2021 (2) TMI 1382 - AT - SEBI

Offence under SEBI - trading pattern created a misleading appearance which amounted to manipulation in the price of scrip - off market transfers at a price much lower than the Last Traded Price LTP - miniscule shares were being sold by the appellants when there was a demand for more shares and that the appellants had a substantive holding in the shares - HELD THAT - Except notices/appellant Narayan Das Rathi nobody was holding the shares prior to 26th February, 2013 and thereafter the shares were transferred in off market transactions to the 27 entities either directly from him or through Appellant Devindar Kumar, for a price less than the price offered through pending buy orders on the exchange platform. Thereafter those shares were sold on miniscule proportion on the platform of SEBI for a higher price though buy orders for this higher price used to be in existence and sufficient share were available to sell, thus substantially contributing to the Last Traded Price (LTP). Tables no. 3 and 4 of the impugned order shows that they had contributed to 70.96 % of the total trades during the period in question. While some of the appellants like Kusum Devi Baid, Kamal Baid, Dev Kishan Mal, Kuldeep Singh, Devindar Kumar, Rachana Atal, Debashish Chowdhary did not explain before the Adjudicating Officer by failing to file reply to the show cause notice, some of the appellant though filed reply were unable to explain as to why they put sell order on miniscule quantity when a comparatively large buy orders were pending for the price which was more than price they purchased. They simply defended their action by replying that selling of shares in miniscule quantities is not illegal. It is true that no direct connection between the seller and the buyer is established in the present case. We do not have material to find out whether respondent SEBI had investigated the said connection. However, in my view the insistence solely on the establishment of the connection or non-prosecution of the buyers would be against the very principle that the facts are to be established on preponderance of probability and not on the requirement that the facts in issue should be proved beyond reasonable doubt or to the hilt. The Tribunal has to consider all the probabilities either favouring or against the premise and to repeat, if majority of probabilities points toward the existence of fact in issue, then the premise/ the charge will have to be upheld. To sum up, we find that trading in the scrip of Dhanleela was suspended on the stock exchange platform for a period of six years. After revocation of the suspension there was no trade at all for a period of 10 months. It was thus a highly illiquid stock. Thereafter the trade opened at Rs. 17.50. During patch one investigation period i.e. from 26th February, 2013 to 9th October, 2013 it reached to 427.85. The appellant and the other notices were the major contributors to this fact through abnormal transactions. Their sell on the exchange platform created a picture of rosy picture of large scale trade quantities through miniscule sale of shares. Thereafter in patch 2 investigation period i.e. from 10th October, 2013 to 5th December, 2013 the price showed the same trend with the same modus operandi. The fundamentals of the company however did not match with this price swing. These appellants had no shares with them before these transactions. They had received shares in off market transaction either directly or indirectly from the Appellant Narayan Das Rathi for lower price than the price available on exchange platform. No logical explanation is forthcoming from the appellants for these abnormal affairs. Therefore only conclusion that can be drawn in my view is that all these transactions were non genuine and were entered into only to manipulate the price of the shares of Dhanleela. It is true that a connection between buyer and seller or between promoter/company and the buyer or seller would be a strong indicator to conclude that there were manipulative trades. In the absence of the same however, this Tribunal is not handicapped in arriving at the above conclusion as preponderance of probabilities definitely lies in favour of the charge as detailed above. In the circumstances in my view the appeals deserve to be dismissed without any order as to costs. The appeals are accordingly dismissed. Misc. Application is also accordingly disposed of. In view of the majority opinion, the impugned order cannot be sustained and is quashed in so far as the appellants are concerned.

Summary

Issues Involved:
1. Violation of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations, 2003).
2. Allegations of manipulation in the price of the scrip of Dhanleela Investments and Trading Company Ltd.
3. Connection and collusion between the appellants and the buyers.
4. Delay in the issuance of the show cause notice.
5. Applicability of previous judgments to the present case.

Issue-wise Detailed Analysis:

1. Violation of Regulations 3 and 4 of PFUTP Regulations, 2003:
The Adjudicating Officer (AO) found that the appellants were not genuine sellers and engaged in trading patterns that created a misleading appearance, amounting to manipulation in the price of the scrip, thus violating Regulations 3 and 4 of PFUTP Regulations, 2003. The AO noted that the appellants sold minuscule shares despite having a substantive holding, which was not a prudent investor's behavior, especially when the price quoted was above the Last Traded Price (LTP). The AO concluded that the appellants' actions were not genuine and were intended to increase the price of the scrip.

2. Allegations of Manipulation in the Price of the Scrip:
The investigation revealed that the trading in the scrip of Dhanleela Investments and Trading Company Ltd. was suspended since 2006 but was revoked in April 2012. The company issued bonus shares in February 2013, and the price of the scrip rose significantly from Rs. 17.50 to Rs. 427.85 within eight months. The appellants were found to have traded on 82 days totaling 298 trades, holding sizeable quantities of shares but selling limited shares despite large orders pending on the stock exchange platform. This trading pattern was alleged to be manipulative, increasing the price of the scrip.

3. Connection and Collusion Between the Appellants and the Buyers:
The appellants contended that they traded in minuscule quantities as sellers and had no connection or collusion with the buyers. They argued that the buy orders were already in existence when they placed their sell orders. The Tribunal found that there was no direct evidence of collusion between the appellants and the buyers. The principle of preponderance of probability could not be exercised in the absence of any connection between the seller and the buyer. The Tribunal noted that selling minuscule amounts of shares by itself is not illegal or manipulative unless collusion with others is found.

4. Delay in the Issuance of the Show Cause Notice:
The appellants argued that there was an inordinate delay in the issuance of the show cause notice. However, the Tribunal did not find this argument sufficient to overturn the AO's findings. The focus remained on whether the appellants' actions were manipulative and in violation of the regulations.

5. Applicability of Previous Judgments to the Present Case:
The appellants relied on the Tribunal's decisions in Nishith M. Shah HUF and Rajesh Jivan Patel, where the absence of a connection between the buyer and the seller was held fatal to SEBI's case. The Tribunal agreed that the controversy involved in the present case was squarely covered by the Nishith Shah case and Rajesh Jivan Patel. The Tribunal noted that the investigative reports did not find any connection between the buyer and the seller or between the appellants and the promoters/directors of the company. Therefore, the impugned order could not be sustained.

Separate Judgment by a Member:
One member of the Tribunal delivered a separate judgment, disagreeing with the majority opinion. The member emphasized the principle of preponderance of probabilities and the need to consider all relevant facts and circumstances. The member noted that the absence of a connection between the buyer and the seller or the non-prosecution of the buyer should not be the sole axis for deciding the appeal. The member concluded that the trading pattern of the appellants, including selling minuscule quantities despite higher buy orders pending, contributed to the manipulation of the price of the scrip. Therefore, the appeals should be dismissed.

Final Decision:
In view of the majority opinion, the impugned order was quashed, and all the appeals were allowed with no order as to costs. The Misc. Application no. 414 of 2020 was also disposed of. The Tribunal noted that the order would be digitally signed due to the COVID-19 pandemic, and parties were directed to act on the digitally signed copy.