Dr. Dheeraj Bhatnagar, Technical Member

These two appeals are directed against order dated 21.02.2023 passed by the AO1, SEBI2 imposing penalty of ₹10 Lakh each on appellants for violating securities laws.

2. Brief facts of the case are:

                   1 Adjudication Officer 2 Securities and Exchange Board of India

                   a) Upon receipt of certain complaints, SEBI conducted an investigation in the scrip of the North Eastern Carrying Corporation Ltd. ('Company/NECC' for Short) for the period between 27.12.2016 and 21.04.2017.

                   b) Stock Exchanges had also received complaints about recommendation to 'buy' NECC shares.

                   c) The appellants, Utkarsh Jain (Noticee No.1) and his mother Vanya Jain (Noticee No.2), are promoters of NECC.

                   d) SEBI issued an SCN3 and a supplementary SCN4 to six noticees including the appellants alleging inter alia that appellants along with connected entities created artificial and fictitious trading volume in NECC scrip giving misleading appearance to provide exit to the appellants.

                   e) Utkarsh Jain sold 9,50,000 shares on BSE and 18,96,090 shares on NSE on 6 trading days contributing 31.10% and 25.30% of market volume respectively. Vanya Jain sold 7,50,198 shares on BSE and 8,75,887 shares on NSE on 6 trading days out of 79 total trading days.

3. We have heard Mr. Kushal Shah, CA, Authorised Representative for the appellants and Mr. Vyom Shah, learned Advocate for the SEBI.

Show Cause Notice dated 22.09.2022 Dated 27.01.2023

4. Mr. Kushal Shah for the appellants submitted that all transactions were genuine and done in the normal course at prevailing market price through registered brokers on screen- based trading platforms. Further, matching of trades on the securities market is an advanced algorithm process. Hence, prior meeting of mind was not possible.

5. He submitted that there are no direct or indirect connections between the appellants and other noticees/counter parties. The impugned order does not contain the allegation of price manipulation against the appellants and the allegation of creation of artificial volume is based on erroneous assumption without any evidence.

6. He submitted that on each day of appellants' trades, there were sufficient volume on the exchanges and therefore, the 'sell' trades of the appellants have legitimately matched with market participants. Further, no alert was generated either by SEBI or Exchanges at the time of trading.

7. He further submitted that imposition of penalty on appellants is discriminatory, harsh and in similar cases, SEBI has given only warning. Further, the AO has acknowledged in the impugned order that no disproportionate gain or unfair advantage was made by the appellants and no quantifiable loss to any investor could be calculated from the material on record. Further, there is nothing on record to indicate any past violation by the appellants and hence, imposing penalty is unjust.

8. In support of his case, he has relied upon SEBI v. Rakhi Trading Pvt. Ltd5, Manjulaben Bhaveshkumar Rangee v. SEBI6, Abhinandan Jain v. SEBI7, Baldevsinh Vijaysinh Zala v. SEBI8, S.P.J. Stock Brokers Pvt Ltd v. SEBI9.

9. In reply, Mr. Vyom Shah, learned Advocate for the SEBI submitted that the appellants are 'connected' with 18 counter-party entities. Noticee No. 1, Utkarsh Jain is the Promoter-Director of the Company NECC and his mother Vanya Jain too is a Promoter. Utkarsh Jain and one Pramod Jain were Directors in NECC Retail Solutions Pvt. Ltd. and two other companies. Mr. Pramod Jain was also a director in M/s Plus Corporate Venture which is 'connected' with other entities through common mobile number, bank transactions, etc. The inter se 'connection' among other counter-party entities is established through common directors, common mobile numbers, common addresses and bank/off-market transactions. The key connected entities include noticee Nos. 310, 411 and other companies.

10. He submitted that it cannot be a mere coincidence that such substantial trades executed by noticee Nos. 1 and 2 on an anonymous trading platform consistently matched with a specific group of connected entities in terms of volume and price without any prior 'meeting of minds'. The trading Civil Appeal No. 1969 of 2011, decided on February 8, 2018 by the Hon'ble Supreme Court of India Appeal No. 1030 of 2022, decided on November 6, 2023 by the Securities Appellate Tribunal, Mumbai Appeal No. 129 of 2023, decided on June 7, 2023 by the Securities Appellate Tribunal, Mumbai Appeal No. 150 of 2019, decided on August 12, 2021 by the Securities Appellate Tribunal, Mumbai Appeal No. 52 of 2013, decided on September 4, 2013 by the Securities Appellate Tribunal, Mumbai Charamshukh IT Marketing Pvt. Ltd.

                   Realstep Agencies Pvt. Ltd.

                   pattern evidences pre-arranged mechanism to facilitate exit to the appellants.

11. He submitted that out of 9,50,000 shares sold by Utkarsh Jain (Noticee No. 2) on 6 days on BSE, 7,05,213 shares (74.23%) were purchased by the connected entities. Out of 217 trades, 138 were 'structured', i.e. spaced within less than 1 minute, which accounted for 41.15% of his net sell quantity and those 217 trades constituted 31.10% of the total market volume on BSE. On the NSE, he traded on 6 days and sold 18,96,090 shares, out of which 12,90,878 shares (68.08%) were purchased by the connected entities. Out of 555 trades, 449 were structured. Those 555 trades constituted 25.30% of the total market volume on the NSE. All trades were executed between 06.02.2017 and 13.04.2017.

12. Regarding the trades executed by Vanya Jain (Noticee No. 2), he submits that during the investigation period, she traded on 5 days on BSE and sold 7,50,198 shares, out of which 1,36,513 shares (18.20%) were purchased by the connected entities. These trades accounted for 24.01% of the market volume on BSE. On NSE, she sold 8,75,887 shares over 6 trading days, of which 94,728 shares (10.82%) were purchased by connected entities accounting for 13.60% of the market volume on NSE. All trades were executed between 16.01.2017 and 06.02.2017.

13. Learned advocate for the SEBI placed emphasis on the structured nature of the trades and submitted that the absence of price variation, coupled with consistent quantity matching by connected counterparties in a staggered manner, demonstrates that the objective was not genuine price discovery, but controlled absorption of supply. No intervening trades were observed with unrelated market participants during the intervals.

14. He submitted that complete absence of price movement despite substantial traded volumes confirms that the transactions were confined within a closed group of entities operating in concert. In a genuine market, significant selling pressure would cause downward price movement. The artificial maintenance of price at a constant level notwithstanding large trades evidences pre-arranged matching and the consequent inflation of trading volumes created false impression of market participation, attracting gullible investors to trade in an otherwise illiquid scrip.

15. He further submitted that prior to the investigation period, Utkarsh Jain held 30,00,000 shares (5.98%) and Vanya Jain held 22,74,900 shares (4.53%) of NECC. During the investigation period, Utkarsh Jain's holding sharply declined his holding to 9,58,910 shares (1.91%) by March, 2017 and Vanya Jain's reduced to 6,48,815 shares (1.29%). The pattern of substantial off-loading during the investigation period, facilitated by the connected entities is consistent with the structured exit mechanism identified in the investigation. In support of his submissions, he relied upon Systematix Shares & Stocks (I) Ltd.12, SEBI v. Kishore R. Ajmera13.

16. We have carefully considered rival contentions and perused the records.

17. The point that arises for our consideration is, whether appellants (noticee Nos. 1 and 2) have created artificial / fictitious volumes by selling their holdings in the Appeal No. 21 of 2012 decided on April 23, 2012 by SAT (2016) 6 SCC 368 scrip of NECC through structured transactions with certain connected counter-party buyers?

18. It is alleged that the appellants systematically offloaded shares on NSE and BSE during the investigation period in a structured manner with connected entities, who placed 'buy' orders with same volume and purchase price within a short time after 'sell' order, i.e., with the time difference of less than one minute between the 'sell' order and the 'buy' order.

19. The main contention of the appellants is that they had executed these transactions through IT-based trading platform of stock exchange, in which the identity of the seller/buyers is not revealed. Further, undisputedly, these transactions were carried out at prevailing market price, which could not have adversely impacted on the uninformed investors. The matching of orders on the exchange platform is extremely advanced with computer software given algorithm process in which system itself matches orders on a price-time priority basis. Therefore, it is not possible to have access to the counter-party.

20. The next contention is that the SEBI has not brought out any direct connection between the appellants and the counter-parties and the learned AO has himself observed in the impugned order that 'there is no direct connection' between the appellants on one side and counter parties on another side. Further, such trades with alleged counter- parties were miniscule and were only on 6 out of 79 days of the investigation period.

21. We note that no proceedings have been initiated against the said 'counter-parties' except 2, even though the allegation is of 'meeting of minds' for artificially inflating volume, which renders the allegation baseless.

