Rajesh Jivan Patel vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

The present appeal has been filed against the impugned order dated March 26, 2020 passed by the Whole Time Member (‘WTM’ for short)

of the Securities and Exchange Board of India (‘SEBI’ for short) restraining the appellant and other noticees from accessing the securities

market for a period of six months and further freezing the mutual funds and other securities of the appellant.

The facts leading to the filing of the present appeal is, that there is a company called Vishvjyoti Trading Limited (‘Vishvjyoti’ for short),

which is listed on the BSE Stock Exchange(‘BSE’ for short). The scrip of this company was suspended for trading from February 17, 2003 on

account of non-submission of quarterly reports which suspension was revoked on March 1, 2012. The first trade appears to have been carried out on

April 5, 2013 and the second trade was carried out on May 31, 2013.

SEBI conducted an investigation into the trading activities of certain entities in the scrip of this company for the period March 1, 2012 to January 6,

2015 in order to ascertain whether any violation of the SEBI Act, 1992 or the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to

Securities Market) Regulations, 2003 (‘PFUTP Regulations’ for short) had occurred or not. The investigation was divided into two patches.

Patch â€" 1 which is called the ‘price rise’ patch was for the period March 1, 2012 to March 18, 2014 and Patch â€" 2 which is called the

‘price fall’ was for the period March 19, 2014 to January 6, 2015. The present dispute relates to the Patch â€" 1 period.

Based on the investigation report, a show cause notice dated September 14, 2017 was issued to the appellant and other entities. In this show cause

notice it was alleged that in 130 out of 134 trading days, only one trade per day was carried out even though there was no connection with the

counter-parties. The sellers including the appellant on the sell side contributed more than 5% of the Last Trade Price (‘LTP’ for short) and that

there were certain connection with other entities. It was alleged that the dealer of the appellant Mr. Shailesh Ghansham Parab was a director in Page

3 Media Limited and Bombay Talkies Media Limited in which Mr. Yuvraj Shetty was also a director and this Mr. Yuvraj Shetty was a director in

Vishvjyoti and, thus, there was a connection between Mr. Shailesh Parab and the company and the trades of the appellant was carried out through

Mr. Shailesh Parab and through M/s. Mittal Share Brokers Private Limited who was the sub-broker of the trades of the appellant. It was also alleged

that Mr. Shailesh Parab was also a director in M/s. Mittal Share Brokers Private Limited.

The show cause notice further alleged that the appellant bought 10,000 shares of the company through off-market transaction from one Mr. Ketan

Chandrakant Wadhwan on April 27, 2013 and thereafter through Mr. Shailesh Parab converted these physical shares into demat mode on May 13,

2013. It was further alleged that there was a demand of 100/500/ 1000 shares on the stock exchange but the appellant only sold miniscule 10 to 15

shares and, in this fashion, sold 971 shares over a period of time at the higher circuit price. It was further alleged that the trading pattern indicated that

the appellant was not a genuine seller and that he had no bonafide intention of selling the scrips and was only instrumental in establishing a higher price

above the LTP. The show cause notice further alleged that the appellant was acting in concert and in collusion with Mr. Shailesh Parab and M/s.

Mittal Share Brokers Private Limited in a fraudulently manner and was indulging with other sellers in manipulating the price. The show cause notice

further alleged that Mr. Shailesh Parab and M/s. Mittal Share Brokers Private Limited were indulging in price manipulation in collusion with the

appellant and other sellers and therefore violated Regulation 3 and 4 of the PFUTP Regulations.

Before the WTM, the appellant contended that the copies of documents asked for was not supplied thereby violating the principles of natural justice,

since no proper reply could be given in the absence of necessary documents. It was further contended that the appellant purchased the shares through

off-market transactions and since the price was increasing the appellant sold some shares. It was also contended that the appellant was not

responsible for increase in the price in as much as the buy orders were already placed before the appellant placed its sell orders and that there was a

difference in time between the buy orders and the sell orders which ranged from 10 minutes to 5.41 hours. The appellant contended that he had no

role to play in the contribution to positive LTP nor was there any collusion between the buyer and seller. It was specifically stated that there was no

meeting of minds, there was no price manipulation and there was no fraud played by the appellant and that the show cause notice was only based on

surmises and conjectures.

The WTM after considering the reply framed two issues, namely, (i) whether the sellers (including the appellant) sold miniscule quantity of shares

with a manipulative intent to increase the price and (ii) whether Mr. Shailesh Parab and M/s. Mittal Share Brokers Private Limited acted in collusion

with the sellers (including the appellant) to indulge in price manipulation.

The WTM after considering the replies, arguments and material evidence on record held that by not providing the order logs did not inhibit the

sellers in any manner for the purpose of filing the response / reply. The WTM further held that there was no delay in the initiation of the proceedings.

The WTM further held that there was no need to give a finding as to whether the sellers were connected with each other or not, in as much as, the

trading pattern of the appellant and other sellers indicate that the trades made by them were not genuine on the ground that the shares were bought

through off-market, were bought at the same time and that the sellers held tradable shares and that the sellers traded these shares in miniscule

quantities and sold on the circuit price and together the appellant and other sellers pumped up the price collectively and thus, on a preponderance of

probability, the appellant along with others were connected to each other.

The WTM further found that the fact that there was no connection between the buyer and the seller was immaterial, in as much as, the appellant

was unilaterally manipulating the price thereby committing a fraud. The WTM thus concluded that on a preponderance of probability, the appellant and

other sellers were connected to each other. The WTM also held that the trades carried out by the appellant and other sellers was with the sole

purpose of raising the price of the scrip.

The WTM also came to a conclusion that Mr. Shailesh Parab and M/s. Mittal Share Brokers Private Limited had no role to play in the

manipulation of the price nor had any connection with the company.

On the aforesaid findings, the WTM passed the impugned order debarring the appellant for a period of six months for violating Regulations 3 and 4

of the PFUTP Regulations.

We have heard Shri Sharan Jagtiani, the learned senior counsel for the appellant and Shri Kumar Desai, the learned counsel for the respondent.

The learned senior counsel for the appellant urged that there was a specific charge of being connected with other sellers. There was also a

specific charge that there was a collusion of the appellant along with other sellers with Mr. Shailesh Parab and M/s. Mittal Share Brokers Private

Limited with regard to the manipulation of the price. There was also a specific charge that there was a connection between Mr. Shailesh Parab and

M/s. Mittal Share Brokers Private Limited with the Company and were thus responsible for manipulation in the movement of the price of the scrip.

The WTM has given a specific finding that there was no connection of the appellant with other sellers nor was there any price manipulation or

collusion by Mr. Shailesh Parab and sub-broker with the company and that they were not involved in the manipulation of the price. It was, thus, urged

that in view of the specific finding given by the WTM in this regard the entire charge against the appellant falls and that no order of penalty could be

passed. In this regard the learned senior counsel for the appellant placed reliance on a decision by this Tribunal in the matter of M/s. Nishith M. Shah

HUF vs. Securities and Exchange Board of India (Appeal No. 97 of 2019 decided on January 16, 2020).

On the other hand, Shri Kumar Desai, the learned counsel for the respondent contended that there is an inter-connection between the sellers and

from the trading pattern it becomes clear that they were acting in concert and manipulating the price of the scrip. It was contented that even though

there was no direct connection but on a preponderance of probability there is an indirect connection which has been specified by the WTM in the

impugned order and which does not suffer from any error. It was also contended that the appellant along with other sellers were controlling the

market volume of the price as was totally responsible for the increase in the price through fraudulent means. In support of his submissions, the learned

counsel placed reliance on the decision of this of this Tribunal in the matter of Jayprakash Bohra vs. Securities and Exchange Board of India (Appeal

No. 162 of 2019 decided on November 5, 2019), Mrs. Kalpana Dharmesh Chheda & Anr. vs Securities and Exchange Board of India & Anr. (Appeal

No. 454 of 2019 decided on February 25, 2020) and Shri Lakhi Prasad Kheradi vs Securities and Exchange Board of India (Appeal No. 232 of 2017

decided on June 21. 2018).

Having heard the learned counsel for the parties, we are of the opinion that the impugned order in so far as the appellant is concerned cannot be

sustained, in as much as, the case is squarely covered by a decision of this Tribunal in the matter of M/s. Nishith M. Shah HUF (supra). The decisions

cited by the respondent are distinguishable on facts. We are further constrained to observe that in the instant case the WTM has travelled beyond the

specific charges framed in the show cause notice and, on this short ground, the impugned order also cannot be sustained.

The show cause notice gave a specific charge against the appellant and other sellers, namely, that they sold miniscule shares and increased the

LTP. Another specific charge was that they were acting in concert with the sellers and indulged in the manipulation of the price of scrip in collusion

with Mr. Shailesh Parab and M/s. Mitta Share Brokers Private Limited. When a specific finding has been given by the WTM that the appellant was

not connected with other sellers, the question of acting in concert with other sellers therefore does not arise. We also find that there is no finding of

any connection between the appellant as a seller with the buyer. We also find that there is a time difference between the buy orders and the sell

orders. The increase in price of the shares is not at the instance of the appellant. In fact, the price has been fixed by the buyer which price was

accepted by the appellant when he sold his shares. We are, thus, of the opinion that the manipulation in price was done by the buyer who was

responsible for the increase in the LTP.

In M/s. Nishith M. Shah HUF (supra) the Tribunal held as follows:-

“We are of the opinion that the impugned order cannot be sustained for the following reasons:-

(a) The investigative reports nor the WTM or the AO found any connection between the buyer and the seller. We also find that neither in the

investigative report nor in the impugned order any connection has been found between the appellant with the promoters / directors of the Company.

Thus, no causal connection has been established.

(b) The investigative report finds that no adverse inference can be drawn against the buyer merely because the buyer had placed buy orders above

LTP. On this basis, the buyer was exonerated from the charge of manipulation in the price of the scrip when admittedly the buyer was placing buy

orders above the LTP.

(c) Buy orders were placed at 9.15 hrs and sell orders were placed during the course of the day but not immediately after the buy orders nor the sell

orders of the appellants were placed before the buy orders.

(d) There is no finding that the appellant has indulged in fraudulent or unfair trade practices in securities.

(e) Selling miniscule amount of shares by itself is not illegal nor manipulative nor violative of Regulation 3 and 4 of the PFUTP Regulations unless

collusion with others is found.

(f) Allegation that the appellant has contributed to the LTP cannot be upheld in the absence of any collusion with the buyer or promoter / director of

the Company. One has to establish a connection between a buyer and with the seller in order to infer a manipulation in the price of the scrip.

(g) The authorities have misread and misapplied the decision of the Supreme Court in Ajmera’s case (supra). In this regard Paragraph 27 of the

judgment is extracted here under:-

“27. Let us apply the aforesaid test to the facts of the present cases before us wherein admittedly there is no direct evidence forthcoming. The first

relevant fact that has to be taken note of is that the scrips in which trading had been done were of illiquid scrips meaning thereby that such scrips

though listed in the Bombay Stock Exchange were not a matter of everyday buy and sell transactions. While it is correct that trading in such illiquid

scrips is per se not impermissible, yet, voluminous trading over a period of time in such scrips is a fact that should attract the attention of a vigilant

trader engaged / engaging in such trades. The above would stand fortified by the note of caution issued by the Bombay Stock

Exchange in the form of a notice/memorandum alerting its members with regard to the necessity of exercising care and caution in case of high volume

of trading in illiquid scrips, as already noted.â€​

In order to apply the aforesaid test, the facts of the present case is, that there is no direct evidence of collusion between the appellant as a seller with

that of the buyer. There is no finding that the appellant was known to the directors or promoters of the Company.

Since no direct evidence is forthcoming we have to see the indirect connection which is that the appellant was selling small quantities of scrips.

Trading in small quantities in scrips is per se not impermissible as held in Ajmera’s case (supra). If trading in miniscule amount leads to an

increase in the price of the scrips one can presume or infer that the trading is manipulative but such trading cannot happen unilaterally. There must be

evidence to show collusion between the buyer and the seller. In the instant case there is none. The principle of preponderance of probability cannot be

exercised in the absence of any connection between the seller and the buyer.

(h) The charge that the appellant had contributed to the LTP as a seller which resulted in the manipulation in the price of the scrips cannot be

sustained in the light of the glaring fact that the same charge against the buyer had been dropped.

(i) In Jagruti Securities Limtied vs Securities and Exchange Board of India (Appeal No. 102 of 2006 decided on October 27, 2008) and in Vikas

Ganeshmal Bengani vs Whole

Time Member, SEBI (Appeal No. 225 of 2009 decided on February 25, 2010) the Tribunal held that the charge of raising price artificially has to be

established and the element of collusion between the buyer and the seller is a sine quo non. We are in the entire agreement with the aforesaid

decisions and reiterate that in the absence of any finding of collusion between the buyer and the seller the charge contributing to the LTP cannot be

sustained.â€​

In the light of the decision in the case of M/s. Nishith M. Shah HUF (supra), we are of the opinion that in the absence of any connection between

the appellant and other sellers and in the absence of any connection being found between the appellant with that of the buyer, the charge of collusion,

manipulation or fraudulent transaction cannot be proved. It is reiterated that connection between buyer and seller is sine qua non for levy of charge of

price manipulation which in the instant case is lacking especially when a specific finding has been given by the WTM that the main charge of

connection with the company throug Mr. Shailesh Parab and M/s. Mittal Share Brokers Private Limited did not exist. Thus, there cannot be any

manipulation nor can the charge be levied solely against the appellant as a seller.

The finding of the WTM that the decision in M/s. Nishith M. Shah HUF (supra) is distinguishable as it is only relevant for synchronized or circular

trades where a connection between buyer and seller has to be established in order to prove manipulation is patently erroneous, in as much as, in all

cases a connection between the buyer and seller is required to be established and which is essential to prove the charge of price manipulation. We are

of the firm opinion that the price manipulation in the instant case cannot be done unilaterally.

In view of the finding of the WTM that Mr. Shailesh Parab and M/s. Mittal Share Brokers Private Limited had no role to play in the manipulation

of the price of the scrip of the company and had no connection with the company the charge of manipulation and collusion against the appellant falls

through and holding the appellant guilty was patently erroneous.

In the light of the aforesaid, the impugned order cannot be sustained and is quashed in so far as the appellant is concerned. The appeal is allowed.

All misc. applications are accordingly disposed of. In view of the aforesaid, it is not necessary to go into the question of delay in the initiation of the

proceedings. We, however, observe that non supply of the log sheet, was an infringement of the appellant’s right to file an appropriate response

after considering the entire log sheets. Merely supplying selected portions of the log sheet which suits the respondent amounts to cherry picking and, in

our opinion, amounts to violation of the principles of natural justice.

Before parting, we are of the view and constrained to observe that the investigation in the present matter was totally shoddy. No effort was made

to investigate the buy side of the transaction nor any effort has been made to analyze it which was necessary to consider the price manipulation in the

scrip of the company. Targeting the appellant and other entities for the manipulation in the price was an irresponsible act especially when the

investigation report indicated that there were other sellers. We also find from a perusal of the investigation report that there was no connection

between the sellers in spite of which a specific charge was framed in the show cause notice that the appellant and other sellers were connected with

each other. Such framing of charge which was against the findings given in the investigation report was wholly illegal. The investigation report clearly

indicated that Mr. Shailesh Parab and M/s. Mittal Share Brokers Private Limited had indulged in price manipulation of the scrip and had a connection

with the company. This aspect should have been deeply investigated.

In view of the aforesaid, parties will bear their own costs. In view of disposal of appeal, both the Misc. Application Nos. 206 of 2020 and 207 of

2020 have become infructuous and are disposed of accordingly.

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 Presiding Officer 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.