Sangeeta Kailash Purohit And Others vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

Adjudication proceedings were initiated against 19 noticees which resulted in the imposition of penalties by an order of the Adjudicating Officer (“AO” for convenience) of the Securities and Exchange Board of India (“SEBI” for convenience) dated June 30, 2022 against 17 noticees. Six of these noticees have filed separate appeals against the common order, being noticees no. 1, 2, 3, 9, 11 and 12. Since the issue is common, all these appeals are taken up together.

Noticees no. 1, 2 and 3 are sellers and noticees no. 9,11 & 12 are buyers.

The charge as per the show cause notice dated October 14, 2021 against the present appellants/ noticees are that noticees no. 1, 2 and 3 manipulated the price and created misleading appearance of trading through miniscule trades. The charge is also of first trade and New High Price (‘NHP’). Noticee no. 1 has also been charged for non-disclosure in respect of the acquisition of shares of Wisec Global Limited and that incorrect information in the Delivery Instruction Slip (‘DIS’) was made stating that off-market transaction was a loan. Noticees no. 1, 2 and 3 have been charged with off-market transaction without payment of consideration and that noticees no. 1 and 2 failed to comply with the summons during the investigation period. Further, noticees no. 1, 2 and 3 along with 9, 11 and 12 created artificial volume and misleading appearance of trading with resulted in the increase in the price during the period September 28, 2016 to June 12, 2017. The allegation was that noticees no. 1, 2 and 3 have violated Section 2(i) read with Section 13, 16 and 18 of the Securities Contract (Regulation) Act, 1956 (“SCRA” for convenience) and Notification dated October 03.2013 and have also violative Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations, 2003” for convenience). Noticees no. 9, 11 and 12 have also been charged with violation of the PFUTP Regulations.

The AO after considering the material evidence on record found that noticees no. 1, 2 and 3 purchased 9,91,494 shares from noticee no. 13 Kolluru Surya Prakash Venkata, who was also a Director in Wisec Global Limited and that these noticees sold 29,74,997 shares. The AO found that noticee no. 1 received the shares from Kolluru Surya Prakash Venkata, who was a Director in Wisec Global Limited and noticee no. 2 received the shares from noticee no. 1. Further, noticee no. 3 received the shares from noticee no. 16 Company in which Kolluru Surya Prakash Venkata was also a Director. The AO found that the receipt of shares by noticees no. 1 and 2 was without any consideration and that noticee no. 1 had wrongly shown this off-market transaction as a loan in the DIS and this was done deliberately in order to avoid the violation of Section 2(i)(a) of the SCRA which requires spot delivery on payment of consideration. Admittedly, no proof was filed showing payment of consideration in the off market transaction. The AO found that the law requires that in order to be a legal transaction, off-market transaction would have to qualify as a spot delivery contract and that showing it as a loan was wholly illegal. The AO also found that the contention of noticee no. 1 that the shares were purchased on behalf of one Vishal Mahesh Waghela and sale proceed were also transferred to him was disbelieved.

The AO further found that noticee no. 1 inspite of the receipt of the summons failed to furnish information sought from the summons. Inspite of service, no reply was filed and, therefore, the AO rightly penalized them.

The AO further found that noticee no. 1, 2 and 3 were acting as sellers and noticees no. 9, 11 and 12 were buyers and had entered into a structured trade thereby creating artificial / fictitious volume of trading and giving false and misleading appearing of trading in an illiquid scrip and, therefore, such structured trade was violative of the Regulations 3 and 4 of the PFUTP Regulations. The AO found that noticees no. 1, 2 and were major sellers and noticees no. 9, 11 and 12 were major buyers and that the buy orders were placed within close proximity of the sell orders and, therefore, this structured trade was misleading the investors and creating artificial volume. The AO further came to the conclusion, that the sellers placing orders in small quantities was an evidence that price was being manipulated.

We have heard Shri Vikas Bengani, Ms. Rinku Valanju, Shri Gagan Chhabra and Shri Gaurav Agarwal, the learned counsel for the appellants and Shri Sumit Rai, the learned counsel for the respondent.

The contention of the learned counsels for noticees no. 9,11 and 12 are that they are buyers and they had no connection with the counterparty, director or promoters of the Company and, therefore, there was no question of entering into trades which could be termed as fictitious for creating artificial volume nor was there any intention of misleading the investors. It was urged, that there is no allegation of price manipulation and that these noticees are still holding the shares which they had bought. It was further urged that there was no synchronized trades or structured trades and that the trades with the counterparty number 1 & 6 was purely coincidental.

On the other hand, the contention of noticees no. 1, 2 and 3 were that they were only sellers and there was no manipulation of the price of the scrip nor was there any structured trades. It was also alleged that there was no connection with the counterparties, namely, noticees no. 9, 11 and 12. Since there was no meeting of mind nor was there any collusion between them. It was also urged, that the penalty imposed was excessive and that lesser penalty has been imposed to similarly situated persons.

In support of their contentions, the learned counsels placed reliance in the case of Ketan Parekh vs. Securities and Exchange Board of India, Appeal No. 2 of 2004 decided on July 14, 2006, Nirmal Bang Securities (P.) Ltd. vs. SEBI decided on October 31, 2003, Securities and Exchange Board of India vs Abhijit Rajan 2022 SCC OnLine SC 1241, Securities and Exchange Board of India vs Rakhi Trading Private Limited (2018) 13 SCC 753.

Having heard the learned counsel for the parties, we find that no arguments / submissions was made against the findings given by the AO with regard to the shares being received off-market by noticees no. 1, 2 and 3. No arguments was raised that the receipt of the shares was with consideration or that the finding of the AO that it was received without consideration is incorrect. The violation of spot delivery under Section 2(i) (a) of the SCRA was also not contested. Consequently, the finding of the AO that the shares of the Company Wisec Global Limited were received by noticees no. 1, 2 and 3 without any consideration from a director of the Company Kolluru Surya Prakash Venkata is affirmed. The violation of Section 2(i) read with Regulations 13, 16 and 18 of the SCRA is also affirmed.

The fact that false information was furnished by noticee no. 1, namely, that the off-market transaction was a loan transaction is also affirmed, since this point was not argued before us.

Thus, from the above, it is clear that noticees no. 1, 2 and 3 received the shares of the Company Wisec Global Ltd. from its Director Kolluru Surya Prakash Venkata without consideration and with the sole intention of increasing the price of the scrip which was the motive. Further, we find that these noticees were selling the shares in miniscule quantities creating NHP and by such trades increased the price of scrip which was manipulative and violative of Regulations 3 and 4 of the PFUTP Regulations.

The contention that there was no manipulation or structured trade is patently erroneous in as much as we find that the trading pattern of the buyers and the sellers was that they traded in close proximity of time inter-se between them. The buy and sell orders were placed within a short time interval varying from 1 minute to 2,3 or 4 minutes. In our view, such trading pattern as found by the AO cannot occur by accident or by coincidence. The trading pattern leads to an inference that there was a meeting of minds with a pre-determined plan and, therefore, there was a collusion between the parties. Such trades executed, in our opinion, are not genuine and were done with a fraudulent intent to create artificial volume in the scrip.

Thus, the structured trades in an illiquid scrip within the proximity of time in the placement of orders rate makes it apparent that the trades were not genuine. The continuous trades placed between the appellants within a few minutes of each other at almost at the same rate is a structured trade falling short of synchronized trades.

On the analysis of the trading pattern of the noticees that is placing of buy orders for small quantity, it is evident that the price of the scrip was manipulated by the noticees and, therefore, the finding that there was an intent to manipulate the price of the scrip does not suffer from any error of law.

Consequently, the findings that noticees no. 1, 2 and 3 have manipulated the price of the scrip through small trades does not suffer from any error of law. Further, the trading pattern of noticees no. 1, 2 and 3 with noticees no. 9,11 and 12, clearly indicates that these structured trades were done with the intent of creating artificial volumes and misleading appearance of trading with the intent of misleading the investors. Such structured trades were violative of Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations. The decisions cited by the learned counsel for the appellants are not applicable to the facts of the present case.

For the reasons stated aforesaid, we do not find any error in the impugned order. All the appeals fail and are dismissed with no order as to costs. Misc. Application are disposed off accordingly.

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. Certified copy of this order is also available from the Registry on payment of usual charges.