TMI Blog2023 (11) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... owed someone, the receptionist paid his debt, the chef paid his debt, the wife paid her debt and the milkman paid his debt. Everything works on credit and through the aforesaid payments everyone was happy. This is how the system works. Can it be said that the entire transaction done by the aforesaid entities was a sham transaction on account of proximity of time? We find that the transaction between the ZEEL and the first entity was validly explained and therefore, at this stage, it was not necessary to go into the context of a larger transaction involving the circular rotation of funds. The decisions cited by the respondent in this regard are not applicable at this stage. Chairperson has proceeded on the presumption that the appellant was involved in the affairs of the Essel Group companies including the borrower entities other than ZEEL. We find that this finding is based on pure surmises and conjectures. There is no material whatsoever which would demonstrate that the appellant was involved in the alleged transactions. The finding that Essel Group companies were involved in the layering of the funds transactions and were under the influence / control of the appellant by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different yardstick regarding the alleged transaction arising out of ZEEL. On one hand the Chairperson has based its finding on a preponderance of probability while on the other hand has refused to accept the evidence filed by the appellant and has rejected the same on the ground that the documents do not prove the genuineness of the transaction beyond a reasonable doubt. This contrary stand taken by the Chairperson is, in our opinion, arbitrary. In any case, an incorrect application of the principles of preponderance of probability has been applied. Whether a proper balance has been made by the impugned directions on the rights, liberties or interest of the person keeping in mind the purpose which it was intended to serve? - Doctrine of proportionality has not been correctly applied and a correct balance has not been made. Considering the genuineness of the documents so produced by the appellant, the first leg of the transaction was validly explained which indicates that the funds moved pursuant to a long standing commercial business relationship. The entries in the bank statement are not fictitious or sham transactions and therefore proceeding and issuing directions on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in eight months. No reason was given as why eight months is required to complete the investigation especially when only bank transactions are to be looked into. During the course of arguments, it has been stated by the respondent that other LoCs given by the promoter group of the appellant including the LoC given by the father of the appellant to the tune of Rs. 4210 crore are now being scrutinized and therefore comprehensive investigation is being done and consequently these five transactions which is impugned in the order is only part of the wider investigation. In view of the aforesaid, we are of the view that prima facie the diversion of funds has not as yet been proved. Sufficient explanation backed by genuine document have been shown by the appellant and having validly discharged their burden. The investigation is going on and considering the track record of SEBI for which we take judicial notice, no investigation is completed within the stipulated period. We have seen that on numerous occasions whenever this Tribunal or the superior Court has directed SEBI to complete the investigation within a stipulated period, the same has not been done and applications after applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld ensure that a fixed deposit of at least Rs. 200 crore would be made available to the Bank at all times while the loan remained outstanding and, in the event of a default, the bank could appropriate the fixed deposit towards repayment. The investigation further revealed that this Letter of Comfort was only known to a few persons in the management and that the Board of Directors were unaware of the said letter. The examination also revealed that the seven related entities of ZEEL were:- Sl. No. Name of the Associate Entities 1. Pan India Infraprojects Pvt. Ltd. 2. Essel Green Mobility Ltd. 3. Essel Corporate Resources Pvt. Ltd. 4. Essel Utilities Distribution Company Ltd. 5. Essel Business Excellence Services Pvt. Ltd. 6. Pan India Network Infravest Ltd. 7. Living Entertainment Enterprises Pvt. Ltd. 5. The investigation revealed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... propriate reply for vacation / modification of the ex-parte ad interim order and that if such a reply along with such vacating application was filed, the WTM would decide the matter after giving an opportunity of hearing within a specified period. Based on the aforesaid direction, replies were filed and the matter was heard by the Chairperson of SEBI who after considering the matter passed the impugned order dated August 14, 2023 confirming the ex-parte ad interim order with the following modification, namely- (i) The investigation in the matter by SEBI shall be completed in a time-bound manner and in any event, within a period of 8 months from the date of this Order; (ii) Entity No. 1 and Entity No. 2 shall not hold position of a Director or a KMP in the following companies till further directions: (a) Zee Entertainment Enterprises Ltd.; (b) Zee Media Corporation Ltd.; (c) Zee Studios Ltd. (wholly owned subsidiary of Zee Entertainment Enterprises Ltd.); (d) Zee Akaash News Pvt. Ltd. (wholly owned subsidiary of Zee Media Corporation Ltd.; (e) any resultant company that is formed pursuant to a merger or amalgamation of the above named companies wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed returned the money they owed to ZEEL as result of revocation of LoC given by Mr. Subhash Chandra. 11. The WTM also came to the conclusion that prima facie the modus operandi adopted showed that Rs. 143.90 crore out of Rs. 200 crore had been transferred from ZEEL / other listed companies of Essel Group to falsely portray repayment of due amounts to ZEEL from associate entities. 12. The WTM accordingly came to a prima facie conclusion that funds had been siphoned of from ZEEL and other listed companies of Essel Group which ultimately benefited the promoter family. 13. The WTM also came to the conclusion that the subsequent disclosure by ZEEL in its annual report showing receipt of funds from associate entities was false and that ZEEL misrepresented the financial statements in its annual report. 14. The WTM also came to the conclusion that the appellant, being the Managing Director and Chief Executive Officer of ZEEL at the time when the funds were moved out of ZEEL for being routed again to ZEEL through layered and circuitous transaction, had a direct role in the diversion of the funds of ZEEL and other listed companies of Essel Group and that the appellant falsely por ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the transactions made by ZEEL to its subsidiary or associate entities were backed by appropriate documentation, namely, memorandum of understanding, agreements and invoices which were duly approved by relevant authorities and that these transactions were also approved by the audit committee. It was, thus, urged that so long as ZEEL had made payments for valuable consideration, the subsequent utilization of funds by other parties to repay ZEEL does not constitute diversion of funds nor does it cause any loss to ZEEL. It was also urged that the appellant was not in control of the day to day transaction of the associate entities and had no access or right to operate its bank accounts and was not involved in the operations, financing or control of the borrower entities nor has the appellant benefited from the alleged impugned transactions. It was also urged that the transaction were genuine and legitimate and consequently there was no misrepresentation in the annual reports nor any false submissions were made to SEBI and consequently the appellant had not violated either the SEBI Act or its Regulations. 18. The Chairperson after considering the objections and after giving an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma facie scheme was orchestrated to the effect that ZEEL had received money from its six associate entities equivalent to the FD amount wherein circular fund transfers had taken place to show receipt of funds from ZEEL to associate entities which was a sham transaction on account of the fact that the entire set of transactions were completed within a few days and at each stage / leg of the scheme, the funds had moved immediately upon receipt of the same by the transferee. (x) Merely by explaining the first leg of transfer made by ZEEL to associate entities is not sufficient to exonerate the appellant inasmuch as there are a plethora of circumstances which are inextricably linked with the fund transaction which prima facie leads to a conclusion as not genuine transactions. (xi) The transactions made by ZEEL to its associate entities being backed by necessary documentation such as memorandum of understanding and agreements only indicates a long standing commercial relationship between ZEEL and associate entities but the said memorandum of understanding and agreements does not carry weight since no material has been brought on record to demonstrate that the impugned fund tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly involved in designing and execution of the scheme which was in violation of the securities laws and since the appellant Entity No. 2 was the Managing Director and Chief Executive Officer during the period when the scheme was designed, he was aware of the liquidation of the fixed deposit by Yes Bank Ltd. and the fact that ZEEL was involved in three of the impugned transactions which prima facie are not found to be genuine transaction. The appellant being involved in the designing and execution of the scheme was also found to be prima facie in violation of the securities laws. (xxi) The impugned fund transactions prima facie was not genuine in nature and consequently the disclosure made by ZEEL in its annual reports was incorrect. (xxii) The appellant prima facie have benefited at the expense of ZEEL and its public shareholders and that appellant not acted in good faith, due diligence and care and in the best interest of ZEEL and its shareholders and therefore the conduct of the appellant was in violation of Regulation 4 of the LODR Regulations. 19. We have heard Dr. Abhishek Manu Singhvi, the learned Senior Counsel with Shri Navroz Seervai, Senior Counsel, Shri Soma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x-parte ad interim order. It was urged that the basic reason for issuing the ex-parte ad interim order in restraining the appellant to hold any position of a Director in a listed company or its subsidiaries was to obviate the possibility of further diversion of funds. This aspect has been given a complete go by and was not considered as a necessary ingredient for confirming the confirmatory order but the restraint order was allowed to continue on the ground that the continuation of the appellant as the Managing Director could impede a fair and transparent investigation. 23. The learned senior counsel contended that there is no material on record to demonstrate that the appellant or any of the entities connected with him have failed to cooperate with the respondent in the investigation or have in any manner impeded the progress of the investigation. On the other hand, the respondent had earlier investigated the LoC and the LODR issue and voluminous correspondence was made between ZEEL and SEBI and the Stock Exchanges regarding various issues including the Letter of Comfort. ZEEL had provided the information sought from the respondent pursuant to which show cause notice was issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roneous and based on surmises and conjectures. Further, pursuant to the merger as approved by the scheme of merger, a completely different entity has come into existence and its corporate structure would be completely different and independent from the erstwhile ZEEL. It was urged that the resultant merger entity will have necessary corporate governance measures in place being a subsidiary of a global conglomerate Sony Corporation, Japan which would be listed on the Tokyo Stock Exchange. Further 50% of the shareholding will be held by the Sony Group. It was thus contended that the finding given in the impugned order that the appellant would be entrusted with substantial powers of management with regard to the affairs of the management company and that the appellant should be kept out of the management till the final outcome of the investigation is purely erroneous, harsh and, at the same time, without any merit. 27. The learned senior counsel contended that out of 9 directors 5 directors would be nominees of shareholders of Culver Max Entertainment Pvt. Ltd. (i.e. Sony) and there would be independent directors of stellar reputation and stature who would be identified and recomme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. (LEEPL) entity was under the influence of the appellant since the appellant and one Anil Chougule worked together is patently erroneous and is against the material evidence on record in as much as the appellant had never worked with Anil Chougule. Further, the appellant only held 2% shareholding in Sprit Infrapower Multiventures Private Limited which in turn held 50% shareholding in New Media Broadcasting Pvt. Ltd. which in turn further held 100% shareholding of LEEPL. It was, thus, urged that the appellant effectively held 1% indirect shareholding of LEEPL and consequently, the finding that the appellant exercised influence over the group entities is patently erroneous. It was also urged that similarly the appellant did not exercise any control through its shareholding interest either in Sprit Infrapower Multiventures Private Limited or in Churu Enterprises LLP. 30. The findings that the appellant had prior knowledge of the appropriation of Fixed Deposit by Yes Bank is again based on surmises and conjectures and is not based on any material document. Such finding on the basis of presumption or on the basis of preponderance of probability is not permissible. 31. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderance of probability and that the impugned order failed to accord appropriate weightage to the material furnished by the appellant. 34. Dr. Singhvi, the learned senior counsel contended that doctrine of preponderance of probability was wrongly applied and that the impugned order has drawn inferences based on hypothetical facts while disregarding the material evidence on record. It was contended that before applying the principles of preponderance of probability and to draw any inference it was necessary to establish the foundational facts which did not exist in the instant case. It was urged that the foundational facts must be established before the presumption could be made. 35. It was also urged that preponderance of probability invoked in the impugned order was contrary to the contemporaneous events and the principle of ante lite motam was not considered in the impugned order though the same was argued before the Chairperson. It was, thus, urged that applying the principle of ante lite motam certain events had no connection with the concerned Letter of Comfort or the alleged misappropriation of the Fixed Deposit by Yes Bank and repayment by borrower entities. It was urg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on February 21, 2023), Apar Industries Ltd. Vs Union of India Through Ministry of Railways and Others (2023) SCC Online Bom 350 and SEBI vs Kishore Ajmera (2016) 6 SCC 368. 39. On the other hand, Shri Darius Khambatta, the learned senior counsel for the respondent contended that the five transactions in question clearly indicates round tripping of the funds from ZEEL to ZEEL and consequently prima facie there appears to be a diversion of funds to the detriment of the shareholders. The learned senior counsel urged that the ad interim order which has now been merged with the confirmatory order does not suffer from any error of law and that the said confirmatory order should continue during the pendency of the investigation. 40. It was urged that the appellant has neither produced any material nor denied the flow of funds among the entities in the manner set out in the interim order. The learned senior counsel contended that the fund flow in the five transactions along with the proximity in the timings of the transactions indicates a prior meeting of minds which action was totally fraudulent under the PFUTP Regulations. It was contended that the flow of funds as depicted in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s solely for the benefit of the promoter group as the appellant was the Managing Director and was not only in control over ZEEL but, being a key managerial personnel, was also in control of the seven associate entities. 45. In support of his submissions the learned senior counsel placed reliance upon a decision of the Supreme Court in Official Liquidator, Supreme Bank Ltd v. P.A. Tendolkar (1973) 1 SCC 602 wherein the Supreme Could held that the conduct of the founder Directors was such that an inference of their complicity could not be ignored. Reliance was also made of another decision of Supreme Court in N Narayan v. AO, SEBI (2013) 12 SCC 152 in which it was held that the directors occupying a certain position in a company were deemed to have knowledge of certain information and events. On this basis, the learned senior counsel for the respondent urged that the appellant, being in a position of Managing Director and Chief Executive Officer of ZEEL and being key managerial personnel in the seven associate companies, had deemed knowledge of the transfer of funds through layered transactions. It was, thus, urged that even on strong preponderance of probability test ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext particularly proximity in timings and interconnectedness of the transaction and related status of the parties involved. 49. The learned senior counsel further contended that the in any case the appellant did not satisfy the first leg of the transaction and the documents so filed was not sufficient to establish a valid transaction beyond a reasonable doubt. The learned senior counsel contended that based on the bank statements it was clear that there was a circuitous routing of the funds and that the initial burden was discharged by SEBI and the onus now shifted upon the appellant which he failed to discharge miserably and the documents so supplied was not sufficient to satisfy the genuineness of the transactions. The learned senior counsel pointed out that the Chairperson considered all the documents in the impugned order in great detail and held that first leg of each of the five transactions was invalid giving appropriate reasons regarding insufficiency of the genuineness of the transactions. The learned senior counsel contended that the appellant only produced partial and incomplete information to justify the transaction which in the opinion of the Chairperson was insuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required to complete a wider investigation since now the respondent finds that there are a large number of transactions running into Rs. 2000 crore involving companies owned, controlled or otherwise related to promoters. Further additional Letter of Comfort issued by the appellant and his father has come into existence including a LoC to the tune of Rs. 4210 crore issued by Mr. Subhash Chandra in his capacity as Chairman of Essel Group. Therefore, the direction to complete the investigation in eight months is aimed to ensuring a comprehensive investigation in the matter. The five transactions in question is only part of the wider investigation which is being carried out by SEBI. 53. It was also urged that ZEEL Sony merger has nothing to do with the passing of the impugned order and the fact that the merger received 99.97% approval from ZEEL shareholders after the passing of the ad interim order has no relevance to the alleged prima facie findings against the appellant. It was urged that the routing of the funds was not in the interest of the shareholders of the ZEEL as there is a direct conflict of interest between the shareholders of ZEEL and the appellant. Consequently, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Essel Corporate Resources Pvt. Ltd. 22.30 30-Sep-19 4. Essel Utilities Distribution Company Ltd. 19.20 30-Sep-19 5. Pan India Infraprojects Pvt. Ltd. 36.90 30-Sep-19 6. Essel Business Excellence Services Pvt. Ltd. 23.00 10-Oct-19 7. Pan India Network Infravest Ltd. 49.30 01-Oct-19 8. Living Entertainment Enterprises Pvt. Ltd. 17.40 01-Oct-19 Total 200.00 57. The ad interim order discloses that Rs. 143.90 crore originated from ZEEL / listed companies of Essel Group and their subsidiaries and the money was received by ZEEL eventually. The round tripping of the funds is depicted here under:- Sl.No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith ZEEL since 2016. LEEPL had entered into an agreement on August 1, 2016 which granted ZEEL exclusive license to distribute five channels, namely, Living Foodz, Living Zen, Living Travelz, Living Homez and Living Rootz. 61. As per agreement ZEEL would withhold 7% of the subscription revenue received from the distribution of the channels and remaining 93% would be paid by LEEPL. In paragraph 73 of the reply, the appellant contended that Rs. 8.35 crore that was paid to LEEPL was part of the channel subscription agreement entered on August 1, 2016 which was amended on March 29, 2019. It was also stated that the audit committee of ZEEL in its meeting of March 28, 2019 had approved related party transactions with LEEPL amounting to Rs. 34 crore for the financial year 2020. The annual audited financial statements for the financial year 2018-19 and 2019-20 indicated the payment made to LEEPL. It was contended that the transaction with LEEPL was not a stand-alone payment but was part of the ongoing contractual payments over several years. The details of payment made in the financial year 201819 and 2019-20 was depicted in paragraph 76 of the reply. It was contended that the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r services rendered to ZEEL pursuant to the agreements. These invoices have not been disputed by the respondent. The only contention raised was that it does not indicate absolute proof of transfer of the monies to LEEPL and EBESPL. 65. Considering the aforesaid we find that the documents filed by the appellant are genuine documents and have not been manufactured for the purpose of the case. We are of the opinion that there was a long standing commercial agreement with LEEPL and EBESPL since 2016. The financial statements of LEEPL makes it clear that it had receivables funds from ZEEL to the tune of Rs. 42.66 crore in financial year 2019-20, Rs. 31.08 crore in financial year 2018-19 and therefore payments of Rs. 8.35 crore made to LEEPL towards channel subscription in terms of the master agreement appears to be genuine at this stage. The annual reports of the previous financial years shows transactions between ZEEL and LEEPL. The invoices which has been issued for services rendered to ZEEL pursuant to these agreements are proof that the agreements were genuine and valid and that monies were transferred pursuant to these agreements. In addition the transactions were audited by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remake rights purchased. For this purpose, coproduction agreements, invoices, remake rights, agreements etc. were filed before the Chairperson. It was urged that payment made by ZSL to PIL was a bonafide business transaction backed by agreement, invoices and requisite approvals for the purchase of intellectual property rights was Rs. 71.34 crore and the acquisition of the intellectual property rights was appropriately accounted for in the inventory in the books of ZSL. Further, the transaction of payment of Rs. 71.34 crore by ZSL was backed by appropriate documents, agreements and invoices. 70. In the ex-parte ad interim order PIL was shown to be an associate company of ZEEL and therefore it was presumed that the money was routed through layered transactions from associate companies of ZEEL to ZEEL. Before the Chairperson it was urged that PIL is an independent company which is in business of n production, distribution and movie aggregation, broadcasting, digital media etc. for the past 30 years. This company was started by Dr. Jayantilal Gada who is a reputed personality in the industry and has made several successful and award-winning movies in the past. It was contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst fresh invoice for Rs. 76.11 crore. PIL has duly paid the GST on this invoice and the ZSL had got the credit of this GST. The finding of the Chairperson that there is discrepancy in the amount shown in the credit note and the transfer is on account of the fact that the transfer of Rs. 71.34 crore was made after deduction of TDS. This factor has not been considered. 73. On a perusal of the documents produced before us we are satisfied that ZSL transferred some money to PIL pursuant to an agreement. The credit notes were given and the difference has been validly explained, GST filings and proof has been submitted. Further, the fact that the PIL is an independent company and is not an associate company or related party of ZEEL has not been disputed. Consequently the transfer of funds from ZSL to PIL ends there itself and subsequent transfer by PIL to other entities is not on the basis of movement of funds or routing of funds by ZEEL. Thus the findings of the Chairperson that the genuineness of the transaction is doubtful and that the documents so filed does not establish the transfer of funds pursuant to the agreement is patently erroneous. 74. The flow of funds of the thir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm commercial relationship and proof of the fact that there were earlier contracts with KCPL and that payments were made in the ordinary course of business. The Chairperson has rejected such contentions on the ground that proof of ZEEL s earlier contract with KCPL has not been submitted nor any correspondence has been submitted without considering the GST filings. We are of the opinion that GST filings indicate proof that payments were made and appropriate GST was paid to the authorities. The stand of appellant has been disbelieved on the ground that advance payment was made to KCPL whereas agreement provided that payment would only be made after services were provided by KCPL and therefore such transfer of funds was not in pursuance of the agreement. We are of the opinion that if the aforesaid finding is accepted then the corollary would be that the services received by ZEEL from KCPL was for no consideration. In any case we find that these agreements so executed with KCPL is not a fictitious document and same are genuine documents and payments have moved pursuant to these agreements. Further, we find that Rs. 41.16 crore was paid by ZEEL to KCPL and only Rs. 23 crore is alleged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Infra Services Pvt. Ltd. We may observe here, that the alleged transaction is alleged to have taken place in September 2019 when Dish Infra Services Pvt. Ltd. was not a related party and therefore it was not possible for the appellant to have any access to the records of Dish Infra Services Pvt. Ltd. Consequently, the finding that money had originated from ZEEL or its listed or related entity is patently false and against the material evidence on record. We further find that there is no finding that the appellant was in control of Dish Infra Services Pvt. Ltd. and, therefore, the finding that there was routing of funds from ZEEL to ZEEL is not proved. 80. The WTM while passing the ad interim order held in paragraph 29 that:- the funds had originated from ZEEL/other listed companies of Essel Group, which moved through multiple layers of Promoter Family owned/controlled entities and was ultimately transferred to ZEEL, in order to show the fulfillment of payment obligations of the Associate Entities towards ZEEL . 81. This was the alleged foundational fact which was prima facie evidenced by the WTM and this prima facie observation led the WTM to pass an order restraining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise, as discussed in previous paragraphs we find that sufficient explanation has been given showing that the funds were paid pursuant to certain agreements, memorandum of understanding and contracts for which the invoices and GST was paid and TDS was evidenced in one case. The genuineness of the documents has not been disputed by the respondent. We find from the perusal of these documents that the allegation of round tripping of funds has been adequately rebutted and that money was paid for valid consideration in the usual course of business. Thus, the finding of the Chairperson on the basis of preponderance of probability cannot be sustained. 85. The learned senior counsel for the appellant relied upon the doctrine of ante lite motam as enunciated by the Supreme Court in Murugan alias Settu vs State of Tamil Nadu (2011) 6 SCC 111 and contended that documents which were executed much before the alleged transactions in question has to be considered and cannot be brushed aside on mere ipse dixit. The words ante lite motam means before the law suit was started . The doctrine is, that if something was done before a legal dispute arose, then it was done at a time when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent which showed that there was long standing commercial business relationship between the ZEEL and the other entities through memorandum of understanding / agreements etc. 89. The contention that the entire transaction has to be looked at as a whole and that the first leg of the transaction alone is not sufficient to prove that there was no round tripping of the funds is erroneous. The contention that it was incumbent upon the appellant to demonstrate the legitimacy of the entire circular transaction and not just limit or confine it to justify the validity of the first leg of transaction in view of the close proximity of the timings of the transaction, related parties involved and interconnectedness of the transactions, in our opinion, is not correct as we have held earlier that complete round tripping of funds has not been found by the respondent. Two of the entities are not related or associate entities of ZEEL. These two entities are independent entities and therefore the allegation that there was round tripping of funds from ZEEL to ZEEL through layered transactions from associate companies / related companies / group companies of ZEEL is incorrect. Once this fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9] AC 398, Reflo Ltd. v Varsani (2014) EWCA Civ 360 Jean D. vs United states of America are not applicable in the facts and circumstances of the present case. 92. Much emphasis was made by the learned senior counsel for the respondent on the proximity of time as a facet to examine the genuineness of the transaction in the light of the observation made by the Supreme Court in paragraph 341 in Vodafone International Holdings BV (supra) wherein it was stated:- 341. One of the tests to examine the genuineness of the structure is the timing test , that is, timing of the incorporation of the entities or transfer of shares, etc 93. As stated earlier, that it is only one such test and it is not the sole test. Proximity of time can raise an eyebrow and may point to a needle of suspicion but beyond that it does not prove that the transaction was fictitious nor can it prove round tripping of funds. In this regard, we provide an example as under:- A customer checks into a hotel and asks for a room. The receptionist informs the customer that a room is available for Rs. 2000/- per day. The customer wants to see the room before he checks in. The receptionist asks the customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding of his family members is patently erroneous. There is nothing on record to show that the appellant had participated in the affairs of the borrower entities or any other Essel Group entity. We find that the appellant is neither an authorized signatory nor a director in the borrower entities and was not involved in the operation, financing or day to day management of the affairs of the borrower entities. In the absence of any active role of the appellant in Essel Group companies / borrower entities, the presumption drawn by the Chairperson that the appellant had exercised control over borrower entities is patently erroneous. 97. The word control has been mostly used by the Chairperson to show that the appellant had an active role in the borrower entities Essel Group companies which is based on presumptions. The Supreme Court in ArcelorMittal India Private Limited vs. Satish Kumar Gupta (2019) 2 SCC 1 explained the expression control as under:- 51. Thus, the expression control , in Section 29-A(c), denotes only positive control, which means that the mere power to block special resolutions of a company cannot amount to control. Control here, as contrasted wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Directors that is in control. If an acquirer were to have power to appoint majority of Directors, it is obvious that he would be in control of the company but that is not the only way to be in control. If an acquirer were to control the management or policy decisions of a company, he would be in control. This could happen by virtue of his shareholding or management rights or by reason of shareholders agreements or voting agreements or in any other manner. The test really is whether the acquirer is in the driving seat. To extend the metaphor further, the question would be whether he controls the steering, accelerator, the gears and the brakes. If the answer to these questions is in the affirmative, then alone would he be in control of the company. In other words, the question to be asked in each case would be whether the acquirer is the driving force behind the company and whether he is the one providing motion to the organization. If yes, he is in control but not otherwise. In short control means effective control. 98. In view of the aforesaid, the finding that the appellant exercised control over the borrower entities / Essel Group companies was based on presumptions in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged by a separate corporate structure which is different and distinct from the structure of ZEEL. 50% of the shareholding would be held by the Sony Group. Five directors would be nominees of Sony and independent directors would be of stellar reputation and stature. Further the Chief Financial Officer would be nominees of Sony. These aspects has not been considered by the Chairperson while presuming that the appellant being responsible for the round tripping of the funds is not fit to hold the position of a Managing Director in the merged entity. 102. We also find that the Chairperson has applied different yardstick regarding the alleged transaction arising out of ZEEL. On one hand the Chairperson has based its finding on a preponderance of probability while on the other hand has refused to accept the evidence filed by the appellant and has rejected the same on the ground that the documents do not prove the genuineness of the transaction beyond a reasonable doubt. This contrary stand taken by the Chairperson is, in our opinion, arbitrary. In any case, an incorrect application of the principles of preponderance of probability has been applied. 103. This Tribunal by its earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights and liberties must be based on the existence of a rational connection between those measures, the situation in fact and the object sought to be achieved; (iii) The measures must be necessary to achieve the object and must not infringe rights to an extent greater than is necessary to fulfil the aim; (iv) Restrictions must not only serve legitimate purposes; they must also be necessary to protect them; and (v) The State should provide sufficient safeguards against the abuse of such interference. We are unable to find force in the arguments of the learned counsel for the Respondent. The impugned notifications do not serve any purpose, apart from reducing the overhead costs of all factories in the State, without regard to the nature of their manufactured products. It would be fathomable, and within the PART G 30 realm of reasonable possibility during a pandemic, if the factories producing medical equipment such as life-saving drugs, personal protective equipment or sanitisers, would be exempted by way of Section 65(2), while justly compensating the workers for supplying their valuable labour in a time of urgent need. However, a blanket notification of exempti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been evolved by Courts, namely, that if an action is taken by an authority which is contrary to law or which is improper or where the action taken is unreasonable then the Court of law is duty bound to interfere with such action and one such mode of exercising power is to exercise the doctrine of proportionality. Where the punitive measure is harsh or disproportionate to the offence which shocks the conscience it is within the discretion of the Court to exercise the doctrine of proportionality and reduce the quantum of punishment to ensure that some rationality is brought to make unequals equal. 106. Similarly, the Bombay High Court in Apar Industries Ltd. Vs Union of India Through Ministry of Railways and Others (2023) SCC Online Bom 350 held:- 30. The scope of the proportionality principle came to be examined in Coimbatore District Central Cooperative Bank v. Coimbatore District Central Cooperative Bank Employees Association. The Supreme Court said:- 17. So far as the doctrine of proportionality is concerned, there is no gainsaying that the said doctrine has not only arrived in our legal system but has come to stay. With the rapid growth of administrative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing knife would suffice. 108. Considering the aforesaid we are of the opinion that the doctrine of proportionality has not been correctly applied and a correct balance has not been made. Considering the genuineness of the documents so produced by the appellant, the first leg of the transaction was validly explained which indicates that the funds moved pursuant to a long standing commercial business relationship. The entries in the bank statement are not fictitious or sham transactions and therefore proceeding and issuing directions on the basis of preponderance of probabilities is, in our opinion, at this stage arbitrary and excessive. The directions ex facie, is punitive and not preventive and is based on incorrect apprehensions and on the basis of preponderance of probabilities. 109. Further, the restrictions are continuing since June 2023 by the impugned order. The Chairperson has directed that the investigation should be completed within eight months and under the garb of temporary restraint the appellant is expected to disassociate from ZEEL and its subsidiaries as well as with the merged entity for ten months or more after which proceedings may be initiated by issuance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce from the ex-parte ad interim order. The WTM while passing the ex-parte ad interim order was of the view that the directions were necessary in order to obviate the possibility of further diversion of funds whereas in the order passed by the Chairperson urgency has been considered on the ground that a fair and transparent investigation would not be possible if the appellant remains a Managing Director as he may impede and obstruct the investigation. In our opinion the reasoning given in the ex-parte ad interim order as well as in the impugned order passed by the Chairperson are bereft of any merit. Till date, no evidence has come forward of any further diversion of funds. Further, the scope of investigation has now been enlarged and is not confined to the LoC of Rs. 200 crore but has been enlarged to investigate other LoCs issued by ZEEL. Considering the aforesaid, when investigations is being done on mere possibilities without any concrete evidence as on date then, in our opinion, passing an ad interim order was wholly unjustified and, in any case, the continuation of the interim order till the completion of the investigation is per se arbitrary and cannot be sustained. 112. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. vs SEBI (2019) SCC SAT OnLine 6 held:- 17. In our opinion, the impugned order is harsh and unwarranted. We are of the opinion that there was no real urgency at this late stage in passing an ex-parte restraint order which virtually amounts to passing a final order. The period of trades is 2017-2018. At the time when the impugned order was passed the future contracts had been executed. The lean season was over. There is nothing on record to indicate that the sales made by the appellants was on a higher side indicating manipulation in the price nor there is any prima facie, finding that by accumulating large stocks of Mentha Oil, the appellant had dominated the market without making any comparison with the total volume of trades in the physical market. In our opinion, the basis of urgency was purely on account of presumption and was not based on any piece of evidence. There should be some shred of evidence to come to a prima-facie conclusion that the appellants are indulging in unfair trade practices in cornering the market with a manipulative intent to manipulate the price. Passing a restraint order which virtually puts a stoppage on the appellants right to trade based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the appellant is about to dispose of the property in question. Further, this principle can only be applied when there is evidence to show that the appellant has acted, or is about to act with the intent to obstruct or delay the adjudication of the proceedings that may be passed against him. We are of the opinion that there is no finding that the appellant will remove the property or will dispose of all the property or that he would obstruct the proceedings or that he would delay the proceedings pursuant to the show cause notice. In the absence of any such finding, the ex-parte interim order cannot be sustained especially when the trades were of 2016 and from 2016 till the date of the impugned order there is no evidence to show that the appellant was trying to divert the alleged notional gain/loss. 118. In Arshad Hussain Warsi Ors. vs SEBI, Appeal no. 284 of 2023, decided on March 27, 2023 , this Tribunal held:- 29. From the aforesaid, it is clear that ad-interim orders can be passed in case of urgency or where it is found that the noticee is about to dispose of the property. In the absence of any finding that the appellants will defalcate the unlawful gains, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of the merged entity. Hence, his continuation as the Managing Director in the merged entity would have no impact on the investigation. 122. The Chairperson while confirming the ad interim order directed the investigation to be completed in eight months. No reason was given as why eight months is required to complete the investigation especially when only bank transactions are to be looked into. During the course of arguments, it has been stated by the respondent that other LoCs given by the promoter group of the appellant including the LoC given by the father of the appellant to the tune of Rs. 4210 crore are now being scrutinized and therefore comprehensive investigation is being done and consequently these five transactions which is impugned in the order is only part of the wider investigation. In view of the aforesaid, we are of the view that prima facie the diversion of funds has not as yet been proved. Sufficient explanation backed by genuine document have been shown by the appellant and having validly discharged their burden. The investigation is going on and considering the track record of SEBI for which we take judicial notice, no investigation is completed within the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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