Securities Appellate Tribunal
Kiran Madhusudan Sheth vs Sebi on 20 September, 2021
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved: 14.9.2021
Date of Decision:20.9.2021
Appeal No.446 of 2020
Janak Chimanlal Dave
140/L, Cavel Cross Lane No.7,
4th Floor, Kaldadevi Road,
Mumbai-400002. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
G-Block, Bandra Kurla Complex,
Bandra (E), Mumbai 400 051. ...Respondent
Mr. Nirman Sharma, Advocate i/b Mr. Vikas Bengani, Advocate for
the Appellant.
Mr. Gaurav Joshi, Senior Advocate with Mr. Nishit Dhruva, Mr.
Hridhay Khurana, Mr. Yash Garach and Ms. Aalisha Shah, Advocates
i/b MDP & Partners for the Respondent.
With
Appeal No.460 of 2020
Jatin Shah
295/A, Sumitra Building,
Bhimani Street, C.R., Matunga,
Mumbai-400019. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
G-Block, Bandra Kurla Complex,
Bandra (E), Mumbai 400 051. ...Respondent
Mr. Vikas Bengani, Advocate for the Appellant.
2
Mr. Yash Garach, Advocate with Mr. Nishit Dhruva, Mr. Hridhay
Khurana and Ms. Aalisha Shah, Advocates i/b. MDP & Partners for
the Respondent.
With
Appeal No.451 of 2020
Bhupesh Harishchandra Rathod
Flat No.1, First Floor,
"A" Wing, Labh Niwas,
4th Kethwadi, Nanubhai Desai Road, Mumbai-
400004. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
G-Block, Bandra Kurla Complex,
Bandra (E), Mumbai 400 051. ...Respondent
Mr. Vikas Bengani, Advocate for the Appellant.
Mr. Gaurav Joshi, Senior Advocate with Mr. Nishit Dhruva, Mr.
Hridhay Khurana, Mr. Yash Garach and Ms. Aalisha Shah, Advocates
i/b. MDP & Partners for the Respondent.
With
Appeal No.469 of 2020
Jigar Praful Ghogari
Room No.6, 3rd Floor,
House No.140K,
Madhavi Thakarsi Building,
Cavel Cross Lane No.7,
Kaldadevi Road, Mumbai-400002. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
G-Block, Bandra Kurla Complex,
Bandra (E), Mumbai 400 051. ...Respondent
Mr. Vikas Bengani, Advocate for the Appellant.
3
Mr. Yash Garach, Advocate with Mr. Nishit Dhruva, Mr. Hridhay
Khurana and Ms. Aalisha Shah, Advocates i/b. MDP & Partners for
the Respondent.
With
Appeal No.476 of 2020
Dilipkumar Pukhraj Jain
Flat No.13, 4th Floor,
Prem Sagar Building,
Nebsit Raod, Mazgaoan,
Mumbai-400010. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
G-Block, Bandra Kurla Complex,
Bandra (E), Mumbai 400 051. ...Respondent
Mr. Vikas Bengani, Advocate for the Appellant.
Mr. Yash Garach, Advocate with Mr. Nishit Dhruva, Mr. Hridhay
Khurana and Ms. Aalisha Shah, Advocates i/b. MDP & Partners for
the Respondent.
With
Appeal No.477 of 2020
Kiran Bhiku Bhanaes
Flat No.16/A,
New Bhatia Mahajan Wadi,
Ground Floor, Dr. M.B. Velkar Street,
Kalbadevi Road, Mumbai-400002. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
G-Block, Bandra Kurla Complex,
Bandra (E), Mumbai 400 051. ...Respondent
Mr. Vikas Bengani, Advocate for the Appellant.
4
Mr. Yash Garach, Advocate with Mr. Nishit Dhruva, Mr. Hridhay
Khurana and Ms. Aalisha Shah, Advocates i/b. MDP & Partners for
the Respondent.
With
Appeal No.478 of 2020
Kishan Balaram Shigvan
159/6, Manik House,
Room No.5, Dr. Vigas Street,
Mumbai -400002. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
G-Block, Bandra Kurla Complex,
Bandra (E), Mumbai 400 051. ...Respondent
Mr. Vikas Bengani, Advocate for the Appellant.
Mr. Yash Garach, Advocate with Mr. Nishit Dhruva, Mr. Hridhay
Khurana and Ms. Aalisha Shah, Advocates i/b. MDP & Partners for
the Respondent.
With
Appeal No.554 of 2020
1.Hemant Sheth Second Floor, 115/117, Bhuleshwar Road, Near Kabutarkhana Bhuleshwar, Mumbai-400002.
2. Prem Parikh Flat No.1, 140/K, Cavel Cross Lane No.7, First Floor, Kalbadevi Road, Mumbai-400002.
3. Ankit Sanchaniya Flat No.9, "B" Wing, Zainab Baug, Bharucha Road, Dahisar (East), Mumbai-400068.
4. Shree Shagun Financial Services (Partnership Firm) 5 First Floor, Flat No.16, 196A Tara House, Dr. Viegas Street, X Lane No.8, Chira Bazar, Mumbai - 400002. ...Appellants Versus Securities and Exchange Board of India SEBI Bhavan, Plot No.C4-A, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai 400 051. ...Respondent Mr. Akshay R. Doctor, Advocate i/b Mr. Vikas Bengani, Advocate for the Appellant.
Mr. Yash Garach, Advocate with Mr. Nishit Dhruva, Mr. Hridhay Khurana and Ms. Aalisha Shah, Advocates i/b. MDP & Partners for the Respondent.
With Appeal No.567 of 2020 Kiran Madhusudan Sheth 113/115, 3rd Floor, Above Ratanlal Barfiwala Shop, Bhuleshwar Road, Mumbai-400002. ...Appellant Versus Securities and Exchange Board of India SEBI Bhavan, Plot No.C4-A, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai 400 051. ...Respondent Mr. Vikas Bengani, Advocate for the Appellant. Mr. Yash Garach, Advocate with Mr. Nishit Dhruva, Mr. Hridhay Khurana and Ms. Aalisha Shah, Advocates i/b. MDP & Partners for the Respondent.
With Appeal No.178 of 2021 Jinal Apurval Rawal Room No.201, 2nd Floor, 6 Rajyog Building, 1st Carpenter Street, Nenu Bhai Desai Road, Mumbai-400004. ...Appellant Versus Securities and Exchange Board of India SEBI Bhavan, Plot No.C4-A, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai 400 051. ...Respondent Mr. Harsh Kesharia, Advocate for the Appellant. Mr. Gaurav Joshi, Senior Advocate with Mr. Nishit Dhruva, Mr. Hridhay Khurana, Mr. Yash Garach and Ms. Aalisha Shah, Advocates i/b. MDP & Partners for the Respondent.
With Appeal No.217 of 2021 Bhavesh Pabari 196/A, Tara House, First Floor, Flat no.16, Dr. Viegas Street, Cavel Cross Lane No.8, Chira Bazar, Mumbai-400002. ...Appellant Versus Securities and Exchange Board of India SEBI Bhavan, Plot No.C4-A, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai 400 051. ...Respondent Mr. Vikas Bengani, Advocate for the Appellant. Mr. Gaurav Joshi, Senior Advocate with Mr. Nishit Dhruva, Mr. Hridhay Khurana, Mr. Yash Garach and Ms. Aalisha Shah, Advocates i/b. MDP & Partners for the Respondent. CORAM: Justice Tarun Agarwala, Presiding Officer Justice M.T. Joshi, Judicial Member Per: Justice Tarun Agarwala, Presiding Officer 7
1. Eleven appeals has been filed against a common order dated 31st July, 2020 passed by the Whole Time Member ('WTM' for short) holding that the appellants had indulged in reversal trades and had made unlawful gains and the appellants were directed to disgorge the amount so calculated jointly and severally.
2. The facts leading to the filing of the present appeal is, that investigation was conducted in the trading of the scrip of Polytex India Limited for the period 13th April, 2012 to 17th December, 2012. Based on the investigation an ex-parte ad-interim order dated 10th May, 2013 was passed restraining the eleven entities from accessing and dealing in the securities market either directly or indirectly. Subsequently, the ex- parte ad-interim order was confirmed on 7th January, 2014. Thereafter, an impounding order was passed on 20th August, 2015.
3. Subsequently, a show cause notice dated 30th December, 2016 was issued alleging that the trading noticees received funds from the financing noticees 8 which were directly transferred to the stock brokers against the pay in obligation of the trading noticees. The show cause notice also alleged synchronized trading, reversal trading and self-trading amongst themselves which resulted in creating artificial volume and contributed to the positive Last Trade Price ('LTP' for short) and, thus, the noticees made unlawful gains.
4. The WTM after considering the matter passed an order dated 31st January, 2019 holding that the noticees had violated Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as 'PFUTP Regulations') as well as Section 12A of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'SEBI Act') and restrained the noticees from accessing the securities market directly or indirectly for different periods to different noticees. The WTM further directed the 9 noticees to disgorge Rs.3,05,99,174 alongwith interest at the rate of 12% per annum jointly and severally.
5. The appellants before us filed 12 appeals being appeal no.205 of 2019 and other companion appeals. These 12 appeals were decided by a common judgement dated 4th March, 2020. This Tribunal held that all the appellants except appellant in appeal no.356 of 2019 violated the provision of the SEBI Act and the PFUTP Regulations and that the violations was established through connection, fund transfer, nature and magnitude of trading, contribution to LTP etc. This Tribunal further held with the document relating to two entities regarding detailed calculation of the disgorgement was not provided.
6. Further, aggregate of trading over a period of 8 months was insufficient to prove reversal trades and that details regarding date wise trading pattern was needed. The Tribunal further held that the financing noticees were equally guilty of violation of the PFUTP Regulations and the SEBI Act. Having found that 10 there was a direct connection between the financing noticees and the trading noticees this Tribunal held that the financing noticees who were earlier restrained by SEBI from accessing the securities market had adopted a scheme by funding trading entities thereby indirectly accessing the securities market. The Tribunal further held that detailed calculations regarding profits were not given and calculations of only certain entities were given. Accordingly, this Tribunal passed the following order which is extracted hereunder:
"34. In the result we pass the following directions:-
(a) Appeal No. 356 of 2019 is allowed and we permit the appellant to liquidate the shares lying in the margin account of Ghogari (Appellant in Appeal No. 207 of 2019) to the extent of the legally permissible debit amount.
(b) In respect of other 11 appeals while upholding the finding in the impugned order that the appellants have violated provisions of SEBI Act and PFUTP Regulations and therefore upholding the direction relating to the restraint imposed on the appellants we remit the matter to SEBI with the following directions:-11
(i) Bring out date-wise details of reversal trades in respect of the trading noticees.
(ii) Bring out details of calculation of profits in respect of all the trading noticees.
(iii) SEBI shall provide (i) and (ii) above to all the appellants and thereafter recalculate the amount of disgorgement against the appellants and pass an order within three months from the date of this order after giving an opportunity of hearing.
35. All appeals are disposed off with the aforesaid directions. No orders on costs."
7. Pursuant to the remand by this Tribunal, the WTM passed a fresh order dated 31st July, 2020 holding that the appellants had indulged in reversal trading and recalculated the ill-gotten gains amounting to Rs.2,69,93,016.79 and, accordingly, directed the appellants to pay the said amount jointly and severally alongwith interest at the rate of 12% per annum. The appellants being aggrieved by the said order has filed the present appeal which are being heard and decided together.
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8. We have heard Mr. Nirman Sharma, Advocate assisted by Mr. Vikas Bengani, Mr. Akshay R. Doctor and Mr. Harsh Kesharia, Advocates for the appellants and Mr. Gaurav Joshi, Senior Advocate assisted by Mr. Nishit Dhruva, Mr. Hridhay Khurana, Mr. Yash Garach and Ms. Aalisha Shah, Advocates for the Respondent.
9. The contention of the appellants are:
i) The directions of this Tribunal as given in para 34
(b)(i) and (ii) has not been complied with as date wise details of reversal trades in respect of the trading noticees has not been brought out in the impugned order.
ii) No finding has been given by the WTM as to which trade of which appellant matched with the trade of the other appellants amounting to reversal trades.
iii) Providing details of reversal trades was insufficient. A categorical finding on each trades 13 being reversal trades was required to be given by the WTM.
iv) The calculation of profits shown is incorrect as while calculating unlawful gains only statutory dues have been deducted. Administrative and brokerage charges should have been also deducted while arriving at the net profit/unlawful gains.
v) No disgorgement could be imposed upon the financing noticees as they have only financed the money and did not indulge in synchronized/self or reversal trades.
vi) Appellant Jinal Apurva in appeal no.178 of 2021 contended that he had incurred a loss of Rs.8,26,149 which is admitted in paragraph nos. 8 and 15 of the impugned order and contends that in view of the loss incurred by him no order of disgorgement could be imposed upon him.
10. On the other hand the learned senior counsel contended that the order of the WTM has been passed 14 in compliance with the directions given by this Tribunal and there is no infirmity in the said order.
11. Having heard the learned counsel for the parties, we find that the remand order of this Tribunal was limited and confined to providing details of reversal trades and further to provide details of calculations of the profits of all the appellants and, accordingly, this Tribunal had directed the WTM to bring out date wise details of reversal trades in respect of the trading noticees and bring out details of calculations of profits in respect of all the noticees.
12. It is correct that the date wise details of reversal trades in respect of the trading noticees qua the appellants have not been provided in the impugned order and, to that extent, the appellants are justified in contending that the order of this Tribunal has not been complied with. But we are of the opinion that by not providing these details in the impugned order the impugned order does not get vitiated for the reasons stated hereunder.
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13. We find that the details of these reversal trades is voluminous and runs into several pages. However, such details were duly provided to the appellants as per our directions given in para 34(b)(iii). We also find that no finding has been given with regard to which trade is a reversal trade with another trading noticee and even though such finding is not given in the impugned order. A general finding has been given that all the trades, the details of which were supplied to the appellants were reversal trades. We also find that no objection was raised by any of the appellants that this trade is not a reversal trade or that trade is not a reversal trade. The appellants before the WTM only reiterated that complete details of reversal trades was not provided to them which fact is incorrect. Thus, we are of the confirmed opinion that even though the WTM has not discussed as to which trade matched with another noticees trades to make it a reversal trade the impugned order does not get vitiated on account of the fact that the appellant did not protest anywhere 16 that the details so provided does not indicate it to be a case of reversal trades.
14. The allegation by some of the appellants who were financing noticees contending that no disgorgement amount could be imposed upon them as they have not carried out any synchronized/self/ reversal trades is misconceived and cannot be accepted. We are of the opinion that this assertion cannot be raised again in these proceedings as this Tribunal had already found them culpable in its earlier order of 4th March, 2020. The Tribunal in its earlier order had found that the financing noticees were not only the financiers but had a direct connection with the trading entities and the amount of money was transferred by them directly to the trading appellants. Further, the Tribunal held that they were already restrained from accessing the securities market and by funding other trading noticees had indirectly accessed the securities market. The creation of manipulative and fraudulent scheme of trading committed by the 17 financing noticees made them liable to jointly pay the amount of disgorgement.
15. The contention of the appellant Mr. Jinal Apurva in appeal no.178 of 2021 that he is not liable to pay any amount towards disgorgement as he had suffered a loss is misconceived. The contention that under Section 11B only unlawful gains could be disgorged and since he has incurred a loss no disgorgement can be made against him is erroneous. We find that the said appellant alongwith other trading noticees had traded amongst themselves and not only connived by misused the stock exchange platform but also violated Regulations 3 and 4 of the PFUTP Regulations. Thus, merely because this appellant has incurred a loss does not mean that he will go scot-free for the violations committed by him under the SEBI Act and the PFUTP Regulations. In this regard, the principle of joint tortfeasors is fully applicable. The Supreme Court in Khenyei v. New India Assurance Company Ltd & Ors (2015) 9 SCC 273 held as under:
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"3. It is a case of composite negligence where injuries have been caused to the claimants by combined wrongful act of joint tortfeasors. In a case of accident caused by negligence of joint tortfeasors, all the persons who aid or counsel or direct or join in committal of a wrongful act, are liable. In such case, the liability is always joint and several. The extent of negligence of joint tortfeasors in such a case is immaterial for satisfaction of the claim of the plaintiff/claimant and need not be determined by the court. However, in case all the joint tortfeasors are before the court, it may determine the extent of their liability for the purpose of adjusting inter-se equities between them at an appropriate stage. The liability of each and every joint tortfeasor vis-a-vis to plaintiff/claimant cannot be bifurcated as it is joint and several liability. In the case of composite negligence, apportionment of compensation between tortfeasors for making payment to the plaintiff is not permissible as the plaintiff/claimant has the right to recover the entire amount from the easiest targets/solvent defendant."
16. The aforesaid decision is squarely applicable and applies in full force on this appellant and, therefore, in our opinion, the said appellant is also to disgorge the amount so calculated jointly and severally.
