TMI Blog2016 (10) TMI 1327X X X X Extracts X X X X X X X X Extracts X X X X ..... al allotees (including the noticees) had nexus with the companies, their promoter /directors and the issue of such shares was under a prior arrangement between them for an objective other than for providing equity capital to the company. The trading data also reveals that most of the shares sold by the preferential allotees and pre IPO transferees were bought by the entities of the Trading Group - this cannot be termed as a coincidence especially when sellers have nexus with the company, as mentioned in the interim order. As brought out in the interim order, ultimate beneficiaries of the whole scheme in question are the preferential allottees and Pre IPO Transferees. It is beyond reason to hold that the company, its promoters/directors, Trading group and Funding group would devise the impugned plan/scheme for the benefit of the entities who are neither party to the plan/scheme nor have any complicity in the plan with others. As, the noticees, who are the preferential allottees, are the ultimate beneficiaries, they cannot pretend to be oblivious to the scheme/plan. The facts and circumstances of this case, strongly indicate that the issue of these shares was under a prior arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B thereof, hereby confirm the directions issued vide the ad interim ex parte order dated June 29, 2015 read with Corrigendum Order dated January 04, 2016 as against the noticees except that they can:- (a) enter into delivery based transactions in cash segment in the securities covered in NSE Nifty 500 Index scrips and/ or S P BSE 500 scrips; (b) subscribe to units of the mutual funds including through SIP and redeem the units of the mutual funds so subscribed; (c) deal in Debt/Government Securities; (d) invest in ETF (e) avail the benefits of corporate actions like rights issue, bonus issue, stock split, dividend, etc.; (f) tender the shares lying in their demat account in any open offer/delisting offer under the relevant regulations of SEBI. Considering business and personal exigencies and liquidity problems submitted by the noticees I allow further relaxations/reliefs to the noticees as under:- (a) They are permitted to sell the securities lying in their demat accounts as on the date of the interim order, other than the shares of the companies which are suspended from trading by the concerned stock exchange and the shares of the four scrips in the SME segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll further directions. The persons/entities against whom the interim order was passed were advised to file their objections, if any, within twenty one days from the date of the order and, if they so desire, to avail themselves of an opportunity of personal hearing before SEBI. 2. The interim order was passed taking into account facts and circumstances more particularly described therein and summarised, inter alia, as under:- a) The aforesaid four companies had very small share capital prior to the year 2011. In the year 2011 and 2012, the companies increased their capital base by issuing shares to several entities, (hereinafter referred to as preferential allottees ), by way of preferential allotment and later by issuing bonus shares. Certain preferential allottees transferred their shares held in the respective companies to several entities (hereinafter referred to as pre IPO transferees ). b) Thereafter, all the four companies came out with IPOs and the entities belonging to the Funding Group (as defined in the interim order) funded substantial portion of the IPOs. The IPO proceeds of the respective IPOs were immediately routed back to the entities of the Funding Group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions, 2003 ( PFUTP Regulations ) and are in contravention of the provisions of Regulations 3(a), (b), (c) and (d), 4(1) and 4(2)(a), (b), (c), (d), (e) and (g) thereof and section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 ( SEBI Act ). This allegation against the Ms. Uma B Ramesh, Sanjeev Tandon (HUF), Umesh Kumar Danwani, Sangeeta Naresh Mittal and Surekha Ashok Mittal is made on the basis of following: (a) The noticees forming part of Trading Group acted as buyers to the pre IPO transferees/ preferential allottees thereby creating artificial demand for the supply of shares from preferential allottees/ pre IPO transferees. (b) The noticees forming part of Trading Group are connected among themselves and provided hugely profitable exit to the pre IPO transferees/ preferential allottees in such scrips that hardly had any credential in the market. (c) In the process, the noticees of Trading Group acting in concert with the pre IPO transferees/ preferential allottees misused the stock exchange system to provide fictitious Long Term Capital Gain (LTCG) benefit to the preferential allottees/pre IPO transferees so as to convert unaccounted inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are suspended from trading by the concerned stock exchange and keep the sale proceeds in an escrow account; (b) to utilize such sale proceeds for the purpose of investment in mutual fund units and fixed deposits. (c) to utilize 25% of their portfolio value for their business purposes and/or for meeting other exigencies subject to the condition that the balance portfolio value does not go below the profit/loss made by them. 7. In the above background, vide letter dated February 29, 2016 and May, 31, 2016, the following reliefs were allowed to the noticee: (i) to subscribe to units of the mutual funds including through SIP and redeem the units of the mutual funds so subscribed; (ii) to avail the benefits of corporate actions like rights issue, bonus issue, stock split, dividend, etc. (iii) to sell the securities lying in their demat accounts as on the