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TMI Blog2018 (4) TMI 1715X X X X Extracts X X X X X X X X Extracts X X X X ..... cate with Mr. K.C. Jacob, Advocate i/b Corporate Law Chambers India Mr. Prakash Shah, Advocate For The Respondent : 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectly 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 Rs. 392/- on March 18, 2008 to Rs. 3,464.60 on August 27, 2009 and post-split the price moved from Rs. 363 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Patel was appointed as Director of SJC on 24.01.2009. 14. For the sake of convenience the details of relationship amongst the parties (appellants) as given in the impugned order is reproduced as follows:- Sr. No. Name of the Noticee Relationship 1. Sh. Savjibhai D. Patel Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws:- (a) Bhavesh Patel Group (Appeal No. 456 of 2015) have been considered connected to the promoter entities of SJC in terms of their common residential locality of Raheja Township at Malad (East); trades of Bhavesh Patel entities had been executed from the same location "4006020024001007"; call records between the counter party (seller) Harjibhai Patel and Savjibhai Patel who lived in the same building etc. Bhavesh Patel Group, along with three entities in the Ramesh Patel Group were the major buyers during Phase-I and Phase-II of the investigation. Between 18.03.2008 to 27.01.2009 a total of 19 trades were executed for a total volume of 6151 shares out of which 2890 shares were traded by Bhavesh Patel Group. They purchased 47% of the shares traded during Phase-I. They did not sell any shares during the open offer. They sold the shares during Phase-III; they were the top sellers in Phase - III and the group as a whole earned a profit to the tune of Rs. 25 Lakh; (b) In Appeal No. 513 of 2015, Mr. Ramesh Patel and Ramesh Patel HUF put buy orders of huge quantity of shares (2500 shares on 18.07.2008, for 2000 shares on 30.07.2008). Ramesh Patel bought 2500 shares at the rate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that during the investigation period of March 18, 2008 to October 1, 2009, the price was manipulated and pushed up by the trading done by parties who were allegedly connected to the Appellants who are the promoters of the company. However, he argued that this contention in the impugned order is devoid of any merit for the following reasons:- (a) Admittedly, the appellants did not trade in a single share even though the prices had risen very substantially. (b) Some parties are admittedly related, but that does not prevent them from legitimately trading in the scrip. Further, admittedly the "Bhavesh Patel" group was not connected to the Appellants. (c) Just because some parties live in the same locality (Raheja Township) cannot amount to being connected. (d) Even as per the particulars in the Impugned order itself, the price rose very substantially because the floating stock was very limited and sellers were selling only at higher prices. 18. Shri. P.N. Modi, Learned Senior Counsel for the appellant further argued that the charge in the impugned order that price / volume manipulation was done so as to manipulate the open offer price to Rs. 447/- as compared to Rs. 25/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, apart from the appellants own funds, was from the mother of appellant no. 1, the HUF of appellant no. 1, the sister of appellant no. 1 and her husband and their company Shamo Investments Pvt. Ltd. 22. It is alleged that a false statement was made in the LOO that "the financial obligations of the acquirers under the offer will be fulfilled through internal resources of the Acquirers and no further borrowing from banks or FI's or NRI's or otherwise is envisages..." since appellant no. 1 received funds from his mother, his HUF, his sister and her husband and their company Shamo Investments Pvt. Ltd. The LOO in fact states that the appellants had already made sufficient financial arrangements and that no further borrowing from banks or FI's or NRI's or otherwise is envisaged. The arrangement of funds by appellant no. 1 from his HUF, his mother, his sister and her husband and their company cannot be alleged to be any false statement in the LOO. In any event, the same cannot amount to borrowing from any banks or FI's or NRI's. 23. Neither 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 ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to jack up the price, then appellants would have not at all entered into any trades which would result in no change in price and/or negative LTP. 28. It is SEBI's case that these buy trades of the appellants matched with counter party Mr. Harjibhai Patel / Mr. Gabani Bharat Harjibhai, promoter related entities and the said counter party, Mr. Harjibhai was staying in the same premises as that of Shri Savjibhai Patel (promoter of company) and also calls were exchanged between Mr. Harjibhai and Shri Savjibhai. Though the appellants used to stay in the same locality, SEBI has not shown any kind of connection between the appellants and Mr. Harjibhai / Mr. Gabani Bharat Harjibhai and /or Shri. Savjibhai. Merely on the basis of staying in the same location and /or some calls have been exchanged between Mr. Harjibhai and Shri Savjibhai, a conclusion cannot be drawn that appellants were part of the alleged deceptive scheme. Moreover, though SEBI has alleged 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, the appellant had bought mere 10 shares of SJC on 28.01.2009 in the ordinary course during the entire investigation period. The said 10 shares are still held by the appellant as on date. 33. In the impugned order, the respondent has inter-alia recorded : (i) That the appellant had entered a buy order for 100 shares, out of which trade for 10 shares was executed and the order for the remaining 90 shares was automatically deleted and that Ramesh D. Patel HUF was the counter party to the said trade of the appellant. It may be noted that there is no finding that the said trade of 10 shares was synchronized or premeditated. (ii) That the order was placed at the 5% upper circuit filter level. It may be noted that due to absence of sellers, the order was placed at upper circuit filter level. Admittedly, due to absence of sellers, 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding is factually false and self-contradictory. Further, the same is coming for the first time in the impugned order. The allegations are baseless and reveal the predetermined mindset of the respondent. Fact is that the whole consideration amount towards open offer obligations was met by Savjibhai Patel through his own sources and not even a penny was given by appellant for the purpose. The impugned order itself holds that the source of funds for the open offer, apart from Savjibhai's own funds, was from the mother of Savjibhai, the HUF of Savjibhai, the sister of Savjibhai and her husband and their company Shamo Investments Pvt. Ltd. (viii) By the impugned order, the respondent has imposed a penalty of Rs. 2.5 crore on all 19 noticees "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 Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e share. No financial arrangement with her uncle Savjibhai Patel. 35. The Learned Senior Counsel for the appellants Shri Mustafa Doctor in Appeal No. 513 of 2015 has relied on the following judgments in support of his arguments (a) Canara Bank and Others vs. Debasis Das and Others (2003) 4 Supreme Court Cases 557; Vikas Ganeshmal Bengani vs. Whole Time Member, SEBI (Appeal No. 225 of 2009 decided on February 25, 2010); Jagruti Securities 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen in its totality to understand the fraudulent scheme hatched by the appellants. In isolation, if the role of any one is examined, it is difficult to get full picture. 40. It is fact that SJC was a company with negative net worth having only limited stock of 2 lac shares which was illiquid and being traded once in a while in very small quantities of 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 abnor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quid and trading was not more than 3 to 29 shares (Phase-I and Phase-II respectively); financial transactions between some of the appellants and the promoters; the relative performance of two companies of the promoters and their association with companies based in Hong Kong and how in Phase-III some of the appellants off-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 Rs. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice 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 rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 1185/- per share on 26.09.2009. This was the highest reported price ever and it is equivalent to a pre-split price of Rs. 11850/-. Since the counter party did not meet the obligation the diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebody 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 Rs. 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 Rs. 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 imposed upon them. 53. In view of the above reasons we find no merit in the appeals except that of Ms. Reshma Patel, Appellant No. 5 in Ap ..... 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