9911796707
Advanced Search 
TMI Blog2023 (11) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. 2. The facts leading to the filing of the present appeal is, that the appellant Punit Goenka is the Managing Director and Chief Executive Officer of Zee Entertainment Enterprises Ltd. ("ZEEL" for short) since January 1, 2010. 3. In November 2019 three Independent Directors of ZEEL resigned (wrongly mentioned as two in the ad interim order) after raising concerns over several issues and one such issue was appropriation of a fixed deposit of Rs. 200 crore of ZEEL by Yes Bank Limited for squaring off the loans of related parties of Essel Group. 4. The respondent conducted an examination regarding the events leading to the resignation of the independent directors. The examination revealed that Subhash Chandra issued a 'Letter of Comfort' dated September 4, 2018 to Yes Bank Ltd. regarding credit facilities availed by Essel Green Mobility Ltd. (EGML). Through this 'Letter of Comfort' it was stated that ZEEL would ensure that a fixed deposit of at least Rs. 200 crore would be made available to the Bank at all times while the loan remained outstanding and, in the event of a default, the bank could appropriate the fixed deposit towards repayment. The investigation further revealed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to hold any position of a director or a Key Managerial Personnel in any listed company or its subsidiaries till further orders, it also directed the appellant to file their reply / objections, if any, within 21 days. Instead of filing a reply the appellant and Shri Subhash Chandra chose to file an appeal before this Tribunal. 8. Against the ex-parte ad interim order, two appeals were filed, one by the appellant Shri Punit Goenka and the other by Shri Subhash Chandra. Both the appeals were disposed by an order dated July 10, 2023 directing the said appellants to file an appropriate reply for vacation / modification of the ex-parte ad interim order and that if such a reply along with such vacating application was filed, the WTM would decide the matter after giving an opportunity of hearing within a specified period. Based on the aforesaid direction, replies were filed and the matter was heard by the Chairperson of SEBI who after considering the matter passed the impugned order dated August 14, 2023 confirming the ex-parte ad interim order with the following modification, namely- "(i) The investigation in the matter by SEBI shall be completed in a time-bound manner and in any ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey owed to ZEEL as result of revocation of LoC given by Mr. Subhash Chandra. 11. The WTM also came to the conclusion that prima facie the modus operandi adopted showed that Rs. 143.90 crore out of Rs. 200 crore had been transferred from ZEEL / other listed companies of Essel Group to falsely portray repayment of due amounts to ZEEL from associate entities. 12. The WTM accordingly came to a prima facie conclusion that funds had been siphoned of from ZEEL and other listed companies of Essel Group which ultimately benefited the promoter family. 13. The WTM also came to the conclusion that the subsequent disclosure by ZEEL in its annual report showing receipt of funds from associate entities was false and that ZEEL misrepresented the financial statements in its annual report. 14. The WTM also came to the conclusion that the appellant, being the Managing Director and Chief Executive Officer of ZEEL at the time when the funds were moved out of ZEEL for being routed again to ZEEL through layered and circuitous transaction, had a direct role in the diversion of the funds of ZEEL and other listed companies of Essel Group and that the appellant falsely portrayed in its annual report that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its subsidiary or associate entities were backed by appropriate documentation, namely, memorandum of understanding, agreements and invoices which were duly approved by relevant authorities and that these transactions were also approved by the audit committee. It was, thus, urged that so long as ZEEL had made payments for valuable consideration, the subsequent utilization of funds by other parties to repay ZEEL does not constitute diversion of funds nor does it cause any loss to ZEEL. It was also urged that the appellant was not in control of the day to day transaction of the associate entities and had no access or right to operate its bank accounts and was not involved in the operations, financing or control of the borrower entities nor has the appellant benefited from the alleged impugned transactions. It was also urged that the transaction were genuine and legitimate and consequently there was no misrepresentation in the annual reports nor any false submissions were made to SEBI and consequently the appellant had not violated either the SEBI Act or its Regulations. 18. The Chairperson after considering the objections and after giving an opportunity of hearing and after perusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved money from its six associate entities equivalent to the FD amount wherein circular fund transfers had taken place to show receipt of funds from ZEEL to associate entities which was a sham transaction on account of the fact that the entire set of transactions were completed within a few days and at each stage / leg of the scheme, the funds had moved immediately upon receipt of the same by the transferee. (x) Merely by explaining the first leg of transfer made by ZEEL to associate entities is not sufficient to exonerate the appellant inasmuch as there are a plethora of circumstances which are inextricably linked with the fund transaction which prima facie leads to a conclusion as not genuine transactions. (xi) The transactions made by ZEEL to its associate entities being backed by necessary documentation such as memorandum of understanding and agreements only indicates a long standing commercial relationship between ZEEL and associate entities but the said memorandum of understanding and agreements does not carry weight since no material has been brought on record to demonstrate that the impugned fund transfer was pursuant to the agreements and therefore the funds transfers p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and since the appellant Entity No. 2 was the Managing Director and Chief Executive Officer during the period when the scheme was designed, he was aware of the liquidation of the fixed deposit by Yes Bank Ltd. and the fact that ZEEL was involved in three of the impugned transactions which prima facie are not found to be genuine transaction. The appellant being involved in the designing and execution of the scheme was also found to be prima facie in violation of the securities laws. (xxi) The impugned fund transactions prima facie was not genuine in nature and consequently the disclosure made by ZEEL in its annual reports was incorrect. (xxii) The appellant prima facie have benefited at the expense of ZEEL and its public shareholders and that appellant not acted in good faith, due diligence and care and in the best interest of ZEEL and its shareholders and therefore the conduct of the appellant was in violation of Regulation 4 of the LODR Regulations. 19. We have heard Dr. Abhishek Manu Singhvi, the learned Senior Counsel with Shri Navroz Seervai, Senior Counsel, Shri Somasekhar Sundaresan, Shri Amit Bhandari, Shri Nitesh Jain, Ms. Shruti Rajan, Shri Mudit Jain, Shri Vivek Shah, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the appellant to hold any position of a Director in a listed company or its subsidiaries was to obviate the possibility of further diversion of funds. This aspect has been given a complete go by and was not considered as a necessary ingredient for confirming the confirmatory order but the restraint order was allowed to continue on the ground that the continuation of the appellant as the Managing Director could impede a fair and transparent investigation. 23. The learned senior counsel contended that there is no material on record to demonstrate that the appellant or any of the entities connected with him have failed to cooperate with the respondent in the investigation or have in any manner impeded the progress of the investigation. On the other hand, the respondent had earlier investigated the LoC and the LODR issue and voluminous correspondence was made between ZEEL and SEBI and the Stock Exchanges regarding various issues including the Letter of Comfort. ZEEL had provided the information sought from the respondent pursuant to which show cause notice was issued and the adjudicatory proceedings are pending. Thus, it was urged that the question of the appellant interfering in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letely different entity has come into existence and its corporate structure would be completely different and independent from the erstwhile ZEEL. It was urged that the resultant merger entity will have necessary corporate governance measures in place being a subsidiary of a global conglomerate Sony Corporation, Japan which would be listed on the Tokyo Stock Exchange. Further 50% of the shareholding will be held by the Sony Group. It was thus contended that the finding given in the impugned order that the appellant would be entrusted with substantial powers of management with regard to the affairs of the management company and that the appellant should be kept out of the management till the final outcome of the investigation is purely erroneous, harsh and, at the same time, without any merit. 27. The learned senior counsel contended that out of 9 directors 5 directors would be nominees of shareholders of Culver Max Entertainment Pvt. Ltd. (i.e. Sony) and there would be independent directors of stellar reputation and stature who would be identified and recommended by the Sony Group. The Chairman of the board will be one of the independent directors who will be recommended by the Cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tently erroneous and is against the material evidence on record in as much as the appellant had never worked with Anil Chougule. Further, the appellant only held 2% shareholding in Sprit Infrapower & Multiventures Private Limited which in turn held 50% shareholding in New Media Broadcasting Pvt. Ltd. which in turn further held 100% shareholding of LEEPL. It was, thus, urged that the appellant effectively held 1% indirect shareholding of LEEPL and consequently, the finding that the appellant exercised influence over the group entities is patently erroneous. It was also urged that similarly the appellant did not exercise any control through its shareholding interest either in Sprit Infrapower & Multiventures Private Limited or in Churu Enterprises LLP. 30. The findings that the appellant had prior knowledge of the appropriation of Fixed Deposit by Yes Bank is again based on surmises and conjectures and is not based on any material document. Such finding on the basis of presumption or on the basis of preponderance of probability is not permissible. 31. It was urged that the Chairperson has completely ignored / overlooked the material evidence filed to show that the transactions ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34. Dr. Singhvi, the learned senior counsel contended that doctrine of preponderance of probability was wrongly applied and that the impugned order has drawn inferences based on hypothetical facts while disregarding the material evidence on record. It was contended that before applying the principles of preponderance of probability and to draw any inference it was necessary to establish the foundational facts which did not exist in the instant case. It was urged that the foundational facts must be established before the presumption could be made. 35. It was also urged that preponderance of probability invoked in the impugned order was contrary to the contemporaneous events and the principle of ante lite motam was not considered in the impugned order though the same was argued before the Chairperson. It was, thus, urged that applying the principle of ante lite motam certain events had no connection with the concerned Letter of Comfort or the alleged misappropriation of the Fixed Deposit by Yes Bank and repayment by borrower entities. It was urged that there was no violation of PFUTP Regulations as there was no fraud and therefore the direction could not be sustained. It was urged t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ajmera (2016) 6 SCC 368. 39. On the other hand, Shri Darius Khambatta, the learned senior counsel for the respondent contended that the five transactions in question clearly indicates round tripping of the funds from ZEEL to ZEEL and consequently prima facie there appears to be a diversion of funds to the detriment of the shareholders. The learned senior counsel urged that the ad interim order which has now been merged with the confirmatory order does not suffer from any error of law and that the said confirmatory order should continue during the pendency of the investigation. 40. It was urged that the appellant has neither produced any material nor denied the flow of funds among the entities in the manner set out in the interim order. The learned senior counsel contended that the fund flow in the five transactions along with the proximity in the timings of the transactions indicates a prior meeting of minds which action was totally fraudulent under the PFUTP Regulations. It was contended that the flow of funds as depicted in the impugned orders in relation to the five transactions has not been disputed by the appellant nor the proximity in the timings of the transactions has als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nel, was also in control of the seven associate entities. 45. In support of his submissions the learned senior counsel placed reliance upon a decision of the Supreme Court in Official Liquidator, Supreme Bank Ltd v. P.A. Tendolkar (1973) 1 SCC 602 wherein the Supreme Could held that the conduct of the founder Directors was such that an inference of their complicity could not be ignored. Reliance was also made of another decision of Supreme Court in N Narayan v. AO, SEBI (2013) 12 SCC 152 in which it was held that the directors occupying a certain position in a company were deemed to have knowledge of certain information and events. On this basis, the learned senior counsel for the respondent urged that the appellant, being in a position of Managing Director and Chief Executive Officer of ZEEL and being key managerial personnel in the seven associate companies, had deemed knowledge of the transfer of funds through layered transactions. It was, thus, urged that even on strong preponderance of probability test there was sufficient evidence for the respondent to charge the appellant under Regulation 4 of the PFUTP Regulations and Regulation 4 of the LODR Regulations. 46. Shri Khambat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n any case the appellant did not satisfy the first leg of the transaction and the documents so filed was not sufficient to establish a valid transaction beyond a reasonable doubt. The learned senior counsel contended that based on the bank statements it was clear that there was a circuitous routing of the funds and that the initial burden was discharged by SEBI and the onus now shifted upon the appellant which he failed to discharge miserably and the documents so supplied was not sufficient to satisfy the genuineness of the transactions. The learned senior counsel pointed out that the Chairperson considered all the documents in the impugned order in great detail and held that first leg of each of the five transactions was invalid giving appropriate reasons regarding insufficiency of the genuineness of the transactions. The learned senior counsel contended that the appellant only produced partial and incomplete information to justify the transaction which in the opinion of the Chairperson was insufficient. It was urged that once the undisputed fact indicates a circular flow of funds in a synchronized manner, the burden shifts to the appellant to show that the entire transaction was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erwise related to promoters. Further additional Letter of Comfort issued by the appellant and his father has come into existence including a LoC to the tune of Rs. 4210 crore issued by Mr. Subhash Chandra in his capacity as Chairman of Essel Group. Therefore, the direction to complete the investigation in eight months is aimed to ensuring a comprehensive investigation in the matter. The five transactions in question is only part of the wider investigation which is being carried out by SEBI. 53. It was also urged that ZEEL - Sony merger has nothing to do with the passing of the impugned order and the fact that the merger received 99.97% approval from ZEEL shareholders after the passing of the ad interim order has no relevance to the alleged prima facie findings against the appellant. It was urged that the routing of the funds was not in the interest of the shareholders of the ZEEL as there is a direct conflict of interest between the shareholders of ZEEL and the appellant. Consequently, there was urgency in issuing directions as there was a fear that the appellant may exercise influence over the entities to misrepresent or selectively disclose facts so as to misdirect the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder discloses that Rs. 143.90 crore originated from ZEEL / listed companies of Essel Group and their subsidiaries and the money was received by ZEEL eventually. The round tripping of the funds is depicted here under:- Sl.No. Name of Listed Entity/its Subsidiaries Amount due (INR in crore) Associate Entity benefited Amount (INR in crore) 1. ZEEL 17.1 Essel Green Mobility Ltd. 40.1 23 Essel Business Excellence Services Pvt. Ltd. 2. Zee Studios Ltd. (wholly owned subsidiary of ZEEL) 17.4 Living Entertainment Enterprises Pvt. Ltd. 66.7 49.3 Pan India Network Infravest Ld. 3. Zee Akaash News Pvt. Ltd. (wholly owned subsidiary of Zee Media Corporation Ltd., a listed company and part of Essel Group) 14.8 Pan India Infraprojects Pvt. Ltd. 14.8 4. Dish Infra Services Pvt. Ltd. (wholly owned subsidiary of Dish TV India Ltd., a listed company and part of Essel Group) 22.3 Essel Corporate Resources Pvt. Ltd. 22.3 Total 143.9 143.9 58. The movement of funds of Rs. 143.90 crore has been depicted in paragraphs 14, 17, 20, 23 and 26 of the ad interim order. The appellant filed various documents to show that the funds given by ZEEL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d IT enabled shared services. ZEEL entered into a Master Service Agreement with EBESPL on September 16, 2016 as amended on May 19, 2017 for outsourcing of various business processes such as finance, accounts, human resource etc. In paragraph 82 of the reply it was stated that Rs. 9 crore was paid to EBESPL on September 26, 2019 under the master service agreement. The payments were duly recorded in the audited financial statement for the financial year 2018-19 and 2019-20. The payment of Rs. 9 crore was not a stand-alone payment but was part of the ongoing contractual payments and details of payments made in the previous financial year 2018-19 and 2019-20 was also indicated in paragraph 84. It was contended that the transactions were backed by all necessary documents, agreements, addendums and invoices and approved by the audit committee. 63. We have perused the agreements / master service agreement, the approvals made by the audit committee, etc. and we find that the genuineness of these documents has not been doubted by the respondent in the impugned order. These documents indicate that the ZEEL had a long standing commercial relationship with LEEPL and EBESPL since 2016 and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreements. We are, thus, satisfied the transfer of funds of Rs. 8.35 crore from ZEEL to LEEPL and Rs. 9 crore to EBESPL was genuine and was made pursuant to the agreement which was executed in the year 2016. 66. The Chairperson has doubted the aforesaid transactions on the presumption that ZEEL paid Rs. 8.35 crore to LEEPL and Rs. 9 crore to EBESPL when it was supposed to receive an amount of Rs. 17.4 crore from LEEPL and Rs. 23 crore from EBESPL. In this regard, we are of the opinion that there was an ongoing contractual relationship between the two parties and hence withholding payment was not required. Even otherwise, the mere fact that some monies was required to be received from the two entities does not in any manner cast doubt on the genuineness of the transaction, namely, the payment made by ZEEL to LEEPL and EBESPL. 67. The flow of funds of the second transaction depicted in paragraph 17 of the ad interim order is extracted here under:- 68. From the above it can be seen that Zee Studio Limited (ZSL) paid Rs. 71.34 crore to Pen India Limited (PIL) and eventually the said sum was received from LEEPL and Pan India Network Infravest Limited (PINIL). 69. The ex-parte ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot been considered by the Chairperson and the same has been conveniently ignored for reasons best known to the Chairperson. On the other hand, the Chairperson tried to dissect the agreements that was entered between ZSL and PIL contending that the details regarding how much work was done on the first agreement when this strategic call was obtained to make remake rights and the correspondence in this regard has not been enclosed and therefore there is nothing to show that the amount paid under the first agreement would be adjusted under the second agreement. Further, the credit notes shows a transaction of Rs. 72.57 crore whereas the transfer was for Rs. 71.34 crore and therefore the credit notes cannot be relied upon. Further no invoice was produced to show such transactions and the GST filing does not indicate that such a transaction against the said invoice was made. The Chairperson came to the conclusion that the said invoice having not been filed with GST cast doubts on the genuineness of the transactions and therefore the documents so filed by the appellants does not establish that the fund transfer was pursuant to the agreement as certain details were missing to establish the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management and innovative marketing. Over the years KCPL has been organizing marquee events such as kyoorius design awards, kyoorius creative awards etc. Its design platform has evolved to become India's largest and world's second largest design conference as on date. These events are organized in association with large media companies like Viacom18, ABP News, ZEEL etc. KCPL is, thus, engaged in advertising and publicity business. ZEEL in the past had entered multiple commercial transaction with KCPL since financial year 2017. ZEEL had been sponsoring events which had been curated by KCPL. In subsequent years the contours of Media and Entertainment (MNE) industry started changing rapidly. Accordingly, ZEEL started a digital platform called ZEE5 in the financial year 2018 and launched four regional channels in the second half of the financial year 2020. ZEEL for the purpose of marketing and advertisement decided to collaborate with KCPL and entered into an exclusive partnership with KCPL through a Memorandum of Understanding on October 23, 2019 along with an addendum dated December 9, 2019. In furtherance to the aforesaid, a service agreement between the two was executed on January ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and part of Essel Group and had paid Rs. 7.2 crore to Norfolk Media Solutions Pvt. Ltd. and ZEEL has received a sum of Rs. 14.8 crore from Pan India Infraprojects Pvt. Ltd. (PIIPL). In this regard we find that Zee Akaash News Pvt. Ltd. paid a security deposit of Rs. 7.2 crore to Norfolk Media Solutions Pvt. Ltd. to acquire certain capital goods. The transactions did not materialize and the money was returned. Zee Akaash News Pvt. Ltd. also paid Rs. 7.6 crore to Midrex Media and Cable Pvt. Ltd. for purchase of certain capital goods. The bank statement of Zee Akaash News Pvt. Ltd. was filed as evidence for the period September 1, 2019 to September 30, 2019 which showed the refund of money by Norfolk Media Solutions Pvt. Ltd. This aspect has not been considered by the Chairperson. 78. The flow of funds of the fifth transaction which is depicted in paragraph 26 of the ad interim order is extracted here under:- 79. It will be seen that Dish Infra Services Pvt. Ltd. has paid Rs. 25 crore to Dcplay Distribution Pvt. Ltd. and ZEEL has received Rs. 22.3 crore from Essel Corporate Resources Pvt. Ltd. In this regard, it was specifically urged that Dish Infra Services Pvt. Ltd. is not part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra Services Pvt. Ltd. is also no longer a related party entity and has nothing to do with the Essel Group since March 2019. Thus, the foundational fact that the funds had originated from ZEEL and through group companies and that the funds moved through layers of associate companies of ZEEL and eventually found its way back to ZEEL has not been established. 82. Once the foundational fact has not been established, the Chairperson committed a manifest error in confirming the ad interim order on the ground of presumptions, assumptions / preponderance of probability. The Supreme Court has categorically held in a catena of cases that foundational facts must be established first before a presumption is made. 83. Out of Rs. 200 crore that was alleged to be repaid by the seven associate companies to ZEEL, the ad interim order only refers to only five transactions totaling Rs. 143.90 crore. No evidence till date has been found with regard to the balance Rs. 66.10 crore. Admittedly, PIL and Dish Infra Services Pvt. Ltd. are not associate companies or related party entities of ZEEL. PIL has received Rs. 71.34 crore for valid consideration. Similarly, the Dish Infra Services Pvt. Ltd. has pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e movement of funds. 86. We are, thus, satisfied that the first leg of the transaction has been validly explained through documents which has not been disputed by the respondent and which are genuine. We are satisfied that at this stage the transfer of funds moved pursuant to long standing commercial business relationship through memorandum of understanding / agreements / service agreements etc. and that these transactions are not sham transactions. The appellant has validly explained the first leg of the transaction and consequently discharged the burden and, at this stage of the investigation, it was not necessary for him to prove the subsequent chain in the movement of the funds. The investigation would investigate and find out as to on what basis the said funds moved from one entity to another entity but so far as the appellant is concerned, he has satisfied the genuineness of the first transaction. 87. Subsequent transfer of funds through layered entities coupled with proximity of timings may create a suspicion and may also raise an eye brow but it does not mean that the movement of funds through banking channels was a fictitious transaction or a sham transaction. On the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oked at as a whole is not correct in the given facts of the present case. At the threshold, we reiterate that the burden was upon SEBI to allege round tripping of funds. SEBI may invoke "substance over form" principle or "piercing the corporate veil" test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction was a sham or a fictitious transaction. In the given case, we find that nothing has come to light to hold that there was a round tripping of funds on the basis of any documentary evidence. 91. The "look at" principle enunciated in W.T. Ramsay Ltd. vs IRC 1982 AC 300 in which it was held that the Revenue or Court must look at a document or a transactions in a context to which it properly belongs to in order to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach is not attracted in the instant case at this stage as we find that the documents so filed by the appellant has not been considered and has been brushed aside on the pretext that it does not prove that the funds moved pursuant to these do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the milkman who had supplied milk on credit. The milkman owed Rs. 500/- to the receptionist and accordingly pays Rs. 500/- to the receptionist. All this happens within a few minutes. The customer comes back after seeing the room and says that he was not satisfied with the condition of the room and asks the receptionist to refund the advance he had given. The receptionist pays back Rs. 500/- to the customer and the customer leaves. 94. The above round tripping of funds happened in a few minutes. Can it be said that each of the transaction was a sham or a fictitious transaction? There was a reason for making the payments. Everyone owed someone, the receptionist paid his debt, the chef paid his debt, the wife paid her debt and the milkman paid his debt. Everything works on credit and through the aforesaid payments everyone was happy. This is how the system works. Can it be said that the entire transaction done by the aforesaid entities was a sham transaction on account of proximity of time? 95. Considering the aforesaid, we find that the transaction between the ZEEL and the first entity was validly explained and therefore, at this stage, it was not necessary to go into the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(27) of the Companies Act, 2013. The Securities Appellate Tribunal held : (SCC OnLine SAT para 6) "6. ... The term control has been defined in Regulation 2(1)(c) of the Takeover Code to "include the right to appoint majority of the Directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner". This definition is an inclusive one and not exhaustive and it has two distinct and separate features : (i) the right to appoint majority of Directors or, (ii) the ability to control the management or policy decisions by various means referred to in the definition. This control of management or policy decisions could be by virtue of shareholding or management rights or shareholders agreement or voting agreements or in any other manner. This definition appears to be similar to the one as given in Black's Law Dictionary (Eighth Edn.) at p. 353 where this term has been defined as under: 'Control-The direct or indirect power to direct the management and policies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese two entities. 100. We further find that the direction that if the appellant is allowed to continue as the Managing Director in ZEEL it would impede or tamper with the investigation is erroneous in as much as we do not find any single incident to show that the appellant has obstructed in the investigation conducted so far. 101. We are also of the opinion that the impugned order relies upon the bank statement which cannot be tampered and which cannot be changed and therefore the presumption that if the appellant is allowed to continue as Managing Director in ZEEL it would impede or tamper with the investigation is patently erroneous. The finding that the appellant should be kept away from the helm of affairs of ZEEL so that the appellant may not exercise his influence over relevant entities to misdirect the course of investigation is patently erroneous. In the first instance, we find that nothing has come to notice that the appellant had adequately exercised any influence over any relevant entities. On the other hand, there is material to show that appellant has always been cooperating with SEBI and whatever information was sought was duly supplied. The movement of funds is bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... temporary restraint which is aimed at preventing the appellant from impeding or obstructing in fair and transparent investigation in the matter. Further, the conduct of the appellant is such that he is not suitable to be part of a listed company. 104. The approach adopted by the Chairperson is misplaced. The Chairperson has not understood the concept of the doctrine of proportionality which is a facet of Article 14 of the Constitution of India. In Ramesh Chandra Sharma and Ors. Vs State of Uttar Pradesh and others (2023) SCC Online SC 162, Supreme Court while considering the principles of proportionality held:- "52. Although the fifth prong, as mentioned in the Gujarat Mazdoor Sabha (Supra) has not been expressly mentioned in Puttaswamy, Chandrachud J (as His Lordship then was), in our view, rightly has read that in in the Gujarat Mazdoor Sabha case (supra) to complete the test. State action that leaves sufficient room for abuse, thereby acting as a threat against free exercise of fundamental rights, ought to necessarily be factored in in the delicate balancing act that the judiciary is called upon to do in determining the constitutionality of such state action - whether legisl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of the Constitution of India. In Andhra Pradesh Dairy Development Corporation Federation vs. B. Narasimha Reddy and Others (2011) 9 SCC 286, the Supreme Court held: "29. It is a settled legal proposition that Article 14 of the Constitution strikes at arbitrariness because an action that is arbitrary, must necessarily involve negation of equality. This doctrine of arbitrariness is not restricted only to executive actions, but also applies to legislature. Thus, a party has to satisfy that the action was reasonable, not done in unreasonable manner or capriciously or at pleasure without adequate determining principle, rational, and has been done according to reason or judgment, and certainly does not depend on the will alone. However, the action of legislature, violative of Article 14 of the Constitution, should ordinarily be manifestly arbitrary. There must be a case of substantive unreasonableness in the statute itself for declaring the act ultra vires of Article 14 of the Constitution. (Vide: Ajay Hasia etc. v. Khalid Mujib Sehravardi, Reliance Airport Developers (P) Ltd. v. Airports Authority of India, Bidhannagar (Salt Lake) Welfare Assn. v. Central Valuation Board, Grand Kaka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -maker has ordered his priorities, reached a conclusion or arrived at a decision. The very essence of decision-making consists in the attribution of relative importance to the factors and considerations in the case. The doctrine of proportionality thus steps in focus true nature of exercise-the elaboration of a rule of permissible priorities. ... 21. The doctrine has its genesis in the field of administrative law. The Government and its departments, in administering the affairs of the country, are expected to honour their statements of policy or intention and treat the citizens with full personal consideration without abuse of discretion. There can be no "pick and choose", selective applicability of the government norms or unfairness, arbitrariness or unreasonableness. It is not permissible to use a "sledgehammer to crack a nut". As has been said many a time; "where paring knife suffices, battle axe is precluded". (Emphasis added) 107. Considering the aforesaid we have to see whether a proper balance has been made by the impugned directions on the rights, liberties or interest of the person keeping in mind the purpose which it was intended to serve. In this regard, no doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts surrounding the events on which the charges are founded. Applying the aforesaid test we find that a heavy burden of proof was upon the respondent. Merely on the basis of bank entries and proximity of time cannot lead to a conclusion to hold that the transactions were fictitious or sham or that the flow of funds was not on the basis of genuine transactions. Considering the evidence that has been filed which is in the form of direct substantive evidence, prima facie, at this stage, it indicates that the funds moved pursuant to long standing commercial business arrangement between the entities which evidence has been disregarded on flimsy grounds. 110. We find that the reasoning given by the Chairperson regarding the urgency in issuing an interim direction pending investigation is erroneous. The Chairperson finding that the urgency in the issuance of the interim directions is not to be assessed from the view point of the transaction but rather it is egregious nature of the transaction which displays the total disregard to the accountability of the Managing Director is, in our opinion, an incorrect approach. In fact, this approach is not only untenable but constitutes a strange an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im order on the touch stone of the finding contained therein but could not have imported fresh reasoning which were alien to the interim order. 113. The entire investigation is based on bank account statements which cannot be tampered by the appellant and therefore the question of impeding in the investigation does not arise. Further, it would be absurd to say the least that the investigation would suffer if the appellant remains at the helm of affairs. 114. We are also of the view that there is a delay in the issuance of an ex-parte ad interim order. The alleged transaction is of the year 2019. No further evidence has come on record to indicate any further diversion of funds. Consequently, in our opinion the impugned order is harsh and unwarranted as there was no real urgency at this late stage in passing the ad interim order. Passing a restraint order at this stage virtually restrains the appellant his right to continue as a Managing Director on the basis of a needle of suspicion which in our opinion is unfounded. 115. In Liberty Oil Mills & Ors. vs. Union of India & Ors. AIR (1984) SC 1271, the Supreme Court held that the urgency must be infused by a host of circumstances and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e impugned order is not sustainable in the eyes of law as it has been passed in gross violation of the principles of natural justice as embodied in Article 14 of the Constitution of India. Accordingly, the appellants are entitled to the reliefs claimed." 117. In Dr. Udayant Malhoutra vs. SEBI, Appeal no. 145 of 2020 decided on June 27, 2020, this Tribunal held as under:- "9. ........... In our opinion, the reasoning given by the WTM justifying its action to pass an ex-parte interim order is patently erroneous and cannot be sustained. On one hand, we find that only a show cause notice has been issued and the matter has not been adjudicated on merits but the appellant, on the other hand, has been directed to deposit the possible disgorgement amount in advance. We are of the opinion that no amount towards disgorgement can be directed to be deposited in advance unless it is adjudicated and quantified unless there is some evidence to show and justify the action taken. An order of the like nature can only be passed during the pendency of the proceedings and such orders cannot be passed at the time of initiation of the proceedings. Further, no order of the like nature can be passed wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the present case, we do not find that any extreme urgent situation existed in 2023 which warranted the WTM to pass an ex-parte ad interim order with regard to a certain set of transactions which occurred in the year 2019. 120. We find that 99.97% of the shareholders of ZEEL had reposed complete faith in the appellant as recent as into 2022 to continue as Managing Director and Chief Executive Officer of the merged entity between ZEEL and Sony. Pursuant to the ex-parte ad interim order NCLT has approved the scheme of amalgamation in which the appellant would hold the post of a Managing Director of the merged entity. This aspect has wrongly been construed by the Chairperson that it will wield substantial power of management of the affairs of the merged company upon the appellant which he cannot be permitted to do so. In our opinion such approach is unwarranted apart from the fact that there is no evidence to show that the appellant exercised positive control over the borrowed entities. The fact that greater responsibility (if any) has come upon the appellant pursuant to the merger, then all the more reason that the appellant should be allowed to continue ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iar circumstances that has been brought on record and, in view of the fact that the foundational facts have not been established coupled with the fact that the respondent has restrained the appellant on a preponderance of probabilities while rejecting the genuine documents on the ground that it does not prove the transactions beyond a reasonable doubt, we are of the opinion that continuation of the interim order would be harsh and unwarranted and thus, cannot be allowed to continue any further. 123. In view of the aforesaid, the impugned order cannot be sustained and is quashed insofar as it relates to the appellant. The restraint order passed by the respondent pursuant to the ad interim order and the confirmatory order restraining the appellant to function as a Managing Director and as directed in paragraph 108(ii) of the impugned order is set aside. The appeal is allowed. The appellant shall, however, cooperate in the investigation. In the event any material comes out against the appellant during the course of investigation then appropriate procedure can be adopted by SEBI in accordance with law. In the circumstances of the case, parties shall bear their own costs. 124. We also ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
