���������������������������������������������������������������������������������������������������������������������������������� BEFORE THE SECURITIES APPELLATE TRIBUNALMUMBAIAppeal No.�� 40/2004
In the matter of:
Coram: ����������� Justice
Shri Kumar Rajaratnam, Presiding Officer ����������� Dr.
B. Samal, Member ����������� N.L.
Lakhanpal, Member Per:� N.L.
Lakhanpal
1.
This is an appeal against
order dated 26.2.2004 passed by the respondent restraining the appellant from
associating with any corporate body in accessing the securities market and
prohibiting him from buying, selling or dealing in securities, directly or
indirectly for a period of one year.� The
appellant is an individual investor and came to adverse notice of the
respondent Securities & Exchange Board of India (SEBI) in the course of
investigations into the irregular trading of shares of a company named
Cyberspace Ltd.� The charge against the
appellant is that he aided and abetted Cyberspace Ltd. in its attempt at market
manipulation of its scrip, thereby violating the provisions of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities
Market) Regulations, 1995.��� The
relevant Regulation 4� (a), (b), (c)
reads as under:- �No
person shall- (a)
effect, take part in, or
enter into, either directly or indirectly, transactions in securities, with the
intention of artificially raising or depressing the prices of securities and
thereby inducing the sale or purchase of securities by any person; (b)
indulge in any act, which
is calculated to create a false or misleading appearance of trading on 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)
� (e)
��
2.
�A brokerage firm Century Consultants Ltd.
(CCL) was found to have committed some irregularities in the trading of the
shares of Cyberspace Ltd.�� On
investigation, it was found that CCL was, in fact, one of the group companies
of Cyberspace Ltd. and the two entities were related to each other through
directorships and cross holdings.��
Cyberspace Ltd. was holding 55% of the equity shares of CCL which, in
turn, was holding 21% of the total paid up equity capital of Cyberspace
Ltd.� Sarvashri G.N. Johari, A.K. Johari
and A.M. Johari were common directors of Cyberspace Ltd. and CCL.� The Bombay Stock Exchange conducted detailed
investigations and identified a list of 26 entities as related parties acting
in concert with the promoters of Cyberspace Ltd. in the creation of an
artificial market for this scrip.� The
names of the appellant Shri Shashikant G. Badani and his wife Mrs. Manjula Badani
were found included in this list of 26 entities.� Since the two were found to have contributed
significantly to the trading volumes of the scrip during the period October
2000 to March 2001 a notice was issued to the appellant asking him to show
cause why a suitable direction under Section 11 read with Section 11B should
not be issued against him.� In reply, the
appellant contended that he was a regular stock market investor and that during
the year 2000-01 he had traded in the shares of 103 companies including
Cyberspace Ltd., his total turnover in the capital market for the year being
more than Rs. 103 crore.� He had
similarly traded in respect of the shares in his wife�s name to the extent of
more than Rs. 40 crore.� In respect of
the shares of Cyberspace Ltd. during the relevant period, he pleaded that the
aggregate turn over of the scrip was more than Rs. 612 crore out of which his
contribution was only about Rs. 20 crore i.e. only 3.38% of the total market
volume.� According to the appellant, he
traded in the shares of this company merely for profit and not for the purpose
of manipulating the price or the volume of the scrip.� He totally denied any knowledge about the
Joharis or about the CCL and Cyberspace Ltd. being group companies.�
3.
The respondent SEBI�s case
against the appellant is largely based on the unusually large volumes and the peculiar
trading adopted by the appellant.� In the
impugned order, SEBI has listed out various transactions during the period
October 2000 to March 2001.� The appellant
had purchased a total of 13,88,160 shares and sold the same within a time span
of 52 trading days.� All these purchases
had been made through the broking company CCL which was a group company of the
Joharis.� The suspicious part, according
to the impugned order, is that the sales of all these shares had been through
other brokers of BSE and NSE.� These
shares were bought through CCL by availing the services of allegedly their
employee Mr. Ajay Gupta who was admittedly paid 10% of the profits.� The impugned order also states that on
certain dates, the transactions of the appellant and his wife contributed very
significantly to the total turnover of the scrip constituting more than 10% of
the total volume, and sometimes touching as high as 46%.� From these admitted facts, the respondent has
deduced that the appellant actively assisted the Joharis � the directors of
Cyberspace Ltd. and CCL � in creating false and misleading appearance of
trading in the scrip of Cyberspace Ltd.
4.
At the time of hearing, the
learned counsel for the appellant argued that the appellant had been regularly
buying and selling shares on the stock markets for several years in the hope of
making profits through legitimate trading and that during the relevant year
2000-01 itself he had traded in the shares of as many as 103 companies.� Regarding the allegation of large volumes of the
scrip of Cyberspace Ltd. he furnished a list of various companies whose shares
had been bought or sold by the appellant in huge volumes involving lakhs of
shares.� He argued that every transaction
in respect of shares of Cyberspace Ltd., like in case of other shares, was
supported by requisite documentation in the form of bills and contract notes
and fully backed by payments and/or deliveries.�
It was therefore his argument that there was no reason to suspect any
involvement of the appellant with the Joharis, who were totally unknown to him
as per his statement recorded during investigations.� Regarding Ajay Gupta, he argued that during
investigation the appellant had totally denied any knowledge about Ajay Gupta
being an employee of CCL and that the appellant knew him only as a trader in
the cloth market.�� The appellant�s so-called
admission during investigation, according to the learned counsel, was only to
the effect that Shri Ajay Gupta used to charge 10% for the services rendered
like bringing the bills, contract notes in the evening to the appellant�s
office, collecting cheques for payment and following up in regard to the
delivery of shares.� The appellant has
been trading in the capital market as an investor for the last 2 decades and has
been making profits and losses in specific transactions in various scrips just
as in the case of his transactions in the Cyberspace Ltd. shares.� The learned counsel therefore argued that
such bonafide transaction in large volumes in fact helped the development of
the market rather than affecting its integrity.�
The learned counsel further argued that the respondent had charged the
appellant with violations of SEBI (Prohibition of Fraudulent and Unfair trade
practices relating to securities market) Regulation, 1995 which practically
amounted to charging him with fraud which is a criminal offence.��� This charge had to be established beyond
reasonable doubt and this burden had not been discharged by the respondent in
the present case.� In this regard, the
learned counsel relied upon the following decisions of the Hon�ble Supreme
Court of India in
i) L.D. Jai Singhani vs. Naraindas M. Punjabi AIR 1976 SC 373
ii)
iii)
iv) Nandkishor Prasad vs. State of
v) Ambalal vs.
vi) Mohansingh vs. Bhanwarlal AIR 1964 SV 1366
vii) Razikram vs. J.S. Chowhan AIR 1975 SC 667 viii)
Svenska Handels Banken vs.
Indian Charge Chrome AIR 1994 SV 626
5.
We have carefully gone into
all the cases cited by the learned counsel for the appellant.
6.
In L.D. Jai Singhani vs.
Naraiandas M. Punjabi AIR 1976 SC 373 , the Bar Council of India had acted on a
complaint against an advocate and the Bar Council of India had disbarred L.D.
Jai Singhani.� The Hon�ble Supreme Court
had held that it was doubtful whether even the complaint had come before the
Bar Council with a truthful version and that the benefit of doubt in a case
like this should have gone to the appellant Jai Singhani.� In Mohansingh vs. Bhanwarlal AIR 1964 SC 1366
Hon�ble Supreme Court had held that �the onus of establishing corrupt practice
is undoubtedly on the person who sets it up and the onus is not discharged on
proof of mere preponderance of probability as in the trial of a civil
suit:� the corrupt practice must be
established beyond reasonable doubt by evidence which is clear and
unambiguous��� The same principle has
been endorsed in Razikram vs. J.S. Chowhan AIR 1975 SC 667 which is also an election
petition as in the case of Mohansingh vs. Bhanwarlal.� The learned counsel wanted to argue on the
basis of these cases that even in civil proceedings when a charge like fraud or
corruption is levelled, it must be proved beyond reasonable doubt and not on
the basis of preponderance of probability.��
We find however that in all these 3 cases the dispute was between two parties
and the Hon�ble Supreme Court has only enunciated the well-known principle of
juris prudence that a charge must be proved beyond reasonable doubt by the
party setting up the charge.� In the
present case, the charge has been levelled by the official regulator of the
Union of India in due discharge of its duties.�
Swenska Handels Banken vs. Indian Charge Chrome AIR 1994 SC 626 was
similarly a case between two parties and the Hon�ble Supreme Court had merely
observed that �In law relating to bank guarantees, the party seeking injunction
from encashing of bank guarantee by the supplier has to show a prima facie case of established fraud
and an irretrievable injury i.e. where the plaintiff has no adequate remedy at
law, and the allegations of irreparable harm are not speculative, but genuine
and immediate, and plaintiff will suffer irreparable harm if the requested
relief is not granted.�� It is clear that
this case has no relevance to the issues in contention in the present case
because the Hon�ble Supreme Court was adjudicating on issues arising out of the
Contract Act (1872), Sale of Goods Act (1930) and the legal position relating
to bank guarantees.� In Ambalal vs.
