TaxTMI 
TaxTMI 
2006 (7) TMI 701
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....ciating with the securities market for a period of 14 years. The order is based on two separate show cause notices issued by the Board to Ketan Parekh and the other above named entities allegedly associated with him which have been found to be either connected with or controlled by Ketan Parekh hereinafter collectively described as KP entities. Since the Board has recorded separate findings in regard to the two show cause notices, it will be convenient to deal with them separately in our order as well. Re: First show cause notice. 3. This show cause notice relates to the alleged price manipulation in the scrip of Lupin Laboratories Limited (for short 'Lupin'). 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 bu....
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....s as well. He also pleaded that it was well known that stock movements are not always rational and are very often irrational and are largely governed by rumours and hearsay. He stated that in continuation of his reply he would be submitting part II thereof shortly which he did not file. The Board fixed 14.3.2003 as the date of hearing for the first show cause notice and afforded an opportunity to the appellant and other entities to appear in person. The appellant could not appear in person on this date as he was in judicial custody in Kolkata. Classic, Panther and Saimangal appeared through their representatives on the date fixed and sought adjournment on the ground that 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 f....
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....establishing an artificial higher price for the scrip of Lupin. Reference was also made to the statements of some of the brokers and others recorded during the course of investigations and on the basis of these statements a finding is recorded that all the three entities namely Classic, Panther and Saimangal were controlled and operated by Shri Ketan Parekh and orders on their behalf were placed either by Ketan Parekh or his brother Kartik Parekh. N.H. Securities had acted as a broker on behalf of Classic and that they both tried to establish a higher price of the scrip. Several instances have been quoted in support of this finding. Ketan Parekh and his entities were found 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 i....
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.... and others in the pharmaceutical industry were expanding faster due to liberalisation and globalisation of the economy. The grievance of the appellants is that the Board should have compared the price movement of Lupin with some other medium size companies which were fast expanding instead of comparing it with large size companies. The learned senior counsel was emphatic in his submission that the price rise in the stock of Lupin was not out of tune with the market sentiment then existing. The learned senior counsel forcefully challenged the finding recorded by the Board that Ketan Parekh and his entities had traded in the scrips of Lupin only with a view to establish a 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. T....
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.... the Board because it was during that period that the scrip of Lupin was showing an unusually fast rising trend along with a steep increase in volumes and therefore no fault could be found for selecting that period. He further pleaded that the shares of Lupin were compared with Ranbaxy, Glaxo, Novartis and Cipla because these four companies were market leaders in pharmaceutical industry and their scrips were quite active on both BSE and NSE. He referred to the instances relied upon by the Board in paragraph 4.9 of the impugned order to urge that repeated orders at slightly higher price for substantial quantities were being placed to hike the price and to ensure that the higher 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 R....
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....their letter heads and it would be useful to reproduce the said letter at this stage. Sub: Personal hearing scheduled for 14th March 2003 at 2.30 p.m. This is with reference to your letter providing us an opportunity of personal hearing before the Chairman, SEBI in relation to the report of the Enquiry Officer dated 30th July 2002. In this respect, you will appreciate that we have represented before you and before the Enquiry officer through Mr. Ketan V. Parekh. On prima facie perusal of the Show Cause Notice you will note that a person with knowledge about the transactions mentioned therein is Mr. Ketan Parekh. Mr. Ketan V. Parekh is currently in judicial custody in Kolkata 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) m....
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.... that all the buy and sell orders were being placed on their behalf under his instructions. It may be relevant to mention here that Shri N.H. Seervai, the learned senior counsel during the course of the hearing had been contending that Ketan Parekh was a different entity from the three companies on whose Board he was a director but did not seriously challenge before us the finding recorded by the Board that he was the force behind the three companies and was controlling them. In the result, it has to be held that Ketan Parekh was controlling the three companies and all the buy and sell orders on their behalf were being placed by him. 9. We shall now deal with the question whether 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 d....
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....compilation, the veracity of which could not be challenged by the respondent because all were computer printouts from the concerned exchanges, it is clear that the price of the shares of pharmaceutical companies was on the rise during the relevant period. It cannot therefore be said that the price of Lupin alone had shot up during the period under consideration. Again, it cannot be said that the price of Lupin had risen solely because the appellants had traded in this scrip. It is relevant to take note of another factor which was highlighted by Shri N.H. Seervai. The BSE index (popularly known as Sensex) had risen from 3060 points on 01/01/1999 to 5005 points on 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 h....
