2017 (9) TMI 2047 - Board - SEBI

Fraudulent and unfair trade practices in violation of SEBI Act - price manipulation of the scrip - HELD THAT - As no adverse findings against the mentioned 114 entities with respect to their role in the manipulation of the scrip of PAL the directions issued against them vide interim order which were confirmed vide Orders later need not be continued. In exercise of the powers conferred u/s 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 June 02 2016 July 05 2016 August 22 2016 and June 02 2017 qua aforesaid 114 entities (paragraph 9 above) with immediate effect. The revocation of the directions issued vide the abovementioned orders is only in respect of the entities mentioned at paragraph 9 of this order in the matter of Pine Animation Limited. As regards remaining entities in the scrip of PAL violations under SEBI Act SCRA PFUTP Regulations etc. were observed and SEBI shall continue its proceedings against them. Hence the directions issued vide Orders dated July 05 2016 August 22 2016 and June 02 2017 against the remaining 62 entities shall continue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether Pine Animation Limited (PAL) and associated entities engaged in fraudulent and unfair trade practices in violation of the Securities and Exchange Board of India Act, 1992 (SEBI Act), the Securities Contracts (Regulation) Act, 1956 (SCRA), and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations).
• Whether the preferential allotment of shares by PAL was used as a mechanism to provide fictitious long-term capital gains (LTCG) to certain entities, thereby converting unaccounted income into accounted income.
• Whether the interim orders issued against 178 entities, including PAL, its promoters, directors, and related entities, were justified based on the alleged manipulation of the scrip's volume and price.
• Whether the investigation findings warranted the continuation or revocation of the interim orders against the 178 entities.

2. ISSUE-WISE DETAILED ANALYSIS

Fraudulent and Unfair Trade Practices

• Relevant legal framework and precedents: The SEBI Act, SCRA, and PFUTP Regulations govern the prohibition of fraudulent and unfair trade practices in the securities market. These laws aim to protect investors and maintain market integrity.
• Court's interpretation and reasoning: The Court evaluated whether PAL and associated entities engaged in manipulative practices to artificially inflate the scrip's price and volume, thereby facilitating fictitious LTCG.
• Key evidence and findings: SEBI's investigation revealed that PAL made preferential allotments of shares to 92 entities, which were allegedly used to provide exit opportunities at inflated prices. The investigation found no adverse evidence against 114 entities, indicating no connection with PAL or involvement in price manipulation.
• Application of law to facts: The Court applied the PFUTP Regulations to assess whether the actions of PAL and associated entities constituted fraudulent practices. The absence of adverse findings against certain entities led to the revocation of interim orders against them.
• Treatment of competing arguments: SEBI's initial findings suggested manipulation, but the detailed investigation did not substantiate these claims for 114 entities. The Court balanced the need for market protection with the rights of entities found not to be involved in wrongdoing.
• Conclusions: The Court concluded that the interim orders against the 114 entities should be revoked due to a lack of evidence of their involvement in the alleged scheme.

Preferential Allotment and Fictitious LTCG

• Relevant legal framework and precedents: The PFUTP Regulations prohibit the creation of artificial price movements and fictitious trading activities. The SEBI Act empowers SEBI to take preventive and remedial actions.
• Court's interpretation and reasoning: The Court examined the preferential allotment of shares as a potential mechanism for generating fictitious LTCG. It considered whether this practice was used to convert unaccounted income into accounted income.
• Key evidence and findings: The investigation did not find evidence linking 114 entities to the alleged scheme of providing fictitious LTCG through preferential allotments.
• Application of law to facts: The Court assessed the legality of the preferential allotment process and its use in generating fictitious LTCG. The absence of evidence against certain entities led to the conclusion that they were not involved in the scheme.
• Treatment of competing arguments: SEBI's initial allegations were weighed against the investigation's findings, which did not support the involvement of 114 entities in the scheme.
• Conclusions: The Court found no basis to continue the interim orders against the 114 entities due to the lack of evidence of their participation in the alleged scheme.

Interim Orders and Investigation Findings

• Relevant legal framework and precedents: SEBI has the authority to issue interim orders to protect the securities market and investors. These orders can be revoked if subsequent investigations do not substantiate the initial allegations.
• Court's interpretation and reasoning: The Court reviewed SEBI's interim orders and the subsequent investigation findings to determine whether the orders should be continued or revoked.
• Key evidence and findings: The investigation found no adverse evidence against 114 entities, leading to the conclusion that they were not involved in the alleged manipulative practices.
• Application of law to facts: The Court applied SEBI's regulatory framework to assess the validity of the interim orders. The lack of evidence against certain entities justified the revocation of orders against them.
• Treatment of competing arguments: The Court considered SEBI's initial concerns about market manipulation against the investigation's findings, which cleared 114 entities of wrongdoing.
• Conclusions: The Court revoked the interim orders against the 114 entities due to the absence of evidence of their involvement in the alleged scheme.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "Considering the fact that there are no adverse findings against the aforementioned 114 entities with respect to their role in the manipulation of the scrip of PAL, I am of the considered view that the directions issued against them vide interim order dated May 08, 2015... need not be continued."
• Core principles established: The judgment reinforces the principle that regulatory actions, such as interim orders, must be supported by substantive evidence. The investigation's findings must justify the continuation or revocation of such orders.
• Final determinations on each issue: The Court determined that the interim orders against 114 entities should be revoked due to the lack of evidence of their involvement in the alleged fraudulent scheme. The proceedings against the remaining 62 entities will continue based on observed violations.