Mr. Shaunak Jagdish Shah & Anr. vs Sebi

Mr. Akash Rebello, Advocate with Mr. Chirag Shah, Mr. Akash Jain, Ms. Daksha Kasekar, Advocates i/b Mansukhlal Hiralal & Co. for the Respondent.

With Misc. Application No. 1134 of 2021 And Appeal No. 629 of 2021 2

1. Mr. Shaunak Jagdish Shah 15A, Shanaz Building, 90, Nepean Sea Road, Mumbai - 400 006.

2. Jamson Securities Pvt. Ltd. 305, Rewa Chambers, 31, New Marine Lines, Mumbai - 400 020. ..... Appellants

Versus

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

Mr. Deepak Dhane, Advocate i/b Corporate Pleaders for the Appellants.

Mr. Akash Rebello, Advocate with Mr. Chirag Shah, Mr. Akash Jain, Ms. Daksha Kasekar, Advocates i/b Mansukhlal Hiralal & Co. for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Justice M. T. Joshi, Judicial Member Ms. Meera Swarup, Technical Member

Per : Justice M. T. Joshi, Judicial Member

1. Aggrieved by the common impugned order dated July 26,

2021 passed by the learned Adjudication Officer (hereinafter referred 3

to as 'AO') of the respondent Securities and Exchange Board of

India (hereinafter referred to as 'SEBI') imposing a penalty of Rs. 20

lacs on the appellant BP Equities Pvt. Ltd. (hereinafter referred to as

'BP Equities'), Rs. 15 lacs on the appellant Shaunak Jagdish Shah

(hereinafter referred to as 'Shaunak') and Rs. 5 lacs on the appellant

Jamson Securities Pvt. Ltd. (hereinafter referred to as 'Jamson

Securities'), the present appeals are preferred.

2. The learned AO found that the present appellants BP Equities

and Shaunak have violated the provisions of Section 12A(a), (b) and

(c) of the Securities and Exchange Board of India Act, 1992

(hereinafter referred to as 'SEBI Act') read with Regulation 3(a), (b,

(c), (d) and 4(1), 4(2)(a) and (g) of the 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'). Additionally, it was also found the

appellant BP Equities and appellant Jamson Securities have also

violated the provisions of Regulation 9(f) of the Securities and

Exchange Board of India (Stock Brokers and Sub-brokers)

Regulations, 1992 (hereinafter referred to as 'Stockbrokers

Regulations'). 4

3. The record would show that Ruchi Soya Industries Ltd.

(hereinafter referred to as 'the company') went through the resolution

plan approved by the National Company Law Tribunal, Mumbai

(hereinafter referred to as 'NCLT'). Thereafter through the

resolution plan, the share of the company was reduced by 99%. The

new promoters got shares in the ratio of 100:1 i.e. for every 100

shares in the company prior to the resolution plan these shareholders

got 1 share each. Thus, new promoters holding became 98.87%

which were under lock in period till February 15, 2021. The entire

promoter holding was pledged. The remaining 1.13% stock was the

only free float available in the market. It was an illiquid stock.

Therefore, on January 27, 2020, it went under the Periodic Call

Auction for illiquid stock and extension of pre-open session to all

scrips as per relevant regulations.

Abnormal activities were noted by the respondent SEBI in the

trading of the stocks, therefore, it conducted investigation in the

trading commencing from January 27, 2020 to May 28, 2020 i.e.

around five months. In these five months, while the opening price

was Rs. 16.1, it went to Rs. 541.35. The present appellants were

found to have used the pre-trades mechanism for 29 days in which 5

they used to place orders far beyond the free float available and

sometime even without there being sufficient margin for placing the

order. All those orders were eventually deleted by the BSE Ltd.

(hereinafter referred to as 'BSE'). However, since those orders

remained on the platform of the stock exchange for few seconds,

according to SEBI, this was a practice of non-genuine trading and,

therefore, the appellants have violated the provisions of PFUTP

Regulations. The appellant BP Equities had the trades in its

proprietary account while appellant Shaunak carried the trades

through appellant Jamson Securities. Therefore, these two appellants

were also found to be in violation of the Stockbrokers Regulations.

Hence the present appeals.

4. We have heard Mr. P. N. Modi, the learned senior counsel

with Ms. Kalpana Desai, Mr. Saurabh Bachhawat, Mr. Sahebrao

Wamanrao Buktare, the learned counsel and Mr. Ravi Vijay

Ramaiya, Chartered Accountant with Mr. Deepak Dhane, the learned

counsel for the appellants and Mr. Akash Rebello, the learned

counsel with Mr. Chirag Shah, Mr. Akash Jain, Ms. Daksha Kasekar,

the learned counsel for the respondent. 6

5. The data collected by the respondent SEBI would show that

these appellants had placed buy orders far greater than the available

market float on 3 trading days and 14 trading days respectively.

