BEFORE
THE SECURITIES APPELLATE TRIBUNAL
MUMBAI�� Appeal No.9/2003KSL & Industries Ltd.���������������������������������������������������������� Appellant Vs. 1. The Chairman, The Securities &
Exchange Board of 2. Gopal Khadaria����������������������������������������������������������������� Respondents Present Shri D. J. Khambatta, Advocate Ms. Rashida Sauliwala, Advocate I/b Paras Kuhad &
Associates��������������������������������������������� For� Appellant Shri Kumar Desai, Advocate Ms. Rita Shivalkar, Advocate Shri Praveen Trivedi, Asstt. Legal Adviser, SEBI�������������������������������������������������� For� Respondent No.1 ORDER����������� Order made
by the Respondent No.1 (SEBI) on 29.11.2002 under section 11B of the Securities
and Exchange Board of India Act, 1992 (the SEBI Act) read with regulation 12 of
the Securities and Exchange Board of India (Prohibition of Fraudulent and
Unfair Trade Practices relating to Securities Market) Regulations, 1995 (the
FUTP Regulations) debarring Shri S. K. Gupta, Shri Ashok Chawla, Shri J. B.
Gupta, Shri Gopal Khadaria and KSL & Industries Ltd., (the Appellant herein
� formerly known as Krishna Texport and Capital Market Ltd.,) �from accessing
and being associated with the capital market for a period of five years� from
29.11.2002, is under challenge in the present appeal.� Though the order is directed� not only to the Appellant but to 4
individuals also, none other than the Appellant has so far filed any appeal against the said order. ����������� The facts
based on which SEBI passed the order have been stated in the order itself.� Briefly those facts are as follows: Manu Finlease Ltd., (MFL) a public
limited company issued a Prospectus
on 5.9.1995 whereby 21,00,000 equity shares of Rs.10/- each were offered for
public subscription.� Out of the same
9,20,000 shares were reserved for preferential allotment � i.e. 4,20,000 shares
to Indian Mutual Funds and 5,00,000 shares to Non Resident Indians.� In that context net offer to the resident
Indian public was only 11,80,000 shares.�
The issue was found oversubscribed by 50.54 times, though the said
company had no sound financial track records.�
In that� context, on 2.8.1996 SEBI
ordered an investigation.� Investigation
revealed manipulation of the public issue made by MFL and also grey market
operations and secondary market manipulations in the shares of the
company.� Pursuant to the investigation
report, show cause notices were issued on 6.8.98 to the persons found� involved including the Appellant.� They responded to the notice by sending
replies and making oral submissions.�
Thereafter SEBI passed the impugned order.� The order deals with charges against each one
of the noticees separately.� Since� the present appeal is confined to the
findings and the decision relating to the Appellant it is not considered
necessary to go into the charges against others in this order.� However, since Shri Gopal Khadaria�s role has
a bearing on the charges levelled against the Appellant it is felt that it
would be advantageous to know the charges against him and also the findings
thereon as per the impugned order.� The
relevant portion from the order is extracted below: �1.� As per the investigation report, Shri Gopal
Khadaria having an address of � 1-A,
Hillview Apartment, JP Road, Andheri (W), Mumbai entered into an � arrangement with M/s. Nathji Enterprises Pvt.
Ltd., an associate concern ����� of MFL
operating from the same premises and having common directors ��� for providing finance through six multiple
applications of 10 lac shares of ����������� Rs.1.00
crore each in the Public Issue of MFL.�
Shri Gopal Khadaria in ����� turn
entered into an agreement dated 7.10.95 with M/s. ����������� Krishna Texport ��������� and
Capital Market Ltd., also for receiving financial accommodation to ������ enable him to apply for 60 lac shares in
the Public Issue of MFL by way � of six
multiple applications of 10 lac shares each. Shri Gopal Khadaria was allotted
97,800 shares of MFL (i.e. 16,300 shares against each of the six applications).
�The delivery of these allotments
was� not received by him but was taken
directly by M/s. Nathji Enterprises P Ltd., an associate of MFL.� The promoters of MFL thus obtained allotment
of 97,800 shares of MFL through this arrangement. Since all the applications were
made on behalf of Shri Gopal Khadaria, a single application for 60 lac shares
should have been made instead of six multiple applications of 10 lac shares
each.� As the net offer to the public in
this case was for 11,80,000 shares, Shri Gopal Khadaria who was acting on
behalf of M/s. Nathji Enterprises P. Ltd.,an associate concern of MFL, could
not have applied for more than 11,80,000 shares being the size of the Public
Issue.� Since the application was for 60,00,000
shares, this was conveniently sub-divided in six multiple applications of
10,00,000 shares each.� This act
resulted� in irregular allotment of MFL
shares to its promoters. Shri Gopal Khadaria resorted to
financing of irregular subscription to the Public Issue of MFL, resulting in
irregular allotments. In his reply to the Show Cause
Notice, Shri Gopal Khadaria stated that he had entered into a purely financial
arrangement with M/s. Nathji Enterprises Pvt. Ltd., and M/s. Krishna Texport
and Capital Market Ltd., to arrange finance for the Public Issue of MFL which
was done by him at a spread of 2% as financing charges.� He stated that an agreement dated 30.9.95 was
entered into with M/s. Nathji Enterprises Pvt. Ltd., who was introduced to him
by Shri S. N. Daga of D.B.India Securities Ltd., for financing 60,00,000 equity
shares in the Public Issue of MFL at interest of 26% p.a.� He denied knowledge of the fact that M/s.
Nathji Enterprises Pvt. Ltd., was an associate concern of MFL having common
directors and operating from the same premises. �Shri Gopal Khadaria entered into another
agreement on 7.10.95 with KTCML for financial arrangement of 6 applications of
10,00,000 equity shares of Rs.10/- each at interest of 24% p.a.� He stated that the applications were by 6
different parties and denied that these applications were multiple.� It was for MFL to accept or reject the
application.� He stated that the shares
were allotted to the applicants and not to him.�
He denied knowledge of the ulterior motive of M/s. Nathji Enterprises
Pvt. Ltd. and management of MFL and stated that he was not a party to the
irregular subscription and irregular allotment of MFL shares. He denied the charges made out
against him and contented that no directions�
u/s.11B of SEBI Act, 1992 read with Regulation 12 of the SEBI
(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Market) Regulations, 1995 could be issued against him.� He further stated that the SEBI (Prohibition
of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations,
1995 were applicable w.e.f. 25.10.95 as notified by SEBI, whereas he had
entered into an agreement with M/s. Nathji Enterprises Pvt. Ltd., and M/s.
Krishna Texport and Capital Market Ltd. prior to this date. Findings. The purported agreement entered
into by Shri Gopal Khadaria with M/s. Nathji Enterprises Pvt. Ltd., was neither
dated nor signed and, therefore, has limited credibility.� Shri Gopal Khadaria has not responded to the
allegation that the delivery of 97,800 shares was not received by him but was
taken directly by M/s. Nathji Enterprises Pvt. Ltd. from MFL.� This arrangement certainly could not have
been possible without the knowledge and consent of Shri Gopal Khadaria. Shri Gopal Khadaria has not denied
his involvement in arranging finance for 6 applications for 60,00,000 shares in
the Public Issue of MFL.� The beneficial
interest of Shri Gopal Khadaria or of M/s. Nathji Enterprises Pvt. Ltd., was
not disclosed in these applications. Shri Gopal Khadaria provided finance for
irregular subscription to the Public Issue of MFL leading to irregular
allotments which facilitated artificially rise in the prices of MFL shares on
the secondary market and thereby inducing�
the sale or purchase of shares by the investing public. Even if the purported agreement
were entered into by Shri Gopal Khadaria with M/s. Nathji Enterprises Pvt.
Ltd., and M/s. Krishna Texport and Capital Market Ltd., prior to 25.10.95, the
implementation� the terms of agreements
i.e. delivery of shares and payments/receipts of funds were effected subsequent
to the notification of the SEBI (Prohibition of Fraudulent and Unfair Trade
Practices relating to Securities Market) Regulations, 1995 which would
therefore be applicable. I thus hold Shri Gopal Khadaria
guilty of the charges levelled against him�. What the SEBI has stated about the Appellant in the order is
also extracted below: �I�������� As per the investigation report, M/s.
Krishna Texport & Capital Market Ltd., (KTCML) provided finance to Shri
Gopal Khadaria for six multiple applications of 10 Lac shares of Rs.1.00 crore
each to the Public Issue of MFL made in the names of its nominees.� For this purpose, stockinvests of Rs.1 crore
each were obtained from State Bank of By indulging in falsification of
its books, accounts and records, KTCML resorted to financing of irregular and
late subscriptions to the Public Issue of MFL, resulting in irregular
allotments. II��������� In its reply, KTCML contended that it
provided financial accommodation on interest to Shri Gopal Khadaria.� All the stockinvests were taken against
deposits of M/s. Krishna Texport and Capital Market Ltd., from State Bank of FINDINGS KTCML has not responded to the
query that the 6 applications financed by it in the names of its nominees
were� in fact multiple applications.� During the personal hearing the representative
of KTCML had acknowledged that the beneficial interest of Shri Gopal Khadaria
was not disclosed in the applications.�
KTCML thus financed irregular subscriptions to the Public Issue of MFL,
resulting in irregular allotments and their subsequent sale to the associate
concerns of MFL.� These irregular
allotments thus facilitated� an
artificial rise in prices of MFL shares on the secondary market, thereby
inducing the sale or purchase of shares by the investing public. I thus hold Krishna Texport &
Capital Market Ltd., guilty of charges levelled against them.� ����������� When the
appeal was taken up for disposal, Shri D. J. Khabatta, learned Counsel
appearing for the Appellant explained the background in which the Respondent
SEBI had passed the order and stated that SEBI has ignored vital facts, that
would show non involvement of the Appellant in the pre public issue and post
public issue developments.� He submitted
that the Appellant�s involvement in the matter is only as a professional
financier, that it had advanced money in the normal� course of its business to Shri Gopal Khadaria
to earn interest after providing adequate safeguards, and it was in no way
connected or associated with the promoters of MFL and not a party to the
alleged manipulation in any manner.� In
this context he referred to the copy of the Agreement dated 7.10.1995 (the
Agreement) entered into between the Appellant and Gopal Khadaria (Respondent
No.2) and submitted that from the Scheme of the agreement it is clear that it
is essentially a funding agreement and such agreements are normally
entered� into by financiers while
advancing money to persons who seek funds for subscribing the shares offered in
public issues, that it has been made clear in the Agreement that the BORROWER
(i.e. Gopal Khadaria) was desirous of applying for 60 lakhs equity shares of
Rs.10/- each for an amount of Rs.6 crores out of the public issue of MFL, that
since he did� not have liquidity to pay
the application money he requested the INVESTOR (i.e. the Appellant) to provide
him financial accommodation to the extent of Rs.6 crores to enable him to apply
for the said shares and for the said financial accommodation,� he agreed to pay interest at the rate of 24%
per annum from the date of stockinvest to the date of allotment and also agreed
to pay interest @ 30% p.a. from the date the�
stockinvest gets debited into the bank�
to the date of final payment made by him, that in the event of funds not
refunded to the Appellant within seven days after intimation to take delivery
of the shares, he was required to pay interest @ 36% p.a.� In this context learned Counsel referred to
clause (f) of the Agreement which stipulated that �To ensure repayment of
Financial Accommodation BORROWER has offered to pledge in favour of the INVESTOR
the shares to be allotted by Manu Finlease Ltd. , and for this purpose has
suggested that the INVESTOR apply for the said shares in own name or in the
name of its nominees�� Learned Counsel in
support of his contention that the financial arrangement with Gopal Khadaria
was a purely financial arrangement and nothing more than that, referred to the
following terms and conditions of the Agreement dated 7.10.1995. �1.� ����� The INVESTOR shall provide Financial Accommodation�� of Rs.6,00,00,000/- to BORROWER from the date of the Stock Invest till the receipt of Share Certificates on allotment. 2.�������� In consideration of the INVESTOR
providing the said Financial ����������� Accommodation
to BORROWER,� BORROWER shall pay to the � INVESTOR interest at the rate mentioned in
para (d) & para (e) on page no.2 (exclusive
of the return on stock invest) for the said period. 3.�������� On or before the earliest closing date
the INVESTOR shall submit ������� application
for the said Equity Shares at the instance of BRROWER together with the application amounts agreed to be
provided to BORROWER as ����������� Financial
Public Issue of Manu Finlease Ltd. 4.�������� In the event allotment of the Shares is
not made or partly made by Manu ���������� Finlease
Ltd. such moneys are refunded by Manu Finlease Ltd. to the INVESTOR shall be
treated as repayment/part repayment of the Financial accommodation. 5.�������� The Shares allotted by Manu Finlease
Ltd. shall pledge to the INVESTOR ������ by
BORROWER to secure repayment of the above Financial accommodation. 6. ������� BORROWER has agreed to repay to the
INVESTOR the entire amount if for � any
reason, the allotment of Shares and/or refund of application money, as � the case may be, is not effected by Manu
Finlease Ltd. and / or the Registrar ��������� above,
BORROWER agrees that the entire amount of the financial assistance of
Rs.6,00,00,000 (Rupees Six Crores Only) or such part thereof, as may be shall
be repaid by them alongwith interest refund in clause �2� above to the
INVESTOR. 7.�������� BORROWER repaying the amount of
Rs.6,00,00,000/- to the INVESTOR ���� within
the prescribed time set out in the preceding Clauses, the INVESTOR� ������� shall
transfer/allow the Shares allotted to the INVESTOR be transferred to �� BORROWER pays the amount of Rs.6,00,00,000/-
(Rupees Six Crores Only) to the INVESTOR there fore the allotment of shares
and/or refund of application money is effected by the Registrars to the Issue,
the INVESTOR agrees that the Allotment Letter /Share Certificates and / or
Refund Warrant that may be received by them.�
Manu Finlease Ltd./ Registrar to the issue, will forthwith transferred
by them to BORROWER, in the case of allotment of shares and in the case of
refund, an amount equal to the amount refunded to the INVESTOR by Manu Finlease
Ltd. / Registrar to the Issue will be paid over to BORROWER by way of cheque
that will be issued in their favour.�
Stamp Duty payable on transfer of the shares to Manu Finlease Ltd. shall
be borned ���� in full by BORROWER. 8.�������� In the event BORROWER fails to repay
the amount due to the INVESTOR within 30 days after receiving intimation to
collect the delivery, the investor shall be entitled to sell the shares that
may be allotted to them by Manu Finlease Ltd./ Registrar to the Issue by
private sale or Public auction after giving one week�s notice in writing to
appropriate the amount due to them (net of the refund received from Manu Finlease
Ltd./ Registrars to the issue) inclusive of interest till that date and in case
of any shortfall; the same shall be made good by BORROWER.� Any surplus balance still remaining after the
appropriation to the INVESTOR, shall be transferred back to BORROWER. 9.�������� In the event that for any reason
whatsoever, the amount of financial accommodation is not refunded to the
INVESTOR within seven days after intimation to take/ lift the delivery.
