2006 (7) TMI 701 - AT - Companies Law

Buying and selling securities in the derivatives segment - manipulation and synchronization in trading of shares - violation of transparent norms of trading in securities - HELD THAT - A perusal of the chart would show that on 13/12/2000 one KP entity is buying the shares of DSQ Bio and another entity is selling at the same time and at the same rate and therefore the trades had to match on the screen of the exchange. In some cases the buyer and the seller is the same entity. The aforesaid chart clearly illustrates how circular trading was carried on by the KP entities in a synchronised manner through DKB as a broker. This is only one instance but not the solitary one. Large number of fictitious trades were executed in this manner in the scrips of different companies whereby artificial volumes were created by Ketan Parekh. The Board has in the impugned order referred to quite a few of the transactions executed by these entities and we are in agreement with those findings that these were synchronised trades executed in a circular manner to create artificial volumes. We are not dealing with each and every transaction executed by the appellants only with a view to avoid making this order bulky. It is relevant to mention here that the modus operandi adopted by KP entities in dealing with CSFB and DKB as brokers was similar and circular and fictitious trades were executed to create artificial volumes and market in the scrips. Ketan Parekh also received finance against delivery of shares without waiting for pay out at the exchange and the transactions were given the semblance of sale and purchase of shares. We have, therefore, no hesitation to hold that if Ketan Parekh and his entities are allowed to continue with their operations they would pose a serious threat to the integrity of the securities market and endanger the interests of the investors. Since this right was denied to the appellants the learned senior counsel contends that the principles of natural justice were flagrantly violated and that the order deserves to be set aside on this ground alone. We do not think so. In the two show cause notices issued to Shri Ketan Parekh and his entities, it was clearly pointed out to them that Shri Ketan Parekh was not only associated with the companies but was also controlling them. At no stage of the proceedings before the Board did Ketan Parekh or any of the companies rebutted this allegation. As a matter of fact, when Ketan Parekh appeared before the Board during the course of investigations he admitted that he was connected with the companies in one way or the other. It is on record that in his reply filed to the first show cause notice he did not dispute this fact. He and the companies did not file any reply to the second show cause notice. At the time of final hearing before the Board all the companies were represented by Shri Ketan Parekh and that the proceedings were being adjourned from time to time when Ketan Parekh was in judicial custody of the Calcutta Police. We also have on record identical letters from the companies requesting for an adjournment on account of non-availability of Ketan Parekh who alone, according to them, was in the know of facts. The written submissions filed by all the companies had also been signed by Shri Ketan Parekh. At no stage of the proceedings did any of the companies or Ketan Parekh make a request to the Board that it needed to cross-examine the representatives of the two brokers and, in our view, rightly, because they knew that it was Ketan Parekh who was controlling them. It appears that the plea that the appellants should have been allowed to cross-examine the representatives of the brokers had been raised for the first time by their counsel at the time of final hearing before the Board which, in any case, was not the stage to raise such a plea. It was at that stage that the appellants pleaded for the first time through their counsel that Ketan Parekh was only a director on the board of the companies and that he was not looking after their day to day business and that he was distinct from those entities. In such a situation we are of the view that the Board was justified in not allowing the representatives of the brokers to be cross-examined when it was never the case of any of the appellants including Ketan Parekh himself that he was not controlling the companies. We have, therefore, no hesitation in rejecting the contention. In this view of the matter it is not necessary for us to discuss the case law cited by the learned senior counsel in this regard. Lastly, it was urged that the Board discriminated against the appellants in imposing a high dose of penalty on them whereas lesser penalty was imposed on the two brokers who had played an equally dubious role, if not more, in the execution of the transactions which have been found to be illegal and manipulative in nature. The argument is that CSFB and DKB had both played an equal role in the execution of the transactions which have been dubbed as illegal and their certificates of registration had been suspended for a period of 18 months and two years respectively whereas the appellants have been debarred from accessing the securities market for a period of 14 years from the date of the order. The learned senior counsel referred to the orders passed by the Board in the case of CSFB and DKB in support of his contention. Having heard the learned Counsel for the parties on the quantum of penalty we are of the view that the Board was not justified in letting off the two brokers lightly by imposing on them a penalty which was clearly disproportionate to the gravity of the charges proved against them. They should have been given a heavier dose considering the fact that their role in the execution of the transactions was no less than those of the appellants. The Board had committed an error in this regard but that matter is not in appeal before us. This, however, will not justify the appellants to contend that the Board should have committed a similar mistake in their case as well and awarded them a lesser punishment. As noticed earlier the appellants have rigged the market in a big way and the penalty imposed on them in our view is quite reasonable having regard to the gravity of the charges proved. Thus, we find no ground to reduce the period of debarment. In view of our findings recorded on the second show cause notice upholding the findings of the Board we find no merit in the appeals which stand dismissed with no order as to costs.

