Dismissed

Madhukar Seth

SAT18 Sept 2003

Case brief

AI extract

What is this about?

Appeal against suspension order for failing to exercise due care and aiding creation of false market in ARBL scrip. Tribunal upheld suspension finding violations of Stock Broker and FUTP Regulations.

What did the court decide?

Suspension of certificate of registration for two years sustained as ordered by SEBI.

What the court decided

AI extract

Outcome

Suspension of certificate of registration for two years sustained as ordered by SEBI.

Issue for consideration

Whether the appellant aided and abetted in creating a false market in ARBL scrip. +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.

Madhukar Seth — Securities and Capital Markets | SAT (2003)

Dismissed

Madhukar Seth

SAT18 Sept 2003

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Case brief

AI extract

What is this about?

Appeal against suspension order for failing to exercise due care and aiding creation of false market in ARBL scrip. Tribunal upheld suspension finding violations of Stock Broker and FUTP Regulations.

What did the court decide?

Suspension of certificate of registration for two years sustained as ordered by SEBI.

What the court decided

AI extract

Outcome

Suspension of certificate of registration for two years sustained as ordered by SEBI.

Issue for consideration

Whether the appellant aided and abetted in creating a false market in ARBL scrip. +2 more

A compact analysis

¶51

Settl. No.	Purchase	Sales	C/f	Delivery
A-22	20,903	Nil	20,903	Nil
A-23	21,729	Nil	42,632	Nil
A-24	8,718	1,200	50,150	Nil
A-25	62,263	100	112,313	Nil
A-26	57,749	Nil	170,062	Nil
A-27	60,038	2,000	228,100	Nil
A-28	19,200	9,200	238,100	Nil
A-29	5,000	23,100	220,000	Nil
A-30	17,707	Nil	237,707	Nil
A-31	12,367	Nil	250,074	Nil
A-32	32,000	82,074	200,000	Nil
A-33	96,283	116,283	180,000	Nil
A-34	136,962	163,473	143,489	10,000
A-35	210,745	220,000	124,234	10,000
A-36	245,198	238,935	123,997	6,500

¶52

A-37	228,512	232,020	115,489	5,000
A-38	179,431	182,276	112,644	Nil
A-39	188,8345	236,578	43,900	21,000
A-40	282,980	230,000	81,824	15,056
A-41	298,419	349,965	15,278	15,000
A-42	285,000	280,278	15,000	5,000
A-43	280,000	293,613	Nil	1,387
A-44	300,000	265,223	34,777	Nil
A-45	280,000	290,389	3,753	20,635
A-46	211,387	205,140	10,000	Nil
A-47	231,750	220,000	21,750	Nil
A-48	304,212	304,950	21,012	Nil
A-49	250,000	271,012	Nil	Nil
A - 50
03-05- 01	254,000
03-07- 01		50,000
03-08- 01		23,135
03-09- 01	45,000	147,289
	299,000	220,424	78,576	Nil
Total	4,626,387	4,438,233		109,578

¶70

ARBL for a total volume of 1,11,36,003 shares (purchases) and 1,00,58,623 shares (sales) in NSE & 1,35,57,641 shares (purchases) & 1,20,55,152 shares (sales) in BSE. His trading accounted for approximately 30% of the total trading on NSE and BSE. Since the arbitrage in the scrip of ARBL was due to the shifting of position by Shri Harinarayan Bajaj and his son Shri Rahul Bajaj, the volumes generated by arbitrageurs are also to be taken into account. Therefore, approximately 60-70% of the volumes in the scrip of ARBL on BSE & NSE could be attributed to Shri Harinarayan Bajaj and his family. As per the distribution schedule of ARBL approximately 43% of its paid up capital i.e. about 43 lakh shares are with the public. The average trading in the scrip from January 2001 to March 2001 was to the extent of 10-15 lakh shares per day. This constitutes approximately 30% of the free float of ARBL. Such abnormally high volumes are indicative of a false market in the scrip. It has been observed from the trading details of Mr. Harinarayan Bajaj and Mr. Sheth, that Shri Sheth has executed 39.39% of total trades of Mr. Harinarayan Bajaj in BSE. Further, his Sheth Securities Limited had executed 40.31% of the total trades of Mr. Harinarayan Bajaj at NSE. Though Shri Sheth, at the time of execution of trades, was not aware of his volume of trades in ARBL vis-à-vis the total volume of the Stock Exchange in ARBL, he must atleast, be aware of the implication of such a huge exposure to Shri Bajaj on the price of the scrip. Accordingly, the series of trades executed by Shri Sheth for Mr. Bajaj cannot be simply termed as normal brokerage transactions. It is therefore, clear that Shri Sheth was responsible for the client to build huge positions in the market leading to creation of a false market in the scrip of ARBL. From the trading data; failure of Shri Sheth to exercise due care and skill in his dealings with Shri Bajaj; allowing client to; build huge positions in the market, indulge in excessive speculation, dominate and control the market trades in ARBL are the clear evidences/instances based on which conclusive inferences can be drawn that Shri Sheth had aided and abetted Shri Harinarayan Bajaj and his family in creating a false market in the scrip of ARBL.

¶98

On a perusal of the impugned order and the material before the Tribunal, it appears that the market collapse in the case ARBL shares was in the context of mega size trading allegedly done for one client -–Bajajs – by several brokers. Gigantic size of the transactions effected for the said client has been stated in the order. It appears that there were several players. But the Appellant was one of the dominant players in this game. There is no evidence on record to show that the 30 and other odd brokers whose services Shri Bajaj made use of, were acting in concert. But I am not prepared to accept that these brokers, though not all, at least some of them were unaware of “something” abnormal in the trading of ARBL scrip in February 2001 to March 2001. An experienced broker like the Appellant can not be totally unaware of the happenings in the scrip at that time. The Appellant had traded for Bajajs from August 2000 and continued to trade in huge quantities through out. It is noted that the Appellant had traded in ARBL scrip for Bajaj and executed transactions if 46,26,387 shares (purchases) and 44,38,233 shares (sales) in the delivery of just 1,09,578 shares in Settlement A-22 to A-50 in BSE The details of the Settlementwise transaction have been furnished in Tabular format in the earlier part of this order. The said transactions accounted for nearly 40% of the total trades of Shri Bajaj. Further M/s. Sheth Securities P. Ltd. a Member of NSE which is undoubtedly an outfit of the Appellant had also executed about 40% of the total Trades of Shri Bajaj. Thus the trades executed by the Appellant and his associate company for Shri Bajaj is exorbitant and to me it appears to be not innocuous transactions. It is on record that Shri Bajaj had defaulted a huge sum of about Rs.1.8 crores to the Appellant at the end of Settlement No.51. It is also noted that series of transactions conducted by the Appellant for Shri Bajaj also appears to have enabled Shri Bajaj to carry forward transactions in the ARBL scrip, that the Appellant thus facilitated Shri Bajaj to ride on the market causing loss not only to himself but put the market in danger. The fact that the appellant had also suffered loss is not an excuse to absolve the Appellant of the charges. An ordinary and prudent stock broker would assess the situation

¶99

taking into consideration all the relevant factors while trading for such a client from whose conduct, as revealed from the facts on records, clearly demonstrated that he was indulging in manipulation solely to benefit him. The Appellant had started trading for Shri Bajaj since August 2000. Before executing series of transactions for his client, any prudent broker would have gone a bit far to ascertain the goings around and also would have normally assessed the financial capability of the person for whom he is trading. It is on record that the Appellant had given high exposure to Shri Bajaj. Before giving such high exposure, he was bound to ensure the capacity of Shri Bajaj to meet the resultant obligations. There is nothing on record to show that he had been diligent in this regard. The areawise size of the client’s residential accommodation, the locality of residence, the nature of the vehicle used etc. stated to have been considered by the Appellant in my view are not the reliable parameters to judge the financial credibility of a person. The Appellant’s submission that he had taken client registration form, entered into agreement etc.by itself is not sufficient. Exercise of due diligence in ongoing transactions is a continuous process and it is not a one time measure to be adhered to while taking up the first transaction. The Appellant’s submission that it was Bajaj’s dishonesty that created the problem does not absolve him of his failure to discharge his duties as a prudent broker. The Appellant’s version that but for the crisis on 9^th March, 2001, nothing would have happened is very strange. All the safety measures are put in position to prevent crisis not to augment crisis. In my view the ARBL crisis was partly due to the failure of the persons concerned in exercising due skill and care expected to have been exercised by them. In my view it was the failure that caused the crisis and not vice versa. That failure could have been avoided if the concerned person had exercised due care and diligence as required. The Appellant’s argument that it was the duty of the Surveillance Deptt. to alert & caution the brokers about Shri Bajaj’s trading activities is difficult to accept. The question whether there was a failure from the surveillance angle, is a different matter. It is for the concerned authorities to address the same and take corrective measures, if considered necessary. In the present appeal we are not examining the role of the Surveillance Deptt. The role of the Appellant is the subject matter. The question is whether the Appellant did exercise due skill

¶100

and care which as a broker he was expected to exercise. In my view, on the basis of the material available on record, it is difficult to conclude that the Appellant had exercised due skill and care in dealing with Shri Bajaj. It is to be noted that it is not that the Appellant had carried on only few trade transactions for Shri Bajaj for a short period. He had transacted in huge volumes for Shri Bajaj and the association dated back to August 2000. If the Appellant could not see any design or pattern in the transactions which Shri Bajaj was executing through the Appellant during the period, then the Appellant certainly deserves to be blamed for being indifferent and unconcerned and for that reason he is at fault for the failure to exercise due skill and diligence. The main thrust of the Appellant’s submission was that the entire fiasco was due to the failure of the Surveillance Deptt. of BSE, faulty system of margin collection, introduction of circuit filters, and the practice of allowing different settlement dates in BSE & NSE. In this context one would like to know that with all the said “faulty systems’ why the crisis developed in the case of ARBL scrip and not in the other scrips as well ? The answer is quite obvious. The crisis in ARBL scrip was a designed one by the interested persons and not a “system failure” as is being attempted to be made out by the Appellant. The Appellant had submitted that he has done his duty as a broker and he is supposed to protect the interest of his client and he is expected to act according to the instructions of the client. It is true that a broker can not act of his own against the instructions of the client. But no one can compel him to be a party to manipulate the market. No doubt a broker is supposed to protect the interest of his client, but he is also expected to protect the interest of the securities market in which he operates. It is his duty to ensure not to be a party to any market manipulation and that the market in which he operates is run on a healthy and non manipulative basis.

Madhukar Seth

Case brief

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What did the court decide?

What the court decided

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Coram

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Madhukar Seth

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

Coram

Case details

Similar cases