Case Law Details

Case Name : Smitaben N. Shah Vs. SEBI (Securities Appealate Tribunal Mumbai) (ITAT Mumbai)
Appeal Number : Appeal No. 37 of 2010
Date of Judgement/Order : 30/07/2010
Related Assessment Year :

Where the details in the charts relied upon in the show-cause notice have been culled out from the trade and order logs and, in the circumstances of the case, it was not only relevant but even necessary that the appellant be furnished with those trade and order logs so that she could possibly make out a case based on other orders punched into the system, non-furnishing of the trade and order logs to the appellant in the circumstances of this case resulted in the violation of the principles of natural justice.

CASE LAWS DETAILS

DECIDED BY: SECURITIES APPELLATE TRIBUNAL, MUMBAI,

IN THE CASE OF: Smitaben N. Shah Vs. SEBI, APPEAL NO: Appeal No. 37 of 2010, DECIDED ON July 30, 2010

RELEVANT PARAGRAPH

FACTS

Nissan Copper Ltd. (hereinafter called the company) came out with an Initial Public Offering (IPO) of 64.10 lackh equity shares with a price band in the range of Rs. 33/-to Rs. 39/-. The issue opened on December 4, 2006 and closed on December 8, 2006. It was oversubscribed by 5.25 times and the issue price was finalized at Rs. 39/- per share. 45 per cent of the issue size (28.85 lackh shares) were required to be subscribed by Qualified Institutional Buyers) (QIB). Only one QIB, namely, Venus Capital Management Inc. and its two sub accounts, namely, Vacuf Ltd. and ITF Mauritius (individually referred to hereinafter as Venus, Vacuf and ITF respectively and collectively as QIB) subscribed for 43.67 lakh shares in the QIB category and received allotment of the entire quota of 28.85 lackh shares. The shares of the company were listed on the Bombay Stock Exchange Ltd. and the National Stock Exchange of India Ltd. (for short BSE and NSE respectively) on December 29, 2006 which was the first day of trading on the stock exchanges and the next day of trading was January 2, 2007. On the day of listing, the shares of the company opened at Rs. 39/- on NSE and Rs. 40/- on BSE and closed at Rs. 130.90/- on NSE and Rs. 128.80/- on BSE. The total traded quantity on the first day of trading was around 7 crore shares on NSE and around 6.11 crore shares on BSE. Spurt in price, traded quantity and the delivery percentage on the first day of listing aroused suspicion of the Securities and Exchange Board of India (referred to hereinafter as the Board) and it ordered investigations. By letter dated January 2, 2007, the Board advised the stock exchanges to withhold the pay-out of securities and funds for the trading done on December 29, 2006 and January 2, 2007 for a period of I5 days and to shift the trading in the scrip to trade-to-trade segment with immediate effect. This precautionary measure was adopted as the pay-out of securities and funds for the trades executed on December 29, 2006 were due on January 3, 2007.

Pending investigations, the then whole-time member of the Board by a detailed ad-interim ex-parte order dated January 17, 2007 directed the stock exchanges to withhold the profits/gains of as many as 40 entities including the appellants and put the same in a separate escrow account. They were also directed to release the funds and securities pay-out of December 29,2006 and January 2,2007 with immediate effect. The Board also restrained some stock brokers from trading in the market but we are not concerned with them in these appeals. The persons/ entities against whom the ex- parte order was passed were given an opportunity to file their objections, if any, within 15 days from the date of the order. It is pertinent to mention that in the ex-parte order the Board found that several persons/ entities which traded in the scrip of the company formed separate groups and the two groups which dealt with QIB are the Vora group and the Reniwal group. All the appellants were identified as a part of the Vora group and we are only concerned with this group in the present appeals. Members of this group allegedly led by one Dhiren Vora are said to have acted in concert with each other in cornering the shares of the company from QIB through structured/ synchronized trades.

On completion of the investigations, the Board served a common show-cause notice dated November 7,2007 on 21 entities including the appellants who had purchased the shares and were collectively referred to as the connected buyers, pointing out that within a few minutes of the commencement of the trading on December 29, 2006, the QIB offloaded its entire allotted quantity of 28.85 lakh shares in the market in quick successive trades of large quantities without the expected price fall which is usually associated with such large sales. It is alleged that because of the similar trading pattern adopted by these 21 entities, they acted in concert with each other and cornered the shares from the QIB by devising a scheme whereby the latter was given an exit route to offload the shares at a predetermined price on the listing day. This scheme, according to the show-cause notice, was meant to prevent a fall in the price of the scrip that accompanies such large sales. Investigations revealed that all the 21 noticees were connected to each other, some of them through financial dealings while others through family relations or business links. The manner in which each of the noticees was connected to the others) is given in Annexures 1 and 2 to the show-cause notice. The noticees allegedly had a design to suck out the liquidity of the shares of the company from the market thereby creating an artificial scarcity of shares. The noticees are said to have executed structured trades with Venus, Vacuf and ITF though the appellants are shown to have executed such trades only with Venus and Vacuf. Some of the details of the structured trades were furnished to the noticees in the show-cause notice though the details were not complete. Having made all these allegations, the show-cause notice states that these establish that the offloading of the shares on the first day of trading was premeditated and thereby the noticees including the appellants violated the provisions of Regulations 3 (a) and (c) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter called the Regulations). The noticees including the appellants were called upon to show-cause why suitable directions be not issued to them under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 including the direction to impound and retain the money already withheld in terms of the ex- parte order dated January 17,2007.

The appellant filed her reply on July 8, 2008 emphatically denying all the allegations. She made a grievance that the data supplied in the show-cause notice and the Annexures thereto in-so-far as they related to the appellant are an interpretation of the trade and order logs which were never made available to her despite a specific request to furnish the same along with other documents and records relied upon by the Board: The case set up by the appellant is that she placed orders for the purchase and sale of shares with her brokers in the normal course of trading and that she acted on her own and that she was neither aware nor connected with others who placed such orders for the same scrip with her broker. Referring to the two Annexures to the show-cause notice pointing out her connection with other entities, she stated that her name does not figure in Annexure 1 at all and that besides being a sister-in-law of Dhiren Vora she was not a part of the Vora group or any other group as wrongly alleged and that she has no concern with the trades executed by Venus, Vacuf or ITF.

Similar is the reply filed by the other appellants. On a consideration of the reply filed by the appellant and taking note of the facts as they emerged from the record and the written and oral submissions of the appellant and the material collected during the investigations and the inquiry, the whole time member found that the appellant who formed a part of the connected buyers had dealt in the shares of the company in a fraudulent manner. Referring to one buy order of the appellant for the purchase of 70,000 shares of the company on NSE on the first day of listing and considering the fact that the same had been modified subsequently which resulted in several trades with Vacuf, he found that there was fine synchronization of order placement and modification even though it involved a QIB and from this he concluded that the appellant was a part of the connected buyers and that the connected buyers arranged QIB subscription for the IPO with the assurance of an exit. The whole time member went on to hold that the connected buyers including the appellant had employed a scheme to grant exit to the QIB on the day of listing and accordingly the QIB sold its entire stock of shares which were purchased by the connected buyers through structured deals. By his order dated December 30, 2009 he found the appellant guilty of violating Regulations 3(a) and (c) of the Regulations and impounded the unlawful gains made by her and directed NSE to remit the same to the Board along with interest accrued thereon within 15 days from the date of the order. She has also been restrained from buying, selling or dealing in securities market in any manner whatsoever directly or indirectly for a period of 3 years from the date of the order. Similar orders have been passed in the case of other appellants as well and identical directions issued. These orders are under challenge before us.

HELD

We may now deal with the contentions raised by the learned counsel for the appellant. The first argument of Shri P.N. Modi Advocate is that the principles of natural justice had been violated in-as-much as the appellant had not been furnished with the trade and order logs repeatedly asked for by her which formed the basis of the charges levelled against her. There is merit in this contention. As already noticed, the primary charge against the appellant is that she along with other buyers who also had a similar pattern of trading, had devised a scheme to allow the QIB an exit route to offload their shares on the first day of trading. In support of this charge, the Board in the show-cause notice had given to the appellant charts containing some selective data culled out from the trade and order logs of the exchange pertaining only to trades of the so called connected buyers including the appellant. We do not think that this data was enough. On the first available opportunity, that is, in response to the ex-parte order dated January 17,2007, the appellant demanded from the Board complete trading history of the scrip on BSE and NSE for December 29, 2006 and January 2, 2007 and more particularly such data that was prevalent at the time when she executed her trades/ transactions. Again, in her reply to the show-cause notice she demanded the trade and order logs and stated “….it is pertinent to note that SEBI is yet to furnish me with copies of the trade and order logs based on which the tables in paragraphs 4, 6 and 7 are based. Thereby, SEBI has denied me an opportunity to submit complete and comprehensive replies to the allegations made against me.” She asked for this material because, according to her, she was not a connected buyer and wanted to know whether she and the alleged connected buyers were the only ones who had similar trading pattern or whether there were other buy and sell orders as well on the trading screen which showed a similar pattern of modification of orders. This information could come only from the trade and order logs which were not supplied to the appellant. It was legitimate for her to know how many other orders were there on the screen and at what rate and how many of those orders were modified and to what extent and how many of those resulted in trades. If this information had been favorable to her it could have changed the fate of the case. The learned counsel for the respondent Board contended that the trade and order logs pertaining to the two days of trades were voluminous and, therefore, it was not feasible to furnish the same to the appellant. We cannot accept this plea. If the records asked for were voluminous, the appellant should have been allowed inspection and since they were in the electronic form, she could have been furnished with a soft copy at her own expense. We may hasten to add that trade and order logs asked for by the appellant are on the records of the stock exchanges as well as with the Board and there is nothing confidential about them. The grievance that the appellant had not been supplied with the trade and order logs was also made before the whole time member and he rejected this contention.

If the documents asked for are relevant and may help the delinquent to prepare his/ her defence they have to be furnished and it is not correct to say that only the documents relied upon in the show-cause notice alone are to be supplied to meet the ends of justice. Let us not forget that the details in the charts relied upon in the show-cause notice nave been culled out from the trade and order logs and, in the circumstances of the case, it was not only relevant but even necessary that the appellant be furnished with those trade and order logs so that she could possibly make out a case based on other orders punched into the system. The appellant had repeatedly pointed out the relevance of these documents to prepare her defence. We are, therefore, satisfied that non-furnishing of the trade and order logs to the appellant in the circumstances of this case resulted in the violation of the principles of natural justice. In this view of the matter, we were inclined to remand the case to the Board for a fresh inquiry.

The case of the Board proceeds on the basis that the 21 persons/ entities including all the appellants to whom the show-cause notice dated November 7, 2007 had been issued were connected to each other and that they designed a scheme to provide an exit to QIB by way of structured trades at a predetermined date, time and price. The connection of each noticee with the other is given in Annexures 1 & 2 to the show-cause notice and they have all been described as “connected buyers” which term, according to the Board, means that they jointly designed and executed trades and acted in tandem. It is also the case of the Board that the appellants before us had a similar trading pattern even though it involved a QIB and its two sub-accounts and from this it has concluded that the appellants were part of the connected buyers. The appellant in her reply has emphatically denied that she had any connection with any other noticee save and except that she is the sister-in-law of one Dhiren Vora featuring among the 21 noticees. She has denied that she was a part of the Dhiren Vora group or any other group and it is her case that she placed orders on the two exchanges through her broker in the normal course of business and acting on her own. She also states that she was not aware or concerned with the orders placed by the other persons/entities through- her broker. According to her she wanted to purchase the shares as she was enthusiastic about the prospects of the company and that she had anticipated that the price of the scrip would rise either in the course of the day or in a couple of days. The other appellants have also denied their connection with any other noticee in Annexure 2 and their stand is that they are also not connected buyers.

From the rival stands of the parties what we need to examine is whether the appellants had any connection with any other noticee and whether they were a part of the “connected buyers”. As already observed, the connection of the appellants with the other entities has been given in Annexures 1 and 2 to the show-cause notice and we have carefully perused these Annexures. Annexure 1 is a bank statement analysis of some persons/ entities and the names of the appellants do not figure anywhere in this Annexure. This Annexure indicates some financial relations between the company and one Shanti Swaroop Reniwal who is shown to be heading the so called Reniwal group. His name also appears among the noticees. The Reniwal group is said to have advanced some loans to Dhiren Vora HUF which are shown to have been returned. There is a rectangular box in Annexure 1 which mentions the words “Vora group*’ which is said to have some connection with Dhiren Vora and some others without identifying those who constitute this group. Then we have Annexure 2 with a heading “Connections Between Major Buy Clients” and it reads “The relationship between the Noticees 1 to 16 who were related to each other in addition to their inter se fund transactions (Annexure 1) is given below:” This Annexure then gives details of 23 persons/entities who are said to be connected with each other. The name of the appellant, Smitaben N. Shah appears in the list as also the names of three other appellants namely, Deven Patel, Tejas Patel and Kirtiben Patel. Interestingly, the name of Mahesh P. Gandhi, the appellant in Appeal no. 282 of 2009 does not feature in the list of connected buyers though he, too, has been held guilty as a connected buyer along-with the other appellants. Smitaben Shah is shown to be connected only to Dhiren Vora. She is his sister-in-law. On a query made by us during the course of the hearing, we were informed that her husband’s sister is married to Dhiren Vora. There is no other connection either with Dhiren Vora or with any other person/entity mentioned in Annexure 2. There is also no business or financial connection with any of the entities referred to in Annexure 1. Dhiren Vora was summoned to appear before the investigating officer on May 22, 2007 and he made a statement on his own behalf and on behalf of Sonal U. Vora, Uday Vora, Sonali Dhiren Vora, M/s. Deep Infrastructure (P) Ltd. and M/s. Park light Securities Ltd. In his answer to the very first question he stated that he was making the statement on behalf of Vora group. From this fact one can assume that the persons/ entities on whose behalf Dhiren Vora made the statement constituted the so called “Vora group”. There is no other material on the record to show who all were the members of the Vora group. If this is the Vora group, none of the appellants figure therein and Dhiren Vora did not represent them. As already noticed, the only connection of Smitaben Shah with the persons mentioned in Annexure 1 is that she is related to Dhiren Vora. This relationship by itself cannot lead us to conclude that she was a part of the “connected buyers”. Apart from Smitaben Shah, the names of the other three appellants also figure in Annexure 2. Their so called “connection” with each other or with the other entities as shown in the Annexure is even more tenuous to hold them as part of the connected buyers who are said to have traded fraudulently in connivance with others. Deven Patel is said to be a connected buyer only because he has financial dealings with one Rajesh Kumar Patel whose name also figures among the noticees. What kind of financial relation they had is not known nor have the details of this relationship been spelt out either in the show-cause notice or in the impugned order. There is also no other material that could throw any light on this matter. Deven Patel is being roped in because Rajesh Kumar Patel is said to have floated Park light Securities Ltd. which is supposed to have been acquired by Dhiren Vora group. Then we have Tejas Patel another appellant before us. He has also been described as a connected buyer. His connection is based on some bank statements the particulars of which have not been referred to either in the show-cause notice or in the impugned order on the basis on which there are said to have been large value fund transfers between him and the aforesaid Rajesh Kumar Patel, H. Nyalchand and Park light. H. Nyalchand Financial Services Limited is a broking company of which Dhiren Vora is a director. There are two Park light companies and which one is being referred to is not known. There is one Park light Securities Limited which was a buyer of the shares of the company from QIB and there is another Park light Investments Private Limited which is a broking company. This is the only connection on the basis on which the Annexure identifies Tejas Patel as a connected buyer. We wonder what the connection is. Kirtiben Patel, the wife of said Rajesh Kumar Patel is another appellant before us. She is said to be a director of Park light Securities Limited which company traded through H. Nyalchand Financial Services Limited of which Dhiren Vora is a director. It is common case of the parties that Kirtiben Patel resigned as a director in June, 1992 long before the impugned transactions took place. This connectivity is again as vague as in the case of the others to make her a connected buyer. As already observed, Mahesh Gandhi, the appellant in Appeal no.282 of 2009 does not figure in any of the two Annexures to the show-cause notice though in the impugned order he has also been shown as a connected buyer. We were wondering how this could be and the ex-parte ad-interim order gives us the reason why he was roped in. He along with the other appellants had purchased shares through the same broker M/s. Religare Securities Limited and that is why they have been artificially grouped together. This is borne out from the allegation made in the show-cause notice as well. This leaves us with ah impression that there has been non application of mind while establishing the connectivity between the appellants and the other noticees or between themselves. Having examined the connections of the appellants with the other entities referred to in Annexure 2, we are satisfied that the Board has failed to establish any link worth the name between these entities white they dealt in the scrip of the company. It is surprising that a conclusion about connectivity between the buyers including the appellants has been drawn on the basis of such jumbled up data and tortuous relationship without even recording the statement of any of the appellants particularly when Dhiren Vora is not owning up any of the appellants as part of his so called group. We cannot lose sight of the fact that a serious charge like fraudulent trading cannot be established on the basis of these tenuous and farfetched connections. In this view of the matter, we have no hesitation to hold that the appellants did not act in tandem with any of the entities referred to in Annexure 2 as alleged in the show-cause notice and found by the whole time member.

The so called connectivity between the appellants has also been sought to be established by the similarity of their trading pattern in the scrip of the company. It is alleged that all the appellants had, on the first day of trading, placed an original buy order for 70,000 shares at a uniform rate of Rs. 30A per share on NSE and BSE at around the same time and modified their orders in a 17 seconds window on NSE at a uniform price of Rs.46.50 and on BSE at Rs.47.50. This proximity of time in placement of buy orders between the appellants at identical rates cannot make us overlook the fact that all the appellants traded through the same broker M/s. Religare Securities Limited as independent clients and the similarity of order placement through the common broker is not such an unusual feature which may lead us to conclude that the appellants were acting in collusion for a fraudulent trade. Again, we are satisfied that the appellants did not place orders for the purchase of identical number of shares and that their orders were for varied quantities through the same broker., Smitaben Shah had placed an order for the purchase of 70,000 shares on NSE and an equal number on the BSE. The Board has called in question only the purchases made by her on the NSE. Deven Patel and Tejas Patel purchased 1,05,000 and 1,65,000 shares respectively on NSE and only the purchase of 70,000 shares by each of them have been called in question. They also purchased 70,000 shares each on BSE on the first day of trading and only Deven Patel’s purchases on BSE have been questioned. Kirtiben Patel also purchased 70,000 shares each on NSE and BSE and all her trades have been impugned. Again, on the second day of trading i.e. on January 2, 2007, they have all traded on both the exchanges for similar quantities and in a similar manner but those trades have not been called in question. By challenging only the purchases of 70,000 shares by each of the appellants on the first day of trading, the Board has brought them on a common platform created artificially to hold that they were acting in tandem. In the case of Mahesh Gandhi, his trading pattern is not akin to the trading pattern of other four appellants and he, too, has been dubbed as a connected buyer only because he traded through the same broker. We find no material on the record which could show that Mahesh Gandhi was in any way connected with any of the connected buyers. Thus, the grouping of the appellants together as connected buyers which the learned counsel for the Board argued so assiduously fails on all counts. It follows that the appellants acted on their own while dealing in the shares of the company and the charge levelled against them that they acted in tandem to provide an exit to the QIB falls flat.

__._,_.___

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