SUPREME COURT UPHOLDS PENALTY IMPOSED BY SEBI AGAINST COMPANIES INVOLVED IN RIGGING THE SECURITIES MARKET

Recently, a two Judge Bench of the Supreme Court comprising of Justice Ajay Rastogi and Justice B.V. Nagarathna passed a Judgment dated 14-09-2022 in DKG Buildcon Pvt. Ltd. Vs The Adjudicating & Enquiry Officer, S.E.B.I. Civil Appeal No. 1742 of 2009 and R.C. Gupta & Co. Pvt. Ltd. Vs. Securities & Exchange Board of India Civil Appeal No. 5833 of 2009 and upheld the penalty imposed by the Securities and Exchange Board of India (SEBI) during its investigation in respect of unusual price movement in trading of shares of M/s Shonkh Technology International Ltd. (Company).

Facts

In the present case, the Appellants, namely, DKG Buildcon Pvt. Ltd. (Appellant No. 1) and R.C. Gupta & Co. Pvt. Ltd. (Appellant No. 2) were shareholders in the aforesaid Company. The SEBI on noticing some unusual price movement in the shares of the Company, conducted an investigation in the matter of purchase and sale of scrip and manipulation of share prices of the Company under the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (Regulations) (the said Regulations had been repealed in 2003).

SEBI Investigation

The SEBI’s investigation into the dealings of shares of the Company revealed that (a) one, M/s Shreejee Yatayat India Limited (Acquirer) had acquired the Company and took the name of the Company w.e.f. 27-07-2000; (b) thereafter, the Acquirer had allotted its shares to the Company’s shareholders including the Appellants and various other companies such as Goldfish Computers Ltd. etc; (c) then the Appellant further transferred their shares to another company namely Sai Mangal Investrade Pvt. Ltd.; (d) one, Mr. Ketan Parekh was controlling and managing the shares of all the aforesaid entities; and that (e) Ketan Parekh was involved in rigging the securities market in 2000 and 2001.

Thus, for the aforesaid reasons, SEBI passed an Order dated 12-12-2003 and prohibited Mr. Ketan Parekh and the shareholders / companies that were being controlled by him from buying, selling or dealing in securities in any manner either directly or indirectly for 14 years.

Aggrieved, the shareholders / companies filed an Appeal before the Securities Appellate Tribunal (SAT) that upheld SEBI’s Order dated 12-12-2003 on 14-07-2006. Thereafter, the Supreme Court dismissed the Appeal filed against SEBI and SAT Orders.

SEBI then initiated proceedings against such entities including the Appellants, whereby, SEBI found that (i) large number of shares of the Company were made available to various entities associated with Ketan Parekh during October 2000 and April 2001; (ii) the entities associated with Ketan Parekh then sold those shares in the securities market in a synchronised manner for creating an artificial market in the said shares; (iii) hence, it was established that the Appellants and other such entities were involved in a series of unauthorised activities starting from allotment of shares of the Company to various people including Ketan Parekh and his associated entities through a series of transfers with a view to making unfair gains, which manipulated the securities market and thereby violated Regulation 4 of the aforesaid Regulations (Prohibition against Market Manipulation); (iv) thus, by Order dated 16-10-2007, SEBI restrained them from accessing the securities market for 5 years and also prohibited them from buying, selling or dealing in securities in any manner either directly or indirectly for 5 years. 

Further Proceedings leading to filing of present Civil Appeal No. 1742 of 2009 by Appellant No. 1

SEBI had earlier issued a Letter dated 02-07-2001 and a Summons on 27-08-2001 to the Appellant No. 1, DKG Buildcon Pvt. Ltd. asking them to furnish certain details and documents pertaining to its shareholding in the Company and its involvement in the aforesaid transactions. Accordingly, the Appellant No. 1 responded to the SEBI and thereafter, exchanged further correspondences with each other. But the Director of the Appellant No. 1 could not be physically present before SEBI Investigating Officer for the inquiry and as a result, SEBI passed an Ex-Parte Order dated 28-11-2003 against the Appellant and imposed a penalty of Rs. 1 Crore under Section 15A (a) of the SEBI Act 1992 as amended in 2002 (Penalty for failure to furnish information, return, etc).

Aggrieved, Appellant No. 1 filed an Appeal before SAT on 06-11-2004 against the Ex-Parte Order dated 28-11-2003, which was dismissed by SAT vide Order dated 01-09-2006 as it was filed beyond statutory period of 45 days and no reasonable explanation was given for the delay caused in filing Appeal.

