BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 29 of 2011
Date of decision: 03.04.2012 - Jayesh P. Khandwala HUF
Proprietor : Zealous Trading Company,
1, Alap Bungalows, Part-I,
Near Mayurpankh Society, Satellite,
Ahmedabad – 380 015. - Jayesh P. Khandwala
1, Alap Bungalows, Part-I,
Near Mayurpankh Society, Satellite,
Ahmedabad – 380 015. … Appellants
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. Janak Dwarkadas, Senior Advocate with Mr. Somasekhar Sundaresan,
Mr. Paras Parekh and Ms. Delna Aga, Advocates for Appellants.
Mr. Kumar Desai, Advocate with Ms. Pratiksha Mody and Mr. Mobin Shaikh,
Advocates for the Respondent.
Coram : P. K. Malhotra, Member
S.S.N. Moorthy, Member
Per : P. K. Malhotra, Member This appeal is directed against the order dated October 26, 2010 passed by the
whole time member of the Securities and Exchange Board of India (for short the Board)
under Section 11 and 11B of Securities and Exchange Board of India Act, 1992 (for
short the Act) prohibiting the appellants from buying, selling or dealing in the securities
market in any manner for a period of three months from the date of the order and further
directing appellant no.1 to disgorge unlawful gains of4,04,20,658/- along with interest of1,21,26,197/-. In the event of non-paymen t of the said amount within the
stipulated period, the appellants are restrained for a further period of seven years from
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accessing the securities market and buying, se lling or dealing in securities in any
manner.
- This case arises out of the initial public offering (IPO) scam that was unearthed
by the Board in the year 2005-06. Before we deal with the facts of the present case, let
us briefly state how this scam/fraud was perpetrated. On receipt of information
regarding alleged abuse and misuse of the IP O 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 compan ies in the years 2003, 2004 and 2005, it
transpired that certain entities opened many demat accounts in fictitious/benami names
and these entities cornered/acquired shares of those companies allotted in the IPOs by
making large number of applications of sma ll value so as to make them eligible for
allotment under the retail cate gory. The strategy adopted was that subsequent to the
receipt of the IPO allotment, these fictitious /benami allottees transferred the shares to
their principals called the ‘key operators ’ who controlled their accounts and who, in
turn, transferred most of the shares to the ‘financiers’ who had originally made available
funds for executing the game plan. In view of the then booming market, the financiers
then sold most of these shares on the firs t day of listing or s oon thereafter thereby
making windfall gains of the price difference between the issue price and the listing/sale
price. - The appellants herein are said to be financiers . Appellant no.1 is a Hindu
undivided Family (HUF) of appellant No.2 who is proprietor of M/s. Zealous Trading
Company. The Board issued a show cause notice dated April 8, 2009 alleging that the
appellants had acquired/cornered shares in the IPOs of IDFC Limited (IDFC), Sasken
Communication Technologies Limited (Sas ken) and Suzlon Energy Ltd. (Suzlon) by
making available finance to key operators and received corresponding shares and
refunds. Thereafter, a number of shares had been transferred to va rious entities like
Sheelu Lalwani and Jitendra Lalwani at issue pr ice when the market price of the shares
was much higher. It is further alleged that the appellants routed the transaction through
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the account of one Bhanuprasad Trivedi and ultimately received the ill-gotten gains into
their account. It is further alleged that the appellant managed to receive shares in the
three IPOs noted above which were meant for retail investors. It is alleged that the
appellants had prior unders tanding with key operators and employed fraudulent,
deceptive and manipulative practices in corner ing the shares meant for retail investors
thereby violating Section 12A of the Act and regulations 3 and 4(1) of the Securities
and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market ) Regulations, 2003 (for sh ort the Regulations). The
appellants are also said to have made unlawful gain of ` 4,04,20,658 and they were
called upon to show cause why action be no t taken against them for the aforesaid
violation and why they should not be aske d to disgorge the amount of illegal gains
made by them.
- The appellants were granted personal h earing and they also filed detailed reply
dated July 24, 2009 denying the allegations. It was submitted by the appellant that they
had lent funds to Sugandh, Roopalben, Bire n Kantilal Shah and Ketan Shah and
Company as a part of their routine busine ss activity. They are engaged in the business
of extending finance and also trading in shares, securities and commodities. Their
lending as well as borrowi ng activities for the year 2003-04, 2004-05 and 2005-06 are
said to be in the range of 345 crores, 650 crores and 720 crores respectively. It was
further submitted by them that in the previous years, when there were no allegations of
any funding by the appellants, regular busin ess transactions we re undertaken with
various parties including those named above. According to the appellants, they had long
standing and continuous relati onship with the above named entities for the purpose of
advancing of the funds as per the extant practice in the market. The appellants were not
aware about the end use of the funds extended by them to their clients. The shares and
the amount received by them were only by way of repayment of loans. The appellants
admitted that they accepted a part of their loan repayment by transfer of shares but
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denied they were involved in any attempt to corner the shares meant for retail investors
or that they were privy to or involved in any scam as alleged by the Board.
- On consideration of the material available on record, reply furnished by the
appellant and after affording them a pers onal hearing, the whole time member of the
Board, by the impugned order, did not accept plea of the appellants that they had lent
money to the above-named entities in the normal course of financing or that they were
not involved in cornering the shares in di fferent IPOs that were meant for retail
investors. The whole time member came to the conclusion that the appellants had
manipulated the IPOs allotment process by providing finance to the entities named
above who, with that money, made app lications in larg e number through
fictitious/benami accounts to corner the shares meant for retail investors. He, therefore,
came to the conclusion that the appellants had violated Section 12A of the Act and
regulations 3 and 4(1) of th e Regulations. He also found that the appellants had made
unlawful gains of4,04,20,658 to the detriment of the re tail investors. A summary of the transactions made by the appellants resulting in the said unlawful gain of4,04,20,658 is given in Table A’ at page 3 of the impugned order, which is reproduced
hereunder for ease of reference.
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Table A : Summary of Transactions
IPO KO Amount (Rs.) Issue Details No. of Receipt of Shares and Refunds Disposal of Shares received Unlawful
provided to Issue Retail Application Size Retail Allotment Size Application by Jayesh Gains (Rs.) KOs Price No. of Amount No. of Amount made Receipt of Shares Refund Transferred No. of shares Commission/ Rs.) Shares (Rs.) Shares (Rs.) No. of Value at issue Amount to/through transferred Sale proceeds Shares price (Rs.) (Rs.) 1 2 3=(69)= 4 5 6=(45) 7 8=(47) 9=(3/6) 10 11=(410) 12 13 14 15 16
(11+12)
IDFC SEIPL 7,14,00,000 34 1,400 47,600 266 9,044 1,500 3,98,734 1,35,56,956 5,78,43,044 Jitendra 9,49,620 3,23,32,600 11,61,675 Biren 4,80,65,000 47,600 1,010 2,05,086 69,72,924 4,03,75,000 +11,61,875 Roopal 12,75,95,000 23,800 5,360* 3,45,800 1,17,57,200 7,01,22,800 Roopal(Bhanu) 11,00,000 3,74,00,000 Bhanu 11,00,000 7,28,75,000 3,54,75,000 Sasken SEIPL 3,50,00,000 260 350 91,000 25 6,500 385 6,375 16,57,500 — Bhanu 14,275 70,45,343 33,33,783 Roopal 9,10,00,000 91,000 1,000 6,500 16,90,000 8,93,10,000 Biren — — — 1,400 3,64,000 — Suzlon Roopal 4,89,60,000 510 96 48,960 16 8,160 1,000 16,000 81,60,000 4,07,00,000 Sheelu 28,800 1,46,88,000 4,50,000 Biren 4,15,00,000 800 12,800 65,28,000 3,49,72,000 +4,50,000 Total 4,04,20,658 *Rs.12,75,95,000 provided by Jayesh to Roopal was used for meeting 50% margin requirement @ Rs.23,800 for 5,360 applications while the balance came from Bharat Overseas Bank.
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- In view of these findings, the appe llants have been prohibited from buying,
selling or dealing in securities or from accessing the securities market in any manner for
a period of three months from the date of the order in addition to the period during
which they remained out of the market pu rsuant to the interim order passed by the
Board. The appellant no.1 has also been dire cted to disgorge th e unlawful gain of4,04,20,658 made by it along with interest of1,21,26,197/- and in the event of non-
payment of the aforesaid amount, the appe llants are restrained from accessing the
securities market for a further period of se ven years without prejudice to Board’s right
to enforce disgorgement. It is against this order of the whole time member that the
present appeal has been filed. - We have heard Mr. Janak Dwarkad as, Senior Advocate and Somasekhar
Sundaresan, Advocate for the appellants and Mr. Kumar Desai, Advocate for the
respondent-Board who have taken us through the records of the case. Learned counsel
for the appellants seriously di sputed the findings arrived at by the whole time member
in the impugned order alleging that the orde r has been passed without application of
mind to the facts rendered by th e appellants and also in viol ation of the principles of
natural justice. It was further submitted th at the impugned order has not dealt with the
defence rendered by the appellants. The s ubmissions made by th e appellants in the
replies as set out at pages 387, 404, 421, 440 a nd 469 of the appeal paperbook have not
been considered or dealt with in the impugne d order. The order, therefore, cannot be
said to be a reasoned one. It was furthe r argued by the learned se nior counsel for the
appellants that while arriving at its conclu sion, the whole time member has relied on
certain observations made by this Tri bunal in Appeal no. 197 of 2009 filed by
Bhanuprasad Trivedi (BT for short) who is said to be a front entity of the appellants. It
was submitted by him that the appellants had no opportunity to present their case in the
appeal filed by BT and any observations made in the case of BT cannot be relied upon
in arriving at conclusions against the appellants. The figures given in the table extracted
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above were also seriously disputed by the learned counsel for the appellants stating that
the impugned order has proceeded on the basi s that there need be no certainty in
demonstrating that the amount sought to be di sgorged is indeed illegitimate gain. Mr.
Somasekhar Sundaresan, learned counsel for the appellants, further argued that the
whole time member has totally ignored the submissions of the appellants that it is
engaged in the business of extending finances and also is trading in shares, securities
and commodities. The details of financing activities of the appellants for the years
2003-04, 2004-05 and 2005-06 have been ignored and entries from the books of
accounts and bank statements have been used in a selective manner in arriving at the
conclusions. It was further submitted that the appellants had, in the course of business,
advanced a loan of 345.57 crores and procured loans of 345.67 crores in the year
2003-04, 654.79 crores and 660.03 crores in the year 2004-05 and 724.14 crores and 716.19 crores in the year 2005-06 respectiv ely while transact ing with various
parties. It was submitted that the appe llants had long standing and continuous
relationship with the clients for the purpose of advancing the funds and the transactions
were carried on the basis of mu tual trust and confidence. Th e fact that there were no
formal documents entered into between the appellants and its clients for the funding
does not in any manner indicate that the making of applications by the clients in various
IPOs were on account of the appellants. The appellants had never faced any bad debts
in the entire history of its operations a nd therefore no requireme nt was felt by the
appellants to seek any formalization of the terms between the parties or for any
securities of the funds advanced. Accordin g to the appellant, th e system was indeed
followed by various parties in the market at the relevant time. The appellants explained
their dealings with the clients and contende d that they were not a financier to the
transactions as defined by the Board in its order dated April 27, 2006. The appellants
claimed that they were not aw are of any irregularities on the part of the clients and the
impugned order has misconstrued the legitimate transaction between the appellants and
their clients. If there was any wrongdoing on the part of its clients, the appellants
cannot be held responsible for the same. It was further submitted that the impugned
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order seeks to disgorge the amounts that have already been disgorged from other
persons who are alleged to be co-conspirat ors thereby ceasing to be disgorgement and
instead unjust enrichment of the respondent- board. Learned counsel for the appellants
took us through the relevant documents in resp ect of the financial transactions relating
to IDFC, Sasken and Suzlon IPOs and point ed out inconsistencies which, according to
the counsel, go to the root of the matter stating that the very foundation of the impugned
order i.e. table summarizing alleged illegitimate transactions is erroneous and serious
doubt raised about the veracity of the information contained therein. A note of
submissions has been filed by the learned counsel for the appellants as an ‘aide
memoire’ and as a supplement to the proceedi ngs to navigate the issues that fall for
determination of the controversy involved in the case which has been taken on record.
- Mr. Kumar Desai, learned counsel for the respondent-Board strongly supported
the findings arrived at in the impugned orde r stating that the appellants have not
disputed the receipt of the shares as listed in the table nor the manner in which the same
were transferred or sold nor the amount received on such tran sfers or sale as all these
amounts are reflected in the appellants’ bank accounts and demat accounts. In para 5.6
of the memorandum of appeal, the appellants had in fact admitted not only that the
appellants had advanced monies to the key operators but also that the said amounts were
utilized by the key operators for making app lications in various IPOs. He took us
through each of the transactions as stated in the table submitted with documents on
record and stated that the appellants were the ultimate beneficiary of the amounts shown
in the table which have been correctly a nd accurately concluded and are recoverable
from the appellants. With regard to the argument that the impugned order is not a
reasoned order or that the arguments advanced on behalf of the appellants have not been
considered, it was submitted that it was not necessary for the respondent-board to give
its decision on each and every submission made before it. The two replies furnished by
the appellants running into 65 pages and 141 pages respectively and written
submissions of 95 pages were duly consider ed and reasons recorded for the decision
arrived at by the Board. The important points raised by the appellants, both preliminary
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as well as on merits, have been set out in the impugned order and separately dealt with.
Therefore, no prejudice is caused to the a ppellants. Learned counsel for the respondent
Board has also filed a brief of his argument s in the form of written submissions which
has been taken on record.