17. The appellant contended that while calculating the profit/unlawful gains the respondent was required to consider the legitimate expenses incurred by them and only thereafter the net profit could be calculated 19 which alone could be disgorged, if any. In this regard it was contended that the WTM had only allowed statutory deductions and had arbitrarily not deducted the brokerage and other legitimate expenses which the appellant had incurred.
18. In this regard Section 11B of the SEBI Act provides as under:
"11-B. Power to issue directions and levy of penalty.
(1) 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,--
............................
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.
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 20 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."
19. A perusal of the aforesaid provision indicates that any person who has made profits or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or Regulations made thereunder would be liable to disgorge an amount equivalent to the unlawful gain or loss averted by such contravention.
20. Thus, disgorgement can only happen if the person contravenes the provisions of the Act or Regulations. Secondly, the disgorgement is equivalent to the wrongful gain made or loss averted. Thus, disgorgement cannot exceed the amount of wrongful gains.
21. The concept of disgorgement under the SEBI laws is based on the principle that a person in possession of wrongful gains by which he is enriched may be asked 21 to part with the amount equivalent to such gains alongwith interest.
22. Black's Law Dictionary defines disgorgement as "The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion." To disgorge means to deprive a person of the value by which he is unjustly enriched. Further, disgorgement is an equitable remedy designed to deprive a wrong doer of his unjust enrichment. It aims in ensuring that a person in possession of the wrongful gain does not continue to enjoy them. Section 11B of the Act only talks about disgorgement of unlawful gains/profits. The concept of "net profits" is not existing in Section 11B but the same has been carved out by Courts exercising equitable jurisdiction. Some Courts have granted only deduction of statutory dues, others have granted other legitimate expenses. In this regard, the learned senior counsel for the respondent fairly pointed out the decisions of the American Courts wherein divergent opinion of deductions have 22 been made especially the decision of Charles C. Liu, ET AL., v. Securities and Exchange Commission, WL 3405845, U.S. Securities and Exchange Commission vs. Goerge Slowinski, Securities and Exchange Commission, v. Christopher A. Faulkner, 2021 WL 75551, Kokesh v. Securities and Exchange Commission, 581 U.S. _(2017).
23. However, disgorgement in our opinion is an equitable remedy under Section 11B of the Act meant to prevent the wrongdoers from enriching himself by his wrong by wresting ill-gotten gains from the hands of the wrongdoer. The provisions relating to disgorgement is thus remedial in nature and is not punitive.
24. Thus, legitimate expenses can be deducted while arriving at net profit. The respondent in this case has only allowed statutory deductions expended as a deduction while arriving at the net profit but did not allow deduction of administrative expenses and brokerage incurred by the wrongdoer. We are in 23 agreement with the findings given by the WTM in this regard. In our opinion net profit from wrongdoing is the gain made by any business or investment, where both the receipts and payments are taken into account. We are further of the opinion that the appellant will not be allowed to diminish the show of profits by putting in unconscionable expenses or other inequitable deductions even though entire profits of a business may result from the wrongdoings of the appellants and therefore are not entitled for the deductions as prayed by them.
25. In this regard Section 37(1) of the Income Tax Act provides as under:
"37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
Explanation 1--For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business 24 or profession and no deduction or allowance shall be made in respect of such expenditure. Explanation 2.--For the removal of doubts, it is hereby declared that for the purposes of sub- section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession."
26. The aforesaid provision debars an assess claiming any deduction from business profits any expenditure which may be incurred for any purpose which is an offence or which is prohibited by law. The aforesaid principle equally applies to SEBI laws since disgorgement is not a penalty nor is punitive as held by this Tribunal in Gagan Rastogi vs. SEBI, in appeal no.91 of 2015 decided on 12th July, 2019.
27. In view of the aforesaid, administrative expenses and brokerage charges are in the nature of business expenses and are not legitimate expenses for the purpose of claiming deductions in order to arrive at the net profit. Disgorgement being an equitable 25 remedy and even though the profits results from wrongdoings, the appellants were rightly denied administrative expenses and brokerage.
28. For the reasons stated aforesaid all the appeals are devoid of merit and are dismissed with no order as to costs.
29. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the registry. In these circumstances, this order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally signed copy sent by fax and/or email.
Justice Tarun Agarwala Presiding Officer Justice M.T. Joshi Judicial Member RAJALA Digitally signed 20.9.2021 by KSHMI NAIR RAJALAKSHMI H RHN Date: 2021.09.25 H NAIR 06:38:07 +05'30'