Order against Bharat Palan in the matter of Hitech Drilling Services Ltd

1. Securities and Exchange Board of India (hereinafter referred to as SEBI) conduced an investigation into the affairs relating to the acquisition of Hitech Drilling Services India Limited (hereinafter referred to as the company) by Aban Lloyd Chiles Offshore Limited (hereinafter referred to as Aban) during March 2001 and the trading in the shares of the company. SEBI investigation revealed that DSP Merryll Lynch Limited (hereinafter referred to as DSPML) acted as the buy side advisers to Aban in respect of the acquisition of the company during 2000-01. The shares of the company were inter alia listed on Bombay Stock Exchange Limited (hereinafter referred to as BSE) and were also permitted to be traded at the National Stock Exchange of India Limited (hereinafter referred to as NSE). As per the details submitted by DSPML, the share price in respect of the abovementioned acquisition of the company was fixed at Rs. 92/- per share, on the evening of March 13, 2001. It was noticed that the shares of the company which were being traded in the range of Rs. 32/- to Rs. 40/- between March 1, 2001 and March 13, 2001, touched the upper circuit limit prices continuously from March 14,2001 till March 16, 2001. DSPML also informed SEBI that, it had conducted an internal inquiry in respect of the involvement of its employees and found that one of the members of the core team divulged unpublished price sensitive information about the acquisition of the company by Aban to Mr. Ramamurthy Srinivasan (another employee of DSPML), but was not a part of the core team.

Further, the investigation also revealed that Mr. Dinesh Krishnan (employee of DSPML during the relevant time) had given a loan of Rs.7,50,000/- to one Paresh Thakkar in March 2001. In the statement given by Mr. Dinesh Krishnan to DSPML, he stated that he had given the said loan to Mr. Paresh Thakkar so that the latter could use the same and his uncle, Mr. Bharat Palan (hereinafter referred to as the noticee) for trading in the shares of the company. It was alleged that the noticee had started placing orders in the shares of the company from March 14, 2001 at prices higher than the prevalent market prices and thereon March 15 and 16, 2001. In view of the above, it was inter alia alleged that the noticee has contravened Regulations 3 and 4(a) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as PFUTP Regulations). SEBI issued a notice dated June 8, 2006 to the noticee inter alia advising him to show cause as to why actions should not be taken/direction issued against him under Sections 11 and 11B of Securities and Exchange Board of India Act, 1992 (Act) read with Regulation 11 and 13 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. Thereafter, copies of the documents which were relied upon were also furnished to the noticee and he was further advised to file his reply.

However, the noticee had failed to file any reply. Though, the noticee was afforded numerous opportunities of hearing before my predecessor, he had failed to appear for hearing and instead, sought adjournments on one or the other grounds. Thereafter, pursuant to the rejection of the application filed by the noticee for consent order in terms of SEBI Circular dated April 20, 2007, an opportunity of hearing was granted to the noticee on June 16, 2009. The noticee, vide letter dated June 9, 2009 sought adjournment of the said hearing to a date preferably after July 16, 2009. Accordingly, another opportunity was granted to the noticee on July 21, 2009. In the meanwhile, the noticee, vide letter dated July 14, 2009 filed his reply to the show cause notice. The contentions of the noticee are considered in the later part of this Order. Mr. Bharat Merchant, Advocate, as authorized by the noticee appeared before me and made submissions on July 21, 2009. Mr. Prakash Shah, Advocate and the noticee were also present during the time of the personal hearing. The learned counsel made submissions on the lines of the reply of the noticee dated July 14, 2009.

2. I have perused the show cause notice issued to the noticee, the oral as well as written submission made on his behalf and other material available on record. One of the allegations leveled against the noticee is that he had violated Regulation 3 of the PFUTP Regulation, by buying the shares of the company from the securities market concealing the fact that he had unpublished price sensitive information about the company and thereby he had deceived the sellers. The learned counsel vehemently argued that though it is mentioned in the show cause notice that Mr. Paresh Thakkar had divulged the information to the noticee, it is silent as to how he had divulged the same information. He, therefore, submitted that the noticee is not liable for the charge of Regulation 3 of the PFUTP Regulations. The learned counsel also brought my attention to the show cause notice (which was based on the statement of Mr. Dinesh Krishnan) that “…………………In the said written statement, Shri Dinesh Krishnan also stated that he gave the above loan to Shri Paresh Thakkar can use his money and his uncle Shri Bharat Palan to trade in the shares of the company……..”.

