Securities Appellate Tribunal
Pinac Stock Brokers Pvt. Ltd. vs Sebi on 19 September, 2016
Author: J.P. Devadhar
Bench: J.P. Devadhar
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date of order reserved: 18/08/2016
Date of decision: 19/09/2016
Appeal No.157 of 2013
Lopa S. Bhavnagari
601, Parshwa Towers,
132 ft Ring Road, Satellite,
Ahmedabad - 380 015. ... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai - 400 051. ... Respondent
Mr. P.N. Modi, Senior Advocate a/w Mr. Vinay Chauhan, Ms. Kalpana Desai
and Mr. K.C. Jacob, Advocates i/b Corporate Law Chambers India for the
Appellant.
Mr. Shiraz Rustomjee, Senior Advocate a/w Mr. Mihir Mody, Mr. Saurabh
Bachhawat and Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. for the
Respondent.
WITH
Appeal No.155 of 2013
Pinac Stock Brokers Pvt. Ltd.
408, Shyamak Complex,
B/H, Kamdhenu Complex,
Ahmedabad - 390 015. ... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai - 400 051. ... Respondent
Mr. Vinay Chauhan a/w Mr. K.C. Jacob, Advocates i/b Corporate Law
Chambers India for the Appellant.
Mr. Shiraz Rustomjee, Senior Advocate a/w Mr. Mihir Mody, Mr. Saurabh
Bachhawat and Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. for the
Respondent.
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CORAM : Justice J.P. Devadhar, Presiding Officer
Jog Singh, Member
Dr. C.K.G. Nair, Member
Per : Dr. C.K.G. Nair
1.Appellants in these appeals are aggrieved by the orders dated 20th May, 2013 and 30th May, 2013, respectively passed by the Whole Time Member (for short "WTM") of Securities and Exchange Board of India ("SEBI" for short). By the said orders, the appellants were restrained from dealing in the securities market, directly or indirectly, for a period of 5 years for violation of the provisions of Section 12A of the Securities and Exchange Board of India Act, 1992 (for short "SEBI Act") and Regulations 3 & 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (for short "PFUTP Regulations"). Since both the impugned Orders are arising out of a common matter and a common ad-interim ex-parte order dated 28th December, 2011 relating to trading in the scrip of Tijaria Polypipes Limited ("TPL" for short) on the opening day of its IPO, both these matters were heard together and disposed of by this common order.
Facts of the case in Appeal No.157 of 2013:-
2. The appellant is an individual investor trading in the securities market through M/s. Parklight Securities Ltd. (for short "Parklight") who is a sub-
broker of ASE Capital Markets Ltd. ("ACML" for short). The appellant traded in the scrip of TPL on the opening day of its IPO on October 14, 2011 and thereby bought and sold 8 lac shares (6 lacs through BSE and 2 lacs through NSE). On the opening day of trading itself, the price of the scrip fluctuated between Rs.63 and Rs.19, with the highs in the early trading hours and the lows in the later trading hours. Since most of the shares were bought -3- in the early trading hours and the prices fell drastically in later hours when she sold them, substantial loss was incurred by the appellant on her TPL portfolio.
3. SEBI conducted an investigation into the issue of extreme volatility in the price of the TPL scrip on the opening day of its IPO and issued an ad- interim ex-parte order against the company, its directors and the appellants in the present appeals, among others. In this ad-interim order it was held that TPL and its promoters were involved in diverting the IPO proceeds and part of the diverted proceeds was used to fund the losses incurred by some of the investors who aided the exit of some other investors [QIBs and retail] as part of a collective strategy. It was also held that the company failed to disclose information relating to certain ICDs through which funds were diverted for this purpose. Final order in the matter in respect of the company and its Directors was passed by SEBI on 20th June, 2014.
4. This Tribunal heard Appeal No.372 of 2014 filed by TPL and its Directors. In its order dated 29th June, 2016, this Tribunal held that the charges against the appellants in that matter relating to diversion of funds was not fully proved and hence not sustainable but that of non disclosure/limited disclosure was proved. Accordingly, the period of debarment of the Company and its Directors from the securities market was reduced from 7 years to 5 years. However, the question of trading in violation of PFUTP Regulations on the opening day of the IPO was not examined while disposing of that appeal which is the crux of the matter being considered in the present two appeals before us.
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5. In the impugned order dated 20th May 2013, the following charges were held proved against the appellant;-
(a) the losses incurred by the appellant in her TPL portfolio were partly funded by TPL;
(b) the appellant incurred heavy losses on the opening day of trading to provide exit to certain retail investors; and
(c) the appellant entered into structured/reversed/synchronized trading.
6. Shri P.N. Modi, Learned Senior Counsel for the appellant argued in detail that following the Order of this Tribunal in the matter of TPL (Order dated 29 June, 2016 in Appeal No.372 of 2014), charges against the appellant fall through because in the said order this Tribunal held that there was no evidence of diversion of IPO proceeds and hence funding to provide for the losses incurred by the appellant, as alleged, does not have merit. There is no layered transaction and no money to provide for exit option. The appellant was doing her normal business of trading in the IPO of TPL, like in several other previous instances. In some of these cases losses were incurred while in some others profits were made. Trading in some of the IPOs was in large quantities (in lacs) while in others it was in thousands.
7. Following her trading experience in the past, it was further argued, that the appellant through multiple orders placed in BSE in the early trading hours between 09:59 and 11:25 at prices ranging from Rs.61.60 and Rs.63.00 bought 6 lac shares of TPL. Similarly at 11:25:03 through 4 orders she bought 2 lac shares @ Rs.61.70 per share through NSE. All these trading were carried out through Parklight - the sub-broker through whom the appellant regularly -5- places her orders. Thereafter the appellant had to go to hospital for urgent medical check-up which was critical given her medical/health condition.
8. On learning at about 2:30 PM that the prices of TPL scrip had crashed, the appellant being a day trader and hence had to settle the account on the same day, had started selling from 14:39:08 onwards. However, being unaware of the likely trend in the prices, initially she sold 2 lac shares in NSE at Rs.25.75 per share incurring a loss of Rs.0.72 Crore assuming that prices could pick up towards the end of the trading day. However, since the declining price trend was not reversed, portfolio in BSE was sold through multiple orders placed between 15:03:47 and 15:09:05 at prices ranging between Rs.19 and Rs.19.75 thereby incurring a total loss of Rs.2.54 Crore. If the appellant was aware that the prices were artificially hiked in the early trading hours, she could have sold the entire quantity of 8 lac shares @ Rs.25.75. Out of a total volume of trading of 10.74 crore in the scrip of the IPO on day one, the appellant had a total trade of only 16 lac shares (buy and sell together) which is an insignificant quantity. The appellant suffered a willful loss and was capable of taking that risk as there were some funds available with her and she could borrow additional funds from Parklight. There was regular fund transfer between Parklight and the appellant, and it was part of their normal business dealing. While Parklight gave about Rs.2 Crore for bridging the funding gap in respect of the TPL portfolio, the appellant had borrowed Rs.5.16 Crore from Parklight on various occasions together.
9. It was further argued by the learned Senior Counsel for the appellant that none of the retail investors, QIBs or other traders who were allegedly -6- instrumental in large scale trading on the opening day of the IPO were in any way connected to the appellant. Therefore, the charges in the impugned order that the appellant did not have the risk taking capacity nor the loss was made good by diverted funds from the IPO by the company (TPL) nor it was with the intention of providing exit to the retail investors whom the appellant neither knows nor have any dealings with, do not have any merit. It was further argued that there was no structured trade nor reversal or synchronized trading done by the appellant, as alleged. The allegation that substantial portion of her trading got matched with another trader namely, Jivraj Bachubhai Zala ("Zala" in short), therefore the appellant has connection with M/s. Grishma Securities Private Limited (for short "Grishma"), the broker of Zala, does not have any merit. It is a fact that the total volume of trading done by Zala was to the tune of Rs.1.485 crore out of which less than 7 lac shares of the appellant's trading got matched (6999749 buy orders and 5.5 lac sell orders). It is only natural that when one trader had a substantial quantity of the volume of trading in his books, others will automatically become counterparty to their trades even in an anonymous trading system.
10. It was further argued by the learned Senior Counsel for the appellant that the appellant's connection with Grishma was severed in 2007 itself as evidenced by Grishma's communication to BSE and further evidenced by the disconnection of the terminals provided to the appellant by the BSE. The appellant had no knowledge about whether ACML, the broker of Parklight, had any link with Grishma as the appellant is not concerned with this issue as she has always traded through her sub-broker, Parklight. A question was also raised by the learned Senior Counsel for the appellant as to why his client should incur a loss of Rs.3.26 crore to provide exit to a few unknown -7- retail investors for 85,000 shares, as alleged, which would have cost only about Rs.54 lacs (at the exit price of Rs.63 per share). So it was squarely the appellant's own decision to trade in the shares of TPL on the opening day of its IPO at a price she thought was fair and the loss was made good by partly using own funds and by borrowing the remaining funds from Parklight with whom she had regular financial dealings. The funds borrowed from Parklight were also refunded during the course of one year plus as is evidenced by the statement of bank transactions given in the appeal memo.
11. The learned Senior Counsel for the appellant stated that the restraining of Parklight and others vide ad-interim ex-parte order dated 28th December, 2011 had been revoked in respect of Parklight vide Order of SEBI dated 2nd November, 2012. Accordingly, the weight of the charges made by the ad- interim ex-parte order against Parklight and thereby on the appellant loses its significance. Similarly adjudication process against the appellant has been initiated vide notice dated 28th January, 2016. The latter adjudication notice has been issued more than 4 years after the issue of the ad-interim ex-parte order dated 28th December, 2011 and 2 years and 8 months after the final Order (impugned order dated 20th May, 2013). Such delayed process when the restraint order has been in force for more than 4 years is against basic canons of justice.
12. Learned Senior Counsel for the appellant relied on this Tribunal's orders dated 17th August 2010 in respect of Appeal No.150 of 2016 in the matter of Mr. Prashant Patel vs. SEBI, which held that certain trades in the nature of negotiated/synchronized trades were to be explained by the client but SEBI did not question the client and also held that 7 out of 54 trades were -8- reversed could have been just a coincidence. Accordingly in the present case, SEBI should have questioned the broker of the appellant, Parklight, who executed the trades.
13. Mr. Shiraz Rustomjee, learned Senior Counsel for SEBI in his arguments stated the following:-
a. The pattern of trading, trade timing, reversal of trade and connection between the parties and other circumstantial evidence have to be seen together in understanding the full picture arising from the situation. It is a fact that many of the trades matched fully with a gap of a few seconds and in some instances even with a gap of just one second. Accidental matching of trade with a particular counterparty and that too repeatedly does not happen especially when the volumes involved are large. In order to happen this, there has to be some prior meeting of minds.
b. Lopa Bhavanagari - the appellant, continued to be the contact person for Grishma as evidenced from the latter's website. Though 2 VSAT terminals were terminated in 2007, the letter from Grishma to BSE produced on record refers to "authorized person" rather than the "contact person". So the contention that there is no link between Grishma and the appellant or the link has been fully severed in 2007 is not proved. A "contact person" is relevant both for VSAT based as well as for internet based trading. Only VSAT termination is not a ground to prove that there is no connection between the appellant and Grishma and the letter given by Grishma and produced as evidence -9- seems to be an afterthought. Furthermore, balance sheet of the appellant refers to an entry with respect to Pinac Stock Brokers Pvt. Ltd. which shows that they are connected irrespective of whether the argument of SEBI that there was fund flow from Pinac to Parklight is sustainable or not. Similarly the extent of financial dealings between Parklight and the appellant suffer from grey areas as the appellant had made varying statements with respect to her borrowings from Parklight. For instance in the original appeal memo it was indicated that Rs.1.78 crore were borrowed while subsequently in a rejoinder the extent of borrowing was indicated as Rs.5.16 crore. Irrespective of these discrepancies, the very fact that the appellant could borrow such large amount of money from a sub-broker itself is strange enough though he agreed with the intervention of the learned Senior Counsel for the appellant that there is no ban on such borrowing between broker/sub-broker and client for the purpose of transaction in securities. There is no conclusive evidence as to the returning of funds borrowed from Parklight though a copy of purported bank statement shows certain fund transfers between the parties though this charge is not pressed. c. It was further argued that though it is contended by the appellant that trading in large quantities in IPOs on the opening day is a normal business of the appellant, the extraordinary loss incurred in the TPL case stands out. There were separate Orders by SEBI against Zala and Grishma on the same matter restraining them from the securities markets. While Zala did not -10- appeal against the order of 7 year ban, Grishma's appeal against the SEBI Oder restraining them from the securities market for five years was rejected by this Tribunal by its Order dated 28 October, 2013 and their review application was also rejected by this Tribunal on 23 April, 2014.
