TaxTMI 
TaxTMI 
2018 (4) TMI 1715
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.... Advocate, Mr. Vinay Chauhan, Advocate 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 disgor....
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....ex-parte order restraining 16 entities from dealing in the securities market directly 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....
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....o supplier to Shyam Star Gems Ltd., a company promoted by Savjibhai. 11. Since SJC 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 f....
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....rjibhai Parshottam Patel, Shantibhai M. Chanchpara, Savjibhai T. Anghan and Dhananjaya S. Desai. (h) Shyam Star Gems (now known as Swarn Sarita Gems Ltd.) is a company promoted by Savjibhai. 16. The role played by different entities are as follows:- (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 ....
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....regate order book size during Phase-II. During Phase-III Jayesh Patel sold 160 shares and made a profit of Rs. 93,783/-. 17. Shri P. N. Modi, learned Senior counsel appearing on behalf of the appellants in appeal no. 525 of 2015 submitted that the main charge against the appellants is 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 floa....
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....he impugned order that appellants did not have sufficient funds for the open offer and, therefore, included Shyam Star Gems Ltd. as a PAC so as to divert shareholders funds from Shyam Star Gems Ltd. is factually false and self contradictory. The impugned order itself holds that the source of funds for the open offer, 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 husban....
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....traded price (LTP) and only 1 trade on April 25, 2008 resulted in an upward movement of price/ positive LTP of Rs. 19.3. It is SEBI's case that the appellants' role in the alleged scheme was to jack up the price of the scrip. It is submitted that if the appellant was part of any scheme and if it was appellants' intention 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....
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....ng out their shareholding of 21.17% in the appellant and w. e. f. 10th August 2011 the name of the appellant company was changed from Shyam Star Gems Ltd. to its current name Swarn Sarita Gems Ltd. 32. The findings qua the appellant company in the impugned order pertain to the period March 18, 2008 to October 1, 2009. However, 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 remainin....
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.... The alleged purpose is belied by the trading pattern of the appellant wherein the appellant did not trade at all in the scrip post January 28, 2009. (vii) That the respondent has further recorded that Savjibhai did not have sufficient funds for the open offer and, therefore, included appellant as a PAC so as to divert shareholders' funds from appellant. The 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....
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.... did not tender any shares in open offer because appellant was considering long term investment. (o) Appellant no. 4 had only a transfer of 4450 shares, return of shares lent to the Desai family. (p) Rs. 16.55 Lakh was given to Savjibhai Patel because of his financial ill health. (q) Appellant no. 5 received various quantities of shares on different dates, totalling 9850 shares as a gift from her mother (appellant no. 4) but not traded in any single 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 th....
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.... with Ramesh Patel was only with respect to some money lent to the HUF of Ramesh Patel. He was not related / connected / linked directly or indirectly to any of the noticees except Urvashi Patel who is his wife. Admittedly, he made a profit of only Rs. 93,783/-. Despite that he has been made joint and severally liable for Rs. 2.5 crore penalty. 39. Shri Gaurav Joshi, Learned Senior Counsel appearing for SEBI in all these appeals submitted that the facts of the matter should be 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....
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....strategy has no merit. 42. Learned Senior Counsel Shri Gaurav Joshi further elaborated the violations committed by various appellants in these appeals in terms of their detailed role as promoters and how they made corporate announcements and disclosures which were not either fully or partially correct; nature of relationship between entities; how different entities placed buy trades at 5% above LTP in Phase-I and Phase-II of the investigation period when the scrip was highly illiquid 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 m....
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.... PFUTP Regulations Regulation 3. Prohibition of certain dealings in securities No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) .............. (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; Regulation 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions 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....
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.... the last traded price during Phase - I and Phase - II and thereafter off-loaded or attempting to off-load those shares when the price had increased dramatically and when liquidity had increased reasonably (around 1100 share per day) during Phase - III as a result of a fraudulent scheme hoisted by the promoters and related entities cannot be faulted. 48. Some specific submissions have been made by some of the appellants before us. These include that appellants are no related to the promoters; their trade is in the normal course of business; only one order for a small quantity has been placed; mere 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 (appell....
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.... a fraud. In Rakhi Trading (supra) it is held that in some cases parties may even incur willful losses in the market to achieve some objectives. 51. It has been submitted before us that some of the parties allegedly connected to the fraudulent scheme were not penalized by the impugned order. We note that these parties were only sellers acting as counter parties to the buy orders placed by some of the appellants herein. Selling in Phase-I and Phase-II is not considered abetting the fraudulent scheme since charge is that by placing buy orders volume and prices have been increased. In such a context somebody 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....