BEFORE THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

In the matter of:

Appeal No.16/2002

Paresh M. Parekh Appellant

Vs.

The Chairman

Securities and Exchange Board of India Respondent

Appeal No.17/2002

Yogesh B. Parekh Appellant

Vs.

The Chairman

Securities and Exchange Board of India Respondent

Appeal No.18/2002

Sanjay B. Valia Appellant

Vs.

The Chairman

Securities and Exchange Board of India Respondent

Appeal No.19/2002

Trupti B. Parekh Appellant

Vs.

The Chairman

Securities and Exchange Board of India Respondent

Appearance:

Shri Sanjay Udeshi

Advocate for Appellant in appeal No. 16/2002

Shri Shyam Mehta

Advocatefor Appellant in appeal Nos. 17/2002 to 19/2002

Shri Pradeep Mandhyan

Advocate

Ms Uma Dalal

Advocate

Shri Phiroz Mehta

i/by Maneksha & Sethna

Shri J.Ranganayakulu

Jt. Legal Adviser, SEBI

Shri KRCV Seshachalam

Asst. Legal Adviser, SEBI for Respondent

 

(Appeals arising out of four orders - all dated 19.2.2002 - made by the Chairman, Securities and Exchange Board of India)

 

 

 

ORDER

These four appeals are directed against the Respondent�s four orders, all dated 19.2.2002. By the said orders the Appellants were prohibited from dealing in securities market for a period of two years. The factual data relating to and the legal issues involved in all the four appeals are common. Therefore, as requested by the Appellants� Counsel and consented to by the Counsel for the Respondent, the appeals were heard together and a common order is made.

Investigations into the working of Vadodara Stock Exchange (VSE) carried out by the Respondent is stated to have revealed price rigging in the scrip of Maa Leafin & Capital Ltd (the company) and involvement therein of one Shri Pramod Gupta a promoter of the company. Shri Gupta was also member (he was President of VSE at the material time) of VSE. The Respondent decided to investigate into the dealings in the company�s shares and also violations, if any, of the rules, regulations etc by intermediaries and others. Accordingly investigation was ordered on 25.6.1998. The investigation inter alia revealed that the company had come out with a public issue of 32,80,000 equity shares of Rs.10 each for cash at par, in March 1996. The issue opened on 14.3.1996. It was not to be closed later than 25.3.1996, or earlier than 18.3.1996. The issue was closed on 18.3.1996. The amount payable on application was Rs.2.50 per share and on allotment Rs.7.50. As per the findings in the investigation, the company�s public issue did not genuinely receive the stipulated minimum subscription of 90% of the issue amount, but created an illusion of having received the minimum subscription, so as to save the public issue, as the failure of the public issue would have necessitated returning the money collected from the public back to them. The modus operandi, as per the findings in the investigation, was that in the first instance the four Appellants herein would subscribe to the shares and then on allotment the shares would be handed over to Shri Gupta. For this purpose four separate but identical Memorandum of Understanding (MOU) were entered into by Shri Gupta with each one of the

 

Appellants. As per the MOU Shri Gupta was interested in applying for shares and each one of the four Appellants were requested to apply for 8 lacs shares in their name in the company�s public issue and on receipt of the allotment handover the shares so received to Shri Gupta or his nominees on payment of full consideration by Shri Gupta with in seven days from the date of intimation of allotment. For the purpose Shri Gupta agreed to pay interest @40% for at least 30 days on the amount laid out for subscribing to the shares. It was also agreed that the capital gains or any other related tax would be born by Shri Gupta. Pursuant to the said MOU each one of them applied for 8,00,000 shares using stock invests dated 18.3.96 issued by Bank of Madura, Matunga branch, Mumbai. The Appellants were allotted 5,05,000 shares each totaling 20,20,000 shares accounting for about 60% of the total number of shares allotted under the issue. According to the Respondent, the stock invests as per the bank records were issued only on 19.3.1996 i.e. one day after the closure of the issue, and as such the belatedly presented stock invest can not be included for the purpose of computing the total subscription received at the closure of the issue that if the Appellants� applications are discarded, the issue would have failed for want of minimum subscription. After the allotment the Appellants were paid back using the issue proceeds, and as required under the MOU they handed over all the share certificates to Shri Gupta alongwith Power of Attorney, that immediately after listing the shares Shri Gupta off loaded the same in the rigged market. According to the Respondent, the Appellants helped Shri Gupta in cornering the shares which facilitated price manipulation by Shri Gupta resulting in payment crisis at VSE. In the light of the said findings of the investigation, the Respondent issued notices to the Appellants on 27.4.2001 asking them to show cause as to why direction under section 11B of the Securities and Exchange Board of India Act, 1992 (the Act) should not be issued to them. The Appellants responded to the show cause notice by filing written reply and also by making oral submissions before the Respondent. The Respondent adjudicated the show cause notices and issued the direction under section 11B of the Act vide orders dated 19.2.2002, prohibiting the Appellants

 

from dealing in securities market for a period of two years from the date of the order.

Shri Shyam Mehta, learned Counsel appearing for the Appellants in appeal nos.17 to 19 referred to the dates of events leading to the issuance of the impugned order and submitted that the orders dated 19.2.2002 relate to the alleged role of the Appellants in a public issue made by the company in March 1996, that it was after 2 years i.e. on 25.6.1998 the Respondent directed an investigation into the matter, that on 27.4.2001 i.e. after about 3 years from initiating investigation, show cause notices were issued, which were adjudicated and orders were made on 19.2.2002 holding the Appellants guilty of two charges and consequently prohibiting them prospectively, from dealing in securities market for two years.

Shri Shyam Mehta referred to the show cause notice issued by the Respondent on 27.4.2001 and submitted that the Appellants were asked to show cause for the reason stated in the notice, as to why appropriate orders should not be issued to them, under section 11B of the Act. He submitted that in the notice the Respondent has not referred to any violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations 1995 (the 1995 Regulation) but it has now taken the stand that the provisions of the said Regulations are attracted. He further submitted that the notice refers to funding of the purchase of shares in the public issue through the stock invests issued on 19.3.1996. But the notice, the order or even the reply filed by the Respondent in the appeals does not state as to on what date the stock invest was received in the concerned branch of the Oriental Bank of Commerce, (Lehripura, Baroda branch) a branch authorised to collect applications with subscription money.

Learned Counsel submitted that according to the notice the two charges which the Appellants were asked to explain are that (1)"By agreeing with Mr. Pramod Gupta, the promoter of MLCL (the company) to make application for such a

 

large quantity (i.e. 25% of the issue) you enabled the issue to be shown as fully subscribed. Thus with your help an illusion of subscription to the public issue of MLCL was created when there was no genuine subscription at all. (2) By entering into an agreement with the promoter Mr. Pramod Gupta for making applications and agreeing to handover the certificates on allotment, you have aided and abetted with the promoter and helped, Mr. Pramod Gupta in cornering the shares which enabled the promoter in creating false market, manipulating the price and subsequent payment crisis in Baroda Stock Exchange". Shri Mehta submitted that there is another blank observation in the notice that "your action as above enables dubious issues to get established and listed and helps the promoters in cornering the shares which then facilitate price manipulation and hence detrimental to orderly development of the capital market and against the interest of genuine investors."

Learned Counsel referred to the reply filed by the Respondent and submitted that in the reply several new charges have been leveled against the Appellants which were not in the show cause notice. In this connection he referred to paragraphs 12, 16, 21, 22, 32, 33 etc in the Respondent�s reply and submitted that the Respondent is not entitled to raise new charges against the Appellants outside the show cause notice issued by it. In support, he cited the decision of the Hon�ble Supreme Court in The State of Punjab V Bakhtawar Singh (1972) 4SCC 730) that :- �natural justice requires that the person complained of should be informed of the charges against him and that he should be given a reasonable opportunity consistent with the charges leveled against him to rebut those charges."

In support of the argument that a charge outside the show cause notice should not be adjudicated and penalised, Shri Mehta also cited Remington Rand of India Ltd v Tahir Ali Saife (1976) 3 SCC 69.

Referring to the charges set out in the show cause notice Shri Mehta

 

submitted that the Respondent in the impugned order has stated that the Appellants paid consideration by using stock invests issued by the Matunga branch (Bombay) of Bank of Madura on 19.3.1996, that since the stock invest was issued on 19.3.1996 it was not to be accounted as subscription received in the public issue which had already closed on 18.3.1996. Learned Counsel submitted that the Respondent has not proved that the stock invests were not dated 18.3.1996. He referred to the photo copy of the relevant stock invest, annexed to the appeal and stated that it was issued by a Bank authorized to issue the stock invests and that in the absence of any thing to prove other wise the presumption is that it was issued on 18.3.1996 as evidenced by the stock invest itself, that the Respondent has not brought in any evidence to show that the stock invest was not issued on 18.3.1996. In this context Shri Mehta submitted that the Appellants� request, to provide the officials of Bank of Madura, on whose alleged statement the Respondent has relied, for cross examination, was not accepted by the Respondent, that the Respondent has not produced any evidence from the receiving bank i.e. Oriental Bank of Commerce, as to when the applications with the stock invests were received by them. He referred to the version of the Respondent as stated in its reply dated 6.5.2002 filed in the Tribunal that "The stock invests were issued against security of Flexi Fixed Deposits ��� which were created out of funds transferred from the account of Sun Pharmaceuticals Ltd on 19.3.96. Entries in all the register/ledger of banks show the date as 19.3.1996. The applications accompanied by the said 4 stock invests issued at Bombay had been handed over by the Appellants admittedly to a representative of the promoter, Shri Pramod Gupta, and ultimately deposited at the Oriental Bank of Commerce, Lehripura New Road Branch, Baroda. Considering the above and the distance between Bombay and Baroda the said applications could not have been deposited at Baroda before the closure of the issue on 18.3.1996 and hence the applications would be deemed to be late applications. If these four applications were to be excluded, the issue would have been subscribed only to the extent of 43% and the issue would have failed." In this context learned Counsel submitted that the application for the

 

stockinvest was made by the Appellants on 18th March, 1996 and the stockinvests were issued to them by Bank of Madura on 18th March, 1996, that this fact is clear from the copy of the stockinvest produced by the Appellants. He submitted that the Respondent has relied upon the entries in certain records of Bank of Madura to show that the stockinvest was issued on 19th March, 1996, that the Appellants are not concerned with the internal records of the Bank and in any case it is in fact irrelevant for the purpose of deciding whether there is any irregularity in the application made by the Appellants, that as far as they are concerned, the date shown on the stockinvest is conclusive proof of the fact that the stockinvest was issued on 18th March, 1996, that if the Bank has for any reason for its own purpose mentioned the date of issuance of the stockinvest as 19th March, 1996, the Appellants would not know about the same and in any case the Appellants cannot be penalized for the same. He gave a plausible explanation that it is likely that in its records the Bank mentioned the date of issuance of the stockinvests as 19th March, 1996 since that was the day on which the amount of the stockinvest, i.e. Rs. 20 lakhs, was transferred in the account of the Appellants with the Bank, that at the time of applying for the stockinvests the Appellants had forwarded a cheque to Bank of Madura for Rs.20 lakhs towards Fixed Deposit, that the cheque was issued by Sun Pharmaceutical Industries Ltd., who also had an account in the same Bank. Learned Counsel further submitted that it is quite possible that on knowing that there was sufficient funds in the account of Sun Pharmaceutical Industries Ltd., and accordingly the account of the Appellants was bound to be credited, the Bank may have issued the stockinvest without waiting for it to clear, on the date of application itself, i.e. 18th March, 1996, that since the funds were actually credited in the account of the Appellant on 19th March, 1996, for internal purposes the Bank may have mentioned 19th March, 1996 as the date of issuance of the stock invest. Learned Counsel further submitted that in connection with the allegations with regard to the delayed submission of stockinvests the Respondent has not stated in the show cause notice that the stockinvest was not

submitted in the Oriental Bank of Commerce on 18.3.1996, or that it was submitted

 

only on 19th March, 1996, that this is obviously because the application was submitted on 18th March, 1996 itself, that it is not the case of the Respondent that the Appellants applied for the stockinvests on 19th March, 1996 and not on 18th March 1996. He submitted that despite the request made by the Appellants the Respondent did not give them an opportunity to cross-examine the officers of the Bank and therefore the Respondent cannot rely on any of the bank documents to record a finding against the Appellants that, the Respondent by doing so has violated the principles of natural justice.

Shri Mehta submitted that the Respondent has not rebutted the presumption, that stock invest was presented on 18.3.1996. According to Shri Mehta the transfer entry date in the Bank�s records is internal to the Bank and the Appellants were not concerned about the internal procedures of the Bank issuing the stock invest. He submitted that it is not in dispute that the stock invest used by the Appellants were not made by the Bank or that these were not made on 18.3.1996. The Respondent�s presumption that it was issued on 19.3.1996 and therefore the same could not have been part of the subscription money received by 18.3.1996 is unfounded. Learned Counsel submitted that what is relevant is the date on which the stock invest was presented, that the only source which could authoritatively state the factual position in this regard was the concerned branch of the Oriental Bank of Commerce, which has not stated that the stock invest was received belatedly. Further the presumption is that since the responsible collection bank having included the amount received from the four Appellants in the collection money as on 18.3.1996, they received the stock invest before the issue was closed on 18.3.1996, that there is no reason to disbelieve the said bank for any reason. Shri Mehta submitted that the Respondent�s submission that Baroda is away from Bombay and hence the stock invest could not have reached Baroda in time etc are of no relevance, as distance is no distance in this

jet age. He submitted, that even in its reply, the Respondent but routinely denying the averments of the Appellants has not said anything to show that the stock invest

 

was deposited with Oriental Bank after the closure of the public issue on 18.3.1996, that on the contrary the Respondent in its reply has admitted that the stock invests issued by Bank of Madura were encashed in the public issue account no.3893 of Oriental Bank of Commerce, Asharam Road branch. He further submitted that even from a realistic point of view also there was no such need to close the company�s issue on 18.3.96 itself urgently if the collection did not reach the expected level, as the issue was opened only on 14.3.96 and the company was entitled to keep the issue opened even beyond 18.3.96 that the issue was closed on 18.3.96 as the company received 100% subscription. He further submitted that none of the official entities including the Lead Manager, Oriental Bank, Registrar to the issue etc has stated that the applications with stock invests from the Appellants were received belatedly, and therefore it was for the Respondent to establish with evidence that stock invest was submitted only after the closure of the public issue. Shri Mehta submitted that the Respondent has not established the allegation that the Appellants had helped Shri Gupta to artificially raise subscription in the public issue by presenting belated stock invests.

Learned Counsel referring to the charge that the Appellants by entering into an agreement with Shri Gupta for subscribing in the public issue, "aided and abetted with Shri Gupta" for cornering shares enabling him to manipulate the market, submitted that this charge also cannot stick, as the Appellants have not done anything illegal and if Shri Gupta of his own had indulged in any illegal activities the Appellants are not responsible for the same.

Shri Mehta referring to the Respondent�s observation that Shri Gupta, on the strength of the PAO given by the Appellants did manipulate the market, submitted that for the criminal act of the Power of Attorney holder the other person is not liable is the normal rule, unless it is established that giver of the Power of Attorney knew of the nature of offence going to be committed by the holder of POA. In support, he

 

cited Travancore Devaswom Board V Neelacantan Moothathu (AIR 1955 TC 83) where in the Hon�ble High Court had observed:

"The principal will not normally be liable for the unauthorized criminal acts of the agents or for the other acts done by him in excess of his authority."

