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                REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2818 OF 2008

Securities and Exchange Board of India            ...Appellant (s)

Versus

Kishore R. Ajmera       ...Respondent (s)

WITH CIVIL APPEAL NO.8769 OF 2012 CIVIL APPEAL NO.6719 OF 2013 CIVIL APPEAL NO.252 OF 2014 CIVIL APPEAL NO.282 OF 2014

J U D G M E N T

RANJAN GOGOI, J.

1. The core question of law arising in this group of appeals  

being similar and the facts involved being largely identical, all  

the appeals which were heard analogously are being decided  

by this common order.

2. The question of law arising in this group of appeals may  

be summarized as follows.

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What  is  the  degree  of  proof  required  to  hold  

brokers/sub-brokers  liable  for  fraudulent/  

manipulative  practices  under  the  Securities  and  

Exchange Board of India (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’).

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. Ajmera)

The respondent-Kishore R. Ajmera is a broker registered  

with the Bombay Stock Exchange.  M/s. 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

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matching trades thereby creating artificial volumes in the scrip  

of  one  Malvica  Engineering  Ltd.  (MEL)  during  the  period  

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 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  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 of any unnatural (voluminous) trading in  

any such illiquid scrip.  Yet, the transaction in question was

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gone through by the sub-broker acting through 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  Securities  and  Exchange  Board  of  

India Act, 1992 (hereinafter for short ‘the SEBI Act’), Securities  

and Exchange Board of India (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  Regulations  2003’).   On  completion  of  all  

aforesaid procedural  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)  of  the  SEBI  (Procedure  for  Holding  

Enquiry by Enquiry Officer and Imposing Penalty) Regulations,  

2002 (as then in force) penalty of suspension of registration of

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the 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 15T 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 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. It is against the said order that the SEBI has  

filed the present appeal under Section 15Z of the SEBI Act.

Civil  Appeal  No.6719  of  2013  (SEBI  Vs.  Ess  Ess  Intermediaries  Pvt.  Ltd.),  Civil  Appeal  No.252  of  2014  (SEBI  Vs.  M/s.  Rajendra  Jayantilal  Shah,  Civil  Appeal  No.282 of 2014 (SEBI Vs. M/s. Rajesh N. Jhaveri)

5. The scrip involved in these appeals is one of M/s. Adani  

Export 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

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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 volume of shares traded  

during the two periods in questions is best evident from 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 substantially in the scrip of   

AEL 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, 2004 to   

July 27, 2004. Further, the said client also entered   

into  self  trades for  52,910 shares.  The said  client   

also  entered  into  structured  trades  wherein  he   

reversed the trades with particular  clients 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  27,  2004.  This  quantity   

accounted  for  12.5%  of  the  total  traded  quantity   

during this period. It is further observed that during   

the  period  between July  28,  2004 to  January  14,  

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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   

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 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 orders were placed within time gap of 1   

minute. Moreover, for 18,38,077 shares buy and sell   

order quantity and rate identical and placed within a   

time gap of 1 minute from each other. In 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, for the   

same period the said client has allegedly entered into   

synchronized  trades  to  the  extent  of  12,25,260   

shares.”    

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 M/S. 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 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  reversed  the  trades  with  particular   

clients of other brokers. It was observed that during   

the  period  between July  28,  2004 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   

3,04,68,762 shares (87.39% of their trades) appear   

to be synchronized.”

M/S. RAJESH N. JHAVERI

“During the course of the said investigation, it   

was observed that the Noticee was one of the sub-

brokers who had traded substantially in the scrip of   

AEL during the first  period for the said client.  The   

Noticee,  for  the  said client,  has allegedly executed  

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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 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 of 0 to 60  

seconds.  The volume of trading in the illiquid scrip being very  

high and the  sequence of  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 of Rs.9,00,000/- for violation of  

FUTP Regulations, 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

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the basis of clear, 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 of the Code of Conduct Regulation  

has been maintained.   

8. The learned Tribunal had disposed of two other appeals  

before it by following the order passed in the case of M/s. Ess  

Ess Intermediaries Pvt.  Ltd.  (respondent in Civil  Appeal  No.  

6719 of  2013).   Consequently the 3 (three)  Civil  Appeals in  

question have been filed before this Court.  

Civil Appeal No. 8769 of 2012 (SEBI Vs. Networth Stock  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  16.10.2002.    The  

allegation against the respondent is that alongwith three other  

member  brokers  of  the  Bombay  Stock  Exchange  the  

respondent had indulged in circular trading of  the scrip on  

behalf of one Indumati Goda.  It is alleged that orders to buy

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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 of 38  

days resulting in a huge and voluminous trading in the illiquid  

shares thereby artificially raising its price in the market.  The  

said  allegations,  on  due  enquiry,  have  been  found  to  be  

established by the order dated 27.12.2011 of the Whole Time  

Member  of  SEBI.   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  

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.

10. There are certain relevant facts which have to be taken  

note 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.

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(ii) The  client  Indumati  Goda  though  required  under  the  

relevant norms had not appeared before the respondent  

at the time 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  

levelled in respect of the transactions in question.

(iv) Proceedings  against  Shri  Shirish  Shah  had  also  been  

initiated 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 has not challenged the penalty imposed.

(vi) The  modus  operandi of  the  circular  trading  involved  

commencement of trading on a particular day 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  

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.

11. It is on these facts that after due enquiry and compliance  

with the laid down procedure that the findings of liability have

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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 client  

on whose behalf the transactions were being carried out.  In  

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  being  

executed.”  

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 present 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 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  

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for her delivery based trades, deliveries were made from her   

demat account.”   

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 of Smt. Indumati Goda and  

Shri Shirish Shah and that the same had caused prejudice to  

the respondent.

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  and  substantial  acquisition  of  securities  or  

control” and reads as follows :  

“12-A. Prohibition of manipulative and deceptive  devices,  insider  trading  and  substantial  acquisition  of  securities  or  control.—No person  shall directly or indirectly—

(a) use  or  employ,  in  connection  with  the  issue,   purchase 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;

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(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 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;

(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 which is in contravention of the   provisions of this Act or the rules or the regulations   made thereunder;

(f) 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  regulations  made  under  this   Act.”

15. Section 15-HA of  the Act  which deals  with penalty  for  

fraudulent and unfair trade practices and Section 15J which  

lay down the factors to be taken into account while adjudging  

the quantum of penalty  reads as follows :

“15-HA.  Penalty  for  fraudulent  and  unfair  trade  practices.—If  any  person  indulges  in  fraudulent  and  unfair  trade  practices  relating  to

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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,  whichever  is  higher.”

“15J.  Factors to be taken into account by the  adjudicating  officer.-   While  adjudging  the  quantum  of  penalty  under  section  15-I,  the   adjudicating  officer  shall  have  due  regard  to  the   following factors, namely :- (a) the  amount  of  disproportionate  gain  or  unfair   

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;

(c) the respective nature of the default.”

16. Section 12-A has to be read along with the provisions of  

FUTP  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:  

“3. Prohibition of certain dealings in securities. —No person shall directly or indirectly— (a) buy,  sell  or  otherwise  deal  in  securities  in  a   

fraudulent manner; (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  

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of the Act or the rules or the regulations made   thereunder;

(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;

(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 made  thereunder:

4. Prohibition  of  manipulative,  fraudulent  and unfair trade practices.—(1) Without prejudice  to  the  provisions  of  Regulation  3,  no  person  shall   indulge in a fraudulent or an unfair trade practice in   securities. (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 market;

(b)-(d) * * * (e) any  act  or  omission  amounting  to   

manipulation of the price of a security; (f) publishing or causing to publish or reporting or   

causing  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) * * * (k) an  advertisement  that  is  misleading  or  that   

contains  information  in  a  distorted  manner   and which may influence the decision of the  investors;

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(l)-(q) * * * (r) planting false or misleading news which may  

induce sale or purchase of securities.”

Regulation 12 of the FUTP Regulation also contemplates  

suspension  or  cancellation  of  registration  of  intermediaries.  

For  the  sake of  brevity  the  provision (Regulation 12)  is  not  

being quoted.  

17. The SEBI (Stock Brokers and Sub-brokers) Regulations,  

1992 in Schedule II  provides for  Code of  Conduct for  stock  

brokers in the following terms :-

       “SCHEDULE II               Securities and Exchange Board of India                    (Stock Brokers and Sub-brokers)  

                                      Regulations, 1992           CODE OF CONDUCT FOR STOCK BROKERS                                                         [Regulation 9]  

A. General.  (1)  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  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 or making personal gains.

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(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  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)  Compliance  with  statutory  requirements:  A  stock-broker 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 to him.”

18. The Code of Conduct for Stock Brokers, inter alia, lays  

down that the stock-broker shall maintain high standards of  

integrity,  promptitude  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 his business.

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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 :-

                              “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  contravenes any of the provisions of the Act, rules   or regulations framed thereunder shall be liable  for any one or more of the following actions—

(i) Monetary penalty under Chapter VIA of the Act.  

(ii) Penalties as specified under 59[Chapter V of the   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.

LIABLE FOR MONETARY PENALTY

26.  A stock broker or a sub-broker shall be liable  for  monetary penalty  in respect  of  the following  violations, namely- (i) to (x) * * *

(xi)  Indulging  in  fraudulent  and unfair  trade  practices   relating to securities.  

(xii) to (xv) * * *

(xvi)Failure to exercise due skill, care and diligence.”

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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 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  (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.      

21. The SEBI Act and the Regulations framed thereunder are  

intended to protect the interests of investors in the Securities

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Market which has seen substantial  growth in tune with the  

parallel developments 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  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.   

22. 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

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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.

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  the  scrips  in  which trading  had been done  were  of  

illiquid scrips meaning thereby that such scrips though listed  

in the Bombay Stock Exchange were 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 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 Bombay Stock

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Exchange in the form 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.   

24. Insofar  as  first  case  (C.A.  No.2818  of  2008  SEBI  Vs.  

Kishore  R.  Ajmera)  is  concerned  the  proved  facts  are  as  

follows:

(i) Both the clients are known to each other and were  

related entities.

(ii)  This 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.

Apart from the above there is no other material to hold  

either lack 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

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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 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. M/s   Ess Ess Intermediaries Pvt. Ltd., M/s  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 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  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.

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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). 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 per  

permissible parameters which are programmed accordingly.   

26. It has been vehemently argued before us that on a screen  

based trading the identity of the 2nd party be it the client or the  

broker  is  not  known  to  the  first  party/client  or  broker.

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According to us, knowledge of who the 2nd party/ client or the  

broker is, is not relevant at all.  While 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  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 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

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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

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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  negligence  and  deliberate  

intention.   

27. Insofar as the plea of  violation of  principles of  natural  

justice,  as  raised  on  behalf  of  the  respondent  in  

C.A.No.282/2014  (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  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 of Indumati 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 of Shirish  

Shah, who admittedly was behind the manipulative practices

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in  question  through  the  brokers,  was  definitely  not  the  

foundation of  the impugned findings recorded by the Whole  

Time Member of SEBI.  The statement of Shirish Shah, even if  

not furnished to the respondent brokers, would not materially  

alter  the  situation  inasmuch  as   it  is  the  liability  of  the  

respondent-brokers, on account of their failure to 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  Indumati  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 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 with monetary penalty. It is also argued  

that  in  case  of  M/s  Ess  Ess  Intermediaries  Pvt.  Ltd.,  M/s

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Rajesh N.  Jhaveri and M/s 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 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  M/s Monarch 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  

M/s. Ess Ess Intermediaries Pvt. Ltd., M/s. Rajesh N.  Jhaveri  

and  M/s.  Rajendra  Jayantilal  Shah  [second  category]  for  

violation  of  the  FUTP  Regulations  cannot  be  a  basis  for  

alteration of the punishment of suspension imposed on M/s.  

Monarch Networth Capital Limited 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

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proper to impose different penalties in different cases involving  

different set of facts, we do not see how and why interference  

should be made in present appeals.  

31. In the light of the above discussions, we dismiss the Civil  

Appeal  No.2818  of  2008  (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, 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.  

…….…………………………...J.                   [RANJAN GOGOI]

         …………………………….……J.     [PRAFULLA C. PANT]

NEW DELHI; FEBRUARY 23, 2016.