Securities Appellate Tribunal
Triumph International Finance India ... vs Chairman, Securities And Exchange ... on 7 February, 2002
ORDER
1. Respondent made an order on 21.6.2001, debarring the Appellant and certain other entities stated to be belonging to Ketan Parekh Group, from undertaking any fresh business as stock brokers and merchant bankers till further orders. The said order is in continuation to the Respondent's order dated 4.4.2001 therein it has been stated that " after taking into consideration the available material and evidence, I am of the prima-facie opinion that continuation of activities by the entities controlled by and connected with Mr.Ketan Parekh or Mr. Kartik Parekh is likely to erode investor confidence and integrity of the capital market" and based on the said view, directed that "Classic Shares and Stock Broking Service, Triumph Securities Ltd, Triumph International Finance Ltd, N. H. Securities Ltd, the entities controlled by and connected with Mr. Ketan Parekh, and their directors, Mr. Ketan Parekh and Mr. Kartik Parekh are debarred from undertaking any fresh business as a stock broker or merchant banker till further orders are passed by SEBI in this regard. Mr. Ketan Parekh, Mr. Kartik Parekh and/or any representatives of the concerned mentioned above are given an opportunity of post decision hearing on April 16, 2001. This order will come into force from April 4, 2001."
2. Identical directions were issued to two more entities viz. KNP Securities Ltd and VN Parekh Securities Ltd, also stated to be of Ketan Parekh group, on 10.4.2001, providing opportunity of post decisional hearing.
3. Since the order was made without giving an opportunity of being heard, the persons affected by the said order were given an opportunity of post decisional hearing, and thereafter the impugned order was made by the Respondent on 21.6.2001. The gist of the conclusion arrived at by the Respondent and the order passed by him is as follows:-
"The irregularities by these entities referred to earlier, are not isolated instances. Indeed they have been repeated and ostensibly in a well thought out and preconceived manner. Also they are of nature serious enough so as to warrant suitable action under law. The irregularities are a threat to the market integrity in as much as they are to the great detriment of a safe and transparent market besides hampering efficient price discovery resulting in adversely affecting investor interest.
I have considered the documents and materials available on record, submissions of the representatives of the concerned parties. I hold that they have prima facie violated the provisions of SEBI Act read with SEBI(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, and SEBI (Brokers and Sub Brokers) Regulations, 1992. I am of the view that orders of SEBI dated 4.04.2001 and 10.04.2001 debarring them from undertaking any fresh business as stock broker and Merchant Bankers, till further orders, should be continued.
An order appointing an Enquiry Officer to enquire into the violations by Triumph International Finance(India)Ltd, Triumph Securities Ltd. NH Securities Ltd., Classic Share and Stock brokers Ltd, KNP Securities Ltd and V.N Parekh Securities Ltd of the provisions of the SEBI Act, Rules and Regulations is passed. The Enquiry Officer after considering the material available on the basis of investigations conducted so far and the material, which may be further supplemented, will expeditiously complete the proceedings, after following the procedure as laid down in the regulations. On receipt of the enquiry officer's recommendations, further decision as to whether prohibition to carry out fresh broking activity on the entities should be continued for a further period or it should be withdrawn, will be taken."
4. The circumstances leading to the investigation and the consequential order, having a bearing on the present appeal as narrated in the impugned order are as follows:
"In the wake of excessive volatility in the index movements of stock exchanges during mid February to mid March, 2001 and apprehensions of possible attempts by certain entities to distort the true price discovery and manipulate the securities markets, investigations were undertaken by SEBI. In this connection, preliminary investigations were carried out to determine the role of entities including that of Triumph International Finance(India)Ltd., ( hereinafter called TIFIL), a Merchant banker and SEBI registered stock broker, Triumph Securities Ltd, NH Securities Ltd., Classic Share and Stock Brokers Ltd - SEBI registered stock brokers and other entities controlled by and/or connected with Ketan Parekh and Kartik Parekh. Investigations prima facie revealed that the above entities indulged in price manipulation in certain scrips to the detriment of the interests of investors and the market in general. Further the Central Bureau of Investigation had arrested Shri Ketan Parekh and his relative, Shri Kartik Parekh in connection with the alleged fraud in issue of pay orders involving the Madhavpura Mercantile Co.operative Bank and the Bank of India. It appeared that funds obtained from these pay orders have been used for stock market operations.
After taking into consideration the material and evidence on record, vide order dated 4th April, 2001 , Triumph International Finance (India)Limited, Triumph Securities Ltd, NH Securities Ltd, Classic Share and Stock Brokers Ltd were ordered not to undertake any fresh business as a stock broker or merchant banker till further orders were passed by SEBI in this regard. They were given an opportunity of post -decisional hearing on April 16,2001. The hearing was later rescheduled to be held on April 18, 2001."
5. The Respondent has addressed the following issues in the impugned order.
(i) Whether the Appellant is/was an entity managed by/controlled by Ketan Parekh?
(ii) Whether the Appellant has prima-facie violated the provisions of SEBI Act, SEBI(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets)Regulations 1995 and SEBI (Stock brokers and Sub-brokers)Regulations, 1992?
(iii) Whether the orders of SEBI passed on April 4, 2001 and April 10, 2001 under section 11B of the SEBI Act, 1992 without giving opportunity of hearing were justified in the circumstances of the case?
6. The Respondent decided all the three issues in the affirmative and made the impugned order. The Appellant feels aggrieved. Hence this appeal.
7. Pending final decision in the appeal, the Appellant had prayed for an interim order staying the operation of the impugned order. The prayer for interim relief, after hearing the parties, was not allowed as was found without merit, vide Tribunal's order dated 24.8.2001. The Appellant thereafter urged certain additional supplementary grounds vide application filed on 8.10.2001. The said application has been taken on record.
8. The Appellant is a public limited company registered under the provisions of the Companies Act, 1956. It is engaged in carrying on business as stock brokers. It is registered under section 12 of Securities and Exchange Board of India Act, 1992 (the Act) as stock broker. It is a member of the National Stock Exchange (NSE) and carried on trading activities in shares and stocks in the said exchange. The Appellant is also a Category I Merchant Banker, eligible to carry on business as merchant banker and underwriter.
9. The Respondent is the Chairman of the Securities and Exchange Board of India. Securities and Exchange Board of India (SEBI) is a statutory body established under section 3 of the Act, mandated to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto. Section 11 of the Act, enumerates the powers and functions of the Board. Amongst several measures enumerated therein, include measures to provide for (i) "registering and regulating the working of stock-brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrar to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities market in any manner" (S.11(2)(b)), (ii) "prohibiting fraudulent and unfair trade practices relating to securities markets (S.11(2)(e)). SEBI, to carry out the purposes of the Act has notified several regulations, which include the Securities and Exchange Board of India (Stock-Brokers and Sub-brokers)Regulations, 1992 ( the 1992 Regulations) and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 ( the 1995 Regulations). In terms of sub section 3 of section 4 of the Act, the Chairman, SEBI is empowered to exercise all powers and do all acts and things which may be exercised or done by the Board , in the matters which are not exclusively reserved for the Board to exercise or do, by regulations. The impugned order has been made by the Respondent exercising the Board's power vested in him in terms of section 3 (4) of the Act.
10. Shri Shyam Divan, learned Counsel for the Appellant argued at length to establish that the Appellant is not a Ketan Parekh Group entity as alleged by the Respondent and it has not indulged in market manipulation to warrant debarment from carrying on its legitimate business activities. He submitted that the entire order proceeds on the hypothesis of "guilt by association" disregarding the admitted facts of the case. Shri Shaukat H. Merchant, learned Counsel, also represented the Appellant.
11. Shri Divan stated certain details of the Appellant, having a bearing on the issues involved in the present appeal. He submitted that the Appellant is a public limited company listed on the Bombay Stock Exchange, it has more than 8000 shareholders, 30.91% of its equity share capital is held by its Managing Director Shri Dharmesh H Doshi and his associates, 11.87% by its Jt. Managing Director, Shri Jatin Sarvaiya and his associates, 15.84% by Smt.Mamta Parekh and Smt. Ami Parekh (7.92% each) and the remaining 41.38% by the public. He submitted that the Appellant is professionally managed and not a part of any group that it has approximately 175 employees working in its 11 offices spread over the country, that it is empanelled with more than 100 banks and financial institutions , that it has over 1000 clients of which more than 100 are institutional clients and more than 200 are corporate clients. He stated that the Appellant's activities include stock broking and merchant banking, and it is also engaged in the whole sale debt market. Shri Divan stated that the Appellant commenced its share and stock broking activities in 1994, and has an extremely high and unblemished reputation in the market that the reputation and the business painfully built over the years has been devastated as a result of the Respondent's baseless order. He submitted that the details of the findings of investigation disclosed in the impugned order and the circumstances referred to therein, attributed to the Appellant, have nothing to do with the volatility in the stock index movements during February and March, 2001, that there were no distortion of true price discovery or manipulation of the securities market by the Appellant as alleged. Shri Divan stated that the Respondent has made a composite order clubbing the Appellant along with various entities/companies stated to be controlled and managed by Ketan Parekh, contrary to the fact that Ketan Parekh has no control in ownership or management of the Appellant, that something really unreal is being attempted to be projected real.
12. Shri Divan pointed out that the Respondent himself is not clear as to the scope of the enquiry which he wants to undertake, as is evident from the manner in which show cause notices have been issued. He submitted that on 13.8.2001 two show cause notices were issued. Another notice was issued on 3.10.2001 and yet another one on 25.10.2001. In this context he referred to the following observations made by the Respondent in his order dated 21.6.2001 that " I have considered the documents and materials available on record, submissions of the representatives of the concerned parties, I hold that they have prima-facie violated the provisions of SEBI Act read with SEBI(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities market) Regulations, 1995 and SEBI(Brokers and Sub brokers) Regulations, 1992", and stated that there is no finding on any violation of the SEBI (Merchant Bankers) Regulations, 1992 any where in the order. Shri Divan stated that out of the two notices issued on 13.8.2001 by the Enquiry officer, one was a common notice addressed to 6 entities which included the Appellant's name, referring to certain alleged violation of regulations and the other notice addressed specifically to the Appellant was in respect of alleged violation of regulation 39(2) of the SEBI (Merchant Bankers) Regulations, 1992 in respect of the pubic offer of equity shares made by Balaji Telefilms Ltd in October, 2000. The show cause notice dated 3.10.2001 stated that it is in continuation of the notice dated 13.8.2001. The show cause notice dated 25.10.2001 stated that it is in continuation of the notices dated 13.8.2001 and 3.10.2001. Shri Divan pointed out that the Respondent, to begin with passes an ex-parte order on 4.4.2001, and then after two months based on its elaborate enquiry passes another order on 21.6.2001, in continuation of its earlier order confirming the debarment of the Appellant from doing business, pending another enquiry and then after two months there from issues 2 more show cause notices, followed by two more notices after a lapse of about two months. Shri Divan pointed out that the Respondent is intentionally issuing show cause notices on installment basis to delay the enquiry and put the Appellant out of activities for reasons best known to the Respondent.
13. Learned Counsel submitted that the Respondent has penalised the Appellant on the assumption that the Appellant is an entity owned and controlled by Ketan Parekh, little bothering to ascertain the actual factual position . He said that the Appellant vide its letter dated 18.4.2001 had informed the Respondent that it is not in any way connected with the said Ketan Parekh and his family, that Shri Ketan Parekh is not a promoter of the Appellant, that he was appointed as Director of the Appellant for the first time on 16.12.2000 and ceased to be a director with effect from 31.3.2001., that he did not attend even a single board meeting and he was never given any executive power or authority to sign any cheques or contract notes, that Ketan Parekh was just a director simplicitor, that too for a very short period. Referring to the ownership pattern of the Appellant, learned Counsel submitted that Parekh family through Smt.Mamta Parekh and Smt.Ami Parekh held just 15.84% of the paid up capital. Shri Divan submitted that the Appellant is neither managed nor controlled by Ketan Parekh and/or his family, that clubbing the Appellant with other entities of the Ketan Parekh Group was entirely unjustified and as result of identifying it as a Ketan Parekh company, the Appellant has been punished. He submitted that the fact that the Appellant had transacted business with other Ketan Parekh entities cannot a ground to conclude that it is a Ketan Parekh Company, that the Appellant being a Stock broker had transacted business for several others and Ketan Parekh was only one among them and not the sole one. Referring to the Respondent's version that the Appellant's office is situated in the same premises where some of the Ketan Parekh companies also have their offices and that the word "Triumph" in the Appellants name is suggestive of its relationship with Triumph Securities Ltd, which is identified as a Ketan Parekh company etc., learned Counsel stated that these are not material worth to be relied on to conclude that the Appellant is a Ketan Parekh company. He stated that sharing office premises is a common practice in the space starved Bombay city, and there are many companies, with 'Triumph' as a part of their name in operation in the country. Shri Divan stated that since the debarment order is not based on any finding of any contravention of the law, but only on the mistaken notion that the Appellant is Ketan Parekh company and as the said finding is without any supporting evidence, the Respondent's direction cannot hold good against the Appellant.
14. Learned Counsel submitted that the impugned order was passed in flagrant violation of the rules of natural justice. Shri Divan submitted that the show cause notice should clearly indicate the nature of violations, if any, and should specifically state the specific provisions violated and also should reveal the material relied on against the noticee. He submitted that an enquiry cannot go beyond the scope of the show cause notice and it is not permissible to produce supplemental material in appeal, that the Respondent has flouted the said requirements in the Appellant's case.
15. Shri Divan referred to the ex-parte order dated 4.4.2001 and stated that the Respondent had stated therein that "SEBI is conducting investigations into the role of Mr Ketan Parekh and his associate concerns for alleged market manipulations in the securities market. Evidence gathered during investigations in the trading in shares of Global Trust Bank reveals the prima-facie involvement of Mr Ketan Parekh and entities controlled by, and connected with him in manipulating the scrip price. There are also indications of his prima facie involvement in manipulating other scrips like Himachal Futuristic Communications Ltd, Lupin Laboratories Ltd, Zee Tele Films Ltd, Aftek Infosys Ltd and Padmini Polymers Ltd. As such his manipulations of the securities market appear to be detrimental to the interest of investors and the market in general. Further, the Central Bureau of Investigation has arrested Mr.Ketan Parekh and his relative Mr. Kartik Parekh in connection with the alleged fraud in issue of pay orders involving Madhavpura Mercantile co-op Bank and Bank of India. It is believed that funds arising from these pay orders have been used for stock market operations". In the order it has been further stated that "after taking into consideration the available material and evidence", the Respondent made the ex-parte order. Shri Divan submitted that the impugned order has been made without following the principles of natural justice as is evident from the fact that at no stage prior to the issue of the ex-parte order on 4.4.2001 inspection of documents was given to the Appellant or the copies of the relied documents made available. He submitted that the ex-parte order made on 4.4.2001 itself having served as a show cause notice, the Respondent is required to confine the enquiry to the areas referred to in the said order and make available the material relied on, to the Appellant to meet its case. In this context he referred to the Appellant's letter dated 18.4.2001 to the Respondent (placed at Annexure D to the appeal) and stated that in the letter it was clearly stated that the Appellant is in no way connected or controlled by Ketan Parekh, and requested the Respondent to furnish a copy of the preliminary inquiry report on the basis of which the Respondent passed the order on 4.4.2001 and also the evidence/material gathered, and stated to be relied on in making the order, that an opportunity of personal hearing to present its case was also sought. Learned Counsel submitted that on 18.4.2001 the Appellant was called for a hearing before the Respondent, but the material sought for was not furnished. Shri Divan stated that at the hearing, the Appellant had represented that it has not been furnished with any material details, basis or data, based on which the order was passed, and in that context the Respondent directed the concerned officer to make available the relevant material, that since the Respondent's direction was not complied with by the officer, again on 22.4.2001 the Appellant wrote to the Respondent requesting to direct the concerned officer to give immediate inspection of the relevant documents etc. Shri Divan submitted that despite the said request also there was no response from the Respondent. In this context he referred to the affidavit of Shri Jatin Sarvaiya dated 3.10.2001, setting out the factual position. In the said affidavit Shri Sarvaiya has stated that he alongwith the Managing Director of the Appellant called on one Shri R.K.Kakkar in the Respondent's office., who was earlier directed by the Respondent to provide inspection of the material, that Shri Kakkar expressed his inability to give inspection on that day, but indicated that he would give inspection on the next day, that inspection was not granted as promised on the next day also, and as a result the Appellant wrote to the Respondent again on 27.4.2001. On 5.5.2001 Shri Kakkar telephonically requested Shri Sarvaiya to attend his office and Shri Sarvaiya responded hoping that it would be to enable him to inspect the documents etc. But nothing of that sort happened that it turned out to be an interrogation session and Shri Kakkar in the course of questioning Shri Sarvaiya showed him some of the details regarding certain transactions which the Appellant had entered into for various clients viz. Adani Exports Limited, Zee Telefilms Ltd, Himachal Futuristic Limited, Nirma Limited and Tips Limited, and sought explanations in respect of these transactions, that after the questions and answers were recorded and when Shri Kakkar wanted the statement to be signed by Shri Sarvaiya, Shri Sarvaiya insisted for a copy of his statement, which Shri Kakkar declined to furnish saying that there was no procedure under which he could hand over statement to the deponent at that stage. In that context Shri Sarvaiya insisted that a formal summons be issued to him, which Shri Kakkar there and then prepared and served on Shri Sarvaiya, that after accepting the summons, Shri Sarvaiya signed the statement. Learned counsel submitted that besides the transactional details which were shown to Shri Sarvaiya during the course of recording of statement, no other documents or records were furnished.
16. After the hearing before the Respondent on 11th May, 2001 Shri Sarvaiya was again summoned by SEBI and further statements were recorded on 12th and 15th May, 2001, certain transactional details were also shown to him in the course of recording the statements, but no other documents or evidence were shown or furnished, that even the statement which was recorded on 5th , 12th , and 15th May, 2001 was not given to Shri Sarvaiya, that the copy of these statements was available for the first time to the Appellant only on 14th August, 2001 along with the show cause notice served on it.
17. Shri Divan stated that Shri Sarvaiya in his affidavit has affirmed that the Respondent's version relating to granting of inspection as recorded in the impugned order dated 21st June, 2001 is false, that the statements referred to in the impugned order viz. of Shri Deshbandhu Gupta, Shri Pramod Broota and Shri Nitin Shukla were all recorded by SEBI after the date on which the same transactions were shown to him on 5th May, 2001. Learned Counsel stated that the statements of Shri Pramod Broota and Shri Nitin Shukla were recorded on 10th May, 2001 and the statement of Shri Deshbandhu Gupta was recorded on 1st June, 2001, and there can be no doubt having regard to the dates on which these statements were recorded that SEBI has relied upon documents and material which were never shown to the Appellant and that some of the documents and statements have been recorded even after conclusion of the personal hearing before the Respondent, that the dates on which the statements were recorded has been suppressed in the impugned order so as to leave open an argument that inspection of this documents was given. Shri Divan submitted that after 5th May, 2001 until the hearing granted by the Respondent on 11th May, 2001, no other documents whatsoever were provided for inspection and no meeting was held between the representatives of the Appellant and SEBI at which inspection could have been granted.
18. Shri Divan referred to the observation in the impugned order with reference to the question as to whether the Appellant is a Ketan Parekh entity or not and stated that in the said context the evidence given by Shri Pramod Broota on 10.5.2001 and the evidence given by Shri Nitin Shukla on 10.5.2001 and the evidence given by Shri Deshbandhu Gupta on 1.6.2001 have been heavily relied on, though the show cause notice was issued prior to the said dates and further that none of these statements were shown to the Appellant. In this context he referred to the SEBI's letter dated 18.7.2001 (Annexure H to the appeal) wherein it has been stated that " we wish to inform you that detailed order has been passed by Chairman on June 21, 2001 copy of which has already been sent to you, after giving opportunity of hearing to the six entities against whom order under section 11B was passed on 4.4.2001 and April 10,2001. Pursuant to this order, Shri Ananta Barua, Division Chief, SEBI has been appointed as enquiry officer inter-alia in respect of your case. Accordingly you are requested to raise all your objections before the above mentioned Enquiry Officer. Further, alongwith show cause notice which is being issued by the Enquiry Officer, the documents relied upon by SEBI would also be made available" and stated that from the statement it is clear that the documents relied upon by the Respondent were not available before passing the impugned order. Referring to the reply filed by the Respondent, learned counsel pointed out that it has been admitted by the Respondent by stating that " the copy of the findings of preliminary investigation has already sent to the Appellant alongwith show cause notice by the Enquiry Officer" that the said show cause notice from the Enquiry Officer is dated 13.8.2001 i.e. after passing the impugned order on 21.6.2001. He refuted the Respondent's version that "the documents on the basis of which the order was passed was shown to and inspected by the Appellant company, the question therefore of the SEBI being called upon to furnish the same cannot and does not arise". He pointed out that the Respondent himself has admitted that "on 5th May, 2001 Mr. Jatin Sarvaiya was summoned by the investigating officer of SEBI and was questioned on the basis of the documents which were shown to him", that the statement itself shows that no inspection was given on 5.5.2001, that Shri Sarvaiya attended the Respondent's office in response to the summons requiring his presence for interrogation.
19. In this context Shri Divan referred to the submissions made by the Respondent before the Tribunal while considering the Appellant's prayer for interim order. He stated that the Respondent had submitted that the order was based on the findings of the preliminary investigation carried out by SEBI, that the Appellant was given enough opportunity to putforth its views, that it has actually availed of the opportunity so provided by making oral and written submissions before the Chairman, that the Appellant was also given inspection of the materials relied on by the Respondent that they are all part of the record and therefore it cannot be said that order was passed, flouting the principles of natural justice. Shri Divan submitted that this submissions are contrary to the actual position , that the submission was made to make the Tribunal believe that the Respondent had made the order following the rules of natural justice, though in reality it was not so. Shri Pramod Broota's statement and Shri Nitin Shukla's statement recorded on 10.5.2001 were not available on 5.5.2001, the date on which the Respondent claims to have given inspection of "all the materials relied on". He further stated that the statement of Kopran official has not been shown to the Appellant till date, that the Respondent's submission that on 12.5.2001 and 15.5.2001 inspection was allowed is also incorrect, as on these dates statement of the Appellant's representative was recorded and during the time of questioning the representative was shown certain documents, chosen by the officer, that the documents so shown cannot by any standard be treated as giving inspection to the Appellant of the documents/ material relied upon.
20. According to Shri Divan the Respondent in his impugned order has attempted to justify and sustain the original debarment order dated 4th April, 2001 and to continue the same pending "further enquiry" by an Enquiry Officer. He submitted that in the letter dated 18th July, 2001 appointing the Enquiry Officer it has been stated that "detailed order has been passed by Chairman on June 21, 2001..." but in the said letter it has also been stated that, "alongwith show cause notice which is being issued by the Enquiry Officer, the documents relied upon by SEBI would also be made available to you". According to the learned Counsel this letter constitutes an admission by the Respondent that (i) documents were withheld by SEBI/the Respondent from the Appellant; (ii) the Appellant was thereby deliberately denied a full and fair opportunity of representing its case before the Respondent; and (iii) that still a "detailed order" was passed against the Appellant clearly violating the principles of natural justice. He submitted that the entire procedure adopted by the Respondent is grossly arbitrary and unreasonable and constitutes a clear pre-determination and pre-judgement of the case, that the proposed inquiry by the Enquiry Officer appointed by the Respondent is nothing but an idle formality in view of the "detailed order" already passed by the Respondent as there is nothing further which the Enquiry Officer can investigate and further that the Enquiry Officer appointed by the Respondent is an officer of the Respondent and as such can never take a view in the matter different from that so emphatically voiced by the Respondent in the said impugned order, that in effect a final detailed order has been passed against the Appellant, in the guise of a temporary order continuing the debarment, pending further inquiry. Learned counsel submitted that a reading of the impugned order clearly would show that it is in the nature of a final order and there is a mere pretense of its being a prima facie conclusion pending further investigation and final determination, that this is a gross abuse of the power conferred upon and vested in the Respondent.
21. Shri Divan stated that the Respondent has gone far beyond the charges and materials stated in the show cause notice and the order has been made behind the back of the Appellant, by withholding information from it ignoring the views of the Courts in several cases. In this connection he cited the following cases to support his submission that any order made against a person without following the rules of natural justice is bad.
22. D.A.Gadgil v. Securities & Exchange Board of India [(2000) CLC 1873], Mohinder Singh Gill v. The Chief Election Commissioner [AIR 1978 SC 851], S.L.Kapoor V Jagmohan [AIR 1981 SC 136], Anand Rathi v. Securities and Exchange Board of India [(2001) 32 SCL 227], Hindustan Lever Ltd v. Director General (Investigation, Registration) [2001(1) SCALE 219] Wimco Vs. Union of India 1980 ELT 235, (Bom) Rapheal Pharmaceuticals Vs Superintendent of Distilleries (1998 (38) ELT 11(AP) and Lubrichem Industries Ltd. Vs. Collector of Customs (1994 (73) ELT 257 (SC)).
23. Shri Divan submitted that in the impugned order, it has been alleged that Ketan Parekh entities have been involved in price manipulation in the scrip of Global Trust Bank Ltd, that a mere perusal of the impugned order shows that except for a mere mention of the Appellant as being one of the entities which have allegedly aided and abetted Ketan Parekh in manipulation of the price of GTB shares, the impugned order nowhere mentions that the Appellant had manipulated the price of the said scrip, not even a single instance has been cited. Shri Divan submitted that as a matter of fact, the Appellant had nothing to do with the transactions and the record/data/documents referred to in the order also clearly establish this fact, that the Appellant has been "roped into" this transaction merely on the false and unsustainable assumption that it is a Ketan Parekh entity and under a sweeping and wholly unsubstantiated heading "Role of Ketan Parekh entities, including TIFIL in price manipulation in the scrip of Global Trust Bank Ltd" and by making an equally sweeping and unsubstantiated damaging statement that "Investigations brought out that Triumph International Finance India Ltd., Triumph Securities Ltd and NH Securities Ltd., have aided and abetted Ketan Parekh in manipulation of price GTB shares".
24. Shri Divan pointed out that there is another allegation in the order on "the role of Triumph Securities Ltd, in the price manipulation case of Aftek Infosys Ltd"., that in the entire discussion thereon, there is not a word about the Appellant. For the reason that Triumph Securities Ltd is a joint venture of the Appellant, cannot be a ground to hold the Appellant responsible and answerable for each and every action of the said joint venture company which is a totally separate and distinct legal entity from the Appellant. According to Shri Divan the Respondent did not want to accept the reality recognised by law as it unsuited him.
25. Learned Counsel cited yet another instance of the alleged manipulation, revealed in the order that the Appellant transacted in substantial quantities in the scrip of Lupin Laboratories Ltd., and that its major client included Classic Credit Ltd., Shri Divan submitted, significantly, whilst merely mentioning Classic Credit Ltd., a company owned/controlled by Mr.Ketan Parekh, there is not even an allegation against the Appellant, though there is a false, and insidious inferential suggestion, that Lupin shares were purchased by Classic Credit through the Appellant. Learned Counsel submitted that as a matter of fact from the transactions cited in the impugned order, it could be seen that there is no transaction by the Appellant with Classic Credit Limited for sale or purchase of Lupin shares., that there is no word in the entire discussion in this regard that the Appellant had any role to play in the alleged price manipulation of Lupin shares.
26. Referring to the impugned order relating to a complaint alleging that "Persons who had not dealt with TIFIL and TSL were shown as clients in the books of the brokers" and "this alleged falsification of accounts is detrimental to integrity of capital markets", the learned counsel submitted that, the Appellant has not been furnished any details orally or in writing in this regard to meet the charge.
27. Shri Divan submitted that the Appellant has been debarred from taking up business as merchant banker and stock broker. Though certain unsubstantiated allegations have been made about the Appellant's activities as a stock broker the order is silent about any such omission or commission by the Appellant with reference to its merchant banking business. Neither the order dated 4.4.2001 nor the order dated 21.6.2001 has made out any ground to debar the Appellant from taking up merchant banker's business.
28. Learned Counsel referred to the show cause notice dated 13.8.2001 relating to the alleged violation of the Merchant Bankers Regulations and stated that the allegation therein is with reference to the role of the Appellant as co-Book running Lead Manager to the public issue made by Balaji Telefilms Ltd on October 20, 2000 that in the said issue J.M. Morgan Stanley Limited was the Book running Lead Manager and IL & FS Merchant Banking Services Ltd., also acted as a co-Book running manager alongwith the Appellant. The crux of the charges against the Appellant in this regard according to the Respondent is that "the information in the prospectus dated 20.10.2001 that Balaji Telefilms Ltd does not have any intention or proposal to alter its capital structure within a period of 6 months from the date of opening the issue was not actually correct. The above was material information for the investors. Thus the above information in respect of the merger with 9 Network Entertainment Private Limited were concealed. From the above it is clear that you have failed to exercise due diligence, ensure proper care and exercise independent professional judgement and failed to ensure that investors are provided with true and adequate information. Thus while acting in the capacity of lead manager you failed to exercise adequate due diligence in ensuring the dissemination of information to investors, failed to provide true and adequate information to the investors, failed to initiate action against the issuer company for violation of memorandum of understanding caused by their withholding of vital information, failed to take action in the interest of the investors before the commencement of trading. You therefore appear to be guilty of violation of items 2, 7(a) and 9 of the Code of Conduct under Schedule III read with regulation 13 of the SEBI (Merchant Bankers) Regulation 1992". Shri Divan submitted that the Appellant has not committed any breach or violation of any of the provisions of the Merchant Banker Regulations. The show cause notice issued is to cover up the Respondent's omission high lighted by the Appellant before the Tribunal while seeking interim relief on 9.8.2001, where it was interalia submitted that no case whatsoever has been made out to justify the debarment of the Appellant from taking any fresh business as merchant bankers, that the show cause notice dated 13.8.2001 was issued immediately after the hearing was concluded on 9.8.2001, that this exhibits a biased approach on the part of the Respondent and its anxiety to somehow make out some case and penalise the Appellant. He further stated that the show cause notice merely sets out bare allegations and does not rely on any evidence whatsoever.
29. Shri Divan stated that on 25.8.2000 Balaji Telefilms entered into a Memorandum of Understanding (MOU) with the Appellant, that the MOU expressly recorded that Balaji Telefilms Ltd was taking steps to issue equity shares of Rs.10/- each at a premium to be decided through Book Building Process, to the public. Further, the MOU recorded that Balaji Telefilms had approached the Appellant to manage the issue and the Appellant had accepted the assignment as Co-Book Running Lead Manager on the terms and conditions set out in the MOU. "The MOU is broadly in the specimen format suggested by SEBI in guidelines issued by SEBI to Merchant Bankers. Significantly, both the MOU as well as SEBI's specimen proforma provide that the company (Balaji) undertakes and declares that information made available to the Co-Book Running Lead Manager or any other statement made in the offer document "shall be complete in all respects" and shall be "true and correct" and that "under no circumstances the company would give or withhold any information or statement which is likely to mislead the investors". The proforma MOU as well as the subject MOU executed between Balaji and the Appellant place the onus and responsibility for making correct statements that may find their way in the offer document, on the issuing company and not on the Merchant Banker. At no stage, prior to 20th November, 2000 did Balaji disclose to the Appellant any proposal or intention to alter its capital structure within the period of 6 months from the date of opening of the issue. In particular, at no stage prior to 20th November, 2000 did Balaji disclose to the Appellant any information whatsoever in respect of any proposed merger of Nine Network Entertainment India Pvt.Ltd.(NNE) with Balaji, that right upto the time when the offer was opened to the public on or about 27th October, 2000 the Appellant had no reason to believe that the statements in the offer document in respect of the alteration of capital structure were inaccurate, the Appellant had repeatedly informed Balaji about the importance of accurate statements and disclosures in the offer document and Balaji assured that each and every statement made in the draft offer document was accurate and truthful. Balaji issued a Declaration forming Part III of the Prospectus dated 20th October 2000 confirming, inter alia, that the disclosure and statements made in the offer document are accurate that that Balaji initiated informal talks with NNE for a strategic alliance only few days after the close of the public issue on 3rd November, 2000, that in other words, right upto the time when the offer document was actually released to members of the public, the representation made in the offer document to the effect the company did not intend or propose to alter its capital structure within a period of 6 months of the date of the opening of the Issue, was an accurate and factually correct statement of fact. No incorrect statement was made in the offer document when the document was released to the public. Subsequent events concerning talks between Balaji and NNE for a strategic alliance which were initiated after the close of the public issue on 3rd November, 2000 cannot detract from the accuracy and correctness of the statements made in the offer document that in any event, the Appellant exercised due diligence in relation to the disclosure andstatements made in the offer document and at no stage it had any reason to doubt the correctness of the statement in the offer document relating to the absence of any intention or proposal on the part of Balaji, to alter its capital structure within the period of 6 months. By a letter dated 20th November, 2000 the Appellant was informed for the first time by Balaji that a meeting of its Board of Directors has been convened on the next date i.e. 21st November, 2000 to discuss the merger proposal. The said letter also stated that the intimation has been given to the Stock Exchanges. The said letter further state that once the Board Meeting is through, the outcome of the meeting will be communicated to the Stock Exchange/SEBI and also public at large through suitable press releases. Thus as soon as the Appellant came to know on 20th November, 2000 it had addressed a letter on the same day to the Board of Directors of Balaji Telefilms Ltd requesting them to inform the Book Running Lead Manager viz. J.M. Morgan Stanley Private Limited in respect of the said developments that attention of the Board of Directors of Balaji was also drawn on to the need that BSE,NSE, SEBI and the Investors need to be informed on the same as this is a significant development that would have an impact on the performance of the company". Shri Divan submitted that in these circumstances, the Appellant cannot be held guilty of violating any of the provisions of the Merchant Bankers Regulations. He further pointed out that no such debarment order has been made against J.M. Morgan Stanley Ltd, the Lead Manager and IL & FS Merchant Banking Services Ltd., the co-Book running Lead Manager, but the Appellant has been singled out and punished.
30. The Learned Counsel submitted that based on the so called "material" on record and on conjuncture and surmises, the debarment on the Appellant taking fresh business as Broker and Merchant Banker is nothing but the suspension of business activities of the Appellant under the Rules and Regulations framed for Brokers and Merchant Bankers, that such penalties can be inflicted only after the trial/enquiry is over, that in the present case, the Respondent has first inflicted the penalty and then ordered the trial, which is contrary to and violative of all canons of law.
31. Shri Divan referred to the allegations made against the Appellant in relation to its activities as a stock broker and submitted that none of the charges mentioned in the impugned order survives. He submitted that the details of the transaction referred to in the order have nothing to do with the excessive volatility in the index movements of stock exchanges during mid February and mid march, 2001 and there were no distortion of true price discovery or manipulation of the securities by the Appellant, as alleged. Learned Counsel submitted that with reference to the allegation of price manipulation in the scrip of Global Trust Bank Ltd and Aftek Infosys Ltd., there is not even a whisper of the Appellant's involvement. With reference to observations regarding the Appellants role in the alleged manipulation in the scrips of Lupin Laboratories, the learned counsel submitted the allegations are unfounded as the Respondent's own data reveals that the Appellant had not transacted business in substantial quantities in the scrip of Lupin Laboratories, and that the Appellant had not entered orders for purchase of shares with a view to establish a higher price. Shri Divan referred to the charge that the Appellant had indulged in cross deals for its clients despite there being a prohibition on the same and that cross deals were put between the two clients of the Appellant, that the deals were put through two separate terminals but placed in the same room, that this was an attempt to circumvent the prohibition of SEBI on negotiated deals, that the buy and sell orders were put at exactly the same time. In this connection he referred to SEBI's own circular dated 14.9.1999 and stated that the said circular does not prohibit cross deals or negotiated deals. He read out the following extract from said circular that "all negotiated deals (including cross deals) shall not be permitted in the manner prescribed in circulars mentioned above and all such deals shall be executed only on the screens of the exchange in the price and order matching mechanism of the exchanges just like any other normal trade" and stated that there is no prohibition on negotiated deals and cross deals executed on the screen of the exchanges and as such the Appellant was legally entitled to carry on cross deals and negotiated deals.
32. With reference to the observations in the order regarding certain complaints against the Appellant, the learned Counsel submitted that these complaints are baseless and in any case these were not shown to the Appellant, that in the Respondent's own version the inquiry is with reference to market conditions which prevailed in Feb-March, 2001 and the complaint has nothing to do with the same, that the complaint factor is an untenable addition to the order.
33. Shri Divan submitted that the exercise of power by the Respondent under section 11B of the said Act, is illegal, ultra vires the SEBI Act, Rules and Regulations and void, as it constitutes a colourable and fraudulent exercise of power. In the guise of passing an interim order, the Respondent has in reality and in effect passed a final detailed order against the Appellant, without following the due process and procedure of law under the Act, read with the Rules and Regulations. He further submitted that it was not open to the Respondent to invoke jurisdiction under section 11B and pass an ex-parte, non-speaking, unreasoned order, against the Appellant, in violation of the principles of natural justice; and thereafter confirm the same by a final detailed speaking order, in the guise of an interim order, for continuing the debarment of the Appellant pending further enquiry and investigation.
34. Shri Divan cited this Tribunal's decision in Shankar Sharma & Ors. v. Securities and Exchange Board of India [(2001) 33 SCL 747] and Sterlite Industries Ltd v. SEBI [ 2001 34 SCL 485]. He submitted that since the facts in Shankar Sharma's case being distinguishable from the facts in the Appellant's case, the view taken by the Tribunal in the said case may not be applicable to the present appeal.
35. Shri Divan also read out extensively from the Tribunal's order in Sterlite Industries and submitted that the Respondent has not established any charge of manipulation to attract the provisions of the SEBI(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, that the Tribunal may follow the view held in the said case that the order issued under section 11B in the instant case is punitive in nature, which the Respondent is not competent to make.
36. Shri Rafiq Dada, learned Senior Counsel appearing for the Respondent submitted that the impugned order is not exclusively directed to the Appellant but to several other Ketan Parekh group companies such as Triumph Securities Ltd, NH Securities Ltd, Classic Shares and Stock Brokers Ltd, KNP Securities and VN Parekh Securities Ltd, etc. also, and as such it cannot be viewed that every finding therein should be relatable to the Appellant directly. He submitted that the conduct of Ketan Parekh entities in the market disturbance witnessed in Feb-March, 2001 is under detailed enquiry and as such it is not proper to evaluate the role of the Appellant independent of the role of the group as a whole, to which the Appellant belongs to.
37. Shri Dada submitted that in the light of the information available with the Respondent, there is every reason to believe that the Appellant is a part of Ketan Parekh group. He submitted that whether the Appellant is a company controlled or associated with Ketan Parekh is a matter to be examined and considered from a very realistic and practical angle. No litmus test is available to prove the association/ connection of corporate entities with each other or the persons behind them, that what is to be considered is the actual association or control, rather than taking a strict legal view point. Shri Dada submitted that for practical purpose, the Appellant, undisputably is a Ketan Parekh group entity. In this connection Shri Dada referred to the Appellant's averment in the memorandum of appeal admitting that Triumph Securities Ltd (TSL), is a Ketan Parekh company, that TSL is a joint venture between Ketan Parekh and the Appellant, that the Appellant has its two Directors on the Board of TSL, that it has also been admitted that the Appellant's office and the office of several other Ketan Parekh entities are located at the same premises, that Ketan Parekh was a director of TSL and also that of the Appellant that Ketan Parekh alongwith his relatives held 51% in TSL and 15.82% in the Appellant. Shri Dada stated that the address of TSL and the head office address for the proprietary trading account of TSL is the same as that of the Appellant. In this context Shri Dada referred to the business agreement entered into between the parties in relation to the premises occupied by them and the cris cross manner in which it has been executed with common signatories. He submitted that the lease agreement entered into among them strengthens the belief that the Appellant and other Ketan Parekh companies are interconnected entities. He also referred to the word 'Triumph", found common in the Appellant's name and in TSL, and stated that it is inconceivable to envisage a situation whereby the name 'Triumph' would be permitted to be used by Ketan Parekh in a company where promoters of TSL did not have majority shareholding or control or any interest. Shri Dada further submitted that Ketan Parekh and Kartik Parekh were directors in the Appellant and the Parekh family directly held about 16% of the Appellants capital, that the resignation of Ketan Parekh & Kartik Parekh from the Board on 31.3.2001 from the Board of the Appellant was to make, believe the investigators that the Appellant is a company outside the group. The intimate business connection with other group entities demonstrated by factual evidence in the order establishes the Appellant's connections with Ketan Parekh group. Shri Dada further submitted that Shri Nimesh Dedhia, an employ of TSL had signed correspondence as an employee of the Appellant. Shri Nimesh Dedhia is a qualified Chartered Accountant and Vice President of TSL and very much a part of the management of TSL and that as per the information available with the Respondent he is incharge of the securities transaction of TSL. Shri Dada further submitted that majority shareholding is not the sole criteria which decide the management of a company, that there are several factors also to be taken into account. In this case he pointed out that Shri Jatin Sarvaiya and his associates hold just 11.87% equity capital in the Appellant's capital and still he has been appointed as the Jt.Managing director, that his holding in fact is less than the shares directly held by the 'Parekhs' (Mrs. Mamta Parekh and Mrs. Ami Parekh of Ketan Parekh family), holding of 15.84%. He also referred to the presence of Ketan Parekh, and his brother on the Board of the Appellant and their exit from the Appellant after the scam unfolded. Common address, common employees, common name, common interest by joint venture etc., cannot be considered as mere coincidence or accidental. In this context Shri Dada submitted that the Global Trust Bank Ltd had vide its letter dated 27.6.2001 had furnished information relating to the securities of Nirma, Tips Industries, DSQ Industries, DSQ Biotech. Shonk Technology , Aftek Infosys and Global E.Commerce, showing beneficiaries in the transactions as the Appellant, Classic Credit and TSL, that the said Global Trust Bank has in the said letter stated that the said shares were held as common security against the borrowings in the name of TSL and the Appellant, that this also indicated the fact that both TSL and Appellant, belong to Ketan Parekh group. Shri Dada also referred to the statements of Shri Broota and Shri Shukla to show the connectivity of the Appellant with Ketan Parekh family. Learned Senior Counsel referred to certain illustrative transactions cited in the impugned order and in particular transaction in the scrips of Lupin Laboratories and pointed out the intimate interplay of the Ketan Parekh Group entities including the Appellant. He pointed out that the pattern of transactions revealed in the order establish the inter connection of the Appellant with Classic Credit, TSL etc. Shri Dada submitted that in the light of the factual position available, it is clear that the Appellant is a part of the Ketan Parekh Group and the Appellant is now trying to distance itself from Ketan Parekh group to save itself from the consequences following the manipulative activities indulged in the stock market by Ketan Parekh group. Shri Dada further stated that though the impugned order is directed to several of Ketan Parekh group companies, none of them except the Appellant has filed an appeal, is also note worthy . So was the case at the time of hearing before the Respondent, said the learned Senior Counsel.