UOI� AIR 1961 SC 264, the Hon�ble Supreme
Court held that even in proceedings under the Sea Customs Act and Land Customs
Act, the fundamental principles of criminal juris prudence and of natural
justice must apply and that the burden of proving was therefore on the customs
authorities to bring home the guilt to the person alleged to have committed a
particular offence by adducing satisfactory evidence.� We note that the Hon�ble Supreme Court has
used the term �satisfactory evidence� and not the term proof beyond all
reasonable doubt as was the contention of the learned counsel throughout the
argument.� It also needs to be noted that
in this case the Hon�ble Supreme Court upheld the confiscation of items 6 to 10
merely on the basis of the statement made in the order of the Collector of
Central Excise to the effect that the appellant had accepted that items 6 to 10
were smuggled goods from Pakistan even though it was contended before the
Supreme Court that such acceptance was not recorded by the Collector of Central
Excise in writing.� Both in Union of
India vs. H.C. Goel AIR 1964 SC 364 and Nandkishor Prasad vs. State of Bihar
AIR 1978 SC 1277, it has been held that �the principle that in punishing the
guilty scrupulous care must be taken to see that the innocent are not punished
applies as much to regular criminal trials as to disciplinary enquiries held
under the statutory rules.�� However, on
the standard of proof the Hon�ble Supreme Court observed that �the minimum
requirement of the rules of natural justice is that the Tribunal should arrive
at its conclusion on the basis of some evidence i.e. evidential material
which with some degree� of definiteness
points to the guilt of the delinquent in respect of the charge against
him.� Suspicion cannot be allowed to take
place of proof even in domestic enquiries.��
In fact the decision in Nandkishore rested specifically on the issue
�whether the impugned orders did not raise any evidence whatever but merely on
suspicion, conjuncture and surmise� and �the appeal failed.� The only case cited by the learned counsel
for the appellant that can possibly be considered coming close to his line of
argument is Union of India vs. Chaturbhai N. Patel & Co.� AIR 1976 SC 712 wherein it has been observed
that �fraud like any other charge of a criminal offence whether made in civil
or criminal proceedings must be established beyond reasonable doubt �� However suspicious may be the circumstances,
however strange the coincidences and however grave the doubts, suspicion can
never take the place of proof.�� On a
closer reading of the full context of the judgment, however, we find that these
observations were in a different context altogether.� In this case, Chaturbhai Patel was not
charged with or tried for fraud.� In fact
it was his firm which had filed a suit for damages against the Union of India
on the allegation that due to the negligence of Indian Railways the goods
dispatched by them did not reach the consignee at Gaya but identical goods
(Tobacco) of inferior type reached there causing them losses.�� The UOI contested the suit mainly on the
ground that due to fraud and collusion between Chaturbahi at Banaras and his
father�s firm in Gujarat the consignment at Banaras was interchanged by
manipulation so that inferior goods were sent to Gaya and the superior goods
were sent to Gujarat which were sold by his firm at Gujarat at a huge
profit.� It was under these circumstances
that the Hon�ble High Court as well as the Supreme Court came to the conclusion
that the defence plea of a fraud was not backed by conclusive or reliable
evidence.
7.
The learned counsel further
argued that the direction prohibiting the appellant from trading in securities
was neither regulatory nor remedial and was in fact penal in nature.� It was his argument that section 11 or
Section 11B of the SEBI Act, 1992 as it stood at the relevant time, did not
empower the respondent to issue such a direction.� The learned counsel submitted that the power
to impose penalty had to be expressly conferred and in support of his argument
he cited, 1. Khemka
& Co. vs. State of 2. M/s.
Deluxe Land Organizers vs. State of 3. D.N.
Ghosh vs. Additional Session Judge Bardwan AIR 1958
8.
