Lalkar Securities Pvt. Ltd vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

The present appeal has been filed challenging the order of the Adjudicating Officer (hereinafter referred to as ‘AO’) of Securities and

Exchange Board of India (hereinafter referred to as ‘SEBI’) dated October 31, 2019 whereby a penalty of Rs. 2 lac has been imposed for

violation of the Code of Conduct for violating Clause A(2) of the Code of Conduct for stockbrokers as specified under Schedule II read with

Regulation 9 of the Securities and Exchange Board of India (Stockbrokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as

‘Stockbrokers Regulations’).

The facts leading to the filing of the present appeal is, that SEBI conducted an investigation into a suspected insider trading by the clients of the

appellant in the scrip of ADF Foods Ltd. (hereinafter referred to as ‘ADF’). During the course of investigation, it was observed that there were

certain irregularities on the part of the appellant while execution of trades on behalf of its clients, namely, Ms. Pallavi Navinchandra Mehta and Ms.

Shefali Bhupendra Mehta during the period May, 21 2016 to July 27, 2016. The investigation department sent two letters dated September 21, 2016

and September 29, 2016 seeking details of the aforesaid two clients of the appellant for the alleged trading in ADF. Through these letters information

was sought, namely, KYC details list of directors, bank statement, clients’ ledger, etc. This information was duly provided by the appellant. On

October 27, 2017, further details were sought by the investigation department, namely, :-

i. “Copy of Account Opening Form (“AoFâ€​) alongwith complete KYC details & other related documents;

ii. Mode(s) of placement of Orders alongwith the relevant details of Order placement during the relevant period;

iii. Copy of recording of the order placement;

iv. Details and copies of contract notes sent;

v. Details of fund transactions;

vi. Copy of communications exchanged with the Clients; and

vii. Client ledgersâ€​.

In response to the aforesaid letter, the appellant provided the requisite information vide letters dated November 3, 2017, November 20, 2017 and

November 24, 2017. The said information as detailed in the memo of appeal is extracted hereunder :-

“a. With regard to point (ii) pertaining to modes of placement of orders along with the relevant details of the order placement during the

period like name of the persons, placing of orders, telephone / mobile numbers from which orders were placed and details of persons

placing the orders and details of person taking the orders, the Appellant had informed that during the relevant period, the orders on behalf

of Mrs. Pallavi Navinchandra Mehta and Mrs. Shefali Bhupendra Mehta. Clients were placed by their authorized person Mr.

Navinchandra Mehta, Mr. Abhishek Mehta and Mr. Bhavesh Thakkar from the phone numbers registered with the Appellant.

b. With regard to point (iii) pertaining to copy of the recording of the order placement, the Appellant had informed that as per the general

practice the recording of order placement is retained only till the successful completion of the trade and settlement. Since there was no

dispute regarding the referred order / its execution and / or settlement of the transaction, the same was not retained and hence it could not

be provided to the Respondent.

c. The Appellant submits that the rest of the documents / details were duly provided to the Respondent and copy of letter dated November 24,

2017 was also forwarded by email dated November 27, 2019. Copies of Appellant’s correspondence dated November 3, 2017,

November 20, 2017 and November 24, 2017; and email dated November 27, 2019 with the relevant details are annexed and collectively

marked as Exhibit “E1â€​ to Exhibit “E4â€​.

It transpires that the respondent was not satisfied with the replies / information given by the appellant and accordingly a show cause notice dated

May 5, 2019 was issued alleging that the appellant failed in maintaining the records and did not provide the details pertaining to placement of orders in

the accounts of its clients Ms. Pallavi Mehta and Ms. Shefali Mehta thereby violating Clause A(2) of the Code of Conduct for stockbrokers as

specified under Schedule II read with Regulation 9 of the Stockbrokers Regulations.

The AO after considering the reply found the appellant guilty for violating the Code of Conduct under the Stockbrokers Regulations and imposed a

penalty of Rs. 2 lac.

We have heard Mr. Somasekhar Sundaresan, the learned counsel for the appellant and Mr. Anubhav Ghosh, the learned counsel for the respondent

through video conference.

