BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Misc. Application No. 25 of 2012
And
Appeal No. 198 of 2011
Date of decision: 12.11.2012 Dipak J. Panchal
403, Shashvat,
Opp Gujarat College,
Ellisbridge,
Ahmedabad – 380 006.
… … Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
…… R nt Mr. Deepak R. Shah, Advocate for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Mobin Shaikh, Advocate for the
Respondent.
CORAM : P. K. Malhotra, Member & Presiding Officer (Offg.)
S. S. N. Moorthy, Member
Per : P. K. Malhotra
These two appeals, no. 198 and 200 of 2011, arise out of a common order
dated May 31, 2011 passed by the adjudicating officer of the Securities and
Exchange Board of India (for short the Board) holding the appellants guilty of
violating provisions of Section 12A(a), (b) and (c) of the Securities and Exchange
Board of India Act, 1992 (the Act) and Regulations 3(a), (b), (c), (d) and 4(1) of
the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities Market) Regulations, 1997 (for short the
regulations) and imposing a penalty of ` 20 crores on the appellant in Appeal no.
198 of 2011 and ` 25 crores on the appellant in Appeal no. 200 of 2011.
2
- Learned counsel for the appellants submitted that separate orders may be
passed in these two appeals as the transactions of the two appellants in the
securities market are separate and distinct. However, we are of the view that facts
relating to the appellants in these appeals are same or similar and evidence against
each of the appellants, to a large extent, is common. The appellants are husband
and wife and investigations against both of them relate to Initial Public Offerings
(IPO) scam that took place during the period 2003 to 2005. It is for these reasons
that the Board has also passed a common order. We are of the view that no
prejudice will be caused to the appellants by passing a common order in these
appeals. Wherever necessary, we will deal with their case individually.
- These cases arise out of the IPO scam that was unearthed by the Board in
the year 2005-2006. Before we deal with the facts of the present case, let us
briefly state how this scam was perpetrated. On receipt of information regarding
alleged abuse and misuse of the IPO allotment process, the Board initiated a probe.
During preliminary analysis of buying, selling and dealing in the shares allotted
through IPOs of as many as 21 companies in the years 2003, 2004 and 2005, it
transpired that certain entities opened a large number of demat accounts in
fictitious/benami names. These entities acquired shares of those companies
allotted in the IPOs by making large number of applications of small value so as to
make them eligible for allotment under the retail individual investor category. The
strategy adopted was that subsequent to the receipt of the IPO allotment, these
fictitious/benami allottees transferred the shares to their principals callthe y
operators’who etheir countsand o, turn, rred ost the
sha res the financie’ had e aille for ecutitgame
plan. In view of the then booming market, the financiers then sold most of these
shares on the first day of listing or soon thereafter thereby making profit out of the
price difference between the issue price and the listing/sale price.
- The appellants before us are members of the Panchal family including
Ms. Roopalben N. Panchal, Mr. Bhargav Ranchodlal Panchal, Ms. Hina Bhargav
Panchal, Mr. Arjav Nareshbhai Panchal. They have been collectively referred to
3
as groupbthe rd. It the othe rd the mber s of
the Panchal group, along with Karvy Stockbroking Ltd., a depository participant
and stockbroker, and certain other entities were involved as key operators in the
scheme/arrangement of cornering shares under the category reserved for retail
individual investors in the IPO of IL&FS Ltd., IDFC Ltd., Shoppers Stop Ltd.,
Datamatics Technologies Ltd., Nandan Exim Ltd., Yes Bank Ltd., SPL Industries
Ltd., National Thermal Power Corporation Ltd., Disman Pharmaceuticals Ltd.,
Tata Consultancy Services Ltd., Nectar Lifesciences Ltd., Sasken Communication
Technologies Ltd., Amar Remedies Ltd., Suzlon Energy Ltd., FCS Software
Solutions Ltd., Gateway Distripark Ltd., Patni Computers Ltd. and TV Today
Networks Ltd. It was alleged that the appellants are closely related with other
members of the Panchal group. They held joint demat and bank accounts with
them and shared the same address. The Panchal group opened bank accounts in
their own names with Bharat Overseas Bank, Ahmedabad Branch and Indian
Overseas Bank, Thaltej Branch, Ahmedabad. A large number of fictitious names
were then added to these bank accounts which were subsequently used for opening
thousands of demat accounts. One such bank account was opened in the name of
Devangi Panchal (No. 50795 with Bharat Overseas Bank) though it is disputed by
appellants and based on this bank account, 297 demat accounts were opened.
Another bank account no. 54199 was opened in the name of Dipak Panchal,
appellant in Appeal no. 200 of 2011, and this account was used for opening 3450
demat accounts. The demat accounts were opened in various devious
combinations of names and surnames. The group is alleged to have created bank
introduction letters for thousands of fictitious names and based on such
introduction letters as proof of identity and address, the afferent demat accounts
were opened. It is further alleged that the appellants, alongwith other members of
the Panchal group and the depository participant, opened thousands of afferent
accounts with the same address as that of the appellants. It is also alleged that the
two appellants were having several joint accounts with other members of the
Panchal group which were used for opening 37,240 afferent accounts and in
making applications in various IPOs. The particulars mentioned in almost all
4
these accounts were alleged to be either of the appellants or other members of the
Panchal group and all these accounts were in some way or the other
related/connected to the bank account of atleast one member of the Panchal group.
These bank accounts were also used to avail of finance for IPOs from the banks
and other financiers also. The appellants and other entities of the Panchal group
made thousands of IPO applications in the retail individual category. The findings
of the Board further revealed that some entities of the Panchal group opened
afferent accounts, some used them for making applications in retail category of
IPOs, some helped in transfer of shares to financiers and some disposed of the
shares. All of them did not play the same role but they complimented one or the
other in executing the game plan. Therefore, the persons involved in the IPO can
be put in threcgoriesnamelthe y erat‘fin’ wh
are beneficiaries of the shares and who helped in making the scam successful. The
appellants were found to be the major beneficiaries of this whole game plan and
they fall in the last category except in respect of IPO of TV Today Networks
where Dipak Panchal was also found to be a key operator. The total shares
received by each members of the Panchal group are set out in the table below:-
Devangi
D. Panchal
Deepak J.
Panchal
Rupalben
Panchal
Hena
Panchal
Bharghav
Panchal
GRAND
TOTAL
Amar Remedies 2,21,000
TCS 52,336 10,842 1,581
NTPC 15,00,000 21,400
Shoppers Stop 5,775
Nandan Exim 43,750 1,750
Yes Bank 2,57,250 2,550
Nectar 45,625
SPL 7,100
IL&FS 1,06,450 600
IDFC 10,80,169 17,10,374 11,000 8,684
Sasken 10,800 1404
FCS 22,015 12600 2,400
Suzlon 1,248 2367
TV Today 41,200 35,500
Dishman 17,000
Datamatics 8,400
Patni 1,15,250
T O T A L 33,94,718 18,97,366 16,371 32,400 17,565 53,58,420
Percentage 63.35 35.41 .30 .60 .33 100
It is see n that the appellants before us are the major beneficiaries of the shares
received out of the said IPO scam. The Board worked out the gains made by t he
appellants from the shares so received by them as under: –
5
Unlawful gains made by Devangi D Panchal (Appeal No. 200 of 2011)
Name of
IPO
Name of
Key
operator
form whom
shares were
received
No of
shares
received
from key
Operator
Issue
Price
(Rs)
(3)
Date of sale
Market/
Off
market
No of
Shares
sold
(1)
Sale
price*
(2)
Actual
Profit
(1) *(2 – 3)
Amar Roopalben
Panchal 221000 28 16.09.05 Market
Off market
204000
17000
50.02
56.05
44,92,080
4,76,850
TCS Roopalben
Panchal 52336 850 – Pledge 52336 987.95 72,19,751
NTPC Roopalben
Panchal 1500000 62 05.11.04 to
24.12.04
Off Market
Pledge
985918
514082
75.50
75.50
1,33,09,893
69,40,107
Shoppers
Stop
Roopalben
Panchal 5775 238 13.07.05 Market 5775 372.60 7,77,315
Nandan Roopalben
Panchal 43750 20 10.06.05 Off Market
Balance
41000
2750
50.20
50.20
13,21,250
83,050
YBL Roopalben
Panchal 257250 45 12.07.05 Market
Balance
175000
82250
62.83
60.80
31,20,250
12,99,550
Nectar Roopalben
Panchal 45625 240 20.07.05
Market
ASE
Balance
31223
10000
4402
267.95
260.10
11,52,183
88,480
SPL Roopalben
Panchal 7100 70 26.07.05 Market 7100 104 2,41,400
ILFS Roopalben
Panchal 106450 125 Balance 106450 185.15 64,02,967
IDFC Roopalben
Panchal 1080169 34 12.08.05-
18.08.05
Market
Off Market
Balance
575586
403063
101520
67.78
69.50
69.50
1,94,43,295
1,43,08,736
36,03,960
Sasken Roopalben
Panchal 10800 260 09.09.05 Off Market
Balance
10450
350
464.55
464.55
21,37,547
71,592
FCS Roopalben
Panchal 22015 50 Balance 22015 179.10 28,42,136
Suzlon Roopalben
Panchal 1248 510 08.11.05 Off Market 1248 692.85 2,28,197
TV Today Self 86200 95 Market 41200 181.35 33,57,620
Total 9,29,18,209
*In respect of off-market transfer and balance in the demat account, closing price on the
day of listing has been taken into consideration for the purpose of calculating gains.
Unlawful gains made by Dipak Panchal (Appeal No. 198 of 2011)
Name of
IPO
Name of Key
operator form
whom shares
were received
No of
shares
received
from Key
Operator
Issue
Price
(Rs)
(3)
Date of sale
Market/
Off
market
No of
Shares
sold
(1)
Sale
price*
(2)
Actual Profit
(1) * (2 – 3)
Dishman Roopalben
Panchal 17000 175 22/04/04 ASE 17000 541.25 62,26,250
TCS Roopalben
Panchal 10842 850 13/09/05 to
11/10/05
Off
market 10842 987.95 14,95,654
Datamatics Roopalben
Panchal 8400 110 ASE 8400 127.20 1,44,480
IDFC Roopalben
Panchal 1710374 34 11-12/08/05 Market
Balance
1180374
530000
69.20
69.50
4,15,49,165
1,88,15,000
Patni Arjav Panchal 115250 230 23.02.04 Off
market 113000 233.20 3,68,800
TV Today Devangi
Panchal 35500 95 Market 35500 181.35 30,65,425
Total 7,16,64,774
*In respect of off -market transfer and balance in the demat account, closing price on the
day of listing has been taken into consideration for the pur pose of calculating gains.
Keeping in view the role played by the appellants in the game plan of the Panchal
group alongwith other entities, the Board was of the view that the appellants have
indulged in fraudulent and manipulative activities within the meaning of the Act
6
and the regulations and employed deceptive schemes to corner shares reserved for
retail individual investors.
- A show cause notice dated June 14, 2006 was issued to Dipak Panchal
under Rule 4 of the Securities and Exchange Board of India (Procedure for
Holding Inquiry and Imposing Penalties by the Adjudicating Officer) Rules, 1995
(for short, inquiry procedure rules) setting out the charge against him and asking
him to show cause as to why enquiry should not be held against him and penalty
imposed. A supplementary show cause notice was also issued on October 20,
2009 and findings of the enquiry report were also made available. Similarly, show
cause notice was issued to Devangi Panchal on June 7, 2006 followed by two
supplementary show cause notices issued on June 14, 2006 and October 20, 2009.
The reply received from them was duly considered. Opportunity of personal
hearing was also afforded. However, it appears from the details recorded in the
impugned order that the opportunity of personal hearing was not availed of by the
appellants and, therefore, the adjudicating officer proceeded with the matter on the
basis of information/material available on record and the submissions made by the
appellants in response to the show cause notices issued to them. After considering
the material available on record, the adjudicating officer found the appellants
guilty of the charges leveled against them and imposed penalties as stated above.
Hence these appeals.
- We have heard Mr. Sunit S. Shah, senior Advocate for the appellant in
Appeal No. 200 of 2011, Mr. Dipak R. Shah Advocate for the appellant in Appeal
no. 198 of 2011 and Mr. Kumar Desai, Advocate for the respondent Board who
have also taken us through the records in detail. At the outset, learned counsel for
the respondent Board submitted that all the facts and the material documents
which formed the basis of the show cause notice to the appellants are the same
which formed the basis of show cause notice issued by the whole time member of
the Board in separate proceedings under Section 11/11B of the Act. On the basis
of the said facts and material, as set out in the show cause notice, order was passed
by the whole time member of the Board against all members of the Panchal group
7
on February 25, 2011. While issuing directions against all the members of the
Panchal group, the whole time member had observed that the acts of serious
irregularities have enriched the appellants at the cost of retail individual investors
and threatened the market integrity. Therefore, after taking into account the period
of prohibition already undergone by the members of the Panchal group, pursuant
to the interim order, they were further prohibited from buying, selling or dealing in
the securities market, in any manner for a period of three months. In addition, the
members of the Panchal group were also directed to disgorge the unlawful gains
including interest thereon amounting to ` 36,03,37,542/-. Devangi Panchal was
directed to disgorge the unlawful gains of 9,01,05,278/- alongwith interest of
4,50,52,639/- (total ` 13,51,57,917/-) and Dipak Panchal was directed to disgorge
unlawful gains of 7,16,64,774/- alongwith interest of 3,58,32,387/- (total of `
10,74,97,161/-). It was pointed out by the learned counsel for the Board that none
of the members of the Panchal group, including the appellants, has filed any
appeal against the said order which has now become final and binding on all
members of the Panchal group including the appellants. Since the issues of both
fact and law already stand concluded against the appellants by the order of the
whole time member dated February 25, 2011, which has become final, the
appellants cannot now reagitate/reargue the issues either on facts or on law.
- To deal with this argument, let us have a look at the scheme of the Act.
The Act was enacted to provide for establishment of the Board to protect the
interest of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected there with or incidental
thereto. Powers and functions of the Board are defined in Chapter IV of the Act.
This chapter not only cast a duty on the Board to protect interest of investors in
securities and to regulate the securities market by such measures as it thinks fit, it
also empowers the Board to make regulations in matters relating to issue of
capital, transfer of securities etc. and also issue joint or special orders prohibiting
any company from issuing of prospectus, any other documents, or advertisement
for soliciting money from the public for the issue of securities. It also empowers
the Board to issue directions to any person or class of persons referred to in
8
Section 12 (i.e. intermediaries) or persons associated with the securities market.
Admittedly, the Board had issued directions prohibiting members of the Panchal
group from dealing in the securities market. A consistent view has been taken by
this Tribunal in the past that exercise of this power is preventive and remedial and
not punitive in nature. There is a separate chapter i.e. Chapter VIA of the Act
which provides for penalties and adjudication. This Chapter provides for penalties
and procedure for adjudication before any penalty, as stated in the Act, can be
imposed. These are the proceedings which are subject matter of consideration in
these appeals. The Act also empowers the Board to suspend or cancel a certificate
of registration under Section 12(3) of the Act. It also provides for punishing a
person under Section 11(6) of the Act for not cooperating in the investigations
carried out by the Board. There is yet another provision in the Act i.e. Section 24
which provides that without prejudice to any award of penalty by the adjudicating
officer, if any person contravenes or attempts to contravene or abets the
contravention of the provisions of the Act or any rules or regulations made
thereunder, he shall be punishable with imprisonment for a term or fine or both as
provided therein. It will, thus, be seen that the Act contemplates three types of
proceedings, namely,
1) remedial and preventive under Chapter IV of the Act;
2) penalties under Chapter V and VIA (proceedings civil in nature); and
3) prosecution under Section 11C(6) and Section 24 (proceedings criminal
in nature)
There is no bar under the Act in taking all the three actions simultaneously or
taking only one of the actions as the Board may deem fit. It does not
automatically follow that if Board has initiated action under one of the powers
enumerated above, there is no need to follow the laid down procedure for initiating
action in exercise of powers conferred under other sections of the Act. The
procedure laid down in all the three situations is different and authorities
competent to take action are also different. Therefore, procedure, as laid down for
each of the actions stated above, will have to be followed. We are, therefore, not
9
inclined to agree with learned counsel for the respondent Board that since the
order passed by the whole time member in exercise of powers under Chapter IV of
the Act has become final, the allegations against the appellants in adjudication
proceedings under Chapter VIA of the Act cannot be agitated. However, we may
hasten to add that in the absence of any additional material or facts placed on
record, the earlier order passed by a competent authority will have a persuasive
value, though not a conclusive proof, in respect of the findings arrived at by the
Board. The charge in adjudication proceedings must stand and be proved on the
basis of material that may be placed on record and considering the defence of the
appellants as placed on record in adjudication proceedings.
- Having said so, let us now deal with the arguments advanced on behalf of
the appellants. Learned counsel for the appellants vehemently contended that
there has been violation of principles of natural justice as the respondent Board has
not followed the procedure laid down for holding enquiry under the enquiry
procedure rules. It was further contended that extracts of the investigation report
made available are unsigned, undated and without page numbers. The findings of
the enquiry officer have not been provided. Learned counsel for the appellants
also submitted that hearing could not be availed of on the scheduled dates for
genuine reasons and the adjudicating officer of the Board has failed to provide
inspection and hearing as prayed for by the appellants.
- We find that on the basis of enquiry conducted by the Board, the
adjudicating officer has clearly brought out the charge against the appellants in the
show cause notice issued to them. Simply because the extract of the enquiry
report annexed to the show cause notice does not contain page numbers or are not
dated it is of no consequence if the parties are not disputing the contents thereof.
If the show cause notice itself provides details of the charge against the appellants
and they are given full opportunity to present their case, no prejudice can be said
to have been caused resulting in violation of principles of natural justice. With
regard to the submission that the hearing could not be availed of for genuine
reasons, we find that the adjudicating officer has dealt with this aspect under the
10
heading ‘show e ce , y pehearin in paragraphs 5 to 19 of
the impugned order. We find that as many as nine dates for hearing were fixed
and the appellants failed to avail of the opportunity of personal hearing granted to
them. The adjudicating officer also fixed two dates granting inspection of
documents and the appellants neglected to take inspection of the documents
referred to and relied upon in the show cause notice. Perusal of the aforesaid
paragraphs of the impugned order clearly shows that the appellants were adopting
dilatory and delaying tactics. Under such circumstances the allegation of breach
of principles of natural justice is without any basis. A person alleging breach of
natural justice must show that prejudice has been caused to him as a result of
inspection not having been granted or opportunity of hearing not being afforded.
It is, in fact, the appellants who failed to avail of this opportunity. Learned
counsel for the appellants has relied on the decisions reported as Canara Bank &
Ors. Vs. Shri Debasis Shah [(2003) 4 SCC 557], Reckitt & Colman of India
Ltd. vs. Collector of Central Excise [1996 (88) ELT 641 SC], Amrit Foods vs.
Commissioner of Central Excise, UP [2005 (190) ELT 433 SC], Hindustan
Polymers Co. Ltd. vs. Collector of Central Excise, Guntur [1999 (106) ELT 12
SC] to contend that adherence to principles of natural justice is of supreme
importance when a quasi judicial body embarks on determining disputes between
the parties, or any administrative action involving civil consequence is in issue.
We have gone through these judgments. These judgments were given in the facts
and circumstances of each case. Though the principle laid down in these
judgments for adhering to rule of audi alteram partem is not in dispute, the
appellants have failed to bring any material on record that either the opportunity of
hearing was not granted or that the charges were such which are not understood by
the appellants or they were not aware of the case which they are required to meet.
The detailed narration given in the impugned order in paras 5 to 19 makes it clear
that the adjudicating officer was more than willing to accommodate the appellants
and it is in fact the appellants who were not willing to avail of the opportunity
afforded to them. In the case of Haryana Financial Corporation vs.
Kailashchand Ahuja [2008 (9) SCC 31], the Supreme Court has observed that
11
the theory of reasonable opportunity and principles of natural justice have been
evolved to uphold the rule of law and to assist the individual to indicate his just
rights. Whether, in fact, prejudice has been caused to the employee or not on
account of denial to him of the report has to be considered on the facts and
circumstances of each case. Even in cases where procedural requirements have
not been complied with, action cannot be ipso facto illegal or void, unless it is
shown that non observance has prejudicially affected the delinquent. In the case in
hand, only reference has been made to the report of the enquiry officer. The show
cause notice is a self contained document containing the allegation against the
appellants and they were given opportunity to give reply, opportunity to inspect
the documents and opportunity of personal hearing. If they have failed to avail of
any such opportunity, no fault can be found with the Board. Since the show cause
notice itself contains details of the charges against them, the appellants cannot
contend that the principles of natural justice have been violated by not making
available to them the enquiry report.
- It was further contended by the learned counsel for the appellants that the
procedure laid down for holding enquiry under Rule 4 of the enquiry procedure
rules has not been followed. According to the learned counsel for the appellants,
the adjudicating officer should have first issued a notice requiring the appellants to
show cause as to why an enquiry should not be held against them and such notice
should contain only the nature of offences that are committed by the appellants. It
is only after considering the reply of the appellants that the decision to hold an
enquiry should have been taken. However, only one notice under Rule 4(1) of the
enquiry procedure rules was issued calling upon the appellants to show cause why
penalty should not be imposed upon them. It was also contended that Sections
15HA and 15HB of the Act have been included in Rule 4(1) of the enquiry
procedurrulonlwieffefNovembe14, wheas ell
transactions relate to the period 2003 to 2005. No enquiry, therefore, can be held
under the said enquiry procedure rules for imposing penalty under Sections 15HA
and 15HB of the Act.
12
- Rule 4 of the enquiry procedure rules prescribes the procedure for holding
enquiry and reads as under :-
“ Holding of inquiry.
4.(1) In holding an inquiry for the purpose of adjudging under
sections 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15HA and 15HB
whether any person has committed contraventions as specified
in any of sections 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15HA
and 15HB the adjudicating officer shall, in the first instance,
issue a notice to such person requiring him to show cause within
such period as may be specified in the notice (being not less
than fourteen days from the date of service thereof) why an
inquiry should not be held against him.
(2) Every notice under sub-rule (1) to any such person shall
indicate the nature of offence alleged to have been committed by
him.
(3) If, after considering the cause, if any, shown by such person,
the adjudicating officer is of the opinion that an inquiry should
be held, he shall issue a notice fixing a date for the appearance
of that person either personally or through his lawyer or other
authorised representative.
(4) On the date fixed, the adjudicating officer shall explain to
the person proceeded against or his lawyer or authorised
representative, the offence, alleged to have been committed by
such person indicating the provisions of the Act, rules or
regulations in respect of which contravention is alleged to have
taken place.
(5) The adjudicating officer shall then give an opportunity to
such person to produce such documents or evidence as he may
consider relevant to the inquiry and if necessary the hearing may
be adjourned to a future date and in taking such evidence the
adjudicating officer shall not be bound to observe the provisions
of the Evidence Act, 1872 (11 of 1872):
Provided that the notice referred to in sub-rule (3), and the
personal hearing referred to in sub-rules (3), (4) and (5) may, at
the request of the person concerned, be waived.
(5A) The Board may appoint a presenting officer in an inquiry
under this rule.
(6) While holding an inquiry under this rule the adjudicating
officer shall have the power to summon and enforce the
attendance of any person acquainted with the facts and
circumstances of the case to give evidence or to produce any
document which, in the opinion of the adjudicating officer, may
be useful for or relevant to, the subject-matter of the inquiry.
(7) If any person fails, neglects or refuses to appear as required
by sub-rule (3) before the adjudicating officer, the adjudicating
officer may proceed with the inquiry in the absence of such
person aftecordine reasons g so.”
13
The enquiry procedure rules were issued by the Central Government in exercise of
the powers conferred by clause (d)(a) of sub-section (2) of Section 29 of the Act
for holding enquiry for the purpose of imposing penalty under Chapter VIA of the
Act. The power to impose penalty does not flow from these rules. Power to
adjudicate flows from Section 15-I of the Act, relevant portion of which reads as
under :-
“ 15-I. Power to adjudicate. – (1) For the purpose of adjudging
under sections 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15H, 15HA
and 15HB, the Board shall appoint any officer not below the
rank of a Division Chief to be an adjudicating officer for holding
an inquiry in the prescribed manner after giving any person
concerned a reasonable opportunity of being heard for the
p urpose of imng y y.
It may be noted that Sections 15H, 15HA and 15HB were substituted for Section
15H by Act no. 54 of 2002 with effect from October 29, 2002. Therefore, the
power of the adjudicating officer to adjudicate for penalties to be imposed under
Sections 15HA and 15HB was conferred in October 2002 and not in October 2006
when Rule 4 was amended. We are also of the view that the enquiry procedure
rules only govern the procedure to be followed by the adjudicating officer while
holding an enquiry and can be applied retrospectively to all the pending
proceedings. On the issue that the adjudicating officer has issued only one notice
under Rule 4(1) of the enquiry procedure rules, we are not inclined to accept the
argument of the learned counsel for the appellants that the procedure was not
followed. Simply because the adjudicating officer has referred to the section
under which penalty can be imposed in the notice itself will not vitiate the
proceedings. Perusal of the record shows that after issuing the show cause notice
and after considering the reply to show cause notice, the adjudicating officer has
issued a further notice fixing the date for appearance of the charged persons. This
appears to be strictly in accordance with the procedure laid down in Rule 4 of the
enquiry procedure rules. We, therefore, reject the arguments of the learned
counsel for the appellants in this behalf.
14
- It was then argued by the learned counsel for the appellants that action
under Section 15HA of the Act can be initiated only if a person indulges in
fraudulent and unfair trade practices relating to securities. The appellants have not
dealt in securities and have not defrauded anyone. The appellants are only buyers
of securities for consideration and that too after listing of the shares on the stock
exchanges. Therefore, they are not part of the IPO scam. It was then argued that
the provisions of Sections 12A(a), (b) and (c) are in peri materia with the
provisions of regulation 3(b), (c) and (d) of the FUTP regulations. The Board has
found the appellants guilty of violating these provisions without identifying the
specific provision which has been violated. It was submitted that penal provisions
are to be strictly construed and without identifying a specific provision, the
appellants cannot be held guilty. Referring to the definition of fraud as contained
in regulation 2(c) of the FUTP regulations, learned counsel for the appellants
further submitted that their action does not fall within the definition of fraud nor
are they persons dealing in securities. They are buyers of the securities in the
ordinary course of dealings on payment of consideration. Such transactions cannot
be construed to be fraudulent.
- We are unable to agree with these submissions of the learned counsel for
the appellants. The appellants may not fall within the category of intermediaries
referred to in Section 12 of the Act but they are definitely persons associated with
the securities market. The High Court of Gujarat in the case of Karnavati Fincap
Ltd. vs. Securities and Exchange Board of India [1996] 87 CompCas 186
(Guj), had an occasion to deal with this issue and this is what the High Court has
held:-
“Twords herperaswittseites ket
have not been defined in the Act. The question then arises whether
“peassociwih he curesmar” akesis our
from persons enumerated in clause (ba)? If one has to go by the
literal meaning, the interpretation which restricts the meaning of
“pe atwittsecuriesmar” o he sons
enumerated in clause (ba) is not acceptable. In ordinary meaning,
the persons associated with the securities market would include all
and sundry who have something to do with the securities market. It
is to be noted that the securities market in the sense is not
confimed o ock hangesonlTwor“perassocied
wih he urimar” e wiitt
imedies. sons iatwitdenot a person having
15
connection or having intercourse with the other, in the present case
t herwiwhom perithave ior
icouritsecitmar”. he er“surimar”
has not been defined under the statute. But taking the meaning of
“suriesas ned n Securies Contrs)Regulon ,
1956, auset s he initon curesadoptunder
tSEBI , tornarmeang tword ketit
will mean a place or institution where the business of selling or
buying of securities is carried on. Selling, buying or dealing with
seites is tsenti iedi ofkethough “suries
mar” n tdefnion ock hange”
under section 2(i) of the Securities Contracts (Regulation) Act
means any body of individuals whether corporate or not, constituted
for the purpose of assisting, regulating or controlling the business of
buyiselordeang n curies“Secit” bee
defined under section 2(h) to include shares, scrips, stocks,
debentures, debenture stock or other marketable securities of like
nature in or of any incorporated company or other body corporate,
etc., etc. Whatin ceable s trefert“marabily” . A
stock exchange is more than a mere selling, buying or dealing place
for securities, but adorns the role of an assisting agency in smooth
conduct of securities business by suitable regulating or controlling
authority. None the less a market cannot be conceived of without a
seller or buyer who are the primary persons for whose purpose the
market exists. All activities of business of selling and buying are
related to the seller or the buyer. It is inconceivable to think that a
buyer or seller of a scrip is not a person associated with the
securities market, where or through which he transacts his business,
whether as trader or as investor, of selling or buying the required
scp”
We have already noted that the findings of the Board are that some entities of
Panchal group opened afferent accounts, some used them for making applications
in retail category of IPOs, some helped in transfer of shares to the financiers and
some disposed of the shares. We have also noted that all of them did not play the
same role but they complemented one or the other in executing the game plan. The
appellants fall in the category of those who are the beneficiaries of these shares
and who made money by selling the shares which were transferred to their demat
accounts by the key operators or the financiers. The definition of fraud, as
contained in regulation 2(c) of the FUTP regulations, is wide enough to encompass
the activity of the appellants within its fold. Penalty under Section 15HA can be
imposed on “ any person ” who indulges in a fraudulent activity. The provisions of
this section are not confined to intermediaries alone. Therefore, this argument of
learned counsel for the appellants is also rejected.
- Learned counsel for the appellants further argued that the investigation
carried out by the Board was with regard to opening of alleged fictitious bank
16
accounts and demat accounts before allotment of shares. There is no allegation
with regard to sale of shares after they were allotted in the IPO. The show cause
notice has not brought out clearly the charge against the appellants. The show
cause notice must be precise, unambiguous, person centeric and must clearly
allege the role of each appellant. The appellants have simply purchased shares
from Roopalben Panchal at prevailing market price/negotiated price and paid legal
consideration. The adjudicating officer has ignored the relevant material and
thereby committed a serious jurisdictional error in arriving at the conclusions. He
has also ignored the fact that the alleged fictitious demat accounts were opened
prior to the opening of the bank accounts. Roopalben Panchal has confirmed the
sale of shares to the appellants indicating the number of shares sold, price at which
these were sold and acknowledgement of the consideration received for the same.
The appellants also submitted declaration of Roopalben Panchal confirming
dealing in the shares. All the transactions have been reflected in the income tax
returns which were filed much earlier than the order passed by the Board.
Therefore, the appellants cannot be said to have committed any fraud as alleged by
the Board and the findings of the adjudicating officer needs to be set aside on these
grounds.
- We are unable to accept these submissions of learned counsel for the
appellants. As per the records available, the investigation was not confined to the
alleged fictitious bank accounts or the demat accounts but was pertaining to the
IPO scam. As discussed in the earlier part of this order, various entities have
played different roles to make the whole IPO scam successful. The role of the
appellants, as discussed above, pertains to permitting use of their bank accounts
for opening fictitious demat accounts and arranging finance using these bank
accounts, getting the shares allotted in the IPO to their accounts and ultimately
selling these shares in the market thereby earning profit. In the facts and
circumstances of the case, it cannot be said that it was a purchase simplicitor of the
shares by the appellants from Roopalben Panchal who was another active member
of the Panchal group in making the IPO scam successful. We are inclined to agree
17
with the learned counsel for the respondent Board that the confirmation letters
submitted by Roopalben Panchal with regard to the number of shares sold, price at
which they were sold and acknowledgement of consideration received from the
appellants are self serving documents which were not produced at the first
available opportunity. In none of these documents, amounts tally with the
consideration for the shares purchased. The declaration given by Roopalben
Panchal confirming dealings of the shares other than IPO and transactions in 1999
does not, in any way, mitigate the case against the appellants with regard to
transactions in respect of shares under the IPO scam. On the basis of material
placed on record, the transfer of shares from Roopalben Panchal to appellants is
not in dispute. These were the shares which were purchased using fictitious demat
accounts is also not in dispute. If the earnings under these shares are shown in the
income tax returns, that by itself, cannot be a mitigating factor if transactions are
otherwise found to be vioaltive of regulatory framework. Learned counsel for the
appellants have referred to certain judgments including the order of this Tribunal
in Jatin Manubhai Shah & Ors. vs. Adjudicating Officer (Appeal no. 16 of
2010 decided on March 1, 2011), Moneygrowth Investment and Consultants
Pvt. Ltd. vs. SEBI (Appeal no. 1 of 2008 decided on August 27, 2008),
Rajendra G. Parikh vs. SEBI (Appeal no. 44 of 2009 decided on January 21,
2010), Sanjay Kumar Gupta vs. SEBI (Appeal no. 107 of 2007 decided on July
8, 2008) and Vikas Ganeshmal Bengani vs. Adjudicating Officer (Appeal no.
