TMI Blog2018 (4) TMI 1715X X X X Extracts X X X X X X X X Extracts X X X X ..... to abnormal levels and creating artificial liquidity in the scrip and thereafter most of the parties trying to off-load their holdings at a substantially inflated price. If individual case is seen independently there is nothing abnormal about it but when the picture is looked at in totality what is unfolding is a fraud perpetuated on the market / investors. It is not that the trade logs are disputed or the financial transactions are in dispute. What is disputed is only the motive behind such trade and the financial transactions. Even the argument of the promoters of SJC that they did not trade is only legally correct since another companyw herein they were promoters at the relevant time placed a buy order on 28.01.2009 (in Phase-II) for 100 shares at price 5% above the LTP, though only 10 shares got delivered. Similarly, appellant placed one buy order for just 5 shares at the rate of ₹ 1185/- per share on 26.09.2009. This was the highest reported price ever and it is equivalent to a pre-split price of ₹ 11850/-. Since the counter party did not meet the obligation the difference was credited to the appellant s account. This appellant was already holding 400 shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent : Mr. Gaurav Joshi, Senior Advocate with Mr. Pulkit Sukhramani and Ms. Vidhi Jhawar, Advocates i/b The Law Point, Mr. Gaurav Joshi, Senior Advocate with Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K Ashar Co JUDGMENTS Per : Dr. C.K.G. Nair, Member 1. These seven appeals are filed to challenge the order of the Adjudicating Officer ( AO for short) of Securities and Exchange Board of India ( SEBI for short) dated August 26, 2015. It has been held in the said order that various entities violated provisions of Section 12A(a) and 12A(c) of the Securities and Exchange Board of India Act, 1992 ( SEBI Act for short) and regulations 3(a), 3(c), 4(1), 4(2)(a), 4(2)(b) and 4(2)(e) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ( PFUTP Regulations for short) by hoisting a fraudulent scheme of trading in the scrip of M/s. S. J. Corporation Ltd. ( SJC for convenience). Accordingly, 13 entities have been directed to disgorge the illegal gains made by them and all 19 entities who were held to be parties to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -interim ex-parte order restraining 16 entities from dealing in the securities market directly or indirectly till further directions. This order was confirmed by the WTM on December 24, 2010. No appeal has been filed challenging either the ad-interim ex-parte order or the confirmatory order of the WTM. Later, an adjudication proceeding was initiated and a show cause notice dated October 14, 2011 was issued to 19 entities (appellants herein) asking why an inquiry should not be held against them and penalty imposed under Section 15HA of the SEBI Act for the alleged violation of Section 12A(c) of the SEBI Act and various provisions of PFUTP Regulations. Following due process like filing of reply and providing opportunity of being heard etc. the AO of SEBI passed the impugned order on 26th August, 2015. Further on 06.09.2017 final order was passed by the WTM which held that neither further restraint nor disgorgement was necessary in view of the AO order dated August 26, 2015. 4. It was observed that during the period of investigation the scrip of SJC which was highly illiquid had registered substantial increase in price and in volume. For instance, price rose from ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10. The sales were made only to two clients Spark Trading and Vee Design (HK) Ltd. and purchases were made from Floral Impex which was also supplier to Shyam Star Gems Ltd., a company promoted by Savjibhai. 11. Since SJC has also entered into diamonds and jewellery business and Savjibhai s other company Shyam Star Gems Ltd. was also in the same business, a comparison has also been made about their market capitalization, EPS, dividend declared return of capital etc. In all these variables the performance of SJC improved while that of Shyam Star declined during the investigation period. 12. While a corporate announcement was made on 14.05.2009 by SJC to BSE that a board meeting to be held on 29.05.2009 would consider the issue of splitting of shares, bonus issues and dividend issue of bonus was not decided. Instead on 03.08.2009 SJC informed that the bonus issue been dropped, though in April 2010 bonus was given. 13. On 11.08.2009, Sanjay V. Patel and Bhavik Patel were appointed as Directors of SJC. The former is the cousin of Savjibhai Patel and the latter the nephew of Usha Patel. However, as per Form 32, Sanjay Pate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Sh. Bhavesh Patel Brother of Ms. Pragna Patel 14. Smt. Rasila Patel Mother of Ms. Pragna Patel Sh. Bhavesh Patel 15. Ms. Pragna Patel Sister of Sh. Bhavesh Patel 16. Ms. Jagruti Ptel Daughter of Smt. Manjula Patel 17. Smt. Manjula Ptel Mother of Ms. Hetal Patel 18. Ms. Hetal Patel Daughter of Smt. Manjula Patel 19. Ms. Geeta Patel Sister-in-law of Smt. Manjula Patel 15. Accordingly, appellants were related to one another in the following manner:- (a) Savjibhai Patel and his wife Usha Patel are the promoters of SJC. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F placed buy orders for various quantities in Phase-II. All these buy orders increased the price of shares considerably. In Phase-III Ramesh Patel and his HUF placed only sell orders. They could sell 185 shares in the price range of 511.55 to 685.35 (post split). Ramesh Patel made a profit of ₹ 2737/-, his HUF made a profit of ₹ 72,497/-; (c) Similarly, buy orders were placed by Shamo Investment (Appellant No. 3 in Appeal No. 513 of 2015), promoted by Ramesh Patel and his wife Dharmishtha Patel. In Phase-III Shamo Investment did not place any buy orders but sold 459 shares and made a profit of ₹ 2,26,403/-. Dharmishtha Patel (Appellant No. 4 in Appeal No. 513 of 2015) received 4450 shares on 09.04.2004 from one Sushilachandra Dhananjay Desai and Surbhi Desai in off-market transaction. In Phase-II she placed buy orders from 18.01.2009 onwards at the upper circuit and bought 633 shares creating artificial buying pressure. Appellant No. 5 in Appeal No. 513, Ms. Reshma Patel received only a gift of shares of SJC from her mother. There is no trading done by her. (d) Appellant in Appeal No. 526 of 2015 placed heavy buy orders during P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price to ₹ 447/- as compared to ₹ 25/- which would have been the open offer price if there had been no manipulation has no meaning because the appellants were forced to make an open offer and had to buy shares offered therein at a higher price. Obviously, their desire and intention would be to pay as low a price as possible and it is impossible to conceive as to why they would be complicit in jacking up the price from ₹ 25/- to ₹ 447/-. It is on record that 7800 shares were offered in the Open Offer @ ₹ 447/- and the Appellants had to pay a total of ₹ 34.86 lac. If the price had been ₹ 25/-, they would have paid only ₹ 1.95 lac and they would have saved ₹ 32.9 lac. In fact, no one would have offered shares because even at the rate of ₹ 447/- per share only 7800 shares were tendered. 19. The allegation in the impugned order is that the company s accounts were rigged by showing bogus transactions of sale and purchase so as to show artificial increase in sales, which acted as a trigger for the share prices to increase is factually false. The impugned order completely ignores the appellants submissions by which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither the SCN nor the impugned order contains a single allegation against Mrs. Usha Patel, except that she is a promoter of the company. She is not even a director. 24. The allegation that Reshma Patel, a relative of the appellant no. 1, played an important role in the manipulation, and earned huge profits is factually false and baseless. The impugned order itself records that Reshma Patel had only received some shares as a gift from her mother and had not traded even a single share. In fact, the Impugned order purports to find fault with her for choosing not to tender her shares in the open offer. 25. The impugned order levies a penalty of ₹ 2.5 crore on all 19 noticees jointly and severally . There are totally differing allegations against different parties some of whom are not even related to each other in a legal / meaningful manner. The appellants in appeal no. 525 of 2015 admittedly did not trade in a single share and made no profits. The impugned order itself alleges that 13 of the parties made actual profits, and 3 of the parties made notional profits . It is inconceivable as to how a joint and several penalty could have been levied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the appellants buy trades matched with Mr. Harjibhai and Mr. Bharat Gabani, SEBI has not taken any action against the said counterparty Mr. Bharat Gabani. Further, appellants did not trade at all in Phase-II (January 28, 2009 to August 27, 2009) when the price of the scrip moved from ₹ 517.15 to ₹ 3463.60. 29. According to SEBI, appellants did not tender their shares inspite of better price of ₹ 447/- offered in the open offer and, therefore, it is assumed that appellants were part of the alleged scheme. Appellants decided not to tender their shares in the open offer because appellants believed that the price of the scrip was likely to move upward and it is matter of record that post stock split (when the aforesaid 2890 shares held by the appellants became 28900 shares) the price moved upwards and, therefore, appellants sold a total of 4000 shares at a price between ₹ 511.55 to ₹ 800.5 in September 2009. It is important to note that even as on date, appellants hold substantial number of shares of the company. 