Securities Appellate Tribunal
Sebi vs Scimitar Investment And Trading ... on 5 January, 2007
ORDER
V.K. Chopra, Member
1. BACKGROUND 1.1 The Securities and Exchange Board of India (hereinafter referred to in short as "SEBI") had conducted an investigation into the dealings in the scrip of Dagger Forst Tools Ltd (hereinafter referred to as "DFTL") for the period November 06, 2000 to October 31, 2001 on observing a sudden spurt in its price as also substantial increase in its volumes. The shares of DFTL were listed at BSE. The price of the scrip of DFTL, which opened at Rs. 10.50 on November 06, 2000 with a corresponding traded volume of only 300 shares continuously increased thereafter along with substantial increase in volumes and ultimately closed at Rs. 49.45 on January 19, 2001. The total traded volume was 11,000 shares on January 19, 2001 when the scrip touched its highest level of Rs. 55.90, registering a rise of about 450%. The gross traded volumes during November 06, 2000 to January 19, 2001 was total 4,32,950 shares. Subsequently, the scrip opened at Rs. 46.25 on January 22, 2001 and traded in the price range of Rs. 36 to Rs. 55 till May 08, 2001. Soon thereafter the price started falling drastically accompanied with substantial reduction in volumes and price of scrip ultimately closed with a price of Rs. 11.25 on October 31, 2001 with trading volumes dipping to 25 shares.
1.2 DFTL is a Yash Birla Group company. M/s Scimitar Investment and Trading Company Pvt. Ltd. (since amalgamated with Godavari Corporation Ltd.) is one of the promoter group companies of DFTL and it was also an investment company of the Yash Birla Group. Investigation revealed that Scimitar Investment and Trading Company Pvt. Ltd (hereinafter referred to in short as 'Scimitar') was holding total 2,40,800 shares i.e. 5.17% of total share capital of DFTL. However, as per the shareholding pattern filed by DFTL as on March 31, 2001 & June 30, 2001, Scimitar was shown to be holding only 44,000 shares. Further, from November, 2000 to October, 2001 the person acting in concert, Shri Sharad Rathi had net purchased 2,20,818 shares constituting 4.74% of the total share capital of DFTL. These holdings of Shri Sharad Rathi, being a person acting in concert with Scimitar, were not provided to DFTL as required under the provisions of Regulations 7(1), 8(2) and 11(1) of Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers Regulations, 1997 (hereinafter referred to in short as "SAST Regulations").
1.3 The Broker, M/s Keynote Capitals Ltd. (hereinafter referred to in short as "M/s Keynote") was observed to be the major buyer during above investigation period and had punched buy orders for large quantities at the circuit price on majority of days when the scrip had touched the upper circuit. Investigation revealed that most of orders placed by Keynote was on behalf of Scimitar and Rathi.
1.4 Thus, the said trades were executed by Scimitar and Rathi with a common objective to artificially raise and maintain the price at a substantial high level and also to create liquidity in the lowly traded scrip so to induce others to trade in DFTL scrip. The said act of Scimitar and Rathi is in violation of the provisions of Regulations 3, 4(a), 4(b) and 4 (e) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to in short as "PFUTP Regulations").
2. SHOW CAUSE NOTICE 2.1 Two separate show cause notices both dated December 30, 2005 were issued to Scimitar and Rathi to show cause as to why appropriate action under Section 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 should not be issued against them for the violations of the provisions of Regulations 3, 4(a), 4(b) and 4 (e) of PFUTP Regulations and Regulations 7(1), 8(2) and 11(1) of SAST Regulations.
2.2 On request from Scimitar, the statement of Shri Arun Singhi, Director, Scimitar, Shri G. L. Lath, Joint President and Company Secretary of DFTL, Shri Suraj Saraogi, Director of Keynote, Shri. L. R. Daga, Joint President, Zenith Ltd. and Shri Sharad Rathi, were forwarded to it vide letter dated February 20, 2006.
3. REPLY DATED JULY 24, 2006 OF SCIMITAR TO THE SHOW CAUSE NOTICE 3.1 Scimitar in their reply stated that Section 11(4) was inserted in the SEBI Act, 1992 with effect from October 29, 2002 whereas the alleged violation pertains to the period November 6, 2000 to October 31, 2001. Hence the said section has no retrospective effect and cannot be applicable in this matter.
3.2 Scimitar also stated that it had been holding shares of DFTL prior to and subsequent to the investigation period and had traded not only in the shares of DFTL but also in various other shares during the relevant period. They stated that their decision to trade in the shares of DFTL was based on their commercial wisdom and was not guided by any manipulative intent or design.
3.3 Scimitar submitted that the price of the scrip is based on host of other factors like global trends, future potential of the industry, demand and supply, performance of the economy etc. including the profit of the company 3.4 Scimitar submitted that they had extended a total loan of Rs 1,01,89,000/- to Rathi for investing in the securities market without entering into any loan agreement and without charging any interest on the loan as he was well known to Yash Birla Group of which they are a part and the said loan was extended to him on the above basis of relationship.
3.5 Scimitar denied that the trades done by Rathi in the scrip of DFTL were done on their behalf. They submitted that inadvertently there has been a lapse on their part as they have not disclosed the increase in their share holding by 2.25% of the company on March 31, 2001 and the same was disclosed to the company DFTL immediately when they became aware about the lapse and the same is evident from the disclosure made by DFTL for the quarter ending September 30, 2001 to BSE.
3.6 Scimitar denied that they were acting in concert with Rathi and therefore not required to disclose the share holding of Rathi to DFTL. Scimitar further stated that they are part of the promoter group and they along with other promoters were already holding around 60.19% of shares / voting rights in DFTL and were enjoying control over it prior to further acquisition of 2.25% in January 2001.
4. REPLY DATED FEBRUARY 6, 2006 OF SHRI SHARAD RATHI TO THE SHOW CAUSE NOTICE 4.1 Shri. Rathi stated that he had made the impugned purchases over a period of time with an intention to sell them at a higher price and the delivery in this case was much higher, whereas the other scrips dealt in by him were squared off.
4.2 He stated that the impugned loan transaction was more on faith and based on past relationships. Hence the company did not formalize it in the form of an agreement. He also stated that he had lost almost his entire life savings in the downfall and had requested the company to consider his case, as he did not have the capacity to repay. The company has not pursued the case legally and settled the dues against the shares of DFTL. He also stated that he tried to repay this favour by syndicating funds for their group companies in subsequent years 2003 and 2004 by charging lower professional fees.
4.3 Shri. Rathi further submitted that he had no intention to manipulate the price and the continuous buying was in desperation because of continued faith by Scimitar by way of lending him money to the extent sanctioned. Further he stated that he had purchased these shares purely based on fundamentals and did not intend to defraud anyone or cause loss to public in general and any investors in particular as he had only purchased the shares and not sold them. The total purchase was less than 5% of the company's paid up capital and he believed that no disclosures were required to be made under SEBI takeover Regulations.
5. HEARING 5.1 Scimitar in its reply requested for an opportunity of personal hearing which was granted. Though Shri. Rathi did not request for personal hearing in his above reply, an opportunity of hearing was also granted to him. Accordingly, they were advised to attend personal hearing on September 29, 2006. Scimitar vide letter dated September 27, 2006 requested for an adjournment on the ground that the counsel briefed in the matter has expressed his difficulty in attending the matter. Rathi also sought adjournment vide his letter dated September 28, 2006 on the ground that he was out of station on that day. Considering the said request, another opportunity of personal hearing was granted on October 12, 2006. Vide letter dated October 09, 2006, Scimitar again requested adjournment of hearing for the reason that the person who is conversant with the facts of the matter was not keeping well. In such circumstances, Scimitar could have made alternative arrangement to attend the hearing. Shri. Rathi attended the hearing on October 12, 2006. As sufficient opportunity for personal hearing had already been given to Scimitar and the reason for adjournment is not logical ground to grant a third opportunity of hearing, I decided to proceed with the matter to pass order on merits of the case.
6. CONSIDERATION OF ISSUE 6.1 I have carefully considered the show cause notices, replies of Rathi and Scimitar, submissions of Rathi during the course of hearing and other materials on record.
