Nirmal Singh Bhangoo vs Sebi

Order Reserved on: 12.6.2017 Date of Decision : 22.6.2017

Appeal No.94 of 2015 Nirmal Singh Bhangoo Farm No.2, Creative Farm, Near Parkland Retreat, Silveroak Lane, Satbari, South Delhi, Delhi - 110074. ...Appellant

Versus

The Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent

Mr. Sameer Rohatgi, Advocate with Mr. Prakash Shah and Mr. Robin Shah, Advocates i/b. Manish Jain, Advocate for the Appellant.

Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody, Mr. Nirav Parmar and Mr. Nishant Upadhyay, Advocates i/b. K. Ashar & Co. for the Respondent.

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

Per : Justice J.P. Devadhar

1.

Appellant is aggrieved by the order passed by the Whole Time Member

('WTM' for short) of the Securities and Exchange Board of India ('SEBI' for short)

on 22nd August, 2014. By the said order PACL Ltd and its present and past directors

including the appellant have been held guilty of running Collective Investment

Scheme ('CIS' for convenience) in contravention of Securities and Exchange Board

of India Act, 1992 ('SEBI Act' for short) and Securities and Exchange Board of India

(Collective Investment Schemes) Regulations, 1999 ('CIS Regulations, 1999' for

short). By the said order, PACL Ltd. and its present directors have been directed to

wind up all the existing CIS and refund the monies collected from the investors with

promised returns. Moreover, the present and past directors including the appellant 2

have been restrained from accessing the securities market and prohibited from

buying, selling or otherwise dealing in the securities market till all the Collective

Investment Schemes of PACL Ltd. have been wound up and all the monies mobilised

through such schemes have been refunded to the investors with returns which were

due to them. Present appeal is filed by the appellant to challenge the direction issued

against the appellant as a past director of PACL Ltd.

2. Appellant was a director of PACL Ltd. during the period from 3rd June, 1996

to 3rd February, 1998. During the said period PACL Ltd had floated certain schemes

under which amounts were collected from investors with promised returns. Even

after the appellant ceased to be a director of PACL Ltd., various schemes were

floated by PACL Ltd and huge amounts were collected.

3. All the schemes run by PACL Ltd. from 1996 onwards were considered by

SEBI to be CIS and accordingly proceedings were initiated against PACL Ltd. and its

present and past directors including the appellant. On completion of the proceedings,

impugned order was passed on 22.8.2014 holding that PACL Ltd and its present and

past directors including the appellant have violated Section 12 (1B) of SEBI Act read

with Regulations 5, 68 and 69 of CIS Regulations, 1999 and accordingly several

directions have been issued against them under the SEBI Act.

4. Challenging the decision of SEBI dated 22.8.2014, PACL Ltd and its present

directors had filed appeals before this Tribunal and all those appeals have been

dismissed by this Tribunal on 12.8.2015. Thus, the decision of SEBI that PACL Ltd

and its present directors have violated Section 12(1B) of SEBI Act read with

Regulations 5, 68 and 69 of CIS Regulations, 1999 has been upheld by this Tribunal.

5. Present appeal filed by the appellant however, was not heard alongwith other

appeals, because of the contention raised by the appellant that he ceased to be director

of PACL Ltd even before the CIS Regulations, 1999 framed by SEBI came into force 3

on 15.10.1999 and therefore the appellant could not be said to have violated the CIS

Regulations, 1999.

6. Counsel for the appellant submitted that as a director, the appellant was not

involved with the day to day management and was merely carrying out his role as an

advisor and therefore, for the violations committed by PACL Ltd and its present

directors the appellant could not be held guilty of violating SEBI Act and the CIS

Regulations, 1999. Moreover, the schemes run during the tenure of the appellant as

director have already been closed and no outstanding liability existed on those

schemes. In these circumstances, it is submitted that SEBI is not justified in issuing

directions against the appellant. Apart from the above, it is submitted, that the

appellant could not be said to have violated the CIS Regulations, as the appellant

ceased to be director of PACL Ltd, even before CIS Regulations came into force.

7. Relying on a decision of the Apex Court in case of SEBI vs. Gaurav Varshney

reported in (2016) 14 SCC 430 counsel for the appellant submitted that since PACL

Ltd has been treated by SEBI to be an existing CIS, as held in the case of Gaurav

Varshney, the appellant who had ceased to be director of PACL Ltd even before CIS

Regulations came into force ought not to have been held guilty of violating the SEBI

Act and the CIS Regulations, 1999. Accordingly, counsel for the appellant submitted

that the directions issued against the appellant be quashed and set aside.

8. Counsel for SEBI, on the other hand, submitted that admittedly, appellant was

a director of PACL Ltd when some of the CIS were floated and run by PACL Ltd.

Since CIS was floated without obtaining registration from SEBI as stipulated under

Section 12(1B) of the SEBI Act which came into force with effect from 25.1.1995,

PACL Ltd and its directors including the appellant have been held guilty of violating

Section 12(1B) of SEBI Act read with Regulations 5, 68 and 69 of CIS Regulations.

As the decision of SEBI has already been upheld by this Tribunal qua PACL Ltd and

its present directors it is submitted that the present appeal is liable to be dismissed. 4

9. Counsel for SEBI further submitted that the decision of the Apex Court in the

case of Gaurav Varshney (supra) is distinguishable on facts. In that case SEBI had

erroneously considered that the CIS run by the company in which Gaurav Varshney

was the director was an existing CIS entitled to run CIS till the CIS Regulations were

framed and as that company failed to apply for registration even after the CIS

Regulations came into force, criminal proceedings were initiated against Gaurav

Varshney as a director of the company, for violating the CIS Regulations. Since

Gaurav Varshney had ceased to be a director of the company before the CIS

Regulations came into force, Apex Court held that Gaurav Varshney could not be

said to have failed to apply for registration under the CIS Regulations. Accordingly,

the criminal proceedings initiated against Gaurav Varshney were quashed. In the

present case, it is specifically held that PACL Ltd and its directors have violated

Section 12(1B) of SEBI Act read with Regulations 5, 68 and 69 of the CIS

Regulations. Accordingly, it is submitted by Counsel for SEBI that the decision of

the Apex Court in case of Gaurav Varshney is distinguishable on facts, because, in

the present case, directions are issued against the appellant, inter alia on the ground

that the appellant is liable for violating Section 12(1B) of SEBI Act.

10. We have carefully considered the rival contentions.

11. It is relevant to note that SEBI had issued a common show cause notice to

PACL Ltd and its present and past directors including the appellant on 14.6.2013

wherein it was alleged, firstly, that during the period from 30.5.1996 till 1.5.2009

several schemes run by PACL Ltd were in the nature of CIS and since the said CIS

were run without obtaining registration from SEBI as contemplated under Section

12(1B) of SEBI Act which came into force with effect from 25.1.1995, PACL Ltd

and its directors including the appellant have violated Section 12(1B) of SEBI Act.

Secondly, it was alleged that even after the CIS Regulations, 1999 came into force,

PACL Ltd was specifically called upon to apply for registration as CIS under the CIS 5

Regulations, however, PACL Ltd and its directors failed to apply for registration as

provided under Regulation 5 and failed to obtain provisional registration as provided

under Regulation 68 of the CIS Regulations, 1999. Thirdly, it was alleged that even

after the CIS Regulations came into force, PACL Ltd had launched new

schemes/plans without obtaining registration as CIS and thereby violated Regulation

69 of the CIS Regulations, 1999.

12. In para 34(w) of the impugned order, the WTM of SEBI has held that PACL

Ltd. violated Section 12(1B) of SEBI Act read with Regulations 5, 68 and 69 of the

CIS Regulations, 1999. In para 36(c) of the impugned order, the WTM of SEBI has

held that for the aforesaid violations committed by PACL Ltd, the present and the

past directors of PACL Ltd. including the appellant are liable. Thus, all the charges

levelled against PACL Ltd have been held to be proved and accordingly directions

have been issued to PACL Ltd and its present and past directors including the

appellant.

13. In the present case, it is not in dispute that the appellant ceased to be a director

of PACL Ltd. even before the CIS Regulations came into force and hence, there was

no question of the appellant discharging any of the obligations set out in the CIS

Regulations. In such a case, fact that PACL Ltd and its present directors failed to

comply with the obligations set out in the CIS Regulations, 1999 could not be a

ground to hold that the appellant is guilty of violating the CIS Regulations, 1999.

14. Fact that the appellant cannot be held guilty of violating the CIS Regulations

would not mean that the appellant cannot be held guilty of violating Section 12(1B)

of SEBI Act. Admittedly, the schemes run by PACL Ltd during the period when the

appellant was a director, were without obtaining registration from SEBI as

contemplated under Section 12(1B) of SEBI Act. Therefore, the WTM of SEBI was

justified in issuing directions, inter alia, against the appellant for violating Section

12(1B) of SEBI Act.

6

15. Argument of the appellant that no direction could be issued against the

appellant, because he was not involved in the day to day management of PACL Ltd

and that the schemes run by PACL Ltd during his tenure have already been closed

and that there are no outstanding liabilities from those schemes is without any merit.

In our order dated 12.8.2015 we have already held that running CIS without obtaining

registration from SEBI is a serious violation and for such violation not only PACL

Ltd but its directors are also liable. Admittedly, some schemes were run by PACL

Ltd when the appellant was a director of PACL Ltd. All those schemes run by PACL

Ltd have been found to be CIS and run without obtaining registration from SEBI in

violation of Section 12(1B) of SEBI Act. Therefore, issuing directions against the

appellant for violating Section 12(1B) of SEBI Act cannot be faulted.

16. Reliance placed by the counsel for appellant on the Apex Court decision in the

case of Gaurav Varshney (supra) is misplaced. That decision does not lay down any

proposition of law that where a director of a company violates Section 12(1B) of

SEBI Act, but resigns as a director before the CIS Regulations, 1999 came into force,

then, no action can be taken against that director. Therefore, fact that the Apex Court

in case of Gaurav Vashney has quashed the criminal proceedings initiated against

Gaurav Varshey on ground that he had ceased to be a director of the company before

the CIS Regulations came into force, would not preclude SEBI from taking action

against the appellant for violating Section 12(1B) of SEBI Act.

17. In the result, we uphold the impugned decision of the WTM of SEBI to the

extent it holds that the appellant is liable for violating Section 12(1B) of SEBI Act

and set aside the impugned decision to the extent it holds that the appellant is liable

for violating the CIS Regulations, 1999. Consequently, qua the appellant, the

impugned direction is modified and the appellant is restrained from accessing the

securities market and prohibited from buying, selling or dealing in securities market

for a period of 5 years from the date of the impugned order i.e. from 22.8.2014 or till 7

the amounts due to the investors with promised returns are refunded by PACL Ltd

and its present directors to the investors, whichever is earlier.

18. Appeal is disposed of in the aforesaid terms with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G.Nair Member

22.6.2017 Prepared and compared by RHN