BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 186 of 2011
Date of decision: 2.11.2011 Aditya Birla Finance Ltd.
Indian Rayon Compound,
Veraval,
Gujarat – 362 266.
…Appellant
Versus
- Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051. - Mentor Capital Limited
(Previously known as Pacific Corporate Services Limited)
713, Raheja Centre,
Nariman Point, Mumbai 400 021. … Respondents
Mr. R. S. Loona, Advocate with Mr. Abhishek Borgikar, Advocate for the
Appellant.
Mr. Shiraz Rustomjee, Senior Advocate with Ms. Daya Gupta, Ms. Harshada
Nagare, Advocates for Respondent no. 1.
Mr. P. N. Modi, Advocate with Ms. Manik Joshi, Ms. Amrita Nandgaonkar,
Advocates for Respondent no. 2.
CORAM : Justice N. K. Sodhi, Presiding Officer
P. K. Malhotra, Member
S. S. N. Moorthy, Member
Per : Justice N. K. Sodhi, Presiding Officer (Oral)
Aditya Birla Finance Limited, the appellant herein is a non-banking
finance company registered with the Re serve Bank of India and engaged in the
business of providing credit facilities to its clients. It shall be referred to
hereinafter as the lender. It provided a loan facility to Mentor Capital Limited,
the second respondent which was formerly known as Pacific Corporate Services
Limited. This respondent shall be referred to hereinafter as the borrower. The
borrower entered into a loan agreement with the lender on June 2, 2010 and
several other security related documents had been executed between them. As per
2
this agreement the borrower could purch ase and sell any securities which were
approved by the lender only through a broke r approved by the latter. It was also
stipulated between the lender and the borro wer that the latter shall maintain a
designated demat account with an approved depository participant. It is common
ground between the parties that the approved broker and the depository
participant in the present case was Aditya Birla Money Limited as it was a
registered stockbroker and a depository par ticipant. It is the case of the lender
that the approved broker and the deposito ry participant is its group company
which fact is not disputed by the borrowe r. As per the loan agreement, the
borrower had opened an approved bank account with HDFC Bank and also an
approved demat account with Aditya Birla Mo ney Limited. In terms of the loan
agreement, the borrower had also executed irrevocable powers of attorney in
favour of the lender by virtue of which the latter alone could operate the approved
bank account and the demat account. It was also the requirement of the loan
agreement that the securities purchased by the borrower shall be pledged with the
lender and in this regard a deed of pledge had also been executed between the
parties though the procedure required for creating a pledge as required by Section
12 of the Depositories Act, 1996 read with Regulation 58 of th e Securities and
Exchange Board of India (Depositories and Participants) Regulations, 1996 had
not been followed. The lender contends that the creation of a pledge as required
by the aforesaid provisions of law was not a condition precedent for the
disbursement of the loan under the loan agreement. Be that as it may, we have on
record that with the m oney lent by the lender, the borrower purchased the
securities of four companies namely, Mahindra Forging Limited, Indusind Bank
Limited, Hindusthan Oil Exploration Company Limited and Welspun Corp
Limited. It is pertinent to mention here that the shares of Welspun Corp Limited
were purchased by the borrower between November 5, 2010 and November 16,
- On receipt of information from th e office of the Assistant Commissioner
of Income Tax, Nagpur, the Securities and Exchange Board of India (for short the
Board) carried out investigations in the scrip of Murl i Industries Ltd. The scope
of the investigations wa s expanded and the Board br ought under its scrutiny the
scrips of four other comp anies namely, Ackruti City Limited, Brushman India
Limited, Welspun Corp. Limited and RPG Transmission Limited. During the
course of the investiga tions, the Board prima faci e found that the promoters
alongwith several other entities had manipulated the scrips of these companies. In
view of the prima facie findings, the Board by its order da ted December 2, 2010
restrained, among others, the borrower fr om accessing the securities market and
prohibited them from buying, selling or d ealing in securities in any manner till
further directions. This ex-parte order was treated as a show cause notice and the
entities which had been restrained includi ng the borrower were required to file
their replies. After hearing the partie s, the ex-parte ad-interim order was
confirmed against the borrower and ot hers on July 19, 2011. We are only
concerned with the borrower in this appeal. Feeling aggrieved by the order of
July 19, 2011, the borrower filed Appeal no. 183 of 2011 before this Tribunal
challenging the findings recorded therein. Since the investigations were going on
and we are informed that they are still continuing, we did not go into the merits of
the issues sought to be raised before us and disposed of the appeal by directing the
Board to conclude the investigations befo re the end of this year. The borrower
made a prayer in that appeal that be ing an investment company it had a large
portfolio of investments the value of which was close to ` 600 crores and that in
view of the falling market it should be allowed to sell the stocks held by it by way
of investment so as to reduce the losses. While not interfering with the merits of
the impugned order, we granted this pray er subject to the condition that the
amounts realized by such sales be deposited in an escrow account. The borrower
also wanted to utilize the sale proceeds to meet with its outstanding liabilities
including government dues. In this regard, we directed the borrower to seek the
permission of the Board. The matter rested at that.- On receipt of information from th e office of the Assistant Commissioner
- In the meantime, the lender by its letter dated December 6, 2010 called
upon the borrower to pay the outstanding am ount in the loan account. Since the 4
borrower failed to do that, the lender approached the Board by its letter of
February 4, 2011 seeking permission to transf er the securities lying in the demat
account of the borrower to its own dema t account and further sought permission
to sell the same to recover the loan am ount. The Board by its letter dated
March 28, 2011 rejected the request made by the lender upon which the latter
filed Appeal no. 110 of 2011 before this Tribunal which was disposed of on
September 2, 2011 on an agreement between the parties. It was agreed that the
lender shall approach the Board with all the relevant records and the Board would
examine the request and pass an appropriate order. The needful was done and by
letter dated October 14, 2011, the request of the lender has ag ain been turned
down. It is against this communication that the present appeal has been filed. - We have heard the learned counsel for the parties including the learned
senior counsel for the Board. Investigations in the matter are still continuing and
whether the borrower had played any mischief while trading in the scrips of five
companies as aforesaid including Welspun Corp Limited is yet to be ascertained.
