SECURITIES EXCHANGE BOARD OF INDIA Vs. M/S OPEE STOCK-LINK LTD.& ANR
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 2252 of 2010, Judgment Date: Jul 11, 2016
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
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 (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.
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 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.
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.
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 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.
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’).
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.
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 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.”
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 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 !
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 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.
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.
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 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 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.
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 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.
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 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 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 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.
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.
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