In the matter of

Rajesh Gupta                                                              Appellant

Vs.

Securities and Exchange Board of India                 Respondent
 
 

Appearance;

Shri V. M. Jindal
Advocate

Shri Rajesh Gupta                                                 for appellant

Shri J. Ranganayakulu
Division Chief, SEBI                                            for respondent
 

The present appeal is against the Respondent's order dated 06.04.2000 made under Section 11B of the Securities and Exchange Board of India Act, 1992 (the SEBI Act), whereby the Appellant has been debarred "from associating with the capital market related activities, dealings in securities, accessing the capital market and associating with any of the intermediaries in the capital market for a period of five years".
 

It has been stated in the order that the Respondent had received certain allegations against the activities relating public issues made by certain companies viz. (1) Karan Finance Ltd. (KFL) (2) Mahanivesh (India) Ltd. (MIL) (3) Geefcee Finance Ltd. (GFL) and (4) Kalyani Finance Ltd. (KAL). M/s Sungrow Datasoft Pvt. Ltd. (SDPL) formerly known as the Elite Computer Technics Pvt. Ltd. (ECTL) was Registrar to the Issue and Transfer Agent (RTA) to the public issues made by the said four companies. One of the complaints was that Shri Rajesh Gupta, a director of the said RTA had colluded with one Tarun Goyal and played an active role in defrauding the investors in the public issues. The impugned order was issued in the light of the conclusion arrived at by the respondent after conducting an equity in the matter.
 

The parties have filed their written submission and also made oral submissions.
 

Shri V. M. Jindal, learned Counsel appearing for the Appellant submitted that the Appellant was one of the directors of ECTL. The said ECTL was granted a certificate of registration by the Respondent in March, 1994 to act as Category 1 RTA for a period of one year, and the registration thereafter on the expiry of said one year, was renewed for a further period of 3 years. The learned Counsel submitted that RTI's activities have been specified in rule 2(e) of the Securities & Exchange Board of India (Registrar to an Issue and Share Transfer Agents) Rules, 1993. The activities of a Registrar to an Issue are restricted to (i) collecting applications from investors in respect of an issue (ii) keeping a proper record of applications and monies received from investors or paid to seller of the securities; and (iii) assisting body corporate or person / group of persons in determining the basis of allotment of securities in consultation with the stock exchange (iv) finalising the list of persons entitled to allotment of securities (v) processing and despatching allotment letters, refund orders or certificates and other related documents in respect of the issue. The learned Counsel submitted that ECTL was not concerned with any of the irregularities and allegations made against the four-issuer companies mentioned in the impugned order. He submitted that a RTA had no role in the incorporation or management of the issue company, or liable for any mis-statement of facts made in the prospectus. The irregularities and defaults pointed out by the Respondent were not known to the Appellant. Had such defaults and irregularities been known to ECTL it would have taken prompt action to withdraw from the said four public issues. It's role was restricted to issue related matters under rule 2(2) of the rules. The Appellant vide his letter dated 15.10.1999 had explained his views in the matter in response to the show cause notice issued by the respondent to him. He further submitted though the respondent had scheduled a personal hearing, the appellant could not be present on the appointed day as he was indisposed. Even though he sought postponement of the hearing, the request was not heeded to and the impugned order was issued on 6.4.2000 without hearing him. He further submitted that the Appellant was not an active director of ECTL since 1996 and he had ceased to be a director on resignation from the Board of Directors, on 29.11.1999.
 

Explaining the Appellant's inability to produce the agreements entered into with the 4 issuer companies referred to in the order called for the respondent, the learned Counsel submitted that since the Regulations provided for preserving the records only for a period of 3 years the records were destroyed as the preservation period had already lapsed by the time the requisition dated 14.10.1999 from the respondent reached the appellant. The appellant, therefore, could not produce the records. But the fact that the Appellant did not produce the same before the respondent did not suggest that the agreement was not executed. He submitted that along with the prospectus, the agreement was also produced before the Registrar of Companies and the Respondent. But for filing the same, these agencies would not have cleared issuance of the prospectus, he submitted.
 

It was also submitted that RTA was not required to interact with the directors or promoters of the issuer companies very often and as such had no occasion to judge them. Since, the RTA attends to clerical job, the interaction was mainly with the subordinate officials of the issuer company and not with the Board of Directors.
 

The learned Counsel submitted that the Appellant is a Chartered Accountant in practice for the last 15 years and had come into contact with several professional colleagues in the course of his practice. Shri Tarun Goyal was one among them. He was not a close friend of Shri Goyal, but merely an acquaintance. The learned Counsel denied the allegation that the Appellant colluded with Shri Tarun Goyal and made ECTL a party to the four public issues. He submitted that ECTL had managed about 40 public issues and the 4 issues under reference were taken up in the ordinary course of business. The fact that there was not even a single complaint against the Appellant shows that he was not a party to any dubious act as alleged in the order. The learned Counsel submitted that there was no case against the Appellant to issue the impugned direction.
 

Shri Ranganayakulu, learned representative for the respondent started his submission with a preliminary objection that the matter under challenge in the appeal being a direction issued under section 11B of the SEBI Act, is not appealable under Section 15T of the Act, as directions are not orders. He submitted that since the expression direction has been used in the Act, in contradistinction to the word "order" in several sections of the SEBI Act, such as 12(3), Chapter VI etc., the "direction" has to be distinguished from order and treated separately. Since, the direction being not an "order" the same cannot be challenged, he submitted.
 

The learned representative submitted that in the light of the facts and circumstances stated in the respondent's order, the appellant was found to be associated with Shri Tarun Goyal in defrauding the investors and Section 11B could reach him as he was the director of the concerned RTA, which is a registered capital market intermediary. Refuting the allegation that the respondent did not follow the rules of natural justice, the learned representative submitted that the appellant was given more than sufficient opportunity to present his case and that he had submitted his written reply explaining the charges and never sought a personal hearing. Despite the fact that there was no such request for personal hearing, the respondent still gave him an opportunity to orally present his case in case desired so. Apparently, he was not interested in making any oral submission. It is clear from his conduct that he was not keen to avail the chance. The submission that he did not get the notice of hearing is unconvincing as the letter was addressed to him to the same address to which the earlier communications and subsequent communications were sent which he had received. The learned representative submitted that it can hardly be a coincidence that ECTL handled all the four issues in which Tarun Goyal was involved. The letters from DSE and NSE annexed to the reply, was relied on by the learned representative to establish the nexus of the ECTL and Tarun Goyal and the gravity of the charges.
 

Before proceeding with the appeal on merits, it is considered necessary to examine the preliminary objection raised by the respondents that the direction is not an order and hence not appealable under section 15T of the SEBI Act. It is rather strange that this sort of an objection has been raised by the respondent now, after having explicitly admitted in several cases that order includes direction as well. Section 20 of the Act, originally incorporated in the SEBI Act with effect from 1992, provided for appeal by any person aggrieved by an order of the Board to the Central Government. By the amendment effected to 15T of the Act, in December 1999 only the forum of appeal has been shifted from Central Government to the Tribunal. Several appeals challenging directions issued by Respondent under Section 11B had been preferred by the aggrieved persons during the last 7 years before the Central Government and the respondent had submitted to that appellate regime. It appears that the respondent has conveniently forgotten the fact that they had in their regulation admitted that the order includes directions. To quote one such regulation is, regulation 67 of the SEBI (Collective Investment Schemes) Regulations, 1999, therein it has been stated an order of the competent authority or the Board issuing directions under regulations 65 is appealable. The appeal provision is contained only in Section 20/15T of the SEBI Act. Similar is the provision available under section 12 of the Insider Trading Regulations notified by the respondent, which provides for appeal against the directions issued by the Board. Again it can be done under section 20/15T. The respondent cannot ignore a concept, which is statutorily recognised.
 

The learned representative during the course of argument had submitted that since the expression 'direction' has not been defined in the SEBI Act and that the expression 'order' has been used in contradistinction, the two expressions are not synonymous. It is true that the word 'direction' has not been defined in the Act. But then it is neither possible nor necessary to define all the words in the statute. The purpose of incorporating a definition section in an act, Rule or Regulation is not to provide a parallel dictionary of words and idioms. Only those expressions, which need by specifically defined in the context in which legislation, are defined. Those words, which are to be understood in literary sense, are not defined. Since the expression 'direction / order' have not been defined in the Act these words have to be understood in the literary sense. According to the commonly accepted standard dictionaries the expressions 'direction' and 'order' are synonymous having the same meaning. In this context the respondent should be aware of the view taken by various High Courts, which had occasion to examine the scope of the directions issued under Section 11B. To quote one, is the view taken by the Gujarat High Court in SEBI v/s Alka Synthetics Ltd. (1999) 19 SCL 460 (Guj). In the said case the issue was about the scope of section 11B which enabled the respondent to issue direction. In that case the Court viewed 'direction' synonymous with 'order'. This is not an isolated case. There are several decisions, which had treated directions issued under Section 11B of the SEBI Act as order for the purpose of Section 20/15t. The preliminary objection has been raised by the respondent without appreciating the legal position ignoring the stand / view already taken by them, the express provisions contained in their own regulations and the views taken by the Courts.
 

For the reasons stated above, the preliminary objection fails. Now I propose to proceed with the merit of the case.
 

According to the version of the respondent, as recorded in the order the Appellant has been debarred from associating with the capital market related activities, dealings in securities, accessing the capital market and associating with any of the intermediaries in the capital market, in view of his conduct as a director of ECTL, which was the RTA to public issue of shares, made by the 4 companies i.e. KFL, MIL, GFL and KAL. These public issues were opened in a span of almost one-year as could be seen from the date of opening of these issues stated below:

KFL 7.3.1995
MIL 16.3.1995
GFL 21.3.1995
KAL 2.4.1996

"I have carefully perused the documents and the relevant material on record including the reply dated 25.10.1999 of Shri Rajesh Gupta. I have also appreciated the facts and circumstances of the case. I feel that Shri Rajesh Gupta as a director of SDPL (formerly known as ECTL) was instrumental in committing the irregularities in the public issues of KFL, MIL, GFL and KAL for which ECTL acted as Registrar to the Issue. The specific irregularities being in case of (i) KFL - fraudulent incorporation of the company, its fraudulent conversion from private to public limited company, on existence of registered office of the company, fraudulent mis-statements in the prospectus, showing a dead person as a Chairman and Director of the company; (ii) in case of MIL - non existence of address of directors, fraudulent operations and mis-statements in prospectus (iii) in case of KAL - fake addresses of promoters, fraudulent introduction to the bank account etc; (iv) in case of GFL - fraudulent projection of Shri Pradeep Mittal as Company Secretary of the company in the prospectus, fake disclosures relating to the auditors report and financial statements in the prospectus etc.

I am convinced that, as the facts on the record indicate, Shri Rajesh Gupta apparently colluded with Shri Tarun Goyal and made ECTL a party to the public issues of KFL, MIL, GFL and KAL. The said regulations lay down the code of conduct for Registrar to an Issue and Share Transfer Agent while vesting responsibilities on registrars to an issue. The code of conduct, inter alia, requires RTI to act with due skill, diligence and care in conduct of all their activities. It is expected of them to meet the directors of the issuing company and ensure that they are going to be associated with genuine issues, before accepting the assignment. Clearly, no due diligence was exercised by you in your capacity as a director of ECTL while accepting these assignments and you had acted recklessly in collusion with Shri Tarun Goyal in becoming a party in committing the above irregularities".

As per the Appellant's own version, the Appellant was associated with the four public issuer companies in the public issues. It is an admitted fact that the Appellant and Shri Goyal were actively involved in the public issues and that the Appellant had signed the requisite agreement from the RTA side with the issuer companies. It is also to be believed that his was the dominant voice in the ECTL, as is evident from the submission that even the fee was decided between the said Goyal and the Appellant. It is also possible to accept the version that all the four companies were linked and Shri Goyal was connected with them.
 

As the Appellant had rightly pointed out that the Registrar to an Issue, cannot, in the absence of evidence, said to be associated with incorporation of the issuer company, its conversion or opening of a bank account, etc. RTA's role is normally in respect of issue related matter specified in rule 2(e) referred to above. This does not mean that the people behind RTA cannot be associated with the pre issue activities of the Issuer Company. They can. But then, it is not a functional relationship as in the case of RTA and the Issuer Company, but a relationship required to be proved with reasonable evidence. There is nothing on record before me supporting the conclusion drawn by the respondent stated in para of the material extracted from the order furnished above.
 

The appellant's submission that he had only professional relationship with Shri Goyal and that he was not aware of the undesirable activities attributed to him is difficult to accept. It cannot be considered as a mere coincidence that Shri Goyal was connected with all 4 companies and these companies had linkage to each other and that ECTL was RTA in the public issues made by all the 4 companies. It is also pertinent to say that all these 4 companies had raised capital during the span of about a year. By the Appellant's own version, ECTL had acted as RTA in about 40 companies. One can hardly believe that such an experienced entity would accept any issuer as its client without verifying the antecedents / history of the promoters, if not to protect the interest of the investors, atleast to ensure its own interest and to ensure prompt payment of fee. The argument that the ECTL had no accession to know the directors of the Issuer Company and that the interaction was with the subordinate staff is difficult to accept. In fact this admission goes against the Appellant in as much as it shows that the Appellant had not exercised due diligence required of him in the matter and adopted a routine casual approach. They abdicated their duties and obligations.
 

The appellant's submission that the necessary agreements were executed with issuer companies but the same were destroyed immediately after the requisite preservation period of three years was over, cannot be accepted as plain truth. May be that SEBI regulations prescribe only a three-year period for preservation of the issue records. But that does not mean that the records should be destroyed in a lightning speed at the nick of expiry of the said 3 year period. There are other legislations like Companies Act, etc., under which the books of accounts and other documents are required to be kept for atleast 8 years. The agreement with Issuer Company being a document relating to receipt of fees is a document coming under the purview of section 209 of the Companies Act for which the preservative period is 8 years. Similarly, the records are required to be preserved till the income tax assessment is over. Non production of the document on the ground of non-availability of the same due to expiry of preservation period under regulation is not acceptable. In this context, it is possible to view the Appellant's action as an alibi to claim execution of the agreement but at the same time an attempt to deny access to the agreement and thereby suppress material information from the scrutiny of the respondent. It is evident that the Appellant had accepted the role of RTA in the public issue of all the 4 companies, and ECTL was only a nominal front for the purpose. The Appellant himself had admitted that Shir Tarun Goyal had referred the issue work to him, as he was also a professional. This itself shows the issue work was taken up by him. Therefore, it was his duty to ascertain the full facts. Since the Appellant had taken up the assignments without verifying and ascertaining the full facts relating to these companies and their management, it can be said that he had not exercised due diligence and care as required under the Regulation. Public issue is a team action and everybody involved has a role to play vigilantly. There is no room for complacency.
 

The appellant's contention that other players in these public issues have been left untouched has been denied by the respondent. The Tribunal was informed by the learned representative of the respondent that as a sequel to those public issues registration of ectl has not been renewed. Directions have been issued to Tarun Goyal and others. In any case the question as to whether other players in the game have been suitably dealt with or not is not a matter to be looked into for dealing with the conduct of the Appellant. His role has to be adjudged with reference to his conduct. All that is required to be established is that whether the Appellant had been found guilty or not. The respondents have established the fact that the Appellant had not acted diligently. Since it has been established at a reasonable level that the Appellant had failed to exercise due diligence, the impugned order sustains.
 

The appeal is accordingly dismissed.