2018 (6) TMI 679 - AT - Companies Law

Serious fraud on the securities market - off-loading the fraudulently dematted excess shares of SCCL to innocent investors - whether SEBI has unduly favoured the violator who are found to have committed serious fraud on the securities market? - Held that - Issuing shares in excess of authorised share capital and further dematting those unauthorized excess shares and allowing those shares to be sold on-market to innocent investors is a serious fraud on the securities market. In such a case, SEBI is unjustified in not initiating any action against the depositories. It is not in dispute that in the present case, the main architect in committing serious fraud on the securities market was Mr. Mishra, Chairman and Director of SCCL. In fact Mr. Mishra, vide letter dated 27.04.2007 had admitted that the shares in excess were intentionally sold by him in order to meet the liability of SCCL towards unsecured creditors. In such a case, merely debarring Mr. Mishra from accessing the securities market for 10 years and not even initiating penalty proceedings against Mr. Mishra who had collected crores of rupees by selling the unauthorized excess shares is wholly unjustified. When 17 entities including the appellant were found to have aided and abetted Mr. Mishra in off-loading the fraudulently dematted excess shares of SCCL to innocent investors in gross violation of PFUTP Regulations, imposing penalty ranging from ₹ 1 lac to ₹ 2 lac on most of the entities as against the imposable penalty of ₹ 25 crore under Section 15HA of SEBI Act clearly shows that SEBI has shown undue leniency by imposing nominal penalty on the violators. In any event, having imposed penalty of ₹ 1 lac in the ex-parte order passed against the appellant, without assigning any reasons SEBI is not justified in treating the appellant differently from other similarly situated violators and imposing higher penalty of ₹ 16 lac on the appellant. The appellant is justified in contending that he is being victimized for approaching this Tribunal and that there is no reason to treat the appellant differently from other similarly situated violators. In our opinion, the course adopted by SEBI in the present case is detrimental to the interests of the securities market. We set aside the impugned order passed against the appellant and restore the matter for fresh decision on merits. We sincerely hope that SEBI would take appropriate remedial measures in the matter and ensure that its credibility as an efficient market regulator is not eroded.

Summary

Issues:
- Imposition of penalty under Section 15HA of SEBI Act for aiding and abetting in off-loading fraudulently dematted excess shares.
- Justification of penalty enhancement from ?1 lac to ?16 lac.
- Allegations of undue leniency towards other entities involved.
- Failure to take action against depositories and main culprit.
- Discrepancies in penalty imposition and dropping of adjudication proceedings.

Imposition of Penalty:
The Appellate Tribunal addressed the appeal against the penalty imposed by SEBI on the appellant for aiding and abetting in off-loading fraudulently dematted excess shares. The investigation revealed that the appellant acquired shares from Mr. Mishra and sold them on-market, indicating a non-ordinary business transaction. SEBI had earlier imposed a penalty of ?1 lac, which was set aside for a fresh decision. Ultimately, a penalty of ?16 lac was imposed on the appellant for violating PFUTP Regulations.

Penalty Enhancement:
The appellant contested the penalty enhancement, arguing against the substantial increase from ?1 lac to ?16 lac after the initial order was set aside for a fresh decision. Additionally, the appellant raised concerns about SEBI's failure to penalize the depositories and the main culprit, Mr. Mishra, who orchestrated the fraudulent off-loading of excess shares.

Undue Leniency and Lack of Action:
The Tribunal acknowledged the appellant's contention regarding SEBI's alleged leniency towards other entities involved in similar violations. It criticized SEBI for not taking action against the depositories responsible for issuing excess dematted shares and for not initiating penalty proceedings against Mr. Mishra, the primary wrongdoer in the case.

Discrepancies and Dropping of Adjudication Proceedings:
The Tribunal noted discrepancies in penalty imposition among the entities involved and the dropping of adjudication proceedings against some violators. It highlighted the inconsistency in findings, indicating that some violators were let off despite evidence of receiving shares from Mr. Mishra. The Tribunal emphasized the need for a fair and consistent approach in such cases to uphold the integrity of the securities market.

Conclusion:
In light of the issues raised, the Tribunal set aside the impugned order and remanded the matter for a fresh decision on merits. It expressed hope for SEBI to take appropriate remedial measures to safeguard its credibility as an efficient market regulator. Despite considering imposing costs on SEBI for abnormalities in the order, the Tribunal refrained from doing so due to the appellant's involvement in aiding and abetting the fraudulent off-loading of excess shares. The Tribunal directed the Registry to inform the SEBI Chairman for necessary action.