In SEBI v. Kishore R. Ajmera, the Supreme Court recently passed an order on several appeals involving a common question of law i.e. what is the degree of proof required to hold brokers/ sub-brokers liable for fraudulent/ manipulative practices under SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 and/ or liable for negligence under the Code of Conduct as specified under SEBI (Stock Broker and Sub-Broker) Regulations, 1992.

The court stated that it is a cardinal rule of law that proof of an allegation levelled against a person may be in the form of direct evidence or circumstantial evidence. In relation to the violations committed by the brokers/sub-brokers, the court stated that the evidence has to be gathered from various circumstances such as the volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders; the proximity of time between the two etc.

The court held that there is a dividing line between negligence and deliberate intention. The difference between Code of Conduct violations and PFUTP Regulations violations depends on the extent of the persistence on the part of the broker/sub-broker. Upto an extent, where the brokers/sub-brokers failed to alert themselves, violations can be attributed to negligence and lack of due care and caution. However, persistent trading either over a long period of time or in respect of huge volumes would show deliberate intention to play the market. The court further added that the said dividing line has to be drawn on the basis of the volume of the transactions and the period of time that the broker/sub-broker indulged in the conduct.

This is a landmark decision by the Supreme Court which has shed some clarity on the determination of liability either for violations of the provisions under PFUTP Regulations or for the violation of the provisions under the Code of Conduct, though the question of broker/sub-broker complicity will always be a fact centric issue.