Order against Basmati Securities Pvt Ltd, oudh Finance & investment Ltd and Alka India Ltd in the matter of market manipulation using GDR issue

DIRECTIONS UNDER SECTIONS 11(1), 11(4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 IN THE MATTER OF MARKET MANIPULATION USING GDR ISSUES AGAINST BASMATI SECURITIES PRIVATE LIMITED, OUDH FINANCE AND INVESTMENT PRIVATE LIMITED AND ALKA INDIA LIMITED

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI), vide an ad-interim ex-parte Order dated September 21, 2011 (hereinafter referred to as the Order) inter alia restrained various entities/persons including Basmati Securities Private Limited (hereinafter referred to as Basmati), Oudh Finance and Investment Private Limited (hereinafter referred to as Oudh) and Alka India Limited (hereinafter referred to as Alka) from dealing in securities or instruments with Indian securities as underlying, in any manner whatsoever, until further orders. Subsequently, Basmati, Oudh and Alka filed their submissions in respect of the Order, vide letters dated November 2, 2011, November 2, 2011 and November 28,2011, respectively. Basmati was afforded a hearing on November 23, 2011 and Oudh and Alka were heard on November 29, 2011, when the said entities made their respective submissions through their Advocates.

2. I have considered the submissions made by the entities as well as the oral submissions made during the hearing and material available on record. The limited issue to be considered at this stage is whether on a consideration of the submissions and documents submitted by the aforesaid entities, the interim ex-parte directions issued vide the Order against them should be confirmed, vacated or modified in any manner. It was observed in the Order that SEBI, was alerted by its surveillance systems of the large scale off-market transactions in certain scrips. Preliminary examination revealed that Foreign Institutional Investors (hereinafter referred to as FIIs), namely, India Focus Cardinal Fund (India Focus), KII Limited (KII), Mavi Investment Fund (Mavi) and Sophia Growth, were converting the Global Depository Receipts (hereinafter referred to as GDRs) underlying the shares of IKF Technologies Limited, Avon Corporation Limited, CAT Technologies Limited, Asahi Infrastructure Limited, K Sera Sera Limited and Maars Software International Limited into equity shares and sold them in the Indian market and that most cancellations happened within a short period of time of their issuances. On noticing that a few entities were repeatedly appearing as counterparties to the 33% to 75% of those shares sold by FIIs in the scrips, SEBI conducted an examination into the same. The prima facie findings of the said examination pointed out to the various aspects of the GDR issues like the large size of the issue vis-à-vis the existing size of the issuing company, unimpressive financials of the said companies, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of FII/Sub-Accounts, sale in Indian stock exchanges and a major portion being bought by a constant group of clients, the trading amongst the said clients and the subsequent off-loading of shares by them. The preliminary findings had pointed towards an elaborate scheme to manipulate the securities market. Alka, Basmati and Oudh are some of the entities who were found to have acted as counterparties to the sell transactions of the FIIs and had also traded with the others in the alleged Group.

3. In the hearing held on November 23, 2011, Mr. Ankit Lohia, Advocate on behalf of Basmati reiterated the submissions made by the said entity, vide letter dated November 2, 2011, which are as follows:

i. It does not have any link/connection/nexus with any of the other entities within the alleged Group and that all the trading done by it was independent of the trading done by the other entities within the alleged Group and Basmati was not acting in concert with any of them. There are no common directors between Basmati and Oudh and the management of both the entities are independent of each other; ii. Basmati continued to hold significant shareholding of the companies and therefore the conclusion in the Order that members of the alleged Group have offloaded the shares purchased by them from the sub-accounts to gullible Indian investors at inflated prices after which the share prices crashed leaving retail investors with huge losses, cannot be correct; iii. In respect of the sr. no. 16 of the table at page 3 of the Order, it was submitted that much before the investigation period, the said entities had purchased the shares of Maars Software International Limited and Avon Corporation Limited.

iv. SEBI has noted that during the period October 8, 2009 to November 27, 2009, the sub-accounts did not trade in the scrip of Asahi and that during the same period, the members of the alleged group bought 15,59,160 shares and sold 29,49,408 shares, which is 41.75% of total market volume by gross basis and that such net sales of shares by the alleged group after providing exit to FIIs has been immediate and counterparties to the alleged group are scattered clients without any concentration. It has been contended that if the allegation is correct, then during the aforesaid period (when the sub-accounts did not trade) the alleged group had no reason to trade. Even though SEBI has concluded that the members of the alleged group traded so as to give an exit opportunity to the sub-accounts, the aforementioned fact evidences that the members of the alleged group or in any event, Basmati was trading in its own right and dictated by its own trading strategy which has had nothing to do with giving any exit to the sub account and that the parties were not engaging in synchronized trading. v. It was contended that if the allegation that the purpose of trading by members of the alleged group was to give an exit opportunity to sub-accounts, there was no reason or purpose for the members of the alleged group to trade during the days when the sub-accounts were not trading.

It was further submitted that Basmati traded on 149 days during the investigation period and has traded in 2,24,67,522 shares of Asahi and contended that the very fact that Basmati extensively traded during the aforesaid period, negatives the allegation of synchronized trading or that Basmati traded so as to give exit to the sub-accounts. vi. The alleged group has purchased shares from entities (other than the sub-accounts) at the same price at which it purchased from the sub-accounts. It therefore cannot be alleged that by purchasing shares at a price higher than `1.00, the alleged group has acted in a manner to benefit the sub-accounts, as such higher price has been paid to one and all. It was the contention that if there was synchronized trading (as per SEBI’s theory), then there should have been a 100% match (or nearly thereabouts) between the parties and not just 60% and 78.59% respectively. vii. It was contended that if the trading in the shares of Avon Corporation Limited by the alleged group was sufficient or necessary to keep the scrip stable, then the price would have never fallen from `11 to `6.11 and that the fact that the price fell by more than 40% clearly reflects that market forces drive prices up or down.

It was also submitted that during the investigation period, Basmati has sold merely 9.04% and purchased merely 9.04% of the total volume of shares traded in Avon in the securities market and therefore contended that Basmati cannot be accused of market manipulation. viii. With respect to the averment that in the scrip of CAT Technologies Limited, it was contended that the very fact that the alleged group has traded 13 times the number of days the sub-accounts have traded (Basmati has traded more than 8 times the number of days the sub-accounts have traded), negatives the allegation that Basmati traded to give exit to the sub-accounts or that there was synchronized trading between these entities. Basmati had traded in the shares, even before the investigation period and therefore the same negatives the allegation that the alleged group had traded in the shares only to provide exit to the sub-accounts. ix. It was submitted that even though the shares traded between India Focus and Basmati/Oudh match, in so far as the total trading by Basmati and Sophia is concerned, it purchased only 22.49% of the total shares sold by Sophia and it had no trading with Mavi.

It was contended that if there was synchronized trading, then there should have been a 100% match between the parties and not just 22.49% (in the case of Sophia) and nil (in the case of Mavi). It is further submitted that Basmati had bought from India Focus only 7.78% of the total shares of CAT Technologies Limited sold by the sub-accounts to alleged group members and that matching of the shares sold by India Focus to Basmati is merely a coincidence. Further, the sub-accounts have sold 37,55,001 shares of CAT Technologies Limited out of which only 12,91,639 (32.48%) shares have been purchased by members of the alleged group and Basmati has purchased only 7,69,640 (20.50%) shares sold by the sub-accounts. x. It was submitted that during the investigation period, Basmati has sold merely 14.34% and purchased merely 14.98% of the total volume of shares traded in CAT Technologies Limited in the market and therefore Basmati cannot be accused of market manipulation. xi. In the scrip of IKF Technologies Limited, it was contended that the fact that the alleged group had traded almost 16 times the number of days India Focus had traded (Basmati has traded more than 5 times the number of days the sub-accounts have traded) and the same negatives the allegation that the alleged group traded to give exit to the sub-accounts or that there was synchronized trading between these entities.

In the said scrip, it was submitted that Basmati had traded even before the investigation period and contended that the same negatives the allegation that the alleged group (or at least Basmati) has traded in the shares only to provide exit to the sub-accounts. It was also submitted that during the investigation period, Basmati has sold merely 5.74% and purchased merely 9.03% of the total volume of shares traded in IKF in the market and contended that in view of the same, Basmati cannot be accused of market manipulation. xii. In the scrip of K Sera Sera Limited, the entity stated that out of 344 trading days, sub-accounts have traded only on 36 days whereas on 326 days, members of the alleged group have traded and that Basmati traded on 300 days during the investigation period and contended that the fact that the alleged group has traded more than 9 times the number of days the sub-accounts have traded (Basmati has traded more than 7 times the number of days the sub-accounts have traded), negatives the allegation that the alleged group traded to give exit to the sub-accounts or that there was synchronized trading between these entities.

It was also submitted that in so far as trading amongst members of the alleged group is concerned, more than 83% of the trading of the members of the alleged group was with third parties. It was further submitted that Basmati has traded in the shares of the said scrip even before the investigation period and therefore it was not correct to say that the alleged group has traded in the shares only to provide exit to the sub-accounts. xiii. It was submitted that Basmati (i) purchased a mere 28.32% of the total sales by India Focus, which is not a high number; (ii) purchased a mere 14.8% of the total shares sold by KII; and (iii) purchased a mere 17.13% of the total sales by Sophia and that the same evidences that Basmati did not purchase shares from the sub-accounts with a view to provide an exit to them and if the same was the case, then Basmati would have bought 100% of the shares sold by the sub-accounts. It was also submitted that Basmati has made a profit of `21,24,965/- while trading in the shares of K Sera Sera Limited and therefore the observation in the Order that profit was not the motive for trading by Basmati is incorrect. xiv.

With respect to the observation that the Group members have not bought shares from sub-accounts with a view of long term investment, it was submitted that Basmati is into the business of trading and its business strategy revolves around making thin margin gains and that it does not acquire shares to hold them as long term investments. It was also submitted that during the investigation period, Basmati has sold merely 11.14% and purchased merely 12.04% of the total volume of shares traded in K Sera in the market and in view of the same, it cannot be accused of market manipulation. xv. It was submitted that Basmati has made a profit of `12,48,053 whilst trading in Maars Software International Limited and therefore the observation in the Order that profit was not the motive for trading by Basmati (the alleged group) is incorrect. xvi. With respect to the preferential allotments made by Eltrol Limited to Oudh and Basmati in 2005 and that JMP was named in SEBI’s order dated October 5, 2005 in the matter of Eltrol Limited, Basmati submitted that it has no connection or link whatsoever with the other entities of the group and/or the sub-accounts, except that Basmati and Oudh have cross shareholdings.

It was further contended that the fact that Eltrol Limited had allotted redeemable preference shares to Basmati in 2005 does not establish that Basmati has any connection and/or link with JMP. xvii. Basmati also submitted that it had been trading in the capital market out of its own resources and/or by obtaining margin funding from its brokers and at times, facing pressure from its stock brokers who had extended margin funding, it was constrained to sell its stock of certain scrips at a loss. It also submitted that trading decisions are also largely dependent on market conditions. In view of its submissions, Basmati requested that the Order be revoked and it be permitted to deal in securities or instruments with Indian Securities as underlying. It was also requested that in the meanwhile, it should be permitted to deal with the securities of other companies (other than the identified Companies in the Order), such that Basmati is in a position to pay off its stock brokers.

4. Oudh inter alia made the following submissions in its aforesaid reply: a. The impugned order has been passed against Oudh without establishing a nexus between Oudh and the other entities against whom directions have also been issued. The impugned order does not even come to a prima facie conclusion that Oudh is connected to any of the other entities mentioned in the impugned order. Oudh does not have any alleged link/connection/nexus with any of the other entities within the alleged Group. Mr. Arun Panchariya is not a shareholder and/or a director in Oudh and that no entity or person that is either owned and/or controlled by Mr. Arun Panchariya is a shareholder and/or a director of Oudh. Oudh has no connection or link whatsoever with Mr. Arun Panchariya. b. Oudh has no connection or link whatsoever with the other entities of the alleged Group and/or the sub-accounts, except that Oudh and Basmati have cross share holdings. There are no common directors between Oudh and Basmati and the management of Oudh and that of Basmati are independent of each other. All the trading done by Oudh was independent of the trading done by the other entities within the alleged Group and Oudh was not acting in concert with any of them.

The trading pattern of Oudh is dictated by the opportunity for and/or the ability to make profits by such trades. Even after the Investigation Period, Oudh continued to hold significant shareholding of the companies. c. It had traded in a few of the Companies such as CAT, IKF, K Sera, even before the investigation period and/or before the issue of GDRs of such companies and in view of the same, the conclusion/charge that Oudh had traded only to give exit opportunities to sub-accounts in structured GDR Issues, stands completely negatived. d. In the scrip of Asahi Infrastructure Limited, with respect to the averment in paragraph 7 on page 4 of the Order, that out of 3,17,71,646 shares of the said scrip sold by the sub-accounts in 31 days, 1,97,13,709 shares (62.05% of shares sold by sub-accounts) have been sold to the members of the alleged group in 17 days, it was submitted that the same negatives the theory of SEBI that the alleged group traded so as to give an exit to the sub-accounts. It was submitted that if the said conclusion was true, then the entire shares of the said scrip sold by the sub-accounts should have been bought by the entities within the alleged group.

The above figures clearly reflect that apart from members of the alleged Group, there were several other entities which had the same outlook in respect of Asahi and hence must have bought shares from the sub-accounts.

e. Further, with respect to the averment in the Order that from September 3, 2009 till October 7, 2009, India Focus sold 50,07,561 shares of Asahi and the members of the alleged group purchased 31,57,317 shares out of which 28,09,125 shares sold by India Focus matched with the shares purchased by the alleged group, it was submitted that if the members of the Group were alleged to provide an exit opportunity to the sub-accounts, then the trading would have been carried out in such a manner that 100% of the shares sold by India Focus would have been bought by an entity/entities belonging to the alleged Group. f. With respect to the averment in the Order that during the period October 8, 2009 to November 27, 2009, the sub-accounts did not trade in the scrip, it was submitted that during the same period, the members of the alleged group bought 15,59,160 shares and sold 29,49,408 shares, which is 41.75% of total market volume by gross basis and that such net sales of shares by the alleged group after providing exit to FIIs has been immediate and counterparties to the alleged group are scattered clients without any concentration.

If conclusion of SEBI was correct, then during the aforesaid period (when the sub-accounts did not trade) the alleged group had no reason to trade. g. With respect to the averment that from November 30, 2009 till January 11, 2011, India Focus sold 2,21,68,292 shares of Asahi and the alleged group bought 2,57,67,757 shares out of which 1,40,70,537 shares matched with the alleged group (63.47% of shares sold by India Focus and 54.61% of shares purchased by the alleged group during the same period); that the price of the scrip closed at `1.00 during most of the days in this period; it was submitted firstly, that if there was synchronized trading, then there should have been a 100% match (or nearly thereabouts) between the parties and secondly, even though the alleged group was continuously purchasing shares of Asahi from October 28, 2009 to January 11, 2009, the price of the scrip fell from `1.23 to `1, the same clearly indicated that market forces were at play and that the finding that the alleged group was supporting the price (by trading) is wrong. During the investigation period, Oudh has not bought any shares of Asahi from the sub-accounts and the only sale that Oudh has done was to SV Enterprises-Oudh sold 2,00,000 shares to SV Enterprises out of a total of 5,17,260 shares, the balance whereof was sold to other entities (who were not part of the alleged group).

It was submitted that Oudh has therefore not enabled any exit to the sub-accounts At the same time, out of 5,17,260 shares, not a single share had been bought by Oudh from any sub account. It was also submitted that Oudh did not make any profit from trading in the shares of Asahi is not material at all. Entities which trade in securities are well aware of the risks and uncertainties and that as long as on an average, Oudh would make a gain out of its trading business (overall scrips), the objective would be met. h. SEBI has noted that in so far as the trading in Avon is concerned, there are 181 days when members of the Group have traded and that their total purchase is 3,76,30,478 shares and total sale is 3,77,81,778 shares which is 28.70% on gross basis of the market volume for the complete period and 34.47% of the market volume for the 181 days when group traded. In view of the same, it is evident that the total percentage of the trading done by the members of the group (in comparison to the market volume for the complete period) is not high. It was submitted further that SEBI itself has noted the fact that the number of shares sold by the alleged group is more than the number of shares purchased which evidences that before the investigation period, the alleged group has had stock of the scrips before purchase of additional shares from the sub-accounts and/or that post the purchase of shares from the sub-accounts, Oudh has purchased shares from other entities as well. i. It is the submission that SEBI has stated that during the investigation period, the sub-accounts (India Focus and KII) had traded only on 35 days whereas there are 181 days when members of the alleged group have traded.

Oudh traded on 54 days during the investigation period. The very fact that the alleged group has traded more than 5 times the days the sub-accounts have traded. (Oudh has traded more than 1.5 times the days the sub-accounts have traded) negatives the theory of SEBI that the alleged group traded to give an exit to the sub-accounts or that there was synchronized trading between these entities. During the investigation period, Oudh has sold merely 3.03% and purchased merely 3.03% of the total volume of shares traded in Avon in the market and that it cannot be accused of market manipulation. j. With respect to the averment that the volume of shares of CAT Technologies Limited on days when the alleged group and sub account have traded is nearly 3 times of the days when they have not traded, it was submitted that the very fact that the alleged group and the sub-accounts consist of at least 10 entities, the trading is bound to be high on those days when they engaged in trading. k. With respect to the statement that the sub-accounts have traded on 18 days and the members of the alleged group have traded on 233 days; that 76,99,279 shares were traded amongst the alleged group members, thus 31.47% of the trading was within the alleged group, it was submitted that Oudh traded on 30 days during the investigation period and the very fact that the alleged group has traded 13 times the number of days the sub-accounts have traded (Oudh has traded almost 2 times the number of days the sub-accounts have traded), negatives the allegation that the alleged group traded to give exit to the sub-accounts or that there was synchronized trading between these entities.

Further, in so far as trading amongst the alleged group members is concerned; more that 68% (a very significant number) of the trading of the members of the alleged group was with third parties. l. With respect to the averment in page 10 of the Order, it was submitted that the same was negative as during the relevant period, India Focus sold 2,45,000 shares out of 7,20,000 shares thus retaining the balance shares (4,75,000 shares) with itself. It was contended that if the entire purpose of India Focus acquiring GDRs, converting such GDRs into shares was to sell the same to members of the Group, then there would have been no rationale or reason for India Focus to continue to hold the balance shares in CAT. It is stated that SEBI has wrongly alleged that the shares of CAT have been purchased by the alleged group but were not held by them since they offloaded their holdings in the scrip to a large number of scattered clients and that a large portion of trading is among them which indicates that the main objective of the alleged Group is to keep trading active in the scrip and submitted that SEBI has erred in drawing a negative inference from the fact that members of the alleged group have not bought shares from the sub-accounts with a view of long term investment.

It was also submitted that the business of Oudh is to trade in shares and securities and not to acquire shares and securities to hold them as investments. m. With respect to the averment that India Focus has traded on only 11 days (members of the alleged group have traded on 170 days) and Oudh traded on 16 days during the investigation period, it was submitted that the alleged group has traded almost 16 times the number of days the sub-accounts have traded (Oudh has traded almost 1.5 times the number of days the sub-accounts have traded), negatives the observation that the alleged group traded to give exit to the sub-accounts or that there was synchronized trading between these entities. n. With respect to the averment that out of the total 7,99,05,100 shares purchased and 6,33,22,661 shares sold by the alleged group, 1,68,94,582 shares were traded among the alleged group, it was submitted that more than 75% of the trading of the members of the alleged group was with third parties and the same negative the allegation that the alleged group traded to give exit to the sub-accounts or that there was synchronized trading between these entities.

It was also submitted that the total percentage of the trading done by the members of the alleged group is not high and that the shares that have been traded between the members of the alleged group is a mere coincidence.

o. With regard to volume of shares traded in K Sera that on days when the alleged group and sub-accounts have traded; the same was nearly 5 times of the days when they have not traded, it was submitted that as the alleged group and the sub-accounts consist of at least 10 entities, the trading is bound to be high on those days they engaged in trading. It was stated that Oudh traded on 259 days during the investigation period and that out of 344 trading days, sub-accounts have traded only on 36 days and the members of the alleged Group had traded on 326 days, and submitted that the very fact that the alleged group has traded for more than 9 times the number of days the sub-accounts have traded (Oudh has traded more than 7 times the number of days the sub-accounts have traded), the same negatives the allegation that the alleged group traded to give exit to the sub-accounts or that there was synchronized trading between these entities. p. As regards the averment that there are 326 days when members of the group have traded and their total purchase is 9,93,94,656 shares and total sale is 9,83,85,183 shares which is 25.90% on gross basis of the market volume for the complete period and 26.20% of the market volume for days when group traded, it was contended that the total percentage of the trading done by the members of the group (in comparison to the market volume for the complete period) is not high. q. It was also submitted that 1,66,37,703 shares were traded between members of the alleged group (i.e.

