R.N. Bhardwaj, Member
1. The appeal was taken up for final disposal with the consent of both the parties.
2. The appeal has been filed against the order of the Adjudicating Officer dated 20/05/2005 the operative portion of which reads as under:
“15. Therefore, in exercise of the powers conferred under section 15-I(2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 18,00,000/- (Eighteen Lacs Only) on Nokia Finance International Pvt. Ltd. for the reasons discussed above. This penalty is justified and appropriate as it would disgorge the unjust enrichment and disproportionate gain accrued to the entity.”
3. The appellant is a corporate member of Ahmedabad Stock Exchange of India and having its office at Ahmedabad.
4. Securities and Exchange Board of India (SEBI), the respondent, conducted an investigation into the dematerialization of shares of Accurate Exports Limited (hereinafter referred to as ‘AEL’) listed in the Stock Exchange, Mumbai (BSE). SEBI conducted investigations about the alleged dematerialization of shares higher than its paid up capital and the subsequent trading in its scrip in the secondary market. The investigation department of SEBI issued three summonses to Nokia Finance International Pvt. Ltd., (‘NFI’ for short), the appellant but they did not appear in response to any of the three summonses.
5. SEBI vide their letter dated 16/07/2004 appointed the Adjudicating Officer under Rule 3 of SEBI (Procedure for Holding Enquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 read with Section 15-I of SEBI Act, 1992 to enquire into and adjudge the failure of NFI to comply with the summonses of SEBI in violation of Section 11C(6) for which a penalty may be imposed under Section 15A of SEBI Act, 1992. The Adjudicating Officer issued a show cause notice dated 14/10/2004 to NFI communicating the allegations leveled against it and asking it why an enquiry in terms of the said Rules should not be conducted against it. There was no response from NFI and accordingly an enquiry was held against the appellant and personal hearing of NFI Director Mr. Samir Shah, was held on 14/02/2005. In the personal hearing Mr. Samir Shah informed that NFI had closed its business for the last 2-3 years and therefore was not in a position to reply to the proceedings. He further said that whatever replies had been given to the Investigating Officer may be treated as reply to these proceedings also. The Adjudicating Officer in his order held that NFI did not comply with the three summonses issued to it. The information and documents sought from NFI were listed in the Annexures to the summons, which are as under:
“a. name and address of directors of NFI as on specified periods and details of other directorships held by them;
“b. Complete details of transactions in the shares of AEL by NFI in the specified period;
“c. Complete details of transactions in the shares of AEL by NFI in the specified period.
“d. Details of off market trades done by NFI in AEL scrip in the aforesaid period.
“e. Copy of demat statement
“f. Copy of bank account statement indicating the funding for the aforesaid transactions.”
6. The Adjudicating Officer held in his order that NFI has not furnished replies to the queries (a), (b), (d) and (f) in the annexure to the summonses, mentioned above. He also said that NFI had 3.89 crores shares of AEL in its demat account as on 25/02/2002 which was 1.79 crore more than the total authorized capital of AEL. NFI was one of the brokers involved in selling these excess shares in the secondary market. NFI was also dealing on behalf of M/s. Coverage and Consultants for trading in the shares of AEL. It was also dealing on its own behalf in the proprietary account. NFI was holding 1.79 crores more shares in excess of the authorized capital of the company. NFI did not disclose the source from where it got these unauthorized shares. This makes the case very serious as the Investigating Authority could not know the real culprits. Had NFI cooperated with the Investigating Authority the real culprit who introduced the excess demat shares in the market could have been caught. Therefore the information sought by SEBI in the summonses was crucial and important for completing the investigation properly. By not complying the summons of 10th December, 2003 and partially complying with the summonses of 19/02/2004 and 08/03/2004, NFI violated the provisions of Section 11C(2) of SEBI Act, 1992 for which penalty is leviable under Section 15A of SEBI Act, 1992.
7. The Adjudicating Officer came to the conclusion that NFI made undue gain by trading in shares of AEL, the price of AEL shares during the period of investigation ranged from Rs. 2.00 to Rs. 0.10 per share. He concluded that assuming the excess shares were traded at Rs. 0.10 per share, NFI made an undue profit of Rs. 18 lakhs. The Adjudicating Officer, in exercise of powers conferred under Section 15I(2) of the SEBI Act, 1992 read with Rule 5 of the SEBI Adjudication Rules, imposed a penalty of Rs. 18 lakhs on NFI. He has also held in the impugned order that the quantum of penalty under Section 15A has been imposed considering the following factors:
(a) the amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of default;
(b) the amount of loss caused to an investor or group of investors as a result of the default; and
(c) the repetitive nature of the default.
8. The learned counsel for the appellant argued that it was incorrect to hold that the appellant did not provide the necessary information to SEBI for conducting the investigation. He submitted that appellant provided most of the required information and documents pertaining to the summonses issued by the respondent. A letter from Coverage and Consultants dated 16/03/2004 about the delivery of shares of Accurate Exports Limited (AEL) was submitted to SEBI. The letter which was addressed to NFI confirmed that 4,82,72,451 shares of AEL were transferred for sale in the account of Nokia Finance International Pvt. Ltd., on its behalf. The letter further says that shares mentioned against the demat account numbers have been returned by NFI and have been given delivery to the specified demat account numbers on behalf of Coverage and Consultants Ltd. The learned counsel for the appellant further argued that a complete demat account of NFI was submitted to SEBI for the period from 01/05/2001 to 31/05/2002. He submitted that from the statement it could be seen that only 34 lakhs of shares of AEL were dealt with by NFI and the rest of the shares were transferred to demat account of Coverage and Consultants as per their instructions. These 34 lakhs shares were within the authorized capital of AEL. The learned counsel also submitted that the impugned order was against the principles of natural justice because the penalty of Rs. 18 lakhs has been imposed on the appellant without mentioning in the show cause notice. The show cause notice did not say that non submission of information would result into penalty of Rs. 18 lakhs. On the contrary the show cause notice only alleged that the company had failed to provide information in response to summonses issued under SEBI Act and thereby made themselves liable for action under Section 15A of SEBI Act. It only asked to show cause within 15 days of receipt of this notice as to why an enquiry should not be held against the appellant as referred to under Section 15I of SEBI Act, 1992. He argued that natural justice demanded that the appellant should have been given an opportunity to respond to the specific charges in the show cause notice.
9. He further argued that in any case the penalty imposed on the appellant was disproportionately high with reference to the offences. He also cited the cases of D.A.Gadgil Vs. SEBI (2004) SAT 819 and KSL & Industries Ltd. Vs. SEBI (2004) sat 797. The learned counsel argued that there was no complaint against the appellant from the public about the dealing of shares of AEL. He submitted that the nature of punishment meted out to the appellant was harsh and disproportionately high in relation to the alleged offence. He submitted that appellant had returned the shares to Coverage and Consultants and handled only 34 lakhs shares and if any penalty was to be levied, it should be only for 34 lakhs shares and not for 1.79 crores shares. He, therefore, requested to set aside the impugned order.
10. The learned counsel for the respondent argued that the non-submission of information pursuant to summonses hampered the investigations. The information sought by SEBI was basic and important for conducting investigation. It was essential for knowing the origin or source of the fake shares. He submitted that even now the required information has not been submitted by the appellant. He also said that name and addresses of Directors of NFI as on specified period and details of other Directorship held by them was not difficult to submit if the appellant wanted to cooperate with the regulator. Similarly the details of bank account statement indicating the funding for the aforesaid transactions were very crucial to the said investigation which could have been complied with. He further submitted that the appellant had made a bland statement that NFI had been closed for the last 2-3 years and therefore was not in a position to respond to the summons, but nowhere had it been mentioned that the appellant had surrendered the broker licence. It is also a fact that appellant had received all the three summonses and yet did not respond. More over as a broker, the appellant is required to maintain the record for five years. He further argued that this was a very serious matter where the shares in excess of authorized capital had been issued and NFI was involved in the trading of such shares. Therefore, NFI should have fully cooperated with the regulator for finding out the real culprits who had issued excess dematerilised shares of AEL in the market. The fact that NFI received three summonses and chose not to supply the information amounts to committing the same offence repeatedly. The penalty imposed by the Adjudicating Officer, therefore, is justified and legitimate in this particular case and therefore the appeal should be dismissed and the impugned order should be upheld. There is no question of violation of natural justice in this case as the appellant was given repeated chances to submit the required information. He was also given a personal hearing on 14/02/2005 and with his consent the hearing was treated for both enquiry and adjudication proceedings.
11. We have carefully considered the documents submitted by the appellant and respondent, and also heard the learned counsel on both sides. We are of the opinion that the appellant did not supply necessary information and documents as sought by the respondent in response to the three summonses issued to him. He also did not supply the necessary information in his personal hearing before the Enquiry and Adjudicating Officer. We do feel that this information is crucial and central to the investigation. The copies of bank statements would certainly indicate the funding pattern of these transactions. Similarly, the name and address of Directors of NFI would also indicate whether there was any relationship with the AEL or with any other entity directly or indirectly involved in these transactions. The reply given by the appellant at the time of personal hearing which is recorded as minutes of personal hearing on 14/02/2005 indicates that the appellant was not willing to reveal much information about the matter. It is noted in the minutes that Shri Samir Shah, Director of NFI, said that they had closed business for the last 2-3 years and were not in a position to give any reply with respect to these proceedings. This does not seem to be very convincing because the closure of business would be from a specific date and the statement ‘period of 2 to 3 years’ is very vague. Moreov
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er there is no evidence on record to suggest that NFI had surrendered its brokers licence. In any case the records are not destroyed even after the business is closed as there is a provision in the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 to maintain and preserve the books of accounts for a minimum period of five years. 12. The appellant had been given more than one opportunity (three summonses) and a personal hearing to submit the required information which was submitted only partially. It is a serious case of excess dematerialized shares than the authorized capital being traded in the market. The appellant could have availed of the opportunity of submitting all the required information and come clean, but he failed to do so. We, therefore, feel that there is no violation of natural justice in this particular case and the penalty has been imposed as per the regulations. The impugned order indicates that the various factors to be reckoned under Section 15(J) of SEBI Act, 1992 were duly considered before deciding on the quantum of penalty imposed. In view of the fact that appellant has failed to give the necessary information to the respondent for conducting investigation into a very serious irregularity in the market, we are inclined to uphold the impugned order and dismiss the appeal. 13. No order as to costs.