TaxTMI 
TaxTMI 
2024 (12) TMI 1463
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....NMCE - National Multi Commodity Exchange [now merged with the Indian Commodity Exchange (ICEX) ICEX - Indian Commodity Exchange]. 2. Brief facts of the case are as follows:- 2.1 NMCE is the country's first, online multi-commodity exchange with nationwide reach. It started its operations on November 26, 2002. This Exchange is now merged with ICEX. 2.2 The Appellant No. 1 is the MD & Executive Vice-Chairman of the NMCE. The Appellant No. 2 M/s Neptune Overseas Ltd. (NOL NOL - Neptune Overseas Ltd.) is a substantial shareholder in NMCE. 2.3 The erstwhile commodity exchange regulator, the FMC received a complaint on November 28, 2010 alleging abuse of position and commission of irregularities in the affairs of NMCE by the appellant No. 1, through certain employees of the NMCE, to pass on unlawful benefits to the appellant No. 2. The auditors appointed by the FMC had also pointed out certain irregularities and misconduct in management of affairs of NMCE in their audit report for the FY 2006-07 and 2007-08. 2.4 Based on the above, an inquiry was instituted by the FMC, in pursuance of which inspection of books and records of the NMCE was conducted by FMC, under Sections 8(2....
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....otice is required to be served and the show cause notice dated June 21, 2011 would be treated as show cause notice to both the appellants. 2.11 In pursuance of the said directions, the appellants were furnished documents on March 8, 2021 and also allowed an opportunity to cross-examine the witnesses. Based on this, the appellants filed written submissions on different dates. 2.12 On the basis of the findings of the inquiry, the Ld. WTM of SEBI held in the impugned order the appellant Nos. 1 and 2 as guilty of abusing their controlling and executing position in the affairs of NMCE, committing various fraudulent acts and passing on illegal monetary benefits to the entities controlled/connected with them. Accordingly, the following directions were issued by the learned WTM vide the impugned order dated November 17, 2021: i) The noticees were declared as not "fit and proper person" in terms of applicable Guidelines dated July 29, 2009 on Equity Structure of Nationwide Multi-Commodity Exchanges after five years of operation, as amended from time to time by FMC. ii) Noticee No. 2 was held to be not a "fit and proper person" to hold any position in the management a....
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....MCE assets, frauds, fabrication of records and ten false agreements and tampering with records. ix. To immediately file a FIR against Mr. Kailash Gupta who has all along been in effective control of ATSPL for perpetrating a fraud on NMCE and claiming payments for non-existed software development and software service, thereby causing it a wrongful loss of at least Rs. 28.80 crore. The four transferee benami shareholders of ATSPL may be made the co-accused. x. To initiate legal action under the relevant sections of the IPC against Shri Kailash Gupta for causing falsification, fabrication and forgery of ten false agreements between the NMCE with ATS / ATSPL in violation of Section 20(a)(i) and Section 20(a)(ii) of the F. C. (R) Act, 1952. xi. To initiate an enquiry whether there is evidence of violation of the provisions of the FEMA in making payment to Kushal Enterprises, Ahmedabad against the claim of ATSLLC, USA in the books of the NMCE, and if there is such evidence, refer the matter to the Enforcement Directorate for appropriate action under the FEMA. xii. The Board of the NMCE may consider referring the case of to the Statutory Auditors for NM....
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....ion of natural justice. In view of the above, we are satisfied that the respondent has extended adequate opportunity for natural justice to the appellants as per clear directions issued by the Hon'ble Supreme Court. It is noteworthy that the appeal before this Tribunal was dismissed on October 18, 2019 on the sole ground of denial of natural justice given to the appellants. Prior to this, the original order passed by the FMC dated July 23, 2011 on the same facts, was also quashed and set aside by the Division Bench of the Hon'ble Gujarat High Court on February 9, 2012 on the same ground. In view of the above, since the appellants have been granted natural justice by the SEBI, we now decide the appeal on merit, considering other grounds as under :- 4. Ground No. 1 - Jurisdiction of FMC - Ground - FMC does not have powers to conduct audit/inspection and cannot exercise its jurisdiction on the shareholders of the associates. 4.1 The practicing company secretary for the appellant Mr. Hitesh Buch submitted that the FMC did not have any jurisdiction to issue show cause notice or initiate inquiry to the shareholders of the recognized association as its powers are limited to submi....
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....shows that FMC has been given substantially wide powers to take such action in relation to forward markets as it may consider necessary in exercise of its powers under Section 4(b). Sections 4 and 8 of FCRA are extracted hereunder :- "Section 4 - Functions of the Commission - The functions of the Commission shall be:- (a) to advise the Central Government in respect of the recognition of, or the withdrawal of recognition from, any association or in respect of any other matter arising out of the administration of this Act; (b) to keep forward markets under observation and to take such action in relation to them as it may consider necessary, in exercise of the powers assigned to it by or under this Act; ......... (e) to undertake the inspection of the accounts and other documents of any recognised association or registered association or any member of such association whenever it considers it necessary; and (f) to perform such other duties and exercise such other powers as may be assigned to the Commission by or under this Act, or as may be prescribed. .............." "Section 8 - Power of Central Governm....
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....ion 4(b) expressly provides wide powers incidental to implement its purpose, Section 8 on the other hand, expressly brings all personnel of the exchange as well as everyone having dealings with the exchange expressly within its jurisdiction. The Ld. Senior Advocate argued that while the provisions of the Act are clear and unambiguous, it is also a well settled position of law that when power is given to an authority to do something, it includes such other incidental or implied powers which would ensure the proper doing of that thing. It was submitted that this principle has been expressly set out in the context of FMC powers under FCRA in the following two decisions:- i. First Commodities Exchange of India vs Union of India (Kerala HC) (paras 25-29; 34-38; 42-49); and ii. UOI v The Bullion and Agricultural Produce Ltd AIR 1973 All 205 (Allahabad HC) (paras 13-17 and 32-33). 4.7 With regard to the second objection on the jurisdictional ground that the intimation letter for inquiry was signed by the Director FMC, who, in the view of the appellants, was not authorised, he submits that the said objection is hyper-technical and has no basis in law as the appellan....
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....ed view, the FMC was vested with wide powers by FCRA for observing Forward Market and 'taking such action in relation to them, as it may consider necessary', and allows it to make an inquiry in relation to the affairs of any association or the affairs of any of its members...' Since the Central Government's powers had been delegated to the FMC, it had all the powers with regard to taking action with regard to the forward market, as it deems necessary. The mechanism of inquiry was only for gathering facts for which it was vested with quasi-judicial powers. Section 8 of the FCRA allowed it to take necessary actions for enabling functioning of the Forward market. In view of this, we do not find any infirmity in the authority of the FMC in initiating inquiry into the management of the NMCE and the manner in which its key management persons performed their duties. 4.9.3 Further, with regard to scope of the inquiry, it is evident that Section 4 of the FCRA Act is pari materia to the Section 11 of the SEBI Act and keeping in view the decision of the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation (supra) and Karnavati Fincap Ltd. (supra), an inquiry which i....
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....Dave is a friend of Mr. Amit Gupta, and was gainfully employed in the USA since 1999. The other 3 new shareholders too are undisputedly linked to the management of NMCE. 5.3 It was alleged that since 2002-03 till September 30, 2010, the appellant No. 2 in the capacity of MD of NMCE, made huge payment to ATSPL amounting to Rs. 29.47 crore for software development. Appellant No. 2 has admitted that it paid INR 29.47 crore to ATSPL while only payment of Rs. 66.32 lakh pertained to software related work, it has also been established that Rs. 66.32 lakh paid to Mantissa Ltd. by ATSPL for software development for ATSPL lacked capacity. Allegedly, the engagement of ATS LLC and ATSPL as Software Vendors of the NMCE, was done without obtaining prior approvals from the Board of Director/Committee (nor was regulated after the appointment), and without defining the scope of work and floating tenders. Further, no disclosure of the relationship of the MD with the vendors was made, even though undisputedly ATSPL was a related company qua the appellants. 5.4 Admittedly, funds so paid to ATSPL were used towards Market-making activity for NMCE, even though during the relevant period, Market-ma....
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....re provider, CMC, had suddenly withdrawn, which left the Exchange without anyone to maintain and repair the bugs in the software. At any given time, trades of more than 1,000 crore were pending/entered on the platform provided by the Exchange. These trades would have been at risk if the software was compromised at any time. Further, ATSPL had worked with CMC in the previous years to help maintain the software. In addition to the same Mr. Bhavit Godiwala, who was the original creator of the software, had just joined ATSPL from CMC. In the said background, the Appellant No. 1 took a decision in the interest of the Exchange to appoint ATSPL as the software provider/vendor of the Exchange. 5.10 In the Impugned Order, it is stated that NMCE paid a huge sum of INR 29.47 Crore to ATSPL towards software development during the years 2006-2010, however, the Impugned Order has failed to note that such payment was in line with the prevalent rates paid to software providers to exchanges. It was also submitted that an amount of Rs. 20 crores approximately had already returned at the relevant time to the Exchange. 5.11 It was submitted that the Respondent has erroneously relied on some extr....
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....to" ATSPL, which again compounds the fact that ATSPL has not developed any software whatsoever for NMCE and whatever software development has been done for NMCE, the same was done with the assistance of Mentissa. In view of the above, the learned senior advocate submitted that these evidences point to an artifice that was perpetrated by the Noticee no. 2 on NMCE which clearly resulted into a huge embezzlement loss to NMCE. 5.13 Mr. Joshi submitted that monies siphoned off from NMCE to a related party of Mr. Kailash Gupta - (M/s. Kushal Enterprises) were in turn used for Market Making. The proprietor of the said firm was Mr. Naresh Gupta (brother of Mr. Kailash Gupta) & a payment of Rs. 2.47 crores were made on May 30, 2006 without any record of corresponding service provided by it. During this period, market making activity was not permitted in the commodity derivatives market by FMC. It was also submitted that from the bank account of ATSPL, huge payments have been made to 16 different entities without any basis. The funds were received by ATSPL from the margin account of NMCE and the same money was used for the purpose of market making. 5.14 In view of this, it was pleaded ....
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.... in the nature of embezzlement of funds by manipulation of the financial accounts. This is the finding recorded by the Income Tax Settlement Commission set up under Chapter XIX of the Income Tax Act, 1961, which is the final fact finding Alternative Dispute Resolution Authority in the scheme of direct tax dispute while deciding application of NMCE. In any case, facts reveal that ATSPL did not have VAT service tax No. nor had adequate manpower and the on-site inspection revealed that it did not exist at the registered address. In its accounts, ATSPL showed receipt from NMCE as "loans and advances". The evidence also shows that payments to ATSPL were sought to be justified through back-dated agreements with retrospective effect and the respondent also brought on record evidence of use of stamp paper from a member, who had ceased to supply stamp papers much earlier to the date of purchase of stamp papers. The directors-shareholders of the ATSPL clearly stated that the family member of appellants were running the company for all practical purposes. Keeping in view these incontroverted facts, we find no merit in the appellant's plea and hold that payment to ATSPL was bogus and made as p....
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....ous consultants on behalf of NMCE was done validly. 7.1 It is alleged that Appellant No. 1, in his capacity of MD of NMCE, engaged a large number of consultants, without following any due process of identification, or defining the scope of work or through competitive bidding. No approval from the Board of NMCE was obtained nor the Board was kept informed about the engagement of the consultants and services availed by NMCE from these consultants. Out of the 144 consultants so appointed, approval was found only for 11 consultants. For the remaining 133 consultants, payment of INR 4.07 Crore was made. The consultants so appointed were alleged to be personal advisers, friends, and well-wishers of Appellant No. 1. Further, allegedly two of such consultants Mr. Kalpen Shah and Mr. V.M. Mehrishi, aided and abetted Appellant No. 1 for committing certain violations. 7.2 Appellants' contention is that it was well within the powers of appellant No. 1, who was acting as MD of NMCE to appoint such consultants, and payment to them was approved by the Board. In the impugned order, the learned AO has also acknowledged that the appellant No. 1 was authorised by the board to engage consultants....