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Petitioner: LAHORE STOCK EXCHANGE VS Respondent: SHAHID GHAFFAR, COMMISSIONER (SECURITIES MARKET)
Court Name: Appellate Bench of Securities and Exchange Commission of Pakistan Judge(s): Abdul Rehman Oureshi, N. K. Shahani Title:LAHORE STOCK EXCHANGE vs SHAHID GHAFFAR, COMMISSIONER (SECURITIES
MARKET) Case No.: Appeal No, 2 of 2002 Date of Judgment:2002-06-27 Reported As: 2002 CLD 1583 Result: Order accordingly Judgment ORDER ' This is an appeal dated 5th January, 2002 filed by the Lahore Stock Exchange (LSE) against the order (impugned order) dated 7th December, 2001 passed by the Commissioner (Securities Markets) of the Commission. 2. The appeal finally came up for hearing on 26th April, 2002. Mr. Aamir Zareef Khan, Deputy Secretary (Legal), LSE and Mr. Faisal Islam, Advocate, attended on behalf of the appellant, LSE. Syed Aamir Masood, Director and Ms. Sumbul Naved Qureshi, Junior Executive, of the Commission, represented the Respondent No, 1. Respondent No, 2, Mr. Aslam Motiwala, attended in person with Mr. Salim Chamdia, Chairman of the Karachi Stock Exchange (KSE). Respondent No, 3, Mr. M. Aamer Riaz, appeared in person with Ejaz Ahmed Bodla, Advocate and Riaz Chaudhry. Respondent No, 4, Mr. Tanveer Malik, appeared in person with Mr. Rafay Alam, Advocate. Mr. Muhammad Rafique Umer, Legal and Corporate Affairs Adviser, KSE and Mr. Arif Habib, represented respondent No, 5. 3. The brief facts of the case are as follows: - (a) During the trading period from Monday, 22nd May, 2000 to Friday, 26th May, 2000 the respondent No,3, on behalf of his client, respondent No,2, placed an order for the sale of 1,061,400 shares of Adamjee Insurance Company Limited (AICL) on the Lahore On-Line Trading System (LOTS) of the LSE that was executed in 33 (thirty-three) trades at rates between Rs,105 and 109. Respondent No, 4 before us, was the buying broker for his client, Diamond Industries Limited in respect of all these 33 trades. (b) While 23 (twenty-three) of these 33 (thirty-three) trades aggregating 1,002,500 shares of AICL related to respondent No, 3's client, respondent No, 2 before us, the other 10 (ten) trades
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aggregating 58,900 shares of AICL related to respondent No, 3's other clients. (c) The manager of the clearing house of LSE communicated to the then Managing Director of LSE his suspicion that the trades between respondent No, 3 (selling broker) and respondent No, 4 (buying broker) is a cross-transactions and being executed with a fraudulent intention in order to shift exposures from one member to another. (d) The LSE taking prompt notice of the said manager's communication on Tuesday, 30th May, 2000 directed that 23 trades, out of the 33 trades, pertaining to 1,002,500 shares of AICL be deleted from LOTS. (e) On 31 May, 2000 respondent No, 2 wrote to respondent No, 3, challenging the decision of the LSE pertaining to deletion of these 23 trades, and requested that the 33 trade transactions be honoured. A copy of his communication was also forwarded to the Commission for necessary action. (f) The Commission took cognizance of respondent No,2's grievances and called a hearing in this respect on 15th July, 2000. Mr. Tariq Iqbal Khan, the then Commissioner, Securities Market Division of the Commission passed an order remanding the case back to LSE and directed it to decide the case afresh. (g) Pursuant to the order dated 15th July, 2001 passed by the then Commissioner, Securities Market, LSE constituted a Sub-Committee of the Board of Directors to look into the matter. The subcommittee, on 15th September, 2000 declared that 23 trade were deleted rightfully from LOTS and recommended that a fine of Rs, 25,000 be imposed on respondents Nos. 3 and 4 by the LSE. (h) Respondent No, 2 then submitted his reply dated 22nd September, 2000 disputing the findings of the sub-committee. The Commission once again considered the matter and forwarded the same to the Joint Committee of the Commission and Stock Exchanges (Joint Committee) for investigation and adjudication. (i) The Joint Committee observed that respondent No, 2 and respondent No, 3 had complied with all procedural requirements; and that had the LSE not deleted 23 trades, the parties concerned would have honoured the transactions. The Committee observed that the inability of the parties not to honour the transactions was due to the acts of LSE. As any action against the LSE did not fall within the jurisdiction of the Joint Committee, the matter was forwarded to Commission for adjudication in December, 2000. (j) On 3rd January, 2001, the Commission issued a directive restraining the LSE from implementing its decision and to treat the 23 trade transactions as genuine and allow the settlement of trades in question. The LSE was also accorded an opportunity of hearing on 8th January, 2001 if it had anything to urge before Commission. The LSE in response assured full co-operation and compliance of the said directive vide its letters dated 5th January, 2001 and 1 1 the January, 2001. (k) On 13rd March, 2001, LSE retracted from the position taken earlier and desired withdrawal of the said directive of the Commission. LSE also requested for another hearing in the matter. Accordingly, an opportunity of hearing was afforded to all the parties on 14th September, 2001 that was attended by respondents Nos. 2 and 3. Managing Director of the appellant and representatives of respondent No, 5. Subsequently the impugned order was passed by the respondent Executive Director who directed the LSE to take steps for honouring the said 23 transactions and also to ensure payment to respondent No, 2. Respondent No, 2 was directed to deliver to the LSE, 1,002,500 shares of AICL inclusive of all benefits received on these shares since 30th May, 2000. 4. Mr. Faisal Islam, counsel for the appellant after briefing the Bench with the facts of the case made the following submissions: - (1) In view of the fact that a Suit No,1592 of 2000 is pending before Sindh High Court and M/s. First Capital ABN (ABN) and respondent No, 2 are the parties in the said suit of Rs, 2.5 million AICL Shares which are in dispute and are the same as transacted with ABN and further that in this case
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damages have also been claimed from ABN for not honouring the Badla transaction regarding the said shares, judicial proprietary demands that this Appeal should not be heard until the decision of the Sindh High Court. Similar proceedings were also pending before the Arbitration Committee of KSE which was subsequently stayed by the Sindh High Court as the High Court itself was seized with the matter. He also submitted that ABN has alleged in the said suit that it was simply a facilitator and behind ABN it was in fact Mr. Iftikhar Shafi another major market player. It has been argued that in the event the Sindh High Court passes judgment in favour of respondent No,2 and accepts its prayer then these proceedings would become infructuous as there would be no relief left to be granted. (m) Narrating the factual aspects, Mr. Faisal stated that in 1998, prohibition on entering into a negotiated deal was imposed by LSE on Lahore Automated Trading System (LOTS). However, in between 22nd to 26th May, 2000 certain transactions were characterized as disputed transactions by the Manager, Clearing House, LSE on account of their being cross and negotiated deals. In this regard letters written by respondents Nos. 3 and 4, the members of LSE who carried out the disputed transactions were also referred, in particular, letter dated 30th May, 2000 allegedly from respondent No,4 a firmly stating that the subject transactions were executed on LOTS in connivance with other member through intercom facility. Another letter dated 5th June, 2000 from respondent No, 3 seeking advice with respect to release of Adamjee Shares held originally by LSE as exposure deposit was also pointed out. Attention was also drawn to letters dated 8 June, 2000 and 20th June, 2000 written to respondent No, 3 who was acting as broker to respondent No, 2 reiterating respondent No, 2's demand to resolve issue pertaining to the deleted transactions. However, in the minutes of Board's meeting of LSE held on 13th July, 2000 when respondents Nos. 3 and 4, members, LSE appeared before the Board and respondent No, 2 was also present, the statements of respondents Nos. 3 and 4 as recorded clearly provide the admissions made by the party with respect to entering into a negotiated deal. An order dated 31st July, 2000 by a single Commissioner was also referred to where under much before the passing of the impugned order a direction was given to LSE to explain as to what action has been taken against the two brokers respondents Nos. 3 and 4 after their acceptance of violation of Regulations of LSE and it was observed that the connivance and malpractice accepted by the two members also casts aspersion on their integrity. The counsel for LSE argued that as per the Notification dated 1st June, 1998, the appellant restrained the members of LSE from entering into Negotiated Deals in LOTs. Negotiated Deal has been defined in Automated Trading Regulations for Lahore On-Line Trading System to "mean a deal which has been negotiated between two parties outside the regular market". The transaction done by respondents Nos. 2 and 3 in connivance with each other by agreeing on the price and the quantity of the shares for the purpose of their sale and purchase through intercom facility would be termed as a Negotiated Deal irrespective of the fact that "the option for brokers to access the special window on their trading terminals which allowed Negotiated Deals, had been shut down by LSE", as mentioned at page 8 of the impugned order. The word "negotiate" has been defined in Black's Law Dictionary, Seventh Edition, 1999 at page 1059 as follows: To communicate with another party for the purpose of reaching an understanding; to bring about by discussion or bargaining. Therefore, the communication of respondent Nos. 2 and 3 on the intercom for the purpose to effect the sale and purchase of the shares in a particular quantity and at a specific price amounts to Negotiated Deal. The counsel argued that in view of the background given above the deleted transactions did in fact constitute negotiated deal as it can be established by showing the nexus between the members who were negotiating and settling the prices via intercom. The parties had used intercom facility and the fact that these transactions were executed in split of seconds and minutes also support this view. It is contended that these transactions were not done in one go in an attempt to give an impression that it was not a
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negotiated deal. Moreover, the admission of the parties itself is an evidence. LSE's counsel submitted that in view of the acceptance of LSE decision by the concerned parties the same could not have been challenged. (n) The principles of natural justice were not adhered to as LSE was not given an opportunity of being heard. It has been alleged that despite LSE's repeated reminders the appellant was not provided with the copy of the appeal and the show-cause notice and the notice of hearing dated 7th September, 2001 was defective as it did not specify particular allegations and was not clear as to which Appeal it was referring to the last time appellant had knowledge of the appeal, it was six months prior to the receipt of notice and it was not disclosed to the appellant that the hearing of appeal in fact is with respect to respondent No, 2's letter dated 22nd September, 2000. It could have been any Appeal, therefore, we had asked Commission to provide a copy of the Appeal. Commission failed to clarify and/or confirm in this regard despite requests being made by LSE, adjournment was flatly refused and the counsel was expected to argue without having been provided with the details of the case. It is stated that the impugned order was announced in blatant disregard of all principles of natural justice. The maxim "audi alteram partem" embodies a well-founded principle of law that no one is to be condemned unheard. Reliance was placed on (sic) SCMR 2232; PLD 1959 SC 45 (case at 2); 1994 SCMR 1299. The impugned order has been passed in utter disregard of these well-established principles of law and natural justice and, therefore, should be set-aside. The counsel argued that as the appellant was not given an opportunity of hearing by the learned single Commissioner, it would be appropriate to remand the case to the learned single Commissioner for decision afresh where the issue of non-hearing of a party arises, the Appellate Courts have always remanded the case. This is also to safeguard the vested right of the party to avail all the remedies (including those of appeals) available under the statute PLD 1985 SC 376; PLD 1964 Pesh. 250 (case at 3B); PLD 1969 SC 599; PLD 1980 Quetta 29. (o) The matter was decided without carrying out any investigation or inquiry. The counsel further submitted that no order by Commission can be passed without investigation. Reference was made to clauses (b), (c) and (f) read with section 20 of Securities and Exchange Commission of Pakistan Act, 1997(the "SECP Act") and section 21 of Securities and Exchange Ordinance, 1969. It is submitted that Securities and Exchange Board of India Act, 1992 (the "SEBI Act") is the parallel legislation to the Act. The powers of Commission under section 20 of the Act are almost similar to the powers of Securities and Exchange Board of India ("SEBI") under section 11 of the SEBI Act. It is argued that after reading the case M.Z. Khan v. Securities and Exchange Board of India AIR 1999 Delhi 164 (case at 6); Karnavati Fincap Ltd. Vs. Securities and Exchange Board of India, company cases (1996) Vol.87, p.186 (case at 7), although none of which is relevant to the issues involved in the instant case, one thing is quite clear that the order passed by SEBI or the Adjudicating Officer in India under the SEBI Act (which are appealable before Securities Appellate Tribunal) are based on the inquiry/investigation undertaken by the Adjudicating Officer. In view of the above grounds, the orders appealable before this honourable Bench are required to be passed on the basis of proper investigation. While doing the inquiry/investigation, the Investigating Officer under the Act and Securities and Exchange Ordinance is empowered, like the Adjudicating Officer in India, to exercise the powers under sections 29 to 32 of the Act and sections 21 and 22 of Securities and Exchange Ordinance. The impugned order was passed without any investigation of the matter as provided under the Act and Securities Ordinance, which, inter alia, require recording of the evidence and examining the witnesses. Therefore, the impugned order is ex facie illegal. (p) The Commissioner (Securities Market) completely overlooked the reliance placed by the appellants on LOTS Regulation 19(f). Therefore there was absence of application of mind on the part of the Executive Director. The learned single Commissioner failed to consider and appreciate
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Regulation 19(f) of the LOTS Regulations on the basis of which the Disputed Transactions were deleted. Regulation 19(f) reads as follows: ' Notwithstanding anything contained in these regulations, the exchange may in its sole discretion cancel any order (before or after settlement) with the prior approval of the Board of Directors. ' Firstly, Regulations 7 and 8 which are referred to in the impugned order are not relevant in the present case and secondly, in view of the non-obstante clause in Regulation 19(0, Regulation 19(f) has an overriding effect on Regulations 7 and 8 as far as the inconsistency contained therein. The learned single Commissioner's failure to take Regulation 19(0 into consideration and his failure to appreciate its effect renders the impugned order bad in law. Regulation 19(f) authorizes the Board of LSE to cancel any Order (before or after settlement). The word "settlement" has not been defined in the LOTS Regulations. However, in Black's Law Dictionary, Seventh Edition, 1999 at page 1377 this word has been defined as follows: ' The conveyance of property - or of interests in property - to provide for one or more beneficiaries. ' An agreement ending a dispute or lawsuit. Payment, satisfaction, or final adjustment. ' Therefore, the words "after settlement" in brackets clearly show that the power under this Regulation is wide enough to include even a "trade" as discussed in the impugned order. The council also referred to the object clause of Memorandum of Association which empowered LSE to delete any transaction if the same is considered dishonourable and unethical. (q) The impugned order is passed without any jurisdiction. The counsel strongly objected to the jurisdictional aspect allegedly exercised vide impugned order. It is his argument that the Bench must look into the scope and extent of Regulator's power in exercise of jurisdiction conferred upon Commission. Commission cannot be allowed to settle private disputes between the parties. For this purpose mechanism is provided under the Ordinance. Remedy in the present case is provided for under section 7 of the Ordinance and as there is no other provision empowering Commission under which action can be taken against LSE. As for section 20 it has been emphasized that these are general regulatory powers and merely a subsidiary clause. Therefore, independent of the Ordinance no action can be taken in pursuance of the said provisions under the Act. Attention of the Bench was also drawn to sections 73 and 74 of the Contract Act. The counsel for LSE argued that the impugned order is not clear in its operative part, which reads as follows: ' LSE to take steps to honour 23 trades for 1,002,500 shares of AICL and how payment to respondent No, 2 at the earliest and; ' Respondent No, 2 to deliver 1,002,500 shares of AICL inclusive of all benefits (such as bonus shares and cash dividend) received on these shares since 30th May, 2000. ' It is counsel's view that his understanding of the Order is that LSE has to sell the shares in the market and whatever it receives the same shall be delivered to respondent No, 2. On the other hand another interpretation which the respondents may give is that LSE has to honour the transaction as it was on the date of deletion and the appellants is required to pay damages to respondent No, 2 on the basis of difference between the original price and the present price of the shares. This in his view amounts to over stepping the jurisdiction by Commission as awarding damages falls within the domain of a Civil Court. Reliance was placed on (1995 SCMR 1431 and PLD 1985 SC 69). It is argued that no two jurisdictions can have parallel jurisdiction. He further referred to section 23 of the Contract Act and argued that in view of the said provision a contract entered into violations of Regulations was void as it was based on fraud. The same cannot be upheld in law. The Negotiated Deals, when barred under the Notification, cannot be given effect to under the provisions of section 23 of the Contract Act, 1872 (the "Contract Act"). (r) While concluding his arguments following facts were further raised to support the view that the contract between respondents Nos. 2 and 3 was even otherwise in violation of the provisions of section 23 of the Contract Act, therefore, the impugned order could not be passed in favour of the
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same. It was contended that as per the statement of respondent No, 3 he had only 300,000 shares for delivery against the purchase order by respondent No, 4 of the total 1,002,500 shares. This shows the fraudulent character of the Disputed Transactions. A contract based on fraud cannot be enforced and in case of any dispute in this regard can only be decided by the Civil Court (1994 SCMR 150). All purchases of the shares were made by respondent No, 4 in the sub-account (021) of Diamond Industries, whose account was already in debit balance in huge amounts. Had the Disputed Transactions been allowed the same would have caused injury to LSE clearing house because the default on part of respondent No, 4 was imminent in view of the common knowledge. Had the Disputed Transactions not been deleted, it would had further affected the investors' confidence and, therefore, were opposed to public policy [1984 SCMR 1; AIR 1933 Born. 209 and PLD 1985 SC 86]. 5. The following submissions were made on behalf of respondent No, 2: - (a) Respondent No, 2 was represented by Mr. Saleem Chamdia who stated that the basic issue involved in this matter is whether the Manager of LSE Clearing House deleted the transactions on valid grounds. The grounds taken for deletion of transaction are that these were (a) cross- transactions (b) negotiated deal. Furthermore, there was apprehension on part of the Clearing House against the parties involved in transactions that the transactions are an attempt to shift risk exposure. As for the jurisdictional issue, he submitted that I would leave it for respondent No,1 to argue on this ground. (b) Attention of the Bench was drawn to the regulation defining the term "negotiated deal". It was argued that the said regulation clearly provides that such a deal can only take place outside the regular market whereas the appellant has himself admitted that the negotiated deals were banned since 1998. Furthermore, the window through which the negotiated deals are operated was also shut. The appellants have also admitted that the transactions were carried on LOTS, therefore, the question of negotiating the deal does not arise. It has also been submitted that the transactions were not executed within few seconds but over a period of 40-45 minutes and not all trades executed were cancelled only 23 out of 33 trades were cancelled. As for the statement and admissions made by respondent No, 4, Mr. Chamdia submitted that respondent No, 4's acceptance and admission has no meaning as the prices of these shares were going down and respondent No, 4 being a buyer naturally had not interest in honouring the said transaction. As for the shifting the risk of exposure it has been submitted by Mr. Chamdia that it is beyond his comprehension as to how any such risk could be apprehended where 300,000 shares were lying with the clearing house as share deposit. The grievance that respondent No, 2 had, was that not only the transaction was not honoured but even the shares deposited with LSE were not returned and it was only with the intervention of the Commission in November that the said shares were returned. The irony, as argued by Mr. Chamdia is that objection is now being taken that receiving of the said shares by respondent No, 2 establishes the point that he had no objection to cancellation/deletion of the transaction. (c) Mr. Chamdia further contended that when the same matter was referred back to LSE by the Commission, the said members were penalized only to the extent of Rs,25,000 whereas now such gross violations are being alleged against them. With respect to statements made by members before the Board, Mr. Chamdia requested the Bench to take note of the fact that it is a difficult for a member to proceed against the Stock Exchange and one should not ignore or overlook the practical realities. It is for the Manager Clearing House who is an expert to proceed only after taking into account the relevant rules and regulations and appreciating the facts of the case, which in the present case LSE failed to do and exceeded its authority. He submitted that the appellants are only referring to regulation 19(f) of LOTS whereas the relevant regulation 7 is more relevant and if these two are read together it would be clear that LSE had no power to delete an executed trade. He cited
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certain instances from the past where in May, 2000 crisis LSE paid to investors a huge sum of money although it was not lawfully obliged. He expressed his surprise that where there is a lawful claim and even demand note and payment orders were issued the claim is wrongfully denied by LSE. On the allegation of connivance it has been argued that had there been any connivance, the parties should have then opted for trading in maximum quantity and should have done it within seconds. As for the allegation regarding the subject shares being same as those of the suit pending before the Sindh High Court, it was clarified that it was ABN which did not honour the transaction and hence the failure led to liquidating the transaction. LSE, however, in submission made by Mr. Chamdia has nothing to do with the suit as LSE is only related to second phase and is primarily required to allow honouring of the transactions traded on LOTS. Regarding the objection pertaining to jurisdiction of the Joint Committee, it has been argued that when the matter was referred to the Joint Committee it was a matter inter se members of Stock Exchanges for which the…
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