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TMI Blog2016 (6) TMI 1502X X X X Extracts X X X X X X X X Extracts X X X X ..... served that after the release of compulsory lock-in period, the preferential allotees and the promoter related entities were provided exit at a high price by the entities related/connected amongst themselves and with Pine (hereinafter referred to as "Exit Providrs"). In the process Exit Providers and allotees artificially increased the volume of the scrip and misused securities market system for making illegal gains and to convert ill-gotten gains into genuine one to avail fictitious long term capital gains (LTCG"). The modus operandi used by these entities is as under: a) On December 13, 2012, Pine made a preferential allotment of 1,50,00,000 equity shares at the price of Rs. 10 per share (hereinafter referred to as the "1st preferential allotment") to 49 entities. b) Thereafter, the promoters namely, First Entertainment Pvt. Ltd. and Unique image Production Pvt. Ltd. who were holding shares in physical form, transferred their entire holdings i.e. 9,27,400 shares to 6 entities, who in turn transferred the shares to 62 entities (the total of 68 entities, hereinafter referred to as "Promoter related entities ") during the period from December 28, 2012 to February 05, 2013. 49 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterim order"), restrained Pine along with other 177 entities, from accessing the securities market and further prohibited them from buying, selling or dealing in securities in any manner whatsoever, till further directions. 4. While the proceedings pursuant to the interim order were going on, an appeal was filed before the Hon'ble Securities Appellate Tribunal ("SAT") by Mr. Mahendra B Mittal and Ms. Pooja Mahendra Mittal (hereinafter collectively referred to as "the Noticees") challenging the interim order. Hearing in this regard was conducted before Hon'ble SAT on April 07, 2016, May 19, 2016 and May 23, 2016 when Hon'ble SAT directed SEBI to pass an appropriate order in the matter. In terms of the directions of Hon'ble SAT, I deem it necessary to conclude these proceedings in respect of the Noticees. 5. It is noted that pursuant to the interim order, the Noticees carried out an inspection of documents on July 02, 2015 and SEBI, vide letter dated July 07, 2015, provided the documents relied upon by SEBI for passing the interim order, to the Noticees. An opportunity of personal hearing was also granted to the Noticees on August 27, 2015 when their authorized represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner whatsoever, till further directions, is an absolute direction, which has throttled their business and crippled their operations. i. They are regular income tax payers and during the financial year 2014-15, they have paid income tax amounting to Rs. 44.98 lakhs. During the financial year 2014-15, they have paid taxes aggregating to Rs. 2,84,018/- in the form of STT on sale of shares of Pine alone. j. 62% of the shares sold by them were sold to parties other than the alleged exit providers. k. There is no reason as to why the directions issued against the Noticees issued vide the interim order ought to be continued. There is indeed no reason to doubt the integrity or credentials of the Noticees. There are no circumstances to indicate that their trading in the securities market would otherwise cause any disruption to or would be a cause for concern to the integrity of the market or to the interest of other investors in the market. The case of the Noticees should be seen in light of the following three criteria: a) Prima facie case of the Noticees; b) Balance of convenience; c) Irreparable harm and injury to the Noticees. l. They have no connection or relationship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mention here that there is no formal "report" for the said preliminary inquiry which can be handed over to the Noticees by SEBI. The findings of the said preliminary inquiry by SEBI have been brought out in the interim order. A detailed investigation in the matter is in progress and a formal investigation report will only be prepared after conclusion of the said investigation. It is also noted that the Noticees have carried out an inspection of documents in the matter and every document/information gathered by SEBI during the preliminary inquiry, which was relied upon by SEBI for the purpose of the interim order, was provided to the Noticees. In view of the above, I do not find any merit in the above submission of the Noticees in this regard. 8. The Noticees have contended no opportunity of hearing was provided to them and no information was sought from them by SEBI before passing the interim order. In this regard, I note that the interim order has been passed on the basis of prima facie findings observed during the preliminary examination/inquiry undertaken by SEBI. The facts, circumstances and the reasons necessitating issuance of directions by the interim order have been examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11(4) clearly provides that "Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned". Further, various Courts, while considering the aforesaid sections of the SEBI Act have also held that principles of natural justice will not be violated if an interim order is passed and a post-decisional hearing is provided to the affected entity. In this regard, the Hon'ble Bombay High Court in the matter of Anand Rathi & Others Vs. SEBI (2002) 2 Bom CR 403, has held as under: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein also..." 11. In view of the above, I find that the interim order passed by SEBI was not in disregard of the principles of natural justice since, reasons for passing the interim order have been clearly stated in the interim order and, in accordance with the settled law, the Noticees were afforded a post-decisional opportunity to file their replies and avail personal hearing. I, therefore, reject the contention of the Noticees in this regard. 12. The Noticees have contended that they have been regularly dealing in shares since the year 1990 and dealing in shares is their only business activity. They also submitted that they have been investing in shares on the advice of Mr. Bal Krishan Mittal, father of Mr. Mahendra Mittal, who, being a reputed individual in the securities market and the financial industry, used to receive tips from many prospective entities and intermediaries. Further, they were made aware of the preferential allotment of Pine through public sources. The Noticees have also denied having any nexus/ connection/ linkage with Pine or its promoters or directors or other entities as alleged in the interim order. In this regard, I note that it is a common understan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at financing of a company by way of preferential allotment, as found in this case, pre-supposes a nexus and prior understanding amongst the issuer, its promoters/directors and the allottees. 14. The above facts and circumstances indicate that Pine and the Noticees were acting in concert towards a common objective that has been brought out in the interim order. Considering the background of Pine, the investment made by the Noticees cannot be termed as a rational investment behavior and such investment, as in this case, could be possible only if the preferential allotees had nexus with Pine and its promoter/directors and the issue of such shares was under a prior arrangement between them for an objective other than providing equity capital to the company. This is further substantiated by the fact that funds received as proceeds of preferential allotments were immediately transferred by Pine to various entities on the same day or next day and were never retained in the company for expansion of its business or for execution of its plans as envisaged in the special resolution in respect of the aforesaid preferential allotments. The trading data also reveals that significant number of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds including through SIP and redeem the units of the mutual funds so subscribed; 2. to avail the benefits of corporate actions like rights issue, bonus issue, stock split, dividend, etc. 3. to sell the securities lying in your 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, in orderly manner under the supervision of the stock exchanges so as not to disturb the market equilibrium and deposit the sale proceeds in a interest bearing escrow account with a nationalised bank. 4. the sale proceeds lying in the aforesaid escrow account shall be dealt with and utilised under the supervision of the concerned stock exchange as provided hereunder:- a. the sale proceeds may be kept in a fixed deposit with a nationalised bank or may be utilised for subscription to units of the mutual funds which shall always be held in the demat form and if such units are redeemed the proceeds thereof shall be credited to the aforesaid escrow account or may be utilised for subscription to the units of mutual funds. 5. The aforementioned window for sale of shares lying in respective portfolio sha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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