Case: 1.SEBI, 2.In Re: Aftek Infosys Limited; In Re: Global Trust Bank Ltd.; In Re: Ranbaxy Laboratories Limited Vs 1.Vidyut Investments Limited. Securities and Exchange Board of India
| Judges | G. Anantharaman, Member |
| Issue | Company Law |
| Judgement Date | January 24, 2007 |
| Court | Securities and Exchange Board of India |
Order:
G. Anantharaman, Member
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BACKGROUND\
1.1 Investigations conducted by Securities and Exchange Board of India (hereinafter referred to as SEBI) in the wake of excessive volatility during the period from April 01, 2000 to March 31, 2001 revealed that entities connected/associated with Shri Ketan Parekh (hereinafter referred to as the KP entities) had indulged in certain manipulative activities such as, synchronized trades, circular trading and creation of artificial volume of the prices of certain scrips of the companies including that of DSQ Software Ltd., Global Telesystems Ltd., Zee Telefilms Ltd., Himachal Futuristic Communication Ltd., Ranbaxy Laboratories Ltd., Aftek Infosys Ltd., Global Trust Bank against the interest of the investors in the securities market. The KP entities through certain stock brokers executed trades which were in the nature of circular and fictitious trades and the same had resulted in creation of artificial volume and artificial markets in the aforesaid scrips. The said transactions made by the KP entities were found to be non-genuine as there was no change in the beneficial ownership of shares i.e. the shares were merely rotating from one KP entity to same or other KP entity and were found to be circular trades undertaken to create artificial volumes and artificial markets in the said scrips.
1.2 In view of the above, SEBI vide order dated December 12, 2003, prohibited the KP entities from buying, selling or dealing in securities in any manner directly or indirectly and also debarred them from associating with the securities market, for a period of fourteen years.
1.3 The aforesaid order of SEBI was challenged before the Hon'ble Securities Appellate Tribunal (SAT) and SAT vide its order dated July 14, 2006 had inter alia observed that "We have, therefore, no hesitation to hold that if Ketan Parekh and his entities are allowed to continue with their operations they would pose a serious threat to the integrity of the securities market and endanger the interests of the investors."
1.4 The aforesaid investigation conducted by SEBI further found that there were movements of shares and funds between the some of the aforesaid companies (mentioned at para 1.1) and KP entities. Such funds and shares were used by KP entities for the purpose of manipulating the securities market and for making payment at the time of settlements in the stock exchanges. It was also found that some of the said companies or their promoters were also trading in the securities market in the same shares which were manipulated by KP entities.
1.5 The investigation conducted by SEBI revealed that Vidyut Investments Ltd. (VIL) a 100% subsidiary of Ranbaxy Laboratories Ltd. (RLL) and registered with Reserve Bank of India (RBI) as a Non Banking Finance Company (NBFC) had financed the dealings of KP entities, namely M/s. V. N. Parekh Securities Pvt. Ltd. (VNPS), M/s. Classic Credit Ltd. (CCL) and M/s. Panther Fincap & Management Services Ltd. (PFMSL). Shri Ketan Parekh was found to be the director of M/s Classic Credit Ltd and M/s Panther Fincap & Management Services Ltd. along with his relatives. Similarly, the relatives of Shri Ketan Parekh namely Shri Navinchandra Parekh, Shri Kirtikumar Parekh, Shri Vinaychandra Parekh, Shri Kartik Parekh and Shri Jayant Parekh were the directors/shareholders of V N Parekh Securities Pvt. Ltd.
1.6 It was found that a sum of Rs.351 crores was financed by VIL to the KP group in two portions i.e Rs.106 crores during January to October, 1999 and Rs.245 crores during November, 1999 to December, 2000. The funds were made available by VIL to the KP entities against security of shares of various listed companies which were manipulated by KP entities such as Global Trust Bank, Aftek Infosys Ltd., Himachal Futuristic Communications Ltd., DSQ Software Ltd. etc.
1.7 The aforesaid funding by VIL had facilitated KP entities to manipulate the securities market and the shares price of the aforesaid companies had witnessed a significant rise accompanied with rise in volumes in the stock exchanges, where the said shares were listed. Further, it was also found that VIL had significantly traded in the shares of the aforesaid companies during the period of investigation, on its own account. The majority of such transactions were made through the stock brokers associated/connected with Shri Ketan Parekh. In the facts and circumstances, it has been alleged that VIL had aided and abetted KP entities in the manipulation and therefore prima facie violated the provisions of Regulation 4 (a), (b), (c), (d) & (e) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995 (FUTP Regulations).
1.8 Accordingly, SEBI had issued show cause notices dated February 5, 2003, June 30, 2004 and December 31, 2004 to VIL asking it to show cause as to why suitable directions should not be issued against it for the alleged violation of the aforesaid provisions. The said show cause notices were issued in respect of its dealing with KP entities in the shares of Ranbaxy Laboratories Ltd., Aftek Infosys Ltd., Global Trust Bank. SEBI had also issued a show cause notice dated March 13, 2003 inter alia against VIL for the alleged violation of the provisions of regulating 10 of the Takeover Regulations. SEBI also initiated adjudication proceedings in respect of the said violations.
1.9 More or less similar submissions were made by VIL in respect of the above show cause notices. The common refrain of such submissions is as under:
• They are RBI registered NBFC and are engaged in the business of granting loans and advances and other activities of a finance company. In the course of their business activities, they have provided financing facilities to several entities. In mid 1998, they had agreed to extend the line of credit to PFMSL, and later to PSPL and CCL, under the agreement executed. This was done by means of secured loans and the security as per the agreement was equity shares of listed Indian companies acceptable to them.
• The transactions entered into by them with Ketan Parekh entities in relation to the alleged price manipulation of the Aftek shares were confined to their bonafide commercial lending transactions.
• It was expressly agreed as per the loan agreement between Vidyut and the KP group brokers that a 50% of margin of security would be retained by Vidyut.
• Loans were taken for periods of 1-17 days on the lines of credit. Interest rates were negotiated between the parties. Security against the loan was shares of around 36 listed companies.
• Since the facility was of the nature of revolving credit, the borrowers allowed them to keep shares for a long term in their DP account and during the period they did not acquire any beneficial interest in these securities. The only interest they acquired in those shares was as a pledgee with limited right to dispose off the shares only upon occurrence of a default under the facility agreements.
• They further stated that they, merely on account of being the lenders to Ketan Parekh (KP) entities, could not be hold liable for the alleged manipulation done by KP group. At the relevant time the credit worthiness of these entities and their standing integrity were considered to be quite high. Even nationalised banks were lending to these entities. Further, they had no knowledge, awareness that Ketan Parekh group was involved in alleged manipulative trade practices.
• Only the registered ownership of such shares was transferred to them by way of security, as a protective measure as a security holder, and that at no point of time did they hold such shares beneficially on their own account. Accordingly, two lakh twenty five thousand and six hundred (2,25,600) shares of Aftek held by them as on December 15, 1999, were held as security in their depository account for the lines of credit extended by them to CCL and PFMSL. In respect of the period commencing from 26.2.2000 to 27.12.2001, they did not hold more than five thousand (5,000) shares of Aftek in their own account as beneficial owners of the shares.
• On termination of the secured credit facility, and subject to repayment of credit, the registered ownership of the shares was to be re-transferred by way of release of security.
• They had no knowledge of and/or control whatsoever over the end use of the funds advanced by them to CCL and PFMSL under the secured credit facilities.
• At no point of time did they require CCL and/or PFMSL to create security over Aftek shares in particular. As per the terms of the secured credit facilities, CCL and PFMSL were entitled to submit shares of any listed company as security. In addition to Aftek shares, CCL and PFMSL created security in their favour over shares of other companies as well and the Aftek shares comprised a part of the total security created by CCL and PFMSL.
• They permitted CCL and PFMSL to only draw down the facilities to the extent of half of the value of the shares deposited with them as security, at any point of time. As they worked on margins related to market price of the securities, there was no question of their raising the market price of the securities.
• The extension of credit facilities to CCL and PFMSL was a genuine bona fide commercial lending transaction and was not intended in any manner whatsoever to assist, directly or indirectly, in manipulation of the price of Aftek shares on the stock exchanges.
• Their trading was part of the normal trading activity in which they were involved. These were not alleged to be of any kind of manipulative transactions. They had traded through both Ketan Parekh group of brokers and non-KP brokers during the relevant time.
• Abetment has not been defined in SEBI act. As per Indian penal code (S 107) the three ingredients of abetment are-
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Instigate a person to do a thing
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Engages with one or more other person or...
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