TMI Blog2009 (12) TMI 1006X X X X Extracts X X X X X X X X Extracts X X X X ..... (IPO) scam that was unearthed by the Securities and Exchange Board of India (for short the Board) in the year 2005-06. The Board received some information regarding the alleged abuse and misuse of the IPO allotment process. It initiated a probe. A preliminary analysis of the buying, selling and dealing in the shares issued through IPOs of various companies during the period 2003-05 showed that certain entities opened many demat accounts in fictitious/benami names and the said entities had cornered/acquired the shares of those companies allotted in the IPOs by making applications in fictitious/benami names with each of the applications being of small value so as to make it eligible for allotment under the retail category. Investigations further revealed that subsequent to the allotment of IPO shares, the fictitious/benami allottees transferred the said shares to their principals who were identified by the Board as key operators/master account holders. The Board was prima facie of the view that thousands of entities in whose names demat accounts and bank accounts had been opened and IPO applications made were either benami (name lenders) or non-existent. Pending investigations, the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent trading of IPO shares of Jet Airways Ltd. and in this appeal we are only concerned with the shares allotted in this IPO. It was alleged in the show cause notice that the first appellant acted as a key operator and had cornered 12053 shares through 553 benami/fictitious demat accounts. The list of these demat account holders was appended to the show cause notice. The IPO opened on February 18, 2005 and closed on February 24, 2005 and the shares were listed on the Bombay Stock Exchange (B SE) and the National Stock Exchange of India Limited (NSE) on March 14, 2005 and the first appellant is alleged to have received 523 off-market credits of 14 shares each in its demat account. The first appellant is also alleged to have received credits of 1442 and 3021 shares from the demat accounts of H. Nyalchand Financial Services and Pravin Ratilal Sh Stk - a depository participant. It is further alleged in the show cause notice that the first appellant was the ultimate beneficiary of the shares allotted to 553 entities all of whom were mere name lenders or benamis and that they transferred the shares to the first appellant immediately on allotment. The allegation made in paragraph 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price and made an unlawful gain of ₹ 12,02,302 which was worked out on the basis of the difference between the purchase price of ₹ 1170 and the average sale price of ₹ 1296.12. The second appellant is said to have made an illegal gain of ₹ 2,24,280 on the sale of 2520 shares which had been transferred to him by the first appellant In view of all these allegations, the appellants were said to have violated Section 12A of the Act and Regulations 3 and 4(1) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (for short the Regulations). The appellants did not file any reply to this show cause notice but relied upon the replies they had filed to the ad-interim ex-parte order dated April 27, 2006 which was treated as a show cause notice in which they denied all the allegations. They were afforded a personal hearing by the whole time member and they also filed their written submissions. On a consideration of the entire material collected during the course of the investigations and the enquiry conducted under Section 11B of the Act and taking note of the oral and writt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that there is no prohibition in law in their doing so nor is there any bar in their subsequent sale in the securities market. He also submitted that merely because the appellants made some profit by subsequently selling the shares in the market does not justify the passing of the order of disgorgement against them which, according to him, is patently erroneous and wholly unjustified. Shri Kumar Desai learned Counsel for the Board, on the other hand, strenuously urged that the appellants are a part of the IPO scam who cornered shares which were meant for the retail investors thereby depriving those investors of their rightful claim under the IPO. The argument on behalf of the Board is that 553 demat account holders were mere name lenders who transferred the shares to the first appellant under a pre-designed manipulative scheme which was meant to deprive the genuine retail investors of their due. It was further argued on behalf of the Board that after cornering the shares as alleged, the appellants sold them in the market at a price much higher than the purchase price and thereby made windfall gains through illegal means. The learned Counsel sought to justify the order of disgorgem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or temporary parking of credits for onward transfer to the financiers who were the ultimate beneficiaries of the scam. The third step was the transfer of the temporary credits from the demat accounts of the key operators to the financiers who had financed the entire game plan and with the sale of shares by the financiers, the IPO scam was complete. In the order dated April 27, 2006 which was subsequently confirmed and on the basis of which the show cause notice was issued to the appellants before us, the first appellant and Deepak kumar Shantilal Jain (appellant in Appeals No. 17 and 19 of 2009) have been identified as key operators in the IPO scam which allegation they have emphatically denied. Now let us see what the whole time member of the Board has found against the appellants in the impugned order. He has recorded a categorical finding in para 10(e) that there is no material on the record to establish that the 553 demat account holders from whom the shares were transferred in the name of the first appellant were benami or fictitious. This is what he has said in this paragraph: There is no material on record that the 553 demat account holders were benami or fictitious. Inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. In the interim order dated April 27, 2006, which is the basis of all the enquiries held against several entities including the appellants allegedly involved in the IPO scam, the first appellant and Deepak kumar Shantilal Jain, the appellant in the connected appeals, were identified as key operators in different IPOs. The term key operator was given a specific meaning in the context of the IPO scam and that definition has been referred to in para 1 of our order. According to that definition, a key operator is one who allowed his demat account for temporary parking of credits received from afferent account (s) before transfer to the financiers. On the basis of the investigations carried out by the Board in which the appellants were identified as key operators, they were served with a show cause notice dated November 24, 2008 and the allegation made against them is as under: It is alleged that Opee Stock Link Ltd. (hereinafter referred to as `noticee') had acted as key operator in the IPO of Jet Airways and cornered 12,053 shares of Jet Airways through 553 benami/fictitious demat accounts. The appellants in their reply to the interim order of April 27, 2006 which had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellants did not transfer the shares to any financiers. Obviously, the question of their parking the shares temporarily for the benefit of the fmanciers does not arise. In this view of the matter, we have no doubt that the appellants were not the key operators as understood by the Board in the context of the IPO scam. Not only the first link in the chain but also the second link of the appellants being key operators is missing. They are also not the financiers as per the meaning assigned to this term in the context of the IPO scam. It is common case of the parties that the appellants had not financed any application for the allotment of IPO shares. In this view of the matter, the entire IPO scam syndrome qua the appellants fails. 6. What actually happened in the present case was that genuine retail investors holding proper demat accounts had applied for the shares in the IPO of Jet Airways Limited in the retail category. The retail segment of the issue was oversubscribed by 2.9 times and, therefore, in consultation with NSE, the issuer company finalized the basis of allocation to the retail investors. It is not in dispute that the maximum shares that were allotted to any re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some of the small-time investors to dispose of their shares even before they are listed because they have a limited financial and risk taking capacity. Because of the uncertainty as to the price of the scrip on its listing, which may be higher than the issue price or could be even lower, the small-time investors do not mind trading in those shares at a lower but safe margin. In the instant case, the issue price was ₹ 1100 and the demat account holders sold them at ₹ 1170 to the first appellant The shares which were listed on March 14, 2005 opened at ₹ 1211 per share and closed at ₹ 1305 per share and the lowest price during the course of the day at which the shares traded is ₹ 1172. In this background, there is nothing unusual if the retail investors sold/transferred their shares at ₹ 1170 per share. Since the appellants purchased the shares from all the demat account holders in the secondary market after those had been allotted to them by the issuer company and unless it can be shown that the allotment was benami/fictitious, it cannot be held that the appellants cornered the shares in the IPO allotment. There is no question of cornering shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out it. What has weighed with the whole time member is that the appellants were not registered stock brokers and there was no occasion for the demat account holders to approach them for broking activities. There is no evidence of broking in these transactions and the appellants have only purchased the shares in off market transactions from the demat account holders in the secondary market and further sold them. In other words, they did not sell the shares in the market on behalf of the allottees. The factors referred to in para 10 of the impugned order individually or collectively do not establish the unholy alliance between the appellants on the one hand and the demat account holders on the other to manipulate the allotment of IPO shares in the retail category. The fact that 553 demat account holders transferred the shares on allotment to the first appellant at the same price of ₹ 1170 per share may raise a doubt but it cannot be disputed that each one of them had a genuine demat account and they applied for the shares with their own funds. In these circumstances it is difficult to hold that they were mere name lenders. The preponderance of probabilities is surely tilted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrongdoers by the courts. Disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. Disgorgement of ill-gotten gains may be ordered against the 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. Since the chief purpose of ordering disgorgement is to make sure that the wrongdoers do not profit from their wrongdoing, it would follow that the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity. In a disgorgement action, the burden of showing that the amount sought to be disgorged reasonably approximates the amount of unjust enrichment is on the Board. In the present case we have held that the appellants committed no wrong when the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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