Allowed

Prakash Shah Shares and Sec. P Ltd.

SAT30 Apr 2003

Case brief

AI extract

What is this about?

The SAT quashed the SEBI order suspending the appellant's registration for 3 months. The Tribunal held the Respondent failed to prove the appellant violated due skill and care norms, noting the sub-broker met margins and no loss occurred.

What did the court decide?

The suspension order dated 22.7.2002 quashed and set aside; appeal allowed.

What the court decided

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BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

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APPEAL NO.47/2002

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In the matter of: Prakash K. Shah Shares & Securities Pvt. Ltd. Appellant Vs. Securities and Exchange Board of India Respondent

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Appearance: Shri. P. K. Samdani Advocate Shri. S. J. Purohit Advocate Shri. A.W. A.H. Mukri Advocate I/b M/s Purohit & Co. for Appellant Shri Kumar Desai, Advocate Ms. Rita Shivalkar, Advocate I/b Maneksha & Sethna Shri. Sandeep Deore Dy. Legal Adviser,SEBI For Respondent

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ORDER

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The present appeal is directed against the Respondent’s order dated 22.7.2002. By the said order the certificate of registration granted to Shri Prakash K. Shah, Member Bombay Stock Exchange (BSE) was suspended for a period of 3 months with effect from 12.8.2002.

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Shri Pravin Samdani, learned Counsel appearing for the Appellant submitted that Shri

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Prakash K. Shah, a proprietary concern, was carrying on stock broking business as a member of BSE, that the membership right of Shri Shah was corporatised with effect from 31.12.1997 and as a result the card was transferred to the corporate entity namely M/s. Prakash K. Shah Shares and Securities Pvt. Ltd. He submitted that as on the date of the impugned order it was the said company which was carrying on the stock broking business and not Shri Shah as mentioned in the order, that therefore the order need be viewed as one directed to the said company and accordingly the appeal also be considered as the one filed by the company. He submitted that he is not taking any technical stand holding that since Shri Shah is no longer holding a certificate of registration and as such there is no question of suspending the same, that he is ready to accept that the order is directed to the corporate entity and requested to modify the title of the appeal by substituting the Appellant’s name as “Prakash K. Shah Shares and Securities Pvt. Ltd.” in the place of ‘Prakash K. Shah’. It is noted that the Respondent has also filed an application dated 21.1.2003 in this regard requesting to take on record the correct factual position as stated therein that:

Prakash Shah Shares and Sec. P Ltd. — Securities and Capital Markets | SAT (2003)

Allowed

Prakash Shah Shares and Sec. P Ltd.

SAT30 Apr 2003

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Case brief

AI extract

What is this about?

What did the court decide?

The suspension order dated 22.7.2002 quashed and set aside; appeal allowed.

What the court decided

¶1

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

¶2

APPEAL NO.47/2002

¶3

In the matter of: Prakash K. Shah Shares & Securities Pvt. Ltd. Appellant Vs. Securities and Exchange Board of India Respondent

ORDER

Shri Pravin Samdani, learned Counsel appearing for the Appellant submitted that Shri

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Market witnessed abnormal price and volume movement in the shares of Amara Raja Batteries Ltd (ARBL) traded on Bombay Stock exchange (BSE)and National Stock Exchange (NSE), in February – March, 2001. The Respondent received complaints alleging market manipulation/ irregularities in the trading of ARBL’s shares. In that context the Respondent ordered investigation to ascertain the role played by various persons/intermediaries, and violations, if any, of the regulatory provisions by them. The investigation is stated to have revealed that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the dominant traders in the ARBL’s shares during the period August 2000 to March 2001, that some of the members of BSE and NSE had aided and abetted Shri Harinarayan Bajaj in creating a false market in ARBL’s scrips and also that they had failed to exercise due care and skill in their dealings. The Appellant was one of the members whose involvement in the matter was subjected to investigation. In the light of the information collected during the course of investigation, the Respondent decided to conduct a detailed enquiry into the role and conduct of the Appellant in trading in the scrip. Accordingly an enquiry officer was appointed on 18.6.2001 to enquire into the affairs of the Appellant in its dealings in the scrip of ARBL and the possible violations of the rules, bye laws and regulations of the Stock Exchanges, provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (the FUTP Regulations) and the Securities and Exchange Board of India (Stock-brokers and Sub-brokers) Regulations, 1992 (the Stock Broker Regulations). The enquiry officer on concluding the enquiry came to the conclusion that the Appellant had failed to exercise due care and skill in its dealings with Shri Bajaj as required by clause A(2) of the code of conduct prescribed for the stock-brokers in the Stock Broker Regulations. He recommended 3 months’ suspension of the certificate of registration granted to the Appellant. The Respondent vide show cause notice dated 13.3.2002communicated the findings of the enquiry officer to the Appellant and asked to show cause as to why the penalty as recommended by the enquiry officer should not be imposed against it. The Appellant responded to the same by filing written explanation and also by making oral submissions before the Respondent.(the Chairman) The Chairman adjudicated the show cause notice. By his order

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allowed them to carry out transactions of Rs.2 crores in carry forward and Rs.3 crores for daily transactions, that since they were the sub brokers of the Appellants for the past several years and the Appellant was dealing in many scrips in the settlement, no separate margin in ARBL was asked but there was always sufficient margin deposit from their side and referred to the copy of the relevant ledger account filed in the proceedings to strengthen the said contention. Shri Samdani submitted that in any case the enquiry officer in his report has not dealt with the adequacy or otherwise of the margin and therefore it is also not a charge covered in the show cause notice adjudicated by the Respondent. He submitted that the Appellant started dealing in the shares of ARBL sometime in the last week of October 2000, that the average trading in ARBL’s scrip per settlement was in the range of 60,000 to 80,000 shares, which by no standard can be considered as a dominant part of the high volume transacted in the shares of the said company during the relevant period. Shri Samdani submitted that the enquiry officer in his report has charged the Appellant of giving ‘huge exposure to his sub broker’ and has viewed this as indicative of the Appellant’s failure to adopt prudential risk management norms. In this context he referred to the show cause notice dated 6.7.2001 and the extract of the investigation report forming part of the same and submitted that the enquiry officer had not levelled any such charge that the Appellant had allowed huge position to Shri Bajaj and the finding thereon has been recorded without giving an opportunity to the Appellant to rebut the same. He submitted that the Appellant had informed the enquiry officer that during the period October 2000 to March 2001 the Appellant had executed trades in ARBL for a total volume of 19,50,160 shares on the purchase side and 18,98,360 on the sales side with total deliveries constituting 21,700 shares that in addition, the carried forward position with 30,000 shares were squared off in the last settlement, that except for the volume of 30,000 shares the Appellant executed the trades through its sub broker only, and the sub broker maintained client registration form and the Appellant was not aware of the identity of the clients for whom the sub broker has done trades. He submitted that the Appellant came to know of the involvement of Shri Harinarayan Bajaj only in February 2001 and immediately on knowing so, cautioned the sub broker against dealing for Shri Bajaj. He submitted that the Respondent has not disputed these facts.

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Settl.No.	Purchase	Sales	C/f	Delivery
A-30	13,740	Nil	13,740	Nil
A-31	20,250	14,107	19,883	Nil
A-32	61,257	81,200	(60)	Nil
A-33	23,268	23,208	Nil	Nil
A-34	10,000	10,000	Nil	Nil
A-35	62,150	62,150	Nil	Nil
A-36	1,07,926	1,07,926	Nil	Nil
A-37	1,02,401	1,02,401	Nil	Nil
A-38	1,20,065	1,08,403	11,662	Nil
A-39	1,37,762	1,11,662	37,762	Nil
A-40	1,55,000	1,47,762	45,000	Nil
A-41	62,075	91,075	5,010	10,990
A-42	2,05,273	2,05,273	5,000	10
A-43	1,60,000	1,60,000	Nil	5,000
A-44	1,18,993	1,00,000	18,993	Nil

A-45	1,25,000	1,38,293	Nil	5,700
A-46	1,00,000	1,00,000	Nil	Nil
A-47	75,000	75,000	Nil	Nil
A-48	75,000	75,000	Nil	Nil
A-49	95,000	95,000	Nil	Nil
A - 50
05-03-01	1,20,000	Nil
07-03-01	Nil	50,000
08-03-01		23,135
09-03-01	Nil	40,000	30,000	Nil
TOTAL	19,50,160	18,98,460		21,700

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allowing the Sub broker to do business within the said limit the Appellant did not suffer in any way, can not be ignored. It is also on record that by the end of February,2001 on the Appellant knowing that it was Shri Harinarayan Bajaj who was trading in ARBL shares, it had warned its Sub broker trading for Shri Bajaj and ensured that the trading limit is reduced substantially. Even the purchase of one lakh and twenty thousand shares, allowed to be made on 5.3.2001at the behest of the sub broker for the reason of the reported commitment made earlier was through, without any default. In this context it is noted that in the statement recorded on 11.5.2001 by the Investigation Officer, under section 11(3) of the Act, Shri Shah on oath had stated that “by the end of February 2001, upon enquiry with Shri Sanjay C. Shah about the client in Amara Raja Batteries Ltd, we were informed that one Shri Shailesh Bajaj was trading in the scrip. We told our Sub broker that it is not safe to trade with Shri Bajaj as he has already been declared defaulter for his trading in Sesa Goa by BSE and asked them to reduce/square off the position. On the morning on March 5, 2001, I reduced my purchase limit of his terminal to 5000 shares for the day and also informed Shri Shishir Khandwala that I do not want to deal in this share any more. Thereafter Shri Sanjay Shah spoke to me over the phone and requested to increase the limit for the day as he had already committed his client.” It is also on record that Shri Shah subsequently corrected the name of the client to Shri Harinarayan Bajaj instead of Shri Shailesh Bajaj, referred to in his statement through an affidavit. In the said context Shri Desai’s argument that the Appellants direction to the Sub broker was with reference to Shri Shailesh Bajaj and not with Shri Harinarayan Bajaj is difficult to accept. In fact there is no such inference in the enquiry report or in the impugned order. It is also noted that out of the 1,20,000 shares purchased on 5.3.2001, 50,000 shares were sold on 7.3.2001 and 40,000 shares sold on 9.3.2001 and the remaining 30,000 shares were carried forward to the next Settlement and was squared off. The Respondents’ contention that as a result of allowing huge exposure to the Sub broker the Appellant had to take delivery of 21,700 shares is factually incorrect. In fact 21,700 shares are the shares given in delivery by the Appellant during the entire transaction and not delivery taken by the Appellant. It is to be noted that giving deliviery of shares and taking delivery of shares are entirely different. The Respondent had viewed that the broker had taken

