BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.164 of 2012
Date of Decision: 18.9.2012
Bankim J. Shah
st Floor, 145, Kamdhenu Complex,
Opp. Sahajanand College, Panjrapole,
Ambavadi, Ahmedabad : 380 015.
…… 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 R. Shah, Advocate for the Appellant.
Dr. Mrs. Poornima Advani, Advocate with Mr. Ajay Khaire and Ms. Rachita Romani,
Advocates for the Respondent.
CORAM : P. K. Malhotra, Member & Presiding Officer ( Offg .)
S.S.N. Moorthy, Member
Per : S.S.N. Moorthy
This order will dispose of two Appeals no.144 and 164 of 2012. The whole time
member of the Securities and Exchange Board of India (for short the Board) has passed a
common order in respect of the two appellants and so the appeals filed by the two
appellants are disposed of by way of a common order.
- The appellants were directors of Denim Enterprise Limited (the company). In the
present appeal, challenge is against an order passed by the whole time member of the
Board by which the appellants were restrained from accessing the securities market and
prohibited from buying, selling or otherwise dealing in securities directly or indirectly for
a period of two years. The whole time member acted under the powers conferred upon
him under section 19 read with section 11B of the Securities and Exchange Board of
India Act, 1992 (Act). The appellants were found guilty of violating regulation 5 of
Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Market) Regulations, 1995 read with regulation 13(2) of
2
the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Market) Regulations, 2003 (referred to hereinafter as the
FUTP Regulations).
- The Board conducted investigations in the dealings in the scrip of the company
for the period November 1, 1999 to March 30, 2000. During the investigation period one
Aushim Khetrapal was the chairman and managing director of the company. The
appellants were directors of the company during the relevant period. The scrip of the
company registered a phenomenal increase from7 on November 1, 1999 to267.25 on
March 31, 2000. According to the Board, the investigation pointed to publication of
false/misleading information about the company by the directors which created artificial
increase in the price of the scrip. A show cause notice was issued to the appellants on
April 23, 2009 to show cause why suitable directions under section 11 of the Act should
not be passed against them for publication of false and misleading information in
newspapers/publications. The case of the Board was that the appellants allegedly
violated regulation 5 of the FUTP Regulations by way of publication of false and
misleading information aimed at creating investor interest in the scrip leading to artificial
increase in the price. The appellants were given a personal hearing when satisfactory
reply was not forthcoming from them. During personal hearing the appellants denied the
allegations raised in the show cause notice. It was highlighted by both the appellants that
they were not involved in the day to day affairs of the company and had no role
whatsoever in the alleged publication of misleading information in the newspapers. The
whole time member, after considering the submissions of the appellant and the material
gathered by him, passed a restraint order under section 11 of the Act as mentioned
hereinabove. - We have heard Mr. Deepak R. Shah and Ms. Kranti Anand, learned counsel for
the appellants and Dr. Poornima Advani, learned counsel for the respondent Board. - The learned counsel appearing for Shri Bankim J. Shah, the first appellant in the
case, submitted that he was not involved in the day to day affairs of the company. It is
specifically represented that the appellant has not involved himself in the dissemination
of any false information as alleged and the information relied upon in the show cause
notice relates to certain news items published by a correspondent of the newspaper. The
3
managing director was responsible for the day to day affairs of the company and the
appellant had no opportunity to cross examine the company secretary whose statement
regarding publication of information was relied upon. The appellant was a non executive
director and he did not attend many of the board meetings. The appellants’ learned
counsel very vehemently questioned the delay in the finalization of the proceedings.
According to him, the direction issued under section 11 of the Act falls beyond the
reasonable period of time and it has affected the normal business pursuits of the
appellants.
- The learned counsel appearing for Shri Suresh Babulal Bafna submitted that the
appellant had no role in the publication of news items which are alleged to be misleading
and false. The appellant was a chartered accountant and he was appointed as a director
only for the sake of advising on accounting matters of the company and he did not
manage the affairs of the company on a day to day basis. It is submitted that the
appellant had no knowledge about the background of the press release and when he found
that some of the news items were not supported by proper agreement among the parties
he resigned from the company. - Both the appellants, while admitting the connection with the promoters and other
directors of the company, submitted that they had no role in the manipulations of the
scrip which resulted in artificial price increase. - Dr. Poornima Advani, learned counsel for the respondent Board, defended the
order of the whole time member. According to her, the appellants attempted to give false
information to the public through the mechanism of stock exchange and the entities
involved in the manipulation of the scrip are closely connected by way of identity of
address, family relationship etc. It is submitted that the whole time member has brought
on record the close connection of the various entities involved in the transactions in the
scrip which points to their joint effort in the manipulation of the scrip. During the
hearing of the appeal the learned counsel for the respondent produced copies of a few
news items which are referred to in the impugned order, and according to her, the news
items have been disseminated by the appellants. In the case of Suresh Babulal Bafna, an
affidavit in reply has also been filed by the Board.
4
- We have considered the rival submissions. The impugned order dwells at length
on the alleged manipulation of the scrip of the company and the connection among the
various entities belonging to the promoter group and the directors. However, the charge
leveled against the appellants relates to violation of regulation 5 of the FUTP
Regulations. So it is not necessary to consider the issue regarding manipulation of the
scrip by way of collusion or connivance of the parties involved therein. Suffice it to say
that as far as the appellants are concerned, what is crucial is their role in the publication
of the alleged misleading news items in the newspapers/journals. Paragraph 11 of the
impugned order lists out several instances of news items appearing in
newspapers/journals. A reading of the contents of the news items as mentioned in the
impugned order makes it clear that the report has been published by the
newspaper/journal by way of news items, prepared by the correspondents of the journal.
There is no specific reference to the appellants in the news items, nor is there any
evidence to show that the appellants were responsible for the publication of the news
items. Of course, there is reference to Shri Aushim Khetrapal, the managing director of
the company, in some of the news items. In another news item it is mentioned that the
company had informed Bombay Stock Exchange Limited (BSE) about opening of office
in London and Tokyo. The respondent Board was specifically directed to produce copies
of the said news items for perusal. The Board could produce only two news items
published by the Express newspaper group. However, the learned counsel for the
respondent could not establish that the appellants were involved in or were responsible
for the publication of the said news items. Even though six instances are referred to in
the impugned order, the respondent’s learned counsel could produce only two instances. - It is worthy of mention that none of the news items on which reliance is placed by
the Board had been given to the appellants for their comments. It is submitted by
appellants’ learned counsel that they had no chance to peruse the material, namely news
items, appearing in the Express publications. It is also submitted that they were not
provided with copies of the news items referred to in the impugned order. Since the
respondent Board has relied heavily on the above mentioned news items in the impugned
order, it was incumbent on it to provide the appellants with copies of the same and elicit
their reaction before coming to the conclusion that the news items emanated from the
5
appellants. We are making this observation in the light of the specific provision in
regulation 5 of the FUTP Regulations which is the foundation of the charge in the present
case. For ease of reference the said regulation is extracted below:
“Prohibition of misleading statements to induce sale or purchase of
securities
- (1) No person shall make any statement, or disseminate any information
which –
(a) is misleading in a material particular; and
(b) is likely to induce the sale or purchase of securities by any other person or
is likely to have the effect of increasing or depressing the market price of
securities, if when he makes the statement or disseminates the information-
(i) he does not care whether the statement or information is true or false; or
(ii) he knows, or ought reasonably to have known that the statement or
information is misleading in any material particular.
Nothing in this sub-regulation shall apply to any general comments made in
good faith in regard to –
(a) the economic policy of the Government,
(b) the economic situation in the country,
(c) trends in the securities markets, or
(d) any other matter of a similar nature,
whether such comments be made in public or in private.”
The regulation is person specific and publication specific. The regulation makes it clear
that no person shall make any statement or disseminate any information which is false or
misleading as mentioned in the regulations above. So, when a person is charged with
violation of the said regulations, it is necessary to establish that the delinquent has
violated the regulation by making a statement or disseminating any information by
himself. In the present case, even though reference is made to certain news items
appearing in newspapers/journals in the show cause notice and no attempt has been made
in the impugned order to connect the same to the appellants so as to establish their
positive involvement in their dissemination. On the one hand, the Board has not provided
the appellants with copies of the news items relied upon. On the other hand, it has been
able to produce only two news items during the hearing of the appeal wherein there is no
material pertaining to the role of the appellants.
6
- In the show cause notice reference is made to the statement given by Shri
Kamlesh M. Shah, company secretary of the company. Suspicion regarding the veracity
of the news reports arose from the statement given by the company secretary. - The whole time member has given a definite finding as regards the wrong doing
of the appellants in the impugned order as under:
“A company acts through its Board of Directors. It is the responsibility of the
directors to ensure that a company functions appropriately and in accordance
with law. Thus, the conduct of the directors of the company is giving false or
misleading press releases was in violaiton of Regulaiton 5 of the SEBI
(Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995 read
with Regulation 13(2) of the SEBI (Prohibition of Fraudulent and Unfair Trade
Practices) Regulations, 2003.” - On a consideration of the facts and evidences on record we have to conclude that
the Board has not established that the appellants involved themselves or were responsible
for making any statement or disseminated any information which is false or misleading.
There is considerable discussion in the impugned order about the manipulation in the
price of the scrip and the connection among the parties. However, as regards the
appellants, the charge is not one of collusion or connivance. The charge of violation of
regulation 5 of the FUTP Regulations cannot be said to have been proved with necessary
evidence in the impugned order. - The learned counsel for the Board referred to the judgment of the Supreme Court
in the case of Chairman, All India Railway Recruitment Board and Another vs. K. Shyam
Kumar and Others, (2010) 6 SCC 614 and Maria Margarida Sequeria Fernandes and
others vs. Erasmo Jack de Sequeria (Dead), 2012 STPL(Web) 181 SC. It is argued that
additional grounds can be looked into and material brought on record for larger public
interest. However, we find that in the present case the appellants were not provided with
documents relied upon in framing the charges and so the consideration of production of
additional material to support the case during the hearing of the appeal may not be
relevant. - In the appeal relating to Bankim J. Shah one of the grounds advanced is the long
delay in finalization of proceedings. We have dealt with this issue in several cases
decided by this Tribunal. We fully appreciate the fact that no time limit is provided for
finalization of proceedings in the Act and regulations. However, delay defeats justice
and causes undue hardship to the delinquent in putting forth timely defense. It is to be
7
noted that in the present case the investigation of 1999-2000 was concluded by the
impugned proceedings in May, 2012. Considerable time has passed after the beginning
of the investigation. Show cause notice was also issued in April 2009, but the
proceedings culminated in May 2012. The proceedings could have been completed
within a reasonable period of time, especially when the appellants have been restrained
from taking part in market operations.
In view of the discussion above, we hold that the appellants cannot be held guilty
of violating regulation 5 of FUTP Regulations. The order of the whole time member is
set aside. In the result the appeals are allowed with no order as to costs.
Sd/-
P.K. Malhotra
Member &
Presiding Officer (Offg .)
Sd/- S.S.N. Moorthy
Member
18.9.2012
Prepared and compared by
RHN