While curtailing SEBI’s case against the Tulsian Group as ‘highly improbable’, the Securities Appellate Tribunal (SAT) at Mumbai has clarified that where connected entities in an illiquid scrip are shown, through undisputed material such as common mobile numbers, common email IDs, common addresses, common directorships and trade logs reflecting inter se trades, to have traded during the investigation period in a manner consistent with coordinated conduct, the Tribunal may infer, on a preponderance of probability, that they joined hands to make the scrip liquid and to increase its share price. In such a case, the defence that trades were executed through the stock exchange electronic platform and that the traders did not know the counter-parties will not succeed if the factual matrix shows trades between connected entities.
The Court held that penalty and disgorgement cannot be sustained where SEBI’s theory of connection and manipulation is internally fragile, inconsequential to the main allegation, or highly improbable on the admitted facts. Thus, where the alleged beneficiary group is not shown to have participated in the manipulation, or where the asserted financial links do not logically support SEBI’s theory, the order against such parties cannot stand. Equally, where an individual’s role is negligible in the context of the overall traded volume and there is no real role in increasing the share price, penalty is not sustainable.
Further, where the adjudicating authority itself records that disproportionate gain, unfair advantage and investor loss are not quantifiable, but imposes differing penalties without reasons, the Tribunal can rationalise the penalty and impose a common quantum where it considers that course just and appropriate, added the SAT.
The Coram comprising Justice P.S. Dinesh Kumar (Presiding Officer), Meera Swarup (Technical Member) and Dr. Dheeraj Bhatnagar (Technical Member) observed that the case of the ECL Group stood on a different footing from the case of Prabhaben Savjani, the Tulsian Group and Jagdish Akhani. As regards the ECL Group appellants, the Tribunal noted that their inter se connections through common mobile numbers, email IDs, addresses and directorships were not in dispute, that they had admittedly traded during the investigation period, and that the ECL scrip was an illiquid scrip whose price rose sharply during that period.
On these facts, and particularly in view of the trade logs and inter se trades between connected parties, the Tribunal held that it was reasonable, on a preponderance of probability, to infer that they had joined hands to make the scrip liquid and to increase its share price. The defence that trades were placed on the electronic platform and that the traders would not know their counter-parties was rejected in light of the pattern of trades between connected entities. The Tribunal also rejected the argument that independent directors could not be held responsible, because of their indulgence in trading in the scrip during the investigation period.
In the case of Prabhaben Savjani, the Tribunal found that although the Whole Time Member (WTM) had imposed a penalty of Rs. 10 lakhs, she had purchased only 1,000 shares, had not sold any shares, was more than 80 years old, and had no role in increasing the share price when seen against the total traded volume of more than 97 lakh shares. The Tribunal therefore held that imposition of penalty on her was not sustainable.
In the case of Jagdish Akhani, the Tribunal observed that he stood in a distinct position because he was both part of the ECL Group and also an amalgamation allottee. The Tribunal noted his connections with several noticees through common mobile numbers, address and directorship, and also recorded that trade logs showed trades between connected entities. Since he had been allotted 50,000 shares in the amalgamation and had realised Rs. 1,22,97,800 by selling those shares, the Tribunal accepted SEBI’s case that disgorgement calculated on those allotted shares could not be interfered with. It also accepted SEBI’s contention that the benefit of the Special Pre-Open Session price could not be made available to him.
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As regards the Tulsian Group, the Tribunal found SEBI’s theory to be highly improbable and too fragile to be countenanced. It held that SEBI’s attempt to establish a link between the Tulsian Group and Ramanbhai Jadav through cloth purchase transactions was inconsequential, because the shares were held by the Tulsian Group while the allegation of price manipulation was against the ECL Group which allegedly purchased those shares. The Tribunal further observed that if SEBI’s own theory of manipulation by the ECL Group was accepted, many other amalgamation allottees had also sold at manipulated prices, yet no action had been taken against them. It also noted that if the Tulsian Group was truly involved in manipulation, they ought to have been penalised under the PFUTP Regulations, which admittedly had not happened. On that reasoning, the Tribunal held that SEBI’s case against the Tulsian Group failed, and the disgorgement against them was unsustainable in law.
The Tribunal also examined the quantum of penalty for the ECL Group and found that although the WTM had referred to Section 15J of the SEBI Act, no reasons had been recorded as to why some noticees were imposed the minimum penalty of Rs. 5 lakhs while others were imposed higher penalties. Since the WTM had itself recorded that the material on record did not disclose disproportionate gain or unfair advantage for noticees, and that investor loss from price manipulation was not quantifiable, the Tribunal held that a common quantum of penalty against all noticees of the ECL Group was just and appropriate.
Briefly, the Ahmedabad Gases Limited, a listed company, underwent amalgamation with Excel Castronics Limited and Indus Coils & Plates Limited, and thereafter its name was changed to Excel Castronics Limited (ECL). After amalgamation, the capital of the erstwhile ECL was reduced by 80%, and 75 lakh equity shares were allotted to 99 shareholders of the merging entities.
SEBI investigated trading in the scrip of ECL for the period between April 12, 2013 and November 19, 2014, alleging that the scrip, which was illiquid, rose from Rs. 9.60 to Rs. 490 during the investigation period, and that connected entities of the “ECL Group” traded among themselves and increased the share price, while certain “amalgamation allottees” sold shares at higher prices and made wrongful gains. Later, by order dated October 01, 2021, the Whole Time Member, SEBI, imposed penalties, disgorgement and debarment against several notices.
