TaxTMI 
TaxTMI 
2017 (9) TMI 392
X X X X Extracts X X X X
X X X X Extracts X X X X
....Pamecha, Advocates JUDGMENT Per : Jog Singh, Member 1. In these three appeals common issues have been raised and, as such, the appeals have been heard together and are being disposed of by this common order with the consent of all the counsel for the parties. For the sake of convenience facts of Appeal No. 68 of 2017 (Dr. Vijay Mallya) is taken as a lead case. By way of this appeal, the Appellant, Dr. Vijay Mallya, has challenged the Show Cause Notice-cum-ad interim exparte impugned order dated January 25, 2017 passed by the Securities Exchange Board of India against the Appellant, (a non-independent non executive director) and certain other Key Managerial Persons ("KMPs") of United Spirits Limited ("USL"), namely, Mr. Ashok Capoor (nonindependent Managing Director), Mr. Sowmiyanarayanan (Assistant Vice President - Accounts), Mr. S. N. Prasad (Senior Vice President - Finance and Accounts), Mr. P. A. Murali (Executive Director and Chief Financial Officer), Mr. Paramjit Singh Gill (President - All India Operations) and Mr. Ainapur S. R. (Divisional Vice President - Accounts). The Appellant herein has been prima facie found to have violated Section 12A(c) of the SEBI Act 1992 ("SE....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t or the rules and the regulations made there under. Regulation 4 (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- a)............... b)............... c)............... d)............... e) any act or omission amounting to manipulation of the price of a security; f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities; g)............... h)............... i)................ j)................ k) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors; 4. Briefly stated the facts of the case is that USL is a company incorporated under the Companies Act, 1956 on March 31, 1999 as "McDowell Spirits Limited" and was later named USL on Octob....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m the statutory auditors BSR & Co. LLP was issued. 6. In January 2015, UBHL defaulted in payment of interest to USL on the ground that UBHL was involved in various winding up proceedings and could not part with any money without the consent of the Court. An investigation was conducted by PWC-UK, at the behest of the USL Board, to assess the transactions qualified by the statutory auditors of USL. The report dated March 24, 2015, revealed that funds from USL had been diverted and the ultimate beneficiaries of these advances were certain group companies of UBHL, including Kingfisher Airlines Ltd ("KFA"). To illustrate, in one instance, USL transferred ` 25 crore to a Tie-up Manufacturing Unit ("TMU") named "UTKAL" on November 24, 2011 and on the same day UTKAL transferred an equivalent amount to KFA. 7. On April 25, 2015, the Board of USL made certain decisions regarding pressing matters such as recovery of funds that were diverted from USL; Dr. Mallya's resignation from the Board, which he unabashedly refused. The Board also decided that an internal committee be constituted by the MD and CEO Mr. Anand Kripalu, to initiate internal proceedings against employees who were involved in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erseas subsidiaries amounting to ` 311.8 crore. The improper transactions so identified, in most cases, were with overseas or Indian entities that appeared to be affiliated to Dr. Vijay Mallya, such as Force India Formula One, Watson Ltd, Continental Administrative Services, etc. Dr. Mallya seemed to have a material, direct or indirect interest in these entities. The USL Board also announced that the mutual release agreed with Dr. Mallya on February 26, 2016, would not extend to matters arising out of the Additional Inquiry Report. The review period for the Additional Inquiry was between October 2010 and July 2014. 12. In view of the findings and clarifications provided by USL, whilst relying on the investigations conducted by PWC-UK and Ernst and Young, the WTM, as an interim measure, passed the Impugned Order restricting the Appellants and the KMPs from accessing the securities market and prohibited from buying selling or otherwise dealing in securities in any manner whatsoever, either directly or indirectly, till further instructions from SEBI. 13. The impugned order has provided the Appellant and the 6 other KMPS mentioned above, an opportunity to file their replies before th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....report of the Statutory Auditors of the USL and the material collected by SEBI from the two Stock Exchanges, i.e., BSE and NSE. There are few other KMPs in the two connected Appeals who have also been found by the Statutory Auditors as having the knowledge of the fund diversion by Dr. Vijay Mallya. The extracts of the two Statutory Auditors' reports have been produced before us by SEBI along with other material on the basis of which prima facie view has been formed by SEBI to pass the impugned order in question against the Appellant and other KMPs. We shall be dealing with the same a little later. 17. The case of the Appellant as submitted by Shri Khambata, learned senior counsel, is that the impugned order suffers from certain legal infirmities. It is argued on behalf of the Appellant that there was no urgency in the matter and as such no occasion for SEBI to invoke discretion conferred upon it by Sections 11(1), 11(4)(b) and 11(B) to pass an ex parte ad interim order against the Appellant without affording any opportunity of hearing. The order is, therefore, violative of the principles of natural justice. It is argued by Shri Khambata that the jurisdictional prerequisite of pend....