BORROWER shall be liable to INVESTOR interest at the rate of 36% per annum. 10.
BORROWER agrees and undertakes that until the loan and
any other amount payable hereunder is repaid in full to the INVESTOR, BORROWER
shall not apply for duplicate certificate of shares allotted by Manu Finlease
Ltd pursuant to the Application made by the INVESTOR as contemplated therein. 11.
All the dividends or profits accruing on bonus or
right shares issued by Manu Finlease Ltd.�
on the shares allotted shall be appropriated to BORROWER under this
agreement and the same shall be transferred to the BORROWER immediately. 12.
Capital Gains, if any, accruing on sale of shares by
the INVESTOR will be to the account of the BORROWER, being the beneficial
owner.� ����������� Learned
Counsel refuting the Respondent�s contention that the Appellant knew of the
arrangement between Gopal Khadaria and others, submitted that the Appellant was
not at all aware of any such arrangements or intention of Shri Gopal Khadaria,
and in fact that being not even a charge levelled against the Appellant in the
show cause� notice, the Respondent is now
precluded from charging the Appellant on that ground.� In this context learned Counsel referred to
the show cause notice dated 6.2.1998 issued to the Appellant and submitted
that, it was not a charge that the Appellant knowingly financed� Gopal Khadaria to manipulate the market in
concert with Nathaji Enterprises, that it is too late for SEBI to level such a
charge in its reply affidavit.� He
referred to the following portion in the show cause notice dated 6.2.1998 in
this regard: �In terms of your agreement dated
7.10.95, you provided finance to Shri Gopal Khadaria for six multiple
applications of Rs.1 crore each to the public issue of MFL made in the name of
your nominees.� For this purpose
stockinvests of Rs.1 crore each were obtained from State Bank of Since the applications were made on
behalf of Shri Gopal Khadaria, a single application for 60 lakh shares should
have been made instead of six multiple applications of 10 lakh shares
each.� As the net offer to the public in
this ca se was for 11,80,000 shares, Shri Gopal Khadaria who was acting on
behalf of Nathji Enterprises P. Ltd., an associate concern of MFL, could not
have applied for more than 11,80,000 shares being the size of the public
issue.� Since the application was for
60,00,000 shares, this was conveniently sub divided in six multiple
applications of 10,00,000 shares each.�
This act resulted in irregular allotment of MFL shares to its promoters. It appears that you have thus
indulged in �fraudulent� act, as defined in regulation 2(1)( c ) of the SEBI
(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Market) Regulations, 1995, specifically prohibited under regulation� 3.� You
resorted to financing of irregular subscriptions to the public issue of
MGL.� These irregular allotments thus
facilitated an artificial rise in the price of MFL shares on the secondary
market, thereby inducing the sale or purchase of shares by the investing
public.� These acts are �market
manipulation� and �unfair trade practices� specifically prohibited under
regulation 4 and 6 of SEBI(Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 1995 respectively.� It is in the said�
background the Appellant was asked to show cause as to why a direction
under section 11B of the SEBI Act read with regulation 12 of the FUTP
Regulations should not be issued against it. ����������� Shri Khambatta submitted that from
the sequence of events also it is clear that the Appellant had only provided
financial accommodation in return for interest, that the funding Agreement was
executed on 7.10.1995, that the MFL�s Public Issue remained open during the
period 14.10.1995 to 18.10.1995, that the Appellant made applications on
18.10.1995, that the applications were made in the name of six persons
(nominees) as instructed by the Borrower, that even though 10,00,000 shares
were applied for by each nominee applicant, only 16,300 shares were allotted to
each one totaling 97,800 shares,� and the
purchase consideration for the same was only Rs.9,78,000/-, that this amount
was debited to the current account of the Appellant for the reason that the
Appellant had instructed the State Bank of Indore to debit the aforesaid amount
to the current account as otherwise the State Bank of Indore, as per its
practice would have broken up the
fixed deposit of Rs.6 crores against which the stockinvests were issued, and
that would have resulted in loss of interest on the said fixed deposit to the
Appellant.� He submitted that as soon as
the shares were allotted the same were handed over to Gopal Khadaria with blank
transfer forms on 27.12.1995 and in the transaction the Appellant received
Rs.25,64,383 by way of interest.� In this context he referred to the copy of
the accounts statements of the Appellant furnished to SEBI vide letter dated
23.10.1996 filed along with the appeal, which clearly indicated that stockinvests
for Rs.9,78,000 were debited to the Appellant�s account on 27.12.1995, that in
the said letter the names of the nominee Applicants and the details of the
stockinvests furnished to MFL were also stated.�
����������� Learned Counsel submitted that the
adjudicating authority has passed the impugned order going beyond the scope of
the show cause notice and therefore the order is bad and deserves to be set aside.�
In this context he referred to the show cause notice dated 6.2.1998 and
submitted that the only charge against the Appellant is that it made 6 multiple
applications and the same resulted in irregular allotment.� He submitted that it is not a charge against
the Appellant that it acted in connivance with any other person, or that it
acted with an intention to defraud
anybody or that it indulged in falsification of the records.� He submitted that the Respondent has referred
to only one document in the show cause notice based on which the charges were
levelled and that document is the Agreement dated 7.10.1995 entered into
between the Appellant and Shri Gopal Khadaria and no other material or document
has been referred to and provided to the Appellant.� Therefore the Respondent is precluded from relying on any other document/material while
adjudicating the show cause notice or defending its order under challenge in
the appeal proceedings.� He submitted
that the Respondent in its reply has referred to an unsigned draft agreement
dated 30.9.95 between Gopal Khadaria and M/s. Nathji Enterprises, stated to
have been given by Gopal Khadaria vide his letter dated 18.11.1996 allegedly
showing that both the parties had reached an understanding that Shri Gopal
Khadaria would arrange finance/share applications for� 60 lakh shares on behalf of Nathji
Enterprises in the public issue, that�
the said letter and the agreement though were in the possession of the
Respondent in the year 1996 no reference to the same was made� in the show cause notice and a copy of the
same was never made available to the Appellant.�
Learned Counsel submitted that in the context of the limited charge
levelled against the Appellant it had answered only the said charge in its
reply dated 18.2.1998 and referred to the same filed with the appeal that: �we
reiterate that this was purely a financial accommodation given on interest to
Shri Gopal Khadaria.� All the Stock
Invests were taken� against the deposits
of the company from the State Bank of We wish to
particularly emphasise that we were neither a party to nor even aware of Shri
Gopal Khadaria acting on behalf of any one else and we therefore pray that the
proposal for issue of any direction U/S.11B of SEBI Act, 1992 read with
regulation 12 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 1995 may kindly be dropped.� Shri
Khambatta referred to the Respondent�s observation in the order based on its
investigation that the Prospectus had banned making multiple applications and
the consequence of multiple applications was also mentioned therein that �the
multiple applications are liable to be rejected.�� According to the Respondent: �State Bank
of Indore Dadar(W) Mumbai issued 6 stock invests of Rs.1 crore each used in the
Public issue of MFL which were issued to various individuals against the
deposit of M/s. Krishna Texport and Capital Market Ltd., (hereinafter referred
to as KTCML)� In terms of an agreement
dated 7.10.1995, KTCML provided these stock invests with each application for
10 lakh shares in the� name of its
nominees to another financier namely Shri Gopal Khadaria.� Since all the applications were made on
behalf of Shri Gopal Khadaria, a� single
application should have been made instead of 6 multiple application of 10 lac
each, which were liable for rejection being multiple applications. As per the
prospectus of MFL, an applicant should submit only one application form (and
not more than one) for the total number of equity shares required.� It was also mentioned that multiple applications
are liable for rejection.� Thus multiple
share applications made by KTCM L in the name of its nominees on behalf of Shri
Gopal Khadaria should have been rejected.�
However, these multiple applications were accepted, which resulted in
irregular allotment of 97,800 shares. These
shares were later delivered by Shri Gopal Khadaria to M/s. Nathji Enterprises
an associate concern of MFL.� Shri Gopal
Khadaria was introduced by M/s. DB India Securities to the MFL for the purpose
of financing the public issue of MFL� ����������� Learned Counsel submitted that the
Respondent itself has admitted that the multiple applications though should
have been rejected, were entertained and irregular allotments were made.� The Respondent has ignored the fact that the
allotments were made by MFL and not the Appellant and for making irregular
allotment MFL is to be held liable and not the Appellant. Learned
Counsel submitted that the Appellant was not aware of the transactions effected
by Gopal Khadaria after the Appellant delivered the shares to him and that Shri
Khadaria was not an agent or associate of the Appellant, that the relationship
between the Appellant and Shri Khadaria was purely commercial and on compliance
of the terms and conditions of the Agreement�
there was nothing left for the Appellant to follow up and the Agreement
ceased to operate. Learned
Counsel submitted that SEBI in its order having come to the conclusion that the
Appellant made multiple applications and having admitted that the share
applications were made in the names of the Appellant�s nominees has gone to the
extent of accusing the Appellant �for the realisation of proceeds of stocks
invests against allotment of MFL shares adjusted in the current account of the
Appellant and not in the bank accounts of�
the allottees� ignoring the fact that those allottees were the nominees
of the Appellant itself and that shares would be in the possession of the
Appellant till such time Shri Gopal Khadaria returned the money paid against
those shares.� He submitted that the
transaction was done by debiting in the Appellant�s current account itself, for
the simple reason to avoid unnecessary loss to the Appellant as otherwise the
fixed deposit of Rupees six crores against which stock invests were issued
would have been broken for the purpose of realisation of such small amount,
causing heavy loss� by way of interest. Learned
Counsel reiterated that only charge made against it is making multiple
applications and for making the multiple applications the consequence stated in
the prospectus was to visit the person.�
In this connection he referred to the following paragraph in the
Prospectus on multiple application,�
under the para with the heading�Multiple Applications liable for
rejection�� that �An applicant should
submit only one application form (and not more than one) under any of the
categories of the total number of Equity shares required.� Two or more applications in single or joint
names will be deemed to be multiple applications, if the sole and/or the first
applicant is one and the same.� The Board
reserves the right to reject in its absolute discretion all or any of the
multiple applications.�� He submitted
that thus it was for the Board of the company to decide as to whether the
multiple applications should be rejected or not and certainly not a matter
attracting the provisions of FUTP Regulations.�
����������� Learned Counsel submitted that the
charge against the Appellant is that it indulged in market manipulation
attracting action under the FUTP Regulations, that this charge can not stick as
the FUTP Regulations came into force only on 25.10.1995 whereas the cause of
the alleged action relates to a period�
before� the notification of the
FUTP Regulations in as much as the�
Agreement between the Appellant and Gopal Khadaria was executed on
7.10.1995, that the MFL�s public issue was
opened on 14.10.1995 and closed on 18.10.1995 and the Appellant had made
applications through nominees� on
18.10.1995 and thereafter there was no action from the Appellant�s side.� Learned Counsel submitted that since show
cause notice itself refers to violation of FUTP Regulations, the Respondent can not invoke the provisions of
section 11 for the violation of a non existent Regulation at the point of
time.� He further submitted that even if
it is assumed for argument sake that the FUTP Regulations attracted to the
facts of the case, still the alleged action is not one prohibited under
regulations 3,4,5 or 6 of the FUTP Regulations.�
He submitted that according to regulation 3, no person shall buy, sell
or otherwise deal in securities in a fraudulent manner.� It is not the Respondent�s case that the
Appellant had indulged in buying or selling or otherwise dealing in securities
in a fraudulent manner, that the charge is making multiple applications.� He referred to the ingredients of regulation
4 and submitted that making multiple applications in a public issue does not
fit in any of the sub clauses of the regulation to consider that the Appellant
indulged in market manipulation attracting the said regulation.� Since the Appellant had not made any
misleading statement to induce sale or purchase of securities regulation 5 has
also no application.� He also referred to
the provisions of clauses 6(a) to (e) of the FUTP Regulations and submitted
that none of the provisions attracted.�
However, in the light of the allegation of �fraud� levelled in the
order, learned Counsel referred to regulation 6(a) and submitted that as per
the said clause (a) �no person shall in the course of his business, knowingly
engage in any act� or practice which
would operate as a fraud upon any person in connection with the purchase or
sale or any other dealing in securities.��
Learned Counsel submitted that regulation 6(a) attracts only if a person
in the course of his business knowingly engage in any act or practice
which would operate as fraud, that the intention of the party in this regard is
thus an important factor for the purpose of regulation 6(a).� He submitted that in this context the definition
of the expression �fraud� in the regulation need also be looked into, that the
ingredients of �fraud� includes �intent to deceive another� and the show cause
notice does not attribute any such �intention to deceive� on the part of the
Appellant.� He further submitted that
even if it is assumed that there is allegation of fraud against the Appellant,
the Respondent cannot simply make the allegations and get away with it without
producing adequate evidence in support of the charge.� In this context he referred to the
observation made by the Hon�ble Supreme Court in Barium Chemicals Ltd. V
Company Law Board (AIR 1967 SC 295) that mere repetition� of the provision of the law is not adequate
when the charge is alleged, that the material based on which such charge is
levelled need be disclosed in the notice.�
He submitted that when fraud is alleged test of evidence is strict and
surmises and conjunctures are not adequate.��
In support of the contention that sufficient proof is required when
fraud is alleged,� learned Counsel
referred to the observation made by Privy Council in Hansraj Gupta V Dehra Dun
Mussoorie Electric Tramway Ltd. (AIR 1940 Privy Council 98) that �the party
alleging fraud is bound to establish it by cogent evidence and suspicion can
not be accepted as proof.� Unless
therefore the proved circumstances are incompatible with the hypothesis of the
person charged with fraud having acted�
in good faith, they can not be accepted as affording sufficient proof of
fraud.�� He submitted that SEBI except
making wild allegation has not put forward any convincing evidence to establish
the charge of fraud.� Learned Counsel
submitted that if making multiple application is fraud, then every person
making such application would be considered as fraudster, and that would really
be a mockery,� that the Respondent has
not stated as to how making multiple application would amount to fraud in terms of regulation 2 (1) (c
) of the FUTP Regulations and in the absence of any explanation in this regard
the Appellant is not in a position to meet the said charge.� In this context he referred to the
observation made by the Hon�ble Supreme Court in B.D. Gupta V State of Haryana
(1973) 3 SCC 149) that a show cause notice not giving the noticee the real
opportunity to defend himself against the charge is not an adequate show cause
notice and based on such a show cause if any action is taken the order taking
such action is bad and liable to be struck down.� He submitted that the said ratio is in equal
force applicable to the Appellant�s case and the order passed by the Respondent
deserves to be set aside because of the inadequate show cause notice.� Learned Counsel also cited Hon�ble Supreme
Court�s decision in Tarlochan Dev Sharma V State of Punjab (2001) 6 SCC 260) to
buttress his argument that an order passed at variance from the show cause
notice of which noticee was not even made aware of, is untenable. � ����������� Shri Khambatta referred to the reply
filed by the Respondent and submitted that through the said reply the
Respondent is making an attempt to bring in new charges and material which is
not permissible, that the purpose of filing reply in an appeal proceeding is
not to supplant� the order which is� under challenge and as such the additional
charges or material being smuggled in now by SEBI through its reply be discarded. ����������� Learned Counsel submitted that the
Respondent has issued the directions�
under section 11B of the SEBI Act and regulation 12 of the FUTP
Regulations.� He submitted that the scope
of the directions which can be issued under regulation 12 is circumscribed by
the Regulation itself in clause (a) to (d) under the said regulation that:������ (a) directing the person concerned not to
deal in securities in any manner (b) requiring the person concerned to call
upon any of its officers, other employees or representatives to refrain from
dealing in securities in any particular manner (c) prohibiting the person
concerned from disposing of any of the securities acquired in contravention of
the FUTP Regulations and (d) directing the person concerned to dispose of any
such securities acquired in contravention of the FUTP Regulations in such
manner as the Board may deem fit for restoring the status quo.� Learned Counsel submitted that the direction
debarring the Appellant �from accessing and being associated with the capital
market��� for a period of five years is
not a direction contemplated under regulation 12.� Learned Counsel further submitted that
section 11B is also not available to issue such a direction as the impugned
order is out and� out punitive and
section 11B is not available to issue such punitive directions has been made
clear by this Tribunal in its order in Sterlite Industries Ltd. V SEBI ((2001)
34 SCL 485) that �Section 11B does� not
even remotely empower the Respondent to impose penalties� that the Tribunal has
been consistently following the said view in other cases also, and he also
cited BPL Ltd., V SEBI ((2002) 38 SCL 310) in support thereof. ����������� Learned Counsel submitted that
penalty is not imposable in a case where the offence was not committed in willful disobedience of law and that the
Appellant had not committed any offence willfully in disobedience of the law
and as such did not deserve any penalty.�
In support of the same, learned Counsel cited the decision of the
Hon�ble Supreme Court in Hindustan Steel Ltd. V State of Orissa 1969 (2) SCC
627) that �an order imposing penalty for failure to carry out a statutory
obligation is the result of a quasi criminal proceeding, and penalty will not
ordinarily be imposed unless the party obliged either acted deliberately in
defiance of law or was guilty of conduct contumacious or dishonest or acted in
conscious disregard of its obligation.��
Learned Counsel submitted that this Tribunal had followed the principles
laid down by the Hon�ble Supreme Court in Hindustan Steel case in several cases
including Kensington Investment Ltd., V SEBI ((2002) 40 SCL 170 (Sat)). ����������� Shri Khambatta submitted that the
impugned order having been issued after an undue delay of 7 years is bad and
deserves to be set aside.� In this
context he cited the observation made by the Hon�ble Bombay High Court in
Universal Agencies P. Ltd. V Union of India (1993 (68) ELT 27 (Bom) ) holding
that imposition of penalty, if at all, after a lapse of ten years is not just
and fair and on that ground the belated adjudication order was set aside.� He also referred to the observation made by
the Hon�ble Supreme Court in Collector of Central Excise V Raghuvir (India)
Ltd. (2000)5 SCC 299 that �Any law or stipulation prescribing a period of
limitation to do or not to do a thing after the expiry of the period stipulated
has the consequence of creation and destruction of rights and, therefore, must
be specifically enacted and prescribed therefor.� It is not for the courts to import any
specific period of limitation by implication, where there is really none,
though courts may always hold when any such exercise of power had the effect of
disturbing rights of a citizen that it should be exercised within a reasonable
period.�� Learned Counsel submitted that
the impugned order dated 29.11.2002 relates to an action allegedly taken in
October, 1995,� i.e. after a delay of
more than 7 years,� and the Respondent
has� not explained the delay.� He submitted that in any case the delay was
not on account of the Appellant. ����������� Learned Counsel submitted that the
impugned order is not to be sustained on any count. ����������� Shri Kumar Desai appearing for the
Respondent submitted that there is a procedural defect in the appeal.� Shri�
Gopal Khadaria has been arrayed as a Respondent in the present appeal
for no reason and his name be deleted. ����������� Shri Desai countering the
Appellant�s contention that FUTP Regulation has no application to the case,
submitted that there is a chain of action from the signing of the Agreement on
7.10.1995 to the handing over of the share certificates on receipt of allotment
to Shri Gopal Khadaria on 27.12.1995 and the chain of action did not stop with
the submission of application for shares on 18.10.95 but reached atleast upto
27.12.95, if not thereafter.� He submitted
that the Appellant�s contention that since the FUTP Regulation was notified on
25.10.95, the alleged charges are beyond the jurisdiction of the said
Regulation is therefore untenable. ����������� Shri Desai submitted that the
Appellant�s version that it was unaware of the design of Shri Gopal Khadaria to
manipulate the market in concert with others is baseless as could be seen from
the fact that the Appellant had agreed to advance Rs.6 crores to Shri Khadaria,
having even stated by him that at that time he had no liquidity to pay the
application money and further that by way of security for such huge amount the
Appellant agreed to take only the shares which were expected to be allotted to
Shri Khadaria.� He further submitted that
the Appellant was not unaware of the fact
that the number of shares offered to the public was only 11,80,000 and
still it decided to make six applications, each seeking 10 lakh shares� i.e. 60 lakh shares against the total number
of 11,80,000 shares offered to the public.�
He submitted that obviously the intention of the Appellant was to give
an impression to the gullible investors that the Public Issue of the
company was oversubscribed by several times so as to lure the investors to buy
the shares from the promoters in the secondary market.� The Appellant being an experienced financier
can not be unaware of the game plan Shri Khadaria and others had designed and
it can not now claim that it was unaware of the same.� He submitted that the Appellant has not
explained as to why 6 applications were made instead of one, if it was that
ignorant of the design of Shri Gopal Khadaria.�
Learned Counsel submitted that 6 applications were made only to show
that the applicants were independent and that the fact as to who is the
beneficial owner was deliberately suppressed in the application, so that each
application would be treated separately and allotment is made to each one of
them, that those multiple applications resulted in irregular allotment
adversely affecting the interest of the genuine investors.� Shri Desai further submitted that according
to the Appellant applications were given for shares on 18.10.1995 along with
stockinvests and the funding agreement was executed on 7.10.1995 i.e. 10 days
before the agreement.� In this context he
submitted that the details of the applicants and stockinvests are found in the
Agreement which raises doubt as to the authenticity of the execution of the
agreement itself on 7.10.95, and that in any case this also raises doubt on the
bonafide of the transaction.� In this
context he referred to the letter dated 23.10.1996 of the Appellant forming
part of the appeal papers. Shri Desai
submitted that from the Appellant�s letter dated 23.10.1996 to SEBI it is also
clear that the Appellant received its�
interest money even before the share allotment was made. ����������� Shri Desai submitted that the
impugned order is well within the scope of the show cause notice and not
outside the purview of the notice as has been alleged.� In this connection he referred to the show
cause notice and submitted that the charge against the Appellant is that it
indulged in �fraudulent act� specifically provided under regulation 3 of the
FUTP Regulations and that reference to the fact that the Appellant made
multiple applications in the nominees� names without disclosing the name of the
beneficiary owner and the realisation proceeds of the stock invests were
adjusted in the current account of the Appellant and not in the bank accounts
of the allottees etc. are made in support of the charge.� Shri Desai submitted that the very fact of
making 6� applications on behalf of Shri
Gopal Khadaria, instead of making one application itself is indicative of the
fact that the Appellant was fully aware of the game plan to manipulate the
market and that it was an active party to the fraudulent action designed to
manipulate the market.� He submitted that
the 6 applications were made to pre empt allotment of shares to that extent to
the public, so as to enable the promoters to grab the shares, that but for such
multiple application, those shares would have gone to the other genuine
applicants.� In the said context the
Appellant who made such applications can not claim ignorance and innocence
stating that its role was only that of financier.� Shri Desai submitted that fraud is implicit
when the charge is that the Appellant was a party to the irregular
allotment.� Shri Desai submitted that the
evidence has not been brought on record to show that the Appellant directly
knew Nathji Enterprises.� But in the
totality of the facts and circumstances and the manner in which payment was
made and received and by making multiple applications etc. it is evident that
the Appellant was also a party to the fraudulent activities indulged in by Shri
Gopal Khadaria with the promoters and associates of MFL. ����������� Learned Counsel submitted that in
the impugned order the Respondent has clearly stated the role of the Appellant
along with few others in arranging irregular subscription toward the Public
Issue of MFL resulting in irregular allotment, that the irregular allotment
facilitated in artificial rise in price of MFL shares on the secondary market,
thereby inducing sale or purchase of shares by the investing public and the
action of the Appellant accordingly is fraud in terms of� regulation 2(1) ( c ) of the FUTP
Regulations.� He submitted that financing
an irregular issue is a fraudulent action. ����������� Shri Desai submitted that the
charges having been proved
categorically, logically the consequences should follow.� It is in the said context the impugned
directions were issued and the Respondent is competent in terms of section 11B
read with regulation 12 of the FUTP Regulations to issue corrective and
remedial measure.� He submitted that the
impugned direction is� not a punitive
order but an order to prevent such activities by the persons involved, that the
objective behind the direction is to disable the Appellant from repeating such
unfair activities for���������� some time
atleast.� Learned Counsel submitted that
the Tribunal in Sterlite case (supra) has not held that the Respondent is not
empowered to take remedial or preventive measures, that in fact the Tribunal
has accepted that under section 11B preventive and remedial measures can be
taken.� Shri Desai submitted that the
Tribunal in Anand Rathi V SEBI ((2002) 35 SCL 1) has held that direction which
is relatable to the conduct of the accused, can be issued under section 11B of
the Act, that in the instant case such nexus has been established.� With reference to the Appellant�s reliance on
Hindustan Steel case (supra) learned Counsel submitted that the Appellant�s
case is different from the facts in the said Hindustan Steel�s case, that it
has been demonstrated in the present case�
that the Appellant had willfully and intentionally acted to defraud
the� investors.� According to Shri Desai� the Appellant�s contention that since the
impugned order was issued after a delay of 7 years and therefore in the light
of the� Hon�ble Bombay High Court�s
observation in Universal Agencies (supra) and the Hon�ble Supreme Court in
Collector of Central Excise (supra) no action is called for now, is baseless
for the reason that investigation of market manipulation is a time taking
process requiring collection of evidence and the Respondent had not delayed the
investigation intentionally and as a result of the delay, even if there is such
delay, the Appellant has not in any way suffered.� ����������� Shri Desai submitted that Barium
Chemical�s case cited by the Appellant is not relevant to the present case, as
it was in the case of an investigation ordered by Company Law Board under
section 237 of the Companies Act, and the said section requires, the competent
authority before ordering an investigation to satisfy that there were
circumstances, as stated in the section, warranting such an investigation, that
there is no such pre requisite under the SEBI Act.� He further submitted that the observation
made by the Privy Council in Hansraj Gupta on the test of evidence in cases
alleging� fraud has been fully satisfied
in the present case.� He further
submitted that the Hon�ble Supreme Court�s decision in B D Gupta�s case relied
on by the Appellant in support of the contention that the show cause notice is
inadequate,� Shri Desai submitted that it
was a case relating to the notice sent to a labourer, a lay man, but that is
not the case of the Appellant which is a professional with adequate expertise
available at its command and it was in a position to understand the charges
clearly.�� He submitted that the show
cause notice issued to the Appellant is self explanatory and the impugned order
has not strayed away from the said notice and therefore Trilochan Dev Sharma�s
case relied on by the Appellant has also no application to the case.� He submitted that the Appellant�s contention
that SEBI is attempting to improve its case through its reply is baseless as in
the reply SEBI has only evaluated the material information already known to the
Appellant. ����������� According to the learned Counsel the
findings in the impugned order are based on facts and the directions issued
being preventive, well within the powers of the Respondent the order deserves
to be sustained. ����������� I�
have carefully considered the rival contentions and the material on
record.� The core charge against the
Appellant as per the show cause notice dated 6.2.1998 is that it �indulged in
fraudulent act� as defined in regulation 2 (1) (c ) of the FUTP
Regulations.� This charge is based� on the Respondent�s finding that the
Appellant �resorted to financing of irregular subscriptions to the public issue
of MFL, resulting in irregular allotments and their subsequent sale to the
associate concerns of MFL.��
According� to the Respondent these
irregular allotments �facilitated an artificial rise in the prices of MFL
shares on the secondary market, thereby inducing the sale or purchase of shares
by investing public� and �these acts are market manipulations� and �unfair
trade practices� specifically prohibited under regulation 4 and 6 of the FUTP
Regulations respectively.� The root cause
of the irregular allotment according to the Respondent is the Appellant making
six separate applications --� multiple
applications - each seeking 10 lakh shares, totaling 60 lakh shares, as against
11,80,000 shares offered to the public by MFL.�
According to the Respondent�� ,
�on listing MFL share opened at Rs.48/- (as against the issue price of Rs.10/-)
on 2.1.1996 and moved to Rs.70 on 26.3.1996 at Delhi Stock Exchange (DSE) and
receded to Rs.54/- on 3.6.1996.� The
major buying in the scrip at DSE was by DBISL (i.e. DB (India) Securities
Ltd.,) on behalf of M/s. Glory Securities Ltd., an associate concern of MFL and
its directors.� An associate concern of
M/s. Glory Securities Ltd., namely M/s. Goodwill Investment also made large
buying in the scrip at DSE.� Their buying
at DSE was responsible for causing an unusual price movement in the scrip.�
(emphasis supplied).� Thus the Respondent
has clearly identified the persons responsible for causing artificial price
movement in the scrip of MFL.� ����������� The order deals with the role of
several players.� Appellant is one among
them.� The Appellant has not been
identified as having bought shares causing unusual price movement in the scrip.� The�
charge against the Appellant is confined to financing irregular
applications resulting in irregular allotment which resulted in market
manipulation.� What the Respondent� has stated about the Appellant�s role in the
process need be examined in this context .�
This is what the Respondent has stated in the impugned order: I���������� As per the investigation report, M/s.
Krishna Texport & Capital Market Ltd., (KTCML) provided finance to Shri
Gopal Khadaria for six multiple applications of 10 lac shares of Rs.1.00 crore
each to the Public Issue of MFL made in the names of its nominees.� For this purpose, stockinvests of Rs.1 crore
each were obtained from State Bank of Indore, Dadar (W) Mumbai in the names of
these nominees against deposits of KTCML with the bank.� The share applications were made in the names
of KTCML nominees and allotments obtained.�
The beneficial ownership of these applications was not disclosed.� The realisation proceeds of stockinvests
against allotment of MFL shares were adjusted in the Current Account of KTCML
and not in the bank accounts of the allottees. By indulging in falsification of
its books, accounts and records, KTCML resorted to financing of irregular and
late subscriptions to the Public Issue of MFL, resulting in irregular
allotments. II��������� In its reply, KTCML� contended that it provided financial
accommodation on interest to Shri Gopal Khadaria.� All the stockinvests were taken against
deposits of M/s. Krishna Texport and Capital Market Ltd., from State Bank of
Indore, Dadar and after allotment the shares were� handed over to Shri Gopal Khadaria.� It was also stated that no shares were sold
to any associate concern of MFL directly by KTCML and that they had no
knowledge of Shri Gopal Khadaria acting on behalf of any other person�. (emphasis supplied) In the said context the Respondent has stated that: �KTCML has not responded to the
query that the 6 applications financed by it in the names of its nominees
were� in fact multiple applications.� During the personal hearing the
representative of KTCML had acknowledged that the beneficial interest of Shri
Gopal Khadaria was not disclosed in the applications.� KTCML thus financed irregular
subscriptions to the Public Issue of MFL, resulting in irregular allotments and
their subsequent sale to the associate concerns of MFL.��� These irregular allotments thus facilitated� an artificial rise in prices of MFL shares on
the secondary market, thereby inducing the sale or purchase of shares by
the investing public.� (emphasis supplied) It is on the basis stated above, the Respondent found the
Appellant guilty of violating the provisions of regulations 4 and 6 of the FUTP
Regulations.� It is not in dispute that
the Appellant had made 6 applications through its nominees for a total of 60
lac shares of MFL.� There is� no charge against the Appellant about any
manipulation in obtaining the stock invest etc. as has been alleged in the
order against some others.� Stock Invests
were obtained from State Bank of Indore, Dadar (Mumbai)� against the fixed deposit of Rs.6 crores
remaining with the said bank in the name of the Appellant. It is to be noted that as per the
order it was the irregular allotment which facilitated artificial rise in price
of MFL shares.� Thus the artificial rise
in the price of the scrip is now� attributed
to the irregular allotment of shares.� In
this context it is to be noted that the�
Respondent in the same order has attributed the cause for unusual price
movement to large buying in the scrip at DSE for Glory Securities.� It is�
to be noted that the shares are actually allotted by the issuer
companies following certain procedures as per the advice of the allotment
committee representing various interests. The share applications received in
response to the public issue are processed by the Registrar to Issue and the
Registrar is also� supposed to act
diligently while processing the applications. It is not that the issuer company
has no responsibility in the matter.� It
is also equally responsible to ensure that the allotments are made in the
proper manner. �It is to be noted that making multiple
applications is not an offence.� In fact
the consequences of making fictitious applications have been indicated in the
Prospectus itself by clearly stating that the multiple applications are liable
to be rejected.� In this context it is to
be noted that submitting multiple applications are different from submitting
applications in fictitious names for subscription.� Section 68A of the
Companies� Act 1956 provides penalty by
way of imprisonment upto 5 years to those persons who� make applications in fictitious names.� No penalty has been provided in the Companies
Act for making multiple applications, as it is not an offence under the said
Act.� It is an admitted� fact that one of the business activities of
the Appellant is that of financing.� The
Appellant has claimed that it is a professional financier.� It advances money against high rate of
interest.� In the instant case also it
had done the same thing.� It agreed to provide
financial accommodation to the tune of�
Rs.6 crores to Gopal Khadaria against 24% interest per annum.� In this context the Agreement dated 7.10.1995
entered into between the Appellant and the said Gopal Khadaria assumes
relevance.� It is to be noted that
whether the terms and conditions of the agreement was adequate or not or that
security offered by the borrower was
adequate to cover the risk involved etc. are not matters of concern to
others.� Risk coverage is the concern of
the lender.� It is for the lender to
protect his interest.� If he fails to
exercise requisite diligence, then he is the person to face the consequences.� On a perusal of the Agreement dated 7.10.1995
I find that Shri Gopal Khadaria had stated the reason for seeeking financial
accommodation from the Appellant.� He had
no choice but to state the reason that the rest of the structure of the agreement
from the angle of security against the loan provided therein is linked to the
shares which he was planning to purchase.�
It is true that the Appellant has advanced application money to the
extent of Rs.6 crores through stock invests to subscribe for 60 lakh shares,
though the net public offer was only for 11,80,000 shares.� The Respondent has taken this as a major
point to establish the role of the Appellant in the alleged market
manipulation.� In� this context it is to be noted that the
Appellant is a financier.� It�s goal is
to maximise its profit.� By giving large
sum for short duration by way of advances, its gain through interest collection
increases.� The financier as such is not
normally expected to exercise any control on the number of shares one proposes to purchase in� a public issue for which financial
accommodation is availed from the financier.�
The Appellant, in my view, undoubtedly knew the total number of shares offered
to the public by MFL and also that Shri Gopal Khadaria was applying for more
shares than the total quantity of shares offered to the public. It is to be
noted that the Appellant was acting as financier for maximising his profit
and� not as a counsellor to the borrower.
