Umashankar Agarwal vs Sebi

Date of Decision: 04.05.2018

Appeal No. 78 of 2018

Umashankar Agarwal B/205, B Wing, 2nd Floor, Rajniketan, Opp. Patkar College, S.V. Road, Goregaon (West) Mumbai- 400 062 ...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. Saurabh Bachhawat, Advocate i/b Mr. Manoj Jain, Chartered Accountant for the Appellant.

Mr. Vishal Kanade, Advocate with Mr. Shantanu Mitra and Mr. Anubhav Ghosh, Advocates i/b Desai & Diwanji for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar (Oral)

1.

Appellant is aggrieved by the order passed by the Adjudicating

Officer ("AO" for short) of Securities and Exchange Board of India

("SEBI" for short) on 19.01.2018. By the said order penalty of ` 16 lac

is imposed on the appellant under Section 15HA of the Securities and

Exchange Board of India, Act, 1992 for aiding and abetting Mr. Bimlesh

Kumar Mishra (Mr. Mishra) in off-loading the fraudulently dematted 2

excess shares of Somani Cement Company Limited. ("SCCL" for

convenience) to the innocent investors in the securities market.

2. SEBI conducted investigation in the scrip of SCCL a public listed

company for the period from 02.07.2004 to 01.04.2005. Investigation

carried out by SEBI revealed that during the investigation period SCCL

made several corporate announcements which appeared to be false and

misleading. It was also noticed that during the investigation period

SCCL had issued 44,73,450 shares in excess of its paid up capital and out

of said excess shares, 37,58,450 shares were dematted by SCCL during

the period from February 2005 till the end of the investigation period and

the said excess shares dematted by Mr. Mishra were sold in the market to

gullible and innocent investors through various entities including the

appellant.

3. It is not in dispute that appellant was one of the persons who had

acquired shares of SCCL from Mr. Mishra in off market and sold them

on-market by receiving an amount of 25 paise per share. Very fact that

the appellant agreed to acquire shares of SCCL in off-market from

Mr. Mishra and sell the said shares on market by receiving 25 paise per

share clearly shows that it was not a transaction carried out in the

ordinary course of business.

4. By an order dated 23.12.2010 SEBI had held that the appellant

through the aforesaid transactions aided and abetted Mr. Mishra in

fraudulently off-loading the excess dematted shares of SCCL and

accordingly imposed penalty of ` 1 lac on the appellant on the ground 3

that the appellant had violated the Securities and Exchange Board of

India (Prohibition of Fraudulent and Unfair Trade Practices relating to

Securities Market) Regulations, 2003 ("PFUTP" Regulations" for

convenience). On appeal this Tribunal set aside the said ex-parte order

and directed SEBI to pass fresh order on merits after hearing the

appellant.

5. Accordingly, the appellant was heard and by the impugned order it

is held that the appellant has violated the PFUTP Regulations and penalty

of ` 16 lac has been imposed on the appellant.

6. Grievance of the appellant is that firstly, just because the ex-parte

order initially passed by imposing penalty of ` 1 lac has been set aside by

this Tribunal and remanded for fresh decision, SEBI is not justified in

enhancing the penalty up to ` 16 lac. Secondly, having not taken any

action against the depositories who were equally responsible for issuing

the excess dematted shares and having not initiated any penalty

proceedings against Mr. Mishra who was the main culprit in the present

case, SEBI is not justified in imposing penalty of ` 16 lac on the

appellant.

7. It is further submitted on behalf of the appellant that in all 17

entities including the appellant had received shares of SCCL in off-

market from Mr. Mishra and sold them on-market and out of 17 entities

penalty has been imposed on 12 entities in the range of ` 1 lac to ` 2 lac

for the similar violations and three persons have been exonerated by 4

wrongly recording that they had not received shares of SCCL in off-

market from Mr. Mishra. In these circumstances, it is submitted, that

imposing penalty of ` 16 lac on the appellant is unjustified.

8. We find merit in the aforesaid contentions as in our opinion, in the

present case, SEBI has unduly favoured the violator who are found to

have committed serious fraud on the securities market.

9. It is a matter of record that the total paid up capital of SCCL in

terms of number of shares as on 05.03.2005 was 71,68,900 shares,

whereas, the total number of shares issued by SCCL as on 05.03.2008

stood at 1,16,42,350 shares. Thus, SCCL had issued 44,73,450 shares in

excess of its paid up capital. Out of 44,73,450 excess shares, 37,58,450

shares were dematted by SCCL during the investigation period. It is also

recorded in the impugned order that Mr. Mishra, Charman and Director

of SCCL had dematted 29,24,500 shares after 23.02.2005 and sold the

same on-market to the innocent investors through various entities

including the appellant who received shares from Mr. Mishra in off-

market transactions. It is also recorded that Mr. Mishra had transferred

41,31,000 shares of SCCL in the off-market to a number of entities who

sold those shares in the market and created artificial volume in the scrip

of SCCL.

10. Issuing shares in excess of authorised share capital and further

dematting those unauthorized excess shares and allowing those shares to

be sold on-market to innocent investors is a serious fraud on the 5

securities market. In such a case, SEBI is unjustified in not initiating any

action against the depositories.

11. It is not in dispute that in the present case, the main architect in

committing serious fraud on the securities market was Mr. Mishra,

Chairman and Director of SCCL. In fact Mr. Mishra, vide letter dated

27.04.2007 had admitted that the shares in excess were intentionally sold

by him in order to meet the liability of SCCL towards unsecured

creditors. In such a case, merely debarring Mr. Mishra from accessing

the securities market for 10 years and not even initiating penalty

proceedings against Mr. Mishra who had collected crores of rupees by

selling the unauthorized excess shares is wholly unjustified.

12. Apart from the above, when 17 entities including the appellant

were found to have aided and abetted Mr. Mishra in off-loading the

fraudulently dematted excess shares of SCCL to innocent investors in

gross violation of PFUTP Regulations, imposing penalty ranging from

` 1 lac to ` 2 lac on most of the entities as against the imposable penalty

of ` 25 crore under Section 15HA of SEBI Act clearly shows that SEBI

has shown undue leniency by imposing nominal penalty on the violators.

13. In any event, having imposed penalty of ` 1 lac in the ex-parte

order passed against the appellant, without assigning any reasons SEBI is

not justified in treating the appellant differently from other similarly

situated violators and imposing higher penalty of ` 16 lac on the

appellant.

6

14. It is further shocking to note that in respect of some of the entities

involved in the present case (eg. In the case of Narendra M. Patel and

Umesh H. Patel) the adjudication proceedings have been dropped by

recording a specific finding that they had not received shares of SCCL in

off-market from Mr. Mishra. In fact, the investigation report specifically

records that those two persons (like the appellant) had also received

shares of SCCL in off-market from Mr. Mishra. Thus, it is apparent that

some of the violators have been let off by recording a finding contrary to

the facts on record. It is difficult to believe that dropping of the

adjudication proceedings in case of some of the violators by recording

findings which are contrary to the facts on record was an inadvertent

error.

15. In these circumstances, the appellant is justified in contending that

he is being victimized for approaching this Tribunal and that there is no

reason to treat the appellant differently from other similarly situated

violators. In our opinion, the course adopted by SEBI in the present case

is detrimental to the interests of the securities market.

16. Accordingly, for all the aforesaid reasons, we set aside the

impugned order passed against the appellant and restore the matter for

fresh decision on merits. We sincerely hope that SEBI would take

appropriate remedial measures in the matter and ensure that its credibility

as an efficient market regulator is not eroded.

7

17. Since the matter is being remanded on account of the abnormalities

noticed in the order of SEBI, we would have imposed heavy costs on

SEBI in the present case. However, looking to the fact that the appellant

who was a Director of Agrawal Shares Finance Pvt. Ltd. has prima facie,

indulged in aiding and abetting Mr. Mishra in off-loading fraudulently

dematted excess shares of SCCL and has indulged in making misleading

statements in his letter dated 04.05.2017 and in the statement recorded on

27.11.2006, we refrain from imposing costs. Apart from the above, it is

difficult to believe that the appellant, a Director of a company. could not

understand the motive behind Mr. Mishra transferring shares of SCCL in

off-market to the appellant and giving to the appellant 25 paise per share

for selling the said shares in the market.

18. In the result, impugned order is set aside and restored for fresh

decision, with no order as to costs. Registry is directed to forward a copy

of this order to the Chairman, SEBI for information and necessary action.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 04.05.2018 Prepared & Compared By: PK