Order againt Mahendra Mittal & Pooja Mittal in the matter of Pine Animation Ltd

1. Pursuant to detection of a huge rise in the traded volume and price of the shares of Pine Animation Limited {formerly known as Four K Animation Limited and hereinafter referred to as "Pine"} on Bombay Stock Exchange Limited ("BSE") during the period from May 22, 2013 to January 30, 2015 (hereinafter referred to as "Examination Period"), Securities and Exchange Board of India ("SEBI") undertook a preliminary inquiry into the dealings in the said scrip. 2. Upon preliminary inquiry, it was prima facie observed that Pine and persons in charge of its affairs created a facade of preferential issue of equity shares of around ₹24.7 crore in order to provide fictitious long term capital gains ("LTCG") to Pine’s preferential allotees and promoter related entities (i.e. entities to whom Pine’s promoters transferred their shares in physical form) so as to convert their unaccounted income into accounted one. It was observed that after the release of compulsory lock-in period, the preferential allotees and the promoter related entities were provided exit at a high price by the entities related/connected amongst themselves and with Pine (hereinafter referred to as "Exit Providers"). In the process Exit Providers and allotees artificially increased the volume of the scrip and misused securities market system for making illegal gains and to convert ill-gotten gains into genuine one to avail fictitious long term capital gains (LTCG”). The modus operandi used by these entities is as under: a) On December 13, 2012, Pine made a preferential allotment of 1,50,00,000 equity shares at the price of ₹ 10 per share (hereinafter referred to as the "1st preferential allotment") to 49 entities. b) Thereafter, the promoters namely, First Entertainment Pvt. Ltd. and Unique image Production Pvt. Ltd. who were holding shares in physical form, transferred their

Order in the matter of Pine Animation Limited entire holdings i.e. 9,27,400 shares to 6 entities, who in turn transferred the shares to 62 entities (the total of 68 entities, hereinafter referred to as "Promoter related entities ") during the period from December 28, 2012 to February 05, 2013. 49 of the Promoter related entities subsequently sold 54.76% of the shares received from the promoters. c) Subsequently, on March 15, 2013, Pine made another preferential allotment of 97,00,000 equity shares at the price of ₹ 10 per share (hereinafter referred to as the "2nd preferential allotment") to 48 entities who included 5 entities who were allotted shares in the 1st preferential allotment. d) In total, Pine allotted 2,47,00,000 equity shares to 92 entities. The equity shares allotted on preferential basis to aforesaid allottees were locked-in for a period of one year i.e. up to December 12, 2013 and March 14, 2014, respectively in terms of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. Thus, the shares held by 49 entities who were allotted shares in the 1st preferential allotment and shares held by 48 entities (including 5 entities who were allotted shares in the 1st preferential allotment) who were allotted shares in the 2nd preferential allotment were not tradable till December 12, 2013 and March 14, 2014, respectively. a) On May 20, 2013, the equity shares of Pine were split in the ratio 1:10 and thereafter between May 22, 2013 to June 19, 2013 ("Patch 1"), the price of the scrip increased from ₹ 472 (unadjusted and ₹ 47.2 adjusted to share split) on May 22, 2013 to ₹ 1006 (unadjusted and ₹ 100.6 adjusted to share split) on June 19, 2013 i.e. an increase by approximately 113%. b) Between June 20, 2013 and December 16, 2013, ("Patch 2") the scrip was traded only on 13 trading days and the price moved from ₹ 1006 (unadjusted and ₹ 100.6 adjusted to share split) to ₹ 910 (unadjusted and ₹ 91 adjusted to share split). c) Thereafter, there was a huge increase in the traded volume during the period December 17, 2013 to January 30, 2015 and the entities connected / related, directly or indirectly, to Pine, started providing hugely profitable exit to the preferential allotees and promoter related entities. d) Such sharp rise in price and volume of the scrip was not supported by any acceptable market factor such as fundamentals, trading history, corporate announcements, etc. but was on account of non-genuine and manipulative trading in the scrip by certain entities.

3. In this backdrop, SEBI, vide an ad interim ex-parte order dated May 08, 2015 (hereinafter referred to as “interim order”), restrained Pine along with other 177 entities, from accessing the securities market and further prohibited them from buying, selling or dealing in securities in any manner whatsoever, till further directions.

4. While the proceedings pursuant to the interim order were going on, an appeal was filed before the Hon'ble Securities Appellate Tribunal ("SAT") by Mr. Mahendra B Mittal and Ms. Pooja Mahendra Mittal (hereinafter collectively referred to as “the Noticees”) challenging the interim order. Hearing in this regard was conducted before Hon'ble SAT on April 07, 2016, May 19, 2016 and May 23, 2016 when Hon’ble SAT directed SEBI to pass an appropriate order in the matter. In terms of the directions of Hon'ble SAT, I deem it necessary to conclude these proceedings in respect of the Noticees. 5. It is noted that pursuant to the interim order, the Noticees carried out an inspection of documents on July 02, 2015 and SEBI, vide letter dated July 07, 2015, provided the documents relied upon by SEBI for passing the interim order, to the Noticees. An opportunity of personal hearing was also granted to the Noticees on August 27, 2015 when their authorized representatives appeared and made submissions on their behalf. Pursuant to the hearing, the Noticees also filed their written submissions. The replies / written submissions of the Noticees are, inter alia, as under: a. The interim order has exclusively quoted from a preliminary inquiry report available with SEBI.

This report is the only basis for the allegations levelled in the interim order. However, a copy of the said inquiry report has not been provided to the Noticees despite repeated requests and even during the inspection of documents. b. SEBI ought to have given them an opportunity of hearing or sought information from them before passing such a severe order. c. They are not any “fly by night” operators in the securities market. They have been dealing in shares since the year 1990 and dealing in shares is their only business activity. They have been investing in shares on the advice of Mr. Bal Krishan Mittal, father of Mr. Mahendra Mittal and the Mittal family is engaged in the business of trading in commodities and brokerage through its company called MBM Commodity Pvt. Ltd. Mr. Bal Krishan Mittal being a reputed individual in the securities market and the financial industry, used to receive tips from many prospective entities and intermediaries. d. The Noticees were made aware of the preferential allotment of Pine through public sources. They applied for preferential shares of Pine out of their own funds in the normal course. e. Even in the past, the Noticees had purchased many scrips in which they suffered losses.

Further, since the year 1994, they have been purchasing shares via preferential issues. This indicates that the investment by the Noticees in Pine was a part of their overall investment strategy and there was no reason for the Noticees to suspect any wrong doing therein. f. The shares of Pine were sold by them on the platform of the exchange at the prevailing market price and they were not aware of the identity of the buyer of such shares. The sale proceeds of such sale have not been shared directly or indirectly with any of the entities mentioned in the order. g. The Noticees did not contribute to the increase in the price of the scrip of Pine. There is no illegality attached anywhere in the order to the trading of the Noticees. h. The prohibition from accessing and dealing in the securities market directly or indirectly, in any manner whatsoever, till further directions, is an absolute direction, which has throttled their business and crippled their operations. i. They are regular income tax payers and during the financial year 2014-15, they have paid income tax amounting to ₹ 44.98 lakhs.

During the financial year 2014-15, they have paid taxes aggregating to ₹ 2,84,018/- in the form of STT on sale of shares of Pine alone. j. 62% of the shares sold by them were sold to parties other than the alleged exit providers. k. There is no reason as to why the directions issued against the Noticees issued vide the interim order ought to be continued. There is indeed no reason to doubt the integrity or credentials of the Noticees. There are no circumstances to indicate that their trading in the securities market would otherwise cause any disruption to or would be a cause for concern to the integrity of the market or to the interest of other investors in the market. The case of the Noticees should be seen in light of the following three criteria: a) Prima facie case of the Noticees; b) Balance of convenience; c) Irreparable harm and injury to the Noticees. l. They have no connection or relationship with any entity named in the ex-parte order or any other entity connected with Pine. m. A listed company is subject to more rigorous and compliance requirements than an unlisted company.

Implied in such circumstances is the confidence about the credentials and background of the people behind the company. The Noticees were therefore more secured about their investment in Pine in light of its status as a regulated entity. The preferential shares were allotted to them in compliance with the guidelines prescribed by SEBI after obtaining approval of the BSE and nowhere in the order is any violation of any provision of law alleged against the Noticees as preferential allotees. That is why the Noticees did not suspect any wrong doing in relation to the preferential allotment of Pine. n. Investment in a listed scrip, given a reputed regulatory framework in India, is not a bad or irrational investment decision. o. They, as regular investors are losing out on many investment opportunities which is leading to heavy losses. The investment of Noticees in Pine was less than 10% of their total portfolio value. p. In view of the above, the Noticees have requested that the debarment directions of the interim order against them may be revoked. 6. I have considered the allegations levelled against the Noticees in the interim order, their replies/written submissions and other material on record.

I note that in the instant case, the directions issued against the Noticees are interim in nature and have been issued on the basis of prima facie findings. SEBI had issued directions vide the interim order in the matter in order to protect the interests of investors in the securities market. Detailed investigation in the matter is still in progress. Thus, the issue for consideration at this stage is whether the interim directions, issued against the Noticees vide the interim order, need to be confirmed, vacated or modified in any manner, during pendency of investigation in the matter. 7. The Notices have submitted that the interim order is solely based on and has exclusively quoted from a preliminary inquiry report available with SEBI which has not been provided to them despite repeated requests. In this regard, I note that the interim order refers to a preliminary inquiry undertaken by SEBI the findings whereof have been brought out in the interim order. It is important to mention here that there is no formal “report” for the said preliminary inquiry which can be handed over to the Noticees by SEBI.

The findings of the said preliminary inquiry by SEBI have been brought out in the interim order. A detailed investigation in the matter is in progress and a formal investigation report will only be prepared after conclusion of the said investigation. It is also noted that the Noticees have carried out an inspection of documents in the matter and every document/information gathered by SEBI during the preliminary inquiry, which was relied upon by SEBI for the purpose of the interim order, was provided to the Noticees. In view of the above, I do not find any merit in the above submission of the Noticees in this regard. 8. The Noticees have contended no opportunity of hearing was provided to them and no information was sought from them by SEBI before passing the interim order. In this regard, I note that the interim order has been passed on the basis of prima facie findings observed during the preliminary examination/inquiry undertaken by SEBI. The facts, circumstances and the reasons necessitating issuance of directions by the interim order have been examined and dealt with in the said interim order.

The interim order has also been issued in the nature of a show cause notice affording the Noticees a post decisional opportunity of hearing. I also note that the power of SEBI to pass interim orders flows from sections 11 and 11B of the SEBI Act which empower SEBI to pass appropriate directions in the interests of investors or securities market, pending investigation or inquiry or on completion of such investigation or inquiry. While passing such directions, it is not always necessary for SEBI to provide the entity with an opportunity of pre-decisional hearing. The law with regard to doing away with the requirement of pre-decisional hearing in certain situations is also well settled. The following findings of the Hon'ble Supreme Court of India in the matter of Liberty Oil Mills & Others Vs Union Of India & Other (1984) 3 SCC 465 are noteworthy:- "It may not even be necessary in some situations to issue such notices but it would be sufficient but obligatory to consider any representation that may be made by the aggrieved person and that would satisfy the requirements of procedural fairness and natural justice.

There can be no tape-measure of the extent of natural justice. It may and indeed it must vary from statute to statute, situation to situation and case to case. Again, it is necessary to say that pre-decisional natural justice is not usually contemplated when the decisions taken are of an interim nature pending investigation or enquiry. Ad-interim orders may always be made ex-parte and such orders may themselves provide for an opportunity to the aggrieved party to be heard at a later stage. Even if the interim orders do not make provision for such an opportunity, an aggrieved party have, nevertheless, always the right to make appropriate representation seeking a review of the order and asking the authority to rescind or modify the order. The principles of natural justice would be satisfied if the aggrieved party is given an opportunity at the request. " 9. Thus, considering the facts and circumstances of a particular case, an ad-interim ex-parte order may be passed by SEBI in the interests of investors or the securities market. It is pertinent to note that the interim order in the present case was passed under the provisions of sections 11(1), 11(4) and 11B of the SEBI Act.

The second proviso to section 11(4) clearly provides that "Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned". Further, various Courts, while considering the aforesaid sections of the SEBI Act have also held that principles of natural justice will not be violated if an interim order is passed and a post-decisional hearing is provided to the affected entity. In this regard, the Hon'ble Bombay High Court in the matter of Anand Rathi & Others Vs. SEBI (2002) 2 Bom CR 403, has held as under: "It is thus clearly seen that pre decisional natural justice is not always necessary when ad-interim orders are made pending investigation or enquiry, unless so provided by the statute and rules of natural justice would be satisfied if the affected party is given post decisional hearing. It is not that natural justice is not attracted when the orders of suspension or like orders of interim nature are made. The distinction is that it is not always necessary to grant prior opportunity of hearing when ad-interim orders are made and principles of natural justice will be satisfied if post decisional hearing is given if demanded.

Thus, it is a settled position that while ex parte interim orders may always be made without a pre decisional opportunity or without the order itself providing for a post decisional opportunity, the principles of natural justice which are never excluded will be satisfied if a post decisional opportunity is given, if demanded."

10. Further, the Hon'ble High Court of Judicature of Rajasthan at Jaipur in the matter of M/s. Avon Realcon Pvt. Ltd. & Ors Vs. Union of India & Ors (D.B. Civil WP No. 5135/2010 Raj HC) has held that: “…Perusal of the provisions of Sections 11(4) & 11(B) shows that the Board is given powers to take few measures either pending investigation or enquiry or on its completion. The Second Proviso to Section 11, however, makes it clear that either before or after passing of the orders, intermediaries or persons concerned would be given opportunity of hearing. In the light of aforesaid, it cannot be said that there is absolute elimination of the principles of natural justice. Even if, the facts of this case are looked into, after passing the impugned order, petitioners were called upon to submit their objections within a period of 21 days. This is to provide opportunity of hearing to the petitioners before final decision is taken. Hence, in this case itself absolute elimination of principles of natural justice does not exist. The fact, however, remains as to whether post-decisional hearing can be a substitute for pre-decisional hearing.

It is a settled law that unless a statutory provision either specifically or by necessary implication excludes the application of principles of natural justice, the requirement of giving reasonable opportunity exists before an order is made. The case herein is that by statutory provision, principles of natural justice are adhered to after orders are passed. This is to achieve the object of SEBI Act. Interim orders are passed by the Court, Tribunal and Quasi Judicial Authority in given facts and circumstances of the case showing urgency or emergent situation. This cannot be said to be elimination of the principles of natural justice or if ex-parte orders are passed, then to say that objections thereupon would amount to post-decisional hearing. Second Proviso to Section 11 of the SEBI Act provides adequate safeguards for adhering to the principles of natural justice, which otherwise is a case herein also…" 11. In view of the above, I find that the interim order passed by SEBI was not in disregard of the principles of natural justice since, reasons for passing the interim order have been clearly stated in the interim order and, in accordance with the settled law, the Noticees were afforded a post-decisional opportunity to file their replies and avail personal hearing.

I, therefore, reject the contention of the Noticees in this regard. 12. The Noticees have contended that they have been regularly dealing in shares since the year 1990 and dealing in shares is their only business activity. They also submitted that they have been investing in shares on the advice of Mr. Bal Krishan Mittal, father of Mr. Mahendra Mittal, who, being a reputed individual in the securities market and the financial industry, used to receive tips from many prospective entities and intermediaries. Further, they were made aware of the preferential allotment of Pine through public sources. The Noticees have also denied having any nexus/ connection/ linkage with Pine or its promoters or directors or other entities as alleged in the interim order. In this regard, I note that it is a common understanding that preferential allotment of shares is an issue of shares by a company to only a select person or group of persons on a private placement basis unlike a public issue where funds are raised from public in general. It is also a matter of common knowledge that a preferential allotment is made on a one to one basis to those persons/entities who are acquainted/familiar with the company and its promoters/directors.

A preferential allotment is not an “open to all” type of investment opportunity as sought to be contended by the Noticee. A company will, in no case, make a preferential allotment to a stranger who just approaches it for allotment of its shares. A preferential allotment is always for the purposes of meeting fund requirements of the concerned company and involves a covert and manifested action on part of the company to issue its shares on preferential basis to select persons/ group of persons who are known to it or its promoters/directors and on part of the preferential allottees to finance the fund requirements of the company and subscribe to its shares. 13. In the instant case, it is undisputed that trading in the scrip of Pine was suspended from November 09, 1998 till June 21, 2012 and during the financial year 2011-12, it had incurred a loss of ₹ 7,08,037 and thereafter earned a meagre profit of ₹ 15,60,007 during FY 2012-13. It does not appeal to reason that the Noticees, who claim to be regular investors in the securities market, invested their hard-earned money in a company like Pine with such poor fundamentals and background without having any connection / relation with the promoters/directors of Pine.

When asked during personal hearing, the Noticees’ authorized representatives failed to give any plausible explanation as to how the company could make allotment to the Noticees if they were not known to it or its promoters/directors and if they had no nexus/connection with them. I am unable to accept the explanation of the Noticees that they invested in Pine to on the advice / tips of some random public sources. I note that the Noticees have not been able to furnish any satisfactory documentary evidence to explain how they were approached by Pine for the preferential allotment, or in providing the details of the offer made by Pine to them and other details of communication between them and Pine in that regard. It is important to note that financing of a company by way of preferential allotment, as found in this case, pre-supposes a nexus and prior understanding amongst the issuer, its promoters/directors and the allottees. 14. The above facts and circumstances indicate that Pine and the Noticees were acting in concert towards a common objective that has been brought out in the interim order.

Considering the background of Pine, the investment made by the Noticees cannot be termed as a rational investment behavior and such investment, as in this case, could be possible only if the preferential allotees had nexus with Pine and its promoter/directors and the issue of such shares was under a prior arrangement between them for an objective other than providing equity capital to the company. This is further substantiated by the fact that funds received as proceeds of preferential allotments were immediately transferred by Pine to various entities on the same day or next day and were never retained in the company for expansion of its business or for execution of its plans as envisaged in the special resolution in respect of the aforesaid preferential allotments. The trading data also reveals that significant number of shares sold by the preferential allotees were bought by the entities of Pine Group. In my view, this cannot be termed as a mere coincidence especially when sellers have nexus with the company and buyers i.e. entities of Pine group are either connected among themselves or connected to the company directly or indirectly as mentioned in the interim order.

As brought out in the interim order, the ultimate beneficiaries of the whole scheme in question are the preferential allottees (including the Noticees). It is beyond reason to hold that the company and other entities mentioned in the interim order, except the preferential allottees, would devise the impugned plan/scheme for the benefit of the entities who are neither party to the plan/scheme nor have any complicity in the plan with others. Since, the Noticees amongst other preferential allotees are the ultimate beneficiaries, they cannot pretend to be oblivious to the scheme/plan. The facts and circumstances of this case, in my view, strongly indicate that the issue of these shares was under a prior arrangement between them for the ulterior motive or the end objective of the scheme that has been brought out explicitly in the interim order. Also, the Noticees’ contention that no specific allegation has been levelled against them in the interim order does not hold any merit in light of the fact that the Noticees have prima facie been found to be a part of the holistic scheme as discussed hereinabove and in the interim order.

In view of the foregoing, I reject the contentions of Noticees in this regard. 15. Considering the above, I find that the Noticees, at this stage, have failed to give any plausible explanation for the charges as described in the interim order and for complete removal of restraint. I, therefore, in this case, reject the prayer for setting aside the interim order or for complete removal of restraint imposed by it. 16. It is pertinent to note here that pursuant to the interim order, several entities had filed their objections/representations on merits and many of them had sought interim reliefs. Thus, while the proceedings in the matter were in progress, after consideration of the facts and circumstances of the matter, SEBI granted certain interim relief(s) to the entities including the Noticees vide letters dated January 20, 2016, permitting them: 1. “to subscribe to units of the mutual funds including through SIP and redeem the units of the mutual funds so subscribed; 2. to avail the benefits of corporate actions like rights issue, bonus issue, stock split, dividend, etc. 3. to sell the securities lying in your demat accounts as on the date of the interim order, other than the shares of the companies which are suspended from trading by the concerned stock exchange, in orderly manner under the supervision of the stock exchanges so as not to disturb the market equilibrium and deposit the sale proceeds in a interest bearing escrow account with a nationalised bank.

4. the sale proceeds lying in the aforesaid escrow account shall be dealt with and utilised under the supervision of the concerned stock exchange as provided hereunder:- a. the sale proceeds may be kept in a fixed deposit with a nationalised bank or may be utilised for subscription to units of the mutual funds which shall always be held in the demat form and if such units are redeemed the proceeds thereof shall be credited to the aforesaid escrow account or may be utilised for subscription to the units of mutual funds. 5. The aforementioned window for sale of shares lying in respective portfolio shall be withdrawn if you execute any trade beyond those mentioned in point (3) above. The aforesaid reliefs shall be subject to the supervision of exchanges and depositories. The concerned depositories / exchanges may be contacted in this regard. “ 17. In view of the foregoing, I, in exercise of the powers conferred upon me under sections 11 and 11B of the SEBI Act read with sections 19 thereof, hereby confirm the directions issued vide the ad interim ex parte order qua the Noticees herein subject to the interim relief(s) provided to the Noticees as mentioned above.

18. This order shall continue to be in force till further directions. A copy of this order shall be served on all recognized stock exchanges and depositories to ensure compliance with above directions.

Sd/-

DATE: June 2nd, 2016 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA