SECURITIES EXCHANGE BOARD OF INDIA Vs M/S OPEE STOCK-LINK LTD.
Bench: ANIL R. DAVE,R. BANUMATHI
Case number: C.A. No.-002252-002252 / 2010
Diary number: 6104 / 2010
Advocates: K J JOHN AND CO Vs
E. C. AGRAWALA
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REPORTABLE
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2252 OF 2010
Securities and Exchange Board of India .....Appellant
VERSUS
M/s. Opee Stock-Link Ltd. & Anr …..Respondents
WITH CIVIL APPEAL NOS.2285, 2286, 2294 & 2303 OF 2010
J U D G M E N T
ANIL R. DAVE, J
1. All these appeals have been filed under the provisions
of Section 15-Z of the Securities and Exchange Board of
India Act, 1992 (hereinafter referred to as ‘the Act’)
challenging the impugned order dated 30th December,
2009, passed by The Securities Appellate Tribunal, Mumbai
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(hereinafter referred as “SAT”) in Appeal Nos. 16 to 20 of
2009, whereby the SAT has allowed the appeals filed by the
respondents herein and set aside the orders dated 31st
December, 2008 passed by the Whole Time Member and the
Adjudicating Officer, SEBI.
2. These are the cases which reflect the manner of getting
excessive number of shares in an irregular manner, which
would adversely affect Retail Individual Investors, who are
the persons with relatively less means and who desire to
invest their hard earned money into shares of companies,
whereby they also make an effort to participate in the
progress of our economy. So as to see that the Stock
Exchanges of the country and the persons connected
therewith do not indulge themselves into illegalities or
irregularities, the Act has been enacted and the
functionaries under the Act have to see that no financial
scams take place in the matters relating to issue or transfer
of shares, management of Stock Exchange etc. One of the
important duties of the functionaries under the Act is to see
that when there is an Initial Public Offerings (IPO), the
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shares are offered to public at large in a particular manner
so that even small investors {who have been referred to
hereinafter as ‘Retail Individual Investors’ (RII)}, also get
fairly good chance to purchase shares of newly floated
companies or shares of existing companies, as and when
they are offered to the public at large.
3. As we are concerned with issue of shares in the nature
of IPO (there is initial offering made by Jet Airways Limited
and Infrastructure Development Finance Company Limited),
without referring to much details about the transactions of
sale or purchase of each company, we have referred to the
nature of the transactions in general terms. When shares of
the aforestated companies were offered to the public at
large, the issue of shares in relation to both the companies
had been over subscribed.
4. Somehow it was brought to the notice of the Security
and Exchange Board of India (SEBI) that several serious
irregularities/illegalities had been committed by some
persons so as to corner shares of the said companies by
adopting certain unscrupulous, immoral and improper
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methods not known to the law, which had not only affected
the RII but had also an effect on the share market because
such dealings by certain greedy persons would adversely
affect the faith of a common man in the functioning of the
share market. The basic purpose with which the Act was
enacted was to see that the share market functions properly
and effectively so that ultimately it may not adversely affect
the economy of our country.
5. Investigations was made by the officials of the SEBI
and in pursuance of the said investigation it was revealed
that in the matter of the IPO of the aforestated two
companies, shares which were meant for RIIs had been
cornered through hundreds of benami/fictitious demat
account holders, which was in violation of the provisions of
Section 12A (a), (b), (c) of the SEBI Act, 1992. Moreover it
was also found that the said transactions were in violation
of Regulations 3 and 4(1) of the Securities and Exchange
Board of India (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Markets) Regulations, 2003
(hereinafter referred to as ‘the Regulations’).
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6. As modus operandi was quite similar in applications
for shares made in respect of both the companies and
parties concerned are common, we have referred to the
issue of Jet Airways India Limited. It was found by the
SEBI that respondent in Appeal No.20 of 2009 before the
SAT had received 12,053 shares out of which 3272 shares
were transferred before the day of listing of shares of the
company with the stock exchange, 3598 shares on the day
of listing and 5183 shares after the day of listing. The said
shares were purchased through off market transactions
from 553 demat account holders, who had been allotted
shares of the said company. The shares of the company
were listed on 14th March, 2005.
7. The said 553 demat account holders sold the shares to
the said respondent at the rate of Rs.1170/- per share,
though the market value of the said shares was much more
than Rs.1170/- per share. The said shares were thereafter
sold by the said respondent at a higher price. Upon
investigation, it was also found that most of those 553
demat account holders were not genuine persons though
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there is no specific finding to that effect but there is a
specific finding by the Whole Time Member of the SEBI
that:-
“(e).There is no material on record that the 553 demat account holders were benami or fictitious. Investigation has not been able to substantiate this. There are name lenders, as alleged in the SCN. The conduct of these account holders substantiates this. All the 553 accounts behaved exactly in the same manner in terms of price and timing, that too, in off market, which is not transparent. However, the allegation that these were benami or fictitious does not make any material difference to the main charge that the noticees used 553 demat accounts to corner shares in the retail segment of the Jet IPO.”
8. The finding by the Whole Time Member of the SEBI is
clear to the effect that the said respondent had not acted as
a share broker. It is an admitted fact that the said
respondent purchased the shares at the rate of Rs.1170/-
per share though the market value of the said shares at the
time when they were purchased was much more and the
shares were sold at an average market value of Rs.1296.12
paise. Had the respondent been a share broker, he would
have charged brokerage from the demat account holders but
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the facts found by the authorities making the investigation
are absolutely different. All the demat holders were paid
some amount by the concerned respondents and the shares
had been sold at a much higher price thereafter. In normal
circumstances, no share holder would sell his shares
through a broker or otherwise at a price below the market
value. In the instant case all the 553 demat account
holders have received the same price viz. Rs.1170/- per
share and that too some of the demat holders sold the
shares either on the date of listing of shares of the company
with the BSE and NSE or even prior thereto, when the
market price of the shares was also not known or
determined. In normal circumstances, no man with normal
prudence would ever enter into such type of transaction but
in this case all the 553 demat account holders did it !
9. Upon knowing the nature of the transactions, the
Whole Time Member of the SEBI was convinced that all the
transactions pertaining to opening of the demat accounts,
applications made by the applicants holding the demat
accounts, sale by those account holders to the respondents
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and sale by the respondents to other buyers of the shares
were of fishy nature. There is a specific finding by the
Whole Time Member of the SEBI, who has thoroughly
examined the facts of the case and has come to the
conclusion, like a trial court, to the effect that the demat
accounts were signed by some persons with different
spellings of their names and in different manners. We also
agree with the findings that normally a person would have
his same signature everywhere and even if at different
places he has signed differently, he would never use
different spellings of his name or would sign in a different
manner with a different spelling of his name.
10. It is also a fact that most of the demat account holders
were not having their trading accounts and many of them
were having a common address. Normally, a demat account
holder, if a genuine one, would use his own correct address
while opening and operating his demat account. Number of
demat account were having same address and that too, care
of someone else and this makes genuineness of the account
holders and the transactions doubtful.
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11. From all the transactions, which are in the nature of a
scam, it is clear that the demat account holders were not
genuine and either they were benami or fictitious and the
shares were purchased on behalf of someone, who had
financed these demat account holders and a show was
made as if the shares were finally sold to the concerned
respondents. The entire chain of the transactions of shares
and doubtful nature of the demat holders, establishes the
fact that all these transactions were nothing but a scam. If
the respondents had acted as brokers, they ought to have
been registered brokers, but they were not. By having the
aforestated device, the respondents had done something
which was against the interest of small investors because
from their quota the shares were allotted to the demat
account holders who were not genuine.
12. As a result of the aforestated transactions, the
respondents got undue benefit. They got the shares
transferred from the so called demat holders at a price
which was less than the market price of the shares.
Normally such things never happen in a well regulated stock
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exchange. The share prices are known to all persons
interested in buying or selling shares and in such
circumstances, it cannot be believed that 553 persons
would sell their shares at a time to one particular person at
a price which is much below the prevailing market price of
the shares. We, once again, note the fact that many of
these demat account holders had used addresses of others
and had signed in a fishy manner in their demat accounts.
In fact, the so-called sale of shares was bogus as there was
someone who had financed all the demat holders, who had
given back the shares to the respondents to whom they had
lent their names for getting the shares.
13. The Whole Time Member of the SEBI has very
meticulously examined the aforestated facts and in our
opinion he has rightly come to the conclusion that the
dealings of the respondents were not fair and were in
violation of the Act as well as the Regulations.
14. Upon perusal of the impugned order passed by the
SAT, we do not find any specific conclusion arrived at by the
SAT to the effect that the findings recorded by the Whole
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Time Member as well as the Adjudicating Officer of the SEBI
were incorrect. The appeals before the SAT were in nature
of First Appeal and therefore, it was open to the SAT to
re-appreciate the evidence after looking at the facts of the
case but upon perusal of the impugned order, we do not
find any such finding to the effect that the findings arrived
at by the Whole Time Member as well as the Adjudicating
Officer of the SEBI were incorrect or perverse for a
particular reason.
15. If one looks at the purpose with which the Act has
been enacted, one can see that its object is to regulate the
securities market and check unfair trade practices. Its
object is also to promote fairness and efficiency in all
dealings relating to the capital market so that confidence of
the persons having dealings with shares etc. is enhanced.
One of the most important objects is to protect the interest
of the investors. In our opinion, the entire case was decided
by the Whole Time Member of the SEBI after keeping in
mind the aforestated object with which the Act has been
enacted.
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16. Upon hearing the learned counsel appearing for both
the sides, we are of the view that the Whole Time Member as
well as the Adjudicating Officer of the SEBI were justified in
imposing penalty upon the respondents for the reasons
recorded by them.
17. We do not find any substance in the submissions
made on behalf of the respondents to the effect that the
price of the shares of Jet Airways India Ltd. paid by the
respondents to the demat account holders was reasonable.
Even according to the submission made by the learned
counsel, value of the said shares, during the said period
varied from Rs.1172/- to Rs.1339/- and in such
circumstances, nobody would believe that all the demat
account holders would sell their shares at the same rate,
viz. Rs.1170/- per share to the respondents. These
transactions are, therefore, definitely of fishy nature.
