Parsoli Corporation Ltd vs Securities and Exchange Board of India on 9 December 2019

1. The present appeal has been filed against the order of the Adjudicating Officer (hereinafter referred to as, ‘AO’) of Securities and Exchange Board of India (hereinafter referred to as, ‘SEBI’) imposing a penalty of Rs. 15 lacs for violation of the provisions of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as, ‘PFUTP Regulations’) and Clauses A(1) to A(5) of 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.

2. The facts leading to the filing of the appeal is, that the appellant is a stockbroker and had registered a client, namely, Nilesh Prajapati who traded in the scrip of Dalal Street Investments Ltd. (DSIL) which were highly illiquid shares on September 10, 2008 and again on September 26, 2008 by selling a total 150 shares on account of which the share price of the stock rose alarmingly creating an artificial volume and market price in the said scrip. It was found that when the scrip was sold by the appellant’s client on September 10, 2008, he did not possess the requisite shares and, accordingly, the

appellant’s client failed to deliver the shares. In spite of this default in the delivery of shares, the appellant allowed his client again to sell 30 shares of the same scrip on September 26, 2008. The appellant was thus, charged for not carrying out proper due diligence in the registration of his client in as much as it was the appellant’s responsibility as a stockbroker to satisfactorily identify his client and further, continuously satisfy itself about the genuineness and financial soundness of the client which the appellant miserably failed to do so. Further, the genuineness of the client also became doubtful as during the investigation, the client could not be traced.

3. We have heard the learned counsel for the parties.

4. We find that the appellant is not entitled for any relief whatsoever. During the investigation, the appellant did not furnish the requisite information to the investigation team. Further, no reply was filed by the appellant pursuant to the show cause notice. Inspite of service of the summons, the appellant failed to appear nor filed any reply to defend himself even though ample opportunity of personal hearing was given.

5. Thus, we are of the opinion that the charge levelled against the appellant remained unreburted. Further, we find that the AO considered the material evidence on record and came to a conclusion that the price payable to the stock exchange pursuant to the default committed by the appellant’s client in the delivery of shares was not recovered by the appellant from its client leads to an irresistible inference that the appellant was itself dealing in the illiquid scrip in order to create artificial volume and market price for vested gain. It has come on record that during the period when the appellant’s alleged client sold 120 shares the price rose from Rs. 4,351/- per share to Rs. 4,438/- per share. The AO was thus, of the opinion that creating artificial volumes and increase in the price scrip was violative of Regulations 3 and 4 of the PFUTP Regulations. The AO also found that due diligence was not carried out by the appellant in the registration of the client and that the appellant had failed to satisfy itself about the genuineness and financial soundness of its client.

6. Before us, the learned counsel for the appellant tried to satisfy the Tribunal that due diligence had been carried out and that the PAN Card, KYC, etc. was all obtained from the client. We are of the opinion that the documents filed before this Tribunal were not

produced by the appellant either before the investigation team or before the AO. Such documents cannot be considered by this Tribunal unless leave of the Tribunal is taken by filing an application for production of additional evidence in consonance with the principles of Order 41 Rule 27 of the Code of Civil Procedure. Such documents cannot be entertained nor can it be considered by the Tribunal.

7. It was urged that the penalty imposed was excessive and not inconformity with the misconduct. It was also urged that the factors available under Section 15J of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as, ‘SEBI Act’) has not been taken into consideration. In this regard, we find that the AO has considered the factors under Section 15J of the SEBI Act and has held that the material available on record is insufficient to quantify the amount of disproportionate gain or unfair advantage made by the appellant or the loss suffered by the investors as a result of the acts done by the appellant can be ascertained. Considering this aspect, we find that since the quantification could not be done, the AO on the basis of approximation has levied a penalty of Rs. 15 lacs which in our opinion is just and appropriate. In the given facts and circumstances of the case, we find that a maximum penalty under

Section 15HA and 15HB is Rs. 25 crores which could be imposed. Considering the gravity of the offence, the AO has only imposed a penalty of Rs. 15 lacs instead of imposing a maximum penalty.

8. For the reasons stated aforesaid, we do not find any merit in the appeal. Dismissed.

Sd/- Justice Tarun Agarwala Presiding Officer

Sd/- Dr. C. K. G. Nair Member

Sd/- Justice M. T. Joshi Judicial Member 09.12.2019 Prepared & Compared by PTM