16.82% of the shares traded by members of the alleged group are among themselves) and therefore it was evident that more than 82% of the trading of the members of the alleged group was with third parties. It was also contended that the same did not prove the allegation that the alleged group traded to give exit to the sub-accounts or that there was synchronized trading between these entities. It was stated that SEBI has alleged Oudh to have engaged in synchronized trades on the ground that Oudh, Alka and Newgen International Private Limited have a common broker (Shriram Insight Share Broker) and contended that the fact that Oudh and other entities deal and conduct its business through a common broker does not establish that Oudh has dealt in such alleged synchronized trades. r. It was submitted that Oudh had not purchased any shares of Maars Software International Limited from the sub-accounts and therefore the allegation that exit has been given to sub-accounts does not hold good at least in so far as Oudh is concerned. It was further stated in so far as trading amongst members of the alleged group is concerned, more than 70% of the trading of the members of the alleged group was with third parties and contended that it therefore be evident that the total percentage of the trading done by the members of the alleged group amongst themselves is not high and the fact that shares have been traded between the members of the alleged group is a mere coincidence.

It was submitted that as Oudh made a profit of `3,65,84 whilst trading in Maars, the observation that profit was not the motive for trading, is incorrect and unfounded. It was also submitted that Oudh has sold merely 1.54% and purchased 1.54% of the total volume of shares traded in Maars in the market and therefore it cannot be accused of market manipulation. s. As regards the averment in the Order that a company, Eltrol Limited made a preferential allotment to Oudh and Basmati in 2005 and that JMP was named is an Order of SEBI dated October 5, 2005 in the matter of Eltrol Limited, it was submitted that Oudh had no connection or link whatsoever with the other entities of the group and/or the sub-accounts, except that Oudh and Basmati have cross shareholdings. It was also submitted that the fact that Eltrol Limited had allotted redeemable preference shares to Oudh in 2005 does not establish that Oudh has any connection and/or link with JMP. t. It had been trading in the capital market out of its own resources and/or by obtaining margin funding from its brokers. At times, facing pressure from its brokers who had extended margin funding, the entity was constrained to sell its stock of certain scrips at a loss.

Further, trading decisions are also largely dependent on market conditions. It is a known fact, that securities trading involves and is dependant a great deal on market movements, chance, time of purchase/sale, method of trading, etc. Under such circumstances, it cannot be accused of indulging in synchronized trades merely on the ground that the entity had traded in the scrips under investigation in view of its outlook that such trades would benefit it. u. It was submitted that due to pending investigations, the entity is suffering huge losses continuously and being an active trader in the securities market, most of the investment positions of itself were created on margin basis with various stock brokers and till date it is paying huge amount of interest at very high rates on these positions. It was also submitted that the entity was being continuously harassed by the stock brokers for recovery of their dues. Oudh requested that it should be allowed to sell its shares to clear the outstanding dues of the stock brokers/lenders and submitted that allowing it to do so to a limited extent would not in any manner defeat the purpose of the Order.

Oudh requested that the directions against it in the Order be set-side and it should be permitted to deal in securities or instruments with Indian Securities as underlying. It also requested that it should be permitted to deal with the securities of other companies (other than the Companies) at an appropriate time, such that Oudh is in a position to pay off its brokers. During the hearing, Mr. Ankit Lohia, Advocate, representing Oudh contended that grouping the entities as a “group” was not substantiated by reasons and submitted that Oudh traded in much lesser quantities when compared to the other entities and that it had an insignificant role.

5. Alka inter alia made the following submissions, vide letter dated November 2, 2011:

a. The Order had made adverse inferences against it solely based on the trading data pertaining to the trading done by it in the shares of Avon, K Sera, IKF, Maars and CAT during the investigation period (January 1, 2009 to May 30, 2010) and that some of its trades have allegedly matched with entities belonging to “Group” and sub accounts as defined in the Order. b. Nothing has been brought on record to demonstrate that it was in any manner connected to the entities belonging to the alleged Group or the sub-accounts. It also specifically denied having any connection/linkage with any of the following entities mentioned in the Order, namely: (a) FII/ Sub accounts (India Focus, KII, Mavi, Sophia Growth) or (b) The companies, Avon, K Sera, IKF, Maars and CAT or their promoters/directors. (c) Basmati, SV, JMP, Oudh. (d) Initial subscribers (e) Euram bank except PANASIA by virtue of Mr. Arun Panchariya being its director during the relevant period who is also shown as promoter in Alka and who also happens to be the brother of Mr. Satish Panchariya (a promoter in Alka), and declared as promoter in Alka India for the said reason. c. Alka submitted that it did not have: (a) Any financial transactions with any of the entities mentioned in the order; (b) Any kind of off market transfer of shares with any of the entities mentioned in the order; (c) Any directorship in any of the entities mentioned in the order or vice versa (except Mr. Arun Panchariya who was a director of Alka India till 2001); (d) Any shareholding in any of the entities mentioned in the order or vice versa at the relevant time, except the alleged scrips in which we traded.

They are still holding the shares of KSera and CAT. (e) Never shared their office address with any of the entities mentioned in the said order. They have never authorized PanAsia to use our address. d. As regards Mr. Arun Panchariya or his entities are concerned, it was submitted that apart from the fact that Mr. Arun Panchariya is a shareholder (2.08%) in Alka and the brother of its promoter-director, Mr. Satish Panchariya, there is no other relation, linkage or connection of Alka with Mr. Arun Panchariya or his entities. It was also submitted that Mr. Arun Panchariya was a director of Alka and resigned in the year 2001. Mr. Arun Panchariya has been shown as part of Alka’s promoter group due to his relationship with its promoter Mr. Satish Panchariya, as he is covered under the definition of promoter under the applicable provisions. It was also submitted that Mr. Arun Panchariya and his entities have no role to play in the management and affairs of the Company in any manner. It had no financial transactions with Mr. Arun Panchariya and his entities and all its investment in the securities including the alleged scrips were out of its own funds.

