ORDER
C. Achuthan, Presiding Officer
1. Market witnessed abnormal price and volume movement in the shares of Amara Raja Batteries Ltd (ARBL) traded on Bombay Stock exchange (BSE)and National Stock Exchange (NSE), in February – March, 2001. The Respondent received complaints alleging market manipulation/ irregularities in the trading of ARBL’s shares. In that context the Respondent ordered investigation to ascertain the role played by various persons/intermediaries, and violations, if any, of the regulatory provisions by them. The investigation is stated to have revealed that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the dominant traders in the ARBL’s shares during the period August 2000 to March 2001, that some of the members of BSE and NSE had aided and abetted Shri Harinarayan Bajaj in creating a false market in ARBL’s scrips and also that they had failed to exercise due care and skill in their dealings. The Appellant was one of the members whose involvement in the matter was subjected to investigation. In the light of the information collected during the course of investigation, the Respondent decided to conduct a detailed enquiry into the role and conduct of the Appellant in trading in the scrip. Accordingly an enquiry officer was appointed on 18.6.2001 to enquire into the affairs of the Appellant in its dealings in the scrip of ARBL and the possible violations of the rules, bye laws and regulations of the Stock Exchanges, provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (the FUTP Regulations) and the Securities and Exchange Board of India (Stock-brokers and Sub-brokers) Regulations, 1992 (the Stock Broker Regulations). The enquiry officer on concluding the enquiry came to the conclusion that the Appellant had failed to exercise due care and skill in its dealings with Shri Bajaj as required by clause A(2) of the code of conduct prescribed for the stock-brokers in the Stock Broker Regulations. He recommended seven days’ suspension of the certificate of registration granted to the Appellant. The Respondent communicated the findings of the enquiry officer to the Appellant and asked to show cause as to why the penalty as recommended by the enquiry officer should not be imposed against it. The Appellant responded to the same by filing written explanation and also by making oral submissions before the Respondent.(the Chairman) The Chairman adjudicated the show cause notice. Vide his order dated 9.8. 2002 the certificate of registration granted to the Appellant was suspended for a period of seven days from 26.8.2002
2.
Claiming to be aggrieved by the said order, the Appellant has preferred the present appeal praying to set aside the Respondent’s order and also to stay the operation of the order pending disposal of the appeal. The prayer for stay of the order pending disposal of the appeal was allowed after hearing counsel for the parties.
3. Shri Pravin Samdhani, learned Counsel appearing for the Appellant briefly stated the facts leading to the filing of the present appeal. He submitted that the Appellant is a member of NSE and BSE that its clientele includes major Financial Institutions, Mutual Funds and high net worth individuals and retail investors. He submitted that NSE, of which the Appellant is a member for the last 8 years, had carried out inspections of the trades and books of account of the Appellant at periodical intervals and no irregularities of any nature were found in respect of any lapse or violation of the Bye-laws, Rules and Regulations of NSE, and there were no complaints against it. Learned Counsel further submitted that the Appellant enjoys an impeccable record of compliance and high reputation and standing in the capital market, that for no fault of the Appellant, and for no reason, its certificate of registration has been suspended.
4. Learned Counsel submitted that the Respondent has admitted in its order that Shri Harinarayan Bajaj and his son Shri Rajhul Bajaj were responsible for the abnormal price and volume movement in ARBL’s scrip during the relevant period, that in fact the Respondent after investigation has concluded that the Appellant had not in any way indulged in any market manipulation, that what the Appellant did was normal broking transaction as a stock broker.
5. Shri Pravin Samdhani referred to the show cause notice dated 6.7.2001 issued by the enquiry officer appointed by the Respondent for the purpose of enquiring into the role of several brokers including the Appellant in the background of the abnormal market behaviour witnessed in the scrip of ARBL’s shares. The enquiry officer issued the notice under regulation 13 of the FUTP Regulations and regulation 28(2) of the Stock Broker Regulations alleging that:
1) the Appellant has aided and abetted Shri Hari Narayan Bajaj and his family members in creating a false market in ARBL’s scrip violating the provisions of regulation 4 of the FUTP Regulations.
2) the Appellant allowed the client to take position beyond the client’s financial capabilities
3) the Appellant failed to exercise due skill and care in its dealings in the scrip of ARBL.
6. Learned Counsel submitted that the Appellant responded to the said show cause notice explaining that the Appellant was not guilty of any of the charges referred to in the show cause notice. He submitted that the enquiry officer exonerated the Appellant of the serious charge of market manipulation, but without any basis viewed that the Appellant had failed to exercise due skill and care in its dealings with Shri Bajaj, that based on the said finding of the enquiry officer, the Respondent on 13.5.2002 served on the Appellant a show cause notice under regulation 29 of the Stock Broker Regulations repeating the two charges covered in the notice issued by the enquiry officer that;
1) the Appellant allowed the client to take position beyond the clients financial capabilities
2) that the Appellant failed to exercise due skill and care in its dealings in the scrip of ARBL
7. Learned Counsel submitted that the Appellant responded to the show cause notice denying the charges by filing written submissions and also by making oral submissions but without properly considering those submissions the Respondent simply went by the recommendations of the enquiry officer and passed a non speaking order suspending the certificate of registration of the Appellant for seven days with effect from 26.8.2002.
8. Shri Pravin Samdhani submitted that the Respondent’s order is based on its perception that the Appellant has failed to exercise due care and skill in its dealings with Shri Rahul Bajaj in ARBL’s scrips, as mandated by clause A(2) of the Code of Conduct in Schedule II of the Stock Broker Regulations. He submitted that based on just two trivial reasons that (i) in the client registration form the annual income and market value of the portfolios of the client has not been indicated and (ii) that the client was not able to pay margin on 9.3.2001, harsh penalty of suspension of the certificate of registration was imposed, little realising the implications of the same.
9. Learned Counsel submitted that the observation of the Respondent that “during the period from August 2000 to March, 2001, the entire volume of trades executed by Satco was for Rahul Bajaj” is absolutely wrong as Shri Bajaj became the Appellant’s client only in January, 2001 and that prior to January it had not traded at all for Shri Bajaj.
10. Learned Counsel referred to the gist of the submissions made by the Appellant in the proceedings before the Chairman, as recorded in the order and submitted that none of its submissions having a bearing on the charge has been rebutted in the order. He submitted that the outstanding position of the client in ARBL at the end of Sett. No. A50 (BSE) was nil and in case of NSE Sett. No. (N-10) as on 3.7.2001 was only 2719 shares and not 65,000 shares as shown in the order that though the actual factual information was made known, the Respondent preferred to go by the erroneous data.
11. In the context of the deficiency in the client registration form referred to in the impugned order, learned Counsel submitted that the enquiry officer in his report had stated that “Satco had taken the prescribed client registration application form and also executed member client agreement with Shri Rahul Bajaj. However, it has been observed from the client registration form that the details at columns pertaining to annual income and market value of portfolio have not been indicated by the client. Satco should have insisted for the said details, otherwise client registration becomes only a formality rather than an exercise of due skill and care in introducing a client to the market.”
12. Learned Counsel submitted that as the annual income and market value of the portfolio of Shri Rahul Bajaj was not indicated in the client registration form submitted by him, the Appellant had insisted for the details from Shri Bajaj and he had stated that he would be changing his investments and would give firm figures within a short period, that the Appellant did thereafter follow up with him for obtaining the details. Learned Counsel submitted that it was not without verification the client’s trade was taken up, that Shri Ajay Gosrani, a valued old client of the Appellant had introduced Shri Bajaj to the Appellant and he had informed the Appellant about Shri Bajaj’s approximate annual income and contents of his portfolio. The Appellant had thus obtained the necessary information and exercised due skill and care in principle and spirit and fulfilled the requirements prescribed under the code of conduct. He submitted that no standard bench mark of due skill and diligence has been specified by the Respondent and it is left to the subjective satisfaction of the broker. Shri Samdhani submitted that performance of a broker can not be judged qua the behaviour of one client. As a broker the Appellant provides service to large number of clients and there was not even a single instance in the past 8 years to show that the Appellant had not exercised due skill and care and this fact is also evidenced from the reports of the periodical inspection carried out by NSE.
13. Learned Counsel referred to the Respondent’s circular letter dated 18.11.1993 on “Precautions to be exercised by member brokers” and submitted that the Respondent itself has identified mandatory requirements by a broker, that obtaining client registration form is not a mandatory requirement thereunder. He submitted that the mandatory requirement is to ensure that the client is personally known to the member broker or has been introduced to him by a person known to him, that the Respondent has taken cognizance of the fact in the instant case that Shri Bajaj was introduced to the Appellant by one of its valued clients viz. Shri Ajay Gosrani. He also referred to the other identification materials such as Passport, Election Identity Card, etc. procured by the Appellant. Learned Counsel submitted that in the absence of any fool proof mechanism to verify the authenticity of the information furnished in a client registration form, introduction of client by a person well known to the broker should be more acceptable, that it is not that Respondent’s case that the Appellant had taken a stranger as client unintroduced by a reliable person.
14. Learned Counsel submitted that creditworthiness of Shri Bajaj was, interalia, ascertained from his introducer, and requisite deposit/margin received/retained/ available, that there was no material information at that point of time even to draw an adverse inference on Shri Bajaj’s conduct or financial capacity. As the Respondent itself has pointed out that the purpose of assessing the financial capability and credit worthiness of the client is to avoid complications & other difficulties, that so far as the business relations inter-se were concerned, no complication or difficulty arose and non-filling of details at columns pertaining to annual income and market value of portfolio did not come in the way of normal business relationship nor did it result in any adverse consequences (such as default in payment by client). He submitted that there was no wrongdoing on the part of the Appellant.
15. Learned Counsel submitted that the punishment of suspension of the business of a broker can be made only if the broker has violated the Rules and Regulations prescribed by the Respondent, that the guidelines under which the client registration form is prescribed and the requirement there to fill in the columns of annual income and the value of portfolio are laid down not under the Stock Broker Regulations and, therefore, the penalty of suspension can not be imposed for the said lapse of not filling the columns of income and the value of portfolio by the client. Learned Counsel submitted that the enquiry officer in his Report has stated that non-filling of information about income and value of market portfolio of client is a “lapse” and as such it cannot be considered as violation of the regulations. He submitted that on the other hand the other requirements of the guidelines regarding the client registration form which are considered mandatory, viz. introduction of the client by the known party, were fulfilled. According to him the Respondent has over stretched the requirement to somehow penalise the Appellant for imposing the penalty of suspension of business.
16. With reference to the specific case of Ms. A referred to by the Respondent, it was submitted by the learned Counsel that she separated from her husband in the year 1997, that in the year of separation and earlier, her own income was nil but she had got portfolio of Rs.19 lacs, that in her form dated 31.7.97, against col. 9 viz. Annual income in last three years, it is – (dash) meaning ‘nil’, that in the subsequent years, she had taxable income and she has given details thereof along with PAN. Learned Counsel submitted that in Ms. A’s case, the Respondent has misinterpreted ‘nil’ annual income as non-filling of the column of annual income and, therefore, the Respondent’s inference in this regard is incorrect.
17. On the allegation regarding failure to exercise prudence in allowing the client to take position beyond his financial position, learned Counsel referred to the Respondent’s observation that “the broker member had given a very high exposure to the client in settlement no A50 (BSE) and N-09 and N-10 (NSE) at a time when price of the scrip reached 52 weeks high”, and submitted that the said finding is baseless as the Respondent has not taken into account the normal practice followed in the market as permitted by the stock exchanges, of allowing gross exposure of members upto 20 times He submitted that in the case of Shri Bajaj, the Appellant had allowed the exposure limit of only 10 times of his deposit, that initial deposit was taken from him and subsequently ensured that his exposure was within the permitted limits, that even on the crucial date i.e. 8.3.2001 Shri Bajaj had a margin of Rs.20,56,964 with the Appellant as against his outstanding position of Rs.2,05,41,300 i.e. less than 10 times the deposit, which indicates that the Appellant had followed the requisite prudential norms. He submitted that on 9.3.2001 (Friday) when BSE closed the market at 3 PM and NSE was open upto 4.30 p.m. ARBL’s scrip was hammered and hit 16% lower filter resulting in mark to market loss to Shri Bajaj, which the Appellant demanded immediately from the client. Dince Shri Bajaj was unable to pay the same immediately, the Appellant exercising due care and financial prudence closed his position on the next working day i.e. on 12.3.2001 (Monday).
18. Learned Counsel submitted that the Broker performance regarding due care, skill and financial prudence is an issue separate from that of sharp and sudden fall in the price of a scrip, that in Shri Bajaj’s case even though he had paid sufficient margin, suffered loss owing to sudden and sharp 16% drop in the price of the scrip in one day, which is a separate issue and hence not to be mixed up with the Broker’s performance regarding due care and skill and financial prudence, particularly when the broker was not responsible for the fall in the price of the scrip, that if the market had not collapsed suddenly, it would have passed as a normal transaction. Learned Counsel submitted that in the instant case the Appellant did exercise due care and financial prudence in demanding immediate payment of mark to market loss and on Shri Bajaja’s failure to do so closed his position immediately to ensure that all its settlement claims are met in full. He submitted that there is a credit balance in Shri Bajaj’s account in the books of the Appellant, that this unassailable fact itself shows due care and caution was exercised by the Appellant in the dealings with Shri Bajaj.
19. Shri Samdhani submitted that the Appellant had done the transactions on behalf of Shri Bajaj in good faith and in normal course of business without any reference or collusion with any other broker or Shri Bajaj, that the trading pattern of the client and his manipulation in the scrip came to light only after the detailed enquiry by the Respondent with the exchanges and the other brokers. In this context learned Counsel referred to the finding of the enquiry officer that “Satco had done few transactions for Mr. Rahul Bajaj. They are primarily squared off transactions, both at NSE and BSE except for delivery of small quantity of shares. There was no indication of the price manipulation at the time Satco executed the trade for Mr. Rahul Bajaj. Satco or its Directors have not traded in the scrip of ARBL. From the material available it is not possible to draw any inference that Satco has the intention to artificially raise or depress the price. There is no proof that Satco was aware of Mr. Bajaj’s dealings with other brokers except Mukesh Babu Securities Ltd., nor had the information that Bajaj is indulging in creating a false market in the scrip of ARBL. What Satco did was a normal broking transaction as a stock broker.” He submitted that this conclusion vindicates the Appellant’s stand.
