The Securities Appellate Tribunal (SAT) has pulled up market regulator Securities and Exchange Board of India (SEBI) for not having a proper mechanism to compensate investors who are victims of stock market manipulations.
Accordingly, in the light of this Tribunal’s earlier orders, and purely given facts and circumstances of this matter, we direct SEBI to compensate the appellants by Rs18,25,041, the amount they invested in the shares of VCL in 2002."
Interestingly, SEBI has asked VCL and its directors to disgorge unlawful gains of Rs4.56 crore with an interest of 10% since August 2002 for manipulation. While this huge money would go to SEBI’s kitty, SEBI pleaded helplessness to compensate the affected investors.
SAT has ordered SEBI to pay more than Rs18 lakhs to the Guptas from the amount being disgorged from VCL and connected entities, or from SEBI’s Investor Protection and Education Fund within a period of three months. SAT, however, refused any interest on the money invested by investors, Ram Kishori Gupta and Harish Chandra Gupta. It says, "No interest thereon shall be paid, since the appellants (the Guptas) should also bear part of the risk of investing in the securities market following the principle of caveat emptor.
Last year, when SEBI asked Vital Communications and its directors to pay unlawful gains of Rs4.56 crore with an interest of 10%, the Guptas appealed before SAT contending that the SEBI order in VCL matter violates the directions given by the Tribunal in its order dated 30 April 2013 as well as the mandate given to the market regulator by the SEBI Act for protecting investors.
In its 2013 order, the SAT has directed the market regulator to "consider directing the concerned entity or VCL to refund the actual amount spent by the appellants on purchasing the shares in question and with appropriate interest and as per law" if SEBI finds VCL guilty of playing fraud on investors.
However, the order passed by SEBI last year against VCL failed to redress grievances of the Guptas, which prompted them to appeal before the SAT.
The SAT bench of Justice Tarun Agarwala, DR CKG Nair and Justice MT Joshi, observed, "... it is contended that SEBI is in breach of not following the directions of this Tribunal, apart from not fulfilling its mandate of protecting the investors. This is particularly relevant in the context that the appellants have been pursuing this matter since 2002 by running from pillar to post. Apart from informing SEBI about the violations committed by the Company VCL in 2003, by means of misleading announcements they approached the National Consumer Disputes Redressal Commission (NCDRC), SEBI and SAT multiple times at very high personal cost.
On account of these complaints SEBI has now confirmed that the Company VCL has committed several violations and passed the disgorgement order, (impugned order). However, still the appellants are left in the lurch without any compensation despite the fact that they are genuine investors in the shares of VCL and despite the explicit direction for compensation by this Tribunal. "
Mustafa Doctor, senior counsel for SEBI contended that the direction contained in the Tribunal’s 30 April 2013 was further modified by the Tribunal’s order on 19 December 2013. He said, "While the first order stated that SEBI may consider compensating the appellants, the second order of this Tribunal modified it by stating that such consideration, if any, has to be as per the provisions of the law and if the circumstances so require.
Citing paragraph 32 of that order, Adv Doctor submitted that "it was virtually impossible for SEBI to provide for restitution to a large number of investors who have invested in the secondary market and incurred losses and giving compensation on a selective basis would be discriminatory as there may be a large number of affected investors and restitution to investors as a class is a complex task beyond the capacity of SEBI."
SAT, however, pulled SEBI for expressing helplessness. "While we sympathise with the submission of the learned senior counsel for the respondent SEBI, we do not agree with the helplessness of SEBI in the context like in this appeal. It is on the relentless efforts of the appellants before us that the violations made by VCL and other entities have been brought to the fore. Such efforts have been going on since the year 2002. The direction contained in our order dated 30 April 2013 though amended in December 2013 was that if violation by VCL was proved the appellants’ claim may be considered as per law. This direction has to be placed in the context of the disgorgement order issued by SEBI (impugned order) whereby Rs4.5 crore (approximately) along with interest has been ordered to be paid by VCL and other entities jointly and severally. The basic idea behind disgorgement is restitution. In the given context, we are of the view that as an investor protection measure the appellants needs to be compensated, since disgorgement without restitution does not serve any purpose."