We find the findings given by the AO is recorded in paragraph No. 12 of the impugned order. The relevant portion is extracted hereunder :-

“12. …… I have perused the replies submitted by the Noticee to SEBI during the course of Adjudication proceedings. I note that the

Noticee was specifically asked to identify the person who had placed the orders on behalf of Ms. Shefali and Ms. Pallavi in the scrip of

ADF. However, the Noticee in its reply merely mentioned that that the orders in the account of Ms. Pallavi and Ms. Shefali used to be

received from Mr. Navinchandra Mehta, Mr. Abhishek Mehta and Mr. Bhavesh Thakkar from the telephone numbers 9820710000,

9820417842 and 9323524675. Thus, the Noticee failed to identify exact person and the phone no. who used to place order on behalf of

Ms. Pallavi and Ms. Shefali in the scrip of ADF during the investigation period. The requirement of ‘due skill, care and diligence’

cannot be defined in anticipation of each and every scenario in the securities market and therefore, a registered intermediary is expected to

have system in place and also follow procedures which facilitates smooth functioning of the securities market. As a diligent stock broker,

the Noticee is expected to maintain a record of the order placement in the account of its clients. Such basic information is critical for SEBI

to identify the persons placing orders on behalf of the clients specifically of Insider trading. It is expected of a stock broker who is a

registered intermediary, to maintain a proper record of order placements from the clients. The identification of the exact person who has

placed orders in an account is crucial from the point of view of investigations conducted by SEBI. If a broker submits such evasive reply by

merely mentioning the names of persons who are authorized to trade in the particular account and not provide exact details of the person

placing the order, it would be extremely difficult for SEBI to ascertain the role of entities dealing in shares such as that in the instant case,

thus, crippling the entire investigating.â€​

The AO in the aforesaid paragraph has specifically noted that the appellant had given the names of the person who had placed the orders in the

account of Ms. Pallavi Mehta and Ms. Shefali Mehta and also provided the telephone numbers. In spite of admitting that this information was given,

the AO still held that the appellant failed to identify the exact person and the phone numbers, placed orders on behalf of Ms. Pallavi Mehta and Ms.

Shefali Mehta. We fail to understand as to what further information was sought for by the respondent in their letter of October 27, 2017. In this

regard, a contention was raised by the learned counsel for the respondent that the appellant was required to give the name of the persons of every

order that was placed in the accounts of Ms. Pallavi Mehta and Ms. Shefali Mehta which was not done. We are constrained to observed that nothing

of this sort has been asked for nor this fact has been recorded in the impugned order. Even otherwise, the information that was sought vide letter

dated October 27, 2017 was duly provided. We have also perused the correspondence between the appellant and the investigation authority and we

find that relevant information was duly provided by the appellant.

We also find that there is nothing under the Code of Conduct to indicate that such type of information was required to be maintained by the

stockbrokers, namely, to provide details of the person of every trade which was made and the call details. In the absence of any such regulation being

framed, the appellant cannot be penalized on this score.

The AO further came to the conclusion that the appellant was required to maintain call data record which he failed to produce. We are again

constrained to observe that there was no such provision requiring the appellant to maintain call data record. In this regard, the appellant has placed two

circulars issued by SEBI dated September 26, 2017 and November 30, 2017. For facility, the said circulars are extracted hereunder :-

CIRCULAR

CIR/HO/MIRSD/MIRSD2/CIR/P/2017/108 Â Â Â Â September 26, 2017

To

All recognized Stock Exchanges,

Dear Sir / Madam,

Sub: Prevention of Unauthorised Trading by Stock Brokers

I. SEBI in the past has taken several steps to tackle the menace of “Unauthorized Trades†viz Periodic Running Account Settlement,

Post transactions SMS/email by exchanges/Depositories, Ticker on broker/DP websites etc. It was observed that in spite of measures taken,

a considerable proportion of investor complaints is of the nature of “Unauthorized Tradesâ€​.

II. The current regulatory requirements in commodity derivative markets require that “The members shall execute the trade of clients only

after keeping evidence of the client placing such order; it could be, interalia, in the form of sound recording.â€​

There are no such requirements in Equity, Equity Derivative and Currency Derivative Market side.

III. To further strengthen regulatory provisions against un-authorized trades and also to harmonise the requirements across markets, it has

now been decided that all brokers shall execute trades of clients only after keeping evidence of the client placing such order, it could be,

inter alia, in the form of:

a. Physical record written & signed by client,

b. Telephone recording,

c. Email from authorized email id,

d. Log for internet transactions,

e. Record of SMS messages,

f. Any other legally verifiable record.

When dispute arises, the burden of proof will be on the broker to produce the above records for the disputed trades.

IV. Further, wherever the order instructions are received from clients through the telephone, the stock broker shall mandatorily use

telephone recording system to record the instructions and maintain telephone recordings as part of its records.

V. This circular shall be effective with effect from 1st January 2018.

VI. The Stock Exchanges are directed to:

a. bring the provisions of this circular to the notice of the Stock Brokers and also disseminate the same on their websites.

b. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above directions in co-

ordination with one another to achieve uniformity in approach.

c. communicate to SEBI, the status of the implementation of the provisions of this circular in their Monthly Development Reports.

VII. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to

protect the interest of investors in securities and to promote the development of and to regulate the securities market.

Yours faithfully,

Debashis Bandyopadhyay

General Manager

CIRCULAR

CIR/HO/MIRSD/MIRSD2/CIR/P/2017/124

November 30, 2017

To

All recognized Stock Exchanges

Dear Sir / Madam,

Sub: Clarification to Cirular on Prevention of Unauthorised Trading by Stock Brokers.

SEBI vide circular no. CIR/HO/MIRSD/MIRSD2/CIR/P/2017/108 dated September 26, 2017 has inter-alia specified that brokers shall

execute trades of clients only after keeping evidence of clients placing such order. Further, SEBI has made it mandatory to use telephone

recording system to record client instructions and maintain telephone recordings wherever the order instructions are received from clients

through the telephone.

Subsequently, SEBI has received representations from stock brokers and their associations expressing operational difficulties caused to

stock brokers. Accordingly, in view of operational difficulties faced by stock brokers, it has been decided as under.

i. Brokers are required to maintain records specified at para III of aforementioned circular for a minimum period for which the arbitration

accepts investor complaints as notified from time to time, currently three years. However in cases where dispute has been raised, such

records shall be kept till final resolution of the dispute.

ii. If SEBI desires that specific records be preserved then such records shall be kept till further intimation by SEBI.

iii. The above mentioned SEBI circular also prescribes that ‘when dispute arises, the burden of proof will be on the broker to produce the

above records for the disputed trades’. However for exceptional cases such as technical failure etc, where broker fails to produce

order placing evidences, the broker shall justify with reasons for the same and depending upon merit of the same, other appropriate

evidences like post trade confirmation by client, receipt/payment of funds/securities by client in respect of disputed trade, etc. shall also be

considered.

The Stock Exchanges are directed to:

a. Bring the provisions of this circular to the notice of the Stock Brokers and also disseminate the same on their websites.

b. Make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above directions.

c. Communicate to SEBI, the status of the implementation of the provisions of this circular of their Monthly Development Reports.

This circular is being issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act,

1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Yours faithfully,

Debashis Bandyopadhyay

General Manager

A perusal of the paragraph Nos. 2 and 3 of the circular dated September 26, 2017 makes it apparently clear that SEBI admits that prior to

September 26, 2017, there was no provision requiring a stockbroker to maintain call data regards. It is from September 26, 2017 onwards that a

provision was made for maintaining call data records. This circular, thus, clearly shows that during that time when the trades were executed, there

was no provision requiring a stockbroker / the appellant in the instant case to maintain call data records.

The AO further held that since the appellant gave evasive reply and failed to identify the exact person and the phone numbers, he violated Clause

A(2) of the Code of Conduct with regard to due skill, care and diligence. The AO held that as a diligent stockbroker, the appellant was required to

maintain a record of the order placed and provide crucial information to SEBI in order to identify the persons placing orders on behalf of the clients

specifically on insider trading and, therefore, it was expected from the appellant to maintain a proper record which in the instant case he has failed to

do so. The AO held that the appellant has failed to exercise due skill, care and diligence in the conduct of its business by failing to identity the person

who placed orders in the accounts of its clients Ms. Pallavi Mehta and Ms. Shefali Mehta and failed to maintain the record of the order placed in the

accounts of the aforesaid clients and, therefore, violated Clause A(2) of the Code of Conduct for stockbrokers as specified under Schedule II read

with Regulation 9 of the Stockbrokers Regulations.

In our opinion, this finding is patently perverse and cannot be sustained. For facility, Clause A(2) of the Code of Conduct in Schedule II of the

Stockbrokers Regulations is extracted hereunder:-

“A. General

(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.â€​

In the instant case, as we have found earlier all relevant details were provided, namely, names of the person who operate the accounts of Ms.

Pallavi Mehta and Ms. Shefali Mehta, telephone numbers were also provided. Whatever information was sought was duly provided. There was no

provision to maintain call data record and such provisions only came after the circular was enforced on September 26, 2017. Thus, the contention that

the appellant failed to exercise due skill, care and diligence is based on surmises and conjunctures.

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

The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor

a certified copy of this order could be issued by the Registry. In these circumstances, 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. Parties will act on production of a digitally

signed copy sent by fax and/or email.