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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 ..... rey. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. - APPEAL NO. 23 OF 2015 - - - Dated:- 13-3-2015 - J. P. DEVADHAR AND A.S. LAMBA,JJ. For The Appellant : Pradeep Sancheti, Sr. Advocate and Vishwanathan Iyer, Sr. Advocate For The Respondent : P.N. Modi, Sr. Advocate Ajay Khaire, Advocates J.P. Sen, Sr. Advocate, Mihir Mody and Rushin Kapadia, Advocates ORDER Justice J.P. Devadhar 1. I have perused the decision rendered by Learned Member Shri A. S. Lamba. I agree with the conclusion drawn therein to the effect that the impugned orders cannot be sustained, however, for the reasons recorded herein. 2. This appeal is filed to challenge the notice put up by the Bombay Stock Exchange Limited ('BSE' for short) on its website on 01.01.2015. By that notice all the trading members of the BSE were informed that the trading in the securities of 22 companies named thereunder including the trading in the securities of the appellant-company would be suspended with effect from 07.01.2015 until further orders. 3. When the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to non-promoters. After issuance of the preferential shares, the share capital of the appellant-company rose to 3,48,80,000 shares out of which 3,15,89,450 shares are held by the general public (including preferential shareholders) and 32,90,550 shares are held by the promoters of the appellant-company. 8. According to BSE, decision to suspend trading in the securities of the appellant was taken as per the directions given by SEBI contained in the minutes of the SEBI Surveillance Committee Meeting held on 10.12.2014 with the Stock Exchanges. In the said minutes, it is recorded that the SEBI had inter alia appraised the Stock Exchanges regarding the modus operandi of market manipulation that is being perpetrated by certain entities, and to prevent further such damage, SEBI has directed the Stock Exchanges to suspend the trading in the companies, which satisfy one or more of the following parameters:- (a) Non-existent on the address mentioned and does appear to be carrying out any operations. (b) Preferential allotments made. Price of the scrip increased with very low volume during one year period of lock-in. After lock-in huge rise in volumes and exit of preferential allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and emergent situation which required the BSE to suspend trading in the securities of the appellant immediately without hearing the appellant. In such a case, if BSE could wait for seven days, then BSE could very well have issued show cause notice and pass appropriate orders after hearing the appellant. As the BSE has failed to do the needful the impugned notice dated 01.01.2015 is liable to be quashed and set aside. (d) Bye Law 39 framed by BSE, deals with suspension of trading, whereas, Bye Law 21 deals with the prohibition of dealing in securities. In the present case, trading is suspended by BSE and that power could be exercised only by the Governing Board of BSE. Since the impugned action is not taken by the Governing Board of BSE, the impugned action is bad in law. Although Bye law 39 is amended by BSE on 16/01/2014 and instead of the Governing Board the 'Exchange' is empowered to suspend dealings on the Exchange for such period or periods as it may determine, the said amendment does not empower Senior General Manager, (Surveillance and Supervision) of BSE to suspend trading as has been done in the present case. Although, Bye Law 39 refers to the standard operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is not correct, because, name plate was in fact displayed outside the office premises as is evident from the photographs furnished by the appellant to the BSE. As regards the allegation that no employee of the appellant was present when the BSE official visited the office, it is submitted that Mr. Morne, an employee of the appellant present at the office, had met the BSE official and had informed him 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. Bhot over the telephone immediately and Mr. Bhot, spoke to the BSE official on telephone and offered to give all assistance or information by personally coming to BSE on the next day. Thereupon, the BSE official told Mr. Bhot that he would consult his seniors and would intimate the time during which Mr. Bhot could meet the BSE officials on the next day. However, the BSE official did not contact Mr. Bhot on the next day. In these circumstances, it is submitted that the decision of SEBI that the appellant-company neither exists at the registered address nor is carrying on any business is wholly unsustainable. (h) The second param ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be found with the price rise due to trading in the scrip of the appellant. (i) When preferential shares are issued with lock-in period, it is obvious that after the lock-in period is over, the preferential shareholders are entitled to off-load the shares, if they choose to do so and therefore, mere fact that there is spurt in trading activities after the lock-in period cannot be a ground to suspend the trading in the scrip of the appellant-company. Fact that some of the preferential shareholders in the appellant-company, namely, Dilip Jiwrajka, Surendra Jiwrajka, Ashok Jiwrajka and Kamal Jajoo were also preferential shareholders in Moryo Industries Ltd. and Radford Global Limited and in those cases they have been restrained by SEBI from buying, selling or dealing in the securities market either directly or indirectly in any manner till further directions cannot be a ground for suspending the trading in the securities of the appellant. Assuming that SEBI/BSE are investigating the role of those preferential shareholders in the appellant-company, SEBI/BSE may impose restriction on those preferential shareholders but that cannot be a ground to suspend the trading in the shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned Senior Advocate appearing on behalf of BSE submitted as follows: (a) Pursuant to a reference from the income tax department that Stock Exchanges are used as a platform for illegal gains through market manipulation, SEBI on investigation passed ad-interim ex-parte orders in case of Moryo Industries Limited on 04/12/2014 and in case of Radford Global Limited and First Financial Services Limited on 19/12/2014. According to SEBI, the modus operandi for market manipulations were as follows:- (i) the concerned companies were listed companies with weak financials poor performances, having barely any business and their stocks were traded at meager prices; (ii) the concerned companies then raised large amounts by preferential allotment of shares which had a lock-in period. (iii) funds received on preferential allotment were not used for the purpose as disclosed and there was no major change or improvement in the performance of the concerned companies, yet there was considerable increase in the prices of the shares of those companies. (iv) the market prices were manipulated by parties who were found to be connected to the concerned companies and/or the allottees, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is the duty of the CEO to give effect to the directives of SEBI and the Managing Director is also obligated to do so as per regulation 25(5) of Securities Contracts (Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012. Apart from the above, the Board of Directors of BSE on 12/02/2015 have confirmed that the MD and CEO had the requisite power to pass the order and suspension of trading under Bye Law 21 and it has also confirmed, ratified and approved all actions taken on 01/01/2015. (e) Regarding the first parameter set out in the minutes dated 10/12/2014, it is submitted that as per the site inspection report, there was no name plate/board of the company and there was only the name plate/board of Sheorey Digital Systems Limited ('Sheorey' for short). Photograph relied upon by the appellant purports to show the name plate of the appellant immediately below the name plate of Sheorey, whereas, the photograph taken by the BSE official shows only the name plate/board of Sheorey. Therefore, the EMC has correctly concluded that the name plate of the company was affixed after the Exchange official's visit to circumvent the observations made by the BS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old part of their allotted shares at abnormal prices of about ₹ 26.50 (gain of about 165%) ₹ 44.95 (gain by 349%). Preferential allottees have also made various off market transfers and the trail of the share movement will have to be traced in the investigation to see the consequences and the conclusion to be drawn. (k) Various decisions relied on by the counsel for appellant relate to final orders passed by the concerned court/authority and none of those decisions related to ad-interim orders passed in emergency situations and pending investigation as is the present case. Hence none of those decisions have any relevance in the present case. (l) In an emergent situation it is open to BSE to suspend trading without hearing and grant post decisional hearing. In the present case post decisional hearing is granted and reasons are recorded in the order dated 12/01/2015. (m) The third parameter specified in the minutes dated 10/12/2014 are also satisfied in the present case, because, admittedly during the previous three years the company's income has been shown in its own accounts as nil or negative and it has suffered only losses. During the years 2001 to 2012 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/01/2015 being Saturday and Sunday there were no trading on those two days and BSE always gives advance notice of 3-4 trading days time before suspension so that innocent investors can sell off the shares they hold, if they so desire. Therefore, making the order operative with effect from 07/01/2015 would not invalidate the impugned order. (r) When a prima facie view is formed that there is market manipulation, then, pending investigation, suspension of trading is the proper course to prevent further damage at the interim stage. In the present case, it is necessary to conduct a detailed investigation and pending such investigation, as the company has satisfied all parameters laid down by SEBI, the suspension in the trading ought to be implemented and continued to prevent further damage to the market and the investors as directed by SEBI. 11. Mr. Sen, Learned Senior Advocate appearing on behalf of SEBI submitted as follows:- (a) BSE has suspended the trading in the securities of the appellant company on the basis of directions, which are formulated in Surveillance Meeting held on 10/12/2014 with a view to protect the interest of investors and the securities market. (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parameters set out in the minutes of the Surveillance Committee Meeting held on 10/12/2014, the trading in the scrip of appellant as also other companies were suspended. (f) In the instant case, minutes of Surveillance Committee Meeting held on 10/12/2014 were approved by the Executive Director-Surveillance on 16/12/2014 and a specific approval was obtained from the Whole Time Member of SEBI on 19/12/2014. Accordingly, vide e-mails dated 19/12/2014 and 29/12/2014 Stock Exchanges were called upon to immediately comply with the minutes dated 10/12/2014. (g) The modus operandi, in these matters appears to be that the entities/persons wanting to convert their unaccounted money to white money, approaches Key Operator. The Key Operator and other entities find companies, which have weak financial, poor performance having barely any business and their stocks are traded at meager prices. The concerned companies then raise large amounts by preferential allotment of shares which have a lock-in period of 1 year. The market prices are manipulated by the parties who are found to be connected to the concerned companies or the allottees and the prices are pushed up substantially on relative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ential shareholders of those companies and other related parties had indulged in market manipulations. If SEBI on investigation had found, prima facie, that the appellant has indulged in market manipulation, then SEBI would have passed ex-parte ad-interim order against the appellant as has been done in case of aforesaid three companies. Very fact that SEBI has not passed any order against the appellant and has directed BSE to suspend the trading in securities of those companies which fulfill the three parameters set out in the surveillance minutes dated 10/12/2014 clearly shows that apart from presuming that the companies which satisfy the three parameters set out in the surveillance minutes dated 10/12/2014 must have been involved in market manipulation, there is no other material to suggest that prima facie the appellant is involved in the market manipulation. 14. In the ex-parte-ad-interim order passed by SEBI on 04/12/2014 against Moryo Industries Ltd., its promotes, directors, preferential allottees and Moryo group entities, it is specifically recorded that Moryo Industries Ltd. did not have any business activity, that there were no corporate announcements and that certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during his surprise unit, there was no name plate/board of the appellant and only the name plate/board of Sheorey Digital Systems Limited ('Sheorey' for short) was displayed at the office premises. 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. In the present case, the facts and the documents produced by the appellant in support of its contention reveal the following:- (a) The record of Registrar of companies shows that Sheorey and appellant have the common address as the registered office address. (b) The BSE official who visited the premises does not dispute that Sheorey is in possession of the premises in question. (c) Documentary evidence is produced to show that Sheorey is a group company and Sheorey has permitted the appellant to use part of the said premises. Terms on which Sheorey has taken the premises in question do not specifically bar a group company from using part of the premises given to Sheorey. (d) Appellant has produced telephone bills, bank state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re prices of the appellant-company started rising after the funds were pumped in after issuance of preferential shares and the share prices rose further, on account of the trades executed by some of the preferential shareholders after the lock-in period, cannot be the sole ground to presume that the appellant-company is involved in market manipulation. Admittedly, BSE approved the third issue of preferential shares at a premium of ₹ 23/- per share. It is not the case of BSE that the appellant has made any misrepresentation to the BSE in issuing the preferential shares at a premium. Therefore, 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. 22. Neither the SEBI nor BSE have deemed it fit to initiate action against those persons whose trades are responsible for the rise in the script of the appellant from ₹ 2.67 per share to ₹ 149/- per share. If the price rise is due to market manipulation, then, instead of catching the market manipulators, the trading in the shares of the appellant-company has been suspended at the instance of SEBI. As a market regulator, SEBI is bound to take action against those who have prima facie indulged in market manipulation and it is not open to SEBI to direct the Stock Exchanges to suspend the trading in the securities of the companies if they satisfy certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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. 26. In view of aforesaid decision, questions as to whether the impugned order dated 01.01.2015 is violative of the principles of natural justice, the question as to whether the draft minutes dated 10/12/2014 have the sanctity of law, and the question as to whether the EMC of BSE had power to suspend the trading in the securities of the appellant-company would become academic and hence are not gone into. Per : A.S. Lamba 27. This appeal has been preferred by 52 Weeks Entertainment Ltd., formerly known as Shantanu Sheorey Aquakult Ltd., (Appellant) against directions issued by Bombay Stock Exchange Ltd. (BSE), Respondent No. 1 on January 1, 2015 suspending Appellant alongwith 21 others from trading of securities, with effect from January 7, 2015, until further notice; and against Securities and Exchange Board of India (SEBI), Respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... huge rise in volumes and exit of preferential allottees. This may be coupled with stock split; (c) Companies having weak financial and the price rise is not supported by financials. 30. Considering the above, the stocks which broadly fulfill any of the parameters stated above, an immediate need was felt to take stern actions so as to contain any damage to the market integrity. How market integrity is damaged by above features, was not explained. Accordingly, SEBI advised the exchanges to immediately shortlist the scrips by applying the above parameters and suspend trading in such scrips with immediate effect, under intimation to SEBI. 31. For implementation of decisions of SEBI Surveillance Meeting held on December 10, 2014, a note was put up to Ld. WTM (RKA) for approval, by Integrated Surveillance Department of SEBI and relevant extract of same is: (a) Non-existent on the addresses mentioned and does not appear to be carrying out any operations; (b) Preferential allotment made. Price of the scrip increases with very low volumes during 1 year period of lock in. After lock-in huge rise in volumes and exit of preferential allottees. This may be coupled with stock spl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtained. 