While available free float available in the market was 0.33 crore

shares, the buy order quantity added by these appellants was 10.92

crore shares. Further, 96% orders of the appellant Shaunak and 42%

orders of the appellant BP Equities were cancelled by the stock

exchange's system due to insufficient collateral. 4% orders were

deleted by appellant Shaunak and 56% by BP Equities themselves

immediately after placing of the orders. They however were visible

on the stock exchange platform for more than 5 seconds. It was,

therefore, found that all these orders were not genuine orders in these

illiquid stocks.

6. Appellant BP Equities submitted before the respondent SEBI

as well as before us that finding a good opportunity to purchase the

shares, it has entered into placing the order through its dealers who

were doing the jobbing during the relevant period. The dealers were

not aware of the orders placed by the other dealers. As per SEBI's

own circular, the buy orders placed beyond the margin should not be

included by the stock exchange system. Therefore, it was the fault of 7

the stock exchange system. Alternatively, it was contended that

merely because the order is shown pending maximum for a period of

20 seconds, it cannot be alleged that it created any mis-appearance.

Even though the market supposed to be opened at 9:00:00 a.m. sharp,

the order acceptance in all securities starts with some delay of few

microseconds, therefore, some of the multiple orders used to be

entered into the trading system and other orders ended up getting

rejected by the system as the exchange has not started by that time.

In all these circumstances, it wanted that the appeal be allowed.

7. The appellant Shaunak and appellant Jamson Securities filed a

common reply. In fact appellant Shaunak is the son of one of the

directors of appellant Jamson Securities. They submitted that the

appellant Shounak could not purchase any shares despite buy orders

remaining on the exchange system throughout the day. The last

trading price of the scrip of the company before it was delisted on

November 13, 2019 was Rs. 3.32. In view of the share capital

reduction as approved by the NCLT, the price was expected to be Rs.

3.32 per share. On the next opening day on pro-rata basis, however,

the scrip opened upon relisting was Rs. 16.10 on January 27, 2020.

The appellant did not trade on that day in the trading. However, 8

finding that the price was very less, the appellant in desperation

started to recover the loss. The appellant in that desperation, tried to

buy the shares of the company but failed to do so as he could not buy

any shares.

8. Upon hearing both the sides, we find that there is no merit in

the submission of the appellants. It is not the case of the appellants

that they were not aware that the shares were illiquid or that free float

was very limited. Despite this, they deliberately placed orders which

they knew that would not be materialized. Similar is the case

regarding the placing the order though no sufficient margin is already

provided. Appellant BP Equities took shelter behind its dealers and

some time in microsecond delay as detailed supra. It could have very

well instructed it dealers as to who should place the orders and

merely because there was allegedly some mismanagement from its

own side in managing its own dealers, the exchange cannot be

blamed for a delay of few microseconds. The learned counsel for the

appellant has submitted that the case of delay in system was not dealt

with by the learned AO. However, we find that in paragraph no. 40

of the order the same is specifically dealt with by the learned AO. 9

9. Learned counsel for the respondent relied on the ratio of M/s.

Blue Peacock Securities Pvt. Ltd. vs. SEBI in Appeal No. 253 of

2018 decided on December 19, 2019 wherein this Tribunal's finding

is that continuously placing and dealing order in cash market was

indicative of entering into non-genuine trades. In paragraph no. 13

of the said judgment, this Tribunal further held as under :-

"13. In this context, then the question is whether even if there is no other violation such as LTP violations, quantity limit violations, the strategy as described above and adopted by the appellants can be termed as deceptive according to Regulation 3(d) of the PFUTP Regulations, 2003. The answer to this question would require an examination of the volumes. Here, prima facie, we note that the volume of conversion of buy orders is generally in the range of 10 to 22% whereas conversion of sell orders is in the range of 56 to 100%. Though the appellants' volumes as a percentage to the total market volume in no case exceeds 10% because of high liquidity in the identified scrips but the very fact that conversion of the buy orders is less than 1/5th (on the average) of the buy orders placed in the system does have the effect of displaying a larger order book than the actual one. By implication, if a number of traders adopt a similar strategy such a strategy would be disastrous for the market as the market would be far from being fair as it is expected to be. Therefore, it would be a tragedy of the commons, a self-defeating strategy and there is a need for regulations to appropriately capture such violations. The contention of the appellants that they have not violated the circuit filters or the quantity limits etc. are irrelevant since there are no allegations relating to the same nor any penalties imposed on those grounds." 10

10. In the circumstances of the case, there is no merit in the

appeals. Hence the following order :-

ORDER

11. Both the appeals are hereby dismissed without any order as to

costs.

12. This order will be digitally signed by the Private Secretary on

behalf of the bench and all concerned parties are directed to act on

the digitally signed copy of this order. Certified copy of this order is

also available from the Registry on payment of usual charges.

Justice Tarun Agarwala Presiding Officer

Justice M. T. Joshi Judicial Member

Ms. Meera Swarup PRAMILA Technical Member Digitally signed by 02.02.2023 TANAJI PRAMILA TANAJI MISAL Date: 2023.02.02 PTM MISAL 11:55:53 +05'30'