Kalpana Dharmesh Chheda And Others vs Securities And Exchange Board Of India And Others

Dr. C.K.G. Nair, Member

This appeal has been filed challenging the order of the Adjudicating Officer (‘AO’ for short) of Securities and Exchange Board of India

(‘SEBI’ for short) dated March 28, 2019 whereby the appellants have been found to have violated Regulations 3(a),(b),(c) and (d) and

regulations 4(1) and 4(2)(a) and (e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations,

2003 (‘PFUTP Regulations, 2003’ for short). Consequently, a penalty of Rs. 45,00,000/- on appellant no. 1 and Rs. 5,00,000/- on appellant no. 2

has been imposed under Section 15 HA of the SEBI Act, 1992.

The facts relevant to the matter are the following:-Appellants are individual traders. Appellant No. 1 is the mother of the Appellant No. 2. SEBI

conducted an investigation into trading in the scrip of Zodiac Ventures Ltd. (‘Zodiac’ for short) for the period October 1, 2013 to December 22,

2014. During part of this investigation period i.e. between October 1, 2013 and August 20, 2014 the price of the scrip of Zodiac increased from Rs.

32.85 to Rs. 537.60 as on May 30, 2014 and closed at Rs. 507.90 as on August 20, 2014. It was further noticed that during the relevant period the

appellants have executed several trades, many of them in very small volume of one share etc., at prices above the Last Traded Price (LTP).

Therefore, it is held in the impugned order that the appellants created a misleading appearance of trading and was manipulating the price of the scrip

to help offload the shares they were holding.

Therefore, adjudication proceedings were initiated against appellants and a show cause notice was issued on August 6, 2018 alleging violation of the

stated provisions of the PFUTP Regulations, 2003.

The details of the 52 trades executed by the appellants are given in paragraph 4 of the impugned order. Most of the trades are sell orders for one

share each and a couple of trades each of 2,3,4 and 5 shares each, two trades of 1000 shares each and one trade of 2000 shares. In 4 of the sell

orders of appellant no. 2 Utkarsh Chheda, the other appellant, Kalpana Chheda was the counterparty.

The crux of the charge against the appellants is, that the appellants have placed sell orders in single shares or in very small quantities at higher and

higher price on 55 days during the relevant period thereby contributed to a total of Rs. 320.45 to market positive LTP through 52 trades. Therefore, it

has been held that appellants’ trade had been of a market manipulative nature and therefore appellants have violated the stated provisions of the

PFUTP Regulations, 2003.

It is the contention of the learned counsel for the appellants Shri Prakash Shah that appellants in their capacity as individual investors were trading

in the scrip of Zodiac in their normal course of business; appellant no. 1 was holding 15045 shares of Zodiac prior to the investigation period which she

inherited from her father-in-law and bought another 1009 shares, all of which were sold; appellant no. 2 was holding 1195 shares as on September 30,

2013 and those shares were sold during the investigation period. In any case, it is the contention of the learned counsel for the appellants that the price

of the scrip increased before the investigation period and went up much above the price at which they transacted their last sales on April 17, 2014 at

the rate of Rs. 425.80. For instance, the price went up further to Rs. 537.60 on May 30, 2014 and even after the post-share split on February 24, 2015

the price of the scrip effectively reached Rs. 968/-. Therefore, the price of the scrip was continuously increasing and appellants as sellers cannot be

charged with any violation for the price rise because they were placing sell orders only on the basis of buy orders available in the system. It was also

contended that they were selling small quantities of shares in most of the days because they found that the share price was on an upward trend.

It was further contended by the learned counsel for the appellants that appellants have no connection with the list of connected entities nor with the

company or its promoters; since the scrip of Zodiac was traded in the ‘T’ group trades were settled compulsorily by delivery and under the tight

supervision of BSE (Respondent No. 2) during the periodic call auction sessions. In order to press their contention that sellers of shares cannot be

accused of impacting the LTP in the absence of any connection with other entities or fund transfers etc. the learned counsel for the appellant relied on

the orders of this Tribunal in respect of M/s. Nishith M. Shah HUF vs. SEBI (Appeal No. 97 of 2019 decided on January 16, 2020) and Sapna Dilip

Bombaywala vs. SEBI (Appeal No. 219 of 2019 decided on January 28, 2020.

We have also heard Shri Kumar Desai, the learned counsel for the respondent SEBI who contended that the appellants’ trading in the scrip of

Zodiac is ex facie manipulative since appellants were the only sellers during most of the days and therefore but for the sell orders placed by the

appellants, mostly in single shares each, no transaction would have fructified and no LTP would have been formed. The appellants mode of trading

was manipulative because instead of selling a large part of their stock when demand was already available in the trading system the appellants were

offloading only one share each most of the time and had benefited considerably from the LTP successively created over a long period of time and

therefore made a windfall gain out of their transactions.

We do not find much merit in the submissions made by the learned counsel for the appellants though generally it can be stated that selling at a price

higher than the LTP particularly when buy orders are available in the system cannot be considered as manipulative in itself. However, looking at the

pattern of trading done by the appellants and the fact that the appellants have derived considerable financial benefit through that particular scheme or

nature of trading we are of the view that the trading pattern adopted by the appellants is of a manipulative and unfair nature and would squarely fall

within the ambit of the PFUTP Regulations. The pattern of trade clearly establishes this as it is on 49 occasions that the appellants sold 1 to 5 shares,

mostly one share, when in fact the buy orders available in the system was much higher. This behavior cannot be justified in terms of normal rational

expectations of a seller. It is on record that the appellants were among the top two net sellers during the relevant period. Therefore, when the

appellants were holding a large number of shares (Appellant No. 1 â€" 15045 shares and Appellant No. 2 â€" 1009 shares), their selling miniscule

quantity of one share each on more than four dozen occasions is nothing but a strategy of manipulation and unfairly benefiting by off-loading the entire

shareholding after raising the price to considerable levels. The Appellant No. 1 was able to sell off 7000 shares on 17th, 18th, and 19th February, 2014

at prices ranging from 182.45 to 189.75. Similarly, on 21st, 24th and 25th March, 2014 the appellants together sold 10174 shares at prices in the range

of 226.05 to 249.20.

We are also constrained to observe that this was a case where the buy side of the transactions also deserved to be analyzed in detail, which has

not been done by the AO by just observing that there were large numbers of buyers placing orders. However, given that several years have gone by

after the event we do not propose to order a reinvestigation at this stage.

Further, we are of the considered view that the penalty imposed on the appellants is on the higher side, particularly, when the entire price rise in

the scrip is not on account of the trading done by the appellants. In fact, we note that even when the appellants were not trading between December

24, 2013 to February 17, 2014 the price of the scrip had gone up from Rs. 152 to 182. Similarly, on intermittent dates as well there were trading by

others which raised the price as the appellants traded on only 55 days out of the investigation period or even the relevant period which runs into 14

months and 7 months respectively. Therefore, while calculating the profits earned by the appellants and in deciding the quantum of penalty based on

the same these facts should have been taken into account as mitigating factors beyond what is apparently done by the AO.

In the result, while upholding the impugned order on merit we reduce the amount of penalty on Appellant No. 1 from Rs. 45 lakh to Rs. 20 lakh

and from Rs. 5 lakh imposed on the Appellant No. 2 to Rs. 2 lakh. This is sufficient to meet the ends of justice given the facts of the matter.

Appellants are directed to pay the amount of penalty within four weeks from the date of the order. No order on costs.