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2008 (5) TMI 716 - AT - Companies LawIngenuine preferential allotment of shares - Disgorgement of ill-gotten gains - whether any finding has been recorded at any stage of the proceedings that the appellant has made no illegal gains? - HELD THAT:- We are of the considered opinion that the enquiry officer has not undertaken any exercise to find out the ill-gotten gains, if any, made by the appellant and the enquiry was only to find out the wrongful acts allegedly committed by the appellant. It is true that the enquiry report has been accepted by the Board as contended on behalf of the appellant and that is why a penalty has been levied debarring it from opening fresh demat accounts till the end of December 2007. Mere acceptance of the enquiry report by the Board does not, in our view, advance the case of the appellant. Further, on receipt of the enquiry report another show cause notice was issued to the appellant on May 4, 2007 enclosing the enquiry report. We have perused that show cause notice as well and find that there is nothing therein to suggest that the appellant had made ill-gotten gains or anything about disgorgement. Thus, we have no hesitation in holding that the question regarding illegal gains, if any, made by the appellant has not been examined at all at any stage of the proceedings. Disgorgement - It is a common term in developed markets across the world though it is new to the securities market in India. Black’s Law Dictionary defines disgorgement as “The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.” Disgorgement of illgotten gains may be ordered against one who has violated the securities laws/regulations but it is not every violator who could be asked to disgorge. Only such wrongdoers who have made gains as a result of their illegal act(s) could be asked to do so. The least that was required of the Board was to have called upon the appellant to show cause why it should not be ordered to disgorge the amount determined in the impugned order. Not having done so, the principles of natural justice have been flagrantly violated. The impugned order, therefore, deserves to be set aside on this ground alone. We also cannot approve the observations made by the Board in the impugned order which have been reproduced in the earlier part of our order and are of the view that action for disgorgement should have been initiated only after the appropriate proceedings against the entities had concluded and their guilt established. We are satisfied that the case of the appellant is no different from the case of the other entities against whom appropriate proceedings are still pending and whose appeals came up for hearing before us on 22.11.2007. We cannot resist expressing our anguish over the irrational manner in which the Board proceeded to pass the impugned order only against the two depositories and their participants. Why we say so is that by its ex-parte order dated April 27, 2006 which is to be read as a part of the impugned order, the Board itself had found that the financiers of the key operators were the ultimate beneficiaries of the IPO scam and it went on to identify 82 financiers and even computed the illegal gains made by some of them in that order and yet issued no directions to them to disgorge the illegal gains made by them. Instead, the two depositories and their participants against whom enquiries are pending have been ordered to disgorge the entire amount of illegal gains without even recording a finding that they made any such gains. If the illegal gains were made by financiers it was they who ought to have been directed to disgorge the amount. One is left guessing why the Board did not issue such directions to them. It did not even initiate disgorgement proceedings against them for reasons better known to the Board. It appears that after identifying the financiers who were the ultimate beneficiaries of the scam, the Board turned a nelson’s eye towards them and chose to proceed against the depositories and their participants and that too, exparte which, to say the least, was most unfair. What is really amazing is that the Board has noticed the correct position in law in para 30 of the impugned order but did not follow the same and ordered disgorgement against those entities against whom no findings of ill-gotten gains have been made, leaving out those against whom such findings had been recorded in the ex-parte order of April 27, 2006. We need not say anything more and leave the matter at that. In view of what has been said above and for the reasons stated in our order dated 22.11.2007 passed in Appeal no. 147 of 2006, we allow the appeal and set aside the impugned order leaving it open to the Board to initiate further proceedings in accordance with law.
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