TaxTMI 
TaxTMI 
2019 (10) TMI 1047
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....n directed to disgorge, jointly and severally, an amount of US $ 92 million along with simple interest at the rate of 6% per annum for the period from March 27, 2009 till December 31, 2014, within 45 days from the date of the impugned order. Further, the appellants as well as six other entities have been restrained from accessing the capital markets directly or indirectly and from dealing in securities or instruments with Indian securities as underlying in any manner whatsoever for a period of 10 years from the date of the order. 2. The impugned order is arising from certain violations noticed by SEBI relating to the issue of Global Depository Receipts ("GDRs") by Cals Refineries Limited ("hereinafter referred to as "Cals"), a listed Indian company, in December 2007 and certain subsequent transactions between Cals and Asia Texx Enterprises Limited (hereinafter referred to as "Asia Texx", (Appellant in Appeal No. 219 of 2015) in 2009. Appellant in Appeal No. 91 of 2015 is the majority shareholder and beneficial owner of Asia Texx. Since both these appeals are challenging the same impugned order, by consent of parties, both the appeals are heard together and disposed of by this com....
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....an by Honor to Banco; all these three events took place on the same day on March 27, 2009, through the accounts held by these entities in Banco. g) Though, the agreement between Cals and Asia Texx dated February 05, 2009 was purportedly for purchase of refinery machinery no machinery was received by Cals. Neither did they receive any refund of US $ 92 million paid by Cals to Asia Texx as advance. On the other hand, Asia Texx received 25 million GDRs from Honor which was transferred free of cost to Gagan Rastogi, the beneficial owner of Asia Texx and son of a Director of Cals Deep Rastogi. 4. This Tribunal dismissed three appeals arising from the order impugned in these appeals filed by Sarvesh Goorha, D. Sundararajan and Deep Kumar Rastogi by our order dated October 12, 2017. Cals' appeal challenging a similar order passed by SEBI dated October 23, 2013 was also dismissed by us vide the same order. We found that the charges relating to Cals and some of the directors at the relevant time including Sarvesh Goorha, D. Sundararajan and Deep Kumar Rastogi were found to be correct and thereby sustained the SEBI orders dated October 23, 2013 and December 31, 2014 in respect of those ....
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....t case, not a single rupee of the alleged wrongful gain is in the possession of the appellants, a fact clearly well known to SEBI and demonstrated from the material on record. The record is clear that Cals did not suffer any loss, the entire GDR issue was fictitious, with the securities being issued without receipt of real funds. The appellants have not received anything out of the US $ 108 million out of the GDR issue that did go to Cals as and when Honor repaid to Banco, the loan taken to purportedly subscribe to the GDRs. The appellants do not hold the US $ 92 million that purportedly went out of Banco purportedly to Cals, and purportedly from Cals to Asia Texx and purportedly from Asia Texx to Honor, and thereafter, purportedly from Honor, back to Banco. Therefore, there is no question of the appellants having been enriched by the sum of US $ 92 million at all. d) The above contentions are supported by SEBI's own investigation report. Banco's defence filed in a claim (No: 2013 Folio 1656) made by claimants before the Commercial Court, UK who had purchased GDRs from Honor, whereby it is clearly documented by a statement on oath by Banco that the sum of US $ 92 million was rou....
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....Cals and Asia Texx appears to have been structured to settle the outstanding liability of Honor to Banco using funds of Cals. Thus the liability of the promoter of Cals (liability of Mr. Sanjay Malhotra through Honor) was discharged using the funds of Cals. h) Therefore, learned counsel for the appellants contended that SEBI investigation report proves the following:- i) the alleged movement of a sum of US $ 92 million was round-tripping from Banco to Banco to disguise the repayment obligation of Honor and Mr. Sanjay Malhotra to Banco. ii). the liability that got discharged therefore, was the liability of Honor, beneficially wholly owned by Mr. Sanjay Malhotra. iii). Therefore, it can never be held that the appellants were the beneficiary of any wrongful gain or loss averted in the sum of US $ 92 million. On the contrary, the SEBI investigation report explicitly finds that the liability discharged i.e. the loss averted, was that of Honor, wholly owned by Mr. Sanjay Malhotra. It is noteworthy that Honor and Mr. Sanjay Malhotra did not participate in the SEBI proceedings. It is on record that the show cause notices issued to them returned undelivered and SEBI moved forward with wh....
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....mit one to retain. From the facts it is clear that Cals did not at all have US $ 92 million in its possession on March 27, 2009. Banco did. The funds purportedly moved around three accounts- Cals to Asia Texx and then back to Banco all the same day. n) It could be seen from the foregoing that the purported transaction for the funds to move from the Cals account in Banco to the Asia Texx account in Banco is numbered after the purported transaction for the funds to move from Asia Texx account in Banco to Honor's account in Banco. Yet, it is a matter of record that prior to the receipt of the US $ 92 million, there was no money in the newly opened account held by Asia Texx with Banco. This would further underline and corroborate that admitted position of round-tripping of funds from Banco to Banco. o) Another facet of the need to apply the subtraction principle is that the jurisdiction to disgorge would be an equitable remedy and it is aimed at ensuring that the person in possession of wrongful gains does not continue to enjoy the same. Unless one demonstrates as to who gained and at whose expense, it would evidently lead to an absurd consequence of the same amount being disgorg....
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.... a remedial provision and not a punitive provision. Sterlite Industries (India) Ltd. v/s SEBI 2001 SCC OnLine SAT 28 (Appeal No. 20 of 2001 decided on October 22, 2001), Videocon International Ltd. v/s SEBI 2002 SCC OnLine SAT 14 (Appeal No. 23 of 2001 decided on June 20, 2002), Rakesh Agarwal v/s SEBI 2003 SCC OnLine SAT 38 (Appeal No. 33 of 2001 decided on November 03, 2003), *612 Charity Commission for England and Wales v Mountstar (PTC) Ltd. and Ors. [2016] EWHC 876 (Ch) April 21, 2016. Irrespective of whether some of these judgements are arising out of tax statutes etc. their ratio squarely applies to 11B order of SEBI in correctly interpreting the economic reality and factual reality. Accordingly, all the transactions have to be considered as a single composite transaction and SEBI cannot arbitrarily choose one point or one layer and apply disgorgement. The appellants also relied on Mafatlal Industries Ltd. and Ors. v/s Union of India (UOI) and Ors. SCC (Civil Appeal No. 3255 of 1984 decided on December 12, 1996) to further their argument that the entire case of SEBI is founded on the premise that the appellants had gained at the expense of Cals when in reality the entire GDR....
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.... The appellants argument that the entire GDR process was vitiated and no genuine capital has been raised so as the appellants to receive any real benefits is fallacious, because, finding that no genuine capital was raised is in the context of one single entity namely, Honor alone subscribing to the GDR issue by Cals. b) There is no dispute on the facts that US$ 92 million was given by Cals to Asia Texx which received 25 million GDRs from Honor and transferred the same to Gagan Rastogi and these entities, therefore, got unjustly enriched at Cals expenses cannot be disputed. c) The appellants contention that the transaction between i) Cals and Asia Texx, ii) Asia Texx and Honor and iii) Honor and Banco were structured as a single transaction under which Asia Texx did not receive any benefit has no merit since clearly these are different transactions entered into by the parties concerned. In these transactions Asia Texx received 25 million GDRs of Cals which was in turn transferred by Asia Texx to Gagan Rastogi, beneficial owner. Even if it is assumed that it was a single transaction it is clear that despite making a payment of US$ 92 million to Asia Texx, Cals received no refin....
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....various provisions of PFUTP Regulations and wrongfully gained cannot be faulted. f) On the basis of the aforesaid findings, the impugned order prohibits the appellants from accessing the Indian capital markets for a period of 10 years and directs the appellants to jointly and severally disgorge the unlawful gain of US $ 92 million made by virtue of the fraudulent transaction between the appellants and Cals, which is fully in accordance with SEBI Act, Rules and Regulations. 11. The learned senior counsel for the respondent while distinguishing the orders cited by the appellants relied on various judgements to substantiate his contentions. Citing the judgement of S.P. Chengalvaraya Naidu v/s Jagannath and Ors. (1994) 1 SCC 1 (Civil Appeal No. 994 of 1972 decided on October 27, 1993, it was submitted that since the appellant, Gagan Rastogi, vide his affidavit dated July 19, 2017 made a false statement about his lack of association/ connection with Cals (while he was actually a shareholder of SRM Exploration Pvt. Ltd. which in turn had become the Promoter of Cals), the appellant Gagan Rastogi does not deserve any relief and such a false declaration alone is sufficient to dismiss t....
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....lso received 25 million GDRs, using the same US$ 92 million which constitutes a wrongful gain." 13. It was further submitted by the learned senior counsel that in SEC v/s A Shapiro, 494 F. 2d 1301 it has been held by the US Court of Appeal that the reach of disgorgement would include not only actual profit received but even "paper" profits. Similar view was held by this Tribunal in the matter of Dushyant N. Dalal v/s SEBI 2010 SCC Online SAT 328 where it speaks about an order of disgorgement on "notional profit" or unrealized gains. Such a view was also held in SEC v/s Commonwealth Chemical Securities Inc, 574 F. 2d 90. In SEC v/s Contorinis 743 F. 3d 296, the disgorgement provision was further extended when it was held that even the gains from insider trading executed by a fund manager on behalf of a fund could also be disgorged though it was not a personal gain of the fund manager. Moreover, unjust enrichment may also be prevented by requiring the violator to disgorge the unjust enrichment he has procured for a third party. As such when third parties have benefitted from illegal activity, it is possible to seek disgorgement from the violator, even if that violator never control....
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....the appellants is that they were arms length parties, though this was found to be factually wrong and stated explicitly so in this Tribunal's order dated October 12, 2017 (supra). Based on further records made available now it is clear that before even December 2007 appellant Gagan Rastogi was very much part of Cals' promoter group SRM as is clear from the Email dated June 13, 2006 from Spice Jet (part of the SRM Group) confirming receipt of funds to the tune of more than Rs. 8.08 crore from Gagan Rastogi and allotting securities worth Rs. 8.33 crores leaving a balance of Rs. 24.75 lakhs in respect of SRM Exploration Pvt. Ltd., though the shares of SRM is claimed to be credited to the appellant's account on December 17, 2007, five days after the issue of GDR by Cals. In the GDR listing particulars filed by Cals with Luxembourg Stock Exchange on December 12, 2007 Gagan Rastogi was shown as a shareholder of SRM Exploration Pvt. Ltd. to the extent of 18.2%. Similarly, on December 17, 2007 at 06:39 a message was sent from Spice Energy (part of the SRM Group) to Gagan Rastogi and few others whereby it was stated that 'Mr. Gagan Rastogi has been designated as the Project Leader' on the D....
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.... further transferred and that too free of cost to Gagan Rastogi. It is also on record that Gagan Rastogi has sold a part of these GDRs, 2.8 million, and received US$ 8.96 million in November 2011. This finding and now admitted fact is against the stand of the appellants in their reply to SEBI dated October 9, 2013 that neither him (Gagan Rastogi) nor Asia Texx had ever converted a single GDRs of Cals into equity shares and continue to hold the entire 25 million GDR. Therefore, it is clearly evident and admitted that GDRs worth US $ 92 million was transferred by Honor to the account of Asia Texx on March 26, 2009, who in turn transferred the same to the account of Gagan Rastogi free of cost on July 9, 2009. Accordingly, the money transferred from the account of Cals to the account of Asia Texx got accrued to Asia Texx and in turn to Gagan Rastogi in the form of 25 million GDR to the tune of the same value of US $ 92 million with each GDR being worth US$ 3.68 at that time. Since the amount involved was US $ 92 million which come into the hands (account) of the Asia Texx and thereafter to Gagan Rastogi this amount is unjust enrichment in their hands. Therefore, direction to disgorge....
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....e Court in respect of SEBI v/s Kishore R. Ajmera (supra) and several others has held that circumstantial evidence or preponderance of probability is sufficient to prove such violations. In any case, in the matter before us we hold that the appellants have made unjust/ unlawful gains to the tune of US$ 92 million beyond any doubt. 22. Given the circuitous scheme adopted by the appellants using the proceeds of the Cals GDR issue and in making unlawful gain the finding in the impugned order that the appellants have violated Section 12A of SEBI Act and PFUTP Regulations, 2003 cannot be faulted. For facility, the relevant provisions of SEBI Act, 1992 and PFUTP Regulations, 2003 are reproduced below:- 12A. No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be liste....
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.... (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or (iii) to secure the proper management of any such intermediary or person, it may issue such directions,- (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market. [Explanation.-For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.]" The explanation to Section 11B of SEBI Act as given above clearly states in....
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..... While on the face of it, it appears a sound argument, such an argument cannot be accepted for reason that if the economic conditions had changed positively more than the unlawful gained could not be disgorged. Such an approach would vitiate the very foundation of disgorgement as an equivalent amount of unlawful gain to be disgorged which itself is one of the defenses put forth by the appellants. Therefore, changes in the economic conditions in the given context has to be accepted as a business risk of the appellants, not to be vitiated in the application of the legal principle on disgorgement. Hence the submission of the appellants that they are willing to surrender the remaining GDRs or the underlying shares, instead of US$ 92 million cannot be accepted. 26. We also note that despite transferring US$ 92 million to Asia Texx and Asia Texx neither returning this amount back to Cals nor supplying plant and equipment to Cals, Cals has not resorted to any legal action against Asia Texx. On the other hand, even if the argument was accepted that Cals paid only a part of agreed amount (US$ 92 million) and hence Asia Texx could not honor that agreement by getting the plant and machin....