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SEBI - Case Laws
Showing 61 to 80 of 650 Records
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2023 (12) TMI 381
Power of SEBI to initiation action against Chartered Accountant (CA) / Auditor of the company - misconduct dereliction of duties and abhorrence of due diligence while conducting statutory audit - auditor as directed that the certified copy of the order be forwarded to the Institute of Chartered Accountants of India ("ICAI") and National Financial Reporting Authority ("NFRA") for appropriate action against the appellants - HELD THAT:- The scope of inquiry by SEBI is very limited and is confined only to the charge of conspiracy of involvement of the appellant in the fraud, if any, and to take consequential action if there is connivance or conspiracy with the appellant and its directors. Only then, SEBI could take action under the SEBI Act and the PFUTP Regulations otherwise it is not open to SEBI to inquire into any charge of professional negligence of the auditor since the audit firm is not dealing directly in securities.
The scope and jurisdiction of SEBI to conduct an inquiry against a Chartered Account or a Chartered Accountant Firm was considered by the Bombay High Court in Price Waterhouse & Co. & Another vs. SEBI [2010 (8) TMI 173 - HIGH COURT OF BOMBAY] it is not open to SEBI to encroach upon the powers vested with the Institute under the CA Act and if there is any material against the Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts then SEBI has powers to take remedial or preventive measures under the SEBI Act. The Bombay High Court held that the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry and if it is found that a particular Chartered Accountant has concocted false accounts in connivance and in collusion with the Officers / Directors of the Company then SEBI could take action.
Jurisdiction of SEBI would depend upon the evidence which is available and if there was some omission without any mens rea or connivance with anyone, in any manner then SEBI cannot issue any further direction and was required to drop the proceedings.
In the instant case, the WTM has given a categorical finding that there is no evidence showing fraud or connivance by the appellants with the officers or directors of the Company. WTM has further given a finding that there is insufficient evidence to hold that the appellants had actually manipulated the books of accounts with knowledge and fraudulent intention and that there was no tangible evidence to show that the appellant had committed a fraud in collusion or connivance with the officers of the Company or its management.
Once there is a finding that the appellants have not manipulated the books of accounts with knowledge and fraudulent intention or in connivance with the officers or management of the Company then no directions could be issued by the WTM to the ICAI or NFRA to consider dereliction of duties and abhorrence of due diligence while conducting statutory audit as in our opinion it was outside the domain of the WTM to issue such directions. At best, administrative directions could have been issued by SEBI to the aforesaid institutions to consider the alleged irregularities but beyond that no adjudicatory directions could be issued by the WTM.
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2023 (12) TMI 318
Power of SEBI to initiation action against Chartered Accountant (CA) / Auditor of the company - Charge of conspiracy and involvement in the fraud against CA firm - statutory auditor working against the fiduciary capacity - appellant is a leading firm of Chartered Accountants consisting of 14 partners and 250 accountants, article assistants and others - appellant was appointed as the joint statutory auditor - appellant had acted against the fiduciary capacity and instead of working in the interest of the shareholders of the company the appellant facilitated the scheme of cleaning up the books of account of the Company despite being aware of the irregularities and misstatements in the financial statements of the Company - investigation report alleged that on the basis of the hand written note the appellant had facilitated the scheme of cleaning up of the books of the Company and therefore recommended initiation of adjudication proceedings. Accordingly, adjudication proceedings were initiated against the appellant under Section 15HA of the SEBI Act - Whether appellant was not involved in the fudging of the books of accounts?
HELD THAT:- In Price Waterhouse Co. Vs. SEBI [2019 (9) TMI 592 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] this Tribunal while considering the role of the appellant as a firm of the C.A.s found that the scope of the enquiry was only restricted to the charge of conspiracy and involvement in the fraud and not to any charge of professional negligence since the C.A. / C.A. firm were not dealing directly in the securities. This Tribunal held that in absence of inducement, fraud was not proved nor there was connivance or collusion by the C.A.s and therefore, the provision of section 12 (A) of SEBI Act and Regulation 3 & 4 of PFUTP Regulations are not applicable. This Tribunal held that gross negligence or recklessness in adhering to the accounting norms in the course of auditing can only point out to the professional negligence which would amount to a misconduct to be taken up only by ICAI.
Once an investigation or a finding in the inquiry comes that the appellant was not involved in the fudging of the books of accounts and that there was no collusion or connivance by the appellant as a statutory auditor with any employee, promoter or director of the Company then the matter has to be dropped and SEBI could not proceed any further. The scope of inquiry was only restricted to the charge of conspiracy and involvement in the fraud and not to any charge of professional negligence since the chartered accountant or chartered accountant firm were not dealing directly in the securities.
Considering the aforesaid the show cause notice only alleged that the appellant had facilitated the scheme of cleaning up of the books of accounts of the Company.
There is no finding of the appellant’s direct involvement in the cleaning up of the books of accounts or in the fudging of the books of accounts of the Company. There is also no finding of the appellant’s collusion or connivance with any director, promoter or employee of the Company and consequently the appellant cannot be charged under Section 12A of the SEBI Act read with Regulation 3 and 4 of the PFUTP Regulations.
While conducting the statutory audit of a company, one of the objectives of an auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. For this purpose, the relevant standard is the Standard of Auditing (‘SA’) 315 titled ‘identifying and Assessing the Risk of Material Misstatement Through Understanding the entity and its Environment’. As per the said standard, identification of risk of material misstatement is a matter of professional judgement.
In the context of SA-315 pertaining to identifying and assessing the risks of material misstatements in financial assessment, it is pertinent to bear in mind that any audit is subject to inherent limitations and that owing to such inherent limitations of an audit, there is an unavoidable risk that some material misstatement of the financial statements may not be detected even though the audit is properly planned and performed in accordance with the SA’s which was also stated by the appellant in the engagement letters executed with CG Power. Risk of not detecting a misstatement resulting from fraud is higher than the risk of not detecting a misstatement resulting from an error. Similarly, the risk of not detecting a material misstatement resulting from management fraud is greater than that resulting from an employee fraud.
The standard of accountancy framed by the ICAI makes a distinction between a statutory auditor and a forensic auditor. We may state here that the role of a statutory auditor is not to function like a forensic auditor. Any statutory audit unlike an internal or forensic audit is inherently carried out on a test check / sampling basis which in the instant case had been done by the appellant. As part of the audit process the appellant had duly carried out the exercise of identifying and assessing the risk of material misstatements in the financial statements in accordance with SA 315.
Accordingly, in its professional judgement and after exercising reasonable professional skepticism, ledger accounts with zero balance in the advance to suppliers / advance from customer account were not identified as those which were subject to risk of material misstatement since zero balances would not have impacted the financial statements and therefore, were not considered for further audit procedures.
Conversely, those accounts which had a closing balance in advance to suppliers / advance from customer account were considered for further audit procedures such as obtaining balance confirmation, verification of underlying service agreements and supply contracts etc. Further, any statutory audit, unlike an internal or a forensic audit, is inherently carried out on a test-check / sampling basis, which was done by the appellant in the case of CG Power also.
We are of the view that if the appellant had not carried out the statutory audit as per the accounting standards framed by the ICAI and in the event the appellant could not have resigned without filing the complete audit report or had failed to consider the netting of amount transferred as loans to Action and Avantha then it was open for SEBI to refer to the ICAI to take disciplinary action against the appellant for violation of the accounting standards. SEBI’s role was limited and confined to the conspiracy charge against the appellant with regard to fudging of the accounts of the Company.
The impugned order cannot be sustained and is quashed. The appeal is allowed.
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2023 (12) TMI 295
Request to place on record a compilation of documents - Writ petitions by minority shareholders - HELD THAT:- This Court is apprised of the fact that the proceedings are listed tomorrow (29 November 2023) before the High Court of Judicature at Bombay. Hence, it is not necessary for this Court to entertain the Special Leave Petition at this stage, particularly bearing in mind what has been observed in paragraphs 2 and 3 of the earlier order [2023 (12) TMI 241 - SC ORDER] which read as follows:
“2 Since the impugned orders of the High Court are purely of an interlocutory nature, we are not inclined to entertain the Special Leave Petitions under Article 136 of the Constitution.
However, the parties would be at liberty to pursue their remedies in accordance with law on all counts after the final judgment of the High Court.”
Should it become necessary for SEBI to raise the issue of interpretation of Regulation 29 at a future date, that issue is kept open to be agitated. SLP dismissed.
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2023 (12) TMI 260
Unlawful gains by fraudulent and manipulative strategy made by Reliance Company - responsibility of noticee no. 2 i.e. the Managing Director - violating Section 12A of the SEBI Act r/w Regulations 3 and 4 of the SEBI PFUTP Regulations - vicarious liability on both criminal and civil liability for contravention of the SEBI Act, Rules and Regulations - Liability against violations committed by the company - WTM issued directions to disgorge the unlawful gains of Rs. 447.27 crores along with interest @12% per annum and further prohibited the Company and the 12 entities from dealing in equity derivatives in the F&O segment of the stock exchanges directly or indirectly for a period of 1 year - Whether Section 27 of the SEBI Act prior to its amendment w.e.f. March 08, 2019 provided for vicarious liability only in respect of criminal proceedings initiated against a Company for contravention of the SEBI Act - Allegation of manipulative scheme - HELD THAT:- There is a distinction between “offence” and “contravention”. Consequently, one has to see the intention of the Parliament when it uses the word “offence” or where it uses the word “contravention”.
Section 27 prior to the amendment i.e. prior to March 08, 2019 had no application to civil liability and only after the amendment w.e.f. March 08, 2019 that Section 27 provided for vicarious liability on both criminal and civil liability for contravention of the SEBI Act, Rules and Regulations.
Finance Act, 2018 did not give retrospective effect to this amendment nor can such effect be inferred by necessary implication from the language of the amendment. The amendment, being substantive in nature can only be prospective and cannot have any retrospective application. The impugned order holding the amendment to be clarificatory in nature is thus patently erroneous.
The meaning of the term “offence” is required to be understood in the context in which it is used in the legislation. A suggestion that the term “offence” as occurring in the SEBI Act also covers civil proceedings is at odds with the range of provisions in Chapter VII of the SEBI Act which is a facet that was not even examined by the AO, much less ruled upon. We find that parliament was conscious of the usage of the two words “contravention” and “offence” in the SEBI Act and consciously chose to replace “offence” with “contravention” explicitly, in order to enlarge the scope of Section 27.
Section 27 of the SEBI Act as it stood prior to the amendment did not apply to civil liability and, therefore, the Managing Director could not be penalised by SEBI u/s 27 of the Act.
It is not necessary for us to deal with the issue as to whether the Managing Director could be made vicariously liable under Section 27 of the SEBI Act for contravention of the Section 12A and Regulations 3 and 4 of the PFUTP Regulations.
Board of Directors had specifically directed the two officers to explore, identify and implement optional avenues of funding and thereafter on 19.11.2007 the Board of Directors were informed by these two persons that the funds are being raised by disposing 5% of RPL shares through trades in RPL securities. In view of this impeccable evidence, notice No. 2 had discharged the burden under Section 27 of the Act and the onus shifted upon SEBI to prove that notice No. 2 was complicit. The finding that the appellant was complicit to the violations committed by the company and, therefore, liable under Section 27 of the Act is patently erroneous and is based on surmises and conjectures.
Specific denial was made by noticee no. 2 of his involvement in the trades executed by the two officers of the company. We also find that the AO in paragraph 64 holds that it is relevant to examine the role of the Managing Director in terms of direct involvement or knowledge with regard to the manipulative scheme or trades undertaken by the company. We find that the AO failed to establish either direct involvement or knowledge of the Managing Director with regard to the trades undertaken by the company and, therefore, the finding that the Managing Director was ‘complicit’ to the violations committed by the company through its two officers is based on surmises and conjectures and on the basis of the figment of his imagination.
The burden that the Managing Director of the Board of Directors exercised all due diligence was discharged and, therefore, the onus shifted back to SEBI to show that the Managing Director was responsible for the execution of the trades in question. In the absence of any finding being given by the AO establishing direct involvement or knowledge of the Managing Director in the execution of the trades the finding that the Managing Director was complicit in the execution of the trades with the two officers is purely based on surmises and conjectures. Thus, on this score noticee no. 2 i.e. the Managing Director cannot be held responsible for the execution of the shares in the facts and circumstances of the present case.
The limited role played by the Board was only to take note of the transactions after they had been executed by the two senior executives. Without considering the findings of the WTM the AO in the impugned order has misdirected itself in holding that the Managing Director was responsible under Section 27 of the SEBI Act merely on the ground that he was the Managing Director.
Assuming that Section 27 of the SEBI Act is applicable for civil proceedings, we find that the requirement to impute a vicarious liability is not satisfied. The law is well settled that the mere fact that a person holds a designation of Managing Director does not suffice for imputing a vicarious liability to such person. It has been repeatedly held that the proof of “active role” in the alleged contravention in issue must be demonstrated by clear and concrete evidence of his active role coupled with criminal intent as a necessary pre-condition for affixing vicarious liability.
Board of Directors in a company is supreme. The Managing Director reports to the Board. The Board has the full authority to delegate any function to any officers of the Company to the exclusion of the Managing Director. The contention of the respondent that the Managing Director is responsible for the day to day affairs of the Company and the officials report to him and, therefore, the Managing Director is responsible is deemed to be in the knowledge of the transactions is not applicable in the case in hand, especially when the Board had specifically authorised the two senior most officials to execute the trades in question. We also find that in the instant case the two officials have reported to the Board and not to the Managing Director.
AO in the impugned order does not arrive at any conclusion that the appellant was involved in the actual conceptualisation and execution of the alleged trades by RIL. We are of the opinion, that whereas the AO recognises that knowledge by the appellant was a pre-requisite for a finding that noticee no. 2 was liable for RIL’s alleged violation yet without giving a conclusive finding has travelled beyond the show cause notice to conclude in paragraph 72 of the impugned order that noticee no. 2 had implicit knowledge of the alleged trades and authorised the implementation plan. The AO further went on to hold that it is highly unlikely that noitcee no. 2 was not aware of the execution of the trades. The findings given by the AO in our opinion is purely based on surmises and conjectures.
In this regard, the word “complicit” means involvement with others in an activity which is unlawful. On the other hand, the word “implicit” is suggestive though not directly expressed.
Thus, in the absence of any specific finding by the AO on noticee no. 2 complicit involvement in the execution of the implementation plan or in the execution of the trades, the AO cannot dwell into surmises and conjectures and base its findings on presumption to hold that the noticee no. 2 was implicitly involved in the transactions on the ground of being a Managing Director and which implies a high level of accountability of knowledge of overall functioning of the Company.
The burden under Section 27 was discharged by noticee no. 2 and the AO has miserably failed to prove that noticee no. 2 was involved in the execution of the trades carried out by two senior executives.
Inordinate delay in the initiation of the proceedings against the noticees - Both noticee nos. 3 and 4 are involved inter alia in the business of construction of building, infrastructure, setting up of a Special Economic Zone (SEZ) and acquisition of properties and invested their idle funds by lending the same by way of short term inter corporate deposits to other companies in order to earn interest and, if necessary, also avail inter corporate deposits from other companies by paying interest - After 10 years the show cause notice dated 21.11.2017 was issued alleging that noticee nos. 3 and 4 were promoted by the Reliance Group and that noticee nos. 3 and 4 by financing the monies to Vinamra were complicit and aided and abetted the manipulation of the trade executed by RIL through its 11 agents - AO has rejected the contention of the appellants holding that there is no delay on the ground that SEBI had taken an internal decision to await the Section 11B proceedings against RIL and its agents before taking further action in the matter.
HELD THAT:- The Limitation starts running from the day the impugned order is passed. Limitation order does not stop on the whims and fancies of a regulator. The regulator cannot stop the clock on the ground that they would await the decision in proceedings initiated u/s 11B before taking further action in the matter. In our opinion, there is no legal bar of initiation of adjudication proceedings during pendency of Section 11B proceedings. In our opinion, adjudication proceedings and Section 11B proceedings can be held in parallel.
There has been an inordinate delay in the issuance of the show cause notice. Even though there is no period of limitation prescribed in the Act and the Regulations for issuance of a show cause notice and for completion of the adjudication proceedings, nonetheless, the authorities are required to exercise its powers within a reasonable period
Time starts to run from the date of commission of the alleged violation. The respondents being aware of this fact and having knowledge of the alleged transactions chose deliberately not to initiate proceedings and, consequently, the action of the respondents cannot be justified by initiating a belated show cause notice.
There is a violation of principles of natural justice in not supplying the documents to noticee nos. 3 and 4 which documents were relied upon in the show cause notice. We find that noticee nos. 3 and 4 had repeatedly addressed letters to SEBI on 11.06.2018 and 25.06.2018 requesting certain documents which were specifically mentioned in the show cause notice. Some of these documents were provided by SEBI vide letter dated 17.06.2019 and 08.03.2019. The documents which were not provided were specifically again asked for which also included a copy of the investigation report.
As decided in T. TAKANO VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA & ANR. [2022 (2) TMI 907 - SUPREME COURT] investigation report is an intrinsic component of the Board’s satisfaction for determining whether there has been any violation of the regulations and that the investigation report forms the material on the basis of which a show cause notice is issued. Since the show cause notice is on the basis of the investigation report there was an obligation imposed upon the respondent to provide the documents asked for by the appellants which they failed to supply. Non supply of the documents was violative of the principles of natural justice. We are also of the opinion that prejudice caused because of non-disclosure of the relevant material was writ large.
On merits finding has been given by the AO that on a combined reading of the Facility Agreement and Agency Agreement it can be inferred that noticee nos. 3 and 4 had prior knowledge of the scheme of alleged manipulative trades by RIL and that noticee nos. 3 and 4 were fully aware that the funds given by them to Vinamra was meant for financing the alleged trades in question and, therefore, noticee nos. 3 and 4 aided and abetted in the manipulative scheme.
This finding in our opinion cannot be sustained as Facility Agreement was signed on August 04, 2007 and September 22, 2007. The execution of these documents is not disputed nor there is any allegation that these agreements were manufactured for the purpose of this case. The starting point for the alleged manipulative scheme by RIL was the decision taken in an around October 30, 2007 to sell RPL shares. These facts are noted in paragraph 26 of the impugned order. On or before October 30, 2007 noticee no. 3 had already advanced funds to the tune of Rs. 625 crores and noticee no. 4 had loaned an amount of Rs. 45 crores on or before October 30, 2007. We are of the opinion, that as on the date of the execution of the Facility Agreement it was not possible for noticee nos. 3 and 4 to have knowledge that RIL would sell shares in the cash segment in November 2007 and that RIL would take positions in the futures segment through its agents. There is no evidence to show that prior to October 30, 2007 the decision of RIL to sell shares of RPL and appoint 12 agents was known to noticee nos. 3 and 4.
Execution of the Facility Agreement had nothing to do with the Agency Agreement which came two months later and, therefore, the Facility Agreement and the Agency Agreement cannot be read together. The two agreements are wholly unconnected and cannot raise any kind of an inference as held by the AO in the impugned order.
The evidence that has been brought on record does not indicate that noticee nos. 3 and 4 could have known in August / September 2007, namely, at the time of execution of the Facility Agreement that RIL would decide in end of October to sell the RPL shares or that RIL would take position in the November futures through its agents or that RIL would enter into agency agreements with the 12 agents or that RIL would trade in the last 10 minutes on November 29, 2007 in such a manner so as to suppress the price of the RPL shares. Thus, in our opinion, when the Facility Agreement was executed, noticee nos. 3 and 4 could not have known that RIL would enter into the cash segment or would take positions in the November 2007 futures.
Assumption / presumption drawn by the AO that the Facility Agreement was entered into solely for the purpose of funding RIL transactions in the November 2007 futures market is wholly erroneous. Pursuant to the Facility Agreements ICDs were placed as early as on September 2007 much before the subject transactions took place and continued to be placed from time to time till March 2008. The finding given by the AO that Rs. 2,775 crores advanced by noticee nos. 3 and Rs. 550 crores advanced by noticee no. 4, to Vinamra were utilised by the 12 agents for the purpose of funding the manipulative trades of RIL is patently erroneous and cannot be sustained. The ICDs given by noticee nos. 3 and 4 were from September to March whereas the funds required by the 12 agents were from November 01, 2007 to November 06, 2007 when they took short positions in the futures segment.
AO however has considered the entire loans of Rs. 2775 crores given by noticee no. 3 and Rs. 550 crores given by noticee no. 4 from the period September 2007 to March 2008. We may note that noticee no. 4 did not lend any money to Vinamra between November 01, 2007 to November 06, 2007 and that noticee no. 3 had given a loan of Rs. 350 crores in two transactions of November 05, 2007 and November 06, 2007 to Vinamra. Thus, the finding of the AO that Rs. 2775 crores and Rs. 550 crores totalling Rs. 3325 crores were given by noticee nos. 3 and 4 that funded the 12 agents for the alleged trades is patently erroneous.
One of the basic charge against noticee nos. 3 and 4 was that noticee nos. 3 and 4 were promoted by Reliance Group. This allegation was found to be false. The AO found that Anand Jain was the Chairman of noticee nos. 3 and 4 and that noticee nos. 3 and 4 were not promoted by the Reliance Group. Once this fact became clear that noticee nos. 3 and 4 were not promoted by the Reliance Group, the AO should have dropped the matter instead of going into a tirade that Anand Jain was closely associated with Reliance Group as a strategic advisor or that Sanjay Punkhia was a common director of noticee nos. 3 and 4 and Vinamra and, therefore, there is a connection between noticee nos. 3 and 4 with Reliance Group. In our view, the reasoning adopted by the AO in coming to a conclusion that noticee nos. 3 and 4 are connected to RIL is baseless and cannot be accepted. Such indirect connection without any further evidence of their involvement cannot be a ground to hold that noticee nos. 3 and 4 were aware of the manipulative trades allegedly conducted by RIL and its agents. It is thus not necessary for us to go into the question of their connection in detail.
It is not necessary for us to go into the question as to whether noticee no. 3 and 4 by giving loans to Vinamra could be held to be dealing in securities violating the PFUTP Regulations as in our view no case is made out of any violation by noticee nos. 3 and 4. Appeal allowed.
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2023 (12) TMI 241
Request to place on record a compilation of documents - As decided by HC [2023 (10) TMI 1173 - BOMBAY HIGH COURT] once it is the entitlement of the petitioners in law to receive such documents, they need to be furnished such documents, unless furnishing of these documents would stand prohibited in law, which is certainly not a situation in the present facts.
HELD THAT:- All material which is directed to be disclosed by the High Court shall be used only for the purpose of the proceedings pending before the High Court and shall not be disseminated to any third party.
Since the impugned orders of the High Court are purely of an interlocutory nature, we are not inclined to entertain the Special Leave Petitions under Article 136 of the Constitution.However, the parties would be at liberty to pursue their remedies in accordance with law on all counts after the final judgment of the High Court.
Special Leave Petitions are dismissed.
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2023 (12) TMI 186
Violation of SEBI Act - validity of settlement orders, which according to the petitioners were patently illegal being beyond the authority and power of the SEBI to accept any settlement - petitioners in writ petitions are minority shareholders - case of the petitioners is to the effect that there is a severe prejudice caused to the petitioners due to several illegalities committed by BNL, at the instance of the majority shareholders who are respondent Nos. 3 to 9 - petitioners have contended that they are the victims of BNL not being listed on a recognized stock exchange, which has severely affected their interest as investors in BNL - before the show cause notice(s) could be taken to its logical conclusion, respondent No. 2 to 9 had moved an application for settlement of the show cause notice(s), by invoking the provisions of 2018 Regulations - petitioners had urged that the SEBI be directed to provide documents to the petitioners as prayed for and directed that the documents, subject matter of prayer clause (g) of the petition be provided to the petitioners.
This Court [2023 (10) TMI 1173 - BOMBAY HIGH COURT] observed, that by no stretch of imagination, could it be said that the petitioners in the present case, who were minority shareholders and in such capacity, being part owners of the company (BNL), to the extent of their shareholding, were not outsiders / alien to the company, and that they were integral to the company, having an inextricable concern and interest in the functioning and management of the company.
Special Leave Petition of respondent no. 2 - BNL and respondent No. 9-Vineet Jain was dismissed by the Supreme Court, as also a decision being taken by the SEBI to assail our order dated 23 October, 2023 before the Supreme Court, what has happened at SEBI’s end in regard to the SEBI’s proceedings against BNL, is not only interesting but quite intriguing.
HELD THAT:- On perusal of the show cause notice, a copy of which is produced for perusal of the Court on behalf of the SEBI, we find that non-compliance interalia of the Rules and Regulations of SEBI are subject matter of the show cause notice, and any plea in opposition as may be urged by BNL and respondent Nos. 3 to 9 (the majority shareholders), would fall for consideration in the adjudication of the show cause notice. This would, however, not mean that the petitioners in their capacity as shareholders, would be dis-entitled or would cease to have any locus to have information / documents in regard to such affairs of BNL and to seek compliance of the Rules and Regulations and the norms of the SEBI by respondent No. 2 and those controlling BNL.
SEBI now needs to resort to a lawful course of action, to adjudicate the show cause notice, so as to reach to a conclusion, whether respondent Nos. 2 to 9 have violated the provisions of the Act, Rules and Regulations, as alleged in the show cause notice and the complaints of the petitioners. We are thus of the opinion that in the facts and circumstances of the case, it would be appropriate that the SEBI expeditiously takes forward the show cause notice and comes to an appropriate conclusion, in accordance with law, in regard to the allegations as made in regard to respondent Nos. 2 to 9 in the show cause notice.
SEBI from 23 October 2023 has not complied our order directing that the documents be furnished to the petitioners. As pointed out on behalf of the petitioners, SEBI has resorted to all possible efforts, not to comply with the order dated 23 October, 2023. Even after the Special Leave Petitions of BNL and Vineet Jain - respondent No. 9 were dismissed by the Supreme Court, the documents were not furnished to the petitioners. SEBI thereafter assailed the orders dated 23 October 2023 before the Supreme Court resulting in dismissal of its Special Leave Petition. Now the SEBI is before the Court taking a stand that the documents need not be furnished and the petitions be disposed of as they are rendered infructuous. We wonder, as what can weigh with the SEBI, in not complying our order dated 23 October, 2023 and not furnishing the documents to the petitioners, except to benefit respondent Nos. 2 to 9. Even such plea that the SEBI would have a legal right or an entitlement, not to furnish documents to the petitioners as ordered by us, was the core issue under our orders, being urged by the SEBI before the Supreme Court, apart from the plea of interpretation of Regulation 29 of the 2018 Regulation.
Considering all these circumstances, we are of the clear opinion that the entitlement of the petitioners to our order dated 23 October 2023, would certainly subsist and the petitioners need to be provided such documents by the SEBI. Moreover, not providing such documents, merely on the ground of the subsequent development that the settlement orders now stands revoked, would completely be an untenable proposition and contrary to our orders dated 23 October 2023, as confirmed by the Supreme Court. Although respondent Nos. 2 to 9 in their business interest may overlook the solemnity of the orders passed by this Court, however, SEBI in its public character cannot take the same approach. In these circumstances, the order dated 23 October 2023 cannot be rendered nugatory. The SEBI is required to holistically consider such orders and not merely in the context of the settlement proceedings, as such order considers the substantive rights of the petitioners, who are shareholders of respondent No. 2 – BNL, having equal rights to that of respondent nos. 3 to 9. SEBI cannot have different yardstick between shareholders. We therefore, direct that our order dated 23 October 2023, which has attained finality, needs to be forthwith complied by SEBI.
On the issue whether the Court should adjudicate prayer (c) and (d) of the petitions, taking an overall view of the matter, and that, now the show cause notice is required to be taken forward, we are of the opinion that in so far as such reliefs are concerned, the same needs to be kept open to be agitated by the petitioners at the appropriate time in appropriate proceedings in the context of the decision which may be taken by the SEBI on the show cause notice. We accordingly, propose to dispose of these petitions by the following order:-
ORDER
(I) The petitioners are entitled to the benefits of the order dated 23 October 2023 as confirmed by the Supreme Court, by rejection of the Special Leave Petitions of respondent Nos. 2 and 9 and thereafter, by rejection of the Special Leave Petition filed by the SEBI.
(II) The order dated 23 October 2023 passed by this Court, be forthwith complied by SEBI.
(III) All the contentions of the petitioners and of the respondents on issues in regard to prayer clauses (c) and (d) are expressly kept open to be agitated at appropriate time in appropriate proceedings.
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2023 (12) TMI 38
Default of appointment of additional director in the category of non-executive independent director by way of a board resolution - person above the age of 75 years as appointed by the board of directors - non-compliance of Regulation 17(1A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’ for short) - whether approval is required to be taken from the shareholders of the Company through a special resolution before a person who has attained the age of 75 years can be appointed? - HELD THAT:- The board of directors can appoint any person as an additional director who shall hold office up to the date of the next Annual General Meeting.
A reading of Section 152(2) and 161(1) of the Companies Act makes it clear that a director can only be appointed by the shareholders of the Company in an Annual General Meeting. However, the board of directors can appoint any person as an additional director who will hold office up to the date of the next Annual General Meeting.
In the instant case, the board of directors appointed Mr. Swaminathan Sivaram as an additional director till the date of the next Annual General Meeting and subject to the approval given by the members of the Company through a special resolution.
From a conjoint reading of Section 149, 152(2), 161(1) of the Companies Act 2013 read with Regulation 17(1A) and 17(1C) of the LODR Regulations makes it apparently clear that the director is required to be appointed by the members of the Company. If a person is appointed as an additional director by the board of directors then his appointment is till the next annual general meeting. Regulation 17(1A) provides that if a person who has attained the age of 75 years then his appointment has to be made by a special resolution passed by the members and Regulation 17(1C) provides that appointment must be approved in the next general meeting or within three months from the date of the appointment whichever is earlier.
In the instant case, the appointment was made on May 16, 2023 by the board of directors which was approved in the next annual general meeting by the member of the Company through a special resolution and that this special resolution was passed on August 10, 2023 within three months from the date of appointment. Thus, from a conjoint reading of Regulation 17(1A) and 17(1C) of the LODR Regulations appointment of an additional director can be made by the board of directors which is required to be approved by the members of the Company through a special resolution and such approval is required to be made within three months.
In Nectar Life Sciences Ltd. vs. SEBI & Ors [2023 (5) TMI 447 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] Tribunal considered the provisions of Regulations 17(1A) with other provisions and held that the word “unless” as depicted in Regulation 17(1A) does not mean “prior approval” nor the requirement of passing a special resolution was a qualificatory condition for appointment as a director.
Thus the contention of the respondent that no person can be appointed as a non-executive independent director unless prior approval of the shareholders was made by a special resolution is erroneous.
Thus Regulation 17(1A) and 17(1C) has to be read harmoniously with the provisions of Section 152(2) and 161(1) of the Companies Act which will make it clear that a person above the age of 75 years can be appointed by the board of directors. Such appointment is required to be approved subsequently within the prescribed period by a special resolution in the next general meeting by the members of the Company which in the instant case was done within the prescribed period. No penalty could have been imposed by the BSE and NSE for violation of Regulation 17(1A) of the LODR Regulations.
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2023 (11) TMI 1285
Insider trading - unlawful gain as in dealing in securities on the basis of unpublished price sensitive information - Pledge of shares
- Noticees were found to have dealt in / sold / transferred SCSL shares held by them ‘while in possession of’ UPSI, thereby violating the provisions of Section 12A(d) and (e) of SEBI Act and Regulation 3(i) of PIT Regulations.
HELD THAT:- Promoter group loan liabilities extinguished through sale of Satyam shares by the lenders, involved unlawful gains made by SRSR along with Ramalinga Raju and Rama Raju, akin to them having directly conducted such sales of SCSL shares in the market.
While the trigger to sell the shares may have been pulled by the lenders, they were not stopped from doing so by SRSR and the Raju brothers, who should have instead arranged for alternate funds to extinguish the loan obligations or increase loan collateral. When an insider allows the sale of pledged shares by a lender to extinguish a loan liability, while in possession of UPSI, this does involve an unlawful gain, akin to the insider having directly sold the shares in the market. As discussed earlier in this Order, the Hon’ble Supreme Court had affirmed the finding of the Second SAT Order which described SRSR as a ‘front entity’ used by the promoters/Raju brothers. SRSR was used for promoter entities to avail loans by pledging shares transferred to SRSR by the Raju family. By allowing the pledged shares to be sold by the lenders to extinguish the loan liability, effectively SRSR ensured unlawful gains for it and the promoters, akin to it selling the shares in the market directly.
Acquisition of 2,78,64,000 SCSL shares by SRSR from the Raju Family were funded by Raju family themselves. Bank balance of the ICICI account in question reveals that SRSR had NIL funds as on the date of the acquisition of shares by SRSR. Sans the fund transferred to SRSR on the very same day by the Raju family, SRSR would not have been in a position to purchase the 2,78,64,000 SCSL shares from the very same Raju family.
Therefore, effectively, SRSR had acquired the said shares without paying any consideration. The pledging of SCSL shares by SRSR and selling of the said pledged shares in the market on account of invocation of pledge by financial institutions (due to margin shortfall) amounted to an indirect sale of SCSL shares by SRSR on behalf of the Raju brothers.
Further, due to invocation of pledge, the liability to repay the loans was also extinguished. The contention that shares were acquired by SRSR from the Raju family (which as observed in the Second SAT order were the promoters of Satyam) for ‘valuable consideration’ appears to be an attempt to lend artificial legitimacy to the transactions.
The so-called acquisition of shares can only be viewed as movement of shares from the left pocket to right pocket of the main perpetrators of the scam- Ramalinga Raju and Rama Raju. Allowing the deduction of this bogus cost i.e. the cost of acquisition, on the strength of the aforementioned round tripping of funds would end up in grossly injuring the confidence of investors in the integrity of the securities market.
In view of the same, we do not find any reason to deduct the claimed cost of acquisition of Satyam shares amounting to INR 2,266 crore from the unlawful gain made by SRSR. Also do not agree with the contention that since the cost of acquisition is more than the loans obtained, there is no basis for issuing a disgorgement order against SRSR.
Thus, in exercise of the powers conferred under section 11, 11(4) and 11B of the SEBI Act read with section 19 of the SEBI Act, 1992, and regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003, and regulation 11 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, for the reasons elaborated in paras 93 and 94 of this Order, hereby restrain the following noticees from accessing the securities market and further prohibit them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner.
Also in exercise of the powers conferred upon me under section 11, 11(4) and 11B of the SEBI Act read with section 19 of the SEBI Act, 1992, and regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003, and regulation 11 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, hereby direct that the Noticees shall disgorge the unlawful gain made by them calculated in Table No. 19 of this Order, along with simple interest at the rate of 12% per annum from January 07, 2009 till the date of payment.
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2023 (11) TMI 67
Share manipulation - unlawful gains through disguised trading - transaction pursuant to the alleged SMS - synchronized trades, self-trades and reversal of trades thereby creating a false appearance of trading and manipulation of the trading volumes in the scrip in question - violation of Section 12A of the SEBI Act r/w Regulation 3 and 4 of the SEBI “PFUTP Regulations” - combined shareholding had triggered the requirement of making an open offer under Regulations 10 and 11 of the SAST Regulations as these 5 noticees were acting in concert and had failed to make an open offer thereby violating the said regulations - orders restraining the appellant from accessing the securities market for a period of four years and from associating himself with any listed Company as a Director
HELD THAT:- The finding that the modus operandi adopted by Arvind Babulal Goyal was to accumulate the shares and thereafter dispose off such shares pursuant to circulation of SMS is patently erroneous and against the material evidence on record.
As upon perusal of the relevant documentary records, we find that the finding that the appellant was trading from the account of Abhay Javlekar is not based on proper appreciation of the documentary evidence. In the first instance, we find that the Know Your Client (“KYC”) document of Abhay Javlekar shows the email ID of Arvind Goyal and mobile number as given - WTM has presumed that the mobile no. is of Arvind Goyal. This number has been denied by the appellant. No effort was made by the investigating officer or by the WTM to find out as to who is the owner of this mobile no. quoted.
Abhay Javlekar admits before the investigating officer that his DIS slip book and cheque book was issued to one Jayesh Solanki which statement is contrary to the stand which he now takes that Arvind Babulal Goyal had taken the DIS slip and cheque book for the purpose of trading.
In our opinion, contradictory stand has been taken by Abhay Javlekar. Abhay Javlekar further admits that many trades were carried out without his knowledge by Pradeep Makhija of Yoke Securities. In the light of the aforesaid glaring evidence which is on record it is difficult to believe that Arvind Babulal Goyal was using Abhay Javlekar’s trading account. Thus, the finding given by the WTM that Arvind Babulal Goyal was using Abhay Javlekar’s account for trading purpose is not based on sound evidence.
Similarly, the finding that Arvind Goyal was involved in manipulative and unfair trade practice by employing self-trades, synchronized and reversal trades thereby creating an artificial volume in the scrip in question is again erroneous and against the evidence in as much as no trades were carried out by Arvind Goyal or Pooja Goyal after the issuance of SMS.
Since no trades were carried out by Arvind Goyal and Pooja Goyal pursuant to the alleged SMS the question of their trades being manipulative and adopting unfair trade practice does not arise. For the same reason, the violation of Regulations 3 and 4 of the PFUTP Regulations cannot be sustained as a result the order of disgorgement towards unlawful gain or loss averted cannot be sustained since we do not find any violation of the PFUTP Regulations.
Order of disgorgement - We are of the opinion that the disgorgement amount has been crystalized under the show cause notice and therefore the said amount could only be considered by the WTM and the WTM could not consider the figures mentioned in the impounding order. We further find that the direction to pay 12% interest per annum on the disgorged amount could not have been issued as we find from a perusal of table 17 that the disgorged amount included the component of interest and, therefore, double interest cannot be charged.
Since we have already held that Arvind Goyal had not traded from the trading accounts of Abhay Javlekar, the allegation that they were acting in concert is thus not proved.
Arvind Babulal Goyal, Pooja Goyal and Abhay Javlekar in their own capacity had acquired the shares. Whether they individually crossed the trigger of 15% / 5% under Regulations 10 and 11 of the SAST Regulations is required to be considered afresh. The AO is required to see whether or not Arvind Babulal Goyal and Pooja Goyal collectively as husband and wife and Abhay Javlekar in his individual capacity had triggered the obligation to make an open offer under Regulations 10 and 11 of the SAST Regulations respectively and if they had triggered the requirement of making an open offer under Regulations 10 and 11 of the SAST Regulations then appropriate penalty commensurate with the acquisition should be levied. Appeal allowed.
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2023 (11) TMI 66
Front running trading activity by certain entities - fraud’ for the purposes of the PFUTP Regulations - Offence under SEBI - investigation found that the appellant Manish Chaturvedi was the key person who perpetrated the front running activity with the aid and assistance of other noticees including his parents (Laxmi Chaturvedi and Manohar Chaturvedi) - HELD THAT:- WTM and the AO correctly held that the trades of Anandilal Chanda and Anandilal Chanda HUF were based on the specific information obtained by Anandilal Chanda from Madhu Chanda, and more so in the absence of any plausible explanation by the appellants (the Chandas) of the peculiar and unusual manner in which their trades were executed ahead of the trades of the clients of Sharekhan and matched with the trades of the Sterling group.
We further find that the nature, volume and value of trades of Anandilal Chanda and Anandilal Chanda HUF further corroborate the fact that they were carrying out front running activity in order to front run the clients of Sharekhan based on the information that was being passed on by Madhu Chanda to Anandilal Chanda.
WTM order and the AO order have correctly held that due to the trading based on prior information of trades of the aforesaid 7 noticees and of the Sterling group, Madhu Chanda, Anandilal Chanda and Anandilal Chanda HUF defrauded investors in the securities market and caused loss to other investors / deprived the investors from profits, and made unlawful gains in their respective trading accounts.
The front runners viz. Viraj Mercantile, Josh Trading, Pinky Auto, E-Ally, Shree Jaisal and Bhavesh Gadhavi respectively have also admitted their role in lending the trading accounts to Praveen Jain and in fact couched their submissions before this Hon'ble Tribunal as a 'mercy petition' whereby they have restricted their submissions only to reduction of penalty and period of debarment imposed against them. In this regard, it is submitted that lending of trading accounts is an offence of grave nature as the same may lead to misuse of trading accounts for activities in the securities market that may not be for genuine transactions as has happened in the present case and the same amounts to ‘fraud’ for the purposes of the PFUTP Regulations.
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2023 (11) TMI 65
Fraudulent Scheme of using the GDR proceeds to fund a subscriber - GDR issue was fully subscribed was misleading as the investors were not informed that the GDR was subscribed by only one entity - fraudulent scheme and violative of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations - AO found that the GDR was subscribed by one entity, namely, Vintage - AO further found that on account of the pledge created by the Company with EURAM Bank the funds were not made available at the Company’s disposal and the same became available in tranches as and when the loan amount was repaid by Vintage. Further, the loan agreement was not disclosed to the stock exchange and to the Indian investors.
HELD THAT:- We find that this modus operandi in the instant appeals is the same as has been dealt with by this Tribunal in a large number of matters relating to the GDR issue wherein the Tribunal has held that non-disclosure of the loan agreement and the pledge agreement was totally fraudulent and violative of the Listing Agreement. This Tribunal also held that the Company and its MDs were aware of the execution of the pledge agreement as well as loan agreement and it was no longer open to them to deny the existence of the said agreements. This Tribunal also held that the Company and its Directors misled SEBI into believing that there were more subscribers to the issue and not one subscriber.
We also held that Company and its MDs were aware of the pledge agreement, non-disclosure of the pledge agreement and loan agreement invited penalty. Further, the corporate announcement did not disclose the fact that the subsisting pledge agreement facilitated the subscribers to subscribe to the GDR issue. The corporate announcement was misleading and presented a distorted version to the investors and created a false version inducing the investors to deal in securities. See Sibly Industries Ltd. vs SEBI . [2022 (7) TMI 1478 - SECURITIES APPELLATE TRIBUNAL, MUMBAI], Aksh Optifibre Ltd. [2022 (6) TMI 1441 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] and Praveen Kumar Hastimal Shah [2022 (7) TMI 1477 - SECURITIES APPELLATE TRIBUNAL,
WTM and the AO while admitting that the appellant was a non-executive independent director and had resigned on February 7, 2012 found that he was a member of audit committee and was required to ensure all the transfer of the GDR proceeds to the accounts of the Company in India - The finding given by the WTM and the AO cannot be accepted. There is nothing on record to indicate that the matter relating to GDR issue was placed by the Company before the audit committee. In the absence of any evidence the finding that it was the responsibility to monitor the end use of the funds is patently erroneous. We are of the opinion that Section 177(4) of the Companies Act, 2013 cannot be applied in the instant case inasmuch as the said provision only came into existence when the Companies Act, 2013 was enacted.
n the absence of any finding that the GDR issue was placed before the audit committee we are of the opinion that members of the audit committee cannot be held responsible for the alleged violation. Further, the finding that there was a long association with the Company is purely based on surmises and conjectures. We also are of the opinion that there is no finding that the appellant was involved in the day to day affairs of the Company merely attending board meetings cannot lead to a conclusion that the appellant was involved in the day to day affairs of the Company.
Independent directors cannot be penalized when they are not part of day-to-day affairs of the company. See Prafull Anubhai Shah vs SEBI [2021 (6) TMI 1159 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] and Rajesh Shah vs SEBI [2021 (7) TMI 1433 - SECURITIES APPELLATE TRIBUNAL, MUMBAI]
In view of the aforesaid, the impugned orders passed by the WTM and AO cannot be sustained and are quashed insofar as it relates to the appellant. The appeals are allowed.
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2023 (11) TMI 64
Unfair Trade Practices relating to Securities Market - scheme of using the GDR proceeds to fund a subscriber to the GDR issue was a fraudulent scheme and violative of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations - non-disclosure of the loan agreement and the pledge agreement was violative of Clause 36 of the Listing Agreement as well as Section 21 of the SCRA Act read with Clause 32 and 50 of the Listing Agreement - penalty imposed on company and directors and MCDs
HELD THAT:- We find that this modus operandi in the instant appeals is the same and has been dealt with by this Tribunal in a large number of matters relating to the GDR issue wherein the Tribunal has held that non-disclosure of the loan agreement and the pledge agreement was totally fraudulent and violative of the Listing Agreement. This Tribunal also held that the company and its MDs were aware of the execution of the pledge agreement as well as loan agreement and it was no longer open to them to deny the existence of the said agreements. This Tribunal also held that the company and its Directors misled SEBI into believing that there were more subscribers to the issue and not one subscriber.
We also held that company and its MDs were aware of the pledge agreement, non-disclosure of the pledge agreement and loan agreement invited penalty. Corporate announcement did not disclose the fact that the subsisting pledge agreement facilitated the subscribers to subscribe to the GDR issue. The corporate announcement was misleading and presented a distorted version to the investors and created a false version inducing the investors to deal in securities - in the light of the aforesaid decisions the findings against the appellants in the instant appeals does not require any interference nor we require to give elaborate reasons. The findings of the AO are upheld.
Quantum of penalty and on the issue of proportionality - SEBI has passed various orders against company and its directors imposing different penalties for identical / similar offences. In a large number of penalties ranging from Rs. 25 lakh to Rs. 1.25 crore have been imposed upon the companies which we have appropriately reduced to Rs. 25 lakh. Similarly, for managing director considering the factor in each of the case the penalties have been reduced to Rs. 10 lakh and Rs. 20 lakh. Similarly, in many cases the penalty ranging from Rs. 5 lakh and Rs. 10 lakh have been imposed upon the directors. In a large number of cases, we have exonerated independent directors.
Thus without going into the specific details, in the instant case, we find that penalty imposed against the company is appropriate as in many other cases we have been reduced the penalty against the company to Rs. 25 lakh. Thus, the penalty imposed by the AO against the company noticee nos. 1 needs no interference. Similarly, we find that the penalty of Rs. 25 lakh imposed upon the noticee nos. 2 who is the CMD is also appropriate and commensurate with the alleged violation as he was the signatory to the account charge agreement / pledge agreement. In so far as noticee nos. 3, 4, 5 and 6 are concerned, we find that noticee nos. 3 was non-executive director and noticee nos. 4, 5 and 6 were independent directors. There is no evidence to show that all these noticees apart from being signatory to the resolution of the board of directors were not involved in the day-to-day affairs of the company nor were they aware or monitor the issuance of the GDR issue.
Independent directors cannot be penalized when they are not part of day-to-day affairs of the company. See Prafull Anubhai Shah vs SEBI [2021 (6) TMI 1159 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] and Rajesh Shah vs SEBI [2021 (7) TMI 1433 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] - Thus the penalty imposed upon notice nos. 3 to 6 to the tune of Rs. 10 lakh each are set aside.
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2023 (11) TMI 18
Ex-parte ad interim order - Appropriation of a fixed deposit - squaring off the loans of related parties - diversion of funds and its circuitous routing which was solely for the benefit of the promoter group as the appellant was the Managing Director and was not only in control over ZEEL but, being a key managerial personnel, was also in control of the seven associate entities - investigation revealed that Axis Bank instead of squaring off the credit facility of EGML had adjusted the fixed deposit against the credit facility given to seven related entities of ZEEL - restraint order passed by the respondent pursuant to the ad interim order and the confirmatory order restraining the appellant to function as a Managing Director
HELD THAT:- As round tripping of funds happened in a few minutes. Can it be said that each of the transaction was a sham or a fictitious transaction? There was a reason for making the payments. Everyone owed someone, the receptionist paid his debt, the chef paid his debt, the wife paid her debt and the milkman paid his debt. Everything works on credit and through the aforesaid payments everyone was happy. This is how the system works. Can it be said that the entire transaction done by the aforesaid entities was a sham transaction on account of proximity of time?
We find that the transaction between the ZEEL and the first entity was validly explained and therefore, at this stage, it was not necessary to go into the context of a larger transaction involving the circular rotation of funds. The decisions cited by the respondent in this regard are not applicable at this stage.
Chairperson has proceeded on the presumption that the appellant was involved in the affairs of the Essel Group companies including the borrower entities other than ZEEL. We find that this finding is based on pure surmises and conjectures. There is no material whatsoever which would demonstrate that the appellant was involved in the alleged transactions.
The finding that Essel Group companies were involved in the layering of the funds transactions and were under the influence / control of the appellant by virtue of its shareholding and shareholding of his family members is patently erroneous. There is nothing on record to show that the appellant had participated in the affairs of the borrower entities or any other Essel Group entity. We find that the appellant is neither an authorized signatory nor a director in the borrower entities and was not involved in the operation, financing or day to day management of the affairs of the borrower entities. In the absence of any active role of the appellant in Essel Group companies / borrower entities, the presumption drawn by the Chairperson that the appellant had exercised control over borrower entities is patently erroneous.
The word “control” has been mostly used by the Chairperson to show that the appellant had an active role in the borrower entities Essel Group companies which is based on presumptions.
Finding that the appellant exercised control over the borrower entities / Essel Group companies was based on presumptions in the absence of any material evidence to show that the appellant was actually in positive control of the Essel Group companies / borrower entities.
The finding that the appellant had exercised control over Sprit Infrapower & Multiventures Private Limited Churu Enterprises LLP through shareholding interest and designated partners is again stretching the matter a bit too far in the absence of material evidence to show that the appellant was actively involved in the day to day management of these two entities.
We further find that the direction that if the appellant is allowed to continue as the Managing Director in ZEEL it would impede or tamper with the investigation is erroneous in as much as we do not find any single incident to show that the appellant has obstructed in the investigation conducted so far.
We are also of the opinion that the impugned order relies upon the bank statement which cannot be tampered and which cannot be changed and therefore the presumption that if the appellant is allowed to continue as Managing Director in ZEEL it would impede or tamper with the investigation is patently erroneous. The finding that the appellant should be kept away from the helm of affairs of ZEEL so that the appellant may not exercise his influence over relevant entities to misdirect the course of investigation is patently erroneous.
We also find that the Chairperson has applied different yardstick regarding the alleged transaction arising out of ZEEL. On one hand the Chairperson has based its finding on a preponderance of probability while on the other hand has refused to accept the evidence filed by the appellant and has rejected the same on the ground that the documents do not prove the genuineness of the transaction beyond a reasonable doubt. This contrary stand taken by the Chairperson is, in our opinion, arbitrary. In any case, an incorrect application of the principles of preponderance of probability has been applied.
Whether a proper balance has been made by the impugned directions on the rights, liberties or interest of the person keeping in mind the purpose which it was intended to serve? - Doctrine of proportionality has not been correctly applied and a correct balance has not been made. Considering the genuineness of the documents so produced by the appellant, the first leg of the transaction was validly explained which indicates that the funds moved pursuant to a long standing commercial business relationship. The entries in the bank statement are not fictitious or sham transactions and therefore proceeding and issuing directions on the basis of preponderance of probabilities is, in our opinion, at this stage arbitrary and excessive. The directions ex facie, is punitive and not preventive and is based on incorrect apprehensions and on the basis of preponderance of probabilities.
Ex-parte ad interim order could have been passed in extreme urgent cases and that such power should be exercised sparingly and should not be exercised in a routine manner. Considering the facts and circumstances of the present case, we do not find that any extreme urgent situation existed in 2023 which warranted the WTM to pass an ex-parte ad interim order with regard to a certain set of transactions which occurred in the year 2019.
We find that 99.97% of the shareholders of ZEEL had reposed complete faith in the appellant as recent as into 2022 to continue as Managing Director and Chief Executive Officer of the merged entity between ZEEL and Sony. Pursuant to the ex-parte ad interim order NCLT has approved the scheme of amalgamation in which the appellant would hold the post of a Managing Director of the merged entity. This aspect has wrongly been construed by the Chairperson that it will wield substantial power of management of the affairs of the merged company upon the appellant which he cannot be permitted to do so.
In our opinion such approach is unwarranted apart from the fact that there is no evidence to show that the appellant exercised positive control over the borrowed entities. The fact that greater responsibility (if any) has come upon the appellant pursuant to the merger, then all the more reason that the appellant should be allowed to continue rather than putting the merger to continue headless when 99.97% of the shareholders reposed faith in the appellant to continue as Managing Director of the merged entity.
Structure of the merged entity is that Sony Group would have the majority shareholding in the merged entity and will also have majority members in the board of directors and would have right to appoint key managerial personnel like Chief Financial Officer, Chief Compliance Officer, Company Secretary etc. the appellant would be just one of the nine directors of the merged entity. Hence, his continuation as the Managing Director in the merged entity would have no impact on the investigation.
Chairperson while confirming the ad interim order directed the investigation to be completed in eight months. No reason was given as why eight months is required to complete the investigation especially when only bank transactions are to be looked into.
During the course of arguments, it has been stated by the respondent that other LoCs given by the promoter group of the appellant including the LoC given by the father of the appellant to the tune of Rs. 4210 crore are now being scrutinized and therefore comprehensive investigation is being done and consequently these five transactions which is impugned in the order is only part of the wider investigation. In view of the aforesaid, we are of the view that prima facie the diversion of funds has not as yet been proved.
Sufficient explanation backed by genuine document have been shown by the appellant and having validly discharged their burden. The investigation is going on and considering the track record of SEBI for which we take judicial notice, no investigation is completed within the stipulated period. We have seen that on numerous occasions whenever this Tribunal or the superior Court has directed SEBI to complete the investigation within a stipulated period, the same has not been done and applications after applications are being filed by SEBI seeking time to extend the period of investigation.
The impugned order cannot be sustained and is quashed insofar as it relates to the appellant. The restraint order passed by the respondent pursuant to the ad interim order and the confirmatory order restraining the appellant to function as a Managing Director and as directed in paragraph 108(ii) of the impugned order is set aside. The appeal is allowed. The appellant shall, however, cooperate in the investigation.
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2023 (10) TMI 1502
Fraudulent and Unfair Trade Practices - Trading in illiquid stock options done by the Noticee during the Investigation Period was in violation of Regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of the PFUTP Regulations - whether the Noticee is liable for a levy of monetary penalty u/s 15HA of the SEBI Act and if yes, how much should be the penalty?
HELD THAT:- Noticee had contributed to the artificial volume in the range of 10.81% to 22.57% vs total market volume in the said contracts. Thus, find that the Noticee by executing non genuine trades, had contributed to the creation of artificial volumes in the said contracts.
Trades between the Noticee and the counterparties were a consequence of pre-meditated decision of all the parties and hence are unfair trades as per PFUTP Regulations. It cannot be a matter of coincidence or lack of awareness, or without knowledge of the counterparties. Hence, the trades placed on the stock exchange platform by mutual understanding are non-genuine trades, which are prohibited under PFUTP Regulations.
Noticee’s transactions, were fraudulent/ manipulative, as contemplated in the PFUTP Regulations. Hence, as inclined to impose monetary penalty on the Noticee.
Quantum of penalty to be levied, we take into regard the manipulative nature of the trades placed by the Noticee that has led to creation of artificial volume in the contract.
Determine the quantum of penalty to be imposed, bearing in mind the parameters laid down in Section 15J of the SEBI Act. The amount of disproportionate gain or unfair advantage is not quantifiable. Therefore, considering all the facts and circumstances in this matter, we are inclined to impose a minimum penalty against the Noticee, as provided under Section 15HA of the SEBI Act.
As per the provisions of the Amendment of Section 15HA vide the Securities Laws (Amendment) Act, 2014, that came into force on September 08, 2014, the penalty shall not be less than five lakh rupees. In the instant case, it is observed that the violation of the PFUTP Regulations, took place after the aforesaid date, therefore, the penalty shall not be less than five lakh rupees.
Therefore, in exercise of powers conferred upon me under Section 15-I(2) of the SEBI Act read with Rule 5 of the Adjudication Rules, I hereby impose a penalty of Rs 5,00,000/- (Rupees Five Lakhs only) upon the Noticee i.e., Manoj Jain HUF (PAN No: AAJHM5595D) under Section 15HA of the SEBI Act for violation of Regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of the PFUTP Regulations.
Noticee shall remit / pay the said amount of penalty within 45 days of receipt of this order through online payment facility available on the website of SEBI.
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2023 (10) TMI 1496
Fraudulent and Unfair Trade Practices under SEBI Act -manipulation or structured trade - imposition of penalties for creating misleading appearance of trading through miniscule trades - HELD THAT:- No error in the orders of the Securities Appellate Tribunal [2023 (5) TMI 1419 - SECURITIES APPELLATE TRIBUNAL MUMBAI] and [2023 (7) TMI 1546 - SECURITIES APPELLATE TRIBUNAL MUMBAI]wherein contention that there was no manipulation or structured trade is patently erroneous in as much as we find that the trading pattern of the buyers and the sellers was that they traded in close proximity of time inter-se between them.
Appeals are accordingly dismissed.
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2023 (10) TMI 1483
Appeal against an order by the Securities Appellate Tribunal - Tribunal's order allowed the appellant to submit a reply to a "notice to show cause" issued by the Whole Time Member of the Securities and Exchange Board of India (SEBI) - HELD THAT:- The impugned order which has been passed by the Securities Appellate Tribunal has left it open to the appellant to submit a reply to the notice to show cause which was issued by the Whole Time Member of the Securities and Exchange Board of India.
This is evident from a bare reading of impugned Seya Industries Ltd. v. SEBI [2023 (6) TMI 1464 - SECURITIES APPELLATE TRIBUNAL MUMBAI]. Moreover, certain other protective directions have been issued.
We, therefore, do not find any reason to entertain the Appeal. Appeal is accordingly dismissed.
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2023 (10) TMI 1393
Insider Trading Allegations - Appellants to be guilty of insider trading under the Prohibition of Insider Trading Regulations, 1992 - promoters of the complainants Prannoy Roy and Radhika Roy also carried out insider trading in the scrip of NDTV during the investigation period. - Non Compliance with NDTV's Code of Conduct - WTM found that Prannoy Roy and Radhika Roy had traded while in possession of price sensitive information and accordingly directed them to disgorge the unlawful gains and also prohibited them from accessing the securities market for a period of 2 years.
HELD THAT:- The trades of Prannoy Roy and Radhika Roy is during PSI-6. In Quantum Securities [2023 (2) TMI - SECURITIES APPELLATE TRIBUNAL MUMBAI] as already held that PSI-6 was not a price sensitive information and, therefore, the charge of insider trading during that period cannot be sustained. The matter of Prannoy Roy and Radhika Roy is thus squarely covered by the decision of this Tribunal in Quantum Securities (Supra) which fact is not disputed by the learned counsel for the respondent.
As we find that Prannoy Roy and Radhika Roy had secured pre-trade clearance from the Compliance Officer of NDTV which is an admitted fact in the show cause notice and, therefore, the trades executed by these two entities was in conformity with the NDTVs Code of Conduct and the PIT Regulations. There is no finding in the impugned order to the effect that the Compliance Office had acted improperly in granting permission to these two entities to sell during the period when the trading window was closed.
The impugned order passed by the WTM against Prannoy Roy and Radhika Roy cannot be sustained.
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2023 (10) TMI 1258
Insider trading in the scrip of the Company - corporate announcement regarding an update on the real estate operation of the Company - penalty of Rs. 10 lakhs u/s15G(i) of the SEBI Act imposed - allegation levelled against the appellant [Vice Chairman and Managing Director of the Company and also a Member of the Audit Committee] was that the Company made corporate announcement regarding an update on the real estate operation of the Company for third quarter on the Bombay Stock Exchange and the National Stock Exchange of India Limited - corporate announcement revealed that the Company during its second quarter had achieved a new sales volume which was up by 5.6% as compared to the preceding quarter - appellant as urged that the real estate operational data was not a price sensitive information - HELD THAT:- Corporate announcement regarding update on the real estate operation of the Company was a price sensitive information. UPSI has been defined under Regulation 2(1)(n) which means any information that is not generally available and which upon becoming generally available is likely the materially affect the price of the securities.
In the instant case, the real estate operational update were part of the financial results for the quarter ended 30.09.2017. It was a price sensitive information and upon announcement it had a material impact in as much as the price of the scrip increased.
Appellant was in possession of this price sensitive information and had traded in the scrip during the period in question. In our opinion, obtaining necessary pre clearance and making requisite disclosures were not enough to show that his trades were not motivated by UPSI.
Regulation 4 of the PIT Regulations prohibits any insider from trading in securities while in possession of UPSI. The proviso to Regulation 4 of the PIT Regulations gives a window to the insider to prove his innocence by demonstrating the circumstances under which he has traded. In the instant case, the appellant is an insider and, therefore, it was upon him to prove that the trades were not motivated by UPSI. We find that no plausible explanation has been given in this regard.
Appellant had traded in the scrip of the Company while in possession of UPSI and had violated Section 12A(d) and (e) of the SEBI Act, 1992 and Regulation 4(1) of the PIT Regulations. No error in the impugned order. Appeal fails.
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2023 (10) TMI 1173
Writ petitions by minority shareholders of Bharat Nidhi Ltd. (‘BNL’) - Request to place on record a compilation of documents - complains to the SEBI of violation by BNL of various provisions of the Securities laws - allegation of violations pertaining to the minimum public sharing norms (“MPS”) as also violations in respect of the promoters disclosure in shareholding in BNL - as contented that BNL was earlier listed on the Delhi Stock Exchange and after the same ceased to be functional, BNL had sought listing of its share at the Calcutta Stock Exchange, which is also not functional. BNL is now stated to be on the Dissemination Board of the National Stock Exchange.
HELD THAT:- The contents of Regulation 29 to the effect “may not be released to the public” is with a further rider that “only if the same prejudices the Board and/or the applicant”. These contents are quite, significant, by virtue of which Regulation 29 cannot be read as a blanket or a mandatory bar on non supply of documents and information.
By no stretch of imagination, can it be said that the petitioners in the present case, who are minority shareholders and in such capacity, being part owners of the company to the extent of their shareholding, are persons who are alien/outsiders to the company (BNL), moreover they are integral to the company, having an inextricable concern and interest in the functioning and management of the company.
Thus the word ‘public’ as used in Regulation 29 can in no manner be made attributable to shareholders of BNL like the petitioners. This apart, if such contention as urged on behalf of the respondents that the petitioners are ‘public’ and therefore, they are not entitled to receive information by the applicability of Regulation 29, if accepted, the same yardstick and parameters become applicable to respondent Nos. 3 to 9, who are also shareholders of BNL, who are hence not a different class, than that of the petitioners. The petitioners as also respondent Nos. 3 to 9 belong to the same species as shareholders
As it cannot be countenanced that some shareholders can take shelter under Regulation 29 to plead confidentiality of settlement information, against a group of other shareholders, so as to bring about an effect that information in relation to settlement be not supplied to such persons of their own class who are similarly situated. No shareholder can take a position that he cannot disclose any information on the affairs of the company to other shareholders. This would bring about a situation of disharmony, distrust causing damage to the management and functioning of the company.
None of the contentions as urged on behalf of respondent Nos. 2 to 9 in opposing the prayer of the petitioners to furnish documents would persuade us to hold that there was any embargo legal and/or factual for such documents not to be furnished/supplied to the petitioners.
The objection of such respondents that the petitioner ought not to have raised such plea on the documents at the midst of the final hearing, as this itself would show that no prejudice was caused to the petitioners, in our opinion, is certainly not a tenable contention, for more than one reason.
Moreover, as observed above, the case of the petitioners is that the very basis of the SEBI undertaking investigation on the complaints as made by the petitioners of BNL violating the rules, regulations and norms as prescribed by SEBI, being violated by BNL and the same forming subject matter of investigation by SEBI and the resultant show cause notice were foundational facts, hence, in such context, it was the petitioners’ entitlement to receive all the documents in that regard. Such documents therefore have all relevancy as law would contemplates in the present lis between the parties. Thus, the impression of respondent Nos. 2 to 9 that the petitioners should not be provided with such documents, is not acceptable.
Once it is the entitlement of the petitioners in law to receive such documents, they need to be furnished such documents, unless furnishing of these documents would stand prohibited in law, which is certainly not a situation in the present facts.
Regulations are framed under the SEBI Act, 1992. The avowed object and intention of the Act is to protect the interests of investors in securities and to promote the development of, to regulate the securities market. Thus, all actions which are taken by the SEBI and through the various bodies as constituted under the Act and the regulations are required to act considering the paramount interest of the investors. For such reasons as well, we do not find as to why the petitioners ought not to be entitled to the documents. We do not find that there is any impediment whatsoever in law or otherwise for the documents, as demanded, to be supplied to the petitioners.
We are inclined to grant to the petitioners interim relief in terms of prayer clause (g).
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2023 (10) TMI 683
Violation of Buyback Regulations and PFUTP Regulations 3 and 4 of the SEBI - Fraudulent and Unfair Trade Practices relating to Securities Market - allegation of misleading public announcement designed to influence the decisions of investors - Company wrote to SEBI informing that it could not ensure buyback of 50% of the amount earmarked as required under Regulation 14(3) of the Buyback Regulations. It requested SEBI to release the cash Escrow amount containing 2.5% of buyback size u/r 15B of the Buyback Regulations
HELD THAT:- The investigation report clearly held that the Company had complied with relevant provisions of Regulation 15B (8) of Buyback Regulations (for release of amount deposited in Escrow account by the Company) holding that “No major impact on price / volume was observed on the basis of any of the corporate announcement made by Cairn during the investigation period”. The Company could not have foreseen or predicted that the stock markets would witness this bullish trend at the time when the decision for going for a buyback was taken nor could the Company be aware at the time of making the public announcement that the traded price of the scrip would be above the maximum buyback price on 68 days out of 123 trading days.
Thus, allegation that the Company had made misleading public announcement on January 14, 2014 designed to influence the decision of investors and to induce sale or purchase of its securities is not proved.
Company failed to show intent towards completing the buyback by not putting enough buy orders at appropriate time and therefore acted fraudulently - As we find that out of 123 trading days available to the Company to conclude the buyback, on 55 days at BSE and 54 days at NSE, the closing price of the scrip was lesser or equal to maximum buyback price of Rs. 335/-.
Closing price was more than maximum buyback price of Rs. 335/- per share from April 2, 2014 to April 23, 2020 and from May 12, 2014 to July 22, 2014 - out of 123 days available to the Company to complete the buyback, it placed buy orders on 82 days on NSE and on all 123 days on BSE.
It is also noted that the SEBI (Buyback of Securities) Regulations, 1998 do not lay down any method or procedure for conducting the buyback. The Company appointed professional merchant bankers and brokers for the buyback transaction and deposited Rs. 143.12 crores in an Escrow account. It cannot be faulted for adopting a prudent and cautious approach by placing few buy orders at the initial stage of the buyback period. Placement of large buy orders at the initial stage could have affected the price of the scrip and possibility of the price going above the maximum price even earlier could not be ruled out.
The Company could not have perceived that in last 2-3 months of the buyback period the price would not be favourable.
There is nothing on record to indicate that the Company instructed the intermediaries to prefer one Stock Exchange over another. The Company utilized Rs. 1225.45 crores in the buyback process and in our view this is not a paltry sum to invest for a non-serious effort to buyback the shares. The above indicates that it cannot be conclusively proved that the Company showed no intent to successfully complete the buyback and there by acted fraudulently.
Thus, we hold that the violations of provisions of Regulations 3(a), (b), (c), (d) and 4(1), 4(2)(K) and (r) of the PFUTP Regulations and Regulations 19(1)(a) of the Buyback Regulations are not proved against the Company.
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