ORDER
N.L. Lakhanpal, Member
1. The matter is taken up for final disposal with the consent of parties.
2. The appellant M/s. Patani Securities Pvt. Ltd., is a stock broker registered with the respondent Securities and Exchange Board of India (SEBI). His certificate of registration has been suspended by impugned order dated 19-8-2004 on the charge of his having violated Clauses A(2) and A(4) of the Code of Conduct for stock brokers specified in Schedule II of Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 as also for the violation of Regulation 4(&) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. The charge of violation of these regulations arises from the transactions which the appellant stock broker entered into on the instructions of one Mr. Sanjay Kothari in respect of shares of M/s. Vakrangee Software Limited (hereinafter referred to as VSL).
3. The share price of VSL increased from Rs. 10 in September, 1999 to Rs. 152 by the end of December, 1999 and subsequently to Rs. 597 by March, 2000. On noticing this extreme volatility in the price of this scrip SEBI ordered investigations which found prima facie involvement of certain brokers and other intermediaries including the appellant M/s. Patani Securities Limited in increasing the share price of VSL during the period September, 1999 to March, 2000. The charge against the appellant is that he entered several transactions in respect of this scrip for huge quantities of shares on behalf of two family members of Shri Sanjay Kothari, namely, Rita S. Kothari and Shobha Kothari. The quantities range from 40,000 on 9-2-2000 to 1,50,000 on 12-11-1999 and 21-12-1999. Regarding the modus operandi, the allegation is that on the days when he traded in these shares on behalf of Kotharis, he entered the transactions in the BOLT system early in the trading session between 09.55.00 to 09.55.59 hours, mostly at prices which were 8 per cent higher than previous day’s closing prices. It needs to be noted that for this scrip the BSE had, at the relevant time, fixed the upper circuit filter at 8 per cent. It is thus alleged that he was instrumental in causing extreme volatility in the prices of this scrip by misusing the trading mechanism of the stock exchange. The appellant on the other hand argues that he merely carried out the orders of his client, namely, the Kotharis, who were known to him for a long time and that as per his knowledge and information, the Kotharis were genuinely interested in buying these shares which is also evident from the fact that they retained the shares till as late as 2003 when they finally sold them at a loss of approximately Rs. 15 lakhs. The Regulations alleged to have been violated are reproduced below:
SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995
“4. Prohibition against market manipulation.–No person shall–
(a) ** ** ** (b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;" Code of Conduct for Stock Brokers Regulation 7: "A. General--(1)** ** ** (2) Exercise of due skill and care: Stock broker shall act with due skill, care and diligence in the conduct of all his business. (3) ** ** **
(4) Malpractices: A stockbroker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors’ interest or which leads to interference with the fair and smooth functioning of the market. A stock broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.”
4. Heard learned Senior Counsel for the appellant Shri Shyam Divan and learned Counsel Shri Dipan Merchant for the respondent. Shri Shyam Divan argues vehemently that the appellant has not violated any of these regulations and that he merely carried out the instructions of his valued client who had been known to him for a long time for a small fee. It is the appellant’s argument that he had exercised due skill and diligence by carrying out the transactions on behalf of a known client, by ensuring appropriate margins and by ensuring that all the obligations of the client to the exchange were honoured. The learned counsel further argues that the quantities can by no means be considered large and in this respect he cites orders passed by the respondent in the matter pertaining to ICICI Brokerage Services Limited wherein the volumes were as high as 1 crore shares and wherein no action was taken by the respondent despite enquiry officer having recommended suspension of certificate of registration for a period of 4 months. The learned counsel also cites several other cases against the brokers which had been closed by the respondent with a mere warning. The learned counsel for the appellant further argues that placing of purchase orders on 10 to 12 trading days during a period of about 6 months could also not be considered as excessive trading with a view to increasing the price of the scrip or manipulating the market. Regarding the posting of orders at 8 per cent above the previous days closing price the appellant argues that it was SEBFs own case that the prices of the shares of this company, in the Software sector, had risen from Rs. 10 to Rs. 597 and that his purchase orders at rates ranging from Rs. 43.10 to Rs. 325.25 could not be considered as having been placed with a view to increasing the price of the scrip. Finally the appellant argues that even out of these 12 orders placed by him on behalf of his client only 4 materialized which shows that there was a lot of demand for this scrip in the market at the relevant time. As against this the learned senior counsel for the respondent, Shri Dipan Merchant, argues that placing of orders at 09.55.00 at 8 per cent higher than the previous day’s closing clearly shows an intent and design to manipulate the market. According to the learned counsel for the respondent, Sanjay Kothari, on whose behalf the orders have been placed by the appellant has also been prohibited from accessing the capital market for a period of 6 months and the impugned order is, therefore, equitable to the extent that it deals with both the persons involved even handedly.
5. We have carefully gone through the pleadings of the learned counsel on both sides. We are in agreement with the learned senior counsel for the appellant that a broker placing orders on behalf of his client for the quantities and the price indicated by the client cannot be considered as lacking in exercise of due skill and care. This is particularly so when all the orders placed by the client have been honoured and there is no default and more particularly the fact that he was a genuine buyer who has retained the shares until as late as 2003. There is no allegation that the appellant indulged in excessive trading not commensurate with his financial soundness. Regulation 7 is thus not attracted in the present case. We also agree that a dozen odd buy orders along with some sell orders as well over a period of six months in respect of a Software scrip which was well traded at the relevant time cannot be considered as contributing to the creation of a false market or interference with the fair and smooth functioning of the market. There is, therefore, no question of violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995.
6. We are unable to appreciate the argument of the learned senior counsel for the respondent as outlined in the impugned order as well that since Mr. Sanjay Kothari has been debarred from the market for six months similar treatment needs to be meted out to the appellant broker as well. Mr. Sanjay Kothari has not filed any appeal and we are not aware of the circumstances of his case. In any case, on the facts and circumstances of the present case, we do not find any case having been made out against the appellant. We, therefore, find that the impugned order is unsustainable. The order is accordingly set aside.
7. No order as to costs.