Gaurav Shah vs Securities and Exchange Board of India on 17 December 2008

BEFORE THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Appeal No. 78 of 2008

Date of Decision : 17.12.2008

Gaurav Shah …… Appellant

Versus

Whole Time Member Securities and Exchange Board of India

…… Respondent

Mr. Ravikumar Varanasi Advocate for the Appellant. Dr. Poornima Advani Advocate with Ms. Harshada Nagare Advocate for the Respondent

Coram : Justice N.K. Sodhi, Presiding Officer Utpal Bhattacharya, Member

Per : Justice N.K. Sodhi, Presiding Officer (Oral)

Cyberspace Ltd. (Cyberspace) is a company incorporated under the provisions of the Companies Act, 1956 and its shares are listed on the Delhi Stock Exchange, Uttar Pradesh Stock Exchange, Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd. (NSE). The promoters and group companies were holding 42.73% of its shares and the public holding was 42.88%. Cyberspace was promoted by Sarvshri Rajendra Kumar Mohta, Arjun Kumar Agarwal, and Anil Kumar Beejawat. In 1993-94 Sarvshri A.K. Johari and Arvind Johari took over Cyberspace. Century Consultants Ltd. (CCL) is one of the group companies of Cyberspace and a member of NSE and BSE and its directors are Sarvshri G.N. Johari, A.K. Johari, Arvind Johari and J.C. Verma. Some of the directors of Cyberspace and CCL are common.

2. On a preliminary enquiry made by BSE, it found that the promoters of Cyberspace were involved in activities which may have contributed towards

manipulating the price of its scrip. There were media reports to this effect pointing out some problems that had arisen in some of the settlements relating to the trades in the scrip. In this background, the Securities and Exchange Board of India (for short the Board) conducted investigations into the affairs of Cyberspace relating to the buying, selling and dealings in its shares. Investigations revealed an unusual movement in the shares during the period from October 1999 to March 2001. The price of the scrip of Cyberspace had gone up substantially during this period and the scrip had traded in large volumes. Investigations also revealed that the promoters of Cyberspace and CCL had acted in concert with large number of shell companies and executed trades in the scrip of Cyberspace which were circular in nature with a view to raise the price and volumes artificially and that such trading created a false market. On the basis of the investigations, the Board issued show cause notices to several entities including Amit Interchemicals P. Ltd. of which the appellant was a Director which were found to be involved in manipulating the scrip of Cyberspace. Show cause notice dated March 19, 2004 was issued to Amit Interchemicals P. Ltd. which was received by the appellant at his residential address. It appears that the noticee (Amit Interchemicals P. Ltd.) had given its address where the appellant was residing. It is alleged in the show cause notice that the noticee had executed several trades with the shell companies/front entities set up by the promoters of Cyberspace and CCL and that they executed trades among themselves with a view to create artificial volumes and market in the scrip. It was also alleged that the price of the scrip had been artificially raised by these circular trades. The noticee was alleged to have violated the provisions of Regulation 4(a) to 4(d) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (for short the regulations). It was called upon to show cause why appropriate directions be not issued to it under sections 11 and 11 B of the Securities and Exchange Board of India Act, 1992 (hereinafter called the Act). On receipt of this notice, the appellant filed a reply dated April 10, 2004 which purports to be on his own behalf. We cannot understand how the appellant could have filed a

reply on its own when he had not received any show cause notice in his own name. Since he is a director of Amit Interchemicals P. Ltd., the reply has to be on behalf of the noticee. Be that as it may, the appellant did not dispute the fact that trades have been executed by the noticee along with other entities which were described as shell companies set up by the promoters of Cyberspace and CCL. He also did not dispute that the trades were circular in nature and were intended to create an artificial market and were executed to raise the price of the scrip. What was stated in the reply was that he was employed with CCL as an officer in the accounts department and that on the threat of losing his job Mr. Arvind M. Johari made him sign some papers inducting him as a director of Amit Interchemicals P. Ltd. and that he was also instructed to open a bank account in the name of the noticee. It is further stated in the reply that the appellant was not aware of the trades executed between the different entities nor was he informed of the trades carried out in the name of the noticee though he was forced to sign the delivery instruction slips by which the shares were transferred. He alleged that he was cheated by the promoters of Cyberspace and CCL and that he did not make any profit in the trades executed in the name of the noticee. On the basis of this reply, he claimed to be innocent and requested the Board to take a lenient view against him. On a consideration of the matter, the whole time member has passed a common order against all the entities allegedly involved in the game plan including the noticee and the appellant. Amit Interchemicals P. Ltd., among others, has been held guilty of executing circular trades thereby creating artificial volumes in the scrip of Cyberspace. All the entities including the noticee have also been found to have manipulated the price of the scrip. In view of these findings the whole time member by his order dated March 3, 2008 debarred, among others, Amit Interchemicals P. Ltd. and the appellant as its Director from accessing the securities market for a period of 5 years. They have also been prohibited from buying, selling or dealing in securities in any manner for the same period. It is against this order that the appellant has filed the present appeal.

3. We have heard the learned counsel for the parties who have taken us through the record. The learned counsel appearing for the Board has placed before us a compilation of documents including the record of transactions during the month of March 2001 executed between different entities in the scrip of Cyberspace. The trades executed between different entities could not be disputed before us as these are computer print outs. To begin with, the appellant had tried to distance himself from Amit Interchemicals P. Ltd. and he contended that he had no concern with this company. He also pleaded ignorance about the trades executed in the name of the noticee. However, when he was confronted with the documents produced by the respondent Board, the learned counsel appearing for him conceded that he was a Director in the company. It is also not disputed that as a Director he had signed delivery instruction slips on behalf of the company on the basis of which the shares have been transferred from one entity to the other. In this background, we cannot accept the plea that the appellant was not aware of the trades executed by Amit Interchemicals P. Ltd. and that he had been forced to become a Director of that company. If that were so, he should have raised his voice and made a complaint but he did not do so. He did not appear during the course of the enquiry despite several notices having been issued to him. In response to one of the notices, his father sent a reply stating that the appellant had nothing more to state beyond what he had stated in his reply dated April 10, 2004. It is, thus, clear that the appellant did not dispute that the circular trades had been executed among different entities which were said to be the front entities of the promoters of Cyberspace and CCL. We have perused the charts now produced before us by the Board and find that large number of trades have been executed by Amit Interchemicals P. Ltd. with the shell companies and that within the group the trades were circular. The appellant cannot disown responsibility in regard to the trades as he was not only the Director of the company but has also signed the delivery instruction slips on its behalf. In this view of the matter, no fault can be found with the impugned order qua the appellant.

4. The learned counsel for the appellant strenuously urged that the penalty levied is too harsh and that the period of debarment should be reduced. He refers to a few instances pertaining to some of the entities involved in the game plan that had been given lesser punishment. We have perused those cases as well and find that in the entire game plan, large number of entities were involved in executing circular trades and that each entity had a separate and distinct role to play. The instances cited by the learned counsel for the appellant pertains to the case of brokers who obviously play a different role from that of the investor. He also cited the case of one Jhugal Kishore Barasia who was an investor. He has been given lesser punishment because he has not been found to be a front entity of the promoter of Cyberspace and CCL which the appellant and the noticee company were. When the promoters of a company through their own front entities start manipulating their own scrip, the charge is more serious and those who act in concert with them are equally responsible. In the facts and circumstances of the case, we are of the view that the penalty imposed on the appellant is reasonable and does not call for any reduction.

For the reasons recorded above, the appeal fails and the same is dismissed with no order as to costs.

Sd/-

Justice N.K. Sodhi

Presiding Officer

Sd/-

Utpal Bhattacharya

Member

17.12.2008 RHN