Judgment:
1. The Securities and Exchange Board of India (for short "the Board") carried out investigations regarding the alleged price manipulation in the scrip of Warner Multimedia Ltd. (hereinafter called "the company").
The investigations revealed that the price of the shares had gone up considerably within a period of about three months and also the volumes. The investigating officer found that the clients of the major trading brokers in the scrip were inter-connected with each other and also to the promoters of the company. The Board appointed an enquiry officer to enquire into the alleged violations. The enquiry officer found that the fundamentals of the company were not strong and that its scrip was considerably illiquid and therefore any prudent stock broker could doubt the intention of the clients and stop trading for them.
Since the appellant who acted as a stock broker for its clients did not stop trading in the scrip, it was concluded that it had failed to exercise due skill and care and indulged in acts detrimental to the public interest which leads to an inference that the Code of Conduct prescribed for brokers and sub-brokers had been violated. The enquiry officer accordingly recommended that the certificate of registration of the appellant as a sub-broker be suspended for a period of one month.
The enquiry report came to be considered by the Board which accepted the same and without applying its mind to the issues involved in the case suspended the certificate of registration of the appellant for a period of one month as per the order dated February 1, 2006. Feeling aggrieved by this order the appellant preferred Appeal No. 46 of 2006 before this Tribunal which came up for hearing on 22-2-2006 and the same was allowed with the following observations: A reading of the impugned order leaves us with the impression that the Board did not apply its own mind to the facts of the case and the submissions made by the appellant. It has blindly followed the recommendations made by the enquiry officer without appreciating the fact that he had found that there was no evidence to suggest that the appellant was connected with the Company or its promoters. We are satisfied that the impugned order has been passed without application of mind and that the Board appears to have abdicated its functions by acting as a mere rubber stamp in following the recommendations of the enquiry officer. This is not what is expected of a quasi-judicial body like the Regulator which has to pass orders imposing penalties on the functionaries of the securities market.
2. It was left open to the Board to proceed against the appellant and pass a fresh order in accordance with law. On receipt of the file from this Tribunal, the whole time member of the Board took up the matter again and afforded a fresh hearing to the appellant. He has by his order dated 12-3-2007 accepted the enquiry report and imposed a minor penalty of censure. It is against this order that the present appeal has been filed.
3. We have heard the learned Counsel for the parties who have taken us through the record. The learned whole time member has accepted the findings of the enquiry officer that even though certain set of persons/entities connected to the promoters of the company had traded in its scrip, there was no evidence to suggest that the appellant was connected either to the company or to its promoters. Reference is also made to the findings of the enquiry officer that the appellant as a sub-broker had traded in the scrip of the company only for a period of 21 days when the price of the shares was declining and therefore it could not be said that the appellant while trading on behalf of its clients had indulged in price manipulation. Having recorded these findings, the learned member of the Board observes in para 5.10 of the impugned order as under: As regard the violation of code of conduct for the stock brokers, the Enquiry Officer also observed that the fundamentals of the scrip of WML were not strong and that the scrip was illiquid. Hence, any prudent stock broker could have doubted the intention of the clients and stop the trading for them. In the instant matter the Noticee continued trading for number of settlements which can be termed as failure on their part to exercise due care and skill. Hence, the Noticee violated Clause (5) of the Code of Conduct laid down under the Stock Brokers Regulations and as such considering all aspects of the matter, I am of the view that a punishment of 'censure' will be adequate.
4. It is on the basis of the aforesaid observations that the appellant has been imposed a minor penalty of censure. In view of the findings that the appellant had not indulged in price manipulation and that it was neither connected to the company nor to its promoters we fail to understand how the appellant can be said to have violated the Code of Conduct prescribed for brokers and sub-brokers. It is not the duty of any of the broker or sub-broker to cross question his clients when they come to him for trading purpose unless, of course, he entertains a doubt regarding the bona fides of the trades sought to be executed by them.
5. Merely because the scrip of the company was illiquid would not create a doubt in the mind of any one, much less a broker or a sub-broker, that the trading was manipulative. The whole time member appears to have mechanically followed what the enquiry officer had observed. The findings recorded by the whole time member in para 5.10 are wholly misconceived, conjectural and based on surmises and we cannot but set aside the impugned order which we hereby do. The appeal is accordingly allowed, leaving the parties lo bear their own costs.