JUDGMENT
N.K. Sodhi, J. (Presiding Officer)
1. J. Patel Share & Stock Brokers Limited is the appellant before us. It is a stock broker registered with the Securities and Exchange Board of India (for short the Board) and is a member of the Bombay Stock Exchange (BSE). The Registrar of Companies, Chennai received some complaints alleging inter alia that the promoters of M/s. Magic Trading and Agencies Ltd. (for short Magic) were trying to create a big market for the shares of this company and then planning to offload their shares by indulging in insider trading by reducing the price thereby cheating the innocent public. The complaints were forwarded to the Board which required the BSE to carry out a preliminary investigation. BSE then reported that steps had been initiated for the amalgamation of QPRO IT Services Limited (for short QPRO) with Magic under section 395 of the Companies Act and that pursuant to the scheme of amalgamation Magic had allotted 50 lac equity shares of Rs.10/- each to the shareholders of QPRO in the ratio of 1:1. It is not in dispute that QPRO was not a listed company on any stock exchange in the country whereas Magic is listed on BSE. Magic then made a request to BSE to list the 50 lac shares issued to the shareholders of QPRO. This matter of listing came up before the listing committee of the BSE which on a consideration of the records of the two companies came to the conclusion that the swap ratio of 1:1 at the time of amalgamation of QPRO with Magic was not correct and, therefore, the request for listing of these shares was turned down. The Board then carried out investigations in the trading of the scrip of Magic during the period from February, 2000 to November, 2000 to find out whether there was any possible manipulation of the price of the scrip. During the course of the investigations it transpired that the scrip of Magic was illiquid and became active only with effect from February, 2000 onwards after a stagnation of one year. It was also found during the course of the investigations that 96% of the total trading in the scrip of Magic was through the appellant and JRM Share & Stock Brokers Pvt. Ltd. (hereinafter referred to as JRM). The investigations further revealed that the appellant and JRM have close connection with each other and the management of these two broking entities were related to the management of Magic. Based on the investigation report an enquiry was held by the Board and the appellant amongst others, was served with a show cause notice alleging that it had in connivance with JRM exclusively traded in the shares of Magic and thereby depressed the price. It was also alleged that the appellant depressed the price in order to influence the swap ratio of the shares of QPRO and Magic. The enquiry officer found that the allegations stood proved against the appellant and he accordingly recommended to the Board that the certificate of registration of the appellant be suspended for a period of five months. On receipt of the enquiry report the Board issued a notice to the appellant calling upon it to show cause why the enquiry report be not accepted and why its certificate of registration be not suspended as recommended by the enquiry officer. The appellant filed its reply denying the allegations. On a consideration of the reply filed by the appellant and the material which the Board had collected during the course of the enquiry proceedings, the whole time member of the Board came to the conclusion that the charges leveled against the appellant stood proved. He accordingly accepted the enquiry report and by his order dated 19.7.2004 suspended the certificate of registration of the appellant for a period of five months. It is against this order that the present appeal has been filed under section 15T of the Securities and Exchange Board of India Act, 1992.
2. We have heard the learned Counsel for the parties. The learned senior counsel for the appellant has at the outset submitted that the impugned order is violative of the principles of natural justice in as much as the appellant was not furnished with the evaluation report on the basis of which the swap ratio of the shares of QPRO and Magic was arrived at in the ratio of 1:1. He also contended that the impugned order is based on conjunctures and surmises and that it would not be in the interest of the appellant to depress the price of the scrip of Magic because that would hurt its shareholders. He also contended that the trades executed by the appellant as a broker on behalf of its clients were genuine in as much as deliveries were made and payments made as per the settlement cycle fixed by BSE. He further contended that the total number of shares of Magic traded during the period by the appellant were so insignificant that no prudent person could draw an inference of an intention to manipulate the price of the scrip by depressing the same.
3. The learned Counsel for the respondent on the other hand strenuously urged that the appellant had acted in connivance with JRM in bring down the price of the scrip of Magic and that the two broking entities were related to each other. He pointed out that one Monica Patel was holding 1,34,350 shares of Magic and that her husband was a director in the appellant company. He also pointed out from the record that Monica Patel was also a director of JRM and that it was in the interest of these entities to depress the price of Magic with a view to influence the swap ratio determined by the evaluation report at the time of amalgamation.
4. Having given our thoughtful consideration to the submissions made on both sides we are of the view that the appeal deserves to succeed. It is common ground between the parties that QPRO merged with Magic and that this merger took place in terms of section 395 of the Companies Act without intervention of the court. At the time of merger the evaluators determined the swap ratio of the shares of the two companies as 1:1 and thereafter Magic allotted 50 lac shares to the shareholders of QPRO. The grievance of the appellant that it had not been furnished with the exchange ratio report appears to be genuine and has adversely affected its right to defend itself in the proceedings before the enquiry officer. As already noticed the allegation made against the appellant is that it in connivance in JRM had depressed the price of the scrip of Magic. The appellant obviously wanted to know the basis on which the swap ratio of 1:1 had been determined. If the price of the shares of the two companies (Magic and QPRO) was determined on the basis of their book value then in that event the fact that the appellant indulged in acts which resulted in depressing the price of Magic would be of no consequence. On the other hand, if the valuation of the two shares had taken into consideration their market price as well then obviously, the fact that the price of the scrip of Magic had been depressed would become important. If the appellant had been furnished with this report it could have taken a stand that the valuation of the two shares had been determined on the basis of their book value. We are, therefore, satisfied that by not furnishing this report the Board has deprived the appellant from taking up such a defence which would have been valid if the price had been determined on the basis of book value. It may be mentioned that in the impugned order it is stated that the exchange ratio had been furnished to the appellant and this fact is seriously disputed by the learned senior counsel appearing for the appellant. Mr. Ravi Hegde, the learned Counsel appearing for the Board on receipt of instructions from the representative of the Board who is present in the court states that a copy of this report had not been furnished to the appellant. We are, therefore, satisfied that the appellant was prejudiced in taking up all the defences before the enquiry officer and that the principles of natural justice were violated.
5. This apart, we are also in agreement with the senior counsel for the appellant that it does not stand to reason as to why the appellant would try to depress the price of the scrip of Magic. Monica Patel holds almost 26% of the shares in Magic. She is the wife of a director of the appellant and she herself is the director in JRM. If the price of the scrip was to be depressed the shareholders of Magic would stand to lose because the total percentage of shareholding of Monica Patel would then come down in the merged entity. It would not be in the interest of the shareholders of Magic that the price of its scrip should be depressed. The impugned order proceeds on surmises and conjunctures and there is no material on the record to substantiate this finding or inference that the Board has drawn. The only suspicious circumstance that appears on the record is that almost all the trades in the scrip of Magic were executed through the appellant and JRM which are related to each other. Suspicion, howsoever strong, cannot take the place of proof. Moreover, the total trades executed by the appellant in the scrip of Magic were to the tune of 36,950 out of a total of 5 lac shares. This figure in our view is too insignificant to draw an inference of any manipulation. The total annual turnover of the appellant at the relevant time was almost to the tune of Rs.2200 crores and trades in the scrip of Magic constituted only 0.0036% of its total turnover. If the appellant were to manipulate the price of the scrip, it would have traded in larger quantity. We do not think that the Board was right in drawing an inference of manipulation. We cannot, therefore, uphold the finding of the Board that the appellant in connivance with JRM had depressed the price of the scrip of Magic. In view of this finding we have no hesitation in setting aside the impugned order.
6. the result, the appeal is allowed and the impugned order dated 19th July, 2005 set aside leaving the parties to bear their own costs.