2021 (6) TMI 1144 - AT - SEBI

Preferential allotments of shares - promoter related entities - price manipulation activities - LTCG in order to convert unaccounted income into accounted income with nil payment of tax as LTCG was exempt from tax -basis for holding the appellants guilty of Section 12A(a),(b) and (c) of the SEBI Act read with Regulation 3 and 4 PFUTP Regulations is, that a prudent investor would not have purchased the shares of a Company which had weak fundamentals and financials and that no one in their right mind would buy the shares unless there was a pre-existing arrangement of reaping in huge profits. HELD THAT - We are of the opinion that the role of the preferential allottees, exit providers and LTP contributors were far more serious than the role of the appellants. The role of the appellants in the instant case is, that they had purchased the shares off market from the six entities who in turn have purchased it from the promoter Company. Whereas, the preferential allottees have been let off, the appellants have been penalized only on the ground of being in proximity with the Company and its directors which finding is perverse in as much as we find that there is no direct connection of the appellants with the Company, its promoters, promoter company or noticees nos. 9 to 11, 75, 77 to 80 who were the main manipulators and the kingpin in the entire scheme. The six entities are not promoter related entities. They have acquired the shares from the promoter Company but they do not become the promoters. The fact that they were de facto controlling the Company is not a relevant issue as it still does not make them promoters of the Company. Thus, merely because the appellants had purchased the shares through off market from the six entities does not and cannot lead to a conclusion that the appellants are connected with the Company or with noticee no. 9 or with promoter related entities or its directors. The finding that appellants were in close proximity or had a connection with the Company, directors etc. is patently erroneous. The six entities had purchased the shares from a promoter Company, namely, noticees 15 to 19 and thereafter the six entities sold it to the appellants. Whereas the notices no. 15 to 19 have been exonerated by the impugned order, the appellants have been booked for having a close proximity with the Company. We find that the appellants have not purchased the shares from the Company. The issue of weak fundamentals would equally apply to the preferential allottees who were allotted the shares at rate of Rs. 10/- per share but these preferential allottes have been let off. Therefore the standard of weak fundamentals cannot be applied in the case of the appellants especially when on the same footing the preferential allottees have been let off. We are of the opinion that it is business prudence to purchase at a lesser price and sell it at a higher price when the market is up thereby earning profits. Making profits in our opinion cannot be termed illegal or manipulative or fraudulent or violative of the PFUTP Regulations. We are also find that the WTM has given a categorical finding that noticee no. 9 was the master mind who manipulated the price with Company and its directors and intermediaries for the benefit of the preferential allottees. These preferential allottees have been let off. We find that there is no direct connection of the appellants with noticee no. 9. There is no involvement of collusion or price manipulation of the appellants and thus there cannot be any violation of regulations 3 4 of the PFUTP Regulations. Six entities had an active role to play in the management of the affairs of the Company from February / March - 2012 onwards. A direct connection has been established between the six entities and the Company and noticee no. 2. The six entities had also acquired the preferential shares of the promoters and therefore we are also of the opinion that the six entities were closely associated with the Company from February / March 2012 onwards and throughout the period when the preferential allotments were made. We are, thus, of the opinion that the six entities were closely connected with the Company and its directors and had a role to play in the formulation of the scheme of issuance of preferential allotment, pumping of the price through LTP contributors and providing an exit mechanism for the preferential allottee. Consequently, in our opinion, the order of the WTM insofar as the six entities are concerned does not suffer from any manifest error of law.

Summary

Issues Involved:
1. Restraint from accessing the securities market.
2. Freezing of shares and mutual funds.
3. Alleged fraudulent scheme involving preferential allotment of shares.
4. Connection with the Company and its promoters.
5. Role of the six entities as intermediaries.
6. Allegation of price manipulation and generating fictitious Long Term Capital Gains (LTCG).
7. Discriminatory treatment of appellants compared to preferential allottees.
8. Bona fide purchase of shares and investment decisions.
9. Role of the appellants in the alleged fraudulent scheme.
10. Connection of the Dhanuka Family with the Company through Bihariji Constructions.

Detailed Analysis:

1. Restraint from Accessing the Securities Market:
The appellants were restrained from accessing the securities market for five years by SEBI's Whole Time Member (WTM) due to their alleged involvement in a fraudulent scheme. The tribunal found this reasoning patently erroneous, noting that the appellants had no direct connection with the Company, its promoters, or directors.

2. Freezing of Shares and Mutual Funds:
The WTM's order also included freezing the shares and mutual funds units in the appellants' demat accounts. The tribunal quashed this order for the appellants, asserting that making profits from trading shares is not illegal unless it involves manipulation or fraudulent intent, which was not proven in this case.

3. Alleged Fraudulent Scheme Involving Preferential Allotment of Shares:
The fraudulent scheme involved preferential allotment of shares, stock splits, price pumping, and providing an exit to preferential allottees. The tribunal noted that the preferential allottees, who made significant profits, were exonerated, while the appellants, who had a lesser role, were penalized, which was discriminatory.

4. Connection with the Company and its Promoters:
The WTM alleged that the appellants were connected to the Company through the six entities. The tribunal found no evidence of direct connection and deemed the finding of close proximity between the appellants and the Company as patently erroneous.

5. Role of the Six Entities as Intermediaries:
The six entities were found to be closely associated with the Company and involved in the fraudulent scheme. The tribunal upheld the findings against these six entities, noting their active role in the management of the Company's affairs and the fraudulent scheme.

6. Allegation of Price Manipulation and Generating Fictitious LTCG:
The WTM alleged that the appellants were part of a scheme to manipulate share prices and generate fictitious LTCG. The tribunal found this allegation unsubstantiated, noting that the appellants' purchase decisions were not imprudent or indicative of a pre-arranged scheme.

7. Discriminatory Treatment of Appellants Compared to Preferential Allottees:
The tribunal highlighted the discriminatory treatment, noting that preferential allottees who made significant profits were exonerated, while the appellants were penalized despite having a lesser role. This was deemed unjust and inconsistent.

8. Bona Fide Purchase of Shares and Investment Decisions:
The appellants argued that they were bona fide purchasers of shares and made investment decisions based on market conditions. The tribunal agreed, stating that making profits from trading shares is not illegal or manipulative unless proven otherwise.

9. Role of the Appellants in the Alleged Fraudulent Scheme:
The WTM found the appellants guilty based on the assumption that no prudent investor would buy shares of a company with weak fundamentals. The tribunal rejected this reasoning, finding no evidence of the appellants' involvement in the fraudulent scheme or price manipulation.

10. Connection of the Dhanuka Family with the Company through Bihariji Constructions:
The WTM alleged that the Dhanuka Family was connected to the Company through Bihariji Constructions. The tribunal found this allegation based on surmises and conjectures, noting that the forensic auditor appointed by SEBI found the loan transactions between Bihariji and the Company to be in the usual course of business.

Conclusion:
The tribunal allowed the appeals of the appellants, quashing the WTM's order restraining them from accessing the securities market and freezing their shares and mutual funds. However, the appeals of the six entities were dismissed, upholding the findings against them. The tribunal emphasized that making profits from trading shares is not illegal unless proven to involve manipulation or fraudulent intent, which was not the case for the appellants.