SECURITIES LAW

Shareholding in Stock Exchanges:

CASE] MCX VS SEBI

SEBI passed MIMPS Regulations for diversification of shareholding in SE.

According to this, 51% of the capital had to be held by the public and this could be done by
basically two ways:
i. By fresh issue of shares
ii. By reduction of existing stake (by selling your share; by placing of shares to persons
shortlisted by SEBI; Issue by private placement to any person who isnt a shareholder
having trading rights; combination of any of the above three)
No person can hold more than 5% stake in SE.

FACTS OF THE CASE:

MCX had two promoters:

i. FTIL (49%)
ii. Multi Commodity Exchange (51%)
Lafin was a promoter of FTIL.
MCX was incorporated and certification of commencement was issued. So, the petitioner
moved an application to SEBI for recognition as SE.
SEBI granted an in-principle approval for currency-derivative segment for one year. In this
year, they had to comply with MIMPS regulations.
SEBI also issued a framework for regulation of trading in MSMEs. Petitioner also moved an
application to trade in this segment. They also wanted permission for equities and derivatives
segment.
After this, petitioner also offered shares on preferential basis to Punjab National Bank with
16% rate of return. There was an option to buy-back the shares after one year.
Petitioner gave a letter for extension of one year to comply with MIMPS and also wanted
approval to trade in interest rate Futures.
FTIL sold 4.9% of its stake to other players and SEBI sought to renew the recognition subject to
conditions that:
i. There will be full compliance of MIMPS
ii. No new permission for other segments will be given.
The Board of Directors decide to develop a scheme of reduction of capital by cancellation of
shares. Subsequently, shares were cancelled and share warrants were issued with it. This was
accepted by High Court.
Therefore, they had complied with MIMPS and sought all approval which was given to NSE and
BSE.
SEBI came to know about the buy-back agreement through news articles.
After this, SEBI issued a notice under Sec 12 and Sec 4A of SEBI ACT to show-cause as to why
recognition should not be cancelled.
SEBI rejected the application for recognition on the following grounds:
i. MIMPS requires Corporatization and Demutualization. There is compliance only in
spirit and not in letter.
ii. Approval from HC is no substitute for approval of SEBI as HC doesnt regulate Securities.
 iii. The method of deduction is not according to MIMPS regulations.
iv. MCX only keeps assuring of compliance but there is no actual compliance.
MCX non-executive Vice Chairman and his wife held 10% equity in Lafin. Website of FTIL
shows MCX as part of FTIL family.
Appeal filed against this order at Bombay HC. SEBI had earlier argued that buy-back is a
forward contract. Counsel of SEBI in HC argued that it is options-contract.
Petitioner rebutted this saying that new-grounds cannot be introduced at appellate stage and
hence, HC cannot decide this question. Grounds on which appeal was rejected:
i. Person acting in Concert was defined in Takeover Code. Objective of Takeover Code
and MIMPS is different and it couldnt be brought here as acquisition exists in TC and
not in MIMPS. No acquisition in this case.
ii. Court referred to the case of CIT KERALA Vs. ALAGAPPA TEXTILES COCHIN LTD and
held that SEBI did not apply the guidelines given in that case. (See the three points)
iii. Criteria of Fit and Proper person: Buy-back arrangement with PNG was not discussed
and permission for scheme of cancellation wasnt taken. Court said that to reject
recognition was disproportionate to this act.
iv. Court said that promoters were doing their best to lower their share.
SLP was filed in SC by SEBI to ask for time to amend regulation and dispose application.

Scope of Securities in SCRA:

CASE] SEBI VS SAHARA

There were two companies of Sahara and both had raised funds through OFCDs by Private
Placements.
Complaint was filed which said that Sahara is collecting money through OFCDs by public.
Third company of Sahara filed an RHP as they wanted to go for Public Issues. They disclosed
that other two companies had collected money through private placement that amounted to
15,000 Crores.
SEBI questioned the Merchant Bankers who valued these securities. But it was told that these
Companies are not listed in SE and hence, their issue is in compliance.
SEBI asked Sahara for information with regards to applications sent, money collected, etc.
Sahara asked MCA that they are unlisted and who has the jurisdiction. MCA said they will
examine the matter.
MCA decided that SEBI has no jurisdiction. Sahara hence, rejected to share any information.
MCA asked for information from Sahara. Information provided was satisfactory.
SEBI issued show-cause notice saying this is a public issue.
Matter went to HC and HC stayed Show-cause proceedings.
SEBI went to SC asking for expedition of matter.
During this, MCA also asked for more information.
SC decided that SEBI can decide the matter. and SEBI held:
i. OFCDs are securities under SCRA.
ii. They are hybrid securities, debentures etc.
iii. Agents collected money for Sahara.
iv. Company must have listed securities.
v. Under Sec 55 Parliament has conferred jurisdiction on SEBI.
Matter in SC:
Contention of Sahara:
 i. Company issued hybrid securities which is defined under Companies ACT but not
SCRA. MCA has jurisdiction.
ii. The word Hybrid was not added when SCRA was amended but it was added in
Companies ACT and impression given is that SEBI will have no jurisdiction.

SC Held:

i. Definition in SCRA has the term other marketable securities of like nature this would
include hybrid securities.
ii. Company defined OFCDs as debentures and hence they would be included under SCRA.
iii. SEBI order is correct and Sahara has to refund money that will be routed through SEBI. If
the orders of the court are not complied then Sahara will be charged for contempt.

(Read after this)

Collective Investment Scheme:

CASE] PGFL VS UNION OF INDIA

PGFL was running a scheme whereby it gave land through a sale deed to people but maintained
the land to themselves till it was fully developed.
Rs. 5000/- was charged out of which 1250/- was sale consideration and 3750/- was for
maintenance.
SEBI used the notice asking for information as they said PGFL is running a CIS. But, PGFL said it
is a sale-purchase agreement and SEBI has no jurisdiction.
SEBI sent a notice again asking for information about how much fund is collected, assurances
given, etc. it was also asked if PGFL collected, money through agro-bonds and if so, SEBI will
take action against them.
This was denied by PGFL but SEBI issued a show-cause notice again because of complaint
made by investor.
PGFL later also replied to SEBI saying that are into sale-purchase agreement and hence, SEBI
has no jurisdiction.
SEBI Chairman passed and order saying PGFL has mobilised funds without permission, credit
rating and registration with SEBI. Hence, they cant collect any more money, cant launch any
more schemes and pay back the money collected.
Matter went to HC and it was observed that, a man from Punjab got land in Delhi, no details of
witnesses was present, traditional words in sale deeds were not present, lands given all over
India and hence, investor couldnt check this. Lands were given in places where work was
impossible (5 feet road).
HC agreed that it is a CIS. Grounds:
i. A flat rate of 1250; 3750; was charged pan-India without taking into consideration
stamp duty, other costs. This represents pooling of money and hence, the first criterion
is satisfied.
ii. Land was given for 5000/- , second criterion is also satisfied.
iii. Investors couldnt check on development of land. Hence, promoters were in charge of
scheme, third criterion also satisfied.
Appeal in SC: It was held that CBI and IT must investigate into this. SEBI must also investigate
with nodal officers and also charged 50 Lakh for frivolous appeals.
FUTP:

CASE] KETAN PAREKH VS SEBI

Togetherness:

SEBI noticed an unusual price rise in Lupin, a pharma company.

During its investigation name of 3 entities came up Classic, Panther and Sai Mangal.
Notice was issued asking for explanation regarding the price rise.
SEBI found all the replies to be identical.
Enquiry began as to how Ketan Parekh was involved in this.
It was known that Ketan Parekh was the director of all the three companies.
SEBI also contended that he had control over these entities:
i. Identical replies and signed by KP.
ii. A trader in Triumph Securities also stated that orders were given by KP and his brother
and placed on behalf of Classic.
iii. Letterhead showed that corporate office was same although registered office was
different.

