2025 (6) TMI 1893 - Board - SEBI

Manipulative scheme designed to defraud investors - trading of shares - zero-revenue company saw four periods of alternate sharp rise and fall in share price within a span of a few months - lack of opportunity for inspection of documents relating to the proceedings - connection between Share Transfers Corporate Announcements and Price Movements - non-cooperation by the Noticees - HELD THAT - LSIL a zero-revenue company since many years planned to acquire Robochef a company owned by family members of Noticees 4 to 6 who held a sizeable number of effective free float shares in LSIL (since 99.66% of LSIL shares are held by only 4 entities which include one promoter 2 public shareholders including JPP and one FPI). JPP (Noticee 2) who owned 12.12% shares of LSIL had even offloaded some of the shares during periods of price rise. JPP owned these shares by paying a consideration of USD 1. It is pertinent to note that post issuance of the interim directions against the Company and issuance of summons by the Investigating Authority appointed in this matter a spate of resignations was witnessed in the Company s management viz. resignation by its Managing Director Compliance Officer Executive Director CFO and an Independent Director. This leads to a strong prima facie suspicion regarding the Company s affairs. It is noted that except one of the newly-inducted directors of LSIL (who is a relative of the owner of PFPL) no other director of LSIL including the Managing Director of LSIL has appeared before the Investigating Authority. Thus the detailed investigation in the matter is getting hampered by the non-cooperation by the Noticees. None of the contentions and claims have been backed by any documentary evidence whatsoever. During the personal hearing JPP was specifically asked to submit documentary evidences in support of the abovementioned contentions. However he has failed to submit any documentary proof in this regard. In absence of any documentary evidence adduced by the Noticee in support of his narrative I am not inclined to accept the same. JPP a resident of Dubai has categorically declined to personally appear before the Investigating Authority appointed in this matter without any reasonable cause even after repeated summons issued in this regard. The Noticee in his email dated April 15 2025 in response to SEBI s summons inter alia stated that this being a civil matter my lawyers mentioned that no custodial investigation is required . The abovementioned pretext for non-appearance before the Investigating Authority appears to be a deliberate attempt by JPP to hamper the investigation. Further till date the directions issued in the Interim Order qua JPP for impounding of illegal gains and providing an inventory of his assets to SEBI have not been complied with by him. As regards Noticees 4 5 and 6 I note that they have contended that their relationship with the directors of Robochef a different company could not be the basis to issue directions against them. As per these Noticees they have no connection with LSIL whatsoever and they sold their shares prior to the announcement by LSIL of the proposed acquisition. They have also claimed that they had no information of the proposed acquisition at the time of sale of shares. The sale of shares of LSIL by the parents of owners of Robochef (which was intended to be acquired by LSIL a zero-revenue company) in close proximity to the announcement of the proposed acquisition by LSIL cannot be dismissed as mere coincidence. It is important to note that Noticee 4 the father of one of the owners of Robochef was solely responsible for contributing 30% of the total trading volume during the first patch of price rise of LSIL scrip. On consideration of the submissions made by the Noticees and the material available on record I find that sufficient grounds have not been made out by the Noticees for interfering with the interim directions. Accordingly I am not inclined to interfere with the interim directions issued against the Noticees or grant any relief to them. Thus it is pertinent to note that LSIL apparently made false submissions to BSE while seeking resumption of trading in its shares. Accordingly SEBI has advised BSE to take suitable action in the matter. Further note that the Interim Order had directed that investigation in this matter be completed by May 15 2025. Considering the non-cooperation by the Noticees in the investigation process I deem it appropriate to extent the timeline for completion of investigation to November 15 2025. Thus I in exercise of the powers conferred upon me under sections 11 (1) 11 (4) and 11B (1) read with section 19 of the SEBI Act 1992 hereby confirm the directions issued vide the Interim Order dated February 11 2025.

Summary

The core legal questions considered by the Tribunal revolve around the prima facie existence of a manipulative scheme involving the trading of shares of a listed company with negligible business operations and financials, the validity and necessity of interim directions issued by the regulator, the connection and liability of various entities and individuals implicated in the alleged scheme, and the procedural fairness accorded to the Noticees during the investigation and adjudication process.

Firstly, the Tribunal examined whether the Noticees, including the company, its promoter, and certain shareholders, were involved in manipulative and fraudulent trading practices in violation of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations). The key statutory provisions invoked were Section 12A(a), (b), and (c) of the SEBI Act, read with Regulations 3(a), (b), (c), (d) and 4(1), 4(2)(a), (b), and (e) of the PFUTP Regulations.

Secondly, the Tribunal considered the appropriateness and legality of the interim directions issued by SEBI, including trading restrictions and impounding of alleged unlawful gains, on the basis of prima facie findings from a preliminary examination. This raised issues concerning the principles of natural justice, the requirement of urgency for ex parte orders, and the sufficiency of the material on record to justify such directions.

Thirdly, the Tribunal addressed the procedural aspects related to the Noticees' rights to inspection of documents, opportunity to be heard, and the extent of cooperation during the investigation, including compliance with summons and furnishing of asset inventories.

Issue-wise detailed analysis:

1. Existence of Manipulative and Fraudulent Trading Practices

The legal framework under consideration included the SEBI Act provisions prohibiting fraudulent and unfair trade practices in securities markets and the PFUTP Regulations that proscribe manipulative conduct such as price rigging, artificial trading, and misleading disclosures.

The Tribunal noted the peculiar financial profile of the Company, which reported negligible revenues, nil cost of materials, and consistent losses over multiple years, yet exhibited an extraordinary surge in share price following the resumption of trading after a decade-long suspension. The share price escalated more than tenfold within two months, reaching a market capitalization of approximately Rs. 22,700 Crore, despite no corresponding improvement in fundamentals or corporate announcements.

SEBI's trade data analysis revealed a pattern of coordinated trading by a limited set of entities who placed buy orders at the upper circuit limits at market open for consecutive days during the price rise phase, and similarly placed sell orders at the lower circuit limits during the price fall phase. This pattern was indicative of a pump-and-dump scheme. The Tribunal also noted the suspicious off-market transfer of a substantial shareholding (12.12%) at a nominal consideration from a public shareholder and ex-director to an NRI, who was found to be connected with the promoter group, thereby raising concerns about collusive arrangements.

The Tribunal acknowledged the complex web of relationships among the Noticees, including their connections to a company targeted for acquisition by the listed company, and the timing of share sales by relatives of directors of that company coinciding with price movements.

In applying the law to these facts, the Tribunal found that the prima facie evidence supported the inference of manipulative conduct in breach of the SEBI Act and PFUTP Regulations. The low free float of shares (0.34%) concentrated among four entities further facilitated potential price manipulation.

Competing arguments by the Noticees, including denials of collusion, assertions of legitimate trading based on long-held investments, and claims of no material impact on price due to their small shareholdings, were noted. However, the Tribunal emphasized that conclusive findings awaited detailed investigation, and the prima facie material sufficed for interim action.

2. Legality and Appropriateness of Interim Directions

The Tribunal examined the Noticees' contentions challenging the interim order on grounds of lack of urgency, procedural unfairness, and insufficiency of material. The Noticees cited judicial precedents emphasizing sparing use of ex parte powers and the necessity of ongoing investigation before interim directions.

The Tribunal observed that the Interim Order was based on a preliminary examination triggered by suspicious trading patterns and dubious share transfers, which presented sufficient grounds for urgent interim measures to protect investors and market integrity. The rapid and repeated price fluctuations in a fundamentally weak company's shares, coupled with concentrated shareholding and suspicious transactions, justified the restrictions.

Regarding procedural fairness, the Tribunal found that the Noticees were afforded opportunities for inspection of documents, personal hearings, and to file replies. While some requests for documents relating to SEBI's internal deliberations were rightly declined, the essential material forming the basis of the Interim Order was shared. The Tribunal rejected claims that the Noticees were denied natural justice.

The Tribunal also considered the Noticees' argument that no preventive action was taken against entities responsible for price rise, but found that the Interim Order identified the key contributors to price movements and that the ongoing investigation would address all facets.

3. Procedural Compliance and Cooperation During Investigation

The Tribunal noted the Noticees' mixed cooperation with SEBI's investigation. While some Noticees availed inspection opportunities and filed detailed replies, others failed to provide specific document lists or attend inspections. Notably, the NRI shareholder declined to appear before the Investigating Authority despite repeated summons, citing the civil nature of proceedings, which the Tribunal viewed as an attempt to hinder investigation.

The Tribunal highlighted the non-compliance by certain Noticees with directions to furnish asset inventories and the resignations of key company officials post Interim Order as aggravating factors. These circumstances strengthened the case for continuing interim restrictions to prevent further market harm.

4. Connection Between Share Transfers, Corporate Announcements, and Price Movements

The Tribunal analyzed the linkages between the off-market transfer of shares at nominal consideration, the proposed acquisition of an unrelated company by the listed company, and the trading activities of relatives of directors of the target company. While the Noticees denied any inside information or collusion, the temporal proximity and trading patterns raised prima facie suspicion of coordinated manipulation.

The Tribunal underscored that such circumstantial evidence, combined with the concentration of shareholding and abnormal price behavior, warranted regulatory intervention pending detailed investigation.

Significant holdings include the following verbatim excerpts and principles:

"The apparent pump and dump scheme in the scrip of LSIL, a zero-revenue company, was also evident from the number of public shareholders in LSIL increasing from 3892 on June 30, 2024 to 6106 on December 31, 2024. It is pertinent to note that 99.66% of the shares of LSIL are held by only four shareholders..."

"The balance of convenience lies in favour of continuing with the interim directions, in order to protect the interest of investors."

"The sale of shares of LSIL by the parents of owners of Robochef (which was intended to be acquired by LSIL, a zero-revenue company) in close proximity to the announcement of the proposed acquisition by LSIL cannot be dismissed as mere coincidence."

"None of the abovementioned contentions and claims have been backed by any documentary evidence whatsoever... In absence of any documentary evidence adduced by the Noticee in support of his narrative, I am not inclined to accept the same."

"Considering the non-cooperation by the Noticees in the investigation process, I deem it appropriate to extend the timeline for completion of investigation to November 15, 2025."

In conclusion, the Tribunal confirmed the interim directions restraining the Noticees from trading or accessing the capital markets, impounding alleged unlawful gains, and directing cooperation with the ongoing investigation. The Tribunal found the prima facie material sufficient to justify these measures, rejected the Noticees' challenges to procedural fairness, and emphasized the need to protect investor interests in light of the suspicious trading patterns and shareholding structures.