Shri Anandkumar Baldevbhai Patel vs Sebi

Date of Decision : 15.03.2019

Appeal No. 78 of 2012

Shri Anandkumar Baldevbhai Patel 01, Shivnagar Society, Bhavpura, Kadi, Gujarat - 382 715. .... 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. Yogesh Jagia, Advocate with Mr. Chinmay Paradkar, Advocate for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Mihir Mody and Mr. Sushant Yadav, Advocates i/b K. Ashar & Co. for the Respondent.

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

Per : Justice Tarun Agarwala, Presiding Officer (Oral)

1.

Securities and Exchange Board of India (hereinafter

"SEBI" for short) conducted an investigation into the trading

activity of Shri Kanaiyalal Baldevbhai Patel (hereinafter "KB"

for short) an individual trader and Passport India Investment

(Mauritius) Ltd. (hereinafter "Passport" for short) for the period

January, 2007 to March, 2009. During the investigation, it was 2 found that KB was placing orders ahead of orders placed by

Passport. One Dipak Patel (hereinafter referred to as "DP") was

Portfolio Manager of Passport who also happened to be the

cousin of KB and the appellant Shri Anandkumar Baldevbhai

Patel (hereinafter referred to as "AB"). It was alleged that DP

provided information to KB and AB regarding the forthcoming

trading activities of Passport. It was found that trades were

executed using the telephone number which was registered in

the name of AB at the common residential address of KB and

AB. It is alleged that AB and KB took advantage of the

information received from DP whereby KB indulged in trading

before Passport and consequently squared off the position when

order of Passport was placed in the market. It was alleged that

KB earned a total profit of Rs.1,56,32,364.01/- from the alleged

trades. Pending investigation, an ex-parte interim order dated

28/5/2009 was passed by the Whole Time Member of SEBI

issuing a slew of directions and one such direction was that the

appellant including others were restrained from buying, selling

or dealing in any securities directly or indirectly.

2. Based on the investigation, a show-cause notice dated

28/02/2011 was issued alleging that DP was placing orders for

Passport coupled with the fact that KB bought and sold shares

of various companies which were common between KB and 3 Passport. The show-cause notice indicated that 557

synchronized trades were executed on the National Stock

Exchange across 11 scrips between KB and Passport wherein

both the Buy Order by the Passport and Sell Order by KB for

identical price was placed within a gap of few seconds.

3. Based on the replies filed by the appellant and others and

the submissions made therein, the Adjudicating Officer of the

Board found the appellant and others guilty of violation of the

provisions of Regulation 3(a), (b), (c) and (d) of Securities and

Exchange Board of India (Prohibition of Fraudulent and Unfair

Trade Practices relating to Securities Market) Regulations, 2003

("FUTP Regulations, 2003" for short) and imposed a monetary

penalty under Section 15HA of Securities and Exchange Board

of India Act, 1992. A penalty of Rs.5 crore was imposed on DP

and KB each and a sum of Rs.1 crore was imposed upon the

appellant. Appeals filed before this Hon'ble Tribunal were

allowed by judgment dated 09/11/2012 holding that the

appellant and others were not manipulating the market as they

were not intermediaries and that front running was prohibited

by intermediaries under the FUTP Regulations, 2003.

4. SEBI, being aggrieved, filed Special Leave Petitions before

the Supreme Court of India. Insofar as the appeal against the 4 appellant was concerned, the Supreme Court disposed of the

appeal by judgment dated 05/04/2017 holding that no finding

has been given by the Tribunal against the appellant to the effect

that omission and commission on the part of AB amounted to

front running or that the trading done from the telephone of AB

amounted to front running. The Supreme Court further

indicated that the Tribunal was required to record an

independent finding for holding AB liable for penalty and

consequently disposed of the appeal directing the Tribunal to de

novo decide the matter afresh.

5. Insofar as the other appeals of SEBI against Passport and

KB, the same was allowed by the Supreme Court by judgment

dated 30/09/2017. The order of the Tribunal was set aside and

the imposition of penalty was affirmed. The said decision is

reported in (2017) 15 SCC 1 SEBI vs. Kanaiyalal Baldevbhai

Patel and other connected appeals. The Supreme Court

explained what front running was in addition to the definition

provided by SEBI in its circular holding that front running

comprises of at least three forms of conduct, namely; trading by

third parties who are tipped on an impending block trade

("tippee" trading), transactions in which the owner or purchaser

of the block trade himself engages in the offsetting futures or

options transaction as a means of "hedging" against price 5 fluctuations caused by the block transaction (self front-running),

and transactions where an intermediary with knowledge of an

impending customer block order trades ahead of that order for

the intermediary's own profit (trading ahead). The Supreme

Court further found that front running was explicitly

recognized under Regulation 4 (2)(q) of the FUTP Regulations,

2003. The Supreme Court further held that in order to establish

charges against tipee, under Regulations 3(a), (b), (c) and (d)

and 4(1) of the FUTP Regulations, 2003, one needs to prove that

a person who had provided the tip was under a duty to keep the

non-public information under confidence. Further, such breach

of duty was known to the tippee who traded in the market with

that information thereby playing a fraud. Insofar as the modus

operandi in the instant case, the Supreme Court gave an explicit

finding against KB and Passport to the extent that the parting of

information with regard to an imminent bulk purchase and the

subsequent transaction was intrinsically connected leading to a

conclusion of joint liability of both the initiator of the fraudulent

practice and other party who had knowingly aided in the same.

The Supreme Court further found that the conduct of DP led KB

and AB to be induced to deal in securities and that KB and AB

would not have entered into the transaction in question had it

not been for the information parted with by DP. The Supreme 6 Court found that KB and AB had acted in connivance with DP

to encash the benefit of the information parted by DP and,

therefore, were parties to the fraud committed by DP and thus

aided and abetted the same. For facility, paragraph 58 of the

judgment is extracted hereunder:-

"58. Adverting to the facts of the present case, if the information with regard to acquisition of shares by M/s. Passport India was parted with by Dipak Patel to Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel and the latter had transacted in huge volume of shares of the particular company/scrip mentioned by Dipak Patel a little while before the bulk order was placed by M/s. Passport India and the said persons had sold the same a short while later at an increased price, such increase being a natural consequence of a huge investment made in the particular scrip by M/s. Passport India, surely, it can be held that by the conduct of Dipak Patel, Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel were induced to deal in securities. A natural and logical inference that would follow is that the aforesaid two latter persons would not have entered into the transactions in question, had it not been for the information parted with by Dipak Patel. The track record of earlier trading of the two persons concerned does not indicate trading in such huge volumes in their normal course of business. Such an inference would be a permissible mode of arriving at a conclusion with regard to the liability, as held by this Court in SEBI v. Kishore R. Ajmera referred to by my learned Brother Ramana J. The volume; the nature of the trading and the timing of the transactions in question can leave no manner of doubt that Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel had acted in connivance with Dipak Patel to encash the benefit of the information parted with by Dipak Patel to them and, therefore, they are parties to the fraud committed by Dipak Patel having aided and abetted the same."

7 6. In the light of the aforesaid narration of facts, we have

heard Shri Yogesh Jagia, learned Counsel assisted by Mr.

Chinmay Paradkar, Advocate for the Appellant. The learned

Counsel for the appellant contended that he is only engaged in

importing and trading of scrap metal and was not dealing in the

securities market. It was further contended that the

Adjudicating Officer only found trading of the securities by KB

and that there was no finding that the appellant had done any

trading. It was contended that the mere fact that KB was using

the landline telephone which was registered in the name of the

appellant does not make the appellant liable for aiding and

abetting or conniving in any fraudulent activities being done

between KB and DP. It was also contended that the ex-parte ad-

interim order dated 28/05/2009 gave a specific prima facie

finding that KB had prior information from DP and on the basis

of the same material SEBI has improved its version in the show-

cause notice by including the name of the appellant which

shows the mala fide intent since no further evidence was

available with the respondent. The learned counsel further

contended that the perusal of the call records does not indicate

any evidence as to what was the conversation which could lead

to conclusion that sensitive information of the market was being

divulged. There is also no evidence to show as to who was 8 calling whom. It was urged that there are other numbers in the

house who may be conversing with DP and, therefore, the

fraudulent activities indicated in the show-cause notice was

vague and was not based on any substantial evidence. It was

contended that there has to be a finding of intentional aiding or

abetting in order to inflict the penalty under the SEBI Act. Since

there is no finding to this extent, the imposition of penalty was

wholly arbitrary. In support of his contention the learned

counsel placed reliance upon decision in Shri Ram v. State of

UP. (1975) 3 SCC 495 wherein the Supreme Court held:-

"........... in order to constitute abetment the abettor must be shown to have "intentionally" aided the commission of the crime. Mere proof that the crime charged could not have been committed without the interposition of the alleged abettor is not enough compliance with the requirements of section 107. A person may for example invite another casually or for a friendly purpose and that may facilitate the murder of the invitee. But unless the invitation was extended with intent to facilitate the commission of the murder, the person inviting cannot be said to have abetted the murder. It is not enough that an act on the part of alleged abettor happens to facilitate commission of the crime. Intentionally aiding and therefore active complicity is the gist of the offence of abetment under the third paragraph of section 107."

The learned counsel has also placed reliance on a decision in the

State of Andhra Pradesh v. Nagoti Venkataramana (1996) 6

SCC 409 wherein the Supreme Court held that strict

construction is required to be adopted in the interpretation of

penal provisions and if any doubt arises, the benefit of doubt 9 should be extended to the accused. The learned counsel also

placed reliance upon a decision of the Tribunal in Bhanwar Lal

Paliwal v. SEBI decided on 31/10/2013 wherein the Tribunal

held that there has to be substantial or clinching evidence to

show any direct or indirect involvement in the execution of the

scrips or any manipulation of the price of the scrips.

7. It was thus urged that in the present case there is no

clinching evidence to lead to the conclusion that the appellant

had indulged in fraudulent activities in the securities market. It

was contended that in the absence of mens rea, the appellant

cannot be found guilty and consequently the imposition of

penalty should be set aside.

8. On the other hand, Shri Gaurav Joshi, the learned Senior

Counsel assisted by Shri Mihir Mody and Mr. Sushant Yadav,

Advocates contended that in the first instance the Supreme

Court had itself found that on the basis of modus operandi the

appellant had sensitive information which induced him for

monetary gains. It was contended that considering the

relationship of the appellant with KB and DP coupled with the

fact that KB and AB were brothers and living under the same

roof as well as usage of telephone registered in the name of the

appellant for trading purposes as well as the mobile calls 10 between DP and AB and between DP and KB during the time

when actually trades were being executed, leaves no room for

doubt that parting of the information by DP to AB and KB and

subsequent transactions by KB are intrinsically connected and

further leaves no room for doubt of the joint liability of KB and

the appellant with the initiator of the fraudulent practice

namely, DP. It was urged that a cumulative analysis from a host

of circumstances was sufficient to lead to a conclusion that AB

was involved in the manipulation of the securities market. It

was urged that the circumstantial evidence was sufficient to

raise a presumption of fraud and connivance including aiding

and abetting by the appellant and that actual intention was

immaterial. It was further contended that the standard of proof

could be judged on a preponderance of probability. In support

of his submission, the learned Senior Counsel placed reliance

upon a decision of the Supreme Court in (2017) 15 SCC 1 in the

case of SEBI V. Kanaiyalal Baldevbhai Patel; (2016) 6 SCC 368 in

the case of SEBI vs. Kishore R. Ajmera, and (2018) 13 SCC 753 in

the case of SEBI vs. Rakhi Trading Private Limited.

9. Having heard the rival contentions of the parties and

upon perusal of the record and the impugned judgment, we

find that admittedly there is a direct relationship between the

appellant, KB and DP. The appellant and KB are real brothers 11 living under the same roof and are partners in Bhoomi

Industries and Bhoomi Pressing Factory. DP is the first cousin of

the appellant who was the portfolio manager in Passport. The

landline telephone was registered in the name of AB which was

used to trade in the securities market on the internet by KB. The

details of calls exchanged which is indicated in the order of the

Adjudicating Officer indicates that there were a total of 40 calls

made to/received from DP during trading hours by the

appellant. There were a total of 33 instances when calls made

to/received by the appellant were within the span of time

during which Buy/Sell orders were placed by either KB or

Passport. There were a total of 8 calls made to/received from

DP during trading hours by KB. Similarly there were such 4

instances when calls made to or received by KB were within the

span of time during which Buy/Sell orders were placed by either

KB or Passport. The high frequency of calls exchanged between

the appellant, KB and DP suggest that DP were regularly in

touch with both the appellant and KB and passed on crucial

information about the dealings of Passport. The higher

percentage of matching trades of KB with Passport leads to an

inference that KB had received prior information from the

appellant about the forthcoming large institutional trades that

enabled KB to square off his initial transactions. 12

10. Annexure-E to the show-cause notice is a chart showing

details of the calls exchanged between DP and KB and the

appellant. A perusal of this chart indicates that the appellant

was speaking to AB on his mobile during the time when the

trades were being carried out by KB on the internet and,

therefore, leads to an inescapable conclusion about the

involvement of the appellant in the entire modus operandi and

also leads to an irresistible conclusion of the appellant being a

part of the front running. From the analysis of the trades

mentioned in the show-cause notice, it can be seen that KB and

Passport were placing orders in close proximity of time. The

majority of the Sell Orders were placed after Passport starting

entering the Buy Orders. The majority of the trades placed by

Passport and KB were in close proximity of time. KB entered

orders in the post closing session and Passport also closed

orders in the post closing session. All these indicate that there

was a premeditative move as most of the trades of KB matched

with the Passport orders. The call records lead to a conclusion

that DP, the appellant and KB used to talk to each other and

sensitive information was passed on during which time KB used

to place orders through the internet. The appellant was integral

part of this collusive trading as he was one of the channels

through which sensitive information was passed on to KB and is 13 equally responsible for front running. Even though there is no

conclusive proof as regard the contents of communication

between DP and the appellant, nonetheless an irresistible

inference can be drawn that sensitive information regarding

forthcoming trades of Passport was passed on by DP to KB and

the appellant. The proximity of time when the mobile calls were

made between DP and AB and the trading of the shares at the

time when Passport was also placing the orders leads to an

irresistible conclusion of the involvement of the appellant as

part of the front running. The modus operandi was such that DP

was in constant touch with KB and the appellant and was

passing on the sensitive information which was being utilized

by KB from his trading activity.

11. In addition to the aforesaid, we also find that the appellant

is the beneficiary of the profits from the trading activities done

by KB. We find that the profit received by KB was transferred

to Bhoomi Industries in which the appellant was a partner. We

further find that the same amount was again transferred to the

personal account of the appellant. Thus an irresistible

conclusion can be drawn that the profits earned through this

illegal trading activity by KB was shared with the appellant. In

this regard, a vague reply was given by the appellant to the

extent that the fund received by the appellant from Bhoomi 14 Industries could have been in the nature of loan or repayment

or withdrawal from capital account. No details were furnished

in this regard and, therefore, an irresistible conclusion drawn by

the Adjudicating Officer that there was a sharing of profits

cannot be faulted.

12. In Securities and Exchange Board of India v. Kishore R.

Ajmera (2016) 6 SCC 368, the Supreme Court held that,

"26. It is a fundamental principle of law that proof of an allegation leveled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and leveled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion."

13. In SEBI vs. Rakhi Trading (P) Ltd. (2018) 13 SCC 753,

Supreme Court held that in the quasi judicial proceedings

before SEBI, the standard of proof is preponderance of

probability and that proof of manipulation depends on

inference drawn from a mass of factual details. The Supreme

Court held that;

15

"4.24. The proof of manipulation in the circumstances always depends on inferences drawn from a mass of factual details. Findings must be gathered from patterns of trading data and the nature of the transactions, etc. Several circumstances of a determinative character coupled with the inference arising from the conduct of the parties in a major market manipulation could reasonably lead to conclusion that the Broker was responsible in the manipulation. The evidence, direct or circumstantial, should be sufficient to raise a presumption in its favour with regard to the existence of a fact sought to be proved."

Supreme Court further held that;

"4.25. Presumption plays a critical role in coming to a finding as to the involvement or otherwise of a market participant in any manipulation. For instance, while trading, a lip service can be paid to a screen based trading system while agreement is reached beforehand between brokers to effect the transaction. Anonymity can be a cloak to cover anastomosis of interest. Therefore, the hackneyed plea based on intentions in the market place cannot pass muster in all circumstances, more so when such intentions are in the special/peculiar knowledge of the parties to the transactions. Also any suggestion attributing innocence to the parties involved in such transactions would give rise to an untenable situation where certain other third persons/entities alone would be responsible for the manipulation and none else."

14. From the aforesaid decisions, it can safely be inferred that

it is not necessary that there has to be a clinching evidence or

that the intention has to be proved in order to impose penalty

under the SEBI Act. The standard of proof is preponderance of

probability and the proof of manipulation always depends on

the inferences drawn from a host of circumstances. A finding

has to be arrived at from the pattern of trading. The cumulative

analysis determines the modus operandi which can lead to an 16 inference regarding the conduct of the parties while

manipulating the securities market and thereby arrive at a

conclusion of manipulation. Circumstantial evidence could be

sufficient to raise a presumption with regard to the existence of

a fact which is sought to be proved. Where a transaction has

been executed with the intention to manipulate the market or

defraud its mechanism will depend on the intention of the

parties which could be inferred from the attending

circumstances since direct evidence in such cases are not

available. As held in SEBI vs. Kanaiyalal Baldevbhai Patel

(supra), the Supreme Court held that it is between inducement

and criminal law and the wider meaning thereof under the SEBI

Act is that to make inducement an offence. The intention behind

the representation or misrepresentation of facts must be

dishonest whereas in the latter category of cases the element of

dishonesty needs not be present or proved. Further in the latter

category of cases (under SEBI Act) a mere inference rather than

proof that the person induced would have acted in a manner

that he did for the inducement was sufficient. The element of

dishonesty or bad faith in the making of inducement was not

required. In the light of the above, the decisions cited by the

learned counsel for the appellant is distinguishable and are not

applicable in the facts and circumstances of the present case. 17

15. In the light of the aforesaid, it is clear that the information

passed on by DP induced the appellant to connive with his

brother KB. The sharing of the profits leaves no manner of

doubt that KB and the appellant had acted in connivance with

DP to encash the benefit of the information parted with by DP.

The appellant was not only part of the front runner but was

involved in the fraud committed by DP and had aided and

abetted the same.

16. For the reasons stated aforesaid, the appeal lacks merit

and is dismissed. In the circumstances of the case, there shall be

no order on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

15.03.2019 prepared & compared by-dg