Order in the matter of notice dated June 15, 2015 issued to Mr. Harishchandra Gupta and Ms. Ramkishori Gupta[SAT Appeal No.332/2017]

WTM/PS/01/IVD/ID-08/APR/2016 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER Order in the matter of notice dated June 15, 2015 issued to Mr. Harishchandra Gupta and Ms. Ramkishori Gupta Date of hearing: October 08, 2015 Appearance: For applicant: Mr. Harishchandra Gupta For SEBI: Ms. Soma Majumdar, General Manager, Dr. Anitha Anoop, General Manager, Mr. Pradeep Kumar, Assistant General Manager and Mr. Bharat Sachdeva, Assistant Manager.

1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) in compliance with the directions of Hon’ble Securities Appellate Tribunal (hereinafter referred to as ‘SAT’) dated November 17, 2014, had considered the complaint of Mr. Harishchandra Gupta and Ms. Ramkishori Gupta (hereinafter collectively referred to as ‘applicants’) in the matter of Vital Communication Limited (hereinafter referred to as ‘Vital’). Upon consideration of the complaint, SEBI vide its order dated December 16, 2014, had directed the Investigations Department of SEBI to examine the feasibility of quantifying the ill-gotten gains, if any, and issue the requisite notice of disgorgement. Vide the said order, it was also directed that the restitution, on merits, in the case of applicants should also be considered in accordance with the provisions of the SEBI Act, 1992 (hereinafter referred to as ‘SEBI Act’) and the regulations framed thereunder.

2. In compliance with the order dated December 16, 2014, Investigations Department conducted the re-examination in the matter with a focus of determining the ill-gotten gains in the scrip of Vital. On completion of the investigation, the findings thereof were communicated to the applicants vide letter dated June 15, 2015.

3. Before proceeding further, it will be appropriate to discuss the facts in the matter of Vital as also noted in the SEBI order dated July 31, 2014. The same are also relevant for the trades of the applicants:

a. Vital had come out with an initial public offering (‘IPO’) of 20,00,000 equity shares of ₹10 each in December 1995. Thereafter, Vital had convened an Extra-ordinary General Meeting on November 18, 1999 and proposed to raise the capital by way of preferential allotment of 72,00,000 equity shares of ₹10 each, at a premium of ₹2.50 amounting to ₹9 crore. During this time, Mr. Vijay Jhindal, Mr. Anup Das, Mr. Ashok Kumar Sharma, Mr. B.L. Bhawan, Mr. Gurudas Sarkar, Mr. J.P. Madan and Mr. Vinay Talwar were the promoter-directors of Vital. Later on December 14, 1999, Vital had allotted 72 lakh equity shares on preferential basis to 15 entities. The details of such preferential allotment are as under: Table A S.No. Preferential Allottees Shares Allotted 1 Anupama Communications Pvt. Ltd. (Anupama) 2,00,000 2 Brut Finance (India) Pvt. Ltd. (Brut Finance) 5,00,000 3 Chankya Apparels Pvt. Ltd. (Chanakya Apparels) 5,00,000 4 Chankya Overseas Pvt. Ltd. (Chankya Overseas) 500,000 5 Cosmo Corporate Services Ltd. (Cosmo Corporate) 5,00,000 6 Fashion Tech India Ltd. (Fashion Tech) 5,00,000 7 Flair Finance (India) Ltd. (Flair Finance) 5,00,000 8 Heritage Corporate Services Ltd. (Heritage Corporate) 5,00,000 9 Perfect Car Scanners Pvt. Ltd. (Perfect Car) 5,00,000 10 Rajat Stock Investments Pvt. Ltd. (Rajat Stock) 5,00,000 11 Troop Trac Chits Pvt. Ltd. (Troop Trac Chits) 5,00,000 12 Troop Trac Exports Pvt. Ltd. (Troop Trac Exports) 5,00,000 13 Troop Trac Electrodes Pvt. Ltd. (Troop Trac Electriodes) 5,00,000 14 Troop Trac Marketing Pvt. Ltd. (Troop Trac Marketing) 5,00,000 15 Wisdom Publishing Pvt. Ltd. (Wisdom Publishing) 5,00,000 Total 72,00,000 b. The allotment money for the preferential allotment was to be paid within 45 days of the allotment (i.e. by January 28, 2000). It was found that the preferential allottees were connected to each other and had financial transactions among themselves and with Vital. Vital had directly provided ₹30.50 lakh and indirectly ₹1.68 crore to the preferential allottees for subscription of its own shares in the preferential allotment. Vital had also given more than ₹1 crore to one CBS System Limited [connected to Mr.

Vijay Jhindal (promoter/ director of Vital and Master Finlease Pvt. Limited)] as advances, part of which in turn was transferred to certain preferential allottees. SEBI order dated July 31, 2014 also observed as under: - Vital prior to the preferential issue had transferred ₹58.75 lakh to Anupama (a preferential allottee where Mr. Vijay Jhindal was authorized to operate the bank account), who in turn had transferred ₹43.75 lakh to other preferential allottees (namely Chankya Apparels, Chanakya Overseas, Cosmo Corporate, Heritage Corporate, Perfect Car, Rajat Stock, Troop Trac Chits, Troop Trac Electrodes and Wisdom Publishing). Such funds were used by these preferential allottees including Anupama as application money for the preferential issue. - Vital had also transferred ₹6.5 lakh to two other preferential allottees, namely, Rajat Stock and Cosmo Corporate on January 11, 2000. - Certain preferential allottees had also received the money from the entities related to Vital in cash during the month of December 1999 and January 2000. - After the preferential issue i.e. December 06, 1999 to January 29, 2000, Vital had transferred ₹2.1 crore to Anupama who in turn had transferred ₹1.2 crore to other preferential allottees. The said money was then transferred to Vital by the preferential allottees as call money.

c. During the months of May – July, 2002, Vital had issued a spate of advertisements. The details of these are as under: - buyback of its shares i.e. 10,00,000 shares at the price of ₹30 (dated May 20, 2002), - preferential issue of 20,00,000 shares @ ₹35 (dated May 27, 2012) and - issue of bonus shares in the ratio of 8:10 (dated June 17, 2002).

Vital later intimated the stock exchanges that its board of directors had rejected the proposals of buy-back and issue of bonus shares, while the preferential allotment was made at just ₹10 per share and not at ₹35 (as was advertised by Vital).

d. The investigation had revealed that Vital was not eligible for issuing bonus shares as its paid up capital had consisted of partly paid up shares. For buyback, Vital had proposed using reserves of ₹7 crore. However, its balance sheet for the financial year ending March 31, 2002, had showed reserves of just ₹4.68 crores. Thereby, the Company was not in a position to comply with the financial and legal requirements of buyback of the shares or the issue of bonus shares. The advertisement regarding the preferential allotment had represented increase in turnover, earnings per share, profit and FII shareholding. However, it was found that the income, profit after tax and earnings per share of Vital had decreased in the financial year 2001-02, compared to the previous year.

In view of the same, the advertisements were found to be a ploy to mislead the investors by benchmarking the price of the scrip at around ₹30, when the scrip was actually being traded around ₹3 to ₹12. Further, the information regarding the rejections of the proposals for buyback and bonus issue were also not disseminated to the public.

e. During the period when such advertisements were being issued by Vital from May 02, 2002 to July 31, 2002, a total of 71.14 lakh shares were sold by certain preferential allottees, namely, Fashion Tech, Perfect Car, Anupama, Rajat Stock, Troop Trac Exports and one S.V. Stockland (an entity who had received the shares of Vital in off-market from 10 preferential allottees) into the market. It was observed from the bank statements of these preferential allottees that part of the sale proceeds of such shares was transferred into the account of one Master Finlease Pvt. Limited (hereinafter referred to as ‘MFL’), an entity owned by Mr. Vijay Jhindal (director of Vital), his wife Ms. Shubha Jhindal and his mother.

f. On completion of the investigation, SEBI issued show cause notices (hereinafter referred to as ‘SCNs’) dated May 24, 2005 (to Vital, Ms. Shubha Jhindal, Mr. Vinay Talwar, Mr. Vijay Jhindal, MFL, Mr. J.P. Madaan and Mr. R.K. Garg) and September 17, 2007 (to Vital, Ms. Shubha Jhindal, Mr. Vinay Talwar, Mr. Vijay Jhindal, MFL, Mr. J.P. Madaan, Mr. R.K. Garg, CBS System, Anupama, Brut Finance, Chanakya Apparels, Chanakya Overseas, Cosmo Corporate, Fashion Tech, Flair Finance, Heritage Corporate, Perfect Car, Rajat Stock, Troop Trac Chits, Troop Trac Exports, Troop Trac Electrodes, Wisdom Publishing, Troop Trac Marketing). Thereafter, SEBI vide its order dated February 20, 2008, had restrained Vital and its directors, namely,

Mr. J. P. Madaan, Mr. R.K. Garg, Mr. Vijay Jhindal, from accessing the securities market and prohibit them from buying, selling and dealing in securities in any manner for a period of two years. Another director of Vital namely Ms. Shubha Jhindal, was also restrained from accessing the securities market and prohibited from buying, selling and dealing in securities in any manner for a period of six months. Against the said order of SEBI, an appeal was filed by the directors of Vital namely Mr. J. P. Madaan, Mr. Vijay Jhindal and Ms. Shubha Jhindal before Hon'ble SAT. The Hon'ble SAT vide its order dated August 28, 2008, remanded the matter back to SEBI with the following observations: “The contents of the advertisements pertain to price sensitive issues and if they are false and misleading as alleged by the Board, it shall be in the interest of the securities market and the investors to find out as to who is responsible for the advertisements and those responsible need to be dealt with appropriately. We are not happy with the impugned order particularly with the manner in which the issues have been discussed. The appeals are accordingly allowed and the impugned order qua the appellants set aside and the cases remanded to the Board with a direction to issue fresh show cause notice(s) to the appellants herein who will file their replies, if necessary….”

4. Thereafter, SEBI initiated further examination in the matter. In the meantime, the applicants namely Mr. Harishchandra Gupta and Ms. Ramkishori Gupta vide letter dated August 02, 2010, filed a request for grant of the compensation with SEBI. SEBI upon consideration, vide its letter dated September 19, 2011, declined the request of the applicants for grant of compensation and also intimated to these that there is no provision under the SEBI Act to direct any company or its directors to pay compensation to the investors. Against this, the applicants preferred an appeal before the Hon’ble SAT. Hon’ble SAT vide its order dated April 30, 2013, directed SEBI to look into the complaint relating to the alleged misleading and fraudulent advertisements issued by Vital, along with the on-going investigation. Hon’ble SAT also directed that the outcome of such investigation be conveyed to the applicants and in case SEBI finds Vital guilty of playing fraud on the investors, it may consider directing the concerned entity or Vital to refund the actual amount spent by the applicants on purchasing the shares in question and with appropriate interest.

5. The subsequent examination/ investigation in the scrip of Vital, revealed unusual movements in the price and volume during the period of April 01, 2002 and August

31, 2002, i.e. the period when the advertisements pertaining to buyback, preferential allotment and bonus shares were issued by Vital. It was found that during the period of April 29, 2002 to May 20, 2002 (i.e. the 20 day period prior to the publication of the advertisements), price and volume in the scrip of Vital had increased compared to the price and volume prevailing during April 01, 2002 and April 28, 2002.

It was also found that Vital had published the advertisement regarding the buyback at the proposal stage itself and the price/ quantity which in the normal course gets decided in the board meeting and announced thereafter was mentioned in the advertisements beforehand. For e.g. Vital on May 20, 2002, had made an advertisement regarding buy back of shares, when the proposal for buyback was to be considered in the board meeting to be held on June 04, 2002.

Further, the corporate actions (i.e. buyback, preferential allotment and bonus shares) announced by Vital were also found to be contradictory in nature as the buyback reduces the number of outstanding shares while the preferential allotment/ bonus issue increases the number of outstanding shares. In view of the above, the advertisements issued by Vital were found to be a ploy to mislead the investors by benchmarking the price of the scrip at ₹30, with an objective to generate interest in the scrip and induce more buying as investors/ shareholders would have envisage a clear gain of around ₹20 per share. As a consequence of such advertisements, the average volume of trading in the scrip had increased by 200%. However, the price of the scrip of Vital went down after the advertisement period and thereby resulted in losses to the investors.

6. The major selling entities during the period of publication of advertisements were found to be Anupama, Fashion Tech, Troop Trac Marketing, Rajat Stock and S.V. Stockland. It is important to note that all these entities except S.V. Stockland (who had received the shares from 10 preferential allottees in off market transactions) were allotted preferential shares of Vital in the year 1999. These entities after the sale of shares had transferred certain funds to MFL (an entity connected to Mr. Vijay Jhindal).

7. On completion of the investigation (initiated after the order of Hon’ble SAT dated August 28, 2008), SEBI issued SCNs dated July 06, 2012 and July 12, 2012. Thereafter, SEBI in its order dated July 31, 2014, concluded that the ‘preferential allotment during December 1991 and their sale during May – July 2002, were carried out as a devise to enable fraudulent gains to the promoters and directors’. The said order also observed as under:- “… 35. … In this case, Mr. Vijay Jhindal alongwith Mr. Vinay Talwar were involved in allotting shares to 15 entities which were connected to VCL and its promoters, directors during December 1999. These 15 entities were provided funds by VCL through another two entities Anupama and CBS System. Further, the 15 preferential allottees sold these shares during May-July 2002 after VCL published false, misleading advertisement regarding buy back of its shares, bonus and preferential issue of shares under the directions of Mr. Vijay Jhindal. The matter regarding buy back of shares, bonus and preferential issue of shares were discussed in the board meetings chaired by Mr. J. P. Madaan and attended by another director Mr. R. K. Garg. The sale proceeds of the shares held by these 15 preferential allottees was transferred to accounts of MFL a company promoted by Mr. Vijay Jhindal and his family. Stock Land, which was not a preferential allottees however, got the shares from some preferential allottees and sold them in the market subsequent to the issuance of false, misleading advertisements by VCL. The sale proceeds received by Stock Land was transferred to the accounts of MFL, an entity owned and controlled by Mr. Vijay Jhindal.”

Vide the said order Vital, Mr. Vijay Jhindal, Mr. Vinay Talwar, Master Finlease Pvt. Limited, Mr. J. P. Madaan, Mr. R. K. Garg, Mr. CBS Systems Limited, Anupama, Brut, Chankya Apparels, Chankya Overseas, Cosmo Corporate, Fashion Tech, Flair Finance, Heritage Corporate, Perfect Car, Rajat Stock, Troop TracChits, Troop Trac Exports, Troop Trac Electrodes, Troop Trac Marketing, Wisdom Publishing and Stock Land were restrained from accessing the securities market and prohibited from buying, selling and dealing in securities in any manner for a period of three years. Another director of Vital namely Ms. Shubha Jhindal, was also restrained from accessing the securities market and prohibited from buying, selling and dealing in securities in any manner for a period of one year. Vide the said order following directions were also issued: “… (b) direct that the preferentially allotted shares of VCL lying in the demat accounts of the preferential allottees shall remain frozen; (c) direct VCL not to give effect to transfer of any shares acquired and held by the preferential allottees in the preferential allotment dated December 14, 1999; (d) restrain the preferential allottees from exercising any voting rights (including through nominee or proxy) or other rights attached to the shares acquired and held by them in the preferential allotment dated December 14, 1999.”

8. Against this order of SEBI, the applicants approached Hon’ble SAT vide a miscellaneous application with a grievance that SEBI has failed to comply with the directions of Hon’ble SAT issued vide order dated April 30, 2013 and as modified on December 19, 2013. Hon’ble SAT vide its order dated November 17, 2014, 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.” 9. In compliance with the order of Hon’ble SAT, SEBI passed an order dated December 16, 2014, while observing that ‘… 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 …’. The said order also stated as under: “… 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 case of complainants, in accordance with the provisions of the SEBI Act, 1992 and the regulations framed thereunder. …” In view of the same, vide the said order, SEBI was directed to examine the feasibility of quantifying the ill-gotten gains, if any, and issue the requisite notice of disgorgement of the same, within three months.

10. Thereafter, SEBI conducted the re-examination in the matter with a focus of determining the ill-gotten gains in the scrip of Vital and vide letter dated June 15, 2015, forwarded the findings of the investigation to the applicants. In the meantime, the applicants again preferred an appeal before Hon’ble SAT against the order of SEBI dated December 16, 2014. Hon’ble SAT vide its order dated August 27, 2015, took cognizance of the findings of the investigation as forwarded to the applicants vide letter dated June 15, 2015. Further, as the said letter had offered an opportunity of personal hearing before the Competent Authority, the applicants withdrew the appeal. Hon’ble SAT disposed of the said appeal of the applicants with an observation that the SEBI shall pass appropriate order on merits after hearing the applicants as expeditiously as possible.

11. An opportunity of personal hearing was granted to the applicants on October 08, 2015, when Mr. Harish Chandra Gupta appeared in person, for himself and his wife and filed the written submissions dated October 08, 2015. The written submissions were taken on record. Mr. Harish Chandra Gupta also made oral submissions, based on the written submissions dated October 08, 2015. The submissions of the applicants, in brief are as under: a. The Hon’ble SAT, while deciding the appeal no. 207 of 2012 vide order dated April 30, 2013, had inter alia passed the following direction: “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.” Therefore, SEBI is obliged to obey and implement the aforesaid order of the Hon’ble SAT. b. While deciding the review application of SEBI in appeal no. 207 of 2012 on December 19, 2013, Hon’ble SAT had passed the order with several clarifications, without touching the direction/ operative portion of its order dated April 30, 2013. c. SEBI in the matter of the Sahara India Real Estate Corp.

Limited & Ors. Vs. Securities Exchange Board of India (‘Sahara case’) had issued the direction on June 23, 2011, to refund the money of the investors with 15% interest, till the date of payment of the same for the violation of law. d. The extent of the nature and the manner of measures which can be adopted by SEBI for giving effect to the functions assigned to it, have been left to the discretion and wisdom of the SEBI. Under Section 11(B) of the Securities Law (Amendment) Bill 2014, SEBI has the powers to pass disgorgement orders, which seek to recoup any illegal gains reaped by corporate or market entities and compensate investors who may have a rightful claim to the money. e. SEBI is bound to take legal action against Vital, its promoter/ directors who were found guilty of playing fraud upon the investors, as observed in SEBI order dated July 31, 2014. In view of the same, SEBI is bound to take legal action against them under Section 15HA of SEBI Act, along with fixing the civil as well as criminal liabilities and issue direction for refund of the amount invested in the shares of Vital by the applicants along with appropriate interest.

Merely debarring Vital and its promoters/ directors from trading, does not in any manner comply with the order of Hon’ble SAT dated April 30, 2013, nor the purpose of establishing SEBI and the mandate provided in the preamble of SEBI Act is met. f. The first misleading advertisement shown on the website of BSE was on May 04, 2002, when the share of Vital was around between ₹3 per share. The applicants had invested in the shares of the Vital after being lured and induced by the false advertisements issued by the Company and its directors. The then existing shareholders of the Vital, who had sold the shares were coextensive to the Company and were also insider traders and were well aware of financial position of Vital as in the AGM of the year 2001-2002, it was discussed that U.P.F.C. had acquired all the fixed assets of Vital (consisting of land, building, plant and machinery) and the same was adjusted towards the term loan. The applicants had invested an amount of ₹18,25,041 for purchasing the shares of Vital believing in the false advertisement and corporate announcements, displayed on the website of BSE and the newspapers.

Such investment later resulted in a loss of ₹51,53,190. g. The words used in a beneficial or welfare statute when they are capable of two constructions, the one which is more in consonance with the object of the Act and for the benefit of the person for whom the Act was made should be preferred. h. The purchase of securities from the sellers on the floor of the exchange is governed by the theory of demand and supply. This theory and equilibrium is disturbed, if extraneous circumstances like false and misleading advertisements are issued. i. SEBI has failed to consider the observation made in the order dated December 16, 2014 and it has also failed to calculate the losses averted by the promoters/ directors/ the concerned entities as mentioned in the SEBI order dated July 31, 2014, which in economic terms is equivalent to profit and can be said to be ill-gotten gain. j. SEBI in its order dated July 31, 2014, has made it clear that the misleading advertisement were an attempt to benchmark the price of the scrip to the level of ₹30 - ₹35, when the scrip was actually trading in the range of ₹3 to ₹12.

The investigation period was divided into four time periods on the basis of price volume data in the scrip, i.e.:

Table B Period Average Share Average Average no. Price (₹) Volume of Traders Time Slot 1 April 1, 2002 to April 26, 2002 3.46 16,795 57 Time Slot 2 April 29, 2002 to May 20, 2002 11.12 3,44,216 910 Time Slot 3 May 21, 2002 to July 15, 2002 8.10 10,29,090 1,965 Time Slot 4 July 16, 2002 to August 31, 2002 3.53 40,440 131 k. The related entities had sold 71.14 lakh shares into the market between May 02, 2002 and July 31, 2002, by taking advantage of the artificial interest created by the misleading advertisements. The concerned entities thus averted a loss of ₹5.44 crore [i.e. 71.14 lakh shares X ₹7.66], ₹7.66 (i.e. the loss averted) being the average of ₹11.12 – ₹3.46. l. The concerned related entities had unloaded the shares in the market and had avoided a loss of ₹9 per share, when the scrip was trading between ₹3 to ₹12. The price of the scrip had later diminished to ₹0.50 paisa. In view of the same, an order for disgorgement equal to ₹5.44 crore and appropriate interest along with the penalty of amount as prescribed under Section 15(G) and 15 (HA) of the SEBI Act may kindly be issued to the concerned entities.

12. I have carefully considered the findings of the investigations, orders passed in the matter of Vital, the directions issued by Hon’ble SAT, submissions made by the applicants and the material available on record. To proceed with, I note the following:

a. The applicants had traded in the scrip of Vital during the period of May 23, 2002 - June 25, 2002 (i.e. during the time when Vital had issued advertisements regarding buy-back of shares, issue of bonus shares and preferential issue of shares) and had invested ₹18,25,041 (by purchasing 1,71,773 shares).

b. I note that SEBI vide its order dated July 31, 2014, has found that the advertisements issued by Vital were at the proposal stage only and there was no legal requirement for their publication. The said order had also held that the advertisements issued by the Company were misleading and was fraud on the investors. The relevant observations of the said order, are as under: “As a consequence of the advertisements, the average volume of trading in the scrip increased by 200% indicating that more investors had traded during the relevant period, ostensibly considering this advertisement to be true. I note that the price of the scrip went down after the advertisement period thereby resulting in loss to investors who bought shares expecting pecuniary gains, consequent to the advertisements. In view of these facts, I find 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.” c. The instant examination in the matter revealed that the promoter group was not holding any shares of Vital, prior to the publishing of the misleading advertisements. Therefore, the shares allotted to the preferential allottees were taken into consideration for calculation of the ill-gotten gains. The details as to how these preferential allottees had received the shares of Vital has been discussed in the paragraphs above. For the sake of convenience, the same are being reproduced below with analysis:

i. Vital had made preferential allotment of 72,00,000 shares in December 1999, to fifteen entities (as noted in table A above) (who were found to be connected to with each other, Vital, promoter and directors of Vital i.e. Mr. Vinay Talwar and Mr. Vijay Jhindal).

ii. SEBI vide its order dated July 31, 2014, has found that Vital had transferred funds to the preferential allottees through layered transactions. The details of such fund transfers by Vital to the connected preferential allottees are as under: - Vital had transferred ₹58.75 lakh to Anupama (a preferential allottee) which in turn transferred ₹43.75 lakh to Chankya Apparels, Chanakya Overseas, Cosmo Corporate, Heritage Corporate, Perfect Car, Rajat Stock, Troop Trac Chits, Troop Trac Electrodes and Wisdom Publishing. - Vital had transferred ₹6.5 lakh to two preferential allottees, namely, Rajat Stock and Cosmo Corporate on January 11, 2000. - Vital had given ₹1 crore to CBS System Limited as advance which was transferred to some of the preferential allottees. - Vital had transferred ₹2.1 crore to Anupma, who in turn had transferred ₹1.2 crore to the preferential allottees. Such funds were then used by the preferential allottees including Anupma, as call money to Vital for the shares allotted in the preferential issue.

- Certain preferential allottees had also received the money in cash from the entities related to Vital during the months of December 1999 and January 2000.

From the above, it is noted that Vital had provided finance to the preferential allottees. It is important to note that the Company was supposed to receive ₹9 crore through the preferential allotment. As can be seen from above, instead of procuring ₹9 crore through the preferential allotment, the Company had financed atleast ₹3.07 crore to the preferential allottees. The preferential allottees had then utilized the said amount for subscribing to the shares of Vital in the preferential allotment. In relation to the same, the following observations of the order dated July 31, 2014, is relevant to be noted: “25. …On account of the repeated circulation of same money between different preferential allottees, the receipt of substantial portion of allotment money for 72,00,000 equity shares was merely a book entry. Considering the facts and circumstances of this case holistically, I find that Vital had issued 72,00,000 new equity shares for value of ₹9 crore in the names of the above mentioned 15 preferential allottees but had not received full consideration as its preferential allotment was financed by Vital itself as discussed hereinabove. I, therefore, find that the consideration for the shares allotted to the respective allottees in the preferential allotment of VCL has not been fully paid by the preferential allottees and the shares were allotted by VCL to the preferential allottess under a fraudulent scheme, artifice and device employed by the VCL, its promoters/directors and preferential allottes who acting in concert amongst themselves and also with VCL and its promoters/directors, illegally and fraudulently acquired 70.25% shares in VCL. In this case, it is established that the payments made by VCL to the preferential allottees passed through various entities, viz. CBS System and Anupama to finally reach the subscriber bank account and in turn to VCL in the form of application money for the preferential allotment….” As also noted earlier, the SEBI order dated July 31, 2014, has held that the scheme of Vital, its promoters/ director and the preferential allottees as a ploy to defraud the investors.

iii. Later in the year 2002, Vital had started issuing advertisements (which have been found to be misleading and fraud on the investors). During the period of May 02, 2002 to July 31, 2002, a total of 71.14 lakh shares of Vital were sold by the preferential allottees, namely, Fashion Tech, Perfect Car, Anupama, Rajat Stock, Troop Trac Exports and one S.V. Stockland (an entity who had received the shares in off-market transactions from the rest of the ten preferential allottees) into the market. As per the available records, these entities had transferred the sale proceeds of the shares so sold i.e. atleast ₹1.05 crore (amount which was traced by the investigation) to one MFL (one of the promoter of Vital and an entity owned by Mr. Vijay Jhindal and his relatives), which were later transferred to the bank accounts of Mr. Vijay Jhindal and Ms. Subha Jhindal and other related entities.

d. The SEBI order dated July 31, 2014, has noted that “… entire chain of events in respect of the buy back, bonus issue and preferential allotment described by VCL, the unwarranted advertisement, large moneys spent, reasons for the proposed corporate actions, reasons for the proposal being rejected, impact on the price/ volume of the shares suggests an orchestrated ploy on part of the promoters to create an artificial demand for the shares of VCL and induce innocent investors for purchasing shares so as to absorb sales by the promoter related entities.”

The said order while making the following observations had concluded that the preferential allotment during December 1999 and the sale of shares by the preferential allottees during May - July 2002, were carried out as a device to enable fraudulent gains to the promoters and directors of Vital: - Mr. Vijay Jhindal was director of Vital during the preferential allotment of shares to fifteen entities in December 1999. These entities were connected to Vital and its promoters/ directors and were provided funds by Vital through two entities Anupama and CBS System. As per the SEBI order dated July 31, 2014, the newspaper advertisements for buyback of shares, preferential allotment and bonus issues during May-June, 2002 were issued under the instructions of Mr. Vijay Jhindal and the payments for such advertisements were made by MFL and one Avisha Credit (both promoted by Mr. Vijay Jhindal and his family members). Allottees in the preferential issue of December 1999 had sold the shares during the period of May – June 2002 and the sale proceeds were transferred back into the account of MFL (an entity owned by Mr. Vijay Jhindal and his family members). - Mr. Vinay Talwar was the Chairman and Managing Director of Vital at the time of preferential allotment of shares in the year 1999 and he was also the introducer for the preferential allottees namely Cosmo Corporate, Fashion Tech, Heritage Corporate, Rajat Stock and Wisdom Publishing for opening the bank account. He was also aware of the actual purpose of the preferential allotment i.e. to cheat the investors. In view of the same, Mr. Vinay Talwar knowingly indulged in an act which was a fraud on the investors. - Mr. J.P. Madaan was the director of Vital, during the period February 28, 2000 to March 31, 2007 i.e. during the period when the misleading advertisements were issued. He and Mr. R. K. Garg (other director of Vital) were present in the board meetings of Vital on June 04, 2002, June 14, 2002 and July 05, 2002 when the issue of buyback, preferential allotment and bonus shares were discussed.

13. In the light of the above discussion, while proceeding further, I note as under: a. The Company had come out with a preferential allotment of 72,00,000 equity shares and had allotted these shares to 15 entities (related to each other, Vital and its promoters/ directors). b. These 15 preferential allottees had received the finance of atleast ₹3.07 crore from Vital. The said money was used by these preferential allottees for subscribing to the shares of Vital. There is nothing on record to show that these preferential allottees had brought in their own funds for the allotment of preferential shares. c. The preferential allottees [Fashion Tech, Perfect Car, Anupama, Rajat Stock, Troop Trac Exports and S.V. Stockland (who had received the shares from other 10 preferential allottees)] had sold 71.14 lakh shares in the year 2002 i.e. during the period when the Company had issued misleading advertisement. The sale proceeds of such sale i.e. atleast ₹1.05 crore was transferred to the account of MFL (an entity promoted by Mr. Vijay Jindal and his family members). d. The allotment of preference shares and issue of misleading advertisements was found to be a fraudulent scheme, artifice and device employed by Vital and its promoters/ directors.

14. At this stage, I refer to the SEBI notice dated June 15, 2015 and note that for determining the ill-gotten gains, calculation were made from two different scenarios, i.e. a. Where the actual cost of acquisition was paid by the preferential allottees, during the time of allotment and b. Where the notional cost of acquisition of the shares in the hands of preferential allottees was considered as closing price of the scrip of Vital one day prior to the first misleading advertisement.

I note that both the scenarios considers certain cost of acquisition in the hands of the preferential allottees. However, considering the SEBI order dated July 31, 2014, wherein, it has been noted that the preferential allottees (who were related to Vital) had received atleast ₹3.07 crore from Vital, such funds were then used by the preferential allottees for subscribing the shares of Vital in the preferential allotment. It is important to note that there is no evidence of payment of actual cost, if any, from the preferential allottees towards the acquisition of shares. Rather, the evidence on record shows that money to the tune of ₹3.07 crore had come from the Company itself and money had gone back to the Company, as consideration for the preferential allotment.

15. It is clear that the Company had funded its related preferential allottees for subscribing its own shares. There is a clear trail for only ₹3.07 crore although the preferential allotment was for ₹9 crore. From the above sequence of facts, it can be said that the preferential allottees had not brought in their own funds for subscribing to the shares of Vital and had acted as conduits for the Company. Later, the Company came out with misleading advertisements and provided the exit opportunity to the preferential allottees. These preferential allottees then sold the shares in the market and the sale proceeds were transferred to MFL (an entity promoted by Mr. Vijay Jindal), a stranger to the entire sequence of events. I note that SEBI vide its order dated July 31, 2014, has already held that the preferential allotment and sale of such shares during the period when misleading advertisements were issued by the Company was a fraud on the investors.

16. The act of fraud as found in the order dated July 31, 2014, threatens the market integrity and orderly development of the market and call for regulatory intervention to protect the interest of investors. These entities cannot be allowed to unjustly enrich themselves at the cost of investors.

17. Considering the above, I note that SEBI while determining the ill-gotten gains in the scrip of Vital, had proceeded on a hypothesis different from the findings in the SEBI order dated July 31, 2014. In view of the above, as the ill-gotten gains are still to be arrived at, it is appropriate to direct SEBI to look into the exact figure of ill-gotten gains by Vital, its promoters/ directors, preferential allottees and MFL and initiate the disgorgement proceedings against those who perpetrated fraud on the investors, at the earliest. Further, it is also appropriate that the claims of the applicants be taken on record and the same may be considered in accordance with the provisions of the Securities and Exchange Board of India Act, 1992 and the Regulations framed thereunder, on disgorgement of the ill-gotten gains.

In view of the foregoing, I in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992, hereby order accordingly.

Date: April 01, 2016 PRASHANT SARAN Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA