Coming down heavily on the market regulator, the Securities Appellate Tribunal (SAT) has directed Securities and Exchange Board of India (SEBI) to pay Rs50,000 as cost to the appellant for an ex-parte order passed without giving due consideration to evidence and relevant documents.
In an order issued on 4 June 2019, the SAT bench of Justice Tarun Agarwala, Dr CKG Nair and Justice MT Joshi,
said "...the ex-parte
interim order (passed in November 2017) continued till the confirmatory order was passed on 30 October 2018. In our opinion, apart from the delay in disposal of the matter, the ex-parte
order was confirmed mechanically without any application of mind and without considering the relevant documents. In our opinion, there was no shred of evidence to come to a prima-facie
conclusion that the appellant was indulging in unfair trade practices with a manipulative intent to manipulate the price."
"We are further of the opinion that whenever an ex-parte order is granted, an endeavour should also be made to dispose of the matter as expeditiously as possible no sooner when the party appears. In the instant case, the ex-parte order was passed on 1 November 2017 and the appellant filed his replies on 3 November 2017, 28 November 2017 and 23 December 2017. It took the WTM almost a year to dispose of the application. We find that at this late stage there was no real urgency to continue with the restraint order. Passing a confirmatory order virtually puts a stoppage on the appellant’s right to trade which in the instant case is based on non-consideration of evidence and, in our opinion, is harsh and unwarranted. In our opinion, for the aforesaid reasons, the appellant is, thus entitled to get costs from the respondent," the SAT said.
The appeal was filed by Sanjay Gupta, one of the promoters and shareholders of Supreme Tex Mart Ltd (STML), listed on the BSE and National Stock Exchange (NSE). SEBI conducted a preliminary examination in the scrips of STML for the period 1 July 2016 to 31 March 2017 in relation to bulk short messages services (SMSs) which recommended trading in the scrips of the company.
SEBI's primary investigation showed that before initiating the bulk SMS campaign, a fund of Rs50 lakh was transferred from the joint account of STML to one Neeleshkumar Lahoti. Mr Lahoti in collusion with Mr Mohsin channelised the funds to RouteSMS on behalf of Future Fintrade. "It was observed that Future Fintrade entered into an agreement with RouteSMS for the purpose of sending bulk SMSs. Payments to Route SMS were made by Mr Mohsin, who received funds either from the joint account of STML or through Mr Lahoti. It was also observed that the bank statement of STML maintained with UCO Bank revealed that STML was the primary account holder, Ram Lal Gupta was joint-holder No1, Sanjay Gupta was joint-holder No2 and Ajay Gupta was joint-holder No3. It was also observed that there appeared to be a nexus amongst the entities and the modus operandi was that the account of STML was used to fund the sending of bulk SMSs, which were sent through Idea Cellular, and Goldleaf International Pvt Ltd, recommending to buy scrips of STML. It was further observed that during the period when SMSs were being sent, the price of the scrips increased and, during this period, the appellant off-loaded its shares at a higher price," the probe by SEBI says.
On the basis of the investigation and material available with the market regulator SEBI's whole time member (WTM) Madhabi Puri Buch found it fit to pass an ex-parte interim order dated 1 November 2017 in order to safeguard the interest of the investors and to protect the integrity of the securities market.
The SEBI WTM further observed that the appellant, along with other entities in collusion, made misrepresentations through the SMSs and by their action and omission had solicited, enticed and induced investors to deal in securities in the scrips of STML and, thus, played a fraud as defined in Regulation 2(1)(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). Based on the prima-facie findings, the SEBI WTM passed an ex-parte ad-interim order pending detailed investigation in the matter.
(Source: SEBI WTM order dated 1 Nov 2017)
Mr Gupta, on 3 November 2017 and 23 December 2017 filed his reply. He contended that he was never a joint-account holder of the bank account of STML and on 19 April 2013 only he had resigned as director from the company as well from Goldleaf International Pvt Ltd.
He also contended that, as per the banking practice, there cannot be a joint account with the company and that the appellant was only an authorised signatory to the bank account of STML as a director but, after his resignation in 2013, his authorisation to use the account came to an end. It was categorically stated that he never operated the account of STML after he resigned as a director. He also submitted certificates from the UCO Bank indicating that the bank account of STML was not a joint account and that he had never signed any cheque after his resignation on 19 April 2013.
Sanjay Gupta, however, admitted that he had sold a part of his shareholding in the ordinary course of his business and, subsequently, in July 2017, he purchased substantial shares from the market on the stock exchange platform again in the ordinary course of business in order to retain a minimum 10% of the total shareholding of STML for wrestling control of STML in future and in order to save STML from mismanagement by the present directors.
In its order, the SAT says, "In spite of the overwhelming evidence being filed by the Mr Gupta, the appellant, the WTM passed a confirmatory order on the strength of the bank statement provided by UCO bank, which indicated that the STML bank account was a joint account in which the appellant was a joint-holder. The WTM further observed that there was a prima-facie fund trail from this joint account to the issuance of the SMSs, which lead to manipulation of the price in the scrips of STML."
"We find that we are unable to accept the manner and approach of the WTM in deciding the matter in such a casual manner without considering the evidence on record," the SAT says, adding, "...the appellant has been linked to these fraudulent transactions on account of being allegedly a joint-holder in the STML’s bank account. This is based on a bank statement obtained by the respondent from UCO Bank for the period from 1 January 2016 to 1 June 2016. The WTM on the basis of this bank statement had issued an ex-parte interim order. No finding has been given by the WTM on the letter dated 2 January 2018 issued by the UCO Bank stating that the account of STML was not a joint account and that the appellant (Sanjay Gupta) had resigned as a director in 2013 and since then had not issued any cheque on behalf of STML. The WTM for reason best known has not considered the certificate issued by the bank and chose to ignore this vital piece of evidence."
Further, the SAT bench observed that a company is a legal entity and can only act through its board of directors or through one or more juridical persons. It says, "In the instant case, no such steps have been taken by the WTM to find out who are the authorized signatories who can transact on behalf of STML. No steps have been taken by the WTM to find out as to whether a joint account with a company can be opened in a Bank or not. No steps were taken by the WTM to check the Bank account opening form or the resolution of the Board of Directors to satisfy itself as to what kind of an account was opened by STML. In the instant case, prima-facie, we find that the bank statement is as a result of a system flaw of the Bank’s computer program. Normally, the bank prepares its own software. Various categories are shown viz, primary holders, first joint account holder and so on. In the instant case, there may not have been a column for an 'authorised signatory' and accordingly, the name of the appellant was shown as a joint-holder. Such facts should have been ascertained by the WTM instead of mechanically treating a bank statement as the gospel truth."
After the SAT order was pronounced, SEBI's senior counsel Kevic Setalvad made an appeal for waiver of the costs contending that such imposition of costs would send a ripple down the throat of the market regulator. "Be that as it may," the Bench said, adding, "We find that in the given circumstances of the case, cost is justified. The oral request of the senior counsel for the respondent is rejected."