BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
Coram: Dr. T. C. Nair, Whole Time Member
Name of the noticee : Shri Vishal J Shah, Director, M/s. Western Projects
Limited
Date of Hearing : 17-07-2006
Appearance of parties
For the noticee : Shri Haresh Dave, Counsel for noticee
For SEBI : Shri P K Bindlish, General Manager
Shri Pradip Bhowmick, Manager
ORDER
UNDER SECTION 11(4)(b) AND 11B OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 AGAINST SHRI VISHAL J SHAH, DIRECTOR OF WESTERN PROJECTS LIMITED IN THE MATTER OF M/s. WESTERN PROJECTS LIMITED
WTM/TCN/ID3/99/02/2007
1.0 BACKGROUND
1.1 This order is directed on Shri Vishal J Shah (herein after referred to as the ‘noticee’), a director of M/s. Western Projects Limited (herein after referred to as ‘WPL’). The allegation against the noticee was that, he also being a proprietor of M/s. Vishal J Shah [member of the Calcutta Stock Exchange (herein after referred to as ‘CSE’)] had executed many cross deals in the scrip of WPL and that in those transactions both the buying and the selling clients belonged to the member. The trades were alleged to be in the nature of matched deals in terms of quantity, time and price and also included proprietary trades between May 07, 2001 and September 17, 2001. It was further alleged that these artificial trades were executed to enable one Mr. Ashwin Mehta who proposed to acquire 17.5% of the shares of WPL at Rs. 3/- per share. He had filed an application with the Securities and Exchange Board of India (herein after referred to as ’SEBI’) on 07-12-2001 for exemption from making a public announcement under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (herein after referred to as ‘SAST Regulations’). The application was however rejected by SEBI. It was alleged that the above said artificial trades were undertaken by the noticee in the capacity as a member and his position as a director in the same company helped him in that endeavour of making the said scrip to be classified as ‘frequently traded shares’ as prescribed by the SAST Regulations so as to reduce the financial liability of the acquirer to enable him to acquire the shares at Rs. 3/- per share instead of the book value of the share which was at Rs. 58/-. In view of the said allegations, an investigation into the matter was initiated and a detailed report was submitted to the Board.
2.0 SHOW CAUSE NOTICE AND ITS REPLY
2.1 In order to enquire into the allegations leveled against the noticee, a Show Cause Notice dated 06-11-2003 was issued to the noticee under Section 11(4)(b) and Section 11B of the SEBI Act, 1992 read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. The aforesaid show cause notice informed the noticee of the charge against him. The show cause notice alleged that that the noticee as a director of WPL along with Shri Ashwin Mehta, the acquirer conspired and acted in concert to mislead SEBI and misrepresent that the shares of WPL are frequently traded. The noticee along with Shri Ashwin Mehta also tried to take advantage of the traded price vis a vis the book value price which was much higher than the traded price. It was also alleged that the noticee had aided and abetted the acquirer to circumvent the provisions of the SAST Regulations by showing artificial trades through his broking outfit and creating artificial market for the scrip, thereby violating the provisions of Regulation 4(b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. The said show cause notice required the noticee to show cause as to why suitable directions including issuing such orders debarring him from accessing the securities market and prohibiting him from buying and selling in securities for a specified period should not be issued under Section 11(4) (b) and 11B of the SEBI Act, 1992 read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. The noticee was further required to submit his reply together with supporting documents within 21 days from the date of receipt of the notice.
2.2 As no reply to the show cause notice was received from the noticee, a notice dated 06-12-2003 for personal appearance of the noticee before the erstwhile Member, SEBI was issued. The noticee sent a facsimile message of his letter dated 16-12-2003, received on 17-12-2003 requesting extension of time for making his submission with respect to the show cause notice. His request was conceeded and a letter dated 19-12-2003 was issued advising him to submit his reply by 02-01-2004. The noticee made his submissions vide letter dated 29-12-2003. I also note that the noticee vide his letter dated 29-12-2003 requested for inspecting the documents relied on in the case and that SEBI by letter dated 08-01-2004 had agreed to the request of the noticee and the noticee was intimated that he could inspect the documents on 14-01-2004. On the said date the noticee was represented by their agents M/s. Deepak Shah and Associates, Chartered Accountants who had inspected the documents. A notice dated 21-01-2004, for hearing was thereafter issued to the noticee wherein he was advised to attend a hearing before the erstwhile Whole Time Member, SEBI on 09-02-2004. This was subsequently postponed to 12-02-2004 on the request of the noticee. As the Whole Time Member in charge of the proceedings had resigned thereafter it was not possible to continue with the enquiry proceedings. Subsequently when the case was referred to me, a notice dated 16-05-2006 was sent to the noticee requiring him to appear before me for a hearing which was scheduled for 15-06-2006. On request from the noticee vide letter dated 13-06-2006, the date of hearing was re-scheduled for 17-06-2006. On the said date, the noticee represented by Shri Haresh R Dave appeared before me and made his submissions.
3.0 ISSUES FOR CONSIDERATION
3.1 I have perused the show cause notice, reply and the submissions of the noticee. The issues that arise for consideration in the present case are:
i) Whether the noticee had aided and abetted Shri Ashwin S Mehta by executing fictitious trades so as to help the said Shri Ashwin S Mehta in circumventing the provisions of the SAST Regulations?
ii) Whether the noticee had violated the relevant provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995?
3.2 I note that the charge against the noticee was that, he also being a member of CSE, had executed many cross and synchronized deals in the scrip of WPL and that in those transactions both the buying and the selling clients belonged to the member. I also note that the noticee had entered into proprietary trades. The trades were alleged to be in the nature of matched deals in terms of quantity, time and price and also included proprietary trades between May 07, 2001 and September 17, 2001. It was further alleged that these artificial trades were executed to enable Mr. Ashwin Mehta who on 07-12-2001 proposed to acquire 17.5% of the shares of WPL at Rs. 3/- per share and filed an application with SEBI for exemption from making a public announcement under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (herein after referred to as ‘SAST Regulations’) which had been rejected. It was alleged that the above said artificial trades were undertaken by the member, also a Director of WPL with the objective of making the said scrip to be classified as ‘frequently traded shares’ as prescribed by the SAST Regulations so as to reduce the financial liability of the acquirer to enable him to acquire the shares at Rs. 3/- per share instead of the book value of the share which was at Rs. 58/-.
3.3 I note that the scrip of WPL was illiquid in the CSE with no trading volumes for years 2000 and 2002. I note that between May and September 2001 there were only 6 trades totaling to 10,000 shares, which is just above 2% of the shares of WPL to enable it to qualify as “frequently traded” scrip. Thus the allegation against the noticee was that just to give the benefit of the price of the scrip to the said Shri Ashwin Mehta, the noticee in his capacity as a broker had executed the trades for some clients just to bring the scrip into the category of frequently traded scrip.
3.4 The noticee in his reply has submitted that SEBI has leveled allegations against him based on flimsy, frivolous and unsustainable ground. I note that the noticee had encouraged trades of his clients in the capacity as a stock broker. He being a director of WPL would be interested in the trading of the scrip. The fact that there was no trading during 2000 and 2002 and the very limited trading during 2001 would go to prove that he was aiding the said Shri Ashwin Mehta. These trades took place only during the said period would also prove that they were for aiding the proposed acquirer, Shri Ashwin Mehta. This kind of tacit understanding if at all was present would have no evidence and thus needs to be only inferred from the facts, circumstances and the events of the case. But I am of the opinion that when passing any directions against any market player, the entities guilt needs to be established. In the present case there is no material evidence to show any nexus between the noticee and Shri Ashwin S Mehta. Thus the benefit of doubt has to be given to the noticee.
4.0 ORDER
4.1 I, therefore, in exercise of powers conferred upon me under Section 11 and Section 11B of the SEBI Act, 1992, hereby direct that the proceedings against Shri Vishal J Shah, Director of WPL be dropped.
DATE: 23.02.2007 T C NAIR
WHOLE TIME MEMBER
PLACE: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA