2009 (12) TMI 1006 - Board - Companies Law

Summary

Issues Involved:
1. Alleged cornering of retail shares in IPOs by appellants.
2. Allegations of fraudulent activities and manipulation of IPO allotment process.
3. Determination of the appellants as key operators in the IPO scam.
4. Legitimacy of off-market transactions conducted by the appellants.
5. Disgorgement of alleged unlawful gains by the appellants.
6. Legal implications of parallel proceedings under Sections 11 and 11B of the SEBI Act and adjudication proceedings under Chapter VIA.

Detailed Analysis:

1. Alleged Cornering of Retail Shares in IPOs by Appellants:
The central issue was whether the appellants had cornered the retail portion of shares issued by Jet Airways Limited and Infrastructure Development Finance Company Limited in their IPOs. The Board's investigation revealed that certain entities had opened multiple demat accounts in fictitious or benami names to corner shares meant for retail investors. However, the whole time member concluded that there was no material evidence to establish that the 553 demat account holders from whom the shares were transferred were benami or fictitious. They were genuine retail investors who applied for shares with their own funds and subsequently sold them in off-market transactions to the appellants. Thus, the appellants did not corner shares in the IPO allotment process.

2. Allegations of Fraudulent Activities and Manipulation of IPO Allotment Process:
The Board alleged that the appellants engaged in fraudulent activities by using 553 demat accounts to corner shares meant for retail investors. The show cause notice accused the first appellant of being the ultimate beneficiary of shares allotted to 553 entities, who were alleged to be mere name lenders or benamis. However, the investigation failed to substantiate that these demat account holders were benami or fictitious. The whole time member's findings indicated that the demat account holders were genuine, and there was no evidence to support the claim of manipulation or fraudulent activity in the IPO allotment process.

3. Determination of the Appellants as Key Operators in the IPO Scam:
The Board identified the first appellant and Deepak Kumar Shantilal Jain as key operators in the IPO scam. Key operators were defined as entities allowing their demat accounts for temporarily parking credits received from multiple afferent accounts before transferring them to financiers. However, the investigation revealed that the demat accounts from which shares were transferred to the first appellant were genuine. Therefore, the appellants did not fit the definition of key operators as they did not receive shares from fictitious accounts nor transferred them to financiers. Consequently, the appellants were not key operators in the IPO scam.

4. Legitimacy of Off-Market Transactions Conducted by the Appellants:
The appellants argued that they purchased shares from original allottees in off-market transactions, which is not prohibited by law. The whole time member found that the appellants bought shares from genuine retail investors in the secondary market, and there was no evidence of any illegality in these transactions. The appellants' actions of purchasing shares in off-market transactions and subsequently selling them at a profit did not constitute a violation of securities laws or manipulation of the IPO allotment process.

5. Disgorgement of Alleged Unlawful Gains by the Appellants:
The whole time member directed the appellants to disgorge alleged unlawful gains made from trading the shares. The first appellant was ordered to disgorge Rs. 12,02,302, and the second appellant Rs. 2,24,280, based on the difference between the purchase price and the average sale price. However, since the appellants did not commit any wrongdoing in trading the shares, the direction to disgorge the amounts was not justified. The concept of disgorgement applies to profits obtained through illegal or unethical acts, and since the appellants' actions were lawful, the disgorgement order was set aside.

6. Legal Implications of Parallel Proceedings under Sections 11 and 11B of the SEBI Act and Adjudication Proceedings under Chapter VIA:
The judgment highlighted the anomaly arising from parallel proceedings under Sections 11 and 11B of the SEBI Act and adjudication proceedings under Chapter VIA. The whole time member and the adjudicating officer arrived at vastly different figures regarding the quantum of unlawful gains, leading to conflicting conclusions. The judgment suggested that a single inquiry body should handle both the issuance of directions and imposition of monetary penalties to avoid such anomalies and expedite matters. This recommendation would require legislative amendment.

Conclusion:
The appeals were allowed, and the impugned orders were set aside. The appellants were not found guilty of cornering shares in the IPO allotment process, acting as key operators, or engaging in fraudulent activities. The direction to disgorge alleged unlawful gains was also set aside, and the judgment recommended legislative changes to address the issues arising from parallel proceedings.