IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
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Date of Hearing
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20/04/2005
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Date of Decision
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03/05/2005
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Appeal No: 134, 134A, 134B & 134C of 2004
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Appellant s– Represented by:
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1. Havemore Financial Services (I) Ltd.
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Mr. Gaurav Joshi along with Mr. Yogesh Adhia, Advocates
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2. Kalpesh Chawalla
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3. Hemang Jangla
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4. Hemanshu Chawalla
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Mr. Kumar Desai along with Ms. Deepa Gupta, Advocates
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CORAM
Justice Kumar Rajaratnam, Presiding Officer
1. Appeals taken up for final disposal with the consent of both parties.
2. The appeals are directed against the common order dated 27th April, 2004 made by respondent (SEBI) debarring the appellants from buying and selling or dealing in securities in any manner for a period of two years. The appellants have, inter alia, prayed for quashing the impugned order. Since all the appeals are against one and same order, with the consent of parties, it was decided to hear the appeals together and make a common order.
3. The first appellant is an investment company. The second and third appellants are Directors of the first appellant company. The main business of the appellant is of investment.
4. The appellant has submitted that Malvica Engineering Limited had forfeited certain shares and after the forfeiture of such shares the said company advertised for the re-issue of such shares. In pursuance to the said advertisement on recommendation of the broker Mr. Pankaj Desai the appellants applied for allotment of certain shares to the Company MEL in or around December, 1999. The appellants were allotted 3,50,000/- shares as under:
First Appellant: 1,50,000
Second Appellant: 1,00,000
Third Appellant: 1,00,000
5. The appellants sold certain shares as and when opportunities arose in the ordinary course of their business out of the total 3,50,000 shares allotted by the company to the appellants. The first appellant sold only 28,000 shares during the relevant period and sold the balance 3,22,000 shares in and about April, 2003 at an average price of Rs. 2/- per share.
6. The appellants submitted that the shares were sold after a period of 10 months and more than 3 years respectively from the date of allotment. The second and third appellant did not sell any shares during the relevant period. The fourth appellant did not apply or held any shares of MEL. The appellant thus submitted that as of today they have suffered a loss of about Rs. 22.97 lakhs.
7. As stated above in March, 1999 the company forfeited 37,63,500 shares held by the public on account of non payment of call money. The company re-issued 35,14,100 shares out of the 37,63,500 forfeited shares in December, 1999 to 46 allottees. At present the company’s capital is Rs. 5,41,21,500/-. The above shares are listed at Vadodara Stock Exchange, Ahmedabad Stock Exchange and Mumbai Stock Exchange.
8. After forfeiture of shares as stated above the company’s public holding was reduced to 3.29% of the issue subscribed and paid up capital of the company (excluding NRI shareholders) and in case NRI shareholders are treated as public, the public holding become 15.15% of the capital. As per the distribution schedule submitted by the company after the forfeiture of the shares there were nearly 91 public shareholders. According to the respondent the 46 allottees to whom the shares are re-issued are related to each other.
9. During the period August 7, 2000 to August 31, 2000 the volume of the scrip increased to 1,19,500 shares on August 7, 2000 and 1,59,900 shares on August 8, 2000 from 100 shares traded on August 4, 2000. During the period the price of the scrip moved from Rs. 9.40 to Rs. 5/-.
10. The scrip touched a low of Rs. 5/- on August 31, 2000 and a high of Rs. 11.10 on August, 14, 2000. During the period December 20, 1999 to January 12, 2000 the volume increased from 100 shares in December 1999 to 1,21,100 shares on January 11, 2000.
11. The Company extended loans to following entities for subscribing to its forfeited and reissued shares.
i. K.P. Securities
ii. K.P. Investment
iii. Mayekar Investment Pvt. Ltd.
iv. Shagufta Investments Pvt. Ltd.
v. Dayanand Finance
12. M/s. Mayekar Investment Pvt. Ltd., M/s. Havemore Financial Services (I) Limited and M/s. and M/s. Harvic Management Services (I) Ltd. traded by matching of trades through following BSE brokers in the scrip during the period August 7, 2000 to August, 31, 2000:
(i) M/s. Ramanlal D. Shah
(ii) M/s. Bipin R. Vora
(iii) M/s. B.M. Gandhi Securities Pvt. Ltd.
(iv) M/s. Kishore R. Ajmera
(v) M/s. S.S. Kantilal Ishwarlal Securities Pvt. Ltd.
13. M/s. Havemore Financial Services (I) Ltd. and M/s. Harvic Management Services (I) Ltd., have also indulged in deals matching with each other. The transactions executed were not genuine transactions as the two Directors of the two companies are the same and there is no change in the beneficial ownership of the shares.
14. Mr. Kalpesh Chawla one of the Director of Havemore Financial Services (I) Ltd., has stated as submitted to the respondent that Mr. Pankaj A Desai, Director of M/s. Mayekar Investments Pvt. Ltd., introduced him to the broker Ramanlal D Shah. M/s. Havemore Financial Services (I) Ltd., and M/s. Harvic Management Services (I) Ltd., are having 2 of their 3 Directors common and hence both are associated companies. Hence M/s. Havemore Financial Services (I) Ltd and Harvic Management Services (I) Ltd., appeared to be counter parties.
15. The respondent has noted that Mr. Hemang Jangla another Director of Havemore Financial Services (I) Ltd., admitted that it was a mistake. The respondent has thus found that the above entities indulged in alleged transactions thereby created artificial volumes. In August, 2000 the companies scrip was thinnely traded. The above entities created huge artificial volumes by entering into alleged transactions among themselves which were not genuine trade transactions.
16. The respondent has found that the aforesaid entities dealt in the company’s scrip in violation of Regulation 4(b), 4(c) and 4(d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. Regulation 4(b), (c) and (d) provides that:
“No person shall—
“(b) indulge in any act, which is calculated to create a false or misleading appearance of trading in the securities market;
“(c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions;
“(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the market price of securities.”
17. The SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 were repealed by Regulation 13(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. However, Regulation 13(2) provides that “notwithstanding repeal of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 any violation of Regulations 3, 4, 5 and 6 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 shall be investigated and proceeded against in accordance with the procedure laid down in these regulations”
18. The corresponding regulations in SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 are provided in the clauses (a), (b), (e) and (g) of regulations 4(2) which stipulate as under:
4(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:-
(a) indulging in any act which creates false or misleading appearance of trading in the securities market;
(b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss;
(c) any act or omission amounting to manipulation of the price of a security;
(d) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security.
19. The appellant No.4 is a non-executive Director and had no direct relationship with the company for which an affidavit has been submitted by appellant No.2 which reads as under:
“1. I say that Appellant No.4 (Hemanshu Chawalla) was appointed as one of the directors of the 1st appellant company from the inception of the 1st Appellant company.
“2. I say that Appellant No.4 is employed with B Arunkumar International Limited, Panchratna, Mumbai as a “Diamond Assorter” for last more more than 5 years and he is required to visit Belgium frequently during the course of employment. At present also, he is at Antwerp, Belgium during the course of his employment.
“3. I say that Appellant No.4 was a non-executive director of the 1st Appellant company and therefore he did not have any participation in the management or affairs of the 1st Appellant company. Appellant No.4 has not drawn any salary from the 1st Appellant company.
“4. I also say that Appellant No.4 had not purchased any shares in Malwika Engineering Ltd. the shares of which are the subject matter of the present Appeal before this Honourable Tribunal.
“5. I say that since Appellant No.4 was a nonexecutive director, he had not taken any decision on behalf of the 1st appellant company either to purchase any shares in Malwika Engineering Ltd or sale any shares so purchased on behalf of the 1st Appellant company.
“6. I respectfully submit that the respondent ought not to have passed any order against Appellant No.4 merely because he was one of the directors of the first appellant company. Neither the Show Cause Notice nor the Impugned Order disclose any case against Appellant No.4.
“7. I therefore submit that the impugned order passed by the Respondent against Appellant No.4 be set-aside with costs.”
20. The respondent submitted that even a non-executive director may be made vicariously liable.
21. The Tribunal in appeal No.133/2003, Rahul H. Shah & Another Vs. SEBI has held that a non-executive Director who does not deal with the day to day affairs of the company cannot be fastened with the liability unless it can be shown that he was involved in the decision making in the company. Paragraph 22 of the said order reads as under:
“22. Therefore, having held that the appellants have not had anything to do with the day-to-day affairs of the company, as admitted by SEBI in its impugned order, we do not think that the appellants can be fastened with any liability.”
The Tribunal also held a similar view in appeal No. 14/2003 Radhavallab Dhoot Vs. SEBI.
22. I have also perused all the documents submitted by both the appellants and the respondent. In case of appellant No.4 I set aside the impugned order in view of the fact that he is a non-executive director and not concerned with the day-to-day affairs of the company. An affidavit is also been filed stating that the 4th appellant is a non-executive director. However taking into account the alleged misconduct was as far back in time as 5 years ago and in the facts and circumstances of the case I reduce the period of ban from two years to one year. I accordingly confirm the misconduct but however reduce the period of ban from 2 years to 1 year. The impugned order is modified accordingly.
23. No order as to costs.
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(Justice Kumar Rajaratnam)
Presiding Officer
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Place: Mumbai
Date: 03/05/2005
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