2017 (9) TMI 2042 - Board - SEBI

Preferential allotment of shares - Moryo Industries Limited and associated entities engaged in fraudulent activities to manipulate the price and volume of its scrip on BSE Limited - HELD THAT - Pursuant to the interim order SEBI conducted a detailed investigation of the entire scheme employed in the instant matter connection amongst the debarred entities funds used for the price manipulation of the scrip of Moryo etc. so as to ascertain the violation of securities laws. Upon completion of investigation by SEBI it is noted that investigation did not find any adverse evidence/findings against 85 entities in respect of their role in price manipulation in the scrip of Moryo warranting continuation of action u/s 11B and 11(4) of the SEBI Act. No adverse findings against the aforementioned entities with respect to their role in the price manipulation in the scrip of Moryo warranting continuation of action u/s 11B and 11(4) of the SEBI Act the directions issued against them vide interim order dated December 04 2014 which were confirmed vide Orders dated March 18 2016 and August 22 2016 are liable to be revoked. In exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act 1992 read with Sections 11 11(4) and 11B of the SEBI Act hereby revoke the Confirmatory Orders dated March 18 2016 and August 22 2016 qua aforesaid 85 entities (including joint allottees tabulated at paragraph 7 above) with immediate effect. The revocation of the directions issued vide the abovementioned orders (at paragraph 9) is only in respect of the entities mentioned at paragraph 7 of this order in the matter of Moryo Industries Limited. As regards remaining 3 entities in the scrip of Moryo violations under SEBI Act SCRA PFUTP Regulations etc. were observed and SEBI shall continue its proceedings against them. Hence the directions issued vide Order dated August 22 2016 against remaining 3 entities viz. Moryo Industries Limited Manoharlal Saraf and Geeta Manoharlal Saraf shall continue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether Moryo Industries Limited and associated entities engaged in fraudulent activities to manipulate the price and volume of its scrip on BSE Limited.
• Whether the preferential allotment of shares was used as a mechanism to provide fictitious long-term capital gains to convert unaccounted income into accounted income.
• Whether the actions of Moryo and associated entities violated the SEBI Act, 1992, and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
• Whether the interim orders restraining the entities from accessing the securities market should be revoked or confirmed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Alleged Fraudulent Activities and Price Manipulation

• Relevant legal framework and precedents: The SEBI Act, 1992, and SEBI (PFUTP Regulations), 2003, provide the legal framework for addressing fraudulent and unfair trade practices in the securities market.
• Court's interpretation and reasoning: SEBI's investigation revealed a substantial increase in the price and volume of Moryo's scrip following the release of the lock-in period. This was primarily due to trading among the Preferential Allottees and Moryo Group entities.
• Key evidence and findings: The investigation found that the Preferential Allottees were provided an exit at high prices by Moryo Group entities, suggesting a scheme to artificially inflate the scrip's price and volume.
• Application of law to facts: SEBI applied the provisions of the SEBI Act and PFUTP Regulations to establish a prima facie case of fraudulent activities against Moryo and associated entities.
• Treatment of competing arguments: SEBI considered the lack of adverse evidence against 85 entities, leading to the revocation of interim orders against them.
• Conclusions: SEBI concluded that Moryo and certain entities engaged in activities that violated securities laws, warranting continued proceedings against them.

Issue 2: Preferential Allotment and Fictitious Long-Term Capital Gains

• Relevant legal framework and precedents: The SEBI Act and PFUTP Regulations address the misuse of securities market mechanisms to generate fictitious gains.
• Court's interpretation and reasoning: SEBI found that the preferential allotment of shares was used to provide fictitious LTCG to allottees, converting unaccounted income into accounted income.
• Key evidence and findings: The investigation highlighted the role of Moryo Group entities in facilitating exits for Preferential Allottees at inflated prices.
• Application of law to facts: SEBI's findings were based on the observed trading patterns and connections among the entities involved.
• Treatment of competing arguments: SEBI's detailed investigation led to the revocation of orders against entities where no adverse findings were made.
• Conclusions: The preferential allotment scheme was deemed a fraudulent mechanism to generate fictitious gains, violating securities laws.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "Considering the fact that there are no adverse findings against the aforementioned entities with respect to their role in the price manipulation in the scrip of Moryo warranting continuation of action under Sections 11B and 11(4) of the SEBI Act, I am of the considered view that the directions issued against them vide interim order dated December 04, 2014 which were confirmed vide Orders dated March 18, 2016 and August 22, 2016, are liable to be revoked."
• Core principles established: The judgment reinforces the principle that fraudulent activities in the securities market, such as price manipulation and fictitious gains, are violations of the SEBI Act and PFUTP Regulations.
• Final determinations on each issue: SEBI revoked the interim orders against 85 entities due to lack of adverse findings, while continuing proceedings against Moryo Industries Limited and two other entities for violations of securities laws.

In conclusion, the judgment highlights SEBI's role in investigating and addressing fraudulent activities in the securities market, ensuring compliance with legal frameworks to protect market integrity.