Order in respect of Ms Ram Kishore Gupta and Mr. Harish Chandra Gupta in the matter of Vital Communications Ltd

WTM/RKA/EFD –DRA-I/159/2014 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992. Proceedings in compliance with the directions of the Hon'ble Securities Appellate Tribunal vide order dated November 17, 2014 in the matter of Ms. Ram Kishori Gupta and Mr. Harish Chandra Gupta vs. Securities and Exchange Board of India (Miscellaneous Application No. 145 of 2014 in Appeal No. 207 of 2012) In the matter of Vital Communications Limited.

1. The instant proceeding is in compliance with the directions of the Hon'ble Securities Appellate Tribunal (hereinafter referred to as "SAT") issued vide its order dated November 17, 2014 in Miscellaneous Application No. 145 of 2014 in Appeal No. 207 of 2012 (Ms. Ram Kishori Gupta and Another vs Securities and Exchange Board of India). The Hon'ble SAT vide the aforesaid order directed as under: "2. In view of above grievance, counsel for SEBI on instruction states that the WTM of SEBI would pass additional order dealing with the directions of this Tribunal set out hereinabove. Accordingly, WTM of SEBI is permitted to pass additional order in relation to grievances set out in Miscellaneous Application No. 145 of 2014 within a period of 4 weeks from today after giving a personal hearing to appellants." 2. In the said Miscellaneous Application, Mr. Harish Chandra Gupta and Ms. Ram Kishori Gupta (hereinafter collectively referred to as “the complainants” or individually by their respective names) inter alia set out the following grievances: (i) Vital Communications Limited (hereinafter referred to as "VCL") had issued misleading and fraudulent advertisement in various news papers in the month of May and June, 2002 to the effect that it was going to consider buy back of its 10 lakh shares at a maximum price of `30/- per share, issue of bonus shares in the ratio 8:19 and preferential issue of 20 lac shares at the rate of `35/- per share. The said advertisements were a ploy to mislead the investors and defraud them from their valuable hard earned money by investing in their shares.

Order in the matter of Vital Communications Ltd. & Ors.

(ii) The complainants had invested an amount of `18,25,041/- in purchasing the shares of VCL believing in their false advertisements and corporate announcements, which were displayed on web page of BSE Ltd.

(iii) The complainants have suffered a loss of `13,83,274/- due to false and misleading advertisements by VCL. (iv) In Appeal No. 207 of 2012, filed by the complainants, the Hon'ble SAT vide its order dated April 30, 2013, inter alia had directed SEBI as under: " ............... Needless to say that in case SEBI finds VCL guilty of playing fraud on the investors, it may consider directing the concerned entity or VCL to refund the actual amount spent by the Appellants on purchasing the shares in question and with appropriate interest and as per law." (v) Thereafter, the Hon'ble SAT, on an application filed by complainants, while accepting the statement of the counsel for SEBI, directed SEBI to pass an order within six months. Subsequently, the Hon'ble SAT, vide its order dated June 13, 2014, extended the time for passing the order on an application filed by SEBI. (vi) The complainants after going through the order of SEBI dated July 31, 2014 observed that the said order was passed without complying with the earlier directions of the Hon'ble SAT. (vii) The complainants submitted that in several cases SEBI has issued direction for refund of money along with 15% interest per annum. SEBI is also duty bound to initiate adjudication proceedings under sections 15HA and 15-I of the Securities and Exchange Board of India Act, 1992 (SEBI Act) in the present matter. (viii) In the above mentioned circumstances, the complainants, inter alia, prayed: (a) for a direction to the concerned entity or VCL to refund the actual amount spent by them on purchasing the shares in question and with appropriate interest and as per law, joint and severally in view of the findings in SEBI order dated July 31, 2014. (b) to comply with the provision of adjudication proceedings for penalty against the guilty under section 15 HA of the SEBI Act along with initiation of criminal proceedings under section 24 of the Act in the interest of investor as well as securities market.

3. In compliance of the order dated November 17, 2014 of the Hon'ble SAT, an opportunity of hearing was granted to the complainants on December 10, 2014, as per their request. On the date of the hearing, Mr. Harish Chandra Gupta appeared before me and made oral as well as written submissions on behalf of the complainants. The submissions made by him in brief are as under: (a) The complainants were investors in the shares of VCL. (b) The complainants were not day traders. The complainants decided to invest in the shares of VCL after being lured and induced by the misleading and false advertisements made by VCL/board of directors. (c) The complainants had suffered loss due to the fraudulent acts of VCL and its promoters/directors. (d) SEBI, in its order dated July 31, 2014 inter alia held that the corporate announcements made by VCL were clearly a device or artifice or scheme to defraud in connection with dealing in securities and that the announcement of buy-back of shares was misleading and without any intention to fulfill and its subsequent withdrawal resulted in a pecuniary loss to the investors who were influenced to purchase shares on the basis of the advertisement.

(e) SEBI has a twin mandate of investor protection and regulation of securities market. Mere passing an order against VCL for violation of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (the PFUTP Regulations) does not mean adequate measures has been taken by SEBI to protect the interest of the investors. (f) SEBI should direct the persons who had made ill gotten gain to refund the actual cost spent by them in purchasing the shares of VCL during the period of investigation. (g) SEBI has enough powers to issue any orders and directions including disgorgement. SEBI has often justified the exercise of its powers on the ground that the same is exercised in the interest of investors. (h) In the present case, merely debarring the company and its promoters/directors from trading, does not in any manner are in compliance of the order of the Hon'ble SAT dated April 30, 2013 nor the purpose of establishing SEBI and the mandate provided in the preamble of the SEBI Act, 1992 is met. 4. The complainants inter alia relied upon the following case laws in support of their contention that SEBI has power to grant relief as set out in the Miscellaneous Application and the written submission filed by them: (a) In the matter of Sahara India Real Estate Corporation pr Ltd & Others vs. SEBI & Ors. [(2013) 1 SCC 1]

(b) In the matter of Chairman, SEBI & Another. vs Shriram Mutual fund & Another (AIR 2006 SC 2287) (c) The orders of SEBI in the matters of Dhaval Mehta and Dushyant Dalal. 5. At the outset, I note that the aforesaid case laws are not strictly applicable in the facts of the present case. In the matter of Sahara India Real Estate Corporation Pvt. Ltd & Others Vs. SEBI & Others [(2013) 1 SCC 1], the Hon'ble Supreme Court was inter alia considering the provisions of the Companies Act, 1956 wherein the said Company was mandated to refund the money to the investors under section 73 of the Companies Act, 1956. In the present case, the complainant has not invested in shares of VCL on any invitation of subscription. In Chairman, SEBI & Another Vs Shriram Mutual Fund & Another the Hon'ble Supreme Court was dealing with the penalty imposed by the Adjudicating Officer of SEBI. The present proceedings before me are not relating to imposition of monetary penalty in adjudication proceedings. 6. I have considered the oral as well as written submissions of the complainants and perused the grievances set out in the Miscellaneous Application No. 145 of 2014 filed by them before the Hon'ble SAT. 7. The main submission made by the complainants before me is that SEBI, vide order dated July 31, 2014 inter alia held VCL and its/promoters guilty of making misleading announcements and thereby inducing the general public to invest in the shares of VCL. In view of the said submission, it would be worthwhile to mention a summary of major findings and the observations in the order of SEBI dated July 31, 2014, as under:

(a) VCL had issued 72,00,000 new equity shares for value of `9 crore to 15 preferential allottees but had not received full consideration as its preferential allotment was financed by VCL itself. Further, it was observed that the shares were allotted by VCL to the preferential allottees under a fraudulent scheme, artifice and device employed by the VCL, its promoters/directors and preferential allottees who acting in concert amongst themselves and also with VCL and its promoters/directors, illegally and fraudulently acquired 70.25% shares in VCL. In view of these facts, it was found that the whole scheme of VCL, its promoters/directors and the preferential allottess was a ploy to defraud the investors in securities market. (b) During the period May- June, 2002, VCL had issued advertisements in several newspapers stating that a meeting of its board of directors was to be held shortly to inter alia consider buy-back of its shares, issue of bonus shares and preferential issue of shares within short span of time. (c) VCL had published the advertisement regarding the buyback at the proposal stage itself, i.e., on May 20, 2002 when the proposal for buyback was to be considered in the board meeting of VCL to be held on June 4, 2002. The said advertisement was a ploy to mislead the investors by benchmarking the price of the scrip at `30/-.

