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2015 (5) TMI 1265 - Board - SEBIMarket manipulation and fraudulent Share trade practices -preferential allotment of shares to generate fictitious long-term capital gains (LTCG) - significant increase in the price of the scrip took place and the price was maintained during the period of lock in on the shares allotted to the preferential allotees - HELD THAT - The entire modus operandi of allotting shares on a preferential basis announcing a stock split and then bringing in connected entities to provide exit was a scheme devised to make ill-gotten gains. The modus operandi of pumping the share price artificially and then dumping the price so that the same cycle could be repeated demonstrates the mala fide of the Pine Group. Also the mechanism is presumably being used to deceive the authorities by laundering black money and making tax-free profits. Further from the copies of the special resolution passed under section 81(1A) of the Companies Act 1956 as available on BSE website it is noted that Pine had disclosed to its shareholders and public that the purpose of aforesaid fund raising through preferential allotment was to fulfil the additional funding requirements of the company for acquisition and development of moveable and immovable property. From the bank statement analysis of Pine it is observed that funds received as proceeds of preferential allotment were immediately transferred to various entities on the same day or in a matter of next three days and was never retained in the company for executing its plans as envisaged in the special resolution passed under section 81(1A) of the Companies Act 1956. Preferential allotment was used as a tool for implementation of the dubious plan device and artifice of Exit Providers Preferential Allottees and Promoter related entities. One could argue that in order to make LTCG the Preferential Allottees in question could have bought in secondary market and waited for a year before selling the shares. In the instant case probably the preferential allotment route was preferred over secondary market route because the share capital of Pine prior to preferential allotment was very small i.e. 30, 00, 000 shares to accommodate the required fictitious LTCG of Rs. 453 crore approximately. As such the capital expansion through preferential allotment and stock split provided much bigger source to the persons involved in terms of volume and price manipulation to facilitate the whole operation. Further the entire scheme of operation also helped the promoters of Pine to exit from the company. The prima facie modus operandi appears to be same as that used in the matter of Radford Global Limited where the stock exchange mechanism was used for the purpose of availing LTCG tax benefit and Pine was found actively involved in the whole design to misuse stock exchange mechanism to generate bogus LTCG. The scheme plan device and artifice employed in this case apart from being a possible case of money laundering or tax evasion which could be seen by the concerned law enforcement agencies separately is prima facie also a fraud in the securities market in as much as it involves manipulative transactions in securities and misuse of the securities market. The manipulation in the traded volume and price of the scrip by a group of connected entities has the potential to induce gullible and genuine investors to trade in the scrip and harm them. As such the acts and omissions of Exit Providers Preferential Allottees and Promoter related entities are fraudulent as defined under regulation 2(1)(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003 ( PFUTP Regulations ) and are in contravention of the provisions of Regulations 3(a) (b) (c) (d) 4(1) 4(2)(a) (b) (e) and (g) thereof and section 12A(a) (b) and (c) of the Securities and Exchange Board of India Act 1992. Considering indulgence of a listed company in such a fraudulent scheme plan device and artifice as prima facie found in this case I am convinced that this is a fit case where pending investigation effective and expeditious preventive and remedial action is required to be taken by way of ad interim ex -parte in order to protect the interests of investors and preserve the safety and integrity of the market. It is also pertinent to mention that vide SEBI s Orders in the matter of Radford Global Ltd and First Financial Services Ltd. Pine itself has been restrained from buying selling or dealing in the securities market till further directions and the said restraint is in operation as on date. As an interim preventive and remedial measure and to maintain orderly development in the securities market in the interests of securities market and investors it would also be necessary to take immediate steps regarding trading in the scrip of Pine on the stock exchange. Considering these facts and the indulgence of a listed company in such a fraudulent scheme plan device and artifice as prima facie found in this case we are convinced that this is a fit case where pending investigation effective and expeditious preventive and remedial action is required to be taken by way of ad interim ex -parte in order to protect the interests of investors and preserve the safety and integrity of the securities market. Restrain orders on persons/entities from accessing the securities market and buying selling or dealing in securities either directly or indirectly in any manner.
1. ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment revolve around allegations of market manipulation and fraudulent practices by Pine Animation Limited and associated entities. The primary issues include:
2. ISSUE-WISE DETAILED ANALYSIS Manipulative and Deceptive Practices
Generation of Fictitious LTCG and Money Laundering
Violation of SEBI Act and PFUTP Regulations
3. SIGNIFICANT HOLDINGS
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