Somani Overseas Ltd. vs Sebi

Order Reserved On: 23.06.2016 Date of Decision : 30.06.2016

Appeal No. 225 of 2014 1.

Somani Overseas Ltd.

306, Nilkanta Apartments, Near Umrajakat Naka Athwa Lines, Surat- 395 002

2. Sumeet Menthol Pvt. Ltd.

504, Trividh Chambers, Opp. Fire Station, Ring Road, Surat, Gujarat- 395 002

3. Sumeet Silk Processors Pvt. Ltd.

504, Trividh Chambers, Opp. Fire Station, Ring Road, Surat, Gujarat- 395 002

4. Sitaram Prints Pvt. Ltd.

306, Nilkanta Apartments, Near Umrajakat Naka Athwa Lines, Surat- 395 002

5. Ambaji Syntex Pvt. Ltd.

504, Trividh Chambers, Opp. Fire Station, Ring Road, Surat, Gujarat- 395 002

6. Urmila Sunder 129, Sarjan Society, Umrajakat Naka Parle Point, Surat- 395 002

7. Ganga Somani 12, Keshav Park Society, Parle Point, Surat- 395 002

8. Sumandevi Somani 37, Ghod Dod Road, Surat- 395 002 ...Appellants

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

WITH Appeal No. 227 of 2014

1. Shankarlal Somani

2. Raj Kumar Somani

3. Bajranglal Somani 504, Trividh Chambers, Opp. Fire Station, Ring Road, Surat, Gujarat- 395 002 ...Appellants

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. Somasekhar Sundaresan, Advocate with Mr. Paras Parekh and Mr. Dhaval Kothari, Advocates i/b. J. Sagar Associates for Appellants.

Mr. Shyam Mehta, Senior Advocate with Mr. Saurabh Bacchawat and Mr. Hitesh Mutha, Advocates i/b K. Ashar & Co. for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar

1. Appellants in these two appeals are aggrieved by the order passed

by the Whole Time Member ("WTM" for short) of Securities and

Exchange Board of India ("SEBI" for short) on 21.05.2014. By the said

order appellants are jointly and severally directed to disgorge

` 4,69,40,232 being the profits earned through fraudulent and

manipulative trades executed in the scrip of Sumeet Industries Limited

("SIL" for short) during the investigation period and further, the

appellants are restrained from accessing the securities market and

prohibited from buying, selling or otherwise dealing in securities, directly 3

or indirectly or being associated with the securities market in any manner

whatsoever for a period of three years.

2. Since both appeals arise from a common order both these appeals

are heard and decided on merits by this common decision.

3. SEBI carried out investigation into the suspected price and volume

manipulation in the scrip of SIL during the period from 01.10.2006 to

12.03.2007. The investigation revealed the following:-

a) As on the quarter ended on March 2007 SIL had

issued 1,73,99,300 equity shares having face value of

` 10 each. The promoters of SIL as on 30.09.2006

held 79,78,832 shares (45.84%) of SIL. Their

shareholding came down to 67,57,677 shares

(38.83%) as on 31.12.2006 and further reduced to

49,38,010 shares (28.38%) as on 31.03.2007 on

account of sale of shares by the promoters.

b) During the investigation period the scrip of SIL was

traded only at Bombay Stock Exchange Limited

("BSE" for short). During the investigation period,

price of SIL scrip went up by 507.4% while the

SENSEX recorded an increase of 3.4% during the

same period (from 12,473.79 on 03.10.2006 to

12,902.63 on 12.03.2007). The price of the scrip

mainly increased during the period from 05.12.2006 4

to 21.02.2007 where, in 52 trading sessions, the price

of the scrip increased from ` 4.81on 05.12.2006 to

` 34.25 on 21.02.2007 (rise of 612%) along with

volumes spurt when the scrip was traded with an

average volume of 9,78,304 shares.

c) One month before the investigation period i.e. during

the period from 01.09.2006 to 30.09.2006, the price of

the shares of SIL was in the range of ` 4.30 to ` 5.90

and the shares of SIL were traded with an average

daily volume of 17,775 shares.

d) One month after the investigation period, the price of

SIL scrip decreased from ` 27.60 on 13.03.2007 to

`15.10 on 30.04.2007 and the scrip was traded with

an average daily volume of 5,26,582 shares.

e) During the investigation period several corporate

announcements were made, some of which were

neither implemented nor intimated to the stock

exchange till issuance of show cause notice by SEBI.

