TMI Blog2003 (9) TMI 796X X X X Extracts X X X X X X X X Extracts X X X X ..... individuals also, none other than the Appellant has so far filed any appeal against the said order. The facts based on which SEBI passed the order have been stated in the order itself. Briefly those facts are as follows: Manu Finlease Ltd., (MFL) a public limited company issued a Prospectus on 5.9.1995 whereby 21, 00, 000 equity shares of ₹ 10/- each were offered for public subscription. Out of the same 9, 20, 000 shares were reserved for preferential allotment - i.e. 4, 20, 000 shares to Indian Mutual Funds and 5, 00, 000 shares to Non Resident Indians. In that context net offer to the resident Indian public was only 11, 80, 000 shares. The issue was found oversubscribed by 50.54 times, though the said company had no sound financial track records. In that context, on 2.8.1996 SEBI ordered an investigation. Investigation revealed manipulation of the public issue made by MFL and also grey market operations and secondary market manipulations in the shares of the company. Pursuant to the investigation report, show cause notices were issued on 6.8.98 to the persons found involved including the Appellant. They responded to the notice by sending replies and making oral submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scription to the Public Issue of MFL, resulting in irregular allotments. In his reply to the Show Cause Notice, Shri Gopal Khadaria stated that he had entered into a purely financial arrangement with M/s. Nathji Enterprises Pvt. Ltd., and M/s. Krishna Texport and Capital Market Ltd., to arrange finance for the Public Issue of MFL which was done by him at a spread of 2% as financing charges. He stated that an agreement dated 30.9.95 was entered into with M/s. Nathji Enterprises Pvt. Ltd., who was introduced to him by Shri S. N. Daga of D.B.India Securities Ltd., for financing 60, 00, 000 equity shares in the Public Issue of MFL at interest of 26% p.a. He denied knowledge of the fact that M/s. Nathji Enterprises Pvt. Ltd., was an associate concern of MFL having common directors and operating from the same premises. Shri Gopal Khadaria entered into another agreement on 7.10.95 with KTCML for financial arrangement of 6 applications of 10, 00, 000 equity shares of ₹ 10/- each at interest of 24% p.a. He stated that the applications were by 6 different parties and denied that these applications were multiple. It was for MFL to accept or reject the application. He stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . I thus hold Shri Gopal Khadaria guilty of the charges levelled against him . What the SEBI has stated about the Appellant in the order is also extracted below: I As per the investigation report, M/s. Krishna Texport Capital Market Ltd., (KTCML) provided finance to Shri Gopal Khadaria for six multiple applications of 10 Lac shares of ₹ 1.00 crore each to the Public Issue of MFL made in the names of its nominees. For this purpose, stockinvests of ₹ 1 crore each were obtained from State Bank of Indore, Dadar (W) Mumbai, in the names of these nominees against deposits of KTCML with the bank. The share applications were made in the names of KTCML nominees and allotments obtained. The beneficial ownership of these applications was not disclosed. The realisation proceeds of stockinvests against allotment of MFL shares were adjusted in the Current Account of KTCML and not in the bank accounts of the allottees. By indulging in falsification of its books, accounts and records, KTCML resorted to financing of irregular and late subscriptions to the Public Issue of MFL, resulting in irregular allotments. II In its reply, KTCML contended that it provided fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement that the BORROWER (i.e. Gopal Khadaria) was desirous of applying for 60 lakhs equity shares of ₹ 10/- each for an amount of ₹ 6 crores out of the public issue of MFL, that since he did not have liquidity to pay the application money he requested the INVESTOR (i.e. the Appellant) to provide him financial accommodation to the extent of ₹ 6 crores to enable him to apply for the said shares and for the said financial accommodation, he agreed to pay interest at the rate of 24% per annum from the date of stockinvest to the date of allotment and also agreed to pay interest @ 30% p.a. from the date the stockinvest gets debited into the bank to the date of final payment made by him, that in the event of funds not refunded to the Appellant within seven days after intimation to take delivery of the shares, he was required to pay interest @ 36% p.a. In this context learned Counsel referred to clause (f) of the Agreement which stipulated that To ensure repayment of Financial Accommodation BORROWER has offered to pledge in favour of the INVESTOR the shares to be allotted by Manu Finlease Ltd., and for this purpose has suggested that the INVESTOR apply for the said s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by them. Manu Finlease Ltd./Registrar to the issue, will forthwith transferred by them to BORROWER, in the case of allotment of shares and in the case of refund, an amount equal to the amount refunded to the INVESTOR by Manu Finlease Ltd./Registrar to the Issue will be paid over to BORROWER by way of cheque that will be issued in their favour. Stamp Duty payable on transfer of the shares to Manu Finlease Ltd. shall be borne in full by BORROWER. 8. In the event BORROWER fails to repay the amount due to the INVESTOR within 30 days after receiving intimation to collect the delivery, the investor shall be entitled to sell the shares that may be allotted to them by Manu Finlease Ltd./Registrar to the Issue by private sale or Public auction after giving one week's notice in writing to appropriate the amount due to them (net of the refund received from Manu Finlease Ltd./Registrars to the issue) inclusive of interest till that date and in case of any shortfall; the same shall be made good by BORROWER. Any surplus balance still remaining after the appropriation to the INVESTOR, shall be transferred back to BORROWER. 9. In the event that for any reason whatsoever, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot in the bank accounts of the allottees. Since the applications were made on behalf of Shri Gopal Khadaria, a single application for 60 lakh shares should have been made instead of six multiple applications of 10 lakh shares each. As the net offer to the public in this ca se was for 11, 80, 000 shares, Shri Gopal Khadaria who was acting on behalf of Nathji Enterprises P. Ltd., an associate concern of MFL, could not have applied for more than 11, 80, 000 shares being the size of the public issue. Since the application was for 60, 00, 000 shares, this was conveniently sub divided in six multiple applications of 10, 00, 000 shares each. This act resulted in irregular allotment of MFL shares to its promoters. It appears that you have thus indulged in 'fraudulent' act, as defined in regulation 2(1)(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, specifically prohibited under regulation 3. You resorted to financing of irregular subscriptions to the public issue of MGL. These irregular allotments thus facilitated an artificial rise in the price of MFL shares on the secondary market, thereby inducing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show cause notice and therefore the order is bad and deserves to be set aside. In this context he referred to the show cause notice dated 6.2.1998 and submitted that the only charge against the Appellant is that it made 6 multiple applications and the same resulted in irregular allotment. He submitted that it is not a charge against the Appellant that it acted in connivance with any other person, or that it acted with an intention to defraud anybody or that it indulged in falsification of the records. He submitted that the Respondent has referred to only one document in the show cause notice based on which the charges were levelled and that document is the Agreement dated 7.10.1995 entered into between the Appellant and Shri Gopal Khadaria and no other material or document has been referred to and provided to the Appellant. Therefore the Respondent is precluded from relying on any other document/material while adjudicating the show cause notice or defending its order under challenge in the appeal proceedings. He submitted that the Respondent in its reply has referred to an unsigned draft agreement dated 30.9.95 between Gopal Khadaria and M/s. Nathji Enterprises, stated to have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Khadaria. Since all the applications were made on behalf of Shri Gopal Khadaria, a single application should have been made instead of 6 multiple application of 10 lac each, which were liable for rejection being multiple applications. As per the prospectus of MFL, an applicant should submit only one application form (and not more than one) for the total number of equity shares required. It was also mentioned that multiple applications are liable for rejection. Thus multiple share applications made by KTCM L in the name of its nominees on behalf of Shri Gopal Khadaria should have been rejected. However, these multiple applications were accepted, which resulted in irregular allotment of 97, 800 shares. These shares were later delivered by Shri Gopal Khadaria to M/s. Nathji Enterprises an associate concern of MFL. Shri Gopal Khadaria was introduced by M/s. DB India Securities to the MFL for the purpose of financing the public issue of MFL Learned Counsel submitted that the Respondent itself has admitted that the multiple applications though should have been rejected, were entertained and irregular allotments were made. The Respondent has ignored the fact that the allotm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etion all or any of the multiple applications. He submitted that thus it was for the Board of the company to decide as to whether the multiple applications should be rejected or not and certainly not a matter attracting the provisions of FUTP Regulations. Learned Counsel submitted that the charge against the Appellant is that it indulged in market manipulation attracting action under the FUTP Regulations, that this charge can not stick as the FUTP Regulations came into force only on 25.10.1995 whereas the cause of the alleged action relates to a period before the notification of the FUTP Regulations in as much as the Agreement between the Appellant and Gopal Khadaria was executed on 7.10.1995, that the MFL's public issue was opened on 14.10.1995 and closed on 18.10.1995 and the Appellant had made applications through nominees on 18.10.1995 and thereafter there was no action from the Appellant's side. Learned Counsel submitted that since show cause notice itself refers to violation of FUTP Regulations, the Respondent can not invoke the provisions of section 11 for the violation of a non existent Regulation at the point of time. He further submitted that even if it is ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 1967 SC 295) that mere repetition of the provision of the law is not adequate when the charge is alleged, that the material based on which such charge is levelled need be disclosed in the notice. He submitted that when fraud is alleged test of evidence is strict and surmises and conjunctures are not adequate. In support of the contention that sufficient proof is required when fraud is alleged, learned Counsel referred to the observation made by Privy Council in Hansraj Gupta v. Dehra Dun Mussoorie Electric Tramway Ltd. (AIR 1940 Privy Council 98) that the party alleging fraud is bound to establish it by cogent evidence and suspicion can not be accepted as proof. Unless therefore the proved circumstances are incompatible with the hypothesis of the person charged with fraud having acted in good faith, they can not be accepted as affording sufficient proof of fraud. He submitted that SEBI except making wild allegation has not put forward any convincing evidence to establish the charge of fraud. Learned Counsel submitted that if making multiple application is fraud, then every person making such application would be considered as fraudster, and that would really be a mockery, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board may deem fit for restoring the status quo. Learned Counsel submitted that the direction debarring the Appellant from accessing and being associated with the capital market for a period of five years is not a direction contemplated under regulation 12. Learned Counsel further submitted that section 11B is also not available to issue such a direction as the impugned order is out and out punitive and section 11B is not available to issue such punitive directions has been made clear by this Tribunal in its order in Sterlite Industries Ltd. v. SEBI ((2001) 34 SCL 485) that 'Section 11B does not even remotely empower the Respondent to impose penalties' that the Tribunal has been consistently following the said view in other cases also, and he also cited BPL Ltd. v. SEBI ((2002) 38 SCL 310) in support thereof. Learned Counsel submitted that penalty is not imposable in a case where the offence was not committed in willful disobedience of law and that the Appellant had not committed any offence willfully in disobedience of the law and as such did not deserve any penalty. In support of the same, learned Counsel cited the decision of the Hon'ble Supreme Court in Hin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant's contention that FUTP Regulation has no application to the case, submitted that there is a chain of action from the signing of the Agreement on 7.10.1995 to the handing over of the share certificates on receipt of allotment to Shri Gopal Khadaria on 27.12.1995 and the chain of action did not stop with the submission of application for shares on 18.10.95 but reached atleast upto 27.12.95, if not thereafter. He submitted that the Appellant's contention that since the FUTP Regulation was notified on 25.10.95, the alleged charges are beyond the jurisdiction of the said Regulation is therefore untenable. Shri Desai submitted that the Appellant's version that it was unaware of the design of Shri Gopal Khadaria to manipulate the market in concert with others is baseless as could be seen from the fact that the Appellant had agreed to advance ₹ 6 crores to Shri Khadaria, having even stated by him that at that time he had no liquidity to pay the application money and further that by way of security for such huge amount the Appellant agreed to take only the shares which were expected to be allotted to Shri Khadaria. He further submitted that the Appellant was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fraudulent act' specifically provided under regulation 3 of the FUTP Regulations and that reference to the fact that the Appellant made multiple applications in the nominees' names without disclosing the name of the beneficiary owner and the realisation proceeds of the stock invests were adjusted in the current account of the Appellant and not in the bank accounts of the allottees etc. are made in support of the charge. Shri Desai submitted that the very fact of making 6 applications on behalf of Shri Gopal Khadaria, instead of making one application itself is indicative of the fact that the Appellant was fully aware of the game plan to manipulate the market and that it was an active party to the fraudulent action designed to manipulate the market. He submitted that the 6 applications were made to pre empt allotment of shares to that extent to the public, so as to enable the promoters to grab the shares, that but for such multiple application, those shares would have gone to the other genuine applicants. In the said context the Appellant who made such applications can not claim ignorance and innocence stating that its role was only that of financier. Shri Desai submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the said Hindustan Steel's case, that it has been demonstrated in the present case that the Appellant had willfully and intentionally acted to defraud the investors. According to Shri Desai the Appellant's contention that since the impugned order was issued after a delay of 7 years and therefore in the light of the Hon'ble Bombay High Court's observation in Universal Agencies (supra) and the Hon'ble Supreme Court in Collector of Central Excise (supra) no action is called for now, is baseless for the reason that investigation of market manipulation is a time taking process requiring collection of evidence and the Respondent had not delayed the investigation intentionally and as a result of the delay, even if there is such delay, the Appellant has not in any way suffered. Shri Desai submitted that Barium Chemical's case cited by the Appellant is not relevant to the present case, as it was in the case of an investigation ordered by Company Law Board under section 237 of the Companies Act, and the said section requires, the competent authority before ordering an investigation to satisfy that there were circumstances, as stated in the section, warranting su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns -- multiple applications - each seeking 10 lakh shares, totaling 60 lakh shares, as against 11, 80, 000 shares offered to the public by MFL. According to the Respondent , on listing MFL share opened at ₹ 48/- (as against the issue price of ₹ 10/-) on 2.1.1996 and moved to ₹ 70 on 26.3.1996 at Delhi Stock Exchange (DSE) and receded to ₹ 54/- on 3.6.1996. The major buying in the scrip at DSE was by DBISL (i.e. DB (India) Securities Ltd.,) on behalf of M/s. Glory Securities Ltd., an associate concern of MFL and its directoRs. An associate concern of M/s. Glory Securities Ltd., namely M/s. Goodwill Investment also made large buying in the scrip at DSE. Their buying at DSE was responsible for causing an unusual price movement in the scrip. (emphasis supplied). Thus the Respondent has clearly identified the persons responsible for causing artificial price movement in the scrip of MFL. The order deals with the role of several players. Appellant is one among them. The Appellant has not been identified as having bought shares causing unusual price movement in the scrip. The charge against the Appellant is confined to financing irregular applications resulting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le or purchase of shares by the investing public. (emphasis supplied) It is on the basis stated above, the Respondent found the Appellant guilty of violating the provisions of regulations 4 and 6 of the FUTP Regulations. It is not in dispute that the Appellant had made 6 applications through its nominees for a total of 60 lac shares of MFL. There is no charge against the Appellant about any manipulation in obtaining the stock invest etc. as has been alleged in the order against some others. Stock Invests were obtained from State Bank of Indore, Dadar (Mumbai) against the fixed deposit of ₹ 6 crores remaining with the said bank in the name of the Appellant. It is to be noted that as per the order it was the irregular allotment which facilitated artificial rise in price of MFL shares. Thus the artificial rise in the price of the scrip is now attributed to the irregular allotment of shares. In this context it is to be noted that the Respondent in the same order has attributed the cause for unusual price movement to large buying in the scrip at DSE for Glory Securities. It is to be noted that the shares are actually allotted by the issuer companies following certain proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase. It is true that the Appellant has advanced application money to the extent of ₹ 6 crores through stock invests to subscribe for 60 lakh shares, though the net public offer was only for 11, 80, 000 shares. The Respondent has taken this as a major point to establish the role of the Appellant in the alleged market manipulation. In this context it is to be noted that the Appellant is a financier. It's goal is to maximise its profit. By giving large sum for short duration by way of advances, its gain through interest collection increases. The financier as such is not normally expected to exercise any control on the number of shares one proposes to purchase in a public issue for which financial accommodation is availed from the financier. The Appellant, in my view, undoubtedly knew the total number of shares offered to the public by MFL and also that Shri Gopal Khadaria was applying for more shares than the total quantity of shares offered to the public. It is to be noted that the Appellant was acting as financier for maximising his profit and not as a counsellor to the borrower. The Appellant had agreed to give financial accommodation upto a sum of ₹ 6 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticipated in the market manipulation and further in the context of the Respondent's failure to establish the Appellant's nexus, if any, with the post allotment market manipulation allegedly indulged in by others, the Appellant can not be held guilty of violating regulations 4 and 6 of the FUTP Regulations. The evidence on record shows that the Appellant provided financial accommodation to Shri Khadaria to subscribe for the shares offered in the public issue made by MFL and ₹ 2564383 by way of interest. It is a legitimate business activity per se. It appears, in the absence of any other evidence to show the contrary, that the Appellant's interest was limited to the extent of making gain out of the transaction and it succeeded in achieving the said goal on receiving the promised interest. The Respondent has alleged that the Appellant had violated the provisions of regulations 4 and 6 of the FUTP Regulations. These regulations are as under: Regulation - 4 No person shall - (a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:- (1) the suggestion, as to a fact, of that which is not true, by one who does not believe it to be true; (2) the active concealment of a fact by one having knowledge or belief of the fact; (3) a promise made without any intention of performing it; (4) any other act fitted to deceive; (5) any such act or omission as the law specially declares to be fraudulent; and fraudulent shall be construed accordingly. Explanation.-Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that regard being had to them , it is the duty of the person keeping silence to speak, or unless his silence is in itself equivalent to speech; I have carefully considered the Respondent's submissions on the charge that the Appellant had violated the provisions of regulation 4 and 6 in the light of the provisions of FUTP Regulations. But I do not find any material on record in support of the said charge. A wild allegation of market manipulation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to Shri Khadaria, it was not over by 18.10.1995 by applying for shares. The activities did not come to an end on 18.10.1995. The transaction was over only on 27.12.1995 i.e. the date on which the Appellant received the allotment and handed over the shares to Shri Khadaria. Since it was an ongoing matter partly covered in the post FUTP notification period, in my view the Appellant's version that the said Regulations has no application to the case is not tenable. The Appellant's submission that the alleged action relates to the year 1995 and as such an order relating to the same issued in the year 2002 is not tenable, is baseless as the investigations involving market manipulations may in certain cases take considerable time. Since the Respondent has failed to substantiate the charge against the Appellant, the question of issuing any direction by the Respondent to the Appellant based on the finding that the Appellant has violated the FUTP Regulations does not arise. Therefore, I do not consider it necessary to go into the sustainability of the impugned directions. For the reasons stated above, the impugned order, to the extent it applies to the Appellant, is set a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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