- We have considered the rival submissions and also perused documents available
on record. With regard to the preliminary i ssue raised on behalf of the appellants that
the order passed by the Board is not a reasoned one and th e arguments advanced by/on
behalf of the appellants have not been cons idered, we are inclined to agree with the
learned counsel for the Board that while passing the order, the Board is required to give
reasons for its decision but this does not mean that the reasons should be as elaborate as
a decision of a Court of Law. It is sufficien t if, after considering the submissions made
by the parties, the Board gives a decision on the issues under its consideration supported
by the reasons for arriving at such a deci sion. The order must reflect that the
submissions made before the Board were duly considered for arriving at a decision and
the decision is supported with reasons. Howeve r, it is also important that if a point has
been raised which may impact the decisi on taken by the authority, such point should
also be dealt with while arriving at the decision. We will come to this aspect a little later
when we deal with the specific submissions which according to the appellants have not
been dealt with by the whole time member. - We cannot lose sight of th e fact that this case cannot be viewed in isolation. It
has to be seen in the light of the material collected and investigations carried out by the
Board in respect of the IPO scam during the year 2003 to 2005. For the purposes of this
scam, the Board, vide its ad-interim ex pa rte order dated April 27, 2006, defined the
term ‘financier’ as under:-
“Financier” is a person w ho either on his own or
alongwith others provided the finance for IPO
subscription and are the ultimate beneficiaries in the
scheme of cornering retail allotment and forking out
a big gain on sale immediately after listing.”
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During the course of investigation the Board could trace the finances to the accounts of
the appellants. In respect of the financing transactions of IDFC and Sasken IPO, it
found that finances were provided by the a ppellants to the key operators through BT
and accordingly show cause notices were i ssued to him also. This Tribunal had an
occasion to deal with the case of BT also where allegation was that BT had cornered
shares in the IPOs of IDFC and Sasken while acting in concert with Roopalben Panchal
(key operator) and Jayesh Khandwala, appellant in this appe al, (Jayesh) with whom he
had prior understanding. It was alleged that BT facilitated the appellant to make ill-
gotten gains by routing the funds and shar es received from key operator through his
accounts. The allegation in the case of BT was th at Jayesh transferred 3.7 crores to BT on 13.8.2005 and BT used this money to pur chase 11 lac shares of IDFC from Roopalben on the same day at the issue price of 34 per share. Roopalben, on receipt
of the money from BT in her bank acc ount on 13.8.2005, transferred the amount to the
bank account of Jayesh on the same day. It was further alleged in the show cause notice
issued to BT that 11 lac shares of IDFC purchased by him from Roopalben were sold in
the market on August 16, 2005 through the broker for 7,28,75,000/- @ 66.25 per
share. The entire sale proceeds received by BT in his bank account on August 17, 2005
were transferred to the bank account of Jayesh on the same day. It was therefore
concluded that Jayesh was the ultimate bene ficiary of the sale pr oceeds and that BT
acted as his front entity. Another charge in that show cause notice was that Jayesh
received 14,275 shares of Sasken from thr ee key operators including Roopalben which
was transferred to BT on September 9, 2005 and September 14, 2005 and then said to
have been sold by BT in the market through the broker. BT is then said to have
transferred the sale proceeds from his account to Jayesh through a cheque. The appeal
(No. 197 of 2009) filed by BT against the or der of the Board was dismissed by this
Tribunal by order dated July 5, 2010. The relevant portion of the order reads as under:-
“9. We have heard the learned counsel on both sides
and it is their common case that the appellant had dealt in
the shares of IDFC and Sasken which, among others, were
involved in the IPO scam. We shall first deal with the
shares of IDFC. It is not in dispute that the IPO of IDFC
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opened on July 15, 2005 and closed on July 22, 2005 and
that the allotment of shares was made on August 5, 2005 at
the rate of Rs.34 per share. Parties are also agreed that the
shares of this IPO were listed on the stock exchanges on
August 12, 2005 and that the clos ing price of the scrip on
the first day of listing was Rs.69.55. The charge against the
appellant is that he cornered shares in this IPO while acting
in concert with Roopalben and Khandwala with whom he
had a prior understanding and that he facilitated Khandwala
to make ill-gotten gains by routing the funds and the shares
through his accounts. The case of the appellant, on the
other hand, is that after the allotment was made on August
5, 2005 he learnt that large number of shares were available
with Roopalben for off-market sale prior to the listing and
that he contacted her. It is also his case that on August 10,
2005 (two days prior to the date of listing) he entered into
an oral agreement with her for the purchase of 11 lac shares
from her at the rate of Rs.35.50 per share. Since he did not
have the funds to purchase, he claims to have borrowed
Rs.3,74,00,000 from Khandwala on August 13, 2005 and
paid the same to Roopalben on the same day i.e. August 13,
2005 on which date she transferre d the shares to his demat
account. According to the appellant, he purchased the
shares from Roopalben in spot transaction(s) off-market
before listing after she had th em in her demat account and
since this was then permissibl e, he (the appellant) did no
wrong in purchasing the shares. It is also his case that he
sold the entire lot of 11 lac shares on market on August 16,
2005 through the broker at the rate of Rs.66.25 per share
and made a huge profit and tr ansferred the entire sale
proceeds to Khandwala in the running loan account.
- Having carefully examined the case as set up by the
appellant and also by the Board and from the record that we
have before us, it is more than clear that the appellant was
hand-in-glove with both Roopa lben and Khandwala with
whom he had a prior understa nding and he facilitated
Khandwala to make ill-gotten gains and that he allowed the
funds and shares to be r outed through his accounts as
alleged and as found by the whole time member in the
impugned order. The story as set up by the appellant is
difficult to believe in the face of the material that is on the
record. If the appellant purchased 11 lac shares from
Roopalben at the rate of Rs.35.50 per share, as claimed by
him, then he should have paid her Rs.3,90,50,000.
Admittedly, he did not pay this amount to her on August
13, 2005 on which date the shares were transferred to his
demat account. He paid only a sum of Rs.3,74,00,000 as is
clear from his bank account and this is the same amount
which he received from Khandwala on the same day. This
amount which the appellant received from Khandwala and
paid to Roopalben clearly shows that she transferred the
shares at the issue price of Rs.34 per share and not at the
rate of Rs.35.50 as claimed by the appellant. To overcome
this difficulty of difference in the two amounts, the
appellant has introduced the fi ction of deferred payment of
Rs.16,50,000 at a distant date of more than nine months.
This amount of Rs.16,50,000/- if paid by the appellant to
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Roopalben in June, 2007 cannot be towards the purchase of
these shares but could well be for some other purpose. The
appellant says he had no connection with Roopalben. If that
were so, why should she transfer 11 lacs shares to him
without receiving the full amount. Again, the shares were
transferred and payment made on August 13, 2005 on
which date they were already listed (t hey were listed on
August 12, 2005) and the closing price of the scrip on the
first day of listing was Rs.69.55. When the shares could be
sold in the market for Rs.69.55 per share or around that
price, why should Roopalben transfer such a large chunk of
shares to the appellant only at the rate of Rs.35.50 per share
and that too on deferred paymen t. Let us not forget that
Roopalben has been identified as one of the key operators
and a prominent player in the IPO scam who abused the
system and cornered very la rge number of shares in
different IPOs only to make money which she had to pass
on to the financiers. She had not gone to the market for
charity. Further, in his repl ies filed to the various show
cause notices issued to him, the appellant has categorically
stated that he purchased the 11 lac shares from Roopalben
in an off-market transaction in a spot deal. The appellant
claims to be a seasoned market player and if his claim is
right, he would have known that in a spot delivery contract
the payment of price for the purchase has to be made on the
date of the contract or on the next day and if it is not so
made the transaction becomes illegal. This is the
requirement of Section 2(i) of the Securities Contracts
(Regulation) Act, 1956. Surely, we do not expect a
seasoned market player dealing in lacs of shares to execute
such an illegal transaction. As a matter of fact, he did not
execute any illegal transaction. He purchased the shares in
a spot transaction(s) and made the payment of
Rs.3,74,00,000 to Roopalben at the issue price of Rs.34 per
share on the same day which money had come from
Khandwala. There is yet an other reason why we cannot
accept the ipse dixit of the appellant that he entered into an
oral agreement for the purchase of shares on
August 10, 2005. In one of his replies filed on December
16, 2006 to the show cause notice dated June 15, 2006 he
himself admitted that the shares had been purchased by him
on August 13, 2005. The relevant part of his reply has been
reproduced in para 3 above. Again, in his letter of July 3,
2007 addressed to the adjudicating officer while submitting
documents after the personal he aring, the appellant clearly
stated that the 11 lac shares of IDFC had been purchased on
SPOT as per purchase voucher no. 35 dated August 13,
- How can we now believe that he had entered into a
verbal agreement to purch ase the shares on August 10, - This is clearly an af terthought. Moreover, the
appellant did not have money to purchase the shares. The
amount of Rs.3,74,00,000 (representi ng the issue price of
11 lac shares) came to his account from Khandwala only on
August 13, 2005 and he paid that amount to Roopalben on
that day when the shares were transferred to his demat
account. This clearly indicates that the transaction took
place on August 13, 2005 and we cannot believe that there
was any verbal agreement on August 10, 2005 as claimed
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by the appellant. Interesti ngly, Roopalben transferred
Rs.3,74,00,000 to Khandwala on August 13, 2005 itself
and this is clear from her bank account. Obviously, the
appellant pleads ignorance about this transfer as he claims
he has no links with Roopalben. But the fact of the matter
is that Khandwala transferred Rs.3.74 crores to the
appellant which money was given to Roopalben for the
purchase of 11 lac shares at the issue price and Roopalben
transferred the same amount back to Khandwala and all this
happened on August 13,2005. In other words, the amount
which came from Khandwala went back to him in his
account on the same day through the appellant and
Roopalben and the circle was complete. What more proof is
required to establish the obvious link between the three of
them. These facts clearly go to establish that they were
acting in concert with each other. Again, the story that the
