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TMI Blog2006 (7) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Persons allegedly involved in the price manipulation are Ketan Parekh (appellant herein), Classic Credit Limited, Panther Fincap and Management Services Limited and Saimangal Investrade Limited (hereinafter referred to as Classic, Panther and Saimangal respectively). The Board witnessed significant rise in price and volumes in the scrip of Lupin during the period from September to December, 1999 on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) and, therefore, it ordered investigations into the buying, selling and dealings in the scrip. Investigations revealed that Ketan Parekh, Classic, Panther and Saimangal had together indulged in the price manipulation in the scrip of Lupin. They were issued a notice dated March 27, 2002 calling upon them to show cause why necessary directions under Regulation 11 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995 (for short the Regulations) and Section 11 and 11B of the Securities and Exchange Board of India Act, 1992 (for short the Act) be not issued to them debarring them from dealing in securities. The appellant filed his reply on 16.12.2002 to the show c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Ketan Parekh was in judicial custody and his personal presence was necessary at the time of the hearing as he alone was in the know of facts. The case was adjourned to April 30, 2003 on which date a similar request for adjournment was made because Ketan Parekh was still in custody and the matter was finally heard on June 23, 2003. At the conclusion of the hearing, the appellant as also Classic, Panther and Saimangal filed their written submissions which were taken into consideration by the Board while passing the final order. The appellant admitted that he was a director on the Board of Classic, Panther and Saimangal which were all independent investment companies. He also stated that he had not acquired any shares of Lupin in his name and the transactions were carried out by the investment companies on whose Board he was a director. He also took the stand that even though he was on the Board of the aforesaid companies he was not involved in the day to day decision making. He also denied that there was any artificial price rise in the scrip during the period under investigation and that placing large orders in the market was not per se illegal. It is pertinent to mention here tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to have transacted in the scrips of Lupin in large quantities which constituted a significant portion of the total transaction on the two exchanges namely BSE and NSE. The Board also found that the floating stock of Lupin in the market was less than 18% because 82.4% was held by its promoters and, therefore, any big order placed by Ketan Parekh or any of his entities would lead to the price fluctuation which was invariably on the higher side. As a result of these findings the Board concluded that the price rise in the scrip of Lupin was artificial which was accompanied by artificial volumes and that Ketan Parekh and his entities were primarily responsible for the same and that they created higher price for the scrip. Accordingly, Ketan Parekh, Classic, Panther and Saimangal were held guilty of violating Regulation 4(a) of the Regulations. Feeling aggrieved by the findings they are in appeal before us. 5. During the course of hearing Shri N.H. Seervai, learned senior counsel appearing for the appellants argued that while it was a fact that Shri Ketan Parekh was on the Board of Classic, Panther and Saimangal, it could not be said that he was controlling them. He urged that these t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher price. He referred to various charts relied upon by the Board in the impugned order to show that in most of the cases there was a marginal difference in the buy orders placed by the appellants than the last traded price of Lupin. He went on to argue that there is nothing unusual if the buy order placed at the time of the opening of the trading at the exchange is higher than the previous day's closing price and that very often buyers do place orders at a higher price to ensure that the deals go through. The learned senior counsel took us through the price volume data of shares of some of the companies in the pharmaceutical industry to prove his point. Having pleaded on the factual aspect, Shri Seervai then submitted that even assuming though not admitting, that there was any artificial rise in the price of Lupin, Regulation 4(a) of the Regulations was not attracted in this case and that no action could be taken against the appellants. The argument is that it is not the case of the Board that artificial rise in price/volumes in the scrip of Lupin had induced any other person to sell or purchase this scrip. According to the learned senior counsel it is the requirement of Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gher price was established. He pointed out several other instances as well including the two trading transactions on 14.10.1999 in support of his contention. He further argued that the three entities had been resorting to matching trades where the sell and purchase orders were placed at the same time at a price higher than the previous day's closing price of Lupin. According to the learned senior counsel the appellants had violated Regulation 4(a) of the Regulations and he was emphatic in his submission that Regulation 4(a) was attracted to the facts and circumstances of this case and that when any person trades in the shares of a company with the intention to artificially raise or depress the price of securities he necessarily induces the sale or purchase of such securities by many other innocent investors who may be difficult to be located. In his view the securities market is so wide spread and in a system of screen based trading various potential investors tracking the scrip through the screen could only see that the scrip is active / inactive, its trading volumes are large / small, its price is going up / down and therefore they may decide to invest/disinvest in the scrip. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a in relation with the matter being CC No. 476/2002. In this connection, he has applied for bail before the Hon'ble Supreme Court which application is scheduled to come up for hearing on the 24th of the March 2003. We are very keen that we must avail of the opportunity of personal hearing and Mr. Ketan Parekh's presence at such hearing is necessary for a full defence in the matter. On this basis we request you to kindly reschedule the personal hearing so that the same (i.e. opportunity for hearing) may be availed of by us, sometime during the first week of April, 2003. You will appreciate that no prejudice will be caused as a result of such rescheduling of the personal hearing. 8. A reading of the letter leaves no room for doubt that Ketan Parekh was the person who was controlling Classic, Panther and Saimangal and that he was the person having knowledge about the shares transacted by these companies. Since he was in the judicial lock up in March 2003 the companies sought an adjournment from the Board which was granted. Apart from this admission made by the three companies, the Board during the course of the investigations had recorded the statements of some witnesses inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ketan Parekh and his three entities namely Classic, Panther and Saimangal were responsible for the price rise in the scrip of Lupin during the period under consideration. It may be mentioned at the outset that every trade that takes place establishes the price of the scrip and the same fluctuates with every buy/sell order which is executed. Having carefully examined the various transactions relied upon by the Board in the impugned order we do not think that they conclusively show that the price rise was due to the transactions undertaken by Shri Ketan Parekh and his three companies. Admittedly, some buy orders were placed by the appellants at slightly higher than the last traded price but this by itself does not lead us to conclude that the increase in the price of Lupin during the period under consideration was solely, or even largely, due to these orders placed by the appellants. The comparison of price movement of certain pharmaceutical stocks with the stock of Lupin will prove the point. It is a normal feature of the stock market that prices of all the stocks pertaining to a particular industry do not always move in tandem. There are a host of factors which influence the patte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 30/12/1999. Similarly, price index of NSE (popularly known as Nifty) had risen from 890 points on 01/01/1999 to 1480 points on 30/12/1999. It is thus clear that not only the shares of the pharmaceutical companies were on the rise but the sentiment of the stock market as a whole was positive and the price of all the shares generally had an upward trend. The Board, however, while recording a finding that Ketan Parekh and his three companies were instrumental in establishing an artificially higher price in the scrip of Lupin has relied upon the transactions executed on 06/10/1999, 14/10/1999 and 15/10/1999. It is not necessary for us to examine all these transactions that took place on these dates and it will suffice if we examine only a few of them by way of a representative sample. The appellants had placed six buy orders of 10,000/-shares each of Lupin on 06/10/1999. These orders were placed within a period of less than four minutes as is shown in the chart below: Name of LTP (Last Date the Name of the Time Qty. Order No. Rate Traded Change In Exchange Broker (Rs.) Price) (Rs.) Price (Rs.) Triumph 6/10/99 BSE Securities 10.14.37 10000 372010160 250 245 5 Ltd., Triumph 6/10/99 BSE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious day's closing price was ₹ 382.25 only. Simultaneously, a sell order had also been placed with another broker Praveen V. Shah at the same time and according to the Board this matching transaction by Classic established a higher price of ₹ 411/-in the scrip of Lupin which was 8% higher than the closing price on the previous day. Relying on the aforesaid transactions, the Board observed that The order for purchase and sale was entered and executed by Classic Credit Ltd., at the opening of trading session on 14.10.1999 at a rate of ₹ 411/-. With this transaction Classic Credit Ltd., established a price of ₹ 411/- in the scrip of Lupin Laboratories Ltd., 8% higher than the closing price on the previous day which was ₹ 382.25 . This finding is based on incomplete data and on the wrong assumption that the order at ₹ 411/- had been placed at the opening of the trading session on 14.10.1999 which is not so. We have perused the trade log of 14.10.1999 as produced by the respondent and it is clear that trading on that day started at 9.55 a.m. Between 9.55 a.m. and 10.03.34 hours more than 100 trades in the scrip of Lupin had been transacted by ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the appellants had artificially raised the price of the scrip of Lupin and had created artificial volumes in the market, the charge levelled against them under Regulation 4(a) cannot stand as it is not the case of the Board that such artificial price rise had induced any person to sell or purchase the scrip of Lupin. In view of our findings recorded herein above that the appellants neither raised the price of Lupin nor did they create any artificial volumes in the market the discussion on this issue becomes academic. Since this issue was debated at length by both sides we think it appropriate to record our findings on the interpretation of Regulation 4(a) so that it could be properly applied in future in other cases that may be pending. In order to deal with the argument of the learned senior counsel it is necessary to refer to the provisions of Regulation 4(a) under which the charge has been levelled against the appellants. This regulation reads as under: Prohibition against market manipulation. 