Order in the matter of Kamal Katkoria;[SAT Appeal No.96 /2017]

Under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992

In the matter of Trading activities of – Kamal Jitendra Katkoria 1. Securities and Exchange Board of India (hereinafter referred to as 'SEBI') investigated the trading activities of Mr. Kamal Jitendra Katkoria (hereinafter referred to as the 'Noticee’). The investigation revealed that during the period January 01, 2010 to December 31, 2010 there were 59 scrip days1 at NSE (in 14 scrips) and 38 scrip days at BSE (in 14 scrips) in which Noticee had traded ahead of one Mr. Colin P Shah's (hereinafter referred to as ‘Colin’) trades and subsequently reversed his initial buy or sell transaction which were on most of the occasions matched with Colin's trades. Details of such trades are described in the following Table: Sr. Particulars NSE BSE Total No. 1 Scrip days in which Noticee had traded ahead of Colin P 59 38 97 Shah's trades. 2 Scrip days in which the matched quantity between Noticee 30 15 45 and Colin was 100% of the quantity bought/sold by Noticee. 3 Scrip days in which the matched quantity between Noticee 10 03 13 and Colin was greater than or equal to 90% but less than 100% of the quantity bought/sold by Noticee. 4 Buy Qty (Shares) 15,87,334 6,74,525 22,61,859 Sale Qty (Shares) 15,96,717 6,86,125 22,82,842 5. Square off profit earned by Noticee. ₹26,69,444 ₹11,30,374 ₹37,99,818

2. On analysis of Noticee’s trades during the period January 01, 2010 to December 31, 2010, following two kinds of his trading patterns were observed : A. Sell-Sell-Buy: Noticee had the information of Colin’s sell order details viz., scrip, quantity, time and price range. Before Colin’s sell orders in the scrip were entered, he had sold the shares in advance.

1 A scrip day denotes each day on which a scrip is traded. Total number of scrip days may be higher than total number of days on which trading has been done, as one trading day may be counted as multiple scrip days on the basis of different scrips traded on one day. E.g. suppose a person has traded in 3 scrips in one trading day, then it would be counted as 3 scrip days. In the matter– Mr. Kamal Katkoria

He had entered buy orders to square up his position in the scrip just before Colin’s sell orders were entered in the same scrip. This pattern of trading is referred as Sell-Sell-Buy. In NSE out of 59 scrip days, in 23 scrip days and in BSE out of 38 scrip days, in 16 scrip days he followed the same pattern. Most of his buy trades were matched with Colin’s sell trades including certain instances of 100% matching. For Example:- On September 13, 2010 at NSE in the scrip MSK Projects (now known as Welspun Projects) Noticee had sold 15,000 shares between 09:54:03 to 11:51:08. He had placed the buy orders to reverse/square off the above sell trades of 15,000 shares at 11:38:15; 11:38:43 and 11:47:44 for 5,000 shares each just before Colin’s sell order of 35,000 shares in the same scrip at 11:56:07. It indicates that he had prior knowledge of the Collin’s sell order. This way he ensured that his reversal orders matches with Collin’s sell order and he earn confirmed profit from these trades. Eventually, his buy orders for 15,000 shares were matched with Colin’s sell order of 35,000 shares of MSK Projects at 11:56:07.

In this way, he earned a square off profit of ₹ 1,06,928.90 on one scrip day. B. Buy-Buy-Sell: Noticee had the information of Colin’s buy order details viz., scrip, quantity, time and price range. Before Colin’s buy orders in the scrip were entered, he had bought the shares in advance. He had entered sell orders to square up his position in the scrip just before Colin’s buy orders in the same scrip were entered. This pattern of trading is referred as Buy–Buy-Sell. In NSE out of 59 scrip days, in 37 scrip days he followed the same pattern and in BSE out of 38 scrip days, in 23 scrip days he followed the same pattern. It is pertinent to mention that most of his sell trades were matched with Colin’s buy trades including certain instances of 100% matching. E.g. On June 21, 2010 at NSE in the scrip of S Mobility, the Noticee had bought 9,500 shares between 10:27:26 to 11:09:33. He had placed the sell orders to reverse/square off the above buy trades of 9,500 shares at 11:10:15 and 11:10:21 for 4,500 shares and 5,000 shares, respectively just before Colin’s buy order of 30,000 shares in the same scrip at 11:13:26.

