BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI

              Appeal No. 131 of 2012  

                   Date of decision: 16.7.2012 

Piyush P. Avlani
68/5, Govind Sadan,
C-25 Road, Sion (West),
Mumbai – 400 022.

        …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. P.N. Modi, Advocate with Mr. Prashant In gle and Mr. Neville Lashkari, Advocates for
Appellant.
Mr. Shiraz Rustomjee, Senior Advocate w ith Mr. Mobin Shaikh, Advocate for the
Respondent.
CORAM : P. K. Malhotra, Member & Presiding Officer (Offg.)
S.S.N. Moorthy, Member
Per : S.S.N. Moorthy

This order will dispose of two appeals namely Appeal no.131 and 133 of 2012.
Counsel for the parties agree th at facts of the case and issues raised in the appeals are
identical in nature and the appeals can be deci ded on the basis of fact s contained in Appeal
no.131 of 2012.

2. The appellant is an indivi dual who trades regu larly in the securities market. The
   present appeal is filed agains t an order passed by the whole time member of the Securities
   and Exchange Board of India (for short the Board) ac ting under section 11 read with
   section 19 of the Securities and Exchange Bo ard of India Act, 1992 (referred to hereinafter
   as the Act) by which the appellant was rest rained from accessing the securities market
   prohibiting him from buying, selling or otherwise dealing in s ecurities directly or indirectly
   for a period of 2 years. The impugned di rection under section 11 of the Act was issued
   since the appellant was found to have violated regulations 3 and 4 of the Securities and 2
   Exchange Board of India (Prohibition of Fra udulent and Unfair Trade Practices Relating to
   Securities Market) Regulations, 2003 (FUTP Regulations).
3. The facts of the case, in brief, are th e following. In March, 2009, M/s. Mahesh
   Kothari Share and Stock Brokers P. Ltd. (M.K.) approached the appe llant seeking a loan
   against the shares of Alka Securities Ltd. (the company). The appellant agreed to lend a
   sum of 72,37,000 to M.K. and in turn M.K. agreed to provide security of 4,00,000 shares of the company. M.K. transferred the said 4,00,000 shares of the company to the demat account of the appellant on March 28, 2009 and th e appellant gave the loan amount to M.K. on March 30, 2009. The appellant kept the shar es of the company intact in his demat account without any transaction wh atsoever in the said shares. The appellant received the said shares of the company in off market transa ction and he did not deal in the shares of the company after March 28, 2009 in any manner. The Board observ ed a spurt in the volumes of the scrip of the company during the period November 2008 to March 2009. In September 2008 the closing price of the scrip was 32.45 while it reached a high of   35.05 in the same month and experienced fluctuations thereafter. After a stock split it reached   32 in May 2009. The Board also received survei llance alerts regarding the shares of the
   company. It was noticed that the promoters of the company transferred large quantities of
   the scrip in off market transa ctions and subsequently traded the same shares on the stock
   exchange. On account of the unusual market movement of a large chunk of the shares of the
   company the Board passed an ex-parte order on July 28, 2009. By way of this ad-interim
   ex-parte order the appellant was prohibited fr om buying, selling or dea ling in the securities
   of the company till further di rections. The ad-interim ex-parte order was passed on the
   observation of the Board that the promoters of the company along with several other entities
   had indulged in manipulative trades with the intention of creating artificial volumes so as to
   give a misleading impression abou t the liquidity of the scrip. The appellant, in its reply,
   explained that he was not engaged in the dealing of the shares of the company in any manner
   and his role was confined only to extending lo an facility to MK. On October 30, 2009 the
   Board passed an interim order confirming the direc tions issued in ex-parte ad-interim order.
   The appellant has been considered a party to the manipulative actions of the promoters of
   the company since he was found to have been i nvolved in the transfer of the shares of the
   company with MK. The appellant filed a deta iled reply denying all the allegations in the 3
   confirmatory order. Subsequently, on December 27, 2010 a show cause notice was issued to
   several entities including the appellant holding them guilty of acting in connivance with the
   promoters of the company in circular trades aimed at creation of artificial volumes and
   enhancing the image of the scri p in the public eye. The a ppellant filed a comprehensive
   reply to the show cause notice which was fo llowed by a personal he aring. The appellant
   denied all the allegations. However, the whole time member of the Board, after considering
   the explanations offered by the appellant, passed a final order in respect of several entities,
   the appellant being one among them, confirmi ng the stand already taken in the earlier
   orders. The appellant challenges the directions of the whole time member in the present
   appeal.
4. The facts of the case and sequence of the events are identical in the case of Ketan
   Joshi but for the difference that he had extended a loan of `   1,50,29,000 on the security of
   8,00,000 shares of the company.
5. Shri P.N. Modi, learned counsel for th e appellant stoutly opposed the directions
   issued by the whole time member. According to him, the role of the appellant in the whole
   chain of events is confined to only providing a loan of `   72,37,000 on the security of
   4,00,000 shares of the company. According to hi m, the appellant is not connected to the
   promoters of the company and he did not trade di rectly or indirectly in the shares of the
   company provided to him as security and the shares are kept intact till date. The loan was
   granted on the basis of an agreement between the parties and the shares were transferred to
   his demat account so as to ensure the appellant’s hold over the shares and to ensure security
   for the loan in the event of future default. It is admitted that the appellant came into
   possession of the shares on March 29, 2009 which is at the fag end of the investigation
   period and he did not possess the shares during a major part of the period under
   investigation. With a reference to the transa ctions in the shares of the company it is
   submitted by the appellant that even during the interregnum i.e. March 2009 to July 2009
   (when the ex-parte ad-interim order was passed) the appellant did not trade in the shares of
   the company even though there was hectic tradi ng in the shares during the said period. The
   appellant had no role in the circular/manipul ative trades highlighted by the whole time
   member since he did not trade in the shares. It follows from the above, according to the
   appellant, that he has not contributed in any manner to the violations of the FUTP 4
   Regulations. It is admitted that the appellant had taken possession of the shares in the nature
   of a security, pure and simple, a nd there was no pledge of the shares so as to invoke the
   provisions of Securities and Exchange Board of India (Depositories and Participants)
   Regulations, 1996 (referred to hereinafter as the DP Regulations). It is contended that law
   does not prohibit any person from insisting on se curity of his choice and in the present case
   the appellant has adopted a simple and workab le form of security shorn off all legal
   complexities. With reference to the charge leveled against the appellant it is argued that the
   whole time member has failed to establish the char ge as against the appellant in as much as
   the role of the appellant in the alleged manipul ation has not been esta blished. It is also
   submitted that the appellant is engaged solely in the business of share trading and a ban of 2
   years from the market would lead to disastrous consequences.
6. Shri Shiraz Rustomjee, learned senior counsel appearing for the Board defended the
   order of the whole time member observing that the role of the promoters and all the noticees
   considered in the impugned order along with the appellant should be considered holistically
   to appreciate the mischief in this case. With reference to the impugned order he submitted
   that the promoters and the impugned entities in the order resorted to off market transactions
   in a large quantity of shares of the company a nd then indulged in trading in the market in
   order to bring back the shares to the promoters with the intention to inflate the volumes and
   thereby hoodwink innocent investors. He woul d argue very strenuously that the appellant
   by virtue of the shares pledged with him, cont ributed to circular trad e and so he has been
   charged with the violation of FUTP Regulations. The overall structure of the transaction has
   been made out in a manipulative manner and the m ovement of shares running to
   several crores establishes a well thought out ga me plan in which the appellant is seriously
   involved. According to him, the case of the appe llant should not be viewed in isolation and
   identical replies given by the parties show th e meeting of minds and manipulative intent.
   With reference to the appeal memorandum he submitted that the transaction in shares has
   been considered by the appellant to be a ple dge without conforming to the legal formalities
   set out for a pledge and this is a glaring mistake on the part of the appellant. It was also
   observed by him that the loan document which is part of the records was not produced at the
   stage of personal hearing, but only afterwards. In short, he submitted that the role of the 5
   appellant is vital in the chain of events when the background of the case and manipulation in
   shares are viewed in proper perspective.
7. We have considered the rival submissions . In the impugned order the appellant is
   held guilty of violating regulations 3 and 4 of the FUTP Regulations. For ease of reference,
   the above regulations are extracted below:
   “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) use or employ, in connection with issu e, purchase or sale of any security
listed or proposed to be listed in a re cognized stock exchange, any manipulative
or deceptive device or contrivance in cont ravention of the provisions of the Act
or the rules or the regulations made there under;
(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;
(d) engage in any act, practice, course of business which operates or would
operate as fraud or deceit upon any person in connection with any dealing in or
issue of securities which are listed or proposed to be listed on a recognized stock
exchange in contravention of the provi sions of the Act or the rules and the
regulations made there under.

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 of loss;
(c) advancing or agreeing to advance any money to any person thereby
inducing any other person to offer to buy any security in any issue only with
the intention of securing the minimum subscription to such issue;
(d) paying, offering or agreeing to pay or offer, directly or indirectly, to any
person any money or money ’s worth for inducing such person for dealing in
any security with the object of infla ting, depressing, maintaining or causing
fluctuation in the price of such security;
(e) any act or omission amounting to manipulation of the price of a security;
(f) to (r) …………………….”

8. It is necessary to examine the charge leveled against the appellant in the backdrop of
   the aforesaid Regulations. The whole tim e member made the following preliminary
   findings: 6
   “The trading activity by the promoter /company connected entities suggests
   circular trading activity with an intenti on of creating the volume so as to give
   the market a false impression about the liqui dity of the scrip. The activities of
   the aforesaid entities are an attempt to attract unsuspecting investors to deal in
   the scrip. The related motive of maintain ing trading price at artificial levels
   may arise from the fact that 74% of promoter shares were pledged against
   loans. The promoters and entities (1 st level and 2 nd level entities) connected to
   the promoters and company appear to have violated th e provisions of
   Regulation 3 and 4 of the S ecurities and Exchange Board of India (Prohibition
   of Fraudulent and Unfair Trade Pract ices Relating to Securities Market)
   Regulations, 2003.”
9. “In the confirmatory order the whole time member observed thus:
   “the prima facie role of the entities in re spect of their dealings in the shares of
   the company and the alleged violations committed by them were brought out in
   the ex-parte order. Though, Mr. Ketan H. Doshi and Mr. Piyush P. Avlani
   stated that they had not traded during the investigation period, they were found
   to have been involved in the transfer of the shares of the company with Mahesh
   Kothari Share and Stock Brokers Privat e Limited (an entity connected to the
   company) on March 28, 2009 i.e. during the relevant period.”
10. In the impugned order the whole time member has reiterated the charge as under:-
    “Investigation, inter-alia, revealed that that ASL, in connivance with the
    promoters, 1st level, 2nd level and Additional Entities (the list of Promoter level
    entities, 1st level entities, 2 nd level entities and Additional Entities are attached
    as Annexure A to this order), entered into transactions with a view to circulate
    the shares of ASL amongst themselves. It was therefore alleged that such acts
    were in violation of the provisions of Regulations 3(a), 3(b), 3(c), 3(d) and 4(1)
    & 4(2)(a), (b) and (g) of SEBI (Prohi bition of Fraudulent and Unfair Trade
    Practices) Regulations, 2003 (hereinafter referred to as ‘PFUTP Regulations’).
    In addition the above, three (3) othe r entities, namel y, JMDE Packaging &
    Realties Ltd , Alpha Graphic India Ltd and Takeshi Marketing Pvt. Ltd., were
    also alleged to have violated Regulation 4(2)(e) of the PFUTP Regulations.”
11. The fact regarding provision of loan by th e appellant on the strength of securities of
    the shares of the company remains undisputed. It is also not disputed that the appellant did
    not transfer the shares of the company in any manner after they came into his possession.
    So, admittedly, the role of the appellant is that of a mere financier. It is stated that the
    appellant is not connected with the promoters or other entities in the impugned order in any
    manner. The appellant extended the loan only at the end of March, 2009 i.e. at the fag end
    of the investigation period. In the replies filed by the appellant at various stages during the
    proceedings it has been stated in categorical te rms that his role ended with the provision of
    loan to the promoters. He has no intention to trade in the shares nor does his conduct show
    any intention to participate in the alleged circul ar trades. It is true that the whole time
    member has made out a chart showing the move ment of the shares during the period under
    consideration (Page 46 of the appeal paper a nd page 16 of the impugned order). However,
    the role of the appellant in the manipulativ e activity vis-à-vis the promoters and other 7
    entities has not been established. The mere f act that a loan was extended by the appellant
    and the promoters of the company whose shares were kept as security with the appellant
    indulged in certain suspicious transactions may not involve the appellant in the web of
    mischief unless his active role in the process is brought out. The learned senior counsel for
    the Board drew our attention to the background of the case and insisted that the whole game
    plan and operation of the same should be view ed holistically. On th e basis of the facts on
    record, we are unable to appreciate as to how the appellant can be linked with the
    manipulative game plan alleged by the whole time member. Unlike many of the entities
    involved in the transactions by way of trading in the shares, the appellant has kept aloof
    without even a single trade in the shares of th e company. So we are unable to see any clear
    finding in the impugned order regarding the role of the appellant in the manipulative process
    which has been alleged against him.
12. The appellant has taken a consistent stand throughout the proceedings that the shares
    of the company were kept with him as securiti es for the loans provided by him. According
    to him, he wanted to have a higher level of security by transferring the shares in his name so
    that future litigation could be avoided. Accordingly, a loan agreement was duly entered into
    between the parties. In the reply filed by the appellant on August 11, 2009, the nature of the
    transaction has been spelt out by him in very clear terms:
    “I was approached by MK for finance ag ainst security of shares in around the
    3rd week of March 2009. I was informed that owing to certa in reasons, they
    had to urgently raise finance to meet certain commitments. They were ready to
    give security of marketable and freely transferable shares of their group listed
    company. We agreed on terms of the fina nce. Considering the facts involved
    and my judgment of the matter, I insist ed that I should get absolute control
    over the security and I should not be made to resort to co mplicated and long
    drawn legal proceedings to recover my monies if the need so arose. Hence, I
    insisted that the shares be transferre d in my name and I was ready though to
    give confirmation to them that I would transfer the shares back to them when
    they repaid my loan with interest. This was duly done.”
13. The facts of the case show that the a ppellant has acted in accordance with his
    intention expressed hereinabove and there has been no attempt to transfer the shares in
    whatever manner.
14. The learned senior counsel appearing fo r the Board drew our attention to the
    statements made by the appellant on various oc casions that the shares of the company were
    taken by him by way of pledge. According to him, pledge of property has got a special legal
    connotation in the Indian Contract Act and DP Regulations. It is stated by him that if law 8
    lays down a certain manner of doing things it ha s to be done only in that manner and not in
    any other way. With reference to the various replies given by the appellant and the grounds
    taken in the appeal memorandum the learned senior counsel for the Board argued that the
    appellant has not complied with the requirement s of a proper pledge and the conduct of the
    appellant was suspicious from the very beginning. It is true that the appellant has used the
    term ‘pledge’ in various parts of the reply furnished by him and also in the grounds of
    appeal. But we do not consider it necessary to analyse the nuances of pledge, bailment and
    other concepts in the present case since this is a case of providing security for loan, pure and
    simple. In the impugned order there is no mate rial to establish th at the appellant was
    engaged in fraudulent practices by resorting to pledge of the impugned shares and there by
    conniving with other entities in the scheme of things. In fact, there is reference to regulation
    58 of the DP Regulations which deals with the manner of creat ing pledge or hypothecation
    of dematerialized shares. However, no ch arge has been made out on the basis of the
    default, if any, in this respect. In any case, we do not find it necessary to enter into an
    examination of the nature of security in this case. The facts of the case show that the
    appellant has insisted on a proper security to safeguard his interest. This was provided by
    MK. It is not necessary to go beyond this fact in the present case.
15. The learned senior counsel for the Board drew out attent ion to the loan agreement
    entered into between the appellant and MK an d observed that it was filed only after the
    personal hearing in the case and non filing of the loan agreement during the proceedings of
    the case gives room for suspicion. We cannot appreciate the argument of the learned senior
    counsel for the Board in as much as the loan agreement is part of the record. It is true that it
    was filed after personal hearing was over. However, it was available to the whole time
    member before the finalization of the impugned or der. He could have investigated into the
    matter if he felt so. This has not been done. In fact, no adverse inference has been drawn in
    the impugned order about the loan agreement. So nothing much turns on the late filing of
    the loan agreement.
16. We have already observed above that the appellant retained the shares with him and
    in the absence of any transfer of shares we cannot attribute any ma nipulative intent. The
    observation of the whole time me mber in the impugned order with regard to this aspect of
    the case is worthy of reference. 9
    “Further, certain noticees have argued that their holding in ASL shares remains
    virtually intact, and this indicates that the shares were not transferred but rather
    pledged to these entities. It is pertin ent to note that the entire scheme of
    manipulation came to a standstill by the interim order in this matter, because of
    which several entities may not have been able to transfer the shares received by
    them to manipulate the scrip. Hence, this argument holds no merit.”
    It is to be noted that there was an interval between the receipt of shares by the appellant and
    the passing of the interim order by the whole time member. During the interval the shares
    were commanding good price in the market. Even then, the appellant did not part with the
    shares. So the consistent stand taken by the appellant regarding retention of the shares by
    way of security stands vindicated. The observation of the whole time member quoted above
    does not point to any specific instance of manipulation by the appellant.
17. We do not find it necessary to go into the case laws referred to by the parties since
    the facts of the case stand on their own right and the case laws cited by the parties may not
    in any way add to the strength of the case.
18. The conduct of the appellant established that he was not connected with the entities
    involved in the transactions and he has no role in the transfer of shares which is the
    foundation of the alleged manipulative transactions by the various entities in the case. In the
    absence of transfer of shares which were re tained by the appellant no manipulative intent
    can be attributed to him. No connection or link with the entities involved in the impugned
    transactions has also been established. The ap pellant’s basic activity of business is trading
    in the securities market. Debarment for a peri od two years is a very harsh punishment for a
    person of his kind. In the present case, no wrong doing attracting th e provisions of FUTP
    Regulations has been established in the impugned order.
    In view of the discussion above, we set aside the order of th e whole time member
    and allow the appeal. No costs. Sd/- P.K. Malhotra Member & Presiding Officer (Offg.)
    Sd/-
    S.S.N. Moorthy
    Member
    16.7.2012
    Prepared and compared by
    RHN