BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.210 of 2011
Date of Decision : 29.3. 2012 Eaugu Udyog Ltd.
434, New Sonal Link,
Linking Road, Malad (West),
Mumbai – 400 064.
….. Appellant Versus
Securities and Exchange Board of India
SEBI Bhavan, C-4A, G Block,
Bandra Kurla Complex,
Bandra (East), Mumbai – 400 051.
..…Respondent Mr. V.I. Garg, Director and Corporate Advisor for the Appellant.
Mr. Kumar Desai, Advocate with Ms. Daya Gupta and Ms. Harshada Nagare, Advocates
for the Respondent.
CORAM : P. K. Malhotra, Member
S.S.N. Moorthy, Member
Per : S.S.N. Moorthy, Member
Challenge in this appeal is ag ainst imposition of a penalty of 12 lacs on the appellant under section 15HA of the Securities and Excha nge Board of India Act, 1992 and 23H of the Securities Contracts (Regulat ion) Act, 1956 (hereinafter referred to as SEBI Act and SCRA respectively). The adjudicating officer found the appellant guilty of violating regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (FUTP Regulations for short) and the Securities and Exchange Board of India notification G.S.R.219(E) dated March 2, 2000 read with se ctions 16 and 18 of the SCRA. For the former violation a penalty of 7 lacs and for the latter a penalty of 5 lacs (totaling 12 lacs) was imposed by the adjudicating officer.
- The appellant is the erstwhile promoter of M/s. Hit Kit Global Solutions Limited
(HKGS). HKGS was listed on the Bombay St ock Exchange and was engaged in the
business of software development. The appe llant held 58.75 per cent shares in HKGS.
The appellant is an investment company and by way of a scheme of arrangement
sanctioned by the Bombay High Court the appell ant decided to divest its entire promoter
2
shareholding in HKGS partly by transfer to existing co-promoters and partly in the
secondary market. Securitie s and Exchange Board of I ndia (for short the Board)
conducted investigation in the trading in the scrip of HKGS during the period October 1,
2004 to January 12, 2005. The Board noticed abnor mal trading features which led to the
suspicion regarding manipulation of trades by the appellant in collusion with a group of
connected entities, Jayesh C. Shah, Haresh S oni, Jaiprakash Jain, Sanjay J. Soni, Dinesh
Vijla and Abhijit Todi. The appellant offloaded 69,56,727 shares in the secondary
market and 25,45,000 shares in off market trans actions. The pattern of trade indicated
that the appellant and the connected entities mentioned hereinabove acted together to
create sufficient cushion for the sale prices of the scrip when huge volumes were traded
in the market. During the investigation period the price of the scrip registered steady
increase and this was considered to be on account of manipulated trades between the
appellant and the connected entities which resulted in keeping the share value steady and
on the rise so that while offloading the shares the appellant did not suffer any loss. The
adjudicating officer also found that in o ff market transaction 20 lakh shares were
transferred to Penta Electronics and Food Pvt. Ltd. (PEFPL), the consideration for which
was received only after a period of nine months from the date of transfer. He concluded
that there was violation of regulations 3 and 4 of the FU TP Regulations and of the
Securities and Exchange Board of India notif ication G.S.R.219(E) dated March 2, 2000
read with sections 16 and 18 of the SCRA.
- A show cause notice was issued to the appellant on May 10, 2010 setting forth the
above mentioned allegations of synchronized trade and violation of the provisions of
SCRA. The appellant filed a detailed reply denying all the allegations levelled against it
in the show cause notice. - In the show cause notice the adjudicating officer provided a de tailed account of
the off-market transactions and the tran sactions in the secondary market. The
transactions were mainly put through Haresh Soni, Jaiprakash Jain, Sanjay J. Soni, Anil
Thakrel and Abhijit Todi who were connect ed by means of common introduction, fund
transfer, third party payments, deliveries et c. The major counter party buyers in the
market were the same entities to which the appellant had transferred shares off-market.
In the background of the transactions in shares with the connected entities the share price
3
and volume increased substantially during the investigation period. To begin with, trades
were in the range of 1 to 311 per month and the price range was 0.855 to 4.89. From
July to September 2004 the trading volumes increased in the range of 4 to 11 lakh shares
per month. The price of the scrip touched ` 5.48 in January 2005. There was steady
increase in price during the period of inves tigation. Regarding off-market transactions
the appellant submitted before the adjudicati ng officer that 5,45,000 shares were sold to
sub-broker Shreeji Securities whose proprie tor happened to be Sanjay Soni. The
consideration for the tran sfer of 5,45,000 shares provided by the sub-broker was not
realized since the cheque was dishonored. There was no attempt to recover the amount
from Shreeji Securities. It was also noticed during invest igation that the bill raised by
Shreeji Securities was fake and the SEBI registration number was not correct. However,
the fact remains that 5,45,000 shares were deb ited from the account of the appellant and
credited to the account of Haresh Soni, Sanjay J. Soni and Jayesh Shah. The argument of
the appellant that the transact ion was in the normal course of business was not accepted
by the adjudicating officer. In the secondary market too, the buy clients for the shares
offloaded by the appellant were the connect ed entities already mentioned above. The
trade logs revealed the increase in price a nd volumes during the investigation period and
the trades between the appellant and the connected entities.
- The appellant’s learned representative ve ry strenuously pointed out that there is
no evidence regarding close connection, let al one, connivance between the appellant and
impugned market players. Acco rding to him, the transacti ons of the a ppellant were
bonafide market operations and there was no attempt to create artificial volumes and
price rise. It was argued that the off-loading was done partly off-market and partly in the
secondary market as per the directions of the High Court of Bombay and the sale effected
through reputed brokers like Kotak Securities Limited and Anand Rathi Securities P.
Ltd. The mischief of circular trading is totally denied by th e appellant. It is observed
that the appellant sold shares by 100 per cent deliverable transaction and had not reversed
any sell transaction by buying equal number of shares on the same day. It was argued
that synchronized trading per se is not il legal and the appellant had no connection with
the persons alleged to be part of the c onnected group. According to the learned
representative for the appellant, the transfer of shares off market to a handful of persons
4
and sale of shares in the s econdary market also to the same persons could not make the
transaction colorable and suspicious. It is argued by the appellant’s learned
representative that apart from the off-market transactions, no other concrete evidence is
brought on record to establish th e relationship/connivance of the parties. A reference is
made to the orders of this Tribunal in Appeal nos. 42 and 43 of 2011 dated 9.9.2011 on
two of the impugned market players Todi and Vijla wherein penalty has been
substantially reduced.
- The learned counsel appearing for the Board defended the order of the
adjudicating officer. According to him, presence of identical persons in off-market trades
and in the secondary market and the data of price and volume in the trade log would
establish beyond doubt the connection of the part ies. In off-market transactions the
counter party is known and it cannot be a co incidence that the same counter parties
appear in the trades in secondary market al so. The trade logs which form part of the
adjudication order highlighted the artificial volumes and price fluctuations intended to
create a favourable market in the off-loading of the shares. The conduct of the appellant
with respect to the non recovery of am ounts though the cheques were dishonoured and
transaction with the same parties in the secondary market sufficiently evidence the
intention of the appellant to jack up the share value. - We have heard the learned counsel for the parties who took us through the details
of the transactions. There is no dispute regarding off-loading of shares partly by way of
off-market dealings and partly by way of secondary market transactions. There is also no
dispute regarding the identity of the counter parties in the above transactions. The rise in
price and volume during the investigation period also remains undisputed. The main
thrust of the appellant’s stand is that off-loading of shares was done as per the directions
of the Bombay High Court and the transactions were genuine commercial dealings where
beneficial ownership was transferred. We are unable to agree with the contention of the
appellant that the transaction was normal, bonafide and transparent. The presence of
same persons as counter parties both in off- market transaction and in secondary market
dealings cannot be dismissed as a mere coincidence. The fact remains that the
“connected persons” Haresh Soni, Jaiprakash Jain, Sanjay J. Soni, Anil Thakrel and
Abhijit Todi were party to synchronized trades. Action has been taken separately in their
5
cases for market manipulation. Some of the penalty orders in respect of the connected
persons were also cited by the appellant’s learned representative. The synchronization of
trades in the market during the investigation period resulted in artificial volumes and
price rise. It is a matter of record that the same persons figure both in off-market and
secondary market transactions. It was necessary for the appellant to obtain maximum
benefit from the off-loading of shares. As already observed, the shares were not trading
well at the beginning of the investigation period. Price and vol ume went up steadily
during the investigation period providing a safe and profitable exit for the appellant. The
circumstances in which the price of the scri p rose and the involvement of the appellant
establish that the market was deliberately kept afloat by the appellant in connivance with
the connected persons. Otherwise, there is no explanation for the presence of identical
counter parties in off-market and secondary market dealings though the appellant would
take a plea of bonafide market transactions.
