Order in the matter of dealing in the shares by Lalit Dua and his associate entities

1. In continuation of the avowed objective to safeguard market integrity, SEBI looked into the recommendations given by Shri Lalit Dua, (hereinafter referred to as Shri Dua) Director of LRS Portfolio & Advisory Services Pvt. Ltd. The research reports of Shri Dua were published on www.indiainfoline.com, a website of SEBI registered stock broker India Infoline Ltd. The website also disseminates detailed information about listed corporates, general comments on capital markets and other financial aspects for the consumption of the investor.

In view of the same, several investors visit the website on a regular basis.

2. Prima-facie, a distinct modus operandi was noticed in the conduct of Shri Dua. Shri Dua used to disseminate company favourable articles in media on frequent basis projecting a bright future of companies whose shares were thinly traded. Thereafter, in contrast to the recommendations, his associated entities used to offload shares (purchased prior to the recommendations) of such companies on the back of induced investor interest created by his recommendations.

3. It was also prima facie noticed that promoter shareholding had decreased in several such scrips wherein recommendations had been given. The entire modus operandi indicates a deliberate and crafty strategy to make personal gains at the expense of investors by inviting them to participate in the trading of shares of the company. In view of the aforesaid observations, a preliminary analysis was conducted into the matter.

4. The findings of the preliminary analysis brought out that Shri Dua and his associate entities would build up the positions in low capital /penny stocks of non descript companies which were infrequently traded and devoid of any investor interest. This position build up is done either by purchasing shares from the promoters of the company or from the market at low prices. Thereafter, buy recommendations were given by Shri Dua on the stock complemented by some favourable /forward looking statements on the performance and future prospects of the company. This generated interest in the trading of such stocks and induced the lay investors to commence transactions in such stocks. This lead to upward movement in the price and volume of such stocks. Finally, the associate entities offloaded their stock at the higher prices created as a result of induced demand for the penny stocks.

5. It was observed that Shri Dua used to publish his research analysis under the name of LRS Research (LRS Portfolio & Advisory Services Pvt. Ltd). It would be pertinent to note that LRS Portfolio & Advisory Services Pvt. Ltd. (hereinafter referred to as LRS Portfolio) is registered with SEBI as a sub broker.

6. It was also brought out during the preliminary analysis that Shri Lalit Dua had published 36 research reports from April 2004 to August 2005 on the website www.indiainfoline.com. It was noticed that most of the scrips in which Shri Dua had published the research reports were listed at the Bombay Stock Exchange Ltd. (BSE) and regional stock exchanges. The scrips are / were being traded at the BSE in following groups:

Group/Segment B1 B2 S T TS Z Total Number of 3 13 10 4 3 3 36 Scrips

It was noted that the companies for which the research reports were published were mostly in the mid-cap or small cap (belonging to B2, S and T Segment). It is significant to note that Shri Dua has not published any research report for the scrip which is being traded in group ‘A’. During the course of preliminary analysis, based on feedback received from the stock exchange, it was brought that there were as many as 21 entities who, prima facie, were related to Shri Dua in one way or the other such as through common address, phone numbers and directors etc. 7. In view of the preliminary findings and to safeguard the interest of the investing public an ad-interim, ex-parte order dated March 21, 2006 under section 11B, 11(4) (b) and 11D of the SEBI Act, 1992 was passed pending investigation against Shri Lalit Dua and his sub broking company LRS Portfolio Advisory Services Ltd. with the following directions: i. “to cease and desist from giving any recommendations about any investment in the securities market in any public media which amounts to the violation of Regulation 4(2)(f) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003; ii. to cease and desist from rendering any investment advice directly and indirectly about any security in the publicly accessible media which amounts to violation of clause B (7A) of the Code of Conduct for Sub Brokers laid down in Schedule III read with regulation 15 of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.” 8. Shri Dua and his associate entities were given opportunity to file objections, if any, to the said order within 15 days from the date of the order and if they so desired, avail themselves of an opportunity of personal hearing at the SEBI Head Office within 15 days from the date of the order. LRS Portfolio vide letters dated April 3, 2006 and April 28, 2006, requested for an extension of time by four weeks for filling reply / submissions to the ex parte order. LRS Portfolio vide their letter dated May 26, 2006 asked for certain documents relied upon by SEBI. In this regard, LRS Portfolio was advised to take an inspection of documents vide letter dated August 28, 2006.

9. An inspection of the documents was granted to Shri Dua on September 4, 2006 vide letter dated August 31, 2006. However Shri Dua vide letter dated August 31, 2006, requested for rescheduling of the date of inspection after September 4, 2004. Acceding to the request of Shri Dua, the next date of inspection of documents was scheduled on October 10, 2006. Shri Dua vide letter dated November 15, 2006, requested to provide copy of additional documents and asked for reasonable time to submit the reply thereafter. Acceding to the request, vide letter dated January 25, 2007 documents were provided to Shri Dua and further extension for submitting the reply was granted for a period of 15 days from the date of receipt of the letter. An opportunity of hearing was granted to LRS Portfolio & Advisory Services Pvt. Ltd. on February 19, 2008 wherein Shri Dua and Shri Vinay Chauhan, Advocate, appeared and made submissions in detail. Shri Dua vide letter dated February 18, 2008 interalia made the submissions as under: i. Complete detailed and comprehensive disclosures were given in every research reports. ii. As regards the allegation that the recommendations were given of thinly traded companies/ penny stocks of non descript companies, Shri Dua submitted that all the 36 companies mentioned in the ad interim ex-parte order were frequently traded as per the SEBI guidelines under the takeover regulations for the years ended December 2004, 2005, 2006 and 2007. It was further submitted that there were around 157 research reports on these companies which have not been published by him.

iii. The normal buying and selling activity of the so called associate companies has been misconstrued and their trading in the normal course of business has been erroneously correlated with the publications of his research reports. Had there been any correlation, the so called associate entities would have acted in a specific manner i.e. always buying prior to the publication of the research reports and always selling post the publication of the research reports. iv. With regard to the allegation that Shri Dua and his associated entities had off loaded the shares which were accumulated prior to the recommendation, it was submitted that the SEBI Order itself clearly states that the alleged associated entities were net sellers during the research period. v. It was submitted that out of the 21 entities /individuals mentioned in the interim order, only 8 entities viz. LRS Portfolio, Lalit Dua (HUF), Ritu Dua, JKC Leasing, BR Financial and Dyna Cables were associated with him. Shri Dua further submitted documents in support of his above stated submissions. 10. I have carefully considered the findings of the ad interim ex-parte order dated March 21, 2006, replies of Shri Dua, the oral submissions made during the hearing and his written submissions along with its annexures dated February 18, 2008.

11. I find that in the above submissions of Shri Dua, it was stated that they were not net buyer prior to the release of research report. I find that SEBI vide its interim order dated March 21, 2006, observed that the Shri Dua had given a buy recommendation in the scrip of Allianz Securities Ltd. on June 1, 2005. However, based on the material evidences shown to me and the data mentioned in the SEBI interim order (para 3.2.4), it is clear that Shri Dua was not a net buyer. Thus, I find that there is substance in the submission made by Shri Dua and prima facie, pending investigation, I am satisfied that, the evidences produced before me establishes a benefit of doubt in favour of Shri Dua.

12. I further find that investigation proceedings initiated against Shri Lalit Dua and others vide order dated April 21, 2006, are in process. I have also noted that almost 2 years have elapsed since Shri Dua and LRS Portfolio have been ceased and desisted from giving any recommendations about investment in the securities market in the public media. From the submissions made by Shri Dua, the corresponding facts and circumstances and in the interest of justice, I find that a suitable order need to be issued, pending investigation, based on the post decisional hearing, provided to Shri Dua.

I am of the view, that prima facie, pending investigation there is no need to continue with the interim directions issued vide order dated March 21, 2006.

13. In view of the above, I, in exercise of powers conferred in terms of Section 19 read with Section 11 and 11 B of SEBI Act, 1992, hereby direct that there is no need to continue with the directions issued against Shri Lalit Dua and LRS Portfolio & Advisory Services Pvt. Ltd. It is however clarified that the present order is being passed for a limited purpose of finalising the ad interim ex-parte order dated March 21, 2006 against Shri Lalit Dua and LRS Portfolio & Advisory Services Pvt. Ltd. and the same should not be treated as exoneration of Shri Lalit Dua and LRS Portfolio & Advisory Services Pvt. Ltd. by SEBI on the charges alleged. It is also clarified that the investigation shall not be influenced by these proceedings/orders/findings and proceed in the matter independently.

14. This Order shall come into force with immediate effect.

PLACE: MUMBAI T .C. NAIR DATE: 28.02.2008 WHOLE-TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA