TCN/ 01/IVD4/04/ 07
BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
Coram : Dr. T.C.Nair, Whole Time Member
IN THE MATTER OF DEALING IN THE SHARES OF M/S VBC FERRO ALLOYS LIMITED BY M/S BLB LIMITED, MEMBER, THE STOCK EXCHANGE LIMITED, MUMBAI AND THE NATIONAL STOCK EXCHANGE LIMITED
Date of hearing : September 8, 2006
Appearances :
For Noticees : Shri Vinay Chauhan, Advocate
Shri B R Bagri, Chairman, BLB Ltd.
Shri Vikram Rathi, Executive Director
Shri J.K. Jain, Consultant
For SEBI : Shri P.K. Nagpal, Chief General Manager
Shri M.A. Shinod, Manager
Ms. Kshama Chavan, Legal Officer
ORDER
UNDER SECTION 11 AND 11B OF SEBI ACT, 1992
1.0 Background
1.1 VBC Ferro Alloys manufactures Ferro Chrome and Ferro Silicon. The shares of the company are listed on the Bombay Stock Exchange Limited (BSE) and the Calcutta Stock Exchange Association Limited (CSE). The company through its announcements had informed BSE that the securities of the company were delisted from Madras Stock Exchange Ltd. and the Hyderabad Stock Exchange Ltd. with effect from December 02, 2004 and April 04, 2005 respectively.
1.2 Securities and Exchange Board of India (hereinafter referred to as SEBI) as a part of its ongoing efforts to protect the integrity of the market, has observed that off late there has been a proliferation of unsolicited recommendations and advices in public media issued by various entities including some SEBI registered intermediaries.
1.3 In continuation of this, it was observed that “strong buy” recommendation was given by the research wing of M/s. BLB Ltd. (hereinafter referred to as BLB), a member of BSE and NSE, on the company VBC Ferro Alloys Ltd. (hereinafter referred to as “the company”). This buy recommendation was published in ‘The Economic Times’ dated September 12, 2005. It was further revealed that BLB had bought large quantities of shares of the company prior to its recommendation and had sold a substantial number of shares just after the publication of the aforesaid report.
1.4 During the preliminary investigations, analysis of BLB’s trading inter alia revealed that it had bought heavily on September 2, 2005 contributing 67.36% of the day’s trading volume of the company which resulted in price rise to Rs. 142 at the close of the day from the previous close of Rs. 118.5. Similarly on September 5, 2005 its contribution to day’s volume was 52.39% and the price rose by Rs. 28.40. On September 6, 2005 its contribution to day’s volume was 24.75% and the price rose by Rs. 6.20.
1.5 It was observed that aforesaid heavy buying and the publication of strong buy recommendation of BLB led to spurt in price. After the publication of the aforesaid report, BLB offloaded substantial chunk of its holding at this jacked up price and made unfair gains at the cost of unsuspecting investors. The analysis of the data by BSE revealed that the BLB’s average price of acquisition of around 3.85 lakh shares of company was around Rs. 162.66 per share and they sold 1,70,222 shares at an average price of Rs. 262.20 per share. Thus BLB in the process earned a profit of around Rs. 1,69,43,898 and also notional profit at the price prevailing at that point of time for the remaining shares held by it.
1.6 Based on the findings of the preliminary investigation, SEBI, while initiating formal investigation into the matter, vide its ad interim ex-parte order dated February 10, 2006 passed under section 11B, 11(4) (b) and 11D directed as under:-
(a) BLB to cease and desist from giving any recommendations about any investment in the securities market in any public media which amounts to violation of Regulation 4(2)(f) and 4(2)(r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
(b) BLB to cease and desist from committing or causing any violation of clause B(7A) of the Code of Conduct for Stock Brokers laid down in Schedule II read with regulation 7 of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.
(c) BLB and Shri Vikram Rathi, Executive Director not to buy, sell or deal in securities of VBC Ferro Alloy Ltd., directly or indirectly, till further directions in this regard.
(d) That the Depositories shall not give effect to any transfer of shares of VBC Ferro Alloy Ltd., lying in the beneficial owner accounts of the BLB Ltd, and Vikram Rathi.
1.7 The above entities were given an opportunity for filing their objections, if any, to the order within 15 days from the date of the order and also seek personal hearing if they so desire.
2.0 Reply of BLB and Personal Hearing
2.1 BLB vide letter dated March 27, 2006 filed its reply and inter alia submitted as under:
(i) that the said ad interim ex parte order has been passed without complying with the conditions specified under Section 11B and 11D of the SEBI Act, 1992. The said order was without authority and hence unsustainable in law. For invoking the powers conferred under the aforesaid provisions, it was necessary for SEBI to conduct an enquiry and an order could be passed only after the enquiry.
(ii) that the matter published was not misleading as 95% of the statements made in the subject article were statements of facts that were culled out from the published Annual Reports of the company.
(iii) that it was right in stating the statement that KGPL was planning an IPO in early 2006 was based on the basis that when the earning/returns increase, the value of a company increases. For unfolding and unlocking such enhanced value and raising further resources for the expansion of business in the wake of public appreciation of the value, it was a normal business sense that the company would take the IPO route, as numerous companies placed in similar circumstances had done so in the past.
(iv) that the assessment that VBC will receive about Rs. 25 crore as dividend was made on the basis that the investments of VBC group in Konasemma EPS Oakwell power Ltd. (KEOPL) was a commercial investment and hence would obviously have been made with a view to getting good returns. Such a return can only be in the form of dividend. Since the project was expected to be operational in 2005-06, it was logical that earnings would ensue to the company thereafter, which in turn, would obviously yield dividend from the year 2006-07.
(v) that it still holds 6.20% equity in the said company, which shows its faith in their research report on the company signifying that it was prepared with all seriousness, and was not glib or flippant or facile or facetious.
(vi) that the sale of shares of VBC on 15th September was guided by their need of funds on account of their pay-in obligation to the exchange.
(vii) that there is enormous difference in the form in which BLB’s research wing had brought out the research report and the form in which it was actually published. The Economic Times gave a disclaimer containing disclosure regarding holding in the company and compressed the research report.
2.2 As desired by BLB, personal hearing was granted on September 8, 2006 wherein oral submissions were made by the Advocate representing BLB. BLB also made written submissions vide letter dated September 22, 2006.
3.0 Consideration of Issues
3.1 I have carefully considered findings in the ad interim ex- parte order dated February 10, 2006, reply of BLB dated March 27, 2006, the submissions made by its representatives during the hearing and his written submissions dated September 22, 2006.
3.2 I note that vide ad interim ex parte order dated February 10, 2006, the prohibitory / preventive directions were passed during the pending investigation and passing of final order. I note that the investigation in the matter has been completed and having accepted the investigation report and the recommendations made thereunder, Board has already initiated the Adjudicating Proceedings against BLB vide order dated February 22, 2007 for committing violations of various regulations.
As regards the order against Shri Vikram Rathi, Executive Director of BLB, I note that all the trades in the shares of the company were executed in the name of BLB in its own account and not in the name/account of Shri Vikram Rathi. I have also examined the demat account statement submitted by Shri Vikram Rathi, which does not show any transaction involving the share of the said company. Further, BLB has admitted in its reply that it had purchased the shares in its proprietary account pre September 12, 2005, which is also reflected in the quarterly shareholding pattern. NSDL has also confirmed that it has executed freeze on the 2,51,911 shares of company lying in the beneficial account of BLB Ltd. Further, I note that pursuant to the investigation, SEBI has initiated action only against BLB and not against its Executive Director Shri Vikram Rathi, in his personal capacity. Therefore, I am of the view that prohibitary ex-parte interim order against Shri Vikaram Rathi needs to be vacated.
3.3 In view of the aforesaid developments and specially in light of the fact that the investigations of SEBI have been completed and action pursuant to the investigation has already been initiated, I do not feel any necessity to continue the prohibition imposed vide order dated February 10, 2006. Therefore, it is just and proper to vacate the ad interim ex parte order against BLB and against Vikram Rathi.
3.4 Before doing that, in light of the objections raised by BLB in its reply dated March 27, 2006 with respect to the powers of SEBI to pass interim orders, I wish to clarify that it is well settled that SEBI can take such measure in the interest of investors and to regulate the securities market after conducting any fact finding exercise, whether one calls it ‘investigation’ or ‘enquiry’. The natural corollary of this is that initiation of formal ‘investigation’ as contemplated under Section 11C or ‘enquiry’ in terms of SEBI (Enquiry) Regulations and/or SEBI (Adjudication) Rules is not a “sine qua non” for exercising powers under Section 11, 11B. Hon’ble SAT also in Karvy Stock Broking Ltd V/s SEBI has held as under :
“ the word “inquiry” used in section 11(4) refers to the inquiries held under sections 11, 11 B, also to the enquiry under the inquiry regulations framed under section 12 (3) and also to the inquiry held under Chapter VI A and it is during the pendency of any of these inquiries that an interim order could be passed with a view to protect the interests of investors or in the interest of market.”
4.0 Order
4.1 In view of the above, I, in exercise of powers conferred in terms of Section 19 readwith Section 11 and 11 B of SEBI Act, 1992, hereby vacate the ad interim ex-parte order against M/s BLB Ltd and Vikram Rathi dated February 10, 2006. Needless to mention that it cannot be misconstrued as permission to BLB and its associates to violate the provisions of law as per clauses (a) and (b) of the order dated February 10, 2006.(quoted supra in para 1.6.)
4.2 It is however clarified that the present order is being passed for a limited purpose of finalising the earlier ad interim ex-parte order dated February 10, 2006 against BLB Limited and Shri Vikram Rathi and the same should not be treated as exoneration of BLB by SEBI on the charges alleged. It is also clarified that the AO shall not be influenced by these proceedings/orders/findings and proceed in the matter independently.
PLACE: MUMBAI T .C. NAIR
DATE: April 25, 2007 WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA