Mr. Vinay Mehta vs Sebi

Date of Hearing : 18.08.2016 Date of Decision : 07.10.2016

Review Application No. 6 of 2016 In Appeal No. 301 of 2014

Mr. Vinay Mehta B 96/2, East of Kailash, New Delhi - 110 065. ..... Applicant (Org. 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. Gaurav Joshi, Senior Advocate with Mr. Ajai Achuthan, Advocate i/b Bharucha & Partners for the Applicant. Mr. Mihir Mody, Advocate with Mr. Saurabh Bachhawat, Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. for the Respondent.

CORAM : Justice J. P. Devadhar, Presiding Officer Jog Singh, Member

Per : Jog Singh

1.

Heard both the learned counsel for the parties on the question of review of

our order dated May 13, 2016.

2. By way of present review application, the applicant has sought the review

of our order dated May 13, 2016 on the ground that his submissions have not

been considered in the order dated May 13, 2016 by this Tribunal. It is true that

the certain paragraphs pertaining to the applicant's submissions and their

consideration have been inadvertently left out in our order dated May 13, 2016.

The following paragraphs may, therefore, be added in the relevant places in order

dated May 13, 2016.

2

PARA 1

1A. However, the appellant in Appeal No. 301 of 2014, has advanced some

additional submissions which are being dealt with below paragraph nos. 22 and

64.

PARA 22

22A. The case of the appellant in Appeal No. 301 of 2014 is that he was

appointed as Managing Director (MD) and Chief Executive Officer (CEO) of the

BRLM company i.e. Almondz Global Securities Ltd. (Almondz) in May 2006

because of his vast experience of having worked in various banks in different

high positions. However, the appellant submits that in the capacity of MD and

CEO of Almondz, he was only engaged in strategic growth of organization and

its subsidiaries by developing new businesses etc. The appellant contends that he

was not actively involved in the day to day affairs of the Almondz including the

due diligence aspect involved in the issuance of an IPO. According to the

appellant, it is the duty of the compliance officer of Almondz to ensure proper

compliance with the statutory requirements regarding true disclosures in the offer

documents. The appellant, therefore, submits that it is not the responsibility of

MD and CEO to ensure that the due diligence process was followed in the matter

of issuance of an IPO in question in accordance with the rules and regulations

prescribed by SEBI. In this context, the appellant places reliance on Regulation

28A of the ICDR Regulations. The appellant also contends that SEBI has erred

in holding that the appellant as the person in-charge was responsible for the

overall business of Almondz.

PARA 64

64A. We have also carefully considered the points urged by the appellant in

Appeal No. 300 of 2014. It is the admitted position that the appellant was the

MD and CEO of Almondz at the relevant time when the IPO of a company, 3

namely, PGIL was issued by Almondz acting as the BRLM for the IPO in

question. It was, therefore, the duty of the appellant to ensure proper compliance

with the legal norms to be adhered to by the officers of his own company i.e.

Almondz. The appellant cannot pass on his responsibility merely by contending

that Regulation 28A of the ICDR Regulations does not refer to MD and CEO but

it talks of a compliance officer to monitor various compliance of the rules and

regulations framed by SEBI particularly in the matter of bringing out an IPO by a

merchant banker. In this connection, it is pertinent to note that Section 27(1) of

the SEBI Act, 1992 clearly provides that "27(1): Where an offence under this

Act has been committed by a company, every person who at the time the offence

was committed was in charge of, and was responsible to, the company for the

conduct of the business of the company, as well as the company, shall be deemed

to be guilty of the offence and shall be liable to be proceeded against and

punished accordingly:

Provided that nothing contained in this sub-section shall render any such person

liable to any punishment provided in this Act, if he proves that the offence was

committed without his knowledge or that he had exercised all due diligence to

prevent the commission of such offence."

64B. On an analysis of section 27(1) of the SEBI Act, it emerges that the said

section can be broken into the following ingredients:

a "offence has been committed by a company": The Order dated May 13,

2016 passed by this Tribunal holds the company, Almondz, guilty under

the Act viz. the non-disclosure of material information in the offer

documents.

b "every person who at the time the offence was committed was in charge of

and was responsible to the company for the conduct of the business of the

company": It is a fact that Mr. Vinay Mehta was, at the time of the

commission of the offence by Almondz, in charge of and responsible to 4

the company for the conduct of the business of Almondz by virtue of

being its Managing Director and Chief Executive Officer.

c "as well as the company": As stated above, the company Almondz was

also held guilty of non-disclosure.

d "shall be deemed to be guilty of the offence and shall be liable to be

proceeded against and punished accordingly".

e "Provided that nothing contained in this sub-section shall render any

such person liable to any punishment provided in this Act, if he proves

that the offence was committed without his knowledge or that he had

exercised all due diligence to prevent the commission of such offence":

The proviso to the section stipulates two situations in which an officer

may not be held liable for the contravention of the company in question.

One is if the officer proves that the offense happened without his

knowledge and second that the officer exercised due diligence to prevent

the contravention. It is the Appellant's responsibility to prove the

existence of one of the two aforementioned situations.

From the foregoing analysis, it is borne out that the appellant herein cannot

escape liability by trying to distance himself from the conduct of Almondz.

64C. It is difficult to believe the argument of the appellant that he had no

knowledge about any due diligence conducted for the IPO of BGIL, or for that

matter any IPO. The judgment of Hon'ble Supreme Court in the case of [Sunil

Bharti Mittal vs. CBI reported in 2015 (4) SCC 609] is not attracted to the

present case for the simple reason that appellant is not being prosecuted for any

criminal act or criminal conspiracy. The impugned order seeks to hold the

appellant responsible, alongwith compliance officer as well as other directors and

the company itself, for breach of ICDR Regulations in the matter of lack of due

diligence and untrue and insufficient disclosures in the offer documents by the

Almondz in respect of the IPO of BGIL. Similarly, the case of [SMS 5

Pharmaceutical Ltd. vs. Neeta Bhalla reported in (2005) 8 SCC 89] does not

help the case of the appellant. In SMS Pharmaceutical Ltd, the Hon'ble Supreme

Court has held that the liability of the director may arise on account of omission

as well. The controversy related to the prosecution launched against the officers

of that company under Sections 138 and 141 of the Negotiable Instrument Act,

1881. The appellant has not brought on record anything to show that as the MD

and CEO, he was not an officer responsible for conducting affairs of his own

company, namely, Almondz of which he was not only the MD but was also

CEO. At this stage, it is pertinent to note that in the case of N. Narayanan vs.

SEBI reported in 2013 (12) SCC 152, it was argued on behalf of the Directors

that role of each director being confined to his field of operation, holding

appellant directors responsible is not justified, for they do not have expertise or

knowledge of intricacies of accounts and finance or sit in judgment over decision

of auditors. The Hon'ble Supreme Court repealed this contention urged on

behalf of the directors by observing that the directors are expected to exercise

their powers on behalf of company with atmost care, skill and diligence. Para 31

of the said judgment is relevant for the present purposes and reproduced

hereinbelow for ready reference :-

"31. A company though a legal entity cannot act by itself, it can act only through its Directors. They are expected to exercise their power on behalf of the company with utmost care, skill and diligence. This Court while describing what is the duty of a Director of a company held in Official Liquidator v. P.A. Tendolkar that : (SCC p. 620, para 45)

"45 ...... A director may be shown to be so placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of a Company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially."

Therefore, we have no hesitation in upholding the finding of SEBI qua the

appellant that as MD and CEO of Almondz he failed in his duty to ensure that 6

there was proper and strict compliance with the regulatory norms prescribed by

SEBI in the matter in hand. Since we have already held that the company and

the other directors have undergone excessive punishment of debarment of about

four and half years as compared to the violation in question, we also hold in the

case of the appellant in Appeal No. 301 of 2014 that the remaining punishment

imposed in impugned order should also be quashed and the appeal should be

partly allowed. Ordered accordingly.

3. Accordingly, registry is directed to incorporate paragraphs 1A, 22A and

64A, 64B and 64C after paragraphs 1, 22, 64 respectively, and issue a fresh copy

of the order dated May 13, 2016 to all the parties accordingly.

4. Accordingly, the review application is disposed of.

Sd/-

Justice J. P. Devadhar Presiding Officer

Sd/-

Jog Singh Member 07.10.2016 Prepared & Compared by PTM