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According to the Respondent the “Appellant had given high exposure to Shri Bajaj and that there was no convincing defense from the Appellant that how it had given such a high exposure to Shri Bajaj”. But it is noted that the Respondent itself had admitted that “there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudent risk management norms of the Stock broker within the framework of law”. The Respondent has not prescribed any yardstick in regard to the nature of prudence to be exercised by a Stock broker. It is left to an extent to the judgment of the Stock broker. It is not the Respondents case that the Appellant allowed its Sub broker to do trading without securing sufficient margin and thereby exposed to risk. It is on record that the Appellant had collected from the Sub broker margin in the range of Rs.35 lakhs to 80 lakhs and there was no default at any point of time on the part of the Sub broker in meeting their obligations. The Appellant has gone on record that “the clean past track record of our said Sub brokers has not created any doubts in our mind for probability of any irregularity in respect of these trades by our said Sub brokers. In spite of these facts, the said Sub brokers have been always regular and within the required limits of margin payments, deliveries etc.” On an analysis of the trading data available in the order, it is seen that the Appellant’s assessment had not gone wrong, when it was trading with the said sub broker, as the Appellant had not suffered any loss. In my view the Respondent’s view that the Appellant had given huge exposure to its Sub broker and that is indicative of the failure on the part of the Appellant to exercise due skill and care is unsupported with evidence. The Respondent seems to have gone by certain obsolute trading figures without correlating the same with the actual quantum of the total trade in the scrip carried out in the market and ignoring the evaluation of the financial capacity of the Sub broker made by the Appellant and the risk contaianing measures followed by the Appellant i.e. collecting sufficient margin before allowing trading by the Sub broker.

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It is clear that the risk management was left to the prudence of the Appellant and the Appellant adopted such measure which it considered necessary. According to the Appellant it had to cover the risk by collecting adequate margins and accordingly it collected margins and allowed the Sub broker to trade within the permissible volumes vis-à-vis margin collected. Infact the enquiry officer in the context of the Appellant’s conduct with reference to the trading transactions has observed that “what Shri Shah did was a normal transaction through his Sub broker”. It is true, as Shri Desai pointed out, that the said observation was made by the enquiry officer while dealing with the charge of violation of regulation 4 of the FUTP Regulations. But, the observation has a bearing on the other charges also as the conclusion is with reference to broking transaction made through the Sub broker. In this context the following finding recorded by the enquiry officer is also considered relevant, that “Shri Shah had entered into an agreement with Sub broker in the prescribed format. As per the same, the registered Sub broker has to take the individual client registration form and enter into an agreement with the client. Further, the Sub broker is also responsible for scrip level and client level position monitoring. Therefore the main broker is not normally aware of the identity of the ultimate client. In this case there was no evidence that Shri Shah was aware that the trades executed by Khandwala shah and Associates was for Shri Harinarayan Bajaj and his family. It is noted that he has not dealt with Shri Bajaj in the past. However, as mentioned above, the quantity traded by his Sub broker was huge and the member should have cautioned his Sub broker not to take such huge exposure. Further, Shri Shah had admitted that in his sworn statement during the investigation that he came to know in the last week of February, 2001, Shri Harinarayan Bajaj was trading in the scrip of ARBL (Enquiry Officer has rightly understood that this reference is to Shri Harinarayan Bajaj and not to Shri Shailesh Bajaj). But Shri Shah had executed huge quantity of shares even after knowing the above, which shows that he had not exercised care in his dealings with the Sub brokers.” The enquiry officer, has viewed that the Sub broker had traded in huge quantity. In the absence of any specific guidelines on the quantum of trade to be carried out through the Sub broker, the Appellant can

Prakash Shah Shares and Sec. P Ltd.

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Prakash Shah Shares and Sec. P Ltd.

Case brief

What is this about?

What did the court decide?

What the court decided

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Cases cited

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Coram

Case details

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