TMI Blog2001 (10) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant's shares are listed on Stock Exchanges at Mumbai (BSE), Calcutta, Delhi, Ahmedabad and also traded at the National Stock Exchange (NSE). 3. The respondent is a statutory regulatory body established under Section 3 of the Act. It is mandated to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. 4. The respondent carried out an investigation into the alleged price manipulation in the scrips of certain companies including the appellant, especially during April and May, 1998. Investigation revealed that a set of persons had cornered large chunk of shares of the appellant, at BSE and NSE resulting in distortion of market equilibrium. Based on the findings of the said investigation, the respondent, on 20-12-1999 issued show-cause notice to the appellant and its directors/officers, viz. Shri Anil Aggarwal, Shri Shashikant and Shri Tarun Jain. In the said show-cause notice it was inter alia alleged that: (i) There were large volumes coupled with fluctuations in prices at the bourse in respect of the appellant's shares specially during April-May, 1998. Share price of the appellant was hoverin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... building up of the positions is seen in the perspective of developments at the corporate level, it would bring to light the probable reasons for connivance of the appellant with Mr. Mehta in manipulating the prices of the shares of the appellant. The share price of the appellant was hovering in the range of ₹ 175 to ₹ 200 since September, 1997. A resolution was passed by the appellant on 16-2-1998 whereby it was decided to issue on preferential basis 90 lakhs warrants to Shri Anil Aggarwal, the promoter of the appellant and his associates. The warrant holder was entitled to apply for one equity share against each warrant held by him, after the expiry of 18 months. The warrant was priced @ ₹ 181 per share as per SEBI guidelines. This offer was accepted by the promoters and by June end 1998 they applied for these 90 lakhs warrants by paying 10 per cent of the face value which came to around ₹ 16.20 crores. (vii) A public offer was made on 17-2-1998 by the appellant for acquisition of 10 per cent equity of Indian Aluminium Company Limited ('INDAL') @ ₹ 90 per share. Later, Alcan, a majority shareholder of INDAL made a competitive bid on 22-3-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pril and May 1998. In the scrip of Sterlite the price moved from ₹ 162 on 17-2-1998 to ₹ 385 on 27-5-1998. Sterlite has not disputed the above price movement which is a fact borne out of actual trading details and price at the stock exchange. I find that the price movement in the scrip of Sterlite was not in conformity with the Sensex/Nifty movements. During the period from 1-4-1998 to 4-6-1998, while the BSE Sensex showed a decline of 11 per cent i.e. from 3969 to 3546 and Nifty showed a decline of 5 per cent from 1081 to 1027, the price of Sterlite share rose by 71 per cent. I find that this rise in price was accompanied by abnormal volumes in these shares both at the BSE and NSE during this period. At the same time, I find that the price movement in the scrips of Sterlite vis-a-vis the price movement of the shares of other companies in the same industry segment was highly abnormal. I do not find any merit in the submissions of Sterlite that rise in the price of scrip of Sterlite was due to open offer for Indal, recommencement of commercial production of Copper Smelter, preferential allotment or declaration of half-yearly result. The findings show the price was due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... okers built up large purchase positions in the carry forward segments in the scrip of Sterlite Industries Ltd. at the BSE which increased from settlement to settlement. The outstanding purchase positions were abnormally high in the scrips of Sterlite and it went to the extent of 3.8 per cent of total equity of Sterlite Industries Ltd. This increase in carry forward positions was accompanied by a corresponding increase in the scrip prices. In Sterlite Industries Ltd., the hawala rate (closing rate on the date of end of settlement) moved consistently from ₹ 260 to ₹ 350 in only five settlements. The settlement wise details of outstanding position along with Hawala Rate in Sterlite are as under :-- Sett. No. Carry forward Purchases Carry forward Sales Purchase V/s Sales (No. of times) Hawala Rate (Rs.) 1. 624200 169300 3.69 260 2. 782800 307300 2.55 305 3. 326600 218200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BSE increased from 8.2 lacs shares in Settlement No. 9 to 12.5 lacs shares in Settlement No. 10 and to 18.8 lacs shares in Settlement No. 11. Thus, the increase in the carry forward position between Settlement No. 9 to Settlement No. 11 was approximately 10.6 lacs shares. Out of the increased carry forward positions, substantial number of shares were on an account of Damayanti Group. This abnormal increase in carry forward position resulted in cornering of the shares. Damayanti Group took delivery of 6,68,000 shares, out of 16,85,700 shares delivered in settlement No. 12, which constituted 39.63 per cent of the total delivery in the settlement. Similarly, a set of brokers of NSE dealing essentially for Damayanti Group took large positions at the NSE in this scrip. The approximate number of shares acquired by Damayanti group through these brokers in Settlement No. 20 was 1,00,200 which is 38.94 per cent of the total delivery of 2,57,300 shares at the exchange. 6.2 Sterlite has admitted that Malco has purchased about 3 lacs (6 lakhs ?) shares at the cost of ₹ 11.75 crores. It was stated that when Malco purchased these shares the sole intention was to help the BSE to avert a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted by the promoters and by June end 1998 they applied for these 90 lacs warrants by paying 10 per cent of the face value which came to around 16.20 crores. 6.4 An offer was made on 17-2-1998 by Sterlite Industries Ltd., for acquisition of 10 per cent equity of INDAL @ ₹ 90 per share. However, SEBI directed Sterlite Industries Ltd. to make minimum offer for 20 per cent equity of INDAL. Later, Alcan, a majority shareholder in INDAL made a competitive offer. At the same time, trading volumes rose in the scrip of Sterlite Industries Ltd. The volumes increased suddenly from 4 to 5 lakhs per settlements to 25 to 30 lakhs per settlements at NSE and around 30 to 40 lakhs at BSE. 6.5 To beat Alcan in its competitive bid, Sterlite Industries Ltd. came with an ingenious scheme. The very next day i.e. 26-5-1998, Sterlite announced its decision to hike the offer size to acquire 52.03 per cent of the equity of INDAL at a price of ₹ 221 each. The total fund required for acquisition of 52.03 per cent equity of INDAL, which amounted to 3.70 crore shares, was ₹ 817.70 crores. This offer was partly in cash i.e. @ ₹ 131 per share and partly in the form of Optionally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in April 1998 but this by itself was not very significant which would have warranted such substantial increase in prices of the shares of Sterlite. This price was artificially raised and it went down to ₹ 195 when the artificial support was withdrawn. At that point of time, the copper smelter plant was working and the production was higher in June and July as compared to production in the month of April. 