Aggrieved, the Appellant No. 1 approached the Supreme Court, which allowed the Appeal, vide Order dated 04.08.2008, on the ground that it will deposit cost of Rs. 1,25,000/- to SEBI. Upon compliance, SAT heard the Appeal and upheld SEBI’s Ex-Parte Order dated 28-11-2003, vide Order dated 07-01-2009. Hence, aggrieved, the Appellant No. 1 filed the present Civil Appeal No. 1742 of 2009 before the Supreme Court.

Further Proceedings leading to filing of present Civil Appeal No. 5833 of 2009 by Appellant No. 2

Similar to Appellant No. 1’s case, Appellant No. 2 initially failed to respond to the Summons issued by SEBI, but later responded to SEBI’s Show Cause Notice dated 15-09-2003 and furnished requisite details. The Adjudicating Officer of SEBI passed an Order dated 31-12-2003 and held that Appellant No.2 failed to respond to its Summons and hence, imposed a fine of Rs. 1 Crore under Section 15A (a) of SEBI Act 1992 as amended in 2002 (Penalty for failure to furnish information, return, etc).

Aggrieved, the Appellant No. 2 filed an Appeal before SAT on 05-10-2004 against SEBI’s Order dated 31-12-2003. The SAT dismissed the Appeal vide Order dated 10-11-2006 on the ground that it was filed beyond the statutory period of 45 days and no reasonable explanation was given for the delay caused in filing the Appeal.

Aggrieved, the Appellant No. 2 approached the Supreme Court, which allowed the Appeal on the ground that it will deposit cost of Rs. 1,25,000/- to SEBI. Upon compliance, SAT heard the Appeal and upheld SEBI’s Order dated 31-12-2003, vide Order dated 07-01-2009. Hence, aggrieved, the Appellant No. 2 filed the present Civil Appeal No. 5833 of 2009 before the Supreme Court.

Appellants’ Claims

That the Appellants’ main claim was that as per Section 15A (a) of SEBI Act 1992, the maximum amount of penalty leviable was Rs. 1,50,000/- for each day of failure. But under the SEBI (Amendment) Act, 2002 that was brought in force on 29-10-2002, the maximum amount of penalty leviable was increased to Rs. 1 Crore for each day of failure. The Appellants claimed that assuming that they were liable to pay penalty, they had first violated the SEBI’s Summons in August 2001 and June 2002 respectively, thus, they would fall under the unamended provisions of 1992 Act and not 2002 Amendment Act. In other words, the amended provisions cannot be given a retrospective effect to the offence committed, if any, prior to such amendment. Hence, Rs. 1 Crore penalty imposed under the 2002 Amendment Act was claimed to be excessive and unsustainable.

Supreme Court

The Apex Court passed a Common Judgment dated 14-09-2022 in both the aforesaid Appeals and made the following observations:

1) That the present dispute has arisen in the background of SEBI’s findings vide Order dated 16-10-2007 that the Appellants were involved in a series of unauthorised activities and thereby, manipulated securities market and violated Regulation 4 of the aforesaid Regulations (Prohibition against Market Manipulation). However, as the Appellants have not filed any Appeal against the said Order dated 16-10-2007 of the SEBI, hence, it has become final qua the Appellants.

2) Further, prior to passing such Order dated 16-10-2007, during the ongoing investigation, SEBI called upon the Appellants to furnish details and records necessary for the purpose of such investigation, which they failed to respond to. Hence, owing to the said non-compliance, SEBI passed the Order dated 28-11-2003 in respect of Appellant No. 1 and Order dated 31-12-2003 in respect of Appellant No. 2 with the finding that the Appellants intentionally failed to respond to the SEBI’s Summons and thus SEBI imposed a penalty of Rs 1 Crore on each of them.

3) That the Appellant No. 1 and 2 had first violated the SEBI’s Summons in August 2001 and June 2002 respectively. Thereafter, SEBI issued fresh Summons dated 01-04-2003 and 09-04-2003 respectively, which was again not complied by Appellants. Hence, non-compliance of fresh Summons constituted fresh offence committed by Appellants. Thus, the Supreme Court held that the amended provisions of SEBI (Amendment) Act, 2002 would apply while levying the penalty on the Appellants in respect of Summons issued subsequent to the 2002 Amendment. As a result, the Apex Court upheld the penalty of Rs. 1 Crore levied on each of the Appellants.

Thus, taking into consideration the severity of offence committed by the Appellants and thereupon, non-compliance of Summons issued by SEBI, thereby, obstructing the smooth investigation, the Supreme Court held that the quantum of penalty imposed is proportionate and justified. As a result, Appeals were dismissed.

 

Harini Daliparthy

Senior Associate

The Indian Lawyer