Case Law Details
Relevant Extract
5. Conclusions:
5.1 Going by the facts narrated by Noticee No. 1, liquidation of 5 % stake was decided. The same had to be done in an orderly manner. There was no outer time fixed for liquidation. Being guided by the analysts’reports and the price trends of the scrip, Noticee No. 1 decided to start the sale in November 2007. Before the sale in the cash segment started, Noticee No. 1, booked positions in the F&O segment to the extent of 9.92 crore shares by entering into agreements with 12 entities for a commission payment. Entrusting a common person to carry out the trades in both cash and F&O segment was the other key factor in the whole operation. Finally when the price dipped on November 29, the entire F&O open positions to the extent of 7.97 crore shares was allowed to expire. In the meanwhile 1.95 crore shares were also liquidated in the cash segment. This is not a normal case of price manipulation or volume manipulation. This is a case of a unique strategy of per se not manipulating the price or volume in a single market, but manipulating the settlement price in one market to gain across the volumes accumulated in the other market. The actual manipulation has happened with respect to the convergence price of the spot with the futures.
5.2 Throughout its written and oral submissions, Noticee No. 1 has referred to its actions as ‘hedging’ to justify its elaborate scheme. The strategy of ‘hedging’, put forward as a defence by Noticee No.1 is nothing but a mirage. While Noticee No.1 has sought to depict a strategy of hedging, when one takes a closer look at what was actually done or intended to be done, the facade of hedge wanes off and exposes the hidden motive or strategy of speculation. It is now amply clear that the ‘hedging’ strategy is a defence set up as an after-thought and was not a pre-planned business strategy. To conclude, I find that Noticee No. 1 was not genuinely hedging the risk but was aiming to reap huge speculative profits by cornering futures positions and playing a fraud on the general investors and the market. Noticee No.1 cornered the OI position to the extent of 61.5% as on 6/11/07 and 40.13% as on 29/11/07 and closed out the outstanding short position of 7.97 crore shares on 29 November, 2007 through its agents (Noticees 2 – 13). This would amount to a well-planned, fraudulent and manipulative trading scheme in terms of the SEBI (PFUTP) Regulations, 2003.
5.3 Thus, on an overall evaluation of the facts and circumstances brought out in the SCN and, the replies tendered through written submission and during the course of the quasi-judicial proceedings, I arrive at the following findings:
(i) Noticee no.1 by employing 12 agents to take separate position limits of Open Interest on its behalf by executing separate agreements with each one of them and cornering 93.63% of the November futures of RPL, has acted in a fraudulent manner while dealing in RPL
(ii) The Noticee No.1, by manipulating the F&O segment through 12 of its agents (Noticees 2 -13) and allowing them to hold the contracts till the last day of expiry and thereafter by closing out the derivative contracts on the 29thof November, 2007 has engaged in a pre-planned fraudulent practice and the same cannot be held to be a mere breach of position limits by the clients attracting penalty under the exchange circulars.
(iii) On the basis of the analysis of the trading strategy/pattern adopted by Noticee No.1 in the cash market during the month of November 2007 and specifically on the 29th of November 2007, being the expiry day of the November Futures of RPL, it is found that there has been a manipulation of the last half an hour settlement price.
5.4 In short, the actions of Noticee No.1 and Noticee Nos.2-13, described in sub-paras (i), (ii) and (iii) above constitute a violation of the provisions of section 1 2A of SEBI Act, 1992 read with regulations 3, 4(1) and 4(2)(e) of the SEBI (PFUTP) Regulations, 2003. Noticee Nos. 2 to 13 have also violated provisions of the SEBI circular No. SMDRP/DC/CIR-10/01 dated November 2, 2001 and NSE circular No. NSE/CMPT/2982 dated November 7, 2001.
5.5 The scope and nature of directions that can be passed in exercise of powers under section 1 1B of the SEBI Act have been discussed elaborately earlier in this order. In view of the fact that Noticee No.1 has made unlawful gains of Rs. 513/- crores, which could not have been made but for the fraudulent and manipulative strategy/pattern adopted by them, I am inclined to direct disgorgement of the unlawful gains made by Noticee No.1. An assessment of the extent of unlawful gains or the loss caused to the investors is necessary, at this stage, so as to decide the exact direction that can be passed against the Noticees, in the matter. I find that the sum of ₹ 513/- crores has been arrived at as the profits in the SCN by taking into account the net short positions in derivatives for all days that the Noticees nos. 2-13 have maintained during November 2007. In the facts of the instant case, I am inclined to adopt the following formula, for the purpose of computation of the unlawful gains:
Computation of the Unlawful gains
| 1 | Average Net short open position in derivatives held by Noticee. Nos. 2-13 across 29 days (Nov. 1 to 29)* |
= 8.51 Crore shares |
| 2 | OI limit available to noticees 2-13 | = 1.09 crore shares |
| 3 | OI limt illegally procured | = 7.42 cr shares |
| 4 | Average gain per share | = 513 cr / 8.51 cr = Rs. 60.28 per share |
| 5 | Total illegal gains made | = 60.28 X 7.42 = Rs. 447.27 crore |
| (* based on day-wise “cumulative net short”shown in Annex -12 to the SCN) | ||
6. Directions :
6.1 In view of the above findings and taking into consideration the magnitude of the fraud across the markets; the quantum of unlawful gains made by the Noticee No. 1 and the role of the agents in facilitating the fraudulent design, I am inclined to pass certain directions against the noticees in order to protect the interest of the investors and reinstill their faith in the regulatory system.
6.2 Accordingly, in exercise of the powers conferred upon me under section 19 of the SEBI Act, 1992 read with sections 11 and 11B of the SEBI Act, and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003, I hereby pass the following directions:-
(i) The noticees named above shall be prohibited from dealing in equity derivatives in the F&O segment of stock exchanges, directly or indirectly, for a period of one year from the date of this order. The noticees may however square off or close out their existing open positions.
(ii) Noticee No. 1 shall disgorge an amount of ₹ 27 crores, as ascertained in para No. 5.5 above along with interest calculated at the rate of 12% per annum from 29 November, 2007 onwards, till the date of payment.
(iii) Noticee No. 1 shall pay the said amounts within 45 days from the date of this Order either by way of demand draft drawn in favour of “Securities and Exchange Board of India”, payable at Mumbai or by e-payment * to SEBI account as detailed below:
| Name of the Bank | Branch Name | RTGS Code | Beneficiary Name | Beneficiary Account No. |
| Bank of India | Bandra Kurla Branch |
BKID 0000122 | Securities and Exchange Board of India |
012210210000008 |
*Noticees who are making e- payment are advised to forward the details and confirmation of the payments so made to the Enforcement department of SEBI for their records as per the
format provided in Annexure A of Press Release No. 131/2016 dated August 09, 2016 which is reproduced as under:
| 1. Case Name: | |
| 2. Name of the payee: | |
| 3. Date of payment: | |
| 4. Amount paid: | |
| 5. Transaction No: | |
| 6. Bank Details in which payment is made: | |
| 7. Payment is made for: (like penalties/disgorgement/recovery/settlement amount and legal charges along with order details: |
6.3 The above directions shall come into force with immediate effect.
6.4 A copy of this order shall be served upon the stock exchanges and the depositories for necessary action and compliance.
IT IS A GOOD ACT AND THE BENIFIT WILL GO TO THE SHERE HOLDERS,