IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Appeal No. 155 of 2003

 

Date of Decision 27.11.2006

 

Saurabh H. Bora	……	Appellant
Versus
Securities & Exchange Board of India	……	Respondent

 

Present :  Mr. P.N. Modi, Mr. Raja Bhosle & Mr. Bharat Merchant,      Advocates for the appellant

                  Mr. Kumar Desai, Advocate for the respondent          

 

Coram:

          Justice N.K. Sodhi, Presiding Officer

            C. Bhattacharya, Member

           

Per:  Justice N.K. Sodhi, Presiding Officer (oral)

            The appellant carries on business inter alia in investment in the shares of different companies and claims to be a high net-worth investor.  He traded in the scrip of Snowcem India Ltd. (for short SIL) in his capacity as an investor.   Kosha Investments Ltd. (KIL) is a promoter group company of SIL.  The shares of SIL are listed for trading amongst others on the Bombay Stock Exchange and National Stock Exchange (BSE and NSE respectively).  A substantial spurt in the price of the shares of SIL was noticed during the period from June 1999 to August 1999.  There was increase in the traded volumes as compared to the period prior to June 1999.  The price of the scrip during this period had risen from Rs. 55/- to Rs. 127/-.  The trading in the scrip of SIL was investigated by the Securities and Exchange Board of India (for short the Board) and it transpired that the appellant had traded in the scrip along with KIL.  The investigations revealed that the entities who had traded in the scrip had employed manipulative tactics either to maintain the price of the scrip or to increase the price drastically and also created artificial volumes by continuously funding the same.  On the basis of the investigations the appellant was served with a show cause notice dated 31.7.2002 alleging that he was among the top clients who had traded in the scrip of SIL with the intention to artificially raise the price of the scrip in collusion with other entities and was involved in circular trading which pushed up the volumes to artificial levels at both NSE and BSE.  The show cause notice further stated that the appellant was responsible for (i) artificially raising the price of the said scrip by entering into purchase and sale of securities not intended to effect transfer of beneficial ownership, and (ii) creating false/artificial volumes of the scrip.   On the basis of these allegations the show cause notice stated that the appellant had aided and abetted the management of SIL in the price manipulation of the scrip and therefore violated the provisions of Regulation 4 (a), (b) and (d) of the Securities and Exchange Board of India (Prohibition of Fraudulent & Unfair Trade Practises relating to Securities Market) Regulations, 1995.  The appellant was required to show cause why suitable directions be not issued to him under Section 11B of the Securities and Exchange Board of India Act, 1992 (hereinafter called the Act) read with Regulation 11 and 12 of the aforesaid Regulations.  A detailed reply was filed by the appellant denying all the allegations.  In response to a notice issued by the Board to appear in person, the appellant failed to do so in spite of several adjournments granted for the purpose.  On a consideration of the material collected by the Board and after considering the reply filed by the appellant, it found the allegations established and accordingly by order dated 21.11.2003 the appellant was restrained from buying, selling or dealing in securities in any manner directly or indirectly for a period of 18 months.  It is against this order that the present appeal has been filed under Section 15T of the Act.

   2.            We have heard the learned counsel for the parties and perused the record including the impugned order.  At the outset we are constrained to observe that the whole time member has referred to the facts in a very disjuncted manner and has made observations during the course of recording the order without referring to any specific trades executed by the appellant and that the inferences drawn are wholly unwarranted for reasons that follow.  As already observed the charges levelled against the appellant are that while trading in the scrip of SIL he artificially raised the price of that scrip.  Reference has been made in the impugned order to a chart in paragraph 18 thereof giving the trading details as collected by the Board from the various brokers of NSE and BSE through whom the appellant had traded in the scrip.  We have perused the chart.  It does not mention the dates of the trades executed though it refers to the settlement numbers.  The learned counsel for the parties are agreed that the trades referred to in the chart pertain to the period between June and August 1999.  A mere look at the chart would show that the appellant during this period had purchased in all 67800 shares of SIL whereas it had sold 5,03,700 shares.  It is thus clear that he was a net seller of 4,35,900 shares.  The argument of the learned counsel for the appellant is that being a net seller of the shares during the period in question the appellant could not have artificially pushed the price of the scrip upwards.  We find merit in this contention.  It is not that a seller can never raise the price of a scrip artificially.  He can, provided he connives with some other person/entity for the purpose of trading in that scrip.  That is not the case set up by the Board in the show cause notice.  What is alleged against the appellant is that while trading in the scrip he had artificially raised the price of the share of SIL.  We agree with the learned counsel that the appellant while selling the shares of SIL on his own could not have raised the price upwards as is alleged.  The learned counsel appearing for the respondent however contended that 4 instances of matching trades have been referred to in the chart in paragraph 26 of the impugned order which would show that the appellant in connivance with KIL had executed matching trades as a result whereof the price of the scrip was gradually pushed up.  We do not think that the chart relied upon in paragraph 26 establishes matching trades executed between the appellant and KIL.  The chart does not furnish the details of the trades inasmuch as the time at which the buy and sell orders were placed and the price at which those were placed are not to be found in the chart.  Unless we have those details it is difficult to hold that these were matching trades in a market where shares were traded in large quantities.  Only 4 instances could be pointed out and these could be a matter of coincidence as well.  Be that as it may, since the details of the trades have not been furnished we cannot rely upon this chart to hold that the appellant had executed matching trades with KIL.  In this view of the matter, we have no hesitation to hold that the first charge levelled in the show cause notice has not been established and that the finding recorded by the Board is not supported by any material on the record.

   3.            The next charge levelled against the appellant is that he entered into purchase and sale of securities not intended to effect transfer of beneficial ownership.  In other words, the appellant is alleged to have been involved in circular trading in the scrip of SIL which pushed up the volumes to artificial levels.  The Board found that this charge was established.  Reliance in this regard was placed on the bank accounts of the appellant, KIL and SIL maintained with Oman International Bank, Nariman Point branch, which shows the flow of funds from SIL to KIL and from KIL to the appellant, who in turn made payment to the company (SIL) for the purchase of 4,38,600 forfeited shares allotted to him.  On the basis of the entries contained in these bank accounts the Board concluded “that the allotment of forfeited shares was not accompanied by any infusion of funds and the shares had been allotted by means of a fictitious book entry”.  Even if we accept this finding of the Board that funds were transferred by SIL to KIL and from KIL to the appellant who in turn purchased the forfeited shares from the company, it does not lead us to the conclusion that the appellant had entered into purchase and sale of shares which were not intended to effect transfer of beneficial ownership as is alleged in the show cause notice.  What happened to the forfeited shares purchased by the appellant?  Were they traded in the market or did he continue to retain them is not clear from the record.  It is not the case of the Board that these shares were further traded in the market.  It was a direct allotment made by SIL to the appellant and even if it be fictitious and without infusion of funds it does not establish the charge levelled against the appellant.  Unless the shares are further traded in the market the same would not get affected.  Since it is not even alleged that these shares were further traded we do not think that the charge is established at all.  What has been found is that allotment was made without infusion of funds which means SIL had provided funds to the appellant to purchase its shares.  This does not establish the second charge levelled against the appellant. 

   4.            In paragraph 22 of the impugned order the Board has noticed numerous fund transfers which took place between KIL and the appellant and has concluded that the allotment of forfeited shares was merely a book entry.  After recording this finding the Board has jumped to the conclusion that the appellant had entered into purchases and sales without intending to effect transfer of ownership thereby creating a false and artificial market in the scrip.  This conclusion in our view is wholly unwarranted as it does not follow from the finding.  Again, in paragraph 24 of the impugned order the Board has observed that approximately 13,77,000 shares of SIL were sold by KIL to the appellant on different dates between July and October 1999 and on the basis of these transactions, according to the learned counsel for the respondent, the price and volumes in the scrip of SIL was manipulated in the market.  We are unable to accept this contention.  It is common ground between the parties that these transactions were off-market.  This being so, these trades could not have affected the market much less manipulated the same.

   5.            The learned counsel for the respondent however urged that the appellant did not respond to the various summons issued to him during the course of the investigations and did not cooperate in those proceedings and this aspect has also been taken note of by the Board while passing the impugned order.  We do not think so.  A perusal of the impugned order would show that the Board inferred that the appellant acting in concert with KIL and other brokers who were trading in the scrip of SIL was responsible for creating an artificial market and carried out substantial transactions thereby aiding and abetting KIL and SIL in the price manipulation of the scrip.  The Board did not take into account the non-cooperation of the appellant during the course of the investigations though it has been noticed as a fact.  Moreover, if the Board felt that the appellant had not cooperated with the investigating officer, then it should have proceeded against him on that ground.  That is not a charge in the show cause notice.

   6.            No other point has been raised.

   7.             In view of what has been stated above we are clearly of the view that the charges levelled against the appellant in the show cause notice have not been established and, therefore, the impugned order cannot be sustained.    In the result, the appeal is allowed and the impugned order dated 21.11.2003 set aside with no order as to costs.

 

27.11.2006