What is the degree of proof required to hold brokers/sub-brokers liable for fraudulent/manipulative practice?

The Supreme Court of India, in its judgement in case of SEBI v. Kishore R. Ajmera delivered on 23 Feb. 2016, dealt with this question.

Facts in brief:
A broker with his sub-broker were allegedly involved in creation of artificial volumes in an illiquid scrip of Malvica Engineering Ltd, who matched volumes for their two related clients. SEBI whole-time member held the broker vicariously liable for conduct of sub-broker and ordered suspension for four months.

Aggrieved Broker filed appeal before Hon’ble Securities Appellate Tribunal (SAT). And SAT by its order dates 05th February 2008 held that in the absence of any direct proof or evidence showing the involvement of the sub-broker in allegedly matching the trades and thereby creating artificial volumes of trading resulting in unnatural inflation of the price of the scrip, the charges are not substantiated. The penalty imposed was accordingly interfered with.

Against this order, SEBI filed appeal before Hon’ble Supreme Court.

The Apex court took up all similar appeals viz. SEBI v. Ess Ess Intermediaries Pvt. Ltd., SEBI v. Rajendra Jayantilal Shah and SEBI v. Rajesh N. Jhaveri where allegations of synchronized trades in Adani Export Ltd. were found and monetary penalties were imposed. And in appeal, SAT had taken the view by order dated 19th June 2013 that the allegations of fraud under the FUTP Regulations, 2003 can be established only on the basis of clear, unambiguous and unimpeachable evidence. The Apex court also took up SEBI v. Networth Stock Broking Ltd.’s appeal, where allegation of circular trading in scrip of G.G. Automotive Gears Ltd. was involved. SEBI held broker liable vide order dated 27th December 2011. In appeal, SAT took the same view as in earlier case.

Applicable legal principle:

The Apex court narrated “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 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. 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 inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”


Applying above principle of law to facts of the cases before it, Hon’ble Supreme Court opined that while proximity of time 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/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 to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural rise in hiking the price/value of the scrip(s).

Hon’ble court while agreeing that the screen based trading system keeps the identity of the parties anonymous, however opined that it will be too naive to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. And it observed that direct proof of such meeting of minds elsewhere would rarely be forthcoming. Hence,

the test is one of preponderance of probabilities so far as adjudication of civil liability arising out of violation of the Act or the provisions of the Regulations framed thereunder is concerned.

However, Prosecution under Section 24 of the SEBI Act for violation of the provisions of any of the Regulations, of course, has to be on the basis of proof beyond reasonable doubt.

Hon’ble Court also observed

“The conclusion has to be gathered from various circumstances 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 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 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 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 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.”

The transactions were notable in that volume of trading in such scrips was usually minimal. The Court opined in the absence of direct substantive evidence, courts can take note of immediate and proximate facts and circumstances surrounding the events on which the charges are founded to reach a reasonable conclusion. As such, the test would be: “what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”

On the facts of the case, though voluminous trading of illiquid scrips was not impermissible per se, the Bombay Stock Exchange had cautioned against the same and asked traders to exercise caution in case of high volume of trading. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a it could be reasonably concluded that there was a concerted effort to indulge in synchronized trades, which resulted in large volumes of fictitious trading, culminating in an unnatural rise in hiking the price of the scrips. By the overall conduct of brokers and their transactions could the court infer not only a lack of due care and caution but also a deliberate intention to indulge in trading beyond forbidden limits.

Accordingly orders of SAT were set aside and orders of SEBI were restored.

Hon’ble Supreme Court observed (Obiter Dicta) “The different Regulations including the Regulations that prescribe the procedural course, namely, SEBI (Procedure for Holding Enquiry by Enquiry Officer and imposing Penalty) Regulations 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 about more clarity and certainty on the norms governing the security/capital market and, therefore, would best serve the interest of strengthening and securing the capital market.”

What can be action by SEBI for not making public announcement, after acquiring shares from capital market?

What can be action by SEBI for not making public announcement, after acquiring shares from capital market?

This is the issue many would have in mind, particularly in minds of promoters who are active in capital markets.

GMR Holdings Pvt Ltd (‘GMR’) is promoter of Parrys Sugar Industries Ltd (‘Parrys), whose shares are listed on stock exchange.

GMR along with person acting in concert (‘PAC’) acquired 2.58% of equity shares of Parrys between 6th May 2009 to 11th May 2009, through bulk deal (i.e. acquisition/sale of more than 0.5% of a target company’s share capital on a normal market segment on a single day per SEBI Circular of 14 January 2004). And from 29 April 2009 to 27 May 2009 it acquired 4.07% shares of Parrys. However no public announcement was made, as required under regulation 11(2) of the SEBI Takeover Regulations, 1997.

SEBI came to know about it from the shareholding pattern filed by several companies, including Parrys and certain observations made by the Bombay Stock Exchange. There upon SEBI conducted an examination of scrip of Parrys. Having found contravention of SEBI Takeover Regulations 1997, SEBI initiated adjudication under section 15H(ii) of the SEBI Act, 1992 by appointing adjudication officer (‘AO’) on 26 March 2014.

AO issued common show cause notice on 08 July 2014 against GMR and PAC for holding inquiry. After seeking several extension of time to reply, noticees filed reply with SEBI on 15 Sep. 2014.

AO granted opportunity of personal hearing to noticees on 14 December 2014, when Authorised Representative (‘AR’) of the noticees made representation before AO.

Broadly AR submitted that acquisition of 4.08% of shares of Parrys were within the limit of creeping acquisition of 5% permissible to it under the second proviso to Regulation 11(2) of the SEBI Takeover Regulations, 1997. And per SEBI Circular no. CFD/DCR/TO/Cir-1/2009 /06/08 dated 06 August 2009 acquirer who holds between 55% and 75% of the shares or voting rights may acquire additional shares/voting rights upto 5% in target company in one or more tranches, without restriction on time frame within which the same can be acquired. This circular, according to AR, permitted to acquire beyond 0.5% on a single day. AR also submitted that acquiring more than 0.5% on a single day was due to inadvertent calculations. And further, AR submitted that just because GMR and its Director were promoter of Parrys, they cannot be treated as PAC.

AO noted that though the acquisition of 4.08% was within the limit of acquisition of 5% under second proviso to Regulation 11(2), it does not exempt acquisition made through bulk deal/ block deal/ negotiated deal or preferential allotment, as stated in the said proviso. AO also did not agree with submission of AR on circular dated 06 August 2009 as the said circular stated “subject to the conditions as specified in this newly inserted proviso …” and observed that the conditions refers to no exemption if acquistion is made through bulk deal / block deal or negotiated deal or preferential allotment. AO also stated that promoter group is a homogenous class and therefore the entire group is considered to have acted together unless proved otherwise and relied upon decision of Hon’ble Securities Appellate Tribunal in the case of Rajesh Toshniwal v. SEBI & Ors dated 01 June 2012.

Finally considering judgement of Hon’ble Supreme Court of India in Swedish Match AB & Anr v SEBI dated 25 August 2004 – (2004) 11 SCC 641, that except in a situation which would bring the case within one or the other ‘exception cause’, the requirement of making public announcement under Regulations 10, 11 and 12 cannot be dispensed with. Thus, AO held that noticees were required to make public announcement in view of acquisition of shares of Parrys in bulk deal.

AO relying on Hon’ble Supreme Court of India’s decision in SEBI v. Shri Ram Mutual Fund (2006) 5 SCC 361 which held that intention of parties for non-compliance of statutory obligation under the SEBI Act and Regulations are not relevant and penalty is attracted as soon as the same are violated. AO imposed penalty of Rs.25 lakhs on noticees collectively.

However the AO despite observing the failure of noticees in making public announcement and loss of exit opportunity to the shareholders at the relevant time, did not mentioned / ordered about making public announcement with interest for the delayed period !

Debenture Trustee penalised by SEBI

SEBI alleged that United Bank of India holding certificate to act as Debenture Trustee violated following:
1) Regulations 13(a), 13A (b), 14, 15(1)(a) and 15(1)(i) of SEBI (Debenture Trustee) Regulations, 1993,
2) Clause 4 & 19 of Code of Conduct read with Regulation 16 and Regulation 21 (1) of SEBI (Debenture Trustee) Regulations, 1993,
3) Regulations 15(2) and 23(4) of SEBI (Issue and Listing of Debt Securities) Regulations 2008,
4) SEBI Circular No. MIRSD/DPS III/Cir-11/07 dated August 06, 2007; and
5) Clause 10.2.3 of the SEBI(Disclosure and Investor Protection) Guidelines.

SEBI (Adjudicating Officer) decision dated 10 September 2015.


SEBI’s inspection team perused the records and documents of the Debenture Trustee for its various conduct since 1992 onwards. Inspection revealed certain deficiencies. SEBI found reply of the debenture trustee as not satisfactory and hence proceeded with adjudication proceedings.

Alleged violations were:

1) Regulation 13A (b): had lent loans to the issuer company for whom it has acted as Debenture Trustee.

Reply: It was having transactions prior to acting as Debenture Trustee. It continued to act Debenture Trustee though no new assignments were accepted from the borrower. All debentures were repaid. It acted without any ulterior motive.

SEBI did not accept the reply.


2) Violation of Regulation 23(4) of SEBI (Issue and Listing of Debt Securities) Regulations 2008 and SEBI Circular No. MIRSD/DPS III/Cir-11/07 dated August 06, 2007.

Debenture Trustees are required to disseminate all information and reports on debt securities, including compliance reports filed by the issuers, to the investors and to the general public by placing them on their website.

Reply: Half Yearly Report on Debenture Trustee activities for the half year ended September, 2013 has been uploaded on its website on regular basis since September 2013 onwards.

SEBI noted that compliance was made from September 2013 onwards but violation for the prior period was found.


3) Violation of clause 4 & 19 of code of conduct read with Regulation 16 and 21(1) of SEBI (Debenture Trustee) Regulations, 1993.

Clause 4 of code of conduct of Debenture Trustee Regulations states that a Debenture Trustee shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment.

Clause 19 of code of conduct of Debenture Trustee Regulations states that a Debenture Trustee shall not make untrue statement or suppress any material fact in any documents, reports, papers or information furnished to SEBI.

Regulation 16 states that every Debenture Trustee shall abide by the Code of Conduct as specified in Schedule III.
Regulation 21 (1) of Debenture Trustee Regulations states that it shall be the duty of every director, officer and employee of the Debenture Trustee who is being inspected, to produce to the inspecting authority such books and other documents in his custody or control and furnish him with the statements and information relating to the Debenture Trustee within such time as the inspecting authority may require.

Reply: Debenture Trustee some relevant data were inadvertently quoted as it last accepted assignment of a listed entity in March 2002, due to very old periodicity. It also contended that difficulties were also faced while fetching data / information from the issuers considering the lapse of time in-between. There was no mala fide intention on its part.

SEBI did not accept the reply.


4) Regulation 13(a) of SEBI (Debenture Trustee) Regulations, 1993 – by delaying of entering into the written agreement with issuer company (after the opening of the subscription list for issue of debentures instead of before the opening).

Reply: Debenture Trustee stated that violation if of 2000-2002 and all debentures are repaid by issuer. Contravention is a one time off case. Henceforth will comply all regulations.

SEBI noted the violation.

5) Regulation 14 of SEBI (Debenture Trustee) Regulations, 1993 and Regulation 15(2) of SEBI (Issue and Listing of Debt Securities) Regulations 2008 – by not explicitly incorporating certain clauses in trust deed.

Reply: Issuer have repaid all issues of Debentures with interest on time.

SEBI noted the violation.


6) Clause 10.2.3 of the SEBI(Disclosure and Investor Protection) Guidelines – by delaying execution of the trust deed.

Reply: Debenture Trustee contended that all issues repaid by issuer and matter is fifteen years old and hence violation may be condoned.

SEBI noted the violation.


7) Regulation 15(1)(i) of SEBI (Debenture Trustee) Regulations, 1993.

Debenture Trustees required to exercise due diligence to ensure compliance of listing agreement by the issuer company and issuer companies did not submit the half yearly communication to the debenture holders and also to the stock exchanges.

Reply: Debenture Trustee had been following up with the Issuer for reports at regular Intervals. However, the Issuer did not bother to reply or provide reports barring on one occasion. In view of the non-cooperation from the Issuer and considering that the issues had been duly redeemed, the non-compliance may be condoned.

SEBI noted the reply.


8) Regulations 15(1)(a) of SEBI (Debenture Trustee) Regulations, 1993 – requires debenture trustees to call for periodic reports from body corporate, which it failed to obtain.

Reply: All the periodical reports from the issuer could not be obtained despite follow-up with the issuer from time to time. Evidence furnished.

SEBI noted the reply.


SEBI found that in first six out of aforesaid eight allegations, the Debenture Trustee has violated the legal requirements. And hence found Debenture Trustee liable for monetary penalty. Penalty of Rs. 2 lakh was levied.

Supreme Court on creeping acquisition under Takeover Code

The judgement of the Hon’ble Supreme Court in Kosha Investments Ltd (delivered on 18 September 2015 summarised below) is of importance for several reasons, like:

  1. Wrong deed can creep up any time (in this case after 3 years by SEBI); and
  2. For SEBI takeover regulations, netting off in creeping acquisition is not allowed.

The appellant, Kosha Investments Ltd., acquired shares of another company Snowcem India Ltd. (hereinafter referred to as ‘SIL’) from one of the original promoters of SIL and thus itself became one of the promoters. An investigation by SEBI covered the period June 1999 to August 1999 when there was an initial upward movement in the price of shares of SIL and also substantial increase in the volume of their trade. As a result of such investigation the appellant faced charges in another proceeding under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and was also served with a show cause notice dated 14.11.2002 for alleged breach of provisions of Regulation 44 and 45(6) of the SEBI Takeover Regulations of 1997 read with provisions of Section 11 and 11B of the SEBI Act.

The proposed action under SEBI Takeover Regulations of 1997 was based upon report of investigation showing that appellant had consistently bought and sold shares of SIL prior to June 1999 and also after August 1999.

The plea of pledge raised by the appellant was found without any substance and only an attempt to conceal subsequent purchase. Hence, SEBI came to a conclusion that the appellant was already holding between 15% to 75% shares of the target company SIL and it could acquire additional shares of this company through creeping acquisition mode, that is, without public announcement only upto 5% of its paid up capital during the period of 12 months ending on 31st March 2000. However, by acquiring 11,36,700 shares of SIL during June 1999 to August 1999 it acquired shares constituting more than 5% of the paid up capital of SIL. For making such acquisition, the appellant was liable to make public announcement as required by Regulation 11(1) of the Regulations of 1997.

Since the appellant failed to do so, the Whole Time Member of SEBI held it guilty and on 27th January 2004 directed the appellant to make open offer and pay interest @15% p.a. from October 28, 1999 till the date of actual payment of consideration.

In appeal before Securities Appellate Tribunal (SAT) it was argued that KIL had not acquired 5% or more than 5% shares or voting rights in respect of shares of SIL at any point of time in the period of 12 months. He submitted that out of 11,36,700 shares which were purchased during June, 1999 to August, 1999 during the same period KIL also sold number of shares of SIL. And determining the shareholding of a person without netting off would give a distorted picture. And therefore the provisions of Takeover Code did not trigger. However, SAT disagreed.

In appeal from SAT, before Supreme Court also it was contended that SEBI failed to consider that the appellant was not only a promoter having more than 15% shares of SIL but it was also in the business of sale and purchase of shares which was being done simultaneously and hence exceeding the limit of 5% at any one point of time was immaterial unless on a net accounting it could be found that such ceiling of 5% had been violated by appellant on account of its retaining more than 5% shares of SIL at the end of a financial year.

Hon’ble Supreme Court observed “If the plea of appellant will be accepted then an acquirer can keep on violating Regulation 11(1) with impunity on as many occasions as he/it wants and avoid letting the public have the required knowledge through public announcements by simply making subsequent sale or transfer to another entity so as to reduce the so-called net acquisition in a financial year to within 5%. This interpretation will defeat the purpose of Regulation 11(1) and shall also render Regulation 14(1) otiose.”

The concept of permitting creeping acquisitions by permitting not more than 5% of the shares or voting rights in a company limits the period for such acquisition to a financial year ending by 31st March. But such concept does not dilute the requirement of making a public announcement within the time mentioned in Regulation 14(1) if the acquisition even if only once made and divested, is of more than 5% of shares or voting rights in the target company.

Appeal before Supreme Court of KIL failed and directed to pay Rs.50,000/- towards cost to SEBI.