According to SEBI, these unimplemented price

sensitive announcements were made with a view to

influence the price of SIL scrip so that the promoter

group entities could reduce their holdings in SIL at a

profitable price.

5

f) Major counter party to the sales of promoter group

entities (i.e. for 11,53,032 shares accounting for

31.80% of total quantity sold by the promoter group)

was Mr. Purshottam Madanlal Khandelwal ("PK" for

short). PK was trading through a stock broker M/s.

SIC Stocks and Services Pvt. Ltd. ("SIC") and during

investigation period PK had placed buy orders for

18,39,36,413 shares of SIL. Total orders placed and

trades carried out by PK are as follows:-

No. Buy Buy order No. of Purchase Qty. % of No. of Sell Order No. of Sale Qty. % of Orders quantity Trades Mkt Sell Quantity Trades Mkt.

Volume Orders Volume

7,540 18,39,36,413, 15,754 1,46,29,418 24.27% 8,086 3,03,97,898 14,257 1,42,62,631 23.65%

g) The valid buy orders placed by PK far exceeded his

valid sell orders thus indicating buying pressure in the

scrip. The total number of valid buy orders placed by

PK (7540 buy orders) constituted 71.83% of the total

valid buy orders placed in the system. Out of total buy

orders placed by PK, 1611 buy orders i.e. 21.37%

orders (constituting 74% of his order quantity) were

deleted and only 7.95% of the buy orders got

executed.

h) Further, about 80% of his buy orders (for

14,90,80,942 shares) were in the nature of large buy

orders (quantity>=1,00,000 shares). Out of these large

buy orders, only buy orders for 73,19,561 shares 6

(4.85% of 14,90,80,942 shares) got executed. Bulk of

such large buy orders for 10,98,39,068 shares

(73.68% of 14,90,80,942 shares) were deleted by PK.

i) Out of large buy orders placed by PK, buy orders for

7,16,45,712 shares (i.e. 48% of 14,90,80,942 shares)

were placed at prices marginally lower than the

prevailing market price. PK had created artificial

buying pressure in the scrip by manipulating the order

book. Out of the large buy orders placed by PK at

prices slightly lower than the prevailing market price,

only a fraction of the orders were executed and bulk

of those orders were deleted. Thus, his intention was

only to create a false appearance of volume in the

scrip and he was not a genuine buyer.

j) PK was counterparty to the sales of promoter group

entities for 1153032 shares (31.80% of total sales of

promoter group entities in the scrip). Out of the above

quantity, trades for 5,38,427 shares (14.85% of sales

of promoter group entities and 47% of the sales of

promoter group entities to PK) were synchronized i.e.

buy and sell orders were placed within one minute of

each other. Further, 1370 trades (for 2,37,035 shares)

of PK were 'self trades' (where he was both on the

buy and sell sides). The buy orders placed by PK

accounted for around 77% of the total valid buy 7

orders placed during this period which was mainly

around the sales of the promoter group entities.

k) It was observed that SIL and PK are connected with

each other. PK had transferred shares of Mefcom

Agro Industries Ltd. ("Mefcom" for short) to SIL

through off market transaction. SIL had transferred

` 18,87,073 to SIC, by way of following three

cheques, out of which an amount of ` 6,91,225 was

credited for the purchase of shares of SIL by PK.

Sr. Cheque Cheque Amount (`) Allegation No. No. Date

1. 547013 15/01/07 6,91,225.00 Credited into Mr. Purshottam Khandelwal's ledger account in the book of SIC for purchases of shares of the company

2. 547014 05/12/06 11,57,310,00 .............

3. 547015 06/12/06 38,538.38

Total (`) 18,87,073.38 ...............

