2016 (10) TMI 1327 - Board - SEBI

Fraudulent Preferential allottees and pre-IPO transferees - Restriction Accessing the securities market and further prohibited them from buying, selling or dealing in securities in any manner whatsoever, till further directions - noticees forming part of Trading Group acted as buyers to the pre IPO transferees/ preferential allottees thereby creating artificial demand for the supply of shares from preferential allottees/ pre IPO transferees - Trading Group are connected among themselves and provided hugely profitable exit to the pre IPO transferees/ preferential allottees in such scrips that hardly had any credential in the market - HELD THAT - Noticees were acting in concert with other entities named in the interim order towards a common objective that has been brought out in the interim order. The investment made by the preferential allotees (including the noticees) cannot be termed as a rational investment behaviour and such investment, as in this case, could be possible only if the preferential allotees (including the noticees) had nexus with the companies, their promoter /directors and the issue of such shares was under a prior arrangement between them for an objective other than for providing equity capital to the company. The trading data also reveals that most of the shares sold by the preferential allotees and pre IPO transferees were bought by the entities of the Trading Group - this cannot be termed as a coincidence especially when sellers have nexus with the company, as mentioned in the interim order. As brought out in the interim order, ultimate beneficiaries of the whole scheme in question are the preferential allottees and Pre IPO Transferees. It is beyond reason to hold that the company, its promoters/directors, Trading group and Funding group 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. As, the noticees, who are the preferential allottees, are the ultimate beneficiaries, they cannot pretend to be oblivious to the scheme/plan. The facts and circumstances of this case, 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. Accordingly, find that the 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. The whole scheme could not have been possible without the involvement/ connivance of companies and their promoters and directors. 5 noticees (covered under this order), have failed to give any plausible reasoning/explanation, at this stage, 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. I, therefore, in this case, reject the prayers of noticees for setting aside the interim order or for complete removal of restraint imposed by it. I, therefore, do not have any reasons to change or revoke the ad interim findings as against them in the interim order. Activities on account of ban and consequent freezing of their demat accounts - These entities have pleaded for removal of the restraint imposed vide the interim order or at least allow them partial relief of permitting trading in securities other than those involved in this case and also allow them to deal in cash and F O segment. It is worth mentioning that the 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 before me, I deem it appropriate to make further relaxations so as to address the issues of the personal and business exigencies or other liquidity problems. 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 June 29, 2015 read with Corrigendum Order dated January 04, 2016 as against the 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. Considering business and personal exigencies and liquidity problems submitted by the noticees I allow further relaxations/reliefs to the noticees as under - (a) They are permitted to sell the securities lying in their demat accounts as on the date of the interim order, other than the shares of the companies which are suspended from trading by the concerned stock exchange and the shares of the four scrips in the SME segment covered under this order, in orderly manner under the supervision of the stock exchanges so as not to disturb the market equilibrium and deposit the sale proceeds in an interest bearing escrow account with a Scheduled Commercial bank. (b) They may deal with or utilize the sale proceeds lying in the aforesaid escrow account under the supervision of the concerned stock exchange as provided under - i. the sale proceeds may be utilised for investments permitted in para 38; ii. upto 25% of the value of the portfolio as on the date of the interim order or the amount in excess of the profit made /loss incurred or value of shares purchased to give exit, whichever is higher, may be utilized for business purposes and/or for meeting any other exigencies or address liquidity problems. The amount will include the value of portfolio in the demat account Explanation For the purposes of determining the portfolio value of the entities, the value of portfolio of securities lying in the demat account/s (individual and joint both) on the date of the interim order after excluding the value of shares that have been suspended from trading as on the date of the communication shall be considered. (c) The aforesaid reliefs shall be subject to the supervision of exchanges and depositories. The stock exchanges may use the existing mechanism available for implementing the similar interim relief earlier granted to some of the entities.

Summary

Issues Involved:
1. Allegations of fraudulent activities by the companies and their associates.
2. Connection and nexus among the entities.
3. Interim order and principles of natural justice.
4. Right to carry on business under Article 19(1)(g) of the Constitution.
5. Attachment of demat accounts.
6. Preferential allotment and its implications.
7. Trading on the stock exchange and manipulation.
8. Reliefs and relaxations granted to the noticees.

