Allowed

Sterlite Industries (India) Ltd. v. SEBI

SAT22 Oct 2001

Case brief

AI extract

What is this about?

The SAT set aside SEBI's order prohibiting Sterlite Industries from accessing the capital market for two years and directing prosecution, holding that there was insufficient evidence to establish price manipulation by the Appellant and that the market access ban was a penalty.

What did the court decide?

Quashed the order prohibiting the Appellant from accessing the capital market and directing prosecution proceedings.

What the court decided

Sterlite Industries (India) Ltd. Vs. SEBI — Securities and Capital Markets | SAT (2001)

Allowed

Sterlite Industries (India) Ltd. v. SEBI

SAT22 Oct 2001

Download

Case brief

AI extract

What is this about?

What did the court decide?

Quashed the order prohibiting the Appellant from accessing the capital market and directing prosecution proceedings.

What the court decided

¶41

Sett. No.	Carry forward Purchases	Carry forward Sales	Purchase V/s Sales (No.of times)	Hawala Rate (Rs.)
1.	624200	169300	3.69	260
2.	782800	307300	2.55	305
3.	326600	218200	1.50	320
4.	350300	204300	1.71	325
5.	575200	222000	2.59	350
6.	666900	197800	3.37	330
7.	734700	169400	4.34	305
8.	768500	170400	4.51	305
9.	788900	147300	5.36	315
10.	1217600	139800	8.71	345
11.	1797400	299900	5.99	270
12.	1416300	475900	2.98	195

¶47

Name of the Entities	No.of warrants	Post issue holding
Sterlite Copper Rolling Mills Pvt. Ltd.	24,00,000	6.76%
Dwarkaprasad Anilkumar Investment Pvt. Ltd.	15,00,000	10.36%
Twin Star Holdings Ltd.	36,00,000	9.86%
Pravin Navin Investment & Trading Co.Pvt.Ltd.	15,00,000	10.63%

26/5/98	1204300	368.90
27/5/98	1337600	360.90
28/5/98	1180500	350.20
29/5/98	803000	346.85
01/6/98	1500100	335.75
02/6/98	1074200	302.25

¶56

Clearing No.	Name of selling broker	Quantity
553	P.R. Shah	40000
566	S.N. Nangalia	39900
200	GNH Global Securities	118200
581	R.R. Mohta	30000
519	N.C. Jain	15000
645	S.N. Tara	25000

¶62

Clearing No.	Name of selling broker	Quantity
739	Lalkar Securities	58, 800
200	GNH Global secs. Ltd.	2, 32, 000
747	SVS Secs. Pvt. Ltd.	21, 300
141	Sanghvi Bros.Brokerage Ltd.	40, 000
553	P. Regulation 3(I) shah	70, 600
566	S. N. Nangalia	1, 35, 000
394	KNC Shares & Securities	22, 500
482	M N Agrawal	20, 000
581	R.R. Mohta	53, 500
295	J.H. Patel	40, 000
785	T.C.P Stock Brokers	5, 000
	Total	6, 99, 500

¶80

Shri Sundaram refuting the Respondent’s version that the Appellant was keen to delay the inquiry proceedings stated that by the Respondent’s own version the inquiry is relatable to the market behaviour witnessed in AprilMay, 1998. But, a show cause notice was issued to the Appellant on 20.12.1999, that is after a lapse of about 18 months, that the Appellant submitted its reply on 10.01.2000 i.e., within just 3 weeks of the receipt of the notice, that the Respondent vide letter dated 08.02.2000 fixed the matter for hearing on 24.02.2000, that on 16.02.2000 the Appellant requested either to "pre-pone or postpone" the date of hearing because of unavoidable reasons. Learned Senior Counsel stated that it was not a request for postponing the hearing to cause delay, that it was left to the Respondent to even pre-pone the hearing if they so wanted. Learned Senior Counsel also stated that as far back on 8.3.2000 the Appellant had sought cross examination of the witnesses on whose statements the Respondent had relied on, the request was repeated on 4.10.2000. There was no response. On 20.3.2001 the Respondent wrote to the Appellant advising to attend the hearing on 3.4.2000 at 3.30 p.m. and present its case and all the issues and objections in respect of the show cause notice, which obviously included the request for cross examination of the witnesses. Shri Sundaram stated that on 3.4.2001 before the scheduled time of the hearing, the Appellant filed a letter requesting the Respondent to fix the hearing any time within a week, so as to enable it to have the benefit of the presence of its Senior Counsel. He pointed out the endorsement on the office copy of the letter filed with the appeal to show that the letter marked "urgent" was delivered at the Respondent’s office at 1.30 p.m. on 3.4.2001 i.e. before the scheduled timing of the hearing. Shri Sundaram stated that the Respondent did not respond to the request and without giving any opportunity to the Appellant to putforth its version, on 19.4.2001 the Respondent passed the order. He stated that the sequence of events narrated above, as also disclosed in the impugned order would show that the delay in investigation was not caused by the Appellant, that though the Respondent was moving at snails pace since 1998, picked up super speed all on a sudden in the light of the heat turned on it after the share market crash in March, 2001 and decided the matter in a hurry even ignoring the rules of natural justice.

¶84

With reference to the alleged contravention of the provisions of regulation 4, Shri Sundaram read out the provisions of the regulation and in particular clauses (a) and (d) and stated that the scope of the regulation need be clearly understood, which the Respondent did not, before applying to the facts of the case and drawing hasty conclusions. He stated that Chapter II of the 1995 Regulations, under which regulations 4 on ‘Prohibition against market manipulation’, regulation 5 on ‘Prohibition of misleading statements to induce sale or purchases of securities’ and regulation 6 on ‘Prohibition on unfair trade practice relating to securities’ are put, is titled "Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market". According to him the object of the regulation, is thus clear that in the absence of any fraud or deceit the provisions of the regulation would not apply, that in the absence of any finding that the transaction was intended to defraud or deceit someone, there is no further scope for any investigation as to who did it and why did it. Shri Sundaram stated that deceit through market manipulation is what the regulation prohibits. In this context he stated that there is not even a whisper of such a charge against the Appellant anywhere in the order. Learned Senior Counsel stated that according to clause (a) of regulation 4, no person shall, effect, take part in or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person. He stated that self-profit is the motivation that attracts clause (a) of the regulation. Shri Sundaram submitted that any price change in the scrips, as a result of genuine purchase or sale would not attract the provision, that if there is no artificiality in a transaction, regulation 4(a) cannot reach. He stated that the words "intention of artificially raising or depressing the price" are the crux and that an artificial price is not the genuine price. Whether the price is genuine or artificial would depend on the attendant facts in each case.

¶85

Referring to the allegation involving purchase of 3 lakh shares by the Appellant, Shri Sundaram stated that shares were not purchased by the Appellant or at its behest, that it was a transaction effected by a broker for his clients. He submitted that as per El Dorado, they purchased 1, 50, 000 shares of the Appellant for their client, Shri Khurana on 8.4.1998 at the rate of Rs. 291. 50 per share and another 1, 50, 000 shares for their client M/s. Crimson on 10.4.1998 at the rate of Rs. 308. 50 per share, that prior to such purchases the share price had already touched Rs. 320 (on 2.4.1998) and the volume of the shares traded on both BSE and NSE during the period 1.4.1998 to 17.4.1998 was about 13 million shares and the price range was between Rs. 295 to Rs.325, that the weighted average price aggregated Rs. 308 per share on the NSE and Rs. 306 per share on BSE during the period. Shri Sundaram further submitted that as a matter of fact, during the period April to June, 1998 the total volume of the Appellant’s shares traded on both these exchanges was to the tune of 69 million shares and as such even if it is assumed for argument sake that MALCO had purchased these shares, it is impossible to believe that just 3 lakh shares traded would in any way manipulate such a big market. He submitted that it is evident that purchase of these 3 lakhs shares on delivery basis had not artificially raised the price or induced any person to sell or purchase the share or it was a device to inflate the price. He reiterated that the purchase was made by El Dorado from the open market at the prevailing rate, that the quantum of shares purchased with reference to the total volume of transaction was trivial to artificially raise or depress the prices and that there was not even a trace of deceit in the transactions. Shri Sundaram submitted that there is nothing on record to show that the transaction involving 3 lakh shares referred to by the Respondent in the order attracted the provisions of regulation 4(a).

¶90

Learned Senior Counsel submitted that MALCO purchased 6,00,000 shares of the Appellant at the specific request of some senior members of the BSE Governing Board to avert a payment crisis in the exchange. He submitted that the sole intention of MALCO in buying the scrips was to help BSE to avert a major payment crisis, which if allowed to happen would have affected innocent investors. Learned Counsel stated that the material on record and the impugned order acknowledges that these transactions were put through at mid night on 12.6.1998 which would never have been possible without the BSE Governing Board being involved, that this favour by MALCO has been twisted and classified as bail out of the Damayanti Group; He submitted neither MALCO nor the Appellant knew the brokers of the Damayanti Group nor was there any means of knowing as to which brokers were selling those shares. Shri Sundaram stated that the impugned order has disregarded the fact that MALCO instructed EL Dorado to first find a buyer (financial institution) for these 6 lakh shares and only if they could not find such a buyer, MALCO would purchase the shares, which MALCO did after one month of the original purchase by El Dorado. He further stated that it is an admitted fact that the shares were purchased to avoid a market crisis at the instance of BSE, and therefore the question of distorting the market did not arise at all; further the beneficial ownership of six lakh shares purchased was transferred to MALCO. He further stated that the fact that MALCO had instructed El Dorado to place the shares with financial institutions and in case it did not fructify, the shares would be purchased by MALCO, indicates the genuineness of the transaction, that if the intention was to manipulate the market, MALCO would have directed El Dorado to place the shares with the brokers. He further stated hat the impugned order itself clearly states that the shares were purchased by MALCO and the purchase was also funded by MALCO and as such the Appellant cannot be said to have violated regulation 4(d). He also pointed out that nowhere it has been stated in the order that there was any fund flow from the Appellant for the purchase of the said 6 lakh shares. MALCO used its own funds. Shri Sundaram submitted that the factual position completely belies the contention that the Appellant had any intention to manipulate the share price. He further submitted that the scope of the provisions of regulation 4(a) and (d) discussed in the context of the transaction relating to purchase of 3 lakh shares is in equal force applicable to the purchase of 6 lakh shares by MALCO and this transaction is also out of the scope of the said regulation.

¶116

Referring to the observation in para 7.3 of the order, that only those brokers who had dealings/ linkages with Damayanti Group were selected for bail out. Shri Sundaram stated that this is factually incorrect. He stated that the factual position in this regard has been stated by Bimal Gandhi himself that even he was not aware of the brokers involved and the purchase was done as per the list prepared by BSE. Shri Sundaram strongly rebutted the Respondent’s version that promoters/company first abetted Shri Harshad Mehta to build up large positions in the shares of the Appellant, which facilitated market manipulation and later provided exit route when the artificial increase in price was not sustained and some of the brokers dealing for Damayanti Group got trapped. He submitted that the Respondent’s observation is not based on any evidence. According to Shri Sundaram, the Appellant and MALCO have nothing to do with Damayanti Group or Shri Harshad Mehta. He stated that the observations of the Respondent are nothing but a figment of imagination, that on the contrary, the Respondent itself has stated that MALCO purchased shares, at the instance of BSE to overcome an impending disaster affecting the credibility of the market. Though the order (in para 9.1) speaks of ‘circumstantial evidence’ there is no evidence of any kind to charge the Appellant that it was involved in market manipulation. Shri Sundaram, stated that the Appellant’s reliance on the decision in Shivajirao Nilangekar Patil v. Mahesh Madhav Gosavi (AIR 1987 SC 294) is misplaced for the simple reason that facts of the Appellant’s case are entirely different and distinguishable from the facts of the said case. He pointed out that the legal position referred to in para 10.2 of the order if read with the observation in para 7.2 of the order would clearly show that the Respondent had drawn its conclusion erroneously holding the Appellant guilty of market manipulation. He also pointed out that price of Rs. 181 referred to in para 10.2 of the order is relating to January, 1998 and this referral date has been deliberately

¶124

Shri Sundaram stated that even in the order the main charge is that the Damayanti Group built up unusually large position in the scrips of the Appellant and of BPL and Videocon resulting in distortion of the market equilibrium and creation of artificial market in their scrips, Thus according to the Respondent it is the Damayanti group which cornered the large chunk of shares resulting in distortion of market equilibrium. He said the transactions involving 3 lakh and 6 lakh shares are not the key issues, but the Respondent is linking the Appellant with the said Damayanti Group and treating it as a part of the said group, holding liable for the actions of the said group. For this purpose the Respondent has not adduced any evidence except stating that the bail out was meant to protect the Damayanti group brokers, ignoring the Appellant’s version that the bail out was made at the instance of BSE to avoid a payment crisis. The Learned Counsel submitted that unless it is established that the Appellant is a part of the Damayanti Group or that the Damayanti Group had cornered shares at the behest of the Appellant, the charge of manipulation against the Appellant cannot be sustained, that the Respondent has failed to establish the said two requirements. He further stated that para 5.5 of the order reiterates that Damayanti Group acting through a set of brokers built up large positions in the carry forward segments in the Appellant’s scrip at the BSE. According to Shri Sundaram, even if it is by Damayanti Group, carry forward segment is not the entire market. He also submitted that the Respondent is deliberately misguiding the authorities by comparing the quantum with carry forward figures, instead of comparing with the total volume traded on the exchange, with a view to play up the percentages. He submitted that the Appellant can not be held responsible for Damayanti Group’s transactions as it has no connection with them. In this context he also referred to the BSE data provided in Annexure ‘R’ and stated that price at which the impugned share transactions were made and its percentage share in the total Turnover also need be looked into. He submitted that the data reveals that these two transactions had no impact on the market that the transactions were uneventful as far as the market was concerned.

¶234

Shri Bimal Gandhi in his statement had unequivocally stated that 1, 50, 000 shares were purchased for Mr. Ashwani Khurana and 1, 50, 000 shares for Crimson Securities. Shri Gandhi in reply to a question from the Investigating Officer had also stated that "the said clients have regular transactions from time to time hence there was no payment on this date from the said client. In the case of Shri Ashwani Khurana we have been regular borrowers from them and we have adjusted the purchase consideration against their loan… Though no payments have been made specifically for the purchases, the accounts of the said parties have been adjusted against the obligations from time to time. As per our understanding with these clients it is incumbent upon us to arrange for funds to meet the pay in liabilities… Since most of their share dealings are through us the said shares were not delivered to them and were in our possession". In this context the corroborating evidence from Ashwani Khurana in his deposition before the Investigating Officer available in the compilation is also relevant. Shri Khurana in his deposition dated 10.9.1998 had admitted that he had purchased 50, 000 shares each of Sterlite in the name of his family concerns, viz. (1) Kanchenjunga Advt. PLtd (2)Khurana & Co. and (3) Iqbal Chand Khurana in the month of April, 1998. Regarding delivery of the shares purchased on his behalf by Dil Vikas, Shri Khurana had stated that "the physical delivery of shares is lying with El Dorado. We normally seek the physical delivery in case of book closure". To a query as to whether he paid consideration of all 1. 50 lakhs shares of Sterlite to M/s. El Dorado, Shri Khurana had stated that "there was a credit balance of Rs. 1.81 crore in Khurana & Co., out of which purchase consideration of Rs. 1.46 crore was met. Similarly M/s.Iqbal Chand Khurana was having a credit balance of Rs.1.54 cr., out of which purchase consideration of Rs.1.46 crore was met. In the case of Kanchenjunga Advt. P.Ltd the purchase consideration of Rs.1.46 crore was met from the opening balance of .45 cr. and the balance was adjusted through the running account which currently shows a Cr. balance of Rs. 35 lakhs as on 10.9.1998. Shri Tarun Jain, Director Finance for Sterlite Industries Ltd, in his deposition dated 6.10.1998 had confirmed the position that MALCO or Sterlite Industries Ltd had not given any loan to El Dorado Guarantee Ltd., Shri Bimal Gandhi or any of the directors or any directors of the associate concerns. The statements of the persons referred to above remain unrebutted.

¶242

It is true that the price of the Appellant’s scrip had steadily increased during the period and fell when the acquisition failed. Upward price movement in the shares of an acquirer company is not uncommon, as the market would respond positively in case the takeover is likely to result in value addition. In the absence of any evidence to show that the price was pushed up to meet the situation at the instance of Appellant, it is difficult to hold the Appellant responsible for the abnormal price movement. The Respondent has failed to reasonably prove its case that the Appellant had manipulated the market to keep the scrip price high. It has gone by inference that the Damayanti Group had manipulated the price and that it was done at the behest of the Appellant, as otherwise MALCO would not have stepped in to bail them out. The fact that MALCO had advanced Rs.11.75 crores to Dil Vikas to purchase the Appellant’s shares remain undisputed. There is reason to believe that the money was made available as requested by certain members of the BSE’s Governing Board. The Respondent in its order has also endorsed this fact. Now the question is whether the Appellant had any role in choosing the brokers to be bailed out. In this context the unrebutted evidence of the Respondent’s witness Shri V.D.Kinkhabwala, a Director of Dil Vikas, dated 15.9.1998 is revealing. He had stated that "the name of the client, number of shares and the price were all given by BSE". The following reply given by the Appellant in response to the show cause notice is also to be noted in the context. It was stated therein that "when MALCO purchased these shares the sole intention was to help the BSE to avert a major payment crisis on the premier exchange of the country and not to manipulate the share price of Sterlite or bail out any particular group of brokers. In fact when MALCO made such payment to El Dorado, it did not even know who were the selling brokers and only realised their identities from the documents

¶245

In the order in para 6.6 it has been stated that "Dayamanti Group was working in concert with the promoters of the company". It appears that this view is formed mainly on the basis of a paper retrieved from the office of the Damayanti group which is stated to be one of the papers having details of investment by Shri Harshad Mehta", wherein under the heading" excess lying as under" it was found written "Dil Vikas – Ster. 1,95, 000 giving the break up of this figure as 1, 50, 000 - 45, 000 margins". It has been further stated in the order that "the Dil Vikas referred to in the said paper is Dil Vikas Finance Ltd, which is an associate company of El Dorado Guarantee Ltd, which is known in market circles as a "jobber" of Sterlite Industries". The order further states that "it was found that El Dorado had purchased 1.5 lakh shares in the name of Crimson Securities, another associate concern of El Dorado in settlement No.3 of BSE. This was the part of the total purchase of 3 lakh shares by El Dorado in that settlement, El Dorado purchased 1.5 lakh shares in the name of M/s.Crimson Securities, their family concern and advised their clients Mr.Ahwani Khurana of Delhi to purchase another 1.5 lakh shares, which they purchased in the name of their group companies". The order also states "the fact that paper (referred to in para 6.6.) was available in the office of Damayanti Group which is a front for Harshad Mehta indicates that there was nexus between El Dorado and Damayanti Group in this regard., The providing of list of the brokers who would like to sell these shares, by the management of the Sterlite Industries Ltd, coupled with transfer of funds from MALCO to Dil Vikas under the garb of clean loan proves a nexus between Damayanti Group on one hand and Sterlite Industries Ltd on the other hand. The sellers who sold these shares to El Dorado were having dealings with Damayanti Group". To my mind this statement by itself does not establish any linkage between the Appellant and the Damayanti Group. The name of a company appearing in the list of investments made by a broker by itself cannot be considered as an evidence proving conclusively that the investment was made by the broker at the company’s behest. The Respondent seems to have not examined in this context any of the Damayanti Group companies to ascertain the factual position. In any case there is no reference to any statement from them, in the order.

¶246

In this context linking the said investment of Shri Harshad Mehta with the purchase made by Dil Vikas, does not in any way help to establish any nexus between the Appellant and Damayanti Group/Shri Harshad Mehta, as Dil Vikas had purchased the shares in its capacity as a broker from the market. The trade relationship, of Dil Vikas with the Appellant could be independent of the transactions it undertakes for its other clients. As a broker it serves other clients as well. It has been demonstrated with evidence that the three lakh shares were purchased by Dil Vikas for others and not for the Appellant or at its behest. In the light of the views already expressed with reference to Shri Murthy’s mentioning of the names of the brokers holding scrips of Sterlite in the market and the nature of Rs.5 crore advanced as Inter Corporate Deposit by MALCO, it is difficult to subscribe to the Respondent’s view in this regard. In this context it is to be noted that the Appellant in its reply has stated that it has no connection with Damayanti Group and therefore it was for the Respondent to establish the nexus, if any existed. It is also to be noted that the Respondent’s witnesses positioned in the Appellant’s employment had also denied of any association with the Damayanti Group. Shri Murthy in his statement had emphatically stated that he had not heard about any of the companies of Damayanti Group mentioned by the Investigating Officer. He had also denied of any knowledge about S/Shri Anil Doshi, Dinesh Doshi and Dilip Shah of Damayanti Group. Shri Tarun Jain had also stated that he had not heard about any of the so-called Damayanti Group companies or the persons referred to by the Investigating Officer. In the absence of adequate evidence from the Respondent’s side to establish any nexus between the Appellant and the Damayanti Group, if not directly, at least indirectly, the Appellant cannot be considered as part of the Damayanti Group or associated with the Damayanti Group and it cannot be held liable for the actions of the said Damayanti Group.

¶280

The legislature has clearly spelt out the penal provisions in the Act at 3 places – section 12(3) provides for suspension or cancellation of the certificate of registration granted to the market intermediaries in the event of their proven misconduct, provision under Chapter VIA, provides for imposition of monetary penalty for certain offences specified therein; section 24 empowers Courts to award punishment for violation of offences under the Act etc. Since legislature has deliberately chosen to create specific offences and penalties thereto, it is not possible to view that under section 11B the Respondent is competent to issue a direction which tantamounts to imposition of penalties. While widening the scope of ‘such measures’ used in section 11, to include penalties, and thereby stretching the scope of issuing directions under section 11B to cover imposition of penalties, the limitation stated above need be kept in mind. However, it is understood that the Respondent has also been taking the view that section 11B is not a penal provision, but preventive and remedial in its application. If that is so, it has to be seen whether the impugned direction prohibiting the Appellant from accessing the capital market for a period of 2 years from the date of the order is preventive or remedial. In the absence of any explanation from the Respondent as to what exactly is meant by "accessing the capital market", it has to be understood as is understood in the common parlance – i.e., entry to the capital market for issuing/offering securities. In this context, it is to be noted that the charge against the Appellant is of market manipulation. The shares of the Appellant are listed/traded in the stock exchanges even today. That being the case preventing the Appellant raising further capital/offering shares to the public in the next two years cannot serve as a preventive measure to debilitate the Appellant indulging in market manipulation. Similarly, by no stretch of imagination the said direction can be considered even remedial as prospective barring of a public issue cannot remedy an act of market manipulation allegedly indulged for a specific purpose, 3 years ago. A remedial action is normally seen as one intended to correct, remove or lessen a wrong, fault or defect. Purport of preventive or remedial directions which can be issued in a proven case of fraudulent and unfair trade practice is discernible from the provisions of regulation 12 of the 1995 Regulations, already cited in this order. In my view the impugned order is neither remedial not preventive but punitive in effect as it takes away the Appellant’s right to mobilise funds from the public to carry on its business. According to Webster’s Encyclopedic Unabridged Dictionary "penalty means a punishment imposed or incurred for a violation of law or rule". In the instant case it is seen that the order is made in the light of the finding by the authority, that the Appellant has violated the regulations. This nexus also strengthens the view that the order debarring the Appellant from accessing the capital market is a penalty. In this view of the matter the order has no legal backing and therefore cannot sustain.

Sterlite Industries (India) Ltd. v. SEBI

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Sterlite Industries (India) Ltd. v. SEBI

Case brief

What is this about?

What did the court decide?

What the court decided

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

Similar cases

A compact analysis

Statutes considered