4. In view of above facts revealed during the investigation, show

cause notices were issued to SIL, its directors, promoter group entities

(appellants herein) and PK on 19.03.2012 calling upon them to show

cause as to why action should not be taken against them for violating the

provisions contained in the SEBI Act, Securities and Exchange Board of

India (Prohibition of Fraudulent and Unfair Trade Practices relating to

Securities Market) Regulations, 2003 ("PFUTP Regulations" for short)

and the Securities Contracts (Regulation) Act, 1956. 8

5. Appellants denied the allegations made in the show cause notice

dated 19.03.2012 and submitted that the trades executed by them were in

the ordinary course of business and therefore the profits made thereunder

cannot be said to be illegal profits and hence, cannot be directed to be

disgorged. It was submitted that since appellants have not committed any

violations, the show cause notice deserves to be dropped.

6. Rejecting the contention of the appellants, the WTM of SEBI

passed a common order on 21.05.2014 against SIL, its directors,

promoter group entities and PK. By the said order, SIL and its two

directors, namely Sumeet Kumar Somani and Mahesh Kumar Somani

were restrained from accessing the securities market for two years and by

the said order appellants and PK are jointly and severally directed to

disgorge the wrongful gains amounting to ` 4,69,40,232 with simple

interest at the rate of 12% per annum from 12.03.2007 till payment and

are also restrained from accessing the securities market in any manner

whatsoever for a period of three years. Challenging the said order dated

21.05.2014 appellants have filed these two appeals.

7. Mr. Sundaresan, learned counsel appearing on behalf of the

appellants submitted as follows:-

a) The WTM of SEBI erroneously held that some of the

public announcement (which could not be

implemented due to bonafide reasons) were made

with the fraudulent intention of inflating the price of

SIL scrip and thereby enable the appellants 9

(promoters) to offload the shares of SIL at inflated

prices and make unlawful gains. By adopting the

arguments advanced by him in Appeal No. 224 of

2014 (SIL v/s SEBI), counsel for the appellants

submitted that when most of the public announcement

made during the investigation period are implemented

and merely because, three public announcements

could not be implemented due to benafide reasons, the

WTM of SEBI ought not to have held that the said

three public announcements were made with

fraudulent intentions.

b) Decision of WTM of SEBI that SIL had funded PK

through SIC for trading in the scrip of SIL is also

erroneous. SIL had paid ` 18,87,073/- to SIC towards

purchase of 67,559 shares of Mefcom. Out of the said

amount of ` 18,87,073/- received from SIL, it appears

that SIC had credited ` 6,91,225/- to the ledger

account of PK. Since the amount paid by SIL to SIC

was towards acquiring 67,559 shares of Mefcom and

it is demonstrated that SIL has in fact received 67,559

shares of Mefcom, the WTM was not justified in

holding that SIL had paid to PK ` 6,91,225/- through

SIC for trading in the shares of SIL.

10

c) In his statement recorded before SEBI, PK had stated

that he had not traded in the scrip of SIL during the

investigation period. PK had further stated that he

knew Mr. Nirmal Jain, an employee of SIC and that

since all demat account and bank accounts of PK were

with Mr. Nirmal Jain, it is possible that Mr. Nirmal

Jain might have traded in the scrip of SIL by using the

accounts of PK. During the course of cross

examination, PK admitted that Mr. K. K. Modi was

the boss of Mr. Nirmal Jain. When confronted with

undertaking dated 12.04.2006 and instruction slip for

delivery/receipt dated 21.01.2007 and 23.01.2007, PK

admitted that the signature on the undertaking dated

12.04.2006 was his signature. By the said

undertaking, PK had authorized Mr. K.K. Modi to

trade on behalf of PK. Admittedly, Mr. K.K. Modi

has not been examined by SEBI. In such a case even

if it is held that PK had traded in the shares of SIL it

cannot be said that PK had traded in the shares of SIL

at the instance of appellants.

d) Fact that PK was counterparty to 11,53,032 shares

(31.80% of the total quantity sold by appellants) and

out of the above quantity, trades for 5,38,427 shares

(14.85% of sales by appellants and 47% of the sales

by appellants to PK) were synchronized cannot be a 11

ground to hold that appellants were connected to PK

and that PK had traded in the shares of SIL with a

view to inflate the price of SIL scrip, so that the

appellants could sell shares of SIL at inflated prices

and make unlawful gains. Moreover, the alleged

synchronized trades were only 0.89% of the total

trades executed in the market during the investigation

period and therefore, such miniscule synchronized

trades ought not to have been the basis for drawing

adverse inference against the appellants.

e) Similarly, fact that PK had placed 7540 buy orders

(71.83% of the total valid buy orders placed in the

system) in the SIL scrip during the relevant period,

out of which 1611 i.e. 21.37% orders (constituting

74% of his order quantity) were deleted and only

7.95% of the orders got executed, cannot be a ground

to hold that PK traded in the shares of SIL at the

instance of the appellants. Fact that PK was placing

large buy orders at prices slightly lower than the

prevailing market price and only a fraction (4.85%) of

buy orders were executed and bulk of the buy orders

were later deleted by PK within few minutes of

placing those buy orders may create buying pressure

in the scrip of SIL, but that cannot be attributed to the

appellants.

12

f) With a view to establish that PK traded in the scrip of

SIL at the instance of SIL and its promoters it is

erroneously held in the impugned order that SIL

transferred ` 6,91,225/- to PK through SIC. As noted

earlier, the documents on record, namely, demat

statements, contract notes and bank statements clearly

show that the amounts paid by SIL to SIC were for

acquisition of 67,559 shares of Mefcom and once it is

established that, in fact, SIL has received 67559

shares of Mefcom, it could not be said that SIL funded

PK through SIC.

g) In the impugned order it is erroneously held that

misleading statements are made in the annual report

of SIL regarding sale of SIL shares, deliberately with

a view to camouflage the transfer of monies to SIC for

the trades of PK in the scrip of SIL. The annual report

of SIL in fact refers to the buy and sale of Mefcom

shares and merely because, the annual report does not

set out the details of sale of Mefcom shares, the WTM

of SEBI could not have held that the annual report of

SIL contained misleading statements.

h) By relying on an e-mail of BSE dated 31.01.2014 and

order of AO dated 20.02.2014 it is held in para 36 of

the impugned order that the contract notes produced 13

by SIL for acquiring 67559 shares of Mefcom were

fake/forged/fabricated and accordingly the claim of

SIL that ` 18,87,073/- was paid by SIL to SIC for

acquiring 67559 shares of Mefcom has been rejected.

This finding is totally perverse for the following

reasons:-

i) E-mail of BSE dated 31.01.2014 was not

furnished to SIL. Without furnishing a copy of

the said e-mail, no adverse inference could be

drawn behind the back of SIL and appellants.

ii) In the show cause notice it was alleged that out

of ` 18,87,073/- paid by SIL to SIC only

` 6,91,225/- constituted 'fund transfer' by SIL

to PK through SIC. However, in the impugned

order it is held that the entire amount of

` 18,87,073/- did not represent the amount paid

by SIL for acquiring 67,559 shares of Mefcom.

Thus, the finding recorded in the impugned

order which is not even alleged in the show

cause notice cannot be sustained.

iii) Even if the e-mail of BSE suggests that the

trades on the basis of contract notes were

executed on behalf of Mr. Deepak Shantilal

Rana, and the said e-mail received after the 14

personal hearing was granted to the appellants,

the WTM of SEBI could not have held that

e-mail against the appellants without giving an

opportunity of hearing to the appellants.

iv) In any event when the fact of receiving 67559

shares of Mefcom by SIL and thereafter sale of

67559 shares of Mefcom by SIL is established

by producing various documentary evidence

especially the demat statement, the WTM of

SEBI could not have disbelieved the case of

SIL that ` 18,87,073/- was paid by SIL to SIC

for acquiring 67,559 shares of Mefcom.

i) The impugned order is dated 21.05.2014 and on the

same day i.e. on 21.05.2014 itself, the very same

WTM of SEBI has passed an order in case of SIC

wherein it is held that PK and Mr. K.K. Modi were

known to each other and Mr. K. K. Modi in his

capacity as remisier was handling PK's account.

However, there is no link to establish the knowledge

or involvement of SIC in the impugned trading of PK

or in any plan of SIL. If there is no link between SIL

and SIC, then obviously it cannot be said that SIL

funded PK through SIC.

15

j) Relying on the decision of the Apex Court in case of

Ritesh Chakarvarti v/s State of M.P. reported in

(2006) 12 SCC 321 it is submitted that in view of

failure on part of SEBI to examine Mr. K.K. Modi no

adverse inference could be drawn against the

appellants.

k) The profits derived from sale of SIL shares was in the

ordinary course of business and could not be said to

be illegal profits and consequently the said profits are

not liable to be disgorged.

l) Assuming for sake of argument it is held that the

profits made in the present case are liable to be

disgorged then the quantum of illegal profits

computed by SEBI is faulty. While the net sale

realization is correctly computed at ` 18.98 per share,

SEBI has wrongly taken the price of ` 4.34 per share

being the closing price on 30.09.2006 as the

acquisition price of SIL shares by the appellants. It is

submitted that since the WTM of SEBI in para 2(f) of

the impugned order has recorded that one month after

the investigation period, the price of SIL scrip

decreased from ` 27.60 on 13.03.2007 to ` 15.10 on

30.04.2007, the price of ` 15.10 ought to have been 16

taken as the acquisition price for determining the

alleged illegal profits.

m) Assuming that the trades in question were

manipulated trades, in the facts of present case, while

directing the appellants to disgorge the profits,

restraining the appellants from accessing the securities

market for three years is extremely harsh and hence

liable to be quashed and set aside.

8. Mr. Mehta, learned Senior Advocate appearing on behalf of SEBI,

on the other hand, by relying on facts of figures set out in the impugned

order submitted as more particularly set out herein below, that no fault

can be found with the impugned order and the appeals filed by the

appellants are liable to be dismissed.

9. We have carefully considered the submissions made by counsel on

both sides.

10. In the present case, the appellants who are promoters of SIL are

held guilty of making illegal profits by resorting to manipulative and

fraudulent trades through PK and are accordingly directed to disgorge the

illegal profits and are also restrained from accessing the securing market

for three years.

11. In our order passed today in Appeal No. 224 of 2014 we have held

that three public announcements made by SIL were not bonafide public

announcements. For the reasons set out in our order in Appeal No. 224 17

of 2014 we hold that SIL and its promoters had made three price

sensitive public announcements not with a view to implement the same

but with a view to inflate the price of the SIL scrip so that the appellants

who are promoters of SIL could off-load the SIL shares at the inflated

price and make illegal profits.

12. It is relevant to note that the appellants claim that as promoters of

SIL they wanted to pump-in funds for expansion of SIL, by subscribing

to the preferential allotment of SIL shares at ` 30 per share. However,

facts on record reveal that no preferential allotment was made on some

pretext or the other and in the interregnum taking advantage of price rise

in the SIL scrip due to price sensitive public announcement, the

appellants have sold more than 30 lac SIL shares at inflated price and

made huge profits. Thereafter, the appellants have abandoned the

proposal to pump in funds by subscribing to preferential allotment of

shares and resorted to the rights issue, wherein, appellants have

subscribed to 95% of SIL shares under the rights issue at ` 15 per share.

These facts amply demonstrate that the unimplemented public

announcements were made with a view to inflate the price of SIL scrip so

as to make profits by off-loading the shares of SIL and thereafter

subscribe to the shares of SIL at ` 15/- per share under the rights issue.

13. Apart from the above, findings recorded in the impugned order that

the trades in the shares of SIL executed by PK has also resulted in

inflating the price of SIL scrip and facilitated appellants to off-load SIL

shares at inflated prices deserves acceptance for the following reasons:- 18

a) Findings recorded in paras 40 to para 44 of the

impugned order clearly reveal that PK was placing

large buy orders at prices slightly lower than the

prevailing market price, and only a fraction (4.85%)

of those orders were actually executed and bulk of the

orders were later on deleted by him within few

minutes of placing those buy orders. Such pattern of

trading gave misleading impression of market depth

and thereby induced the buyer's interest in the scrip of

SIL.

b) PK was counterparty to 11,53,032 shares (31.80% of

the total quantity sold by the promoter group entities).