d) This Tribunal's order dated 17th August 2010 in respect of Appeal No.150 of 2016 in the matter of Mr. Prashant Patel vs. SEBI is distinguishable on facts as that deals mainly with negotiated deals and was a situation of a few reversed trades matching out of many over several trading days while the present matter is substantive matching of trading on one day.
While it is a fact that Parklight has been let off under Section 11 proceedings under the Intermediary Regulations are under progress.
14. The leaned Counsel for SEBI therefore argued that in the totality of the circumstances, i.e. high volume of trading by a few entities, the trade timing, high incidence of matching, circumstantial evidences regarding their connection, the inexplicability of the extent of financial dealings between a sub-broker and its client, all indicate that there was considerable meeting of minds between these entities and the charge that the appellant is part of a larger scheme of things and thereby violated the provisions of the PFUTP Regulations as stated in the impugned order are fully sustainable.
15. Learned Senior Counsel for SEBI relied on the decision of this Tribunal in the matter of V.G. Capital Market Pvt. Ltd. vs. SEBI (Appeal No.135 of 2009 dated 1/12/2009) regarding reversal of trade. In this Order this Tribunal held -11- that reversal of trades was not possible unless they were manipulated and "such trades are possible when buy and sell orders are put into the system at the same point of time for the same or almost similar quantity at almost the same price". Further, he relied heavily on the decision of the Hon'ble Apex Court in the case of SEBI vs. Kishore R. Ajmera, (2016) 6 Supreme Court Cases 368, which examined in detail the degree of proof required for proving fraudulent/manipulative practice with prior meeting of minds. In order to safeguard the objectives of SEBI Act and Regulations framed thereunder to protect the interest of the market in tune with parallel developments in the economy, it is necessary to take the facts and circumstances of a matter in totality to prove manipulative/fraudulent behavior, when direct evidence on meeting of minds is not forthcoming.
APPEAL NO.155 OF 2013:-
16. The appellant in this case is a company and is a corporate investor regularly trading in the F&O and capital market segments through M/s. Monarch Project & Fin Market Ltd. and Parklight. Both the Learned Senior Counsel for the appellant as well as for the Respondent agree that the basic argument in this appeal is the same as that of Appeal No.157 of 2013 (Lopa Bhavanagri) except that volume of trading and the losses incurred etc. are different. The volume of trading by the appellant in this appeal was 18 lac and the losses incurred Rs.6.12 crore. Vide the impugned Order dated 30th May, 2013 this appellant was restrained for a period of 5 years, same as in the case of Lopa Bhavanagari. Accordingly, the underlying facts of both the appeals are same and can be disposed of together.
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17. We find merit in the argument made by the learned Senior Counsel for the appellants on the contention that diversion of IPO funds and thereby part funding of the losses made by the appellant cannot be sustained following the order of this Tribunal in case of Tijaria Polypipes Ltd. (Appeal No.372 of 2014 decided on 29/6/2016). However, we do not agree with the arguments that the appellant's trading in the TPL scrip on the opening day of IPO was just business as usual. We notice from the data of IPO trading in 2011 submitted by the appellant that there was only one instance out of 13 instances where the volume of trading was more than her TPL Portfolio. In the remaining 11 cases trading ranges between 3092 shares to 263521 shares. While the loss incurred on the TPL portfolio was Rs. 3.26 crore, in all other cases the profit/loss was in the range of Rs.(-) 3534 and 63.6 lac. Therefore, the TPL portfolio stands out in terms of its value and loss incurred. It defies comprehension that the appellant did not care about the price movements of the scrip for about 3 hours despite the fact that the total value of the buy order of 8 lac shares placed by the appellant between 9:59 and 11:25 hours was to the tune of Rs. 5 Crore and being a day trader she had to square it up the same day. Conflicting statements by the appellant regarding the amount she borrowed from Parklight, ranging from Rs.1.78 crore to Rs.5.16 crore raise doubts about the sanctity of the statements made by the appellant in Appeal No.157 of 2013.
18. It is a fact that several entities were involved in the transactions in question and SEBI has passed orders against most of them. As explained in para 13(c) above, it is also on record that some of them did not even appeal against their long term restraining from the securities market and some of the appeals were dismissed by this Tribunal. In the facts of present case, in view -13- of trading pattern and their timing, matching of trades between specified counter-parties within seconds, the inference drawn by the Whole Time Member of SEBI that the appellants were connected with Grishma cannot be faulted. Argument of the appellant in Appeal No.157 of 2013 that she had severed her link in the year 2007 is not convincing, because, in the year 2007, the connection was severed only in relation to 2 VSAT terminals and there is nothing on record to suggest that her connection with Grishma in relation to internet based trading were severed. Therefore, the inference drawn by the Whole Time Member on the basis of the Grishma's website that appellant in Appeal No.157 of 2013 continued to be the contact person for Grishma, cannot be faulted. In case of appellant in Appeal No.155 of 2013, it is admitted that apart from the quantum of trades, the facts are similar to the case of the appellant in Appeal No.157 of 2013. In these circumstances, the overwhelming circumstantial factors relating to the volume and pattern of trade, trade timing etc. are sufficient to prove the charge that the appellant engaged in reversal of trade and enabled the exit of some of the investors. As concluded by the Hon'ble Apex Court in the matter of SEBI vs. Kishore R. Ajmera, it is difficult to find conclusive proof in such matters. Here it is relevant to quote the Apex Court Judgment in case of SEBI vs. Ajmera:
"It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion there from. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.......... -14- While the screen-based trading system keeps the identity of the parties anonymous it will be too naïve to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. Direct proof of such meeting of minds elsewhere would rarely be forthcoming. The test is one of preponderance of probabilities so far as adjudication of civil liability arising out of violation of the Act or the provisions of the Regulations framed thereunder is concerned..... In the present case, it is clear from all these surrounding facts and circumstances that there has been transgression by the Appellant beyond the permissible dividing line between negligence and deliberate intention."
19. However, given the fact that charges of diversion and consequent flow of IPO funds to the appellants is not sustainable as ordered by this Tribunal in TPL order (Appeal No.372 of 2014 decided on 29/6/2016), the period of restraint imposed on the appellants need to be modified. In the context that diversion of IPO funds is not proved, this Tribunal asked the learned Senior Counsel for SEBI as to what they propose to do with the show-cause notice dated 28 January, 2016 issued to the appellants, after a gap of about 3 years from the impugned Order. The learned Senior Counsel for SEBI, on instruction, stated that the said show-cause notices issued to the two appellants herein will not be pursued.
20. In the facts of these two cases, since the appellants have already undergone debarment from the securities market for about 4 years and 9 months, in our opinion, the debarment already undergone would meet the ends of justice. In this view of the matter, we modify the impugned order and restrict the period of debarment for the period already undergone by the appellants. As a result, the appellants would be entitled to access the securities market with immediate effect.
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21. Both the appeals are disposed of in the above terms with no order as to costs.
Sd/-
Justice J.P. Devadhar Presiding Officer Sd/-
Jog Singh Member Sd/-
Dr. C.K.G. Nair Member 19/09/2016 Prepared & compared by-ddg