TaxTMI 
TaxTMI 
2006 (7) TMI 701
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....directly and also debarring them from associating 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, th....
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.... stocks had spread to the pharmaceutical stocks 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 ....
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....raded price and was, therefore, instrumental in 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 fi....
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....ze and urged that medium size companies like Lupin 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 h....
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....ued that the period of investigation was selected by 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 Regu....
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....companies wrote identical letters on the same date on 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 pe....
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....aw is that he was the person who was controlling the companies and 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 w....
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....r compared. From the various charts that he produced along with the 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 ....
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.... Change In Exchange Broker (Rs.) Price) Price (Rs.) (Rs.) C.J. Dalal 14/10/99 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 ....
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....antity traded by the appellants was less than 25%. In such a situation we find it 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....
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....sons willing to trade in the securities come to buy and sell and they are provided with a platform 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. ....
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....st was made for the supply of the copies of the statements recorded by the Board. There is no mention of 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 Investm....
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....ions read with Section 11B of the Act including a direction to prohibit them from dealing in securities be not 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 Pa....
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....rson from those who constitute it and in that sense Ketan Parekh would be distinguished from the entities said 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 ....
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....aries are expected to play the game according to the rules all of which are not codified. We also know that not all play 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 im....
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....s per se not illegal. Merely because a trade was crossed on the floor of the stock exchange with the buyer and seller entering 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 mar....
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....1 up to June 30, 2001, the settlement cycle at the Bombay Stock Exchange (BSE) was from Monday to Friday and at the National 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 objec....
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....sp; 14:03:13 99260 70.00 NH Sec PFMS 200010300573657 200010300573631 14:03:13 14:03:11 100000 100000 70.00 70.00 14:03:27 740 70.00 NH Sec PFMS 200010300573657 200010300573915 14:03:13 14:03:27 100000 100000 70.00 70.00 14:03:27 99260 70.00 NH Sec PFMS 200010300573920 200010300573915 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 &....
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....,99,750 shares of GTB at Rs. 70/- on October 30, 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 Rs. 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 so....
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....t (financier) to advance a short term loan to 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....
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....ng executed by KP entities through the stock 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 ....
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....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. 25. We shall now deal with the remaining two submissions made by the learned senior counsel on behalf of the appellants. It was strenuously contended by Shri N.H. 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 comp....
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.... 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. 26. 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 d....