6.6 Damayanti Group was working in concert with promoters of the company. During the visit of the SEBI investigation team to the office of Damayanti Group at 1208, Maker Chambers V, Nariman Point, copies of certain documents were furnished by employee of Damayanti Group in response to summons. One of the papers had details of investment by Shri Harshad Mehta. On this paper under the heading 'excess lying as under' there is noting Dil Vikas, ster - 1,95,000 . The break up of this figure has also been given as 1,50,000 + 45,000 margins. Dil Vikas referred to Dil Vikas Finance Ltd., which is an associate company of Eldorado Guarantee Ltd., which is known in market circles as 'jobber' of Sterlite Industries Ltd. It was found that Eldorado had purchased 1.5 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be done by them for Sterlite Industries Ltd. It can be inferred from the following facts (a) funds being given by MALCO ostensibly as loan, (b) transaction being entered at the instance of Mr. Murthy of Sterlite who gave details of counter party broker with whom this negotiated deals was entered, (c) departure from normal practice of entering in inward and outward register of shares received in the office in respect of 45,000 shares, (d) non-furnishing of details regarding the financier and owner of this 45,000 shares, (e) loan has been given by MALCO for six months though the need for Eldorado was only for two days, (f) availability of details of 1,95,000 shares in the office of Damayanti Group, that transaction was for Damayanti Group and Sterlite Industries Ltd. In view of the above, it is concluded that Eldorado was used as a conduit for parking of shares. 7.1 The promoter and Damayanti Group nexus became further clear from the fact that some of the brokers at BSE and NSE who were dealing for Damayanti Group and who could not carry forward their outstanding positions in Sterlite Industries Ltd. sold these shares to Dil Vikas Finance Ltd., an associate concern of Eldorad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t BSE's Governing Board members had approached Sterlite with a view to avoid market having a payment crisis and for avoiding any draw down from trade guarantee funds in order to fulfil commitments. Sterlite has admitted that any such payment crisis would have further tarnished the corporate reputation of Sterlite and at the same time this was perceived as an opportunity by the promoters to acquire some further shares at an attractive price. It further stated that when MALCO purchased these shares the sole intention was to help BSE to avert a major payment crisis on the premier exchange of the country and not to manipulate the share prices of Sterlite or bail out any particular group of brokers. 7.3 Only brokers who had dealings/linkages with Damayanti Group were selected for bailing out. Why would any limited company who is responsible to its shareholders would like to pick up shares of Sterlite when there were no genuine buyers and only sellers in the market and that too from those brokers who were dealing for Shri Harshad Mehta unless they were in league with him. The rate at which the transactions was to be entered and the name of the brokers with whom it was to be entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt judgment which is stated as under: Shivajirao Nilangekar Patil v. Mahesh Madhav Gosavi AIR 1987 SC 294. 'There is no question in this case of giving any clean chit to the appellant in the first appeal before us. It leaves a great deal on suspicion that tampering was done to please Shri Patil or at his behest. It is true that there is no direct evidence. It is also true that there is no evidence to link him up with tampering. Tampering is established. The relationship is established.' 10.1 After taking into consideration all that has been stated above and the circumstantial evidence, I am convinced that Sterlite Industries Ltd. has indulged in price manipulation of the scrip of Sterlite during the period April and May, 1998 and violated regulation 4 (a) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 read with Section 11(1) and 1 l(2)(e) of SEBI Act, 1992. 10.2 Creation of false market and price manipulation is a very serious offence and is in violation of regulation 4(a) and 4(d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rness and integrity of the securities market. I am of the view that integrity of the securities market has been effected. In order to ensure that the confidence of investors in securities market remains unimpaired, it would be necessary to issue suitable direction. 10.5 In view of the above, I in exercise of powers under Section 4(3) read with Sections 11 and 11B of SEBI Act hereby direct that Sterlite Industries is prohibited from accessing the capital market for a period of 2 years from passing of this order. It is further ordered that prosecution proceedings under Section 24 read with Section 27 of the SEBI Act for violation of regulation 4(a) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 1995 shall be initiated against Sterlite Industries through their directors namely Shri Anil Aggarwal, Shri Tarun Jain and Shri Shashikant. 8. Shri C.A. Sundaram, the learned senior counsel appearing for the appellant submitted that the impugned order is contrary to the rules of natural justice, as the respondent did not give personal hearing to the appellant nor allowed it to cross examine the witnesses upon whose s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respond to the request and without giving any opportunity to the appellant to put forth its version, on 19-4-2001 the respondent passed the order. He stated that the sequence of events narrated above, as also disclosed in the impugned order would show that the delay in investigation was not caused by the appellant, that though the respondent was moving at snails pace since 1998, picked up super speed all on a sudden in the light of the heat turned on it after the share market crash in March, 2001 and decided the matter in a hurry even ignoring the rules of natural justice. 10. Shri Sundaram submitted that the impugned order cannot sustain legally and factually. He submitted that the respondent has chosen two transactions involving the appellant's shares i.e., 3 lakh shares purchased by El Dorado Guarantee Ltd. (El Dorado) for their clients on 8/10-4-1998 and 6 lakhs shares purchased by MALCO on 12-6-1998 and come to the conclusion. In this context the learned senior counsel submitted that these two transactions when compared with total transaction of the appellant's shares in BSE/NSE during the relevant period, are insignificant to have any impact on the market or the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stated that there is not even a whisper of such a charge against the appellant anywhere in the order. The learned senior counsel stated that according to Clause (a) of regulation 4, no person shall, effect, take part in or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person. He stated that self profit is the motivation that attracts Clause (a) of the regulation. Shri Sundaram submitted that any price change in the scrips, as a result of genuine purchase or sale would not attract the provision, that if there is no artificiality in a transaction, regulation 4(a) cannot reach. He stated that the words 'intention of artificially raising or depressing the price' are the crux and that an artificial price is not the genuine price. Whether the price is genuine or artificial would depend on the attendant facts in each case. 13. Referring to the allegation involving purchase of 3 lakh shares by the appellant, Shri Sundaram stated that shares were not purchased by the appellant or at its behest, that it was a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulation 4(d). In this context he stated that from the factual position it is clear that the shares were purchased at the prevailing market price on delivery basis and it was intended to register in the name of the clients, and not to distort the price mechanism, and therefore it cannot be said that the transaction attracted regulation 4(d). 15. Referring to the purchase of 6 lakh shares of the appellant by MALCO in June, 1998, Shri Sundaram submitted that provisions of regulation 4(a) and (d) are not attracted to the said purchase also as could be seen from the factual position being referred to later. The shares were purchased as requested by the BSE, to avert a payment crisis and save the market. 16. Shri Sundaram submitted that the respondent has wrongly concluded that the appellant and MALCO are one and the same entity. MALCO is a public limited company, run by its board of directors in management and that it is not even a subsidiary of the appellant, the fact that MALCO is an associate company of the appellant should not be construed to hold that MALCO is an agent of the appellant, that the relation is not that of principal and agent but that of business associates, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the order that there was any fund flow from the appellant for the purchase of the said 6 lakh shares. MALCO used its own funds. Shri Sundaram submitted that the factual position completely belies the contention that the appellant had any intention to manipulate the share price. He further submitted that the scope of the provisions of regulation 4(a) and (d) discussed in the context of the transaction relating to purchase of 3 lakh shares is in equal force applicable to the purchase of 6 lakh shares by MALCO and this transaction is also out of the scope of the said regulation. 18. The learned senior counsel submitted that in the context of market manipulation charge levelled against the appellant, it is necessary to clearly understand what is actually meant by 'market manipulation'. According to him the respondent has made the allegation without fully appreciating the scope of the said expression. He stated that the expression 'manipulation' for the purpose of the regulation has not been defined, but its meaning is well understood in the market and by the regulators all over the world. He stated that the scope of the expression has been subjected to scrutiny by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Strand Corporation v. Sunchemical Corporation 553 F. 2d 1033, 1044 (7th cir.) ] 19. Shri Sundaram stated that the law in this regard is materially identical in India and in USA and therefore the decision of the US Courts could be followed for guidance. 20. The learned senior counsel submitted that there is no allegation or finding of deceit either in the show-cause notice issued to the appellant or in the impugned order. In this context Shri Sundaram further cited the observations made by the Administrative Judge on 'manipulation'. Manipulation 'The court in Resch-Cassin listed various factors which characterize attempts by manipulators to raise the price of a security. Among them are price leadership by the manipulator, domination and control of the market, and restricting the floating supply of stock 362 F. Supp. At 976-77. However, an infinite variety of manipulative devices are encompassed within Section 10(b) and Rule 10b-5. See Herpich v. Wallace, 430 F. 2d 792, 802 (5th Cir. 1970). A finding of manipulation is not dependent upon the presence of any particular device usually associated with a manipulative scheme. Swartwood, Hesse, Inc., 50 S.E.C. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongest countervailing evidence will be sufficient to outweigh this presumption . Halsey, Stuart Co., 30 S.E.C. at 124 n. 28, citing Opinion of General Counsel, Section Ex. Act Rel. No. 3056 (1941); see also VIIIL. Loss J. Seligman, Securities Regulation, 3974.75 (3d.ed. 1991). Scienter Rapidly rising prices in the absence of any demand are well-known symptoms of .....Unlawful market operations . Dlugash v. SEC 373 F.2d at 109. In this case, the price of Of Counsel units rose dramatically despite an almost total absence of demand. Between November 23 and December 8, over only 11 trading days, the price of Of Counsel units almost doubled, from $ 4-1/8 to $ 8. This rapid increase occurred in the absence of any significant retail demand for the securities, and in the absence of any news about the company. This price increase, which cannot be attributable to any normal market forces, is a clear basis for me to infer the necessary scienter in connection with a finding that Wolf Co., Hibbard and Wegard illegally manipulated the market for Of Counsel securities. 21. The learned senior counsel further submitted that the respondent has referred to irrelevant data to show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned senior counsel submitted that MALCO did not finance 3 lakh shares on delivery basis purchased by El Dorado, that the loan of ₹ 5 crores given by MALCO to Dil Vikas, a registered RBI satellite dealer for Government securities was deposited by Dil Vikas in their separate earmarked satellite account with RBI from which funds could only be utilised for RBI transactions and for no other purpose. He said that the said loan had nothing to do with the purchase of these 3 lakh shares, as the loan amount itself was only ₹ 5 crores, while the purchase consideration for 3 lakh shares was over ₹ 9 crores. Shri Sundaram submitted that both the parties for whom the shares were purchased by El Dorado, namely Crimson and Shri Khurana, had admitted that they were beneficially entitled to these shares, that the respondent has blacked out this factual position to suit its convenience. 24. Shri Sundaram referred to Shri Murthy's statement dated 30-9-1999 (at A.10) to the effect that he had not given any instructions to anyone in El Dorado Guarantee Ltd. or to any other associate concern to buy the appellant's shares. According to Shri Sundaram in the light of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion while drawing conclusions. In this context he referred to Annexure 'A' to the appeal, therein the market price and volume traded on BSE and NSE have been shown and stated that as per the said Annexure the price of the scrip was opened on 8-4-1998 at 296 and closed at 291 and the traded volume was 241 153. On 10-4-1998 the corresponding figure was 299 and 319.80 and volume was 447 539. Shri Sundaram stated that 8-4-1998 and 10-4-1998 are relevant as the shares for Khurana and Crimson were purchased on the said dates. Shri Sundaram submitted that the volume traded in NSE during the period 1-4-1998 to 17-4-1998 was 6,370,900 and in BSE it was 6,582,991, making a total of 12,953,891, that the weighted average price of the scrip in NSE was ₹ 308 and in BSE ₹ 306.16 and therefore in the light of the said factual position, it is not possible for any reasonable man to conclude that purchase of 3 lakhs shares @ ₹ 291 (on 8.4) and @ ₹ 308 (on 10/4) by anybody had resulted in manipulation of the market. He stated that a perusal of the said annexure would also reveal that there was no erratic movement of price or volume as a result of the said purchase, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard and that MALCO purchased shares at the price fixed by the Governing Board officials of BSE and the quantum was also decided by them, MALCO had no choice, that the whole purpose was to go by BSE to avoid market crash and thereby protect the interests of all concerned, including the investors. Shri Sundaram submitted that such an action taken at the behest of BSE, to protect the interests of the capital market cannot be considered by any standard a market manipulation to attract the provisions of regulation 4(a) and (d). 29. The learned senior counsel submitted that 6 lakh shares were purchased by MALCO on the specific request of the authorities from Bombay Stock Exchange, neither MALCO nor the appellant knew the brokers of Damayanti Group allegedly involved in the transactions. He stated that the respondent had ignored the fact that MALCO had instructed El Dorado to find a buyer for the said 6 lakh shares and only if they could not find a buyer, MALCO would purchase such shares, which MALCO did after one month of the purchase by El Dorado. Shri Sundaram pointed out that the respondent has failed to recognise the fact that MALCO is a separate and independent legal entity and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferral date has been deliberately left out to misguide the Tribunal to show that the time gap between the rate of ₹ 181 prevailed and ₹ 385 on 27-5-1996 was very narrow. He submitted that purchase of 3 lakh shares by El Dorado was on 8/10-4-1998 and purchase of 6 lakh shares by MALCO on 12-6-1998 and these purchases were made at the market price and the market data furnished by the appellant indicate that these transactions had no impact on the market as has been alleged in the order. 31. Referring to the respondent's finding that the motive for the alleged price manipulation was relatable to the appellant's plan to acquire shares of INDAL in the context of competition from ALCAN, the learned senior counsel submitted that the said finding is baseless and contrary to the facts. Shri Sundaram submitted that the respondent had ignored the fundamental difference in valuing the shares allotted to the promoters and the minimum conversion price for Optionally Convertible Preference Shares (OCPs), that the allegation that the price was rigged to sustain the minimum conversion price of OCPs of ₹ 350 is without any substance inasmuch as OCPs were to be converted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian company made a non negotiated bid to take over an under performing unit of a multinational corporation, that it was but natural that the appellant was expected to make higher profits and benefit immensely from the potential acquisition of INDAL. He stated that other major factors for price rise could be attributed to re-commencement of commercial production at copper smelter which was closed twice during June-December 1997, declaration and commencement of commercial production at copper after operations stabilised, declaration of excellent half-yearly results of July-December 1997 on 27-2-1998, preferential allotment to promoters at a price above market price. He further submitted that the price did fall in June, but the reasons for that are not far to seek, that the nuclear blasts in Pokharan had led the entire market taking down, followed by the Union budget which the stock market interpreted as 'unfriendly' for several weeks and unloading of large quantities of the appellants scrips by certain institutional investors. Shri Sundaram stated that the price movement was spontaneous and not manipulated. 34. The learned senior counsel submitted that the impugned ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the respondent's attempt to stretch the order at this stage, beyond what it is, need be disregarded. In this context he referred to the observation made by the Hon'ble Supreme Court in Mohinder Singh Gill v. Chief Election Commissioner AIR 1978 SC 851 that when a statutory functionary makes an order based on certain grounds its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. 36. Shri Sundaram stated that even in the order the main charge is that the Damayanti Group built up unusually large position in the scrips of the appellant and of BPL and Videocon resulting in distortion of the market equilibrium and creation of artificial market in their scrips. Thus according to the respondent it is the Damayanti group which cornered the large chunk of shares resulting in distortion of market equilibrium. He said the transactions involving 3 lakh and 6 lakh shares are not the key issues, but the respondent is linking the appellant with the said Damayanti Group and treating it as a part of the said group, holding liable for the actions of the said group. For this purpose the respondent has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant and its officers as one of the ingredients of any offence has been established by any material on record warranting such prosecution. 39. Shri Rafiq Dada, the learned senior counsel appearing for the respondent submitted that the appellant's argument that MALCO and the appellant are distinct and separate and therefore MALCO's action should not be treated as appellant's action is untenable. He submitted that technically the two companies are different, but their management is common and the action of MALCO has to be seen in the context of their close relationship. Shri Dada submitted that practically both the companies are under the same management and MALCO did what the appellant wanted. In this context the learned senior counsel referred to the reply of the appellant to the show-cause notice that 'Sterlite bailed out the broker of the Damayanti Group through MALCO a purchasing about 6 lakh shares at a cost of about ₹ 11.75 cores'. He further read out the following portion from the reply in this context- It is true that in the first week of June 1998, we were informed by some senior members of the BSE Governing Board of an impending problem in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge authorities that there is an impending problem in settlement of dues in the Bombay Stock Exchange and requested us to take suitable action in order to prevent a major crisis in the Bombay Stock Exchange. On their request we had placed a sum of ₹ 11.75 crores on the disposal of El Dorado Guarantee Ltd. on a clear understanding that the said sum will be utilized for purchase of securities and MALCO would take up 6,06,000 shares of Sterlite Industries (India) Ltd., only if no other buyer available. As they were not able to place the shares with any other investor we had bought 6,06,000 shares of Sterlite Industries for which the necessary contract copies are enclosed. The purchase of shares has been entirely financed through the internal resources of the company and we had not borrowed from any entities for financing this transaction'. Shri Dada submitted that from this letter it is clear that the bail out was done to avoid payment crisis relating to sterlite shares and not MALCO's shares, that the bail out was mainly to protect the brokers dealing in sterlite shares, who had cornered shares, and MALCO was interested for the reason that both the companies are under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to in May 1999. Shri Dada stated that in order to induce the investors to exercise their option in favour of sterlite in preference to Alcan's offer, the share prices of sterlite were rigged to ₹ 350. He further submitted that on the basis of the public offer made by the appellant for the acquisition of INDAL's shares, the total fund required was ₹ 817.70 crores, that to generate this fund it was proposed to issue OCPs worth ₹ 333 crores and arrange loans/bank guarantees from different banks. The learned senior counsel submitted that the appellant had vested interest to push up its share prices to ₹ 350 so as to make its open offer to the shareholders of INDAL attractive. 44. Shri Dada submitted that it is incorrect to say that there is no material or evidence on record of artificially raising the share price. He submitted that the two purchases of 3 lakh shares or 6 lakh shares are merely illustrative. According to the learned senior counsel the appellant connived with Shri Harshad Mehta to artificially raise the price of its shares, that Shri Harshad Mehta built up large positions in the carry forward segment at BSE where positions can be le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48. Shri Dada cited yet another decision of the Hon'ble Supreme Court in Directorate of Enforcement v. MCTM Corporation Ltd. [1996] 2 SCC 471 in support: Therefore, unlike in a criminal case, where it is essential for the prosecution to establish that the accused had the necessary guilty intention or in other words the requisite 'mens rea' to commit the offence with which he is charged before recording his conviction, the obligation on the part of the Directorate of Enforcement in cases of contravention of the provisions of Section 10 of FERA, would be discharged where it is show that the blame worthy conduct of the delinquent had been established by wilful contravention by him of the provisions of Section 10 FERA, 1947. It is the delinquency of the defaulter itself which establishes his blame worthy conduct... 49. Shri Dada submitted that the above observation was with reference to an adjudication under FERA and the principle stated therein is in equal force applicable to the instant case. Shri Dada also referred to the argument put forward by the respondent before this Tribunal and accepted, in the appeal filed by Canbank Investment Management Services Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence to show that the appellant was the beneficiary in the transactions propping the prices up. Shri Dada referred to the show-cause notice wherein it has been stated that investigation revealed that the entity 'Dil Vikas' referred to in the records of Shri Harshad Mehta, is Dil Vikas Finance Ltd., an associate company of El Dorado Guarantee Ltd., which is known in market circles as 'jobber' of the appellant, a finding which the appellant has not denied in its reply. The appellant's nexus with the Damayanti Group, thus stands established. 53. Referring to the funds for transaction involving 3 lakh shares Shri Dada stated that Bimal Gandhi of Dil Vikas Finance Ltd. had vide letter dated 8-4-1998 sought a loan of ₹ 5 crores and MALCO made available the loan vide cheque dated 16-4-1998 @ 15 per cent interest for a period of 6 months. Interest never paid. ₹ 11.75 crores was also paid to El Dorado through whom the bail out was made. 54. The learned senior counsel stated that to MALCO it was clear that the brokers should be bailed out at any cost. The company had in any case provided the funds and incidentally requested the broker to find out a purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to which brokers were selling those shares, the learned senior counsel submitted that these sort of particulars are not that secret in the market as has been claimed by the appellant, that the fact that transactions were entered in the exchange system on 12-6-1998 as 'all or one' deals synchronizing the timing of logging in of the trades by the buyers and the sellers at the pre-determined price itself shows the name of the brokers were known of the appellant. 58. Shri Dada rebutted the appellant's version that the respondent has not adduced any material or evidence to establish the nexus or connection of the appellant with Damayanti Group brokers or Shri Mehta, save and except the piece of paper found in Shri Mehta's office with the scribbling 'Oil Vikas Ster-1,95,000, Shri Dada submitted that the aforesaid paper suggest that the Damayanti Group was working in concert with the promoters of the appellant. The learned senior counsel submitted that it is clear that Shri Murthy had furnished the names of the brokers to El Dorado from whom the said 3 lakh shares were to be purchased, that the said 3 lakh shares were purchased to reduce the floating stock of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e upheld. He also submitted that while S/shri Aggarwal and Tarun Jain being the officers of the appellant in terms of Section 27 and Shri Sashikant being an abettor, are liable to be prosecuted. 61. I have carefully considered the submissions, both written and oral, made by the learned senior counsel for the parties, and my views are stated below : 62. The respondent has in a nut shell put the back ground of the case and its finding in the first two paragraphs of the impugned order as under : Investigations were conducted by SEBI into the alleged price manipulations in the scrips of BPL, Videocon and Sterlite. Investigations revealed that there were large volumes coupled with fluctuation in prices at the exchanges in respect of BPL Limited, Videocon International Ltd. and Sterlite Industries Ltd., (hereinafter referred of as BPL, Videocon and Sterlite respectively) especially during April and May 1998. The Investigation revealed that a set of brokers and sub brokers acting on behalf of a common set of clients were acting as front for Shri Harshad Mehta cornered a large chunk of shares of Sterlite both at BSE and NSE. These common clients hereinafter called Damayanti Gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wers available under Sections 11 and 11B, the Chairman directed that 'Sterlite Industries is prohibited from accessing the capital market for a period of 2 years from passing this order'. And also 'ordered that prosecution proceedings under Section 24, read with Section 27 of the SEBI Act for violation of regulations 4(a) and 4(d)... shall be initiated against Sterlite Industries through their directors namely Shri Anil Aggarwal, Shri Tarun Jain and Shri Shashikant'. 66. In the back ground that the impugned order relates to the market crisis erupted in April-May 1998, there were allegations from both sides holding the opposite party responsible for the delay. In any case, I do not consider it necessary to look into those charges and counter charges in this regard, as this Tribunal is now only required to consider the sustainability of the end product, i.e., the order. 67. Shri Sundaram's submission that the order was made without giving adequate opportunity of being heard and that witnesses were not given to be cross examined, lost the vigour as he himself ultimately stated that he was not pressing the issue, so as to avoid further delay in the matter. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tte. We will discuss the provisions of the said regulations a little latter. Before that let us also have a look at Section 11B invoked by the respondent to issue the directions. Text of Section 11B is extracted below : 11B. Power to issue directions.--Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,-- (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interest of investors or securities market; or (iii) to secure the proper management of any such intermediary or person it may issue such directions,-- (a) to any person or class of persons referred to in Section 12, or associated with the securities market; or (b) to any company in respect of matters specified in Section 11A, as may be appropriate in the interests of investors in securities and the securities market. Now back to the Regulations : Regulation 2(b) defines dealing in securities as under : 'dealing in securities' means an ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding on the securities market; (c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions; (d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities; (e) pay, offer or agree to pay or offer, directly or indirectly, to any person any money or money's worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing, or causing fluctuations in the market price of securities; 72. Chapter III provides for investigation into alleged contravention of the regulations and consequential action thereafter. In terms of regulation 10 the concerned investigating officer is required to submit the investigation report to the Board. Regulations 11, 12 and 13 deal with the follow up action. 11. Power of the Board to issue directions.--The Board may, after consideration of the report referred to in regulation 10, and after giving a reasonable opportunity of hearing to the person concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions must be with the intention of distorting the prices of securities. It should induce the sale or purchase of securities by any person. As Shri Sundaram pointed out element of deceit is an underlying factor in the transaction. A genuine transaction by itself cannot attract the regulation though such a transaction had resulted in market price variation. The regulation attracts if the transaction is made . with an intention of artificially raising or depressing the prices of securities so as to induce any other person to sell or purchase the securities. The participation need not necessarily be direct, it can be indirect as well. In this context the observation made by the US Court in Hynes case (supra) relied by Shri Sundaram gives strength to the belief that deceit or fraud are components of market manipulation. The Court had observed : It is sufficient for the person to engage in a course of business which operates as a fraud or deceit as to the nature of the market for the security to face the charge of manipulation. The Court had also observed that: proof of manipulation is generally not based on single activity, but rather on a course of conduct showing an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchase of these shares, yet the transactions have been found to be done by them for Sterlite Industries. It can be inferred from the following facts : (a) funds being given by MALCO ostensibly as loan, (b) transaction being entered at the instance of Murthy of Sterlite who gave details of counter-party broker with whom this negotiated deal was entered, (e) departure from normal practice of entering inward and outward register of shares in the office in respect of 45,000 shares, (f) non-furnishing of detail regarding the financier and owner of 45,000 shares, (g) loan has been given by MALCO for six months though the need for El Dorado was only for two days, (h) availability of details of 1,95,000 shares in the office of Damayanti Group. Based on the above, it was concluded 'that this transaction was for Damayanti Group and Sterlite Industries Ltd.' and 'El Dorado was used as a conduit for parking of shares'. It has also been stated that the transactions with Ashwani Khurana were in the nature of financing transactions and have been given colour of purchase and sale of shares as:-- (i) no payments were received from the client and pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specifically informed that the advance given by MALCO to Dil Vikas Finance would be used to buy the shares of Sterlite Industries Ltd. nor where there any instructions from them in this connection'. The respondent had examined Shri Tarun Jain, the Appellant's Director, Finance on 6-10-1998. In answer to a question that whether he or Murthy had given any instructions to buy 3 lakh shares of Sterlite Industries Ltd., Shri Jain had stated 'we had not given any instructions as stated by Shri Bimal Gandhi in his statement shown to me'. He had further stated that he had checked up with Shri Murthy and Shri Murthy also said that no instructions as claimed by Shri Bimal Gandhi were given. 82. In this context it is also to be noted that 1,50,000 shares were purchased by Dil Vikas for Shri Ashwani Khurana on 8-4-1998 @ ₹ 291.50 and 1,50,000 shares were purchased for Crimson Associates on 10-4-1998 @ ₹ 308.50. In fact in the order itself it has been stated that 'El Dorado purchased 1.5 lakh shares in the name of Crimson securities, their family concern and advised their clients Mr. Ashwani Khurana of Delhi to purchase another 1.5 lakh shares which they purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We normally seek the physical delivery in case of book closure'. To a query as to whether he paid consideration of all 1.50 lakh shares of Sterlite to El Dorado, Shri Khurana had stated that there was a credit balance of ₹ 1.81 crore in Khurana Co., out of which purchase consideration of Rs, 1.46 crore was met. Similarly Iqbal Chand Khurana was having a credit balance of ₹ 1.54 cr., out of which purchase consideration of ₹ 1.46 crore was met. In the case of Kanchenjunga Advt. (P.) Ltd. the purchase consideration of ₹ 1.46 crore was met from the opening balance of 45 cr. and the balance was adjusted through the running account which currently shows a Cr. balance of ₹ 35 lakhs as on 10-9-1998. Shri Tarun Jain, Director Finance for Sterlite Industries Ltd., in his deposition dated 6-10-1998 had confirmed the position that MALCO or Sterlite Industries Lid. had not given any loan to El Dorado Guarantee Ltd., Shri Bimal Gandhi or any of the directors or any directors of the associate concerns. The statements of the persons referred to above remain unrebutted. 84. The finding that El Dorado had purchased shares as instructed by Shri CBR Murthy has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... izing the timings of the logging of trades after the official hours at pre-determined price is contrary to what is stated in para 6.9 of the order wherein it has been stated that these were negotiated deals. In fact the view that it was negotiated deals has been confirmed by Shri Gandhi in his statement. 87. The respondent's argument that even though technically MALCO and Sterlite are two separate entities, the action of MALCO should be consi- dered as the action by Sterlite cannot be altogether discarded while examining the applicability of regulation 4(a) as regulation 4(a) refers to transactions indirectly effected also. The proximity factor, no doubt is relevant. But in the instant case there is no evidence to show that even MALCO had purchased the shares. In the said context there is nothing much that would emerge even by treating both the companies as closely associated. 88. Another ground adduced in support of the manipulation of market by the appellant is that MALCO lent ₹ 11.75 crore to El Dorado for acquiring 6 lakh shares of the appellant in the 2nd week of June, 1998 to bail out brokers associated with the Damayanti Group of Shri Harshad Mehta. 89. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p price high. It has gone by inference that the Damayanti Group had manipulated the price and that it was done at the behest of the appellant, as otherwise MALCO would not have stepped in to bail them out. The fact the MALCO had advanced ₹ 11.75 crores to Dil Vikas to purchase that appellant's shares remain undisputed. There is reason to believe that the money was made available as requested by certain members of the BSE's Governing Board. The respondent in its order has also endorsed this fact. Now the question is whether the appellant had any role in choosing the brokers to be bailed out. In this context the unrebutted evidence of the respondent's witness Shri V.D. Kinkhabwala, a Director of Dil Vikas, dated 15-9-1998 is revealing. He had stated that 'the name of the client, number of shares and the price were all given by BSE'. The following reply given by the appellant in response to the show-cause notice is also to be noted in the context. It was stated therein that 'when MALCO purchased these shares the sole intention was to help the BSE to avert a major payment crisis on the premier exchange of the country and not to manipulate the share price o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment by Shri Harshad Mehta, wherein under the heading 'excess lying as under' it was found written 'Dil Vikas - Ster, 1,95,000 giving the break up of this figure as 1,50,000 - 45,000 margins'. It has been further stated in the order that the Dil Vikas referred to in the said paper is Dil Vikas Finance Ltd. which is an associate company of El Dorado Guarantee Ltd., which is known in market circles as a 'jobber' of Sterlite Industries . The order further states that 'it was found that El Dorado had purchased 1.5 lakh shares in the name of Crimson Securities, another associate concern of El Dorado in settlement No. 3 of BSE. This was the part of the total purchase of 3 lakh shares by El Dorado in that settlement, El Dorado purchased 1.5 lakh shares in the name of Crimson Securities, their family concern and advised their clients Mr. Ashwani Khurana of Delhi to purchase another 1.5 lakh shares, which they purchased in the name of their group companies'. The order also states 'the fact that paper (referred to in para 6.6) was available in the office of Damayanti Group which is a front for Harshad Mehta indicates that there was nexus between El D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mayanti Group mentioned by the Investigating Officer. He had also denied of any knowledge about S/shri Anil Doshi, Dinesh Doshi and Dilip Shah of Damayanti Group. Shri Tarun Jain had also stated that he had not heard about any of the so called Damayanti Group companies or the persons referred to by the Investigating Officer. In the absence of adequate evidence from the respondent's side to establish any nexus between the appellant and the Damayanti Group, if not directly, at least indirectly, the appellant cannot be considered as part of the Damayanti Group or associated with the Damayanti Group and it cannot be held liable for the actions of the said Damayanti Group. 94. It has been stated in the order (para 7.3) that the promoters/company first 'abetted Shri Harshad Mehta to build up large positions in the Appellant's shares which facilitated market manipulation'. But no evidence has been adduced in support of this allegation except posing a question on the wisdom of the appellant. 95. Shri Dada's argument that the appellant was the beneficiary, in as much as the price manipulation was in the context of its bid to take over INDAL and by applying the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings in a court of law, that in an inquiry like the instant one it is the 'preponderance of probability' that is to be taken into consideration and not to go by 'proof beyond doubt' as required in criminal proceeding. 