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ciples of natural justice and fair play in action." The Learned Counsel for the appellant also placed reliance on the ruling of this Tribunal in the case of D. A. Gadgil Vs. SEBI [2003 48 SCL 480 (SAT)] wherein this Tribunal observed that "natural justice demands that a person who is to be directly affected by an administrative action be given prior notice of what is proposed so as to enable him to make proper representation of defend his cause. The aim of the rules of natural justice is to secure justice. Soul of the rule is fair play in action. The message of the doctrine is that no one should be condemned without being heard." Learned Counsel for the applicant submits that this Tribunal in Zenith Infotech Limited Vs. SEBI [Appeal No. 59/2013 decided on 23.07.2013] held that SEBI was duly empowered to pass an ex-parte order in urgent cases but this power was to be exercised sparingly in most deserving cases of extreme urgency. 20. The Learned Counsel for the Appellant submits that SEBI has passed the impugned order having adverse consequence on the Appellant behind his back, without giving an opportunity of hearing or inquiring and informing the Appellant that such legal action ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Therefore, in the absence of a formal investigation or representation sought from the person aggrieved, it is submitted that the impugned order is passed in violation of powers granted to SEBI under the SEBI Act. 23. On the basis of the above submissions, the appellant concludes that the charges are based on total surmises, probabilities and conjectures. SEBI cannot merely make the allegations without producing adequate evidence in support of the charge. The party alleging fraud is bound is establish it by cogent evidence and suspicion cannot be accepted as proof. 24. The appellant has drawn out attention to the position occupied by him in the USL ostensibly without going into the merit of the findings in detail. It is submitted that Shri Mallya was a non-executive chairman of USL at the time the alleged violation took place. He was not involved in the day to day management of the USL and was never connected with the preparation of final results of the company. The various violations of the FUTP regulations, particularly, enshrined in Regulation 3(d); 4(i); 4(2)(e); 4(2)(f) and 4(2)(k), etc. have been erroneously placed on the appellant instead of on the other persons who were ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eceit. SEBI has not produced any evidence to show that there has been manipulation of the price of a security. Further, in the absence of any allegation that any of the financial reports published by USL were untrue or inaccurate at any stage, SEBI has erred in alleging a prima face violation of Regulation 4(2) of the PFUTP Regulations. 27. It is also one of the contentions raised by the Appellant that SEBI grossly erred in placing reliance on biased third party report of PWC-UK dated 24.03.2015 and observations contained in E&Y Report dated 29.06.2016. Shri Khambata submits that SEBI had no power to rely upon private reports to pass an ex-parte ad interim order against the Appellant in the manner in which it has been sought to be done by the respondent. More precisely, Shri Khambata submits that the private reports can corroborate SEBI's investigation and enquiry but said private reports cannot be the sole basis for passing such an ex-parte order of drastic nature. The contention is that the two reports of the Auditors are not authentic and are motivated and have been given under the influence of Diageo, the Appellant's competitor. 28. Lastly, Shri Khambata submits that the expr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tc. which is at paragraph 1.15, page 72 of the Appeal. USL, by relying upon the PWC-UK Report gave SEBI a point wise reply vide their letter dated 16.06.2016 (paragraph 1.16 at page 73 of the Appeal). A copy of the PWC-UK Report and Additional Inquiry Report dated 24.03.2015 and 29.06.2016 were submitted to SEBI by USL respectively by their letters dated 20.06.2016 and 11.07.2016 (Paragraph 1.17 and 1.19 at pages 78 and 79 of the Appeal respectively). USL gave further information on clarifications sought by SEBI by their letter dated 05.08.2016, which is at paragraph 1.20, page 79 of the paper book). 30. We have given a thoughtful consideration to the above submissions of both the Learned Senior Counsel for the parties. First of all we would like to deal with the contention of Shri Khambata that it was not a case fit enough in which powers conferred under 11, 11(b), 11(4) of the SEBI Act should have been invoked for passing the ad interim order and that it has led to violation of the natural justice inasmuch as no opportunity of hearing was afforded to the Appellant before passing the impugned order. We have looked into the various judgments cited by Shri Khambata in this regard. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ignificant dues towards the Income Tax Appellate Tribunal and instructed that USL "would have to come up with ` 44 Crore, if needed." (c) Email dated 19.04.2012 to P. A. Murali, whereby the Appellant stated that - "1. You are aware of my compulsion to keep KFA flying. Any slippage will be a disaster for the Group. 2. To set the record straight, I confirm that you have been acting under my direct authorization, for which I take responsibility. 3. You are aware that I have been following up three fund raising proposals - A) HDFC B) Bank of Maharashtra C) Pelican Funding. The Pelican Funding is to ensure that UBHL meets its obligations as well as to fund KFA. 4. As the Pelican Funding is complex and time consuming despite best efforts, I am asking for interim funding support from USL. Once this is in place, UBHL can return funds to USL with the appropriate accounting entries. (d) Vide email dated 13.07.2012, Mr. Ashok Capoor informed the Appellant that it was not possible for USL to support UB Group Companies to meet any of their needs and, in fact, USL needed support from UB Group Companies in those circumstances. In response, the Appellant, vide an emai....