283 of 2009 decided on March 8, 2010) to contend that the charge levelled
against the delinquent must be precise and unambiguous. Vagueness in the show
cause notice is fatal to the case. We have looked into these orders. While
agreeing with the preposition that the charges in the show cause notice must be
clear and unambiguous, we find that there is no such infirmity in the impugned
order. When a case is to be established on the basis of circumstantial evidence,
establishing the complicity of persons involved in fraudulent or unfair schemes is a
challenge. There are situations where different layers of the transactions, each of
which may fall within the four corners of law, but, if analysed cumulatively, may
bring them within the fraudulent transactions as prescribed in the regulations.
18
Whether a transaction or series of transactions integrally connected with each
other will fall within the purview of fraudulent transactions, as defined in the
regulations, will depend upon the facts brought out on record during the
investigation and the connection established between the parties. Examined in that
perspective, the Board has placed sufficient material on record to prove that the
transactions entered into by the appellants fall within the definition of ‘ fraud ’ as
provided in regulation 2(c) of the FUTP regulations.
- It was then argued by the learned counsel for the appellants that the Board
has not indicated in the impugned order as to which provisions of regulation 3(a)
to (d) and 4(1) of the regulations or section 12A(a) to (c) of the Act are violated.
Let us have a look at these provisions:-
“3. No person shall directly or indirectly-
a) buy, sell or otherwise deal in securities in a fraudulent
manner;
b) use or employ, in connection with issue, purchase or sale
of any security listed or proposed to be listed in a
recognized stock exchange, any manipulative or deceptive
device or contrivance in contravention of the provisions of
the Act ort the rules or the regulations made thereunder;
c) employ any device, scheme or artifice to defraud in
connection with dealing in or issue of securities which are
listed or proposed to be listed on a recognized stock
exchange;
d) engage in any act, practice, course of business which
operates or would operate as fraud or deceit upon any
person in connection with any dealing in or issue of
securities which are listed or proposed to be listed on
recognized stock exchange in contravention of the
provisions of the Act or the rules and the regulations made
thereunder.
- Prohibition of manipulative, fraudulent and unfair
trade practices
(1) Without prejudice to the provisions of regulation 3, no
person shall indulge in a fraudulent or an unfair trade
practice in securities.
19
12A. Prohibition of manipulative and deceptive devices,
insider trading and substantial acquisition of securities or
control.- 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
recognised 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 listed on recognised stock exchange;
c) engage in any act, practice, course of business which operates
or would operate as fraud or deceit upon any person, in
connection with the issue, dealing in securities which are
listed or proposed to be listed on a recognised stock exchange,
in contravention of the provisions if this Act or the rules or
the regulations made thereunder;
(d) to (f) ……………………………………………………………………………. ”
It may be noted that the provisions of regulation 3 (b), (c) and (d) of the FUTP
regulations are in peri materia with the provisions of section 12A(a), (b) and (c) of
the Act and are couched in a general term to cover wide range of manipulative
practices. Similarly, regulation 3(a) and 4(1) of the FUTP regulations prohibits
dealing in securities in a fraudulent manner. Once a conclusion is arrived at that
fraud has been perpetrated while dealing in securities, all these provisions get
attracted in a situation like the one under consideration. We are not inclined to
agree with the learned counsel for the appellants that Board should have identified
as to which particular provision of the Act or the FUTP regulations has been
violated.
- After perusing the material placed on record and after hearing learned
counsel for the parties, we are convinced that the appellants are part of the Panchal
group. Some members of the Panchal group opened bank accounts with Bharat
Overseas Bank and Indian Overseas Bank and these bank accounts were used to
open several other afferent bank accounts and thousands of afferent demat
accounts in the name of fictitious persons. These afferent demat accounts were
used by members of the Panchal group to make applications in various IPOs. The
20
applications were made on the basis of loans taken from the two banks or Karvy,
the depository participant, in the name of the afferent bank account holders or
other demat account holders. Loans were also raised by members of the Panchal
group from private financiers. On allotment of shares, these shares were
transferred from the afferent accounts to the accounts of the Panchal group who
further transferred the shares either in the demat accounts of the financiers or other
members of the Panchal group including the appellants. The appellants then sold
these shares and made substantial profit. On the basis of material placed on
record, we cannot find any fault with the findings arrived at by the adjudicating
officer of the Board that the appellants have indulged in fraudulent/manipulative
activities and employed deceptive devise to corner the shares reserved for retail
individual investors in the IPOs to defraud the retail individual investors and such
activity is not only in breach the integrity of the market, but also vioaltive of the
provisions of section 12A (a), (b) and (c) and Regulation 3 (a), (b), (c) and (d) and
4(1) of the FUTP regulations. There is a clear finding of the Board that the
provisions, as noted above, stand violated and it was not necessary for the Board to
give specific finding with regard to violation of each of the sub-regulation of the
FUTP regulations or the sub-section of the Act.
- Learned counsel for the appellants then argued that the penalty of ` 25
crores imposed on Devangi Panchal and ` 20 crores imposed on Dipak Panchal is
too high and not commensurate with the violations alleged to have been committed
by the appellants. The role of the appellants is that of selling the shares after they
were listed and making profit thereon. They are neither key operators nor
financiers. Even the key operators or the financiers who were the main
perpetrators of the IPO scam have not been imposed such a heavy penalty. A chart
has been made available by the appellants indicating the penalties imposed by the
adjudicating officer in other cases relating to this IPO scam and the same is
reproduced here for the sake of convenience :-
21
Annexure 3 “ Details of orders of Ld. Adjudicating Officer u/s 15 I in case of IPO Ir
Sr.
Name of Financers
Date of
orders
passed
by Ld.
AO
Unlawful
gains
alleged by
Ld. Ao
Penalties of
AO
Note
1 Jayantilal Jitmal 29.09.09 10,64,354 31,00,00
2 Sarvani Choudhary
30.09.09
9,58,959
6,00,000
- Anand Choudhary 6,00,000
- Netanand B Choudhary 2,00,000
- Netanand B HUF Choudhary 5,50,000
- Vinita Choudhary 7,00,000
- Bhanuprasad Trivedi 31.03.10 3,63,00,000 4,00,00,000 1
- Ashok Bagrecha 31.12.08 16,931 1,00,000
- Chandrakant A Parekh 11.01.10 22,45,120 66,00,000
- Deepakkumar S Jain 31.12.08 84,08,495 10,00,000
- Dushyant Dalal
Puloma Dalal
02.06.11
4,94,19,379
14,00,00,000
2
- NSDL 27.04.07 5,00, 00,000 3
- Opee Stock Link Ltd. 30.12.08 24,00,000 25,00,000 4
- Rajkumar Jain 30.10.09 10,00,000 15,00,000 5
- Roopal Panchal 31.01.12 22,02,162 15,00,000
- Arjav Panchal 31.01.12 1,00,000
Note:
1 Hon ’
Hon’ble SAT remback the said App 184/2011 decided on dat
Hon’ble SAT set aside thy vide orde
Hon’ble Sat set aside the y vidr 30
Hon’ble SAT set aside thy vide orde
’ble S
”
22
- It was further submitted that the whole time member of the Board, while
passing the order under Section 11 and 11B of the Act, has not only debarred the
appellants from dealing in securities, a disgorgement order has also been passed
whereby the members of the Panchal group have been directed to disgorge the
unlawful gains including the interest thereon amounting of ` 36,03,37,552/-.
Devangi Panchal has been directed to pay a total amount of ` 13,51,57,917/- and
Dipak Panchal has been directed to disgorge an amount of ` 10,74,97,161/-. In
view of the lower monetary penalties on others and the order of disgorgement
against the appellants and the role played by the appellants, only a nominal penalty
should have been imposed on the appellants.
- On the other hand, learned counsel for the respondent Board submitted that
though the quantum of penalty is justiciable and can be gone into by the appellate
authority, the appellate authority should not normally interfere with the quantum
of penalty if the adjudicating officer has taken into account relevant factors for the
purpose of arriving at the quantum. The penalty imposed by the adjudicating
officer is appropriate and correct and ought not to be interfered with except to
correct certain inadvertent errors/inaccuracies. Learned counsel for the respondent
Board has also placed on record a chart indicating the proceedings initiated against
persons involved in the IPO scam. It is a detailed chart running into five pages
and giving the details of the proceedings initiated under Section 11B, adjudication
proceedings, prosecution proceedings, CBI proceedings and consent proceedings
under the Act and it contain details of 82 such entities. Suffice it to say that in the
said chart the maximum amount of disgorgement against any other entity is in the
case of M/s. Excell Multi Tech Limited, where it has been asked to disgorge an
amount of 22,05,86,584/- and an interest of 8,82,34,634/-. No order in the
adjudication proceedings appears to have been passed against the said entity,
although, the said entity has played the role of a financier to make the IPO scam
successful. The chart also indicates that a large number of cases have been settled
in consent proceedings and no further action was initiated against the entities who
settled the matters through consent proceedings.
23
- We have given our thoughtful consideration to the submissions made by
the learned counsel on both sides. Section 15HA of the Act under which the
penalty has been imposed by the adjudicating officer on these appellants reads as
under :-
“ 15HA. Penalty for fraudulent and unfair trade practices.- If
any person indulges in fraudulent and unfair trade practices
relating to securities, he shall be liable to a penalty of twenty-five
crore rupees or three times the amount of profits made out of such
practices, whichever is higher. ”
Section 15J of the Act also enumerates the factors to be taken into account by the
adjudicating officer while adjudging the quantum of penalty and it reads as
under :-
“ 15J. Factors to be taken into account by the adjudicating
officer.- While adjudging the quantum of penalty under section
15-I, the adjudicating officer shall have due regard to the
following factors, namely:-
(a) the amount of disproportionate gain or unfair advantage,
wherever quantifiable, made as a result of the default;
(b) the amount of loss caused to an investor or group of investors
as a result of the default;
(c) t he repetive nature default
No doubt, while passing the order, the adjudicating officer of the Board has made
reference to the above noted provisions and has imposed maximum penalty which
could have been imposed under the Act. Simply because the Act provides for
heavy penalties, does not mean that invariably heavy penalty alone should be
imposed. Imposition of penalty depends on many factors including the factors
enumerated in Section 15J of the Act. We cannot lose sight of the fact that the key
operators and the financiers were more culpable for the whole IPO scam as
compared to the appellants. In none of the cases made available by the appellants
and the respondent Board, as noted above, such a heavy penalty has been imposed
on any other entity involved in the case except on Excell Multi Tech Limited
which was held to be guilty of financing the IPO transactions. We also notice that
a large number of cases have been settled through consent proceedings. The
24
appellants were restrained from trading in the market for a sufficiently long period
and in the order passed under Section 11 and 11B of the Act, they have been
directed to disgorge an amount of more than ` 24.26 crores. Keeping in view the
order passed by the whole time member of the Board against the appellants, the
quantum of penalty imposed on other entities involved in the scam and also the
fact that a large number of entities have been permitted to settle the matter through
consent proceedings, we are of the view that ends of justice would be met by
reducing the penalty in the case of the two appellants before us to ` 2 crores each.
- While upholding the findings arrived at by the adjudicating officer, we
reduce the penalty to ` 2 crores in respect of each of the appellants.
The appeals stand disposed of accordingly with no order as to costs.
Sd/-
P. K. Malhotra
Member &
Presiding Officer (Offg.)
Sd/-
S. S. N. Moorthy
Member 12.11.2012
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