18. The submission to the effect that no Retail Individual
Investor had made any complaint to the SEBI is not at all
relevant because the SEBI need not act only on the basis of
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a complaint received. If from its independent sources, the
SEBI, after due enquiry comes to know about some illegality
or irregularity, the SEBI has to act in the manner as it acted
in the instant case. The fact, however, remains that because
of the undue advantage which the respondents got, some
small investors or RII must have not got the shares, which
they ought to have been allotted.
19. The learned counsel for the respondents also made a
submission that a common address given by several demat
account holders would not show any irregularity. We do not
agree with the said submission, because normally a person
would give his own address when he is opening his demat
account. Rarely, a person would give someone else’s
address if he is not having any permanent address or is
likely to shift his residence. In the instant case, not one or
a few, but several demat holders had given one particular
address and it is also pertinent to note that upon initiation
of an inquiry at the instance of the SEBI, most of the demat
accounts had been closed by the demat account holders.
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20. The submission was also to the effect that the shares
could have been sold before they were listed with a stock
exchange and such a sale cannot be said to be an illegality.
Looking at the fact that number of persons, having common
address of their demat accounts, selling their shares at the
same price to a particular person before listing of shares of
a company with a stock exchange is not a normal thing. In
the facts and circumstances of the case, we do not accept
the said submission made by the learned counsel appearing
for the respondents.
21. We also note that the Securities Contracts (Regulation)
Act, 1956 (SCRA) has been enacted to prevent undesirable
transactions in securities by regulating the business of
dealing therein, by providing for certain other matters
connected therewith like regulating functioning of
recognised stock exchanges and working of the members of
such stock exchanges. The SCRA is a special law to
regulate the sale and purchase of shares and securities and
hence it prevails over the provisions of the Indian Contract
Act, 1872 and Sale of Goods Act, 1930, insofar as the
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matters which are specifically dealt with by the SCRA. The
contracts for sale and purchase of securities, as envisaged
under the SCRA, can be entered into only in a prescribed
manner in a notified area and that can only be effected
through registered members of a recognised stock exchange
(i.e. stock brokers) and the only exception to this is a Spot
Delivery Contract.
22. ‘Spot Delivery Contract’ is defined in Section 2(i) of the
SCRA as a contract, which –
“(a) provides for actual delivery of securities and the payment of a price thereof either on the date of the contract or on the next day, excluding the time involved in dispatch of shares and remittance of money where parties do not reside in the same town/locality;
(b) transfer of securities by depository from the account of one beneficial owner (demat account) to the account of other beneficial owner (demat account) were securities involved are in demat form.”
Section 2(i)(b) of the SCRA was introduced in the statute
book with effect from September 20, 1995. It is clear from
the aforestated definition of ‘Spot Delivery Contract’ that to
enter into such a contract, the seller has to effect actual
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delivery of securities and the buyer has to pay the price
therefor either on the same day or on the next day and
further, the said transfer should be coupled with transfer of
the Securities from one Beneficial Owner (BO) to another.
Considering the scope of Spot Delivery Contract as defined
in Section 2(i) of the SCRA in Bhagwati Developers Pvt.
Ltd. v. Peerless General Finance and Investment
Company Ltd. & Anr. (2013) 9 SCC 584, this Court has
held as under :-
“...... a contract providing for actual delivery of securities and the payment of price thereof either on the same day as the date of contract or on the next day means a spot delivery contract.”
Considering the facts and circumstances of the present
case, the transfer of shares did not comply with the
requirements of the provision of either Section 13 or Section
2(i) of the SCRA. Therefore, the off market trading indulged
into by the Respondents was rightly held to be per se illegal
by the Whole Time Member.
23. The submission made to the effect that the Tribunal is
a final fact finding authority cannot be disputed. According
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to the learned counsel, the facts found by the SAT should
not be disbelieved by this Court. However, for coming to a
definite conclusion contrary to the findings arrived at by the
lower authority, the appellate authority, in the instant case,
the SAT, ought to have recorded specific reasons for arriving
at a different conclusion, but we do not find any sound
reason for coming to a different conclusion in the impugned
order. On the other hand, we find detailed discussion for
coming to a particular conclusion in the order, which was
passed by the Whole Time Member of the SEBI and
therefore, we do not see any reason for the SAT to disturb
the said finding without mentioning any strong and
justifiable reason for coming to a different conclusion.
24. For the aforestated reasons and in view of the
submissions made by the learned counsel appearing for the
appellant for sustaining the orders passed by the Whole
Time Member as well as the Adjudicating Officer of the
SEBI, we quash and set aside the impugned order passed
by the SAT.
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25. The appeals filed by the SEBI are allowed with no
order as to costs and the orders passed by the SAT are
quashed so as to give effect to the orders passed by the
Whole Time Member as well as the Adjudicating Officer,
SEBI. The said orders shall be acted upon within two
months from today.
………………..……………….J. (ANIL R. DAVE)
…….…………..……………….J. (R. BANUMATHI)
NEW DELHI; JULY 11, 2016.