2023 (8) TMI 201 - AT - SEBI

Tribunal affirms SEBI's findings on market violations, upholds penalties for fraudulent funding scheme.

Scan Infrastructure Ltd., Unisys Softwares and Holding Industries Ltd., Vibhuti Multi Trade Private Limited, Allbright Electricals Pvt. Ltd. Versus Securities and Exchange Board of India,

The Tribunal upheld the findings of the SEBI Administrative Officer, ruling in favor of SEBI against the Company and noticees for violations of PIT ... Violation of the SEBI (Prohibition of Insider Trading) Regulations - Financial assistance to the preferential allottees - limiting genuine capital infusion - direction of the WTM directing the appellants to pay the amount jointly or severally - HELD THAT:- We are of the opinion, that when the Company uses its own funds and distribute it to the allottees for the purpose of subscription to the shares it deceives the genuine investors and falsely leads the investors to invest in the shares of the Company. Such scheme in our opinion perpetuates a fraud on the ordinary investors and gives a false impression that there was an infusion of funds through preferential allotment. We are further of the opinion, that this kind of fraudulent act which is an unfair device was meant to deceive the investors and such act is clearly prohibited u/s 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations. In view of the aforesaid, the contention raised by the learned counsel for the Company does not hold any merit. Direction of the WTM directing the appellants to pay the amount jointly or severally - A person can be directed to disgorge amount equivalent to the wrongful gain made by him. By such contravention, the liability to disgorge the amount is individual and not collective - Direction of the WTM directing the appellants to pay the amount jointly or severally is against the provisions of Section 11B and to that extent, it cannot be sustained. There is no inter se connection of noticees no. 10, 11 and 14 with the other noticees except that these noticees are connected to the Company noticee no. 1. In our view, the directions to pay the penalty amount jointly and severally was not proper and is arbitrary. The appellants have been found to be part of the scheme planned by the Company and have been involved in transferring the funds to the preferential allottees for subscription of the preferential allotment of the shares. The AO has imposed a penalty of Rs. 46 lakhs upon 23 noticees to be paid joint and severally which works out to Rs. 2 lakhs per noticee. However, considering the peculiar facts and circumstances of the present case, which shall not be treated as a precedent in other cases, we are of the opinion, that the penalty of Rs. 4 lakhs would be just and proper for each of the appellants i.e. noticees no. 10, 11 and 14. Issues Involved:1. Violation of SEBI (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations).2. Violation of Section 12A of the SEBI Act, 1992 read with Regulations 3 & 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations).3. Incorrect quarterly shareholding pattern disclosures to the Stock Exchange.4. Funding of preferential allotment by the Company.Summary:Issue 1: Violation of PIT RegulationsThe SEBI investigation revealed that the promoters of the Company acquired shares resulting in a change in their shareholding exceeding Rs. 5 lakhs in value or 25,000 shares or 1% of the total shareholding or voting rights. The promoters failed to make necessary disclosures to the Company and Stock Exchange under Regulation 13(4A) read with 13(5) of the PIT Regulations. The Company also filed incorrect quarterly shareholding pattern disclosures to the Stock Exchange, violating Section 21 of the Securities Contracts (Regulation) Act, 1956 (SCRA) read with Clause 35 of the Listing Agreement.Issue 2: Violation of Section 12A of the SEBI Act and PFUTP RegulationsThe AO found that the Company had devised a scheme to fund the preferential allottees, thereby limiting genuine capital infusion. Noticees No. 9-23 acted as conduits, facilitating the Company's financial assistance to the preferential allottees. This action was deemed fraudulent, violating Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations. The AO imposed a penalty of Rs. 4 lakhs on the Company for violating the PIT Regulations and Rs. 46 lakhs on noticees No. 1-23 for violating the PFUTP Regulations.Issue 3: Incorrect Quarterly Shareholding Pattern DisclosuresThe Company submitted incorrect quarterly shareholding patterns to the Stock Exchange during the quarter ending December 2011. It was found that certain entities were not holding any shares on December 31, 2011, as they had transferred the shares before that date. This resulted in a violation of Section 21 of the SCRA read with Clause 35 of the Listing Agreement.Issue 4: Funding of Preferential Allotment by the CompanyThe Company funded the allotment of its shares to the preferential allottees. The investigation revealed that noticees No. 2-8 received Rs. 7.50 crores from noticee No. 11, Allbright Electricals Pvt. Ltd., which received funds from noticees No. 9 and 10. The Company transferred Rs. 2.75 crores to Allbright Electricals Pvt. Ltd., facilitating the preferential allotment. The AO found this round-tripping of funds to be fraudulent, indicating no genuine capital infusion.Appeals and Tribunal's FindingsThe appellants contended that the transactions were in the usual course of business and denied any fraudulent intent. The Tribunal, however, upheld the AO's findings, stating that the round-tripping of funds indicated a fraudulent scheme to fund the preferential allotment. The Tribunal also addressed the issue of joint and several liability, modifying the penalty to Rs. 4 lakhs for each appellant (noticees No. 10, 11, and 14) instead of the collective Rs. 46 lakhs.ConclusionThe appeals by Unisys Softwares and Holding Industries Ltd. and others were dismissed or partly allowed, with penalties adjusted accordingly. The Tribunal emphasized the fraudulent nature of the scheme and the importance of genuine capital infusion, affirming the AO's decision with minor modifications to the penalties imposed.