Shri Umesh Khariwala vs Sebi

Order Reserved on: 12.07.2019

Date of Decision : 09.09.2019

Appeal No. 295 of 2017

Shri Umesh Khariwala 5/18, Jai Lalaram CHS Ltd., Kharkar Lane, Thane - 400 601. ..... 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. L.S. Shetty, Advocate with Mr. U.R. Naik and Ms. Sanika Lalit, Advocates i/b L.S. Shetty & Associates for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Anubhav Ghosh and Ms. Rashi Dalmia, 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 : Dr. C.K.G. Nair, Member

1.

This appeal has been filed to challenge the order of the

Adjudicating Officer ('AO' for short) of the Securities and

Exchange Board of India ('SEBI' for short) dated August 21, 2

2017. By the said order a penalty of Rs. 50 lakh has been

imposed on the appellant under Section 15HA of the SEBI

Act, 1992 for violations of Regulations 3(b), 3(c), 4(1) and

4(2) (r) of the SEBI (Prohibition of Fraudulent and Unfair

Trade Practices) Regulations, 2003 ('PFUTP Regulation' for

short)

2. Facts relevant to the matter are the following: SEBI

conducted an investigation into trading in the scrip of M/s.

Adam Comsof Limited ('ACL' for short) during the period

October 29, 2003 to October 31, 2004. The said investigation

revealed that ACL made a number of corporate

announcements during October 29, 2003 to February 6, 2004

relating to preferential allotment, issuance of redeemable

preferential shares, interim dividend, stock split and bonus

shares etc. Further, after the consequential price rise in the

scrip from Rs. 6.00 to Rs. 22.00 during subsequent period i.e.

February 9, 2004 to August 10, 2004 a group of entities by

the name Rajkumar Basantani Group ('RKB Group' for short)

off-loaded shares of ACL in the market resulting in drastic

decline of price from Rs. 22.00 to Rs. 2.60.

3. Various announcements made by the Company as

indicated in the impugned order are the following:- 3

Sl.

Date News Subject News No.

1. 19.09.2003 Consideration A meeting of the Board of of issuance of directors of AC will be held secured bonds on September 26, 2003 to consider mobilizing funds by issuing secured bonds in the markets.

2. 22.12.2003 Board of ACL has informed BSE that Directors of a meeting of the Board of ACL to Directors of the Company consider issue will be held on December of equity 22, 2003 to transact the shares on following business: (i) To preferential consider the issue of Equity basis. shares through Preferential Allotment. (ii) To consider the issue of Redeemable Preferential Shares. (iii) To call the ensuing Annual General Meeting on Shorter Notice.

3. 31.12.2003 Board of ACL has informed BSE that Directors of the Board of Directors at ACL approves their meeting held on Preferential December 22, 2003 has Issue decided to issue 45,00,000 equity shares of Rs.10/-

each at a premium of Rs.2/-

per share through preferential allotment to promoters and body corporate and to issue 50,00,000 10% Redeemable/Convertible preferential shares@ Rs.10/- each. 4. 21.01.2004 Board of ACL has informed BSE that Directors of a meeting of the BoD of the ACL to Company will be held on declare January 30, 2004, to dividend recommend 10% interim dividend on equity shares, and to split the face value of 4

shares from Rs. 10/- per share to Rs. 5/- per share.

5. 30.01.2004 ACL declares ACL has informed BSE that dividend the meeting held on January 30, 2004, the Board has declared 10% Interim Dividend on equity shares and also decided to spilt the face value of the equity share from Rs 10/- per share to Rs 5/- per share subject to the approval of the members in the general meeting.

6. 01.04.2004 Board of ACL has informed BSE that Directors of a meeting of the BoD of the ACL to Company will be held on consider the April 9, 2004, to consider issue of Bonus the issue of Bonus Shares.

Shares.

7. 19.08.2004 Board of ACL has informed BSE that Directors of a meeting of the Board of ACL to Directors of the Company consider will be held on August 23, Bonus issue 2004 to discuss and recommend the issue of Bonus Shares.

4. It is found that many of the announcements were neither

implemented nor even board meeting dated April 9, 2004 and

August 23, 2004 took place.

5. The appellant was an Additional Director of ACL

during the period October 8, 2003 to June 2, 2004 when many

of the corporate announcements were made by the ACL. In

addition, on April 5, 2004, 1,46,439 shares were transferred to

the account of the appellant held jointly with his wife from an 5

account jointly held by the appellant and one Mr. Anil

Tambe, Director of Collar Biotech Limited. Further, on the

same day the appellant received 1,49,000 shares in off-market

transaction from related / connected entities without any

consideration. Further, on April 12, 2004, 1,58,354 shares

were transferred from an account jointly held by the appellant

and Mr. Jayendra Thakkar, Director of Kolar Biotech Ltd. to

the appellant's account jointly held with his wife. Also, on the

same day i.e. on April 12, 2004 the appellant received

1,58,000 shares in off market transactions from related

entities without any consideration. During April 5, 2004 -

April 28, 2004 the appellant sold 1,88,273 shares through the

trading account maintained with Sharekhan Ltd. in the name

of M/s. Pragati Investments (Proprietor - Pratima Khariwala,

wife of the appellant) for a total consideration of Rs.

13,97,299/-. Also, during April 29, 2004 - May 12, 2004 the

appellant sold 1,17,686 shares in the market for a total

consideration of Rs. 2,80,478/- through the joint account held

in the name of the appellant and his wife with HDFC Ltd. On

June 2, 2004 the appellant resigned from the post of

Additional Director of ACL. The resignation letter was sent to

the Thane office of the company instead of its registered 6

office with shows that the appellant was aware of the fact that

the registered office was closed/non-functional.

6. On February 25, 2010 SEBI passed an order against the

appellant for violation of PFUTP Regulation and thereby

imposed a penalty of Rs. 20 lakh. This tribunal set aside the

said order dated February 25, 2010 on August 20, 2015 and

remanded the matter back to the AO. On October 14, 2016

SEBI issued a show cause notice and on June 29, 2017 and

opportunity of personal hearing was given to the appellant.

7. Thereafter, SEBI furnished details of the transactions of

the appellant in the shares of ACL. On July 31, 2017 another

opportunity of personal hearing was given to the appellant.

8. On August 21, 2017 the AO passed the impugned order

imposing a penalty of Rs. 50 lakh under section 15HA of

SEBI Act, 1992 for violation of various provisions of PFUTP

Regulations.

9. Learned counsel for the appellant Shri L.S. Shetty

contended that only because the appellant was an Additional

Director of ACL for a short time of 8 months from October 8,

2003 to June 2, 2004 the appellant has been held responsible

for the misdoings of ACL. The appellant was a medical 7

doctor and was an employee of M/s Soundcraft Industries

Ltd. which is under the same management of ACL. Since the

Chairman and Managing Director of ACL, Soundcraft and

Kolar Biotech Ltd., three sister concerns resigned and left

India in April 2004 the appellant also resigned from the

company in June 2004. The adjudication order dated February

25, 2010 was passed as an ex-parte order in respect of the

appellant. Since all the directors of ACL had left in 2004 form

32 was not filed with the RoC regarding his resignation.

However, in 2005 itself the appellant informed BSE, NSE and

SEBI that he had never attended any board meeting of ACL.

In response to the show cause notice dated October 14, 2016

the appellant had informed the AO that he is a practicing

medico and he joined as an Additional Director of ACL only

for looking after the technical aspects of the company and

denied having participated in any board meeting of ACL.

Through additional submissions the appellant reiterated these

facts to the AO. When the appellant was informed of his

signatures in the financial results for the quarter ending

December 31, 2003 and in the corporate governance report

for the year appellant noticed that the signature was forged

and informed the same to the AO on August 14, 2017. 8

10. In short the learned counsel for the appellant submitted

that the appellant was only an Additional Director of ACL

and did not have any role in its day-to-day management nor

attended any of the board meetings. His signature was forged

on the financial results and corporate governance report of

ACL. Being not part of any board meeting the appellant was

not aware of any of the corporate announcements made by

ACL nor any of the alleged wrong doings of ACL. Just

because he was an additional director for a short period of

eight months he cannot be held vicariously liable for the

offences, if any, made by the company or its other directors.

Further, the appellant also took the stand that the

Adjudicating Officer should have proceeded on the basis of

the original show cause notice issued in 2009 and should not

have issued another show cause notice in October 2016. This

was against what was ordered by this tribunal while

remanding the matter back to the AO vide its order dated

August 20, 2015.

11. As regards the transactions in the shares of ACL, the

learned counsel for the appellant contended that most of these

transactions were done by M/s Pragati investments, a

proprietary concern of the appellant's wife and not by the 9

appellant and the first holder of those shares was his wife.

Therefore in computation of the penalty only the shares where

the appellant was the 1st holder should have been included. If

the same is done the proceeds come to only Rs. 2,80,478/-.

Therefore, even if penalties are imposed on the appellant it

should have been on the basis of this amount only and not on

the basis of the total sales proceeds calculated at

Rs. 1,677,777/-. In short, it was contended that he had no role

in the corporate announcements made by ACL and his

transactions in the shares of ACL is limited and was done in

the ordinary course of business, having no role in either the

corporate announcements nor in the price rise of the shares of

ACL and therefore he violated no provisions of the PFUTP

Regulations. In order to press his contentions, the learned

counsel for the appellant also relied on the order of the Delhi

High Court in the matter of Rashima Verma vs Securities

and Exchange Board of India (2009) 157 DLT 417 and

stated that a person sought to be arraigned as an accused has

to have some connection with the day to day management of

the Company or in relation to the offences committed by the

Company.

10

12. We have also heard the learned senior counsel for the

respondent SEBI, Shri Gaurav Joshi. It was urged by him that

misleading corporate announcements by ACL is a matter of

record. It is also an admitted fact that the appellant was a

director of ACL during October 2003 to June 2004

irrespective of whether he was an additional director, which is

only a designation before getting confirmed by the

shareholders. Through these various misleading corporate

announcements the price of the scrip of ACL was increased

from Rs. 6/- to Rs. 22/- during the relevant time during which

the appellant had offloaded a large quantity of shares and

afterwards the price fell sharply to Rs. 2.60 on August 10,

2004. Despite being a director in the board of ACL, apart

from claiming that he did not participate in the meetings etc,

the appellant did not produce any evidence and therefore just

relying on ignorance or negligence does not absolve the

appellant from his duties and liabilities of a Director. In any

case the Compliance Report on Corporate Governance and

the quarterly audit reports clearly show that the appellant had

attended the board meetings during that quarter. The

signatures therein tally with the signatures of the appellant in

his PAN card. Further, all the companies-ACL, Kolar Biotech

Ltd. and Soundcraft Industries Ltd. belong to the Rajkumar 11

Basantani group and the appellant was an employee of one of

them and was a Director of another and hence cannot pretend

complete ignorance of the on goings in ACL.

13. The learned senior counsel further submitted that

assuming that the appellant was not aware of the corporate

announcements etc. it is inexplicable how he had received a

large number of shares of ACL off market and why he has

bought and sold a huge quantity of shares during the relevant

time. These trades are not disputed nor the gain of about Rs.

17 lakh. The appellant held 18 demat accounts either

individually or jointly with others as provided by the

depositories. At the same time the appellant describes himself

as a small-time investor. His claim of being a sub- broker in

order to save brokerage is also not substantiated with any

evidence. In the face of the evidence of large-scale dealings in

the script of ACL during the relevant time of misleading

corporate announcements and soon thereafter a director of the

company cannot feign ignorance and take shelter. The

preponderance of probability alone would make him liable. In

the instant matter further no explanation has been given by

the appellant either before SEBI or before this Tribunal

regarding his transactions in the scrip of ACL; how he got 12

large number of shares off market and at what price etc. is

still unknown to us. Relying on the judgment of the Hon'ble

Supreme Court of India in the matter of N. Narayanan vs

Adjudicating Officer, SEBI, MANU/SC/0426/2013, the

learned senior counsel for SEBI emphasized the responsibility

of the Directors.

14. We find no merit in the contentions made by the

appellant. The contention that no fresh show cause notice

could be issued by the AO is without any merit since this

Tribunal had remanded the matter on the ground of its ex-

parte nature and asking the AO to pass a fresh order in

accordance with law. It did not prevent the AO from issuing a

fresh show cause notice or a supplementary show cause notice

as deemed appropriate. We also find no merit in the

submission that the appellant as a director was fully oblivious

to the ongoings in the company in which he was a

director/additional director for 8 months. His submission that

the signatures were forged in the documents submitted by the

company has no merit and we would treat it as an afterthought

in the face of the fact that the company was facing several

disputes and litigations and all the Directors had left the 13

Company with the Chairman and Managing Director even

leaving the country.

15. It is to be noted that large quantity of shares were

transferred to the demat account of the appellant jointly held

with his wife by other directors of Kolar Biotech Ltd. and the

appellant was having joint account with directors of Kolar

Biotech Ltd. In addition the appellant received 1,58,000

shares off market without any consideration for which no

explanation has been given.

16. Examination of the demat account statements of the

appellant, as submitted by depositories reveal the following.

The appellant had 18 demat accounts held either singly or

jointly with others; many of which are presently closed.

During the relevant period the appellant had substantial

transactions in the scrips of Adam Comsof Ltd., Kolar

Biotech Ltd., and Soundcraft Industries Ltd. Seven of these

accounts show transactions in the scrip of Adam Comsof Ltd.

including off-market transfers. Two of the accounts were

jointly held with Mr. Anil Tambe and Mr. Jayendra Thakkar,

respectively, who were directors of Kolar Biotech Ltd. The

Joint account with Anil Tambe, having DP ID- IN301854

Client ID- 10038476 received off market credit of 1,66,439 14

shares out of which 1,46,439 shares were transferred to the

account of the appellant held jointly with his wife Ms.

Pratima Khariwala on 05.04. 2004. The joint account with

another director Mr. Jayendra Thakkar, having DP

IDIN301854 and Client ID- 10038468 received off-market

credit of 1,58,354 shares which was in turn transferred on

12.04.2004 to the joint account of the appellant held with his

wife Ms. Pratima Khariwala.

17. The complete unwillingness to give any explanation

relating to large scale transactions in the shares of ACL,

including off market transactions, with parties in the RKB

Group at the relevant time itself speaks volumes of the

collusion of the appellant with the company ACL and its

group entities. Neither the explanation of being a small

investor nor a sub- broker without any documentation nor that

the first holder of most of the shares was his wife do not

absolve the appellant from these dealings particularly when

the appellant was an additional director of ACL. Therefore

even assuming that he was not party to the corporate

announcements made by ACL he was conscious of the price

rise in the script of the company and offloaded huge amount

of shares of ACL in the market and made a substantial profit 15

of almost Rs. 17 lakh. Therefore the finding that he has

violated provisions of the PFUTP Regulations cannot be

faulted. Given these facts we find no merit in the appellant's

reliance on the order of Rashima Verma (supra), which is

distinguishable on facts.

18. The penalty imposable under Section 15HA of SEBI

Act at the relevant time was that of twenty-five crore rupees

or three times the amount of profits made out of such

practices, whichever is higher. Given the undisputed facts

about the various transactions in the shares of ACL by the

appellant when he was an Additional Director of ACL and

other facts as detailed herein make the appeal fail. The

penalty of Rs. 50 lakh imposed in the given facts of the case

is fair and just.

19. Accordingly, appeal is dismissed with no order as to

costs.

Sd/-

Justice Tarun Agarwala Presiding Officer Sd/-

Dr. C.K.G. Nair Member Sd/-

Justice M.T. Joshi Judicial Member 09.09.2019 Prepared and compared by:msb