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TMI Blog2010 (7) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... rsubscribed by 5.25 times and the issue price was finalized at ₹ 39/- per share. 45 per cent of the issue size (28.85 lac shares) were required to be subscribed by Qualified Institutional Buyer(s) (QIB). Only one QIB, namely, Venus Capital Management Inc. and its two sub accounts, namely, Vacuf Ltd. and ITF Mauritius (individually referred to hereinafter as Venus, Vacuf and ITF respectively and collectively as QIB) subscribed for 43.67 lac shares in the QIB category and received allotment of the entire quota of 28.85 lac shares. The shares of the company were listed on the Bombay Stock Exchange Ltd. and the National Stock Exchange of India Ltd. (for short BSE and NSE respectively) on December 29, 2006 which was the first day of trading on the stock exchanges and the next day of trading was January 2, 2007. On the day of listing, the shares of the company opened at ₹ 39/- on NSE and ₹ 40/- on BSE and closed at ₹ 130.90/- on NSE and ₹ 128.80/- on BSE. The total traded quantity on the first day of trading was around 7 crore shares on NSE and around 6.11 crore shares on BSE. Spurt in price, traded quantity and the delivery percentage on the first day of li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sales. It is alleged that because of the similar trading pattern adopted by these 21 entities, they acted in concert with each other and cornered the shares from the QIB by devising a scheme whereby the latter was given an exit route to offload the shares at a predetermined price on the listing day. This scheme, according to the show cause notice, was meant to prevent a fall in the price of the scrip that accompanies such large sales. Investigations revealed that all the 21 noticees were connected to each other, some of them through financial dealings while others through family relations or business links. The manner in which each of the noticees was connected to the other(s) is given in Annexures 1 and 2 to the show cause notice. The noticees allegedly had a design to suck out the liquidity of the shares of the company from the market thereby creating an artificial scarcity of shares. The noticees are said to have executed structured trades with Venus, Vacuf and ITF though the appellants are shown to have executed such trades only with Venus and Vacuf. Some of the details of the structured trades were furnished to the noticees in the show cause notice though the details were no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced by the other persons/entities with my brokers. (b)I placed the order to purchase shares of Nissan Copper Limited with brokers Limited at a price of ₹ 30/- per share at 10:10:14 am even as per the tables in paragraph 23. (c)I intended to purchase the shares since I was enthusiastic about the prospects of the company i.e. Nissan Copper Limited and could not gather sufficient number of shares in the IPO. I had also anticipated that he price of the scrip would rise in the course of the day or in a couple of days and hence wanted to invest substantially in the scrip. (d)As my orders remained unexecuted for around 30 minutes and therefore, I modified the orders by increasing the price to ₹ 46.50 per share at 10:35:53 and my modified order for shares allegedly matched with the sell order placed by Vacuf Limited. (e)My trading behavior is consistent with normal trading behavior of any investor who foresees a short term profit opportunity in a newly listed share. (f)It is pertinent to note that the orders and modifications of the orders were made in accordance with the rules, regulations and bye-laws of the Stock Exchanges and therefore, valid and permitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme intended to provide an exit to the Flls or to such out liquidity or to create an artificial market for the shares. Similar is the reply filed by the other appellants. On a consideration of the reply filed by the appellant and taking note of the facts as they emerged from the record and the written and oral submissions of the appellant and the material collected during the investigations and the enquiry, the whole time member found that the appellant who formed a part of the connected buyers had dealt in the shares of the company in a fraudulent manner. Referring to one buy order of the appellant for the purchase of 70,000 shares of the company on NSE on the first day of listing and considering the fact that the same had been modified subsequently which resulted in several trades with Vacuf, he found that there was fine synchronization of order placement and modification even though it involved a QIB and from this he concluded that the appellant was a part of the connected buyers and that the connected buyers arranged QIB subscription for the IPO with the assurance of an exit. The whole time member went on to hold that the connected buyers including the appellant had employed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d fault only with her one buy order of 70,000 shares on NSE on the first day of trading and has found no fault with the sell orders on the same day on the same exchange. It has also not found any fault with her trades on the BSE on the first day of trading nor with the trades on BSE and NSE on the second day of trading. The other appellants are also day traders and had traded on NSE and BSE on both the days like Smitaben Shah. 7. We may now deal with the contentions raised by the learned counsel for the appellant. The first argument of Shri P.N. Modi Advocate is that the principles of natural justice had been violated in as much as the appellant had not been furnished with the trade and order logs repeatedly asked for by her which formed the basis of the charges levelled against her. There is merit in this contention. As already noticed, the primary charge against the appellant is that she alongwith other buyers who also had a similar pattern of trading, had devised a scheme to allow the QIB an exit route to offload their shares on the first day of trading. In support of this charge, the Board in the show cause notice had given to the appellant charts containing some selective da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber and he rejected this contention with his observations in paragraph 8 of the impugned order and this is what he said: "There is absolutely no dispute about the facts - the order timing and the transaction values. The trade log and order log are relevant if there is dispute about the trades/orders placed by the noticees. In any case, SEBI is not under obligation to arrange and provide all the records and documents that the accused may need and even may not need to defend itself. The tests of natural justice are met if the records relied upon are provided and I find that the same has been provided." We do not agree with the whole time member. If the documents asked for are relevant and may help the delinquent to prepare his/her defence they have to be furnished and it is not correct to say that only the documents relied upon in the show cause notice alone are to be supplied to meet the ends of justice. Let us not forget that the details in the charts relied upon in the show cause notice have been culled out from the trade and order logs and, in the circumstances of the case, it was not only relevant but even necessary that the appellant be furnished with those trade and orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are also not connected buyers. 9. From the rival stands of the parties what we need to examine is whether the appellants had any connection with any other noticee and whether they were a part of the "connected buyers". As already observed, the connection of the appellants with the other entities has been given in Annexures 1 and 2 to the show cause notice and we have carefully perused these Annexures. Annexure 1 is a bank statement analysis of some persons/entities and the names of the appellants do not figure anywhere in this Annexure. This Annexure indicates some financial relations between the company and one Shanti 10Swaroop Reniwal who is shown to be heading the so called Reniwal group. His name also appears among the noticees. The Reniwal group is said to have advanced some loans to Dhiren Vora HUF which are shown to have been returned. There is a rectangular box in Annexure 1 which mentions the words "Vora group" which is said to have some connection with Dhiren Vora and some others without identifying those who constitute this group. Then we have Annexure 2 with a heading "Connections Between Major Buy Clients" and it reads "The relationship between the Noticees 1 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atel whose name also figures among the noticees. What kind of financial relation they had is not known nor have the details of this relationship been spelt out either in the show cause notice or in the impugned order. There is also no other material that could throw any light on this matter. Deven Patel is being roped in because Rajesh Kumar Patel is said to have floated Parklight Securities Ltd. which is supposed to have been acquired by Dhiren Vora group. Then we have Tejas Patel another appellant before us. He has also been described as a connected buyer. His connection is based on some bank statements the particulars of which have not been referred to either in the show cause notice or in the impugned order on the basis on which there are said to have been large value fund transfers between him and the aforesaid Rajesh Kumar Patel, H. Nyalchand and Parklight. H. Nyalchand Financial Services Limited is a broking company of which Dhiren Vora is a director. There are two Parklight companies and which one is being referred to is not known. There is one Parklight Securities Limited which was a buyer of the shares of the company from QIB and there is another Parklight Investments Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. 10. The so called connectivity between the appellants has also been sought to be established by the similarity of their trading pattern in the scrip of the company. It is alleged that all the appellants had, on the first day of trading, placed an original buy order for 70,000 shares at a uniform rate of ₹ 30/- per share on NSE and BSE at around the same time and modified their orders in a 17 seconds window on NSE at a uniform price of ₹ 46.50 and on BSE at ₹ 47.50. This proximity of time in placement of buy orders between the appellants at identical rates cannot make us overlook the fact that all the appellants traded through the same broker M/s. Religare Securities Limited as independent clients and the similarity of order placement through the common broker is not such an unusual feature which may lead us to conclude that the appellants were acting in collusion for a fraudulent trade. Again, we are satisfied that the appellants did not place orders for the purchase of identical number of shares and that their orders were for varied quantities through the same broker. Smitaben Shah had placed an order for the 13purchase of 70,000 shares on NSE and an equal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs did not get executed or were executed for insignificant quantities prior to the final updation ...". A finding to this effect has been recorded in the ex-parte order as well. It is, therefore, admitted and the learned counsel for the Board could not dispute that some of the orders at the original rate, though for insignificant quantities did get executed. Even if one trade gets executed at the rate of ₹ 30/- as put in by the appellants, how can it be said that the rate was unrealistic. Obviously, there were persons to sell the shares at that rate. It is by now well settled that every trade establishes the price of the scrip. We cannot lose sight of the fact that the impugned purchase orders of the appellants had been executed on the first day of trading when there was no circuit filter on the price range of the scrip and the price discovery mechanism of the stock exchanges was in full play to discover the price. The price discovery mechanism allows a free play of the forces of demand and supply on the basis of which the price is discovered. In other words, the price is what a willing buyer pays to a willing seller. When the price discovery mechanism is in operation on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he market. This fact appears to have been lost sight of by the Board while framing the charges and the whole time member seems to be right in not recording a finding on this issue. We also cannot agree with the learned counsel for the Board that the appellants had purchased large quantity of shares with a view to corner them from the QIB. The purchases made by the appellants which have been called in question are only 70,000 shares each on the first day of trading. We cannot lose sight of the fact that the IPO had been over subscribed by 5.25 times which means that for every one share allotted there was an unmet demand for more than four shares and the market opened on the first day of trading with this appetite. It was, therefore, natural that investors/traders would throng the market to purchase the shares in large quantities which is evident from the fact that more than 13 crore shares of the company were traded on the first day of trading on both the exchanges. It is pertinent to mention that despite the sale of 28.85 lac shares by the QIB on the first day of trading, the market demand was more than the supply as a result of which the intra-day price of the scrip showed an upwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally observed in most of the scrips traded in the stock market and not specific to this scrip. Therefore, on the face of it, it cannot be said the day-traders have manipulated price of the scrip. However, due to the extra-ordinary volume of day-trading activity in the scrip, the role played by the day-traders in the scrip is to be examined thoroughly." The learned counsel drew our attention to paragraph 32 of the show cause notice to argue that price manipulation was implied. Paragraph 32 of the show cause notice reads as under:- "Within a few minutes on December 29, 2006, the FII had off-loaded around 28.85 lakh shares constituting 45% of the free float of the shares of the company in quick successive trades of large quantity, without any concomitant and expected price fall associated with such large sales. These shares were cornered by the connected buyers through similar trading patterns. It was observed that the connected buyers devised a scheme whereby the FII got an exit at a predetermined price on the listing day in order to prevent a price fall that accompanies such large sales and had a design to suck out the liquidity of the shares of the company from the market, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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