Allowed

Ksl and Industries Ltd.

SAT30 Sept 2003

Case brief

AI extract

What is this about?

SAT allowed an appeal filed by KSL & Industries Ltd. against a SEBI order debarring access to the capital market. The tribunal found insufficient evidence to establish that the appellant knowingly participated in the irregular allotment or subsequent market manipulation.

What did the court decide?

The impugned order applying to the Appellant was set aside and the appeal was allowed to that extent.

What the court decided

Ksl and Industries Ltd. — Securities and Capital Markets | SAT (2003)

Allowed

Ksl and Industries Ltd.

SAT30 Sept 2003

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Case brief

AI extract

What is this about?

What did the court decide?

The impugned order applying to the Appellant was set aside and the appeal was allowed to that extent.

What the court decided

¶41

When the appeal was taken up for disposal, Shri D. J. Khabatta, learned Counsel appearing for the Appellant explained the background in which the Respondent SEBI had passed the order and stated that SEBI has ignored vital facts, that would show non involvement of the Appellant in the pre public issue and post public issue developments. He submitted that the Appellant’s involvement in the matter is only as a professional financier, that it had advanced money in the normal course of its business to Shri Gopal Khadaria to earn interest after providing adequate safeguards, and it was in no way connected or associated with the promoters of MFL and not a party to the alleged manipulation in any manner. In this context he referred to the copy of the Agreement dated 7.10.1995 (the Agreement) entered into between the Appellant and Gopal Khadaria (Respondent No.2) and submitted that from the Scheme of the agreement it is clear that it is essentially a funding agreement and such agreements are normally entered into by financiers while advancing money to persons who seek funds for subscribing the shares offered in public issues, that it has been made clear in the Agreement that the BORROWER (i.e. Gopal Khadaria) was desirous of applying for 60 lakhs equity shares of Rs.10/- each for an amount of Rs.6 crores out of the public issue of MFL, that since he did not have liquidity to pay the application money he requested the INVESTOR (i.e. the Appellant) to provide him financial accommodation to the extent of Rs.6 crores to enable him to apply for the said shares and for the said financial accommodation, he agreed to pay interest at the rate of 24% per annum from the date of stockinvest to the date of allotment and also agreed to pay interest @ 30% p.a. from the date the stockinvest gets debited into the bank to the date of final payment made by him, that in the event of funds not refunded to the Appellant within seven days after intimation to take delivery of the shares, he was required to pay interest @ 36% p.a. In this context learned Counsel referred to clause (f) of the Agreement which stipulated that “To ensure repayment of Financial Accommodation BORROWER has offered to

¶63

Learned Counsel submitted that the adjudicating authority has passed the impugned order going beyond the scope of the show cause notice and therefore the order is bad and deserves to be set aside. In this context he referred to the show cause notice dated 6.2.1998 and submitted that the only charge against the Appellant is that it made 6 multiple applications and the same resulted in irregular allotment. He submitted that it is not a charge against the Appellant that it acted in connivance with any other person, or that it acted with an intention to defraud anybody or that it indulged in falsification of the records. He submitted that the Respondent has referred to only one document in the show cause notice based on which the charges were levelled and that document is the Agreement dated 7.10.1995 entered into between the Appellant and Shri Gopal Khadaria and no other material or document has been referred to and provided to the Appellant. Therefore the Respondent is precluded from relying on any other document/material while adjudicating the show cause notice or defending its order under challenge in the appeal proceedings. He submitted that the Respondent in its reply has referred to an unsigned draft agreement dated 30.9.95 between Gopal Khadaria and M/s. Nathji Enterprises, stated to have been given by Gopal Khadaria vide his letter dated 18.11.1996 allegedly showing that both the parties had reached an understanding that Shri Gopal Khadaria would arrange finance/share applications for 60 lakh shares on behalf of Nathji Enterprises in the public issue, that the said letter and the agreement though were in the possession of the Respondent in the year 1996 no reference to the same was made in the show cause notice and a copy of the same was never made available to the Appellant. Learned Counsel submitted that in the context of the limited charge levelled against the Appellant it had answered only the said charge in its reply dated 18.2.1998 and referred to the same filed with the appeal that:

¶78

to violation of FUTP Regulations, the Respondent can not invoke the provisions of section 11 for the violation of a non existent Regulation at the point of time. He further submitted that even if it is assumed for argument sake that the FUTP Regulations attracted to the facts of the case, still the alleged action is not one prohibited under regulations 3,4,5 or 6 of the FUTP Regulations. He submitted that according to regulation 3, no person shall buy, sell or otherwise deal in securities in a fraudulent manner. It is not the Respondent’s case that the Appellant had indulged in buying or selling or otherwise dealing in securities in a fraudulent manner, that the charge is making multiple applications. He referred to the ingredients of regulation 4 and submitted that making multiple applications in a public issue does not fit in any of the sub clauses of the regulation to consider that the Appellant indulged in market manipulation attracting the said regulation. Since the Appellant had not made any misleading statement to induce sale or purchase of securities regulation 5 has also no application. He also referred to the provisions of clauses 6(a) to (e) of the FUTP Regulations and submitted that none of the provisions attracted. However, in the light of the allegation of “fraud” levelled in the order, learned Counsel referred to regulation 6(a) and submitted that as per the said clause (a) “no person shall in the course of his business, knowingly engage in any act or practice which would operate as a fraud upon any person in connection with the purchase or sale or any other dealing in securities.” Learned Counsel submitted that regulation 6(a) attracts only if a person in the course of his business knowingly engage in any act or practice which would operate as fraud, that the intention of the party in this regard is thus an important factor for the purpose of regulation 6(a). He submitted that in this context the definition of the expression “fraud” in the regulation need also be looked into, that the ingredients of ‘fraud’ includes ‘intent to deceive another’ and the show cause notice does not attribute any such ‘intention to deceive’ on the part of the Appellant. He further submitted that even if it is assumed that there is allegation of fraud against the Appellant, the Respondent cannot simply make the allegations and get away with it without producing adequate evidence in support of the charge. In this context he referred to the observation made by the Hon’ble Supreme Court in Barium Chemicals Ltd. V Company Law Board (AIR 1967 SC 295) that mere repetition of the provision of the law is not adequate when

¶79

the charge is alleged, that the material based on which such charge is levelled need be disclosed in the notice. He submitted that when fraud is alleged test of evidence is strict and surmises and conjunctures are not adequate. In support of the contention that sufficient proof is required when fraud is alleged, learned Counsel referred to the observation made by Privy Council in Hansraj Gupta V Dehra Dun Mussoorie Electric Tramway Ltd. (AIR 1940 Privy Council 98) that “the party alleging fraud is bound to establish it by cogent evidence and suspicion can not be accepted as proof. Unless therefore the proved circumstances are incompatible with the hypothesis of the person charged with fraud having acted in good faith, they can not be accepted as affording sufficient proof of fraud.” He submitted that SEBI except making wild allegation has not put forward any convincing evidence to establish the charge of fraud. Learned Counsel submitted that if making multiple application is fraud, then every person making such application would be considered as fraudster, and that would really be a mockery, that the Respondent has not stated as to how making multiple application would amount to fraud in terms of regulation 2 (1) (c ) of the FUTP Regulations and in the absence of any explanation in this regard the Appellant is not in a position to meet the said charge. In this context he referred to the observation made by the Hon’ble Supreme Court in B.D. Gupta V State of Haryana (1973) 3 SCC 149) that a show cause notice not giving the noticee the real opportunity to defend himself against the charge is not an adequate show cause notice and based on such a show cause if any action is taken the order taking such action is bad and liable to be struck down. He submitted that the said ratio is in equal force applicable to the Appellant’s case and the order passed by the Respondent deserves to be set aside because of the inadequate show cause notice. Learned Counsel also cited Hon’ble Supreme Court’s decision in Tarlochan Dev Sharma V State of Punjab (2001) 6 SCC 260) to buttress his argument that an order passed at variance from the show cause notice of which noticee was not even made aware of, is untenable.

¶95

Shri Desai submitted that the charges having been proved categorically, logically the consequences should follow. It is in the said context the impugned directions were issued and the Respondent is competent in terms of section 11B read with regulation 12 of the FUTP Regulations to issue corrective and remedial measure. He submitted that the impugned direction is not a punitive order but an order to prevent such activities by the persons involved, that the objective behind the direction is to disable the Appellant from repeating such unfair activities for some time atleast. Learned Counsel submitted that the Tribunal in Sterlite case (supra) has not held that the Respondent is not empowered to take remedial or preventive measures, that in fact the Tribunal has accepted that under section 11B preventive and remedial measures can be taken. Shri Desai submitted that the Tribunal in Anand Rathi V SEBI ((2002) 35 SCL 1) has held that direction which is relatable to the conduct of the accused, can be issued under section 11B of the Act, that in the instant case such nexus has been established. With reference to the Appellant’s reliance on Hindustan Steel case (supra) learned Counsel submitted that the Appellant’s case is different from the facts in the said Hindustan Steel’s case, that it has been demonstrated in the present case that the Appellant had willfully and intentionally acted to defraud the investors. According to Shri Desai the Appellant’s contention that since the impugned order was issued after a delay of 7 years and therefore in the light of the Hon’ble Bombay High Court’s observation in Universal Agencies (supra) and the Hon’ble Supreme Court in Collector of Central Excise (supra) no action is called for now, is baseless for the reason that investigation of market manipulation is a time taking process requiring collection of evidence and the Respondent had not delayed the investigation intentionally and as a result of the delay, even if there is such delay, the Appellant has not in any way suffered.

¶111

It is an admitted fact that one of the business activities of the Appellant is that of financing. The Appellant has claimed that it is a professional financier. It advances money against high rate of interest. In the instant case also it had done the same thing. It agreed to provide financial accommodation to the tune of Rs.6 crores to Gopal Khadaria against 24% interest per annum. In this context the Agreement dated 7.10.1995 entered into between the Appellant and the said Gopal Khadaria assumes relevance. It is to be noted that whether the terms and conditions of the agreement was adequate or not or that security offered by the borrower was adequate to cover the risk involved etc. are not matters of concern to others. Risk coverage is the concern of the lender. It is for the lender to protect his interest. If he fails to exercise requisite diligence, then he is the person to face the consequences. On a perusal of the Agreement dated 7.10.1995 I find that Shri Gopal Khadaria had stated the reason for seeeking financial accommodation from the Appellant. He had no choice but to state the reason that the rest of the structure of the agreement from the angle of security against the loan provided therein is linked to the shares which he was planning to purchase. It is true that the Appellant has advanced application money to the extent of Rs.6 crores through stock invests to subscribe for 60 lakh shares, though the net public offer was only for 11,80,000 shares. The Respondent has taken this as a major point to establish the role of the Appellant in the alleged market manipulation. In this context it is to be noted that the Appellant is a financier. It’s goal is to maximise its profit. By giving large sum for short duration by way of advances, its gain through interest collection increases. The financier as such is not normally expected to exercise any control on the number of shares one proposes to purchase in a public issue for which financial accommodation is availed from the financier. The Appellant, in my view, undoubtedly knew the total number of shares offered to the public by MFL and also that Shri Gopal Khadaria was applying for more shares than the total quantity of shares offered to the public. It is to be noted that the Appellant was acting as financier for maximising his profit and not as a counsellor to the borrower. The Appellant had agreed to give financial accommodation

Ksl and Industries Ltd.

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Ksl and Industries Ltd.

Case brief

What is this about?

What did the court decide?

What the court decided

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

Similar cases

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