Judgment:
P.K. Malhotra
1. The appellant before us is a stock broker registered with the Securities and Exchange Board of India (for short the Board). It dealt in the scrip of M/s Denim Enterprises Limited (the company) on its account and also for a number of clients.
2. On the basis of a complaint dated February 18, 2000, the Board carried out investigations into the dealings in the scrip of the company for the period November 1, 1999 to March 30, 2000. It was observed by the Board that the scrip of the company traded below par value at the Bombay Stock Exchange (BSE) till the end of November 1999. Subsequently, there was a rise in the price of the scrip. From January, 2000 onwards, the volumes traded and the price of the scrip increased sharply. The appellant was one of the stock brokers who dealt in the scrip on its own account as well as on account of its client. The appellant had placed large buy orders at near circuit limit rates and some of these orders were deleted immediately thereafter. The appellant was placing large buy orders and it was also the only seller in the scrip of the company on certain trading days. The Board found that as per the trading details, the appellant had purchased 3,56,200 shares and sold 4,17,600 shares and was, therefore, a net seller of 62,900 shares during the investigation period. The gross purchase of the appellant was 9.65% and gross sale was 11.36% accounting for 11.11% of the gross trading of the scrip. The submission of the appellant was that the orders were placed by broker M/s. Kiritkumar Kantilal Shah (KKS) who is a member of the Ahmedabad Stock Exchange. On the request of KKS, the BOLT was installed by the appellant at the office premises of KKS at Ahmedabad and all transactions in the scrip were done through the said BOLT at Ahmedabad. It was not possible for the appellant to monitor the transactions done through BOLT installed at Ahmedabad. In any case, there were no alerts in the system with regard to these transactions and when the appellant came to know about it, it immediately cancelled the arrangements with the said KKS.
3. The other allegation against the appellant is that it had bought and sold 42800 shares in jobbing account using six different clients code and also that it allotted VSAT terminals to M/s. Clio and Classic Finance who are not stock brokers of the Ahmedabad Stock Exchange (ASE) and were not eligible for allotment of BSE terminals provided by the appellant. It is also alleged that the appellant had violated KYC norms as it had failed to ensure required information in the forms including residential address, annual income, market value of portfolio etc. In reply, the appellant had submitted before the Board that it had not entered into any transactions in the scrip except by way of jobbing and all other transactions were done by KKS in ordinary course of business. Regarding KYC forms, the appellant had submitted that it was a new system which was introduced at the relevant time and the discrepancies, if any, were due to oversight. However, as and when the appellant came to know about the discrepancies, the same were rectified. On the issue of allowing M/s Clio and Classic Finance to deal in the scrip on behalf of others without being registered as its sub broker, the appellant submitted before the Board that it was done by its staff member who had no knowledge about it.
4. In the enquiry proceedings initiated against the appellant, the replies submitted by it were considered and it was also afforded an opportunity of personal hearing. The designated authority of the Board, after considering the material on record and hearing the appellant, found it guilty of the charges mentioned above and concluded that the appellant had violated Regulation 4(a) and (b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 read with Regulation 13 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and also violated Clauses A(1) to A(5) of the Code of Conduct prescribed for stock brokers in Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. Therefore, in terms of the provisions of Regulations, 27 read with Regulation 38 (2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, the designated authority recommended that the appellant be prohibited to take up any new assignment for a period of one month.
5. The post enquiry show cause notice dated October 6, 2010 was issued to the appellant making available to it a copy of the report of the designated authority and calling upon it to show cause as to why action should not be taken against it as recommended by the designated authority or a higher penalty should not be imposed as deemed fit by the competent authority. After considering the representation of the appellant and affording it an opportunity of hearing, the whole time member of the Board passed the impugned order on May 10, 2012 upholding the findings of the designated authority and suspending the certificate of registration of the appellant for a period of one month. Hence this appeal.
6. We have heard the learned counsel for the parties who have taken us through the records. The main defence of the appellant is that the transactions in the scrip except jobbing activity, were done by KKS through BOLT installed at Ahmedabad and that these were done in the normal course of business and it is impossible to keep watch on each and every scrip. The appellant has not denied the deficiencies pointed out by the Board with regard to maintenance of KYC forms and also that it permitted Classic Finance to deal on behalf of clients without being registered as a sub broker and also allotment of VSAT terminals to Clio Finance. We are inclined to agree with the conclusion arrived at by the whole time member of the Board that in view of the fact that the appellant had given BOLT terminals to KKS, it was the primary responsibility of the appellant to monitor the transactions on the terminal. This tribunal, in the case of Sunil Shares and Stock Pvt. Ltd. (Appeal no. 24 of 2007 decided on 5.8.2010) referred to by the designated authority in its report and relied upon by learned counsel for the respondent Board has observed that no matter who uses the terminal, the appellant as a stock broker can not escape its liability for orders that were placed through its terminal. We have no hesitation in upholding the findings with regard to deficiency in the maintenance of KYC forms and allowing M/s. Classic Finance to deal in the scrip on behalf of others without being registered as its sub-broker.
7. We may, however take note of the other arguments of learned counsel for the appellant on the issue of delay in holding the enquiry and action of the Board in suspending the certificate of registration of the appellant for a period of one month as against recommendation of the designated authority that appellant be prohibited to take up any new assignment for a period of one month. We note that the complaint under investigation by the Board is dated February 18, 2000 and the Board carried out investigations into the dealing in the scrip of the company for the period November 1, 1999 to March 30, 2000. It is after eight years of the filing of the complaint that the Board instituted the enquiry by its order dated August 13, 2008. It took almost one year for the enquiry officer to submit his report which was submitted on September 28, 2010. Even after the enquiry report, it took the Board another one year to grant personal hearing to the appellant and the impugned order was passed after ten months of the grant of personal hearing. It is not a case where large number of parties were involved or information was to be collected from different sources which could have given a valid reason to the Board justifying delay in holding the enquiry. Further, neither the show cause notice issued to the appellant along with the report of the designated authority nor the impugned order shows as to why the whole time member, while accepting the findings of the designated authority, has not accepted the recommendations of the designated authority to prohibit the appellant from taking up new assignments for a period of one month and has decided to issue a direction of suspending the certificate of registration of the appellant for a period of one month. Regulation 27 of the Securities and Exchange Board of India (Intermediaries) Regulation, 2008 mandates that while submitting its report, the designated authority shall also recommend the action to be taken by it against the noticee. Such action may include suspension of certificate of registration for a specified period, cancellation of certificate of registration, prohibition to take up new assignment or contract or warning etc. Regulation 28 of the said regulations further provides that the designated member of the Board shall consider the report and pass an order as expeditiously as possible and the endeavor shall be made to pass the order within 120 days from the date of receipt of reply from the noticee. The scheme of the regulation clearly empowers the designated authority to recommend the action taken and also authorised designated member to pass order expeditiously. The principles of natural justice require that if the designated member is not agreeing with the recommendations of the designated authority, at the time of issuing show cause notice, it must also give its reason as to why it is not accepting recommendations of the designated authority and proposes to take action and impose higher penalty on the appellant. By any stretch imagination we are not suggesting that the designated member can not impose a higher penalty than what has been suggested by the designated authority or that it must adhere to the time limit and pass order within the time limit as prescribed in Regulation 28. The time limit prescribed in Regulation 28 indicates a reasonable time depending on the facts and circumstances of the case. The designated member is fully competent to pass orders even beyond said time also if circumstances and fact situation of a case so warrant. Similarly, the designated member can also impose a penalty higher than that recommended by the designated authority but it must give a notice to that effect to the delinquent. In the case in hand there is no indication either in the post enquiry show cause notice issued to the appellant or in the impugned order as to why higher penalty as compared to the one recommended by the designated authority is being imposed. Keeping in view the fact that there has been inordinate delay on the part of the Board in passing the order for which there are no justifiable reasons indicated either in the order or on record and also the fact that while agreeing with the findings of the designated authority on the charges against the appellant, no reasons are recorded as to why the case called for a higher penalty, we are of the view, that ends of justice would be met by reducing the penalty to the one recommended by the designated authority i.e. the appellant may be prohibited to take up new assignment for a period of one month.
While upholding the findings of the Board on the charges levelled against the appellant, we reduce the penalty to prohibiting the appellant to take up new assignment for a period of one month from date of this order.
The appeal stands disposed of accordingly with no order as to costs.