In the Securities Appellate Tribunal, Mumbai

Eonour Technologies Ltd. and R. Karthik

v.

Securities & Exchange Board of India

JUSTICE, N. K. SODHI, PRESIDING OFFICER

AND ARUN BHARGAVA AND UTPAL BHATTACHARYA, MEMBER

APPEAL NO. 124 OF 2006

August 30, 2007

Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation 2003 - Prohibition of manipulative, fraudulent and unfair trade practices - Board found that immediately after ‘K’ took over appellant-Company as promoter, company’s scrip started trading substantially on Madhya Pradesh stock exchange (MPSE) and BSE - Accordingly Board, conducted investigations which revealed, inter alia, that two companies namely HAL and VESL owned by one ‘N’ at behest of appellants traded in company’s scrip and managed to push up price to unrealistic levels - It was also found that ‘K’ transferred certain shares of company to ‘S’ who could not make payment for same - ‘S’ however, transferred those shares to ‘JFL’ i.e. another company owned by ‘N’ - Accordingly, notice was issued to appellants for alleged violation of regulations and thereafter an order under section 11B of the Securities and Exchange Board of India Act, 1992, was passed debarring appellants from dealing in securities in any manner for a period of three years - On instant appeal, it was noticed that this fact was not disputed by parties that HAL and VFSL along with their employees traded in scrips in question on BSE and executed circular trades by creating artificial volumes for which they had been punished by Board - Besides, shares were transferred to HAL and VFSL at 50 per cent of book value of share which was about Rs. 17 although listed price of share on BSE was between Rs. 520 and Rs. 634 - It was also noticed that transfer of shares to ‘JFL’ by ‘S’ and subsequent trading by JFL on BSE was to advantage of ‘K’ because scrip of company had been manipulated and price jacked up - Whether in aforesaid circumstances, it could be concluded that transfer of shares to different companies belonging to ‘N’ namely, HAL, VFSL and JFL, either directly or indirectly, was motivated and intention was that said companies should manipulate price of scrips on BSE - Held, yes - Whether, therefore, impugned order passed by Board was correct and could be upheld - Held, yes

FACTS

‘K’ was the promoter of the appellant - company. He took over the company from the previous promoters in the month of November 1999. The Board after carrying out investigation found that immediately after ‘K’ took over the company its scrips started trading substantially on Madhya Pradesh stock exchange (MPSE) and BSE. The investigation further revealed that in MPSE about 7 brokers had formed a cartel and they indulged in circular trading in the scrip which pushed up the price to unrealisitic levels i.e., Rs. 31.50 to Rs. 401. Investigation also revealed that some entities at behest of ‘K’ traded in scrip on BSE and managed to raise price up to Rs. 634.75. It was also found that ‘K’ who was holding 75 per cent of total equity capital of appellant company had transferred 1.24 laks shares to ‘S’ and 1.45 lakhs shares to HAL and ‘VFSL’ two companies owned by ‘N’. Later ‘S’ who did not pay for 1.24 lakhs shares transferred to him by ‘K’, transferred those shares to JFL, i.e., another company owned by ‘N’. On basis of said findings ‘K’ was served a notice as to why action be not taken against them for creating a false / artificial market in scrip of company both on MPSE and BSE. Subsequently, Board after considering the K’s reply passed an order directing ‘K’ and company not to deal in securities in any manner for a period of three years from the date of order.

On appeal:

HELD

As regards charge No. 1, the allegation was that ‘K’ was a party to the manipulation of the price of the scrip on MPSE. It was common ground between the parties that seven brokers who were members of MPSE had formed a cartel and they traded in the scrip of the company executing circular traded creating artificial volumes. By separate orders passed by the Board, these seven members of the cartel had been punished for executing circular trades which orders had not been challenged by them. The question was whether those seven members of MPSE had traded at the behest of the appellants. The finding of the Board in this regard was that the scrip of the company was illiquid and suddenly showed an increase in the price which was due to circular trading. The Chairman of the Board observed that there was nothing special about the fundamentals of the company for such a movement and that the promoter was a first generation entrepreneur without any major track record to boast about. From these facts he jumped to the conclusion that circular trading on MPSE had taken place in connivance with the promoter of the company. That view could not be subscribed to say the least, the finding was conjectural and based on surmise and inferences which were unwarranted. There was no material on the record to show that the seven brokers on the MPSE has traded either in connivance with the appellants or at their behest. Of course, they traded in a circular manner creating artificial volumes which might have increased the price but that did not involve the appellants. Therefore, there was no hesitation in reversing the finding of the Board on the first charge. [Para 5]

As per charge No.2, HAL, VFSL, JFL and some others traded in the scrip of the company on the BSE from 12-6-2000 onwards and the price of the scrip which opened at Rs. 520 had gone up to Rs. 634 on 7-7-2000. These trades were all circular and created artificial volumes. It was admitted by the parties that the Board by its separate orders passed against these entities had imposed a penalty of debarring them from accessing the capital market for a period of three years each. The charge against the appellants was that those entities traded in the scrip at the instance and behest of ‘K’. The Board had found this charge as established. This charge stood established though for a different reason. It was not in dispute that ‘K’ transferred 1,45,000 shares each to HAL and VFSL. Having transferred these shares he received a sum of Rs. 25 lakhs from each of them which amount was deposited in the accounts of the company. The question was why did ‘K’ transfer these shares to HAL and VFSL. The explanation furnished by ‘K’ was that he was in need of finances and approached ‘N’ who owned HAL and VFSL and entered into an agreement with the two companies on 5-6-2000 whereby shares were transferred to them and they were to pay a sum of Rs. 25 lakhs each within a period of 60 days. The stand of ‘K’ was that the shares were pledge which stand was false. It was true that the amount was received in the coffers of the company on 7-8-2000 and 6-9-2000, but the explanation furnished by ‘K’ was not acceptable. ‘K’ was alleged to have executed two agreements with each of the two companies - one for the loan and the other for pledging the shares. The stand taken by ‘K’ was obviously false because the shares were not pledged and instead they had been transferred in the name of HAL and VFSL as was clear from the demat account, which fact was admitted. When shares are to be pledged for obtaining loan, there is a procedure prescribed under the Depositories Act, 1996 and the regulations framed thereunder. Admittedly, that procedure had not been followed. Moreover, the pledged shares cannot be traded till such time the pledge is redeemed. Since the shares were transferred in the name of the two companies which made payments subsequently, the agreements, even if they were to be accepted, resulted in an outright sale and not a pledge as was contended by ‘K’. The fact that the shares were transferred in the name of the two companies belied the stand taken by ‘K’. The two agreements allegedly executed by ‘K’ with each of the two companies (HAL and VFSL) were nothing but sham transactions as found by the Board and that finding was agreeable because these agreements could not be relied upon. They were prepared on a plain piece of paper and not on a stamp paper. Such agreements could be prepared at any time. This was not the manner in which such agreements were executed. The question was why were the shares transferred to HAL and VFSL by ‘K’. It was on record and that fact was not disputed by the parties that HAL and VFSL along with their employees traded in these shares on the BSE and executed circular trades by creating artificial volumes for which they had been adequately punished by the Board. Obviously, these shares were transferred by ‘K’ to enable the two companies and their employees to trade in those shares and manipulate the price of the scrip which they did. Therefore, the trades executed on the BSE by HAL, VFSL and other entities including their employees was at the behest of ‘K’. It was relevant to notice another material aspect in this regard. The shares were transferred to HAL and VFSL in June 2000 at 50 per cent of the book value of the share which was about Rs. 17 although the listed price of the share on the BSE was between Rs. 520 and Rs. 634. It was, thus, clear that the shares were transferred at a ridiculously low price. Therefore, the transfer of the shares to HAL and VFSL was motivated and the intention was that the two companies should manipulate the price on the BSE. In this view of the matter, the second charge stood established. [Para 6]

As regards charge No. 3 this charge really followed from the second charge. Having successfully manipualted the price of the scrip on the BSE the appellants approached Bank for a loan and pledged 5,04,000 shares. The book value of the share was around Rs. 34 whereas loan was obtained on the listed price which was around Rs. 600. The Board was not wrong when it observed that the appellants had deceived bank. [Para 7]

According to charge No. 4, ‘S’ transferred the shaers of JFL at the behest of ‘K’. The stand of ‘K’ was that he sold the shares to ‘S’ and in pursuance to that agreement, these were transferred. Admittedly, the agreement fell through. There was no reason why ‘S’ should not have returned the shares back to ‘K’. He instead transferred the shares to JFL on 9-6-2000 and this company also traded on the BSE and was a party to the circular trades for which suitable action had been taken against it by the Board. It was quite probable that ‘K’ had provided JFL with shares to trade in the market and asked ‘S’ to transfer them to JFL. The transfer of shares to JFL and subsequent trading by it on the BSE was to the advantage of ‘K’ because the scrip of the company had been manipulated and price jacked up. This was an inference but in the circumstances, it could not be said to be far fetched.

In view of the findings recorded on the second and fourth charge which were very serious indeed, impugned order was to be upheld and the appeal was to be dismissed. [Para 9]