Securities Appellate Tribunal
Super Infincon Pvt. Ltd. vs Sebi on 24 November, 2014
Author: J.P. Devadhar
Bench: J.P. Devadhar
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date of decision : 24/11/2014
Appeal No.151 of 2014
Super Infincon Pvt. Ltd.
Balkrishna Krupa,2nd Floor,
45/49, Babu Genu Road,
Princess Street, Mumbai - 400 002. ... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C-4A, "G" Block,
Bandra Kurla Complex,
Bandra (E), Mumbai - 400 051. ... Respondent
WITH
Appeal No.177 of 2014
Shri Danish Merchant
9,"Opriya", Dr. Peter Dias Road,
Bandra (West), Mumbai - 400 050. ... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C-4A, "G" Block,
Bandra Kurla Complex,
Bandra (E), Mumbai - 400 051. ... Respondent
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Mr. J.J. Bhatt a/w Ms. Rinku Valanju, Advocates for Appellants.
Mr. Shyam Mehta, Senior Advocate a/w Mr. Mihir Mody and Mr. Rushin
Kapadia i/b K.Ashar & Co., Advocates for the Respondent.
CORAM : Justice J.P. Devadhar, Presiding Officer
Jog Singh, Member
A. S. Lamba, Member
Per : A.S. Lamba (Oral)
1.The two appeals Nos. 151 of 2014 and 177 of 2014 mentioned above arise out of identical facts and circumstances, although adjudicated separately vide order No.IVD-ID5/SIL-SIPL/AO/DRK-AKS/EAD3-506/50- 2014 dated March 27, 2014 and order No.IVD-ID5/SIL-DM/AO/DRK- AKS/EAD3-504/48-2014 dated March 27, 2014, respectively, were heard together by consent of two concerned parties and are being disposed off vide their common order.
2. Facts of the case in brief are that Super Infincon Pvt. Ltd., Appellant No.1 is a promoter group company of Supertex Industries Ltd. (SIL) and both Appellant No.1 and Appellant No.2 were allotted shares of SIL in preferential allotment by Super Infincon Pvt. Ltd.
3. During the period January 1, 2009 and August 31, 2009 (IP) scrip of SIL opened at Rs.26.50 on January 1, 2009, reached a high of Rs.64.00 on 05/08/2009, period low of Rs.12.50 on 05/02/2009 and closed at Rs.54.60 on 31/08/2009.
4. A show-cause notice (SCN) was issued to the two Appellants alleging that Appellants had indulged in synchronized trade in scrip of SIL with one -3- another, during IP and that Appellant No.1 had purchased 2,30,151 shares - out of which 1,94,564 shares were purchased from appellant No.2 - and out of these 1,94,564 shares, 1,64,076 shares were synchronized and out of 1,64,076 synchronized shares, 42,812 shares were perfectly synchronized (Trades matched within a minute of placing of orders, Price and Quantity of the shares were also the same).
5. Facts of the case relating to Appellant No.2 are substantially the same as in case of Appellant No.1, since 1,94,564 shares sold by Appellant No.2 were purchased by Appellant No.1, besides Appellant No.2 was also seller of 1,50,000 shares in SIL scrip to Kapilaben, in off-market transaction and in view of this off-market sale of shares in SIL scrip, Appellant No.2 was connected to Kapilaben and is hence part of a group of clients connected to each other.
6. Thereafter some instances of synchronized trades of Appellants in the scrip of SIL are provided and it is further alleged that Appellants trading in the scrip of SIL during I.P. on basis of synchronization of trades with one another, which led to false and misleading appearance of trading and hence are fraudulent in nature.
7. Appellant No.1 replied to SCN, inter alia, stating that:
• From details of trading in scrip of SIL during I.P., he only bought shares, which were delivery based and those purchasers were in normal course of investment.
• No off-market transactions were done by him during I.P. -4- • From trade data furnished in SCN, only trades that got converted into trades were mentioned and log provided did not include unexecuted orders, modified orders and cancelled orders, absence of which makes details furnished one sided, incomplete and incorrect and hence proper answers to alleged violations cannot be furnished, resulting in violation of principles of natural justice. • Appellant No.1 stated that he brought 2,30,151 shares of SIL on 8 days and his buy quantity of 42,812 shares (on 4 days), which resulted from his order getting matched in normal course of price- time priority algorithm of exchange and synchronized volume is insignificant, one sided and does not have features of synchronized orders. Data furnished in this connection by Appellant No.1 shows that his total traded volume of four day of perfect synchronization was 42,812 shares while total market value was 7,67,568 and overall synchronization was 1,64,076.
• It is not established as to how Appellant No.1 and Appellant No.2 were connected to counter broker(s) or their end clients. Merely, if some orders of part of orders got matched, it cannot be said that there was prior meeting of minds or collaboration. • Price rise during pre I.P. cannot be significant, since price of Rs.35.00 of SIL shares as on 15.12.2008 was that of share with face value of Rs.10.00 each, whereas price as on 01.10.2008 (Rs.0.72) as well as on 23/24//27 October, 2008 (Rs.0.45) was when face value of shares was Re.1.00 each.
• ISL had allotted shares on preferential basis to Appellant No.1 and to Appellant No.2, separately and independently. No relation -5- between two exists. Appellant No.2 selling shares on the market and Appellant No.1 buying some of these shares (as investment) was through market were independent and separate decisions of the parties. If prior understanding existed, then entire lot of 1,94,564 shares could have been synchronized. • Appellant No.1, submitted that any alleged synchronization of 42,812 shares could not lead to false and misleading appearance as Appellant No.1 lifted actual deliveries and thus his volume was genuine. Beneficial ownership of shares has passed on to Appellant No.1. There is clearly mis-appreciation of Appellant No.1's order/ trade data and analysis thereof is incomplete as Appellant No.1's taking deliveries of the shares, has been totally ignored.
8. Submissions of Appellant No.2 are:
He receives advice from his stock broker for investment During I.P., textile industry was growing due to Government incentives He traded in market through BOLT He is not connected with anyone except Amrit Gandhi, who is his employee He was in need of money and has therefore sold the shares consistently.
9. In consideration of evidence and findings, Ld. A.O. has observed from inquiry report (IR), that Appellant No.1 who is a promoter group entity, has executed synchronized trades with Appellant No.2, who is one of the preferential allottee of shares of SIL and that Appellant No.1 bought 1,94,564 -6- shares from Appellant No.2, out of which 1,64,076 shares were synchronized and 42,812 shares perfectly synchronized and instances of synchronized trades are cited thereafter.
10. Ld. A.O. has thereafter quoted order of Hon'ble SAT in Sparkline Mercantile Co. Pvt. Ltd. Vs. SEBI, in which it is stated that it is difficult to get direct evidence with regard to synchronization of trades and it is only on basis of circumstantial evidence that such a connection can be proved. It is further quoted that a large number of trades were executed among group entities within a minute of placing of order, which cannot happen without prior meeting of minds among the connected entities.
11. Thereafter, Ld. A.O. has observed that trade executed by Appellant No.1 were not of one instance but 51 such transactions carried out over a period of time and 71.2% of shares traded in the scrip by Appellant No.1 were synchronized and repeated nature of such transactions clearly established mala fide intent of Appellant No.1., while entering into such transactions. It is concluded by Ld. A.O. that such trading pattern lead to price fluctuation and create false appearance of trading in securities market and thereby tending to mislead gullible investors.
12. It may be noted that Ld. A.O. has relied on IR, one order of SAT and observed from order log/trade log to arrive at conclusion that trading patterns of Appellant No.1 lead to price fluctuation and create false appearance of trading, while in the SCN it was alleged that Appellant No.1's trading has led to false and misleading appearance of trading. How false and -7- misleading appearance as alleged in SCN has got changed to price fluctuation and false appearance; has not been explained in the impugned order.
13. It is also pertinent to point out that Ld. A.O. has relied on IR, order log, trade log and one order of SAT to arrive at his conclusions and has not dealt with submissions of Appellants at all. If submissions of Appellants were not relevant, not worth considering and/or worthy of dismissal, then A.O. should have dealt with these while passing his judgment but ignoring the submissions without even referring to these, is not appreciated by the Tribunal.
14. Ld. A.O. is required to deal with each and every submission of Appellants and thereafter arrive at his conclusions either accepting these, rejecting these or partially accepting/rejecting but must give logical, acceptable and rationale reasons, based on applicable law, facts, circumstances, precedents, case laws, etc. but ignoring the submissions and not dealing with them is not acceptable to the Tribunal.
15. It is also pointed out that Ld.A.O. has differed from his allegations in SCN to his conclusions in impugned order, as pointed out above, without assigning any reason whatsoever. In case conclusions differ from allegations, the same must be dealt appropriately by giving supplementary SCN or otherwise, but the way it is done here, is flagrant violation of justice.
16. It is also observed that para 4 of SCN to Appellant No.1 was replaced later by another para. Original para 4 of SCN stated number of synchronized share as 42,812, while in replaced para 4 synchronized shares were stated to be 1,64,076 while 42,812 were perfected synchronized shares. -8-
17. This shows total non-application of mind on part of Ld. A.O. while issuing SCN. It may also be mentioned that conclusions arrived at by Ld. A.O. that such trading patterns lead to price fluctuation and creates false appearance of trading in securities market, is also without any reasoning, logic or rationale, since price fluctuation, as a result of synchronized trading has not been dealt with at all and false appearance of trading also does not appear plausible, since trading took place, even if it was synchronized, but still if happened and price was paid, delivery taken, then how it was false, could not be explained by Ld. Senior Counsel of Respondent.
18. Lastly, another incongruity in the impugned order may also be pointed out, is classification of synchronized trades into perfect synchronized trades and synchronized trades. This Tribunal had occasion to deal with synchronization of trade on a number of occasions in various appeals and has always frowned on the practice of synchronization as aberration of market mechanism and upheld the impugned orders and in most of the cases and synchronization in even 4 instances was upheld as a mechanism to manipulate security markets, and it has been the stance of this Tribunal to frown on synchronization when it has some unholy purpose attached to it, but it has been held by the Tribunal that all synchronization is not bad but become bad when undertaken to rig, manipulate or defeat fair play in securities market and hence each instance of synchronization has to be shown resulting in rigging/manipulation to defeat fair play in market mechanism, to be termed bad in law. In the instant case, the purpose of synchronization has not been brought out.
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19. Now coming back to re-classification of synchronization by Ld. A.O. into perfect synchronization (on happening within 1 minute of placing buy or sale orders with some number of shares and price) and into synchronization (without definition, but which is not perfect), has been found by the Tribunal to be arbitrary and without purpose and on the contrary seen to be leading to confusion only. It is reiterated that purpose of synchronization to be punishable; which has to tampering, manipulating the fair play in securities markets and it is imperative that this has to be brought out clearly and unambiguously, before a trade is termed synchronized, which is punishable and simple or bland statement that trade is synchronized, without specifying manipulative purpose, is not acceptable to the Tribunal.
20. One more aspect connected to the Appeal is found intriguing and hence brought to Respondent's notice, concerns issue of appointment of Adjudicating Officer u/s 19 of Securities and Exchange Board of India Act, 1992 read with 15-I of SEBI Act, 1992 and Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995. This order is issued by R.K. Padmanabhan, who is E.D. in SEBI and is acting in proceedings of WTM appointing A.O. As per section 19 of SEBI Act, Board may by general or special order, in writing, delegate to any member, officer of the Board or any other person subject to such conditions, etc. Presumably the power of Board to appoint A.O.s has been delegated to WTM (by name). Now these proceedings, as reported by E.D., does not spell out the name of WTM who has been delegated these powers nor is the letter of appointment of A.O. signed by WTM. Whether delegated powers can be exercised on basis of proceedings and signed by an E.D. - is the legitimate -10- exercise of power - may be examined by SEBI and action, as considered appropriate, may be taken.
21. In view of non-consideration of submissions of Appellants in the impugned order, especially the submission that the trades are genuine trades for which Appellant had paid and in fact took delivery of shares and also due to introduction of new terms such as perfect synchronization and synchronization, without defining what synchronization now means and also in view of fact that conclusions have been drawn, which were not alleged in SCN - without furnishing any reasons for same and these conclusions such as trading pattern lead to price fluctuation and creates false appearance of trading, being without any basis, the impugned order is set aside and case is restored back to file of Ld. Adjudicating Officer of Respondent for de-novo starting proceedings by issuance of fresh SCN, removing defects in earlier SCN, calling for explanation of Appellants to allegations, affording opportunity to Appellants of being heard and passing fresh orders, in facts and circumstances of the case, taking into account all relevant material including submissions of Appellants appropriately.
Sd/-
Justice J.P. Devadhar Presiding Officer Sd/-
Jog Singh Member Sd/-
A.S. Lamba Member 24/11/2014 Prepared & compared by-ddg