2016 (7) TMI 624 - SC - Companies Law

Ingenuine demat account holder - getting excessive number of shares in an irregular manner - undue benefit - Held that - We do not find any substance in the submissions made on behalf of the respondents to the effect that the price of the shares of Jet Airways India Ltd. paid by the respondents to the demat account holders was reasonable. Even according to the submission made by the learned counsel, value of the said shares, during the said period varied from ₹ 1172/- to ₹ 1339/- and in such circumstances, nobody would believe that all the demat account holders would sell their shares at the same rate, viz. ₹ 1170/- per share to the respondents. These transactions are, therefore, definitely of fishy nature. The transfer of shares did not comply with the requirements of the provision of either Section 13 or Section 2(i) of the SCRA. Therefore, the off market trading indulged into by the Respondents was rightly held to be per se illegal by the Whole Time Member. The submission made to the effect that the Tribunal is a final fact finding authority cannot be disputed. According to the learned counsel, the facts found by the SAT should not be disbelieved by this Court. However, for coming to a definite conclusion contrary to the findings arrived at by the lower authority, the appellate authority, in the instant case, the SAT, ought to have recorded specific reasons for arriving at a different conclusion, but we do not find any sound reason for coming to a different conclusion in the impugned order. On the other hand, we find detailed discussion for coming to a particular conclusion in the order, which was passed by the Whole Time Member of the SEBI and therefore, we do not see any reason for the SAT to disturb the said finding without mentioning any strong and justifiable reason for coming to a different conclusion. The Whole Time Member of the SEBI has very meticulously examined the aforestated facts and in our opinion he has rightly come to the conclusion that the dealings of the respondents were not fair and were in violation of the Act as well as the Regulations.

Summary

Issues Involved:
1. Legality of the share transactions in the IPOs of Jet Airways Limited and Infrastructure Development Finance Company Limited.
2. Alleged violations of the SEBI Act, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003.
3. The role and findings of the Securities Appellate Tribunal (SAT) versus the Whole Time Member and Adjudicating Officer of SEBI.
4. The impact on Retail Individual Investors (RII) and the integrity of the securities market.
5. Compliance with the Securities Contracts (Regulation) Act, 1956 (SCRA).

Detailed Analysis:

1. Legality of the Share Transactions in the IPOs:
The appeals challenged the SAT's order which set aside the SEBI's decision regarding irregularities in the IPOs of Jet Airways Limited and Infrastructure Development Finance Company Limited. SEBI's investigation revealed that shares meant for RIIs were cornered through hundreds of benami/fictitious demat account holders, violating Section 12A (a), (b), (c) of the SEBI Act, 1992, and Regulations 3 and 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003.

2. Alleged Violations of SEBI Act and Regulations:
The SEBI found that the respondents had engaged in transactions that were not transparent and against the interest of small investors. The shares were purchased from 553 demat account holders at a rate below the market value and sold at a higher price, indicating a scam. The Whole Time Member of SEBI concluded that the demat accounts were not genuine and were used to corner shares in the retail segment of the IPO.

3. Role and Findings of SAT vs. SEBI Authorities:
The SAT allowed the appeals, setting aside the SEBI orders without providing specific reasons to counter the detailed findings of the Whole Time Member and Adjudicating Officer of SEBI. The Supreme Court noted that the SAT, as a first appellate authority, should have re-appreciated the evidence but failed to provide any substantial reasons for its contrary conclusions.

4. Impact on Retail Individual Investors and Market Integrity:
The transactions adversely affected RIIs, who were deprived of shares due to the respondents' actions. The SEBI Act aims to protect investors' interests and ensure the securities market's integrity. The Supreme Court emphasized that SEBI acted rightly to maintain market confidence and fairness.

5. Compliance with SCRA:
The Supreme Court highlighted that the SCRA regulates securities transactions to prevent undesirable practices. The respondents' off-market trading did not comply with Section 2(i) of the SCRA, which defines a 'Spot Delivery Contract.' The transfer of shares did not meet the requirements, and the Whole Time Member rightly deemed the transactions illegal.

Conclusion:
The Supreme Court quashed the SAT's order, reinstating the SEBI's decisions. The appeals by SEBI were allowed, and the orders by the Whole Time Member and Adjudicating Officer of SEBI were to be acted upon within two months. The judgment reinforced the importance of regulatory compliance and protection of small investors in the securities market.