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2015 (7) TMI 702 - SECURITIES APPELLATE TRIBUNAL MUMBAI

2015 (7) TMI 702 - SECURITIES APPELLATE TRIBUNAL MUMBAI - TMI - Request for Interim order / relief - SEBI order to restrain from dealing in securities in the Indian Securities Market (including through Offshore Derivative Instruments) - To restrain from accessing the Indian Securities market directly or indirectly - As SEBI needs off shore assistance, needs 4 to 5 months for completing the investigation - Held that:- There can be no dispute that the appellant has suffered serious prejudice on ac .....

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privy to UPSI that L&T has fixed the floor price for selling the shares of LTFH at ₹ 70/- per share is based on mere 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 .....

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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 access the Indian Securities Market. - Appeal No. 391 of 2014 - Dated:- 8-5-2015 - J.P. Devadhar, J. For The Appellant : Mr. Darius Khambata, Senior Advocate with Mr. Somase .....

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ppellant on June 5, 2014 has been continued until further orders. As a result, the appellant continues to be restrained from dealing in securities in the Indian Securities Market (including through Offshore Derivative Instruments) and/or accessing the Indian Securities market, directly or indirectly, in any manner whatsoever until further orders. 2. Counsel for SEBI on instruction states that the investigation in the present case involves cross border investigation and since Bloomberg terminal h .....

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Lamba retired with effect from March 17, 2015. Thereafter, new Bench could not be constituted because, another Member Shri. Jog Singh has been on long leave due to ill health. In these circumstances, counsel for appellant submitted that the delay in disposing of the appeal on merits is causing serious prejudice to the appellant as the appellant continues to be restrained for accessing the securities market in India and the said order is adversely affecting the business of the appellant even outs .....

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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 o .....

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o sell shares of LTFH in the F&O segment at an exceptionally high average price of ₹ 80.94/- per share. According to SEBI above transactions are prima facie inimical to the interest of the participants in the securities market and therefore pending investigation on the question as to whether appellant was privy to UPSI relating to the floor price fixed by L&T, to safeguard the interest of the securities market it is necessary to restraint the appellant from dealing in securities in .....

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which were listed on the Bombay Stock Exchange Limited ( BSE for short) and National Stock Exchange ( NSE for short) with effect from August 12, 2011. In order to comply with the minimum public shareholding requirement under the Securities Contracts (Regulation) Rules, 1957 ( SCRR for short), L&T was required to reduce its stake in LTFH up to 75%. b) During the period from mid 2012 to March 2014, the earnings estimate memorandum from equity analysts covering LTFH had been very negative. As a .....

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to bring its shareholding in LTFH to 75%, L&T was required to offload more than 6% shares of LTFH after expiry of requisite 12 weeks cooling-off period from the previous sale that took place in November- December 2013. d) On March 10, 2014 L&T addressed a letter to SEBI stating therein that considering the 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 dispo .....

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uld 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. .....

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March 13, 2014 at 9.22 P.M., L&T made two announcements to the stock exchanges (BSE & NSE). First announcement was that in order to comply with the minimum public shareholding norms as specified in SCRR, L&T will launch an OFS of 5,55,05,755 shares in LTFH on March 14, 2014 by appointing CS as seller broker in the OFS. Second announcement was that the floor price for the shares offered in OFS has been fixed by L&T at ₹ 70/- per share. i) Accordingly, when 5,55,05,755 share .....

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g in a profit of approximately ₹ 20 crore. j) In the first week of April 2014 SEBI approached an FII through whom appellant had traded in LTFH futures and sought trade rationale. Appellant furnished the trade rationale on April 07, 2014 to the broker which was then forwarded to SEBI. Thereafter, as a follow-up action, SEBI sought various informations from the FIIs and the appellant responded to SEBI directly with its responses on the queries raised by SEBI and voluntarily offered to furnis .....

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t 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) .....

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raint order which is causing serious prejudice to the appellant and therefore the restraint order be vacated forthwith. m) However, by the impugned order dated October 16, 2014 the ad interim ex-parte order has been confirmed and the restraint order passed against appellant has been continued until further directions. 7. Mr. Khambata, Learned Senior Advocate appearing on behalf of the appellant submitted that SEBI had been conducting investigation in the present case since April 2014. It is more .....

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illegal to continue the restraint order imposed against the appellant. 8. It is further submitted by counsel for appellant that since mid 2012 the shares of LTFH had negative sentiment in the market and the same is evident from the reports of various market analysts. In fact in November-December 2013, L&T had sold 1% shares of LTFH in the market at prices below the then prevailing prices. In the market gauging exercise for LTFH undertaken by CS on March 10, 2014, more than 70 institutional i .....

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per shares and closed at ₹ 74.55/- per share. In the cash segment the price of shares of LTFH opened at ₹ 86/- per share and closed at ₹ 79.20/- per share. During the course of the day on March 13, 2014, the appellant entered into 5309 derivative contracts through 5 FIIs equivalent to selling 2,12,36,000 shares of LTFH at an average price of ₹ 80.94/- per share. 10. Counsel for appellant further submitted that it is only when L&T late in the evening on March 13, 2014 .....

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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 O .....

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H is highly suspicious for the following reasons:- a) Appellant took an aggressively short position that is equivalent to 84.15% of the total open interest in the scrip of LTFH on March 13, 2014. b) After taking such an unusually aggressive short position in the F&O segment, appellant took a reverse position of 2,75,10,484 shares in the cash market by subscribing to the OFS at a price of ₹ 71.50/- on March 14, 2014. c) By taking such positions, appellant locked in a profit of approxima .....

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s contacted by the CS team as a prospective investor. For the aforesaid reasons, SEBI has assumed that the appellant must have been in possession of UPSI about the floor price of the OFS prior to entering into the derivative contracts on March 13, 2014 and accordingly, pending investigation, SEBI has debarred the appellant from entering the securities market until further order. 12. Counsel for appellant submitted that there is no inconsistency in the trading effected by the appellant on the F&a .....

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gative sentiment in respect of the shares of LTFH meaning thereby that L&T should sell the shares of LTFH during OFS with deep discount. Anticipating 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, 201 .....

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y 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 future date at the prices prevailing on March 13, 2014, it was legally permissible and open to the appellant to take reverse position if the shares of L .....

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bmitted on behalf of the appellant that the intention of the appellant to make profits by selling the overvalued asset viz shares of LTFH and buying back the shares of LTFH that were available at a lesser price was a bonafide intention and not motivated by any UPSI as alleged or otherwise. Fact that in the present case, appellant had made profits of about ₹ 20 crores, without being any prior exposure in the scrip of LTFH and the fact that the appellant has traded through five FIIs cannot b .....

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3, 2014 was 34.4% of the futures volume and 21.8% of the total futures and stock volume and therefore the contention of SEBI to the contrary is totally unjustified. In the impugned order, these facts have neither been considered nor dealt with and hence the impugned order is liable to be quashed and set aside. 16. Lastly, counsel for appellant submitted that the impugned order passed by SEBI, has caused serious prejudice to the appellant and its reputation as a clean Asian Multi Asset Fund in ev .....

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rder. 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 s .....

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lying shares. In fact, it was the highly aggressive trading done by the appellant in the derivative segment that caused distortion in the price of derivatives contract of LTFH. 18. Counsel for SEBI submitted that admittedly 70 potential investors as also the appellant were involved in the market gauging exercise conducted by CS and none of them barring the appellant took aggressive position of short selling 2,12,36,000 shares of LTFH in the F&O segment and keep the position open as on March .....

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ormation. On March 13, 2014, L&T announced the floor price for OFS at 9:22 P.M. On the same day, 12 hours prior thereto that is at 9:21:24 A.M., two employees of CS in correspondence with each other (as is evident from the Bloomberg chat) had stated in relation to LTFH s share that they (L&T) are likely to come at a steep discount about 70 types . The above piece of evidence coupled with aggressive acts of the appellant which caused abnormal movement in the market, had led to the prima f .....

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has the power to pass interim order when the interests of the investors is affected or there is disruption of the market. The power under Section 11(4) read with Section 11B of SEBI Act is temporary in nature and can be exercised pending investigation and/or after investigation. As such, by its very nature, exercise of powers under Section 11(4) read with Section 11B do not require SEBI to prove the case beyond reasonable doubt. As a corollary, as long as there exists some material to take actio .....

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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 in .....

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red and therefore, the appellant is not justified in contending that its argument has not been considered in the impugned order. 23. Counsel for SEBI further submitted that in para 25 of the affidavit in reply dated February 02, 2015 what is stated is that both in the exparte order and in the impugned order, SEBI has not concluded that the appellant has come in possession of the UPSI through CS. Such a conclusion can be arrived at only on completion of investigation. 24. Counsel for SEBI further .....

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appellant. 25. Counsel for SEBI further submitted that waiver of the cooling off period by SEBI had no bearing on the trading of the appellant or its outcome. If relaxation was not granted, the scrip price could have gone down on March 14, 2014 and in that event there could be two possibilities viz, either the floor price had to be lowered or the OFS had to be postponed. If the floor price was lowered, appellant would have bought shares through OFS at further lower price and if OFS was postpone .....

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rch 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 appel .....

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he 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, that is, on March 27, 2014 at an average price of ₹ 80.94/- per share and on March 14, 2014, took reverse position by subscribing to 2,75,10,484 shares of LTFH in the OFS (offered by L&T) at a price of ₹ 71.50/- per share and thereby locked in a profit of ₹ 20 crore (approximately) based on the difference between the av .....

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ort position in the shares of LTFH which led to market disruption. Secondly, on March 13, 2014 at 9:21:24 A.M. two employees of CS in correspondence with each other as per the Bloomberg chat had stated that in respect of LTFH s share that they (L&T) are likely to come at a steep discount about 70 types . 29. SEBI considers that on March 13, 2014 there was abnormal movement/ market disruption in the F&O segment, because, the LTFH scrip in the F&O segment opened at ₹ 87.80/- wher .....

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moves in tandem with the price of underlying shares. Admittedly, March 13, 2014, was the first day of trading in LTFH shares in the F&O segment and in fact on that day, the LTFH shares in the F&O segment opened at a price higher than the price of LTFH share in the cash segment. During the course of the day on March 13, 2014 in all 13,664 derivative contracts equivalent to selling 5,46,56,000 shares of LTFH were traded in the F&O segment. Out of 13,664 derivative contracts, 5309 deriv .....

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cts 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 .....

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he shares of LTFH were overvalued and in view of the negative sentiment it would be safe to keep the short position open on March 13, 2014. Secondly, since L&T was appraised through CS about the negative feeling in respect of LTFH shares and since there was a demand for deep discount, the appellant had every reason to believe that L&T would sell shares of LTFH at a price lesser than the price prevailing in the cash segment. There is no material on record to rebut the above explanation of .....

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ofits by squaring off the deals by entering into transactions in the cash segment. Since, the appellant is the only person who has taken such aggressive short position and kept it open on March 13, 2014, SEBI is justified in investigating the matter. However, during the pendency of such investigation to restrain the appellant from accessing the Indian Securities Market solely based on the fact that the appellant took aggressive short position on March 13, 2014 and took reserve position on March .....

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l shares of LTFH with a floor price of ₹ 70/- per share and that is why the appellant took aggressive short position on March 13, 2014 and kept it open. 32. It is relevant to note that as per SEBI circular dated 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 .....

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n 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 that the appellant was privy to such UPSI. 33. L&T .....

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ares of LTFH through OFS. This is because, if the shares of LTFH were to be sold on March 14, 2014, then only depending upon the price of LTFH shares at the end of the trading hours on March 13, 2014, L&T could fix the floor price for selling the shares of LTFH through OFS on March 14, 2014. To illustrate, if at the end of the trading hours on March 13, 2014 the shares of LTFH had closed at ₹ 65/- per share, then fixing the floor price at ₹ 70/- per share, even before the close o .....

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e close of trading hours that too without having any knowing that pursuant to the exemption granted by SEBI shares of LTFH could be sold through OFS on March 14, 2014 is without any basis and hence unsustainable. 34. Entire case of SEBI in presuming that L&T must have fixed the floor price for sale of LTFH shares at ₹ 70/- per share is that from the Bloomberg chat transcripts provided by CS, it is noticed by SEBI that on March 13, 2014, information like, likely to come in at a steep di .....

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h 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 .....

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of SEBI that L&T or CS or any of their employees have furnished UPSI to the appellant. Counsel for SEBI in answer to a query fairly stated that according to CS, complete Bloomberg chat transcripts have been furnished by CS to SEBI. If SEBI accepts the contention of CS that complete chat transcripts are provided by CS, then there is no question of SEBI approaching Bloomberg seeking further chat transcripts. It is only if, SEBI suspects that CS might not have disclosed complete chat transcript .....

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appellant traded in the F&O segment on March 13, 2014. In these circumstances, the prima facie view formed by SEBI on the basis of Bloomberg chat provided by CS that the appellant was privy to the UPSI that L&T has fixed the floor price at ₹ 70/- per share before entering into the trades on March 13, 2014 is purely hypothetical and there is no rational basis for such presumption drawn by SEBI. 37. It is contended on behalf of SEBI that due to the non-co-operation on part of Bloombe .....

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n has now hit the road block. Fact that the appellant was involved in the market gauging exercise cannot be a ground to presume that the appellant was privy to the UPSI that floor price is fixed at ₹ 70/- per share, because, admittedly, 70 institutional investors were also involved in the market gauging exercise and if those institutional investors are considered to be privy to UPSI, then there is no reason to presume that the appellant was privy to UPSI on account of involvement in the ma .....

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hares 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 .....

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ant from accessing the securities market pending investigation, especially when there is not even one good reason to discard the explanation given by the appellant for keeping the short position open at the end of trading hours on March 13, 2014. 39. There can be no dispute that the appellant has suffered serious prejudice on account of restraint order which is operation for nearly one year. No doubt that under Section 11(4)/11B of SEBI Act, SEBI is empowered to restrain a person from entering t .....

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