Disgorgement for sham securities transactions upheld where layered transfers did not negate unjust enrichment or wrongful gain.

A sham securities transaction used to siphon funds and acquire GDRs can constitute unjust enrichment even where the money moved through layered account entries and was later passed on. The note states that the equivalent value had accrued to the beneficiary through the GDR transfer, so the absence of retained cash did not defeat wrongful gain. It further states that Section 11B of the SEBI Act, read with the PFUTP Regulations, permits disgorgement of wrongful gain or loss averted as an equitable remedy once fraudulent conduct and unjust enrichment are established. On that basis, the disgorgement direction with interest was treated as valid.

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Issues: (i) Whether the appellants had made wrongful gain or unjust enrichment of US$ 92 million through the transaction with Cals and Asia Texx. (ii) Whether the direction to disgorge US$ 92 million with interest was sustainable under Section 11B of the SEBI Act and the PFUTP Regulations.

Issue (i): Whether the appellants had made wrongful gain or unjust enrichment of US$ 92 million through the transaction with Cals and Asia Texx.

Analysis: The transaction dated 5 February 2009 was found to be a sham device to siphon funds from Cals. Asia Texx received US$ 92 million as advance for refinery machinery, but no machinery was supplied and the amount was not returned. The same funds were then used in the linked transaction to acquire GDRs, which were transferred free of cost to the beneficial owner of Asia Texx. The fact that the money moved through account entries and was later passed on did not negate the enrichment, because the amount had accrued to Asia Texx and its beneficiary in the form of value equivalent to the GDRs.

Conclusion: The appellants were held to have been unjustly enriched by US$ 92 million.

Issue (ii): Whether the direction to disgorge US$ 92 million with interest was sustainable under Section 11B of the SEBI Act and the PFUTP Regulations.

Analysis: The explanation to Section 11B expressly empowered SEBI to direct disgorgement of wrongful gain or loss averted, and the conduct was found to violate Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations. Disgorgement was treated as an equitable remedy directed against wrongful gain, and the authority was not bound to trace the funds to the last link in the chain once unjust enrichment was established. The appellants' reliance on the absence of retained cash and on subsequent transfers was rejected.

Conclusion: The disgorgement direction with interest was upheld as valid and lawful.

Final Conclusion: The appeals failed on merits, the impugned SEBI order was sustained, and the appellants remained jointly and severally liable for disgorgement with interest.

Ratio Decidendi: Where a securities transaction is found to be a fraudulent or sham arrangement resulting in unjust enrichment, SEBI may direct disgorgement of the equivalent wrongful gain under Section 11B even if the benefit was routed through layered account entries or subsequently passed to another entity.

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