BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 44 of 2011
Date of decision: 29.07.2011 Naimish K. Shah
206, Kalash I,
Near Jain Temple,
Navrangpura,
Ahmedabad – 380 008.
…… Appellant
Versus Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
…… Respondent
Mr. Deepak Dhane, Advocate for the Appellant.
Dr. Poornima Advani, Advocate with Mr. Ajay Khaire, Mr. Angshuman Kaushik,
Advocates for the Respondent.
CORAM : P. K. Malhotra, Member
S.S.N. Moorthy, Member
Per : P. K. Malhotra, Member
The Short question that arises for our consideration in this appeal is
whether the appellant has vi olated the provisions of S ection 11C(2) & (3) of the
Securities and Exchange Board of India Act, 1992 (the Act) by not furnishing the
information called for by the Securities and Exchange Board of India (the Board)
Facts of the case, in brief, are as under.
- The Board received a communication from the Income Tax Department
alongwith a note on survey action in the case of Tripex Overseas Limited,
Ahmedabad (for short the company) which alleged certain violations on the part
of the company relating to provisions of Securities Contract (Regulations) Act
1956, the Securities and Exchange Board of India Act, 1992 (the Act) and the
regulations/guidelines issued thereunder. The Board conducted investigations
into the scrip of the company for the period from April 1, 2006 to June 16, 2007. 2
It was noted by the Board that the appe llant was the auditor of the company
during the relevant period. The Board addressed a letter dated October 6, 2008 to
the appellant informing him that the Board is investigating the alleged violation
by the company and asked him to furnish certain clarification/information. The
said letter reads as under:-
“Sub.: Tripex Overseas Ltd.
SEBI is investigating the alleged violation of the SEBI Rules,
Regulations and guidelines by the captioned company. While
scrutinizing the information received in the said matter we have
come across certain irregularitie s relating to the accounts and
financial statement of the compa ny. Considering the irregularities,
it portrays a misleading picture of the company and its financial
statements and whether the financial statement presents a true and
fair view of the affairs of the co mpany. In this regard we would
like to have certain clarification and information from you. - Please furnish a copy of audited financial statement with
your comments on the same for the financial year 2005-06,
2006-07. - Please furnish a copy of the report under CARO 2003 for
the above period with your comments on the same. - The company has reportedly claimed depreciation of
Rs.2.94 Crores on assets that were not in its possession.
Please provide depreciation chart for Income Tax and
Companies Act for the said period showing addition and
deletion of each item along with calculation of
depreciation. - The company had made severa l corporate announcements
including mergers and ac quisition. Whether these
materialized. Also provide your comments on the swap
ratio arrived at for the purpose of merger. - It was observed that the company did not have required
capacity to produce the reported quantity of sale. - Any other information that will be useful in the course of
investigation.
Please furnish the above information positively by October 20,
2008.”
Since no reply was received by the Board, a reminder dated December 10, 2008
alongwith copy of the letter dated Oct ober 6, 2008 was sent to the appellant
asking him to reply latest by December 15, 2008. In response to the letter dated
October 10, 2008, the appellant sought time to file his reply by January 15, 2009.
In the said letter the appellant also stat ed that he had not received the Board’s
letter dated October 6, 2008. However, no reply was furnished by the appellant
within the time sought by him. Ther eafter, the Board issued summons under
Section 11C of the Act asking the appellant to provide the document/information 3
by January 29, 2009 and also asked him to a ppear in person on February 5, 2009.
In response to the said summons , the appellant, vide its letter dated
February 2, 2009, responded to the six points as under:-
“(1) Audited Financial Statemen ts of Tripex Overseas ltd.
for the years 2005-06 and 2006-07 are not available
with me. I have already gi ven all the statements to
party concern. From F.y.2007-08 and onwards I am
not the Auditor of the Company, which please note.
(2) A copy of Reports under Caro-2003 are not available
with me.
(3) I am not looking the Income Tax matters of the
company so these Details are not available with me.
(4) I am not knowing anything regarding acquisition and
mergers. As it is the personal matter of the
company, which please note.
(5) I have nothing to say about Income-Tax matters.
(6) There is no other information available with me
which will be Useful in the course of investigation.”
The reply furnished by the appellant was not found satisfactory by the Board
because documents called for were not made available. It issued another letter
dated February 9, 2009, asking the appellant to appear in person on February 17, - Vide its letter dated February 18, 2009, the appellant again sought time for
personal appearance. However, he again fa iled to appear before the Board. The
Board then issued notice dated December 22, 2009, under Rule 4(1) of the
Securities and Exchange Board of Indi a (Procedure for Holding Enquiry and
Imposing Penalties by the Adjudicating Of ficer) Regulations, 1995. It is only in
response to the said notice that, for the first time, the appellant submitted certain
documents alongwith his letter dated January 11, 2010 which reads as under:-
“1. I am submitting herewith Annual Financial Statements
for F.Y. 2005-2006 with Comments. I have no records
for F.Y. 2006-2007 So I belive that I have not Audited
the Financial Statements for F.Y. 2006-2007 and
hence not submitting To you. - A copy of Report under CARO 2003, for F.Y. 2005-
2006 is submitting herewith. - The particulars regarding Depreciation is not available
with me. - Regarding Corporate announcements including
mergers and acquisition, I have Not any instructions or
materials for that matter, so I am not in a position to
Say anything in this matter. 4 - I have no comments for capacity of production with
sales figure for F.Y. 2005-2006. - I am submitting herewith Xerox copy of my PAN
card.”
Further, during the course of inquiry and in hi s statement recorded on July
29, 2010, it is for the first time the appell ant stated that he has not audited the
financial statements of the company for the financial year 2006-07 onward. - The adjudicating officer, after consid ering the response received from the
appellant and the material on record, came to the conclusion that the appellant did
not comply with the summons issued to him by the investigating authority. He,
therefore, found the appellant guilty of violating the provisions of Sections 11C(2)
and (3) of the Act and by his order date d January 11, 2011 imposed a penalty of
` 5 lakhs under Section 15A(a) of the Act. It is against this order that the present
appeal has been filed. - We have heard learned counsel for th e parties who have taken us through
the records. At the outset, learned c ounsel for the appellant objected to the
affidavit in reply filed on behalf of the respondent on the ground that new
allegations of connivance/knowledge of the auditor and its active participation in
fabricating the financial results of the company have been made. According to
him, such allegations are not part of the show cause notice and hence the
affidavit-in-reply should not be taken on record. We have perused the affidavit-
in- reply. It gives a gist of the b ackground in which it became necessary to
conduct an investigation into affairs of the company. With a view to facilitate the
investigation conducted by the Board ag ainst the company, the appellant was
asked to furnish the information. The affidavit narrates the background in which
the summons were issued to the appellant calling for the information and asking
for his personal appearance. It was made clear that affidavit-in-reply will be
looked into only with regard to the violations alleged in the show cause notice and
nothing beyond that. - There is no denying the fact that no information called for by the Board
was provided by the appellant before the issu e of show cause notice on 5
December 22, 2009. The appellant has contra dicted his own statement in various
communications. In his letter dated February 11, 2009, the appellant submitted
that the financial statements of th e company for the year 2005-06 and 2006-07
were not available with him. In hi s letter dated June 8, 2009, the appellant
submitted that he had audited the accounts of the company for the financial year
2005-06 and 2006-07 but did not furnish the required documents. In his reply
dated January 11, 2010, he submitted the audited accounts for the year 2005-06
but stated that “I believe that I have not audited the financial statements for FY
2006-07 and hence not submitting the same to you”. The adjudicating officer
observed that in his earlier communicat ion, he denied having audited financial
statements for the year 2005-06 with him but later, on receipt of the summons, he
submitted the same. The adjudicating officer further observed that the
information regarding financial stat ements of the company, the CARO 2003
report and other details about the company were crucial to facilitate investigation
into the activities of th e company. Since the information was not forthcoming
from the company, the same was called for from the appellant who was the
auditor of the company at the relevant time. The company was suspected to be
engaged in fraudulent practices on a large scale and the information in possession
of the appellant was extremely important in determining the state of affairs within
the company. The investigations were closed on September 9, 2009 and it is only
thereafter and that too on receipt of summons for holding inquiry against the
appellant that a part of information was furnished by him. The information
furnished by the appellant was belated, incomplete and was received after
conclusion of the investigation and only after the show cause notice was served
on him. It needs to be appreciated that the Board, as a market regulator, cannot
perform its duties in accordance with law if the market players do not cooperate
with it. Non furnishing of informa tion and documents in response to the
summons issued by the Board is indeed a serious wrong and cannot be taken
lightly. We, therefore, cannot find any fault with the action taken by the Board in
the impugned order. We, therefore, answ er the issue formulated above in the
affirmative. Section 15A(a) of the Act provides that any person who is required 6
under the Act or any rules or regulati ons made thereunder to furnish any
document, return or report to the Board fails to do so shall be liable to a penalty of1 lakh for each day during which such failure continues or1 crore, whichever
is less. Information was first sought fr om the appellant on October 6, 2008 and
only a part of it was furnished on January 11, 2010 and that too after the closure
of the investigation and issuance of the s how cause notice. We are, therefore,
satisfied that the adjudicating officer was justified in imposing the penalty of ` 5
lakhs on the appellant.
For the reasons stated above, we do not find any merit in the appeal and
the same is dismissed with no order as to costs.
Sd/-
P. K. Malhotra
Member
Sd/-
S. S. N. Moorthy
Member
29.07.2011
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