Regulations etc. found in the show cause notice, is an act of impropriety of breaching the norms set out in the circulars issued by the Respondent governing the functioning of the Surveillance Department in the stock exchanges. The Respondent itself has after detailed investigation and enquiry concluded that the information obtained by Shri Rathi was not made use of by him or his companies for profit making and that his action has not actually resulted in benefitting him or his broking companies or caused any loss to anybody. Shri Rathi was subjected to investigation and enquiry in the context of the havoc witnessed in the market on March 2, 2001, to find out whether his action had in any way contributed to the same. Respondent after detailed enquiry has given him a clean chit absolving him of any role in depressing the market. It is therefore felt that restraining Shri Rathi holding directorship etc., for a period of two years is disproportionate to the gravity of the wrong doing by him and the actual fall out thereof. It is all the more so, in view of the fact that Shri Rathi is not barred from carrying on the business of stock broking in any manner, by the order. In fact the impugned order itself has impliedly restricted the disqualification that Shri Rathi is "not a fit and proper person" for a period of just nine months as could be viewed from the suspension order passed against his two companies, by limiting the period of suspension to nine months. Thus, taking into consideration the totality of the facts and circumstances of the case, it is felt that it would be but fair and reasonable to restrain Shri Rathi holding any post of director / office bearer of stock exchanges for one year. Accordingly that portion of the impugned order relating to Shri Rathi is modified as under.

Anand Rathi v. SEBI

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

Similar cases

Anand Rathi v. SEBI

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

Similar cases

Statutes considered