The Appellant had agreed to give financial accommodation upto a sum of Rs.6
crores and it had put safe guards considered necessary to protect its� interests.�
In that context how the said Rs.6 crores was to be utilised was a matter
for the borrower to decide.� Borrower
desired to make 6 applications.,� The Appellant
made six applications in the name of the nominees of the Appellant.� It was necessary to apply in the name of� nominees of the Appellant to protect its� interest as the shares to be allotted was to
be kept with the Appellant as security.��
On receipt of� shares and
receiving the interest on the entire Rs.6 crores from Shri Gopal Khadaria,� the Appellant handed over the shares to Shri
Gopal Khadaria and with that the Agreement ceased to be operative.� In this context it is to be noted that the
Appellant handed over the shares to Shri Gopal Khadaria.� It did not trade in those shares.� It acted as per the terms of the
agreement.��� It is also to be noted that
against 60 lakh shares applied for, the Appellant�s nominees� received only 97,800 shares which accounted
only for 8.28% of the net shares issued to the public.� The percentage is still less at 4.65% if the
total public issue of 21,00,000 shares is taken as the base.� There is nothing on record to show the
Appellant�s involvement after the closure of the transactions covered in the
Agreement dated 7.10.1995. The Respondent �has not brought any
evidence on record to show that the Appellant was aware of the design of Shri
Khadaria and Nathji Enterprises as alleged.�
There is nothing on record to show that the Appellant was aware of what
transpired between Shri Khadaria and Nathji Enterprises.� In fact the Respondent had gone on record by
saying that �the purported agreement entered into by Shri Gopal Khadaria with
M/s. Nathji Enterprises P. Ltd. was neither dated nor signed and therefore has
limited credibility.�� As the said
document is not acceptable even to nail Shri Gopal Khadaria, certainly it can�t
be used to book the Appellant.� In this
case it is also to be noted that existence of such an unsigned agreement was
never brought to the� notice of the
Appellant, during the enquiry proceedings.�
It is not known as to whether the statement of Shri Gopal Khadaria was
ever recorded.� In any case no such
statement is on record.� In the absence of any evidence to
show that the Appellant also knew the alleged designs of Shri Khadaria and the
promoters of MFL and intentionally participated in the market manipulation and
further in the context of the Respondent�s failure to establish the Appellant�s
nexus, if any, with the post allotment market manipulation allegedly indulged
in by others, the Appellant can not be held guilty of violating regulations 4
and 6 of the FUTP Regulations. The evidence on record shows that the Appellant
provided financial accommodation to Shri Khadaria to subscribe for the shares
offered in the public issue made by MFL and Rs2564383 by way of interest.� It is a legitimate business activity per
se.� It appears, in the absence of any
other evidence to show the contrary, that the Appellant�s interest was limited
to the extent of making gain out of the transaction and it succeeded in
achieving the said goal on receiving the promised interest.� The Respondent has alleged that the
Appellant had violated the provisions of regulations 4 and 6 of the FUTP
Regulations.� These regulations are as
under: Regulation - 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)
indulge in any act, which results in reflection of
prices of securities based on transactions that are not genuine trade
transactions; (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)
pay, offer or agree to pay or offer, directly or
indirectly,� to any person any money or
money�s worth for inducing another person to purchase or sell any security with
the sole object of inflating, depressing, or causing fluctuation in the market
price of securities.� (emphasis supplied). Regulation - 6 �No person shall � (a)
in the course of his business, knowingly engaged in
any act, or practice which would operate as a fraud upon any person in
connection with the purchase or sale of, or any other dealing in, any
securities; (b)
on his own behalf or on behalf of any person, knowingly
buy, sell or otherwise deal in securities, pending the execution of any
order of his client relating to the same security for purchase, sale or other
dealings in respect of securities. Nothing contained in this clause
shall apply where according to the clients instruction, the transaction for the
client is to be effected only under specified conditions or in specified� circumstances; (c)
intentionally and�
in contravention of any law for the time being� in force delays the transfer of securities in
the name of the transferee or the despatch�
of securities or connected documents to any transferee; (d)
(d) indulge in falsification of the books, accounts
and records (whether maintained manually or in computer or in any other form); (e)
when acting as an agent, execute a transaction� with a client at a price other than the price
at which the transaction was executed by him, whether on a stock exchange or
otherwise, or at a price other than the price at which it was set off against
the transaction of another client. (emphasis supplied) The expression �fraud� has been
defined� in regulation� 2(1)( c ) as�
under: ( c) �fraud� includes any of the
following acts committed by a party to a contract or with his connivance, or by
his agent, with intent to deceive another party thereto or his agent, or to
induce him to enter into the contract:- (1)
the suggestion, as to a fact, of that which is not
true, by one who does not believe it to be true; (2)
the active concealment of a fact by one having
knowledge or belief of the fact; (3)
a promise made without any intention of performing it; (4)
any other act fitted to deceive; (5)
any such act or omission as the law specially declares
to be fraudulent;� and �fraudulent� shall
be construed accordingly. Explanation.�Mere silence as to facts likely to affect the
willingness of a person to enter into a contract is� not fraud, unless the circumstances of the
case are such that regard being had to them , it is the duty of the person
keeping silence to speak, or unless his silence is in itself equivalent to
speech; I have carefully considered the
Respondent�s submissions on the charge that the Appellant had violated the
provisions of regulation 4 and 6 in the light of the provisions of FUTP
Regulations.� But I do not find any
material on record� in support of the
said charge.� A wild allegation of market
manipulation, in particular the charge of fraudulent action unsupported with
convincing evidence is not to be sustained.�
I fully agree with Shri Khambatta�s submission in this regard that
allegation of �fraud� can not survive on mere conjectures and surmises.� �Financing irregular subscriptions resulting
in irregular allotment� by� itself can
not be considered as fraud and in violation of regulation�� 4 or 6 of the FUTP Regulations.� If somebody unconnected with the financier,
who had only borrowed money from the financier to subscribe for the shares in a
public issue, subsequently makes use of the shares received� in an�
irregular allotment, to manipulate the market,� on that ground alone� in the absence of any positive evidence
against the financier that he had intentionally�
made available finances so as to enable the other person to manipulate
the market, the financier can not be held guilty of market manipulation. Real
nexus of the financier � directly or indirectly�
- with� the market manipulation
has to be established to hold the financier guilty.�� In my view the Respondent has failed to
establish violation of the provisions of FUTP Regulations as stated in the show
cause notice against the Appellant.�
Therefore the impugned order can not be sustained. �By indulging in falsification of
its books, accounts and records KTCML resorted to financing of irregular and
late subscriptions to the Public Issue of MFL� is not a charge the Appellant
was asked to answer in the show cause notice and the Respondent therefore
cannot adjudicate such a charge and pass an order thereon.� In any case the said charge is also found
unsupported with any convincing evidence.�
The Appellant has explained the reason for debiting the payment� consideration of the shares into its account.� Since the application was made by its
nominees and the shares were allotted to the nominee applicants, I do not
consider that taking debit of the purchase consideration in the Appellant�s
current account as falsification of account.�
The Appellant�s argument that since
they had executed the agreement on 7.10.1995 and application for shares was
made on 18.10.1995 and that since the FUTP Regulations came thereafter on
25.10.1995, FUTP Regulations has no application is baseless.� As Shri Kumar Desai rightly pointed out,
though the Appellant executed the agreemnt on 7.10.1995 to provide financial
accommodation to Shri Khadaria, it was not over by 18.10.1995 by applying for
shares.� The activities did not come to
an end on 18.10.1995.� The transaction
was over only on 27.12.1995 i.e. the date on which the Appellant received the
allotment and handed over the shares to Shri Khadaria.� Since it was an ongoing matter partly
covered� in the post FUTP notification
period, in my view the Appellant�s version that the said Regulations has no
application to the case is� not
tenable.� The Appellant�s submission that
the alleged action relates to the year 1995 and as such an order relating to
the same issued in the year 2002 is not tenable, is baseless as the
investigations involving market�
manipulations may in certain cases take considerable time.� Since the Respondent has failed to
substantiate the charge against the Appellant, the question of issuing any
direction by the Respondent to the Appellant based on the finding that the
Appellant has violated the FUTP Regulations does not arise.� Therefore, I do not consider it necessary to
go into the sustainability of the impugned directions. For the reasons stated above, the
impugned order, to the extent it applies to the Appellant, is set� aside and the appeal is allowed to the said
extent. ����������������������������������������������������������Sd/- ����������������������� ���� (C. ACHUTHAN)������������������������ PRESIDING OFFICER Place: MumbaiDate: |
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