Learned Counsel submitted that the Appellants have not been charged for any market manipulation that the Appellants have not aided or abetted Shri Gupta in indulging in market manipulation. According to Shri Mehta, the thrust of the Respondent�s charge is based on the misplaced notion that by entering into an MOU and by financing the purchase of shares, the Appellants were involved in the alleged market manipulation indulged in by Shri Gupta. In this context he referred to the copy of the MOU filed with the memorandum of appeal and stated that it is a simple document relating to a financial transaction, normally followed for the purpose in the market circles, that the purpose and limitation of the transaction is clear from the MOU itself, that the understanding was that the Appellants would apply for Rs.20 lakhs worth shares and the consideration for the same would also go from them and on allotment the Appellants will hand over the shares to Shri Gupta on receipt of full consideration from him and that till such time, the amount laid out will fetch 40% interest, that the shares which could be retained with them till the full payment was received served as security to protect the Appellants� interest. He submitted that the purpose of this transaction from the point of view of the Appellants was to earn income by way of differential interest, that this has been noted by the Respondent as is reflected in paras 8(VI), (VII) of its reply in the appeal that "all of them (i.e. four Appellants) borrowed money from M/s. Sun Pharmaceuticals Ltd and the purpose of their investment was to earn differential interest by borrowing from one source and on lending to another. Generally they earned 1-2% per month. No security was offered to Sun Pharma and it was mainly on trust between them and Sun Pharma but an agreement was entered into with the persons to whom the money was on-lent."

Learned Counsel submitted that the Appellants acted in terms of the said

 

MOU by applying for the shares offered through the prospectus issued by the company and on receipt of allotment after making full payment by them, and on receiving the requisite payment from Shri Pramod Gupta the share certificates were handed over to him alongwith Power of Attorney, enabling him to deal in those shares. He referred to the copy of the Power of Attorney annexed to the appeal. Shri Mehta submitted, that on completing the transaction as per the MOU, the matter came to an end and there was nothing further between the Appellants and Shri Gupta. According to him it was only a limited financial transaction permitted under law and the Appellants were unaware of the intentions, if any, of Shri Gupta.

Learned Counsel submitted that the MOU in question in effect was a buy back arrangement between Shri Gupta and the Appellants that the Appellants were to purchase the shares offered in the company�s public issue on condition that Shri Gupta will take it as per the agreement, that law does not prohibit such transactions, and when there is no legal prohibition on such transactions no penalty is imposable for effecting the transactions. In this context he referred to the Respondent�s view as stated in para 16 of its reply that "the Appellants applied for almost 100% of shares offered in the public issue. For that they had an MOU of repurchasing by the promoter." The Respondent had further stated that "individual acts of entering into an MOU may not be a violation. Likewise borrowing monies also may not be a violation" that having said so the Respondent had taken a totally inconsistent stand that " But when all these acts are put together they form part of a larger plan of action which can be described as a fraudulent activity under SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995". He submitted that this is the first time the Appellants are charged for fraudulent action which was not in the show cause notice or in the impugned order, that in the show cause notice the market manipulation was attributed to Shri Gupta and not to the Appellants. He further submitted that since the Respondent itself has

admitted that entering into an MOU or borrowing monies is not an offence, it cannot

 

raise such a serious charge out side the show cause notice at this stage. Shri Mehta submitted that another new charge levelled is that the transactions were benami transaction, little bothering to find out as to how the transaction effected in clear terms of the MOU could be treated as a benami transaction that it is also an admitted fact that the funds for subscribing in the public issue were not provided by Shri Pramod Gupta, that the Appellants had borrowed money for the purpose from Sun Pharma and the said Sun Pharma is not owned or controlled by Shri Pramod Gupta. He further submitted that the Respondent in para 30 of its reply has admitted that "SEBI has no jurisdiction to proceed for a benami transaction in public issue of shares," but at the same time it has assumed authority of its own by holding that "it is imperative on the part of SEBI to take care of the interest of other investors���". Learned Counsel stated that even though the Respondent admits it has no power to deal with benami cases, it still insists on issuing penal orders, though it could very well refer, if the impugned transaction was a benami transaction, to other agencies for taking suitable action, that the Respondent seems to be under the impression that it can assume power to do anything it wants even if the subject matter is out side its statutory jurisdiction. Learned Counsel referring to the Respondent�s Counsel�s version that the expression "fraud" be given an expanded meaning to meet the situation submitted that scope of the expression "fraud" in regulation 2 (c) in the 1995 Regulations should not be expanded beyond what is stated therein in view of the penal consequences that would visit those indulging in the fraudulent transactions, that a penal provision has to be construed strictly that in any case the show cause notice has not charged the Appellants for violation of any of the provisions of the 1995 Regulations.

Shri Mehta referred to the Respondent�s guidelines relating to the Disclosure required to be made in Prospectus (dated 12.10.1995) and stated (Clarification No.XIII) that the disclosure requirements stated in para 2 therein are required to be

complied with by the issuer company and not by the investor. He further submitted

 

that infact the said guidelines accept the practice of "buy back and "stand by" and similar arrangements for purchase of securities by promoters etc., that the requirement is only to make disclosure of the details in the prospectus that this shows there is no prohibition on any buy back arrangement.

Learned Counsel submitted that the Respondent is unclear about its stand and by way of example he stated that in para 11 of its reply the Respondent has stated that "on 11.5.96 from the CA of Pramod Gupta & Co four drafts of twenty lakhs each were issued in favour of the four applicants namely Shri Sanjay Valia, Ms. Trupti Parkeh, Shri Yogesh Parekh, and Shri Paresh Parekh", but in the show cause notice issued to the Appellants the version is entirely different as much as it states: "Against your application for 8,00,000 shares you were allotted 5,05,000 shares. After the allotment of shares, the amount of your investment was paid back to you by MLCL by demand draft". (MLCL means the company).

Referring to the charge of "aiding and abetting" Shri Gupta by the Appellants, Shri Mehta submitted that this charge can not be sustained as the Respondent has not shown any thing indicating that the Appellants had intentionally sold the shares to Shri Gupta to enable him to manipulate the market. In this context Shri Mehta submitted that the Hon�ble Supreme Court in Shri Ram V The State of UP had held that "intentional aiding and therefore active complicity is the gist of the offence of abetment".

He referred to observation made by the court in Lingam Ramanna (Indian Law Reporter � Madras series Vol. II p.137) � relied on by the Respondent�s Counsel and stated that the view held therein has no relevance, in view of the subsequent judgments of the Hon�ble Supreme Court in the matter including Shri Ram�s case (supra).

 

 

Learned Counsel also submitted that, even if it is found that the Appellants were found wanting in certain respects, it was not for the Respondent to issue such a harsh direction debarring them from dealing in securities market for a period of 2 years. He submitted that this direction is an outright punishment. The Respondent has stated in its reply that the direction is in the context of fraudulent market manipulation, but the Respondent has not resorted to the procedure provided under the 1995 Regulations, to investigate such offences before issuing the directions and as such the direction issued is not tenable. He further submitted that the impact of the penalty awarded is severe and dis-proportionate to the offence allegedly committed by the Appellants. In this context he cited Hon�ble Supreme Court�s observation in Ex-Naik Sardar Singh V Union of India (AIR 1992 SC 417) that "�����... the sentence has to suit the offence and the offender. It should not be vindictive or unduly harsh. It should not be so dis-proportionate to the offence as to shock the conscience and amount in itself to conclusive evidence of bias."

Shri Mehta further submitted that in any case the Respondent is not empowered under section 11B of the Act to issue such a direction which tantamounts to imposition of penalty. In support of this, he cited this Tribunal�s decision in Sterlite Industries (India) Ltd V SEBI ((2001) 34 SCL 485) that � "that the power under section 11B is restricted to issue appropriate direction for the purpose of protecting the interest of the investors etc mentioned in the section. ����. that section 11B does not even remotely empower the Respondent to impose penalties."

Shri Sanjay Udeshi, learned Counsel appearing for the Appellant in appeal no. 16/2002 submitted that he is adopting the submissions made Shri Shyam Mehta. He added that while imposing such severe penalty, the guilt has to be proved to the hilt, that the proceedings before the Respondent are quasi criminal proceedings and the Respondent can not go on adding fresh charges which are not in the show cause notice. He submitted that the Respondent has admitted that it was Shri Pramod

 

Gupta who indulged in market manipulation and not the Appellant, and still the Respondent has decided to penalize the Appellant, that for Shri Pramod Gupta�s offence, Shri Pramod Gupta is to be punished and not the Appellant and there is absolutely no justification to issue such an order prohibiting the Appellant from dealing in securities market for 2 years, in the facts and circumstances of the case.

Shri Pramod Mandhyan, learned Counsel appearing for the Respondent submitted that the Appellants were in know of the intention of Shri Gupta to manipulate the market after the public issue and they knowingly participated in the public issue to help Shri Gupta to accomplish the said objective, that they had obtained about 60% shares in the public issue, that the block of shares so procured in turn was given to Shri Gupta. He submitted that even the subscription made in the public issue was not in order as the stock invests used to finance the subscription were found to have deposited after the closure of the public issue, that but for the Appellants� active role the public issue would have failed and Shri Gupta would not have succeeded in manipulating the market. Learned Counsel submitted that the Appellants can not be unaware of the statutory prohibition on making applications in fictitious names for acquiring shares in the public issue contained in section 68A of the Companies Act that the company had also reproduced the text of the said section 68A in the prospectus. He submitted, that Shri Gupta along with the Appellants had designed a plan to corner the entire public issue is evident from the fact that the Appellants had actually applied for 32 lakh shares as against 20.28 lakhs shares offered to the public, that each one of them got 5,05,000 shares out of the total public issue of 32,80,000 shares. In this context the learned Counsel submitted that out of the said 32.80 lakh shares, 20.28 lakhs shares were offered to the general public and additionally 5 lakhs shares were offered to Mutual funds, 7.5 lakhs shares to NRI/OBC s, and 2000 shares to employees, that the promoters knew pretty well that Mutual Funds NRI/OBC etc., will not subscribe to the issue and the shares earmarked to the said class of public would also certainly come to them.

 

Learned Counsel further submitted that the MOU entered into by the Appellants with Shri Pramod Gupta is not enforceable, that it is not executed on stamp paper and not even dated, that the fact is that it was meant only to show on record that there was an MOU and the parties had acted as per the terms of the said MOU. In this context he also referred to the POA given by the Appellants in favour of one Shri Bharat Gupta authorizing him to do everything on behalf of the Appellants in relation to the shares allotted to them, that the purpose of giving such a blanket POA was to enable Shri Gupta to deal in the shares as he desired. He further submitted that the POA dated 5.6.96 was to be valid up to 31.3.1997, thereby providing enough time to Shri Gupta to deal in the shares at his will and Shri Gupta made use of the same and manipulated the market.

According to the learned Counsel the transactions under consideration are hit by the provisions of section 3 of the Benami Transactions (Prohibition) Act, 1998 (the Benami Act) which prohibited benami transactions, and such transaction is an offence punishable under law. Learned Counsel submitted that the Appellants did not make the necessary disclosure in terms of section 187C of the Companies Act which requires a benami holder make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interest in such share and failure to do attracts penalty.

Shri Mandhyan submitted that the Appellants had aided and abetted Shri Gupta in his act of market manipulation. In this context he referred to section 107 of the Indian Penal Code and also referred to Lingam Ramanna�s case (supra) therein in the Court had observed that "abetment consists either of instigation or of conspiracy followed by an act or illegal omission pursuant thereto, or of intentional aid in the doing of a thing, and a person is said to aid the doing of an act, who either prior to or at the time of, the commission of the act does any thing in order to facilitate the commission of that act and thereby facilitates it".

 

The learned Counsel also referred to section 120A of the Indian Penal Code and submitted that there is every reason to believe that the Appellants had conspired with Shri Gupta to manipulate the market and their active involvement is clear from the facts and the role played by them. He submitted that lending money is not an illegal act and the Appellants are not charged for lending money to Shri Gupta, that the charge against them is that they financed the purchase of shares for Shri Gupta knowing well about Shri Gupta�s plan to manipulate the market. In this context he reiterated the observation made by the Court in Lingam Ramannas case (supra) that abetment consists either of instigation or of conspiracy etc.

With reference to the Appellants submissions that in the show cause notice they were not charged for any violation of the 1995 Regulations, learned Counsel submitted that it is not necessary that the specific regulation should be explicitly mentioned in the show cause notice, but the gravamen of the charge stated in the notice itself is indicative of the violation of the said regulation. In this context he submitted that the charge leveled against the Appellants is that they "by entering into an agreement with the promoter Shri Pramod Gupta for making applications and agreeing to hand over the certificates on allotment you have aided and abetted with the promoter and helped Shri Pramod Gupta in cornering the shares, which enabled the promoter in creating false market manipulating the price and subsequent payment crisis at Baroda Stock Exchange."

He submitted that the 1995 Regulations prohibits fraudulent and unfair trade practices relating to securities market and referred to the meaning of the expression "fraud" defined in regulation 2 (c) that : "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."

According to the learned Counsel the MOU between the Appellants and Shri Pramod Gupta has to be viewed from the realistic point of view and not as a contract affecting two parties alone, that it has to be seen in a wider context involving the interest of the investors at large. He submitted that the expression "fraud" in regulation 2(c) need be given a wider meaning to cover the cases like the Appellants� action in the context of fraudulent and unfair trade practices in the securities market. He submitted that what the Appellants and Shri Gupta did was an act of deceit designed to cheat the investors in the market.

Learned Counsel submitted that non disclosure of the proposed buy back arrangement, resulting in cornering of shares by Shri Gupta, in the prospectus was deliberate and Appellants knew fully well of the same. In this context he read out from SEBI Guidelines (1993) on "Safety net on Buy back arrangement that "Any safety net scheme or buy back arrangements of the shares proposed in any public issue should be finalised in advance and disclosed in the prospectus. Such

 

arrangements shall be made available only to all original resident individual allottees. Such facility should be limited upto a maximum of 500 share per allottee and the offer should be valid at least for a period of 6 months form the last date of dispatch of securities. The financial capacity of the person making available such facility should be disclosed in the draft prospectus."

Learned Counsel further submitted that the primary function of the Respondent is to achieve the object of the SEBI Act, that in subsection (1) of section 11 of the Act the Respondent�s primary function has been stated that "��. it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit" He submitted that Section 11B of the Act empowers the Respondent to issue appropriate directions for the purpose and the impugned direction was issued in exercise of the said power to achieve the objective of the Act and that it is not a punitive measure. He submitted that the ratio in Sterlite (supra) is not applicable to the present case as the factual position is different.

Shri Mandhyan further submitted that the four MOU�s should not be considered as un connected, distinct or separate arrangement, that these MOUs have to be seen as one in view of the interse relationship of the Appellants, and its objective, that these individual contracts form part of the larger agreement arrived at by the Appellants and Shri Gupta to defraud the investors. He further submitted that it was the duty of the Appellants to disclose that they were applying for the shares on a buy back arrangement with the promoter, but they preferred not to disclose this vital information to the investing public .

Leaned Counsel submitted that tendering stock invests issued after the closure of the public issue is only a corroborative evidence and not a charge by itself. In this context he referred to the Appellants� version in their written submissions

 

before the Respondent, explaining the possible reason for showing in the bank records the issue date of stock invest as 19.3.1996 attributing to the internal procedure that the bank would have followed in maintaining its records, and stated that by any standard it was not possible to deposit the stock invests dated 18.3.1996 made in Mumbai, on the same day at Baroda, before the public issue was closed. He submitted the "probability" of reaching it on 18.3.1996 itself has to be seen in the over all scenario, such as the nature of MOU, application for shares far exceeding the number offered to the public, authorizing the holder of POA to deal in the shares handed over to him in any manner etc. With reference to the Appellants version that if the company had not received the money, there was no compulsion to close the public issue on 18.3.1996 itself and the issue could have been kept open for few more days, learned Counsel submitted that early closure was a ploy to fool the public to show that there was overwhelming support to the issue from the public that creating such an impression was to attract the investors to purchase the company�s shares at higher price. In this context learned Counsel referred to the Chairman�s observation in the order that "I have carefully examined Shri Parekhs reply, oral submissions made during personal hearing and also taken into account relevant material available record. I find from the record that the aforementioned four applications are known to each other and as a group have subscribed to many a public issue using similar modus operandi. From the stock invest register of the bank, it was noted that the four applicants had taken stock invests for large amounts for applying in public issues of as many as 20 companies around that period." Shri Mandhyan submitted that in the light of the well reasoned order it is clear that the Appellants� action was clearly a case of fraud on the investors and as such deserves to be dealt with as ordered in the impugned order.

