TMI Blog2013 (4) TMI 652X X X X Extracts X X X X X X X X Extracts X X X X ..... that false corporate announcement gave false figures relating to advance, security deposit and income pertaining to the theatres which were not inexistence. The deposits shown were turned out to be not genuine but mere book entries to hide receivables in the balance sheet. Responsibility is cast on the Directors to prepare the annual records and reports and those accounts should reflect ‘a true and fair view’. As decided in Official Liquidator v. P.A. Tendolkar (1973 (1) TMI 53 - SUPREME COURT OF INDIA) a Director as so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of business of the company even though no specific act of dishonesty is provide against him personally. The facts in this case clearly reveal that the Directors of the company in question had failed in their duty to exercise due care and diligence and allowed the company to fabricate the figures and making false disclosures by overlooking the numerous red flags in the revenues, profits, receivables, deposits etc. which should not have escaped. Profit as on quarter ending June 2007 was three times more than the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... witnessed tremendous growth, characterized particularly by increasing participation of public. Investors confidence in the capital market can be sustained largely by ensuring investors protection. Disclosure and transparency are the two pillars on which market integrity rests. Facts of the case disclose how the investors confidence has been eroded and how the market has been abused for personal gains and attainments. 2. The Appellate Jurisdiction of this Court guaranteed under Section 15Z of the Securities and Exchange Board of India Act, 1992 (for short SEBI Act ) has been invoked challenging a joint order dated 5.10.2012 passed in Appeal Nos. 28 and 29 of 2012 passed by Securities Appellate Tribunal, Mumbai (for short Tribunal ) upholding the order passed by SEBI dated April 18, 2011 restraining the appellant for a period of two years from buying, selling or dealing in securities and the order passed by the adjudication officer dated July 28, 2011 imposing a monetary penalty of 50 lacs under Section 15HA of SEBI Act. 3. The appellant was the promoter as well as a whole time Director of M/s Pyramid Saimira Theatre Limited (PSTL), a company registered under the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... am buildup. Further, it was also stated that he had only relied upon the auditor s statements in financial matters and hence was not personally liable for the violation of the provisions of SEBI Act and Regulations 2003. Personal hearing was accorded to the appellant on 30.8.2010. Written Submissions dated 15.9.2010 filed by the appellant was also considered by SEBI. The Board noticed following specific violations:- a) manipulated accounts by fictitious entries; b) made false disclosures to the stock exchange; c) did not co-operate with the investigations, and d) did not maintain certain books of accounts. 6. On facts, the officer found that all the above-mentioned violations had been established. Consequently, the Whole Time Member (WTM) of SEBI, in exercise of powers conferred under Section 19 of the SEBI, held that the Directors were found guilty for the violation of Section 12A of SEBI Act, 1992 and Regulation 3(b), 3(c), 3(d), 4(1), 4(2)(a), 4(2)(e), 4(2)(f), 4(2)(k), 4(2)(r) of the Regulations 2003. WTM of SEBI then, in exercise of the powers conferred on him under Section 19 read with Sections 11, 11B and 11(4) of the SEBI Act and Regulation 11 of Regulations 2003, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ially inflated prices of the scrip based on inflated financial results which enabled them to raise higher quantum of funds that would not have been possible otherwise. 12. The quarterly unaudited financial results of the company for the quarter ended 31st March 2007 to the quarter ended 31st March 2009 shows the following details: Particulars For the quarter ended (in Rs. Lakh) March June 30, Sept. Dec. 31, March June 30, Sept. Dec. 31, March 31, 2007 30, 2007 2007 31, 2008 2008 30, 2008 2008 31, 2009 2007 Net Sales 6756.89 12271.43 14418.79 23141.87 24556.12 2501.87 25225.72 13794.81 8069.04 Other 23.24 13.68 231.75 152.90 144.05 12.94 - 2.08 - Income Total 6780.13 12285.11 14650.54 23294.77 24700.17 25027.81 25225.72 13796.89 8069.04 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62.04 136.70 Karnataka 45.86 7.60 53.45 Kerala 12.95 12.95 Others 0.28 1.23 1.52 Total 437.21 112.18 549.58 17. On theatre income of Rs. 303.46 crore from Tamil Nadu region included consolidated credit entries of Rs.244 crore with corresponding consolidated debits Theatre Collections Receivable Account . The account did not show any income from April 2008 onwards. The journal vouchers in respect of those entries did not carry any such narration such as daily collection report number, name of theatre etc. The receivables were adjusted against cost of content, transferred to advance/security deposit account or remained unrealized. As on March 31, 2008, the total receivables of the company from Tamil Nadu region were Rs. 38.58 crore. Out of that, Rs.2.19 crore was outstanding against 162 theatres and the balance Rs. 36.39 crore outstanding in one account only which did not contain the theatre wise break up. Further it was also noticed that the entire amount of Rs.75 crore from own theatres in Andhra Pradesh was accounted by single journal voucher which di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alse records and that he has no role as such in preparing the accounts and finance of the company. 20. The facts and figures as such are not in dispute and the defence taken is that the statements were duly audited by statutory auditors and, consequently, it could not be held that the appellant had violated the provision of SEBI Act or the provisions of Regulations 2003. 21. Let us now examine the scope of the various provisions stated to have been violated by the appellant and its consequences. Section 12A falls in Chapter VA of the SEBI Act which reads as follows: PROHIBITION OF MANIPULATIVE AND DECEPTIVE DEVICES, INSIDER TRADING AND SUBSTANTIAL ACQUISITON OF SECURITIES OR CONTROL Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. 12A. No person shall directly or indirectly (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of the provisions of the Act or the rules and the regulations made there under: 4. Prohibition of manipulative, fraudulent and unfair trade practices 1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. 2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following namely:- a) indulging in an act which creates false or misleading appearance of trading in the securities market; b) .. (d) .. e) any act or omission amounting to manipulation of the price of a security; f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities. g) . h) . i) .. j) ... k) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors; l) . (p) . (q) . (r) planting false or misleading news which may induce sale or purchase of secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the provisions of the Companies Act have also to be borne in mind. For instance, in SEBI Act, there is no provision for keeping proper books of accounts by a registered company. 26. Section 209 of the Companies Act says that every company shall keep at the registered office proper books of accounts. Books of accounts should be so kept as to give true and fair view of the state of the company s affairs and explain transactions. Of course, the auditors of the company must examine whether the company has maintained proper cost accounting records as required by the rules. Companies whose securities are traded on a public market, it is trite law that the disclosure of information about the company is crucial for the correct and accurate pricing of the company s securities and for the official operation of the market. Section 210 of the Companies Act states that at every annual general meeting of the company, the Board of Directors is required to lay before it a balance-sheet as at the end of and a profit and loss account for the financial year. 27. Clause 41 of Listing Agreement between the SEBI and the concerned companies requires the companies to furnish to stock exchange and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecords and reports and those accounts should reflect a true and fair view . The over-riding obligation of the Directors is to approve the accounts only if they are satisfied that they give true and fair view of the profits or loss for the relevant period and the correct financial position of the company. 33. Company though a legal entity cannot act by itself, it can act only through its Directors. They are expected to exercise their power on behalf of the company with utmost care, skill and diligence. This Court while describing what is the duty of a Director of a company held in Official Liquidator v. P.A. Tendolkar (1973) 1 SCC 602 that a Director may be shown to be placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of business of the company even though no specific act of dishonesty is provide against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially. 34. The facts in this case clearly reveal that the Directors of the company in question had failed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36. We have, on facts, clearly found that the Directors of the company have created artificiality by projecting inflated figures of the company s revenue, profits, security deposits and receivables and that the manipulation in the financial results of the company resulted in price rise of the scrip of the company and the promoters of the company then pledged their shares to raise substantial funds from financial institutions. The conduct of the appellant and others was, therefore, fraudulent and the practices they had adopted, relating to securities, were unfair, which attracted the penalty provisions contained in Section 15 HA read with 15J of the SEBI Act. Disclosure and Transparency: 37. Gower and Davies on Principles of Modern Company Law, 9th Edition (2012) at page 751, reiterated their views on the scope and rationale of annual reporting required under the Companies Acts, as follows: On the basis that forewarned is forearmed the fundamental principle underlying the Companies Act has been that of disclosure. If the public and the members were enabled to find out all relevant information about the company, this, thought the founding fathers of our company law, wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cers of the company had caused to publish forged and misleading results of the company, various quarterly financial results and the annual results for the year 2007-08, were reported to the stock-exchanges containing inflated figures of the company s revenue, profits, security deposits and receivables and those financial statements which were relied upon by investors in making investment decisions, which did not reflect a true and fair view of the state of affairs of the company. 40. The appellant has taken the stand, as already stated, that even though he was a whole time Director he was not conversant with the accounts and finance and was only dealing with the human resource management of the company, hence, he had no fraudulent intention to deceive the investors. We find it difficult to accept the contention. The appellant, admittedly, was a whole time Director of the company, as regards the preparation of the annual accounts, the balance-sheet and financial statement and laying of the same before the company at the Annual General Meeting and filing the same before the Registrar of the Companies as well as before SEBI, the Directors of the company have greater responsibility, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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