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2022 (3) TMI 1226 - Supreme CourtSEBI

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Statutory appeal under Section 15Z limited to questions of law; factual findings and record-based inferences upheld
SC held that its statutory appeal under Section 15Z is confined to questions of law, not routine factual reappraisal, and will not disturb Tribunal findings grounded in record-based inferences. The Tribunal's factual conclusions that the April 2005 advertisements and subsequent forex announcement were supported by pre-announcement steps, and that allegations of price and account manipulation lacked proved connectivity, are affirmed. The Tribunal's reversal of SEBI's finding on the first advertisement is left intact as a factual determination. The SC rejected a blanket right to cross-examination, setting that issue aside for future adjudication while upholding the Tribunal's decision on other grounds.

Scope of appeal on a question of law under Section 15Z - Deference to specialized tribunals on findings of fact and evidentiary inferences - Misleading and fraudulent public statements under PFUTP Regulations - Market manipulation and orchestrated trades as contraventions of PFUTP Regulations - Principles of natural justice and right to cross examination in regulatory adjudicationScope of appeal on a question of law under Section 15Z - Deference to specialized tribunals on findings of fact and evidentiary inferences - The ambit of the Supreme Court's statutory appeal under Section 15Z is confined to questions of law, with due deference to the Tribunal's fact finding and development of sectoral law. - HELD THAT: - Section 15Z limits the Supreme Court's appellate jurisdiction to "any question of law arising out of" the Tribunal's order. While the Court may substitute its decision on erroneous constructions of legal provisions or general principles of law, not every interpretation or re appraisal of facts by the Tribunal qualifies as a question of law. Tribunals exercising Section 15T have wide powers to re examine facts, interpret the Act and evolve consistent sectoral principles; appellate intervention under Section 15Z must respect that institutional competence and will not readily treat fact bound inferences or the Tribunal's development of policy or regulatory approach as questions of law warranting interference. The Court adopted a contextual and pragmatic approach to draw the boundary between law and fact, emphasizing restraint and deference to the Tribunal's expertise except where a legal error is demonstrated. [Paras 12, 20, 21]Supreme Court will entertain appeals under Section 15Z only on questions of law; findings of fact and inferences drawn by the Tribunal are generally beyond the scope of interference.Misleading and fraudulent public statements under PFUTP Regulations - Deference to specialized tribunals on findings of fact and evidentiary inferences - The advertisements dated 07.04.2005 and 20.04.2005 do not, as a matter of law, give rise to a question warranting interference; the Tribunal's factual conclusions reversing SEBI on these matters are affirmed. - HELD THAT: - The Court treated the Tribunal's reversal of SEBI's findings on the two advertisements as fact based determinations made after reappreciation of documents (agreements, bank statements and timing of RBI application) and specific inferences therefrom. Since these conclusions rest on factual evaluation and inferences properly within the Tribunal's appellate fact finding jurisdiction, they do not constitute questions of law under Section 15Z. Accordingly, the Supreme Court declined to re examine the merits of those factual findings. [Paras 24, 26]Tribunal's factual findings that the advertisements were not violative are upheld; no interference under Section 15Z.Market manipulation and orchestrated trades as contraventions of PFUTP Regulations - Deference to specialized tribunals on findings of fact and evidentiary inferences - The Tribunal's conclusion that SEBI failed to establish connectivity and manipulation sufficient to prove contravention of the PFUTP Regulations is a factual finding not attracting intervention under Section 15Z. - HELD THAT: - SEBI's case rested on alleged off market transactions and links between outside entities and the company to generate volumes and inflate price/profits. The Tribunal, upon reappreciation, found absence of definite sustainable links and insufficient material to prove that any alleged manipulation of accounts was undertaken with the objective of luring investors. Those conclusions derive from the Tribunal's factual inferences; they do not raise pure questions of law for the Supreme Court to decide under Section 15Z. Consequently, the Court declined to overturn the Tribunal's fact based determinations. [Paras 29]Tribunal's finding that SEBI did not prove manipulation is affirmed; no question of law made out for interference.Principles of natural justice and right to cross examination in regulatory adjudication - Scope of appeal on a question of law under Section 15Z - The Supreme Court set aside the Tribunal's general observation that there is an absolute right to cross examination in all SEBI proceedings and declined to decide the legal question on cross examination in this case. - HELD THAT: - SEBI had relied on a letter from a stockbroker author contradicting the company's position; the company sought cross examination of the author. The Tribunal held that denial of such cross examination violated natural justice. Subsequent precedent (T. Takano) was noted to establish principles of disclosure and limits thereto, but not to lay down a categorical cross examination right. Because the Tribunal's substantive fact findings did not require resolution of a general rule on cross examination, the Court held that the Tribunal erred in laying down an inviolable principle that a right to cross examine always exists. The Supreme Court therefore set aside that general observation and left the legal question open for determination in an appropriate case. [Paras 36, 37, 38]The Tribunal's categorical finding of a universal right to cross examination is set aside; the question of a right to cross examine in SEBI proceedings is left open for future adjudication.Final Conclusion: Civil Appeal dismissed; the Securities Appellate Tribunal's factual findings on advertisements and alleged market manipulation are affirmed as not raising questions of law under Section 15Z, but the Tribunal's broad, categorical observation asserting a universal right to cross examination is set aside; the legal question on cross examination is left open. Parties to bear their own costs.

2022 (2) TMI 907 - Supreme CourtSEBI

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Disclosure of investigation reports in PFUTP proceedings is required, but sensitive information may be redacted for fairness and confidentiality.
PFUTP adjudication requires disclosure of the investigation report when it forms part of the material on which SEBI bases its satisfaction, because fair hearing, transparency, and accountability demand access to relevant material. The report is not merely internal and the noticee is entitled to disclosure of relevant parts for defence; the duty is not unlimited, and sensitive third-party, personal, or strategic information may be redacted where confidentiality, public interest, or market stability justify it. The Bombay High Court judgment is set aside, the appeals are allowed, and SEBI is directed to disclose relevant parts of the report and give a reasonable opportunity to respond.

Duty to disclose investigation report - Regulation 9 of PFUTP Regulations - Regulation 10 of PFUTP Regulations - Principles of natural justice / right to fair hearing - Relevancy test for disclosure - Inter-departmental communication privilege - Third-party confidentiality and market-sensitive information - Redaction subject to written reasons and judicial scrutinyRegulation 9 of PFUTP Regulations - Regulation 10 of PFUTP Regulations - Duty to disclose investigation report - Principles of natural justice / right to fair hearing - Whether the investigation report prepared under Regulation 9 must be disclosed to a person served with a show cause notice under Regulation 10. - HELD THAT: - Regulation 10 mandates that the Board act "after consideration of the report referred to in regulation 9" and after giving a reasonable opportunity of hearing. The investigating authority's report is therefore an intrinsic component of the Board's satisfaction under Regulation 10 and cannot be treated as merely an internal document immune from disclosure. Principles of natural justice require that material which is relevant to adjudication and which has been or will be taken into account for arriving at satisfaction must be disclosed to the noticee so as to permit an effective hearing. The Court distinguishes the narrow holding in Natwar Singh (about an earlier, preliminary stage where only material relied upon need be disclosed) from the present adjudicatory stage under Regulation 10 where full disclosure of relevant material is required subject to limited exceptions. [Paras 21, 24]Investigation reports under Regulation 9 that are relevant to the Board's satisfaction under Regulation 10 must be disclosed to the noticee consistent with the requirements of natural justice.Relevancy test for disclosure - Inter-departmental communication privilege - Third-party confidentiality and market-sensitive information - Ipse dixit not sufficient - What is the scope of disclosure and what exceptions to disclosure are permissible? - HELD THAT: - Disclosure is governed by a relevancy nexus: only those parts of the investigation report that have a bearing on the action proposed against the noticee and that in all reasonable probability could have influenced the decision must be disclosed. An assertion by the authority that it did not rely on a document (ipse dixit) does not absolve it from disclosing material which is relevant and likely to have influenced the decision. At the same time, the right to disclosure is not absolute. The Board may withhold or redact portions that prima facie affect third-party personal information, commercial confidences, strategic or market-sensitive information or information that would imperil the orderly functioning of the securities market. The Board must make a prima facie case that disclosure would affect third party rights or market stability; thereafter the onus shifts to the noticee to demonstrate that the withheld material is necessary to mount an effective defence. Redactions must be exercised in good faith, for specific reasons and are subject to judicial scrutiny. [Paras 39, 41, 46, 48, 49]Disclose those parts of the report relevant to the allegations; the Board may redact and withhold parts dealing with third-party personal or commercially sensitive/market-sensitive information, but such withholding must be justified and is subject to challenge.Procedure for disclosure and hearing - Remedial judicial oversight - What procedural steps must follow once disclosure is required? - HELD THAT: - Where disclosure is required, the Board must provide copies of the relevant parts of the investigation report to the noticee and afford a reasonable opportunity of hearing before a final decision is taken. The Court directed specific timelines in this case: disclosure within one month, one month for the noticee to respond, and a personal hearing to be fixed before taking the final decision. The investigating authority's compliance with the duty to disclose can be examined by the court or appellate forum; sealed inspection and judicial scrutiny are available if necessary to determine whether redactions were appropriate. [Paras 51, 52, 53, 54]The Board must disclose the relevant parts of the report and grant a reasonable hearing; the Court may examine compliance and the present case is remitted for disclosure and fresh hearing in the terms directed.Final Conclusion: The appeals are allowed. The investigation report under Regulation 9, insofar as it is relevant to the Board's satisfaction under Regulation 10, must be disclosed to the noticee subject to narrowly tailored redactions protecting third party personal, commercial and market sensitive information. The Board must disclose the relevant parts within one month, allow one month for the noticee's response and grant a personal hearing before a final order is passed; the High Court judgment is set aside.

2021 (10) TMI 1311 - BOMBAY HIGH COURTSEBI

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Debenture trust deeds governed meeting procedure, and a consent settlement was recorded with the suit disposed of accordingly.
Settlement terms were recorded because all concerned parties agreed to the revised payout, the plaintiffs undertook to transfer their debentures, withdraw objections and forgo further claims, and the matter was disposed of on that consent basis. For debenture-holder meetings, the governing procedure was held to be the Debenture Trust Deeds, as contractual instruments between the parties, so later SEBI regulations could not be applied retrospectively to change those terms. The debenture trustee was directed to convene and conduct the meetings in accordance with the respective trust deeds.

Compromise and settlement as full and final satisfaction - obligation to transfer debentures on receipt of settlement amount - Debenture Trustee's duty to convene meetings in accordance with Debenture Trust Deed - non-retrospective operation of regulatory amendments on existing contracts - court-approved modification to resolution plan for similarly placed creditorsCompromise and settlement as full and final satisfaction - obligation to transfer debentures on receipt of settlement amount - court-approved modification to resolution plan for similarly placed creditors - Approval of the amended settlement for the Plaintiffs (individual debenture holders) increasing the payout from 24.96% to 29.96% of principal and the concomitant transfer/assignment obligations of the Plaintiffs. - HELD THAT: - The Court recorded and approved the resolution as negotiated: under the ICA-lenders' approved resolution plan the secured debenture holders were entitled to 24.96% of principal; the Plaintiffs had received part payment and, by agreement as an exception, the Resolution Applicant undertook to pay an additional 5% of the principal such that the aggregate payout to the Plaintiffs became 29.96% of the total principal outstanding. The Plaintiffs agreed that on receipt of the agreed aggregate sum they would transfer/assign their debentures and all rights therein to the Resolution Applicant or its nominee and execute requisite documents. The Court treated these terms as full and final satisfaction of all claims by the Plaintiffs and as justification for disposing of the suit by compromise. [Paras 5, 6, 7, 8, 9]The amended settlement increasing the payout to 29.96% and the Plaintiffs' undertaking to transfer debentures on receipt of the settlement sum is approved and accepted as full and final settlement.Debenture Trustee's duty to convene meetings in accordance with Debenture Trust Deed - Direction to the Debenture Trustee (Defendant No.3) to call and conduct meetings of debenture holders in accordance with the terms of the respective Debenture Trust Deeds for placing the settlement for approval. - HELD THAT: - The Court directed the Debenture Trustee to call and conduct meetings of all Debenture Holders under all three Debenture Trust Deeds within 30 days, ensuring that the calling, conduct and voting at such meetings conform to the terms of the respective Trust Deeds. The Debenture Trustee was to place the settlement/compromise (as envisaged and modified) for consideration and approval of beneficial owners or debenture holders. The order also noted that any supplementary trust deed would be taken into account. [Paras 11, 13, 14]Debenture Trustee directed to convene and conduct meetings strictly in accordance with the respective Debenture Trust Deeds and to place the proposed settlement for approval.Non-retrospective operation of regulatory amendments on existing contracts - Rejection of SEBI's submission that the latest SEBI resolutions can retrospectively alter the terms of existing Debenture Trust Deeds and govern calling/conduct of meetings notwithstanding contract terms. - HELD THAT: - The Court examined SEBI's contention that the most recent SEBI resolutions should govern meetings irrespective of the Debenture Trust Deed language and found this submission unsustainable. The Debenture Trust Deed is a contract whose terms are known to parties at execution and cannot be retrospectively altered by subsequent regulations without consent. SEBI's resolutions operate from the date specified and cannot be read to apply retrospectively to change a critical contractual term governing meetings and voting. The correct reading is that the relevant SEBI resolution in force at the time of execution should be incorporated, but later regulations do not retrospectively govern the Trust Deed between the parties. [Paras 12]SEBI's submission that later SEBI resolutions can retrospectively govern the Debenture Trust Deeds is not accepted; the Debenture Trust Deeds govern calling and conduct of meetings between the parties.Compromise and settlement as full and final satisfaction - Final disposal of the suit and interlocutory application on the basis of the compromise; IA declared infructuous; refund of court fees directed. - HELD THAT: - Having approved the compromise and recorded undertakings (including confidentiality), the Court disposed of the suit in the terms agreed by the parties. The interlocutory application was declared infructuous and disposed of. The Court directed refund of court fees in accordance with the Rules and authorised issuance of a certificate for refund under the relevant provision, treating the date of the order as the date of claim for repayment. The order was made with the consent of the parties and on the peculiar facts of the case and was not to operate as a precedent against SEBI. [Paras 16, 17, 18, 21, 22]Suit disposed of by consent on the terms of the compromise; IA infructuous and disposed of; court fees to be refunded as directed.Final Conclusion: The Court approved and recorded the parties' compromise increasing the Plaintiffs' payout to 29.96% of principal, accepted undertakings to transfer debentures on payment, directed the Debenture Trustee to convene meetings in accordance with the respective Debenture Trust Deeds to place the settlement for approval, rejected SEBI's contention of retrospective application of later regulations to alter Trust Deed terms, and disposed of the suit and IA on the agreed terms with directions for refund of court fees.

2021 (10) TMI 1463 - SECURITIES APPELLATE TRIBUNAL, MUMBAISEBI

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Client funds segregation and permitted withdrawals were strictly enforced, with misuse and delayed settlement treated as regulatory breaches.
Client accounts must be settled within the prescribed intervals and client funds and securities must remain segregated in compliance with the governing circular. Delays caused by software or depository issues did not excuse repeated non-compliance over several quarters, so the violation was established. Client funds may be withdrawn only for permitted client-related payments and identified purposes; using such funds to meet debit balances and other liabilities amounted to misuse. The circular drew no distinction for internal balances of group entities, associates or related persons, and a later circular was treated as a clarification of the earlier position. The regulatory breaches were upheld and the appeal was rejected.

2021 (11) TMI 516 - SC OrderSEBI

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Supreme Court Upholds SEBI's Attachment Order, Appoints R S Virk
SEBI's request to vacate the SAT's order was granted by the Supreme Court, staying further proceedings. The attachment notice issued by SEBI aimed to recover funds related to PACL's scheme. DDPL and Unicorn objected to SEBI's actions, citing procedural errors. The Supreme Court affirmed SEBI's authority under Article 142 and appointed Shri R S Virk to evaluate objections. Shri R S Virk's tenure was extended, and various interlocutory applications were allowed based on his assessments. The Court upheld SEBI's attachment order, allowing DDPL and Unicorn to deposit funds in an Escrow account.

Attachment order - vacation of appellate stay - primacy of Supreme Court directions under Article 142 - jurisdictional impropriety of parallel appellate interference - recourse to a court appointed judicial officer for objections - escrow to secure contested funds pending adjudication - possession and transfer of attached property to implementing authorityAttachment order - vacation of appellate stay - primacy of Supreme Court directions under Article 142 - jurisdictional impropriety of parallel appellate interference - recourse to a court appointed judicial officer for objections - escrow to secure contested funds pending adjudication - Whether the interim order of SAT staying SEBI's attachment and permitting operation of accounts should be vacated and further proceedings before SAT stayed, and the manner in which objections to SEBI's attachment are to be adjudicated pending compliance with this Court's directions. - HELD THAT: - The Court held that the attachment dated 1 March 2021 was issued by SEBI to implement directions issued by this Court under Article 142 and that the interim order of SAT entertaining appeals and permitting operation of accounts would, if allowed to stand, frustrate the implementation of this Court's directions. The Court found it inappropriate for SAT to have entertained the appeals in light of the supervisory scheme created by this Court and emphasised that parties aggrieved by SEBI's attachment should be permitted to move this Court and avail the mechanism created by the Court. Accordingly, the SAT order dated 26 March 2021 was vacated and further proceedings before SAT in the specified appeals were stayed. The Court directed that DDPL and Unicorn may submit their objections to the attachment to Shri R S Virk, the judicial officer appointed by this Court, who is empowered to obtain the view of the Enforcement Directorate; his report shall be placed before this Court after hearing the parties. Pending further orders, the attachment continues to operate to the extent of the amount identified for recovery, but the Court granted liberty to the companies to deposit that amount in an escrow to the satisfaction of SEBI, whereupon SEBI may modify the attachment to operate only in respect of the escrowed amount and may direct investment of escrowed funds in interest bearing fixed deposits. [Paras 13]The SAT order dated 26 March 2021 is vacated; further proceedings before SAT are stayed; objections to the attachment to be heard by Shri R S Virk and reported to this Court; the SEBI attachment remains in operation to the extent directed, subject to deposit in escrow in accordance with the directions.Possession and transfer of attached property to implementing authority - Whether possession of the immovable property at C 55, Sector 57, Noida should be handed over to SEBI (or its authorised representative) for administration under the Court's scheme. - HELD THAT: - The Official Liquidator was directed to hand over possession of the identified immovable property to the Nodal Officer cum Secretary of SEBI, an authorised representative of SEBI, subject to production of requisite title documents. SEBI was directed to publish a notice so that any person asserting a claim may have it adjudicated before Shri R S Virk. A claim by an unsecured creditor (PBCL) must be lodged in the requisite form to be processed within four weeks. The interlocutory application was made absolute and disposed of in these terms. [Paras 5]The Official Liquidator shall hand over possession of the Noida property to SEBI's authorised representative; SEBI to publish notice and claims to be adjudicated by Shri R S Virk; the interlocutory application is allowed.Appointment of judicial officer for objections - Whether the tenure of Shri R S Virk, the judicial officer appointed by this Court to examine claims and objections, should be extended. - HELD THAT: - The Court noted that the tenure of Shri R S Virk was due to expire on 31 October 2021 and extended his tenure to 31 March 2022 to ensure continuity in the adjudicatory mechanism established by the Court for the implementation of its directions. [Paras 2]The tenure of Shri R S Virk is extended until 31 March 2022.Claims evaluation by court appointed officer - release of properties confirmed on evaluation - Whether interlocutory applications seeking release or exclusion of specified properties from attachment, after evaluation by Shri R S Virk, should be allowed. - HELD THAT: - Applicants placed claims before Shri R S Virk, the judicial officer nominated by this Court, and those claims were found valid on evaluation. SEBI and the Justice R M Lodha Committee raised no objection to allowing the interlocutory applications in accordance with Shri R S Virk's evaluations. The Court accordingly allowed the batch of interlocutory applications and directed removal or release of the properties as assessed by Shri R S Virk, subject to the filing and processing of any outstanding claims in the prescribed manner. [Paras 3]The interlocutory applications in the identified batch are allowed in terms of the evaluations made by Shri R S Virk.Interim restraint on release of funds - Whether compensation payable to certain respondents should be restrained pending further orders. - HELD THAT: - In IA No.121435 of 2020 the Court issued notice returnable in three weeks and, pending further orders, directed that the first and second respondents shall not release the compensation to Respondent Nos. 3 to 29. This is an interim protective direction to preserve funds until the notice is adjudicated. [Paras 2]Issue notice; pending further orders, the first and second respondents shall not release the compensation to Respondent Nos. 3-29.Final Conclusion: SEBI's IA is allowed in part: the SAT interim order of 26 March 2021 is vacated and further proceedings before SAT stayed; objections to SEBI's attachment to be submitted to the Court appointed judicial officer whose report will be considered by this Court; the SEBI attachment continues to operate for the recovery amount unless that sum is deposited in escrow to SEBI's satisfaction; additional interlocutory applications concerning property possession, claim evaluations and tenure extension are disposed of in accordance with the directions recorded above.

2021 (9) TMI 1519 - SECURITIES APPELLATE TRIBUNAL MUMBAISEBI

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Independent directors cleared of GDR fraud penalties as mere resolution signatories without operational involvement
The Securities Appellate Tribunal Mumbai allowed appeals by two non-executive independent directors against SEBI penalty and debarment orders in a fraudulent GDR case. The Tribunal held that being mere signatories to resolutions without involvement in day-to-day affairs or decision-making was insufficient to establish guilt. For the first director, the Tribunal found regulatory inconsistency as the AO had previously cleared him in similar circumstances. For the second director who chaired the audit committee, the Tribunal ruled that questioning GDR proceeds utilization was beyond audit committee purview, especially since loans were promptly repaid and funds were used for intended purposes. However, the Managing Director's penalty was reduced to Rs. 20 lakh per GDR issue for non-disclosure violations under the Listing Agreement, with debarment upheld.

Non-disclosure under Listing Agreement - liability of non-executive independent director - signatory to board resolution not sufficient for fraud - consistency in regulator's findings - penalty proportionality and mitigation in absence of investor loss - debarment as consequence of culpability in securities market misconduct - SEBI Act and PFUTP Regulations - scope of application to directorsLiability of non-executive independent director - signatory to board resolution not sufficient for fraud - consistency in regulator's findings - Whether the AO's subsequent finding holding Mr. H.S. Anand liable and imposing penalty and debarment was sustainable in view of an earlier AO finding exonerating him - HELD THAT: - The Tribunal noted that an earlier AO had expressly found that Mr. H.S. Anand was a non-executive independent director who only attended the February 21, 2008 meeting, provided technical expertise, was not involved in day-to-day affairs or financial decision-making, and therefore committed no violation. The later AO, without reconciling or distinguishing that earlier finding, held him guilty and imposed penalty and debarment on the ground of trusteeship duties of an independent director. The Tribunal held that, once the earlier finding of non-involvement was recorded, the regulator could not adopt a contradictory view in proceedings concerning the same facts and modus operandi; mere signatory status to a resolution is insufficient to infer participation in a fraudulent scheme. Accordingly, the subsequent order imposing penalty and debarment on Mr. H.S. Anand was held to be patently erroneous and was quashed. [Paras 6, 7, 8, 9, 14]Penalty and debarment imposed upon Mr. H.S. Anand quashed; appeals allowed.Liability of non-executive independent director - scope of audit committee responsibilities - non-disclosure under Listing Agreement - Whether Mr. I.S. Sukhija, a non-executive director and alleged Chairman of the Audit Committee, could be held liable and penalised/debarred for the GDR transactions and the alleged non-disclosures - HELD THAT: - The Tribunal rejected the respondent's application to introduce additional annual reports under Order 41 Rule 27, finding no justification for late production and noting the documents were publicly available and should have been relied upon earlier. The Tribunal held that mere status as Chairman of the Audit Committee does not establish participation in or knowledge of a fraudulent scheme. The Tribunal observed that the transactions showed the GDR proceeds were used for the purpose stated in the resolution (establishing a subsidiary) and in one case proceeds were paid immediately and in the other within a couple of months; hence there was no established fraud or loss to investors. Consequently, the findings that Mr. I.S. Sukhija ought to have questioned the use of proceeds were misplaced and did not amount to culpability under the SEBI Act or PFUTP Regulations. [Paras 10, 11, 14]Penalties and debarments imposed on Mr. I.S. Sukhija quashed; appeals allowed.Non-disclosure under Listing Agreement - penalty proportionality and mitigation in absence of investor loss - debarment as consequence of culpability in securities market misconduct - Whether Mr. Gurmeet Singh, as Managing Director and signatory to Loan and Pledge Agreements, was liable for violations and what relief, if any, was appropriate - HELD THAT: - The Tribunal accepted that Mr. Gurmeet Singh, being the Managing Director, was involved in day-to-day affairs and was signatory to the Loan Agreement and Pledge Agreement. The Tribunal held that non-disclosure of those agreements to the Stock Exchange under the Listing Agreement amounted to a violation warranting penalty. However, the Tribunal found no evidence that the Company or investors suffered loss, and that the GDR proceeds were used for the purpose stated in the resolution (setting up a subsidiary). The Tribunal therefore concluded that while the finding of violation for non-disclosure was sustainable, there was no fraud established. Applying the principle of proportionality and in view of absence of loss, the Tribunal reduced the quantum of penalty to what it considered just and proper for each GDR issue and upheld the debarment. [Paras 12, 13, 14]Finding of violation against Mr. Gurmeet Singh affirmed; penalties reduced to Rs. 20 lakh for each GDR issue and debarment upheld; appeals partly allowed/ dismissed as indicated.Final Conclusion: The Tribunal quashed the penalties and debarments imposed on Mr. H.S. Anand and Mr. I.S. Sukhija and allowed their appeals; it affirmed liability of Mr. Gurmeet Singh for non-disclosure under the Listing Agreement but reduced the penalty to Rs. 20 lakh for each GDR issue while upholding debarment, and disposed of the appeals accordingly.

2021 (9) TMI 1518 - SECURITIES APPELLATE TRIBUNAL MUMBAISEBI

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Issues:
Challenges to orders by Whole Time Member and Adjudicating Officer of SEBI, non-disclosure in GDR issuance, penalties and debarment imposed, role of directors in fraudulent scheme, applicability of past tribunal decisions, excessive penalties, liquidation of company.

Analysis:
The judgment involved challenges to orders by the Whole Time Member (WTM) and the Adjudicating Officer (AO) of SEBI regarding non-disclosure in the issuance of Global Depository Receipts (GDRs). The appellants were imposed penalties and debarment for their roles in the fraudulent scheme. The company issued GDRs without disclosing crucial information, leading to selective disclosure to the Bombay Stock Exchange (BSE) and suppression of material facts. Both the WTM and the AO found the scheme violative of SEBI Act and PFUTP Regulations, resulting in penalties and debarment.

The appellants, non-executive independent directors, challenged the charges, arguing they were not involved in day-to-day affairs and had no specific role in GDR issuance. The respondent contended that the directors' responsibility stemmed from their signatory roles in the board resolution. Past tribunal decisions were cited, but the tribunal found reliance on those decisions misplaced. The tribunal emphasized that mere presence at the board resolution did not imply involvement in fraudulent activities.

Regarding the appeals of two other appellants, the tribunal found that the managing director and chief executive officer were responsible for non-disclosures and violations of the listing agreement. However, it noted that the company was now under liquidation, the GDR proceeds were utilized appropriately, and no specific fraud or inducement was alleged. The tribunal found the penalties imposed excessive and arbitrary, reducing them for these appellants.

Ultimately, the tribunal quashed the orders against some appellants based on past tribunal decisions, while partially allowing the appeals of others by reducing penalties and debarment periods. The judgment highlighted the importance of fairness, transparency, and proportionality in penalties, considering the circumstances of the case and the responsibilities of the individuals involved.

Company executives win appeal against excessive penalties for inadequate GDR proceeds disclosure violations
Securities Appellate Tribunal Mumbai held that while a company made inadequate disclosures regarding GDR proceeds and loan arrangements to BSE, the GDR issue was genuine and not fraudulent. Appeals of three appellants were allowed based on precedent, with penalties quashed. For two other appellants who were company executives, penalties were reduced from Rs. 50 lakh to Rs. 20 lakh each, and debarment period reduced from five years to two years six months, finding original penalties excessive despite affirming disclosure violations.

Violation of statutory duties of disclosure and transparency - liability of non-executive independent directors for alleged corporate fraud - responsibility of executive directors for disclosure failures - application of the PFUTP Regulations to alleged fraudulent schemes - assessment of proportionality of penalties and debarment under Section 15J principlesLiability of non-executive independent directors for alleged corporate fraud - violation of statutory duties of disclosure and transparency - Whether appellants Jaiprakash Kabra, Gopaldas Maheshwari and Rajesh Jhunjhunwala can be held liable for fraud or nondisclosure merely because they were signatories to the board resolution authorising the GDR issue. - HELD THAT: - The Tribunal held that mere presence as signatories to the board resolution dated May 7, 2010, without any finding that the appellants had an active role in or prior knowledge of a fraudulent scheme, is insufficient to fasten liability for fraud or nondisclosure. Reliance placed by SEBI on decisions where non executive directors were shown to be involved in company affairs was found misplaced because no material was produced to establish participation by these appellants in the issuance of GDRs or in decisions to withhold information. The Tribunal followed its earlier decisions which require positive evidence of involvement beyond being a signatory and held that the impugned findings against these three appellants were perverse and unsustainable. [Paras 10, 11, 12, 13, 17]Findings and orders of the AO insofar as they relate to Jaiprakash Kabra, Gopaldas Maheshwari and Rajesh Jhunjhunwala are quashed; their appeals are allowed.Responsibility of executive directors for disclosure failures - violation of statutory duties of disclosure and transparency - assessment of proportionality of penalties and debarment under Section 15J principles - application of the PFUTP Regulations to alleged fraudulent schemes - Whether appellants Pradip Mundhra and Sanjay Taparia are liable for nondisclosure and, if so, whether the penalties and debarment imposed are justified. - HELD THAT: - The Tribunal found that Pradip Mundhra (managing director and signatory to the pledge agreement) and Sanjay Taparia (chief executive officer) were at the helm of the company's affairs and had a duty to ensure transparency; selective disclosures to the stock exchange and non disclosure of the loan/pledge arrangements amounted to violation of the listing obligations. However, the Tribunal also found that the GDR issue itself was genuine, proceeds were utilised as per offering and there was no specific pleading or evidence that proceeds were diverted or that investors suffered loss; consequently, the factual matrix did not support a finding of a fraudulent scheme under the PFUTP Regulations. Having regard to the AO's own finding of no disproportionality or investor loss and the absence of a fraudulent misappropriation, the Tribunal concluded that the quantum of penalty and the period of debarment were excessive. The violation findings were affirmed but sanctions were moderated accordingly. [Paras 14, 15, 16, 17]Findings of violation against Pradip Mundhra and Sanjay Taparia affirmed for nondisclosure; penalty of Rs. 50 lac reduced to Rs. 20 lac each and debarment of five years reduced to two years and six months; appeals partly allowed.Final Conclusion: The appeals of the three non executive independent directors are allowed and the penalties against them are quashed for lack of evidence of active participation in the alleged scheme; the appeals of the two executive officers are partly allowed-findings of nondisclosure are affirmed but monetary penalties and period of market access debarment are reduced as disproportionate.

2021 (7) TMI 971 - Supreme CourtSEBI

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Issues: (i) Whether the power to compound offences under Section 24A of the Securities and Exchange Board of India Act, 1992 requires the prior consent of SEBI; (ii) whether, on the facts of the case, the offences involving alleged price rigging and misuse of public issue proceeds should be compounded.

Issue (i): Whether the power to compound offences under Section 24A of the Securities and Exchange Board of India Act, 1992 requires the prior consent of SEBI.

Analysis: Section 24A contains a non obstante clause and vests the power to compound in the Securities Appellate Tribunal or the court before which the proceedings are pending. The provision does not mention SEBI as a consenting authority. Reading a mandatory consent requirement into the text would amount to rewriting the statute. At the same time, because SEBI is the expert regulator and prosecuting agency under the Act, its views on the nature, gravity and market impact of the alleged default must be sought and given due deference, unless those views are shown to be mala fide or manifestly arbitrary.

Conclusion: Prior consent of SEBI is not mandatory for compounding under Section 24A, but SEBI's views must be obtained and considered with due deference.

Issue (ii): Whether, on the facts of the case, the offences involving alleged price rigging and misuse of public issue proceeds should be compounded.

Analysis: The alleged conduct was not a private wrong capable of being settled merely by restitution. It involved serious allegations of market manipulation, artificial price rise, misuse of IPO proceeds and conduct affecting investors and the stability of the securities market. In such cases, the public character of the offence and the broader impact on investor confidence justify refusing compounding, even where some compensatory steps were taken and the regulator did not suffer from any lack of information or arbitrariness in opposing the application.

Conclusion: The offences were not fit to be compounded on the facts.

Final Conclusion: The statutory power under Section 24A is controlled by the text of the Act and must be exercised with regard to SEBI's expert view and the public character of securities-market offences. On the facts, compounding was rightly declined and the challenge failed.

Ratio Decidendi: Under Section 24A of the SEBI Act, the tribunal or court alone decides compounding, but must seek and seriously consider SEBI's expert views; offences of a public-market character involving investor harm and market manipulation should not ordinarily be compounded.

SEBI compounding requires regulator's views, but market-manipulation offences affecting investors were not fit for compounding.
Section 24A of the SEBI Act vests compounding power in the SAT or the court seized of the proceedings, and prior consent of SEBI is not mandatory; however, SEBI's expert views on the nature, gravity and market impact of the alleged default must be sought and given due deference unless mala fide or manifestly arbitrary. Applying that approach, allegations of price rigging, artificial price rise and misuse of public issue proceeds were treated as offences of a public-market character affecting investors and market confidence, so compounding was refused despite compensatory steps. The challenge therefore failed and compounding was declined on the facts.

Compounding of offences under Section 24A of the SEBI Act - Requirement of consent of SEBI for compounding - Deference to regulatory view of SEBI - Non-obstante clause and exclusive power of SAT or Court to compound - Distinction from CrPC Section 320 and NI Act Section 147/JIK Industries - Public interest versus private nature of offences - Guidelines for compounding under Section 24ACompounding of offences under Section 24A of the SEBI Act - Requirement of consent of SEBI for compounding - Non-obstante clause and exclusive power of SAT or Court to compound - Distinction from CrPC Section 320 and NI Act Section 147/JIK Industries - Deference to regulatory view of SEBI - Whether the consent of SEBI is a mandatory prerequisite to the SAT or Court exercising power to compound offences under Section 24A of the SEBI Act. - HELD THAT: - Section 24A, which begins with a non-obstante clause, entrusts the power to compound specified offences to the Securities Appellate Tribunal or to the Court before which proceedings are pending. The plain language of Section 24A does not require SEBI's consent. Where Parliament has intended a role for SEBI it has expressed it elsewhere in the statute (for example Section 24B which involves SEBI's recommendation to the Central Government). Nevertheless SEBI is the statutory regulator, prosecuting agency and possesses specialised expertise; consequently the SAT or Court must obtain SEBI's views on an application for compounding and afford those views a high degree of deference in the absence of manifest arbitrariness or mala fides. The court should not read a veto or prior-consent requirement into Section 24A; doing so would amount to judicial legislation. The decision in JIK Industries and provisions under the CrPC and NI Act were examined and distinguished on the basis that Section 24A is a distinct statutory scheme and must be given its natural meaning, subject to the obligation on SAT/Court to seek and give weight to SEBI's views. [Paras 82, 83, 84, 85, 90]SEBI's consent is not a statutory precondition to compounding under Section 24A, but the SAT or Court must solicit SEBI's views and accord them significant deference unless they are manifestly arbitrary or mala fide.Guidelines for compounding under Section 24A - Public interest versus private nature of offences - Deference to regulatory view of SEBI - Whether, on the facts of the present case, the offences should be compounded. - HELD THAT: - Having articulated factors and procedural expectations (including those appearing in SEBI's circulars and FAQs) which the SAT or Court should follow when adjudicating compounding applications, the Court applied those principles to the factual matrix. The allegations involved alleged price rigging, misuse of IPO proceeds and manipulation affecting investor protection and market stability. The matter had been considered by SEBI's High Powered Advisory Committee which recommended non-compounding; that recommendation was neither mala fide nor manifestly arbitrary. Given the gravity of the allegations, the public character of the conduct alleged and SEBI's considered objection, compounding was not warranted in the present case. [Paras 92, 93, 94]The appeal is dismissed on merits: compounding is not appropriate on the facts and the High Court's order refusing compounding is affirmed.Final Conclusion: The judgment affirms the High Court: Section 24A does not confer a veto to SEBI but requires the SAT or Court to obtain and give substantial deference to SEBI's views before compounding; applying those principles the Court found the allegations in this case to be of a public character affecting investor protection and market stability, SEBI's objection was not manifestly arbitrary, and compounding was rightly refused.

2021 (7) TMI 751 - Supreme CourtSEBI

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Court clarifies winding-up rules for mutual funds, emphasizes transparency, trustee consent, and SEBI's regulatory powers.
The court provided a comprehensive interpretation of the relevant regulations, emphasizing transparency, accountability, and the importance of informed decision-making in the winding-up process of mutual fund schemes. It upheld the constitutional validity of Regulations 39 to 42, highlighting the role of trustees in seeking unitholders' consent before winding up a scheme. The judgment reinforced SEBI's regulatory powers to protect investors and market integrity, ensuring a balanced approach that safeguards unitholders' rights while maintaining regulatory oversight and market stability.

Consent of the majority of the unitholders - winding up of a mutual fund scheme - harmonious construction of Regulations 39 to 42 with Regulation 18(15)(c) - cease-and-freeze effect of Regulation 40 - trustees' opinion to wind up under Regulation 39(2)(a) - timing of seeking unitholders' consent (post-publication under Regulation 39(3)) - SEBI's powers under Section 11 and Section 11B of the SEBI Act - challenge of manifest arbitrariness / excessive delegation to trusteesConsent of the majority of the unitholders - Regulation 18(15)(c) - Meaning of 'consent' in Regulation 18(15)(c). - HELD THAT: - The Court held that 'consent' in Regulation 18(15)(c) denotes affirmative consent of the majority of unitholders present and voting (i.e. simple majority of votes cast), not the majority of the entire body of unitholders. Silence or abstention by absent unitholders is neither acceptance nor rejection. The ordinary and purposive interpretive approach was applied to avoid an impracticable quorum requirement for an indefinite and fluctuating electorate of unitholders; practical construction and authorities on corporate/quorum principles were relied upon to conclude that the consent is to be computed by reference to those who exercise their right to vote, and in a poll by reference to units held.Consent means a simple majority of the unitholders present and voting (in a poll, computed by units), not majority of all unitholders.Timing of seeking unitholders' consent (post-publication under Regulation 39(3)) - cease-and-freeze effect of Regulation 40 - Regulations 39 to 42 - When the consent of unitholders under Regulation 18(15)(c) must be sought in relation to winding up under Regulations 39-42. - HELD THAT: - The Court construed Regulations 39-42 harmoniously with Regulation 18(15)(c) and held that trustees' decision to wind up under Regulation 39(2)(a) must be followed by disclosure by the trustees under Regulation 39(3); the unitholders' consent required by Regulation 18(15)(c) is to be sought after publication of the notice (post-disclosure), not before publication. This construction preserves the instantaneous operation of Regulation 40 on publication and avoids practical absurdity and commercial chaos that would result from requiring prior polling before notice. Regulation 41(1) (meeting to authorise steps for winding up) remains the procedural mechanism by which unitholders may authorise the authorised person to take steps for winding up.The trustees must publish the notice under Regulation 39(3) and then seek unitholders' consent; consent is not a pre-condition to publication and triggering of Regulation 40.Trustees' opinion to wind up under Regulation 39(2)(a) - SEBI's powers under Section 11 and Section 11B of the SEBI Act - Whether SEBI can inquire into or issue directions in relation to a trustees' decision to wind up under Regulation 39(2)(a). - HELD THAT: - The Court rejected the categorical proposition that SEBI has no role to examine trustees' decision. Although clause (a) vests primacy in trustees' opinion, SEBI retains power under Sections 11 and 11B of the SEBI Act to conduct inquiry/investigation and to issue directions where justified (e.g. if trustees act extraneously or contrary to fiduciary duties or regulatory mandates). Section 11B enables SEBI to issue directions after enquiry if necessary in the interest of investors or market, and such powers can be exercised to ensure compliance with the Regulations; SEBI's remedial powers therefore can engage even when trustees form an opinion under Regulation 39(2)(a). The Court emphasised statutory safeguards, delegated-regulation context, and the trustees' fiduciary role but held SEBI oversight is not excluded.SEBI may, after enquiry, inquire into and issue directions under Sections 11/11B even in respect of trustees' winding-up decisions where regulatory requirements or fiduciary duties are breached.Challenge of manifest arbitrariness / excessive delegation to trustees - Regulation 39(2)(a) - Constitutional challenge that Regulation 39(2)(a) is void for excessive delegation and manifest arbitrariness. - HELD THAT: - Applying principles of purposive and restrained review in economic regulation, and having construed Regulation 18(15)(c) to require post-publication unitholder consent and noting the statutory framework (trustees' independence, notice and disclosure obligations, SEBI oversight), the Court held the challenge on grounds of vagueness/excessive delegation and manifest arbitrariness fails. The expression 'happening of any event' is read with the qualification 'which requires the scheme to be wound up' and in the context of the Regulations, giving flexibility to trustees to respond to diverse commercial contingencies does not amount to unconstitutional delegation.The constitutional challenge to Regulation 39(2)(a) on grounds of excessive delegation/arbitrariness is rejected.Regulation 53(b) and Regulation 40 - redemption requests received prior to publication - Whether AMCs/trustees must honour redemption/repurchase requests received prior to publication of the winding-up notice when Regulation 40's cease-and-freeze operates. - HELD THAT: - The Court identified this as a grey factual and legal area requiring full factual adjudication and clarity from the adjudicating authorities. The interaction between the obligation in Regulation 53(b) to dispatch redemption proceeds within ten working days and the immediate freeze under Regulation 40 upon publication raises contested factual questions (timing of requests, compliance, possible regulatory violations, availability of funds, borrowing within prescribed limits). Given outstanding factual disputes and pending adjudication under the SEBI Act, the Court refrained from a final pronouncement and left the question to be addressed in the adjudication proceedings and on full facts.Issue remanded for factual determination in the adjudication proceedings; no final decision here on honouring redemption requests received before publication.Final Conclusion: The Court construed Regulation 18(15)(c) to require affirmative consent of a simple majority of unitholders present and voting (in a poll, by units), and held that trustees may publish the winding-up notice under Regulation 39(3) and trigger Regulation 40 immediately; unitholders' consent is to be sought after that disclosure. SEBI retains power to inquire and issue directions under Sections 11/11B where trustees act contrary to regulatory duties. The constitutional challenge to the winding-up provisions was rejected. The specific issue whether redemption requests received before publication must be honoured despite Regulation 40 was left for factual adjudication and is remanded to the statutory process.

2021 (7) TMI 1417 - SECURITIES APPELLATE TRIBUNAL, MUMBAISEBI

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Tribunal quashes open offer order, dismisses heirs' liability. SEBI criticized for delay.
The Tribunal allowed the appeals, quashing the order requiring the acquirers, heirs of deceased, and promoters to make an open offer under SEBI Act and SAST Regulations. The liability of legal heirs for violations by deceased acquirers was dismissed, emphasizing that the obligation ceased with the acquirers' death. The Tribunal found no evidence of promoters acting in concert and criticized SEBI for a 12-year delay in proceedings, deeming it unreasonable. It held that proceedings against deceased persons were illegal and directing an open offer after 12 years was inappropriate. The Tribunal directed each party to bear its costs and stressed SEBI's need for timely proceedings.

Inordinate delay and laches in regulatory enforcement - actio personalis moritur cum persona - liability of legal heirs for obligations of a deceased acquirer - open offer obligation on acquisition beyond threshold under SAST Regulations - exclusion for transmission on succession or inheritance - limitations on issuing directions to heirs and procedural fairness - alternative remedial powers under Regulation 44 of the SAST RegulationsInordinate delay and laches in regulatory enforcement - Whether the initiation of proceedings and issuance of the show cause notice after a lapse of twelve years was barred by inordinate delay and laches. - HELD THAT: - The Tribunal found a 12-year lapse between the acquisitions (financial year 2005-06) and issuance of the show cause notice in 2017. The acquisition was a matter of public record known to the stock exchange and SEBI, and SEBI's intermittent queries did not amount to timely enforcement. The respondent's prolonged inaction, including issuing notices to deceased persons despite being informed of their death, demonstrated a lackadaisical approach and caused prejudice by defeating the remedial purpose of the open offer remedy. The decision relied on the principle that, where no statutory limitation is prescribed, powers must be exercised within a reasonable time and inordinate delay that defeats the object of proceedings warrants quashing. Applying these principles, the Tribunal held the initiation of proceedings and the consequential order unsustainable on the ground of delay. [Paras 16, 17, 18, 23, 26]Proceedings and the impugned order were quashed on the ground of inordinate delay and laches.Actio personalis moritur cum persona - liability of legal heirs for obligations of a deceased acquirer - limitations on issuing directions to heirs and procedural fairness - exclusion for transmission on succession or inheritance - Whether the liability to make an open offer survives the death of the acquirer and can be imposed on legal heirs. - HELD THAT: - The Tribunal held that personal liability cannot be prosecuted against a deceased person and that SEBI proceeded incorrectly by issuing show cause notices to persons known to be dead. Relying on the maxim actio personalis moritur cum persona and the regulatory scheme, the Tribunal noted Regulation 27(1)(c) (allowing withdrawal where the sole acquirer, being a natural person, has died) and Regulation 3(1)(g) (excluding acquisitions by transmission on succession or inheritance from applicability of certain provisions). These provisions demonstrate that obligations arising from an acquirer's personal act do not automatically transfer to heirs. Further, the Tribunal emphasised that heirs cannot be directed to make an open offer unless they are impleaded and given an opportunity to be heard. Consequently, the WTM's view that the obligation survives and can be imposed on heirs was held to be without legal basis. [Paras 9, 20, 21, 22, 26]The direction to saddle legal heirs with the deceased acquirers' obligation to make an open offer was illegal and without authority; such liability does not survive the acquirer's death.Open offer obligation on acquisition beyond threshold under SAST Regulations - Whether the promoters (other noticees) were shown to be acting in concert so as to attract collective liability for the alleged breach of the open offer obligation. - HELD THAT: - Although the WTM concluded that all promoters/noticees were acting in concert, the Tribunal found that there was no adequate material or finding demonstrating a common objective or concerted action by the other promoters. The Tribunal observed that promoters who did not make acquisitions should not be presumed to have acted in concert absent evidence, and that the 1997 Regulations did not deem promoters to be acting in concert per se. The absence of a specific finding and requisite assessment on concerted action caused prejudice to those promoters, and the WTM's collective imposition of liability was therefore unsustainable. [Paras 11, 23, 26]The finding that the other promoters were acting in concert was not established and could not sustain collective liability.Alternative remedial powers under Regulation 44 of the SAST Regulations - Whether directing an open offer after a long lapse was an appropriate remedial measure, or whether alternative directions under Regulation 44 should have been considered. - HELD THAT: - The Tribunal noted that Regulation 44 provides a range of remedial measures (including disinvestment, freezing of rights, debarment, transfer to investor protection funds, or making an offer for sale) which the Board may issue in the interest of the market. Given the long delay and the resultant prejudice, directing an open offer after 12 years was held to be inappropriate. The Tribunal observed that less disruptive or more practicable measures under Regulation 44 could have been considered instead of ordering a belated open offer that would defeat its remedial purpose. [Paras 24, 25, 26]The direction to make an open offer after 12 years was inappropriate; the impugned order was quashed and alternative measures under Regulation 44 were identified as available remedies.Final Conclusion: The Tribunal allowed the appeals, quashed the impugned WTM order directing open offers, and held that proceedings were vitiated by inordinate delay and laches, that personal liability did not survive the death of acquirers so as to bind heirs, that promoters were not shown to be acting in concert, and that a belated open offer was an inappropriate remedy in the circumstances; parties to bear their own costs.

2021 (7) TMI 1433 - SECURITIES APPELLATE TRIBUNAL, MUMBAISEBI

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Securities Appellate Tribunal quashes debarment orders in GDR fraud case citing insufficient evidence of knowledge
The Securities Appellate Tribunal, Mumbai allowed appeals challenging debarment orders related to a fraudulent GDR issue. The case involved misleading information to shareholders about GDR subscription and undisclosed fraudulent loan arrangements through pledge agreements. The Tribunal held that mere presence during board resolution passage cannot establish knowledge of fraudulent intent or manipulation. The finding that board resolution authorized pledge agreements was deemed erroneous and unsupported by evidence. The resolution did not indicate appellants' prior knowledge of price manipulation or fraud against shareholders and investors. Consequently, the Tribunal quashed the impugned orders of both the AO and WTM regarding the appellants.

Liability of independent non-executive directors - use of board resolution authorising deposit of GDR proceeds as security is not ipso facto evidence of fraud - necessity of positive evidence to establish collusion, fraudulent intent or knowledge - application of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP RegulationsLiability of independent non-executive directors - use of board resolution authorising deposit of GDR proceeds as security is not ipso facto evidence of fraud - necessity of positive evidence to establish collusion, fraudulent intent or knowledge - application of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations - Whether mere presence as an Independent Non Executive Director on the board resolution authorising opening an account and permitting use of GDR proceeds as security renders the appellants liable for fraud and in violation of Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations. - HELD THAT: - The Tribunal applied its earlier decisions concerning virtually identical board resolutions and identical modus operandi in GDR issuances. A board resolution authorising the deposit of GDR proceeds in a bank account and permitting the bank to use such proceeds "as security in connection with loans" cannot, by itself, be read as authorising or evidencing a scheme to provide loans to a third party or to facilitate a fraudulent subscription by a single entity. Absent independent evidence that the directors knew of, participated in, or intended the subsequent arrangements (pledge, loan to a third party, or nondisclosure to the exchange), liability cannot be fastened merely because a director was a signatory or present when the resolution was passed. The Tribunal accordingly held that, in the facts before it, no finding was recorded by the WTM or the AO establishing that the appellants had any role in the issuance of the GDRs, had knowledge of the alleged fraudulent arrangements, or colluded in them. Reliance on the quoted precedents led to the conclusion that the findings of violation of Section 12A and Regulations 3 and 4, insofar as they related to these appellants, were unsustainable.Findings of liability and culpability against the appellants for the alleged fraudulent GDR issuance are quashed; the penalties and directions imposed by the AO and the WTM insofar as they relate to the appellants are set aside.Final Conclusion: The appeals are allowed; the impugned orders of the Adjudicating Officer and the Whole Time Member insofar as they relate to the appellants are quashed and set aside; no order as to costs.

2021 (6) TMI 1159 - SECURITIES APPELLATE TRIBUNAL, MUMBAISEBI

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Director's debarment overturned as mere presence during board resolution insufficient to prove fraud liability
Securities Appellate Tribunal, Mumbai allowed appeal against director's debarment for fraudulent GDR issuance. Investigation revealed GDR was issued without proper consideration and adequate disclosure. WTM found director liable for participating in board resolution authorizing GDR issuance and bank account opening. Tribunal held mere presence during resolution passage insufficient to establish liability without evidence of knowledge or involvement in fraud. Being non-executive independent director, cogent evidence required to prove awareness or connivance in fraudulent scheme. Impugned order quashed as no evidence established director's role in GDR fraud.

Liability of non-executive non promoter independent director - mere presence on board resolution not sufficient for culpability - requirement of cogent evidence of consent or connivance for director liability - duty of directors to ensure fairness and transparency - interpretation of board resolution authorising bank to use proceeds as security - debarment from securities market - inadmissibility of late-produced annual report without application under Order 41 Rule 27 CPCLiability of non-executive non promoter independent director - mere presence on board resolution not sufficient for culpability - requirement of cogent evidence of consent or connivance for director liability - debarment from securities market - Whether the appellant, a non executive non promoter independent director, could be held liable and debarred for the fraudulent issuance of GDRs solely by virtue of his participation in the board resolution dated July 27, 2006. - HELD THAT: - The Tribunal found no evidence that the appellant participated in or had knowledge of any fraudulent arrangement relating to the GDR subscription. The impugned WTM finding was grounded on a general proposition that boards play a key role and that directors may be liable if board processes cause an act or omission; however, the resolution merely authorised opening an account and permitted the bank to use proceeds as security in connection with a loan, without stipulating that proceeds would secure a loan to a third party. Prior decisions of the Tribunal on nearly identical facts were followed, holding that such a resolution cannot be inferred to be the starting point of a fraudulent scheme and that signatory status to the resolution, by itself, is insufficient to establish intention to manipulate or to prove collusion. The Tribunal emphasised statutory and regulatory guidance that independent or non whole time directors should not be held liable absent cogent evidence that default occurred with their consent or connivance or that they were aware of and involved in the fraud. Applying these principles, the Tribunal concluded that the WTM's debarment order against the appellant was unsustainable in the absence of any specific evidence of his role in the issuance or diversion of GDR proceeds. [Paras 11, 12, 13, 19, 20]Impugned debarment order quashed insofar as it relates to the appellant; appeal allowed.Inadmissibility of late-produced annual report without application under Order 41 Rule 27 CPC - evidentiary relevance of newly raised facts - Whether the respondent could rely on the appellant's alleged chairmanship of audit and remuneration committees, based on annual reports produced after conclusion of arguments, to sustain liability. - HELD THAT: - The Tribunal rejected the respondent's attempt, raised after judgment was reserved, to rely on annual reports indicating that the appellant was chairman of certain committees. Those materials were not part of the record before the WTM and were not pleaded in the show cause notice. The Tribunal held that such evidence, tendered for the first time in a short note after arguments, cannot be taken into account unless brought on record by an application for additional evidence in accordance with Order 41 Rule 27 CPC supported by an affidavit. Moreover, even if considered, the mere fact of chairmanship would be irrelevant unless there was evidence that the appellant had a role in or knowledge of diversion of GDR proceeds; absent such proof, the additional fact does not affect the decision. [Paras 14, 15, 16]Annual reports produced belatedly cannot be considered; new facts raised at that stage are inadmissible and irrelevant to establish culpability.Final Conclusion: The Tribunal held that mere presence as a signatory to the board resolution did not establish culpability of the appellant, a non executive non promoter independent director, for the fraudulent GDR issuance; in the absence of cogent evidence of his consent, connivance or involvement, the WTM's debarment order is quashed and the appeal is allowed, with parties to bear their own costs.

2021 (6) TMI 1144 - SECURITIES APPELLATE TRIBUNAL MUMBAISEBI

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Appellants cleared of PFUTP liability as no direct collusion; six closely linked entities held liable for manipulation
AT held appellants were improperly singled out for PFUTP violations: there was no direct connection, collusion or price-manipulation link between the appellants and the company, its promoters or the principal manipulator (noticee no. 9), so culpability against the appellants could not be sustained. The tribunal found the six entities, which acquired shares from the promoter and managed company affairs, were closely connected with the scheme and rightly held liable; the WTM order against those six entities did not suffer from manifest error. Preferential allottees were treated differently in the impugned order, and AT rejected application of the "weak fundamentals" standard to justify penalizing the appellants.

Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations - Regulations 3 and 4 of PFUTP - preponderance of probabilities - bona fide purchaser - connection/proximity in price manipulation - promoter related entities - restraint from accessing securities market - exoneration and revocation of regulatory directions - long term capital gains conversion of unaccounted income - discriminatory treatment/dual standards in adjudicationRegulations 3 and 4 of PFUTP - preponderance of probabilities - bona fide purchaser - connection/proximity in price manipulation - discriminatory treatment/dual standards in adjudication - Whether the appellants (off-market buyers who sold on-exchange) were guilty of violating Regulations 3 and 4 of the PFUTP Regulations and liable to be restrained from accessing the securities market. - HELD THAT: - The Tribunal held that the WTM's finding of guilt was principally based on an inference that a prudent investor would not buy shares of a company with weak fundamentals and suspended trading unless there was a pre-existing arrangement to reap profits. The Tribunal found this reasoning to be erroneous and perverse: making profits per se is not unlawful, and the WTM had not shown collusion or any material evidence linking the appellants with the Company, its promoters, or the identified manipulators. The Tribunal noted that the more central actors (preferential allottees, LTP contributors and exit providers) had been exonerated by revocation orders, yet the appellants were penalized on the basis of proximity and profit, which amounted to inconsistent standards. The Tribunal emphasised absence of direct evidence of funding, profit-sharing, or assurances given to the appellants, and observed that the WTM's inference rested on surmise and conjecture rather than corroborative material. Insofar as the Dhanuka family was concerned, the Tribunal accepted the forensic auditor's finding that the loan transactions with Bihariji were in the ordinary course of business and that classification of the family as promoter-related was dropped; mere business dealings were insufficient to infer participation in the manipulative scheme. On these bases the Tribunal concluded there was no material to sustain violations against the appellants and quashed the impugned directions insofar as they related to them. [Paras 35, 36, 37, 38, 43]Impugned order insofar as it restrained and penalised the appellants is quashed and the appellants are exonerated.Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations - promoter related entities - connection/proximity in price manipulation - restraint from accessing securities market - Whether the six intermediary entities (who acquired shares from promoters and transferred them to beneficiaries) were correctly held to be connected with the Company and liable for market manipulation. - HELD THAT: - The Tribunal upheld the WTM's findings against the six entities. The record established that the six entities had acquired a substantial block of shares from the erstwhile promoters, paid consideration, and from February/March 2012 exercised active roles in the Company's affairs: change of corporate office to premises owned by one of them, involvement in appointment of directors, correspondence regarding RTA and depository, participation in transfer formalities and use of the Company's email id. Documentary and bank evidence supported that they had paid for the share acquisitions and that transfers were not explained as loans satisfied by shares. The Tribunal found the WTM was justified in disbelieving the six entities' claim that shares were taken merely in satisfaction of loans (no loan agreements, no collateral, and transfers disproportionate to alleged loans). On this material, the Tribunal found a direct connection between the six entities and the Company and no manifest error in the WTM's order holding them liable and imposing restraints. [Paras 39, 40, 41, 42, 43]Appeals of the six entities are dismissed and the WTM's order insofar as it relates to them is upheld.Final Conclusion: The Tribunal quashed the WTM's directions against the listed appellants (Appeal Nos. 102, 44, 85, 235, 246, 247, 571, 572, 573, 575 and 581 of 2020) and exonerated them from alleged violations of Regulations 3 and 4 of the PFUTP Regulations; appeals filed by the six intermediary entities (Appeal Nos. 178, 179, 180 and 181 of 2020) were dismissed and the WTM's order against them was sustained. No order as to costs.

2021 (5) TMI 1029 - SECURITIES APPELLATE TRIBUNAL, MUMBAISEBI

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Issues: (i) whether the penalties imposed on the company and its managing director for the GDR-related fraudulent arrangement required interference on the ground of proportionality; (ii) whether an independent director who was a signatory to the board resolution and a member of the audit committee could be held liable for the fraudulent conduct and concealment; (iii) whether the order of caution and penalty imposed on another director could be sustained in the absence of material showing participation in the fraud.

Issue (i): whether the penalties imposed on the company and its managing director for the GDR-related fraudulent arrangement required interference on the ground of proportionality.

Analysis: The company's case involved false and misleading disclosures regarding the GDR subscription, concealment of the loan and pledge arrangements, and diversion of the proceeds outside India. The Tribunal accepted the findings that the company and the managing director were part of the fraudulent scheme and noted that the penalty imposed was within the statutory maximum. The comparative material relied upon did not establish parity, as the facts of the present matter were materially distinct.

Conclusion: The penalties imposed on the company and the managing director were upheld and no interference was called for.

Issue (ii): whether an independent director who was a signatory to the board resolution and a member of the audit committee could be held liable for the fraudulent conduct and concealment.

Analysis: Mere signature on the board resolution, by itself, did not establish fraudulent conduct or violation of the securities law regime. However, membership of the audit committee gave access to the company's financial status, and the failure to notice that the GDR proceeds were not being used for the stated business purpose supported liability. The Tribunal treated this as sufficient participation in the scheme to justify the penalty.

Conclusion: The finding of liability and the penalty imposed on the independent director were sustained.

Issue (iii): whether the order of caution and penalty imposed on another director could be sustained in the absence of material showing participation in the fraud.

Analysis: The only basis against this director was alleged presence in the meeting at which the resolution was passed, a fact that was disputed. The Tribunal held that the resolution by itself did not create suspicion or amount to fraud, and that there was no evidence showing involvement in the GDR fraud or in defalcation of funds. The findings rested on conjecture rather than proof.

Conclusion: The caution order and the penalty against this director were set aside.

Final Conclusion: The appeals of the company, the managing director, and the independent director were dismissed, while the appeals of the other director were allowed and the adverse orders against him were quashed.

Ratio Decidendi: Liability for a securities-market fraud must rest on material showing actual participation in the fraudulent scheme or conscious breach of duty; mere formal association with a board resolution, without more, is insufficient, though committee membership and access to financial information may justify an inference of complicity where the fraudulent diversion of funds is apparent.

Securities fraud liability turns on actual participation or conscious breach, not mere formal board association.
In a GDR-related securities fraud matter, the Tribunal held that penalties on the company and its managing director were justified because the record showed false disclosures, concealment of loan and pledge arrangements, and diversion of proceeds outside India. An independent director was also held liable where, beyond signing the board resolution, audit committee membership gave access to financial information and the failure to detect misuse of GDR proceeds supported an inference of participation. By contrast, a director against whom only disputed presence at the meeting was alleged faced no material showing involvement in the fraud, so the caution and penalty were set aside.

Fraudulent scheme via loan and pledge - misleading disclosures to regulators and investors - proportionality of penalty - liability of an independent director and duty of audit committee members to raise red flags - evidentiary requirement to implicate a director in fraud; board resolution alone insufficient - violations of the PFUTP Regulations and Listing Agreement disclosure obligationsFraudulent scheme via loan and pledge - misleading disclosures to regulators and investors - proportionality of penalty - violations of the PFUTP Regulations and Listing Agreement disclosure obligations - The findings of the WTM and the Adjudicating Officer that Chromatic India Limited engaged in a fraudulent arrangement in relation to the GDR issue, made misleading disclosures and violated regulatory obligations, and the penalties imposed on the company and its whole time director are affirmed. - HELD THAT: - The Tribunal confirmed the concurrent findings that the GDR subscription was effectively by a single entity (Vintage), that a Loan Agreement and Pledge Agreement were used so that the GDR proceeds were not available to the company and were concealed from investors and regulators, and that false subscriber lists and nondisclosures violated the PFUTP Regulations and Listing Agreement. Under the statutory penalty regime the maximum sanction was Rs. 25 crores; the AO imposed Rs. 10 crores on the company, which the Tribunal found to be appropriate, non arbitrary and consistent with the penalties imposed in comparable matters. The Tribunal accepted the respondent's explanation that differences in quantum across cases were explained by differing facts (e.g., repatriation of funds in other matters, existence of distinct aggravating conduct here) and held that discretionary relief was not available where the WTM/AO findings were not assailed on merits before it. [Paras 9, 11, 16]Appeals of the company and its whole time director are dismissed and the penalties confirmed.Liability of an independent director and duty of audit committee members to raise red flags - signatory to board resolution - The finding that the independent director Ajay Sethi was liable and the penalty imposed on him is sustained. - HELD THAT: - The Tribunal held that mere signature on the Board resolution does not by itself establish fraud; however, where the director was a member of the Audit Committee (and other oversight committees) he had access to the company's financial position and the manner of utilization of GDR proceeds and therefore had a duty to raise objections when proceeds were not used for stated purposes. The Tribunal relied upon prior Tribunal reasoning to conclude that failure, in those circumstances, to object amounted to conduct that attracted liability under Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations; the AO's imposition of a penalty was not erroneous. [Paras 12, 13, 14, 15]Appeal of Ajay Sethi is dismissed and the penalty upheld.Evidentiary requirement to implicate a director in fraud; board resolution alone insufficient - evidence of participation in fraud - The orders of the WTM and the AO insofar as they restrained and penalized Vipin Sharma are quashed; his appeals are allowed. - HELD THAT: - The Tribunal found that, to implicate a director in the fraud, the authority must point to evidence showing the director's involvement in the fraudulent scheme or misappropriation of funds; presence on, or being a signatory to, a board resolution of itself did not establish such involvement. The WTM's caution and the AO's monetary penalty rested on the disputed premise that the appellant was present at the meeting and aware of objectives behind the resolution; those findings amounted to surmise and conjecture in the absence of corroborative evidence. Consequently the restraint and penalty against Vipin Sharma could not be sustained. [Paras 17, 18, 19, 20, 21]Impugned orders against Vipin Sharma are quashed and his appeals are allowed.Final Conclusion: The Tribunal confirmed the WTM and AO findings and penalties against Chromatic India Limited, and against director Vinod Kumar Kaushik and Ajay Sethi, finding the company level penalty proportionate; orders and penalty against director Vipin Sharma were quashed for lack of evidence. Parties to bear their own costs.

2021 (4) TMI 1367 - SECURITIES APPELLATE TRIBUNAL, MUMBAISEBI

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Issues Involved:
1. Delay in filing appeals
2. Restraining appellants from accessing securities market
3. Imposition of penalties for violations of regulations
4. Liability of different appellants in the case

Issue 1: Delay in filing appeals
The judgment begins by condoning the delay in filing the appeals based on the reasons stated in the applications. The miscellaneous applications for condonation of delay are allowed, indicating a procedural issue addressed at the outset.

Issue 2: Restraining appellants from accessing securities market
The judgment discusses two separate orders by the Whole Time Member (WTM) of the respondent Securities and Exchange Board of India (SEBI) and the Adjudicating Officer (AO) concerning the appellants. The WTM restrained all appellants from accessing the securities market for five years, while the AO imposed penalties for violations of various regulations. The orders were based on violations of specific regulations related to fraudulent and unfair trade practices in the securities market.

Issue 3: Imposition of penalties for violations of regulations
The common facts of the case involve the issuance of Global Depository Receipts (GDRs) by the appellant Company, where the GDR proceeds were not utilized as intended but were instead used to create a false impression of immediate subscription. The GDRs were later converted into equity shares and sold in the Indian securities market. The judgment details the involvement of different appellants in these transactions and their defenses against liability.

Issue 4: Liability of different appellants in the case
The judgment analyzes the roles of each appellant in the case. Independent non-executive directors were found not liable as they did not participate in the GDR proceeds issue after passing the resolution. A resigned director was also deemed not liable for subsequent actions. However, the Managing Director, Whole Time Director, and the Company were held liable for their involvement in the fraudulent activities based on their roles and responsibilities. The judgment concludes by allowing some appeals and dismissing others based on the individual liability of each appellant.

Overall, the judgment provides a detailed analysis of the issues involved, focusing on the violations of regulations, individual liabilities of the appellants, and the rationale behind the decisions regarding penalties and restraints in accessing the securities market.

Independent non-executive directors absolved of liability for fraudulent GDR proceedings they didn't participate in
The Securities Appellate Tribunal held that independent non-executive directors who merely passed a resolution but did not participate in subsequent GDR proceedings could not be penalized for fraudulent activities. A director who resigned on the day of resolution passing was also absolved of liability for subsequent acts. However, the Managing Director, Company, and Whole Time Director were held liable for the fraudulent GDR issue and misappropriation of proceeds. The Managing Director could not escape responsibility by claiming he merely followed Lead Manager instructions, as his position required awareness of the account charge agreement's consequences.

Condonation of delay - non-executive independent director - exemption from liability - resignation prior to transactions - no liability - liability of company for acts of managing director - personal liability of managing director - whole time director - responsibility for day to day affairs - PFUTP Regulations - violations - penalty and market restraint upheldCondonation of delay - Applications for condonation of delay in filing the appeals were allowed. - HELD THAT: - The Tribunal, for the reasons stated in the applications, excused the delay in filing the appeals and permitted the matters to be heard on merits. [Paras 1]Miscellaneous application nos. 586, 662 and 663 of 2019 allowed; delay condoned.Non-executive independent director - exemption from liability - resignation prior to transactions - no liability - PFUTP Regulations - violations - Independent non executive directors and a director who resigned on the day of the impugned board resolution could not be held liable under the impugned orders. - HELD THAT: - The Tribunal found on the record that appellants Mr. Govind Das Pasari, Mr. Bharat Kumar Doshi and Mr. Avichal Kasliwal were independent non executive directors who did not participate in or follow up the GDR proceeds after passing of the board resolution, and no adverse inference was drawn against them in the impugned orders. Similarly, Mrs. Jyoti Bankda having tendered and had her resignation accepted on the day the resolution was passed could not be made responsible for subsequent acts (such as execution of the account charge agreement) undertaken by the Managing Director. The Tribunal applied these factual findings to absolve them of liability under the PFUTP Regulations and related orders. [Paras 15, 16]Appeals of Mr. Govind Das Pasari, Mr. Bharat Kumar Doshi, Mr. Avichal Kasliwal and Mrs. Jyoti Bankda allowed; impugned orders quashed insofar as they relate to these appellants.Liability of company for acts of managing director - personal liability of managing director - whole time director - responsibility for day to day affairs - PFUTP Regulations - violations - penalty and market restraint upheld - The Company, the Managing Director and the Whole Time Director were held liable for the fraudulent use of GDR proceeds and the consequential violations; penalties and market restraint were sustained against them. - HELD THAT: - The Tribunal held that the Company is vicariously liable for the acts of its Managing Director, and the Managing Director cannot escape liability by claiming he acted on the Lead Manager's instructions. The Whole Time Director, by virtue of his role in the day to day affairs, could not plead ignorance of the non return of GDR proceeds. The record showed execution of the account charge agreement and misappropriation of proceeds; on these findings the Tribunal affirmed liability under the PFUTP Regulations and upheld the penalty and restraint imposed by SEBI against Syncom Healthcare Ltd., Mr. Ajay Bankda and Mr. Jagdish Prakash Bagaria. [Paras 17, 18]Appeals of Syncom Healthcare Ltd., Mr. Ajay Bankda and Mr. Jagdish Prakash Bagaria dismissed; impugned penalty and restraint orders sustained as against them.Final Conclusion: Delay in filing the appeals was condoned; the impugned orders were quashed insofar as they related to the three independent non executive directors and the director who had resigned the same day, while the orders imposing penalties and a five year market access restraint were upheld against the Company, its Managing Director and the Whole Time Director.

2021 (4) TMI 1366 - SECURITIES APPELLATE TRIBUNAL, MUMBAISEBI

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Adjournment and virtual hearing directions, with digitally signed orders accepted for service and compliance during Covid-19.
The Tribunal adjourned the hearing on the request of counsel who was ill and listed the matter for a later date. To manage proceedings during the Covid-19 period, the parties were directed to take instructions from the Registrar 48 hours before the fixed date to confirm whether the hearing would proceed by video conference or physically. The order also stated that, where physical signing and certified copies were not practicable, a digitally signed copy sent by fax or email would be treated as authorised for service and compliance.

Adjournment for illness of counsel - hearing by video conference due to Covid-19 pandemic - directions to take instructions before hearing - validity and service of digitally signed orders - use of electronically transmitted copies for complianceAdjournment for illness of counsel - Adjournment of the hearing on account of illness of the appellant's counsel and listing of the matter for a future date. - HELD THAT: - The bench recorded the request for adjournment on the ground that the appellant's counsel had not recovered from illness and acceded to the request. The matter was accordingly adjourned and listed for hearing on the specified date. [Paras 1]Hearing adjourned; matter listed on May 21, 2021.Directions to take instructions before hearing - hearing by video conference due to Covid-19 pandemic - Parties directed to ascertain, 48 hours before the fixed date, whether the matter will be taken up via video conference or by physical hearing. - HELD THAT: - Recognising the need to plan the mode of hearing, the Tribunal directed the parties to take instructions from the Registrar 48 hours prior to the listed date to determine whether the hearing will proceed through video conference or physically. This direction is procedural and intended to facilitate orderly conduct of the hearing in the prevailing circumstances. [Paras 2]Parties to take instructions from the Registrar 48 hours before the date to determine mode of hearing.Validity and service of digitally signed orders - use of electronically transmitted copies for compliance - Digitally signed copy of the order is authorised for purposes of compliance and service where physical signing and certified copy issuance are not possible. - HELD THAT: - The Tribunal noted that the matter was heard by video conference due to the Covid-19 pandemic and that it was not possible to physically sign the order or issue a certified copy. In these circumstances the order will be digitally signed by the Private Secretary on behalf of the bench, and the parties were directed to act on the digitally signed copy sent by fax and/or email. This provides temporary procedural validity to electronically transmitted copies where traditional physical formalities cannot be completed. [Paras 3]Digitally signed copy authorised; parties may act on digitally signed copy sent by fax and/or email.Final Conclusion: Adjournment granted; parties directed to confirm mode of hearing 48 hours before the listed date; digitally signed electronic copy of the order authorised for service and compliance in view of inability to provide a physically signed or certified copy.

2021 (2) TMI 1382 - SECURITIES APPELLATE TRIBUNAL, MUMBAISEBI

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SEBI price manipulation order upheld after appellants artificially inflated suspended stock price through coordinated trading scheme
The Securities Appellate Tribunal, Mumbai dismissed appeals against SEBI's order regarding price manipulation in shares. Appellants received shares through off-market transfers at prices below Last Traded Price from one entity, then sold minimal quantities on exchange platform at higher prices despite pending large buy orders. This created misleading trading appearance in an illiquid stock that had been suspended for six years. The appellants contributed 70.96% of total trades during investigation period, causing price to rise from Rs. 17.50 to Rs. 427.85 without matching company fundamentals. Tribunal found transactions non-genuine and manipulative based on preponderance of probabilities, dismissing appeals without costs.

Manipulation of securities - Inducement under Regulation 4 of PFUTP - Preponderance of probabilities - Collusion between buyer and seller - Illiquid scrip trading and miniscule sell orders - Off-market transfersCollusion between buyer and seller - Manipulation of securities - Liability under Regulations 3 and 4 of the PFUTP Regulations in the absence of established connection/collusion between the seller-appellants and the buyers - HELD THAT: - The Tribunal examined whether the Adjudicating Officer could sustain penalties for manipulation where no direct evidence of nexus between the appellants (sellers) and the buyers or promoters was found. Relying on the reasoning in Nishith M. Shah HUF and construing the facts of the present case, the majority concluded that, in the absence of any finding of collusion or other causal connection linking the sellers to buyers or promoters, the charge of manipulation could not be sustained against the appellants. The Tribunal noted that selling miniscule quantities by itself is not unlawful and that an inference of manipulation requires evidence of collusion unless the balance of probabilities otherwise indicates guilt. Applying this test to the material on record, the Tribunal found the requisite connection/not proven and set aside the AO's penalty order as to the appellants. [Paras 9, 10, 13, 14, 33]Penalty order under Regulations 3 and 4 quashed as against the appellants for want of established collusion; appeals allowed.Preponderance of probabilities - Illiquid scrip trading and miniscule sell orders - Off-market transfers - Inducement under Regulation 4 of PFUTP - Whether, on the proved facts (illiquidity, off-market transfers and pattern of miniscule sales), the preponderance of probabilities supported a finding of non-genuine trading/manipulation against the appellants - HELD THAT: - The Tribunal analysed the factual matrix - long suspension of trading in the scrip, subsequent off-market transfers from a primary transferor to the appellants at prices below pending exchange buy orders, and repeated miniscule sell orders that matched higher buy orders on the exchange - against the civil standard of proof. While one member concluded that these circumstances could indicate non-genuine transactions and manipulation when weighed together, the majority found that, on the whole record and applying the preponderance test, SEBI had not proved that the appellants engaged in manipulative trades connected with the buyers. Accordingly, the material did not establish inducement by the appellants sufficient to sustain penalties under Regulation 4, and the penalty findings were set aside as to the appellants. [Paras 20, 21, 22, 28, 31]On the balance of probabilities, the facts did not support sustaining the AO's finding of non-genuine trading/manipulation against the appellants; appeals allowed (penalty quashed).Final Conclusion: The impugned adjudication order imposing penalties under Regulations 3 and 4 of the PFUTP Regulations, 2003 is quashed insofar as the appellants are concerned; all appeals are allowed with no order as to costs and miscellaneous application disposed.

2021 (2) TMI 598 - Supreme CourtSEBI

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Winding up of mutual fund schemes: unitholder consent by majority of participating voters upheld; objections to e-voting rejected
Winding up of mutual fund schemes requires unitholder consent under clause (c) to Regulation 18(15), which the document interprets as consent by a majority of unitholders who participated in the poll, not a majority of all unitholders. Objections to e-voting procedures and to the appointment of the e-voting provider were rejected because the platform was certified and supervised and the participation levels (approximately 38% numerical, 54% value) were sufficient; rejected corporate votes would only increase affirmative proportions. Trustees may engage a third party to undertake orderly realization, liquidation and distribution to unitholders; appointment of a third party to wind up was directed.

Consent of the unitholders - majority of the unitholders present and voting - simple majority - quorum in an indefinite electorate - e voting validity - poll results and internal management - winding up procedure and disbursement - appointment of an independent third party for winding up - misfeasance and fraud allegations - Regulation 39(2)(a) applicability Consent of the unitholders - majority of the unitholders present and voting - simple majority - quorum in an indefinite electorate - Meaning of 'consent of the unitholders' in clause (c) of sub regulation (15) of Regulation 18 of the Mutual Fund Regulations. - HELD THAT: - The Court construed 'consent' in Regulation 18(15)(c) as affirmative consent required from a simple majority of those unitholders who participate in the poll, not a majority of the entire pool of unitholders. The regulation does not prescribe a quorum or a mode of voting; given the practical impossibility of requiring participation by a majority of all unitholders in schemes with very large and fluctuating registers, the Court adopted a pragmatic construction: abstentions or silence cannot be treated as either acceptance or rejection. The Court relied on principles distinguishing definite and indefinite electorates, authorities on quorum and majority, and the need to avoid an interpretation that would render the regulation unworkable or absurd. Consequently, 'consent' under clause (c) means a simple majority of unitholders present and voting (including voting by electronic poll), and not majority of all unitholders in number. [Paras 11, 12, 16, 17, 19] For the purpose of Regulation 18(15)(c), consent means a simple majority of the unitholders who participate in the poll (present and voting); silence/abstention is neither consent nor dissent. E voting validity - poll results and internal management - winding up procedure and disbursement - appointment of an independent third party for winding up - Validity of the e voting process and results, and consequential order to proceed with winding up and disbursement of the six schemes. - HELD THAT: - The Court examined the conduct of the e voting (including notices, appointment of KFin Technologies as e voting service provider, the Scrutiniser, and an Observer appointed by SEBI), the Observer's report, forensic analysis, complaints and technical issues raised by objectors, and the poll results. The Court held that the e voting process was substantially in accordance with law and that the objections raised (including alleged technical irregularities, issues with IP addresses, timing of appointment publicity, minor procedural lapses and content of notices) did not materially vitiate the poll. The Court accepted the trustees' and Scrutiniser's tabulation (both on one vote per unitholder and proportionate per unit bases) showing overwhelming affirmative votes, rejected the objectors' challenges, and held that the unitholders gave their consent by majority to wind up the six schemes. The Court, with parties' consent, appointed M/s. SBI Funds Management Pvt. Ltd. to undertake winding up (liquidation and distribution) and directed that disbursements may be made in tranches, following a best effort principle to realise assets at the best possible value. [Paras 36, 39, 40, 41, 42] The e voting results are valid and objections thereto are rejected; the unitholders have consented by majority to winding up the six schemes, and winding up and disbursement shall proceed in accordance with the Court's directions, including appointment of M/s. SBI Funds Management Pvt. Ltd. to conduct the winding up. Misfeasance and fraud allegations - Regulation 39(2)(a) applicability - Whether Regulation 18(15)(c) applies where trustees have formed an opinion under Regulation 39(2)(a), and allegations of misfeasance/malfeasance/fraud by trustees/AMC. - HELD THAT: - The Court expressly declined to decide whether clause (c) of Regulation 18(15) is triggered or operates when trustees form an opinion under Regulation 39(2)(a), and also did not adjudicate allegations of misfeasance, malfeasance or fraud against the trustees/AMC or their consequences (including restitution/liability). Those matters remain the subject of separate proceedings (including SEBI's show cause action following the forensic report) and are to be examined and decided independently. [Paras 4, 42] Left open for adjudication in due course; the Court did not decide the applicability of Regulation 18(15)(c) in cases where trustees act under Regulation 39(2)(a), nor the allegations of misfeasance/malfeasance/fraud. Final Conclusion: The Court construes 'consent of the unitholders' in Regulation 18(15)(c) as a simple majority of those unitholders who participate in the poll (present and voting); having found the e voting process and results to be substantially valid and the objections untenable, the Court upheld the unitholders' consent to wind up the six Franklin Templeton schemes, directed winding up and disbursement in terms of its orders (including appointment of M/s. SBI Funds Management Pvt. Ltd.), and left open separate questions regarding applicability of Regulation 18(15)(c) when trustees act under Regulation 39(2)(a) and the various allegations of wrongdoing for adjudication in other proceedings.

2020 (12) TMI 1219 - SECURITIES AND EXCHANGE BOARD OF INDIASEBI

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Fraudulent IPO Funding Leads to Restrictions on Company & Promoters
The case involved fraudulent funding of IPO applications to meet listing requirements and misappropriation of IPO proceeds. The company and connected entities were found to have funded IPO applicants and diverted IPO proceeds to reimburse the funding entities. The company failed to provide adequate documentation for fund utilization. As a result, the court directed the promoters to make a public offer, restrained the company from accessing the securities market for 8 years, and imposed restrictions on holding directorial positions and trading securities. The company faced compulsory delisting if public shareholding decreased.

Prohibition of manipulative and deceptive devices - Prohibition of fraudulent, manipulative and unfair trade practices - Minimum subscription requirement for IPOs (90% under ICDR Regulations) - Liability of company directors for fraud perpetrated through the company - Inadequacy of underwriting contract as a defence to a pre-arranged funding scheme - Remedial power to protect investors by offering exit and delisting directionsProhibition of manipulative and deceptive devices - Prohibition of fraudulent, manipulative and unfair trade practices - Minimum subscription requirement for IPOs (90% under ICDR Regulations) - The Noticees acted in concert to fund IPO applications and thereby implemented a fraudulent scheme to achieve the mandatory subscription threshold for listing. - HELD THAT: - SEBI's investigation and the material on record establish interconnections among the Noticees through fund flows, common addresses and common directors. The funding group entities issued third party cheques and directly or indirectly financed numerous applicants; 161 applicants funded by these entities received allotments totalling 13,24,000 shares (29.03% of allotments). The Company accepted third party cheques and allotted shares to such applicants without satisfactory explanation or verifiable documents. The Underwriting Agreement did not impose an obligation on the underwriter to subscribe to the entire unsubscribed portion so as to achieve the 90% threshold and therefore does not negate the inference of a pre meditated funding scheme. In the absence of credible, contemporaneous evidence to show bonafide commercial transactions or loans, the preponderance of probabilities is that the Company and the funding group Noticees colluded to fund subscriptions so as to procure listing in circumvention of Regulation 14(1) of the ICDR Regulations, thereby engaging in manipulative and deceptive conduct violative of Section 12A of the SEBI Act and Regulations 3 and 4(1) of the PFUTP Regulations. [Paras 16, 17, 21, 24, 29]Issue answered affirmatively: the Company and Noticee nos.4-11 were connected and, collectively with Noticee nos.1-3, funded IPO subscriptions under a fraudulent scheme to meet the 90% minimum subscription requirement and violated Section 12A of the SEBI Act and Regulations 3 and 4(1) of the PFUTP Regulations.Prohibition of fraudulent, manipulative and unfair trade practices - Liability of company directors for fraud perpetrated through the company - Inadequacy of underwriting contract as a defence to a pre-arranged funding scheme - The IPO proceeds were not utilized for the objects stated in the prospectus and substantial sums were diverted to the funding group entities, implicating the Company and its directors in violations. - HELD THAT: - The Company's asserted utilisation break up was inadequately supported. Documents produced post hearing (agreements, invoices) were unregistered, unsigned by independent witnesses, contradicted disclosures in the prospectus and lacked third party verifiable corroboration. Significant transfers from IPO proceeds occurred immediately after listing; approx. INR 15.65 Crore was transferred out soon after the IPO, of which a substantial portion went to funding group entities. The timing, manner and absence of contemporaneous supporting records indicate diversion of IPO proceeds rather than bona fide expenditure for declared objects. Given that directors occupy a central role in corporate acts, Noticee nos.2 and 3, being directors at the time, are liable for the company's fraudulent conduct as they failed to ensure true disclosures and proper utilisation of funds. [Paras 36, 42, 43, 48, 52]Issue answered against the Company and its directors: the IPO proceeds were not deployed as represented in the prospectus and were diverted to entities that financed subscription, constituting violations of Section 12A of the SEBI Act and Regulations 3 and 4(1) of the PFUTP Regulations; directors are held liable for these acts.Final Conclusion: SEBI found that the Company, its directors and the funding group entities colluded to fund IPO subscriptions to meet the regulatory 90% threshold and thereafter diverted IPO proceeds to those funding entities; violations of Section 12A of the SEBI Act and Regulations 3 and 4(1) of the PFUTP Regulations were held to be established. Remedies and directions were issued including a public offer for exit and related delisting facilitation, market access restraints on the Company and specified persons, debarments for specified Noticees, freezing of holdings during restraint, and immediate operation of the order to protect investor interest.

2021 (1) TMI 761 - SECURITIES APPELLATE TRIBUNAL, MUMBAISEBI

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Issues Involved
1. Validity of the debarment order issued by SEBI.
2. Interpretation of the resolution dated October 19, 2007.
3. Appellant's involvement and liability in the alleged fraudulent activities.

Detailed Analysis

1. Validity of the Debarment Order Issued by SEBI
The appellant contested the SEBI's order dated March 6, 2020, which debarred the appellant from accessing the securities market for five years and froze his securities. SEBI's Whole Time Member (WTM) found that the appellant's actions in the GDR issue constituted fraud under the PFUTP Regulations. The WTM directed the company to refund the money from Banco and debarred the appellant based on the resolution dated October 19, 2007, which allowed Banco to use the funds as security for loans.

2. Interpretation of the Resolution Dated October 19, 2007
The resolution authorized the opening of a bank account with Banco Efisa S.A. for receiving subscription money for the GDR issue and allowed the bank to use the funds as security in connection with loans. The appellant argued that the term "in connection with loans" referred only to loans taken by the company, not third parties. The appellant relied on the Tribunal's decision in Adi Cooper v. SEBI, which held that a similar resolution did not imply an intention to manipulate the market or commit fraud.

3. Appellant's Involvement and Liability in the Alleged Fraudulent Activities
The appellant argued that he was a non-executive independent director involved only in policy decisions and not in the day-to-day management of the company. SEBI contended that the appellant, being a director for over ten years and a signatory to the resolution, was involved in the fraudulent arrangement facilitating the GDR issue. The Tribunal found no evidence that the appellant was aware of or involved in the fraudulent activities. The Tribunal noted that the appellant's role was limited to policy decisions, and there was no finding that he was involved in the day-to-day affairs or aware of the Credit Agreement and Account Charge Agreement.

Judgement
The Tribunal concluded that the controversy was covered by the decision in Adi Cooper's case, where it was held that the resolution did not imply an intention to commit fraud. The Tribunal found no evidence of the appellant's involvement in the day-to-day management or knowledge of the fraudulent activities. The Tribunal held that Section 27 of the SEBI Act, which deals with the liability of directors, was not applicable as there was no finding that the appellant had knowledge of the fraud. Consequently, the Tribunal quashed the SEBI's order insofar as it related to the appellant and allowed the appeal with no order as to costs.

The Tribunal noted that the order would be digitally signed due to the Covid-19 pandemic, and parties were directed to act on the digitally signed copy.

SEBI Debarment Overturned: No Fraud Found
The Tribunal quashed SEBI's debarment order against the appellant, finding no evidence of his involvement in fraudulent activities or day-to-day management. Relying on a previous case, the Tribunal held that the resolution did not indicate fraudulent intent. As the appellant was not found to have knowledge of the fraud, Section 27 of the SEBI Act on director liability was deemed inapplicable. The appeal was allowed with no costs, and parties were instructed to act on the digitally signed order due to the Covid-19 pandemic.

Interpretation of board resolution authorizing bank to use subscription proceeds as security in connection with loans - prohibition of fraudulent and unfair trade practices - liability of director for fraud under the SEBI Act and PFUTP Regulations - requirement of knowledge or involvement for imposition of liability under Section 27 of the SEBI ActInterpretation of board resolution authorizing bank to use subscription proceeds as security in connection with loans - prohibition of fraudulent and unfair trade practices - The legal import of the board resolution dated October 19, 2007 and whether that resolution, by itself, established a fraudulent scheme under the PFUTP Regulations resulting in the appellant's liability. - HELD THAT: - The Tribunal held that the resolution authorising the bank to "use the funds so deposited... as security in connection with loans if any" is susceptible of the ordinary meaning that the bank could use the deposited GDR proceeds as security for loans taken by the company itself. The Tribunal followed its earlier decision in Adi Cooper, observing that at the time the resolution was passed the third party (Clifford) was not in the picture and there was no basis to infer that the resolution was a prelude to a fraudulent arrangement to finance a third party's subscription. Absent any finding that the appellant knew of or participated in the subsequent Credit Agreement or Account Charge Agreement, the WTM's conclusion that the resolution evidences fraud under Regulations 3 and 4 of the PFUTP Regulations was held to be unsupported. The Tribunal therefore found that the charge of collusion or fraud against the appellant was not proved on the basis of the resolution alone (paras 12-13). [Paras 12, 13]The resolution did not, by itself, establish a fraudulent scheme implicating the appellant; the finding of fraud based solely on that resolution was set aside.Liability of director for fraud under the SEBI Act and PFUTP Regulations - requirement of knowledge or involvement for imposition of liability under Section 27 of the SEBI Act - Whether the appellant, a non executive director who asserted lack of involvement in day to day management, could be held liable under Section 27 of the SEBI Act and thereby be debarred absent findings of knowledge or participation. - HELD THAT: - The Tribunal observed there was no finding by the WTM that the appellant was involved in day to day management, aware of, or party to the Credit Agreement and Account Charge Agreement that enabled the third party financing. The respondent's attempt to rely on attendance or committee chairmanship was not supported by record material before the WTM and could not be relied upon to fasten liability. As Section 27 cannot be applied where the offence is committed without the incumbent's knowledge, the Tribunal held that applying Section 27 to the appellant was erroneous on these facts. The Tribunal distinguished the authority relied upon by the respondent and concluded that the WTM had not established the requisite knowledge or participation to impose director liability (paras 14-15). [Paras 14, 15]The appellant could not be held liable under Section 27 in the absence of findings of knowledge or involvement; the imposition of debarment on that basis was unsustainable.Final Conclusion: The impugned order insofar as it debarred the appellant and held him liable for fraud under the SEBI Act and PFUTP Regulations is quashed; the appeal is allowed with no order as to costs.

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