9911796707
TMI Blog2001 (10) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in copper and aluminium manufacturing business. The appellant's shares are listed on Stock Exchanges at Mumbai (BSE), Calcutta, Delhi, Ahmedabad and also traded at the National Stock Exchange (NSE). 3. The respondent is a statutory regulatory body established under Section 3 of the Act. It is mandated to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. 4. The respondent carried out an investigation into the alleged price manipulation in the scrips of certain companies including the appellant, especially during April and May, 1998. Investigation revealed that a set of persons had cornered large chunk of shares of the appellant, at BSE and NSE resulting in distortion of market equilibrium. Based on the findings of the said investigation, the respondent, on 20-12-1999 issued show-cause notice to the appellant and its directors/officers, viz. Shri Anil Aggarwal, Shri Shashikant and Shri Tarun Jain. In the said show-cause notice it was inter alia alleged that: (i) There were large volumes coupled with fluctuations in prices at the bourse in respect of the appellant's shares specially during Apri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lings/linkage with Damayanti Group. (vi) If the building up of the positions is seen in the perspective of developments at the corporate level, it would bring to light the probable reasons for connivance of the appellant with Mr. Mehta in manipulating the prices of the shares of the appellant. The share price of the appellant was hovering in the range of ₹ 175 to ₹ 200 since September, 1997. A resolution was passed by the appellant on 16-2-1998 whereby it was decided to issue on preferential basis 90 lakhs warrants to Shri Anil Aggarwal, the promoter of the appellant and his associates. The warrant holder was entitled to apply for one equity share against each warrant held by him, after the expiry of 18 months. The warrant was priced @ ₹ 181 per share as per SEBI guidelines. This offer was accepted by the promoters and by June end 1998 they applied for these 90 lakhs warrants by paying 10 per cent of the face value which came to around ₹ 16.20 crores. (vii) A public offer was made on 17-2-1998 by the appellant for acquisition of 10 per cent equity of Indian Aluminium Company Limited ('INDAL') @ ₹ 90 per share. Later, Alcan, a majority shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erlite Industries Ltd, especially during April and May 1998. In the scrip of Sterlite the price moved from ₹ 162 on 17-2-1998 to ₹ 385 on 27-5-1998. Sterlite has not disputed the above price movement which is a fact borne out of actual trading details and price at the stock exchange. I find that the price movement in the scrip of Sterlite was not in conformity with the Sensex/Nifty movements. During the period from 1-4-1998 to 4-6-1998, while the BSE Sensex showed a decline of 11 per cent i.e. from 3969 to 3546 and Nifty showed a decline of 5 per cent from 1081 to 1027, the price of Sterlite share rose by 71 per cent. I find that this rise in price was accompanied by abnormal volumes in these shares both at the BSE and NSE during this period. At the same time, I find that the price movement in the scrips of Sterlite vis-a-vis the price movement of the shares of other companies in the same industry segment was highly abnormal. I do not find any merit in the submissions of Sterlite that rise in the price of scrip of Sterlite was due to open offer for Indal, recommencement of commercial production of Copper Smelter, preferential allotment or declaration of half-yearly resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through a set of brokers built up large purchase positions in the carry forward segments in the scrip of Sterlite Industries Ltd. at the BSE which increased from settlement to settlement. The outstanding purchase positions were abnormally high in the scrips of Sterlite and it went to the extent of 3.8 per cent of total equity of Sterlite Industries Ltd. This increase in carry forward positions was accompanied by a corresponding increase in the scrip prices. In Sterlite Industries Ltd., the hawala rate (closing rate on the date of end of settlement) moved consistently from ₹ 260 to ₹ 350 in only five settlements. The settlement wise details of outstanding position along with Hawala Rate in Sterlite are as under :-- Sett. No. Carry forward Purchases Carry forward Sales Purchase V/s Sales (No. of times) Hawala Rate (Rs.) 1. 624200 169300 3.69 260 2. 782800 307300 2.55 305 3. 326600 218200 1.50 320 4. 350300 204300 1.71 325 5. 575200 222000 2.59 350 6. 666900 197800 3.37 330 7. 734700 169400 4.34 305 8. 768500 170400 4.51 305 9. 788900 147300 5.36 315 10. 1217600 139800 8.71 345 11. 1797400 299900 5.99 270 12. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as purchased about 3 lacs (6 lakhs ?) shares at the cost of ₹ 11.75 crores. It was stated that when Malco purchased these shares the sole intention was to help the BSE to avert a major payment crisis on the premium exchange of the country and not to manipulate the price of Sterlite or bail out any particular group of brokers. Sterlite in its reply has stated that Malco is mainly an affiliate by reason of only two directors on the respective Board of Directors being common. It was further stated that two companies are distinct corporate entities. It is pertinent to note that Sterlite in its Letter of Offer for acquisition of shares of Indal has stated Malco as one of its Group Companies. Sterlite has further stated that in June, 1998 any such payment crisis would have without any fault of Sterlite further tarnished the corporate reputation of Sterlite. At the same time this was perceived as an opportunity by the promoters to acquire some further shares at an attractive price. It is further stated that purchase of shares by promoters is permissible under the regulations upto 5 per cent of the capital of the company. It is pertinent to note that the creeping limit for acquisitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... months from the date of allotment at a price which would have been at a discount of 10 per cent of the average of the weekly high and low of the closing market price of Sterlite Industries Ltd. during the 10 weeks immediately preceding the conversion date. However, this price was subject to minimum conversion price of ₹ 350 per share. In case the OCPs (OCPs having face value of ₹ 10 each) were not converted, the same were redeemable in two equal instalments at the end of 3rd and 4th year from the date of allotment. For generating funds to the tune of ₹ 817.70 crores, it was proposed to issue OCPs worth 333 crores, arrange loans from ICICI to the extent of ₹ 200 crores, procure Bank Guarantees from Bank of Nova Scotia, Banque Nationale De Paris and ABN Amro Bank to the tune of ₹ 110 crores, etc. If one