6.2 At the very outset, I find that Scimitar has taken a stand in its reply that provisions of Section 11 (4) cannot be applied with retrospective effect when there is no such express mention in the statue. I feel that the provision of Section 11 (4) inserted into SEBI Act, 1992 with effect from October 29, 2002 is only an explanation or elucidation of the powers vested in SEBI under Section 11 of SEBI Act. Consequently, the power to take action under Section 11 (4) was already vested with SEBI under Section 11 of the SEBI Act. As a result, the action taken pursuant to the Show Cause Notice issued under Section 11 (4) would be valid. Hence, I am proceeding in the matter on the basis of the materials on record.
6.3 The first charge against Scimitar and Rathi is that they had dealt in the scrip of DFTL in a fraudulent manner and transacted in the scrip with a view to create artificial market. They have succeeded in executing their common intention to manipulate the price and volumes in the scrip of DFTL, which is evident from the price movement from Rs. 10.50 on November 06, 2000 and which continuously increased thereafter accompanied with substantial increase in volumes and it ultimately closed at Rs. 49.45 on January19, 2001. Subsequently, the scrip opened at Rs. 46.25 on January 22, 2001 and traded in the price range of Rs. 36 to Rs. 55 till May 08, 2001. Thereafter however the price of the scrip started falling drastically alongwith substantial reduction in volume and ultimately closed with a price of Rs. 11.25 on October 31, 2001 with a trading volume having dipped to 25 shares only.
6.4 I find that Scimitar and Rathi placed buy orders through a common broker M/s Keynote for large quantities at the circuit price on majority of days when the scrip had touched the upper circuit. During November 06, 2000 to January 19, 2001, Scimitar has done substantial trading in DFTL when its gross purchased a total of 199,800 shares and net purchased 196,700 shares at BSE which was approximately 46.15% market gross purchased volume and 78.74% of the market net purchased volume. In this period the price of the scrip registered a substantial jump from Rs. 10.50 on November 06, 2000 to its peak of Rs. 55.90 on January 19, 2001. The scrip also touched the upper circuit on 22 trading days when the prices of the scrip closed more than 7% above the previous day's close at BSE. These purchases were all made at successively higher prices. In the table given below, trade details for those days when the price touched the upper circuit are shown along side the quantity purchased and price paid by Scimitar clearly indicating substantial concentration of Scimitar's trading on the days when the price touched the upper circuit.
Date Open High Low Close % Change No. of Trades Total Qty. of Shares Traded Scimitar Qty Rate 17/11/00 10.25 11.35 10.25 11.35 7.58 26 2300 20/11/00 12.20 12.20 12.20 12.20 7.49 1 100 (100) 12.10 21/11/00 13.15 13.15 13.15 13.15 7.79 1 100 22/11/00 14.15 14.15 14.15 14.15 7.60 3 250 23/11/00 14.30 15.25 14.30 15.25 7.77 16 2850 24/11/00 16.40 16.45 14.75 16.45 7.87 27 4850 3000 16.52 27/11/00 17.75 17.75 17.75 17.75 7.90 3 400 28/11/00 19.15 19.15 19.15 19.15 7.89 13 1900 05/12/00 19.05 21.55 19.05 21.50 7.50 133 10000 7300 21.00 06/12/00 23.00 23.20 23.00 23.20 7.91 17 1850 11/12/00 27.85 27.85 27.85 27.85 7.95 20 3900 3800 27.95 12/12/00 30.05 30.05 30.05 30.05 7.90 31 8900 8900 30.15 13/12/00 32.00 32.40 32.00 32.40 7.82 37 7350 7350 32.49 14/12/00 34.70 34.95 34.70 34.95 7.87 39 5550 5550 35.04 19/12/00 31.55 36.80 31.50 36.80 7.92 143 13900 10750 35.81 20/12/00 39.70 39.70 35.65 39.70 7.88 119 15750 15400 39.47 28/12/00 37.00 37.35 32.25 37.35 7.95 75 6300 1050 36.50 29/12/00 39.00 40.30 35.50 40.20 7.63 246 16950 14100 39.81 15/01/01 42.20 42.25 40.75 42.25 7.92 175 16850 9300 42.06 15/01/01 500 40.88 16/01/01 42.50 45.60 42.50 45.60 7.93 131 25150 23950 45.67 6.5 It is observed from the above table that Scimitar has shown considerable interest in DFTL shares. It has transacted in the scrip in large quantities to manipulate the price by cornering substantial quantities of the floating stock of scrip which earlier had very low per day trading volumes. It had punched buy orders for large quantities at the circuit price on majority of the days on which the scrip had hit the upper circuit. These purchases were made at successively higher prices wherefrom it appears that the trading has been done only with an intention to artificially raise the price and to create volumes in the market. Scimitar in its reply stated that the decision to execute the said trades was based on their commercial wisdom. However, Scimitar has not explained the reason to put large quantities of buy orders at the circuit price on majority of the days. In this context, it is relevant to note that Scimitar is a promoter group company of DFTL.
6.6 I also observe that Shri. Rathi got registered as a client with the broker M/s Keynote on November 20, 2000. From the date of registration to January 19, 2001 he has gross purchased 61,500 shares and net purchased 51,700 shares, constituting 14.20% & 20.70% of market gross & net purchases volumes, respectively. Out of this, he has purchased a substantial quantity of 50,100 shares at very high upper circuit price of Rs. 53.25, on January18, 2001. A total quantity of 52,500 shares was traded on this day. In the subsequent period, from January 20, 2001 to October 31, 2001, Rathi trading through the broker M/s Keynote has gross purchased 3,28,726 shares and net purchased 1,67,674 shares constituting 50.37% and 71% of market gross and net purchased volumes, respectively. Further, as per the BSE observations, his incremental trades were primarily responsible for raising the price of the scrip in the range of Rs. 36 to Rs. 55 from January 22, 2001 to May 08, 2001.
6.7 I find that Shri. Rathi who is a Chartered Accountant by profession was well connected with various Yash Birla Group companies. His links with the above group were revealed when Shri Suraj Saraogi, director of M/s Keynote in his statement stated that Shri L.R.Daga, Joint President of Zenith Ltd (a Yash Birla Group company) had introduced Shri. Rathi as a client to M/s Keynote, through which he did substantial trading in DFTL scrip. Further, Scimitar in its reply dated July 24, 2006 admitted their relationship and also their connection with the company DFTL. Rathi has also admitted the said linkage and relationship in his reply dated February 6, 2006. In view of their relationship among themselves and with the company DFTL and considering their specific concentration in DFTL shares, clearly proves that intention of Scimitar and Rathi was to jack up its prices by corresponding large volumes to create interest/ liquidity in the scrip and also to induce others to trade in this lowly traded scrip.
6.8 I find that Rathi had bought large number of shares at the highest price of the day on two days when prices touched the upper circuit. The details are as follows:
Date Open High Low Close % Change No. of Trades Qty. of Shares traded Sharad Rathi Qty.
Rate 19/12/2000 31.55 36.80 31.50 36.80
7.92 143 13900 1200 36.96 18/01/2001 53.10 53.10 53.10 53.10 7.93 242 52500 50100 53.25 The above details show that on December 19, 2000 the price of DFTL scrip touched the upper circuit at Rs. 36.80 and a total of 13,900 shares were traded at BSE. From the trading details of Rathi, I find that Rathi has purchased 1,200 shares at Rs. 36.96. Again on January 18, 2001 the scrip touched the upper circuit at Rs. 53.10 with a trading quantity of 52,500 shares out of which 50,100 shares were purchased by Rathi at Rs. 53.25 per share.
6.9 I find from the subsequent period of January 22, 2001 to October 31, 2001 i.e. during the Settlement No. 044 / 2000-01 to 152/2001-02 that the broker M/s Keynote had substantial concentration in both gross and net traded volumes. It contributed 60% of the market gross traded volume with gross purchase of 391,680 shares and with a net purchase of 221,681 shares had 94% contribution to the net traded volumes at BSE. During this period, Rathi through the broker M/s Keynote, had gross purchased a substantial 328,726 shares constituting 50.37% of the total gross traded volume at BSE. Further, Rathi had contributed 71.10% of the net traded volume at BSE with net purchase of 167,674 shares.
