M/S. Master Finlease Ltd. vs Sebi

Date of Decision : 21.10.2016

Appeal No. 334 of 2014

M/s. Master Finlease Ltd. 606, Kailash Building, Kasturba Gandhi Marg, Connaught Place, New Delhi - 110 001. ...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. Manish Jain, Advocate for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Anubhav Ghosh, Advocates i/b. The Law Point for the Respondent.

CORAM : Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per : J.P. Devadhar

1.

Appellant is aggrieved by the order passed by the Adjudicating Officer

('A.O.' for short) of Securities and Exchange Board of India ('SEBI' for short) on

22nd July, 2014. By the said order penalty of Rs.25 lac is imposed on the

appellant under section 15HA of the Securities and Exchange Board of India Act,

1992 ('SEBI Act' for short) for 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).

2. Facts relevant for the present appeal are as follows:-

a) SEBI conducted investigation in respect of buying, selling and

dealing in the shares of Gangotri Textiles Limited ('Gangotri' for short) 2

during the period from 7.4.2006 to 31.5.2006. The shares of Gangotri are

listed on the Bombay Stock Exchange ('BSE' for short) and on the

National Stock Exchange of India Ltd. ('NSE' for short).

b) During the investigation period it was observed that the scrip of

Gangotri went up by 33.24% in BSE and 26.88% in NSE while the sensex

recorded a decrease of 12.21% and Nifty recorded a decrease of 12.89%.

c) It was also noticed that the price of the scrip mainly increased from

April 20, 2006 to May 5, 2006, that is, during the said trading days the

price of the scrip increased from Rs.41.2/43 (NSE/BSE) on April 19, 2016

to Rs.71.05/70.95 (NSE/BSE) on May 5, 2006, a rise of 72.45% / 65%

(NSE/BSE) alongwith volume spurt. Investigation further revealed that as

on March 6, 2013 the price of the scrip at NSE and BSE was Rs.2.55 and

Rs.2.24 respectively.

d) The investigation carried out by SEBI revealed that during the

investigation period several entities including the appellant herein

(hereinafter referred to as 'Vishvas Group') had allegedly executed

synchronized trades, circular trades and reversal trades among themselves

and traded in significant variation to the Last Traded Price (LTP) in the

shares of Gangotri.

e) As the trades executed by the appellant were considered to be in

violation of PFUTP Regulations, show cause notice was issued to the

appellant. In the reply to the show cause notice, appellant stated that

during the investigation period, the appellant had bought only 5804 shares

and sold 7000 shares of Gangotri and therefore, the allegation that the

appellant had created artificial volume and price manipulation is not

sustainable.

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f) Thereafter several opportunities of personal hearing were offered,

however, the appellant failed to avail the said opportunity. Hence on the

basis of material on record the impugned order was passed.

3. Mr. Jain, learned Advocate appearing on behalf of the appellant submitted

as follows:-

a) Fact that the appellant had the same address as that of Avisha Credit

and Vishvas Projects Ltd., an entity allegedly connected to the Vishvas

Group, and merely because appellant was a shareholder to the extent of

19.24% in Vishvas Securities Ltd. and the appellant had off market-

transfers with Vishvas Securities Ltd., it could not be inferred that the

appellant belonged to Vishvas group and that the trades executed by the

appellant were in violation of PFUTP Regulations.

b) The Adjudicating Officer is not justified in holding that the trades

executed by the appellant were synchronized trades or circular trades

especially when the appellant has incurred loss by executing the trades in

question.

c) Before initiating action against the appellants it was obligatory on

part of SEBI to investigate in to the question as to whether the mitigating

factors set out in Section 15J of SEBI Act, exist in favour of the appellant

or not. Failure on part of SEBI to investigate in that behalf has vitiated the

impugned decision and hence the impugned order deserves to be quashed

and set aside.

d) In any event having recorded a finding that it is difficult to quantify

the disproportionate gain or unfair advantage enjoyed by the appellant and

admittedly there being no loss to the investors, the Adjudicating Officer is

not justified in imposing exorbitant penalty of Rs.25 lac against the

appellant.

