2024 (12) TMI 1463 - AT - SEBI

Forward Market Commission (FMC) powers to conduct audit/inspection and exercise its jurisdiction on the shareholders of the associates - Fraudulent acts and passing on illegal monetary benefits to the entities controlled/connected - abuse of position and commission of irregularities in the affairs of NMCE by the appellant No. 1, through certain employees of the NMCE, to pass on unlawful benefits to the appellant No. 2. Forward Market Commission (FMC) - FMC was vested with wide powers by FCRA for observing Forward Market and taking such action in relation to them, as it may consider necessary , and allows it to make an inquiry in relation to the affairs of any association or the affairs of any of its members Since the Central Government s powers had been delegated to the FMC, it had all the powers with regard to taking action with regard to the forward market, as it deems necessary. The mechanism of inquiry was only for gathering facts for which it was vested with quasi-judicial powers. Section 8 of the FCRA allowed it to take necessary actions for enabling functioning of the Forward market. In view of this, we do not find any infirmity in the authority of the FMC in initiating inquiry into the management of the NMCE and the manner in which its key management persons performed their duties. With regard to scope of the inquiry, it is evident that Section 4 of the FCRA Act is pari materia to the Section 11 of the SEBI Act and keeping in view the decision of the Hon ble Supreme Court in the case of Sahara India Real Estate Corporation (supra) and Karnavati Fincap Ltd. (supra), an inquiry which is intended to protect the interest of the investors is wide in its scope. The findings of the inquiry suggest that there was indeed unauthorized use of significant amount of funds belonging to the investors (margin money) of the NMCE (Rs 29 Cr.) without due process claimed to be for software development, which could not be substantiated and for market-making activity, (which was not allowed at the relevant time). Therefore, the inquiry for protecting the interests of the investors, is well within the scope of Section 4 of FCRA. Other jurisdictional challenge which questions the authority of the Director FMC to direct inquiry, in view of the notification dated March 12, 1964, it is evident that the Central Government had delegated the powers u/s 8(1) and 8(2) of the FCRA upon the director also and hence the plea of the appellant to treat the enquiry as ab initio void, is unsustainable. In view of this, we do not find any merit on the challenge on the grounds of jurisdiction in the matter. Thus, ground Nos. 1 and 2 have no merit. Legitimacy of Payment made to ATSPL - Undoubtedly, the payment of Rs. 28.80 crore towards software development is a bogus payment made to the related parties. In effect, it is in the nature of embezzlement of funds by manipulation of the financial accounts. This is the finding recorded by the Income Tax Settlement Commission set up under Chapter XIX of the Income Tax Act, 1961, which is the final fact finding Alternative Dispute Resolution Authority in the scheme of direct tax dispute while deciding application of NMCE. In any case, facts reveal that ATSPL did not have VAT service tax No. nor had adequate manpower and the on-site inspection revealed that it did not exist at the registered address. In its accounts, ATSPL showed receipt from NMCE as loans and advances . The evidence also shows that payments to ATSPL were sought to be justified through back-dated agreements with retrospective effect and the respondent also brought on record evidence of use of stamp paper from a member, who had ceased to supply stamp papers much earlier to the date of purchase of stamp papers. The directors-shareholders of the ATSPL clearly stated that the family member of appellants were running the company for all practical purposes. Keeping in view these incontroverted facts, we find no merit in the appellant s plea and hold that payment to ATSPL was bogus and made as per the directions of the appellant No. 1 at the cost of NMCE s investors Irregularity in issuance of shares of NMCE to appellant No. 2 (NOL) - The funds of the Exchange were used for allotment of NMCE shares to the Appellant No. 2 at the instance of Appellant No. 1, who was the MD and Vice-Chairman of NMCE. The investigation has revealed that the allotment was made without approval and in violation of provisions of Companies Act, 1956 and without payment of application money at the time of allotment. The allotment was also made without receiving money and out of the running account. On consideration of these facts, we hold that the allotment of shares of NMCE to the appellant No. 1 is bogus. Hence, this ground is also liable to be rejected. Appointment of various consultants on behalf of NMCE was done validly - Appointment of 144 consultants by the appellant no. 1 for NMCE was made without following any due process or documentation. In view of this, this ground is also liable to be rejected. Misappropriation of money belonging to NMCE for personal and family expenses - As seen that the in show cause notice, allegations have been made in respect of misuse of NMCE funds amounting to Rs. 19.20 lakh for Ms. Anjana Gupta on foreign travel and for purchase of phone / appliances at her flat at Paldi Ahmedabad. An amount of Rs. 3.88 lakh is alleged on account of foreign travel, phone purchased for Mr. Nanak Gupta and amount of Rs. 2.03 lakhs was incurred for foreign travel, mobile phone purchased for Ms. Pooja Gupta and an amount of Rs. 1.38 lakh was spent on foreign travel of Amit Gupta. Further, it was alleged that appellant had purchased three cars out of Exchange funds in his own name for an amount of Rs. 20.93 lakhs and also purchased car for his wife Poonam Gupta for Rs. 11.45 lakhs and, another car for Rs. 14.40 lakh for Shri Nanak Gupta from the funds of the NMCE. Appellant had denied the charges levelled without providing any cogent explanation. Thus, there is no explanation forthcoming on behalf of the appellants to show that these expenses were made for legitimate purposes. Therefore, we find no merit in this ground also.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the Forward Market Commission (FMC) had the jurisdiction to conduct an inquiry and issue directions to the appellants.
• Whether the payments made to Arrow Total Solutions Private Limited (ATSPL) were legitimate and in accordance with the law.
• Whether the issuance of shares of the National Multi Commodity Exchange (NMCE) to Neptune Overseas Ltd. (NOL) was irregular.
• Whether the appointment of various consultants by the NMCE was valid.
• Whether there was misappropriation of NMCE funds for personal and family expenses by the appellants.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Jurisdiction of FMC

• Relevant legal framework and precedents: The appellants argued that the FMC did not have jurisdiction to conduct an inquiry into the affairs of NMCE and its shareholders, as its powers were limited under Sections 4 and 8 of the Forward Contracts (Regulation) Act, 1952 (FCRA). The respondents contended that the FMC had wide powers akin to those of SEBI under Section 11 of the SEBI Act, 1992, to protect investor interests.
• Court's interpretation and reasoning: The Tribunal held that the FMC had wide powers under the FCRA, which included taking necessary actions related to forward markets. The inquiry conducted by FMC was within its jurisdiction as the powers were delegated by the Central Government.
• Conclusion: The Tribunal found no merit in the appellants' jurisdictional challenge, affirming that the FMC's actions were within its authority.

Issue 2: Legitimacy of Payments to ATSPL

• Relevant legal framework and precedents: The appellants contended that ATSPL was legitimately appointed as a software vendor and that payments were made in line with industry standards. The respondents argued that the payments were fraudulent and constituted embezzlement.
• Court's interpretation and reasoning: The Tribunal noted that ATSPL was a related party, lacking the capacity for software development. Payments to ATSPL were not justified, and the funds were misused for unauthorized market-making activities.
• Conclusion: The Tribunal held that the payments to ATSPL were fraudulent and constituted embezzlement, rejecting the appellants' contentions.

Issue 3: Issuance of Shares to NOL

• Relevant legal framework and precedents: The appellants argued that the issuance of shares was valid and that the inquiry was barred by delay. The respondents claimed that the shares were allotted without proper consideration and approval.
• Court's interpretation and reasoning: The Tribunal found that the shares were allotted using NMCE's funds without proper approval, constituting a fraudulent transaction.
• Conclusion: The Tribunal rejected the appellants' arguments, holding that the issuance of shares was irregular.

Issue 4: Appointment of Consultants

• Relevant legal framework and precedents: The appellants claimed that the appointments were within the MD's powers. The respondents argued that the appointments were made without due process.
• Court's interpretation and reasoning: The Tribunal found that the appointments were made without proper documentation or approval, indicating malfeasance.
• Conclusion: The Tribunal held that the appointments were invalid, rejecting the appellants' claims.

Issue 5: Misappropriation of NMCE Funds

• Relevant legal framework and precedents: The appellants denied misappropriation allegations. The respondents provided evidence of misuse of funds for personal expenses.
• Court's interpretation and reasoning: The Tribunal found that the appellants failed to provide a legitimate explanation for the expenses, confirming misappropriation.
• Conclusion: The Tribunal rejected the appellants' denial of misappropriation, upholding the allegations.

3. SIGNIFICANT HOLDINGS

• The Tribunal affirmed the FMC's jurisdiction, stating, "The FMC was vested with wide powers by FCRA for observing Forward Market and 'taking such action in relation to them, as it may consider necessary.'"
• The Tribunal held that the payments to ATSPL were fraudulent, noting, "The payments made to ATSPL by NMCE were not for bona fide purposes of software development."
• The Tribunal concluded that the issuance of shares to NOL was irregular, stating, "The allotment of shares of NMCE to the appellant No. 1 is bogus."
• The Tribunal found the appointments of consultants invalid, highlighting, "Appointment of 144 consultants by the appellant no. 1 for NMCE was made without following any due process or documentation."
• The Tribunal confirmed misappropriation of NMCE funds, emphasizing, "No explanation forthcoming on behalf of the appellants to show that these expenses were made for legitimate purposes."
• The appeal was dismissed with no costs awarded.