Round-tripping through preferential allotment funds was treated as fraud, while blanket joint penalty liability was modified.

Preferential allotment funds routed through intermediary entities back to the issuer were treated as a deceptive round-tripping arrangement, because the structure created only the appearance of capital infusion and fell within fraudulent and unfair trade practices in the securities market. The Tribunal also held that penalty liability could not be imposed as a blanket joint and several burden where the noticees did not stand on the same footing and the facts did not justify collective recovery. The composite penalty direction was therefore modified to separate individual liability for the concerned appellants, while the finding of fraudulent funding was upheld.

---

---

Issues: (i) Whether the transfer of funds through intermediary entities to the preferential allottees constituted a fraudulent scheme amounting to round tripping and a violation of the prohibition against fraudulent and unfair trade practices. (ii) Whether the direction imposing the penalty jointly and severally on all noticees was justified or required modification.

Issue (i): Whether the transfer of funds through intermediary entities to the preferential allottees constituted a fraudulent scheme amounting to round tripping and a violation of the prohibition against fraudulent and unfair trade practices.

Analysis: The fund movement between the company, the intermediary entities and the preferential allottees took place in a short span and followed a structured pattern which showed that the subscription money had been routed back to the company through conduits. The arrangement did not reflect genuine capital infusion and instead created the false appearance of infusion through preferential allotment. Such device was held to be deceptive and to fall within the prohibition against fraudulent conduct and unfair trade practices in the securities market.

Conclusion: The funding arrangement amounted to a fraudulent round tripping scheme and the finding of violation was upheld against the appellants concerned.

Issue (ii): Whether the direction imposing the penalty jointly and severally on all noticees was justified or required modification.

Analysis: The liability for penalty could not be treated as a blanket joint liability where the noticees did not stand on the same footing and there was no sufficient inter se connection showing a common basis for collective recovery in the same manner. The Tribunal distinguished the role of the appellants who were only connected with the company and held that, in the peculiar facts, the composite direction was excessive. The penalty was therefore reworked on an individual basis for the appellants who succeeded partly.

Conclusion: The joint and several direction was modified and a separate penalty of Rs. 4 lakhs each was sustained for the concerned appellants.

Final Conclusion: The common fraudulent funding arrangement was affirmed, but the penalty mechanism was tailored so that the company's appeal failed while the other appellants obtained partial relief by having the collective penalty converted into individual liability.

Ratio Decidendi: Where preferential allotment money is routed back through connected entities so that the issuer funds the very subscription ostensibly made by allottees, the arrangement is a fraudulent device lacking genuine capital infusion; but penalty liability must be fixed on a legally supportable basis and cannot be imposed as a blanket joint and several burden without proper justification.

---