APR 27, 2016

SEBI hammers down yet another illegitimate LTCG Caravan

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Sudden unusual price movement in the scrip of Kailash Auto Finance Limited (company or KAFL) between November 07, 2014 to December 31, 2014 grabbed the attention of SEBI, to know the cause of concern the SEBI undertook preliminary investigation as follows:

Patch Tenure Price range
(in Rs.)
Average Trading Volume Average No. of Trades
Patch-1 17.01.2013 to 04.06.2013 11 to 36.25 280 shares per day 3 trades per day
Patch-2 22.07.2013 to 05.11.2014 36.85 to 28.45 15 Lakh shares per day 685 trades per day
Patch-3 07.11.2014 to 31.12.2015 28.05 to 2.01 7 Lakh shares per day NA
  1. Findings under Investigation:
    1. During the end of year 2012, the management and control of KAFL was acquired by Careful Project Advisory Ltd (hereinafter called as CPAL) and Panchshul Marketing Ltd. (hereinafter called as PML), CPAL and PML collectively called as “Promoters”.
    2. he Promoters which took control of KAFL were incorporated only in the year 2010 having no business and weak financial standing.
    3. On the surprise inspection being conducted by BSE at registered and corporate office of KAFL, it was found that registered office was occupied by a Chartered Accountant firm, though correspondences were received on behalf of the company and the corporate office was found locked. This clearly showed that there were no operations in KAFL as well.
    4. It was also revealed that Promoters did rounds of fictitious Private Placement on high premium. Instances of fund layering and announcement of bogus corporate actions were also observed.
    5. Post merger of Promoters into KAFL in 2013 shareholders of the unlisted transferor companies became shareholders of listed company, consequently the scrip was manipulated in accordance with premeditated scheme and entries of tax free profit was accommodated.
    6. The modus operandi used by the parties in the matter is outlined as herein below:

      Modus Operandi of the scheme as per SEBI’s order:

  2. Action taken by SEBI:
  3. The Interim order has been passed against 246 entities in total including KAFL, 3 promoter/ promoter related entities of KAFL, 118 beneficiaries, 82 KAFL group entities, 23 primary allottees, 19 recipients of CPAL & PML shares and others.

    The order has been issued as Ex-Parte Interim Directions issued under the following provisions of SEBI Act and Regulations:

    1. Section 11(1), 11(4) and 11B of the SEBI Act, 1992 for the alleged violation of section 12A of the SEBI Act, 1992; and
    2. Regulation 2(1)(c), 3 (a), (b), (c) and (d) and 4(1), (2) (a), (b), (e) and (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Security Market) Regulation,2003.
  4. Directions passed under the order:
  5. Order directs that above-mentioned 246 entities are restrained from-

    1. accessing the securities market; and
    2. Buying, selling or dealing in securities, either directly or indirectly, in any manner whatsoever.

    These directions shall remain in force till further directions of SEBI.

  6. Other actions which SEBI may take:
    1. Initiation of Penal Proceedings: Action taken by SEBI is without prejudice to its rights vested under Chapter VIA of the Act which deal with penalties and Adjudication. This means that SEBI apart from this interim order may also initiate adjudication proceedings against the alleged persons.
    2. Referring of matter to other Regulators: having regard to actions taken by SEBI in other similar matters, SEBI may also consider referring the matter to other law enforcement agencies like Income tax department, Enforcement Directorate, Financial Intelligence Unit, etc for initiating probe into possible violations against the entities involved.
  7. The way forward:
  8. Considering the complexity of matter and nature of the order following may be taken care of:

    1. The instant order has been passed in the form of SCN and offers a post decisional hearing.
    2. A reply putting forward all the facts, legal submissions and objections may be made to SEBI and an opportunity of hearing may be asked;
    3. Effective representation may be made before SEBI in the hearing.