TaxTMI 
TaxTMI 
2008 (5) TMI 716
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....mat accounts that had been used for cornering IPO shares had been opened during the year 2003, the Board broadened its investigations to all IPOs between 2003 and 2005. On the basis of the preliminary investigations the Board prima facie found that the appellant as a depository participant (DP) had opened large number of fictitious demat accounts in collusion with its so called sub brokers (application collecting agents) including Roopalben Panchal by disregarding the 'know your client' norms and that it also provided finance to the fictitious entities and indulged in fabrication of documents. After examining the role played by the appellant in the IPO scam, the Board prima facie concluded as under:- "As may be seen from the discussions in the following paragraphs, it appears that Karvy DP having strategised the business plan for wrenching the IPO market, aided abetted and actively colluded with Roopalben Panchal and other clients by not only opening thousands of dematerialized accounts in fictitious/benami names in gross disregard of KYC norms and providing/arranging IPO finance to these benami/fictitious entities but also by indulging in fabrication of documents to cover the tr....
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.... in progress. In the case of the appellant two separate proceedings were initiated - (i) enquiry under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry officer and Imposing Penalty) Regulations, 2002 (enquiry regulations) and (ii) adjudication proceedings under chapter VI A of the Securities and Exchange Board of India Act, 1992 (for short the Act). The Appellant had been found to have played a dubious role as a DP by allegedly opening large number of fictitious demat accounts in collusion with Roopalben Panchal and others. For these illegalities/violations the Board ordered an enquiry under the enquiry regulations. The appellant is also alleged to have financed some transactions as a stock broker and is said to have made an illegal gain of Rs. 7,79,125/- for which adjudication proceedings had been ordered by the Board. While appropriate proceedings were pending against the entities concerned including the enquiry and adjudication proceedings against the appellant and when their guilt was yet to be established and whether any of those entities had made any ill-gotten gains was yet to be found out, the Board felt the need to require those entities....
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....gement was passed against them. Same is the position with the present appellant. While allowing the other appeals we left it open to the Board to initiate, in accordance with law, disgorgement proceedings against such entities as may become liable to disgorge. The learned senior counsel for the appellant herein did not want us to pass the same order in this appeal. This appeal was accordingly separated from the bunch of other appeals and is being disposed of by this order. (4) Shri N. H. Seervai learned senior counsel for the appellant took us through the record and strenuously urged that in the case of the appellant, the enquiry proceedings under the enquiry regulations initiated against it had already come to an end and that the appellant had been found guilty of some wrong doings for which a notice was issued to it to show cause why the appellant be not prohibited from acting as a DP for a period of 18 months and that by order dated 22.6.2007 the Board while accepting the enquiry report has prohibited the appellant from opening fresh demat accounts till the end of December 2007. Appeals no. 75 and 111 of 2007 have been filed by the appellant against this order which are pending....
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....to make sure that the wrongdoers do not profit from their wrongdoing, it would follow that the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity. In a disgorgement action, the burden of showing that the amount sought to be disgorged reasonably approximates the amount of unjust enrichment is on the Board. (6) We will now deal with the rival contentions of the parties. In the light of what we have said above, the only question that needs to be answered is whether any finding has been recorded at any stage of the proceedings that the appellant has made no illegal gains. If there is such a finding, as contended by the learned senior counsel for the appellant, then he is right and the Board cannot be permitted to initiate fresh proceedings for that purpose and if not, it would be open to the Board to go ahead. We have given our thoughtful consideration to the contention of the appellant and express our inability to agree with Shri Seervai, learned senior counsel, appearing on its behalf. The enquiry officer has not recorded any finding to the effect that the appellant made no illegal gains. As a matter of fact, the issue whether th....
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....e carefully gone through the aforesaid observations of the enquiry officer and have not been able to persuade ourselves to agree with the appellant that a finding has been recorded that it made no illegal gains as a result of its wrongful activities. This issue has not at all been examined during the course of the enquiry. We have also gone through the show cause notice dated September 22, 2006 that was issued to the appellant by the enquiry officer and are of the view that the question of ill-gotten gains, if any, made by the appellant was not the subject matter of that notice and only the details of its wrong doings have been referred to therein. We are also of the considered opinion that the enquiry officer has not undertaken any exercise to find out the ill-gotten gains, if any, made by the appellant and the enquiry was only to find out the wrongful acts allegedly committed by the appellant. The observations to which reference has been made by the learned senior counsel for the appellant are to be read in the context of the illegalities allegedly committed by the appellant. Those cannot be read out of context to mean that a firm finding had been recorded that no illegal gains h....