Mr. Rajendra Kumar Kothari vs Sebi

Rajendra Kumar Kothari is being taken into

consideration.

2. PSIT Infrastructure and Services Ltd. made a

preferential allotment of 1,10,00,000 shares at the rate

of Rs.10/- per share on 23rd July, 2012 to 49 non-

promoter entities. The appellants were the preferential

allottees totaling 1200 shares. The said shares were

listed on the BSE platform for trading with effect from

13th August, 2013.

3. According to the appellants they were in need of

money and, accordingly, handed over their shares to a

broker for sale and placed their signature on blank

transfer forms.

4. It transpires that these shares were sold through off

market to 22 entities in small lots of 50 shares over a

period of three weeks and soon thereafter these 22 4

entities started selling miniscule quantity on the stock

market thereby increasing the price of the scrip.

Securities and Exchange Board of India (hereinafter

referred to as 'SEBI') noticing the abnormal movement

in the price of the scrip during the period May, 2012 to

March, 2015 conducted an investigation and found that

the price rose from Rs.50 to Rs.466.95. Accordingly

two show cause notices were issued, one by the Whole

Time Member ('WTM' for short) and the other by the

AO. After considering the reply, the WTM passed an

order dated 5th June, 2020 restraining the appellants

from accessing the securities market for a period of six

months. The AO by the impugned order of 31st July,

2020 has imposed a penalty of Rs.5 lakhs each on the

appellants and Rs.1 lakh on 22 entities. The appellants

being aggrieved by the imposition of penalty by the

AO have filed the present appeal.

5. The finding of the AO is, that the 22 entities/

noticees received the shares from the appellants

through off market and thereafter started selling in the 5

market and sold it off within four months. The AO

found that there were large buy orders inspite of which

the 22 entities sold miniscule quantities thereby

creating artificial volume and increasing the price of

the scrip. The AO found that the strategy adopted by

22 entities was part of large scheme which had a

manipulative intent to increase the price and that the

sales made by the 22 entities had a positive LTP by

86.56%.

6. Considering the aforesaid, the Adjudicating Officer

found that the trades executed by the 22 entities had a

manipulative intent to increase the price which was

fraudulent and collusive and had a structured scheme

of collusion between the noticees and, therefore, was

violative of Regulations 3 and 4 of the Securities and

Exchange Board of India (Prohibition of Fraudulent

and Unfair Trade Practices Relating to Securities

Market) Regulations, 2003 and, accordingly levied a

penalty of Rs.1 lakh on 22 entities and Rs.5 lakhs on

the appellants.

6

7. The AO also found that there was no direct

connection between the appellants and the noticees but

the circumstances and the conduct determined the

connection in as much as all the shares were brought

by the 22 noticees through the appellant and sold in

small quantities and even though the sales was made

within the circuit price but collectively the sales made

by the 22 entities pushed up the price of the scrip. The

AO also found that these shares were illiquid when the

shares were sold by the appellants to the 22 entities.

The AO also found that these shares sold by the

appellants to the 22 entities were roughly sold at the

prevailing market price.

8. In the light of the aforesaid, we have heard Mr.

Monil Punjabi, Advocate assisted by Mr. Himanshu

Agarwal, Advocate for the Appellants and Ms. Nidhi

Singh, Advocate assisted by Ms. Kinjal Bhatt and Mr.

Hersh Choudhary, Advocates for the Respondent.

9. The learned counsel for the appellant submitted that

he is not questioning the findings passed by the AO 7

and is only confining his submissions on the

proportionality of the penalty imposed on the

appellants. The contention raised is, that the appellants

alongwith 22 other noticees were found to be part of a

scheme for making an artificial demand and price rise

of the scrip and all of them have been found guilty of

the same charge, the 22 noticees have only been

penalized Rs.1 lakh each whereas the appellants on the

other hand have been penalized Rs.5 lakh each which

is wholly arbitrary and is not based on any cogent or

sound reasons.

10. In this regard, we find from the impugned order

that the only role assigned to the appellants were that

they sold their 1200 shares off market through a broker

to the 22 entities. It has come on record that the price

at which the appellants had sold was roughly at the

market price. There is no finding that the appellants by

selling their 1200 shares had increased the price of the

scrip or created an artificial demand. The AO finds

that there was a demand for sale of shares in the 8

market but for reasons best known the appellants chose

to sell the shares through off market which created a

suspicion.

11. Be that as it may, even if the preponderance of

probability is taken into consideration that there was

some indirect connection between the appellants and

the 22 entities the appellants cannot be burdened with

the charge of price manipulation or fraud or

inducement to the investors. Even on preponderance

of probability the appellants had no further role to play

in the subsequent sale of the shares in miniscule

quantities by the 22 entities. In the absence of any

finding that the appellants had something to gain by

selling of the shares in small quantities and in the

absence of any finding that the appellants were in some

way connected with other preferential allottees or with

the promoters of the company the imposition of

penalty of Rs.5 lakhs on the appellants in not justified.

12. We are of the opinion that the charge of

manipulation in the price or the increase in positive 9

LTP or the creation of artificial volume has been

proved against the 22 entities. Such charges are absent

in so far as the appellants are concerned. Their only

role was to sell their 1200 shares to the 22 entities

through off market and that too at the prevailing

market price.

13. In the light of the aforesaid, we do not find any

justification by the AO in imposing a penalty of Rs.5

lakhs upon the appellants. We consequently allow the

appeals in part and while affirming the order against

the appellants we reduce the penalty from Rs.5 lakhs to

Rs.1 lakh each to be paid by the appellants. In the

circumstances of the case parties shall bear their own

costs.

14. The present matter was heard through video

conference due to Covid-19 pandemic. At this stage it

is not possible to sign a copy of this order nor a

certified copy of this order could be issued by the

registry. In these circumstances, this order will be

digitally signed by the Private Secretary on behalf of 10

the bench and all concerned parties are directed to act

on the digitally signed copy of this order. Parties will

act on production of a digitally signed copy sent by fax

and/or email.

Justice TarunAgarwala RAJALAKS Digitally signed by RAJALAKSHMI H NAIR

HMI H NAIR Date: 2020.12.28 Presiding Officer 15:25:33 +05'30'

Dr. C. K. G. Nair Member

Justice M.T. Joshi Judicial Member

24.12.2020 RHN