98. In this context it is to be noted that Chairman holding the appellant guilty of indulging in price manipulation has stated that 'creation of false market and price manipulation is a very serious offence'. Evidence merely probabalising and endeavouring to prove the fact on the basis of preponderance of probability is not sufficient to establish such a serious offence of market manipulation. When such a serious offence is investigated and the charge is established, the fall out of the same is multifarious. The impact of such an adverse finding is wide especially in the case of a large public company having large number of investors. The stigma sticks and it also hurts, not the company alone, but its shareholders as well. 'Not all the King's horses and all the King's men' can ever salvage the situation. Mere conjunctures and surmises are not adequate to hold a person guilty of such a serious offence. The extent of proof requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igation to record a finding of guilt only upon being satisfied beyond reasonable doubt. It would be impermissible to reach a Conclusion on the basis of preponderance of evidence or on the basis of surmise, conjuncture or suspicion. It will also be essential to consider the dimension regarding mens rea. This proposition is hardly open to doubt or debate particularly having regard to the view taken by this court in L.D. Jaishinghani v. Naraindas N. Punjabi AIR. 1976 SC 373 - wherein Ray, CJ speaking for the Court has observed: ... In any case, we are left in doubt whether the complainants version, with which he had come forward with considerable delay, was really truthful. We think that in a case of this nature, involving possible disbarring of the advocate concerned, the evidence should be of a character which should leave no reasonable doubt about guilt. The Disciplinary Committee had not only found the appellant guilty but had disbarred him permanently. [In Re An advocate AIR 1989 SC 245] [Emphasis supplied] (p. 376) 100. About the test of evidence in a civil proceeding, the following observations made by the Hon'ble Court Razikram v. J.S. Chouhan - AIR 1975 SC 667 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 11.75 crores for bailing out brokers, it is understood that no show-cause notice was issued to MALCO and subjected it to any inquiry. For excluding MALCO from the scope of investigation and inquiry the respondent has not given any valid explanation. It is felt that an inquiry into the conduct of MALCO in the episode would have helped the respondent to gather more material information and such information would have helped the respondent to examine the charge more seriously and purposefully. 104. Now on the direction issued by the respondent. It is seen from the order that the direction debarring the appellant accessing the capital market was issued invoking the powers vested in the respondent under sections 11 and 11B. Since I have already reproduced the text of these two sections in the earlier part of this order, the same is not reproduced again. The Tribunal had occasion to examine the scope and reach of these sections in Bank of Baroda v. SEBI[2000] 26 SCL 532 (SAT)(Mum.) and had expressed the following view : 53. Section 11 and Section 11B are interconnected and co-extensive as both these sections are mainly focussed on investor protection. On a careful perusal of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue such a direction under Section 11B the Court observed:-- 'The SEBI Act is an Act of remedial nature and, therefore, the preset cases could not be compared with the cases relating to the fiscal or taxing statutes or other penal statutes for the purposes of collection of levy, taxes etc. As and when new problems arise, they call for new solutions and the whole context in which the SEBI had to take a decision, on the basis of which impugned orders were passed, cannot be said to be without authority of law in face of the provisions contained in Section 11 and Section 11B. As the language of Section 11(1) itself shows and as the matters for which the measures can be taken are provided in Sub-section (2) of Section 11. It is clearly made out by the plain reading of the language of the section itself that the SEBI has to protect the interests of the investors in securities and has to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in Sub-section (2) of Section 11 and in due discharge of this duty cast upon the SEBI as a part of its statutory function, it has been invested with the powers to issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;. According to Blacks Law Dictionary direction means 'a guiding or authoritative instruction, order, command. 106. It has to be noted that Section 11B does not even remotely empower the respondent to impose penalties. Hon'ble Calcutta High Court had held that prescribing an offence and its punishment is an essential plenary function of the legislature - D.N. Ghosh v. Addl. Sessions Judge AIR 1959 Cal. 208. Hon'ble Gujarat High Court also held the same view in Delux Land Organisers v. State of Gujarat AIR 1992 Guj. 75 holding that ... Any power to impose penalty must be statutority warranted and executive Government cannot create penal provisions by issuing circulars when there is no authority to impose such penalty flowing from any provision of law , (p. 79) 107. Hon'ble Supreme Court in Khemka Co. (Agencies) (P.) Ltd. v. State of Maharashtra MANU/SC/0442/1975MANU/SC/0442/1975 : AIR 1975 SC 1549, while considering the question as to whether the assessee under the Central Sales-tax Act, 1956 could be made liable for penalty under the provisions of the State Sales-tax Act, had considered the power to impose penalty. It had held : ...It is a well sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the common parlance - i.e., entry to the capital market for issuing/offering securities. In this context, it is to be noted that the charge against the Appellant is of market manipulation. The shares of the appellant are listed/traded in the stock exchanges even today. That being the case preventing the appellant raising further capital/offering shares to the public in the next two years cannot serve as a preventive measure to debilitate the appellant indulging in market manipulation. Similarly, by no stretch of imagination the said direction can be considered even remedial as prospective barring of a public issue cannot remedy an act of market manipulation allegedly indulged for a specific purpose, 3 years ago. A remedial action is normally seen as one intended to correct, remove or lessen a wrong, fault or defect. Purport of preventive or remedial directions which can be issued in a proven case of fraudulent and unfair trade practice is discernible from the provisions of regulation 12 of the Regulations, already cited in this order. In my view the impugned order is neither remedial nor preventive but punitive in effect as it takes away the appellant's right to mobilise fund ..... X X X X Extracts X X X X X X X X Extracts X X X X
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