IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 15/2005 & 16/2005
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Date of Hearing
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20.4.2005
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Date of Decision
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3.5.2005
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In the matter of:
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Satish R. Shah
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Appellant – Represented by
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Shetal S. Shah
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Mr. Jigar Shah, Advocate
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Versus
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Securities & Exchange Board
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Respondent –Represented by
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of India
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Mr. Subhash Jha, Advocate
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Coram:
Justice Kumar Rajaratnam, Presiding Officer
Per: Justice Kumar Rajaratnam, Presiding Officer
1. Appeal is taken up with consent of parties.
2. Although two impugned orders are challenged in these appeals, they relate to the same allegation and the orders have been passed on the same day namely 13th July 2004. By consent, common order is passed as the question of law that arises for consideration are the same.
3. Both the appellants are promoters of a company known as M/s. Sawaca Business Machines Ltd (hereinafter referred to as “the company”). They are also directors of the company. The company is a listed company and listed for trading in BSE and Ahmedabad Stock Exchange.
4. The facts very briefly are that on 22.10.2001 the Chairman of SEBI ordered investigation of the scrip of the company during the period from October 1999 to December 1999.
5. The investigation revealed that the company had allegedly resorted to fictitious book entries by showing subscription towards preferential allotment. The investigation further revealed that the company had shown a credit of Rs. 4.80 crore in the bank account as against Rs. 5.20 crore required to have been received. It appears that there was no real infusion of funds and the whole process of funding appears to be a book entry. Shares were allotted to various investors including the promoter group without actual infusion of funds.
6. A show cause notice was issued to the company and to the appellants dated 29.9.2003 calling upon them to show cause as to why suitable action should not be taken under Section 11(4) read with Section 11B of the SEBI Act.
7. It was contended by the appellants that they had resigned from the Board subsequently and all the shares allotted to the appellants were intact in their name and they did not exit from the company as alleged by the respondent. By the impugned orders dated 13.7.2004 the appellants were found guilty of violating Regulation 6(d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practises relating to Securities Market) Regulations, 1995 (hereinafter referred to as “1995 Regulation”) read with Regulation 11 and 13 of SEBI (Prohibition of Fraudulent and Unfair Trade Practises relating to Securities Market) Regulations, 2003 (hereinafter referred to as “2003 Regulation”). Consequently, the appellants were prohibited from associating with any corporate body in accessing capital market and also were prohibited from buying, selling or dealing in securities for a period of 2 years. The order was to come into force with immediate effect. The impugned orders dated 13.7.2004 are under challenge in these appeals.
8. It is not known as to why two separate orders were passed since the allegations are the same and the impugned orders are also dated 13.7.2004. Be that as it may, we shall deal with the contentions of the appellants.
9. It was contended by the appellants that the respondents have travelled beyond the scope of the show cause notice and that no opportunity of a personal hearing was given before punishing them for violation of Regulation 6(d) of the 1995 Regulations read with clause 13.4.2 of SEBI (Disclosure and Investor Protection) Guidelines, 2000. It is further alleged that no notice was issued to show cause against violation of the said Regulation 6(d).
10. It is further submitted that the appellants are punished because of their vicarious liability as they were the directors of the Company at the relevant time. It is submitted that there is no express or implied provision in Section 11(4)(b) or 11B so as to make a director vicariously liable for the act of the company. In the absence of such express provision in the act, the power usurped by the respondent under Section 11(4)(b) and 11B are without jurisdiction and unsustainable in law.
11. It is also submitted that there is no specific averment in the show cause notice against the appellants that he was in charge and responsible for the business of the company at the relevant time. In the absence of such averment, the appellant cannot be fastened with such a liability. It is stated that the exemplary punishment imposed under the appellants are illegal, unjustified and unsustainable in law.
12. It is submitted that all entries in the books, accounts and records of the company were genuine and there was no falsification thereof. The respondent has not at all given any details or reasons for its holding that there was any falsification of the company’s books, accounts or records. It is submitted that the impugned order is thus not a speaking order and without any merits.
13. The appellants have submitted that the bank statement furnished by the company for the period from 1.7.1999 to 30.6.2000 under letter 13.9.2001 clearly reflects that the company had received full amount of Rs. 5.2 crore being the total value of the shares. It is stated that the respondent had failed to take into consideration the total sum of Rs. 40 lakh consisting of Rs. 15.50 lakh, Rs. 15 lakh and Rs. 9.50 lakhs received on 29.12.99 and 30.12.99, towards the price of preferential allotments. The appellant submitted that the above factual position was completely misconceived in the impugned order and the order is passed without any application of mind and proper examination of documents on record.
14. There appears to be some force in the submission that the appellants could not have been penalised for violation of Regulation 6(d) since the show cause notice only refers to Regulation 4 of the 1995 Regulations. There is also some force in the submission that Section 11(4) of the SEBI Act, 1992 could not have been invoked against the appellant since Section 11(4) which gives the power to SEBI to restrain persons from accessing securities market came into force on 29.10.2002 after the alleged misconduct which was in the year 1999.
15. The respondent should have been careful in confining itself to the Regulation which the appellants have violated. If according to the show cause notice the appellant violated Regulation 4 the appellants could not have been found guilty of violating Regulation 6. Regulation 4 deals with prohibition against market manipulation and Regulation 6 deals with prohibition of unfair trade practises relating to securities. It appears that the appellants could not have been found guilty under Regulation 6 when the show cause notice speaks only of Regulation 4(a), (b) and (d). Regulation 4(a), (b), and (d) reads as follows:
“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 and thereby inducing the sale or purchase of securities by any person;
(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;
(c) …
(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities;
(e) …”
16. None of these Regulations really apply to the facts which lead to the respondent to conclude that the appellants are guilty of violating Regulation 4(a), (b) and (d). But certainly on a perusal of the Regulations the appellant, in my view, could rightly have been found guilty of violating Regulation 6 which deals with Unfair Trade Practises relating to securities market.
17. The gamut of the charge as stated by the learned senior counsel for the respondent was that preferential allotments were made to the tune of Rs. 5.2 crore and these allotments to a large measure were made to the promoters. Undoubtedly, the appellant at the relevant time were directors and also promoters of the company. According to the respondent only Rs. 4.8 crore were received by the company on the basis of the preferential allotment to the promoter and others. There was a substantial short fall of payment since the total amount of money that should have been infused in the company was Rs. 5.2 crore, while in fact only Rs. 4.8 crore were only brought in towards preferential share allotment.
18. Even this amount which has come in, as can be seen from paragraph 8 of the impugned order appears to be unacceptable. A sum of Rs. 40,000/- has been shown as credit on 5.1.2000 and 29 entries are shown as credit entries of Rs. 40,000/- on 5.1.2000. This is a clear case of kite flying where the same amount which is credited originally appears to have been debited and credited again. That is how the figure of Rs. 4.8 crore is arrived at. The paragraph 8 of the impugned order is a tell-tale of the manipulations.
19. We have no hesitation in coming to the conclusion that the appellants as promoters were responsible for a violation under Regulation 6 of the 1995 Regulation. As stated earlier, unfortunately the show cause notice only refers to Regulation 4 (a), (b), and (d).
20. On a careful perusal of the Regulation 4 (a), (b), and (d), it would not be possible to hold that Regulation 4(a), (b) and (d) applies to the facts of this case. Certainly, Regulation 6 will apply since Regulation 6 deals with unfair trade practises relating to securities. But the show cause notice does not refer to Regulation 6. Equally Section 11(4) will not apply to the facts of this case since 11(4) was introduced only on 29.10.2002.
21. But that does not mean that there is no power under Section 11B to pass appropriate orders in public interest, both during the pendency of the enquiry and thereafter. In these circumstances of the case, I have no hesitation in concluding that there is a violation of 1995 Regulation and lack of transparency under SEBI (Disclosure and Investment Protection) Guidelines, 2000.
22. With regard to the quantum of debarment of two years, it was submitted by the learned counsel for the appellant that the period of debarment is excessive.
23. Clause 13.4.2 of the 2000 Guidelines reads as follows:
“The equity share and securities convertible into equity shares at a later date, allotted in terms of above said Resolution shall be made fully paid up at the time of their allotment.”
24. From the records it is clear at the time of allotment of shares were not fully paid by the allotees. Therefore, there is a clear violation of the SEBI (DIP) Guidelines, 2000.
25. It was submitted with regard to the quantum of ban that the appellants are husband and wife and they have resigned from the company and the investigation revealed that it was Mahendra A. Shah along entities such as Harvic Management Services Ltd., Mayekar Investment Pvt. Ltd. and Rajesh N. Jhaveri, who were the predominant traders in the scrip of the company, during the investigation period. This is mentioned in paragraph 6 of the impugned order.
26. Investigation has established that trading by only those persons contributed to the initial price rise in the scrip. It was also seen that after they created investor interest in the scrip, they started selling the shares, which they were already holding and/or had purchased from the management.
27. It is submitted that none of the appellants had exited from the scrip unlike the others and there was no connection with the real perpetrators of the violation.
28. Taking all the facts into account and taking into account the allegations related to the allotment for the year December 1999 and also the fact that the role played by the appellant was far less serious than the role played by Mahendra Shah along with Harvic Management Services Ltd., Mayekar Investment Pvt. Ltd and Rajesh Jhaveri, I feel it appropriate to reduce the ban from 2 years to 1 year.
29. Accordingly, the order is modified to the above extent. The impugned order is sustained in so far as the FUTP Regulation and DIP violations are concerned. However, the period from accessing the capital market shall be reduced from 2 years to 1 year from the date of the impugned order.
30. The appeal is disposed of accordingly. No order as to costs.
(Justice Kumar Rajaratnam)
Presiding Officer
Place: Mumbai
Date: 3.5.2005
//SR5053