2016 (8) TMI 1614 - Board - SEBI

Fraudulent and manipulative activities in the trading of shares -scheme/device or artifice involving a fa ade 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 - preferential allotees and the promoter related entities 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 LTCG. Responsibility of Pine and its Directors - HELD THAT - A director who is part of a company s board shall be responsible for all the deeds/acts of the Company during the period of his directorship. From this I note that the whole scheme of operations starting from issue of equity shares on preferential basis to exit of preferential allottees at a very high price could not have been fructified without the involvement and co-operation of the directors of Pine.Therefore do not find any merit in the contention of the directors in this regard. One of the directors viz; Mr. Rajagopalan Nagaraja Sharma has submitted that he had tendered his resignation to the Board immediately on change of ownership of the company but was asked to continue for a short time till the new Board of Directors was formed. However finding his name still appearing as director of the company in January 2013 he had written to the Registrar of Companies Tamil Nadu Chennai on February 04 2013 informing them about his resignation in July 2012. I note that Mr. Sharma has not produced any document to substantiate that the company had received the resignation letter submitted by him in July 2012. Further the Annual Report of the company for the year ending March 2013 continued to show Mr. Sharma as one of the directors of Pine and also mentions about his appointment as Executive Director for a period of one year from 2nd September 2013 to 1st September 2014. Therefore do not accept claims of Mr. Sharma. Promoters of Pine and Directors of the Promoter Companies - 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 and in the light of the contrary submissions made by the concerned entities and in the absence of any documentary evidence in support of their submissions do not find any merit in the submissions made by the promoters and their directors at this stage. Promoter related entities - As brought out in the interim order the ultimate beneficiaries of the whole scheme in question are preferential allottees and the Promoter Related Entities. It is beyond reason to hold that the company and other entities mentioned in the interim order except the Promoter Related Entities 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. The facts and circumstances of this case in my view 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 view of the foregoing reject the contentions of Promoter related entities in this regard. Preferential Allottees - No merit in the contention of the preferential allotees that they have no nexus with the exit providers as none of the shares sold by them were purchased by the exit providers. With regard to contention made by some of the preferential allotees that they have not paid a premium of Rs.10 per share and that an error in the interim order was evidenced from paragraph 5 wherein it was mentioned that Strangely in spite of such fundamentals and tarnished track record of long period of suspension of trading exit by the promoters and no available market price on account of no trading in the scrip Pine was able to garner funds aggregating to Rs.24, 70, 00, 000 from aforesaid 92 entities at a premium of Rs. 10 per share within a short span of few months from the revocation of suspension . In this regard it may be clarified that this was a typo error in the interim order. LTP Contributors - From the analysis of order book made after the passing of the interim order it was observed that during the price increase period i.e. patch 1 there were total of 119 buy orders for 21, 420 shares placed by 25 buyers. Of these 21, 420 shares buy orders for 16, 740 shares constituting 78.15% of the order book were placed by the 6 LTP Contributors as brought out in the table above. From the data it is also observed that they have placed buy orders with average quantity per order in the range of 47 shares to 461 shares. From the above trading pattern of the noticees it was observed that the contribution to price rise by top 3 LTP Contributors is individually quite high (around 15%). In this background reject the submissions of top 3 LTP Contributors that their trading did not have an impact on the price rise of the scrip of Pine. The Noticees have demonstrated that they had placed the buy orders seeing huge demands on previous trading day as against thin volume traded and purchase quantity was always far less than the traded volume. Further they had placed impugned orders in the scrip without foreseeing any manipulation or being a party to the scheme described in the interim order. They have also demonstrated that they had purchased only 1181 shares out of his own funds through 31 trades without being party to the scheme in question. I do not find sufficient material at this stage to attribute role of the some of the LTP contributors in the dubious plan scheme or devices and to continue the directions issued in the interim order against such LTP contributors. Supply side was being intentionally restrained/controlled by the sellers - This type of trading pattern in illiquid scrip like Pine prima facie indicates that the seller being in control of the tradable shares of this scrip played a major role in manipulating the price of the scrip. From the order book it appears that a facade of huge demand at upper circuit was created without which a scrip like Pine with hardly any credential regarding its trading history fundamentals business or financial standing etc. could not have witnessed an increase in the price (113%) within a period of 19 trading days. The only way the price of such scrip could have increased is by deploying manipulative trading pattern. Although the role of buyers in creating such demand cannot be outrightly ignored the facts and circumstances of each case need to be holistically examined. Exit Providers - Exit providers have contended that SEBI has erroneously named them as exit providers and clubbed them as Pine Animation Group entities and they have not done any wrong-doing -Exit providers had prima facie acted in concert/league 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 reap the benefit of tax exemption available under the Income Tax Act as discussed in the interim order. Therefore at this stage reject the contention of these Noticees in this regard. In the instant case the interim order has reasonably highlighted the modus operandi wherein Pine its promoters and directors in nexus with the preferential allottees made a facade of preferential allotment ostensibly to raise money and simultaneously the promoters of Pine transferred their holdings to the promoter related entities. Thereafter the preferential allottees and the promoter related entities with the aid of the Exit providers misused the stock exchange mechanism to exit at a high price in order to generate fictitious LTCG. While the tax related issues will be looked after by the other law enforcement agencies SEBI would look into the probable violations of securities market system. Thus in the instant case some of the Noticees while acting under dubious plan device and artifice have traded in the shares of Pine that prima facie led to the creation of artificial volume in the scrip by misuse of securities market system. Therefore prima facie the acts and deeds of some of the Noticees are fraudulent and are in contravention of the provisions of the Securities Laws so far as it relates to the misuse of securities market system. Considering the findings as mentioned above the facts and circumstances of the case do not justify the continuation of the directions passed against Rajesh Kumar Shukla (BGGPS9416R) vide the interim order dated May 08 2015. Therefore in exercise of the powers conferred upon me under section 19 read with sections 11(1) 11(4) and 11B of the Securities and Exchange Board of India Act 1992 hereby revoke the directions as against him. 122 Noticees have at this stage failed to give any plausible reasoning/explanation for their acts and omissions as described in the interim order and have not been able to make out a prima facie case for revocation of the interim order. Case in hand is peculiar as large number of entities have been restrained and the ongoing investigation in the matter may take time in completion. I have been conscious that the restraint order should not cause disproportionate hardship or avoidable loss to the portfolio of the noticees. That is why several relaxations such as allowing investment in mutual fund units permission to liquidate existing portfolio and keep the proceeds in escrow account and even utilize 25% of the proceeds for meeting exigencies etc. have been made in the past. Now at this stage considering the facts and circumstances of this case and submissions/oral arguments made we deem it appropriate to make further relaxations so as to address the issues of the personal and business exigencies or other liquidity problems. Considering the above in exercise of the powers conferred upon me under section 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 dated May 08 2015 as against the aforesaid 122 Noticees except that they can - (a) enter into delivery based transactions in cash segment in the securities covered in NSE Nifty 500 Index scrips and/ or S P BSE 500 scrips; (b) subscribe to units of the mutual funds including through SIP and redeem the units of the mutual funds so subscribed; (c) deal in Debt/Government Securities; (d) invest in ETF (e) avail the benefits of corporate actions like rights issue bonus issue stock split dividend etc.; (f) tender the shares lying in their demat account in any open offer/delisting offer under the relevant regulations of SEBI; Few exceptions/relaxation/reliefs for 122 Noticees and those restrained entities in respect of whom the confirmatory orders have already been passed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core issues considered in this judgment are:

