2016 (7) TMI 1711 - Board - SEBI

Fraudulent and manipulative activities in the trading of shares - Pine and persons in charge of its affairs created a facade of preferential issue of equity shares in order to provide fictitious long term capital gains ( LTCG ) to Pine s preferential allotees and Promoter related entities (i.e. entities to whom Pine s promoters transferred their shares in physical form) so as to convert their unaccounted income into accounted one HELD THAT - It is a well-accepted position that a preferential allotment signifies that the allottees agree with the issuer on one-to-one basis to finance its fund requirements and is not an open to all investment opportunity. Such financing pre-supposes nexus and prior understanding amongst the issuer its promoters/directors and the allottees. A stranger cannot just make investment in a preferential allotment merely on the basis of an advice without having nexus directly or indirectly and prior understanding with the company. Investigation in the matter is in progress and appropriate decision in accordance with law would be taken after completion thereof. As prima facie found in the interim order Pine its promoters its directors preferential allottees Promoter related entities and Exit Providers have acted in connivance for implementation of dubious plan device and artifice that has led to the misuse of stock exchange mechanism to artificially increase price and volume of the scrip to provide illegitimate gains to the preferential allottees and Promoter related entities in order to claim LTCG benefits that has not only eroded the market integrity but has also been detrimental to the interests of investors who might have been lured to invest in the scrip due to such manipulative and fraudulent trading in the scrip and price movement. No reason to revoke or modify the directions of the ad interim ex parte order dated May 08 2015 in the matter of Pine Animation Limited against the Noticees. Therefore in exercise of the powers conferred upon under section 19 of the SEBI Act read with sections 11(1) 11(4) and 11B thereof hereby confirm the directions issued against entities.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment involve the alleged fraudulent and manipulative activities in the trading of shares of Pine Animation Limited. Specifically, the issues include:

• Whether Pine Animation Limited and associated entities engaged in manipulative practices to artificially inflate the price and trading volume of its shares.
• Whether the preferential allotment of shares was used as a facade to provide fictitious long-term capital gains to the allottees and promoter-related entities.
• Whether the interim directions issued by SEBI against the entities involved should be confirmed, vacated, or modified pending further investigation.

ISSUE-WISE DETAILED ANALYSIS

1. Manipulative Practices in Share Trading

• Relevant Legal Framework and Precedents: The Securities and Exchange Board of India (SEBI) Act, particularly sections 11(1), 11(4), and 11B, empowers SEBI to take measures to protect the interests of investors and ensure the integrity of the securities market. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, govern the preferential allotment of shares.
• Court's Interpretation and Reasoning: The Court noted that Pine and associated entities engaged in a scheme to artificially inflate the price and trading volume of its shares through manipulative trading practices. This involved creating a facade of preferential allotment and providing exit opportunities to preferential allottees and promoter-related entities at inflated prices.
• Key Evidence and Findings: The evidence included the pattern of share allotments, transfers, and trading, which indicated a coordinated effort to manipulate the market. The sharp rise in share prices and volumes was not supported by any genuine market factors.
• Application of Law to Facts: The Court applied the relevant provisions of the SEBI Act to conclude that the actions of Pine and associated entities constituted a misuse of the securities market mechanism for illegitimate gains.
• Treatment of Competing Arguments: The entities involved did not submit replies or seek a hearing, despite being given ample opportunity. Therefore, the Court proceeded based on the available record.
• Conclusions: The Court found prima facie evidence of manipulative practices and concluded that the interim directions should remain in force.

2. Preferential Allotment as a Facade

• Relevant Legal Framework and Precedents: Preferential allotment is governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, which require transparency and fairness in the allotment process.
• Court's Interpretation and Reasoning: The Court observed that the preferential allotment was used as a mechanism to convert unaccounted income into accounted income through fictitious long-term capital gains.
• Key Evidence and Findings: The allotment of shares to select entities with connections to Pine's promoters and the subsequent trading patterns supported the conclusion of a premeditated scheme.
• Application of Law to Facts: The Court applied the legal principles governing preferential allotments to determine that the allotments were not genuine and were part of a manipulative scheme.
• Treatment of Competing Arguments: The absence of responses from the entities involved led the Court to rely on the prima facie findings of the interim order.
• Conclusions: The Court concluded that the preferential allotment was a facade for illicit financial gains.

3. Confirmation of Interim Directions

• Relevant Legal Framework and Precedents: SEBI's power to issue interim directions to protect investor interests and market integrity is well established.
• Court's Interpretation and Reasoning: The Court reasoned that the interim directions were necessary to prevent further misuse of the securities market and protect investor interests.
• Key Evidence and Findings: The ongoing investigation and the prima facie findings of manipulative practices justified the continuation of the interim directions.
• Application of Law to Facts: The Court applied SEBI's regulatory framework to maintain the interim restrictions on the entities involved.
• Treatment of Competing Arguments: The lack of engagement from the entities involved led the Court to uphold the interim order.
• Conclusions: The Court confirmed the interim directions, emphasizing the need for ongoing investigation and regulatory oversight.

SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The Court emphasized that "the actions of Pine, its promoters, its directors, preferential allottees, Promoter related entities and Exit Providers have acted in connivance for implementation of dubious plan, device and artifice that has led to the misuse of stock exchange mechanism."
• Core Principles Established: The judgment reinforced the principle that preferential allotments must be genuine and not used as a tool for market manipulation or tax evasion. It also highlighted SEBI's role in maintaining market integrity.
• Final Determinations on Each Issue: The Court confirmed the interim directions against the entities involved, maintaining the restrictions on their market activities pending further investigation.