TMI Blog2015 (7) TMI 702X X X X Extracts X X X X X X X X Extracts X X X X ..... e presumption and without any sustainable basis. In these circumstances, continuation of the restraint order is unjustified. However, since the restraint order passed against the appellant has already operated for nearly a year and since SEBI claims that the investigation is at a crucial stage, in the facts of present case, pending further investigation it would be just and proper to pass the following interim order - complete the investigation within a period of two months from today - SEBI deems it fit to proceed further in the matter, then SEBI shall issue show cause notice and pass appropriate order thereon after giving an opportunity of hearing to the appellant, within a period of one month from the date of issuing show cause notice - If SEBI fails to issue show cause notice to the appellant within two months from today and if issued, fails to pass an order as stated above within a period of one month from the date of issuing show cause notice, then and in that event the impugned confirmatory order dated October 16, 2014 continuing the restraint order passed under the exparte ad-interim order dated June 05, 2014 shall come to an end and the appellant would be entitled to ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he plea of the appellant for grant of interim relief is heard by consent of both parties. 4. Appellant is a company incorporated in Cayman Island, and operates as a collective investment vehicle or a fund under the laws of Cayman Island. Appellant has been trading in securities around the world including the Indian Securities Market. 5. Dispute in the present case relates to the appellant making profits of about 20 crores by entering into 5309 derivative contracts in the Futures and Options segment ( F O segment) of the stock exchange on March 13, 2013 equivalent to selling 2,12,36,000 shares of L T Finance Holding Limited ( LTFH for short) at an average price of ₹ 80.94/- per share and taking reverse position on March 14, 2014 by purchasing 2,75,10,484 shares of LTFH at a price of ₹ 71.50/- per shares in the Offer for Sale ( OFS for short) offered by L T Limited ( L T for short) which is the parent company of LTFH. According to SEBI appellant must have had Unpublished Price Sensitive Information ( UPSI for short) on March 13, 2014 that L T has fixed the floor price for selling the shares of LTFH through OFS on March 14, 2014 at ₹ 70/- per share and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market conditions and other relevant factors, L T was contemplating to sell the shares of LTFH through OFS in the next 2 to 3 days. Since the cooling-off period from the last disposal of shares of LTFH through OFS had not expired, L T, by the said letter requested SEBI to grant exemption from the cooling-off period and also the requirement of minimum gap between two OFS of 2 weeks. e) On March 10, 2014 Credit Suisse Securities (India) Private Limited ( CS for short) as merchant banker of L T conducted market gauging for LTFH scrip with more than 70 institutional investors with a view to ascertain potential investors interest and the price at which the investors would be willing to subscribe to the shares of LTFH in the OFS. Appellant had also participated in the said market gauging exercise. In that market gauging exercise, negative sentiment in respect of the shares of LTFH were expressed, meaning thereby that the investors would seek deep discount to buy shares of LTFH from L T. f) Shares of LTFH which were traded only in the cash segment were also permitted to be traded in the F O segment of the stock exchanges with effect from March 13, 2014. On March 13, 2014 in the mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary investigation conducted by SEBI creates a strong suspicion that the appellant must have built the unusual and aggressive short position in the F O segment ahead of the OFS on the basis of UPSI which it had received or had access to, regarding the likely floor price of the OFS. It is further stated that the source through which appellant might have got the information can be established only after detailed investigation and pending such investigation it is necessary to restrain the appellant from dealing and/or accessing the Indian Securities Market. l) Appellant while furnishing the particulars sought by SEBI from time to time, filed its detailed reply to the aforesaid ex-parte ad-interim order of SEBI. In its reply, the appellant denied all allegations made in the ex-parte ad-interim order. During the course of personal hearing the appellant submitted that inspite of investigation there being no direct or indirect evidence to suggest that even remotely the appellant was in possession or had access to UPSI, it is improper to continue the restraint order which is causing serious prejudice to the appellant and therefore the restraint order be vacated forthwith. m) However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 12 weeks cool-off period requirement under the OFS circular, L T could take its decision to fix the floor price for selling the shares of LTFH through OFS. Accordingly, L T fixed the floor price and thereafter at 9.22 P.M. on March 13, 2014 announced that L T would be selling 5,50,05,755 equity shares of LTFH (face value of ₹ 10/- each) at ₹ 70/- per share as floor price on March 14, 2014 between 9:15 A.M. and 3:30 P.M. at BSE and NSE. Since appellant had entered into various derivative contracts on March 13, 2014 for selling 2,12,36,000 shares of LTFH at an average price of ₹ 80.94/- per share, the appellant as a prudent businessman purchased 2,75,10,484 shares of LTFH in the OFS at an average price of ₹ 71.50/- per share. It is submitted that entering into futures contract relating to the shares of LTFH on March 13, 2014 and taking reverse position on March 14, 2014 by purchasing shares of LTFH in the OFS was in the ordinary course of business and merely because the appellant made profits of about ₹ 20 crore in the above transactions, SEBI is not justified in restraining the appellant from entering into the Indian Securities Market merely on suspic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nticipating that the shares of LTFH would be sold with deep discount, the appellant had taken calculated risk and accordingly entered into derivative contracts on March 13, 2014. Since L T on March 14, 2014 offered to sell shares of LTFH in OFS at ₹ 70/- per share, the appellant as a prudent business measure took reverse position on March 14, 2014 by subscribing to the shares of LTFH offered by L T at a lower price. The trades executed by the appellant on March 13, 2014 and March 14, 2014 were in the ordinary course of business and that the appellant was not privy to any UPSI as alleged or otherwise. Two employees of CS who were chatting through the Bloomberg terminal were neither known to the appellant nor the appellant had any access to that chat and hence it cannot be inferred on the basis of said chat that the appellant was privy to any UPSI. 13. Relying on decisions of this Tribunal in case of Rakhi Trading Pvt. Ltd. v/s SEBI (Appeal No. 70 of 2009 decided on 11/10/2010) and Indiabulls Securities Ltd v/s SEBI (Appeal No. 51 of 2009, decided on 26/10/2010) it is submitted by counsel for appellant that having entered into derivative contracts to sell shares of LTFH at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors, administrators and investors. Even though the impugned order pertains only to India, appellant is suffering badly as lot of such parties have suspended or stopped working with the appellant on account of continuation of the impugned restraint order. In fact all the 5 brokers through whom appellant traded in LTFH futures and even CS have stopped trading OTC in all markets (including outside India). In these circumstances, it is submitted that pending investigation the appellant be permitted to access the Indian Securities Market. 17. Mr. Nankani, Learned Senior Advocate appearing on behalf of SEBI on the other hand submitted that on March 13, 2014, the LTFH shares in the F O segment opened at ₹ 87.80/-, whereas, in the cash segment, the same scrip opened at ₹ 86%, thus there was a premium of Rs + 1.80 in the derivative segment. However, at the end of trading hours on March 13, 2014, the LTFH scrip in the F O segment closed at ₹ 75.55/- whereas, in the cash segment, the LTFH scrip closed at ₹ 79.20/- that is at a discount of ₹ 3.35/-. Such a movement was an abnormal movement, because, the F O price is normally higher than the underlying share an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11B do not require SEBI to prove the case beyond reasonable doubt. As a corollary, as long as there exists some material to take action under Section 11(4) and/or Section 11B of the SEBI Act, the adequacy or inadequacy of such evidence or material cannot be a ground for judicial review. 21. Counsel for SEBI submits that neither Section 11(4) nor Section 11B of SEBI Act prescribes any time limit for continuation of the orders passed therein. Therefore, SEBI is justified in continuing the ex-parte order for a reasonable period. In the present case, investigations are being conducted for the first time in relation to the trading done by Offshore Derivative Instrument Client through several FIIs in the F O market. Since the investigation herein involves cross border investigation extending to places outside India which is beyond the jurisdiction of SEBI, it is taking little longer time in gathering information from entities not regulated by SEBI. The investigations are at a crucial stage and the conduct of the client is found to be suspicious and explanation for executing the trade is found to be non-existent. The investigation file is confidential and contains privileged communica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell the contract on expiry day, that is, on March 27, 2014 and therefore price movement in one way or the other in between one or two days after March 13, 2014 would have had no impact on the appellant s trading decision. Accordingly, it is submitted that no interference is called for at this stage and the appeal deserves to be dismissed. 26. I have carefully considered the rival submissions. 27. In the present case, pending investigation, which commenced in April 2014, SEBI by its ex-parte order dated June 05, 2014 has restrained the appellant from accessing the Indian Securities Market and by the impugned order dated October 16, 2014, the ex-parte restraint order has been continued until further orders. Entire case of SEBI is based on the prima facie belief that on March 13, 2014 the appellant must be privy to the UPSI that L T would be selling shares of LTFH on March 14, 2014 with floor price fixed at ₹ 70/- per share. According to SEBI, the appellant, being privy to the above UPSI, took aggressive short position in the F O segment on March 13, 2014 by entering into 5309 derivative contracts which is equivalent to selling 2,12,36,000 shares of LTFH on the expiry day, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant through five FIIs. Thus, on March 13, 2014, 8355 (13664-5309=8355) derivative contracts equivalent to selling 3,34,20,000 shares of LTFH were entered into by various traders other than the appellant. It is a matter of record that at the end of trading hours on March 13, 2014, appellant had kept all the 5309 derivative contracts open, whereas, 7471 derivative contracts out of 8355 derivative contracts entered into by third parties other than the appellant were squared up during the course of the day thereby leaving only 884 derivative contracts open. According to SEBI, selling securities in the F O segment at a price higher than the price of the underlying in the cash segment is the natural phenomena. If that be so, then, no fault can be found with the appellant in entering into 5309 derivative contracts equivalent to selling 2,12,36,000 shares of LTFH at a price higher than the price of LTFH shares in the cash segment. In fact counsel for SEBI fairly stated that the abnormal movement of the trading in the F O segment on March 13, 2014 was not due to the appellant taking aggressive short position simpliciter but due to the fact that the appellant took aggressive short positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d July 18, 2012, the floor price for the OFS could be declared by L T only after the close of trading hours and before the close of business hours of the exchanges on T-1 day. Thus, as per the above SEBI circular, L T could disclose the floor price after the trading hours on March 13, 2014 only if the shares of LTFH were to be sold by L T through OFS on March 14, 2014. As rightly contended by the counsel for the appellant, in view of the cooling off period L T could sell shares of LTFH only on March 17, 2014, unless exempted by SEBI. Admittedly, exemption from the cooling off period granted by SEBI was communicated to L T by e-mail at 6:57 P.M. on March 13, 2014. It is not the case of SEBI that either the L T or CS or the appellant had any information in the morning of March 13, 2014 that SEBI had taken a decision to grant exemption from the cooling off period and that decision would be communicated to L T late in the evening on March 13, 2014. In such a case, question to be considered is, whether, SEBI is justified in presuming that in the morning of March 13, 2014 or prior thereto L T had fixed the floor price for selling the shares of LTFH in OFS at ₹ 70/- per share and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI above information gathered from CS leads to strong presumption that prior to the appellant entering into derivative contracts on March 13, 2014 the floor price was fixed at ₹ 70/- per share and the appellant was privy to such UPSI. 35. Plain reading of the chat transcript between two CS employees viz __ likely to come in at a steep discount about 70 types would simply mean that there is a possibility of L T fixing the floor price for sale of shares of LTFH through OFS at ₹ 70/- per share. From the said chat transcript it can neither inferred that CS had recommended nor L T had finalized the floor price to sell the shares of LTFH at ₹ 70/- per share before the trades of the appellant were executed on March 13, 2014. Apart from the above, there is nothing on record to suggest, even prima facie, as to how the appellant had access to such chat between the two employees of CS. 36. Assuming that L T had fixed the floor price at ₹ 70/- per share, appellant could be said to be privy to such UPSI or have access to such UPSI only through L T or CS. It is not even the prima facie belief of SEBI that L T or CS or any of their employees have furnished UPSI to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the market gauging exercise. Similarly fact that the appellant without having any existing exposure in the shares or derivatives of LTFH had taken aggressive short position in the F O segment on March 13, 2014 at an average price of ₹ 80.94/- cannot be said to be the basis to presume that the appellant was privy to UPSI especially when the market sentiment gathered in the market gauging conducted by CS on March 10, 2014 clearly indicated that the investors were seeking deep discount to buy shares of LTFH from L T through OFS. Moreover on March 13, 2014 a number of market analysts had recommended selling shares of LTFH in the F O segment. In such a case, entering into derivative contracts on March 13, 2014 and taking reverse position on March 13, 2014 by subscribing to the shares of LTFH through OFS cannot be said to be on account of appellant being privy to UPSI that L T has fixed floor price for OFS at ₹ 70/- per share, merely because two employees were chatting that L T is likely to fix the floor price at ₹ 70/- per share. 38. Fact that the appellant locked in a profit of approximately ₹ 20 crore by entering in to 5309 derivative contracts on March ..... X X X X Extracts X X X X X X X X Extracts X X X X
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