2014 (12) TMI 1434 - Board - SEBI

Preferential allotment of shares - preferential allottees acting in concert with Moryo Group have misused the stock exchange system to generate fictitious LTCG so as to convert their unaccounted income into accounted one with no payment of taxes as LTCG is tax exempt - HELD THAT - The entire scheme employed in this case is necessary to find out the role of any other entity therein including the stock brokers involved in transactions as observed in this case connection amongst the concerned entities and the ultimate owners of funds used for manipulating the price of the scrip. While SEBI would investigate into the probable violations of the securities laws the matter may also be referred to other law enforcement agencies such as Income Tax Department Enforcement Directorate and Financial Intelligence Unit for necessary action at their end as may be deemed appropriate by them. SEBI strives to safeguard the interests of a genuine investor in the Indian securities market. The acts of artificially increasing the price of scrip mislead investors and the fundamental tenets of market integrity get violated with impunity due for such acts. As prima facie find that the acts and omissions of Moryo Group and allottees as described above is inimical to the interests of participants in the securities market. Therefore allowing the entities that are prima facie found to be involved in such fraudulent unfair and manipulative transactions to continue to operate in the market would shake the confidence of the investors in the securities market. In this case it is noted that as on November 15 2014 the allottees are still holding 4032070 shares of Moryo that were allotted to them in the aforesaid preferential allotment. The price of the scrip is still around Rs.225 per share which is 9 times more than the allotment price. Unless prevented they may use the stock exchange mechanism in the same manner as aforesaid 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 for any unlawful/forbidden activities. A listed company in such a fraudulent scheme plan device and artifice as prima facie found in this case as 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 I in exercise of the powers conferred upon me in terms of section 19 read with section 11(1) section 11 (4) (b) and section 11B of the SEBI Act 1992 pending inquiry/investigation and passing of final order in the matter hereby restrain the following persons/entities from buying selling or dealing in the securities markets either directly or indirectly. The stock exchanges and the depositories are directed to ensure that all the above directions are strictly enforced. The persons/entities against whom this Order is passed may file their objections if any within twenty one days from the date of this order and if they so desire avail themselves of an opportunity of personal hearing before the Securities and Exchange Board of India on a date and time to be fixed on a specific request received from the said persons.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment revolves around several core issues:

• Whether the preferential allotment of shares by Moryo Industries Limited was used as a tool for market manipulation and fraudulent activities.
• Whether the trading activities of the Moryo Group entities constituted fraudulent and manipulative practices under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
• Whether the entities involved in the trading of Moryo shares were connected and acted in concert to manipulate the market.
• Whether the actions of the entities involved amounted to a scheme to generate fictitious long-term capital gains (LTCG) to convert unaccounted income into accounted income.
• Whether the SEBI's interim order to restrain the entities from trading in the securities market was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Preferential Allotment as a Tool for Market Manipulation

• Relevant Legal Framework: SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
• Court's Interpretation and Reasoning: The court observed that the preferential allotment was not backed by genuine business needs and was primarily used to facilitate a fraudulent scheme.
• Key Evidence and Findings: The allotment of shares at a low price followed by a significant price increase without any improvement in the company's fundamentals.
• Application of Law to Facts: The allotment was deemed a pre-arranged scheme to benefit connected entities.
• Treatment of Competing Arguments: The court dismissed arguments suggesting legitimate business purposes, citing lack of evidence.
• Conclusions: The preferential allotment was a tool for market manipulation.

Issue 2: Fraudulent and Manipulative Trading Practices

• Relevant Legal Framework: SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
• Court's Interpretation and Reasoning: The court found that the trading activities were designed to create artificial price and volume movements.
• Key Evidence and Findings: Trading patterns showed matched trades among connected entities, contributing to artificial price inflation.
• Application of Law to Facts: The trades were deemed manipulative, violating SEBI regulations.
• Treatment of Competing Arguments: The court rejected defenses of independent trading, emphasizing the coordinated nature of activities.
• Conclusions: The trading practices were fraudulent and manipulative.

Issue 3: Connection and Concerted Action Among Entities

• Relevant Legal Framework: SEBI regulations and precedents on establishing connections among entities.
• Court's Interpretation and Reasoning: The court identified multiple connections among the entities through common addresses, directors, and financial transactions.
• Key Evidence and Findings: Detailed analysis of KYC details, bank statements, and trading patterns.
• Application of Law to Facts: The entities were found to be acting in concert, supporting the manipulation scheme.
• Treatment of Competing Arguments: Arguments of independent operations were dismissed due to overwhelming evidence of connections.
• Conclusions: The entities were connected and acted in concert.

Issue 4: Scheme to Generate Fictitious LTCG

• Relevant Legal Framework: SEBI regulations on fraudulent practices and tax laws regarding LTCG.
• Court's Interpretation and Reasoning: The scheme was designed to convert unaccounted income into tax-exempt LTCG.
• Key Evidence and Findings: Layering of fund transfers and trading above the last traded price (LTP) to inflate share prices.
• Application of Law to Facts: The scheme violated securities regulations and tax laws.
• Treatment of Competing Arguments: Justifications of legitimate trading were rejected due to the artificial nature of the price and volume increases.
• Conclusions: The scheme was a fraudulent mechanism to generate fictitious LTCG.

Issue 5: Justification of SEBI's Interim Order

• Relevant Legal Framework: SEBI Act, 1992, and SEBI's powers to issue interim orders.
• Court's Interpretation and Reasoning: The interim order was necessary to protect market integrity and investor interests.
• Key Evidence and Findings: Ongoing manipulative activities and potential for further harm to the market.
• Application of Law to Facts: The order was justified to prevent further fraudulent activities.
• Treatment of Competing Arguments: Arguments against the order were dismissed, emphasizing the need for immediate action.
• Conclusions: The interim order was justified and necessary.

3. SIGNIFICANT HOLDINGS

• Verbatim Quotes: "The preferential allotment was a tool for implementation of the dubious plan, device and artifice of Moryo Group and allottees."
• Core Principles Established: The judgment reinforced the principle that market manipulation through coordinated trading and preferential allotments is a violation of securities laws.
• Final Determinations: The entities involved were restrained from trading in the securities market, pending further investigation.