Securities Appellate Tribunal
Sparkline Mercantile Co Pvt. Ltd. vs Sebi on 16 January, 2012
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 171 of 2011
Date of decision : 16.01.2012
Sparkline Mercantile Co Pvt. Ltd.
26, Krishna Niwas,
498, Kalbadevi Road,
Mumbai - 400 002. ...... 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. Zal Andhyarujina, Advocate with Mr. Deepak Dhane, Advocate for the Appellant. Mr. Kumar Desai, Advocate with Ms. Harshada Nagare, Advocate for the Respondent. Coram : P. K. Malhotra, Member S.S.N. Moorthy, Member Per : P. K. Malhotra, Member This appeal is directed against the order dated December 31, 2010 passed by the adjudicating officer of the Securities and Exchange Board of India (for short the Board) holding the appellant guilty of violating regulations 4(1) and 4(2) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (for short the Regulations). He has found that the appellant, in collusion with certain brokers and clients, had executed synchronized trades on the Bombay Stock Exchange in the scrip of Jindal Drilling & Industries Ltd. (for short the company) and indulged in non-genuine/fraudulent transactions in violation of the Regulations which resulted in creation of artificial volume, manipulation of the price of the scrip and distorting the market equilibrium. The appellant was served with a show cause notice dated July 25, 2008 requiring it to show cause as to why an enquiry should not be held against it and penalty imposed for the 2 said violations. Admittedly, the appellant did not avail of this opportunity and the adjudicating officer, by an ex-parte order, found the appellant guilty of the charge and imposed a monetary penalty of Rs.25 lacs on it. Hence this appeal.
2. We have heard learned counsel for the parties. The allegations against the appellant are that the appellant, along with some other connected entities, had executed synchronized/circular trades and indulged in non-genuine transactions in the scrip of the company on the Bombay Stock Exchange during the investigation period from May 10, 2005 to September 2, 2005. The details of total purchase, sale and gross trading are mentioned in the show cause notice in the form of a table as under:
Name of the Broker Total buy Total Sell Gross % to market client Trading gross Samradha Indiabulls Finstock Securities 261700 268200 529900 4.61 Ltd.
Emerging Indiabulls
Capital Securities 41644 171167 212811 1.85
Ltd.
Sparkline Religare
Mercantile Securities 308757 326832 635589 5.54
Ltd.
V&U ASE Capital
374263 365437 739700 6.44
Caplease Market Ltd.
Hem Kanak UTI
Mercantile Securities 293474 243474 536948 4.68
Ltd.
Chirag Tanna M R Share
526756 447311 974067 8.49
Broker Ltd.
Total 1806594 1822421 3629015 31.63
The details of their trading amongst themselves are also provided in the form of a table as under:
Buy/Sell Samradha Emerging Sparkline V&U Hem Chirag Total Finstock Capital Mercantile Caplease Kanak Tanna Mercantile Samradha 0 5000 31500 2051 50484 64105 153140 Finstock Emerging 0 0 0 23354 0 3100 26454 Capital Sparkline 21390 200 25331 44384 73208 164513 Mecantile V&U 5298 1402 5444 500 1227 17093 30964 Caplease Hem Kanak 62634 0 37040 17152 0 42783 159609 Mercantile Chirag 35325 0 67584 19962 49355 2525 174751 Tanna Total 124647 6402 141768 88350 145450 202814 709431 3 These trades are not disputed by the parties. The case of the appellant is that in penalty proceedings, it is incumbent on the authority to bring out a clear connection with the group entities and the appellant. The only connection that has been brought out by the adjudicating officer is that Emerging Capital Advisors Limited, one of the group entities, and the appellant are located at the same address and also have same phone number. There has been no transaction between Emerging Capital Advisors Ltd. and the appellant. It was further submitted by the learned counsel for the appellant that the synchronized trades per se are not illegal. It is only when synchronization of trades is done with a view to manipulate the market that such trades can be questioned. The evidence brought on record is not enough to bring home the charge against the appellant and punishing him for violating regulations 4(1) and 4(2) of the Regulations. In the absence of any such findings having been recorded by the adjudicating officer, the charge against the appellant cannot sustain and the order passed by the adjudicating officer needs to be set aside.
3. We are unable to agree with the learned counsel for the appellant that the adjudicating officer has failed to bring home the charge against the appellant. The trades executed by the group entities have been mentioned in the tables in the show cause notice as extracted above. References have also been made to the relevant portions of the investigation report indicating that during the investigation period these related entities have traded amongst themselves. The interconnection between these related entities have also been referred to by the adjudicating officer in para 21 of his order which is reproduced below for ease of reference:
"The Investigation Report has also established the relationship between the concerned entities. Shri Chirag Tanna was introduced to the stock broker M R Share Broking Pvt. Ltd. by Shri Dilip Nabera, who is one of the contact persons/directors of both Emerging Capital Advisors Ltd. and Adhunik Finance Pvt. Ltd. As per the information provided by NSE Mayrose Capfin Pvt. Ltd. and Samradha Finstock Pvt. Ltd. have the same address. Emerging Capital Advisors Ltd. and the noticee are located at the same address and also have same phone number. Common address was mentioned in the letterheads of both the noticee and Mayrose Captin Pvt. Ltd. One of the directors of Hem Kanak Mercantile Pvt. Ltd., Mrs. Sadhana Nabera is the wife of Shri Dilip Nabera. The BSE Investigation Report had also mentioned that Adhunik 4 Finance Pvt. Ltd. and Samradha Finstock Pvt. Ltd. have a common phone number. It was observed from the Form No.3CD - Statement of particulars required to be furnished under section 44AB of the Income Tax Act, 1961 in the Assessment year 2004- 05 that V&U Caplease Pvt. Ltd. had received Rs.50 lacs from Adhunik Finance Private Ltd. Adhunik Finance in its reply dated March 10, 2008 admitted that it had given Rs.50 lacs to V&U Caplease Pvt. Ltd. as loan against shares to be purchased in due course in the financial year 2003-04. However, the deal could not be materialized and the amount was returned back latter on."
It is an admitted position that it is difficult to get direct evidence with regard to synchronization of trades for the purpose of upsetting the market equilibrium or to manipulate the market. It is only on the basis of circumstantial evidence that such a connection can be proved. Looking at the details provided in the investigation report, the show cause notice and the findings recorded by the adjudicating officer, we are convinced that the adjudicating officer has brought enough material on record in support of the conclusion that the entities mentioned in the tables above are connected entities and traded among themselves with prior arrangement resulting in creation of artificial volume and distorting the market equilibrium. A large number of trades were executed among the group entities within a minute of placing the order. This cannot happen without prior meeting of minds among the connected entities. From the details of the trades executed and having regard to the trading system, we do not think that such large number of trades could match between the same parties unless the trading system was being abused. Therefore, we have no hesitation in upholding the findings recorded by the adjudicating officer in the impugned order.
4. It was then argued by the learned counsel for the appellant that under similar facts and circumstances relating to the same transaction in relation to two other group entities namely, Hem Kanak Mercantile Private Limited (Appeal no. 171 of 2009 decided on 11.3.2010) and Samradha Finstock Pvt. Ltd. (Appeal no. 204 of 2010 decided on 28.2.2011) this Tribunal had reduced the penalty to Rs. 7 lacs. We have seen the earlier orders. The transactions are the same and the entities involved are also group entities. The case of the appellant is identical to the two cases referred to above. The 5 appellant, therefore, cannot be given a different treatment. We, therefore, reduce the penalty to Rs. 7 lacs in this case.
In the result, while upholding the findings of the adjudicating officer, we reduce the penalty to Rs.7 lacs. The impugned order stands modified accordingly. There will be no order as to costs.
Sd/-
P. K. Malhotra Member Sd/-
S.S.N. Moorthy Member 16/01/2012 Prepared & compared by-ddg