BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of decision : 15/01/2015 Appeal No.91 of 2013 Purshottam Budhwani B‐2, Himalaya Society, Milind Nagar, Asalfa, Ghatkopar (W), Mumbai – 400 084. … Appellant Versus Securities and Exchange Board of India SEBI Bhavan, Plot No.C‐4A, “G” Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051. … Respondent Mr. Sunit Shah, Advocate and Mr. H.D. Dave, Advocate for the Appellant Mr. Shiraz Rustomjee, Senior Advocate with Mr. Rushin Kapadia, Advocate i/b K.Ashar & Co. for the Respondent. CORAM : Justice J.P. Devadhar, Presiding Officer A. S. Lamba, Member Per : A.S. Lamba 1. This is an appeal filed by Purshottam Budhwani (Appellant) Vs. The Whole Time Member, SEBI (Respondent) against impugned order No.WTM/MSS/ISD/98/2011 dated May 23, 2011 passed by Ld. Whole Time Member, ordering Appellant to disgorge Rs.9,39,38,030/‐, comprising Rs.5,87,11,269 towards unlawful gain made by Appellant and Rs.3,52,26,761 towards simple interest at the rate of 10% per annum for six years (2005‐11) on unlawful gains, within 15 days from date of order. The disgorgement is -2-
arising due to certain activities of Appellant during 2005‐which will be dealt subsequently‐in connection with Initial Public Offer (IPO) of 13 companies. 2. Activities of Appellant relating to IPO of 13 companies are: •
Addition of names of several actual existing persons who could be identified and their address verified on basis of their election voting cards, as joint account holders – to his existing or newly open bank accounts, stating address of joint account holder as his own address and obtaining welcome letter from concerned bank for joint account holder. •
Break different parts of name of each joint account holder, including title, and combine these parts and title to engineer multiple names for each joint holder. •
Use welcome letter from bank in name of joint account holder and various engineered names to open multiple demat accounts for each actual existing joint account holder, with Karvy Stock Broking Pvt. Ltd. – a depository participant (DP) of CDSL and Prateek Stock Vision Pvt. Ltd. ‐ another DP of CDSL. •
Multiple Applications for allotment of shares in IPOs of 13 companies, were made by Appellant, based on each applicants bank account – held jointly with himself and numerous engineered demat accounts and by availing of finance from either Dushyant Dalal (Dushyant) – a financer; or using his own finances. •
On allocation of shares against various multiple applications made by Appellant, which were always much less than shares -3-
applied for – Appellant transferred each and every allotted shares in response to multiple applications to his various demat accounts, invariably before listing of share in stock exchanges and utilized refunds received from IPO issues – due to lesser allocation of shares than applied for – to return funds to Dushyant or used these refunds for applications in subsequent IPOs and also transferred part of shares of IPO available in his demat accounts, to Duyshyant or a nominee of Dushyant or sold the shares in off‐market transactions or sold shares in market or retained some of these shares in his various demat accounts. 3. In view of Applicants, abovementioned activities, Appellant was able to make undue profits/gains, since he controlled all joint accounts and engineered demat accounts, since he made all multiple applications in IPOs himself – perhaps himself appending signatures of applicants – as seen from similarity of signatures of all signatures in form and style‐and since he controlled finance – including the refunds from IPO Applications money, Appellant was held violative of Section 12(A)(a), (b) and (c) of Securities and Exchange Board of India Act, 1992 (SEBI Act) and Regulations 3(a),(b),(c) and (d) and 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1993 (PFUTP Regulations). Appellant was called upon to show cause vide letter No.ISD/SR/VB/SCN/OW/6119/2010 dated May 20, 2010, as to why suitable directions under Section 11(4) read with Section 11 and Section 11B of SEBI Act, be not issued to restrain Appellant from buying, selling or dealing in -4-
securities, to disgorge an amount of Rs.7,78,62,010 with interest and appropriate directions to realize shares in his frozen demat accounts for purpose of meeting directions for disgorgement. 4. In response to SCN dated May 20, 2010 Appellant appeared before Ld. WTM on March 1, 2011 and made preliminary submissions and sought time for written submission, which he did vide letter dated March 7, 2011, but did not appear before Ld. WTM after appearance on March 1, 2011, despite ample opportunities, and accordingly Ld. WTM disposed off proceedings in terms of SCN and Appellant’s written submissions. 5. Appellant had in his preliminary submissions, submitted that; (i) he is not a person associated with securities market, either as intermediary or otherwise, and hence powers under Section 11 and 11B of SEBI Act cannot be invoked against him; (ii) SEBI does not have power to hold any investigation or enquiry under Section 11, 11(4) and 11(B) of SEBI Act and hence SCN under these Sections is bad in law; (iii) The matter is pending before Adjudicating Officer for inquiry and SEBI cannot initiate parallel inquiry under Section 11, 11(4) and 11(B) of SEBI Act and pass orders for disgorgement; (iv) SEBI does not have powers of disgorgement under Section 11, 11(4) or 11(B) of SEBI Act, since as per Section 15HA of SEBI Act, penalty up to 3 times of profit can be imposed, and power of disgorgement, under Section 11 & 11(B), would result in double jeopardy; (v) Section 11 & 11(B) of SEBI Act, which are not penal provisions, cannot be used to impose penalty, (vi) Same authority should have issued the SCN, as well as directions under Section 11 and 11B, but in instant case, directions have been issued by WTM, while SCN was issued by an OSD, which is not permissible; (vii) Principles of -5-
Natural Justice have not been complied with, as inspection of various documents and cross‐examination denied. 6. Ld. WTM has dealt with each of these preliminary objections, ad‐
seriatim, as follows: (i) Appellant made applications for thousands of demat account holders, arranged funds, transferred shares from these thousands of demat accounts to his own demat accounts and disposed of said shares or retained these in his demat accounts, which activities make him a person associated with securities market; since Hon’ble High Court of Gujarat has in the matter of Karnavati Fincap Ltd. and Alka Spinners Ltd. vs. SEBI has held buyers and sellers of scrips, as persons associated with securities market, on the same footing as intermediaries. (ii) SAT had, in the matter of Karvy Stock Broking Ltd. vs. SEBI, held that it is clear from language of Section 11(4) of SEBI Act that “the measures that SEBI may take in the orders it may pass would be either pending investigation or enquiry or on completion of such investigation or enquiry,” thus Section 11B explicitly enables SEBI to issue suitable directions after making an enquiry also. (iii) SEBI Act empowers SEBI to initiate appropriate proceedings like 11B, adjudication, prosecution, etc. or any combination of these, as may be warranted in the circumstances, to deal with violations of SEBI Act, Rules and Regulations made under these, and conclusion of one proceeding does not have to wait -6-
for conclusion of another and can proceed in parallel and independent of another, since these multiple proceedings are not expected to result in same findings or same directions. (iv) It is well settled principle that a person, who unjustly enriches himself by unlawful means should be required to give up unjust enrichment, as was held by SAT in Karvy Stock Broking Ltd. Vs. SEBI and Dhaval Mehta Vs. SEBI and reiterated in Shri Shadilal Chopra Vs. SEBI, Dushyant N. Dalal Vs. SEBI and Ms. Puloma Dalal Vs. SEBI. (v) SAT had observed in Karvy Stock Broking Ltd. Vs. SEBI that disgorgement is not a penalty but monetary equitable remedy and thus does not amount to double jeopardy, if an entity has to pay penalty under Section 15HA of SEBI Act and at the same time the same entity has to disgorge unlawful gains under Section 11(B) of SEBI Act, for the same act of violation of Securities Laws. (vi) Ld. WTM has not found any illegality, or even irregularity in the act, where SCN was issued by OSD and order under Section 11, 11(B), 11(4) of SEBI Act passed by Ld.WTM, since SCN and directions are issued by the functionaries, who have been delegated powers to do so. Ld. WTM has found it desirable that allegations (presumably SCN) are made by a functionary lower in Grade while the determination of the allegations as made by a functionary higher in Grade, which is the case here. Further, it is stated by Ld. WTM that SEBI follows a practice that a WTM, who does not supervise that Department which has -7-
issued SCN, determines the allegations made in SCN, which brings out higher objectivity in quasi‐judicial proceedings. (vii) It is stated by Ld. WTM that Appellant sought examination of witnesses but did not justify its need and that allegations in SCN are based on transactions in bank and demat accounts of the Appellant and not on any statement of any person. Ld. WTM has further stated that request for inspection of documents has no bearing on the matter since inspection of all documents relied on for SCN has been provided to appellant. 7. This Tribunal agrees with all findings of Ld. WTM, relating to preliminary objections of Appellant, except regarding issuance of SCN by an OSD and issuance of directions by Ld. WTM and in this contention Ld. WTM may confirm that OSD, who issued SCN had authority to issue SCN, in writing, from competent authority under relevant Section of SEBI Act, 1992 or regulations framed thereunder, to issue SCN and that SEBI Act, 1992 or regulations framed thereunder allows issuance of SCN by one functionary and its adjudication by another functionary. 8. On merits of the case, the Appellant has submitted that, (i) same address was mentioned in all applications for subscription in IPOs and registrar/issuer could have used the address field to reject multiple applications, (ii) no retail investor has grievance against him and (iii) in absence of any express provision, doctrine of joint and several liabilities cannot be invoked and Appellant cannot be held liable for benefits accrued to third parties; besides stating that expenses incurred on interest, income tax liability and other expenses, needs to be excluded from disgorgement -8-
amount, and amount to be disgorged should be Rs.5,09,34,014 and not Rs.7,78,62,010 as in SCN. 9. Regarding due diligence of registrar/issuer to detect multiple applications, with same address, Ld. WTM has stated that due diligence of Registrar/Issuer is not expected to detect all kinds of frauds, including one perpetrated by Appellant and it does not absolve Appellant of manipulative charge against the Appellant. While accepting that Registrar/Issuer is not expected to detect all kinds of frauds in concerned IPO, yet a fraud of the kind perpetrated by Appellant by making 235 to 5884 applications each in 13 IPOs, which were signed in same form and style, which were having one common address, all applications were numbered serially, ‘perhaps’ applications in some cases were submitted in floppies and not in material form, and all these applications were printed and not hand‐written, leaves one wondering why Registrar/Issuer could not detect a fraud of this magnitude, perpetrated in not one but in 13 IPOs and Appellant was not the only key operator carrying out these kinds of activities in relation to IPO’s from 2003‐2005, but there were several other key operators in these IPOs, who perpetrated the same kind of fraud in all these IPOs, though with a little variation here and there and that too in engineering names for opening demat accounts by making different combinations by combining one surname with 50 names, etc., was not dictated by Registrar / Issuer of IPO then what sort of fraud detection systems existed with Registrar/Issuers of IPOs, which makes a total mockery of due diligence system of Issuer /Registrar of these IPO’s. 10. Regarding submission of Appellant of no investor’s grievance against him, argument of Ld.WTM is accepted. It is also stated that fraud committed -9-
by Appellant was against securities market in particular and not against any individual investor or group of investors but against all investors, in general and, as expected, no investor complained or expressed his grievance against this kind of fraud by Appellant, although genuine investors did suffer by lesser allocation of shares in IPOs than their entitlements due to allocation of shares against applications engineered by appellant. 11. This Tribunal also agrees with Ld. WTM regarding set‐off of expenses of in perpetrating fraud from disgorgement amount and that these expenses have not been allowed and should not be allowed. Regarding set‐off for income tax paid on unlawful gains, this Tribunal is of the view that same cannot be allowed and Appellant has the viable option of claiming refund of same, from income tax, authorities. 12. This brings us to the last submission of Appellant regarding deducting deductions of (i) interest on disgorgement, (ii) profit of financer, (iii) Natural gains, it will be better to first look at how the disgorgement amount has been got built up, before considering reliefs sought by Appellant. 13. For TCS shares it is seen that 20 shares were allotted for 602 applications each and 17 shares were allotted for 1939 applications, which add up to 45003 shares, against 44994 shares at page 8 of SCN. Similarly for Gokuldas Export, it is stated that page 11 of SCN that number of applications was 1425 and each application was allotted 15 shares, on firm allotment basis, and hence number of shares transferred from 1425 applicants to Appellant’s demat should be 21325; whereas number of applications is shown as 956 applications and total shares transferred to demat account of Appellant as -10-
14340. No of applications at 1425 is also borne out from amount invested for application money for 1425 applications at Rs..6,35,90,625 @ Rs.44,625 per application. Similarly for Nectar Lifesciences, number of applications is 1500, as at page 13 of SCN, for which amount of applications is Rs.7,20,00,000 @ Rs.48,000 for 1500 applications. Firm allotment for each application is 25 and hence number of shares transferred to demat accounts of Appellant should be 37,500, whereas in table at page 9 of SCN is shown as 18,950 shares against 1074 applications. 14. Discrepancies in total availability of shares for TCS, Gokuldas Exports and Nectar Lifesciences needs to be reconciled. 15. Similarly in page 12 of SCN relating to TCS shares, sale of shares in market is 8200 and off‐market sale is 36,794, whereas elsewhere 8200 is sale in off‐market, while sale in market is 36,794. This needs reconciliation. 16. In case of IDFC shares, off‐market transfer to Chavda and three transferees after that, is on four occasions, at prices ranging from Rs.37 to 50 from 08/08/2005 to 18/08/2005, when market price was higher and these transfers were at instance of Dushyant Dalal. As per formula in extent for calculating gains these prices should be calculated at closing price of concerned scrip on day of listing and hence this price has to be taken into account for these four off‐market sale, for calculating unlawful gain of Appellant. 17. In case of IDFC, Appellant made 8554 applications and was allotted 266 shares against applications, thus 15,65,144 shares were allotted and transferred to demat accounts of Appellant, whereas total number of shares -11-
in demat accounts (at page 9 of SCN) is 9,77,180 (CDSL) and 588,644 (NSDL) which add up to 15,65,824. This has to be reconciled. 18. In para 8d of Impugned Order (page 9), it is stated that, “as per SCN, Appellant is liable for illegal gains of Rs.7.78 crore, and has not been asked to disgorge illegal gain of Rs.0.87, which he facilitated “others to make”. As a matter of fact, this is ill‐gotten gain of Dushyant, as shown at page 14 of SCN (Rs.87,78,724 to be enact) and Dushyant is not in “others to make” and this amount is not included in amount of Appellant for disgorgement but Dushyant has been asked to disgorge, in a separate order of disgorgement against him. “Others” in “others to make” are Chavda or not named and all such transactions are in respect of shares of various scrips in off‐market transactions and included in amount for disgorgement against Appellant and not included in amount to be disgorged from Dushyant and since these others have not been asked to disgorge separately, which add to Rs.2,12,31,078, inclusion of this amount in amount to be disgorged by Appellant, in correct. 19. The amount of Rs.2,12,31,078 has been arrived at after including 20,000 shares transferred to Dushyant in the scrip of Shopper Stop, which is included in 22000 shares sold in off market, but Dushyant is not shown as having received 20,000 of these 22,000 share, which are in fact shown against Dushyant at page 14 of SCN and included for disgorgement from Dushyant. As a matter of fact, this amount is for disgorgement from Dushyant for these 20,000 shares comes to Rs.29,61,200 @ Rs.134.60 profit per share. -12-
20. In any case, taking unlawful gain of others from 23850 of Shopper Stop transferred in off‐market by Appellant at Rs.32,10,210; amount shown for disgorgement occurring to third parties, comes to Rs.2,12,31,078 + Rs.32,10,210 i.e. Rs.2,44,41,288, which is still short of Rs. 2,69,27,996/‐ as claimed by Appellant. 21. Now coming to para 8c of Impugned Order at pages 9 and 10, it is not at all clear how the figure of relief of Rs.1,91,50,741 as against disputed amount of Rs.2,69,27,996, has been arrived at. In the case of TCS, no. of shares transferred off‐market by Appellant is 8200 in SCN page 8 and in his reply to SCN dated 7th March, 2011 (Page 179 of MOA), Appellant has shown transaction of 7709 shares to financers, namely LL Phulwani (595 shares), LL Phulwani (264 shares) and Dushyant (6850 shares). Thereafter Appellant has shown receipt of funds from the financers and repayment of same in money terms and kind (transfer of shares of TCS) along with interest and thus has claimed that for Dushyant it is Rs.5,8,22,500, for 6850 shares. It may be mentioned that ill‐gotten profit per share is Rs.968.47 – Rs.850 is Rs.118.47 and not Rs.850, as shown in calculation by Appellant. Hence, basis of disputed claim and working out relief by Ld. WTM is not clear due to the fact that market and off‐market transactions for TCS as on page 12 of SCN and at page 8 of SCN have been interchanged and also that number of shares of TCS transferred to account of Appellant should be 45003 and not 44,994 as in SCN and impugned order. 22. Now coming to case of Gokuldas Export, in which it is stated that, out of 14,340 transferred to demat account of Appellant, 1299 shares were sold in market and 13041 sold in off‐market and these off‐market transfers are to -13-
others (i.e. not Dushyant). Appellant is stating that he had transferred 7787 shares of Gokuldas to Dushyant. This claim may be accepted but it has to be considered that while arriving at ill‐gotten gain, Appellant has taken sale price of share at Rs.425, which is the same as issue price; which means shares were transferred in off‐market. Since Appellant has not disputed shares transferred of shares – as shown in SCN – in market or off‐market, it can be considered that shares transferred to Dushyant were off‐market and included in 14,340 transferred in off‐market. This cannot be otherwise, since shares transferred in market in this case is only 1299, whereas shares claimed transferred to Dushyant is 7887. 23. It is also seen from table at page 14 of SCN that Dushyant has not been accounted for ill‐gotten gains from Gokuldas shares. Hence it may be that Appellant had sold 7887 shares of Gokuldas to Dushyant, but still it is not a case of double counting. 24. Now coming to Yes Bank disputed amount, it is seen that Appellant claims to have sold 2000 shares to LL Phulwani, 320 to LL Pulwani (HUF) and 63,975 to Dushyant, for which ill‐gotten gains for Yes Bank, is disputed. These three sales total to 66,295 shares. Besides these three, Appellant also claims that he sold 20,000 shares to Raj Kumar Jain @ Rs.57 per share, but does not state if these shares are off‐market or on‐market, but difference is only Rs.3.80 between rate of ill‐gotten profit, worked out by Ld. WTM and ill‐gotten profit, claimed by Appellant i.e. Rs.76,000 only. In this case also, it is seen that major chunk of sale to three financers is to Dushyant and Dushyant ill‐
gotten profit does not include only ill‐gotten profit from sale of Yes Bank. For other two financers, they have not been asked to disgorge and hence gain to -14-
financers – in off market sale, is not being counted twice. Case of Rajukumar Jain is not clear, as stated earlier. 25. However, in relief granted to Appellant by Ld. WTM of Rs.1,91,50,741 as against Rs.2,69,27,996 claimed by Appellant, it is seen that major contribution to relief is on account of IDFC share sale in off‐market and it is possible to justify the same or deny it, since case of IDFC, starting from total number of shares transferred to his demat, as worked by Ld. WTM and as per understanding of this Tribunal is wide and hence no attempt is being made to see if claim of disputed claim by Appellant from IDFC shares and as worked out by Ld. WTM, is justified or not. 26. However, still the following facts are not clear to this Tribunal and on this, the following comments are offered: •
Majority of disputed claim by Appellant was on account of sale of shares by Appellant to other parties, which did not include Dushyant, who have not been asked to disgorge and hence claim of disgorgement from Appellant, on behalf of this other parties was justified and cannot be termed double disgorgement. •
Ld.WTM has made no attempt to consider the undisputed claim, in any depth, and even not justified the relief by any reasoning, let alone rational and acceptable reasoning. •
In case Ld. WTM is satisfied that there is merit in granting relief, based on reasons, he is entitled to grant relief, to the extent justified but this fifty‐fifty approach is not appreciated, since disgorgement is based on ill‐gotten/unlawful gains and should -15-
not based on irrational or unjustified reasoning and similarly the relief should be justified, based on sound reasoning, which is not the case in Impugned Order. 27. During the course of hearing, Ld. Counsel for Appellant stated that his client has been asked to disgorge ill‐gotten gain on shares of these various 13 scrips in his demat account, which are part of total transferred shares from various demat accounts and now available with him, after transferring others shares in market and off‐market transactions. These shares in Appellant’s demat account have been frozen by Respondent and Appellant represented that he cannot pay ill‐gotten gains of shares of these 13 scrips, since his demat account holding these shares, if frozen by Respondent. Tribunal feels in this respect that this submission has merit and Respondent is also directed that this submission of Appellant be considered appropriately, so that Appellant is able to sell his shares for payment of disgorgement amount. 28. In view of above and other reasons, detailed supra, the Impugned Order is set aside and case is remanded back to Respondent for taking necessary action and deciding the matter, after affording hearing to Appellant and most importantly to pass an order based on sound reasoning, logic and rational considerations. 15/01/2015 Prepared & Compared by Ddg/PTM Sd/‐ Justice J.P. Devadhar Presiding Officer Sd/‐ A.S. Lamba Member