Gaurang Ajit Sheth vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of Decision: 20.01.2016

Appeal No. 2 of 2015

Gaurang Ajit Sheth 115/117, Bhuleshwar Road, 3rd Floor, Kabutar Khana, Mumbai- 400 002 ...Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051 ...Respondent

Mr. Nirman Sharma, Advocate i/b Dharam & Co. for the Appellant.

Mr. Kumar Desai, Advocate with Ms. Shruti Chiniwar, Advocate i/b K. Ashar & Co. for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Jog Singh, Member

Per: Justice J.P. Devadhar (Oral)

1. Appellant is aggrieved by the order passed by the Adjudicating

Officer ("AO" for short) of Securities and Exchange Board of India

("SEBI" for short) on 23.09.2014. By the said order the appellant is held

guilty of violating the provisions contained in the Securities and

Exchange Board of India (Prohibition of Fraudulent and Unfair Trade

Practices relating to Securities Market) Regulations, 2003 ("PFUTP"

Regulations" for short) and accordingly penalty of ` 5 lac is imposed

against the appellant under Section 15HA of the Securities and Exchange

Board of India Act, 1992 ("SEBI Act" for short). 2

2. Impugned order is a common order passed against 16 persons and

the broker (Arcadia Share & Stock Brokers Pvt. Ltd.) on the footing that

the said persons constituted Pabari-Parikh Group and the said group

including the appellant indulged in certain off market transfers,

synchronized trades and self trades in the shares of LGS Global Ltd. now

known as Ybrant Digital Limited ("LGS" for convenience) in violation of

PFUTP Regulations.

3. Appellant is duly qualified in the financial management studies

and has been carrying on the share trading activity since last several

years.

4. SEBI investigated the trading activities in the scrip of LGS during

the period from 10.02.2009 to 07.05.2010 and by interim order dated

02.02.2011 SEBI restrained several persons/ entities from accessing the

securities market and prohibited them from buying, selling or dealing in

securities in any manner till further orders. The said order was confirmed

on 08.07.2011. No allegation was made against the appellant in any of

the above orders.

5. However, a show cause notice was issued to the appellant on

08.10.2013. In para 3 of the show cause notice it was alleged that the

appellant herein was connected with the Pabari-Parikh Group consisting

of sixteen persons. In para 6 of the said show cause notice it was alleged

that the said group including the appellant indulged in certain off market

transfers as per the list annexed thereto. The list annexed to the show

cause notice, however, did not set out any off market transfers by the 3

appellant. In the show cause notice it was further alleged that the

aforesaid off market transfers among the group establish the connection

between the group persons including the appellant.

6. In para 5 of the said show cause notice it was also alleged that the

appellant (Gaurang Ajit Sheth) and Noticee No. 8 (Hemant Madhusudan

Sheth) having common address and common telephone number were

members of the Pabari-Parikh Group and both of them were directors of

Rajnandi Yarns Pvt. Ltd.

7. In his reply to the show cause notice dated 11.08.2014, appellant

clearly stated in para 3 as follows:-

"I am not staying with Hemant Sheth or sharing common

telephone number. I fail to understand how the aforesaid

details are being ascertained by SEBI during Investigation.

It is pertinent to mention that all correspondence by SEBI of

Gaurang Sheth is sent at 115/117, Bhuleshwar Road, 3 rd

floor, Kabutar Khana Mumbai- 400 002 which is not the

address of Hemant Sheth. The allegation that we share a

common address and telephone number with sl no. 22 i.e.

Hemant M Sheth is wrong itself as my address an (sic) is

115/117, Bhuleshwar Road, 3rd Floor, Kabutar Khana

Mumbai- 400 002 and telephone number is 22405859 (zerox

copy of telephone bill enclosed for your ready reference)

and Mr. Hemant Sheth whose address is 2nd Floor

Manekchand Panachand 115/117 Bhuleshwar Road, 4

Mumbai- 400 002 and telephone no. 22406890 (zerox copy

of telephone bill enclosed for ready reference). So the

allegation regarding common address and telephone

number does not arise. Further the records with the SEBI

also show that Gaurang Ajit Sheth address: 115/117

Bhuleshwar Road, 3rd Floor, Kabutar Khana, Mumbai- 400

002 (page no. 2 of SCN) and Shri Hemant M Sheth Flat No.

29, 2nd Floor, 115/117 Bhuleshwar Road Near Kabutar

Khana, Mumbai- 400 002 (page no. 1 of SCN)."

(emphasis supplied)

8. Even though the appellant had specifically denied the allegations

made in the show cause notice and specifically asserted that even the

letters addressed by SEBI belie the allegation of SEBI that both the

appellant and Hemant Madhusudan Sheth have common address, the AO

failed to consider the said submissions raised by the appellant and by

merely recording the alleged connection set out in the show cause notice

concluded in para 16 of the impugned order, that the Noticee No. 1 to 16

(which included the appellant and Hemant Sheth) were all connected to

each other in one way or the other. In para 17 of the impugned order the

AO further recorded that the Pabari-Parikh Group i.e. Noticee No. 1 to

16 (including the appellant) had indulged in certain off market transfers

and that the said off market transfers among the group confirmed the

relationship/connection between the said group. 5

9. As rightly contended by the counsel for the appellant, the AO has

recorded the above findings mechanically and without application of

mind, because, if the AO had applied his mind to the reply filed by the

appellant, then he would have definitely dealt with the argument of the

appellant that even the records of SEBI do not show that the appellant

and Hemant Madhusudan Sheth do not have common address and

common telephone number as alleged in the show cause notice.

Moreover, when the appellant had placed on record the correct address

and telephone number of the appellant which is different from the

address and telephone number of Hemant Madhusudan Sheth, the AO

was duty bound to deal with the said arguments in the impugned order.

Failure on part of AO to deal with the arguments advanced by the

appellant raised in the reply to the show cause notice and arriving at a

conclusion which runs counter to the said reply filed by the appellant has

let to miscarriage of justice because, on account of the alleged common

address and common telephone number which is unsubstantiated, it is

held that the appellant belongs to Pabari-Parikh Group which indulged in

violation of the regulation framed by SEBI.

10. Apart from the above, alleging in the show cause notice that the

appellant had indulged in off market transfers was improper, because the

chart annexed to the show cause notice did not refer to any off market

transfer by the appellant. In any event, when the appellant had

specifically denied to have indulged in off market transfers, the AO could

not have brushed aside the reply of the appellant and mechanically hold

that the appellant has indulged in off market transfers. 6

11. Counsel for SEBI, however, contended that since the decision of

AO that the appellant and Hemant Sheth had common address and

common telephone number is based on the KYC records and since the

appellant had not disputed the KYC records, no fault can be found with

the decision of AO. With reference to the findings relating to the off

market transfers, counsel for SEBI submitted that since the chart annexed

to the show cause notice did not contain any off market transfer, it must

be held that including the name of the appellant in the list of persons who

had indulged in off market transfers was an inadvertent error or

typographical error and hence could be ignored and the impugned order

could be upheld by reducing the penalty to the extent deemed fit and

proper.

12. We see no merit in the above contentions. It is relevant to note that

the in the present case, the show cause notice was issued by the same AO

who has passed the impugned order. Very fact that the

AO had sent the show cause notices to the appellant and Hemant Sheth at

their respective independent addresses clearly belies the contention of

SEBI that as per the KYC records both had common address and

common telephone numbers. If there was any discrepancy in the records

of SEBI and KYC records, the appellant ought to have been confronted

with the same. In any event, when the appellant in his reply to the show

cause notice had clearly doubted the correctness of the documents

gathered during the course of investigation and further furnished two

independent addresses and two independent telephone numbers and 7

contended that the said addresses and telephone numbers are also to be

found in the records of SEBI, the AO was duty bound to verify the same

before confirming the allegations leveled against the appellant. It could

be that the particulars furnished by the appellant to the authorities under

the KYC norms and to the SEBI were mutually contradictory. However,

without dealing with the said inconsistency, if any, in the impugned

order, the AO could not have confirmed the allegations leveled against

the appellant. It was preposterous on part of AO to hold that the

appellant belonged to the Pabari-Parikh Group on the basis of

unsubstantiated facts especially when the appellant doubted the sanctity

of the facts allegedly gathered by SEBI during the course of

investigation.

13. Apart from the above, it was improper on part of AO to allege in

the show cause notice that the appellant had indulged in off market

transfers especially when the chart annexed to the show cause notice did

not set out any off market transfers by the appellant. In any event, when

the appellant specifically denied to have indulged in off market trades,

the AO could not have in a perfunctory manner recorded in para 17 of the

impugned order that the noticee no. 1 to 16 (including the appellant) have

indulged in off market transfers and that the said off market transfers

among the group confirm the relationship/connection between the Pabari-

Parikh Group. Alleging that the appellant had indulged in off market

trades on the basis of the chart annexed to the show cause notice which

did not contain any off market transfers by the appellant, clearly shows

that the said show cause notice was issued without application of mind. 8

In addition to the above, confirming the said allegation in the impugned

order, inspite of the appellant bringing it to the notice of AO that the

appellant had not indulged in off market transfers, clearly shows height

of irresponsibility on part of AO.

14. By no stretch of imagination it can be said that holding the

appellant guilty of indulging in off market trades was an inadvertent error

or typographical mistake. Even after recording in para 17 of the

impugned order that the Pabari-Parikh Group including the appellant

have indulged in off market trades, in para 29 of the impugned order, the

AO records the submission of the appellant that the appellant has not

indulged in off market trades and thereafter, without dealing with the said

contention of the appellant, in para 36 of the impugned order the AO has

recorded that the relationship of the Noticee No. 1 to 16 (including the

appellant) and the off market transfers set out in para 16 & 17 of the

impugned order stand established. Therefore, in the facts of present case,

it is impossible to accept the argument that the findings recorded in the

impugned order holding that the appellant had indulged in off market

trades was an inadvertent error or typographical error. On the contrary,

holding the appellant guilty of indulging in off market transfers without

any basis whatsoever and by ignoring the specific plea of the appellant

clearly shows that the impugned order has been passed with a

preconceived notion of holding the appellant guilty on some pretext or

the other. 9

15. Once the findings recorded in the impugned order that the

appellant belonged to the Pabari-Parikh Group itself is found to be faulty,

then it becomes futile to go into the question as to whether the appellant

had indulged in synchronized trades with the said group and whether the

appellant executed self trades or not as a member of the said group.

Whether the penalty of ` 5 lac imposed against the appellant is

commensurate with the violations allegedly committed by the appellant

compared to the violations allegedly committed by the members of

Pabari-Parikh Group against whom also penalty of ` 5 lac has been

imposed on each member, is also a question which needs reconsideration.

16. In these circumstances, we set aside the impugned order qua the

appellant and restore the matter for fresh decision on merits and in

accordance with law. In the ordinary course we would have restored the

matter to the same AO who has passed the impugned order. However, in

the present case, since the callous attitude on part of AO is not restricted

to the appellant alone and has extended to three other persons referred to

in the impugned order and in the appeals filed by those three persons, on

noticing that the findings recorded therein are mutually contradictory,

counsel for SEBI fairly stated that the impugned order passed against

those three appellants be quashed and set aside. Accordingly on

*20.01.2016 we have allowed the appeals filed by those three appellants,

and set aside the impugned order qua those three appellants with a

direction to SEBI to pass fresh order on merits. 10

17. In these circumstances, since the perfunctory order passed by the

AO is not restricted to an isolated case of the appellant alone but extends

to three more appellants, in the interest of justice, while setting aside the

impugned order qua the appellant, we direct that SEBI may consider

entrusting the remanded matters (including the case of three appellants

which are remanded on *20.01.2016) to any competent AO other than the

AO who passed the impugned order.

18. Appeal is disposed of in the above terms with no order as to costs.

Sd/- Justice J.P. Devadhar Presiding Officer

Sd/- Jog Singh Member 20.01.2016 Prepared & Compared By: PK

*As amended pursuant to order dated 29.01.2016 which reads thus:

ORDER:

It is brought to our notice by Counsel on both sides that in

paragraphs 16 and 17 of the order passed in the above Appeal on

20/01/2016, the date of the order in case of three other Appellants is

inadvertently typed as "19.01.2016" instead of typing as "20.01.2016".

The inadvertent error be corrected accordingly.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

29/01/2016 Prepared & Compared By: ddg