appellant took loan from Khandwala for the purchase of
shares cannot be believed in the circumstances of the
present case. Except for the ipse dixit of the appellant, there
is not even an iota of material to show that any loan
transaction took place. There is nothing on the record to
show that Khandwla was a money lender but assuming that
to be so, it is impossible to believe that such huge sums of
money could have been lent without any documentation or
security. Since the appellant has set up the case that he
borrowed money from Khandwala, it was for him to
establish the fact by producing cogent material on the
record. In the absence of any such material, we cannot but
hold that the story of borrowi ng money is incredible and
cannot be relied upon. Another interesting feature of the
case may be noticed at this stage. It is the appellant’s own
case that having procured the shares from Roopalben at the
rate of Rs.34 per share as found by us or, at the most, at the
rate of Rs.35.50 per share as claimed by him, he sold them
in the market on August 16, 2005 at the rate of Rs.66.25
per share for a total am ount of Rs.7,28,75,000. This sale
was on market through the broker and a contract note was
executed a copy of which is on the record. He received this
amount in his bank account on the following day i.e.,
August 17, 2005. According to the T+2 system of
settlement of trades that is prevalent in the market, the
payout date was August 18, 2005. Surprisingly, he received
the amount one day prior to the payout date and more
interestingly, he transferre d the entire sale proceeds to
Khandwala on the same day without deduction of any
brokerage, securities turnover tax, service tax, etc. On a
query made by us, the learned counsel for the appellant
informed us that Khandwala’s brother is a director in the
broker company (Khandwala Integrated Financial Services
Pvt. Ltd.). All this leads us only to one conclusion that the
appellant, Roopalben and Khandwala were acting in
concert with each other in th e IPO scam while dealing in
the shares of IDFC and that the appellant did not make any
purchases in the secondary market in the ordinary course of
trading as was now sought to be argued before us. From
what we have observed above, it is clear that Khandwala
was providing the finances which were being routed
through the accounts of the appellant and his demat account
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had also been used for parkin g and selling the shares. The
shares cornered in the IPO could have been sold directly by
Roopalben or Khandwala in the market without involving
the appellant but apparently he was brought in only to
complicate the web of entities involved in the IPO scam
and obfuscate the issue with a view to avoid detection.
- This brings us to the IPO shares of Sasken. Here
again we have no doubt that the appellant played foul in
selling the shares received from Khandwala which clearly
shows that he was mixed up with him. It is not in dispute
that after receiving the shares of Sasken from three key
operators including Roopalbe n, Khandwala transferred on
September 9, 2005 and September 14, 2005, 13,550 and
725 shares respectively aggregating to 14,275 shares to the
appellant. It is the appellant’ s case that he purchased these
shares from Khandwala at th e rate of Rs.300.40 per share
for a total consideration of Rs.42,88,210. The demat
account of the appellant shows that he received these shares
from Khandwala but there is not an iota of evidence on the
record to show that the appellant ever purchased these
shares. He has not produced bank account or any other
supporting document to show th at consideration was paid
for these shares. His ipse dixit cannot be accepted. The
onus was on him to establish that he purchased the shares.
In the absence of any evidence we cannot but hold that
these shares were transferred without consideration. Again,
the appellant sold these shares through the broker on
September 9, 2005 at the rate of Rs.493.54 per share for a
gross amount of Rs.70,45,343.75 even though by that date
he had received only 13,550 shares. This by itself is not an
illegality because short sales are permissible. However, the
interesting part of the story is that the broker transferred on
September 14, 2005 the gross amount of Rs.70,45,343.75
to the account of the a ppellant without deducting
brokerage, turnover tax and ot her transaction charges and
the appellant on receipt of the amount immediately on the
same day transferred the gross amount of sale proceeds to
Khandwala. A copy of the bank account of the appellant is
on the record. We cannot believe the version of the
appellant that the amount had been transferred towards the
repayment of the loan because the accounts have not been
produced. We are satisfied that in the absence of any other
cogent explanation, the appell ant is resorting to the same
loan theory which has no basis. The transfer of Sasken
shares to the appellant and th e subsequent sale by him and
remitting the amount to Khandwala is enough proof of the
fact that he was a front entity of Khandwala for selling the
cornered shares for making illegal gains. - In view of our findings r ecorded above, we have no
hesitation to hold that the appe llant did not deal with the
shares of IDFC and Sasken in the ordinary course of
business in the secondary market but was acting in concert
with Roopalben and Khandwala in the IPO scam. We are in
agreement with the whole time member that the appellant
indulged in unfair trade practi ces in the securities market
and facilitated Khandwala to make ill-gotten gains and
15
thereby violated Section 12A of the Act and Regulations 3
and 4 of the Regulations.”
It was strenuously argued by learned counsel for the appellants that the above order of
this Tribunal has no consequences because any observation made by the Tribunal in any
earlier case could only be in aid of the decision in that case and cannot be regarded as
having created a binding precedent. In BT’s case, the appellants were not a party and
had no occasion to defend themselves. Therefore, any observations about the appellants
in that order may at best be regarded as obi ter, or an observation in aid of the larger
order based on facts that then seemed appare nt and by no stretch of imagination can
such observation be regarded as a legal pre- emption or prohibition of the dispensation
of justice in subsequent proceedings agains t third parties who were not party to the
earlier proceedings. The reliance placed by the whole time member in para 10.4 and
10.5 of the impugned order vitiates the order as the appellants had no opportunity to
present their case before the Tribunal when the appeal of BT was heard.
- Learned counsel for the Board submitted that even if the said observations in
paragraphs 10.4 and 10.5 are not taken into consideration, the order passed by the Board
against the appellants woul d still stand as the alleged observations were merely
corroborative and the facts have been indepe ndently established against the appellants
as set out in paragraphs 18, 19, 20 and 30 of the show cause notice and in table ‘A’ read
with paragraphs 10.3 and 10.5 of the impugned or der. It was further alleged that the
facts on the basis of which the Board had ma de the allegations and arrived at findings
against BT and the appellants are the same. The charge against the appellants is that
they had received shares in three IPOs meant for retail investors and had made ill-gotten
gains. No doubt, the appellant s are financiers and have been providing finance to
various entities but that by its elf is not enough to show th at the appellants had not
provided finance for the transactions in question. The conduct of the appellants show
that they had acted in con cert with key operator and BT and had provided finance in
respect of the transactions listed in the table reproduced above. Therefore, no fault can
be found with the order of disgorgement.
16
- On the issue of disgorgement, the couns el on both sides were in agreement that
the disgorgement is the forced giving up of profits obtained by illegal or unethical acts.
It is the repayment of ill-gotten gains that is imposed on wrongdoer by the Courts. This
Tribunal in the case of Karvy Stock Broking Ltd. vs. Securities and Exchange Board of
India (Appeal No. 6 of 2007 decided on May 2, 2008) had summarized the position in
this regard as under:
“5. Before we deal with the contentions of the parties, it
is necessary to understand what disgorgement is. It is a
common term in developed markets across the world
though it is new to the securities market in India. Black’s
Law Dictionary defines disgorgement as “The act of giving
up something (such as profits illegally obtained) on demand
or by legal compulsion.” In commercial terms,
disgorgement is the forced giving up of profits obtained by
illegal or unethical acts. It is a repayment of ill-gotten
gains that is imposed on wr ongdoers by the courts.
Disgorgement is a monetary equitable remedy that is
designed to prevent a wrongdoe r from unjustly enriching
himself as a result of his i llegal conduct. It is not a
punishment nor is it concerned with the damages sustained
by the victims of the unlawful conduct. Disgorgement of
ill-gotten gains may be ordered against one who has
violated the securities laws/re gulations but it is not every
violator who could be asked to disgorge. Only such
wrongdoers who have made gains as a result of their illegal
acts(s) could be asked to do so. Since the chief purpose of
ordering disgorgement is to make sure that the wrongdoers
do not profit from their wrongdoing, it would follow that
the disgorgement amount should not exceed the total profits
realized as the result of the unlawful activity. In a
disgorgement action, the bur den of showing that the
amount sought to be disgor ged reasonably approximates
the amount of unjust enrichment is on the Board.” - We have examined the facts of the present case and considered the arguments of
learned counsel on both sides in the background of the position as stated above and are
of the view that there are certain glaring inconsistencies in the order and some important
submissions made by the appellant have not been taken note of by the whole time
member while passing the order and these go to the root of the matter. Some such
discrepancies are:-
(i) As will be seen from table as reprodu ced above, it is stated that the
appellants had pr ovided a sum of ` 12,75,95,000 to Roopalben
Panchal, the key operator, for making applications in the IPO of IDFC.
17
A copy of the order dated January 31, 2012 passed by the Board in the
case of Roopalben Panchal (key oper ator) has been pl aced on record
by learned counsel for the appellants and according to table on page 23
of that order, it is stated that the appellant provided an amount of 7,87,50,000 to Roopalben Panchal for the said purpose. In response to this, learned counsel for the Board st ated that it is a mistake in the order and the Board would take n ecessary steps in due course to correct the said error. It needs to be appreciated that the order against the appellant was passed as early as on October 26, 2010 and the order against Roopalben Panchal was passed on January 31, 2012. As stated above, disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of illegal conduct. Therefore, there has to be a certainty with regard to the amount of finance provided and the amount of illegal gains resulting therefrom. We are inclined to agre e with the learned counsel of the appellants that such a wide dispar ity in quantum cannot be irrelevant for the purpose of alleging financing of transaction by the appellants to the key operator, more so, when the amount of disgorgement is being worked out on the basis of providing finance of 12,75,95,000.
(ii) It was stated by the appellant that B.T. had shown the profits made by
him from sale of 11 lac shares of IDFC in his income-tax return and
has paid capital gains tax payable in respect thereof. This plea was also
taken by the appellants in their reply at pa ge 469 of the appeal
paperbook. The whole time member, while passing the impugned
order, has not dealt with this issue at all. This is an important issue
which may have a bearing on the final decision that may be arrived at.
Under similar circumstances, in anot her order in the case of Jayantilal
Jitmal vs. SEBI (Appeal No. 5 of 2010 decided on 9.9.2010) referred
to during the course of hearing, the appellant was held to be a
18
beneficial owner of the shares be cause he had reflected the total
amount received in his books of account and paid tax thereon. If B.T.
has shown the sale price of 11 lac shares in his books of account and
paid income tax on the profits made on such sale of shares, how can
the appellants be held to be the beneficial owners of these shares. Why
can’t their plea that they were only financiers of BT and not of the key
operator be accepted is not clear to us. The whole time member has not
recorded any findings to the effect that the appellants were aware about
the IPO scam or the deal between the key operator and B.T. for
financing of the IPO transactions. In the absence of any such findings,
we fail to understand how financier of a financier can be held guilty
when it is on record that the appellants are providing finance to BT and
other entities not only in this tr ansaction but in a lot of other
transactions running to hundred cror es. It is not denied that the
appellants are in the business of financing and had been providing
finance as noted in the earlier part of this order. The finance in this
case was also provided only on August 13, 2005 whereas IPO of IDFC
opened on July 15, 2005, closed on July 22, 2005 and allotment of
shares was made on August 5, 2005. It is the Board’s own case that the
appellants provided finance to BT only on August 13, 2005. In that
case, it requires examination as to how such a transaction can be
treated as one for financing the IPO of IDFC.
(iii)It was argued by the learned counsel for the Board that even if the
observations made in paras 10.4 a nd 10.5 supporting the findings in
the appellants’ case on the basis of observations made by this Tribunal
in the case of BT are ignored, the order can stand on its own. However,
we are of the view that if the orde r is read as a whole, it gives an
impression that while arriving at its conclusion, the observations made
by this Tribunal in BT’s case heavily weighed with the whole time
19
member. We are inclined to agree with the learned counsel for the
appellants that any observation made by this Tribunal in the case of BT
against the appellants, needs to be re-examined in the light of
additional material that has been pl aced on record by the appellants in
their case.
(iv) There is nothing in the impugned order to show that the appellants
provided finance to Biren for the Sasken IPO and yet 1400 shares of
Sasken acquired from Biren have been taken into account while
arriving at the amount of disgorgement. If no finance was provided by
the appellants to Biren for the Sasken IPO and in the absence of any
allegation against Biren for manipulating the Sasken IPO, how can the
sale proceeds of 1400 shares be tr eated as illegitimate gain of the
appellants for the purpose of disgorgement.
The above are only illustrations of discrepa ncies that have been pointed out by the
appellants during the course of hearing. Thes e illustrations go to the root of the matter
and decision thereon may have impact on the final view on the issue of financing of IPO
transactions and disgorgement. The whole tim e member has not dealt with these issues
in the impugned order. In the written s ubmissions, the appellants have pointed out
certain other inconsistencies which were also pointed out in reply to the show cause
notice but have not been dealt with by the w hole time member. As stated earlier, in the
case of disgorgement, only ill-gotten gains can be ordered to be disgorged and the
disgorgement amount should not exceed the total profits realized as a result of unlawful
activity. We are, therefore, of the consid ered view that the matter needs to be
reconsidered in the light of the inconsistencies noted above as well as those pointed out
by the appellants in response to the replies filed to the show cause notice and personal
hearing.
20
In view of the foregoing discussions, we cannot but set aside the impugned order
which we hereby do and remand the matter to the Board for holding fresh proceedings
against the appellants after giving them an opportunity of hear ing. It is made clear that
we have not expressed any view on any of th e issues raised in the appeal which shall
remain open. Since the transactions relate to the year 2004 and 2005, we direct the
Board to conclude the proceedings expeditiously. No costs.
Sd/-
P. K. Malhotra
Member
Sd/-
S.S.N. Moorthy
Member
03.04.2012
Prepared & compared by-ddg