BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Misc. Application No. 108 of 2010
And
Appeal No. 192 of 2010
Date of decision: 21.2.2011 1) Premchand Shah
81, Silver Beach Co-op. Hsg. Society,
Opp. Suryavanshi Sabhagruha Marg,
Dadar, Mumbai – 400 028.
2) Sharman P Shah
81, Silver Beach Co-op. Hsg. Society,
Opp. Suryavanshi Sabhagruha Marg,
Dadar, Mumbai – 400 028.
3) Nihal P Shah
81, Silver Beach Co-op. Hsg. Society,
Opp. Suryavanshi Sabhagruha Marg,
Dadar, Mumbai – 400 028.
4) M/s Sumaria Appliances Private Limited
81, Silver Beach Co-op. Hsg. Society,
Opp. Suryavanshi Sabhagruha Marg,
Dadar, Mumbai – 400 028.
5) Mradula V Shah
L J Road, Opp. Victoria School,
Mahim, Mumbai – 400 016.
6) Sushila P Shah
102, Maheshwar Mansion,
Bapubhai Vashi Road,
Vile Parle (W), Mumbai – 400 056.
7) Vijaykumar N Shah
102, Maheshwar Mansion,
Bapubhai Vashi Road,
Vile Parle (W), Mumbai – 400 056.
8) Shreya V Shah
102, Maheshwar Mansion,
Bapubhai Vashi Road,
Vile Parle (W), Mumbai – 400 056.
9) Bindi V Shah
102, Maheshwar Mansion,
Bapubhai Vashi Road,
Vile Parle (W), Mumbai – 400 056.
10) Vanechand N Vora
7th Floor, West Minister,
Chunabhatti, Sion, Mumbai – 400 022.
……Appellants
2
Versus
The Adjudicating Officer,
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 for Appellants.
Mr. Shiraz Rustomjee, Advocate with Ms. Daya Gupta, Ms. Harshada Nagare,
Advocates for the Respondent.
CORAM : Justice N. K. Sodhi, Presiding Officer
S. S. N. Moorthy, Member
Per : Justice N. K. Sodhi, Presiding Officer
Whether the appellants connived with Narendra Prabodh Ganatra and his
related/connected entities (referred to hereinafter as the Ganatra group) to manipulate
the price upwards of the scrip of Gemstone Investments Ltd. (hereinafter called the
company) to off-load their stake at higher prices and thereby violated regulations 3
and 4 of the Securities and Exchange Boar d of India (Prohibiti on of Fraudulent and
Unfair Trade Practices relating to Securitie s Market) Regulations, 2003 (for short the
regulations) is the primary question that arises in this appeal. Facts as they emerge
from the record and which have not been disputed by the parties may first be stated.
- The appellants are the promoters of th e company which was incorporated in
the year 1994 and they acquired it in N ovember 1998 from the erstwhile promoters
after making a public announ cement under regulation 11(1) of the Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (for short th e takeover code). However, they did not make the
necessary disclosures under the takeover c ode. Presently, all the appellants except
appellant no. 1 have exited from the co mpany and they do not hold any shares.
