Almondz Entertainment Pvt. Ltd And Others vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

The present appeals have been filed against a common order dated April 30, 2020 passed by the Adjudicating Officer (hereinafter referred to as

‘AO’) of Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) imposing penalties for violation of Regulations 3

and 4 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market) Regulations, 2003

(hereinafter referred to as ‘PFUTP Regulations’). Since a common issue is involved, all the appeals are being decided together.

The dispute in all these appeals relate to the trades executed by the appellants in the scrip of Richa Industries Ltd. during the period December 1,

2008 to December 31, 2009. In the investigation period, it was observed that the scrip rose from Rs. 61.10 on December 1, 2008 to Rs. 161.80 on

November 16, 2009 and closed at Rs. 110.20 on December 31, 2009. The show cause notice was issued on February 6, 2014 to 60 entities on the

charge of synchronized trading and there being no change in real beneficial ownership resulting in artificial increase in the volume of trades which

were fraudulent and manipulative in nature. The AO after considering the matter passed an order dated May 19, 2015 imposing penalties to the

noticees. 25 such noticees including the appellants challenged the order of the AO before this Tribunal. This Tribunal by an order dated June 22, 2016

allowed the appeals and quashed the order of the AO in so far as it related to the appellants and remitted the matter again to the AO for fresh

consideration in the light of the observation made in the order.

Subsequently, a fresh show cause notice in June 2018 was issued reiterating the same charges, based on which after considering the replies of the

appellants, the AO passed the impugned order imposing penalties. The appellants being aggrieved by the impugned order have now filed the present

appeals.

We have heard Mr. Sachin Mittal and Mr. Vikas Bengani, the learned counsel for the appellants and Mr. Vishal Kanade, the learned counsel

alongwith Mr. Abhiraj Arora and Ms. Rashi Dalmia, the learned counsel for the respondent through video conference.

The contention raised by the learned counsel for the appellants is, that the AO had divided the investigation period into two groups, namely, group 1

and group 2. It was contended that pursuant to the remand order by this Tribunal, SEBI appointed two AOs and one AO decided the matter against

the six entities and the present AO decided the matter against the remaining entities including the appellants. It was urged that the AO by an order of

November 24, 2019 exonerated these six entities holding that no charge of synchronization or artificial increase in volume of trades or fraudulent and

manipulative trading was found and accordingly discharged the six noticees. It was further urged that in so far as the present appeals are concerned,

on the same charge and on the same trading pattern and being in the same group, the appellants have been penalized and penalties have been

imposed. It was contended that the two orders of the AO analyzing the same trades, same patterns of trading and for the same group have given

contradictory findings and on this short ground the impugned order should be set aside even though, it was urged that on merits the appellants have

also made out the case for quashing of the impugned order.

The fact that another AO passed an order dated December 24, 2019 on some of the noticees who were in the same group as that of the appellants

had not been disputed by the learned counsel for the respondent. In this regard, it thus, become essential to see what findings have been given against

the appellants and how it is contradictory to the findings given by the other AO who exonerated these six entities.

In the impugned order, the AO has given a finding that the appellants and other noticees are connected with each other on the basis of the common

mobile number which were mentioned in the KYC forms and only on this basis, the AO came to the conclusion that the appellants and other entities

are connected to each other and made synchronized trades which were manipulative in nature. The AO while coming to this conclusion did not

consider the submission of the appellants that all KYC forms were not on record and that main person Mr. Anjani who was the mastermind and who

had opened the demat accounts fraudulently and operated the demat accounts of the appellants was not accepted. On the hand, the other AO found

that Mr. Anjani and five other entities had different residential addresses and were residing in different cities and held that merely because some

mobile number were found common in the KYC forms was not sufficient to connect them. The AO in the order of December 24, 2019 held that on

the basis of a common mobile numbers in the KYC forms was not sufficient to connect them especially when the entities were residing in the

different cities.

In this regard, we find that the findings of the two AOs are contradictory to the same set of facts. The appellants are also residing in the different

cities and have different residential addresses. Further, a specific assertion was raised that all KYC forms are not on record. Therefore, in our opinion,

the appellants are also entitled for a similar relief. Since the appellants as well as the six entities who were in the same group and were charged with

the same violation of trading in the synchronized and fraudulent manner without any real change in the beneficial ownership creating artificial volume

of trades we are also of the opinion that merely on the basis of a common mobile numbers in KYC forms is not sufficient to hold the appellants are

being connected with the other entities.

In the impugned order, the AO found that the time difference between the buy order and sell order was less than 60 seconds and, therefore, the

trades were synchronized trades. On the other hand, the AO exonerated the six entities on this issue holding, “thus, the structured trades would not

have been said to be intentional. In this regard, while 10 seconds is a very small time difference between orders, I find the arguments on time

difference in order price acceptable, as a trade cannot be intended to match in a structured manner with difference in order priceâ€​.

Thus, we find that whereas the appellants have been found guilty of executing synchronized trades on the basis of time difference between the

buy order and sell order the six entities on the same charge were exonerated. In our opinion, if the six entities were exonerated, the appellants are

entitled for the same relief.

In this manner, the impugned order holds that the appellants had indulged in circular trades, synchronized trades, self-trades creating artificial

volume of trades which were manipulative and fraudulent. On the other hand, the AO exonerated the six entities on the same charge.

We are also of the opinion that synchronized trading can only happen between connected persons having common intentions. Since connection

between the appellants and other entities have not been established, the charge relating to synchronized trading automatically fails.

In the light of the aforesaid, we are of the opinion that it is not necessary to dwell on the merits of the case as contradictions in the findings given

by two AO’s are sufficient to set aside the findings given in the impugned order.

In so far as the appeal of Dhvani Darshan Kothari & Anr. is concerned, who are in the second group, the said appellants have been penalized on

the charge that they are connected on the basis of a common mobile number. This charge is apparently common and, therefore, we are of the opinion

that the appellants cannot be found connected on the basis of a common mobile number which is insufficient.

The appellants have been charged and found guilty on the basis of purchasing the scrip off-market from Bahar Paper Pvt. Ltd. and was found to

have sold the same shares online to the same counter party and, therefore, came to the conclusion that these trades are fraudulent. We find that the

appellant Dhvani Kothari purchased 10,000 shares off-market on June 30, 2009 and had sold the same on July 7, 2009. Her husband the second

appellant purchased 50,000 shares on June 16, 2009 and sold 40,000 shares online.

This Tribunal while allowing the appeals of the said appellants by its earlier order dated June 22, 2016 found as under :-

“8. In the Table set out in para 16 of the impugned order, it is recorded that the appellant-Dhvani Kothari is related to her husband

Darshan Kothari. Apart from the above, nowhere in the impugned order it is stated that the appellant was connected with Bahar Paper Pvt.

Ltd. or any of the entities set out in the impugned order. Fact that the appellant purchased shares of RIL from Bahar Paper Pvt. Ltd. in off

market and sold the said shares on market, wherein, Bahar Paper Pvt. Ltd. happens to be the counter party, no doubt raises strong

suspicion that the said trade may not be a genuine trade. However, without recording any reasons as to how the said trade could be said to

be fraudulent and manipulative trade or the basis on which the appellant could be said to be connected to Bahar Paper Pvt. Ltd., merely on

the basis of certain general observations the AO could not have arrived at a conclusion that the trades executed by the appellant were

fraudulent and manipulative trades.

Apart from the above, from the impugned order it is not possible to ascertain as to whether the AO has held that the trades executed by the

appellant were circular trades or synchronized trades or structured trades. Assuming that the trades executed by the appellant were synchronized

trades or circular trades, the AO is not justified in treating the appellant who has executed a single trade on market to be on par with other persons

who have been executed several circular trades, synchronized trades, structured trades and self trades on market and impose uniform penalty of ` 5

lac on all such persons including the appellant.

It is relevant to note that indulging in a fraudulent and unfair trade practice relating to securities is a serious offence and therefore, under Section

15HA of SEBI Act, maximum penalty of ` 25 crore is imposable on any person indulging in such practices. In such a case, the AO without considering

the merits of individual case of the appellant could not and ought not to have held that the trade executed by the appellant was a fraudulent trade.â€​

This Tribunal held that purchasing off-market from Bahar Paper Pvt. Ltd. and selling online to the same counter party may raise strong suspicion

that the transfer may not be genuine. The Tribunal found that no reasons were recorded as to how the said trades are manipulative and fraudulent and

that one transfer cannot make it synchronized, circular or reversal and execution of one trade cannot be treated at par with the trades executed by the

other entities which were large in number.

In this regard, we find that the appellant Dhvani and Darshan executed one trade and since it was sold to the same counter party, the AO held that

it was fraudulent. There is no finding as to how the trades executed by these appellants were synchronized or circular or reversal. There is no

consideration or reasoning given as to how the execution of one trade could make it synchronized, circular or reversal and how they are treated at par

with the other entities. We find that the AO has not considered the directions given by this Tribunal in its earlier order. We are further of the opinion

that this set of appellants is also entitled for the same relief as other appellants on the basis of contradictory findings.

For the reasons stated aforesaid, the impugned order passed by the AO cannot be sustained in so far as the appellants are concerned and is

quashed. The appeals are allowed with no order as to costs.

The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor

a certified copy of this order could be issued by the Registry. In these circumstances, this order will be digitally signed by the Private Secretary on

behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally

signed copy sent by fax and/or email.