Op EdsOP. ED.

I. Introduction

The coronavirus crisis encouraged traditional and even first time investors to look for alternative investment opportunities, and cryptocurrencies have been an unconventional and increasingly popular alternative ever since.[1] Cryptocurrencies are a form of digital currency based on blockchain technology, widely considered secure, decentralised and providing anonymity to its users, while using cryptography[2] to secure the transaction records. Due to the highly secure nature of transactions, purchases cannot be traced, and individuals can use it to purchase even illegal merchandise, including drugs or firearms.[3] Although cryptocurrency is “secure” two elements make cryptocurrencies riskier than bank accounts: market volatility and the lack of federal insurance and regulation.[4]

The cryptocurrency market crossed $1 trillion value earlier this year,[5] while unofficial industry estimates suggest that Indian owned investments in cryptocurrencies to be approximately US $1.4 billion.[6] Further, the PwC 2020 Time for Trust Report[7] found that blockchain technology would add $1.76 trillion (~1.4%) to the global Gross Domestic Product (GDP) by the year 2030. A global poll revealed that 73% of millionaires would invest in cryptocurrencies, such as Bitcoin and Ethereum, before the end of 2022.[8]

In 2018,  Reserve Bank of India (RBI) promulgated a circular[9] which prohibited banks from extending financial services that involved cryptocurrency, though  RBI had raised concerns about the potential financial, legal and security risks associated with it since 2013.[10] The Ministry of Finance constituted an Inter-Ministerial Committee which published the report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, 2019[11] raising several pertinent concerns including the need to secure consumers from fraud and risks, the protection of the financial system, and the need to prevent criminal activities. Thus, the Committee submitted the Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019[12], which suggested a blanket ban on cryptocurrencies. Interestingly, the Draft Bill provided under Section 8(1) that whoever directly or indirectly mines, generates, holds, sells, deals in, transfers, disposes of or issues cryptocurrency, shall be punished with up to 10 years of imprisonment. The severity of the proposed imprisonment is in line with Para 2 of  Part A of the Schedule under the PMLA, giving us a clear indication as to how seriously the Government views these transactions.

However, a Supreme Court Bench comprising of  R.F. Nariman, Aniruddha Bose and V. Ramasubramanian, JJ. quashed  RBI circular in Internet and Mobile Assn. of India v. RBI,[13] (hereinafter “IMAI”), on the ground of proportionality, and upheld the contention that the denial of access to cryptocurrency users would be tantamount to a denial of the right to carry on any trade or profession guaranteed under Article 19(1)(g)[14] of the Constitution of India (hereinafter “the Constitution”). Thereafter, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was set to be introduced in the Lok Sabha, to prohibit all private cryptocurrencies operational in India.[15] There is a strong likelihood that this step is being undertaken, because  RBI is instructed to launch its own digital currency.[16] Yet, as on date, there is no definitive regulation governing cryptocurrencies, adding to the uncertainty and confusion about its legality in India.

The Government of India initially wanted to encourage blockchain technology whilst opposing the legitimisation of cryptocurrency because once the unit of transaction changes from rupees to any kind of cryptocurrencies, tax recovery or general regulatory control would become extremely difficult and may reach beyond the regulatory capacity of the Government.[17] Thus, the Government has attempted to welcome blockchain technology,[18] but has vehemently opposed the use of private cryptocurrencies.[19] Recently, it was reported that the Government plans to consult experts and seek “legal opinion at the highest level” before it comes to a final decision on whether to allow the trading and holding of cryptocurrencies within the domestic market.[20]

Therefore, it is warranted to declutter the aspect of cryptocurrencies regarding the foregoing anticipation of money laundering attached to it, as to whether it can or rather should, be regulated through the PMLA, in view of its decentralised and peer-to-peer (P2P) network mechanism apropos its tenuous legality.

II. Legality of Cryptocurrency

The key issue surrounding cryptocurrency is the inability to define its legal status. In light of cryptocurrencies being prone to anti-money laundering/counter terrorist financing (AML/CTF), the “silk road,”[21] or sophisticated cyber hackings,[22] almost no country has recognised cryptocurrency as a valid legal tender.[23] Though recently, El Salvador became the first country to adopt Bitcoin as a parallel legal currency,[24] while the move was anticipated to be allied with legal and economic issues by the International Monetary Fund (IMF).[25]

The Supreme Court in IMAI[26] judgment recognised that  RBI could notify cryptocurrencies to fall under the definition of “currency” under the Foreign Exchange Management Act, 1999[27] (hereinafter “FEMA”). Therefore, cryptocurrency users would be deemed to carry on an activity that falls within the control of  RBI. The Court further held that cryptocurrency does not hold any inherent monetary value and it cannot be classified as a prepaid instrument under the Payment and Settlement Systems Act, 2007[28] (PSSA). However, the Court recognised the ability of  RBI to regulate cryptocurrencies under the PSSA. Notwithstanding the IMAI[29] judgment,  RBI has “major concerns” on the impact of cryptocurrency trade on the country’s financial stability.[30]

On 24-3-2021, the Ministry of Corporate Affairs made it mandatory for companies dealing with cryptocurrencies to disclose profit or loss incurred on transactions, the amount of cryptocurrency they hold and deposits or advances from any person.[31] Further, multiple banks have warned their customers of restrictions if they deal in cryptocurrencies, further adding uncertainty on the tenuous legality of cryptocurrencies.[32] The Court in IMAI[33] judgment opined that,

  1. It is as much true that VCs (virtual currencies) are not recognised as legal tender, as it is true that they are capable of performing some or most of the functions of real currency.

Certain cryptocurrencies known as “stablecoins” are today’s economic equivalent of money market funds, which could create significant damage in the broader crypto market.[34] One of the serious criticisms of cryptocurrencies is that it has no inherent worth, and it only has the worth that the world gives it.[35] Moreover, owing to the decentralised structure, a random “broken heart” emoji tweeted by Elon Musk drastically fluctuated the market valuation of Bitcoin.[36] A monetary system that fluctuates on individual opinions, might be regarded as inherently flawed. Further, cybercriminals are going after cryptocurrency, with an increase in the number of new modifications of miners, according to a report by the cybersecurity firm Kaspersky.[37]

Thus, how can there be a currency that is not backed up by a sovereign State? The IMAI[38] judgment noted that, “George Friedman, the founder and Chairman of Geopolitical Futures LLC, an online publication, aptly summarised this dilemma as follows:

  1. 104. Bitcoin is neither fish nor fowl … But both pricing it as a commodity when no commodity exists and trying to make it behave as a currency, seem problematic. The problem is not that it is not issued by the Government nor that it is unregulated. The problem is that it is hard to see what it is.

III. Cryptocurrency and money laundering

Some cryptocurrencies such as Monero, Zcash, DASH, Verge and Horizen provide their users with maximum privacy, making it almost impossible to trace the parties involved in the transactions.[39] In other words, most cryptocurrencies allow criminals to hide the source of their wealth. Though Bitcoin records all transactions which are contained in a freely distributed database,[40] criminals reportedly[41] laundered US $2.8 billion through Bitcoin exchanges in 2019, up from US $1 billion in 2018, making it even more appealing to criminals.[42] Thus, there is minimal or no law enforcement oversight protection, since there is no authority for regulating cryptocurrency, as opposed to the active role of the Government in the distribution of fiat currencies.

Cryptocurrencies being primarily based on P2P mechanism attract launderers for having the total cost of cash out strategy at less than 15% of the proceeds of crime, compared to other money laundering methods costing up to 50%.[43] It is because the information relating to the transaction, or the source of funds mostly are anonymous, making it next to impossible to bring it within the ambit of the PMLA, besides the fact that not recording every transaction detail violates Section 12[44] of the PMLA, which imposes an obligation on banking companies, financial institutions, and intermediaries to maintain and upkeep records. This anonymity and accessibility arguably make cryptocurrencies the preferred safe haven for criminal activities including money laundering.[45]

Therefore, unless anonymity is omitted from all transactions relevant to cryptocurrency, tracing or freezing the digital wallet suspected to be containing “proceeds of crime,” would practically become impossible for an agency like the Directorate of Enforcement (hereinafter “ED”). The Draft Bill which sought to ban all cryptocurrencies, attempted to address the problem of anonymity by bringing the act of mining, generating, issuing, holding, using, selling, transfer and/or disposal of cryptocurrency within the meaning of a “scheduled offence,” under the PMLA. Further, it has been reported that India’s leading cryptocurrency exchanges, including WazirX, CoinDCX and CoinSwitch Kuber, have partnered with Internet and Mobile Association of India to set up an advisory board to implement a code of conduct for the crypto industry in India.[46] Recently, the ED reportedly issued a notice to WazirX for allegedly violating the FEMA for transactions worth ₹2,790.74 crore.[47] Even though India has not yet passed a law on cryptocurrency, certain types of transaction have a higher risk of attracting penalties.[48]

The Supreme Court in  IMAI[49] judgment observed that virtual currencies are not widely accepted modes of exchange and thus they could also not be regarded as a final discharge of debt. The Government once aimed to block cryptocurrencies and welcome blockchain technology in the same breath, however, the Government may be required to recognise cryptocurrency if it intends to generate revenue through it and prevent its misuse as an avenue of money laundering. Moreover, the Indian income tax law is unclear regarding the tax impact on the gains earned from cryptocurrencies.[50]

 IV.  Where the world stands on cryptocurrency

According to the United Nations, the estimated amount of money laundered globally in a year is 2% to 5% (or $800 billion to $2 trillion) of the global GDP.[51] While the world leans towards the sustainable development goals to counter climate change, a debate looms around the energy consumption in cryptocurrency mining. As per an analysis of the Cambridge Centre for Alternate Finance, Bitcoin consumes approximately 110 Terawatt hours per year – 0.55% of the global electricity production, or roughly equivalent to annual energy draw of Malaysia or Sweden.[52] Is the cryptocurrency energy consumption appropriate use of non-renewable resources or the world needs to reject this model of monetary system?

In Canada, digital currencies are not legal tender,[53] but are bound by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2000, which include processes such as record keeping, verification, suspicious transaction reporting, and registration. In Singapore, primarily the Payment Services Act, 2019, mandate that cryptocurrency businesses should obtain a licence complying with AML/CTF regulations. In the United Kingdom, those engaged in crypto related business have to register with the Financial Conduct Authority, and they have to comply with AML/CTF measures provided under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations, 2017. Recently, it was reported that up to 50 companies dealing in cryptocurrencies such as Bitcoin may be forced to close after failing to meet the UK’s AML rules.[54]

On the other hand, in the United States,[55] though there is no federal regulation governing cryptocurrencies, the Financial Crimes Enforcement Network (FinCEN) regulates money services businesses (MSBs) under the Bank Secrecy Act of 1970. Thus, while MSBs are required to conduct a comprehensive risk assessment of exposure to money laundering, FinCEN regulates MSBs to develop, implement, and maintain a compliance program for AML/CTF. Recently, the owner of a Bitcoin exchange was convicted by a federal jury for his role in a transnational and multimillion-dollar scheme to defraud Americans and received a 121-month prison sentence.[56] Another man was sentenced to 121 months in federal prison for conspiring to distribute and possess methamphetamine, a dangerous drug, the payment of which was done through cryptocurrency.[57] These are just a few illustrations that point to the dangers of an unregulated anonymous currency.

 V. The way forward

 Cryptocurrency needs to be regulated, undoubtedly. However, the PMLA as it currently exists is wholly insufficient to deal with money laundering via cryptocurrency and there can be two procedures to tackle this insufficiency. Firstly, it may be regulated by amending Section 2(s)(sa)[58] of the PMLA to include cryptocurrency business persons within the meaning of “person carrying on designated business or profession,” bringing the exchange service provider within the meaning of “reporting entity” under Section 2(w)(wa) and imposing “client due diligence/KYC” requirements on cryptocurrency businesses under Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. Secondly, an effective legislation can be enacted with an autonomous body as thewatchdog, to affect safe utilisation of the currency. India should reasonably anticipate that decentralised and unregulated cryptocurrencies, while undermining the control of e RBI, can destabilise the economy; alongside being misused for circumventing capital controls, money laundering or illegal purchases. The verdict of the Supreme Court in IMAI[59] shall necessarily be complied with, which makes a ban on cryptocurrencies to be violative of the fundamental right to trade guaranteed under the Constitution. However, it is more likely that this position will have to be revised and a legislative ban be imposed as the dangers of cryptocurrency become clearer.


Criminal Lawyer based out of New Delhi.

†† Intern, Law Chambers of Jai Anant Dehadrai [3rd Year, BA LLB (Hons), Jamia Millia Islamia, Delhi].

1 Hadar Y. Jabotinsky and Roee Sarel, “How the Covid-19 Pandemic Affected the Cryptocurrency Market” (CLS Bluesky Blog, 26-3-2021) <https://clsbluesky.law.columbia.edu/2021/03/26/how-the-covid-19-pandemic-affected-the-cryptocurrency-market/>.

[2] Kathleen Richards, “What is Cryptography” (TechTarget, April 2020) <https://searchsecurity.techtarget.com/definition/cryptography>.

[3] Dawn Allcot, “How Does Cryptocurrency Work – and is it Safe?” (Yahoo Finance, 2-5-2021) <https://finance.yahoo.com/news/does-cryptocurrency-safe-150059419.html>.

[4] Ibid.

[5] Samanth Subramanian, “Crypto is Now the World’s Fifth-Most Circulated Currency by Value” (Quartz, 12-1-2021) <https://qz.com/1954555/all-the-worlds-crypto-is-now-worth-more-than-1-trillion/>.

[6] James Mathew, “Crypto Investors Get a Shock as India Drafts Bill to Ban Digital Currency” (Arabian Business, 20 April 2021) <https://www.arabianbusiness.com/alternative-assets/462324-crypto-investors-get-shock-as-india-circulates-draft-bill-to-ban-the-digital-currency>.

[7] PwC, “Time for Trust: The Trillion-Dollar Reasons to Rethink Blockchain” (PwC, October 2020) <https://image.uk.info.pwc.com/lib/fe31117075640475701c74/m/2/434c46d2-a889-4fed-a030-c52964c71a64.pdf>.

[8] Kevin Helms, “Millionaires FOMO: 73% Will Own Bitcoin by 2022, Survey” (Bitcoin News, 19-11-2020) <https://news.bitcoin.com/millionaires-fomo-73-own-bitcoin/>.

[9] Reserve Bank of India, “Prohibition on dealing in Virtual Currencies” (RBI/2017-18/154, 6-4-2018) <https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF>.

[10] Vinod Joseph et al., “India: Cryptocurrencies In India – Past, Present & Future” (Mondaq, 13-5-2020) <https://www.mondaq.com/india/fin-tech/944312/cryptocurrencies-in-india–past-present-future>.

[11]Ministry of Finance, Report of the Committee to Propose Specific Actions to be Taken in Relation to Virtual Currencies, (Department of Economic Affairs, 28-2-2019) <https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf>.

[12] Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 <https://prsindia.org/files/bills_acts/bills_parliament/Draft%20Banning%20of%20Cryptocurrency%20&%20Regulation%20of%20Official%20Digital%20Currency%20Bill,%202019.pdf>.

[13] (2020) 10 SCC 274.

[14] Article 19(1)(g), Constitution.

[15] BQ Desk, “India’s Cryptocurrency Ban: Top 5 Things to Know” (BloomberQuint, 18-2-2021) <https://www.bloombergquint.com/business/indias-cryptocurrencies-ban-top-5-things-to-know>.

[16] Manoj Sharma, “RBI Working on Digital Currency, Wants to Tap on Blockchain Technology: Das” (Business Today, 25-2-2021) <https://www.businesstoday.in/current/economy-politics/breaking-rbi-reservations-regarding-cryptocurrencies-shaktikanta-das/story/432317.html>.

[17] Subhajit Sengupta, “A Vehement ‘No’ to Cryptocurrencies but Blockchain is ‘Welcome’, Arun Jaitley Says” (News18, 1-2-2018) <https://www.news18.com/news/business/a-vehement-no-to-cryptocurrencies-but-blockchain-is-welcome-arun-jaitley-says-1648003.html>.

[18] NITI Aayog, “Blockchain: The India Strategy” (Draft Discussion Paper, January 2020) <https://niti.gov.in/sites/default/files/2020-01/Blockchain_The_India_Strategy_Part_I.pdf>.

[19] FE Bureau, “Cryptocurrency ban to be made explicit; Govt to introduce Bill soon” (The Financial Express, 4-3-2021) <https://www.financialexpress.com/money/cryptocurrency-ban-to-be-made-explicit-govt-to-introduce-bill-soon/2205896/>.

[20] Aashish Aryan, “More Liberal Debate Likely: Govt Wants Legal Opinion on Cryptos” (The Indian Express, 21-5-2021) <https://indianexpress.com/article/business/banking-and-finance/more-liberal-debate-likely-govt-wants-legal-opinion-on-cryptos-7323780/>.

[21] David Adler, “Silk Road: The Dark Side of Cryptocurrency” (FJCFL Blog, 21-2-2018) <https://news.law.fordham.edu/jcfl/2018/02/21/silk-road-the-dark-side-of-cryptocurrency/>.

[22] Robert McMillan, “The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster” (Wired, 3-3-2014) <https://www.wired.com/2014/03/bitcoin-exchange/>.

[23] The Law Library of Congress, Regulation of Cryptocurrency Around the World (Global Legal Research Center, June 2018) <https://www.loc.gov/law/help/cryptocurrency/cryptocurrency-world-survey.pdf>.

[24] Sandeep Soni, “El Salvador Creates History: Becomes World’s First Country to Adopt Bitcoin as Legal Currency,” (The Financial Express, 9-6-2021) <https://www.financialexpress.com/economy/el-salvador-creates-history-becomes-worlds-first-country-to-adopt-bitcoin-as-legal-currency/2268056/>.

[25] Reuters, “IMF Sees Legal, Economic Issues with El Salvador Bitcoin Move” (The Economic Times, 10-6-2021) <https://economictimes.indiatimes.com/markets/cryptocurrency/imf-sees-legal-economic-issues-with-el-salvador-bitcoin-move/articleshow/83404747.cms>.

[26] (2020) 10 SCC 274.

[27] Foreign Exchange Management Act, 1999.

[28] Payment and Settlement Systems Act, 2007.

[29] (2020) 10 SCC 274.

[30] ET Bureau, “RBI’s Stance on Cryptocurrency Unchanged, Governor Das Says” (The Economic Times, 4-6-2021) <https://economictimes.indiatimes.com/tech/technology/rbis-concerns-on-cryptocurrency-remain-unchanged-governor-shaktikanta-das-says/articleshow/83230813.cms>.

[31] Amendments in Schedule III to the Companies Act, 2013, (Ministry of Corporate Affairs, 24-3-2021) <https://mca.gov.in/Ministry/pdf/ScheduleIIIAmendmentNotification_24032021.pdf>.

[32] Ridhima Saxena, “HDFC Bank, SBI Card Warn Customers of Restrictions if They Deal in Cryptocurrencies” (BloombergQuint, 29-5-2021) <https://www.bloombergquint.com/crypto/hdfc-bank-sbi-card-warn-customers-of-restrictions-if-they-deal-in-cryptocurrencies>.

[33] (2020) 10 SCC 274.

[34] Bloomberg, “Can a Cryptocurrency Break the Buck?” (Mint, 1-6-2021) <https://www.livemint.com/opinion/online-views/can-a-cryptocurrency-break-the-buck-11622504970042.html>.

[35] Priya Dialani, “Future of Cryptocurrency? Will it Grow or Stoop Low?” (Analytics Insight, 4-6-2021) <https://www.analyticsinsight.net/future-of-cryptocurrency-will-it-grow-or-stoop-low/>.

[36] Eric Lam, “Bitcoin Slips After Musk Tweets Broken-Heart Emoji for Token” (BloombergQuint, 4-6-2021) <https://www.bloombergquint.com/technology/bitcoin-drops-after-musk-tweets-broken-heart-emoji-for-token>.

[37] Bureau, “Cybercriminals go After Cryptocurrency: Report” (The Hindu Business Line, 5-6-2021) <https://www.thehindubusinessline.com/economy/cybercriminals-go-after-cryptocurrency-report/article34736492.ece>.

[38] (2020) 10 SCC 274.

[39] Shobhit Seth, “The 6 Most Private Cryptocurrencies” (Investopedia, 5-1-2021) <https://www.investopedia.com/tech/five-most-private-cryptocurrencies/>.

[40] Gaspare Jucan Sicignano, “Money Laundering Using Cryptocurrency:

The Case of Bitcoin!” Athens Journal of Law 2021 7(2) 253 <https://www.athensjournals.gr/law/2021-7-2-7-Sicignano.pdf>.

[41] Mike Orcutt, “Criminals Laundered $2.8 Billion in 2019 Using Crypto Exchanges, Finds a New Analysis” (MIT Technology Review, 16-1-2020) <http://technologyreview.com/2020/01/16/130843/cryptocurrency-money-laundering-exchanges/>.

[42] Nyman Gibson, “What is Bitcoin Laundering?” (NGM) <https://ngm.com.au/bitcoin-laundering/>.

[43] Sergi Delgadi-Segura et al., “Cryptocurrency Networks: A New P2P Paradigm”, Mobile Information Systems (Hindawi, 2018) <https://www.hindawi.com/journals/misy/2018/2159082/>.

[44] Section 12, PMLA.

[45] Matthew Leising, “Booming Decentralized Finance a Potential Haven for Money Laundering” (Bloomberg, 1-10-2020) <https://www.bloomberg.com/news/articles/2020-10-01/booming-crypto-market-a-potential-haven-for-money-laundering>.

[46] Ashwin Manikandan and Apoorva Mittal, “India’s Cryptocurrency Industry Draws Up ‘Legitimacy Plan’ ” (The Economic Times, 3-6-2021).

<https://economictimes.indiatimes.com/tech/technology/indias-cryptocurrency-industry-draws-up-legitimacy-plan/articleshow/83188685.cms>.

[47] Neil Borate, “What ED’s Notice to WazirX Means for Indian Crypto Traders?” (Mint, 15-6-2021) <https://www.livemint.com/market/cryptocurrency/what-ed-s-notice-to-wazirx-means-for-cryptotraders-11623689353255.html>.

[48] Ibid.

[49] (2020) 10 SCC 274.

[50] Harsh Bhuta, “Hold Crypto Assets? Here’s How you are Going to Pay Income-Tax on it” (The Economic Times, 6-6-2021) <https://economictimes.indiatimes.com/markets/cryptocurrency/hold-crypto-assets-heres-how-you-are-going-to-pay-income-tax-on-it/articleshow/83277122.cms>.

[51] United Nations Office on Drugs and Crimes, “Money Laundering” <https://www.unodc.org/unodc/en/money-laundering/overview.html>.

[52] Nic Carter, “How Much Energy Does Bitcoin Actually Consume?” (Harvard Business Review, 5-5-2021) <https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume>.

[53] Government of Canada, Digital Currency <https://www.canada.ca/en/financial-consumer-agency/services/payment/digital-currency.html>.

[54] Kalyeena Makortoff, “Cryptocurrency Dealers Face Closure for Failing UK Money Laundering Test” (The Guardian, 3-6-2021) <https://www.theguardian.com/technology/2021/jun/03/cryptocurrency-dealers-face-closure-for-failing-uk-money-laundering-test>.

[55] Tookitaki, Cryptocurrency Regulations in the United States <https://www.tookitaki.ai/compliance_hub/cryptocurrency-regulations-in-the-united-states/>.

[56] Press Release, “Owner of Bitcoin Exchange Sentenced to Prison for Money Laundering” (Department of Justice, 12-1-2021) <https://www.justice.gov/opa/pr/owner-bitcoin-exchange-sentenced-prison-money-laundering>.

[57] Press Release, “California Man Sentenced to 121 Months for Methamphetamine Trafficking” (Department of Justice, 29-4-2021) <https://www.justice.gov/usao-nh/pr/california-man-sentenced-121-months-methamphetamine-trafficking>.

[58] Section 2(s)(sa) of PMLA.

[59] (2020) 10 SCC 274.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): S.K. Mohanty, Whole Time Member while imposing penalty under Section 11B(2) read with Section 15D(b) and 15HB of SEBI Act, 1992 on Kotak Mahindra restrained it from launching any new FMP scheme for a period of six months.

In the instant case, SEBI observed that the investors of certain Fixed Maturity Plans (FMP), by the Kotak Mahindra Mutual Fund (KMMF), were not paid their full proceeds based on the declared Net Asset Value of the schemes as on their respective maturity dates and the case of the Noticee was that it did not indulge in segregation of portfolio.

During investigation, the violations that the show cause notice thus alleged were :

  1. Lack of due diligence and proper care leading to not rendering high standards of service.
  2. Failure to consider research report and analyse various factors.
  3. Non-disclosure of adverse information to the unit holders.
  4. Extension of maturity date of NCDs beyond the maturity date of the scheme.
  5. Partial redemption and FMPs not wound up at the end of maturity.
  6. Creation of segregated portfolio.
  7. Wrong method of valuation of securities.

The Tribunal believed it was a deserving case for holding the Noticee liable for issuance of appropriate directions for disgorgement of a part of the management fee that it had unjustifiably charged from the unit holders of the six FMP schemes. Therefore, imposed a penalty of Rs. 5000000/- Section 11B(2) read with Section 15D(b) and 15HB of SEBI Act, 1992, and also restrained the Noticee from launching any new FMP scheme for a period of six months. The Tribunal very blatantly stated,

“Keeping in view the foregoing factual exposition about various acts of indiscipline, utter neglect of due diligence, inordinate delay in communicating with the investors, violation of the statutory sanctity of the maturity dates of the FMP schemes, permitting extension of the maturity of the ZCNCDs of the Issuers in contravention of extant regulations etc., there remains no doubt in mind that the Noticee has acted in gross violation of provisions of the SEBI Act, 1992, MF Regulations, 1996 as well as various circulars issued by SEBI from time to time hence, the Noticee is inter-alia liable to be held guilty of failure to exercise due diligence, care and render high quality of service as well as for failure to disclose information having negative impact on the six FMP schemes to its investors on time”.

[Kotak Mahindra Asset Management Company Limited, In re, WTM/SM/IMD/IMD-I DOF2/13158/2021-22, decided on 27-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.

Legislation UpdatesNotifications

SEBI has issued a circular on Modalities for implementation of the framework for Accredited Investors in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992, to protect the interest of investors in securities market and to promote the development of, and to regulate the securities market.
Pursuant to public consultation and approval of the SEBI Board, the framework for “Accredited Investors” (‘AIs’) has been introduced in the securities market. In this regard, the SEBI (Alternative Investment Funds) Regulations, 2012, SEBI (Portfolio Managers) Regulations, 2020 and SEBI (Investment Advisers) Regulations, 2013 have been amended and notified on August 03, 2021.
Under the aforesaid framework, AIs may avail flexibility in minimum investment amount (“Lower ticket size”) or concessions from specific regulatory requirements applicable to investment products, subject to conditions applicable for specific products/ services under the aforesaid Regulations. The modalities of accreditation are provided in Annexure A.
Refer to Annexure A for modalities for Accreditation HERE 
Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (Sebi): Madhabi Puri Bach, Whole Time Member, on not finding any justifiable reason to revoke or modify the directions issued against the Noticee concluded that the findings in the interim order continue to stand at prima facie level, was of the opinion that the Noticee was prima facie, in contravention of various provisions of the IA Regulations and the PFUTP Regulations, as outlined in the Interim Order.

In the pertinent matter, the Noticee had challenged the impugned interim-ex parte order of SEBI. The interim ex-parte Order of SEBI stated that the Noticee:

-did not carry out risk profiling and suitability assessment of clients as per the provision of SEBI (Investment Advisers) Regulations, 2013 (hereinafter referred to as “IA Regulations”);

-did not charge fair and reasonable fee from clients as per the provision of IA Regulation;

-did also trigger the Code of Conduct for Investment Advisers by virtue of the above activities.

Therefore SEBI was of the view that the Noticee had violated SEBI (Investment Advisers) Regulations, 2013 (hereinafter referred to as “IA Regulations”) and  SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as “PFUTP Regulations”)

The Tribunal considered various factors and the ex-parte order and the basis on which the Order was passed. It therefore, concluded that

“allowing the Noticee to continue providing its services to its clients, regardless of whether they have complained against the Noticee or not, would be tantamount to allowing the fraudulent investment advisory activity to continue, which will be inimical to the interests of clients and will also be in contravention of what has been envisaged under the IA Regulations. Hence, the interim order was passed in order to protect the interests of existing as well as prospective clients of the Noticee”.

It was further of the opinion that,

“As already mentioned in the interim order, existing clients of the Noticee have been sold services without any consideration of their financial situation, investment objective and risk profiling. The selling of such plans goes against the concept of customized advice which would be required to be provided based on the investors’ risk profile. This requirement of risk profiling goes to the very root of suitability of investment advice as clients are required to get the investment advice based on their risk profile. Exposing the existing clients to such advice, which has no co-relation to their risk profile, is against the interest of those investors. Further, the very nature of the investment advisory activity being practiced by the Noticee has been found to be fraudulent and in violation of the provisions of PFUTP Regulations and IA Regulations”.

[Dezire Research, In re, WTM/MB/WRO/WRO/13050/2021-22, decided on 20-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI):  Madahabi Puri Bach, Whole Time Member while keeping in view the violation of MPS requirement, the Tribunal considered it to be appropriate that Riddhi Siddhi Gluco Biols Ltd. (RSGBL) increase its public shareholding and further gave directions of debarment from the securities market for the violation.

In the instant case, it was alleged in the show cause notice that the Noticees participated in a fraudulent device or scheme at various stages to fraudulently show that the shares of RSGBL were frequently traded shares and thereafter making the delisting offer successful at fraudulently arrived price. It was also alleged that RSGBL did not comply with the requirement of Minimum Public Shareholding (MPS).

The Tribunal considered the various conditions so put forth, and the existing circumstances and was thus of the opinion that violation of Sections 12A(a), (b) and (c) of SEBI Act, 1992 read with Regulations 3(a), (b), (c), (d), 4(1) & 4(2)(a) of PFUTP Regulations, 2003 and Regulations 4(5)(a), (b) &(c) of Delisting Regulations against Noticee No. 1 to 9 and 13 to 35 stands established.

The Tribunal also gave relief to some Noticees by stating,

“Stuti, Siwana and Kauvery (Noticee No. 7, 8, & 9) have merged/amalgamated with Vital (Noticee No. 6) and are no longer in existence. Therefore, any directions passed against Stuti, Siwana and Kauvery under Sections 11(1), 11(4) and 11B (1) of SEBI Act may not serve any purpose”.

The Tribunal stated,

“…it is imperative that this balance be restored and the disproportionate advantage arising out of non-compliance of the MPS requirement not be permitted to be vested with the Promoter / Promoter Group. In view thereof, in the interest of all investors and the orderly development of the securities market, it is necessary to pass suitable directions”.

The Tribunal was of the opinion,

“Section 11 of SEBI Act casts a duty on the Board to protect the interests of investors in securities and to promote the development of and to regulate the securities market”.

Further very sternly stated,

“Thus, power to take all measures necessary to discharge its duty under the statute which is a reflection of the objective disclosed in the preamble has been conferred in widest amplitude. Pursuant to the said objective, PFUTP Regulations have been framed. The said Regulations apart from other things aim to preserve and protect the market integrity in order to boost investor confidence in the securities market. By executing a fraudulent scheme, as has been executed by the Noticees in the instant matter, the price discovery system itself is affected. It also has an adverse impact on the fairness, integrity and transparency of the stock market”.

[Riddhi Siddhi Gluco Biols Limited, In Re, WTM/MB/IVD/ID12/12998/2021-22, decided on 11-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Karnataka High Court: A Division Bench of Abhay S. Oka, CJ and M. Nagaprasanna, J. dealt with issue of powers which can be conferred on the Court-appointed Administrator for recovery proceedings.

The instant Writ Petition was filed under Articles 226 and 227 of the Constitution of India praying to issue a writ in the nature of mandamus by constituting a team of Auditors to conduct Forensic Audit of accounts and all transactions of Respondent 7 from the year 2010 till 31-12-2020 at the earliest and to constitute a Special Investigation Team headed by High Ranking Officer to investigate the role of every person involved or connected to Respondent 8 Society both by Respondent 2 and by Respondent 5, 6 and 9 being monitored by this Court and submit report thereby.

The present matter deals with the issue of powers which can be conferred on the Court-appointed Administrator of Sri Guru Sarvabouma Souharda Credit Co-operative Limited (for short “the Credit Co-operative”) The said Credit Co-operative is registered under Section 4 of the Karnataka Souhardha Sahakari Act, 1997 (for short “Act of 1997”). Various allegations have been made about several financial irregularities, acts of misappropriation, acts of embezzlement of funds and creation of fictitious accounts to the extent of 500.00 Crores in relation to the Credit Co-operative. It also deals with the cause of the investors of Sri Guru Raghavendra Sahakara Bank Niyamitha (for short “the said Co-operative Bank”) in which the said Credit Co-operative has invested an amount of about Rs 235.00 Crores which it seeks to recover.

In the order of appointment of an administrator for the said credit cooperative, Court observed

“The State Government has appointed a Competent Authority in accordance with sub-section (1) of Section 5 of the said Act of 2004. However, the powers, duties and functions of the Competent Authority under the said Act of 2004 are well defined. The Competent Authority has not been empowered to look after the day-to-day functioning of the Credit Co-operative.

There is no one who can effectively deal with the investors. Therefore, the question is whether a retired Senior Bank Official can be appointed as an Administrator who will ensure that the day-to-day activities of the Credit Co-operative will continue.”

The order also proposed two names out of which Shri K.S. Shyam Prasad, Retired Deputy General Manager, Canara Bank was appointed as an Administrator and it was observed that what powers can be exercised by the retired Bank Officer who is appointed as the Administrator. The Court observed “To enable the Court to decide the said question, we propose to direct the Administrator to take charge of the Credit Co-operative and to examine the records of the said Credit Co-operative. After examining the records and after making a study of the situation at the grass root level, the Administrator will submit a report to this Court stating what according to him are the immediate steps required to be taken for restoring the functioning of the said Credit Co-operative”

The Court observed that apart from the fact that the Court appointed Administrator, it cannot create new liabilities, the act of renewal of the Fixed Deposits may give a false hope to the investors. Therefore, it was proposed to permit the Administrator to renew the Fixed Deposits of the investors on the requisition in writing submitted by each investor stating that he or she is fully aware that even if the Fixed Deposit is renewed, and that there is no guarantee that the principal amount and interest will be paid by the said Credit Co-operative to him/her. Moreover, the investor will have to give undertaking not to make any personal claim against the Administrator on the basis of the renewed Fixed Deposits.

Other powers granted to the Administrator of Sri Guru Sarvabouma Souharda Credit Co-operative Limited, Mr K.S. Shyam Prasad are:

  1. To continue day-to-day functioning of the said Credit Co-operative without creating any liability except the liabilities which are permitted under this order;
  2. The administrator shall be empowered to initiate recovery proceedings against the borrowers of the said Credit Co-operative by issuing notices and by filing appropriate proceedings in accordance with law on behalf of the said Credit Co-operative. For that purpose, the Administrator shall be entitled to engage services of Advocates;
  3. In the event, any borrower comes forward to repay the loan amount, after obtaining a specific leave of this Court, the Administrator shall be entitled to accept the amount due and payable from the borrower, execute necessary documents and issue provisional discharge certificate. The amount received from the borrowers shall be credited to the account of the said Credit Co-operative in the name of the Competent Authority under the said Act of 2004;
  4. We permit the Administrator to accept the upto date amount due and payable from Shri Sreepathi Herele P, to execute necessary registered document of cancellation of mortgage and to issue discharge certificate subject to compliance with the conditions as suggested by the Administrator in his report. The amount received from the said borrower shall be credited to the account of the Competent Authority under the said Act of 2004;
  5. On the request in writing made by any member of the Credit Co-operative holding Fixed Deposits for renewal of the Fixed Deposits, the Administrator is permitted to renew the Fixed Deposits provided the person holding the Fixed Deposit, gives a written undertaking stating that he or she is fully aware that even if the Fixed Deposit is renewed, there is no guarantee that the principal amount and interest will be paid by the said Credit Co-operative. The investor shall also give an undertaking that he will be entitled to receive the principal amount of Fixed Deposit and interest only to the extent permitted under the orders of the Special Court under the said Act of 2004. The investor of the Fixed Deposit will also give an undertaking not to make any personal claim against the Administrator on the basis of the renewal of the Fixed Deposit. Only after such undertakings in writing are given by the investor and after making due inquiry about the genuineness of the Fixed Deposit receipt, the Administrator shall renew the Fixed Deposits;
  6. The Administrator shall submit a report to the Competent Authority under the said Act of 2004 containing details of the amounts payable as on today towards arrears of the salary of the staff, arrears of rent in respect of office premises, arrears of electricity, water and maintenance charges in respect of the office premises, internet charges, sundry expenditures incurred on running of the office. He will also submit an estimate of the amount required per month for meeting the aforesaid expenditure for running the office of the said Credit Co-operative. The Administrator shall also submit an ad hoc estimate of the amount required towards Advocate’s fees. As soon as the details are received, the Competent Authority shall be immediately make an application to the Special Court for permitting the Competent Authority to release the aforesaid amounts to the Administrator. The Special Court shall pass an order on the applications/report submitted by the Competent Authority within maximum period of one month from the date of filing of the report/application by the Competent Authority;
  7. We direct the ED to apply to the Competent Court under the Prevention of Money Laundering Act, 2002, for permitting the said Credit Cooperative toe its office premises for running its office. If such an application is made, the said Court shall decide the same at the earliest;
  8. It will be open for the Administrator to make a requisition for conduct of statutory audit or re-audit of the accounts of Credit Co-operative;
  9. We direct that the Administrators of both the Co-operative Bank and the said Credit Co-operative shall hold regular meetings to sort out various issues arising between two entities;
  10. In the event the Administrator of the Credit Co-operative needs further directions, he will submit a report to the Court through the learned Additional Government Advocate, who will immediately move the Court on the basis of the said report for necessary directions.

The matter will be next heard on 18-08-2021.[K.R. Narsimha Murty v. Secretary Ministry of Co-operative Societies, Writ Petition No. 7350 OF 2020 (GM-RES-PIL), decided on 23-07-2021]


Arunima Bose, Editorial Assistant has reported this brief.


Appearances

IN W.P. NO. 7350 OF 2020

Mr. Sushal Tiwari, Advocate for applicant on I.A.No.12/2020;

Mr. V. Sreenidhi, AGA for R-1 & R-3 to R-6;

Mr. Manmohan P.N. for R-12;

Mr. R.V.S. Naik and Mr. V. Vinay Giri Advocate for R-2 and R-10;

Mr.  Rajesh S.V., Advocate for intervenors;

Mr. A.M. Vijay, Advocate for intervenors;

Mr. Madhukar Deshpande, Advocate for R-11;

Mr. Abhinav R, Advocate for impleading applicant on I.A.No.7/2020;

Mr. S.P.Shankar and Mr. B.V. Malla Reddy, Advocate for impleading applicant on I.A.No.11/2020; R-7 and R-8 are served;

Mr. Halesha R.G., Advocate for impleading applicant on  I.A.No.13/2020;

Mr. Shyam Prasad, Administrator 

IN W.P. NO. 8674 OF 2020

Mr. Satyanand B.S. for petitioners

Mr. V. Sreenidhi, for R-1, R-2, R-4 to R-6 & R-10;

Mr. R.V.S. Naik, Mr. V. Vinay Giri, Advocate for R-3;

Mrs. Vani H, Advocate for R-7

Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): Madhabi Puri Buch, (Whole Time Member) imposed certain restrictions on GJ Advisory Services and Profit Ideas Advisory Services (“Noticees”) for indulging in unregistered Portfolio Management Services.

SEBI received several complaints against noticees alleging unregistered portfolio management activities. On examination, the Board noticed that the noticees had undertaken the management of funds as well as securities of their clients and the fees/funds were collected through the Banks Accounts of the noticees. It was found out that both the noticees were engaged in ‘portfolio management services. The Board observed that by virtue of providing unregistered Portfolio Management Services, the noticees had collected an amount of Rs 8,89,23,049 as fees towards the management of funds and securities of clients.  Thus, the activities noticees were prima facie, in violation of Section 12(1) of SEBI Act read with Regulation 3 of Portfolio Management Services (“PMS”) Regulations.

The Board opined that permitting the investors to receive a portfolio management service from an unregistered entity would cause irreparable injury to the development of the securities market as the objective of SEBI is not only the protection of investors but also orderly development of securities market. Hence, the Board held that Gourav Jain and Poonam Jain who were the proprietors of GJ advisory and Profit Ideas respectively, were liable for unregistered portfolio management services and, therefore, the Board issued following orders against the noticees:

  1. to cease and desist from acting as a portfolio manager and to solicit or undertake such activity or any other activities in the securities market.
  2. Not to divert any funds raised from investors.
  3. Not to dispose of or alienate any assets, or any interest or investment or charge on any of such assets held in their name, except with the prior permission of SEBI.
  4. Immediately withdraw and remove all advertisements, materials etc. in relation to their portfolio management activity or any other unregistered activity in the securities market.
  5. Not to access the securities market and buy, sell or otherwise deal in securities in any manner.

Consequently, the directions were made to the Banks not to allow any debits/ withdrawals and not to allow any credits to the accounts of the noticees, without permission of SEBI. The Depositories were also directed to ensure, till further directions, that no debit or credit be permitted in the demat accounts held by noticees. [GJ Advisory services and Profit Ideas Advisory Services, In Re., 2021 SCC OnLine SEBI 2, decided on 04-01-2021]

Business NewsNews

BACKGROUND

The financial position of The Lakshmi Vilas Bank Ltd. (the bank) has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth.

In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, the bank is also experiencing the continuous withdrawal of deposits and low levels of liquidity. It has also experienced serious governance issues and practices in recent years which have led to the deterioration in its performance. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019 considering the breach of PCA thresholds as on March 31, 2019.

REVIVAL EFFORTS

The Reserve Bank had been continually engaging with the bank’s management to find ways to augment the capital funds to comply with the capital adequacy norms. The bank management had indicated to the Reserve Bank that it was in talks with certain investors. However, it failed to submit any concrete proposal to Reserve Bank and the bank’s efforts to enhance its capital through the amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end. As such, the bank-led efforts through market mechanisms have not fructified. As bank-led and market-led revival efforts are a preferred option over a regulatory resolution, the Reserve Bank had made all possible efforts to facilitate such a process and gave enough opportunities to the bank’s management to draw up a credible revival plan, or an amalgamation scheme, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity.

MORATORIUM

After taking into consideration these developments, the Reserve Bank has come to the conclusion that in the absence of a credible revival plan, with a view to protecting depositors’ interest and in the interest of financial and banking stability, there is no alternative but to apply to the Central Government for imposing a moratorium under Section 45 of the Banking Regulation Act, 1949. Accordingly, after considering the Reserve Bank’s request, the Central Government has imposed moratorium for thirty days effective.

ASSURANCE TO THE DEPOSITORS

The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic. In terms of the provisions of the Banking Regulation Act, the Reserve Bank has drawn up a scheme for the bank’s amalgamation with another banking company. With the approval of the Central Government, the Reserve Bank will endeavour to put the Scheme in place well before the expiry of the moratorium and thereby ensure that the depositors are not put to undue hardship or inconvenience for a period of time longer than what is absolutely necessary.

The Reserve Bank has also issued certain directions to the bank under section 35 A of the Act ibid.


Reserve Bank of India

[Dt. 17-11-2020]

Legislation UpdatesNotifications

SEBI vide its Circular no. CIR/MRD/DRMNP/25/2014 dated August 27, 2014, has, inter alia, specified guidelines pertaining to Core Settlement Guarantee Fund and Default Waterfall for Clearing Corporations.

2. Pursuant to deliberations with the Risk Management Review Committee (RMRC) of SEBI and various stakeholders, it has been decided to amend the following provisions of the aforesaid Circular.

a. Clause 14 of the said Circular dated August 27, 2014 shall stand modified as under:

“Further Contribution to/ Recoupment of Core SGF

14) Requisite contributions to Core SGF by various contributors (as per clauses 7 and 8) for any month shall be made by the contributors before start of the month. In the event of usage of Core SGF during a calendar month, contributors shall, as per usage of their individual contribution, immediately replenish the Core SGF to MRC. However, such contribution towards replenishment of Core SGF by the members would be restricted to only once during a period of 30 calendar days regardless of the number of defaults during the period. The period of 30 calendar days shall commence from the date of notice of default by Clearing Corporation to market participants.

In case there is failure on part of some contributor(s) to replenish its (their) contribution, same shall be immediately met, on a temporary basis during the month, in the following order:

(i) By CC

(ii) By SE”

b. Layer VII of the default waterfall, as specified under clause 16 of the said Circular dated August 27, 2014, shall stand modified as under:

“VII. Capped additional contribution by non-defaulting members of the segment. **

**

(i) CC shall call for the capped additional contribution only once during a period of 30 calendar days regardless of the number of defaults during the period. The period of 30 calendar days shall commence from the date of notice of default by CC to market participants.

(ii) CCs shall have relevant regulations/provisions for non-defaulting members to resign un-conditionally within the abovementioned period of 30 calendar days, subject to member closing out/settling any outstanding positions, paying the capped additional contribution and any outstanding dues to SEBI. No further contribution shall be called from such resigned members.

(iii) The maximum capped additional contribution by non-defaulting members shall be lower of 2 times of their primary contribution to Core SGF or 10% of the Core SGF of the segment on the date of default in case of equity/ debt segments.

(iv) The maximum capped additional contribution by non-defaulting members shall be lower of 2 times of their primary contribution to Core SGF or 20% of the Core SGF of the segment on the date of default in case of derivatives segment.

(v) In case of shortfall in recovery of assessed amounts from non-defaulting members, further loss can be allocated to layer ‘VI’ with approval of SEBI.”

3. Clearing Corporations are directed to:

(i) put in place the adequate systems and issue the necessary guidelines for implementing the above decision.

(ii) make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

(iii) bring the provisions of this circular to the notice of the trading members/clearing members/custodians and also to disseminate the same on the website.

(iv) communicate to SEBI the status of implementation of the provisions of this circular through the Monthly Development Report.

4. This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.


Securities Exchange Board of India

[Circular dt. 03-01-2020]


Note:

A core Settlement Guarantee Fund (SGF) is a corpus used for settlement of trades during defaults and all intermediaries — stock exchanges, clearing corporations, and brokers — contribute towards it.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): Coram of Justice Tarun Agarwala (Presiding Officer), Justice M.T. Joshi (Judicial Member), and Dr C.K.G. Nair (Member), dismissed the appeal filed by the appellant and affirmed the order passed by the Whole Time Member (‘WTM’) of SEBI.

WTM had passed an order against the appellants under Section 11 and 11B of SEBI Act directing them to refund the money collected by the Company during their respective period of directorship through the issuance of Non-Convertible Debentures (‘NCDs’) including the application money collected from investors along with interest at the rate of 15% p.a. The appellants were appointed as directors from 2009 to 2013. During the financial years 2010-11, 2011-12, 2012-13, the Company made an offer of NCDs and raised an amount of Rs. 9.06 crores from 4,518 allottees. Since there was a violation of the SEBI Act, Companies Act, and Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations), SEBI passed an order of debarment and refund to investors against the Company and its directors/promoters. The appellants were directors of the company during the time when the NCDs were issued. Accordingly, an interim order was passed against the appellants and a show-cause notice was issued to show cause as to why suitable direction under Section 11 and 11B read with Section 73(2) of the Companies Act should not be passed against them. After giving an opportunity of hearing, the WTM found the appellants were involved in the issuance of the offer of NCDs during the time when they were directors which was in violation of the Companies Act and ILDS Regulations. Accordingly, the WTM issued directions for a refund of the money along with interest, etc.

The appellants contended that the said order was erroneous since there was no finding that the appellants were “officers in default” and consequently, the mandate provided under Section 73(2) of the Companies Act cannot be invoked. In support of this submission, the appellants have placed reliance upon Pritha Bag v. SEBI, 2019 SCC OnLine SAT 110.

The Tribunal held that the decision of the Tribunal in Pritha Bag case was not applicable to the facts and circumstances of the present case. The WTM came to the conclusion that the appellants were “officers in default” by relying on the definition as under Section 5(g) of the Companies Act. No evidence was filed to show that any of the officers set out in clauses (a) to (c) of Section 5 of the Companies Act was entrusted to discharge the obligation contained in Section 73 of the Companies Act. In Pritha Bag case, there was no finding that the appellant in that appeal was an “officer in default” and, therefore, the Tribunal had held that the mandate provided under Section 73(2) of the Companies Act could not be invoked. The said decision was also distinguishable on the ground that there was a managing director in that company who was responsible for the affairs of the company. Moreover, on perusal of the impugned order, the appellants had admitted before the WTM that they were aware of the collection of the money from the investors by the company and further submitted that the appellants were willing to make a refund to the investors. In the light of such admission, the appellants could not escape the liability of refund of the amount along with interest as directed by the WTM. [Saikat Brahmachari v. SEBI, 2019 SCC OnLine SAT 200, decided on 14-11-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal, Mumbai: The Coram of Tarun Agarwala, J., (Presiding Officer), Dr C.K.G. Nair, (Member), M.T. Joshi, J., (Judicial Member) dismissed the appeals which were filed against the order which imposed a penalty on the appellants for not following Regulation 7(2) (a) of the Securities and Exchange Board of India (Prohibition of Insider Trading (PIT) Regulations, 2015

The appellant was a promoter of a company incorporated under the Companies Act, 1956. As per Regulation 7(2)(a) of the PIT Regulations, 2015 every promoter, was required to disclose to the company the number of such shares acquired or disposed of within two trading days of such transaction if the value of the shares traded, whether in one transaction or a series of transactions over any calendar quarter, aggregated to a traded value in excess of 10 lakh rupees. The said Regulation was not followed by the appellant and accordingly a show cause notice was issued to him for having failed to make the relevant disclosure under the provisions of Regulation 7(2)(a) of the PIT Regulations. The Adjudicating Officer passed an order holding him guilty of violating the provision of Regulation 7(2)(a) of the PIT Regulations and accordingly imposed a penalty of Rs 5,00,000 under Section 15A(b) of SEBI Act. The said appellants being aggrieved by the imposition of penalty filed the appeal.

The Court found that no disproportionate gain or unfair advantage was made by the appellants while undertaking the transactions in the shares of the Company nor any loss was caused to the investors as a result of non-disclosure. Thus the violation was only technical in nature. The Court thus reduced the penalty by declaring it disproportionate and excessive. Further, it was held that imposition of higher penalty amounted to discrimination especially when it was the first offence made by them. The appellants had violated Regulation 7(2)(a) of the PIT Regulations and consequently, the minimum penalty was justifiable. These three appeals failed and were dismissed. [Nitin Agrawal v. SEBI, 2019 SCC OnLine SAT 18, decided on 25-03-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India: The Board comprising G. Mahalingam as  Whole Time Member, allowed Oil India’s application seeking exemption/relaxation from strict enforcement of the requirement contained under Regulation 24(i)(e) of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018.

The aforesaid application was necessitated on account of the transfer of 333,20,401 equity shares held by the promoter of the company, i.e., Government of India to the Asset Management Company (AMC) of Central Public Sector Enterprise Exchange Traded Fund (CPSE–ETF). This activity was carried out as a part of the government’s disinvestment process.

Oil India submitted that the proposed buy–back inter alia will help in optimizing its capital structure and improve its key financial ratios and would also lead to a reduction in outstanding shares, improvement in earnings per share and enhanced return on invested capital.

The Board noted that as per Regulation 28 of the Buy–back Regulations, SEBI may, in the interest of investors and the securities market, relax the strict enforcement of any requirement of aforesaid Regulations except the provisions incorporated from the Companies Act, if it is satisfied that the requirement is procedural in nature or the requirement may cause undue hardship to investors.

It opined that the strict enforcement of Regulation 24(i)(e) of Buy–Back Regulations against Oil India, at this point in time, may result in undue hardship to investors including shareholders of the company who may seek to participate in the proposed buyback. In view thereof, the exemption/relaxation sought for by Oil India was allowed.[Buy-back of securities in Oil India Ltd., In re, WTM/GM/CFD/87/2018–19, Order dated 31-01-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): Madhabi Puri Buch, a Whole-Time Member addressed the issue of global depository receipts issued by Transgene Biotek Ltd. in order to defraud investors.

SEBI received a complaint against Transgene Biotek Ltd. alleging of fraud by issuing global depository receipts and misutilisation of proceeds by transferring the same for undisclosed and ulterior purposes under the garb of consideration for technology transfer to defraud the investors. SEBI conducted inquiry in order to find the probable impact of allegations on the securities market in India and on the interests of investors. SEBI passed an ad-interim ex-parte order which was later confirmed where based on the preliminary inquiry, six entities were restrained from accessing the securities market and trading in securities.

SEBI conducted a detailed inquiry in the entire GDR issued by Transgene Biotek Ltd. to ascertain the violation of securities laws. It found no adverse evidence or finding in respect of violation of provisions of SEBI Act and PFUTP Regulations against 3 entities with respect to their role in the scheme of diverting of the GDR proceeds of TBL and their endeavor to legitimatize the proceeds was found. Thus the confirmation order was liable to be revoked and the proceeding against the other entities ought to be continued. Therefore, under Section 19 of the SEBI Act read with Sections 11, 11(4) and 11-B of the SEBI Act confirmatory order was revoked. [Transgene Biotek Limited, In re,2018 SCC OnLine SEBI 167, order dated 06-11-2018]

.