6.10 I have examined the quarterly financial results of the company DFTL and find that it had earned negligible amount of profit of only Rs. 0.36 million on net sales of Rs. 48.59 million for the quarter April-June, 2000. In the quarter of July 01, 2000 to September 30, 2000, though the net sales increased to Rs. 50.76 million still the company incurred a net loss of Rs. 1.78 million. In the next quarter of October 01, 2000 to December 31, 2000 the net sales increased to Rs. 93.63 million and the company recorded a net profit of only Rs. 3.11 million. During the financial year 2000-01, DFTL has overall earned negligible profit of only Rs. 1.75 millions and in each subsequent quarter continued to suffer huge amount of losses. Scimitar in its reply stated that the price of the scrip is based on several other factors like global trends, future potential of the industry, demand and supply, performance of the economy etc. In this, however, neither the financial results nor other factors justify abrupt and steep increase in the price and volumes of the scrip.
6.11 I have also examined the statement of Shri G.L. Lath, the Joint President and Company Secretary of DFTL. As per his statement, during the FY 2000-01 the performance of the company was not good, primarily due to the prevailing recession in the automobile industry. About 80% of company's products were sold to this sector and due to recession in this sector, sales of the company were affected and it incurred losses. He clarified that during the period there were neither any talks for any new Joint Venture nor any foreign collaboration. These details evidently give a negative picture of the company and do not justify steep rise in the price of the scrip. It is therefore reasonable to conclude that price rise could only be a result of manipulative action and was not backed up by the fundamentals of the company or projected business plans or any other reason.
6.12 With regard to the charge of offer and acceptance of payment to purchase the scrip with the object of inflating, depressing or causing fluctuations in the market price of DFTL, I find that Scimitar offered an amount of Rs. 1, 01, 89,000/-. to Rathi which was accepted and utilized by Rathi for trading in the scrip of DFTL. Shri. Rathi in his reply stated that these funds were invested in DFTL scrip and he has financed his investment in DFTL scrip out of loan of around Rs. 1 crore taken from Scimitar. He further stated that he was introduced by Shri L R Daga, Joint President of Zenith Ltd to Shri K P Chokhani and Shri Arun Singhi, senior executives in Yash Birla Group who looks after the lending and investment functions. I also find that on January 02, 2001, he wrote a letter to Scimitar, asking for a loan of Rs. 150 Lacs and on January 31, 2001 itself he received Rs. 60 Lacs for investment in shares. By the end of investigation period he was granted a loan aggregating to Rs. 1,01,89,000/-.
6.13 Further, above facts were also confirmed by Shri Arun Singhi, Director, Scimitar who accepted having given a loan of Rs. 1,01,89,000/- to Shri Sharad Rathi. The resultant shares out of this loan were purchased in the name of Rathi even though they were delivered to Scimitar.
6.14 All the facts given above are again summarised as under:
• Only an application was filed by Shri Rathi on January 02, 2001 and the loan was sanctioned without any written agreement. There was no internal record for processing of the loan. There was no record of any terms and conditions agreed upon. Even the rate of interest to be charged was neither agreed nor paid.
• There were no Board Minutes suggesting sanction of the loan since the sanctioning was done orally by directors, Shri Arun Singhi and Shri D.K. Agarwal without any office noting anywhere.
• It is further observed from the details during the year 2000 to 2003 that Scimitar had never sanctioned such a huge loan to any other entity except to Shri Sharad Rathi.
• Total amount sanctioned appears to be well beyond the repayment capacity of Shri Rathi as he did not have any substantial net-worth and his annual income from all sources put together as shown in his IT returns, was only around Rs. 2 to 3 lacs.
• Scimitar has submitted that the loan was granted against the security of equity shares. But this contention is not borne out by any evidence since no security was received before sanction of loan. Further, as per their mutual arrangement the loan amount was first disbursed to purchase shares and then only those purchased shares were received by Scimitar as security.
• Shri Sharad Rathi has submitted a copy of the letter received from Scimitar whereby it transferred DFTL shares purchased by him to its own name in full and final settlement of all the claims against him. However, from details submitted by Scimitar it appears that about 30,262 shares were actually not transferred as promised and this fact was also stated by the director of Scimitar. In spite of this, Scimitar has not initiated any action for recovery of the Loan amount or the interest on it.
• Therefore, I find that this transfer of funds from Scimitar to Sharad Rathi was only a collusive transfer of funds with hidden ulterior motive already explained hereinabove.
6.15 Scimitar in its reply dated July 24, 2006 admitted that there was no loan agreement between Scimitar and Rathi and no interest on the said loan was charged because of their relationship with Yash Birla group.
6.16 I note that Rathi was well known in the senior-executive circle of Yash Birla Group companies. Being introduced to Scimitar by one such executive working in Yash Birla Group, he managed to take a loan of substantial amount which was well beyond his repayment capacity, for investment in shares of DFTL. Again he was introduced by an executive of the group to the broker M/s Keynote, which was also executing orders for Scimitar and traded substantial quantity of DFTL shares. Therefore, I find that the trades done in DFTL scrip by Rathi were actually done on behalf of the promoter group entity, Scimitar and presence of a common broker and a common source of funds for trading can not be overlooked as a matter of coincidence. The common objective of both Scimitar and Rathi was to artificially raise and maintain the price at a substantial high level and create liquidity in the lowly traded scrip and also to induce others to enter into this scrip. These actions are in violation of the provisions of Regulations 3, 4(a), 4(b) and 4 (e) of PFUTP Regulations.
6.17 Further I find that Scimitar which had a shareholding of 44,000 equity shares constituting 0.95% of total share capital of DFTL, as on September 30, 2000 has net purchased further 196,800 shares by January 22, 2001 and its total holding rose to 2,40,800 shares i.e. 5.17% of total share capital of DFTL. However, Scimitar did not inform this change to DFTL as its holding as on March 31, 2001 & June 30, 2001 as per the shareholding pattern filed by DFTL was showing only 44,000 shares. Further, from November, 2000 to October, 2001 the person acting in concert, Rathi has net purchased 2,20,818 shares constituting 4.74% of the total share capital of DFTL. Scimitar submitted that their shareholding as on September 30, 2001 was 1,48,880 which they had disclosed to the company DFTL. Scimitar also stated that there has been a lapse on their part to disclose the increase in their shareholding by 2.25% to DFTL. They added that their individual shareholding in DFTL had increased from 0.44% to 3.95% as on January 2001. However, Scimitar has not specifically denied the finding of the Investigation that its total holding rose to 2,40,800 shares i.e. 5.17% of total share capital of DFTL as on January 22, 2001.
6.18 Rathi has admitted his shareholdings in DFTL i.e. 4.74%, but stated that his total purchase in DFTL was less than 5% of DFTL's paid up capital. If however, we club Rathi's shareholding of 4.74% in DFTL with Scimitar's admitted holding of 2.25% in DFTL, they would fall under the definition of "acquirer" under Regulation 2(1)(b) of SAST Regulations which reads as follows:
acquirer means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer.
6.19 The word 'person acting in concert' is defined in Regulation 2(1)(d) of SAST Regulations as under:
"Persons acting in concert" comprises persons who, pursuant to an agreement or understanding acquires or agrees to acquire shares in a company for a common objective or purpose of substantial acquisition of shares....
6.20 In view of the commonality of objective between the acquirer and the person acting in concert, their action cannot be treated in isolation and as such it tantamounts to contravention of the threshold limit prescribed in the SAST Regulations. All the facts clearly prove that Scimitar and Rathi have acquired more than 5% of shares in DFTL and this fact was not disclosed to the company as prescribed under Regulation 7(1), 8(2) and 11(1) of SAST Regulations.
6. ORDER 6.1 Having regard to all the facts and circumstances of the case, I, in exercise of the powers conferred upon me under Section 19 of Securities and Exchange Board of India Act, 1992 read with Section 11(4) and 11 B of Securities and Exchange Board of India Act, 1992 and Regulations 44 of Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers) Regulations, 1997, do hereby restrain M/s Scimitar Investment and Trading Company Pvt. Ltd. (since amalgamated with Godavari Corporation Ltd.) and Shri Sharad Rathi from buying, selling and dealing or accessing the securities market in any manner for a period of 6 months from the date of this Order.
6.2 This order shall come into force with immediate effect.