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M/s. Dhanlaxmi Cotex Ltd. v/s Securities and Exchange Board of India

    Appeal No. 7 of 2009
    Decided On, 08 July 2009
    At, SEBI Securities Exchange Board of India Securities Appellate Tribunal
    By, MEMBER
    Mr. Zal Andhyarujina, Advocate with Mr. Bharat Merchant, Advocate for the Appellant. Dr. Poornima Advani, Advocate with Ms. Harshada Nagare, Advocate for the Respondent.

Judgment Text
Justice N.K. Sodhi, Presiding Officer (Oral)

This order will dispose off three Appeals no. 156 and 157 of 2008 and 7 of 2009 which involve common questions of law and fact. The appellants in Appeals no.156 and 157 of 2008 are registered brokers whereas the appellant in the third appeal is the client who traded on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) through the other two appellants as its brokers. Since we are remanding the cases to the Securities and Exchange Board of India (for short the Board) for a fresh enquiry, it is not necessary for us to state the facts in detail.

Soundcraft Industries Limited (for short SIL) is a public limited company whose shares are listed on BSE and NSE. One Rajkumar Chainrai Basantani (for short Basantani) is the Chairman of this company. He is also in his individual capacity a trading member of NSE. He is also a director of Kolar Sharex Pvt. Ltd. (for short KSPL) which is also a registered stock broker at BSE. It is the case of the Board that SIL was proposing to come out with a preferential allotment of shares and with that object in view Basantani the chairman of the company in league with several entities including the three appellants before us started executing circular and synchronized trades with premeditated intent to maintain the price of the scrip which would have benefited SIL for pricing the preferential issue. It is alleged that M/s. Dhanlaxmi Cotex Limited (for short Dhanlaxmi) ? one of the appellants before us was in league with Basantani and some of his other entities and had executed circular trades in the scrip of SIL on BSE. It is also the case of the respondent Board that while executing the circular trades, Dhanlaxmi had acted through M.R. Share Broking Pvt. Ltd. (for short MRSB) a registered broker on BSE. Another charge levelled against Dhanlaxmi is that it executed synchronized trades with a premeditated intent on NSE with Basantani and other related entities through V.R.M. Share Broking Pvt. Ltd. which is a registered stock broker on NSE.

On an enquiry conducted by the Board, it found that the two charges levelled against Dhanlaxmi stood established and the whole time member of the Board by his order dated 9.1.2009 debarred Dhanlaxmi from accessing the securities market and prohibited it from buying, selling or dealing in securities either directly or indirectly for a period of six months.

By two separate orders the Board also found the two brokers in Appeals no. 156 and 157 of 2008 guilty of aiding and abetting Basantani in implementing his game plan by executing circular and synchronized trades as aforesaid and their certificates of registration have been suspended for a period of one month each. Hence these appeals.

We have heard the learned counsel for the parties at length. The first charge leveled against Dhanlaxmi is that it executed circular trades on BSE through M.R. Share Broking Pvt. Ltd. In the show cause notice dated August 31, 2005 issued to this appellant, the Board had furnished the following diagram showing circular trading amongst the brokers on July 2, 2001:-



The charge against Dhanlaxmi is that while acting through MRSB as its broker it purchased shares from KSPL and sold them to Park Light Investment Pvt. Ltd. (for short PLIPL). The AMS 2700 KSPL MRSB PLIPL number of shares said to have been purchased from KSPL and sold to PLIPL have not been mentioned. How could the appellant properly respond to such a chart. Be that as it may, the whole time member in the impugned order finds that the charge of circular trading stands established and again relied upon the same chart as was referred to in the show cause notice but this time the number of shares purchased from KSPL and sold to PLIPL have been mentioned. This chart reads as under :-



AMS 2700 3500 1300

When we examine the aforesaid chart it is clear that KSPL had sold 3500 shares to

Dhanlaxmi through MRSB on July 2, 2001 which in turn sold 1300 shares to PLIPL. On the basis of this chart the whole time member holds that the allegation of circular trading stands established. We are unable to sustain this finding for more than one reason. If KSPL had sold 3500 shares to MRSB which in turn sold 1300 to PLIPL, then what happened to the balance shares. The impugned order is silent. The learned counsel appearing for the Board, however, pointed out from the trade logs which were produced in Court that the remaining shares had also been sold by MRSB to entities related to Basantani. The learned counsel for the appellant, however, controverted this contention and after examining the trade logs he submitted that they did not show the sale to other entities. This apart, we are also of the view that the aforesaid diagram / chart gives a misleading impression, in as much as, it reflects that shares were first sold by KSPL to MRSB which then sold to PLIPL. This is factually incorrect. The trade logs produced in Court show otherwise. The sale by MRSB to PLIPL is earlier in point of time than the sale by KSPL to MRSB. The learned counsel for the respondent Board has some explanation to offer but we are of the opinion that these diagrams AMS Broker KSPL Broker MRSB PLIPL do not establish the charge of circular trading conclusively. Moreover, the trade logs which were produced in Court had not been furnished to the appellant and the learned counsel appearing on its behalf was right in contending that it had no opportunity to explain the trade logs from which the aforesaid diagrams had been deduced. We are also of the view that in the circumstances of the case the Board should have relied upon the basic data in the form of trade logs / order logs in coming to the conclusion regarding the allegations made against Dhanlaxmi rather than basing itself on the aforesaid diagrams, deduced from those logs which do not reflect the correct position.

As regards the charge of synchronized trades allegedly executed by Dhanlaxmi through VRM on NSE, we are of the view that some more information ought to have been furnished to the appellant before a finding could be recorded. The order logs / trade logs relied upon do not contain the full information. For instance, the quantity of the buy order and the sell order and the sell order price are not mentioned in the details of the so-called structured deals. These details have been compiled by culling out parts of the order logs and trade logs and the appellants are justified in urging that full information was not furnished to them as a result whereof the principles of natural justice stood violated. The learned counsel for the respondent Board, on the other hand, strenuously contended that a mere look at the details furnished by the Board clearly indicates that Dhanlaxmi had bought shares when the seller was Jaitra Estate Developers Pvt. Ltd. (for short Jaitra) a client of Basantani. She further pointed out that when Jaitra was the buyer it was Dhanlaxmi who was selling the shares. Some of the trades do reveal this pattern and this may raise a strong suspicion but unless full details of the synchronized trades are furnished to the appellants, we cannot affirm the findings of the Board on this charge. Again, reliance was placed on the price volume chart produced on the record and it was pointed out on behalf of the Board that the price of the scrip of SIL was sought to be ma

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intained during the period of investigation. This may not be exactly correct but we do find that the price of the scrip did not vary much. These charts also by themselves do not decisively establish the charge of synchronized trading by Dhanlaxmi through VRM. For the reasons recorded above the appeals are allowed, impugned orders set aside and the cases are remanded to the Board for a fresh decision in accordance with law. Before parting with our order, we may mention that whatever has been observed hereinabove is only for the purpose of remanding the cases back to the Board and no observation made should be taken as an expression of our views on the merits of the issues involved in the appeals. The Board shall examine all issues without being influenced by any of the observations made by us hereinabove. No costs.