BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
DATE: 04.06.2019
Misc. Application No. 148 of 2019
And
Appeal No. 89 of 2019
Sanjay Gupta
House No. 445, Sant Nagar,
Civil Lines, Ludhiana – 141001.
Punjab, India.

…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
Dr. S. P. Sharma, Advocate for the Appellant.
Mr. Kevic Setalvad, Senior Advocate with Mr. Anubhav Ghosh,
Ms. Rashi Dalmia and Mr. Abhishek Mishra, Advocates i/b The Law
Point for the Respondent.
CORAM : Justice Tarun Agarwala, Presiding Officer
Dr. C. K. G. Nair, Member
Justice M. T. Joshi, Judicial Member
Per : Justice Tarun Agarwala, Presiding Officer (Oral)
1.

The present appeal has been filed against the confirmatory order
dated October 30, 2018 passed by the Whole Time Member
(hereinafter referred to as, ‘WTM’) confirming the ex-parte adinterim order dated November 1, 2017. The facts leading to the
filing of the present appeal is, that the appellant was one of the
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promoters and shareholders of a Company called M/s. Supreme Tex
Mart Ltd. (hereinafter referred to as, ‘STML’). The shares of STML
are listed on Bombay Stock Exchange Ltd. (BSE) and National Stock
Exchange of India Ltd. (NSE).

SEBI conducted a preliminary
examination in the scrips of STML for the period July 1, 2016 to
March 31, 2017 in relation to bulk Short Messages Services (SMSs)
which recommended trading in the scrips of the Company.
2.

On the basis of the investigation and material available with
SEBI, the WTM found it fit to pass an ex-parte interim order dated
November 1, 2017 in order to safeguard the interest of the investors
and to protect the integrity of the securities market. The ex-parte adinterim order against the appellant was as under :“(a) Prohibited from buying, selling or dealing in
securities, directly or indirectly, in any manner
whatsoever, till further directions;
(b) Directed to cease and desist from disseminating
messages or news in any form related to the
securities market, directly or indirectly, by any
means whatsoever.”
3.

The prima-facie basis for passing the ex-parte ad-interim order
by the WTM was that prior to sending of SMSs, there was a fund
3
transfer of Rs. 50 lacs from the joint account of the STML to Mr.
Lahoti. Mr. Lahoti in collusion with Mr. Mohsin channelized the
funds to RouteSMS on behalf of Future Fintrade. It was observed
that Future Fintrade entered into an agreement with RouteSMS for
the purpose of sending bulk SMSs. Payments to RouteSMS were
made by Mr. Mohsin who received funds either from the joint
account of STML or through Mr. Lahoti. It was also observed that
the bank statement of STML maintained with UCO Bank revealed
that STML was the primary account holder, Mr. Ram Lal Gupta was
Joint holder No. 1, appellant was Joint holder No. 2 and Mr. Ajay
Gupta was Joint holder No. 3.

It was also observed that there
appeared to be a nexus amongst the entities and the modus operandi
was that the account of STML was used to fund the sending of bulk
SMSs which was sent through Idea Cellular, Goldleaf International
Pvt. Ltd., etc. recommending to buy scrips of STML. It was further
observed that during the period when SMSs were being sent, the
price of the scrips increased and, during this period, the appellant offloaded its shares at a higher price.
4.

The WTM further observed that the appellant alongwith other
entities in collusion made misrepresentations through the SMSs and
by their action and omission had solicited, enticed and induced
investors to deal in securities in the scrips of STML and, thus, played
a fraud as defined in Regulation 2(1)(c) of the Securities and
4
Exchange Board of India (Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities Market) Regulations, 2003
(hereinafter referred to as, ‘PFUTP Regulations’).

It was also
observed that the price manipulation done through fraudulent and
deceitful manner also attracted the prohibition under Section 12A(a),
(b) and (c) of the Securities and Exchange Board of India Act, 1992
(hereinafter referred to as, ‘SEBI Act’) as well as Regulations 3(a),
(b), (c) and (d) read with Regulations 4(1), 4(2)(f) and (r) of the
PFUTP Regulations. Based on the aforesaid prima-facie findings,
the ex-parte ad-interim order was passed pending detailed
investigation in the matter.
5.