30. It is further submitted that a bare reading of the impugned order makes it clear that SEBI has levell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llers, the remaining order of 90 shares was automatically deleted. (iii) That from 28.1.2009 the price of the scrip started moving up significantly. Admittedly, post 28.1.2009 the appellant has not bought or sold even a single share of SJC. In view of the illiquidity of the scrip, the appellant did not buy any further shares. (iv) That the appellant had bought and sold more than 100 shares each in various other scrips during the investigation period, whereas the appellant had traded only in 10 shares in the scrip of SJC, therefore, the trading pattern clearly indicates an abnormal interest shown by the appellant in the scrip of SJC. The said finding reveals complete non application of mind. Buying of 10 shares of SJC cannot lead to a finding that the appellant had abnormal interest in the scrip of SJC. It is not the case that the quantum of trading of the appellant in the scrip of SJC is far in excess of the quantum of trading in other scrips. (v) That the appellant had deliberately misled the investors by manipulating the order book and to create artificiality in the market so as to serve its own purpose. There was no allegatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cees jointly and severally . There are totally different allegations against the various different parties. The appellant admittedly had bought 10 shares during the investigation period and made no profits. The impugned order itself alleges that 13 of the parties made profits, and 3 of the parties made notional profits . Given these it is inconceivable as to how a joint and several penalty could have been levied. 34. Learned Senior Counsel Shri Mustafa doctor appearing on behalf of the appellants made the following submissions in Appeal no. 513 of 2015:- (a) Five appellants are regular investors in securities market. (b) Shares splits are undertaken for increasing liquidity, therefore, increase in volume / liquidity in Phase III is not abnormal. (c) Turnover automatically increases price. (d) Only 3 of the appellants (Ramesh Desai, Ramesh Desai HUF, M/s. Shamo Investments Pvt. Ltd.) sold 644 shares in Phase-III and still hold 10329 shares. (e) Appellants no. 4 and 5 (Dharmishtha Patel and Reshma Patel) did not buy or sell any shares. Shares bought by appellant no. 4 were be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties Ltd. vs. SEBI (Appeal No. 143 of 2008 decided on October 27, 2008); M/s. Dimensional Securities Pvt. Ltd. vs. SEBI (Appeal No. 143 of 2008 decided on June 29, 2009); Sterlite Industries (India) Ltd. vs. SEBI (Appeal No. 20 of 2001 decided on October 22, 2001) and submitted that SCN should be unambiguous and in the SCN benefit gained by the appellant was not clearly stated; prices may not be always based on fundamentals, it could go down or up on technicalities and preponderance of probabilities is not enough to hold one acting in connivance or being part of a fraud. 36. Learned Counsel Ms. Ankita Singhania appearing on behalf of the appellant in Appeal No. 526 of 2015 submitted that penalty imposed on all the 19 appellants jointly and severally is not sustainable, there is no disgorgement, the ingredients of fraud are not met, impugned trades were neither manipulative nor induced by anybody, small quantity of trades had not impacted volume or prices, no collusion between appellant and other noticees / entities, all trades genuine, legal, delivery based and beneficial ownership changed and section 15J not considered while imposing the huge penalty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at an average of 3 to 29 shares per day during Phase-I and Phase-II of the investigation period. In parallel with multiple false/misleading corporate announcements, announcements relating to stock split, bonuses and dividends and by transferring some business from sister company to the appellant company, the price of these illiquid shares was jacked up by trading in small quantities by entities related to the promoters. While in phase I and II of the investigation period the volume of trading remained subdued because of very limited floating stock available (promoters holding was more than 70% and a considerable part of the remaining stock was held by the related parties) but after the split of the stock on August 28, 2009 the volume of trading increased during which most of the appellants offloaded part of their holdings at abnormal prices. In such a scheme, it is not easy to decipher the exact role played by each entity and hence the need for looking at the schema in totality. 