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2016 (6) TMI 1502 - Board - SEBIFraudulent and manipulative activities in the trading of shares - Exit Providers and allotees artificially increased the volume of the scrip and misused securities market system for making illegal gains and to convert ill-gotten gains into genuine one to avail fictitious long term capital gains (LTCG ) - Whether the interim order issued by SEBI against the Noticees restraining them from accessing the securities market should be confirmed vacated or modified during the pendency of the investigation? HELD THAT - The interim order passed by SEBI was not in disregard of the principles of natural justice since reasons for passing the interim order have been clearly stated in the interim order and in accordance with the settled law the Noticees were afforded a post-decisional opportunity to file their replies and avail personal hearing. I therefore reject the contention of the Noticees in this regard. As brought out in the interim order the ultimate beneficiaries of the whole scheme in question are the preferential allottees (including the Noticees). It is beyond reason to hold that the company and other entities mentioned in the interim order except the preferential allottees would devise the impugned plan/scheme for the benefit of the entities who are neither party to the plan/scheme nor have any complicity in the plan with others. Since the Noticees amongst other preferential allotees are the ultimate beneficiaries they cannot pretend to be oblivious to the scheme/plan. The facts and circumstances of this case in my view strongly indicate that the issue of these shares was under a prior arrangement between them for the ulterior motive or the end objective of the scheme that has been brought out explicitly in the interim order. Also the Noticees contention that no specific allegation has been levelled against them in the interim order does not hold any merit in light of the fact that the Noticees have prima facie been found to be a part of the holistic scheme as discussed hereinabove and in the interim order. Thus reject the contentions of Noticees in this regard. Noticees at this stage have failed to give any plausible explanation for the charges as described in the interim order and for complete removal of restraint. Therefore in this case reject the prayer for setting aside the interim order or for complete removal of restraint imposed by it. Thus in exercise of the powers conferred upon me under sections 11 and 11B of the SEBI Act read with sections 19 thereof hereby confirm the directions issued vide the ad interim ex parte order qua the Noticees herein subject to the interim relief(s) provided to the Noticees as mentioned above.
1. ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
2. ISSUE-WISE DETAILED ANALYSIS Interim Order and Procedural Fairness - Relevant legal framework and precedents: The interim order was issued under sections 11 and 11B of the SEBI Act, which empower SEBI to pass directions to protect investors' interests. The legal precedent allows for interim orders without pre-decisional hearings if post-decisional hearings are provided. - Court's interpretation and reasoning: The Court held that the interim order was not in violation of natural justice principles as it provided a post-decisional opportunity for the Noticees to present their case. - Key evidence and findings: The interim order was based on prima facie findings from a preliminary inquiry. The Noticees were given opportunities to inspect documents and present their submissions. - Application of law to facts: SEBI's actions were deemed appropriate given the urgency and nature of the allegations. The Court found no merit in the Noticees' claim of procedural unfairness. - Treatment of competing arguments: The Noticees argued they were not given a pre-decisional hearing, but the Court found that the post-decisional opportunity sufficed. - Conclusions: The interim order was upheld as procedurally fair. Nexus with Pine Animation Limited - Relevant legal framework and precedents: The legal framework considers the nature of preferential allotments and the typical connections between companies and allottees. - Court's interpretation and reasoning: The Court noted that preferential allotments are typically made to known entities and not strangers, suggesting a connection between Pine and the Noticees. - Key evidence and findings: The Noticees failed to provide evidence of how they were approached for the allotment, indicating a likely connection with Pine. - Application of law to facts: The Court inferred a nexus based on the nature of the preferential allotment and the lack of plausible explanations from the Noticees. - Treatment of competing arguments: The Noticees claimed no connection with Pine, but the Court found their explanations insufficient. - Conclusions: The Court concluded that there was a probable nexus between the Noticees and Pine. Rationality of Investment - Relevant legal framework and precedents: The rationality of investment decisions is assessed based on company fundamentals and investor behavior. - Court's interpretation and reasoning: The Court found the investment irrational given Pine's poor financial health and trading suspension history. - Key evidence and findings: Pine's financial losses and trading suspension were inconsistent with a rational investment strategy. - Application of law to facts: The Court deduced that the investment was likely part of a pre-arranged scheme rather than a rational decision. - Treatment of competing arguments: The Noticees argued their investment was part of their overall strategy, but the Court did not find this credible. - Conclusions: The investment was deemed irrational and indicative of a pre-arranged scheme. 3. SIGNIFICANT HOLDINGS - Preserve verbatim quotes of crucial legal reasoning: The Court emphasized, "It is beyond reason to hold that the company and other entities mentioned in the interim order, except the preferential allottees, would devise the impugned plan/scheme for the benefit of the entities who are neither party to the plan/scheme nor have any complicity in the plan with others." - Core principles established: The principles of natural justice are satisfied with post-decisional hearings in urgent interim orders. Preferential allotments imply a connection between the company and allottees. - Final determinations on each issue: The interim order was confirmed, maintaining restrictions on the Noticees, while allowing limited interim reliefs to manage existing investments.
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