Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): Suresh B Menon, Adjudicating Officer, imposed a monetary penalty of Rs three lakh on Viaan Industries and its promoters under the provision of Section 15A(b) of the SEBI Act, for violating Regulations 7(2), 7 SEBI 7(2) (a)  and 7 (2) (b) of the Prohibition of Insider Trading Regulations, 2015 (PIT).

In the pertinent matter, on October 29, 2015, Viaan Industries Limited (VIL) made a preferential allotment of 5,00,000 equity shares to four persons and in the said preferential allotment 1,28,800 shares each were allotted to Noticee no. 1 & 2 viz., Ripu Sudan Kundra and Shilpa Shetty Kundra, respectively. Both the noticees were required to make the necessary disclosure to the company in terms of the provisions of Regulation 7(2) (a) of the PIT Regulations, as the relevant transactions in question through the aforementioned preferential allotment exceeded Rupees 10 Lakh in value. And the Company was required to make the necessary disclosures to the stock exchange within two trading days of the receipt of the disclosures from Noticee no. 1 and 2 or from becoming aware of such information pertaining to the transactions. But during the course of investigation, it was observed that the Noticees allegedly failed to make the relevant disclosures required under Regulations 7 (2) (a) and 7 (2) (b) of the PIT Regulations within the stipulated time period. Thereafter, it was further observed that even when the disclosure was so made it was after a delay of more than 3 years.

The notices submitted that “the delay in making the necessary disclosures under the PIT (Prohibition of Insider Trading) Regulations was due to inadvertence and without any malafide intention.”

The adjudicating officer, while rejecting the submission, stated that, “the disclosure requirements mandated under the respective regulations serve very important purposes. The stock exchange is informed so that the investing public will come to know of the position enabling them to stick on with or exit from the company. Timely disclosures of the details of the shareholding of the persons acquiring substantial stake is of significant importance as such disclosures also enable the regulators to monitor such acquisitions. In the instant matter, the acquisition of shares by the promoters through the preferential allotment having value of more than Rs 10 Lakh is of relevance from an investors’ perspective”.

Therefore, considering the available records and facts and circumstances of the case at hand imposed a monetary penalty upon the Noticees under section 15 A (b) of the SEBI Act.[Viaan Industries Limited, In re, Order/SBM/KL/2021-22/12740-12742, decided on 28-07-2021]


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: A Division Bench of Dr D.Y. Chandrachud and M.R. Shah, JJ. declared that  SEBI’s consent is not mandatory for compounding of offence under Section 24-A of the Securities and Exchange Board of India Act, 1992. However, the view of the Securities and Exchange Board of India (“SEBI”) as an expert regulator must necessarily be borne in mind by the Securities Appellate Tribunal and the Court before deciding an application to compound the offence. The Court also elucidated certain guidelines for compounding under Section 24-A.

The Court was dealing with a case which concerned alleged acts of price rigging and manipulation of share prices. The task before the Court was to interpret Section 24-A in a manner that furthers the statutory role of SEBI.

The Appeal

The appellant was being prosecuted for an offence under Section 24(1) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”). The appellant sought compounding of the offence under Section 24-A. The trial court rejected the application, upholding SEBI’s objection that the offence could not be compounded without its consent. The Delhi High Court also affirmed the judgment of the trial court. Aggrieved, the appellant approached the Supreme Court.

Backdrop and Timeline

The appellant is the director and promoter of Ideal Hotels & Industries Limited (“Company”). In 1995, the Company made an Initial Public Offer (“IPO”). In June 1996, SEBI received a complaint alleging that certain Delhi/Bombay based brokers had, on the instructions of the Company, purchased its shares and that huge deliveries were kept outstanding in the grey market. Again in October 1996, a complaint alleging price rigging and insider trading in the scrip of the Company was received. After a preliminary inquiry, SEBI initiated an investigation against the Company. SEBI identified six entities who were responsible for upward movement in the scrip. These entities were directly/indirectly related to the Company and its directors, and the appellant managed their day-to-day affairs.

In November 1999, the Chairperson of SEBI appointed an Adjudicating Officer to adjudicate upon the allegations. Prior to Adjudicating Officer’s decision, SEBI also filed a criminal complaint in March 2000 before the Additional Chief Metropolitan Magistrate, Tis Hazari Court, Delhi, alleging violation of certain provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

While the proceedings were pending before the Adjudicating Officer, SEBI’s Chairperson passed an order in September 2000 under Section 11-B read with Section 4(iii) of the SEBI Act accepting the proposal of the appellant and others to make an offer to purchase the shares owned by the shareholders of the Company who are not its promoters. In compliance of the order, the promoters/directors of the Company acquired equity shares which raised their holding to the extent of about 95% of the Company (post-IPO). Thereafter, the Company also got its shares delisted from various stock exchanges.

In June 2001, the Adjudicating Officer determined, among other things, that the appellant had failed to comply with the 1997 Takeover Regulations. Penalty was accordingly levied on the appellant.

Application for compounding of offence

In October 2013, an application under Section 24-A of the SEBI Act was filed by the appellant before the trial court, seeking compounding of offence in the criminal complaint filed by SEBI since they had already purchased the shares from the public in accordance with the order of SEBI Chairperson and had paid the penalty levied by the Adjudicating Officer.

The High Powered Advisory Committee (“HPAC”) of SEBI recommended that the offence should not be compounded. By an order passed in November 2018, the trial court dismissed the compounding application. A revision petition was filed by the appellant before the Delhi High Court to challenge the order of the trial court which was dismissed in April 2019.

Analysis and Observations

Compounding of offences under S. 24-A of SEBI Act

The Court noted that Section 24-A, which provides for the compounding of certain offences, contains certain characteristic features which need to be understood while interpreting its provisions:

(i) Section 24-A begins with a non-obstante clause, “notwithstanding anything contained in the Code of Criminal Procedure 1973”;

(ii) any offence punishable under the SEBI Act can be compounded, provided it is not an offence which is punishable only with imprisonment or with imprisonment and fine. Therefore, only where a fine is an alternative to imprisonment does the provision apply;

(iii) the offence may be compounded either before or after the institution of any proceeding; and

(iv) the offence may be compounded by Securities Appellate Tribunal (“SAT”) or by a Court, before which such proceedings are pending.

The Court further recorded that Section 24-A provides for the compounding of an offence either before or after the institution of any proceeding. It was observed:

[O]nce a proceeding has been instituted before a Court which is seized of it, it is the imprimatur of the Court that is required in such a situation. The expression ‘or a court before which such proceedings are pending’ would indicate that once proceedings have been instituted before it, the Court has exclusive jurisdiction to compound offences.

For a better understanding of practical implications of the language of Section 24-A, the Court referred to certain circulars issued by SEBI. After so referring, the Court concluded that:

(i) A party can seek compounding under Section 24-A at any stage once the criminal complaint has been filed by SEBI;

(ii) the party shall have to file the application for compounding before the Court where the criminal complaint is pending;

(iii) a copy of the application for compounding must also be sent to SEBI, which will place it before the High Powered Advisory Committee (“HPAC”); and

(iv) the HPAC’s decision on the application, be it an acceptance or an objection, shall be placed by SEBI before the appropriate court, which will have to pass appropriate orders.

The Court was of the opinion that:

Hence, this makes it abundantly clear that while the HPAC’s decision on a party’s application for compounding under Section 24-A must be placed before the appropriate Court, the final decision must remain in the domain of the Court.

However, since SEBI argued that its consent must be deemed mandatory for compounding an offence under Section 24-A, the Court also independently evaluated the argument on its merits.

24-A of SEBI Act not trammeled by S. 320 CrPC

Section 320 CrPC permits compounding of offences. The Court highlighted that Section 24-A of the SEBI Act commences with a non-obstante provision which operates notwithstanding anything contained in CrPC. Sub-sections (1) and (2) of Section 320 CrPC deal with compounding of offences under IPC, while sub-section (9) stipulates that no offence shall be compounded except as provided in the Section. However, the stipulation contained in sub-section (9) of Section 320 ceases to have effect in relation to the compounding of offences under the SEBI Act by virtue of a specific non-obstante provision contained in Section 24-A providing for the compounding of offences punishable under that legislation. Section 24-A, by incorporating a non-obstante provision indicates a legislative intent to the effect that the power to compound offences punishable under the SEBI Act is not trammeled by the provisions of Section 320 CrPC.

Consent of SEBI not mandatory

Noting that the plain language of Section 24-A does not provide for the consent of SEBI, the Court observed that:

The issue is whether this Court should read the requirement of the consent of SEBI into the provision, on the ground that this is a casus omissus.

The Court was of the clear opinion that this would amount to rewriting the statutory provision by introducing language which has not been employed by the legislature. Reliance was placed on Union of India v. Rajiv Kumar, (2003) 6 SCC 516.

It is evident, said the Court, that Section 24-A does not stipulate that the consent of SEBI is necessary for the SAT or the Court before which such proceedings are pending to compound an offence. Where Parliament intended that a recommendation by SEBI is necessary, it has made specific provisions in that regard in the same statute. The Court held that:

Hence, it is clear that SEBI’s consent cannot be mandatory before SAT or the Court before which the proceeding is pending, for exercising the power of compounding under Section 24-A.

While so declaring, the Court observed that it is also important to remember that proceedings for the trial of offences under the SEBI Act are initiated on a complaint made by SEBI by virtue of Section 26 of the SEBI Act. SEBI is a regulatory and prosecuting agency under the legislation. Hence, while the statutory provisions do not entrust SEBI with an authority in the nature of a veto under the provisions of Section 24-A, it is equally necessary to understand the importance of its role and position.

Interpretation of S. 24-A that furthers statutory role of SEBI

The Supreme Court referred to a consistent line of precedent, where the Court has been mindful of the public interest that guides the functioning of SEBI and has refrained from substituting its own wisdom over the actions of SEBI. Its wide regulatory and adjudicatory powers, coupled with its expertise and information gathering mechanisms, imprints SEBI’s decisions with a degree of credibility. The Court was of the view that:

The powers of the SAT and the Court would necessarily have to align with SEBI’s larger existential purpose.

Therefore, the task before the Court was to interpret Section 24-A in a manner that furthers the statutory role of SEBI, rather than one which thwarts its considered course of action.

In Court’s opinion, while the statute has entrusted the powers of compounding offences to the SAT or to the Court, as the case may be, the view of SEBI as an expert regulator must necessarily be borne in mind by the SAT and the Court, and would be entitled to a degree of deference. It was held:

[B]efore taking a decision on whether to compound an offence punishable under Section 24(1), the SAT or the Court must obtain the views of SEBI for furnishing guidance to its ultimate decision. These views, unless manifestly arbitrary or mala fide, must be accorded a high degree of deference. The Court must be wary of substituting its own wisdom on the gravity of the offence or the impact on the markets, while discarding the expert opinion of the SEBI.

Guidelines for Compounding under S. 24-A of SEBI Act

The Court noted that Section 24-A only empowers the SAT or the Court before which proceedings are pending with the power to compound the offences, without providing any guideline as to when should this take place. Hence, the Court deemed it necessary to elucidate upon some guidelines which the SAT or such Courts must take into account while adjudicating an application under Section 24-A:

(i) They should consider the factors enumerated in SEBI’s circular dated 20-4-2007 and the accompanying FAQs, while deciding whether to allow an application for a consent order or an application for compounding.

(ii) According to the circular dated 20-4-2007 and the accompanying FAQs, an accused while filing their application for compounding has to also submit a copy to SEBI, so it can be placed before the High Powered Advisory Committee. The recommendation of the HPAC is then filed before the SAT or the Court, as the case may be. As such, the SAT or the Court must give due deference to such opinion. The opinion of HPAC and SEBI indicates their position on the effect of non-prosecution on maintainability of market structures. Hence, the SAT or the Court must have cogent reasons to differ from the opinion provided and should only do so when it believes the reasons provided by SEBI/HPAC are mala fide or manifestly arbitrary.

(iii) The SAT or Court should ensure that the proceedings under Section 24-A do not mirror a proceeding for quashing the criminal complaint under Section 482 CrPC, thereby providing the accused a second bite at the cherry. The principle behind compounding is that the aggrieved party has been restituted by the accused and it consents to end the dispute. Since the aggrieved party is not present before the SAT or the Court and most of the offences are of a public character, it should be circumspect in its role. In the generality of instances, it should rely on SEBI’s opinion as to whether such restitution has taken place.

(iv) Finally, the SAT or the Court should consider whether the offence committed by the party submitting the application under Section 24-A is private in nature or it is of a public character, the non-prosecution of which will affect others at large. As such, the latter should not be compounded even if restitution has taken place.

Decision

The Court was of the view that the nature of allegations in the instant case involved serious acts which impinged upon the protection of investors and the stability of securities market. Alleged acts of price rigging and manipulation of prices of shares have a vital bearing on investors’ wealth and orderly functioning of securities market.

It was held that SEBI was justified in opposing the request for compounding of offences. The decision which has been taken by SEBI was not mala fide nor did it suffer from manifest arbitrariness. Having due regard to the nature of the allegations, the Court held that an order for compounding was not warranted. Therefore, judgment of the Delhi High Court was affirmed, though for different reasons as discussed above. [Prakash Gupta v. SEBI, 2021 SCC OnLine SC 485, decided on 23-7-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): Madhabi Puri Bach, Whole Time Member, considering the alleged violations committed, issued directions restraining Global Infratech and Finance Ltd (GIFL), its two directors and 12 other individuals from the securities market for their roles in a fraudulent scheme of trading in the firm’s shares and for price manipulation.

In the instant case, upon analysis, it was observed that the Noticees were part of an alleged manipulative scheme to make preferential allotment and manipulate the benefit connected to the preferential allottees, promoters of the company and promoter related entities. In the show-cause notice, it was further alleged that there was an established nexus and meeting of minds between the noticees to inflate the price of the scrip of  GIFL and thus violated the provisions of Regulation 3(a),(b),(c),(d) and Regulation 4(1),4(2) (a), (e) of PFUTP Regulations. Furthermore, the other 33 Noticees were alleged to be connected with GIFL and were a part of the scheme to make preferential allotment, manipulate the price of the scrip and get benefit by selling the shares at an artificially inflated price. And had thus, violated the provisions of Regulation 3(a), (b), (c), (d) and Regulation 4(1) of PFUTP Regulations, 2003. GIFL and directors of GIFL at the time of preferential allotment were alleged to have violated the provisions of Regulation 3 (a), (b), (c) and (d) and Regulation 4(1) of PFUTP Regulations, since a company cannot act by itself, but only through its directors who are expected to exercise their powers on behalf of the company with utmost care, skill and diligence.

Some of the Noticees had contended that it is a well-settled law that the taint of  fraud cannot be attached or charged on preponderance of probability, and compelling evidence should be brought on record for a person/entity to be held liable for fraud

The Tribunal while assessing the preliminary objection of the Noticees, that SEBI did not provide crucial details, documents and records for the proceedings, and that the were not inspection of documents

Further, upon perusal of the SCN, I find that there is no allegation against Noticee No. 13 to 41 that the trades of Noticee No. 13 to 41 had resulted into LTP contribution, price manipulation, volume manipulation, circular trades, reversal trades, synchronized trades, etc. The only allegation in the SCN against Noticee No. 13 to 41 is that they are connected to GFIL and LTP contributors and sold shares at artificially inflated prices and thereby involved in the fraudulent schemes.

After considering a catena of SAT orders, it was of the opinion that, “there is no ‘single’ or ‘only’ test to determine the charge of price manipulation in cases wherein the primary charge is emanating from miniscule trading by the sellers over a period of time at the highest possible price on each day”. While substantiating the definition of fraud under regulation 2(1)(c), it pointed out various acts and omissions which do not presume the connection of the person committing the same with another, but are still clear violations. It stated, “… Further, regulations 3 and 4 of the PFUTP Regulations also use phrases such as no person shall use or employ, no person shall indulge, etc. and do not, at all places, stipulate the requirement of a connection between two parties to a transaction in order to establish a violation. Further, the prohibition of fraudulent dealing in securities includes an act of fraudulent buying or selling. It may be noted that the unilateral act of fraudulent buying or selling is also included in the definition of fraud under FUTP Regulations. There can be instances where artificial demand and price rise can be created choosing to buy unilaterally. Therefore, the Regulations make it clear that unilaterally by virtue of fraudulent selling alone, a person can manipulate the price of a security”. And highlighted the fact that steep price rise with meager volume followed by a sudden increase in volume at high price is not a normal market trend.

Therefore, it was held that the connected preferential allottees had sold the shares at inflated price and received substantial benefit and the directors have acted in a fraudulent manner in furtherance of a larger scheme and their acts are attributed to the Company. Resultantly, the Company and the Directors were restrained for two years and other allottees for a period of six months from accessing the securities market and buying, selling or dealing in securities, either directly or indirectly, in any manner for the period mentioned below against their name from the date of this order. Also, further restrained them from associating themselves with any listed public company and any public company which intends to raise money from the public or any intermediary.[Global Infratech and Finance Limited, In re, WTM/MB/IVD/ID6/ 12613 /2021-22, decided on 16-07-2021]

Case BriefsSupreme Court

Supreme Court: In a sequel to its earlier order directing winding up of six mutual fund schemes of Franklin Templeton Mutual Fund, a Division Bench of S. Abdul Nazeer and Sanjiv Khanna, JJ. ruled that the trustees are required to seek consent by majority of the unit holders, when they by majority decide to wind up a  mutual fund scheme. Also, consent by majority of the unit holders should be sought post-publication of the notice and disclosure of the reasons for winding up.

In its earlier order dated 12-2-2021 [Franklin Templeton Trustee Services (P) Ltd. v. Amruta Garg, 2021 SCC OnLine SC 88], the Supreme Court has allowed the winding up of six mutual fund schemes by Franklin Templeton Mutual Funds, by holding that as per the poll results, the unit holders of the six schemes have given their consent by majority to wind up the six schemes. It had however not examined certain aspects then. The task before the Supreme Court now was two-fold. First, decide whether the decision of the trustees to wind up a scheme under Regulation 39(2)(a) of the SEBI (Mutual Funds) Scheme, 1996 must muster the consent of the majority of the unit holders as per Regulation 18(15)(c). And second, decide the challenge to the constitutional validity of certain provisions of the SEBI (Mutual Funds) Regulations, 1996 itself.

Below is a comprehensive analysis of the entire discussion by the Supreme Court:

(A) Interpretation of Regulations 39 to 42, their interplay and harmonious construction with Regulation 18(15)(c) of the Mutual Funds Regulations, 1996

Regulations 39 to 42 and 18(5)(c)

Regulation 39 relates to ‘winding up’ of a scheme of a mutual fund. In terms of sub-regulation (2), a scheme of a mutual fund can be wound up: (a) on the happening of any event, which, in the opinion of the trustees[1], requires the scheme to be wound up; (b) if 75% of its unit holders[2] pass a resolution for winding up of the scheme; or (c) SEBI directs winding up of the scheme in the interest of the unit holders. When a scheme “is to be wound up” under sub-regulation (2), the trustees are required by sub-regulation (3) of Regulation 39 to issue a public notice in newspapers as specified.

Regulation 40, which is in the nature of statutory injunction, states that on and from the date of publication of notice under Regulation 39(3), the trustees and the Asset Management Company (“AMC”)[3] shall cease to: (a) carry on any business in respect of the scheme to be wound up; (b) create or cancel units of the scheme; and (c) issue or redeem units of the scheme. Regulation 41 relates to the procedure and manner of winding up. Regulation 42 states that after receipt of the report under Regulation 41(3), if SEBI is satisfied that all measures relating to winding up have been complied with, the scheme would cease to exist. Regulation 42-A stipulates that the units of the mutual funds scheme shall be delisted from the recognised stock exchange in accordance with the guidelines as may be specified by SEBI.

Regulation 18(15)(c), which relates to rights and obligations of the trustees, in simple words requires the trustees to take consent of the unit holders, when they, by majority, decide to wind up or prematurely redeem the units.

Decision of the High Court

The judgment of the Karnataka High Court which was under challenge, interpreted Regulation 18(15)(c) and Regulation 39(2)(a) to hold that the decision of the trustees to wind up a scheme under clause (a) to Regulation 39(2) must muster the consent of the majority of the unit holders as per Regulation 18(15)(c).

The Challenge

Contesting the finding of the High Court, the SEBI, the trustees and the AMC argued that the unit holders do not come into the picture when the trustees and the SEBI, under clauses (a) and (c) respectively of Regulation 39(2), decide to wind up a scheme. Their decision is final and binding on the unit holders. Only when the unit holders want to wind up a scheme, in terms of clause (b), a resolution by 75% of the unit holders is mandated. Thus, they contended that the findings of the High Court to the contrary should be reversed.

Analysis and Decision

(i) Interpretation of the term ‘consent’ in Regulation 18(15)(c)

In its order dated 12-2-2021 (2021 SCC OnLine SC 88), the Supreme Court interpreted Regulation 18(15)(c) and the word ‘consent’ therein. It held that the underlying thrust behind Regulation 18(15)(c) is to inform the unit holders of the reason and cause for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an impossibility.

The Court in the said earlier order had concluded that Regulation 18(15)(c) need not have affirmative consent of majority of all or entire pool of unit holders. The words ‘all’ or ‘entire’ are not incorporated and found in that Regulation.  It was held:

“Thus, consent of the unit holders for the purpose of Regulation 18(15)(c) would mean simple majority of the unit holders present and voting.”

(ii) Trustees are required to seek consent of unit holders

Discussing Regulation 18(15)(c) and Regulations 39 to 42 at length, the Court concluded that Regulation 18(15)(c) mirrored by use of the word ‘shall’ is couched as a command. Regulation 39(2) under clause (a) vests the power of winding up of a scheme with the trustees, and with the unit holders under clause (b) and with the SEBI under clause (c), but under Regulation 18(15)(c), the trustees are required to seek consent of the unit holders, when they by majority decide to wind up a scheme.

The Court was of the opinion that the expression ‘when the majority of the trustees decide to wind up’ in Regulation 18(15)(c) manifestly refers to clause (a) to Regulation 39(2) as this is the only Regulation which entitles the trustees to wind up the scheme. Regulation 18(15)(c), when it refers to trustees’ decision to wind up, it implies the trustees’ opinion to wind up the scheme. It was held:

“Principle of harmonious construction should be applied which, in the context of the Regulations in question, would mean that the opinion of the trustees would stand, but the consent of the unit holders is a pre-requisite for winding up.”

The Court said that such interpretation in no way dilutes or renders clause (b) to Regulation 39(2) meaningless or redundant. That clause applies where the winding up process is initiated at the instance of the unit holders, i.e. upon 75% of unit holders of the scheme passing a resolution for winding up. It was observed:

“Clause (b) does not in any manner reflect that clause (c) to Regulation 18(15) should not be read as it ordains in simple words.”

The Court rejected the argument that the unit holders are lay persons and not well versed with the market conditions. It was noted that investments by the unit holders constitute the corpus of the scheme. To deny the unit holders a say, when Regulation 18(15)(c) requires their consent, debilitates their role and right to participate. It is an in-contestable position that the unit holders exercise informed choice and discretion when they invest or redeem the units. Regulations envision the unit holders not as domain experts, albeit as discerning investors who are perceptive and prudent. The Court observed:

“The unit holders, when in doubt, as prudent investors may be advised to abstain, but they are not placid onlookers, impuissant and helpless when the trustees decide to wind up the scheme in which they have invested. The stature and rights of the unit holders can co-exist with the expertise of the trustees and should not be diluted because the trustees owe a fiduciary duty to them.

Thus, the contention that the trustees being specialists and experts in the field, their decision should be treated as binding and fait accompli has to be rejected not only in view of the specific language of Regulation 18(15)(c), but to be in concinnity with the objective and purpose of the Regulations.”

A hypothetical submission that the unit holders may reject a valid and well-considered opinion of the trustees for winding up, and therefore Regulation 18(15)(c) is directory, was again rejected by the Court. It said that:

“Assumptions cannot be a ground to wrongly interpret Regulation 18(15)(c).”

Completing the interpretation of Regulation 18(15), the Court recorded that clause (a) applies and requires the trustees to obtain consent of the unit holders whenever required by SEBI in the interest of the unit holders. Clause (b) states that the trustees would obtain consent of the unit holders whenever required to do so on the requisition made by three-fourths of the unit holders of any scheme. Accordingly, clause (a) would apply whenever SEBI mandates and clause (b) applies whenever three-fourths of the unit holders of the scheme make a requisition.

(iii) At what stage consent of unit holders is required

Harmoniously interpreting Regulations 39 to 42, the Court opined that the consent of the unit holders, as envisaged under 18(15)(c), is not required before publication of the notices under Regulation 39(3). It was held:

Consent of the unit holders should be sought post-publication of the notice and disclosure of the reasons for winding up under Regulation 39(3).

 (B) Constitutional validity of the Mutual Funds Regulations

One of the appellants raised a challenge to the constitutional validity of the SEBI (Mutual Funds) Regulations, 1996.

The Challenge

Regulation 39(2)(a) was assailed as suffering from the vice of excessive delegation. It gives unbridled power to the trustees to wind up a scheme. It was submitted that Regulation 39(2)(a) suffers from manifest arbitrariness in the absence of any prescription regulating the exercise of the power by the trustees.

It was also submitted that Regulation 39(3) equally suffers from the vice of manifest arbitrariness. Though the trustees are required to give notice disclosing circumstances leading to winding up of the scheme to SEBI, this requirement is meaningless and superficial as SEBI cannot go into the question and circumstances to be satisfied as to existence of an event warranting the extreme action of winding up.

It was further contended that Regulation 41 does not prescribe any mechanism or manner in which the authorised person or the AMC can ascertain the liabilities which are due and payable under the scheme. Lastly, it was contended that Regulation 42 is also manifestly arbitrary as SEBI is to perform only ministerial functions, much less than the functions of a regulator.

Analysis and Decision

(i) Power of SEBI to pass directions in interest of unit holders

After referring to the provisions of the SEBI Act, 1992 and elucidating the powers of SEBI, the Supreme Court expressed its reservations on the High Court’s observation regarding powers of SEBI under 11-B (Power to issue directions and levy penalty). The Supreme Court was of the opinion that if there is a violation of the regulations, i.e. Regulation 39(2)(a), 39(3), 40, 41 or 42 by the trustees or the AMC, it is open to SEBI to proceed in accordance with law and in terms of 11-B of the SEBI Act. The Court said that:

If the trustees have acted for extraneous and irrelevant reasons and considerations, the action would be in violation of clause (a) to Regulation 39(2) and therefore amenable to action under the SEBI Act, including directions under Section 11-B.

 (ii) Power of trustees not unbridled

The Court refused to accept that the trustees under Regulation 39(2)(a) have been given absolute and unbridled power to wind up a scheme. The Court noted that the language of clause (a) states that the trustees must form an opinion on the happening of any event which requires the scheme to be wound up. Further, as per Regulation 39(3), the trustees are bound to give notice disclosing the circumstances leading to the winding up of the scheme. These notices along with the reasons have to be communicated to SEBI and made known to the unit holders by publication in newspapers. The trustees are, therefore, required to come to a conclusion that due to specific circumstances articulated in writing, the scheme is required to be wound up. The Court concluded that:

This is not a case of excessive delegation wherein the legislative function has been abdicated and passed on to the trustees who can act as per their whims and fancies. … There are … sufficient guidance and safeguards in the Regulations itself on the power of the trustees to decide on winding up of the fund.

(iii) Unit holders not creditors

Culling out the distinction between unit holders and creditors drawn from the Mutual Fund Regulations, the Court noted that unit holders are investors who take the risk and, therefore, entitled to profits and gains. Having taken the calculated risk, they must also bear the losses, if any. Unit holders are not entitled to fixed return or even protection of the principal amount. Creditors, on the other hand, are entitled to fixed return as per mutually agreed contracts. Their rate of return is in the nature of interest and not profit or loss. Creditors are not risk takers as is the case with the unit holders. It was the Court’s opinion that:

In this sense, unit holders are somewhat at par with the shareholders of a company.

It was held that the argument that the unit holders should be treated pari passu with the creditors is farfetched. Similarly, the contention that unit holders are identically placed as home buyers under the Insolvency and Bankruptcy Code, was held to be equally frail and a weak argument.

(iv) Manifest arbitrariness and Scope of judicial review

The Court observed that the Mutual Fund Regulations being in the nature of economic regulations, the Court would exercise restrain while exercising power of judicial review unless clear grounds justify interference.

It was noted that the principle of manifest arbitrariness requires something to be done in exercise in the form of delegated legislation which is capricious, irrational or without adequate determining principle. Delegated legislations that are forbiddingly excessive or disproportionate can also be manifestly arbitrary. However, held the Court:

In view of the interpretation placed by us and the discussion above, the Regulations under challenge do not suffer from the vice of manifest arbitrariness.

(C) Grey Area ─ Regulation 53

Referring to issue related to the interpretation of Regulation 53 (Despatch of warrants and proceeds) of the Mutual Fund Regulations, the Court said that it is a grey area which the Court would not like to decide at this stage, till it has full facts and decision in the pending adjudication proceedings. Clause (b) to Regulation 53 requires that the AMC shall despatch the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase.

Issue in question would arise whether the AMC or the trustees are bound to honour and pay the redemption or repurchase proceeds for requests received before the date of publication of notice in terms of Regulation 39(3).

The High Court has held the expression ‘business’ in clause (a) of Regulation 40 refers to business activity and, therefore, would include payment of redemption proceeds to the unit holders, which would include the request for redemption received prior to the date of publication under Regulation 39(3). The case set up by some parties was at variance with the dictum pronounced by the High Court.

The Court said that before it can answer this aspect, it would like to have greater clarity on the factual matrix, which would be possible once the pending proceedings are concluded.

(D) Closing and Clarification

The Court refrained from referring and commenting on facts and left several issues open at this stage. Nevertheless, it clarified that the observations in the instant Order and the earlier Order dated 12-2-2021 (2021 SCC OnLine SC 88) should not be read as binding factual findings or conclusions on any disputed facts. Of course, the legal interpretation of Regulation 18(15)(c) and Regulations 39 to 42 are conclusive and binding. It was also clarified that any finding given by the High Court on facts or even on legal issues not subject matter of the instant Order or the earlier Order dated 12-2-2021 (2021 SCC OnLine SC 88) would not be treated as conclusive and binding as the findings are sub-judice and pending before the Supreme Court on interpretation as well as merits. [Franklin Templeton Trustee Services (P) Ltd. v. Amruta Garg, 2021 SCC OnLine SC 464,   decided on 14-7-2021]


[1] ‘Trustees’ has been defined in Regulation 2(y) to mean the board of trustees or the trustee company who hold the property of the mutual fund in trust for the benefit of the unit holders.

[2] ‘Unit holder’ has been defined in Regulation 2(z)(i) to mean a person holding a unit in the scheme of a mutual fund. It may be understood as akin to shareholder in a company.

[3] The AMC is a company, approved by SEBI under Regulation 21(2), which undertakes business activities in the nature of management and advisory services provided to the pooled assets.


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Competition Commission of India (CCI): Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members) addressed the allegations against the National Stock Exchange for alleged contravention of provisions of the Competition Act.

Present matter was filed against National Stock Exchange of India Limited for alleged contravention of Section 4, particularly Sections 4(2)(b)(ii) and 4(2)(c) of the Competition Act.

What were the allegations against NSE?

  • Indulged in practices of granting preferential market access to select brokers
  • Creating artificial information asymmetry
  • Market Manipulation in relation to co-location facilities
  • Uniform fee charged from all members towards co-location services, but allegedly uniform benefits have not been accorded to all trading members who had paid for the service.

Analysis, Law and Decision

While analysing the matter, Coram noted that the co-location facility was in vogue since 2009. Further, it was added that the choice of technology, which had been alleged to have created distortions, ceased to exist as far back as in 2016 and there seems to be confidence instilled in the system, with 188 members of the exchange availing the facility and the sectoral regulator specifying guidelines for adherence by the exchange for provision of such facility. As submitted by the Informant, even the charges payable for availing such facility have been considerably reduced.

Commission observed that

Mere pendency of matters in alternate forums does not axiomatically place any embargo on the Commission to halt its mandate in discharging its statutory obligations, in the face of any alleged anti-competitive conduct which is brought or comes to its notice.

Co-location facility creates a divide between two classes of trading members

NSE stated that the said facility was made available on a first come first serve basis and essentially there is no pick and choose. Further, it added that it is not the only exchange in India providing co-location facility, even other exchange like BSE is providing the same.

Coram stated that in the present case,  the consumers are the trading members who were looking for the co-locational facility for algorithmic trading.

Abuse of dominant position by NSE in provision of co-location facility?

Commission noted the submission of NSE that at the time of introducing co-location services, SEBI had not prescribed any specific technology to be used and that it had a choice between two technologies:

  • TCP/IP technology, and
  • MTBT

NSE, after studying practices of some leading international stock exchanges providing co-location services, came to a decision to have TCP technology as it provided market safety, reliability, integrity and accessibility.

Commission agreeing with the above submission that if there had been a bonafide choice of a particular technology, coupled with the fact that the sector regulator did not observe any instance of fraudulent conduct in violation of SEBI (PFUTP) Regulations, 2003 in the provision of the co-location facility which had been the mainstay of the allegations against NSE, then it ought not to be found in contravention of Section 4 of the Act.

Should the co-location facility be stalled as it is in itself anti-competitive?

A robust exchange acts as a backbone of the financial system and the provision of co-location facility by exchanges help increase volumes of trades manifold and provides liquidity to investors. This augurs well for the market, the companies and the economy.

Commission stated that to stop the co-location facility will be retrograde. Further noting that the Sectoral Regulator, SEBI did not stop the co-location facility in any manner since its introduction and had recognised the said service.

Hence, in view of the Commission, no prima facie case exists. [Manoj K Sheth v. National Stock Exchange, Case No. 35 of 2019, decided on 28-06-2021]


Advocates before the Commission:

For the Informant: Mr. Nithyaesh Natraj, Advocate Mr. Animesh Kumar, Advocate Mr. Anirudh, Advocate

For OP: Mr. Neeraj Kishan Kaul, Sr. Advocate, Mr. Somasekhar Sundaresan, Advocate, Mr. Naval Chopra, Advocate
Mr. Aman Singh Sethi, Advocate, Ms. Manika Brar, Advocate and Mr. M. Vasudev Rao, General Counsel 


Additional Information:

What are co-location facilities?

Co-location is the practice of renting space for servers and other computing hardware at a third-party provider’s data centre facility. Co-location helps in the faster movement of data. In the context of co-location services, NSE had on 31.08.2009, announced the launch of co-location services along with the guidelines/ procedure to be followed by members interested in availing co-location facility. Members availing co-location facility are allowed to take one or more leased lines to the co-location facility from different telecom service providers for the purpose of setting up or modifying parameters, trading related activities and hardware, software, network-related access, software download/upload and monitoring and data downloads.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): A Bench of Justice Tarun Agarwala SEBI(Presiding Officer) and M.T. Joshi (Judicial Member) allowed a few appeals and dismissed the others while hearing a group of appeals and termed the order cryptic, in so far as it exonerated the preferential allottees, exit providers and the LTP contributors from the charge of Section 12A(a),(b) and (c) of the SEBI Act read with Regulation 3 and 4 PFUTP Regulations on the ground that they had no role to play in the price manipulation.

The present appeal was against the order passed by the SEBI for restraining the appellants and the six entities from accessing the securities market for a period of five years and further freezing the shares and mutual funds units lying in their Demat accounts for the same period. The group of appeal was divided into two categories. The entities in the first set of appeals being, appeals nos. 102, 44, 85, 235, 246, 247, 571, 572, 573, 575 and 581 of 2020 and were called the ‘appellants’. The entities in the second set of appeals being, appeals nos. 178, 179, 180 and 181 were called ‘six entities’.  Noticing the sharp rise in the trading volume and price in the scrip of the Company, SEBI conducted an investigation in the trading in the scrip of the Company and, based on the investigation, SEBI passed an ex parte ad interim order dated May 8, 2015, against 178 entities. The 178 entities were categorised as:- (i) The Company; (ii) The directors and promoters of the Company; (iii) The promoter related entities; (iv) The preferential allottees; (v) The exit providers; (vi) The LTP contributors.

It was revealed that the entire modus operandi was a scheme devised to provide ill gotten gains to the preferential allottees and promoter related entities, and that the increase in the trading volume occurred after lock in period expired of the preferential allottees. It was further found that there were two sets of entities; one group was primarily involved in pushing up the price when the shares were under the lock in period and the second group was acting as buyers in patch-2 in order to provide an exit opportunity to the preferential allottees. On the basis of which, whole time member found that the appellants had violated the PFUTP provisions.

The Appellate Tribunal was of that opinion that,

“…We find from a perusal of the record that the preferential allottees gained the most of more than Rs. 430 crore but what we find is that the WTM has exonerated, by a cryptic order, the preferential allottees, exit providers and the LTP contributors from the charge of Section 12A(a),(b) and (c) of the SEBI Act read with Regulation 3 and 4 PFUTP Regulations on the ground that they had no role to play in the price manipulation.

Further

“…We are of the opinion that the appellants stands on a better footing than that of the preferential allottees and if the preferential allottees have been let off on the ground that they have not manipulated the price nor had any role to play in the price manipulation, then all the more reasons to hold for the appellants that they had no role to play in the manipulation of the price and are therefore liable to be exonerated…”.

And it thus states that,

“… In our opinion this finding is perverse. We are of the opinion that the respondents are adopting dual standards. The issue of weak fundamentals would equally apply to the preferential allottees who were allotted the shares at rate of Rs. 10/- per share but these preferential allottes have been let off. Therefore the standard of weak fundamentals cannot be applied in the case of the appellants especially when on the same footing the preferential allottees have been let off. And, “…in our opinion, the order of the WTM insofar as the six entities are concerned does not suffer from any manifest error of law…”.

[Umang Dhanuka v. SEBI, 2021 SCC OnLine SAT 158, decided on 08-06-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): S.K. Mohanty, Whole Time Member, in a detailed 167 paged order, following the principles of the preponderance of probabilities, held that the charges relating to violation of all the provisions laid down in detail in the show cause were found to have been substantially established.

In the pertinent matter, there were 13 Noticees, that were directly or indirectly an active part of the entire chain of events. It was when the SEBI noticed a sharp fall in the price of the scrip of Zylog Systems Limited (ZSL) that it conducted a preliminary investigation on the basis of which an ex-parte ad-interim order was passed restraining Noticees 2-7 from buying, selling or dealing in the securities markets, either directly or indirectly, in any manner, till further directions. The said directions were issued on the basis of certain prima-facie observations regarding multiple violations of the Securities Law, including misleading disclosures made by ZSL and its promoters, promoters using Company’s funds to deal in the shares of ZSL, dependent/relative of director using funds of ZSL to deal in its shares, non-compliance of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (the ‘SAST Regulations, 2011’), non-disclosures by ZSL and its promoters and directors etc. ZSL is a Chennai based information technology enabler and solutions provider for enterprises worldwide.

The show cause notice directly indicated with instances and enlisted 26 such observations:

The Company had, directly as well as through various connected entities, transferred funds to both Sthithi and Sripriya which were used by these entities for their dealings in the scrip of ZSL. The disclosed shareholding of the promoters did not match with their shareholdings as per their demat statements. It appeared that ZSL was being run and managed by four key persons viz. Sudarshan, Ramanujam, Srikanth and Srihari, who were known to each other well before the IPO of the Company was launched. At the same time, Srikanth was shown as an Independent Director in the RHP despite being directly and closely related to Srihari and Sripriya, and despite being a director in the wholly owned subsidiary of ZSL etc. The said appointment of Srikanth as Independent Director continued till 2010. Various irregularities in running the affairs of the Company, oral instruction being given to the staff handling desk functions, inadequate narration in the books of accounts of the Company for various fund transactions etc. suggested that the operations of ZSL were not being conducted in compliance with the Corporate Governance norms, amongst other things.

During the course of investigation, the price of the scrip of ZSL had witnessed heavy on account of increased supply of shares due to invocation of pledge and subsequent sale of shares of promoters by IFCI Ltd. and Karvy Financial Services Limited) on account of non-payment of interest due to be paid by the promoters. Despite being aware of that, ZSL informed BSE that it was having ‘business as usual’ and promoters were increasing their stake in the Company. Therefore, it was alleged that, despite facing severe financial stress and continuous selling of shares from the accounts of the promoters, ZSL made a contrarian disclosure falsely stating that promoters were increasing their shareholding and the Company was having ‘business as usual’. False and misleading statement in media were witneseed and thereby violating the provisions of Section 12A(a), (b), (c) of the SEBI Act, 1992 read with regulations 3(a), (b), (c), (d) and 4(1), 4(2)(a), (f) and (r) of the PFUTP Regulations, 2003. The promoters failed to make disclosures regarding their transactions in the scrip of ZSL as well as their pledge related transactions in the said scrip.

The Tribunal in its detailed order took note of all the points and the overwhelming factual evidences that the Noticees no. 2 to 7 were acting as one common group in respect of their dealings in the scrip of ZSL in furtherance of their common fraudulent scheme.

The following issues were dealt in detail by the Tribunal:

Issues: 

  1. Whether false and misleading disclosures/statements were made in the RHP as well as in subsequent filings, submitted to the stock exchanges?
  2. Whether Noticees no. 2 to 7, jointly or severally concocted an elaborate fraudulent scheme in furtherance of a common objective and, thereby, violated the provisions of SEBI Act, 1992 and PFUTP Regulations, 2003?
  3. Whether the Noticees no. 2 to 7, acting in concert with one another, have violated the provisions of regulation 3(2) of the SAST Regulations, 2011 and section 12A(f) of the SEBI Act, 1992?

The entire order does not only consist of the violations and the clear cut evidences to prove the same and the manner but also relieves the person not so involved in the scheme. For instance, it remarked,

“…remuneration and qualification are two crucial criterions to evaluate and adjudge the significance of a position held by a person in an organisation and his importance and status in participating in the management of a company. I find it difficult to believe that both Srikanth and Srihari, being more qualified and earning much more than Viswanathan, can claim that they were working under Viswanathan and were executing his commands in the Company, more so when it has already been observed on the basis of overwhelming factual evidence that both Srikanth and Srihari being very close to the promoters, have played crucial roles in giving effect to various transactions in shares and funds in the names of different conduit entities at their behest…”

The tribunal referred to SEBI v. Monarch Networth Capital Ltd., (2016) 6 SCC 368, wherein the Supreme Court, while wherein  while dealing with the issue of principles of natural justice, has, inter alia, observed that :

…Insofar as the plea of violation of principles of natural justice, as raised on behalf of the respondent in C.A. No. 282/2014 (Monarch Networth Capital Ltd.) is concerned, we do not think the same to be justified in any manner. The relevant extracts of the trade log which have been perused by us, in view of the clear picture disclosed with regard to the particulars of the offending transactions, must be held to be sufficient compliance of the requirement of furnishing adverse materials to the affected party.

It further stated that,

“…the non-disclosure of relationships of Srikanth with Sripriya and Srihari appears to be a deliberate act on the part of the Company and is strongly suggestive of the fact that these three Noticees being part of the scheme cooked together by promoters of the Company and the appointment of Srikanth as an Independent Director was nothing but a eyewash as Srikanth cannot be held to be ‘independent’ at any point of time in any manner whatsoever even before the Company had floated its IPO…”. And that “…operations of ZSL were not being conducted in compliance with even the basic norms of Corporate Governance…”.

The tribunal also took note of the details about Srikanth as available on the MCA website indicating instances wherein Srikanth’s directorship with other companies was not disclosed in RHP, and mentioned them categorically. And further mentioned how “anyone can see a pattern of wrong disclosures regarding the directorship of Srikanth in various disclosures filed by ZSL and such wrong disclosure in the RHP of ZSL is not a one-off incident”. Vouching for the correctness of the statements despite knowing them to be outright false and misleading was also pointed out very clearly.

And the following were dealt in conjunction.

  1. Common Objective
  2. Role of other Noticees
  3. Funding of Sthithi and Spriya
  4. False and misleading disclosures by the Company and Promoters

It also stated that,

“…I note from the First Information Report filed by the Union Bank of India at Banking Securities and Fraud Cell, Central Bureau of Investigation at Bengaluru with respect to ZSL and its subsidiary ZSIL that the account of ZSL was already reported as fraudulent account by various other banks viz. Syndicate Bank, Dena bank, Federal bank and Andhra Bank on account of diversion of funds/non-creation of assets and submission of fake bills etc. I also note from the said FIR that Union Bank of India has declared ZSL as a wilful defaulter…”.

Directed Noticees 2-7 to make a public offer within 45 days of the present order, through a merchant banker, to acquire the shares of the Company from public shareholders in terms of the provisions of SAST Regualtions, 2011.

Directed Noticees 2-7 to pay interest at the rate of 10% per annum along with the offer price, for the period starting from the date when these Noticees became liable to make open offer for the first time i.e. from July 10, 2012, till the date of payment of consideration, to the shareholders. Further restrained from accessing the securities market including by issuing prospectus, offer document or advertisement soliciting money from the public and are further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner.

Restrained Noticee no. 3-7 from holding the post of director, or any key managerial position or associating themselves in any capacity with any listed public company and any public company.

Noticees 8-13 are restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities (including units of mutual funds), directly or indirectly, or being associated with the securities market in any manner.

In regards with Noticee 1, it was of the opinion, “…the Hon’ble Madras High Court vide its Order dated July 03 2014, has appointed the Official Liquidator, as the Provisional Liquidator of the Company, however, no further order on winding up of the Company has been passed till date. I find that at this stage, direction of any nature against the Company may not serve any purpose…”.

[Zylog Systems Ltd., In Re., 2021 SCC OnLine SEBI 145, decided on 14-06-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): G. Mahalingam (Whole Time Member) held that while directors are not prohibited from trading in units of the schemes managed by the Asset Management Company, they should ensure that such trading conforms to ethical and moral standards and legal norms expected to be complied by a person entrusted with quasi-fiduciary responsibilities.

Unfair trade Practice or Fraudulent?

Whether the redemption of units in some schemes of a mutual fund by a director of the Asset Management Company of the Mutual Fund and his immediate family, at a time when the said schemes were facing significant redemption pressure (schemes were later wound up) and the director was allegedly in possession of material non-public information relating to the same, would fall within the scope of ‘fraudulent’ or ‘unfair trade practice’ as defined under SEBI(Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.

Background

Franklin Templeton Mutual Fund (FT-MF) is s SEBI registered mutual fund. Franklin Templeton Asset Management Company Ltd. (“FT–AMC”) is the Asset Management Company and Franklin Templeton Trustee Services Pvt. Ltd. (“Trustees”) acts as the Trustee of FT–MF.

Vide notice dated 23-04-2020, Trustees informed the unit holders of certain schemes of FT-MF that it was winding up the schemes in conformity with the provisions of Regulation 39(2)(a) of the SEBI (Mutual Fund) Regulations, 1996.

SEBI ordered Forensic Audit/Inspection in terms of Regulation 66 of the Mutual Fund Regulations and found that Noticee’s 1, 2 and 3 had redeemed units in the Impugned Debt Schemes during the period. In view of the same, SEBI issued a Show Cause Notice.

Analysis, Law and Decision

Insider trading Regulations

 Insider Trading Regulations, when they were notified in 1992, primarily sought to prohibit ‘insiders’ connected to the issuer of the security from trading on the basis of superior information obtained during the course of their employment or association with the issuer; whereas the PFUTP Regulations covered other forms of trading done by exploiting information asymmetries by any person, even though he may not be an ‘insider’ or connected to an ‘insider’.

Board noted that Courts have recognized that certain types of trades executed on the basis of superior information would fall within the definition of ‘fraud’ under PFUTP Regulations 2003.

Laws dealing with information asymmetries (PIT Regulations and PFUTP Regulations) essentially seek to address the issues arising out of disparities in access to material information, that is otherwise not legally available to general investors, and to prevent those persons having access to such superior information from exploiting the informational advantage, in order to protect the integrity of the market and maintain investor confidence.

Bench noted that Noticee 1 could reasonably be expected to be privy to material non-public information and it was held that redemption of units was done while being in possession of material non-public information.

Board expressed that the timing of the trades is also crucial circumstantial, evidence in the present matter.

Trades by Noticee  2, who is the wife of Noticee 1, was undertaken on March 23, 2020, and March 24, 2020- i.e. the trades were done in close proximity to the dates when Noticee 1 started redeeming his investments as well as that of Noticee 3. It is further seen that on March 24, 2020, both Noticee 1, on behalf of Noticee 3, and Noticee 2 were redeeming units.

It needs to be borne in mind that Noticee  2 was also experienced finance professional in her own right. Given her experience, she was expected to be aware of the sensitivity of the transactions undertaken by Noticee 1, being a key functionary of the AMC with access to material non-public information and its implications.

Given the facts and circumstances under which Noticee 2 had redeemed the units, it leads the Bench to conclude that such redemptions were done on the basis of material non-public information Noticee  1 had in respect of the Impugned Debt Schemes.

Whether the redemptions can be considered as fraudulent trades?

SEBI held that it found it difficult to hold that redemption of units by the Noticees satisfies the parameters of ‘fraud’ as defined under regulation 2(1)(c) read with regulation 3(a) of the PFUTP Regulations 2003, also the conduct of the Noticees did not satisfy the requirements for sustaining the charge under regulation 4(2)(q) of PFUTP Regulations 2003. 

Whether the redemptions can be considered as an Unfair trade practice? 

‘Unfair trade practice’ is not defined under the PFUTP Regulations 2003.

Supreme Court in the decision of SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1 has observed that the scope of the term ‘unfair trade practise’ is wider than that of the term ‘fraud’ and activities which do not satisfy the parameters of ‘fraud’ could independently have proceeded under Regulation 4(1) if it can be considered as an ‘unfair trade practice’.

Bench expressed that the primary purpose for having laws prohibiting trading on the basis of asymmetric access to information is to foster confidence in the securities markets. Such trading by directors of a company is also a breach of the fiduciary duty as the insider effectively converted corporate information for private profits to the detriment of the other investors.

SEBI expressed that Regulations 18(25)(B)(vi) and 18(27)(vi), respectively, required the Trustees and the independent directors of the AMC/Trustee to put in place a ‘code of ethics’ which were designed to prevent fraudulent, deceptive or manipulative practices by insiders in connection with personal securities transactions. It was further noted that the AMC had formulated a Policy on Conflict of Interest.

Policy, which listed the obligations of the relevant persons, inter alia, requires employees and directors to “not [participate] in decision making in case person [is] having actual perceived or potential conflicts of interest in the transaction” and also requires them to “pro-actively report any actual perceived or potential conflicts of interest.”

Board added that Noticee 1 being a person having wide experience in securities market, it was expected that his conduct would be line with the quasi-fiduciary responsibility that a director of an AMC owed to the unitholders of the mutual fund.

On making an investment in the impugned debt schemes, Noticee 1 should have upfront declared his investments to AMC and should have sought to recuse himself from any decision related to the Impugned Debt Schemes and should have also refrained himself from accessing any non-public information relating to the schemes, material or non-material.

Therefore, the conduct of Noticee 1 in redeeming units in the Impugned Debt Schemes while in possession of material non-public information was not in line with the high ethical standards expected of a person vested with such quasi-fiduciary responsibilities and the same was also not in compliance with the ‘code of ethics’ and the ‘Conflict of Interest Policy’ of the AMC which clearly spelt out restrictions on dealing in securities while in possession of material non-public information.

Redemption of units by a director of the asset management company of a mutual fund while being privy to material non-public information cannot be considered as fair conduct.

Conclusion

Redemption of units by the Noticee 1 on his own behalf and on behalf of Noticee 3 while being privy to material non-public information was an ‘unfair trade practice’ and in contravention of Regulation 4(1) of PFUTP 2003.

Facts and circumstances and timing of the redemptions made by Noticee 2 lead to a distinct likelihood that the said redemptions were also based on material non-public information passed on by Noticee 1.

Since during the course of proceedings, Noticee 3 expired, proceedings against were abated.

However, since Noticee 1 had done the transactions on behalf of Noticee 3, the directions of disgorgement will be applicable to the corpus standing in the name of Noticee 3 also.

Directions

  1. Noticee 1 and Noticee 2 shall be restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of one (1) year from the date of this order. During the period of restraint, Noticee 1 and Noticee 2 shall not liquidate their existing holding of securities including the units of mutual funds.
  2. Noticee 1 and Noticee 2 shall jointly and severally transfer the amounts mentioned within a period of forty-five (45) days, from the date of receipt of this order. In case of failure to do so, simple interest at the rate of 12% per annum shall be applicable from the expiry of the said 45 days till the date of actual transfer;
  3. Noticee 1 shall be liable to pay a monetary penalty of Rs 4 crores for the redemptions undertaken on his own behalf and on behalf of Noticee 3, and Noticee 2 shall be liable to pay a monetary penalty of Rs 3 crores for the redemptions from her account, under Section 15HA of the SEBI Act, 1992;
  4. Noticee 1 and Noticee 2 shall pay their respective penalties within a period of forty-five (45) days, from the date of receipt of this order. In case of failure to do so, simple interest at the rate of 12% per annum shall be applicable from the expiry of the said 45 days till the date of actual payment.

[Franklin Templeton Mutual Fund, In Re.,  2021 SCC OnLine SEBI 131, decided on 7-06-2021]

Op EdsOP. ED.

Special Purpose Acquisition Company (SPACs) have been gaining popularity since the past few years in the international capital markets regime. SPACs have been in existence for a very long time, however, the growth in SPACs that the markets have seen recently especially in the United States of America is tremendous. In India, SPACs have been a hot topic ever since the renewable energy giant ReNew Power has used the SPAC strategy to get itself listed in the Nasdaq exchange.

A SPAC is a special purpose acquisition company formed in order to raise capital funds through initial public offering (IPO). These are also commonly known as blank cheque companies. A SPAC is initially a shell corporation and the amount generated from the IPO is then stored in a trust fund account until the target operating business is identified. After the target company is identified, the consent of the SPAC’s shareholders is sought and those shareholders who do not want to sell their holdings are given an option to redeem them. Finally, the de-SPAC phase begins, wherein the acquisition transaction is completed.

The SPAC regime in India is once again in talks, especially after ReNew Power’s combination with RMG Acquisition Corporation II — which is a US-based SPAC Companies like Grofers, Flipkart, Videocon D2H and the travel agency Yatra have also indulged in or are in talks of indulging into US based SPACs, wherein the acquisitions would be multi-million-dollar deals. SPACs are generally used by start-ups to get listed easily. In light of these circumstances, it is imminent for India to redesign the SPAC regulations and GoPro SPAC, which currently is not the scenario in India.

Regulatory framework in India

  1. Companies Act, 2013[1]: After demonetisation, the Government has been keeping shell corporations under their thumbs. A Parliamentary Committee in 2018 had asked the Government to provide a proper definition for the term “shell corporation” to avoid any form of legal ambiguity to avoid unnecessary litigation. It generally takes 18-24 months to complete SPAC transactions. However, as per Section 248[2] of the Companies Act, 2013, the Registrar of Companies can eliminate a company’s name from registration if they fail to commence business operations within 12 months of its incorporation. This would lead to a lot of legal issues for the directors and promoters of the corporation. But, this problem can be easily avoided by revisiting the regulations and introducing amendments in Companies Act, providing exemptions to SPACs if the purpose of their registration is already made clear to the Registrar of the Companies, thereby clearing up any ambiguity which might arise due to the business operations not being able to commence within 1 year of the SPAC’s incorporation.
  2. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009[3]: The SEBI regulations do not provide any relief to SPACs as well. According to Section 6(1)[4] of ICDR Regulations, as amended in 2018, state the eligibility criteria for public listing. For an IPO, a company must have[5]:

(i) Net tangible assets of at least Rs 3 crore for the preceding 3 years.

(ii) Average operation profits of the corporation must be at least Rs 15 crores during the preceding three years.

(iii) The net worth of the corporation must be at least Rs 1 crore in each of the preceding years.

SPACs definitely cannot meet these requirements and thereby get no acceptance under the SEBI regulations. SEBI has, however, since 2017 taken a leaf out of USA’s book and is starting to give recognition to SPACs. The Securities and Exchange Commission (SEC) of the United States of America supervises all SPAC transactions, SEBI must also take this into consideration and come up with a framework to regulate all SPAC transactions in India. This will lead to better augmentation of start-ups as SPACs are much more lucrative to investors than traditional IPOs. To achieve this, SEBI has mobilised a Committee to scrutinise the feasibility of pro-SPAC regulations in India.

Risk factors involved and the possible future of SPACs

Although, SPACs leads to easier and faster listing of start-ups, however, it means that the cumbersome and expensive listing process is not followed, thereby making it a huge risk for retail investors. As India lacks a specific framework for SPACs, the redemption of shares by the listed companies might not be permissible under the current regulations. Once again, India could take inspiration from the United States of America and bring about amendments in regulations to enable the investors to either redeem their holdings or claim a refund of the amount they have invested prior to the acquisition of the target corporation.

Another massive regulatory challenge that SPACs face in India are the stamp duty requirements. The SPAC route of listing is taken by start-ups as they are cost-effective in nature. However, the transactions through SPACs occur by way of reverse merger, which attracts heavy stamp duties. Due to this, the scheme of mergers also has to be floated and affirmed by the tribunals, which then leads to a lot of compliance issues of Companies Act, 2013. A possible exemption to SPAC transactions vis-à-vis stamp duties, could be an effective way of promoting the SPAC route of listing.

The abovementioned issues are further complemented by the RBI regulations for inbound mergers. It is most likely for the merger between SPAC and target company to be a form of cross-border merger. Therefore, this attracts various regulations as prescribed by RBI while dealing with inbound mergers. It is necessary for the transferee company to issue or transfer security to persons which are not residing in India as per the sectoral caps provided by the RBI guidelines. However, since SPACs do not have a specific business model to operate upon, the sector to which such SPAC belongs is subject to conjecture and speculation.

The taxation regime of India is also anti-SPAC in many ways. For example, the Indian tax authorities do not allow foreign listed SPACs to acquire Indian start-ups without capital gain tax. So, the capital gain is ensued at the hands of the shareholders. It is necessary to allow SPAC transactions in India. This would mean that both the SPAC and the target corporation would be based in India, therefore, such transaction would take the form of merger under a scheme of amalgamation. Such transactions are tax neutral in nature. This will also make sure that no tax liability is levied upon the shareholders involved.

On 10-3-2021 the consultation paper[6] on proposed International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 was released. The provisions in this regulation do talk about SPAC listings under Indian Financial System Code (IFSC). As per the consultation paper, for a SPAC listing to be valid, the minimum amount of the offer should be USD 50 million. However, there is only one IFSC in India to date, in GIFT City, Gujarat, which is also not fully established and is still in the development phase.

Conclusion

It is about time for the Indian market regulators to adapt with the dynamics of modern market instruments and come up with pro-SPAC regulations, if India is to achieve its full capital market potential. Other Asian markets like Hong Kong and Singapore are already working on the regulations regarding SPAC listings and countries like USA, Australia, etc., have already seen a huge rise in SPAC listings eversince they came up with stringent regulations governing SPACs. As per Mckinsey’s research paper[7], India’s capital market has been sized up at a USD 140 billion. Further, through SPAC listings, it would be possible for India to bring its capital market potential to the fullest and being able to release USD 100 billion worth of funding each year.

Implementing de-SPAC transactions might seem to be very challenging, but it is not impossible and through proper amendments in the existing regulations and by rectifying the compliance and cost issues, India will soon see a rise in the numbers of SPAC listings.


Pursuing BBA LLB with Business Law (Hons.), 4th-year student of law at ICFAI Law School, Dehradun, e-mail: karn1706@gmail.com.

[1] <http://www.scconline.com/DocumentLink/6ojfhdA2>.

[2] Ministry of Corporate Affairs, GoI, (last visited 13-5-2021) <https://www.mca.gov.in/SearchableActs/Section248.htm>.

[3] <http://www.scconline.com/DocumentLink/Xj38ATHA>.

[4] <http://www.scconline.com/DocumentLink/4u311Td3>.

[5] Securities and Exchange Board of India, (last amended on 8-1-2021) <https://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-last-amended-on-january-08-2021-_41542.html>.

[6] International Financial Services Centres Authority (10-3-2021) <https://ifsca.gov.in/Viewer/ReportandPublication/9>.

[7] Nitin Jain, Fumiaki Katsuki, Akash Lal and Emmanuel Pitsilis, Deepening Capital Markets in Emerging Economies, (12-4-2017) <https://www.mckinsey.com/industries/financial-services/our-insights/deepening-capital-markets-in-emerging-economies>.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): Soma Majumder, Adjudicating Officer, imposed a 25 crore penalty on Yes Bank Ltd. (YBL), and separate penalties on the three senior executives of its private wealth management team for perpetrating fraud on its customers by influencing them to alter their investment positions from fixed deposits (FD) to risky AT-1 bonds.

In the pertinent matter, the Bank was allegedly involved in the sale of AT1 bond fraudulently, which started in 2016 and continued till 2019. It appeared that YBL wanted to free up ‘shelf space’ for institutional investors to subscribe to further capital of YBL. Therefore, the Noticees devised a devious scheme to dump the AT1 bonds on their hapless customers acted through its employees including the three senior executives to perpetrate such fraudulent acts on its hapless and unsuspecting customers, some of whom were influenced to even alter their investment positions from FDs to these risky AT1 bonds. In order to do that, the Noticees highlighted the AT1 bonds as earning high interest vis-à-vis the FDs. The omission on the part of the Noticees to forward the relevant documentation to the investors customers indicated suppression of material facts and thus misrepresentation Some of the customers also closed the FDs and used the money to buy the AT1 bonds.

Noticee 1 had put forth 52 submissions and Noticee 2 had put 15 additional submissions.

While addressing the demand of the Noticees to cross-examine the complainants, it was held that, “…I note that while the impugned complaints have been the basis of initiation of investigation by SEBI, the charges in the SCN have been alleged on the basis of the detailed fact-finding which investigation conducted. Cross-examination is meant for assisting the Noticees to rebut the evidence against them while contesting the matter. However, since the complaints of the investors are not primarily relied upon in this proceedings, the question of cross-examination does not arise and hence no prejudice is caused to the Noticees by not acceding to their request for cross-examination…”.

The tribunal after looking into all the submissions so made, took note of all the evidences, documents and the proximate facts and circumstances, and was thus of the opinion that “It is clear that to further their own cause, the Noticees devised a scheme to purposely suppress the risk factors of the AT-1 bonds and to highlight the attractive features and also distorted and misrepresented the material facts, so that their customers could be influenced to invest in these risky bonds, some of who also shifted their investments from FDs to these bonds. It is clear that the Noticees had an intention to defraud the customers while making the sales pitch to their customers which is why they did not institute any of the aforesaid safeguards. It cannot be a matter of coincidence that such a large number of customers, i.e. 1311, were influenced and induced to invest in these risky bonds…”.

It further observed that, “It is seen from the facts of the instant case that these AT-1 bonds were ‘down sold’ in order to make ‘shelf space’ for the Institutional Investors to subscribe to further capital which may be issued by the YBL. So it was in the interest of Noticee1 to make shelf space and make the Institutional investors to subscribe to further capital and therefore Noticee 1 decided to facilitate the down selling of these AT-1 bonds…”.

It also took note of the fact that I note that initially, AT1 bonds were allowed to be issued only to institutional investors. Thereafter, vide its circular dated September 01, 2014, RBI allowed Banks to issue AT1 Bonds to individual investors but also mandated issuers to appropriately disclose to the investors, the unique features along with the risks associated with the bonds. And therefore, the issuer had the fiduciary duty to make sure that the features and risks of the instrument were known to the investors. And the difference between a subordinated bond and a fixed deposit should have been made clear while highlighting that it is not covered by deposit insurance.

Therefore the Tribunal exclaimed that,“ I conclude that the AT-1 bonds were sold to the customers of YBL by the Noticees without adopting adequate safeguards to protect their interests and without sufficient due diligence”. “…I conclude that the allegation that Noticees 1 to 4 violated Regulations 3(a), 3(c), 3(d) and 4(1) of PFUTP Regulations and Sections 12A(b) & 12A(c) of the SEBI Act and Noticees 1 and 2 also violated Regulation 4(2)(s) of PFUTP Regulations, read with Explanation (1) to Regulation 4(2) of PFUTP Regulations stands established. Further, Noticees 3 and 4 have submitted that the amendment to Section 4(2)(s) of PFUTP Regulations came into effect only in February 2019 after they had left the employment of YBL…”.

Resultantly a penalty of 25 crores was imposed on Yes Bank Ltd. a penalty of Rs 1 crore on Vivek Kanwar, head of private wealth management, and Rs 50 lakh each on Ashish Nasa and Jasjit Singh Banga.[Yes Bank Limited, In re, Order/SM/MG/2021-22/11306-11309, decided on 12-04-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): K Saravanan, Adjudicating authority, imposed a penalty of Rs 2 crore on Reliance Industries Ltd. (RIL), while making the noticees responsible not only on their own behalf but also on behalf of the minor noticees, being their natural guardians.

The issue herein was that, 12 crore equity shares of Rs 10/- each were allotted by RIL to 38 allottee entities on January 07, 2000. The allotment was made consequent to the exercise of the option on warrants attached with 6,00,00,000 – 14% NCD of Rs. 50/- each aggregating to Rs. 300,00,00,000 (PPD IV) issued in the year 1994.  Therefore, the allegation against the Noticees was to the effect that 6.83% shares that were acquired by RIL promoters together with Persons Acting in Concert (PACs) in exercise of option on warrants attached with Non-Convertible Secured Redeemable Debentures (NCD), which was in excess of ceiling of 5% prescribed in Regulation 11(1) of Takeover Regulations, without making any public announcement for acquiring shares.  Moreover, since the promoters and PACs did not make any public announcement for acquiring shares, it was alleged that they had violated the provisions of regulation 11(1) of Takeover Regulations. Resultantly, adjudication proceedings were initiated under Section 15H of the SEBI Act, 1992 against 36 promoters and PACs, which includes the 34 Noticees and 2 other entities.

Subsequently, certain preliminary issues were made pertaining to the jurisdiction, power of SEBI, which the Noticees believed should be adjudicated upon. And the adjudicating authority dealt with all the preliminary issues substantively one by one. While dealing with one of the preliminary issue to initiate proceedings after an inordinate delay, it was of the opinion “…In any event, even the delay, as argued, is not relevant to the present proceeding as the violation is a substantive violation in the nature of an “economic offence”…”.

Issues

  1. Whether the Noticees have violated the provisions of Regulation 11(1) of Takeover Regulations?
  1. Does the violations, if established, attract monetary penalty under Section 15H of SEBI Act, 1992? If yes, then what would be the monetary penalty that can be imposed upon the Noticees, taking into consideration the factors mentioned in Section 15J of the SEBI Act, 1992 read with Rule 5(2) of the Rules?

 The adjudicating authority while acting in affirmation stated, “Noticees have acquired 6.83% shares of RIL consequent to exercise of option on warrants attached with Non-Convertible Secured Redeemable Debentures (NCD), which was in excess of ceiling of 5% prescribed in Regulation 11(1) of Takeover Regulations, without making any public announcement for acquiring shares and, thus, have violated the provisions of Regulation 11(1) of Takeover Regulations. Further remarked, “…In the instant case, the violation was not one which was committed once and for all but that which continues till date. The violation is a disobedience…”.

The adjudicating authority while holding the RIL in default stated, “…I note that the Hon’ble Supreme Court of India in the matter of SEBI v. Shri Ram Mutual Fund (2006) 68 SCL 216 held thatonce the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant. Once the contravention is established, then the penalty is to follow.“…It is an admitted fact that the Noticees did not make the public announcement as per the mandatory requirement of Regulation 11 of the Takeover Regulations and the open offer being a consequential and necessary part thereof, which was absolute in nature. Such a failure is a continuing violation till discharge…”.

“…the warrants were issued in the year 1994 much before their coming into existence of the Takeover Regulations. At the same time, I note that the entire scheme of Takeover Regulations rest on the pedestal of ‘control’.  “…In effect, I note that the Noticees have neither complied with in obtaining the approval of shareholders supplying them with the prescribed details nor have they come out with a public announcement till date. Thus, I note that the Noticees have been enjoying all rights attached to the impugned acquisition without complying with the relevant law…”.

Thus, the violation of Regulations 11(1) of the Takeover Regulations made the Noticees liable for penalty under Section 15H of the SEBI Act, 1992.

While deciding on the penalty, the adjudicating authority was of the opinion that, “…With regard to the above factors to be considered while determining the quantum of penalty, I note that no quantifiable figures or data are available on record to assess the disproportionate gain or unfair advantage and amount of loss caused to an investor or group of investors as a result of the default committed by the Noticee. However, the fact remains that the Noticees by their failure to make public announcement, deprived the shareholders of their statutory rights/ opportunity to exit from the company…”

Therefore imposed Rs 25,00,00,000 penalty, to be paid jointly and severally, under Section 15H of SEBI Act, 1992 for violation of Regulation 11(1) of Takeover Regulations.[Reliance Industries Ltd., In re, Order/KS/AE/2021-22/11266-11299, decided on 07-04-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): S.K. Mohanty (Whole Time Member) in a detailed 92 paged order, barred six individuals and seven entities from the securities market for varying periods and directed some to disgorge illegal gains. Further made clear distinctions from the cases referred to, in regards with the instant matter, specifying very categorically the different factual threads.

The present matter pertains to the issuance of GDR by Zenith Birla (India) Limited and the independent and concerted efforts of the other Notices.. It had issued 1.81 million GDRs for USD 22.99 million in 2010. Thereafter, all the 1.81 million GDRs were cancelled and converted into equity shares. Post cancellation of the aforesaid GDRs, it was noticed that 4,77,30,000 shares of Zenith on conversion of 1,377,667 GDRs were sold in the Indian securities market through FII-sub-account namely India Focus Cardinal Fund  (IFCF). Similarly, 1,15,06,560 shares of Zenith on the conversion of 319,626 GDRs were sold in the Indian securities market through FII-sub account namely High Blue Sky Emerging Market Fund.  DRThe Company had concealed material facts from its shareholders and investors of Indian securities market and thereby had prevented them from taking an informed decision while dealing in the shares of the Company.

There were certain submissions made by the parties which the Court dealt with suitably, for instance, “…I note that the instant proceedings are in the nature of quasi-judicial proceedings and the provisions of Indian Evidence Act, 1872 are not strictly applicable to such proceedings. Further, the principle under Section 65 (a) of the said Act, itself provides for admissibility of a document as a secondary evidence under certain condition inter alia, when the original is in possession of the person against whom the document is sought to be proved, or of any person out of reach of, or not subject to the process of the Court. As stated in the beginning, the copies of the documents relied upon in the SCN to prove the allegations, were actually obtained during investigation through the help of overseas securities market regulators and the copies of all such documents relied upon in the SCN have been duly made available to the Noticees. The Noticees have filed their written replies to the SCN by referring to those documents, hence the objection to the reliability on those documents at this stage is without any reason and does not explain as to how these copies of documents have caused prejudice in defending their interest and contesting the allegations made against in the SCNs…”.

“Noticee no. 6 should understand that the instant proceeding is an inquisitional proceeding where an entity is required to offer comments / replies in response to the allegation levelled in the SCN. It is not an adversarial proceeding i.e. a dispute resolution proceeding where respective counter parties present their respective claims to a third neutral party, or an adjudicator for deciding the dispute…””… Hence the contention of the Noticee no. 6 is not tenable and he is expected to only confine his submissions in rebutting the allegations made against him in the SCN…”.

The Court further remarked, “On the basis of close connection of IFCF and HBS with AP and the role played by the AP, Vintage, IFCF and HBS in implementing the fraudulent scheme of GDR issue of Zenith, it is the call of justice that all these entities should be made jointly and severally liable to disgorge the said illegal gains earned by IFCF and HBS. Therefore, in my considered view, the gains made by these Noticees by selling such shares are liable to be disgorged since the underlying shares of those GDRs for which no consideration was paid by Vintage, were sold and unlawful gains were made out of such sale by these Noticees…”. Therefore, such acts providing partial and distorted information to the public about issuance of GDRs by the Company were observed to be acts falling in the category of fraudulent acts.

Common submission by some of the Noticees:

GDR were issued by the Company in 2010 while SEBI had issued SCN after 9 years of the GDR and such inordinate delay of around 9 years is unjustified and unfair.

Replying to which the court exclaimed, “….The submissions advanced by the Noticees may give a semblance of credibility on first blush, however, after scrutiny of the records before me, I am of the view that the aforesaid observations of the Noticees and the decisions relied upon by them would neither be applicable nor be helpful to the Noticees, as the facts and the context of the matters referred to above are distinguishable from the facts of the present matter…”

While taking cognizance of the individual and active role of the Noticees in connivance with Zenith, the Court took note of the role of the Bank also. The Court gave due credit to the corrective steps that the Bank took by removing the director from its joint venture, further dissolving and transferring its sub account. And therefore it stated, “…in my opinion, though the acts of the Noticee no. 13 are in violation of the provisions alleged in the SCN, taking cognizance of the aforesaid mitigating measures taken by it as a bank and as a FII, the matter needs to be considered accordingly…”.[Zenith Birla (India) Ltd, In re, 2021 SCC OnLine SEBI 75, decided on 30-03-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): A Coram of Tarun Agarwala, J., (Presiding Officer) and M.T. Joshi, J., (Judicial Member) while dismissing an appeal held that separate penalties by the stock exchanges could be imposed.

In the present matter, BSE and NSE separately imposed a penalty of Rs 12 lakh for violation of Regulation 17 and 19 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), in two consecutive quarters. The stock exchanges suspended the trading activities of the appellant considering the non-payment of penalty amount.  The appellant contended that the default was made only in the first quarter. Further, contended that, separate penalties for the same offence cannot be imposed by the two stock exchanges separately.

The Coram resultantly found defaults in both consecutive quarters. While relying on the SEBI’s conscious decision in W.S. Industries (India) Limited v. BSE Ltd. (Appeal No. 8 of 2019 decided on 19.09.2019) held that, separate penalties by the stock exchanges could be imposed.[PVP Ventures Ltd. v. Bombay Stock Exchange Ltd., 2021 SCC OnLine SAT 90, decided on 17-03-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): G Mahalingam, (Whole Time Member) while revising the recommendations made by the Designated Authority (DA) considering the serious lapses of the Noticee (Book Running Lead Manager) in regards with carrying out due diligence, were taken note of. Resultantly, Noticee is prohibited from accepting any new clients for a period of three months.

The present matter was brought out from an investigation carried out by SEBI into the IPO of Sudar Industries Ltd. (SIL), for which Ashika Capital Limited (Noticee) was the Book Running Lead Manager (BRLM), in which certain lapses were found on account of BRLM. In the instant case the Delegated Authority had observed that the issuer company did not disclose the transactions of Addon Exports, A R Fabrics, Elim Traders, RJ Traders and Shalom Fashion, which were proprietorship firms of employees of SIL and persons connected to it, in the related party transaction. The Noticee contended that there was nothing on record that could have raised an iota of suspicion that the proprietorships in question were connected with the employees and there were no standard guidelines for the due diligence process.

Issues raised were:

  1. Non-disclosure of Independent director’s involvement in key strategic and financial decisions
  2. Heavy dependence on few buyers/suppliers and non-disclosure of the buyers and suppliers being related to the promoters and the promoter group
  3. Wrong disclosures made in the offer document regarding KMPs
  4. Non – Disclosure of Related Party Transactions

The enquiry report indicated clearly that SIL was very much dependent on its clients for around 80% of its revenues and further established a cogent pecuniary relationship.

It was thus held, “…It was further noted that the Noticee had merely relied on an undertaking and information given by the issuer company instead of independently verifying the facts by examination of documents. Thus, the merchant banker in the present case has mechanically disclosed the information provided by the issuer without exercising reasonable diligence to ensure adequate, true and fair disclosures in the prospectus. The Noticee by not independtly exercising adequate diligence has deprived the investors of material information to enable them to make a balanced and well informed decision, which clearly breached the obligations imposed…”.

While stressing on the need for diligence, a landmark judgment of the Supreme Court was referred to, Chander Kanta Bansal V. Rajinder Singh Anand (2008) 5 SCC 117 “…According to Oxford Dictionary (Edn. 2006),the word “diligence” means careful and persistent application or effort. “Diligent” means careful and steady in application to one’s work and duties, showing care and effort. As per Black’s law Dictionary (18thEdn), “Due Diligence” means the diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation. According to Words and Pharses by Drain-Dyspnea (PermanentEdn.13-A)“due diligence”, in law, means doing everything reasonable, not everything possible.“ Due Diligence” means reasonable diligence. It means such diligence as a prudent man would exercise in the conduct of his own affairs…”.

Further stated that, “…I find that the recommendation is not commensurate with the gravity of the lapses/acts of negligence attributable to the Noticee. Hence, I am inclined to appropriately revise the recommendation and pass suitable directions…”.

[Sudar Industries Limited, In re, 2021 SCC OnLine SEBI 62, decided on 17-03-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): G. Mahalingam (Whole Time Member), while exercising powers conferred under Section 12(3)  read with Section 19 of the SEBI Act and Regulation 27(5) of the Intermediaries Regulations, cancelled the certificate of registration of the Alliance Intermediaries and Network Private Limited (Noticee), on account of activity and willful issuance of fake and bogus contract notes against receipt of cash to show fictitious transactions as genuine ones and enable its clients to book fictitious speculative gains and short/long term gains/losses for tax purposes.

In the pertinent case, it was found by the Noticee was registered with the Securities and  Exchange  Board of  India as a  member of  Inter-Connected  Stock Exchange of India Limited. During 2004  to  2007,  contract notes were issued by intermediaries (i.e. person of any business in the market) to clients (individual entities) on behalf of the Noticee on accepting cash from intermediaries and giving cheques by the Noticee to intermediaries.  The Noticee was earning a commission of 0.15% for the deposit of cash in its various companies. Counsel appearing before the Investigating authority also presented the modus operandi of for issuing fake contract notes for speculative profits/losses on behalf of clients.

Therefore, recorded that as per the findings of the Income  Tax  Department, the Noticee was engaged in making accommodation entries for clients to facilitate speculative short term / long term profits/losses. And further noted that the activities of the Noticee, were inherently fraudulent and were aimed at aiding and abetting tax frauds. And held that the Noticee was no longer a ‘fit and proper person and thereby in respect of Alliance Intermediaries and Network Private Limited has violated  Regulation  5(e)  read with  Regulation  5A  of the  Stock  Brokers  Regulations read with provisions of  Schedule II of the Intermediaries Regulations.[Alliance Intermediaries and Network Private Limited, In re, 2021 SCC OnLine SEBI 24,  decided on 09-03-2021]

Case BriefsHigh Courts

Kerala High Court:  N. Nagaresh, J., addressed the instant petition filed by a Non-Banking Finance Company to challenge show-cause notices issued by the Securities and Exchange Board of India. The petitioner had sought to declare that the show-cause notices were ultra vires to the provisions of the Companies Act, 1956, the provisions of the Securities and Exchange Board of India Act, 1992, and were violative of Article 14 and Article 19(1)(g) of the Constitution.

Brief facts of the case were, the petitioner company was a Public Limited Company registered with the Reserve Bank of India (RBI). It had been subjected to stringent monitoring by its Auditors and RBI Inspectors. To augment its capital base and resources, the petitioner had made a private placement of equity shares several time. Such private placements were made to very few persons who were associated with the petitioner as member/staff/borrower. Applications for equity shares were given to specific persons. SEBI had issued a letter dated 19-10-2017, seeking information from the petitioner regarding alleged deemed public issue and had called for information from the petitioner. On not being satisfied with the information and documents provided by the petitioner, SEBI had issued a show-cause notice dated 05-04-2019.

The petitioner, while relying on the judgment of the Supreme Court in Joint Collector Ranga Reddy District v. D. Narsing Rao, (2015) 3 SCC 695, contended that there had been 19 years of inordinate delay and laches in proceeding against the petitioner. Also, in spite of requests, the copies of the complaints on the basis of which the show-cause notice was issued were not made available to the petitioner, thereby offending the settled principles of natural justice.

The Bench noticed that the petitioner-Company had passed resolutions authorising issue of equity shares to any person including existing members of the Company in any manner the board may deem fit. The language of the resolution indicated that what was intended by the Company was not strictly private placement. The language of the resolutions indeed gives rise to a suspicion or indication that the Company proposed to issue shares to the public. It is for the said reason that the SEBI sought explanation from the petitioner. The Bench stated,

“It was true that the information sought for by the SEBI related back to the year 2001. However, the required information are those which are required by the petitioner to be statutorily maintained. Therefore, the delay in issuing these Show Cause Notices, cannot cause prejudice to the petitioner.”

Hence, the Bench stated, it could not be said that jurisdictional facts necessary to initiate proceedings did not exist. Even if the petitioner-company was incapacitated to provide any information required by the SEBI, it could very well give reasoned explanation for the same to the SEBI.  Lastly, it was held the issue being at show-cause stage, it would not be appropriate for the Court to interfere with the statutory proceedings at this stage. Thus, the petition was dismissed.[BRD Securities Ltd. v. SEBI, 2021 SCC OnLine Ker 1027, decided on 25-02-2021]


Kamini Sharma, Editorial Assistant has put this story together.

Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): S.K. Mohanty, (Whole Time Member) had granted exemptions to Pantone Finvest Ltd., from complying with the requirements of regulation 3(2) read with regulation 10(1)(a)(ii) of the Takeover Regulations 2011 with respect to direct acquisitions in Tata Communications Ltd.

Pantone Finvest Ltd. had proposed acquisition of equity shareholdings of 26.12% in Tata Communications Ltd. as the government had shown its intention to divest its shareholding in the Company partly through the OFS process and partly through sale to a strategic partner i.e., Pantone. Such an increase in shareholding of the Pantone from the current holdings of 48.87% to 58.87% in the Company would trigger an open offer obligation under regulation 3(2) of Takeover Regulations 2011.

The Board noted that both Pantone and government were part of the promoter group of the Company for more than three years in the past thereby, the proposed transaction was eligible for general exemption under regulation 10(1)(a)(ii) of Takeover Regulations 2011. However, it was further noted that the proviso of regulation 10(1)(a) of Takeover Regulations 2011 had mandated that the price should be within the prescribed threshold.

The issue in the instant case was that neither Pantone nor government could determine whether the price arrived at in the OFS process would be in accordance with the proviso of regulation 10(1)(a) of Takeover Regulations 2011. If the discovered price was not within the prescribed range, the transaction would not be eligible for automatic exemption. Therefore, an exemption application had been filed under regulation 11 of Regulations 2011.

The Board observed that the proposed acquisition would make no change in either total equity share capital or total share capital of the Company. Hence, the Board had granted an exemption to Pantone from complying with the requirements of regulation 3(2) read with regulation 10(1)(a)(ii) of the Takeover Regulations 2011 with respect to the proposed direct acquisitions in the Company. However, the exemption was limited to requirements of making an open offer and Pricing Condition and not from disclosure requirements under Chapter V of the Regulations.  [Acquisition of shares and voting rights in Tata Communication Ltd., In Re., WTM/SKM/CFD/5 of 2020-21, decided on 23-02-2021]


Kamini Sharma, Editorial Assistant has put this story together.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): Justice Tarun Agarwala, Presiding Officer, Dr C.K.G. Nair  Member and Justice M.T. Joshi, Judicial Member affirmed the impugned order and allowed the appeal partly.

The present appeal has been filed against the order dated August 31, 2020, passed by the Adjudicating Officer i.e. AO of Securities and Exchange Board of India i.e. SEBI imposing a penalty of Rs. 8 lakh for violation of Regulation 3 and 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 i.e. PFUTP Regulations.

A show-cause notice was issued in the trading of the scrip of Malabar Trading Company Ltd. i.e. ‘MTCL’. It was alleged that the appellant had contributed to more than 5% of the total market positive LTP through 63 trades for a total quantity of 4304 shares during patch-1. It was further alleged that the appellant placed sell orders in the range of 1 to 500 shares when the respective buy order quantity was in the range of 100 to 3400 shares especially when more shares were available, inspite of which the appellant on most of the dates traded only on one share. It was, thus, alleged that the appellant was manipulating the share price and created a misleading appearance of trading in the scrip by such trades thereby violating Regulation 3 and 4 of PFUTP Regulations. The AO found that the appellant had no bonafide intention to sell when sufficient buy orders were available and despite having adequate holdings in the scrip of MTCL sold only one share per transactions which resulted in the creation of positive LTP and thus created a false misleading appearance of trading in the securities market. The AO, thus, held that such trading pattern amounts to manipulation of the price of the scrip.

The Tribunal observed that except on three occasions the appellant only sold one share at a time on a daily basis. This trading pattern created a misleading appearance with the intention to manipulate the market if not the price. Thus, even if there is no connection with the buyer the trading pattern shows a concerted effort to manipulate the market and therefore it was observed that the appellant was not acting as a genuine seller. It was further observed that appellant had no bonafide intention to sell because inspite of sufficient buy orders being placed with abundant quantity being available in the market the appellant was only placing sell orders of one share at a time. This clearly shows his intention of manipulating the market for vested reasons.

The Court thus held that the finding of the AO that the appellant had violated the provisions of Regulation 3 and 4 of PFUTP Regulations does not suffer from any error of law. The Court further held “in the given circumstances when the appellant was only selling miniscule quantity the penalty of Rs. 8 lakh is harsh and excessive and does not commensurate with the alleged violations. Given the surrounding circumstances we are of the opinion that the penalty of Rs. 1 lakh in the given circumstances shall be just and sufficient.”

In view of the above, the appeal was allowed and impugned order affirmed.[Tanuj Khandelwal v. SEBI, 2021 SCC OnLine SAT 78, decided on 04-01-2021]


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Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): Ananta Barua, (Whole Time Member) found Chairman of Future Group, Kishor Biyani and its other promoters indulged in insider trading. The Board, in addition to a year ban on Kishor Biyani, Anil Biyani and Future Corp. Resource Pvt. Ltd. (FCRPL), had also imposed the penalty of Rs 1 crore on each.

The order was passed in connection with an announcement dated 20-04-2017 related to the “Composite Scheme of Arrangement between FRL, BSPL, PHRPL and their respective Shareholders”. SEBI had passed a show-cause notice regarding the said arrangement, alleging insider trading and wrongful gain thereby.

Whether there was an Unpublished Price Sensitive Information (UPSI)?  

On 20-04-2017, Future Retail Ltd. (FRL) made a corporate announcement to the stock exchanges regarding segregation of certain business of FRL through a Composite Scheme of Arrangement between FRL, BSPL and PHRPL and their respective Shareholders. The information related to scheme of arrangement, which resulted in the de-merger of certain business from FRL, had its own appreciable impact on the price of the shares of FRL and therefore, information was price sensitive.

Regulation 2(1) (n) of the Prevention of Insider Trading (PIT) Regulations, 2015 prescribes as under:

“………(n) “unpublished price sensitive information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities”

Therefore, the information which was disclosed to the stock exchanges by FRL on 20-04-2017, prior to its disclosure was UPSI.

Whether Noticees except Noticee 7, are insiders?

The definition of “insider”, as given in Regulation 2(1)(g) of PIT Regulations, 2015 showed that any person,

  • who is connected person; or
  • who is in possession of or having access to UPSI,

Regulation 2(1)(d)(ii)(j) of PIT Regulations, 2015 inter alia provides that a company wherein a director of a company or his immediate relative or banker of the company, has more than ten per cent. of the holding or interest, shall be deemed to be connected person unless the contrary is proved. Noticee 2, Kishor Biyani had been shown as person exercising significant influence on FRL being significant beneficial owner of shares held by noticee 1 FCRPL in FRL. Kishor Biyani, having held beneficial interest in 32% shares of FCRPL was an insider as per the provisions.  Noticee 3, Anil Biyani, (Promoter of FRL) being immediate relative of Kishor Biyani was deemed to be connected persons in terms of the Regulations, 2015. FCRPL, being a connected entity was an insider as mentioned above. Noticee 4, the employee trust formed by FCRPL i.e., FCRPL Employee Welfare Trust (FCRPLWT) was deemed to be a connected person. Noticee 5 and 6 i.e., Rajesh Pathak  and Rajkumar Pande were also directors in other group companies of Future Group and had frequent communication with Kishor Biyani which had suggested direct or indirect association of with FRL, which was the requirement under Regulation 2(1)(d) of the PIT Regulations, 2015 for terming a person as “connected person”.  Noticee 8, Arpit Maheshwari was part of the emails where issue related to the scheme was being discussed. Since, he was privy to the UPSI, he was an insider in terms of Regulations 2(1)(g)(ii) of PIT Regulations, 2015.

Whether Noticees except Noticee 7, have traded in the securities of FRL when in possession of the UPSI?

The Board observed that FCRPL purchased Rs. 36,25,000 shares and FCRPLWT purchased Rs. 8,00,500 shares, of FRL during the period of UPSI. While Kishor Biyani and Anil Biyani who were insiders of FRL and were holding beneficial interest in 32% and 15% shares in FCRPL, respectively, were the persons who took the decisions for impugned trades on behalf of FCRPL, in the shares of FRL during the UPSI period. Noticee 5, in consultation with noticee 6, had issued instructions to IDBI to purchase the shares of FRL on behalf of noticee 4 during the UPSI period. IDBI then placed the order with Sajag Securities Pvt. Ltd., Stock Broker of Noticee 4, for purchasing the shares of FRL. While noticee 8 employed with FRL as Deputy Manager, had traded in the scrip of FRL during the period of UPSI. The Board held,

“Once it is established that an insider when in possession of UPSI has traded in the securities then it is a natural inference that such trades were on the basis of the UPSI.”

SEBI observed that noticee 7 (as a compliance officer of FRL) had violated Clause 4 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders as specified in Schedule B read with Regulation 9(1) of PIT Regulations, 2015 as he failed to close the trading window with respect to the aforesaid announcement dated 20-04-2017. The Board further noticed that as per the list of people/entities submitted by FRL to whom pre-clearance was given for trading in the scrip of the FRL, noticee 7 gave pre-clearance to FCRPL for trading in the scrip of FRL while knowing the fact that FCRPL and its directors i.e. Kishor Biyani and Anil Biyani were insiders and might have access to the UPSI.

Directions:

In view of the aforesaid findings, SEBI issued following directions:

  • FCRPL, Kishor Biyani, Anil Biyani along with noticees 5 and 6 were restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, for a period of one (1) year;
  • Noticees 1, 2, 3, 5 and 6 were restrained from buying, selling or dealing in the securities of the Future Retail Limited (FRL) for a period of two (2) years;
  • Noticee 8 was restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, for a period of one (1) year; and further from buying, selling or dealing in the securities of the Future Retail Limited (FRL), for a period of two (2) years;
  • FCRPL, Kishor Biyani and Anil Biyani were directed to jointly and severally disgorge an amount of Rs. 17,78,25,000.
  • Noticee 8 was directed to disgorge an amount of Rs. 13,320 along with an interest at the rate of 12% per annum to Investor Protection and Education Fund (IPEF).
  • FCRPL and FCRPLWT were directed to jointly and severally disgorge an amount of Rs. 2,75,68,650 along with an interest at the rate of 12% per annum.
  • Penalty of Rs. 1 crore was imposed on FCRPL, Kishor Biyani and Anil Biyani each which was directed to be paid within a period of 45 days,
  • Noticee 5 and 6 were imposed with a penalty of Rs. 25 lakh, each and were directed to pay their respective penalties within a period of 45 days;
  • Noticee 7 was imposed with penalty of Rs. 10 lakh, and was directed to pay penalty within a period of 45 days,

However, SEBI clarified that the obligation of the noticees in respect of settlement of securities, purchased or sold in the cash segment of the recognized stock exchange(s), would be allowed to be discharged irrespective of the restraint/prohibition. Further, all open positions, if any, of the noticees, in the F&O segment of the recognised stock exchange(s), were permitted to be squared off, irrespective of the restraint/prohibition imposed by this Order. [Future Corporate Resources (P) Ltd.., In Re., 2021 SCC OnLine SEBI 28, decided on 03-02-2021]


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Security and Exchange Board of India (SEBI): Madhabi Puri Buch, (Whole Time Member) issued ex-parte order against National Stock Advisory Research (NSAR) on finding out its indulgence in unauthorised activities.

SEBI had received a complaint against NSAR, a proprietorship firm of Neeraj S Lodhi alleging that NSAR was an unregistered stock advisory firm; was in the business of taking money from small investors by providing them wrong trading tips and calls, and after receipt of money they did not respond to phone calls and messages of investors.

After conducting the examination in this matter, the Board noticed that neither NSAR nor its proprietor Neeraj S Lodhi was registered with SEBI in any capacity. The Board observed that NSAR had been putting information in public domain/advertising by using website namely www.nationalstockadvisory.com about the various services offered by it in securities market. It was also observed that various plans/packages were being offered by NSAR to avail Services. Thus, NSAR was prima facie, holding itself out as an investment Adviser without obtaining registration from SEBI and observing mandated regulations. Regulation 3(1) of SEBI (Investment Advisers) Regulations, 2013 states that:

“…no person shall act as an investment Adviser or hold itself out as an investment Adviser unless he has obtained a certificate of registration from the Board under these regulations”.

The Board held the activities of NSAR, prima facie, in violation of Section 12(1) of SEBI Act, 1992 read with regulation 3(1) of the IA Regulations, 2013. Therefore, to prevent NSAR from collecting any more funds from the public and indulging in unauthorized investment advisory activities, the Board by way of interim ex-parte order issued the following directions against NSAR and its proprietor Neeraj S Lodhi:

  • to cease and desist from acting as an investment advisor including the activity of acting and representing through any media (physical or digital) as an investment advisor,
  • not to divert any funds collected from investors
  • not to dispose of or alienate any assets,
  • to immediately withdraw and remove all advertisements, representations, literatures, brochures, materials, publications, documents, websites, communications etc.
  • not to access the securities market and buy, sell or otherwise deal in securities, either directly or indirectly, in any manner whatsoever;
  • to provide a full inventory of all assets held in their name,
  • ICICI Bank and SBI are directed not to permit any debits/withdrawals and not to allow credits, from/to the following bank accounts, without the permission of SEBI.
  • The Depositories are directed to ensure, that they neither permit any debits nor any credits in the demat accounts held by Neeraj S Lodhi.

[National Stock Advisory Research, In Re., 2021 SCC OnLine SEBI 27, decided on 01-02-2021]


Kamini Sharma, Editorial Assistant has put this story together