41. It is an unique case of market manipulation where the scheme employed by the appellants involved hiking the price of the shares in which the promoters had to make open offer. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f-loaded the shares in SJC. He also walked us through the detailed trade logs of the appellants, which is on record. 43. In conclusion, Learned Senior Counsel Shri Gaurav Joshi reiterated that the role of each individual /party in isolation does not clearly bring out the scheme of fraud and manipulation perpetuated by the appellants together. Therefore, in the impugned order those who made unlawful gains by trading have been asked to disgorge the unlawful gains and those who played any role in the fraudulent scheme have been asked to jointly and severally pay the penalty of ₹ 2.5 crore. On a specific query from the bench on the role of Reshma Patel in the entire scheme as to whether getting some shares as a gift from her mother and keeping the shares without selling make her a party to the fraudulent scheme the learned senior counsel fairly stated that the role of Reshma Patel is not that clear. 44. Learned Counsel Shri. Gaurav Joshi relied on the following judgments of the Supreme Court (a) Securities and Exchange Board of India vs. Rakhi Trading Private Ltd. (Civil Appeal No. 1969 of 2011 decided on February 08, 2018); (b) Securities and Exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- (a) indulging in an act which creates false or misleading appearance of trading in the securities market; (b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss; (c) (d) (e) any act or omission amounting to manipulation of the price of a security; 46. From the totality of the picture there is no ambiguity in our mind that a scheme of fraud has been conceived and implemented by the appellants herein, except appellant no. 5 in appeal 513 of 2015. We also hold that this is a unique case of manipulation. A defunct company is taken over by a few parties; peculiar interest is shown by a few others in buying the shares of that company placing orders mostly at 5% above the LTP thereby gradually raisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess; only one order for a small quantity has been placed; mere call records are not sufficient to prove the connection; staying in the same locality is not an indicator of a connection; giving a small amount of loan to a relative is not connected to manipulation in trade etc. 49. We find no merit in these arguments given that the basic facts and the available evidence is sufficient to prove existence of a fraudulent scheme. It is not that the trade logs are disputed or the financial transactions are in dispute. What is disputed is only the motive behind such trade and the financial transactions. Even the argument of the promoters of SJC (appellants in appeal no. 525 of 2015) that they did not trade is only legally correct since another company (appellant in appeal 531 of 2015) wherein they were promoters at the relevant time placed a buy order on 28.01.2009 (in Phase-II) for 100 shares at price 5% above the LTP, though only 10 shares got delivered. Similarly, appellant in Appeal No. 535 of 2015 placed one buy order for just 5 shares at the rate of ₹ 1185/- per share on 26.09.2009. This was the highest reported price ever and it is equivalent to a pre-split pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t scheme since charge is that by placing buy orders volume and prices have been increased. In such a context somebody offering the shares for sale is not abetting the fraudulent scheme. Similarly, during the open offer period if anybody has offered the shares for sale it was rightly not considered in abetting fraudulent scheme. Therefore, no action taken against such entities cannot be held to be faulty. 52. All the appellants argued that a joint and several liability of a penalty of ₹ 2.5 crore imposed on appellants is not sustainable or even practical because the allegedly connected entities are not a homogenous group. In fact, the connection itself is disputed though blood relationship between some of them is not. However, we find no fault in imposing such a joint and several penalty as it is now abundantly clear that the appellants were acting together and together they inflated the notional value of their shares to more than ₹ 132 crore. If they could be party to such a fraudulent scheme whether they are a homogeneous group or otherwise they should find a way to fulfill the consequences / obligation of paying the penalty jointly and severally impose ..... X X X X Extracts X X X X X X X X Extracts X X X X
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