Securities Appellate Tribunal
Chintamani Shares And Broking Ltd. ... vs Sebi on 23 March, 2010
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.203 of 2009
Date of Decision : 23.3.2010
Chintamani Shares and Broking Ltd.
(Paresh Doshi, Director)
822-Star Chambers,
Harihar Chock, Rajkot - 360 001. .....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. Ronak Davda, Chartered Accountant for the Appellant. Mr. Kumar Desai, Advocate with Mr. Kersi Dastoor, Advocate for the Respondent. CORAM : Justice N.K. Sodhi, Presiding Officer Samar Ray, Member Per : Justice N.K. Sodhi, Presiding Officer (Oral) This order will dispose of three Appeals no.203, 207 and 232 of 2009 all of which involve identical questions of law and fact. The show cause notices issued to the three appellants arise out of the same investigations carried out by the Securities and Exchange Board of India (for short the Board) in the scrip of M/s. BSEL Infrastructure Realty Limited and M/s. Maharashtra Seamless Ltd. (hereinafter referred to as BSEL and MSL respectively). The scrips of these companies are listed on the Bombay Stock Exchange and also on the National Stock Exchange. The primary charge that is leveled against the appellants is that they alongwith some others formed a group and executed trades within that group which were circular in nature. Para 7 of the show cause notice issued to Chintamani Shares and Broking Ltd. (for short Chintamani) which is the appellant in Appeal no.203 of 2009 makes the following allegations:
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"7. The findings of the investigation relevant to the Noticee are mentioned hereunder:
i. It was observed that Pratik R. Shah, who is also your director, has indulged in synchronized trading in the scrip of BSEL and MSL in NSE through CSBL. The details of synchronized trading are given hereunder:
ii. ..............
iii. ..............
iv. ..............
v. The circular trading exhibit the pattern of A>B>C>A,
A>B>A or the combinations of them. The detail of the
day wise trading for the above period is given in annexure II. Summary of day wise trading is given in Annexure III."
Mr. Pratik R. Shah referred to in the show cause notice is the appellant in Appeal no.207 of 2009 and a director of Chintamani. M/s. Shelter Agencies and Securities P. Ltd. has filed Appeal no. 232 of 2009. They shall both be referred to hereinafter as Pratik Shah and Shelter respectively. Identical show cause notices were issued to Pratik Shah and Shelter as well as they are all said to form a part of the same group. The details of the circular trades allegedly executed by all the three appellants have been shown in Annexures II and III which were furnished to them alongwith the show cause notice.
2. The adjudicating officer by his three different orders dated August 28, 2009 found the appellants guilty of the charges leveled against them and held that they violated the provisions of Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and also the code of conduct prescribed for the brokers. He imposed a penalty of Rs.2 lacs on Chintamani and another sum of Rs3 lacs on Pratik Shah who traded through Chintamani. A penalty of Rs.5 lacs has been imposed on Shelter which traded in its proprietary account while executing the offending trades. It is against these orders that the present appeals have been filed.
3. We have heard the learned counsel for the parties who have taken us through the record and the impugned order. After carefully examining the details of the trades executed by the appellants as shown in Annexures II and III to the show cause notices which have not been disputed before us, the following pattern of their trading emerges: 3
07/01/2004(2) Annexure 'B' Ambadas/Jaico Pratik shah/Chintamani 3000 shares (13:8:23 to 13:08:56) 1500 shares (10:48:09 to 10:48:28) 1500 shares (14:08:04 to 14:08:21) Fincare / Mangal 3000 shares (14:04:33 to 14:04:49) Shelter (Own) 1500 shares / (14:13:39) 4 This chart is one instance of the trades executed by the appellants in the scrip of BSEL on the National Stock Exchange. The first named person in different boxes in the chart is the client and the second named person is the broker. When we look at the pattern of trading it becomes clear that 1500 shares of BSEL are transferred by Fincare through its broker Mangal to Pratik Shah on 7.1.2004 between 10:48:09 to 10:48:28 who is trading through his own broking company Chintamani. Having received these shares, Pratik Shah through Chintamani transfers them to Ambadas through its broker Jaico. Ambadas through Jaico then transfers the shares to Shelter which is a broker and is trading in its proprietary account. Shelter then transfers the shares to Fincare through Mangal. The time at which these shares were transferred is mentioned in the chart above. When the shares reach Fincare through Mangal, the circle is complete. In other words, shares were traded by the clients through their respective brokers through the trading mechanism of the stock exchange but there was no transfer of beneficial ownership. The trades even though seen on the screen of the trading system only created artificial volumes which in turn generate investor interest and induce/trap lay investors to invest. Such circular trading which is only meant to create artificial volumes is prohibited by the aforesaid regulations. The aforesaid chart is not the only instance. There are several other trades executed by the group in a similar circular manner which clearly establishes the charge leveled against them. In this view of the matter, no fault can be found with the orders of the adjudicating officer holding the appellants guilty.
4. The learned counsel for the appellants then contended that the trades executed by the appellants had not affected the price of the scrip and since the market had not been adversely affected, the appellants should not be held liable. We are unable to agree with this contention. Assuming that the price of the scrip has not been affected (though there is no material on the record to substantiate this submission) it does not absolve the appellants from the charge leveled against them. Circular trades by themselves adversely affect the market even if the price of the scrip is not manipulated.
5. The learned counsel then urged that this was a fit case in which the quantum of penalty as imposed by the adjudicating officer should be reduced as the same was highly excessive and disproportionate to the gravity of the charge. Here again, we are unable to 5 agree with the learned counsel. The appellants have been found guilty of executing circular trades which created false and misleading appearance of trading in the securities market which is, indeed, a serious market irregularity and cannot be viewed lightly. The adjudicating officer after taking note of the provisions of section 15J of the Securities and Exchange Board of India Act, 1992 has imposed a penalty on the market players by adopting a uniform standard. He has imposed a penalty of Rs.3 lacs on each client who traded in the aforesaid manner and another sum of Rs.2 lacs on the broker who executed those trades on behalf of the clients. In the case of Shelter, the broker was wearing two hats. It was a client and also a broker as it executed trades in its proprietary account. It is for this reason that a sum of Rs. 5 lacs has been imposed on it. We do not think it is necessary for us to interfere with the amount of penalty imposed which, in our view, cannot be said to be excessive at all.
In the result, we find no merit in the appeals and the same stand dismissed leaving the parties to bear their own costs.
Sd/-
Justice N.K. Sodhi Presiding Officer Sd/-
Samar Ray Member 23.3.2010 Prepared and compared by RHN 6