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Securities and Exchange Board of India: Mehul C. Choksi has been restrained from buying, selling or dealing in securities and is prohibited from accessing securities market for a period of 10 years with a penalty of Rs. 5 crores for indulging in fraudulent and unfair trade practices.

Facts:

The instant proceeding emanates from a Show Cause Notice (‘SCN’) dated 24-05-2022 which was issued by SEBI against Mehul C. Choksi (Noticee), pursuant to an investigation by SEBI into the alleged manipulative trading in the scrip of Gitanjali Gems Ltd (‘GGL’).

Vide SEBI’s order dated 10-03-2017, an investigation was directed in the matter of alleged manipulative trading in the scrip of GGL to ascertain whether there was any violation of the provisions of the SEBI Act, 1992, the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, (‘PFUTP Regulations) and the SEBI (Substantial Acquisition of Shares and Takeover) Regulations 1997 and 2011 respectively. Accordingly, SEBI investigated trading activities of certain entities in the scrip of GGL for the period 18-07-2011 to 25-01-2012 (investigation period).

Findings of Investigation:

The shares of GGL were listed on both BSE and NSE. The scrip was under suspension on both the exchanges and the scrip was last traded on BSE on 1-04-2019 and on NSE on 26-04-2018. In October 2018, GGL went under Corporate Insolvency Resolution Process.

Noticee was the Chairman and Managing Director (‘MD’) of GGL during the investigation period. One of the Front Entities was a former employee of GGL. Investigation revealed that though he was an employee of GGL only till February 2011, the relationship between Mehul Choksi and Manoj continued even after his resignation, as there were fund transfers between Mehul Choksi and Reva Superstructures Pvt. Ltd., an entity connected with former employee of GGL who an authorized signatory for the current account of Reva, which was maintained with ICICI Bank. From the account statement of the said account of Reva, it was observed that there were frequent fund transfers between Mehul Choksi (from his personal account) and Reva. Further, transactions pertaining to opening of a Fixed Deposit for GGL were also observed in the bank statement of Reva.

On analysis of Bank statements of GGL and Suspected Entities, it was noted that GGL was transferring and receiving funds from the Suspected Entities (including the Front Entities) through layering and these amounts were either utilized for meeting pay-in obligations / margin obligations towards brokers or they pertained to pay-outs received from exchanges which were transferred back to GGL. On the basis of the transfer of funds, it was observed that GGL was facilitating and funding the purchase and sale of its shares through Front Entities.

It was found that the Front Entities’ connection with Mehul Choksi and the fund transfers with GGL made it clear that the trades of the Front Entities in the derivatives segment were not for hedging purposes but for maintaining the price and volume of the scrip of GGL to benefit Mehul Choksi.

Observation and Analysis:

Through the investigation, it was revealed that the bank accounts of GGL was singly operated by the Mehul Choksi. On considering the same, it is evident that he was using the Front Entities for executing trades in the scrip of GGL.

The SEBI further restrained Mehul Choksi from buying, selling or otherwise dealing in securities, directly or indirectly, in any manner whatsoever and is further prohibited from accessing the securities market, for a period of ten years from the date of this Order. He has been directed topay a monetary penalty of ₹ 5 Crore.

[Gitanjali Gems Ltd- Mehul C. Choksi, In re, 2022 SCC OnLine SEBI 154, decided on 31-10-2022]


*Kriti Kumar, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): Madhabi Puri Buch, a Whole-Time Member addressed the issue of global depository receipts issued by Transgene Biotek Ltd. in order to defraud investors.

SEBI received a complaint against Transgene Biotek Ltd. alleging of fraud by issuing global depository receipts and misutilisation of proceeds by transferring the same for undisclosed and ulterior purposes under the garb of consideration for technology transfer to defraud the investors. SEBI conducted inquiry in order to find the probable impact of allegations on the securities market in India and on the interests of investors. SEBI passed an ad-interim ex-parte order which was later confirmed where based on the preliminary inquiry, six entities were restrained from accessing the securities market and trading in securities.

SEBI conducted a detailed inquiry in the entire GDR issued by Transgene Biotek Ltd. to ascertain the violation of securities laws. It found no adverse evidence or finding in respect of violation of provisions of SEBI Act and PFUTP Regulations against 3 entities with respect to their role in the scheme of diverting of the GDR proceeds of TBL and their endeavor to legitimatize the proceeds was found. Thus the confirmation order was liable to be revoked and the proceeding against the other entities ought to be continued. Therefore, under Section 19 of the SEBI Act read with Sections 11, 11(4) and 11-B of the SEBI Act confirmatory order was revoked. [Transgene Biotek Limited, In re,2018 SCC OnLine SEBI 167, order dated 06-11-2018]

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