[The following guest post is contributed by Kanwardeep
Singh Kapany
(5th B.S.L.LL.B) and Mitravinda Chunduru (4th B.S.L.LL.B.), both students of
ILS Law College, Pune
Singh Kapany
(5th B.S.L.LL.B) and Mitravinda Chunduru (4th B.S.L.LL.B.), both students of
ILS Law College, Pune
This is a continuation
of Part 1, which is available here]
of Part 1, which is available here]
DEFENCES
What amounts to commission of
Illegal Synchronisation had been a moot point for quite a while. However, with
the passage of time and development of jurisprudence having taken place on the
said subject, not only have factors that point towards the said contravention crystallised
but so have the defenses. If successfully pleaded, these defenses will either
act as a mitigating factor as they will be taken into consideration for
imposition of reduced penalty or in certain situations, if the facts warrant,
vitiate the proceedings in relation to Illegal Synchronisation in toto.[1]
Illegal Synchronisation had been a moot point for quite a while. However, with
the passage of time and development of jurisprudence having taken place on the
said subject, not only have factors that point towards the said contravention crystallised
but so have the defenses. If successfully pleaded, these defenses will either
act as a mitigating factor as they will be taken into consideration for
imposition of reduced penalty or in certain situations, if the facts warrant,
vitiate the proceedings in relation to Illegal Synchronisation in toto.[1]
Inordinate Delay In Filing
Of Show Cause Notices
Of Show Cause Notices
Expeditious
disposal of proceedings wherein allegations of market manipulation are involved
should be the foremost concern as this alone ensures that SEBI is carrying out
its duty effectively to protect the interest of investors in securities and to
promote the development of and regulating the securities market as mandated by
SEBI Act.[2] Inordinate delay in
conducting inquiries and in punishing the delinquent not only permits market
manipulator to operate in the market, it also has demoralizing effect on the
market players who are ultimately not found guilty but ‘Damocles sword’ of
inquiry keeps hanging on them for years together from the date of starting
investigation by SEBI to the date of completion of inquiry proceedings.[3]
Time and again Competent Forums have expressed that SEBI must undertake
necessary steps to ensure that inquiry proceedings against market manipulators
are completed expeditiously and guilty persons are punished in a time bound
manner[4] so
as to prevent violation of principles of natural justice[5]
which occurs when such proceedings are delayed without any fault on the part of
Alleged Contravener.
disposal of proceedings wherein allegations of market manipulation are involved
should be the foremost concern as this alone ensures that SEBI is carrying out
its duty effectively to protect the interest of investors in securities and to
promote the development of and regulating the securities market as mandated by
SEBI Act.[2] Inordinate delay in
conducting inquiries and in punishing the delinquent not only permits market
manipulator to operate in the market, it also has demoralizing effect on the
market players who are ultimately not found guilty but ‘Damocles sword’ of
inquiry keeps hanging on them for years together from the date of starting
investigation by SEBI to the date of completion of inquiry proceedings.[3]
Time and again Competent Forums have expressed that SEBI must undertake
necessary steps to ensure that inquiry proceedings against market manipulators
are completed expeditiously and guilty persons are punished in a time bound
manner[4] so
as to prevent violation of principles of natural justice[5]
which occurs when such proceedings are delayed without any fault on the part of
Alleged Contravener.
No Access To
Documentary Evidence And Or Witnesses
Documentary Evidence And Or Witnesses
The materials upon which SEBI may
rely in order to prove contravention of the Act & Regulations are inter alia details, records and
statements such as order logs and trade logs. An Alleged Contravener
necessarily would require access to the said materials for presenting an
effective defense. Therefore, an opportunity to peruse and inspect the said
materials has to be mandatorily provided to the Alleged Contravener.[6]
However, if by not providing certain material, which formed basis of an order,
the Alleged Contravener is not at all prejudiced, then such an omission will
not be fatal to the continuation of proceedings. Also, on certain occasions if testimony
of certain individuals has been relied upon[7] to
come to a certain finding, in such cases, an opportunity to cross examine such
individuals has to be mandatorily provided to the Alleged Contravener.[8]
rely in order to prove contravention of the Act & Regulations are inter alia details, records and
statements such as order logs and trade logs. An Alleged Contravener
necessarily would require access to the said materials for presenting an
effective defense. Therefore, an opportunity to peruse and inspect the said
materials has to be mandatorily provided to the Alleged Contravener.[6]
However, if by not providing certain material, which formed basis of an order,
the Alleged Contravener is not at all prejudiced, then such an omission will
not be fatal to the continuation of proceedings. Also, on certain occasions if testimony
of certain individuals has been relied upon[7] to
come to a certain finding, in such cases, an opportunity to cross examine such
individuals has to be mandatorily provided to the Alleged Contravener.[8]
Discrimination
Differential treatment presupposes
discriminatory conduct. When contraveners are meted out different punishments,
some with softer and the other with harsher, this is not at all sufficient to establish
existence of discriminatory conduct on the part of the Competent Forum. For
pleading discrimination what has to be clearly brought out is the factum that
the Competent Forum has gone ahead and provided different punishments where the
role played by all the Alleged Contraveners is homogeneous. Also, presence of discernible
reasons, for reaching a conclusion is considered to be fair and non arbitrary[9] as
reason is the heart beat of fair play. Therefore, absence of reasons in an
order passed by a Competent Forum wherein similarly placed Alleged Contraveners
are treated differently will squarely fall within the ambit of discriminatory
conduct.
discriminatory conduct. When contraveners are meted out different punishments,
some with softer and the other with harsher, this is not at all sufficient to establish
existence of discriminatory conduct on the part of the Competent Forum. For
pleading discrimination what has to be clearly brought out is the factum that
the Competent Forum has gone ahead and provided different punishments where the
role played by all the Alleged Contraveners is homogeneous. Also, presence of discernible
reasons, for reaching a conclusion is considered to be fair and non arbitrary[9] as
reason is the heart beat of fair play. Therefore, absence of reasons in an
order passed by a Competent Forum wherein similarly placed Alleged Contraveners
are treated differently will squarely fall within the ambit of discriminatory
conduct.
Merely Carrying Out Directions
Of Client
Of Client
This is a broker specific defense. The
broker is expected to carry out the directions of the client such as executing
trades for the client.[10]
The trading system in place is designed to maintain complete anonymity. Until
it cannot be shown that the broker was aware of the intention of the client
being to undertake Illegal Synchronisation or that the client and the broker
had colluded to do the same, or that the broker had individually undertaken to
do the same, merely Legal Synchronisation will not at all be sufficient to hold
the broker in contravention of either the SEBI Act or PFUTP Regulations or
Broker Regulations.
broker is expected to carry out the directions of the client such as executing
trades for the client.[10]
The trading system in place is designed to maintain complete anonymity. Until
it cannot be shown that the broker was aware of the intention of the client
being to undertake Illegal Synchronisation or that the client and the broker
had colluded to do the same, or that the broker had individually undertaken to
do the same, merely Legal Synchronisation will not at all be sufficient to hold
the broker in contravention of either the SEBI Act or PFUTP Regulations or
Broker Regulations.
CONCLUSION
Illegal Synchronisation is not just
an actus reus based contravention, it necessarily requires the presence
of mens rea as well. Across the board, Illegal Synchronisation is considered
to be a serious offence, “Not all the King’s horses and all the King’s men’
can ever salvage the situation.” The impact of such an adverse finding is
wide, more so in the case of a large public company having large number of
investors. Therefore, evidence merely raising probabilities and endeavouring to
prove the fact on the basis of preponderance of probability is not sufficient
to establish such a serious offence. Also, mere conjunctures and surmises are
not adequate to hold a person guilty of such a serious offence. What will be
required is the presence of reasonably strong evidence.[11]
an actus reus based contravention, it necessarily requires the presence
of mens rea as well. Across the board, Illegal Synchronisation is considered
to be a serious offence, “Not all the King’s horses and all the King’s men’
can ever salvage the situation.” The impact of such an adverse finding is
wide, more so in the case of a large public company having large number of
investors. Therefore, evidence merely raising probabilities and endeavouring to
prove the fact on the basis of preponderance of probability is not sufficient
to establish such a serious offence. Also, mere conjunctures and surmises are
not adequate to hold a person guilty of such a serious offence. What will be
required is the presence of reasonably strong evidence.[11]
Another pertinent aspect which is a
continuation of the burden of proof aspect is whether merely establishing
Illegal Synchronisation is enough or whether it has to be shown that investors were
actually influenced by such contravention of the Act & Regulations. When an
Alleged Contravener takes part in or enters into transactions relating to
securities with the intention to artificially raise or depress the price,
innocent investors in the market are thereby automatically induced to buy /
sell their stocks. The buyer or the seller is invariably influenced by the
price of the stocks and if that is being manipulated, the Alleged Contravener
doing so necessarily influences the decision of the buyer / seller thereby
inducing them to buy or sell depending upon how the market has been
manipulated. Therefore, inducement to any person to buy or sell securities is
the necessary consequence of manipulation and flows therefrom.[12]
Therefore, SEBI is just burdened with establishing Illegal Synchronisation.
Once that is established, it will necessarily follow that the investors in the market
had been induced to buy or sell and that no further proof in this regard is
required.
continuation of the burden of proof aspect is whether merely establishing
Illegal Synchronisation is enough or whether it has to be shown that investors were
actually influenced by such contravention of the Act & Regulations. When an
Alleged Contravener takes part in or enters into transactions relating to
securities with the intention to artificially raise or depress the price,
innocent investors in the market are thereby automatically induced to buy /
sell their stocks. The buyer or the seller is invariably influenced by the
price of the stocks and if that is being manipulated, the Alleged Contravener
doing so necessarily influences the decision of the buyer / seller thereby
inducing them to buy or sell depending upon how the market has been
manipulated. Therefore, inducement to any person to buy or sell securities is
the necessary consequence of manipulation and flows therefrom.[12]
Therefore, SEBI is just burdened with establishing Illegal Synchronisation.
Once that is established, it will necessarily follow that the investors in the market
had been induced to buy or sell and that no further proof in this regard is
required.
The market, as already observed, is
so wide spread that it may not be humanly possible for SEBI to track the
persons who were actually induced to buy or sell securities as a result of
manipulation and law can never impose a burden which is impossible to be
discharged.[13]
While SEBI is drawn to the task of establishing that the Alleged Contravener has
indulged in Illegal Synchronisation, by presenting evidence that meets the
aforementioned standard, it need not wait for the final outcome of the said lis.
SEBI is very well empowered, for the purpose of protecting the interest of
investors[14]
in securities market, to issue directions[15] as
is appropriate in the interests of investors in securities and the securities
market and SEBI has made judicious use of the said power on previous occasions.[16]
so wide spread that it may not be humanly possible for SEBI to track the
persons who were actually induced to buy or sell securities as a result of
manipulation and law can never impose a burden which is impossible to be
discharged.[13]
While SEBI is drawn to the task of establishing that the Alleged Contravener has
indulged in Illegal Synchronisation, by presenting evidence that meets the
aforementioned standard, it need not wait for the final outcome of the said lis.
SEBI is very well empowered, for the purpose of protecting the interest of
investors[14]
in securities market, to issue directions[15] as
is appropriate in the interests of investors in securities and the securities
market and SEBI has made judicious use of the said power on previous occasions.[16]
[Concluded]
– Kanwardeep Singh Kapany &
Mitravinda Chunduru
Mitravinda Chunduru
[1] In Re: Genus Commu-Trade Limited; In Re: The shares of Birmingham Thermotech Limited,
MANU/SB/0105/2009.
MANU/SB/0105/2009.
[2] Shri Ashok K. Chaudhary v. SEBI,
MANU/SB/0126/2008.
MANU/SB/0126/2008.
[3] Subhkam Securities Private Limited v. SEBI, MANU/SB/0156/2012.
[4] M/s. Prashant J. Patel v. SEBI,
MANU/SB/0194/2012.
MANU/SB/0194/2012.
[5] Libord Finance Limited v. SEBI,
[2008] 86 SCL 72 (SAT).
[2008] 86 SCL 72 (SAT).
[6] Purshottam Budhwani v. SEBI,
MANU/SB/0001/2015.
MANU/SB/0001/2015.
[7] Ketan Parekh v. SEBI, MANU/SB/0229/2006.
[8] Triveni Managaement Consultancy Services Limited v. SEBI,
MANU/SB/0071/2013.
MANU/SB/0071/2013.
[9] The Constitution of
India, 1949, art 14.
India, 1949, art 14.
[10] Ajmera Associates Limited v.
SEBI, MANU/SB/0044/2010.
SEBI, MANU/SB/0044/2010.
[11] Sterlite Industries (India) Limited v. SEBI, MANU/SB/0040/2001.
[12] Sebi v. A Nitin Capital
Services Limited, MANU/SB/0101/2007.
Services Limited, MANU/SB/0101/2007.
[13] Iridium v. Motorola Case,
AIR 2011 SC 20.
AIR 2011 SC 20.
[14] Securities and
Exchange Board of India Act, 1992, section 11.
Exchange Board of India Act, 1992, section 11.
[15]
Securities
and Exchange Board of India Act, 1992, section 11B.
Securities
and Exchange Board of India Act, 1992, section 11B.
[16] In the matter of Blessing Agro Farm India Limited and its Directors
WTM/SR/CIS-SRO/114/12/2014; Order against
M/S Lee Capital Services Private Limited, WTM/RKA/MIRSD/53/2013.
WTM/SR/CIS-SRO/114/12/2014; Order against
M/S Lee Capital Services Private Limited, WTM/RKA/MIRSD/53/2013.
