2015 (5) TMI 484 - AT - Companies Law

Suspension of the trading in the securities of the appellant company w. e.f.07/01/2015 - Notice put up by the Bombay Stock Exchange Limited on its website as on 01/01/2015 - SEBI directed the Stock Exchanges to suspend the trading on charges of market manipulation - Concurrent decision by members of tribunal with same conclusion - Held that - First set of reasoning - Justice J.P. Devadhar - According to the BSE trading in the securities of the appellant are suspended because, the appellant fulfils all the three parameters set out in the SEBI surveillance minutes dated 10/12/2014. Question, therefore to be considered is, whether BSE is justified in holding that the appellant-company satisfies the three parameters specified in the SEBI surveillance minutes dated 10/12/2014. First parameter that the appellant does not exist at the address mentioned and does not appear to be carrying out any operations - According to the appellant, the name plate of the appellant was in fact displayed just below the name plate/board of Sheorey. This fact is seriously disputed by BSE. Existence of a company is not to be determined on the basis of name plate/board . It is also held that when BSE official gave surprise visit, no employee of the appellant was present at the said address and hence the appellant cannot be said to be existing at the address mentioned. It is not in dispute that the BSE official who gave surprise visit to the appellant-company, had met Mr. Morne, (an employee of the appellant) at the premises in question. It is also not in dispute that on the BSE official disclosing his identity, Mr. Morne informed that Mr. Cyrus Bhot who looks after the day to day affairs of the company had gone out for business work at Nariman Point. In fact Mr. Morne contacted Mr. Cyrus Bhot and in turn Mr. Cyrus Bhot spoke to the BSE official and offered all assistance in the matter. In these circumstances, decision of BSE that the appellant-company does not exist at the address mentioned and does not carry on business from the said premises and thus fulfils the first parameter set out in the SEBI minutes dated 10/12/2014 cannot be sustained. Second parameter that wide fluctuations in preferential share price of the company - If a defunct company like the appellant revives it business by pumping in finance through the issuance of preferential shares duly approved by BSE and there after corporate announcements have been made from time to time in relation to the business commenced by the appellant and those announcements were duly displayed on the BSE website, then rise in share prices of that company would be a natural phenomena and in such a case, in the absence of any evidence to the contrary it cannot be presumed that there must be market manipulation and pending investigation suspend the trading in the shares of those companies. Hence, decision of BSE that second parameter set out in minutes dated 10/12/2014 are satisfied in the present case is unsustainable. mere fact that the preferential shareholders after the lock-in period have sold their shares cannot ipso-facto be a ground for suspending the trading in the shares of the appellant-company. Also assuming that the preferential shareholders who had traded in the shares of the appellant-company had prima-facie indulged in market manipulation, then those preferential shareholders could be restrained from buying, selling or dealing in shares to prevent the market abuse. Instead of taking action against those violators, BSE has penalized the appellant by suspending the trading in the shares of the appellant-company, even though there is not an iota of evidence to show that the appellant-company or its promoters/directors have directly or indirectly indulged in market manipulation. Third parameter that company has weak financials and price rise in the scrip of company - It is not in dispute that by issuing preferential shares from time, to time the appellant-company has raised ₹ 38.36 crores. Thereafter, the appellant-company has commenced its business of film production by entering into contracts with reputed entities/persons in the film industry and that film production has already commenced. Neither the execution of contracts nor commencement of film production is disputed by the BSE. Admittedly, corporate announcements made by appellant regarding raising funds through preferential shares and also corporate announcements made by appellant regarding the contracts entered with reputed entities/persons were duly displayed on the BSE website so that the investors are made known about the revival of the appellant-company. In such a situation, inference drawn by BSE that the appellant-company has weak financials and the price rise in such scrips is not supported by financials is wholly unjustified. At no point of time, either before passing the impugned order on 01/01/2015 or before passing the reasoned order on 12/01/2015, the appellant was called upon to explain the manner in which the funds collected by issuing preferential shares have been utilized. However, in the order dated 12/01/2015 it is alleged that no particulars have been given as to how the funds have been utilized. Such a finding recorded without seeking any explanation from the appellant is wholly unjustified. In order to demonstrate bonafides on part of the appellant, counsel for appellant submitted that pending investigation, trading in the securities of the appellant be allowed subject to the promoters of the appellant-company giving an undertaking to the effect that they would not trade in the shares of the appellant-company for such period as this Tribunal deems fit and proper. Second set of reasoning - Justice A.S. Lamba - Executive Management Committee (EMC) has come to a wrong conclusion that company did not exist at its registration address although sign-board of Company did not exist at that address and apparently Company tried to correct this by putting sign-board subsequently, but Company is right in stating there is no requirement-in-law for an official of the Company to be present there during working hours, when a receptionist existed, at premises, to take a messages and he conveyed the message also. Regarding second parameter- Weak financials and price rise in the scrip not supported by the parameters, it is admitted by Company that financial results of the last three years - after resumption of listing - have been bad with practically no income, but as per the Company - business model of company is Entertainment Business is such that income/revenue start after 3 years or so and investors invest in these companies on basis of so many factors like future prospects, which as per company, are healthy in view of producing films/TV serials are necessary ground work for same has been done. Another factor on which BSE was relying was on Table at para 4.5 (c) which shows increase in shares traded and average volume, before and after lock-in period. It was seen that average was arrived at by dividing no. of shares traded by number of days scrip was traded, before and after lock-in and since no. of days of trading before and after lock-in were different and hence comparison of company s averages traded volume, before and after lock in, is not correct for arriving at informed decision. Towards the end question of dealing with the entire issue - on emergency basis and on basis of the three parameters was not that investors do not evade tax, but was to see that investors do not use stock exchange mechanism for LTCG, but after deciding parameters to prevent use of stock exchanges for purposes of LTCG, the objective was changed to prevent use of stock exchanges for tax-evasion; the question arises if parameter suitable for preventing LTCG - which is a legal activity - can be used for purposes of tax evasion - which is an illegal activity - without addressing the issue transparently or even consciously. For all the aforesaid reasons, the impugned order dated 01/01/2015 in so far as it relates to the appellant as also the order dated 12/01/2015 recording reasons for suspending the trading in the shares of the appellant-company are quashed and set aside subject to the following condition that Promoters of the appellant-company shall not buy, sell or deal in the securities of the appellant-company till 30/06/2015. - Decided in favour of appellant.

Summary

Issues Involved:
1. Legality of the suspension notice issued by BSE on 01.01.2015.
2. Compliance with principles of natural justice.
3. Justification for suspension based on SEBI's surveillance parameters.
4. Authority of BSE's officials to suspend trading.
5. Role of SEBI in directing BSE to suspend trading.

Detailed Analysis:

1. Legality of the Suspension Notice:
The appellant challenged the BSE notice dated 01.01.2015, which suspended trading in their securities effective from 07.01.2015. The notice lacked specific reasons, legal provisions violated, and the period of suspension. The appellant argued that such a notice is unsustainable in law, citing the Supreme Court decisions in *Kranti Associates (P.) Ltd. v. Massod Ahmed Khan* and *Asstt. Commissioner v. Shukla Bro.*. The BSE justified the suspension based on SEBI's Surveillance Committee Meeting minutes dated 10.12.2014, which outlined three parameters for identifying companies involved in market manipulation.

2. Compliance with Principles of Natural Justice:
The appellant contended that the suspension was issued without a prior hearing and lacked reasons, violating principles of natural justice. The BSE provided a post-decisional hearing on 08.01.2015 and recorded reasons on 12.01.2015, justifying the suspension based on SEBI's parameters. The Tribunal noted that the appellant was not given an opportunity to explain the utilization of funds raised through preferential shares before the suspension, deeming the finding unjustified.

3. Justification for Suspension Based on SEBI's Parameters:
The BSE claimed that the appellant satisfied all three parameters set by SEBI:
- Non-existence and Operations: The BSE's site inspection report indicated no nameplate or employees at the registered address. The appellant provided evidence of their presence and operations, including contracts and financial documents, which the Tribunal found credible.
- Preferential Allotments and Price Rise: The BSE argued that the appellant's share price increased significantly after preferential allotments, indicating manipulation. The appellant countered that the price rise was due to genuine business activities and corporate announcements. The Tribunal found no evidence of market manipulation by the appellant or its directors.
- Weak Financials: The BSE cited the appellant's weak financials as a reason for suspension. The Tribunal noted that the appellant had raised substantial funds through preferential shares and commenced business activities, making the weak financials argument unsustainable.

4. Authority of BSE's Officials to Suspend Trading:
The appellant questioned the authority of BSE officials to suspend trading, arguing that such power rested with the Governing Board under Bye-law 39. The BSE claimed the Managing Director had the authority under Bye-law 21. The Tribunal found that the resolution authorizing the MD was passed after the suspension, making the action unauthorized at the time.

5. Role of SEBI in Directing BSE to Suspend Trading:
The SEBI directed BSE to suspend trading based on surveillance parameters to prevent market manipulation. The Tribunal noted that SEBI had not found prima facie evidence of manipulation by the appellant, unlike in other cases where SEBI had issued ex-parte orders. The Tribunal criticized SEBI and BSE for acting without proper authorization and failing to provide a clear legal basis for the suspension.

Conclusion:
The Tribunal quashed the BSE's suspension order dated 01.01.2015 and the subsequent order dated 12.01.2015, subject to conditions that the promoters of the appellant-company shall not trade in the company's securities until 30.06.2015. The Tribunal allowed SEBI/BSE to take action if prima facie evidence of market manipulation by the appellant or its promoters/directors is found. The appeal was disposed of with no order as to costs.