2020 (12) TMI 156 - HC - SEBI

Court denies bail in Rs. 344.07 crores fraud case, citing seriousness of economic offenses.

The court dismissed the applicant's bail application in a case involving allegations of fraudulent transfer of mutual fund units worth Rs. 344.07 crores. ... Fraudulent use of the mutual funds units of the complainant - Applicant seeking the grant of regular bail - applicant herein malafidely facilitated the accused director Awanish Kumar Mishra and AFSPL in using the said fraudulently transferred mutual fund units for margin - applicant seeking interim bail on the account of his wife’s illness - HELD THAT:- Applicant was in a fiduciary capacity and has allegedly committed gross breach of trust in relation thereto in alleged connivance with other co-accused persons of an alleged amount of INR 344.07 crores, and it has to be taken into account the factum that the complainant is a public limited company, and that the members of the public have also consequently been allegedly defrauded of the amount of INR 344.07 crores by alleged fraudulent use of the mutual funds units of the complainant of INR 344.07 Crores by the accused persons inclusive of the applicant arrayed as the accused no.4 by inter alia creation of 350 shell companies. Applicant is alleged to have committed an economic fraud which affects the moral fabric of society, coupled with the factum that economic offences corrode the very fabric of democratic governance and probity in public life and are considered to be the gravest offences against the society and the persons alleged to have committed such offences are necessarily required to be treated differently in the matter of bail. What is brought forth through the observations therein is to the effect that merely because a person who was not arrested by the police or Investigating Agency during investigation nor produced in custody as envisaged in Section 170 of the Cr.P.C., 1973 ought not to be taken into custody merely because the charge sheet has been filed, the same however, does not spell out an embargo on the Court to reject a prayer made for bail by such an accused not arrested during investigation or not produced in custody, to be taken into custody in the circumstances where the facts of a case as alleged bring forth the gravity and magnitude of the alleged commission of an offence and consequently negate the grant of bail. As regards the contention raised on behalf of the petitioner that the petitioner was not a flight risk and there is no scope of his tampering evidence and influencing the witnesses, the same per se does not suffice to grant bail to the applicant in view of the magnitude of the alleged commission of breach of fiduciary trust placed. In the circumstances the bail application filed by the applicant seeking the grant of regular bail is rejected and as regards the prayer made by the applicant seeking the grant of interim bail for the reasons that his wife is unwell, it cannot be overlooked that the proceedings in the present application are pending since institution in June 2020 and apparently there is no urgency qua the treatment of the applicant’s wife required - The bail application in the circumstances is dismissed. Issues Involved:1. Grant of regular bail to the applicant.2. Allegations of fraudulent transfer of mutual fund units worth Rs. 344.07 crores.3. Role of the applicant in the alleged fraud.4. Impact of the alleged fraud on the complainant.5. SEBI's investigation and findings.6. Applicant's defense and arguments for bail.Detailed Analysis:1. Grant of Regular Bail to the Applicant:The applicant sought regular bail in relation to FIR No.46/2019, PS EOW, New Delhi under Sections 406/420/467/468/471/120B of the Indian Penal Code, 1860. The applicant had been arrested on 04.02.2020, and the charge sheet was filed on 11.11.2019 without his arrest. The applicant's first bail application was dismissed by the learned ACMM, and subsequent applications, including one for interim bail due to his wife's illness, were also dismissed.2. Allegations of Fraudulent Transfer of Mutual Fund Units Worth Rs. 344.07 Crores:The status report dated 11.06.2020 stated that a complaint was received regarding the fraudulent transfer of mutual fund units/securities worth Rs. 344.07 crores. The complainant's subsidiaries had opened demat accounts with Allied Financial Services Pvt. Ltd. (AFSPL), and after several investments, the complainant held securities worth Rs. 344.07 crores as of 28.12.18. The complainant's redemption request was not processed, and it was later discovered that the securities were not available in the demat accounts.3. Role of the Applicant in the Alleged Fraud:The applicant, V. Hansprakash, was the Head of Business Department and Chief Business Strategy Officer of IL & FS Securities Services Ltd. (ISSL). The investigation revealed that the applicant facilitated AFSPL in using fraudulently transferred mutual fund units for margin in derivative trading. The applicant allegedly suggested extending intraday benefits over and above available collaterals to selected clients, potentially changed data sent to the exchange and bank, and sent data without reducing collateral value, violating exchange rules.4. Impact of the Alleged Fraud on the Complainant:The complainant, a public limited company, alleged that the fraudulent transfer of mutual fund units worth Rs. 344.07 crores severely impacted its operations, including paying salaries to employees. The complainant also alleged that the applicant and co-accused received a wrongful gain of Rs. 380 crores by using the mutual fund units as their own margin money.5. SEBI's Investigation and Findings:SEBI's investigation, supported by the Grand Thornton Forensic Audit Report, revealed several irregularities and non-compliance by ISSL, where the applicant was a business head. SEBI issued a show cause notice to ISSL, highlighting the applicant's role in facilitating the fraudulent transfer of securities. The investigation found that ISSL released collaterals without corresponding reduction in exposure/margin requirements and allowed AFSPL to roll over positions after termination of their contract.6. Applicant's Defense and Arguments for Bail:The applicant argued that the charge sheet was filed without his arrest, indicating no recovery or discovery was required from him. He claimed there was no possibility of influencing witnesses as he had left ISSL. The applicant also argued that the trial would take many years to conclude, and the main offences were committed by AFSPL, not ISSL or the applicant. He claimed that no wrongful loss occurred to the complainant as the mutual funds were seized by the police. The applicant also stated that he was merely a salaried employee and not involved in operations or compliance.Conclusion:The court observed that the applicant was in a fiduciary capacity and allegedly committed a gross breach of trust involving Rs. 344.07 crores. The court noted the gravity and magnitude of the alleged economic fraud, which affects the moral fabric of society. Despite the applicant's arguments, the court found no sufficient grounds to grant bail, considering the seriousness of the offences and the ongoing investigation. The bail application was dismissed, and the court emphasized that the decision did not reflect on the merits or demerits of the case.