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TMI Blog2011 (8) TMI 1371X X X X Extracts X X X X X X X X Extracts X X X X ..... this Tribunal was set aside and the cases remitted with a direction to pass separate orders in each of the five appeals. As observed above, we are dealing with these appeals group wise as stated by the learned senior counsel for the Appellants. Learned Additional Solicitor General appearing for the Respondent Board has No. objection to the disposal of the appeals in the manner as suggested by the Appellants. Group I Appeals No. 146, 112 and 113 of 2010 constitute this group as they arise out of the same set of facts and allegations. 2. Did Parsoli Corporation Ltd. (hereinafter referred to as Parsoli) and its promoters/directors defraud its shareholders by transferring their shares in their own demat accounts on the basis of forged signatures and forged/duplicate share certificates and when caught, compensate the shareholders by crediting back in their demat accounts shares through off market transactions is the primary question that arises for consideration in this group of appeals. Facts as they emerge from the record are these. 3. Parsoli is a public limited company and its shares are listed, among others, on the Bombay Stock Exchange Ltd., Mumbai (BSE). Zafar Yunus S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer and assured the latter that in case of any complaint, Parsoli would take the responsibility and compensate the shareholders. During the course of the investigations, Parsoli, its managing director and joint managing director had been asked to provide details of the process by which the shares were being transferred. By letter dated July 19, 2008, Parsoli furnished the minutes of the meeting of the share transfer committee of its directors held on January 31, 2004. Parsoli was then asked to provide the complete documents showing the transfer of shares and the procedure followed to which it replied by its letter of August 11, 2009 that We only have in our possession minutes of the Board meeting held as on January 31, 2004. The other disclosures are not with us. The managing director of Parsoli appeared before the investigating officer on August 5, 2008 and several questions were put to him soliciting information in this regard. He undertook to furnish the information by August 8, 2008 which was never done. From all this it was inferred that Parsoli and its managing director and joint managing director both of whom were members of the share transfer committee were not co-operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 15HA of the Act and Section 19H of the Depositories Act, 1996. On receipt of the aforesaid notices, the Appellants did not file any reply to the show cause notice dated June 10, 2009 before the whole time member. However, they filed their reply before the adjudicating officer to the show cause notice dated July 17, 2009 denying all the allegations. The Appellants appeared before the whole time member and were given a personal hearing and they filed their written submissions which could be treated as their reply to the allegations levelled against them in the show cause notice. The whole time member and the adjudicating officer conducted separate proceedings and on the basis of the material collected by them during the course of the enquiry and also the material that was collected during the investigations, they both found the Appellants guilty of the charges levelled against them. By order dated July 27, 2010, the whole time member recorded his findings against the Appellants in the following words: 10. In light of the above findings, I find that the noticees: 10.1 By not providing information to SEBI and giving misleading and contradictory information, have v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggrieved by these directions, Parsoli and its two directors have filed Appeal No. 146 of 2010. 5. The adjudicating officer has also found the Appellants and their front entities guilty of all the charges levelled against them in the show cause notice dated July 17, 2009 and by his order dated May 5, 2010, he imposed the following monetary penalties on them: Having regard to the nature and gravity of the charges established and after taking into account the factors contained Section 15J of the SEBI Act, 1992 and other statutory provisions I hereby impose the following monetary penalties in exercise of the powers conferred as Adjudicating Officer. (i) a consolidated penalty of Rs. 25 lakhs on Parsoli Corporation Limited, Mr. Zafar Sareshwala, Managing Director and Mr. Uves Sareshwala, promoter / Director under Section 15A(a) of the SEBI Act, 1992 for the violation of Section 11C(2) and (3) of SEBI Act. (ii) a consolidated penalty of Rs. 3 crores on the promoters' family of Sareshwalas comprising of (a) Mr. Zafar Sareshwala, Managing Director (b) Mr. Uves Sareshwala, (c) Mr. Talha Yunus Sareshwala and (d) Mr. Saleha Mohammed Yunus Sareshwala under Section 15HA of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two directors of Parsoli namely, Zafar Yunus Sareshwala and Uves Yunus Sareshwala have been directed to make a public offer through a merchant banker to acquire shares from public shareholders by paying them the price as determined in the manner prescribed in Regulation 23 of the delisting Regulations framed by the Board. The direction in para 12(d) is only consequential and if, on the implementation of the direction in para 12(c), the public shareholding of Parsoli falls below the minimum required to be maintained, then it has to be delisted compulsorily. It is urged that these directions are ultra vires Sections 11 and 11B of the Act and beyond the show cause notice. The second argument of the learned senior counsel is that the restraint orders issued in paras 12(a) and (b) by which the Appellants have been restrained from accessing the securities market directly or