22. We find that the investigation report notes that there were complaints of sudden price rise in the scrip of NECC followed by the price falls, as also of spread of SMSs from various IDs recommending investors to 'buy' the scrip of NECC. However, in the investigation, the allegation of manipulating the price rise was not proved based on the finding that the transactions between the suspected entities contributed to -10.25 % of the LTP14 and -37.35% to negative LTP, which was less than 5.56% to the market LTP and it is held as insignificant. Further, the investigation report reveals no 'connection' between the appellants who are the promoters of NECC with M/s. Market Magnify Global Research Pvt. Ltd. ('Market Magify' for short), who is alleged of sending SMS messages. No fund transaction between them is noted and no adverse finding has been drawn against Market Magnify.

23. With regard to the alleged inter se structured trades amongst the 'connected entities' (other than the appellants), the charge was dropped considering such contribution, being less than 10%. However, the investigation report charges these counter-party entities for structured trading for allowing the appellants to exit by off-loading their shares. We may record that 9 out of 11 alleged connected entities have been let off without mentioning any reason in the impugned order.

24. We find no tenable basis for appellants' connection which hinges on Pramod Jain and Utkarsh Jain being directors Last Traded Price in NECC Retail. Mr. Pramod Jain has not been charged in these investigations and he had quit directorship of NECC retail, (which is the only connection between Utkarsh and Pramod Jain) prior to the impugned transactions. Mr. Pramod Jain was a director in another company, Plus Corporate Venture Pvt. Ltd ('Plus Corporate' for short). The said Plus Corporate had bank transactions with another entity Charamsukh (noticee No.3). While other entities are alleged to be connected with Charamsukh (noticee No.3) either through mobile number or common address and the appellants have no connection whatsoever with any one of them. Therefore, holding them as 'connected entities' based on the sole connection of Pramod is very fragile because, Pramod Jain was an ex-director of NECC Retail, another related company. Unless, there is material to establish that he had continued relation with Utkarsh Jain, this allegation, in our view is without any credible evidence. Further, Mr. Pramod Jain is neither a director nor shareholder in counter- party companies and therefore, these companies cannot be held to be 'connected' with Mr. Pramod Jain and through him with the appellants. Under these circumstances, on the face of it, no connection direct or indirect, could be established between the appellants and 9 counter-party entities (which are indirectly connected with Charamsukh) through Mr. Pramod Jain.

25. We also note that transactions have taken place on the floor of the stock exchanges on certain specified dates and despite the said transactions, the promoters continued to hold significant shareholding and control over the company NECC. In the investigation report, allegation of price rise was also dropped. Therefore, the allegation of allowing exit to 2 persons i.e. appellant-promoters in the absence of price rise does not establish any mens rea. We note that learned AO has recorded that there is no direct 'connection' of appellants with the alleged connected parties and except 2, none of them have not been charged in the impugned order. Since, the allegation of structured transactions within a short time between the appellants on one side and counter-parties on the other is based on presumption of prior 'meeting of minds', particularly when the counter-party entities are not charged, the allegation against the appellant is untenable.

26. The learned AO relying upon Systematix Share (supra) has attempted to justify by holding that action was not initiated in case of certain counter-parties based on severity of allegation. We note that the said decision was given based on peculiar facts of that case. However, in the present case, we note that in the inspection report, 11 counter-parties were recommended to be charged for violation of PFUTP Regulations along with noticee Nos. 1 and 2 and neither in inspection report nor in the impugned order any assessment of relative severity of violation is made. Under the circumstances, the charge of "meeting of minds"

for orchestrating structured transactions for artificial inflation in volumes does not sustain.

27. We also note that the appellants have duly disclosed these transactions under Regulation 29(2) and 29(3) of the SAST Regulations15 and Regulation 7(2(a) of the SEBI (PIT) Regulations16. Further, the allegation of misleading the investors is not supported by any finding of increased interest in NECC during the six dates of alleged transactions. On the other hand, admittedly, on these six dates, it was Utkarsh SEBI (Substantial Acquisition of Shares and Takeover) Regulations, SEBI (Prohibition of Insider Trading) Regulations, 2015 Jain, who was responsible for 74.23% volume on BSE and 68.08% volume on NSE while Vanya Jain is responsible for 18.20% on BSE and 10.82% on NSE, with 'connected entities'. Thus, there is no empirical finding in support of the allegation of misleading and adversely impacting other investors. We have already noted that there is no allegation of price manipulation.

Accordingly, we decide the point for consideration as Negative.

28. In view of the above discussion, the following :-

                   ORDER

                   i. Appeal Nos.397 and 398 of 2023 are allowed.

                   ii. Order dated 21.02.2023 passed by the AO, SEBI is set aside qua the appellants.

                        iii. Pending interlocutory application(s), if any, stand disposed of.