see the price movement since 25-5-1998, as tabulated below, it would be clear that price immediately touched a high ₹ 385 (?) on 27-5-1998. Prices started falling off after that. Date No. of shares Price 25-5-1998 1071000 350.10 26-5-1998 1204300 368.90 27-5-1998 1337600 360.90 28-5-1998 1180500 350.20 29-5-1998 803000 346.85 01-6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .6) was available in the office of Damayanti Group which is a front for Shri Harshad Mehta indicated that there was a nexus between El Dorado and Damayanti Group in this regard. The providing of list of the brokers who would like to sell these shares by management of the Sterlite Industries Ltd. coupled with transfer of funds from MALCO to Dil Vikas under the garb of clean loan proves a nexus between Damayanti Group on one hand and Sterlite Industries Ltd. on the other hand. The sellers who sold these shares to El Dorado were having dealings with Damayanti Group. This can be found from the table below : Clearing No. Name of selling broker Quantity 553 P.R.Shah 40000 566 S.N. Nangalia 39900 200 GNH Global Securities 118200 581 R.R. Mohta 30000 519 N.C. Jain 15000 645 S.N. Tara 25000 6.8 It was also found that the transaction with Shri Ashwin Khurana were in the nature of financing transactions and have been given colour of purchase and sale of shares as (i) no payments were received from the client and purchase consideration was adjusted against amounts borrowed from Shri Khurana earlier (ii) no deliveries were given to the client and they were kept with the br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icked up by MALCO only. The persons who were bailed out or whose positions was taken up by Eldorado are as under : Clearing No. Name of selling broker Quantity 739 Lalkar Securities 58,800 200 GNH Global Secs. Ltd. 2,32,000 747 SVS Secs. Pvt. Ltd. 21,300 141 Sanghvi Bros. Brokerage Ltd. 40,000 553 P. Regulation 3(1) Shah 70,600 566 S.N. Nangalia 1,35,000 394 KNC Shares & Securities 22,500 482 M. N. Agarwal 20,000 581 R.R. Mohta 53,500 295 J.H. Patel 40,000 785 T.C.P. Slock Brokers 5,000 Total 6,99,500 The actual shares were around 6,06,000 shares as some of the transactions entered as bulk deals were cancelled. However, the trade log of BSE showed the above figure of 6,99,500. 7.2 Sterlite has admitted that MALCO has forwarded ₹ 11.75 crores of El Dorado in view of the payment problems. Sterlite had admitted that BSE's Governing Board members had approached Sterlite with a view to avoid market having a payment crisis and for avoiding any draw down from trade guarantee funds in order to fulfil commitments. Sterlite has admitted that any such payment crisis would have further tarnished the corporate reputation of Sterlite and at the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mily concerns M/s. Crimson Securities and advised their clients MR. Ashwini Khurana of Delhi to purchase another 1.5 lakh shares. Even if the statement of these above persons are not taken into consideration, I find that such large chunk of shares of Sterlite shares were purchased through 'all or no deals' in BSE terminals by synchronising the timings of the logging of trades after the official hours at the pre-determined price. It is very difficult to conclude that in such a large deal which was in the form of negotiated deal, the buyers and sellers were not knowing each other. 9.1 From the above circumstantial evidence, it is very difficult to conclude that Sterlite was not involved in the price or market manipulation in the scrip of Sterlite or that the same was a normal transaction. At this juncture, I would like to refer to the Supreme Court judgment which is stated as under: Shivajirao Nilangekar Patil v. Mahesh Madhav Gosavi AIR 1987 SC 294. 'There is no question in this case of giving any clean chit to the appellant in the first appeal before us. It leaves a great deal on suspicion that tampering was done to please Shri Patil or at his behest. It is true that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision Bench of the Bombay High Court in the matter of R.R. Bohra v. SEBI (SCL 1998) has held that Section 11B of the SEBI Act is an enabling provision enacted to empower SEBI to protect the interest of investors and to promote the development of and to regulate the securities market and to prevent malpractices and manipulations inter alia by brokers. Such an enabling provision must be construed so as to subserve the purpose for which it is enacted. I, therefore, do not agree with the submission that SEBI has no power to prohibit Sterlite from accessing the capital market. 10.4 After taking into consideration the material and evidence gathered during the investigations in the price manipulations of Sterlite the calculated manner in which manipulations has been caused the gravity and seriousness of the offences which could cause great harm to the fairness and integrity of the securities market. I am of the view that integrity of the securities market has been effected. In order to ensure that the confidence of investors in securities market remains unimpaired, it would be necessary to issue suitable direction. 10.5 In view of the above, I in exercise of powers under Section 4(3) r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2000. There was no response. On 20-3-2001 the respondent wrote to the appellant advising to attend the hearing on 3-4-2000 at 3.30 p.m. and present its case and all the issues and objections in respect of the show-cause notice, which obviously included the request for cross examination of the witnesses. Shri Sundaram stated that on 3-4-2001 before the scheduled time of the hearing, the appellant filed a letter requesting the respondent to fix the hearing any time within a week, so as to enable it to have the benefit of the presence of its senior counsel. He pointed out the endorsement on the office copy of the letter filed with the appeal to show that the letter marked 'urgent' was delivered at the respondent's office at 1.30 p.m. 3-4-2001 i.e., before the scheduled timing of the hearing. Shri Sundaram stated that the respondent did not respond to the request and without giving any opportunity to the appellant to put forth its version, on 19-4-2001 the respondent passed the order. He stated that the sequence of events narrated above, as also disclosed in the impugned order would show that the delay in investigation was not caused by the appellant, that though the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Regulations, under which regulation 4 on 'Prohibition against market manipulation', regulation 5 on 'Prohibition of misleading statements to induce sale or purchases of securities' and regulation 6 on 'Prohibition on Unfair Trade Practice Relating to Securities' are put, is titled 'Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market'. According to him the object of the regulation, is thus clear that in the absence of any fraud or deceit the provisions of the regulation would not apply, that in the absence of any finding that the transaction was intended to defraud or deceit someone, there is, no further scope for any investigation as to who did it and why did it. Shri Sundaram stated that deceit through market manipulation is what the regulation prohibits. In this context he stated that there is not even a whisper of such a charge against the appellant anywhere in the order. The learned senior counsel stated that according to Clause (a) of regulation 4, no person shall, effect, take part in or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to artificially raise or depress the prices and that there was not even a trace of deceit in the transactions. Shri Sundaram submitted that there is nothing on record to show that the transaction involving 3 lakh shares referred to by the respondent in the order, attracted the provisions of regulation 4(a). 14. Shri Sundaram further stated that regulation 4(d) which prohibits any person entering into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the market price of securities, is also not attracted to the case. He submitted that only those transactions in securities not intended to effect transfer of beneficial ownership but intended only to distort the market prices of securities, alone would attract regulation 4(d). In this context he stated that from the factual position it is clear that the shares were purchased at the prevailing market price on delivery basis and it was intended to register in the name of the clients, and not to distort the price mechanism, and therefore it cannot be said that the transaction attracted regulation 4(d). 15. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o avoid a market crisis at the instance of BSE, and therefore the question of distorting the market did not arise at all; further the beneficial ownership of six lakh shares purchased was transferred to MALCO. He further stated that the fact that MALCO had instructed El Dorado to place the shares with financial institutions and in case it did not fructify, the shares would be purchased by MALCO, indicates the genuineness of the transaction, that if the intention was to manipulate the market, MALCO would have directed El Dorado to place the shares with the brokers. He further stated that the impugned order itself clearly states that the shares were purchased by MALCO and the purchase was also funded by MALCO and as such the appellant cannot be said to have violated regulation 4(d). He also pointed out that nowhere it has been stated in the order that there was any fund flow from the appellant for the purchase of the said 6 lakh shares. MALCO used its own funds. Shri Sundaram submitted that the factual position completely belies the contention that the appellant had any intention to manipulate the share price. He further submitted that the scope of the provisions of regulation 4(a) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 10b-5 thereunder, the Division must prove, as it has done here, that one or more individuals engaged in any act, practice, or course of business which operated as a fraud or deceit upon any person in connection with the purchase or sale of the security (SEC v. Kimmes, 799 F. Supp. 852, 858 (ND III 1992). In establishing a violation of Section 10(b) and Rule 10b-5 the commission must show that the individual acted with scientier (Aaron v. SEC 446 US. 680, 701-02 [1980]). "Scienter is an element of violation of Section 17(a)( 1) of the Securities Act and Sections 10( b) and 15(c) of the Exchange Act - the Supreme Court has defined scienter as "a mental state embracing intent to deceive manipulate or defraud" (Ernst & Ernst v. Hochfelder 425 US 185, 193 n. 12 [1976]). "Recklessness in sufficient to satisfy the scienter requirement" "[Sand Strand Corporation v. Sunchemical Corporation 553 F. 2d 1033, 1044 (7th cir.)"] 19. Shri Sundaram stated that the law in this regard is materially identical in India and in USA and therefore the decision of the US Courts could be followed for guidance. 20. The learned senior counsel submitted that there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es also constitute a series of transactions. The series of transactions in Of Counsel securities caused an increase in the price for Of Counsel units. Two factors in particular indicate that Wolf & Co., Hibbard, and Wegard artificially inflated the price of Counsel securities. First, there was virtually no retail demand for Of Counsel securities during the rapid price rise. During the entire period from November 16, 1993 through December 8, 1993 only 1.9% of the Of Counsel units volume involved retail customers. And second, there was no publicly disseminated information regarding Of Counsel to account for the price increase from the $ 3.25 IPO price to the high price of $ 8. [18]." It is settled Commission law that "one who accumulates at rising prices and sells out at prices created by his buying efforts will be presumed to have raised prices for the purpose of inducing other to buy. Only the strongest countervailing evidence will be sufficient to outweigh this presumption". Halsey, Stuart & Co., 30 S.E.C. at 124 n. 28, citing Opinion of General Counsel, Section Ex. Act Rel. No. 3056 (1941); see also VIIIL. Loss & J. Seligman, Securities Regulation, 3974.75 (3d.ed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms, that in fact the entire finding of the respondent that the 3 lakh shares were purchased by the appellant is based on the untested evidence of Shri Gandhi. Shri Sundaram stated that Shri Gandhi's statement that Shri Murthy had informed him about the availability of 3 lakh shares of the appellant with certain brokers has been adopted by the respondent to hold that Shri Gandhi purchased those shares as instructed by Shri Murthy though Shri Murthy had denied the version. Shri Gandhi had also stated that it was Shri Murthy of MALCO who agreed to provide funds for buying approximately 6 lakh shares of the appellant in June, 1998. Shri Sundaram submitted that in any case Shri Murthy, as could be seen from his evidence had denied of having given any instructions to Shri Gandhi to buy three lakh shares and as far as funding to purchase 6 lakh shares by MALCO is concerned, the factual position remains undisputed. 