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SEBI - Case Laws
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2022 (5) TMI 1313
Insider trading - as noted suspected entities had traded in the mentioned scrip on the basis of unpublished price sensitive information (‘UPSI’ for short) in contravention to the provisions of SEBI Act, 1992 and SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’ - Whether appellants were not privy to any inside information and were therefore not in possession of UPSI? - HELD THAT:- There is no doubt that information of sale of ILPL was in the public domain since July 15, 2016 but this information which came into the public domain was not treated to be an UPSI by the WTM on the ground that the resolution passed by IVL on July 15, 2017 was only a raw information and there was no crystallized offer through an identified purchaser or ascertained consideration amount for the purpose of crystallizing the UPSI. If the information of sale of ILPL by IVL on July 15, 2016 was not a UPSI and was in the public domain then the purchase of shares by the appellants between July 15, 2016 to March 1, 2017 could not be made the basis of UPSI. We, thus, conclude that since there was no UPSI during this period the trades executed by the appellants were not violative of Regulation 4(1).
The EGM of IIL was held on March 1, 2017 on which date it authorized the Board of Directors to give a loan upto Rs. 600 crores or could acquire upto Rs. 600 crores. Thus, this information of acquisition, if any, came into existence on March 1, 2017. Thus, UPSI period can start from March 1, 2017 onwards till March 14, 2017.
The appellants alleged that they were never in possession of UPSI. In this regard the resolution of IVL on July 15, 2016 to sell ILPL can be the starting point of UPSI. The WTM has however disregarded this date as not a UPSI. We also find that this information came in the public domain and therefore the decision to sell ILPL was not a price sensitive information nor was it an UPSI.
WTM has strongly relied on the fact that the appellant Pia Johnson was a member of the managing committee appointed by the Board of Directors of IVL who were authorized to authorize IDSL to sale its stake in ILPL. Based on this fact, the WTM concluded that the appellant Pia Johnson had inside information and was in possession of UPSI. This fact that the appellant was a member of the managing committee can create a suspicion that the appellant could be in possession of UPSI but in our opinion the appellants were successful in proving that they had no UPSI. It has come on record that no meeting of this managing committee was ever held and therefore there was no occasion to discuss the sale of ILPL. Further, we find that there is no finding that the resolution of IIL on March 1, 2017 or notice dated January 25, 2017 or resolution of Board of Directors of IREL on February 3, 2017 was known to the appellants. The appellants had nothing to do with IREL or IIL and therefore there can be no presumption that the appellants had information that IIL was in the process of purchasing ILPL.
We also find that during the investigation the statement of the two CEOs of IVL and IREL were recorded and both the CEOs clearly stated that the information regarding sale of ILPL was not made known to others and that the appellants had no knowledge of the deal. These statements has not been considered by the WTM coupled with the fact that Mr. Gurbans Singh in his statement categorically made statement that he only came to know only in March 2017 that ILPL was up for sale. Thus the trades made by Mehul Johnson in March 2017 cannot be said to be made when in possession of UPSI.
We are satisfied that the appellants were not in possession of UPSI when they purchased the shares of IVL during the alleged UPSI period as per the show cause notice. In our view, the appellants have successfully discharged the burden under the proviso to Regulation 4 of the PIT Regulation. Considering the aforesaid, the impugned order cannot be sustained and are quashed. The appeals are allowed with no order as to costs.
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2022 (5) TMI 813
Pledge of shares - Pawnor and the pawnee’s right to sue for recovery and sell the pawned goods - Accretion on pawned goods - Pledge or hypothecation of securities held in a depository - legal jurisprudence relating to law of pledge - rights of depository Participant - right of redemption given to the pawnor vide Section 177 of the Contract Act - whether the Depositories Act, 1996 read with the Regulation 58 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996, For short, ‘1996 Regulations’ has the legal effect of overwriting the provisions relating to the contracts of pledge under the Indian Contract Act, 1872 - Relevant provisions of the Contract Act - HELD THAT:- We do not find any derogation or conflict between Section 176 of the Contract Act and sub-regulations (8) and (9) of Regulation 58. Regulation 58(8) entitles the pawnee to record himself as a ‘beneficial owner’ in place of the pawnor. This does not result in an ‘actual sale’. The pawnee does not receive any money from such registration which he can adjust against the debt due. The pledge creates special rights including the right to sell the pawn to a third party and adjust the sale proceeds towards the debt in terms of Section 176 of the Contract Act. The reasoning that prior notice under Section 176 of the Contract Act would interfere with transparency and certainty in the securities market and render fatal blow to the Depositories Act and the 1996 Regulations is farfetched as it fails to notice that the right of the pawnee is to realise money on sale of the security. The objective of the pledge is not to purchase the security.
Purchase by self, as held above, is conversion and does not extinguish the pledge or right of the pawnor to redeem the pledge. Equally, it may be a disincentive for both the pawnor and the pawnee in many cases, if we accept this interpretation and ratio, which would inhibit them from entering into a transaction creating a pledge. Difficulties and disputes regarding price, valuation, right to redemption etc. could invariably arise. There would also be difficulties in case the dematerialised securities are not traded as in the present case. If the case pleaded by MHPL is to be accepted, the entire dues of PIFSL stand paid without in fact a single penny coming to the coffer of PIFSL. Whether or not PIFSL will be able to find a willing buyer and sell the shares is unknown given the fact that the shares are unlisted and MHPL continues to be the holding company of NEVPL.
In the context of the present case, the contract of pledge envisages that PIFSL is entitled to get itself recorded as ‘beneficial owner’ without forfeiting its right in terms of Clause 6.2 to sell the shares. The contention of MHPL that Clauses 6.1 and 6.2 are in the alternative and once PIFSL has exercised option under Clause 6.1, the option under Clause 6.2 is closed must be rejected as absolutely untannable. We do not find any such condition in the two clauses. As noticed above, PIFSL could not have exercised the right under Clause 6.2 unless the pledge shares were registered in its name as ‘beneficial owner’. This step was necessary to enable PIFSL to exercise its right and enforce the sale of pledge shares. Whether or not it would be successful in selling the pledge shares is unknown and uncertain even today. The amount of money that would be received is also unknown and uncertain.
As per Clause 5.1(m), the pawnor agrees that throughout the continuance of the pledge created pursuant to the pledge deed and until the repayment of the amount outstanding in full under the transaction document, that is, the Bridge Loan Agreement, the pawnor shall remain the beneficial owner of the shares pledged at all times, except on the sale made by the pawnee as the bridge loan lender. Further, vide Clause 5.1(k), the pawnor has irrevocably waived any right it may have under the Depositories Act, the 1996 Regulations, or any other applicable law to the extent it is inconsistent with the provisions of the Pledge Deed. Clause 5.1(k) would only apply if the Depositories Act, the 1996 Regulations, or any other law permits the parties to contract out of the regulations by mutual agreement. It is a settled position of law and as discussed above, a contract cannot be inconsistent with the provisions of any existing law, including regulations, unless the said law permits the parties to enter into a contract inconsistent with the provision.
PIFSL by the letter dated 23rd January 2018 had informed MHPL in terms of Clause 6.1 that there has been an occurrence of default, which has continued and, therefore, they, on 16th January 2018, in exercise of its right under Clause 6.1 of the pledge deed, have applied for transfer of the pledged shares in its name. Consequently, all the rights in the pledged shares, including but not limited to the right of attending general body meetings, voting rights, and rights to receive dividends and other distributions, now vests with them as per Clause 2.3(A)(ii)(b),
This intimation to MHPL is without prejudice to any rights or remedies PIFSL has in terms of the pledge deed or security documents executed in pursuance of the bridge loan agreement. PIFSL expressly reserved its right to transfer and sell pawned shares for value providing five days’ notice as required under Clause 6.2 of the pledge deed and Section 176 of the Contract Act. We would, without hesitation, therefore hold that on becoming the ‘beneficial owner’ in the records of the ‘depository’, the pawnee had complied with the procedural requirement of Regulation 58(8) to enforce the right to sell the shares. Thereafter, such a sale should be made according to Sections 176 and 177 of the Contract Act. Violation of the said provisions, if made by PIFSL, would have its consequences as per the law. Pawn has not been sold and there is no violation of the Contract Act or for that matter the Depositories Act and the 1996 Regulations. PIFSL has not overlooked its obligations under Sections 176 and 177 of the Contract Act by relying upon sub-regulation (8) to Regulation 58, which has an entirely different object and purpose.
Recording change in the register of the ‘depository’, whereby PIFSL as the pawnee has become the ‘beneficial owner’, is only to enable the pawnee to sell and transfer the shares in accordance with the Depositories Act and the 1996 Regulations. The object and purpose of sub-regulation (8) to Regulation 58 is not to nullify the obligation of MHPL i.e., the pawnor, and PIFSL i.e., the pawnee, under the Contract Act but to enable PIFSL to exercise its rights under Section 176. It also follows that MHPL is entitled to redeem the pledge before the sale to a third party is made.
As to be held that registration of the pawn, that is the dematerialised shares, in favour of PIFSL as the ‘beneficial owner’ does not have the effect of sale of shares by the pawnee. The pledge has not been discharged or satisfied either in full or in part. PIFSL is not required to account for any sale proceeds which are to be applied to the debt on the ‘actual sale’. The two options available to PIFSL as the pawnee under Section 176 of the Contract Act remain and are not exhausted.
For the aforesaid reasons, the present appeal must be allowed and the impugned order passed by the Appellate Authority dated 20th June 2019 upholding the orders of the Adjudicating Authority dated 6th July 2018 and the emails of the IRP dated 19th February 2018 are set aside. It is held that MHPL is not a secured creditor of the Corporate Debtor, namely NNPIL, to the extent of the value of the 31,80,678 shares. PIFSL has rightly made a claim as financial creditor of the Corporate Debtor without accounting for the value of 31,80,678 shares of NEVPL in its claim petition. Insolvency proceedings against the Corporate Debtor, namely NNPIL, will proceed accordingly.
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2022 (5) TMI 761
Fraudulent and Unfair Trade Practices relating to Securities Market - Transaction violative of Regulation 3 and 4 of the PFUTP Regulations - HELD THAT:- ‘Specified proceedings’ has been defined under Section 2(f) of the Settlement Regulations, 2018, namely, the proceedings that have been initiated by SEBI under the SEBI Act, Securities Contracts (Regulation) Act, 1956 or Depositories Act, 1996 as the case may be. 14,000 odd cases have been initiated under the illiquid stock option matters wherein similar kind of transaction have been executed and similar violation is proposed against all these noticees under Regulation 3 and 4 of the PFUTP Regulations. These 14,000 entities form a class of persons and are involved for similar defaults. Therefore, in our opinion, the Board can specify a procedure and terms of settlement for these classes of persons under Clause 26 of the Settlement Regulations, 2018.
SEBI should reconsider and seriously give a thought in coming out with a fresh scheme under Clause 26 of the Settlement Regulations, 2018. Such scheme can be a onetime scheme for this class of person. The terms of settlement should be attractive so that it could attract the noticees / entities to come forward and settle the matter which will ameliorate the harassment of penalty proceedings to the noticees and at the same time would help to clear the backlog of these pending matters before various AOs.
While considering the scheme SEBI should take into consideration the provision of Section 15HA of SEBI Act prior to the amendment made by Act No. 27 of 2014 with effect from September 8, 2014. We find that various AOs have imposed a sum of Rs. 1 lakh for similar trades which were executed prior to September 8, 2014 and Rs. 5 lakh have been imposed for similar trades after the amendment of September 8, 2014.
SEBI should also take into consideration that only a few trades were executed for small gains and some of the AOs have exonerated these noticees on the ground that such miniscule trades did not create any impact. We also request SEBI that while framing a scheme under the Settlement Regulations, 2018 it may also take into consideration the reduction of the quantum of penalty imposed in matters decided so far.
We direct the Registrar of this Tribunal to send a certified copy of this order to the Chairperson of SEBI within a week for necessary information and action.
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2022 (5) TMI 760
Insider trading - information relating to the financial results was an Unpublished Price Sensitive Information (“UPSI”) - confirmatory order confirming the ex-parte ad-interim order whereby the appellant was restrained from buying or selling any securities, either directly or indirectly, till further orders - appellant was a Senior Corporate Counsel of Infosys and, being an officer/employee of Infosys, was reasonably expected to have access to the UPSI and, on a preponderance of probability basis, the appellant was in possession of UPSI and thus, was an insider under Regulation 2(1)(g) of the PIT Regulations - HELD THAT:- As in the absence of any direct or indirect evidence coming forth at this stage and the fact that the investigation is still continuing which may take time for issuance of a show cause notice, we are of the opinion that the continuation of the interim order against the appellant is unjustified especially when the appellant has not traded in the scrip nor there is any finding that he is a party to the unlawful gain.
Admittedly, the appellant has not traded in the scrip. The two partnership companies have traded in the scrip in which admittedly the appellant is not a partner. Direction to deposit the unlawful gain have already been issued against the two partnership companies. The interest of the securities market is thus safeguarded.
The investigation has not yet concluded and, therefore, it would take some time for issuance of a show cause notice. Final orders will come much later. Considering the aforesaid when only prima facie observations are being made which the appellant has sufficiently explained and discharged his burden we are of the opinion that at this stage debarring a person from accessing the securities market is not justified in the facts of the case.
We further observe that the investigating party will not be influenced by any observation made by us in the present order which are tentative in nature and will not be utilised to the advantage of either party.
The confirmatory order as well as the interim order in so far as it relates to the appellants cannot be sustained and are quashed. The appeals are allowed. In the circumstances of the case parties shall bear their own costs.
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2022 (5) TMI 659
Related party transaction - Company proposed to enter into a transaction with one Neelkanth Realtors Private Limited for purchase of 40,000 sq. ft. of residential space - Extra-Ordinary General Meeting was convened for rescinding the resolution in which, the related parties also voted - violation of Regulation 23 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 - HELD THAT:- The Securities Appellate Tribunal has not approved this order passed by the Adjudicating Officer and has allowed the appeal filed by the present respondents while, inter alia, holding that the bar of voting as per Section 188 of the Companies Act, 2013 on related parties operated only at the time of entering into a contract or arrangement, i.e., when the resolution dated 15.07.2014 was passed; and therein the said related parties indeed abstained from voting. The Appellate Tribunal found no fault in the said parties voting in the recalling/rescinding of the said resolution.
The view, as taken by the Appellate Tribunal, in the given set of facts and circumstances of the present case, appears to be a plausible view of the matter. In fact, nothing of ill-intent on the part of the respondents has been established in the present case.
The hyper-technical stance of the appellant could have only been, and has rightly been, disapproved on the given set of facts and circumstances.
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2022 (4) TMI 1650
Offence under SEBI - charge of price manipulation - Misuse of the trading system for creation of bogus long term capital gains and short term capital gains - appellants were restrained from accessing the securities market for a specified period as mentioned in the impugned order and were further prohibited from buying, selling or otherwise dealing in the securities either directly or indirectly - HELD THAT:- Acquisition of 17.64% of the shares by the two connected entities Samtal Financial System Pvt. Ltd. and Anant Fin Consultancy Pvt. Ltd. took place on March 21, 2011 and May 31, 2011 and was not spread over a period of time. The acquisition made on March 21, 2011 was around the same time when the first preferential allotment was made.
This is another indication to show that the promoter directors and the connected entities were cornering the entire free float of the shares of the Company so that they could control the buying and selling of the shares.
Evidence has come indicating that inspite of large buy orders pending during Patch 1-A and Patch 1-B no sale were being made and only miniscule shares were being sold so that the price of the shares could rise since it was found that the shares that was being sold was above the LTP.
We also find that during Patch 1-A, 4560 shares were sold by 13 noticees and whereas only 3910 shares were delivered, the balance 650 shares were not delivered. The selling of these miniscule shares above LTP raised the price from Rs. 11/- to Rs. 173.65.
These 3910 shares which were sold by the connected noticees were traced back to Anant Fin Consultancy Pvt. Ltd. and, therefore, the scheme got exposed to the extent that the Company wanted to keep the free float of the shares between the promoter directors and its connected noticees so that they could control the market to increase the price of the shares.
This view is based on the finding that the connected noticees were predominantly the sellers contributing 85.04% as sellers and the liquidity of the shares in the market was meager. Further, we find that in Patch 1-B the 13 noticees who were sellers in Patch 1-A became the buyers in Patch 1-B.
Promoter directors and other connected noticees indulged in manipulation in the scrip and benefited by selling the shares in the subsequent patch period. We find that the entire scheme of acquiring the shares by the new promoters and ensuring this free float of shares prior to the resumption of trading on the Stock Exchange platform and using the same for manipulating the price so that the price of the scrip increased multifold which resulted in subsequent sale of shares to benefit from the manipulated price was carried out by the new promoters and connected noticees in connivance with each other. Such scheme was totally fraudulent and violative of Regulation 3 and 4 of PFUTP Regulations. Thus, the Company cannot escape its liability.
Thus, in view of the finding given by the WTM that Santosh Kumar Agarwal was not involved in the day to day affairs of the Company and was not part of the orchestrated scheme to manipulate the price of the scrip, the order of the WTM debarring Santosh Kumar Agarwal for a period of 5 years does not make any sense. In the absence of any reasoning, the debarment order against Santosh Kumar Agarwal is wholly misplaced.
We are of the opinion that the appellants in the first set were guilty of violation of Regulation 3 and 4 of the PFUTP Regulations except the appellant Santosh Kumar Agarwal.
Connection of Subodh Agarwal with the new promoters Manoj Kumar Agarwal and Deepa Mittal is clear and deep rooted. Contention that it was only a historic association is a misnomer. In fact, it was a deep rooted connection going back to several years - various entities and connected noticees were connected to Subodh Agarwal either directly to a common directorship or through off-market transaction or where common shareholders in a Company.
We find that many of these entities / noticees connected through Subodh Agarwal traded during various patch periods and were responsible for a fraudulent scheme in the scrip of the Company.
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2022 (4) TMI 1577
Appellant seeks leave of the court to withdraw the petition with liberty to approach this court or any Meera Jadhav forum as advised, if petitioners are not satisfied with the orders to be passed by SEBI in the settlement applications filed by some of the respondents or in the show cause notices issued to some of the respondents before us.
Respondents states that show cause notices have been issued to 62 entities and considering the situation that we have just come out of Covid-19, an attempt will certainly be made to dispose the proceedings at the earliest. Mr. Andhyarujina appearing for respondent no.4 states that proceedings before SEBI pertaining to respondent nos.3 and 4 are going on and it is not like what petitioners have stated that there is no progress. We are not going into this aspect but considering the over all situation, we would expect the SEBI, i.e., respondent no.1 to complete the proceedings pending before them which have been agitated in this petition, as early as possible within 6 months. Liberty to apply for extension.
All rights and contentions of the parties are kept open. We clarify that we have not made any observations on the merits of the matters pending before the SEBI.
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2022 (4) TMI 945
Insider trading - Whether existed a close relationship/immediate relation between the appellants? - circumstantial evidence (trading pattern and timing of trading) - HELD THAT:- In the present case, as rightly argued by the learned counsel of the appellant, the foundational facts were not proved which could raise the alleged presumption. SEBI failed to place on record any material to prove that the appellants were “connected persons” to Balram Garg as required by Regulation 2(1)(d)(ii)(a) read with Regulation 2(1)(f) of the PIT Regulations as none of the appellants were financially dependent on Balram Garg or even alleged to have consulted Balram Garg in any decision related to trading in securities.
In light of the above principles of law laid down by this Court, it was imperative on the Respondent/SEBI to place on record relevant material to prove that the appellants namely, Mrs. Shivani Gupta, Sachin Gupta, Amit Garg and Quick Developers Pvt. Ltd. were “immediate relatives” who were “dependent financially” on appellant Balram Garg or “consult” Balram Garg in “taking decisions relating to trading in securities”. However, SEBI failed to do so as has been already recorded by the WTM in its order dated 11.05.2021. The said appellants were not “immediate relatives” and were completely financially independent of the appellant Balram Garg and had nothing to do with the said Balram Garg in any decision making process relating to securities or even otherwise.
In the context of appellant no. namely Quick Developers Pvt. Ltd., the record clearly reveals that it is neither a “holding company” or an “associate company” or a “subsidiary company” of PCJ nor the appellant Balram Garg has ever been the Director of Quick Developers Pvt. Ltd. Therefore, Quick Developers Pvt. Ltd. cannot be held to be a “connected person” visàvis the appellant Balram Garg.
Reliance of the Respondent/SEBI on transactions between appellant Sachin Gupta and PCJ and the subsequent payments of rent by PCJ is against the principles of natural justice as these allegations were not part of the Show Cause Notices
There is no material on record for the WTM and the SAT to arrive at the finding that both late P.C. Gupta and the appellant Balram Garg communicated the UPSI to the other appellants. The said appellants were not “immediate relatives” and were completely financially independent of the appellant Balram Garg and had nothing to do with the him in any decision making process relating to securities or even otherwise. The submission of the learned counsel of the respondent regarding the same residential address of the appellants also falls flat as admittedly the parties were residing in separate buildings on a large tract of land. Lastly, in our opinion, the SAT order suffers from nonapplication of mind and the same is a mere repetition of facts stated by the WTM. The Appellate Tribunal was exercising jurisdiction of a First Appellate Court and was bound to independently assess the evidenced and material on record, which it evidently failed to do.
Accordingly, the appeals are allowed and the impugned judgement and final orders of WTM and SAT are set aside. The deposits made by the appellants in both the appeals in terms of the impugned orders or interim orders of this Court shall be refunded to the respective appellants.
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2022 (4) TMI 708
Release of the mutual funds in favour of the applicant/Respondent No.5, which are of the value of about 350 crores - Earlier, by order this Court had given the option to applicant/Respondent No.5 to get mutual funds converted/encashed and the amount was to be deposited in a fixed deposit account of a nationalized bank - HELD THAT:- The subsequent supplementary chargesheet submitted by the EOW, and relied upon by the learned counsel for the petitioner, ought not to be ignored while considering this matter. In its earlier orders, this Court has clearly found that the securities need to be released in favour of the applicant/Respondent No.5. The only question is with regard to the mode and manner of the securities to be furnished by the applicant/Respondent No.5. It is not disputed that the petitioner has, in terms of the order dated 16.03.2021, complied with the condition of furnishing bank guarantee of ₹ 344.07 Crores.
In paragraph 20 of this application filed by the applicant/Respondent No.5, it is stated that the applicant is a public limited company, having sound financials with a strong balancesheet and other financial statements (assets of INR 18,556 Crores and turnover of INR 8,779 Crores during financial year 202021). The same is not denied by the other parties who have filed their respective replies to this application.
We are of the opinion that the operative part of the order dated 21.09.2021 deserves to be modified and, accordingly, the same is modified to the extent that instead of bank guarantee for a sum of ₹ 344.07 Crores, which has been furnished by applicant/Respondent No.5, in terms of order dated 16.03.2021, the applicant/Respondent No.5 shall now furnish bank guarantee for a sum of ₹ 100 Crores and it shall further furnish a corporate guarantee to the extent of ₹ 300 Crores. The bank guarantee earlier furnished by the applicant/Respondent No.5 to the extent of ₹ 344.07 Crores shall stand discharged on the applicant/Respondent No.5 fulfilling the above condition to the satisfaction of the Trial Court concerned.
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2022 (3) TMI 1639
Violations of the SEBI laws - violation of SEBI Circular dated November 18, 1993 - allegation of mis-utilising funds of clients for purposes other than those mentioned in the Circular such as for settlement of debit balance client's or proprietary obligations or for own purposes, as well as for granting margin exposure to proprietor or debit balance clients - HELD THAT:- We find that the AO has dealt with the objection raised by the appellant and has held that the appellant has violated the 1993 Circular read with Regulation (26)(xiii) of the Brokers Regulations, 1992. In our opinion, the findings given by the AO in this regard does not suffer from any error of law.
In Arihant Capital Markets Ltd [2021 (10) TMI 1463 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] the order cannot be faulted with. The earlier circular had clearly stated that the funds of the client cannot be applied for any other purposes. The appellant's case was that the funds were applied by it for the dues for their associates, group company, etc. Now, during the arguments only, the issue of nonexistence of formula in the previous circular is brought up. In fact, the said formulization is nothing but the crystallization of the earlier circular.
No error in the impugned order. The appeal fails and is dismissed with no order as to costs.
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2022 (3) TMI 1638
Dismissal of appeal for want of prosecution due to the appellant's counsel repeatedly seeking adjournments - As decided by SAT [2021 (11) TMI 1219 - SECURITIES APPELLATE TRIBUNAL MUMBAI] as appellant does not want to argue the matter today. The appeal is dismissed for want of prosecution. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the registry. The order will be digitally signed by the Private Secretary on behalf of the bench
HELD THAT:- As Tribunal has noted that the appeal was fixed during the COVID-19 pandemic and, therefore, it was not even possible for the members of the Tribunal to sign the order. All that the order records is that on that day, the Advocate for the appellants appeared and sought adjournment. Tribunal goes to the extent of saying that the counsel for the appellants was not interested in arguing the case. That was no ground to dismiss an appeal and especially, during the period affected by COVID-19 pandemic.
The second impugned order is by which an application for restoration of the appeal made by the appellants was dismissed. There was no reason to dismiss the said application. The Tribunal has adopted a hyper-technical approach.
Accordingly, we set aside both the impugned orders and restore Appeal to the file of the Securities Appellate Tribunal.
We make it clear that the appellants shall cooperate with the Tribunal for early disposal of the appeal and shall not seek any adjournments on unwarranted grounds.
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2022 (3) TMI 1540
Compulsory delisting against the company - Payment of reinstatement fee to the Exchange - company was granted 30 days time to submit all pending compliances including payment of all outstanding Exchanges dues and to complete the formalities for revocation of suspension of securities of the company - Whether appellant entitled to pay annual listing fee during the suspension period? - as argued appellant is not entitled to pay the reinstatement fee as demanded by the respondent - HELD THAT:- We find that reinstatement fee is one of the requirements for purpose of revocation of suspension in the trading of securities. This requirement of payment of reinstatement fee is also gathered from the Circular dated December 19, 1994 issued by SEBI and Master Circular of listing dated January 18, 2019 wherein it becomes obligatory for a Company whose securities continue to be listed at the Exchange to pay annual listing fee as well as reinstatement fee for considering revocation of suspension in trading in the securities of the company.
The respondent is entitled to levy fee for the purpose of revocation of suspension of trading in securities and the same is binding on companies desirous of such revocation. The Byelaw also empowers the respondent to reinstate suspended securities subject to conditions as it deems fit. Further in Clause 43 of the Listing Agreement the respondent is entitled to levy reinstatement fee upon companies seeking revocation of suspension of trading in securities.
We do not find any error in the interim order passed by the Delisting Committee. The appeal fails and is dismissed with no order as to costs.
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2022 (3) TMI 1539
Offence under SEBI Act - fraudulent scheme of issuing GDR with an ulterior motive - whether the appellants had played part in the fraudulent scheme of issuing GDR with an ulterior motive? - HELD THAT:- Appeals of Farmax India Limited and Mr. M. Srinivasa Reddy, M.D. - Very stand of the appellant Mr. Srinivasa Reddy that he was credulous enough to sign blank documents; further he-the Managing Director of Farmax being instrumental in obtaining a Board Resolution as detailed (supra), the defense taken by him and Farmax is merely an eyewash. Millions of US$ were involved in the transaction. Their silence for a period of three years would clearly show the involvement of these appellants in the entire episode. The appeals filed by these appellants therefore fail.
Appellant Farmax on its own has not indulged into fraudulent activity but the activities is imputed to it as the Board of Directors and the Managing Director had indulged into the same. Since the penalty would be in fact on the shareholders of the company in our view, imposition of penalty of Rs. 12 crore would be excessive. In the circumstances, the Appeal challenging the order of the AO needs to be partly allowed and the penalty needs to be reduced from Rs. 12 crore to Rs. 5 crore.
Sanjay Aggarwal And Nithish Bangera - The very fact that the appellant provided a draft of disclosure to be made by the Farmax to the exchanges that the issue of the GDR was successfully subscribed; that he has forwarded the draft Resolution to be passed by the appellant Farmax which culminated in authorizing the pledge of GDR proceeds; seeking of signatures on blank documents from appellant Farmax would clearly shows that the appellant did not act simply as a bonafide coordinator between the company and the Lead Manager etc. The appeal of the appellant Sanjay Aggarwal, therefore fails.
Nithish Bangera, he was sole employee of La Richesse owned by appellant Sanjay Aggarwal.The appellant was merely an employee of appellant Sanjay Aggarwal and the observation made by the learned WTM as regard the appellant Sanjay Aggarwal that he was an “advisor” and responsible chartered accountant would not be applicable in this case. One email forwarded to him seeking blank TT slips from the Farmax would not lead to believe that this appellant was aware of the entire fraudulent scheme of GDR issue. The evidence in this regard is lacking. The appeal therefore deserves to be allowed as regard the present appellant.
Prospect Capital Ltd. and John Behar Lead Manager is not merely a post office between the company issuing GDR and the investors investing in the same. The Lead Manager has to conduct due diligence in collecting and evaluating all information. It has to obtain confirmation of acceptance of subscription from the initial investors to the GDR issue etc. The Lead Manager has to show that it has carried its activity as per the procedures devied.
On the other hand, even if we ignore the alleged fact of issuing a false letter as alleged by SEBI, the very fact that the appellants failed to show that they had confined their activity only to the procedure correctly, would lead us to believe that they were involved in the clandestine scheme.
As fact that appellant no. 2 John Behar is closely connected to another noticee Arun Panchariya is an added factor in this direction -as submitted by SEBI that ESCROW agreement dated May 05, 2010 entered into between Farmax, EURAM Bank and Prospect Capital Ltd. noted that Prospect Capital Ltd. had agreed with Farmax “to procure investors for the subscription of GDRs”. However instead of procuring investors these appellants procured sole investor i.e Vintage which is an entity of Arun Panchariya connected both the appellants. Therefore our view, on facts, the order of SEBI as regards these appellants cannot be faulted with.The appeal of Prospect Capital Ltd. as well as John Behar fails.
European American Investment Bank AG - The entire reading of the order of the learned WTM in that case would show that the EURAM-FII’s role as a foreign investment institute was investigated and examined by respondent SEBI. Its role as a banker providing finances to subscribers to the GDR and accepting collateral of the GDR proceeds from the respective companies was not examined. The principle of issue estoppel therefore would not at all be applicable in the present case.
As regard the fact of the case, it is an admitted fact the appellant had advanced loan to Vintage for subscribing to the GDR of the Farmax as a sole subscriber. The Vintage is owned by noticee Arun Panchariya. Present appellant had joint venture with Arun Panchariya as detailed supra. The appellant did not explain as to why no collateral security could be obtained from Vintage or Arun Panchariya. However, the GDR proceeds to be received in future were accepted as a pledge by EURAM Bank.
As it was nothing but a case of making two entries in two accounts i.e. one in the account of Vintage of granting loan and another in the account of Farmax of receiving the GDR proceeds and holding the same as a security for the loan advance to Vintage. In the process, appellant EURAM had earned interest and the loan remained fully secured by the GDR proceeds. It would be naive to believe that EURAM Bank did not know the purpose for which the GDRs are issued and whether the pledging of the GDR proceeds for a stranger could be an object or purpose of issuing GDR.
Appellant relying on the case of Dilip S. Pendse vs SEBI Appeal No. 80 of 2009 decided on November 19, 2009 submitted that the preponderance of probability to prove the charge of fraud is higher than the regular one. Considering the status of the appellant as an International Bank; that it was registered as a foreign investment institute in India, having connection with the noticee Arun Panchariya, in our view the above test is satisfied in the present case.
Present appeal also fails.
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2022 (3) TMI 1498
Convening a meeting of seven debenture holders to consider the Resolution Plan approved by the ICA lenders - meeting put to vote such resolution as may be necessary in terms of the Debenture Trust Deed - HELD THAT:- Having considered the submissions, it would be appropriate following the law laid down by this Court in Rajkumar Nagpal [2021 (10) TMI 1311 - BOMBAY HIGH COURT] to grant ad-interim relief in terms of prayer clause (c). Accordingly, Defendant No.2 is directed to call meeting of the seven Debenture Holders under the three Debenture Trust Deeds within two weeks of this order. The calling, conducting and voting at such meetings shall be governed by the terms of the respective Debenture Trust Deeds. At such meetings, the second Defendant will place for consideration and approval of the beneficial owners or debenture holders the settlement offer / compromise / arrangement / Resolution Plan approved by ICA lenders on 19th June, 2021 and put to vote such Resolution Plan.
It is made clear if there is any further or later or supplementary trust deed, then the provisions of that supplementary trust deed will also be taken in to account.
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2022 (3) TMI 1449
Offence under SEBI Act - Mobilisation of the funds - violation of the CIS Regulations - Prohibition of manipulative, fraudulent and unfair trade practices - Violation of the provisions of Section 12(1B) of the SEBI Act read with Regulation 3 of CIS Regulations and Regulation 4(2)(t) of the PFUTP Regulations - Scope of definition of fraud - monetary penalty of Rs.20 crores to be paid jointly and severally by the appellant, the Company and its Directors - HELD THAT:- In the instant case, we have gone through the entire impugned order and we do not find any finding to indicate that the appellant committed a fraud in the mobilisation of the funds. In the absence of any finding of fraud the charge of violating Regulation 4(2)(t) of the PFUTP Regulations cannot be proved. We are satisfied that in the absence of any finding of fraud against the appellant there is no violation of Regulation 4(2)(t) committed by the appellant.
Regulation 4(2)(t) provides illegal mobilisation of funds. The impugned order does not show any iota of evidence that the appellant was involved in the illegal mobilisation of funds after he joined as a Director. Admittedly, the appellant was appointed as a Director in 2010. Majority of the schemes floated by the Company was already launched prior to the appellant’s appointment as a Director. There is no finding by the Adjudicating Officer that such and such scheme was launched during the period when the appellant became a Director nor there is any finding that the appellant was responsible in the mobilisation of the funds under those schemes.
The finding that no evidentiary proof has been filed by the appellant that he is not an officer in default or that he did not attend the board meeting when such scheme was launched is patently erroneous. The burden has wrongly been placed upon the appellant. A charge has been levelled against the appellant, namely, violation of Regulation 4(2)(t). The responsibility to prove the charge is upon the prosecution, namely, upon SEBI. It is for the respondent to prove that the appellant was an officer in default or that he attended the meeting when a scheme was launched. It cannot be presumed that the appellant must have been present in the meeting of the board of directors when the scheme was launched. We are satisfied that in the instant case SEBI has failed to discharge its burden.
In any case, the finding of the Adjudicating Officer that the appellant and other Directors are officers in default is totally misplaced. Under Section 5(g) of the Companies Act, 1956 all Directors can be treated as officers in default only when there is a finding that there was no Managing Director or designated person who was responsible for the mobilisation of the funds. We find that there is no finding that the Company did not have any designated person or Managing Director and, therefore, all Directors would be deemed to be officers in default.
Penalty under Section 15HA can be imposed if a person indulges in fraudulent or unfair trade practices. We have already held that the appellant has not indulged in fraudulent and unfair trade practice and, therefore, no penalty under Section 15HA could be imposed.
In the light of the aforesaid, the impugned order in so far as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed. Attachment orders, if any, on the appellant’s demat account, bank account etc. shall be lifted forthwith. All the misc. applications are also accordingly disposed of. In the circumstances of the case parties shall bear their own costs.
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2022 (3) TMI 1226
Violation of provisions of the Act and the PFUTP Regulations - What is the scope and ambit of statutory appeal to the Supreme Court under Section 15Z of the Act against an order passed by the Securities Appellate Tribunal? - HELD THAT:- Supreme Court will exercise jurisdiction only when there is a question of law arising for consideration from the decision of the Tribunal. A question of law may arise when there is an erroneous construction of the legal provisions of the statute or the general principles of law. In such cases, the Supreme Court in exercise of its jurisdiction of Section 15Z may substitute its decision on any question of law that it considers appropriate.
Not every interpretation of the law would amount to a question of law warranting exercise of jurisdiction under Section 15Z. The Tribunal while exercising jurisdiction under Section 15T, apart from acting as an appellate authority on fact, also interprets the Act, Rules and Regulations made thereunder and systematically evolves a legal regime. These very principles are applied consistently for structural evolution of the sectorial laws. This freedom to evolve and interpret laws must belong to the Tribunal to subserve the Regulatory regime for clarity and consistency. These are policy and functional considerations which the Supreme Court will keep in mind while exercising its jurisdiction under Section 15Z.
Whether the advertisements dated 07.04.2005, 20.04.2005, are in violation of Regulations 3 (a), (b), (c), (d) read with Regulation 4 (1), (2) (k) and (r) as amounting to misleading and defrauding the investors? - As per the first advertisement dated 07.04.2005, it was alleged by SEBI that in violation of Regulation 4 (2) (k) and 4 (r) of the PFUTP Regulations, the Company proceeded to announce on 07.04.2005 the launch of the worldwide outbound package tour services. These services were intended to operate across 25 cities in India and were expected to achieve a revenue of ₹ 1000 million with a net profit of ₹ 200 million in its first year. SEBI alleges that this announcement was made for the sole purpose of misleading the investors. This finding is reversed by the Tribunal based on an agreement between the Company and M/s Gem Tours and Travels Private Limited to establish a subsidiary company called ‘Mega Holidays Ltd.’ to handle the tour services. The Tribunal also noted the bank statement supporting the Company's transaction with M/s Gem Tours and Travels Private Limited.
Tribunal has reversed the findings of SEBI on the basis of its own inferences drawn from the documents on record. The decision of the Tribunal is fact-based and does not give rise to any question of law for invoking the jurisdiction of the Supreme Court under Section 15Z. For this reason, we are not inclined to interfere with the finding of fact, which must rest with the conclusions drawn by the Tribunal.
Second announcement dated 20.04.2005 is concerned, it relates to the allegation of announcing the commencement of business in foreign exchange with the launch of ‘Mega Forex Brand’ as alleged that the Company made false statements such as that it is expected to grab 5-10% of the market share in the forex market, “which is at 5-6 billion dollars” in a span of one or two years. Here again, the Tribunal concluded that the application for a license to deal with foreign exchange which is alleged to have been made in September 2005 was only a revised application. The revised application is said to have been made in as a reply to the queries of the Reserve Bank of India on their original application, which was in fact made on 14.04.2005, that is even before the announcement. The Tribunal, therefore, was of the opinion that the announcement is not imaginary but is based on specific steps taken before the date of announcement, lending credence to the said activity.
the conclusion is drawn by the Tribunal, being factual, not giving rise to any question of law, the jurisdiction of this Court under Section 15Z cannot be invoked. For this reason, we affirm the finding of the Tribunal and there is no occasion for this court to interfere with the decision of the Tribunal. The issue is answered against the appellant.
Whether the company has violated Regulations 3(a), (b), (c) and (d) and Regulation 4(1), 4(2)(k) and 4(2) (r) of the SEBI (PFUTP) Regulations, 2003 by manipulating the share prices and accounts? - The Tribunal in its appellate jurisdiction came to the conclusion that the connectivity could not be established and that the conclusions drawn by the Board were insufficient - The findings are based on the Tribunal's inferences drawn from the material available on record. The conclusions drawn by the Tribunal do not give rise to any question of law warranting interference of this court under Section 15Z of the Act. This issue is answered against the appellant.
Whether there is a right to cross-examine the author of a letter if the SEBI seeks to rely on that letter, adverse to the company? - There is a right of disclosure of the relevant material. However, such a right is not absolute and is subject to other considerations as indicated under paragraph 62(v) of the judgment above referred. In this judgment, there is no specific discussion on the issue of a right to cross-examination but the broad principles laid down therein are sufficient guidance for the Tribunal to follow. There is no need for us to elaborate on this point any further.
Coming back to the facts of the present case, we have noticed that the Tribunal has arrived at its conclusions based on independent facts concerning (a) the allegations under Regulation 4 relating to the issuance of misleading advertisements dated 07.04.2005 and 20.04.2005 as well as (b) allegations relating to manipulation of scrip prices and profits to lure investors. As indicated earlier, the Tribunal concluded that the allegations could be proved.
As we are not interfering in the findings of fact arrived at by the Tribunal the Company’s claim for cross-examining would pale into insignificance. This question presents itself merely as an academic issue.
We are also of the opinion that, there was no necessity for the Tribunal to lay down as an inviolable principle that there is a right of cross-examination in all cases. In fact, the conclusion of the Tribunal based on evidence on record did not require such a finding. We, therefore, set aside the findings of the Tribunal to this extent while upholding its decision on all other grounds. We would also leave the question of law relating to the right of cross-examination open and to be decided in an appropriate case by this Court.
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2022 (3) TMI 1113
SEBI Circular applicability - whether or not SEBI would qualify as “Any person aggrieved”? - Retrospective applicability of circular - Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities” - Plaint came to be amended now seeking an injunction restraining RCFL and BoB from acting upon, implementing or taking any steps for diluting, extinguishing or creating third party rights in respect of the security provided under the DTD - HELD THAT:- In our view, if SEBI has a statutory right to file an Appeal, such right cannot be divested by virtue of certain remarks passed by the Ld. Single Judge in the Impugned Orders to the effect that the order would not constitute a precedent against SEBI.
There is no mention whatsoever in the SEBI Circular suggesting its retrospective applicability, we are unable to rule that the SEBI Circular would also apply to defaults committed prior to 13th October, 2020. As a consequence, it follows that the SEBI Circular cannot be applied retrospectively to the present case in view of the admitted fact that RCFL committed defaults prior to 13th October, 2020 and the ICA was executed on 6th July, 2019 which are dates prior to the coming into force of the SEBI Circular and prior to the Supplementary DTD incorporating reference to the SEBI Circular.
Having held that the SEBI Circular cannot be applied retrospectively on settled principles of statutory interpretation, we are unable to appreciate SEBI’s submission that the SEBI Circular being beneficial in nature ought to be applied nonetheless. We cannot also accept the submission that it must also apply in view of the fact that the SEBI Circular does not take away or impair the voting rights of debenture holders. We are therefore unable to apply the SEBI Circular to the defaults and DTDs which admittedly predate the SEBI Circular.
We are also guided by the overall structure of the SEBI Circular. Chapter A thereof provides for an Event of Default, Chapter B provides for seeking consent of investors for (i) enforcement of security; and (ii) signing an Inter-Creditor Agreement and lastly; Chapter C provides for the conditions for signing of the Inter-Creditor Agreement by Debenture Trustee(s) on behalf of investors. The structure itself puts in place a chronological mechanism starting with the event of default and consequences thereafter. We fail to understand how this structure can be applied in a piecemeal manner to prior defaults and Inter-Creditor Agreements entered into post such defaults and prior to the SEBI Circular having come into force or even prior to the Supplementary DTD being executed.
We cannot accept SEBI’s submission that the most recent of its resolutions / circulars must govern meetings irrespective of the original contract between the parties. SEBI argues that the SEBI Circular is incorporated into the DTDs by virtue of the Supplementary Debenture Trust Deed(s) executed on 11th March, 2021. In order to deal with this submission, we note that the DTDs were executed on 3rd May, 2017, 23rd May, 2017 and February 5, 2018. As stated hereinabove, defaults were committed prior to, 13th October, 2020 and the ICA was executed on, 6th July, 2019. We have already held that the SEBI Circular cannot be applied to defaults committed prior to 13th October, 2020. This being so, the subsequent incorporation of the SEBI Circular to the DTDs by virtue of the Supplementary Debenture Trust Deed(s) executed on 11th March, 2021 could only logically apply the SEBI Circular to defaults occurring post such incorporation or at best, to defaults post 13th October, 2020.
We are informed that in so far as the Debenture Trust Deed dated May 23, 2017 is concerned, YBL has no voting share. Therefore, unless the 32 Debenture Holders under the Debenture Trust Deed dated May 23, 2017, approve the settlement / compromise, the settlement / compromise cannot go through. This is irrespective and independent of YBL, considering that YBL does not have any voting rights under this Debenture Trust Deed dated May 23, 2017. In so far as the Debenture Trust Deed dated May 3, 2017 is concerned, YBL holds 68% of the Debentures in value. The majority required to approve the Resolution Plan under the DTDs is 75%. Therefore, YBL would still require an additional 7% positive vote for approval of the Resolution Plan. Therefore, we do not see how YBL can in fact single handedly determine the faith of the vote.
We do not see how the interest of retail investors is not protected should voting be carried out in terms of the DTDs. Under this procedure, the decision making power still vests with each individual Debenture Holder. Every Debenture Holder will have the right to vote and the faith of the vote shall be decided by a majority of 3/4th after taking into consideration the votes cast by the Debenture Holders. This mechanism, is in our opinion, fair, just, equitable and in keeping with the interest of all stakeholders.
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2022 (2) TMI 1408
Power of SEBI statutory initiating action against statutory auditor / chartered accountant - appellant who is a statutory auditor / chartered accountant has been prohibited from issuing any certificate of audit and has been restrained from rendering any other auditing services to any listed companies and intermediaries for a period of one year - as alleged company had made wrong misleading or inadequate disclosures to the stock exchange and had understated the outstanding loans and interest and financial changes in the annual returns of 2008-09, 2009-10 and 2010-11 and had violated Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations.
The stand of the appellant is, that the preparation and presentation of the financial statement and the job to ensure that they are free from material misstatement whether due to fraud or error is the responsibility of the management. The appellant as a statutory auditor was responsible to express an opinion on the financial statement based on the internal audit and was not involved in the preparation of the books of accounts of the company or the misstatement in the balance sheet by the company.
HELD THAT:- In the instant case, the show cause notice alleged that the company did not utilize the IPO proceeds and that it was diverted to different entities in the guise of making payments towards the objects stated in the prospectus. The focus in the show cause notice was to examine the role of the appellant as the statutory auditor with regard to due diligence done by it by certifying the expenditure incurred by the company towards the IPO expenses out of the IPO proceeds. The appellants certified the amount was utilized as per the prospectus. A.O. however found that there were lapses on the part of the appellant and due diligence was not carried out by them while certifying that the IPO proceeds were utilized for the objects stated in the prospectus.
We find that the A.O. has only found that due diligence was not carried out by the appellant. There is no finding that the appellants were instrumental in preparing false and fabricated accounts or have connived in preparation or falsification of the books of account. There is no finding that the appellants had manipulated the books of accounts with knowledge and intention, in the absence of which, there is no deceit or inducement by the appellants. In the absence of any inducement, the question of fraud committed by the appellants does not arise. This Tribunal in Price Waterhouse (supra) has categorically held that a C.A. can be proceeded against them if they are instrumental in preparing false and fabricated accounts otherwise SEBI has no power to proceed against them.
Section 12A(a) & (b) of the SEBI Act is obviously not applicable to the appellant as they are not dealing in the securities. Similarly, Section 12(c) cannot be made applicable because no fraud has been carried out by the appellant. Further, in the absence of connivance, deceit, or manipulation Regulation 3 & 4 of the PFUTP Regulations cannot be made applicable.
Thus when a specific finding has been given by the WTM in the impugned order that the promoters and the directors of the DCHL had a private and discreet arrangement between the company and DCM which was only known to the promoters and directors of the DCHL with regard to the understatement of loans and liabilities in the annual accounts of DCHL, it is clear that the appellant as a statutory auditor was not responsible for the preparation and falsification of the books of accounts, the financials of the company and the balance sheet of the company.
Thus in order to give a finding on collusion, there must be some material which could lead to an inference of collusion. Once a finding is given that the appellant was not involved in the fabrication and fudging of the books of accounts and the balance sheet and if the appellant had no intention or knowledge of such understatement being shown in the financials, the charge of fraud or collusion or connivance with the directors and promoters of the company cannot be levied, only on the ground that he was not diligent or cautious or did not check the outstanding loan details from the banks and through other sources. Lack of due diligence can only lead to professional negligence which would amount to a misconduct which could be taken up only by ICAI.
Thus the impugned order in so far as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed with no order as to costs.
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2022 (2) TMI 907
Violation of “PFUTP Regulations”- Duty to Disclose Investigative Material - Exceptions to the Duty to Disclose - whether an investigation report under Regulation 9 of the PFUTP Regulations must be disclosed to the person to whom a notice to show cause is issued? - HELD THAT:- The findings of the investigation report are relevant for the Board to arrive at the satisfaction on whether the Regulations have been violated. Even if it is assumed that the report is an inter-departmental communication, as held in Krishna Chandra Tandon [1974 (4) TMI 103 - SUPREME COURT] there is a duty to disclose such report if it is relevant for the satisfaction of the enforcement authority for the determination of the alleged violation.
In Natwar Singh [2010 (10) TMI 156 - SUPREME COURT] it was held that material which is relevant to the subject-matter of the proceedings must be disclosed, unless the scheme of the statute indicates to the contrary. The non-disclosure of such material is prima facie arbitrary. A deviation from this general rule was made based on the stage of the proceedings. It was held that it is sufficient to disclose the materials relied on if it is for the purpose of issuing a show cause notice for initiating inquiry.
In the present case, since the report of the investigating authority under Regulation 9 enters into the calculus of circumstances borne in mind by the Board in arriving at its satisfaction under Regulation 10 for taking actions as specified in Regulations 11 and 12, it would be contrary to the Regulations to assert that the investigation report is merely an internal document of which a disclosure is not warranted. In any event, the language of Regulation 10 makes it clear that the Board forms an opinion regarding the violation of Regulations after considering the investigation report prepared under Regulation 9. Thus, the investigation report has to be duly disclosed to the noticee. However, the right to disclosure is not absolute. It needs to be determined if the non-disclosure of the investigative report is protected by any of the exceptions to the rule.
Contention of the respondents that since the investigation report under Regulation 9 would also include information on “commercial and business interests, documents involving strategic information, investment strategies, rationale for investments, commercial information and information regarding the business affairs of the entities/persons concerned” affecting the privacy and the competitive position of other entities, it should not be disclosed - We cannot be oblivious to the wide range of sensitive information that the investigation report submitted under Regulation 9 may cover, ranging from information on financial transactions and on other entities in the securities market, which might affect third-party rights. The report may contain market sensitive information which may impinge upon the interest of investors and the stability of the securities market. The requirement of compliance with the principles of natural justice cannot therefore be read to encompass the right to a roving disclosure on matters unconnected or as regards the dealings of third parties. The investigating authority may acquire information of sensitive nature bearing upon the orderly functioning of the securities market. The right of the noticee to disclosure must be balanced with a need to preserve any other third-party rights that may be affected.
We find that the appellant is unable to prove that the disclosure of the entire report is necessary for him to defend the case - The appellant did not sufficiently discharge his burden by proving that the non-disclosure of the above information would affect his ability to defend himself. However, merely because a few portions of the enquiry report involve information on third-parties or confidential information on the securities market, the respondent does not have a right to withhold the disclosure of the relevant portions of the report. The first respondent can only claim non-disclosure of those sections of the report which deal with third party personal information and strategic information on the functioning of the securities market.
Board should determine such parts of the investigation report under Regulation 9 which have a bearing on the action which is proposed to be taken against the person to whom the notice to show cause is issued and disclose the same. It can redact information that impinges on the privacy of third parties. It cannot exercise unfettered discretion in redacting information. On the other hand, such parts of the report which are necessary for the appellant to defend his case against the action proposed to be taken against him need to be disclosed.
The notice to show cause issued to the appellant is for violation of the provisions of the SEBI Act, SCRA and PFUTP Regulations. The show cause notice has specifically referred to what was revealed during the course of the investigation and has invoked the provisions of the PFUTP Regulations in the allegations against the appellant.
Conclusion:-
(i) The appellant has a right to disclosure of the material relevant to the proceedings initiated against him. A deviation from the general rule of disclosure of relevant information was made in Natwar Singh (supra) based on the stage of the proceedings. It is sufficient to disclose the materials relied on if it is for the purpose of issuing a show cause notice for deciding whether to initiate an inquiry. However, all information that is relevant to the proceedings must be disclosed in adjudication proceedings;
(ii) The Board under Regulation 10 considers the investigation report submitted by the Investigating Authority under Regulation 9, and if it is satisfied with the allegations, it could issue punitive measures under Regulations 11 and 12. Therefore, the investigation report is not merely an internal document. In any event, the language of Regulation 10 makes it clear that the Board forms an opinion regarding the violation of Regulations after considering the investigation report prepared under Regulation 9;
(iii) The disclosure of material serves a three- fold purpose of decreasing the error in the verdict, protecting the fairness of the proceedings, and enhancing the transparency of the investigatory bodies and judicial institutions;
(iv) A focus on the institutional impact of suppression of material prioritises the process as opposed to the outcome. The direction of the Constitution Bench of this Court in Karunakar [1993 (10) TMI 310 - SUPREME COURT] that the non-disclosure of relevant information would render the order of punishment void only if the aggrieved person is able to prove that prejudice has been caused to him due to non-disclosure is founded both on the outcome and the process;
(v) The right to disclosure is not absolute. The disclosure of information may affect other third-party interests and the stability and orderly functioning of the securities market. The respondent should prima facie establish that the disclosure of the report would affect third-party rights and the stability and orderly functioning of the securities market. The onus then shifts to the appellant to prove that the information is necessary to defend his case appropriately; and
(vi) Where some portions of the enquiry report involve information on third-parties or confidential information on the securities market, the respondent cannot for that reason assert a privilege against disclosing any part of the report. The respondents can withhold disclosure of those sections of the report which deal with third-party personal information and strategic information bearing upon the stable and orderly functioning of the securities market.
The Board shall be duty-bound to provide copies of such parts of the report which concern the specific allegations which have been levelled against the appellant in the notice to show cause. However, this does not entitle the appellant to receive sensitive information regarding third parties and unrelated transactions that may form part of the investigation report.
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2022 (1) TMI 1451
Offence under SEBI Act - Charge for IPO applications in fictitious names - exercise of power under Section 482 of Code of Criminal Procedure and Article 226 and 227 of Constitution of India - as noted petitioner had opened Demat Accounts in fictitious and benami names and made large number of applications in the IPOs in the category of retail investors in fictitious and benami names only with a view and malafide to corner the quota of retail investors in the IPOs by the companies
Validity and impact of SEBI's Consent Order - HELD THAT:- One doesn’t require much prescience to understand that the allegations made by SEBI while initiating proceedings under SEBI Act and as also prosecution initiated by CBI are similar in nature. In such circumstances, the Consent Order assumes significance and one is required to look into whether Consent Order passed in the matter tantamounts to compounding the offences alleged against the petitioner, in accordance with the guidelines of the said consent scheme.
Thus, the consent application so moved by the petitioner is in accordance with guidelines of SEBI. Prosecution pending against him was also pointed out by him and even he urged that he be exonerated from the cases so started either by SEBI or at the behest of SEBI.
After considering all relevant parameters as provided in said Consent Circular including gravity of offence, SEBI has passed the Consent Order. We no doubt of whatsoever nature in my mind that the gravity of offence and as well as the large public interest were duly considered before compounding the proposed prosecution by SEBI. It is also not in dispute that the petitioner had disgorged Rs. 2.35 crore and in a sense the public interest was duly secured and protected.
SEBI, the complainant, in the present matter having agreed to compound the said irregularities upon payment of certain amounts allegedly earned by the petitioner and the petitioner having been paid the same, it can no more be termed as fraudulent act on the part of petitioner warranting continuation of prosecution based on such allegations.
The dispute between the parties were predominantly commercial in nature having little criminal overtone and this being so, in my humble view, the observations made of the principles so laid down by the Hon’ble Apex Court in the case of Parbatbhai Aahir Alias Parbatbhai Bhimsinghbhai Karmur and Others [2017 (10) TMI 1194 - SUPREME COURT] clearly applies to the case in hand.
The disputes which are predominantly commercial in nature with little criminal overtone can be quashed by the Hon’ble Court while exercising the power under Section 482 of the Cr.P.C
As far as the impleadment of complainant as a party respondent is concerned, in our opinion, having regard to the facts and circumstances there was no necessity for the petitioner to implead the complainant as a party respondent. Therefore, do not find merit in the submissions of learned Counsel for respondent No. 2 that the Petitions are bad for non-joinder of complainant as a party respondent.
The present are the fit cases in which the Court can exercise its inherent power under Section 482 of the Cr.P.C. and as also under Article 227 of the Constitution of India. Therefore, conclude that the continuation of the proceedings in Special CBI Case and Special CBI Case pending on the files of the Special Judge (CBI), Greater Mumbai, qua the Petitioner herein shall be an abuse of process of Court, therefore, the same is hereby ordered to be quashed and set aside in order to meet the ends of justice.
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