Order in the matter of G.G. Automotive Gears Ltd in respect of Mr. Shirish Shah

WTM/PS/26/IVD/ID-1/JULY/2010 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER IN THE MATTER OF G.G. AUTOMOTIVE GEARS LTD. In respect of Mr. Shirish Shah Date of Hearing: November 5, 2009 Appearance For noticee: Mr. Shirish Shah For SEBI: Mr. Jai Sebastian, Presenting Officer Ms. Medha Sonparote, Deputy General Manager Mr. Bhagwandas, Manager Ms. Kshama Wagherkar, Assistant Legal Adviser ORDER Under Sections 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 read with Regulation 11 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigation into the buying, selling and dealings in the scrip of G.G. Automotive Gears Ltd. (hereinafter referred to as ‘GGAGL’) for the period of August 1, 2002 to October 16, 2002, inter-alia to ascertain any violation 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’).

2. The trading details of the persons who had traded in the scrip were collected and analyzed along with the data of the volumes contributed by the entities traded during the relevant period. During the period, the price of the scrip increased from Rs.23 as on August 01, 2002 to Rs.115.30 as on October 16, 2002. A sharp fluctuation in volumes were also observed in the scrip i.e. from 16,847 shares as on August 01, 2002 to 1,05,776 shares as on September 17, 2002 and from 77,041 shares to 19,962 shares during the period of September 18, 2002 to October 16, 2002.

3. The investigation prima facie revealed that circular trading by two groups of brokers and clients contributed to an unusual spurt in the traded volumes of the scrip. Out of these two groups, the group consisting of four brokers namely DPS Shares and Securities Pvt. Ltd., Unique Stockbro Pvt. Ltd., Networth Broking Ltd. and Action Financial Services (I) Ltd. and their clients were found trading intra-day for 40 days in circular manner during the relevant period in the scrip. The total volume generated by way of such circular trades was 4,28,749 shares about 19% of the total quantity traded during the period under investigation. Its contribution was between 13 and 34% of day-wise volumes. The price of the scrip increased from Rs.23.60 to Rs.98.25 during the period of circular trading i.e. August 1, 2002 to September 30, 2002. Inter alia it was revealed that Ms. Trusha Goda, client of Unique Stockbro Pvt. Ltd. and Ms. Indumati Goda, client of Networth Broking Ltd. prima facie related/ connected to each other, had created artificial volumes in the scrip of GGAGL, by trading in circular manner.

4. During investigation, Ms. Trusha Goda and Ms. Indumati Goda submitted to the Investigating Authority that they had never dealt in the shares of GGAGL. It was further submitted by them that one Mr. Shirish Shah (hereinafter referred to as ‘noticee’) had fraudulently traded in the scrip on behalf of them. They mentioned about a police complaint filed by Mr. Ajay Goda, brother in law of Ms. Trusha Goda against the noticee for cheating/ fraud and impersonation. Thereafter, noticee was summoned by the Investigating Authority on January 11, 2005. On this date noticee appeared and admitted of having traded in the name of Goda family and stated that Mr. Ajay Goda had complete knowledge of the trading being done by him as he had provided all the documents for opening bank accounts.

5. Based on the findings of investigation, SEBI inter alia issued a show cause notice dated June 13, 2006 (hereinafter referred to as ‘SCN’) to noticee under Section 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) read with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulation, 2003. The SCN alleged that the noticee while trading for Ms. Trusha Goda and Ms. Indumati Goda was observed to be a part of a group of clients/ brokers involved in the circular trading and had actively traded in the shares of GGAGL during the relevant period among themselves, created artificial volumes and thereby contributed to the price rise in the scrip of GGAGL. The SCN, therefore, alleged that the acts of the noticee were in violation of Regulations 4(a), (b), (c) and (d) of PFUTP Regulations as applicable at the relevant period. Accordingly, it called upon the noticee to show cause as to why action under Section 11, 11B and 11(4) of SEBI Act, including restraining him from accessing the capital market and prohibiting from buying, selling or dealing in the securities in any manner whatsoever for a particular period should not be initiated against him.

6. The noticee vide his letters dated August 17, 2006 and February 19, 2007 replied to the SCN and requested for an opportunity of personal hearing. Accordingly an opportunity of personal hearing was granted to the noticee on September 2, 2009, however the noticee requested for an adjournment vide his letter dated September 01, 2009. Another opportunity of personal hearing was granted to the noticee on October 30, 2009, wherein Mr. Shirish Shah appeared and requested for adjournment of hearing which was in the interest of justice was acceded to and matter was adjourned to November 05, 2009. On the date fixed Mr. Shirish Shah appeared and made submissions. Pursuant to this, written submissions along with copy of police complaint were submitted by the noticee vide his letter dated December 14, 2009, the same has been taken on record for the present proceedings.

7. I have carefully considered the SCN, replies of the noticee, the written submissions and the material available on record. The main contentions of the noticee in brief are: a. The statement recorded on January 11, 2005 was given under fear, psychosis and coercion and nothing stated on that day should be held against him.

b. Had not operated the accounts of Goda family with the brokers/ banks/ depository participants. c. Transactions in the shares of GGAGL had been executed under the instructions and on behalf of Goda family. Had not dealt in the shares of GGAGL either in my personal capacity or on behalf of any other person. d. Denied of dealing directly/ indirectly in the shares of GGAGL. e. Noticee and Ajay Goda had decided to make application in the public issues in the name of the family members of Ajay Goda and profits made thereof be shared. In accordance with the verbal agreement between the noticee and Ajay Goda, various documents of Goda family for opening bank account and demat account were handed over to noticee. f. In the year 2001, Ajay Goda approached noticee and asked for documents relating to bank and demat account for undertaking certain transactions. Accordingly all documents were handed over to Ajay Goda by the noticee. g. Noticee and Ajay Goda thereafter had decided to do jobbing transactions in the name of Goda family. However profits made out of this were not enough. In August 2002, Ajay Goda insisted that he would like to do jobbing transactions himself and would not like to share profits with the noticee.

Ajay Goda wanted noticee to operate all his family members’ accounts and do the jobbing transactions as per his instructions and for this service he agreed to pay the noticee certain percentage of jobbing profit. Since, August, 2002, all transactions were executed as per the instructions of Ajay Goda including transactions in the scrip of GGAGL. h. In October 2002, Ajay Goda pressurized the noticee to sign a declaration/ affidavit wherein noticee admitted that all the transactions in the name of Ajay Goda's family members were done by the noticee. i. Had lodged a written complaint with police by understanding that Ajay Goda may misuse the declaration. j. In the mean time Ajay Goda also lodged a complaint with Economic Offence Wing (hereinafter referred to as ‘EOW’), by alleging that noticee had opened bogus bank and demat accounts in the name of Goda family and had undertaken transactions in the stock market. The EOW conducted an enquiry and concluded that Ajay Goda was aware of all the transactions and none of the transaction can be attributed to the noticee independently. k. Was not provided the inspection and copies of the documents. l. No evidence that he indulged in manipulation.

8. I note that the SCN has described the transactions entered by Ms. Trusha Goda and Ms. Indumati Goda clearly, along with supporting evidence (i.e. trade details, instances of circular trades etc.). I note that these two clients has submitted that they had not traded in the scrip and on behalf of them the noticee had traded in the scrip. Noticee on the other hand has submitted that all this was done on the instance of Ajay Goda. After having examined this, the issues arises for my consideration are: a. Whether the noticee fraudulently traded on behalf of Goda family? b. Whether the noticee indulged in circular trading and was responsible for creating artificial volumes while trading in the scrip of GGAGL? My findings are as under:

9. Whether the noticee fraudulently traded on behalf of Goda family?

a. I note that Ms. Trusha Goda, client of Unique Stockbro Pvt. Ltd. and Ms. Indumati Goda, client of Networth Broking Limited denied that they ever traded in the shares of GGAGL. Ms. Trusha Goda named noticee who had fraudulently traded on their behalf. I note that a police complaint was also filed by her brother-in-law, Ajay Goda against the noticee for cheating/ fraud and impersonation.

b. I note that the noticee in his statement dated January 11, 2005, before the Investigating Authority has admitted of having traded in the name of Goda family and stated that Ajay Goda had complete knowledge of such trading being done by him as he had provided all the documents for opening various bank accounts and demat accounts. However, while replying to SCN, noticee has submitted that the said statement was given under fear and coercion and nothing stated in it should be held against him. I have seen the statement of noticee dated January 11, 2005 and note that the same is three page hand written document, recorded in the presence of Investigating Authority and the noticee himself has given the declaration that the same is true and correct to the best of his knowledge. No details have been provided as to what was the fear and what coercion was used as he was not under any custody. Further, during the personal hearing in the present matter, the noticee had clearly told that he and Ajay Goda were partners.

c. From the said statement of noticee, I note that the same was given for two matters namely ‘Database Finance Ltd.’ and GGAGL. I note that the matter of ‘Database Finance Ltd.’ has been concluded as against the noticee by affording him an opportunity of personal hearing on November 21, 2006. The final order in the matter was passed on January 14, 2009 by SEBI thereby the noticee was debarred for a period of two years. Considering this fact, I note that the submission of noticee in the present matter are misleading and his plain retraction from his earlier statement is solely to confuse the proceedings.

d. From the aforesaid, I note that the modus operandi of noticee in the matter of ‘Database Finance Ltd.’ and the present matter appears to be same. Even the statement given by the noticee on January 11, 2005 was for both the said matters. Considering this, I note that as in the matter of Database Finance Ltd. it has been found that noticee was the kingpin behind the transactions of clients namely Ms. Indumati Goda and Mr. Rajubhai U. Goda. I note that the said findings of SEBI, have been accepted by the noticee as he is still undergoing the debarment as given vide order dated January 14, 2009.

e. From the material available on record it is not clear whether Ajay Goda was aware of the activities of noticee or not, as he has not been made a party to the present proceedings. However, I note that the noticee had played an active role in opening the bank and demat accounts in the name of members of Goda family without their knowledge, which itself constitute a criminal offence.

f. I note that noticee cannot take different stands in the proceedings of similar nature. The charge herein and the charge in the matter of ‘Database Finance Ltd.’ are similar and the noticee cannot escape the liability by simply denying and retracting the statements already given. Considering this, it can be concluded that the noticee had traded on behalf of Goda family.

9. Whether the noticee indulged in circular trading and was responsible for creating artificial volumes while trading in the scrip of GGAGL?

a. The SCN has alleged a pattern of circular trading among four brokers namely DPS Shares and Securities Pvt. Ltd., Unique Stockbro Pvt. Ltd., Networth Broking Ltd. and Action Financial Services (I) Ltd. who were trading in the scrip of GGAGL for their clients. I note that the same or nearly same number of shares was rotated in a circular manner among the group on daily basis and the trades were so well organized that the same number of shares went back to the original seller at the end of the day and the net position of each client remained nil. This group consisting of noticee who was trading for Ms. Trusha Goda and Ms. Indumati Goda had traded in the scrip of GGAGL on 40 days. The trade quantities of the noticee in the scrip during the period of investigation were as under (Table - A): Table- A S.No. Broker Name and Code Client Name Bought Sold 1. Action Financial Services (India) P.B. Chandrashekhar 1,20,479 1,11,030 Ltd. 2. DPS Shares and Securities Pvt. Anju Gandhi 3,500 5,000 Ltd. Atul Gandhi 28,000 30,850 Harshad 8,125 8,125 Soham Sec. 40,000 48,999 S 2,500 2,500 S012 18,230 18,250 3. Unique Stockbrokers Pvt. Ltd. Hitesh Shah 66,775 67,825 Trusha Goda 29,890 37,750 4. Networth Broking Ltd. I.U. Goda 1,11,250 98,420 Total 4,28,749 4,28,749 b. I observe that the total volume generated by noticee while trading for Ms. Trusha Goda and Ms. Indumati Goda and the other clients trading in the scrip, constituting the group had together created a volume of 4,28,749 shares i.e. about 19% of the total trading volume of 22,75,804 shares during the relevant period. I note that the total number of shares on buy and sell side of the group is exactly matching i.e. 4,28,749 shares. I observe from table A above, that the noticee had the highest contribution in the said group trades. Noticee in association with the other entities active in the scrip had created an artificial volume of 2,77,310 shares by way of trading in circular manner i.e. by purchasing 1,11,250 shares and selling 98,420 shares on behalf of Ms. Indumati Goda and by purchasing 29,890 shares and selling 37,750 shares on behalf of Ms. Trusha Goda.

c. I note that the group consisting of noticee had traded in a circular pattern. The number of circular trades entered by brokers on behalf of their clients in the scrip of GGAGL have been brought out below (Table – B): Table – B Name of broker No. of Trades Action Financial Services (I) Ltd. 1863 DPS Shares and Securities Pvt. Ltd. 1864 Networth Broking Ltd. 2053 Unique Stockbro Pvt. Ltd. 1710 d. Further, during the relevant period, various instances of circular trading among the said group including noticee have been observed. A few instances of such exact circular trades have been brought out below (Table - C): Table – C Buying Buy Client Name Selling Sell Client Name Quantity Member Member Traded August 01, 2002 (between 13:21:55 to 14:36:30) Unique Stock. Hitesh Shah Networth Broking I. U. Goda 1,250 Networth Broking I.U. Goda Action Financial P.B. Chandrashekharhar 1,250 Action Financial P.B. Chandrashekhar DPS Shares Harshad 1,250 DPS Shares Harshad Unique Stock. Hitesh Shah 1,250 August 28, 2002 (between 10:27:59 to 10:44:32) Networth Broking I.U. Goda Unique Stock. Hitesh Shah 2,500 Unique Stock. Hitesh Shah Action Financial P.B. Chandrashekhar 2,500 Action Financial P.B. Chandrashekhar DPS Shares Soham Sec. 2,500 DPS Shares Soham Sec. Networth Broking I.U. Goda 2,500

September 13, 2002 (between 13:14:46 to 14:02:38) DPS Shares Soham Sec. Unique Stock. Hitesh Shah 3,750 Unique Stock. Hitesh Shah Action Financial P.B. Chandrashekhar 3,750 Action Financial P.B. Chandrashekhar Networth Broking I.U. Goda 3,750 Networth Broking I.U. Goda DPS Shares Soham Sec. 3,750 September 25, 2002 (between 11:18:16 to 14:51:23) Networth Broking I.U. Goda Action Financial P.B. Chandrashekhar 6,250 Action Financial P.B. Chandrashekhar DPS Shares Atul Gandhi 6,250 DPS Shares Atul Gandhi Unique Stock. Trusha Goda 4,250 Unique Stock. Trusha Goda Networth Broking I. U. Goda 4,250

I note from the above instances of circular trades that there was an exact matching of quantities entered by the noticee. From this, I consider that the exact matching of quantities entered by the entities was not accidental and clearly shows some concerted efforts to get the orders matched with each other. e. From the above discussion, I find that the noticee while acting in a group, had indulged in circular trades regularly as may be clear from the details given hereunder: i. A total of 7,490 trades were executed among the group of clients and a volume of 4,28,749 shares was created accounting for 19% of the total trading volume. ii. The time difference between buy orders and sell orders ranged from 0-60 seconds at most instances. iii. The net delivery of noticee was nil. iv. The total intra-day volume contributed by the group of clients ranged from 13% to 34%.

f. Aforesaid facts point out that the orders of most of the trades entered by the noticee were punched in with preconceived motive and prior arrangement that the orders would be picked up by a particular client of the group on the opposite side. I note that there is startling proximity in the time of entering of orders at the exact price and quantity resulting in to matching of the trades. This clearly indicates synchronization in the logging of the orders, even as these were executed on the screen of the exchange. A large number of trades were got matched regularly. The noticee had indulged in such trades with regularity which projected volumes in the scrip in a way that was not market determined but was with a motive to induce innocent investors to enter the market. Such transactions are clearly not genuine transactions and were solely entered by noticee for creating misleading appearance of trading in the scrip.

g. Most of the trades in circular pattern were synchronized. The said trades were carried out for number of days and the timing for the orders so placed also matched at most instances ranging from 0-60 seconds. The occurrence of such structured and synchronized deals in circular manner persistently cannot be a co-incidence because the shares were rotated intraday within a closed group of clients. Even though screen based trading system is faceless in nature and maintain anonymity of the counterparty broker/ client, it is also an established fact that two parties with prior intent can match their trades with each other by placing orders simultaneously at the same price. In the present case, the circular trading on so many days clearly reveals manipulative intent. These transactions, apart from creating artificial volume of trading, also influenced the prices, by giving an impression to others that the scrip is being actively traded at prevailing prices which are genuine prices.

10. From the facts given in para above, I find that the trading pattern indulged into by the noticee and the group was in the nature of circular trades since they were the main entities who traded amongst themselves by executing synchronised trades with the intention that the orders of a particular entity get matched with the other. I find that the transactions of the noticee had resulted in creation of artificial volume in the scrip. The pattern of trading indicates instances when the time difference between buy and sell orders was nil. In several instances there was a perfect matching of quantity and price. From this, I note that unknown persons can not trade continuously by putting orders in such a pattern and contribute significantly to the total volumes in the market. The execution of circular trading repeatedly for several days by the noticee and the group reveal that they were having some nexus with each other. I find that these entities had executed trades with a pre-determined plan to match their trades which were not indicative of genuine transactions since it did not result into transfer of beneficial ownership. As discussed above, the increase in the volume in the scrip can primarily be attributed to the trades done by the noticee. Thus, from the aforesaid acts of noticee, I am of the view that the charge of violation of provisions of Regulation 4(a), (b), (c) and (d) of PFUTP Regulation (as applicable at the time) read with Regulation 4(1), 4(2) (a), (b), (e) and (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market) Regulations, 2003 are established.

11. Therefore, taking into consideration the facts and circumstances of the case, I, in exercise of the powers conferred upon me under Sections 19 of the SEBI Act read with Sections 11, 11B and 11(4) of SEBI Act, 1992 read with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, do hereby restrain the noticee, Mr. Shirish Shah from buying, selling or dealing in securities market whatsoever or accessing the securities market, directly or indirectly, for a period of three years from the date of this order.

12. This order shall be served on all recognized stock exchanges and depositories to ensure that the noticee is not allowed to undertake transactions as prohibited in para 11 above.

13. This order shall come into force with immediate effect.

DATE : 19/JULY/2010 PRASHANT SARAN PLACE : MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA