Miscellaneous Order in respect of Application made by Ms. Kumkum Agarwal in the matter of ABG Shipyard Ltd

WTM/MPB/EFD-1-DRA-III/115A/2020 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: MADHABI PURI BUCH, WHOLE TIME MEMBER Miscellaneous Order In respect of Application made by Ms. Kumkum Agarwal in the matter of ABG Shipyard Ltd.

Background 1. Securities and Exchange Board of India (“SEBI”) passed a final order dated March 24, 2020 in the matter of ABG Shipyard Ltd. wherein inter alia, Second Land Developers Pvt. Ltd., Mr. Rishi Agarwal and Mr. Kamlesh Kumar Agarwal were prohibited from buying, selling or otherwise dealing in securities. In view of the prohibition on sale of securities, during the period of restraint, the existing holding, including units of mutual funds of the aforesaid entities were also frozen. 2. Pursuant to the passing of final order, Ms. Kumkum Agarwal (“Applicant”) who is the wife of Mr. Kamlesh Kumar Agarwal challenged the aforesaid final order before the Hon’ble Securities Appellate Tribunal (“SAT”) as she was aggrieved that mutual fund units in which she is the primary holder and her husband is the second joint holder, were also frozen. Hon’ble SAT vide its Order dated October 20, 2020, directed the applicant to make an application before SEBI for the same. Reply & Hearing 3. Subsequent to the Hon’ble SAT order, the applicant vide her application dated October 24, 2020, inter alia, submitted that she has been purchasing mutual funds from time to time and currently has mutual fund units worth Rs. 40.50 lakh. Contesting that all the mutual fund units bought from her own funds, she prayed that her mutual fund folios should be unfrozen. 4. The applicant was granted an opportunity of hearing on October 29, 2020 vide an email dated October 26, 2020. In response to the same, the applicant vide her letter dated October 27, 2020, inter alia, submitted her bank statements, Form 16 for the Order in respect of Application made by Ms. Kumkum Agarwal in the matter of ABG Shipyard Ltd.

FY 2014-15 to FY 2018-19 and ITR for FY 2009-10 to FY 2018-19. 5. At the time of hearing, the authorized representative of the applicant reiterated the submissions made previously and also submitted that the applicant had capital gains in the year 2007-08 to the tune of approximately Rs. 3.3 crore which were invested in fixed deposit and mutual fund units. The applicant was granted time till November 3, 2020 to submit bank statements for the relevant financial years along with demat statement in support of her submission. The applicant vide her letter dated November 2, 2020, submitted the documents as available with her. Consideration & Findings 6. I have considered the submissions of the application and materials available on record including the final order. On perusal of the same, the following issues arise for consideration. 6.1. Whether the applicant had independent sources of income / funds for purchase of mutual fund units worth Rs. 40.50 lakh which are under freeze? 6.2. If the applicant had independent sources of income / funds, what directions, if any, should be issued in the matter?

Issue No. 1- Whether the applicant had independent sources of income / funds for purchase of mutual fund units worth Rs. 40.50 lakh which are under freeze? 7. I note from the submissions of the applicant that impugned mutual fund units bought by her, can be divided into two categories: 7.1. Investment of Rs. 30 lakh in 3 mutual funds on December 29, 2017. 7.2. Investment of Rs. 10.50 lakh in various ELSS schemes of mutual funds from FY 2011-12 to FY 2018-19. Investment of Rs. 30 lakh 8. With respect to the investment of Rs. 30 lakh, the applicant has submitted that the same are from the proceeds of a fixed deposit made on December 17, 2016 which matured on December 20, 2017. The source of money for the said fixed deposit, as per applicant’s submission is the gain made by her in the year 2007-08 invested in earlier fixed deposits from time to time. She submitted that she used to regularly invest her surplus funds in fixed deposits and units of mutual funds from time to time. To these submissions, the applicant later on added that she has been earning for a long time. 9. In view of the above submission it needs to be tested whether the source of funds for the fixed deposit dated December 17, 2016 is directly or indirectly from the capital gains of 2007-2008.

