Securities Appellate Tribunal
Gagan Rastogi vs Sebi on 12 July, 2019
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved On: 26.02.2019
Date of Decision : 12.07.2019
Misc. Application No. 206 of 2017
And
Misc. Application No. 318 of 2017
And
Appeal No. 91 of 2015
Gagan Rastogi
2 Leonic Hill Road,
Unit 02-04, Singapore- 239 192 ...Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai - 400 051 ...Respondent
Mr. Somasekhar Sundaresan, Advocate i/b Ms. Sonu Tandon
for the Appellant.
Mr. Gaurav Joshi, Senior Advocate with Mr. Aditya Mehta,
Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K.
Ashar & Co. for the Respondent.
WITH
Misc. Application No. 172 of 2015
And
Appeal No. 219 of 2015
Asia Texx Enterprises Limited
1805 Harbour Industrial Center,
10 Lee Hing Street, Apleichau-Hong Kong ...Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai - 400 051 ...Respondent
2
Mr. Somasekhar Sundaresan, Advocate i/b Ms. Sonu Tandon
for the Appellant.
Mr. Gaurav Joshi, Senior Advocate with Mr. Aditya Mehta
and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for
the Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Dr. C.K.G. Nair, Member
Per: Dr. C.K.G. Nair
Misc. Application No. 172 of 2015
In
Appeal No. 219 of 2015
There is a delay of 14 days in filing the present appeal.
Cause shown is sufficient. The delay in filing the appeal is
condoned and the delay condonation application is allowed.
Appeal Nos. 91 of 2015 and 219 of 2015
1.These appeals have been filed to challenge the order of the Whole Time Member (hereinafter referred to as "WTM") of Securities and Exchange Board of India (hereinafter referred to as "SEBI") dated December 31, 2014. By the said order, inter alia, the appellants have been directed to disgorge, jointly and severally, an amount of US $ 92 million along with simple interest at the rate of 6% per annum for the period from March 27, 2009 till December 31, 2014, within 45 days from the date 3 of the impugned order. Further, the appellants as well as six other entities have been restrained from accessing the capital markets directly or indirectly and from dealing in securities or instruments with Indian securities as underlying in any manner whatsoever for a period of 10 years from the date of the order.
2. The impugned order is arising from certain violations noticed by SEBI relating to the issue of Global Depository Receipts ("GDRs") by Cals Refineries Limited ("hereinafter referred to as "Cals"), a listed Indian company, in December 2007 and certain subsequent transactions between Cals and Asia Texx Enterprises Limited (hereinafter referred to as "Asia Texx", (Appellant in Appeal No. 219 of 2015) in 2009. Appellant in Appeal No. 91 of 2015 is the majority shareholder and beneficial owner of Asia Texx. Since both these appeals are challenging the same impugned order, by consent of parties, both the appeals are heard together and disposed of by this common order.
3. The facts relevant to these appeals are the following:-
a) On December 11, 2007 one M/s Honor Finance Limited (hereinafter referred to as "Honor"), (registered in the British Virgin Islands on 4 October 5, 2007) beneficially owned by Mr. Sanjay Malhotra, entered into a Credit Agreement with a Portuguese bank namely;
Banco Effisa (hereinafter referred to as "Banco"). Under this Agreement Honor received a loan of US $ 200 million from Banco for the purpose of subscribing to a GDR issue by Cals.
b) On the same day Banco and Cals entered into an Account Charge Agreement whereby the GDR subscription proceeds worth US $ 200 million were charged as security for Banco's loan to Honor. On December 12, 2007 the GDR issue of Cals was opened and declared fully subscribed by its lead manager by 10 foreign investors.
c) By virtue of this arrangement, that is the Credit Agreement as well as Account Charge Agreement, the parties concerned (Cals, Honor and Banco) were able to use the proceeds of GDR subscription in a circular fashion. Honor used the amount of US $ 200 million loan to 5 subscribe to the Cals GDR issue and later on proceeds from selling the said GDRs in the Indian market between December 18, 2007 and October 07, 2008 were used to refund the loan partly. Cals was able to use the GDR proceeds in their account with Banco only to the extent of such refunds made by Honor to Banco in view of the Account Charge Agreement.
d) On December 15, 2008 the Credit Agreement was extended up to June 15, 2009 in view of the outstanding loan of Honor to the tune of US $ 91.8 million. On January 13, 2009 the Account Charge Agreement was also extended up to June 15, 2009,
e) An Agreement dated February 05, 2009 was signed by Cals and Asia Texx for the purchase of certain refinery machinery worth US$ 290 million by Cals from Asia Texx, an entity incorporated in Hong Kong in May 2008.
f) On March 27, 2009 Cals paid an amount of US $ 92 million (US$ 90 million + US$ 2 million) 6 to Asia Texx. Asia Texx, in turn, transferred the amount of US $ 92 million to Honor as payment for the 25 million GDRs of Cals purchased from Honor on March 26, 2009.
Honor used US$ 92 million to repay the balance loan taken from Banco. All these payments; US $ 92 million by Cals to Asia Texx, the payment of the same amount by Asia Texx to Honor and repayment of the outstanding loan by Honor to Banco; all these three events took place on the same day on March 27, 2009, through the accounts held by these entities in Banco.
g) Though, the agreement between Cals and Asia Texx dated February 05, 2009 was purportedly for purchase of refinery machinery no machinery was received by Cals. Neither did they receive any refund of US $ 92 million paid by Cals to Asia Texx as advance. On the other hand, Asia Texx received 25 million GDRs from Honor which was transferred free of cost to Gagan Rastogi, the beneficial owner 7 of Asia Texx and son of a Director of Cals Deep Rastogi.
4. This Tribunal dismissed three appeals arising from the order impugned in these appeals filed by Sarvesh Goorha, D. Sundararajan and Deep Kumar Rastogi by our order dated October 12, 2017. Cals' appeal challenging a similar order passed by SEBI dated October 23, 2013 was also dismissed by us vide the same order. We found that the charges relating to Cals and some of the directors at the relevant time including Sarvesh Goorha, D. Sundararajan and Deep Kumar Rastogi were found to be correct and thereby sustained the SEBI orders dated October 23, 2013 and December 31, 2014 in respect of those parties and thereby dismissed all those appeals.
5. We also note that a consent application was filed by appellants in these appeals before SEBI vide application dated November 22, 2013, which was rejected by SEBI on June 10, 2014.
6. The learned counsel Shri Somasekhar Sundaresan appearing on behalf of the appellants fairly submitted that the appellants herein are pressing only the second direction in the 8 impugned order, that is the direction to disgorge an amount of US $ 92 million along with interest. The first direction, that is restraining the appellants, among others, for 10 years from the Indian securities market, is not pressed in view of this Tribunal's order dated October 12, 2017. Moreover, since no party has challenged the said order of this Tribunal the direction relating to 10 years restraint has attained finality.
7. The learned counsel for the appellants thereafter made the following submissions:-
a) For disgorgement as per explanation to 11B of the SEBI Act, SEBI must prove possession of wrongful gains in the hands of the person concerned; quantify the amount of the wrongful gain; and then proceed to disgorge an equivalent amount, in accordance with law.
b) At the heart of the case is a fraudulent GDR issue whereby no genuine capital was actually raised. The only purported subscriber to the US $ 200 million GDR issue was Honor, an entity incorporated outside India and beneficially owned by Mr. Sanjay Malhotra, a 9 promoter of Cals. The subscription was purportedly financed by Banco. Honor's repayment obligations were secured by an Account Charge Agreement, whereby Cals provided the funds purportedly raised from the GDR issue as security for the loan given by Banco to Honor. These funds and the GDRs issued were held by Banco as security for the loan granted to Honor. The GDRs were sold from time to time in the Indian market and the proceeds were used by Honor to repay Banco, which would then correspondingly release the charge by a corresponding amount to Cals. In this manner US $ 108 million was released to Cals. For the balance US $ 92 million, the parties executed an extension of the arrangement and devised a round-tripping of funds emanating from Banco and ending up with Banco all on a single day, with the entries being posted from account to account all of which were opened by the parties and held with Banco.10
c) In the instant case, not a single rupee of the alleged wrongful gain is in the possession of the appellants, a fact clearly well known to SEBI and demonstrated from the material on record. The record is clear that Cals did not suffer any loss, the entire GDR issue was fictitious, with the securities being issued without receipt of real funds. The appellants have not received anything out of the US $ 108 million out of the GDR issue that did go to Cals as and when Honor repaid to Banco, the loan taken to purportedly subscribe to the GDRs. The appellants do not hold the US $ 92 million that purportedly went out of Banco purportedly to Cals, and purportedly from Cals to Asia Texx and purportedly from Asia Texx to Honor, and thereafter, purportedly from Honor, back to Banco. Therefore, there is no question of the appellants having been enriched by the sum of US $ 92 million at all.
d) The above contentions are supported by SEBI's own investigation report. Banco's defence 11 filed in a claim (No: 2013 Folio 1656) made by claimants before the Commercial Court, UK who had purchased GDRs from Honor, whereby it is clearly documented by a statement on oath by Banco that the sum of US $ 92 million was round-tripped and was destined never to leave Banco custody and control. Statements of bank accounts held by each of Cals, Asia Texx and Honor with Banco would also reveal this fact. Asia Texx's bank account opening request with Banco was on February 05, 2009 and which was opened on March 25, 2009 just days before March 27, 2009, which account was the one through which the round-tripping was effected.
e) The impugned order, contrary to the record and explicit findings of investigation, renders a blatantly erroneous finding of enrichment of Asia Texx by reason of the refinery purchase contract dated February 05, 2009 by which US $ 92 million was purportedly received on paper by Asia Texx, ignoring the purported GDR purchase dated March 26, 2009 by which the 12 funds purportedly received on paper by Asia Texx also was paid out on paper to Honor on March 27, 2009 and ignoring the purported payment of the very same US $ 92 million by Honor to Banco, also on March 27, 2009.
f) The salient portions of the findings in the investigation report are to be probed further.
SEBI called for data regarding the transaction with Asia Texx. It was observed that the contract signed by Cals was to disguise the round tripping of funds to settle the loan taken by Honor to subscribe to GDRs. Banco informed SEBI that the loan granted to Honor was settled throughout the financing period through earnings received by Honor from the sale of the GDRs of Cals in the Indian market which were received by Honor. From the data obtained from Banco, it is observed that Honor had succeeded in selling GDRs to various entities during the period December 18, 2007 till October 07, 2008. However, as on December 15, 2008, an amount of US $ 13 9,18,00,000 (US$ 91.8 million) was still outstanding in the loan account of Honor.
g) Subsequent to signing the extension agreements, on March 26, 2009, Asia Texx acquired 2,50,00,000 GDRs at the rate of US $ 3.68 amounting to US $ 9,20,00,000. Cals had signed a contract with Asia Texx for acquisition of refinery equipment and paid US $ 9,20,00,000 to Asia Texx as advance and the balance amount to be paid within 180 days. It is now observed that the contract signed by Cals was to disguise the round tripping of funds to settle the loan outstanding in the name of Honor with Banco. From the above sequence of events, it is thus observed that the transaction between Cals and Asia Texx appears to have been structured to settle the outstanding liability of Honor to Banco using funds of Cals. Thus the liability of the promoter of Cals (liability of Mr. Sanjay Malhotra through Honor) was discharged using the funds of Cals.
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h) Therefore, learned counsel for the appellants contended that SEBI investigation report proves the following:- i) the alleged movement of a sum of US $ 92 million was round-tripping from Banco to Banco to disguise the repayment obligation of Honor and Mr. Sanjay Malhotra to Banco. ii). the liability that got discharged therefore, was the liability of Honor, beneficially wholly owned by Mr. Sanjay Malhotra. iii). Therefore, it can never be held that the appellants were the beneficiary of any wrongful gain or loss averted in the sum of US $ 92 million. On the contrary, the SEBI investigation report explicitly finds that the liability discharged i.e. the loss averted, was that of Honor, wholly owned by Mr. Sanjay Malhotra. It is noteworthy that Honor and Mr. Sanjay Malhotra did not participate in the SEBI proceedings. It is on record that the show cause notices issued to them returned undelivered and SEBI moved forward with whoever replied and have now fastened the disgorgement liability on the appellants. 15
i) The precise sum held by Cals subject to Banco charge was US $ 91,800,000. It is admitted that Banco knew that sum of US $ 92 million to be paid to Asia Texx by Cals would subsequently be paid to Honor and in part used by Honor to repay Banco. It is further admitted that Banco would not otherwise have been willing to permit the payment of Cals funds subject to the Account Charge Agreement.
j) Clearly, Honor and its owner Mr. Sanjay Malhotra were unable to sell any GDRs to repay the loan to Banco after October 2008. Further as on December 15, 2008, an amount of US $ 91.8 million was still outstanding. The Credit Agreement's initial tenure had expired on December 15, 2008, so the final repayment date was extended for a period of six months until June 15, 2009. The Account Charge Agreement too was extended until June 15, 2009. Thereafter on March 27, 2009, the round-tripping of funds from Banco to Banco was effected, neither leaving anything in 16 possession of the appellants nor releasing a single dollar from the possession of Banco.
k) Therefore, every averment in the impugned order about purported unjust enrichment of the appellants at the expense of Cals is far from being borne out by the material on record.
l) The concept of disgorgement is based on the principle that a person who is in possession of wrongful gains by which he is enriched may be asked to part with amounts equivalent to such gains. The concept of unjust enrichment has been fairly well evolved by way of case law and academic literature. For tracing enrichment and restitution of proceeds, the following three ingredients are to be presupposed- First that person concerned has been enriched; Second, that he has been enriched at the expense of the victim; and Third, that it would be unjust to allow him to retain the benefit. Moreover, commentary from Prof. Peter Birks, an eminent authority on the subject, and who has been cited in various 17 judgments of the Hon'ble Supreme Court of India would show that it would be necessary to demonstrate that the appellants' alleged gain must represent a loss to Cals. In other words, a subtractive enrichment should be by subtraction or taking from Cals assets.
m) Therefore, at the heart of the doctrine is the notion of restoration of benefit that which justice does permit one to retain. From the facts it is clear that Cals did not at all have US $ 92 million in its possession on March 27, 2009. Banco did. The funds purportedly moved around three accounts- Cals to Asia Texx and then back to Banco all the same day.
n) It could be seen from the foregoing that the purported transaction for the funds to move from the Cals account in Banco to the Asia Texx account in Banco is numbered after the purported transaction for the funds to move from Asia Texx account in Banco to Honor's account in Banco. Yet, it is a matter of record that prior to the receipt of the US $ 92 million, 18 there was no money in the newly opened account held by Asia Texx with Banco. This would further underline and corroborate that admitted position of round-tripping of funds from Banco to Banco.
o) Another facet of the need to apply the subtraction principle is that the jurisdiction to disgorge would be an equitable remedy and it is aimed at ensuring that the person in possession of wrongful gains does not continue to enjoy the same. Unless one demonstrates as to who gained and at whose expense, it would evidently lead to an absurd consequence of the same amount being disgorged from multiple persons. In other words, it would lead to the absurd proposition that even someone who is not in possession of funds could be asked to pay contrary to the Explanation to Section 11B of the SEBI Act.
p) In the instant case, Cals did not even lose US $ 92 million since to begin with the GDR issue itself was fake; and to follow up, the funds 19 were always with Banco and remained with Banco and in fact the funds never left the possession of Banco. Banco had lent US $ 200 million and received US $ 200 million although it was not possible for Honor to use just the GDR proceeds to repay Banco.
q) The impugned order ignores all these factors and proceeds on the untenable footing that there has been an enrichment of Asia Texx to the extent of US $ 92 million.
r) It is settled law that in discerning multi-stage transaction that constitute one composite single transaction, the cumulative effect and whole of transaction has to be seen and not just part of it.
s) Disgorgement is an equitable remedy. The Asia Texx transaction evidently being a mere book entry for US $ 92 million and the appellants not being in possession of the sum of US $ 92 million, there can never arise the question of disgorging the same from the hands of the appellants.
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t) At worst, the receipt of 25 million GDRs, which is held to be a device for having paid US $ 92 million to Honor is the only asset with the appellants from the allegedly wrongful transaction. It is a matter of record that from the 25 million GDRs, Asia Texx had sold 2.8 million GDRs and the realization value of US $ 8,96,000 was infused into Cals. The appellants have all along been ready and willing to surrender the remaining GDRs/ underlying shares.
8. Learned counsel for the appellants relied on a large number of judgements to buttress his contentions. Citing Kokesh v/s Securities and Exchange Commission 2017 SCC OnLine US SC 58 (No. 6-529 decided on June 05, 2017) it was contended that disgorgement is a penal provision and hence limitation would apply. Though the explanation to 11B of the SEBI Act was inserted in 2014, it envisages that disgorgement should be a direction to any person who made profit and such a disgorgement should be an amount equivalent to the wrongful gain made. The learned counsel also relied on the following judgements to contend that Section 11B of the SEBI Act has 21 been always a remedial provision and not a punitive provision. Sterlite Industries (India) Ltd. v/s SEBI 2001 SCC OnLine SAT 28 (Appeal No. 20 of 2001 decided on October 22, 2001), Videocon International Ltd. v/s SEBI 2002 SCC OnLine SAT 14 (Appeal No. 23 of 2001 decided on June 20, 2002), Rakesh Agarwal v/s SEBI 2003 SCC OnLine SAT 38 (Appeal No. 33 of 2001 decided on November 03, 2003), *612 Charity Commission for England and Wales v Mountstar (PTC) Ltd. and Ors. [2016] EWHC 876 (Ch) April 21, 2016. Irrespective of whether some of these judgements are arising out of tax statutes etc. their ratio squarely applies to 11B order of SEBI in correctly interpreting the economic reality and factual reality. Accordingly, all the transactions have to be considered as a single composite transaction and SEBI cannot arbitrarily choose one point or one layer and apply disgorgement. The appellants also relied on Mafatlal Industries Ltd. and Ors. v/s Union of India (UOI) and Ors. SCC (Civil Appeal No. 3255 of 1984 decided on December 12, 1996) to further their argument that the entire case of SEBI is founded on the premise that the appellants had gained at the expense of Cals when in reality the entire GDR issue was a sham. There was no economic gain for Cals; there was no economic gain for the appellants as well. Hence the need for taking economic reality into account. Citing 22 Sharad Birdhichand Sarda v/s State of Maharashtra (1984) 4 SCC 116 (Criminal Appeal No. 745 of 1983 decided on July 19, 1984) and SEBI v/s Kishore R. Ajmera (2016) 6 SCC 368 (Civil Appeal No. 2818 of 2008 decided on February 23, 2016) it was contended that whether in Criminal or in Civil law the burden of proof has to be established at a sufficiently strong level while proving an accusation and that onus rest on the shoulders of the respondent SEBI. Further as in Kishore R. Ajmera (supra) though a preponderance of probability may be sufficient to prove a civil liability the respondent has a duty to consider the proximate facts and circumstances surrounding the events on which the charges are levied and thereafter reach a reasonable and fair conclusion which is not done in the instant matter.
9. The appellant, in rejoinder, distinguished a number of judgements relied on by the respondent SEBI in the impugned order. Accordingly, S.P. Chengalvaraya Naidu v/s Jagannath and Ors. (1994) 1 SCC 1 (Civil Appeal No. 994 of 1972 decided on October 27, 1993, K. N. Mehra v/s State of Rajasthan AIR 1957 SC 369 (Criminal Appeal No. 51 of 1955 decided on February 11, 1957), Shri Krishan Kumar v/s Union of India AIR 1959 SC 1390 (Criminal Appeal No. 114 of 1957 23 decided on May 21, 1959). Mahabir Kishore v/s State of Madhya Pradesh (1989) 4 SCC 1 (Civil Appeal No. 1826 (N) of 1974 decided on July 31, 1989, SEC v/s A Shapiro, 494 F. 2d 1301, Commonwealth Chemical Securities Inc, 574 F. 2d 90, Dushyant N. Dalal v/s SEBI 2010 SCC Online SAT 328 and SEC v/s Contorinis 743 F. 3d 296, relied on by SEBI does not help the respondent SEBI, it was contended by the learned counsel for the appellants.
10. The learned senior counsel Shri Gaurav Joshi, appearing on behalf of the respondent SEBI, on the other hand, submitted that as is clear from the impugned order and as upheld by this Tribunal in the Cals order (supra) the entire policy purpose of attracting foreign exchange through issue of GDR was vitiated by some of the entities who manipulated the GDR issue process. The instant case is one of the many such instances. The leaned senior counsel, in the aforesaid background, further submitted as follows:-
a) The appellants argument that the entire GDR process was vitiated and no genuine capital has been raised so as the appellants to receive any real benefits is fallacious, because, finding that 24 no genuine capital was raised is in the context of one single entity namely, Honor alone subscribing to the GDR issue by Cals.
b) There is no dispute on the facts that US$ 92 million was given by Cals to Asia Texx which received 25 million GDRs from Honor and transferred the same to Gagan Rastogi and these entities, therefore, got unjustly enriched at Cals expenses cannot be disputed.
c) The appellants contention that the transaction between i) Cals and Asia Texx, ii) Asia Texx and Honor and iii) Honor and Banco were structured as a single transaction under which Asia Texx did not receive any benefit has no merit since clearly these are different transactions entered into by the parties concerned. In these transactions Asia Texx received 25 million GDRs of Cals which was in turn transferred by Asia Texx to Gagan Rastogi, beneficial owner. Even if it is assumed that it was a single transaction it is clear that despite making a payment of US$ 92 25 million to Asia Texx, Cals received no refinery machinery from Asia Texx. On the other hand, it is on record that Asia Texx received 25 million GDRs of Cals from Honor. In this context, it is also important to note the statement made by Banco before UK Commercial Court that Banco was aware that an amount of US$ 92 million was being paid by Cals to Asia Texx for Cals refinery project and that Asia Texx was willing to make payment of the same amount to Honor to purchase the GDRs.
d) The transaction between Cals and Asia Texx was a related party transaction [a finding upheld by this Tribunal's order (supra)] which ought to have been disclosed by Cals, but was instead falsely portrayed as a normal arms length commercial transaction. The money required for Asia Texx to purchase the 25 million Cals GDRs from Honor came from Cals itself as Asia Texx did not have any money of its own to purchase the GDRs. The effect of the transaction was to fraudulently 26 siphon monies out of Cals to enrich Gagan Rastogi (a promoter of Cals through his holding in SRM Exploration and being son of Deep Rastogi, Director of Cals) under the pretext of a payment of setting up a Refinery Project. Gagan Rastogi benefited as he received the 25 million GDRs free of cost. The entire transaction between Cals and Asia Texx is inextricably linked to the GDR process.
Gagan Rastogi and Asia Texx were the recipients of wrongful /ill-gotten gains of US $ 92 million.
e) As per the annual report of Cals for the year 2008-2009, as a Director of Cals, Deep Rastogi admittedly had significant influence over that company at the time when the agreement with Asia Texx was signed, in February 2009.
Gagan Rastogi who was the beneficial owner of Asia Texx is the son of Deep Rastogi. Asia Texx, therefore, was clearly an enterprise owned and significantly influenced by a relative of the Director and key management 27 personnel of Cals viz. Deep Rastogi. The transaction between Cals and Asia Texx pursuant to the agreement between them for purchase of refinery equipment, which was portrayed as a commercial transaction, was clearly a related party transaction in accordance with AS-18 with Clause 32 of the Listing Agreement. Asia Texx has acted fraudulently in the matter. Being the beneficial owner of Asia Texx, Gagan Rastogi (son of Deep Rastogi) was clearly the beneficiary of the fraudulent transaction. Hence, the finding that the appellants have violated various provisions of PFUTP Regulations and wrongfully gained cannot be faulted.
f) On the basis of the aforesaid findings, the impugned order prohibits the appellants from accessing the Indian capital markets for a period of 10 years and directs the appellants to jointly and severally disgorge the unlawful gain of US $ 92 million made by virtue of the fraudulent transaction between the appellants 28 and Cals, which is fully in accordance with SEBI Act, Rules and Regulations.
11. The learned senior counsel for the respondent while distinguishing the orders cited by the appellants relied on various judgements to substantiate his contentions. Citing the judgement of S.P. Chengalvaraya Naidu v/s Jagannath and Ors. (1994) 1 SCC 1 (Civil Appeal No. 994 of 1972 decided on October 27, 1993, it was submitted that since the appellant, Gagan Rastogi, vide his affidavit dated July 19, 2017 made a false statement about his lack of association/ connection with Cals (while he was actually a shareholder of SRM Exploration Pvt. Ltd. which in turn had become the Promoter of Cals), the appellant Gagan Rastogi does not deserve any relief and such a false declaration alone is sufficient to dismiss the appeal forthwith. Further quoting Section 23 of the Indian Penal Code which contains the definition of "wrongful gain" and "wrongful loss" as under:
"Wrongful gain"- "Wrongful gain" is gain by unlawful means of property to which the person gaining is not legally entitled. "Wrongful loss".- "Wrongful loss" is the loss by unlawful means of property to which the 29 person losing it is legally entitled. Gaining wrongfully, losing wrongfully.- A person is said to gain wrongfully when such person retains wrongfully, as well as when such person acquires wrongfully. A person is said to lose wrongfully when such person is wrongfully kept out of any property, as well as when such person is wrongfully deprived of property"
the learned senior counsel submitted that what is important is whether one has acquired any gain wrongfully, retention of the said gain is not important. This is further emphasised by the judgements of Hon'ble Supreme Court in K. N. Mehra v/s State of Rajasthan AIR 1957 SC 369 (Criminal Appeal No. 51 of 1955 decided on February 11, 1957), Shri Krishan Kumar v/s Union of India AIR 1959 SC 1390 (Criminal Appeal No. 114 of 1957 decided on May 21, 1959). Further, in Mahabir Kishore v/s State of Madhya Pradesh (1989) 4 SCC 1 (Civil Appeal No. 1826 (N) of 1974 decided on July 31, 1989 the Hon'ble Supreme Court has held that "Enrichment may take the form of direct advantage to the recipient such as by the receipt of money or indirect one for instance where inevitable expense has been saved.
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12. Accordingly it was contended by the learned senior counsel for SEBI that any gain made, loss averted or expense saved by a person by contravention of the SEBI Act and Regulations can be disgorged by SEBI. The impugned order rightly directs Gagan Rastogi and Asia Texx to jointly disgorge the sum of US$ 92 million as this was a wrongful gain made, loss averted and expense saved by them as is evident from the following:
"i) Asia Texx received US$ 92 million from Cals purportedly for the purchase of refinery machinery. However, Cals did not receive any machinery from Asia Texx despite making this payment. The US$ 92 million was therefore clearly a wrong gain made by Asia Texx.
ii) Alternatively, Asia Texx saved the expense or averted the loss of providing Cals with refinery machinery for which it received US$ 92 million.
iii) Gagan Rastogi and Asia Texx also received 25 million GDRs, using the 31 same US$ 92 million which constitutes a wrongful gain."
13. It was further submitted by the learned senior counsel that in SEC v/s A Shapiro, 494 F. 2d 1301 it has been held by the US Court of Appeal that the reach of disgorgement would include not only actual profit received but even "paper" profits. Similar view was held by this Tribunal in the matter of Dushyant N. Dalal v/s SEBI 2010 SCC Online SAT 328 where it speaks about an order of disgorgement on "notional profit" or unrealized gains. Such a view was also held in SEC v/s Commonwealth Chemical Securities Inc, 574 F. 2d 90. In SEC v/s Contorinis 743 F. 3d 296, the disgorgement provision was further extended when it was held that even the gains from insider trading executed by a fund manager on behalf of a fund could also be disgorged though it was not a personal gain of the fund manager. Moreover, unjust enrichment may also be prevented by requiring the violator to disgorge the unjust enrichment he has procured for a third party. As such when third parties have benefitted from illegal activity, it is possible to seek disgorgement from the violator, even if that violator never controlled the funds. The logic of this, as more fully articulated above, is that to fail to impose disgorgement on such violators would allow them to unjustly enrich their affiliates. 32
14. The crux of the rather extensive and elaborate arguments and voluminous case law advanced by the learned counsel for the appellants is that the appellants are not a beneficiary of US $ 92 million allegedly transferred from the account of Cals kept with Banco. According to the appellant it is evident that no money has effectively come to the account of the appellants since the transfer of funds from Cals account to the account of Honor took place on the same day, March 27, 2009, through just account entries. The entry in the account of the appellant Asia Texx was just like that, only an account entry. Accordingly, the appellants did not revive any money and made any unlawful gain in the absence of which no disgorgement could have been ordered by SEBI.
15. We do not agree with the contentions of the appellants. It is clear from the records that there was an agreement dated February 05, 2009 between Cals and Asia Texx. It is important to note that in this agreement for purchase and sale of "certain processing units and/or equipment" for the oil refinery project Asia Texx is described as the "owner" and Cals as the "buyer". There is no record or evidence to show the contentions of Asia Texx incorporated in May 2008 had such plants/ machinery in its possession nor it even had any experience on oil refinery 33 matters. Despite receiving an advance of US$ 92 million the agreement was never honoured by Asia Texx. Further, even if, the transfer of funds by Cals was done as account entries on the same day, March 27, 2009 it is clear that the funds were transferred from Cals account to Asia Texx's account which in turn got transferred to the account of Honor. If the appellants had no role in the entire episode, it is inexplicable as to why the appellant Asia Texx got 25 million GDRs of Cals from Honor which was subsequently transferred to its beneficial owner Gagan Rastogi (Appellant) free of cost. These transfer documents show that the value of GDRs at the relevant time was to the tune of US $ 92 million at US$ 3.68 per GDR.
16. In the context of the transaction between Cals and Asia Texx the relationship between these parties need to be emphasised. One of the arguments advanced by the appellants is that they were arms length parties, though this was found to be factually wrong and stated explicitly so in this Tribunal's order dated October 12, 2017 (supra). Based on further records made available now it is clear that before even December 2007 appellant Gagan Rastogi was very much part of Cals' promoter group SRM as is clear from the Email dated June 13, 2006 from Spice Jet (part of the SRM Group) confirming receipt of funds 34 to the tune of more than ` 8.08 crore from Gagan Rastogi and allotting securities worth ` 8.33 crores leaving a balance of ` 24.75 lakhs in respect of SRM Exploration Pvt. Ltd., though the shares of SRM is claimed to be credited to the appellant's account on December 17, 2007, five days after the issue of GDR by Cals. In the GDR listing particulars filed by Cals with Luxembourg Stock Exchange on December 12, 2007 Gagan Rastogi was shown as a shareholder of SRM Exploration Pvt. Ltd. to the extent of 18.2%. Similarly, on December 17, 2007 at 06:39 a message was sent from Spice Energy (part of the SRM Group) to Gagan Rastogi and few others whereby it was stated that 'Mr. Gagan Rastogi has been designated as the Project Leader' on the DRC Iron Ore Project'. All this prove a deep and substantial engagement of Gagan Rastogi with the Spice Energy/ SRM Group much earlier to the actual allotment of shares of SRM Exploration Pvt. Ltd. claimed to be on December 17, 2007. In any case, it is to be noted that the entire process of allotment and of crediting shares to the tune of 33% of the equity capital of the company (SRM Exploration) cannot be done in a matter of 4 to 5 days as claimed by the appellant that he became a promoter of SRM Group only subsequent to the issue of Cals GDR on December 12, 2007 and that too after 35 the information that Cals GDR issue had been successfully subscribed was furnished to the BSE Limited by Cals.
17. Appellants claim that they were not associated with the GDR issue is untenable. An issue process is over only when the proceeds from the issue is fully utilized as planned. GDR issue is akin to an IPO or FPO, except that in this case of GDR it is issued to investors abroad. In the case of IPO/FPO utilization of proceeds are also monitored by SEBI and in case of violation penal and remedial action are taken.
18. We agree with the submission (as well as the judgments relied on by the appellants) that equitable remedy demands that disgorgement has to be made from the point of unjust enrichment or where the chickens come to roost. However, we cannot accept the arguments that no such unjust enrichment has been made by the appellants nor disgorgement has to be made from where the unjust enrichment rests finally. If one entity who has unjustly enriched knowingly transferring those proceeds further to some other entity does not prevent the authorities from disgorging the same from the original beneficiary of unjust enrichment. The choice is clearly that of the authority to pursue and disgorge an illegal gain from any 36 point of a chain, if such a chain exists. Tracing to the last point of the chain is an exercise in futility and is not needed. When the proof of unjust enrichment is right before the eyes of an authority chasing the mirage of further transfers itself cannot be supported.
19. In any case, apart from submitting that US $ 92 million just got transferred from one account to another and to a third party on the same day, appellants have no real explanation as to how 25 million GDRs of Cals worth US $ 92 million has come to rest on Asia Texx account and why it was further transferred and that too free of cost to Gagan Rastogi. It is also on record that Gagan Rastogi has sold a part of these GDRs, 2.8 million, and received US$ 8.96 million in November 2011. This finding and now admitted fact is against the stand of the appellants in their reply to SEBI dated October 9, 2013 that neither him (Gagan Rastogi) nor Asia Texx had ever converted a single GDRs of Cals into equity shares and continue to hold the entire 25 million GDR. Therefore, it is clearly evident and admitted that GDRs worth US $ 92 million was transferred by Honor to the account of Asia Texx on March 26, 2009, who in turn transferred the same to the account of Gagan Rastogi free of cost on July 9, 2009. Accordingly, the money transferred from 37 the account of Cals to the account of Asia Texx got accrued to Asia Texx and in turn to Gagan Rastogi in the form of 25 million GDR to the tune of the same value of US $ 92 million with each GDR being worth US$ 3.68 at that time. Since the amount involved was US $ 92 million which come into the hands (account) of the Asia Texx and thereafter to Gagan Rastogi this amount is unjust enrichment in their hands. Therefore, direction to disgorge this amount jointly and severally from the appellants as held in the impugned order does not suffer from any legal infirmity.
20. Reliance placed by the appellants on various judgements (supra) are distinguishable. Contentions regarding restriction on Section 11B of SEBI Act, relying on Karvy Stock Broking Ltd. v/s SEBI (Appeal No. 06, 2007 decided on May 02, 2008), is unfounded as there is nothing in Section 11B which restricts SEBI from issuing directions which are also penal in nature, if necessary. In any case disgorgement is not a penal action but only an equitable remedy as held by this Tribunal in Dushyant N. Dalal & Anr. (supra). The ratio of Relfo Ltd. (in liquidation) (supra) is fully relevant in the present matter since there is no reason at all for a tracing action. Rather, such a tracing is not necessary here since it is evidently clear 38 from the records that US$ 92 million was transferred by Cals to Asia Texx and Cals did not get back either this amount or the refinery machinery. Asia Texx is, therefore, a direct recipient of the amount of US$ 92 million. Similarly, reliance on Vodafone International Holdings BV (supra), W T Ramsay Ltd. (supra) etc. are in different context as those judgements are arising under tax statute and interpretation of transactions in relevant legal context and hence looking at such transactions as a single/whole transactions where it may be difficult to apportion different segment. In the facts of the present matter such circular manoeuvring is not necessary as facts are quite linear from the records before us. When the elephant is right in the drawing room of the appellants this Tribunal does not have to go for a round trip around the world looking for a needle in the haystack. That would be not only selective blindness but discarding clearly available evidence right before our eyes.
21. Reliance on Mafatlal Industries Ltd. (supra) also does not help the appellants since the present matter satisfies the conditions laid down by the Hon'ble Supreme Court in the matter. It is very clear that Asia Texx/ Gagan Rastogi have been unjustly enriched at the cost of Cals and its investors. Further, reliance on Sharad Birdhichand Sarda (supra) is also 39 of no help to the appellants as it is a criminal matter which obviously needs proof beyond reasonable doubt. However, in securities laws violations orders of the Hon'ble Supreme Court in respect of SEBI v/s Kishore R. Ajmera (supra) and several others has held that circumstantial evidence or preponderance of probability is sufficient to prove such violations. In any case, in the matter before us we hold that the appellants have made unjust/ unlawful gains to the tune of US$ 92 million beyond any doubt.
22. Given the circuitous scheme adopted by the appellants using the proceeds of the Cals GDR issue and in making unlawful gain the finding in the impugned order that the appellants have violated Section 12A of SEBI Act and PFUTP Regulations, 2003 cannot be faulted. For facility, the relevant provisions of SEBI Act, 1992 and PFUTP Regulations, 2003 are reproduced below:-
12A. No person shall directly or indirectly--
(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;
(b) employ any device, scheme or artifice to defraud in connection with issue or 40 dealing in securities which are listed or proposed to be listed on a recognised stock exchange;
(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;
3 (c) and (d) and Regulation 4(2)(f),4(2)(k) and 4(2)(r) of the PFUTP Regulations, 2003 3 Prohibition of certain dealings in securities No person shall directly or indirectly--
(a) ....
(b).....
(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;
(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.
41
4. Prohibition of manipulative, fraudulent and unfair trade practices (1)...
(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:--
(a)....
(b)....
(c)....
(d)....
(e)....
(f) publishing or causing to
publish or reporting or
causing to report by a
person dealing in
securities any information
which is not true or which
he does not believe to be
true prior to or in the
course of dealing in
securities;
(g) ...
(h) ...
(i) ...
(j) ...
(k) an advertisement that is
misleading or that
contains information in a
distorted manner and
which may influence the
decision of the investors;
(l) ...
(m) ...
(n) ...
(o) ...
(p) ...
(q) ...
(r) planting false or
misleading news which
may induce sale or
purchase of securities.
42
23. The contention of the appellants that explanation to Section 11B is not strictly adhered to in ordering disgorgement in this matter does not have any merit. For convenience Section 11B is reproduced as follows:-
"11B. Power to issue directions.- Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,--
(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or
(iii) to secure the proper management of any such intermediary or person, it may issue such directions,--
(a) to any person or class of persons referred to in section 12, or associated with the securities market; or
(b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market.43
[Explanation.--For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.]"
The explanation to Section 11B of SEBI Act as given above clearly states in unequivocal terms that SEBI always had the power to direct any person who made profit or averted loss in any transaction or activity in contravention of the provisions of SEBI Act or Regulations thereunder and to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. In the instant matter it is quite clear from the fact that the appellants have made wrongful gain in terms of the US$ 92 million received as advance from Cals since the Agreement to supply refinery machinery was not implemented nor the said amount was returned to Cals, by Asia Texx. US$ 92 million is exactly the same amount of wrongful gain made which has been directed to be disgorged by the entities who directly benefited 44 from the wrongful gains. Therefore, there is no conflict between the explanation under Section 11B of the SEBI Act and what is directed by the impugned order.
24. Order on Kokesh (Supra) also does not come to the help of the appellants on several grounds. Firstly, in the Indian context disgorgement is treated as an equitable remedy and not as a penal provision and there are no limitations to the application of provisions under SEBI Act. Secondly, in the instant appeals it is clearly evident that the gain or unjust enrichment made by the appellants only has been directed to be disgorged. As such what is directed to be disgorged is a direct gain to the appellants and no indirect gains are involved. Thirdly, Kokesh was issued by applying limitation treating it as a criminal penalty in the facts of that matter and this ratio is not universally followed thereafter. This is evident when the second circuit issued a Summary Order on August 29, 2017 in Securities and Exchange Commission v. Metter (No. 16-526, 2017 WL 3708084 (2d Cir. Aug, 29, 2017) just a few months after Supreme Court's order dated June 05, 2017 in Kokesh (Supra). This clearly shows that Kokesh (Supra), even in the US is inconclusive and clearly the spirit of Contorinis (Supra) still prevails. (For a discussion on the subject see, Other 45 People's Money: SEC Disgorgement after Kokesh by Daniel R. Walfish at wp.nyu.edu].
25. Argument of the appellant that the economic reality needs to be considered while imposing penalty or directing disgorgement etc. because the GDRs have declined in value over time as the market conditions, including that of Cals, have changed over the years. While on the face of it, it appears a sound argument, such an argument cannot be accepted for reason that if the economic conditions had changed positively more than the unlawful gained could not be disgorged. Such an approach would vitiate the very foundation of disgorgement as an equivalent amount of unlawful gain to be disgorged which itself is one of the defenses put forth by the appellants.
Therefore, changes in the economic conditions in the given context has to be accepted as a business risk of the appellants, not to be vitiated in the application of the legal principle on disgorgement. Hence the submission of the appellants that they are willing to surrender the remaining GDRs or the underlying shares, instead of US$ 92 million cannot be accepted.
26. We also note that despite transferring US$ 92 million to Asia Texx and Asia Texx neither returning this amount back to 46 Cals nor supplying plant and equipment to Cals, Cals has not resorted to any legal action against Asia Texx. On the other hand, even if the argument was accepted that Cals paid only a part of agreed amount (US$ 92 million) and hence Asia Texx could not honor that agreement by getting the plant and machinery for US$ 290 million, Asia Texx also has not taken any legal action against Cals for an unfulfilled agreement. There is just a mention that appellants made (unsuccessful) efforts through one Hardt Group in 2011, 2 years after the agreement with Cals, through a novation agreement to purchase the machinery. Apparently, both the parties are quite comfortable with each other in simply ignoring millions of US$. Therefore, the finding that the agreement between Cals and Asia Texx dated February 05, 2009 is nothing but a scheme or artifice to siphon off the funds of Cals for the unlawful gain of Gagan Rastogi and Asia Texx, entities related to Cals stands fully sustained. Here it is pertinent to reiterate that the appellant Gagan Rastogi was a promoter of Cals through his 33% holdings in SRM Exploration Pvt. Ltd. as well as being son of Deep Rastogi, who was a Director of Cals at the relevant time.
27. Given the above facts and position of law we uphold the impugned order. Both the Appeals are dismissed with no 47 orders on costs. Consequently, appellants are directed to jointly and severally pay SEBI an amount of US$ 92 million, along with simple interest at the rate of 6% per annum from March 27, 2009 till the date of payment, within 30 days from today.
28. In view of the dismissal of the appeals, Misc. Application Nos. 206 of 2017 and 318 of 2017 have become infructuous and the same are also dismissed as such.
Sd/-
Justice Tarun Agarwala Presiding Officer Sd/-
Dr. C.K.G. Nair Member 12.07.2019 Prepared & Compared By: PK