JUDGMENT
N.K. Sodhi, J. (Presiding Officer)
1. Whether the appellant has violated Regulation 4(e) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (for short “the Regulations”) is the short question which arises for consideration in this appeal filed under Section 15T of the Securities and Exchange Board of India Act, 1992. Facts giving rise to this appeal lie in a narrow compass and these may first be noticed.
2. The Securities and Exchange Board of India (for short “the Board”) conducted investigations into the trading of the scrip of Moschip Semi Conductors Limited (for short “the Company”) for the period from May 7, 2001 to May 31, 2001. Investigations revealed that one B. Jayaprakash had traded in the scrips of the Company during the period in question solely for the purpose of establishing a higher price from Rs. 25.80 to Rs. 50/- and that he executed his orders through the appellant – a sub broker which is the proprietary concern of Mr. A. Rama Rao. It is not in dispute that for seven days consecutively Jayaprakash placed orders through the appellant for the purchase of the scrips of the Company at the upper circuit price i.e. 4% higher than the previous day’s closing price. It is also not in dispute that Jayaprakash did not have enough funds at his disposal for the purchase of shares and that the appellant as a sub-broker gave him credit facilities in this regard. It has been established on record and not disputed by the appellant that Jayaprakash purchased 19,160/- shares of the Company for the value of Rs. 60.19 lacs in the month of May, 2001 and that his annual income did not exceed Rs. 3 lacs. Pursuant to the investigations, the Board appointed an enquiry officer to look into the matter. A show cause notice was issued to the appellant who filed his reply and after considering the same the enquiry officer concluded that the appellant had violated Regulation 4(e) of the Regulations and also the code of conduct prescribed for brokers and sub-brokers under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (for short “the 1992 Regulations”). The enquiry officer recommended that the certificate of registration of the appellant as a sub-broker be suspended for six months. On receipt of the enquiry report, the Board issued a show cause notice to the appellant along with a copy of the enquiry report calling upon him to file his reply which he did and on consideration of the entire material on record it was found that the appellant had given credit facilities to Jayaprakash to enable him to purchase the scrips of the Company and that he had placed purchase orders on the asking of Jayaprakash at the upper circuit price for seven days consecutively during the month of May, 2001. The Board concluded that Regulation 4(e) of the Regulations and the code of conduct prescribed under the 1992 Regulations stood violated and accordingly by order dated January 27, 2005 suspended the certificate of registration of the appellant for a period of six months. It is against this order that the present appeal has been filed.
3. We have heard the learned counsel for the parties. The facts as found by the Board have not been disputed by the appellant and therefore we are of the view that the appellant has violated Regulation 4(e) of the Regulations and also the code of conduct prescribed for the sub-brokers. At this stage it may be relevant to refer to clause (e) of Regulation 4 which the appellant is said to have violated. It reads as under:
4. No person shall –
(a) ….
(b)….
(c)….
(d)….
(e) pay, offer or agree to pay or offer, directly or indirectly, to any person any money or money’s worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing, or causing fluctuation in the market price of securities.
4. A reading of the aforesaid Regulation makes it clear that no person can pay, offer or agree to pay or offer directly or indirectly money to any person for inducing him to purchase or sell shares with the sole object of inflating the price of any scrip in the market. In the case before us the appellant as a sub-broker had given credit facilities to the tune of 70% to Jayaprakash to enable him to purchase the shares. Further, Jayaprakash was placing orders through the appellant for the purchase of the scrips of the Company at the upper circuit price and this he did for seven days continuously. It is, thus, obvious that Jayaprakash and the appellant together were trying to inflate the price of the shares of the Company. There is no other inference that can be drawn from the facts as found by the Board. It is contrary to normal human conduct that a person who wants to buy shares should pay more than the price for which those shares are available in the market. If he does so the legitimate inference that could be drawn is that he is trying to manipulate the price of the scrip. Every transaction that takes place in the market establishes the price of the scrip and therefore we have no hesitation in holding that the appellant by providing credit facility to Jayaprakash had offered him money solely for the purpose of purchasing shares with a view to inflate the price of the scrip of the Company. It is the admitted case of the appellant that he had no other dealings with Jayaprakash except that as a sub-broker he purchased shares for him.
5. We also find that the code of conduct prescribed for the sub-brokers had also been violated. Regulation 15 of the 1992 Regulations referred to herein above provides that a sub-broker shall abide by the code of conduct specified in schedule II to these Regulations. Clause (A) of the schedule pertaining to the code of conduct for sub-brokers provides that a sub-broker shall maintain high standard of integrity, promptitude and fairness in the conduct of all investment business and shall act with due skill, care and diligence in the conduct of all investment business. When Jayaprakash was placing orders for the purchase of shares at the upper circuit price for seven days consecutively, the appellant who is a professional sub-broker should have realized that the price of the scrip was being manipulated / inflated. It cannot be believed that the appellant did not become suspicious when such purchase orders were being placed on him. The learned counsel for the appellant admits that his client had good relations with Jayaprakash and therefore he was willing to purchase the shares for him at a price which was higher than the one for which they could be purchased in the market. The object of the two was obviously to bench mark the price of the scrip. As a sub-broker the appellant should have either refused to implement the orders or else he should have advised Jayaprakash against manipulating the price / inflating the price. Admittedly, he did not do so and therefore the Board is right in holding that he did not exercise due skill, care and diligence in the conduct of his business as a sub-broker. In this view of the matter no fault can be found with the findings recorded by the Board. We have no hesitation in answering the question posed in the earlier part of the order in the affirmative. We also hold that the appellant as a sub-broker has violated the code of conduct prescribed by the 1992 Regulations.
6. What penalty should be imposed on the appellant is the next question for our consideration. Having regard to the fact that this is a first time default committed by the appellant and taking into account the volume of the shares traded we are of the view that the suspension of the certificate of registration for a period of six months is little harsh in the circumstances of the case. We accordingly modify the order and reduce the period of suspension from six months to three months. Ordered accordingly. There is no order as to costs.