Mumbai: ASecurities and Exchange Board of India (Sebi) investigation has found that former multiplex operator Pyramid Saimira Theatre Ltd (PSTL) founder Nirmal Kotecha and his childhood friend Dharmesh Shah used at least 15 fronts to manipulate the firm’s stock price to make unfair windfall gains.
Sebi has summoned at least six alleged defaulters for a fresh hearing in the PSTL case this month, even as its appeal to criminally prosecute Kotecha and a few others continues in the city sessions court of Mumbai.
Sebi filed this case on 31 March 2016, alleging that Kotecha and some associates violated capital market rules by engaging in fraudulent, abusive, manipulative and illegal activities detrimental to the interest of investors and to the integrity of the securities market. Mint has reviewed a copy of the lawsuit.
Sebi’s summons to some of these defaulters comes as the regulator seeks a speedy closure to the eight-year old case, said two people with direct knowledge of the matter. The regulator, under new chairman Ajay Tyagi, is pushing for a quick resolution to several decade-old cases which have been languishing after interim orders were passed. In March, for instance, it passed an order barring Reliance Industries Ltd from the derivative markets; the latter has since challenged the order at the Securities Appellate Tribunal.
In the PSTL case, Sebi passed interim orders in 2009 barring Kotecha and 229 other entities from accessing the securities market. Those orders followed an investigation after Chennai-based PSTL said it was a target of fraud. The firm said it was sent a forged letter, purportedly from Sebi, asking another promoter P.S. Saminathan to make an open offer to PSTL’s minority shareholders at a rate more than four times the prevailing market price.
News reports based on the forged letter pushed up the price and trading volumes of PSTL. In the interim order, Sebi said the forgery was possibly done to manipulate the stock price of PSTL.
In follow-up investigations, Sebi found that between 1 June 2008 and 19 December 2008, Kotecha used at least 15 front entities to carry out circular trading to push up trading volumes in the stock. He also engaged in other fraudulent practices such as self-trades and funded front entities for their trades, says the criminal lawsuit filed by Sebi.
Some of the fronts were Kotecha’s relatives while others were associate firms; they purchased PSTL shares prior to 19 December 2008 and sold the shares on 22 and 23 December 2008 to make windfall gains, according to the lawsuit. In the week leading to the publishing of this Sebi letter, the Pyramid stock gained 72% on the BSE.
“There was no corporate development in reality to support such a rise in price," the lawsuit said, adding that two out of the top three buyers on the BSE and three out of the top five buyers on NSE during the first 12 days of December 2008 were entities associated with Kotecha. Between 1 June 2008 and 19 December 2008, around 35.46% of the total traded volume in PSTL on the BSE was accounted for by these 15 entities, the Sebi investigation revealed.
Sebi has alleged that all such unfair dealings were meant to enable Kotecha to artificially inflate the stock price and offload his substantial holding in PSTL (at around 30%).
“Forgery was a desperate last attempt on the part of NK (Nirmal Kotecha) to attract large volumes in the PSTL scrip from unsuspecting investors to enable NK to offload the large stake," said the lawsuit. “It is therefore alleged that NK has violated Sebi’s PFUTP (Prevention of Fraudulent and Unfair Trade Practices) regulations, 2003."
Sebi didn’t respond to emails seeking comment. Mint couldn’t contact Kotecha and Shah as their whereabouts are not known at the moment. This story will be updated with their responses when received.