Respite for Stock Brokers

The proliferation of business news channels, both English and vernacular, has seen the anchors with screen-time on these channels garner popularity and influence. Indeed, their recommendations and tips carry sway, especially with retail investors. This puts them in positions of power, and with great power should come great responsibility. Scrutiny of their own market conduct is therefore, justified.

SEBI has taken action against errant news anchors in the recent past and much has been said about the Buy-Today-Sell-Tomorrow (BTST) and Intra-day modus operandi alleged in these cases. However, a recent order of the Ld. Adjudicating Officer, SEBI[1] has shed some light on its stance towards alleged involvement and liabilities of stock brokers in such cases. In doing so. SEBI has treated knowledge of the alleged fraudulent trades as a key determinant of liability under the SEBI (Stock Brokers) Regulations, 1992.

SEBI embarked on an investigation into the trading patterns of one such prominent anchor of a reputed Hindi business news channel and his associates. One of his associates was the authorised person (AP) of a brokerage firm (Stock Broker). Their “apparent close relationship” was determined on the basis of Call Data Records and chat-messages obtained by SEBI.

The said AP (operating under the trade name PAM Investment) was alleged to have had knowledge in advance regarding the scrips which the anchor was going to recommend on-air. He is then alleged to have purchased these shares in advance, in anticipation of a spike in the price around the time the recommendation was made on air. Shortly after the recommendation was made, he would sell these shares, taking advantage of the impact of the stock recommendation. A high degree of correlation between the recommendations on-air and the trading pattern, coupled with the records of contact between the said Authorized Person and the said anchor led SEBI to the conclusion that the trades were executed fraudulently.

The Stock Broker of which PAM Investments was the AP was also drawn in to the investigation and received a Show Cause Notice from SEBI. SEBI’s contention against the Stock Broker was that it had violated SEBI Circulars[2] read with Regulations 29 and 30 of the SEBI (Stock Brokers) Regulations, 1992 (“Stock Brokers Regulations”). However, no knowledge of the fraudulent scheme could be imputed to the Stock Broker as per the investigation by SEBI.

As per SEBI’s Circular dated 09 November 2009, an authorized person is any person who is appointed as such by a stock broker (including Trading Member) and who provides access to the trading platform of a stock exchange as an agent of the stock broker. An authorized person is an agent of a stock broker and the stock broker is responsible for the authorized person’s acts and omissions.

In this case the Stock Broker failed to provide evidence regarding all the orders placed by the AP and those acting in collusion with him. This was explainable as the orders were placed using the Computer to Computer Link (CTCL) terminal allotted to that very errant AP.

The Ld. Adjudicating Officer, SEBI noted that no role in the fraudulent scheme mentioned above was attributable to the Stock Broker. It was held that the mere fact that the trades were dealt by the AP through the CTCL terminal of the Stock Broker was insufficient for the charge of violation of the Stock Brokers Regulations to be sustained. This was because there was no evidence to corroborate that the Stock Broker had knowledge of the fraudulent scheme and/or trades. The investigation report of SEBI had no finding in this regard and the show cause notice did not allege as such.

The order sheds light on the limits of vicarious liability of stock brokers under the Stock Broker Regulations and attendant circulars, for the acts and omissions of their authorized persons. A valuable lesson from this order is that the stock broker’s liability cannot be stretched to acts or omissions which were not in the knowledge of the stock broker.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

KC Jacob, Counsel, Email – kcjacob@elp-in.com

Harshvardhan Nankani, Senior Associate – Email – harshvardhannankani@elp-in.com  

[1] Adjudication Order No. Order/BM/JR/2024-25/30573 dated 18 July 2024.
[2]SEBI/HO/MIRSD/DOP1/CIR/P/2018/54 dated 22 March 2018 and MIRSD/DR-1/Cir-16/09 dated 06 November 2009.