23. The learned senior counsel submitted that MALCO did not finance 3 lakh shares on delivery basis purchased by El Dorado, that the loan of ₹ 5 crores given by MALCO to Dil Vikas, a registered RBI satellite dealer for Government securities was deposited by Dil Vikas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said transaction differently to support its story. Shri Sundaram submitted that from Bimal Gandhi's evidence it is clear that MALCO was not informed by Dil Vikas that the advance was to buy the appellant's shares. Further from Shri Gandhi's deposition (question 18) it is clear that he did not remember about the contact person for the purchase of these shares that it is to be noted that Shri Murthy has also stated that he also did not say'. In answer to Question 21, Shri Gandhi had admitted that 'the firm regularly do corporate finance with Sterlite Group which include MALCO'. Shri Sundaram submitted that in the light of the factual position stated above the advance given by MALCO cannot be considered as an advance to buy the appellant's shares as has been alleged by the respondent. 26. Shri Sundaram further submitted that the respondent has not fully appreciated the factual position while drawing conclusions. In this context he referred to Annexure 'A' to the appeal, therein the market price and volume traded on BSE and NSE have been shown and stated that as per the said Annexure the price of the scrip was opened on 8-4-1998 at 296 and closed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel stated that the inference drawn in para 6.8 and 6.9 of the order is not based on any reasonable information/evidence, that on the contrary the findings are contrary to the facts on record. Referring to para 7.1 of the order, Shri Sundaram submitted that the respondent itself has admitted that this deal (6 lakh shares) was actually for MALCO an associate company of Sterlite Industries Ltd. which was approached by the ESE to bail out brokers having payment difficulties, MALCO forwarded 11.75 crores to El Dorado for this deal. In fact the position that MALCO purchased shares has been re-iterated in para 7.2 also. By this statement the respondent itself has admitted that the purchase was made for MALCO and not for the appellant and the reason for such purchase was BSE's request to help to avoid a payment crisis. BSE is a public authority which has representatives of the respondent on its Governing Board and that MALCO purchased shares at the price fixed by the Governing Board officials of BSE and the quantum was also decided by them, MALCO had no choice, that the whole purpose was to go by BSE to avoid market crash and thereby protect the interests of all concerned, includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edibility of the market. Though the order (in para 9.1) speaks of 'circumstantial evidence' there is no evidence of any kind to charge the appellant that it was involved in market manipulation. Shri Sundaram, stated that the appellant's reliance on the decision in Shivajirao Nilangekar Patil v. Mahesh Madhav Gosavi MANU/SC/0120/1986MANU/SC/0120/1986 : AIR 1987 SC 294 is misplaced for the simple reason that facts of the appellant's case are entirely different and distinguishable from the facts of the said case. He pointed out that the legal position referred to in para 10.2 of the order if read with the observation in para 7.2 of the order would clearly show that the respondent had drawn its conclusion erroneously holding the appellant guilty of market manipulation. He also pointed out that price of ₹ 181 referred to in para 10.2 of the order is relating to January 1998 and this referral date has been deliberately left out to misguide the Tribunal to show that the time gap between the rate of ₹ 181 prevailed and ₹ 385 on 27-5-1996 was very narrow. He submitted that purchase of 3 lakh shares by El Dorado was on 8/10-4-1998 and purchase of 6 lakh shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The fact that price movement was linked to the appellant's acquisition of INDAL shares is evident from the fact that the prices started slipping down considerably from 2-6-1998, in the wake of the press note issued by the respondent on 1-6-1998 by virtually stopping the appellant from bidding for INDAL shares. 33. Shri Sundaram referred to the appellant's take over bid of INDAL and stated that, it is but natural that scrip price of acquirer going up in the event of such a take over, that when the appellant purchases a company it is own growth, its assets improves and naturally the share price should also increase, that it is the optimism that drives the prices up. The appellant had made an open offer for the acquisition of a substantial stake in INDAL, a company promoted by the Canada based multinational Alcan Aluminium Corporation Ltd., that this was the first time in India that a local Indian company made a non negotiated bid to take over an under performing unit of a multinational corporation, that it was but natural that the appellant was expected to make higher profits and benefit immensely from the potential acquisition of INDAL. He stated that other major factors fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rshad Mehta to artificially raise the price of the appellant's shares, and stated that such attitude from the regulator deserve all out condemnation, that on the basis of two trivial transactions that too not involving the appellant. the respondent has generalised the conduct of the appellant and invoked penal action. He pointed out, that the statement of the respondent, though unsustainable, is an after thought as nowhere in the order the respondent has stated that those two cases are only illustrative. In fact the truth is that there are no other cases and that is why the respondent could not bring in any other case. Shri Sundaram stated that an elaborate investigation spanning over three year period would not have missed any transaction, if actually there had been such transactions. Shri Sundaram submitted that the respondent at this appellate stage cannot improve the impugned order and the respondent's attempt to stretch the order at this stage, beyond what it is, need be disregarded. In this context he referred to the observation made by the Hon'ble Supreme Court in Mohinder Singh Gill v. Chief Election Commissioner AIR 1978 SC 851 that when a statutory functionary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veals that these two transactions had no impact on the market, that the transactions were uneventful as far as the market was concerned. 37. Shri Sundaram submitted that the respondent has no power to issue such an order under 11B debarring the company from accessing the capital market. In this context he cited the decision of this Tribunal in Tirupati Finlease Ltd. v. SEBI [2000] 27 SCL 179 (SAT - Mum.). Wherein the Tribunal had held that for the omissions and commissions personal to the promoters, a company promoted by them cannot be in the normal course held responsible. 38. The learned senior counsel submitted that regulation 11 or any other provisions of the Act or the Regulations do not confer any power on the respondent to direct a ban on the appellant accessing the capital market. Shri Sundaram also submitted that the order is wrong in directing to launch prosecution of the appellant and its officers as one of the ingredients of any offence has been established by any material on record warranting such prosecution. 