4. We see no merit in the above contentions.

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5. In para 15 of the impugned order the Adjudicating Officer has recorded

the connection of the appellant with the Vishvas Group entities. In the said para,

it is recorded that the address of the appellant and the address of Avisha Credit

Capital Ltd and Vishvas Projects Ltd is common. It is also recorded in the said

para that the appellant holds 19.24% shares on Vishvas Securities Ltd and that the

appellant had off market transactions with Vishwas Securities Ltd.

6. Having thus established the connection between the appellant and the

Vishvas group entities, the A.O. with facts and figures has established that the

appellant is totally wrong in contending that it had bought 5804 shares of

Gangotri and sold 7000 shares of Gangotri during the investigation period. In the

impugned order it is recorded on the basis of trade and other logs that during the

investigation period, appellant had traded in the scrip of Gangotri at BSE as well

as NSE and bought 38,000 shares and 20500 shares of Gangotri and sold 18,386

shares and 1,11,400 shares of Gangotri at BSE and NSE respectively.

7. Apart from the above, the A.O. has recorded a finding that in respect of

several trades executed by and between appellant and Vishvas Group of entities,

the difference between buy order time and sell order time was less than 60

seconds and there was no difference between buy order rate and sell order rate as

well as there was no difference between buy order quantity and sell order

quantity. Finding of fact recorded in the impugned order relating to the

synchronised trades of the appellant with the Vishvas group entities are as

follows:-

a) Out of the total 20,500 shares of Gangotri bought by the appellant at

NSE during the investigation period 5804 shares were synchronized with

the members of Vishvas Group viz. Ishita Finstock Ltd. & ISF Securities

Ltd.

b) Out of the total 1,11,400 shares of Gangotri sold by the appellant at

NSE during the investigation period 7000 shares were synchronized with 5

the member of Vishvas Group viz. MEFCOM Securities Ltd. One of the

instances of the synchronized trade by the appellant with other members of

Vishvas Group was that, on 28th April, 2006, the Appellant sold 5000

shares of Gangotri at the rate of Rs.57.95/- to MEFCOM Securities

Limited (MEFCOM for short, a Vishvas Group entity) at 15:24:27 and the

buy order was placed by MEFCOM at 15:24:27 at the rate of Rs.57.95 for

5000 shares and the sell order was placed by the appellant at 15:24:23 at

the rate of Rs.57.95 for 5000 shares. The aforesaid facts establish beyond

any shadow of doubt that the appellant had indulged in synchronized

trades.

8. Apart from the above, the Adjudicating Officer has clearly brought on

record that the appellant had indulged in circular trades by recording the

following:-

a) Out of the 38,000 shares of Gangotri bought by the appellant at

BSE, during the investigation period, 27,399 shares were involved in

circular trading with the other members of Vishvas group i.e. MEFCOM,

Purshottam Khandelwal ('Purshottam' for short) and Praveen Poddar

('Praveen' for short).

b) Out of 18,386 shares of Gangotri sold by the appellant at BSE

during the investigation period, 18,386 shares were involved in circular

trading with the other members of the Vishvas Group i.e. Purushotam and

ISF Securities Ltd ('ISF' for short).

c) Similarly, out of 20,500 shares of Gangotri bought by the appellant

during the investigation at NSE, 9814 shares were involved in circular

trades with the members of the Vishvas Group.

d) Out of 1,11,400 shares sold by the appellant during the investigation

period at NSE 36,865 shares were involved in circular trading with the

other members of the Vishvas Group i.e. MEFCOM and Ishita. 6

e) As a result of above trades executed by Vishvas group entities, the

price of the scrip of Gangotri at BSE/NSE had increased from

Rs.43/Rs.41.25 on April 19, 2016 touched the high of Rs.70.95/Rs.71.05

on May 5, 2006 and then decreased to Rs.44.35/RS.45.40 on May 31, 2006

within a period of one and half month.

9. In these circumstances, the finding recorded by the Adjudicating Officer

that the pattern of synchronized order placement and circular trading clearly

establish that the transactions were carried out with the intension that the orders

of participating entities should match and that there was prior arrangement with

respect to those of transactions cannot be faulted. The Adjudicating Officer is

justified in holding that the very fact that the Vishvas group entities were trading

continuously among themselves by placing orders in such pattern thereby

contributing significantly to the total volume in the market cannot be faulted.

10. Argument advanced by the counsel for the appellant that having common

address and having shares of Vishvas Securities Ltd. could not be a ground to

infer that the appellant was connected with the Vishvas Group is without any

merit. In the present case, the Adjudicating Officer has not only established the

connection of the appellant with the Vishvas Group but also demonstrated that

the trading pattern among themselves resulted in synchronized trades and

circular trades which were in violation of the PFUTP Regulations.

11. Fact that the appellant had incurred loss by executing the trades in

question cannot be a ground to infer that the said trades were not in violation of

the PFUTP Regulations. Having violated the PFUTP Regulations, the appellant

cannot escape the penal liabilities merely because the appellant chose to incur

losses on account of the trades in question.

12. Argument of the appellant that before initiating action against the

appellant it was obligatory on the part of SEBI to investigate into the question as

to whether the mitigating factors set out in Section 15J of SEBI Act existed or 7

not is also without any merit. Question of taking into consideration the

mitigating factors set out in Section 15J arises only when it is established that

the provisions contained in the SEBI Act and the Regulations framed thereunder

have been violated. In the present case, after having come to the conclusion that

the appellant had violated the provisions contained in the PFUTP Regulations

the Adjudicating Officer has recorded a finding that it is difficult to quantify

exactly the disproportionate gain or unfair advantage enjoyed by the appellant

and the consequent losses suffered by the investors. Although, the violations

committed by the appellant fall under Section 15HA of SEBI Act and the

penalty imposable thereunder was Rs.25 crore, the Adjudicating Officer has

imposed a penalty of Rs.25 lac against the appellant which cannot be said to be

exorbitant or excessively high. It is a matter of record that SEBI has proceeded

against various entities of the Vishvas group entities for violating the PFTUP

Regulations and has imposed varying penalties up to the extent of Rs.1crore. In

these circumstances, no fault can be found with the decision of the Adjudicating

Officer in imposing penalty of Rs.25 lac as against the appellant on Rs.25 crore

imposable under Section 15HA of the SEBI Act for violating the PFUTP

Regulations.

13. At the beginning of the hearing arguments were advanced on the

question, as to whether the hearing of the appeal ought to be postponed in view

of the decision of the Apex Court in case of SEBI vs. Roofit Industries Ltd

reported in (2016) 194 Comp.Cases 186 (S.C.) regarding imposition of

mandatory penalty of Rs.25 crores under Section 15HA of SEBI Act being

reconsidered in view of the subsequent judgment of the Apex Court in case of

Siddharth Chaturvedi & Etc. vs. SEBI reported in [2016]195CompCas(SC). In

the present case, since SEBI in exercise of its discretion had imposed penalty of

Rs.25 lac as against the penalty of Rs.25 crore imposable, both parties agreed to

proceed with the hearing of the appeal.

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14. However, at the end of his arguments counsel for the appellant having

realized that it would be difficult to succeed in the matter, repeatedly sought to

seek adjournment on the ground that the decision of the Apex Court in case of

Roofit Industries Ltd. (supra) is being reconsidered. However, the request was

rejected and arguments were concluded.

15. Being dissatisfied with the above conduct of the counsel for the appellant

on conclusion of the hearing we had pronounced that we are dismissing the

appeal with costs quantified at Rs.10,000/-. However, for the misconduct of the

counsel, we deem it proper not to penalize the appellant. Accordingly, we

refrain from imposing costs.

16. In the result, the appeal is dismissed with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

21.10.2016 Prepared and compared by

RHN