We have gone through these
cases and we do not find any similarity with the matter before us.� For instance, Khemka case related to
collection of Central Sales Tax by the State Sales Tax machinery and it was
held that in the case of default the penalty available under the State Act
could not be imposed on the defaulter in the absence of any specific provision
for the imposition of penalty for such default in the Central Act.� In the Deluxe Land Organisers case, the
Central Government had issued a circular asking the State governments to grant
exemptions from certain provisions of 1. Sterlite
Industries India Ltd. vs. SEBI 2. BPL
Ltd. vs. SEBI 3. Rupam
Sharma vs. SEBI 4. KSL
& Industries vs. SEBI in support of his argument that the orders of penal
nature could not be passed in exercise of powers vested under Section 11B of
the SEBI Act, as it then existed.� As
against this, the learned counsel for the respondent invited our attention to
the common orders passed by this Tribunal on October 27, 2003 in appeal nos. 15
to 19/2003 wherein this Tribunal, before its conversion into a multi-member
Tribunal had clarified the position in respect of the earlier cases as cited by
the learned counsel for the appellant.���
We have also been informed that while the cases cited by the learned
counsel for the appellant are in appeal before the Hon�ble Bombay High Court
those cited by the learned counsel for the respondent are in appeal before the
Hon�ble Supreme Court of India and no interim orders have been passed.� We would therefore like to refrain from
discussing these cases any further.
9.
Finally the learned counsel
for the appellant concluded his arguments stating that each and every transaction
entered into by the appellant was a genuine and bonafide transaction in the
usual course of business.� Every �transaction �was backed �by contract notes and bills issued by the
brokers and was put through the BOLT and NEAT (Online trading systems at the BSE
& NSE) �trading Systems followed by
deliveries and payments as necessary.�
According to the learned counsel there was nothing artificial about the
appellant�s transactions and the charge of his having created an artificial
market for the scrip in question was totally unfounded.� Large volumes, according to him, did not by
themselves amount to creation of an artificial market and in any case the
volumes in respect of this scrip were comparable to the volumes in respect of
large number of other scrips included in the appellants substantial portfolio. �He denied any knowledge on the part of the
appellant about the market manipulation activities of the Joharis or the
inter-relationship between Cyberspace and CCL, or for that matter the fact of
Shri Ajay Gupta being an employee of CCL.�
As against this, the learned counsel for the respondent summarized his
case stating that SEBI acted in the matter after due enquiry by the BSE on the
basis of unusually large volumes and the strange trading pattern of huge daily
sales and purchases of a scrip whose price had been falling and the employment
of Ajay Gupta as a middleman on a profit sharing basis at the rate of 10%.� The learned counsel for the respondent further
argued that the appellant had not been able to satisfactorily explain the fact
of having made all purchases through CCL and having effected almost the entire
sales through other brokers beyond stating that the choice of the broker
depended on the exposure limits. 10.
We have carefully gone
through all the facts of the case as well as the legal points raised by the
learned counsel on both sides.� We are
not able to appreciate the argument of the learned counsel for the appellant about
the standard of proof because, as we have observed before, the appellant is not
being tried for fraud in this case.� He
has only been called upon to explain why his huge volumes of transactions in
respect of this particular scrip about which there is evidence of market
manipulation should not be viewed as being in breach of the Regulations.��� It is not a case which can be said to be a
case of no evidence.� We find that with the
respondent having brought sufficient data on record in the show cause notice as
well as in the impugned order, the appellant has not been able to furnish
satisfactory explanations.� �Obviously, the appellant is well versed in securities
trading having a large portfolio of 103 securities.��� His argument that his trading volumes in
respect of several other securities were equally large does not hold water because
these were the shares of large and reputed companies unlike a newcomer on the scene
like Cyberspace Ltd.� Obviously, he knew
that its value was getting eroded by the day as he kept on buying and selling
this scrip in large volumes day after day.�
It would be understandable if a discerning investor bought up large
quantities of a declining stock in the hope of future profits.� Or, for that matter, if he made his exit in
one go or in suitable lots to cut his losses.�
But this almost daily buying and selling of a declining stock in such
massive volumes is not an explainable conduct on the part of a prudent investor
like the appellant.� In any case, he has
not offered any plausible explanations despite being given adequate
opportunity.� The respondent SEBI was
therefore justified in concluding that he did all this because he had the
insider assurance that he would not suffer financially in the process.� And this is where Ajay Gupta comes in � the conduit
between the appellant and the promoters � in exchange for sharing 10% of the
profits. 11.
In these circumstances, we
uphold the impugned order.� However,
looking at the fact that the appellant is 75 years old and is not an
intermediary but only a regular investor with almost his entire portfolio held
jointly with his wife, we would like to take a somewhat lenient view and reduce
the period of restraint from twelve months to six months.� �In the
meanwhile, the relief provided to him vide our interim orders dated 24.3.2004
passed on a broad consensus allowing him to exit from the market to the extent
of half of his holdings shall enure to benefit.�
There shall be no order as to costs.
Place: Mumbai Date:� 17.6.2004 //sr04616 |
|||||||||||||||||||
| Printer Friendly page | Email this page |