Devang D. Master vs Sebi

Order Reserved On: 06.12.2017 Date of Decision : 05.01.2018

Appeal No. 140 of 2015

Devang D. Master 16-A, Tower "C", Viceroy Park, Thakur Village, W.E. Highway, Kandivali (E), Mumbai- 400 101 ...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. P. N. Modi, Senior Advocate i/b Mr. Jayesh Ahire for the Appellant.

Mr. Mustafa Doctor, Senior Advocate with Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar

1.

Appellant is aggrieved by the order passed by the Adjudicating

Officer ("AO" for short) of Securities and Exchange Board of India

("SEBI" for short) on December 24, 2014. By the said order aggregate

penalty of ` 1 crore [` 20 lac under Section 15HA, ` 75 lac under Section

15H(ii) and ` 5 lac under Section 15A(b) of the Securities and Exchange

Board of India Act, 1992 ("SEBI Act, 1992" for short)] is imposed on the 2

appellant for violating the provisions contained in the SEBI (Prohibition

of Fraudulent and Unfair Trade Practices relating to Securities Market)

Regulations, 2003 ("PFUTP Regulations" for short), SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations, 1997 ("SAST

Regulations, 1997") and the Securities and Exchange Board of India

(Prevention of Insider Trading) Regulations, 1992 ("PIT Regulations,

1992" for short).

2. Penalty imposable under Section 15HA is up to ` 25 crore.

Similarly penalty imposable under Section 15H is up to ` 25 crore and

penalty imposable under Section 15A is up to ` 1 crore. Thus, as against

the penalty of ` 51 crore imposable under Section 15HA, 15H & 15A(b)

of SEBI Act, 1992 for the violations allegedly committed by the

appellant, the AO of SEBI after considering all mitigating factors has

imposed aggregate penalty of ` 1 crore. Appellant, however, submits

that in the facts of present case, penalty ought not to have been imposed

on the appellant and alternatively submits that the penalty imposed is

exorbitant and disproportionate to the violations allegedly committed by

the appellant.

3. Facts relevant for deciding the issues raised in this appeal are as

follows:-

a) Appellant who was the promoter and director of

Empower Industries India Ltd. ("EIIL" for

convenience) held 3,90,050 shares of EIIL out of 3

5,00,000 shares issued by EIIL. Thus, the appellant

held nearly 80% of the total shareholding of EIIL.

b) In the month of October 2004, the appellant

admittedly handed over 1,25,000 shares of EIIL in

physical form along with 5 unsigned blank transfer

deeds (share transfer forms) to Mr. Shambhu

Agrawal (finance broker) who was to arrange personal

loan of ` 1 crore to the appellant. However, without

arranging the loan, Mr. Shambhu Agrawal on

01.11.2004 transferred the aforesaid 1,25,000 shares

in the name of his 5 family members. Appellant

claims that the said shares were transferred without

the consent of the appellant and by forging the

signature of the appellant on the share transfer forms.

Admittedly, till date neither the appellant has received

any consideration from Mr. Shambhu Agrawal in

respect of the aforesaid 1,25,000 shares nor the

appellant has filed any complaint or initiated any

proceedings against Mr. Shambhu Agrawal to get

back the said shares.

c) On 27.01.2005 the appellant transferred 2,500 shares

of EIIL from his demat account to the pool account of

Ruchiraj Shares and Stock Brokers Pvt. Ltd. and the

appellant claims that the said 2,500 shares were later 4

on utilized to meet certain settlement obligation of

Shambhu Agrawal.

d) On 31.01.2005 appellant rematerialized 2,40,500

shares of EIIL and handed over 2,13,000

rematerialized shares (out of 2,40,500 rematerialized

shares) to Mr. Shambhu Agrawal along with unsigned

share transfer forms so that on Mr. Shambhu Agrawal

arranging a loan of ` 1 crore to the appellant all the

shares handed over to Mr. Shambhu Agrawal could be

offered as collateral security for the loan.

e) On 10.02.2005 Mr. Shambhu Agrawal gave to the

appellant ` 2,59,000 by cheque and ` 2,41,000 by

cash as token advance.

f) On 25.02.2005 Mr. Shambhu Agrawal transferred

2,13,000 shares received from the appellant to 22

entities. Appellant claims that the aforesaid transfers

were effected without the consent and knowledge of

the appellant by forging the signature of the appellant

on the share transfer forms.

g) On 02.03.2005 the Board of Directors ("BOD") of

EIIL made a corporate announcement that in the

Board Meeting scheduled to be held on 08.03.2005

the Board would consider the pricing of the issue and 5

also consider the options and ways for expansion

plans, acquisition and any other related matter for

growth of the company and also consider increase in

the authorised capital and issue of rights/ preferential

shares.

h) After the above corporate announcement, market price

of EIIL shares increased from the closing price of

` 100.12 on 01.03.2005 to ` 101.90 on the next

trading day and the volume of trading increased from

average daily trading volume of 3685 shares to

average daily trading volume of 22606 shares during

the investigation period (16.12.2005 to 11.03.2005).

i) On 11.03.2005 Bombay Stock Exchange Ltd.

("BSE") received a letter dated 08.03.2005 from EIIL

wherein it was stated that the Board meeting

scheduled on 08.03.2005 has been cancelled/

postponed as the directors of the company had gone

out of station and that any further notice in that regard

would be given to the stock exchange in due course.

j) As Mr. Shambhu Agrawal could not arrange loan of

` 1 crore, appellant on 25.03.2005 returned the

advance amount of ` 5 lac to Mr. Shambhu Agrawal

in cash and on 31.03.2005 Mr. Shambhu Agrawal

returned 2,15,500 shares (1,82,150 in physical form + 6

33,350 in demat account) to the appellant. At that

time, appellant claims that he realised for the first

time that 2,15,500 shares (2,13,000+2500) returned by

Mr. Shambhu Agrawal were not the original shares

given by the appellant to Mr. Shambhu Agrawal but

the shares belonging to 5 different parties. However,

appellant claims that since equal quantity of shares

were returned, the appellant did not take any action

against Mr. Shambhu Agrawal.

k) SEBI after conducting an enquiry in respect of the

aforesaid transactions, passed an order on 31.01.2013

which was set aside by this Tribunal on 23.04.2014

and remanded for fresh decision, inter alia, by

recording as follows:-

"During the course of hearing, it was felt that

in the facts and circumstance of the case, a

comparison of the Appellants signature would

be required to ascertain authenticity of his

alleged signature on the transfer deeds. This

factual analysis may also require additional

evidence. It would be, therefore, appropriate to

remand this matter to the learned adjudicating

officer for fresh hearing and adjudication."

l) Thereafter, the AO heard appellant again and passed

the impugned order on 24.12.2014 without recording 7

any additional evidence. Appellant has filed the

present appeal to challenge the order dated

24.12.2014.

4. Mr. Modi, learned Senior Advocate appearing on behalf of

appellant submitted as flows:-

a) Entire charge and findings recorded against the

appellant and appellant's purported involvement in

the alleged conspiracy are solely based on the

allegation that the appellant had transferred 1,25,000

shares and 2,13,000 shares of EIIL to the Agrawal

family. Case of the appellant at all times had been

that he had never signed any of the purported transfer

deeds and therefore the transfers effected on the basis

of forged and fabricated documents cannot be the

basis for holding the appellant guilty of violating the

regulations framed by SEBI.

b) To prove his case, the appellant had obtained a

signature comparison report from a forensic expert

and on perusal of the said report this Tribunal on

23.04.2014 had set aside the order passed by the AO

on 31.01.2013 and directed the AO to pass fresh order

on merits after recording additional evidence, if

deemed necessary, to ascertain the authenticity of the

signature on the transfer deeds. However, the AO has

passed the impugned order without recording any 8

additional evidence and without recording any finding

that the signatures on the two sets of the transfer

deeds are genuine or legitimate signatures of the

appellant. It is submitted that even to the naked eye it

is evident that the signatures on the two sets of

transfer deeds are different. In these circumstances, it

is submitted that the impugned order passed by the

AO by ignoring the expert report is liable to be

quashed and set aside.

c) The AO by relying on a decision of the Apex Court in

the case of Shashi Kumar v/s Subodh Kumar reported

in AIR 1964 SC 529 has erroneously held that the

expert evidence cannot be relied upon without any

other corroborative evidence. In that case, witness to

the will in dispute, had deposed before the Court

which was contrary to the expert evidence. In that

context the Apex court held that when substantive

evidence of the attesting witness to the will was

available, the opinion of a handwriting expert cannot

override the substantive evidence. In a subsequent

case reported in AIR 1980 SC 531 (Murarilal v/s State

of Madhya Pradesh) the Apex Court had held that it

would be unjustifiable to reject the opinion of an

expert on the sole ground that it was not corroborated.

Thus, the impugned decision which is based on 9

misinterpretation of the Apex Court decision deserves

to be quashed and set aside.

d) In para 43 & 48 of the impugned order the AO has

recorded that in the absence of any objection raised by

the RTA, it must be presumed that the shares were

transferred after following the due procedure and

accordingly the AO has rejected the plea of the

appellant that the transfer deeds were forged and

fabricated. It is submitted that without calling for the

documentary evidence to show that due procedure

was actually followed by the RTA, the AO is not

justified in rejecting the plea of the appellant merely

on the basis of conjectures and surmises.

e) In the investigation report it is recorded that the

Agrawal family had stated that they had acquired

shares through two sub-brokers and in support of that

contention bills from the two sub-brokers were

produced. Since the two sub-brokers had denied to

have issued any such bills it is evident that the

Agrawal family had forged/fabricated the purported

bills of two sub-brokers. In such a case, instead of

SEBI filing FIR/ Police Complaint, against Agrawal,

it is erroneously held in the impugned order that the

appellant had failed to produce any corroborative

evidence such as FIR/ Police Complaint in support of 10

the plea that the signatures on the share transfer forms

were forged.

f) In para 47 of the impugned order it is erroneously

held that all transfer deeds were checked and

signature was tallied by the company official and the

company's seal was also affixed on all the transfer

deeds thereby confirming the authenticity/

genuineness of the transfer. It is submitted that the

above finding is recorded without raising any such

ground in the show cause notice and without giving

any opportunity to the appellant to rebut such ground.

Moreover, the aforesaid finding is totally false,

because, no company official had signed on any of the

transfer deeds and the company's seal was not affixed

on any of the transfer deeds and there is only a rubber

stamp on the transfer deeds which obviously has been

placed by the RTA only and not by any company

official.

g) Finding recorded in para 40 and 41 of the impugned

order that the appellant had given the shares as

collateral/ security for the loan is totally incorrect,

because, the appellant had simply handed over shares

in physical form along with unsigned transfer forms

so as to obtain loan of ` 1 crore. It is only when the

loan was advanced the appellant would have signed 11

the blank transfer deeds and at that point of time

collateral/ security would have been created.

Therefore, the AO is not justified in holding that the

appellant had given the shares as collateral/ security

for the loan without receiving any loan.

h) As per the direction given by this Tribunal in the

earlier round of litigation on 23.04.2014, it was

incumbent upon the AO to adjudicate upon the issue

of legitimacy/ forgery of the appellant's signatures on

the transfer deeds, inter alia, by calling upon the RTA

to explain as to how RTA permitted transfer of shares

despite variation in the signatures on the transfer

deeds. Since the AO has failed to comply with the

directions given by this Tribunal, the impugned order

is liable to be quashed and set aside.

i) As the shares belonging to the appellant were

transferred on the basis of forged/ fabricated transfer

deeds, it cannot be said that the appellant knowingly

transferred shares to any of the parties and

consequently the appellant cannot be held guilty of

violating the SAST Regulations or the PIT

Regulations. Therefore, any manipulation in the price

or volume of the shares or any circular movement of

the shares by any third parties cannot be attributed to

the appellant. Hence, the finding recorded by the AO 12

that the appellant has violated the PFUTP Regulations

cannot be sustained.

j) Although 1,25,000 shares, and 2,13,000 shares were

handed over by the appellant to Mr. Shambhu

Agrawal, the finance broker, for arranging loan of

`1 crore, the appellant had received only ` 5 lac as

token advance from Mr. Shambhu Agrawal. As the

loan transaction did not materialize, the appellant had

returned ` 5 lac to Mr. Shambhu Agrawal and

thereupon, Mr. Shambhu Agrawal on 31.03.2005

returned 2,15,500 shares being 2,13,000 shares

handed over by the appellant to Mr. Shambhu

Agrawal and 2500 shares which were transferred by

the appellant to the pool account of Ruchiraj- who

was the broker. Although on 31.03.2005 the shares

returned by Mr. Shambhu Agrawal were not the same

shares which the appellant had given to Mr. Shambhu

Agrawal, in view of the fact that equal quantity of

shares were returned, the appellant did not take any

action against Mr. Shambhu Agrawal for illegally

transferring the shares handed over by the appellant to

Mr. Shambhu Agrawal. Fact that the appellant has

not initiated any action against Mr. Shambhu Agrawal

for forging and fabricating the signature of the

appellant on the transfer deeds, cannot be a ground to 13

hold that the appellant has sold the shares in violation

of the regulations framed by SEBI.

k) Shares belonging to the appellant which were

transferred by Mr. Shambhu Agrawal under the

forged transfer deeds were not used for any of the

impugned trades. In fact, the investigation report (see

page 166 of the Memorandum of Appeal) records that

there were no debit and credit entries in the demat

statement of the Agrawal family during the

investigation period. As the shares of the appellant

were transferred by forging and fabricating the

signature of the appellant on the transfer deeds

without the consent and knowledge of the appellant

and the said shares have not been utilized for

manipulating the price or volume in the scrip of EIIL,

the AO is not justified in holding that the appellant

has transferred the shares of EIIL in violation of the

regulations framed by SEBI.

l) Fact that the appellant after the investigation period

had sold 26000 shares at the rate of ` 120 - ` 127 per

share in June 2005 could not be a ground to hold that

the appellant had taken advantage of the alleged

manipulation in the price of the scrip. In the

impugned order it is recorded that the price and

volume manipulation took place during the 14

investigation period from 16.02.2005 to 11.03.2005

and by 11.04.2005 the prices had come down to

` 97.80. The subsequent increase in price in June

2005 to ` 120 - ` 127 is not alleged to be a

consequence of any alleged manipulation. Therefore,

appellant could not be said to have taken advantage of

the alleged price/ volume manipulation by selling the

shares of EIIL.

m) As regards the alleged misleading corporate

announcements made by EIIL, it is submitted that the

appellant was not the person who communicated

either of the corporate announcements to the stock

exchange. There were five directors in EIIL at the

relevant time yet the appellant alone is held liable for

the misleading corporate announcement which is

wholly unjustified.

n) The corporate announcement made on 02.03.2005

was legitimate and genuine and there is nothing on

record to suggest that the same was bogus or

fabricated. Merely, because, the company could not

ultimately come out with any rights or preferential

issue could not be a ground to hold that the corporate

announcements made were false and intended to lure

the investors. The corporate announcement made on

02.03.2005 did not state that EIIL had decided to 15

come out with the rights or preferential issue of

shares. What was announced was that a Board

Meeting has been scheduled on 08.03.2005 to

consider as to whether to come out with any such

rights/ preferential issue and the pricing thereon.

Clearly, there was no representation made to the

investors that the company had decided to issue

rights/ preferential shares as wrongly interpreted in

the impugned order.

o) The Board Meeting scheduled to be held on

08.03.2005 was cancelled and accordingly intimated

to the stock exchange. Merely, because, the word

"postponed" was also used in the said letter, the AO is

not justified in holding that the meeting scheduled to

be held on 08.03.2005 was postponed but never held

thereafter.

p) Without prejudice to the aforesaid submissions it is

submitted that the penalties imposed against the

appellant are exorbitant and disproportionate. If

transfer of shares triggered disclosure obligations on

part of appellant, then the very same transfers would

also trigger disclosure obligations on part of

Mr. Shambhu Agrawal and his family. However, no

action is taken against the Agrawal family under the 16

SAST Regulations or the PIT Regulations for not

discharging the disclosure obligations. In fact by an

order dated 10.12.2012 consolidated of ` 10 lac has

been imposed on five Agrawal family members for

the alleged violation of PFUTP Regulations.

Similarly, other parties who were allegedly involved

in the price and volume manipulation have only been

levied penalties in the range of ` 1 lac to 5 lac. In

these circumstances, it is submitted that the impugned

order which seeks to levy penalty of ` 1 crore is

exorbitant and disproportionate. Accordingly, it is

submitted that the impugned order be quashed and set

aside and alternatively it is submitted that the penalty

be reduced to the extent as this Tribunal deems fit and

proper.

5. We see no merit in the above arguments.

6. Basic argument of the appellant is that the impugned order is

passed by disregarding the direction given by this Tribunal on 23.04.2014

in Appeal No. 61 of 2013. It is contended that as per the direction given

by this Tribunal on 23.04.2014, the AO could pass the impugned order

only after recording additional evidence in relation to the plea of the

appellant that the shares have been transferred by forging the signature of

the appellant on the transfer deeds. Since, the impugned order is passed

without recording any additional evidence it is submitted that the

impugned order is liable to be quashed and set aside. 17

7. Perusal of the order of this Tribunal dated 23.04.2014 clearly

shows that there was no direction given to the AO to pass fresh order

only after recording additional evidence. The said order merely records

that since the appellant claims that the shares belonging to the appellant

have been transferred by forging the signature of the appellant on the

share transfer forms and in support of the above contention the appellant

relied on a report of Forensic Expert which became available after the

original order was passed by the AO on 31.01.2013, this Tribunal set

aside the order dated 31.01.2013 and remanded the matter by directing

the AO to pass fresh order, inter alia by recording additional evidence, if

found necessary, on the issue relating to forgery in the light of the report

of the Forensic Expert produced by the appellant. Thus, the AO had the

discretion either to record additional evidence or not to record additional

evidence in relation to the plea of forgery raised by the appellant.

Therefore, argument of the appellant that the impugned order is passed

by disregarding the direction given in the order dated 23.04.2014 cannot

be accepted.

8. In the impugned order the AO has held that the signature

comparison report/ handwriting comparison report cannot be considered

in the absence of any other corroborative evidence to substantiate the plea

of the appellant that his signatures on the transfer deeds were forged.

Assuming that the AO was not justified in seeking corroborative

evidence for considering the report of Forensic Expert, the question to be

considered herein is, whether the AO could hold the appellant guilty of

violating the SEBI Act and the regulations framed thereunder, without 18

considering the plea of the appellant that the shares were transferred by

forging his signature. In other words, assuming that the shares of EIIL

held by the appellant were transferred by forging the signature of the

appellant on share transfer forms, whether, in the facts of present case the

appellant could be said to have violated the SEBI Act and the regulations

framed thereunder.

9. Appellant claims that EIIL shares belonging to the appellant have

been transferred by forging the signature of the appellant came to his

knowledge on 31.03.2005 when Shambhu Agrawal instead of returning

the very same EIIL shares given by the appellant, returned EIIL shares

that were in the name of third parties. Appellant further submits that he

did not take any action against Shambhu Agrawal for forging the

signature of the appellant, because, equal quantity of shares were

returned by Shambhu Agrawal.

10. There is no merit in the above argument, because, appellant had

handed over in all 3,38,000 shares of EIIL which were all in the name of

the appellant (1,25,000 shares in October 2004 and 2,13,000 shares on

31,01,2005) to Shambhu Agrawal whereas, on 31.03.2005 Shambhu

Agrawal had returned to the appellant only 2,15,500 shares of EIIL

which were all in the name of third parties. To a specific query raised by

this Tribunal regarding the balance shares, counsel for the appellant fairly

stated that appellant has no explanation to offer. Thus, it is evident that

the appellant handed over in all 3,38,000 shares whereas, Shambhu

Agrawal returned only 2,15,500 shares that were in the name of third

parties. Therefore, argument of the appellant that he did not take action 19

against Shambhu Agrawal for forgery on account of receiving equal

quantity of shares handed over to Shambhu Agrawal is contrary to facts

on record and hence unsustainable.

11. It is interesting to note that out of 2,15,500 shares returned by

Shambhu Agrawal, 1,82,150 shares were in physical form and 33,350

shares were transferred directly to the demat account of the appellant. It

is not in dispute that immediately after 31.03.2005 appellant got the

1,82,150 shares in physical forms transferred to his own name.

Assuming that on 31.03.2005 the appellant for the first time came to

know that shares of EIIL handed over to Shambhu Agrawal have been

fraudulently transferred by Shambhu Agrawal, very fact that the

appellant instead of taking action against Shambhu Agrawal for

transferring the shares allegedly by committing forgery chose to get the

1,82,150 shares in physical form transferred from the name of third

parties to the name of the appellant clearly shows that either Shambhu

Agrawal had transferred the shares with the consent of the appellant or

that the appellant had acquiesced to the transfer of shares being effected

by Shambhu Agrawal. Thus, assuming that the shares of EIIL belonging

to the appellant were transferred by forging the signature of the appellant,

that fact has no bearing in the present case, because, penalty is imposed

on the appellant for acquiring shares of EIIL from third parties without

complying with the provisions contained in the regulations framed under

the SEBI Act and not on account of transferring the shares of EIIL

belonging to the appellant.

20

12. Moreover, once it is admitted by the appellant that on 31.03.2005

he became aware about the transfer of shares belonging to the appellant it

obviously means that on 31.03.2005 the appellant knew that on account

of such transfer of shares, his shareholding in EIIL stood reduced from

80% to less than 10%. Therefore, when appellant took steps for

transferring 1,82,150 shares in the name of third parties to the name of

the appellant, it was within the knowledge of the appellant that such

transfer would result in increasing the shareholding of the appellant in

EIIL in excess of 15% and in such a case various obligations under the

Takeover Regulations would get triggered. Appellant who was the

promoter-director of EIIL cannot feign ignorance of the obligation to

comply with the regulations framed under the SEBI Act when shares are

acquired by him from third parties in excess of the limits prescribed

under the regulations.

13. Thus, the facts on record reveal that the appellant holding about

80% shares of EIIL resorted to rematerializing the shares of EIIL and

then handed over 3,38,000 shares to Shambhu Agrawal in November

2004 and January 2005 for allegedly arranging loan of ` 1 crore.

Shambhu Agrawal transferred the said shares to his own name and to the

name of his family members and others. Thereafter, the said shares were

traded on market. Finally on 31.03.2005, Shambhu Agrawal without

arranging loan of ` 1 crore returned only 2,15,500 shares out of 3,38,000

shares. Admittedly, 2,15,500 shares returned by Shambhu Agrawal were

in the name of third parties. Assuming that on 31.03.2005 appellant

came to know that 3,38,000 shares of EIIL handed over by the appellant 21

to Shambhu Agrawal were transferred by forging the signature of the

appellant after 31.03.2005 appellant could not have acquired shares of

EIIL in excess of the limits prescribed, without following the obligations

prescribed under the regulations framed by SEBI.

14. With this background, we may now consider the arguments

advanced on behalf of the appellant in relation to the charges held proved

against the appellant in the impugned order.

15. First charge held against the appellant in the impugned order is that

the appellant as a promoter- director of EIIL was instrumental in issuing

misleading corporate announcement on 02.03.2005 and therefore guilty

of violating the PFUTP Regulations. The corporate announcement made

by EIIL on 02.03.2005 was that in the meeting Scheduled to be held on

08.03.2005 the Board would inter-alia consider options and plans for

expansion/ growth of the company and also consider increase in

authorized capital and issue of rights/ preferential shares. However, no

such meeting was held on 08.03.2005 and by a letter dated 08.03.2005

(received by the BSE on 11.03.2005) the stock exchange was informed

that the Board meeting Scheduled on 08.03.2005 has been cancelled/

postponed as the directors of the company had gone out of station and

that any further notice in that regard would be given to the stock

exchange in due course.

16. It is not in dispute that immediately after the above corporate

announcement made at 11.02 AM and 4.44 PM on 02.03.3005, the price 22

of the EIIL scrip increased from the closing price of ` 100.15 on

01.03.2005 to ` 101.90 on 02.03.2005 and the volume increased from

daily trading volume of 3685 shares to average daily trading volume of

22606 shares during the investigation period. Thus, it is apparent that the

above corporate announcement was a price sensitive information and in

fact the said corporate announcement had immediate impact on the price

and volume of EIIL scrip.

17. By letter dated 08.03.2005 the stock exchange was informed that

the Board meeting Scheduled on 08.03.2005 has been cancelled/

postponed as the directors of the company had gone out of station. From

that letter it cannot be inferred that on 08.03.2005 the company had

decided to drop consideration of the corporate announcement made on

02.03.2005. Very fact that the letter dated 08.03.2005 records that any

further notice in relation to the agenda for the meeting scheduled on

08.03.2005 would be given to the stock exchange in due course, clearly

shows that the corporate announcement made on 02.03.2005 was to be

considered by the Board in any of the subsequent meetings. Admittedly,

in none of the subsequent Board meetings the corporate announcement

made on 02.03.2005 was considered. Therefore, the argument of the

appellant by letter dated 08.03.2005 EIIL had informed the stock

exchange that the corporate announcement made on 02.03.2005 has been

cancelled, cannot be accepted. Consequently, the decision of the AO that

misleading corporate announcement was made on 02.03.2005 cannot be

faulted.

23

18. Argument of the appellant that he had not made the corporate

announcement on 02.03.2005 and when were several directors in EIIL,

the AO could not hold appellant alone guilty of making misleading

corporate announcement is without any merit as can be seen from the

following:-

a) Appellant was the promoter-director of EIIL holding

3,90,050 shares out of 5,00,000 shares issued by EIIL.

Prior to the corporate announcement dated 02.03.2005

the appellant in October 2004 had handed over 1,25,000

shares of EIIL in physical form along with unsigned

blank share transfer forms to Shambhu Agrawal a finance

broker. Thereafter, on 27.01.2005, appellant transferred

2500 shares of EIIL from his demat account to the pool

account of Ruchiraj Shares and Stock Brokers Pvt. Ltd.

On 31.01.2005 appellant rematerialized 2,40,500 shares

of EIIL and handed over 2,13,000 rematerialized shares

to Shambhu Agrawal along with unsigned share transfer

forms. On a query raised by this Tribunal, counsel for

the appellant admitted that all the aforesaid 3,40,500

shares of EIIL (1,25,000+2500+2,13,000) were handed

over/ transferred by the appellant to Shambhu Agrawal/

Ruchiraj Shares & Stock Brokers Pvt. Ltd. so that on

Shambhu Agrawal arranging loan of ` 1 crore, the said

shares could be offered as collateral security. 24

b) Instead of arranging loan of ` 1 crore, Shambhu

Agrawal on 01.11.2004 transferred 1,25,000 shares

received from the appellant to his own name and to

the name of his other family members. Similarly, on

25.02.2005 Shambhu Agrawal transferred 2,13,000

shares received from the appellant to the name of 22

entities.

c) Finding of fact recorded in para 33 and 34 of the

impugned order is that the Agrawal family during the

period from 02.03.2005 to 11.03.2005 sold 1,07,000

shares of EIIL which was 49% of the total market

volume during the investigation period.

d) In para 37 of the impugned order the AO has recorded

a finding that out of the 22 entities to whom the shares

of EIIL belonging to the appellant were transferred by

Shambhu Agrawal, some of the entities sold 63,300

shares of EIIL during the investigation period,

wherein majority of the counter parties to the trades

were entities belonging to the group.

e) Above facts on record reveal that prior to the

corporate announcement dated 02.03.2005, appellant

holding nearly 80% shares of EIIL rematerialized the

shares and handed over 3,38,000 shares in physical

form to Shambhu Agrawal allegedly for availing loan 25

of ` 1 crore. Instead of arranging loan of ` 1 crore,

Shambhu Agrawal allegedly gave token amount of ` 5

lac (` 2,59,000 by cheque and ` 2,41,000 in cash)

which was allegedly returned by the appellant in cash

to Shambhu Agrawal on 31.03.2005 and thereupon on

31.03.2005 Shambhu Agrawal returned 2,15,500

shares of EIIL which were in the name of the third

parties.

f) Thus, prior to the corporate announcement, appellant

indulged in rematerializing the shares of EIIL and

handed over 3,38,000 rematerialized shares to

Shambhu Agrawal, who transferred the said shares to

his family members and others who traded the said

shares on the stock exchange during the investigation

period when the corporate announcement was made

and thereafter on 31.03.2005, Shambhu Agrawal

returned 2,15,500 shares which were in the name of

third parties who had traded in the shares of EIIL

during the investigation period.

g) Although appellant claims that Shambhu Agrawal

transferred the shares of EIIL belonging to the

appellant by forging the signature of the appellant,

very fact that the appellant has not initiated any

proceedings against Shambhu Agrawal for allegedly 26

committing forgery and the fact that the appellant

even after receiving back only 2,15,500 shares out of

the total 3,38,000 shares handed over to Shambhu

Agrawal has not chosen to take any steps for receiving

the balance shares clearly shows that there were deep

rooted conspiracy between the appellant and Shambhu

Agrawal in utilizing the shares of EIIL belonging to

the appellant for trading on market during the period

when misleading corporate announcement was made.

19. Aforesaid facts on record establish beyond any shadow of doubt

that the appellant was instrumental in issuing misleading corporate

announcement on 02.03.2005. Thus, on one hand appellant was

instrumental in issuing corporate announcement by EIIL on 02.03.2005

which was admittedly not considered by the Board of EIIL at any time

thereafter and on the other hand appellant in connivance with Shambhu

Agrawal manipulated a device for trading in the shares of EIIL belonging

to the appellant during the period of corporate announcement which

resulted in increase in the price and volume of the EIIL scrip. Thus, it is

apparent that corporate announcement was nothing but a device adopted

to lure the investors to trade in the shares of EIIL. Since the corporate

announcement was not even considered by the Board it is abundantly

clear that the said corporate announcement was not made with bonafide

intentions.

20. In these circumstances, finding recorded by the AO that the

appellant was instrumental in issuing misleading corporate 27

announcement on 02.03.2005 in gross violation of the PFUTP

Regulations cannot be faulted. Penalty imposable for such fraudulent

and unfair trade practices under Section 15HA of SEBI Act is up to

` 25 crore. In the present case, the AO after considering all mitigating

factors has imposed penalty of ` 20 lac under Section 15HA which

cannot be said to be excessive or unreasonable.

21. Second charge held against the appellant is that the appellant has

failed to comply with the public announcement/ open offer obligation

contained in regulation 10 & 11(1) of the Takeover Regulations, 1997.

22. As noted earlier, appellant as a promoter-director of EIIL was

holding 3,90,050 shares of EIIL which constituted nearly 80% of the

entire shareholding. Admittedly, appellant resorted to rematerializing the

shares of EIIL and in October 2004 handed over 1,25,000 shares and on

31.01.2005 handed over 2,13,000 in physical form to Shambhu Agrawal

which were transferred by Shambhu Agrawal to his own name, to the

name of his family members and other entities. Although, the appellant

claims that the aforesaid shares were transferred by Shambhu Agrawal

without the consent and knowledge of the appellant and by forging the

signature of the appellant, it is admitted by the appellant that on

31.03.2005 he came to know about the above transfer of shares.

23. Thus, admittedly on 31.03.2005 appellant was aware that shares of

EIIL held by him have been transferred. Consequently, on 31.03.2005

was aware that on account of such transfer of shares effected by

Shambhu Agrawal, shareholding of the appellant in EIIL stood reduced 28

from 80% to 9.91%. Therefore, on 31.03.2005 when Shambhu Agrawal

returned 2,15,500 shares of EIIL in the name of third parties, appellant

knew that transferring those shares to the name of the appellant would

result in increasing the shareholding of the appellant in EIIL from 9.91%

to 43.10% (see para 58 of the impugned order). Regulation 10 & 11(1)

of the Takeover Regulations mandatorily requires a person acquiring

15% or more shares to make public announcement/ open offer.

Admittedly, 2,15,500 shares of EIIL have been transferred to the name of

the appellant without following the procedure prescribed under the

Takeover Regulations. It is important to note that out of 2,15,500 shares

returned by Shambhu Agrawal 1,82,150 shares were in physical form and

it is the appellant who took steps to transfer the said 1,82,150 shares in

the name of third parties to the name of the appellant. Thus, it is

apparent that acquiring shares of EIIL in excess of the limits prescribed,

without making public announcement/ open offer was in gross violation

of regulation 10 & 11(1) of the Takeover Regulations.

24. Penalty imposable under Section 15H(ii) of SEBI Act for failure to

comply with regulation 10 & 11(1) of the Takeover Regulations is up to

` 25 crore. However, in the facts of present case, the AO after taking

into consideration all mitigating factors has imposed penalty of ` 75 lac

as against the penalty of ` 25 crore imposable under Section 15H(ii) of

SEBI Act which cannot be said to be excessive or unreasonable.

25. Third charge held against the appellant is that the appellant has

violated regulation 7(1A) read with regulation 7(2) of the Takeover 29

Regulations and regulation 13(4) read with regulation 13(5) of the PIT

Regulations.

26. In para 60 and 61 of the impugned order, the AO has set out the

obligation of the appellant to make disclosures under the aforesaid

regulations when the shareholding of the appellant in EIIL stood reduced

from 53.01 to 9.91% and thereafter increased from 9.91% to 43.01% on

31.03.2005. Assuming that on 31.03.2005 appellant came to know about

the transfer of shares belonging to the appellant, after 31.03.2005

appellant ought to have made disclosures which the appellant failed to

do. Similarly, when shares of EIIL in the name of third parties were

transferred to the name of the appellant disclosures ought to have been

made, but the appellant failed to make disclosures. Thus, in the facts of

present case, decision of the AO that the appellant has violated the

disclosure obligations contained in the Takeover Regulations and PIT

Regulations cannot be faulted.

27. Penalty imposable under Section 15A (b) of SEBI Act for failing

to comply with the disclosure obligations under the aforesaid regulations

is up to ` 1 crore. However, the AO after considering all mitigating

factors has imposed penalty of ` 5 lac which cannot be said to be

excessive or unreasonable.

28. Strong reliance was placed on the statement contained in the SEBI

investigation report (at page 166 of the Appeal Paper Book) to the effect

that there were no debit and credit entries in the demat statement of the

Agrawal family during the investigation period. We see no merit in the 30

above contention, because, admittedly appellant had handed over shares

of EIIL in physical form to Shambhu Agrawal. In such a case question

of making any debit or credit entry in the demat account does not arise at

all. Moreover, once it is established that the appellant had adopted a

modus operandi for trading in the shares of EIIL belonging to the

appellant in violation of the regulations framed by SEBI, then

irrespective of the fact that the appellant had received any consideration

or not, the appellant is bound and liable to face the consequences for

violating SEBI Act and the regulations framed thereunder. Fact that

lesser penalty has been imposed on the Agrawal group cannot be a

ground to take lenient view towards the appellant, because, the appellant

was the chief architect of manipulating a device for committing fraud on

the investors in the securities market.

29. Thus, in the fact of present case, appellant who was instrumental in

manipulating a device to defraud the investors in the securities market

could have been made liable to pay aggregate penalty up to ` 51 crores

[(up to ` 25 crore under Section 15HA, up to ` 25 crore under Section

15H(ii) and up to ` 1 crore under Section 15A(b)] under the SEBI Act.

However, after considering all mitigating factors the AO has imposed

aggregate penalty of only ` 1 crore on the appellant promoter-director of

the company who was the chief architect in manipulating a device which

is prohibited under the securities laws. Hence, in the facts of present

case, aggregate penalty or ` 1 crore imposed on the appellant cannot be

said to be exorbitant or unreasonable.

31

30. For all the aforesaid reasons, we see no merit in the appeal and the

same is hereby dismissed with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 05.01.2018 Prepared & Compared By: PK