Confirmatory Order against Sophia growth in the matter of Market Manipulation using GDR issues

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) had vide an ex-parte ad interim Order dated September 21, 2011 (hereinafter referred to as the Order) inter alia directed Sophia Growth (hereinafter referred to as Sophia), a share class of Somerset India Fund, Sub- Account, not to deal in securities or instruments with Indian securities as underlying, in any manner whatsoever, until further orders. Sophia filed its written submissions dated October 12, 2011. Thereafter, an opportunity of hearing was afforded to Sophia on November 21, 2011, when Mr. Pesi Modi, Advocate along with Mr. Ranjit Bhonsale, Mr. Chetan Shah and Ms. Naheed Carrimjee (of M/s. Desai Desai Carrimjee & Mulla, Advocates and Solicitors) appeared on behalf of Sophia and made submissions. Pursuant to the hearing, vide letter dated November 22, 2011, the counsel for Sophia submitted certain contract notes that were said to be with respect to the GDRs purchased corresponding to the shares sold during the investigation period. The submissions inter alia made by Sophia in the matter are the following: i. Its trades were in the normal course of business. ii.

There is no allegation of any connection or relationship with Mr. Arun Panchariya, Mr. Satish Panchariya, Pan Asia, Euram Bank and the alleged Group. iii. It has no connection whatsoever with any of the Foreign Insitutional Investors (FIIs), sub-accounts/sellers (the sub-accounts), Indian clients “acting as major counterparties/Buyers group”, named in the Order. With regard to the Companies named in the Order, the only connection or relationship that was established was that of a genuine shareholder. iv. The trades of Sophia in the scrips identified in the Order were principally influenced by the fact that when the Global Depository Receipts (GDRs) were purchased by Sophia, they were available in the GDR market at a discount over the issue price of GDRs. Further, there was an arbitrage opportunity as the prices of GDRs at the time of purchase as well as at the time of conversion was lower than the price of the underlying scrip in the Indian Market. This clearly gave a good investment opportunity to Sophia by acquiring the GDRs at deep discount. Lastly, Sophia had the ability to hold on to investments in order to identify the outperformers and high growth companies in the market. v. K Sera came up with the GDR issue in October 2007. The proceeds of the GDR issue were to be inter alia invested in production and/or acquisition of movies/television content.

The offer price of GDRs was US$5.25 (1 GDR is equivalent to 10 underlying shares, which was equivalent to Rs. 24.15 per share). The price of the underlying Indian securities at the time of the GDR issue was Rs. 30/-. Therefore, the GDRs were issued at a discount over the price of the underlying Indian securities. At the time of purchase of GDRs itself, there was a clear arbitrage opportunity as the price in the Indian Stock Exchange was much higher than the GDR price. The purchase of GDRs were also influenced by the fact that (a) a company which comes up with a GDR issue shows its credibility in the Indian Market as well as the International Market; (b) a GDR issue shows that the Company has met with the eligibility norm under the Foreign Exchange Management Act, 1999; (c) the Company is able to access the foreign market successfully shows a positive market perception in favour of the Company; (d) the GDR issue was recognized and approved by shareholders of the company. The GDRs were converted into Indian securities principally for two reasons viz. (i) the GDR market was more illiquid as compared to the Indian market; and (ii) the price in the GDR market was lower than the price in the Indian market.

The share prices of K Sera had also dropped from its peak level of about Rs. 50/- per share. Therefore, Sophia was looking at exiting the scrip of K Sera and therefore, the question of purchasing further shares of K Sera would not arise. vi. The allegation that the trades of Sophia matched with the trades of the other entities, which were buying in the market appears to be a mere coincidence in as much as it was only on the days, when the “buy clients” (as named in the order) were buying that Sophia was able to exit the scrip of KSera. It may probably be because of the reason that the “group/buy clients” were the main buyers in the market and would thus be counterparties to most of the sellers. vii. CAT Technologies came up with the GDR issue in July 2007. The proceeds of the GDR issue were to be, inter alia, invested in setting up offices in the United States as well as setting up subsidiaries in Dubai. The offering price of GDRs was US$ 1.50 (1 GDR is equivalent to 6 underlying shares). The price of the underlying Indian securities at the time of the GDR issue was Rs. 5.34. Sophia did not purchase any shares in the primary issue.

The price of the shares substantially increased between June 2007 and December 2007 and rose above Rs. 18/- per share around December 2008/January 2009. This was one of the reasons, which made Sophia interested in the securities of CAT Technologies. viii. Sophia purchased the GDRs of CAT Technologies in the secondary market for the first time on December 11, 2007. The price of each share underlying GDRs on December 11, 2007 was Rs. 8.22, whereas the price of the underlying Indian securities was Rs. 9.68. Sophia incurred a substantial loss in the scrip of Cat Technologies. There was no intention of manipulating the price of the securities. Sophia sold the shares of CAT Technologies only when there was substantial trading in the shares. CAT

Technologies formed only a minor portion of the total exposure of Sophia in the Indian market and the trading was also insignificant as compared to the total GDR exposure of Sophia. ix. The total trading by Sophia as compared to the total volume during the investigation period as well as the total purchases made by the “group” was insignificant and therefore, could not have influenced the price or the volume of the scrip. x. The observation of SEBI in paragraph 9 (unnumbered paragraph 4 at page 10) with regard to the allegations that the shares were acquired by the sub-accounts (which is alleged to include Sophia) post cancellation of GDRs does not apply to Sophia in as much as all the purchases by Sophia were made in the secondary GDR market and Sophia did not purchase any shares after the cancellation of GDRs by CAT Technologies. xi. Cals came up with the GDR issue in December 2007. The proceeds of the GDR issue were to be inter alia invested in the setting up of a refinery in India. The proposed venture of Cals showed a strong growth potential. The offering price of GDRs was US$ 25.38 (1 GDR is equivalent to 100 underlying shares). The price of the underlying Indian securities at the time of the GDR issue was Rs. 5.62. Therefore, the GDRs were issued at a substantial discount over the price of the underlying Indian securities. xii. Maars came up with the GDR issue in September 2007. The proceeds of the GDR issue were to be, inter alia, invested in the BPO Business. The offering price of GDRs was US$ 2.43 (1 GDR is equivalent to 10 underlying shares). The price of the underlying Indian securities at the time of the GDR issue was Rs. 4.49. Around September 2008, the GDRs were trading at equivalent price of Rs. 3.51 per share, which was at a discount over the market price in India and a discount to the GDR issue price. This was the reason, which made Sophia Growth interested in the securities of Maars.

xiii. Sophia had no intention of manipulating the market and the trades carried on by Sophia were purely driven by market perception as well as potential profit/arbitrage in the GDRs. There is no relation of Sophia with Mr. Arun Panchariya or any of the other entities named in the Order. xiv. Sophia did not subscribe to any GDRs during the public issue and the purchases made by Sophia were only in the secondary market when the GDRs were available at a substantial discount over the issue price. Sophia held the GDRs/underlying securities for 3-12 months before selling them in the Indian Market and most of the trades by Sophia were executed upon substantial volumes dealt in the scrip. Therefore, the inferences drawn by SEBI that Sophia artificially created any volume in the market is completely devoid of any merits. Sophia sold in much smaller quantities as compared to the purchases made by it because the Indian stock market did not give sufficient liquidity in the shares held by Sophia. It did not have any desire to influence the price that Sophia kept its trading volume in the underlying shares much below the total volume in the market as well as a percentage of the total outstanding shares. In fact, Sophia deliberately kept its trading at a volume below ½% of the total outstanding shares so that it would not significantly influence the price of the securities. xv. The activities of Sophia were completely independent of the activities of the other entities named in the Order. The allegation that the counter parties to the sales of Sophia were the “group: is a mere coincidence in as much as they appear to be the only counter parties who were buying on the days when Sophia sold its shares after seeing a substantial volume in the shares. 2. I have considered the reply of Sophia, the oral submissions made by the learned counsel during the hearing and other material available on record. It was noted that Sophia had sold 3,375,000 shares of Maars, out of which 603,174 shares (17.87% of shares sold by Sophia) were matched with the Group. In the scrip of K Sera, Sophia sold 1,545,000 shares, out which 509,496 shares (32.98% of the total shares of K Sera sold by Sophia) were purchased by the Group

Members. Similarly, Sophia had sold 1,500,001 shares of CAT Technologies, out of which 450,000 (30% of shares of CAT sold by Sophia) were purchased by Group Members. 3. At this stage, the findings points out to a case where a group of sub-accounts have sold considerable quantities of shares on conversion of the GDRs of the respective companies, the counterparties were seen to be another set of entities whose presence as counterparties was regular in the identified scrips when the said sub-accounts sold those shares. The companies which had issued such GDRs had financials which could not readily attract investors. Such companies have come out with GDR issue of size considerably larger than their existing equity capital size. Further, GDRs were issued by such companies on the advice/arrangement from Pan Asia whose founder was none other than Mr. Arun Panchariya. Considering the facts that, a common entity (Pan Asia) and Mr. Arun Panchariya of Pan Asia advised the companies in their GDR issuances, Mr. Arun Panchariya’s alleged relationship with Euram Bank, Alka India Limited and India Focus Cardinal Fund, the pattern of trading by the sub-accounts and the Group entities especially Alka India Limited, Oudh Finance and Investment Private Limited and Basmati Securities Private Limited and the Groups inter-se trading, as outlined in the Order and the prima facie findings of the preliminary examination which pointed to the various suspicious aspects of the GDR issues like the size of the issue being multiple times the existing capital of issuing company, unimpressive financials of the company, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of FII/Sub-Accounts, sale in Indian stock exchanges by them and a major portion being bought by common set of clients, the inter-se trading amongst the said clients and subsequent off-loading by them, when seen in totality, do not convince me at this stage to vacate the interim directions issued against Sophia.

At this stage, the prima facie findings suggest that Sophia was a part of a larger group which had allegedly indulged in the manipulation. Given this chain of events and circumstances, the preponderance of probability at this stage suggests the involvement of Sophia in the alleged scheme of things and that I am unable to consider the case on its merits, at this stage, since the investigation in the matter is not yet completed.

4. The limited issue to be considered at this stage is whether on a consideration of the submissions and documents submitted by Sophia, the interim ex-parte directions issued against it vide the Order should be confirmed, vacated or modified in any manner. At the outset, it is to be noted that this Order does not and cannot judge the case against Sophia on merits as the investigation in the matter is in progress. The findings and observations that have been made in the Order are only prima facie in nature and are subject to the findings of the investigation. On the basis of the prima facie findings and observations, the Order had alleged that the activities of Sophia is in violation of Section 12A (a),(b) and (c) of Securities and Exchange Board of India Act, 1992 read with Regulation 3(a)(b)(c)(d), 4(1) and 4(2)(a) of SEBI( Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003 and Regulation 13A (2) of Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995.

5. One of the observations made in the Order was that Sophia cancelled shares of the examined companies and was subsequently found to be selling in the Indian Stock Exchanges. The counterparties to the said sell trades were the entities of the alleged Group on each occasion. Sophia has contended that the reason behind conversion of GDRs into Indian securities was the illiquid GDR market as compared to the Indian market; and the lower price in the GDR market than the price in the Indian market. However, I am unable to accept the aforesaid contention in view of its percentage of total GDR conversion in various companies (ranging from 30.21% to 6.07%). At this stage, the findings of the preliminary investigation against Sophia suggest a preponderance of probability that it may be a part of the alleged manipulation. The same would be confirmed or reversed by the final findings of the investigation that is in progress in the matter. However, at this stage, the preliminary findings and observations made in the Order and the observations made hereinabove and also the facts and circumstances of the matter in its totality, persuades me to confirm the directions issued against the entity vide the Order. Since the investigation in the matter is in progress, the same would consider the submissions/contentions and documents furnished by Sophia to arrive at conclusion as to the said entity’s involvement in the manipulation. The case against Sophia would again be reviewed on completion of the investigation and appropriate course of proceedings would be taken, as deemed fit, in accordance with law.

6. I also note that SEBI vide Orders dated December 30, 2011 and January 25, 2012 has allowed other FIIs in the matter like Mavi, India Focus, Euram Bank etc. to sell their shares held in their dematerialized accounts in order to avoid reduction in their portfolio value and also to meet the demand of lenders/stock brokers towards the loan facility, if any, availed by such entities. In view of the same, a similar treatment could be afforded to Sophia. Since the Order is an ex-parte Order and the findings made therein are prima facie in nature, I am of the considered opinion that the directions made in the Order against Sophia be modified to a limited extent to take care of the above.

7. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11(1), 11(4) and 11B thereof, hereby modify the directions issued vide the ad interim ex-parte Order dated September 21, 2011 in the matter of market manipulation using GDR issues against Sophia Growth, to the limited extent of allowing it to sell the securities held by it, if any, in its demat accounts. Sophia Growth shall deposit sale proceeds, in case of any sale, in a bank fixed deposit earning interest and it shall not be allowed to withdraw monies from the said account including interest without the prior permission of the Securities and Exchange Board of India. In case, Sophia Growth intends to utilize any or whole of the sale proceeds, it shall seek prior permission of the Securities and Exchange Board of India

8. I also note that the registration of Sophia Growth (a share class of Somerset India Fund) with SEBI had expired on July 09, 2010.

9. In the facts and circumstances of the case, I also direct that the investigation ordered in the matter be concluded expeditiously and action as deemed fit be taken in accordance with law.

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: MAY 17, 2012