Order against Keynote Capitals Ltd. in the matter of Pyramid Saimira Theatre Ltd

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI), vide an ad interim ex-parte Order dated April 23, 2009 (hereinafter referred to as the Order) had issued certain directions against various persons and entities (as mentioned therein) in the matter of Pyramid Saimira Theatre Limited (hereinafter referred to as PSTL). Keynote Capitals Limited (hereinafter referred to as Keynote) was one such entity which was prohibited in terms of the Order, from giving any trade recommendations in respect of companies listed in any of the recognized stock exchanges, till further directions. The said direction was issued against Keynote, as Keynote was alleged to have made non-genuine recommendations and the related valuation of the PSTL scrip, were intended to facilitate fraudulent transactions in shares of PSTL at an artificially inflated price. The said action of Keynote was viewed as a breach of professional and ethical standards, besides misleading unsuspecting investors in the securities market. Pursuant to the Order, Keynote vide letter dated May 21, 2009 filed its objections. Subsequently, an opportunity for personal hearing was also granted to Keynote on July 2, 2009, when Mr. Somasekhar Sunderasan, Advocate appeared on its behalf and made submissions. Mr. Suraj Saraogi, Mr. Devin Joshi and Mr. Nitin Khandkar, officials of Keynote were also present during the hearing. Subsequent to the hearing, Keynote vide letter dated July 16, 2009 had also furnished a list of research reports issued by it with a ‘BUY’ recommendation of various companies and the names of the media sector companies researched by it.

2. I have considered the reply dated May 21, 2009 filed by Keynote, the oral submissions made by Mr. Somasekhar Sundaresan, the learned advocate on its behalf, the letter dated July 16, 2009 from Keynote and other material available on record. In the facts and circumstances, the limited issue for consideration at this stage is whether based on the available materials on record and after considering the submissions made by Keynote, the directions issued by SEBI vide the Order need to be continued, revoked or modified in any manner, in so far as it relates to Keynote. The Order had prohibited Keynote from giving any trade recommendations in respect of companies listed in any of the recognized stock exchanges, till further directions. The circumstances which led to the passing of the Order had been mentioned in detail therein. The investigation in the matter of PSTL, prima facie revealed the operation of a widely distributed network of persons/entities who had joined hands in breaching market integrity by manipulating the shares of PSTL, forging a letter purported to be issued by SEBI to Mr. P.S.

Saminathan (promoter of PSTL), publicizing its contents and the manipulators taking benefit of the artificial price rise caused by the said letter and selling off their substantial stake in the market, to their advantage and to the detriment of the unsuspecting investors. There were other persons/entities who appeared to have played their role in various capacities such as publicizing the contents of the forged SEBI letter, routing funds through various layers, offloading substantial shares at an artificial inflated price on December 22, 2008 etc. From the findings of the preliminary investigation, it is noted that Mr. P.S.Saminathan (Chairman and Managing Director of PSTL) had purchased 13,70,000 equity shares of the company, representing 4.845% of the paid-up capital of PSTL from Mr. Nirmal Kotecha (belonging to the Promoters Group) through the stock broker, Keynote in the form of a cross deal. It is seen that, though the transaction was executed on June 20, 2008 on BSE, the settlement by delivery of shares was done only on July 24, 2008 by Keynote i.e. after more than one month from the date of the transaction.

The trade was executed at a price of Rs.250/- per share and thus the total value of the said sale was Rs.34.25 crore. Mr. Nirmal Kotecha had requested Keynote to transfer the credit of Rs.34 crore lying in his trading account with Keynote on account of sale of shares on June 20, 2008 to the account of Mr. P.S. Saminathan by debiting his account with Rs.34 crore, as per his mutual understanding with Mr. P.S. Saminathan. As per the client ledger provided by Keynote, the money was not actually received in Mr. Nirmal Kotecha’s account and only a ledger entry was passed in the books for transferring an amount of Rs.33,99,04,292.28/-, which was the credit lying in Mr. Nirmal Kotecha’s account after adjusting the debit accumulated in his account of Rs.1,57,837.24/-. It is seen that Mr. Nirmal Kotecha gave a post dated cheque dated December 2, 2008 for Rs.25,95,707.26/- to Keynote and requested it to credit the same to the account of Mr. P.S. Saminathan with Keynote and also requested that 13,70,000 shares be transferred to the demat account of Mr. P.S. Saminathan. The balance amount was also paid by Mr. P.S.

Saminathan on July 24, 2008. I observe that there was no receipt of funds by Mr. Nirmal Kotecha from Mr. P.S. Saminathan on the date of the transaction and that on the basis of the letter from Mr. Nirmal Kotecha, Keynote has only made book entries. Further, the shares were also not exchanged on the pay-out date.

3. The allegation against Keynote in the Order was that its recommendations and the related valuation of the PSTL scrip were not genuine and that the same were intended to facilitate fraudulent transactions in shares of PSTL at an artificially inflated price. The said action of Keynote was viewed as a breach of professional and ethical standards, besides misleading unsuspecting investors in the securities market. As stated in the Order, the research report dated February 05, 2008 of Keynote had made a “buy" recommendation on PSTL with a 13 month target price of Rs.1,074/-, when the market price was only around Rs.408/- (average price on NSE) during the said period. However, in contrast to the same, the research reports of other stock brokers had recommended a buy price in the range of Rs.400/- to Rs.600/-. The prices recommended by certain other stock brokers in their reports are as follows:

a. Anand Rathi Securities Limited had recommended a target price of Rs.575/- as on January 30, 2008, when the then prevailing market price was around Rs. 350/- (average price on NSE). b. Religare Securities Limited had recommended a target price of Rs.557/- as on April 21, 2008, when the prevailing market price was around Rs. 353/- (average price on NSE). c. Goldman Sachs Limited had recommended a target price of Rs.499/- as on May 29, 2008, when the prevailing market price was around Rs. 353/- (average price on NSE). d. Religare Securities Limited had recommended a target price of Rs.480/- as on July 7, 2008, when the market price was around Rs. 177/- (average price on NSE). In view of the same, it has been alleged that Keynote had issued non-genuine recommendations in its research reports to facilitate manipulation in the shares of PSTL during the relevant period.

4. In respect of the charges, Keynote had submitted that it had not traded in a single share of PSTL and that even the trading done by its clients were in negligible quantities. It contended that the research report in respect of PSTL, published by it, was not an isolated case of publishing such reports and that it had from time to time covered over 300 companies under their research and had a clear basis for justifying the contents of the research published by it in every single case. It further submitted that merely because an upward price manipulation is discovered in relation to transactions in one stock, every ‘buy’ recommendation of the stock cannot be presumed to have been a deliberate collusion in the manipulation or that a downward price manipulation being discovered, every ‘sell’ recommendation cannot be regarded as part of the conspiracy of manipulation. With respect to the allegations as contained in paragraph 58 of the Order, Keynote stated that the same was without any justification other than pointing out the earlier instances of its associates assisting PSTL in its corporate actions.

Keynote contended that the investigation failed to appreciate that the alleged research report issued on February 5, 2008 was a “Results Update” and not an initial report and that it was in the said Update that it had retained the price target. According to Keynote, the initial research report dated December 12, 2007 was issued almost one year prior to the investigation period and that SEBI ought to have considered the market scenario around the period when the same was issued. It further contended that, merely because an affiliate had been the lead manager of the Initial Public Offer of PSTL in December 2006, the research report issued by Keynote in December 2007 and the updates thereto cannot be regarded as part and parcel of the price manipulation. According to Keynote, the preparation of the research report involves a complex and systematic process after a detailed study of every factor influencing the price of a company and that the research is a systematic discipline which takes into account all the social and economic factors that influence the market, and refuted the allegation that the research report was not genuine.

As regards its reports on PSTL, Keynote stated that the same was prepared based on concrete grounds on the basis of information available to it and after a detailed analysis by its team. It further submitted that the initial report dated December 12, 2007 contained a disclaimer clause which stated that it may have broking or investment banking relationship with PSTL. Keynote further stated that there were no malafide intentions on its part in issuing the research report and contended that, had its intentions been to facilitate fraud, it would have never reduced their earnings estimates and issued downward price revision. They also contended that all these events occurred much before the investigation period and also prior to the dates when alleged artificial trades were being executed as contained in the interim order. Keynote submitted that after the IPO of PSTL, many stock brokers had issued research reports and updates. Keynote further submitted that the target price of Rs.1074/- was arrived on the basis of a detailed research and analysis.

5. In respect of the averment in the Order that that Keynote’s research team had not published any other media/ entertainment industry sector report giving target/recommended price since November 2004, the learned advocate had submitted during the hearing that in the past, Keynote had released research reports in respect of companies in the media sector also. However, the same has to be examined in detail in the on-going investigation which is in the advanced stage. Having considered the submissions of Keynote, the facts and the attendant circumstances of the case do not convince me to revoke the interim direction issued against Keynote, at this stage. The fact that Keynote Corporate Services Limited had lead managed and had underwritten the initial public offering of PSTL during December 2006 and had also acted as its advisors for raising of 90 million dollar (Rs.369 crore) through issue of Foreign Currency Convertible Bonds (FCCBs) in the international market to fund, leads me to infer that Keynote Corporate Services Limited was associated with PSTL in its attempt to mobilise funds.

Keynote Corporate Services Limited was also associated with PSTL in a deal to acquire Dimple Cine Advertisers. It becomes clear that Keynote Group was having good business relationship with PSTL. Besides, Mr. P.S. Saminathan and Mr. Nirmal Kotecha had traded in the shares of PSTL during the relevant period through Keynote. Keynote has valued PSTL at Rs.1074/- when the valuation of others, were in the range of Rs.400/- to Rs.600/-. Thus, there was a vast price difference between the valuation done by Keynote of the PSTL shares with the valuation done by the other stock brokers in their reports. Therefore, the aforesaid facts could lead to prima facie inference that Keynote could have exorbitantly valued the shares of PSTL to favour PSTL and its promoters. As the investigation in the present matter is in an advanced stage, it would be prudent on my part to wait till the outcome of the investigation and review the action against Keynote. The ongoing investigation shall inter alia examine the said research reports and analyse whether the target price of Rs.1,074/- was arrived at based on reasons and supporting material, and come to their conclusion.

Therefore, at this stage, I am of the considered view that it would not be appropriate to revoke the interim direction issued against Keynote vide the Order, till further orders.

6. 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, 11B and 11(4) thereof, hereby confirm the directions issued against Keynote Capitals Limited, vide the ex-parte interim Order dated April 23, 2009.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: JULY 6, 2010