36. Thus some decisions were taken in meeting of SEBI surveillance meeting on December 10, 2014, all the decisions were not put up to Ld. WTM (RKA) for approving implementation of same since parts of minutes were not put up and Ld. WTM (RKA) did not approve the criteria and wanted the same to be fine tuned with some observation on tax-evasion but without revision of criteria as per noting of Ld. WTM (RKA), minutes in original were sent by SEBI to Exchanges for immediate action with direction that Exchanges shall continuously fine tune the criteria for ensuring appropriate immediate action against the companies which are misusing/advising/manipulating the stock market for tax-evasion , - which is different from objective of SEBI Surveillance Meeting dated December 10, 2014, viz. deal with modus operandi being used by entities for Long Term Capital Gain. 37. The most significant aspect of above is that objective of entire exercise has been changed from dealing with aspect of LTCG through mechanism of stock exchanges - which to the best of this Tribunal's understanding is a legitimate activity and not barred by any law/enactment/executive order of the Government - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant in the trading of Appellant Company. Respondents have not informed the Appellant about any surveillance issues as far as trading in securities of Appellant Company is concerned. Impugned order has created chaotic situation for the Appellant Company and its shareholders. Respondent No. 1 has not passed reasoned/speaking order while conveying its decision to suspend trading in securities. Approval of competent authority for effecting suspension has not obtained. I.O. suffers from legal/technical deficiencies, including interests of retail investors, ignorance of provisions of law, lackadaisical approach and inept handling of the matter. I.O. not based on show cause notice. 40. On first day of hearing of the case by this Tribunal, it was decided that BSE will afford an opportunity of hearing to the Appellant based on a reference from BSE to Appellant stating parameters for taking a decision on suspension of scrip and BSE's observation on each of the parameters and pass suitable order in the matter. Parameter, observation of BSE and Reply of Appellant are stated as follows; Parameter: Non-existence of company at registered office address avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in scrip cannot be linked to exit of preferential allottee. 41. The allegations as in SCN, observations of BSE, and submission of Appellant were placed before Exchange Management Committee (EMC) of BSE and this committee has decided that it is necessary that a detailed investigation be carried out by the Exchange/SEBI. Pending such investigation, as the company has satisfied all parameters laid down by SEBI, the suspension in the trading of the securities of the company ought to be implemented and continued as an interim preventive measure and to maintain orderly development in the securities market, such suspension is essential and in the interests of market and the investors, and the same is as directed by SEBI. 42. It must be clarified, at this stage, that BSE or any Stock Exchange has no mandate to act for the objective, as stated above and stating this in its decision to keep Appellant Company under suspension is not justified since this mandate is available to SEBI, as per SEBI Act, 1992 and, at the most BSE can state that parameters indicated by SEBI, are met by the Appellant, and hence Appellant is suspended, as per parameters specified by SEBI. 43. It was one o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of same was sufficient, if it existed - but by conferring this authority, when he had acted before hand, gives rise to suspicion that such an authority did not exist prior to January 1, 2015. It is stated in resolution that - Bye law 21 of BSE empowered MD CEO to take requisite action to prohibit dealings in securities, but then how MD CEO exercised their power to suspend trade - which is as per the BSE Bye-law 39. When suspension and prohibition are different measures and under different Bye-laws, then how one can be used to exercise power under the other. As a matter of fact BSE could take the plea that suspension was under Bye-law 39, but then here MD CEO does not have inherent power to exercise the same, unless specifically authorized by GB, but since the same did not exist on the date the same was exercised by MD CEO, BSE in now tying itself in knots to make us believe that same existed, whereas same did not exist on January 1, 2015. If MD CEO of BSE has acted within power conferred on him by GB or inherited by him, there was no need to say the last sentence in resolution - that In any event, the decision taken by the EMC on December 24, 2014 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter 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 - necessary ground work for same has been done. 51. In any case, weak financial is not a good parameter to suspend trading of a company on Stock Exchange and as per Appellant 30% of listed companies on BSE are loss-making, at any time and then their trading is to be suspended. 52. Price of scrip depends on so many factors for scrips of company's operating in different segments and sectors that is not possible to relate the price of the scrip on simply one or two such factors. As a matter of fact these factors may run into hundreds and still it may not be possible to say that all have been accounted for. As a matter of fact, it is foolhardy on part of SEBI/BSE to go into this question, which in any case is determined by market and only requirement of SEBI (through not of BSE) is to act in investors interests in securities and to promote development and regulation of securities market and if it is seen that the same is being compromised, manipulated, rigged; SEBI is duty bound to act decisively, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 56. It is now being stated by SEBI/BSE that these companies were almost non-existent companies with hardly any activity, let alone profit, in the last 3-4 years, and had weak financials although - quite a few of these were delisted/suspended for non-payment of exchange's fee etc. but it is strange that BSE recommended these company's case to SEBI for permission to raise funds through rights issues to outsiders, not once but three times in most of these cases, despite knowing fully well about their no activities, non-existence, weak financials but also allowed these companies rights issue based on what - this Tribunal does not know but after having these companies file DRHP with them - offer suggestion for changes or issue observations, which was to be necessarily carried out, in terms of SEBI (ICDR) Regulations, 2009; did SEBI/BSE not know these facts before recommending/allowing them to raise funds through rights issue, and also did not observe abnormal price ris ..... 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