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TMI Blog2024 (12) TMI 1463X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 protecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the FMC, in pursuance of which inspection of books and records of the NMCE was conducted by FMC, under Sections 8(2) and 8(4) of the FCRA FCRA - FMC (Regulation) Act, 1952 . 2.5 Based on the findings of the inspection report, a show-cause notice was issued on June 21, 2011 by FMC. Following this, the final order was passed ex-parte by the FMC on July 23, 2011, issuing several directions to the appellants. 2.6 The said order was challenged by the appellants before the Division Bench of the Hon ble Gujarat High Court, which set aside the order dated February 9, 2012, with the direction to FMC to provide natural justice to the appellants and with further direction that the appellant No. 1 shall not take part in the functioning of the NMCE till disposal of the matter. 2.7 The said order of Hon ble Gujarat High Court was challenged by FMC before the Hon ble Supreme Court on February 22, 2012 vide SLP Nos. 10225 - 10227 of 2012. On March 22, 2012, the Hon ble Supreme Court stayed the order of Hon ble Gujarat High Court dated February 9, 2012 till further orders. 2.8 Meanwhile, the Forward Market Contract Regulation Act was repealed and consequently, the FMC was merged with the SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be not a fit and proper person to hold any position in the management and Board of any association/ Commodities Exchange recognized or registered by Government of India /FMC/SEBI. iii) The noticees were directed not to directly or through any entity controlled by them, hold shares in any Association/ Commodities Exchange recognized or registered by Government of India/FMC/SEBI, in excess of 2% of total issued capital of such Association/Exchange. The noticees were directed to bring down their holding in ICEX or any other Association/Commodities Exchange to 2% or less, within a period of three months from the date of the order. 2.13 The learned WTM also held that the following directions which were issued by the FMC to NMCE, shall be construed as directions being issued in the instant proceedings: i. To refer the matter to the appropriate authorities under the Companies Act, 1956 for cancellation of the irregular allotment of 29,32,280 shares to the appellant No. 1, who shall not have voting rights. ii. To take appropriate legal action against Shri Kailash Ramkishan Gupta and ATSPL ATSPL - Arrow Total Solutions Private Limited to recover the wrongful and illegal over-payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -10 and also Statutory Auditors for Neptune Overseas, Neptune World Trade and ATSPL, the Institute of Chartered Accountants, for appropriate disciplinary action for negligence, dereliction of duty and lack of professional integrity. xiii. To review all the consultancies and discontinue, wherever not yet discontinued, all the consultancies which were granted without following transparent arms length competitive bidding process or without due authorization from the Board of the Exchange. xiv. To immediately file an FIR, against Ms Poonam Gupta (nee Verma), her husband Shri Kaushik Gaurav Verma, the then Exchange Employee Shri Suneil Jain, the professional backer Shri Vishal and Shri Shekhar Singh, Employee of M/s. Tarmac Affairs, P R Agency of the NMCE for common conspiracy and illegal trespassing in to the Exchange premises late night on 21st 22nd February, 2011 and making a systematic attempt at sabotaging the IIT and software systems of the Exchange . 3. Before us, Mr. Hitesh Buch, authorized representative made detailed submissions on behalf of the appellants and Mr. Gaurav Joshi, learned senior Advocate for the respondent SEBI presented the case. 3.1 We find that the Hon ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted under Sections 4 and 4A of the FCRA and such provisions did not empower FMC to carry out any inquiry and pass orders relating to day-to-day management of NMCE, which is not amenable to FMC s jurisdiction but is limited to trades and transactions on the exchange; and that the shareholder or Directors of NMCE do not fall within the scope of FMC s powers. 4.2 Further, it was submitted that even under Section 8(2)(b) of the FCRA, FMC does not have powers to make an enquiry into the day-to-day management of NMCE. The said section only empowers an inquiry into the affairs of the association or any of its members. The appellants are neither the association nor its members. It was also submitted that under the scheme of Section 8 after the inquiry is completed, the report is to be submitted to the Central Government. However, neither the FMC nor the person conducting inquiry are empowered or had jurisdiction. 4.3 The second challenge to jurisdiction by the Appellant is on the ground that the delegation of powers under S. 26 of Forward Contracts (Regulation) Act, 1952 read with Notification dated 04.05.1960 delegates the powers vested with the Central Government under S. 8(1) and 8(2)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts members, as the case may be, as may be prescribed.] (2) Without prejudice to the provisions contained in sub-section (1), where the Central Government considers it expedient so to do, it may, by order in writing, (a) call upon a recognised association or a member thereof to furnish in writing such information or explanation relating to its affairs or the affairs of any of its members [or his affairs, as the case may be as the Central Government may require, or (b) appoint one or more persons to make an inquiry in relation to the affairs of such association or the affairs of any of its members and submit a report of the result of such inquiry to the Central Government within such time as may be specified in the order or, in the alternative, direct the inquiry to be made, and the report to be submitted, by the governing body of such association acting jointly with one or more representatives of the Central Government; and (c) direct the Commission to inspect the accounts and other documents of any recognised association or of any of its members and submit its report thereon to the Central Government. (3) Where an inquiry in relation to the affairs of a recognize association or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other team members, who were to conduct the enquiry /investigation as per Section 8 of FCRA. 4.8 It was submitted that notwithstanding the above, subsequently by notification dated March 12, 1964 being S.O. No. 928 issued by Central Government, the powers were entrusted with the Director. The Ld. Senior Advocate also informed that this notification was filed as part of the Affidavit dated July 26, 2011 by FMC in Gujarat HC. It was submitted that the said intimation letter (signed by the Director FMC) does not call for information per se but only identifies the team that would call for information as it deems fit and that that the enquiry was indeed conducted by and in the presence of the two Deputy Directors. 4.9 The Ld. Senior Advocate further submitted that the Hon ble Supreme court has held in the context of disciplinary proceedings that there is no prohibition for an higher authority to take decision or impose penalty as held in Balbir Chand vs. FCI [(1997) 3 SCC 371 (para 3)] and reiterated in UPPCL v Virendra Lal [(2013) 10 SCC 39 (para 23)]. In view of the above, it was submitted that the inquiry carried out by FMC, which is basis of the impugned order is well within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 4.9.4 With regard to the 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 under Section 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. We next consider grounds Nos. 2 to 5 which read as follows :- 5. Ground No. 2 - Payment made to ATSPL are legitimate Ground No. 3 The emails discussing ATSPL have been taken out of context in the impugned order Ground No. 4 Order of it settlement commission mentioned in the impugned order in paragraph No. 91(XIII) to Paragraph No. 91(XIX) was not a part of the record Ground No. 5 Agreements with ATSPL were approved by the NMCE board of Directors 5.1 In the impugned order, the appellants have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the family members of appellant No. 2 to them, the actual control and management of bank account and business of ATSPL remained with the family members of the appellant No. 2. It was also alleged that 10 agreements between NMCE and ATSPL were doctored by backdating with retrospective effect so as to regularize it ex-facto, for which employees of the NMCE were coerced. 5.6 Further, ATSPL did not have any Service tax registration number/VAT No., nor adequate manpower to develop software for NMCE. It had no client other than NMCE. Site inspection by the inquiry team of FMC could not locate ATSPL at its disclosed registered address. Furthermore, it was noted that the money received by ATSPL from NMCE was shown by it under the head Loans and Advances in its books. 5.7 It is also noted by the WTM that out of the funds received by ATSPL from NMCE, an amount of INR 4.80 Crore (approx.) was transferred to appellant no. 2. Prima facie the said fund transfer was towards purchase of shares of NMCE by one Mr. Anil Singhania for an amount of INR 3.63 Crore. Further, from the bank account of ATSPL, huge amounts of payments were made to various entities (in the range of 4 Lakh to 7.46 Crore), a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Exchange with ATSPL and played a part in approving the same. 5.12 In response the Senior Advocate of the respondent Mr. Gaurav Joshi submitted that Mr. Amit Gupta and Ms. Poonam Gupta (son and daughter of appellant No. 1), were actively involved in the interface of ATSPL with NMCE, despite having transferred their shareholding and having resigned from the Directorship in ATSPL. It was submitted that the bank records of ATSPL further show that the authorized signatories to the said bank account were Ms. Poonam Gupta Verma, Ms. Anjana Gupta and Mr. Samar Dave, even though the family members of appellant No. 1 had resigned from the Board of ATSPL. This finding was also confirmed by the Audit Report of Pipara Co. Chartered Accountants. Mr. Joshi also submitted that Mr. Kailash R. Gupta has categorically admitted that no approval from the Board of NMCE was obtained for appointing ATSPL as a software vendor and that no technical or financial evaluation of ATSPL was done before appointing it as a software vendor for NMCE. No other IT company was approached when CMC Limited withdrew its support. It was submitted that there was not a single client of ATSPL, either in past or later to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the case with regard to ground Nos. 2 to 5 and in the light of the rival submissions and evidence on record. Undisputedly, the company ATSPL is a related entity qua the appellants having been promoted by the close family members of the appellant No. 1. The appellant could not justify the ground for engaging ATSPL for software development while the said company did not have any capacity for software development nor had adequate manpower and there was no other client. Its selection by NMCE management was done without floating RFP, without comparing alternative available options and without giving any workline or scope of work for software development. The evidences on record clearly show that the equity holding of such ATSPL changed hands to four individuals, who were known to the appellants, for the purpose of creating a camaflouge to avoid audit scrutiny. The evidences on record demonstrate that for the purpose of software development by the Exchange, the company M/s. Mintessa Ltd., which was maintaining and developing software for NMCE for five years, were outsourced by ATSPL and who were compensated with an amount of Rs. 66.32 lakhs only for software development of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t), by unauthorizedly /fraudulently transferring the funds of NMCE to appellant no. 1, both by way of transactions through a running account and also by transferring funds via ATSPL. The allotment of shares to Appellant No. 2 was not backed by receipt of cash consideration, and effectively, funds of NMCE itself were used by Appellant No. 1 to acquire shares of NMCE in the name of Appellant No. 2. 6.2 Appellants contention is that allotment of the shares to noticee No. 1 was completed in December 2006 and, therefore, the enquiry conducted after four years after allotment is barred by delay and laches. Secondly, FMC did not have any jurisdiction to investigate into the acquisition of shares of the recognized exchange. 6.3 Records disclose that allotment of 250000 shares was made to NOL by NMCE on April 10, 2022. Finally, 19,74,900 shares were allotted on January 19, 2004, 12,37,500 shares on October 14, 2006 and 3,98,280 shares were allotted on December 30, 2006. The main issue in question is of bogus and excessive payment to ATSPL which is a related company of the appellants, without following due process of a sum of Rs. 28.80 crore out of which an amount of Rs. 3.63 crore was used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing any due process or documentation. In view of this, this ground is also liable to be rejected. 8. Reg. - Ground No. 8 -No misappropriation of money belonging to NMCE for personal and family expenses. 8.1 It was noted that the Appellant No. 1 by misusing his position as MD of NMCE, utilised the funds of NMCE towards various personal expenses of his family members, inter-alia, expenditure on foreign/local travel undertaken by the daughters/sons of the Appellant No. 1, interior work of flats, purchases of electronic items like LCD TV, A.C. and mobile phones etc. Further, three cars (03) purchased out of the funds of NMCE (amounting to INR 20.93 Lakh) were registered in the individual name of Appellant No. 1 out of which two cars were used by his family members. The maintenance expenses of such cars including driver s salary, fuel etc., were being borne by NMCE. Further, another car (Skoda) which was registered in the name of NMCE, was being used by Mr. Nanak Gupta, another son of Appellant No. 1, even though the latter had no formal connection with NMCE in any official manner. 8.2 It is seen that the in show cause notice, allegations have been made in respect of misuse of NMCE fu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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