Appeal No. 391 of 2014. Case: Factorial Master Fund Vs Securities and Exchange Board of India. Delhi DRAT SEBI Cases

Case NumberAppeal No. 391 of 2014
CounselFor Appellant: Darius Khambata, Senior Advocate, Somasekhar Sundaresan, Advocate, Paras Parekh and Dhaval Kothari, Advocates i/b. J. Sagar Associates and For Respondentst: Vikram Nankani, Senior Advocate and Yogesh Chande, Advocate i/b. Economic Laws Practice
JudgesJ.P. Devadhar, J. (Presiding Officer)
IssueSecurities and Exchange Board of India Act, 1992 - Sections 11(4), 11B
Judgement DateMay 08, 2015
CourtDelhi DRAT SEBI Cases


J.P. Devadhar, J. (Presiding Officer)

  1. Appellant is aggrieved by the confirmatory order passed by the Whole Time Member ('WTM' for short) of Securities and Exchange Board of India ('SEBI' for short) on October 16, 2014, whereby the ex-parte ad interim order passed by WTM of SEBI against the appellant on June 5, 2014 has been continued until further orders. As a result, the appellant continues to be restrained from dealing in securities in the Indian Securities Market (including through Offshore Derivative Instruments) and/or accessing the Indian Securities market, directly or indirectly, in any manner whatsoever until further orders.

  2. Counsel for SEBI on instruction states that the investigation in the present case involves cross border investigation and since Bloomberg terminal having its headquarter in New York City, USA has refused to share information required for the present case, SEBI has sought assistance of U.S. Securities and Exchange Commission (USA) in the matter. As a result, it is submitted that it would take at least 4 to 5 months for completing the investigation.

  3. This appeal was substantially heard in March 2015 by a Bench consisting of the Presiding Officer and Member Shri. A.S. Lamba. However, before the hearing could be completed Member Shri. A.S. Lamba retired with effect from March 17, 2015. Thereafter, new Bench could not be constituted because, another Member Shri. Jog Singh has been on long leave due to ill health. In these circumstances, counsel for appellant submitted that the delay in disposing of the appeal on merits is causing serious prejudice to the appellant as the appellant continues to be restrained for accessing the securities market in India and the said order is adversely affecting the business of the appellant even outside India. Accordingly, counsel for the appellant submitted that pending hearing and final disposal of the appeal, prayer of the appellant for grant of interim reliefs may be considered. Hence, the plea of the appellant for grant of interim relief is heard by consent of both parties.

  4. Appellant is a company incorporated in Cayman Island, and operates as a collective investment vehicle or a fund under the laws of Cayman Island. Appellant has been trading in securities around the world including the Indian Securities Market.

  5. Dispute in the present case relates to the appellant making profits of about 20 crores by entering into 5309 derivative contracts in the Futures and Options segment ("F&O" segment) of the stock exchange on March 13, 2013 equivalent to selling 2,12,36,000 shares of L&T Finance Holding Limited ("LTFH" for short) at an average price of ` 80.94/- per share and taking reverse position on March 14, 2014 by purchasing 2,75,10,484 shares of LTFH at a price of ` 71.50/- per shares in the 'Offer for Sale' ("OFS" for short) offered by L&T Limited ("L&T" for short) which is the parent company of LTFH. According to SEBI appellant must have had Unpublished Price Sensitive Information ("UPSI" for short) on March 13, 2014 that L&T has fixed the floor price for selling the shares of LTFH through OFS on March 14, 2014 at ` 70/- per share and that is why on March 13, 2014 the appellant took aggressive short position in the F&O segment to sell shares of LTFH in the F&O segment at an exceptionally high average price of ` 80.94/- per share. According to SEBI above transactions are prima facie inimical to the interest of the participants in the securities market and therefore pending investigation on the question as to whether appellant was privy to UPSI relating to the floor price fixed by L&T, to safeguard the interest of the securities market it is necessary to restraint the appellant from dealing in securities in the Indian Securities Market.

  6. To consider the question, as to whether SEBI is justified in holding that the transactions carried out by the appellant on March 13, 2014 were prima facie inimical to the interests of the participants in the Indian Securities Market and to consider the question as to whether the appellant has made out a case for grant of interim relief, it would be appropriate to set out following relevant facts:--


    1. L&T as a parent company held more that 82% shares of LTFH which were listed on the Bombay Stock Exchange Limited ('BSE' for short) and National Stock Exchange ('NSE' for short) with effect from August 12, 2011. In order to comply with the minimum public shareholding requirement under the Securities Contracts (Regulation) Rules, 1957 ("SCRR" for short), L&T was required to reduce its stake in LTFH up to 75%.

    2. During the period from mid 2012 to March 2014, the earnings estimate memorandum from equity analysts covering LTFH had been very negative. As a part of fundamental research, Kotak Securities Limited on March 11, 2013 held a meeting at Hong Kong along with senior managerial staff of LTFH which was attended by the appellant. Since then, the appellant had been fundamentally and technically negative on the stock price of LTFH.

    3. After obtaining SEBI approval on July 18, 2013, L&T disposed of 1% of its shareholding in LTFH during November-December 2013 through market sale and the last sale was at ` 68.98/- per share. Thereafter, to bring its shareholding in LTFH to 75%, L&T was required to offload more than 6% shares of LTFH after expiry of requisite 12 weeks cooling-off period from the previous sale that took place in November- December 2013.

    4. On March 10, 2014 L&T addressed a letter to SEBI stating therein that considering the market conditions and other relevant factors, L&T was contemplating to sell the shares of LTFH through OFS in the next 2 to 3 days. Since the cooling-off period from the last disposal of shares of LTFH through OFS had not expired, L&T, by the said letter requested SEBI to grant exemption from the cooling-off period and also the requirement of minimum gap between two OFS of 2 weeks.

    5. On March 10, 2014 Credit Suisse Securities (India) Private Limited ("CS" for short) as merchant banker of L&T conducted market gauging for LTFH scrip with more than 70 institutional investors with a view to ascertain potential investors interest and the price at which the investors would be willing to subscribe to the shares of LTFH in the OFS. Appellant had also participated in the said market gauging exercise. In that market gauging exercise, negative sentiment in respect of the shares of LTFH were expressed, meaning thereby that the investors would seek deep discount to buy shares of LTFH from L&T.

    6. Shares of LTFH which were traded only in the cash segment were also permitted to be traded in the F&O segment of the stock exchanges with effect from March 13, 2014. On March 13, 2014 in the morning some reputed analysts had strongly recommended selling futures on March 13, 2014 which was the first day of listing the shares of LTFH in the F&O segment.

    7. On March 13, 2014 futures contract in LTFH opened at ` 87.80/- per share. The appellant entered into 5309 derivative contracts of LTFH on March 13, 2014 through five FIIs by way of P-Notes/Swaps which is equivalent to selling 2,12,36,000 shares of LTFH at an average price of ` 80.94/-.

    8. On March 13, 2014 at 9.22 P.M., L&T made two announcements to the stock exchanges (BSE & NSE). First announcement was that in order to comply with the minimum public shareholding norms as specified in SCRR, L&T will launch an OFS of 5,55,05,755 shares in LTFH on March 14, 2014 by appointing 'CS' as seller broker in the OFS. Second announcement was that the floor price for the shares offered in OFS has been fixed by L&T at ` 70/- per share.

    9. Accordingly, when 5,55,05,755 shares of LTFH were offered for sale through OFS on March 14, 2014, the appellant subscribed to 2,75,10,484 shares of LTFH in the OFS at an average price of ` 71.50/- per share. Thus as against an obligation to sell 2,12,36,000 shares of LTFH at an average price of ` 80.94/- per share under the derivative contracts entered into on March 13, 2014, the appellant on March 14, 2014, acquired 2,75,10,484 shares of LTFH in the OFS at an average price of ` 71.50/- per share, thereby locking in a profit of approximately ` 20 crore.

    10. In the first week of April 2014 SEBI approached an FII through whom appellant had traded in LTFH futures and sought trade rationale. Appellant furnished the trade rationale on April 07, 2014 to the broker which was then forwarded to SEBI. Thereafter, as a follow-up action, SEBI sought various information's from the FIIs and the appellant responded to SEBI directly with its responses on the queries raised by SEBI and voluntarily offered to furnish any other information that is deemed necessary by SEBI. Indeed, from time to time, the appellant has furnished requisite information that were demanded by SEBI.

    11. On June 05, 2014 SEBI passed an ex-parte ad-interim order against the appellant thereby restraining the appellant from dealing in and/or accessing the Indian Securities Market directly or indirectly until further orders. In the said order it is stated that the preliminary investigation conducted by SEBI creates a strong suspicion that the appellant must have built the unusual and aggressive short position in the F&O segment ahead of the OFS on the basis of UPSI which it had received or had access to, regarding the likely floor price of the OFS. It is further stated that the source through which appellant might have got the information can be established only after detailed investigation and pending such investigation it is necessary to restrain the appellant from dealing and/or accessing the Indian Securities Market.

    12. Appellant while furnishing the particulars sought by SEBI from time to time, filed its detailed reply to the aforesaid ex-parte ad-interim order of SEBI. In its reply, the appellant denied all allegations made in the ex-parte ad-interim order. During the course of personal hearing the appellant submitted that inspite of investigation there being...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT