2024 (10) TMI 1745 - AT - SEBI

SEBI 15HA penalty for fraudulent trades and misleading accounts upheld; appeals dismissed for delay and admitted violations

Appeals before SAT arising from SEBI's order imposing penalty u/s 15HA for fraudulent and unfair trade practices were dismissed. A technical director had ... Fraudulent and unfair trade practices - Director Technical (Noticee No. 4) signed the financial statements disclosing misleading financial figures - imposition of a penalty u/s 15HA - application for condonation of delay - no explanation for delay - HELD THAT:- Appellants have admitted the acts done by them but seek to explain that they had acted at the instance of some other person. The charges levelled against the appellants are serious. Financial misstatements may lead to serious consequences in the share market. Noticees No. 22 and 23 have received the shares of the Company from the promoters and the connected entities and subsequently sold them through the stock exchange platform. They have later transferred the sale proceeds to the promoters and connected entities. As the Noticees have admitted the violations, nothing further remains for consideration. Keeping in view the gravity of the acts done by and their admission, we find no merit in these appeals. In addition, appeals have been filed with an inordinate delay and there is no explanation whatsoever. Having considered the appeals both on delay and on merits for reasons recorded hereinabove they stand dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether inordinate delay of more than 500 days in filing the appeals against the order imposing penalty under Section 15HA of the SEBI Act was liable to be condoned. 1.2 Whether the appellants incurred liability for fraudulent and unfair trade practices under Section 15HA of the SEBI Act by (i) signing financial statements containing misleading financial figures, and (ii) permitting use of their demat and bank accounts for large-scale transactions in the company's shares and transfer of sale proceeds to promoters and connected entities. 1.3 Whether the appellants' plea of acting under directions or influence of others, or their personal circumstances (employment status, financial hardship, lack of independent trading activity), could exonerate them from liability or warrant interference with the penalty imposed. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Condonation of inordinate delay in filing the appeals Interpretation and reasoning 2.1 The Court noted that all appellants expressly admitted in their own applications that they received the adjudication order on 30 August 2022 and that the appeals were filed after delays of 565, 563 and 550 days respectively. 2.2 The only explanation offered was that the appellants 'were not aware of the future course of action', contacted a lawyer, and in that process delay occurred; they further asserted, in identical language, that the delay was neither wilful nor wanton and that they had a good case on merits. 2.3 The Court found that such a generic, verbatim and unsupported explanation did not constitute a sufficient or satisfactory cause. The delay was characterised as 'inordinate' and 'not explained'. Conclusions 2.4 The appeals suffered from inordinate delay without any cogent explanation, and on this ground alone did not merit consideration. The Court nonetheless proceeded to examine the merits and found no ground for interference, leading to dismissal of the appeals. Issue 2: Liability under Section 15HA for signing misleading financial statements and facilitating connected trades Interpretation and reasoning - Noticee No. 4 (Director Technical) 2.5 It was not disputed that Noticee No. 4, as Director (Technical) of the company and a doctorate degree holder, signed the financial statements which contained misleading financial figures. 2.6 In her own affidavit, she admitted that she attended board and AGM meetings, was asked to sign the balance sheet 'because they told me that since I was a director, I need to sign', and that she signed under 'sole belief and trust' as the Managing Director, company secretary and auditor had also signed. 2.7 The Court held that her position as a Director and her admission of signing the financial statements, despite her claim of non-involvement in finance matters, established her participation in the misstatement of financial results. Her explanation that she signed on trust and at the instance of others did not negate the violation. Interpretation and reasoning - Noticees No. 22 and 23 (use of demat and bank accounts) 2.8 Noticee No. 22 admitted, in a sworn affidavit, that while working for the company she allowed her demat account to be used by another person (Noticee No. 25), at a time when the company was in financial crisis, for handling share transactions of the company; she further arranged for her brother-in-law (Noticee No. 23) to open a demat account 'for this purpose alone'. 2.9 She admitted that whatever amounts were credited in her bank account and in the bank account of Noticee No. 23, out of the sale of shares, were 'immediately transferred to the respective companies' / promoters and connected entities, and that apart from this they did not undertake other share transactions. 2.10 Noticee No. 22 also requested that her earlier letter and that of Noticee No. 23, allegedly drafted by Noticee No. 25, be ignored, thereby reaffirming her later admissions as the correct factual position. 2.11 Noticee No. 23, in the appeal, similarly admitted that his demat account was used by Noticee No. 25 and that he had opened the account for that limited purpose. 2.12 On the basis of SEBI's submissions and the record, the Court found that: - Noticees No. 22 and 23 each dealt with 7,50,000 shares; - They transferred Rs. 3,32,30,776 and Rs. 3,04,18,651 respectively to promoters/connected entities; and - Overall, Noticees No. 22 and 23 together contributed Rs. 6.36 crores out of a total of Rs. 31.08 crores transferred through such arrangements. 2.13 The Court emphasised that the charges were serious: financial misstatements 'may lead to serious consequences in the share market', and the routing of large volumes of shares and sale proceeds through employees' and relatives' accounts to promoters and connected entities formed part of such misconduct. Conclusions 2.14 The Court held that Noticee No. 4's admitted act of signing financial statements containing misleading figures, and Noticees No. 22 and 23's admitted facilitation of trading and fund transfers through their accounts to promoters and connected entities, constituted violations attracting penalty under Section 15HA of the SEBI Act. Issue 3: Effect of pleas of innocence, acting under directions, and personal hardship on liability and penalty Interpretation and reasoning 2.15 The appellants contended that they were innocent, had not independently traded, and had merely acted on directions of others: Noticee No. 4 as an employee/Director acting under management instructions; Noticee No. 22 as a long-serving employee who trusted Noticee No. 25; and Noticee No. 23 as an indigent person whose demat account was used by another. 2.16 They also urged personal circumstances, such as widowhood, lack of income, and non-involvement in finance or investment decisions, as grounds for exoneration or leniency. 2.17 The Court observed that in substance the appellants had admitted the acts constituting the violations and were only attempting to shift responsibility to others, particularly Noticee No. 25 and the company's management. 2.18 The Court held that such pleas did not erase or neutralise their own admitted participation in the acts found to be violative. Their roles as Director and employees, the magnitude of the share and fund transfers routed through their accounts, and the gravity of the misconduct outweighed their assertions of ignorance, trust, or hardship. Conclusions 2.19 The Court concluded that, in light of the seriousness of the violations and the clear admissions, there was no basis to interfere with the quantum of penalty of Rs. 5 lakhs each imposed under Section 15HA. 2.20 On combined consideration of both limitation and merits, the appeals were dismissed and all interlocutory applications disposed of, with no order as to costs.