9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2016 (3) TMI 1321 - Board - Companies LawFraud under SEBI - unusual price movement and volume in the scrip of Kailash Auto Finance Ltd. - Share retransfers amongst chosen interconnected parties, unrealistic increase of liquidity in shares of Kailsah Auto held by shareholders of CPAL and PML pursuant to scheme of amalgamation - Held that - In the instant case, prima facie, find that the entire gamut of events commencing from the typical gambit of allotment of shares by CPAL and PML to a select coterie, running through the maze of funds/shares transfers and retransfers amongst chosen interconnected parties, unrealistic increase of liquidity in shares of Kailsah Auto held by shareholders of CPAL and PML pursuant to scheme of amalgamation is a classic example of touch-me-not distancing through intermediations and culminating in the final denouement wherein connected parties with all their manipulative assemblage came to the fore setting a seal on their machinations of fraudulent, manipulative and deceptive dealings to the detriment of unsuspecting investors. The whole picture on the canvass suggests tell- tale strands of how each one of the connected entities at various sequences in the chain has catalysed the routing of funds and shares, in a web of make believe transfers/transactions meant to mislead and obfuscate, to the final confluence in the market amidst artificial volume and price rise entrapping the unsuspecting and gullible investors. The manipulation in the traded volume and price of the scrip by a group of connected entities as observed in this case has potential to further induce unsuspecting and gullible investors to trade in the scrip and harm them. These connected parties have grossly misused the stock exchange system to generate bogus LTCG to aid and help beneficiaries to convert their unaccounted income into accounted one with no payment of taxes as LTCG is tax exempt. SEBI strives to safeguard and protect the interests of a genuine investor in the Indian securities market. The fraudulent, manipulative and deceptive acts, device, plan and artifice employed by the connected parties acting in league in this case have wider impact on the securities market and should be dealt with sternly and post- decisional hearing will be sufficient compliance of procedure, in the facts and circumstances of this case. Considering the facts and circumstances of this case and the indulgence of a listed company in such fraudulent, manipulative and deceptive plan, device and artifice as prima facie found in this case, I am convinced that this is a fit case where, pending investigation, effective preventive and remedial action is required to be taken by way of ad interim ex-parte order to protect the interests of investors and preserve the safety and integrity of the securities market. In order to protect the interest of the investors and safeguard the integrity of the securities market, I, in exercise of the powers conferred upon me in terms of section 19 read with section 11(1), section 11 (4) and section 11B of the SEBI Act, 1992, pending investigation in the matter, hereby restrain the persons/entities from accessing the securities market and buying, selling or dealing in securities, either directly or indirectly, in any manner whatsoever, till further directions. This order shall come into force with immediate effect. The stock exchanges and the depositories shall ensure that the above directions are strictly enforced.
Issues Involved:
1. Unusual price movement and volume in Kailash Auto Finance Ltd. 2. Layering and circulation of funds among interconnected parties. 3. Corporate actions including capital reduction, issuance of bonus shares, private placement, and merger. 4. Non-cooperation from Kailash Auto and associated entities. 5. Surprise inspection by BSE. 6. Acquisition of management and control by CPAL and PML. 7. Price and volume manipulation in three distinct periods (Patch-1, Patch-2, Patch-3). 8. Analysis of key financial figures and ratios. 9. Fund flow analysis and layering. 10. Creation of artificial demand and supply. 11. Potential tax evasion and misuse of stock exchange system. 12. Fraudulent and manipulative activities in securities market. Detailed Analysis: Unusual Price Movement and Volume in Kailash Auto Finance Ltd. SEBI observed a sudden and unusual price movement and volume in the scrip of Kailash Auto Finance Ltd. from November 07, 2014, to December 31, 2015. The price fell from ?28.05 to ?2.01 per share, with a daily average trading volume of 7 lakh shares. Prior periods showed different price ranges and volumes, indicating substantial changes during the observed period. Layering and Circulation of Funds Among Interconnected Parties SEBI's preliminary examination revealed acts and omissions related to dealing in Kailash Auto shares, including layering and circulation of funds among interconnected parties. This involved acquisition and divestment of securities of connected unlisted private companies, capital reduction, issuance of bonus shares, private placement, and merger with Kailash Auto. Corporate Actions Including Capital Reduction, Issuance of Bonus Shares, Private Placement, and Merger The management and control of Kailash Auto were acquired by CPAL and PML, which led to significant corporate actions. This included the reduction of share capital and the merger of CPAL and PML with Kailash Auto, approved by the High Courts of Allahabad and Bombay. The paid-up share capital was reduced by 90%, and additional shares were issued to CPAL and PML shareholders. Non-cooperation from Kailash Auto and Associated Entities During the examination, Kailash Auto, its Registrar, and suspected entities holding shares in concerned private unlisted companies were asked to provide relevant information but failed to provide satisfactory responses. Surprise Inspection by BSE BSE conducted a surprise inspection at Kailash Auto's registered and corporate offices. It was found that the registered office was occupied by a chartered accountant firm, and the corporate office was locked with no company officials present, indicating no operations were carried out at these addresses. Acquisition of Management and Control by CPAL and PML CPAL and PML acquired 69.81% of Kailash Auto's total paid-up share capital from the erstwhile promoter through a share purchase agreement. The board of directors approved CPAL and PML as promoters and agreed on capital reduction and merger schemes. Price and Volume Manipulation in Three Distinct Periods (Patch-1, Patch-2, Patch-3) The price and volume in Kailash Auto's scrip were analyzed in three patches: - Patch-1 (January 17, 2013, to June 04, 2013): The price increased from ?11 to ?36.25 with low trading volume. Certain entities influenced the price through first trades, contributing significantly to the price rise. - Patch-2 (July 22, 2013, to November 05, 2014): The price opened at ?37 and closed at ?28.45, with high trading volume. Beneficiaries were net sellers, and entities forming part of Kailash Auto Group I and II were net buyers, providing exit to beneficiaries. - Patch-3 (November 07, 2014, to December 31, 2015): The price fell from ?28.50 to ?2.01, with reduced trading volume. The downward trend was due to lower trading concentration by beneficiaries and entities of Kailash Auto Group I and II. Analysis of Key Financial Figures and Ratios The key financial figures of CPAL, PML, and Kailash Auto indicated weak operating results. Despite poor performance, CPAL and PML issued bonus shares in disproportionate ratios, and funds were circulated among primary allottees and the companies, generating fictitious share premium values. Fund Flow Analysis and Layering Funds were transferred among various entities, including CPAL, PML, and their primary allottees, creating a facade of investment. The analysis showed significant layering of funds, masking the true identity of ultimate owners. Creation of Artificial Demand and Supply Entities related to Kailash Auto created artificial demand by being net buyers to beneficiaries, thereby manipulating the price and volume. Two interconnected groups, Kailash Auto Group I and II, were identified, contributing significantly to the trading volume. Potential Tax Evasion and Misuse of Stock Exchange System The entire process of private placement, share premium fabrication, bonus shares issuance, and subsequent trading was designed to generate bogus long-term capital gains (LTCG) exempt from tax under the Income Tax Act, 1961. The stock exchange system was grossly misused in this process. Fraudulent and Manipulative Activities in Securities Market The acts and dealings of primary allottees, recipients of CPAL and PML shares, beneficiaries, LTP contributors, and entities of Kailash Auto Group I and II were found to be fraudulent, manipulative, and deceptive under SEBI regulations. They contravened various provisions of the SEBI Act and PFUTP Regulations. Conclusion The judgment highlights a complex scheme involving price and volume manipulation, layering and circulation of funds, and misuse of corporate actions to create artificial demand and supply. The entities involved were found to have engaged in fraudulent and manipulative activities, significantly impacting the securities market's integrity. The order restrains the involved entities from accessing the securities market and mandates further investigation to protect investors' interests and maintain market integrity.
|