3. According to the learned counsel, the said statement is not sufficient enough to make any adverse inference against the noticee, mainly for the reason that neither Mr. Dinesh Krishnan nor Mr. Paresh Thakkar were subjected to cross examination. Further, it was contended that the noticee had not received any information from Mr. Paresh Thakkar and that his trades in the shares of the company could not be attributed to Mr. Paresh Thakkar. He also stated that Mr. Paresh Thakkar was not an employee of DSPML during the period when he had traded and that he had no business relationship with any other person associated with DSPML. According to the noticee, his trades in the shares of the company during the relevant period were purely on account of market conditions. As per the show cause notice, the link which connects the noticee with the unpublished price sensitive information, apart from the allegation that Mr. Paresh Thakkar had divulged the information to the noticee, is the written statement of Mr. Dinesh Krishnan given to DSPML. The contents of the relevant portion of the said statement were already mentioned in the show cause notice and the same has been reproduced above in this order. The noticee denied that he had no unpublished price sensitive information as alleged. The show cause notice is also silent about the transfer of money, if any, from Mr. Paresh Thakkar to the noticee. In this regard, the noticee stated that he had not received any money from Mr. Paresh Thakkar or from Mr. Dinesh Krishnan for purchasing the shares of the company. The admitted relationship between Mr. Paresh Thakker and the noticee, alone would not be sufficient enough to make him guilty of the allegation that the noticee had traded in the shares of the company concealing the fact that he had unpublished price sensitive information. The noticee stated that he had purchased 3,000 shares of the company on March 15 & 16, 2001. His contention is that, if he had unpublished price sensitive information (which was finalized on March 13, 2001 as per the show cause notice), why he would wait till March 15, 2001 to purchase the shares of the company? In the facts and circumstances of the case, in the absence of sufficient evidence, the noticee is entitled to a benefit of doubt in respect of the allegation of violation of Regulation 3 of the PFUTP Regulations.

4. The other allegation against the noticee is that he had placed buy orders in the shares of the company at upper circuit filter prices and induced the sale of the shares of the company, in violation of 4(a) of the PFUTP Regulations. In this regard, it is alleged in the show cause notice that the noticee along with others had bought the shares of the company through one Ishita Investments (proprietor Mr. Ashish Dhirawani), which in turn traded through certain stock brokers. It was also alleged that the noticee had placed orders in the shares of the company at prices higher than the prevalent market prices and induced the sale of the shares of the company. In the show cause notice it was stated that, Mr. Ashish Dhirawani in his statement given to SEBI on June 25, 2001, stated that he had inter alia dealt in the shares of the company for the noticee. He stated that the noticee had also placed the orders. Further, in his statement given to SEBI on August 17, 2001, Mr. Ashish Dhirawani stated that he made payments to the noticee by way of cash/cheques/demand drafts. It was stated in the show cause notice that on March 15 and 16, 2001, Mr. Ashish Dhirawani had purchased nearly 2,26,000 shares of the company on behalf of its clients including the noticee. In this regard, the noticee contended that the allegations of his trading were based only on the verbal statements of Mr. Ashish Dhirawani and without any supporting documentary evidence, in the show cause notice. The learned counsel also contended that the case against the noticee rests only on the basis of the oral evidence given by third parties. The noticee further stated that, Mr. Ashish Dhirawani made contradictory statements as he had first mentioned that he made payments to Mr. Paresh Thakkar and then subsequently changed his version and stated that he had not made any payment to Mr. Paresh Thakkar. According to him, the statement of Mr. Ashish Dhirawani is not accurate and that he was not subjected to cross examination.

In such circumstances, it was argued that, the statements of third parties including that of Mr. Ashish Dhirawani cannot be relied upon for the purposes of establishing the charges leveled against the noticee. The noticee claimed that, he had bought only 3,000 shares and that the said trading cannot be attributed to the fact that he is related to Mr. Paresh Thakkar. The learned counsel also stated that the analysis of the transactions of M/s Vinayak Investments on NSE and BSE would clearly indicate that the share price had already reached the upper circuit limit even prior to their buy orders on the impugned dates (March 14 to March 16, 2001).

5. It is contended that the show cause notice does not mention the price at which the orders were placed by the noticee. According to the noticee, without such details, it cannot be held that he had placed orders at a price higher than the upper circuit level. The noticee claimed that on March 14 to 16, 2001, other stock brokers had started placing the orders at the upper circuit limit at the beginning of the market hours and that M/s Vinayak Investments started placing their orders only after that. According to the noticee, no investor would try and deliberately purchase shares at a high cost and incur deliberate losses. Therefore, the noticee claimed that he cannot be held liable for placing the orders at the upper circuit level. I note that there is no whisper in the show cause notice about the rate at which the noticee had placed the orders and the upper circuit price. In the absence of such details, it cannot be held that the trades of the noticee were responsible for creating share price at the upper circuit level. The fact that the noticee had dealt in the shares of the company is not in dispute. It is alleged in the show cause notice that Mr. Ashish Dhirawani had purchased 2,26,000 shares of the company based on the orders placed by the noticee and others. It was submitted that the said transactions would clearly indicate that the share price had already reached the upper circuit limit even prior to their buy orders on the impugned dates (March 14 to March 16, 2001). In short, according to the noticee, at the time of the said transactions, the market price was at the upper circuit limit itself and hence, it cannot be alleged that he had artificially inflated the share price. The show cause notice is silent with respect to the number of shares purchased by the noticee. However, the contention of the noticee is that he had purchased only 3,000 shares and that too on March 15, 2001. He also contended that, if he had unpublished price sensitive information (which was finalized on March 13, 2001 as per the show cause notice), why would he have waited till March 15, 2001 to purchase 3,000 shares of the company.

6. This is a case wherein the allegation is that the noticee had placed his buy orders at upper circuit filter level and thus induced the sale of the shares of the company. In such a case, the show cause notice should have mentioned certain basic details such as the price at which the orders were placed by the noticee vis-a-vis the upper circuit filter price. In this regard, it is pertinent to note the contention of the noticee that the orders of M/s Vinayak Invesments were not at the upper circuit price. The learned counsel for the noticee also contended that the show cause notice was inconsistent in respect of the charge of violation of Regulation 4(a) of the PFUTP Regulations. He stated that in paragraph 2 of the show cause notice, it was inter alia alleged that the noticee violated Regulation 4(a) of the PFUTP Regulations by placing buy orders in the scrip of the company at upper circuit filter prices and thus induced the sale of the shares of the company. However, in paragraph 7, it was alleged that from March 14, 2001, the noticee along with others started placing the orders in the scrip of the company at prices higher than the prevalent market prices and thus induced the sale of the shares of the company.

According to the noticee, his orders were not placed at the upper circuit filter level and that by the time he had placed the orders, the share price had already reached the upper circuit level. It is not in dispute that the share price of the company witnessed a sharp increase during the period March 14 to 16, 2001. Admittedly, the deal of acquisition of the company by Aban was finalized on March 13, 2001 evening and the same was informed to the stock exchanges on March 18, 2001. Thus, it cannot be ruled out that the said spurt in the share price of the company during March 14 to 16, 2001 could be an outcome of some foul play by certain entities including those who were in possession of such unpublished price sensitive information. However, in the absence of sufficient material to show that the noticee had received the information and that he had placed the buy orders on the basis of the said information and also in the absence (in the show cause notice) of the rate at which the noticee had placed orders, I am of the view that the noticee is entitled to a benefit of doubt. In the facts and circumstances, I dispose of the present proceedings as ordered hereinunder.

7. In view of the foregoing, in exercise of the powers conferred upon me under Sections 11 and 11B of Securities and Exchange Board of India Act, 1992 read with Section 19 of thereof and Regulations 11 and 13 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, I hereby dispose of the show cause notice dated June 8, 2006 in the matter of Hitech Drilling Services India Limited, in so far as Mr. Bharat Palan is concerned, without any directions.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: FEBRUARY 15, 2010