Subsequently, the appellant appeared and filed his replies dated
November 3, 2017, November 28, 2017 and December 23, 2017,
contending that he was never a joint holder of the Bank account of
STML. He further submitted that the appellant had resigned as a
director of STML on April 19, 2013 which was duly accepted by
STML as well as from the Goldleaf International Pvt. Ltd. Form 32
was duly filed by the Company before the Registrar of Companies
(ROC). It was also contended that due to differences the appellant
disinherited his son Gautam Gupta (the director of STML and a
noticee) and re-wrote his WILL dated February 9, 2016. It was also
contended that Gautam Gupta, his son, filed a police compliant
against the appellant on May 13, 2016 and that STML also filed a
5
defamation Suit against him on March 22, 2016.

It was also
contended that the appellant had filed a petition before NCLT
Chandigarh against STML and its directors Ajay Gupta (Brother) and
Gautam Gupta (Son) for mismanagement of STML under the
Companies Act, 2013. It was also stated by the appellant that he was
never a joint account holder with STML in the bank account
maintained with UCO Bank.

It was contended that as per the
banking practice there cannot be a joint account with the Company
and that the appellant was only an authorized signatory to the bank
account of STML as a director but after his resignation in 2013 his
authorization to use the account came to an end. It was categorically
stated that he never operated the account of STML after he resigned
as a director. In this regard, the appellant produced certificates from
the UCO Bank indicating that the bank account of STML was not a
joint account and that the appellant had never signed any cheque
after his resignation on April 19, 2013.

The appellant further
submitted that he had no nexus with the promoters and the directors
of STML nor had any connection with the sending of the SMSs at
any point of time in the year 2016 as he had ceased to be a director
since April 2013. In view of the serious differences with the present
management, it was contended that question of conspiring with other
entities in order to benefit from the price manipulation did not arise
as the appellant was never a party to the price manipulation through
6
the scheme of SMSs. The appellant however admitted that he had
sold a part of his shareholding in the ordinary course of his business
and subsequently, in July 2017, he purchased substantial shares from
the market on the stock exchange platform again in the ordinary
course of business in order to retain a minimum 10% of the total
shareholding of STML for the purpose of wrestling control of STML
in future and in order to save STML from mismanagement by the
present directors.
6.

Inspite of the overwhelming evidence being filed by the
appellant, the WTM passed a confirmatory order on the strength of
the bank statement provided by UCO bank which indicated that the
STML bank account was a joint account in which the appellant was a
joint holder. The WTM further observed that there was a prima-facie
fund trail from this joint account to the issuance of the SMSs which
lead to manipulation of the price in the scrips of STML.
7.

We have heard Dr. S. P. Sharma, the learned counsel for the
appellant and Mr. Kevic Setalvad, the learned senior counsel
alongwith Mr. Anubhav Ghosh and Ms. Rashi Dalmia, the learned
counsel for the respondent. We find that we are unable to accept the
manner and approach of the WTM in deciding the matter in such a
casual manner without considering the evidence on record.

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8.

There is no doubt that there is a prima-facie finding of
distribution of funds from the account of STML to various entities
for the purpose of sending SMSs recommending to buy the scrips of
STML. There is further a prima-facie finding that the bulk SMSs led
to manipulation in the scrips of STML which action was fraudulent
under the provisions of the PFUTP Regulations.
9.

However, the appellant has been linked to these fraudulent
transactions on account of being allegedly a joint holder in the
STML’s bank account. This is based on a bank statement obtained
by the respondent from UCO Bank for the period from January 1,
2016 to June 1, 2016. The WTM on the basis of this bank statement
had issued an ex-parte interim order. No finding has been given by
the WTM on the letter dated January 2, 2018 issued by the UCO
Bank stating that the account of STML was not a joint account and
that the appellant had resigned as a director in 2013 and since then
had not issued any cheque on behalf of STML. The WTM for reason
best known has not considered the certificate issued by the bank and
chose to ignore this vital piece of evidence.
10. Under the Banking Regulation Act, 1949, for opening an
account of a Company, amongst other documents, a resolution from
the Board of Directors and power of attorney granted to its managers,
officers or employees to transact on behalf of the Company is
8
required to be filed. A Company is a legal entity and can only act
through its Board of Directors or through one or more juridical
persons. In the instant case, no such steps have been taken by the
WTM to find out who are the authorized signatories who can transact
on behalf of STML. No steps have been taken by the WTM to find
out as to whether a joint account with a Company can be opened in a
Bank or not. No steps were taken by the WTM to check the Bank
account opening form or the resolution of the Board of Directors to
satisfy itself as to what kind of an account was opened by STML. In
the instant case, prima-facie, we find that the bank statement is as a
result of a system flaw of the Bank’s computer program. Normally,
the bank prepares its own software. Various categories are shown
viz, Primary holders, first joint account holder and so on. In the
instant case, there may not have been a column for an “authorized
signatory” and accordingly, the name of the appellant was shown as a
joint holder. Such facts should have been ascertained by the WTM
instead of mechanically treating a bank statement as the gospel truth.
11.

The WTM has also not considered the fact that the appellant
had resigned in the year 2013 which resignation was accepted by the
Company and forwarded to the ROC in Form 32. There is not even a
discussion in the impugned order with regard to the resignation of the
appellant from the Company. There is no discussion or finding that
9
the appellant was still a director of the Company or was responsible
of the affairs of the Company in some manner or the other.
12.

Further, the appellant has clearly brought out the acrimonious
litigation between the appellant and other directors of STML,
namely, disinheriting his son, lodging of FIR by his son against him,
defamation suit filed by STML against him, etc. Nothing has been
discussed by the WTM with regard to the effect of this litigation.
13. In order to attribute fraudulent malpractices to the appellant, it
was essential to atleast give a prima-facie finding that there was a
causal link between the appellant and other entities including STML
which indulged in the manipulation of the price of the scrips of
STML through bulk SMSs. We find, that in the instant case, when
the appellant has come forward with a specific case that he had
resigned in 2013 and was not part of the management of STML
during the time when bulk SMSs were sent supported by two letters
of the Bank, coupled with the fact that there was a litigation going on
between the appellant and his son and brother who were directors of
the Company, it was the bounden duty of the WTM to deal with this
aspect and atleast give a prima-facie finding on the basis of an in
depth analysis of the evidence that there was a causal linkage of the
appellant with the manipulative increase in the price of the shares of
the company through bulk SMSs.

The WTM has conveniently
10
overlooked these evidences which on the face of it is glaring and
could not be overlooked in a casual manner.
14. The fact that the appellant sold a substantial portion of his
holdings during the increase of the price of the scrip cannot by itself
lead to a conclusion of the appellant indulged in any manipulative or
fraudulent practice which would come under PFUTP Regulations
unless there was further evidence to show that the appellant was
acting in concert as a homogenous group with other entities. No
such observation or prima-facie evidence has been given by the
WTM.
15.

We are, consequently, of the opinion that the impugned order
in so far as it relates to the appellant cannot be sustained.
16.

SEBI has power to pass interim orders and such interim orders
can also be passed ex-parte. Interim orders are passed in order to
prevent further possible mischief of tampering with the securities
market. If during investigation, it is found prima-facie, that the
person is indulging in manipulation of the securities market, it would
be obligatory for SEBI to pass an interim order or for that matter an
ex-parte interim order in order to safeguard the interests of the
investors and to maintain the integrity of the market. Normally,
while passing an interim order, the principles of natural justice has to
be adhered to, namely, that an opportunity of hearing is required to
11
be given. Procedural fairness embodying natural justice is to be
applied whenever action is taken affecting the rights of the parties.
At times, an opportunity of hearing may not be pre-decisional and
may necessarily have to be post-decisional especially where the act
to be prevented is imminent or where action to be taken brooks no
delay. Thus, pre-decisional hearing is not always necessary when exparte ad-interim orders are made pending investigation or enquiry
unless provided by the statute. In such cases, rules of natural justice
would be satisfied, if the affected party is given a post-decisional
hearing.
17. However, it does not mean that in every case, an ex-parte
interim order should be passed on the pretext that it was imminent to
pass such interim order in order to protect the interest of the investor
or the securities market. An interim order, however, temporary it
may
be,
restraining
an
entity/person
from
pursuing
his
profession/trade may have substantial and serious consequences
which cannot be compensated in terms of money.
18. Thus, ex-parte interim order may be made when there is an
urgency. As held in Liberty Oil Mills & Ors. vs. Union of India &
Ors. [AIR (1984) SC 1271] decided on May 1, 1984, the urgency
must be infused by a host of circumstances, viz. large scale misuse
and attempts to monopolise or corner the market.

In the said
12
decision, the Supreme Court further held that the regulatory agency
must move quickly in order to curb further mischief and to take
action immediately in order to instill and restore confidence in the
capital market.
19. However, when an ex-parte interim order is passed and a party
approaches the authority for vacation of the ex-parte order, the
authority is required to act prudently especially when the party
approaches the authority immediately for its vacation which in the
instant case was done within three days from the passing of the exparte order. The appellant filed its reply as early as on November 3,
2017.

However, the ex-parte interim order continued till the
confirmatory order was passed on October 30, 2018. In our opinion,
apart from the delay in disposal of the matter, the ex-parte order was
confirmed mechanically without any application of mind and without
considering the relevant documents. In our opinion, there was no
shred of evidence to come to a prima-facie conclusion that the
appellant was indulging in unfair trade practices with a manipulative
intent to manipulate the price.
20.

The appellant has stated on affidavit before SEBI on December
23, 2017 that he has no other source of income except trading in
shares and that as a result of the ex-pate order, his broker
prematurely closed his trading positions which the appellant had
13
taken in F&O segment resulting in a loss of Rs. 50 lacs. This aspect
has not been considered by the WTM. We are further of the opinion
that whenever an ex-parte order is granted, an endevour should also
be made to dispose of the matter as expeditiously as possible no
sooner when the party appears. In the instant case, the ex-parte order
was passed on November 1, 2017 and the appellant filed his replies
on November 3, 2017, November 28, 2017 and December 23, 2017.
It took the WTM almost a year to dispose of the application. We
find that at this late stage there was no real urgency to continue with
the restraint order. Passing a confirmatory order virtually puts a
stoppage on the appellant’s right to trade which in the instant case is
based on non-consideration of evidence and, in our opinion, is harsh
and unwarranted.

In our opinion, for the aforesaid reasons, the
appellant is, thus entitled to get costs from the respondent.
21.

For the reasons stated aforesaid, the ex-parte ad-interim order
as confirmed by the confirmatory order cannot be sustained and are
quashed in so far as it relates to the appellant. It would be open to
SEBI to pass a fresh order in accordance with the principles of
natural justice if and when fresh evidence comes before it. In the
circumstances of the case, the appellant is entitled to get costs and is
computed at Rs. 50,000/- (Rupees Fifty Thousand Only) which shall
be paid by the respondent to the appellant within four weeks from
14
today. Proof of compliance will be intimated to the Registrar of this
Tribunal.
22.

After the aforesaid order was pronounced the learned senior
counsel Shri Setalvad made an appeal for waiver of the costs
contending that such imposition of costs would send a ripple down
the throat of the respondent. Be that as it may. We find that in the
given circumstances of the case, cost is justified. The oral request of
the learned senior counsel for the respondent is rejected.

Sd/Justice Tarun Agarwala
Presiding Officer
Sd/Dr. C. K. G. Nair
Member
Sd/Justice M. T. Joshi
Judicial Member
04.06.2019
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