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Judgment
Tarun Agarwala, Presiding Officer
Four appeals have been filed by 45 noticees questioning the order dated November 30, 2022 passed by the Adjudicating Officer (“AO” for convenience) and order dated December 05, 2022 passed by the Whole Time Member (“WTM” for convenience) wherein penalties have been imposed by the AO and directions have been issued by the WTM. Since the issue is common all the appeals are being decided together. For facility, the facts stated in Appeal No. 219 of 2023 Shalomiben Anilbhai Bariya & Ors. vs. SEBI is being taken into consideration.
This is the second round of litigation for most of the appellants. Appeal No. 217 of 2023 has been filed by 15 noticees and Appeal No. 218 of 2023 has been filed by 13 noticees questioning the order of the AO dated January 30, 2022. Appeal No. 219 of 2023 has been filed by 8 noticees and Appeal No. 220 of 2023 has been filed by 9 noticees against the order of the WTM dated December 05, 2022. In Appeal No. 217 of 2023, 7 out of 15 noticees and in Appeal No. 218 of 2023, 4 of the noticees have not questioned the order of the WTM and, therefore, the finding against them in so as the WTM’s orders as concerned has become final.
The facts leading to the filing of the present appeal is, with regard to the trades made in the scrip of Dhyana Finstock Limited. These facts have been narrated in our order dated June 10, 2022 passed in Appeal No. 448 of 2020 in Farooq Kasam Hawa and other connected appeals. For facility, paragraphs 2 to 7 of the said order are extracted hereunder:-
“2. The facts leading to the filing of the appeals are, that a complaint was received by BSE Ltd. (“BSE” for short) on 28th July, 2015 informing that several investors had entered into buy orders on 27th July, 2015 on the basis of a tip received on Short Message Service (‘SMS’ for short). This led to a preliminary examination in the scrip of Dhyana Finstock Ltd., based on which an ad-interim ex-parte order dated 1st June, 2016 was passed restraining certain entities from accessing the securities market. By the said order, BSE was directed to withhold the payout funds of trades executed by certain entities on 27th July, 2015. Subsequently, various confirmatory orders were passed from time to time through which the ex-parte ad interim order was either confirmed, modified or was revoked.
Subsequently, an investigation was carried out in the trading activities in the scrip of Dhyana Finstock Ltd. for the period from June 13, 2014 to July 27, 2015. This investigation period was divided into three patches. Patch 1 was for the period 13th June, 2014 to 28th November, 2014. Patch 2 was for the period 1st December, 2014 to 24th July, 2015 and patch III was for 27th July, 2015.
Based on the investigation, a show cause notice was issued on 20th April, 2018 alleging that the Company issued 64,25,000 shares to 49 preferential entities on 30th November, 2013. The shares of the Company was listed on the BSE on 12th June, 2014 in the category of “Trade for Trade” (T2T) which means trades which compulsory resulted into delivery of shares and that a person cannot execute intra day trades in such a scrip. Out of 49 preferential allottees, 7 of them, namely, noticee nos. 5 to 11 received Rs.15 lakhs each on 28th November, 2013 from noticee no.12, Mihir Consulting and Trading Company for the purpose of applying for the preferential allotment. Noticee nos. 5 to 11 did not have adequate funds of their own. Noticee no.12, Mihir Consulting and Trading Company received Rs.1 crore from AA Plus Commodity Broking Pvt. Ltd. on 28th November, 2013 and another Rs.5 lakh from noticee no.15, Mainak Comtrade Pvt. Ltd. In all noticee no.12 received a sum of Rs.1,05,00,000/- on 28th November, 2013 which was distributed to noticee nos. 5 to 11 of Rs. 15 lakhs on 28th November, 2013 i.e. on the same date. The show cause notice further alleged that noticee nos. 13 to 15 had connection with the Company, Dhyana Finstock Ltd., noticee no.1, namely, that the Director of noticee no.13 was also a Promoter in the noticee no.1, Company and that the Director of noticee no.15 was also a Promoter in the noticee no.1, Company. It was also alleged that noticee no.15 was a related party as per the Annual Report for the financial years 2013-14 and 2014-15.
The show cause notice further alleged that 89 entities were inter-connected on the basis of KYC documents, common directorship, fund transfers, off market transactions etc.
It was also alleged that in Patch 1, 26 entities, namely, noticee nos.17, 18, 19, 20, 21, 43, 44, 45, 80, 81 on the buy side and noticee nos. 22 to 28, 46, 47, 50 to 56 on the sell side traded amongst themselves and created a New High Price on 27 trading days and that these trades were fraudulent as it inflated the price of the scrip artificially. It was alleged that during this period, the price of the scrip rose from Rs. 251 to Rs. 354. In Patch 2, it was alleged that there were 16 noticees on the buy side, namely, noticee nos. 29, 30, 31, 43, 44, 45, 49, 58, 59, 60, 61, 62, 63, 64, 65 and 81 and 21 counter party sellers, namely, noticee nos. 9, 11, 15, 16, 18, 32, 33, 34, 35, 36, 38, 39, 40, 41, 42, 46, 47, 50, 66 and 81 as a result of which the price rose from Rs. 352 to Rs. 395 and also created a New High Price and increase in the market volume. It was alleged that 85% of the market volume was created by sale of shares by preferential allottees and that the counter party buyers who purchased the shares were funded by this Company related entities, namely, noticee nos.12, 14, 15, 16, 17 and 18.
It was also alleged that noticee nos. 32, 33, 34, 35, 36, 37, 38, 41 and 50 were preferential allottees and while selling the shares manipulated the price of the scrip and made profits. Further, noticee nos.16, 18, 21, 29, 31, 43, 44, 61, 62, 63, 64, 80 and 81 also manipulated the price and were net sellers on 27th July, 2015 and made profits. Further, noticee nos. 67, 68, 70, 71, 73, 74, 75, 76 and 79 were exit providers to the preferential allottees by buying at inflated prices and were also net sellers on 27th July, 2015 and also made huge profits.”
The WTM after considering the matter passed an order dated July 29, 2020 imposing various directions. Similarly, the AO passed an order dated August 11, 2020 imposing various penalties. Against the orders of the WTM and AO, 107 appeals were filed by 66 noticees which was decided by this Tribunal on June 10, 2022 in Appeal No. 448 of 2020 Faqooq Kasam Hawa and other connected appeals. This Tribunal allowed one appeal and remanded several appeals for reconsideration in the light of the observation made in the order and dismissed the remaining appeals. For facility, paragraphs 44 and 45 of our order dated June 10, 2022 is extracted hereunder:-
“44. In the light of the aforesaid, the impugned orders of the WTM and AO in so far as it relates to noticee no.50 in Appeal nos. 47 of 2021 and 48 of 2021 are set aside. The said appeals are allowed.
The impugned orders of the WTM and AO in Appeal nos. 221 and 222 of 2021, 223 and 224 of 2021, 227 and 228 of 2021, 233 and 234 of 2021, 235 and 236 of 2021, 243 and 244 of 2021, 245 and 246 of 2021, 249 and 250 of 2021, 251 and 252 of 2021, 257 and 258 of 2021, 259 and 260 of 2021, 261 and 262 of 2021, 269 and 270 of 2021, 275 and 276 of 2021, 279 and 280 of 2021, 287 and 288 of 2021, 289 and 290 of 2021 and appeal nos.231 and 232 of 2021, 253 and 254 of 2021, 297 and 298 of 2021, 225 and 226 of 2021, 229 and 230 of 2021, 239 and 240 of 2021, 265 and 266 of 2021, 247 and 248 of 2021, 219 and 220 of 2021, 263 and 264 of 2021, 241 and 242 of 2021, 237 and 238 of 2021, 277 and 278 of 2021 for noticee nos.62, 29, 64, 43, 49, 30, 65, 31, 63, 44, 61, 42, 58, 60, 66, 16, 15, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79 are set aside. The matter is remitted to the WTM and AO to reconsider the matter in the light of the observations made upon and decide the same afresh after giving an opportunity of hearing within six months from today. The appeals are allowed with no order as to costs. All other appeals are dismissed with no order as to costs. All the misc. applications are also accordingly disposed of.”
The appeals that was remanded for reconsideration was based on the basis of our observation made in paragraphs 38 to 43 which are extracted hereunder:-
“38. Some of the noticees who have traded in Patch 1 and 2 contended that their contribution towards positive LTP was less than 1% which is miniscule and, therefore, their trades does not impact the price manipulation if considered individually. It was urged that the WTM and the AO have erred in considering the LTP cumulatively contributed by all the noticees. In this regard, 17 noticees who contributed less than 1% are appellants are as under:
Sr.
No.
Appellants
Appeal No.
Noticee
No.
1.
Dholakia Jayshreekishor
221of 2021 &
222 of 2021
62
2.
Shalomiben Anilbhai Bariya
223 of 2021 &
224 of 2021
29
3.
ChandirkabenNaranbhai
Panchal
227 of 2021 &
228 of 2021
64
4.
Gaurang Patha
233 of 2021 &
234 of 2021
43
5.
Bimesh Arvindbhai Jani
235 of 2021 &
236 of 2021
49
6.
Dipakkumar Rajaram Joshi
243 of 2021 &
244 of 2021
30
7.
Nikunj Dineshkumar Soni
245 of 2021 &
246 of 2021
65
8.
Birju Pravinchandra Sanghvi
249 of 2021 &
250 of 2021
31
9.
Jayshreeben Shah
251 of 2021 &
252 of 2021
63
10.
Ankit Rajeshbhai Rajput
257 of 2021 &
258 of 2021
44
11.
Ronak Nayankumar Shah
259 of 2021 &
260 of 2021
61
12.
Hitesh Chinubhai Shah
261 of 2021 &
262 of 2021
42
13.
Pratikbhai Kiritkumar Shah
269 of 202 &
270 of 2021
58
14.
Shah Chirag
275 of 2021 &
276 of 2021
60
15.
Manisha Rajendra Modi
279 of 2021 &
280 of 2021
66
16.
Pranatpal Tradelink Pvt.
Ltd.
287 of 2021 &
288 of 2021
16
17.
Mainak Comtrade Pvt. Ltd.
289 of 2021 &
290 of 2021
15
In addition, 13 such noticees, have alleged that they have not contributed to the LTP, namely,
Sr.
No.
Appellants
Appeal No.
Noticee No.
1.
Kiritbhai Shantilal Shah
231 of 2021 &
232 of 2021
67
2.
Naranbhai Panchal
253 of 2021 &
254 of 2021
68
3.
Rahim Umarbhai Ravkarda
297 of 2021 &
298 of 2021
69
4.
Kishorbhai Sonabhai Dholakiya
225 of 2021 &
226 of 2021
70
5.
Rinkeshkumar Panchal
229 of 2021 &
230 of 2021
71
6.
Yogendra J. Pranjapati
239 of 2021 &
240 of 2021
72
7.
Hiteshkumar Mahipatlal Patel
265 of 2021 &
266 of 2021
73
8.
Manish Shah
247 of 2021 &
248 of 2021
74
9.
Anilbhai Bhalabhai Baria
219 of 2021 &
220 of 2021
75
10.
Hiral Manish
263 of 2021 &
264 of 2021
76
11.
Prajapati Nilesh J
241 of 2021 &
242 of 2021
77
12.
Manthan Rajendrabhai Modi
237 of 2021 &
238 of 2021
78
13.
Rohitkumar Shatilal Shah
277 of 2021 &
278 of 2021
79
These facts have not been disputed by the respondent. The only contention raised is that the LTP contribution of these noticees if considered individually may not appear significant but if considered cumulatively the contribution is more than 90% of the total market positive LTP. In this regard, the appellants have relied upon the decision in the matter of Nikki Global Finance Ltd., wherein the WTM have exonerated 99 such noticees whose LTP contribution was less than 1%. The WTM found such trades executed by these noticees to be miniscule and insignificant.
In this regard, we have perused the order of the WTM in the case of Nikki Global and find that a a similar scheme was hatched. The show cause notice alleged that 109 noticees had traded amongst themselves during Patch 1 which has contributed positively to net LTP significantly which were fraudulent and violative of the Regulations 3 and 4 of the PFTUP Regulations. The WTM in its order held:
“c. However, with regard to the other allegation relating to the trades by 90 connected entities resulting into contribution of 42.23% to market +ve LTP during Patch-1, I note that such a contribution is indeed a significant contribution. In this regard, many of the Noticees herein have contended that, their contribution to LTP during Patch 1, is miniscule and negligible and in some cases even zero and hence, they ought not be held liable for any allegations of manipulation in the price of NGFL. I have perused the trades of the 90 connected entities as referred in Table 1 of the SCN. After analyzing the same, I find that out of the 90 connected entities, only 75 entities have been made Noticees to the present SCN, the details of which are as under: …………
d. From the above Table, I find that out of the above 75 Noticees, except for Noticee no. 1, 3, 18, 9, 5, 2, 4, 8, 20 and 82, the +ve LTP contribution to the market +ve LTP of the other Noticees during Patch 1 is less than 1%. The trades of Noticee no. 1, 3, 18, 9, 5, 2, 4, 8, 20 and 82 (hereinafter referred to as ’the 10 Noticees’), have resulted into 31.24% of contribution to market positive LTP during Patch 1 and 26.7% of the total market volume during Patch 1. I also note that except for the 10 Noticees, the other Noticees contribution to the market +ve LTP is not so significant to invite the rigors of regulatory direction under section 11B of SEBI Act, 1992.”
The WTM accordingly, exonerated those noticees who contributed less than 1% on the ground that they did not impact the price manipulation.
In our opinion, considering that SEBI has issued a benchmark exonerating such trades to be insignificant where LTP contribution is less than 1%, we are of the opinion that case of these noticees requires reconsideration. We are of the opinion that a consistent stand is required to be taken by the respondent as a regulator and cannot take different stands for different noticees.”
This Tribunal while upholding the findings against the appellants with regard to price manipulation, funding preferential allottees, LTP contribution, purchasing shares from preferential allottees and providing exit to preferential allottees were found to have violated Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to the Securities Market) Regulations, 2003 (“PFUTP Regulations” for convenience). However, this Tribunal found that in the scrip of Nikki Global decided by the WTM dated February 26, 2021 many noticees were exonerated on the ground that their individual LTP contribution was less than 1% and that it did not impact the price manipulation. This Tribunal in paragraph 43 held that a consistent stand is required to be taken by the Regulator and cannot take different stands for different noticees. Based on the aforesaid observation, the order against these noticees was set aside. The matter was remitted to the AO and WTM to decide the matter afresh in the light of the observation made in the said order.
The AO and the WTM after reconsidering the matter have passed the impugned orders finding the appellants guilty of price manipulation and holding that the case of Nikki Global was distinguishable on facts. The WTM in paragraph 23 held that the decision of the WTM in Nikki Global did not lay down any policy benchmark and the said order exonerating noticees having less than 1% LTP contribution was passed in the peculiar facts and circumstances and that case. In Paragraph 24 the WTM held that the decision in Nikki Global was distinguishable on facts which are not applicable to the facts in the instant case. In paragraph 25, the WTM found that the role of each entity in Nikki Global was not examined holistically nor the cumulative effect of the trades of each entities was considered. On this basis, the WTM distinguished Nikki Global’s case and said that the decision of Nikki Global will not apply to the present facts and circumstances where the appellants have played a fraudulent role and manipulated the price in the scrip in question in connivance with the company, its directors and other entities. The WTM found that the fraudulent activities conducted by the appellants were funding the preferential allottees, contributed to the LTP, created New High Price, purchase shares from preferential allottees or provided exit to the preferential allottees and dumped the shares on July 27, 2015 causing loss to various investors. The WTM found that the scheme orchestrated by the company and its directors and the manipulation of the price by the appellants in connivance with the company and its directors was totally fraudulent and violative of Regulations 3 and 4 of the PFUTP Regulations. Similar findings were also given by the AO.
We have heard Shri Parveen Kumar Bansal, the learned counsel for the appellants and Shri Pradeep Sancheti, the learned senior counsel for the respondent.
The learned counsel for the appellants contended that the case of Nikki Global is similar if not identical to the case of the appellants and that there are no distinguishing features. The finding that the case of Nikki Global is distinguishable on facts or that the case of each entity in Nikki Global was not examined holistically is patently erroneous and that a bare reading of the order in Nikki Global would indicate that the role of each entity was examined and that the facts are similar as that of the appellants in the present case. It was contended that a finding was given in Nikki Global’s case that the entities had played a fraudulent role and manipulated the price of the scrip but were exonerated on account of the fact that their individual LTP contribution was less than 1%. It was thus urged, that benefit of that decision should be given. In support of his submission the appellants relied upon a decision in the case of Sorabh Kumar Poddar vs. SEBI in Appeal No. 72 of 2021 and other connected appeals dated February 14, 2023.
It was also urged, that the Regulator should take a consistent stand and should not take different stand for different noticees. It was also contended that the WTM and the AO has not considered the directions issued by this Tribunal and has showed scant regards to the Tribunal. It was contended that orders passed by the Tribunal is required to be respected by the subordinate authorities. In support of his submission the learned counsel placed reliance upon a decision of the Supreme Court in Union of India vs. Kamlakshi Finance Corporation Ltd. [1992] Suppl.(1) SCC 443.
On the other hand, the learned senior counsel for the respondent contended that this Tribunal while deciding the matter in the first round by its order of June 10, 2022 had found these appellants to be guilty of price manipulation and acting in connivance with the company and its directors. These findings have been given in paragraph 16-25 of the order of this Tribunal dated June 10, 2022. It was further contended that the matter was remitted to the authorities below only on the short ground that the authorities should consider the matter in the light of the decision taken in Nikki Globlal’s case. It was urged, that the impugned orders has taken into consideration the decision of the WTM in Nikki Global which was distinguished and thereafter the authorities has proceed to consider the matter on merits and again came to a conclusion that the appellants have played a fraud and manipulated the price in the scrip in question and thereby violated Regulation 3 and 4 of the PFUTP Regulations.
The learned senior counsel further contended that the order of Nikki Global dated February 26, 2021 was considered by this Tribunal in Surendra Kumar Gupta vs. SEBI in Appeal No. 343 of 2021 decided on 07.02.2022 and other connected appeals wherein the order of the WTM dated February 26, 2021 was set aside. It was urged, that when the order was set aside the question of comparing that case with the present facts now does not arise.
Having heard the learned counsel for the parties, we find that this Tribunal in its earlier order dated June 10, 2022 (in the matter of Farooq Kasam Hawa and other connected appeals) found the noticees including the appellants had indulged in fraudulent activities such as funding the preferential allottees, LTP contributions, purchasing shares from preferential allottees and providing exit to the preferential allottees. This Tribunal found that they were involved in price manipulation. Finding has been given that money was given to these noticees to trade amongst themselves for the purpose of increasing the price and thereafter loan was used to buy the shares at inflated price from preferential allottees. This Tribunal has dealt in detail in its order of June 10, 2022 and after finding the fraudulent activities had remitted the matter only on a short ground to consider the case of Nikki Global and that if their LTP contribution was less than 1% then consider whether benefit has to be given to the present appellants or not.
The WTM and the AO have distinguished the case of Nikki Global. Much arguments have been raised that the case of Nikki Global was similar on facts with the case of the appellants. We are of the opinion, that these submissions have now become irrelevant in view of what we hold hereinafter.
The decision of the WTM in the case of Nikki Global was considered by this Tribunal in Surendra Kumar Gupta in Appeal No. 343 of 2021 and other connected appeals. This Tribunal held that the benchmark of 1% fixed by the WTM was not based on any intelligible criteria nor was based on any Circular or Regulations framed by SEBI and, therefore, the fixation of 1% was arbitrary. This Tribunal also held that when positive LTP as a group is being considered then individual positive contribution cannot be considered. This Tribunal for the aforesaid reasons and on other grounds held that the order of the WTM cannot be sustained and was quashed. For facility paragraph 15(4),(5) and 16 are extracted hereunder.
“15(4) Further, out of 75 noticees, 65 noticees have been exonerated by the WTM on the ground that their individual positive LTP was less than one percent and, therefore, no direction could be issued under section 11B. The benchmark of one percent fixed by the WTM, in our opinion, is not based on any intelligible criteria nor is based on any circular or regulations framed by SEBI in this behalf to show as to how much percentage of positive LTP would be treated as violative of Regulations 3 and 4 of the PFTUP Regulations or would be treated as unfair trade practice. Classification is based on intelligible differentia. The differentia bears a reasonable nexus with the object sought to be achieved. In the instant case, we find that classification is not based on any intelligible criteria nor has any nexus with the objective of the Regulations. In the absence of any criteria laid down by SEBI the fixation of one percent by the WTM without any reasonable basis is arbitrary.
(5) The WTM cannot blow hot and cold and take positive LTP as a group on one hand and consider individual positive contribution of each noticee individually and exonerate them having found that their contribution was less than one percent.
In view of the aforesaid, the directions given by the WTM under section 11B of the SEBI is arbitrary and cannot be sustained. The impugned order is quashed. The appeals are allowed. Misc. application no.420 of 2021 is also disposed of accordingly. In the circumstances of case parties shall bear their own costs.”
Once this Tribunal has given a finding that fixation of 1% LTP contribution by the WTM is arbitrary and the order in the matter of Nikki Global has been quashed, the question of considering the case of Nikki Global in the present matter now does not survive.
When an order is quashed or set aside, the said order is wiped out from its existence as held in Shree Chamundi Mopeds Ltd. vs. Church Of South India 6 Trust Assn. (1992) 3 SCC 1. Thus, once the order is wiped out from its existence, the question of comparing the case of appellants with the case of Nikki Global which is no longer in existence does not arise.
Further, we are of the opinion, when the appellants have been found to be connected to the Company and to the Directors and to a large extent with each other and were found to be involved collectively in manipulating the price then the collective contribution towards LTP is required to be considered and individual contribution of each noticee cannot be considered.
In the light of the aforesaid, the contention of the appellants that they are entitled for the benefit of having less than 1% contribution cannot be considered.
Reliance by the appellants of the decision of this Tribunal in the case of Sorabh Kumar Poddar vs. SEBI dated February 14, 2023 (Supra) is misplaced. In paragraph 21 this Tribunal held that all the sellers have contributed less than 1% of the sell volume and thus on that ground also the impugned orders could not be sustained. The said decision is distinguishable on facts as in that case the Tribunal found that there was no connection with the said appellants with the buyers or with the sellers and, therefore, they were not connected. It was also found that the said appellants were not guilty of increasing the price as it was the buyers by placing the buy orders first were guilty of increasing the price. The Tribunal also found that the buyers were let off by the authorities. In addition to the aforesaid the Tribunal also found that the individual contribution was less than 1% towards LTP and, therefore was miniscule and, consequently, the impugned orders against them were set aside. The said decision is clearly distinguishable and is not applicable.
In view of the aforesaid, we are of the view that the appellants are not entitled for any relief on the ground that they have less than 1% LTP contribution individually. We are of the view that the LTP contribution has to be considered collectively which was substantial.
We accordingly, do not find any merits in the submissions raised by the appellants. All the appeals fail and are dismissed with no order as to costs.
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.