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2018 (4) TMI 682

straint imposed by the order of the WTM of SEBI - Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control - Held that:- Provisions in the SEBI Act, PFUTP Regulations and the clarification given by the Hon’ble Supreme Court merchant banking is undoubtedly an act of dealing in securities and therefore direction to a Merchant Banker not to undertake merchant banking business when under restraint is fully justified. - There is no suspension or cancellation of the license of the Merchant Banker in the instant matter requiring separate procedure to be followed. In any case, the requirement of following the procedure laid out in the Intermediaries Regulations, 2008 would arise when a fresh matter is taken up against a Merchant Banker not when a restraint order is imposed on it on account of serious PFUTP violations. As such, both the appeals are without any merit and liable to be dismissed. - No merit in the argument of the appellant company that its present management is completely disconnected from the management prior to 2008. Similarly, we find no merit in the arguments of the appellant that Ashok Shah as a separ .....

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has not been either suspended or cancelled by the impugned communication dated December 22, 2016, the question of following the procedure for suspending or cancelling the license does not arise at all. Accordingly, we do not find any merit in the arguments regarding violation of natural justice. - No merit in these appeals and both appeals are dismissed with no order as to costs. Consequently, - Misc. Application No. 4 of 2017 And Appeal No. 4 of 2017 With Appeal No. 20 of 2017 - Dated:- 1-2-2018 - Mr. J. P. Devadhar, Mr. Jog Singh And Dr. C. K. G. Nair For The Appellants : Mr. P.N. Modi, Senior Advocate i/b Crawford Bayley & Co. and Mr. Keval Ponkiya, Chartered Accountant i/b Keval Ponkiya And Associates For The Respondent : Mr. Pradeep Sancheti, Senior Advocate with Mr. Pulkit Sukhramani and Ms. Vidhi Jhawar, Advocates ORDER Per : Dr. C.K.G. Nair (Oral) 1. These two appeals have been filed by the appellant aggrieved by two orders of Securities and Exchange Board of India ( SEBI for short). Appeal No. 4 of 2017 is filed against the order dated August 12, 2016 passed by the Whole Time Member ( WTM for short) of SEBI wherein the appellant (among others) has been prohibited .....

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nt of ₹ 12 crore. Platinum also made incorrect filings relating to promoters shareholding. Therefore Platinum and its directors / promoters violated SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2007 ( SAST Regulations, 1997 for short) and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 ( PFUTP Regulations for short). 4. The specific allegation in the impugned order dated August 12, 2016 against the appellant herein is that the appellant was one of the parties connected to the promoters of Platinum as they had received 10 lakh shares from Tushar Shah, one of the promoters of Platinum, on August 4, 2006. These shares were sold in the market and the appellant made a profit of ₹ 20,64,745/- therefore the appellant aided and abetted Platinum and its promoters and directors and thereby violated provisions of Sections 12A(a),(b) & (c) of SEBI Act, 1992 read with Regulation 3(a), 3(b), 3(c) & 3(d), 4(1) & 4(2)(e) of PFUTP Regulations, 2003. Hence, 3 years restraint from the securities market and direction to disgorge the amount of unlawful gains made imputing the acquisition cost at & .....

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the SEBI (Intermediaries) Regulations, 2008 by issuing a separate show cause notice and providing an opportunity of being heard etc. and following a two stage process as applicable to intermediaries. The order of the WTM dated August 12, 2016 did not pass any instruction relating to the suspension / cancellation of the certificate of registration of the appellant as a Merchant Banker nor did it find that the appellant was not a fit and proper person as a Merchant Banker. However, through the communication dated December 22, 2016 Deputy General Manger of SEBI has unilaterally declared the appellant as not fit and proper without following any due process and restrained the appellant from taking any merchant banking business. Accordingly, the order impugned in Appeal No. 20 of 2017 is violative of natural justice and has to be quashed and set aside forthwith. The appellant also relied on the decision of this Tribunal in the case of Almond Global Securities Ltd. vs SEBI (Appeal No. 275 of 2014 decided on May 13, 2016) wherein it was held that in every case where a restraint order is passed against a person that person may not become an unfit and improper person. Therefore, in the inst .....

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ng on record to show that these shares belonged to Mahavir Impex as claimed by the appellant nor the appellant was able to produce any acceptable evidence (other than one ledger of their own) whereby any fact relating to such dealing between the appellant and Mahavir Impex could be proved. Further, both Ashok Shah and Hiralal Shah, the original directors of the appellant, were also directors of Platinum in the past. It was Ashok Shah as director of Platinum who signed a tripartite agreement with NSDL etc. in March 30, 2000. 11. Learned Senior Counsel for SEBI further submitted that not only Ashok Shah, who was the founder director of the appellant but also several other entities connected / related to Ashok Shah also received shares of Platinum off-market from its promoters / directors during the same period. Accordingly, the appellant received 10 lakh shares from Tushar Shah, one of the promoters of Platinum on August 4, 2006. On the same day Vashi Construction also received 10 lakh shares from Tushar Shah through off-market transaction. Ashok Shah and Hiralal Shah were directors of Vashi Construction. Further, Rudra Securities received a total of 24 lakh shares through off-market .....

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k Shah with the appellant company. 13. Shri Pradeep Sancheti, Learned Senior Counsel for SEBI further submitted that the communication from the Deputy General Manager of SEBI dated December 22, 2016 neither suspends nor cancels the license of the appellant. The communication has only advised the appellant to desist from acting as a Merchant Banker consequent to the WTM s order dated August 12, 2016 impugned in Appeal No. 4 of 2017 whereby the appellant has been restrained from dealing in securities directly or indirectly for a period of 3 years from the date of that order. A clear reading of Section 12(1) and 12A of SEBI Act, 1992 and Regulations 2, 3 and 11 of PFUTP Regulations, 2003 make it abundantly clear that a Merchant Banker who is charged with PFUTP violations and therefore restrained from the securities market cannot discharge its functions as a Merchant Banker because merchant banking is indirectly dealing in securities market. For ease of reference we reproduce the relevant sections of SEBI Act and PFUTP Regulations, 2003 which reads as under: SEBI Act, 1992 12. (1) No stock-broker, sub- broker, share transfer agent, banker to an issue, trustee of trust deed, registrar t .....

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tly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. Further, Regulation 11 of PFUTP Regulations, 2003 reads thus:- 11. (1) The Board may, without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) of section 11 and section 11B of the Act, by an order, for reasons to be recorded in writing, in the interests of investors and securities .....

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is broad. Moreover, the inclusion of term otherwise transacting itself provides an internal evidence for being broadly worded so as to include situations such as the present one. 26. There is no dispute as to the fact that fraud is jurisprudentially very difficult to define or cloth it with particular ingredients. A generalized meaning may be difficult to be attributed, as human ingenuity would invent ways to bypass such behaviour. It is to be noted that fraud is extensively used in various regulatory framework which mandates me to take notice of the conceptual and definitional problem it brings along. Fraud is among the most serious, costly, stigmatizing, and punitive forms of liability imposed in modern corporations and financial markets. Usually, the antifraud provisions of the security laws are not coextensive with common-law doctrines of fraud as common-law fraud doctrines are too restrictive to deal with the complexities involved in the security market, which is also portrayed by the changes brought in through the 2003 regulation to the 1995 regulation. 15. In the light of the above provisions in the SEBI Act, PFUTP Regulations and the clarification given by the Hon ble Supr .....

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nt company. As such, we do not find any merit in the arguments of the appellant that the appellant company had a clean break with its past directors / management, which is far from the truth. Given these continued association of Ashok Shah and related entities with the appellant company the latter s unwillingness to produce details relating to the dealings in the shares of Platinum, including their argument that shares belonged to Mahavir Impex, become dubious and as such cannot be accepted. 19. The argument that the respondent did not follow the procedure laid out in suspending / cancelling the merchant banking license is without any merit, because no such order has been passed by the WTM of SEBI in the order dated August 12, 2016 (impugned order in Appeal No. 4 of 2017). Argument that the procedure required under the Intermediaries Regulations have been violated and thereby natural justice has been violated have no merit because the appellant has been charged with major violations of conspiring with other entities and thereby violating the provisions of PFUTP Regulations. In such a case, question of observing the principle of natural justice does not arise. The Hon ble Supreme Co .....

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