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Latest Judgements Of The Securities Appellate Tribunal (SAT)

Security Appellate Tribunal

Case 1:  Bharat Patel & Ors. V/s SEBI

What is the distinction between an Open Offer and Regulatory Disclosures?

The said case revolves around the violation of disclosure requirements of the appellants from the accounts of Bharat Patel, a Joint Account where Minal Patel wife of Bharat Patel being the First holder and the Second holder being Bharat Patel and the PAT Financials Consultancy Ltd.

The issues were described as the transfer of shares of Jyoti Limited between the three appellants which triggered disclosures requirements in various instances pertaining to Regulation 13(4), 13(1) and Regulation 29(1) of the SAST Regulations of SEBI. The SEBI on violation of such provisions issued a fine of 15 lakhs in total for such consecutive events.

On 17 April 2017 from the Joint Account of Minal and Bharat Patel 13,35,834 shares were transferred in the account of Bharat Patel whereby his shareholding in the Company reached 8.51%, thus, triggering disclosure requirements.

On 2 August 2013 appellant Bharat Patel transferred back the same 13,35,834 shares from his account to the above referred Joint Account. This decreased the shareholding of Bharat Patel again to the extent of 7.80% which triggered disclosure requirements on appellant Bharat Patel. These shares on the same date re-transferred back to PAT Financial Ltd. from the joint account of Menal and Bharat Patel. These two consecutive events attracted the disclosure requirements by

On 5 August 2013, the PAT Financial Consultancy Ltd. transfer shares of 7,60,000 to some entity which also required disclosure requirements and again on 7 August 2013, it re-acquired back those 7,60,000 shares which also required disclosures.

The defense of the appellate on these three accounts that these were of the same family and they should be treated as persons acting in concert. The holdings were a part of consolidating holdings, so transfer and re-transfer of 13,35,834 shares will be excepted as per Regulation 10 of the SAST Regulations.

The Learned Tribunal rejected the arguments and held that the application of Regulation 10 of SAST Regulation is for exemption from open offer and not of from disclosures in shareholding. The tribunal relied on its own judgment in Akriti Global Trades Ltd. v/s SEBI. The term ‘persons acting in concert’ has nothing to do with disclosure requirements The same is to be applied in case of requirement of an open offer to be made under the regulations. It is an admitted fact that the beneficial ownership in the shares was transferred at the various points of time which required to be disclosed by the appellant either to the Company or to the stock exchanges as per the regulations. Having failed in this, they would be liable for the penalty.

Case 2:  KSBL Securities Ltd. v/s NSE Ltd.

What are the consequences of pledging a client’s money?

The appellant challenged the DAC (Disciplinary Action Committee) order date 28 November 2018 where an application for the review of an earlier order of dated 2nd August 2018 was made, whereby, it imposed a penalty of Rs.15 lakhs and suspension of trading members of the appellant from all segments of NSE for 5 days.

The allegation charged was based on an inspection from the 1-January-2017 to 7-September-2017 which are:

  1. Unexplained use of funds raised by pledging of client securities with NBFCs and Bank to the tune of Rs.19.23 cores belonging to 515 clients.
  2. Acceptance of deposits by offering fixed returns from more than 200 entities and to the tune of Rs.21.56 cores and not reflecting such receipts of sounds in the financial ledgers/ trial balance of the appellant.
  3. Discrepancy in the computation of net worth and misrepresentation of data submitted to the exchange.

The appellant in defense argued that the securities of some clients were pledged because of the margin shortfall of those clients. The appellants referred two judgments whereby a small amount of penalty of Rs.50,000 or less was imposed in a similar case. The appellants falsified the allegation of taking deposits of assured returns because it was a short term unsecured loans taken from external sources to promote its proprietary arbitrage and ALGO Trading Business.

On the third allegation, it argued that a revised net worth certificate was produced to the DAC which was duly noted by it and no action was called off against the appellant. As of the allegation of misrepresentation of data, it submitted a CA certificate to the stock exchange which had certified that no securities belonging to the credit balance of the clients have been pledged and the period of such allegation was of an earlier period.

Therefore, the appellant is not liable to such a harsh penalty of Rs.15 Lakhs and 5 days suspension. To challenge such harsh penalty it relied on Hon’ble Supreme Courts Judgement in M/s Prrsaar v/s NSE whereby a matter has been remanded to SAT to decide afresh quantum of punishment.

The defendant relied on the fact that funds of the tune of Rs.19.23 crores were raised which was in excess of its client’s obligation by pledging the securities belonging to those clients. It also pointed out that more than 350 out of 515 clients did not have any obligation/debit balance but still their securities were pledged by the appellant. On the magnitude of punishment, the respondent reasoned that the imposition of such penalty is reasoned and the appellant is liable such acts.

The learned Tribunal held and observed that the magnitude of money involved is Rs.19 crore worth of clients’ security which was pledged and the appellant also accepted Rs.21.56 crore of deposits and non-settlements of funds belonging to 601 clients, etc. However, the Tribunal accepted the fact that the appellant has complied with DAC orders and submitted a CA certificate on fulfillment of the net worth criteria.

The Tribunal held that the penalty imposed was disproportionate and modified the punishment whereby the penalty of 15 lakh and the suspension from all trading activities for 5 days was changed to non-enrolment or registration of fresh clients for a period of one month.

Case 3: Rajesh Ranka V/s SEBI

How company scrips are used to defraud shareholders?

The appeal was against an interim order dated 5 Nov 2013 and confirmatory order dated 17th May 2015 issued under the provision of S.11(1), 11(4) and 11B of the SEBI Act imposing a penalty of Rs. 50 Lakhs.

The company SMS Techsoft Ltd. allotted 3 crores shares through preferential allotment to 31 entities after splitting in the ratio of 1:10 whereby the 3 crore shares became worth of 30 crores. A lock-in period of 1 year was also imposed.

Around the time the lock-in was about to end an SMS (Short Messaging Services) was circulated to various investors recommending the purchase of the scrip of the company. This SMS undertook an inquiry of the SEBI and it was reviled that the 37 entities working as a group had developed a fraudulent device and acting together in trading of companies shares through these scrip of the company by falsely portraying fraudulent transactions as genuine preferential allotment of shares and offloading the shares allotted pursuant to the preferential allotment thereby earning illegal profits which was against the interest of genuine shareholder of the company.

Consequently SEBI through an order dated 5 November 2013 restrained the 37 entities from accessing the securities market and further prohibiting them from buying, selling or dealing in the securities market either directly or indirectly and further directed them to keep an amount of Rs. 6 crores funds with an escrow account which they had earned illegally from the sale of shares allotted on preferential basis by the company. The company has further restrained the appellant from raising any capital through the securities market either directly or indirectly.

Consequently SEBI through an interim ex-parte order dated 5 November 2013 which was later confirmed through an order dated 7th May 2015 restrained the 37 entities from accessing the securities market and further prohibiting them from buying, selling or dealing directly or indirectly in securities. It further directed them to keep an amount of Rs. 6 cores in an escrow account which they earned illegally through the sale of preferential shares of the company. The company was also restrained from raising capital from the securities market either directly or indirectly.

In addition to the above penalties, the Whole Time Member passed an order dated 27 July 2018 restraining the appellant and other entities from dealing in the securities market for a period of 10 years and also made them jointly and severally liable to an amount of Rs. 6,78,85,716/- along with simple interest calculated at the rate 12% per annum with effect from 5th November 2013 till the date of payment.

The Tribunal found out that the appellant was holding a power of attorney and was acting in concert, on behalf of the other entities. He was the whole conspirator in developing fraudulent devices by operating all the accounts of the appellants through the power of attorney. The appellant was held jointly and severally liable to disgorge the amount as per the order passed by the Whole Time Member.

The SEBI looking into the seriousness and gravity upheld the order of SEBI and the Whole Time Director and directed to deposit Rs. 6,00,11,512/- in the escrow account within 30 days and also imposed a penalty of Rs. 50 Lakh under Section 15B of SEBI Act for not complying with the order dated 5th November 2013 for a lapse of 6 years.

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