indirectly for a period of seven years and restraining the two directors from holding the position of a director in any listed company for the same period are also arbitrary, perverse and ultra vires Sections 11 and 11B of the Act. The third submission of Shri Shyam Divan, senior advocate is that the Appellants did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to 252 shareholders which are now in issue were transferred by the directors in their own names or their front entities and got them dematerialised and later when the shareholders applied for the dematerialisation of the shares held by them in physical form, the directors compensated them (shareholders) by crediting shares from their demat accounts to the accounts of the shareholders. We have perused the transfer documents carefully and find that the shares were transferred by the directors on the basis of forged signatures of the shareholders and also on the basis of forged/duplicate share certificates. This is an open and shut case and the charge of fraudulent transfer of shares stands established on the Appellants' own showing. This is what a few transfer documents that we have perused as a sample reveal. One Deepakbhai S. Shah purchased on October 13, 1995, 100 shares of Parsoli from Indulal Shah and Shashank Indulal Shah who were then the joint holders. These shares were transferred in the name of Deepakbhai S. Shah on December 5, 1995 and it is common case of the parties that he has been holding these shares since then in physical form. The share transfer form on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 22, 2005 for the dematerialisation of his shares and his request was rejected by RTA on the ground Original certificates present are those for which the duplicates have already been issued. Interestingly, Parsoli decided to compensate Deepakbhai S. Shah and sent a communication to him dated May 31, 2006 in this regard giving altogether a different reason from that of RTA for rejecting his request for dematerialisation. This is what Parsoli wrote to Deepakbhai S. Shah: Above referred DRN has been rejected by our RNT under Code-13 Misc. - Certificate received is already stands demated in our system. Please contact company for further details. We have taken necessary steps to compensate you considering that your request seems to be genuine. We have already credited above referred account by off market transaction. Xerox copy of delivery slip is enclosed and request you to verify with your DP. Hence your problem is resolved. It is, thus, clear that when Deepakbhai S. Shah approached Parsoli for the dematerialization of his shares, the latter found his request to be genuine. If his request was genuine then the earlier transfer on the basis of the share transfer form da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As regards the transfer documents which had been furnished to the Appellants on the previous date of hearing, the learned senior counsel very fairly conceded that the signatures of the transferor (shareholder) on the transfer forms did not tally with his admitted signatures. Since Parsoli has not explained as to who produced the transfer documents, it is reasonable to infer that the transfer documents bearing forged signatures of the shareholders were prepared by Parsoli and its directors and they also prepared forged/duplicate share certificates which they themselves certified as true on the basis of which the RTA formally effected the transfers. We have some other instances as well where shares were fraudulently transferred in the accounts of the directors of Parsoli on the basis of share transfer forms which do not bear any signature of the transferee. We have on record share transfer form No. 105794 transferring shares from the name of one Prabhudas P. Prajapati in the name of Mohammed A. Kothawala and the transferee has not signed the form. There are several instances of this type. We are satisfied that transfer deeds with No. signatures at all and with single signature in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained at two different places and this violated the provisions of Regulations 53A and 54(5) of the depository Regulations. This violation was knowingly committed for achieving the object of defrauding the shareholders. It may be mentioned that separate proceedings were initiated against the RTA as well and by order dated October 14, 2009, its certificate of registration was cancelled which order was upheld by this Tribunal. To justify the retention of specimen signature cards, the Appellants have taken contradictory stands. Before the whole time member, their stand was that these cards had not been furnished to the RTA as those were in torn condition. The learned Counsel for the Appellants took the same plea before us during the course of the hearing. However, in paragraph 6.85 of the memorandum of appeal, the Appellants also state that the specimen signature cards were not handed over to the share transfer agent for better operational and administrative control. Both these reasons cannot go together. Be that as it may, during the course of the hearing we directed the Appellants to produce the original specimen signature cards of the shareholders for our perusal which they d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged signature/otherwise on TD and for issue of duplicate shares. 2) Our attention is drawn by you that many time you have observed that share certificates so issued on 6th April, 1995, though it is printed on same day, colour of the share certificates are different and specimen of which are enclosed. When we authenticate the TD for verification of signature of the transferor we are also scrutinizing the genuineness/correctness of certificates of blue colour and other colour and put signature of authorised officer on TD and send you the certificate/s with TD. We clarify that such types of certificates of different colours are issued, printed and signed by authorised signatory of the company and they are valid certificates for transfer. 3) If later on any complaint is received from any party or we receive the certificates for transfer, which have already been transferred earlier, we undertake the full responsibility to compensate such proposed transferee/holder who has bought the shares. If received at your end, please send such type TD with certificates to us for resolving the complaint and we will take necessary action in the matter. We assure and undertake that necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ematerialisation of his shares, the directors of Parsoli realized that they would be caught and before that could happen they compensated him by transferring shares from their own demat accounts to his account and this is how Parsoli purchased his silence. Let us not forget that all the shareholders whose shares were fraudulently transferred were small shareholders who were satisfied when they received their shares back and did not consider it worthwhile to pursue the matter further. Merely because there were No. complaints does not mean that the Appellants did not commit any fraud. We agree that fraud is a serious charge but we do not agree with the learned senior counsel that in civil proceedings like the present, it cannot be established on preponderance of probabilities. In civil proceedings, unlike in criminal proceedings, even a serious charge like fraud has to be established on preponderance of probabilities and since this charge is serious higher has to be the degree of probability to establish the same. Having regard to the manner in which the Appellants conducted themselves in transferring the shares of the innocent shareholders, we are satisfied that the charge of fraud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e share certificates were in the possession of the shareholders and yet their shares were transferred on the basis of some other share certificates which could not but be forged/duplicate. The Appellants owe an explanation in this regard. They did not explain to the Board whether the share certificates on the basis of which the transfers were effected were forged/duplicate. Even to a query put by us, we did not get any answer. The only inference that can be drawn is that the Appellants prepared those forged/duplicate share certificates in order to effect transfers. We cannot find fault with the findings recorded by the whole time member in this regard. In this view of the matter, we cannot but hold that the Appellants committed fraud of the worst kind and their conduct, to say the least, was heinous and we answer the question posed in para 2 above in the affirmative. Persons like the Appellants should have No. place in the securities market if its integrity is to be preserved. In view of these findings of ours, we have No. hesitation to hold that the Appellants have violated Regulations 3 and 4 of the FTUP Regulations. These Regulations prohibit a person from directly or indirectly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Parsoli as a listed company could be issued some directions but it could not be restrained from operating as a stock broker or a depository participant in the securities market. It is urged that if Parsoli had done some wrong as a stock broker or as a depository participant, action could be taken against it under Section 12(3) of the Act after complying with the procedural requirements prescribed in Securities and Exchange Board of India (Intermediaries) Regulations, 2008 but No. directions could be issued to it under Sections 11 and 11B as aforesaid. We have given our thoughtful consideration to the different facets of the second argument of the learned senior counsel and find No. merit in any of them. Before we deal with the arguments, it is necessary to refer to the relevant provisions of Sections 11 and 11B of the Act on which the argument of the learned senior counsel is based. 11. Functions of Board - (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. (2) and (3)................ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestors or for the development and Regulation of the securities market. It has the freedom to play only within these parameters. Having left it to the Board to take such measures that are necessary for investor protection and Regulation and development of the securities market, Sections 11(2) and 11(4) without diluting the powers of the Board under Section 11(1) suggest some of the measures which it can take in this regard. Clause (b) of Section 11(4) clearly entitles the Board to restrain persons from accessing the securities market and prohibit any person associated with the market to buy, sell or deal in securities if that were to become necessary for investor protection or for preserving the integrity of the securities market. In other words, when the Board finds that any person associated with the securities market has committed some serious wrongs, he can surely be kept out of the market to prevent him from committing that wrong again and to preserve its integrity and this is one way of regulating the market. Again, Section 11B entitles the Board to issue such directions to any of the intermediaries referred to in Section 12 or to any person associated with the securities ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he public shareholders, the public shareholding of Parsoli comes below the minimum level required to be maintained, then it should be compulsorily delisted. The learned senior counsel has taken serious objection to these directions being issued under Sections 11 and 11B of the Act. He has strenuously argued that these directions are ultra vires the provisions of Sections 11(4) and 11B of the Act and that they are neither preventive nor remedial. According to the learned senior counsel, these directions are punitive in nature which could not be