It was further submitted that for the alleged acts of Mr. Arun Panchariya, if any, Alka must not be penalized. e. SEBI has wrongly stated that it is a shareholder of Basmati and submitted that it was not concerned with the shareholding of Oudh in Basmati and the said Order wrongly on assumption that Alka and Oudh are shareholders of Basmati, linked Oudh with Alka to draw adverse inferences against it. It was also submitted that Alka subscribed to the shares of Basmati in the year 2005 and that during April 2008, by way of a transfer deed, it had transferred its entire shareholding in Basmati to an entity, Shree Mahaganga Sugar Mills Limited. That Alka, after noting from the said order and post inspection of documents from SEBI, wrote to Basmati drawing its attention to the fact that it had sold its shareholding in Basmati long back and are no more their shareholders. It was also submitted that from the audited balance sheet of the company for the last 3 years, the shareholding in Basmati is not reflected post 2008. f. During the relevant time, it was trading in various scrips including the impugned scrips, dehors sinister intent or design, independently and in the ordinary course of business and the quantum of trading in the alleged scrips is comparable to its trading in other scrips.

The alleged matching of trades with the entities belonging to the alleged “group” entities / sub accounts on certain occasions is purely coincidental and is in no manner manipulative or fraudulent in nature. g. With regard to its trading in the impugned scrips, Alka submitted as follows: (i) Asahi – In Asahi, it had have not traded at all. (ii) Avon – In Avon, it had traded during the investigation period (January 1, 2009 to May 31, 2010) on 13 days (July 29, 2009, July 30, 2009, August 6, 2009, August 10, 2009, August 11, 2009, August 12, 2009, August 13, 2009, August 20, 2009, August 31, 2009, October 17, 2009, January 19, 2010, February 10, 2010 and February 16, 2010) out of total 344 trading days during the period of examination, which comes to only 3.78%. Its trading in the scrip during the period of examination compared to the total trading in securities comes to only 5.44%. Its total volume in the scrip comes to only 1.90% of the market volume of the scrip during the period of examination. The entity’s average daily volume in the scrip comes to only 1.90% compared to average daily volume of the scrip during the period of examination.

Its total purchase in the scrip is 1.06% of the market volume in the scrip, and total sale is 1.06% of the market volume in the scrip during the period of examination. It submitted that it executed trades in the scrip only when the scrip was highly liquid and that none of its trades matched with the trades of sub accounts in the scrip. That there is no nexus between its trading in the scrip with the trading done by other entities and also the GDR issue of the said company. That it was not counterparties to the trades of FII in the scrip. It further submitted that it traded only on 13 days during the entire period of examination which spans for 17 months (which if calculated comes to an average of 3 trades for every passage of 4 months) and its total purchase is 1391958 shares and total sale is 1391958 shares which is only 5.44% on net basis of the market volume for the investigation period. It further submitted that its trades in the scrip is much less (5.44%) as compared to its trading in other scrips (94.56%) of its total trades during the same period. (iii) CAT: In CAT, it had traded only on 6 days out of total 344 trading days during the period of examination, which comes to only 1.74% and that it did not trade in the scrip on 338 days i.e. 98.26% of the total trading days during the period of examination.

The entity’s trading in the scrip during the period of examination compared to our total trading in securities comes to only 1.45% and its total volume in the scrip comes to only 0.85% of the market volume of the scrip during the period of examination. Its average daily volume in the scrip comes to only 0.85% compared to average daily volume of the scrip during the period of examination. Average daily market volume in the scrip when Alka had not traded is 247307 and that when Alka had traded is 245076 which are similar. Its total purchase in the scrip is 0.76% of the market volume in the scrip, and total sale is 0.12% of the market volume during the period of examination. Its trades matching with sub-accounts is merely a result of market matching mechanism and that as on date, the entity was holding 7,83,378 shares in CAT. The entity submitted that it started trading in the scrip on January 19, 2009 and traded on 6 days (i.e. January 19, 2009, March 20, 2009, June 4, 2009, August 10, 2009, August 20, 2009, November 17, 2009), and its last trade in the scrip was on November 17, 2009. It submitted that its total purchase in the scrip during this period was 637920 shares and the entity continues to hold 783378 shares in the scrip as a long term investment.

It is submitted that some of the shares purchased by it matching with the sale by sub-accounts is a result of the screen based trade matching mechanism of the stock exchange therefore the same cannot be taken as ground to draw adverse inference against it. It further stated that it had traded on 6 days and its total purchase was 637920 shares with a total sale of 104542 shares, which is only 0.85% on net basis of the market volume for the investigation period. It also submitted that its trades in the scrip were (1.45%) much less than its trades in other scrips (98.55%) of our total trades during the same period. The entity stated that it had also traded in the scrip during period other than the investigation period. The entity submitted that it was still holding 783378 shares in the scrip which established that its investments were for long terms and that its trading in the scrips were independent from the others and it was never part of the alleged group. With regard to its trading in the shares and the purchase of 3,00,000 shares in the scrip from Sophia, it was submitted that the trades were done on screen based mechanism of the exchange and we were never aware of the counterparties.

(iv) IKF: In IKF, the entity had traded only on 5 days (August 27, 28, 31, 2009, September 1, 7, 2009), out of total 344 trading days during the period of examination, which comes to only 1.45% and that it had not at all traded in the scrip on 339 days i.e. 98.55% of the total trading days during the period of examination. Its trading in the scrip during the period of examination compared to its total trading in securities comes to only 8.49%. The entity’s total volume in the scrip comes to only 0.91% of the market volume of the scrip during the period of examination. The average daily market volume in the scrip when Alka had not traded is 9,43,237 and that when Alka had traded is 9,38,021 which is almost the same. The entity’s total purchase in the scrip is 0.67% of the market volume in the scrip, and total sale is 0.67% of the market volume during the period of examination. It further submitted that the trades matching with the sub-accounts are merely a result of market matching mechanism. It was submitted it was apparent from the price volume data that it had traded in the scrip only when the volume was substantially high.

It submitted that its trades were neither pre-arranged nor synchronized in nature and had no link or connection with the alleged entities/group or the trades of the sub-accounts. According to the entity, its total purchase is 2174298 shares and total sale is 2174298 shares which was only 0.91% on net basis of the market volume for the investigation period. It further stated that its trades in the scrip (0.91%) was much less than its trading in other scrips (99.09%) out of its total trades during the same period. It was further submitted that a substantial portion of its purchases are still held by it. (v) K Sera: In K Sera, the entity has traded only on 35 days out of total 344 trading days during the period of examination, which comes to only 10.17% and that it had not traded in the scrip on 309 days of the total trading days during the period of examination, which comes to only 89.83%. On all the days when the entity had traded, the volumes in the scrip were substantially high. The entity’s trading in the scrip during the period of examination compared to its total trading in securities comes to only 17.29%.

Its total volume in the scrip comes to only 1.19% of the market volume of the scrip during the period of examination. The entity’s total purchase in the scrip is 0.56% of the market volume in the scrip, and our total sale is 0.69% of the market volume during the period of examination. None of its trades matched with the trades of sub accounts in the scrip and that as on date it is holding 20,00,000 shares of K Sera. It denied the averment that it had mainly traded during the period July 2, 2009 to February 18, 2010 and submitted that it had similar trading prior to July 2, 2009 also. It further submitted that its trades did not match with the trades of the sub-accounts and therefore it cannot be alleged to have given exit to the sub-accounts. The entity stated that it had in total purchased 3947776 shares and made total sale is 4902842 shares which constituted only 1.19% on net basis of the market volume for the investigation period. It further submitted that its trades in the scrip (1.19% during the period of examination) were much less than its trades in other scrips (98.81%) out of its total trade during the same period.

The entity contended that no adverse inference can be drawn against it on the basis that it had purchased and sold shares since the same were done in the ordinary course. As regards the alleged off-market transfers in the scrip, the entity contended that the same were done by the stock broker towards internal adjustments consequent to margin financing. Admittedly, substantial portion of our trades have been picked up by others in the market. It was also contended that shares were purchased by others as well and it is not the case that all the trades have been picked up by group entities/sub accounts. Further, according to the entity, it is not the case that its trades were synchronized or matching trades with group entities / sub accounts. (vi) Maars: In Maars, the entity has traded only on 13 days out of total 344 trading days during the period of examination, which comes to only 3.78%. Its trading in the scrip during the period of examination compared to its total trading in securities comes to only 7.32%. The entity’s total volume in the scrip comes to only 2.65% of the market volume of the scrip during the period of examination.

Its average daily volume in the scrip comes to only 2.65% compared to average daily volume of the scrip during the period of examination. The average daily market volume in the scrip when Alka had not traded is 3,95,785 and that when Alka had traded is 3,91,214 which are similar. Its total purchase in the scrip is 0.57% of the market volume in the scrip, and total sale is 2.21% of the market volume during the period of examination. It was submitted that the entity’s trades matching with those of the sub-accounts is a result of market matching mechanism. According to the entity, it had traded on 13 days and its total purchase is 7,70,500 shares and total sale was 29,77,866 shares which is only 2.65% on net basis of the market volume for the investigation period. As regards the allegation of synchronised trading, the entity denied the same and submitted that there is a time gap of more than 27 minutes in the order time and counter party order time (as recorded in the table at page 22 of the said order). h. As regards the alleged sharing of the entity’s address by Pan Asia, it was submitted that it never authorized Pan Asia to use its address.

It further contended that the fact of unauthorized use of its address, if any, by Pan Asia, a foreign company and the relationship of Mr. Arun Panchariya, with its promoter-director Mr. Satish Panchariya, cannot be used to draw any adverse inference against it. With respect to its connection with Mr. Arun Panchariya, it submitted that the shareholding of Mr. Arun Panchariya in Alka is disclosed as 2.08% and that Mr. Arun Panchariya has been disclosed as promoter in Alka as he is covered under the definition of ‘promoter’ by virtue of him being the brother of Mr. Satish Panchariya, the promoter director of Alka since its inception.

The said entity was represented in the hearing held on November 29, 2011 by Mr. Vinay Chauhan, Advocate, who made submissions.

6. I have considered the submissions of the said entities. In sum and substance, they submitted that: a. there was no connection with other entities or with Mr. Arun Panchariya or with entities connected to him; b. except for cross shareholding between Oudh and Basmati, there was no other relationship; c. they traded in the shares of certain scrips identified in the Order even before the investigation period and/or before the GDR issuances and therefore the charge that they had traded in such shares to give exit opportunities to the sub-accounts is not correct; d. The entities (of the Group) purchased the shares of Maars and Avon even before the investigation period and therefore it cannot be said that their purchases were only to provide exit opportunities to the sub-accounts; e. The entire quantity (100%) of the shares sold by the sub-accounts had not been picked up by the alleged Group. Therefore, it would not be correct to allege that the Group entities provided exit opportunities to the sub-accounts. Further, a high percentage of shares was picked up by third parties also in respect of certain identified scrips; f. During certain periods (within the investigation period), when the sub-accounts did not trade, the Group entities had traded in considerable quantities. Therefore, if the allegation that the Group entities had only brought to provide exit opportunity to the sub-accounts is correct then the Group entities had no reason to trade when the sub-accounts were not trading during the period or on certain days; g. Profits were made while trading and therefore the observation in the Order that profit was not the motive for trading by the entities (Basmati and Oudh) is incorrect; h. They purchased and sold small quantities which cannot manipulate the market; and i. Entities (of the Group) have traded in the scrips on many times the number of days when the sub-accounts have traded.

Further, the submissions of Alka can be summarised as follows:

a. There was no connection with the entities of the alleged Group or the sub-accounts; b. Mr. Arun Panchariya was its director and had resigned in 2001 and was shown in its promoter category as he was the brother of its promoter Mr. Satish Panchariya. Mr. Arun Panchariya had no role to play in the management and the investment decisions of Alka; c. The alleged matching of trades with entities belonging to the Group and sub-accounts was purely accidental; d. Its trades (volumes) were less in the identified scrips when compared to its total trading in securities; e. It still continues to hold shares of certain identified scrips (CAT, K Sera) f. Its trades in the identified scrips were done only on a few days; g. Substantial portion of shares sold by it have been picked by others in the market; h. It never authorised Pan Asia to use its address; and i. Merely because Alka traded in few Indian companies who had at some point in time availed professional services of Pan Asia Advisors Limited (Pan Asia) for issue of GDRs, cannot be a factor for penalising Alka.

7. This is a case where SEBI was of the prima facie view that certain companies that have financials that may not readily attract investors to subscribe to their large GDR issues had in fact issued GDRs which were substantially larger than the total equity of such companies prior to the GDR issues and the said GDRs which were in the range of 17.75% to 78.49% of the issued size, were converted into equity shares. It was also observed that the shares of the identified seven companies in the Order were generally less-liquid before the GDR were issued when compared to the period post such GDR issuance. It was further observed from the GDR cancellation data that India Focus & KII had converted their GDRs in Asahi and Avon; India Focus, KII and Sophia Growth amongst others converted their GDRs in K Sera; India Focus, KII, Sophia Growth and Mavi amongst others have converted their GDRs in IKF; Mavi, India Focus and KII amongst others have converted their GDRs in CAT; and Sophia Growth, India Focus, KII and Mavi converted their GDRs in Maars. The details of the quantities of GDRs that were cancelled / converted and the name of the scrips were given in the table at pages 29 and 30 of the Order.

Pursuant to the conversion, the entities/sub-accounts started to sell the same in the Indian stock exchanges. The Order had observed with respect to the trading of Group members like Basmati, SV, Alka, JMP and Oudh, that their buy trades were matching on a consistent basis with the sell trades of the sub-accounts. The Order also observed that the very high percentage of trades of sub-accounts matching with the Group entities as counterparties across different companies raised a suspicion of a possible pre-arrangement between the Group and the sub-accounts due to the fact that most of the companies examined were illiquid companies and that it would be difficult for the sub-accounts to sell their holdings without experiencing major price fall. The Order had further observed that the sub-accounts and the aforesaid Indian clients (trading entities) were the major contributors to the volumes of the select scrips dealt with in the Order. I further note that the Order mentioned the examination of the trading by the sub-accounts and the Group entities for the period January 1, 2009 and May 31, 2010 (the examination period).

Of the shares of Asahi sold by KII and India Focus, Basmati had purchased a total of 1,24,02,409 shares (7,50,755 shares from KII and 1,16,51,654 shares from India Focus). In respect of shares of Asahi Infrastructure Limited sold by Basmati, it was found that the buying entities were Basmati itself and SV, who are alleged to be the entities of the Group. When India Focus and KII were selling shares of Avon, it was found that Basmati and Oudh along with SV were purchasing the shares which were sold by the said sub-accounts. Further, for the shares sold by Alka, Oudh and Basmati (with JMP and SV), the major buying entities were found to be Alka, Basmati, JMP, Oudh and SV. In CAT, the sub-accounts, India

Focus, Sophia Growth and Mavi were selling shares after cancellation of GDRs. Here the buying entities of the alleged Group were Alka, Basmati and Oudh. The total sell quantity (of 2,45,000 shares) of India Focus was purchased by Basmati and Oudh. Further, when the entities, Alka, JMP, SV, Basmati and Oudh were selling shares of CAT, the buying entities of considerable quantities were none other than the Group entities. In the matter of IKF, India Focus had sold 1,96,07,456 shares of which 1,48,35,662 shares were purchased by Alka, Basmati, JMP, Oudh and SV. It is to be noted that almost 76% of the shares sold by India Focus had been purchased by the Group entities. Further, when the entities of the Group had sold the shares, the counterparties for substantial shares were none other than the Group entities. In K Sera, the sub-accounts, India Focus sold 13545000 shares; KII sold 1,17,81,430 shares; and Sophia Growth sold 37,95,000 shares, of which substantial quantities were purchased by the Group entities including Basmati and Oudh, as mentioned in the table in page 19 of the Order. In this scrip also, when the entities, Alka, Oudh and Basmati (including others of the alleged Group) sold share, the counterparties for a substantial portion were the Group entities. While trading in Maars, the sub-accounts, India Focus, Mavi and Sophia Growth sold a total of 1,52,18,242 shares. Of the shares sold by Mavi, Alka, Basmati including JMP and SV purchased 97% of the quantity sold. In this scrip also, when the Group entities (including Alka, Basmati and Oudh) sold shares, considerable quantities were purchased by the Group entities including Alka, Basmati and Oudh. Thus, from the said pattern of selling by the sub-accounts, purchase of substantial quantities of such shares sold by the entities of the Group and the counterparties being the Group entities an inference was drawn in the Order that the Group entities were successful in buying large chunks of shares from the sub-accounts and then disposing them off in the securities markets and that the Group entities have maintained volumes and have not held on to the shares. The Order had mentioned the role of Mr. Arun Panchariya and Pan Asia, on the basis of the preliminary findings made in the investigation being done in the matter.

8. The Order has inter alia observed that the various aspects of the GDR issues like, the large size of the issue vis-à-vis existing size of the issuing company, un-impressive financials of the company, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of Foreign Institutional Investors (FIIs)II/Sub- Accounts, sale of shares pursuant to cancellation of GDRs in Indian stock exchanges and the majority of which was purchased by a constant group of clients and further off-loading by them point towards an elaborate scheme to manipulate the market. Further, I note inter alia below the prima facie findings, in so far as Basmati, Alka and Oudh are concerned:

a. Basmati has been observed to be a major counterparty to the trades of Sub- Accounts in the six scrips examined. The percentage of shares sold by Sub- Accounts to Basmati on BSE, compared to their total sell in a particular scrip ranges from 20.50% (in Cat) to 39.04% (in Asahi). Basmati has also purchased 4,328,355 shares of K Sera from India Focus on NSE which is 32.14% of shares of KSera sold by India Focus on NSE. Out of the total trading of Basmati across the exchanges in all the scrips, 37.99% is in the six scrips examined and described in this order. As explained in the Interim Order, Basmati has done synchronised trades with India Focus in CAT and IKF. Basmati is also observed to be doing synchronised trades with JMP and SV in IKF. Synchronised trades are also observed between Mavi and Basmati in the scrip of Maars. b. Oudh is another major counterparty to the trades of Sub-Accounts. The quantum of shares it has purchased from Sub-Accounts as a percentage of total shares sold by Sub-Accounts is 3.99% to 19.79% in four scrips where it is observed as counterparty. Out of the total trading of Oudh across the exchanges in all the scrips, 29.47% is in the six scrips examined.

Oudh is also observed to be entering into synchronised trades with India focus in CAT and IKF. As discussed earlier, connection exists between Oudh and Basmati and Alka as also with India Focus. Therefore, prima facie the trading between Oudh and other Group members and India Focus was done in an artificial manner with prior information of the orders being put by others. c. As explained in the narratives on trading in these six scrips, there were several instances where Basmati, Oudh, Alka have done synchronised trading with one another. d. Alka, another member of the group has less trading in the scrips which were examined. However, as discussed earlier the company is controlled by the family members of Mr. Arun Panchariya. As discussed earlier, Basmati, Oudh, Alka and India Focus are connected. Therefore, prima facie, the orders which matched among them were with prior knowledge of one another. e. In view of the observations made above, the dealings of the Group members in the examined scrips with other Group members and Sub-Accounts is a prima facie violation of Section 12A (a),(b) and (c) of SEBI 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. f. From the data available, it appears that Mr Arun Panchariya is a common link between Company and the initial subscribers to GDRs and for the purchase of GDRs by Sub-Accounts as well as sell to their majority counterparties in the domestic market.

India Focus is a Sub-Account managed by him and observed to be most active in converting GDRs managed by Pan Asia and selling them in Indian markets. Further, prima facie, Group members acting as major counterparties to sell orders of India Focus are also connected to Mr. Arun Panchariya. 9. I also note that the volumes of the scrips had increased significantly after the conversion of GDRs into equity shares and the subsequent sale in the stock exchanges. The details of the same were provided in a table in the Order at page 27. Further substantial quantities of the GDRs (approximately 18% to 79%) issued by the identified companies were converted into equity shares. The preliminary investigation has observed that a repetitive pattern emerged as the same set of Sub-Accounts sold most of their holdings to the same set of counterparties, most of the GDRs being issued during the year 2009, the same bank (Euram Bank) being utilised to deposit the proceeds of the GDRs and the GDR issue being managed by Pan Asia. Further, Mr. Arun Panchariya was found to be the founder/owner of Pan Asia. The SEBI preliminary investigation has found connections between the entities and that most of them were prima facie found to be connected to Mr. Arun Panchariya and his brother Mr. Satish Panchariya.