Summary

Issues Involved:
1. Alleged Price Manipulation in Lupin Laboratories Limited (First Show Cause Notice)
2. Alleged Circular and Fictitious Trades by KP Entities (Second Show Cause Notice)
3. Control and Management of KP Entities by Ketan Parekh and Kartik Parekh
4. Alleged Violation of Principles of Natural Justice
5. Quantum of Penalty Imposed by SEBI

Detailed Analysis:

1. Alleged Price Manipulation in Lupin Laboratories Limited (First Show Cause Notice):
The first show cause notice concerned alleged price manipulation in the scrip of Lupin Laboratories Limited by Ketan Parekh and his entities (Classic, Panther, and Saimangal). The Securities and Exchange Board of India (SEBI) observed a significant rise in Lupin's price and volumes from September to December 1999, leading to an investigation. SEBI found that Ketan Parekh and his entities engaged in price manipulation. They issued a notice to show cause why they should not be debarred under Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995, and Sections 11 and 11B of the SEBI Act, 1992.

The appellants argued that the price movement in Lupin was due to market optimism and the potential growth of Lupin compared to larger pharmaceutical companies. SEBI concluded that the price rise in Lupin was artificial, accompanied by large volumes, and Ketan Parekh and his entities were responsible for this manipulation, violating Regulation 4(a) of the Regulations.

Upon review, the Tribunal found that while some buy orders were placed at slightly higher prices, this did not conclusively prove that the price rise was solely due to the appellants' actions. The Tribunal noted that the price rise in Lupin was consistent with the overall market sentiment and the rise in other medium-sized pharmaceutical companies. Therefore, the Tribunal held that the appellants did not artificially raise the price of Lupin or create artificial volumes, and the findings of SEBI in this regard could not be upheld.

2. Alleged Circular and Fictitious Trades by KP Entities (Second Show Cause Notice):
The second show cause notice involved allegations of circular and fictitious trades by KP entities through brokers Credit Suisse First Boston (CSFB) and Desdner Klienwort Bensons Securities (DKB). SEBI found that KP entities engaged in circular trading, synchronized trades, and financing transactions to create artificial volumes and manipulate the market. SEBI issued a show cause notice to Ketan Parekh, Kartik Parekh, and their entities, alleging violations of Regulation 11 of the Regulations and Section 11B of the Act.

The Tribunal found that Ketan Parekh and his entities executed numerous circular and fictitious trades, creating artificial volumes and manipulating the market. The Tribunal noted that these transactions were non-genuine, circular in nature, and executed to raise short-term finance by distorting the exchange mechanism. The Tribunal upheld SEBI's findings and concluded that allowing Ketan Parekh and his entities to continue would pose a serious threat to the integrity of the securities market and endanger investors' interests.

3. Control and Management of KP Entities by Ketan Parekh and Kartik Parekh:
The Tribunal examined whether Ketan Parekh and Kartik Parekh controlled the KP entities. It found sufficient evidence to conclude that Ketan Parekh was controlling the entities and taking day-to-day decisions on their behalf. The Tribunal noted that Ketan Parekh filed replies and written submissions on behalf of the entities and that the entities admitted his control in their letters to SEBI. The Tribunal held that Ketan Parekh was the force behind the entities and was responsible for their actions.

4. Alleged Violation of Principles of Natural Justice:
The appellants contended that SEBI violated the principles of natural justice by not allowing them to cross-examine the representatives of the brokers whose statements were recorded during the investigation. The Tribunal found that the appellants did not request cross-examination at the appropriate stage and that SEBI was justified in not allowing it. The Tribunal held that there was no violation of natural justice.

5. Quantum of Penalty Imposed by SEBI:
The appellants argued that SEBI imposed a disproportionately high penalty on them compared to the brokers involved. The Tribunal acknowledged that SEBI erred in imposing a lighter penalty on the brokers but held that this did not justify reducing the penalty on the appellants. The Tribunal found the penalty of debarment for 14 years reasonable given the gravity of the charges proved against the appellants.

Conclusion:
The Tribunal dismissed the appeals, upholding SEBI's findings in the second show cause notice and concluding that Ketan Parekh and his entities engaged in manipulative activities, creating artificial volumes and market manipulation. The Tribunal found no merit in the appeals and upheld the penalty imposed by SEBI.