Hence, KP was in absolute control.

What they have done after coming together:

SEBI compared it with big companies and it was noticed that Lupin is mid-cap company and
hence, has greater potential of development.
On comparison with other mid-cap companies (Torrent, AP) it showed that there was no
unusual price rise.
Both Sensex and Nifty showed rise.
Panther gave buy orders for 9,99,750 shares at the price of 70/- per share. Within minutes,
Classic gave sell order for 10,00,000 shares as spot transaction for 69/-

FUTP:

SEBI held it to be manipulation of market as:

i. Broker CSFB is gaining Rs.1/- per share.
ii. 2 people had nothing to lose, KP and CSFB.
iii. CSFB has gone for Short-selling
Shares are sold without owning it. Hence, shares are borrowed to sell. There is always a risk of
not being able to arrange for shares but in this this transaction, there is no such risk.
In this case, both shares and money are with KP. No actual exchange of shares.
In this case, short-term loan has been raised for 5 days as both money and hares are with KP.
For short term loans, one must go to money market. Securities market is only for long term
loan.
Hence, it was held to be FUTP.

CASE] SEBI VS KISHORE AJMERA

The defendant is a broker with BSE and also has sub-brokers.

Company involved is Malavika Engineering Ltd.
The Sub-broker had two clients, A and B.
They buy 66,300 shares and sell 77,700 shares during the first period.
 After this, 32,500 were bought and 28,800 were sold.
The buyer and seller are controlled by the same family and are also beneficiaries of fortified
shares allotted by MEL.
Scrips of MEL are ill-liquid. However, there was a sudden activity.
BSE had asked brokers to be careful while dealing with scrips of ill-liquid shares.
SEBI suspended the registration of brokers for 4 months.
This was challenged before SAT. SAT held:
i. Direct proof needed to sustain the action and in absence of direct proof, action cannot
be sustained.
Matter went to SC.
i. On Degree of proof required: Direct proof is not needed. Court has to draw a logical
inference on circumstantial evidence given to court. Commonality was found in the next
three transactions in this case.
ii. SEBI gave suspension however, SC gave monetary penalty.
iii. The first transaction wasnt manipulative but others were found to be so due to the
volume of trade.

CASE] SEBI VS KANHAIYALAL BALDEVBHAI PATEL

Three scenarios:
i. A person was a portfolio manager at PIIML and he shared information with his cousins
that company will make investment in securities. Cousins enter into a trade and after
company gives a bulk order, they make huge profits.
ii. An equity dealer in Central Bank of India; his wife was a regular trader in securities. It
was alleged that wife traded before Bank went for large investment.
iii. Person was trading in 4 companies including Religare securities, as intermediary. Large
volumes were brought and sold as per information given by someone who worked for
Religare.
Question: Whether these instances are front-running?
Regulation 4(2)(q): An Intermediary buying or selling securities in advance of a substantial buy
order.
In these instances, intermediaries were not involved, will the regulation apply here?
Front-running:
Circular in 2002 clarified this (read the definition)
This can be of two types:
i. Tippee Trading
ii. Trading Ahead

In 1995, SEBI in a consultative paper said that Front-running was a manipulative practice.

Court Held:
i. In initial FUTP, the definition of Fraud came from Indian Contract Act. In ICA, fraud does
not put anyone at an advantage to regulate the market. it was a simple definition
however, Securities market is very complicated.
ii. concept of unfairness is broader than in SM. In SM, the phrase was for a catch all
provision.
iii. Intermediaries are only specifically mentioned as they are fiduciaries. But if someone
else trades too, it falls under fiduciary relationship.
iv. Pigeon-Hole theory must not be followed. Even if not covered by general provisions, act
can fall under FUTP.