Ikab Securities & Investment Ltd vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

The appellant has challenged the order dated July 30, 2020 passed by the Adjudicating Officer (‘AO’ for short) of the Securities and Exchange Board of India (‘SEBI’ for short) wherein the appellant has been imposed a penalty of Rs. 60 lakh under Section 15HA for violation of Section 12A (a), (b) and (c) of the SEBI Act, 1992 read with Regulation 3 (a), (b), (c) and (d) as well as 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘PFUTP Regulations’ for short).

A show cause notice dated March 20, 2014 was issued to the appellant along with three other noticees to show cause as to why an inquiry should not be held and penalty should not be imposed under Section 15HA and 15HB of the SEBI Act. The show cause notice alleged that three noticees, Nilesh Kapadia, Dharmesh Shah, Ashok Nayak along with others acted as a group to front run HDFC trades thereby defrauding HDFC investors and thereby violated Section 12A (a), (b) and (c) of the SEBI Act and Regulation 3 (a), (b), (c) and (d) as well as 4(1) of the PFUTP Regulations. Insofar as the appellant is concerned the charge leveled against the appellant who is a broker is, that it aided and abetted the execution of the front running trades by the other noticees through its dealer Bankim Shah. For facility, the charge against the appellant as stipulated in paragraph 32 of the show cause notice is extracted here under:-

“32. It is observed that Bankim Shah was the director and dealer of IKAB Securities and Investment Limited. All the Front run trades were placed by Bankim as instructed by Nilesh to Dharmesh. The front run trade details were confirmed back to Nilesh by Dharmesh. The involvement of a director of the broking entity confirms the fact that the broking entity aided and abetted its clients for execution of front run trades which includes matched trades and creation of the misleading appearance in the securities market. Further, 109 instances of front run trades could not be executed unless the broking entity had aided and abetted its clients. Therefore, it is alleged that the broker IKAB Securities & Investment Limited had aided and abetted Nilesh, Dharmesh, Vivek, Rashi Investments, Ashok and Bankim Shah who have acted as a group to front run HDFC trades and have defrauded the HDFC investors and is therefore alleged to have violated Section 12A (a), (b) and (c) of SEBI Act, Regulations 3 (a), (b), (c) and (d), 4(1) and 4(2)(a) of PFUTP Regulations and Regulation 7 of Broker Regulations read with Clause A of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 of the Broker Regulations.”

The AO after considering the material evidence on record and after considering the reply of the appellant and other noticees found that Noticee nos. 1and 2 had perpetrated a scheme of front running trades of HDFC with the help of Bankim Shah and that Noticee nos. 1 and 2 employed a scheme to defraud the investors of HDFC. The AO also found that the trades and account of Noticee no. 3 was placed by Bankim Shah who had traded the scrips where he allegedly executed front-running trades and in other non-front instances as well. The AO found that Noticee no. 3 was a beneficiary of the fraudulent scheme of front-running and profited to the tune of Rs. 37.32 lakhs.

Insofar as the appellant who was Noticee no. 4 in the proceeding before AO, the findings has been recorded in paragraph 102, 103 and 104 to the effect that the dealer of the appellant Bankim Shah colluded with Noticee nos. 1 and 2 in carrying out the impugned front-running transaction. Further, since Bankim Shah had a long association with the appellant who had his own terminal and dedicated clients and who charged the clients on a lumpsum basis indicates that Bankim Shah had a significant control over the activities of the appellant as a broker. The AO, on this basis, further held that the appellant failed to monitor the trades taking place through the trading terminal being used by Bankim Shah in spite of holding that there was no mechanism to monitor or prevent such front-running at that relevant moment of time. The AO further concluded that front-running transactions could not be made possible unless it was facilitated by the appellant and consequently imposed a penalty of Rs. 60 lakhs. For facility, the relevant part in paragraph 102, 103 and 104 is extracted here under:-

“102. Noticee 4 was the broker whose dealer Bankim Shah colluded with Noticees 1 and 2 in carrying out the impugned front-running transactions in the relevant period. This fact has not been disputed. Bankim Shah had punched orders for all the impugned front running transactions in the accounts of Noticees 3, Vivek and Rashi. Noticee 4 has sought to distance itself from the illegal trades by laying the entire blame on its dealer Bankim Shah,by stating that Bankim Shah did not continue as its Director after 2005. However, the fact remains that Bankim Shah had a long association with Noticee 4, being its Director, admittedly from December 15, 2001 to December 19, 2005. Even after he no longer served as a Director, Bankim Shah continued to be a dealer with his own terminal and dedicated clients. Bankim Shah also charged his clients on a lumpsum basis indicating some kind of profit sharing. This indicates that Bankim Shah had significant control over activities of Noticee 4 as a broker.

From the above, it is evident that for the duration of the investigation period Noticee 4 failed to monitor the trades taking place through the trading terminal being used by its dealer for executing front-running transactions in the accounts of its clients. Noticee 4 has also admitted that it did not have any mechanism in place to monitor or prevent front-running a the relevant time.

It was impossible for the 3 clients to have made front running transactions unless these were facilitated by Noticee 4.”

We have heard Shri P.R. Ramesh, the learned counsel for the appellant and Shri Mustafa Doctor, the learned senior counsel for the respondent.

Admittedly, the scheme was hatched by Noticee nos. 1 and 2. The trades were placed by Bankim Shah. Bankim Shah was a director in the appellant firm who resigned in 2005. Bankim Shah was given a terminal and had his own dedicated clients. Bankim Shah was the agent of his clients for the trades which he had executed. Such execution of trades had nothing to do with the appellant who was only a broker. There is no finding of any profit sharing between Bankim Shah and the appellant or between the appellant with the clients of Bankim Shah.

Merely because the appellant had a long association with Bankim Shah does not lead to any conclusion that Bankim Shah had significant control over the activities of the appellant as a broker. In our opinion this finding that Bankim Shah had significant control over the activities of the appellant as a broker is purely based on surmises and conjectures. In the absence of any iota of evidence on this score, this finding cannot be sustained.

We also find that the AO admits that there was no mechanism with the broker to monitor or prevent such front-running at that moment of time. Therefore, the allegation that the appellant aided and abetted the front-running trades of the other noticees cannot be proved nor can the appellant be held to have violated any provision of the SEBI Act and PFUTP Regulations. We further find that the finding that the appellant facilitated the front-running transaction made by the other noticees is again purely based on surmises and conjectures.

In view of the aforesaid, when a clear finding has been given that Noticee nos. 1 and 2 had perpetrated the scheme of front-running trades with the help of Bankim Shah, the finding against the appellant that he was the architect of the front-running transaction and that he had aided and abetted was wholly erroneous based on surmises and conjectures.

In view of the aforesaid, it is not necessary for us to deal with the other submissions raised by the appellant.

In view of the aforesaid, the impugned order insofar as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed with no order as to costs.

This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order.

Certified copy of this order is also available from the Registry on payment of usual charges.