BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 49 of 2012
Date of Decision: 16.4.2012 M/s Rajesh N. Jhaveri
410, Wall Street 1, Opp. Orient Club,
Ellisbridge, Ahmedabad – 380 006.
……Appellant
Versus Securities and Exchange Board of India
SEBI Bhavan, Plot No.C-4A, G Block,
Bandra Kurla Complex,
Bandra (East), Mumbai – 400 051.
…… Respondent Mr. Deepak R. Shah, Advocate for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Mihir Mody, Mr. Mobin Shaikh, Advocates for the
Respondent.
ORAM : P. K. Malhotra, Member
S.S.N. Moorthy, Member
er : S.S.N. Moorthy, Member
This appeal is filed against an order passed by the adjudicating officer of the Securities
and Exchange Board of India (for short the Board) imposing a penalty of 3 lacs on the
appellant under section 15HA of the Securities and Exchange Board of India Act, 1992. The
adjudicating officer found the appellant guilty of violating regulation 4 of the Securities and
Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to
Securities Market) Regulations, 2003 (FUTP Regulation) and accordingly penalty of 3 lacs
was imposed.
- The appellant is the proprietor of M/s. Rajesh N. Jhaveri. He was engaged in trading
of the scrip of M/s. Adani Exports Ltd. (the company) and he was found to have acted,
alongwith a few other entities, in the manipulation of the scrip of the company. The Board
conducted investigations in the buying, selling and dealing in the shares of the company for
the period November 27, 2003 to December 23, 2003. During investigation, it was noticed
that there was sharp increase in the price and volume of the scrip on National Stock Exchange
of India Limited (NSE) and the Bombay Stock Exchange (BSE). The price of the scrip 2
increased from 209.55 to 443.10 in a span of 19 trading days. The scrip registered the
highest price of 478 on December 19, 2003. The adjudicating officer found that the
appellant, alongwith a few other entities, was involved in market manipulation and so the
provisions of FUTP Regulations were attracted. A show cause notice was issued on
May 31, 2006 calling for the appellant’s explanation. The adjudicating officer called upon the
appellant to show cause as to why an enquiry should not be held against him for fraudulent
and unfair trade practices and consequent imposition of penalty.
- During the hearing of the appeal, the appellant’s learned counsel raised a preliminary
objection regarding the issue of notice under Rule 4 of Securities and Exchange Board of India
(Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995
(Inquiry Rules). It was contended that the adjudicating officer should have issued two
separate notices, one under Rule 4(1) for holding an enquiry and another under Rule 4(3) for
personal hearing after forming an opinion on the basis of the enquiry conducted. According to
the appellant’s learned counsel, para 4.0 of the show cause notice combines Rules 4(1) and
4(3) and so the entire proceedings are vitiated. - The learned counsel for the Board defended the issue of show cause notice and the
contents of paragraph 4.0 therein observing that the requirements of Rule 4(1) and 4(3) have
been complied with substantially and no prejudice has been caused to the appellant. - We have considered the rival submissions. At the outset, it has to be mentioned that
the objection now raised by the appellant’s learned counsel has not been raised either before
the adjudicating officer or in the grounds of appeal before this Tribunal. However, the issue
being one of a question of law, we would like to deal with the same. Rule 4(1) of the
Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing
Penalties by Adjudicating Officer) Rules, 1995 envisages the adjudicating officer to issue a
notice for holding an enquiry. Rule 4(3) envisages the adjudicating officer to issue a notice
fixing a date for the appearance of the person after forming an opinion that the enquiry has to
be held. In the present case para 4.0 of the show cause notice reads as under:-
“You are therefore, advised to show cause as to why an inquiry should not
be held against you in terms of Rule 4 of SEBI (Procedure for Holding
Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 and
penalty be not imposed under Section 15HA and Section 15HB of SEBI
Act, 1992.”
It is true that the adjudicating officer has called upon the appellant to show cause as to why an
enquiry should not be held and penalty should not be imposed. However, on a perusal of the
3
records we find that the adjudicating officer has complied with all the requirements of
Rule 4(1) and 4(3) before concluding that the appellant is liable to penal action. The wording
in the said paragraph as to why penalty should not be imposed cannot be taken as prejudging
the issue. The series of correspondence between the adjudicating officer and the appellant
subsequent to the issue of show cause notice would show that documents relevant to the
proceedings were provided to the appellant and sufficient opportunity provided to him for
defence. The purpose of issuing show cause notice is to make a person aware of the wrong
doing and to provide sufficient opportunity to defend himself and thereby come to a proper
and well reasoned conclusion regarding the conduct of the person. These notices are essential
for avoiding unjust and arbitrary action of the authorities. So, what is crucial for consideration
is whether the person accused has been given sufficient notice and reasonable opportunity to
defend himself. In the present case, we find that the above requirements have been complied
with. The show cause notice was issued on May 31, 2006. The appellant sent a reply to the
show cause notice on June 26, 2006. Further, the appellant was issued with a notice on
August 12, 2009 and a personal hearing was scheduled on August 25, 2009. In the meantime,
the appellant applied for consent proceedings before the Board and sought another opportunity
pending decision of the consent proceedings. On February 22, 2010 Shri Anish Kharidia
appeared on behalf of the appellant and a written reply was filed on March 16, 2010. The
appellant required the adjudicating officer to provide him with complete transaction details of
the company for the period on NSE for verification. However, the adjudicating officer
provided the appellant with the details of transactions done by him in the scrip of the company
and offered another opportunity of hearing. There was no appearance on the date scheduled.
The list of events narrated above would make it abundantly clear that the adjudicating officer
held the enquiry as laid down in the relevant rules and sufficient opportunity was given to the
appellant for personal hearing time and again. We are of the view that none of the
requirements laid down in Rule 4(1) or 4(3) have been violated. On the other hand, the rules
have been complied with in proper spirit. Therefore, the contention regarding issue of
separate notices under Rule 4(1) and 4(3) is not tenable in the facts of the case.
- The second contention raised by the appellant’s learned counsel is that the proceedings
dragged on for a considerable period of time and the delay in finalizing the proceedings was
not justified. 4 - We have considered this issue. Admittedly, the delay alleged by the appellant’s
learned counsel has not resulted in any prejudice to him. It is true that the show cause notice
was issued on May 31, 2006 while the adjudication order was passed on September 27, 2011.
In fairness, the proceedings need not have taken such a long time. However, the list of events
given in detail in paragraph 5 above would show that there was constant correspondence
between the appellant and the adjudicating officer on several issues relating to the matter and
on every occasion personal hearing was also granted. As long as it is not on record that any
prejudice has been caused to the appellant because of the delay, the ground taken by the
appellant’s learned counsel cannot be entertained. - With regard to the merits of the case, the main argument of the appellant is that the
alleged volume of transactions is negligible as compared to the total trades in the scrip of the
company and it has not created any impact on the market. According to the appellant’s
learned counsel, the volume traded in both the NSE and BSE should have been compared vis-
à-vis the alleged manipulative transactions and it would be evident that the volume relating to
manipulation is very negligible. It is also contended that the appellant should have been
provided with the entire trade logs relating to the transactions in the scrip of the company and
the failure to do so has resulted in miscarriage of justice. A reference is made to the order of
this Tribunal in Appeal no.207 of 2011 dated 23.1.2012 (Nrupesh C. Shah vs. Securities and
Exchange Board of India) wherein the volume of shares transacted is mentioned to be a
critical factor and if that decision is applied to the present case the penalty imposed is highly
excessive. In brief, the appellant would contend that there was no deliberate act of reversal or
synchronization of trades aimed at upsetting the market equilibrium and the volume traded by
him is substantially of a lower order. - The learned counsel for the Board strongly supported the order of the adjudicating
officer. He submitted that the appellant was given the trade logs relating to his transactions in
NSE which was material to the enquiry in his case and there was no need to provide the entire
trade logs relating to the transactions in the scrip of the company as a whole which is not
relevant to him. With a reference to the facts mentioned in the adjudication order it is
observed that the appellant alongwith a few other entities was involved in 228 reversal trades
in 10 days out of 19 days of trade and this has not been disputed by the appellant. According
to him, the percentage of trades involved in the manipulation is quite substantial and the trades
relate to only 10 days which is very significant. It is also pointed out that the investigation 5
period in the present case relates to the period prior to split up of shares and so the decision of
the Tribunal referred to by the appellant’s learned counsel is not squarely applicable.
- We have considered the submissions of the learned counsel and gone through the
records of the case. The charge is one of synchronization/reversal of trades in the scrip of the
company during a short interval of 10 days out of 19 days of trade. The adjudicating officer
has brought on record the details of the transactions, the trades done by the connected entities,
percentage rate of synchronization to the quantity traded and the sample trade logs. The
appellant’s learned counsel has not raised any objection against the trade logs detailed in the
adjudication order. His argument revolves around negligible quantity of trade and absence of
any impact on the market. In the facts of the case, we cannot appreciate both these
contentions. The fact remains that the appellant has entered into synchronized/reversal trades
during the period under investigation. It is not material whether the alleged volume of
manipulation is insignificant as compared to the total volume of the scrip of the company
traded during the period. What is relevant is the conduct of the parties in effecting the trades.
The impact on the market relates to creation of artificial volumes by the manipulative trades
undertaken by the appellant. The adjudicating officer has brought on record the manipulative
trades in a convincing manner.
“I find that the Noticee had entered into fictitious synchronized and/ reversal
trades trading with specific counterparties. Also for most trades, buy and
sell orders were placed within seconds (0 to 11 seconds) of each other. The
order limit prices and quantities were also matching with those of the
designated counterparty in almost all the trades. The reversal of most trades
took place on the same day or on next day after execution of first set of
trades. It cannot be a co-incidence that such a large number of transactions
spread over many days have matched between specific brokers only. Also,
the zero time difference or near zero time difference between placement of
buy and sell orders indicates your clear intention to create artificial volume
on the days of your trades. Such type of transactions cannot be considered
as genuine transactions.” - The facts of the case would show that the appellant and the connected entities have
placed orders in such a way as to ensure matching of the buy and sell quantity and the price
with the same counter parties and the difference in time is zero to a few seconds. So the
matching of price, quantity, order and time is established in the present case. The appellant
deliberately attempted to create artificial volumes in the market to keep the price of the scrip
afloat. This squarely falls under regulation 4 of the FUTP Regulations. - As regards the appellant’s reference to the order of this Tribunal in Appeal no.207 of
2011 (Nrupesh C. Shah vs. Securities and Exchange Board of India), we do not find any point 6
in his favour. The facts of the case show that the trades in the impugned case relate to the
period prior to the split up of the shares and so the value of the shares was considerably high.
So the case is not comparable with the decision cited by the appellant’s learned counsel. We
also hold that the adjudicating officer was right in providing the appellant with the material
relevant to the investigation and not the entire trade logs relating to the transactions in the
scrip of the company. In any investigation procedure, justice can be rendered if the person is
provided with the material relevant to him and which is proposed to be used against him for
which he should be given reasonable opportunity of defence. In the present case, no useful
purpose would have been served by providing the appellant with details of all the transactions
concerning the scrip of the company.
In view of the discussion above, we hold that the adjudicating officer has brought on
record sufficient material to show that the appellant’s wrong doing falls under regulation 4 of
the FUTP Regulations. The quantum of penalty imposed, is just and reasonable in the facts of
the case. The impugned order is, therefore, upheld and the appeal dismissed. No order as to
costs.
Sd/-
P. K. Malhotra
Member
Sd/- S. S. N. Moorthy
Member
16.4.2012
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