It is not in dispute that with the funds received from the lender, the borrower had
traded in the scrips of four companies, three of which are not under the scanner of
the Board. It is common ground between th e parties that the scrips of Mahindra
Forging Limited, Indus Ind Bank Lim ited and Hindusthan Oil Exploration
Company Limited are not under investig ations and only the scrip of Welspun
Corp Limited is being looked into by th e Board. In the case of Welspun Corp
Limited, the shares were purchased by the borrower between November 5, 2010
and November 16, 2010. The loan agreem ent was executed between the parties
on June 2, 2010. The period for which th e scrip of Welspun Corp Limited is
being investigated is not only prior to the period when the borrower purchased the
shares but also prior to the date of the loan agreement. The learned senior counsel
appearing for the Board informs us that the dealings in the scrip of Welspun Corp
Limited are being investigated for th e period between January 2009 and March - This being the position and having re gard to the equities of the case and
also taking note of the fact that ther e is not a whisper about any wrong doing on 5
the part of the lender, it would be reasonable and fair to allow the prayer made by
it. As already noticed earlier, the prayer made by the borrower to sell the shares
to reduce the losses has already been grante d. In this view of the matter, we set
aside the impugned order and issue the following directions:-
(i) The demat account of the borrower with the designated/approved
depository participant shall be unfrozen for the limited purpose of
transfer of shares to the demat account of the lender.
(ii) The lender shall be at liberty to sell the shares to the extent necessary
to recover its outstanding dues. The shares, if any, that remain after
recovering its dues shall be retransferred by the lender to the demat
account of the borrower with J. M. Financial Services Private
Limited (demat a/c no. 10017965 – DPID no. IN302927). The
lender is directed to inform th e Board and the borrower soon after
the sales are made and shall also furnish to them copies of the
contract notes. The details of the loan adjustment shall also be
furnished to them.
(iii) The appellant undertakes that in the event it is called upon by the
Board or by this Tribunal to br ing back the money which it would
have realized by the sale of shar es, it shall do so forthwith. The
undertaking is recorded. It is, how ever, may clear that if and when
the lender is called upon to bring back the money, it shall be open to
it to challenge the said direction and avail such remedies as are
available in accordance with law.
- Before concluding, we may take note of the two contentions sought to be
raised by the learned senior counsel fo r the Board. He contends that it is
irrelevant in the present case whether the shares were purchased out of the funds
advanced by the lender as the Board has not taken any action ag ainst the lender.
He also contends that the amount should not be allowed to be realized since a 6
valid pledge has not been created in acco rdance with Depositories Act and the
Regulations framed thereunder. - It is not necessary to adjudicate upo n the first contention. As regards the
second contention, it is nobody’s case that a valid pledge in terms of Section 12 of
the Depositories Act read with Regulati on 58 of the aforesaid regulations had
been created. The learned senior counsel also sought to cont end that there are
discrepancies and manipulations in the loan documents that were produced before
the Board and the ones annexed to the earlier appeal filed by the lender. There is
no mention of any discrepancy either in the impugned order nor has the Board
filed a reply in the present case raising this issue. Therefore, we have not allowed
this plea to be raised now for the first time before us during the course of the
arguments. We are also making it clear that nothing stated hereinabove should be
taken as an expression of our view on the merits of the issues that may come up
for the consideration of the Board during or after the investigations.
In the result, the appeal is allowed as above with no order as to costs.
Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
P. K. Malhotra
Member
Sd/-
S. S. N. Moorthy
Member
2.11.2011
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