Detailed Analysis:

1. Allegations of Fraudulent Activities:
The Securities and Exchange Board of India (SEBI) issued an interim order restraining 254 entities, including four companies, from accessing the securities market due to alleged fraudulent activities. The companies increased their capital base through preferential allotment and IPOs, then routed IPO proceeds back to the Funding Group, effectively financing their own IPOs. The Trading Group manipulated stock prices, providing profitable exits to preferential allottees and pre-IPO transferees, who collectively made a profit of ?614 crore. SEBI alleged that these acts were prima facie fraudulent under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

2. Connection and Nexus Among Entities:
The interim order detailed the connection among the companies, their promoters, directors, preferential allottees, pre-IPO transferees, and the Trading and Funding Groups. It was alleged that the preferential allottees and pre-IPO transferees acted in concert with these groups to manipulate stock prices and volumes for illegal gains. The noticees contended they had no connection with the companies or other entities involved. However, SEBI inferred a nexus based on the nature of preferential allotments, which are typically made to persons known to the company and its promoters.

3. Interim Order and Principles of Natural Justice:
The noticees argued that the interim order violated principles of natural justice as no opportunity for a hearing was provided before its issuance. SEBI countered that the interim order was based on prima facie findings and issued in the nature of a show-cause notice, affording a post-decisional hearing opportunity. This approach has been upheld by various judicial precedents, including the Hon'ble Bombay High Court and the Hon'ble Supreme Court of India, which recognize the validity of post-decisional hearings in urgent or interim matters.

4. Right to Carry on Business Under Article 19(1)(g):
The noticees claimed that the restraint order breached their fundamental right to carry on business under Article 19(1)(g) of the Constitution of India. SEBI argued that this right is subject to reasonable restrictions in the interest of the general public, as authorized by Article 19(6). The SEBI Act, a special legislation, empowers SEBI to protect investor interests and regulate the securities market. The restraint order was issued to prevent fraudulent activities and protect market integrity, thus not violating the constitutional right.

5. Attachment of Demat Accounts:
The noticees contended that SEBI had attached their demat accounts without judicial approval, as required for bank accounts under section 11(4)(e) of the SEBI Act. SEBI clarified that the provision applies only to bank accounts, not demat accounts. The interim order restrained the noticees from accessing the securities market, resulting in the suspension of their demat accounts for credit and debit, which does not constitute attachment requiring judicial approval.

6. Preferential Allotment and Its Implications:
The noticees argued that preferential allotments were legitimate and questioned SEBI's scrutiny of such allotments. SEBI maintained that preferential allotments, typically made to known persons, were used as a tool in the fraudulent scheme. The companies and their promoters/directors had a prior understanding with the preferential allottees, who financed the companies' fund requirements. The allotments were part of a larger plan to manipulate stock prices and provide profitable exits to the allottees.

7. Trading on the Stock Exchange and Manipulation:
The noticees claimed their trades on the anonymous screen-based system of stock exchanges could not be manipulative. SEBI countered that manipulative intent can be inferred from the conduct and pattern of transactions. The interim order highlighted how the Trading Group manipulated stock prices to provide exits to preferential allottees at artificially inflated prices. The noticees' trades, though individually small, collectively contributed to the scheme.

8. Reliefs and Relaxations Granted to the Noticees:
SEBI provided certain interim reliefs to the noticees, including the ability to sell securities in their demat accounts, invest in mutual funds, and utilize sale proceeds for business and personal exigencies. These measures aimed to balance the need for market integrity with the noticees' liquidity and business requirements. The interim order was confirmed with modifications, allowing the noticees to engage in specific transactions under supervision while the investigation continued.

Conclusion:
The SEBI interim order was upheld, with certain relaxations granted to address the noticees' liquidity and business needs. The investigation into the alleged fraudulent activities and manipulation of the securities market by the companies and their associates is ongoing.