IN THE SECURITIES APPELLATE TRIBUNALMUMBAI
Appeal No. 55/2003
In the matter of:
Coram: Justice Kumar Rajaratnam, Presiding Officer C. Bhattacharya, Member R. N. Bhardwaj, Member
Per: Justice Kumar Rajaratnam, Presiding Officer
1. The appellant is a Chartered Accountant. Aggrieved by the order of Chairman of SEBI dated 27.1.2003 in debarring him from the capital market for a period of 5 years has preferred this appeal. 2. This order was passed under extraordinary jurisdiction conferred on SEBI under Section 11B of the SEBI Act. The operative portion of the impugned order reads as follows:- “In the facts and circumstances as discussed above, I, in exercise of the powers conferred upon me under Section 4(3) of the SEBI Act 1992 read with Section 11B of the SEBI Act and Regulation 12 of the said Regulations debar Brahaspati Financiers Ltd. and its directors namely Shri S.K. Gupta, Smt. Suman Gupta, Smt. Navnidhi Garg, Shri K.N. Gupta, Shri Kapil Kumar Gupta, Shri Diwakar Gandhi, Chartered Accountant and Suraj Securities & Finance Ltd. in any capacity whatsoever, from associating with the capital market related activities, dealing in securities, accessing the capital market and associating with any of the intermediaries in the capital market for a period of five years. This order will come into force with immediate effect.”
3. The facts very briefly are there is a company by name Brahaspati Financier Ltd. (hereinafter referred to as “Brahaspati”). Brahaspati came out with a public issue of 24,00,000 equity shares of Rs. 10/- each for a cash at par aggregating to Rs. 240 lakhs. The issue opened on 25.7.1996 and closed on 5.8.1996. Apart from this 26,17,200 equity shares were reserved for the promoters. 4. In the course of the investigation by SEBI, it was alleged that there were certain serious mis-statements in the prospectus. Investigation revealed that S.K. Gupta, Smt. Suman Gupta & Smt. Navnidhi Garg had resigned as Directors of Brahaspati prior to the opening of its public issue and its management was handed over to Mr. Rajneesh Gandhi and his brother Diwakar Gandhi, the appellant herein. No corrigendum was issued and the allegation against the appellant was that S.K. Gupta was still shown as promoter of Brahaspati. The next allegation against the promoters of Brahaspati was that companies by name Chhavi Holdings Pvt. Ltd., Abhishek Fincap Pvt. Ltd, Riya Fincap Pvt. Ltd., Deepal Fincap Services Pvt. Ltd. and Happy Fincap Services Pvt. Ltd. subscribed to the tune of Rs. 261.72 lakh as promoters contribution. In other words, it was contended by the respondent that the promoters’ contribution was merely by way of book entry and no fund was actually received. On 24.7.1996, one day before the opening of the issue, Brahaspati’s account showed a meagre balance of Rs. 4000/-. The funds it is alleged, were not the funds of the promoters’ contribution to Brahaspati. Investigation also showed that the appellant, Diwakar Gandhi although not directly connected with the company was the brain behind the public issue, which gave misleading information to the public. Another curious aspect of the matter was that Manmohan Singh & Co., who was the Chartered Accountant of the company had certified that the promoters’ contribution was received prior to the opening of the public issue. Mr. Arun Dogra representing Manmohan Singh & Co. has categorically stated that these certificates were forged certificates. 5. We may well ask ourselves the question as to why a third party who is not connected with the company has been visited with a ban of five years. The answer to this question lies in the fact that the entire operation was at the behest and indeed guidance of the appellant. The contributors in the category of promoters’ quota it appears all operated from 4, Central Lane, Bengali Market, New Delhi. The details of the company and shares and the amount paid are as follows:-
6. It appears to us from the show cause notice that the control and management of the company was through the appellant who was a dummy director. The Supreme Court in Delhi Development Authority vs. Skipper Construction Co. P. Ltd. (1996) 4 SCC 622 held that where a corporate character is employed for the purpose of committing illegality, the Court would ignore the corporate character and will look at reality behind the corporate veil to do justice. 7. From the facts of the case as set out in the show cause notice it is clear that the promoters’ contribution was merely by way of book entries and no funds were actually generated. It is also clear that the investigation revealed Brahaspati was controlled and managed by the appellant as a shadow director. 8. It was also found out during investigation that an unstamped document claimed to be a power of attorney signed by Ashok Kumar Sharma in his favour was also found. The appellant appeared before the enquiry conducted by the respondent and promised to furnish all the information which he did not ultimately. Another piece of material pointing the needle of suspicion on the appellant was the graph produced by the respondent.
9. The managing director of Financial Horizon was the appellant. From the chart it can be very clearly seen that Financial Horizon had funded to two other players and ultimately the funds went into the lap of Brahaspati in a circuitous way. The last player namely Abhishek, Deepal and Chhavi have their address at 4, Central Lane, Bengali Market, New Delhi, which is the address of the appellant. It appears from the flow of fund that the appellant was in effective control of the company. Another graph was shown in the show cause notice which also reveals the alleged common factor between Brahaspati and the appellant, which is extracted below: “RECEIPT OF PROMOTERS’ CONTRIBUTION BY BFL (Rs. Lacs)
10. All the cash deposits were out of cash withdrawals promoters and that is how Brahaspati got its money just before opening of the prospectus. These pieces of material each in itself may not be clinching to sustain the impugned order. What is unfortunate is that the impugned order is not a speaking order, when we compare the materials placed in the show cause notice. 11. We have perused the show cause notice which contains allegations which tries to explain the nexus between the appellant as a shadow director and Brahaspati. However, when you peruse the impugned order there is hardly any discussion which makes reference to the allegations. It is a cryptic order and by no stretch of imagination can it be called a speaking order if the allegations are taken into account. We extract below the order relating to Diwakar Gandhi. “SCN dated August 31, 1999 was issued to Shri Diwakar Gandhi in response to which his counsel requested for copies of documents relied upon during investigations. The documents asked for in the aforesaid letter were sent vide letter dated March 6, 2000 to Shri Diwakar Gandhi. The letter was returned undelivered by the courier authorities with the remarks “Incomplete Address.” Letter dated March 21, 2000 was then sent to Shri Diwakar Gandhi, with a copy to his counsel, asking him to collect the relevant documents from SEBI by March 24, 2000. The letter was returned undelivered with the comments “No Such Person”. Vide letter dated March 31, 2000 sent to his counsel, Shri Diwakar Gandhi was given a final opportunity to reply to the SCN. No response has been received to the SCN. The counsel has also stated that they are unaware of the whereabouts of their client. After persistent follow up, a reply dated 7.9.2000 was received from the advocates of Shri Diwakar Gandhi. IT has been contended by Shri Diwakar Gandhi that he was neither a director, promoter nor part of operation control of BFL. He has referred to the contents of the prospectus which make no mention of his association with BFL and has contended that unnecessary reliance was being placed on the statement made by Shri S.K. Gupta in establishing his association with the company. It has been contended that the persons named, as directors in the prospectus of BFL were exclusively responsible for all matters connected to the Public Issue. He also referred to the statement made by Shri Raj Chawla, where upon his association with BFL has been established. It has been stated that the Registered Office of BFL was not at his office during the Public Issue and shifted to his office address on 15.10.1996. He further stated that Shri Rajneesh Gandhi was his real brother and a director in BFL and had independent business activities over which he had no control. It has been admitted that Shri Sav Sachin Chaku used to work with him as a part time accountant but he was not aware of his other activities. Regarding Shri Mug Singh, it was stated that he was the driver of his neighbour and often used to visit his office. He denied any association with Chhavi Holdings Pvt. Ltd., Abhishek Fincap Services Pvt. Ltd., Riya Fincap Pvt. Ltd., Deepal Fincap Services Pvt. Ltd. and Happy Fincap Services Pvt. Ltd. Regarding findings on promoter’s contribution, he categorically denied that he had contributed to the promoter’s contribution in BFL or was associated with any of the entities mentioned in the SCN in any manner. During the personal hearing granted by Chairman, SEBI on 26.9.2002 and subsequent written submissions dated 9.10.2002, Shri Diwakar Gandhi reiterated his earlier submissions. Findings In his reply to the SCN, Shri Diwakar Gandhi has attempted to skit the main issues and stress upon irrelevant trivialities. It has been incorrectly assumed that the persons named as directors of BFL in its prospectus had been absolved of their responsibilities pursuant to the investigations. The charges against Shri Diwakar Gandhi as made out in the SCN need to be appreciated in the totality of circumstances and taking into account the entire findings of the investigations. The statements by Shri S.K. Gupta and Shri Raj Chawla only confirm the findings of the investigations and were not relied upon as primary evidence. Further, it cannot be a mere co-incidence that his employees have introduced or were authorised signatory of the bank account of associate concerns of BFL. Shri Diwakar Gandhi also failed to furnish any evidence to contravent the charges made out in the SCN. I therefore hold Shri Diwakar Gandhi guilty for his above conduct.” (Emphasis by Court) 12. There are obviously two possible courses to be adopted, one was to quash the impugned order or the other was to quash the impugned order and remand the matter to SEBI to pass a speaking order based on the show cause notice and after considering the reply by appellant. 13. At this stage, it was vehemently submitted by Mr. Paras Kuhad, the learned senior counsel for the appellant that to remand the matter at this far of time would cause great hardship to a practising Chartered accountant and tax consultant. The appellant has filed an affidavit which reads as follows: “I, Diwakar Gandhi, do hereby solemnly affirm in connection with the following appeal: 1. I say that the impugned order against which the captioned appeal was filed by me in wholly unsustainable, travels far in access of the material on record and deserves to be set aside. 2. I say that in the event of the Hon’ble Securities Appellate Tribunal being inclined to remand the matter back to SEBI regardless of the impugned order being quashed, I shall be subjected to severe agony, in view of the fact that the proceedings leading to the impugned order already having taken over 4 (Four) years. Specifically, the show cause notice was dated 31st August 1999, while the material necessary for dealing was made available only by 2nd August 2000. Although the reply thereafter was filed on 13th September 2000 and 8th October 2002, the impugned order was passed as late as 27th January 2003. 3. I say that any remand of the matter back to the respondent would only lead to further protracted proceedings, which in the light of what is stated above, would, apart from being unproductive alone, continue to damage my reputation. As a financial consultant, any continued reputation risk would be of immense damage to me. 4. I hereby submit that against this backdrop, should the Hon’ble Tribunal be included to remand the matter back, I would instead submit to the Quantum of the Sentence contained in the impugned order being curtailed until the date of disposal of the Appeal. 5. I pray that such submission may be taken on record only on the promise that no stigma may attach to my financial career. 6. I crave the indulgence of the Hon’ble Tribunal for an expeditious disposal of the appeal.”
14. The chronology of alleged events are set out below:
15. Taking into account the facts and circumstances of this case and taking into account that the appellant has already suffered almost three years of being banned from the securities market, and taking into account the investigation related to a period in the year 1996 which is hanging like a Damocles sword on the appellant and also taking into account the career of the appellant, it would be appropriate to reduce the period till the end of November 2005. 16. Accordingly, the order is modified. 17. We wish to state that the order passed by this Tribunal may not be considered as a stigma in the facts and circumstances of the case in his future career.
Place: Mumbai Date: 16.11.2005
//SR110516
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