It indicates that he had the prior knowledge of Colin’s buy order. This way, he ensured that his reversal orders matches with Collin’s buy order and he earn confirmed profit from these trades. Eventually, his sell orders for 9,500 shares were matched with Colin’s buy order of 30,000 shares of MSK Projects at 11:13:26. In this way he earned a square off profit of ₹ 18441.60 in a scrip day. C. On NSE, on May 5, 2010 in the scrip of Bank of Rajasthan and on BSE on October 6, 2010 in the scrip of Edelweiss, both the above trading patterns were observed. 3. During investigations, the Noticee vide his letters dated March 13, 2012 and March 26, 2012 had stated that he placed order on behalf of Colin by using Colin’s e-mail account. It was observed during investigations that the Noticee had prior knowledge about the Colin's trades, and based on the same he had bought and sold the shares as discussed hereinabove. These trades were executed only with an intention to square-off his trades by matching with Colin’s forthcoming orders at profit and these trades had created false or misleading appearance of trading in the securities market.

It was alleged that the above mentioned trades were not natural trades and they had disturbed the market equilibrium and normal price discovery mechanism of stock exchanges and had created false or misleading appearance of the trading in the securities market and manipulated the price of the scrips. Further, these trades were executed in fraudulent manner by him, to defraud Colin and other investors in the market. 4. It was observed that by way of such trades the Noticee earned a profit of ₹37,99,818 (₹26,69,444 while trading on NSE + ₹11,30,374 while trading on BSE). Since the Noticee had executed the above trades initially in his own account instead of executing these trades in Colin’s account, Colin had lost the price advantage in these trades and the profits made in Noticee's account could be attributed as loss to the Colin and other investors in the securities market. 5. In view of the above, SEBI issued a Show Cause Notice (‘SCN’) dated August 08, 2013 to Noticee alleging that he had traded ahead of Colin’s trades based on the prior knowledge about Colin's trades, executed matched trades with Colin and created an artificial volume and hence, he had allegedly disturbed the market equilibrium and normal price discovery mechanism of stock exchanges and violated the provisions of regulations 3(a), 3(b), 3(c), 3(d), and 4(1), of SEBI (Prohibition of Fraudulent and Unfair Trade practices relating to Securities Market), Regulations 2003 (hereinafter referred to as the "PFUTP Regulations"), read with section 12A (a),(b),(c) of Securities and Exchange Board of India Act, 1992 (SEBI Act).

These provisions are reproduced hereunder:- PFUTP Regulations: (3) - No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made thereunder; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made thereunder.

4(1) without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. SEBI Act 12A. No person shall directly or indirectly – (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder. 6. By the SCN the Noticee was called upon to show cause as to why directions under sections 11(1), 11(4) and 11B of the SEBI Act should not be issued against him for the violations alleged to have been committed by him, which may include disgorging the alleged ill-gotten gain of ₹37,99,818 made by him and debarring him from accessing the securities market and prohibiting him from buying, selling and otherwise dealing in securities for an appropriate period of time.

7. Noticee did not submit any reply to the SCN and the reminder sent by SEBI to the Noticee was returned undelivered with remark “refused to accept”. The Noticee was afforded an opportunity of personal hearing in the matter and the same was communicated to him by SEBI vide letter dated October 11, 2013 which was also returned undelivered with remark “refused to accept”. The communication sent to the Noticee in this regard through registered post was also returned undelivered with remark “Unclaimed”. However, vide his e-mail dated November 12, 2013, the Noticee submitted his reply to the SCN and stated that due to some family problem he was out of town and hence he could not reply to the SCN earlier. One more opportunity of personal hearing was granted to Noticee on December 17, 2013 when he appeared and made oral submissions on the line of his written reply. In his replies, the Noticee made inter alia the following submissions: (a) That he was neither a 'connected person' nor a 'deemed connected person' as defined under the SEBI ( Prohibition of Insider Trading regulations) 1992, (PIT Regulations).

He was not having any price sensitive information and he was not involved in insider trading. (b) That he was working with Colin for 2 years before the impugned trades and was his employee at the time of those trades.

(c) That he was using a prepaid mobile number. Colin used to call him in the morning and used to instruct him to buy/sell shares on his behalf. Accordingly, he used to instruct the broker orally or via e-mail from Colin’s account. (d) The transactions were done by Colin himself. In some cases, the Noticee followed the trading pattern of Colin and traded ahead of the trades of Colin and later squared off the trades and earned some profit apart from his salary. The matching of his trades with Colin was co-incidental as from his qualification and educational background it could be seen that he was not in a position to take any undue price advantage. Further, he never concealed his income from Income Tax Department. 8. During the personal hearing, the Noticee submitted that he is a person of meager means and hardly earns moneys to even meet his daily needs. During relevant time, he was an employee of Colin who himself undertaking the impugned transactions for his own benefits and the Noticee undertook the impugned trades on instructions of Colin. In few instances, following the trading pattern of Colin, the Noticee directly traded ahead of the trades of Colin and later squared off those trades and earned some profit apart from his salary.

He pleaded that he should not be disgorged entire alleged profits as all those trades were not undertaken by him but were trades for the benefit of Colin. The Noticee further claimed that all the profits earned by him on account of such trades including those which Noticee had undertaken directly have been extorted by Colin. The Noticee was given seven days time to make these submissions by way of an affidavit, however he has failed to do so. 9. I have carefully considered the SCN, the replies/submissions of the Noticee and the relevant material available on record. I note that there is no allegation in the SCN that the Noticee indulged in insider trading or that he was a 'connected person' or 'deemed to be connected person' or was holding 'unpublished price sensitive information' as defined under the PIT Regulations. I, therefore, find the submissions of the noticee in this regard irrelevant. 10. I note that the noticee has not disputed the impugned transactions described in the SCN. However, he has contended that impugned transactions were done by Colin himself and being employee of Colin the noticee had placed the order on his instructions.

The noticee has admitted that in some instances he had followed the trading pattern of Colin and traded ahead of the trades of Colin and earned some profit. The pattern of transactions as described in the SCN suggests that Noticee did indulge in fraudulent trading by way of placing orders ahead of Colin's orders based on the prior knowledge about Colin's trades as alleged in the SCN. In this regard, I note that Hon’ble Securities Appellate Tribunal (“Hon’ble SAT”) in the matter of Vibha Sharma and Jitendra Kumar Sharma vs. SEBI (Order dated September 04, 2013 in Appeal no. 27 of 2013) has held that an act of front running is always considered injurious be it an intermediary or any other person. The following observations made by Hon’ble SAT in that case are worth mentioning: “We would like to give a liberal interpretation to the concept of front running and would hold that any person, who is connected with the capital market, and indulges in front running is guilty of a fraudulent market practice as such liable to be punished as per law by the respondent. The definition of front running, therefore, cannot be put in a straight-jacket formula.” 11. I, therefore, find that in this case, the Noticee has contravened the provisions of regulations 3(a),(b),(c),(d) and 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade practices relating to Securities Market), Regulations 2003, read with section 12A (a),(b),(c) of Securities and Exchange Board of India Act, 1992. I, therefore, in order to protect the interest of investors and the integrity of the securities market, in exercise of the powers conferred upon me by virtue of section 19 read with sections 11 and 11B of the SEBI Act and the provisions of regulations 11and 13 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, hereby restrain Mr. Kamal J. Katkoria (PAN: AHCPK7426P) from accessing the securities market and also prohibit them from buying, selling, and otherwise dealing in securities market, directly or indirectly, in any manner whatsoever, for a period of three years from the date of this order.

12. I note that even during investigation, the noticee vide his letters dated March 13, 2012 and March 26, 2012 submitted that he had placed order 'on behalf of Colin' by using Colin’s e-mail account. Admittedly, the Noticee was an employee of Colin during the relevant time of occurrence of the impugned transactions. In these facts and circumstances, the preponderance of probability is that though the Noticee might have placed orders on behalf of his employer Colin on his instructions, he had also indulged in such fraudulent transactions for himself independently. I find that while the role of Noticee in the impugned transactions is established, the probable role of Colin has not been examined. Further, in view of the statement of the Noticee during investigation and also during the hearing, the ill-gotten gain, if any, of the Noticee cannot be computed with certainty at this stage. I, therefore, find that the role of Colin in the impugned transactions and profit, if any, earned by him also need to be investigated. It also needs to be ascertained, by further investigation in the matter, as to how much ill-gotten profit the Noticee earned on account of his trades.

I, therefore, direct accordingly. 13. A copy of this Order shall be served upon the stock exchanges and the depositories for ensuring compliance. 14. This Order shall come into force with immediate effect.

DATE: May 26th, 2014 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA