TaxTMI 
TaxTMI 
2009 (11) TMI 979
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....urities and Exchange Board of India Act, 1992. All the appeals involve common questions of law and fact and were heard together. Since arguments were addressed in Appeal No. 80 of 2009, the facts are being taken from this case. Counsel for the parties are agreed that the decision in this case shall govern the other appeals as well. 2. The Securities and Exchange Board of India (hereinafter called the Board) received a complaint dated December 3, 2001 from M/s. Tata Finance Limited (for short TFL) alleging various irregularities committed by the appellant who, at the relevant time, was its managing director. The primary grievance of the complainant was that at the instance of the appellant, his friends, relatives and associates sold 2,90,000 shares of TFL on the basis of unpublished price sensitive information in his possession during March, 2001. The shares were said to have been sold through two brokers namely, M/s. Jhunjhunwala Stock Brokers Private Limited and Malini Sanghvi Securities Private Limited. In these appeals, we are only concerned with Malini Sanghvi Securities Private Limited which will be referred to hereinafter as the Broker. The Board carried out investigations....
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....re in appeal before us. It is common case of the parties that Mrs. Anuradha S. Pendse is the wife of the appellant and Nalini Properties Private Limited (for short Nalini) is a company promoted by her and Mr. Sudhakar Pendse, the father of the appellant and they are the only directors in this company. 3. The fact that the appellant was the managing director of TFL at the relevant time and that his wife Mrs. Anuradha S. Pendse and Nalini traded in the scrip of TFL is not in dispute before us. It is also not in issue that the appellant was in possession of unpublished price sensitive information in the second/third week of March, 2001 pertaining to the estimated losses suffered by Nishkalp and TFL and that Mrs. Anuradha S. Pendse and Nalini are persons deemed to be connected with TFL and, therefore, `insiders' within the meaning of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (hereinafter called the regulations). What is really in dispute is whether Mrs. Pendse and Nalini traded in the scrip of TFL when the appellant was in possession of the unpublished price sensitive information. The case of the appellant is that Mrs. Pendse a....
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....ck exchange(s) and every broker is required to furnish to the client without delay a contract note for all transactions in the form specified by the stock exchange. The Bombay Stock Exchange on which Exchange the transactions in question are said to have been executed, has prescribed two Forms, A & B in which the stock brokers are required to issue the contract notes. The contract note is issued in Form A when the transaction is executed between the two clients through their respective broker(s) but when the sale/purchase is made to/from a broker in his proprietary account (on his own account), the cover note is required to be issued in Form B. The appellant contends that since Mrs. Anuradha S. Pendse and Nalini sold the shares to the Broker in its proprietary account, the contract notes were issued by the latter in Form B. Apart from the fact that these contract notes indicate that the transactions were executed by Mrs. Pendse and Nalini on September 11, 2000, there is also on record material to show that these transactions had been reported by the Broker to the Bombay Stock Exchange. By its letter dated September 16, 2000, the Broker sent five contract notes dated September 11, 2....
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....412) Ms Malini Sanghvi, Designated Director and Shri Ajit Sanghvi, Director, appeared before the Committee. They stated that the transactions were not spot delivery transactions, but these were off market hand delivery transactions. They confirmed that though late, the transactions were reported to the Exchange. They also stated that they had issued contract notes in the prescribed Form B and had obtained the written consent from their clients i.e. the buyer as well as the sellers. They accepted the delay in delivery and payment to the clients. DECISION: The Committee noted that (a) There was delay in reporting transactions to the Exchange and (b) There was delay in settlement of the trades. It was noted that written consent of the clients was obtained as required under Bye-law 15 of the Exchange and the transactions were reported to the Exchange, though late." In view thereof, the Committee decided to warn the member to be more careful in future and also decided that the member should submit a written undertaking to the Exchange confirming that in future it will strictly follow all the Rules, Bye-laws and Regulations of the ....
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....or paid) and recorded in the financial statements of the periods to which they relate." (Accounting Standard (AS)1 on Disclosure of Accounting Policies Clause 10.c). It is, thus, clear that there is a clear distinction between the revenue earned and revenue received and the moment a contract is complete, the right to receive the revenue thereunder accrues though it may be received subsequently. When we look at the aforesaid bill(s) and the contract notes read with the Party Ledger maintained by the Broker in the name of Mrs. Anuradha Pendse, it is more than clear that the sale transactions by Mrs. Anuradha Pendse and Nalini were clinched in September, 2000 though the amount thereunder was received by her on March, 30, 2001. In the letter of January 21, 2002 Mrs. Anuradha Pendse has also admitted that the delivery of the shares was given on March 28, 2001 subsequent to the transactions. It may be mentioned that the shares sold by Mrs. Anuradha Pendse and Nalini were in dematerialized form and their demat accounts were debited on the basis of the transfer instruction forms on March 28, 2001. This fact is also clear from the demat account of Mrs. Anuradha Pendse maintained by the Nati....
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.... the time of the settlement of the account at the end of the accounting year 2000-01. It is further clear that the trades though executed in September, 2000 were not settled within the time prescribed by the Bye-laws of Bombay Stock Exchange Limited. It is common case of the parties that the trades executed by Mrs. Anuradha Pendse and Nalini were off market hand delivery transactions which according to Bye-law 48(ii) of the Bye-laws had to be settled not later than fourteen days following the date of the contract. Admittedly, there was a long delay in settling the trades and since it was the responsibility of the Broker to settle the trades, the Stock Exchange, Mumbai, through its Disciplinary Action Committee took action against it for the delay and issued the warning as noticed earlier. It is pertinent to mention that during the course of the investigations, the Broker was sent for and its representative appeared on January 24, 2002 and it was pointed out to him that the trades of TFL shares in September, 2000 were not in accordance with the Securities Contracts (Regulation) Act, 1956 and he was asked to explain as to when the deliveries were given and payments made. This is what....
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....g. 9. The entire material produced by the appellant in support of his case has been discarded by the whole time member and he has given reasons for doing so. We shall now examine each of those reasons and see whether they are tenable to establish the preponderance of probabilities against the appellant As already noticed, the case of the appellant is that Mrs. Pendse and Nalini sold the shares on September 11, 2000 and that these transactions were reported by the Broker to the stock exchange as per its letter of September 16, 2000 which was received by the Bombay Stock Exchange on September 19, 2000. This letter of the Broker by which it reported the transactions to the Exchange has not been accepted and the whole time member has given two reasons for the same in para 14 of the impugned order. The first ground for rejection is that even though it bears the stamp of the Exchange acknowledging receipt of the letter, the date and time has not been recorded in the place provided for the same in the acknowledgement receipt and that the date "11.9.2000" is handwritten outside the seal. We have perused the photocopy of this letter which is on the record and can only observe that this g....
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....ker and the latter sold the same to IECIL on a back to back basis on the same day. The whole time member has referred to the contract notes and finds that in the ones issued to Mrs. Pendse and Nalini, it is stated "Securities SOLD TO you for" and in the one issued to IECIL it was mentioned "Securities BOUGHT FROM you for'. On the basis of these captions, the whole time member jumps to the conclusion that these contract notes refer to some transactions by which Mrs. Pendse and Nalini had purchased the shares and that these contract notes belie the stand of the appellant that they had sold the shares of TFL in September, 2000. On this basis the whole time member holds that they are not relevant to the issue. He further holds that the appellant has failed to substantiate his plea that the shares were actually sold by Mrs. Pendse in September, 2000 as claimed. We are really surprised at these findings recorded by the whole time member. To say the least, there is total non-application of mind to the facts of the case and he has not even cared to look at the material on the record. The investigations carried out by the Board had indicated that at the behest of the appellant, Mrs. Pen....
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....h 30, 2001 but nowhere does the show cause notice allege that Mrs. Pendse and Nalini had ever purchased the shares. If that had been the case, it would not support the charge of insider trading, having regard to the nature of the unpublished price sensitive information available with the appellant As a matter of fact, the Board proceeded throughout on the basis that Mrs. Pendse and Nalini had sold the shares and the only dispute between them was whether the sale took place in September, 2000 or in March, 2001. It is for the first time in the impugned order that a finding has been recorded that the contract notes pertain to the purchase of TFL shares by Mrs. Pendse and Nalini. At no stage prior to the passing of the impugned order was the appellant or Mrs. Pendse or even Nalini ever confronted with the fact that they had purchased the shares or that the contract notes pertained to their purchases. It is true that the contract notes were produced by the appellant and he did so in support of the plea that Mrs. Pendse and Nalini had sold the shares. During the course of the investigations, the representative of the Broker was summoned to appear on 24.1.2002 and again on 10.8.2002 and i....
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.... record the letter dated January 21, 2002 addressed by Mrs. Anuradha Pendse to the Chief General Manager of the Board pointing out that she had entered into only one off market deal in September 2000 through the Broker and sold 10,000 shares of TFL. She also pointed out that she did not execute any other transaction in TFL shares during the period from April, 2000 to April 30, 2001. This part of her statement has never been doubted by the Board and nor is there any material on the record to show that she executed any other trade except the one evidenced by the contract note. We have also noticed earlier that the sales made by Mrs. Pendse and Nalini through the Broker on September 11, 2000 had been reported by the Broker to the Bombay Stock Exchange. If the whole time member had any doubt about the transactions at any stage of the proceedings, he could have easily gathered further information from the Exchange which is not only as intermediary of the securities market but also under the regulatory control of the Board. It would have been in the fitness of things, if the Board had at some stage of the proceedings verified the details of the transactions executed by Mrs. Pendse and Na....
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.... the transaction of sale of TFL shares in September, 2000 is complete and this wholly substantiates the case of the appellant 12. We have already noticed that the appellant had placed strong reliance before the Board on the proceedings recorded by the Disciplinary Action Committee of the Bombay Stock Exchange chaired by a former Judge of the Bombay High Court. The proceedings to which detailed reference has already been made, clearly establish the fact that the transactions executed by Mrs. Pendse and Nalini in September, 2000 had been reported though there was a delay of eight days in reporting. These proceedings also indicate that there was a delay in the settlement of the trades. Having regard to these delays, the Disciplinary Action Committee decided to warn the Broker. The minutes of the Disciplinary Action Committee have been brushed aside by the whole time member merely by observing that the transactions in question were executed in the year 2000-01 whereas the minutes of the Disciplinary Action Committee were recorded on March 12, 2003. This had to be so and this is no ground to discard the minutes. We cannot uphold the findings recorded by the whole time member in this ....