Shri Mandhyan referred to the case laws cited by the Appellant�s Counsel and stated that the facts of the present case are in no way comparable to the facts of those cases cited and therefore the observations of courts/ratio, in those cases are not

 

attracted to the instant case.

The four orders under challenge are substantially identical. These orders relate to the Appellants� role in a public issue made by the company some time in March 1996 and the help allegedly provided by them to Shri Pramod Gupta, promoter of the company, for creating false market and manipulating the share price of the company leading to payment crisis in VSE. The basic facts are common. Legal provisions stated to have been violated are common. Directions issued are identical. But for the name of the Appellants and certain dates, the text of the orders is also common. Still, for reasons best known to the Respondent, it has preferred to issue four separate orders directed to each Appellant. Since the pleadings, order etc are substantially identical in all the four appeals, one of the appeals i.e. appeal no.17 filed by Shri Yogesh Parekh, was taken up for referral purpose, in the appellate proceedings.

It is noticed that the Respondent had issued more or less identical show cause notices to the Appellants. The Respondent adjudicated the notice. In the order made by the Chairman, it has been stated that :-

"I have carefully considered the facts on records, the investigation report, Shri Parekh�s oral as well as written submissions and in view of the findings recorded above, I hold Shri Parekh guilty of charges leveled against him in the show cause notice���" (In the other 3 orders names of the respective Appellant place in the peace of Shri Yogesh Parekh). As the Appellants have been held guilty of the charges leveled against them in the show cause notice, let us have a look at the material potion of the show cause notice, which is extracted below:

"M/s.Maa Leafin & Capital Ltd (hereinafter referred to as MLCL/the

 

 

company) having its registered office at 5 Steel Chambers, Old Lakkadpitha, Madan Zampa Road, Baroda- 390 001 came out with a public issue of 32,80,000 equity shares of Rs.10/- each in March 1996. Investigations were initiated into irregularities in the public issue of MLCL and price manipulation in the scrip immediately thereafter, vide Chairman�s Order dated June 25, 1998.

Investigations revealed that in the public issue, you acting in concert with your sister Ms. Trupti Parekh, your cousin Shri Sudhir Valia and an acquaintance Shri Paresh Parekh had applied for 32 lakh shares which almost equaled the public issue size of Rs.32.8 lakh shares.

In statement recorded on 9th December 1999 enclosed as Annexure I, you admitted to knowing Mr. Pramod Gupta, main promoter of MLCL. You also admitted to having entered into a memorandum of understanding (MOU) with Mr. Pramod Gupta and provided a copy thereof. The MOU clearly stated that Pramod Gupta was interested in applying shares worth Rs.20 lacs and requested you to apply in the public issue of MLCL for which interest @40% was agreed to be paid for at least 30 days. The MOU further stated that you would hand over the shares allotted to Mr. Pramod Gupta or his nominees on payment of full amount payable (on application as well as allotment) within seven days from allotment intimation date. Capital gains or any other tax would be borne by Mr. Pramod Gupta. A copy of the MOU entered between you & Pramod Gupta is enclosed as per Annexure II.

Pursuant to the above agreement, you have applied for 8,00,000 equity shares of the company vide application no.8877449 using stock invest no.217869 issued by Bank of Madura, Matunga branch, Mumbai. Your application amounted to almost 25% of the public issue size. As per bank records available with us and from the funds flow (enclosed as Annexure III), the

 

said stock invest appears to have been issued to you only on 19th March, 1996 i.e. one day after the closure of the issue. Your application was deposited with Oriental Bank of Commerce, Lehripura, Baroda branch. Since the stock invest in question itself has been issued after the closure of the issue and considering the distance between Bombay and Baroda, your application apparently has been deposited after the closure of the issue. It appears to us that you, along with your associates, had made the applications after the closure of the issue in order to bail out the public issue and your application enabled the issue to be shown as fully subscribed.

Against your application for 8,00,000 shares, you were allotted 5,05,000 shares. After the allotment of shares, the amount of your investment was paid back to you by MLCL by demand draft. Whereupon, in terms of your MOU with Mr. Pramod Gupta, you admitted to have handed over the share certificates to an intermediary, along with a Power of Attorney (POA) in favour of Mr. Bharat Gupta, which clearly mentioned that Mr. Bharat Gupta has full right to sell, endorse, transfer and assign the within mentioned equity shares of Maa Leafin & Capital Ltd. A copy of the POA entered into between you and Mr. Bharat Gupta of Baroda is enclosed as per Annexure IV. Investigations revealed that immediately after listing the shares so handed over by you have been offloaded in the market, after artificially manipulating the market price for the shares.

By agreeing with Mr. Pramod Gupta, the promoter of MLCL to make application for such a large quantity (i.e. almost 25% of the issue) you enabled the issue to be shown as fully subscribed. Thus, with your help an illusion of subscription to the public issue of MLCL was created when there was no genuine subscription at all. By entering into an agreement with the promoter Mr. Pramod Gupta for making applications and agreeing to hand

 

over the certificates on allotment, you have aided and abetted with the promoter and helped Mr. Pramod Gupta in cornering the shares, which enabled the promoter in creating false market, manipulating the price and subsequent payment crisis at Baroda Stock Exchange.

Your action as above enables dubious issues to get subscribed and listed and helps the promoters in cornering the shares which then facilitate price manipulation and hence, detrimental to orderly development of the capital market and against the interest of genuine investors.

You are, therefore, advised to show cause as to why appropriate directions u/s 11B of SEBI Act, 1992 including prohibiting you from dealing in the securities market should not be issued against you."

Basically two charges have been made against the Appellants in the notice. I would like to mention the same though slightly repetitive:

  1. by agreeing with Shri Pramod Gupta, promoter of the company, to apply for nearly 25% of the issue, the Appellants enabled the issue to be shown as fully subscribed though infact there was no genuine subscription to the requisite extent.

  2. the Appellants by procuring large quantity of shares in the public issue at the behest of Shri Pramod Gupta, aided and abetted Shri Gupta in cornering the shares of the company, enabling him in creating false market and manipulating the share price causing a payment crisis in VSE.

What was the course of action proposed to be taken by the Respondent against the Appellants in the light of these 2 charges? Issuing appropriate

 

 

directions under section 11B including prohibiting them from dealing in the securities market. The Respondent after enquiry debarred the Appellants from dealing in the securities market for a period of 2 years.

In this context it is considered useful to have a look at the reasoning given by the Chairman, for passing the impugned order. As per the order:

"M/s. Maa Leafin & Capital Ltd. (hereinafter referred to as MLCL) having its registered office at 5 Steel Chambers, Old Lakkadpitha, Madan Zampa Road, Baroda � 390 001, came out with a public issue of 32,80,000 equity shares of Rs.10/- each for cash at par in March 1996. The issue opened on 14th March, 1996 and closed on 18th March, 1996.

Whereas, price manipulation and rigging in the scrip immediately after the public issue of MLCL was noticed and therefore, Securities and Exchange Board of India (hereinafter referred to as SEBI) vide its order dated June 25, 1998 initiated investigations into manipulation in the price of the scrip and creation of illusion regarding subscription etc.

It was seen from the investigations that the public issue of MLCL did not genuinely receive minimum subscription of 90% of the issue size from the public and an illusion of subscription to the public issue of MLCL was created by M/s. Paresh Parekh, Yogesh Parekh, Sanjay Valia and Trupti Parekh, acting in concert with Shri Pramod Gupta, promoter of MLCL.

Minimum subscription of 90% is mandatory for each issue of capital to public and if the company does not receive 90% of issued amount from public subscription before the closure of issue, as per the provisions of Companies Act, SEBI Disclosure and Investor Protection Guidelines and terms of prospectus, the company is under obligation to refund the

 

subscription to the public unless underwriting obligations have been invoked.

From the investigations it was seen that the issue was subscribed in the following manner:

Shri Pramod Gupta, promoter of MLCL, was introduced to Shri Paresh Parekh by Shri Jayesh Bhai, a market acquainttanee. Shri Pramod Gupta met

Shri Paresh Parekh 4-5 days prior to the making of applications and the details of the arrangement for investment in MLCL shares were tied up. The proposal was then given by Shri Paresh Parekh to Shri Sanjay Valia, in whose company by name Sanjay Valia & Co. Shri Yogesh Parekh was doing his articleship. Further, Shri Sanjay Valia, Shri Yogesh Parekh and Ms. Trupti Parekh are related to each other. As per the arrangement a Memorandum of Understanding (hereinafter referred to as �MOU�) was signed between M/s. Paresh Parekh, Yogesh Parekh, Sanjay Valia, Trupti Parekh and Shri Pramod Gupta. The MOU clearly stated that Pramod Gupta was interested in applying shares worth Rs.20 lacs and requested each one of the aforementioned 4 persons to apply in the public issue of MLCL. For the purpose, Shri Pramod Gupta agreed to pay interest @40% for at least 30 days on the amount laid out for subscribing to the shares of MLCL. The MOU further stated that M/s. Paresh Parekh, Yogesh Parekh, Sanjay Valia, Trupti Parekh would hand over the shares allotted to them to Mr.Pramod Gupta or his nominee on payment of full amount payable (on application as well as allotment) within seven days from the date of intimation of allotment and that the capital gains or any other tax would be borne by Mr. Pramod Gupta.

Pursuant to the said MOU, M/s. Paresh Parekh, Yogesh Parekh, Sanjay Valia, Trupti Parekh had applied for 8,00,000 equity shares each using stock invests no.217868 to 217871, all dated 18.03.1996 issued by Bank of Madura,

 

Matunga branch, Mumbai. As per bank records and from funds flow, it is seen that the said stock invests have been issued only on 19th March, 1996 i.e. one day after the closure of the issue. Admittedly the applications of aforementioned applicants were handed over to the representative of Shri Pramod Gupta and the same were deposited with Oriental Bank of Commerce, Lehripura, Baroda branch. Considering the distance between Bombay and Baroda, it was concluded that the applications have been deposited after the closure of the issue and it was held that M/s. Paresh Parekh, Yogesh Parekh, Sanjay Valia, Trupti Parekh had made the applications in order to bail out the public issue and their applications enabled the issue to be shown as fully subscribed, as their applications cumulatively amounted to almost 100% of the public issue size.

Further from the investigation it was seen that the aforesaid applicants have been allotted 5,05,000 shares each totaling 20,20,000 , which constituted more than 60% of the shares allotted under the public issue. After the allotment of shares, the amount of their investment was paid back to all the four aforementioned applicants from out of the issue proceeds by MLCL, whereupon the aforementioned applicants handed over all the share certificates to Mr. Pramod Gupta along with a power of attorney. Investigations further revealed that immediately after listing, the shares so handed over to Mr. Gupta were offloaded in the market, after the market price of the scrip had been manipulated.

It was, therefore, alleged that M/s. Paresh Parekh, Yogesh Parekh, Sanjay Valia, Trupti Parekh had, by entering into an agreement with the promoter Mr. Pramod Gupta for making applications on his behalf and agreeing to hand over the share certificates on allotment of shares, helped Mr. Pramod Gupta in making a dubious issue successful and had aided and abetted Shri

 

Pramod Gupta in cornering the shares which then facilitated price manipulation and subsequent payment crisis at Baroda Stock Exchange.

Thus, in view of the above facts and after examining statements of the persons above mentioned, records and proceedings, more particularly the way

in which the public issue was shown to be subscribed, I am of the opinion that the activities of M/s. Paresh Parekh, Yogesh Parekh, Sanjay Valia, Trupti Parekh were detrimental to the interest of investors in the public issue of MLCL and to the integrity of the capital market, and that they have aided and abetted Shri Pramod Gupta in creating an illusion of successful issue; had helped him to corner 60% of shares allotted by hiding his real identity behind their names as applicants and that enabled manipulation in the scrip of MLCL.

Pursuant to investigations, a show cause notice dated 27th April, 2001 as to why directions under section 11B of SEBI Act, 1992, should not be issued against M/s. Paresh Parekh, Yogesh Parekh, Sanjay Valia, Trupti Parekh, was issued whereby copies of all the documents relied upon were also supplied to them.

Shri Yogesh Parekh replied to the above said show cause vide his letter dated 11th May, 2001, denying all allegations and contending that he had never violated any rules and regulations. Further he requested for an inspection of the funds flow and all other bank records relied upon by the Investigating Officer. Shri Parekh was granted an opportunity in this regard. Shri Parekh inspected the documents on October 3, 2001.

Further an opportunity of personal appearance was granted to Shri Parekh to appear before me on January 23, 2002., Shri Parekh along with Mr Shyam

 

Mehta, advocate, had attended the personal hearing, made oral submissions and followed it up by written submission which was received by SEBI on 1st February, 2002.

I have carefully examined Shri Parekh�s reply, oral submissions made during personal hearing and also taken into account relevant material available on record. I find from the records that the aforementioned four applicants are known to each other and as a group have subscribed to many a public issue using similar modus operandi. From the stock invest register of the bank, it was noted that the four applicants had taken stock invests for large amounts for applying in public issues of as many as 20 companies around that period.

In his reply and also during personal hearing before me Shri Parekh had contended that he had never abetted manipulation of price in the scrip of MLCL and never colluded in creation of the illusion of subscription etc., and that in fact, there was no illusion etc. Further, Shri Parekh had cited various case laws in his written submission dated 28.01.2002 and defended that he should not be held liable for the acts committed by Shri Pramod Gupta.

I have examined these case laws and find that the views and ratios of these cases are based on different facts than the instant matter and have no relevance to the nature of the present proceedings. At the time of his personal hearing, it was pointed out to Shri Parekh that aiding and abetting a promoter in order to make a dubious issue successful is different from mere financing of an applicant to any public issue as contended by him. Further, the fact remains that the applications with stock invests dated 18.03,1996 issued by bank of Madura Ltd., Matunga Branch at Mumbai could not have reached Baroda branch of the Bankers to the Issue on the same day and hence these applications were surely the late applications and if these were excluded

 

from the computation of subscription, then the subscription to the public issue was hardly 43% and the issue would have failed.

Moreover, I have observed that Shri Parekh had entered in to MOU with Shri Pramod Gupta which clearly stated that Shri Pramod Gupta was interested in applying for shares of MLCL and requesting Shri Parekh to manage for applying in the issue. If it was only financing, Shri Parekh should have lent the money to Shri Gupta thus enabling Shri Gupta to apply for the shares himself. This was not done. Had this been done, MLCL, the merchant bankers, the stock exchange etc. would have been in a position to know that Shri Pramod Gupta was attempting to corner the shares and appropriate steps would have then been taken to prevent it. By hiding this fact and allowing Shri Pramod Gupta to apply for shares behind his name, Shri Parekh had misled the company into allotting shares. Shri Parekh and his accomplices knew that Shri Pramod Gupta could not have applied in his own name being a promoter for 100% of the public issue and Shri Parekh had hence applied on Shri Gupta�s behalf and handed over all the shares to Shri Pramod Gupta after allotment for pecuniary benefit which clearly showed that Shri Parekh was never a genuine investor but merely acted as a front for Shri Gupta. This in my opinion is not a mere financing activity but borders on deecit and misleads the company into making wrong allotments.

I have carefully considered the facts on record, the investigation report, Shri Parekh�s oral as well as written submissions and in view of the findings as recorded above, I hold Shri Parekh guilty of the charges leveled against him in the show cause notice and I conclude that such activities are detrimental to the interest of genuine investors and orderly development and integrity of the capital market and if left unchecked could undermine the faith of investors in securities market.

 

Therefore, in exercise of the powers conferred under section 11B of securities and Exchange Board of India Act, 1992, I D.R. Mehta, direct that Shri Yogesh Parekh s/o Shri Babu Lal Parekh residing at 13, Shree Niketan, 16, Vithalbhai Road, Vile Parle(W), Mumbai -400056 be hereby prohibited from

dealing in securities market for a period of two years with immediate effect."

It is well accepted principle that an order requires to be judged by the reasons stated in the order. The Respondent in its reply to the appeal and its Counsel during the course of the arguments had made an attempt to add certain new charges such as violation of section 3 of the Benami Act, non compliance of Section 187C of the Companies Act etc. Attempt was also made to bring in certain new facts. It is made clear that the Respondent at this stage of the proceedings is not entitled to raise fresh charges or improve the order by bringing new material. This limitation is clear from the Hon�ble Supreme Court�s decision in Mohinder Singh Gill V. Chief Election Commissioner.((1978)1SCC 405)

"����. when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and can not be supplemented by fresh reasons in the shape of affidavit or other wise. Otherwise an order bad in the beginning may, by the time it comes to Court on account of a challenge, get validated by additional grounds later brought out. We may here draw attention to the observations of Bose, J. in Gordhandas Bhanji (AIR 1952 SC 16)

"Public orders, publically made, in exercise of a statutory authority can not be construed in the light of explanations subsequently given by the officer making the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the actings and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself."

 

Orders are not like old wine becoming better as they grow older."

Therefore only those charges levelled against the Appellants in the show cause alone are required to be considered now. The Respondent is free to adjudicate fresh charges, if it so desires, after due notice to the Appellants.

It is not in dispute that the Appellants had reached at an understanding with Shri Pramod Gupta and had executed an MOU, charting out the detailed terms and conditions of the transaction. Since the MOU has been considerably relied on by both the parties it is considered necessary to extract the full text of the same for instant reference. All the four MOUs are substantially identical. Text of one of the MOU�s is extracted below:

"Mr. Pramod Gupta, Prop. Pramod Gupta & Co. is interested in applying shares worth Rs.20,00,000/- (Rs.2.50 � x ([8,00,000]) in the coming public issue of (MAA LEAFIN & CAPITAL LTD opening on 14-3-1996 and request Mr. Yogesh Parekh to manage for applying in this public issue. Mr. Pramod Gupta, Prop. Pramod Gupta & Co., will pay fixed interest @40% p.a. for atleast 30 days for this issue to Mr. Yogesh Parekh.

On amount invested in the application for the above public issue for a period of 30 days. In respect of this application Mr. Yogesh Parekh will handover the shares allotted in proportionate manner to him/her in favour of Mr. Pramod Gupta, Prop. Pramod Gupta & Co., or his nominees on payment of full amount payable (on application as well as on allotment). Such payment will be made within 7 days from the allotment intimation date "Capital gain tax or any other tax like I.T. and other liabilities accruing consequent to the above transfer of shares will be borne by Mr. Pramod Gupta, Pro. Pramod Gupta & Co." Investor shall identify Ms. Yogesh Parekh on account of this transaction. Expenses for this transaction incurred by Ms. Yogesh Parekh will be reimbursed by Mr.

 

Pramod Gupta. Proprietor of Pramod Gupta & Co. Dispute if any shall be referred to sole arbitrator decided by both the parties.

Interest will be charged for the actual days of Stock Invest/F D subject to minimum of 30 days, and thereafter @40% p.a. for actual number of days".

The Respondent�s case is that the Appellants in terms of the said MOU procured in all 20,20,000 shares of the company in the public issue by directly paying the consideration, and on allotment handed over the shares so received to Shri Gupta with an open ended Power of Attorney (POA) enabling him to deal in those shares as he desired, that the POA dated 5.6.96 was valid up to 31.3.1997 and as such it provided sufficient time to Shri Gupta to act. While the Appellants urged that it was a normal financial arrangement followed in the market, the Respondent viewed it as part of a design meant to defraud the innocent investors in the securities market.

The factual position regarding the date of submission of the share application form with stock invest by the Appellants is in dispute. The Appellants have produced copy of the stock invest made by the Matunga (Mumbai) branch of Bank of Madura, which is found dated 18.3.1996, and insisted that in the attendant circumstances the presumption is that the stock invest was deposited with the collection bank on 18.3.1996. But the Respondent, relying on the records of Bank of Madura has claimed that the stock invests were issued only on 19.3.1996 i.e. a day after the public issue was closed. Date of submission of stock invest matters lot as the success or failure of the company�s public issue depends on this. If it is to be considered that the stock invest was not presented before the closure of the issue on 18.3.1996, the issue would be undersubscribed necessitating refund of money to all those who had applied for shares in the said issue. Thus the factual position decides the fate of the public issue. In this connection it is to be noted that there is nothing on record to show that the collection bank i.e. Oriental Bank of Commerce, had not

 

 

received the stock invest in time but accounted it as valid receipt. There is nothing from the Registrar to the issue and the Lead Manager to show that the application with stock invest was submitted belatedly by the Appellants. The allotment committee comprising representatives of the company, stock exchange etc supposed to have carefully examined the quantum of the subscription received till the closure of the public issue, has also not mentioned any thing to the effect that the stock invest accompanying the Appellants� applications was received after the closure of the public issue. Lead bank, Registrar to the issue, and allotment committee are "people on the spot" with an eagle eye to see that public issue complies with all the statutory requirements. The intermediaries associated with the public issue are expected to exercise" due "diligence, care and skill" while dealing with the public issue related matters. There is nothing in the order or in the reply filed by the Respondent to show that these agencies had failed in their duty in as much as by clearing an otherwise failed issue. In my view it is the duty of the company and its management and the intermediaries and other agencies associated with the public issue and listing, to ensure that the payment received after the closing of the public issue is not accounted for computing the quantum of subscription received. But a person who had belatedly applied in the public issue cannot be said to have violated any legal provision. Belated submission of application with or with out the request consideration only disables him getting allotment, but no penal consequences would visit him on that count. In the light of the facts and circumstances as revealed in the proceedings, it is not possible to hold the Appellants guilty of participating in the public issue and having saved an otherwise failed public issue by illegal means.

With reference to financing of purchase of shares and handing over the shares received in the public issue to Shri Pramod Gupta it has to be noted that such arrangement is not a new device adopted by the Appellants as is evident from the Chairman�s observation in the order that � "I find from the records that aforementioned four applicants are known to each other and as a group

 

have subscribed to many a public issue using similar modus operandi." The Appellants� financing the purchase of shares, has been explained by them. The Respondent has not refuted their version. To a question put to Shri Yogesh Parekh (Appellant in appeal no.17/2002) by the investigating officer as to "what is the purpose of your investment in the issue? How you choose the issue?" the answer was "The purpose was to earn some interest differential between the rate at which the money was borrowed by us from Sun Pharma and at the rate at which it was on �lent. Generally I retain about 1-2%." It is also noticed from the order that the Appellants were not having any long lasting association with Shri Gupta. In the order it has been stated that "Shri Pramod Gupta, promoter of MLCL was introduced to Shri Paresh Parekh by Shri Jayesh Bhai, a market acquaintance. Shri Pramod Gupta met Shri Paresh Parekh 4-5 days prior to the making of applications and the details of arrangement for investment in MLCL shares were tied up. The proposal was then given by Shri Paresh Parekh to Shri Sanjay Valia in whose company Sanjay Valia & Co, Shri Yogesh Parekh was doing his articleship. Further, Shri Sanjay Valia, Shri Yogesh Parekh and Ms. Trupti Parekh are related to each other." This statement of the Respondent suggests that it was a "case specific arrangement" and the Appellants were interested in making some return out of the transaction and that there was no other understanding underlying the agreement. In this connection it is to be noted that it was not Shri Pramod Gupta who had advanced money to the Appellants. It was out of the money borrowed by the Appellants from Sun Pharmaceuticals Ltd, they paid the consideration towards the cost of purchase of the shares and the said Sun Pharma is not owned or controlled by Shri Gupta. For the said reason it is also difficult to hold that the Appellants acted as benamis of Shri Gupta. As already stated, the Respondent itself has admitted that the Appellants were financing such issues earlier also. In this context it is also to be noted that as per the material on record, the Appellants on receiving full payment from Shri Gupta handed over the share certificate to him. I do not see any thing blame worthy in giving POA to the purchaser of the shares to enable him to deal feely in those shares.

 

There is nothing on record to show that the Appellants were benefited out of the transactions in any manner, except for the return received by way of interest at the predetermined rate. Section 68A of the Companies Act, referred to by the learned Counsel for the Respondent, in my view is not attracted to the case as the Appellants had not made any application in fictitious names as the applications were made in their own name. In the light of the factual position presented before me, it is not possible to hold the Appellants responsible for "creating an illusion of subscription" to the public issue as alleged. It is on record that the Appellants had remitted the payments through stock invest which the collection Bank and other intermediaries involved having accounted as proper receipt, can not be considered in a different manner in the absence of adequate evidence to rebutt the position. The Respondent has not produced any statement from the concerned branch of Oriental Bank of Commerce, which is supposed to be the collection branch, to the effect that the stock invests were received by them belatedly. In the absence of any evidence to prove other wise I am not prepared to subscribe to the Respondent�s version that the public issue was really under subscribed but artificially saved by the subscription belatedly made by the Appellants. The Appellants argument that the Bank officers were not provided to them for cross examination by the Respondent and as such the principles of natural justice have not been followed, is baseless as the Respondent had relied on the date of issue of stock invest as reflected in the records of the Bank, and the Appellants have not stated that these documents were not made available to them for inspection.

Let us examine the next charge that by entering into an agreement with Shri Pramod Gupta for making applications and agreeing to hand over to him the share certificates on allotment, the Appellants had aided and abetted Shri Gupta in cornering shares which enabled him to manipulate the market. There are two limbs to this charge �(i) the Appellants, aided, abetted and helped Shri Gupta in cornering the shares (ii) cornering the shares enabled Shi Gupta to manipulate the market, and

 

therefore impliedly the Appellants were also involved in indulging market manipulation.

As far as the 1st limb of the allegation is concerned it is evident that Shri Gupta had acquired substantial portion of the shares offered to the public in the issue. But there is no evidence to show that the Appellants had intentionally done any thing illegal to enable Shri Gupta to corner shares. The Appellants had acted only as financiers, as they had done in other cases as the Respondent had stated. They did it for a return and there is nothing to show that they were aware of the market manipulation programme which Shri Gupta had planned. Their association with Shri Gupta as per the facts on record was not very thick or very long. Shri Gupta for reasons known to him wanted some one to buy shares with a buy back arrangement. It suited the Appellants who were looking for opportunities to make short term investment for a good return. Some one introduced one of them to Shri Gupta. They seized the opportunity. Transactions were through. They got their money back. They were not found thereafter on the scene. The Respondent has not produced any evidence to show the Appellants involvement/association with Shri Gupta after the transaction was completed. With reference to the alleged failure to disclose the buy back arrangement in the prospectus it has to be noted that the prospectus was issued by the company and not by the Appellants and it is not the Appellants� obligation to ensure disclosure of the buy back arrangement in the prospectus. It was for the company and its management to make the requisite disclosures in the prospectus. It is noticed that the company has not mentioned any thing about the buy back arrangement in the prospectus, except that "the promoters holding after the proposed public issue will be 18,00,000 equity shares i.e. 35.43% of the post issue capital." In any case the Appellants can not be held liable for the disclosure deficiency in the prospectus. However it appears that the failure to make the disclosure in the prospectus, in the facts of the case, had little effect on Shri Gupta cornering the shares. In this context it is also noted that the prospectus is dated 19.2.1996. The

 

issue was opened on 14.3.1996. The order reveals "Shri Pramod Gupta promoter of MLCL was introduced to Shri Paresh Parekh by Shri Jayesh Bhai, a market acquaintancee. Shi Pramod Gupta met Shri Paresh Parekh 4-5 days prior to the making of applications and the details of the arrangements for investment in MLCL were tied up." Applications for shares can not be made before the opening of the issue. The reference to 4-5 days prior to making of application therefore can not be inferred to a period before the date of issue of the prospectus which was almost one month prior to the opening of the public issue. Thus it appears that buy back arrangement was made after the publication of the prospectus. Cornering of shares by a person being not an offence by itself, the Appellants who had transferred the shares which resulted in the "cornering" also by itself, can not be an offence.

In fact, the Respondent has also not stated that the transaction between the Appellants and Shri Gupta, by itself was in violation of the Act or any specific regulation. The main charge is against Shri Gupta that he manipulated the market; cornering of shares enabled him to do so, that cornering was possible with the help of the Appellants. Thus impliedly if Shri Gupta had not manipulated the market as alleged, the Appellants transaction would not have been adversely viewed. The Respondent has stated that the Appellants� "aided and abetted" Shri Gupta in committing the offence. In this context the observation made by the Hon�ble Supreme Court on the scope of section 107 of Indian Penal Code which defines abetment, in Shri Ram V. State of UP. (AIR 1975 SC 175) is to be kept in mind.

"����� in order to constitute abetment the abettor must be shown to have "intentionally" aided the commission of the crime. Mere proof that the crime charged could not have been committed without the interposition of the alleged abettor is not enough compliance with the requirements of section 107. A person may for example invite another casually or for a friendly purpose and that may facilitate the murder of the invitee. But unless the invitation was extended with intent to facilitate the commission of the murder, the person inviting can not be said

 

to have abetted the murder. It is not enough that an act on the part of alleged abettor happens to facilitate the commission of the crime. Intentionally aiding and therefore

active complicity is the gist of the offence of abetment under the third paragraph of

section 107."

Viewed from the said legal position, there is nothing on record to show that the Appellants had entered into the transaction intentionally to facilitate Shri Gupta to indulge in market manipulation. Market manipulation resulting in defrauding the investors is a serious charge, which has to be established with reasonably good evidence, if not beyond doubt. In the instant case the Respondent has failed to produce the requisite evidence in support of its charge that the Appellants aided and abetted Shri Gupta in indulging in market manipulation. In this context, it is also noticed that neither in the impugned order nor in the reply filed by the Respondent there is any material evidencing the manipulation stated to have been indulged in even by Shri Gupta. If one is to be charged for helping a person in committing an offence, it is necessary to bring on record the commissioning of the offence by the other person. The Respondent has not considered it necessary to produce any material evidencing the omission of offence by Shri Gupta. The order simply states that the Appellants had "aided and abetted Shri Pramod Gupta in cornering the shares which then facilitated price manipulation and subsequent payment crisis in Baroda Stock Exchange."

There cannot be two views on the need to take appropriate stringent action against a market manipulator and those who aided and abetted such manipulation. But then it is necessary to reasonably establish the charge and the role of the players. The Respondent has failed in this regard.

The Respondent in its reply simply stated "An investigation into the working

of Vadodara Stock Exchange (VSE) was conducted during September 10-12, 1996.

 

it was found during the investigation that there was price rigging in the scrip of M/s. Maa Leafin & Capital Ltd (hereinafter referred to MLCL) in which Shri Pramod Gupta, member of VSE was involved. Shri Pramod Gupta was the President of VSE

at the material time and also a promoter of MLCL � An enquiry was ordered by SEBI to look into the allegations of building up position in the scrip of MLCL with a view to rig price, which subsequently led to problems like difficulty in meeting the pay in obligations, delay in margin payment etc. " Based on Enquiry Officer�s report Chairman SEBI passed an order suspending Shri Pramod Gupta as a broker for one year effective form January 1, 1998". The Respondent has not even thought it fit to bring on record at least its order indicting Shri Gupta, to support its version that Shri Gupta had manipulated the market. According to the Respondent Shri Gupta was the main villain in the story and he got away with suspension lasting for a year. It has to be noted that Shri Gupta was also the President of VSE at that point of time and as such it was all the more grave, if he had indulged in market manipulation. But the Appellants who allegedly aided, abetted and helped Shri Gupta to corner the shares were debarred from dealing in securities market for 2 years. Since the order has failed to establish the charges leveled against the Appellants, it is felt that it is of no consequence as to the specific legal provision invoked to issue directions against the Appellants. Therefore, it is not considered necessary for the Tribunal to examine the legality or otherwise of the direction issued by the Respondent to the Appellants under Section 11B of the Act.

For the reasons stated above, the appeals are allowed.

Sd/-

(C. ACHUTHAN)

Place: Mumbai PRESIDING OFFICER

Date: October 8, 2002