Mr. Madhukar C. Sheth vs Sebi

Date of Decision: 28.09.2016

Appeal No. 457 of 2015

Mr. Madhukar C. Sheth 603, Elizabeth Apts., BSM Road, Elphinstone Mumbai- 400 013 ...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. Malkan, Advocate for the Appellant.

Mr. Aditya Chitale, Advocate with Mr. Tomu Francis, Advocate for the Respondent.

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

Per: Justice J.P. Devadhar (Oral)

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 August 31, 2015. By the said order penalty of ` 13

lac is imposed on the appellant under Section 15A(b) of the Securities

and Exchange Board of India Act, 1992 ("SEBI Act" for short), out of

which penalty of ` 6,50,000 is imposed for violating regulation 7(1) read

with regulation 7(2) of the Securities and Exchange Board of India

(Substantial Acquisition of Shares and Takeovers) Regulations, 1997

("SAST Regulations, 1997" for short) & regulation 13(1) of the 2

Securities and Exchange Board of India (Prevention of Insider Trading)

Regulations, 1992 ("PIT Regulations" for short) and penalty of

` 6,50,0000 is imposed for violating regulation 13(3) read with

Regulation 13(5) of the PIT Regulations.

2. In the impugned order, penalty is imposed on the appellant

basically on ground that the appellant had acquired and sold shares of

Fact Enterprise Limited ("Target Company" for convenience) in the year

2008 & 2010 respectively which were in excess of the limits prescribed

under regulation 7(1) read with regulation 7(2) of the SAST Regulations,

1997/ regulation 13(1) of PIT Regulations, as a result whereof disclosure

provisions contained in the said regulations got triggered. Since the

appellant failed to make disclosures as contemplated under those

provisions and also the appellant failed to make disclosures as

contemplated under regulation 13(3) read with regulation 13(5) of the

PIT Regulations, proceedings were initiated against the appellant and by

the impugned order penalty of ` 13 lac is imposed on the appellant.

3. Counsel for the appellant fairly stated that the acquisition/ sale of

shares of the Target Company by the appellant were in excess of the

limits prescribed under regulation 7(1) of the SAST Regulations, 1997/

regulation 13(1) read with 13(3) of the PIT Regulations and that the

appellant has not made disclosures as contemplated under those

provisions. It is also admitted by the counsel for the appellant that no

disclosures have been made by the appellant as contemplated under

regulation 13(3) read with regulation 13(5) of the PIT Regulations. 3

4. Inspite of the fact that there is violation of the provisions contained

in the SAST Regulations, 1997 and PIT Regulations, counsel for the

appellant submitted that the penalty imposed on the appellant by the

impugned order cannot be sustained for the following reasons:-

a) Impugned violation took place in the year 2008/2010

whereas show cause notice was issued belatedly on

February 28, 2014 and the impugned order is passed

belatedly on August 31, 2015 and hence, in view of

inordinate delay in initiating proceedings against the

appellant, the penalty imposed against the appellant

deserves to be deleted.

b) Substantial shares of the Target Company acquired by

the appellant were by way of pledge and pledged

shares do not trigger the disclosure requirements.

c) Alternatively, it is submitted that penalty imposed on

the appellant is exorbitant, excessively high and the

said penalty has been imposed without considering the

mitigating factors set out under Section 15J of the

SEBI Act.

5. We see no merit in the aforesaid contentions.

4

6. It is not in dispute that acquisition and sale of shares of the Target

Company were in excess of the limits prescribed under regulation 7(1) of

the SAST Regulations, 1997 and regulation 13(1) of the PIT Regulations

and hence disclosure obligations specified under those regulations got

triggered. Admittedly, the appellant has failed to make disclosures as

stipulated under those provisions. It is also admitted that the appellant

has failed to make disclosures as contemplated under regulation 13(3)

read with regulation 13(5) of the PIT Regulations. Where a person

violates the provisions contained in the Regulations framed by SEBI then

that person is inter-alia liable for monetary penalty as stipulated under

SEBI Act.

7. Argument of the appellant that inspite of the violations committed

by the appellant, no penalty could be imposed on the appellant, because

the proceedings have been initiated after several years from the date on

which violations took place is without any merit. Neither the SEBI Act

nor the Regulations framed thereunder stipulate that proceedings for

imposing penalty must be initiated within a specified time from the date

on which violations are committed. It is not the case of the appellant that

in the present case, SEBI was aware of the violations committed by the

appellant long back and inspite of the knowledge above violations, SEBI

initiated penalty proceedings belated on February 28, 2014. In these

circumstances, argument of the appellant that the proceedings have been

initiated belatedly and, therefore, penalty deserves to be deleted cannot

be sustained.

5

8. Argument advanced on behalf of the appellant that substantial

shares of the Target Company were acquired by the appellant under a

pledge and disclosure provisions would not apply to the pledged shares is

equally without any merit. Findings recorded in the impugned order is

that the appellant had not acquired the shares under a pledge by following

the procedure prescribed under regulation 58 of the SEBI (Depositories

and Participants) Regulations, 1996 ("DP Regulations" for short) and in

fact the pledged shares were transferred to the demat account of the

appellant. Once the shares are transferred to the demat account of the

appellant, the appellant becomes absolute owner of the said shares with

all the benefits attached to those shares. In such a case, appellant is

bound and liable to make disclosures especially when such acquisitions

are in excess of the limits prescribed under the respective regulations.

Since the appellant has failed to make disclosures, appellant cannot

escape penal liability.

9. Argument of the appellant that the penalty imposed against the

appellant is exorbitant and excessively high and that the said penalty has

been imposed without considering the mitigating factors set out under

Section 15J of the SEBI Act is also without any merit. Penalty imposable

for violating regulation 7(1) read with regulation 7(2) of the SAST

Regulations, 1997/ regulation 13(1) of the PIT Regulation, under Section

15H(ii) of the SEBI Act is ` 1 lac per day up to a maximum of ` 1 crore.

Similarly for failure to comply with regulation 13(3) read with regulation

13(5) of the PIT Regulations the penalty imposable is ` 1 lac per day up

to maximum of ` 1 crore. In the present case, since the disclosures were 6

not made the penalty imposable for violating regulation 7(1) read with

7(2) of the SAST Regulations, 1997/ regulation 13(1) of the PIT

Regulations would be ` 1 crore and for violating regulation 13(3) read

with regulation 13(5) of the PIT Regulations the penalty imposable

would be ` 1 crore. Thus, as against the penalty of ` 2 crore imposable

against the appellant, the AO of SEBI after taking into consideration all

mitigating factors has imposed penalty of `13 lac which cannot be said to

be excessively high or exorbitant.

10. 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/-

Jog Singh Member

Sd/-

Dr. C.K.G. Nair Member 28.09.2016 Prepared & Compared By: PK