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TMI Blog2021 (6) TMI 1144X X X X Extracts X X X X X X X X Extracts X X X X ..... han the role of the appellants. The role of the appellants in the instant case is, that they had purchased the shares off market from the six entities who in turn have purchased it from the promoter Company. Whereas, the preferential allottees have been let off, the appellants have been penalized only on the ground of being in proximity with the Company and its directors which finding is perverse in as much as we find that there is no direct connection of the appellants with the Company, its promoters, promoter company or noticees nos. 9 to 11, 75, 77 to 80 who were the main manipulators and the kingpin in the entire scheme. The six entities are not promoter related entities. They have acquired the shares from the promoter Company but they do not become the promoters. The fact that they were de facto controlling the Company is not a relevant issue as it still does not make them promoters of the Company. Thus, merely because the appellants had purchased the shares through off market from the six entities does not and cannot lead to a conclusion that the appellants are connected with the Company or with noticee no. 9 or with promoter related entities or its directors. The finding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh LTP contributors and providing an exit mechanism for the preferential allottee. Consequently, in our opinion, the order of the WTM insofar as the six entities are concerned does not suffer from any manifest error of law. X X X X Extracts X X X X X X X X Extracts X X X X ..... m the six entities upon a consideration and thereafter sold the same and made profits. 5. During the period March 28, 2013 to January 30, 2015 the price of the shares rose from Rs. 441/- to Rs. 1006/- and eventually came down to Rs. 38.85 per share on January 30, 2015. Between March 22, 2013 to June 19, 2013 the price increased from Rs. 472/- to Rs. 1000/-. Between June 20, 2013 to December 16, 2013 the price hovered from Rs. 1006/- to Rs. 910/- per share and from July 10, 2014 to January 2, 2015 the price went down from Rs. 707.50 to Rs. 388.50 and as on January 30, 2015 the prices came down to Rs. 38. 85/-. 6. Noticing the sharp rise in the trading volume and price in the scrip of the Company, SEBI conducted an investigation in the trading in the scrip of the Company and, based on the investigation, SEBI passed an ex parte ad interim order dated May 8, 2015 against 178 entities. The 178 entities were categorized as under:- (i) The Company; (ii) The directors and promoters of the Company; (iii) The promoter related entities. (iv) The preferential allottees; (v) The exit providers; (vi) The LTP contributors; 7. It was observed in the ex parte ad interim order that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embers were directors, namely, noticee nos. 59, 46 and 70. 10. The ex parte ad interim order consequently restrained 178 entities from accessing the securities market as it prima facie found that noticees acted in concert to generate LTCG in order to convert unaccounted income into accounted income with nil payment of tax as LTCG was exempt from tax. The appellants in the interim order was categorized as "promoter related entities" as they had bought the shares from the six entities who in turn had bought the shares from the original promoters. 11. The WTM thereafter passed a confirmatory order dated August 22, 2016 against 122 entities including the appellants confirming the directions passed in the ex parte ad interim order with certain relaxations. Separate orders against other entities were passed by the WTM on June 2, 2016, July 5, 2016 and January 26, 2017. In the confirmatory order, the WTM held that the Company was involved in the modus operandi for the benefit of the preferential allottees, exit providers and promoter related entities and it seems that the transfer of the shares of the promoters to the promoter related entities was under a prior arrangement. The WTM, how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares when the price had been manipulated thereby reaped huge profits. It was further alleged that on March 31, 2013, the original promoters were not holding the shares and had off loaded its holdings to the six entities and, as per the forensic auditor‟s report, the Company was being operated by noticee no. 9, Shri Jagdish Prasad Purohit who was the main person to discover the price at Rs. 441/- per share on the BSE platform. It was alleged that the Company and its directors were part of the manipulative scheme and that all the appellants had violated Section 12A(a),(b) and (c) of the SEBI Act read with regulation 3 and 4 PFUTP Regulations. Insofar as the appellants Dhanuka Family are concerned, the additional ground was that they were party to the alleged fraudulent scheme on account of loan transfer. It was contended that the Dhanuka Family had purchased the shares from Gajakarna, who is one of the six entities, who in turn had purchased the same from the original promoters of the Company (notice no. 15 to 19) and therefore the Dhanuka Family were connected to the Company on account of the loan transaction between the Company and the Bihariji Constructions in which som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other entities and that they had no nexus with the price manipulation of the scrip and that their role was limited to the extent of transferring their shares to the six entities. 17. The WTM further found that there was a nexus between noticee no. 2 who was a promoter and director of the Company with the six entities. It was found that the Company was operating from a flat which belonged to one of the six entities (notice no. 23) in Mumbai. The WTM found that acquisition of shares by the six entities on the basis of a loan taken by noticee nos. 15 to 19 was not based on any cogent evidence and was thus disbelieved. The WTM held that loan given to strangers with whom six entities had no business activities without taking any collateral security was not a bona fide transaction. 18. The WTM further came to a conclusion that the six entities acted as conduits in the scheme of manipulation in the price of the scrip and indulged in a pre-designed plan to manipulate the share price in order to benefit the ultimate buyers, namely, the appellants. The WTM came to a conclusion that the complicity of the appellants in the fraudulent scheme could be judged by the fact that in spite of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dropped. It was further contended that in an identical matter in the case of Mishka Finance and Trading Limited, the role of the entities in the said case was identical to the role of the appellants, namely, that parties had bought shares off market and sold the same at a high price were exonerated on the ground that there was no evidence to prove that they had manipulated the price. It was urged that the case of Mishka Finance and Trading Limited which was decided by the WTM by its order of December 5, 2017, being identical, the appellants should have been given the similar relief. 22. It was further contended that the appellants had no links with the Company or promoters or directors of the Company and that the appellants were bona fide purchasers. It was urged that the foundation of the impugned order is, that the trading in the shares of the Company had been suspended by BSE for many years whose performance and prospectus were so poor that no legitimate investor would even invest in the shares and therefore the appellants must have been assured fraudulent profits. It was urged that this finding is patently erroneous and is based on surmises and conjectures. The finding that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its on their investments on the basis of a fraudulent scheme which involved manipulation in the price of the scrip of the Company. It was contended that the appellants bought shares from the six entities who were closely associated with the Company and that these six entities were also de facto controlling and managing the Company. It was contended that these six entities acquired the shares from the promoters entities in physical form through off market transaction and thereafter sold it to the appellants which can only happen if the appellants knew these six entities. It was also urged that the appellants had close proximity with the six entities because they purchased the physical shares at a lower price than the face value. It was also contended that the appellants had an advantage over the preferential allottees as there was no lock in period of the shares which they have purchased. It was urged that since the Company was making losses and had weak financial fundamentals, a well known investor would not have purchased the shares and the fact that the appellants had purchased the shares gives rise to a preponderance of probabilities that the appellants knew that they would earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the charge of Section 12A(a),(b) and (c) of the SEBI Act read with Regulation 3 and 4 PFUTP Regulations on the ground that they had no role to play in the price manipulation. We are of the opinion that the appellants stands on a better footing than that of the preferential allottees and if the preferential allottees have been let off on the ground that they have not manipulated the price nor had any role to play in the price manipulation, then all the more reasons to hold for the appellants that they had no role to play in the manipulation of the price and are therefore liable to be exonerated. 27. If the preferential allottees who have made huge profits have been let off there is no reason why the appellants should not be let off. The WTM however, has taken an exception on the fact that the appellants had made huge profits. We are of the opinion that it is not a crime to make huge profits unless you show that the profits were made by manipulating the price in collusion and with fraudulent intent with other entities such as the Company and its directors and promoter related entities which in the instant case is lacking. 28. We are of the opinion that the role of the preferential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le inference based on the preponderance of probabilities that the appellants had purchased the shares with this pre-arranged scheme that they would reap in huge profits when the price of the scrip rises. In our opinion this finding is perverse. We are of the opinion that the respondent are adopting dual standards. The issue of weak fundamentals would equally apply to the preferential allottees who were allotted the shares at rate of Rs. 10/- per share but these preferential allottes have been let off. Therefore the standard of weak fundamentals cannot be applied in the case of the appellants especially when on the same footing the preferential allottees have been let off. We are of the opinion that it is business prudence to purchase at a lesser price and sell it at a higher price when the market is up thereby earning profits. Making profits in our opinion cannot be termed illegal or manipulative or fraudulent or violative of the PFUTP Regulations. 32. We also are of the confirmed opinion that the appellants are not connected with the Company or its promoters through the six entities. The appellants are located in all parts of the country and the appellants had purchased the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellants. The finding that the appellants had purchased the shares pursuant to a pre-decided scheme with an assurance of a profitable exit at a manipulated price is purely based on surmises and conjectures without any corroborative evidence. This finding cannot be based on a preponderance of probabilities especially in the absence of reasonable explanation as to why would anyone give the appellants an assurance of a profitable exit at manipulated price. Further, there is nothing on record to suggest as to who had given such an assurance to the appellants. Nothing has come on record to indicate that the six entities had sold the shares for some ulterior purpose. The six entities did not know these appellants directly and unless there was some intention of parting with the profits the charge of selling the shares with huge profits under a pre-decided scheme is farfetched. 37. Insofar as the Dhanuka Family is concerned we are satisfied that the finding that the said appellants were in close proximity with the Company is based on surmises and conjectures. It has come on record that there was business dealings between the Company namely, Bihariji in which loans were taken from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile promoter Company against the outstanding loan. We are in complete agreement with the findings given by the WTM in as much as, other than this statement, there is no other evidence to show that the loans were given to the promoter Company. If there is no business connection with the promoter Company and they are strangers then it is but natural that when a loan is given, then collateral security is taken. In the instant case neither there is any loan agreement nor there is any collateral security to show that some loan was given to the promoter Company. On the other hand, we find that the promoter Company has given evidence to the effect that they had sold the shares to these appellants on payment of consideration which is reflected in their books of accounts. This fact, when these six entities were accosted by the WTM, was not disputed nor any other explanation has been offered. We are further of the opinion that the shares transferred by each of the noticee nos. 20 to 25 were not proportionate to the alleged outstanding loans, if any. Thus, the stand of these six entities that the shares were transferred to them by the erstwhile promoter Company against the outstanding loans c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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