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2015 (6) TMI 1216 - SECURITIES AND EXCHANGE BOARD OF INDIAFraudulent IPO - Screen based trading with manipulative or fraudulent intent - Restraint orders - preferential allotment of the shares of Eco, Esteem, CNE and HPC, and, thereafter getting those shares listed on the stock exchange so as to avail exemption on LTCG tax gains - HELD THAT:- The transactions in the said scrips were with a premeditated understanding, plan, device or artifice. In the present matter, once the shares of these companies got listed in SME segment of BSE, the Trading Group entities manipulated the price/volume of the scrips and then provided profitable exit to preferential allottees and Pre IPO transferees. Moreover, in any market, a sudden supply if not matched by similar demand leads to price fall. Considering the same, 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 absorbing the supply. In this case, the entities of Trading Group created the demand against the supply from the preferential allottees/pre IPO transferees. In the whole process, the principle of price discovery was kept aside and the market lost its purpose. It is evident from the above analysis that the Trading Group entities provided a hugely profitable exit to the preferential allottees and pre IPO transferees. Preferential allottees, pre IPO transferees acting in concert with Funding Group and Trading Group have used the stock exchange system to artificially increase volume and price of the scrip for making illegal gains and to convert ill-gotten gains into genuine one. However, the whole scheme could not have been possible without the involvement/ connivance of companies and their promoters and directors. The acts and omissions were prima facie for generating fictitious LTCG so as to convert unaccounted income of preferential allottees and pre-IPO transferees into accounted one with no payment of taxes as LTCG is tax exempt under section 10(38) of Income Tax Act, 1961. I prima facie find that the above modus operandi helped the concerned entities to not pay income tax on account of LTCG and helped them to show the source of this income to be from legitimate source i.e. stock market. The manipulation in the traded volume and price of the scrip by a group of connected entities in this case, has not only resulted in enabling illegal benefit to a group of entities but also has the potential to induce gullible and genuine investors to trade in the scrip and harm them. As such the acts and omissions of companies, Funding Group, Trading Group entities, preferential allottees and pre-IPO transferees are “fraudulent’ as defined under regulation 2(1)(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations‟) and are in contravention of the provisions of Regulations 3(a), (b), (c) and (d) and 4(1), 4(2)(a), (b), (c), (d), (e) and (g) thereof and section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992. Certain market manipulations are taking place in the scrips of Eco, Esteem, CNE and HPC. I note that currently major portion of the shareholding (around 35.43% in Eco, 41.10% in Esteem, 41.01% in CNE and 56.22% in HPC) is lying with the preferential allottees, pre IPO transferees, Funding Group, Trading Group and the promoters/directors of these companies. It is also pertinent to mention that Eco and Esteem have already obtained approval of shareholders for migrating from SME platform to Main Board of BSE. If these companies are allowed to shift to Main Board of BSE, the minimum Bid Size of ₹ 1 Lakh, which is currently present in SME segment of the exchange, will not be applicable in the Main Board. Consequently, it will increase the liquidity in the scrips as well as very small investors, who are kept away from SME segment through Minimum Bid Size, may also be induced to invest in these companies. Unless prevented they may use the stock exchange mechanism in the same manner as discussed hereinabove for the purposes of their dubious plans as prima facie found in this case. In my view, the stock exchange system cannot be permitted to be used to achieve unlawful benefits whether tax related or otherwise. Considering these facts and the indulgence of a listed company in such a fraudulent scheme, plan, device and artifice as prima facie found in this case, I am convinced that this is a fit case where, pending investigation, effective and expeditious preventive and remedial action is required to be taken by way of ad interim ex -parte in order to protect the interests of investors and preserve the safety and integrity of the market. In order to protect the interest of the investors and the integrity of the securities market in exercise of the powers conferred upon in terms of section 19 read with section 11(1), section 11 (4) and section 11B of SEBI Act, 1992, pending inquiry/investigation and passing of final order in the matter, hereby restrain the concerned persons/entities from accessing the securities market and buying, selling or dealing in securities, either directly or indirectly, in any manner. The stock exchanges and the Depositories are directed to ensure that all the above directions are strictly enforced.
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