The average volume of trading in the scrip increased by 200% indicating that more investors had traded during the relevant period, ostensibly considering the advertisement for the buy-back to be true. The announcement of buy-back of shares was misleading and without any intention to fulfill. (d) VCL attempted to mislead the public by issuing the advertisements for proposed preferential allotment shares at `35/- whereas the board of VCL in its meeting had approved the preferential allotment of shares at a price of `10/-, and by benchmarking the price of the scrip to the levels of `30-35 when the scrip was actually trading in the range of `3-12. (e) After the misleading advertisements, the 15 preferential allottees sold the shares allotted to them during May-July 2002 and the sale proceeds were transferred to accounts of Master Finlease Pvt. Ltd. (MFL), a company promoted by Mr. Vijay Jhindal (promoter-director of VCL during that period of time) and his family. (f) The whole scheme of things starting from preferential allotment during December 1999 to 15 entities which were connected to VCL, its promoters and directors and subsequent sale of shares by these entities in the market during May-July 2002 and the flow of sale proceeds to the accounts of promoters and their companies were carried out as a devise to enable fraudulent gains to the promoters and directors.

8. I note that the submission of the complainants is that they had invested an amount of `18,25,041/- in the shares of VCL based on various advertisements by VCL. In support of such claim, the complainants have submitted the copies of contract notes. According to the complainants, they were not day traders and that they had actually invested in the shares of VCL on the basis of the positive corporate announcements made by VCL. 9. I have considered the submissions and prayers of the complainants, as stated above, and have also perused the findings in the order of SEBI dated July 31, 2014. I note that some of the entities against whom the said order was passed have filed appeals before the Hon'ble SAT. I find merit in the arguments of the complainants that under the SEBI Act SEBI has the mandate to protect the interest of the investors in securities market and, therefore, should take appropriate measures to exercise this mandate. I am also of the view that no person can be allowed unjust enrichment by way of wrongful gain made on account of fraudulent, manipulative and unfair trade practices.

I, however, find that in the instant case, the ill-gotten gain, if any, made by the persons/entities mentioned in the SEBI order dated July 31, 2014 had not been quantified during the investigation and therefore, the same was not considered in the aforesaid order. 10. I, therefore, in the facts and circumstances of the present case and after taking into account the findings of SEBI in the order dated July 31, 2014, consider it a fit case to examine the feasibility of quantifying the ill gotten gains, if any, and disgorgement of the same and, thereafter, consider restitution, on merits, in the case of complainants, in accordance with the provisions of the SEBI Act, 1992 and the regulations framed thereunder. As regards the other prayer of the complainants in the Miscellaneous Application, i.e., initiation of adjudication proceedings and prosecution, I note that actions under different sections of the SEBI Act and regulations are decided by the Competent Authority after taking into account the facts and circumstances of each case. In this case also, the Competent Authority at the relevant point of time had finalised the line of action considering the facts of the case.

I do not find any reason to issue any direction on this issue. Moreover, I also find that as far as the relief to the complainants is concerned, it can be given only through the process of disgorgement if justified by the facts and circumstances of the case. 11. I, in view of the above, in exercise of powers conferred upon me by virtue of section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11 and 11B thereof, hereby, direct the Investigations Department (IVD) to examine the feasibility of quantifying the ill gotten gains, if any, and issue the requisite notice for disgorgement of the same within three months from the date of this order. The restitution, on merits, in the case of the complainants, should also be considered by the Department in accordance with the provisions of the Securities and Exchange Board of India Act, 1992 and the Regulations framed thereunder. The prayers of the complainants and their grievances set out in the said Miscellaneous Application are accordingly disposed of. Sd/- DATE: DECEMBER 16th, 2014 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA