Supreme Court of India
SECURITIES AND EXCHANGE BOARD OF INDIAversusKISHORE R. AJMERA
- Citation
- 2016 INSC 201
- Decided
- 23 February 2016
- Disposal
- Disposed off
- Bench
- RANJAN GOGOI
Holding
Liability for fraudulent or manipulative trading can be established on the basis of circumstantial evidence showing volume, rapid buy‑sell cycles, and repeated patterns, and the penalties imposed by SEBI are upheld.
Summary
The Securities and Exchange Board of India (SEBI) appealed against several brokers and sub‑brokers, including Kishore R. Ajmera, for alleged manipulative and fraudulent trading in illiquid securities. The issues centered on whether the brokers could be held liable and penalised under the SEBI Act and its regulations despite the absence of direct evidence, and what standard of proof was required. The Supreme Court held that liability may be inferred from the totality of circumstances—such as large volumes, rapid buy‑sell cycles, and repeated patterns—showing a meeting of minds and deliberate intent, distinguishing it from mere negligence. It clarified that the parallel provisions in the SEBI Act and various regulations create confusion, but the courts must apply a logical, pre‑ponderance‑of‑probabilities test for civil liability, while criminal prosecution under Section 24 requires proof beyond reasonable doubt. Consequently, the Court dismissed the appeal of Ajmera, upheld SEBI’s suspension order, and set aside the Securities Appellate Tribunal’s interference in the other appeals, restoring the penalties imposed by SEBI.
Issues considered
- The degree of proof required to hold brokers/sub‑brokers liable for fraudulent or manipulative practices under SEBI regulations
- Whether circumstantial evidence of trade volume, timing, and pattern can establish liability in the absence of direct proof
- Distinction between negligence and deliberate intention in imposing penalties
- Applicability of different penalties (suspension vs monetary penalty) across similar cases
- Whether the respondents were denied natural justice in the SEBI enquiry process
Legislation cited
- Securities and Exchange Board of India Act, 1992s. 12-A, s. 15-HA, s. 15J, s. 19, s. 24
Subjects
SEBIbroker liabilityfraudulent trade practicesmanipulative tradingilliquid securitiescircumstantial evidencepenaltynatural justicesynchronized tradingcircular trading
Judgment
[2016] I S.C.R. 1118
A SECURITIES AND EXCHANGE BOARD OF INDIA
v.
KISHORE R. AJMERA
(Civil Appeal No.2818 OF 2008)
B FEBRUARY 23, 2016
[RANJAN GOGOi AND PRAFULLA C. PANT, JJ.)
Securities and Exchange Board of India Act, I992 - s. 19 -
Securities and Exchange Board of India (Stock Brokers and Sub-
Brokers) Regulations, 1992 - Reg 9 - Securities and Exchange
c Board of India (Prohibition of Fraudulent and Unfair Trade
Practices Relating to the Securities Market) Regulations, 2003 -
SEBI (Procedure for Holding Enquiry by Enquiry Officer and
Imposing Penalty) Regulations, 2002 - Reg 13(4) - Fraudulent/
manipulative practices under the SEBI Regulations and violation
D of the Conduct Regulations by the brokers and sub-brokers - Degree
ofproof required to hold them liable - Power of imposition ofpenalty
- In the first category, sub broker acting through broker, allegedly
involved in creating artificial volumes in the illiquid scrips and
Member, SEBI held the broker liable and ordered suspension for
four. months - In second category, sub brokers allegedly
E synchronized trades in respect of a huge number of illiquid scrip in
quick succession of time - In third category, allegation that
respondent-broker alongwith other member brokers, indulged in
circular trading of the scrip on behalf of one client and suspension
of respondent's membership for one month - Tribunal holding that
F in the absence of any direct proojlevidence showing the involvement
of broker and sub-broker, charges not substantiated, and interfered
with the penalty - On appeal, held: As regards power of imposition
of penalty for manipulative or fraudulent practices or for violation
of the Regulation, I 992, no clarity in the parallel provisions
contained in the Act and the Regulations - Comprehensive legislation
G can bring more clarity and certainty on the norms - In the instant
case, there is no direct evidence forthcoming - In the first category,
inference of negligence/lack of due care etc., not established even
on proof of the primary facts alleged so as to make broker liable
which was rightly upheld by the tribunal - As regards the second
H
1118
0>totll v. KISHORE R. AJMERA 1119
and third category, conclusion has to be gathered from various A
circumstances like the volume of the trade effected; the period of
persistence in trading in the particular scrip; the particulars of the
buy and sell orders, namely, the volume thereof; the proximity of
time between the two and such other relevant factors - It is clear
from all these surrounding facts and circumstances that there has
B
been transgressions by the respondents beyond the permissible
dividing line between negligence and deliberate intention - If the
primary authority had thought it proper to impose different penalties
in different cases involving different set offacts, interference should
not be made - Orders of the tribunal set aside and penalty imposed
on brokers by SEBI restored. c
Disposing of the appeals, the Court
HELD: 1.1 The views are recorded on a somewhat unclear
if not a confused picture that emanates from parallel provisions
contained in the Act and the Regulations framed thereunder. This
is particularly in the context of the power of imposition of penalty D
on determination of liability either for manipulative or fraudulent
practices or for violation of the Code of Conduct Regulation, 1992.
The different Regulations including the Regulations that prescribe
the procedural course, namely, SEBI (Procedure for Holding
Enquiry by Enquiry Officer and imposing Penalty) Regulations E
2002 and the successor Regulation i.e. SEBI (Intermediaries)
Regulations 2008 contain identical and parallel provisions with
regard to imposition of penalty resulting in myriad provisions
dealing with the same situation. A comprehensive legislation can
bring )!bout more clarity and certainty on the norms governing
the security/capital market and, therefore, would best serve the F
interest of strengthening and securing the capital market.
[Para 20][1135-C-El
1.2 It is a fundamental. principle of law that proof of an
allegation levelled against a person may be in the form of direct
substantive evidence or, as in many cases, such proof may have G
to be inferred by a logical process of reasoning from the totality
of the attending facts and circumstances surroundi11g the
allegations/charges made and levelled. While direct evidence is
a more certain basis to come to a conclusion, yet, in. the absence
thereof the Courts cannot be helpless. It is the judicial duty to H
1120 SUPREME COURT REPORTS [2016) I S.C.R.
A take note of the immediate and proximate facts and circumstances
surrounding the events on which the charges/allegations are
founded and to reach what would appear to the Court to be a
reasonable conclusion therefrom. The test would always be that
what inferential process that a reasonable/prudent man would
adopt to arrive at a conclusion. [Para 22)[1136-A-C]
B
1.3 In the instant case, there is no direct evidence
forthcoming. The scrips in which trading had been done were of
illiquid scrips meaning thereby that such scrips were not listed
in the Stock Exchange and, thus, was not a matter of everyday
buy and sell transactions. While it is correct that trading in such
c illiquid scrips is per se not impermissible, yet, voluminous trading
over a period of time in such scrips is a fact that should attract
the attention of a vigilant trader engaged/engaging in such trades.
The above would stand fortified by the note of caution issued by
the Stock Exchange in the form of a notice/memorandum alerting
D its members with regard to the necessity of exercising care and
caution in case of high volume of trading in illiquid scrips.
fJ>ara 23]f1136-D-F]
1.4 In SEBI Vs. Kishore R. Ajmera case the proved facts are
that both the clients are known to each other and were related
E entities; this fact was also known to the sub-broker and the
respondent-broker; the clients through the sub-broker had
engaged in mutual buy and sell trades in the scrip in question,
volume of which trade was significant, keeping in mind that the
scrip was an illiquid scrip. Apart from this there is no other
material to hold either lack of vigilance or bona jides on the part
F of the sub-broker so as to make respondent-broker liable. An
irresistible or irreversible inference of negligence/lack of due
care etc., is not established even on proof of the primary facts
alleged so as to make respondent-broker liable under the
Conduct Regulations, 1992 as has been held in the order of the
G Whole Time Member, SEBI which was rightly reversed in appeal
by tbe Tribunal. [Para 24)(1136-G-H]
1.5 In the second and third category, the volume of trading
in the illiquid scrips was huge. Coupled with the said fact, what
has been alleged and reasonably established, is that buy and sell
H orders in respect of the transactions were made within a span of
SEBI v. KISHORE R. AJMERA 1121
0 to 60 seconds. While the said fact by itself i.e. proximity of time A
between the buy and sell orders may not be conclusive in an
isolated case such an event in a situation where there is a huge
volume of trading can reasonably point to some kind of a
fraudulent/manipulative exercise with prior meeting of minds.
Such meeting of minds so as to attract the liability of the broker/
B
sub-broker may be between the broker/sub-broker and the client
or it could be between the two brokers/sub-brokers engaged in
the buy and sell transactions. When over a period of time such
transactions had been made between the same set of brokers or
a group of brokers a conclusion can be reasonably reached that
there is a concerted effort on the part of the concerned brokers c
to indulge in synchronized trades the consequence of which is
large volumes of fictitious trading resulting in the unnatural rise
in biking the price/value of the scrip(s). The trades in question
were not "negotiated trades" executed in accordance with the
terms of the Board's Circulars issued from time to time. A
D
negotiated trade, it is .clarified, invokes consensual bargaining
involving synchronizing of buy and sell orders which will result in
matching thereof but only as per permissible parameters which
are programmed accordingly. [Para 25](1137-C-G]
1.6 The knowledge of who the 2'' party/ client or the broker
is, is not relevant at all. While the screen based trading system E
keeps the identity of the parties anonymous it will be too naive
to rest the final conclusions on said basis which overlooks a
meeting of minds elsewhere. Direct proof of such meeting of
minds elsewhere would rarely be forthcoming. The test, is one of
preponderance of probabilities so far as adjudication of civil F
liability arising out of violation of the Act or the provisions of the
Regulations framed thereunder is concerned. Prosecution under
Section 24 of the Act for violation of the provisions of any of the
Regulations, of course, has to be on the basis of proof beyond
reasonable doubt. The conclusion has to be gathered from various
circumstances like that volume of the trade effected; the period G
of persistence in trading in the particular scrip; the particulars of
the buy and sell orders, namely, the volume thereof; the proximity
of time between the two and such other relevant factors. The fact
that the broker himself has initiated the sale of a particular
quantity of the scrip on any particular day and at the end of the H
SUPREME COURT REPORTS [2016] 1 S.C.R.
A day approximately equal number of the same scrip has come back
to him; that trading has gone on without settlement of accounts
i.e. without any payment and the volume of trading in the illiquid
scrips, all, should raise a serious doubt in a reasonable man as to
whether the trades are genuine. The failure of the brokers/sub-
brokers to alert themselves to this minimum requirement and
B
their persistence in trading in the particular scrip either over a
long period of time or in respect of huge volumes thereof, would
not only disclose negligence and lack of due care and caution but
would also demonstrate a deliberate intention to indulge in trading
beyond the forbidden limits thereby attracting the provisions of
c the FUTP Regulations. The difference between violation of the
Code of Conduct Regulations and the FUTP Regulations would
depend on the extent of the persistence on the part of the broker
in indulging with transactions of the kind that has occurred in the ,
instant cases. Upto an extent such conduct on the part of the
brokers/sub-brokers can be attributed to negligence occasioned
D
by lack of due care and caution. Beyond the same, persistent
trading would show a deliberate intention to play the market.
The dividing line has to be drawn on the basis of the volume of
the transactions and the period of time that the same were indulged
in. In the instant cases it is clear from all these surrounding facts
E and circumstances that there has been transgressions by the
respondents beyond the permissible dividing line between
negligence and deliberate intention. [Para 26)(1137-H;
1138-A-H]
1.7 The stage at which the monetary penalty was imposed
F on the two other brokers indulging in circular trading is prior to
any determination of liability of the said two brokers who did not
contest the charges. In the case of Mis MNC Lmt. the stage has
advanced far beyond the above and had culminated in operative
findings against the said sub-broker. The imposition of monetary
penalty in the second and third' category cases of for violation of
G the FUTP Regulations cannot be a basis for alteration of the
punishment of suspension imposed on MNC Ltd to one of
monetary penalty. In this regard, provisions of Section 15J of the
SEBI Act has to be kept in mind and if the primary authority had
thought it proper to impose different penalties in different cases
H involving different set of facts, interference should not be made
SEBI v. KISHORE R. AJMERA 1123
in instant appeals. [Para 30)(1139-H; 1140-A-C] A
1.8 As regards other appeals the orders of th\l Securities
Appellate Tribunal is set aside and the orders and penalty imposed
on the respondents-brokers by the respective orders of the Whole
Time Member of the SEBI is restored. [Para 31)(1140-D)
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2818 B
OF2008
From the Judgment and Order dated 05.02.2008 of the Securities
Appellate Tribunal, Mumbai in Appeal No. 13 of2007.
WITH c
C. A. NO. 8769 OF 2012
C. A. NO. 6719 OF 20t3
'
C. A. NOS. 252 AND 282 OF 2014
Chander Uday Singh, Sr. Adv., Pratap Venugopal, Ms. Surekha
Raman, Purushottam K. Jha, Ms. Niharika, (For Mis. K. J. John & Co.) D
for the Appellants.
Abbay A. Jena, Ranjit B. Raut, (For Ms. Bina Gupta), Rajesh
Kumar, Neeraj Vasu, Devavrath Anand, R. K. Srivastava, Deepak Shah,
Senthil Jagadeesan, Govind Manoharan, Ms. Suchitra Kumbhat for the
Respondent. E
The Judgment of the Court was delivered by
RANJAN GOGOi, J. I. The core question of law arising in this
group ofappeals being similar and the facts involved being largely identical,
all the appeals which were heard analogously are being decided by this
common order. F
2. The question of law arising in this group of appeals may be
summarized as follows.
What is the degree of proof required to hold brokers/sub-brokers
liable for fraudulent/ manipulative practices under the Securities G
and Exchange Board oflndia(Prohibition of Fraudulent and Unfair
Trade Practices Relating to Securities Market) Regulations and/
or liable for violating the Code of Conduct specified in Schedule
II read with Regulation 9 of the Securities and Exchange Board
of India (Stock-Brokers and Sub-Brokers) Regulations, 1992?
(hereinafter referred to as the 'Conduct Regulations, 1992'). H
1124 SUPREMF t OURT REPORTS [2016] 1 S.C.R.
A 3. At the outset facts of each case on which the above question of
law have arisen may be taken specific note of.
Civil Appeal No. 2818 of 2008 (SEBI Vs. Kishore R.
Ajmeral
The respondent-Kishore R. Ajmera is a broker registered with
B the Bombay Stock Exchange. Mis. Prakash Shantilal & Company is
one of the sub-brokers through whom the two clients, namely, Mayekar
Investments Pvt. Ltd. and M/s. K.P. Investment Consultancy are alleged
to have indulged in matching trades thereby creating artificial volumes in
the scrip of one Malvica Engineering Ltd. (MEL) during the period
c 20.12.1999 to 31.3.2000 and 7.8.2000 to 31.8.2000. The gravamen of
the allegations levelled against the sub-broker for which the respondent
has been held to be vicariously liable is that during the aforesaid period
the two clients, who are related to each other through majority
shareholding in the hands of common family members, had through the
sub-broker bought 66,300 shares and sold 77,700 shares of MEL during
D the first period and a total of 32,500 and 28,800 shares of MEL,
respectively, during the second period. Not only both the clients were
related but they were also beneficiaries of the allotment of the shares
made directly by the parent company i.e. MEL. The said allotment
incidentally was made out of the shares that were forfeited on account
E of failure to pay call money by the allottees, following a public offer.
The scrip in question was a illiquid scrip where the volume of trading is
normally minimal. A note of caution had also been struck by the Bombay
Stock Exchange by circulating an advice requiring brokers to be aware
ofanyunnatural (voluminous)trading in any such illiquid scrip. Yet, the
transaction in question was gone through by the sub-broker acting through
F the terminal of the broker i.e. respondent-Kishore R. Ajmera. It is on
the said facts that charges of negligence, lack of due care and caution
were levelled against the sub-broker and in turn against the broker.
The said charges were found to be proved after holding a due
enquiry and by complying with all the procedural requirements under the
G Securities and Exchange Board oflndiaAct, 1992 (hereinafter for short
'the SEBI Act'), Securities and Exchange Board oflndia (Stock Brokers
and Sub-Brokers) Regulations, 1992 (hereinafter Code of Conduct
Regulations, 1992) and the Securities and Exchange Board of India
(Prohibition of Fraudulent and Unfair Trade Practices Relating to the
Securities Market) Regulations, 2003 (hereinafter for short the 'FUTP
H
SEBI v. KISHORE R. AJMERA [RANJAN GOGOi, J.] 1125
Regulations 2003 '). On completion of all aforesaid procedural A
requirements the Whole Time Member, SEBI found the charges against
the broker to be established and under the provisions of Section 19 of
the SEBI Act read with Regulation 13(4) ofthe·SEBI (Procedure for
Holding Enquiry by Enquiry Officer and Imposing Penalty)Regulations,
2002 (as then in force) penalty of suspension of registration of the
B
respondent as a broker for a period of four months was ordered.
4. Aggrieved, the respondent filed an appeal before the Securities
Appellate Tribunal under Section I 5T of the SEBI Act. The aforesaid
appeal was answered by the learned Tribunal by order dated 05 .02.2008
by holding that in the absence of any direct proof or evidence showing
the involvement of the sub-broker in allegedly matching the trades and c
thereby creating artificial volumes oftrading resulting in unnatural inflation
of the price of the scrip, the charges are not substantiated. The penalty
imposed was accordingly interfered with. It is against the said order that
the SEBI has filed the present appeal under Section I 5Z of the SEBI
Act. D
Civil Appeal No.6719 of 2013 CSEBI Vs. Ess Ess
Intermediaries Pvt. Ltd.), Civil Appeal No.252 of 2014 CSEBI
Vs. Mis. Rajendra Jayantilal Shah, Civil Appeal No.282 of 2014
CSEBI Vs. Mis. Rajesh N. Jhaveril
5. The scrip involved in these appeals is one ofM/s. Adani Export E
.. Ltd. (AEL) and the period of investigation involved is 09.07.2004 to
14.01.2005 and 08.08.2005 to 09.09.2005. The respondents are all sub
brokers who are alleged to have synchronized trades in respect of a
huge number of shares during the periods in question. The voluine of
shares traded during the two periods in questions is best evident from F
the following extracts of the orders of the Whole Time Member passed
in each of the cases.
ESS ESS INTERMEDIARIES PVT. LTD.
"During the course of the said investigation, it was observed
that the Noticee was one of the sub-brokers who had traded G
substantially in the scrip ofAEL during the first and the second
period for the said client. The Noticee, for the said client, has
allegedly' executed synchronized trades for 1,15,870 shares
of AEL during the period from July 9, ~004 to July 27, 2004.
Further. the said client also entered into self trades for 52,910
H
1126 SUPREME COURT REPORTS [2016) I S.C.R.
A shares. The said client also entered into structured trades
wherein he reversed the trades with particular c/iel11s of other
brokers. A total trading of 1,29,422 shares was executed by
the said client in such manner between July 16, 2004 and
July 2 7, 2004. This quantity accounted for 12.5% of the total
traded quantity during this period. It is further observed that
B
during the period between July 28, 2004 to January 14, 2005
the said client is alleged to have entered synchronized trading
for buying 83,45,924 shares and selling 87,60,410 shares.
The said client was part of the group which executed trades
of 3,48,53,139 shares during the above period which is
c around 51% of total traded volumes. Of these trades
3,04,68, 762 shares (87.39% of their trades) appear to be
synchronized.
It is further alleged that the said client along with few other
entities executed reverse trades to the extent of 38,21,269
D shares during the second period. It is alleged that the said
client along with few other entities traded in a manner such
that orders for 28,22,240 shares appear to be synchronized
as the buy and sell a,rders were placed within tiine gap of I
minute. Moreover, for 18,38,077 shares buy and sell order
qua11tity and rate identical and placed within a time gap of 1
E minute from each other. Jn case of 116 trades for 2183102
shares the time gap between the buy and sell orders was
between 0-10 seconds. The said client's contribution to the
alleged manipulation is to the extent of 13,21,582 shares on
buy side and 15,04,408 on the sell side. Similarly on NSE,
F for the same period the said client has allegedly entered into
synchronized trades to the extent of 12,25,260 shares."
MIS. RAJENDRA JAYANTILAL SHAH
"During the course of the said investigation, it was observed
that the Noticee was one of the sub-brokers who had traded
G substantially in the scrip of AEL during the first period for
the said client. The Noticee, for the said client, has allegedly
executed synchronized trades for 1,17,601 shares of AEL
during the period from July 9, 2004 to July 27, 2004. The
said client also entered into structured trades wherein he
H reversed the trades with particular clients of other brokers. It
SEBI v. KISHORE R. AJMERA [RANJAN GOGOi, J.] 1127
was observed that during the period between July 28, 2004 A
to January 14, 2005 the said client is alleged to have entered
synchronized trading for buying 66,20, 117 shares and selling
67,44,545 shares. The said client was part of the group which
executed trades of 3,48,53,139 shares during the above period
which is around 51% of total traded volumes. Of these trades
B
3,04,68, 762 shares (87.39% of their trades) appear to be
_synchronized. "
MIS. RAJESH N. JHAVERI
"Duri11g the course of the said i11vestigation, it was observed
that the Noticee was one of the sub-brokers who had traded C
substantially in the scrip of ASL during the first-period for
the said clie11t. The Noticee, for the said client, has allegedly
executed synchronized trades for 1,15,870 shares of AEL
during the period from July 9, 2004 to July 27, 2004. The
said client was part of the group which executed trades of
3,48,53,139 shares during the above period which is around D
51% of total traded volumes. Of these trades 3,04,68, 762
shares (87.39% of their trades) appear to be synchronized."_
6. It is further alleged that in respect of all the transactions buy
and sell orders were placed within a time gap ofO to 60 seconds. The
volume of trading in the illiquid scrip being very high and the sequence of E
the buy and sell orders being in quick succession of time, the respondents
have been held guilty of contravening Regulations 4(1),4(2)(a), 4(2)(b),
4(2)(e), 4(2)(g) and 4(2)(n) of the FUTP Regulations, 1995 and also the
provisions of the Code of Conduct Regulations, 1992. Accordingly,
monetary penalty ofRs.9,00,000/- for violation ofFUTP Regulations, F
2003 and Rs.1,00,000/- for violation of the Code of Conduct Regulations
have been imposed.
7. In appeal, the Tribunal by the impugned order dated 19.06.2013
had taken the view that the allegations of fraud under the FUTP
Regulations, 2003 can be established only on the basis of clear, G
unambiguous and unimpeachable evidence which is not available in the
instant case. Accordingly, the penalty imposed under the FUTP
regulations had been interfered with by the learned Tribunal while the
penalty for violation of the provisions ofthe Code of Conduct Regulation
has been maintained.
H
1128 SUPREME COURT REPORTS [2016] 1 S.C.R.
A 8. The learned Tribunal had disposed of two other appeals before
it by following the order passed in the case of Mis. Ess Ess Intermediaries
Pvt. Ltd. (respondent in Civil Appeal No. 6719of2013). Consequently
the 3 (three) Civil Appeals in question have been filed before this Court.
Civil Appeal No. 8769 of 2012 (SEBI Vs. Networth Stock
B Broking Ltd.)
9. The scrip involved in the present case is of a company registered
as G.G. Automotive Gears Ltd. and the period of investigation undertaken
is 1.8.2002 to 16. l 0.2002. The allegation against the respondent is that
alongwith three other member brokers of the Bombay Stock Exchange
c the respondent had indulged in circular trading of the scrip on behalf of
one Indumati Goda. It is alleged that orders to buy and sell in respect of
the scrip were placed by one Shrish Shah on behalf of the client Indumati
Goda and such circular trading amongst the 4 brokers continued for a
period of38 days resulting in a huge and voluminous trading in the illiquid
shares thereby artificially raising its price in the market. The said
D allegations, on due enquiry, have been found to be established by the
order dated 27.12.2011 of the Whole Time Member ofSEBI. Holding.
the respondent liable for contravention of Regulations 4(a), 4(b), 4(c)
and 4(d) of the FUTP Regulations 1995 and the Code of Conduct
Regulation, 1992, suspension of membership of the respondent for a
E period of one month had been ordered. The said findings and the penalty
imposed have been reversed by the learned Tribunal by the impugned
order dated 19.06.2012 giving rise to the instant appeal at the instance of
the SEBI.
JO. There are certain relevant facts which have to be taken note
F of with regard to the present case, at this stage.
(i) Circular and synchronized trading per se is not prohibited
and in fact is regulated by the SEBI regulations in force.
(ii) The client lndumati Goda though required under the relevant
norms had not appeared before the respondent at the time
G of registration for opening an account. The required
documents were submitted by one Shri Shirish Shah on his
behalf.
(iii) Though proceedings had been 'initiated against Smt.
Indumati Goda she has been exonerated of all charges
H levelled in respect of the transactions in question.
SEBI v. KISHORE R. AJMERA [RANJAN GOGOi, J.] 1129
(iv) Proceedings against Shri Shirish Shah had also been initiated A
and in the said proceedings Shri Shah had been found liable
and had been appropriately dealt with.
(v) The circular trading involved four brokers and in respect of
two of them, monetary penalty has been imposed. The third
broker in respect of whom suspension has been ordered B
has not challenged the penalty imposed.
(vi) The modus operandi of the circular trading involved
commencement of trading on a particulacday by a sale
made by one broker to a second and continuation of such
sale in a circular manner until at the end of the day the c
same or substantially the same number of shares would
come back to the first broker who had initiated the sale.
This went on for 38 days.
(vii) The time difference between buy and sell orders was 0 to
60 seconds in most cases. D
11. It is on these facts that after due enquiry and compliance with
the laid down procedure that the findings of liability have been recorded
and penalty imposed, as noticed above. In appeal, the learned Tribunal
took the view, as in the earlier cases, that there is no direct material to
. show that the respondent sub-broker was aware of the identity of the E
client on whose behalf the transactions were being carried out. Jn fact,
'the consistent view of the learned Tribunal in all the cases, including the
present one, has been that "in an on screen based trading it is not possible
for the broker to know who the counter party is at the time the trade is
~eing executed."
F
12. The further finding of the learned Tribunal in the present case
is that though it was urged on behalf of SEBI that trading to the extent
(volume) involved in the pr~sent case in. case of an'·illiquid scrip is
sufficient to indicate gross irregularities and violations, what was ignored
is that, "the client had been regularly trading in the same fashion in
as many as 25 different scrips and since inception, the client :S trading G
pattern was primarily by way of day trading whereby she bought
and sold equal quantities in respective scrips in the. course of the
day. All payments were made from her bank account and even for
her delivery based trades, deliveries were madefrom he'r demat
account. .,
H
1130 SUPREME COURT REPORTS (2016] I S.C.R.
A 13. The learned Tribunal has further held that in the present case
the principles of natural justice had been violated on account of the fact
that the entire of the trade log as distinct from the extracts therefrom
had not been furnished to the respondent; so also the statements ofSmt.
Indumati Goda and Shri Shirish Shah and that the same had caused
prejudice to the respondent.
B
RELEVANT PROVISIONS OF THE SEBI ACT AND
THE REGULATIONS
14. Section 12-A contained in Chapter V-A of the SEBI Act deals
with "Prohibition of manipulative and deceptive devices, insider trading
c and substantial acquisition of securities or control" and reads as follows:
"12-A. Proliibition of manipulative and deceptive devices,
insider trading and substantial acquisition of securities or
contro/.-No person slia// directly or indirectly-
(a) use or employ. in connection with the issue, purchase
D or sale of any securities listed or proposed to be listed
on a recognised stock exchange, any manipulative or
deceptive device or contrivance in contravention of the
provisions of this Act or the rules or the regulations
made thereunder;
E (b) employ any device, scheme or artifice to defraud in
connection with issue or dealing in securities which are
listed or proposed to be listed on a recognised stock
exchange;
(c} engage in any act, practice, course of business which
F operates or would operate as fraud or deceit upon any
person, in connection with the issue, dealing in
securities which are listed or proposed to be listed on a
recognised stock exchange, in contravention of the
provisions of this Act or the rules or the regulations
made thereunder;
G
(d) engage in insider trading;
(e) deal in securities while in possession of material or non-
public information or communicate such material or non-
public information to any other person, in a manner
H
SEBI v. KISHORE R. AJMERA [RANJAN GOGOi, J.] 1131
which is in contravention of the provisions of this Act A
or the rules or the regulations made thereunder;
(j) acquire control of any company or securities more than
the percentage of equity share capital of a company
whose securities are listed or proposed to be listed on a
recognised stock exchange in contravention of the B
regulations made under this Act. "
15. Section 15-HA of the Act which deals with penalty for
fraudulent and unfair trade practices and Section I SJ which lay down
the factors to be taken into account while adjudging the quantum of
penalty reads as follows : , C
"15-HA. Penalty for fraudulent and unfair trade practices.-
If any person indulges in fraudulent and unfair trade practices
relating to securities he shall be liable to a penalty of twenty-five
crore rupees or three times the amount of profits made out of
such practices, whiche.ver is higher." D
"lSJ. Factors to be taken into account by the adjudicating
officer.- ·While adjudging the quantum ofpenalty under section
15-1, the adjudicating officer shall have due regard to the
following factors, namely :-
(a) the amount of dispnoportionate gain or unfair E
advantage, wherever quantifiable, made as a result of
the default;
(b) the amount of loss caused to an investor or group of
investors as a result of the ,default;
F
(c) the respective nature of the default. ".
