Factorial Master Fund vs Sebi

Order Reserved On: 25.06.2018 Date of Decision : 29.06.2018

Appeal No. 01 of 2017

Factorial Master Fund C/o 190 Elgin Avenue, George Town, Grand Cayman KY1- 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. Ravichandra Hegde, Advocate with Mr. Paras Parekh, Ms. Aashni Dalal, Mr. Robin Shah and Ms. Stuti Shah, Advocate i/b J. Sagar Associates for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Tomu Francis and Mr. Vivek Shah, Advocates for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar

1.

This appeal is filed to challenge the order passed by the Whole

Time Member ("WTM" for short) of Securities and Exchange Board of

India ("SEBI" for short) on 08.12.2016. By the said order dated

08.12.2016 it is held that the appellant had indulged in unusual and

aggressive trading in the scrip of L&T Finance Holdings Limited

("LTFH" for convenience) on 13.03.2014 ahead of the announcement of 2

'Offer for Sale' ("OFS") of shares of LTFH on 14.03.2014 by the

promoter, Larsen & Toubro Limited (L&T) and thereby locked a profit of

` 20.04 crore which was an unlawful gain and accordingly directed the

appellant to disgorge the entire unlawful gain of ` 20,04,67,840/- with

simple interest @ 10% per annum from March 2014 till the date of

payment.

2. Facts relevant for the present appeal are as follows:-

a) Appellant is a company incorporated in Cayman

Islands. Appellant operates as a collective investment

vehicle or as a fund under the laws of Cayman

Islands. Appellant has been trading in securities, inter

alia, in the Indian securities market.

b) LTFH is a company whose shares are listed on

various stock exchanges. LTFH is promoted by L&T.

c) As per the Securities Contracts (Regulation) Rules

1957 (SCRR), L&T holding more than 82% shares of

LTFH was required to comply with the Minimum

Public Shareholding (MPS) norms by reducing its

shareholding in LTFH to 75% by August 2014.

d) Accordingly, the Board of Directors of L&T in the

meeting held on 25.01.2013 approved dilution of the

company's stake in LTFH either by way of OFS or 3

through any other mode and authorized the

management to take necessary action.

e) After obtaining SEBI approval on 18.07.2013, 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. Further sale of

LTFH shares to meet the MPS norms could be

effected by L&T after the cooling off period of 12

weeks from the previous sale that took place in

November-December 2013.

f) On 10.03.2013 L&T addressed a letter to SEBI

seeking exemption from cooling off period of 12

weeks ending on 17.03.2014, because considering the

market conditions and other relevant factors, L&T

was contemplating to sell the shares of LTFH through

OFS may be in the next 2-3 days.

g) On 10.03.2014 Credit Suisse Securities (India) Pvt.

Ltd. ('CS') as merchant banker of L&T conducted

market gauging for LTFH 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. It is not in dispute that the

appellant had participated in the said market gauging 4

exercise, wherein negative sentiments were expressed

meaning thereby that the investors would seek deep

discount to buy shares of LTFH from L&T.

h) On 11.03.2014 NSE issued a circular whereby listing

of LTFH was allowed in the Futures and Options

('F&O') segment for the first time from 13.03.2014.

i) On 12.03.2014 the investment team of the appellant

got risk limit approval from its compliance officer

situated at Hong Kong to participate in the scrip of

LTFH to be offloaded by L&T upto the limit of USD

25 million.

j) On 13.03.2014 some reputed brokers strongly

recommended selling LTFH scrip in the F&O

segment which was the first day of its listing in the

F&O segment.

k) On 13.03.2014 futures contract in LTFH opened at

` 87.80 per share and closed at ` 74.55 per share. In

the cash segment the price of LTFH shares opened at

` 86 per share and closed at ` 79.20 per share.

l) On 13.03.2014 in all 13664 derivative contracts

equivalent to 5,46,56,000 shares of LTFH were traded

in the F&O segment and out of these 13664 derivative 5

contracts 5309 derivative contracts equivalent to

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

appellant through five FIIs and the remaining 8355

derivative contracts equivalent to 3,34,20,000 shares

of LTFH were entered into by traders other than the

appellant. It is not in dispute that at the end of trading

hours on 13.03.2014, appellant had kept all the 5309

derivative contracts open, whereas, other traders,

squared off 7471 derivative contracts out of 8355

derivative contracts and kept only 884 derivative

contracts open. Thus, on 13.03.2014 appellant sold

futures of LTFH (about 1/3 of the volume traded) and

kept its position open while others squared off their

positions leading to the appellant ending up with over

80% of open interest.

m) At 18:57 PM on 13.03.2014 SEBI informed L&T that

it had granted exemption from the mandatory cooling

off period.

n) At 20:20 PM on 13.03.2014 L&T informed NSE

(National Stock Exchange of India Limited) & BSE

(BSE Limited) about the OFS on 14.04.2014 between

09:15 AM to 03:30 PM.

o) AT 20:24 PM on 13.03.2014 L&T informed NSE &

BSE that the floor price of LTFH for the OFS has 6

been fixed at ` 70 per share. At 20:36 PM NSE

published the OFS and at 20:52 PM on 13.03.2014

NSE announced that the L&T has fixed the floor price

at ` 70/- per share.

p) On 14.03.2014 appellant participated in the OFS as an

investor and purchased 2,75,10,484 shares of LTFH at

a price of ` 71.50 per share in the OFS offered by

L&T.

q) After obtaining details of the trades from the appellant

SEBI issued an ex-parte ad-interim order on

05.06.2014 thereby restraining the appellant from

dealing and/or accessing the securities market until

further orders. The said order was passed on the

prima facie belief that the appellant was privy to the

likely floor price of the OFS and, therefore, the

appellant took unusual and aggressive short position

in the F&O segment ahead of the OFS while in

possession of UPSI. The said ex-parte order was

confirmed on 16.10.2014.

r) Challenging the confirmatory order of SEBI dated

16.10.2014 appellant filed Appeal No. 391 of 2014

before this Tribunal. Said appeal was disposed of on

08.05.2015 inter alia holding that the prima facie view 7

of SEBI that the appellant was privy to the UPSI

regarding the likely floor price of OFS is baseless,

because as per the SEBI Circular, L&T could fix the

floor price for OFS on 13.03.2014 after the trading

hours only if the shares of LTFH were to be sold

through OFS on 14.03.2014, provided exemption

from the cooling off period was granted by SEBI.

Admittedly, exemption from the cooling off period

granted by SEBI was communicated to L&T at 6: 57

PM on 13.03.2014. In such a case, it was held that the

prima facie view of SEBI that the appellant was privy

to the Unpublished Price Sensitive Information

("UPSI") regarding the floor price of OFS during the

market hours on 13.03.2014 cannot be sustained.

However, in view of the statement made by counsel

for SEBI that the investigation is at a crucial stage,

this Tribunal gave two months time to complete the

investigation and if deemed fit to issue show cause

notice and within one month of issuing show cause

notice pass an order, failing which the confirmatory

order dated 16.10.2014 as also the ex-parte ad-interim

order would come to an end.

s) As SEBI failed to issue show cause notice within the

stipulated time, by an order dated 08.07.2015 this

Tribunal held that the appellant would be entitled to 8

access the Indian Securities market with a clarification

that failure on part of SEBI to issue show cause notice

within the stipulated time would not come in the way

of SEBI in issuing a show cause notice if any new

facts adverse to the appellant come to the knowledge

of SEBI.

t) Accordingly, on completion of investigation, fresh

show cause notice was issued to the appellant on

07.12.2015 and, thereafter, by the impugned order

dated 08.12.2016 it is held that the appellant who had

participated in the market gauging exercise had

received UPSI from Mr. Sumit Jalan, Director, Equity

Capital Markets of CS about the impending OFS and

accordingly appellant took aggressive short position

in the F&O segment on 13.03.2014 and participated in

the OFS on 14.03.2014 and thereby made unlawful

gain of ` 20.04 crore which is directed to be

disgorged. Challenging the said order dated

08.12.2016 present appeal is filed.

3. Mr. Hegde, learned counsel appearing on behalf of the appellant

submitted that the impugned order passed by the WTM of SEBI cannot

be sustained because, firstly, the impugned order is based on incorrect

and factually wrong facts set out in the order. Secondly, there being no

new evidence brought on record, order passed by this Tribunal on

08.05.2015 in the earlier round of litigation holding that the ex-parte ad- 9

interim order and the confirmatory order has been passed merely on

presumption and without any sustainable basis would equally apply for

setting aside the impugned order. Thirdly, it is submitted that reliance

placed by SEBI on the statement of Mr. Sumit Jalan, Director of Credit

Suisse recorded on 24.06.2015 is wholly misplaced, because, Mr. Jalan

had specifically stated in his statement that the specific terms of the

offering was entirely the managements prerogative which is finalized at

the time launching the OFS and that the day to day discussions with L&T

management were never disclosed to the investors including Mr. Barun

Agarwal, representative of the appellant.

4. Mr. Joshi, learned Senior Advocate appearing on behalf of SEBI,

on the other hand, submitted that UPSI came into existence on

10.03.2014 when L&T sought from SEBI exemption from the cooling off

period of 12 weeks so as to offload the shares of LTFH through OFS.

Admittedly, the appellant participated in the market gauging exercise

conducted by Credit Suisse and during the period from 10.03.2014 to

12.03.2014 Mr. Sumit Jalan, one of the officials of Credit Suisse had

telephonic discussion with officials of L&T and was in constant

communication with a representative of the appellant. Thus, the only

necessary conclusion that any reasonable person could derive from the

above communication is that the appellant was privy to the UPSI about

the impending/ imminent OFS and, therefore, the profits made from the

trades when in possession would be unlawful gain and hence liable to be

disgorged.

10

5. We have carefully considered the rival submissions.

6. In our opinion, impugned decision of SEBI cannot be sustained for

the following reasons:-

a) Fact that on 10.03.2014 L&T had applied to SEBI

seeking exemption from the cooling off period so as

to offload the LTFH shares through OFS prior to

17.03.2014 (date on which cooling off period was to

expire) could not be considered as UPSI, because,

SEBI was not obliged to grant exemption and it was

open to SEBI to reject the application made by L&T

seeking exemption. In such a case, mere fact that

L&T had made application to SEBI on 10.03.2014

seeking exemption from the cooling off period could

not be a ground to hold that L&T was to sell shares of

LTFH through OFS prior to 17.03.2014 by obtaining

exemption from SEBI.

b) In any event, admittedly, L&T with a view to achieve

MPS norms had sold 1% shares of LTFH through

OFS in November- December 2013 and the balance

shares of LTFH were to be sold on expiry of the

cooling off period of 12 weeks, that is, on or after

17.03.2014. In such a case, appellant had every

reason to believe that as in the past L&T would sell

shares of LTFH through OFS on or after 17.03.2014

and accordingly enter into derivative contracts in the 11

scrip of LTFH in the F&O segment and keep the

position open and thereafter buy shares of LTFH in

the OFS that was likely to be offered by L&T on or

after 17.03.2014. Thus, irrespective of any

knowledge that L&T had made an application on

10.03.2014 seeking exemption, it was open to the

appellant to aggressively sell shares of LTFH in the

F&O segment which commenced for the first time on

13.03.2014 and buy the shares of LTFH from L&T in

the OFS which was likely to be offered on or after

17.03.2014. Therefore, in the facts of present case,

SEBI is not justified in holding that the appellant

traded in the scrip of LTFH in the F&O segment on

13.03.2014 while in possession of alleged UPSI that

L&T had made an application to SEBI on 10.03.2014

seeking exemption from the cooling-off period.

c) Decision of SEBI that by participating in the market

gauging exercise carried out by CS during the period

from 10.03.2014 to 12.03.2014 appellant became

privy to the UPSI that L&T would sell LTFH shares

immediately is without any merit, because, on the

dates on which market gauging exercise was

conducted by CS there was no decision taken by SEBI

to grant exemption from cooling-off period. In fact

SEBI decided to grant exemption on 13.03.2014 after 12

the trading hours and communicated the same to L&T

at 18:57 PM on 13.03.2014, whereas, appellant had

aggressively traded in the LTFH shares in the F&O

segment on 13.03.2014 during the trading hours and

kept the position open hoping to buy shares of LTFH

from L&T in the OFS that was likely to be offered on

or after 17.03.2014. Therefore, mere fact that the

appellant had participated in the market gauging

exercise conducted by CS could not be a ground to

hold that the appellant was privy to the UPSI that

L&T would sell shares of LTFH through OFS

imminently.

d) Similarly, fact that the representative of the appellant

had conversation with Mr. Sumit Jalan, of CS during

the period from 10.03.2014 to 12.03.2014, could not

be a ground to presume that the appellant became

privy to the UPSI that L&T would sell shares of

LTFH through OFS even before 17.03.2014 because,

as on those dates apart from the application made by

L&T seeking exemption, there was no reason to

believe that SEBI would grant exemption. It is not the

case of SEBI that application made by L&T is

invariably allowed by SEBI.

e) In fact Mr. Sumit Jalan of CS in his statement

recorded by SEBI on 24.06.2015 had categorically 13

stated that specific terms of the OFS were to be

exclusively determined by the management of L&T at

the time of launching of OFS. Mr. Sumit Jalan had

further stated that the day to day discussions between

CS and L&T management were never disclosed to the

investors including the representative of the appellant.

In such a case, it is difficult to accept the decision of

SEBI that on account of the conversation between the

representative of the appellant and Mr. Sumit Jalan of

CS between 10.03.2014 to 12.03.2014 appellant

became privy to the UPSI that L&T would sell shares

of LTFH through OFS imminently.

f) It is interesting to note that in the impugned order the

WTM has held that the information received by the

appellant from CS/ its officials was in the 'ordinary

course of business' covered under the proviso to

regulation 3 of the PIT Regulations and hence there

was no case for taking action against CS and its

officials. Therefore, having held that neither CS nor

its officials have passed on any UPSI to the appellant,

SEBI is not justified in presuming that the appellant

must have received UPSI during the market gauging

exercise or during the conversation with Mr. Sumit

Jalan of CS.

14

7. Strong reliance was placed by counsel for SEBI on the decisions of

the Apex Court in case of SEBI v/s Kishore Ajmera reported in (2016) 6

SCC 368 and in the case of SEBI v/s Rakhi Trading Pvt. Ltd. (Civil

Appeal No. 1969 of 2011 decided on 08.02.2018). In our opinion, ratio

laid down in the aforesaid cases does not support the decision taken by

SEBI in the present case. In fact, immediate and proximate facts and

circumstances surrounding the events on which the charge has been

framed against the appellant clearly show that the appellant aggressively

traded in the scrip of LTFH in the F&O segment on 13.03.2014 not on

the basis that L&T had made application on 10.03.2014 but on the

presumption that L&T would sell the LTFH shares through OFS on or

after 17.03.2014. Thus, the aforesaid decisions do not support the case

of SEBI.

8. To sum up, in the facts of present case, admittedly, L&T had sold

1% shares of LTFH in November- December 2013 through OFS and was

entitled to sell the balance shares after the expiry of the 12 weeks cooling

off period on 17.03.2014. Therefore, appellant who had participated in

the market gauging exercise on 10.03.2014 had every reason to believe

that L&T would sell LTFH shares on or after 17.03.2014. It is not in

dispute that during the market gauging exercise, various investors

including appellant had expressed their views demanding deep discount

in the shares of LTFH. Therefore, appellant had every reason to believe

that the shares of LTFH would be offered by L&T at a deep discount on

or after 17.03.2014. In the absence of any bar on the investors who had

participated in the market gauging exercise to trade in the scrip in which 15

the market gauging exercise was conducted, in the facts of present case,

SEBI is not justified in presuming that the appellant had traded in the

scrip of LTFH in the F&O segment on 13.03.2014 while being in

possession of the UPSI that L&T would sell the shares of LTFH through

OFS imminently. In other words, in the fact of present case, in our

opinion, this is a fit case to grant benefit of doubt, because, it is possible

that the appellant aggressively traded in the scrip of LTFH in the F&O

segment on 13.03.2014 and kept the position open not on the basis of

UPSI but on the basis of calculated risk that L&T which had commenced

off loading of LTFH shares in November-December 2013 would sell the

balance shares of LTFH after the expiry of cooling-off period, that is, on

or after 17.03.2014.

9. In the result, appeal is allowed by setting aside the impugned order

passed by SEBI on 08.12.2016 against the appellant.

10. Before parting, we would like to bring it to the notice of SEBI that

the question as to whether investors participating in the market gauging

exercise should be allowed to trade in all segments of the market prior to

the issue opens needs to be looked into.

11. Appeal is disposed of in the aforesaid terms with no order as to

costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 29.06.2018 Prepared & Compared By: PK