38. With reference to the Appellant's version that the impugned order was passed without following the principles of natural justice, the learned Senior Counsel submitted that there is no merit in this allegation, that it is nothing but an objection for the sake of objection. With reference to the order dated 4.4.2001 Shri Dada submitted that it was an ad-interim measure, in the wake of extreme emergency, and to protect the interests of investors and the securities market the Appellant made the impugned order that the exercise of such a power has the approval of the law and the Courts have approved of the legal position in this regard. Since an emergent action was called for, order on 4.4.2001 was issued and the Appellant and others covered in the order were given post decisional hearing opportunity and the Appellant had made use of the same fully. He refuted the Appellant's contention that the order dated 21.6.2001 is a final order and stated that in the order itself it has been stated, that the Respondent had considered the documents and material available on record and the submissions of the representatives of the concerned parties and in the light of the same he held that the noticees have prima-facie violated the statutory provisions, that the order debarring the noticees is an interim order, pending completion of an exhaustive inquiry which the Respondent had ordered vide the said order. Shri Dada further submitted that the direction to the inquiry officer was that, he "after considering the material available on the basis of investigations conducted so far and the material which may be further supplemented, will expeditiously complete the proceedings, after following the procedures as laid down in the regulations", that thus it is clear that the inquiry officer was not precluded from examining fresh material which would be available in due course. Learned Senior Counsel submitted that during the course of enquiry, the enquiry officer is empowered to issue show cause notices, if he so considers and the enquiry officer has rightly issued the notices in the on going present enquiry, that the Enquiry officer does not become functus officio on issuing the first show cause notice, that he continues to be the enquiry officer till he submits his report. Shri Dada pointed out that on the contrary if the Enquiry Officer fails to issue show cause notice and decides the issue, he could be blamed for not following the principles of natural justice.
39. With reference to the allegation that material relied on by the Respondent was not allowed to be inspected by the Appellant, Shri Dada submitted that the Respondent has given reasonable opportunity to the Appellant to inspect the material to counter the charges, that in any case the impugned order is not the final order and that the final order would be made on receipt of the enquiry report and the Appellant is at liberty to putforth his point of view before the Enquiry Officer and again before the competent authority making the final order, that there is no lack of opportunity to the Appellant to present its case. Shri Dada submitted that at this stage the Respondent cannot express any views on the show cause notices, as to the scope, material provided there in etc., as those show causes notices are issued by the enquiry officer and not by the Respondent and if the Respondent expresses any views thereon now, it is likely to be viewed as the Respondent pre-deciding the matter pending before the enquiry officer. Learned Senior Counsel further submitted that all the documents which were available as on the date of post decisional hearing were offered to the Appellant that the other documents and material which were collected during the enquiry following the post decisional hearing were also relied upon since they corroborate the findings in the order dated 4.4.2001, that all the details and materials relevant were made available to the Appellant by the enquiry officer and since the enquiry is in progress the Appellant is in a position to rebut the material evidence before the Enquiry Officer and convince him. Shri Dada submitted that the Respondent had not denied inspection of any material but the representative of the Appellant had categorically declined inspection of any record concerning Ketan Parekh and his group companies. In this connection he referred to the averments in the Respondent's reply dated 29.10.2001 to the Affidavit filed by Shri Jatin Sarvaiya in his rejoinder. He stated that when Jatin Sarvaiya was called by the investigating officer for recording his statement he was inter alia asked as to whether he would like to have inspection of the records, relating to charges of manipulation of share price of Global Trust Bank by Ketan Parekh, Shri Sarvaiya had replied, that he did not want to inspect any record concerning Ketan Parekh and his group companies. Learned Senior Counsel referred to Shri Sarvaiya's statement dated 5.5.2001 in this regard. Shri Dada further submitted that in para 9 of the Memorandum of Appeal, the Appellant has admitted that materials/evidence were furnished and that in para 11(a) the Appellant has relied upon the statements of S/Shri Broota and Shukla.
40. Learned Senior Counsel submitted that the Appellant vide its letter dated 18.4.2001 (Annexure 'D' to the appeal) had specifically requested the Respondent to furnish the following viz. (a) a copy of the preliminary enquiry report on the basis of which the order as made on 4.4.2001 and (b) a copy of the evidence/material gathered as is alleged by the Respondent and the basis on which the Respondent has passed the order. In this context Shri Dada referred to the Appellant's own admission in para 9 of the appeal memorandum that " the inspection of documents/evidence which had been so far furnished to the Appellant had not revealed any material which could form the basis of debarment", which signifies that the materials were shown to the Appellant. In this context he also referred to the Appellant's letter dated 11.5.2001 (paras 7 and 8) (Annexure F) and stated that the Appellant was aware of the material based on which the Respondent had issued the order, that in para 8 of the said letter it has been clearly stated by the Appellant that "inspection of documents/evidence being directed by the Hon'ble Chairman did not reveal any material which could be the basis of the impugned order", that what material was to be given inspection is clear from para 7 of the memorandum of appeal - " The Respondent had immediately directed Dr.R.K.Kakkar to give inspection of all the documents and details which formed the basis of the order dated 4.4.2001"- and the Appellant has admitted that the inspection was carried out. Learned Senior Counsel also referred to the Appellant's letter dated 9.5.2001 received in the SEBI's office on 16.5.2001, wherein the Appellant had stated that "should you have any further clarification on these matters you may contact the undersigned", that it is to be noted that there in there is no reference to non compliance of the directions given by the Respondent at the time of hearing, for providing inspection of the material, that if there had been any lapse on the part of the officer who was directed to give inspection, the Appellant would not have kept quiet and certainly it would have been brought to the notice of the Respondent. Shri Dada referred to the Appellant's letter dated 19.6.2001, to show that there was no request for inspection of material pending with the Respondent. Learned Senior Counsel place considerable reliance on the following portion of the said letter that "This has reference to your letter bearing Ref.No.IES/ID1/RKK/SP/2640/2001 dated April 5, 2001 enclosing therewith a copy of the order dated April 4, 2001 passed by the Chairman, SEBI.
We were heard by the Hon'ble Chairman on 23rd April, 2001 without any disclosure. The Hon'ble Chairman, Dr.D.R.Mehta was pleased to direct inspection of the details and materials on the basis of which the above order was issued. Thereafter, we were heard on 11th May, 2001. Since 11th May we have been waiting for outcome of the hearing from SEBI, but there has been no response whatsoever. We have been kept absolutely in suspense about the ban on our activities, vide the above mentioned order.
All this while we were asked to provide various and voluminous data for which bare minimum period is given to us. Despite that we have provided most of the data in time. We fail to understand that at one end we are not informed about the ban order raised against us since 4.4.2001 and at the other end we are pressurised to submit voluminous data without reasonable time and which has no relevance to the grounds on which we have been debarred from our legitimate business activities.
We have already requested in person to inform us about the status of the proceedings and hearing. We once again request you to look into the matter and pass appropriate speaking order on the subject matter.
In the event if we do not hear from you soon from the date hereof, we will be left with no option but to assume that you want us to redress our grievances before any other appropriate forum".
41. Shri Dada submitted that though the letter refers to the Respondent's direction to give inspection, there is not even a whisper, about any lapse on the part of the concerned officer to give inspection, and that the subject of inspection has been referred to in the letter, no complaint of any failure to give inspection is there, that the request therein is for an early decision. According to the learned Senior Counsel this itself shows that the Appellant was given inspection.
42. Shri Dada referring to the Appellant's version that Shri D.B.Gupta's statement was not disclosed to the Appellant stated that the Appellant has not made any complaint in this regard in paras 9 and 10 of the appeal, which goes to suggest that the statement of Gupta was also shown alongwith other material shown to the Appellant. Shri Dada pointed out that it was not possible to show each and every piece of evidence collected in the investigation to the Appellant for the reason that it was a composite enquiry involving several entities and further the enquiry being at a preliminary stage disclosure of certain information at that point of time would adversely affect the ongoing enquiry and as such the Respondent had to withhold certain particulars of sensitive nature, in the larger interest. The main issue under investigation/enquiry is as to how Ketan Parekh's activities adversely affected the market to the detriment of investors and stock market activities. The Appellant is one of the group entities. In such a composite mega investigation, if the disclosure of certain material is likely to adversely affect the investigation/enquiry, the concerned authority is entitled to withhold the same till the investigation/enquiry is over, that if the inquiry officer relies on such withheld data, he will certainly give an opportunity to the Appellant to make representation before he makes the final order. Shri Dada submitted that the Appellant has without any basis, raised the bogey of failure to provide inspection of the material evidence and the same need be ignored. He stated that the Respondent has complied with the rules of natural justice, as is necessary in an enquiry of the type under consideration.
43. With reference to the complaints against the Appellant referred to in the order, the learned Senior Counsel stated that the charges are very serious having an impact on the integrity of the market. He stated that the Respondent had received some complaints against the Appellant alleging that for certain shares sold through the Appellant payments were not made to the clients. As per a complaint from one European Investment Ltd, against the sale of 55,000 shares of Global Tele Systems , a sum of Rs.36.27 crore and against 35,000 shares of Himachal Futuristic Communication Ltd (HFCL) another sum of Rs.34.44 crore, payment was not received from the Appellant that, yet another lapse complained is in the case of Claridge Investments and Finance Ltd, which is a member of the National Stock Exchange and acting as client of the Appellant, that the said company brought out 4,80,000 shares of HFCL during settlements 42 and 44 of 2000, but the Appellant did not deliver the shares within the prescribed time, that in another complaint it has been alleged that the persons who had not dealt with the Appellant and TSL were shown as clients in their books. Shri Dada referred to the copy of the complaints and other materials in this regard relied upon by the Respondent, at page 100-112 of the Respondent's reply, and submitted that failures of these nature are not in conformity with the professional standards expected of a broker, that a broker who acts in a manner detrimental to the interests of its clients in particular and the capital market in general is not a fit and proper entity to continue in the capital market.
44. Shri Dada submitted that the investigation/enquiry is a composite one covering several component companies of the Ketan Parikh Group. The order has discussed the role of several entities which include the Appellant also. He referred to the following observation in the impugned order that "during the course of investigation carried out by SEBI in the shares of Aftek Infosys Ltd, Lupin Laboratories Ltd and Global Trust Bank Ltd, evidence has been found of price manipulation by Ketan Parekh group entities. The prima facie involvement of these entities in price manipulation was also seen in other scrips like Himachal Futuristic Communication Ltd, Zee Telefilms Ltd, Padmini Polymers Ltd. etc. In most of these instances, the brokers associated were TIFIL (the Appellant), TSL, N.H.Securities Ltd and Classic Shares and Stock Broking Services Pvt. Ltd". In this context Shri Dada referred to the findings recorded in the order against issue No.2, in the case of the manipulations in the shares of Global trust Bank Ltd, Aftek Infosys Ltd and Lupin Laboratories by various Ketan Parekh entities. With reference to the Appellant's role he referred to the illustrative case involving the shares of Lupin Laboratories. Referring to the data stated in the order, Shri Dada submitted that the Appellant and other Ketan Parekh entities had transacted in substantial quantities in the scrip of Lupin Laboratories, that its major client included Classic Credit Ltd., that investigation revealed that the Appellant had entered orders for purchase of shares with a view to establish higher price that this was done by entering large buy order at price higher than the last traded price, resulting in sweeping of the existing buy order in the market and establishing progressively higher price. Shri Dada also submitted that from the illustrative cases shown in the order, it is evident that the Appellant had also indulged in cross deals for its clients, despite there being a prohibition on the same. He refuted the Appellant's contention that the cross deals are permissible and there is no prohibition on carrying on cross deals and submitted that the circular relied upon by the Appellant does not in any way support the Appellant's contention in this regard. He further submitted that from the details of Order Log and Trade Log received from the Exchange, which were shown to the Appellant during the inspection, it could be seen that Ketan Parekh Group of entities were the selling clients of the Appellant and that other set of entities belonging to Ketan Parekh group were buying client of the other counter party broker, that the very purpose of impersonal trading in which sellers and buyers without knowing each other put their trades in the trading system of the exchanges and which in turn ensured " best price" was defeated through synchronised/with the prior understanding trades put by the Appellant and counter party broker of their respective clients. The proximity of timing of putting buy and sell orders, making trades almost on every occasion coupled with exact matching of price and quantity of shares between buying and selling broker clearly show that deals were actually negotiated deals put through the trading system in a synchronised manner to circumvent the prohibition of SEBI on negotiated deals.
45. Shri Dada submitted that from the data available it is clear that the Appellant indulged in irregularities such as facilitation of price manipulation, creation of artificial volume, price establishment, cross deals etc. against the fair market practices to the detriment of investors. In this context he cited US Supreme Court decision in Earnest & Earnest v. Hochflder to explain the meaning of "manipulation" in the stock deals and also the concept like 'Wash Sales' and "matched orders" resorted to by the Appellant.
46. With reference to the Appellant's version that the orders dated 4.4.2001 and 1.6.2001 do not speak any thing with reference to the Appellant's merchant banking activities and still the Appellant has been debarred from taking up merchant banking business, Shri Dada stated that the Respondent has embarked on a mega investigation on the role of Ketan Parekh and the entities owned and controlled by him, in the wake of the market scam unfolded in Feb-March, 2001 and there is sufficient evidence to form a prima-facie view that the Appellant and other entities in the group had manipulated market for personal benefit, in total disregard to the interests of the investors at large. Having found that the Appellant has indulged in unfair practices, and that the Appellant presently being under detailed scrutiny it is but fair to put off the Appellant from undertaking any stock market related activities which includes merchant banking and hence the debarment, pending the outcome of the ongoing enquiry.
47. With reference to SEBI's power to issue the impugned order the learned Senior Counsel stated that now it is well settled position in the light of several decisions of the various High Courts that the Respondent is empowered to issue orders of the like one impugned. In this context he referred to the latest decision of the Hon'ble Bombay High Court in Anand Rathi v. SEBI (2001) 32 SCL 227 and this Tribunal in Shanker Sharma V SEBI (Supra).
48. I have very carefully considered the material available in the impugned order and the memorandum of appeal, rejoinder etc., filed by the parties, as also the detailed submissions of the learned Counsel for the parties as also the several authorities cited by them to support their respective point of view.
49. The Appellant's argument that the order dated 21.6.2001 is a final order is difficult to accept as from the order itself it is clear that it is not the final order. In this context at the cost of repetition I would extract the relevant portion from the order which makes the position clear:
"I hold that they have prima facie violated the provisions of SEBI Act read with SEBI(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, and SEBI (Brokers and Sub Brokers) Regulations, 1992. I am of the view that orders of SEBI dated 4.04.2001 and 10.04.2001 debarring them from undertaking any fresh business as stock broker and Merchant Bankers till further orders should be continued. An order appointing an Enquiry Officer to enquire into the violations by Triumph International Finance(India)Ltd, Triumph Securities Ltd. NH Securities Ltd., Classic Share and Stock brokers Ltd, KNP Securities Ltd and V.N Parekh Securities Ltd of the provisions of the SEBI act, Rules and Regulations is passed. The Enquiry Officer after considering the material available on the basis of investigations conducted so far and the material, which may be further supplemented, will expeditiously complete the proceedings, after following the procedure as laid down in the regulations. On receipt of the enquiry officer's recommendations, further decision as to whether prohibition to carry out fresh broking activity on the entities should be continued for a further period or it should be withdrawn, will be taken."
(emphasis supplied).
50. From the above extract it is clear that the order made by the Respondent on 21.6.2001 is not a final order that the final order will be made only on completion of the enquiry ordered by the Respondent, and till such time a final decision based on the conclusion of the ongoing enquiry is taken, the temporary debarment in force would continue. The direction to the Enquiry Officer to consider " the material available on the basis of the investigations conducted so far and the material which may be further supplemented" is indicative of the fact that the Enquiry Officer is empowered to issue supplementary show cause notice, if so required
51. The Respondent's power to issue such an impugned order pending inquiry was examined while considering the Appellant's prayer for interim orders. The view expressed by this Tribunal while deciding the said prayer still hold good. The Tribunal in the said order (2001) 33 SCL 363 had held that:
"The Appellant's contention that SEBI has no power under section 11/11B of the Act to issue such an order also cannot sustain in view of the decision of the Hon'ble Bombay High Court in Anand Rathi's case (supra). The Issues raised in the said case and the decision thereon have a bearing on the issues raised in the appeal. In the said case in the wake of allegation that Shri Anand Rathi, the then President of BSE had obtained certain information considered as confidential and sensitive from the surveillance department of BSE, SEBI conducted a preliminary enquiry and based on the findings of the enquiry SEBI formed a prima-facie opinion that Shri Rathi's action affected the integrity of the capital market and in order to ensure that no further harm or detriment is caused to the market or that investors are not adversely affected or that the safety and security of the markets remain unimpaired , invoking the powers under sections 11 and 11B, SEBI vide order dated 12.3.2001 restrained Shri Rathi and his associate companies from undertaking any fresh business as a broker till further orders. Shri Rathi filed a Writ Petition in the Hon'ble Bombay High Court challenging the said order. The following observations made by the Hon'ble Court on 2.5.2001 while dismissing Shri Rathi's Writ Petition are applicable to the present case as well:
Para 17:
"The plain reading of section 11 itself shows that SEBI has to protect interests of the investors in securities and to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-section (2) of section 11 and in due discharge of its duty cast upon SEBI as part of its statutory functions, it has been invested with the powers to issue directions under section 11B.... However, the impugned order cannot be termed as either punishment or penalty. It is only an interim measure to prevent further possible mischief of tampering with the securities market. A preliminary enquiry into the conduct of the petitioners has been conducted. A preliminary report is also submitted and it is found prima facie that the petitioners have been indulging in manipulations of securities market. Hence, in order to safeguard the interest of the investors and to maintain the integrity of the market the petitioners have been directed not to undertake any fresh business as brokers till the enquiry proceedings are completed and further proceedings in the matter are taken. In our opinion, the impugned order as passed by SEBI is fully empowered in taking"
Para 18 " Section 11B is an enabling provision enacted to empower the SEBI Board to regulate securities market in order to protect the interests of the investors.
.....We have, therefore, to adopt the construction that gives force and life to the legislative intention rather than the one which would defeat the same and render the protection illusory. In the matter of construction of enabling statute, the principle applicable is that if the Legislature enables something to be done, it gives power at the same time, by necessary implication to do everything which is indispensable for the purpose of carrying out the purpose in view. We thus find that the SEBI has ample authority in law to take the action under section 11B as has been taken by it".
Para 21:
" In the light of the above decisions and also in the light of the fact that the SEBI as regulator of securities market is empowered to take all necessary measures to protect the interest of the investors and the capital market, we have no hesitation in holding that the SEBI is fully competent and is empowered by sections 11 and 11B to pass interim order in aid of the final order..... SEBI is charged with duty to protect the public and the integrity of the capital markets and as a Regulator, it is certainly empowered to order suspension as an interim measure pending investigation into serious allegation of manipulation and insider trading. We, therefore, overrule the submission that the SEBI had no power to pass the impugned order."
Para 35 " ...... SEBI as a regulatory agency has been constituted with avowed object or protecting the interest of the investors. The decision taken by the regulatory agency in exercise of its powers is entitled to the greatest weight and the Courts will be slow to interfere with such decisions of orders".
52. In the context of the submission made by Shri Rathi's Counsel in the said writ petition that the interim order should not completely stop the appellants during business, the Honourable Court observed:
" the question is not whether the petitioners should be permitted to trade in any particular scrip but whether in public interest they should be permitted to trade at all pending investigation into the allegations. Secondly, this very question would involve weighing the nature of the allegations, the extent of the petitioners involvement and, most importantly the element of public interest. But these are all matters for the consideration of the authority making the order which in this case is SEBI. In the facts of this case, it cannot be said that SEBI's orders are unwarranted in law or without any justification. The SEBI is charged with the duty to protect the public. What will protect the public must involve an exercise of discretionary powers and so the question of the appropriate remedy is necessarily a matter of administrative competence." (para 37)
53. The impugned order is only an interim order and not a final order as claimed by the Appellant . Since it is an interim order and that an enquiry is in progress I do not consider it necessary and proper for the Tribunal to embark on an enquiry by itself into the facts of the case at this stage, but leave it to the Enquiry Officer concerned who, it is expected will consider the facts and follow the statutory requirements and also the rules of natural justice while arriving at the conclusions. With reference to the submissions relating to the interpretation of the data and on the adequacy or inadequacy of the evidence putforth by learned Counsel for the parties, I refrain from making any observation now, but to say that the Respondent after investigation has come to a prima facie conclusion warranting debarment of the Appellant from taking up stock broking and merchant banking activities for the time being - till the enquiry findings are available - and that the enquiry is in progress. The impugned order is stated to be issued in the interest of investors and the securities market. Therefore it may not be appropriate, at this juncture for the tribunal to make any comments on the adequacy or inadequacy of the evidence or express any views on the decision taken by the Respondent based on its perception of the material available before it.
54. All the issues addressed in the order are therefore left open. As already stated, since an enquiry is in progress, it is felt that it will not be in order for the Tribunal to finally adjudicate the matter now, as a finding by the Tribunal on the charges leveled against the Appellant would in effect pre-empt the enquiry itself. Even though the factual position putforth by the parties have been stated in this order in detail, I refrain from drawing any conclusion based on those facts for the time being so as to enable the Enquiry Officer to hold a purposeful enquiry and the Respondent to pass an appropriate order.
55. The Tribunal had occasion in Shankar Sharma & Ors. v. SEBI to examine an order made by the Respondent, debarring the Appellants therein, from undertaking fresh business etc. in the wake of the prima facie finding of market manipulation etc., in Feb-March, 2001, pending completion of an enquiry ordered by the Respondent. This Tribunal had upheld the Respondent's order in the said case stipulating that the enquiry be completed and orders passed with in a time frame. It is felt that in the Appellant's case also, the enquiry need be completed expeditiously and the order passed at the earliest, as the Appellant has been put out of business because of the debarment order of the Respondent pending enquiry.
56. It is seen from the order that since April, 2001, the Appellant has been deprived of carrying on its business activities. The impugned order passed on 21.6.2001 states that the ban on the Appellant undertaking fresh business would continue pending enquiry, meaning thereby that if the enquiry is prolonged the ban on the Appellant taking fresh business also would continue. It may not be fair and proper to allow the enquiry to continue indefinitely and thereby subject the Appellant to undue hardship. But at the same time, it will be also unfair to deny reasonable time to the Respondent to complete such an enquiry involving several entities. According to the information furnished by the Respondent an Enquiry Officer has already been appointed and the enquiry is in progress. It is felt that in all fairness the enquiry should be completed as expeditiously as possible. No doubt Shri Dada had stated that the enquiry is not with reference to one specific entity but directed to several entities and as such is a time consuming one. The scope of enquiry may be wide, number of persons under scrutiny may be large, but it cannot go on indefinitely in view of the fact that the Appellant has been put out of business subject to the outcome of the enquiry, since April, 2001 and such continued deprivation of its right indefinitely is not a matter to be viewed lightly. It is now almost an year that the investigation/ enquiry is going on and it is high time that it is completed early. It is therefore felt that the enquiry and final order therein, need be expedited. The Respondent is therefore directed to complete the enquiry and pass the final order with detailed reasons within 10 weeks from today. In case the Respondent fails to complete the enquiry and pass the final order within the stipulated time, the order restraining the Appellant undertaking fresh business as Stock Brokers and Merchant Bankers would cease to operate from the date of expiry of the said time limit, enabling the Appellant to undertake fresh business as Stock Brokers, and Merchant Bankers. The Appellant is directed to extend full co.operation in the enquiry, so as to enable the Respondent to complete the process within the time stipulated above. It is made clear that all contentions of the parties are expressly kept open. The Respondent shall decide the matter without being influenced in any manner by the observations made in this order.
57. In the light of the facts and circumstances of the case and also the legal position set out by the Hon'ble Bombay High Court in the Anand Rathi's case, I do not consider it proper to interfere with the impugned order at present. Therefore, the order is left undisturbed. The order is upheld.
58. The appeal is dismissed.