16. Section 12-A has to be read along with the provisions ofFUTP
Regulations, 2003, SEBI (Stock-Brokers and Sub-Brokers) Regulations,
1992 and the SEBI (Procedure for Holding Enquiry by Enquiry Officer
and imposing Penalty) Regulations, 2002. Regulation 3 and 4 of the FUTP
Regulations reads as follows: G
"3. Proilibition of certain tlealings in securities.-No person
shall directly or indirectly-
(a) buy, sell or otherwise deal in securities in a fraudulent
manner;
H
1132 SUPREME COURT REPORTS (2016] l S.C .R.
A (b) use or employ, in connection with issue, purchase or
sale of any security listed or proposed to be listed in a
recognised stock exchange, any manipulative or
deceptive device or contrivance in contravention of the
provisions of the Act or the rules or the regulations made
thereunder;
B
(c) employ any device, scheme or artifice to defraud in
connection with dealing in or issue of securities which
are listed or proposed to be listed on a recognised stock
exchange;
c (d) engage in any act, practice, course of business which
operates or would operate as fraud or deceit upon any
person in connection with any dealing in or issue of
securities which are listed or proposed to be listed on a
recognised stock exchange in contravention of the
provisions of the Act or the rules and the regulations
D made thereunder:
4. Prohibition of manipulative, fraudulent and unfair trade
practices.-(]) Without prejudice to the provisions of
Regulation 3, no person shall indulge in a fraudulent or an
unfair trade practice in securities.
E
(2) Dealing in securities shall be deemed to be a fraudulent
or an unfair trade practice if it involves fraud and may include
all or any of the following, namely-
(a) indulging in an act which creates false or misleading
appearance of trading in the securities· markef,' ·
F
(b)-(d) • • •
(e) any act or omission amounting to manipulation of the
price of a security;
(j) publishing or causing to publish or reporting or causing
G to report by a person dealing in securities any
information which is not true or which he does not
believe to be true prior to or in the course of dealing in
securities;
(g)-(j) • • •
H
SEBI v. KISHORE R. AJME1lA [RANJAN GOGOi, J.] 1133
(k) an advertisement that is misleading or that contains A
information in a distorted manner and which may
influence the decision of the investors;
(1)-(q) • • •
(r) ·planting false or misleading news which may induce
sale or purchase of securities. " B
Regulation 12 of the FUTP Regulation also contemplates
suspension or cancellation of registration of intermediaries. For the sake
ofbrevity the provision (Regulation 12) is not being quoted.
17. The SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 c
in Schedule II provides for Code of Conduct for stock brokers in the
following terms :-
"SCHEDULE II
Securities and Exchange Board of India
D
(Stock Brokers and Sub-brokers)
Regulations, 1992
CODE OF CONDUCT FOR STOCK BROKERS
[Regulation 9}
E
A. General.
(/) Integrity: A stock-broker. shall maintain high standards
of integrity, promptitude and fairness in the conduct of all his
business.
(2) Exercise of due skill and care : A stock-broker shall act F
with due skill, care and diligence in the conduct of all his
business.
(3) Manipulation.: A stock-broker shall not indulge in
manipulative, fraudulent or deceptive transactions or schemes
or spread rumours with a view to distorting market equilibrium G
or making personal gains.
(4) Malpractices: A stock-broker 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
H
1134 SUPREME COURT REPORTS [2016] l S.C.R.
A interference with the fair and smooth functioning of the
market. A stockbroker shall not involve himself in excessive
speculative business in the market beyond reasonable levels
not commensurate with his financial soundness. ·
(5) Complia11ce with statutory requireme11ts: A stock-broker
B shall abide by all the provisions of the Act and the rules,
regulations issued by the Government, the Board and the Stock
Exchange from time to time as may be applicable lo him. "
18. The Code of Conduct for Stock Brokers, inter alia, lays down
that the stock-broker shall maintain high standards ofintegrity, promptitude
c and fairness in the conduct of all investment business and shall act with
due skill, care and diligence in the conduct of all investment business.
The code also enumerates different shades of the duties of a stock-
broker towards the investor, details of which are not being extracted
herein except to say that all such duties pertain to the high standards of
integrity that the stock-broker is required to maintain in the conduct of
D his business.
19. Chapter VI of the Conduct Regulation, 1992 deals with liability
for contravention of the provisions of the Act, Rules or the Regulations
in the following terms:-
E "CHAPTER VI
PROCEDURE FOR ACTION IN CASE OF DEFAULT
[Liability for contravention of the Act, rules or the regulations-
25. A stock broker or a sub-broker who co11tmvenes a11y of
the provisio11s of the Act, rules or regulatio11s framed
F
thereu11der shall be liable for any 011e or more ofthe following
actio11s-
(i) Monetary penalty under Chapter VIA of the Act.
(ii) Penalties as specified under 59{Chapter V of the
G Securities and Exchange Board of India (Intermediaries)
Regulations, 2008} including suspension or
cancellation of certificate of registration as a stock
broker or a sub-broker,
(iii) Prosecution under section 24 of the Act.
H
SEBI v. KISHORE R. AJMERA [RANJAN GOGOi, J.] 1135
LIABLE FOR MONETARY PENALTY A
26. A stock broker or a sub-broker shall he liable for monetary
penalty in respect of the following violations, namely-
(i) to (x) * * *
(xi) Indulging in fraudulent and unfair trade practices
relatin~ to securities.
B
(xii) to (xv) • • •
(xvi) Failure to exercise due skill, care and diligence."
20. Before embarking upon the necessary discussions, we would
like to record our views on a somewhat unclear if not a confused picture
that emanates from parallel provisions contained in the Act and the c
Regulations framed thereunder, as referred to above. This is particularly
in the context of the power of imposition of penalty on determination of
liability either for manipulative or fraudulent practices or for violation of
the Code of Conduct Regulation, 1992. The different Regulations including
·the Regulations that prescribe the procedural course, namely, SEBI D
(Procedure for Holding Enquiry by Enquiry Officer and imposing Penalty)
Regulations 2002 and the successor Regulation i.e. SEBI (lntennediaries)
Regulations 2008 contain identical and parallel provisions with regard to
imposition of penalty resulting in myriad provisions dealing with the same
situation. A comprehensive legislation can bring about more clarity and
E
certainty on the norms governing the security/capital market and,
therefore, would best serve the interest of strengthening and securing
the capital market.
21. The SEBI Act and the Regulations framed thereunder are
intended to protect the interests of investors in the Securities Market
which has seen substantial growth in tune with the parallel developments F
in the economy. Investors' confidence in the Capital/Securities Market
is a reflection of the effectiveness of the regulatory mechanism in force.
All such measures are intended to preempt manipulative trading and
check all kinds of impermissible conduct in order to boost the investors'
confidence in the Capital market. The primary purpose of the statutory G
enactments is to provide an environment conductive to increased
participation and investment in the securities market which is vital to the
growth and development of the economy. The provisions of the SEBI
Act and the Regulations will, therefore, have to be understood and
interpreted in the above light.
H
1136 SUPREME COURT REPORTS [2016] l S.C.R.
A 22. It is a fundamental principle of law that proofofan allegation
levelled against a person may be in the form of direct substantive evidence
or, as in many cases, such proof may have to be inferred by a logical
process of reasoning from the totality of the attending facts and
circumstances surrounding the allegations/charges made and levelled.
B While direct evidence is a more certain basis to come to a conclusion,
yet, in the absence thereof the Courts cannot be helpless. It is the
judicial duty to take note of the immediate and proximate facts and
circumstances surrounding the events on which the charges/allegations
are founded and to reach what would appear to the Court to be a
reasonable conclusion therefrom. The test would always be that what
C inferential process that a reasonable/prudent man would adopt to arrive
at a conclusion.
23. Let us apply the aforesaid test to the facts of the present
cases before us wherein admittedly there in no direct evidence
forthcoming. The first relevant fact that has to be taken note of is that
D the scrips in which trading had been done were of illiquid scrips meaning
thereby that such scrips were not listed in the Bombay Stock Exchange
and, therefore, was not a matter of everyday buy and sell transactions.
While it is correct that trading in such illiquid scrips is per se not
impermissible, yet, voluminous trading over a period oftime in such scrips
E is a fact that should attract the attention of a vigilant trader engag~d/. ·
engaging in such trades. The above would stand fortified b.y the note of
caution issued by the Bombay Stock Exchange in the fon)I of a notice/
memorandum alerting its members with regard to the necessity of
exercising care and caution in case of high volume of trading in illiquid
scrips, as already noted.
F 24. Insofar as first case (C.A. No.2818 of2008 SEBI Vs. Kish ore
R. Ajmera) is concerned the proved facts are as follows:
(i) Both the clients are known to each other and were related
entities.
G (ii) Th is fact was also known to the sub-broker and the
respondent - broker.
(Iii) The clients through the sub-broker had engaged in mutual
buy and sell trades in the scrip in question, volume of which
trade was significant, keeping in mind that the scrip was an
illiquid scrip.
H
SEBI v. KISHORE R. AJMERA [RANJAN GOGOi, J.] 1137
Apart from the above there is no other material to hold either lack A
of vigilance or bona fides on the part of the sub-broker so as to make
respondent-broker liable. An irresistible or irreversible inference of
negligence/lack of due care etc., in our considered view, is not established
even on proof of the primary facts alleged so as to make respondent-
broker liable under the Conduct Regulations, 1992 as has been held in
B
the order of the Whole Time Member, SEBI which, according to us, was
rightly reversed in appeal by the Securities Appellate Tribunal.
25. This will take us to the second and third category of cases i.e.
Mis Ess Ess Intermediaries Pvt. Ltd., Mis Rajesh N. Jhaveri and M/
s Rajendra Jayantilal Shah [second category] and M/s Monarch Networth
Capital Limited (earlier known as Networth Stock Broking Limited) [third c
category]. In these cases the volume of trading in the illiquid scrips in
question was huge, the extent being set out hereinabove. Coupled with
the aforesaid fact, what has been alleged and reasonably established, is
that buy and sell orders in respect of the transactions were made within
a span of 0 to 60 seconds. While the said fact by itself i.e. proximity of D
time between the buy and sell orders may not be conclusive in an isolated
case such an event in a situationwhere there is a huge volume of trading
.. can reasonably-point to some kind of a fraudulent/manipulative exercise
with prior meeting of minds. Such meeting of minds so as to attract the
liability of the broker/sub-broker may be between the broker/sub-broker
and the client or it could be between the two brokers/sub-brokers engaged E
in the buy and sell transactions. When over a period of time such
transactions had been made between the same set of brokers or a group
of brokers a conclusion can be reasonably reached that there is a
concerted effort on the part of the concerned brokers to indulge in
·synchronized trades the consequence of which is large volumes of F
fictitious trading resulting in the unnatural rise in hiking the price/value
of the scrip(s). It must be specifically taken note of herein that the trades
in question were not "negotiated trades" executed in accordance with
the terms of the Board's Circulars issued from time to time. A negotiated
trade, it is clarified, invokes consensual bargaining involving synchronizing
of buy and sell orders which will result in matching thereof but only as G
. per permissible parameters which are programmed accordingly.
26. It has been vehemently argued before us that on a screen
based trading the i.dentity of the 2"' party be it the client or the broker is
not known to the first party/client or broker. According to us, knowledge
of who the 2"' party/ client or the broker is, is not relevant at all. While H
1138 SUPREME COURT REPORTS [2016] l S.C.R.
A the screen based trading system keeps the identity of the parties
anonymous it will be too naive to rest the final conclusions on said basis
which overlooks a meeting of minds elsewhere. Direct proof of such
meeting of minds elsewhere would rarely be forthcoming. The test, in
our considered view, is one of preponderance of probabilities so far as
adjudication of civil liability arising out of violation of the Act or the
B
provisions of the Regulations framed thereunder is concerned.
Prosecution under Section 24 of the Act for violation of the provisions of
any of the Regulations, of course, has to be on the basis of proof beyond
reasonable doubt.
The conclusion has to be gathered from various circumstances
c like that volume of the trade effected; the period of persistence in trading
in the particular scrip; the particulars of the buy and sell orders, namely,
the volume thereof; the proximity of time between the two and such
other relevant factors. The fact that the broker himself has initiated the
sale of a particular quantity of the scrip on any particular day and at the
D end of the day approximately equal number of the same scrip has come
back to him; that trading has gone on without settlement of accounts i.e.
without any payment and the volume of trading in the illiquid scrips, all,
should raise a serious doubt in a reasonable man as to whether the trades
are genuine. The failure of the brokers/sub-brokers to alert themselves
to this minimum requirement and their persistence in trading in the
E particular scrip either over a long period of time or in respect of huge
volumes thereof, in our considered view, would not only disclose
negligence and lack of due care and caution but would also demonstrate
a deliberate intention to indulge in trading beyond the forbidden limits
thereby attracting the provisions of the FUTP Regulations. The difference
F between violation of the Code of Conduct Regulations and the FUTP
Regulations would depend on the extent of the persistence on the part of
the broker in indulging with transactions of the kind that has occurred in
the present cases. Upto an extent such conduct on the part of the brokers/
sub-brokers can be attributed to negligence occasioned by lack of due
care and caution. Beyond the same, persistent trading would show a
G deliberate intention to play the market. The dividing line has to be drawn
on the basis of the volume of the transactions and the period of time that
the same were indulged in. In the present cases it is clear from all these
surrounding facts and circumstances that there has been transgressions
by the respondents beyond the permissible dividing line between
H negligence and deliberate intention.
SEBI v. KISHORE R. AJMERA [RANJAN GOGOi, J.] l 139
27. Insofar as the plea of violation of principles of natural justice, A
as raised on behalf of the respondent in C.A.No.28212014 (Monarch
Networth Capital Ltd.) is concerned, we do not think the same to be
justified in any manner. The relevant extracts of the trade log which
have been perused by us, in view of the clear picture disclosed with
regard to the particulars of the offending transactions, must be held to
B
be sufficient compliance of the requirement of furnishing adverse
materials to the affected party. It is not the case of the respondents that
such trading in the scrips in question had been a regular feature all along.
Insofar as the statement ofindumati Gowda is concerned, it is the stand
of the SEBI that the same was not relied upon to come to the impugned
conclusions and findings. The statement ofShirish Shah, who admittedly c
was behind the manipulative practices in question through the brokers,
was definitely not the foundation of the impugned findings recorded by
the Whole Time Member ofSEBI. The statement ofShirish Shah, even
ifnot furnished to the respondent brokers, would not materially alter the
situation inasmuch as it is the liability of the respondent-brokers, on
D
account of their failureto correct the huge irregularities that were going
on through their terminals, that was the subject matter of consideration
of the Whole Time Member.
28. The fact that on behalf of the client lndumati Gowda similar
transactions were entered into in respect of other illiquid scrips which
did not disclose any irregularities can hardly be a ground to overlook E
what has happened in case of the scrip involved in which the respondent
Monarch Networth Capital Limited had indulged in.
29. There is yet another argument advanced on behalf of the
respondent - Monarch Networth Capital Limited, namely, that two of
the brokers who were allegedly involved in circular trading were let off F
with monetary penalty. It is also argued that in case of Mis Ess Ess
Intermediaries Pvt. Ltd., Mis Rajesh N. Jhaveri and Mis Rajendra
Jayantilal Shah [second category] monetary penalty has been imposed
for indulging in manipulative trading under the FUTP Regulations. On
the said basis, it is submitted that a lesser penalty of monetary compensation G
would. be justified.
30. We disagree. with the above contention. The stage at which
the monetary penalty was imposed on the two other brokers indulging in
circular trading is prior to any determination of liability of the said two
brokers who did not contest the charges. In the case of Mis Monarch
H
1140 SUPREME COURT REPORTS (2016] I S.C.R.
A Networth Capital Limited the stage has advanced far beyond the above
and had culminated in operative findings against the said sub-broker.
The imposition of monetary penalty in the case of Mis. Ess Ess
Intermediaries Pvt. Ltd., Mis. Rajesh N. Jhaveri and Mis. Rajendra
Jayantilal Shah [second category] for violation of the FUTP Regulations
cannot be a basis for alteration of the punishment of suspension imposed
B
on Mis. Monarch Networth Capital Limited to one of monetary penalty.
In this regard, provisions of Section !SJ of the SEBI Act has to be kept
in mind and if the .primary authority had thought it proper to impose
differenfpenalties in different cases involving different set of facts, we
do not see how and why interference should be made in present appeals.
c 31. In the light of the above discussions, we dismiss the Civil Appeal
No.2818 of2008 (SEBI Vs. Kishore R.Ajmera) and affirm the order
dated 05.02.2008 passed by the Securities Appellate Tribunal, Mumbai.
Insofar as the remaining appeals are concerned, we allow the
same and set aside the orders of the Securities Appellate Tribunal,
D Mumbai passed in each of the appeals and restore the orders and penalty
imposed on the respondents - brokers by the respective orders of the
Whole Time Member of the SEBI.
Nidhi Jain Appeals disposed.
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