Out of the above quantity, trades for 5,38,427 shares

(14.85% of promoter group sales and 47% of the

promoter group sales to PK) were synchronized i.e.

buy and sell orders were placed within one minute of

each other. In these circumstances, the WTM of SEBI

is justified in holding that placing sell orders by the

appellants (promoter group entities) with PK for same

quantity at the same price within too negligible time

difference repeatedly over a period of time are clear

indication that those synchronized trades were not a

matter of coincidence.

19

c) Bulk buy orders placed by PK as also synchronized

trades executed by PK created spurt in the volume and

price of SIL scrip and during that period the

appellants have sold more than 30 lac shares of SIL

and made huge profits.

d) Although the appellants have contended that they

were not connected with PK, fact that PK had off-

market dealings with SIL and that PK had transferred

17559 shares of Mefcom to SIL without receiving any

consideration and that the appellants are the only

beneficiaries of the manipulative trades executed by

PK clearly show that the appellants and PK were

connected to each other and that PK resorted to

manipulative trades with a view to inflate the price of

SIL scrip so as to enable the appellants to off-load the

shares of SIL at inflated prices.

e) In the written submission filed on behalf of appellants

it is submitted (see page 18 of the written

submissions) that the deep link among Mefcom, SIC,

PK and Vishwas Securities is established from the

quarterly filings of shareholding pattern with stock

exchanges by Mefcom. If PK, Vishwas Securities and

SIC had deep links, then obviously appellants as

promoters of SIL had also deep links with PK and 20

Vishwas Securities, because PK executed

manipulative trades in the scrip of SIL for the benefit

of appellants whereas, Vishwas Securities was to be a

joint venture partner of SIL for developing 200 acres

of land to be acquired by SIL as per the public

announcements made by SIL. Moreover, it is a matter

of record that the Board of directors of SIL on

27.02.2007 had approved allotment of 2,50,000 shares

of SIL to Vishwas Securities on preferential basis. All

these factors show that SIL, PK and Vishwas

Securities were all connected to each other.

f) It may not be out of place to note that PK has deemed

it fit not to challenge the impugned decision.

In these circumstances, the findings recorded in the impugned order that

PK executed manipulative trades in the scrip of SIL with a view to inflate

the price of SIL scrip and thereby enable the appellants to off-load the

shares of SIL at inflated prices cannot be faulted.

14. Since the profits or gains made by the appellants are on account of

fraudulent and manipulative trades, the appellants are liable to disgorge

the said wrongful gains.

15. Computation of wrongful gains in the impugned order at

` 4,69,40,232 is seriously disputed by the appellants. Appellants do not

dispute the net sale realization on sale of SIL shares during the 21

investigation period (weighted average sale price) determined at ` 18.98

per share of SIL. However, the appellants object to the acquisition price

determined at ` 4.34 per share by taking the closing price on 30.09.2006,

merely because the investigation by SEBI commenced from 01.10.2006.

16. We see merit in the contention of appellants. Fact that SEBI

investigated into the trades of SIL from 01.10.2006 cannot be a ground to

hold that fraudulent and manipulative trades were executed in the SIL

scrip from 01.10.2006. Admittedly, PK had not commenced trading in

the SIL scrip from 01.10.2006 and therefore, it cannot be said that the

manipulative trades took place from 01.10.2006 and accordingly take the

closing price on 30.09.2006 as the acquisition price of the SIL shares sold

by the appellants while determining the illegal profits. If manipulative

trades commenced with the trading executed by PK, then the price

prevailing on the date on which PK commenced trading could be taken as

the acquisition price of SIL shares.

17. In para 2(f) of the impugned order, the WTM of SEBI by referring

to the price of SIL scrip prevailing on 30.04.2007 at ` 15.10 has sought

to demonstrate that the price of SIL scrip during the investigation period

was inflated. If price of SIL scrip prevailing on 30.04.2007 was a

relevant criteria, then why the price prevailing on 30.09.2006 is taken

into consideration while computing the illegal profits is not explained in

the impugned order. Thus, the illegal profits computed by the WTM of

SEBI at ` 4,69,40,232/- cannot be said to be based on relevant criteria. 22

18. In these circumstances, while upholding the decision of WTM of

SEBI that the appellants are liable to disgorge the illegal gains made on

sale of SIL scrip during the investigation period, we set aside the illegal

profits quantified at ` 4,69,40,232/- and direct that the quantum of illegal

profits be determined afresh by setting out the norms laid down by SEBI

for determining the illegal profits.