date of the interim order, other than the shares of the companies which are suspended from trading by the concerned stock exchange and the shares of 4 scrips in the SME segment in which the Interim order dated June 29, 2015 has been passed, in orderly manner under the supervision of the stock exchanges so as not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16 and pass an pass an order on merits as expeditiously as possible and in any event within four weeks from the date of order. The hearing on October 14, 2016 could not be held due to certain reasons, and the matter was again represented before SAT wherein it was submitted that the hearing to Ms. Uma B Ramesh would be rescheduled on October 20, 2016 or October 21, 2016. Accordingly in compliance with the directions of Hon ble SAT, hearing to Ms. Uma B Ramesh was scheduled on October 20, 2016 which was attended by her authorised representative. 11. This order deals with respect to 5 entities and order with respect to 19 entities will be passed post the hearing is concluded. Accordingly, the proceedings against 5 entities are being dealt with in this order. 12. I note that the interim order highlighted the profit/gain earned by the preferential allottees/pre IPO transferees. The details of the profit/gain earned by the preferential allottees covered in this order and against whom confirmatory directions have been dealt in the order are tabulated below: S. No. PAN Name Profit ( LTCG) (in ₹) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative submitted at the time of hearing that her trades did not match with the Trading group entities, hence it cannot be termed as she was provided exit by the entities forming part of trading group. e) The order completely ignored the factual position that preferential allottees had no role to play in the fraudulent scheme. The order completely neglects the fact that the alleged scheme of manipulation might have been floated for the benefit of IPO allottees along with any other persons. f) The investment in the shares of CNE was from her own funds on the basis of yielding profits. The order does not contain any specific charge against her, nor role played by her in the alleged manipulation. She highlighted the judgement in the matter of Shanker Goyal and Ors Vs The Municipal Council, Ajmer AIR1997Raj176 that every piece of evidence to justify issuance of an ad interim order. g) There is no urgency in exercising powers under Section 11(1), 11(b) and 11(4) of SEBI Act and passing of an ex-parte order, without proper adjudication of various issues, has resulted in violation of principles of natural justice. Exercise of an arbitrary power is unwarranted and unjustif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. 2. Sanjeev Tandon (HUF) and Umesh Kumar Danwani a) They are not able to understand the exact nature of alleged violation by them and they have been bundled with a group of entities completely unknown to them. b) The order passed without any prior letter/communication/notice or any correspondence seeking their explanation or clarification is basis principles of law of equity, fair play and natural justice. c) They are retail investor and they trade in the market keeping utmost faith on SEBI Stock Exchanges. They submitted that their transactions were genuine, fair, transparent and bonafide and not in violation of any provisions of securities market. d) Price of the ECO has remained more or loss stable during their transaction dates and therefore no loss ought to have been caused to any investor who dealt in the shares of ECO. e) The restraint order against them is breach of fundamental right of carrying on business under the constitution of India. f) There is no grievance, objection or cautionary notice was issued by stock exchange or SEBI with respect to IPO and bonus issue of ECO. g) There is no connection/ relation/ financial dealing with ECO/ Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve paid income tax without claiming any deductions/ set off of losses. Thus the question of avoidance of tax or non payment of long term capital gain tax is not applicable in his case. r) They requested that the order against them be made inoperative, discharge them from all allegations and permit them to buy and sell shares and mutual funds and utilize the entire proceeds for their need based requirement. 3. Sangeeta Naresh Mittal and Surekha Ashok Mittal a) The aforesaid Interim Order has been issued ex parte and they have been condemned unheard in gross violation of cardinal rule of 'audi alteram partem and therefore violates basic principles equity, fair play and natural justice. b) Their demat account has been frozen and SEBI has acted beyond its scope, purview and power and transgressed the power delegated to it by the Parliament of India. c) They have not bought, sold or otherwise dealt in HPC in a fraudulent manner at all and have not indulged in an act which created false or misleading appearance of trading in scrip of HPC. d) They have not advanced any person thereby inducing any other person to offer to buy any security in any issue only with the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the allegations levelled against the noticees in the interim order, their replies/written submissions and other material available on record. I note that in the instant case, the directions issued against the noticees are interim in nature and have been issued on the basis of prima facie findings. SEBI had issued directions vide the interim order in the matter in order to protect the interests of investors in the securities market. Detailed investigation in the matter is still in progress. Thus, the issue for consideration at this stage is whether the interim directions, issued against the noticees vide the interim order, need to be confirmed, vacated or modified in any manner, during the pendency of investigation in the matter. 15. The facts and circumstances of the instant case as brought out in the interim order, prima facie, show the modus operandi employed by the four companies, their directors, their promoters, preferential allottees/pre IPO transferees, Trading group and Funding group, who made a fa ade of preferential allotment followed by their respective IPOs. Once the shares were listed on the stock exchange, the Trading Group entities started pushing up the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2002 (2) BomCR 403 upheld the procedure of post decisional hearing in such matters and observed as under: 31. It is thus clearly seen that pre decisional natural justice is not always necessary when ad-interim orders are made pending investigation or enquiry, unless so provided by the statute and rules of natural justice would be satisfied if the affected party is given post decisional hearing. It is not that natural justice is not attracted when the orders of suspension or like orders of interim nature are made. The distinction is that it is not always necessary to grant prior opportunity of hearing when ad-interim orders are made and principles of natural justice will be satisfied if post decisional hearing is given if demanded. 32. Thus, it is a settled position that while ex parte interim orders may always be made without a pre decisional opportunity or without the order itself providing for a post decisional opportunity, the principles of natural justice which are never excluded will be satisfied if a post decisional opportunity is given, if demanded. (b) Hon'ble High Court of Judicature for Rajasthan at Jaipur in the matter M/s. Avon Realcon Pvt. Ltd. Ors Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of natural justice. It may and indeed it must vary from statute to statute, situation to situation and case to case. Again, it is necessary to say that pre-decisional natural justice is not usually contemplated when the decisions taken are of an interim nature pending investigation or enquiry. Ad-interim orders may always be made ex-parte and such orders may themselves provide for an opportunity to the aggrieved party to be heard at a later stage. Even if the interim orders do not make provision for such an opportunity, an aggrieved party has, nevertheless, always the right to make appropriate representation seeking a review of the order and asking the authority to rescind or modify the order. The principles of natural justice would be satisfied if the aggrieved party is given an opportunity at the request. 17. I, therefore, do not find any violation of principles of natural justice while passing the interim order as contended by the noticees. In this case, as discussed hereinabove, the purpose of the interim order is to achieve the objectives of investor protection and safeguarding the market integrity by enforcing the provisions of the SEBI Act. In my view, section 11(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other attendant circumstances. The power under sections 11 and 11B of the SEBI Act can be invoked at any stage i.e. either during pendency or on completion of inquiry or investigation. In the present case, the modus operandi where suspected entities were misusing the stock exchange mechanism came to light only in June 2015. Further, the interim order clearly brings out the reasons and circumstances for issuance of ex-parte ad- interim directions. I, therefore, do not find any merit in the above common contention of the noticees. 19. Another contention of the noticees is that the open restraint order is in breach of their fundamental right to carry on business under Article 19(1)(g) of the Constitution of India. Article 19(1)(g) guarantees to all citizens, the right to practice any profession or to carry on any occupation, trade or business. However, at the same time it is pertinent to mention that this freedom is not unbridled, as clause (6) of Article 19 authorises legislation which imposes reasonable restrictions on this right in the interest of general public. It is a matter of common knowledge that the Securities and Exchange Board of India, 1992 is a special Act enacted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n preferential allotment, the issuance of the same cannot be questioned. In my view, this contention has no merit as preferential allotment is like any other corporate action/instrument, allowed as per the extant regulations for raising funds by corporate bodies for their business requirements. However, the same become questionable/doubtful when it is used as tool for implementation of any dubious plan or mala fide intention as done in the instant case in the manner described in the interim order. The preferential allotment in the present matter done by the four companies was a fa ade as described in the interim order. I, therefore, find no merit in the above submission. 22. The noticees have contended that there is nothing in the interim order to allege or demonstrate any wrong-doing on their part. They have further contended that they are not connected/related to the companies, or their promoters or directors or with any entities who are alleged to be indulged in the price manipulation or with the Trading Group entities. According to these entities, the basis of connection/relation with the companies is merely the preferential allotment. The noticees have also contended that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue its shares on preferential basis to select persons/ group of persons who are known to it or its promoters/directors and on the other part of the preferential allottees to finance the fund requirements of the company and subscribe to its shares. 