SEBI had conducted an investigation into the alleged irregularity in the trading in the shares of a company listed on the Bombay Stock exchange. The investigation revealed that the company had planted certain corporate announcements. SEBI had issued an order imposing a penalty on the company for allegedly violating the SEBI Act, 1992.
Original Description:
Original Title
Adjudication Order against Mercury Fund Management Company Ltd in the matter of Gennex Laboratories Ltd.
SEBI had conducted an investigation into the alleged irregularity in the trading in the shares of a company listed on the Bombay Stock exchange. The investigation revealed that the company had planted certain corporate announcements. SEBI had issued an order imposing a penalty on the company for allegedly violating the SEBI Act, 1992.
SEBI had conducted an investigation into the alleged irregularity in the trading in the shares of a company listed on the Bombay Stock exchange. The investigation revealed that the company had planted certain corporate announcements. SEBI had issued an order imposing a penalty on the company for allegedly violating the SEBI Act, 1992.
SECURITIES AND EXCHANGE BOARD OF INDIA [ ADJUDICATION ORDER NO. EAD-2/DSR/ RG/ 203 /2014 ] ________________________________________________________________
UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 In respect of Mercury Fund Management Company Limited
In the matter of Gennex Laboratories Limited
1. Securities and Exchange Board of India (hereinafter referred to as "SEBI ") had conducted an investigation into the alleged irregularity in the trading in the shares of Gennex Laboratories Limited ( hereinafter referred to as "GLL"), a company listed on the Bombay Stock Exchange Limited (hereinafter referred to as "BSE") and into the possible violation of the provisions of the SEBI Act, 1992 (hereinafter referred to as the Act) and various Rules and Regulations made there under during the period from April 30, 2007 to November 18, 2008.
2. It was observed that GLL (formerly known as Prudential Pharmaceuticals (PPL)) was incorporated in the year 1985 as a private limited company and became public limited in the year 1994. The name of the company was changed to Gennex Laboratories Ltd. w.e.f. September 19, 2007. It was originally promoted by Pharmasia Ltd. Later, one Mr. Vinod Baid & Associates acquired controlling stake in the year 1994 for setting up facilities for manufacture of Bulk Drugs and Drug Intermediates.
3. The investigation, inter alia, revealed GLL had planted certain corporate announcements. Out of the said announcements, it was observed that the Brought to you by http://StockViz.biz Page 2 of 10
company had only implemented the corporate announcement with regard to the preferential allotment of shares and warrants to Silver Golden Property Develop Fin Investment Ltd. and Carwin Mercantiles (P) Ltd., whereas, the remaining corporate announcements were not implemented and therefore, were false positive corporate announcements. On July 04, 2007 i.e. just before the corporate announcement with respect to the investment proposal of one Mr. Arun Jain, Chairman of Innevesco Pvt. Ltd, Mercury Fund Management Company Limited (hereinafter referred to as the Noticee/MFMCL), erstwhile promoter of GLL, had received 9,60,000 shares of GLL from the promoter of GLL viz. Mr. Vinod Baid in off market transaction. Further, out of the said shares so received, the Noticee had sold 9,30,850 shares during the period July 05, 2007 to August 22, 2007 during which the price of scrip had increased from ` 24.10 to ` 26.55. It was, therefore, alleged that the promoter had transferred the shares in off market to the Noticee and the Noticee in turn sold the said shares in the market taking advantage of the positive announcement made by GLL which were never implemented. It was also observed that the company had not informed the stock exchanges about subsequent implementation status.
4. SEBI has, therefore, initiated adjudication proceedings against the Noticee for allegedly violating the provisions of Regulation 12(a), (b) and (c) of the Act read with Regulation 3 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the PFUTP Regulations).
APPOINTMENT OF ADJUDICATING OFFICER 5. I have been appointed as the Adjudicating Officer vide order dated the December 13, 2013 under Section 15-I of the Act read with Rule 3 of the SEBI ( Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the said Rules) to inquire into and adjudge under Section 15HA of the Act, the alleged violation of provisions of law by the Noticee.
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NOTICE, REPLY AND PERSONAL HEARING 6. The Noticee was issued a Show Cause Notice dated March 07, 2014 (hereinafter referred to as SCN) under Rule 4(1) of the said Rules to show cause as to why an inquiry should not be held and why penalty be not imposed on it for the aforesaid violations. Vide letter dated March 26, 2014, the Noticee acknowledged the receipt of the said SCN and requested four weeks' time to file its reply in the matter. However, no reply was received from the Noticee. Thereafter, in the interest of natural justice and in order to conduct an inquiry as per Rule 4(3) of the said Rules, an opportunity of personal hearing was granted to the Noticee on July 08, 2014 vide notice of hearing dated June 23, 2014. However, again vide letter dated July 05, 2014, the Noticee while acknowledging the receipt of the said hearing notice, requested for further four weeks' time to file its reply in the matter. As no reply was received from the Noticee, another opportunity of personal hearing was granted to it on August 25, 2014 vide notice dated August 05, 2014. However, the Noticee did not attend the hearing on the scheduled date. Vide letter dated August 22, 2014 (received on August 25, 2014), the Noticee has once again requested for four more weeks' time to file its reply in the matter.
7. I am of the opinion that sufficient time has been granted to the Noticee to file its reply and ample opportunities of hearing have been granted to the Noticee to present its case before me in the interest of natural justice. In view of the same, I am proceeding with the inquiry taking into account the documents and material as available on record.
CONSIDERATION OF EVIDENCE AND FINDINGS 8. I have carefully perused the charges leveled against the Noticee in the SCN and the documents and material available on record. In the instant matter, the following issues arise for consideration and determination :- (a) Whether the Noticee has violated the provisions of Section 12A(a), (b) and (c) of the Act read with Regulation 3 of the PFUTP Regulations? Brought to you by http://StockViz.biz Page 4 of 10
(b) Do the violations, if any, on the part of the Noticee attract any penalty under Section 15HA of the SEBI Act ?
(c) If yes, what should be the quantum of monetary penalty?
9. Before proceeding further, I would like to refer to the relevant provisions of the Act and PUFTP Regulations which read as under :
Relevant provisions of the SEBI Act, 1992: Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. 12A. No person shall directly or indirectly (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognized stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;
Relevant provisions of PFUTP Regulations: Prohibition of certain dealings in securities 3. No person shall directly or indirectly - (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made thereunder; Brought to you by http://StockViz.biz Page 5 of 10
(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; and, (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made thereunder."
10. I find from the SCN that GLL is a company listed on the BSE. During the investigation period, GLL had planted false positive announcements, the details of which are as under:
Date News Price movement in the scrip Trading by MFMCL Status 05.07.07 (1:22:31 P.M.)
Informed BSE about board meeting on July 16,2007 to discuss about the investment & management participation proposal received from the INNOVESCO PTE LTD, Singapore and the financial arrangement to be made for the proposed Bio-tech Products. On July 5,2007, the scrip opened at ` 24.10, lower than previous days close of ` 24.45 and reached till ` 25.65 with 253 trades. The last trade before this announcement was executed at ` 24.20 and first trade after announcement was at ` 24.45. During July 6,2007 to July 13,2007, the price has moved from ` 26.15 to ` 29.95 in 1506 trades. During 30.04.07 03.07.07, had purchased 2055 shares and sold 16,17,350 shares. On 05.07.07, the total trading was 3,42,912 shares and it sold 2 Lakh shares.
During 06.07.07 to 12.07.07, sold 2 Lakh shares Not implemented Brought to you by http://StockViz.biz Page 6 of 10
16.07.07 (6:10:26 P.M) Informed BSE about in-principle approval of the investment and management proposals from Mr. Arun Jain, Chairman of Innovesco Group of Companies, Singapore and his Associates and decision to allot 30% of the expanded Equity capital of GLL to Mr. Arun Jain & his Associates and/or their SPV in India on preferential basis at a price to be determined after receipt of the valuation report. The statutory auditor, M/s. Laxmi Niwas & Jain, was appointed for valuation of the business of the Company and to determine the quantum of investment to be brought in by M/s. Arun Jain & Associates. The price of the scrip opened at ` 28.00 on July 16,2007 (1.23% lower than the previous close price of ` 28.35) and reached till `28.85 with 72 trades during the day.
On July 17,2007, the price opened at ` 28.95 and fell down to ` 27.10
sold 55000 shares and counterparties were scattered. Total trading was 83,574 shares.
During 17.07.07 to 22.08.07, purchased 5350 shares and sold 5,30,850 shares Not implemented 29.08.07( 1:35:02 PM) Informed BSE about Board meeting on September 04, 2007 to consider the allotment of 2500000 equity shares and issue of 25,00,000 equity warrants as under: Silver Golden Property Develop Fin Investment Ltd, Mumbai. 1500000 shares and 2500000 warrants Carwin Mercantiles (P) Ltd, Kolkata 1000000 shares The scrip opened at ` 27.70 on August 29,2007 (prev. day cl. price ` 27.50) and fell down to ` 27.35. There were 36 trades during the day. had not traded on this date. Implemented 04.09.07( 3:08:51 PM) Informed BSE about approval of above decision. The scrip opened at ` 31.35 (4.85% higher than the prev. cl. price of ` 29.90) and same was the closing price. There were 22 trades during the day. Similarly on 05.09.07, the scirp opened at ` 32.90 and remain the price of the day with 28 trades. had not traded on this date. Subsequently during 07.09.07 to 19.08.08, purchased 65,153 shares and sold 3,91,194 shares. Implemented 27.08.08( 11:12:43 AM) Informed BSE that in Board meeting held on Aug 26, 2008, it was unanimously decided to make an offer for purchase of 51% Stake in Ammana Bio Pharma Ltd and authorized the Managing Director of the Company to enter into necessary Shareholders Agreement with them for acquisition of said stake. The scrip opened at ` 46.25 on August 27,2007 (prev. cl. price ` 46.40), reached till ` 48.00 and closed at ` 45.05. There were 246 trades during the day. had not traded on this date & subsequently till the end of investigation period. Not implemented
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11. I find from the above corporate announcements that GLL had implemented only the corporate announcement with regard to the preferential allotment of shares and warrants to Silver Golden Property Develop Fin Investment Ltd. and Carwin Mercantiles (P) Ltd. whereas, the remaining announcements were not implemented. Upon inquiring the implementation status of these corporate announcements, the company had informed that the proposed investment by one Mr. Arun Jain did not take place as proposed and further, the deal with Ammana Bio Pharma Limited could not be executed as Ammana had not complied with the relevant requirements. Further, it was also noted that the company had not informed about the subsequent implementation status to the stock exchange and thereby, had left the investors at large uninformed about the same.
12. I further find that on July 04, 2007 i.e. just before the corporate announcement with respect to the investment proposal of one Mr. Arun Jain, Chairman of Innevesco Pvt. Ltd, the Noticee (erstwhile promoter of GLL) had received 9,60,000 shares of GLL from one of the promoters of GLL viz. Mr. Vinod Baid in off market transaction. Further, out of the said shares so received, the Noticee had sold 9,30,850 shares during the period from July 05, 2007 to August 22, 2007 i.e. the period during which the price of scrip had increased from ` 24.10 to ` 26.55. It was noted that the said promoter had transferred the shares in off market to the Noticee and the Noticee in turn had sold part of the said shares in the market, taking advantage of the positive announcement by the company which was never implemented. It was, therefore, alleged in the SCN that the Noticee had facilitated the promoter viz. Mr. Vinod Baid in off loading the shares of GLL in the market who in turn made unlawful gains by taking advantage of the inflated price of the scrip, thereby, violating Section 12A(a), (b) and (c) of the Act read with Regulation 3 of the PFUTP Regulations.
13. I find that upon receipt of 9,60,000 shares from Mr. Vinod Baid, the Noticee had sold 9,30,850 shares during the period from July 05, 2007 to August 22, 2007. During the said period, the price of the scrip had increased from ` 24.10 to ` 26.55. Further, I note that upon making of another corporate Brought to you by http://StockViz.biz Page 8 of 10
announcement on July 16, 2007, the price of the scrip had increased from ` 28.00 to ` 28.85. In the meantime, as the price of the scrip kept increasing steadily, the Noticee offloaded more shares of GLL in the market between July 06, 2007 and August 19, 2008 when the price of the scrip was in the range of ` 24.10 to ` 31.35. Further, I find that upon examining the said off market transaction and inquiring into the details, Mr. Vinod Baid and the Noticee had termed the said transfer of 9,60,000 shares as loan against shares. It was informed by Mr. Vinod Baid that the shares were transferred to the Noticee as security in connection with the financial assistance given by it and proper consideration was received. Whereas, the Noticee had stated that Mr. Vinod Baid had approached the Noticee for loan against shares and on the basis of agreement entered between the two, shares were transferred in the account of the Noticee. Further, the same were sold by the Noticee through its broker in the market. However, I do not find merit in the said statements inasmuch as neither the Noticee nor Mr. Vinod Baid had provided any Bank Statements evidencing transfer of funds nor a copy of agreement entered into for loan against shares was made available.
14. As the Noticee has neither submitted any reply to the SCN nor has it availed the opportunity of personal hearing granted to it, I find that the Noticee has nothing to submit in the matter and therefore, the said transaction was nothing but an act of fraudulent and manipulative trade practice adopted by Mr. Vinod Baid in collusion with the Noticee in creating artificial and false market in the scrip of GLL and thereby, misled the investors at large.
15. I also note that actions under Section 11and 11B of the SEBI Act were initiated against GLL and its directors including Mr. Vinod Baid for violating various provisions of the PFUTP Regulations. SEBI, vide order dated September 13, 2013, while holding the company and its directors guilty of violating the provisions of PFUTP Regulations gave directions of restraining GLL and its directors including Mr. Vinod Baid from accessing the securities market and also prohibiting them from buying, selling, and otherwise dealing in securities market, directly or indirectly, in whatsoever manner, for a period of three years from the date of the said order. Further, aggrieved by the said Brought to you by http://StockViz.biz Page 9 of 10
order, GLL and Mr. Vinod Baid had filed an appeal before the Hon'ble Securities Appellate Tribunal(SAT). While upholding the said order passed by SEBI, SAT vide its order dated February 25, 2014 observed at para 17 as under:
"......... From these facts, it is more than just a plausible scenario that Mr. Baid and MFMCL were acting in collusion with each other and that they cleverly succeeded in creating a false market for the shares of GLL thereby duping investors into purchasing shares, the prices of which were artificially hiked."
16. From the foregoing, I conclude that the Noticee did facilitate Mr. Vinod Baid in off loading the shares in the market and in making unlawful gains thereby, violating Section 12A(a), (b) and (c) of the Act read with Regulation 3 of the PFUTP Regulations thus, liable for imposition of monetary penalty under Section 15HA of the Act which reads as under:
15HA.Penalty for fraudulent and unfair trade practices.- If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.
17. While imposing penalty, it is obligatory to consider the factors stipulated in Section 15J of the SEBI Act which reads as under: 15J - Factors to be taken into account by the adjudicating officer While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely:- (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; (c) the repetitive nature of the default. Brought to you by http://StockViz.biz Page 10 of 10
18. I observe that, from the material available on record, it is difficult to quantify the exact gain or unfair advantage accrued to the Noticee or the extent of loss suffered by the investors as a result of the default of the Noticee. The said defaults on the part of the Noticee are not repetitive in nature.
ORDER
19. In view of the above, after considering all the facts and circumstances of the case and exercising the powers conferred upon me under Section 15-I (2) of the SEBI Act read with Rule 5 of the said Rules, I impose a penalty of `50,00,000/- (Rupees Fifty Lakhs Only) under Section 15HA of the SEBI Act on the Noticee viz. Mercury Fund Management Company Limited in the matter. In my view, the penalty is commensurate with the default committed by the Noticee.
20. The penalty amount as mentioned above shall be paid by the Noticee through a duly crossed demand draft drawn in favour of SEBI Penalties Remittable to Government of India and payable at Mumbai, within 45 days of receipt of this order. The said demand draft should be forwarded to the Division Chief, IVD-8, Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051.
21. In terms of the Rule 6 of the said Rules, copies of this order are sent to Noticee and also to Securities and Exchange Board of India.
Date: September 02, 2014 D. SURA REDDY Place: Mumbai ADJUDICATING OFFICER
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