Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited

WTM/GM/EFD/22/2020-21

SECURITIES AND EXCHANGE BOARD OF INDIA ORDER In respect of SEBI Order dated January 31, 2019 and Hon’ble Securities Appellate Tribunal order dated March 04, 2020 in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited.

In respect of: Sl. No. Name PAN 1. Jigar Praful Ghogari ASFPG8598L 2. Kiran Bhiku Bhanaes AQUPB0853G 3. Janak Chimanlal Dave AEPPD9110D 4. Dilipkumar Pukhraj Jain AACPJ5643C 5. Bhupesh Harischandra Rathod AACPR3785K 6. Kishan Balaram Shigvan BAWPS1264D 7. Kiran Madhusudan Sheth ALJPS1874Q 8. Shree Shagun Financial Services ABTFS0353F (SSFS) 9. Oliwonders Financial Services Pvt. Ltd. AABCO2030J (OFSPL) 10. Neevan Capital Markets Pvt. Ltd. AACCN7650G (NCMPL) 11. Jatin Shah AACPS6128D 12. Bhavesh Pabari AKGPP8679N 13. Hemant Sheth ANOPS8607E 14. Prem Parikh ALHPP3489N 15. Ankit Sanchaniya BLNPS3316L 16. Jinal Apurval Rawal ATHPR5041C

Background

1. SEBI passed a final order dated January 31, 2019 (hereinafter referred to as “SEBI order”) against the Noticees holding them liable for violating the provisions of Regulations 3(a), (b), (c) and (d) and 4(1), 4(2)(a), (b), (e) and (g) of the SEBI(Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (hereinafter referred to as “PFUTP Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited

Regulations”) and section 12A(a), (b) and (c) of the SEBI Act, 1992. The order was passed in the context of their fraudulent and manipulative trading in the scrips of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited.

2. The Noticees preferred an appeal against the SEBI order before the Hon’ble Securities Appellate Tribunal (hereinafter referred to as “SAT”). SAT vide common order dated March 04, 2020 (hereinafter referred to as “SAT Order”) upheld the findings in the SEBI order on merits; however, as regards the direction of disgorgement passed against the Noticees, SAT remitted the matter back to SEBI for fresh consideration of illegal gains made by the Noticees through the fraudulent and manipulative trades. SEBI was also directed to bring out the date-wise reversal of trades done by the trading Noticees and pass a fresh order within a period of three months after granting an opportunity of hearing.

3. An opportunity of personal hearing was granted to Noticees on July 14, 2020.

Reply of the Noticee

4. Pursuant to the hearing, the Noticees submitted replies dated July 21, 2020 wherein they have made elaborate submissions. However, I would remain within the scope of the limited review directed by the Hon’ble Tribunal and consider only the submission related to issue of reversal of trades and calculation of ill-gotten gains. The Noticees made submissions on similar lines during the hearing and the written submissions and summary of the same is given below,- i. SEBI has not provided complete details as directed by the Hon’ble Tribunal and has therefore not complied with the directions. In order to comply with the direction of the Tribunal, SEBI was required to establish the charge of reversal trades and providing details of all trades carried out over the 8 months is not sufficient. It requires giving

Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited samples of what should be treated as reversal trades as opposed to all trades which has been set aside by the Hon’ble Tribunal.

ii. SEBI, despite the Order of the Tribunal requiring supply of data of all 9 Noticees, has provided details of reversal of trades only of 8 Trading Noticees iii. In view of the allegation of manipulation starting right from 12-10-2010 to 17-12-2012 except 3-4 months, it was imperative that at least for the purpose of disgorgement, the data for the entire period from 12-10-2010 to 10-05-2013 (date of Ex-Parte Order) be provided. Despite repeated requests this data has not been provided.

iv. Contrary to the assertion of SEBI in paragraph 8 and 9 of the SCN and Order dated 31-01-2019, there is no profit but there is a clear loss. As per the Trade Log data provided by the SEBI, purchases and sell transactions of all the nine Noticees have been taken together for the purpose of calculation of illegal gains. The purchase price of 1,25,72,948 shares was Rs. 214.52 and the sell price of 1,26,20,917 shares was Rs. 214.23. Thus, there was a loss of Rs. 0.29 paisa per shares incurred by the Noticees. Apart from the loss of Rs. 0.29 paisa per shares i.e. approx. Rs. 36,46,000/-, all 9 Noticees incurred expenses of Rs. 3.75 Crore (approx.) towards Brokerages (0.40% to 0.50% on Delivery Trades and 0.10% on Intra Day Trades), Securities Transaction Tax (0.10% on delivery), SEBI Turnover Fees and Transactions Charges (0.0132%), Service Taxes (12.50% on Brokerage amount), Demat Charges, and Interest / Pay in Delay Charges. Thus, the Trading Noticees suffered losses of Rs. 4.11 Crore by executing trades during the period of Investigation.

v. The losses are in fact even higher than Rs. 4.11 Crore as the Noticees continue to hold substantial quantity of shares of Polytex which remain unsold after prices had fallen post investigation period.

Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited vi. The expenses in course of the transactions have to be excluded from gains. This is settled position of law as held by the Hon’ble Supreme Court of the United States in Order dated 22-06-2020 in the matter of LIU ET AL. v. SECURITIES AND EXCHANGE COMMISSION.

vii. It is an admitted position that the Trading Noticees could not return the entire fund provided by the financing Noticees due to heavy losses in the scrip of Polytex, Gemstone and KGN. Thus, the question of passing on of the profit from Trading Noticees to Financing Noticees does not arise.

viii. The Trading Noticees had suffered huge losses in the scrip of Polytex which is evident from the Arbitration Awards passed by the Arbitrator wherein it is recorded that several Trading Noticees had suffered losses in the said scrips and had defaulted in honouring their payments.

ix. As per SEBI’s own judgement disgorgement is individual liability and person who suffered losses has to be let off by SEBI.

x. Allegation have been made against 5 Noticees regarding Reversal of Trade in the scrip of Gemstone. However, after remanding back of the matter, no details has been provided of Reversal of Trades in the scrip of Gemstone.

xi. The Noticees placed reliance on certian Orders passed by the SEBI and the Hon’ble Tribunal to support their submission that the liability to disgorge the amount has to be an individual liability and not collective.

xii. SEBI has not made any allegation of connection in between the Noticees and the Company and/or its Promoters/Director. SEBI has also not received a single Complaint from investor or shareholders of Polytex.

Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited xiii. It was also submitted that the Noticees were in the process of challenging specific parts of Order dated 04-03-2020 before the Hon’ble Supreme Court. The same could not be done on account of the restrictions of lockdown due to COVID-19 pandemic.

The following additional submissions were made on behalf of Bhavesh Pabari xiv. The Noticee had not traded in the scrip and there is no allegations against the Noticee of trading in the Show Cause Notice dated 30-12-2016. Further, the Noticee had not transferred or received any funds from the account of any of the entities mentioned in the above SCN of SEBI.

xv. Further, none of the entities who had traded in the scrips had ever mentioned or submitted that they have executed trades on the Noticees instruction nor is there any evidence on record that the Noticee authorised any of the said entities to execute the transactions in the said scrips.

Scope of the limited remand

5. The SAT Order has upheld SEBI’s order on merits concurring with SEBI on the finding that the Noticees acted as a group and had indulged in manipulative trades in the scrip of Polytex India Limited (‘Polytex’), KGN Enterprises Limited (‘KGN’) and Gemstone Investments Limited (‘Gemstone’) attracting the provisions of the SEBI Act and PFUTP Regulations. The relevant portions of the SAT order is reproduced below,- “..all these entities were found to be connected and manipulating the market by various means. In a scheme of manipulative and unfair trading it is not necessary that every participant should be indulging in every type of trading violation or even in the same / similar magnitude. Once they are found to be part of a group trying to manipulate the volume or price of the scrip they became party to the violation. Hair splitting arguments that some traded more than others or on more days or some indulged in synchronized reversal Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited and self-trade while others did only one of those types do not cast away their violations. However, we agree with the contention of Dave that more disaggregated details are needed to prove reversal trade and in the impugned order only aggregates are given though we do not agree with their submission that reversal trade done on the same trading day only can be treated as reversal trades.”

6. The matter is being taken up for consideration on a direction of limited remand. The relevant part of the SAT Order [para 34(b) (i) and (ii)] reads as:

(i) Bring out date-wise details of reversal trades in respect of the trading Noticees. (ii) Bring out details of calculation of profits in respect of all the trading Noticees.”

Consideration

7. I note that SEBI in its order has held that six of the Noticees namely 1) Dilip Jain, 2) Kiran Bhanaes, 3) Kishan Shigvan, 4) Jigar Ghoghari, 5) Kiran Sheth and 6) Jinal Rawal had executed synchronized trades amongst themselves which resulted in creation of artificial volume in the market. Further, 8 Noticees, which included the 6 Noticees who had engaged in synchronised trades mentioned above, and Noticees Bhupesh Rathod and Janak Dave, had engaged in reversal trades amongst themselves which resulted in creation of artificial volume in the market. The Order also noted that 7 Noticees, which included all the Noticees who had engaged in reversal trades apart from Bhupesh Rathod, had also indulged in self trades. The order further noted that all the trading Noticees had contributed to positive LTP by their fraudulent trades. Order further held that 8 Noticees had made unlawful gains of Rs. 3,05,99,174 by their fraudulent and manipulative trades in the scrip.

Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited

Reversal of Trades

8. I, first proceed to address the issue of reversal trades carried out by the Noticees. It is noted from the remand order of the Hon’ble Tribunal that SEBI has been directed to bring out date-wise details of reversal trades done by the trading Noticees. The Tribunal had noted that the SEBI order only provides aggregates over an 8-month period. I note from the records that date wise trading details corresponding to the reversal trades executed by the Noticees, the aggregate of which was provided in Table 9 of the SEBI order, has now been provided to the Noticees. It is also noted that the date wise trading details of pertaining to Rawal Jinal Apurva has not been provided as the said Noticee had incurred a loss on account of his manipulative trades and his trades have not been used for computing the profits made by the group. I am, therefore, convinced that the direction of Hon’ble Tribunal in this regard has been complied with.

9. I now proceed to the address the arguments raised on behalf of the Noticees in relation to reversal trades at the hearing and in the written submissions. The main issue raised in this regard was that trades have to be on the same day or at least within a few days’ time to be considered/categorised as reversal transactions. In this regard, I note that the Hon’ble Tribunal has observed in the remand order that, “We also note that the interpretation of reversal trade is different from its standard /normal interpretation. Even if the contention (and the ratio of those two judgments relied upon by SEBI M/s. Master finlease Ltd. (supra) and Anita Dalal (supra) are taken on board, more details regarding the date-wise trading pattern of the appellants atleast on sample days is needed.”

Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited

10. In the matter of Anita Dalal v. SEBI1, SAT had held that,- “The contention of the appellant that there is a vast difference between the quantity order and the quantity matched cannot be taken as a ground to prove the innocence of the appellant. In market manipulation perfect synchronization and exact matching of trades may not be available. In the present case matching / reversal, though of different quantities, has taken place consistently over a period of time... It is a process of continuous, periodical and conscious matching in several trades over a period of time.”

11. I note that the Hon’ble Tribunal has observed in the remand order that the “interpretation of reversal trade is different from its standard /normal interpretation”. The difficulty in adopting a straitjacket approach towards defining such manipulative practises is now well recognised by courts in India. The Hon’ble Supreme Court in the matter of SEBI v. Kanaiyalal2 had acknowledged the difficulty in defining such practises by making amendments to the FUTP Regulations. The Hon’ble Court had observed that,- “11. It is important to note that SEBI has amended the Regulation, a number of times, to keep up with the technology and times. .. 1 2. Although aforesaid amendments are made to the Regulation, yet such amendments sometimes fail to live up to human ingenuity and growth of technology. Usurpation of reprehensible profits by fraudsters, who are not entitled to them, must be made answerable by this Court as per established tenants of Rule of law without leaving incentives for fraudulent practices, based on creativity of disingenuous, to survive the legal gambits.

1 Appeal No. 211 of 2012 decided on December 3, 2012 2 MANU/SC/1188/2017 Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited

26…A generalized meaning may be difficult to be attributed, as human ingenuity would invent ways to bypass such behaviour.”

12. In securities market, ‘reversal trades’ are understood to be trades where the parties after executing a trade enter into a ‘reverse trade’ or opposite trade for similar quantities usually within a short time period. However, as held by the Hon’ble Tribunal in the matter of Anita Dalal, in a given case reversal transaction could also happen over multiple days. What is important is the intention of the parties to manipulate the scrip as can be noted from the nature of their trades across multiple days.

13. The Hon’ble Supreme Court in the matter of SEBI v. Rakhi Trading3 had held that “Once the reversal transactions are shown to be non-genuine or shown to be fictitious creating a false or misleading appearance in the market for ulterior purpose and that the stock market was misused by such manipulative device, this is in clear violation of the provisions of PFUTP Regulations, 2003.”

14. In the present case, since it is established that all the Noticees were acting as a group and were engaged in manipulative trading in the scrip, I have no hesitation in holding that the back and forth transaction in scrip between the Noticees have to be considered as reversal trades even though such trades happened across days.

Computation of the ill-gotten gains

15. I now move to the address the issue of calculation of profits. The Hon’ble Tribunal had directed SEBI to give the details of the manner in which the ill-gotten gains made by the Noticees were calculated.

Table 1

3 MANU/SC/0096/2018 Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited

Wt. Avg. Wt. Avg. Buy Value Sell Value Client Name Buy Qty. Buy Price Sell Qty. Sell Price Profit/Loss (INR) (INR) S (INR) (INR) (INR) N 60,99,03,11 210.61 212.49 DILIPKUMAR 28,95,780 28,97,891 61,57,93,547 8 JAIN 1 2,111 2,86,120 Total 61,01,89,23 28,97,891 28,97,891 61,57,93,547 56,04,309 8 JANAK 13,49,01,30 228.09 231.31 5,91,428 5,60,947 12,97,56,403 CHIMANLAL 3 DAVE 2 30,481 76,75,349 Total 13,49,01,30 5,91,428 5,91,428 13,74,31,752 25,30,449 3 BHUPESH 22,95,75,52 182.39 183.26 HARISHCHAN 12,58,640 11,72,846 21,49,45,454 7 DRA 3 RATHOD 85,794 2,16,44,084 Total 22,95,75,52 12,58,640 12,58,640 23,65,89,538 70,14,010 7 KISHAN 25,00,08,84 226.00 226.43 11,06,199 10,91,124 24,70,71,957 BALARAM 1 SHIGVAN 4 15,075 37,92,000 Total 25,00,08,84 11,06,199 11,06,199 25,08,63,957 8,55,116 1 KIRAN 34,19,42,01 229.57 229.42 14,89,452 13,78,459 31,62,51,708 MADHUSUDA 1 N SHETH 5 1,10,993 2,80,35,811 Total 34,19,42,01 14,89,452 14,89,452 34,42,87,519 23,45,508 1 JATIN 176.04 173.81 2,96,196 5,21,42,414 4,05,608 7,04,99,388 SHANTILAL 6 SHAH 1,09,412 1,47,84,773 Total 4,05,608 6,69,27,187 4,05,608 7,04,99,388 35,72,200 RAWAL 44,96,52,17 214.76 214.11 20,93,677 20,79,421 44,52,34,665 JINAL 4 APURVA 7 14,256 35,91,360 Total 44,96,52,17 20,93,677 20,93,677 44,88,26,025 (8,26,149) Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited

KIRAN 22,42,98,77 217.33 215.89 10,32,053 10,79,497 23,30,56,559 BHIKU 4 BHANAES 8 47,444 64,44,545 Total 23,07,43,31 10,79,497 10,79,497 23,30,56,559 23,13,240 9 JIGAR 40,47,51,92 223.67 220.52 PRAFULCHA 18,09,523 19,55,124 43,11,56,517 8 NDRA 9 GHOGHARI 1,45,601 2,00,40,247 Total 42,47,92,17 19,55,124 19,55,124 43,11,56,517 63,64,342 5 3,05,99,174 Total profit

16. The above table captures the manner in which profits were calculated by SEBI. For transactions, that happened during the investigation period, the actual price at which the transaction was executed was taken for this purpose. However, it can be noted that all the entities had not completely squared off their positions and as result there was either a small excess buy or sell by the Noticees during the investigation period, which is highlighted in the table. In cases where there was excess sell during the investigation period, the buy price of such shares were calculated by taking the price at which similar quantity of shares were purchased by the Noticee immediately prior to the investigation period. Similarly, in cases where there was excess buy, the profits were calculated by taking the price at which the shares equivalent to the excess buy was sold immediately post the investigation period. To illustrate, in the case of Dilipkumar Jain, he had bought 28,95,780 shares and sold 28,97,891 shares during the investigation period, and the actual price at which such shares were bought and sold was taken for the purpose of computing the ill-gotten gains. However, since he had sold 2,111 shares more than the number of shares he had bought in this period, the buy price of such shares were computed by taking the price at which a similar amount of shares was bought by him immediately prior to the investigation period.

Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited

The total ill-gotten gains of Rs. 3,05,99,174 made by the group was arrived at by adopting the above approach.

17. Now I will proceed to address the contentions put forth on behalf of the Noticees during the hearing and in the written submissions related to the calculation of profits. The first submission put forth on behalf of the Noticees was that it was imperative that at least for the purpose of disgorgement, the data for the entire period from 12-10-2010 to 10-05- 2013 was provided. I note that the Noticees have sought data pertaining to the trading in the scrip which falls outside the investigation period in this matter and therefore it is outside the scope of the limited remand. I also note that the Hon’ble Tribunal in the remand order has already rejected the contention raised by the parties to club the investigation in this matter with another investigation carried out by SEBI in the same scrip for a different time period. I, therefore, note that there is no merit in this contention put forward on behalf of the Noticees.

18. The next submission on behalf of the Noticees was that the expenses incurred in course of the transactions have to be excluded while calculating ill-gotten gains. In this regard, I am of the view that while calculating the ill-gotten gains made by entity through fraudulent and manipulative transactions in the securities market, what is to be taken into account is the price at which the shares were acquired and disposed of. The brokerage and other expenses associated with the purchases and sales done by the Noticees in relation to the transactions that are stamped as ‘fraudulent’ or ‘unlawful’ can only be treated as costs of committing fraud and cannot be given benefit of. The only exception can be statutory levies borne by the Noticees while executing such trades. I therefore note that out of the expenses claimed by the Noticees, only securities transaction tax and SEBI turnover fee would be eligible for set off from ill-gotten gains.

Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited

STT applicable for Equity Transactions during the investigation period Delivery Transactions: Purchase: 0.10% of Turnover Sell 0.10% of Turnover Intraday Purchase: NIL Sell 0.025% of Turnover SEBI Turnover fees during the investigation period. Nature of the securities transaction Rate of Fee All sale and purchase transactions in 0.0001 per cent of the price at which the securities other than debt securities securities are purchased or sold (Rs. 10 per crore) 19. The Noticees have submitted that as per the data available from the BSE Price Volume Data in the scrip of Polytex, 75% of total trades had been marked delivery and 25% as intra-day during the investigation period. As can be noted from Table I, the cumulative buy value of the trades by the Noticees which have been taken for the purpose of calculating the ill-gotten gains was Rs. 2,28,90,79,601 and the sell value was Rs. 2,31,96,78,775. The STT and SEBI turnover fee paid at the applicable rates during the investigation period for such trades works out to Rs. 36,06,157.46. The ill-gotten gains made by the Noticees after excluding the eligible expenses would be Rs. 2,69,93,016.79.

Directions:-

20. Accordingly, in exercise of the powers conferred upon me under section 19 of the SEBI Act, 1992 read with sections 11 and 11B of the SEBI Act, and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003, I confirm the computation of ill gotten gains made in SEBI order dated January 31, 2019 and hereby direct the Noticees to jointly and severally, disgorge an amount of Rs. 2,69,93,016.79, as ascertained in para No. 19 above, along with interest calculated at the rate of 12% per annum from 17 December, 2012 onwards, Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited till the date of payment. The above payments shall be made by the parties in the manner provided in the SEBI order dated January 31, 2019.

Place: Mumbai G. MAHALINGAM Date: July 31, 2020 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Order in the matter of Polytex India Limited, Gemstone Investments Limited and KGN Enterprises Limited