Santosh Agarwal vs Sebi

Date of Hearing : 25.02.2020 Date of Decision : 04.03.2020

Appeal No. 93 of 2020

Jigna Vipul Vora Flat No. A/202, 2nd Floor, Tejas Residency, Station Road, Jogeshwari (East), Mumbai - 400 060. ..... 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

Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

With Misc. Application No. 510 of 2019 And Appeal No. 418 of 2019

Nandkishore Didwania 1604, Lilium Tower - II, 2

Mahindra Gardens, S. V. Road, Near Patkar College, Goregaon (West), Mumbai - 400 062. ..... 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. Rinku Valanju, Advocate i/b R V Legal for the Appellant. Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

With Appeal No. 469 of 2019

Kalpana Mukesh Ruia C/o Mukesh Ruia Unit No. 1102/1103, Express Zone, A Wing, Patel Vatika, Off. Western Ex. Highway, Malad East, Mumbai - 400097. ..... 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 3

Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

With Misc. Application No. 541 of 2019 And Appeal No. 471 of 2019

Dharmendra Harilal Bhojak Room No. 3, Sahadev Niwas, Turel Pakhadi Road, Zakaria Road, Malad (W), Mumbai - 400 064. ..... 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

Mr. Harsh Kesharia, Advocate for the Appellant. Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

With Misc. Application No. 542 of 2019 And Appeal No. 472 of 2019

Pankaj Jayantilal Dave A-607, Shri Sai Ganesh SRA CHSL, 4

Rajesh Compound, Dahisar (East), Mumbai - 400 068. ..... 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

Mr. Harsh Kesharia, Advocate for the Appellant. Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

With Appeal No. 473 of 2019

Ashraf Usmani MG 8/13, KDA Colony, Jama Masjid, Jajmau, Kanpur, Uttar Pradesh - 208010. ..... 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

Mr. Vikas Bengani, Advocate for the Appellant. Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent. 5

With Misc. Application No. 624 of 2019 And Misc. Application No. 632 of 2019 And Appeal No. 578 of 2019

Santosh Agarwal B Wing, 301-302-304, Salasar Shrusti Bldg, Temba Road, Bhayander (W), Thane - 401107. ..... 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. Rinku Valanju, Advocate i/b R V Legal for the Appellant. Mr. Anubhav Ghosh, Advocate i/b The Law Point for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C. K. G. Nair, Member Justice M. T. Joshi, Judicial Member

Per : Dr. C. K. G. Nair, Member 6

1.

These 7 appeals have been filed to challenge the order of the

Adjudicating Officer (hereinafter referred to as 'AO') of Securities

and Exchange Board of India (hereinafter referred to as 'SEBI')

dated May 22, 2019. By the said order a penalty of Rs. 18 lacs has

been imposed jointly and severally upon 12 noticees for violation of

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

Securities and Exchange Board of India (Prohibition of Fraudulent

and Unfair Trade Practices relating to Securities Market)

Regulations, 2003 (hereinafter referred to as 'PFUTP Regulations').

In addition, on one of the noticees an additional penalty of Rs. 2 lacs

has been imposed for violation of provisions of Securities and

Exchange Board of India (Prohibition of Insider Trading), 1992

(hereinafter referred to as 'PIT Regulations') and Securities and

Exchange Board of India (Substantial Acquisition of Shares and

Takeovers) Regulations, 2011 (hereinafter referred to as 'SAST

Regulations').

2. The basic facts relating to the matters are the following :- 7

1. SEBI conducted an investigation regarding the trading

activities in the scrip of Finalysis Credit and Guarantee

Company Ltd. ('FCGCL' for short).

2. It was observed that 42 entities have violated various

provisions of the PFUTP Regulations and one noticee

(Noticee No. 42) in addition, violated certain provisions

of PIT Regulations as well as SAST Regulations as

detailed in the impugned order.

3. Accordingly, a show cause notice was issued to 42

noticees which, inter-alia, alleged that the noticees were

responsible for the abnormal price rise in the scrip of

FCGCL between March 28, 2012 to February 6, 2013

from Rs. 40.20 to Rs. 182.10 and increased trading

activities in terms of volumes as well in the scrip.

4. It was also alleged that the noticees were connected

entities in terms of KYC connections and off-market

share transactions based connection as detailed on page

Nos. 5-6 of the impugned order.

8

3. Further, it was alleged that these 42 entities were part of a

larger group of 181 entities who were allegedly involved in the

fraudulent trading activities in the scrip of FCGCL. However,

adjudication proceedings have been initiated against 37 noticees

(Noticee Nos. 5 to 41), for creation of artificial volumes based on a

criteria of more than 0.75% contribution to the artificial volume per

entity and creation of artificial volume for two or more days and 5

other noticee Nos. 1 to 4 and 42 who were connected entities through

off-market transfer of shares. Further, based on the said cut off, 144

entities as given in table 5 of the impugned order at pages 10-20

therein were let off with an administrative warning.

4. Thereafter, it is alleged that all the present noticees i.e. from 1

to 42 have collectively traded amongst themselves and created

artificial volume of 39,14,301 shares constituting 23.05% of the

market volume through a combination of off-market and on market

transactions in the scrip during the investigation period, and,

therefore, violated the stated provisions of the PFUTP Regulations.

In addition, Noticee No. 42 had crossed holding of more than 5% of

the total paid up capital of the company which was liable to be

disclosed under Regulation 13(1) of the PIT Regulations as well as 9

under Regulation 29(1) of the SAST Regulations within two working

days of crossing the shareholding above 5% level which was not

done. Similarly, when he reduced his holding by more than 2% also

it was liable to be disclosed under these provisions which were not

done. Hence charge of violation of the PIT and SAST Regulations

also against noticee No. 42, in addition to violation of the PFUTP

Regulations.

5. Therefore, the factual matrix of the entire mater shows that

there was a large group of 181 plus 5 entities involved in the

manipulation. Out of these, 144 entities were let off with an

administrative warning and further investigation was conducted in

respect of 42 entities out of which finally penalty has been imposed

on 12 of them. In order to further filter the entities who have

violated the stated provisions, so as to imposed penalty, the AO has

imposed the further condition of individual contribution to the total

artificial volume of more than 1.78% and trading on two or more

days. By this reasoning / condition, noticees Nos. 12 to 41 have

been let off without imposing any monetary penalty and monetary

penalty has been imposed only on noticee Nos. 1 to 11 and 42 under

Section 15HA of the Securities and Exchange Board of India Act, 10

1992 thereby imposing a total penalty of Rs. 18 lacs jointly and

severally upon these 12 noticees.

6. We have heard the learned counsel appearing on behalf of the

various appellants and the basic contentions raised by these learned

counsel are the following :-

a) The investigation period in the matter was during 2010-

11 and a show cause notice was issued after 6 years, on

September 25, 2017.

b) 181 entities were initially identified as connected to the

alleged manipulation out of which 144 were let off with

an administrative warning based on an artificial criteria

of less than 0.75% of the volume of artificial trading.

c) Thereafter, in the impugned order 30 entities have been

let off on a completely arbitrary criteria of less than

1.78% of the total artificial volume and two days of

trading and these 30 entities were let off even without

an administrative warning. Therefore, there are serious

anomalies in the entire process of passing orders against

the appellants.

11

d) Since each appellant is not connected to any other

appellant or atleast to most of the appellants, it is

practically impossible to pay the penalty on a joint and

several basis even assuming that the penalty is

sustainable.

7. We have also heard Mr. Anubhav Ghosh, the learned

counsel for the respondent SEBI who tried to convince us that the

criteria adopted by the AO is sound as entities who traded in low

volumes and on a single day were though let off in terms of penalty

they are not exonerated from the charge; rather the finding in the

impugned order itself is that they were parties to the violations but

because of the low magnitude of their violations no penalty has been

imposed. Therefore, not imposing a penalty is not tantamount to

leaving them scot-free.

8. We are unable to appreciate the rationale provided in the

impugned order. A group of entities have been found to be involved

in violating provisions of PFUTP Regulations; all of them were

individually and collectively responsible for the fraudulent and

manipulative activities and thereby creation of artificial volumes and 12

jacking up of the price of the scrip as per the findings. In this

context, 144 entities were let off with an administrative warning

based on a criteria of less than 0.75% per entity share in the artificial

volume. Thereafter, subsequent to the adjudication 30 entities were

let off even without an administrative warning based on a criteria of

less than 1.78 % per entity share of the artificial volume. There is a

huge contradiction on this differential punishment / treatment.

Further, we do not find any logic in adopting the cut off of 1.78% of

the artificial volume in deciding to let off people who traded below

that level without even a warning and in imposing a monetary

penalty on entities who traded even slightly above that level. Test of

reasonable classification has to be based on legally sound footings;

not based on some arbitrary numbers particularly while imposing a

penalty on a segment of the group who are party to the violations. In

the instant case, we find that this logic of intelligible differentia is

lacking.

9. On the other hand, given the magnitude of artificial trading

in the scrip, including the off-market transactions by a few entities,

the issues involved in the matter are serious and needs a thorough

examination. Similarly, given the contention of the appellants that 13

all of them are not connected to each other or even known to each

other a joint and several liability of penalty also needs to be relooked

given the practical implementation problem.

10. Given the above reasons, we quash the impugned order and

allow the appeals, but remand the matter back to the file of the AO of

SEBI. The AO shall pass a fresh order in accordance with law within

a period of six months from the date of this order. No orders on

costs. Consequently, all Misc. Applications have become

infructuous and are also dismissed as such.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 04.03.2020 Prepared & Compared by PTM