In order to ascertain this, I proceed to examine the trail of capital gains to the date of fixed deposit dated December 17, 2016. 10. It is observed from the details of long term capital gains submitted by the applicant that she had purchased 5,905 shares of Orissa Manganese & Minerals Pvt. Ltd. in the year 1970-71 at Rs. 10/- per share. At the time of sale in April, 2007, the capital gain was Rs. 3,10,89,234/-. The applicant has submitted that since the investment was made in the year 1970-71, she does not have relevant documents to support her purchase. 11. In view of applicant’s submission, the bank account of the applicant (HDFC bank A/c No.- 00051000074637) was examined. It is noted that on April 9, 2007, there is a credit of Rs. 3,14,14,600/- in the bank account of applicant being the capital gain. Further, the bank account shows a credit of Rs. 89,00,412/- from the redemption proceeds of two mutual funds on May 24, 2007. These two amounts thus, totals to Rs. 4,03,15,012. Thereupon, from the total sum of Rs. 4,03,15,012/-, the applicant invested Rs. 2.95 crore in fixed deposit on June 1, 2007 and Rs. 1.05 crore were invested in three mutual funds on May 18, 2007. 12. With respect to the fixed deposit made on June 1, 2007, it is observed that the said fixed deposit matured on August 19, 2007. The maturity amount was Rs. 3,02,07,935/-.

Out of the maturity amount, a sum of Rs. 3 crore was again invested in a fixed deposit on September 3, 2007. This fixed deposit was prematurely encashed and withdrawn on December 26, 2007 and on January 4, 2008. As per narration in the bank statement, on January 4, 2008, a sum of Rs. 2.5 crore was withdrawn by the applicant. The description read as follows: “RTGS OF KUMKUM AGARWAL”.

13. It is observed from the bank statement of the applicant that post January 4, 2008 when the fixed deposit was prematurely encashed and withdrawn, the applicant has next invested in a fixed deposit on October 18, 2016, a sum of Rs. 30 lakh. Thus, it is noted from the bank statement that the fixed deposits that were made from the proceeds of capital gain in the FY 2007-08 were completely encashed and withdrawn by January 4, 2008. The bank balance post premature encashment and withdrawal of Rs. 2.5 crore on January 4, 2008 was Rs. 41,02,675/-. This bank balance of approximately Rs 41 lakh had become Rs 2,40,851/- by the end of the FY 2007-08. Post January 4, 2008, there were 6 debits and 1 credit transaction in the bank account of the applicant. The credit transaction was fund transfer from Tagus Engineering Pvt. Ltd., hence, it has nothing to do with the proceeds of capital gain. Out of the 6 debit transactions only 1 debit transaction was for investment in mutual fund and the rest were fund transfers. Thus, from the aforesaid discussion it can be seen that the proceeds of fixed deposits which were made out of proceeds of capital gain were withdrawn by the applicant on January 4, 2008. Hence, it is observed that the source of fixed deposit made on December 17, 2016 was not the funds generated from the fixed deposits made from the proceeds of capital gain. 14. The next issue which needs to be addressed is the status of the 3 mutual funds investment made by the applicant from the proceeds of capital gain May 18, 2007. It is observed from the bank statement that a sum of Rs. 1.05 crore was invested in 3 mutual funds as follows: AIG India Equity Fund – Rs. 40 lakh, ICICI Prudential Infrastructure Fund – Rs. 30 lakh and HDFC Mid-Cap Opportunities Funds – Rs 35 lakh. The proceeds from the first two mutual funds were credited in the bank account on November 7, 2008 while the proceeds from HDFC mutual fund was credited on January 20, 2009. Prior to November 7, 2008, the closing balance in the bank account was approximately Rs. 10.92 lakh. It is noted that in this Rs. 10.92 lakh, dividend income from ICICI mutual fund was approximately Rs. 8.30 lakh. Subsequent to the credit of proceeds of Rs 59,62,895/- from the 3 mutual funds, the closing balance in the bank account was approximately Rs. 70.86 lakh on January 20, 2009.

15. Now it has to be determined whether Rs. 70.86 lakh is the source of the fixed deposit made on December 17, 2016. It is seen from the bank statement of the applicant that post January 20, 2009, there is a debit transaction of Rs 1 lakh which was invested in Birla mutual fund on March 26, 2009. Post this debit transaction, there are 2 credit transactions on April 1, 2009 and April 13, 2009, of a total amount of approximately Rs. 33.54 lakh. Thus, the closing balance on April 13, 2009, is approximately Rs. 1.03 crore. It is observed that out of Rs. 33.54 lakh, a sum of Rs 33 lakh has come as a credit transaction from Kotak mutual fund by way of partial redemption. It may be noted that the investment in Kotak mutual fund is not from the proceeds of capital gain. (Investment of Rs 1 crore in Kotak mutual fund was made on September 20, 2008. The closing balance in applicant’s bank account as on July 31, 2008 was approximately Rs. 55 lakh. Subsequently, a deposit of Rs. 1.3 crore was made on August 2, 2008. Thus, the closing balance post the aforesaid deposit was approximately Rs. 1.9 crore. The next two debits in the bank account are that of Rs. 83.55 lakh (approximately) for foreign currency conversion (GBP) on August 4, 2008 and the other was on September 20, 2008 for investment in Kotak mutual fund for Rs. 1 crore.) On April 15, 2009, approximately a sum of Rs. 94.21 lakh was debited for the purpose of conversion to GBP. Considering there was partial redemption from Kotak mutual fund immediately before the aforesaid foreign currency conversion, a benefit of doubt can be given to the applicant that Rs. 33 lakh was redeemed for the sole purpose of the foreign currency conversion. In other words, out of the mutual funds proceeds which were made out of capital gain, which is Rs. 70.86 lakh, approximately Rs. 61 lakh was used for the foreign currency conversion. Thus, approximately Rs 9 lakh is left from the mutual funds proceeds. 16. On further perusal of the bank statement, it is noted that the aforesaid sum of approximately Rs 9 lakh was carried forward by the applicant till February 14, 2010. On February 15, 2010, a sum of Rs 6 lakh was withdrawn by the applicant through RTGS. The remaining approximately Rs 3 lakh was carried forward by the applicant and the next investment made by her, is of Rs 1 lakh each on 3 occasions in March 2012, 2013 and 2014.

17. In view of the aforesaid discussion, it can be said that the proceeds of mutual funds (3 in nos.: AIG India Equity Fund, ICICI Prudential Infrastructure Fund and HDFC Mid-Cap Opportunities Funds) which were purchased from the capital gain made in the year 2007-08, were either redeemed or were invested prior to the investment in the fixed deposit made on December 17, 2016. Thus, it is observed that the source of the fixed deposit made on December 17, 2016 were not the proceeds of the aforesaid 3 mutual fund schemes. 18. Therefore, the question further arises is on the basis of material available on record, whether the applicant has her own source of funds other than the proceeds of capital gain in 2007-08 for the fixed deposit made on December 17, 2016. 19. It is observed from the bank statement of the applicant, she had invested Rs. 30 lakh in a fixed deposit on December 17, 2016. Prior to December 17, 2016, her closing balance on November 28, 2016 was approximately Rs. 19.20 lakh. Subsequently a deposit of Rs. 25 lakh was made by ABG International Pvt. Ltd. on December 1, 2016. On a query raised to the applicant as to the nature of the deposit, the applicant stated that it was the part of the loan given by the applicant to ABG International Pvt. Ltd. As per the applicant, a loan of Rs. 58 lakh was given by her to ABG International Pvt. Ltd. on July 26, 2013 which was substantially returned to her on July 5, 2016 and on December 1, 2016. It is noted from the bank statement that the applicant has partially redeemed her investment in Kotak mutual fund to the tune of approximately Rs. 55.93 lakh which was credited on the same day when the loan was given by the applicant to ABG International Pvt. Ltd. i.e., on July 26, 2013. Going back further, it is observed that the applicant’s bank account was debited for Rs 1 crore on September 20, 2008 for the investment made in Kotak mutual fund.

Thus, on the basis of current materials, there is a reasonable basis for stating that loan was given by the applicant from her assets. 20. With respect to the closing balance of approximately Rs. 19.20 lakh as on November 28, 2016 in the bank account of applicant is concerned, it is observed that the applicant has been getting monthly salary credit of approximately Rs. 89,000/- from Agbros Glass Works (India) Pvt. Ltd. from April, 2014 onwards. This along with other credits in the form of credit interest capitalisation and dividend payout makes the bulk of Rs. 19.20 lakh. 21. In view of the aforesaid discussion, it can be observed that the proceeds of capital gain made by the applicant in the year 2007-08 which were invested in fixed deposits and mutual funds, were redeemed by the applicant in subsequent years. The last of which, as per available records was in the month of March, 2014. However, because of applicant’s other source of income i.e., salary, credit interest capitalisation and dividend payout, the applicant had adequate bank balance to invest in the fixed deposit made on December 17, 2016. Thus, it is observed that the source of funds for the fixed deposit made by the applicant on December 17, 2016 is her own.

ELSS Investments of Rs. 10.5 lakh 22. The applicant has submitted that she has been regularly making ELSS investment from the FY 2011-12 to FY 2018-19 in various mutual funds. She has submitted her bank statements and ITR to substantiate her claim. 23. With respect to the ELSS investment made in the FY 2011-12 to FY 2013-14, it has been noted in preceding paragraph 16, that the applicant had the requisite money in her bank account to make the investments. Further, the same is also corroborated from the ITRs for the respective financial year which shows that her total income during that period was more than her investment amount. 24. For the ELSS investment made from FY 2014-15 to FY 2018-19, it is seen from the Form 16 of the applicant for the said financial years that her total salary is Rs 12 lakh per annum. The same coupled with the closing bank balance prior to her investment shows that the applicant had her own funds to invest in ELSS schemes of various mutual funds. 25. It would be appropriate to make a remark here, for the determination of the issue on hand, that what is relevant is not only the total earning over a period of time for which the tax is paid, it is also relevant to see whether the applicant had the funds from her own sources of income at the relevant time of purchase of impugned mutual funds after taking into account the expenditure incurred from her own sources of income.

Issue No. 2: If the applicant had independent sources of income / funds, what directions, if any, should be issued in the matter? 26. It is observed that the applicant is not a party to the final order and based on the aforesaid discussion, as per material made available on record, it is also noted that the mutual fund units worth Rs. 40.50 lakh were bought from her own funds / income. Thus, considering the facts and circumstance of the matter, an appropriate direction has to be given to release the mutual fund folios wherein the applicant is the primary holder and the units were bought from her own funds / income. Order 27. In facts and circumstances of the case, I, in exercise of the powers conferred upon me in terms of Section 19 read with Sections 11(1) and 11B(1) of the SEBI Act, issue the following direction: 27.1. The mutual fund folios mentioned in the table below wherein Ms. Kukkum Agarwal (PAN: ABRPA1393C) is the primary holder shall be unfrozen from the date of this order: Sl. No. Mutual Fund Scheme Folio No. 1 Aditya Birla Sun Life Tax Relief’96 Fund Growth - Regular 1036467017 2 Aditya Birla Sun Life Equity Hybrid’95 Fund Growth – 1036467017 Regular Plan 3 Axis Long Term Equity Fund Regular Dividend 90416006515 4 DSP Tax Saver Fund Regular Plan - Growth 4161307/76 5 HDFC Tax Saver Regular Plan - Growth 4010848/15 6 HDFC Hybrid Equity Fund Regular Plan - Growth 4010848/15 7 ICICI Prudential Long Term Equity Fund (Tax Saving) - 2650469/71 Dividend 8 ICICI Prudential Equity & Debt Fund - Growth 2650469/71

28. The above direction shall take effect immediately. 29. A copy of this order shall be served upon Ms. Kumkum Agarwal and Registrar and Transfer Agents for necessary action and compliance with the above directions.

Sd/-

DATE: November 09, 2020 MADHABI PURI BUCH PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA