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2015 (7) TMI 702
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....tly, in any manner whatsoever until further orders. 2. Counsel for SEBI on instruction states that the investigation in the present case involves cross border investigation and since Bloomberg terminal having its headquarter in New York City, USA has refused to share information required for the present case, SEBI has sought assistance of U.S. Securities and Exchange Commission (USA) in the matter. As a result, it is submitted that it would take at least 4 to 5 months for completing the investigation. 3. This appeal was substantially heard in March 2015 by a Bench consisting of the Presiding Officer and Member Shri. A. S. Lamba. However, before the hearing could be completed Member Shri. A. S. Lamba retired with effect from March 17, 2015. Thereafter, new Bench could not be constituted because, another Member Shri. Jog Singh has been on long leave due to ill health. In these circumstances, counsel for appellant submitted that the delay in disposing of the appeal on merits is causing serious prejudice to the appellant as the appellant continues to be restrained for accessing the securities market in India and the said order is adversely affecting the business of the appellant ....
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....ant facts:- a) L&T as a parent company held more that 82% shares of LTFH which were listed on the Bombay Stock Exchange Limited ('BSE' for short) and National Stock Exchange ('NSE' for short) with effect from August 12, 2011. In order to comply with the minimum public shareholding requirement under the Securities Contracts (Regulation) Rules, 1957 ("SCRR" for short), L&T was required to reduce its stake in LTFH up to 75%. b) During the period from mid 2012 to March 2014, the earnings estimate memorandum from equity analysts covering LTFH had been very negative. As a part of fundamental research, Kotak Securities Limited on March 11, 2013 held a meeting at Hong Kong along with senior managerial staff of LTFH which was attended by the appellant. Since then, the appellant had been fundamentally and technically negative on the stock price of LTFH. c) After obtaining SEBI approval on July 18, 2013, L&T disposed of 1% of its shareholding in LTFH during November-December 2013 through market sale and the last sale was at Rs. 68.98/- per share. Thereafter, to bring its shareholding in LTFH to 75%, L&T was required to offload more than 6% shares of LTFH after expiry of requisite 12 ....
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.... appellant subscribed to 2,75,10,484 shares of LTFH in the OFS at an average price of Rs. 71.50/- per share. Thus as against an obligation to sell 2,12,36,000 shares of LTFH at an average price of Rs. 80.94/- per share under the derivative contracts entered into on March 13, 2014, the appellant on March 14, 2014, acquired 2,75,10,484 shares of LTFH in the OFS at an average price of Rs. 71.50/- per share, thereby locking in a profit of approximately Rs. 20 crore. j) In the first week of April 2014 SEBI approached an FII through whom appellant had traded in LTFH futures and sought trade rationale. Appellant furnished the trade rationale on April 07, 2014 to the broker which was then forwarded to SEBI. Thereafter, as a follow-up action, SEBI sought various informations from the FIIs and the appellant responded to SEBI directly with its responses on the queries raised by SEBI and voluntarily offered to furnish any other information that is deemed necessary by SEBI. Indeed, from time to time, the appellant has furnished requisite information that were demanded by SEBI. k) On June 05, 2014 SEBI passed an ex-parte adinterim order against the appellant thereby restraining the appella....
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....entiment in the market and the same is evident from the reports of various market analysts. In fact in November-December 2013, L&T had sold 1% shares of LTFH in the market at prices below the then prevailing prices. In the market gauging exercise for LTFH undertaken by 'CS' on March 10, 2014, more than 70 institutional investors including the appellant had opined that in view of the negative sentiment it would be just and proper for L&T to offer the shares of LTFH in OFS with deep discount. 9. Counsel for appellant further submitted that on March 13, 2013 in the morning, which was the first day of listing the shares of LTFH in the F&O segment, some reputed brokerages had strongly recommended selling futures in the F&O segment. On March 13, 2014, the futures contract in LTFH opened at Rs. 87.80/- per shares and closed at Rs. 74.55/- per share. In the cash segment the price of shares of LTFH opened at Rs. 86/- per share and closed at Rs. 79.20/- per share. During the course of the day on March 13, 2014, the appellant entered into 5309 derivative contracts through 5 FIIs equivalent to selling 2,12,36,000 shares of LTFH at an average price of Rs. 80.94/- per share. 10. Counsel fo....
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....llant was involved as a potential investor in the market gauging exercise undertaken by 'CS' (prior to March 13, 2014) and during the said exercise the appellant was contacted by the 'CS' team as a prospective investor. For the aforesaid reasons, SEBI has assumed that the appellant must have been in possession of UPSI about the floor price of the OFS prior to entering into the derivative contracts on March 13, 2014 and accordingly, pending investigation, SEBI has debarred the appellant from entering the securities market until further order. 12. Counsel for appellant submitted that there is no inconsistency in the trading effected by the appellant on the F&O segment on March 13, 2014 and on the cash segment on March 14, 2014. Trades effected by the appellant on March 13, 2014 were based on analysis of fact that the price of the scrip of LTFH was overvalued. Appellant had arrived at the above conclusion based on various research reports which were all brought to the notice of the Adjudicating Officer. Moreover, in the market gauging exercise conducted by 'CS' on behalf of L&T, 70 institutional investors including the appellant had appraised negative sentiment in respect of the....
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....as traded through five FIIs cannot be a ground to assume that the appellant was privy to UPSI prior to entering into derivative contracts on March 13, 2014. 15. It is submitted by the counsel for appellant that the WTM of SEBI committed an error in holding that the appellant on March 13, 2014 took an aggressively short position that is equivalent to 84.15% of the total open interest in the scrip of LTFH. In the reply filed by appellant it was specifically stated that as per Bloomberg, appellant's actual position in LTFH on March 13, 2014 was 34.4% of the futures volume and 21.8% of the total futures and stock volume and therefore the contention of SEBI to the contrary is totally unjustified. In the impugned order, these facts have neither been considered nor dealt with and hence the impugned order is liable to be quashed and set aside. 16. Lastly, counsel for appellant submitted that the impugned order passed by SEBI, has caused serious prejudice to the appellant and its reputation as a clean Asian Multi Asset Fund in every jurisdiction that it trades is tarnished. Fund management industry of which the appellant is a part, operates just like any other industry functions in an....
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....me day, 12 hours prior thereto that is at 9:21:24 A.M., two employees of CS in correspondence with each other (as is evident from the Bloomberg chat) had stated in relation to LTFH's share that they (L&T) are "likely to come at a steep discount about 70 types". The above piece of evidence coupled with aggressive acts of the appellant which caused abnormal movement in the market, had led to the prima facie belief that the appellant had prior knowledge of the minimum floor price before the same was made public at 9:22 P.M. on March 13, 2014. The channel or source of UPSI for the appellant is the subject matter of a detailed investigation which is currently in progress. Therefore, pending detailed investigation SEBI being empowered under Section 11(4) of the SEBI Act is justified in restraining the appellant from accessing the securities market. 20. Counsel for SEBI further submitted that SEBI has the power to pass interim order when the interests of the investors is affected or there is disruption of the market. The power under Section 11(4) read with Section 11B of SEBI Act is temporary in nature and can be exercised pending investigation and/or after investigation. As such, by i....
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....e interim action was taken against the appellant after thorough examination and analysis of trading of all top clients and on the basis of circumstantial evidence gathered. Even if the appellant had not made any profit, in the interest of maintaining market integrity, action would still have been taken against the appellant. 25. Counsel for SEBI further submitted that waiver of the cooling off period by SEBI had no bearing on the trading of the appellant or its outcome. If relaxation was not granted, the scrip price could have gone down on March 14, 2014 and in that event there could be two possibilities viz, either the floor price had to be lowered or the OFS had to be postponed. If the floor price was lowered, appellant would have bought shares through OFS at further lower price and if OFS was postponed, the appellant would have simply closed the open short position by entering into market transactions. Similarly, if the price of the scrip were to go up on March 14, 2014, the same would not have changed the floor price as is evident from the chat transcript. Thus in all the scenarios, the series of events from the appellants side would not have changed the trading outcome at a....
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....I considers that on March 13, 2014 there was abnormal movement/ market disruption in the F&O segment, because, the LTFH scrip in the F&O segment opened at Rs. 87.80/- whereas in the cash segment the same scrip opened at Rs. 86/-. Thus, there was a premium of Rs +1.80/- in the derivative segment. On the same day that is after the trading hours on March 13, 2014 the LTFH scrip in the F&O segment closed at Rs. 75.55/- and in the cash segment, the LTFH scrip closed at Rs. 79.20/- that is at a discount of Rs. 3.65/-. According to SEBI the above market movement was abnormal, because the F&O price is normally higher than the underlying share and moves in tandem with the price of underlying shares. Admittedly, March 13, 2014, was the first day of trading in LTFH shares in the F&O segment and in fact on that day, the LTFH shares in the F&O segment opened at a price higher than the price of LTFH share in the cash segment. During the course of the day on March 13, 2014 in all 13,664 derivative contracts equivalent to selling 5,46,56,000 shares of LTFH were traded in the F&O segment. Out of 13,664 derivative contracts, 5309 derivative contracts equivalent to selling 2,12,36,000 shares of LTFH ....
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....to book profits by squaring off the deals by entering into transactions in the cash segment. Since, the appellant is the only person who has taken such aggressive short position and kept it open on March 13, 2014, SEBI is justified in investigating the matter. However, during the pendency of such investigation to restrain the appellant from accessing the Indian Securities Market solely based on the fact that the appellant took aggressive short position on March 13, 2014 and took reserve position on March 14, 2014 by subscribing to the shares of LTFH from L&T through OFS, would be wholly unjustified especially when the explanation given by the appellant to keep the short position open on March 13, 2014 is a reasonable and possible view that could be taken in the matter. 31. Question then to be considered is, whether there is any merit in the prima facie view of SEBI that at the time of entering into derivative contracts on March 13, 2014 the appellant was privy to UPSI that L&T was to sell shares of LTFH with a floor price of Rs. 70/- per share and that is why the appellant took aggressive short position on March 13, 2014 and kept it open. 32. It is relevant to note that as pe....
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.... Rs. 65/- per share. Floor price for OFS cannot be fixed in advance and has to be fixed with reference to the price prevailing at the end of trading hours on the day previous to the date on which shares are to be sold through OFS. Therefore, the presumption drawn by SEBI that L&T had fixed the floor price on March 13, 2014 even before the close of trading hours that too without having any knowing that pursuant to the exemption granted by SEBI shares of LTFH could be sold through OFS on March 14, 2014 is without any basis and hence unsustainable. 34. Entire case of SEBI in presuming that L&T must have fixed the floor price for sale of LTFH shares at Rs. 70/- per share is that from the Bloomberg chat transcripts provided by CS, it is noticed by SEBI that on March 13, 2014, information like, 'likely to come in at a steep discount about 70 types' was being circulated amongst the members of Equity team of CS. It was noticed by SEBI that the above message from one CS employee to another in the Equity team was sent at 9:21:24 hours on March 13, 2014, whereas, the formal announcement of OFS and the floor price fixed by L&T were made at 21:22:00 hours on the same day. According to SEBI a....
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....13, 2014 is purely hypothetical and there is no rational basis for such presumption drawn by SEBI. 37. It is contended on behalf of SEBI that due to the non-co-operation on part of Bloomberg terminal in furnishing the requisite information, the investigation has hit the road block and that is why there is delay in completing the investigation. As noted above, the prima facie view of SEBI that on March 13, 2014 L&T had fixed the floor price at Rs. 70/- per share and prima facie view of SEBI that the appellant was privy to such UPSI is based on mere presumption and hence devoid of any merit. Admittedly, after investigating the matter, for more than one year the investigation has now hit the road block. Fact that the appellant was involved in the market gauging exercise cannot be a ground to presume that the appellant was privy to the UPSI that floor price is fixed at Rs. 70/- per share, because, admittedly, 70 institutional investors were also involved in the market gauging exercise and if those institutional investors are considered to be privy to UPSI, then there is no reason to presume that the appellant was privy to UPSI on account of involvement in the market gauging exercise....