Appellant no. 1 holds 3,61,070 shar es and continues to be a promoter. The shares of
the company are listed on the Bombay Stock Exchange Ltd. Mumbai and the audited
profit for the financial year 2005-06 was17.40 lacs and for the financial year 2007-08 it was17.20 lacs. However, for the financial year 2006-07, the company
reported a loss of2.70 lacs on an equity capital of3 crores. 3 - The Securities and Exchange Board of I ndia (for short the Board) carried out
investigations in the scri p of the company for the pe riod from August 28, 2006 to
August 21, 2008 as it was during this period a nd thereafter that the Ganatra group
made large purchases of shares of the comp any from the market. It was also during
this period that the appellants sold their shares though they effected sales only up to
July 3, 2007. It is on record that the a ppellants held 25,17,630 shares of the company
(83.92 per cent) out of the tota l issued share capital of 30 lac shares. The appellants
started selling their shares with effect from August 29, 2006 and the last sale was
executed on July 3, 2007 and the sales were in the price range of3.08 to28.50 per
share of the face value of10. Sushila P. Shah, one of the appellants sold 20,000 shares on August 29, 2006 in the price range of3.08 to3.23 and thereafter the sales were gradually made at prices higher th an these. It is also established on the record that out of 24,80,480 shares sold by the appellants, 18,42,119 shares (74.26 per cent of the total shares sold by the appella nts) were purchased by the Ganatra group which, admittedly, consists of 17 persons whose details are given in Annexure II to the show cause notice. The rest of the shares were purchased by others. Investigations also revealed that after November 2005, trading in the scrip on BSE commenced only on August 28, 2006 and the price rose from2.94 on August 28, 2006 to45.45 on November 12, 2007 and thereafter it came down to14.85 on April 15, 2008 and
again increased to51.80 on August 21, 2008 . It is clear from the record that the Ganatra group consistently traded in the scrip from August 28, 2006 to August 21, 2008 and this group mainly made purchases and the price went up to51.80 per share
on August 21, 2008. It is allege d that the Ganatra group entered into circular/reverse
trades which accounted for 50.33 per cent of the market volumes during the period
from March 20, 2007 to August 21, 2007 which resulted in incr ease in price and
volumes. However, we are not concerned with these allegations in the present appeal
since the Ganatra group is not in appeal before us and the impugned order is not
directed against that group. On the conclusion of the investigations, the Board decided
to initiate adjudication proceedings against the appellants. 4 - On the basis of the facts found during the investigations, the appellants were
served with a show cause notice dated June 4, 2010 alleging th at they acted in
collusion with Ganatra group when they sold their shares as aforesaid. The primary
reason for alleging collusion is that majority of the shares sold by the appellants had
been purchased by the Ganatra group. It is also alleged that the Ganatra group “acting
in collusion, consistently traded in the scrip from August 28, 2006 to August 21, 2008
and increased the price of the scrip from2.94 (on August 28, 2006) to51.81 (on
August 21, 2008)”. It is further alleged that “Once the price of the scrip had gone up,
then the promoter/Company re lated entities started sell ing in the market after
December 13, 2006”. The show cause notice also states that “the scrip was not traded
from August 31, 2006 to September 24, 2006 and during that period there were 93 buy
orders (57 buy order placed by some entities of Narendra Ganatra group) placed by 12
brokers for their 21 clients for 10,12,200 shares (for 974000 shares orders placed by
Narendra Ganatra group). These buy orders remained unexecuted due to non
availability of sale orders in the system.” The deta ils of the trading done by the
Ganatra group were provided to the appellan ts in Annexure IV to the show cause
notice. Another charge that is levelled against the appellants is that even though they
made a public announcement in accordance with the takeover code in 1998 when they
acquired the company, appellants 1 to 4 did not make the necessary disclosures
thereunder and thereby violated regulation 7(1A) of the takeover code. Appellants 1
to 6 were also required to make the n ecessary disclosures under the Securities and
Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (for short
the insider regulations). Since they failed to make these disclosures they have been
charged for violating regula tions 13(3) and 13(4) of insider regulations. The
appellants filed a reply to the show cause notice denying all the allegations. They did
not seriously dispute that they had not made the necessary disclosures under the
takeover code and also under the insider re gulations. On a consideration of the
material collected during the c ourse of the investigations and the enquiry held by the
adjudicating officer and after affording a personal hearing to the appellants, the
adjudicating officer came to the conclusion th at the appellants had connived with the 5
Ganatra group to manipulate the price and volumes of the scrip of the company with a
view to off-load their stake at higher prices and thereby violated regulations 3 and 4 of
the regulations. He also found that appellant s 1 to 6 had failed to make the necessary
disclosures under the takeover code and the insider regulations. Accordingly, by his
order of September 6, 2010 he imposed a monetary penalty of6 crores on the appellants for violating regulations 3 and 4 of the regulations and a consolidated penalty of5 lacs on appellants 1 to 6 for viola ting the takeover code and the insider
regulations as detailed in his or der. Appellants 1 to 4 have been levied a penalty of1 lac each whereas appellants no. 5 and 6 have been imposed a penalty of50,000/-
each. It is against this order that the present appeal has been filed. - We have heard the learned counsel 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, except 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 which
come to 1.22 per cent of its total issued shar e capital. It is also on record that 74.26
per cent of the shares sold by the appellants 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 gr oup was collusive. The 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 execu ting the sale transact ions as to who the
counter party was. The impugned order pa ssed by the adjudicati ng officer records a
finding of connivance primarily on the ground th at the majority of the shares sold by
the appellants had been purchased by the Ganatra group. This fact does raise some
suspicion but, in the facts and circumstances of this case as discussed hereinafter, we
cannot conclude that there was any conniva nce 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 counter party’s broker. In other words, the trading 6
system does not permit any interaction be tween the buyer and the seller except
through the system. A sell order put into th e system will match the best buy order on
the basis of price time prior ity. Similarly, a buy order wi ll match a sell order on the
same basis and it is the system which ma tches the orders. Despite the anonymity of
the system, we have seen that traders and/or their brokers try to defeat 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 fr equently in illiquid
scrips. In the case before us, there is no charge against the appellants that they
matched/synchronized their se ll orders with the buy orde rs of the Ganatra group by
punching in the orders simulta neously in a manipulative ma nner. In the absence of
any such allegation, the charge of connivan ce could be established only if there was
some other contemporaneous material on th e 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 th at the charge of connivance as levelled
against the appellants must fail. Mere suspicion on the ground that majority of the
shares sold by the appellants have been purchased 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 a nd stated in the show caus e notice and noticed in the
impugned order, we find that the charge of connivance cannot succeed. It is common
ground between the parties that the scrip of the company was illiquid and this fact is
borne out from the show cau se 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 pur chase of 10,12,200 shares and these were
pending and these remained unexecuted due to n on availability of sellers. It is also a
fact that out of these 93 buy orders, 57 buy or ders 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 7
group who were then controlling the company wanted to sell their shares for reasons
which have been stated in their reply a nd the Ganatra group st arted purchasing the
shares from August 2006 upto August 21, 2008 and even thereafter and gained control
of the company by reason of their shareholding though appellant no. 1 continues to be
one of the promoters. The allegation in th e show cause notice is that the appellants
and the Ganatra group connived with each othe r to increase the price of the scrip and
when the price went up, the appellants off- loaded their stake at higher prices and
violated the regulations. This allegation, too, must fail. It is established on the record
that the appellants were selling their sh ares and the Ganatra group was buying the
shares. To increase the price of the scrip could be in the intere st of the appellants
because they were sellers but it could 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, w hy should the Ganatra group conn ive to increase the price
when they were buying the shares. If at a ll 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 fr om the fact that the appellants sold their
shares from August 29, 2006 to Ju ly 3, 2007 as noticed earlier in the price 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 purchas ing 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 notice 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 wa s being manipulated upwards which did go upto51.80. We cannot, therefore, accept the theo ry of connivance. The possibility
of the shares having been sold and bought by the two groups in the ordinary course of 8
trading through the exchange mechanism canno t 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 and 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 reme mber that the remaining 25 per cent of the
shares sold by the appellants were picked up by others. This would indicate that there
were other buyers in the market as well. If the two groups were conniving, the easiest
way for them would have been to synchroni ze their trades as is usually done when
traders manipulate the scrips and, in that event, the entire lot could be purchased by
the Ganatra group. This has not happened. Th is fact also does not support the charge
of connivance. - There is yet another reason why the ch arge of connivance with Ganatra group
to increase the price of the scrip cannot be sustained against the appellants. There is
no gainsaying the fact that the pr ice of the scrip did go up from3.08 to51.80
when the appellants sold the shares and the Ganatra group purchased them. The
Ganatra group kept purchasing till August 21, 2008 whereas th e 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 (des cribed 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 client s 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 bound 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 9
the Ganatra group. Same is the position with regard to patch II where the period is
from March 20, 2007 to August 21, 2008. Du ring 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 result ed in 20176 trades for 2,29,44,675 shares.
Since the demand was far in excess of the supply, the price went up. Another
interesting feature to notice here is that th ere 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 appellants 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 appe llants and the Ganatra group connived to increase the
price of the scrip. - We may now refer to the circumstances that were pointed out by the learned
counsel for the respondent Board on the basi s of which he strenuously argued that the
findings recorded in the impugned order be up held. He contended that the scrip was
illiquid from the year 2002 till August 2006 as there was no trading during this period
and the fact that more than 74 per cent of the shares sold by the appellants were picked
up by the Ganatra group should lead us to infer that they were both conniving with
each other. We have already discussed this aspect earlier and we do not think that this
fact alone could lead us to hold that there was c onnivance between the two groups.
The learned counsel also poi nted out that the financial performance of the company
was poor and it had not declared dividend for the last five years and had suffered
losses during the year 2006-07 and, therefore, there was no occasion for the Ganatra
group to purchase such large quantity of shares. He also pointed out that the first
appellant who was selling on behalf of ot her appellants knew Narendra Ganatra who
was introduced to him in the year 2005 and on the basis on this acquaintance, Ganatra
had been inducted as a director in the co mpany in the year 2007. According to the
learned counsel for the Board these factor s taken collectively should lead us to
conclude that the two groups were conniving to increase the price of the scrip. He also 10
referred to the run away price increase in the scrip between August 2006 and August
2008 when the price of the scrip increased and went up to ` 51.80 per share. He wants
us to infer that this price rise was due to the connivance of the appellants with the
Ganatra group. He also referred to the allegation that the Ganatra group had executed
circular and reverse trades to increase the price of the scrip and that the appellants
traded even during a part of patch II when the price was increasing due to the
manipulation by the Ganatra group. We have noticed all these submissions in the
earlier part of our order and we do not th ink that the factors now pointed out by the
learned counsel would establish the charge ag ainst the appellants. The fact that the
appellants made huge profits when they sold the shares is again no reason for us to
hold that there was any connivance or manipulation in the price of the scrip. We have
already discussed the reasons why the price of the sc rip increased which was due to
excessive demand. Having considered all th e factors now pointed out by the learned
counsel and taking a holistic view of the ma tter, we are satisfied that the charge
levelled against the appellants has not been established. The question posed in the
opening part of this order is, accordingly, answered in the negative. - This brings us to the other charge leve lled against the appellants. It is alleged
that when they acquired the company in the year 1998 they did not make the necessary
disclosures required under re gulation 7(1A) of the takeov er code and also under
regulations 13(3) and 13(4) of the insider regulations. The adjudicating officer has
found them guilty on this score as well and imposed a monetary penalty of ` 5 lacs.
The fact that the appellants did not make the necessary disclosures under the takeover
code and the insider regulations has not been seriously disputed before us during the
course of the hearing though it was argued by Shri P. N. Modi, Advocate that the
required information was already on the website of the exchange. The argument is
that the appellants had in substance complied with the disclosure requirements though
the disclosures were not made in the pr escribed format. We cannot accept this
argument. When law prescribes a manner in which a thing is to be done, it must be
done only in that manner or no t at all. Both sets of re gulations prescribe formats in
which the disclosures are to be made and those are then put out for the information of 11
the general public through special window(s ) of the stock exchange which did not
happen in this case. The fact that non disclosure ha s been made penal makes it clear
that the provisions of regulation 7(1A) of the takeover code and regulations 13(3) and
13(4) of the insider regulati ons are mandatory in nature . Non disclosure of the
information in the prescribed manner deprived the investing public of the information
which is required to be available with them when they take an informed decision while
making investments. Lapse on the part of the appellants is obvious and no fault can,
therefore, be found with the impugned orde r holding them guilty of not making the
necessary disclosures.
In the result, the appeal is partly allowed and the findings recorded by the
adjudicating officer holding the appellants guil ty of violating regul ations 3 and 4 of
the regulations and imposi ng a monetary penalty of ` 6 crores are set aside. The
findings on the other issue re garding non disclosures and the penalty imposed as a
result thereof are upheld. There is no order as to costs.
Sd/-
Justice N. K. Sodhi
Presiding OfficerSd/- S. S. N. Moorthy Member
21.2.2011
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