2001 (1) TMI 889 - DSC - Companies Law

Issues involved:

Formation of conspiracy, connection of respondents 1-5 to the conspiracy evidenced by circuitous flow of securities at off-market rates between 13-5-1992 and 15-5-1992, ratification of contracts, authority of respondents 4 and 5 after 7-5-1992 letter, whether Canfina can recover loss since transactions were on PMS accounts.

Formation of Conspiracy

The evidence shows that the four contracts between 13-5-1992 and 15-5-1992 were interconnected and not independent transactions. Two legs involved sale/purchase at depressed off-market rates (Rs. 14 and Rs. 16.50 per unit), while the other two legs were at prevailing market rates of Rs. 20 and Rs. 30 per unit for the same scrips. This artificial structuring of rates when the market price was constant resulted in a loss of Rs. 22.12 crores to Canfina, which is the exact sum of profits earned by Citibank (Rs. 27.50 lakhs), HPD (Rs. 21.1625 crores), and Dhyan Investments (Rs. 68.75 lakhs). The evidence proves the conspiratorial agreement to cause this loss to Canfina by unjustly enriching the respondents.

Connection of Respondents 1-5 to the Conspiracy

The letter dated 15-5-1992 (Exhibit O) from HPD to Dhyan Investments shows a tripartite arrangement between Ashok Kumar of Canfina (Respondent 4), HPD, and Dhyan Investments regarding the rates and delivery of scrips. HPD admitted purchasing from Citibank on 15-5-1992 and selling to Dhyan. The accounts (Exhibits A1, C, R3(30)) prove the circuitous flow of funds from Canfina to Dhyan to HPD and back to Dhyan, without any real investment by HPD or Dhyan. The evidence connects respondents 1 (HPD), 2 (Citibank), 3 (Dhyan), 4 (M.K. Ashok Kumar), and 5 (S. Mohan) to the conspiracy.

Ratification of Contracts

The ratification by Canfina's board on 26-8-1992 (Exhibit R3(35)) related only to the acts of PW-2 in signing the cheque on 15-5-1992, not the rates at which the deals were struck. Mere receipt of delivery on 11/15-7-1992 cannot constitute ratification of the depressed rates. The evidence does not support ratification of the off-market rates causing loss.

Authority after 7-5-1992 Letter

The letter dated 7-5-1992 (Exhibit R3(10)) withdrew certain delegated powers of the dealers, but did not remove the designations of respondents 4 and 5 as Chief Dealer and Dealer respectively. The evidence shows they continued acting as dealers in May 1992 to settle outstanding BRs after the scam. Hence, the 7-5-1992 letter did not divest them of authority to strike the impugned deals.

Recoverability of Loss from PMS Transactions

The PMS guidelines (Exhibit R3(34)) stipulated that transactions were to be carried out at market rates and undeployed funds were treated as borrowings of the bank. The evidence proves the transactions violated these guidelines by being struck at artificial off-market rates, causing loss to Canfina's funds, though temporarily deployed for clients. Hence, Canfina can maintain this suit to recover the loss suffered on the PMS transactions.

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