Allowed

Bpl Limited v. SEBI [14 - 19 of 2001] [Final order]

SAT20 Jun 2002

Case brief

AI extract

What is this about?

The Tribunal examined whether a four-year ban on capital market access was a punitive penalty under Section 11B of the SEBI Act or merely a preventive measure. It also adjudicated on the appealability of prosecution directions. The court held the ban was punitive and set it aside, granting relief to the petitioner. However, it ruled that directions to launch prosecution are not appealable orders under Section 15T, and the Tribunal lacks Section 482 CrPC jurisdiction to quash such directions, dismissing the appeal on that count.

What did the court decide?

The direction prohibiting the Appellant from accessing the capital market for four years was set aside. The appeal to set aside the direction to launch prosecution against the Appellants was dismissed as beyond the Tribunal's jurisdiction.

Bpl Limited Vs. SEBI [14 - 19 of 2001] [Final order] — Securities and Capital Markets | SAT (2002)

What the court decided

AI extract

Outcome

Issue for consideration

Whether a direction prohibiting a company from accessing the capital market for four years constitutes a penalty under Section 11B of the SEBI Act. +3 more

Detailed headnote6 paragraphs

1. A direction prohibiting a company from accessing the capital market for a specific period constitutes a penalty if it operates as punishment rather than a preventive or remedial measure. Such a ban, which deprives the company of funds for business without correcting past misconduct, falls outside the scope of Section 11B, which aims to protect investor interests.

2. Under Section 11B, the Board's power to issue directions to prevent affairs being conducted detrimentally to investors does not authorize the imposition of penalties. A complete ban exceeding the regulation's intent amounts to punishment.

3. The phrase 'not to deal in securities' under Regulation 12(a) does not encompass a company's right to raise capital through public issues. 'Dealing' refers to buying, selling, or transacting in securities, distinct from the primary activity of issuing funds.

4. Section 27 of the SEBI Act establishes that directors and officers are not automatically liable for a company's offence. They are only deemed guilty if the offence was committed with their consent, connivance, or due to their neglect, and they must prove lack of knowledge or exercise of due diligence.

5. A direction by SEBI to launch prosecution is not an appealable order under Section 15T of the SEBI Act. To be 'aggrieved' requires a direct and injurious impact on personal pecuniary or proprietary rights, which a prosecution direction does not confer.

6. Directions to prosecute cannot be set aside by the Tribunal as it lacks inherent powers under Section 482 CrPC reserved for High Courts.

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BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

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In the matter of: Appeal No.14/2001
BPL Limited	Appellant
Vs
Securities & Exchange Board of India	Respondent
Appeal No.15/2001
Shri Rajeev Chandrasekhar	Appellant
Vs
Securities & Exchange Board of India	Respondent
Appeal No.16/2001
Shri Ajit Nambiar	Appellant
Vs
Securities & Exchange Board of India	Respondent
Appeal No.17/2001
Shri R. Murali	Appellant
Vs
Securities & Exchange Board of India	Respondent
Appeal No. 18/2001
Shri T.P.G. Nambiar	Appellant
Vs
Securities & Exchange Board of India	Respondent
Appeal No. 19/2001
Shri T.C. Chauhan	Appellant
Vs
Securities & Exchange Board of India	Respondent

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APPEARANCE:

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Shri Aspi Chinoy Senior Advocate

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Shri Shyam Divan Advocate Shri Yash Kapadia Advocate Ms. Monisha Asher Ms. Priti Shetty I/b Crawford Bayley & Co (in appeal No.14/2001, 16/2001to 19/2001) for Appellants Shri Somesekhar Sundaresan Advocate I/b. Udwadia, Udeshi & Berjis (in Appeal No.15/2001) for Appellant Shri R. A. Dada Senior Advocate Shri Kumar Desai Advocate Shri C.S.Balsara Advocate Ms. U. M. Dalal Shri A. P. Patel i/by Maneksha & Sethana Ms.Poonam A. Bamba Division Chief , SEBI for Respondent

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(Appeals arising out of the order dated 19.4.2001 made by Shri D.R.Mehta, Chairman, Securities & Exchange Board of India)

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ORDER

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These six appeals are directed against the common order dated 19.4.2001 made by Shri D.R.Mehta, the then Chairman, Securities and Exchange Board of India. By the said order the Appellant in appeal No.14/2001 ( the Appellant company) has been directed “not to access the capital market for a period of four years” . It has been further ordered that prosecution proceedings under section 24 of the Securities and Exchange Board of India Act, 1992 ( the Act) for violation of clauses (a) and (d) of regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995 (the 1995 Regulations) be initiated against the Appellant company through its directors/officers viz. Shri Rajiv Chandrasekhar, Shri Ajit Nambiar, Shri R.Murali, Shri T.P.G.Nambiar and Shri T.C.Chauhan.

¶9

The Appellant company is a public limited company, mainly engaged in the production and marketing of consumer electronic products like televisions, home appliances, telecom products, alkaline and dry cell batteries, medical instruments and other electronic products. The share capital of the Appellant company as on 31.3.98 was Rs.269.30 millions. Subsequently it was raised to Rs.776.90 millions. It’s shares are listed on seven stock exchanges across the country. Shares of the Appellant are stated to be widely held by the promoters group, banks, foreign institutional investors, financial institutions, non-resident Indians, employees and members of the Public. Promoters, relatives and friends are stated to be holding about 53% of the Appellant’s paid up capital.

¶10

S/Shri Rajeev Chandrasekhar, Ajit Nambiar, R.Murali, T.P.G.Nambiar and T.C.Chauhan, the Appellants in appeal Nos. 15/2001, 16/2001, 17/2001. 18/2001 and 19/2001 respectively, are described in the impugned order as directors/officers of the Appellant company - Shri T.P.G. Nambiar as non executive Chairman, Shri Ajit Nambiar as Vice Chairman and Managing Director, S/Shri Rajeev Chandrasekhar and T.C.Chauhan as Directors and Shri Murali as Financial Controller.

¶11

The Respondent is a statutory body established by the Central Government under section 3 of the Act. It is mandated to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

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Brief facts leading to filing of the present appeals are as follows:

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Large volumes coupled with abnormal price movements were reportedly observed in the stock exchanges in respect of the shares of the Appellant company, particularly during the period between April and May, 1998. Suspecting price manipulation, the Respondent caused an investigation. Based on the findings of the investigation spanning over a period of about 18 months, the Respondent on 20.12.1999, issued show cause notices to the Appellant company and to the other Appellants herein, asking them to explain their conduct in the context of the prima facie finding that the Appellant company had indulged in market manipulation, violating regulation 4(a) and (d) of the 1995 Regulations. The text of the show cause notices issued to the Appellants was identical, but for a reference to section 27 of the Act in the case of the officers/directors of the Appellant company. The show cause notice interalia contained the following allegations/ observations:

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There were large volumes coupled with fluctuation in prices of the scrips at the bourses in respect of the Appellant company, Videocon International Limited (Videocon) and Sterlite Industries Ltd.(Sterlite) , especially during April and May, 1998.

¶15

The Appellant company’s share price which was around Rs.180/- in April, 1998 touched a high of Rs.446/- by first week of June, that the price movement was not in conformity with the Sensex/Nifty movements, and also not in line with the price movement of the shares of other companies in the same industry segment, that the scrip could not sustain the rise longer and fell sharply after 04.06.98 to a low of Rs.139/- in the month of June, 1998

¶16

The investigations revealed that a set of brokers and sub-brokers acting on behalf of a common set of clients cornered a large chunk of shares of the Appellant company at both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). These clients called Damayanti group, built up unusually large positions in the Appellant’s shares resulting in distortion of the market equilibrium and creation of artificial market in these shares.

¶17

Damayanti group comprised mainly of the following entities, viz. Damayanti Finvest Pvt.Ltd, CDP Fincap and Leasing Pvt.Ltd, KRN Finvest and Leasing Pvt.Ltd, Rijuta, Finvest Pvt.Ltd, Ikshu Finvest Pvt.Ltd, Money Television Industries Ltd. These entities had neither the financial worth nor the professional expertise to undertake the kind of dealings, which they have supposedly done through a large number of brokers and merely acted as front for Shri Harshad Mehta, who is a notified person under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (the Special Court Act)

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Damayanti group acting through a set of brokers built up large purchase positions in the carry forward segments at BSE in the Appellant’s scrip which increased from settlement to settlement, that this increase in carry forward position was accompanied by a corresponding increase in the scrip prices, which were being manipulated, that the hawala rate moved from Rs. 163 in Settlement No.1 to Rs.410 by Settlement No.11 on account of these manipulations. The profits earned by Damayanti group / Shri Harshad Mehta as a result of increase in hawala prices over successive settlements were utilised for making further purchases both at BSE and NSE in cash segment, payment of margins, and building up further positions in carry forward segment. The delivery of shares received was also utilised for raising finances by doing share badla. Thus, through this modus operandi, substantial portion of traded stock of the Appellant company was cornered by Damayanti group/Shri Harshad Mehta and this cornering caused creation of artificial market and price manipulation in the scrip.

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• It was found from a letter dated 20.8.1997 written by Shri R.Balathandayutham, Vice President of BPL Sanyo Finance Ltd (BSFL) an associate company of the Appellant obtained alongwith some other documents from the office premises of the Damayanti Group at 1208, Maker Chambers V, Nariman Point, Mumbai that Digital Leasing and Finance Ltd (Digital) , a member of NSE, was asked to purchase 5 lakhs shares of the Appellant company @ Rs.100 per share. A copy of a contract note bearing No.GE 34/2 dated 26.8.1997 issued on BSFL showing purchase of 5 lakhs shares valued at Rs.5 crores and a copy of the bill raised in this regard on BSFL, a transaction to which only BSFL and Digital could be privy being contracting parties, was found in the said premises of Damayanti group. Digital stated that a written order to purchase the said 5 lakh shares @ Rs.100/- was received by them from BSFL on 20.8.1997 and also received Rs.5 crores on 5.9.1997 from BSFL towards the purchase consideration. But investigations revealed that this payment was actually received by Digital from the Appellant company though credit for this was given in the books of account to BSFL . The purchase bill of 5 lakh shares appeared to be consequent to the purchase order, that on enquiries with NSE it was found that no such order was logged in by Digital at the time mentioned in the bill. On questioning, Digital admitted that this transaction was not executed as the contract was cancelled at the behest of BSFL. However, Digital could not explain how the bill with time and order number was issued when the deal had not taken place. Appellant made payment to Digital on 6.9.1997 when order to purchase the shares was purportedly cancelled on 26.8.1997. Digital when asked whether the money was refunded back to BSFL stated that instead of refunding the money they approached BSFL with an offer for sale of shares and Fully Convertible Debentures (FCDs) of Money Television Industries Ltd (an Unlisted company) Digital in turn had earlier received offer to sell

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shares/FCDs of Money Television Industries Ltd (Money Television) from Damayanti Group. It was claimed that Digital sold 38,13,500 shares and 11, 86, 500 FCDs of Money Television @ Rs.10/- each to BSFL. The counter parties for this transactions were entities belonging to Damayanti group. It was also seen that the bill for the sale of shares and debentures of Money Television was of the same date and number as the original bill raised for sale of the Appellant’s shares. This showed that something was amiss as there cannot be two bills with the same bill number and same date if these bills were issued at different point of time.

¶21

• On a perusal of the off market deals submitted by Digital to NSE, it was found that they had shown the following sales on spot basis to BSFL - (a) 1,25,000 shares of the Appellant company for Rs.75.625 lakhs on 30.9.1997 (b) 2,00,000 shares of Krebs Biotech for Rs.210 lacs on 7.10.1997 and (c) 1,00,000 shares of Swaraj Mazda for Rs.70 lakhs on 4.11.1997. However, they submitted a revised copy of the statement to NSE which did not include these transactions of BSFL and in its place sale of 1,10,000 shares of the Appellant company to BSFL @ Rs.400 each was shown. These revised contract notes and bills were also reflected in the account of BSFL. Digital when confronted with the details gathered from NSE stated that the said transactions were not executed and therefore a revised statement was submitted to NSE. However, Digital could not explain why these transactions were shown in the first place when the same had not taken place.

¶22

S/Shri Chauhan and Balathandayutham of BPL group could not explain as to why Rs.5 crores was transferred to Digital in September, 1997 when the contract dated 20.8.1997 for purchase was cancelled on 26.8.1997. They also could not explain why Digital had raised the bill if the transaction was not executed. It was also seen that the Appellant company directly paid to Digital Rs.8.62 crores and in addition, a sum of Rs.75.625 lakhs was also transferred to Digital from the accounts of BSFL on 6.10.1997. Thus a total sum Rs.9, 38, 12, 500 was transferred to Digital from BPL group and there was no explanation from Shri Chauhan and Shri Balathandayutham as to why these funds were given, as no prudential businessman would pay further amounts when earlier amounts were to be recovered.

¶23

It was not clear whether BPL group had purchased shares and FCDs of Money Television. According to Shri Chauhan Digital had offered shares and FCDs of Money Television for sale which was not considered fit by him and the offer was turned down. However, it was seen from the documents available with Digital that shares and FCDs of Money Television were delivered to BSFL and duly acknowledged by Shri A.R.Rajaram, Company Secretary of the Appellant. Shri Chauhan could not explain as to why the bill was raised by Digital in the name of BSFL if there was no such purchase. He merely stated that his decision was not to buy the shares of Money Television and that BPL group had still to receive Rs.5 crores from Digital. It was seen that despite a period of more than a year having elapsed BSFL had not taken any steps to recover this money. The explanation for purchase of 1,10,000 shares of the Appellant @ Rs.400/- per share is also not convincing and appears to be an after thought.

¶24

• Director of Digital stated that dealings were being done at their counter by Shri Harshad Mehta though billing was being done in the name of his nominee i.e. Damayanti group. As regards receipt of amount from BPL

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group it was also admitted that they (Digital) were informed by Shri Harshad Mehta that a large payment would be credited into their account from BPL group from Bangalore to settle Damayanti’s outstanding pay-inliability. It was also stated that contract notes were issued just to provide an alibi for transfer of funds and cover up the links of BPL group with Shri Harshad Mehta after SEBI investigations had commenced. The above facts indicate that BPL was in connivance with Shri Harshad Mehta in manipulating the prices of the scrip. There was no purchase of shares of BPL group from Digital and all the funds transferred were sent to enable Shri Harshad Mehta to build up positions in the Appellant’s scrip to manipulate the prices.

¶26

• The evidence in the form of bills/contract notes of Digital issued to BPL group, copies of accounts of Damayanti group from the books of Digital showing receipt of money from BPL group and its disbursement on account of Damayanti group entities, details of telephone records showing contact between the Appellant’s Directors and Shri Harshad Mehta etc. available at the office premises of Damayanti group at 1208 Maker Chambers V, coupled with admissions of Shri Chauhan and Director of Digital show that management of BPL connived with Shri Harshad Mehta through Damayanti group in manipulations of the price of shares of the Appellant company.

¶27

• Large number of brokers of BSE and NSE who were dealing on behalf of Damayanti group had cornered a substantial chunk of the Appellant’s shares and some of them faced payment problems and could not discharge their commitments towards pay in liabilities as they did not get the payments from their clients i.e. Damayanti group. It was gathered during the course of investigations that some of the office bearers of BSE approached M/s. Seventilal Kantilal Securities P.Ltd (SSKL) broker at BSE and NSE, to get in touch with the Appellant company to bail out these brokers. It was admitted by the director of SSKL that they got in touch with the Appellant. In pursuance of this, Rs.47 crores were transferred from the entities connected with BPL group under the garb of application money for preferential shares in a loss making associate company of SSKL (Monoplan). The money was used for purchase of shares through “all or none” or “bulk” deals at predetermined rates and quantities by synchronizing the timing of logging in of the trades by the buyers and sellers who were dealing for Shri Harshad Mehta through Damayanti group, that the trading system of BSE was opened much beyond the closure of trading time to facilitate these transactions on 17.6.98 and 19.6.98. It was found that SSKL later sold 20 lakhs shares out of 25 lakhs shares purchased by them, for a consideration of Rs.35.36 crores. At that stage, out of Rs.47 crores received, Rs.31.66 crores was returned to BPL group entities, and preferential shares were issued for the balance amount of Rs.15.34 crores. BPL group gave this money (Rs.15.34 crores) to cover a loss of Rs.11.64 crores suffered by SSKL in this regard. This shows that SSKL merely provided a facade to BPL group for purchase of its own shares and through this methodology the prohibition imposed by section 77 of the Companies Act was circumvented.

¶28

• In view of the presence of fabricated contract notes in favour of BSFL and details of transfer of funds from BPL group to Digital, telephone bills linking Shri Harshad Mehta with BPL group, admissions of Digital and contradicting statements of directors/officials of the Appellant company, the Appellant seems to have connived with Shri Harshad Mehta and

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created a false market and manipulated the prices of scrips. Further there is no plausible explanation as to why a public limited company which is responsible for its share holders should buy its own shares at Rs.235/when the market was falling and there were only one side sellers and no genuine buyers in this scrip, in violation of section 77 of the Companies Act only from those brokers who were dealing with Shri Harshad Mehta/Damayanti group. This further indicates that BPL group connived with Shri Harshad Mehta to build up large positions in the shares of the Appellant company, which facilitated market manipulation. The Appellant provided an exit route to brokers dealing for Damayanti group, when the artificial price could not be sustained and these brokers got trapped.

¶30

In the light of the above, the Appellant company was asked to explain its conduct with reference to violation of regulation 4(a) and 4(d) of the 1995 Regulations read with section 11(1) and 11(2)(e) of the Act, and show cause as to why directions including directions prohibitting it from dealing in securities and accessing the capital market and any other suitable direction in the interest of investors and securities market under section 11 read with section 11B of the Act and regulation 11 of the 1995 Regulations, should not be issued and proceedings under section 24 of the Act should not be initiated for the above violations.

¶31

The Appellants answered the show cause notice. The show cause notice was adjudicated by the Chairman of the Respondent and passed the impugned order confirming the charges set out in the show cause notices. Operative portion of the order as stated in para 14.1 and 14.2 of the impugned order is extracted below: “14.1:In view of the above findings based on documentary evidence, strong circumstantial evidence corroborated by statements of various persons, it is conclusively established that BPL was involved in creating a false market and manipulating the prices of its scrip, inconnivance with Shri Harshad Mehta by aiding, abetting and being instrumental in effecting transactions by taking part and entering directly and indirectly into transaction in the shares of BPL.

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14.2: Therefore in exercise of the powers conferred upon me by sub section (3) of section 4, read with sections 11 and 11B of the SEBI Act, I hereby direct M/s.BPL Limited not to access the capital market for a period of four years. It is further ordered that prosecution proceedings under section 24 of the SEBI Act for violation of clauses (a) and (d) of regulation 4 of the said Regulations be initiated against BPL through its directors/officers, Shri Rajeev Chandrasekhar, Shri Ajit Nambiar, Shri R.Murali, Shri T.P.G.Nambiar and Shri T.C.Chauhan”.

¶33

Since all the six appeals pertain to the same order, it was decided with the consent of the parties, to hear the appeals together and pass a common order.

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Shri Aspi Chinoy, learned Senior Counsel appearing for the Appellants except for Appellant in appeal No.15/2001, submitted that the order is bad in law and cannot be sustained as it is passed without following the principles of natural justice, and without jurisdiction and contrary to the material on record.

¶35

Shri Chinoy referred to the show cause notice dated 20.12.1999 issued to the Appellant company and the other Appellants herein and stated that the Respondent had offered inspection of the documents and material which was being relied on by it. He stated that by a letter dated 25.1.2000 the Appellant company requested the Respondent to confirm the list of documents and material that were being relied upon by the Respondent, referred to in the said letter, and the Respondent was also informed of the Appellant’s desire to take inspection of the documents listed in the letter at a

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mutually convenient date, but the Respondent did not confirm the documents upon which it would be placing reliance. Inspection of the documents was completed on 29.4.2000 and on 20.6.2000 and the Appellant company filed its replies to the show cause notice. Thereafter the Appellant company made oral and written submissions and afterwards the Respondent issued the impugned order. Shri Chinoy stated that on a perusal of the order it could be was seen that the Respondent relied on certain material which was not before the Respondent and never disclosed to the Appellant. He submitted that reliance on material by the decision making authority without disclosing the same to the person likely to be adversely affected, is violation of the principles of natural justice. He further stated that the Appellant had specifically enumerated the documents and material on which reliance was being placed by the Respondent, that this position was at no stage disputed by the Respondent. He stated that the Respondent has travelled far beyond the record and has relied upon material that was not referred to or disclosed in the show cause notice and copies whereof were not even offered for inspection to the Appellant. In this context he referred para 6.2 of the impugned order and submitted that the findings therein was of considerable importance, and the documents/material based on which such conclusion has been drawn were not made available to the Appellants for inspection. By way of illustration he cited few documents referred to in para 6.3.4 and 8 of the impugned order. These are the statements of Shri Vinod C Shah, Shri Dilip N Shah , Shri Dinesh D Doshi, Shri Anil Doshi and statements of certain unspecified brokers – all referred to in para 6.3.4 (b) and (d) of the order. He also referred to letter dated 12.5.1998 of LKP Shares and Securities Ltd (para 7.1) Travel bills issued by M/s. Bonik Travels and Taurus Travels (para 8.1(a) proof of payment of Rs.14 lakhs to Harshad Mehta’s lawyers by Damayanti group (para 8.1(a)), unsigned letter dated 18.9.1997 from Shri Harshad Mehta to Central Bureau of Investigation (para 8.1 (b)) and document containing investments and bearing notes/jottings in the hand writing of Shri Harshad Mehta (para 8.1(c). Shri Chiboy submitted that these documents are very important., as the Respondent has relied on them to link Damayanti group with Shri Harshad Mehta and also to link the Appellant with them.

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Learned Senior Counsel further submitted that the Appellant company had specifically requested the Respondent to provide Shri Shripal Morakhia, of Seventilal Kantilal Securities P. Ltd. (SSKL) for cross examination, which was not agreed to by the Respondent. In this context he referred to the Appellant’s formal application dated 24.1.2001 to provide Shri Shripal Morakhia for cross examination as Shri Morakhia’s cross examination was very essential, as he was the representative of SSKL stated to have approached the Appellant at the behest of the office bearers of BSE and NSE, further that in support of the show cause notice, the Respondent had relied on SSKL’s letter dated 25.6.98 to the Respondent and inspection of the said letter was granted to the Appellant, that during the course of hearing on 24.1.2001 before the Respondent’s Chairman, the Appellant’s Counsel had explained as to why cross examination of Shri Morakhia was considered necessary. Shri Chinoy stated that the Chairman had asked the Appellant to make written submission on the issue of cross examination and accordingly written submission was also made that at the hearing on 4.4.2001, the Respondent’s representative stated that they would not rely upon SSKL’s letter dated 25.6.1998 but reliance would be placed on the statement of Shri Tarun Parvin Chandra Shah dated 16.9.1998. The learned Senior Counsel referred to said letter and stated that the statement of Shri Tarun Shah by implication brings in the letter dated 25.6.1998 and

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in any event Shri Morakhia was the person having personal knowledge of the transactions referred to in the letter dated 25.6.1998. In this context Shri Chinoy referred to the finding recorded in para 13 of the order and stated that as regards the allegation in the show cause notice relating to events in June, 1998, the only material brought forward by the Respondent was the statements of Shri Tarun Shah dated 16.9.1998 and the letter dated 25.6.98, that there are detailed references to Shri

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Morakhia in the said letter, that this letter stands incorporated in the statement of Shri Tarun Shah, interalia in view of his reference to the letter in the course of the statement. Learned Senior Counsel submitted that it is not open to the Respondent to rely upon the statement dated 16.9.98, without reference to the 25.6.98 letter, that if as recorded in para 13.7 of the impugned order, the Respondent is not relying on the said statement dated 16.9.98 and letter dated 25.6.98, then there is no evidence on record relating to the transactions of June, 1998 and the finding in this regard must fall. He submitted that it is not open to the Respondent to rely piecemeal on the statement without relying upon the letter dated 25.6.98 which is referred to in the statement. Learned Counsel stated that in the circumstances it was incumbent on the Respondent to provide Shri Morakhia for cross examination and the failure to do so amounts breach of the principles of natural justice.

¶40

Shri Chinoy referred to para 8.2 of the impugned order wherein it has been stated that “ the above documentary, oral and circumstantial evidence conclusively points out that Harshad Mehta was using the office premises of 1208, Maker Chambers V, which ostensibly is the office of Damayanti group entities and used Damayanti group as front for his manipulative activities” and stated that the Respondent uses the material and draws conclusion based on the same against the Appellant and at the same time denies access to the same to the Appellant. He submitted that the caveated submission by the Respondent that “ in so far as they relate to the Appellant” is important in the context. He stated that the question is not as to whether the documents relate to the Appellant or not. The question is whether the documents are relevant to the charges levelled against the Appellant, that the documents are certainly relevant, as they are used to link the Appellant with Shri Harshad Mehta and to suggest that Shri Harshad Mehta acted at the behest of the Appellant. He stated that since the material has been used against the Appellant, the Appellant was entitled to inspect the same/to get a copy of the document. Shri Chinoy referred to the Respondent’s version in its reply (p.15) that “ all the documents/materials relied upon ( in so far as they relate to the Appellant), in the impugned order had been made available to the Appellant” and stated that it is not factually correct. In this context he referred to the letters from the Appellant’s side dated 25.1.2000,15.2.2000, 15.3.2000, 16.3.2000, 29.4.2000 forming part of the Respondent’s reply and particularly referred to the Respondent’s letter dated 15.5.2000 in reply to the Appellant’s letter dated 29.4.2000 and pointed out that the Respondent had agreed to provide photocopies of only few documents selected out of several documents listed in the letter, implying that only those “documents relating to BPL” will be provided and not the entire material relating to the charges levelled against the Appellants in the notice. Shri Chinoy further stated that the Appellant had repeatedly requested the Respondent to adjudicate the show cause notice only on the documents/material disclosed to it and referred to the Appellant’s letter dated 20.6.2000 a copy of the same has been annexed to the appeal, that only selected documents were made available for inspection is evident from the Respondent’s own averment in para 4 of the reply that “ documents obtained from 1208 Maker Chambers V, (reference para 8.1 (e) of the impugned order including copy of account of Damayanti group with Digital, copy of contract note issued by Digital to BSFL, correspondence of BSFL and Digital and the documents showing transactions in the shares of the Appellant by Damayanti group of companies and LKP Shares and Securities had been inspected by and copies were given to the Appellant”. Shri Chinoy submitted that the said statement is only about the documents made available that the rest of the documents were withheld from the Appellants to their disadvantage.

¶41

In support of his above submissions regarding disclosure of materials relating to charges, right of cross examination etc., in tune with the principles of natural justice Shri Chinoy cited the following decisions of the Hon’ble Supreme Court:

¶42

(1) State of Madhya Pradesh v. Chintaman Sadashiva Waishampayan (AIR 1961 SC 1623). In the said case relying on Union of India v. TR Varma (AIR 1957 SC 882)

¶43

“Stating it broadly and without intending it to be exhaustive it may be observed that rules of natural justice require that a party should have the opportunity to adducing all relevant evidence on which he relies, that the evidence of the opponent should be taken in his presence, and that he should be given the opportunity of cross examining the witnesses examined by that and that no material should be relied on against him without his being given an opportunity of explaining them”- the Hon’ble Supreme Court observed that “ it is hardly necessary to emphasise that the right to cross examine the witnesses who give evidence against him is a very valuable right and if it appears that effective exercise of this right has been prevented by the enquiry officer by not giving to the officer relevant documents to which he is entitled, that inevitably would be that the enquiry had not been held in accordance with rules of natural justice.”

¶44

(2) KhemChand v Union of India (AIR 1958 SC 300)

¶45

“If the opportunity to show cause is to be a reasonable one it is clear that he should be informed about the charge or charges levelled against him and the evidence by which it is sought to be established, for it is only then that he will be able to putforward his defence. If the purpose of this provision is to give the Government servant an opportunity to exonerate himself from the charge and if this opportunity is to be a reasonable one he should be allowed to show that the evidence against him is not worthy of credence or consideration and that he can only do if he is given a chance to cross examine the witnesses called against him and to examine himself or any other witness in support of his defence”

¶46

(3) M.A.Jackson v.Collector of Customs (1998) 1 SCC 198

¶47

“Once it is admitted that the price mentioned in the magazine was not mentioned in the show cause notice issued to the petitioner, any reliance on the said price mentioned in the magazine, by the Customs authorities must be held to be illegal. Further, that this point was taken in the grounds of the appeal, before the appellate authorities, a copy of the magazine was never made available to the petitioners . The fact that an extract of the relevant portion thereof was produced before the CEGAT for the first time, does not cure the defect”. (emphasis supplied)

¶48

Hindustan Lever Ltd v. Director Genral (Investigation and Registration) 2001(1) SCALE 219

¶49

"Apart from the fact that the evidence on record does not show that there was any protest by Jain General Stores to the appellant against the so called practice of sending more slow moving goods and less of fast moving goods, we find that neither in the show cause notice nor in the additional particulars was there any mention , with regard to Jain General Stores. Principles of natural justice would require that appellant against whom an order of cease and desist could be passed under the provisions of the MRTP Act is entitled to know the case which it has to meet. Passing of an order like the present one results in civil consequences and it is now well settled that in such an event principles of natural justice have to be followed. It is for this reason that the Act and the Regulations required a notice to show cause to be issued. We would expect that the notice which is issued either itself must provide or an accompanying or subsequent documents must indicate to the person to whom notice is served, the case which is required to be met. It does appear that there was a complaint by Jain General Stores which had been filed with the commission and if the commission wanted to take that complaint into consideration, then the least which

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could have been expected was that the Appellant should have been put to notice thereof. This was not done. On this ground alone, therefore, no order could be passed against the appellant in relation to the termination of its agreement with Jain General Stores”. (emphasis supplied)

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Learned Senior Counsel referring to the charges levelled against the Appellant company submitted that there is no material to support the conclusion that the Appellant was involved in creating a false market and/or manipulating the price of its shares as alleged. He submitted that increase in the share price of the Appellant in April-May, 1998 could be for several independent reasons that the price movement did not imply that there was market manipulation. In this context he referred to the facts stated in para Q of the grounds of appeal which included the Appellant’s financial position, impressive performance, profitability, market leadership, product range and demand, corporate recognition etc. With reference to the Respondent’s contention that the scrip of the Appellant was moving abnormally compared with the movement of the BSE/NSE index, Shri Chinoy referred to the share price movement data for 3 calendar years i.e. 1997, 1998 and 1999 filed with the appeal and pointed out that in the year 1997 the highest price quoted in August, 1997 was Rs.105/followed by Rs.104/- in December. In 1998, the highest quote in January was Rs.121, in February, Rs.129, in March, Rs.165, in April, Rs.417, in June, Rs.446. In July the price fell to Rs.180, in August, Rs.158, in September, Rs.157, in October, Rs.152, in November, Rs.138 and in December, it was Rs.146. He also referred to the highest rates in 1999, that in January it was Rs.226, in February Rs.200, in March Rs.395, in April Rs.415, in May Rs.474, in June Rs.530, in July Rs.535, in August Rs.569, in September Rs.637, in October Rs.577, in November Rs.385 and in December Rs.365. Relying on these monthly high quotes, Shri Chinoy stated that evidently the price had reached much higher (at Rs.637/-) in September 1999 as against the highest quote of Rs.446/- in June 1998. He submitted that the Respondent has not disputed this factual position and has not made any allegation that there was any abnormal price movement in the Appellant’s scrips in 1999. Shri Chinoy submitted that it is thus clear that the prices are decided by market forces and the price movement in 1998 was not in any way different.

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Learned Senior Counsel submitted that the Respondent has attributed certain transactions allegedly taken place some time in September, 1997 as the cause of the so called abnormal price rise in the shares of the Appellant in April-May, 1998, totally ignoring the proximity factor and the causal link. He referred to the show cause notice and the impugned order and stated that it is an admitted fact that a sum of Rs.5 crores was given to the broker viz. Digital by BSFL in September, 1997. He also referred to the contract note and bill raised by Digital on 26.8.97 in the name of BSFL. Fund flow was in September 1997 and the alleged manipulation relates to several months thereafter in April/May 1998. Learned Senior Counsel submitted that even in the Respondent’s own version based on its investigation as reflected in the show cause notice and in the order, it was a set of brokers and sub brokers acting on behalf of a set of clients identified as Damayanti group, allegedly a front for Shri Harshad Mehta, cornered the shares of the Appellant company both at BSE and NSE and built up unusually large positions resulting in distortion of the market equilibrium and creation of artificial market in these scrips.

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Shri Chinoy further submitted that the Appellant had not given any money to purchase its shares to anybody. In the normal course of transactions it had given loan to BSFL and it was not of the Appellant’s concern as to the manner in which BSFL utilised the funds. He admitted the fact of lending Rs.5 crores to BSFL, but vehemently denied the charge that it was given to purchase its own shares. In this context he referred to the copy of the contract notes issued and the bills raised by Digital and stated that it was in the name of BSFL, that BSFL is a totally independent

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and distinct entity . In this context he, referred to the statement made by Shri R.Balathandayutham, Vice President, BSFL in his deposition dated 10.8.1998 that “in fact the shares have been received by BPL Sanyo Finance ltd., and lodged for transfer on 16.7.1998”. He submitted that with reference to purchase of Money Television’s shares and FCD’s also it is clear from the bill (copy filed with the appeal) that the buyer was not the Appellant. He submitted that BSFL is a finance company and there were transactions between the Appellant and the BSFL in the nature of inter corporate loans and deposits, and the funds advanced to BSFL in 1997 by the Appellant were part of the normal transactions, that the Respondent’s contention that it was meant for purchase of the shares of the Appellant company is baseless. He submitted that the Respondent has not produced any credible evidence to establish that the money was given by the Appellant to purchase its shares.

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Shri Chinoy submitted that the Respondent has gone on the wrong presumption that BSFL, Sanyo Finance and the Appellant are one and the same entity, though it is not so. Learned Senior Counsel stated that these are distinct entities had been brought to the notice of the Respondent by the Appellant in its reply dated 20.6.2000 to the show cause notice. He stated that the areas of business, the constitution of the Board of Directors, employees, pattern of shareholding and ownership, places of business/work/operations, the controlling mind etc., in respect of the said two entities are different and distinct from that of the Appellant. By way of explanation he stated that the Appellant and BSFL are engaged in distinctly separate business activities that the Appellant is engaged in the manufacture and marketing of consumer electronic products like colour TVs, home appliances, telecom products, etc. where as BSFL is a finance company engaged in the business of leasing, hire purchase, bill discounting, investment etc. He submitted that shareholding pattern of both the companies are distinct, that the Appellant’s shares are widely held and listed on various stock exchanges across the country where as , BSFL is a closely held unlisted company with the shareholding divided equally between the Appellant and Sanyo Electric Company of Japan. According to the learned Senior Counsel the Board of Directors of the Appellant is also distinct and independent from the Board of BSFL, that at the relevant period ( i.e. between September, 1997 and June, 1998), the Board of the Appellant company comprised 11 members and in the same period the Board of BSFL comprised 8 directors of whom 4 directors were nominees of Sanyo Electric Company of Japan and the remaining 4 directors were nominees of the Appellant, that one of the nominees of the Sanyo Electric Company was the whole time Director. He further pointed out that during the relevant period, there were only three common directors between the Appellant and BSFL namely S/Shri T.P.G.Nambiar, M.A.Uppal and T.C. Chauhan. He submitted that the Appellant was not in a position to control BSFL by virtue of its shareholding or management participation, as there was another equal partner in the ownership and management. He stated that the Appellant and BSFL are totally distinct and that BSFL is not a front company or dummy of the Appellant and as such there is no question of piercing the corporate veil. It is a “fifty fifty” joint venture of two different groups - Indians and Japanese - and not under the sole ownership or control of the Appellant. Learned Senior Counsel submitted that the impression that the Appellant and BSFL are one and the same is incorrect. Shri Chinoy refuted the Respondent’s version in para 13.1 that “BPL was exercising its controlling mind in respect of BSFL”, and stated that BSFL is a business associate of the Appellant does not mean, that it is under the control or management of the Appellant, that the Respondent has failed to establish that the Appellant is the controlling mind of BSFL.

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Shri Chinoy stated that the specific allegations in the show cause notice/order are directed against the said BSFL and not against the Appellant. By way of illustration he referred to the Respondent’s version in the show cause notice that (i) on 20.8.97 BSFL gave a mandate to Digital to purchase 5 lakh shares (para 8), (ii) a contract note dated

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26.8.1997 issued on BSFL in respect of the purchase of 5 lakh shares of the Appellant (para 8), (iii) a bill dated 16.8.97 raised on BSFL in respect of the said transaction (para 8), (iv) Digital received Rs.5 crores on 5.9.97 from BSFL (para 9), (v) credit for this payment was given in the books of account of Digital to BSFL (para 9), (vi) Digital approached BSFL with an offer for the sale of shares and FCDs of Money Television, (vii) Digital sold 38,13,500 shares and 11,86,500 FCDs of Money Television to BSFL, (viii) Digital sold on a spot basis to BSFL shares of the Appellant, Krebs Biotech and Biotech and Swaraj Mazda (para 10), (ix) Digital sold 1,10,000 shares of the Appellant to BSFL (para 11), (x) shares and FCDs of Money Television were delivered to BSFL and (xi) BSFL did not take any steps to recover the money from Digital. He stated that despite the said factual position, the Appellant has been identified as the person involved in the transaction.

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Shri Chinoy further submitted that the Respondent has wrongly held that the Appellant was “exercising its controlling mind in respect of BSFL”, that this finding was on the basis that there were three common directors, that 50% of the shareholding of BSFL, is held by the Appellant and that Shri T.C.Chauhan was part of the decision making process for grant /advances by the Appellant to BSFL and that he was also the person taking investment decision for BSFL in his capacity as a director BSFL. Learned Senior Counsel submitted that these factors individually or collectively cannot justify the conclusion reached at by the Respondent to treat the Appellant and BSFL as the same person in law and the finding that “BPL Ltd was exercising its controlling mind in respect of BSFL.”

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Shri Chinoy submitted that to hold that a public limited company indulged in manipulation it is necessary to establish the willfull act or intend of those managing the company. “Intention” is an ingredient of regulation 4(a) and 4(d). In this connection Shri Chinoy referred to the Respondent’s following observation in para 13.3 of the order that “BPL has further contended that any charge of market manipulation must involve malafide on the part of the alleged manipulator and has further stated that a malafide intention cannot be attributed to an artificial person like BPL. It is an established position of law that a company may be criminally liable for a breach of provision of the Act or other statutory duties, although a company may not be liable for certain offences under the penal code. The Courts have recognised that regarding criminal liability involving mens rea, the mental element of those in control and management of the company is attributed to the company itself”. In this context learned Senior Counsel submitted that the charge of market manipulation implies an improper motive or intention that when such a charge is levelled against an artificial person or body corporate, it is necessary for the party making the charge to establish that the controlling/directing mind of the artificial person, that is, the Board of Directors or a committee of directors or the shareholders in general meeting, were involved in manipulation, that the subject transactions were never put up before the Board of the Appellant or a committee of its directors or before its shareholders. In this context he referred to the following authorities

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(i) Esso Standard Inc v. Udharam B Japanwalla 1975(45) Co.cases 16(Bom), (ii) ANZ Grindlays v. Director of Enforcement, decided by the Hon’ble Bombay High Court on 7.11.1998 in W.P.No.1972/1994 etc.)

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Shri Chinoy read out extensively from the Esso Standard’s case and in particular the following paragraphs:

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“The passage of Viscount Haldane, Lord Chancellor, in Lennard’s Carrying Company Ltd v. Asiatic Petroleum Co.Ltd (1915) AC 705) referred to by Lord Diplock, is as follows:

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“My Lords, a corporation is an abstraction. It has no mind of its own any

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more than it had a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co-ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company.”

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“But it must be proved as a matter of fact that the officers were acting within the limits of their authority on behalf of the company.

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Applying this test to the present case we feel no hesitation in holding that the complaint was drafted without any regard to these principles. There is not a word to suggest anywhere in the complaint that the officers –accused Nos. 2 to 5- had done any act on behalf of the company so as to make such act in law the act of the company. On the contrary the averments made in the complaint as stated above are that they had common intention with the company; this, in our judgement, is nothing but confused thinking on the matter. The law attributes to the company intention of the officers of the company under certain circumstances. The company’s intention could be ascertained only when the company in a general body or at the meeting of the board of directors or in accordance with the memorandum of association or articles of association has expressed that intention in the form in which it should be expressed. In the absence of any such averment it is clear that the complaint against the applicant company is clearly not maintainable in law having regard to the general principles of criminal liability enunciated by the House of Lords in the above case”.

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From ANZ Grindlays he cited the following paras:

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“Another submission of Mr.Venugopal and Mr.Chinoy is that for the first time the Act of 1973 has adopted provisions under Section 58 and 59. The first deals with vexatious search etc., by officers of Enforcement. What is more pertinent that the second deals with the presumption of culpable mental state This is a complete departure from the legislative intendment as envisaged by the Act 1947. This measure has brought a drastic change in legislative approach and consequently by necessary implication Mens Rea has become the essential ingredient of the commission of the contravention.

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Section 58 is brought to prevent vindictive attitude or venom of the officers of the Enforcement Directorate or any person willfully giving false information. The very nature of the offence clearly involves culpable mental state. Section 59 reads thus:-

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“Presumption of culpable mental state(1) In any prosecution for any offence under this Act which requires a culpable mental state on the part of the accused, the Court shall presume the existence of such mental state but it shall be a defence for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution.

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Explanation:- In this section “culpable mental state” includes intention, motive, knowledge of a fact and belief in, or reason to believe, a fact.

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(3) The provisions of this section shall, so far as may be, apply in relation

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to any proceeding before an adjudicating officer as they apply in relation to any prosecution for an offence under this Act”. (emphasis supplied)

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The learned Counsel then contended that there is no provision under the Act 1973 which expressly include Mens Rea or Culpable Mental State. Implied inclusion of Mens Rea is therefore necessary in every offence or contravention, otherwise it would completely frustrate the scheme of Section 59. Submission is not well-founded. Presence of Mens Rea as an essential ingredient of commission depends on very nature of the offence. For instance, Section 30 refers to, where such national desires to acquire any foreign exchange. Section 47 refers directly or indirectly evade or avoid in any way the provisions of the Act. Section 48 refers to making a false statement. Section 49 refers to abetting non compliance and section 58 refers to making a vexatious search or willfully and maliciously giving false information. These are certain contraventions or offences which inherently involve the ingredient of the culpable state of mind. In such or similar circumstances, the Court is obliged to presume the culpable state of mind of the accused, as envisaged by Section 59. Rightly it is contended by Mr.Chandrachud that the offence under Section 8 and 9 of the Act of 1973 are absolute when any person without necessary permission commits any of the prohibitive acts.”

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Shri Chinoy submitted that the principle laid down in the cited cases is applicable to prosecution and adjudication. He stated that in regulation 4(a) and 4(d) specific requirement of intend is there. The impugned order also charges the Appellant acting in “connivance” with Shri Harshad Mehta by ‘aiding’ “abetting” and “instrumental in effecting transactions resulting in market manipulations”. He submitted that conspiracy, abatement, etc., involve sound intend. He stated that the Appellant being a corporal body has no mind independent of those in control, that the order does not even suggest that any one in control in the Appellant was involved in manipulating market that even, Shri Chauhan’s role is stated to be restricted only to advance of loans. Shri Chinoy stated that there is nothing in the order to show that loan was given to BSFL by the Appellant with the intend to manipulate the market.

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Shri Chinoy refuted the charge that the Appellant was responsible for the price movement in its scrip or for the abnormal trade volumes as alleged. He denied that the volumes traded were abnormal or that the price was due to manipulations..

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Shri Chinoy submitted that share price movements of several other companies indicate that the share prices of these companies also rose against the trend and movement of Sensex/Nifty during the period September, 1997 to June,1998. By way of example he stated that the price of Pentafour Software Ltd rose on BSE from Rs.129 in September , 1997 to Rs.1082 in May, 1998, in the same period in the case of Zee Films the price movement was from Rs.115 to Rs.610, in Satyam Computers from Rs.160 to Rs.504, in HCL-HP from Rs.35 to Rs.332, in ITC from Rs.495 to Rs.830. He stated that the general market sentiment and confidence in the Appellant’s scrip is evident from the steady rise in the scrip value between July, 1998 and September, 1999, that on BSE the scrip rose from July, 1998 high of Rs.180 to a high of Rs.636 in September, 1999, that the increase during said period was much greater than the increase during the subject period, which clearly demonstrates that rise in the Appellant’s scrip price may be justified on the basis of objective factors, having nothing whatsoever to do with the market manipulation. Shri Chinoy submitted that the Respondent’s case is based on one transaction of 1997, that a solitary purchase of shares cannot be considered as an act of manipulation, that further the Respondent has not established any motive or produced any evidence to show that the Appellant or any of the promoters got any benefit as a result of the transaction. Motive is an important aspect of manipulation.

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Shri Chinoy referring to the observation in para 9.12 of the order submitted that the

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Appellant did not enter into any transaction with Digital that the agreement for purchase of shares valued at Rs.5 crores was between BSFL and Digital, that the payment of Rs.5 crores was also made by BSFL to Digital, that the purchase order and bill mentioned in para 9.1 were issued by BSFL and not by the Appellant company. Further from the extract of the accounts stated to be maintained by the Digital provided to the Appellant also it is clear that it was BSFL who had paid money to Digital. The receipt of money from the Appellant by BSFL is also evidenced.

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Shri Chinoy submitted that the affidavit of Digital dated 30.9.1999 is not worth even the paper on which it is written, that it is a self serving affidavit by Digital who admits to engaging in a variety of improper activities and then claiming that he was merely a scapegoat , that it is inconceivable that a broker who claims to have destroyed the bills and issued fresh bills in their place was acting in bonafide.

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Learned Senior Counsel stated that there were infact no transaction as recorded in para 9.4(b)(ii)a(b)(c) of the impugned order that in so far as the transaction in relation to purchase of 1,10,000 shares of the Appellant was concerned this transaction was put through and the transfer was duly recorded in the Appellant’s member’s register, that as per the records the said shares were transferred in favour of BSFL, and BSFL in turn sold these shares and the transferee in respect of the onwards sale was also duly registered.

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With reference to charge of Rs.9.4 crore payment to Digital by the Appellant Shri Chinoy stated that 4.4 crores pertained to 1,10,000 shares of the Appellant purchased by BSFL., that since the payment of Rs. 4.40 crores was in respect of a transaction by BSFL and the beneficial ownership was transferred to BSFL, there could not be any question of this transaction resulting in any market manipulation. As regards the payment on 5.9.1997 of Rs.5 crores, the learned Senior Counsel submitted that this payment was made by BSFL to Digital and not by the Appellant. He submitted that the entries in the books of account of Digital showed that the payment on 5.9.1997 was not in lieu of any transaction for the purchase of shares. He stated that in so far as the disbursals made by Digital are concerned, these are the matters with which the Appellant is not in any way concerned.

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Shri Chinoy referring to the 2nd limb of the charge, that is funding to bail out “the brokers in distress,” referred to the Respondent’s observation in this regard as found in the show cause notice that “investigations revealed that a large number of brokers of BSE and NSE who were dealing on behalf of Damayanti group had cornered substantial stock of BPL shares and some of them faced payment problems and could not discharge their commitments towards pay in liabilities as they did not get the payments from their clients i.e. Damayanti group. It was gathered during the course of investigation that some of the office bearers of BSE approached SSKL to get in touch with BPL to bail out these brokers (SSKL is perceived to be close to BPL management) It was admitted by Director of SSKL that they got in touch with BPL Ltd. In pursuance of this it appears that funds totalling around Rs. 47 crores were transferred from the entities connected with BPL group under the garb of application money for preferential shares in a loss making associate company of SSKL (Monoplan)”. In this context Shri Chinoy stated that there is nothing to show that the shares were bought at the Appellant’s instance. Shri Chinoy pointed out that if the outstanding position was built up at the instance of the Appellant it was not necessary for BSE to tell the Appellant about the position, as the Appellant itself would have known and acted suitably, that this itself shows that the purchases were not done at the Appellant’s instance and the Appellant’s non involvement in the activities of the brokers. He further pointed out that the charge is of bailing out and not of purchasing shares. Shri Chinoy admitted that the Appellant had provided funds to avoid a market crisis, but denied that the funds were given to bail out any particular

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broker holding outstanding position in the scrips of any particular company. In this context he stated that the funding was done at the behest of BSE as is born out from the letters issued by BSE to SSKL, on 12.6.1998 and to Tata Finance on 17.6.1998, annexed to the appeal. In this connection, he also referred to Shri Pramod Purushottam Katdhare’s statement dated 24.9.1999 wherein Shri Katdhare had informed the investigating officer that “ the Stock Exchange through SSKL Stock Brokers(Shri Shripal Morakhia) approached BPL for diffusing the crisis. It was represented to BPL that they are being approached at the instance of SEBI and in the general interest of the stock market”. Shri Chinoy re-iterated that bail out per se is not a manipulation in terms of regulation 4(a) and (d), that it is nobody’s case that the Appellant purchased/transacted in securities, that unless it is shown that the purchase of shares was done at the Appellant’s instance, no charge of manipulation can stick on the Appellant. Learned Senior Counsel stated that the Appellant had not entered into any purchase transaction, that if there were any such share transactions, it would have been the Appellant’s bail out, that no such charge has been established or even levelled against the Appellant, that all that the Appellant did was that it provided funds, as required by the management of the stock exchange to diffuse an otherwise explosive crisis in the market, to protect the interest of investors. Shri Chinoy submitted that by the Respondent’s own version, cornering of shares was done at the instance of Damayanti group and it was Damayanti group who failed to pay. He also stated that bail out is an incident pertaining to June, 1998 where as the charge against the Appellant is funding a broker in the year 1997 to manipulate the market.

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Shri Chinoy denied the Respondent’s version that the Appellant in connivance with Shri Harshad Mehta through Damayanti group was instrumental in manipulating the prices of its shares. He submitted that the charge is thus a charge of conspiracy. He stated that there is no nexus of any sort between the Appellant and Shri Harshad Mehta or Damayanti group and that the Appellant has not provided any evidence in support of its contention. He also stated that the Respondent has not provided any material/document to the Appellant establishing relationship between Damayanti group and Harshad Mehta. Shri Chinoy submitted that the Respondent has levelled very serious charges against the Appellant in a very casual way, without even bothering to state the basis on which the charge is founded. He submitted that the Respondent has reached at the conclusion that the Appellant has indulged in market manipulation attracting the provisions of regulation 4(a) and 4(d) only on the basis of conjuctures and surmises. He stated that contravention of regulation 4(a) and 4(d) are offences of penal consequences and therefore the standard of proof required to prove the charge is rigid. In this context he cited the following decisions. Ambalal v. Union of India AIR 1961 SC 264

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“A customs officer is not a judicial tribunal and a proceeding before him is not a prosecution. But the relevant provision of the Sea Customs Act and the Land Customs Act are penal in character. The appropriate customs authority is empowered to make an inquiry in respect of an offence alleged to have been committed by a person under the said Acts, summon and examine witness, decide whether an offence is committed, make an order of confiscation of the goods in respect of which the offence is committed and impose penalty on the person concerned. To such a situation, though the provisions of the Code of Criminal Procedure or the Evidence Act may not apply except in so far as they are statutorily made applicable, the fundamental principles of criminal jurisprudence and of natural justice must necessarily apply. If so, the burden of proof is on the customs authorities and they have to bring home the guilt to the person alleged to have committed a particular offence under the said Acts by adducing satisfactory evidence”.......................

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“Section 106 of the Evidence Act also in terms does not apply to a proceeding under these Acts. If S.106 of the Evidence Act is applied, then, by analogy, the fundamental principles of criminal jurisprudence must equally be invoked. If so, it follows that the onus to prove the case against the accused is on the customs authorities. Where the customs authorities do not discharge the burden, the order of confiscation is bad. (emphasis supplied)

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Shri Chinoy stated that the ratio of the case is applicable to the present case also that the onus is on the Respondent to prove its version.

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Mohan Sigh v Bhanwarlal (AIR 1964 SC 1366):

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“The onus of establishing a corrupt practice is undoubtedly on the person who sets it up,and the onus is not discharged on proof of mere preponderance of probability as in the Trial of a Civil Suit; the corrupt practice must be established beyond reasonable doubt by evidence which is clear and unambiguous” (emphasis supplied)

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Ch. Razik Ram v. J.S.Chouhan (AIR 1975 SC 667)

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Before considering as to whether the charges of corrupt practice were established, it is important to remember the standard of proof required in such cases. It is well settled that a charge of corrupt practice is substantially akin to a criminal charge. The commission of a corrupt practice entails serious, penal consequences. It only vitiates the election of the candidate concerned but also disqualifies him from taking part in elections for a considerably long time. Thus the trial of an election petition being in the nature of an accusation, bearing the indelible stamp of quasi-criminal action, the standard of proof is the same as in a criminal trial. Just as in a criminal case, so in an election petition, the Respondent against whom the charge of corrupt practice is levelled, is presumed to be innocent unless proved guilty. A grave and heavy onus therefore, rests on the accuser to establish each and every ingredient of the charge by clear, unequivocal and unimpeachable evidence beyond reasonable doubt. It is true that there is no difference between the general rules of evidence in civil and criminal cases and the definition of “proved” in Section 3 of the Evidence Act does not draw a distinction between civil and criminal cases. Nor does this definition insist on perfect proof because absolute certainly amounting to demonstration is rarely to be had in the affairs of life. Nevertheless, the standard of measuring proof prescribed by the definition, is that of a person of prudence and practical good sense. “Proof” means the effect of the evidence adduced in the case. Judged by the standard of prudent man, in the light of the nature of onus cast by law, the probative effect of evidence in civil and criminal proceedings is markedly different. The same evidence which may be sufficient to regard a fact as proved in a civil suit, may be considered insufficient, for a conviction in a criminal action. While in the former a mere preponderance of probability may constitute an adequate basis of decision. In the latter a far higher degree of assurance and judicial certitude is requisite for a conviction. The same is largely true about proof of a charge of corrupt practice, which cannot be established by a mere balance of probabilities and, if, after giving due consideration and effect to the totality of the evidence and circumstances of the case, the mind of the Court is left rocking with reasonable doubt- not being the doubt of a timid, fickle or vacillating mind - as to the veracity of the charge, it must hold the same as not proved.

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We have reiterated the above principles not as a ceremonial refrain of what has been said by this Court again and again but to emphasise their importance as a guide in the matter. A court embarking upon an appreciation of evidence, without this rudder and

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compass, is apt to find itself at sea, mistaking every flotsam for shore, suspicion for proof and illusion for reality. Since these principles were not constantly kept in mind, the approach of the High Court in this case to the issues involved and the treatment of evidence, appears to have gone away. It is therefore, necessary to reappraise the evidence from the stand-point indicated above.”

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Ramanbhai Nagribhai Patel v. Jasvant Singh Udersingh Dabhi (AIR 1978 SC 1162): We may state that the charge of bribery is in the nature of a criminal charge and has got to be proved beyond doubt. The standard of proof required is that or proving a criminal or a quasi criminal charge. A clear cut evidence, wholly credible and reliable is required to prove the charge beyond doubt. Evidence merely probabilising and endeavouring to prove the fact on the basis of preponderance of probability is not sufficient to establish such a charge”.

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Shri Chinoy stated that the charge of bribing in an election is an act of manipulation and the test of evidence required to punish the manipulator spelt out in the order is applicable to manipulations covered in regulation 4(a) and 4(d). He stated that market manipulation is a corrupt practice, with serious consequences, affecting the public and the test laid by the Court as aforesaid is applicable in deciding the charge of manipulation.

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Ramsingh v. Col.Ram Singh (AIR 1986 SC 3)

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“In Samant N. Balakrishna v. George Fernandez (1969) 3 SCR 603 : (AIR 1969 SC 1201), this Court while dwelling on the principles to be followed in election cases pithily pointed out thus: “The principle of law is settled that consent may be inferred from circumstantial evidence but the circumstances must point unerringly to the conclusion and must not admit of any other explanation. Although the trial of an election petition is made in accordance with the Code of Civil Procedure, it has been laid down that a corrupt pratice must be proved in the same way as a criminal charge is proved. In other words, the election petitioner must exclude every hypothesis except that of guilt on the part of the returned candidate or his election agent.”

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In Ch. Razik Ram v. Ch. Jaswant Singh Chouhan, (1975) 4 SCC 769 : (AIR 1975 SC 667) this Court laid down the following principles:

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“Before considering as to whether the charges of corrupt practice were established, it is important to remember the standard of proof required in such cases. It is well settled that a charge of corrupt practice is substantially akin to a criminal charge. The commission of a corrupt practice entails serious penal consequences. It not only vitiates the election of the candidate concerned but also disqualifies him from taking part in elections for a considerably long time. Thus, the trial of an election petition being in the nature of an accusation, bearing the indelible stamp of quasi criminal action, the standard of proof is the same as in a criminal trial.

¶102

Secondly, even of the nature of the trial of an election petition is not the same in all respects as that of a criminal trial, the burden of proving each and every ingredient of the charge in an election petition remains on the petitioner. If a fact constituting or relevant to such an ingredient is pre-eminently within the knowledge of the respondent, it may affect the quantum of its proof but does not relieve the petitioner of his primary burden.”

¶103

In Balwan Singh v. Prakash Chand, (1976) 3 SCR : (AIR 1976 SC 1187) Shinghal, J. made the following observations:

¶104

“Another argument of Mr. Bindra was that the corrupt practice in question should not have been found to have been committed as the election petitioners did not examine themselves during the course of the trial in the High Court. There was however no

¶105

such obligation on them, and the evidence which the election petitioners were able to produce at the trial could not have been rejected for any such fanciful reason when there was nothing to show that the election petitioners were able to give useful evidence to their personal knowledge but stayed away purposely.” In the case of Sultan Salahuddin Owasi v. Mohd. Osman Shaheed (1980) 3 SCC 281 : (AIR 1980 SC 1347), to which one of us (Fazai Ali, J.) was a party, this Court observed thus:-

¶106

“It is now well settled by a large catena of the authorities of this Court that a charge of corrupt practice must be proved to the hilt, the standard of proof of such allegation is the same as a charge of fraud in a criminal case.” In Ram Sharan Yadav v. Thakur Muneshwar Nath Singh (1984) 4 SCC 649: (AIR 1985 SC 24), to which two of us were parties, this Court observed thus:

¶107

“The sum and substance of these decisions is that a charge of corrupt practice has to be proved by convincing evidence and not merely by preponderance of probabilities. As the charge of a corrupt practice is in the nature of a criminal charge, it is for the party who sets up the plea of ‘undue influence’ to prove it to the hilt beyond reasonable doubt and the manner of proof should be the same as for an offence in a criminal case. This is more so because once it is proved to the satisfaction of a court that a candidate has been guilty of ‘undue influence’ then he is likely to be disqualified for a period of six years or such other period as the authority concerned under Section 8-A of the Act may think fit.

¶108

By and large, the Court in such cases while appreciating or analysing the evidence must be guided by the following considerations: the nature, character, respectability and credibility of the evidence, the surrounding circumstances and the improbabilities appearing in the case, the slowness of the appellate court to disturb a finding of fact arrived at by the trial court who had the initial advantage of observing the behaviour, character and demeanour of the witnesses appearing before it, and the totality of the effect of the entire evidence which leaves a lasting impression regarding the corrupt practices alleged.”

¶109

This, therefore concludes the question regarding the standard of proof.”

¶110

Shri Chinoy submitted that all the decisions cited above arise out of civil proceedings. Since the charge levelled against the Appellant is quasi criminal in nature, evidence required to prove the charge should beyond doubt. He also stated that since the charge levelled against the Appellant is accusatory in nature, it is quasi criminal.

¶111

Shri Chinoy explained the ingredients of regulation 4 and stated that it is on prohibition on the market manipulation and clauses (a) to (e) are the type of market manipulations prohibitted. He stated that the manipulation is a fraud and the charge of fraud whether in a civil or criminal proceedings need be established beyond doubt. In support of this submission he relied on the observations made by the Hon’ble Supreme Court in the following cases:

¶112

Union of India v. Chaturbhai M. Patel : (AIR 1976 SC 712)

¶113

“The High Court has carefully considered the various circumstances relied upon by the Appellant and has held that they are not at all conclusive to prove the case of fraud. It is well settled that fraud like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt: per Lord Atkin in A.L.N. Narayanan Chetteyar v. Official Assignee, High Court Rangoon, AIR 1941 PC 93. However suspicious may be the circumstances, however, strange the coincidences, and however grave the doubts suspicion alone can never take the place of proof. In our normal life we are

¶114

sometimes faced with unexplainable phenomenon and strange coincidences, for, as it is said, truth is strange than fiction. In these circumstances, therefore, after going through the judgement of the High Court we are satisfied, that the Appellant has not been able to make out a case of fraud as found by the High Court.”

¶115

Shri Chinoy cited Svenska Handelsbanken v. M/s. Indian Charge Chrome (AIR 1994 SC 626) and stated that therein also the Hon’ble Court had re-iterated the Privy Council’s observation in Narayanan Chetteyar’s case, quoted in Chaturbhai’s case that “ fraud like any other charge of a criminal proceedings must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and conjuncture”

¶116

In this context he also referred to Ambalal’s case (supra) and re-iterated that the principles laid down therein should be strictly followed. He submitted that the test of evidence in a case like market manipulation is not the normal preponderance of probability but it is the proof beyond doubt.

¶117

Shri Chinoy also referred to the view taken by this Tribunal in Sterlite Industries Ltd v. SEBI (2001) 31 SCL 485: (2001) 45 CLA 195 (SAT) on the scope and reach of regulation 4(a) and 4(d) and the test of evidence required to establish the charge. Shri Chinoy pointed out that in the said case this Tribunal considering all aspects had categorically observed that mens rea is an element of regulation 4(a) and 4(d). He stated more serious the charge – more rigorous is the test of evidence. He also pointed out that any casual approach in a matter of serious adverse effect on a public company, should not be accepted as the same would affect the interest of its large number of share holders.

¶118

Shri Chinoy referred to the observation made by the Respondent in para 13.67 of the impugned order that the directions contemplated are not penal in nature but are of “remedial nature and issued in the interest of investors and development and regulation of the securities market with the object to prevent the fraudulent and unfair trade practices and market manipulation” and submitted that the said version is not correct but only a rhetoric. According to Shri Chinoy the impugned directions are neither preventive nor remedial but outright penal. He referred in this context to the meaning of these expressions, given in the Blacks Law Dictionary (7th edn. 1999) that:

¶119

“penal (pee-nel), adj. Of relating to, or being a penalty or punishment, esp. for a crime.

¶120

“The general rule is that penal statutes are to be construed strictly. By the word ‘penal’ in this connection is meant not only such statutes as in terms impose a fine, or corporal punishment, or forfeiture as a consequence of violating laws, but also all acts which impose by way of punishment damages beyond compensation for the benefit of the injured party, or which impose any special burden, or take away or impair any privilege or right.” William M. Lile et al., Brief Making and the Use of Law Books 344 (3d ed. 1914).

¶121

“The word penal connotes some form of punishment imposed on an individual by the authority of the state. Where the primary purpose of a statute is expressly enforceable by fine, imprisonment, or similar punishment the statute is always construed as penal.” 3 Norman J. Singer, Sutherland Statutes and Statutory Construction § 59.01, at 1 (4th ed. 1986).

¶122

penalty. 1. Punishment imposed on a wrong doer, esp. in the form of imprisonment or fine.

¶123

• Though usu. for crimes, penalties are also sometimes imposed for civil wrongs. 2. Excessive liquidated damages that a contract purports to impose on a party that breaches.

¶124

• If the damages are excessive enough to be considered a penalty, a court will usu. not enforce that particular provision of the contract. Some contracts specify that a given sum of damages is intended “as liquidated damages and not as a penalty” – but even that language is not fool proof.

¶125

“A penalty is a sum which a party … agrees to pay or forfeit in the event of a breach, but which is fixed, not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach, or as security, where the sum is deposited or the covenant to pay is joined in by one or more sureties, to insure that the person injured shall collect his actual damages. Penalties … are not recoverable or retainable as such by the person in whose favor they are framed … .”

¶126

Charles T. McCormick, Handbook on the Law of Damages § 146, at 600 (1935).

¶127

civil penalty. A fine assessed for a violation of a statute or regulation <the EPA levied a civil penalty of $10,000 on the manufacturer for exceeding its pollution limits>.

¶128

statutory penalty. A penalty imposed for a statutory violation; esp., a penalty imposing automatic liability on a wrongdoer for violation of a statute’s terms without reference to any actual damages suffered.

¶129

remedial, adj 1. Affording or providing a remedy; providing the means of obtaining redress .

¶130

Intended to correct, remove, or lessen a wrong, fault, or defect .

¶131

Of or relating to a means of enforcing an existing substantive right; procedural .

¶132

remedial action. Environmental law. An action intended to bring about or restore long-term environmental quality; esp., under CERCLA, a measure intended to permanently alleviate pollution when a hazardous substance has been released or might be released into the environment, so as to prevent or minimize any further release of hazardous substances and thereby minimize the risk to public health or to the environment. 42 USCA § 9601(24); 40 CFR § 300.6. – Also termed remedy. Cf. CERCLA; REMOVAL ACTION.

¶133

Shri Chinoy submitted that the distinction between a penal action and remedial action is clear from the meaning of these expressions. He referred to the Chairman’s direction in para 14.2 of the order that “in exercise of the powers conferred upon me by sub section (3) of section 4 read with section 11 and 11B of the SEBI Act, I hereby direct M/s.BPL Ltd. not to access the capital market for a period of four years” and stated that this direction by any standard is not preventive or remedial, but certainly punitive. He submitted that the 1995 Regulations have provided remedial measures and the Respondent has chosen to not to use any of those remedial measures but decided to penalise the Appellant by debarring it from raising capital for its business activities.

¶134

Shri Chinoy referred to regulation 11 empowering the Respondent to issue directions and stated that directions can be issued only for the purposes specified in regulation

¶135

12 and that the impugned direction is outside the purview of the said regulation 12.

¶136

Shri Chinoy read out the provisions of section 11B and stated that the section empowers the Respondent to issue directions. He further stated that the fact that section does not provide any procedural safeguards or even guidelines, demonstrates that the directions covered thereunder cannot be issued by way of penalties. He further stated that section stipulates only the object for which the directions can be issued and not the nature of directions. He further submitted that penalties cannot be created by the Respondent. It is a substantive power which should come from the statute. Penalties are required to be statutorily defined and one can’t whimsically create an offence and impose penalty at his sweet will. Shri Chinoy submitted that if 11B is construed to be a penal provision then it is ultravires and liable to be struck down. Referring to the impugned direction he stated that debarring the Appellant accessing capital market for four years cannot be considered remedial with reference to the alleged offence stated to have been committed more than 3 years ago, that the prohibition on the Appellant company raising capital from the public is to be considered as a penalty and imposition of such penalty is out of the purview of section 11B and as such the same deserves to be set aside.

¶137

In support of his argument in this regard he cited the following extracts from the decided cases:

¶138

Khemka and Co.(Agencies Pvt.Ltd) v. State of Maharashtra (AIR 1975 SC 1549)

¶139

“It is a well settled canon of construction of statutes that neither a pecuniary liability can be imposed nor an offence created by mere implication. It may be debatable whether a particular procedural provision creates a substantive right or liability. But, I do not think that the imposition of pecuniary liability which takes the form of a penalty or fine for a breach of a legal obligation, can be relegated to the region of mere procedure and machinery for the realization of tax. It is more than that such liabilities must be created by clear, unambiguous and express enactment. The language used should leave no serious doubts about its effects. So that the persons who are to be subjected to such a liability for the infringement of law are not left in a state of uncertainty as to what their duties or liabilities are. This is an essential requirement of a good government of laws”

¶140

Shri Chinoy submitted that the Hon’ble Supreme Court in the cited case had made it clear that “in the absence of any specific provision for imposition of penalty” no penalty could be levied that “penalty like imposition of tax cannot be included within the procedural part”. Shri Chinoy stated that there is not only any specific provision but there is not even a suggestion in section 11B, to the effect that penalty can be imposed thereunder.

¶141

Commissioner of Sales Tax v. Anoop Wines (AIR 1988 SC 2042):

¶142

This was a case where a sales tax assessee did not get itself registered as dealer under the Sales Tax Act inspite of a direction of the department to do so. As such penalty was imposed on it for non-registration. The stand of the assessee was that it was not under legal obligation to seek registration and therefore the question of any penalty under section 15A (1)(g) of the Act did not arise . The penalty was sought to be sustained under cla. (d) of S.8.A(1) but the said clause was inapplicable as the assessee started his business in the preceding year and not during the course of the assessment year. In the appeal before the Hon’ble Supreme Court, the penalty was sought to be justified under Cl.(c) of S.8A(1). The Hon’ble Court while dismissing the Revenue’s appeal observed:

¶143

“It is not a question of sustaining jurisdiction by reference to a wrong section as was done in the case of L. Hazari Mal Kuthiala v. Income Tax Officer, Special Circle, Ambala canntt. (1961 41 ITR 12 at p.20: (AIR 1961 SC 200 at pg.204) where this Court held that if a particular action is valid under one section, it cannot be rendered invalid because reference was made to another section, and it makes no difference if the two empowering provisions are in the same statute. But this principle will have no application where in a penal action no notice was given or resort to such provision was made to the delinquent or the offending party”.

¶144

Kantilal Babulal and Bros. v. H.C.Patel (AIR 1968 SC 445)

¶145

This was a case where a Sales Tax Officer, without giving effect to the order passed by the Sales Tax Appellate Tribunal, to refund the amount collected as tax from a dealer on the sales effected outside the State from 26.1.1950 to 31.3.1951, proceeded to take steps for forfeiting the amount to the State Government under S.12 A(4) of the Sales Tax Act.

¶146

“According to the Revenue S.12A(4) is a penal provision; and it provides for the imposition of penalty on those who contravene Section 12A(1) and (2). It was said on its behalf that power to enact such a provision is incidental to the power to take sales. I support of that contention reliance was placed on the decision of the Gujarat High Court in Ram Gopal v. Sales Tax Officer, Surat, (1965) 16 STC 1005 (Guj). That decision upheld the validity of Sec. 12A(4). If that decision lays down the law correctly then the appellants are out of court. But we think that the said decision cannot be sustained.

¶147

We shall not go into the question whether from the language of the impugned provision it is possible to hold that it is a penal provision. For our present purpose we shall assume it to be so. We shall also assume that the legislature had legislative competence to enact that provision. But the question is whether it is violative of Article 19 (1) (f) which guarantees the freedom to hold property. Prima facie the appellants are entitled to get the amount ordered to be refunded to them. It is for the respondents to establish that the same is liable to be forfeited. Even according to the respondents that amount can be forfeited only as a measure of penalty for the contravention of section 12A (1) and (2). Under our jurisprudence no one can be penalised without a proper enquiry. Penalising a person without an enquiry is abhorrent to our sense of justice. It is a violation of the principles of natural justice which we value so much.

¶148

The impugned provision which provides for the forfeiture of the amount in the hands of the dealers, does not lay down any procedure for ascertaining whether in fact the dealer concerned had collected any amount by way of tax from his purchasers outside the State and if so what that amount is. Neither Section 12A (4) nor any rule framed under the Act contemplates any enquiry much less a reasonable enquiry in which the person complained of can plead and prove his case or satisfy the authorities that their assumptions are either wholly or partly wrong. The Act is silent as to the machinery and procedure to be followed in determining the question as to whether there has been a contravention of Sections 12A (1) and (2), and if so, to what extent. Hence it would be open to the department to evolve all the requisite machinery and procedure which means that the whole thing, from the beginning to end, is treated as of a purely administrative character, completely ignoring the legal position. The imposition of a penalty on a person is at least of a quasi-judicial character.

¶149

The impugned provision does not concern itself only with the amount admittedly collected by a person in contravention of sub-sections (1) and (2) of Sec.12A. Even if there is any dispute either as to the factum of collection or as to the amount collected, such a case also comes within the scope of Section 12A (4). Yet that section does not provide for any enquiry on disputed questions of fact or law. The forfeiture provided for in Section 12A (4) prima facie infringes Article 19 (1) (f). Therefore it is for the respondents to satisfy the Court that the impugned provision is a reasonable restriction imposed in the interest of the general public.

¶150

Section 12A (4) does not contemplate the making of any order. As mentioned earlier, that section prescribes that if any registered dealer collects any amount by way of tax in excess of the amount payable by him under the Act, the amount so collected shall, without prejudice to any prosecution that may be instituted against him for an offence under the Act, be forfeited to the State Government and he shall within the prescribed period pay such amount into a government treasury and in default of such payment shall be recovered as arrears of land revenue. This section does not contemplate adjudication. Nor does it provide for making any order. Hence, it is doubtful whether any appeal can be filed against a demand made under that Section under Section 21. The question whether appellants in the instant case had been afforded a reasonable opportunity to establish their case or not is beside the point. The constitutional validity of a provision has to be determined on construing it reasonably. If it passes the test of reasonableness, the possibility of powers conferred being improperly used, is no ground for pronouncing it as invalid, and conversely if the same property interpreted and tested in the light of the requirements set out in Part III of the Constitution, does not pass the test, it cannot be pronounced valid merely because it is being administered in the manner which might not conflict with the constitutional requirements. On a reasonable interpretation of the impugned provision, we have no doubt that the power conferred under Section 12A (4) is unguided, uncanalised and uncontrolled.

¶151

In Re: An advocate (AIR 1989 SC 245)

¶152

“At this juncture it is appropriate to articulate some basic principles which must inform the disciplinary proceedings against members of the legal profession in proceedings under Section 35 of the Advocates Act, read with the relevant Rules:

¶153

essentially the proceedings are quasi criminal in character inasmuch as a Member of the profession can be visited with penal consequences which affect his right to practise the profession as also his honour; under Section 35(3)(d) of the Act, the name of the Advocate found guilty of professional or other misconduct can be removed from the State Roll of Advocates. This extreme penalty is equivalent of death penalty which is in vogue in criminal jurisprudence. The Advocate on whom the penalty of his name being removed from the roll of Advocates is imposed would be deprived of practising the profession of his choice, would be robbed of his means of livelihood, would be stripped of the name and honour earned by him in the past and is liable to become a social aparthied. A disciplinary proceeding by a statutory body of the Members of the profession which is statutorily empowered to impose a punishment including a punishment of such immense proportions is quasi-criminal in character; as a logical corrolory it follows that the Disciplinary Committee empowered to conduct the enquiry and to inflict the punishment on behalf of the body, in forming an opinion must be guided by the doctrine of benefit of doubt and is under an obligation to record a finding of guilt only upon being satisfied beyond reasonable doubt. It would be impermissible to reach a

¶154

conclusion on the basis of preponderence of evidence or on the basis of surmise, conjucture or suspicion. It will also be essential to consider the dimension regarding mens rea:

¶155

This proposition is hardly open to doubt or debate particularly regard to the view taken by this Court in L.D. Jaisinghani v. Naraindas N. Punjabi (1976) 1 SCC 354: (AIR 1976 SC 373 at p.376) wherein Ray, CJ., speaking for the Court has observed:-

¶156

“In any case, we are left in doubt whether the complaint’s version, with which he had come forward with considerable delay was really truthful. We think that, in a case of this nature, involving possible disbarring of the advocate concerned, the evidence should be of a character which should leave no reasonable doubt about guilt. The Disciplinary Committee had not only found the appellant guilty but had disbarred him permanently.”(emphasis added)

¶157

Shri Chinoy also read out extensively from this Tribunal’s order in Sterlite case (supra) and stated that the view taken by the Tribunal in the said case is applicable to the present case in equal force. He stated that the Appellant has not indulged in any market manipulation attracting the provisions of regulation 4(a) and (d). He further stated that the Respondent has failed to substantiate the charge levelled against the Appellant with any cogent evidence, that the direction issued by the Respondent under section 11B debarring the Appellant accessing the capital market for 4 years is a penalty imposed which is beyond the ambit of section 11B and hence unauthorised. Referring to the scope of regulation 12 (a) of the 1995 Regulations, Shri Chinoy submitted that the said regulation does not empower the Respondent to debar the Appellant raising capital from the market for its business activities. He stated that a direction under regulation 12 (a) can be with reference to dealing in securities, that accessing capital market to raise funds cannot be considered as dealing in securities. He stated that a statutory order if it is found bad has to go as it prejudices the liberty of the other person. Shri Chinoy submitted that the impugned order is a final order passed under section 11B and not a protem order. He referred to the decisions in Anand Rathi, R.R.Bohra, Alka Synthetics and R.Z.Khan, relied on by the Respondent and stated that none of these decisions has any application to the present case, as they relate to the Respondent’s powers to issue interim orders pending final decision in a matter. He stated that the scope and reach of an interim order are different, as the purpose of passing such an order is different. He further pointed out that though the impugned order is relatable to the manipulation in trade allegedly done by the Appellant it does not prevent the Appellant from dealing / trading in securities that the direction is on an unrelated aspect affecting the Appellant’s business activities which is not relatable to the alleged charge at all.

¶158

Countering the Respondent’s version that the decision to initiate prosecution is not a part of the order, Shri Chinoy submitted that, if that is so that portion of the order should go, and if it is to be there, then also it should go as no offence has been established against the Appellant company and other Appellants, that in any case it should go.

¶159

Shri Chinoy for the Appellants in appeals 16,17,18 and 19 of 2001 submitted that the Respondent has ordered to launch prosecution proceedings under section 24 of the SEBI Act for violation of clauses (a) and (d) of the 1995 Regulations against the Appellant through its directors and officers ( 5 in number) including the 4 Appellants whom he represented. He pointed out that there is not even a grain of evidence in the impugned order to launch prosecution against any of the Appellants.

¶160

Shri Chinoy pointed out that the direction is to prosecute the Appellant company in the light of the findings arrived at by the Respondent. But direction is not to prosecute the Appellant directly but through its officers and directors. He submitted that it is not permissible under the law to launch vicarious criminal prosecution. The Respondent’s order is not clear whom really it wants to prosecute, the Appellant or the others. He submitted that the law does not permit prosecution of a person through another, that prosecution through proxies is unheard of.

¶161

Shri Chinoy referred to the provisions of sections 24 and 27 of the Act and stated that the Respondent has not made out any case to proceed against the Appellants either under section 24 or under section 27 and the order to launch prosecution has been made without application of mind. Shri Chinoy submitted that the Appellant has 11 directors and many senior officers and there is no reference anywhere in the show cause notice or in the order as to why these five Appellants have been chosen to be prosecuted. There is no reference in the show cause notice or in the order about their position in the company, role in the management, or involvement in the market manipulation. He pointed out that the show cause notice served on the Appellants is exactly identical to the one served on the Appellant company but for the addition of reference to section 27. He stated that each Appellant had separately replied to the show cause notice and had requested to give them an opportunity of being heard. Since there is no reference at all to their replies in the order it is obvious that the Respondent has not taken into consideration their submissions. He further submitted, that despite their request for an opportunity for personal hearing, the Respondent did not provide any such opportunity . Notice of hearing was not sent to the Appellant Officers/Directors and the impugned order was passed without giving adequate opportunity to them to present their case, in total violation of the principles of natural justice.

¶162

Shri Chinoy referred to the common show cause notice dated 20.12.1999 issued to the Appellant officers that

¶163

“After taking into consideration all that has been stated above, it appears that BPL Ltd has violated Regulation 4(a) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 read with section 11(2) (e) of the SEBI Act, 1992. Further, as per the provisions of section 27 of the SEBI Act, 1992 you are also deemed to have violated the provisions of the Act . .........Accordingly you are requested to show cause why directions prohibiting you from dealing in securities and accessing the capital market........ should not be issued.” Shri Chinoy submitted that section 27 is not available to issue directions in an adjudication. Hesubmitted that though the Show cause notice refers to section 27, the order it appears has given up the decision to prosecute them under section 27 as the direction is only to prosecute the Appellant company ‘through’ the Appellant officers. Under section 27 the company and the persons referred to in the section are liable to be prosecuted provided there is sufficient justification to the same.

¶164

Shri Chinoy referred to the written reply given by the Appellants in response to the show cause notice in this regard that:

¶165

“on a correct interpretation of Section 27, the provisions of that section do not have any application to adjudication proceedings such as these proceedings since Section 27 applies only in the case of criminal prosecutions under Section 24 of the SEBI Act, 1992. The deeming provision under Section 27(1) would be attracted where an ‘offence’ has been committed by a company. Offences are covered by Section 24 which provides, inter alia, that where a person is held guilty of an offence he shall be punishable with imprisonment for a term which may extend to one year, or with fine,

¶166

or with both. Section 26 of the Act provides, inter alia, that no court shall be cognizance of any offence punishable under the SEBI Act or the said Regulations, except on a complaint made by SEBI. Moreover, it is provided that no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under this Act. It is clear from reading the provisions of the SEBI Act, specifically, Section 27 that the deeming provisions would be attracted in prosecution proceedings under Section 24 and would have no application to adjudication proceedings. It is submitted that proposed directions under Regulation 11 and / or Section 11 read with Section 11B cannot be passed against any individual director on the basis of Section 27. Any such direction would be without jurisdiction. It is submitted that the ingredients necessary for the application of Section 27 are not fulfilled in the present case. In the first place, no offence has been committed by BPL Ltd. Second, the present noticee would not fall within the ambit of the expression ‘incharge of and responsible to’ the company for the conduct of the business of the company.

¶167

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¶168

The thrust of the show cause notice is that there was market manipulation in respect of the BPL Ltd. scrip. The charge of manipulation necessitates mens - rea or an improper intention and also implies an improper motive. There is no allegation in the show cause notice that (the Appellants had) in any manner benefited from the increase in the price of the BPL Ltd. scrip or the alleged manipulation. Neither (the Appellant) nor the immediate family members had traded in the BPL Ltd. scrip during the relevant period and no profit, gain or benefit has accrued to either (the Appellant or his family). There is no allegation, much less any evidence of any profit or benefit of any type availing to (the Appellants) benefit. In the circumstances, it is submitted that the adjudication proceedings against me ought to be forthwith dropped.”

¶169

Countering the Respondent’s contention that an order to launch prosecution under section 24 is not appealable before the Tribunal, under section 15T of the Act, Shri Chinoy submitted that in terms of section 15T any person aggrieved by an order passed by the Respondent is entitled to file an appeal in the Tribunal, that the Respondent having passed a statutory order against the directors/officers to launch prosecution against them, the said order is appealable. He pointed out that though the Respondent had taken a stand at the time of arguing the interim relief application of the Appellant that the prosecution is independent of the order under section 11B, the Respondent has relied on the said order as the basis for launching the prosecution, further that though the Respondent had stated before the Tribunal that they would not be proceeding with the criminal prosecution during the pendency of the appeal, the Respondent has filed the prosecution and process has been issued by the Court, that this action of the Respondent all the more establishes that prosecution and the impugned order are not unrelated, and therefore this Tribunal need also set aside the order to launch prosecution covered in the order. Shri Chinoy stated that the impugned order is a composite order including the direction to launch prosecution and as such the Tribunal has jurisdiction to set aside the said part of the order also.

¶170

Shri Somasekhar Sundaresan, learned Counsel appearing for the Appellant in appeal No.15/2001 submitted that he was adopting the submissions made by Shri Chinoy. He submitted that the Appellant is in no way concerned or involved in the activities of the Appellant company, that he was/is not occupying any position in the company, that he had not attended even a single board meeting of the Appellant company during the relevant period, that he has resigned from the Board of the Appellant. Learned Counsel submitted that the Appellant has been unnecessarily roped in for reasons best known or unknown to the Respondent, that he was not even given adequate opportunity to present his case in a personal hearing though he had

¶171

requested for the same, that if the Respondent had given such an opportunity the Appellant would have explained the position that he is not in any way associated with the management or business activities of the Appellant company to attract the provisions of section 27 of the Act. Shri Sundaresan submitted that it is wrong to consider the Appellant as a person in “charge” and “responsible for the conduct of the business” of the Appellant, that he is a technocrat and as a result of the mindless action by the Respondent his reputation and business has affected adversely. Shri Sundaresan cited the following observations from the Hon’ble Supreme Court’s decision in the Institute of Chartered Accountants of India v. L.K.Ratna (AIR 1987 SC 71) to further his argument on the need to follow the principles of natural justice by adjudicating authorities before passing orders of far reaching consequences like the instant one:

¶172

“Our attention has been invited to the difference between the terms in which S.21(3) and S.21(4) have been enacted and, it is pointed out, that while in S.21(4) Parliament has indicated that an opportunity of being heard should be accorded to the member, nowhere in S.21(3) do we find such requirement. There is no doubt that there is difference between the two provisions, But to our mind, that does not affect the question. The textual difference is not decisive. It is the substance of the matter, the character of the allegations the far reaching consequences of a finding against the member, the vesting of responsibility in the governing body itself, all these and kindred considerations enter into the decision of the question whether the law implies a hearing to the member at that stage”.

¶173

Xxxxxxxxx

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“It is next pointed out on behalf of the Appellant that while Regulation 15 requires the Council, when it proceeds to act under S.21(4), to furnish to the member a copy of the report of the disciplinary committee, no such requirement is incorporated in regulation 14 which prescribes what the Council will do when it receives the report of the disciplinary committee. That, it is said, envisages that the member has no right to make a representation before the council against the report of the Disciplinary Committee. The contention can be disposed of shortly. There is nothing in regulation 14, which excludes the operation of the principles of natural justice entitling the member to be heard by the Council when it proceeds to render its finding. The principles of natural justice must be read into the unoccupied interstices of the statute, unless there is a clear mandate to the contrary”. (emphasis supplied)

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Shri Sundaresan stated that since the Appellant has been chosen as an instrumentality to proceed against the Appellant company, it was incumbent on the Respondent to hear the Appellant irrespective of the fact whether there was any specific provision in the Act or not, following the principle laid down by the Hon’ble Supreme Court in Ratna’s case. He pointed out that this deficiency cannot be cured in the subsequent proceedings as observed by the Court that “.... it seems to us, there is manifest need to ensure that there is no breach of fundamental procedure in the original proceedings, and to avoid treating an appeal as an overall substitute for the original proceeding”

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Shri Rafiq Dada, learned Senior Counsel appearing for the Respondent in the cited appeals referred to certain developments relating to the matter. According to him the Appellant company started funding Digital, a broker member of NSE since August, 1997, to purchase its own shares, through Shri Harshad Mehta outfits and continued to supply funds during the period October, 1997-March, 1998, that the initial

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contribution was Rs.5 crores and the supplemental supply was to the tune of Rs.4.11 crores. He further submitted that the Appellant company also pumped out substantial amount in June, 1998 to bail out some brokers of BSE/NSE who were in distress as a result of their inability to meet huge pay in liabilities. According to Shri Dada the funding was made to manipulate the market and the effect was visible. Shri Dada referred to the factual position stated in the Respondent’s reply and stated that during April, 1998 the scrip of the Appellant traded between Rs.180 to Rs.257 and between 1.5.98 to 4.6.98 it ranged between Rs.231/- and Rs.446/-, that such price movement was not in conformity with the Sensex/Nifty movements, that this increase was accompanied by abnormal volumes in the said shares both at BSE and NSE during 1.4.98 to 4.6.98. Learned Senior Counsel stated that despite the falling trend in the stock index since May, 1998, the price of the scrips of the Appellant continued to rise, but fell sharply after 4.6.1998 and touched as low at Rs.139 in June, as the artificial price could not sustain long. He also stated that there were large purchase positions in the scrip of the Appellant in the carry forward segment of BSE which increased over the settlement that in the case of the Appellant the outstanding purchase position went to the extent of nearly 9.5%, that the outstanding purchases position were several times of the sales position in the scrip of the Appellant, that for instance in settlement No.9 carry forward purchase position was 24.55 lacs shares while carry forward sales position was 2.45 lacs., that the increase in carry forward position was accompanied by a corresponding increase in the scrip price, that the Hawala rate increased from Rs.163 in settlement No.1 to Rs.410 by settlement No.11 on account of the manipulations. In this context he referred to the settlement wise details of the outstanding positions in the Appellant’s scrip alongwith the Hawala rates for the settlements 1 to 12, furnished in para D(1) in the Respondent’s reply as under :

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Sett No	Carry forward Purchases	Carry forward Sales	Purchase V/s Sales (No.of times)	Hawala Rate (Rs.)
1	2331600	349400	6.67	163
2	2359400	305000	7.74	177
3	1460100	215400	6.78	182
4	1480400	224200	6.60	225
5	1892400	219300	8.63	270
6	2009900	173800	11.56	260
7	2358200	170400	13.84	260
8	2524200	252500	10.00	265
9	2455200	245300	10.01	330
10	2546400	297300	8.57	390
11	2522600	421300	5.99	410
12	992700	538000	1.85	280

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Shri Dada stated that the consistent increase in the Hawala rate at the end of each trading period by and large ‘bench marked’ the scrip price for trading at the beginning of a subsequent trading cycle and this was due to the building up of concentrated purchase positions by a set of brokers of BSE, acting in concert and on behalf of Damayanti group, and Digital to whom the Appellant supplied money was one among them. He submitted that at one point of time, the brokers dealing for Damayanti group had total outstanding position of more than 70% of the total

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position at the exchange, and similarly the set of brokers of NSE dealing for Damayanti group took delivery of around 70% of the total delivery of the scrip of the Appellant in settlement No.22 which witnessed highest delivery of around 5 lacs shares. Shri Dada submitted that it is thus established that the Damayanti group trading through the said brokers had substantially cornered the traded stock of the Appellant. He stated that the traded volumes of the Appellant’s scrip during 5.1.98 to 26.6.98 at BSE was 825.05 lacs but delivery was only 23.045 lac shares which was just 2.75%, that the position in NSE where the scrip can be traded only in the cash segment, the volume traded was 785.34 lacs shares and delivery effected was 63.42 lacs i.e. 8.08%. Shri Dada stated that extent of artificial trading is evident from the fact that the total delivery at BSE in settlement Nos. 11 and 12 for the Appellant’s scrip was 2.3 lacs shares while the traded volume in the said settlement was 162.38 lac shares, that the corresponding figures at NSE were delivery of 10.80 lacs shares against the traded volume of 186.60 lacs shares. Shri Dada submitted that the demand and supply forces in the market are relatable to the traded quantity and floating stock, that the concentrated purchases in a scrip also influences the demand and in turn the price of the scrip, that the volume of deliveries taken/given by few entities have a material impact on the price movement and the large positions carried forward over a period of time also affects the prices. He stated that the price movement in the scrip of the Appellant was not due to the normal market forces but due to manipulation and the resultant creation of false market.

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Learned Counsel refuted the Appellant’s contention that the Respondent has identified BPL group and the Appellant as one and the same entity erroneously and the Appellant has been held liable for the omissions and commissions, if any, of the other companies in the group, and stated that in the impugned order enough evidence has been arrayed to show that the controlling mind in BSFL and Sanyo Finance is the Appellant. In this context he referred to the “predominant share ownership”, common directorship, Shri T.C.Chauhan’s role, and the role of Shri Rajaram, the Appellant’s Company Secretary as the authorised authority for the said entities. Shri Dada in particular referred to the statement of Shri Balathandayutham, Vice President of BSFL and stated that, there was no difficulty at all in coming to the conclusion that the Appellant was exercising its controlling mind through its director Shri T.C.Chauhan and he was instrumental in effecting and taking part in the transactions to inflate the prices and create false market using Digital as a conduit.

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Shri Dada referred to the impugned order and stated that the fact that Damayanti group is a front set up of Shri Harshad Mehta, has been well established and that Shri Mehta being a person notified under the Special Court Act was under certain restrictions to carry on the business and as such he was using Damayanti group of companies to carry out his designs. Shri Dada reiterated the factual position stated in paras 6.1 to 8.1 of the impugned order in this regard. Shri Dada in this context also referred in aprticular to the statement of Shri Satinderpal Gulati of LKP Shares and Securities referred to in para 8.1(e) of the order that “A letter showing delivery of 2, 00, 000 shares of BPL by Damayanti Finvest Pvt.Ltd to LKP on 15.4.98 which was duly acknowledged by LKP. The investigations revealed that one Shri Satinder Pal Gulati who was working with LKP shares and Securities Ltd (hereinafter referred to as LKP) had sent the said fax. In his statement Shri Gulati stated that LKP was to receive approx. Rs.3 crores from M/s. Shrenik Shah and M/s. Bharat Kona, the BSE brokers. These Brokers had earlier taken loan from LKP to meet obligations arising out of purchases on behalf of Harshad Mehta. Shri Mehta could not repay the said amount to these brokers, therefore, it was agreed that Shri Mehta would pay directly to LKP. This arrangement was accepted by Shri Mehta and LKP. Shri Gulati also stated that despite persistent persuasion for almost four years, the payments were not made by Shri Mehta. Later Shri Mehta asked LKP to purchase Videocon, Sterlite shares. Shri Gulati further stated that Shri Harshad Mehta had told him that since Shri Harshad

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Mehta was interested in those scrips, the price of those scrips would go up and LKP could adjust the profits made on the trading of these shares against the amounts due from him. Accordingly, LKP group bought 6, 00, 000 shares of BPL, 1, 00, 000 shares of Sterlite and 80, 000 shares of Videocon from the open market totalling around 15 crores. On the instructions of Shri Harshad Mehta, LKP used to periodically send statements of the cost of total purchases made on his recommendations and the market valuation of their investments indicating the notional profits/actual profits. It was explained by Shri Gulati that these statements, were addressed to Mr.Atul Parekh, an associate of Shri Harshad Mehta and sent by FAX at telephone No.2829831 (of Damayanti Group). The documents obtained from 1208 Maker Chambers V, Nariman point, Bombay were shown to Shri Gulati and it was confirmed by him that these were sent by LKP to Mr.Atul Parekh in accordance with their arrangement with Shri Harshad Mehta. Since LKP did not make any profits on the investment in these shares as promised by Shri Harshad Mehta, in lieu thereof they were given 2,00,000 shares of BPL by Shri Harshad Mehta on 15.4.98 towards repayment of loan. These shares were delivered to LKP on the letterhead of Damayanti Finvest Pvt.Ltd with whom they otherwise had no dealings”. Shri Dada stated that this statement indicates Shri Harshad Mehta’s involvement in the game.

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The learned Senior Counsel submitted that there is enough evidence to show that Digital was transacting for Damayanti group and the said Damayanti group was in turn acting for Shri Harshad Mehta. To establish the Appellants nexus with Shri Mehta, Shri Dada cited several telephone calls made by Shri Mehta to Shri Chauhan.

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Shri Dada referring to the order and the averments in the Respondent’s reply submitted that it has been established that, in the modus operandi adopted by the Appellant, the purchases were effected by brokers associated with the Damayanti group. He stated that the payment of Rs.5 crores has been made by the Appellant to Digital in September, 1997 for which an antedated delivery of 1,10,000 shares of the Appellant @ Rs. 400/- had been made in June, 1998, that further funds had been provided by the Appellant during the period 6.7.97 to 9.3.98 and 6.5.98 to Digital for the purchase of its shares, that the Appellant admittedly bailed out the said brokers during the payment crisis in 1998, that the whole set of operations continued from September, 1997 till June, 1998, that April/May 1998 is not too remote from September/October, 1997 to effect manipulation. In this context Shri Dada cited the conduct of the brokers namely Satyanarayan Nangalia, a member of BSE who amongst others was involved in the creation of artificial market in the scrip of the Appellant, that the said Nangalia had traded mainly on behalf of Damayanti group in cash as well as carry forward segment, that it was found that 61% of his position in settlement No.11 was on behalf of Damayanti group. Learned Senior Counsel further stated that the said broker had a carry forward position of 368 100 shares at the end of settlement No.11 which was 12.04% of the cumulative position at BSE, that his position was 5 lakh shares or say 36% of the position at the BSE in settlement No.43, increased to 7, 70, 000 shares in settlement No.44 (43%). Shri Dada submitted that Shri Nangalia could not clear his pay in obligations for settlement No.11, that in the settlement he also failed to pay an adhoc margins of Rs.90 lakhs called by BSE, that he could not clear his pay in obligation for settlement No.12 which was largely settled by sale of 305700 shares of the Appellant company to Khandelwal Securities and SSKL @ RS.235/- as a bulk deal.

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Shri Dada stated that BSFL had given the money to Digital but in reality the amount belonged to the Appellant and the Appellant used BSFL as a conduit to pass on the funds to Digital to finance transactions by Damayanti group, for carrying out transactions, that instead of recovering its dues of Rs. 5 crores and stopping any further dealings with Digital, further money was paid to the said broker, that the statement of Shri Chauhan that purchase of 1, 10, 000 shares of the Appellant was

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made to recover the advance paid to the broker is belied by the fact that further payment of Rs.4.40 crores was made when the earlier amount was yet to be recovered. He referred to the details of money sent by the Appellant to Digital as stated in the order that Rs.5 crores was made on 5.9.1997, Rs.75 lacs on 10.10.97, 22.10.97, and 31.10.97, Rs.27.50 lacs on 17.11.97, 22.12.97, 2.2.98, 5.3.98 and 2.5.98 making the total payment to the extent of Rs.8, 62, 50, 000, that BSFL transferred only Rs.75, 62, 500 on 6.10.97 to Digital from its account, that Shri Balathandayutham has admitted the position and no convincing explanation could be given by Shri Chauhan and Shri Balathandayutham as to why these funds were given by the Appellant to Digital and Digital in turn disbursed the amount to the brokers. In this context Shri Dada stated that the funds were disbursed more or less on the same day by Digital to the brokers. He referred to the details of disbursement made, as furnished in para 9(f) of the order. Shri Dada stated that it was seen from the books of Digital that on 5.9.97 itself, when the Appellant transferred Rs.5 crores to Digital account there was out go of approximately Rs.6 crores on behalf of Damayanti group, that this shows that the transfer amount was not in lieu of any transaction involving purchase of shares. He further stated, that it is found from the Damayanti group A/c in the books of Digital annexed to the appeal that credit was given by Digital to Damayanti group from the Appellant, indicating that the amounts received from Appellant were for Damayanti group. Shri Dada submitted that the material on record, especially the statements of Shri Balathandayutham, Shri T.C. Chauhan and the affidavit of Digital forming part of the appeal conclusively establishes that the Appellant had made payments to Damayanti group.

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Shri Dada submitted that the statement of Shri Gulati dated 11.7.98 indicated the game plan of Shri Harshad Mehta, that Shri Mehta was to rig the price inter alia the Appellant’s shares to Rs. 500. He submitted that the factual position stated in the order clearly shows that the Appellant in connivance with Shri Harshad Mehta was instrumental in manipulating the prices of the scrip. According to Shri Dada there was no purchase of shares by the Appellant, that all the funds transferred were to enable Shri Harshad Mehta to manipulate the price of its shares.

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In support of the involvement of the Appellant company, Shri Dada referred to the copy of the acknowledgement of the receipt of the securities of Money Television, though in the name of Sanyo Finance, by Shri Rajaram, the Company Secretary of the Appellant.

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Shri Dada had placed heavy reliance on Shri R. Balathandayutham’s (V.P. of BSFL) statement dated 10.8.98 who had stated that he was “associated with the BPL group” in various capacities for the past 23 years. According to him “BPL Sanyo Ltd is a joint venture between Sanyo Electric Co. Ltd. and BPL group acting through its Chairman Shri T.P.G. Nambiar with each party holding 50% equity” that “in the normal course of business BPL Sanyo Finance Ltd is also following bill discounting, leasing and hire purchase, ICDs, etc to various companies of BPL group”. More clearly he had stated that “BPL Sanyo Finance Ltd is engaged in leasing, hire purchase, bill discounting, ICDs, purchase and sale of shares etc. BPL Sanyo Finance is registered with Reserve Bank of India as a NBFC.” He had admitted that “after 31.3.98 we have purchased 1,10,000 shares of BPL Ltd at the rate of Rs.400/- each on 2.6.98 from M/s. Digital Leasing and Finance Ltd, a member broker of BSE and NSE. He had stated that “During the period 1.4.97 to 31.3.98 we have sold 1,92,500 shares of BPL Ltd on various dates at different rates aggregating 1,62,53,615 through M/s. Sheshanka Securities, member of Bangalore Stock Exchange & NSE .............. we also purchased 5000 shares of BPL Ltd on 29.8.97 at the rate of Rs.77.80 from M/s. Nagarjuna Securities.” Shri Dada stated that Shri Balathandayutham with reference to the transaction with Digital had stated “we have made a payment of Rs.75,62,500 during 97-98 and another Rs.3,35,00,000 was paid by BPL Ltd on our behalf to M/s. Digital

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Leasing and Finance Ltd during 97-98, another Rs.27, 50, 000 was paid by BPL Ltd to M/s. Digital Leasing and Finance Ltd during 98-99 against which 1,10,000 shares of BPL Ltd were purchased by us on 2.6.98 for Rs.4, 40, 00, 000. To another query Shri Balathandayutham had stated that “some where in August 1997 we placed an order for 5 lakhs shares of BPL Ltd @ of around Rs.100/- per share with Digital Leasing and Finance Ltd, and they were not able to deliver the shares and cancelled the contract note. The mandate was given some where in August 97. Since the BPL group was on the look out for a media company which will be helpful in strengthening our publicity department, Digital Leasing and Finance Ltd came with the proposal to offer shares and convertible debentures in Money Television Ltd. Since it is not our line of business, in getting engaged in a media company, we thought it is more appropriate to purchase the shares in the name of Sanyo Finance (Firm). I would also like to inform, that in order to strengthen and accelerate the BPL group media business the decision was taken by the management. Already magazines in the name of Asian Age is under vide circulation in metros.”

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To another question about the constitution and address of Sanyo Finance and its relationship with the Appellant group, Shri Balathandayutham had stated that “Sanyo Finance is a partnership firm with two corporate partners and one individual by the name Mr. Rajagopal. Both the corporates are already in the media business. One of the corporate partners is in the media business, to my knowledge. To my knowledge they have an office in Bombay and Bangalore, but I do not know the complete address. The address mentioned in the letter of Digital Leasing and Finance Ltd is that of BPL Sanyo Finance Ltd and not theirs I cannot comment on the relationship between Sanyo Finance and the BPL group”. Shri Dada further referred to Shri Balathandayutham’s statement that “Major share purchase business (more than approximately one crore rupee value) is decided by the directors and they may nominate any one or more of the directors to go ahead with the purchase of shares. The main director who takes such types of decisions is Shri T.C. Chauhan. Generally resolutions are passed by the Board of Directors for decisions for purchase of shares having value more than one crore.” Shri Dada stated that in the said context Shri Balathandayutham was asked as to when decision for purchase of five lakh BPL shares was taken in August 1997, there was any Board Resolution for this decision, the answer was “that there was no specific Board Resolution as the transaction with Digital Leasing and Finance Ltd for purchase of BPL shares was not through.” According to Shri Dada there cannot be a resolution as the transaction was fudged. To another question as to whether there was any Resolution by which the requirement of purchase of 5 lakhs shares of BPL was dropped and in its place the management was satisfied about the purchase of Money Television Ltd’s shares, Shri Balathandayutham had replied “There is no Board resolution to the effect that five lakhs share of BPL were not to be purchased.” To another question how Digital Leasing and Finance Ltd was contacted and who gave the reference for this company and how they decided to buy the shares through this Bombay Company when they had sold large chunk of shares of BPL Ltd through Bangalore brokers, Shri Balathandayudam had stated “Shri T.C. Chauhan was in touch with Digital Leasing and Finance Ltd and through the associate company of Digital leasing and Finance Ltd in Bangalore. Only Shri Chauhan will be able to answer this question”. Shri Dada referred to another question“Rupees five crores was transferred as per the record of Digital Leasing and finance Ltd, in September 1997. Your company (BPL Sanyo Finance Ltd) had given mandate to buy 5 lakh shares of BPL Ltd in August 1997. You had mentioned earlier that there was no Board Resolution for the decision to purchase 5 lakh shares of BPL as the transaction could not be executed. Please explain why the money was transferred to Digital Leasing and Finance Ltd when the transaction could not be executed.” To this his answer was “I can not answer this question” To another question “you just now mentioned that the deal for purchase of Money Television Shares had to be undertaken as the money which was already given to Digital Leasing and Finance Ltd

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for purchase of 5 lakh BPL shares was to be recovered in view of the fact that Digital Leasing and Financing Ltd could not purchase share of BPL Ltd. Please explain where is the question of recovering the money when you had given mandate for purchase of BPL shares in August 1997 which could not be completed and the money was transferred to Digital Leasing and Finance Ltd, much later”, Shri Balathandayutham answered “I do not know this, Shri Chauhan can answer this question.” Shri Dada cited the following questions and answers in support of his contention that Rs.5 crores given by the Appellant company was meant to manipulate its share prices.

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Q.18. Who placed the order on Digital Leasing and Finance Ltd. for purchase of 5, 00, 000 shares of BPL and how was this order placed ? A.18. As per the instruction of Shri T.C. Chauhan, I gave a written mandate to Digital Leasing and Finance Ltd to purchase 5 lakh shares of BPL LTD.

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Q.19. Why were shares not purchased ?

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A.19. The broker Digital Leasing and Finance Ltd issued the contract note for purchase of 5, 00, 000 shares of BPL Ltd at Rs.100/- each for Rs.5 crores. Since the broker could not deliver the shares, he cancelled the contract.

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Q.21. When was the order for purchase of shares placed ?

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A.21. August 20,1997.

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Q.22. When was the contract executed ?

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A.22. The broker has made out the contract note on August 26, 1997but has not delivered these shares.

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Q.23. When was the contract cancelled as stated by you?

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A.23. The broker informed Shri T.C. Chauhan subsequently, say with in a fortnight about the cancellation of the contract.

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Q.24. Upon cancellation of the contract did BPL Sanyo Finance Ltd pay/ receive the broker the difference on account of the price fluctuations in the BPL Limited shares ?

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A.24. We have neither paid nor received any amount from the broker

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Q.33. In response to question 7, you have stated that Rs. 3, 35, 00, 000 and Rs. 27, 50, 000 were paid by BPL Ltd to Digital Leasing and Finance Ltd. on our behalf for purchase of 1, 10, 000 shares of BPL Ltd. Does this tantamounts to purchase of own shares by BPL Ltd ?

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A.33. As a part of the portfolio investment we use to request BPL Ltd to transfer the funds to Digital Leasing and Finance Ltd. As the shares in BPL Limited on 31.3.97 and subsequent period were sold, we wanted to atleast replenish the quantity sold by us.

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Shri Dada with reference to Shri Chauhan’s role vis-a-vis BPL cited the following portions from Shri Chauhan’s statements recorder on 14.8.1998 and 27.9.99.

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To a question as to who authorised the decisions for BSFL in the matter relating to investments in shares and securities, Shri Chauhan’s answer was “Normal transactions of buy and sell, say up to a crore of rupees are authorised by the officers like Shri

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Balathandayutham and a summary is presented to the Board as and when it needs. Beyond that it is informally discussed by the Board. A quarterly review of the activities of the company is presented to the Board as and when it meets and all the activities including investments are reviewed. Shri Dada stated that Shri Balathandayutham’s statement of 10.8.98 regarding decision to purchase the Appellant’s shares when shown to Shri Chauhan, he had stated “the investments decisions are, as mentioned earlier, discussed informally in the Board. Only in case of an offer of 5 lakh BPL shares that had come to my notice through some broker, this was as usual informally discussed at the Board meeting of BPL Sanyo Finance Ltd, and based on its concurrence, I asked Shri Balathandayutham to go ahead and purchase the shares. No documentation was prepared for the decision of the Board and this was orally communicated to Shri Balathandayutham.” To another question as to what was the source of funds available with BSFL for the purchase of five lakhs shares of BPL Shri Chauhan replied “BPL Sanyo Finance Ltd, asked for a loan of rupees five crores form BPL Ltd. At BPL Ltd, I am responsible for the sales of all the group companies and as and when any of the group companies has a requirement of funds, I authorise and provide temporary accommodation to them. Accordingly, rupees five crores was given by BPL Ltd to BPL Sanyo Finance Ltd.” To another question “How was the payment of rupees five crores recovered from Digital Leasing and Finance Ltd”? the answer was “Since the broker was not able to deliver the shares BPL Sanyo Finance Ltd. had to recover the payment of rupees five crores from the broker. An offer was received for a media company- Money Television Ltd. Since BPL Ltd, already has a presence in the media business through an advertising company as well as news paper company, BPL was interested in exploring acquisition for a media television company. This media presence is because of its direct synergy with our existing business of selling branded hardware. I made enquiries about Money television Ltd, through our various channels and came to the conclusion that it will not be a suitable acquisition. The offer therefore was turned down. I understand that the said broker had also sent five crore worth of shares of Money Television Ltd to Sanyo finance. Sanyo Finance is a partnership firm belonging to the BPL group set up to manage media business”. To another question as to “who made the offer for sale of shares of Money Television Ltd and by whom was the offer received”. Shri Chauhan had stated “I understand the offer came from the same broker Digital Leasing and Finance Ltd and the offer was received by somebody in BPL Sanyo Finance Ltd”. Shri Dada referred to question 29 and the answer to the same from Shri Chauhan:

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Q.29. “I am showing you contract note No.1 dated 26.8.97 and bill no. GC05/305001 dated 26.8.97 issued by Digital Leasing and Finance Ltd for sale of shares and convertible debentures of Money television Ltd, valued at rupees five crores. The contract note and bill along with the share/debenture certificates have been received by BPL Sanyo Finance Ltd on 26.8.97. If the decision was not to purchase shares of Money Television Ltd why were these shares and debentures received and acknowledged form the broker.”

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“I have seen the documents and they appear to have been received and acknowledged by Shri A.R. Rajaram, the Company Secretary of BPL Ltd. My decision was not to buy the shares of Money Television Ltd. To my knowledge these shares were delivered by the broker about two three months back. I cannot say how Shri Rajaram has acknowledged the documents and accepted delivery of shares and debentures of Money Television Ltd in August 1997.”

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To another question that “BPL Finance has purchased 1, 10, 000 shares of BPL Ltd in June 1998 @ Rs.400/- per share from Digital Leasing and Finance Ltd. who authorised purchased of these shares” Shri Chauhan had stated “I understand the broker asked for further payment to be able to honour his earlier commitment for purchase of five lakh shares for BPL Sanyo Finance Ltd. For that payments were made piecemeal

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amounting to approximately 4.4 crores. At this stage this broker delivered 1, 10, 000 shares of BPL quoting the then price of approximately Rs. 400/- per share. These were accepted by BPL Sanyo Finance Ltd to recover the value of 4.4 crores paid to him. The amount of five crores paid to him in August 1997 is still outstanding for which he has to deliver 5 lakh shares of BPL to us.” Shri Dada referred to another question that “Since it has been almost close to one year since BPL Sanyo Finance Ltd made the payments to Digital Leasing and Finance Ltd, have any steps taken against the broker for the recovery of rupees five crores or the equivalent five lakh shares of BPL” and the answer there to “I understand that the company is continuously pursuing the matter. As I mentioned earlier, offer of Money Television Ltd’s shares came for equivalent value, which on examination was turned down about some time in March/April 1998. Subsequently the company has been pursuing the matter for recovery. However, no suit for recovery or complaint or arbitration has been filed so far.” In the context of the statement dated 27.9.1999, Shri Chauhan was put the question “are you aware that order for purchase of 5 lakh shares of BPL Ltd was ostensibly given by M/s. BPL Sanyo Finance Ltd to Digital Leasing and Finance Ltd in 1997. Shri R.Balathandayutham stated that this order was given at your instance and the broker (Digital Leasing and Finance Ltd) was directly in touch with you. Can you clarify whether Shri R.Balathandayutham was speaking the truth?” According to Shri Chauhan “in any previous statements have mentioned that an offer came to me for these BPL shares and after discussion in the BPL Sanyo Finance Board we had decided to ask the company to buy these shares and I instructed Shri R.Balathandayutham to place an order on Digital Leasing and Finance Ltd and I do not recall who approached me on behalf of Digital Leasing and Finance Ltd with the proposal.”

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Shri Dada stated that Shri Chauhan in answer to a question had admitted that “I also recall speaking to Shri Harshad Mehta on a few occasions. As mentioned earlier the discussion was always on company’s prospects and market share and such connected issues.” In the light of the said statement the investigating officer had posed that “It is quite likely in the context of manipulations in the shares of BPL that Shri Harshad Mehta was in touch with you for reasons other than knowing merely prospects of the company. Please explain the details of actual discussions”. To this Shri Chauhan’s answer was “As I mentioned earlier, I have spoken to Shri Harshad Mehta on a few occasions and the discussions have always been about the business prospects of the company in the context of the total market.”

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Shri Dada to show that Sanyo Finance and BPL Sanyo Finance Ltd and the Appellant are under the same management, referred to the copy of the letter dated 28.8.97 (Annexed to the appeal) from Digital to Sanyo Finance, 1/1 Palace Road, Bangalore 560 001 re Bill No. GC05/305001 where under the said Digital had forwarded certificate in respect of 38,13,500 shares and 11,86,500 FCD’s of Money Television and stated that these certificates were received by Shri Rajaram, company secretary of the Appellant for BPL Finance Ltd, same was the case with the contract note and the bill issued by Digital.

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Shri Dada did place considerable reliance on Digital’s “affidavit” dated 30.9.99 a copy of which has been filed along with the appeal. Shri Dada read out the following extract from the said affidavit:

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“We were introduced to Shri Harshad Mehta around March 1996 by Shri Harish Teparia a mutual business acquaintance. We met at Shri Mehta’s residence at Madhuli Building, Worli, and he indicated his interest in doing share trading activity through our company. We worked out terms of brokerage with him i.e. 0.1% for trading and 0.5% for delivery based transactions. He made it clear from the beginning that under no

¶218

circumstances were we to use his name or we could face problems with statutory bodies. Therefore, he suggested that we do business with Damayanti Finvest P. Ltd. and other related companies. At that time, we had read an article in the papers that Supreme Court of India had allowed Shri Harshad Mehta to do fresh business, and we assumed he was operating through Damayanti group to protect his money from attachments

¶219

xxxxxxxxxxxxxxxxxx

¶220

Regarding the direct payment from BPL, we were informed by Shri Harshad Mehta that a large payment would be credited into our account from BPL Bangalore to settle Damayanti’s outstanding pay in liability. They did not divulge any further details but instructed us to make our pay-in to NSE and transfer the balance funds to them. We were told that instructions for the accounting entry would be given to us later, and we in good faith believed them and acted with the sole view to help our clients. We received an amount of Rs.9.10 crores from BPL Bangalore for the financial year 1997-98 starting from Aug/September 1997. We did not meet any BPL personnel before receiving this payment.

¶221

On 26.8.97 we executed a contract note by fax with BPL for sale of 5, 00, 000 shares of BPL @ Rs. 100/-. We also received a letter dated 20.8.97 signed by Shri Balathandayutham, Vice President of BPL Sanyo Finance Ltd, confirming their order for 5, 00, 000 shares of BPL @ Rs.100/-. On 5.9.97 we received Rs.5 crores from BPL by way of Demand draft (5 of Rs.90 lakhs each, and 1 of Rs.50 lakhs). As soon as we received the funds from BPL Bangalore, after deducting Damayanti groups dues to us, we disbursed the balance amount as per their instructions to various entities and then waited for their instructions to close the entry. Later starting from 6.10.97 to 9.3.98 we received an amount of Rs.4, 10, 62, 500 from BPL Bangalore in installments, plus a final Rs.27.5 lakhs received on 6.5.98. Against this amount, during that period we raised a bill on BPL for the following sale as per instructions of Damayanti:

¶222

2 lacs shares of KREB BIOTECH

¶223

1 lac shares of SWARAJ MAZDA

¶224

1.25 lac shares of BPL

¶225

Later, the above bill was changed to reflect a sale of 1, 10, 000 shares of BPL scrip @ Rs. 400/- upon Damayanti’s instructions, in good faith, without suspecting any wrong doing in their frequently changing instructions we cancelled and destroyed the previous bill and issued the fresh bill. We never gave delivery of these share to BPL although we have stated and Shri Rajaram has acknowledged that we have delivered the share on 6.6.98 we still have to receive Rs.1,87,500 from BPL Bangalore.

¶226

Just after the SEBI investigation started Damaynati informed us that the previous bill for 5, 00, 000 shares of BPL was not acceptable to BPL Bangalore and asked us to change the bill to Money Television Shares and FCDs amounting to Rs. 5 crores. During the SEBI investigation around July/August 1998, we sent our representatives Shri Pramod Dakua to Bangalore to hand over delivery of Money Television Shares and FCDs to Shri Rajaram, Company Secretary of BPL Bangalore. Shri Rajaram acknowledged the delivery and contract note/bill back dated on 28.8.97.

¶227

During all these transactions we were never in touch with the BPL Group. We received instructions only from Shri Harshad Mehta and we treated BPL Bangalore as just one of the entities introduced to us by Damayanti group. It was only during the SEBI investigations that we were introduced to BPL’s Shri Rajaram, Shri Balathandayutham and Shri Chauhan at Shri Pramod Katdare’s Dadar office on the insistence of Shri Harshad Mehta, that if any SEBI enquiry were to reach us, we should be able to identify each other. We followed the above instructions under economic duress and the coersion of Damayanti group who refused to settle their huge accumulated dues unless we co-operated.

¶228

By the time we realised that we had been made scape goats, we were already embroiled in the SEBI investigation and we could not find an exit route unless we forfeited the Damayanti groups dues to us. For this reason alone, we were compelled to say what they wished us to. We were asked not to say anything about Shri Harshad Mehta’s involvement.”

¶229

According to Shri Dada, Digital’s this affidavit clearly establishes the nexus between Damayanti group and Harshad Mehta and Damayanti group and the Appellant company.

¶230

Shri Dada submitted that the role of the Appellant in bailing out the brokers who were not in a position to meet their pay in liabilities has been established by the Appellant’s own admission and statements and material on record. He pointed out that the Appellant has not denied its involvement in bailing out brokers, that what has been denied, is that it did not approach BSE for bailing out the brokers, that it has been established that money has been provided by the Appellant and its associate concerns for the purpose of bailing out the said brokers. In this context Shri Dada referred to the fund supply position as detailed in the Respondent’s reply as under :

¶231

EXTRACT

¶232

SSKI purchased 20 lac shares for Rs.47 Crores on 17/19.06.1998 on behalf of Monoplan, a loss making company of SSKI.

¶233

Monoplan received Rs.47 crores as Application money for allotment of 15% preference shares from BPL controlled entities.

¶234

Rs.15.5 crores from Rs.15.15 crores Rs.16 crores Oriental Transport from Orion from Badalona Ltd. on 19.06.98. Construction Overseas Pvt. This money (Rs.15.5 Company Co. Ltd (an associate crores) was Pvt. Ltd. Out of of SSKI) on refunded by Rs.15.5 crores, 26.06.98. This Monoplan on Rs.16.1 lacs were money was 28.01.99 to Oriental refunded by refunded by Transport Ltd. Monoplan on Monoplan on 28.01.99 to Orion 28.01.99. Construction Company co.

¶235

This money (Rs.15.5 crores was given by BPL on 18/6/98 to Oriental Transport Limited towards subscription of 14% NCDs on private placement basis.	Pvt. Ltd. This money (Rs.15.5 crores) was given by BPL on 18/6/98 to Orion Construction company towards subscription of 14% NCDs on private placement basis	This money (Rs.16 crores) was received by Badalona from BSFL on 26/6/98 as advance towards allotment of 14% convertible debentures
		BSFL had received this money on 25/6/98 from BPL Sanyo and Utilities and Appliances Limited, a BPL Group Company.

¶236

Shri Dada stated that a large number of brokers of BSE and NSE who were dealing on behalf of Damayanti group had cornered a substantial chunk of the Appellant’s shares and some of them faced payment problems and could not discharge their commitments towards pay in liabilities as they did not get the payments from their clients i.e. Damayanti group. In this context he stated that it was admitted by the Director of Seventilal Kantilal Securities P. Ltd (SSKL) that they got in touch with BPL Ltd for funds. Shri Dada stated that in pursuance to the same funds totalling around Rs. 47 crores were transferred from the entities connected with the Appellant under the garb of application money for preferential shares in a loss making associated company of SSKL (Monoplan). This money, was used for purchase of shares through all or none or bulk deals at predetermined rates and quantities by synchronizing the transactions with the brokers of Damayanti group.

¶237

Shri Dada submitted that SSKL purchased 20 lacs shares of BPL for Rs.47 crores on behalf of Monoplan Securities Ltd on 17/19 June 1998 .. that these shares were subsequently sold in two tranches at a loss of Rs. 11, 63, 80, 000 as 19 lacs shares were sold for Rs.33, 50, 08, 000 on 13.1.99 and 1 lac shares for Rs.1, 86, 12, 000 on 22.1.99, that against the loss of Rs.11, 63, 80, 000 and interest thereon Monoplan kept Rs. 15, 33, 90, 000 in the garb of allotment of preference shares to Orion Construction company and Rs.31, 66, 10, 000 was returned by Monoplan on 28.1.99 as excess application money to BPL and to its group companies.

¶238

In support of the submission regarding the Appellants knowledge and involvement he referred to the following statement of Shri Pramod Purrushottam Katdhare, Tax Consultant to BPL and some of the BPL group companies. (dt 24.9.99)

¶239

“I have read in the papers regarding the developing crisis and also heard from the people (refers to the payment crisis in BSE/NSE in June 98). Chairman of BPL Shri T.P.G. Nambiar was also very concerned about such crisis. The stock exchange

¶240

through SSKL Stock Brokers (Shri Shripal Morakhia) approached BPL for diffusing the crisis. It was represented to BPL that they are being approached at the instance of SEBI and in the general interest of the stock market. The Stock Exchange authorities also have issued a letter dated 12th June 1998 addressed to SSKL, requesting them to help in clearing the position of 30 lakh shares, which would restore the confidence of the investors. The common price fixed by the Exchange was at Rs.235/- per share. It was also mentioned in the letter that the Stock Exchange has succeeded in garnering the suitable investors up to 5 lakh shares. It was also informed that the Exchange is discussing the matter with the Tata group of companies to co-operate and to support the Exchange in their endeavour, with the above back ground and particularly with the representation made by SSKL that they are sent by SEBI, Badalonna Overseas P. Ltd. and Monoplan Securities Ltd were the two companies belonging to SSKL Rs.47 crores was transferred to these two companies for purchase of debentures and preference shares. Some preferential shares were allotted to Orion Construction Co. Pvt. Ltd by Monoplan Securities. The rest of the money was refunded back later in the early part of 1999”. Shri Dada stated that from this statement it is clear that the requisite funds for the bail out purpose was made available by the Appellant company. Shri Dada also referred to the “affidavit” of Shri Katdhare dated 20.12.1999, forming part of the appeal and stated that in the said affidavit he had reiterated his version made in the statement of 24.9.99 that BPL had funded to bail out the brokers in distress.

¶241

Referring to the authorities cited by Shri Chinoy, Shri Dada submitted that the ratio in none of the cases would be applicable to the present case in view the distinguishable features.

¶242

Referring to Esso Standard Inc V. Udharam Bhagavandas Japanwalla (supra) he stated that the principle laid down in the said case is not applicable to the present case as in the instant case the Appellant company itself has admitted the charge of funding stated in the show cause notice and confirmed in the order.

¶243

Referring to the Hon’ble Bombay High Court in Standard Chartered Bank V V.B. Survase/ ANZ Grindlays Bank V Directorate of Enforcement cited by Shri Chinoy, Shri Dada stated that the observation made by the Hon’ble Court therein is with reference to section 58 and 59 of FERA Act and as such have no application to the instant case that mens rea is not an ingredient of regulation 4(a) and 4(d). In support of his contention he cited Director of Enforcement v. MCTM Corporation P. Ltd (1996) 2 SCC 471 where in the Hon’ble Supreme Court had, with reference to imposition monetary penalty in adjudication proceedings under the FERA, stated “Unlike in criminal case where it is essential for the prosecution to establish that the ‘accused’ had the necessary “guilty intention” or in other words the requisite “mens rea” to commit the alleged offence with which he is charged before recording his conviction, the obligation on the part of the Directorate of Enforcement, in case of contravention of the provisions of section 10 of FERA, would be discharged where it is shown that the blame worthy conduct of the delinquent had been established by wilful contravention by him of the provisions of section 10 of FERA 1947. It is the delinquency of the defaulter itself which establishes his blameworthy conduct .......”. Shri Dada submitted that the blame worthy conduct of the Appellant is manifest in the act of market manipulation.

¶244

Shri Dada referred to the standard of proof required to take action in matters like the one under consideration and stated that the Appellant has been subjected only to adjudication, that the standard of proof required in an adjudication is not that high as required in a criminal proceeding, that in a criminal proceeding evidential standard of proof is beyond reasonable doubt but the requirement in an enquiry like the present one is preponderance of probabilities, which is much less than the strict

¶245

proof requirements in a criminal proceeding. He cited the decision of the Hon’ble Supreme Court in Gulabchand vs. Kudilal AIR 1966 SC 1734 in support. He also referred to the decision of the Hon’be Special Court (Trial of Offences Relating to Transactions in Securities at Bombay) in National Housing Bank. v. ANZ Grindlays. 1998(2)LJ 153 in this regard. He stated that it is principle laid down in Gulabchand that prevails and not that of Chaturbhai and Svenska relied on by the Appellant.

¶246

Shri Dada referred to Ambalal (AIR 1961 SCS 264) relied on by the Appellant and stated that the decision therein is in the context of confiscation of goods and the Court’s observation therein was based on commission of an offence as could be seen from para 6 of the judgement:

¶247

“The Court has held that a custom officer is not a judicial tribunal and that a proceeding before him is not a prosecution. But it cannot be denied that the relevant provisions of the Sea Custom Act and the Land Customs Act are penal in character. The appropriate customs authority is empowered to make an enquiry in respect of an offence alleged to have been committed by a person under the said Acts, summon and examine witnesses, decide whether an offence is committed, make an order of confiscation of the goods in respect of which the offence is committed and impose penalty on the person concerned, ......... . To such a situation, though the Code of Criminal Procedure or the Evidence Act may not apply except in so far as they are statutorily made applicable, the fundamental principles of criminal jurisprudence and of natural justice must necessarily apply.” In the said case the Honourable Court also had viewed that “we cannot also accept the contention that by reason of the provisions of section 106 of the Evidence Act the onus lies on the Appellant to prove that he brought the said items of goods into India in 1947”.............. “If Section 106 of the Evidence Act is applied then, by analogy, the fundamental principles of criminal jurisprudence must equally be involved”. Shri Dada submitted that in the instant case neither the Code of Criminal Procedure nor Evidence Act is attracted to warrant strict proof. Shri Dada referred to Mohan Singh (AIR 1964 SC 1366), Ch.Razik Ram (AIR 1975 SC 667), Ramanbhai NagjiBhai Patel (AIR 1978 SC 1162), Ramsingh (AIR 1986 SC 3) and stated that the main issue involved in those cases were charge of corrupt practices indulged in election, and the test of evidence laid down to establish charge of corrupt practices in election cases cannot be imported to a case of market manipulation, that corrupt practices in election matters are taken as a special case akin to criminal charge and hence the Court prescribed severe test. Svenska’s case (1994 SC 626) relied on relates to indulgence of fraud in a matter involving bank guarantee which the Court considered out right as a criminal act and the strict proof test was applied, that it is not so in the present case. Chaturbhai case (AIR 1976 SC 712) relates to fraud by a consignor indulged in to cheat the Railways. Shri Dada submitted that the test of evidence laid down in Gulabchand’s case (AIR 1966 SC 1734) laid down by the 5 judges Bench is the law in this regard, a position which the Bombay High Court has already highlighted in NHB/ANZ Grindlay (Supra). In NHB’s case Hon’ble High Court had viewed that “In this case the law of the land happens to be as per the judgement of the constitutional Bench of the Supreme Court in Gulabchand’s case, as against that, Chaturbhai’s judgement is of a Bench of two judges. Gulabchand’s case was not cited before the Bench hearing Chaturbhai’s case.” Shri Dada submitted that even if it is viewed that charge under regulation 4(a) is a criminal charge, still the test laid down in Gulabchand’s case is the one applicable.

¶248

Shri Dada submitted that to establish the charge of manipulation and hold a person liable for the same circumstantial evidence is sufficient and from the material on record it is evident that Appellant company had indulged in market manipulation attracting the provisions of regulation 4(a) and 4(d) Countering Shri Chinoy’s interpretation of regulation 4, Shri Dada submitted that the scope of the regulation is wide enough to bring in, the conduct of the Appellant thereunder. In this context Shri Dada referred to the definition of the expression ‘fraud’ in regulation 2(c) and stated that it is not an ingredient of regulation 4(a) and 4(d), that where ever fraud/fraudulent transactions are covered, it has been specifically included in the regulation, as in regulation 3 and 6. Shri Dada explained the ingredients of regulation 4(a) and (d) and stated that deceit need not necessarily be there to attract the regulation. He also emphasised the expression ‘directly or indirectly’ in regulation 4 (a) and stated that in the instant case it was the Appellant company who indirectly caused transactions in shares and indulged in manipulation. He reiterated the finding in the impugned order that as a result of the carry forward position built up by Damayanti group of brokers, and that at a time when they were to face the music, the Appellant appeared on the horizon as their saviour to bail out, pumping out huge sum of money, that the Appellant was not simply interested in the brokers but it was because these brokers had acted at the behest of the Appellant. Shri Dada stated that self benefit was the motive and therefore regulation 4(a) and 4(d) attracted. Learned Senior Counsel submitted that in the light of the finding that the Appellant had manipulated the market to its benefit, the impugned order is perfectly justified and need be upheld.

¶249

Referring to the Appellant’s submission that the direction issued by the Respondent is a penal one, Shri Dada submitted that it is not so. In this context he referred to para 13.6 of the impugned order and stated that the legal position has been clearly stated therein that “the directions contemplated in the show cause notice are not penal in nature but are of remedial nature”. In this connection learned Senior Counsel referred to the show cause issued to the Appellants and stated that the notice has clearly stated the violation and the consequences that would visit such violations and he read out the following portion from the notice:

¶250

“After taking into consideration all that has been stated above it appears that BPL Ltd has violated Regulation 4(a) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations read with Section 11(1), 11(2)(e) of SEBI Act, 1992. Accordingly, BPL Ltd is requested to show cause why directions including directions prohibiting BPL Ltd from dealing in securities and accessing the capital market and any other suitable direction in the interest of investors and securities market under section 11 read with section 11B of the SEBI Act read with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations should not be issued. You are also requested to show cause why prosecution proceedings under section 24 of SEBI Act, 1992 should not be initiated for the above mentioned violations”. In the case of other Appellants the only addition in the show cause notice was a reference to section 27 of the Act as they were deemed to be guilty to attract the said section.

¶251

Shri Dada submitted that once Regulation 11 is referred, automatically Regulation 12 also comes into. He stated that the notice clearly states the nature of violation and the attendant section and regulations and it is not correct to say that the show cause notice was vague and evasive on this count.

¶252

Shri Dada stated that the Respondent has established the charge of market manipulation attracting the provisions of regulation 4(a) and 4(d) and justification for

¶253

issuance of direction under section 11/11B of the Act and regulation 12 of the 1995 Regulations. He further stated that since the said direction is remedial in nature, and the interest of investors the Respondent is well with in its powers to issue such a direction debarring the Appellants from accessing the capital market for 4 years. He stated that even if it is viewed that under section 11B such a direction is impermissible following this Tribunal’s decision in Sterlite case (supra) still the order is to be sustained as regulation 12(a) empowers the Respondent to direct the person concerned not to deal in securities. In this context he referred to the scope of the words “dealing in securities” used in regulation 12(a) with reference to the definition available in regulation 2(b), “that dealing in securities means an act of buying, selling or otherwise dealing in any security or agreeing to buy, sell or otherwise deal in any security by any person either as principle or agent. Shri Dada submitted that dealing in securities “is wider in its scope and includes “accessing the capital market” and therefore the impugned direction is well within the powers vested in the Respondent.

¶254

In support of the submission that Respondent has power to issue directions under section 11B of the Act, Shri Dada cited this Tribunal’s decision in Bank of Baroda v. SEBI (2000) 38 CLA (SAT) and decisions of High Court’s in Anand Rathi & others v. SEBI (2001) 32 SCL 227 (Bom); M.Z. Khan v. SEBI (AIR 1999 Del 64); Alka Synthetics Ltd v. SEBI (1999) 19 SCL 460 (Guj) and R.R. Bohra V. SEBI (1999) 33 CLA 243 (Bom).

¶255

Shri Dada submitted that various High Courts have upheld the powers of the Respondent under section 11/11B to issue appropriate directions as an interim measure though penal in nature, and as such the Respondent is empowered to issue directions under section 11B which are penal in nature, in its final orders also.

¶256

Shri Dada referred to the cases cited by Shri Chinoy in the context of the Respondent’s powers under section 11B and stated that none of those decisions is applicable to the instant case. Referring to Khemka’s case (AIR 1975 SC 1549) he stated that it was in the context of absence of statutory powers to impose penalty. Shri Dada submitted that the impugned direction has been issued in terms of the powers available under the section 11/11B of the Act and regulation 12(a) and as such the ratio of the said case is not applicable. Referring to Kantilal Babulal’s case (AIR 1968 SC 445), he stated that the issue involved therein was forfeiture of money without statutory authority. In that case the Sales Tax Officer, without giving effect to the order passed by the Sales Tax Appellate Tribunal, to refund the amount collected as tax from a registered dealer, proceeded to take steps for forfeiting the amount to the State Government under section 12A(4) of the Bombay Sales Tax Act without even holding an enquiry. In this context Shri Dada read out section 11 and 11B of the Act and stated that the instant order has been passed by the Respondent exercising the authority vested in it following the procedure of enquiry laid down in the Act/Regulation. Referring to L.D. Jaisinghani vs. Narayandas M. Punjabi (1976 SC 373) and in ReAdvocate (AIR 1989 SC 245) Shri Dada stated that both these cases relate to matters connected with the disciplinary proceedings against Advocates for violating the professional misconduct under the Advocates Act and Bar Council of India Rules. The principle that the evidence should be of a character “which should leave no reasonable doubt about guilt” is not applicable to the cases of market manipulation established in an inquiry, as held in NHB vs ANZ Grindlay’s case (supra). He further stated that in Commissioner, Sales Tax, U.P. vs Anoop Wines (AIR 1998 SC 2042) the decision that imposition of penalty cannot be sustained by implication, has no application to the instant case as the Respondent had clearly stated the offence and the penal provisions attracted to the case in the show cause notice itself. He said for the said reason Hindustan Lever case (2001 scale 219) has also no application. Shri Dada stated that Jackson’s case (1998) 1 SCC 198 was in the context of non disclosure of material in the show cause notice and use of such undisclosed material later, it is not so in the present case and hence the said decision has no application to the instant case.

¶257

With reference to the Appellants’ plea in appeals 15,16,17,18,19 Shri Dada stated that under section 24, prosecution lies against them and that it is not necessary that a full fledged enquiry following the rules of natural justice should precede the decision to prosecute, that the principles of natural justice will be followed in the proceedings before the trial court. Shri Dada reiterated that even if the Appellant company is not prosecuted, the other Appellants can still be prosecuted independently as the scope of section 24 is wide enough in this regard. He explained the scope of section 24. In the context of Ratna’s case cited by Shri Sundaresan, Shri Dada submitted that a decision to prosecute by itself does not affect the rights and obligations warranting interference by the Tribunal. In this context he referred to the following observation made by the Hon’ble Bombay High Court in ANZ Grindlay’s case (supra) relied on by this Tribunal in its interim order dated 21.5.2001 in the present appeals.

¶258

“We are unable to accept the plea that impugned provisions abrogates prestige or reputation of the official because he/she had to face prosecution. No person can maintain the dignity or cherish prestige by avoiding due process of law. Law being a guardian, it maintains and protects the dignity and honour of every person. Dignified and honourable persons have to stand the test and trial articulated by law. And in obedience he or she has to submit to the process. Cherishing majesty of law and its process is a inner core of the dignity of individual in a Democratic World, which runs on the wheel of Rule of Law.”

¶259

Shri Dada submitted that since the prosecution having been launched against the Appellants, the forum to contest the charges made in the prosecution is the trial Court and not this Tribunal. He submitted that this Tribunal has no power to decide in an appeal as to whether a person is liable to be prosecuted or not under section 24, that the powers available under section 482 of Cr. PC are not available to the Tribunal.

¶260

Shri Dada submitted that in the light of the facts and circumstances as revealed in the order, there is every reason to hold that the Appellant company had indulged in market manipulation violating the provisions of regulation 4(a) & (d) attracting the consequences as laid down in regulation 12(a) and section 11 and 11B of the Act, and therefore the impugned order has been rightly issued.

¶261

I have carefully considered the submissions made by the learned Counsel for the parties, the pleadings and the entire material on record before me.

¶262

The heading of the impugned order clearly states that the order is “in the matter of price manipulation in BPL share.” Undoubtedly the subject matter of the order is price manipulation in the shares of the Appellant. The back ground in which the order was issued has been briefly stated in the impugned order and I have stated the same in the earlier part of this order. The Respondent on noticing abnormal market behaviour in the scrip of certain companies, including the Appellant’s, ordered an investigation to ascertain whether the market behaviour was due to any manipulation. The investigation attributed market manipulation as the cause and also viewed that the Appellant had a role therein. In the light of the said prima facie finding, the Respondent decided to enquire into the matter. Accordingly show cause notices were issued to the Appellants. The matter was adjudicated and the impugned order was passed. The Appellant was found involved in “creating a false market and manipulating the prices of its scrip, in connivance with Shri Harshad Mehta, by aiding, abetting and being instrumental in effecting transactions by taking part and entering directly and indirectly into transaction in the shares of BPL.” The Appellant company was therefore held guilty of violating regulation 4(a) and 4(d) of the 1995 Regulations. In that context the Respondent vide order dated 19.4.01 directed the Appellant company “not to access the capital market for a period of four years”. It

¶263

was further ordered that prosecution proceedings for violation of regulation 4(a) and 4 (d) be initiated against the Appellant company “through its directors/ officers, Shri Rajiv Chandrasekhar, Shri Ajit Nambiar, Shri R. Murali, Shri T.P.G. Nambiar and Shri T.C. Chauhan.”

¶264

Shri Chinoy had argued at length that the impugned order was passed without following the principles of natural justice as the Respondent has travelled far beyond the records and has relied upon material that was not referred to or disclosed in the show cause notice. He also stated that the Appellants were denied the right of cross examination of persons whose statements have been relied upon in the order. By way of illustration he had referred to para ‘E’ in the Memorandum of Appeal wherein the Appellant had listed the following documents, which according to the learned Senior Counsel were not referred to in the show cause notice but are mentioned for the first time in the impugned order:

¶265

(i) Statement of one Vinod C. Shah referred to in para 6.3.4.(b)(i) of the impugned order;

¶266

(ii) Statement of one Dilip N. Shah referred to in para 6.3.4(b)(ii) of the impugned order;

¶267

(iii) Statement of one Dinesh D. Doshi referred to in para 6.3.4(b)(iii) of the impugned order;

¶268

(iv) Statement of one Anil Doshi referred to in para 6.3.4(c) of the impugned order;

¶269

(v) Statements of unspecified brokers referred to in paragraph 6.3.4(d) of the impugned order;

¶270

(vi) Letter dated 12th May, 1998 of LKP Shares and Securities Ltd. (‘LKP’) referred to in para 7.1 of the impugned order;

¶271

(vii) Travel bills issued by M/s. Bonik Travels referred to in para 8.1(a) of the impugned order;

¶272

(viii) Travel bills issued by M/s. Taurus Travels referred to in para 8.1(a) of the impugned order;

¶273

(ix) Proof of payment of Rs.14 lakhs to Harshad Mehta’s lawyers by Damayanti Group referred to in para 8.1(a) of the impugned order;

¶274

(x) Unsigned letter dated 18th September, 1997 from Harshad Mehta to CBI referred to in para in 8.1(b) of the impugned order;

¶275

(xi) Documents containing investments and bearing notes/jottings in the handwriting of Harshad Mehta, referred to in para 8.1(c) of the impugned order;

¶276

Learned Senior Counsel submitted that in the circumstances, the impugned order is liable to be set aside solely on the ground that extensive material has been relied upon by the Respondent, without granting any opportunity to the Appellant to consider and explain the same. Denial of cross examination of Shri Shripal Morakhia, a representative of SSKL who is stated to have approached the Appellant at the behest of BSE, seeking funds for bail out operation was also cited in particular by Shri Chinoy.

¶277

The Respondent has denied the allegation. In its reply it has stated “the Appellant had inspected and had been provided copies of all documents as desired by it. It is denied that there had been any violation of the principles of natural justice as alleged. It is submitted that in the impugned order, no documents/adverse material has been relied upon without having been made available to the appellant for their inspection. It is submitted that the respondent had offered inspection of all the documents mentioned in the para (E) of the grounds of appeal to the appellant. However, the appellant chose to take inspection of only certain documents which were sufficient for drafting their reply. It is submitted that the documents obtained from 1208, Maker Chambers V [(reference para 8.1(e) of the impugned order]) including copy of account of Damayanti Group with Digital, copy of contract note issued by Digital to BSFL, correspondence of BSFL and Digital and the documents showing transactions in the shares of the appellant by Damayanti Group of companies and LKP Shares and Securities (LKP) had been inspected by and were given to the Appellant.”

¶278

On a perusal of the list of documents referred to by the learned Senior Counsel, it appears that these documents have been relied on by the Respondent to establish association of Damayanti group and Shri Harshad Mehta. But this is not the only material on which the Respondent has relied on in this regard and the Appellant has been furnished those other materials relied on.

¶279

In the light of the core charge levelled against the Appellant and taking into consideration the submission made by the parties in this regard, I am of the view that, the Appellants’ allegation that they were deprived of reasonable opportunity to rebutt the charge for want of material from the Respondent’s side, appears to me, a bit exaggerated. On a realistic approach, in the light of the totality of facts, I am of the view that the Appellants have not been denied of material information by the Respondent, so as to hold that the order has been passed in total disregard to the principles of natural justice. On the Respondent’s unwillingness to provide Shri Shripal Morkhia of SSKL for cross examination by the Appellant, the reason put forth by the Respondent is found acceptable. The Appellant wanted to cross examine him in the context of the statements of Shri Morkhia in his letter dated 25.6.98. The Respondent has made it clear that the statement of Shri Morkhia made in the letter dated 25.6.98 had not been relied upon in the impugned order. In para 13.7 of the order it has been stated –“I note that, during the personal hearing on 04.04.2001 the Counsel for BPL specially confirmed that they do not insist on cross examination (of Shri Morkhia) if, SEBI is not placing reliance on the said statement”. I do not find any reliance on Shri Morkhia’s statement in the order. Cross examination of a witness, no doubt is very relevant and also very important, from the evidential angle. But the rule has exceptions. In K.L. Tripathi Vs. State Bank of India (1984) 1 SCC 43) Hon’ble Supreme Court had observed that if the credibility of a person who has testified or given some information is in doubt, or if the version or the statement of the person who has testified is in dispute, right of cross examination must inevitably form part of fair play in action.” I do not find any force in the submission from the Appellants’ side in its demand for cross examination of Shri Morakhia. It is well settled judicially that absence of any formal opportunity of cross examination per se does not invalidate the decision arrived at fairly. “If no useful purpose is likely to be served by allowing cross examination, then Courts will be slow – rather unwilling to disturb that decision” (Bushell V Secretary of state for the Environment – (1980) 2 All ER 608). When there is no lis regarding the facts, but certain explanation of the circumstances, there is no requirement of cross examination to be fulfilled to justify fair play in action.

¶280

I have carefully considered the case law cited by the learned Senior CounselWaishampayan (AIR 1961 SC 1623), Khem Chand (AIR 1958 SC 300), M.A. Jackson (AIR 1988 1SCC 198), and Hindustan Lever 2001(1) SCALE 219 – and find none of these

¶281

decisions of any help to the Appellants’ case, as the facts in those cases are clearly distinguishable from the facts in the present case. Since the Respondent had not relied on the statement of Shri Morkhia, the request for his cross examination cannot be sustained.

¶282

In the case of the Appellants viz. Shri Rajeev Chandrasekhar, Shri Ajit Nambiar, Shri R. Murali, Shri T.P.G. Nambiar and Shri T.C. Chauhan, also it was urged that the Respondent had not followed the principles of natural justice and as such the impugned order against them is bad and untenable. On a perusal of the impugned order, I find that the order is directed only against the Appellant company and the direction is to launch prosecution proceedings against the Appellant company through its directors and officers – S/Shri Rajeev Chandrasekhar, Ajit Nambiar, R.Murali, T.P.G. Nambiar, and T.C. Chauhan. There is no finding of guilt against them in the impugned order. Their prosecution as per the impugned order is incidental to the finding of guilt against the Appellant company. The direction is to prosecute the Appellant company. Therefore in the absence of any adverse finding or charge against them in the order, and for the reason that they are being proceeded only in the light of the Respondent’s finding that the Appellant company is guilty, and further that, there are in built provisions in law ensuring sufficient opportunities to the accused in a prosecution case, to putforth its defense before the trial court before passing any adverse order, it is difficult to hold that the Respondent should have heard the said Appellants before passing the impugned order and by not doing so failed to follow the principles of natural justice. Opportunity of being heard before launching prosecution is not ordinarily known to any penal jurisprudence. Infact, it is seen that the said Appellants were also given opportunity to put forth their version in the proceedings before the Respondent, vide show cause notice issued to them on 20.12.1999. The requirements of regulation 8 of the 1995 Regulations have thus been complied with.

¶283

It has been stated in the operative portion of the order that powers under sections 11 and 11B of the Act have been invoked to issue the impugned directions. Though there is no specific reference to regulation 11 of the 1995 Regulations therein, on a perusal of the order and the show cause notice, it can be safely inferred that power available in regulation 11 of the 1995 Regulations has also been invoked. The omission to specifically refer the said regulation in the order is not fatal, as there is a legal source of authority to issue the directions.

¶284

It is to be noted that the object of the Act is broadly stated in its preamble in the following words, that it is an Act “to provide for the establishment of a Board to protect the interests of the investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”. Section 3 of the Act empowers the Central Government to establish a Board by the name of the Securities and Exchange Board of India, with a Chairman and five members. The Board is in position since 1992. In terms of sub section 3 of section 4 of the Act, in the areas otherwise determined by regulations, the Chairman also enjoys all powers of the Board. The impugned order has been made by the Respondent Chairman exercising the concurrent power of the Board vested in him.

¶285

Chapter IV of the Act deals with the functions of the Board. This chapter comprises 4 sections – i.e. Section 11, on functions of the Board, section 11A on matters to be disclosed by the companies, section 11AA on Collective investment scheme and section 11B on power to issue directions. Since the powers under section 11 and 11B have been invoked in the matter, it is felt necessary to have a look at these two sections. According to sub section (1) of section 11:

¶286

“Subject to the provisions of this Act, it shall be the duty of the Board to

¶287

protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit”

¶288

Sub section (2) refers to measures to provide for certain matters enumerated therein, with a caveat that it is without prejudice to the generality of the provisions of sub section (1) “Prohibiting fraudulent and unfair trade practices relating to securities” is one of the measures, SEBI is expressly empowered to take. In exercise of the said power SEBI has made the 1995 Regulations. This Regulations came into force with effect from 25.10.1995, that is the date on which it was published in the official gazette. We will discuss the provisions of the said regulations a little later. Before that let us also have a look at section 11B invoked by the Respondent to issue the directions. Text of section 11B is extracted below:

¶289

“Power to issue directions

¶290

11B. Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary;-

¶291

(i) in the interest of investors, or orderly development of securities market; or

¶292

(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or

¶293

(iii) to secure the proper management of any such intermediary or person.

¶294

it may issue such directions,-

¶295

(a) to any person or class of persons referred to in section 12, or associated with the securities market; or

¶296

(b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market”

¶297

Now back to the 1995 Regulations:

¶298

Regulation 2(b) defines dealing in securities as under:

¶299

"dealing in securities” means an act of buying, selling or otherwise dealing in any security or agreeing to buy, sell or otherwise deal in any security by any person either as principal, or as agent”.

¶300

The expression “fraud” has been defined in clause (c) of regulation 2 as under:

¶301

“Fraud includes any of the following acts committed by a party to a contract or with his connivance, or by his agent with intent to deceive another party thereto or his agent or to induce him to enter into the contract:

¶302

(1) the suggestion, as to a fact, of that which is not true, by one who does not believe it to be true

¶303

(2) the active concealment of a fact by one having knowledge or belief of the fact

¶304

(3) a promise made without any intention of performing it

¶305

(4) any other act fitted to deceive

¶306

(5) any such act or omission as the law specially declares to be fraudulent; and ‘fraudulent’ shall be construed accordingly,

¶307

Explanation: Mere silence as to facts likely to effect the willingness of a person to enter into a contract is not a fraud, unless the circumstances of the case are such that regard being had to them it is the duty of the person keeping silence to speak or unless his silence is in itself equivalent to speech.”

¶308

Chapter II is the core chapter in the Regulations titled “Prohibition of Fraudulent and Unfair Trade Practices relating to securities market”. Regulation 3 thereunder prohibits any person from buying, selling or otherwise, dealing in securities in a fraudulent manner. Prohibition against market manipulation’ is covered by regulation 4. Regulation 5 is on “Prohibition of misleading statements to induce sale or purchase of securities” and regulation 6 prohibits “unfair trade practices relating to securities”. In the present case the charge is that the Appellant has violated regulation 4(a) and (d). Full text of the said regulation 4 is extracted below:

¶309

Prohibition against market manipulation:

¶310

No person shall –

¶311

(a)effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities, and thereby inducing the sale or purchase of securities by any person;

¶312

(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;

¶313

(c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions;

¶314

(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities;

¶315

(e) pay, offer or agree to pay or offer, directly or indirectly, to any person any money or money’s worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing, or causing fluctuations in the market price of securities;

¶316

Chapter III provides for investigation into alleged contravention of the regulations and consequential action thereafter. Regulation 7 empowers SEBI suo motu or upon information received by it to cause an investigation to be made in respect of the conduct and affairs of any person buying, selling or otherwise dealing in securities, by an investigating officer, for the purposes, namely- (a) to ascertain whether there are any circumstances which would render any person guilty of having contravened any of these regulations or directions issued there under (b) to investigate into any complaint of any contravention of the regulation, received from any investor, intermediary or any investors. In terms of regulation 8, in the normal course , before causing an investigation the Board is required to give notice to the person concerned but this requirement can be dispensed with for certain reasons specified in the regulation. Regulation 9 is on the duties and obligations of the person under investigation. In terms of regulation 10 the concerned investigating officer is required

¶317

to submit the investigation report to the Board. Regulations 11, 12 and 13 deal with the follow up action. These three regulations are extracted below:

¶318

“11. Power of the Board to issue directions:- The Board may, after consideration of the report referred to in regulation 10, and after giving a reasonable opportunity of hearing to the person concerned, issue directions for ensuring due compliance with the provisions of the Act, rules and regulations made thereunder, for the purposes specified in regulation 12.

¶319

Purpose of directions:- The purpose for which directions under regulation 11 may be issued are the following namely:

¶320

(a) directing the person concerned not to deal in securities in any particular manner.

¶321

(b) requiring the person concerned to call upon any of its officers, other employees or representatives to refrain dealing in securities in any particular manner;

¶322

(c) prohibiting the person concerned from disposing of any of the securities acquired in contravention of these regulations;

¶323

(d) directing the person concerned to dispose of any such securities

¶324

(e) acquired in contravention of these regulations, in such manner as the Board may deem fit, for restoring the status-quo ante.

¶325

Suspension or cancellation of registration:- The Board may, in the circumstances specified in regulation 11, and without prejudice to its power under regulation 12, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registrations under section 12 of the Act;

¶326

Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the regulation applicable to such intermediary is complied with”

¶327

Scope of regulation 4(a) and (d) was elaborately argued by learned Senior Counsel appearing for the parties. While Shri Chinoy vehemently argued that the said regulations are not attracted, Shri Dada in equal force emphasised that these regulations are attracted. In this context it is considered necessary to examine the scope and reach of the said regulation 4(a) and (d), to begin with.

¶328

On a perusal of regulation 4 it is clear that prohibition is against market manipulations stated in clauses (a) to (e) therein. According to the impugned order the Appellant company indulged in the type of market manipulation referred to at clause (a) and (d) . Text of the regulation has been already extracted above. To attract regulation 4(a) (i) a person should have effected, taken part in, or entered into either directly or indirectly, transactions in securities (ii) the transactions must be with an intention (iii) such transaction must be to artificially raise or depress the prices of securities (iv) the result of the action must be to induce the sales or purchase of securities by any person. The ingredients of regulation 4(d) are that (i) a person must enter into a purchase or sale of any securities (ii) said purchase or sale must not be intended to effect the transfer of beneficial ownership (iii)the purchase or sale must be intended to operate only as a device to inflate, depress or cause fluctuations in the market price of securities. On a perusal of the regulation it is clear that reach of clause (a) is wider than the reach of clause (d). Regulation 4(a) brings not only the purchaser and seller but even third parties also to its ambit , if they are

¶329

found in any way involved in effecting or taking part in the transactions directly or indirectly. The motive behind the action and the effect of the actions is also relevant. Transactions in securities, with the intention of raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person is the pointer in this regard. Artificial action to induce other persons to transact in securities is the core theme of regulation 4(d). According to Blacks Law Dictionary “deceit” means “ a fraudulent and deceptive misrepresentation, artifice or device used by one or more persons to deceive and trick another, who is ignorant of the true facts, to the prejudice and damage of the party imposed upon”. The caption of Chapter II referred to above is also a pointer in this regard. On a careful perusal of the regulation it is clear as Shri Chinoy pointed out that element of deceit is an underlying factor in the transaction. A genuine transaction by itself cannot attract the regulation though such a transaction had resulted in market price variation. Regulation 4(a) attracts only if the transaction is made with an intention of artificially raising or depressing the prices of securities so as to induce any other person to sell or purchase the securities. The participation need not necessarily be direct, it can be indirect as well, as pointed out by Shri Dada.

¶330

Prohibition in regulation 4(d) is on entering into transactions for a purchase or sale of any securities not intended to effect transfer of beneficial ownership but intended only as a device to distort the market price of securities. In other words the regulation covers speculative trading. Under regulation 4(d) it is not necessary that the action should result in inducing others to purchase or sell the securities as in the case of regulation 4(a). It has to be noted that in both the clauses, the intention of the party is relevant. Therefore an element of mens rea is also involved.

¶331

The factual matrix based on which charge of market manipulation has been levelled against the Appellant company is as under:

¶332

Providing funds to the tune of Rs.9.4 crores to Damayanti group, a front for Shri Harshad Mehta, a person notified under the Special Court Act, during 5.9.97 to 2.5.98 for carrying out transactions to manipulate market.

¶333

Providing funds to the tune of approximately Rs.47 crores to bail out some of the brokers connected with Damayanti group trapped in payment crisis in BSE/NSE in June 1998.

¶334

The Respondent has briefly explained the back ground and has also made certain observations in the following first few paras of the order giving an insight into the matter:

¶335

“Large volumes coupled with abnormal price movements were observed in the stock exchanges in respect of shares of BPL Ltd (BPL), particularly during the period between April and June 1998. The price of the BPL scrip which was Rs.180/- during April touched a high of Rs.446/- by first week of June. The said price movement in the scrip of BPL was not in conformity with the movement in index of The Stock Exchange, Mumbai (Sensex) / National Stock Exchange, Index (Nifty). The BSE sensex showed a decline of 11% i.e. from 3969 to 3546 and Nifty showed a decline of 5% from 1081 to 1027, whereas, the price of BPL share rose by 148%. This rise in price was accompanied by abnormal volumes in the share of BPL, both at The Stock Exchange, Mumbai (BSE) and National Stock exchange (NSE) during this period and that the price movement in the scrip of BPL vis a vis the price movements of the shares of other companies in the same industry segment was highly abnormal. Though price of BPL was continually on rise, the scrip could not sustain the rise any longer and fell sharply after 04.06.98

¶336

and declined to a low of Rs.139/- in the month of June, 1998.

¶337

Consequently, investigations were conducted by SEBI into the suspected price manipulations in the scrips of BPL. The investigations revealed the facts as appear in subsequent paras.

¶338

A set of brokers and sub brokers viz. R.R.Mohta – BSE broker, M/s. Ramrakh R Bohra – BSE broker, M/s. Sony Securities Ltd.-NSE broker, M/s. Digital Leasing & Finance Ltd (hereinafter referred to as Digital).NSE broker etc acting on behalf of a common set of clients i.e. Damayanti Group, cornered a large quantity of shares of BPL both at BSE and NSE.

¶339

These clients i.e. Damaynati Group transacted in the share of BPL through these brokers and built up unusually large positions in the carry forward segment in the scrips of BPL. It was noticed that the outstanding purchase positions were abnormally high in the scrips and it went to the extent of 9.45% of total equity of BPL. This increase in carry forward positions was accompanied by a corresponding increase in the scrip price. The increase in hawala prices of the scrip (closing rate on the date of the end of the settlement) over successive settlements, was used for making further positions in carry forward etc. The delivery of shares received was also utilised for raising finances by doing share badla. In BPL, the hawala rate moved consistently from Rs.163 in settlement no.1 to Rs.410 by settlement no. 11. Damayanti Group acting through a set of brokers built up large concentrated positions in the scrip at BSE. This position was around 70% of the total position at the Exchange (BSE and NSE) in BPL.”

¶340

The Respondent’s final conclusion is found in para 14.1 of the order which reads as under:

¶341

“In view of the above findings based on documentary evidence, strong circumstantial evidence corroborated by statements of various persons, it is conclusively established that BPL was involved in creating a false market and manipulating the prices of its scrip, in connivance with Shri Harshad Mehta by aiding, abetting and being instrumental in effecting transactions by taking part and entering directly and indirectly into transaction in the shares of BPL”.(emphasis supplied) The order though refers to cornering of shares by companies of Damayanti group and involvement of Shri Harshad Mehta, is silent about the action, if any, taken against them. However, learned Senior Counsel appearing for the Respondent stated that they have been proceeded against separately and orders also have been issued in most of the cases holding them guilty of market manipulation.

¶342

The charges against the Appellant company as already stated relate to supply of funds by it in two tranches –i.e. (i) Rs.9.4 crores for financing transactions in the market and (ii) Rs.47 crores to bail out the “brokers in distress”. To begin with let us examine the 1st phase of the alleged funding:

¶343

The details of various payments made by BPL to Digital, as per the impugned order are as under:

¶344

Date	Amount(Rs.)
05.09.97	5 crores
10.10.97	75 lakhs

¶345

22.10.97	75 lakhs
31.10.97	75 lakhs
17.11.97	27.50 lakhs
22.12.97	27.50 lakhs
02.02.98	27.50 lakhs
05.03.98	27.50 lakhs
02.05.98	27.50 lakhs
Total	8,62,50,000

¶346

The order further states that only Rs. 75, 62, 500 was transferred from the accounts of BSFL on 6.10.97. The Respondent’s version is that the funds were supplied to Digital on account of Damayanti group and the said Digital made further disbursals of money so received to various entities/brokers etc to buy the Appellant’s shares.

¶347

The Respondent has also stated that from the books of Digital it was noticed that “on 5.9.97 itself when BPL transferred Rs.5 crores to Digital account, there was out go of approximately Rs.6 crores on the same day itself on behalf of Damayanti group.” According to the Respondent “this goes to prove that the transfer of the said amount was not in lieu of any transaction of purchase of shares as alleged by BPL”. In this context it may be stated that only because there was an outflow from Digital to the extent of Rs.6 crores on 5.9.97 to Damayanti group against Rs.5 crores stated to have been received on 5.9.97 from BPL, by itself cannot be considered as an evidence to prove the version that the money was given to purchase shares of the Appellant company. Digital, it is admitted by the parties, is a share broker and there is no mention any where in the order that it was dealing exclusively for the Appellant company. Therefore only on the basis of the fundflow from it to others in the absence of other clinching evidence it is difficult to support the Respondent’s version.

¶348

In this context it is to be noted that the Respondent has relied on the so called affidavit of Digital. This affidavit is a crucial piece of evidence relied on by the Respondent. A portion of this affidavit I have already extracted in the earlier part of this order. Still for proper reference, at the cost of repeatation, portion relevant to the issue under consideration is extracted below:

¶349

“On 26.08.97 we executed a contract note by fax with BPL for sale of 5, 00, 000 shares of BPL @ Rs.100/-. We also received a letter dated 20.8.97 signed by Shri Balathandayutham, Vice President of BPL Sanyo Finance Ltd, confirming their order for 5, 00, 000 shares of BPL @ Rs.100/-. On 05.09.97 we received Rs.5 crores from BPL by way of Demand draft (5 of Rs.90 lakhs each, and 1 of Rs.50 lakhs). As soon as we received the funds from BPL Bangalore, after deducting Damayanti groups dues to us, we disbursed the balance amount as per their instructions to various entities and then waited for their instructions to close the entry. Later starting from 06.10.97 to 09/03/98 we received an amount of Rs. 4, 10, 62,500 from BPL Bangalore in installments, plus a final Rs.27.5 lacs received on 06/05/98. Against this amount, during that period we raised a bill on BPL for the following sale as per instructions of Damayanti:

¶350

2 lacs shares of KREB BIOTECH

¶351

1 lac shares of SWARAJ MAZDA

¶352

1.25 lac shares of BPL.

¶353

Later, the above bill was changed to reflect a sale of 1,10,000 shares of BPL scrip @

¶354

Rs.400/- upon Damayanti’s instructions, in good faith, without suspecting any wrong doing in their frequently changing instructions we cancelled and destroyed the previous bill and issued the fresh bill. We never gave delivery of these share to BPL although we have stated and Shri Rajaram has acknowledged that we have delivered the share on 06/06/98 we still have to receive Rs.1,87,500 from BPL Bangalore.

¶355

¶356

¶357

By the time we realised that we had been made scapegoats, we were already embroiled in the SEBI investigation and we could not find an exit route unless we forfeited the Damayanti groups dues to us. For the reason alone, we were compelled to say what they wished us to. We were asked not to say anything about Shri Harshad Mehta’s involvement.”

¶358

Though the statement is branded as “Affidavit” and drawn on a stamp paper of Rs.20/- I find the same wanting in basic requirements of a proper affidavit. It is nothing but a letter addressed to the Chairman of the Respondent in reply to a show cause under regulation 29 of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 in an inquiry against Digital. Notice under Regulation 29 is issued for the purpose of imposition of penalty in the light of the report submitted by the inquiry officer in an inquiry conducted under regulation 28. Thus it is clear that the conduct of the said Digital was under inquiry and the inquiry officer had found him guilty of violating the regulations and had consequently recommended imposition of penalty. The contents in the “Affidavit” under reference need be viewed in the said context. It is clear from the tone of the “Affidavit” that it is some sort of a mercy pleading. It has admitted several lapses on its part including manipulation of records to suit its interest. There are glaring contradictions as well. To quote one such contradiction – in the first para it has been stated that “the money received from BPL was disbursed as per their instructions to various entities”, but in the fourth para it has been stated “during all these transactions we were never in touch with the BPL Group. We received instructions only from Shri Harshad Mehta”. While accepting the “Affidavit” of such a person whose credibility is questionable, utmost caution is necessary. Those portions therein which are corroborated with other evidence alone can be taken into consideration.

¶359

It has been stated that Digital executed a contract for sale of 5 lac shares of BPL based on a letter dated 20.8.97 signed by Shri Balathandayutham, Vice President of BSFL confirming their order for 5 lakh shares of BPL @ Rs.100/- . In the “Affidavit” it has also been stated that “ We received from BPL by way of Demand Drafts (5 of Rs.90 lacs each and 1 of Rs.50 lacs)” and “later starting from 6.10.97 to 9.3.98 received an

¶360

amount of Rs. 4, 10, 62, 500 from BPL Bangalore in instalments, plus a final Rs. 27.5 lacs on 6.5.98”. A copy of Shri Balathandayutham’s letter regarding “purchase of BPL Ltd Equity shares”, is on record. This letter is on the printed letterhead of “BPL Sanyo Finance Ltd”. The letter addressed to Digital Leasing and Finance Ltd reads as follows:

¶361

“This refers to the telephonic conversation, the undersigned had with you on the above subject and we do hereby confirm that 5, 00, 000 Equity shares of BPL Ltd may kindly be purchased at the price of Rs.100/- per share (including brokerage). On receipt of the confirmation by way of contract note issued in this direction we will make necessary arrangements to settle the dues. Kindly do the needful.(emphasis supplied)

¶362

Thanking you, Very truly yours BPL SANYO FINANCE LTD

¶363

Sd/-

¶364

R.BALATHANDAYUTHAM VICE PRESIDENT

¶365

It is seen from the copy of the contract note and the bill relating to the above transaction forming part of the appeal that these are in the name of BPL Sanyo Finance Ltd- specially marked to Shri R. Balathandayutham. On a perusal of the copy of the details of the transactions provided by Digital, relied on by the Respondent, and forming part of the appeal, the following entries are noticed.

¶366

Date	Party	Amount Received(Rs.)
5.9.97	BPL Sanyo Finance Ltd	5,00,00,000
6/7.10.97	BPL Sanyo Finance Ltd	75,62,500
10.10.97	BPL Sanyo Finance Ltd	75,00,000
22.10.97	BPL Sanyo Finance Ltd	75,00,000
31.10.97	BPL Sanyo Finance Ltd	75,00,000
17.11.97	BPL Sanyo Finance Ltd	27,50,000
22.12.97	BPL Sanyo Finance Ltd	27,50,000

¶367

The details available on record also reveal payment by Digital to several entities including certain entities stated to be of Damayanti group. Digital’s statement shows receipt of only Rs.5 crores on 5.9.97 from BSFL, but the amounts paid on that day are as follows:

¶368

Date 05.09.97

¶369

Party	Amt. Paid
Malar Share Shoppee	4906800.00
Arhum Securities	422025.00
J.D. Investment	115000.00
Bharati D. Thakker	116670.00
Jignesh Dalal	115000.00
Time Investment	267300.00

¶370

Scope Investment	642800.00
Surya Investment	87400.00
Shri Krishna & Co	293660.15
Anil Shah Securities	1200000.00
Satyanarayan Nangalia	768401.16
N.V. Shah	705408.50
SonySecurities	1100000.00
Malar Share Shoppe	590330.00
SonySecurities	1700214.15
Kirti J. Shah	230000.00
Damayanti Fin	33770000.00

¶371

On a perusal of the material available it is clear that Digital was doing business for several clients and some of the entities of Damayanti group were also among them. The evidence on record, shows that Digital had received funds from BSFL and transacted business making use of the funds. It was BSFL which had instructed as to the nature of securities to be purchased as is evident from Shri Balathandayutham’s letter referred to above.

¶372

It is seen from the show cause notice dated 20.12.1999 issued by the Respondent, based on the findings of the investigation carried by it that “ Shri R. Balathandayutham, Vice President of BPL Sanyo Finance Ltd, an associate company of BPL Ltd” had given mandate to Digital to purchase 5 lacs shares of the Appellant company @ Rs.100/- per share and also stated that the contract note 26.8.97 in this regard was issued on BPL Sanyo Finance Ltd and the purchase bill dated 26.8.97 was also found raised on BPL Sanyo Finance Ltd. Digital’s version to the extent of the involvement of BPL Sanyo Finance Ltd thus stands confirmed. But then, it has been stated that the said transaction of 5 lac shares of the Appellant did not materialise and cancelled on 26.8.97. In this context it is seen that the Respondent had asked Digital whether the money was “refunded back to BPL Sanyo Finance Ltd” and to this Digital’s reply was that instead of refunding the money they approached BPL Sanyo Finance Ltd with an offer for sale of shares and Fully Convertible Debentures (FCDs) of Money Television Industries Ltd and Digital claimed that it sold 38, 13, 500 shares and 11,86,500 FCD’s of Money Television @ Rs.10/- each to BPL Sanyo Finance (a firm). According to the Respondent, as per the documents available with Digital those shares and FCDs of Money Television were delivered to BPL Sanyo Finance were acknowledged by Shri A.R. Rajaram, Company Secretary on a back date. The Respondent has viewed that since Shri A.R. Rajaram, Company Secretary of the Appellant, acknowledged receipt of those shares and FCDs it could be considered to be an acquisition in effect by the Appellant itself. In this context it is seen from the copy of the contract note and the bill relating to the transaction involving the said securities filed in the appeal, that these are in the name of “Sanyo Finance”. Copy of the contract note and bill indicates that the documents were received “For BPL Sanyo Finance Ltd” by Shri A.R. Rajaram in his capacity as the Authorised signatory. It is therefore difficult to agree to the view that since Shri Rajaram, who is also the Company Secretary of the Appellant, having accepted the documents, the transaction should be considered as made by the Appellant itself. In this context it is to be noted that the Respondent itself had admitted that Sanyo Finance is a partnership firm. Shri R. Balathandayutham in his statement dated 10.8.98 to a query by the investigating officer (Q.10.) on the constitution and relationship of Sanyo Finance with the BPL Group had stated –“Sanyo Finance is a partnership firm with two corporate partners and one individual by the name of Shri Rajgopal ............................. I cannot comment

¶373

on the relationship between Sanyo Finance and the BPL Group”. But Shri T.C.Chauhan was more candid. He in his statement dated 14.8.98 had said ‘Sanyo Finance is a partnership firm belonging to the BPL Group set up to manage media business”. However I do not find any indication in the order of any attempt having made to find out as to who are all the partners of the said firm and in particular whether the Appellant was one of the partners. In this context it has to be noted that the impugned order is directed to the Appellant and not to the BPL Group. It is felt that it would have been more appropriate to identify the involvement of each entity of the group and examine its role if any, in the transactions and reach at conclusions based on the role of each concerned and proceed against the concerned entity, if found necessary, instead of referring to the involvement of the Group and then proceeding against the Appellant without establishing any charge specific against it.

¶374

Now coming back again to the alleged supply of funds by the Appellant to Digital the statements made by Shri Balathandayutham and Shri T.C.Chauhan, on which the Respondent has placed heavy reliance, throw some light. Their statements remain unrebutted on this particular point. Shri Balathandayutham in his statement dated 10.8.98 had stated that BPL Sanyo Finance Ltd is engaged “in leasing, hire purchase, bill discounting, ICDs, purchase and sale of shares etc, that it is registered with the Reserve Bank of India as a NBFC”. The fact that the said company was carrying on investment activities in securities is evident from his answer (A.6) that “all the investments by BPL Sanyo Finance Ltd as on 31.3.97 are reflected in the audited balance sheet provided to you. The investments as on 31.3.98 are separately given to you. After 31.3.98 we have purchased, 1, 10, 000 shares of BPL Limited at the rate of Rs.400/- each on 2.6.98 from M/s. Digital Leasing and Finance Ltd, a member broker of BSE and NSE. During the period 1.4.97 to 31.3.98 we have sold 192500 shares of BPL Ltd on various dates and at different rates aggregating 1, 62, 53, 615 through M/s. Sheshanka Securities, member Bangalore Stock Exchange and NSE, M/s. Nagarjuna Securities, member Hyderabad Stock exchange and M/s. Alpic Securities. All these brokers have offices and branches in Bangalore. We also purchased 5000 shares of BPL Ltd on 29.8.97 at the rate of Rs.77.80 from M/s. Nagarjuna Securities”. Thus it is clear that the said company was transacting in securities through different brokers.

¶375

In this connection it is also worth noting his statement in the context of the company’s transaction with Digital referred to in the order. In answer to a question (A.7) Shri Balathandayutham had stated that “we have made payment of Rs. 75, 62, 500 during 97-98 and another Rs. 3, 35, 00, 000 was paid by BPL Limited on our behalf to M/s. Digital Leasing and Finance Ltd during 97-98 and another Rs. 27, 50, 000 was paid by BPL Ltd to M/s. Digital Leasing and Finance Limited during 98 - 99 against which 1, 10, 000 shares of BPL were purchased by us on 2.6.98 for Rs. 4, 40, 00, 000.” Shri Balathandayutham has also admitted the fact of purchasing the shares and FCDs in the name of Sanyo Finance from out of the funds of Rs.5 crores given by it to Digital in 1997. The question of cancellation of the earlier transaction stated to be involving 5 lac shares of BPL and the substitution by Money Television Securities and alleged back dated receipt of the same are matters involving BSFL and Digital. The Respondent has not produced any evidence to show that these actions were taken at the behest of the Appellant. Regarding the purchase of 1, 10, 000 shares by BPL Sanyo Finance Limited from Digital for Rs.4, 40, 00, 000 remains unrebutted and the Appellant has stated that BSFL had lodged the same for transfer on 16.7.98 and the transfer has been recorded also remains unrebutted. Shri Balathandayutham had in his answer to the question (Q.33) also indicated the nature of the transaction involved. The investigating officer had put a question that – “In response to question No.7, you have stated that Rs. 3, 35, 00, 000 and Rs. 27, 50, 000 were paid by BPL Limited to Digital Leasing and Finance Ltd, on our behalf for purchase of 1,10,000 shares of BPL Ltd. Does this tantamount to purchase of own shares by BPL Ltd?” to which Shri Balathandayutham stated that “As a part of the portfolio investment we use to request

¶376

BPL Limited to transfer the funds to Digital Leasing and Finance Ltd. As the shares in BPL Ltd on 31.3.97 and subsequent period were sold, we wanted atleast to replenish the quantity sold by us”. From Shri Balathandayutham’s statements on record it is clear that BSFL used to deal in the shares of the Appellant. For its fund requirements it used to approach the Appellant. I do not see any thing illegal or improper as it is, on the part of BSFL, which is a finance company, in the normal course of the business activities purchasing and selling securities of companies including the shares of the Appellant. There is no prohibition in law on a group company investing in the shares of another company in the same group, provided the investment is not by the subsidiary in the shares of its holding company that it is no where stated in the order that BSFL is a subsidiary of the Appellant. There is no evidence to show that the Appellant was funding the purchase of its shares. The investigation has not gone into the details of the transactions between the Appellant and BSFL, but seems to have jumped to hasty conclusions.

¶377

The Respondent had put considerable reliance on the statement of Shri T.C.Chauhan who is a Director in the Board of the Appellant and also in BSFL. In his statement dated 14.8.1998 Shri Chauhan had admitted that he was Director marketing of the Appellant, and also a Director of BPL Sanyo Finance Ltd. According to him he had no day to day involvement in the affairs of BSFL and no particular responsibility was assigned to him (A.3), that he was not looking after the affairs relating to investment in shares and securities by BSFL. To a question (Q.7) as to who authorises the decision for BSFL in the matters relating to investments in shares and securities, Shri Chauhan’s answer was “Normal transactions of buy and sell, say up to a crore of rupees, are authorised by the officers like Shri Balathandayutham ................. Beyond that it is informally discussed by the Board. A quarterly review of the activities of the company is presented to the Board as and when, it meets and all the activities including investments are reviewed.” With reference to the purchase of 5 lac shares of the Appellant by BSFL, Shri Chauhan stated (A.11) that the “Investment decisions are as I mentioned earlier discussed informally in the Board. Only in case of an offer of 5 lakh BPL, shares that had come to my notice through some broker. This was as usual informally discussed at the Board meeting of BPL Sanyo Finance Ltd and based on its concurrence, I asked Shri Balathandayutham to go ahead and purchase the shares. No documentation was prepared for the decision of the Board and this was orally communicated to Shri Balathandayutham”. This statement further strengthens the v i ew t h at t h e in vest m e n t dec i s i o n was n ot ta k e n by S hri C h au h a n in hi s capac i ty as t h e director of the Appellant, but as a part of the Board of Directors of BSFL. It is the Board of Directors who takes normally the investment decisions in a company. But the practice is to delegate the Boards power in this regard to a committee of Directors or even to a director or officer. But the Respondent has not produced any such documentary evidence showing that Shri Chauhan was authorised to take investment decision in the Appellant company or in BSFL. To another question (Q.15) as to what was the source of funds available with BPL Sanyo Finance Ltd for the purchase of these five lakh shares of BPL” Shri Chauhan’s answer was “BPL Sanyo Finance Ltd. asked for a loan of rupees five crores from BPL Ltd. At BPL I am responsible for the sale of all the group companies and as and when any of the group companies has a requirement of funds, I authorise and provide temporary accommodation to them. Accordingly rupees five crores was given by BPL Ltd to BPL Sanyo Finance Ltd.” Thus there is abundant evidence to show that the Appellant company had given money to BSFL. But at the same time no evidence has been produced to show that BSFL was given money to use it for any particular purpose and or that BSFL was acting at the behest of the Appellant. Digital’s version that they received money directly from the Appellant itself is not a sound reason to conclude that Appellant was funding. The loanee can always direct the lender to disburse the amount to any person of the loanee’s specification and in that case the lender will directly pay the sum to that specified person and such direct payment does not mean that the lender

¶378

was lending money to that specified person. In the instant case it is born out of the records of the Digital that the fund was provided by BSFL and share purchases were also made for the said BSFL. The Respondent’s argument that the Appellant did not take any steps to recover Rs. 5 crores from Digital only proves the Appellants case that it was not Appellant’s money but BSFL’s. Shri Chauhan had stated at that time that “the company was continuously pursuing the matter, that no suit for recovery or complaint or arbitration was filed”. However it is found that subsequently BSFL had purchased the securities of Money Television against the said Rs.5 crores and 1,10,000 shares of the Appellant company against Rs.4.70 crores paid to Digital. For the purpose of considering the Appellant’s case, I do not consider it necessary to go into the details of the transactions BSFL had with Digital and Digital with others for the reasons discussed in this order.

¶379

The fact that BSFL had received money from the Appellant has been even accepted by the Respondent. But the Respondent’s version is that the said BSFL was used as a conduit to supply funds to Damayanti group and that the Appellant “was exercising its controlling mind in BSFL.” The basis on which the Respondent has come to the conclusion that “BPL was exercising its controlling mind in respect of BSFL” has been stated in para 13.1. of the order as follows:

¶380

“BPL has also contended that BPL is a separate and distinct, corporate entity from BSFL and the show cause notice has alleged transactions not by BPL but by BSFL and Sanyo finance. It has also contended that the controlling mind in respect of these entities is distinct from BPL. In this regard, I observe that the facts found in paras above clearly establish that BSFL is an associate of BPL which has been admitted by BPL. This fact was also indicated in the show cause notice. The same is further supported by the statement of Shri T.C.Chauhan, common Director of BPL and BSFL and also of Shri Balathandayutham, Vice President of BSFL who have stated that BSFL is a group company of BPL. It is also evident from the shareholding pattern of BSFL as submitted by BPL itself as annexure to its reply. From the said share holding pattern, it is clear that BPL and its associates hold 50% of the share holding of the BSFL. In addition, BPL and BSFL have three common directors namely Shri T.P.G. Nambiar, Shri M.A. Uppal and Shri T.C.Chauhan. these facts clearly suggest that BSFL is an associate of BPL ltd. It is also established

¶381

that Shri T.C. Chauhan who is part of process of decision making for grant of loan/advances in BPL in his capacity as a director is also the person taking investment decisions for BSFL in his capacity as a Director of BSFL. The same is further corroborated by the statement of Shri Balathandayutham who in response to a separate query as to who takes the decision in BSFL for purchase of shares etc stated that “the main director is Shri T.C.Chauhan”. Thus it is clear that BPL was exercising its controlling mind in respect of BSFL”.

¶382

BSFL is an associate company of the Appellant is the main basis on which the Respondent has come to the conclusion that “BPL was exercising its controlling mind in respect of BSFL”. The fact that BSFL is an associate company of the Appellant has been even admitted by the Appellant. But then it is erroneous to view that because BSFL is an associate company of the Appellant, the Appellant should be exercising controlling mind in respect of BSFL. The Respondent’s version in para 13.1 of the order gives an impression that BPL is the major shareholder and the Board of Directors of BSFL is dominated by BPL nominees. This is only one sided version. For the reason best known to the Respondent, it has not stated the materials fully in this regard. It is on record that BSFL is a joint venture with “fifty fifty” participation in ownership and management by BPL Ltd and a Japanese firm viz. Sanyo Electronic

¶383

company. While 50% of the share capital is with BPL Ltd, the remaining 50% is with the said Japanese firm. Out of the eight member Board of directors of BSFL, four directors are the nominees of BPL Ltd and the remaining four directors are the nominees of the said Japanese partner. There is no indication any where in the order that the said Sanyo Electronic Company, had given any authority to BPL to take decisions independently. On the contrary it is on record that out of four nominee directors of the said Sanyo Electronic company one of the directors viz. Shri Yoshi nobu Machino was a whole time Director of BSFL at the relevant period. It cannot be said in the absence of any evidence that the said nominee directors including the whole time director was “non existent entities” and it was BPL which was controlling the company. Respondent’s reliance on the role of Shri Chauhan’s dual role to establish its proposition is unfounded. Respondent has cited Shri Balathandayutham’s statement that “the main director is Shri T.C. Chauhan” to support its said theory But Shri Chauhan’s statement in answer to a question as to “the nature of your duties and responsibilities as a director of BPL Sanyo Finance Ltd” was that “I have no day to day involvement in the affairs of BPL Sanyo Finance Ltd. I attend its Board meetings. There is no particular responsibility assigned to me in BPL Sanyo Finance Ltd” seems to have been ignored. The reason for relying on Shri Balathandayutham’s statement and ignoring Shri Chauhan’s statements in such a matter has not been stated. Further it is not clear as to what exactly Shri Balathandayutham means by “main director” and it appears that, he was not asked to explain the same.

¶384

No serious effort seems to have been made by the Respondent to investigate as a fact how the management of BSFL has been conducted, so as to determine as to who was actually controlling the company though the Respondent’s finding is based on the theory that BPL is the controlling mind in BSFL and as such the transactions effected by the said BSFL need be considered as the transactions effected by the Appellant. The Respondent's proposition that "BPL was exercising its controlling mind in respect BSFL” so long remains unestablished the Appellant cannot be held liable for the actions of BSFL.

¶385

On a perusal of the show cause notice and the impugned order it is found that the material allegations are mainly levelled against BSFL and the instances cited in para 1 in the Memorandum of appeal are born out of the record that (i) on 20.8.97 BSFL gave mandate to Digital to purchase 5 lakh shares of BSFL, (ii) contract note and bills in respect of the transaction were raised in the name of BSFL, (iii) Digital received Rs. 5 crores on 5.9.97 form BSFL, (iv) credit for this payment was given in the books of account Digital to BSFL, (v) Digital approached BSFL with an offer for sale of securities of Money Television, (vi) Digital sold securities of Money Television, BPL, Knobs Biotech, etc to BSFL, (vii) securities were delivered to BSFL.

¶386

The various dates on which funds were supplied has been stated in the impugned order. It is also seen from the order that by June 98, the outstanding position of various brokers for the BPL shares in BSE was to the extent of 30 lakh shares. In the absence of any credible evidence, it is difficult to hold the view that it was the funds supplied by the Appellant in 1997 caused such a situation with the share price reaching a high of Rs.446/- in March 98. The Appellant’s argument that its shares had reached a high of Rs.636/- in September 1999 and the Respondents have not found it as a manipulated price and as such the price of Rs.446/- in March 98 cannot be considered as a “created price” is unacceptable. The price movement of shares are unpredictable. What is important is that whether it was artificially pushed up or pushed down intentionally. The Respondent has put forth material to believe that the broker’s abnormal activities could have effected the price in March 1998. The ‘quote’ has to be seen in that background. However, the Respondent has failed to establish any nexus between the price rise and the Appellant’s role vis-a-vis the same. In fact in

¶387

the order itself the Respondent has stated that:

¶388

“a set of brokers and sub-brokers viz. Shri R.R.Mohta – BSE broker, M/s. Ramrakh R.Bohra-BSE broker, M/s. Sony securities Ltd - NSE broker, M/s. Digital Leasing and Finance Ltd - NSE broker etc on behalf of a common set of clients i.e. Damayanti group, cornered large quantity of shares of BPL both at BSE and NSE. These clients –i.e. Damayanti Group transacted in the shares of BPL through these brokers and built up unusually large positions in the carry forward segment in the scrips of BPL. It was noticed that the outstanding purchase positions were abnormally high in the scrips and it went to the extent of 9.45% of total equity of BPL. This increase in carry forward position was accompanied by a corresponding increase in the scrip price. The increase in the hawala prices of the scrip (closing rate on the date of the end of the settlement) over successive settlements, was used for making further positions in carry forward etc. The delivery of shares received was also utilised for raising finances by doing share badla. In BPL the hawala rate moved consistently from Rs.163 in settlement No.1 to Rs.410 by settlement No.11. Damayanti group acting through a set of brokers built up large concentrated positions in the scrip at BSE. This position was around 70% of the total position at the Exchanges (BSE and NSE) in BPL...................................... The said brokers of BSE and NSE who were dealing on behalf of Damayanti group and who had allegedly cornered a substantial stock of BPL shares faced payment problems and could not discharge their pay-in-liabilities as they did not receive payment from Damayanti group”. In the order, it has also been asserted that “Above facts strongly suggest that Damayanti group of companies were transacting as front companies to facilitate transactions of Shri Harshad Mehta who is a notified person under the Sepecial court (Trial of offences Relating to Transactions in Securities) Act, 1992 and is subject to several restrictions imposed by the Courts in respect to dealing in securities and therefore could not have dealt in his own name and therefore conceived of these entities to operate as a front for him in the securities.” It has also been stated in the order that “Damayanti Group had cornered large quantity of shares of BPL. Out of a floating stock of around 40 lakh shares, around 34 lakh shares were in the control of Shri Harshad Mehta through various entities of Damayanti group/ L.K.Patel”. The Appellant has contested the accuracy of the Respondent’s figure of 40 lakh shares as floating stock. According to the Appellant “infact the floating stock was 1,18,00,000 shares as stated by BPL Ltd on affidavit.” If that is so, it makes a lot of difference.

¶389

Thus the Respondent itself, as is seen from its own finding recorded in the order, has come to the conclusion that it was Damayanti group of Shri Harshad Mehta transacted in the shares and the manner in which these companies built up their position much above the sustainable level and doomed.

¶390

I have very carefully gone through the material relied on by the Respondent to establish the Appellant’s alleged nexus between the Damayanti group/Shri Harshad Mehta and find no convincing evidence to support the Respondent’s contention. In para 6, 7, and 8 the Respondent has marshalled some material and it establishes association of Damayanti group with Shri Harshad Mehta. I have come to this finding based on the preponderance of probability. But the preponderance of probability test has failed in establishing nexus between the Appellant and the said Damayanti group/Shri Harshad Mehta for want of sufficient materials. The strong reliance on the alleged telephonic conversions of Shri Harshad Mehta with Shri Chauhan does not help to prove the Respondent’s case. It has to be remembered that Shri Chauhan was acting in a dual capacity as director of the Appellant and BSFL. The documents show

¶391

fund flow from BSFL to Digital etc. In that context the only inference possible is that the discussions if at all was with reference to investments, could be only with reference to investments by BSFL as it is seen from the material that it was not BPL but BSFL was investing in securities. Shri Chauhan has not admitted that he had discussed any thing about the investments. In the absence of any tangible material evidence on record it is difficult to link the Appellant with Shri Harshad Mehta on the basis of the said telephone calls alone. Unless it is reasonably established that Shri Harshad Mehta and his Damayanti Group transacted business at the behest of the Appellant it is difficult to hold the Appellant’s involvement in the transactions effected by Damayanti group/Shri Harshad Mehta.

¶392

There is no where in the order any mention of the Appellant transacting in any shares either directly or indirectly. Since BSFL has been found to be involved in the matter, why it was not subjected to investigation/inquiry and why no action was considered against it remains unexplained. According to the learned Senior Counsel for the Respondent all those entities involved such as Digital and other brokers and persons like Shri Harshad Mehta have been proceeded against. But BSFL was left untouched. Was it because that an order against BPL would be considered as an order against BSFL?. In my view not issuing show cause notice and pursing investigation into the conduct of BSFL cannot be considered as a trivial omission in the light of the factual position emerging out of the order. This omission has materially affected the outcome of the investigations.

¶393

Yet another finding in the order is that the Appellant had provided funds to the tune of Rs.47 crores to bail out the brokers in distress. In this context the portion dealing with the said charge is extracted below for ready reference:

¶394

12.1 (a) It has been revealed that a large number of brokers of BSE and NSE, dealing on behalf of Damayanti Group had cornered a substantial stock of BPL shares. It is also found that in Settlement No.12 i.e. from 8.6.98 to 12.6.98 some of the brokers, who dealt in the scrips (BPL, Videocon and Sterlite) and had large purchase positions, faced payment problems and could not discharge their commitments towards pay-in liabilities. It appears that these brokers were not able to get the payments from their clients i.e. Damayanti Group, a front for Shri Harshad Mehta. The shares marked for delivery were to be paid for, and on account of non-availability of requisite funds from Damayanti Group an arrangement was worked out whereby these shares were sold to SSKI and M/s. Jayantilal Khandwala through “all or none” or “bulk” deals at pre-determined rates and quantities by synchronizing the timing of logging in of the trades by the buyers and the sellers. Investigations revealed that trading system of the Exchange was opened much beyond the closure of trading time, to facilitate these transactions. These transactions were entered late in the night of 17th June 1998 and 19th June 1998.

¶395

(b) Another quantity of 4.5 lakh shares were also lying with the Clearing House of NSE on behalf of brokers who dealt for Damayanti Group and could not discharge their pay-in liabilities. The above facts also indicate that Damayanti Group had cornered large quantity of shares of BPL. Out of floating stock of around 40 lakh shares, around 34 lakh shares were in the control of Shri Harshad Mehta through various entities of Damayanti Group/LKP etc.

¶396

12.2(a) Inquiries were made with SSKI and M/s. Jayantilal Khandwala, members of the BSE who had purchased around 25 lakh shares of BPL at an aggregate cost of approximately Rs.60 crores. It has been found in the

¶397

books of SSKI that purchases were made on behalf of M/s. Monoplan Securities Limited (Monoplan). The said money was transferred, to Monoplan, a loss making company of SSKI, ostensibly, as application money towards allotment of 15% preference shares. The said money was received from the following entities which are under control/influence of BPL due to business relations as referred in subsequent para.

¶398

Applicant	No.of shares	Amount(Rs. In lacs)	Date
Oriental Transport Ltd	15,50,000	1550.00	19.06.98
Orion Construction Co. Pvt Ltd	15,50,000	1550.00	19.06.98
Badalona Overseas Pvt Ltd	16,00,000	1600.00	26.06.98
Total	4700.00

¶399

(b) It has further been revealed during the investigations that Exchange officials contacted SSKI to approach BPL for bailing out those brokers who were in difficulty. SSKI in turn approached BPL who arranged the necessary funds. BPL has not denied having provided funds for helping the brokers who were not able to met their pay-in liabilities, but, they stated they had not approached SSKI for the purpose but, it is the SSKI allegedly on behalf of BSE/ SEBI, who had approached them for making available the required funds for the purpose. In view of the admission of BPL regarding providing of funds for helping brokers, I do not consider it necessary to go into further details.

¶400

(c) So far as BPL’s submission that SSKI had allegedly approached them on behalf of BSE and that same had the approval of SEBI is concerned, I note that in response to a specific query during personal hearing, whether they can produce any written communication or refer to any oral advice by SEBI in this regard, BPL submitted that though they did not receive any formal or verbal communications from SEBI, but they were given the impression by SSKI/BSE that the said bail out is being carried out at the instance of SEBI and therefore, the said funds were provided in the interest of investors and capital market. It is surprising to note that a public limited company did not even consider it appropriate to verify with SEBI, before parting with the shareholders money that too to the tune of approx. Rs.47 crores.

¶401

12.3 Further, the above findings as mentioned in 12.2(a) above, are further substantiated by the fact that flow of funds to the account of Monoplan has taken place from BPL connected / controlled entities i.e. Oriental Transport Ltd, Orion Construction Co. Ltd, Badalona Overseas Pvt. Ltd. Ostensibly, both Orion and Oriental had received an advance of Rs.15.5 crores each from BPL towards subscription of 14% Non Convertible Debentures on a private placement basis on 18.06.98. This money was transferred to Monoplan on the same day. Badalona is an associate concern of SSKI and had received application money of Rs. 16 crores from BSFL on 26-06-98 towards allotment of 14% Convertible Debentures. BSFL in turn had received Rs.16 crores as advance towards allotment of 13% Convertible Debentures on private placement basis from BPL Sanyo Utilities and Appliances Ltd., a company belonging to the BPL group, on 25.06.98. Thus investment of Badalona is also in reality an investment of BPL group. Thus BPL and its associate concern M/s. BPL Sanyo Utilities and Appliances Ltd placed Rs. 47 crores at the disposal of SSKL for purchase of approximately 20 lacs shares of BPL through a web of entities.

¶402

Investigations into ultimate use of this fund, has brought out clearly that transfer of funds from BPL Group was to provide accommodation to those select brokers who were dealing on account of Damayanti Group. A camouflage of investment by different entities in preference shares in an associate company of SSKI was created to hide the real nature of transactions. It is also found that Rs.31,66,10,000/- was returned by Monoplan on 28/1/99.

¶403

Instead of allotting 47 lakh shares against the receipt of Rs.47 crores, only 15, 33, 900 shares were allotted.

¶404

4 Out of the shares purchased by SSKI as bail-out from the funds provided by the BPL group, 20, 00, 000 shares of BPL were sold subsequently in two tranche, one for 19,00,000 shares @ Rs.176.32 on 13/1/99 and 1, 00, 000 shares @ Rs.186.12 on 22/1/99. Thus, shares which were purchased for Rs.47 crores on 17th and 19th June, were sold for a consideration of Rs.35,36,20,000 i.e. at a loss of Rs.11, 63, 80, 000. Against this loss, Monoplan Securities Ltd. has kept with them Rs.15, 33, 90, 000 in the garb of allotment of preference shares to Orion Construction, which covers loss of Rs.11.64 crores and accrued interest thereon. Thus, it establishes that BPL indirectly acquired shares through Monoplan Securities.

¶405

12.5 The above findings are further substantiated by the statement of Shri Pramod Purshottam Katdhare, a tax consultant handling financial and tax matters of some of the BPL Group companies and an authorised representative of BPL, who stated on oath that Chairman of BPL Mr. T.P.G. Nambiar was also very concerned about this crisis. The stock exchange approached BPL thorough SSKI for diffusing the payment crisis and in that connection, they transferred the funds to Monoplan and Badalona Overseas Pvt. Ltd. (associate companies of SSKI). So far as the time as to when the transfer of funds from BPL, Bangalore to Digital are concerned, he stated that Mr. Balathandayutham or Mr. Chauhan may be able to inform in this regard.

¶406

Thus, it is established beyond doubt that BPL not only funded Harshad Mehta/ Damayanti Group and indirectly taken part in transaction in the securities but also funded bailing out of various brokers when they could not meet their pay-in liabilities.” (emphasis supplied)

¶407

The fact that the Appellant had provided Rs.47 crores, as stated in the impugned order has not been denied by the Appellant. Infact the Appellant has admitted the same as could be seen from its reply dated 20.6.2000 to the show cause notice that “What emerges from the material on record is that when a payment crisis was sensed by officials of the BSE and NSE, an effort was made bona fide to try and prevent a collapse or crash of the market. The actions of BPL Ltd. in respect of making funds available so as to prevent a crash in the market must be seen as an effort to advance investor protection and not against the interest of investors as is sought to be made out in the show cause notice. Indeed, at that time it was projected to BPL Ltd. and the management of BPL Ltd. understood that the actions and assistance on their part had the endorsement and approval of not only BSE and NSE officials but also of SEBI itself”. As per the statement of Mr. Katdhare dated 24/9/1999, “BPL Ltd. was given to understand that SSKL was approaching BPL Ltd. at the instance of SEBI. BPL Ltd. was also given to understand that officials of the BSE/NSE were engaged in discussions with the Tata group to also assist in ensuring that the small investor is protected and that the market does not crash. The paragraphs under reply distort the

¶408

correct position and project an entirely incorrect picture in relation to the crisis that was prevented. BPL Ltd had no role to play in the ‘all or none’ or ‘bulk’ deals at predetermined rates. BPL Ltd had no knowledge as

¶409

to the brokers who were entering into these transactions. At all times, BPL Ltd. was given to understand that the transactions were put through with the approval of stock exchange officials and SEBI”.

¶410

As per the Respondent’s own version “it has been revealed during the investigations that Exchange officials contacted SSKL to approach BPL for bailing out those brokers who were indifficulty. SSKL approached inturn BPL who arranged the money.” Thus it is clear that it was not the Appellant who had, of its own, decided to pump in money for bail out purpose. It was done at the behest of BSE to save the market from a serious crisis.

¶411

The material reveals that it was not the Appellant, who decided as to who should be bailed out. It was BSE who decided the name of the brokers to be bailed out, the quantity of the shares to be purchased, the rate at which the purchase was to be made etc. This is evident from the following statement of Shri Tarun Parvin Chandra Shah (Tarun Shah) dated 16.9.98, which the Respondent has also relied on. Shri Tarun Shah was a director of SSKL, during the relevant period to whom the money was reportedly given by the Appellant for bail out purpose. Shri Tarun Shah had stated:

¶412

“As stated earlier, the negotiation was done with President and Vice President of the BSE. At their instance these purchases of BPL Ltd shares were made. We on our part wanted to ensure that we are not stuck up with bad delivery and so we desired that the deal should be routed through the Stock Exchange mechanism. As asked by the Stock Exchange President and Vice President we punched in the deals for purchase of BPL Ltd shares, and this was done at a mutually agreed price of Rs.235/- per share. The price of Rs.230/- which is mentioned in Received Delivery Slip down loaded by the Exchange, is the hawala rate of Settlement No.13. All the deals other than all or none deals took at Rs.235/- only.

¶413

The deals were entered as bulk deals as certain brokers stuck up with pay-inliabilities for Settlement No.12 and as the pay in day was falling on 18th and the payment had to be made by that time, the deals were routed as bulk deals. We could muster only Rs.30 crore approximately by 17th of June and so only a limited quantity was put as bulk deals (to the extent of amount available). I had given a blank letter signed to my employee and asked him to punch in BPL Ltd shares to the extent of nearly 12, 77, 000. The name of the broker and the quantity for each broker was decided by the Exchange. In respect to the all or none deals, one line of phone was held by me and on the other side it was Shri Banthia who asked me to punch in all or none window a particular quantity at a fixed price of Rs.234.90 per share. We punched in nearly 3, 35, 000 shares in this fashion. The price, the broker, and quantity for each broker was decided by Shri Banthia subject to over all limit of 3, 35, 000 shares @ Rs. 234.90 for all or none deals. The all or none deals were carried out in the normal trading hours”. (emphasis supplied).

¶414

Shri Banthia, whose name appears in the statement above was at that time Vice President of BSE. In answer to another question, Shri Shah had reiterated the position –“We would like to make it clear that we were not desirous of acquiring any shares of BPL Ltd. We were requested by officials of BSE, to buy shares of BPL Ltd only to help certain brokers who had pay in difficulties. All the deals either as bulk deals or all or none deals which were entered on 17th June or 19th June at BSE were at the insistence of BSE officials. The deals with NSE brokers were done at the rate of Rs.209.10. Here too, purchase of 1, 00, 000 shares of BPL Ltd was at the instance of NSE officials and ” we did not desire to purchase these shares . (emphasis supplied).

¶415

Shri Tarun Shah has also admitted in his statement that “we approached the management of BPL to arrange for the necessary funds. The management of BPL helped Monoplan Securities by arranging application money for preference shares.” (emphasis supplied).

¶416

The Respondent has stated that Monoplan Securities Ltd is a SSKL company. Once it remains established that the funding of SSKL for bail out purpose was made at the behest of BSE, the channel and the manner in which the payment was effected is not of much relevance.

¶417

The fact that SSKL was approached by BSE is evident from the copy of the letter dated 12.6.98 from BSE to SSKL filed in the appeal. This letter also gives the perception of BSE on the market crisis under reference:

¶418

Substantive portion of the said letter is as under:

¶419

“Economic Sanctions following Indias Nuclear Test, non-fulfillment of investors expectations in the Union Budget 1998, plunging Yen and the very recent cropping of South East Asian Crisis has affected market sentiments. Seized of these problems SEBI has announced measures for strengthening the market.

¶420

We are hopefull that with these regulatory measures and efforts put in by our exchange the investors confidence would be restored. The present outstanding positions of various members for the BPL shares is around 30 lakh shares. As the members has been successful in garnering suitable investors up to 5 lakh shares, we suggest you try and arrange for purchase 25 lakh shares, so that the entire outstanding position is cleared. The Exchange has worked out a common price of Rs.235 per share”. The Appellant has filed a copy of another letter dated 17.6.98 from BSE to Chairman of Tata Finance Co. Ltd on the same subject. The introductory para of the letter is identical to the letter of BSE to SSKL referred above. In the 2nd para it has been stated that “.................. However we would appreciate if your company and the Tata group co-operate with us to support us in this endeavor. The present outstanding position of various members for the BPL shares is around 30 lakh shares. As the Exchange has been successful in garnering suitable investors up to 25 lakh shares we suggest that you purchase 5 lakh shares so that the entire outstanding position is cleared. The Exchange has worked out a common price of Rs.235 shares per share...........” (emphasis supplied).

¶421

The learned Senior Counsel for the Respondent had invited my attention to the statement dated 24.9.99 of Shri Pramod Purushottam Katdhare who claimed to be associated with the Chairman of the Appellant for 20 years, and is stated to be authoirsed to give statement on behalf of BPL Ltd. When asked (Q.7) “In June 1998, there was payment crisis in BSE and NSE, do you recollect how BPL was approached during this period and sequence of events”, Shri Katdhare’s answer was “I have read in the papers regarding the developing crisis and also heard from the people. Chairman of BPL, Shri T.P.G. Nambiar was also very concerned about such crisis. The Stock exchange through SSKL Stock Brokers (Shri Shripal Morakhia) approached BPL for diffusing the crisis. It was represented to BPL that they are being approached at the instance of SEBI and in the general interest of the stock market. The Stock Exchange authorities also have issued a letter dated 12th June 1998 addressed to SSKL requesting them to help in clearing the position of 30 lakh shares, which would restore

¶422

the confidence of the investors. The common price fixed by the Exchange was at Rs.235/- per share. It was also mentioned in the letter that the Stock Exchange has succeeded in garnering the suitable investors up to 5 lakh shares. It was also informed that the Exchange is discussing the matter with Tata Group of companies to co-operate and support the Exchange in their endeavor. With the above background and particularly with the representation made by SSKL that they are sent by SEBI, Badalonna Overseas Pvt. Ltd and Monoplan Securities Ltd were the two companies belonging to SSKL, Rs.47 crores was transferred to these two companies for purchase of debentures and preferential shares. Some preferential shares were allotted to Orion Construction Co. P. Ltd by Monoplan Securities. The rest of the money was refunded back later in the early part of 1999.”

¶423

From the position stated above, it is clear that Shri Katdhare is a person who knew the developments and there is no reason to disbelieve his statement. Therefore Shri Dada’s reliance on the statement relating to funding of Rs.47 crores for bail out purpose by the Appellant is acceptable. But the charge that “BPL indirectly acquired (its) shares through Monoplan” is baseless in the light of the material on record. The order has also highlighted Shri Katdhare’s statement that “Chairman of BPL, Shri T.P.G. Nambiar was also very concerned about this crisis” to support the Appellant’s involvement in the manipulation. I donot see any thing that way in the concern stated to have been expressed by Shri Nambiar to suggest the Appellant’s involvement as alleged. Admittedly Shri Nambiar as the Chairman of the Appellant, and also a promoter should be concerned in a payment crisis of such a magnitude, involving his company’s shares, that if he had not got perturbed in that context, then it would have been rather strange. A senior functionary of a company, that too “a heavy stake holder”, cannot remain unconcerned in such a situation.

¶424

The allegation that the Appellant funded bailing out of various brokers dealing for Damayanti group when they could not meet their pay-in-liabilities, in the light of the above discussion, is found baseless and untenable.

¶425

The fact is that the outstanding position was of brokers. If it had been a creation of the Appellant, obviously BSE’s approach would have been certainly different. BSE wanted Appellant’s help to defuse the crisis situation and the Appellant favourably responded to BSE’s request by providing funds is evident from the facts before me. A crisis was avoided to benefit the market and the investors. This by any standard can be considered as an act of market manipulation to attract the provisions of regulation 4(a) and (d).

¶426

Indulging in fraudulent and unfair trade practices stated in regulation 4(a) and (d) is a serious charge visiting serious consequences as could be seen from the regulations, which enables the Respondent even put a brake on a person’s right to do business for his livelihood. The wrong doer is also liable to be prosecuted. In the instant case the charge of manipulation is all the more aggravated as the Appellant has been held for “involving in creating false market and manipulating the price of its scrip in connivance with Shri Harshad Mehta by aiding, abetting and being instrumental in effecting transactions........................” . The Respondent has stated that Shri Harshad Mehta is a notified person under the Special Court Act and is subject to several restrictions imposed by the courts in respect of dealing in securities.” In this context the charge against the Appellant that it was involved in creating the false market and manipulating the price of its scrip in connivance with Shri Harshad Mehta by aiding, abetting”etc becomes all the more serious inviting serious consequences and hence the same need be well proved. Based on mere conjectures and surmises and on baseless assumptions and presumptions, it is not possible to hold the Appellant guilty of such a serious charge attracting serious consequences. It is also noticed that the Appellant is a large public limited company, with large number of

¶427

public shareholders and therefore bracketing it with a notified person under the Special Court Act, in the absence of enough evidence, would not be correct.

¶428

According to the Respondent, Damayanti group was a front of Shri Harhad Mehta who was under several restrictions and not allowed to deal in securities. It appears that, companies and other brokers knew that Shri Harshad Mehta was operating through Damayanti Group atleast from 1996 onwards. Shri Harshad Mehta was notified under the Special Court Act and his membership in the stock exchange was also suspended in 1992. When the ‘market’ knew of Shri Harshad Mehta’s activities “in disguise”, it is difficult to believe that the Respondent was unaware of the same till June 1998. If the Respondent did not know about his indirect presence in the market till they completed the investigation in 1998 then it is indicative of the Respondent’s inadequate market intelligence set up. On the contrary if the Respondent was aware of his activities, the question why timely steps could not be taken to stop him from indirectly dealing in securities, assumes importance. The Respondent has suspended/cancelled certificate of registration of several market intermediaries and also debarred certain entities from dealing in securities during the last few years. “Harshad Mehta game” stated by the Respondent makes one doubt as to whether there is any active mechanism in position to ensure, that those entities disqualified to deal in securities are not dealing indirectly in securities through front companies/proxies. Unless there is some mechanism in position to ensure that the disqualified persons are not indirectly running the show, the very purpose of passing such orders will be defeated. Respondent may like, to consider this aspect.

¶429

In the order it has been stated that “it has also contended that BPL has not been benefited in any way by the alleged transactions. I find that with the increase in market capitalisation of the company, the company does get benefited with enhancement of its public esteem shareholders wealth/value. This also facilitates institutional support/funding for the company. Besides it also helps the company in bench marking of the share price for further placements. Therefore, the above said contention of BPL is not tenable”. These observations are hypothetical. In any case in the Appellant’s case, there is no evidence to show that it benefitted in such manner.

¶430

With reference to the test of evidence applicable to the domestic inquiries, Shri Dada had referred to the decision in Gulabchand (supra) that “it is wrong to insist that in civil cases such charge must be proved clearly and beyond reasonable doubt” and therefore the principle laid down in Chaturbhai is not the one to be followed. He had also cited the Hon’ble Bombay High Court in National Housing Bank (supra) in this regard. In the said case the Hon’ble High Court had reiterated the principle laid down by the Hon’ble Supreme Court in Gulabchand’s case. The position in the instant case is that even the test laid down in the Gulabchand’s case has not been met. Evidence is a must to punish whether the proceeding is civil or criminal. But the extent varies in domestic inquiry and criminal prosecution. This Tribunal is not suggesting for a moment that to proceed against a person under regulation 4(a) and 4(d) , the charge must be proved beyond reasonable doubt. Shri Chinoy had also cited certain cases, which I have extracted in the earlier part of the order and also Shri Dada’s countering submissions thereon. I do not consider it necessary to discuss the principles laid down by the Court in the cases cited by them, in this regard as the Tribunal had considered the nature of evidence required for the purpose in Sterlite case (supra). I do not find any authority cited by them warranting reconsideration of the view held in Sterlite. In the Sterlite case also the charge was manipulation of the market and the direction issued by the Respondent therein was also identical, but for the tenure of the prohibition. The views expressed by this Tribunal in the said case are squarely applicable to the present case also. It was held in the said case:

¶431

“Shri Dada had argued about the degree of evidence required in an adjudication like the one, in contradistinction to the nature of evidence required in criminal proceedings in a court of law, that in an inquiry like the instant one it is the “preponderance of probability” that is to be taken into consideration and not to go by “proof beyond doubt” as required in criminal proceeding.

¶432

In this context it is to be noted that Chairman holding the Appellant guilty of indulging in price manipulation has stated that “creation of false market and price manipulation is a very serious offence”. Evidence merely probabalising and endeavouring to prove the fact on the basis of preponderance of probability is not sufficient to establish such a serious offence of market manipulation. When such a serious offence is investigated and the charge is established, the fall out of the same is multifarious. The impact of such an adverse finding is wide especially in the case of a large public company having large number of investors. The stigma sticks and it also hurts, not the company alone, but its shareholders as well. “Not all the King’s horses and all the King’s men” can ever salvage the situation. Mere conjuctures and surmises are not adequate to hold a person guilty of such a serious offence. The extent of proof required to hold the delinquent guilty has been explained by the Hon’ble Supreme Court in Bank of India v. Degala Surya Narayana (AIR 1999 SC 2407) . The Court held:

¶433

"strict rules of evidence are not applicable to departmental enquiry proceedings. The only requirement of law is that the allegation against the delinquent officer must be established by such evidence acting upon which a reasonable person acting reasonably and objectively may arrive at a finding upholding the gravamen of the charges against the delinquent officer. Mere conjucture or surmise cannot sustain the finding of guilt even in departmental enquiry proceeding. (emphasis supplied)

¶434

In M.S.Bindra v. Union of India, (1998) 7 SCC 310 the Court had while deciding an appeal against the removal of an officer from service on doubtful integrity held that “mere possibility is hardly sufficient to assume that it would have happened”. In Nandakishore Prasad v. State of Bihar (1978) 3 SCC 366, the Court while considering the appeal against the removal of an employee from service based on the findings of a departmental enquiry viewed that “ Before dealing with the contentions canvassed, we may remind ourselves of the principles in point crystalised by judicial decisions. The first of these principles is that disciplinary proceedings before a domestic tribunal are of a quasi judicial character; therefore, the minimum requirement of the rules of natural justice is that tribunal should arrive at its conclusion on the basis of some evidence, i.e. evidential material which with some degree of definiteness

¶435

points to the guilt of the delinquent in respect of the charges against him. Suspicion cannot be allowed to take the place of proof even in domestic inquiries. As pointed out by this Court in Union of India v. H.C.Geol (AIR 1964 SC 364) ‘the principle that in punishing the guilty scrupulous care must be taken to see that the innocent are not punished, applies as much to regular criminal trials as to disciplinary inquiries held ’ under the statutory rules . (emphasis supplied).

¶436

In the context of a disciplinary action against an advocate, the Hon’ble Court had held that “disciplinary authority empowered to conduct the inquiry and to inflict the punishment on behalf of the body, in forming an opinion must be guided by the doctrine of benefit and is under an obligation to record a finding of guilt only upon being satisfied beyond reasonable doubt. It would be impermissible to reach a conclusion on the basis of preponderance of evidence or on the basis of surmise, conjucture or suspicion. It will also be essential to consider the dimension regarding

¶437

mens rea . This proposition is hardly open to doubt or debate particularly having regard to the view taken by this Court in L.D.Jaisinghani v. Naraindas N Punjabi (1976) 1 SCC 354: AIR 1976 SC 373 at P. 376 – wherein Ray, CJ speaking for the Court has observed:

¶438

“In any case we are left in doubt whether the complainants version with which he had come forward with considerable delay was really truthful. We think that in a case of this nature, involving possible debarring of the advocate concerned the evidence should be of a character which should leave no reasonable doubt about guilt. The Disciplinary Committee had not only found the Appellant guilty but had disbarred him permanently. (In Re An advocate AIR 1989 SC 245)” (emphasis supplied).

¶439

About the test of evidence in a civil proceeding, the following observations made by the Hon’ble Court (Razikram v. J.S.Chauhan - AIR 1975 SC 667: (1975) 4 SCC 769) is to be noted:

¶440

“It is true that there is no difference between the general rules of evidence in civil and criminal cases and the definition proved in section 3 of the Evidence Act does not draw a distinction between civil and criminal cases. Nor does this definition insist on perfect proof because absolute certainty amounting to demonstration is rarely to be had in the affairs of life. Nevertheless, the standard of measuring proof prescribed by the definition is that of a person of prudence and practical good sense… ….. The same is equally true about proof a charge of corrupt practice which cannot be established by ” a mere balance of probabilities . (emphasis supplied)

¶441

The Hon’ble Supreme Court in yet another case with reference to adjudication under the Sea Customs Act and Land Customs Act relating to imposition of penalty on the person concerned had held:

¶442

“To such a situation though the provisions of the Code of Criminal Procedure or the Evidence Act may not apply, except in so far as they are statutorily made applicable, the fundamental principles of criminal jurisprudence and of natural justice must necessarily apply. If so, the burden of proof is on the customs authorities and they have to bring home the guilt to the person alleged to have committed a particular offence under the said Acts by adducing evidence” (Ambalal v. Union of India AIR 1961 SC 264).

¶443

On application of the standard of evidence required to hold a person guilty of an offence, as set out by the Hon’ble Supreme Court cited above, it is seen that the evidence produced by the Respondents is not sufficient to hold the charge against the Appellant. From the case law referred to above it is clear that in the absence of reasonably strong evidence (though not beyond reasonable doubt), even in a civil proceeding, a person cannot be held guilty and awarded punishment. Mere surmise, conjucture or suspicion cannot sustain the finding of guilt. I have very carefully examined the impugned order and find that the conclusion drawn by the Respondents holding the Appellant guilty of indulging in market manipulation in contravention of regulation 4(a) and 4(d) of the 1995 Regulations is not substantiated by sufficient evidence”.

¶444

Even if it is assumed that it was the Appellant’s fund, in the absence of reasonable evidence to show the nexus between the Appellant company and Damayanti group and further that the said Damayanti group acted at the behest of the Appellant company, it is not possible to hold the Appellant liable for the activities of Damayanti group, especially in view of the seriousness of the allegation and the legal consequences thereof. Bail out per se is not an act of manipulation. The Respondent has not made out any case that the brokers who faced payment problem were holding large positions on the Appellant’s account. On the contrary the Respondent has stated that it was Damayanti group for Shri Harshad Mehta cornered the shares. But the relevance of that again depends on the evidence

¶445

showing as to whehter it was a quid pro quo measure. Not enough evidence in this regard has been adduced by the Respondent. The Respondent has not established the charge against the Appellant company by such evidence, acting upon which a reasonable person acting reasonably and objectively may arrive at a finding upholding the charges. Mere conjuctures or surmises cannot sustain the finding of a serious charge like manipulation of market in connivance with a person notified under the Special Court Act.

¶446

It is also seen from the material on record that the market volatility was not confined to the Appellant’s shares alone, but the shares of companies like Sterlite, and Videocon were also involved, and there was payment crisis in respect of the transactions entered into by brokers in respect of the said companies’ shares also. It cannot be a coincidence that the shares of these three companies were involved during the market volatility witnessed in April- May, 1998. It is nobody’s case that those three companies are under the same management. Therefore it is obvious that there was a third party, who played a major role in the market manipulation and that third party according to the Respondent was Damayanti group. The impugned order has left out the Damayanti group from the range of investigation vis-a-vis the Appellant. According to the Respondent it was Shri Harshad Mehta who acted through Damayanti group. There is no indication in the order that Shri Harshad Mehta was examined and his statement was recorded/considered. Since Shri Harshad Mehta, according to the Respondent, being the person who manipulated the market through his front companies, it was incumbent on the Respondent to record his statements and also of those concerned persons in his front companies and consider the same in thecontext of the charge levelled against the Appellant. Subjecting Shri Harshad Mehta and others to separate investigation and passing separate orders is not a substitute for obtaining their statements in the present case.

¶447

Respondent Chairman has directed the Appellant company “not to access the the capital market for a period of four years”. It has also been directed that “prosecution proceedings under section 24 of the SEBI Act for violation of clauses (a) and (d) of regulation 4 of said Regulations be initiated against BPL be through its directors/officers Shri Rajiv Chandrasekhar, Shri Ajit Nambiar, Shri R.Murali, Shri T.P.G. Nambiar and Shri T.C.Chauhan”. The directions have been issued invoking the powers under section 11 and 11B of the Act. Learned Senior Counsel for the Respondent had submitted that not only under section 11 and 11B but under regulation 12(a) also such directions can be issued. Text of section 11 and 11B and regulation 12(a) has already been extracted in the earlier part of this order.

¶448

This Tribunal considered the scope and reach of the said two sections in Sterlite case (supra) and had viewed as under:

¶449

“Now on the direction issued by the Respondent. It is seen from the order that the direction debarring the Appellant accessing the capital market was issued invoking the powers vested in the Respondent under section 11 and 11B of the Act . Since I have already reproduced the text of these two sections in the earlier part of this order, the same is not reproduced again. The Tribunal had occasion to examine the scope and reach of these sections in Bank of Baroda v. Securities Exchange Board of India ((2000) 26 SCL 532 : (2000) 38 CLA 226: (2001) CLC 714): and had expressed the following view:

¶450

“Section 11 and section 11B are interconnected and coextensive as both these sections are mainly focussed on investor protection. On a careful perusal of the said section 11 referred to in the earlier paragraphs, it could be seen that the Respondent has been in no uncertain terms mandated to

¶451

protect the interests of investors in securities by such measures as it thinks fit. Of course those measures are subject to the provisions of the Act. The expression ‘measure’ has not been defined in the Act. So we have to go by its generally understood meaning. According to Corpus Juris Secundum measure means “anything desired or done with a view to the accomplishment of a purpose, a plan or course of action intended to obtain some object, any course of action proposed or adopted by a Government”. However, I am not inclined to agree with the Respondent’s view that the power under section 11 is unlimited. I am of the view that the legislature has circumscribed the power, by putting the caveat that these measures are subject to the provisions of the Act. The ambit of power is contained within the frame work of the Act. But within the statutory frame work such power reigns.

¶452

While section 11 deals with the functions of the Board, section 11B is on the powers of the Board. Section 11B is more action oriented, in a sense it is a functional tool in the hands of the Board. In effect section 11B is one of the executive measures available to the Respondent to enforce its prime duty of investor protection. As could be seen from the text of the section reproduced above, the Respondent is empowered to issue directions in the interests of investors to any person or class of persons referred to in section 12 of the Act or associated with the securities market. In other words the section identifies the persons to whom and the purposes for which, directions can be issued.

¶453

Gujarat High Court had examined the scope of section 11 and section 11B vis-a-vis the Respondent’s position, while deciding an appeal against the Single Judge’s order in Alka Synthetics Case (supra). The basic issue for consideration before the Division Bench in the said appeal was as to whether the Respondent had the authority to issue an order under section 11B of the Act for impounding or forfeiting the money received by stock exchanges, as per the concluded transactions under its procedure, until final decision is made. While negating the views of the Single Judge, and upholding the Respondent’s power to issue such a direction under section 11B the Court observed:-

¶454

“The SEBI Act is an Act of remedial nature and, therefore, the present cases could not be compared with the cases relating to the fiscal or taxing statutes or other penal Statutes for the purposes of collection of levy, taxes etc. As and when new problems arise, they call for new solutions and the whole context in which the SEBI had to take a decision, on the basis of which impugned orders were passed, cannot be said to be without authority of law in face of the provisions contained in section 11 and section 11B. As the language of section 11(1) itself shows and as the matters for which the measures can be taken are provided in sub-section(2) of section 11. It is clearly made out by the plain reading of the language of the section itself that the SEBI has to protect the interests of the investors in Securities and has to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-section (2) of section 11 and in due discharge of this duty cast upon the SEBI as a part of its statutory function, it has been invested with the powers to issue directions under section 11B. … … … … …. Thus, so far as the authority of law in the SEBI to issue such directions is concerned, such authority to take measures as it thinks fit is clearly discernible on the basis of the provisions contained in section 11 read with section 11B of the SEBI Act. … … … …..We have to therefore consider and interpret the power of

¶455

SEBI under the provisions so as to see that the objects sought to be achieved by Act is fully served, rather than being defeated on the basis of any technicality……………… The duty and function had been entrusted to take such measures as it think fit and in order to discharge this duty, the power is vested under section 11B. …… … ………. The authority has been given under the law to take appropriate measures as it thinks fit and that by itself is sufficient to cloth the SEBI with the authority of law”.

¶456

One has to view the powers of the Respondent under the provisions of the Act in the context of the objects sought to be achieved by the Act and the duty cast on them in achieving the same. Section 11 and section 11B give enormous authority to the Respondent in this regard. As long as the power exercised under section 11B is subject to the provisions of the Act and well within the legal and constitutional frame work, intended to achieve the purposes of the Act and subjecting the persons specified in the section, the power will sustain. Since the exercise of power is subject to the provisions of the Act and the purposes for which it can be exercised and the persons to whom it can reach has been specified in the section, it can not be said that the power is unguided or unlimited. It is a wholesome provision designed to achieve the objectives of the Act.”

¶457

But it is to be noted that the power under section11B is restricted to issue appropriate direction for the purpose of protecting the interest of the investors etc. mentioned in the section. The scope of the expression ‘direction’ has not been defined in the Act. But the word has been judicially interpreted by Courts. Hon’ble Bombay High Court had viewed that “in law direction means guidance or command” (AIR 1988 Bombay 416 at p. 421). According to the Hon’ble Supreme Court in Rajendranath v.CIT (1979) 4 SCC 282, “a direction by a statutory authority is in the nature of an order requiring positive compliance”. According to Blacks Law Dictionary direction means “ a guiding or authoritative instruction, order, command”.

¶458

It has to be noted that section 11B does not even remotely empower the Respondent to impose penalties. Hon’ble Calcutta High Court had held that prescribing an offence and its punishment is an essential plenary function of the legislature (D.N.Ghosh v. Addl. Sessions Judge (AIR 1959 Cal.208.) Hon’ble Gujarat High Court also held the same view in Delux Land Organisers v. State of Gujarat (AIR 1992 Guj. 75) holding that

¶459

"any power to impose penalty must be statutorily warranted and executive Government cannot create penal provisions by issuing circular when there is no authority to impose such penalty flowing from any provision of law”. Hon’ble Supreme Court in Khemka and Co.(Agencies) Pvt.Ltd v. State of Maharashtra (AIR 1975 SC 1549) , while considering the question as to whether the assessee under the Central Sales Tax Act, 1956 could be made liable for penalty under the provisions of the State Sales Tax Act, had considered the power to impose penalty. It had held:

¶460

“It is well settled canon of construction of statutes that neither a pecuniary liability can be imposed nor an offence created by mere implication. It may be debatable whether a particular procedural provision creates a substantive right or liability. But I do not think that the imposition of pecuniary liability which takes the form of a penalty or fine for a breach of a legal right can be relegated to the region of mere procedure and machinery for the realization of tax. It is more than that. Such liabilities must be created by clear, unambiguous and express enactment. The language used should leave no serious doubts about its effect so that the

¶461

persons who are to be subjected to such a liability for the infringement of law are not left in a state of uncertainty as to what their duties or liabilities are. This is an essential requirement of a good government of laws”. (emphasis supplied)

¶462

The legislature has clearly spelt out the penal provisions in the Act at 3 places – section 12(3) provides for suspension or cancellation of the certificate of registration granted to the market intermediaries in the event of their proven misconduct, provision under Chapter VIA, provides for imposition of monetary penalty for certain offences specified therein; section 24 empowers Courts to award punishment for violation of offences under the Act etc. Since legislature has deliberately chosen to create specific offences and penalties thereto, it is not possible to view that under section 11B the Respondent is competent to issue a direction which tantamounts to imposition of penalties. While widening the scope of ‘such measures’ used in section 11, to include penalties, and thereby stretching the scope of issuing directions under section 11B to cover imposition of penalties, the limitation stated above need be kept in mind. However, it is understood that the Respondent has also been taking the view that section 11B is not a penal provision, but preventive and remedial in its application. If that is so, it has to be seen whether the impugned direction prohibiting the Appellant from accessing the capital market for a period of 2 years from the date of the order is preventive or remedial . In the absence of any explanation from the Respondent as to what exactly is meant by “accessing the capital market”, it has to be understood as is understood in the common parlance – i.e. entry to the capital market for issuing/offering securities. In this context, it is to be noted that the charge against the Appellant is of market manipulation. The shares of the Appellant are listed/traded in the stock exchanges even today. That being the case preventing the Appellant raising further capital/offering shares to the public in the next two years cannot serve as a preventive measure to debilitate the Appellant indulging in market manipulation. Similarly, by no stretch of imagination the said direction can be considered even remedial as prospective barring of a public issue cannot remedy an act of market manipulation allegedly indulged for a specific purpose, 3 years ago. A remedial action is normally seen as one intended to correct, remove or lessen a wrong, fault or defect. Purport of preventive or remedial directions which can be issued in a proven case of fraudulent and unfair trade practice is discernible from the provisions of regulation 12 of the 1995 Regulations, already cited in this order. In my view the impugned order is neither remedial nor preventive but punitive in effect as it takes away the Appellant’s right to mobilise funds from the public to carry on its business. According to Webster’s Encyclopedic Unabridged Dictionary “penalty means a punishment imposed or incurred for a violation of law or rule”. In the instant case it is seen that the order is made in the light of the finding by the authority, that the Appellant has violated the regulations. This nexus also strengthens the view that the order debarring the Appellant from accessing the capital market is a penalty . In this view of the matter the order has no legal backing and therefore cannot sustain.”

¶463

The Respondent in its order has observed that “the directions contemplated in the show cause notice are not penal in nature but are of remedial nature and issued in the interest of the investors and development and regulation of the securities market with the obejct to prevent the fraudulent and unfair trade practices and market manipulation. If such malpractices are not curbed they may go to distrub the equilibrium of the market and may endanger the safety and security of the capital market.” This finding has absolutely no nexus with the impugned order and in effect it is a penalty imposed on the Appellant. Hence, for the reasons stated above the direction cannot be sustained.

¶464

In the light of the above I do not consider it necessary to examine the entire case law

¶465

cited by Shri Chinoy and the submissions of Shri Dada on the non applicability of the ratios of the said cases to the present one. No authority has been cited warranting reconsideration of the views expressed by this Tribunal in Sterlite.

¶466

Learned Senior Counsel for the Respondent had cited the following cases to support his contention that the Respondent is empowered to issue the impugned direction:(1) Anand Rathi and Ors. v. Securities and Exchange Board of India (2001) 32 SCL 227 (Bom), (2) M.Z.Khan v. SEBI (AIR 1999 Delhi 64), (3) SEBI v.Alka Synthetics (1999) 19 SCL 460 (Guj)).(4) R.R.Bohra v. SEBI((1999) 33 CLA 243).

¶467

I have carefully gone through each one of these decisions and find no support to hold that after completing the enquiry, a direction under section 11B which tantamounts to imposition of penalty can be issued. No doubt a direction under section 11B can reach a company whose shares are listed in stock exchanges as the company can be considered as “person associated with the securities market” in terms of section 11B(a). But from the purpose for which the direction can be issued under section 11B as provided in the section, it is clear that a direction on conclusion of the inquiry cannot be in the nature of a penalty. Directions under section 11B can be issued only on being satisfied by the Board after an inquiry, that it is necessary –

¶468

(i) in the interest of investors, or orderly development of securities market; or

¶469

(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or

¶470

(iii) to secure the proper management of any such intermediary or person.

¶471

In my view the impugned direction is beyond the scope of section 11B. It is also to be seen whether the impugned direction prohibiting the Appellant from accessing the capital market for a period of 4 years is an investor protection measure or not. In this context it is seen that the charge against the Appellant is market manipulation. It has to be noted that the Appellant is a large public limited company with large pubic participation. Appellant’s shares are listed/traded on BSE, NSE, and several other stock exchanges. Preventing the Appellant from raising capital from the public in the next 4 years cannot serve as a measure to debilitate the Appellant indulging in market manipulation. The direction cannot also be considered as a remedial measure in the interest of investors, as prospective ban on raising capital cannot remedy an act of market manipulation allegedly indulged 3 years ago. Purport of preventive or remedial direction which can be issued in a proven case of fraudulent and unfair trade practice is discernible from regulation 12. In my view the impugned order is punitive in effect as it takes away the Appellant’s right to raise funds from the public to carry on its business. Penalty means a punishment imposed or incurred for violation of law or rule. In the instant case the order has been passed by the Respondent in the light of the finding that the Appellant has violated regulation 4(a) and 4(d). This nexus also strengthens the view that the order banning the Appellant raising capital from the public is in effect a penalty.

¶472

The decisions relied on by Shri Dada cited above are in the context of challenge to the Respondent’s authority to issue interim orders during the pendency of inquiry and the Courts had viewed that such orders which are required to protect the interest of the investors can be issued. The impugned direction, for the same reason stated in the Sterlite case extracted above, is nothing but a penalty in effect and is in fact against the interest of investors, as a ban on raising funds to meet the Appellant company’s business requirements is likely to adversely affect the company’s ongoing business activities and further expansion /development and thereby the shareholders’ interest .

¶473

Learned Senior Counsel for the Respondent had putforth an alternate argument that even if it is held that in the light of this Tribunal’s decision in Sterlite’s case section 11B cannot be used for debarring the Appellant accessing the capital market, still the Respondent can issue such direction under regulation 12(a) read with regulation 11 as the said regulation empowers Respondent to direct the person concerned “not to deal in securities in any particular manner”. According to the learned Senior Counsel the words “not to deal in securities” are wide enough to cover debarring a company from accessing the market for a specific period. This interpretation of regulation 12(a), I am afraid, is too far fetched . It is well accepted in the market circle that “ accessing the capital market” and “dealing in securities” are different. Raising money by a company from the public, by any standard cannot be considered as an act of dealing in securities. “Dealing in securities” normally means transactions in securities. “Dealing in securities” as per the definition at regulation 2(b) means “ an act of buying, selling or otherwise dealing in any security or agreeing to buy , sell or otherwise deal in any security by any person either as principal or agent”. The act of raising capital from the market by its very nature does not come under the definition “dealing in securities”. Therefore the Respondents’ contention that under regulation 12(a) it is empowered to issue such direction is untenable.

¶474

The Respondent has also stated that the impugned direction is issued in the interest of investors. But there is no explanation as to how the said direction is in the interest of investors at this point of time. In fact for the reason stated in the preceeding paras issuing such a ban on the Appellant company raising capital for four years is against the interest of the investors and thereby against the purpose for which direction under section 11B is permitted to be issued. The view taken by this Tribunal in Sterlite case extracted above in relation to issuance of directions under section 11 and 11B, in equal force is applicable to the present case also. In the said view of the matter the impugned direction has no legal backing and therefore cannot sustain.

¶475

As already stated, in the absence of sufficient material evidence to establish that the Appellant had directly or indirectly indulged in market manipulation, the impugned order holding the Appellant guilty of violating regulation 4(a) and 4(d) cannot sustain and therefore deserves to be set aside.

¶476

In the appeals filed by Shri Rajiv Chandrasekhar, Shri Ajit Nambiar, Shri R.Murali, Shri T.P.G. Nambiar and Shri T.C.Chauhan they had inter-alia prayed to set aside the direction to launch prosecution against them. They have adduced several grounds in support. In this connection it is to be noted that there is no finding of guilt in the order against the said Appellants. The direction is to prosecute the Appellant company through the Appellants.

¶477

On a perusal of the order it is seen that the prohibition on the Appellant company on accessing the capital market is made invoking the provisions of section 11 and 11B of the Act and regulation 11 and 12 of the 1995 Regulations. Prosecution against the Appellant company through its directors/ officers has been ordered under section 24 of the Act. In this context, the following observation made in the interim order made by this Tribunal in the present appeals (2001) 32 SCL 95 are considered relevant.

¶478

“In terms of section 24(1), if any person contravenes or attempts to contravene or abets the contravention of the provisions of the Act or any rules or regulations made there under he shall be punishable with imprisonment for a term which may extend to one year, or with fine or with both. In terms of section 26(1) of the Act, cognizance of an offence punishable under the Act etc. by a court is permissible only on a complaint made by SEBI ( the Respondent).

¶479

On a combined reading of sections 24 and 26 it is clear that prosecution for offences can be launched by the Respondent and the power to launch such prosecution is not in any way circumscribed by any of the provision of the Act. It is left to the discretion of the Respondent to decide to launch or not to launch prosecution under the Act. It is also to be noted that no “order” as such is required to launch prosecution in view of the clear provisions of section 26 of the Act because it is only SEBI which is competent to file prosecution and none else. It is clear that under the Act the Respondent has uninhibited power to launch prosecution against persons contravening the provisions of the Act, rules or regulations made there under. It is not with in the appellate powers of the Tribunal to stall launching of prosecution by the Respondent under section 24/26 of the SEBI Act.

¶480

Now coming to the question of the penal liability of the directors/officers of a company proceeded against for an offence, we need look into the provisions of section 27 of the Act, which reads as under :

¶481

“27(1) Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

¶482

Provided that noting contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

¶483

Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. ……… …… ….”.

¶484

On a perusal of the section, it is thus clear that for the offence committed by a company its directors/officers are not automatically punished along with the company. Section provides safeguards by giving opportunity to them to prove their non involvement in commission of the offence, to escape from the attendant penal consequences. It could be seen that as per the provisions of section 27 only those persons in charge and responsible at the relevant point of time for conduct of business of the company alone are deemed to be held guilty for contravention. So legal fiction comes into operation against the persons indicated only on establishing facts, which are appurtenant with the contravention. Such persons can successfully resist the prosecution by establishing want of knowledge about the contravention or exercises of due deligence to prevent the same. Such onus on a person can not be considered so heavy. Ordinarily the same could be discharged.

¶485

Referring to the Appellant’s submission that criminal prosecution results in diminishing the personal reputation of the concerned person , I would only refer to the following observation made by the Bombay High Court in ANZ Grindlay’s case (supra).

¶486

¶487

and honourable persons have to stand the test and trial articulated by Law. And in obedience, he or she has to submit to the process. Cherishing majesty of law and its process is a inner core of the dignity of individual in a Democratic World, which runs on the wheel of Rule of Law”.

¶488

On behalf of the Appellants it was argued that the Tribunal is adjudicating an appeal against the order made by the Respondent and one of the directions in the said order is to launch prosecution proceedings against the Appellants and therefore the Tribunal is competent to decide whether such an order directing prosecution is sustainable or not, that a person aggrieved by an order directing prosecution against him has the right to appeal against the order in terms of section 15T of the Act.

¶489

Certainly Section 15T of the Act enables any person aggrieved by an order of SEBI to file an appeal to the Tribunal. From Section 15T it is clear that to file an appeal there should be an order to start with. Then comes the impact of the order. If a person is aggrieved by that order, he is entitled to file an appeal. Since the section uses the wider expression “ any person” right of appeal is not restricted only to the parties before the Board in the proceedings. Anybody, whether he was a party or not in the proceedings before the Board, is entitled to prefer an appeal, provided he is aggrieved by that order. Thus the first test is the existence of an order and then the impact of that order on a person.

¶490

It has been described in Corpus Juris Secundum (Vol.IV) that “broadly speaking a party or person is aggrieved by a decision only when it operates directly and injuriously upon his personal pecuniary or proprietory rights”. It is not possible to subscribe to the view that a direction to launch prosecution would operate directly and injuriously on any of the rights of the Appellants. The expression “aggrieved person” in section 15T means person affected by an order. In that sense the Appellants are not aggrieved persons. A decision to launch prosecution by itself cannot be considered a cause of grievance to approach the Tribunal through an appeal. Therefore I am of the view that a direction to launch prosecution against the Appellant company is not an order appealable in the Tribunal and the Tribunal is not empowered to adjudicate the same.

¶491

According to the learned Senior Counsel for the Appellants, the Respondents have already launched prosecution against the Appellants. As Shri Dada, learned Senior Counsel for the Respondent rightly pointed out, this Tribunal does not enjoy the inherent powers of High Courts under section 482 of the Cr.PC to issue any order for quashing pending proceedings before any Court of law.

¶492

For the reasons stated above this Tribunal is of the view that it is beyond the jurisdiction of this Tribunal to issue any order setting aside the Respondent’s direction to launch prosecution against the Appellant company through its directors/officers. Therefore I do not consider it necessary to examine the grounds adduced by the Appellants in support of their contention, in this regard.

¶493

For the reasons stated above the Respondents’ order directed to the Appellant company “not to access the capital market for a period of four years” is set aside.

¶494

Appeals allowed to the extent stated above.

¶495

(C.ACHUTHAN) PRESIDING OFFICER

¶496

Place: Mumbai

¶497

Date: June 20, 2002

Bpl Limited v. SEBI [14 - 19 of 2001] [Final order]

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Bpl Limited v. SEBI [14 - 19 of 2001] [Final order]

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