4. No person shall - (a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy / sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer / seller thereby inducing him to buy or sell depending upon how the market has been manipulated. We are therefore of the view that inducement to any person to buy or sell securities is the necessary consequence of manipulation and flows therefrom. In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be discharged. This, in our view, clearly flows from the plain language of Regulation 4(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by certain entities to distort the true price discovery and manipulate the securities market, the Board ordered investigations into the affairs of two brokers namely, Credit Suisse First Boston (India) Securities Pvt. Ltd., and Desdner Klienwort Bensons Securities (I) Limited (hereinafter referred to as CSFB and DKB respectively). Investigations were carried out for the period from April 1, 2000 to March 31, 2001 and these revealed that Classic, Luminant Investment Private Limited (Luminant) and Panther had sold the shares of some companies through these two brokers which were bought either by the same entity or by other entities connected / controlled by Ketan Parekh / Kartik Parekh. The other entities allegedly involved in similar transactions were Saimangal, NH Securities Limited (for short NH Securities ), Classic Shares and Stock Brokers Limited (CSSB), Chitrakut Computers Private Limited (Chitrakut), Classic Infin Limited (Classic Infin) and Panther Investrade Limited (Panther Investrade). After the conclusion of the investigations the Board issued a show cause notice to Ketan Parekh, Kartik Parekh and the aforesaid entities alleging that they were all being controlled and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... you note that a person with knowledge about the transactions mentioned therein is Mr. Ketan Parekh. The matter was being adjourned time and again on the request of the appellants because Ketan Parekh was not available and was finally heard on June 19, 2003. On a consideration of the material collected by the Board during the course of investigations and after considering the written submissions filed by the appellants, it came to the conclusion that Ketan Parekh and Kartik Parekh and also their entities which are being controlled by them were guilty of the charges levelled against them and that by indulging in circular and fictitious trades they created artificial volumes and artificial market in the scrips in which they traded. The Board also found that Ketan Parekh and his entities had raised finance through manipulative transactions and that they indulged in synchronized trades bench marking the prices of certain scrips. In view of this finding and also those recorded under the first show cause notice the Board by its order dated December 12, 2003 exercising its powers under Section 11(4)(b) and 11B of the Act read with Regulation 11 of the Regulations prohibited Ketan Parekh, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. The fact that Tejwant Singh and members of his family have created several corporate bodies does not prevent this Court from treating all of them as one entity belonging to and controlled by Tejwant Singh and family if it is found that these corporate bodies are merely cloaks behind which lurks Tejwant Singh and/or members of his family and that the device of incorporation was really a ploy adopted for committing illegalities and/or to defraud people. In view of the serious allegations levelled against the appellants we are of the view that it would be proper to lift the corporate veil of the KP entities and when we do that we find it is Ketan Parekh who is lurking behind the corporate curtain. 18. The Board in the impugned order has ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nter. He indulges in what is called circular trading where a few of them get together and buy and sell large blocks of shares among themselves. The shares are sold to associates at a price higher than what is prevailing in the market who in turn sell them to another associate for even a higher price. All transactions usually cancel out each other and the shares remain within the circle without any genuine trading transaction. This creates an impression that the stock is an actively traded one and sought after and, therefore, such transactions attract those outside the circle to buy the stocks. In other words, the general investing public gets induced to buy such stocks. The manipulators not only increase artificially the trading volumes but also benchmark the price because every trade establishes the price of the scrip. Circular trading is among the easiest ways to increase volumes. Tragically, retail investors and day traders are most vulnerable to such trading as they follow the herd mentality because they lack market intelligence and experience to diagnose such cases and they are usually the ones left holding the parcel when the music stops. The manipulators who had taken large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sults in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium. Any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available. The nature of the transaction executed, the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn. 21. We may now brief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the normal course he could have gone to a bank or any financial institution and after pledging the shares he could have raised the money. In that event he would have lost control over the shares for as long as they remained pledged. Instead of adopting this method he decided to use the market mechanism in a devious way and executed transactions giving them the semblance of sale and purchase of shares thereby achieving the same object of raising money without losing control over the shares. The following chart will illustrate the manner in which he operated through his entities thereby manipulating the market. Circular trades of KP entities through CSFB Prop Account Ketan Parekh Group entities buying the same shares through other set of brokers, which was sold by CSFB Prop A/c through CSFB Sec through synchronized trades KP entities, after synchronized trades, sold the shares to CSFB Sec via deals Scrip Trade Exch- Trade Trade Trade Buy Buy Sell Order number Sell Order umber Sell order Buy Order 'Sell Buy Buy Buy Exch- Trade Trade Qty Price Sell Name Date ange Time Qty Price Member Client Time Time Order Order Order Order ange Time Client Qty Qty Price Price GTB 30-Oct 00 NSE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2000 on the NSE. The orders are placed within a span of less than 5 minutes ranging from 14:02:41 hours to 14:07:13 hours. CSFB which is essentially a broker sells the shares to Panther from its propriety account i.e., it acts as a client which is permissible. As a normal transaction the settlement would have taken place on T+5 basis which was then prevalent. In other words the shares would have been delivered and the price paid only at the end of the settlement cycle. Within less than seven minutes of Panther's buy orders, Classic - another KP entity, sells 10 lac GTB shares through a cross deal to CSFB in its propriety account at ₹ 69/-. This is a cross deal because CSFB acted as a broker on behalf of Classic and also on its own behalf. This was also a spot deal where shares were delivered instantly against receipt of money. CSFB in the process made a profit of Re. 1/-per share within a few minutes. It is, thus, clear that the shares which moved apparently from one KP entity to another remained within the control of Ketan Parekh and Classic through the spot deal receive d the price of the shares from CSFB to whom they were sold and that Panther would be paying to CFSB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ketan Parekh. As already observed, these transactions were not meant to execute a genuine trade in the scrips because the control of those was always with Ketan Parekh and he had a clear understanding with CSFB in this regard which acted hand in glove with him in executing these transactions and we are informed that action has been taken against it as well. The fact that these were financing transactions is further clear from the statement that was made by the representative of CSFB during the course of the investigations. He stated that the brokerage which it was charging from the KP entities varied depending upon the period intervening the date on which the money was advanced and the date on which it was received back. In the aforesaid illustrations the finance was given to Ketan Parekh through Classic and the money was received back by CSFB through Panther and the brokerage was proportionate to the number of days that elapsed between the day on which money was advanced to Ketan Parekh through Classic and the day when it was received back through Panther. The major portion of the amount that was charged as brokerage was in reality the interest for the days for which the amount ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange mechanism is further clear from yet another set of transactions executed among them and in some of the cases the buyer and the seller were the same. The following chart pertains to the synchronised trades at NSE where KP entities are selling through DKB as a broker and simultaneously other set of KP entities are buying through other brokers: Scrip Trade Date Trade Time Trade Price Trade Qty Buy member Sell Client Buy Client Sell Order Time Buy Order Time Sell Order Vol. Buy Order Vol. Sell Order Price Buy order price DSQ Bio 13-Dec-00 11:01:32 238.25 74339 NH Sec CCL PFMS 11:01:32 11:01:31 100000 100000 238.25 238.25 DSQ Bio 13-Dec-00 11:01:32 238.25 25661 NH Sec CCL NH Sec 11:01:32 11:01:31 100000 100000 238.25 238.25 DSQ Bio 13-Dec-00 11:01:42 238.25 99995 NH Sec CCL NH Sec 11:01:42 11:01:38 100000 100000 238.25 238.25 DSQ Bio 13-Dec-00 11:01:54 238.25 98965 CSSB CCL CSSB 11:01:54 11:01:53 100000 100000 238.25 238.25 DSQ Bio 13-Dec-00 11:02:04 238.25 96486 CSSB CCL CSSB 11:02:04 11:02:04 100000 100000 238.25 238.25 DSQ Bio 13-Dec-00 11:02:04 238.25 1014 CSSB CCL SSB 1:02:04 11:01:53 100000 100000 238.25 238.25 DSQ Bio 13-Dec-00 11:02:13 238.25 98987 Keynote CCL PFMS 11:0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Seervai that the Board had violated the principles of natural justice as it did not allow Ketan Parekh and his entities to cross-examine the representatives of the brokers whose statements had been recorded during the course of investigation which statements had been relied upon by the Board in recording its findings against the appellants. The argument of the learned senior counsel is that Ketan Parekh was only a Director on the board of the companies which have been dubbed as his entities and that he had no concern with their day to day working and that it was necessary to cross-examine the representatives of the brokers who had stated that it was Ketan Parekh who was placing the buy and sell orders on behalf of the companies. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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