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TMI Blog2015 (5) TMI 484X X X X Extracts X X X X X X X X Extracts X X X X ..... orders. 3. When the appeal was moved before this Tribunal for urgent reliefs, grievance made by the appellant was that the impugned notice is issued without hearing the appellant and without assigning any reasons. Hence we directed the BSE to hear the appellant and record reasons for issuing the impugned notice on 01.01.2015. Accordingly, the BSE has heard the appellant and on 12.01.2015 recorded its reasons for issuing the impugned notice dated 01.01.2015. 4. Question therefore to be considered in this appeal is, whether BSE is justified in suspending the trading in the securities of the appellant with effect from 07/01/2015 for the reasons recorded by it on 12.01.2015 after granting post decisional hearing. 5. Facts relevant for the purposes of the present appeal are that the appellant is a public limited company engaged in the activity connected with the entertainment market such as film making. Shares of the appellant-company are listed on the BSE. However, trading in the shares of the appellant-company on BSE were suspended during the year 2001- 2012 as the appellant was not in a position to pay the Listing fees as also CDSL/NSDL charges, Registrar fees and salary of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttees. This may be coupled with stock split. (c) Companies having week financials and the price rise in such scrip is not supported by financials. According to BSE the appellant-company fulfills all the aforesaid three parameters laid down in the minutes of Surveillance Committee Meeting held on 10.12.2014, and therefore the BSE by its notice dated 01.01.2015 has sought to suspend trading in the shares of the appellant-company until further orders. 9. Mr. Sancheti, Learned Senior Advocate appearing on behalf of the appellant submitted that the impugned notice dated 01.01.2015 issued by the BSE as well as the reasons recorded subsequently in support of the impugned action cannot be sustained for the following reasons:- (a) Impugned notice published on the BSE website on 01.01.2015 is neither addressed to the appellant nor it contains facts or reasons for suspending the trading in the securities of the appellant. It does not specify the provision of law that is allegedly violated by the appellant and does not specify the period for which the trading in the securities of the appellant shall remain suspended. Such a notice which does not contain facts or reasons for suspending the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r suspension of trading, appellant has not violated any of the criteria specified in the SEBI circular dated 30/09/2013. Therefore, the impugned notice issued by the Senior General Manager, (Surveillance and Supervision) of BSE is without jurisdiction and hence liable to be quashed. (e) Relying on a decision of Gujarat High Court in case of Alka Synthetics Ltd. vs. SEBI reported in (1995) 95 Comp. Cas 663 (Guj) and a decision of Karnataka High Court in case of Bharat Electronics Ltd. v. BEL Head Officer Staff Association reported in 2001(3) Kar L. J. 201, it is submitted that when an order is passed whether in exercise of its administrative functions or quasi judicial functions, reasons recorded in the said order alone has to be considered and the reasons cannot be supplied by other documents or evidence. In the present case, impugned notice dated 01.01.2015 does not contain any reason and therefore the impugned notice cannot be sustained. (f) In any evident, it is submitted that the first parameter set out in the draft minutes dated 10.12.2014 cannot be said to have been satisfied in the present case, because, the registered office of the appellant is in fact located on First Fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the draft minutes dated 10.12.2014 required BSE to identify the companies which have made preferential allotments and if the price of the scrip of those companies increased with very low volume during the first year of lock-in period and after the lock-in period if there is huge rise in the volume and exit of preferential shareholders then, suspend the trading in the shares of those companies. In the present case, shares under the third preferential issue duly approved by BSE were issued at a premium of Rs. 23 per share. Apart from the above, there were corporate announcements made on BSE website in relation to the following contracts entered into by the appellant with third parties:- (a) Line Production Agreement dated 09/10/2013 entered into by and between appellant and Abbas Mustan Film Productions Pvt. Ltd. ('AMFP' for short) for production of a film. AMFP is a reputed and well known entity inter-alia engaged in the business of creating, managing, supervision, developing creative content for and supervision and executing the production and distribution of cinematograph films. (b) Film Director Agreement dated 25/08/2014 entered into between appellant and Mr. Abbbas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allegation that the appellant-company has indulged in any irregularities/illegality either while issuing the preferential shares or the promoters of the of appellant-company have traded in violations of the norms laid down by SEBI/BSE. (j) Trading in 6,01,877 shares of appellant-company throughout the year commencing from 15.03.2014 to 06/01/2015 as against the total quantity of 3,48,00,000 shares issued by appellant cannot be said to be abnormal trading. Moreover, if the criteria was to suspend the trading in the shares of loss making companies, then there were several loss making companies and there was no reason to selectively suspending the trading in the securities of certain companies including the appellant-company. (k) The third parameter set out in the draft minutes dated 10/12/2014 required BSE to identify the companies with weak financials and if the price rise in the scrip of those companies are not supported by the financials of those companies then suspend the trading in the shares of those companies. If the price rise is due to market manipulation of the shares on the exchange, then the proper course is to pass an order against that person and not to suspend the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. (v) once the lock-in period was over, the preferential allottees sold their shares at such rigged high prices t o connected parties who were set up to buy the same and made huge profits which are also exempt from capital gains tax. (b) According to SEBI, such misuse of the trading system whether amounts to money laundering or tax evasion would be gone into by the concerned agencies and that the SEBI would only be investigating the matter from the angle of probable violation of securities laws. (c) During the SEBI Surveillance Committee Meeting held with Stock Exchanges on 10/12/2014, SEBI urged the Stock exchanges to suspend the trading of shares of companies which satisfy any one or more of the three parameters set out in the minutes recorded on 10/12/2014. Thereafter by e-mails dated 19/12/2014 and 29/12/2014 SEBI insisted that the exchange must immediately implement the directions contained in the minutes dated 10/12/2014 by suspending the trading in the securities of those companies which fulfill one or more parameters set out in the minutes dated 10/12/2014. Accordingly BSE identified the companies which fulfilled the parameters set out in the minutes dated 10/12/2014 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and committed perjury. (f) contention of appellant that Sheorey had permitted the appellant to use part of its premises is unsustainable, because, the leave and license agreement between Sheorey and the Trustees of Tarabai Trust, prohibits Sheorey from allowing user of the said premises in whole or in part to any person/persons. The telephone bill, bank statement produced by the appellant merely show the mailing address and do not satisfy the requirement. Some of the documents produced by the appellant show different address as its registered office. It is relevant to note that the appellant had changed its name pursuant to a resolution dated 15/01/2013 but the application filed by appellant with the BSE for change in name was incomplete and could not be processed. The exchange has repeatedly reminded the appellant to submit the required documents, but the same has not been furnished till date. (g) The second parameter prescribed by SEBI is also satisfied in the present case. Admittedly the appellant had made three preferential allotments during the period from March 2013 to September 2014. By issuance of the said preferential shares appellant has raised Rs. 38.36 crores, while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not pay salary of its staff. Thus, the huge price jump up in the shares of appellant is not justified by the performance of the appellant and is obviously a manipulation. (n) Various agreements produced by the appellant merely give hope of future prospectus. Not a single rupee has been earned by the appellant since the last three years. Merely, announcing execution of some contracts cannot justify the huge price increase. The contracts relied upon by the appellant does not remotely indicate the revenue likely to be earned by the appellant in the future. In these circumstances, exceptional price in the scrip from Rs. 2.67 to Rs. 149 between 16/12/2013 to 31/12/2014 which is a 5480.52% increase in the price is totally unbelievable and cannot be said to be genuine merely because public announcements of executing some contracts for producing a film in future have been made. The price rise was on very small volumes on most days and the price kept rising even when large volumes were sold on certain odd days inter alia by the preferential allottees. This is not at all commensurate with the financials of the appellant-company and is a clear indication of manipulation. (o) argument of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... measures that can be adopted by SEBI have been left to the discretion and wisdom of SEBI. Apex Court in case of Sahara India Real Estate Corpn. Ltd. vs. SEBI reported in (2013) 1 SCC 1 has considered the aforesaid powers of SEBI and held that aforesaid powers are conferred to promote the development of the securities market and the said power has not been curtailed or whittled down in any manner by any other provisions under the SEBI Act, as no provision has been given an overriding effect over Section 11(1) of SEBI Act. (c) SEBI came across serious market manipulations, which were operated by raising large amounts in companies having weak financials, by issuing preferential allotment of shares, which had a lock in period of one year. The market prices were manipulated by parties who were found to be connected to the companies or the allottees. The prices were pushed up substantially on relatively small volumes and once the lock-in period was over, the preferential allottees sold their shares at high prices to connected parties and made huge profits which were also exempt from long term capital gains tax. (d) SEBI noticed that other companies followed the trend as stated above an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions at substantially higher prices. The preferential allottees sold their shares at high prices to connected parties who are set up to buy the same by preferential allottees and make huge profits which were exempt from capital gains tax. The market platform in this type of transaction was misused by artificially rigging the price so as to have an unfair long term capital gains tax exemption. (h) SEBI as a market regulator, while not directly concerned with money laundering or tax evasion, is certainly concerned with the manipulation of the price of a scrip and to achieve that object, suspension of trading in such scrips it was agreed upon as a surveillance measure to suspend the trading in shares, pending investigation. The suspension pending investigation is imperative and naturally in the interest of small investors who may be otherwise induced by market manipulation to invest in the scrip. (i) Surveillance measures by their very nature are confidential and hence cannot be made public. (j) BSE has passed a reasoned order and given its reasons for suspending the trading in the shares of the appellant-company. In the present case, in view of the complex nature of investigatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and contributed to the artificial price rise in the scrip. In the present case, neither SEBI, nor BSE have found that the appellant-company or its promoters/directors have directly or indirectly traded in the shares of the appellant-company. Hence, the case of the appellant being not comparable with Moryo Industries Limited SEBI, in the absence of any evidence to suggest that the appellant has indulged in market manipulation SEBI could not have asked BSE to suspend the trading in securities of the appellant if the three parameters set out in the minutes dated 10/12/2014 were satisfied. 15. Fact that some of the preferential shareholders of the appellant-company were also preferential shareholders of Moryo Industries Limited and Radford Global Limited and those preferential shareholders have been found to have prime facie connived with those companies along with its directors/promoters in resorting to market manipulation while trading in the shares of Moryo Industries Ltd./Radford Global Limited cannot be a ground to presume that the preferential shareholders of the appellant company as also the appellant company, its directors/promoters have connived and resorted to market manipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered of the appellant. None of those contracts have been doubted. (f) Fact that in some contracts the appellant has erroneously shown their administrative office address as the registered address of the appellant cannot be a ground to hold that the appellant-company does not exist, especially when, existence of the administrative office is not disputed. In these circumstances, presumption drawn by BSE that the appellant-company does not exist at the address mentioned and does not appear to be carrying out any operations is wholly unjustified and contrary to the facts on record. 18. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manipulation. In the present case, no such findings are recorded. Hence, decision of BSE that second parameter set out in minutes dated 10/12/2014 are satisfied in the present case is unsustainable. 20. Apart from the above, preferential shareholders, after the lock-in period were legally entitled to off-load the shares acquired by them on preferential basis. In such a case, 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. 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. 21. According to BSE even the third par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder 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. 24. Fact that 86% of the shares of the appellant-company are held by preferential shareholders and the fact that some of those preferential shareholders have allegedly indulged in market manipulation cannot be a ground to consider that all preferential shareholders are market manipulators. In any event, fact that some of the preferential shareholders has indulged in alleged market manipulation, cannot be a ground to suspend the trading in the shares of the appellant-company until further orders. SEBI through its counsel and also in its written submissions stated before us that it would take at least one year to complete the investigation and till then, it would be just and proper to suspend the trading in the shares of the appellant in the interest of investors. In the facts of present case, since there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was without any reference to any bye-law of BSE or any other securities law governing BSE relationship with these entities; * Suspension was without any mention of time period; * Suspension was without any reference to any previous correspondence between BSE and any of 22 entities, such as show cause notice, explanation, reply of these entities; * Only statement for suspension in trading of the entities was - "pursuant to directions received from SEBI, as a surveillance measure trading in the securities of the following companies will be suspended with effect from Wednesday January 7, 2015 until further notice". * Against two of these 22 entities, sign (*) existed - which is explained as - "Scrips already under suspension", when these companies are already under suspension, how can these be suspended another time. * Towards, the end, it was stated - "In case of any clarifications, members may contact Shri Ravindra Shetty (22728792)/Shri Rajesh Gandhi (22728281) - who are Ravindra Shetty or Rajesh Gandhi, not mentioned. 29. Only clarity, to some extent, in Notice of BSE dated January 1, 2015 was that the Notice was issued by BSE - in pursuant to directions received from SEBI, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, which was not put up to Ld. WTM (RKA): * The exchanges were of the view that suspension in non-existent companies would be lifted only when the company is able to satisfy its presence at registered office address along with the assets/operations of the company. * In respect of company where preferential allotment was done, it was decided that SEBI would share its findings and name of the companies with the exchanges. The exchanges were advised to conduct a comprehensive back-listing based on the SEBI analysis and submit their feed-back by December 19, 2014. * Since the above LTCG route has been witnessed in scrips relisting after invocation of suspension, BSE/NSE were advised to tighten their procedure for relisting including a site visit in such cases. 33. The above points mentioned were part of minutes of agenda item and were relevant, important and were in context of subject matter, but were omitted from note seeking approval of Ld. WTM (RKA) for implementation, after 'presumably' the same had been approved by Chairman of surveillance meeting i.e. by Shri Gyan Bhushan, ED, SEBI; but it is certain that this note was routed through the same ED (Gyan Bhushan) for app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very doubtful, and suspension of these companies become unfructuous, since purpose of identification is now tax-evasion which was preventing companies from using mechanism of stock exchanges for purposes of LTCG. 38. In this context, it may also pointed out, no mention - of any securities law (SEBI Act, Securities Contracts (Regulation) Act, or Companies Act, 1956 or any regulation framed under it - exists in the entire proceedings and direction of SEBI to stock exchanges have to have reference to these, since stock exchanges are expected to take action for suspension listed companies with stock-exchanges, which have far reaching legal consequences. However, some objective of this entire exercise is mentioned in para (xii) of draft minutes of Surveillance Meeting held on December 10, 2014 as - "Stock Exchanges agreed that these types of companies are not serving any genuine investor intent and possibly needs to be suspended from trading". Actually the word "intent" was replaced by "interest", by BSE. "Genuine investor intent/interest" - is a new term used by SEBI, without defining as to what it is and certainly, it is not purpose for which SEBI was created, as per SEBI Act, 1992. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eply: Company represented that BSE official visited and asked for Director of the Company and was informed that Mr. Cyrus Bhot - working director - was away and official left his visiting card with receptionist (Mr. Marne) and that Director be informed of his visit. Mr. Bhot - was informed of this by Mr. Marne - who contacted official of BSE immediately Parameter: Regarding the missed out part of the first information i.e. does not appear to be carrying out any operations. Observation: No observation. Reply: Appellant has produced copies of its financial results (audited and unaudited) for years 2011 to 2015; minutes of meeting of BOD during 2013-2014-2015 and have also produced copies of agreements with various parties, in furtherance to it's business. Parameter: Weak Financials and Price Rise of Scrip: Observation: Company is having weak financials and income during last three years was 0.00, 0.2 , 6.79 cr. A question was put to BSE as to how income of a company could be negative and Sr. Counsel replied that it was stated, as such, by Company. Reply: Company has admitted their financial position has been weak in last three years but now Company has entered into new vent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction. 44. One of the grounds of appeal is that decision of suspending the trading in securities and who have signed the I.O. are not the authorized officials who could take such decision. From perusal of earlier notice of BSE, dated January 1, 2015 suspending trading in Appellant scrip, it is seen that no authority or rule, bye-law, regulation is cited. 45. This question was posed to Ld. Sr. Counsel for BSE, who stated that suspension was in terms of Bye-law 21 - "Governing Board may prohibit dealings" and was approved by MD, earlier designated ED. It was pointed out Bye-law 21 of BSE authorized Governing Board and not MD/ED and that Bye-law 21 allows "prohibition of dealings", while BSE's Bye-law 39 allows "suspension of Admission to Dealings on the Exchange". Ld. Sr. Counsel could not deal with the query satisfactorily how suspension can be affected under Bye-law 21, but stated MD/ED was authorized by Governing Board for this purpose. Ld. Sr. Counsel for BSE has produced a resolution of Board of Directors of BSE dated February 12, 2015 to the effect that "MD & CEO was and is empowered to take requisite actions to prohibit dealings in securities pursuant to right vested in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttitude" of BSE is not appreciated. 47. A lot of discussion took place and case laws cited when an action taken without affording hearing to the aggrieved party can be corrected by affording post direction hearing to meet the requirements of law to natural justice we may not go into this question now, since it was done with consent of both the parties and raising this question, after proceedings undertaken and raising question whether it rectifies the earlier shortfall in proceedings or not, is not considered proper. 48. Lastly let us see the Impugned Order dated January 12, 2015 as decided by EMC. The pleas taken by Appellant were: * Are conditions for taking action in emergent situation satisfied, if decision is taken, made known to all, but is to be implemented after six days. * 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing prices at regular interval, dealing with small quantities of shares in pursuance to a scheme or deceptive device or in contrivance in contravention of provisions of SEBI (PFUTP) Regulations, SEBI must take action against such persons, as per law, but fixing a parameter and then tying scrips to same - is in the opinion of this Tribunal - is not the proper course of action and do injustice to investors or distorts the market, which may cause hardship/loss to one set of investors and/or which appears the case here since only 4 persons , not connected to promoters, have traded in shares of Appellant - these people if have done traded in manipulative manner, which can be recognized, should be appropriately dealt with, as per law but if due to action of these 4 persons, trading in scrip is suspended it will affect promoters, who appeared working hard to revive the company or other intending buyers and sellers in this scrip, who want to trade in same but will also be deprived of trading, even if they have not acted for manipulation of the scrip. 54. 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one full year and yet allowed them stock splits when lock-in period ended. This raises more questions about effectiveness, generation and monitoring of surveillance by concerned persons - who catch/notice these activities when they want to. 57. Towards the end, it must be concluded that SEBI/BSE have done everything that was required to do in a very undesirable manner, whimsical and callous manner and SEBI has tried to do get it done through BSE, when only SEBI had the mandate and a duty cast on SEBI - to protect interests of investors, etc. - and is loaded with all unfettered powers to deal with such situations, on emergent basis but both SEBI/BSE are trying to do these things - which are legal and have legal ramifications - without mention of any law, and not obtaining mandatory and unambiguous approval of WTM of SEBI, which were legally required, before advising BSE to act and BSE also acting without proper authorization, taking action under a bye-law when another one was more appropriate, without mention of any law/authority in exercise of powers and thereafter trying to regularize the matter on ex-post facto basis; have not covered themselves in glory, but rather harmed the ..... 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