Jinesh D. Bhatt vs Sebi

Appeal No.260 of 2017 Jinesh D. Bhatt 1402, Divya Gunjan, Ganesh Chowk, Mahavir Nagar, Kandivali (West), Mumbai -400 067. .... Appellant

Versus

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

Mr. Ratnesh Mishra, Advocate with Mr. Ghanshyam Upadhyay, Advocate i/b. Law Juris for the Appellant.

Mr. Vishal Kanade, Advocate with Mr. Anubhav Ghosh and Ms. Rashi Dalmia, Advocates i/b. The Law Point for the Respondent.

With Appeal No.269 of 2017

1.

Tarun Kumar Brahambhatt B 1203, Gaurav Geet Housing Society, Gaurav Garden Complex Bandar Pakhadi Road, Kandivali (West), Mumbai-400067.

2. Krishnakumar Brahambhatt B 1203, Gaurav Geet Housing Society, Gaurav Garden Complex Bandar Pakhadi Road, Kandivali (West), Mumbai-400067.

2

3. Prarthana Brahambhatt B 1203, Gaurav Geet Housing Society, Gaurav Garden Complex Bandar Pakhadi Road, Kandivali (West), Mumbai-400067. .... Appellants

Versus

Adjudicating Officer Securities and Exchange Board of India SEBI Bhavan, C-4A, G-Block, Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051. ... Respondent

Mr. J.J. Bhatt, Advocate with Ms. Rinku Valanju, Advocate i/b. R.V. Legal for the Appellants.

Mr. Vishal Kanade, Advocate with Mr. Anubhav Ghosh and Ms. Rashi Dalmia, Advocates i/b. The Law Point for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Justice M.T. Joshi

1. The present appeals have arisen out of two distinct

violations under two different Regulations by Appellant no.1

Tarun Kumar Brahambhatt in Appeal no.269 of 2017.

Appellant Jinesh Bhatt is found in violation of Securities and

Exchange Board of India (Substantial Acquisition of Shares

and Takeovers) Regulations, 1997 (hereinafter referred to as

'SAST Regulations') and Securities and Exchange Board of

India (Prohibition of Insider Trading) Regulations, 1992 3

(hereinafter referred to as 'PIT Regulations') alongwith

Appellant no.1 Tarun Kumar and rest of the appellants in

Appeal no.260 of 2017. Appellant Tarun Kumar is solely

found violating Regulations 3, 4 (2) (a), (b), (e) and (g) of

Securities and Exchange Board of India (Prohibition of

Fraudulent and Unfair Trade Practices Relating to Securities

Market) Regulations, 2003 (hereinafter referred to as

'PFUTP Regulations'). Thus, two distinct facts are involved

in the common impugned order passed by the respondent

Securities and Exchange Board of India (hereinafter referred

to as 'SEBI'). It would be worthwhile first to take for

consideration the case of violation of PFUTP Regulations by

appellant Tarun Kumar Brahambhatt.

2. The proceedings were initiated against the appellant

Tarun Kumar alongwith other noticees no.3 to 7 (not before

us) for manipulating the prices of Rajratan Global Wire Ltd.

(hereinafter referred to as 'Rajratan'). The Adjudicating

Officer found that the other noticees trade was miniscule and

no nexus could be found in the trade between appellant Tarun

Kumar and these other noticees. In the circumstances, the

proceedings against those noticees were dropped. However,

the appellant Tarun Kumar was found in violation of the

Regulations of PFUTP Regulations as detailed above and, 4

therefore, penalty of Rs.15 lakhs was imposed on him under

Section 15HA of the Securities and Exchange Board of India

Act, 1992 (hereinafter referred to as 'SEBI Act').

3. The facts leading to this order are as under -

SEBI conducted investigation in the trading pattern in

the scrip of Rajratan for a period 1st June, 2009 to 26th

November, 2009. The investigation was carried as it was

found that for a period of six months prior to the

investigation period, the average number of shares traded was

only 1,658 which rose to 20,287 during the period of

investigation. However, in the next period of six months the

average trade had decreased to 1751. Similar was the case

regarding the price of the scrip.

4. During the period prior to the investigation, the price of

the scrip ranged from Rs.60/- to Rs.85.4/-. During the

investigation period however the price increased to

Rs.279.4/- and six months thereafter the price decreased to

Rs.201/-. During the investigation it was found that the scrip

was traded on 152 days. Out of the top ten buy and sell

clients appellant Tarun Kumar stood first in both the

categories. During the period he purchased 5,82,129 shares

and sold 5,79,084 shares. His contribution to market volume

in buying was 18.88% while in sell it was 18.78%. 5

The analysis of his trading showed that he used to buy

at the opening of the trade on much higher price than the Last

Traded Price (LTP) in very miniscule proportion say one to

ten shares and then sell his stock for a higher price. Some

time he used to carry out self trade. The details of the trades

carried by him date wise are detailed by the Adjudicating

Officer with time of trading, volume of trade and price from

para nos.49 to 57 of the impugned order.

These details reveal the appellant's strategy was to

purchase bulk of the shares at a lesser market price.

Thereafter, he used to place buy orders on the opening of the

market at much higher price than the LTP for small number

of shares some time one share only. Once that order got

executed then he used to sell his stock at a higher price. The

Adjudicating Officer therefore concluded that appellant

Tarun Kumar had entered into manipulative orders in a short

time which cannot be called a genuine trade except with

manipulative intention behind such trade. So far as trades of

others noticees are concerned, no connection was found in

trading. They were not counter parties to the transactions of

the appellant. However finding the above trading pattern of

the appellant Tarun Kumar, he was found to have violated the

provisions of the PFUTP Regulations as detailed supra. 6

5. The submissions of the appellant before the

Adjudicating Officer as well as the submissions of the

learned counsel for the appellant are that the appellant in fact

traded within the circuit limit fixed by the stock exchanges.

The appellant has traded between 22nd February, 2010 to 8th

July, 2010 by which time the price of the shares had already

increased from Rs.73 to Rs.170. The net effect of the trading

of the appellant is merely Rs.28.28 increase which is

negligible. No uniform unidimensional pattern of trading of

the appellant can be found. Even as recently as on 28th June,

2009 the price of the shares of Rajratan is Rs.866 which

would show that the Company is fundamentally strong. It

was further argued that the appellant was alleged to have

entered into the synchronized trades but the counter parties

are exonerated by the Adjudicating Officer. The very logic

of the allegation therefore fails. So far as self trades are

concerned those are miniscule and those in itself would not

prove that the present appellant had no fraudulent intention to

trade.

6. On the other hand, the learned counsel for the

respondent SEBI submits that the trading pattern as analysed

by the Adjudicating Officer and the conclusion drawn are

based on the factual trading pattern of the appellant Tarun 7

Kumar. The pattern is clear. He therefore supported the

findings. We find that the appellant used to purchase shares

of Rajratan at a lower market price. Then he would place a

buy order on the opening of the trading day at much higher

than the lower price for one for two shares. Once that order

is executed the price would rise and appellant Tarun Kumar

would sell his stock and thus gain from the same. He was

indisputably buyer no.1 and seller no.1 during the

investigation period. Therefore the issue of effect of

exoneration of the counter parties is immaterial. It is true

that synchronized trades or self trades in itself without any

motive may not be called manipulative trade practices. In the

present case, however the pattern as highlighted above would

go to show that the present appellant Tarun Kumar with a

view to gain, indulged into trading in a fraudulent manner as

detailed supra. In our view the order of the Adjudicating

Officer in this regard therefore cannot be faulted.

7. This takes us to the next issue regarding the violation of

the SAST and PIT Regulations in which all the appellants in

both the appeals are parties. This relates to the transfer of

shares of Velan Hotels Ltd. It is an admitted fact that on 11th

January 2010 all the present appellants held 12,99,949 shares

of Velan Hotels Ltd. This accounted for 16.77% of the total 8

shareholding. The shares were more than 15% of the

shareholding. No public announcement was made regarding

the transfer of these shares from the promoters to the

appellants which according to the respondent SEBI was

against the provisions of Regulation 10 of the SAST

Regulations. Therefore the public disclosure was required to

be made under Regulation 10 of the SAST Regulations. It

also invoked the provisions of the PIT Regulations.

8. The case of all the appellants in this regard is that they

had not "acquired" shares. Promoters of Velan Hotels Ltd.

namely Mr. Muthukumaran Ramalingam and Mr. M.R.

Gautam were in need of funds for establishing a shopping

mall project. Therefore they approached appellants Tarun

Kumar and Jinesh for finance. They executed agreement for

pledge of the shares with these two appellants as a security

towards finance to be raised. Accordingly, 13,60,000 shares

were transferred in off market transaction by the said

promoters to these two appellants as well as other appellants.

However, because of various reasons the funds could not be

raised by these appellants. In the circumstances 4,25,166

shares were returned to the promoters from the account of the

appellant Tarun Kumar and his wife Prarthana Brahambhatt.

Further, they were not 'persons acting in concert' as per the 9

definition of SAST Regulations. As no acquisition of shares

has taken place, SAST Regulations as well as PIT

Regulations would not be applicable.

The Adjudicating Officer did not accept the submission.

The AO found that though the copy of the agreement before

her would show that there was a pledge agreement between

appellants Tarun Kumar and Jinesh the same is not recorded

as a pledge in depository records. The shares were

transferred as beneficial owners to all these appellants. Even

the promoters had not marked the 'pledge' on the shares

transfer account. The Adjudicating Officer further observed

that while the shares were transferred between 14th

November to 16th December, 2009 the so called pledge

agreement is dated 19th December, 2009. The cheques

indicated in the said agreement were dated 15th and 27th

January and 2nd and 10th February, 2010.

