2017 (6) TMI 1412 - Board - SEBI

Fraudulent and unfair trade practices in violation of SEBI Act -scheme/device or artifice involving a facade of preferential issue of equity shares of Pine Animation Limited (hereinafter referred to as Pine ) in order to provide fictitious Long Term Capital Gains ( LTCG ) to preferential allottees and promoter related entities - interim order as restrained 178 entities including the Noticees from accessing the securities market and further prohibited them from buying selling or dealing in securities either directly or indirectly in any manner whatsoever till further directions. HELD THAT - Transfer of shares in physical form was under a prior arrangement for some sort of ulterior and unlawful gains. It is also noted that majority of the shares sold by these persons were bought by exit providers by creating artificial demand for the shares of the company during the period December 17 2013 to January 30 2015. In my view this cannot be termed as mere coincidence especially when sellers have nexus with the company and buyers i.e. Exit Providers. The facts and circumstances of this case prima facie indicate that the transfer of these shares in physical form was under a prior arrangement for the ulterior motive or the end objective of the scheme that has been brought out explicitly in the interim order. In such circumstances and considering the fact that the submissions of the entities are not supported by any evidence I am not inclined to accept the same. These entities are related amongst themselves and have together sold 5, 17, 000 shares and for a value of approximately Rs. 4, 25, 30, 350. It is observed from Table B in para 6(iii) that the sell value of the shares of Pine sold by these entities are more than Rs. 1, 00, 00, 000 even individually. From the manner in which purchase and sale transactions were done by them with persons who are connected with the company directly or indirectly or with exit providers who are also connected as mentioned in the interim order it becomes important that traded volume of these entities should be looked into collectively as a group keeping in mind the whole scheme or device used by the Pine group entities to make unlawful gain by manipulating the share price of the scrip of Pine and misusing the stock exchange mechanism by adopting the modus operandi as described in the interim order. As the investigation in the matter is in progress at this stage do not find any merit in the contention of the entities. In the instant case exit providers had acted as buyers when the preferential allottees and the promoter related entities were selling the shares of Pine after the lock-in period. These persons bought shares of Pine at high prices and in huge volume by putting in large amount of money as detailed in the Table at para 6(iv) of this order. Such trading behaviour of the exit providers cannot be justified on any economic rationale and indicates existence of premeditated arrangement among the entities of the Pine group. Further as has been mentioned earlier had these entities not traded/dealt in the scrip of Pine during the relevant period it would not have been possible for the preferential allotees and the promoter related entities to offload/sell in large numbers at such price in such a stock that has hardly any intrinsic value. Exit providers had prima facie acted in concert and misused the exchange platform to provide exit to the preferential allotees and promoter related entities at a high price thereby enabling these preferential allotees and promoter related entities to make unlawful gains undermining the integrity of the securities market. The submissions made by them have no merit at this stage. Director of Pine Krishnakumar Omprakash Murarka as appointed as an independent director of the company only from May 28 2014 and in such circumstances in the absence of any other evidence he cannot be imputed with knowledge about the preferential allotments of shares of Pine share split and the price manipulation in the scrip of Pine during the lock-in period which happened prior to his appointment as director of the company. Further there is no prima facie finding in the interim order that he was involved in the manipulation of share price or the volume of share traded on the stock exchange. It has been also submitted by him that he was not holding any share of Pine and has not traded in the scrip during the examination period. Therefore of the view that there is no prima facie case against him. Preferential allottees have failed to substantiate their claim that they made investment in preferential allotment of Pine as a genuine investor. A stranger cannot make large investment in a preferential allotment merely on the basis of an advice or presentation without having any connection direct or indirect and prior understanding with the company. Findings mentioned in the interim order against these entities and their involvement in series of acts from preferential allotment to their exit from the company and similar modus operandi adopted by some preferential allottees - (Brij Bhushan Singal in the matter of First Financial and Mishka Financial which are still under investigation) - leaves no doubt about their prima facie involvement in unlawful activity. Thus in exercise of the powers conferred upon u/s 19 of the SEBI Act read with sections 11(1) 11(4) and 11B thereof hereby confirm the directions issued vide the ad interim ex parte order against the aforesaid 26 entities.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the interim directions issued by SEBI against the Noticees should be confirmed, vacated, or modified during the pendency of the investigation.
• Whether the Noticees were involved in a scheme to manipulate the securities market through preferential allotment and subsequent trading of shares of Pine Animation Limited.
• Whether the principles of natural justice were violated by not providing the Noticees with a pre-decisional hearing or sufficient documents to defend themselves.
• Whether the Noticees had any legitimate investment intent or were part of a premeditated scheme to manipulate the market.
• Whether the Noticees, particularly the exit providers, were acting in concert to provide an exit to preferential allottees and promoter-related entities at inflated prices.

2. ISSUE-WISE DETAILED ANALYSIS

Interim Directions and Natural Justice

The Court considered whether the interim directions were justified and if the principles of natural justice were upheld. The interim order was based on prima facie findings to protect investor interests and market integrity. The Court noted that SEBI's power to issue interim directions without pre-decisional hearings is well established, especially when urgent action is necessary. Post-decisional hearings were provided, and the Noticees were allowed to inspect documents and file objections.

Preferential Allotment and Market Manipulation

The Court analyzed whether the preferential allottees and promoter-related entities were involved in a scheme to manipulate the market. The preferential allottees claimed to be genuine investors, but the Court found that the circumstances of the allotment and subsequent trading suggested a premeditated scheme. The Court noted that Pine Animation Limited raised significant funds through preferential allotments despite lacking market credentials, indicating a prior understanding between the company, its promoters, and the allottees.

Evidence and Connections

The Noticees argued that they lacked connections with Pine's promoters or other involved entities. However, the Court found that the trading patterns and relationships among the entities indicated a coordinated effort to inflate share prices and provide exits at high prices. The Court emphasized that the lack of direct evidence of financial dealings did not negate the prima facie findings of a scheme.

Role of Exit Providers

The Court examined the role of exit providers, who were alleged to have created artificial demand to facilitate the sale of shares by preferential allottees and promoter-related entities. The Court found that the exit providers' trading behavior lacked economic rationale and indicated a premeditated arrangement. The exit providers contributed significantly to the market's buy volume, enabling the preferential allottees and promoter-related entities to sell shares at inflated prices.

3. SIGNIFICANT HOLDINGS

The Court held that:

• The interim directions against Krishnakumar Omprakash Murarka were revoked, as there was no prima facie case against him.
• The remaining Noticees failed to provide plausible explanations for their actions and were unable to make a prima facie case for revocation of the interim order.
• The preferential allottees and promoter-related entities were likely aware of and involved in the scheme to manipulate the market.
• The exit providers acted in concert with other entities to facilitate the scheme, undermining market integrity.

The Court confirmed the interim directions against the 26 Noticees but allowed certain relaxations, such as engaging in delivery-based transactions in specified securities, subscribing to mutual funds, and dealing in debt/government securities. The Court emphasized that these relaxations were subject to the supervision of exchanges and depositories.