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....9 BSE (Purchase) 10.03.34 25000 85040040 411 382.25 Buyer and (closing) Seller both Classic Credit Ltd. Parvin V. 14/10/99 BSE Shah (sale) 10.03.34 25000 411 Price on Buyer and previous Sellar both Classic Creditday) Ltd. C.J. Dalal 14/10/99 BSE (Purchase) 15.12.51 30000 85040076 412.80 Buyer and Buyer and Seller both Sellar both Classic Classic Credit Credit Ltd. Ltd., Milan 14/10/99 BSE Mahendra 15.12.52 40000 460120041 412.80 Buyer and Buyer and Seller both Sellar both Classic Classic Ltd., Credit Ltd. Classic had placed a buy order of 25000 shares of Lupin through broker C.J. Dalal at 10.03.34 hours at a rate of Rs. 411/- when the previous day's closing price was Rs. 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 Rs. 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 Rs. ....
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....t difficult to hold that the transactions undertaken by the appellants had artificially increased the volumes in the scrip of Lupin during the period under consideration. In the result, we have no hesitation to hold that the appellants did not establish a higher price for the scrip of Lupin nor did they create artificial volumes and the findings recorded by the Board in this regard cannot be upheld. 12. We will now deal with the other contentions raised by Shri N.H. Seeravai, learned senior counsel for the appellants. It was vehemently argued by the learned senior counsel that even if it were to be assumed 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 t....
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.... where a buyer buys securities without knowing the seller and vice-versa. The stock exchange is also a platform for the fair price discovery of a scrip based on the market forces of demand and supply. Securities market is so wide spread and in a system of screen based trading various potential investors who track the scrips through the screens of the exchanges only see whether a particular scrip is active or not, whether it is trading in large volumes and whether the price is going up or down. Having regard to these factors he makes up his mind to invest or disinvest in the securities. When a person takes part in 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 necess....
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.... any such request in the impugned order. This being so, mere ipse dixit of the appellant at the time of hearing before us which is seriously disputed by the Board cannot be accepted to hold that the principles of natural justice were violated. For the reasons stated above, the charge levelled against the appellant in the first show cause notice dated March 27, 2002 must fail. Re: Second show cause notice 16. This brings us to the second show cause notice dated July 30, 2002. Due to excessive volatility in the index movements of stock exchanges during mid February to mid March, 2001 and apprehensions of some attempts 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 w....
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....ot issued against them. None of the appellants responded to the second show cause notice. They were afforded an opportunity of hearing and were called upon to appear before the then Chairman of the Board on March 14, 2003. All the KP entities requested for an adjournment on the ground that Shri Ketan Parekh was in judicial custody of Kolkatta Police and that his presence was required during the hearing. They all wrote identical letters of request stating that "you will appreciate that we have represented before you and before the Enquiry Officer through Mr. Ketan V. Parekh. On prima facie perusal of the show cause notice 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....
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.... to be associated with him but this rule has several exceptions which have now come to be recognised by our Courts, Courts in England and also in the United States. Palmer on Company Law, Volume I, Part II has discussed several situations where the court would disregard the corporate veil and has pointed out several exceptions to the general rule. That discussion has been approved by the apex Court in Delhi Development Authority v. Skipper Construction Company Pvt. Ltd. MANU/SC/0497/1996 wherein their Lordships after discussing the law on the subject as it prevails in some other jurisdictions have observed as under: 28. The 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 Co....
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....ay the game fairly and some manipulate the market. There are a variety of methods in which the market could be manipulated all of which cannot be envisaged as human ingenuity knows no bounds and sometimes even the Board - the watchdog of the securities market comes to know only after the event. However, one of the methods commonly employed by manipulators to create an impression of high trade volumes and rising prices is circular trading. This is how it works: a manipulator targets a scrip and acquires as much of the floating stock as is necessary to ensure his profits and creates an illusion of high trading volumes at the counter. 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 out....
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....tering the price at which they intended to buy and sell respectively, the transaction does not become illegal. A synchronised transaction even on the trading screen between genuine parties who intend to transfer beneficial interest in the trading stock and who undertake the transaction only for that purpose and not for rigging the market is not illegal and cannot violate the regulations. As already observed 'synchronisation' or a negotiated deal ipso facto is not illegal. A synchronised transaction will, however, be illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results 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 cir....
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....al Stock Exchange (NSE) was from Wednesday to Tuesday. In July, 2001 rolling settlement was introduced in phases across all stock exchanges in India. To begin with, it was T+5 i.e., trades taking place on a Monday were settled on the following Monday. Thereafter the cycle was reduced to T+3 and currently it is T+2. 22. Let us now examine some of the transactions executed by Ketan Parekh and his entities allegedly with a view to raise funds from the market by rigging its mechanism. It appears that Ketan Parekh wanted to raise funds against shares of various companies including Global Trust Bank (GTB) held by him or his entities. In 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 operat....
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....5 14:03:27 14:03:27 100000 100000 70.00 70.00 14:05:27 740 70.00 Milan Sec PFMS 200010300573920 200010300576521 14:03:27 14:05:27 100000 100000 70.00 70.00 14:05:27 99260 70.00 Milan Sec PFMS 200010300576531 200010300576521 14:05:27 14:05:27 100000 100000 70.00 70.00 14:05:38 740 70.00 Milan Sec PFMS 200010300576531 200010300576799 14:05:27 14:05:38 100000 100000 70.00 70.00 14:05:38 99260 70.00 Milan Sec PFMS 200010300576802 200010300576799 14:05:38 14:05:38 100000 100000 70.00 70.00 14:06:28 590 70.00 Milan Sec PFMS 200010300576802 200010300577845 14:05:38 14:06:28 100000 100000 70.00 70.00 14:06:35 99360 70.00 Milan Sec PFMS 200010300577959 200010300577845 14:06:35 14:06:28 100000 100000 70.00 70.00 &nb....
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....e d the price of the shares from CSFB to whom they were sold and that Panther would be paying to CFSB only at the end of the settlement period. In this way Ketan Parekh through Classic has raised short term money while retaining control over the shares which have actually been traded through the exchange mechanism without the intention of transferring any beneficial ownership therein. It is true that these shares were actually transferred from the account of Classic to CSFB which held them as a temporary parking slot and they eventually went to Panther. Since Classic and Panther are both being controlled by Ketan Parekh, the latter took a short term loan from CFSB which acted as a financier for the period of a few days for which it gave the money to Classic without incurring any risk because it had shares worth that amount by way of security. CSFB was not to retain those shares nor did it purchase them with the intention of actually buying them. It had purchased those shares for passing them on to Panther and for the period it retained the shares it had advanced a short term loan to Ketan Parekh through Classic. Ketan Parekh had, thus, raised a short term loan from CSFB against th....
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.... amount that was charged as brokerage was in reality the interest for the days for which the amount had been advanced to Ketan Parekh through different entities. It is, thus, clear that the transactions were in reality financing transactions though they were given the semblance of sale and purchase of shares. Transfer of shares from Classic to Panther through CSFB was not a solitary instance and a very large number of transactions were executed in a similar fashion not only between Classic and Panther but also between the other KP entities. As found by the Board, which fact was not disputed before us at the time of hearing, that during the period from April 1, 2000 to March 31, 2001 shares worth Rs. 5644 crores were traded only by three Ketan Parekh entities on the NSE and BSE by raising short term finance from CSFB the broker. Trades by other entities were in addition. Such large was the trading by Ketan Parekh and his entities. Having regard to the frequency of the transactions, their value and volumes and taking note of the fact that they involved circular trading without change of beneficial ownership and without intending to trade, we have no hesitation in holding that these t....
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.... 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 11:02:13 11:02:13 100000 100000 238.25 238.25 DSQ Bio 13-Dec-00 11:02:13 238.25 1013 CSSB CCL CSSB 11:02:13 11:02:04 100000 100000 238.25 238.25 DSQ Bio 13-Dec-00 11:02:29 238.25 1013 Keynote PFMS PFMS 11:02:29 11:02:13 100000 100000 238.25 238.25 DSQ Bio 13-Dec-00 11:02:30 238.25 50000 Keynote PFMS PFMS 11:02:29 11:02:30 100000 50000 238.25 238.25 DSQ Bio 13-Dec-00 11:02:30 238.25 47895 CSSB PFMS CSSB 11:02:29 11:02:30 100000 50000 238.25 238.25 DSQ Bio 13-Dec-00 11:02:47 238.25 49825 CSSB PFMS CSSB 11:02:47 11:02:45 50000 50000 238.25 238.25 24. 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 case....
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....d 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-avai....