2013 (6) TMI 90 - Board - Companies Law

Penalty u/s 15H(ii) of SEBI Act, 1992 - case of SEBI that all the 7 allottees acted in concert with each other for the purpose of acquiring a huge number of shares of PCL Comp through preferential allotment but failed to come out with a public announcement to acquire the said shares as per Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 - penalty of ₹ 20 lacs on 11 appellants and 4 more noticees guilty of violating the provisions of Regulation 10 of the SAST Regulations, 1997 jointly and severally - Held that - As it is evident that all seven allottees had bank accounts with Vinayak Sahakari Bank & all the bank accounts had negligible balance in them before the date of the allotment. Few of them even opened their bank accounts just before the date of allotment of the shares. There was a common pattern of circular fund flow, involving Hirak Biotech Ltd. and Sarang Chemicals Ltd, both of which are group concerns of PCL Comp. All the seven allottees were funded by Hirak and one was funded by Sarang. All the shares allotted were pledged with the Ahmedabad Peoples Bank against loans taken by PCL Comp and its group companies, including Hirak and Sarang. The address of another allottee, Rudra Securities, prior to 11/11/2008 was the residential address of the 1st Appellant. No cogent explanation has been provided by the Appellants with regard to the receipt of funds, the application and the allotment of shares, except to say that they raised debt to apply. It is the admitted position before the adjudicating officer that no documents were available in support of this contention. Thus a minute perusal of the impugned order thus makes it abundantly clear that the 7 allottees in question acted with a common purpose and design in the matter of allotment of 2.90 crore preferential shares in question. It is established by the learned adjudicating officer beyond doubt that all the 7 persons functioned as a one entity for all practical purposes and intents. All the three companies in the appeals, who acted through individual directors only, are equally responsible for the wrongful acts in question and hence liable to pay the penalty imposed upon them by the impugned order. Violation of the principles of natural justice - Held that - As it is noted that all the relied upon documents, which were asked for by the appellants, were supplied to them by the adjudicating officer. Adjournments on personal grounds to the appellants for personal hearing were also liberally granted by the adjudicating officer in consonance with the principles of natural justice. Therefore, the plea regarding violation of principles of natural justice being raised at this stage is an afterthought and hence liable to be rejected. Breach of Article 14 read with Article 21 of the Constitution of India - Held that - The adjudicating officer has given convincing reasoning regarding exoneration of Shri Ashok H. Shah and Ms. Neha Shethwala appreciated by Tribunal Therefore there is no violation of Articles 14 and 21 of the Constitution of India. No arbitrary or unreasonable approach adopted by the adjudicating officer towards any of the appellants or noticees. The argument of the appellants, regarding infringement of Art.14, therefore, stands rejected. In the facts of the present case, even if the expression personal liberty is interpreted to include in its ambit the right to livelihood , as pressed by appellants, the same cannot be extended to allow the appellants to carry on trade or business in shares against the statutory and regulatory norms prescribed lawfully by the SEBI. It would, otherwise, be injurious to public interest and may also have insidious effect on the capital market. Therefore, the plea advanced by the appellants based on Art. 21 also fails. Appeal dismissed.

Issues Involved:
1. Imposition of penalty under Section 15H(ii) of the SEBI Act.
2. Violation of Regulation 10 of the SAST Regulations, 1997.
3. Connection and concerted action among the allottees.
4. Validity of the appellants' transactions and their claims.
5. Procedural fairness and principles of natural justice.
6. Alleged violation of Articles 14 and 21 of the Constitution of India.

Detailed Analysis:

1. Imposition of Penalty under Section 15H(ii) of the SEBI Act:
The appeals were filed against an order imposing a penalty of Rs. 20 lacs on the appellants for violating provisions of Section 15H(ii) of the SEBI Act. The adjudicating officer concluded that the appellants were guilty of violating Regulation 10 of the SAST Regulations, 1997, and imposed the penalty jointly and severally on the appellants.

2. Violation of Regulation 10 of the SAST Regulations, 1997:
Regulation 10 mandates a public announcement for acquiring shares that entitle the acquirer to exercise 15% or more of the voting rights in a company. SEBI's investigation revealed that the seven allottees acted in concert to acquire a substantial number of shares of PCL Comp through preferential allotment without making the required public announcement, thus violating Regulation 10.

3. Connection and Concerted Action Among the Allottees:
The adjudicating officer found that the seven allottees had a common purpose and acted in concert. Evidence pointed to connections between the entities and individuals involved, including common directors and circular fund flows. The adjudicating officer noted that the seven allottees functioned as one entity for practical purposes, substantiated by their bank transactions and interconnections.

4. Validity of the Appellants' Transactions and Their Claims:
The appellants claimed that their transactions were bona fide and that they had no connection with the other entities. They argued that the shares were unlisted and thus did not attract SEBI regulations. However, the adjudicating officer found these claims unsubstantiated, noting the lack of documentary evidence and the circular nature of the fund flows. The Tribunal upheld the adjudicating officer's findings, rejecting the appellants' claims.

5. Procedural Fairness and Principles of Natural Justice:
The appellants contended that the adjudicating officer violated principles of natural justice by not providing adequate opportunity to present evidence or cross-examine witnesses. The Tribunal found that the adjudicating officer had granted reasonable opportunities for personal hearings and had supplied all relied-upon documents. The plea of procedural unfairness was deemed an afterthought and rejected.

6. Alleged Violation of Articles 14 and 21 of the Constitution of India:
The appellants argued that the penalty violated their rights under Articles 14 and 21 of the Constitution. The Tribunal noted that the adjudicating officer had provided rational justification for exonerating two individuals while penalizing the others. The Tribunal found no arbitrary or discriminatory action by the adjudicating officer, and thus no violation of Article 14. Regarding Article 21, the Tribunal held that the right to livelihood does not extend to conducting business in violation of regulatory norms, and thus the plea based on Article 21 also failed.

Conclusion:
The Tribunal dismissed all three appeals, upholding the penalty imposed by the adjudicating officer. The Tribunal found that the appellants acted in concert in violation of Regulation 10 of the SAST Regulations, 1997, and that the adjudicating officer had followed due process and principles of natural justice. The arguments regarding constitutional violations were also rejected.

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