Allowed

Subhkam Securities Pvt. Ltd.

SAT22 Apr 2003

Case brief

AI extract

What is this about?

The SAT allowed an appeal by a stock broker suspended for seven days by SEBI. The Tribunal held the broker had exercised due skill and care despite minor gaps in client forms and no initial margin collection, as the client was known personally and margins were collected afterward for carry forwards.

What did the court decide?

Suspended certificate of registration for seven days set aside.

What the court decided

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BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

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Appeal No. 53/2002

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Subhkam Securities Pvt. Ltd Appellant
Vs.
Chairman, Securities & Exchange Board of India Respondent
Appearance:
Shri J. J. Bhatt,
Sr. Advocate, Shri Vipin Jain,
Chartered Accountant for Appellant
Shri Kumar Desai, Advocate,
Ms. Daya Gupta,
Advocate
Shri Sandeep Deore,
Dy. Legal Adviser, SEBI for Respondent

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ORDER

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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

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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 BSE, 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 seven days’suspension of the certificate of registration granted to the Appellant. The Respondent communicated 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 making oral submissions before the Chairman of the Respondent.(the Chairman) The Chairman adjudicated the show cause notice. Vide his order dated 8.8.2002 the certificate of registration granted to the Appellant was suspended for a period of seven days from 26.8. 2002.

Subhkam Securities Pvt. Ltd. — Securities and Capital Markets | SAT (2003)

Allowed

Subhkam Securities Pvt. Ltd.

SAT22 Apr 2003

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Case brief

AI extract

What is this about?

What did the court decide?

Suspended certificate of registration for seven days set aside.

What the court decided

¶1

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

¶2

Appeal No. 53/2002

¶3

Subhkam Securities Pvt. Ltd Appellant
Vs.
Chairman, Securities & Exchange Board of India Respondent
Appearance:
Shri J. J. Bhatt,
Sr. Advocate, Shri Vipin Jain,
Chartered Accountant for Appellant
Shri Kumar Desai, Advocate,
Ms. Daya Gupta,
Advocate
Shri Sandeep Deore,
Dy. Legal Adviser, SEBI for Respondent

¶4

ORDER

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shares were taken by Shri Bajaj. Learned Counsel submitted that this was the only purchase transaction effected by the Appellant for Shri Bajaj, that the transaction was closed in November 2000, much before the market was manipulated. He submitted that the Appellant ensured that Shri Bajaj promptly met his financial obligation arising from his position, that the Appellant in fact squared up accounts with Shri Bajaj and unlike other brokers, the Appellant had no dues owing by Shri Bajaj, that the Appellant had no dealings with Shri Bajaj during the period of extreme volatility, which was during the period December 2000 to March 2001. He submitted that commensurate with the trading activity of Shri Bajaj margin was required to be deposited by the Appellant with BSE and Shri Bajaj had deposited the margin money with the Appellant. In this context he referred to the finding recorded in the report by the enquiry officer that the Appellant “had collected the required margin from Mr. Bajaj”, and submitted that this finding was reached despite the allegation in the notice of enquiry to the effect that the Appellant had traded on behalf of Shri Bajaj without collecting any initial deposit and margin. In other words, the enquiry officer was satisfied on the basis of the material and particulars furnished by the Appellant that the required margin had been taken, before undertaking trading He submitted that the Respondent in the impugned order has wrongly recorded that no margin was initially collected from Shri Bajaj that the correct position was that Mr. Bajaj had paid Rs.1,01,000 on 12.10.2000. According to the Appellant at the relevant time ARBL scrip was an A Group scrip which one could freely purchase on forward basis and carry forward the same subject to fulfillment of the conditions relating to payment of margin and the purchase was within the individual and aggregate exposure for ‘A’ Group shares, that the trade of one lakh shares of ARBL constituted not even 1% of the Appellant’s trade volume during the relevant time which was to the tune of Rs.300 crores in each settlement, that the value of the said one lakh shares was around Rs.97 lakhs which constituted just 5% of the Appellant’s total carry forward exposure of Rs.20 crores, that the Appellant had placed with the stock exchange margins on securities valued around Rs.14 crores which was sufficient to take care of any loss on account of subject trade.

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Appellant can not be said to be unaware of the other brokers’ dealings for Bajaj, that several particulars were not disclosed in the form etc. can not be accepted at this stage of the proceedings. I do not find any thing wrong in Shri Vipul Shah, who the Appellant claims is its business associate, introducing the client, that in one way an introduction from a known business associate could be more trustworthy than an introduction from an unknown person. Similarly, transacting the business through the Ghatkopar branch of the Appellant by itself does not indicate anything unusual to suspect the bona fides of the Appellant. The enquiry officer has come to the conclusion mainly on the ground that (1) in the client registration form the details pertaining to Annual income and market value of portfolio of the client was not reflected (2) Shri Bajaj was given high exposure by executing trades with buy positions ranging from 25,000 to 85,000 shares per settlement with an exposure capital of Rs.2 crores (3) Shri Bajaj was allowed to take exposure beyond his financial capacity. But it is evident from the material on record that Shri Bajaj was introduced to the Appellant by known source and that the Appellant’s representative had made spot visit and verified the client detail. In these circumstances, in my view, omission to fill up few columns remain as pure technical lapse and it can not be considered as failure to exercise diligence and care. It was the case with LKPSS also, but the said omission was not considered as a failure to exercise due skill and care in the case of LKPSS. With reference to the other two grounds referred to above, it is seen that the Appellant had clearly explained the position in its reply to the show cause notice from the Respondent, an extract of which has been provided in the preceding portion of this order. The impugned order has not made any observation on the said submissions. The Respondent has admitted that it has not set any prudential norms and as such the Appellant allowing Bajaj to trade taking adequate margin and putting the cap at Rs.2 crores based on its judgement can not be said to be a failure to exercise due skill and care. I find the submission made by the Appellant in this regard, especially in the absence of any specific rebuttal of the same by the Respondent, convincing and acceptable. In these circumstances I am not inclined to agreement with the conclusion arrived in the impugned order that the Appellant had failed to comply with the requirement of regulation 7 read with Clause A (2) in Schedule warranting imposition of penalty. In view of the same, I do not consider it necessary to go into the various authorities cited by the learned counsel, on the principles governing imposition of penalty, proportionality etc.

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Sett No	Purchase	Sales	C/F	Delivery
A-29	1,00,000	Nil	1,00,000	Nil
A-30	1,00,000	Nil	1,00,000	Nil
A-31	1,00,000	Nil	1,00,000	Nil
A-32	1,00,000	Nil	1,00,000	Nil
A-33	1,00,000	Nil	1,00,000	Nil
A-34	Nil	30,000	55,000	15,000
A-35	Nil	42,500	Nil	12,500
TOTAL	1,00,000	72,500		27,500

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The enquiry officer himself has admitted in his report that the ‘due skill and care’ in clause A(2) of the Code of conduct “would mean, at least such care and skill as a man of ordinary prudence and caution would exercise under similar circumstances.” From the factual position emerging out of the enquiry report/impugned order it is difficult to come to the conclusion that the Appellant’s conduct had failed to pass the test of due skill and care as laid down by the enquiry officer. On the contrary the evidence on record is in support that the Appellant had exercised such care and skill as a man of ordinary prudence and caution would exercise in the normal situation. From the undisputed fact, it is noticed that the Appellant had received client registration form from Shri Bajaj, it had executed member client registration agreement, it had obtained requisite margin, that it collected the full dues from Shri Bajaj in time, in respect of the transactions done by it for Shri Bajaj. It is also noted that after 13.10.2000, the Appellant did not purchase shares for Shri Bajaj. Even the transaction made earlier was closed by the 1^st week of November 2000. As the enquiry officer stated in his report what the Appellant did was a normal broking transaction. It appears that the Respondent has considered the transaction involving 1 lac shares of the total value of Rs.97 lakhs as a transaction giving high exposure to Shri Bajaj. But according to the Respondent’s own version “there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudential risk management norms of the stock broker.” The Respondent has not prescribed any yardstick in regard to the nature of prudence to be exercised by a broker. That being the case the Appellant can not be held guilty for purchasing 1 lakh shares on the instruction of its client, and for having carried forward the same to few settlements so long it was satisfied about the credentials of the client, and the transaction was backed up with requisite margin received from the client. It is on record that the ARBL scrip at that time was an‘A’ Group scrip and carry forward trade was permitted in the said scrip against margin collected. The fact that the Appellant carried forward the trade to 6 settlements by itself can not be considered as a failure to exercise due skill and care on its part. The enquiry officer has gone on record that the Appellant “had taken the prescribed client registration form and also

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executed member client agreement with Shri Harinarayan Bajaj. It had collected the required margins from Shri Bajaj” In this context it is noted that the enquiry officer in the show cause notice dated 6.7.2001 had observed “the member has traded on behalf of the clcient without any initial deposit or margin.” Therefore, the observation recorded by the enquiry officer in his report on completion of the enquiry that the Appellant had collected the required margin from Shri Bajaj cannot be considered as an unsupported finding, as there is no reason to believe that he would have recorded such a finding on an important issue included in the show cause notice without really satisfying the position from the records. It is in the said context the Appellant’s submission refuting the version in the impugned order that no margin was initially collected from Bajaj need be viewed. The Appellant has averred that Shri Bajaj had handed over a cheque of Rs.1,01,000 on 12.10.2000 to the Appellant. Obviously the enquiry officer might have noted the receipt of the same by the Appellant before reaching the conclusion that the Appellant had collected the required margin. Otherwise he would not have absolved the Appellant of not collecting requisite margin, by making such an affirmative statement. If the Respondent had any material with it to establish that there was no margin collection and the finding of the enquiry officer was not correct, the Respondent could have produced the same, in support thereof, atleast during the appellate proceeding. In the absence of adequate evidence, it is not possible to ignore the finding of the enquiry officer who had access to the primary documents during the enquiry and accept the version of the Respondent in its order based on the oral statement/admission stated to have been made by the Appellant’s representative. The Respondent has not filed a copy of the statement of the representative of the Appellant, relied on by it in support of its version. I find it difficult to agree with Shri Desai’s submission that the reference to “required margin” by the enquiry officer is with reference to the margin requirement for the trade carried forward.

Subhkam Securities Pvt. Ltd.

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Subhkam Securities Pvt. Ltd.

Case brief

What is this about?

What did the court decide?

What the court decided

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

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