2022 (3) TMI 1449 - AT - SEBI

Offence under SEBI Act - Mobilisation of the funds - violation of the CIS Regulations - Prohibition of manipulative, fraudulent and unfair trade practices - Violation of the provisions of Section 12(1B) of the SEBI Act read with Regulation 3 of CIS Regulations and Regulation 4(2)(t) of the PFUTP Regulations - Scope of definition of fraud - monetary penalty of Rs.20 crores to be paid jointly and severally by the appellant, the Company and its Directors - HELD THAT - In the instant case, we have gone through the entire impugned order and we do not find any finding to indicate that the appellant committed a fraud in the mobilisation of the funds. In the absence of any finding of fraud the charge of violating Regulation 4(2)(t) of the PFUTP Regulations cannot be proved. We are satisfied that in the absence of any finding of fraud against the appellant there is no violation of Regulation 4(2)(t) committed by the appellant. Regulation 4(2)(t) provides illegal mobilisation of funds. The impugned order does not show any iota of evidence that the appellant was involved in the illegal mobilisation of funds after he joined as a Director. Admittedly, the appellant was appointed as a Director in 2010. Majority of the schemes floated by the Company was already launched prior to the appellant s appointment as a Director. There is no finding by the Adjudicating Officer that such and such scheme was launched during the period when the appellant became a Director nor there is any finding that the appellant was responsible in the mobilisation of the funds under those schemes. The finding that no evidentiary proof has been filed by the appellant that he is not an officer in default or that he did not attend the board meeting when such scheme was launched is patently erroneous. The burden has wrongly been placed upon the appellant. A charge has been levelled against the appellant, namely, violation of Regulation 4(2)(t). The responsibility to prove the charge is upon the prosecution, namely, upon SEBI. It is for the respondent to prove that the appellant was an officer in default or that he attended the meeting when a scheme was launched. It cannot be presumed that the appellant must have been present in the meeting of the board of directors when the scheme was launched. We are satisfied that in the instant case SEBI has failed to discharge its burden. In any case, the finding of the Adjudicating Officer that the appellant and other Directors are officers in default is totally misplaced. Under Section 5(g) of the Companies Act, 1956 all Directors can be treated as officers in default only when there is a finding that there was no Managing Director or designated person who was responsible for the mobilisation of the funds. We find that there is no finding that the Company did not have any designated person or Managing Director and, therefore, all Directors would be deemed to be officers in default. Penalty under Section 15HA can be imposed if a person indulges in fraudulent or unfair trade practices. We have already held that the appellant has not indulged in fraudulent and unfair trade practice and, therefore, no penalty under Section 15HA could be imposed. In the light of the aforesaid, the impugned order in so far as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed. Attachment orders, if any, on the appellant s demat account, bank account etc. shall be lifted forthwith. All the misc. applications are also accordingly disposed of. In the circumstances of the case parties shall bear their own costs.

Summary

Issues Involved:
1. Whether the time-sharing business of the Company constituted a Collective Investment Scheme (CIS) under SEBI regulations.
2. Whether the appellant, as an Independent Non-executive Director, violated Regulation 4(2)(t) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations).
3. Whether the penalty imposed under Section 15HA of the SEBI Act was justified.

Issue-wise Detailed Analysis:

1. Collective Investment Scheme (CIS):
The Tribunal affirmed the finding that the Company's time-sharing business was a CIS. This issue had already been settled in a previous order by the Whole Time Member, which was challenged and upheld in appeal, becoming final inter se between the parties.

2. Violation of Regulation 4(2)(t) of PFUTP Regulations:
The appellant contended that he was an Independent Non-executive Director and not involved in the day-to-day affairs of the Company. The Adjudicating Officer concluded that the Company violated Section 12(1B) of the SEBI Act and that the Directors, including the appellant, failed to provide evidence that they were not officers in default or that they did not attend board meetings when the schemes were launched. However, the Tribunal found no finding of fraud against the appellant in the mobilisation of funds. Regulation 4(2)(t) applies only if there is fraud, which was not established. The Tribunal held that SEBI failed to prove the appellant's involvement in illegal mobilisation of funds, especially since most schemes were launched before his appointment.

3. Penalty under Section 15HA of the SEBI Act:
The Tribunal noted that the penalty under Section 15HA can only be imposed for fraudulent and unfair trade practices, which was not proven against the appellant. The appropriate penalty for non-compliance with CIS registration is under Section 15D(a), which was not invoked. The Tribunal quashed the penalty imposed under Section 15HA, stating that the appellant did not indulge in fraudulent and unfair trade practices.

Conclusion:
The Tribunal allowed the appeal, quashed the impugned order concerning the appellant, and directed the lifting of attachment orders on the appellant’s demat and bank accounts. The Tribunal emphasized that SEBI failed to discharge its burden of proof regarding the appellant's involvement in the alleged violations.