19. Plea of the appellants that the impugned order which seeks to

restrain the appellants from accessing the securities market is harsh and

excessive, deserves acceptance for the following reasons-

a) In the impugned order it is held that SIL funded PK

through SIC for trading in the shares of SIL with a

view to inflate the price of SIL scrip and thereby

enable the appellants to off-load the SIL shares at the

inflated prices and make illegal profits. According to

appellants SIL had paid ` 18,87,073/- to SIC for

acquiring 67559 shares of Mefcom and out of the said

sum of ` 18,87,073/-, if SIC transfers ` 6,91,225/- to

PK, it cannot be said that SIL had funded PK through

SIC. The demat statement of SIL clearly show that

67559 shares of Mefcom were actually received by

SIL. In such a case, fact that SIC transferred `

6,91,225/- to PK out of ` 18,87,073/-received from

SIL, could not be a ground to hold that SIL funded to

the extent of ` 6,91,225/- to PK through SIC. 23

b) Apart from the above, the demat statement of SIL

clearly shows that out of 67559 Mefcom shares, SIL

has received only 50000 shares of Mefcom from SIC

and the balance 17559 shares of Mefcom are received

by SIL from PK. When SIL had paid ` 18,87,073/- for

acquiring 67559 shares of Mefcom, why SIC

delivered only 50,000 shares and why PK delivered

17559 shares of Mefcom to SIL without receiving any

consideration from SIL is a question, which ought to

have been considered before arriving at a conclusion

that SIL funded PK through SIC. Without considering

these aspects of the matter, findings recorded in the

impugned order that SIL funded ` 6,91,225 (out of `

18,87,073) to PK through SIC for trading in the shares

of SIL cannot be sustained.

c) Moreover, by relying on an e-mail of BSE dated

31.01.2014 it is held in the impugned order that the

entire amount of ` 18,87,073/- did not represent the

amount paid by SIL for acquiring 67559 shares of

Mefcom. No such case was made out in the show

cause notice. Even the e-mail of BSE dated

31.01.2014 was not furnished to the appellants. Thus,

the findings recorded by the WTM of SEBI which

goes beyond the allegations made in the show cause

notice and is based on e-mail of BSE dated 24

31.01.2004 which was not furnished to the appellants

cannot be sustained being violative of the principles

of natural justice.

d) In the impugned order, it is erroneously held that the

Annual Report of SIL contains misleading statements.

This finding is unsustainable, because the Annual

Report of SIL refers to purchase and sale of Mefcom

shares and merely because the sale particulars were

not set out therein, it could not be inferred that the

Annual Report contained misleading statements.

e) As the restraint order passed by the WTM of SEBI is

based on various findings recorded in the impugned

order and some of the findings set out herein above

cannot be sustained, we deem it proper to modify the

impugned order by reducing the period of restraint

from three years to the period already undergone by

the appellants up to the date of present order.

20. In the result, we pass the following order:-

a) The WTM of SEBI was justified in holding that the

trades executed by the appellants in the scrip of SIL

during the investigation period were fraudulent and

manipulative trades and therefore the wrongful gains

made by the appellants from the said fraudulent and 25

manipulative trades are liable to be disgorged by the

appellants. However, the quantum of unlawful gains

determined by the WTM of SEBI being not in

accordance with any precise norms, we set aside the

quantum of unlawful gains determined by SEBI and

direct the WTM of SEBI to recompute the quantum of

unlawful gains liable to be disgorged by the

appellants.

b) Since some of the findings recorded in the impugned

order cannot be sustained for the reasons set out in

para 19 above, we modify the impugned order by

reducing the period of restraint imposed on the

appellants from 3 years to the period of restraint

undergone by the appellants up to the date of the

passing of the present order.

21. Both the appeals are disposed of in the above terms, with no order

as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 30.06.2016 Prepared & Compared By: PK