• Whether the interim order issued by SEBI against Pine Animation Limited and associated entities was justified and should be confirmed, vacated, or modified.
• The legality and appropriateness of SEBI's interim orders without pre-decisional hearings.
• The involvement of Pine Animation Limited, its directors, promoters, and associated entities in a scheme to provide fictitious long-term capital gains (LTCG) and convert unaccounted income into accounted income.
• The role of preferential allottees, promoter-related entities, and exit providers in manipulating the securities market.
• Whether the actions of the entities involved constituted fraudulent and unfair trade practices under the SEBI Act and PFUTP Regulations.

2. ISSUE-WISE DETAILED ANALYSIS

Interim Orders and Natural Justice:

• Legal Framework: SEBI's power to issue interim orders stems from Sections 11 and 11B of the SEBI Act, allowing it to protect investor interests pending investigations.
• Court's Interpretation: The Court noted that pre-decisional hearings are not always necessary for interim orders, especially when urgency is involved. The opportunity for post-decisional hearings satisfies natural justice.
• Conclusion: The interim order was found to be in accordance with the law, and the principles of natural justice were not violated.

Involvement in Fraudulent Scheme:

• Legal Framework: The SEBI Act and PFUTP Regulations prohibit fraudulent and manipulative practices in the securities market.
• Court's Interpretation: The Court found that the preferential allotment and subsequent trading activities were part of a scheme to manipulate the market and generate fictitious LTCG.
• Key Evidence: The Court noted the sharp rise in Pine's share price without supporting fundamentals, the transfer of shares to promoter-related entities, and the coordinated trading patterns.
• Conclusion: The Court concluded that Pine, its directors, and associated entities were involved in a fraudulent scheme.

Role of Preferential Allottees and Exit Providers:

• Legal Framework: Preferential allotments should be made to known entities with a legitimate purpose.
• Court's Interpretation: The Court found that the preferential allottees and exit providers were complicit in the scheme, providing exits at inflated prices to convert unaccounted income.
• Conclusion: The actions of these entities were part of a coordinated effort to manipulate the market.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: The judgment reinforces SEBI's authority to issue interim orders without pre-decisional hearings in cases of urgency and highlights the responsibility of directors and entities involved in market manipulation schemes.
• Final Determinations: The interim order was confirmed for 122 entities, with certain relaxations provided for trading in specific securities and financial instruments. The order against Rajesh Kumar Shukla was revoked.
• Verbatim Quote: "The interim order in this case was in accordance with provisions of law envisaged in the SEBI Act and was not in disregard of the principles of natural justice."

The judgment underscores the importance of market integrity and the role of regulatory bodies like SEBI in safeguarding investor interests and maintaining fair trading practices. The decision to uphold the interim order against most entities reflects the seriousness of the fraudulent activities identified in the case.