IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

 

Date of Hearing

02/02/2005

Date of Decision

11/02/2005

 

 

Appeal No: 160 of 2004

 

 

Appellant � Represented by:

Viram Investment Pvt. Ltd.

Mr. Janak Dwarkadas, Sr. Advocate with Mr. Somasekhar Sundaresan, Advocate

Versus

 

Securities & Exchange Board of India

Respondent- Represented by

 

Mr. Kumar Desai, Advocate

 

 

Appeal No: 161 of 2004

 

 

Appellant � Represented by:

Amal Parikh

Mr. Janak Dwarkadas, Sr. Advocate with Mr. Somasekhar Sundaresan, Advocate

Versus

 

Securities & Exchange Board of India

Respondent- Represented by

 

Mr. Kumar Desai, Advocate

 

 

 

Appeal No: 162 of 2004

 

 

Appellant � Represented by:

Uday Shah

Mr. Janak Dwarkadas, Sr. Advocate with Mr. Somasekhar Sundaresan, Advocate

Versus

 

Securities & Exchange Board of India

Respondent- Represented by

 

Mr. Kumar Desai, Advocate

 

 

CORAM

 

��������� Justice Kumar Rajaratnam, Presiding Officer

��������� N.L. Lakhanpal, Member

 

 

Per:��� N.L. Lakhanpal, Member

 

1.                  The appeals were taken up for final disposal through this common order with the consent of parties.

2.                  The impugned order dated 8th September, 2004 directs the appellants not to deal in securities for a period of 6 months on the charge of violation of Regulation 4(b) and (c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 1994. Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 1994 reads as follows:

�4.������ No person shall

�a)������ ��..

�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.�

3.                  A company called M/s. Intellivision Software Limited (ISL) had forfeited 31,00,000 shares vide its Board resolution dated 05/04/2000 for non-payment of call money.Out of these forfeited shares 29,02,400 shares were re-issued at par vide Board resolution dated 04/07/2000 to 227 allottees.The appellant in appeal No. 160/2004, Viram Investment Pvt. Ltd. was allotted 1,50,000 shares out of the forfeited shares reissued by ISL on behalf of appellants in appeal Nos. 161 and 162 of 2004.

4.                  Viram Investment Private Limited (VIPL) is jointly owned by equal shareholders, Mr. Amal Parikh and Mr. Uday Shah, the appellants in appeal Nos.161 and 162 of 2004 respectively. S/Shri Parikh and Shah are also the promoters of a broking firm OHM Stock Brokers Private Limited (OSBPL). This broking firm is not in appeal before us because no order has been passed against it.

5.                  The 1,50,000 shares out of the forfeited shares of ISL allotted to VIPL were credited to the D-Mat account of VIPL on May 4, 2001. These shares were transferred by VIPL to the D-Mat account of Mr. Shah and Mr. Parikh in equal proportion on August 9, 2001 because these had been applied for by VIPL on their behalf pursuant to an agreement dated April 1, 1999.On February 19, 2002 S/Shri Parikh and Shah sold 75,000 shares each to OHM Stock Brokers Private Limited, the broking entity promoted by them � at the prevailing market price of Rs. 103/- per share.A month later OSBPL sold 1,45,000 shares back to VIPL, again on the floor of the BSE, at the then prevailing market price of Rs. 30.05 per share.

6.                  Treating these sales amongst the appellants and the broking firm owned by them as synchronized or matched deals, SEBI has passed the impugned order directing the appellants to disassociate themselves from the market for a period of 6 months.Being aggrieved, the appellants� have filed the present appeals. It is the appellants� contention that there is no bar against trading between related entities as long as such trading is not aimed at creating a false or misleading appearance of trading in securities market or such trading results in reflection of prices of securities based on transactions that are not genuine trade transactions. It is the case of the appellants that these couple of transactions were undertaken by the appellants, who are undoubtedly related to each other, for tax planning and other purposes and not for creating any false or misleading appearance of trading on the securities market.SEBI�s case is that any synchronized or matched trades or any non-genuine trades meant to serve any purpose other than ordinary trading are per se prohibited trades attracting the provisions of Regulation 4(b) and (c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 1995. For examining the rival contention it would be useful to reproduce the following graph extracted from paragraph 10 of the impugned order.

Date

Open

High

Low

Close

Volume

15/02/2002

104

104

104

104

50

19/02/2002

103

104

103

103

150002

20/02/2002

82.45

82.45

82.45

82.45

50

21/02/2002

66

66

66

66

50

22/02/2002

52.85

52.85

52.85

52.85

400

26/02/2002

48.65

48.65

48.65

48.65

25

27/02/2002

44.8

44.8

44.8

44.8

502

28/02/2002

41.25

41.25

41.25

41.25

50

04/03/2002

38

38

38

38

100

05/03/2002

35

35

35

39

50

06/03/2002

35.9

41.8

35.9

41.8

20

07/03/2002

38.5

43.9

38.5

38.5

61

11/03/2002

35.45

35.45

35.45

35.45

55

19/03/2002

32.65

32.65

32.65

32.65

10

20/03/2002

30.05

30.05

30.05

30.05

145000

21/03/2002

27.65

27.65

27.65

27.65

235

26/03/2002

25.45

25.45

25.45

25.45

2

27/03/2002

23.45

23.45

23.45

23.45

28

28/03/2002

21.6

21.6

21.6

21.6

185

01/04/2002

19.9

19.9

19.9

19.9

25

02/04/2002

18.35

18.35

18.35

18.35

5

04/04/2002

16.9

17.1

16.9

16.9

500

05/04/2002

15.55

15.55

15.55

15.55

275

08/04/2002

14.35

14.35

14.35

14.35

200

09/04/2002

15.45

15.45

13.25

13.25

100

10/04/2002

11.95

11.95

11.95

11.95

3775

 

7.                  It is clear from the above graph that the respondent SEBI has taken objection basically to the trades entered into on 19/02/2002 and 20/03/2002. We notice from this graph that both these trades have been entered into on the basis of the prevailing market price on the previous day.We also notice that it is nowhere SEBI�s case that the appellants had any role to play either in taking the price of the scrip to the artificially high level of Rs. 104/- per share on 15/02/2002 or to bringing it down to Rs.11.95 on 10/04/2002. We have carefully perused the investigation report dated 26.6.2002.A detailed investigation was conducted with respect to the conduct of the appellants for the period of 15/02/2002 to 10.4.2002.The investigation report clearly states at paragraph 14 in the conclusion that the price fall in the scrip is mainly due to the selling pressure in the scrip.Paragraph 14 reads as follows:

�From the above analysis, it appears that the price fall in the scrip is mainly due to a selling pressure in the scrip.This might be due to the fact that most of the shareholders had acquired the shares at par.There was a change in the management of the company and then it changed its business and acquired a newly formed partnership firm and did not have any profits to justify a price of Rs. 104.00.�

8.                  The investigation report itself concludes that there was no concrete evidence to establish deliberate hammering of the price of the scrip except certain instances wherein certain parties had placed sale orders at lower circuit rates on consecutive dates.It is not even the case of the respondent that there was deliberate hammering of the price of scrips.Indeed, the price of scrip as noted by the investigating officer, could not have been more than Rs. 10/-.The stand of the Intel Vision Software itself was that the price of scrip could not be more than its par value.In spite of that, it was traded at the rate of Rs. 90 to 100 during the year 2000.In fact it was quoted in the Hyderabad Stock Exchange at price lower than what it was quoted at the Bombay Stock Exchange.It cannot be said in these circumstances that there was any hammering of the scrip by the appellants.

9.                  We have also perused the circular dated 14.9.1999.All that the circular says is that negotiated deals shall be executed on the screen of the exchange.In this case, admittedly all deals were on the screen of the exchange.

10.             In the order passed in ICICI Brokerage Services Ltd., cited by the appellants the respondent has acknowledged that negotiated deals have to be done through the price and order matching mechanism of the stock exchange.SEBI itself has recognised in that order that the synchronised trades are not per se illegal unless they have the effect of manipulating the market.�� Specifically, in the said order, the respondent found that all the ingredients of synchronised trading were present in the trades done by ICICI Brokerage Services Ltd. But the price of the shares remained constant at Rs. 83/- per share. In other words the respondent recognized in that order that synchronized trades conducted on the screen need not be per se illegal if they do not have a bearing on the market.

11.             The volatility in the price of this scrip as shown in the graph has thus been d�hors of these two transactions. We also notice that the trading volumes in this scrip have been totally insignificant for the entire investigation period except for these two transactions and that these two transactions therefore had no positive or negative effect on the market price of the scrip.What we are therefore left with is only the rival contentions regarding the nature of these two transactions. According to SEBI such transactions are per se manipulative transactions and therefore violative of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 1995.The appellants on the other hand have contended that there is no bar on inter corporate transactions or on transactions between related entities as long as such transactions do not affect the market. In support of their contention, the appellants have again cited SEBI�s orders in the proceedings against ICICI Brokerage Service Limited wherein Chairman, SEBI, has observed at page 17 of that order as follows:

�In sharp contrast, synchronized transactions are used by unscrupulous market participants to deny investors other than those within a closed group, a chance to participate in the trading system of the stock exchange and these are used as tools for manipulation of the price and volume of shares. For the above reason, although it cannot be said that synchronized deals are per se illegal, for the same reason, it cannot be said that all synchronized transactions are legal and permitted.All synchronized transactions which have the effect of manipulating the market are against fair market practices and hence undesirable and prohibited.� (emphasis supplied)

12.             We are fully in agreement with the above observations made by Chairman, SEBI in the proceedings against ICICI Brokerage Services Limited. A reading of the Regulation 4(a) and 4(c) also shows that the objectionable acts inviting action under these regulations have to be both �calculated to create a false or misleading appearance of trading on the securities market� and/orshould �result in reflection of prices of securities based on transactions that are not genuine trade transactions�.In the present case SEBI seems to have merely gone by the fact that the transactions in question being amongst related entities, cannot be considered to have been ordinary trades in the market and therefore per se non genuine and violative of regulations.Even if we consider transactions undertaken for tax planning as being non genuine trades, such trades in order to beheld objectionable, must result in influencing the market one way or the other. We do not find any evidence of that either in the investigation conducted by the Bombay Stock Exchange, copy of which has been annexed to the memorandum of appeal or in the impugned order that there was any manipulation.�� It is also seen that the impugned transactions have taken place at the prevailing market price. Trading in securities can take place for any number of reasons and the authorities enquire into such transactions which artificially influence the market and induce the investors to buy or sell on the basis of such artificial transactions.This is not even the case of the respondent, therefore it is not possible for us to sustain the impugned order.

13.             Accordingly the appeals are allowed and the impugned order is set aside.No order as to costs.

 

 

 

(N.L. Lakhanpal)

Member

(Justice Kumar Rajaratnam)

Presiding Officer

 

Place: Mumbai

Date: 11/02/2005

*/as

 



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