SEBI revokes interim orders against 85 entities in preferential allotment case after finding no adverse evidence

SEBI revoked interim orders against 85 entities in a preferential allotment case involving price manipulation allegations. Following detailed investigation, SEBI found no adverse evidence against these entities regarding their role in manipulating the scrip price and volume on BSE. The confirmatory orders dated March 18, 2016 and August 22, 2016 were revoked with immediate effect under sections 11, 11(4) and 11B of the SEBI Act. However, proceedings continue against the remaining 3 entities where violations were established.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether Moryo Industries Limited and associated entities engaged in fraudulent activities to manipulate the price and volume of its scrip on BSE Limited.
• Whether the preferential allotment of shares was used as a mechanism to provide fictitious long-term capital gains to convert unaccounted income into accounted income.
• Whether the actions of Moryo and associated entities violated the SEBI Act, 1992, and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
• Whether the interim orders restraining the entities from accessing the securities market should be revoked or confirmed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Alleged Fraudulent Activities and Price Manipulation

• Relevant legal framework and precedents: The SEBI Act, 1992, and SEBI (PFUTP Regulations), 2003, provide the legal framework for addressing fraudulent and unfair trade practices in the securities market.
• Court's interpretation and reasoning: SEBI's investigation revealed a substantial increase in the price and volume of Moryo's scrip following the release of the lock-in period. This was primarily due to trading among the Preferential Allottees and Moryo Group entities.
• Key evidence and findings: The investigation found that the Preferential Allottees were provided an exit at high prices by Moryo Group entities, suggesting a scheme to artificially inflate the scrip's price and volume.
• Application of law to facts: SEBI applied the provisions of the SEBI Act and PFUTP Regulations to establish a prima facie case of fraudulent activities against Moryo and associated entities.
• Treatment of competing arguments: SEBI considered the lack of adverse evidence against 85 entities, leading to the revocation of interim orders against them.
• Conclusions: SEBI concluded that Moryo and certain entities engaged in activities that violated securities laws, warranting continued proceedings against them.

Issue 2: Preferential Allotment and Fictitious Long-Term Capital Gains

• Relevant legal framework and precedents: The SEBI Act and PFUTP Regulations address the misuse of securities market mechanisms to generate fictitious gains.
• Court's interpretation and reasoning: SEBI found that the preferential allotment of shares was used to provide fictitious LTCG to allottees, converting unaccounted income into accounted income.
• Key evidence and findings: The investigation highlighted the role of Moryo Group entities in facilitating exits for Preferential Allottees at inflated prices.
• Application of law to facts: SEBI's findings were based on the observed trading patterns and connections among the entities involved.
• Treatment of competing arguments: SEBI's detailed investigation led to the revocation of orders against entities where no adverse findings were made.
• Conclusions: The preferential allotment scheme was deemed a fraudulent mechanism to generate fictitious gains, violating securities laws.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "Considering the fact that there are no adverse findings against the aforementioned entities with respect to their role in the price manipulation in the scrip of Moryo warranting continuation of action under Sections 11B and 11(4) of the SEBI Act, I am of the considered view that the directions issued against them vide interim order dated December 04, 2014 which were confirmed vide Orders dated March 18, 2016 and August 22, 2016, are liable to be revoked."
• Core principles established: The judgment reinforces the principle that fraudulent activities in the securities market, such as price manipulation and fictitious gains, are violations of the SEBI Act and PFUTP Regulations.
• Final determinations on each issue: SEBI revoked the interim orders against 85 entities due to lack of adverse findings, while continuing proceedings against Moryo Industries Limited and two other entities for violations of securities laws.

In conclusion, the judgment highlights SEBI's role in investigating and addressing fraudulent activities in the securities market, ensuring compliance with legal frameworks to protect market integrity.

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