The Order had mentioned that Mr. Arun Panchariya was a director and promoter of Alka. In almost all the scrips, a major portion of the shares sold by the Sub- Accounts have been bought by the Group entities including Alka, Basmati and Oudh. The very high percentage of the trades of the sub-accounts matching with the Group entities as counterparties across various companies identified in the Order, prima facie suggested a pre-arrangement between the Group and the sub-accounts. Further, the trades of the Sub-Accounts and the Group entities were found to have contributed substantially to the volumes of such scrips. I also note the following observation from the Order “14. The inference that can be drawn from the trading of Group vis-à-vis FII is that the Group entities have been successful in buying large chunks of shares from the Sub-Accounts and then disposing it off in the markets. Group have maintained volumes in the market but not held on to the shares of companies examined, therefore it is clear that the Group entities have not bought the shares from Sub-Accounts with a view of long term investment.

The buyers to the shares sold by Group are either Group members or in majority are scattered investors. Prima facie overall trading by these suspected entities have given a false impression to the market of high volume probably done so in order to keep genuine and unsuspecting investors interested in the scrip over the period of activity before the Group finally off-loaded shares……”

10. The entities have contended that there was no link between themselves and the others in the alleged Group or with the sub-accounts. In this regard, I find that in a matter involving a group of entities alleged to have done a particular act as alleged in the Order, the connections may not be apparent. The entities expect SEBI to bring on record, any agreement amongst them and the others, on record as the same may not be available. Therefore, in such circumstances, the factors like common addresses, shareholding and cross shareholding, trading pattern and the like are important factors which enable SEBI to arrive at a prima facie finding that the entities are acting together in concert. Further, if such factors suggest any preponderance of probability of an entity being involved in the alleged malafide acts, then SEBI would decide as to whether to issue ex-parte directions or not against such entity. It has also been contended that the entire quantity (100%) of shares sold by the sub-accounts had not been purchased by the alleged Group and therefore it would not be correct to allege that the Group entities provided exit opportunities to the sub-accounts. I have given a serious thought to the said submissions which do not find much merit. It may not be possible for the entities to match their trades 100% at all the times, because third parties may at times pick up the shares sold by one set of related entities. The same could be the case here also. With respect to the submission that trading in the shares of the select scrips identified in the Order even before the investigation period and/or before the GDR issuances and therefore the charge that the entities had traded in such shares to give exit opportunities to the sub-accounts is not correct, I am of the view that it could be possible that an entity had traded in a scrip prior to and post the investigation period and that it could have, being part of a well laid out plan, given exit opportunities to the selling sub-accounts. However, the said finding in the Order against the entities is only prima facie made on the basis of preliminary findings which need to be ratified by the findings of the investigation when complete.

11. Based on the pattern of trading by the sub-accounts and the Group entities especially Alka, Oudh and Basmati and the Group’s trading with the entities of the same group, as outlined in the Order, and the facts that Alka and Oudh were the shareholders in Basmati and the alleged connection of Mr. Arun Panchariya with Alka and the prima facie findings of the said examination which pointed out to the various aspects of the GDR issues like the large size of the issue vis-à-vis the existing size of the 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 and a major portion being bought by a constant group of clients, the trading amongst the said clients and subsequent off-loading by them and the facts and circumstances of the case, the entire alleged schema at this preliminary stage, when seen in totality, does not convince me to vacate the directions issued against Alka, Basmati and Oudh. At this stage, the findings of the preliminary investigation against the entities, Alka, Basmati and Oudh suggest a preponderance of probability that they may be part of the alleged manipulation.

However, the same would be confirmed or reversed by the final findings of the investigation that is in progress in the matter. The observations made above and the facts and circumstances of the matter at this stage, therefore persuades me to confirm the directions issued vide the Order against Basmati, Oudh and Alka. Having taken such a view, I would also like to reiterate that in an Order which is issued after a post-decisional hearing, SEBI would not judge a case on its merits but considers whether any apparent error or a case of mistaken identity has happened while passing the interim ex-parte order. The order would need to see whether the interest of a person is prejudiced or affected on wrong facts or apparent mistake on the face of it and not to make any observations on the merits of the case as the investigation into the matter is underway. Since the investigation in the matter is in progress, the same would consider the submissions/contentions and documents furnished by the aforesaid three entities and arrive at conclusions as to their involvement in the manipulation. The case against Basmati, Alka and Oudh would be reviewed on completion of the investigation and appropriate course of proceedings would be taken, as deemed fit, in accordance with law.

Having arrived at such a view, I find that Alka has submitted that it is suffering huge loss as a result of erosion of its portfolio. It had submitted the details of the same. According to the entity, the value of its portfolio as on September 2011 was `11,03,04,283/- which has reduced to `6,75,98,643/- as on November 2011. The entity has submitted that a chart presenting its portfolio valuation as on the day of passing of the Order and as on November 25, 2011 is annexed to its reply. It also submitted that it was already out of the markets which lead to huge losses. Oudh has also submitted that it is also suffering losses continuously and that being an active trader in the securities market, most of its investment positions were created on margin basis with various stock brokers and that till date it is paying huge amount of interest at very high rates on those positions. It was also submitted that Oudh is continuously being harassed by those stock brokers for recovery of their dues. In view of the same, Oudh requested that it should be allowed to sell its shares to clear the outstanding dues of the brokers/lenders.

It was also submitted that allowing it to sell its holding to a limited extent would not in any manner defeat the purpose of the Order. Similar submissions were made on behalf of Basmati also. I have considered these submissions. The portfolio of securities of the entities could reduce in their value because of the falling markets. Further, the demands of the stock brokers and the mounting interest overheads, as submitted by the entities, could cause distress to them. Since the Order is an interim 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 Basmati, Oudh and Alka be modified to a limited extent to take care of such submissions.

12. In this regard, I note that in an appeal [Appeal No. 193 of 2011-India Focus Cardinal Fund vs. SEBI], the Hon’ble SAT had allowed India Focus to sell all the securities held by it (as enlisted in Exhibits G and J to the appeal) and the sale proceeds were directed to be deposited in a fixed deposit with ICICI Bank Limited earning interest. Hon’ble SAT also directed that India Focus shall not be allowed to withdraw monies from that account including interest without the prior permission of SEBI and that in case it wants to utilize any or whole of the sale proceeds, it shall seek the permission of SEBI. The direction regarding sale of securities has been given by the Hon’ble SAT in view of falling markets to avoid further erosion in the value of the portfolio held by India Focus. I find that a similar direction can be issued in this case also.

13. 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 Basmati Securities Private Limited, Oudh Finance and Investment Private Limited and Alka India Limited to the limited extent of allowing them to sell their securities held in their dematerialised accounts. They shall deposit the sale proceeds, in case of any sale, in a fixed deposit with any nationalised bank. The aforesaid entities shall not be allowed to withdraw monies including the interest accrued thereon, if any, from the fixed deposits without prior permission from the Securities and Exchange Board of India. If the entities intent to utilise any or whole of the sale proceeds including the accrued interest, if any, they shall seek specific permission of the Securities and Exchange Board of India citing reasons for making such a request.

14. The aforesaid directions would be in force till further directions.

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: APRIL 25, 2012