ORDER
M. Damodaran, Chairman
1. By a common order dated February 18, 2005 Securities and Exchange Board of India (hereinafter to be referred as ‘SEBI’) directed the Uttar Pradesh Stock Exchange Association Limited (hereinafter referred to as the ‘UPSE’) to suspend 14 brokers mentioned in the following tabular statement for the periods mentioned in the said order.
Sr. No.
Name of the Broker
Trade Name
SEBI Registration No.
1
Navin Securities Pvt. Ltd
Navin Securities
INB101023936
2.
Ajay Securities Pvt. Ltd.
Ajay Securities Pvt. Ltd.
INB101023332
3.
Rajratan Financial Services
Pvt. Ltd.
Rajratan Financial Services
Pvt. Ltd.
INB101027739
4.
SK Jindal Share Brokers Pvt. Ltd.
SK Jindal Share Brokers Pvt. Ltd.
INB101000135
5.
Pradeep K Bansal
Pradeep K Bansal
INB100859813
6.
Apoorva Securities Pvt. Ltd.
Apoorva Securities
INB101022631
7.
Mayank Goel
Mayank Goel
INB100949118
8.
Sunil Kumar Gupta
Sunil Bros.
INB100377913
9.
Prashant Jain
Prashant Jain
INB100831018
10.
Sandeep Mittal & Company
Sandeep Mittal & Company
INB100830812
11.
Manjeet Singh Sethi
Manjeet Singh Sethi
INB100517012
12.
Deepak Kumar Agarwal
Deepak Kumar Agarwal
INB100348119
13.
Hanupriye Securities Pvt. Ltd.
Hanupriye Securities Pvt. Ltd.
INB101146935
14.
Vinod Kumar
Vinod & Co.
INB100694710
2. S.K. Jindal Share Broker Pvt. Ltd (hereinafter to be referred as SKJ) was directed to be suspended for a period of one year.
3. Aggrieved by the order of SEBI all entities except the four entities mentioned in serial numbers 5,7,13 and 14 filed appeals (Appeal Numbers 47 of 2005 to 56 of 2005) before the Hon’ble Securities Appellate Tribunal (hereinafter referred to as ‘SAT’). SAT vide interim order dated March 4, 2005 stayed the order dated February 18, 2005. Thereafter SAT passed a final common order dated July 6, 2006 in Appeal Number 47 of 2005. All the above appeals were disposed of as not maintainable. Subsequently, vide letter dated August 1, 2006 UPSE suspended the membership of SKJ along with others covered by the order with effect from August 7,2006.
4. Subsequently, three entities namely SKJ, M/s C.M. Sethi and M/s Raj Ratan Financial Services Limited filed writ petitions before the Hon’ble Allahabad High court. The Writ Petitions were numbered as W.P. No. 43809 of 2006, W.P. No. 43812/2006 and W.P. 43815/2006 respectively. SKJ in its petition contended that there is no provision to prohibit it from trading on the stock exchange merely on the ground that it was engaged in carry forward transactions. The petitioner therein further contended that carry forward transaction is nowhere defined, therefore, the broker cannot be debarred. Apart from the above SKJ also denied that it performed any carry forward transaction.
5. After hearing the parties, the Hon’ble High court vide order dated August 31, 2006 held that Rule 11 of the Securities Contracts (Regulation) Rules, 1957 (hereinafter referred to as ‘Rules’) empowers SEBI to modify its own orders. The Hon’ble High Court further directed that SKJ may file a representation before SEBI and further directed SEBI to pass a speaking order within six weeks, if possible, from the date of receipt of such representation along with the certified copy of the order of the Hon’ble High court.
6. In pursuance of the above order of Hon’ble High court, SKJ filed a written representation vide letter dated September 13, 2006 which was received by SEBI on September 19, 2006.
7. SKJ vide the above representation has reiterated its denial that it was involved in any carry forward transactions and submitted that it had been wrongly suspended for one year by SEBI. SKJ prayed for setting aside the order dated February 18,2005 passed by SEBI and for awarding compensation of Rs. 1 lac.
8. Before dealing with the representation of SKJ it is necessary to recall the facts leading to passing of the order dated February 18,2005 by the then Chairman,SEBI. Amidst reports of widespread illegal carry forward transactions taking place, SEBI officials conducted an inspection of UPSE on November 08, 2001 and November 09, 2001. It was observed that the 14 members of UPSE mentioned in the preceding Tabular statement were involved in illegal and unauthorised carry forward transactions in securities in violation of SEBI Circular No. SMD/POLICY/CIR-33/2001 dated June 21, 2001(hereinafter referred to as ‘the Circular’).
9. Thereafter an Inquiry Officer was appointed by SEBI for holding an inquiry in terms of Section 6(3) (b) of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as ‘SCRA’). Accordingly an inquiry was held duly following the prescribed procedure. Subsequent to the aforesaid order, it was noticed that the name of Vinod Kumar Gupta was inadvertently included in the order appointing the Inquiry Officer instead of Shri Vinod Kumar. Therefore, vide another order dated May 16, 2002, the inquiry against Shri Vinod Kumar Gupta was dropped and inquiry against Shri Vinod Kumar (trade name Vinod Kumar & Co.) was separately conducted.
10. After the conclusion of inquiry, the Inquiry officer submitted to the Board for consideration his two reports; one dated May 15 2002 in respect of 13 brokers and another report dated August 09, 2002 in respect of Shri Vinod Kumar.
11. Copies of the reports of the Inquiry Officer was sent to the above mentioned 14 brokers for their reply asking them to show cause as to why action should not be taken against them under Section 6(3) of the SCRA read with Rule 11 of the Rules. The said show cause notice dated September 19, 2002 was sent to SKJ. The said brokers were advised to reply within 21 days of the receipt of the notices together with the documents if any, which they chose to rely upon in support of their reply. Vide letter dated November 09,2002 SKJ submitted its reply to the show cause notice. It was also given an opportunity of personal hearing before the then Chairman, SEBI. Sunil Kumar Gupta, Navin Securities Pvt. Ltd , Pradeep K Bansal, Ajay Securities Pvt. Ltd., Apoorva Securities Pvt. Ltd., SKJ and Rajratan Financial Services Pvt. Ltd. appeared in person for the said hearing. Alter considering the enquiry report and the submissions of the above entities, SEBI passed the order dated Feb 18,2005, suspending the 14 brokers as more particularly described in the tabular statement.
12. Issues for consideration: In view of the observation of the Hon’ble High court and the representations of SKJ, the following issues arise for consideration:
1. Whether SKJ had engaged in carry forward transactions as alleged in the show cause notice?
2. Whether SKJ can be suspended for a specific period, if the first question is answered in the affirmative?
3. Whether any case for modification of the order dated February 18, 2005 has been made out by SKJ?
4. Whether SKJ should be paid any compensation as prayed for in its representation?
13. Question 1: Whether SKJ had engaged in carry forward transactions as alleged in the show cause notice?
The finding as to the first question is clearly dependent on the definition of what constitutes carry forward transactions in the securities market under compulsory rolling settlement. Before going into the definition as also raised by SKJ before the Hon’ble High court, it would be appropriate to consider the situation prevailing before banning of badla system or carry forward transactions and the introduction of compulsory rolling settlement.
14. In order to contain excessive speculation, SEBI had issued a directive in December 1993 prohibiting carry forward transactions in the dealings of securities. However, this was reviewed by SEBI, and pursuant to the recommendations of the G.S. Patel Committee to review the system, carry forward transactions in securities were permitted in 1995, subject to some safeguards, vide circular No. MD/SED/3703/95 dated October 16, 1995. This was further reviewed by Prof J.R. Varma Committee in 1997 and the system was further modified in the name of modified carry forward system (hereinafter to be referred as ‘MCS’) subject to a number of safeguards vide circular No. SMD/POLICY/CIR- /97 dated October 21, 1997.
15. Thereafter National Stock Exchange, Mumbai (hereinafter referred to as ‘NSE’) introduced the Automated Lending and Borrowing Mechanism (hereinafter referred to as ‘ALBM’) followed by Borrowing and Lending of Securities Scheme (hereinafter referred to as ‘BLESS’) of the Bombay Stock Exchange (hereinafter referred to as ‘BSE’). Both of them reduced the risks involved in the Badla trading system.
16. Subsequently vide circular dated March 20, 2001, SEBI issued a direction that all scrips which were included in the ALBM/BLESS or MCFS in any stock exchange, as also all scrips which were included in the BSE 200 list, but were not covered under ALBM/BLESS or MCFS, would be traded only in the compulsory rolling settlement on a nation wide basis on all the stock exchanges from July 2, 2001. Vide circular No. SMDRPD/Policy/Cir-30/2001 dated May 24 2001, 251 scrips were identified for being traded under compulsory rolling settlement. Later, the ban on carry forward transactions was extended to all scrips vide circular No. SMDRP/Policy/CIR-33/2001 dated June 21, 2001 prescribing that all scrips would have to be traded under compulsory rolling settlement. The circular which mandated the trading in rolling settlement, in effect, baned all carry forward transactions, since rolling settlement was made compulsory.
17. Under the T+5 rolling settlement which was in operation at the time of the alleged transactions, trades done on T day were settled on the 5th working day (excluding the T day). Under the T+5 rolling settlement, trades done on each single day were settled separately from the trades done on earlier or subsequent trading days as opposed to Account period settlement. The netting of trades was allowed only for the day and not for multiple days. Therefore the trading position at the end of the day had to be settled by delivery or payment or by squaring off the position. The obligation to deliver or pay at the end of trading day could not be carried forward to the next trading day. Therefore, carry forward transactions means any trading activity or device which had got the ultimate effect of carrying forward one’s buy or sell obligations, in effect, beyond the period allowed in the circular. If any such activity was undertaken by any one, such activity would be contrary to the circular and therefore would be illegal.
18. I find that in the alleged transactions reproduced in the Annexure A enclosed with the Inquiry Report, the brokers entered into sell and buy transactions with one particular broker and reopened the buy or sell position on the next day with the same broker. For example SKJ in trade no 32260 sold 300 scrips in Penta Media Graphic for a price of Rs. 76.50 with A S &Co. as the counter party, on December 11, 2001 which transaction was executed at 3:48:22:440 PM towards the end of the trading hours. On the morning of the next day at 9:39:44:540 AM i.e. at the beginning of the trading session, the same amount of shares in the same scrip for the same price were bought back from the same counterparty broker A S &Co. In the same manner there were several transactions in various scrips as mentioned in the Annexure A.
19. I also find that on four occasions in the sample data of 50 transactions, SKJ reversed his trade with the same counterparty A S &Co. for the same quantity and at the same price in the scrips Penta Media Graphics and Reliance Industries Ltd., except in the sale transaction in the trade No. 8695. On other occasions SKJ reopened its respective trades in trade Nos 10111, 26152, 43746, 37037, 30511, 45943 in the scrip of ITC Ltd and Penta Media Graphics and Satyam Computers on the next day of the respective trades with the same counterparty broker namely Agarwal Share & Stock Broker. Pvt. Ltd for the same price.
20. I find that the trades as described above in the scrips mentioned at Annexure A of the Inquiry Report were repeatedly done in the cases of Counter party brokers Ajay Jayaswal, Ajay securities Pvt. Ltd, Akash Securities Pvt Lt, Akriti Securities Pvt Ltd., Amar & Co, Anand Kumar Saraswat, Anil & Co, Anil Kumar Agarwal, and Anupama Dalmia. In all such cases the price for which the trade was reversed was the same as the price in the first leg except for a few occasions. In all occasions, the reversal of the trades were done for the same quantity of shares as in the first leg.
21. I further hold that in almost all the transactions mentioned in Annexure A, the reversal of the trade was for the same price and for the same quantities between the same parties. It is illogical that a genuine trade would be conducted in this way. I further find from the inquiry report that the transactions carried out in the last fifteen minutes of a trading on a day were done to reverse the trades carried out earlier. This means that in case of sell obligations incurred by SKJ, it reversed its trade with the same counter party broker, thereby, bringing its sell/delivery obligations to an end at the end of trading day. By way of illustration on December 06, 2001 in trade no 61091 SKJ offset its previously incurred obligation to sell 250 shares of Reliance Industries Ltd, at a price of Rs. 315.00 per share to A S &Co. as counter party broker, by purchasing the same quantity of shares of the same company for the same price from the same counter party. By such reversal, SKJ, in appearance, had no net obligation to deliver these shares at the end of the trading session. But this reversal of trade in trade no. 61091 was used as a disguise to carry forward his delivery obligation for the reason that SKJ again reopens his trade by way of selling on the next day i.e, December 7, 2001 the same quantity of scrips of same description and price with the same broker.
22. I hold that the same device is followed in case of buy/payment obligations incurred by SKJ. SKJ reversed its trade with the same counter party broker by entering into a sale transaction for the same price and quantity, thereby, in appearance its buy / payment obligations came to an end at the end of the trading day. By way of illustration in trade number 42970 on November 21,2001 extracted at page 3 of Annexure A of inquiry report, SKJ offset its previously incurred obligation to buy 1050 shares of Larsen & Toubro for a price of Rs. 207.95 per share, towards Anil & Co., by selling the same quantum of shares of the same company for the same price to the same counter party. By such reversal SKJ, in appearance, has no net obligation to pay for the shares of the above description at the end of the trading session. But this reversal of trade in trade no. 42970 is used as a disguise to carry forward its payment obligation. This is clear from the fact that SKJ again reopened its trade by way of buying on the next day i.e., November 22, 2001 from the same broker, the same quantity of scrips of same description and price. This in effect is a carry forward to the next day i.e, November 22, 2001, of the obligation to buy 1050 shares of Larsen & Toubro for a price of Rs. 207.95 from Anil &Co.
23. I have perused and analysed the data reproduced in the Annexure A of the inquiry report dated May 15, 2002. I find that SKJ has followed the above strategy to indulge in illegal carry forward of the obligation to pay or deliver the shares mentioned in the Annexure with various counter party brokers mentioned in the Annexure A. I further find that SKJ has not denied that he had entered into the impugned transactions. He has only challenged the nature of the transactions. Therefore, I find that the impugned transactions are in effect carry forward transactions as alleged in the show cause notice and SKJ has indulged in those transactions prohibited by law.
24. Whether SKJ can be suspended for a specific period, if the first question is answered in the affirmative?
25. Since I answered the first issue in the affirmative, I proceed to consider the second issue. Section 6 (3) (b) of SCRA reads as follows:
(3) Without prejudice to the provisions contained in sub-section (1) and (2), the Securities and Exchange Board of India, if it is satisfied that it is in the interest of the trade or in the public interest so to do, may, by order in writing,-
(b) appoint one or more persons to make an inquiry in the prescribed manner in relation to the affairs of the governing body of a stock exchange or the affairs of any of the members of the stock exchange in relation to the stock exchange and submit a report of the result of such inquiry to the Securities and Exchange Board of India within such time as may be specified in the order or, in the case of an inquiry in relation to the affairs of any of the members of a stock exchange, direct the governing body to make the inquiry and submit its report to the Securities and Exchange Board of India.
The above provision empowers SEBI to appoint inquiry officers to inquire into matters in relation to the affairs of any of the members of the stock exchange in relation to the stock exchange. The member’s relationship with the stock exchange is governed and regulated by various statutory enactments, Regulations and circulars issued by SEBI and by the rules, bye laws and Regulations of the respective stock exchanges. Therefore for violations of the provisions of the above, an inquiry under Section 6 (3) (b) of SCRA can be initiated. In the present case an inquiry was conducted to find out whether the circular mentioned earlier banning carry forward transaction had been violated by SKJ.
26. If the inquiry report establishes the violation of any of the Acts / Regulations, Circulars etc, Rule 11 of the Rules empowers SEBI to direct the governing body of the stock exchange to take such disciplinary action against the offending member including fine, expulsion, suspension or any other penalty of a like nature not involving the payment of money. Rule 11 of the Rules reads as follows:
11. Obligation of the governing body to take disciplinary action against a member if so directed by Securities and Exchange Board of India.
After receiving the report of the result of an enquiry made under Clause (b) of sub-section (3) of Section 6 of the Act, the Securities and Exchange Board of India may take such action as they deem proper and, in particular, may direct the governing body of the stock exchange to take such disciplinary action against the offending member, including fine, expulsion, suspension or any other penalty of a like nature not involving the payment of money, as may be specified by the Securities and Exchange Board of India; notwithstanding anything to the contrary contained in the rules or bye-laws of the stock exchange concerned, the governing body shall give effect to the directions of the Securities and Exchange Board of India in this behalf and shall not in any manner commute, revoke or modify the action taken in pursuance of such directions, without the prior approval of the Securities and Exchange Board of India. The Securities and Exchange Board of India may however, either of its own motion or on the representation of the member concerned, modify or withdraw its direction to the governing body.
27. The reading of the above provision shows that it is obligatory on the part of the Governing Body of the Stock Exchange to comply with the direction issued by SEBI. The inquiry report dated May 15, 2002 brings out the violation of the circular mentioned earlier banning carry forward transactions. Therefore, it is decidedly within the powers of SEBI to pass the direction mentioned in its order dated February 18, 2005.
28. Whether any case has been made by SKJ, for modification of the order dated February 18, 2005?
SKJ has not produced any fresh evidence to disprove the allegation made against it nor has any evidence in support of its contention that the alleged transactions are not carry forward transactions. SKJ has neither pointed out any mistake nor error apparent on the face of the order dated February 18, 2005. SKJ has merely reiterated the contention that the alleged transactions are not carry forward transactions. I have already decided the issue against SKJ. Therefore, no case for modification of the order dated February 18, 2005 has been made out by SKJ.
29. Whether SKJ is entitled to be paid any compensation as prayed for in its representation?
30. Since the order dated Februray 18, 2005 was passed in discharge of the statutory function, the question of compensation does not arise.
31. Therefore, in exercise of the powers conferred upon me under Sec 4 (3) of Securities and Exchange Board of India Act,1992 read with Section 6 (3) (b) of Securities Contracts (Regulation) Act, 1956 and Rule 11 of Securities Contracts (Regulation) Rules 1957, I ,hereby, decide that the order dated February 18 ,2005 directing the Uttar Pradesh Stock Exchange Association Ltd. suspending inter alia, S.K.Jindal Share Brokers Pvt. Ltd for a period of one year requires no modification and the same shall continue to be in force.