Factorial Master Fund vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Order Reserved On : 01.05.2015 Date of Decision : 08.05.2015

Appeal No. 391 of 2014

Factorial Master Fund C/O 190 Elgin Avenue, George Town, Grand Cayman KYI-9005, Cayman Islands. ...Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent

Mr. Darius Khambata, Senior Advocate with Mr. Somasekhar Sundaresan, Advocate, Mr. Paras Parekh and Mr. Dhaval Kothari, Advocates i/b J. Sagar Associates for the Appellant.

Mr. Vikram Nankani, Senior Advocate with Mr. Yogesh Chande, Advocate i/b Economic Laws Practice for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer

Per: Justice J.P. Devadhar

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 2

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. 3

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 4

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:-

a) 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%.

b) 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 5

had been fundamentally and technically negative on

the stock price of LTFH.

c) 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.

d) 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.

e) 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 6

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.

f) 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.

g) 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/-.

7

h) 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.

i) 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.

j) In the first week of April 2014 SEBI approached an

FII through whom appellant had traded in LTFH

futures and sought trade rationale. Appellant 8

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 informations 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.

k) 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 9

from dealing and/or accessing the Indian Securities

Market.

l) 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 no direct or indirect

evidence to suggest that even remotely the appellant

was in possession or had access to UPSI, it is

improper to continue the restraint order which is

causing serious prejudice to the appellant and

therefore the restraint order be vacated forthwith.

m) However, by the impugned order dated October 16,

2014 the ad interim ex-parte order has been

confirmed and the restraint order passed against

appellant has been continued until further directions.

7. Mr. Khambata, Learned Senior Advocate appearing on behalf of

the appellant submitted that SEBI had been conducting investigation in

the present case since April 2014. It is more than a year from the date of

commencement of investigation and till date there is not an iota of

evidence to suggest that the appellant was in possession or had access to 10

UPSI on March 13, 2014 relating to the floor price of LTFH shares to be

offered by L&T through OFS on March 14, 2014. Therefore, in the

absence of any evidence to suggest that the appellant was privy to UPSI

relating to the floor price of LTFH shares to be offered for sale by L&T

through, OFS it is wholly improper and illegal to continue the restraint

order imposed against the appellant.

8. It is further submitted by counsel for appellant that since mid

2012 the shares of LTFH had negative sentiment in the market and the

same is evident from the reports of various market analysts. In fact in

November-December 2013, L&T had sold 1% shares of LTFH in the

market at prices below the then prevailing prices. In the market gauging

exercise for LTFH undertaken by 'CS' on March 10, 2014, more than 70

institutional investors including the appellant had opined that in view of

the negative sentiment it would be just and proper for L&T to offer the

shares of LTFH in OFS with deep discount.

9. Counsel for appellant further submitted that on March 13, 2013 in

the morning, which was the first day of listing the shares of LTFH in the

F&O segment, some reputed brokerages had strongly recommended

selling futures in the F&O segment. On March 13, 2014, the futures

contract in LTFH opened at ` 87.80/- per shares and closed at ` 74.55/-

per share. In the cash segment the price of shares of LTFH opened at

` 86/- per share and closed at ` 79.20/- per share. During the course of

the day on March 13, 2014, the appellant entered into 5309 derivative 11

contracts through 5 FIIs equivalent to selling 2,12,36,000 shares of

LTFH at an average price of ` 80.94/- per share.

10. Counsel for appellant further submitted that it is only when L&T

late in the evening on March 13, 2014, received exemption granted by

SEBI from the 12 weeks cool-off period requirement under the OFS

circular, L&T could take its decision to fix the floor price for selling the

shares of LTFH through OFS. Accordingly, L&T fixed the floor price

and thereafter at 9.22 P.M. on March 13, 2014 announced that L&T

would be selling 5,50,05,755 equity shares of LTFH (face value of

` 10/- each) at ` 70/- per share as floor price on March 14, 2014

between 9:15 A.M. and 3:30 P.M. at BSE and NSE. Since appellant had

entered into various derivative contracts on March 13, 2014 for selling

2,12,36,000 shares of LTFH at an average price of ` 80.94/- per share,

the appellant as a prudent businessman purchased 2,75,10,484 shares of

LTFH in the OFS at an average price of ` 71.50/- per share. It is

submitted that entering into futures contract relating to the shares of

LTFH on March 13, 2014 and taking reverse position on March 14,

2014 by purchasing shares of LTFH in the OFS was in the ordinary

course of business and merely because the appellant made profits of

about ` 20 crore in the above transactions, SEBI is not justified in

restraining the appellant from entering into the Indian Securities Market

merely on suspicion that the appellant must be privy to some UPSI prior

to entering into the trades in question.

12

11. Counsel for appellant submitted that in the impugned order it is

held that the trading pattern of the appellant in relation to the scrip of

LTFH is highly suspicious for the following reasons:-

a) Appellant took an aggressively short position that is

equivalent to 84.15% of the total open interest in the

scrip of LTFH on March 13, 2014.

b) After taking such an unusually aggressive short

position in the F&O segment, appellant took a

reverse position of 2,75,10,484 shares in the cash

market by subscribing to the OFS at a price of

` 71.50/- on March 14, 2014.

c) By taking such positions, appellant locked in a profit

of approximately ` 20 crore based on the difference

between the average price at which the short position

was created and the OFS subscription price of

` 71.50/- per share.

d) Appellant did not have any prior exposure in the

scrip of LTFH and the appellant used 5 different FIIs

for its trades in the derivative contracts of LTFH.

e) Appellant was involved as a potential investor in the

market gauging exercise undertaken by 'CS' (prior to

March 13, 2014) and during the said exercise the 13

appellant was contacted by the 'CS' team as a

prospective investor.

For the aforesaid reasons, SEBI has assumed that the appellant must

have been in possession of UPSI about the floor price of the OFS prior

to entering into the derivative contracts on March 13, 2014 and

accordingly, pending investigation, SEBI has debarred the appellant

from entering the securities market until further order.

12. Counsel for appellant submitted that there is no inconsistency in

the trading effected by the appellant on the F&O segment on March 13,

2014 and on the cash segment on March 14, 2014. Trades effected by

the appellant on March 13, 2014 were based on analysis of fact that the

price of the scrip of LTFH was overvalued. Appellant had arrived at the

above conclusion based on various research reports which were all

brought to the notice of the Adjudicating Officer. Moreover, in the

market gauging exercise conducted by 'CS' on behalf of L&T, 70

institutional investors including the appellant had appraised negative

sentiment in respect of the shares of LTFH meaning thereby that L&T

should sell the shares of LTFH during OFS with deep discount.

Anticipating that the shares of LTFH would be sold with deep discount,

the appellant had taken calculated risk and accordingly entered into

derivative contracts on March 13, 2014. Since L&T on March 14, 2014

offered to sell shares of LTFH in OFS at ` 70/- per share, the appellant

as a prudent business measure took reverse position on March 14, 2014 14

by subscribing to the shares of LTFH offered by L&T at a lower price.

The trades executed by the appellant on March 13, 2014 and March 14,

2014 were in the ordinary course of business and that the appellant was

not privy to any UPSI as alleged or otherwise. Two employees of CS

who were chatting through the Bloomberg terminal were neither known

to the appellant nor the appellant had any access to that chat and hence it

cannot be inferred on the basis of said chat that the appellant was privy

to any UPSI.

13. Relying on decisions of this Tribunal in case of Rakhi Trading

Pvt. Ltd. v/s SEBI (Appeal No. 70 of 2009 decided on 11/10/2010) and

Indiabulls Securities Ltd v/s SEBI (Appeal No. 51 of 2009, decided on

26/10/2010) it is submitted by counsel for appellant that having entered

into derivative contracts to sell shares of LTFH at a future date at the

prices prevailing on March 13, 2014, it was legally permissible and open

to the appellant to take reverse position if the shares of LTFH were

available in the market at a price lesser than the price at which the

appellant had agreed to sell the shares of LTFH under the derivative

contracts in the F&O segment. In the present case, merely because,

L&T had offered to sell the LTFH shares under OFS on March 14, 2014

at a far lesser price, it cannot be presumed that on March 13, 2014 the

appellant was privy to UPSI that on March 14, 2015 L&T was to sell the

shares of LTFH at ` 70/- per share.

14. It is further submitted on behalf of the appellant that the intention

of the appellant to make profits by selling the overvalued asset viz 15

shares of LTFH and buying back the shares of LTFH that were available

at a lesser price was a bonafide intention and not motivated by any UPSI

as alleged or otherwise. Fact that in the present case, appellant had made

profits of about ` 20 crores, without being any prior exposure in the

scrip of LTFH and the fact that the appellant has traded through five FIIs

cannot be a ground to assume that the appellant was privy to UPSI prior

to entering into derivative contracts on March 13, 2014.

15. It is submitted by the counsel for appellant that the WTM of SEBI

committed an error in holding that the appellant on March 13, 2014 took

an aggressively short position that is equivalent to 84.15% of the total

open interest in the scrip of LTFH. In the reply filed by appellant it was

specifically stated that as per Bloomberg, appellant's actual position in

LTFH on March 13, 2014 was 34.4% of the futures volume and 21.8%

of the total futures and stock volume and therefore the contention of

SEBI to the contrary is totally unjustified. In the impugned order, these

facts have neither been considered nor dealt with and hence the

impugned order is liable to be quashed and set aside.

16. Lastly, counsel for appellant submitted that the impugned order

passed by SEBI, has caused serious prejudice to the appellant and its

reputation as a clean Asian Multi Asset Fund in every jurisdiction that it

trades is tarnished. Fund management industry of which the appellant is

a part, operates just like any other industry functions in an ecosystem.

The ecosystem of a fund consists of its counterparties, banks,

custodians, directors, administrators and investors. Even though the 16

impugned order pertains only to India, appellant is suffering badly as lot

of such parties have suspended or stopped working with the appellant on

account of continuation of the impugned restraint order. In fact all the 5

brokers through whom appellant traded in LTFH futures and even CS

have stopped trading OTC in all markets (including outside India). In

these circumstances, it is submitted that pending investigation the

appellant be permitted to access the Indian Securities Market.

17. Mr. Nankani, Learned Senior Advocate appearing on behalf of

SEBI on the other hand submitted that on March 13, 2014, the LTFH

shares in the F&O segment opened at ` 87.80/-, whereas, in the cash

segment, the same scrip opened at ` 86%, thus there was a premium of

` + 1.80 in the derivative segment. However, at the end of trading hours

on March 13, 2014, the LTFH scrip in the F&O segment closed at

` 75.55/- whereas, in the cash segment, the LTFH scrip closed at

` 79.20/- that is at a discount of ` 3.35/-. Such a movement was an

abnormal movement, because, the F&O price is normally higher than

the underlying share and moves in tandem with the price of underlying

shares. In fact, it was the highly aggressive trading done by the appellant

in the derivative segment that caused distortion in the price of

derivatives contract of LTFH.

18. Counsel for SEBI submitted that admittedly 70 potential investors

as also the appellant were involved in the market gauging exercise

conducted by CS and none of them barring the appellant took aggressive

position of short selling 2,12,36,000 shares of LTFH in the F&O 17

segment and keep the position open as on March 13, 2014. Examination

of trading of those potential investors and other top entities trading in

the scrip of LTFH ahead of the announcement of floor price by L&T

was done holistically as part of examination process and pending further

investigation ad-interim ex-parte order was passed on June 05,2014

thereby restraining the appellant from accessing the Indian Securities

Market till further orders.

19. Counsel for SEBI submitted that in case of an OFS, the floor price

is a price sensitive information. On March 13, 2014, L&T announced

the floor price for OFS at 9:22 P.M. On the same day, 12 hours prior

thereto that is at 9:21:24 A.M., two employees of CS in correspondence

with each other (as is evident from the Bloomberg chat) had stated in

relation to LTFH's share that they (L&T) are "likely to come at a steep

discount about 70 types". The above piece of evidence coupled with

aggressive acts of the appellant which caused abnormal movement in the

market, had led to the prima facie belief that the appellant had prior

knowledge of the minimum floor price before the same was made public

at 9:22 P.M. on March 13, 2014. The channel or source of UPSI for the

appellant is the subject matter of a detailed investigation which is

currently in progress. Therefore, pending detailed investigation SEBI

being empowered under Section 11(4) of the SEBI Act is justified in

restraining the appellant from accessing the securities market.

20. Counsel for SEBI further submitted that SEBI has the power to

pass interim order when the interests of the investors is affected or there 18

is disruption of the market. The power under Section 11(4) read with

Section 11B of SEBI Act is temporary in nature and can be exercised

pending investigation and/or after investigation. As such, by its very

nature, exercise of powers under Section 11(4) read with Section 11B do

not require SEBI to prove the case beyond reasonable doubt. As a

corollary, as long as there exists some material to take action under

Section 11(4) and/or Section 11B of the SEBI Act, the adequacy or

inadequacy of such evidence or material cannot be a ground for judicial

review.

21. Counsel for SEBI submits that neither Section 11(4) nor Section

11B of SEBI Act prescribes any time limit for continuation of the orders

passed therein. Therefore, SEBI is justified in continuing the ex-parte

order for a reasonable period. In the present case, investigations are

being conducted for the first time in relation to the trading done by

Offshore Derivative Instrument Client through several FIIs in the F&O

market. Since the investigation herein involves cross border

investigation extending to places outside India which is beyond the

jurisdiction of SEBI, it is taking little longer time in gathering

information from entities not regulated by SEBI. The investigations are

at a crucial stage and the conduct of the client is found to be suspicious

and explanation for executing the trade is found to be non-existent. The

investigation file is confidential and contains privileged communications

and SEBI is ready to place the same for perusal of this Tribunal. SEBI

shall endeavour to complete the investigation within a reasonable period

and hence the impugned order need not be interfered with. 19

22. Counsel for SEBI further submitted that in para 14 of the

impugned order dated October 16, 2014 the argument of appellant that

the actual position in LTFH on March 13, 2014 was 34.4% of the

future's volume has been considered and therefore, the appellant is not

justified in contending that its argument has not been considered in the

impugned order.

23. Counsel for SEBI further submitted that in para 25 of the affidavit

in reply dated February 02, 2015 what is stated is that both in the ex-

parte order and in the impugned order, SEBI has not concluded that the

appellant has come in possession of the UPSI through CS. Such a

conclusion can be arrived at only on completion of investigation.

24. Counsel for SEBI further submitted that there is no merit in the

contention that action was taken against the appellant because of

significant profit made by the appellant from the transactions in

question. The interim action was taken against the appellant after

thorough examination and analysis of trading of all top clients and on

the basis of circumstantial evidence gathered. Even if the appellant had

not made any profit, in the interest of maintaining market integrity,

action would still have been taken against the appellant.

25. Counsel for SEBI further submitted that waiver of the cooling off

period by SEBI had no bearing on the trading of the appellant or its

outcome. If relaxation was not granted, the scrip price could have gone

down on March 14, 2014 and in that event there could be two 20

possibilities viz, either the floor price had to be lowered or the OFS had

to be postponed. If the floor price was lowered, appellant would have

bought shares through OFS at further lower price and if OFS was

postponed, the appellant would have simply closed the open short

position by entering into market transactions. Similarly, if the price of

the scrip were to go up on March 14, 2014, the same would not have

changed the floor price as is evident from the chat transcript. Thus in all

the scenarios, the series of events from the appellants side would not

have changed the trading outcome at all. By entering into derivative

contracts, the appellant had agreed to sell the contract on expiry day,

that is, on March 27, 2014 and therefore price movement in one way or

the other in between one or two days after March 13, 2014 would have

had no impact on the appellant's trading decision. Accordingly, it is

submitted that no interference is called for at this stage and the appeal

deserves to be dismissed.

26. I have carefully considered the rival submissions.

27. In the present case, pending investigation, which commenced in

April 2014, SEBI by its ex-parte order dated June 05, 2014 has

restrained the appellant from accessing the Indian Securities Market and

by the impugned order dated October 16, 2014, the ex-parte restraint

order has been continued until further orders. Entire case of SEBI is

based on the prima facie belief that on March 13, 2014 the appellant

must be privy to the UPSI that L&T would be selling shares of LTFH on

March 14, 2014 with floor price fixed at ` 70/- per share. According to 21

SEBI, the appellant, being privy to the above UPSI, took aggressive

short position in the F&O segment on March 13, 2014 by entering into

5309 derivative contracts which is equivalent to selling 2,12,36,000

shares of LTFH on the expiry day, that is, on March 27, 2014 at an

average price of ` 80.94/- per share and on March 14, 2014, took reverse

position by subscribing to 2,75,10,484 shares of LTFH in the OFS

(offered by L&T) at a price of ` 71.50/- per share and thereby locked in

a profit of ` 20 crore (approximately) based on the difference between

the average price at which the short position was created and the OFS

subscription price of ` 71.50/- per share.

28. Prima facie view of SEBI that on March 13, 2014, the appellant

was privy to the UPSI that on March 14, 2014 L&T was to sell shares of

LTFH in OFS with floor price fixed at ` 70/- per share, is based on two

factors. Firstly, according to SEBI, on March 13, 2014 there was

abnormal movement in the F&O segment and cash segment on account

of appellant taking aggressive short position in the shares of LTFH

which led to market disruption. Secondly, on March 13, 2014 at

9:21:24 A.M. two employees of CS in correspondence with each other

as per the Bloomberg chat had stated that in respect of LTFH's share

that they (L&T) are 'likely to come at a steep discount about 70 types'.

29. SEBI considers that on March 13, 2014 there was abnormal

movement/ market disruption in the F&O segment, because, the LTFH

scrip in the F&O segment opened at ` 87.80/- whereas in the cash

segment the same scrip opened at ` 86/-. Thus, there was a premium of 22

` +1.80/- in the derivative segment. On the same day that is after the

trading hours on March 13, 2014 the LTFH scrip in the F&O segment

closed at ` 75.55/- and in the cash segment, the LTFH scrip closed at

` 79.20/- that is at a discount of ` 3.65/-. According to SEBI the above

market movement was abnormal, because the F&O price is normally

higher than the underlying share and moves in tandem with the price of

underlying shares. Admittedly, March 13, 2014, was the first day of

trading in LTFH shares in the F&O segment and in fact on that day, the

LTFH shares in the F&O segment opened at a price higher than the price

of LTFH share in the cash segment. During the course of the day on

March 13, 2014 in all 13,664 derivative contracts equivalent to selling

5,46,56,000 shares of LTFH were traded in the F&O segment. Out of

13,664 derivative contracts, 5309 derivative contracts equivalent to

selling 2,12,36,000 shares of LTFH were entered into by the appellant

through five FIIs. Thus, on March 13, 2014, 8355 (13664-5309=8355)

derivative contracts equivalent to selling 3,34,20,000 shares of LTFH

were entered into by various traders other than the appellant. It is a

matter of record that at the end of trading hours on March 13, 2014,

appellant had kept all the 5309 derivative contracts open, whereas, 7471

derivative contracts out of 8355 derivative contracts entered into by

third parties other than the appellant were squared up during the course

of the day thereby leaving only 884 derivative contracts open.

According to SEBI, selling securities in the F&O segment at a price

higher than the price of the underlying in the cash segment is the natural

phenomena. If that be so, then, no fault can be found with the appellant 23

in entering into 5309 derivative contracts equivalent to selling

2,12,36,000 shares of LTFH at a price higher than the price of LTFH

shares in the cash segment. In fact counsel for SEBI fairly stated that the

abnormal movement of the trading in the F&O segment on March 13,

2014 was not due to the appellant taking aggressive short position

simpliciter but due to the fact that the appellant took aggressive short

position and left it open, while others deemed it fit to square off the

derivative contracts.

30. Explanation given by the appellant for keeping the short position

open on March 13, 2014, is that firstly, the shares of LTFH were

overvalued and in view of the negative sentiment it would be safe to

keep the short position open on March 13, 2014. Secondly, since L&T

was appraised through CS about the negative feeling in respect of LTFH

shares and since there was a demand for deep discount, the appellant had

every reason to believe that L&T would sell shares of LTFH at a price

lesser than the price prevailing in the cash segment. There is no material

on record to rebut the above explanation of the appellant. In such case,

fact that many traders who had entered into derivative contracts to sell

shares of LTFH had squared off the deals on March 13, 2014 itself

cannot be a ground to presume that the appellant did not square off the

deals, because the appellant was privy to UPSI that L&T had fixed the

floor price of ` 70/- per share. It is possible that the appellant took

calculated risk in waiting for L&T to sell shares of LTFH at discount,

whereas, others opted to book profits by squaring off the deals by 24

entering into transactions in the cash segment. Since, the appellant is

the only person who has taken such aggressive short position and kept it

open on March 13, 2014, SEBI is justified in investigating the matter.

However, during the pendency of such investigation to restrain the

appellant from accessing the Indian Securities Market solely based on

the fact that the appellant took aggressive short position on March 13,

2014 and took reserve position on March 14, 2014 by subscribing to the

shares of LTFH from L&T through OFS, would be wholly unjustified

especially when the explanation given by the appellant to keep the short

position open on March 13, 2014 is a reasonable and possible view that

could be taken in the matter.

31. Question then to be considered is, whether there is any merit in

the prima facie view of SEBI that at the time of entering into derivative

contracts on March 13, 2014 the appellant was privy to UPSI that L&T

was to sell shares of LTFH with a floor price of ` 70/- per share and that

is why the appellant took aggressive short position on March 13, 2014

and kept it open.

32. It is relevant to note that as per SEBI circular dated July 18, 2012,

the floor price for the OFS could be declared by L&T only after the

close of trading hours and before the close of business hours of the

exchanges on T-1 day. Thus, as per the above SEBI circular, L&T could

disclose the floor price after the trading hours on March 13, 2014 only if

the shares of LTFH were to be sold by L&T through OFS on March 14,

2014. As rightly contended by the counsel for the appellant, in view of 25

the cooling off period L&T could sell shares of LTFH only on March

17, 2014, unless exempted by SEBI. Admittedly, exemption from the

cooling off period granted by SEBI was communicated to L&T by

e-mail at 6:57 P.M. on March 13, 2014. It is not the case of SEBI that

either the L&T or CS or the appellant had any information in the

morning of March 13, 2014 that SEBI had taken a decision to grant

exemption from the cooling off period and that decision would be

communicated to L&T late in the evening on March 13, 2014. In such a

case, question to be considered is, whether, SEBI is justified in

presuming that in the morning of March 13, 2014 or prior thereto L&T

had fixed the floor price for selling the shares of LTFH in OFS at ` 70/-

per share and that the appellant was privy to such UPSI.

33. L&T could fix the floor price for selling the shares of LTFH

through OFS on March 13, 2014, only if the shares were to be sold

through OFS on March 14, 2014 and disclose the same only after the

trading hours on March 13, 2014. It is inconceivable that without having

any knowledge that SEBI has granted exemption from the cooling off

period and on the basis of which shares of LTFH could be sold through

OFS on March 14, 2014, L&T would determine the floor price on

March 13, 2014 for selling the shares of LTFH through OFS. This is

because, if the shares of LTFH were to be sold on March 14, 2014, then

only depending upon the price of LTFH shares at the end of the trading

hours on March 13, 2014, L&T could fix the floor price for selling the

shares of LTFH through OFS on March 14, 2014. To illustrate, if at the

end of the trading hours on March 13, 2014 the shares of LTFH had 26

closed at ` 65/- per share, then fixing the floor price at ` 70/- per share,

even before the close of trading hours on March 13, 2014 would be

futile as no one would buy shares of LTFH at ` 70/- per share when

shares are available in the market at ` 65/- per share. Floor price for

OFS cannot be fixed in advance and has to be fixed with reference to the

price prevailing at the end of trading hours on the day previous to the

date on which shares are to be sold through OFS. Therefore, the

presumption drawn by SEBI that L&T had fixed the floor price on

March 13, 2014 even before the close of trading hours that too without

having any knowing that pursuant to the exemption granted by SEBI

shares of LTFH could be sold through OFS on March 14, 2014 is

without any basis and hence unsustainable.

34. Entire case of SEBI in presuming that L&T must have fixed the

floor price for sale of LTFH shares at ` 70/- per share is that from the

Bloomberg chat transcripts provided by CS, it is noticed by SEBI that on

March 13, 2014, information like, 'likely to come in at a steep discount

about 70 types' was being circulated amongst the members of Equity

team of CS. It was noticed by SEBI that the above message from one CS

employee to another in the Equity team was sent at 9:21:24 hours on

March 13, 2014, whereas, the formal announcement of OFS and the

floor price fixed by L&T were made at 21:22:00 hours on the same day.

According to SEBI above information gathered from CS leads to strong

presumption that prior to the appellant entering into derivative contracts 27

on March 13, 2014 the floor price was fixed at ` 70/- per share and the

appellant was privy to such UPSI.

35. Plain reading of the chat transcript between two CS employees viz

__ 'likely to come in at a steep discount about 70 types' would simply

mean that there is a possibility of L&T fixing the floor price for sale of

shares of LTFH through OFS at ` 70/- per share. From the said chat

transcript it can neither inferred that CS had recommended nor L&T had

finalized the floor price to sell the shares of LTFH at ` 70/- per share

before the trades of the appellant were executed on March 13, 2014.

Apart from the above, there is nothing on record to suggest, even prima

facie, as to how the appellant had access to such chat between the two

employees of CS.

36. Assuming that L&T had fixed the floor price at ` 70/- per share,

appellant could be said to be privy to such UPSI or have access to such

UPSI only through L&T or CS. It is not even the prima facie belief of

SEBI that L&T or CS or any of their employees have furnished UPSI to

the appellant. Counsel for SEBI in answer to a query fairly stated that

according to CS, complete Bloomberg chat transcripts have been

furnished by CS to SEBI. If SEBI accepts the contention of CS that

complete chat transcripts are provided by CS, then there is no question

of SEBI approaching Bloomberg seeking further chat transcripts. It is

only if, SEBI suspects that CS might not have disclosed complete chat

transcripts or considers that there is some more Bloomberg chat which 28

may not be in possession of CS, SEBI would be justified in approaching

Bloomberg seeking further chat transcription. There is nothing on

record to suggest that Bloomberg is in possession of any information

which is vital to the investigation carried out by SEBI. Inspite of

investigating the matter for more than a year, SEBI is not in a position to

arrive at a conclusion as to whether L&T had fixed the floor price for

OFS before the appellant traded in the F&O segment on March 13,

2014. In these circumstances, the prima facie view formed by SEBI on

the basis of Bloomberg chat provided by CS that the appellant was privy

to the UPSI that L&T has fixed the floor price at ` 70/- per share before

entering into the trades on March 13, 2014 is purely hypothetical and

there is no rational basis for such presumption drawn by SEBI.

37. It is contended on behalf of SEBI that due to the non-co-operation

on part of Bloomberg terminal in furnishing the requisite information,

the investigation has hit the road block and that is why there is delay in

completing the investigation. As noted above, the prima facie view of

SEBI that on March 13, 2014 L&T had fixed the floor price at ` 70/- per

share and prima facie view of SEBI that the appellant was privy to such

UPSI is based on mere presumption and hence devoid of any merit.

Admittedly, after investigating the matter, for more than one year the

investigation has now hit the road block. Fact that the appellant was

involved in the market gauging exercise cannot be a ground to presume

that the appellant was privy to the UPSI that floor price is fixed at ` 70/-

per share, because, admittedly, 70 institutional investors were also 29

involved in the market gauging exercise and if those institutional

investors are considered to be privy to UPSI, then there is no reason to

presume that the appellant was privy to UPSI on account of involvement

in the market gauging exercise. Similarly fact that the appellant without

having any existing exposure in the shares or derivatives of LTFH had

taken aggressive short position in the F&O segment on March 13, 2014

at an average price of ` 80.94/- cannot be said to be the basis to presume

that the appellant was privy to UPSI especially when the market

sentiment gathered in the market gauging conducted by CS on March

10, 2014 clearly indicated that the investors were seeking deep discount

to buy shares of LTFH from L&T through OFS. Moreover on March 13,

2014 a number of market analysts had recommended selling shares of

LTFH in the F&O segment. In such a case, entering into derivative

contracts on March 13, 2014 and taking reverse position on March 13,

2014 by subscribing to the shares of LTFH through OFS cannot be said

to be on account of appellant being privy to UPSI that L&T has fixed

floor price for OFS at ` 70/- per share, merely because two employees

were chatting that L&T is likely to fix the floor price at ` 70/- per share.

38. Fact that the appellant locked in a profit of approximately ` 20

crore by entering in to 5309 derivative contracts on March 13, 2014

through five different and independent FIIs and on March 14, 2014

covered nearly same number of shares in cash segment by subscribing to

the OFS at a price of ` 71.50/- per share, cannot be a ground to presume

that the appellant was privy to UPSI and thereby restrain the appellant 30

from accessing the securities market pending investigation, especially

when there is not even one good reason to discard the explanation given

by the appellant for keeping the short position open at the end of trading

hours on March 13, 2014.

39. There can be no dispute that the appellant has suffered serious

prejudice on account of restraint order which is operation for nearly one

year. No doubt that under Section 11(4)/11B of SEBI Act, SEBI is

empowered to restrain a person from entering the securities market,

pending investigation, provided, there is a prima facie evidence to

suggest that such person has violated any of the provisions of SEBI Act

or the Rules/Regulations made thereunder. In the present case, the prima

facie view taken by SEBI that before entering into trades on March 13,

2014, the appellant was privy to UPSI that L&T has fixed the floor price

for selling the shares of LTFH at ` 70/- per share is based on mere

presumption and without any sustainable basis. In these circumstances,

continuation of the restraint order is unjustified. However, since the

restraint order passed against the appellant has already operated for

nearly a year and since SEBI claims that the investigation is at a crucial

stage, in the facts of present case, pending further investigation it would

be just and proper to pass the following interim order:-

a) SEBI shall complete the investigation within a period

of two months from today.

31

b) If on completion of such investigation SEBI deems it

fit to proceed further in the matter, then SEBI shall

issue show cause notice and pass appropriate order

thereon after giving an opportunity of hearing to the

appellant, within a period of one month from the date

of issuing show cause notice as stated in clause (a)

above.

c) If SEBI fails to issue show cause notice to the

appellant within two months from today and if

issued, fails to pass an order as stated above within a

period of one month from the date of issuing show

cause notice, then and in that event the impugned

confirmatory order dated October 16, 2014

continuing the restraint order passed under the ex-

parte ad-interim order dated June 05, 2014 shall

come to an end and the appellant would be entitled to

access the Indian Securities Market.

40. In view of the above interim order nothing survives in the appeal.

Hence the appeal is also disposed of in the above terms with no order as

to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer 08.05.2015 Prepared & Compared By: PK