WTM/SR/SEBI/ISD/18/03/2017. Case: In Re: Gitanjali Gems Limited and Ors. Vs. Securities and Exchange Board of India

Case Number:WTM/SR/SEBI/ISD/18/03/2017
Party Name:In Re: Gitanjali Gems Limited and Ors. Vs
Judges:S. Raman, Whole Time Member
Issue:Securities And Exchange Board Of India Act, 1992 - Sections 11, 11(4), 11B, 11C, 12A (a), 12A (a)(c), 19
Judgement Date:March 10, 2017
Court:Securities and Exchange Board of India
 
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Order:

S. Raman, Whole Time Member

Background -

1. Gitanjali Gems Limited ("Gitanjali Gems") is a public limited company listed on Bombay Stock Exchange ("BSE") and National Stock Exchange of India Limited ("NSE"). On receipt of a market alert, Securities and Exchange Board of India ("SEBI") conducted a prima facie examination of the trading in the scrip of Gitanjali Gems for the period from July 18, 2011 to January 25, 2012 ("Examination Period").

2. The examination prima facie revealed the following -

2.1 The Promoters of Gitanjali Gems during the Examination Period were -

2.2 An analysis of the Know Your Client ("KYC") documents, bank, financial statements of the following entities ("Choksi Group") who traded or funded certain transactions in the scrip of Gitanjali Gems, revealed their connection with the abovementioned Promoter entities through common phone numbers, residential address, electronic mail, inter se transfer of funds, etc. -

2.3 An analysis of the trading data of the abovementioned entities at Sr. No. 8-22 revealed domination of trading by the Choksi Group during the Examination Period to the extent of 25.70% of the gross market volume in the cash segment and 20.52% of gross market volume in the derivative segment (entity at Sr. No. 23 i.e. Sanskar Gems Private Limited, had not traded in the scrip of Gitanjali Gems; it however, funded the trading by some of the aforementioned entities in the said scrip).

2.4.1 An analysis of the trades executed by the Choksi Group in the scrip of Gitanjali Gems vis-à-vis percentage of the entire market activity in the derivative and equity segments of the said scrip over a period of six months i.e. the Examination Period, showed a near 100% concentration of trades by the said entities. The aforesaid is explained as under -

2.4.2 The Choksi Group entities were only interested in the scrip of Gitanjali Gems. Such huge concentration raised serious suspicion, more importantly, considering the connection with the Promoters of Gitanjali Gems, it also indicated that the Choksi Group was acting as front for the Promoters of Gitanjali Gems and while acting as such, the Promoters remained invisible to the public in so far as their trades were concerned. For different expiry periods of the derivative contracts of Gitanjali Gems, the counter parties to the trades of Choksi Group (more than 80%) were a select set of Foreign Institutional Investors ("FIIs"). In other words, the Choksi Group was found to have been periodically rolling over their positions in the derivative contracts of Gitanjali Gems with a common set of counterparties.

2.4.3 On January 24, 2012 (i.e. a day before the exclusion of the scrip of Gitanjali Gems from trading in the derivative segment), the trades of Choksi Group in the scrip of Gitanjali Gems in equity/derivative segment were synchronized to the extent of 28.46% to 100% with the trades of other entities. Similarly, in the derivative segment, on January 24, 2012, the trades of Choksi Group were synchronized in the range of 59.75% to 99.50% with trades of certain other entities. FIIs were mostly appearing as counterparties to the synchronized trades of the Choksi Group.

2.4.4 The scrip of Gitanjali Gems was introduced in the derivative segment from July 18, 2011, onwards. However, the said scrip was excluded from trading w.e.f. January 25, 2012, in terms of NSE Circular dated November 18, 2011 (reference No. NSE/FAOP/19385) for inter alia breaching the applicable Market Wide Position Limit ("MWPL"). The Choksi Group was found to have held significant percentage of Open Interest ("OI") as net long position during the Examination Period ranging upto 56.65% of MWPL in Gitanjali Gems, which is summarized as under -

2.4.5 As per the SEBI Master Circular dated December 31, 2010 (No. CIR/DNPD/7/2010), the Choksi Group fell under the 'Customer Level' category. A consequence of such classification was that the Choksi Group was required to comply with the position limit mentioned therein i.e. 5%. The aforesaid position limit was also stipulated under the subsequent SEBI Master Circular dated January 2, 2012 (No. CIR/DNPD/1/2012). The open positions of the Choksi Group had surpassed the limit of 5% of the OI in the derivatives contract of a particular underlying stock and also the limit of 1% of the free float market capitalization (in terms of the number of shares) of the scrip in question, which was prima facie in violation of the said Master Circular.

2.4.6 The Choksi Group was able to build up substantially large position in the derivatives segment ranging from 32.91% to 56.65% of MWPL thereby circumventing the position limit of 5% specified by SEBI as specified in its Master Circulars dated December 31, 2010 and January 2, 2012. The abovementioned cornering of position limits by the connected/related entities deprived other bona fide investors from taking position in the scrip of Gitanjali Gems. The Choksi Group had combined their long position in the scrip of Gitanjali Gems in the derivatives market with long position in the cash market thereby being net long in both the cash and derivatives segment which was not a hedged position. The trading pattern of Choksi Group entities in the scrip of Gitanjali Gems, who were allegedly connected to the Promoters of Gitanjali Gems, prima facie indicated that the Promoters used the Choksi Group to build up substantial large position in the scrip of Gitanjali Gems in the derivatives segment, thereby circumventing the position limit prescribed by SEBI. Such trading was alleged to be in violation of Section 12A (a), (b), (c) of the Securities and Exchange Board of India Act, 1992 ("SEBI Act"), Regulations 3 and 4(1) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ("PFUTP Regulations").

2.5.1 The disclosures made by Gitanjali Gems to BSE regarding shares pledged by the Promoter and Promoter Group for the quarter ended September 2011 and December, 2011, was found to be different from that obtained by SEBI from the Depositories. For example,

"i. For the quarter ended September 2011, as per the details furnished by Gitanjali Gems to BSE, 18.73% of the Promoters' holding was pledged while according to data obtained from Depositories, the corresponding figure was 27.92%.

ii. Similarly, as much as 42.77% of the Promoters' holding was pledged for the quarter ended December 2011 (as per data obtained from Depositories) while only 30.95% was declared to BSE by Gitanjali Gems."

2.5.2 The Promoters furnished misleading declarations regarding shares pledged by them. The said acts of the Promoters were in violation of Regulation 8A(2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ("Takeover Regulations, 1997"), in respect of the disclosure made for the quarter ended September 2011; Regulation 31(1) read with Regulation 31(3) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Regulations, 2011"), in respect of the disclosure made for the quarter ended December 2011.

2.6.1 The Promoters' holding in Gitanjali Gems as on March 31, 2011 was 54.73% of the share capital (Source: BSE website). In terms of Regulation 11(1) of the Takeover Regulations, 1997 and Regulation 3(2) of the Takeover Regulations, 2011, the Promoters together with persons acting in concert cannot acquire more than 5% of voting rights in any financial year (creeping acquisition) unless they make a public announcement to acquire shares. Considering the relationship between the Choksi Group and the Promoters of Gitanjali Gems, the Choksi Group were persons acting in concert with the Promoters. The Choksi Group and the Promoters of Gitanjali Gems appeared to have a common objective for the purposes of substantial acquisition of shares and voting rights. During the financial year 2011-2012 (till March 21, 2012), the Choksi Group alongwith the Promoter of Gitanjali Gems, Shri Mehul Choksi, acquired 65.36% of the shares of Gitanjali Gems (gross acquisitions). It was observed that they had crossed 5% on May 19, 2011. The same was not followed by the concomitant requirement of making the public announcement to acquire shares, in terms of Regulation 11(1) of the Takeover Regulations, 1997 and Regulation 3(2) of the Takeover Regulations, 2011. Further, the subsequent acquisition of shares by the Promoters of Gitanjali Gems along with the Choksi Group was not followed by a public announcement in terms of Regulations 11(2) of the Takeover Regulations, 1997 and Regulation 3(2) of the Takeover Regulations, 2011.

2.6.2 The gross acquisitions of the Choksi Group along with Mehul Choksi from April 1, 2011 till March 21, 2012, are summarized below:

2.7 In response to the letter of SEBI dated May 18, 2012, the entities at Sr. No. 8-23 stated that they/their directors/promoters/key management personnel were not related in any manner with Gitanjali Gems/its Promoters/Key Management Personnel. From the sequence of events enumerated above and connections among themselves (as stated in paragraph 2.2), prima-facie the entities at Sr. No. 8-23 furnished incorrect and misleading information to SEBI.

Show Cause Notice, Reply and Personal Hearing

3. On October 26, 2012, SEBI issued a common Show Cause Notice ("SCN") calling upon the Entities, viz. entities at Sr. No. 1 - 23, to show cause as to why suitable directions under Sections 11, 11B and 11(4) of the SEBI Act, Regulations 44 and 45 of the Takeover Regulations, 1997 read with Regulation 32 of the Takeover Regulations, 2011 including but not limited to:

i. Directions restraining them from buying, selling or dealing in securities in any manner for a suitable period of time; and/or

ii. Restraining them from accessing the securities market directly or indirectly; and/or

iii. Directing them to make an open offer for...

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