Rajiv Gandhi vs Sebi

Date of Decision : 07.02.2020

Appeal No. 164 of 2019

Shailesh Shah 701 Shaswat, 7th Floor, Vaibhav Building Compound, S.V. Road, Vile-Parle, Mumbai - 400 056. ...Appellant Versus

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

Ms. Mugdha Modi, Advocate i/b Juris Link for the Appellant.

Mr. Karan Bhosale, Advocate with Mr. Chirag Bhavsar, Ms. Eram Quraishi and Mr. Harshad Vyas, Advocates i/b MDP & Partners for the Respondent.

WITH Appeal No. 165 of 2019

Devang Vyas 17/16, Shastri Nagar, Linking Road, Santacruz - West, Mumbai - 400 054. ...Appellant

Versus Securities and Exchange Board of India. SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent 2

Ms. Mugdha Modi, Advocate i/b Juris Link for the Appellant.

Mr. Karan Bhosale, Advocate with Mr. Chirag Bhavsar, Ms. Eram Quraishi and Mr. Harshad Vyas, Advocates i/b MDP & Partners for the Respondent.

AND Misc. Application No. 224 of 2019 And Appeal No. 166 of 2019

Rajiv Gandhi A/102, New Shivam CHS, Shripal Complex, Agashi Road, Virar (W), Thane - 401 303. ...Appellant Versus

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

Ms. Mugdha Modi, Advocate i/b Juris Link for the Appellant.

Mr. Karan Bhosale, Advocate with Mr. Chirag Bhavsar, Ms. Eram Quraishi and Mr. Harshad Vyas, Advocates i/b MDP & Partners for the Respondent. .

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member

Per : Dr. C.K.G. Nair, Member

Misc. Application No. 224 of 2019:-

For the reasons stated in the application, the delay in filing

Appeal No. 166 of 2019 is condoned. The Misc. Application No.

224 of 2019 is allowed. 3

Appeal Nos. 164 of 2019, 165 of 2019 and 166 of 2019:-

1.

These three appeals have been filed to challenge the order of

the Adjudicating Officer ('AO' for short) of Securities and

Exchange Board of India ('SEBI' for short) dated January 31,

2019. By the said order the appellants have been held to have

violated various provisions of the SEBI (Prohibition of Fraudulent

and Unfair Trade Practices relating to Securities Market)

Regulations, 2003 ('PFUTP Regulations, 2003' for short) and

therefore penalties of Rs. 20 lakh each on the appellant Devang

Vyas in Appeal No. 165 of 2019 and Rajiv Gandhi in Appeal No.

166 of 2019 and Rs. 10 lakh on appellant Shailesh Shah in Appeal

No. 164 of 2019 has been imposed. Since all three appeals

challenge the same impugned order, with consent of the parties,

these appeals are heard together taking Appeal No. 165 of 2019 as

the lead matter and dispose of by a common decision.

2. Facts relevant to the appeals are the following.

SEBI conducted an investigation relating to trading in the scrip of

M/s. Le Waterina Hotels and Resorts Ltd. ('Le Waterina' for

short), a Company listed at Bombay Stock Exchange Limited

('BSE' for short), for the period from October 1, 2010 to March 5,

2012. Consequently, a show cause notice dated September 28,

2017 was issued to 16 entities who were found to be connected / 4

related entities for alleged violations of the provisions of Section

12A(a),(b),(c) of SEBI Act, 1992 read with Regulations

3(a),(b),(c),(d),4(1),4(2)(a) and (g) of PFUTP Regulations, 2003.

Further, consequent to a share split in the ratio of 1:10 on July 4,

2011 the number of shares of the Company increased from

66,62,840 to 6,66,28,400. During the investigation, it was noted

that 16 entities who are related / connected have indulged in a

scheme of trading which involved certain off-market transactions

as well as subsequent on-market transactions and indulged in large

scale manipulation of the volumes in the scrip of Le Waterina and

thereby violated the stated provisions of PFUTP Regulations

2003. For instance, it was observed that promoter related entities

Anila Jalan (mother of Sanjay Jalan) and Rinku Jalan (wife of

Sanjay Jalan) had transferred shares to various entities through

off-market transactions. These entities as well as some other

entities who received shares from Devang Vyas (appellant in

Appeal No. 165 of 2019) and Farah Devang Vyas through off-

market transfers traded in the scrip during the investigation period

were connected entities as explained in paragraph 29 of the

impugned order. Though 16 of these entities were found to be

connected / related the impugned order is issued against only 12

of them since the other four, namely, Sanjay Jalan, Anila Jalan,

Rinku Jalan and Kamal Kothari have filed settlement applications 5

and in the case of Kamal Kothari by a settlement order dated

March 28, 2018 the proceedings were disposed off. Therefore,

though the impugned order gives the connection between all these

entities directions have been passed only in respect of 12 entities

specified therein.

3. Learned counsel Ms. Mugdha Modi appearing on behalf of

the appellants submits that appellant in Appeal No. 165 of 2019,

Devang Vyas, was only an employee of M/s. Guiness Securities

Ltd., a brokerage, whose Managing Director was Kamal Kothari.

He was on this job from August 2009 and sometime in August

2010 he discontinued the job informally. Further, though the

appellant has made some trades in the scrip of Le Waterina and

recommended the scrip for trading to some other clients he never

made any money out of it nor violated any securities laws.

Recommendation on the scrip was done on the instructions of his

employer Kamal Kothari.

4. It was further contended by the learned counsel for the

appellant that a trading account in the name of the appellant was

unlawfully opened by Kamal Kothari without the appellant's

permission and large scale trading was done using this fabricated

account. When the appellant came to know of this he made

complaints to the BSE as well as to Mumbai Police. Moreover, 6

appellant won an arbitration award against M/s. Guiness

Securities Ltd. for the losses incurred on account of unauthorized

trading.

5. It was further contended that the impugned order is defective

in several ways. Despite the fact that a common Show Cause

Notice (SCN) was issued to 16 entities, order has been passed

only against 12 of them, and the brain behind the entire issue,

Kamal Kothari was allowed to go lightly with a consent

application and three other noticees also have been allowed the

consent route. However, the impugned order continues to rely on

the violations made by those parties inorder to press charges

against the appellants. Similarly, out of several entities allegedly

connected as given in the impugned order, orders have been

passed only against 12 entities. For instance, an investor Man

Mohan Damani whose trades constitutes 21.5% of the total

volume of the alleged manipulative transactions has not been

found guilty at all while the appellant with a volume of only

4.98% of the total transactions have been found guilty. It was also

contended that though the impugned order has taken pains in

elaborating on the volume of trades matched between the

'suspected entities' how such volume manipulation has impacted 7

prices has not been explained and if prices were not affected the

allegation of volume manipulation cannot stand on its legs.

6. Further, it was contended that the impugned order does not

deal with the issue of the appellant winning the arbitral award nor

the fact that the appellant had complained against Kamal Kothari

for the illegal trading in his unauthorized account and therefore

while imposing a penalty of Rs. 20 lakh against the appellant no

benefit of the said transactions, which was not the fault of the

appellant, was given to him. Further, several entities who are in

similar position in terms of the alleged violation have been

imposed only lighter penalty of Rs. 5 lakh while the appellant has

been charged with a heavy penalty of Rs. 20 lakh.

7. As regards Appeal No. 164 of 2019 it was contended by the

learned counsel for the appellant that the appellant had only done

39 trades which was matched with two counterparties only; one

Mr. Paresh C. Doshi and another Mr. Himmatlal Lakhani. The

appellant is not connected to those entities. Further, the appellant

is only an individual businessman who invests in the share market

and executes trades only on the exchange system. Given this

background of the appellant and despite giving detailed

explanation to the SCN the AO has failed to take into account the

submissions and passed the impugned order and imposed a heavy 8

penalty of Rs. 10 lakh despite the fact that the appellant has lost

heavily on account of the activities of Kamal Kothari.

8. As regards Appeal No. 166 of 2019 the learned counsel for

the appellant submitted that the appellant was also an employee of

M/s. Guiness Securities Ltd. and was acting on the instructions of

Kamal Kothari and accordingly purchased the scrip as well as

recommended the scrip to other investors. Accordingly, the

appellant was only a pawn in the hands of Kamal Kothari. Further,

when Kamal Kothari was selling the shares suddenly and thereby

the prices were falling, appellant had incurred heavy losses.

Accordingly, imposition of a heavy penalty of Rs. 20 lakh against

the appellant mainly arising from the wrong doing of Kamal

Kothari is too harsh and disproportionate punishment and without

considering the submissions made by the appellant before the AO.

9. The learned counsel Shri Karan Bhosale appearing for the

respondent SEBI submits that the connection between various

parties is well established as detailed in the impugned order at

pages 16 - 18. It is also an admitted position that the appellant

Devang Vyas and Rajiv Gandhi were employees of M/s. Guiness

Securities Ltd. and were actively trading in the scrip of Le

Waterina as well as recommending the scrip to others. The third 9

appellant Shailesh Shah was involved in the entire process as he

received shares off-market from Farah Devang Vyas in addition to

trading on-market on a number of occasions where the counter

parties were also part of the related group entities even if the

submission of Shailesh Shah that the counter parties were not

directly connected to him is considered.

10. Further, it was contended that the statements made by the

appellants before the investigating authorities have clearly

established their role and connection in the entire manipulative

episode in the scrip of Le Waterina. For instance, appellant

Devang Vyas in his statement dated August 26, 2014 and

September 1, 2014 stated that "I have placed orders in my, Farah

Vyas and Rajiv Gandhi's account with M/s. Rikhav Securities and

Kantilal Chaganlal Securities". Similarly, Rajiv Gandhi made the

statement before the investigating authority on August 7, 2015

that "Mr. Devang Vyas used to instruct me to buy shares".

Therefore, though these appellants claim to be pawn in the hands

of Kamal Kothari they are not innocent pawn but abetting

participants in the scheme of manipulation.

11. The learned counsel for the SEBI further submitted that

though appellant Devang Vyas now submits before this Appellate

Tribunal that the trading account with M/s. Guiness Securities 10

Ltd. was opened without his knowledge, such a stand was never

taken before the AO. Further, regarding the submission that no

action has been taken against Man Mohan Damani, learned

counsel submitted that though Mr. Damani was the largest single

trader in terms of volume during the pre-stock split period no

connection could be established between him and other suspected

entities and hence no action was taken against Mr. Damani.

However, both Devang Vyas and Rajiv Gandhi were involved

during pre-stock split as well as post-stock split period

contributing substantial percentage to both gross volume of sell

and buy. Shailesh Shah was an active trader in the scrip with

substantial number of trades and many of them matching with

suspected entities during the post-split period. In any case since

Shailesh Shah was only party to the trades and therefore

contributed to volume manipulation and not amongst those who

induced others to trade in the scrip, a lower penalty of Rs. 10 lakh

has been imposed against him while in respect of the other two

appellants an amount of Rs. 20 lakh each has been imposed. As

regards the contention that there was no analysis of price rise or

price change on account of manipulative trading activities of the

appellants and others it was submitted by the learned counsel for

SEBI that it is more a case of volume manipulation than of price

manipulation. However, even if the impugned order has not dealt 11

with the price effect the same is given in the SCN which shows

that prices moved from Rs. 35 to 144 during the pre-split period

and between Rs. 5.33 to Rs. 15.45 during post-split period mostly

on account of the increased trading activities and the scheme of

manipulation implemented by the appellants and other noticees

against whom orders have been passed.

12. Having heard the learned counsel for the parties and after

perusing the records relating to all the three appeals, we are of the

view that the entire episode is a case of circular trading caused by

a group of entities in order to manipulate the market in the scrip of

Le Waterina. There is sufficient evidence that this group of

entities, including the appellants, converted the scrip of Le

Waterina into a highly traded one from a lightly traded scrip and

thereby imposing heavy cost on the unsuspecting investors in the

market. Therefore, we have no doubt that it is a clear case of

market manipulation as defined under the relevant provisions of

SEBI Act and the PFUTP Regulations 2003, which we reproduce

for convenience herein:-

"SEBI ACT, 1992

Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control.

12A. No person shall directly or indirectly--

12 (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized 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;

(d) engage in insider trading;

(e) deal in securities while in possession of material or non-

public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act.

Chapter II of PFUTP Regulations, 2003 PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO THE SECURITIES MARKET

3. Prohibition of certain dealings in securities

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 there under;

13

(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 there under.

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:--

(a) indulging in an act which creates false or misleading appearance of trading in the securities market;

(d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or money's worth for inducing such person for dealing in any security with the object of inflating, depressing, maintaining or causing fluctuation in the price of such security;

(g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security;"

13. The contention of the learned counsel for the appellants that

there is no price manipulation nor even any analysis of the

changes in price and therefore no violation of PFUTP Regulations

has no merit since volume manipulation is also a PFUTP

violation, particularly, as stated under Regulation 4(2)(a). Further,

the contention that appellants were mere pawn in the hands of

Kamal Kothari, the MD of the broker M/s. Guiness Securities Ltd. 14

does not have any merit since they were not only senior officials

and accomplices as evidenced from their roles and functions

and/or in terms of the role in recommending the scrip to other

entities. Therefore, the finding in the impugned order that they

were enablers in perpetuating the violations cannot be faulted.

14. Penalty of Rs. 20 lakh each on two appellants (Devang Vyas

and Rajiv Gandhi) and Rs. 10 lakh on Shailesh Shah have been

imposed under Section 15HA of SEBI Act which provides for a

penalty of not less than Rs. 5 lakh but which may extend to Rs. 25

crore or the three times an amount of profits made, whichever is

higher. Accordingly, the penalty amount imposed cannot be

considered as harsh or disproportionate. However, at the same

time, we note that Devang Vyas appellant in Appeal No. 165 of

2019 had won an arbitral award on part of his alleged trades which

has not been dealt with properly by the AO of SEBI. When the

appellant had won an award against the broker for certain disputed

trades and thereby compensated for the said fact had to be

considered in the order. Since this fact has not been dealt with in

the impugned order, we are not able to decipher whether this

benefit was given to the appellant while calculating the amount of

penalty. In the absence of which and in the interest of justice, the 15

penalty amount imposed on Devang Vyas, appellant in Appeal

No. 165 of 2019, needs to be reduced.

15. In the result, while upholding the impugned order on merits

we reduce the amount of penalty imposed on Devang Vyas from

Rs. 20 lakh to Rs. 15 lakh. The amounts of penalty imposed on the

appellants Rajiv Gandhi and Shailesh Shah at Rs. 20 lakh and

Rs. 10 lakh respectively is retained. Therefore, Appeal No. 165 of

2019 is partly allowed and Appeal Nos. 164 of 2019 and 166 of

2019 are dismissed, with no orders on costs. Appellants are

directed to pay the amounts of penalty within four weeks from the

date of this order.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 07.02.2020 Prepared and compared by:msb