issued. Another facet of this argument is that dehors the provisions of the delisting Regulations, the Board has No. powers to issue such directions. These arguments have No. merit at all and deserve to be rejected at the threshold. It is true that the directions that can be issued under Sections 11 and 11B of the Act have necessarily to be preventive or remedial in nature and we are clearly of the view that these directions are preventive. The Appellants had defrauded their shareholders as discussed hereinabove. While the shareholders were enjoying the warmth of their investments by holding the shares in physical form, their shares had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow how this figure has been worked out but, be that as it may, the burden shall only be on the directors/promoters of Parsoli who have played the real mischief. One cannot cheat/defraud one's own shareholders and then claim that one is being burdened with a financial liability. If there is a financial liability, so be it as it is only incidental and the object is to protect the shareholders. 14. Before we conclude, we may take note of another argument advanced by the learned senior counsel for the Appellants. He strenuously contended that the directions issued in paragraph 12(c) and (d) of the impugned order by which the second and the third Appellants have been directed to provide an exit route to the shareholders are beyond the show cause notice and deserve to be set aside on this ground. He pointed out that the show cause notice does not state that such directions could also be issued and, therefore, the Appellants have had No. opportunity to represent against the issuance of such directions. We are unable to accept this contention. We have carefully gone through the show cause notice and find that the details of the misconduct committed by the Appellants have been mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard. We are, therefore, satisfied that No. prejudice or injustice has been caused to the Appellants particularly in the background that such directions are well known to the market. Having regard to the conduct of the Appellants which has been discussed in detail hereinabove and in view of the grave misconduct that has been established on the record, we are of the firm view that the directions of the kind contained in para 12(c) and (d) of the impugned order are called for in the circumstances of this case to protect the interests of the shareholders. Even if it were to be assumed (though we are holding to the contrary) that there was some lacuna in the show cause notice in this regard, we are upholding the directions in exercise of our powers under Rule 21 of the Securities Appellate Tribunal (Procedure) Rules, 2000 to secure the ends of justice. It may be mentioned that Rule 21 of these rules enables this Tribunal to make such orders or give such directions as may be necessary or expedient, among others, to secure the ends of justice. 15. This brings us to the second argument of the learned senior counsel for the Appellants as noticed in para 7 above. It is argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board debar that company from manufacturing motor cars. In this illustration the answer has to be in the negative because the activity of manufacturing cars is not market related but if the listed company was carrying on any other activity or wearing any other that as a market intermediary in the securities market, it could certainly be kept out therefrom depending upon the nature of the misconduct. If the wrong committed is heinous as in the present case, the object of the Act would be better achieved by keeping the wrongdoer out of the market completely No. matter the number of hats he may wear. We may hasten to add that whether for a particular wrongdoing, the market player is to be kept out of the securities market completely or only in regard to a particular activity would depend upon the facts and circumstances of each case and also on the gravity of the wrongdoing. In the facts and circumstances of the present case, we have No. doubt that the Board was justified in keeping the first Appellant out of the market completely in regard to all its activities for a period of seven years because the wrongdoing is rather serious. It is for the same reason that we would uphold the ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are unable to agree with the learned Counsel. 17. We shall first deal with the penalty of Rs. 25 lacs that has been imposed on Parsoli and its two directors as aforesaid. As already noticed, this penalty has been levied for violating Section 11C(2) (3) of the Act. These provisions read as under: 11C. Investigation.- (1).... (2) Without prejudice to the provisions of Sections 235 to 241 of the Companies Act, 1956 (1 of 1956), it shall be the duty of every manager, managing director, officer and other employee of the company and every intermediary referred to in Section 12 or every person associated with the securities market to preserve and to produce to the Investigating Authority or any person authorised by him in this behalf, all the books, registers, other documents and record of, or relating to, the company or, as the case may be, of or relating to, the intermediary or such person, which are in their custody or power. (3) The Investigating Authority may require any intermediary or any person associated with securities market in any manner to furnish such information to, or produce such books, or registers, or other documents, or record before him or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RTA. His answer to as many as 15 questions was that he would furnish the information by August 8, 2008 which he never did. The other answers that he gave to some of the questions were evasive. We have perused the statement of the managing director and in the background of the findings that we have recorded hereinabove, we have