Allowed

Videocon International Limited v. SEBI

SAT20 Jun 2002

Case brief

AI extract

What is this about?

The SAT allowed appeals against SEBI's order penalizing Videocon International for market manipulation. The tribunal held there was insufficient evidence to prove the company manipulated prices, quashed the capital market ban as punitive, and dismissed the prosecution appeal as non-maintainable.

What did the court decide?

The direction prohibiting the Appellant from raising money from the public in the capital market for 3 years was set aside. Appeals allowed to the extent stated.

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BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

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In the matter of:

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Appeal No. 23/2001 Videocon International Ltd Appellant Vs. 1. Securities & Exchange Board of India 2. Shri D.R.Mehta, Chairman, SEBI 3. Dr.R.K. Kakkar, Division Chief,SEBI Respondents Appeal No. 24/2001 Shri V.N.Dhoot Appellant Vs. 1.Securities & Exchange Board of India 2. Shri D.R.Mehta, Chairman, SEBI 3. Dr.R.K. Kakkar, Division Chief, SEBI Respondents Appeal No.25/2001 Shri S.M.Hegde Appellant Vs. 1.Securities & Exchange Board of India 2. Shri D.R.Mehta, Chairman, SEBI 3. Dr.R.K. Kakkar, Division Chief, SEBI Respondents Appeal No.26/2001 Shri S.K.Shelgikar Appellant Vs. 1.Securities & Exchange Board of India 2. Shri D.R.Mehta, Chairman, SEBI 3. Dr.R.K. Kakkar, Division Chief, SEBI Respondents APPEARANCE: Mr. C.A.Sundaram Sr.Advocate Ms Neeta Rajda Advocate I/b. DSR Associates in Appeal No.23/2001 for Appellant Mr.J.D.Dwarkadas Sr. Advocate Ms Dipti Rajda Advocate I/b. DSR Associates in Appeal No 24/2001 and 25/2001 for Appellants

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Mr. Surendra Raja Advocate Mr. Zal Andhyarujina Advocate in Appeal No.26/2001 for Appellant Mr.R.A.Dada Sr.Advocate Mr.Kumar Desai Advocate Ms Uma Dalal Advocate I/b. Maneksha & Sethna Mr. S.V.Krishna Mohan Division Chief, SEBI Mr. Vijaykrishnan G Legal Officer, SEBI for Respondents

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(Appeals arising out of the order dated April 19, 2001 made by Shri D.R. Mehta, Chairman, Securities and Exchange Board of India)

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ORDER

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The present appeals are directed against the order dated 19th April, 2001, made by Shri D.R.Mehta, the then Chairman, Securities & Exchange Board of India. By the said order the Appellant in appeal No.23/2001 has been directed “not to raise money from the public in the capital market for a period of three years in the interest of investors”. It has been further directed that prosecution proceedings be launched against the Appellant “through” its directors/officers i.e. Shri V.N.Dhoot, Shri Shelgikar and Shri S.M.Hegde, the Appellants in appeals No.24/2001, 25/2001 and 26/2001 respectively, under the provisions of the Securities and Exchange Board of India Act, 1992 ( the Act) for violation of regulation 4(a) and 4(d) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations 1995 ( 1995 the Regulations).

Videocon International Limited Vs. SEBI — Securities and Capital Markets | SAT (2002)

Allowed

Videocon International Limited v. SEBI

SAT20 Jun 2002

Download

Case brief

AI extract

What is this about?

What did the court decide?

The direction prohibiting the Appellant from raising money from the public in the capital market for 3 years was set aside. Appeals allowed to the extent stated.

¶1

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

In the matter of:

(Appeals arising out of the order dated April 19, 2001 made by Shri D.R. Mehta, Chairman, Securities and Exchange Board of India)

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ORDER

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Referring to the allegation that the public announcement of open offer to acquire 2% of the Appellant’s equity share capital by the promoters had artificially increased the price and volume of the scrip, learned Senior Counsel submitted that such a public announcement followed by a public offer cannot in any manner be considered as a device to manipulate the market. He submitted that the public announcement was made, though not required by law, to benefit the investors, and there is no bar on making a creeping acquisition in a fair and transparent manner to benefit the other shareholders, that the creeping acquisition by the promoters through public offer was in tune with the objective of the Takeover Regulations. He submitted that the very foundation of the charge of manipulation levelled against the Appellant is linked to the public announcement of offer made on 9.4.1998 by the promoters to acquire 2% of the Appellant’s share capital (i.e. 14.24 lakh shares) from the public. According to Shri Sundaram any offer to buy shares at a price higher than the prevailing market price would necessarily activate the market and as long as the offer price is not an artificial one and the offerer honours the commitment, it cannot be viewed as an act of manipulation, that in the instant case neither the offer price was an artificial one nor the commitment to buy the shares remained unfulfilled Shri Sundaram submitted that it is an admitted position that on 9.4.1998 the price of the Appellant’s share was Rs.62/-, that the offer to acquire 14.24 lakh shares at Rs.165 per share involving a total investment of Rs.21 crores was for the promoter group to consolidate its share holding and strengthen its position as the promoters had apprehension that raiders would take over the company by cornering the shares taking advantage of the low cost of acquisition. He further submitted that the public offer was made after intimating Respondent SEBI and upon the terms and conditions as approved by it. In this context the learned Senior Counsel referred to the promoter’s letter dated 9.4.1998 addressed to Respondent SEBI, copy of the text of the public offer, and the press reports, annexed to the appeal and in particular , the contents of the letter dated 9.4.1998 and stated that the promoters had stated the reasons for making the public offer and had even sought the Respondent's “support and guidance” in the matter.

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Shri Sundaram submitted that despite the knowledge of the said public offer, at no point of time did Respondent SEBI raise any objection with regard to the aforesaid public offer but gave its tacit approval as is evident from the Respondent’s own statement in the show cause notice issued to the Appellant, that “Managing Director of Videocon was called and advised that they should refrain from making such announcements of intentions to buy at “higher prices” without actually initiating a formal process of offer, as such announcements lead to artificially affecting the price of the scrip. Thereafter a public announcement was made wherein price of Rs.165/- for each share of Videocon was offered”. He submitted that if the promoters had any intention to defraud other shareholders, they would not have offered to pay 2 ½ times the prevailing market value of the shares by making the public offer, that if the intention was to defraud other share holders, rather than offering such a higher price the promoters would have preferred to depress the market price of the shares to their advantage. Shri Sundaram stated that the Respondents have failed to appreciate that the promoters having committed themselves to acquire 14.24 lakh shares on 9.4.1998 from the public at the rate initially of Rs.140 and later at Rs.165 per share, by “bench marking” the market price of the shares no benefit would be derived, that it is but natural that when an attractive public offer is made to acquire shares at a price higher than the market price , the existing shareholders and potential investors would try to acquire more and more shares by the record date (1.6.1998 in this case) resulting in increase in the volume and the price and the offer to buy shares at the rate of Rs.165 against the market rate of Rs.62/-, cannot have a different effect and be an exception. Learned Senior Counsel stated that the very fact that immediately after the record date the share price dropped from Rs.162.50 to Rs.50/- on 4.6.1998 itself demonstrates that increase in the volume and price was only on account of the investors wanting to derive benefit of the public offer made by the promoters. He stated that since the public offer did take place and the promoters acquired the shares as promised, there has been no prejudice to any shareholder of the Appellant. Shri Sundaram stated that the allegation that the Appellant indulged in manipulating the price and volume of its own shares pursuant to the public offer made by the promoters and that it was done for the purpose of

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“bench marking the price of its shares” is contrary to and inconsistent with the facts on record and hence untenable. He also stated that the offer price was not an artificial price as could be seen from the Appellant’s Balance Sheet as on 31.3.1998 and referred to the parameters like Price Earning Ratio, Book value of the shares, dividend rate etc., and also the progressive growth pattern of the Appellant year after year. He further stated that creeping acquisition itself boosts investor confidence in the company and upward share price movement is the normal effect, in such a context. He stated that the offer price was in no way manipulated, that as a result of the higher price offered, everybody who wanted to take advantage of the offer, got benefited and that benefit was not confined to few but wide spread. He also stated that fixing a purchase price in tune with the book value cannot be considered as an artificial price. Referring to the observation in the impugned order that “timing of the offer of the company in April and its subsequent revised offer in May 1998 has to be seen against the back ground where its share prices were showing unusual rise and the company’s funding of the operators in the market who built up long position in the scrips of the company”, Shri Sundaram stated that as per the Respondent’s version ten crore rupees was made available in April and if that be so it could not have an impact on trading in mid May, 1998 He also stated that the Respondents have conveniently ignored the fact that the promoters had only purchased the shares and did not sell the same and book any profit. He further stated that the promoters intending to increase their holding would normally try to depress the share value to reduce the cost of their acquisition, rather than increasing the cost. Learned Senior Counsel submitted that in the light of the facts and circumstances of the case, the Appellant cannot be held to have manipulated the market, to attract the provisions of regulation 4(a) and 4(d) of the 1995 Regulations.

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Shri Sundaram submitted that the Appellant has not been charged for violating the Takeover Regulations, that if the Respondents had felt that the creeping acquisition was not in accordance with the provisions of the Takeover Regulations they would have by now proceeded against the Appellant, that even after 3 years of the public offer they have not done so would clearly indicate that there was nothing illegal on the part of the Appellant company. He stated that the Respondents cannot stop promoters making public offer for the purpose of creeping acquisition, that making an informed public announcement is not in contravention of the law, but is more in tune with the spirit of the Takeover Regulations and the consequential market response to such a legitimate action should not be a matter of concern to the Respondents. Shri Sundaram referring to the Respondents’ version that under the Takeover Regulations, in the context of acquisition of shares public offer is required to be made only when the same attracts regulations 10 or 11, submitted that public offer is not barred in the context of creeping acquisition is evident as the Respondents have accepted the transparent creeping acquisition by the promoters. He submitted that there is no prohibition in the regulation on an acquirer making a public offer and making creeping acquisition. The Respondents’ present version that “ you ought not to have done so ” is not correct, that the Respondent SEBI has forgotten the fact that it had asked the Appellant to make the offer and accordingly the public offer was made and for obeying the Respondent’s order, it cannot now blame the Appellant. Shri Sundaram referring to the Respondent’s version that as a result of the public announcement made on 9.4.1998 scarcity was created in the market and consequently the share price shot up, stated that by the Respondents’ own version it was the public announcement which was responsible for the market hike. He stated that making a genuine public announcement/ offer being not illegal, and if the price as a result of the offer moved up, the

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offerer cannot be blamed, as it was only the natural effect of a legal action. Shri Sundaram stated that in one breath the Respondents consider the public announcement as the cause of price rise and in another breath they consider Rs 10 crores stated to have been given by the Appellant company as the cause that they are not sure of the casue. Shri Sundaram, referred to the effect of the public announcement on the market during 9.4.98 to 21.4.98 as perceived by the Respondents, that volumes on both exchanges fell drastically and the shares hit circuit filters soon after opening on 13.4.98, 20.4.98 and 21.4.98 that as a result of the fall in the volumes, the floating stock was reduced artificially and consequently an artificial demand was created resulting in rise in the price of the Appellant’s shares from Rs.62 to Rs.105 by 21.4.98, that in the show cause notice and in the order the Respondent had stated that “ this rise in price was accompanied by abnormal volumes in the scrip both at the BSE and NSE during this period”, and submitted that thus the Respondents themselves have taken a contradictory view. Since the offer price was relatable to the economic fundamentals governing the share prices the purchase price offered by the promoters cannot be considered as artificial, as alleged. Learned Senior Counsel submitted that if an offer is made within the real value of the scrip, then the presumption is that the offer price/transaction price is not an artificial price, but if the price is beyond the real value, the price can be considered as a manipulated price, that in the instant case the offer price was not above the real value. He further submitted that the price and volume movement is natural in the context of a public offer to purchase shares which are fundamentally sound, at a price higher than the prevailing market rate, from the shareholders whose name appears on the company’s register on a prospective record date, as many would try to buy and few would like to sell, to reap the benefit when the offer is made, resulting in scarcity of shares in the market and rise in price that it is the law of demand and supply that drive the market.. Shri Sundaram submitted that the yard stick of artificiality should be one of objective approach and not of subjective approach. Shri Sundaram referred to the various provisions of the Takeover Regulations and the requirements thereunder and stated that the Regulations is an investor friendly one as well, and that the Appellant has not violated any of the provisions of the said Regulations while making the creeping acquisition . He stated that the public announcement was made on 9.4.98 and public offer was also made on 29.5.98, scrupulously following the time frame provided in the Regulations.

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With reference to the allegation that the Appellant provided about Rs.10 crores to Damayanti group to finance the transactions, Shri Sundaram submitted that the Respondents have not cited a single transaction by the Appellant, to support the allegation. On the contrary it has been stated in the order that “ Damayanti group acting in concert, through a set of brokers had built up a large concerted position of around more than 50% of the total position at the exchange in the scrip of Videocon” and “this cornering of shares had created artificial market and price manipulation in the scrip” . He submitted that the daily market turnover in the scrip was to the tune of Rs20 crores per day and as such the allegation that just with ten crore rupees reportedly provided by the Appellant, one could hold 50% of the market position is unbelieable and the finding arrived at by the Respondents in this regard is self contradictory. He referred to the flow of funds depicted in the impugned order and stated that it could be seen therefrom that not even one rupee has been given by the Appellant to the Damayanti group. He submitted that JHPL to whom the Appellant is stated to have given Rs.10 crores is a pure trade transaction and the said JHPL is not a Videocon group company , that it is owned and controlled by some one else and the Appellant has no control over the business decisions of the said JHPL . He submitted that the Respondents have stated in the order categorically that all the brokers (mentioned in the order) “dealt with extensively in the Videocon scrip on behalf of Damayanti group”, thereby admitting that it was the brokers who had transacted in the Appellant’s shares on behalf of Damayanti group. He submitted that the Appellant was not connected with or concerned in the share transactions done by brokers on behalf of Damayanti group or any other entities. Referring to the finding in the order that GNH Global Securities Ltd and Shri Satyanarayan Nangalia “were given large amounts for purchase of shares” Shri Sundaram stated that by the Respondent’s own version these two brokers were paid just Rs.1.25 crores each. He stated that the Respondent has in a story telling manner stated that the Videocon group was financing Damayanti group by sham transactions, without bothering to substantiate such a serious charge.

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the Damayanti group or that the Damayanti group had cornered shares at the behest of the Appellant, the charge of manipulation against the Appellant flowing from the transactions made by the Damayanti group cannot be sustained, that the Respondent has failed to establish the said requirement. He stated that though it has been categorically stated in the order that the Damayanti group acting through a set of brokers built up large positions in the carry forward segments in the Appellant’s scrip at BSE, the Appellant has been penalised for the same though it cannot be held responsible for Damayanti group’s transactions as it has no connection with them. He further stated that the Respondents have totally ignored the quantum of the so called funds provided by the Appellants, vis-à-vis the cost of the shares stated to have been accumulated by Damayanti group. He referred to the observation in the order that as a part of the bail out package 503000 shares of Videocon were purchased @ 111.60 aggregating Rs.5.62 crores by Fedex Securities Ltd, and stated that the said Fedex is not connected with the Appellant, that it is absurd to hold that all those who have normal business transactions with the Appellant are “ intimately connected” to it. As per the Respondents’ own version the payment by Fedex for the purchase of these shares was made partly out of receipt of share application money of Rs.50 lakhs from JHPL, loan of Rs.90 lakhs from JHPL and Rs.1.25 crores from the Appellant towards deposit of lease fee, etc that these figures add up to Rs. 2.5 crores only and there is no indication as to who financed the balance amount of Rs.3.12 crores stated to have involved in the transaction, that it should obviously be by some one and the Respondents have suppressed the information, as revealing the same would have gone against their theory, that if the Appellant had been that interested, as alleged, Fedex would have been entirely funded for the purpose by the Appellant. He further stated that the allegation against the Appellant that the Appellant provided funds through its associates and certain brokers who dealt in the equity shares of the Appellant and rigged the company’s share price between 1.4.98 to 4.6.98 and provided funds to bail out brokers in June, 1998 is totally baseless. In this context he referred to the observations in the order that a sum of Rs.773.18 lakhs was given to Madhukar Seth during 13.6.98 to 27.8.98 for the bail out operation effected on 12.6.98. The fund flow stated therein is that from 13.6.98 to 19.6.98, was Rs.3.75 crores, 2.7.98 to 30.7.98 Rs.2.70 and 1.8.98 to 27.8.98 Rs.1.28crores!`

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KRN Finvest P.Ltd and Rituja Finvest P.Ltd. Shri Sundaram stated that these are the companies shown as Damayanti group companies by the Respondent in the show cause notice issued to the Appellant. From Shri Nangalia’s statement it is clear that he had traded for the said clients. To another question seeking the name of the counter party broker to whom he had sold 2.4 lakh shares of the Appellant, Shri Nangalia had answered “After the trading hours of 12.6.98 the exchange asked us to put the sale order in Sterlite Industries in “all or none” segment. Accordingly we put the order and the same was picked up by some other brokers. Since all or none segment does not indicate the clearing number of counter party broker we are not in a position to give you the name of counter party broker. Similarly 2.4 lakh shares of Videocon International were put in all or none segment at the instruction of the client and it was picked up by some other broker. Since in both the cases we had a C/F position there was no need to give the delivery”. Shri Sundaram stated that it is thus evident that it was not in the knowledge of the Appellant as to who were the brokers involved in the bail out and Shri Nangalia had stated that the transaction was done on the instructions of his client, and the Appellant has not been stated as a client by Shri Nangalia. Shri Sundaram referred to another question put by the Respondents to Shri Nangalia as to whether “he had dealt for a client viz.M/s. Gandak Investments P.Ltd and how he was introduced to the said client and what was the nature of the transactions”, and the answer thereto - “ we were told by Hema of 1208 Maker Chamber V that they wanted to sell certain shares of Global Telesystems Ltd which would be purchased by M/s.Gandak Investments Ltd, we have not met any person from M/s.Gandak Investments Ltd and do not know their office”. The Respondent had asked Shri Nangalia to state in the light of his large scale business with Damayanti group, the financial credibilities of the said group, and in reply thereto he had stated – “ I received all the margins in time. There were no payment problems. Even in the beginning when the exposure was to the tune of a lakh shares of BPL, I was given around 30,000 shares of BPL as security. I did not have any doubts about their financial credibilities. In my view whatever I have done is correct as a normal broker”. Shri Sundaram submitted that, the one spot transaction, referred to by the Respondents cannot be considered as a channel for routing funds to corner shares. In this context he specifically referred to the observation in the order that the “Brokers GNH Global Securities Ltd and Satyanarayan Nangalia in a statement to SEBI had stated that Equity and Gandak belonged to the Videocon Group and were introduced to them as client by Damayanti. These brokers were given large amounts for purchase of shares in spot by companies belonging to Videocon Group and they were inrtroduced as clients to these brokers by Damayanti Group, shows that this arrangement of purchase of shares in spot was worked out to transfer funds from Videocon Group to Shri Harshad Mehta through Damayanti Group entities”. He submitted that such conclusion is baseless as there is nothing to support the same in the statement of the said two brokers placed before the Tribunal. Similar is the case; with the Respondents’ observation that “whenever the clients of these brokers i.e. Damayanti group were short of funds, Videocon group through Equity and Gandak provided the necessary funds by sham transactions disguised as spot transactions between Damayanti group and Videocon group. Shri Sundaram submitted that these are all findings springing out of imagination and definitely not from any evidence. In this context he referred to the test of evidence required, to hold a person guilty of manipulation in terms of regulation 4(a) and 4(d), explained by this Tribunal in Sterlite Industries Ltd v. SEBI ([2001]34 SCL 485: [2001] 45 CLA 195 (SAT)) and stated that the impugned order has failed to pass the test.

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Shri Sundaram referred to the statement of Shri Navanit N Rana of GNH Global Securities Ltd and pointed out that to the Respondent’s query that “any shares other than VIL, Sterlite, BPL were purchased from his counter for Damayanti group, Shri Rana had replied in the affirmative and had stated that the other shares which were purchased and sold were of SAIL, LIC Housing, Global Tele, Kreb Bio, Tata Chemical, Nagarjuna Fertiliser. To another query about the sale of shares of Kreb Biotech and Global Telesystems as spot transactions to Equity Investments and Gandak Investments, Shri Rana had stated that payments were made directly to Sony and Valfin upon the instructions of Damayanti group and the payments were received upon the instructions of Damayanti group and the payments were received only after Damayanti group had given delivery of shares sold by them. Shri Sundaram stated that dealings in shares with Damayanti group is not an offence, that the question is whether the Appellant had funded the said group with the intention to manipulate the market, that there is not even an iota of evidence against the Appellant in this regard. Shri Sundaram also referred to the statement by Shri Satvinderpal Singh Gulati of LKP Group to show the non involvement of the Appellant and that LKP group purchased shares of its own. Shri Satvinderpal Singh had deposed that “LKP group had to receive a sum of approximately Rs.3 crores from M/s. Shrenik Shah and Bharat Khona, both members of the BSE on account of payments given to them about 4 years back. For almost 4 years, the LKP group could not recover these amounts and the interest thereon. Despite our repeated insistence, the brokers expressed their inability to make over payment. We were told by the broker that they had recoverable dues from Mr. Harshad Mehta and that we should recover our dues from him. Accordingly, we started following up with Mr.Harshad Mehta for recovery of our dues. This has been going on for almost 4 years. Since Harshad Mehta could not pay up, he suggested that we purchase certain shares on his recommendation, make a profit on their sale and adjust the outstanding dues from the profits, . This was about a year ago. He made a recommendation in several scrips (about 30 or so)

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We purchased approximately 6, 00, 000 shares of BPL, 1, 00, 000 of Sterlite, 80, 000 shares of Videocon Ltd and others…., these purchases were made by us through our inhouse broking concerns LKP Shares and Securities Ltd., LKP Securities Ltd and some other brokers of BSE and NSE like Satyanarayan Nangalia, Valfin Securities etc. We received deliveries in respect of all our purchases and have also got some of them transferred in our name…….” Shri Sundaram stated that this statement indicates Harshad Mehta’s role, and also explains some of the transactions of Nangalia, Valfin Securities etc., and the non involvement of the Appellant. He also referred to the statement of Shri Nangalia to a question as to whether he had dealt for a client viz. M/s.Gandak Investments P.Ltd and how he was introduced to the said client and what was the nature of the transactions with them? that “ we were told by Hema of 1208 Maker Chambers V that they wanted to sell certain shares of Global Tele Systems Ltd, which would be purchased by Gandak Investments P.Ltd. We have not met any person from Gandak Investments P.Ltd and do not know their office. 1, 80, 000 shares of Global Telesystems Ltd were purchased by M/s.Gandak Investments Ltd on spot basis which were sold by one of the concerns of Anil Doshi and Dinesh Doshi we received a payment of Rs.1.25 crores against this., The delivery of these shares were not given by us to M/s. Gandak Investment P.Ltd., we were then asked by Hema to purchase 1,20,000 shares of BPL in settlement nos. 12 in the Account of M/s.Gandak Investments P Ltd., and then sell these shares in the same settlement. A loss of approximately Rs.1.03 crores was debited to their account. Since the payment was not coming from M/s.Gandak Investments P.Ltd we sold 1, 18, 000 shares of Global Telesystems Ltd in the market in settlement nos. 13, 14 and 15. We have to recover about Rs.11 lakhs from M/s.Gandak Investments Pvt.Ltd, for which we contact Anil Doshi, and Hema”. Shri Sundaram submitted that from this statement it is clear that it was Damayanti group which identified the broker and not the Appellant and the brokers were transacting at the behest of the said Damayanti group , that there is no evidence to show that Damayanti group used Appellant’s money to purchase the Appellant’s shares and and there is no evidence to show that the Appellant gave money and instructed Shri Harshad Mehta to corner the shares on its behalf, that on the contrary as per the Respondents, Harshad Mehta is the profiteer, that to charge the Appellant under regulation 4(a), there is no cause and link. The Respondents have wrongly come to the conclusion that the Appellants money was used to buy its own shares at its behest. Shri Sundaram stated that the bail out as such had no reaction in the market and it is not per se illegal. If the Respondent had made out a case that the brokers were holding large positions on the Appellant’s account, then the Appellant is liable, but in the instant case the Respondent has admitted that it was Damayanti group of companies cornered the shares for Shri Harshad Mehta, that in the light of such clear finding, the Appellant cannot be held to have manipulated the market.

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Shri Sundaram submitted that the fact of BSE approaching the Appellant company and other companies seeking help to get over the payment crisis was not unknown to the Respondents as the Appellant had stated the factual position in this regard in its reply to the show cause notice dated 20.12.1999; that such knowledge is also evident from the text of the questions put in by the Respondent’s investigating officer to certain brokers like Shri Satyanarayan Nangalia that the Respondent SEBI cannot now take a stand that it was not aware of the same. He submitted that bail out per se does not attract regulation 4 and is not illegal in any manner. Shri Sundaram stated that the Respondents have now picked up a portion of Shri Dhoot’s negative answer to a question by the investigating officer as to whether Shri Dhoot or his associate companies had received any communication from BSE governing Board members to help brokers having payment difficulties in June, 1998, and used the same against the Appellant company. Shri Sundaram stated that the factual position was explained to the Respondents by the Appellant in its written submission dated 20.12.1999 and this factual submission is corroborated by other witnesses such as Shri Nangalia and Shri Navanit N Rana. He also stated that there is no finding contrary to the fact and that it is admitted by the Respondents also in the show cause notice that the companies involved were BPL, Videocon and Sterlite. He stated that since it has been stated in the order that Damayanti group cornered shares, the profit motive behind such cornering cannot be with anybody but with Damayanti group or the persons owning or controlling the said group and that in any case it is not the Respondent’s case that Damayanti group is owned or controlled by the Appellant. With reference to the memorandum of understanding arrived at between JHPL and Shriram Investment company Ltd., relied on in the order, Shri Sundaram submitted that the Appellant is in no way connected or concerned with arrangement arrived at between the management of the said two companies and that it is not proper to rope in the Appellant company to every transaction, involving its share. About Rs.1.25 crores payment by the Appellant to Fedex , the Respondents themselves have admitted the purpose for which the payment was made that it was not to buy shares but was towards deposit for lease, and in the light of such a factual finding, the Respondents’ version that the money was paid to purchase the Appellant’s share cannot sustain.

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Learned Senior Counsel stated that the instant case is a three pieces jigsaw puzzle put in one hole, that these three pieces are (1) the open offer (2) the acquisition and (3) the bail out action. He stated that the time frame involved in the case of public offer and acquisitions as per the Respondents is the period between 1.4.98 to 4.6.98. The bail out action is outside the said time frame.There is a commonality in the case of open offer and bail out as the factual position of the said action remains undisputed leaving the dispute to facts concerning acquisition of shares. Learned Senior Counsel submitted that the Respondents’ view that all the three actions are related to each other is not correct. He stated that by making the public offer the promoters had only helped the investors by offering to buy their shares at the rate of Rs.165/- when the price was languishing at Rs.51/-, that this was not a call for subscription to the company’s shares independent of any investment from the promoters, that the promoters had stated that they are prepared to buy 14.24 lakh equity shares representing 2% of the paid up capital of the Appellant company by putting their own money of approximately Rs 21 crores. In this context he referred to the letter dated 9.4.1998 from the promoter to the Respondent SEBI, the public announcement and the public offer following the same and also the fact of the promoters buying the shares at the rate they promised. He stated that despite the fact that the promoters had informed the Respondent SEBI about their proposed public offer, and the Respondent having asked them to make the public offer has taken an about turn and is finding fault with the public offer so made as the cause of volatile market behaviour, which is not befitting to anybody, especially to a public authority like the Respondent. Learned Counsel submitted that the public offer proposal was transparent and to benefit all the investors and it is untenable to view such an action, which is inconformity with the goal of investor protection as criminal act to be proceeded against. He submitted that to proceed against the Appellants, the Respondent is required to establish the motive and how the Appellants profiteered in the process and harmed the other investors’ interest. Shri Dwarkadas refuted the Respondent’s allegation that the offer price of Rs.165/- per share was meant for “bench marking”. He pointed out the fact that the promoters had agreed to purchase the shares spending Rs.21 crores of their own money, has been ignored by the Respondents, that there was no compulsion on any investor to purchase the shares at the higher price offered , that the price quoted was the price at which the promoters were willing to buy the shares from others. He submitted that in the context of such a good public offer, it is but natural that the trade volume and the price would go up. He stated that the Respondents have missed the fact that when 14 lakhs shares were to be purchased, it was not specifically targeted to anybody, but left to the investors at large and that is how the market was driven and that is the practice everywhere. He stated that for the increase in the trade volume and share price, the answer lies in the offer itself, that it is wrong to say that the public offer artificially raised price and volume. He reiterated that what is real is not artificial., that artificiality is the main ingredient of regulation 4(a) and 4(d) and there was nothing artificial in the public offer made by the promoters of the Appellant company.

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Shri Shelgikar – Appellant in appeal No.26/2001- has made written submissions. His Counsel submitted that he is adopting the submissions made for the Appellant company, Shri Dhoot and Shri Hegde. It has been stated that the Appellant is a Chartered Accountant by profession and a professional consultant to many companies including the Videocon group companies, that he is neither a director and/or an officer of the Appellant company, but only an authorised signatory of the said company, that he is not an officer as defined in section 2(30) of the Companies Act as far as the Appellant company is concerned. The fact that he is only an authorised signatory of the Appellant company has been accepted by the Respondents and still the Respondents considered that “the Appellant is acting under the direction, supervision and control of the promoters of Videocon International Ltd and in respect of its financial dealings” and based on the said perception the Appellant has been considered liable to be charged under section 27. According to the Appellant, the said section 27 deems only two categories of persons to be guilty of the offence committed by the company, that under the first category comes those “persons incharge and responsible to the company for the conduct of the business of the company” at the relevant time when the offence was committed and the second category deems any “director, manager, secretary or other officer of the company” guilty of such offence if it is committed with the consent or connivance of, or is attributed to any neglect on their part”. The Appellant being merely an authorised signatory and a consultant to the Videocon group is not a person either “incharge of” or “responsible to the company for the conduct of the business of the company” that he is not a “director, manager, secretary or other officer of the company” and as such cannot be deemed to be guilty for the offence allegedly committed by the Appellant company, to come under section 27.

¶80

was published, the shares were quoted on BSE and NSE at about Rs.60/62, and trade volume per day on BSE was about 10 lakh shares and on NSE about 5.75 lakh shares. He stated that “Videocon” by its letter dated 9.4.1998 intimated the Respondent inter alia that Dhoot family and its associates wished to consolidate their equity holding in the Appellant company by acquiring 2% shares in the open market by making public offer @ Rs.140/- per share and that open offer would be made in the week following the public announcement. He stated that the price of the scrip was around Rs.62/- on that day, that “Videocon” made a press announcement to the aforesaid effect which was reported on 10.4.1998 in the Economic Times. Shri Dada stated that the effect of the said announcement, during 9.4.1998 to 21.4.1998, on the market was that volumes on both the stock exchanges, -BSE and NSE – fell drastically and the share hit circuit filters on 13th, 20th and 21st April 1998, that as a result of fall in the volume, floating stock was reduced artificially thereby creating artificial demand for the shares resulting in rise in the share price from Rs.62 to Rs.105 by 21.4.1998. He stated that during the period 29.4.1998 to 2.5.1998 the Appellant company and Videocon Appliances Ltd made funds of approximately Rs.7 crores through myriad of transactions through several bank accounts with Federal Bank, Fort Branch Mumbai to brokers viz. Sony Securities, S.N. Nangalia, GNH Global Ltd, to mope up the reduced floating stock which led to further increase in price and thereby helped in maintaining the price at high levels, that the said brokers acting on instruction from Damayanti group built up large positions, and as a result of the aforesaid, price of Appellant’s share was hiked to Rs.151/- by 25.5.1998 i.e. well above the open offer purchase price of Rs.140/-, that on 25.5.1998 another public press announcement was made increasing the public offer price from Rs.150 to Rs.165/- and in that context the Respondent SEBI called the Managing Director of the Appellant company and requested him to refrain from making public announcement expressing the intention of the promoters to make purchase of 2% by a public offer without actually making a public offer, as the said press announcement had led to artificial increase in the price of the shares. Shri Dada stated that during 25.5.1998 to 4.6.1998, the Appellant made available approximately Rs.3 crores through a myriad of transactions through several bank accounts with Federal Bank, Fort Branch to Valpin Finance to purchase shares of the Appellant company for payment of margin, carry forward etc., and as a result of which the share price shot up to Rs.167/- and volume increased , that 46 lakh shares were in carry forward segment. In the last week of May, 1998 the open offer was made. On 1.6.1998 trade volumes reached a peak of 46, 70, 887 shares and share price jumped to Rs.168/- . The public offer was opened on 15.6.1998 and closed on 3.7.1998. By end of June 1998 the Appellant Company’s shares crashed to Rs.51/- and volume also came down to 1, 03, 558 per day as the artificial support was no longer there. Shri Dada submitted that on 4.6.1998, BSE faced payment crisis, that between 4.6.1998 and 30.7.1998 the Appellant company and its associate firms provided funds of approximately 15 crores to brokers such as Madhukar Sheth and Co, Jaisukhlal Jagjivan, Spring Field Securities Ltd and Venture Securities Ltd to bail out brokers dealing with Damayanti group, as detailed in the show cause notice and in the impugned order.

¶84

Shri Dada submitted that all the 4 brokers referred to above had extensively dealt in the Appellant company’s shares on behalf of Damayanti group that the funds were shown to have been received by brokers in their books as money received for spot purchases where the selling client was Damayanti group entities and the buying client was two Videocon group companies viz. Equity Investments P.Ltd and Gandak Investment Ltd., to whom the Appellant company through JHPL had provided Rs.10 crores. He further stated that in certain cases, the payments were not received by the broker selling the shares to Equity and Gandak but were made directly to other brokers by Equity and Gandak on behalf of Damayanti group. He stated that, to create record of transactions, accounting entries were made in the books of the broker, that in reality these were merely financing arrangements, given a colour of purchase and sale of shares and whenever the clients of Damayanti group was short of funds Videocon group through Equity and Gandak provided funds by transactions disguised as spot transactions between Damayanti group and Videocon group. Shri Dada referred to the observation in the impugned order that some of the brokers dealing on behalf of Damayanti group who had cornered a substantial quantum of the Appellant company’s shares faced payment problem in June, 1998, could not discharge their commitments towards pay in liabilities , that the outstanding carry forward position of some of these brokers were taken up by M/s. Madhukar Seth & Co., Jaisukhlal Jagjiwan, Spring Field Securities and Ventura Securities Ltd., brokers of BSE through “ all or none” or “bulk” deals at pre-determined rates and quantities by synchronising the timing of logging in of the trades by the buyers and the sellers. Shri Dada read out from the impugned order the names of the brokers connected with Damayanti group who sold these shares in the bail out package, and stated that the fund flow of the purchasing clients, the concerned brokers, etc. revealed that these brokers received funds from the entities connected with Videocon group only and the prominent entities who purchased the Appellant company’s shares from the said brokers were Mehta Integrated Finance Ltd/Mehta Securities Ltd(MIFL/MSL) (Rs.873.18 lacs) Spring Field Securities (Rs.108.0 lacs) and Fedex Securities Ltd (Rs.562.00) lacs), that the aforesaid sum of Rs.15.5 crores was made available by JHPL after receiving the same from Videocon group of companies . He stated that Madhukar Seth & Co., had taken over the outstanding purchase positions of the BSE brokers in the Appellant company’s scrip to the extent of 5, 65, 000 shares, that a total of 10 lakh shares were sold by Madhukar Seth as bail out package to the entities connected with Videocon group.

¶87

cheques were drawn by the Appellant for the purpose was Federal Bank, Fort branch. To another question as to who takes the decision in respect of the private limited companies in the group Shri Hegde had replied that “ the decisions are taken by Dhoot Brothers in respect of the above mentioned private limited companies of the Group. Shri Dada referred to several paras in Shri Hegde’s deposition in an attempt to show Shri Hegde’s close association with the Videocon group . Shri Hegde had further stated that Equity Investments P.Ltd and Gandak Investments P.Ltd belonged to the Videocon group of companies and he was the authorised signatory for the bank accounts of these companies also.. To another query on the logic of money flowing from VPL to Equity Investments P.Ltd and Gandak Investments P.Ltd” he had stated that “this flow of funds of approximately Rs.10 crores from VPL to Equity Investments P.ltd and Gandak Investments P.Ltd is at the instance of my Chairman V.N.Dhoot”, that “ the decision for investment by Equity Investments P. Ltd and Gandak Investments P.Ltd was taken by my Chairman, Shri V.N.Dhoot, that “the cheques for the investments by Equity and Gandak were issued by me on the instructions of Shri V.N.Dhoot”. To another question “ Is it true that this purchase of shares was made by M/s. S.N.Nangalia, Sony Securities, GNH Global Securities, Valfin Finance etc. which involved purchases of VIL Shares alongwith other shares” Shri Hegde had answered “ this payment was not made for buying of VIL shares but was meant for purchase of other shares” and to another question “were these payments to the above brokers meant for purchase of shares or were they in the nature of loans given to the brokers or on behalf of any third party” he had answered that “ these payments were for purchase of shares only and not as loans. To another question “ did you receive contract notes and bills for the purchase of shares from these brokers”, Shri Hegde had answered “Yes, this should be in office.” Shri Dada stated that these statements clearly indicates that Shri Hegde was not a mere authorised signatory, but an integral part of the management of the Videocon group and also that the companies in the group are well interconnected.

¶93

In this context he referred to that portion of the impugned order relating to the bail out and attempted to link the transactions referred to therein with the statements of the brokers. Shri Dada stated that in reality JHPL is a close associate of Videocon group, that the said JHPL even uses the letterhead of the other companies in the group and as an example and in support he cited the use of Videocon Leasing’s letterhead by JHPL , on which MOU with Sriram group was drawn up, that JHPL’s claim of arms length transactions is baseless as there is enough reason to believe JHPL has close link with Videocon group . In this context Shri Dada also referred to the statement of Darshan Mehta that the MIFL/MSL had done transactions on behalf of their clients Madhukar Sheth for purchase of shares of the Appellant company in the month of June, 1998 as specified and directed by their clients Sangath Investments PLtd and Sheth Integrated Pvt.Ltd, that JHPL made payments to Madhukar Sheth on behalf of the clients, for the orders placed by the clients with the broker Madhukar Seth. Shri Dada also referred to the statement of Shri Ashok Jogani of Sangath Investment P.Ltd that he had dealt in the Appellant company’s shares that he had purchased approx. 10 lakh shares of the Appellant company through MIFL and the deal was done with Madhukar Sheth, that to a query as to why the deal was done through Sheth with whom MSL or MIFL had no dealings in the normal course Shri Jogani had stated that “ when we got the put option offer, we approached Joy Holdings P.Ltd to finance our purchase. Joy Holdings Mr. Shelgikar is known to us. They agreed to finance on the condition that share shall be held in the name of MIFL and physical delivery of shares will be kept with Joy Holdings till repayment of loan. Shares will be purchased through whom was also stipulated by Joy. The shares were to be transferred in the name of MIFL because MIFL had guaranteed repayment of loan taken by Sangath”. Shri Dada referred to Shri Jogani’s following deposition summing up the position that:

¶101

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 proof requirement in a criminal proceeding. He cited the decisions 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’ble 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. Shri Dada submitted that to establish the charge of manipulation and hold a person responsible 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 Sundaram’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) or 4(d) as is being made out by Shri Sundaram, that wherever fraud/fraudulent transactions are covered, it has been specifically included in the regulation, as in regulations 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 at a time when they were to face the music, Videocon group appeared on the horizon

Date	Circuit filter(Rs.)
13.4.98	77.90
20.4.98	97.35

¶171

In this context it is to be noted that the 5% bench mark was brought in with effect from 28.10.98 prior to that it was 2% . The limit has been further raised to 10% with effect from 24.10.2001. The creeping acquisition upto the specific limit without mandating public offer is a concession to those in control of the company as is evident from the observation in the Bhagwati committee’s report that “the committee appreciated the fact that in a competitive environment it become necessary for person(s) in control of the company to consolidate their holding either suo moto or to build their defences against take over threats” . It is also to be noted that the limit has been progressively increased from 2% to 5% to 10% over the last 5 years. It is therefore clear that public offer is mandatory only if the quantum of shares involved exceeds the prescribed limit. But there is no prohibition in the Regulations on an acquirer acquiring shares by following the fair and transparent offer route. The Respondent’s observation that the promoters “ought not to have resorted to public offer” as the creeping acquisition was within the limit, when viewed in the light of the underlying spirit of the Regulations is difficult to accept. The Takeover Regulations is substantially based on the recommendations of Justice Bhagwati Committee. The Committee in its report had observed that the Regulations should “help in evolving good business standards as to how fairness to shareholders can be achieved as maintenance of such standards is of importance to the integrity of the financial markets and they should not concern themselves with issues of competition or financial or commercial advantage or disadvantages of a takeover”. The Committee had also observed that it would be impracticable to devise regulations in such detail to cover the entire range of situations which could arise in the process of substantial acquisition of shares and take overs and instead there should be a set of general principles which should guide the interpretation and operation of the Regulation especially in circumstances which are not explicitly covered by the Regulation. The principles enumerated in the report inter alia include (1) equality of treatment and opportunity to all shareholders and (2) protection of interests of shareholders. Equality of treatment and opportunity to all shareholders, is the corner stone of Takeover Regulations. Viewed in the said back drop, it is difficult to agree to the Respondent’s version that the public announcement of offer to buy 2% of the equity capital of the Appellant was improper or uncalled for, especially in view of the fact that the procedure followed was fair and transparent providing “equality of treatment and opportunity to all shareholders”. The Respondents have failed to establish that the said public offer was intended to artificially raising or depressing the prices of securities to defraud/deceit other shareholders. A public announcement, which does not attract the provisions of regulation 4 cannot be considerd as an act of market manipulation. It is not a per se charge, but needs to be established with factual evidence. In the light of the financial parameters presented by Shri Sundaram based on the Appellant company’s published balance sheet as on 31.3.1998, and that the offer price of Rs.,165 was below the “real value” of the share, it cannot be said that the said price was an artificial price as has been alleged by the

¶181

In this context it is also relevant to note the observations made by the Respondents in the show cause notice dated 20.12.1999. In the context of the promoters press announcement to acquire 2% of the share capital @Rs.140/165, that “Managing Director of Videocon was called and advised that they should refrain from making such announcements of intentions to buy at “higher prices” without actually initiating a formal process of offer, as such announcements lead to artificially affecting the price of the scrip. Thereafter a public announcement was made wherein price of Rs.165 for each share of Videocon was offered” The fact that the promoters action was not in violation of the Takeover Regulations is also established from the fact that the Respondents till date have not proceeded against the Appellant for any such violation. The upward market price movement and the consequential impact on the trade volume, in the context of such an attractive offer is not unusual. The Respondents have failed to establish in what way the said offer was an exception. In the absence of any tangible evidence from the Respondent’s side showing that the said public offer was meant to manipulate the market, there is no choice but to believe that the market response was in tune with the pattern normally found in such a situation. In this context yet another fact which has to be noted is that the Respondents have failed to estbalish the Appellant’s motive behind such an acquisition. Learned Senior Counsel for the Respondents had stated that “self benefit was the motive”. But he did not throw much light on that, as to what gain the promoters expected to get or actually got by acquiring shares at such a higher price shelling out about Rs.21 crores of their own money. There is yet another important factor to be noted in this regard. It was the promoters , who acquired the shares representing 2% of the paid up capital to consolidate their holding and strengthen their position, and it was not a buy back of shares by the company. The Appellant is not a closely owned company, the public holding in it is around 65% leaving only 35% with the promoters. It is not a “family concern” of Dhoot’s to be identified with Dhoots. That being the case, it was incumbent on the part of the Respondents to clearly state as to how the Appellant company could be held liable for the consequences, if any, arising out of the acquisition of shares by the promoters. According to the Respondents’ version (in its reply) “ the promoters of the Appellant company had made the public offer for the purpose of bench marking the shares of the Appellant company at Rs.165/- per share and creating an artificial demand in the said shares of the Appellant

¶188

of this funding by JHPL of Equity and Gandak to the tune of Rs.10 crores need also be noted. In the context of bail out it has been stated that “the fund flow of the purchasing entities, the concerned brokers etc. revealed that these brokers received from entities connected with Videocon group only. Therefore the said funds (15.5 crores) were made available by JHPL after receiving the same from Videocon Group of companies”… The fountain head of fund flow appears to Videocon Petroleum Ltd. Not only the letter dated 1.7.98 but there is also corroborating evidence to the said effect. The statement made by the Appellant company in the letter dated 1.7.1998 has been taken cognizance of by the Respondents is evident from the questions put by the Investigating Officer (I.O) to Shri Hegde while recording his statement. It is seen from Shri Hegde’s deposition dated 9.7.98 that the I.O had asked him to “explain the logic of money flowing from VPL to Equity Investments P.Ltd and Gandak Investments Pvt.Ltd” (Q.27) and in answer there to Shri Hegde had stated: “This flow of funds approximately Rs.10 crores from VPL to Equity Investments P.Ltd and M/s.Gandak Investments P.Ltd is at the instance of my Chairman Shri V.N.Dhoot. Only he can explain this”. The I.O had confronted Shri Dhoot with said statement of Shri Hegde as could be seen from the deposition of Shri Dhoot dated 20.7.99. The I.O had put the following Question to Shri Dhoot “Mr.Hegde stated in his statement that the cheques to Valfin, Sony, GNH, S.N.Nangalia were given to them based on your instructions, What is your reply? (it is to be noted that these are four entities to whom Rs.10 crores were paid at a time the public offer was in the offing. ). In reply thereto Shri Dhoot had stated “I am the Chairman of Videocon Petroleum Ltd (VPL) and this company had surplus funds of Rs.500 crores in 1998. Out of this, around Rs.25 crores were invested in listed securities. This was a normal investment of the investment division of VPL”. In this context the statement of Shri Hegde in answer to the following question is also relevant:

¶193

The fund flow from VPL to purchase shares as stated by the Appellant company remains unrebutted. The Appellant company has stated by its letter dated 1.7.1998 it was VPL’s money which was given to JHPL through Domebell Investment P.Ltd (DIP). The Respondents have also not rebutted this factual position. The Respondents in the order had also stated about the funds made available by Videocon group. However, in the flow chart the Appellant company has been shown as the starting point and other group companies such as Domebell Investments, JHPL, Equity Investments, Gandak Investments etc. as intermediaries in the fund movement channel till it reached the brokers. It appears that no attempt has been made to find out as to whether the funds were actually provided by VPL as claimed by the Appellants or it was the Appellants own funds. The evidence on record strengthens the Appellants version that Rs. 10 crores was made available by VPL and was routed through other companies including the Appellant company.The Appellant’s version is that instead of returning the loan amount to VPL directly, it was paid to DIPL, at the behest of VPL and DIPL acted as directed by VPL. Factual position in this regard could have been verified from the records of the concerned companies. In any case there is no rebuttal of the Appellant’s version from the Respondents’ side, on the contrary the Respondents have relied on the Appellant’s letter dated 1.7.1998. The Appellant’s contention that JHPL is a totally independent company and not in any way associated or connected with it is untenable. The fact that JHPL received money directly from Domebell, a Videocon group company, and JHPL passed on the money to two other Videocon group companies viz. Equity Investments P.Ltd and Gandak Investments Ltd goes to demolish the Appellants contention that JHPL is unrelated to the Videocon group. What is missing is a finding with facts that Rs.10 crores paid to Equity Investments and Gandak Investments actually belonged to the Appellant company, and a rebuttal of the factual position putforth by the Appellant company in its letter dated 1.7.1998. The respondents have established fund flow from

¶225

“The SEBI Act is an Act of remedial nature and, therefore, the preset 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 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”.

¶232

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

Videocon International Limited v. SEBI

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Videocon International Limited v. SEBI

Case brief

What is this about?

What did the court decide?

Issues for consideration

Cases cited

Parties & counsel

Case details

Similar cases

What the court decided

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