BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of Decision : 15.03.2019 Appeal No. 78 of 2012 Shri Anandkumar Baldevbhai Patel 01, Shivnagar Society, Bhavpura, Kadi, Gujarat – 382 715. …. Appellant 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. Yogesh Jagia, Advocate with Mr. Chinmay Paradkar, Advocate for the Appellant. Mr. Gaurav Joshi, Senior Advocate with Mr. Mihir Mody and Mr. Sushant Yadav, Advocates i/b K. Ashar & Co. for the Respondent. CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Per : Justice Tarun Agarwala, Presiding Officer (Oral)

1. Securities and Exchange Board of India (hereinafter

“SEBI” for short) conducted an investigation into the trading activity of Shri Kanaiyalal Baldevbhai Patel (hereinafter “KB” for short) an individual trader and Passport India Investment (Mauritius) Ltd. (hereinafter “Passport” for short) for the period January, 2007 to March, 2009. During the investigation, it was found that KB was placing orders ahead of orders placed by Passport. One Dipak Patel (hereinafter referred to as “DP”) was Portfolio Manager of Passport who also happened to be the cousin of KB and the appellant Shri Anandkumar Baldevbhai Patel (hereinafter referred to as “AB”). It was alleged that DP provided information to KB and AB regarding the forthcoming trading activities of Passport. It was found that trades were executed using the telephone number which was registered in the name of AB at the common residential address of KB and AB. It is alleged that AB and KB took advantage of the information received from DP whereby KB indulged in trading before Passport and consequently squared off the position when order of Passport was placed in the market. It was alleged that KB earned a total profit of Rs.1,56,32,364.01/- from the alleged trades. Pending investigation, an ex-parte interim order dated 28/5/2009 was passed by the Whole Time Member of SEBI issuing a slew of directions and one such direction was that the appellant including others were restrained from buying, selling or dealing in any securities directly or indirectly.

2. Based on the investigation, a show-cause notice dated

28/02/2011 was issued alleging that DP was placing orders for Passport coupled with the fact that KB bought and sold shares of various companies which were common between KB and Passport. The show-cause notice indicated that 557 synchronized trades were executed on the National Stock Exchange across 11 scrips between KB and Passport wherein both the Buy Order by the Passport and Sell Order by KB for identical price was placed within a gap of few seconds.

3. Based on the replies filed by the appellant and others and

the submissions made therein, the Adjudicating Officer of the Board found the appellant and others guilty of violation of the provisions of Regulation 3(a), (b), (c) and (d) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“FUTP Regulations, 2003” for short) and imposed a monetary penalty under Section 15HA of Securities and Exchange Board of India Act, 1992. A penalty of Rs.5 crore was imposed on DP and KB each and a sum of Rs.1 crore was imposed upon the appellant. Appeals filed before this Hon’ble Tribunal were allowed by judgment dated 09/11/2012 holding that the appellant and others were not manipulating the market as they were not intermediaries and that front running was prohibited by intermediaries under the FUTP Regulations, 2003.

4. SEBI, being aggrieved, filed Special Leave Petitions before

the Supreme Court of India. Insofar as the appeal against the appellant was concerned, the Supreme Court disposed of the appeal by judgment dated 05/04/2017 holding that no finding has been given by the Tribunal against the appellant to the effect that omission and commission on the part of AB amounted to front running or that the trading done from the telephone of AB amounted to front running. The Supreme Court further indicated that the Tribunal was required to record an independent finding for holding AB liable for penalty and consequently disposed of the appeal directing the Tribunal to de novo decide the matter afresh.

5. Insofar as the other appeals of SEBI against Passport and

KB, the same was allowed by the Supreme Court by judgment dated 30/09/2017. The order of the Tribunal was set aside and the imposition of penalty was affirmed. The said decision is reported in (2017) 15 SCC 1 SEBI vs. Kanaiyalal Baldevbhai Patel and other connected appeals. The Supreme Court explained what front running was in addition to the definition provided by SEBI in its circular holding that front running comprises of at least three forms of conduct, namely; trading by third parties who are tipped on an impending block trade (“tippee” trading), transactions in which the owner or purchaser of the block trade himself engages in the offsetting futures or options transaction as a means of “hedging” against price fluctuations caused by the block transaction (self front-running), and transactions where an intermediary with knowledge of an impending customer block order trades ahead of that order for the intermediary’s own profit (trading ahead). The Supreme Court further found that front running was explicitly recognized under Regulation 4 (2)(q) of the FUTP Regulations,

2003. The Supreme Court further held that in order to establish

charges against tipee, under Regulations 3(a), (b), (c) and (d) and 4(1) of the FUTP Regulations, 2003, one needs to prove that a person who had provided the tip was under a duty to keep the non-public information under confidence. Further, such breach of duty was known to the tippee who traded in the market with that information thereby playing a fraud. Insofar as the modus operandi in the instant case, the Supreme Court gave an explicit finding against KB and Passport to the extent that the parting of information with regard to an imminent bulk purchase and the subsequent transaction was intrinsically connected leading to a conclusion of joint liability of both the initiator of the fraudulent practice and other party who had knowingly aided in the same. The Supreme Court further found that the conduct of DP led KB and AB to be induced to deal in securities and that KB and AB would not have entered into the transaction in question had it not been for the information parted with by DP. The Supreme Court found that KB and AB had acted in connivance with DP to encash the benefit of the information parted by DP and, therefore, were parties to the fraud committed by DP and thus aided and abetted the same. For facility, paragraph 58 of the judgment is extracted hereunder:- “58. Adverting to the facts of the present case, if the information with regard to acquisition of shares by M/s. Passport India was parted with by Dipak Patel to Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel and the latter had transacted in huge volume of shares of the particular company/scrip mentioned by Dipak Patel a little while before the bulk order was placed by M/s. Passport India and the said persons had sold the same a short while later at an increased price, such increase being a natural consequence of a huge investment made in the particular scrip by M/s. Passport India, surely, it can be held that by the conduct of Dipak Patel, Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel were induced to deal in securities. A natural and logical inference that would follow is that the aforesaid two latter persons would not have entered into the transactions in question, had it not been for the information parted with by Dipak Patel. The track record of earlier trading of the two persons concerned does not indicate trading in such huge volumes in their normal course of business. Such an inference would be a permissible mode of arriving at a conclusion with regard to the liability, as held by this Court in SEBI v. Kishore R. Ajmera referred to by my learned Brother Ramana J. The volume; the nature of the trading and the timing of the transactions in question can leave no manner of doubt that Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel had acted in connivance with Dipak Patel to encash the benefit of the information parted with by Dipak Patel to them and, therefore, they are parties to the fraud committed by Dipak Patel having aided and abetted the same.”

6. In the light of the aforesaid narration of facts, we have

heard Shri Yogesh Jagia, learned Counsel assisted by Mr. Chinmay Paradkar, Advocate for the Appellant. The learned Counsel for the appellant contended that he is only engaged in importing and trading of scrap metal and was not dealing in the securities market. It was further contended that the Adjudicating Officer only found trading of the securities by KB and that there was no finding that the appellant had done any trading. It was contended that the mere fact that KB was using the landline telephone which was registered in the name of the appellant does not make the appellant liable for aiding and abetting or conniving in any fraudulent activities being done between KB and DP. It was also contended that the ex-parte ad- interim order dated 28/05/2009 gave a specific prima facie finding that KB had prior information from DP and on the basis of the same material SEBI has improved its version in the show- cause notice by including the name of the appellant which shows the mala fide intent since no further evidence was available with the respondent. The learned counsel further contended that the perusal of the call records does not indicate any evidence as to what was the conversation which could lead to conclusion that sensitive information of the market was being divulged. There is also no evidence to show as to who was calling whom. It was urged that there are other numbers in the house who may be conversing with DP and, therefore, the fraudulent activities indicated in the show-cause notice was vague and was not based on any substantial evidence. It was contended that there has to be a finding of intentional aiding or abetting in order to inflict the penalty under the SEBI Act. Since there is no finding to this extent, the imposition of penalty was wholly arbitrary. In support of his contention the learned counsel placed reliance upon decision in Shri Ram v. State of UP. (1975) 3 SCC 495 wherein the Supreme Court held:- “……….. in order to constitute abetment the abettor must be shown to have “intentionally” aided the commission of the crime. Mere proof that the crime charged could not have been committed without the interposition of the alleged abettor is not enough compliance with the requirements of section 107. A person may for example invite another casually or for a friendly purpose and that may facilitate the murder of the invitee. But unless the invitation was extended with intent to facilitate the commission of the murder, the person inviting cannot be said to have abetted the murder. It is not enough that an act on the part of alleged abettor happens to facilitate commission of the crime. Intentionally aiding and therefore active complicity is the gist of the offence of abetment under the third paragraph of section 107.” The learned counsel has also placed reliance on a decision in the State of Andhra Pradesh v. Nagoti Venkataramana (1996) 6 SCC 409 wherein the Supreme Court held that strict construction is required to be adopted in the interpretation of penal provisions and if any doubt arises, the benefit of doubt should be extended to the accused. The learned counsel also placed reliance upon a decision of the Tribunal in Bhanwar Lal Paliwal v. SEBI decided on 31/10/2013 wherein the Tribunal held that there has to be substantial or clinching evidence to show any direct or indirect involvement in the execution of the scrips or any manipulation of the price of the scrips.

7. It was thus urged that in the present case there is no

clinching evidence to lead to the conclusion that the appellant had indulged in fraudulent activities in the securities market. It was contended that in the absence of mens rea, the appellant cannot be found guilty and consequently the imposition of penalty should be set aside.

8. On the other hand, Shri Gaurav Joshi, the learned Senior

Counsel assisted by Shri Mihir Mody and Mr. Sushant Yadav, Advocates contended that in the first instance the Supreme Court had itself found that on the basis of modus operandi the appellant had sensitive information which induced him for monetary gains. It was contended that considering the relationship of the appellant with KB and DP coupled with the fact that KB and AB were brothers and living under the same roof as well as usage of telephone registered in the name of the appellant for trading purposes as well as the mobile calls between DP and AB and between DP and KB during the time when actually trades were being executed, leaves no room for doubt that parting of the information by DP to AB and KB and subsequent transactions by KB are intrinsically connected and further leaves no room for doubt of the joint liability of KB and the appellant with the initiator of the fraudulent practice namely, DP. It was urged that a cumulative analysis from a host of circumstances was sufficient to lead to a conclusion that AB was involved in the manipulation of the securities market. It was urged that the circumstantial evidence was sufficient to raise a presumption of fraud and connivance including aiding and abetting by the appellant and that actual intention was immaterial. It was further contended that the standard of proof could be judged on a preponderance of probability. In support of his submission, the learned Senior Counsel placed reliance upon a decision of the Supreme Court in (2017) 15 SCC 1 in the case of SEBI V. Kanaiyalal Baldevbhai Patel; (2016) 6 SCC 368 in the case of SEBI vs. Kishore R. Ajmera, and (2018) 13 SCC 753 in the case of SEBI vs. Rakhi Trading Private Limited.

9. Having heard the rival contentions of the parties and

upon perusal of the record and the impugned judgment, we find that admittedly there is a direct relationship between the appellant, KB and DP. The appellant and KB are real brothers living under the same roof and are partners in Bhoomi Industries and Bhoomi Pressing Factory. DP is the first cousin of the appellant who was the portfolio manager in Passport. The landline telephone was registered in the name of AB which was used to trade in the securities market on the internet by KB. The details of calls exchanged which is indicated in the order of the Adjudicating Officer indicates that there were a total of 40 calls made to/received from DP during trading hours by the appellant. There were a total of 33 instances when calls made to/received by the appellant were within the span of time during which Buy/Sell orders were placed by either KB or Passport. There were a total of 8 calls made to/received from DP during trading hours by KB. Similarly there were such 4 instances when calls made to or received by KB were within the span of time during which Buy/Sell orders were placed by either KB or Passport. The high frequency of calls exchanged between the appellant, KB and DP suggest that DP were regularly in touch with both the appellant and KB and passed on crucial information about the dealings of Passport. The higher percentage of matching trades of KB with Passport leads to an inference that KB had received prior information from the appellant about the forthcoming large institutional trades that enabled KB to square off his initial transactions.

10. Annexure-E to the show-cause notice is a chart showing

details of the calls exchanged between DP and KB and the appellant. A perusal of this chart indicates that the appellant was speaking to AB on his mobile during the time when the trades were being carried out by KB on the internet and, therefore, leads to an inescapable conclusion about the involvement of the appellant in the entire modus operandi and also leads to an irresistible conclusion of the appellant being a part of the front running. From the analysis of the trades mentioned in the show-cause notice, it can be seen that KB and Passport were placing orders in close proximity of time. The majority of the Sell Orders were placed after Passport starting entering the Buy Orders. The majority of the trades placed by Passport and KB were in close proximity of time. KB entered orders in the post closing session and Passport also closed orders in the post closing session. All these indicate that there was a premeditative move as most of the trades of KB matched with the Passport orders. The call records lead to a conclusion that DP, the appellant and KB used to talk to each other and sensitive information was passed on during which time KB used to place orders through the internet. The appellant was integral part of this collusive trading as he was one of the channels through which sensitive information was passed on to KB and is equally responsible for front running. Even though there is no conclusive proof as regard the contents of communication between DP and the appellant, nonetheless an irresistible inference can be drawn that sensitive information regarding forthcoming trades of Passport was passed on by DP to KB and the appellant. The proximity of time when the mobile calls were made between DP and AB and the trading of the shares at the time when Passport was also placing the orders leads to an irresistible conclusion of the involvement of the appellant as part of the front running. The modus operandi was such that DP was in constant touch with KB and the appellant and was passing on the sensitive information which was being utilized by KB from his trading activity.

11. In addition to the aforesaid, we also find that the appellant

is the beneficiary of the profits from the trading activities done by KB. We find that the profit received by KB was transferred to Bhoomi Industries in which the appellant was a partner. We further find that the same amount was again transferred to the personal account of the appellant. Thus an irresistible conclusion can be drawn that the profits earned through this illegal trading activity by KB was shared with the appellant. In this regard, a vague reply was given by the appellant to the extent that the fund received by the appellant from Bhoomi Industries could have been in the nature of loan or repayment or withdrawal from capital account. No details were furnished in this regard and, therefore, an irresistible conclusion drawn by the Adjudicating Officer that there was a sharing of profits cannot be faulted.

12. In Securities and Exchange Board of India v. Kishore R.

Ajmera (2016) 6 SCC 368, the Supreme Court held that, “26. It is a fundamental principle of law that proof of an allegation leveled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and leveled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”

13. In SEBI vs. Rakhi Trading (P) Ltd. (2018) 13 SCC 753,

Supreme Court held that in the quasi judicial proceedings before SEBI, the standard of proof is preponderance of probability and that proof of manipulation depends on inference drawn from a mass of factual details. The Supreme Court held that; “4.24. The proof of manipulation in the circumstances always depends on inferences drawn from a mass of factual details. Findings must be gathered from patterns of trading data and the nature of the transactions, etc. Several circumstances of a determinative character coupled with the inference arising from the conduct of the parties in a major market manipulation could reasonably lead to conclusion that the Broker was responsible in the manipulation. The evidence, direct or circumstantial, should be sufficient to raise a presumption in its favour with regard to the existence of a fact sought to be proved.” Supreme Court further held that; “4.25. Presumption plays a critical role in coming to a finding as to the involvement or otherwise of a market participant in any manipulation. For instance, while trading, a lip service can be paid to a screen based trading system while agreement is reached beforehand between brokers to effect the transaction. Anonymity can be a cloak to cover anastomosis of interest. Therefore, the hackneyed plea based on intentions in the market place cannot pass muster in all circumstances, more so when such intentions are in the special/peculiar knowledge of the parties to the transactions. Also any suggestion attributing innocence to the parties involved in such transactions would give rise to an untenable situation where certain other third persons/entities alone would be responsible for the manipulation and none else.”

14. From the aforesaid decisions, it can safely be inferred that

it is not necessary that there has to be a clinching evidence or that the intention has to be proved in order to impose penalty under the SEBI Act. The standard of proof is preponderance of probability and the proof of manipulation always depends on the inferences drawn from a host of circumstances. A finding has to be arrived at from the pattern of trading. The cumulative analysis determines the modus operandi which can lead to an inference regarding the conduct of the parties while manipulating the securities market and thereby arrive at a conclusion of manipulation. Circumstantial evidence could be sufficient to raise a presumption with regard to the existence of a fact which is sought to be proved. Where a transaction has been executed with the intention to manipulate the market or defraud its mechanism will depend on the intention of the parties which could be inferred from the attending circumstances since direct evidence in such cases are not available. As held in SEBI vs. Kanaiyalal Baldevbhai Patel (supra), the Supreme Court held that it is between inducement and criminal law and the wider meaning thereof under the SEBI Act is that to make inducement an offence. The intention behind the representation or misrepresentation of facts must be dishonest whereas in the latter category of cases the element of dishonesty needs not be present or proved. Further in the latter category of cases (under SEBI Act) a mere inference rather than proof that the person induced would have acted in a manner that he did for the inducement was sufficient. The element of dishonesty or bad faith in the making of inducement was not required. In the light of the above, the decisions cited by the learned counsel for the appellant is distinguishable and are not applicable in the facts and circumstances of the present case.

15. In the light of the aforesaid, it is clear that the information

passed on by DP induced the appellant to connive with his brother KB. The sharing of the profits leaves no manner of doubt that KB and the appellant had acted in connivance with DP to encash the benefit of the information parted with by DP. The appellant was not only part of the front runner but was involved in the fraud committed by DP and had aided and abetted the same.

16. For the reasons stated aforesaid, the appeal lacks merit

and is dismissed. In the circumstances of the case, there shall be no order on costs. Sd/- Justice Tarun Agarwala Presiding Officer Sd/- Dr. C.K.G. Nair Member 15.03.2019 prepared & compared by-dg