A unique perspective to Breach of Trust under SEBI
The Securities and Exchange Board of India established by the Government of India in 1992, being a regulatory body has been incorporated to protect the interest of investors investing in securities along with regulating the securities market and to promote the development of and to regulate the securities market. SEBI has issued regulatory functions including registration of brokers, agents, sub-brokers, transfer agents, merchant banks etc.; notifications of rules and regulations; levying of fees, regulation of investment schemes, prohibiting unfair trade practices and has the power to impose monetary penalties on capital market intermediaries. It can also impose a suspension of registration of a broker for various reasons like contravention of SEBI rules and regulations, deceptive investment advice that tentamounts to misconduct by broker.
In the matter of M/s. K R Choksey Commodity Brokers Pvt. Ltd. vs. SEBI, SEBI said in its order:
“The conduct displayed by the noticee (being referred to K R Choksey Commodity Brokers Pvt. Ltd.) as a market intermediary, by indulging in participation/ facilitation in the trading in ‘paired contracts’ on the NSEL, by turning a blind eye to all the illegalities associated with those contracts and the fraudulent manner which trading in those ‘paired contracts’ taking place on the exchange platform of the NSEL, has seriously belied the trust of the Regulator in the integrity and intent of the platform of the NSEL,”; “After committing such grave misconduct, K R Choksey Commodity Brokers can no longer be called a ‘fit and proper person’ for holding the certificate of registration as a commodity derivatives broker in the securities market.” Thereafter SEBI asked the broker to allow its existing clients to withdraw or transfer their securities or funds held in its custody within 60 days.
In September 2009, NSEL (now defunct) introduced the concept of ‘paired contracts’ for trading which allowed buying and selling in same commodity through two different contracts at two different prices on the exchange platform, wherein the investors could buy a short duration contract and sell a long duration contract and vice versa at the same time and at a pre-determined price.
It was further noticed that trades for the buy contract (T+2 / T+3) and the sell contract (T+25/ T+36) used to happen on the NSEL on the same day at same time and at different prices, involving the same counterparties.
The scheme of ‘paired contracts’ traded on the NSEL ultimately caused a huge loss to the investors to the extent of Rs 5,500 crore.
In the matter of Money Mishra Financial Services vs. SEBI, SEBI penalised Money Mishra Financial Services (MMFS), a partnership firm having two partners namely, Awanish Kumar Mishra and Jitendra Kumar Tiwari and also penalised a private limited company being Money Mishra Overseas wherein they both were directors, in a matter involving unauthorised transfer of mutual fund units and their misutilisation towards margin money/collaterals levying a fine of Rs 50 lakh each on (MMFS) and Money Mishra Overseas Pvt. Ltd. Company and a fine of Rs.5 lakhs each on Awanish Kumar Mishra and Jitendra Kumar Tiwari. SEBI noted that in order to meet their huge margin requirements to the tune of Rs 368.45 crore, the Tiwaris had have indulged in such illegal activities involving unauthorized transfer of MF units from the demat accounts of the beneficial owners to their own accounts and again through their demat accounts, ultimately to ISSL (clearing member) for meeting their margin requirements By indulging in such acts, they violated the provisions of PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) norms. The aforesaid case relates to transfer of units during the period 2017 to 2019.
Through three separate orders, SEBI imposed a penalty of Rs. 5 lakh each on Nidhi Kunj Baheti, Manish Kandhari HUF and Karuna Retails for indulging in non-genuine trades in illiquid stock options at BSE.
Separately, the capital markets watchdog slapped a whooping fine of Rs. 3 lakh on Rajesh Chopra for violating insider trading rules in the matter of Varun Beverages. In the concerned matter, Rajesh Chopra was an employee of Varun Beverages at the time of violation of rules. The regulator had conducted an examination in the scrip of Varun Beverages for the period commencing January 2017 to April 2018. And the violating practices were caught and brought on record.
Apart from cases of brokers/companies/firms indulging into unfair trade practices, there have been several cases wherein brokers give out deceptive investment advice to their client for personal gains such as commissions and more. For instance, a stockbroker may present to you derivatives as a vehicle that may enhance your portfolio. While as a product, they sure do hold the potential, it is not everyone’s cup of tea. Of course, your broker is well-aware of the risks of this particular instrument and that it does not suit your risk profile. They may still strongly recommend and pursue you to indulge in such trades. Such brokers may be liable for misconduct.
SEBI clearly states in the Code of Conduct for Stock Brokers (Regulation 7) that a stock-broker shall not make a recommendation to any client who might be expected to rely thereon to acquire, dispose of, retain any securities unless he has reasonable grounds for believing that the recommendation is suitable for such a client upon the basis of the facts, if disclosed by such a client as to his own security holdings, financial situation and objectives of such investment. The stock-broker should seek such information from clients, whenever he feels it is appropriate to do so.
SEBI also clarifies that a stock-broker shall not encourage sales or purchases of securities with the sole object of generating brokerage or commission and that a stock-broker shall not furnish false or misleading quotations or give any other false or misleading advice or information to the clients with a view of inducing him to do business in particular securities and enabling himself to earn brokerage or commission thereby.
As per SEBI (Stock Brokers) Regulations 1992, a stock 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 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, (iii) Prosecution under section 24 of the Act.
Chapter VIA of the SEBI Act, 1992 provides for penalty for contravention where no separate penalty has been provided under Section 15HB stating that, “Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to One Crore Rupees.”.
Chapter VIA of the SEBI Act, 1992 provides also provides the Power to adjudicate.
Section 15-I states that, “(1) For the purpose of adjudging under sections 15A, 15B, 15C, 15D, 15E, 15F, 15G [15H, 15HA and 15HB], the Board shall appoint any officer not below the rank of a Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty. (2) While holding an inquiry the adjudicating officer shall have power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.”.
“The Board may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify: Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter: Provided further that nothing contained in this sub-section shall be applicable after an expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal under section 15T, whichever is earlier.”.
CHAPTER V of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 provides for Action in Case of Default and Manner of Suspension or Cancellation of Certificate stating under Section 23 that, “Where any person who has been granted a certificate of registration under the Act or regulations made thereunder, –
(a) fails to comply with any conditions subject to which a certificate of registration has been granted to him;
(b) contravenes any of the provisions of the securities laws or directions, instructions or circulars issued thereunder; the Board may, without prejudice to any action under the securities laws or directions, instructions or circulars issued thereunder, by order take such action in the manner provided under these regulations.”.
Moreover, SEBI Act, 1992 also provides for Prosecution under Section 24 stating that,
“(1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made thereunder, he shall be punishable with imprisonment for a term which may extend to ten years, or with fine, which may extend to twenty-five crore rupees or with both.
(2) If any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to ten years, or with fine, which may extend to twenty-five crore rupees or with both.”.
Let us look at these violations with an interesting perspective.
As per Section 405 of Indian Penal Code, “Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or wilfully suffers any other person so to do, commits criminal breach of trust”.
IPC states that the essential elements of breach of trust can be deduced to:
(1) dominion over property,
(2) dishonest intention to use the property for one’s own use or disposal of the property and
(3) breach of law.
It is thought provoking to note that when cases of misconduct, deceptive investment advice, fraudulent and unfair trade practices by brokers occur, along with the punishments as aforestated, one can also allege offence of breach of trust and penalise the broker/advisor by correlating the essential elements of the offence of breach of trust with the other SEBI Regulations and provisions of SEBI Act. When we say the offender must have dominion over the property, we can interpret that brokers have a dominant position over the trading practices because clients have limited knowledge of such investments and they rely on broker’s advice which satisfies the first element of breach of trust. When we say that the broker gave improper advice to the client by encouraging trade of securities with the sole object of generating brokerage or commission under Regulation 7 we can deduce it to dishonest intention towards the client by advising without understanding the risk-taking capacity of the client or forcing the client into unnecessary losses or illegal investments which satisfies the second element of breach of trust. Contravention of the aforesaid regulation amounts to breach of law and is punishable as aforestated and therefore it satisfies the third element of breach of trust.
Author: Jigna Mehta,(Alumni of KES Shri Jayantilal H.Patel Law College)