Interim Order in in the matter of Kailash Auto Finance Ltd.

Shri Rajeev Kumar Agarwal, Whole Time Member, SEBI, passed an ad interim ex -parte order dated March 29, 2016 in the matter of Kailash Auto Finance Ltd. (Kailash Auto)and restrain 246 entities from accessing the securities market and buying, selling or dealing in securities,  either directly or indirectly, in any manner whatsoever, till further directions.

The interim order has been passed based on the findings of preliminary examination which inter-alia observe as under:

1. Careful Projects Advisory Ltd.(CPAL) and Panchshul Marketing Ltd.(PML) were incorporated with a dubious plan and premeditated arrangement to increase number of shares through private placement and bonus issue by executing non-genuine and sham transactions, thereafter CPAL and PML were amalgamated with Kailash Auto Finance Ltd. Pursuant to the schemes of reduction in share capital of Kailash Auto and amalgamation, 1972 shareholders of CPAL and 2058 shareholders of PML (beneficiaries) received shares of Kailash Auto. The market capital of Kailash Auto had increased by approximately 206 times.
2. Kailash Auto did not have any business operations and reported very poor fundamentals during the relevant period i.e., the financial years 2010-11, 2011-12, 2012-13 and 2013-14. The adjusted net profits and earnings per share (EPS) of Kailash Auto for these periods were always nil or negligible as reported by it. Prior to January 2013, there was no trading at all in the scrip of Kailash Auto and there was no market discovered price for the scrip during this period. Thus, the astronomical increase in the price of the scrip after January 2013 and continuance of the increased price from July 2013 to November 2014 was not supported by any genuine factor such as fundamentals/operating results of the company and market forces of supply and demand in its shares. Such price rise and maintenance thereof during the relevant period were predominantly on account of transactions amongst the connected/related entities during these periods as found during preliminary inquiry. 
3. In this regard, it is noted that during the period from January  2013 to June 2013, price of the shares of Kailash Auto were rigged by top LTP contributors from `11 to `36.25 mainly through first trades on 27 instances acting in league with connected counter parties under a pre-meditated plan, device and artifice. After artificially increasing the price of the scrip in this period through manipulations with active involvement of these connected counter parties, the beneficiaries off-loaded the shares of Kailash Auto at an average price of `35/-each to the connected entities of exit providers and made huge profit of approximately 3400% on their investment. It is relevant to mention that prior to July 2013, the scrip of Kailash Auto was illiquid and thinly traded. On account of price increase during the period from January 2013 to June 2013, trading interest of gullible investors in the scrip was created, after this period when beneficiaries started exiting to connected/related entities of exit providers, trading by gullible investors was witnessed. It has been observed that during the period from November 2014 to December 2015 the innocent and gullible investors had been lured into trading in the scrip of Kailash Auto and they had been entrapped in the price fluctuations of the scrip.
4. CPAL and PML had used the recipients of CPAL shares and recipients of PML shares as conduit to facilitate the transfer of their shares to the beneficiaries. On the basis of fund transfer beneficiaries were also connected /related with recipients of CPAL shares and recipients of PML shares , CPAL and PML The beneficiaries had received shares of CPAL and PML at an average price of `1/- per share. Theses beneficiaries off-loaded shares of Kailash Auto  to connected/related entities of Kailash Auto Group I and II (after holding the shares for more than one year) at an average price of `35/- and booked huge profit of 3400% and claimed exemption of long term capital gains (LTCG) on such profit.  
5. Apart from market manipulation in the scrip of Kailash Auto, the entire plan, device and artifice of private placement, fabrication of share premium, issuance of bonus shares, subsequent transfers and retransfers of shares and funds to connected/related entities was designed and structured to beguile the same as transactions with commercial sense to generate bogus LTCG which is exempt from tax under the provisions of the Income Tax Act, 1961. During this process the stock exchange system was grossly misused.
6. In the process all the beneficiaries booked profit of approximately ` 1600 Crores.

The full text of the order is available on the website: www.sebi.gov.in