Manipulative transactions erode investors' confidence in the securities market: SEBI

Manipulative transactions erode investors' confidence in the securities market: SEBI

In the matter of Birla Pacific Medspa Ltd., the Securities and Exchange Board of India (SEBI) has imposed a monetary penalty of Rs.20 Lakhs each on the Noticees (Shri KetanVora Proprietor of M/s New Fashion, K V Impex, Shri JigarVora Proprietor of M/s J C Enterprise, and Dinesh Vora HUF Proprietor of Vora Associates).

SEBI conducted investigation into the initial public offer of Birla Pacific Medspa Limited(BPML/Company), for the period from July 7, 2011to July 15, 2011(Investigation Period), since there was high volatility on the day of listing.

SEBI initiated Adjudication proceedings against the Noticees under Section 15HA of the Securities and Exchange Board of India Act, 1992 (SEBI Act), for the alleged violation of Regulations 3(a), (b), (c), (d) and 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practicesrelating to Securities Market) Regulations, 2003 (PFUTP Regulations)read with Section 12A(a), (b) & (c) of the SEBI Act.

The Noticees contended that they were approached by one Mr. P V R Murthy, an official of BPML and told them that BPML would be transferring funds to them which had to be transferred to other entities as instructed. In order to build potential relationship with the company the Noticees transferred the funds. They were not aware that the fund transferred to its bank account were part of IPO proceeds of BPML.

They also put forth that as the receipt and further transfer happened within a period of one day, the Noticees were instructed by BPML to knock offthe transactions against each other. Since the transaction were knocked off against each other, they did not affect the financial of the Noticees and they were not reflected in the account books of the Noticee.

The Adjudicating Officer(AO) opined that there was no unexplained / unreasonable delay that would vitiate the entire proceedings per se. Notwithstanding the same, it was also noted that there is no provision in the SEBI Act, 1992 which may have the effect of prohibiting SEBI from taking action beyond a particular period of time in a given case.

The AO concluded that the Noticees were fully aware of thescheme of siphoning of IPO proceeds by BPML and willingly became conduit for the said transfer of funds by BPML from the IPO proceeds. The claim of the Noticees that the receipt and transfer were knocked off and there was no impact on their financial position was not acceptable. On the contrary, it became apparent that the Noticees were beneficiary to the extent the monies held back by them.

It was also concluded that BPML through the Noticees had siphoned off the IPO fundsof BPML. The Noticees were an integralpart of the scheme by which IPO funds were transferred from BPML to various entities for siphoning off. Hence, the AO found that theaforementioned act of the Noticees was in clear violation of Regulations 3(a), (b), (c), (d)and4(1) of the PFUTP Regulations read with Section 12A(a), (b) & (c) of the SEBI Act.

Lastly, it was discussed that the Noticees admittedly routed funds at the behest of BPMLto various other entities. Further, as per bank statements of Noticees, they had retained an amount of around Rs 74 lakhs which could be considered as ill-gotten gainsasthese funds were not returned to BPML.

The PFUTP Regulations aim to preserve and protect the market integrity in ordert boost investor confidence in the securities market. Noticees, in the instant matter, by agreeing to participate in illegal routing of IPO funds of BPML through deceptive and fraudulent transactions facilitated BPML to siphon off IPO money for purposes other than stated in the prospectus and thereby defrauded investors who had invested in the IPO of BPML.

Further, the manner of routing IPO funds through multiple layers to give a color of genuineness to otherwise fraudulent transfers also demonstrated the manipulative intention of Noticees which had an adverse impact on the fairness, integrity and transparency of the stock market.