TaxTMI 
TaxTMI 
2021 (6) TMI 1144
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....DING OFFICER 1. This group of appeals is against a common order dated November 18, 2019 passed by the Whole Time Member ("WTM" for short) of Securities and Exchange Board of India ("SEBI" for short) restraining the appellants and the six entities from accessing the securities market for a period of five years and further freezing the shares and mutual funds units lying in their demat accounts for the same period. For facility, the facts in the appeal of Umang Dhanuka & Ors.( Dhanuka Family), Appeal No. 102 of 2020 is being taken into consideration. In some of the appeals there is a delay in the filing of the appeals and, accordingly, separate applications for condoning the delay have been filed. For the reasons stated in the applications, the delay in the filing of the appeals are condoned. Miscellaneous Applications are allowed. 2. In this group of appeals, we have divided the appeals in two categories. The entities in the first set of appeals being, Appeals Nos. 102, 44, 85, 235, 246, 247, 571, 572, 573, 575 and 581 of 2020 are herein called the "appellants". The entities in the second set of appeals being, Appeals Nos. 178, 179, 180 and 181 are herein called "six entities"....
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....8, 2015 against 178 entities. The 178 entities were categorized as under:- (i) The Company; (ii) The directors and promoters of the Company; (iii) The promoter related entities. (iv) The preferential allottees; (v) The exit providers; (vi) The LTP contributors; 7. It was observed in the ex parte ad interim order that the modus operandi was first to allot preferential shares, then stock split, then pump up the price, then provide an exit to the preferential allottees at a higher price. It was observed that after the second preferential allotment on March 15, 2013 there was a sharp increase in the price of the shares of the Company and that prior to the preferential allotment there was no trading activity. It was found on the basis of investigation that the increase in the trading volume occurred after lock in period expired of the preferential allottees. It was further found that there were two sets of entities; one group was primarily involved in pushing up the price when the shares were under the lock in period and the second group was acting as buyers in patch-2 in order to provide an exit opportunity to the preferential al....
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.... by the WTM on June 2, 2016, July 5, 2016 and January 26, 2017. In the confirmatory order, the WTM held that the Company was involved in the modus operandi for the benefit of the preferential allottees, exit providers and promoter related entities and it seems that the transfer of the shares of the promoters to the promoter related entities was under a prior arrangement. The WTM, however, found that Bihariji and its directors (who were the appellants in appeal no. 102 of 2020) have not been classified as promoters related entities on the basis of the loan transactions between the Company and the Bihariji Constructions. 12. Thereafter, the WTM passed a revocation order dated September 19, 2017 against 114 entities. These 114 entities were identified as preferential allottees, exit providers and LTP contributors. The WTM discharged these noticees from the ad interim orders on the ground that these preferential allottees had no connection with the Company or its promoters or promoter related entities nor had any role in the price manipulation and therefore there was no violation committed by these entities with regard to the Securities and Exchange Board of India Act, 1992 ("SEBI A....
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....were party to the alleged fraudulent scheme on account of loan transfer. It was contended that the Dhanuka Family had purchased the shares from Gajakarna, who is one of the six entities, who in turn had purchased the same from the original promoters of the Company (notice no. 15 to 19) and therefore the Dhanuka Family were connected to the Company on account of the loan transaction between the Company and the Bihariji Constructions in which some of the Dhanuka Family members were the directors. 15. The WTM after considering the replies of all the noticees and, after considering the material evidence on record, found that the trading in the shares of the Company had been suspended by the BSE for many years and that the Company‟s performance and prospectus were very poor. The WTM held that even though the suspension of the shares was revoked no legitimate investor would ever think of investing in the shares of the Company on account of weak fundamentals. It was further found that the Company made two large fraudulent preferential allotment of shares to the preferential allottees and thereafter the market price was manipulated and the price was increased by LTP contributors. ....
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....l security was not a bona fide transaction. 18. The WTM further came to a conclusion that the six entities acted as conduits in the scheme of manipulation in the price of the scrip and indulged in a pre-designed plan to manipulate the share price in order to benefit the ultimate buyers, namely, the appellants. The WTM came to a conclusion that the complicity of the appellants in the fraudulent scheme could be judged by the fact that in spite of the fundamentals of the Company being poor the appellants purchased the shares at a low price knowing with the understanding that the shares could be sold at a later point of time at a relatively higher price. The WTM came to a conclusion that the purchase decision by the appellants could not be called a prudent decision of a genuine investor and that the onwards transfer of shares by the six entities was part of a scheme / pre-planned arrangement with a definite assurance to the appellants that they would be able to sell the shares at a higher rate. Insofar as appellants Dhanuka Family was concerned the WTM found that on account of loan taken by Bihariji there was a direct connection and close proximity with the Company. 19. On the af....
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....ere bona fide purchasers. It was urged that the foundation of the impugned order is, that the trading in the shares of the Company had been suspended by BSE for many years whose performance and prospectus were so poor that no legitimate investor would even invest in the shares and therefore the appellants must have been assured fraudulent profits. It was urged that this finding is patently erroneous and is based on surmises and conjectures. The finding that the appellants have violated regulations 3 and 4 of the PFUTP Regulations merely on the basis of preponderance of probabilities is erroneous. It was further urged that the manipulation of price was done by noticee nos. 9, 10 and 11 in connivance with Company and its directors and other promoter related entities. In the absence of any charge of collusion, the appellants would not be booked for violation under regulations 3 & 4 of the PFUTP Regulations. 23. The appellants urged that the finding that the investments made by the appellants cannot be termed as a regular investment made in the ordinary course of business on the ground that the Company had weak fundamentals and the trading had been suspended for 14 years is purely c....
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....alue. It was also contended that the appellants had an advantage over the preferential allottees as there was no lock in period of the shares which they have purchased. It was urged that since the Company was making losses and had weak financial fundamentals, a well known investor would not have purchased the shares and the fact that the appellants had purchased the shares gives rise to a preponderance of probabilities that the appellants knew that they would earn huge profits from the purchase of these shares. It was contended that insofar as the Dhanuka family is concerned there was a direct connection with the Company through an NBFC which is controlled by the Dhanuka family, namely, Bihariji wherein it has come on record that the Company had advanced loans to Bihariji and therefore the link / close proximity with the Company stands established. 25. Having heard the learned senior counsel for the parties at some length we find that the entire basis for holding the appellants guilty of Section 12A(a),(b) and (c) of the SEBI Act read with Regulation 3 and 4 PFUTP Regulations is, that a prudent investor would not have purchased the shares of a Company which had weak fundamentals....
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....d not be let off. The WTM however, has taken an exception on the fact that the appellants had made huge profits. We are of the opinion that it is not a crime to make huge profits unless you show that the profits were made by manipulating the price in collusion and with fraudulent intent with other entities such as the Company and its directors and promoter related entities which in the instant case is lacking. 28. We are of the opinion that the role of the preferential allottees, exit providers and LTP contributors were far more serious than the role of the appellants. The role of the appellants in the instant case is, that they had purchased the shares off market from the six entities who in turn have purchased it from the promoter Company. Whereas, the preferential allottees have been let off, the appellants have been penalized only on the ground of being in proximity with the Company and its directors which finding is perverse in as much as we find that there is no direct connection of the appellants with the Company, its promoters, promoter company or noticees nos. 9 to 11, 75, 77 to 80 who were the main manipulators and the kingpin in the entire scheme. 29. The six entit....
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....ness prudence to purchase at a lesser price and sell it at a higher price when the market is up thereby earning profits. Making profits in our opinion cannot be termed illegal or manipulative or fraudulent or violative of the PFUTP Regulations. 32. We also are of the confirmed opinion that the appellants are not connected with the Company or its promoters through the six entities. The appellants are located in all parts of the country and the appellants had purchased the shares through agents and brokers. There is no evidence of any direct connection with the six entities and, in any case, there is not even an iota of evidence of the appellants being connected with the Company, its directors, promoter related entities and noticee nos. 9 to 11, etc. The finding that the appellants are closely associated with the Company is patently erroneous. 33. On the other hand, the preferential allotments are given to a chosen few by the Company and its directors especially to their preferred persons who are known and closely associated with the Company or its directors. Such preferential allottees who are not strangers and who are closely associated with the Company because of the prefere....
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....hese appellants directly and unless there was some intention of parting with the profits the charge of selling the shares with huge profits under a pre-decided scheme is farfetched. 37. Insofar as the Dhanuka Family is concerned we are satisfied that the finding that the said appellants were in close proximity with the Company is based on surmises and conjectures. It has come on record that there was business dealings between the Company namely, Bihariji in which loans were taken from the Company at a higher rate of interest. The forensic auditor‟s report appointed by SEBI has clearly given a finding that the loans taken by Bihariji was in the usual course of business and that there was nothing wrong in the said transactions. Based on this forensic auditor‟s report the charge of the Dhanuka family being promoter related entities was dropped. Further, having a business connection with the Company does not mean that there were part of the scheme of manipulating the price or they were part of some collusion which in any case is not the finding given by the WTM. The only charge is that being connected through this loan transaction the Dhanuka family is guilty of violatio....
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....n payment of consideration which is reflected in their books of accounts. This fact, when these six entities were accosted by the WTM, was not disputed nor any other explanation has been offered. We are further of the opinion that the shares transferred by each of the noticee nos. 20 to 25 were not proportionate to the alleged outstanding loans, if any. Thus, the stand of these six entities that the shares were transferred to them by the erstwhile promoter Company against the outstanding loans cannot be accepted. 41. We also find that these six entities had acquired 30.91% shares of the Company from the erstwhile promoters and paid the sale consideration for the same in February / March-2012. This finding is based on the bank statements and other documentary evidence produced by noticee nos. 15 to 19. Though the share transfer forms are executed on February 9, 2013 but we find that various appellants were given the physical shares from December 2012 onwards. However, we find that from February / March-2012 onwards the six entities were basically controlling the affairs of the Company. The Corporate Office of the Company was changed from Chennai to Mumbai to a premise owned by on....