No. doubt that Parsoli and its directors were deliberately withholding the information that was sought from them during the course of the investigations. Obviously, they were trying to cover up their fraudulent acts. Non furnishing of the information to the investigating officer in these circumstances was indeed serious and such non furnishing would hinder the investigations. If market players start withholding information from the Board, the latter would not be in a position to perform its statutory duties enjoined upon it by the Act. Parliament had noticed that the penalties that were provided for the violations were inadequate and did not serve as a deterrent to the market players and it is for this reason that the Act came to be amended in the year 2002 as noticed above and the penalties were enhanced considerably. The penalty for not furnishing the infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the wrongdoing. We are unable to agree with the learned senior counsel that the factors enumerated in Section 15J have not been considered by the adjudicating officer. He has examined those factors and took note of large number of instances in which the shares belonging to the unsuspecting public shareholders were fraudulently transferred in favour of the promoters and their associates and concluded that the misconduct of the Appellants was repetitive in nature. He has also observed that it would be difficult to assess and convert into monetary terms the gains made by the Appellants in the fraudulent acts with any mathematical precision. He has also taken into account the gravity of the fraud and the modus operandi employed by the Appellants and concluded that it calls for a deterrent penalty. We have perused the impugned order carefully and are in agreement with findings recorded therein and find No. ground to interfere with the quantum of penalty imposed. Group II Appeals No. 145 of 2010, 77 and 80 to 82 of 2011 fall in this group as they all arise from the same set of facts and allegations. 20. Parsoli is a listed company and governed by the listing agreement executed w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d June 28, 2010, the whole time member has restrained Parsoli from accessing the securities market directly or indirectly for a period of one year from the date of the order. However, Parsoli has been allowed to service its existing clients both as a broker and also as a depository participant. The adjudicating officer by his separate orders passed against Parsoli and its promoters/directors has imposed different monetary penalties on them. Parsoli has filed Appeal No. 145 of 2010 against the directions issued by the whole time member and Appeal No. 82 of 2011 against the order of the adjudicating officer imposing monetary penalty. Appeals No. 77, 80 and 81 of 2011 have been filed by the promoters of Parsoli challenging the orders passed by the adjudicating officer imposing monetary penalties on them. As already observed, these appeals arise out of the same facts and the main arguments were addressed in Appeal No. 145 of 2010. 21. Challenging the findings recorded by the whole time member, the learned senior counsel argued that the promoters of Parsoli had pledged their shares with private financiers to raise funds for the company and that the pledgees wrongfully transferred the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the decision was reversed in the meeting held on November 18, 2005 which decision was subsequently adopted by the annual general meeting on December 31, 2005, Parsoli and its promoters deliberately withheld this information from BSE and thereby from the investing public and the reason why they withheld this information is not far to seek. The earlier decision to recommend dividend was in public domain and being price sensitive had the potential to influence the price of the scrip. When the decision was reversed, the information of reversal was likely to have an adverse impact in the market. Moreover, Parsoli and its directors wanted the investing public to remain under the impression that dividend was being declared even though the decision in that regard had been reversed. This is a novel method adopted by Parsoli and its directors in misleading the investing public and we are in agreement with the whole time member that they violated Regulations 3 and 4 of the FUTP Regulations. The whole time member has also found that Parsoli and its directors did not furnish the details of the record sought from them during the course of the investigations and that they did not co-operate wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as coming out with a dividend when the proposal in this regard had been dropped? As already noticed, the Appellants had willfully withheld this information from the stock exchange. Equally serious are the violations pertaining to the listing agreement and non-cooperation during the course of the investigations. We have No. hesitation in upholding the impugned orders in all these appeals and also the monetary penalties imposed on Parsoli and its promoters/directors. Group III 24. The solitary appeal that falls in this group is Appeal No. 150 of 2010. The charge levelled against Parsoli in this appeal is non-compliance of the order dated February 20, 2009 by which the Board had directed it to remove the RTA and appoint another RTA within a period of six months from the date of the order. The whole time member, by his order of July 22, 2010, has held that Parsoli had failed to comply with the order and accordingly restrained it from accessing the securities market for a period of six months from the date of the order. This order is under challenge in this appeal. It is common case of the parties that the order dated February 20, 2009 had been complied with by Parsoli though ther ..... X X X X Extracts X X X X X X X X Extracts X X X X
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