Confirmatory order in respect of Kanaiyalal Baldev Patel, Dipak Patel, Anandkumar Baldevbhai Patel and Bhoomi Industries

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) vide an ad interim ex-parte Order dated May 28, 2009 (hereinafter referred to as the Order), amongst other directions, restrained Mr. Dipak Patel, Mr. Kanaiyalal Baldev Patel, Mr. Anandkumar Baldevbhai Patel and M/s. Bhoomi Industries from buying, selling or dealing in any securities, directly or indirectly, till further directions. Mr. Dipak Patel was also directed not to associate himself with any Foreign Institutional Investor (FII), sub-account or any registered entity of SEBI, till further orders. Mr. Kanaiyalal Baldev Patel and Mr. Anandkumar Baldevbhai Patel were directed to deposit Rs.1,12,68,659.35/-with the National Stock Exchange of India Limited (hereinafter referred to as NSE) within fifteen days from the date of the Order. Further, the Order also directed Passport Capital, LLC and its sub-account, Passport India Investment (Mauritius) Limited to conduct an internal enquiry and initiate appropriate action against their employee, Mr. Dipak Patel and to submit an ‘action taken report’ within thirty days of the Order. For the sake of convenience, Mr. Dipak Patel, Mr. Kanaiyalal Baldev Patel, Mr. Anandkumar Baldevbhai Patel and M/s. Bhoomi Industries are collectively referred to as ‘the parties’ and individually by their respective names. It was alleged that the parties have contravened the provisions of Regulations 3 & 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the PFUTP Regulations). Mr. Dipak Patel and Mr. Kanaiyalal Baldev Patel filed their objections to the Order, vide their letters dated July 31, 2009 and August 25, 2009, respectively. Mr. Anandkumar Baldevbhai Patel, vide letter dated August 25, 2009 filed objections to the Order on his behalf and also for M/s. Bhoomi Industries. Thereafter, the parties were heard in a personal hearing, when Mr. Yogesh K. Jagia, Advocate appeared before me on October 22, 2009 and made his submissions on their behalf. Mr. Dipak Patel was also present during the said hearing. The objections filed by the parties are similar and these are considered in the later part of this Order.

2. The limited issue for consideration, at this stage, is whether the interim directions issued vide the Order needs to be continued, modified or vacated, in so far as the parties are concerned. As per the preliminary findings, Mr. Dipak Patel, working as a portfolio manager in Passport India Investment (Mauritius) Limited (hereinafter referred as Passport) had passed on confidential information about the dealings of Passport in the securities market to his cousin brothers, Mr. Kanaiyalal Baldev Patel and Mr. Anandkumar Baldevbhai Patel and that it was prima facie found that, after receipt of the said information, Mr. Kanaiyalal Baldev Patel had placed orders and executed trades before the buy-sell orders of Passport were placed. He had then squared-off his positions when the orders of Passport were placed in the market, thereby generating unlawful gain for himself from the price movement caused by such large buy/sell orders of Passport. In view of the aforesaid conduct, the parties were alleged to have indulged in “customized front running.”

3. Mr. Dipak Patel in his objections had inter alia stated that impugned directions were passed without any notice and therefore contrary to the provisions of law. This argument would not benefit him, in view of the express provisions in the Securities and Exchange Board of India Act, 1992 (the Act), which empowers SEBI to pass interim directions. The Order was passed by SEBI pursuant to the preliminary findings of the investigation in the matter. He contended that the reply of Mr. Kanaiyalal Baldev Patel to the summons of SEBI dated May 2, 2009 has not been considered. In this regard, I note that SEBI had issued summons dated May 2, 2009 to Mr. Kanaiyalal Baldev Patel to file certain information by May 11, 2009. Instead of filing the said information as directed by SEBI within the stipulated time, Mr. Kanaiyalal Baldev Patel, vide letter dated May 11, 2009 had sought two weeks time for submission of the information.Subsequently, the said information was received by SEBI only on June 1, 2009, after the issuance of the interim order on May 28, 2009. Thus, the contention that SEBI had not considered the reply of Mr. Kanaiyalal Baldev Patel would not arise.

In terms of the preliminary findings, during the period between January 1, 2007 and March, 2009, Mr. Kanaiyalal Baldev Patel, while trading ahead of Passport India in 228 scrip days had bought and sold equal number of shares in all the 228 scrip days. The contention of Mr. Dipak Patel was that he did not discuss about the business activities of Passport with them. He denied having ‘called’ Mr. Kanaiyalal Baldev Patel for the purpose of passing any information about the activities of portfolio management carried out by him for Passport. He submitted that for the period between October 2008 and January 2009, there were only 18 times he had conversed with Mr. Anandkumar Baldevbhai Patel and the common trades between Mr. Kanaiyalal Baldev Patel and Passport were 39 and therefore contended that the conversation has no relevance with the dealings of Mr. Kanaiyalal Baldev Patel. These submissions would not benefit the parties in the facts and circumstances of the case. It is an admitted fact that Mr. Dipak Patel was the portfolio manager of Passport for India. He served as a point of contact between the stock brokers and Passport as he placed the buy-sell orders for Passport.

It was also found that a number of telephone calls were exchanged between Mr. Dipak Patel, Mr. Kanaiyalal Baldev Patel and Mr. Anandkumar Baldevbhai Patel, during the relevant period. Mr. Kaniayalal Baldev Patel was seen to have been placed orders ahead of Passport during the period between January 1, 2007 and March 2009 in 228 scrip days. His trading pattern involved reversing the previous buy-sell trades entered into by him, with the subsequent trade orders placed by Passport. While doing so, Mr. Kanaiyalal Baldev Patel had benefited monetarily from the price fluctuations caused by the orders placed by Passport. In this regard, it has been contended that Mr. Kanaiyalal Baldev Patel had dealt in 34 scrips and that only, 17 scrips were common between him and Passport. The said contention is not appealing in the light of the facts and circumstances of the case. It was seen that in out of 228 scrip days, 214 scrip days were common between Passport and Mr. Kanaiyalal Baldev Patel. It was also noted that in 76 scrip days, the matched quantity between Passport and Mr. Kanaiyalal Baldev Patel was greater than or equal to 90%.

Further, in 48 scrip days, the buy-sell quantity of Mr. Kanaiyalal Baldev Patel was greater than that of Passport. Prima facie, the total profit earned by Mr. Kanaiyalal Baldev Patel from such trades was to the tune of Rs.1.13 crore. When there are more than 6000 companies listed on the stock exchanges, it cannot be a coincidence that 50% of the scrips in which Passport had dealt would also be dealt with by Mr. Kanaiyalal Baldev Patel during the same period. From the preliminary findings of the investigation, it was prima facie seen that Mr. Kanaiyalal Baldev Patel was gaining on each occasion when he had placed orders ahead of Passport.

4. The Order has also mentioned that on January 31, 2008, Mr. Kanaiyalal Baldev Patel had sold the 59,633 shares of Financial Technologies (India) Limited to Passport, out of his purchase of 63,518 shares. The manner of trades executed by Mr. Kanaiyalal Baldev Patel suggested that he was privy to the information about the dealings of Passport before placing his orders. Mr.

Dipak Patel further contended that the dealing of Mr. Kanaiyalal Baldev Patel was not linked to the communication with him. With respect to the fund transfers, Mr. Dipak Patel stated that not a ‘single paisa’ was credited or had accrued to his account and that he had transferred the funds to his cousin brother, Mr. Kanaiyalal Baldev Patel out of natural love and affection to help him carry on his business. These arguments are far from convincing at this stage. Given the fact that Mr. Dipak Patel was the portfolio manager of Passport in India and was placing trade orders for Passport coupled with the fact that his cousin brother, Mr. Kanaiyalal Baldev Patel had bought and sold shares of various companies which were common between him and Passport, does not appear to be coincidental but seems to be a clear preconceived plan of the parties. Further, this has to be seen from the other attendant circumstances such as the admitted relationship among the parties, fund transfers, the telephone calls exchanged among them, during the relevant period, as mentioned in the Order, etc. The instances of matching of trades with Passport are not trivial to be easily brushed aside. He also contended that it was highly improbable that as a portfolio manager with a good salary package knowing his responsibilities, would indulge in such kind of activities when no benefit accrued to his account. That Mr. Dipak Patel had not made any gains from the impugned transactions, as submitted is irrelevant at this stage, when the circumstances indicate his prima facie role in the transactions entered into by Mr. Kanaiyalal Baldev Patel

5. Mr. Dipak Patel also contended that the Order directing him not to associate with any FII or with any SEBI registered intermediary did not have any ‘rider’ nor the extent of the same was defined in the said Order. He contended that the same was against Article 19(1)(g) of the Constitution of India and ‘bad’ on the said ground. He further submitted that he was forced to resign from Passport because of the Order and that directions in the Order had directly impacted his right to practice any profession or to carry on any occupation, trade or business. In this regard, I note that in terms of Article 19(1)(g) of the Constitution of India, all citizens have the right to practice any profession, or to carry on any occupation, trade or business. The said right is applicable to all citizens and is not unfettered but subject to certain restrictions contained in Article 19 thereof. Mr. Dipak Patel has allegedly used his position as the portfolio manager of Passport and passed on the confidential information of the impending trades of Passport to his cousin brother, who in turn had placed orders before the orders for Passport were placed in the securities market.

When the orders for Passport were placed thereafter, Mr. Kanaiyalal Baldev Patel had taken position on the opposite sides, thereby making unjust profits. The instances of matched transactions with Passport have been mentioned in the Order. In such circumstances, it became necessary to restrain Mr. Dipak Patel who was allegedly responsible for passing on such information. It was also thought fit to direct him not to associate himself with any other intermediaries. The Order is interim in nature aimed at preventing further market abuse by the parties concerned and was issued in the interest of the investors and the securities market. Therefore, the part of the Order directing him not to be associated with any FII or SEBI registered intermediary is an interim measure and does not violate his right of profession or business. In this context, I note that the Hon’ble Bombay High Court in Anand Rathi vs. Securities and Exchange Board of India [2001 INDLAW MUM 26], a case where an order of SEBI inter alia restraining the petitioner therein from acting as a director member of the governing body of a stock exchange till further orders, was challenged, had observed as follows - “……………In the instant case the order impugned is of interim nature which is passed by SEBI in a pending inquiry.

The question of any violation of article 19(1)(g) does not arise”. (Emphasis supplied)

Therefore, the plea that the action of SEBI was violative of Article 19(1)(g) of the Constitution has no merit. It is also noted that, as directed by SEBI, Passport had conducted an internal inquiry in the matter and submitted the report. The findings in the said report are not relied upon at this stage for the purpose of this order. However, the same would form part of the material collected during the ongoing investigation and would be appropriately dealt with at the relevant time.

6. The parties have also contended that they were not intermediaries and therefore would not be covered under Regulation 4(2)(q) of the PFUTP Regulations, 2003. On behalf of the parties, it has been contended that the allegation was that of ‘customized front running’ and that for alleging ‘fraud’, it needs to be shown that there was an inducement on their part. In this regard, I find that Mr. Dipak Patel has allegedly passed on information of the orders to be placed by Passport and based on the said information, Mr. Kanaiyalal Baldev Patel had profited. The act of the parties had resulted in wrongful gain to the parties concerned. Had not Mr. Dipak Patel passed on the specific information, Mr. Kanaiyalal Baldev Patel would not have been able to indulge in such transactions and make such profits. In such cases, the pattern of trading done by Mr. Kanaiyalal Baldev Patel on the basis of specific information allegedly passed on by Mr. Dipak Patel to him is in the nature of ‘front running’. Though, Regulation 4(q) would apply for an intermediary, the acts of the parties are nevertheless covered under the other provisions of Regulations 3 and 4 of the PFUTP Regulations. Though, Mr. Dipak Patel has denied passing on the information about the activities of portfolio management carried out by him for Passport with his cousin brothers, the attendant circumstances would strengthen the allegation of SEBI that information was passed on by him to his cousin brothers and who had benefited from indulging in such ‘front running’ activities. The same is also reinforced by the Bloomberg transcripts of the communication had by Mr. Dipak Patel with the stock broker. The said details were mentioned in the order.

7. With regard to the profit purported to have been made by Mr. Kanaiyalal Baldev Patel by his trades, the preliminary analysis found the same to be to the tune of Rs.1.13 crore. The same was calculated after taking into account the trades of Mr. Kanaiyalal Baldev Patel at NSE only. The said amount was directed to be deposited with NSE and the same has been complied with by Mr. Kanaiyalal Baldev Patel. In this regard, he has submitted that the actual profit amount was around Rs.77.33 lakhs and contended that SEBI did not take into account the deductions in respect of Securities Transactions Tax (STT), brokerage and other expenses while calculating the profits. In this regard, I find that the purported profit which accrued to him is prima facie from unapproved acts. Therefore, Mr. Kanaiyalal Baldev Patel cannot claim discounts and concessions from the profits on the ground that he had to incur incidental expenses arising from such trades. Therefore, expenses/STT borne by him from the purported profit cannot be discounted. As said earlier, the trades of Mr. Kanaiyalal Baldev Patel in NSE alone have been taken to calculate the profit. If his trades (with Passport) in BSE are also taken, the profit figure would be much more. Further, the correct assessment of the quantum of profits made by him would be subject to the outcome of the on-going investigation. Such issues would be appropriately dealt with after the conclusion of the investigation in the matter by SEBI.

8. During the personal hearing, the learned advocate inter alia submitted that the allegations were primarily against Mr. Kanaiyalal Baldev Patel and that the Order was silent about Mr. Anandkumar Baldevbhai Patel. I am unable to accept the said submission. It was noted that a number of telephone calls were exchanged between Mr. Dipak Patel and Mr. Anandkumar Baldevbhai Patel. It was observed that most of the trade orders of Mr. Kanaiyalal Baldev Patel were placed through internet using the land line telephone registered in the name of Mr. Anandkumar Baldevbhai Patel. In respect of the telephonic calls exchanged between the parties, it has been submitted that the call records relied upon by SEBI for the purpose of the Order did not establish a link between a call for every trade undertaken by Mr. Kanaiyalal Baldev Patel and that it merely showed that Mr. Dipak Patel was in regular touch with Mr. Kanaiyalal Baldev Patel and Mr. Anandkumar Baldevbhai Patel. I am unable to place reliance on the said submissions of the parties, at this stage. As seen from the facts and circumstances, it cannot be a coincidence that Mr. Kanaiyalal Baldev Patel had dealt in the scrips just prior to the dealing of Passport in the same scrip with such regularity.

He is also found to have been the counter party to the trades of Passport and had earned unjust gain by taking advantage of the price movement. This needs to be seen in the background that Mr. Dipak Patel was the portfolio manager of Passport and was directly responsible for the investments of Passport in the Indian securities market. In this scenario, the role played by Mr. Anandkumar Baldevbhai Patel in the scheme of things cannot be taken lightly. It was submitted on behalf of M/s. Bhoomi Industries that, there were no allegations against it, except that it is a partnership firm. The preliminary investigation of SEBI had also found fund transactions between Mr. Dipak Patel (NRE account maintained with Kotak Bank) and Mr. Kanaiyalal Baldev Patel and between Mr. Kanaiyalal Baldev Patel and M/s. Bhoomi Industries. The sale proceeds of Mr. Kanaiyalal Baldev Patel were credited in his account maintained with the Kotak Bank and he was found to have transferred the funds to his other accounts and also to the account of M/s. Bhoomi Industries (a partnership firm, where Mr. Kanaiyalal Baldev Patel and Mr. Anandkumar Baldevbhai Patel were the partners).

Though, the learned advocate also submitted that the said entity had no demat accounts or transactions in the securities market, I note that there were fund transactions between the accounts of Mr. Kanaiyalal Baldev Patel and M/s. Bhoomi Industries, during the relevant period. The investigation in the matter is in progress. In view of the foregoing, I am not convinced at this stage that there is any need to revoke or modify the interim directions issued in the matter to Mr. Dipak Patel, Mr. Kanaiyalal Baldev Patel, Mr. Anandkumar Baldevbhai Patel and M/s Bhoomi Industries.

9. Therefore, I, in exercise of powers conferred upon me under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 read with Section 19 thereof, hereby confirm the directions issued vide ad interim ex-parte Order dated May 28, 2009 against Mr. Dipak Patel, Mr. Kanaiyalal Baldev Patel, Mr. Anandkumar Baldevbhai Patel and M/s Bhoomi Industries.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: FEBRUARY 9, 2010