- The appellant’s learned representati ve placed considerable emphasis on the
proposition that synchronized tr ade per se is not illegal. A reference was made to a
decision of this Tribunal in Ketan Parekh vs . Securities and Excha nge Board of India,
(Appeal no.2 of 2004 dated July 14, 2006) and Prashant J. Patel vs. Securities and
Exchange Board of India, (Appeal no.150 of 2006 dated August 17, 2010). It is true that
synchronized trade by itself may not be illegal if it is in the normal course of market
operations and there are no facts which suggest manipulation or fraudulent intent. Every
case has to be judged from the facts and circumstances relating to that case and not on the
touchstone of general legal propositions. If the facts of the case bring out a different
intent of the parties they may have to be c onsidered in their prope r perspective. This
tribunal has held in the case of Prashant J. Patel mentioned supra that synchronized trades
executed with a view to manipulating the market is illegal.
“We have already held that negotia ted/synchronized trades are not by
themselves illegal but if a synchronized trade 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 de tection or does
not involve change of bene ficial ownership or is executed to create false
volumes resulting in upsetting the market equilibrium, it would be illegal.
In other words, the intention with which a synchronized trade is executed
would be the material factor to determ ine whether the trade is fraudulent.
In the case before us, it is the appellant’s own case that he executed
negotiated deals/trades on behalf of his clients whose details were
furnished by him to the Board in the reply to the show cause notice.”
6
In the present case, the transactions entered into by the appellant cannot be termed as
simple and straight. The circumstances of the case do point to something more than
normal and transparent business transaction. So, the argument of the appellant’s learned
representative that the appellant was acting bonafide cannot be accepted. The appellant’s
learned representative also referred to the orde r of this Tribunal in the case of Dinesh R.
Vijla vs. Adjudicating Officer, Securities and Exchange Board of India, (Appeal no.42 of
2011 dated 9.9.2011) wherein it has been obser ved that the Tribunal did not find any
connection between the two appellants and the promoter. As al ready observed above,
every case has to be judged in the background of the facts and circumstances of that case.
The facts of the present case and the circum stantial evidence brought on record are quite
different and we cannot arrive at a conclusion as in the case of Dinesh Vijla referred to
above. The adjudicating officer has clearly brought out the nature of the trades and their
relevance in the circumstances which require d the appellant to obtain maximum benefit
out of a scrip which was trading very poor at the beginning of the investigation period.
In fact, inter se connection of parties can best be appreciat ed through the conduct of the
parties. In the present case the appellant was motivated by the objective of maximum
profit and the transaction with the connected entities helped in keeping the price and
volume at a considerably higher level than in the normal circumstances. The adjudicating
officer has brought out the role of the a ppellant and the market manipulation in a
convincing manner.
i. “The Noticee was major seller in the market and for 25.02% of its
total sales the counter party were the connected entities to whom
Noticee also transferred shares in the off market.
ii. The synchronized trades of th e Noticee constituted 17.02% of its
total sales with the counter parties. There was exact matching of
the price and time difference between the buy order and sell orders
was within seconds.
iii. The synchronized trades were carri ed out for over a period of two
months in 1034 trades.
iv. The Noticee not only synchronized th e trades in the market with
the counter party entities who we re connected but by transferring
the shares in the off-market to the connected entities enabled those
entities to execute trades among themselves which were
synchronized and created artificial volume as also influenced the
price of the scrip.”
- In view of the facts discussed above and the conduct of the appellant, we have to
come to the irresistible conclusion that th e adjudicating officer has rightly found fault
with the appellant for violating regulations 3 and 4 of the FUTP Regulations.
7
- The second charge in this appeal relates to the violation of provisions of SCRA by
the appellant. The appellant transferred 20 lac shares to PEFPL in two instalments on
16.12.2004 and 27.12.2004 off market. The conten tion of the appellant before the
adjudicating officer was that the impugned transfer did not involve any sale of shares but
only a transfer to a mandate holder for finding out a market for the shares. Considering
the manner in which the shares were transfer red and entry of the same in the depository
account in the name of the tr ansferee, the adjudicating o fficer took the view that
beneficial ownership was transferred to PEFPL and all the attendant provisions of SCRA
applied to the transaction. PEFPL transfer red back 6,86,000 shares to the appellant and
transferred 13,14,000 shares for which a consid eration of 40 lacs was received. The
appellant received the above c onsideration of 40 lacs on 8 th September, 2005. The
adjudicating officer concluded that receip t of payment on September 8, 2005 was in
violation of the provisions rela ting to transfer of funds in s pot delivery. On this count,
the appellant was held to be liable to a penalty as per section 23H of the SCRA. - During the hearing of the appeal a preliminary objection was raised by the
appellant’s learned representative with regard to a corrigendum to the show cause notice.
Show cause notice in this case was issued on 10 th May, 2010 while a corrigendum was
issued on 19th February, 2011. In the corrigendum the adjudicating officer mentioned the
provisions of section 23H of SCRA with emphasis on the quantum of penalty relating
thereto. In the original show cause notice, in pa ragraph 20, mention was made of
section 23(h) of SCRA and the penalties a ttached thereto. The appellant’s learned
representative argued that no proper opportu nity was given after the issue of the
corrigendum to the show cause notice and this is vital in so far as the quantum of penalty
in section 23H of SCRA is substantially high. - On a perusal of the records and the conduc t of the appellant in its reply to the
show cause notice we do not find any merit in this contention. It is true that the
adjudicating officer has substi tuted part of the original show cause notice with the
corrigendum issued on February 19, 2011. The penalty imposed in the adjudication order
is in conformity with the provisions contai ned in the corrigendum. But a perusal of the
reply to the show cause notice filed by the appellant makes it very clear that the appellant
has properly understood the charge as one relating to section 23H of th e SCRA Act. In
8
the reply filed by the appellant on 21 st December, 2010 the following submissions are
made:
“d. Without prejudice to the above, the Noticee states that the said Show
Cause Notice has been issued for a lleged violation of the provision of
section 15HA of the SEBI Act and section 23H of the SCRA Act. Section
15HA of the SEBI Act contemplates penalty for fraudulent and unfair
trade practice. The term ‘fraudulent’ has been bought out by the definition
of the word ‘fraud’ as per regulations 2(c) of the SEBI (Prohibition of
Fraudulent and Unfair Trade Practic es relating to S ecurities Market)
Regulations, 2003 (PFUTP Regulations, 2003).”
The appellant has also understood the correct charge as made out by the adjudicating
officer and it is evident in paragraph 47 of the reply to the show cause notice.
“47. In paragraph (19) of the SCN, it is alleged that by the act described
in paragraph (18), the Noticee has vi olated SEBI notification GSR 219(E)
dated 2 March 2000 read with sections 16 and 18 of the SCRA. This is
denied.”
Since the relevant provisions of the Act have been properly understood by the appellant
and suitable reply relating thereto has been furnished in writing there is no case of denial
of natural justice on this count.
- The appellant’s learned representative argued at length stating that a mandate
letter given to PEFPL for sale of shares was not in the nature of “spot contract” and so
there was no violation of the provisions of SCRA. According to him, there was only a
contingent contract with the mandate holder for identification of a prospective buyer.
The mandate was attached with elements of uncertainty because of price, quantity, time
etc. and the mandate holder was expected only to locate a prospective buyer. - The learned counsel appearing for the Board submitted that the transaction was in
the nature of spot delivery and there was tr ansfer of beneficial ownership from the
appellant to PEFPL. With re ference to the mandate letter the learned counsel for the
Board pointed out that the terms of the mandate letter were not complied with and PEFPL
had behaved purely as the owner of the shares and transferred the proceeds to the
appellant. - We have gone through the mandate letter. It is necessary to highlight the terms
and conditions of the same:
“Dear Sir,
As per our mutual discussions we are giving you mandate for Placement
of 20,00,000 equity shares of Rs.2/- each of Sun Beam Infotech Limited to
the Corporate Investors in the pric e band of Rs.2.90 to Rs.4.90 per share
on the following terms and conditions:-
9
1) Minimum lot of 5,00,000 shares shall be placed with one single investor.
2) The investor shall agree to hold the investment on long terms basis.
3) The delivery of the shares shall be gi ven to the investor in Demat Form
only against the receipt of the paymen t of full consideration, and if the
basis of payment is on credit terms, the delivery of the shares shall be
given strictly in physical form and they will be allowed to demat the same
after the receipt of payment from them.
4) The mandate is valid for Three months from the date of this letter.
5) The payment shall be made on or before six months from the date of the
final negotiation with the investor.
If you are unable to finalize the deal within the validity period of this mandate
you will be under obligation to return b ack the shares to the company, which
are to be given by us, pursuant to this mandate in your demat account,
immediately after finalization of this mandate.”
- One of the conditions which is glaring in the mandate letter is that it is valid for
three months from 10th December, 2004. Obviously PEFPL made the payment of 40 lacs
only in September, 2005 which is much after the stipulated period of three months in the
mandate letter. Another significant factor to be noted is that the shares are being
transferred to the demat account of PEFPL. This implies transfer of beneficial ownership
of the shares. Once PEFPL becomes the bene ficial owner as per the provisions of the
Depositories Act, it cannot be regarded as a mere custodian or mandate holder for the
only purpose of identifying a pr ospective buyer. The conduct of the parties, which is
important in any transaction, establishes that there was a transfer of the shares. Even
though the appellant has made out a sale note for the sum of ` 40 lacs in its name making
PEFPL a witness thereof much cannot be made out of this. The adjudicating officer has
brought on record the nuances of the legal and factual matrix of the transactions in the
impugned order. The conduct of the parties and nature of the transaction establish that
the appellant entered into a transaction in off market with PEFPL and received the
payment after nine months which is in cont ravention of the provisi ons relating to spot
delivery contracts. As per section 2(i) of the SCRA ‘spot delivery contract’ is defined as
under:-
2 ( i) “spot delivery contract” means a contract which provides for,—
( a) actual delivery of securities and the payment of a price therefore either
on the same day as the date of the c ontract or on the next day, the actual
period taken for the despatch of the securities or the remittance of money
therefore through the post being excl uded from the computation of the
period aforesaid if the part ies to the contract do not reside in the same
town or locality;
( b) transfer of the securities by th e depository from the account of a
beneficial owner to the account of a nother beneficial owner when such
securities are dealt with by a depository;”
10
In the facts of the case, PEFPL has to be cons idered to be the real owner once the shares
are transferred to its demat account. As observed above, th e conditions of the mandate
letter were not complied with. PEFPL sold th e shares and transferred the balance to the
account of the appellant. This is beyond the terms provided for in the mandate letter. The
transfer of beneficial ownership comes along with the rights and liabilities attached to the
ownership of the shares. In the present case , the credit of the shares in the depository
account of PEFPL and the subsequent sale of pa rt of the shares and return of the balance
show that PEFPL was not a mere mandate hol der as contended by the appellant. In the
circumstances of the case, there is a spot deliv ery contract as envisaged in section 2(i) of
the SCRA Act. Since the payment of consider ation is not in conformity with the above
provision of SCRA penalty under section 23H is called for.
In view of the forgoing discussion, we hold that the order of the adjudicating
officer does not call for any interference. The imposition of penalty is confirmed.
Appeal dismissed. No order as to costs.
Sd/- P.K. Malhotra
Member
Sd/-
S.S.N. Moorthy
Member
29.3.2012
Prepared and compared by
RHN