TMI Blog2019 (10) TMI 1047X X X X Extracts X X X X X X X X Extracts X X X X ..... If one entity who has unjustly enriched knowingly transferring those proceeds further to some other entity does not prevent the authorities from disgorging the same from the original beneficiary of unjust enrichment. The choice is clearly that of the authority to pursue and disgorge an illegal gain from any point of a chain, if such a chain exists. Tracing to the last point of the chain is an exercise in futility and is not needed. When the proof of unjust enrichment is right before the eyes of an authority chasing the mirage of further transfers itself cannot be supported. Apart from submitting that US $ 92 million just got transferred from one account to another and to a third party on the same day, appellants have no real explanation as to how 25 million GDRs of Cals worth US $ 92 million has come to rest on Asia Texx account and why it was further transferred and that too free of cost to Gagan Rastogi. It is also on record that Gagan Rastogi has sold a part of these GDRs, 2.8 million, and received US$ 8.96 million in November 2011. This finding and now admitted fact is against the stand of the appellants in their reply to SEBI dated October 9, 2013 that neither him (Gagan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than the unlawful gained could not be disgorged. Such an approach would vitiate the very foundation of disgorgement as an equivalent amount of unlawful gain to be disgorged which itself is one of the defenses put forth by the appellants. Therefore, changes in the economic conditions in the given context has to be accepted as a business risk of the appellants, not to be vitiated in the application of the legal principle on disgorgement. Hence the submission of the appellants that they are willing to surrender the remaining GDRs or the underlying shares, instead of US$ 92 million cannot be accepted. Finding that the agreement between Cals and Asia Texx dated February 05, 2009 is nothing but a scheme or artifice to siphon off the funds of Cals for the unlawful gain of Gagan Rastogi and Asia Texx, entities related to Cals stands fully sustained. Here it is pertinent to reiterate that the appellant Gagan Rastogi was a promoter of Cals through his 33% holdings in SRM Exploration Pvt. Ltd. as well as being son of Deep Rastogi, who was a Director of Cals at the relevant time. Given the above facts and position of law we uphold the impugned order. Both the Appeals are dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Texx. Since both these appeals are challenging the same impugned order, by consent of parties, both the appeals are heard together and disposed of by this common order. 3. The facts relevant to these appeals are the following:- a) On December 11, 2007 one M/s Honor Finance Limited (hereinafter referred to as Honor ), (registered in the British Virgin Islands on October 5, 2007) beneficially owned by Mr. Sanjay Malhotra, entered into a Credit Agreement with a Portuguese bank namely; Banco Effisa (hereinafter referred to as Banco ). Under this Agreement Honor received a loan of US $ 200 million from Banco for the purpose of subscribing to a GDR issue by Cals. b) On the same day Banco and Cals entered into an Account Charge Agreement whereby the GDR subscription proceeds worth US $ 200 million were charged as security for Banco s loan to Honor. On December 12, 2007 the GDR issue of Cals was opened and declared fully subscribed by its lead manager by 10 foreign investors. c) By virtue of this arrangement, that is the Credit Agreement as well as Account Charge Agreement, the parties concerned (Cals, Honor and Banco) we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that the charges relating to Cals and some of the directors at the relevant time including Sarvesh Goorha, D. Sundararajan and Deep Kumar Rastogi were found to be correct and thereby sustained the SEBI orders dated October 23, 2013 and December 31, 2014 in respect of those parties and thereby dismissed all those appeals. 5. We also note that a consent application was filed by appellants in these appeals before SEBI vide application dated November 22, 2013, which was rejected by SEBI on June 10, 2014. 6. The learned counsel Shri Somasekhar Sundaresan appearing on behalf of the appellants fairly submitted that the appellants herein are pressing only the second direction in the impugned order, that is the direction to disgorge an amount of US $ 92 million along with interest. The first direction, that is restraining the appellants, among others, for 10 years from the Indian securities market, is not pressed in view of this Tribunal s order dated October 12, 2017. Moreover, since no party has challenged the said order of this Tribunal the direction relating to 10 years restraint has attained finality. 7. The learned counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the sum of US $ 92 million at all. d) The above contentions are supported by SEBI s own investigation report. Banco s defence filed in a claim (No: 2013 Folio 1656) made by claimants before the Commercial Court, UK who had purchased GDRs from Honor, whereby it is clearly documented by a statement on oath by Banco that the sum of US $ 92 million was round-tripped and was destined never to leave Banco custody and control. Statements of bank accounts held by each of Cals, Asia Texx and Honor with Banco would also reveal this fact. Asia Texx s bank account opening request with Banco was on February 05, 2009 and which was opened on March 25, 2009 just days before March 27, 2009, which account was the one through which the round-tripping was effected. e) The impugned order, contrary to the record and explicit findings of investigation, renders a blatantly erroneous finding of enrichment of Asia Texx by reason of the refinery purchase contract dated February 05, 2009 by which US $ 92 million was purportedly received on paper by Asia Texx, ignoring the purported GDR purchase dated March 26, 2009 by which the funds purportedly received on paper by Asia Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r loss averted in the sum of US $ 92 million. On the contrary, the SEBI investigation report explicitly finds that the liability discharged i.e. the loss averted, was that of Honor, wholly owned by Mr. Sanjay Malhotra. It is noteworthy that Honor and Mr. Sanjay Malhotra did not participate in the SEBI proceedings. It is on record that the show cause notices issued to them returned undelivered and SEBI moved forward with whoever replied and have now fastened the disgorgement liability on the appellants. i) The precise sum held by Cals subject to Banco charge was US $ 91,800,000. It is admitted that Banco knew that sum of US $ 92 million to be paid to Asia Texx by Cals would subsequently be paid to Honor and in part used by Honor to repay Banco. It is further admitted that Banco would not otherwise have been willing to permit the payment of Cals funds subject to the Account Charge Agreement. j) Clearly, Honor and its owner Mr. Sanjay Malhotra were unable to sell any GDRs to repay the loan to Banco after October 2008. Further as on December 15, 2008, an amount of US $ 91.8 million was still outstanding. The Credit Agreement s initial tenure had expired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is would further underline and corroborate that admitted position of round-tripping of funds from Banco to Banco. o) Another facet of the need to apply the subtraction principle is that the jurisdiction to disgorge would be an equitable remedy and it is aimed at ensuring that the person in possession of wrongful gains does not continue to enjoy the same. Unless one demonstrates as to who gained and at whose expense, it would evidently lead to an absurd consequence of the same amount being disgorged from multiple persons. In other words, it would lead to the absurd proposition that even someone who is not in possession of funds could be asked to pay contrary to the Explanation to Section 11B of the SEBI Act. p) In the instant case, Cals did not even lose US $ 92 million since to begin with the GDR issue itself was fake; and to follow up, the funds were always with Banco and remained with Banco and in fact the funds never left the possession of Banco. Banco had lent US $ 200 million and received US $ 200 million although it was not possible for Honor to use just the GDR proceeds to repay Banco. q) The impugned order ignores all these fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarely applies to 11B order of SEBI in correctly interpreting the economic reality and factual reality. Accordingly, all the transactions have to be considered as a single composite transaction and SEBI cannot arbitrarily choose one point or one layer and apply disgorgement. The appellants also relied on Mafatlal Industries Ltd. and Ors. v/s Union of India (UOI) and Ors. SCC (Civil Appeal No. 3255 of 1984 decided on December 12, 1996) to further their argument that the entire case of SEBI is founded on the premise that the appellants had gained at the expense of Cals when in reality the entire GDR issue was a sham. There was no economic gain for Cals; there was no economic gain for the appellants as well. Hence the need for taking economic reality into account. Citing Sharad Birdhichand Sarda v/s State of Maharashtra (1984) 4 SCC 116 (Criminal Appeal No. 745 of 1983 decided on July 19, 1984) and SEBI v/s Kishore R. Ajmera (2016) 6 SCC 368 (Civil Appeal No. 2818 of 2008 decided on February 23, 2016) it was contended that whether in Criminal or in Civil law the burden of proof has to be established at a sufficiently strong level while proving an accusation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, got unjustly enriched at Cals expenses cannot be disputed. c) The appellants contention that the transaction between i) Cals and Asia Texx, ii) Asia Texx and Honor and iii) Honor and Banco were structured as a single transaction under which Asia Texx did not receive any benefit has no merit since clearly these are different transactions entered into by the parties concerned. In these transactions Asia Texx received 25 million GDRs of Cals which was in turn transferred by Asia Texx to Gagan Rastogi, beneficial owner. Even if it is assumed that it was a single transaction it is clear that despite making a payment of US$ 92 million to Asia Texx, Cals received no refinery machinery from Asia Texx. On the other hand, it is on record that Asia Texx received 25 million GDRs of Cals from Honor. In this context, it is also important to note the statement made by Banco before UK Commercial Court that Banco was aware that an amount of US$ 92 million was being paid by Cals to Asia Texx for Cals refinery project and that Asia Texx was willing to make payment of the same amount to Honor to purchase the GDRs. d) The transaction between Cals and Asia Texx wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Regulations. 11. The learned senior counsel for the respondent while distinguishing the orders cited by the appellants relied on various judgements to substantiate his contentions. Citing the judgement of S.P. Chengalvaraya Naidu v/s Jagannath and Ors. (1994) 1 SCC 1 (Civil Appeal No. 994 of 1972 decided on October 27, 1993, it was submitted that since the appellant, Gagan Rastogi, vide his affidavit dated July 19, 2017 made a false statement about his lack of association/ connection with Cals (while he was actually a shareholder of SRM Exploration Pvt. Ltd. which in turn had become the Promoter of Cals), the appellant Gagan Rastogi does not deserve any relief and such a false declaration alone is sufficient to dismiss the appeal forthwith. Further quoting Section 23 of the Indian Penal Code which contains the definition of wrongful gain and wrongful loss as under: Wrongful gain - Wrongful gain is gain by unlawful means of property to which the person gaining is not legally entitled. Wrongful loss .- Wrongful loss is the loss by unlawful means of property to which the person losing it is legally entitled. Gaining wrongfully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed but even paper profits. Similar view was held by this Tribunal in the matter of Dushyant N. Dalal v/s SEBI 2010 SCC Online SAT 328 where it speaks about an order of disgorgement on notional profit or unrealized gains. Such a view was also held in SEC v/s Commonwealth Chemical Securities Inc, 574 F. 2d 90. In SEC v/s Contorinis 743 F. 3d 296, the disgorgement provision was further extended when it was held that even the gains from insider trading executed by a fund manager on behalf of a fund could also be disgorged though it was not a personal gain of the fund manager. Moreover, unjust enrichment may also be prevented by requiring the violator to disgorge the unjust enrichment he has procured for a third party. As such when third parties have benefitted from illegal activity, it is possible to seek disgorgement from the violator, even if that violator never controlled the funds. The logic of this, as more fully articulated above, is that to fail to impose disgorgement on such violators would allow them to unjustly enrich their affiliates. 14. The crux of the rather extensive and elaborate arguments and voluminous case law advanced by the learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that before even December 2007 appellant Gagan Rastogi was very much part of Cals promoter group SRM as is clear from the Email dated June 13, 2006 from Spice Jet (part of the SRM Group) confirming receipt of funds to the tune of more than ₹ 8.08 crore from Gagan Rastogi and allotting securities worth ₹ 8.33 crores leaving a balance of ₹ 24.75 lakhs in respect of SRM Exploration Pvt. Ltd., though the shares of SRM is claimed to be credited to the appellant s account on December 17, 2007, five days after the issue of GDR by Cals. In the GDR listing particulars filed by Cals with Luxembourg Stock Exchange on December 12, 2007 Gagan Rastogi was shown as a shareholder of SRM Exploration Pvt. Ltd. to the extent of 18.2%. Similarly, on December 17, 2007 at 06:39 a message was sent from Spice Energy (part of the SRM Group) to Gagan Rastogi and few others whereby it was stated that Mr. Gagan Rastogi has been designated as the Project Leader on the DRC Iron Ore Project . All this prove a deep and substantial engagement of Gagan Rastogi with the Spice Energy/ SRM Group much earlier to the actual allotment of shares of SRM Exploration Pvt. Ltd. claimed to be on December ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n November 2011. This finding and now admitted fact is against the stand of the appellants in their reply to SEBI dated October 9, 2013 that neither him (Gagan Rastogi) nor Asia Texx had ever converted a single GDRs of Cals into equity shares and continue to hold the entire 25 million GDR. Therefore, it is clearly evident and admitted that GDRs worth US $ 92 million was transferred by Honor to the account of Asia Texx on March 26, 2009, who in turn transferred the same to the account of Gagan Rastogi free of cost on July 9, 2009. Accordingly, the money transferred from the account of Cals to the account of Asia Texx got accrued to Asia Texx and in turn to Gagan Rastogi in the form of 25 million GDR to the tune of the same value of US $ 92 million with each GDR being worth US$ 3.68 at that time. Since the amount involved was US $ 92 million which come into the hands (account) of the Asia Texx and thereafter to Gagan Rastogi this amount is unjust enrichment in their hands. Therefore, direction to disgorge this amount jointly and severally from the appellants as held in the impugned order does not suffer from any legal infirmity. 20. Reliance placed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidence or preponderance of probability is sufficient to prove such violations. In any case, in the matter before us we hold that the appellants have made unjust/ unlawful gains to the tune of US$ 92 million beyond any doubt. 22. Given the circuitous scheme adopted by the appellants using the proceeds of the Cals GDR issue and in making unlawful gain the finding in the impugned order that the appellants have violated Section 12A of SEBI Act and PFUTP Regulations, 2003 cannot be faulted. For facility, the relevant provisions of SEBI Act, 1992 and PFUTP Regulations, 2003 are reproduced below:- 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 recognized 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 or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) ( p) ( q) ( r) planting false or misleading news which may induce sale or purchase of securities. 23. The contention of the appellants that explanation to Section 11B is not strictly adhered to in ordering disgorgement in this matter does not have any merit. For convenience Section 11B is reproduced as follows:- 11B. Power to issue directions.- Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,- ( i) in the interest of investors, or orderly development of securities market; or ( ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or ( iii) to secure the proper management of any such intermediary or person, it may issue such directions,- ( a) to any person or class of persons referred to in section 12, or associated with the securities mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed thereafter. This is evident when the second circuit issued a Summary Order on August 29, 2017 in Securities and Exchange Commission v. Metter (No. 16-526, 2017 WL 3708084 (2d Cir. Aug, 29, 2017) just a few months after Supreme Court s order dated June 05, 2017 in Kokesh (Supra). This clearly shows that Kokesh (Supra), even in the US is inconclusive and clearly the spirit of Contorinis (Supra) still prevails. (For a discussion on the subject see, Other People s Money: SEC Disgorgement after Kokesh by Daniel R. Walfish at wp.nyu.edu]. 25. Argument of the appellant that the economic reality needs to be considered while imposing penalty or directing disgorgement etc. because the GDRs have declined in value over time as the market conditions, including that of Cals, have changed over the years. While on the face of it, it appears a sound argument, such an argument cannot be accepted for reason that if the economic conditions had changed positively more than the unlawful gained could not be disgorged. Such an approach would vitiate the very foundation of disgorgement as an equivalent amount of unlawful gain to be disgorged which itself is one of the defenses put f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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