20. Learned Counsel submitted that the general practice is that the transactions are executed by brokers on behalf of their high net worth clients in the normal course of business and these transactions do not cause suspicion that the same are manipulative in nature, as adequate margins and safety are provided. He stated that the value of trades of Shri Bajaj in these particular settlements was just 3% of the Appellant’s total trades, that the Appellant executed transactions on behalf of Shri Bajaj in the normal course of business after satisfying about his bonafides and on obtaining the requisite margins, that the Appellant had no knowledge of the total volume traded by Shri Bajaj in the scrip with other brokers in the exchange or with members of different exchanges, that the Appellant had exercised due care and skill required of the normal broker that it had no reason to suspect the bonafides or intention of Shri Bajaj.
21. As regards allegations of high or “over exposure” given to Shri Rahul Bajaj and lack of due diligence, learned Counsel submitted that the Appellant had always obtained in time and maintained more than adequate margin required, and allowed the client leverage only permitted by the Stock Exchanges – a margin of Rs.52.07 lacs plus ten thousand shares of ARBL (as collateral) worth approximately Rs.31.50 lakhs aggregating to Rs.83.57 lakhs on March 7, 2001 were collected by the Appellant from the client, that the volume of trading by Shri Rahul Bajaj in ARBL through the Appellant at the maximum level was only 3% of overall trading in all scrips at the Appellant’s office and it was only Rs.3.4 crore or 1/16th of total market outstanding of Rs.48 crore in ARBL scrip on BSE and NSE combined, that thus the exposure allowed to Shri Rahul Bajaj was not excessive or “over exposure” as alleged by the Respondent. He further submitted that moreover, margins stipulated by the Respondent/Stock Exchanges were collected in time from the client so that actual payments of margins on an ongoing basis helped the Appellant in assessing the financial capacity of the client, and therefore, the allegation that the Appellant did not assess the financial capacity of the client is not correct. Besides, the client was transacting continuously for three months and not first time with the Appellant. Further, the client executed the client Agreement on January 5, 2001 and executed the first trade on January 9, 2001 and not from October 2000 as wrongly stated in the impugned order. Furthermore, the sharp fall in the price of scrip of ARBL from Rs.309 per share to Rs.269 between 3.30 P.M. and 4.30 P.M. on Friday, March 9, 2001 was result of the market failure. When the price of ARBL scrip fell, Shri Bajaj did not pay mark-to-market margin, then and then only, as a part of discretion and due diligence, – and not ‘forced’ as alleged by the Respondent – the Appellants squared off the outstanding position of Shri Rahul Bajaj at the opening of the market on Monday the 12th March, 2001, that this action is also supported by Bye-law 231 of BSE which permits the member broker to square up any outstanding position of the constituent when he fails to meet his mark-to-market margin. He submitted that the Appellant fulfilled the requirements of pay-in / delivery etc. of the settlement at the stock exchanges, and thus, full care, skill and due diligence was exercised by the Appellant throughout and hence the punishment of suspension of the business of the Appellant is unwarranted and uncalled for.
22. It was submitted that the Respondent is not allowed in law to discriminate and give differential treatment/punishment on the same facts/situations to the brokers concerned. In case of Seshanka Securities Pvt. Ltd., the Respondent has not suspended the broker firm for not obtaining information on annual income and value of portfolio of the client. Moreover, the client was not even introduced in their case. Even then the said broker was not penalized at all but was just warned. In this context he referred to the conclusion of the Enquiry Officer on the failure of not indicating annual income and market value of portfolio in the client registration form in the case of M/s. Seshanka Securities Pvt. Ltd. He referred to the following portion in the Respondent’s order in the case of M/s. Seshanka Securities Pvt. Ltd:
“However, it is seen that in the client registration form, details of columns pertaining to Annual income and market value of portfolio have not been indicated by the client. Further, it has also been observed that the column pertaining to the introduction of client, Shri Bajaj, was left blank though the broker member has admitted that it had no past dealings with the client. In view of this, I feel that the broker member should have insisted for the said details and introduction of the client from a known person otherwise client registration becomes only a formality rather than an exercise of due skill and care in introducing a client to the market. In view of the above, by considering the assurance given by the broker member in its written submissions dated May 30, 2002, I agree with the recommendations given by the Enquiry Officer and therefore under the provisions conferred upon me under section 4(3) of SEBI Act, 1992 and under Regulation 29(3) of SEBI (Stock Brokers & Sub Brokers) Regulations, 1992, I hereby warn M/s. Sheshanka Securities Pvt. Ltd., member, National Stock Exchange to be careful and cautious in future and any repetition of such acts shall be viewed seriously.”
23. In this context he also referred to the Respondent’s order in SMK Shares and Stock Brokers P. Ltd. He submitted that in the case of SMK Shares & Stock Brokers the Respondent had concluded that the “broker member had given high exposure to Shri Harinarayan Bajaj by executing a buy order of 10,000 to 50,000 shares in each of the settlements in ARBL. In view of the fact that the broker member had to initiate legal proceedings against its client, I feel that the broker should be more cautious in future in its dealings in the securities market.”
24. Learned Counsel submitted that for reasons best known to the Respondent the Appellant placed in the same situation, has been treated harshly whereas in other cases of comparatively serious lapses, the brokers were let off by cautioning them to be careful in future. He submitted that for a minor technical lapse, the Appellant has been penalised by suspending its certificate of registration for 7 days ignoring the impact of such decision on the Appellant’s business. With reference to the impact of the suspension order he referred to the letter dated 21.8.2002 from Canara Bank expressing the bank’s reluctance to continue the facility hitherto enjoyed by the Appellant; letter dated 21.8.2002 from Indus Bank expressing concern over the order passed by the Respondent, and direction from NSE to reduce the outstanding position in view of the development. He submitted that the enquiry officer had categorically stated that the Appellant had done normal broking activities and still penalty was imposed.
25. Learned Counsel referred to the decision of the Hon’ble Supreme Court in Panduranga Dattatraya Khandekar V Bar Council of India (AIR 1984 SC 110) and submitted that in the said case the Hon’ble Supreme Court had viewed that “Mere negligence unaccompanied by any moral delinquency on the part of a legal practioner in the exercise of his profession does not amount to professional misconduct” and submitted that the mere failure to obtain certain columns filled in the client registration form with few blank columns did not involve moral delinquency on the part of the Appellant to warrant penalty.
26. Learned Counsel referred to this Tribunal’s decision in LKP Securities Ltd. V The Securities and Exchange Board of India (2003) 41 SCL 1 (SAT-MUM) and submitted that he is adopting the argument of the Appellant therein in respect of imposition of penalty, scope of due diligence, need for making reasoned order etc.
27. Referring to the submission of the Respondent’s Counsel bringing in new facts and grounds beyond the show cause, Shri Samdhani submitted that it is not permissible to improve the order by providing supporting reasons or bring in at the appellate stage any fresh facts not covered in the notice/order. In Support he cited Hon’ble Supreme Court in Mohinder Singh Gill V Chief Election Commissioner (1978) 1 SCC 405).
28. Shri Kumar Desai, learned Counsel appearing for the Respondent submitted that the Respondent has rightly imposed the penalty of suspension of the certificate of registration as the charges against the Appellant have been established.
29. Shri Desai submitted that based on the findings in the investigation carried out by the Respondent, the Appellant was asked to explain its conduct with reference to certain charges referred to in the show cause notice and in the light of the reply of the Appellant in response thereto, the Appellant was found wanting in exercising due skill and care in its trading in the scrip of ARBL for Shri Bajaj. Shri Desai submitted that a broker before taking up any business for a client is required to know the client’s identity, credibility and background, and certain procedures for the purpose have been specified in this regard by the Respondent. He submitted that this requirement is a part of the risk management, that time and again the Respondent has highlighted the precautions to be exercised by member brokers. He submitted that the member brokers of stock exchanges are expected to know their clients through a proper introductory procedure and exercise due precaution while dealing with the clients.
30. Shri Desai referred to the show cause notice dated 13.5.2002 issued by the Respondent and the enquiry report forming part of the said notice, and submitted that the charges and the backup material in respect of each charge has been stated in the enquiry report. He submitted that the Appellant has been found wanting in exercising due care and skill in its dealing with Shri Bajaj as mandated by clause A (2) of the Code of Conduct prescribed vide regulation 7 of the Broker Regulations, that the said finding is based on the omissions and commissions stated in the report which broadly are (1) the client registration form furnished by the client was found deficient in vital information pertaining to the annual income and market value of portfolio of the client (2) that the Appellant had given exposure to Shri Bajaj by executing buy orders in each settlement giving very high exposure to the Appellant without following the requisite prudential norms in giving exposure to the client and (3) that the Appellant allowed the client to take huge position beyond the clients financial position as demonstrated by his conduct in relation to his margin obligation on 9.3.2001 when the scrip touched lower circuit on NSE.
31. Shri Desai referred to the copy of the client registration form dated 5.1.2001 referred to by the Appellant available on record and submitted that it is not the proper form, that the form filed by the Appellant relates to derivatives trading and Shri Bajaj was not in derivatives trading at the relevant point of time. In this context he referred to the observation in the impugned order “that broker member vide its reply dated May 27, 2002 replied that while annual income and market value of the portfolio of its client Shri Rahul Bajaj was not indicated in the Client Registration Form, the broker member had insisted for the said details from the aforesaid client and he had replied that he would be changing his investments and would give firm figures within a short period. It was also stated that Shri Ajay Gosarani, who had introduced the aforesaid client to the broker member had informed the broker member about his approximate annual income and contents of his portfolio and thereby the broker member had obtained the necessary information and exercised due skill and care and fulfilled the requirements prescribed under the Code of Conduct”. Shri Desai submitted that thus the Appellant itself has admitted that the crucial information throwing light on the financial credibility of the client was not available with the Appellant when it started trading for Shri Bajaj, that the Appellant’s claim that Shri Bajaj had made an upfront deposit of Rs.3 lakhs is also not supported in the absence of appropriate entries in the Form. He submitted that the Appellant’s claim that the deposit was received and kept in a separate account is only an after thought, that the fact is that the Appellant had no such deposit with it when it started trading for Shri Bajaj. In this context he also referred to the copy of the trading account filed with the appeal and submitted that receipt of deposit of Rs.3 lakhs is not reflected therein. He submitted that as per the said ledger account it was on 22.2.2001 the Appellant received Rs.3 lakhs as deposit though the Appellant had started trading for Shri Bajaj from January 2001. In this connection he referred to the sample form relevant for client registration and submitted that details of market value of portfolio and three years annual income of the client are required to be furnished therein. He submitted that the said disclosure is not an empty formality, but to guide the broker on the financial credibility of the client which has a bearing on the business that he would undertake for the client. Learned Counsel further submitted that taking margin by itself is not enough, unless the broker is certain that the person is good for dealing, that if the credentials of the client is unknown, the broker would not be in an position to follow the requisite prudential risk management norms. In this context Shri Desai referred to one of the client registration forms produced (in Ms A’s form) and submitted that the said form was also deficient in material on the annual income and portfolio value of the client etc. and that the Appellant was not scrupulously following the “know your client” requirement is thus evident. He submitted that the Respondent is not concerned about the broker size, type of his clients, names of the directors etc. A broker is required to discharge his duties and if he fails to do so the Respondent cannot simply ignore such failure, especially if it has a bearing on the risk management system.
32. Learned Counsel referred to the tabular statement filed with the appeal memorandum showing the details of trade done for Shri Bajaj by the Appellant and submitted that it is evident from the data that the said client was shifting trading from BSE to NSE and vice versa, and the Appellant should have taken note of this, especially in view of the fact that he was an individual client and not an institutional investor. Shri Desai submitted that from the material available on record it is evident that the Appellant had done considerable quantum of trade for Shri Bajaj, though he was only a first time client and the Appellant was not having full particulars of him, that since he was an unknown client, it was incumbent on the part of the Appellant to be cautious in its dealings with him. He submitted that it was on 9.3.2001, for the first time the Appellant faced the crisis and even in the first instance itself it was proved that Shri Bajaj was not financially sound enough to give such huge position.
33. Shri Desai referred to the reasoning given by the Respondent in the order in support of the findings recorded therein holding the Appellant’s failure to fulfill the requirements of the prescribed Code of Conduct. He submitted that the Appellant had given an exposure to Shri Bajaj by executing buy order of 1,100 shares to 60,000 shares in BSE and 15,000 to 1,15,000 shares at NSE in each of the settlement in ARBL. He submitted that the Appellant had given very huge exposure to Bajajs in A-50 at BSE and N-09 and N-10 of NSE at a time when the price of the scrip reached 52 weeks high, that in terms of money, as per the prevailing price of the scrip in these settlements, the exposure given by the Appellant was Rs.1.80 crore in settlement No. 50 of BSE and Rs.3.40 crores in settlement No. N-09 of NSE, that by giving such high exposure to its first time client, the Appellant failed to exercise due skill and care in its dealings with Bajaj. He submitted that squaring off the trade is not an exercise of due diligence, it is a requirement of the regulations.
34. Learned Counsel submitted that the description of the failure as ‘lapse’ does not save the violation, that it is the substance, rather than the words in which the contravention is vouched, that matters. He submitted that failure to exercise due skill and care is not confined only to the failure to secure requisite information from the client, but it has to be viewed in the totality of the facts and circumstances and also the attendant repercussions.
35. With reference to the two orders passed by the Respondent in the case of SMK Shares and Stock Brokers P. Ltd. and Seshanka Securities P. Ltd. learned Counsel submitted that whether a particular case warrants penalty and if it warrants, what should be the quantum of penalty etc. depends on the facts specific to each case and in the light of the totality of the facts and circumstances relating to the said two cases, the Respondent considered that it was sufficient to warn the concerned parties to be careful in future, but considering the gravity of the failure in the Appellant’s case it was felt that suspension of certificate for a short period of 7 days was warranted.
36. Learned Counsel refuted the Appellant’s contention that the impugned order is a non speaking order and submitted that on a perusal of the order it is clear that every finding therein is well reasoned. He submitted that the facts in LKP Securities case referred to by the Appellant is not comparable to the present case and, therefore, the relief granted in that case should not be made available to the Appellant.
37. Learned Counsel submitted that taking into consideration the totality of the facts and circumstances, it is evident that the Appellant had failed to exercise due skill and care and accordingly the suspension of certificate for a short period of 7 days cannot be considered disproportionate or unwarranted.
38. I have carefully considered the pleadings and the submissions made by the Counsel for the parties, and the material on record, and my views are as follows:
The impugned order is in the context of the market behaviour in terms of price and volume, witnessed in trading in the shares of ARBL, particularly in February – March, 2001. It is seen that the price of the scrip which was hovering around Rs.91/- in the 1st week of October 2000, reached Rs.205/- on January 1, 2001 and further touched a high of Rs.320/- on March 8, 2001. But the same crashed to Rs.78.50 by March 19, 2001. Further the volumes traded in the scrip around 50,000 – 60,000 shares per day went up to the extent of 10-15 lacs shares per day in January – March, 2001. The Respondent’s investigation prima facie revealed one Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the predominant traders in the scrip of ARBL during the period August 2000 to March, 2001 and held them responsible for the creation of false market. The investigation carried out by the Respondent indicated that various members of both NSE and BSE had aided and abetted Shri Harinarayan Bajaj in creating a false market, in the scrip of ARBL and they were also found to have not exercised due skill and care in their dealings. The Appellant was one among those brokers who were investigated in the said context. Though after the investigation and enquiry, the Appellant was absolved of the charge of aiding and abetting Bajajs, it was found wanting in exercising due skill and care in its dealings, as required in terms of Clause A(2) of the Code of Conduct prescribed in the Broker Regulations.
39. The core finding of the Respondent is confined to the following few paragraphs in the order :
“I have perused the extracts of the investigation report, the Enquiry Report, the reply filed by the broker member and also the submissions made on behalf of the broker member at the time of the personal hearing. It is observed that due to the transactions of Shri Harinarayan Bajaj and his son Shri Rahul Bajaj, the volumes in the scrip of ARBL went up to around 8-15 lakhs shares per day in the month of February & first week of March 2001 from 50,000-60,000 shares per day in Oct, 2000. It is also observed that the broker member has started dealing in the scrip of ARBL since October 2000.
It is also observed that the broker member transacted in the scrip of ARBL and purchased and sold 1,32,200 shares at BSE. The broker member also purchased 2,47,100 shares and sold 1,72,100 shares at NSE. It is also observed that when the price of the scrip of ARBL hit the lower circuit on 9.3.2001 at NSE, the client of the broker member had a purchase position of 65000 shares on NSE. Out of the aforesaid 65,000 shares, 30,000 shares were sold at Rs.287.75 and 32,281 shares were sold at Rs.223.90/- per share. On March 12, 2001, 2719 shares were marked for delivery.
It is an admitted fact that the broker member had taken the prescribed Client Registration application form and also executed Member Client Agreement with the broker member. However, it is established from the Client Registration Form, that the details at Columns pertaining to the annual income and market value of portfolio of client have not been indicated. Since the aforesaid two details are very important for determining the credit worthiness of the client, the broker member should have indicated the said details in the Client registration Form. Further the Client was dealing with the broker member for the first time. The aforesaid lapse of the broker member is not expected from a prudent broker doing common stock broking business.
It is established that during the period from Aug 2000 to March 2001, the majority of the volume of trades executed by the broker member was for Shri Rahul Bajaj. The broker member also executed negligible trades i.e. less than 1000 shares per client and dealt with only few clients in the scrip of ARBL. The broker member had given an exposure to its client, Shri Rahul Bajaj by executing a buy order of 1,100 shares to 60,000 shares in BSE and 15,000 to 1,15000 shares at NSE in each of the settlements in ARBL. The broker member had given a very high exposure to the client in settl.A-50., at BSE and N-09 and N-10 of NSE at a time when the price of the scrip reached 52 week’s high. In terms of money, as per the prevailing price in these settlements, the exposure given by the broker member is Rs.1.80 crores (settlement No. A-50 of BSE) to Rs.3.40 crores (settlement No. N 09 of NSE). By giving such high exposure to its first time client, the broker member failed to exercise due skill and care in its dealing with its client, Shri Rahul Bajaj in the scrip of ARBL as mandated under Clause A(2) of the Code of conduct prescribed under SEBI (Stock Brokers and Sub Brokers) Regulations, 1992. It is also established that the broker member had no dealings with its client, Shri Rahul Bajaj in the past. The contention of the broker member that the penalty imposed by the stock exchanges for general non registration of clients by members is only Rs.5000/- is not relevant, since the present enquiry is initiated under SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 and for the violations committed by the broker member, of the said Regulations.
It is also admitted by the broker member that its client defaulted even for paying the Mark to Market losses for the trades executed on March 09, 2001 which forced the broker member to sell the positions on March 12, 2001. Further the broker member contended that they have taken regularly the details pertaining to annual income and market value of portfolio of the client, from their clients and for substantiating their argument the broker member had filed few specimen of the client registration form. It is observed that in one of the specimen forms submitted by the broker member i.e. in the case of Ms. Samant Arundathi, the details regarding the annual income is not specified.
It is observed that the above mentioned acts of the broker member clearly indicates that the broker member had given high exposure to its new client and with whom the broker member had no dealings in the past. In terms of money the exposure given by the broker member to its client is Rs.1.80 crores (settlement No. A-50 of BSE) to Rs.3.40 crores (settlement No. N 09 of NSE). The broker member had also not mentioned the details pertaining to the annual income and the market value of the portfolio of its client Shri Rahul Bajaj. It is noted that the details pertaining to the annual income is not indicated in one of the specimen client registration forms submitted by the broker member. The afore said acts of the broker are in violation of Clause A (2) of the Code of conduct prescribed under regulation 7 of the said regulation which state as follows:
Schedule II
A. General
1) ………….
2) Exercise of due skill and care: A stock Broker, shall act with due skill, care and diligence in the conduct of all his business.
……………………..
In view of the above circumstances, it is concluded that the broker member had failed to exercise due care and skill in its dealing with its client and thereby violated Clause A(2) of the Code of Conduct as prescribed under regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
Therefore by considering the above facts and circumstances, I agree with the
recommendations given by the Enquiry Officer and therefore under the provisions conferred upon me Section 4(3) of SEBI Act, 1992 and under Regulation 29(3) of SEBI (Stock Brokers & Sub Brokers) Regulations, 1992, I hereby suspend the certificate of registration granted to M/s. Satco Securities and Financial Services Ltd., as a stock broker of National Stock Exchange for a period of 7 days w.e.f. August 26, 2002 for violating Clause A(2) of Schedule II of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.”
40. It is noticed from the impugned order that the suspension of the certificate of registration granted to the Appellant is based on the Respondent’s finding that the Appellant had violated clause A(2) of the Code of Conduct under the Stock Broker Regulations. The Respondent has relied on the material relied on by the enquiry officer. His reasoning has been followed. His recommendation has been accepted.
41. The broad regulatory regime applicable to the stock brokers and the sub brokers under the Securities and Exchange Board of India Act, 1992 (the Act) is the Stock Broker Regulations. According to regulation 7 of the said Stock Broker Regulations’ “the Stock Brokers holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II”. Schedule II enumerates the Code for stock brokers. The Code is grouped under three parts viz. A-General, B-Duty to the Investor and C-Stock Brokers vis–vis other Stock Brokers. Clause A(2) referred to in the impugned order is appearing under Part A of the Code which is as under.
“(2) Exercise of due skill and care: A stock broker shall act with due skill, care and diligence in the conduct of all his business.”
42. Though clause A(2) is silent on details, the Respondent has issued circulars detailing certain measures for the benefit of stock brokers in this regard. One such circular dated 18.11.1993 is on “Precautions to be exercised by member brokers of recognised stock exchanges while selling shares on behalf of clients, entertaining new clients etc”. In the said circular certain precautions which are compulsorily required to be followed by stock brokers and certain other precautions in the nature of guidelines to be followed as and when circumstances warrant, have been stated. One of the compulsory precautions required to be followed as per the said circular is that the stock broker “ensure that the client is personally known to the member broker or has been introduced to him by a person known to him.” It is in furtherance of the said requirement the Respondent has devised a standard format known as the clients registration form for the use of brokers. This client registration form is expected to provide certain particulars of the client to the broker, so as to enable him to “evaluate” the client before the broker takes up trading for him.
43. Learned Counsel for the Appellant had advanced an argument that for breach of code of conduct penalty of suspension is not imposable. In this context it is noted that in terms of section 12(3) of the Act the Respondent is empowered to suspend or cancel a certificate of registration granted to a market intermediary in such manner as may be determined by regulations. Regulation 26(1) of the Broker Regulations is to be noted in this context. According to regulation 26(1) (ii) the Respondent is empowered to impose a penalty of suspension of registration of a stock broker if “the stock broker does not follow the code of conduct annexed at Schedule II.” Code of Conduct under Schedule II in the Regulation is a part of the Regulation. It is like any other regulation with attendant penal consequences provided in the Act/Regulations to meet non compliance of the same. Therefore, the Appellant’s argument that for failure to follow the code of conduct no penalty is imposable, is untenable. The Appellant had also harped on the expression “lapse” used by the Respondent while dealing with failure of the Appellant in complying with clause A(2) of the Code of Conduct. According to him a “lapse” is not a violation of any regulation to attract a penalty. In my view, the Respondent has explained the nature of failure and because the failure has been described at few places as a lapse it will not change the nature of the failure, so as to not to attract the consequences attached to such failure. It is the substance that matters – not the description.
44. The Appellant’s submission that the impugned order is a non speaking order is unfounded. The Respondent in its order has dealt with the submission made by the Appellant and also the basis on which it has come to the conclusion. The reasoning given in the order may not be acceptable to the Appellant. But that does not make a reasoned order an unreasoned one. Shri Samdhani had submitted that an order should stand of its own. I fully agree with Shri Samdhani’s version supported by M.S. Gill’s case (supra) that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. The Respondent is not to reshape or refurbish the order in the appellate proceedings. The Counsel can not adduce new grounds and new facts which are not in the show cause notice/order.
45. The Respondent has found the Appellant guilty of violation of clause A(2) of the Code of Conduct on the following grounds:
(i) the Appellant by virtue of his trading in ARBL on behalf of Shri Bajaj had failed to exercise due skill and care in its dealing and
(ii) had allowed Shri Bajaj to take position beyond the clients financial capacity
46. On a perusal of the impugned order and the material before me, it appears that the market collapse in the case of ARBL scrip was in the context of mega size trading allegedly done for one client – Bajajs – by several brokers. Gigantic size of the transaction in the said scrip for the said client carried through several brokers has been stated in the order. It appears that several brokers were involved – around 40 in number – as stated by the Appellant’s Counsel. It is seen from the material on record that the Appellant started trading in the scrip of ARBL only from January 2001. The trading details as furnished by the Appellant and uncontested by the Respondent, are as under:
Trading at BSE
Trading, Delivery & CF (Badla) Position of Amaraja Batters from Aug 00 to March 01.
Sett No Purchase Sales C/F Delivery A-42 1,100 - 1,100 NIL A-43 15,000 16,100 NIL NIL A-44 16,100 16,100 NIL NIL A-49 40,000 40,000 NIL NIL A-50 60,000 60,000 NIL NIL 132,200 132,200 ================= Trading at NSE Trading, Delivery & CF (Badla) Position of Amaraja Batters from Aug 00 to March 01. Sett No Purchase Sales C/F Delivery N-06 15,000 15,000 NIL NIL N-07 16,100 16,000 NIL NIL N-08 36,000 36,000 NIL NIL N-09 115,000 105,000 NIL 10,000 N-10 65,000 62,281 NIL 2,719 N-11 2,719 NIL 2,719 247,100 237,100 ================= 47. The material based on which the Respondent has come to the conclusion is the following finding of the enquiry officer:
“It is an admitted fact that SATCO had executed trades in the scrip of ARBL for Mr. Rahul Bajaj amounting to a total volume of 1,32,200 shares (Purchases) and 1,32,200 shares (sales) in settlement No. A 42 to A 44. A 49 to A 50 in BSE. At NSE the member had executed a total volume of 2,47,100 shares (purchases) and 1,72,000 shares (sales) in settlement Nos. N 02 -03, N 08 to 10. It has been observed that Satco has sold 30,000 shares @ Rs.287.75 and further 322,281 shares at Rs.223.90 per share and delivery was marked for 2,719 shares on March 12, 2001 (Settlement No. N 10).
SATCO had taken the prescribed client registration application form and also executed member – client agreement with Shri Rahul Bajaj. However, it has been observed from the client registration form that the details at columns pertaining to annual income and market value of portfolio have not been indicated by the client. SATCO should have insisted for the said details, otherwise, client registration becomes only a formality rather than an exercise of due skill and care in introducing a client to the market.
As revealed in the hearing held on 25.09.2001, during the period from August 2000 to March 2001, the entire volume of trades executed by SATCO was for Mr. Rahul Bajaj. In addition they have also executed negligible trades i.e. less than 1,000 shares per client and dealt with only few clients in the scrip of ARBL. This shows that SATCO had given exposure to Shri Rahul Bajaj by executing a buy order of 1,100 to 60,000 shares in BSE and 15,000 to 1,15,000 shares in NSE in each of the settlements in ARBL. It should be noted that there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudential risk management norms of the stock broker within the framework of law. Further, most of the trades in BSE and NSE executed by SATCO were squared off. It is also a significant point to note that SATCO had no dealings with Shri Bajaj in the past. However, SATCO had given a very high exposure to the client in Settlement No. A 50, NSE and N 09 and N 10 of NSE at a time when the price of the scrip reached 52 week’s high. As per the prevailing price in these settlements, the exposure given by SATCO in terms of money is Rs.1.80 crores (Settlement No. A 50 of BSE) to Rs.3.40 crores (Settlement No. N 9 of NSE). This indicates that SATCO had not followed prudential norms in giving exposure to the client. In its own admission, the client had defaulted even paying Mark to Market losses for the trades executed on March 09, 2001, which forced SATCO to sell the positions on March 12, 2001.” (emphasis supplied)
48. To the allegation that SATCO has allowed the client to take position which is beyond the client’s financial position, it is found that Shri Rahul Bajaj defaulted in his margin obligations on March 09, 2001 when the scrip touched lower circuit on NSE. Further as explained in the preceding para, SATCO allowed client to take huge positions, when the ruling price of the scrip was very high. In view of the same, there is no convincing rebuttal from SATCO as to how it had allowed such a huge exposure to the client, which by any standard, is beyond the clients financial position, unless SATCO had examined and satisfied about the net worth of the client. It is to be noted that Shri Rahul Bajaj is a new client to SATCO. SATCO not produced any evidence to show that it had examined and satisfied about the net worth of Shri Rahul Bajaj.
49. From the aforesaid, I find that SATCO had failed to exercise due care and skill in its dealings with Shri Rahul Bajaj in ARBL, as mandated by the said clause A(2) of the Code of conduct specified for stock brokers. I, therefore, find that SATCO is guilty of violating Clause A(2) of Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations 1992.”
50. From the finding of the enquiry officer quoted above it could be seen that the enquiry officer had observed that the Appellant had given high exposure to Shri Bajaj and that there was no convincing defense from the Appellant that how it had given such a high exposure to Shri Bajaj. According to the Respondent’s own admission “there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudent risk management norms of the stock broker within the frame work of law”. Respondent has not prescribed any yardsticks in regard to the nature of ‘prudence’ to be exercised by a broker. It is left to an extent to the judgment of the broker. In this context it may be noted that the total volume of the trade in ARBL’s shares transacted in the month of February and first week of March 2001 was around 8-15 lakhs shares per day, that a few transactions of shares effected by the Appellant can not be regarded as to have created any serious impact on the market considering the total volume of turnover in that scrip, much less creating a false and misleading market as alleged. The observation made by the enquiry officer in his report, which the Respondent has accepted, is also worth noting. According to the enquiry officer “there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudential risk management norms of the stock broker within the framework of law. Further, most of the trades in BSE and NSE executed by SATCO were squared off”. Thus it is clear that the risk management was left to the prudence of the Appellant and the Appellant adopted the measure which it considered necessary. According to the Appellant it had to cover the risk by collecting adequate margins and it collected margins and traded much below the permissible volume vis–vis the margin collected. In fact the enquiry officer has also in the context of the Appellant’s conduct in the trade has observed that “What SATCO did was normal broking transaction as a stock broker.” The clean chit on the conduct of the Appellant has to be kept in mind while considering the charges leveled against it by the Respondent. It is noted that it is not the Respondent’s case that the Appellant had acted in concert with other brokers.
51. The Respondent’s argument that the Appellant had not verified the financial position of Bajaj, that it should have asked for the details of the annual income and market value of port folio etc. are not that serious to charge the Appellant for failure to exercise due skill and care, in the context that Bajaj was introduced as a client by one of the ‘valued client’ of the Appellant. As per the Respondent’s own admission Shri Bajaj had furnished the client registration form and executed the concerned agreement. The argument that the Bajaj’s financial capability was unknown to the Appellant remains unsupported, that on the contrary, the Appellant had submitted that it started trading for him based on the input from one of its clients and Shri Bajaj was providing the requisite margin. In this context the following explanation given by the Appellant to the Respondent in its reply to the show cause notice is also to be noted.
52. “SEBI/Stock Exchange allowed at that time gross Exposure to members upto 20 times of capital deposit. We may also like to add here that as regard exposure criterion, the exposure limit as provided under the Augmented Lending & Borrowing Mechanism (ALBM) of NSE and Borrowing & Ledinging of Securities Scheme (BLESS) of BSE, the Clients were allowed to take position in the market based on leveraging of margins rather than the financial capacity of the Client to take entire delivery. In this case we had allowed the client exposure limit of only upto 20 times of his deposit. We had taken initial deposit from the client and subsequently ensured that his exposure was within the permitted limits in as much as on the crucial date 8th March 2001, the client had a margin of Res.20,56,964.52 with us against his outstanding position of Rs.2,05,41,300/- i.e. less than 10 times the deposit with us. This indicates that the client had the necessary capacity and we had taken abundant caution and care and exercised due financial prudence, according to SEBI/Stock Exchange standards. However, on the 9th March (Friday) 2001, when BSE closed the market at 3 p.m. while NSE was open upto 4.30 p.m. the scrip was hammered and hit the 16% lower filter resulting in MTM (mark-to-market) loss to the client, which we demanded immediately from the Client but he was unable to pay the same immediately. As the Client failed to pay MTM, we, exercising due care and financial prudence, closed his position on the next working day i.e. 12th March, (Monday) 2001.
53. It is important to note in this context that the Broker’s performance regarding due car e, skill and financial prudence is an issue separate from that of sharp and sudden fall in the price of a scrip and both issues should not be mixed up. In the above case, the Client, even though he had paid sufficient margin, suffered loss owing to sudden and sharp 16% drop in the price of the scrip in one day, which is a separate issue and hence should not be mixed up with the Broker’s performance regarding due care, skill and financial prudence, particularly when SATCO is not responsible for the fall in the price of the scrip ARBL. The price-fall in ARBL scrip was so sudden and sharp with market-wide ramifications that SEBI itself had to investigate, in detail, all the related deals and submitted its Report to the Court. If the market had not collapsed, it would have passed as a normal transaction, but we are being blamed for the incident with which we have little connection. If these two events are viewed separately, you will find that we are not at fault. As a matter of fact, we review each client’s position every day, after the market hours and take, as in this case an immediate appropriate action of generating margin calls, advising the clients to reduce the exposure or in rare cases, as in the present case, square off the client’s trading position. Even in this case, we did exercise due care and financial prudence in demanding immediate payment of MTM and on the client’s failure to do so, closed his position immediately to ensure that all our settlement claims are met in full.”
54. From the facts available, it is difficult to hold that the Appellant had given high exposure to Shri Bajaj or that Shri Bajaj was allowed to trade beyond his financial capacity or that the Appellant had failed to exercise due care in its dealings. It is on record that the Appellant had the requisite margin with it and as a result of the market collapse, the Appellant did not suffer on account of transacting with Shri Bajaj. Prudential risk management measures followed by the Appellant worked well till the market collapsed suddenly. In this context it is to be noted that the enquiry officer who had access to the books of account of the Appellant, after examining all the relevant material had come to the conclusion that:
“SATCO had done a few transactions for Mr. Rahul Bajaj. They are primarily squired off transaction, both at NSE and BSE, except for delivery of small quantity of shares. There was no indication of price manipulation at the time SATCO executed the trade for Mr. Rahul Bajaj. SATCO or its Directors have not traded in the scrip of ARBL. From the material available it is not possible to draw any inference that SATCO had the intention to artificially raise or depress the price. There is no proof that SATCO was aware of Mr. Bajaj’s dealings with other brokers except Mukesh Babu Securities Ltd. nor had the information that Mr. Bajaj is indulging in creating a false market in the scrip of ARBL. What SATCO did was a normal broking transaction as a stock broker. In view of this, it can not be held that SATCO has aided and abetted Shri Hari Narayan Bajaj and his family in creating a false market in the scrip of ARBL. Therefore, I find that SATCO is not guilty of violating Regulation 4 of SEBI (Prohibition f Fraudulent and Unfair Trade Practices relating to Securities Market) Regulation 1995.”
55. I agree with Shri Kumar Desai’s submission that the conduct of the Appellant has to be judged with reference to the totality of the facts and circumstances and not only with reference to failure to obtain the client registration duly filled in etc. While viewing from the totality of the facts and circumstances one cannot ignore the clear conclusion drawn by the enquiry officer that “what Satco did was a normal broker transaction as stock broker”. A normal broking transaction in my view includes following the attendant normal risk containing measures as well.
56. The Appellant has categorically stated in its reply to the show cause notice to the enquiry officer that Mr. Rahul Bajaj was registered as a client under client ID No. 21152 after completing all the statutory formalities such as executing client broker agreement, obtaining client registration form etc. and collection of upfront margin to the tune of Rs.3 lacs. As per the Appellant’s statement
“The said client dealt with our Bandra dealing office during the period 11.01.2001 to 27.01.2001. As already advised by us during the hearing, the client collected back the above said margin of Rs.3 lacs from us on 5.2.2001. Thereafter, on 21.2.2001, he approached our Kandivali Branch and placed an order for buying of 11,000 shares of ARBL Ltd. approximately worth Rs.30 lacs (10% of the exposure) on 22.2.2001. The next day i.e. 23.2.2001, the client bought 25,000 shares of approximate value of Rs.67.69 lacs and again paid margin of Rs.6.75 lacs (10% of the total value) on 24.2.2001. Likewise, our Branch executed orders as per instructions of the client and collected the applicable margins as and when due. We at head office as well as branch level, took due and sufficient care in completing statutory formalities like Client Registration. Client-broker Agreement and in collection of the margin with respect to the exposure of the client within the frame work of BSE/NSE rules and regulations of SEBI.
As on March 8, 2001 the outstanding position was Rs.20,17.300 and the exposure margins deposited by the client was Rs.20,56,964.52. On 9th March 2001 i.e. Friday when the market lost ground substantially, the price of ARBL was ruling at Rs.266/- Hence, the next day, on Saturday, 10th March 2001, we asked the Client to pay mark to market loss amounting to around Rs.35 lakhs. In response to our demand for immediate payment of mark to market loss, the Client informed that he was not in a position to pay- mark to market loss immediately.
Under the circumstances, we had no alternative except to dispose off the Client’s holdings immediately on the next working day (i.e. Monday) to cover mark-to-market loss. Accordingly, on 12/3/2001 (Monday) we offloaded 30,000 shares of the client @ Rs.287.75 and 32,281 shares @ Rs.223.90 with the sole object of realising our dues from the Client. The execution of the above transaction of offloading shares of ARBL on 12.3.2001 on account of the compelling reasons, as enumerated above, fully justifies the exercise of our skill and abundant caution and care within the purview of regulation 7 of Schedule II of SEBI (Stock Broker and Sub Broker) Regulations, 1992.”
57. Learned Counsel submitted that Shri Bajaj’s account in the books of the Appellant as on 20.3.2001 showed a credit balance.
58. It is not even the Respondent’s contention that the Appellant had not collected adequate margin from the client. According to the Appellant:
“We have to state that the client from very inception traded within the exposure limits and paid exposure margins the day they became due. Initially, the client paid us deposit of Rs.3 lakhs for getting exposure of 10 times for trading upto Rs.30 lakhs. Subquently, the client was complying with the margin requirements on the day of trading itself thereby giving us no suspicion in regard to his future financial capabilities for taking his positions. It was only when the market lost the ground substantially on Friday, the 9th March, 2001 when after closing of the market, we asked the client to pay mark to market loss amounting to around Rs.35 lakhs, then it was at this stage that we were advised by the client that he was not in a position to pay mark to market loss immediately but, would pay us later. We did not agree with him and with a view to covering mark-to-market loss, we offloaded shares of the client, as soon as the market opened on the next trading day i.e. Monday, the 12th March 2001 with the object of stopping him from trading without paying margins.”
59. In this context it is noted that the enquiry officer has not recorded any contrary finding. According to the enquiry officer “Shri Rahul Bajaj defaulted in his margin obligations on 9.3.2001.” The behaviour of the market on 9.3.2001 was abnormal and the Appellant took all possible steps to contain the risk. In fact the Appellant acted promptly and diligently and averted loss to it.
60. The Respondent in my view has over relied on the deficiency in the client registration form in as much as it did not disclose the annual income and value of portfolio of Shri Bajaj. The whole purpose of client registration form is to provide input to the broker to know the client for whom he is going to trade. There are several particulars required to be furnished therein. But then, no broker in my view will undertake trade for a client unless he is personally satisfied by the financial credentials and background of the client and for that in my view there can not be a better supplementary source than a person known to the broker. The information furnished by the client in the client registration form need not necessarily be always correct, especially if the intention of the client is not normal trading. Take for instance the instant case wherein Shri Bajaj has disclosed the name of only one broker with whom he had registered, though the column in the application requires to give the details of all the brokers with whom he has registered. But the investigation and enquiry report suggest that Shri Bajaj was transacting through several brokers. If Shri Bajaj had disclosed the identities of other brokers through whom he was trading that would have put the Appellant on alert. In the context of Shri Desai’s argument that the client registration form submitted to the Appellant by Shri Bajaj is the one used for derivatives trading, it is to be noted that using the said form by itself is not a fatal breach. It is not the Respondent’s contention that the Appellant was also doing trading in the derivative sector and the form under reference was only for the said purpose. The Appellant was not trading in derivatives for Shri Bajaj. The Appellant had basic inputs about Shri Bajaj in the said form also. It had executed client agreement, enquiries were made through person known to it and also traded much below the limit with reference to the margin on hand and as a result of the care the Appellant had taken, it could save from any loss as a result of market crash on 9.3.2001. The reference to the client registration form filed by Ms. ‘A’ and the deficiency therein is of no relevance to the present case, as the enquiry is directed against the Appellant’s failure in exercising due skill and care in its dealings with Shri Bajaj. In the circumstances of the case, in my view omission to fill up few columns in the client registration form remains a pure technical lapse and it cannot be considered as a major failure to exercise due skill and care to warrant penalty of suspension of certificate of registration. I do not consider it necessary to go into the stand taken by the Respondent in the case of Seshank Securities and SMK Shares and Stockbrokers as the charge against the Appellant to warrant the penalty having found unfounded.
61. In the light of the facts and circumstances of the case discussed above I am not inclined to agree with the conclusion arrived at by the Respondent that the Appellant had failed to comply with the requirement of regulation 7 read with Clause A(2) in Schedule II of the Stock Broker Regulations so as to warrant imposition of penalty of suspension of the certificate of registration. Therefore, I do not consider it necessary to go into the various authorities on the principles governing imposition of penalty, doctrine of proportionality etc. cited by the learned Counsel for the Appellant and the counter submissions by the Respondent’s Counsel.
62. For the reasons stated above, the order can not be sustained.
63. Appeal allowed.