BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 47 of 2011
Date of decision: 29.07.2011 Mr. Narendra Ganatra
B/36, Kumar Apartment,
Behind R. C. Church,
Vikroli Station Road,
Vikroli (West),
Mumbai – 400 079.
……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. J. J. Bhatt, Advocate for the Appellant.
Dr. Poornima Advani, Advocate with Mr. Aj ay Khaire, Ms. Amrita Joshi,
Advocates for the Respondent.
CORAM : P. K. Malhotra, Member
S.S.N. Moorthy, Member
Per : P. K. Malhotra, Member
The appellant before us is said to be an investor carrying on trading and
investment in equity shares of different companies at Mumbai. It is alleged
against the appellant that he , in collusion with other en tities, indulged in circular
and synchronized trades in the scrip of Gemstone Investment Limited (for short
the company) and entered into reversal of trades through different brokers using
different client codes and created artificial volume and misleading appearance of
trades in the scrip of the company which raised its price and enabled
promoters/company related entities to o ffload their shares in the company and
thereby violated the provisions of Regul ation 4 of the Secur ities and Exchange
Board of India (Prohibition of Fraudulent Trades and Unfair Practices relating to
Securities Market) Regulations, 2003 (for short the Regulations).
2
- The facts of the case, in brief, are that the Securities and Exchange Board
of India (for short the Board) carried out investigations in the scrip of the
company for the period from August 28, 2006 to August 21, 2008. It was noted
that during this period, the pr omoter group entities consisting of ten persons
offloaded bulk of their shareholding and another group entity, collectively
referred to as ‘Narendra Ganatra Gr oup’, including the appellant,
bought a large chunk of shares and thereby control over the company. The
shareholding of the promoters reduced from 69.65% during the quarter ending
June 30, 2006 to 1.22% by the quarter ending September 30, 2008 and the price of
the scrip also rose from2.94 on August 28, 2006 to45.45 on November 12,
2007, came down to14.85 on April 15, 2008 and again increased to51.80 on
August 21, 2008. From the trade and orde r log analysis, it was observed that
some of Narendra Ganatra Group entities de alt in the scrip of the company and
purchased 12.90 lacs shares accounting for 49.75% of the total market volume
and sold 2,38,400 shares. The Board also noted that out of 13,03,800 shares sold
by the promoter group, for 9,45,500 shares i. e. (72.51%), the counter party was
Narendra Ganatra Group entitie s. It was alleged that the appellant, acting in
collusion with other entities of Na rendra Ganatra Group and with the
promoters/directors of the company, indulged in circular and synchronized trades
in the scrip and entered in to reversal of trades th rough different brokers using
different client codes and created artificial volume and misleading appearance of
trading in the scrip and raised its price which induced investors to deal in the
shares of the company and enabled promot ers/company related entities to offload
their stakes in the company. A show cause notice dated May 31, 2010 was issued
to Ganatra Group entitie s, including the appellant, calling upon them to show
cause as to why an inquiry should not be held against them and penalty
imposed under Section 15HA of the Act for the alleged violation of the
regulations. The appellant filed its repl y and denied the al legations levelled
against him. After affording an opportunity of hearing and 3
considering appellant’s response, the ad judicating officer of the Board, by its
order dated January 24, 2011 held him guilty of violating the provisions of
regulation 4 of the Regulations and imposed a penalty of ` 5 lakhs on the
appellant under Section 15HA of the Act. The appeal is directed against this
order. - We have heard the learned counsel for the parties who have taken us
through the records of the case. Mr. J. J. Bhatt, learned counsel for the appellant
has drawn our attention to the earlier or der of the Tribunal in Appeal no. 192 of
2010 dated February 21, 2011 in the case of Premcand Shah and Ors. vs. The
Adjudicating Officer, Securities and Excha nge Board of India pertaining to the
promoter group entities of the company where the Tribunal has held that the
promoter group and the Ganatra Group can not be held to have connived to
increase the price of the scrip. This is what the Tribunal has held:-
“5. We have heard the learned c ounsel for the parties at length
and they have taken us through the records of the case. It is not in
dispute that the appellants as a group are inter se related/connected
to each other and that they, ex cept appellant no. 1, have exited
from the company by selling the shares held by them. Appellant
no. 1 has also sold his shares but is continuing to hold 3,61,070
equity shares of the company wh ich come to 1.22 per cent of its
total issued share capital. It is also on record that 74.26 per cent of
the shares sold by the appellan ts had been purchased by the
Ganatra group. The question that we need to answer is whether the
sale of the shares by the appellants and the purchase thereof by the
Ganatra group was collusive. Th e appellants contend that they
sold the shares in the market in the ordinary course of trading
through the stock exchange mechanism and that they did not
connive with the Ganatra group and that they did not know at the
time of executing the sale transactions as to who the counter party
was. The impugned order passe d by the adjudicating officer
records a finding of connivance primarily on the ground that the
majority of the shares sold by the appellants had been purchased
by the Ganatra group. This fact do es raise some suspicion but, in
the facts and circumstances of this case as discussed hereinafter,
we cannot conclude that there was any connivance between the
two groups. There is no denying the fact that the trading system of
the stock exchange maintains complete anonymity and does not
allow one party to a transaction or even his broker to know as to
who the counter party is or the co unter party’s broker. In other
words, the trading system does not permit any interaction between
the buyer and the seller except through the syst em. A sell order
put into the system will match the best buy order on the basis of
price time priority. Similarly, a buy order will match a sell order
on the same basis and it is the sy stem which matches the orders.
Despite the anonymity of the system, we have seen that traders 4
and/or their brokers try to def eat the system by matching the buy
and sell orders by punching them into the system simultaneously
for the same amount and for the same price. This happens more
frequently in illiquid scrips. In the case before us, there is no
charge against the appellants that they matched/synchronized their
sell orders with the buy orders of the Ganatra group by punching in
the orders simultaneously in a manipulative manner. In the
absence of any such allegation, th e charge of connivance could be
established only if there was some other contemporaneous material
on the record to show connivance between the appellants and the
Ganatra group. There is no such material on the record and,
therefore, we have no hesitation to hold that the charge of
connivance as levelled against th e appellants must fail. Mere
suspicion on the ground that majority of the shares sold by the
appellants have been purchase d by the Ganatra group cannot lead
us to conclude that the charge is established. When we look to the
other facts as established on the record and stated in the show
cause notice and noticed in the impugned order, we find that the
charge of connivance cannot su cceed. It is common ground
between the parties that the scri p of the company was illiquid and
this fact is borne out from the show cause notice itself. For almost
a month from August 31, 2006 to September 24, 2006, the scrip
was not traded in the market and during this period there were 93
buy orders put in the system by 12 different brokers on behalf of
their 21 clients for the purchase of 10,12,200 shares and these were
pending and these remained unexecute d due to non availability of
sellers. It is also a fact that out of these 93 buy orders, 57 buy
orders were placed by the Ganatra group. If the appellants and the
Ganatra group were conniving as alleged, then the appellants
would have come forward to sell their shares when the buy orders
were pending in the system. This did not happen and, therefore, no
trade took place. This fact demolishes the allegation of
connivance. Again, it is clear from the record that the appellants as
a group who were then controlling the company wanted to sell
their shares for reasons which have been stated in their reply and
the Ganatra group started purchasing the shares from August 2006
upto August 21, 2008 and even thereafter and gained control of the
company by reason of their sh areholding though appellant no. 1
continues to be one of the promot ers. The allegation in the show
cause notice is that the appellants and the Ganatra group connived
with each other to increase the pr ice of the scrip and when the
price went up, the appellants off-loaded their stake at higher prices
and violated the regulati ons. This allegation, to o, must fail. It is
established on the record that th e appellants were selling their
shares and the Ganatra group was buying the shares. To increase
the price of the scrip could be in the interest of the appellants
because they were sellers but it co uld not be in the interest of the
Ganatra group which was buying from the market. Their interest
in this regard would obviously clash. It is the case of the
appellants that the Ganatra group is still holding the shares and is
in control of the company. This fact could not be disputed by the
learned counsel for the Board and, in any case, it is not the Board’s
case that this group has off-loaded the shares. This being so, why
should the Ganatra group connive to increase the price when they
were buying the shares. If at all it was to manipulate, it would
bring the price down. In this view of the matter, we cannot uphold
the charge of connivance. The charge of connivance is further
belied from the fact that the appellants sold their shares from
August 29, 2006 to July 3, 2007 as noticed earlier in the price 5
range of3.08 to28.50. The last sale by the appellants was on
July 3, 2007 at the rate of28.50. The Ganatra group continued purchasing the shares upto August 2008 and, according to the show cause notice, the price of the scrip went up to51.81 on
August 21, 2008. The show cause no tice also states that the
Ganatra group was executing circular /reverse trades to raise the
price upwards. If the appellants were conniving with the Ganatra
group then they would not have exited on July 3, 2007 when the
price of the scrip reached28.50. They would have waited for some more time knowing that the price of the scrip was being manipulated upwards which did go upto51.80. We cannot,
therefore, accept the th eory of connivance. The possibility of the
shares having been sold and bought by the two groups in the
ordinary course of trading through the exchange mechanism cannot
be ruled out in the circumstances of this case. The scrip was,
admittedly, illiquid. The appellants as a group were in the market
to sell a large chunk of shares a nd the Ganatra group consisting of
17 persons was also in the market to make big purchases to take
control of the company. In such a scenario, it is possible that
Ganatra group picked up around 74 per cent of the shares sold by
the appellants. We must also remember that the remaining 25 per
cent of the shares sold by the appellants were picked up by others.
This would indicate that there we re other buyers in the market as
well. If the two groups were c onniving, the easiest way for them
would have been to synchronize their trades as is usually done
when traders manipulate the scrips and, in that event, the entire lot
could be purchased by the Ganatr a group. This has not happened.
This fact also does not support the charge of connivance. - There is yet another reason why the charge of connivance
with Ganatra group to increase th e price of the scrip cannot be
sustained against the appellants. There is no gainsaying the fact
that the price of the scrip did go up from3.08 to51.80 when
the appellants sold the shares and the Ga natra group purchased
them. The Ganatra group kept purchasing till August 21, 2008
whereas the appellants exited on July 3, 2007 when the price of the
scrip was ` 28.50 per share. We have on record that during the
period from August 28, 2006 to March 16, 2007 (d escribed as
patch I in the show cause notice) there were 4592 buy orders for
3,73,85,295 shares placed by 110 buy brokers on behalf of 333 buy
clients and there were 1976 sell orders for 56,94,403 shares placed
by 78 sell brokers on behalf of 213 sell clients which resulted in
1864 trades for 25,92,500 shares. These details had been furnished
to the appellants alongwith the show cause notice. It is, thus, clear
that during patch I, the buyers were far in excess than the sellers
and the number of shares offered for sale were far less than those
for which buy orders were in the system. In such a situation the
price of the scrip had to go up. It must be remembered that the
price discovery mechanism of the stock exchanges works on the
principle of demand and supply and if the demand is more than the
supply, the price is bou nd to go up and this is the reason why the
price of the scrip went up during patch I and not because the
appellants were conniving with the Ganatra group. Same is the
position with regard to patch II where the period is from March 20,
2007 to August 21, 2008. During this period there were 20,242
buy orders for 3,10,81,583 shares placed by 400 buy brokers on
behalf of 1966 buy clients and there were 20,895 sell orders for
1,05,31,799 shares placed by 458 sell brokers on behalf of 1994
sell clients which resulted in 20176 trades for 2,29,44,675 shares. 6
Since the demand was far in excess of the supply, the price went
up. Another interesting feature to notice here is that there were
large number of buyers and sellers in both patch I and patch II and
the appellants who were the sellers are only 10 in number and the
Ganatra group which was buying consists of only 17 persons. It is
clear that apart from the appella nts and the Ganatra group there
were large number of other buyers and sellers in the market which
led to price increase. In this background, we cannot hold that the
appellants and the Ganatra group co nnived to increase the price of
the scrip.”
In view of Tribunal’s findi ng noted above, the appellant cannot be said to have
connived with the promoter group. Let us now see what is the evidence available
on record to show that the appellant colluded with its own group entities and
entered into circular/synchronized trades. The details of trades in the scrip of the
company by the appellant are as under:-
Date Broker’s name Buy qty. Sell qty. Net qty.
Buy +
Sell –
Avg.
Rate
06/11/06 Ford Brothers 100 + 100 6.91
30/11/06 Arcadia 10,000 + 10,000 11.19
01/12/06 Arcadia 6,400 – 6,400 11.64
04/12/06 Arcadia 1,800 – 1,800 12.22
05/12/06 Arcadia 1,800 – 1,800 12.82
18/12/06 Arcadia 5000 + 5,000 10.53
11/01/07 Arcadia 5,000 – 5,000 16.43
18/12/06 Ford Brothers 10,000 + 10,000 10.51
18/01/07 Ford Brothers 5,100 – 5,100 17.04
19/01/07 Ford Brothers 5,000 – 5,000 16.97
Total 25,100 25,100 0
It is the case of the appellant that he had not indulged in any fraudulent or unfair
trade practice while dealing in the scrip of the company. All his transactions were
carried out through the stock exchange mechanism during trading hours and were
executed at the then prevailing market price. All these transactions were delivery
based and there was real and effective transfer of beneficial ownership.
At the time of entering into these trans actions, the appellant was not holding any
position in the company. He became Director of the company much later.
Dr. Poornima Advani, learned counsel for the Board strenuously argued before us
that the appellant was known to the Managing Director of the company and he
(the appellant) facilitated the promoter group entities to offloa d their shares in
7
favour of the Ganatra Group entities. The fact that at a later date i.e. on
August 1, 2007, the appellant was appointed as Director of the company and later
became Managing Director of the company is sufficient proof of his connivance
with the promoter group and his being a part of the Ganatra group in entering into
circular trades. We are unable to accept the arguments of learned counsel for the
Board. Even the Adjudicating Officer, while passing the impugned order has not
been able to bring any evidence on record to indicate nexus of the appellant with
other group entities and has inferred the collusion fr om attending circumstances.
This is what he has said in para 17 of his order:-
“17. The abovementioned details prima facie, suggest about the
connection/relation between the Noticee and the other group
members. The said details also indicate relation/connection of the
Noticee with GIL and its promoters. However, I am of the view
that since in this regard no other evidence is available to
indicate direct nexus of the Noticee with the said other entities,
it would be appropriate to infer collusion from the attending
circumstances of the case that have been discussed below .”
(emphasis supplied)
The role of the appellant in purchase and sale of shares has been noted by him as
under:-
“On 06.11.2006 the Noticee had purchased 100 shares from one of
the Narendra Ganatra Group entities namely Manish Joshi by
placing a buy order which was 4.88% above the last traded price
(LTP). Further, the Noticee had bought a total of 10,000 shares on
30.11.2006 and 15,000 shares on 18.11.2006. The said 25,000
shares were bought by the Noticee from Vanechand Vora and
Mridula Shah (two of the promoter group entities) as
counterparty.”
After discussing other evid ence available on record, th e adjudicating officer has
observed as under with regard to appellant’s role:-
“30. In the aforesaid manipulative trades, as far as individual
role of the Noticee is concerned, I have noted that his trades
are not very significant . (emphasis supplied) During the
investigation period he had purchased 25,100 shares of GIL and
also sold the same num ber of shares. For his purchase of 25,000
shares the counter party sellers were the promoter group entities
and for his one trade of 100 shares the buy order was placed at a
price higher than LTP and the counter party seller was Bhavesh
Pabari i.e. one of the Narendra Ganatra Group entities.”
8
However, in para 33 of his order, the Adjudicating Officer has concluded that
although the individual trades of the appellant in the scrip are not many, he is not
inclined to give him any benefit of doubt. We are of the considered view that it is
here that the Adjudicating Officer ha s failed to arrive at the right conclusion.
We should not lose sight of the fact that the charge against the appellant is of
conniving with the group enti ties in creating false and misleading appearance of
trading in the market and artificially raising the price of the scrip and for such a
serious charge, higher degree of probability is required. Such a charge cannot
stand on surmises and conjectures. The a llegations in the show cause notice as
well as in the impugned order are against the Ganatra Group entities.
No evidence has been brought on record to show the role that the appellant has
played in the group in execu ting synchronized or circular trades thereby creating
false or misleading appearance of trading in the scrip. The appellant had traded
only during the period from November 6, 2006 to January 19, 2007 in the price
range of 6.90 to 17.00. During the investigation period, the price of the scrip
rose from 2.94 on August 28, 2006 to 45.45 on November 12, 2007 and
thereafter it came down to 14.85 on April 15, 2008 and increased to 51.80 on
August 21, 2008. The price fluctuation during the period when the appellant
traded was small in comparison to market volatility. Theref ore, the appellant
cannot be held guilty of manipulating the pr ice of the scrip. We also notice that
out of 446 days of trading where 2,55,37,175 shares were traded, the appellant
traded only on ten days with a total buy and sell quantity of 25,100 shares.
All his transactions we re through the trading system a nd were delivery based.
The connection of the appellant with other group entities is also restricted to his
brother Nimesh Ganatra and Mr. Bhavesh Pabari. The fact that the appellant
shares common address with his brothe r Nimesh Ganatra or has introduced
Bhavesh Pabari to broker is not suffi cient evidence to prove the charge of
connivance in executing circular trades. The adjudicating officer has discussed in
the impugned order the total shares so ld and purchased by the Ganatra group
entities but has failed to bring on record the role played by the appellant in
9
executing these trades. As far as individual role of the appellant is concerned,
admittedly, his trades have not been considered ‘very significant’. In the absence
of any evidence on record, direct or ci rcumstantial, against the appellant in
manipulating the trades or raising the pric e of the scrip, he deserves to be given
the benefit of doubt.
In the result, the appeal is allowed and the impugned order is set aside
with no order as to costs.
Sd/-
P. K. Malhotra
Member
Sd/-
S. S. N. Moorthy
Member 29.07.2011
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