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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 ..... now merged with the Indian Commodity Exchange (ICEX) ICEX - Indian Commodity Exchange]. 2. Brief facts of the case are as follows:- 2.1 NMCE is the country's first, online multi-commodity exchange with nationwide reach. It started its operations on November 26, 2002. This Exchange is now merged with ICEX. 2.2 The Appellant No. 1 is the MD & Executive Vice-Chairman of the NMCE. The Appellant No. 2 M/s Neptune Overseas Ltd. (NOL NOL - Neptune Overseas Ltd.) is a substantial shareholder in NMCE. 2.3 The erstwhile commodity exchange regulator, the FMC received a complaint on November 28, 2010 alleging 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. The auditors appointed by the FMC had also pointed out certain irregularities and misconduct in management of affairs of NMCE in their audit report for the FY 2006-07 and 2007-08. 2.4 Based on the above, an inquiry was instituted 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une 21, 2011 would be treated as show cause notice to both the appellants. 2.11 In pursuance of the said directions, the appellants were furnished documents on March 8, 2021 and also allowed an opportunity to cross-examine the witnesses. Based on this, the appellants filed written submissions on different dates. 2.12 On the basis of the findings of the inquiry, the Ld. WTM of SEBI held in the impugned order the appellant Nos. 1 and 2 as guilty of abusing their controlling and executing position in the affairs of NMCE, committing various fraudulent acts and passing on illegal monetary benefits to the entities controlled/connected with them. Accordingly, the following directions were issued by the learned WTM vide the impugned order dated November 17, 2021: i) The noticees were declared as not "fit and proper person" in terms of applicable Guidelines dated July 29, 2009 on Equity Structure of Nationwide Multi-Commodity Exchanges after five years of operation, as amended from time to time by FMC. ii) Noticee No. 2 was held 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 Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gupta who has all along been in effective control of ATSPL for perpetrating a fraud on NMCE and claiming payments for non-existed software development and software service, thereby causing it a wrongful loss of at least Rs. 28.80 crore. The four transferee benami shareholders of ATSPL may be made the co-accused. x. To initiate legal action under the relevant sections of the IPC against Shri Kailash Gupta for causing falsification, fabrication and forgery of ten false agreements between the NMCE with ATS / ATSPL in violation of Section 20(a)(i) and Section 20(a)(ii) of the F. C. (R) Act, 1952. xi. To initiate an enquiry whether there is evidence of violation of the provisions of the FEMA in making payment to Kushal Enterprises, Ahmedabad against the claim of ATSLLC, USA in the books of the NMCE, and if there is such evidence, refer the matter to the Enforcement Directorate for appropriate action under the FEMA. xii. The Board of the NMCE may consider referring the case of to the Statutory Auditors for NMCE since the financial year 2004-05 till 2009-10 and also Statutory Auditors for Neptune Overseas, Neptune World Trade and ATSPL, the Institute of Chartered Accountants, for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt. It is noteworthy that the appeal before this Tribunal was dismissed on October 18, 2019 on the sole ground of denial of natural justice given to the appellants. Prior to this, the original order passed by the FMC dated July 23, 2011 on the same facts, was also quashed and set aside by the Division Bench of the Hon'ble Gujarat High Court on February 9, 2012 on the same ground. In view of the above, since the appellants have been granted natural justice by the SEBI, we now decide the appeal on merit, considering other grounds as under :- 4. Ground No. 1 - Jurisdiction of FMC - Ground - FMC does not have powers to conduct audit/inspection and cannot exercise its jurisdiction on the shareholders of the associates. 4.1 The practicing company secretary for the appellant Mr. Hitesh Buch submitted that the FMC did not have any jurisdiction to issue show cause notice or initiate inquiry to the shareholders of the recognized association as its powers are limited to submitting report to the Central Government only. It was submitted that the functions and powers of FMC are listed under Sections 4 and 4A of the FCRA and such provisions did not empower FMC to carry out any inquiry and pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 4 - Functions of the Commission - The functions of the Commission shall be:- (a) to advise the Central Government in respect of the recognition of, or the withdrawal of recognition from, any association or in respect of any other matter arising out of the administration of this Act; (b) to keep forward markets under observation and to take such action in relation to them as it may consider necessary, in exercise of the powers assigned to it by or under this Act; ......... (e) to undertake the inspection of the accounts and other documents of any recognised association or registered association or any member of such association whenever it considers it necessary; and (f) to perform such other duties and exercise such other powers as may be assigned to the Commission by or under this Act, or as may be prescribed. .............." "Section 8 - Power of Central Government to call for periodical returns or direct inquiries to be made.- (1) Every recognised association and every member thereof shall furnish to the Central Government such periodical returns relating to its affairs, or the affairs of its members, as the case may be, as may be prescribed.] (2) Witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law that when power is given to an authority to do something, it includes such other incidental or implied powers which would ensure the proper doing of that thing. It was submitted that this principle has been expressly set out in the context of FMC powers under FCRA in the following two decisions:- i. First Commodities Exchange of India vs Union of India (Kerala HC) (paras 25-29; 34-38; 42-49); and ii. UOI v The Bullion and Agricultural Produce Ltd AIR 1973 All 205 (Allahabad HC) (paras 13-17 and 32-33). 4.7 With regard to the second objection on the jurisdictional ground that the intimation letter for inquiry was signed by the Director FMC, who, in the view of the appellants, was not authorised, he submits that the said objection is hyper-technical and has no basis in law as the appellant is attempting to apply the principles of criminal law to quasi-judicial proceedings, which is impermissible. He submitted that the Appellants have relied on precedents under criminal law to suggest that the entire enquiry is vitiated merely because an officer of an higher rank has signed the intimation letter nominating the relevant Deputy Directors and other team members, who were to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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. 4.9.3 Further, 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 relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to ATSPL while only payment of Rs. 66.32 lakh pertained to software related work, it has also been established that Rs. 66.32 lakh paid to Mantissa Ltd. by ATSPL for software development for ATSPL lacked capacity. Allegedly, the engagement of ATS LLC and ATSPL as Software Vendors of the NMCE, was done without obtaining prior approvals from the Board of Director/Committee (nor was regulated after the appointment), and without defining the scope of work and floating tenders. Further, no disclosure of the relationship of the MD with the vendors was made, even though undisputedly ATSPL was a related company qua the appellants. 5.4 Admittedly, funds so paid to ATSPL were used towards Market-making activity for NMCE, even though during the relevant period, Market-making activity was not allowed as per law. The said payment to ATSPL was made from the margin account of ATSPL, which was considered to be breach of the risk management system of NMCE. 5.5 The Learned WTM has relied upon the statements of Mr. Samar Dave and the other two shareholders of NMCE, who have admitted that they were not aware of management of funds of ATSPL and despite transfer of shareholding of ATSPL from the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Mr. Bhavit Godiwala, who was the original creator of the software, had just joined ATSPL from CMC. In the said background, the Appellant No. 1 took a decision in the interest of the Exchange to appoint ATSPL as the software provider/vendor of the Exchange. 5.10 In the Impugned Order, it is stated that NMCE paid a huge sum of INR 29.47 Crore to ATSPL towards software development during the years 2006-2010, however, the Impugned Order has failed to note that such payment was in line with the prevalent rates paid to software providers to exchanges. It was also submitted that an amount of Rs. 20 crores approximately had already returned at the relevant time to the Exchange. 5.11 It was submitted that the Respondent has erroneously relied on some extracts of emails to allege that ATSPL was a company controlled by the Appellant. The Respondent has failed to consider that the appointment of ATSPL was approved by the Board of Directors in their meeting dated November 4, 2006. The Respondent has failed to consider that a nominee of the FMC was always a member of the Board of Directors of NMCE. The FMC was, therefore, aware of all the dealings, appointments and contracts entered into by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that monies siphoned off from NMCE to a related party of Mr. Kailash Gupta - (M/s. Kushal Enterprises) were in turn used for Market Making. The proprietor of the said firm was Mr. Naresh Gupta (brother of Mr. Kailash Gupta) & a payment of Rs. 2.47 crores were made on May 30, 2006 without any record of corresponding service provided by it. During this period, market making activity was not permitted in the commodity derivatives market by FMC. It was also submitted that from the bank account of ATSPL, huge payments have been made to 16 different entities without any basis. The funds were received by ATSPL from the margin account of NMCE and the same money was used for the purpose of market making. 5.14 In view of this, it was pleaded that the payments made to ATSPL and ATS were not legitimate which caused loss to the exchange and which was held to be "embezzlement loss" by the Income Tax Settlement Commission in their final settlement order under Section 245-D of the Income Tax Act, 1961 in the case of NMCE. Such order is final and conclusive on the facts. In view of this, it was submitted that the contentions of the appellant deserve to be rejected. 5.15 We have careful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Accordingly, we hold these grounds Nos. 2 to 5 as untenable and reject them. 6. Reg. Ground No. 6 - There was no irregularity in issuance of shares of NMCE to appellant No. 2 (NOL) 6.1 It is recorded in the impugned order that Appellant No. 1, by using his position as MD of the NMCE, has caused allotment of 29,32,680 shares of NMCE to Appellant No. 2 (Neptune Overseas Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144 consultants so appointed, approval was found only for 11 consultants. For the remaining 133 consultants, payment of INR 4.07 Crore was made. The consultants so appointed were alleged to be personal advisers, friends, and well-wishers of Appellant No. 1. Further, allegedly two of such consultants Mr. Kalpen Shah and Mr. V.M. Mehrishi, aided and abetted Appellant No. 1 for committing certain violations. 7.2 Appellants' contention is that it was well within the powers of appellant No. 1, who was acting as MD of NMCE to appoint such consultants, and payment to them was approved by the Board. In the impugned order, the learned AO has also acknowledged that the appellant No. 1 was authorised by the board to engage consultants. However, he clearly used his powers, which shows malfeasance by engaging various persons without identifying need for engagement, without documentation of such engagement and without apprising the board about such engagement. No detail with regard to the scope of work and the services actually performed by these consultants was furnished. 7.3 On careful consideration of facts and circumstances, we hold that appointment of 144 consultants by the appellant no. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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