The appellants had further argued that they cannot be

called as "persons acting in concert" as per the definition

given in the SAST Regulations. So far as this second limb of

the argument is concerned, as per the appellant themselves

while appellant Tarun Kumar and Jinesh had entered into an

agreement with the promoters, on their instructions shares

were also transferred to other appellants namely 10

Krishnakumar Brahmbhatt and Prarthana Brahmbhatt. Thus,

it cannot be gainsaid that the appellant Tarun Kumar and

appellant Jinesh were acquirers while appellants

Krishnakumar and Prarthana were the persons acting in

concert with them as there is common objective between

them.

The issue is as to whether the transfer of shares were

infact acquisition attracting the provisions of SAST

Regulations and eventually PIT Regulations or the

transaction was merely a pledge. However, one thing that is

required to be noted is that as per the provisions of the SAST

Regulations, 1997 even pledge of more than 5% etc of the

shares is required to be disclosed to the Company and to the

stock exchanges. Relevant rules 7(1A) alongwith the

explanation of SAST Regulations, 1997 reads as under:-

"Acquisition of 5 per cent and more shares or voting rights of a company.

7. 1 (1) Any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any, held by him) would entitle him to more than five per cent or ten per cent or fourteen per cent or fifty four per cent or seventy four per cent shares or voting rights in a company, in any manner whatsoever, shall disclose at every stage the aggregate of his shareholding or voting rights in that company to the company and to the stock exchanges where shares of the target company are listed.

11 (1A) Any acquirer who has acquired shares or voting rights of a company under sub-regulation (1) of regulation 11, shall disclose purchase or sale aggregating two per cent or more of the share capital of the target company to the target company, and the stock exchanges where shares of the target company are listed within two days of such purchase or sale along with the aggregate shareholding after such acquisition or sale.

Explanation.--For the purposes of sub-regulations (1) and (1A), the term 'acquirer' shall include a pledgee, other than a bank or a financial institution and such pledgee shall make disclosure to the target company and the stock exchange within two days of creation of pledge."(Emphasis supplied)

9. As regards the violation of Regulation 10 the issue for

consideration is as to whether the transfer was pledge or

acquisition of shares. The learned counsel for the appellant

submitted that later on the appellants have returned

substantive shares and only 2,33,933 shares remained to be

returned. This fact is recorded in the order dated 10th

January, 2018 passed by another Adjudicating Officer while

dealing with the same transactions under Regulation 11 of the

SAST Regulations, 1997. He further submits that the

Adjudicating Officer has exonerated the promoter and the

present appellants from the said proceedings accepting the

case that it was a pledge transaction. The copy of the said

order is filed as Annexure 2 to the Compilation filed on

record by the appellant.

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The learned counsel for the respondent however points

to the fact that in the subsequent proceedings, the

Adjudicating Officer was dealing with the adjudicating the

case of the promoters and increase of percentage of the

shareholding of the promoters under Regulation 11. Para 37

of the said order would show that for lack of evidence in the

matter the violation of Regulation 11(2) read with Regulation

14(1) of the Regulations was held to be not established.

10. In the present case, the learned counsel submits that for

the public in general there was actually a transfer of shares in

the demat account of the appellant beyond 15% of the total

shares. The depository account also showed the same. He

therefore submitted that the Adjudicating Officer had rightly

held that there was acquisition of shares by the appellant

beyond 15% of the total stock of the Company and, therefore,

it was clearly violation of the Regulations.

11. Upon hearing both the sides in our view while

Regulation 7 provides for disclosures even in case of pledge

to private individual, the transaction in question for public in

general and market was change in the shareholding pattern.

The term pledge was nowhere put either in the transfer

account of the promoters or depository account. In that view 13

of the matter, the violations of the Regulations is clearly

ruled.

12. As regards the quantum of penalty the learned counsel

for the appellant submits that the magnitude of the 'offence'

is required to be considered while awarding compensation in

criminal cases. He further submitted that the appellant ought

to have been heard on quantum of compensation. On the

other hand, learned counsel for the respondent rightly

submits that the present case cannot be branded as criminal

case. He points to the reasoning forwarded by the

Adjudicating Officer in the impugned order in this regard.

He submits that the fraudulent practices of appellant Tarun

Kumar in trading the shares of Rajratan and not making

disclosure as well as nondisclosure of acquisition of shares of

Velan Hotels Ltd. and public announcement to acquire the

shares would amount to deprivation of fair treatment of the

shareholders who are affected by the change in control. In

the circumstance, he submitted that the penalty of Rs.15

lakhs imposed upon appellant Tarun Kumar for violation of

PFUTP Regulations, Rs.25 lakhs on the appellants jointly

and severally for violation of Regulation 10 read with

Regulation 14 of the SAST Regulation and of Rs.6 lakhs on

appellant Tarun Kumar and Jinesh for violation of Regulation 14 13(1) of PIT Regulations and Regulation 7(1) of the SAST

Regulations was justified. He further supports the penalty

imposed upon the appellant Jinesh of Rs.4 lakhs for violation

of Regulations 13(3) and 13(5) of the PIT Regulations.

Considering all the material on the record, in our view

the discretion exercised by the Adjudicating Officer needs no

interference in this regard also. In the circumstances, the

appeals are hereby dismissed.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member

17.9.2019 Prepared and compared by RHN