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2015 (6) TMI 1216 - Board - SEBIFraudulent IPO - Screen based trading with manipulative or fraudulent intent - Restraint orders - preferential allotment of the shares of Eco, Esteem, CNE and HPC, and, thereafter getting those shares listed on the stock exchange so as to avail exemption on LTCG tax gains - HELD THAT - The transactions in the said scrips were with a premeditated understanding, plan, device or artifice. In the present matter, once the shares of these companies got listed in SME segment of BSE, the Trading Group entities manipulated the price/volume of the scrips and then provided profitable exit to preferential allottees and Pre IPO transferees. Moreover, in any market, a sudden supply if not matched by similar demand leads to price fall. Considering the same, any rational investor would not have dumped a large number of shares without facing the risk of a significant price fall until and unless he was sure of the demand side absorbing the supply. In this case, the entities of Trading Group created the demand against the supply from the preferential allottees/pre IPO transferees. In the whole process, the principle of price discovery was kept aside and the market lost its purpose. It is evident from the above analysis that the Trading Group entities provided a hugely profitable exit to the preferential allottees and pre IPO transferees. Preferential allottees, pre IPO transferees acting in concert with Funding Group and Trading Group have used the stock exchange system to artificially increase volume and price of the scrip for making illegal gains and to convert ill-gotten gains into genuine one. However, the whole scheme could not have been possible without the involvement/ connivance of companies and their promoters and directors. The acts and omissions were prima facie for generating fictitious LTCG so as to convert unaccounted income of preferential allottees and pre-IPO transferees into accounted one with no payment of taxes as LTCG is tax exempt under section 10(38) of Income Tax Act, 1961. I prima facie find that the above modus operandi helped the concerned entities to not pay income tax on account of LTCG and helped them to show the source of this income to be from legitimate source i.e. stock market. The manipulation in the traded volume and price of the scrip by a group of connected entities in this case, has not only resulted in enabling illegal benefit to a group of entities but also has the potential to induce gullible and genuine investors to trade in the scrip and harm them. As such the acts and omissions of companies, Funding Group, Trading Group entities, preferential allottees and pre-IPO transferees are fraudulent as defined under regulation 2(1)(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 ( PFUTP Regulations‟) and are in contravention of the provisions of Regulations 3(a), (b), (c) and (d) and 4(1), 4(2)(a), (b), (c), (d), (e) and (g) thereof and section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992. Certain market manipulations are taking place in the scrips of Eco, Esteem, CNE and HPC. I note that currently major portion of the shareholding (around 35.43% in Eco, 41.10% in Esteem, 41.01% in CNE and 56.22% in HPC) is lying with the preferential allottees, pre IPO transferees, Funding Group, Trading Group and the promoters/directors of these companies. It is also pertinent to mention that Eco and Esteem have already obtained approval of shareholders for migrating from SME platform to Main Board of BSE. If these companies are allowed to shift to Main Board of BSE, the minimum Bid Size of ₹ 1 Lakh, which is currently present in SME segment of the exchange, will not be applicable in the Main Board. Consequently, it will increase the liquidity in the scrips as well as very small investors, who are kept away from SME segment through Minimum Bid Size, may also be induced to invest in these companies. Unless prevented they may use the stock exchange mechanism in the same manner as discussed hereinabove for the purposes of their dubious plans as prima facie found in this case. In my view, the stock exchange system cannot be permitted to be used to achieve unlawful benefits whether tax related or otherwise. Considering these facts and the indulgence of a listed company in such a fraudulent scheme, plan, device and artifice as prima facie found in this case, I am convinced that this is a fit case where, pending investigation, effective and expeditious preventive and remedial action is required to be taken by way of ad interim ex -parte in order to protect the interests of investors and preserve the safety and integrity of the market. In order to protect the interest of the investors and the integrity of the securities market in exercise of the powers conferred upon in terms of section 19 read with section 11(1), section 11 (4) and section 11B of SEBI Act, 1992, pending inquiry/investigation and passing of final order in the matter, hereby restrain the concerned persons/entities from accessing the securities market and buying, selling or dealing in securities, either directly or indirectly, in any manner. The stock exchanges and the Depositories are directed to ensure that all the above directions are strictly enforced.
Issues Involved:
1. Unusual Price/Volume Movement in Listed Companies 2. Financial Performance and Preferential Allotments 3. IPO Funding and Utilization of Proceeds 4. Price Manipulation by Trading Group 5. Profits Earned by Preferential Allottees and Pre-IPO Transferees 6. Connection and Relationship Among Entities 7. Violations of SEBI Regulations Issue-Wise Detailed Analysis: 1. Unusual Price/Volume Movement in Listed Companies: SEBI noticed a significant rise in traded volumes and prices of the shares of Eco Friendly Food Processing Park Limited, Esteem Bio Organic Food Processing Limited, Channel Nine Entertainment Limited, and HPC Biosciences Limited, listed on the SME segment of BSE. The prices of these companies' shares increased astronomically from their listing dates till December 31, 2014. 2. Financial Performance and Preferential Allotments: The financial analysis revealed that the Profit After Tax (PAT) and Earnings Per Share (EPS) of these companies had been consistently decreasing from FY 2012-13 onwards, despite the sharp rise in their share prices. These companies raised funds through a series of preferential allotments during this period. Goldline International Finvest Limited held significant shares in these companies and was further allotted additional shares on a preferential basis. 3. IPO Funding and Utilization of Proceeds: The companies issued IPOs in 2013, with Guiness Corporate Advisory Limited acting as the merchant banker. The IPO proceeds were immediately transferred back to entities belonging to the Funding Group. The Funding Group financed a substantial portion of the IPOs, and the subscription monies were routed back to them, indicating that the companies financed their own IPOs and allotted shares without receipt of consideration. 4. Price Manipulation by Trading Group: A set of connected entities, referred to as the Trading Group, was found to be influencing the price of the scrips through positive Last Traded Price (LTP) contributions. These entities placed trades with negligible quantities, contributing significantly to the price rise. The Trading Group entities were connected through common directors, addresses, phone numbers, funding, and off-market transactions. 5. Profits Earned by Preferential Allottees and Pre-IPO Transferees: The preferential allottees and pre-IPO transferees made substantial profits by selling shares at artificially inflated prices. The Trading Group entities provided a profitable exit to these allottees and transferees. The profits were made within a period of 20-24 months, with returns ranging from approximately 11,073% to 17,606%. 6. Connection and Relationship Among Entities: The entities of the Funding Group and Trading Group were inter-connected through common directors, addresses, phone numbers, and financial transactions. The connection among these entities was established through various factors, including common addresses and directors. 7. Violations of SEBI Regulations: The acts and omissions of the companies, Funding Group, Trading Group, preferential allottees, and pre-IPO transferees were found to be fraudulent under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, and in contravention of the provisions of Section 12A of the SEBI Act, 1992. The manipulation in the traded volume and price of the scrips enabled illegal benefits to a group of entities and had the potential to mislead genuine investors. Conclusion: The judgment concluded that the transactions in the scrips were with a premeditated understanding, plan, device, or artifice. The companies, Funding Group, Trading Group, preferential allottees, and pre-IPO transferees used the stock exchange system to artificially increase volume and price of the scrips for making illegal gains and converting ill-gotten gains into genuine ones. The judgment imposed restrictions on the involved entities from accessing the securities market and directed a detailed investigation into the entire scheme.
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