9911796707
TMI Blog2002 (9) TMI 796X X X X Extracts X X X X X X X X Extracts X X X X ..... violating the terms of issue of the prospectus, circulars and SEBI Guidelines on Disclosure and Investor Protection, the Chairman of the Respondent, invoking section 11B of the Securities and Exchange Board of India Act, 1992 (the Act) directed that the Appellant be prohibited from accessing capital market and dealing in securities market in any capacity for a period of 3 years from the date of the order. The Appellant claiming to be aggrieved by the said order filed the present appeal praying to set aside the order. Even though the Appellant had prayed, pending final hearing and disposal of the appeal, to restrain the Respondent from implementing the order, this prayer was not pressed when the matter was taken up on 2.5.2002 for consideration. Ms. Sanober P. Nanavati, learned counsel for the Appellant narrated the background of the appeal. The Appellant s version as submitted by the learned counsel, and as stated in the appeal / rejoinder, having a bearing on the issue under consideration, briefly is under: The impugned order is misdirected to the Appellant as he had resigned from the Board of the company with effect from 7.5.1995 whereas the public issue was opened on 9.5.19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s disassociation with the company when there was no such requirement for an ordinary director to comply with either in the Companies Act or in the Act or Guidelines; that in any case the Appellant could do nothing much as he was under threat from Shri Gandhi. The learned counsel reiterated the following submissions made by the Appellant in his written submission before the Respondent in the enquiry proceedings that: I may further state that Late Shri U. N. Gandhi introduced himself to me as MBA (Finance), and in the prospectus also he was shown as MBA (Finance). When it came to my knowledge that Late Shri Gandhi was not MBA I, without disclosing my name brought this fact to the notice of SEBI to stall the Public Issue of Incap Financial Services Ltd. Unfortunately the complaints so made were not viewed seriously by SEBI. When I could not succeed in stalling the public issue I tendered my resignation on 7/5/1995. The investigation carried out by SEBI has not found anything about my involvement in the irregularities in the public issue of the company. It appears that relying on allegation made by Shri Kantibhai Patel that I was the mastermind behind the entire operation and wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the interest of investors or orderly development of securities market, to any person or class of persons referred to in section 12 or associated with the securities market. In other words, the section indentifies the persons to whom and the purpose for which directions can be issues. The Appellant had neither subscribed nor held nor dealt in any share in the company and, therefore, he can not be equated with a person associated with the securities market with in the meaning of section 11B that the Hon ble Gujrat High Court in Karnavati Fincap Ltd., V SEBI (1996 (10) SCL.5 (Guj) had interpreted the words person associated with the securities market appearing in section 11(2) of the Act as a person having connection or having intercourse with the others dealing in securities market. A direction having penal effect can not be issued in the absence of mensrea and further that such a direction can not in any case be issued on the basis of surmise, conjucture or suspicion, as has been held by the Hon ble Supreme Court on L D Jaishivphani V Naraindas N. Punjabi (AIR 1976 SC 374). The directions issued against the Appellant prohibiting him from accessing the capital market and directin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany before BSE. A single, stray, lone instance does not and can not amount to an involvement in the alleged irregularities for the purpose of invoking the provisions of Section 11B of the Act,. An association with the securities market is essential. It was further submitted that except the journey to Mumbai on 27th/28th July, 1995 the Appellant had not visited alone or accompanied late Mr. U.N. Gandhi to Chennai or any other place after 7/5/1995 for any purpose much less to generate subscription for Public Issue. It is also contrary to the findings of the investigation by the Respondent because according to the findings, the Stock Invests in favour of the company were already obtained in the month of May/June 1995. The statement of Mr.Kantibhai Patel heavily relied by the Respondent is not only contrary to the Appellant s statement recorded by the Respondent on 18/1/1999 wherein he had catagorily stated that Shri Dilip Gajjar accompanied Gandhi to Chennai. The Respondent has countered the contentions of the Appellant, in its reply and in the oral submissions made by its Representative as follows: In 1994-95 many companies without any financial credibility had come out with pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he will assist the company in the field of management, law, accounts, etc. He was appointed as director by his own version in December 1994. Prior to that in October 1994 he was appointed as Company Law Consultant on retainership basis. He was involved with the public issue of the company right from the planning stage till the listing is evident not only from the fact that he was a functional director of the company during the relevant period but also from his conduct, that he had accompanied Shri Gandhi, managing director of the company to Bombay Stock Exchange on 28.7.1995, a few days before listing permission was granted by the exchange, that he accompanied the managing director on his trips in order to generate subscription to the public issue etc. The fact that the Appellant was not designated as executive director is of no relevance to absolve him of the charges in view of the fact that his field of responsibility in respect to the company was clearly demarcated that according to his own as statement he was company law consultant to the Company. It is incorrect to hold that the Appellant resigned on 7.5.95 as claimed by him, for the reason that he himself had written to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Status Management Services Ltd V. SEBI [(2000)26 SCL 491], Integrated Amusements Ltd V. SEBI [(2000 27 SCL 458] and Phenomenal Plantations Ltd V. SEBI [(2002) 36 SCL 780]. I have carefully considered the material on record and the submissions of the parties and my views are as follows: It is an admitted fact that the company s public issue was not a fair one, that the issue was manipulated. The Appellant has not disputed the Respondent s version in this regard. In any case in the light of the factual position as put forth by the Respondent, in the absence of any evidence to the contrary, the position as stated by the Respondent is accepted. In this context it is also noticed that the company and its three other directors have been proceeded against and action has been taken against them, by the Respondent for their role in manipulating the said public issue. The Appellant s main thrust of the argument is that he was not associated with the company s public issue, that he had resigned from the Board of the company before the public issue opened, that though he knew of the mishandling of the public issue he could not expose the same as he was under threat from Shri Gandhi th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng more. It is noticed from the copy of the prospectus filed in the proceedings that the Appellant was a director of Wizma Securities Ltd, of which Chairman was Shri Gandhi. Further Shri Gandhi has been described as a financial consultant and not as a company law consultant. In this context it is also to be noted that the said Wizma Securities Ltd was one of the applicants (out of the 27 applicants put in position) who had paid 31 lakhs for the shares to save the public issue. There is no difficulty in accepting the factual position, that the Appellant was associated with the company in official capacity as consultant/director from October 1994 to 1.8.1995. In this context it is noticed that the prospectus was dated 10.4.1995 and the public issue was opened on 9.5.1995 during the period when the Appellant was holding office in the company. Further, even if it is assumed that he had resigned on 7.5.95 (which is not so) he allowed his name to be put in the prospectus, and he did not make any announcement that he was not director of the company as disclosed in the prospectus. The submission that he was under threat and that is why he did not disclose resignation from the company bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce along with Shri U.N. Gandhi and once I attended Bombay Stock Exchange on 28.7.1995. It is now difficult to tell why I accompanied him. Though he cannot deny the factual position, he preferred to be evasive in explaining the visit. The Appellant, to another question from the investigating officer had stated that I did not associate with the public issue operation , I guided the company only on company law matters. The Appellant s version gives an impression that a public issue has no requirement of any guidance from the company law angle. This statement is coming from a practicing company secretary claiming to have 31 years of experience in the filed of company law. The Appellant in his deposition has admitted that he knew that the issue was not fully subscribed and that it was managed. In that context when he was asked as to why he did not complain about it to any of the authorities, his answer was I was threatened of dire consequences . It was stated that the threat was form Shri Gandhi - a person who was a co-director in another company and whom he had accompanied to different office / authorities for the purpose of public issue. The fact that he had accompanied Shri Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident. To another question as to who appointed lead manager, registrar and auditors the answer was candid - Everything was done by Shri R.S. Sharma and Team . To another question as to what is the extent of involvement of other directors namely, Shri Kotaria and Shri Roopram Sharma in the entire operations? the answer was Shri Roopram Sharma was the mastermind behind the entire operations and was involved with Shri U.N.Gandhi from the beginning and afterwards with Shri S.N. Gandhi. Shri Kotaria was also a member of Gandhi s group. At present he is the Managing Director. This statement gains credibility in the light of the admission of the Appellant that he had accompanied Shri Gandhi to the Merchant Banker, Registrar etc., and that Registrar to the issue had collected details of the public issue from his office. From the material on record it is evident that he was not a director simplicitor. He was actually involved in the public issue, which was designed to defraud the public. Therefore the ratio in the Nanjudih s case (Supra) and the DCA circular referred to by the Appellant are of no help to him. He is liable for the role he played in the public issue made by the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Respondent to impose penalties. In Sterlite, this Tribunal had observed: But it is to be noted that the power under section 11B is restricted to issue appropriate direction for the purpose of protecting the interest of the investors etc. mentioned in the section. The scope of the expression direction has not been defined in the Act. But the word has been judicially interpreted by Courts. Hon ble Bombay High Court had viewed that in law direction means guidance or command (AIR 1988 Bombay 416 at p. 421). According to the Hon ble Supreme Court in Rajendranath v.CIT (1979) 4 SCC 282, a direction by a statutory authority is in the nature of an order requiring positive compliance . According to Blacks Law Dictionary direction means a guiding or authoritative instruction, order, command . It has to be noted that section 11B does not even remotely empower the Respondent to impose penalties. Hon ble Calcutta High Court had held that prescribing an offence and its punishment is an essential plenary function of the legislature (D.N.Ghosh v. Addl. Sessions Judge (AIR 1959 Cal.208.) Hon ble Gujarat High Court also held the same view in Delux Land Organisers v. State of Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated above need be kept in mind. However, it is understood that the Respondent has also been taking the view that section 11B is not a penal provision, but preventive and remedial in its application. If that is so, it has to be seen whether the impugned direction prohibiting the Appellant from accessing the capital market for a period of 2 years from the date of the order is preventive or remedial. In the absence of any explanation from the Respondent as to what exactly is meant by accessing the capital market , it has to be understood as is understood in the common parlance i.e., entry to the capital market for issuing / offering securities. In this context, it is to be noted that the charge against the Appellant is of market manipulation. The shares of the Appellant are listed / traded in the stock exchanges even today. That being the case preventing the Appellant raising further capital/offering shares to the public in the next two years cannot serve as a preventive measure to debilitate the Appellant indulging in market manipulation. Similarly, by no stretch of imagination the said direction can be considered even remedial as prospective barring of a public issue canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the securities market. The scope and reach of the section is clear. First part of the section refers the purpose for which directions can be issued. Second part refers to the persons to whom the directions can be addressed. The expression associated appearing in clause (a) above also means connected with. So the question to be considered in the Appellant s case is as to whether he can be said to be associated / connected with the securities market. In this context it has to be noted that the section is restricted not only to persons who are associated directly with the securities market. It is applicable to persons associated with the securities market directly or indirectly. The company s shares are listed on the stock exchange. It has entered into listing agreement with the stock exchanges at Mumbai, Ahmedabad etc., and its shares are traded on the stock exchanges. The stock exchanges are integral part of the securities market. Therefore the company has to be considered as a person associated with the securities market. Once it is held that a company is a person associated with the securities market, logically it has to be accepted that its directors are also associated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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