25. The shares of Eco was listed on January 14, 2013, Esteem was listed on February 07, 2013, CNE was listed on March 12, 2013 and HPC was listed on March 19, 2013. Prior to the listing of the shares of the said 4 companies, the trading in their shares could have happened only between the entities on a one to one basis. Further, when asked during the personal hearing, the noticees/their authorized representatives failed to give any plausible explanation as to how the company could make allotment to the preferential allottees if they were not known to it or its promoters/directors. I also note that the noticee have not been able to furnish any satisfactory documentary evidence that they were approached by companies for the preferential allotment, or in providing the details of the offer made by companies to them and other details of communication between them and companies in that regard. It is important to note that financing of a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated for the purposes of giving profitable exit (where the Trading group had already pushed the prices up through manipulation) to the preferential allottees/pre IPO transferees for availing exemption on LTCG tax gains and /or for converting unaccounted income into accounted income. 30. The noticees have also raised another contention that they did not have any role in the manipulation of the price of the scrip of the companies or in the entire plan described in the interim order. They have further contended that there is no material to prove that their acts were fraudulent and that they violated the provisions mentioned in the interim order. In this regard, I note that the facts and circumstances of the instant case discussed hereinabove and in the interim order indicate that the preferential allotment was an essential and important act in the whole scheme of things and the need to make such preferential allotment to achieve the end objective of the scheme has been amply brought out in the interim order. The interim order has reasonably highlighted the modus operandi wherein the company in nexus with the preferential allotees made a fa ade of preferential allotment ostensibly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o contended that SEBI has made sweeping, bald and common observations against them, amongst others in the interim order and there has been no attempt to examine their particular and individual role in the matter. In this regard, it should be appreciated that the in the modus operandi as observed in the matter, individual contribution to the scheme might look to be insignificant but collectively it completes the circle of manipulation, deceit or fraud. Further, the manner of their linkages/connection with the others allegedly forming part of the scheme have been discussed in the interim order. Accordingly, I do not find merit in such submissions. 33. Ms. Uma B Ramesh have contended that their sell transactions matched with the entities, who are not even mentioned in the interim order. Hence, the allegation that they were provided exit by Trading Group entities is erroneous. In this regard, It is important to note that the noticees are the benefeciaries of the entire scheme brought out in the interim order. Further the role of possibility of involvement of other entities to whom the noticees sold thei shares in the entire scheme cannot be totally ruled out at this stage. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in concert with Funding Group and Trading Group have used the stock exchange system to artificially increase volume and price of the scrip for making illegal gains and to convert ill-gotten gains into genuine one. The whole scheme could not have been possible without the involvement/ connivance of companies and their promoters and directors. 36. The 5 noticees (covered under this order), have failed to give any plausible reasoning/explanation, at this stage, for their acts and omissions as described in the interim order and have not been able to make out a prima facie case for revocation of the interim order. I, therefore, in this case, reject the prayers of noticees for setting aside the interim order or for complete removal of restraint imposed by it. I, therefore, do not have any reasons to change or revoke the ad interim findings as against them in the interim order. 37. Having dealt with the contentions of the noticees as aforesaid, I note that they have raised concern over challenges in running their activities on account of ban and consequent freezing of their demat accounts. These entities have pleaded for removal of the restraint imposed vide the interim order or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in orderly manner under the supervision of the stock exchanges so as not to disturb the market equilibrium and deposit the sale proceeds in an interest bearing escrow account with a Scheduled Commercial bank. (b) They may deal with or utilize the sale proceeds lying in the aforesaid escrow account under the supervision of the concerned stock exchange as provided under:- i. the sale proceeds may be utilised for investments permitted in para 38; ii. upto 25% of the value of the portfolio as on the date of the interim order or the amount* in excess of the profit made /loss incurred or value of shares purchased to give exit, whichever is higher, may be utilized for business purposes and/or for meeting any other exigencies or address liquidity problems. * The amount will include the value of portfolio in the demat account Explanation: For the purposes of determining the portfolio value of the entities, the value of portfolio of securities lying in the demat account/s (individual and joint both) on the date of the interim order after excluding the value of shares that have been suspended from trading as on the date of the communication shall be considered. (c) The afo ..... 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