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
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