Haneef lucky not to be Indian stock broker

WITHOUT CONTEMPT

Mohammed Haneef was fortunate. He is only a doctor and practised medicine in Australia. Arrested by Australian law-enforcers for feared involvement in the Glasgow bombings, Bangalore-bred Haneef was ignominiously picked up.

Even after he secured bail, his visa was suspended on grounds of him being an undesirable person.

One of the Glasgow bombers was Haneef's cousin. Haneef's mobile phone SIM card was said to have been shared with his cousin, and he had a one-way ticket to India although his visa had a long residual period of validity.

Eventually, the authorities acknowledged that such incriminating material was inadequate for securing a conviction in an Australian court, and completely discharged him. All this was done in a matter of a few weeks.

Had Haneef been a stock broker in India, and been suspected of being close to wrong-doers in the capital market, his experience would most likely not be the same. So very often, when the regulators suspect price manipulation through synchronised trading (i.e. where the buyer and the seller have timed their order entry with corresponding identical number of shares and price), the brokers through whom the trades were effected come in for flak.

No person can trade on the stock exchange without a broker. The automated screen-based anonymous trading system ensures that neither the selling broker nor the buying broker is aware of who the counter-party broker is, and even more, who the client of such counter-party broker is. If the clients of two brokers hatch a conspiracy to time the entry of their orders at identical values and volumes to synchronise their trades, the regulator often accuses the broker first, of direct involvement, and then, of lack of due skill, care and diligence in preventing such conspiracy.

Now, it is just impossible for any broker to detect such an occurrence. Even with the benefit of hindsight, it is not possible for the broker to discover such an occurrence "" the entire transaction system, right from order-entry into the trading platform to the completion of settlement of the trade is anonymous. It is only the stock exchange that can find out, and always with the benefit of hindsight that the clients of two brokers had entered orders at the same time.

It is nobody's case that a stock broker can never be involved in a conspiracy to manipulate prices by indulging in synchronised trading. A detailed investigation would be necessary to ascertain wrong-doing. And similar to Australia's anti-terror laws unleashed on Haneef, the Sebi Act, 1992, has conferred phenomenal powers on the Securities and Exchange Board of India (Sebi).

Using Section 11B of the Sebi Act, specific directions can be issued to the brokers suspected of involvement. These directions could be not to deal in securities, not to deal for specific clients, not to be involved in the market until further notice and the like. Using Section 11(4), similar directions can be passed even without completing any probes.

Suspicion over a broker's role in price manipulation was just an example. On similar suspicions, several people have been acted against. These powers have been used against issuers of securities, market intermediaries and a range of persons associated with the capital market. Courts tend not to interfere with such directions issued on an interim basis since an expert regulator's investigations are normally not interfered with. The stock broking community too enjoys a reputation in Indian society that is comparable or worse than the reputation of litigation lawyers in the US.

Worse, just as the Australians disregarded a bail order, and went to strike at Haneef's visa, despite rulings of the Securities Appellate Tribunal laying down the principle that a bona fide broking service cannot be assailed as a conspiracy with the manipulators, notices continue to get issued to brokers on identical circumstances. Terms like "KP-Entity", "KP-stocks" and "KP-associate" (KP being Ketan Parekh) have gained a new undefined scar giving license to issue notices, or to persist with proceedings despite the case being weak.

In stark contrast to what happened to Haneef, time is of no consequence in the usage of these emergency powers in India. Several orders passed under Sections 11 and 11B of the Sebi Act continue to hang without final orders being passed for years, at times, even after a post-decisional hearing is granted.

In one case (disclosure: the author was involved in the defence), using powers under Sections 11 and 11B, a fund manager was asked not to deal in securities until further notice on suspected wrong-doing. The ostensible emergency: he planned to set up a mutual fund in India on his own. It did not matter that no mutual fund can be set up without a licence from the very same regulator. Eventually, an order was passed, which the courts overthrew just on facts.

It is such cases that harm credibility. There are lessons to be learnt from Haneef's experience.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)

somasekhar@jsalaw.com