2010 (11) TMI 1057 - AT - Companies Law

Summary

Issues Involved:
1. Whether the appellants acted as financiers in the IPO scam.
2. Whether the appellants were involved in cornering shares meant for retail investors.
3. Whether the appellants employed fraudulent, deceptive, and manipulative practices.
4. Whether the appellants made unlawful gains and should be directed to disgorge the amount.
5. Whether the Board has the power to direct disgorgement and interest on the disgorged amount.

Summary:

1. Whether the appellants acted as financiers in the IPO scam:
The appellants, both practicing chartered accountants, were alleged to have provided finance to key operators, Budhwani and Sugandh, enabling them to apply for shares in the retail category of ten IPOs. The Board issued a show cause notice u/s 11 and 11B of the Securities and Exchange Board of India Act, 1992, alleging that the appellants employed fraudulent practices by financing these transactions.

2. Whether the appellants were involved in cornering shares meant for retail investors:
The appellants denied collusion, claiming they merely lent money. However, the whole time member found that the appellants manipulated the IPO allotment process by providing finance to key operators who made applications through fictitious/benami accounts, thereby cornering shares meant for retail investors. The shares received by the appellants were not loan repayments but were transferred as per a prior understanding.

3. Whether the appellants employed fraudulent, deceptive, and manipulative practices:
The Tribunal held that the appellants financed the key operators to corner shares in the retail category, thereby employing fraudulent, deceptive, and manipulative practices in violation of Section 12 A of the Act and Regulations 3 and 4(1) of the Regulations. The appellants' claim of a principal-to-principal relationship was rejected, and it was found that they acted in concert with the key operators.

4. Whether the appellants made unlawful gains and should be directed to disgorge the amount:
The appellants were found to have made an unlawful gain of Rs. 4.05 crores by selling the cornered shares at a higher price post-listing. The Tribunal affirmed the direction to disgorge this amount along with Rs. 1.95 crores as interest. The argument that the Board lacked the power to direct disgorgement was rejected, citing that disgorgement is an equitable remedy to prevent unjust enrichment.

5. Whether the Board has the power to direct disgorgement and interest on the disgorged amount:
The Tribunal upheld the Board's power to order disgorgement and interest, stating that the principles of justice, equity, and good conscience authorize such directions. The rate of 12% interest was deemed appropriate given the appellants' illegal profits and the general rate of interest.

Conclusion:
The appeal was dismissed, affirming the findings and directions of the whole time member, including the prohibition on dealing in securities and the order to disgorge the unlawful gains with interest.