Gagan Rastogi vs Sebi

Gagan Rastogi 2 Leonic Hill Road, Unit 02-04, Singapore- 239 192 ...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. Somasekhar Sundaresan, Advocate i/b Ms. Sonu Tandon for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Aditya Mehta, Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent.

WITH Misc. Application No. 172 of 2015 And Appeal No. 219 of 2015

Asia Texx Enterprises Limited 1805 Harbour Industrial Center, 10 Lee Hing Street, Apleichau-Hong Kong ...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 2

Mr. Somasekhar Sundaresan, Advocate i/b Ms. Sonu Tandon for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Aditya Mehta and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member

Per: Dr. C.K.G. Nair

Misc. Application No. 172 of 2015 In Appeal No. 219 of 2015

There is a delay of 14 days in filing the present appeal.

Cause shown is sufficient. The delay in filing the appeal is

condoned and the delay condonation application is allowed.

Appeal Nos. 91 of 2015 and 219 of 2015

1.

These appeals have been filed to challenge the order of

the Whole Time Member (hereinafter referred to as "WTM") of

Securities and Exchange Board of India (hereinafter referred to

as "SEBI") dated December 31, 2014. By the said order, inter

alia, the appellants have been directed to disgorge, jointly and

severally, an amount of US $ 92 million along with simple

interest at the rate of 6% per annum for the period from March

27, 2009 till December 31, 2014, within 45 days from the date 3

of the impugned order. Further, the appellants as well as six

other entities have been restrained from accessing the capital

markets directly or indirectly and from dealing in securities or

instruments with Indian securities as underlying in any manner

whatsoever for a period of 10 years from the date of the order.

2. The impugned order is arising from certain violations

noticed by SEBI relating to the issue of Global Depository

Receipts ("GDRs") by Cals Refineries Limited ("hereinafter

referred to as "Cals"), a listed Indian company, in December

2007 and certain subsequent transactions between Cals and Asia

Texx Enterprises Limited (hereinafter referred to as "Asia

Texx", (Appellant in Appeal No. 219 of 2015) in 2009.

Appellant in Appeal No. 91 of 2015 is the majority shareholder

and beneficial owner of Asia Texx. Since both these appeals

are challenging the same impugned order, by consent of parties,

both the appeals are heard together and disposed of by this

common order.

3. The facts relevant to these appeals are the following:-

a) On December 11, 2007 one M/s Honor Finance

Limited (hereinafter referred to as "Honor"),

(registered in the British Virgin Islands on 4

October 5, 2007) beneficially owned by

Mr. Sanjay Malhotra, entered into a Credit

Agreement with a Portuguese bank namely;

Banco Effisa (hereinafter referred to as

"Banco"). Under this Agreement Honor

received a loan of US $ 200 million from

Banco for the purpose of subscribing to a GDR

issue by Cals.

b) On the same day Banco and Cals entered into

an Account Charge Agreement whereby the

GDR subscription proceeds worth US $ 200

million were charged as security for Banco's

loan to Honor. On December 12, 2007 the

GDR issue of Cals was opened and declared

fully subscribed by its lead manager by 10

foreign investors.

c) By virtue of this arrangement, that is the Credit

Agreement as well as Account Charge

Agreement, the parties concerned (Cals, Honor

and Banco) were able to use the proceeds of

GDR subscription in a circular fashion. Honor

used the amount of US $ 200 million loan to 5

subscribe to the Cals GDR issue and later on

proceeds from selling the said GDRs in the

Indian market between December 18, 2007 and

October 07, 2008 were used to refund the loan

partly. Cals was able to use the GDR proceeds

in their account with Banco only to the extent

of such refunds made by Honor to Banco in

view of the Account Charge Agreement.

d) On December 15, 2008 the Credit Agreement

was extended up to June 15, 2009 in view of

the outstanding loan of Honor to the tune of US

$ 91.8 million. On January 13, 2009 the

Account Charge Agreement was also extended

up to June 15, 2009,

e) An Agreement dated February 05, 2009 was

signed by Cals and Asia Texx for the purchase

of certain refinery machinery worth US$ 290

million by Cals from Asia Texx, an entity

incorporated in Hong Kong in May 2008.

f) On March 27, 2009 Cals paid an amount of US

$ 92 million (US$ 90 million + US$ 2 million) 6

to Asia Texx. Asia Texx, in turn, transferred

the amount of US $ 92 million to Honor as

payment for the 25 million GDRs of Cals

purchased from Honor on March 26, 2009.

Honor used US$ 92 million to repay the

balance loan taken from Banco. All these

payments; US $ 92 million by Cals to Asia

Texx, the payment of the same amount by Asia

Texx to Honor and repayment of the

outstanding loan by Honor to Banco; all these

three events took place on the same day on

March 27, 2009, through the accounts held by

these entities in Banco.

g) Though, the agreement between Cals and Asia

Texx dated February 05, 2009 was purportedly

for purchase of refinery machinery no

machinery was received by Cals. Neither did

they receive any refund of US $ 92 million

paid by Cals to Asia Texx as advance. On the

other hand, Asia Texx received 25 million

GDRs from Honor which was transferred free

of cost to Gagan Rastogi, the beneficial owner 7

of Asia Texx and son of a Director of Cals

Deep Rastogi.

4. This Tribunal dismissed three appeals arising from the

order impugned in these appeals filed by Sarvesh Goorha, D.

Sundararajan and Deep Kumar Rastogi by our order dated

October 12, 2017. Cals' appeal challenging a similar order

passed by SEBI dated October 23, 2013 was also dismissed by

us vide the same order. We found that the charges relating to

Cals and some of the directors at the relevant time including

Sarvesh Goorha, D. Sundararajan and Deep Kumar Rastogi

were found to be correct and thereby sustained the SEBI orders

dated October 23, 2013 and December 31, 2014 in respect of

those parties and thereby dismissed all those appeals.

5. We also note that a consent application was filed by

appellants in these appeals before SEBI vide application dated

November 22, 2013, which was rejected by SEBI on June 10,

2014.

6. The learned counsel Shri Somasekhar Sundaresan

appearing on behalf of the appellants fairly submitted that the

appellants herein are pressing only the second direction in the 8

impugned order, that is the direction to disgorge an amount of

US $ 92 million along with interest. The first direction, that is

restraining the appellants, among others, for 10 years from the

Indian securities market, is not pressed in view of this

Tribunal's order dated October 12, 2017. Moreover, since no

party has challenged the said order of this Tribunal the direction

relating to 10 years restraint has attained finality.

7. The learned counsel for the appellants thereafter made

the following submissions:-

a) For disgorgement as per explanation to 11B of

the SEBI Act, SEBI must prove possession of

wrongful gains in the hands of the person

concerned; quantify the amount of the

wrongful gain; and then proceed to disgorge an

equivalent amount, in accordance with law.

b) At the heart of the case is a fraudulent GDR

issue whereby no genuine capital was actually

raised. The only purported subscriber to the

US $ 200 million GDR issue was Honor, an

entity incorporated outside India and

beneficially owned by Mr. Sanjay Malhotra, a 9

promoter of Cals. The subscription was

purportedly financed by Banco. Honor's

repayment obligations were secured by an

Account Charge Agreement, whereby Cals

provided the funds purportedly raised from the

GDR issue as security for the loan given by

Banco to Honor. These funds and the GDRs

issued were held by Banco as security for the

loan granted to Honor. The GDRs were sold

from time to time in the Indian market and the

proceeds were used by Honor to repay Banco,

which would then correspondingly release the

charge by a corresponding amount to Cals. In

this manner US $ 108 million was released to

Cals. For the balance US $ 92 million, the

parties executed an extension of the

arrangement and devised a round-tripping of

funds emanating from Banco and ending up

with Banco all on a single day, with the entries

being posted from account to account all of

which were opened by the parties and held with

Banco.

10

c) In the instant case, not a single rupee of the

alleged wrongful gain is in the possession of

the appellants, a fact clearly well known to

SEBI and demonstrated from the material on

record. The record is clear that Cals did not

suffer any loss, the entire GDR issue was

fictitious, with the securities being issued

without receipt of real funds. The appellants

have not received anything out of the US $ 108

million out of the GDR issue that did go to

Cals as and when Honor repaid to Banco, the

loan taken to purportedly subscribe to the

GDRs. The appellants do not hold the US $ 92

million that purportedly went out of Banco

purportedly to Cals, and purportedly from Cals

to Asia Texx and purportedly from Asia Texx

to Honor, and thereafter, purportedly from

Honor, back to Banco. Therefore, there is no

question of the appellants having been enriched

by the sum of US $ 92 million at all.

d) The above contentions are supported by SEBI's

own investigation report. Banco's defence 11

filed in a claim (No: 2013 Folio 1656) made by

claimants before the Commercial Court, UK

who had purchased GDRs from Honor,

whereby it is clearly documented by a

statement on oath by Banco that the sum of US

$ 92 million was round-tripped and was

destined never to leave Banco custody and

control. Statements of bank accounts held by

each of Cals, Asia Texx and Honor with Banco

would also reveal this fact. Asia Texx's bank

account opening request with Banco was on

February 05, 2009 and which was opened on

March 25, 2009 just days before March 27,

2009, which account was the one through

which the round-tripping was effected.

e) The impugned order, contrary to the record and

explicit findings of investigation, renders a

blatantly erroneous finding of enrichment of

Asia Texx by reason of the refinery purchase

contract dated February 05, 2009 by which US

$ 92 million was purportedly received on paper

by Asia Texx, ignoring the purported GDR

purchase dated March 26, 2009 by which the 12

funds purportedly received on paper by Asia

Texx also was paid out on paper to Honor on

March 27, 2009 and ignoring the purported

payment of the very same US $ 92 million by

Honor to Banco, also on March 27, 2009.

f) The salient portions of the findings in the

investigation report are to be probed further.

SEBI called for data regarding the transaction

with Asia Texx. It was observed that the

contract signed by Cals was to disguise the

round tripping of funds to settle the loan taken

by Honor to subscribe to GDRs. Banco

informed SEBI that the loan granted to Honor

was settled throughout the financing period

through earnings received by Honor from the

sale of the GDRs of Cals in the Indian market

which were received by Honor. From the data

obtained from Banco, it is observed that Honor

had succeeded in selling GDRs to various

entities during the period December 18, 2007

till October 07, 2008. However, as on

December 15, 2008, an amount of US $ 13

9,18,00,000 (US$ 91.8 million) was still

outstanding in the loan account of Honor.

g) Subsequent to signing the extension

agreements, on March 26, 2009, Asia Texx

acquired 2,50,00,000 GDRs at the rate of US $

3.68 amounting to US $ 9,20,00,000. Cals had

signed a contract with Asia Texx for

acquisition of refinery equipment and paid

US $ 9,20,00,000 to Asia Texx as advance and

the balance amount to be paid within 180 days.

It is now observed that the contract signed by

Cals was to disguise the round tripping of

funds to settle the loan outstanding in the name

of Honor with Banco. From the above

sequence of events, it is thus observed that the

transaction between Cals and Asia Texx

appears to have been structured to settle the

outstanding liability of Honor to Banco using

funds of Cals. Thus the liability of the

promoter of Cals (liability of Mr. Sanjay

Malhotra through Honor) was discharged using

the funds of Cals.

14

h) Therefore, learned counsel for the appellants

contended that SEBI investigation report

proves the following:- i) the alleged movement

of a sum of US $ 92 million was round-tripping

from Banco to Banco to disguise the repayment

obligation of Honor and Mr. Sanjay Malhotra

to Banco. ii). the liability that got discharged

therefore, was the liability of Honor,

beneficially wholly owned by Mr. Sanjay

Malhotra. iii). Therefore, it can never be held

that the appellants were the beneficiary of any

wrongful gain or loss averted in the sum of US

$ 92 million. On the contrary, the SEBI

investigation report explicitly finds that the

liability discharged i.e. the loss averted, was

that of Honor, wholly owned by Mr. Sanjay

Malhotra. It is noteworthy that Honor and

Mr. Sanjay Malhotra did not participate in the

SEBI proceedings. It is on record that the

show cause notices issued to them returned

undelivered and SEBI moved forward with

whoever replied and have now fastened the

disgorgement liability on the appellants. 15

i) The precise sum held by Cals subject to Banco

charge was US $ 91,800,000. It is admitted

that Banco knew that sum of US $ 92 million

to be paid to Asia Texx by Cals would

subsequently be paid to Honor and in part used

by Honor to repay Banco. It is further admitted

that Banco would not otherwise have been

willing to permit the payment of Cals funds

subject to the Account Charge Agreement.

j) Clearly, Honor and its owner Mr. Sanjay

Malhotra were unable to sell any GDRs to

repay the loan to Banco after October 2008.

Further as on December 15, 2008, an amount

of US $ 91.8 million was still outstanding. The

Credit Agreement's initial tenure had expired

on December 15, 2008, so the final repayment

date was extended for a period of six months

until June 15, 2009. The Account Charge

Agreement too was extended until June 15,

2009. Thereafter on March 27, 2009, the

round-tripping of funds from Banco to Banco

was effected, neither leaving anything in 16

possession of the appellants nor releasing a

single dollar from the possession of Banco.

k) Therefore, every averment in the impugned

order about purported unjust enrichment of the

appellants at the expense of Cals is far from

being borne out by the material on record.

l) The concept of disgorgement is based on the

principle that a person who is in possession of

wrongful gains by which he is enriched may be

asked to part with amounts equivalent to such

gains. The concept of unjust enrichment has

been fairly well evolved by way of case law

and academic literature. For tracing

enrichment and restitution of proceeds, the

following three ingredients are to be

presupposed- First that person concerned has

been enriched; Second, that he has been

enriched at the expense of the victim; and

Third, that it would be unjust to allow him to

retain the benefit. Moreover, commentary

from Prof. Peter Birks, an eminent authority on

the subject, and who has been cited in various 17

judgments of the Hon'ble Supreme Court of

India would show that it would be necessary to

demonstrate that the appellants' alleged gain

must represent a loss to Cals. In other words, a

subtractive enrichment should be by

subtraction or taking from Cals assets.

m) Therefore, at the heart of the doctrine is the

notion of restoration of benefit that which

justice does permit one to retain. From the

facts it is clear that Cals did not at all have US

$ 92 million in its possession on March 27,

2009. Banco did. The funds purportedly

moved around three accounts- Cals to Asia

Texx and then back to Banco all the same day.

n) It could be seen from the foregoing that the

purported transaction for the funds to move

from the Cals account in Banco to the Asia

Texx account in Banco is numbered after the

purported transaction for the funds to move

from Asia Texx account in Banco to Honor's

account in Banco. Yet, it is a matter of record

that prior to the receipt of the US $ 92 million, 18

there was no money in the newly opened

account held by Asia Texx with Banco. This

would further underline and corroborate that

admitted position of round-tripping of funds

from Banco to Banco.

o) Another facet of the need to apply the

subtraction principle is that the jurisdiction to

disgorge would be an equitable remedy and it

is aimed at ensuring that the person in

possession of wrongful gains does not continue

to enjoy the same. Unless one demonstrates as

to who gained and at whose expense, it would

evidently lead to an absurd consequence of the

same amount being disgorged from multiple

persons. In other words, it would lead to the

absurd proposition that even someone who is

not in possession of funds could be asked to

pay contrary to the Explanation to Section 11B

of the SEBI Act.

p) In the instant case, Cals did not even lose US $

92 million since to begin with the GDR issue

itself was fake; and to follow up, the funds 19

were always with Banco and remained with

Banco and in fact the funds never left the

possession of Banco. Banco had lent US $ 200

million and received US $ 200 million

although it was not possible for Honor to use

just the GDR proceeds to repay Banco.

q) The impugned order ignores all these factors

and proceeds on the untenable footing that

there has been an enrichment of Asia Texx to

the extent of US $ 92 million.

r) It is settled law that in discerning multi-stage

transaction that constitute one composite single

transaction, the cumulative effect and whole of

transaction has to be seen and not just part of it.

s) Disgorgement is an equitable remedy. The

Asia Texx transaction evidently being a mere

book entry for US $ 92 million and the

appellants not being in possession of the sum

of US $ 92 million, there can never arise the

question of disgorging the same from the hands

of the appellants.

20

t) At worst, the receipt of 25 million GDRs,

which is held to be a device for having paid US

$ 92 million to Honor is the only asset with the

appellants from the allegedly wrongful

transaction. It is a matter of record that from

the 25 million GDRs, Asia Texx had sold 2.8

million GDRs and the realization value of US $

8,96,000 was infused into Cals. The appellants

have all along been ready and willing to

surrender the remaining GDRs/ underlying

shares.

8. Learned counsel for the appellants relied on a large

number of judgements to buttress his contentions. Citing

Kokesh v/s Securities and Exchange Commission 2017 SCC

OnLine US SC 58 (No. 6-529 decided on June 05, 2017) it was

contended that disgorgement is a penal provision and hence

limitation would apply. Though the explanation to 11B of the

SEBI Act was inserted in 2014, it envisages that disgorgement

should be a direction to any person who made profit and such a

disgorgement should be an amount equivalent to the wrongful

gain made. The learned counsel also relied on the following

judgements to contend that Section 11B of the SEBI Act has 21

been always a remedial provision and not a punitive provision.

Sterlite Industries (India) Ltd. v/s SEBI 2001 SCC OnLine

SAT 28 (Appeal No. 20 of 2001 decided on October 22, 2001),

Videocon International Ltd. v/s SEBI 2002 SCC OnLine SAT

14 (Appeal No. 23 of 2001 decided on June 20, 2002), Rakesh

Agarwal v/s SEBI 2003 SCC OnLine SAT 38 (Appeal No. 33

of 2001 decided on November 03, 2003), *612 Charity

Commission for England and Wales v Mountstar (PTC) Ltd.

and Ors. [2016] EWHC 876 (Ch) April 21, 2016. Irrespective

of whether some of these judgements are arising out of tax

statutes etc. their ratio squarely applies to 11B order of SEBI in

correctly interpreting the economic reality and factual reality.

Accordingly, all the transactions have to be considered as a

single composite transaction and SEBI cannot arbitrarily choose

one point or one layer and apply disgorgement. The appellants

also relied on Mafatlal Industries Ltd. and Ors. v/s Union of

India (UOI) and Ors. SCC (Civil Appeal No. 3255 of 1984

decided on December 12, 1996) to further their argument that

the entire case of SEBI is founded on the premise that the

appellants had gained at the expense of Cals when in reality the

entire GDR issue was a sham. There was no economic gain for

Cals; there was no economic gain for the appellants as well.

Hence the need for taking economic reality into account. Citing 22

Sharad Birdhichand Sarda v/s State of Maharashtra (1984) 4

SCC 116 (Criminal Appeal No. 745 of 1983 decided on July

19, 1984) and SEBI v/s Kishore R. Ajmera (2016) 6 SCC 368

(Civil Appeal No. 2818 of 2008 decided on February 23, 2016)

it was contended that whether in Criminal or in Civil law the

burden of proof has to be established at a sufficiently strong

level while proving an accusation and that onus rest on the

shoulders of the respondent SEBI. Further as in Kishore R.

Ajmera (supra) though a preponderance of probability may be

sufficient to prove a civil liability the respondent has a duty to

consider the proximate facts and circumstances surrounding the

events on which the charges are levied and thereafter reach a

reasonable and fair conclusion which is not done in the instant

matter.

9. The appellant, in rejoinder, distinguished a number of

judgements relied on by the respondent SEBI in the impugned

order. Accordingly, S.P. Chengalvaraya Naidu v/s Jagannath

and Ors. (1994) 1 SCC 1 (Civil Appeal No. 994 of 1972

decided on October 27, 1993, K. N. Mehra v/s State of

Rajasthan AIR 1957 SC 369 (Criminal Appeal No. 51 of 1955

decided on February 11, 1957), Shri Krishan Kumar v/s Union

of India AIR 1959 SC 1390 (Criminal Appeal No. 114 of 1957 23

decided on May 21, 1959). Mahabir Kishore v/s State of

Madhya Pradesh (1989) 4 SCC 1 (Civil Appeal No. 1826 (N)

of 1974 decided on July 31, 1989, SEC v/s A Shapiro, 494 F.

2d 1301, Commonwealth Chemical Securities Inc, 574 F. 2d

90, Dushyant N. Dalal v/s SEBI 2010 SCC Online SAT 328

and SEC v/s Contorinis 743 F. 3d 296, relied on by SEBI does

not help the respondent SEBI, it was contended by the learned

counsel for the appellants.

10. The learned senior counsel Shri Gaurav Joshi,

appearing on behalf of the respondent SEBI, on the other hand,

submitted that as is clear from the impugned order and as

upheld by this Tribunal in the Cals order (supra) the entire

policy purpose of attracting foreign exchange through issue of

GDR was vitiated by some of the entities who manipulated the

GDR issue process. The instant case is one of the many such

instances. The leaned senior counsel, in the aforesaid

background, further submitted as follows:-

a) The appellants argument that the entire GDR

process was vitiated and no genuine capital has

been raised so as the appellants to receive any

real benefits is fallacious, because, finding that 24

no genuine capital was raised is in the context

of one single entity namely, Honor alone

subscribing to the GDR issue by Cals.

b) There is no dispute on the facts that US$ 92

million was given by Cals to Asia Texx which

received 25 million GDRs from Honor and

transferred the same to Gagan Rastogi and

these entities, therefore, got unjustly enriched

at Cals expenses cannot be disputed.

c) The appellants contention that the transaction

between i) Cals and Asia Texx, ii) Asia Texx

and Honor and iii) Honor and Banco were

structured as a single transaction under which

Asia Texx did not receive any benefit has no

merit since clearly these are different

transactions entered into by the parties

concerned. In these transactions Asia Texx

received 25 million GDRs of Cals which was

in turn transferred by Asia Texx to Gagan

Rastogi, beneficial owner. Even if it is

assumed that it was a single transaction it is

clear that despite making a payment of US$ 92 25

million to Asia Texx, Cals received no refinery

machinery from Asia Texx. On the other hand,

it is on record that Asia Texx received 25

million GDRs of Cals from Honor. In this

context, it is also important to note the

statement made by Banco before UK

Commercial Court that Banco was aware that

an amount of US$ 92 million was being paid

by Cals to Asia Texx for Cals refinery project

and that Asia Texx was willing to make

payment of the same amount to Honor to

purchase the GDRs.

d) The transaction between Cals and Asia Texx

was a related party transaction [a finding

upheld by this Tribunal's order (supra)] which

ought to have been disclosed by Cals, but was

instead falsely portrayed as a normal arms

length commercial transaction. The money

required for Asia Texx to purchase the 25

million Cals GDRs from Honor came from

Cals itself as Asia Texx did not have any

money of its own to purchase the GDRs. The

effect of the transaction was to fraudulently 26

siphon monies out of Cals to enrich Gagan

Rastogi (a promoter of Cals through his

holding in SRM Exploration and being son of

Deep Rastogi, Director of Cals) under the

pretext of a payment of setting up a Refinery

Project. Gagan Rastogi benefited as he

received the 25 million GDRs free of cost. The

entire transaction between Cals and Asia Texx

is inextricably linked to the GDR process.

Gagan Rastogi and Asia Texx were the

recipients of wrongful /ill-gotten gains of US $

92 million.

e) As per the annual report of Cals for the year

2008-2009, as a Director of Cals, Deep Rastogi

admittedly had significant influence over that

company at the time when the agreement with

Asia Texx was signed, in February 2009.

Gagan Rastogi who was the beneficial owner

of Asia Texx is the son of Deep Rastogi. Asia

Texx, therefore, was clearly an enterprise

owned and significantly influenced by a

relative of the Director and key management 27

personnel of Cals viz. Deep Rastogi. The

transaction between Cals and Asia Texx

pursuant to the agreement between them for

purchase of refinery equipment, which was

portrayed as a commercial transaction, was

clearly a related party transaction in accordance

with AS-18 with Clause 32 of the Listing

Agreement. Asia Texx has acted fraudulently

in the matter. Being the beneficial owner of

Asia Texx, Gagan Rastogi (son of Deep

Rastogi) was clearly the beneficiary of the

fraudulent transaction. Hence, the finding that

the appellants have violated various provisions

of PFUTP Regulations and wrongfully gained

cannot be faulted.

f) On the basis of the aforesaid findings, the

impugned order prohibits the appellants from

accessing the Indian capital markets for a

period of 10 years and directs the appellants to

jointly and severally disgorge the unlawful gain

of US $ 92 million made by virtue of the

fraudulent transaction between the appellants 28

and Cals, which is fully in accordance with

SEBI Act, Rules and Regulations.

11. The learned senior counsel for the respondent while

distinguishing the orders cited by the appellants relied on

various judgements to substantiate his contentions. Citing the

judgement of S.P. Chengalvaraya Naidu v/s Jagannath and

Ors. (1994) 1 SCC 1 (Civil Appeal No. 994 of 1972 decided on

October 27, 1993, it was submitted that since the appellant,

Gagan Rastogi, vide his affidavit dated July 19, 2017 made a

false statement about his lack of association/ connection with

Cals (while he was actually a shareholder of SRM Exploration

Pvt. Ltd. which in turn had become the Promoter of Cals), the

appellant Gagan Rastogi does not deserve any relief and such a

false declaration alone is sufficient to dismiss the appeal

forthwith. Further quoting Section 23 of the Indian Penal Code

which contains the definition of "wrongful gain" and "wrongful

loss" as under:

"Wrongful gain"- "Wrongful gain" is gain by

unlawful means of property to which the

person gaining is not legally entitled.

"Wrongful loss".- "Wrongful loss" is the loss

by unlawful means of property to which the 29

person losing it is legally entitled. Gaining

wrongfully, losing wrongfully.- A person is

said to gain wrongfully when such person

retains wrongfully, as well as when such

person acquires wrongfully. A person is said

to lose wrongfully when such person is

wrongfully kept out of any property, as well as

when such person is wrongfully deprived of

property"

the learned senior counsel submitted that what is important is

whether one has acquired any gain wrongfully, retention of the

said gain is not important. This is further emphasised by the

judgements of Hon'ble Supreme Court in K. N. Mehra v/s State

of Rajasthan AIR 1957 SC 369 (Criminal Appeal No. 51 of

1955 decided on February 11, 1957), Shri Krishan Kumar v/s

Union of India AIR 1959 SC 1390 (Criminal Appeal No. 114

of 1957 decided on May 21, 1959). Further, in Mahabir

Kishore v/s State of Madhya Pradesh (1989) 4 SCC 1 (Civil

Appeal No. 1826 (N) of 1974 decided on July 31, 1989 the

Hon'ble Supreme Court has held that "Enrichment may take the

form of direct advantage to the recipient such as by the receipt

of money or indirect one for instance where inevitable expense

has been saved.

30

12. Accordingly it was contended by the learned senior

counsel for SEBI that any gain made, loss averted or expense

saved by a person by contravention of the SEBI Act and

Regulations can be disgorged by SEBI. The impugned order

rightly directs Gagan Rastogi and Asia Texx to jointly disgorge

the sum of US$ 92 million as this was a wrongful gain made,

loss averted and expense saved by them as is evident from the

following:

"i) Asia Texx received US$ 92 million from

Cals purportedly for the purchase of

refinery machinery. However, Cals did

not receive any machinery from Asia

Texx despite making this payment. The

US$ 92 million was therefore clearly a

wrong gain made by Asia Texx.

ii) Alternatively, Asia Texx saved the

expense or averted the loss of providing

Cals with refinery machinery for which it

received US$ 92 million.

iii) Gagan Rastogi and Asia Texx also

received 25 million GDRs, using the 31

same US$ 92 million which constitutes a

wrongful gain."

13. It was further submitted by the learned senior counsel

that in SEC v/s A Shapiro, 494 F. 2d 1301 it has been held by

the US Court of Appeal that the reach of disgorgement would

include not only actual profit received but even "paper" profits. Similar view was held by this Tribunal in the matter of

Dushyant N. Dalal v/s SEBI 2010 SCC Online SAT 328 where

it speaks about an order of disgorgement on "notional profit" or

unrealized gains. Such a view was also held in SEC v/s

Commonwealth Chemical Securities Inc, 574 F. 2d 90. In

SEC v/s Contorinis 743 F. 3d 296, the disgorgement provision

was further extended when it was held that even the gains from

insider trading executed by a fund manager on behalf of a fund

could also be disgorged though it was not a personal gain of the

fund manager. Moreover, unjust enrichment may also be

prevented by requiring the violator to disgorge the unjust

enrichment he has procured for a third party. As such when

third parties have benefitted from illegal activity, it is possible

to seek disgorgement from the violator, even if that violator

never controlled the funds. The logic of this, as more fully

articulated above, is that to fail to impose disgorgement on such

violators would allow them to unjustly enrich their affiliates. 32

14. The crux of the rather extensive and elaborate

arguments and voluminous case law advanced by the learned

counsel for the appellants is that the appellants are not a

beneficiary of US $ 92 million allegedly transferred from the

account of Cals kept with Banco. According to the appellant it

is evident that no money has effectively come to the account of

the appellants since the transfer of funds from Cals account to

the account of Honor took place on the same day, March 27,

2009, through just account entries. The entry in the account of

the appellant Asia Texx was just like that, only an account

entry. Accordingly, the appellants did not revive any money

and made any unlawful gain in the absence of which no

disgorgement could have been ordered by SEBI.

15. We do not agree with the contentions of the appellants.

It is clear from the records that there was an agreement dated

February 05, 2009 between Cals and Asia Texx. It is important

to note that in this agreement for purchase and sale of "certain

processing units and/or equipment" for the oil refinery project

Asia Texx is described as the "owner" and Cals as the "buyer".

There is no record or evidence to show the contentions of Asia

Texx incorporated in May 2008 had such plants/ machinery in

its possession nor it even had any experience on oil refinery 33

matters. Despite receiving an advance of US$ 92 million the

agreement was never honoured by Asia Texx. Further, even if,

the transfer of funds by Cals was done as account entries on the

same day, March 27, 2009 it is clear that the funds were

transferred from Cals account to Asia Texx's account which in

turn got transferred to the account of Honor. If the appellants

had no role in the entire episode, it is inexplicable as to why the

appellant Asia Texx got 25 million GDRs of Cals from Honor

which was subsequently transferred to its beneficial owner

Gagan Rastogi (Appellant) free of cost. These transfer

documents show that the value of GDRs at the relevant time

was to the tune of US $ 92 million at US$ 3.68 per GDR.

16. In the context of the transaction between Cals and Asia

Texx the relationship between these parties need to be

emphasised. One of the arguments advanced by the appellants

is that they were arms length parties, though this was found to

be factually wrong and stated explicitly so in this Tribunal's

order dated October 12, 2017 (supra). Based on further records

made available now it is clear that before even December 2007

appellant Gagan Rastogi was very much part of Cals' promoter

group SRM as is clear from the Email dated June 13, 2006 from

Spice Jet (part of the SRM Group) confirming receipt of funds 34

to the tune of more than ` 8.08 crore from Gagan Rastogi and

allotting securities worth ` 8.33 crores leaving a balance of

` 24.75 lakhs in respect of SRM Exploration Pvt. Ltd., though

the shares of SRM is claimed to be credited to the appellant's

account on December 17, 2007, five days after the issue of GDR

by Cals. In the GDR listing particulars filed by Cals with

Luxembourg Stock Exchange on December 12, 2007 Gagan

Rastogi was shown as a shareholder of SRM Exploration Pvt.

Ltd. to the extent of 18.2%. Similarly, on December 17, 2007 at

06:39 a message was sent from Spice Energy (part of the SRM

Group) to Gagan Rastogi and few others whereby it was stated

that 'Mr. Gagan Rastogi has been designated as the Project

Leader' on the DRC Iron Ore Project'. All this prove a deep and

substantial engagement of Gagan Rastogi with the Spice

Energy/ SRM Group much earlier to the actual allotment of

shares of SRM Exploration Pvt. Ltd. claimed to be on

December 17, 2007. In any case, it is to be noted that the entire

process of allotment and of crediting shares to the tune of 33%

of the equity capital of the company (SRM Exploration) cannot

be done in a matter of 4 to 5 days as claimed by the appellant

that he became a promoter of SRM Group only subsequent to

the issue of Cals GDR on December 12, 2007 and that too after 35

the information that Cals GDR issue had been successfully

subscribed was furnished to the BSE Limited by Cals.

17. Appellants claim that they were not associated with the

GDR issue is untenable. An issue process is over only when the

proceeds from the issue is fully utilized as planned. GDR issue

is akin to an IPO or FPO, except that in this case of GDR it is

issued to investors abroad. In the case of IPO/FPO utilization of

proceeds are also monitored by SEBI and in case of violation

penal and remedial action are taken.

18. We agree with the submission (as well as the judgments

relied on by the appellants) that equitable remedy demands that

disgorgement has to be made from the point of unjust

enrichment or where the chickens come to roost. However, we

cannot accept the arguments that no such unjust enrichment has

been made by the appellants nor disgorgement has to be made

from where the unjust enrichment rests finally. If one entity

who has unjustly enriched knowingly transferring those

proceeds further to some other entity does not prevent the

authorities from disgorging the same from the original

beneficiary of unjust enrichment. The choice is clearly that of

the authority to pursue and disgorge an illegal gain from any 36

point of a chain, if such a chain exists. Tracing to the last point

of the chain is an exercise in futility and is not needed. When

the proof of unjust enrichment is right before the eyes of an

authority chasing the mirage of further transfers itself cannot be

supported.

19. In any case, apart from submitting that US $ 92 million

just got transferred from one account to another and to a third

party on the same day, appellants have no real explanation as to

how 25 million GDRs of Cals worth US $ 92 million has come

to rest on Asia Texx account and why it was further transferred

and that too free of cost to Gagan Rastogi. It is also on record

that Gagan Rastogi has sold a part of these GDRs, 2.8 million,

and received US$ 8.96 million in November 2011. This finding

and now admitted fact is against the stand of the appellants in

their reply to SEBI dated October 9, 2013 that neither him

(Gagan Rastogi) nor Asia Texx had ever converted a single

GDRs of Cals into equity shares and continue to hold the entire

25 million GDR. Therefore, it is clearly evident and admitted

that GDRs worth US $ 92 million was transferred by Honor to

the account of Asia Texx on March 26, 2009, who in turn

transferred the same to the account of Gagan Rastogi free of

cost on July 9, 2009. Accordingly, the money transferred from 37

the account of Cals to the account of Asia Texx got accrued to

Asia Texx and in turn to Gagan Rastogi in the form of 25

million GDR to the tune of the same value of US $ 92 million

with each GDR being worth US$ 3.68 at that time. Since the

amount involved was US $ 92 million which come into the

hands (account) of the Asia Texx and thereafter to Gagan

Rastogi this amount is unjust enrichment in their hands.

Therefore, direction to disgorge this amount jointly and

severally from the appellants as held in the impugned order does

not suffer from any legal infirmity.

20. Reliance placed by the appellants on various

judgements (supra) are distinguishable. Contentions regarding

restriction on Section 11B of SEBI Act, relying on Karvy Stock

Broking Ltd. v/s SEBI (Appeal No. 06, 2007 decided on May

02, 2008), is unfounded as there is nothing in Section 11B

which restricts SEBI from issuing directions which are also

penal in nature, if necessary. In any case disgorgement is not a

penal action but only an equitable remedy as held by this

Tribunal in Dushyant N. Dalal & Anr. (supra). The ratio of

Relfo Ltd. (in liquidation) (supra) is fully relevant in the present

matter since there is no reason at all for a tracing action. Rather,

such a tracing is not necessary here since it is evidently clear 38

from the records that US$ 92 million was transferred by Cals to

Asia Texx and Cals did not get back either this amount or the

refinery machinery. Asia Texx is, therefore, a direct recipient of

the amount of US$ 92 million. Similarly, reliance on Vodafone

International Holdings BV (supra), W T Ramsay Ltd. (supra)

etc. are in different context as those judgements are arising

under tax statute and interpretation of transactions in relevant

legal context and hence looking at such transactions as a

single/whole transactions where it may be difficult to apportion

different segment. In the facts of the present matter such

circular manoeuvring is not necessary as facts are quite linear

from the records before us. When the elephant is right in the

drawing room of the appellants this Tribunal does not have to

go for a round trip around the world looking for a needle in the

haystack. That would be not only selective blindness but

discarding clearly available evidence right before our eyes.

21. Reliance on Mafatlal Industries Ltd. (supra) also does

not help the appellants since the present matter satisfies the

conditions laid down by the Hon'ble Supreme Court in the

matter. It is very clear that Asia Texx/ Gagan Rastogi have

been unjustly enriched at the cost of Cals and its investors. Further, reliance on Sharad Birdhichand Sarda (supra) is also 39

of no help to the appellants as it is a criminal matter which

obviously needs proof beyond reasonable doubt. However, in

securities laws violations orders of the Hon'ble Supreme Court

in respect of SEBI v/s Kishore R. Ajmera (supra) and several

others has held that circumstantial evidence or preponderance of

probability is sufficient to prove such violations. In any case, in

the matter before us we hold that the appellants have made

unjust/ unlawful gains to the tune of US$ 92 million beyond any

doubt.

22. Given the circuitous scheme adopted by the appellants

using the proceeds of the Cals GDR issue and in making

unlawful gain the finding in the impugned order that the

appellants have violated Section 12A of SEBI Act and PFUTP

Regulations, 2003 cannot be faulted. For facility, the relevant

provisions of SEBI Act, 1992 and PFUTP Regulations, 2003 are

reproduced below:-

12A. No person shall directly or indirectly--

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or 40

dealing in securities which are listed or proposed to be listed on a recognised stock exchange;

(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;

3 (c) and (d) and Regulation 4(2)(f),4(2)(k) and 4(2)(r) of the PFUTP Regulations, 2003

3 Prohibition of certain dealings in securities No person shall directly or indirectly--

(a) ....

(b).....

(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;

(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

41

4. Prohibition of manipulative, fraudulent and unfair trade practices (1)...

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:--

(a)....

(b)....

(c)....

(d)....

(e)....

(f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities; (g) ... (h) ... (i) ... (j) ... (k) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors; (l) ... (m) ... (n) ... (o) ... (p) ... (q) ... (r) planting false or misleading news which may induce sale or purchase of securities. 42

23. The contention of the appellants that explanation to

Section 11B is not strictly adhered to in ordering disgorgement

in this matter does not have any merit. For convenience Section

11B is reproduced as follows:-

"11B. Power to issue directions.- Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,--

(i) in the interest of investors, or orderly development of securities market; or

(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or

(iii) to secure the proper management of any such intermediary or person, it may issue such directions,--

(a) to any person or class of persons referred to in section 12, or associated with the securities market; or

(b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market.

43 [Explanation.--For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.]"

The explanation to Section 11B of SEBI Act as given above

clearly states in unequivocal terms that SEBI always had the

power to direct any person who made profit or averted loss in

any transaction or activity in contravention of the provisions of

SEBI Act or Regulations thereunder and to disgorge an amount

equivalent to the wrongful gain made or loss averted by such

contravention. In the instant matter it is quite clear from the fact

that the appellants have made wrongful gain in terms of the US$

92 million received as advance from Cals since the Agreement

to supply refinery machinery was not implemented nor the said

amount was returned to Cals, by Asia Texx. US$ 92 million is

exactly the same amount of wrongful gain made which has been

directed to be disgorged by the entities who directly benefited 44

from the wrongful gains. Therefore, there is no conflict between

the explanation under Section 11B of the SEBI Act and what is

directed by the impugned order.

24. Order on Kokesh (Supra) also does not come to the help

of the appellants on several grounds. Firstly, in the Indian

context disgorgement is treated as an equitable remedy and not

as a penal provision and there are no limitations to the

application of provisions under SEBI Act. Secondly, in the

instant appeals it is clearly evident that the gain or unjust

enrichment made by the appellants only has been directed to be

disgorged. As such what is directed to be disgorged is a direct

gain to the appellants and no indirect gains are involved.

Thirdly, Kokesh was issued by applying limitation treating it as

a criminal penalty in the facts of that matter and this ratio is not

universally followed thereafter. This is evident when the

second circuit issued a Summary Order on August 29, 2017 in

Securities and Exchange Commission v. Metter (No. 16-526,

2017 WL 3708084 (2d Cir. Aug, 29, 2017) just a few months

after Supreme Court's order dated June 05, 2017 in Kokesh

(Supra). This clearly shows that Kokesh (Supra), even in the

US is inconclusive and clearly the spirit of Contorinis (Supra)

still prevails. (For a discussion on the subject see, Other 45

People's Money: SEC Disgorgement after Kokesh by Daniel R.

Walfish at wp.nyu.edu].

25. Argument of the appellant that the economic reality

needs to be considered while imposing penalty or directing

disgorgement etc. because the GDRs have declined in value

over time as the market conditions, including that of Cals, have

changed over the years. While on the face of it, it appears a

sound argument, such an argument cannot be accepted for

reason that if the economic conditions had changed positively

more than the unlawful gained could not be disgorged. Such an

approach would vitiate the very foundation of disgorgement as

an equivalent amount of unlawful gain to be disgorged which

itself is one of the defenses put forth by the appellants.

Therefore, changes in the economic conditions in the given

context has to be accepted as a business risk of the appellants,

not to be vitiated in the application of the legal principle on

disgorgement. Hence the submission of the appellants that they

are willing to surrender the remaining GDRs or the underlying

shares, instead of US$ 92 million cannot be accepted.

26. We also note that despite transferring US$ 92 million to

Asia Texx and Asia Texx neither returning this amount back to 46

Cals nor supplying plant and equipment to Cals, Cals has not

resorted to any legal action against Asia Texx. On the other

hand, even if the argument was accepted that Cals paid only a

part of agreed amount (US$ 92 million) and hence Asia Texx

could not honor that agreement by getting the plant and

machinery for US$ 290 million, Asia Texx also has not taken

any legal action against Cals for an unfulfilled agreement. There

is just a mention that appellants made (unsuccessful) efforts

through one Hardt Group in 2011, 2 years after the agreement

with Cals, through a novation agreement to purchase the

machinery. Apparently, both the parties are quite comfortable

with each other in simply ignoring millions of US$. Therefore,

the finding that the agreement between Cals and Asia Texx

dated February 05, 2009 is nothing but a scheme or artifice to

siphon off the funds of Cals for the unlawful gain of Gagan

Rastogi and Asia Texx, entities related to Cals stands fully

sustained. Here it is pertinent to reiterate that the appellant

Gagan Rastogi was a promoter of Cals through his 33%

holdings in SRM Exploration Pvt. Ltd. as well as being son of

Deep Rastogi, who was a Director of Cals at the relevant time.

27. Given the above facts and position of law we uphold

the impugned order. Both the Appeals are dismissed with no 47

orders on costs. Consequently, appellants are directed to jointly

and severally pay SEBI an amount of US$ 92 million, along

with simple interest at the rate of 6% per annum from March 27,

2009 till the date of payment, within 30 days from today.

28. In view of the dismissal of the appeals, Misc.

Application Nos. 206 of 2017 and 318 of 2017 have become

infructuous and the same are also dismissed as such.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 12.07.2019 Prepared & Compared By: PK