2024 (8) TMI 1345 - Board - SEBI

SEBI bans individual for three years over fraudulent trading through layered overseas FII transactions

SEBI imposed a three-year market ban on the noticee for fraudulent securities trading through layered overseas transactions. The noticee used FII route to ... Routing of funds to the Indian Securities Market by Noticee/Mr. Vijay Mallya -Violation of SEBI Act and PFUTP Regulations - financial route i.e. the FII route was used by the Noticee to trade in the Indian Securities market by concealing his identity - layering the transactions in the names of various overseas registered entities and opening accounts in their names in UBS-UK Bank, even though the Noticee himself was the actual beneficial owner of each of these front entities HELD THAT:- Noticee in abusing the framework of the FII Regulations and dealing in securities of listed companies of his group of companies in India, indirectly, in a fraudulent manner and by employing a manipulative and deceptive artifice, thereby, indulging in purchase and sale of securities of Herbertsons / USL clearly was detrimental to the investors at large and was with an intention to deceit the market players in violation of the provisions of Regulation 3(a), (b) and (d) of the PFUTP Regulations, 2003 and Section 12A(a) and 12A(c) of SEBI Act, 1992. The shareholding pattern of Herbertson available on the BSE website for the quarter ending December 31, 2005 that Phipson, McDowell and UBHL were shown as Indian Promoters of Herbertsons holding 53,49,775 shares (56.18%), 4,59,809 shares (4.83%) and 22,46,756 (23.59%), respectively. As Phipson was wholly owned subsidiary of McDowell and Herbertsons was subsidiary of Phipson. Thus, find that all the said companies were belonging to the same group i.e. UB group of which the Noticee was the Chairman. These shares of Herbertsons were partially transferred to Matterhorn through block deals dated February 28, 2006 and March 03, 2006. Post such transfer of shares, Matterhorn Ventures was shown as a Non-Promoter Public Shareholder under sub-section of ‘FIIs’ in Shareholding Pattern of Herbertsons as on March 31, 2006. As already found entire transaction in the shares of Herbertsons and USL was funded by the Noticee, indirectly, through VNHL by routing funds through overseas bank accounts and therefore, the shareholding of Matterhorn Ventures of 9.98% shares of Herbertsons actually belonged to the promoter category being totally funded by the Noticee. Noticee/Mr. Vijay Mallya indeed had misrepresented the truth and concealed a material fact known to him that the shareholding shown in the name of Matterhorn actually belonged to the promoter category as the same was totally funded by the Noticee thereby, violating the provisions of Regulation 4(2)(f) of the PFUTP Regulations, 2003. Section 11 of the SEBI Act, 1992 confers a duty on the Board to protect the interests of investors in securities and to promote the development of and to regulate the securities market. The said objectives are all interlinked. Noticee, in the instant case, has devised a scheme to indirectly trade in the shares of his own group companies through layered transactions / fund flow using his overseas related companies through FII route in order to keep his identity masked and trade in the Indian Securities market in defiance of the regulatory norms. Such acts of the Noticee are not only fraudulent and deceptive but are a threat to the integrity of the securities market. Earlier, also WTM, SEBI had debarred the Noticee from accessing the securities market and prohibited him from buying, selling or otherwise dealing in the securities in any manner for a period of 3 years from the date of the said order (i.e. from June 01, 2018 till May 31, 2021) for manipulative activities such as diversion of funds and / or improper transactions in the scrip of USL in violation of the PFUTP Regulations, 2003 read with the SEBI Act,1992. SEBI had also restrained the Noticee from holding a position as Director or Key Managerial Person of a listed Company for a period of 5 years from the date of the said order (i.e. from June 01, 2018 till March 31, 2023). The said order was challenged before the Hon’ble SAT, which later was dismissed due to want of prosecution which ultimately resulted in attainment of finality of the directions issued by the WTM, SEBI in the order dated June 01, 2018. Thus, I find that the Noticee has been indulging in manipulative and fraudulent activities and indulging in unfair trade practices while dealing in the securities market in violation of the securities laws. Thus, find that appropriate directions under Section 11B read with Section 11(1) of the SEBI Act, 1992 in order to protect the market integrity and deter such activities from the markets would meet the ends of justice. ORDER:- The Noticee is hereby restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, for a period of three (3) years from the date of this order. The Noticee is further restrained from associating himself with any listed company or proposed to be listed company, in any capacity, directly or indirectly, for a period of three (3) year from the date of this order. As during the period of restraint, the existing holding of securities including the holding of units of mutual funds of the Noticee shall remain frozen. The obligation of the debarred Noticee, in respect of settlement of securities, if any, purchased or sold in the cash segment of the recognized stock exchange(s), as existing on the date of this Order, can take place irrespective of the restraint /prohibition imposed by this Order only, in respect of pending unsettled transactions, if any. All open positions, if any, of the Noticee debarred in the present Order, in the F&O segment of the stock exchanges, are permitted to be squared off, irrespective of the restraint/prohibition imposed by this Order. Issues Involved:1. Delay in initiating proceedings.2. Misuse of FII route for trading.3. Misrepresentation of shareholding.4. Violation of SEBI Act and PFUTP Regulations.5. Principles of natural justice and opportunity of hearing.Issue-wise Detailed Analysis:1. Delay in Initiating Proceedings:The Noticee argued that the proceedings initiated after a delay of 15 years were unfair and violated principles of natural justice. The Noticee highlighted that SEBI regulations and other relevant laws typically require records to be maintained for 5 to 8 years, making it difficult to verify the authenticity of documents after such a long period. SEBI countered this by detailing the complexity of the investigation, which involved coordination with multiple foreign regulatory bodies and the collection of data from various jurisdictions. SEBI cited judgments from the Securities Appellate Tribunal (SAT) and the Supreme Court, which acknowledged that delays in such complex investigations are sometimes unavoidable.2. Misuse of FII Route for Trading:The Noticee was found to have used a sub-account, Matterhorn Ventures, an FII, to indirectly trade in the scrips of his own group entities, Herbertsons Limited and United Spirits Limited (USL). The investigation revealed that funds were routed through various overseas entities controlled by the Noticee, thereby concealing his true identity. This was in violation of Regulations 3(a), (b), and (d) of the PFUTP Regulations, 2003, and Section 12A(a) and (c) of the SEBI Act, 1992. SEBI emphasized that the FII Regulations are intended to facilitate foreign investments, not to serve as conduits for Indian entities to reinvest in India.3. Misrepresentation of Shareholding:The Noticee was found to have misrepresented the shareholding of Matterhorn Ventures in Herbertsons as non-promoter public holding, whereas it actually belonged to the promoter category. This misrepresentation violated Regulation 4(2)(f) of the PFUTP Regulations, 2003. The investigation showed that the Noticee funded the acquisition of shares through layered transactions involving various overseas entities, ultimately masking his identity and misleading investors.4. Violation of SEBI Act and PFUTP Regulations:The Noticee's actions were found to be in violation of the SEBI Act, 1992, and PFUTP Regulations, 2003. The Noticee employed manipulative and deceptive practices to trade in the shares of his group companies, which was detrimental to investors and the integrity of the securities market. SEBI cited judgments from the Supreme Court, which emphasized that market abuse and manipulation undermine investor confidence and market integrity.5. Principles of Natural Justice and Opportunity of Hearing:The Noticee argued that the opportunity of hearing provided by SEBI was an empty formality. SEBI countered this by detailing the multiple opportunities given to the Noticee to inspect documents and present his case. Despite these opportunities, the Noticee failed to file a reply on merits or attend the hearings. SEBI cited legal principles, emphasizing that refusal to participate in an inquiry without valid reason cannot be pleaded as a violation of natural justice at a later stage.Conclusion and Order:SEBI concluded that the Noticee had indeed violated the provisions of the SEBI Act, 1992, and PFUTP Regulations, 2003. The Noticee was restrained from accessing the securities market and prohibited from buying, selling, or dealing in securities, directly or indirectly, for a period of three years. Additionally, the Noticee was barred from associating with any listed company in any capacity for three years. The existing holding of securities of the Noticee was ordered to remain frozen during the period of restraint. This order was to come into immediate effect, and copies were to be sent to recognized stock exchanges, depositories, and registrar and transfer agents for compliance.