2025 (11) TMI 870 - AT - SEBI

Appeal allowed; disgorgement overturned and Rs.67 crore penalty set aside, matter remitted for fresh penalty assessment

Mr. Arun Panchariya Versus The Adjudicating Officer/Whole Time Member Securities and Exchange Board of India, Mumbai

AT allowed the appeal. The Tribunal found the lead manager implicated only in the first-stage fraud involving GDR subscription, held disgorgement against ... SEBI's powers to order disgorgement direction - restraining the appellant from accessing the securities market for a period of 3 years - Global Depository Receipts (GDRs) - imposition of a penalty - company received and utilized the balance GDR proceeds - first noticee Company issued GDRs - By a resolution, the Directors of the Company authorized EURAM European American Investment Bank AG Bank to use GDR proceeds deposited with the Bank as security in connection with the loan. HELD THAT:- This Tribunal, following the decision in KII Ltd. v. SEBI [2018 (6) TMI 1867 - THE SECURITIES APPELLATE TRIBUNAL MUMBAI ] has held that Lead Manager has committed fraud in the first part i.e. subscription of GDR by Vintage by using the proceeds of GDR as security to get a loan to subscribe to GDR. Thus, in view of the finding rendered by this Tribunal that Lead Manager was involved in first stage of the fraud only, the order of disgorgement is not sustainable for the appellant. What remains for consideration is the penalty. Learned Advocate for the appellant, argued that in cases where the GDR amount is far more than the amount in this case, SEBI has not imposed any penalty and imposed lesser penalty in some cases. Though it was argued by Shri Rai that penalty is imposed based on consideration of facts of a particular case, in our opinion a Regulator must deal with the cases with an even hand. The tabular column shows that where the GDR amount is more than double the amount involved in this case SEBI has imposed a penalty of Rs. 20 Lakhs. The amount involved in this case is USD 9.99 million. The appellant was not involved in the second leg of the fraud. Therefore, the imposition of Rs. 67 Crores is not justified. Therefore, the same requires a second look in the hands of SEBI. Appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the direction to disgorge a specified sum from the appellant is sustainable where this Tribunal has earlier held that the company received and utilized the balance GDR proceeds and the appellant was involved only in the 'first stage' of the transactions. 2. Whether the imposition of a monetary penalty of Rs. 67 Crores on the appellant is legally justified having regard to: (a) the appellant's limited role confined to the first stage of the alleged scheme; (b) comparative penalties imposed in other GDR cases; and (c) the principles of proportionality and even-handed regulatory treatment. 3. Whether the direction debarring the appellant from accessing the securities market for three years requires any remedy in light of the debarment period having lapsed. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of the disgorgement direction where the appellant was found to be involved only in the first stage and the company received and utilized GDR proceeds Legal framework: SEBI's powers to order disgorgement/restoration of ill-gotten gains arise from statutory/regulatory authority to remedy contraventions and prevent unjust enrichment; such directions must be supported by findings linking the noticee to the benefit sought to be disgorged. Precedent Treatment: The Tribunal followed prior authority (referred to as KII Ltd. v. SEBI) in assessing involvement in staged transactions and attributing responsibility for gains linked to specific stages. Interpretation and reasoning: The Tribunal recorded its own earlier finding (in an appeal by the Company) that the Company had received the balance of the GDR proceeds and had utilized the amount for the purpose of the issue. The Tribunal further found the first stage (arrangement to enable Vintage to subscribe using a loan secured by GDR proceeds) to be distinct from the second stage (conversion/sale of GDRs in the Indian market), and that entities involved in the second stage had no proven connection to the Company or to the appellant beyond remoteness. The impugned disgorgement directed against the appellant thus lacked evidential basis because there was no finding that proceeds from subsequent sales reached the appellant or that the appellant received the benefit sought to be disgorged. Ratio vs. Obiter: Ratio - where a regulator seeks disgorgement, there must be evidence of receipt or benefit by the noticee; absent such link, disgorgement is not sustainable. Obiter - observations about the distinctness of stages reinforce but do not extend the ratio beyond the facts. Conclusions: The disgorgement direction against the appellant is set aside as unsustainable in law because (a) the Tribunal's earlier findings established company receipt/use of GDR proceeds, and (b) there is no evidence that proceeds of later transactions were received by the appellant. (Cross-reference: Issue 2, on proportionality of penalty where culpability is stage-limited.) Issue 2: Legality and quantum of the penalty of Rs. 67 Crores - proportionality, even-handedness, and need for re-examination Legal framework: Regulatory penalty must be proportionate to culpability, grounded in the facts, and consistent with principles of fairness and non-arbitrariness. Comparative treatment of like cases is relevant to assessing whether a penalty is manifestly disproportionate or indicative of arbitrary application. Precedent Treatment: Tribunal relied on its treatment of GDR-related matters and the principle that each case is fact-specific, but also emphasized that a regulator must act with an even hand and cannot impose wildly divergent penalties for comparable factual matrices. Interpretation and reasoning: The Tribunal acknowledged that penalties are fact-specific but examined comparative decisions where SEBI imposed much lower penalties (e.g., Rs. 20 Lakhs) in matters involving GDR amounts larger than the present case. Noting that the appellant's involvement was limited to the first stage and he was not implicated in the second-stage market sales, the Tribunal found the Rs. 67 Crores penalty to be grossly disproportionate on the material before it. The Tribunal held that such quantum required a second look by the regulator to ensure consistency with principles of proportionality and even-handedness. Accordingly, the Tribunal set aside the penalty direction and remitted the matter to SEBI to re-examine and pass a fresh order in accordance with law. Ratio vs. Obiter: Ratio - where an individual's proven involvement is confined to a limited stage of a scheme and there is comparative evidence of markedly lower penalties in factually similar GDR cases, an excessive penalty may be set aside and remitted for reconsideration to prevent arbitrary or disproportionate punishment. Obiter - commentary that regulators must consider comparative penalties and ensure uniformity without prescribing a rigid formula. Conclusions: The Rs. 67 Crores penalty is set aside and the matter is remitted to the regulator for fresh consideration of quantum consistent with the Court's findings on limited culpability and the need for even-handed regulatory conduct (cross-reference: Issue 1 concerning absence of benefit justifying disgorgement). Issue 3: Debarment direction rendered infructuous by efflux of time Legal framework: Debarment is a protective/regulatory sanction that operates for a fixed period; lapse of the specified period may render challenges to such a direction academic unless collateral consequences remain. Interpretation and reasoning: The Tribunal noted that the three-year debarment period has already worked itself out and thus the challenge to that direction is rendered infructuous; no further relief was required on that limb. Ratio vs. Obiter: Ratio - where a time-bound sanction has expired, a challenge thereto may be moot unless residual consequences persist. Obiter - no additional remedial direction was necessary in light of expiration. Conclusions: No effective relief was required in respect of the debarment direction because the period has elapsed. Ancillary procedural disposition On the basis of the foregoing analyses, the Tribunal allowed the appeal to the extent of setting aside the disgorgement direction and the penalty direction; the disgorgement direction was quashed outright, and the penalty direction was remitted to the regulator for fresh, proportionate adjudication in accordance with law. Pending interlocutory matters were disposed of and no costs were awarded.