Mr. Ashlesh Shah vs Sebi

Order Reserved On: 06.04.2018 Date of Decision : 18.04.2018

Misc. Application No. 254 of 2017 And Appeal No. 265 of 2017

Mr. Ashlesh Shah 16, Vasupujyakrupa Society, Ambawali, Ahmedabad- 380 015 ...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. J. J. Bhatt, Advocate with Ms. Rinku Valanju, Advocate i/b R. V. Legal for the Appellant.

Mr. Mustafa Doctor, Senior Advocate with Mr. Tomu Francis and Mr. Vivek Shah, Advocates for the Respondent.

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

Per: Justice J.P. Devadhar (Oral)

1.

This appeal is filed to challenge the order passed by the Whole

Time Member ("WTM" for short) of Securities and Exchange Board of

India ("SEBI" for short) on 05.09.2017. By the said order three persons

including the appellant are prohibited from buying, selling or dealing in

the securities market for the period as more particularly set out therein.

Out of the three persons set out in the impugned order, only the appellant

has chosen to file appeal against the impugned order dated 05.09.2017. 2

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

a) SEBI conducted investigation in respect of trading in

the scrip of Rotam Commercials Limited ("RCL" for

convenience) for the period from 20.01.2010 to

17.05.2010. Investigation revealed that during the

said period the price of RCL scrip increased from

` 82.15 (opening price) on 20.01.2010 to ` 153 on

12.04.2010 and closed at ` 69.90 on 17.05.2010.

b) Investigation further revealed that the promoter/

promoter group entities of RCL and their connected

entities (collectively known as 'Malani group')

wanted to liquidate their holdings and exit from RCL.

As the scrip of RCL was an illiquid scrip, the modus

operandi adopted was that RCL transferred funds to

another connected/ related group (commonly referred

to as 'Krupa Soni group') consisting of Ms. Krupa

Soni, Mr. Sanjay Soni, J M Soni Consultancy,

Mr. Krunal Gopaldas Rana, Mr. Dhirenkumar

Dharmdas Agarwal and Mr. Ashlesh Shah (Appellant

herein) who purchased 2,49,966 shares (26.04% of the

total capital) and sold 2,10,343 shares (21.91% of the

total capital) during the period of investigation.

c) On the basis of above information gathered during the

course of investigation, show cause notice was issued 3

to several entities including the appellant to show

cause as to why action should not be taken for

violating the provisions contained in the Securities

Contracts (Regulation) Act, 1956, Securities and

Exchange Board of India Act, 1992 and the

regulations framed thereunder.

d) On receiving reply from the noticees to the show

cause notice including the appellant, the WTM of

SEBI passed an order on 01.10.2014 thereby

prohibiting all the noticees including the appellant

from buying, selling or dealing in the securities

market, in any manner whatsoever for a period of 5

years.

e) On appeal filed by the appellant, this Tribunal vide

order dated 10.10.2014 set aside the order of WTM of

SEBI dated 01.10.2014 qua the appellant and

remanded the matter for fresh decision on merits.

f) Accordingly, fresh order was passed by the WTM of

SEBI against the appellant on 11.06.2015. By the

said order the appellant was once again prohibited

from buying, selling or dealing in the securities

market for a period of 5 years.

g) On appeal filed by the appellant, this Tribunal vide

order dated 08.12.2016 set aside the order passed by 4

the WTM of SEBI on 11.06.2015 basically on ground

that in case of other group entities with whom the

appellant was allegedly connected, fresh order on

remand was yet to be passed and therefore, it would

be just and proper that the WTM of SEBI passes a

composite order against all the group entities

including the appellant.

h) Accordingly, the WTM of SEBI passed the impugned

order on 05.09.2017, whereby three persons including

the appellant are prohibited from buying, selling or

dealing in the securities market for the period as more

particularly set out in the impugned order.

i) Challenging the said order dated 05.09.2017 the

appellant has filed the present appeal.

3. Basic charge upheld in the impugned order is that the appellant and

two other persons belonging to the Krupa Soni group had created

artificial trading interest in the illiquid scrip of RCL so as to enable the

Malani group (promoter group) to exit the company in violation of the

securities laws.

4. Reasons on the basis of which the WTM of SEBI has arrived at the

aforesaid conclusion may be summarized thus:- 5

a) Prior to the investigation period (i.e. between

01.10.2009 to 19.01.2010) the liquidity in the scrip of

RCL being very low, the RCL scrip was an illiquid

scrip.

b) During the investigation period (i.e. between

20.01.2010 to 17.05.2010) price of RCL scrip rose

from ` 77.75 per share to ` 153/- on 12.04.2010 and

then closed at ` 69.90 on 17.05.2010. The total traded

quantity during the investigation period was for

9,36,115 shares in 79 trading days with average daily

traded quantity being 11,850 shares.

c) Post investigation period (i.e. between 18.05.2010 to

30.09.2010) the average daily traded quantity in the

RCL scrip was for 18921 shares and during the post

investigation period while the sensex moved up by the

19.17%, the RCL scrip closed at ` 29.65 on

30.09.2010 and thereafter on 13.09.2011 the RCL

scrip closed at ` 18.95 per share.

d) During the investigation period Krupa Soni group had

purchased 2,49,966 shares (approximately 26.70% of

the total traded quantity) for ` 3.09 crore and had sold

2,10,343 shares (approximately 22.47% of the total

traded quantity) for ` 2.66 crore with the gross 6

quantity traded by the group being approximately

24.59% of the market gross.

e) During the investigation period the promoter group

(Malani group) exited RCL by selling 2,47,125 shares

at a value of ` 2.58 crore.

f) Krupa Soni group entities were the counter parties for

approximately 28.19% of all the sales effected by

Malani group of entities during the investigation

period.

g) RCL had funded Krupa Soni group by transferring

` 42 lac to J. M. Soni Consultancy (Prop. Sanjay

Soni) during the period April-May 2010.

h) As per the KYC records, appellant belonging to the

Krupa Soni group had introduced Krunal G. Rana

(another member of Krupa Soni group) to the broker

for opening trading account. On 24.02.2010, the

appellant had received ` 2.75 lac from J.M. Soni

Consultancy (Prop. Sanjay Soni) and on 06.04.2010

the appellant had bought 7700 shares of RCL at

` 149.86 per share and sold 7000 shares on

13.04.2010 at ` 146.22 per share and further sold 420

shares on 16.04.2010.

7

i) Even in the past appellant has been found guilty of

violating the securities laws.

5. It is the case of the appellant that neither the appellant belonged to

Krupa Soni group nor the appellant's trade could be said to have created

artificial momentum in the illiquid scrip of RCL and therefore the

impugned order deserves to be quashed and set aside.

6. No doubt that during the entire investigation period Krupa Soni

group had purchased 2,49,966 shares of RCL valued at ` 3.09 crore and

had sold 2,10,343 shares of RCL, valued at ` 2.66 crore. However, the

appellant placed buy order only once and bought 7700 shares of RCL on

06.04.2010 at a cost of ` 11.53 lac. There is nothing on record to suggest

that Malani group entities were the counter parties to the buy order

placed by the appellant.

7. In the impugned order, the WTM of SEBI has set out a list of top

ten buyers and top ten sellers in the RCL scrip during the investigation

period. In that list the name of the appellant does not appear.

8. However, the appellant is held to belong to Krupa Soni group and

is held to have created artificial momentum in the illiquid RCL scrip,

because, firstly appellant had introduced Krunal G. Rana (belonging to

the Krupa Soni group) to MTL Share and Stock Brokers Ltd. for opening

a trading account and Krunal G. Rana had heavily traded in the RCL

scrip during the investigation period. Secondly, RCL transferred funds to

J.M. Soni Consultancy (Prop. Sanjay Soni) and J. M. Soni Consultancy in 8

turn made several payments to Krunal G. Rana and also paid ` 2.75 lac to

the appellant on 24.02.2010. Thereafter on 06.04.2010 appellant had

purchased 7700 shares of RCL and sold 7000 shares on 13.04.2010 and

420 shares on 16.04.2010. Since the Malani group (promoter group) had

liquidated their shareholding in RCL during the investigation period and

Krupa Soni group entities were counter parties to most of the trades of

Malani group it is held that the appellant belonging to the Krupa Soni

group was also responsible for creating momentum in the illiquid scrip

and, thereby facilitate the exit of the promoters of RCL.

9. It is relevant to note that during the investigation period the RCL

scrip rose from ` 82.15 up to ` 153, whereas, appellant purchased 7700

shares on 06.04.2010 at a cost of ` 11.53 lac i.e. @ ` 149.86 per share.

Thus, on the date on which the appellant bought the shares, the RCL

scrip had ceased to be an illiquid scrip and in fact the RCL scrip was

virtually at its peak. In such a case, it is difficult to sustain the decision

of the WTM that the appellant was also involved in creating artificial

momentum in the RCL scrip so as to facilitate the promoters of RCL to

exit the company.

10. Decision of the WTM that the appellant belonged to Krupa Soni

group deserves acceptance, because, admittedly appellant had introduced

Krunal G. Rana to the broker for opening the trading account and

admittedly Krunal Rana had traded in the RCL scrip for several days

during the investigation period. Moreover, it is an admitted fact that the

appellant had several financial dealings with J.M. Soni Consultancy a 9

sole proprietary concern of Sanjay Soni who had also traded in the shares

of RCL on several days during the investigation period. Ms. Krupa Soni

is the wife of Sanjay Soni who had also traded in the shares of RCL on

several days during the investigation period. Thus, the facts on record

clearly show that the appellant belonged to Krupa Soni group.

11. However, mere fact that the appellant belonged Krupa Soni group

could not be a ground to hold that the single buy order placed by the

appellant on 06.04.2010 to buy 7700 shares of RCL was with a view to

create an artificial momentum in the illiquid scrip of RCL. As noted

earlier, by 06.04.2010 the RCL scrip had ceased to be an illiquid scrip

and in view of heavy trading, the RCL scrip had virtually reached its

peak on 06.04.2010. The WTM of SEBI sought to link receipt of

` 2.75 lac by the appellant from J.M. Soni Consultancy on 24.02.2010 to

the shares of RCL bought by the appellant on 06.04.2010. However, it is

relevant to note that the appellant acquired 7700 shares at a cost of

` 11.53 lac, whereas, the amount received by the appellant from J. M.

Soni Consultancy was only ` 2.75 lac. Moreover, the bank statements

furnished by the appellant show that during the investigation period,

appellant had advanced huge amounts to J.M. Soni Consultancy. When

the appellant had advanced huge amounts to J. M. Soni Consultancy

during the investigation period, it could not be said that the appellant had

received ` 2.75 lac from J.M. Soni Consultancy for acquiring shares of

RCL and thereby create artificial interest in the illiquid RCL scrip so as

to enable the Malani group (promoter group) of RCL to exit the

company. Since SEBI has not investigated fund movement from the 10

appellant to J.M. Soni Consultancy, we find it difficult to uphold the

decision of the WTM that funds were transferred from RCL to J.M. Soni

Consultancy and from J.M. Soni Consultancy to the appellant for buying

the shares of RCL so as to create artificial momentum in the RCL scrip

and facilitate the promoters of RCL to exit the company.

12. Apart from the above, the WTM of SEBI has committed an error

in holding that even in the past this Tribunal in the case of Krupa Soni v/s

SEBI (Appeal No. 32 of 2013 decided on 24.01.2014) has found the

appellant guilty of violating the securities laws. In that case SEBI had

held that Krupa Soni group had committed violations in the scrip of

'Shree Global Tradefin'. While setting out the names of the persons

belonging to the Krupa Soni group this Tribunal had merely recorded that

the appellant belonged to Krupa Soni group. Neither in that case, SEBI

had issued any show cause notice to the appellant, nor this Tribunal in

that case had held that the appellant had violated securities laws in the

scrip of 'Shree Global Tradefin'. Therefore, the WTM of SEBI is wholly

unjustified in holding that in the past also the appellant has been found to

have violated the securities laws.

13. As on date the appellant has already suffered prohibition imposed

by the WTM for more than two years. Since we find it difficult to sustain

the view taken by the WTM qua the appellant, in the facts of present case

we deem it proper to give benefit of doubt to the appellant and

accordingly set aside the impugned decision qua the appellant. 11

14. In the result, appeal is allowed by setting aside the impugned order

qua the appellant with no order as to costs. In view of disposal of the

appeal, Miscellaneous Application No. 254 of 2017 becomes infructuous

and is disposed of accordingly with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 18.04.2018 Prepared & Compared By: PK