39. Shri Rafiq Dada, the learned senior counsel appearing for the respondent submitted that the appellant's argument that MALCO and the appellant are dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that MALCO is one of the leading companies in the Sterlite group, that to another question he had stated that El Dorado Guarantee Ltd. is 'our brokers', that reference to 'our brokers' is significant. The learned senior counsel stated that Shri Murthy is not a small fry as he had boasted that 'he handled all high value transactions of all finance, related whether for LCs, bank guarantees, funds, commercial papers, NCDs and that he had a portfolio of more than 1000 crores'. 41. Shri Dada submitted that reference to 'our management' by Shri Murthy is to the common management of the appellant and MALCO. To show that MALCO had acted at the behest of the appellant the learned senior counsel cited letter dated 19-5-1999 of MALCO to the respondent wherein it has been stated that 'during the first week of June, 1998 we were approached by the Bombay Stock Exchange authorities that there is an impending problem in settlement of dues in the Bombay Stock Exchange and requested us to take suitable action in order to prevent a major crisis in the Bombay Stock Exchange. On their request we had placed a sum of ₹ 11.75 crores on the disposal of El Dorado ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant's scrips as could be seen from the particulars furnished in para 7.1 of the order. He also stated that in the carry forward segment 3 lakh shares is a substantial quantity to affect the market equilibrium. 43. Shri Dada submitted that the appellant had to keep its share price high and that is why it indulged in manipulating the price. He stated that since the minimum conversion price was stated to be ₹ 350 in respect of the OCPS, the share price of the appellant had to be above ₹ 350 in order to induce any person to subscribe to the OCPS floated by the appellant as the prevailing price of the share would have as impact on the decision of any person to subscribe to the OCPS. He refuted the appellant's contention that the appellant could have had no interest in rigging the price to ₹ 350 in April 1998, as the conversion of the said OCPS was to be given effect to in May 1999. Shri Dada stated that in order to induce the investors to exercise their option in favour of sterlite in preference to Alcan's offer, the share prices of sterlite were rigged to ₹ 350. He further submitted that on the basis of the public offer made by the appellant for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based upon reason and common sense. The concepts of probability, and the degrees of it, cannot obviously be expressed in terms of units to be mathematically enumerated as to how many of such units constitute proof beyond reasonable doubt. There is an unmistakable subjective element in the evaluation of the degrees of probability and the quantum of proof. Forensic probability must, in the last analysis, rest on a robust common sense and, ultimately, on the trained intuitions of the judge. While the protection given by the criminal process to the accused persons is not to be eroded, at the same time uninformed legitimization of trivialities would make a mockery of administration of criminal justice." (p. 2154) 47. Shri Dada stated that, thus even in criminal cases strict test of evidence is not insisted, the evidential requirement in adjudication proceedings could be much less. 48. Shri Dada cited yet another decision of the Hon'ble Supreme Court in Directorate of Enforcement v. MCTM Corporation Ltd. [1996] 2 SCC 471 in support: "Therefore, unlike in a criminal case, where it is essential for the prosecution to establish that the accused had the necessary guilty int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant in the Alcan war", that the price pep up was done obviously at the behest of the appellant, that the only beneficiary of such manipulation was the appellant and that was the reason for the appellant to go out of way to protect the brokers as their saviour. In this context the learned senior counsel cited the decision of the Hon'ble Supreme Court in Shivajirao Nilangekar Patil's case (supra) that: "There is no question in this case of giving any clean chit to the appellant in the first appeal before us. It leaves a great deal of suspicion that tampering was done to please Shri Patil or at his behest. It is true that there is no direct evidence. It is also true that there is no evidence to link him up with tampering. Tamperingis established. The relationship is established...." (p. 310) 52. He submitted that 'INDAL' take over gives sufficient circumstantial evidence to show that the appellant was the beneficiary in the transactions propping the prices up. Shri Dada referred to the show-cause notice wherein it has been stated that investigation revealed that the entity 'Dil Vikas' referred to in the records of Shri Harshad Mehta, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities would be required only for a period of about two days, but the loan was obtained for 6 months. 57. Shri Dada further submitted that the appellant has failed to offer any rationale for the purchase of its 6,06,000 shares by MALCO, that the intention of MALCO was not to help BSE to avert payment crisis but to protect selected brokers. Shri Dada further submitted that the question of investors being affected would not arise in the context because the shares of the appellant were held by brokers known to be operating on behalf of the Damayanti Group, that in any event, investors would never have been affected as brokers who had purchased the shares of the appellant were trapped. Referring to the appellant's version that neither MALCO nor the appellant knew the brokers of the Damayanti Group nor had they ever spoke to them about this transaction nor was there any means of knowing as to which brokers were selling those shares, the learned senior counsel submitted that these sort of particulars are not that secret in the market as has been claimed by the appellant, that the fact that transactions were entered in the exchange system on 12-6-1998 as 'all or one' dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order and reiterated the contention that as a result of the carry forward position built up by Damayanti Group of brokers, and at a time when they were to face the music, MALCO appeared on the horizon as their saviour to bail them out, that MALCO was not simply interested in the brokers but for the cause that they had acted at the behest of the appellant. He also referred to para 6.5 of the order and stated that the motive or intend for manipulating the market was relatable to the acquisition of the shares of INDAL. Shri Dada stated that self benefit was the motive behind the transaction and the transaction was designed accordingly, therefore regulations 4(a) and 4(d) attracted. 60. The learned senior counsel submitted that in the light of the finding that the appellant had manipulated the market to its benefit, the impugned order under Section 11B is perfectly justified and need be upheld. He also submitted that while S/shri Aggarwal and Tarun Jain being the officers of the appellant in terms of Section 27 and Shri Sashikant being an abettor, are liable to be prosecuted. 61. I have carefully considered the submissions, both written and oral, made by the learned senior cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that 'promoters/ company first abetted Shri Harshad Mehta to build up large positions in the shares of Sterlite Industries Ltd., which facilitated market manipulation and later provided an exit route when the artificial increase in price was not sustained and some of the brokers dealing for Damayanti Group got trapped' (para 7.3). The gravity of the offence attributed to the appellant has been stated in the following words that 'creation of false market and price manipulation is a very serious offence' (para 10.2). Obviously taking into consideration 'the calculated manner in which manipulation has been caused, the gravity and seriousness of the offences which could cause great harm to the fairness and integrity of the market' and 'in order to ensure that the confidence of investors in securities market remains unimpaired (para 10.4)' invoking the powers available under Sections 11 and 11B, the Chairman directed that 'Sterlite Industries is prohibited from accessing the capital market for a period of 2 years from passing this order'. And also 'ordered that prosecution proceedings under Section 24, read with Section 27 of the SEBI Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt necessary to have a look at these two sections. According to Sub-section (1) of Section 11 : "Functions of Board.--(1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it think fit". 70. Sub-section (2) refers to measures to provide for certain matters enumerated therein, with a caveat that it is without prejudice to the generality of the provisions of Sub-section (1), 'Prohibiting fraudulent and unfair trade practices relating to securities' is one of the measures, the SEBI is expressly empowered to take. In exercise of the said power the SEBI has made the Regulations. These Regulations came into force with effect from 25-10-1995, that is the date on which it was published in the official gazette. We will discuss the provisions of the said regulations a little latter. Before that let us also have a look at Section 11B invoked by the respondent to issue the directions. Text of Section 11B is extracted below : " 11B. Power to issue directions.--Save as otherwise provided in Section 11, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buying, selling or otherwise, dealing in securities in a fraudulent manner. Prohibition against market manipulation' is covered by regulation 4. Regulation 5 is 'Prohibition of misleading statements to induce sale or purchase of securities and regulation 6 prohibits unfair trade practices relating to securities. In the present case the charge is that the appellant has violated regulation 4(a) and 4(d). Full text of the said regulation 4 is extracted below: "4. Prohibition against market manipulation.--No person shall- (a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities, and thereby inducing the sale or purchase of securities by any person; (b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market; (c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions; (d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehemently argued that the said regulations are not attracted Shri Dada in equal force emphasised these regulations are attracted. In this context it is considered necessary to examine the scope and reach of the said regulation 4(a) and (d), to begin with. 74. On a perusal of regulation 4 it is clear that prohibition put therein is against market manipulations stated in five clauses therein at Clauses (a) to (e). According to the impugned order the market manipulation referred to at Clause (a) and (d) are applicable to the appellant's conduct. On a perusal of the regulation it is clear that reach of Clause (a) is wider than the reach of Clause (d). Regulation 4(a) attracts not only the purchaser and seller but even third parties to its ambit, if they are found in any way involved in effecting or taking part in the transactions directly or indirectly. Those transactions must be with the intention of distorting the prices of securities. It should induce the sale or purchase of securities by any person. As Shri Sundaram pointed out element of deceit is an underlying factor in the transaction. A genuine transaction by itself cannot attract the regulation though such a transaction h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 shares for Shri Ashwani Khurana, a client of El Dorado. (B) Advance of ₹ 11.75 crores to El Dorado by MALCO for acquisition of shares by Dil Vikas Finance to bail out certain brokers to avoid payment crisis in the scrips of the appellant. 78. With reference to the acquisition of the three lakh shares, the basic question to be considered is as to whether these shares were purchased at the instance of the appellant. In this context the following observation made in para 6.9 of the order is very relevant. Even though this para has been already extracted above, at the cost of repetition it is again extracted for ready reference. It reads : "Though, Shri Gandhi denied that any assurance was given by Mr. Murthy as regards the funds for the purchase of these shares or any commitment as regards the buy back of these shares or sharing of gains/losses on the purchase of these shares, yet the transactions have been found to be done by them for Sterlite Industries. It can be inferred from the following facts : (a) funds being given by MALCO ostensibly as loan, (b) transaction being entered at the instance of Murthy of Sterlite who gave details of counter-party broker with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent. This factual position has been confirmed by Shri Bimal Gandhi of Dil Vikas also in his evidence before the respondent. Shri Bimal Gandhi in his deposition dated 8-9-1998 before the Investigating Officer had admitted the receipt of ₹ 5 crores from MALCO 'towards advance for purchase of Government of India securities'. There is also evidence on record to show that the cheque for ₹ 5 crore from MALCO was deposited by the said party in their current account maintained with the RBI as a satellite dealer for Government securities. Shri Gandhi had also admitted that 'Dil Vikas Finance Ltd. had purchased Government securities on 16-4-1998'. 81. In fact Shri Gandhi in his deposition referred to above had stated in the context of obtaining ₹ 5 crores as Inter Corporate Deposit from MALCO that 'neither were they specifically informed that the advance given by MALCO to Dil Vikas Finance would be used to buy the shares of Sterlite Industries Ltd. nor where there any instructions from them in this connection'. The respondent had examined Shri Tarun Jain, the Appellant's Director, Finance on 6-10-1998. In answer to a question that whether he or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from time to time. As per our understanding with these clients it is incumbent upon as to arrange for funds to meet the pay in liabilities... Since most of their share dealings are through us the said shares were not delivered to them and were in our possession'. In this context the corroborating evidence from Ashwani Khurana in his deposition before the Investigating Officer available in the compilation is also relevant. Shri Khurana in his deposition dated 10-9-1998 had admitted that he had purchased 50,000 shares each of Sterlite in the name of his family concerns, viz. (1) Kanchenjunga Advt. (P.) Ltd. (2) Khurana & Co. and (3) Iqbal Chand Khurana in the month of April, 1998. Regarding delivery of the shares purchased on his behalf by Dil Vikas, Shri Khurana had stated that 'the physical delivery of shares is lying with El Dorado. We normally seek the physical delivery in case of book closure'. To a query as to whether he paid consideration of all 1.50 lakh shares of Sterlite to El Dorado, Shri Khurana had stated that there was a credit balance of ₹ 1.81 crore in Khurana & Co., out of which purchase consideration of Rs, 1.46 crore was met. Similarly Iqbal Chand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he statements extracted above are from the statements made by S/Shri Gandhi, Khurana, Murthy and Jain before the respondent's Investigating Officer and their statements have also been relied on by the respondent. Depositions of these persons have been filed in the appeal by the appellant in a compilation. The respondent has not questioned the authenticity or admissibility of any of the statements. Therefore in the light of the evidence discussed above it is difficult to agree to the respondent's view that 3 lakh shares were purchased by the appellant or at its behest and that M ALCO had provided funds to meet the purchase consideration. 86. The finding in the context of purchase of 3 lakh shares in para 8.1 of the order that such large chunk of shares were purchased through 'all or no deals' in BSE terminals by synchronizing the timings of the logging of trades after the official hours at pre-determined price is contrary to what is stated in para 6.9 of the order wherein it has been stated that these were negotiated deals. In fact the view that it was negotiated deals has been confirmed by Shri Gandhi in his statement. 87. The respondent's argument that even t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion price of ₹ 350 at the end of 18 months from the date of issue, to meet the fund requirements of acquisition also required the appellant's scrip price to be kept high to attract subscription. 90. It is true that the price of the appellant's scrip had steadily increased during the period and fell when the acquisition failed. Upward price movement in the shares of an acquirer company is not uncommon, as the market would respond positively in case the takeover is likely to result in value addition. In the absence of any evidence to show that the price was pushed up to meet the situation at the instance of appellant, it is difficult to hold the appellant responsible for the abnormal price movement. The respondent has failed to reasonably prove its case that the appellant had manipulated the market to keep the scrip price high. It has gone by inference that the Damayanti Group had manipulated the price and that it was done at the behest of the appellant, as otherwise MALCO would not have stepped in to bail them out. The fact the MALCO had advanced ₹ 11.75 crores to Dil Vikas to purchase that appellant's shares remain undisputed. There is reason to believe th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to show a nexus between the appellant and the Damayanti Group or that the Damayanti Group had acted at the behest of the appellants it is not possible to view the alleged market manipulation by the said Damayanti Group as the one by the appellant, Therefore, I do not consider it necessary to go into the details of the index movement etc. in this context as the respondent has failed to establish the appellant's involvement in any transaction linking such price movement. This failure is fatal in proving its case. 92. In the order in para 6.6 it has been stated that 'Damayanti Group was working in concert with the promoters of the company'. It appears that this view is formed mainly on the basis of a paper retrieved from the office of the Damayanti Group which is stated to be one of the papers having details of investment by Shri Harshad Mehta, wherein under the heading 'excess lying as under' it was found written 'Dil Vikas - Ster, 1,95,000 giving the break up of this figure as 1,50,000 - 45,000 margins'. It has been further stated in the order that "the Dil Vikas referred to in the said paper is Dil Vikas Finance Ltd. which is an associate company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or others and not for the appellant or at Us behest. In the light of the views already expressed with reference to Shri Murthy's mentioning of the names of the brokers holding scrips of Sterlite in the market and the nature of ₹ 5 crores advanced as Inter Corporate Deposit by MALCO, it is difficult to subscribe to the respondent's view in this regard. In this context it is to be noted that the appellant in its reply has stated that it has no connection with Damayanti Group and therefore it was for the respondent to establish the nexus, if any existed. It is also to be noted that the respondent's witnesses positioned in the appellant's employment had also denied of any association with the Damayanti Group. Shri Murthy in his statement had emphatically stated that he had not heard about any of the companies of Demayanti Group mentioned by the Investigating Officer. He had also denied of any knowledge about S/shri Anil Doshi, Dinesh Doshi and Dilip Shah of Damayanti Group. Shri Tarun Jain had also stated that he had not heard about any of the so called Damayanti Group companies or the persons referred to by the Investigating Officer. In the absence of adequate ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w attention to the observations of Bose J. in Gordhandas Bhanji [AIR 1952 SC 16 at page 18]: 'public order publically made in exercise of a statutory authority cannot be construed in the light of the explanations subsequently given by the officer making the order of what he meant or of what was in his mind or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the acting and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself. Orders are not like old wine becoming better as they grow older". (p. 858) 97. Shri Dada had argued about the decree evidence required in an adjudication like the one, in contradistinction to the nature of evidence required in criminal proceedings in a court of law, that in an inquiry like the instant one it is the 'preponderance of probability' that is to be taken into consideration and not to go by 'proof beyond doubt' as required in criminal proceeding. 98. In this context it is to be noted that Chairman holding the appellant guilty of indulging in price manipulation has state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l material which with some degree of definiteness points to the guilt of the delinquent in respect of the charges against him. Suspicion cannot be allowed to take the place of proof even in domestic inquiries'. As pointed out by this Court in Union of India v. H.C. Goel (AIR 1964 SC 364) 'the principle that in punishing the guilty scrupulous care must be taken to see that the innocent are not punished, applies as much to regular criminal trials as to disciplinary inquiries held under the statutory-rules. [Emphasis supplied] 99. In the context of a disciplinary action against an advocate, the Hon'ble Court had held that 'disciplinary authority empowered to conduct the inquiry and to inflict the punishment on behalf of the body, in forming an opinion must be guided by the doctrine of benefit and is under an obligation to record a finding of guilt only upon being satisfied beyond reasonable doubt. It would be impermissible to reach a Conclusion on the basis of preponderance of evidence or on the basis of surmise, conjuncture or suspicion. It will also be essential to consider the dimension regarding mens rea. This proposition is hardly open to doubt or debate particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an offence, as set out by the Hon'ble Supreme Court cited above, it is seen that the evidence produced by the respondent is not sufficient to hold the charge against the appellant. From the case law referred to above it is clear that in the absence of reasonably strong evidence, even in a civil proceeding, a person cannot be held guilty and awarded punishment. Merc surmise, conjuncture, or suspicion cannot sustain the finding of guilt. I have very carefully examined the impugned order and find that the conclusion drawn by the respondent holding the appellant guilty of indulging in market manipulation in contravention of regulation 4(a) and 4(d) is not substantiated by sufficient evidence. 103. Even though in the order it has been stated that it was MALCO which had provided ₹ 5 crores for purchase of 3 lakh shares and ₹ 11.75 crores for bailing out brokers, it is understood that no show-cause notice was issued to MALCO and subjected it to any inquiry. For excluding MALCO from the scope of investigation and inquiry the respondent has not given any valid explanation. It is felt that an inquiry into the conduct of MALCO in the episode would have helped the responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons referred to in Section 12 of the Act or associated with the securities market. In other words the section identifies the persons to whom and the purposes for which, directions can be issued. 55. The Gujarat High Court had examined the scope of Section 11 and Section 11B vis-a-vis the respondent's position, while deciding an appeal against the Single Judge's order in Alka Synthetics Ltd. case [1999] 19 SCL 460. The basic issue for consideration before the Division Bench in the said appeal was as to whether the respondent had the authority to issue an order under Section 11B of the Act for impounding or forfeiting the money received by stock exchanges, as per the concluded transactions under its procedure, until final decision is made. While negating the views of the Single Judge, and upholding the respondent's power to issue such a direction under Section 11B the Court observed:-- 'The SEBI Act is an Act of remedial nature and, therefore, the preset cases could not be compared with the cases relating to the fiscal or taxing statutes or other penal statutes for the purposes of collection of levy, taxes etc. As and when new problems arise, they call for new solut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the section, it can not be said that the power is unguided or unlimited. It is a wholesome provision designed to achieve the objectives of the Act." (p. 562) 105 But it is to be noted that the power under Section 11B is restricted to issue appropriate direction for the purpose of protecting the interest of the investors etc. mentioned in the section. The scope of the expression 'direction' has not been defined in the Act. But the word has been judicially interpreted by Courts. Hon'ble Bombay High Court had viewed that 'in law direction means guidance of command' V.P.S. Gill v. Air India AIR 1988 Bom. 416 at p. 421. According to the Hon'ble Supreme Court in Rajendranath v. CIT[1979] 4 SCC 282, 'a direction by a statutory authority is in the nature of an order requiring positive compliance'. According to Blacks Law Dictionary direction means 'a guiding or authoritative instruction, order, command. 106. It has to be noted that Section 11B does not even remotely empower the respondent to impose penalties. Hon'ble Calcutta High Court had held that prescribing an offence and its punishment is an essential plenary function of the legisla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue a direction which tantamounts to imposition of penalties, While widening the scope of 'such measures' used in Section 11, to include penalties, and thereby stretching the scope of issuing directions under Section 11B to cover imposition of penalties, the limitation stated above need be kept in mind. However, it is understood that the respondent has also been taking the view that Section 11B is not a penal provision, but preventive and remedial in its application. If that is so, it has to be seen whether the impugned direction prohibiting the appellant from accessing the capital market for a period of 2 years from the date of the order is preventive or remedial. In the absence of any explanation from the respondent as to what exactly is meant by 'accessing the capital market', it has to be understood as is understood in the common parlance - i.e., entry to the capital market for issuing/offering securities. In this context, it is to be noted that the charge against the Appellant is of market manipulation. The shares of the appellant are listed/traded in the stock exchanges even today. That being the case preventing the appellant raising further capital/offering sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
