In a setback to the Adani Group, a Mumbai sessions court has overturned a 2014 order of a lower court which had discharged Adani Enterprises Ltd (AEL), its chairman Gautam Adani and managing director Rajesh Adani for alleged cheating and manipulation of share prices of AEL through entities controlled by Ketan Parekh, the stockbroker and main accused in India’s biggest stock market scandal dating back to 1999-2000.
Almost three years after the government filed a revision petition against the lower court order, the court of Additional Sessions Judge D E Kothalikar has said an investigation by the fraud investigation office of the government has “prima facie” established that the promoters of the Adani Group and Ketan Parekh made “unlawful gain” of around Rs 388.11 crore and Rs 151.40 crore respectively via alleged manipulation of the shares of AEL, the flagship firm of Adani Group.
According to the order — it was signed by ASJ Kothalikar on November 27 and uploaded on December 1, 2019 — the case against Adanis has been sent to the lower court for trial hearing. The court has directed Gautam Adani and Rajesh Adani to appear before the Additional Chief Metropolitan Magistrate for hearing, said Rajendra P Parkar, advocate representing the government.
Email, phone calls and text messages to the official spokesperson of the Adani Group since January 7 did not elicit any response.
The case against AEL and its promoters date back to 1999. According to the complaint of Serious Fraud Investigation Office (SFIO) in the court, the promoters of AEL “provided funds and shares to Ketan Parekh (KP) entities for running illegal activities in the capital market with dishonest intention,with a view to manipulate the share market”.
The agency also alleged that the promoters off-loaded their shareholding when the share price was at peak and started purchasing it when the prices came down, to maintain their shareholding in the company and earn profit.
Parekh’s alleged modus operandi, according to the SFIO, was to rig share prices of firms in collusion with promoters through circular trading. Circular trading is a fraudulent trading scheme where sell orders are entered by a broker who knows that offsetting buy orders, either have been or will be entered. As a result, these trades don’t represent any change in the beneficial ownership of the security.
The SFIO alleged that in November 1999, promoters of AEL changed the cut-off date of a bonus issue already approved by its board. This was done to help two Parekh-controlled companies — Classic Credit Ltd and Panther Fincep and Management Service Ltd — become eligible for bonus shares, the SFIO said. As a result, these two firms bought about 5 lakh shares of AEL at Rs 44.77 crore in November 1999 and got another 5 lakh shares after the bonus issue of AEL later that month.
Apart from this, the AEL, according to SFIO, had advanced zero-interest loans of about Rs 293.45 crore to firms controlled by Parekh. The agency alleged that out of the total advance, around Rs 80.49 crore was raised by AEL through its subsidiaries Adani Agro Pvt Ltd, Adani Properties Pvt Ltd and Adani Impex Pvt Ltd. “…the promoters of Adani entities made unlawful gains by providing funds and shares to KP (Ketan Parekh) entities for artificially manipulating shares of the company and offloading their shareholdings when the share price was ruling high. They (Gautam Adani and Rajesh Adani) were also aware of the manipulation and price movement of the shares at each stage as they were controlled with their own finances and shares by KP entities through his group companies,” the SFIO complaint stated.
Capital Markets regulator, Securities and Stock Exchange Board of India (Sebi) too has found that firms of Parekh did a lot of trading in the shares of AEL between 2000 and 2001 and manipulated shares prices of the company.
“The public was deceived to believe that the price movement of the scrip was normal and was induced to acquire the shares offloaded in the market by the promoters of the company as its peak price. The KP (Ketan Parekh) entities made unlawful gain of about Rs 151.40 crore from the transactions in the Adani Scrip and the promoters of Adani Group made unlawful gain about Rs 388.11 crore.The members of the public and other persons suffered huge losses amounting to approximately Rs 151.40 crore plus Rs 388.11 crore on account of the aforesaid unlawful activities,” the court stated in its order, citing the SFIO complaint.
The court also said the lower court judge “committed mistake in passing an order of discharge” of Adanis, before giving the SFIO “an opportunity to lead evidence”.
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