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TMI Blog2017 (6) TMI 1412X X X X Extracts X X X X X X X X Extracts X X X X ..... e an ad interim ex-parte order dated May 8, 2015 (hereinafter referred to as "interim order"), restrained 178 entities, including the Noticees, mentioned above, from accessing the securities market and further prohibited them from buying, selling or dealing in securities, either directly or indirectly, in any manner whatsoever, till further directions. 2. The interim order was passed in view of the prima facie findings about a scheme/device or artifice involving a facade of preferential issue of equity shares of Pine Animation Limited (hereinafter referred to as "Pine") in order to provide fictitious Long Term Capital Gains ("LTCG") to preferential allottees and "promoter related entities" (i.e. entities to whom Pine's promoters directly/indirectly transferred their shares in physical form). It was observed that after the release of shares from compulsory lock-in period, the preferential allottees and the promoter related entities were provided exit at an artificially inflated price by the entities related/connected amongst themselves and with Pine (hereinafter referred to as "Exit Providers"), by misusing stock exchange system, for making unlawful gains and to convert ill-gotten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nadjusted and Rs. 100.6 adjusted to share split) and Rs. 910 (unadjusted and Rs. 91 adjusted to share split). h) During the period from December 17, 2013 to January 30, 2015, i.e., after the lock-in period got over, there was substantial increase in the traded volume of the shares of Pine. It was observed that a group of connected/related entities were acting as counterparties to the trades done by the Preferential allottees/Promoter related entities. The direct/indirect relationship was observed among these entities from the analysis of information in Know Your Client ("KYC") forms, bank statements, off-market transactions amongst them and the information available on the Ministry of Corporate Affairs ("MCA") website. i) The interim order observes that the sharp rise in price and volume of the scrip was not supported by any acceptable market factors such as fundamentals, trading history, corporate announcements, etc. but was on account of non-genuine and manipulative trading in the scrip by certain entities. 3. After passing of the ad interim ex-parte order and during the pendency of the investigation, the restrained entities were given opportunity to inspect documents and fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit/gain made by these persons are as under: Profit/gain made by the preferential allottees Sl.No. Name Number of shares allotted Profit earned on the sale of shares (Rs. ) 1 Brij Bhushan Singal 12,00,000 1,17,22,500 2 Pankaj Dhanji Goshar 6,00,000 87,60,49,695 3 Praveen K Arora 1,00,000 1,07,63,600 (iii) Mr. Madanlal Jain and Mr. Moolchand Jain had received physical shares in off-market deals from Mr. Nimesh S Joshi who had received it from one of the promoters of Pine - First Entertainment. Mr. Mukesh Kumar Jain had received physical shares in off market deal from Mr. Roshni N Joshi who had also received it from First Entertainment. Mr. Vikas Jain had received physical shares in off-market deals from Mahaganapati Financial Services Pvt. Ltd. who had received it from another promoters of Pine - Unique Image. The details of shares purchased by these promoter related entities in off market deals are as under: Table A - Shares purchased in off market deals Sl. No. Name Promoter related entities Promoters of Pine 1 Madanlal Jain Nimesh S Joshi First Entertainment 2 Moolchand Jain 3 Mukesh Kumar Jain Roshni N Joshi 4 Vikas Jain Mahaganpati Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Noticees 7. All the 27 Noticees have filed their replies in the matter. Subsequent to filing of reply, an opportunity of hearing was granted to them on December 30, 2016. Authorised Representative or counsel appeared for hearing on behalf of Mr. Krishnakumar O. Murarka, Mc Pride Distillery Pvt. Ltd., Mr. Mukesh Kumar Jain, Mr. Moolchand Jain, Mr. Vikas Jain, Mr. Madan Lal Jain and Mr. Praveen Arora on December 30, 2016. Mr. Pankaj D Goshar requested for another date of hearing and accordingly, he was heard on January 12, 2017. Other noticees, though filed their replies, did not appear for hearing. Some Noticees have also filed written submissions subsequent to the hearing. The summary of replies and submission of these Noticees are as under: (i) Krishnakumar Omprakash Murarka - Replied vide letters dated June 20, 2015, September 12, 2016 and filed written submissions vide letter dated January 9, 2017. * It has been submitted that he was appointed as Non-Executive Independent Director w.e.f May 28, 2014. The preferential allotment was made prior to his appointment as director in the company. Copy of Form DIR-12 filed pursuant to section 7(1)(c), 168 & 170(2) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014 and there were many occasions when his sell order could not get executed. He is still holding 1,18,75,000 shares of Pine. * The order has been passed in violation of principles of natural justice as no opportunity of hearing was granted to him. * The directions passed against him by the interim order were not warranted as there was no urgency. It is neither preventive or remedial nor curative. (iii) Pankaj Dhanji Goshar (Preferential Allottee) - Replied vide letters dated October 27, 2015, December 23, 2015, March 2, 2016, December 26, 2016 and filed written submissions dated February 1, 2017. * It has been stated that though documents relied upon in the matter have been provided, he was not provided all documents requested by him and therefore he is unable to comprehensively defend himself. * No substantive evidence of any nature for establishing connections or relationship with any of the parties mentioned in the order has been provided, except for Ms. Lata V Shah who is his sister. He had no financial dealings and is not connected or related to any other person whose names are mentioned in the SEBI order. * He invested in the shares of Pine on the basis of recom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isement in newspaper around January 2013 where in one investor wanted to sell his stake in Pine. * That, on majority of occasions, the sale volume of the shares sold by them was insignificant percentage of the total traded volume and cannot by any stretch of imagination be said to be part of the alleged scheme. (vi) Replies furnished by exit providers Dreamlight Exim Private Limited, Duari Marketing Pvt. Ltd., Gajgamini Mercandise Private Limited, Gangeshwari Trades Private Limited, Hanshika Dealers Private Limited, Ladios Trading Private Limited, Mobixa Distributors Private Limited, Muchmore Vincom Private Limited, Rangan Vincom Private Limited, Reachsmart Developers Pvt. Ltd., Rochak Vinimay Private Limited, Rochi Dealcom Pvt. Ltd., Sidhiman Vyapaar Private Limited and Vishnudham Marketing Private Limited are similar. The summary of the replies are as under: * They are neither directly nor indirectly related to Pine or any of its Promoters/Directors and they have not acted in concert with them. * They have denied all the allegations made in the interim order and have submitted that they have not violated the provisions of the SEBI Act and the PFUTP Regulations. * They h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, 2017. * It is not connected/related to Pine nor is part of any alleged group. * It is a bona fide investor and the shares of Pine were bought in the normal course of business on the basis of market information. * It has not manipulated the share price of Pine since the shares were bought by it on the anonymous trading platform of the stock exchange. * With regard to funding for investment in Pine, the entity has stated that funds were received as short term advance from Keshav Madhav Enterprise. Consideration and findings 8. I have considered the allegations levelled against the Noticees in the interim order, their replies, written submissions and other materials on record. I note that in the instant case, the directions issued against the Noticees are interim in nature and have been issued on the basis of prima facie findings. SEBI had issued directions vide the interim order in the matter in order to protect the interests of investors in the securities market. Detailed investigation in the matter is still in progress. Thus, the issue for consideration at this stage is whether the interim directions, issued against the Noticees vide the interim order, need to be conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arka has submitted that he had no relation/nexus either with the preferential allottees or with any other shareholders of the company and that he was appointed as Non-Executive Independent Director of Pine with effect from May 28, 2014 i.e., after the preferential allotment, and he was not involved in day to day affairs of the company. It is observed from the Annual Report of the company for the years 2011-2012 and 2012-2013 that his name is not appearing as a director of the company. The Annual Report of the company for the year 2013-14 mentions that he was appointed as Director of the company from May 28, 2014 for a period of five years. Thus, he was appointed as an independent director of the company only from May 28, 2014 and in such circumstances, in the absence of any other evidence, he cannot be imputed with knowledge about the preferential allotments of shares of Pine, share split and the price manipulation in the scrip of Pine during the lock-in period which happened prior to his appointment as director of the company. Further, there is no prima facie finding in the interim order that he was involved in the manipulation of share price or the volume of share traded on the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. Further, no explanation has been provided as to how they were selected by the Company for making the presentation to them. The fact that such presentations were made to few persons, individually, itself suggests existence of prior understanding between the company, its promoters/directors and the Noticees. The submission of the preferential allottees that they made investment in company out of their own funds has no particular relevance or merit as to counteract the charge of a dubious plan. With regard to the contention of the entities that there is no allegation or evidence of any financial dealings or giving any fund to anyone connected to Pine or connected to the transactions, it is observed that the investigation in the matter is still on and explanations provided by them are not satisfactory. Therefore, at this stage, I am not inclined to accept them. 16. Thus, the preferential allottees named above, have failed to substantiate their claim that they made investment in preferential allotment of Pine as a genuine investor. A stranger cannot make large investment in a preferential allotment merely on the basis of an advice or presentation without having any connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial demand for the shares of the company during the period December 17, 2013 to January 30, 2015. In my view, this cannot be termed as mere coincidence especially when sellers have nexus with the company and buyers i.e. Exit Providers. The facts and circumstances of this case, in my view, prima facie indicate that the transfer of these shares in physical form was under a prior arrangement for the ulterior motive or the end objective of the scheme that has been brought out explicitly in the interim order. In such circumstances and considering the fact that the submissions of the entities are not supported by any evidence, I am not inclined to accept the same. 19. It has been also submitted by these four entities that on majority of occasions, the sale volume of the shares sold by them was insignificant percentage of the total traded volume and cannot by any stretch of imagination be said to be part of the scheme. In this regard, it is observed that these entities are related amongst themselves and have together sold 5,17,000 shares and for a value of approximately Rs. 4,25,30,350. It is observed from Table B in para 6(iii) that the sell value of the shares of Pine sold by these ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding in Pine. In such circumstances, a sudden supply if not matched by similar demand would have led to price fall. Considering this, 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 will be absorbing the supply. It has been prima facie found that, in this case, the Exit Providers created the demand against the supply from the Preferential Allottees and Promoter related entities. The exit providers contributed 47.14% of the gross buy volume of the market in the scrip of Pine and around 81.38% of their purchases were from Preferential Allottees and Promoter related entities. It has been also bought up in the interim order as to how the Exit Providers made possible for the Preferential Allottees/Promoter related entities to sell their substantial stake at a hugely profitable price which cannot be treated as a mere coincidence. Therefore, it is observed that such an elaborate scheme could be successful only if Pine and its promoters/directors, Preferential Allottees, Promoter related entities and the Exit Providers were acting in a pre-determined manner and were ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promoter related entities to offload/sell in large numbers at such price in such a stock that has hardly any intrinsic value. 25. In view of the above, I find that exit providers had prima facie acted in concert and misused the exchange platform to provide exit to the preferential allotees and promoter related entities at a high price thereby enabling these preferential allotees and promoter related entities to make unlawful gains undermining the integrity of the securities market. The submissions made by them have no merit, at this stage. Conclusions and directions 26. Considering the findings as mentioned above, the facts and circumstances of the case do not justify the continuation of the directions passed against Kirshnakuma Omprakash Murarka (AAJPM6827G) vide the interim order dated May 08, 2015. I, therefore, in exercise of the powers conferred upon me under section 19, read with sections 11(1), 11(4) and 11B of the SEBI Act, 1992 hereby revoke the directions as against him. 27. I, however, find that the following Noticees have, at this stage, failed to give any plausible reasoning/explanation for their acts and omissions as described in the interim order and have not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , read with sections 11(1), 11(4) and 11B thereof, hereby confirm the directions issued vide the ad interim ex parte order dated May 08, 2015 against the aforesaid 26 entities mentioned in para 27 above, except that they can:- (a) Carry on 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; (g) deal with or utilize the sale proceeds lying in the aforesaid escrow account under the supervision of the concerned stock exchange as provided hereunder:- i. the sale proceeds may be utilised for investments permitted above; 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 e ..... 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