JUDGMENT
N.K. Sodhi, J. (Presiding Officer)
1. This appeal under Section 15T of the Securities and Exchange Board of India Act, 1992 (for short “the Act”) is directed against the order passed by the whole time member of the Securities and Exchange Board of India (hereinafter called “the Board”) imposing a minor penalty of censure on the appellant under Regulation 13 of the Securities and Exchange Board of India (Procedure for Holding Enquiry) Regulation, 2002.
2. The Board conducted investigations into the trading of the scrip of Cyberspace Infosys Ltd. (for short “Cyberspace”) and for violation of the provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (for short ” FUTP Regulations”). During the course of investigations it was found that trading in the scrip of Cyberspace on the Bombay Stock Exchange and National Stock Exchange had shown high trading volumes from January to March, 2001. It was also discovered that Cyberspace and its promoters M/s. Century Consultants Ltd. and a group of twenty entities traded in the scrip of Cyberspace who were all related/ associated with each other and that Mangla Capital Services Pvt. Ltd. (for short ‘Mangla’) was one of the brokers through whom the said trades were executed. An enquiry officer was appointed to conduct an enquiry into the alleged violations by Mangla of the provisions of the Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as “Brokers Regulations”). It was alleged that Mangla had violated the code of conduct prescribed by Regulation 7 of the Broker Regulations and had also violated Regulation 4 of the FUTP Regulations. The enquiry officer held a detailed enquiry in which Mangla was afforded full opportunity to explain the charges leveled against it and came to the conclusion that there was no evidence to establish that Mangla had indulged in price manipulation in the scrip of Cyberspace. Mangla had also not executed any proprietary trades and, therefore, the enquiry officer gave the benefit of doubt and dropped the charges pertaining to the violation of FUTP Regulations. The Enquiry Officer, however, found that Mangla had been issuing two contract notes for the trades of its clients. One contract note was in the name of the client and the other in the name of Shri. Vinod Gupta – Director of Mangla and that on the basis of the second contract note Shri. Vinod Gupta got instant cash from HDFC Bank and the same was paid to the client. He also found that Mangla was financing its client through Insta Cash Facility from HDFC Bank. This activity of Mangla, according to the enquiry officer, facilitated its clients to receive immediate cash for the sales made and they used that money to purchase the same shares through other brokers and thereby indulged in market manipulation. Mangla as a broker was found guilty of violating the Code of Conduct as prescribed in paragraph A(3) and (4) of Schedule II read with Regulation 7 of the Broker Regulations. There was yet another finding recorded by the enquiry officer against Mangla. It was found that Mangla had traded in the scrip of Cyberspace for 19 clients through a middleman namely Shri Vinod Agarwal who acted as a sub broker and since he was not registered as such with the Board, Mangla dealt with an unregistered sub broker which was in contravention of the circular dated March 31, 1997. The clients were said to be related to the promoters of Cyberspace. In view of this finding the enquiry officer concluded that Mangla also violated paragraph A(2) of Schedule II read with Regulation 7 of the Broker Regulations. Accordingly, a recommendation was made for the imposition of a minor penalty of censure.
3. On receipt of the enquiry report, the Board issued a notice to Mangla calling upon it to show cause why the recommendations as made by the enquiry officer be not accepted and why a minor penalty be not imposed. A copy of the enquiry repot was sent along with the notice. Mangla filed its reply to the show cause notice. On a consideration of the reply, the written submissions filed by Mangla and other material on the record and after affording an opportunity of personal hearing the Board found that Mangla had violated the Code of Conduct as prescribed in paragraph A(2) and (4) of Schedule II read with Regulation 7 of the Broker Regulations and imposed a minor penalty of censure as recommended by the enquiry officer. Hence this appeal.
4. We have heard Shri. Iqbal Chagla learned senior counsel for the appellant and Shri Kumar Desai learned Counsel for the Board. The two charges that were leveled against Mangla were that it had been issuing two contract notes for the trades that it executed on behalf of its clients and that it also dealt with Shri. Vinod Agarwal, an unregistered sub broker and thereby violated the circular issued by the Board. When the inquiry report was furnished to Mangla along with the show cause notice served by the Board the former while denying the allegations generally, stated that “we would request you to take on record our various replies filed before you.” It had filed its reply before the investigating officer as per its letter dated October 10, 2001, the relevant part of which reads as under:
6. With regards to your findings:
a] No where in your Rules, Regulation or Act have we read that the brokers cannot use the help of middleman and agents. Sir this is normal business practice in every market. Is it necessary for the management to be in touch with the client in person, that is physically? Sir, in the case of Internet Trading also physical contact is not possible. Please advice which of your provisions speaks of personal physical contact with the client.
We are also like Bank and Institutions where there is no individual or person to person contact. Business is done at corporate to corporate level. Sir, Binod Agarwal has played a role of a agent.
…
[g] Sir with regards to the two contract notes, one issued to the client and the other to Vinod Gupta for availing Insta Cash, sir, we believe that there was nothing fraudulent about the contracts. Both the contracts were of the same client code, contract no., address and it was only a single trade that was executed on the floor of the exchange. The second contract note did not have any impact on the market. The final beneficiary of both the contracts was the same client. The action of Vinod Gupta also was for the benefit of Mangla’s unknown of the fact that he may be connected to Century client only. It is obvious that the contract in favour of VKG was for the purpose of availing Insta Cash. If instead of VKG the clients/ customer themselves had availed of Insta Cash facility the situation would have been the same. There was no impact on the market for the contract issued to Vinod Gupta the same customers code in a single trade having been used in both the contracts the can well be considered to be a counter parts of each other and as such only one contract and cannot have independent impact on the market.
5. From the aforesaid reply of Mangla it is clear that it has admitted having dealt with Vinod Agarwal as an agent. It has also admitted having executed two contract notes for each trade and has given a justification for the same. It is, thus, clear that Mangla violated the circular dated March 31, 1997 which mandates every broker to issue a contract note only in the name of the client. The contract note that was issued in the name of Vinod Gupta – the Director of Mangla was used for the purpose of procuring instant cash from HDFC Bank under its scheme. Vinod Gupta having received instant cash paid the same to the clients and made no undue financial gain either to himself or to the company. It is true that if Mangla had not issued the second contract note in the name of its Director the client could have directly approached HDFC Bank and obtained instant cash in which case Mangla would have lost its clients but this does not mean that the circular issued by the Board had not been violated. Since the circular had been violated which violation in a given case could be serious, the Board was justified in imposing the minor penalty of censure.
6. The second charge also stands admitted. Mangla admittedly, dealt with Vinod Agarwal who played the role of an agent and brought business to the company. The learned senior counsel strenuously urged that the role played by Vinod Agarwal was not that of a sub broker and, therefore, it could not be said that Mangla dealt with an unregistered sub-broker. It is common ground between the parties that Vinod Agarwal is not a registered sub broker with the Board. The learned Counsel for the parties took us through the statement made by Vinod Kumar Gupta- Chairman of Mangla during the course of the inquiry proceedings. Having perused the statement in detail we are satisfied that he actually acted as a sub broker and since he was not registered as such, Mangla was in error in dealing with him. As already observed he brought the clients to Mangla and performed such other functions which a sub-broker would do under the Brokers Regulations. In this view of the matter, we find no ground to interfere with the findings recorded by the Board.
7. In the result, the appeal fails and the same stands dismissed with no order as to the costs.