2014 (1) TMI 1652 - AT - Companies Law

Penalty for violation of various provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003 - Off market transactions - Powers of SEBI - Held that - During the enquiry it has been categorically found that appellant nos. 1 to 6 have a common address and two common directors. In this backdrop Shri Joby Mathew learned counsel for appellant nos. 1 to 6 has admitted the connection among appellant nos. 1 to 6 and rightly so. As far as remaining appellants and / or Noticees are concerned it is not disputed that a large quantity of shares of the same company i.e. RUNL was received by way of off-market transactions by them from appellant nos. 1 to 6. It is also borne out of the records that the remaining appellants and / or Noticees sold shares by way of synchronized trades to appellant nos. 1 to 6 mostly on the same day or immediately thereafter within a few days. Nobody has disputed these transactions either before us or before the learned AO. Such reversal of the off-market transactions in a quick succession through synchronized on-market transactions to the same set of entities in almost similar fashion within a very short span of time clearly points out that all the entities are connected to each other in some way. We hold that the story advanced by the appellant nos. 1 to 6 regarding borrowing of loan from entities no. 7 to 21 is misconceived untenable on facts and hence rejected.In view of the above discussion of law and facts we do not find any merit in the case of the appellants and the appeals are liable to be dismissed. Powers of SEBI - SEBI as Regulator has ample powers and discretion to take a subjective decision in respect of certain entities on the basis of availability of sufficient evidence against them. At the same time SEBI is also empowered to take a subjective decision in a given case not to take or even drop action against certain other entities in the same case if it is satisfied on the basis of material on record that there is insufficient weak or no evidence to finally bring such entities to the book. In such an eventuality SEBI may decide not to take any action against such entities. - Decided against the appellants.

Summary

Issues Involved:
1. Condonation of delay in filing appeals.
2. Alleged violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, and SEBI Act, 1992.
3. Connection among the appellants and other entities.
4. Legitimacy of off-market transactions.
5. Validity of the penalty imposed by SEBI.
6. SEBI's discretion in taking action against certain entities.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing Appeals:
The appeals numbered 189, 190, 191, 192, 193, and 194 of 2013 were filed after the statutory period of 45 days. The appellants filed six miscellaneous applications seeking condonation of the delay. After reviewing the grounds presented, the Tribunal allowed the applications, thereby condoning the delay.

2. Alleged Violation of SEBI Regulations and SEBI Act, 1992:
SEBI conducted an investigation into irregularities in the trading of Rich Universe Networking Ltd. (RUNL) shares from February 1, 2010, to September 24, 2010. The investigation found that 21 entities were connected and engaged in off-market transactions and reversal/circular/synchronized trades, creating artificial volume and misleading the market. A show cause notice was issued to these entities for violating Regulations 3(a) to (d), 4(1), and 4(2)(a) and (g) of the FUTP Regulations, 2003.

3. Connection Among the Appellants and Other Entities:
The appellants initially denied any connection among themselves or with the other 15 entities. However, during the enquiry, it was found that appellants 1 to 6 shared a common address and two common directors, which they eventually admitted. The remaining appellants received a large quantity of RUNL shares via off-market transactions from appellants 1 to 6 and sold them through synchronized trades, indicating a connection among all entities.

4. Legitimacy of Off-Market Transactions:
The appellants argued that their transactions were in the ordinary course of business and involved temporary funding needs. They contended that off-market transactions do not affect share price and volume. However, the Tribunal found that these transactions were reversed through synchronized market trades, leading to price manipulation. The argument that the transactions were spot delivery contracts was rejected, as the transactions did not meet the criteria defined under Section 2(i) of the Securities Contracts (Regulations) Act, 1956.

5. Validity of the Penalty Imposed by SEBI:
The Adjudicating Officer concluded that the charges against the Noticees were proved, imposing a penalty of Rs. 25 lakh on Scope Vyapar Pvt. Ltd. and Rs. 3 lakh on each of the remaining entities. The Tribunal upheld this decision, noting that the appellants engaged in manipulative trading practices, as evidenced by the reversal of off-market transactions through synchronized trades.

6. SEBI's Discretion in Taking Action Against Certain Entities:
The appellants argued that SEBI did not take action against some intermediaries. The Tribunal noted that SEBI has the discretion to decide whether to take action based on the availability of sufficient evidence. SEBI's decision not to act against certain entities does not invalidate the proceedings against those with sufficient evidence. The Tribunal also distinguished this case from another SEBI order involving Global Depository Receipts, which was not relevant to the present appeals.

Conclusion:
The Tribunal dismissed the appeals, finding no merit in the appellants' arguments. The appellants were directed to deposit the monetary penalty within two months, failing which SEBI could recover the amount with interest as per law.