Milind Gandhi vs Sebi

Date of Decision: 23.03.2023

Misc. Application No. 260 of 2023 And Misc. Application No. 261 of 2023 And Appeal No. 277 of 2023

Milind Gandhi 1305-A Wing, Hubtown Sunmist, Sir Wadi, Andheri (East), Mumbai- 400 069 Maharashtra ...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. Abishek Venkataraman, Advocate with Mr. Pulkit Sukhramani, Ms. Vidhi Jhawar and Mr. Deepank Anand, Advocates i/b JSA, Advocates & Solicitors for the Appellant.

Mr. Vishal Kanade, Advocate with Mr. Manish Chhangani, Ms. Samreen Fatima and Mr. Sumit Yadav, Advocates i/b The Law Point for Respondent- SEBI.

CORAM: Justice Tarun Agarwala, Presiding Officer Ms. Meera Swarup, Technical Member

Per: Justice Tarun Agarwala, Presiding Officer (Oral) 2

1.

The present appeal has been filed against the order dated

December 21, 2022 passed by the Adjudicating Officer ("AO"

for convenience) of the Securities and Exchange Board of India

("SEBI" for convenience) imposing a penalty of Rs. 5 lakhs for

violation of Section 12A of the SEBI Act, 1992 read with

Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and

Unfair Trade Practices relating to Securities Market)

Regulations, 2003 ("PFUTP Regulations, 2003" for

convenience).

2. The facts leading to the filing of the present appeal is, that

a complaint was received on June 14, 2019 on the SCORES

platform alleging insider trading. SEBI accordingly instituted

an investigation and found that the Company Cox and Kings

Financial Service Limited ("the Company" for convenience) did

not present a true and fair view of its financial results.

3. Accordingly, a show cause notice dated June 14, 2019 was

issued against the appellant and six other noticees to show cause

as to why an enquiry should not be held and why a penalty

should not be imposed for misrepresenting the financial

statements of the Company for the quarter ending September

30, 2018 and quarter ending December 31, 2018. The show 3

cause notice also revealed that the misrepresentation and the

financial statements were detected in the quarter ending March

31, 2019 inspite of which there was misrepresentation of the

financials in the Information Memorandum which was issued on

March 13, 2019 and advertisement that was issued on March 29,

2019.

4. The AO after considering the material evidence on record

and after considering the replies of the noticees found that the

appellant and noticee no. 3 were the Chief Financial Officer and

were in-charge of the financial statements of the Company and

were also signatory to the Information Memorandum and

further failed to discharge their duties in ensuring that the

published financial statements were in accordance with the

applicable and notified accounting standards. The AO came to

a conclusion that the appellant did not present a true and fair

view of the affairs of the Company and accordingly violated

Section 12A of the SEBI Act read with Regulations 3 and 4 of

the PFUTP Regulations. The AO accordingly imposed a

penalty of Rs. 5 lakhs upon the appellant.

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5. We have heard Shri Abishek Venkataraman, the learned

counsel for the appellant and Shri Vishal Kanade, the learned

counsel for the respondent and have perused the records.

6. The show cause notice was issued to the appellant and six

other noticees. Noticees no. 1, and 2 were the Executive

Directors. Noticees no. 4, 5 and 6 were the Independent

Directors. Noticee no. 3 was the Chief Financial Officer in

whose tenure the second and the third quarter financial

statements were found to be incorrect. This Chief Financial

Officer whose name was Shailesh Pednekar resigned but

continued as the Executive Director in the Company.

7. The appellant was appointed as the Chief Financial Officer

on January 24, 2019.

8. The admitted position is, that the financial statement of the

second quarter ending September 30, 2019 was finalized by the

Board of Directors on October 30, 2018. Further, the financial

statement for the third quarter ending December 31, 2018 was

finalized on January 21, 2019 by the Board of Directors. The

financial statement of the second quarter and the third quarter

was finalized during the tenure of noticee no. 3 as the Chief 5

Financial Officer in which admittedly, the financial statements

were misrepresented and a true and correct pictures of the

financial was not depicted. The appellant was obviously not

involved in the preparation and misrepresentation of the

financials for the second quarter and the third quarter.

9. It has become on record that the misrepresentation was

detected by the Company in the fourth quarter ending March 31,

2019 during the period when the appellant was appointed as the

Chief Financial Officer on January 24, 2019. Pursuant to the

detection of the misrepresentation in the financials steps were

taken to rectify and the same was rectified and in the fourth

quarter ending March 31, 2019 and was approved by the Board

of Directors in April 2019.

10. Prior to the rectification and detection of the

misrepresentation the Information Memorandum was issued on

March 13, 2019 on the basis of the second quarter and third

quarter financial statement ending September 30, 2018 and

December 31, 2018. Obviously, the Information Memorandum

contained incorrect statements and the same was also found in

the advertisement which was published on March 29, 2019. 6

11. The AO has held the appellant to be responsible for the

misstatement of the financials in the Information Memorandum

and advertisement on the ground that he was the Chief Financial

Officer appointed on January 24, 2019 in the fourth quarter of

the year ending March 31, 2019. The AO came to the

conclusion that since the misstatement was detected by the

Company in the fourth quarter it was the duty and responsibility

of the appellant as Chief Financial Officer to present the correct

financial position of the Company in the Information

Memorandum and the advertisement that was issued under the

statutes.

12. In our opinion, the approach of the AO in holding the

appellant to be guilty is patently erroneous for the following

reasons:-

a) Admittedly, the appellant was not responsible for

the misstatements in the financial statement for

the quarter ending September 30, 2018 and

December 31, 2018 as the appellant was not the

Chief Financial Officer nor in employment of the

Company during that time.

b) There is no finding that the misrepresentation in

the financial statement was detected by the 7

Company before the issuance of the Information

Memorandum on March 13, 2019.

c) Further, the rectification of the financial statement

after detection was only finalized by the Board of

Directors in April 2019 but prior to that detection

the Information Memorandum was issued.

d) The Information Memorandum was issued on the

basis of the financials so stated in the financial

statement ending September 30, 2018 and

December 31, 2018.

13. Thus, we are of the opinion, that the appellant cannot be

fastened with the responsibility of presenting an incorrect

financial statement in the Information Memorandum.

14. We also find that the AO has given a finding that since the

appellant was a signatory to the Information Memorandum in

that event he is also responsible for the misrepresentation of the

financials of the Company. In our opinion, such an approach is

patently erroneous in as much as merely by being a signatory

does not entitle the respondent to fasten responsibility. There

has to be something more than just his signatures and in the

absence of any other evidence, the liability cannot be fastened 8

only on this ground. In this regard, this Tribunal in G V Films

Limited and Ors. vs. SEBI Appeal No. 1043 of 2022 decided

on January 06, 2023 held:-

"16. ...The Annual Report is approved by the Board of Directors and the Noticee no. 13 was only a signatory to the Annual Report. He, thus, cannot be found guilty of the charges..."

15. The said decision is squarely applicable in the instant

case. In addition to the aforesaid, we find that the AO has

exonerated the Executive and Independent Directors on the

ground that they were unaware for the misrepresentation of the

financial statement of the Company for the quarter ending

September 30, 2018 and December 31, 2018. We find that

these Directors were also signatories to the Information of

Memorandum but have been exonerated by the AO.

16. In view of the aforesaid, the impugned order cannot be

sustained in so far as the appellant is concerned and is quashed.

The appeal is allowed. In the circumstances of the case, parties

shall bear their own costs. The misc. applications are disposed

off accordingly.

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17. This order will be digitally signed by the Private Secretary

on behalf of the bench and all concerned parties are directed to

act on the digitally signed copy of this order. Certified copy of

this order is also available from the Registry on payment of

usual charges.

Justice Tarun Agarwala Presiding Officer

Ms. Meera Swarup Technical Member PRERNA Digitally signed 23.03.2023 by PRERNA MANISH MANISH KHARE PK Date: 2023.03.24 KHARE 16:47:46 +05'30'