You are on page 1of 8

SVKM’S

NMIMS KPM SCHOOL OF LAW

A PROJECT SUBMITTED ON:


GAURAV SHAH V/S WHOLE TIME MEMBER, SECURITIES AND
EXCHANGE BOARD OF INDIA

IN COMPLIANCE TO PARTIAL FULFILLMENT OF THE


MARKING SCHEME, FOR SEMESTER 10 OF 2018-2019, IN THE
SUBJECT OF FINANCIAL MARKET REGULATIONS

SUBMITTED TO FACULTY:
SHRIKANT AITHAL

FOR EVALUATION
SUBMITTED BY:
RIDDHI TULSHIAN (A056)
ADARSH HIMATSINGHKA (A032)
B.B.A LL.B. (HONS.)
Abstract
This paper aims to study the case of Gaurav Shah vs. Whole Time Member, Securities
and Exchange Board of India and analyze whether a director of a company can be
unaware of the stock trades of his company and that he was forced to be director of
the company in order to hide the manipulation of the stock prices.

Methodology
This research project has followed the doctrinal method of research, which requires
the researcher to acquire, arrange and then understand the data that is already
available in the public domain.1 Hence, this is a secondary method of data collection.

Introduction
Gaurav Shah vs. Whole Time Member, Securities and Exchange Board of India is a
case based on manipulation of stock prices by a company and the subsequent
debarment of the company and its’ Directors from the securities market by SEBI. This
case was filed in appeal against the order passed by the whole time member of SEBI
stating that the period of 5 years as punishment was not applicable to Mr. Gaurav
Shah as he had been forced by the other directors to sign documents and that he was
not aware of the market manipulation that was taking place. However, the Securities
Appellate Tribunal (SAT) did not agree with this contention of the appellant and
upheld the penalty imposed by SEBI on the appellant, thereby dismissing the appeal.

Facts of the Case


Cyberspace is a listed company and had a public holding of 42.88%. Century
Consultants Ltd. (CCL), a listed company, is one of the group companies of
Cyberspace. Some of the directors of Cyberspace and CCL are common.
On a preliminary enquiry made by BSE, it was found that the promoters of
Cyberspace were involved in manipulating the price of its scrip. There were media
reports that showcased problems in the trades in the scrip. When SEBI investigated in
the matter, it was found that there was unusual movement in the shares of Cyberspace
during the period October 1999 to March 2001. The scrip had been traded in large
1
Roderick, M. (2014), “Source-usage within doctrinal legal inquiry: choices, problems, and
challenges” <http://www.bjutijdschriften.nl/tijdschrift/lawandmethod/2014/06/RENM-D-13-00003>
Accessed on 29th November 2016.
volumes and the price of the scrip had gone up substantially during this period.
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 SEBI issued show cause notices to several entities including Amit
Interchemicals P. Ltd. (AIPL), which were found to be involved in manipulating the
scrip of Cyberspace. Gaurav Shah was a Director of Amit Interchemicals Ltd. The
show cause notice, which was issued to AIPL, was received by Gaurav Shah. It had
been alleged that AIPL had executed several trades with the shell companies set up by
the promoters of Cyberspace and CCL. This was done by executing trades amongst
themselves, with a view to create artificial volumes and market in the scrip. The price
of the scrip had been artificially raised by circular trades. APIL was alleged to have
violated Regulation 4 (a) to (d) of the SEBI (FUTP) Regulations, 2003. Gaurav Shah
filed a reply on behalf of AIPL even though he had not received any notice in his
name. Thus, the reply had to be on behalf of AIPL. Gaurav Shah did not dispute any
of the allegations of market manipulation and that circular trades were being carried
out intended to create an artificial market. He stated in his reply that he was made to
sign documents by the promoters on the threat of losing his job and was forcefully
made the director of AIPL and that he was unaware of the trades that had been carried
out. He claimed that the promoters of Cyberspace cheated him and that he had not
made any profit in the trades and claimed innocence.
On consideration of the matter by the whole time member, a common order was
passed against all the entities and AIPL, among others, was held guilty of executing
circular trades thereby creating artificial volumes in the scrip of Cyberspace. Thereby,
AIPL and Gaurav Shah were debarred from accessing the securities market for a
period of 5 years. Gaurav Shah filed an appeal against this order of the whole time
member in the SAT.

Order Of The Tribunal


The Tribunal cleared that there was no dispute that the trades had been executed
between the different entities as there were computer print outs and evidence proving
the same. Gaurav Shah, the appellant, had tried to pin all the blame on the promoters
of Cyberspace and distance himself from the case, without assuming any
responsibility of the trades. However, he was the Director of AIPL and it was not
disputed that as a Director, he had signed delivery instruction slips on behalf of the
company. It was difficult for the Tribunal to accept the plea that the appellant was
unaware of the trades and that he was forced to become the Director of AIPL. Thus, it
was clear to the Tribunal that appellant did not dispute that the circular trades had
been executed. On perusal of charts produced by SEBI, it was found by the Tribunal
that large number of trades had been executed by AIPL with shell companies and that
within the group the trades were circular. The Tribunal held that the appellant cannot
disown responsibility as he had signed the delivery slips on behalf of the company
authorizing the trades and that the order of the whole time member was adequate.
The appellant also pled that the penalty of 5 years disbarment be reduced, as it was
too harsh. The Tribunal said that: 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. Thus, the appeal of
Gaurav Shah was dismissed.

What is Market/ Stock Manipulation?


Market manipulation is a type of market abuse where there is a deliberate attempt to
interfere with the free and fair operation of the market and create artificial, false or
misleading appearances with respect to the price of, or market for, a
product, security, commodity or currency.2
Market manipulation is prohibited in most countries. The US Securities Exchange Act
defines market manipulation as "transactions which create an artificial price or
maintain an artificial price for a tradable security".
Manipulation is the act of artificially inflating or deflating the price of a security or
otherwise influencing the behavior of the market for personal gain. Manipulation is
illegal in most cases, but it can be difficult for regulators and other authorities to
detect. Manipulation is also difficult for the manipulator as the size and number of
participants in a market increases. It is much easier to manipulate the share price of
smaller companies, such as penny stocks, because they are not as closely watched by
analysts and other market participants as the medium and large cap firms.

2 The New Market Manipulation, 66 Emory Law Journal 1253, (2017)


Manipulation is variously called price manipulation, stock manipulation and market
manipulation.

What are the Stages of Stock Manipulation?


1. Sharp Selloff- Large sell orders
2. Large wick- price Rejection
3. Temporary Consolidation
4. Further Fall of Share Prices
5. Sudden Reversal- Inflow of Buy Orders

Picture Source: Trading Coach

Whether Court can direct SEBI to take action?


In K. Venkateswarlu v. Securities and Exchange Board of India and others3, a writ
petition was filed under Article 226 of the constitution of India by the petitioner
making prayers, inter alia, for issuing a writ of mandamus or any other appropriate
writ directing the first respondent (SEBI) to conduct an enquiry regarding price
manipulation/insider-trading of the respondent no. 2 scrip during the said period;
direct the first respondent to file a report on the subject for further directions. But
Delhi High Court held that those who deal in stock market and purchase shares as a

3
(2008) 2 Comp. LJ 205 (Delhi)
mode of investment know very well that stock market is sometimes in the grip of
bulls and sometimes in the grip of bears. Recent trend in the stock market has shown
that the stock prices do not reflect the real value of the share and hike and fall in the
price of the share takes place due to several factors like sudden interest of the foreign
investors into Indian stock market or sudden fall in the stock market world over. SEBI
is a specialized body constituted under the Act, which takes care of different
regulations meant for stock market. SEBI is supposed to know when and where the
investigation is to be done by it. This court on the prayer of individual shareholder
because of fall in price of his shares cannot give directions to SEBI to conduct
investigations either itself or through CBI. It was surprising that the petitioner had
come when share price of his share has fallen. He must be earning profits when share
price went up by the same process which the petitioner is alleging was responsible for
fall in the share price and petitioner did not approach the court at that time, although,
petitioner is stated to be dealing in shares for the last ten years. When you suffer
losses you suddenly feel that there is some manipulation and when you gain profits,
the same feeling is not there. For these reasons, the court found the petition not
maintainable and dismissed it.

Laws to Curb Market Manipulation and Unfair Trade Practices


Post the enactment of laws to curb insider trading, there was an urgent need to address
the problems of unfair trade practices and fraud and manipulation. The SEBI enacted
the Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities
Market Regulations (FUTP Regulations) in 2003. As stated in the FUTP Regulations,
“Fraud includes any act, expression, omission or concealment committed whether in
a deceitful manner or not by a person or by any other person with his connivance or
by his agent while dealing in securities in order to induce another person or his agent
to deal in securities, whether or not there is any wrongful gain or avoidance of any
loss”.
The FUTP Regulations, passed on July 17, 2003 lists down the following points as
unacceptable in securities market for regulating the securities market from frauds and
scams. Chapter II (3) of this regulation deals with prohibition of unfair dealings in
securities. It states that:
 Nobody directly or indirectly should indulge in fraud relating to selling,
buying or dealing with securities;
 No one should use any manipulative or deceptive means to violate the
provisions of the Act;
 No one should employ any scheme or device or a strategy to defraud the
dealings connected with securities.
Any breach to the above-mentioned statements would be considered, unlawful. If any
of those breaches are done by any individual or a company it would be investigated
by SEBI and appropriate actions would be taken against the party who commits such
unlawful activity by SEBI.
Securities and Exchange Board of India (SEBI) plays a pivotal and instrumental role
in prohibiting any sort of activities that are manipulative or fraudulent or unfair in the
securities market. After SEBI encountered many unfair practices, frauds that affect
the securities market, SEBI passed a special regulation pertaining to prohibition of
manipulative, fraudulent and unfair trade practices in chapter II (4) of 2003
regulation. This special regulation prohibits inflation of stock prices, manipulation of
stocks, creating fake appearance of trading of securities, dealing in stolen securities,
etc.

Section 4 of the FUTP Regulations:


Prohibition of manipulative, fraudulent and unfair trade practices:
(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice
if it involves fraud and may include all or any of the following, namely:-
(a) indulging in an act which creates false or misleading appearance of trading in the
securities market;
(b) dealing in a security not intended to effect transfer of beneficial ownership but
intended to operate only as a device to inflate, depress or cause fluctuations in the
price of such security for wrongful gain or avoidance of loss;
(c) advancing or agreeing to advance any money to any person thereby inducing any
other person to offer to buy any security in any issue only with the intention of
securing the minimum subscription to such issue;
(d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person
any money or money’s worth for inducing such person for dealing in any security
with the object of inflating, depressing, maintaining or causing fluctuation in the price
of such security;

CONCLUSION

In India, companies have resorted to unfair and manipulative means to create


fluctuations in the share prices time and again, this brought about the need for SEBI
to be more stringent. In the present case that we have analyzed, the appellant instated
as director of the shell company carried out circular trades to manipulate stock prices.
This is a major fraud in the system, which has been used to deceive the investors and
traders for the sole purpose of earning undue profits. The management including the
directors of the company are bound to be held responsible and accountable for their
actions in relation to the trades and other official transactions. Thus, the SAT in this
case held, that 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. Therefore, the judiciary upheld the sanctity and
integrity of the financial market transactions and held the management answerable for
their actions.

You might also like