Sanjay Gupta vs Sebi

DATE: 04.06.2019

Misc. Application No. 148 of 2019 And Appeal No. 89 of 2019 Sanjay Gupta House No. 445, Sant Nagar, Civil Lines, Ludhiana - 141001. Punjab, India. ...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

Dr. S. P. Sharma, Advocate for the Appellant. Mr. Kevic Setalvad, Senior Advocate with Mr. Anubhav Ghosh, Ms. Rashi Dalmia and Mr. Abhishek Mishra, Advocates i/b The Law Point for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C. K. G. Nair, Member Justice M. T. Joshi, Judicial Member

Per : Justice Tarun Agarwala, Presiding Officer (Oral)

1.

The present appeal has been filed against the confirmatory order

dated October 30, 2018 passed by the Whole Time Member

(hereinafter referred to as, 'WTM') confirming the ex-parte ad-

interim order dated November 1, 2017. The facts leading to the

filing of the present appeal is, that the appellant was one of the 2

promoters and shareholders of a Company called M/s. Supreme Tex

Mart Ltd. (hereinafter referred to as, 'STML'). The shares of STML

are listed on Bombay Stock Exchange Ltd. (BSE) and National Stock

Exchange of India Ltd. (NSE). SEBI conducted a preliminary

examination in the scrips of STML for the period July 1, 2016 to

March 31, 2017 in relation to bulk Short Messages Services (SMSs)

which recommended trading in the scrips of the Company.

2. On the basis of the investigation and material available with

SEBI, the WTM found it fit to pass an ex-parte interim order dated

November 1, 2017 in order to safeguard the interest of the investors

and to protect the integrity of the securities market. The ex-parte ad-

interim order against the appellant was as under :-

"(a) Prohibited from buying, selling or dealing in

securities, directly or indirectly, in any manner

whatsoever, till further directions;

(b) Directed to cease and desist from disseminating

messages or news in any form related to the

securities market, directly or indirectly, by any

means whatsoever."

3. The prima-facie basis for passing the ex-parte ad-interim order

by the WTM was that prior to sending of SMSs, there was a fund 3

transfer of Rs. 50 lacs from the joint account of the STML to Mr.

Lahoti. Mr. Lahoti in collusion with Mr. Mohsin channelized the

funds to RouteSMS on behalf of Future Fintrade. It was observed

that Future Fintrade entered into an agreement with RouteSMS for

the purpose of sending bulk SMSs. Payments to RouteSMS were

made by Mr. Mohsin who received funds either from the joint

account of STML or through Mr. Lahoti. It was also observed that

the bank statement of STML maintained with UCO Bank revealed

that STML was the primary account holder, Mr. Ram Lal Gupta was

Joint holder No. 1, appellant was Joint holder No. 2 and Mr. Ajay

Gupta was Joint holder No. 3. It was also observed that there

appeared to be a nexus amongst the entities and the modus operandi

was that the account of STML was used to fund the sending of bulk

SMSs which was sent through Idea Cellular, Goldleaf International

Pvt. Ltd., etc. recommending to buy scrips of STML. It was further

observed that during the period when SMSs were being sent, the

price of the scrips increased and, during this period, the appellant off-

loaded its shares at a higher price.

4. The WTM further observed that the appellant alongwith other

entities in collusion made misrepresentations through the SMSs and

by their action and omission had solicited, enticed and induced

investors to deal in securities in the scrips of STML and, thus, played

a fraud as defined in Regulation 2(1)(c) of the Securities and 4

Exchange Board of India (Prohibition of Fraudulent and Unfair

Trade Practices relating to Securities Market) Regulations, 2003

(hereinafter referred to as, 'PFUTP Regulations'). It was also

observed that the price manipulation done through fraudulent and

deceitful manner also attracted the prohibition under Section 12A(a),

(b) and (c) of the Securities and Exchange Board of India Act, 1992

(hereinafter referred to as, 'SEBI Act') as well as Regulations 3(a),

(b), (c) and (d) read with Regulations 4(1), 4(2)(f) and (r) of the

PFUTP Regulations. Based on the aforesaid prima-facie findings,

the ex-parte ad-interim order was passed pending detailed

investigation in the matter.

5. Subsequently, the appellant appeared and filed his replies dated

November 3, 2017, November 28, 2017 and December 23, 2017,

contending that he was never a joint holder of the Bank account of

STML. He further submitted that the appellant had resigned as a

director of STML on April 19, 2013 which was duly accepted by

STML as well as from the Goldleaf International Pvt. Ltd. Form 32

was duly filed by the Company before the Registrar of Companies

(ROC). It was also contended that due to differences the appellant

disinherited his son Gautam Gupta (the director of STML and a

noticee) and re-wrote his WILL dated February 9, 2016. It was also

contended that Gautam Gupta, his son, filed a police compliant

against the appellant on May 13, 2016 and that STML also filed a 5

defamation Suit against him on March 22, 2016. It was also

contended that the appellant had filed a petition before NCLT

Chandigarh against STML and its directors Ajay Gupta (Brother) and

Gautam Gupta (Son) for mismanagement of STML under the

Companies Act, 2013. It was also stated by the appellant that he was

never a joint account holder with STML in the bank account

maintained with UCO Bank. It was contended that as per the

banking practice there cannot be a joint account with the Company

and that the appellant was only an authorized signatory to the bank

account of STML as a director but after his resignation in 2013 his

authorization to use the account came to an end. It was categorically

stated that he never operated the account of STML after he resigned

as a director. In this regard, the appellant produced certificates from

the UCO Bank indicating that the bank account of STML was not a

joint account and that the appellant had never signed any cheque

after his resignation on April 19, 2013. The appellant further

submitted that he had no nexus with the promoters and the directors

of STML nor had any connection with the sending of the SMSs at

any point of time in the year 2016 as he had ceased to be a director

since April 2013. In view of the serious differences with the present

management, it was contended that question of conspiring with other

entities in order to benefit from the price manipulation did not arise

as the appellant was never a party to the price manipulation through 6

the scheme of SMSs. The appellant however admitted that he had

sold a part of his shareholding in the ordinary course of his business

and subsequently, in July 2017, he purchased substantial shares from

the market on the stock exchange platform again in the ordinary

course of business in order to retain a minimum 10% of the total

shareholding of STML for the purpose of wrestling control of STML

in future and in order to save STML from mismanagement by the

present directors.

6. Inspite of the overwhelming evidence being filed by the

appellant, the WTM passed a confirmatory order on the strength of

the bank statement provided by UCO bank which indicated that the

STML bank account was a joint account in which the appellant was a

joint holder. The WTM further observed that there was a prima-facie

fund trail from this joint account to the issuance of the SMSs which

lead to manipulation of the price in the scrips of STML.

7. We have heard Dr. S. P. Sharma, the learned counsel for the

appellant and Mr. Kevic Setalvad, the learned senior counsel

alongwith Mr. Anubhav Ghosh and Ms. Rashi Dalmia, the learned

counsel for the respondent. We find that we are unable to accept the

manner and approach of the WTM in deciding the matter in such a

casual manner without considering the evidence on record. 7

8. There is no doubt that there is a prima-facie finding of

distribution of funds from the account of STML to various entities

for the purpose of sending SMSs recommending to buy the scrips of

STML. There is further a prima-facie finding that the bulk SMSs led

to manipulation in the scrips of STML which action was fraudulent

under the provisions of the PFUTP Regulations.

9. However, the appellant has been linked to these fraudulent

transactions on account of being allegedly a joint holder in the

STML's bank account. This is based on a bank statement obtained

by the respondent from UCO Bank for the period from January 1,

2016 to June 1, 2016. The WTM on the basis of this bank statement

had issued an ex-parte interim order. No finding has been given by

the WTM on the letter dated January 2, 2018 issued by the UCO

Bank stating that the account of STML was not a joint account and

that the appellant had resigned as a director in 2013 and since then

had not issued any cheque on behalf of STML. The WTM for reason

best known has not considered the certificate issued by the bank and

chose to ignore this vital piece of evidence.

10. Under the Banking Regulation Act, 1949, for opening an

account of a Company, amongst other documents, a resolution from

the Board of Directors and power of attorney granted to its managers,

officers or employees to transact on behalf of the Company is 8

required to be filed. A Company is a legal entity and can only act

through its Board of Directors or through one or more juridical

persons. In the instant case, no such steps have been taken by the

WTM to find out who are the authorized signatories who can transact

on behalf of STML. No steps have been taken by the WTM to find

out as to whether a joint account with a Company can be opened in a

Bank or not. No steps were taken by the WTM to check the Bank

account opening form or the resolution of the Board of Directors to

satisfy itself as to what kind of an account was opened by STML. In

the instant case, prima-facie, we find that the bank statement is as a

result of a system flaw of the Bank's computer program. Normally,

the bank prepares its own software. Various categories are shown

viz, Primary holders, first joint account holder and so on. In the

instant case, there may not have been a column for an "authorized

signatory" and accordingly, the name of the appellant was shown as a

joint holder. Such facts should have been ascertained by the WTM

instead of mechanically treating a bank statement as the gospel truth.

11. The WTM has also not considered the fact that the appellant

had resigned in the year 2013 which resignation was accepted by the

Company and forwarded to the ROC in Form 32. There is not even a

discussion in the impugned order with regard to the resignation of the

appellant from the Company. There is no discussion or finding that 9

the appellant was still a director of the Company or was responsible

of the affairs of the Company in some manner or the other.

12. Further, the appellant has clearly brought out the acrimonious

litigation between the appellant and other directors of STML,

namely, disinheriting his son, lodging of FIR by his son against him,

defamation suit filed by STML against him, etc. Nothing has been

discussed by the WTM with regard to the effect of this litigation.

13. In order to attribute fraudulent malpractices to the appellant, it

was essential to atleast give a prima-facie finding that there was a

causal link between the appellant and other entities including STML

which indulged in the manipulation of the price of the scrips of

STML through bulk SMSs. We find, that in the instant case, when

the appellant has come forward with a specific case that he had

resigned in 2013 and was not part of the management of STML

during the time when bulk SMSs were sent supported by two letters

of the Bank, coupled with the fact that there was a litigation going on

between the appellant and his son and brother who were directors of

the Company, it was the bounden duty of the WTM to deal with this

aspect and atleast give a prima-facie finding on the basis of an in

depth analysis of the evidence that there was a causal linkage of the

appellant with the manipulative increase in the price of the shares of

the company through bulk SMSs. The WTM has conveniently 10

overlooked these evidences which on the face of it is glaring and

could not be overlooked in a casual manner.

14. The fact that the appellant sold a substantial portion of his

holdings during the increase of the price of the scrip cannot by itself

lead to a conclusion of the appellant indulged in any manipulative or

fraudulent practice which would come under PFUTP Regulations

unless there was further evidence to show that the appellant was

acting in concert as a homogenous group with other entities. No

such observation or prima-facie evidence has been given by the

WTM.

15. We are, consequently, of the opinion that the impugned order

in so far as it relates to the appellant cannot be sustained.

16. SEBI has power to pass interim orders and such interim orders

can also be passed ex-parte. Interim orders are passed in order to

prevent further possible mischief of tampering with the securities

market. If during investigation, it is found prima-facie, that the

person is indulging in manipulation of the securities market, it would

be obligatory for SEBI to pass an interim order or for that matter an

ex-parte interim order in order to safeguard the interests of the

investors and to maintain the integrity of the market. Normally,

while passing an interim order, the principles of natural justice has to

be adhered to, namely, that an opportunity of hearing is required to 11

be given. Procedural fairness embodying natural justice is to be

applied whenever action is taken affecting the rights of the parties.

At times, an opportunity of hearing may not be pre-decisional and

may necessarily have to be post-decisional especially where the act

to be prevented is imminent or where action to be taken brooks no

delay. Thus, pre-decisional hearing is not always necessary when ex-

parte ad-interim orders are made pending investigation or enquiry

unless provided by the statute. In such cases, rules of natural justice

would be satisfied, if the affected party is given a post-decisional

hearing.

17. However, it does not mean that in every case, an ex-parte

interim order should be passed on the pretext that it was imminent to

pass such interim order in order to protect the interest of the investor

or the securities market. An interim order, however, temporary it

may be, restraining an entity/person from pursuing his

profession/trade may have substantial and serious consequences

which cannot be compensated in terms of money.

18. Thus, ex-parte interim order may be made when there is an

urgency. As held in Liberty Oil Mills & Ors. vs. Union of India &

Ors. [AIR (1984) SC 1271] decided on May 1, 1984, the urgency

must be infused by a host of circumstances, viz. large scale misuse

and attempts to monopolise or corner the market. In the said 12

decision, the Supreme Court further held that the regulatory agency

must move quickly in order to curb further mischief and to take

action immediately in order to instill and restore confidence in the

capital market.

19. However, when an ex-parte interim order is passed and a party

approaches the authority for vacation of the ex-parte order, the

authority is required to act prudently especially when the party

approaches the authority immediately for its vacation which in the

instant case was done within three days from the passing of the ex-

parte order. The appellant filed its reply as early as on November 3,

2017. However, the ex-parte interim order continued till the

confirmatory order was passed on October 30, 2018. In our opinion,

apart from the delay in disposal of the matter, the ex-parte order was

confirmed mechanically without any application of mind and without

considering the relevant documents. In our opinion, there was no

shred of evidence to come to a prima-facie conclusion that the

appellant was indulging in unfair trade practices with a manipulative

intent to manipulate the price.

20. The appellant has stated on affidavit before SEBI on December

23, 2017 that he has no other source of income except trading in

shares and that as a result of the ex-pate order, his broker

prematurely closed his trading positions which the appellant had 13

taken in F&O segment resulting in a loss of Rs. 50 lacs. This aspect

has not been considered by the WTM. We are further of the opinion

that whenever an ex-parte order is granted, an endevour should also

be made to dispose of the matter as expeditiously as possible no

sooner when the party appears. In the instant case, the ex-parte order

was passed on November 1, 2017 and the appellant filed his replies

on November 3, 2017, November 28, 2017 and December 23, 2017.

It took the WTM almost a year to dispose of the application. We

find that at this late stage there was no real urgency to continue with

the restraint order. Passing a confirmatory order virtually puts a

stoppage on the appellant's right to trade which in the instant case is

based on non-consideration of evidence and, in our opinion, is harsh

and unwarranted. In our opinion, for the aforesaid reasons, the

appellant is, thus entitled to get costs from the respondent.

21. For the reasons stated aforesaid, the ex-parte ad-interim order

as confirmed by the confirmatory order cannot be sustained and are

quashed in so far as it relates to the appellant. It would be open to

SEBI to pass a fresh order in accordance with the principles of

natural justice if and when fresh evidence comes before it. In the

circumstances of the case, the appellant is entitled to get costs and is

computed at Rs. 50,000/- (Rupees Fifty Thousand Only) which shall

be paid by the respondent to the appellant within four weeks from 14

today. Proof of compliance will be intimated to the Registrar of this

Tribunal.

22. After the aforesaid order was pronounced the learned senior

counsel Shri Setalvad made an appeal for waiver of the costs

contending that such imposition of costs would send a ripple down

the throat of the respondent. Be that as it may. We find that in the

given circumstances of the case, cost is justified. The oral request of

the learned senior counsel for the respondent is rejected.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 04.06.2019 Prepared & Compared by PTM