T. Takano vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Order Reserved on: 11.12.2019 Date of Decision : 29.01.2020 Misc. Application No. 3 of 2019 And Misc. Application No. 532 of 2019 And Appeal No. 407 of 2018 A.T. Rajan 301 Daisy, Omaxe Green Valley, Sector 42, Faridabad - 121 010. ...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. Ashim Sood, Advocate with Ms. Shreya Suri, Mr. Rhythm Buaria and Mr. Saurabh Bachhawat, Advocates i/b Indus Law for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Vivek Shah, Advocate i/b ELP for the Respondent.

WITH Misc. Application No. 579 of 2019 And Appeal No. 427 of 2018 T. Takano 28-186, Tsutsujigaoka, Aoba-ku, Yokohama-city, Kanagawa-pref., 227-0055, Japan ...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 2

Mr. Ashim Sood, Advocate with Ms. Shreya Suri, Mr. Rhythm Buaria and Mr. Saurabh Bachhawat, Advocates i/b Indus Law for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Vivek Shah, Advocate i/b ELP 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.

These two appeals have been filed to challenge the

confirmatory order dated August 16, 2018 passed by the Whole

Time Member ('WTM' for short) of Securities and Exchange

Board of India ('SEBI' for short). By the said order directions

contained in the interim order dated February 12, 2018, along with

the corrigendum dated March 6, 2018, were confirmed. By the

interim order appellants, among others, have been restrained from

accessing the securities market or dealing with the securities

market directly or indirectly and BSE Limited ('BSE' for short)

was directed to appoint an independent auditor / audit firm for

conducting a detailed forensic audit of the books of account of

Ricoh India Limited ('Ricoh' for short) from the financial year

2012-13 till March 6, 2018. The said forensic audit had to be

completed and the report submitted to SEBI through BSE within 3

six months from March 6, 2018 i.e. latest by early September

2018. Since both these appeals are filed challenging the same

impugned order, by consent of the parties, both the appeals are

heard together and decided by this common decision by taking

Appeal No. 407 of 2018 as the lead matter.

2. Following certain observations by the statutory auditor of

Ricoh M/s. BSR & Co. LLP while conducting review of the

financial statements of quarter ending June 30, 2015 and half year

ending September 30, 2015 Ricoh ordered a preliminary

investigation through PricewaterhouseCoopers Private Limited,

India ('PwC' for short). Based on the findings in the preliminary

investigation report Ricoh sent a letter to SEBI dated April 20,

2016 stating that the financial statements of the Company for the

quarters ending June 30, 2015 and September 30, 2015 did not

reflect the true and fair view of the state of affairs of the Company

and therefore requested SEBI to conduct an investigation into

possible violations of SEBI (Prohibition of Fraudulent and Unfair

Trade Practices relating to Securities Market) Regulations, 2003

("PFUTP Regulations" for short). It was also stated that Ricoh

was also doing further investigation to ascertain the extent of

deviations from the true state of affairs and the reasons for the

same. Subsequently, Ricoh disclosed a loss of Rs. 1118 crore in its 4

financial statements for the year ending March 2016 in its annual

report. Copy of the final report / forensic review by PwC was also

submitted to SEBI by Ricoh vide letter dated November 29, 2016.

3. Based on the aforesaid information, SEBI initiated an

investigation in the matter, particularly to examine the role of the

Key Managerial Person (KMP) responsible for such

misstatements in the books of account of Ricoh. SEBI also

summoned to Mr. Manoj Kumar, Mr. Arvind Singhal and

Mr. Anil Saini three senior officials of Ricoh to appear before the

investigating authority for recording their statements. Mr. Manoj

Kumar and Mr. Arvind Singhal, in addition, also gave their

written submissions. Thereafter, SEBI sought further details from

Ricoh which was also provided by the Company. Thereafter based

on its own investigation and findings it was noted by SEBI that

the financial misstatements commenced from the financial year

2012-13 onwards and Ricoh suffered considerable amount of loss

on account of transfers to third parties, write-offs or non-recovery

of debts, non-existence of inventory etc. It was further noted that

share price of Ricoh had gone up considerably on account of the

misstatements in the accounts and consequent painting of a rosy

picture regarding its profitability. Share price rose from Rs. 33/-

on April 2, 2012 to Rs. 1030/- on August 4, 2015 which, however, 5

declined to Rs. 413/- on April 1, 2016 and further to Rs. 193/- on

December 12, 2016. Similarly, from a net loss of Rs. 1.32 crore in

2012-13 the loss increased to Rs. 1118 crore in 2015-16.

4. Appellant in Appeal No. 407 of 2018 was a long serving

official of Ricoh and was Senior Vice President and Chief

Strategy Officer during 2014-15 and 2015-16. Subsequently on

April 13, 2016 he was appointed as MD and CEO. Appellant in

Appeal No. 427 of 2018 was the MD and CEO of Ricoh during

2012-13 to 2014-15.

5. Learned Counsel Shri Ashim Sood representing the

appellants submits that the impugned order has been passed in

absolute disregard of the settled principles of natural justice and

fair hearing. Though written submissions of the appellants were

taken on record by the WTM of SEBI those submissions have not

been considered while confirming the interim order. Moreover,

both the appellants were not given another opportunity for

personal hearing though the appellants repeatedly sought the same

while filing their supplementary submissions.

6. Further, it was contended by the learned Counsel for the

appellants that SEBI relied only on the findings in the preliminary

report / forensic audit by PwC but the same report did not find any 6

evidence against the appellants nor their names were included in

any wrongdoing. Therefore, while relying on the said PwC report,

instead of sticking to the finding in the report that three employees

of Ricoh and an outside entity was involved in the malafide

activities of financial wrongdoing, the names of the appellants

have been arbitrarily added in the Show Cause Notice and

thereafter an ex parte interim order was passed against them

without any basis. However, the appellants fully cooperated with

the enquiry of WTM of SEBI and provided detailed replies to the

WTM. Instead of considering those replies the impugned order

just records the same and proceeded to confirm the directions

contained in the interim order without having any regard to the

consequences of the restraint order on the appellants.

7. It was specifically pointed out by the learned Counsel for the

appellant that vide letters dated March 6, 2018, June 6, 2018 and

June 28, 2018 and during personal hearing on June 11, 2018 that

there was no mention whatsoever regarding any alleged role and

involvement of the appellant in any fraudulent transaction in the

interim order. It was also submitted that the appellant was not

dealing with any of the financial matters of Ricoh; he was made

MD only on April 13, 2016 and he was never Head of SCM and

was only Senior Vice President, Corporate Strategy Office etc. 7

However, these submissions are not considered and without

considering the submissions the interim directions were confirmed

vide the impugned order. Similarly, Mr. T. Takano also vide his

letters dated June 6, 2018 and June 28, 2018 and personal hearing

on June 11, 2018 also submitted that there was no evidence

relating to his wrongdoings and only because he was the MD and

CEO in previous years his name has been included in the list of

those who are responsible for the alleged wrongdoings. Therefore,

a vicarious liability has been cast upon this appellant without any

evidence / finding about his role in the wrongdoings only because

he was MD and CEO of Ricoh and such liability has been

imposed without considering the submissions made by the

appellant.

8. The learned Counsel for the appellants while substantiating

the stand also read out paragraph 28 of the impugned order which

reads as follows:-

"I note that the facts of the case clearly Point towards large-scale irregularities in the business transactions of the company and manipulations in its books of accounts amounting to fraud. However, the actual extent and time span of such irregularities and manipulations and the exact roles of the Noticees in such alleged fraud are still not fully ascertained. In the absence of any crystallised findings with regard to the individual roles of the Noticees, it would be premature to give credence to the submissions of the individual Noticees."

8 Similarly, he also emphasized paragraph 29 of the said order

which reads as follows:-

"I note that the independent auditor / audit firm, appointed by the BSE for conducting a detailed forensic audit of the books of accounts of Ricoh for the financial year 2012-13 onwards, as per the directions in the Interim Order, is yet to submit its report to SEBI through BSE and a clear picture regarding the financial affairs of the company and the role of various Noticees in the alleged fraud is yet to emerge pending such investigation. Therefore, it would be prudent to keep all questions related to the role of the Noticees in the alleged fraudulent and manipulative activities open so that the investigations pending in the matter may not be prejudiced in any manner by this order. Consequently, I find it appropriate not to vacate the directions issued against the Noticees vide the Interim Order at this stage, in the interest of the investors and the integrity of the securities market."

9. Therefore, the learned Counsel for the appellants contended

that there is no evidence relating to any malafide activities or any

collusion or abetment from the side of the appellants. The forensic

report as ordered by SEBI had to be made available through BSE

latest by the first week of September 2018. Even after one year

SEBI has not brought out the said report or passed any final order

in the matter. Therefore, appellants are undergoing restraint since

March 6, 2018 for no fault of theirs and since there is no evidence

relating to any wrongdoing from the part of the appellants, just

based on suspicion and on the presumption that evidence may be 9

forthcoming in the forensic report etc. the impugned order cannot

be sustained.

10. In order to press his contentions the learned Counsel for the

appellants relied on Union of India (UOI) vs Chaturbhai M.

Patel & Co. (MANU/SC/0046/1975) and submitted that in the

absence of proving a case of fraud against the appellants the

impugned order cannot survive. Further, by relying on

Maharashtra State Board of Secondary and Higher Secondary

Education vs K.S. Gandhi and Others (1991) 2 SCC 716 it was

canvassed that "If there are no positive proved facts, oral,

documentary or circumstantial from which the inferences can be

made the method of inference fails and what is left is mere

speculation or conjecture" the alleged prima facie violations

cannot be sustained without evidence. Further relying on

63 Moons Technologies Ltd. vs Union of India 2019 SCC

OnLine SC 624 it was submitted that only subsequent materials

i.e., materials in the form of facts that have taken place after the

order in question is passed, that can be looked at or relied on

subsequent to passing of the impugned order and therefore the

forensic audit report which is now available and sought to be used

as evidence to sustain the impugned order at this stage is legally

untenable. Learned Counsel for the appellant also relied on State 10

of Goa and Another vs Colfax Laboratories Ltd. and Another

(2004) 9 SCC 83, Fedco (P) Ltd. Another vs S.N. Bilgrami

Others (1960) 2 SCR 408 : AIR 1960 SC 415 and The Siemens

Engineering Co. of India Ltd. vs. The Union of India and

Another (1976) 2 SCC 981 to support his contentions.

11. Learned Senior Counsel Shri Gaurav Joshi appearing on

behalf of SEBI, on the other hand, contended that the impugned

order is not just based on the report / forensic review of PwC; in

addition SEBI also conducted an investigation and sought details

from the Company etc. The impugned order contains clear cut

evidence relating to large scale diversion and misstatements of

funds of Ricoh to the tune of Rs. 1118 crore. By giving a rosy

picture and thereby appellants misleading the public has resulted

in considerable loss to the investors and therefore passing the

impugned order was very much in public interest since it was

relating to the interest of a listed Company, its investors and the

stakeholders at large.

12. The learned Senior Counsel for respondent SEBI further

contended that for unknown reasons the PwC report was restricted

to chose a six months period of June and September quarters of

2015 only when it was already on record that misstatements of

accounts started from financial year 2012-13 onwards. Hence, the 11

attempt of the management of Ricoh, which included the

appellants and other noticees, was just to cover up the entire issue

and hence the limited brief of enquiring into six months financial

statements given to the PwC but even this report of PwC dated

November 17, 2016 points out serious anomalies in the financial

statements of Ricoh as given in paragraphs 4 and 5 at page 3 of

the impugned order. Similarly, its dealing through entities such as

FDSL and Redhex belonging to relatives of the noticees, transfer

of funds and transactions of circular nature through those entities

are all part of the finding of the SEBI's investigation as detailed at

pages 5, 6 and 7 of the impugned order. The relationship between

persons involved in the suspect transactions are also detailed in

the PwC report as shown at page 8 of the impugned order. SEBI's

own investigation by which Rs. 683 crore losses came into picture

and how the share prices and profitability of the Company got

affected in the process are all on record.

13. It was also contended by learned Senior Counsel for SEBI

that KMPs such as MD & CEO cannot take shelter under

ignorance of the wrongdoings in the Company and place such

wrongdoings only at the doorsteps of their junior officers. In the

instant case the amount of misstatements is more than Rs. 1100

crore and no MD who has been at the helm for years can pretend 12

ignorance of the same and get away with it. As regards Mr. A.T.

Rajan irrespective of whether he was Head of SCM (in fact the

order at page 12 states the designation correctly based on his own

statement), in any case he was a senior officer of Ricoh as Senior

Vice President and Chief Strategy Officer who was senior enough

to be made the MD and CEO on April 13, 2016. Even if he was

not in-charge of the finance division findings regarding

misstatements of accounts relating to inventories squarely come

within the Supply Chain Management unit which was his

responsibility and given such a finding his involvement is not a

matter of just conjecture and suspicion.

14. The learned Senior Counsel for the respondent SEBI also

guided us through various transactions of Ricoh with FDSL and

Redhex and other companies involved and the role of the KMPs

of Ricoh and other third parties who have been found to have

violated Section 12A(a), 12A(b) and 12A(c) of SEBI Act, 1992

read with regulations 3(b), 3(c), 3(d), 4(1), 4(2)(e), 4(2)(k) and

4(2)(r) of PFUTP Regulations. The learned Senior Counsel further

submitted that more evidence is now available through the

forensic audit got done by BSE, report of which is now available,

which SEBI wanted to place on record. It was also submitted that

vide affidavit dated September 17, 2019 the concluding 13

paragraphs of the said forensic report was placed on record which

contains the appellants' role. Therefore, while the investigation is

continuing, it is also in the fitness of things that some more time

be granted to SEBI to pass a final order taking into account the

evidence contained in the forensic report and other evidence

collected in the interim and thereby issuing a comprehensive show

cause notice. On instructions, the learned Senior Counsel further

submitted that such a show cause notice will be issued within one

week and subject to the appellants cooperation a final order can be

passed within a very short time as may be allowed by this

Tribunal.

15. The learned Senior Counsel, relying on Chairman, All India

Railway Recruitment Board and Another vs K. Shyam Kumar

and Others (2010) 6 SCC 614 submitted that additional grounds

can be looked into to examine the validity of an order in public

interest. SEBI has passed the impugned order under Section 11

and 11B in public interest. Similarly, relying on K.K. Ahuja vs

V.K. Vora and Ors. MANU/SC/1111/2009 it was contended that

the role of MD or Joint MD and their accountability are well

established in law and hence application of Section 27 of the SEBI

Act to contend that Mr. Takano is squarely covered in the matter. 14

16. Having heard the detailed submissions made by the learned

counsel for the parties and having perused the documents placed

before us we are of the view that interim directions passed on

February 12, 2018 has been in operation for about 21 months now.

Even after the confirmatory order dated August 16, 2018 more

than 16 months have passed. The forensic report was to be

available latest by first week of September 2018 pending which

hearing of these appeals had been postponed periodically. We

further note that while hearing on a Misc. Application filed by

Mr. Arvind Singhal, one of the noticees in this proceedings

against whom also directions have been passed by the said orders,

we had directed SEBI to make the forensic report known by the

last week of August 2019.

17. Be that as it may. The more proximate issue before us is to

decide whether the impugned order can be sustained on its own

merits. Here we find paragraph 28 and 29 of the impugned order

(quoted at paragraph 5 and 6 of this order) bring out only a

suspicion about the role of the appellants. Moreover, we note that

though the submissions of the appellants have been noted in detail

in the impugned order they have not been dealt with appropriately.

Concluding part of paragraph 28 of the impugned order states as

below:-

15

"In the absence of any crystallised findings with regard to the individual roles of the Noticees, it would be premature to give credence to the submissions of the individual Noticees."

Similarly, paragraph 29 of the impugned order further states that:-

"a clear picture regarding the financial affairs of the company and the role of various Noticees in the alleged fraud is yet to emerge pending such investigation."

18. Therefore, the question before us is how long the appellants

would be kept out of the market through directions contained in an

interim order and confirmatory order which are based on only a

prima facie suspicion and vicarious liability attributable to a MD /

CEO. This question becomes more relevant particularly in the

facts of the case where we are told that the Company Ricoh itself

is under liquidation and the appellants are not in-charge of the said

Company and therefore not in a position to influence the decisions

of the Company. Moreover, we also note that the submissions

made by the appellants have not been dealt with in the impugned

order in any meaningful manner thereby effectively confirming

the interim directions without taking into account the submissions

and the documents made available by the appellants. Given these

factors we find it difficult to sustain the impugned order qua the

appellants.

16

19. In the result, both the appeals succeed and the impugned

order is quashed qua the appellants. However, SEBI is at liberty

to issue a fresh show cause notice and proceed in the matter in

case evidence against the appellants are available through the

forensic audit report or through SEBI's own investigation.

No orders on costs.

20. Misc. Application Nos. 3 of 2019 and Misc. Application

No. 532 of 2019 in Appeal No. 407 of 2018 and Misc. Application

No. 579 of 2019 in Appeal No. 427 of 2018 seeking interim relief

have become infructuous and are disposed of as such.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member 29.01.2020 Prepared and compared by:msb