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The Appellate Jurisdiction of this Court guaranteed under Section 15Z of the Securities and Exchange Board of India Act, 1992 (for short ‘SEBI Act’) has been invoked challenging a joint order dated 5.10.2012 passed in Appeal Nos. 28 and 29 of 2012 passed by Securities Appellate Tribunal, Mumbai (for short ‘Tribunal’) upholding the order passed by SEBI dated April 18, 2011 restraining the appellant for a period of two years from buying, selling or dealing in securities and the order passed by the adjudication officer dated July 28, 2011 imposing a monetary penalty of 50 lacs under Section 15HA of SEBI Act.- SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading etc. or else they will be failing in their duty to promote orderly and healthy growth of the Securities market. Economic offence, people of this country should know, is a serious crime which, if not properly dealt with, as it should be, will affect not only country’s economic growth, but also slow the inflow of foreign investment by genuine investors and also casts a slur on India’s securities market. Message should go that our country will not tolerate “market abuse” and that we are governed by the “Rule of Law”. Fraud, deceit, artificiality, SEBI should ensure, have no place in the securities market of this country and ‘market security’ is our motto. People with power and money and in management of the companies, unfortunately often command more respect in our society than the subscribers and investors in their companies. Companies are thriving with investors’ contributions but they are a divided lot. SEBI has therefore, a duty to protect investors, individual and collective, against opportunistic behavior of Directors and Insiders of the listed companies so as to safeguard market’s integrity. Print and Electronic Media have also a solemn duty not to mislead the public, who are present and prospective investors, in their forecast on the securities market. Of course, genuine and honest opinion on market position of a company has to be welcomed. But a media projection on company’s position in the security market with a view to derive a benefit from a position in the securities would amount to market abuse, creating artificiality. SEBI has the duty and obligation to protect ordinary genuine investors and the SEBI is empowered to do so under the SEBI Act so as to make security market a secure and safe place to carry on the business in securities.

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English: Logo of Bombay Stock Exchange.

English: Logo of Bombay Stock Exchange. (Photo credit: Wikipedia)

 
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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL Nos.4112-4113 of 2013
(D.No.201 of 2013)
N. Narayanan .. Appellant
Versus
Adjudicating Officer, SEBI .. Respondent
J U D G M E N T
K. S. Radhakrishnan, J
1. India’s capital market in the recent times has witnessed
tremendous growth, characterized particularly by increasing
participation of public. Investors’ confidence in the capital market
can be sustained largely by ensuring investors’ protection.
Disclosure and transparency are the two pillars on which market
integrity rests. Facts of the case disclose how the investors’
confidence has been eroded and how the market has been abused
for personal gains and attainments.

 

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2. The Appellate Jurisdiction of this Court guaranteed under
Section 15Z of the Securities and Exchange Board of India Act,
1992 (for short ‘SEBI Act’) has been invoked challenging a joint
order dated 5.10.2012 passed in Appeal Nos. 28 and 29 of 2012
passed by Securities Appellate Tribunal, Mumbai (for short
‘Tribunal’) upholding the order passed by SEBI dated April 18,
2011 restraining the appellant for a period of two years from
buying, selling or dealing in securities and the order passed by the
adjudication officer dated July 28, 2011 imposing a monetary
penalty of 50 lacs under Section 15HA of SEBI Act.
3. The appellant was the promoter as well as a whole time
Director of M/s Pyramid Saimira Theatre Limited (PSTL), a
company registered under the Companies Act, 1956. The shares
of PSTL were listed on Bombay Stock Exchange Ltd. (BSE) and
National Stock Exchange (NSE) at the relevant time. The company
was involved in the business of Exhibition (Theatre), Film and
Television, Content Production, Distribution, Hospitality, Food &
Beverage, Animation and Gaming and Cine Advertising etc. The
company had nine Directors, including the appellant herein. ThePage 3
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investigation department of SEBI noticed that the company had
committed serious irregularities in its books of accounts and
showed inflated profits and revenues in the financial statements
and lured the general public to invest in the shares of the
company based on such false financial statements thereby
violated the provisions of Securities and Exchange Board of India
(Prohibition of Fraudulent and Unfair Trade Practice Relating to
Securities Market) Regulations, 2003 (for short ‘Regulations
2003’). Consequently, a notice was issued to the appellant and to
the other Directors stating that they had violated Section 12A of
SEBI Act and Regulation 3(b), 3(c), 3(d), 4(1), 4(2)(a), 4(2)(e), 4(2)
(f), 4(2)(k), 4(2)(r) of Regulations 2003 and were directed to show
cause why appropriate directions as deemed fit and proper under
Sections 11, 11B and 11(4) of the SEBI Act read with Regulation 11
of Regulations 2003 be not issued against them.
4. The appellant replied to the show cause notice vide letter
dated February 3, 2010 stating that there were no irregularities
and the company’s Managing Director and the Principal Officer
would send a detailed reply in that regard. Later, a notice dated Page 4
4
April 8, 2010 under Rule 4(1) of the SEBI (Procedure for Holding
Inquiry and imposing penalties by Adjudicating Officer) Rules,
1995 was issued to the Directors to show cause why penalty be
not imposed under Section 15HA of the SEBI Act for the alleged
contravention of the provision of the Act.
5. The appellant submitted a detailed reply stating that it was
the Managing Director and Principal Officer of the company who
was in charge of day-to-day affairs of the company including the
operations, finance and accounts, secretarial and compliance,
legal services and technical services. Appellant, it was stated,
though was a whole time Director of the company was only
handling Human Resource Department of the company and was
fully engrossed in the recruitment of personnel, training and team
buildup. Further, it was also stated that he had only relied upon
the auditor’s statements in financial matters and hence was not
personally liable for the violation of the provisions of SEBI Act and
Regulations 2003. Personal hearing was accorded to the appellant
on 30.8.2010. Written Submissions dated 15.9.2010 filed by thePage 5
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appellant was also considered by SEBI. The Board noticed
following specific violations:-
(a) manipulated accounts by fictitious entries;
(b) made false disclosures to the stock exchange;
(c) did not co-operate with the investigations, and
(d) did not maintain certain books of accounts.
6. On facts, the officer found that all the above-mentioned
violations had been established. Consequently, the Whole Time
Member (WTM) of SEBI, in exercise of powers conferred under
Section 19 of the SEBI, held that the Directors were found guilty
for the violation of Section 12A of SEBI Act, 1992 and Regulation
3(b), 3(c), 3(d), 4(1), 4(2)(a), 4(2)(e), 4(2)(f), 4(2)(k), 4(2)(r) of the
Regulations 2003. WTM of SEBI then, in exercise of the powers
conferred on him under Section 19 read with Sections 11, 11B and
11(4) of the SEBI Act and Regulation 11 of Regulations 2003,
passed an order restraining the appellant and other Directors for a
period of two years and three years respectively from buying,
selling or dealing in securities in any manner whatsoever orPage 6
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accessing the securities market directly or indirectly and from
being Director of any listed company.
7. The Adjudicating Officer also held that the appellant and
others have violated the provisions of Section 12A of SEBI Act and
Regulation 3(b), 3(c), 3(d), 4(1), 4(2)(a), 4(2)(e), 4(2)(f), 4(2)(k),
4(2)(r) of Regulations 2003 and took the view that the appellant
and other Directors are liable for monetary penalty under Section
15HA of SEBI Act whereby a penalty of 50 lacs was imposed on the
appellant.
8. The above order, as already indicated, was affirmed in an
appeal by the Tribunal, the legality of which is the subject matter
of this appeal.
9. We may before examining various legal issues that arise for
consideration in this appeal wish to indicate that the investigation
had revealed that the financial results contained in the quarterly
report filed with the stock exchanges contained inflated figures of
the company’s revenue profits, security deposits and receivables.Page 7
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Further, the manipulation in the financial results of the company
resulted in price rise of the scrip of the company and the
promoters pledged their shares to raise substantial funds from
financial institutions.
10. We would like to demonstrate on the facts of this case as well
as law on the point that “market abuse” has now become a
common practice in the India’ security market and, if not properly
curbed, the same would result in defeating the very object and
purpose of SEBI Act which is intended to protect the interests of
investors in securities and to promote the development of
securities market. Capital market, as already stated, has
witnessed tremendous growth in recent times, characterized
particularly by the increasing participation of the public. Investor’s
confidence in capital market can be sustained largely by ensuring
investors’ protection.
11. Before examining the law on the point, we would like to
demonstrate how the company and its Directors had inflated
figures of the company’s revenue profits, security deposits andPage 8
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receivables which were relied upon by investors for making
investment decisions. Facts would also indicate that the Directors
had pledged their shares and artificially inflated prices of the scrip
based on inflated financial results which enabled them to raise
higher quantum of funds that would not have been possible
otherwise.
12. The quarterly unaudited financial results of the company for
the quarter ended 31st March 2007 to the quarter ended 31st March
2009 shows the following details:
Particulars For the quarter ended (in Rs. Lakh)
March
31,
2007
June 30,
2007
Sept. 30,
2007
Dec. 31,
2007
March
31, 2008
June 30,
2008
Sept. 30,
2008
Dec. 31,
2008
March
31, 2009
Net Sales 6756.8
9
12271.4
3
14418.7
9
23141.8
7
24556.1
2
2501.87 25225.7
2
13794.8
1
8069.04
Other
Income
23.24 13.68 231.75 152.90 144.05 12.94 – 2.08 –
Total
Income
6780.1
3
12285.1
1
14650.5
4
23294.7
7
24700.1
7
25027.8
1
25225.7
2
13796.8
9
8069.04
Total
Expenditur
e
6122.6
0
9936.44 12513.4
2
19718.5
4
22366.9
3
22886.7
2
23478.4
8
12997.5
8
6859.02
Net profit /
loss
583.47 1600.77 1511.31 2986.50 -311.22 1349.72 870.42 -7474.35 -8527.25
Equity 2827.6
4
2827.65 2827.65 2827.65 2827.65 2827.65 2827.65 2827.65 2827.65
Face value
of shares
(in Rs.)
10 10 10 10 10 10 10 10 10Page 9
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13. The above facts and figures would indicate that the net sales
for the quarter ended June 30, 2007 doubled as compared to the
previous quarter. In the subsequent quarters, till the quarter
ended September 30, 2008, that upward trend had continued and
in the quarter ended December 31, 2008, there was a sudden fall
in the net sales figures (the net sales figures for the quarter ended
December 31, 2008 were down by around 45% as compared to the
previous quarter).
14. The company also showed a loss of Rs.74.74 crore in the said
quarter. For the quarter ended March 31, 2009, the company
again showed a loss of Rs. 85.37 crore. The net profit figures also
surged in sync with the total income upto the quarter ended June
30, 2008 except for the quarter ended March 31, 2008.
15. SEBI, it was pointed out, had verified books of accounts of the
company for the financial year 2007-2008 to ascertain whether
proper books of accounts and supporting documents were
maintained by the company in respect of the theatre income,
theatre receivables and theatre security deposits and whether thePage 10
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financial disclosures made by the company to the stock exchanges
as per listing agreement reflected true and fair view of the state of
affairs of the company.
16. SEBI’s investigation revealed that for the financial year 2007-
08, total revenue of Rs. 749.30 crore included an income of Rs.
549.58 crore from theatres which is stated as follows:
(In Rs. Crore)
Region From PSTL
Theatres
From Non-PSTL
Theatre
Total Revenue
from Theatres
Tamil Nadu 303.46 41.51 344.97
Andhra
Pradesh
74.66 62.04 136.70
Karnataka 45.86 7.60 53.45
Kerala 12.95 12.95
Others 0.28 1.23 1.52
Total 437.21 112.18 549.58
17. On theatre income of Rs. 303.46 crore from Tamil Nadu
region included consolidated credit entries of Rs.244 crore with
corresponding consolidated debits ‘Theatre Collections Receivable
Account’. The account did not show any income from April 2008
onwards. The journal vouchers in respect of those entries did not
carry any such narration such as daily collection report number,Page 11
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name of theatre etc. The receivables were adjusted against cost
of content, transferred to advance/security deposit account or
remained unrealized. As on March 31, 2008, the total receivables
of the company from Tamil Nadu region were Rs. 38.58 crore. Out
of that, Rs.2.19 crore was outstanding against 162 theatres and
the balance Rs. 36.39 crore outstanding in one account only which
did not contain the theatre wise break up. Further it was also
noticed that the entire amount of Rs.75 crore from own theatres in
Andhra Pradesh was accounted by single journal voucher which
did not have any other supporting documents in support of those
consolidated entries or journal vouchers, despite assurance to
provide the same. Those facts lead the SEBI to conclude that
those revenues disclosed inflated figures in its annual report for
2007-08 and thereby misled the investors.
18. The company disclosed no stock exchanges on January 30,
2009 that it had entered into agreement with 802 theatres as on
June 30, 2008. Out of 802 agreements, the company could show
only 257 original agreements to SEBI officials which lead SEBI to
conclude that the balance 545 agreements never existed. ThePage 12
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fictitious revenues had converted to ‘theatre collection
receivables’ which in turn had been converted to ‘security
deposits’. It was noticed security deposits were not genuine but
were created to hide receivables in the balance sheet since
outstanding receivables for a period of six months had to be
compulsorily disclosed in its annual report. The SEBI therefore
concluded the company had made a false corporate
announcement to the effect that it had entered into agreement
with 802 theatres thereby misled the investing public.
19. The appellant’s main defence was that, though he was the
Whole Time Director as well as Promoter of the company, yet was
not involved in the day-to-day management of the company and
that he was looking after the Human Resource Department of the
company. Further, it was also stated that the financial statements,
accounts etc. were prepared and duly audited by the statutory
auditors, verified by the audit committees and reviewed by the
managing Director and that, in the company, the role of each
Director was confined to his field of operation and there was no
justification for holding a Director to be in over-all charge andPage 13
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control of the affairs of the company. Further, it was also pointed
out that the auditors were well versed in accounts and finance,
therefore, there was no reason for the Directors who have no
expertise or knowledge of the intricacies of the accounts and
finance to suspect them or sit in judgment over their decisions. In
such circumstances, it was contended, that there is no justification
in debarring them from buying, selling or dealing in securities or
accessing securities market or to impose penalty since there is no
mens rea on the part of the appellant in intentionally stating any
untrue statement or preparing false records and that he has no
role as such in preparing the accounts and finance of the
company.
20. The facts and figures as such are not in dispute and the
defence taken is that the statements were duly audited by
statutory auditors and, consequently, it could not be held that the
appellant had violated the provision of SEBI Act or the provisions
of Regulations 2003.Page 14
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21. Let us now examine the scope of the various provisions
stated to have been violated by the appellant and its
consequences. Section 12A falls in Chapter VA of the SEBI Act
which reads as follows:
“PROHIBITION OF MANIPULATIVE AND DECEPTIVE
DEVICES, INSIDER TRADING AND SUBSTANTIAL
ACQUISITON OF SECURITIES OR CONTROL
Prohibition of manipulative and deceptive devices,
insider trading and substantial acquisition of securities
or control.
12A. No person shall directly or indirectly –
(a) use or employ, in connection with the issue,
purchase or sale of any securities
listed or proposed to be listed on a recognised stock
exchange, any manipulative or
deceptive device or contrivance in contravention of the
provisions of this Act or the rules or the regulations
made thereunder;
(b) employ any device, scheme or artifice to defraud in
connection with issue or dealing in securities which are
listed or proposed to be listed on a recognised stock
exchange; Page 15
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(c) engage in any act, practice, course of business
which operates or would operate as fraud or deceit
upon any person, in connection with the issue, dealing
in securities which are listed or proposed to be listed on
a recognised stock exchange, in contravention of the
provisions of this Act or the rules or the regulations
made thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or
non-public information or communicate such material
or non-public information to any other person, in a
manner which is in contravention of the provisions of
this Act or the rules or the regulations made
thereunder;
(f) acquire control of any company or securities more
than the percentage of equity share capital of a
company whose securities are listed or proposed to be
listed on a recognised stock exchange in contravention
of the regulations made under this Act.”
22. Section 12A has to be read along with various provisions of
Regulations 2003. Chapter II of Regulations 2003 deals with
prohibition of fraudulent and unfair trade practices relating to the
securities market and Chapter III deals with investigation. SEBIPage 16
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has also noticed the violation of Regulations 3 and 4 of 2003
Regulations, which read as follows:
“PROHIBITION OF FRAUDULENT AND UNFAIR TRADE
PRACTICES RELATING TO THE SECURITEIS MARKET:
3. Prohibition of certain dealings in securities
No person shall directly or indirectly.
(a) buy, sell or otherwise deal in securities in a
fraudulent manner;
(b) use or employ, in connection with issue,
purchase or sale of any security listed or proposed
to be listed in a recognized stock exchange, any
manipulative or deceptive devise or contrivance
in contravention of the provisions of the Act or the
rules or the regulations made there under;
(c) employ any device, scheme or artifice to
defraud in connection with dealing in or issue of
securities which are listed or proposed to be listed
on a recognized stock exchange;
(d) engage in any act, practice, course of business
which operates or would operate as fraud or
deceit upon any person in connection with any
dealing in or issue of securities which are listed or
proposed to be listed on a recognized stock
exchange in contravention of the provisions of the
Act or the rules and the regulations made there
under:Page 17
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4. Prohibition of manipulative, fraudulent and unfair
trade practices
(1) Without prejudice to the provisions of
regulation 3, no person shall indulge in a
fraudulent or an unfair trade practice in
securities.
(2) Dealing in securities shall be deemed to be a
fraudulent or an unfair trade practice if it involves
fraud and may include all or any of the following
namely:-
(a)indulging in an act which creates false or
misleading appearance of trading in the
securities market;
(b) …..
(d)…..
(e) any act or omission amounting to
manipulation of the price of a security;
(f) publishing or causing to publish or reporting
or causing to report by a person dealing in
securities any information which is not true
or which he does not believe to be true prior
to or in the course of dealing in securities.Page 18
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(g) …….
(h) …….
(i) ……..
(j) ………
(k) an advertisement that is misleading or
that contains information in a distorted
manner and which may influence the
decision of the investors;
(l) …….
(p) …….
(q) …….
(r) planting false or misleading news which
may induce sale or purchase of securities.”
23. The object and purpose of the above-mentioned statutory
provisions are to curb “market manipulation”. Palmer’s
Company Law, 25th Edition (2010), Volume 2 at page 11097
states: “Market manipulation is normally regarded as thePage 19
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“unwarranted” interference in the operation of ordinary market
forces of supply and demand and thus undermines the “integrity”
and efficiency of the market.” See also Gower & Davies –
Principles of Modern Company Law, 9th Edition (2012) at page
1160.
24. Reference may also be made to the penalty provisions which
is contained in Chapter VI A of the SEBI Act of which we are mainly
concerned with Section 15HA which deals with penalty for
fraudulent and unfair trade practices and Section 15J which deals
with the factors to be taken into account by the adjudicating
officer while adjudging the quantum of penalty. Those provisions
are given below for easy reference:
“15HA. Penalty for fraudulent and unfair trade
practices.- If any person indulges in fraudulent and
unfair trade practices relating to securities, he shall be
liable to a penalty of twenty-five crore rupees or three
times the amount of profits made out of such practices,
whichever is higher.”
“15J. Factors to be taken into account by the
adjudicating officer.-While adjudging quantum of penaltyPage 20
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under section 15 I, the adjudicating officer shall have
due regard to the following factors, namely:
(a) the amount of disproportionate gain or unfair
advantage, wherever quantifiable, made as a result of
the default;
(b) the amount of loss caused to an investor or group of
investors as a result of the default;
(c) the repetitive nature of the default.”
25. In Sahara India Real Estate Corporation Limited and
Others v. Securities and Exchange Board of India and
Another (2013) 1 SCC 1, this Court has noticed that though the
Indian Companies Act, 1956 was modeled on English Companies
Act, 1948, no efforts have been made to incorporate universally
accepted principles and concepts into our company law. Of late,
however, some efforts have been made by carrying out few
amendments to the Companies Act, 1956, so also in the SEBI Act,
1992 and Rules and Regulations framed therein to keep pace with
the English Companies Act and related legislations. When we
interpret the provisions of the SEBI Act and the Regulations
relating to a company registered under the Companies Act, thePage 21
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provisions of the Companies Act have also to be borne in mind.
For instance, in SEBI Act, there is no provision for keeping proper
books of accounts by a registered company.
26. Section 209 of the Companies Act says that every company
shall keep at the registered office proper books of accounts.
Books of accounts should be so kept as to give true and fair view
of the state of the company’s affairs and explain transactions. Of
course, the auditors of the company must examine whether the
company has maintained proper cost accounting records as
required by the rules. Companies whose securities are traded on
a public market, it is trite law that the disclosure of information
about the company is crucial for the correct and accurate pricing
of the company’s securities and for the official operation of the
market. Section 210 of the Companies Act states that at every
annual general meeting of the company, the Board of Directors is
required to lay before it a balance-sheet as at the end of and a
profit and loss account for the financial year. Page 22
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27. Clause 41 of Listing Agreement between the SEBI and the
concerned companies requires the companies to furnish to stock
exchange and to publish unaudited financial result on a quarterly
basis in the prescribed format. Section 55A of the Companies Act
deals with the powers of SEBI which says some of the provisions
referred to therein, so far as they relate to issue and transfer of
securities and non-payment of dividends in the case of listed
companies be administered by SEBI. Further, it is also indicated
that how the books of accounts have to be kept by the company,
so also with regard to audit of account etc. finds a place in the
Companies Act, so also the qualification and disqualification of the
Managing Directors.
28. We notice in this case that the Directors of the company had
clearly violated provisions of Section 12A of SEBI Act read with
Regulations 3 and 4 of 2003 Regulations. Companies whose
securities are traded on a public market, disclosure of information
about the company is crucial for the accurate pricing of the
companies’ securities and also for the efficient operation of the
market.Page 23
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Corporate Governance and Directors
29. SEBI Act read with Regulations of the Companies Act would
indicate that the obligations of the Directors in listed companies
are particularly onerous especially when the Board of Directors
makes itself accountable for the performance of the company to
share holders and also for the production of its accounts and
financial statements especially when the company is a listed
company.
30. The Directors of the company or the person in charge directly
or indirectly use or employ, in connection with the issue, purchase
or sale of any securities listed in stock exchange, any manipulative
or deceptive device or contrivance in contravention of SEBI Act or
the Regulations made thereunder have necessarily to be dealt with
in accordance with the provisions of the Act and the Regulations
which is absolutely necessary for the investor’s protection and to
avoid market abuse. Page 24
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31. The facts clearly indicated that the company had made false
corporate announcement stating that it had entered into
agreements with 802 theatres and that false corporate
announcement gave false figures relating to advance, security
deposit and income pertaining to the theatres which were not
inexistence. The deposits shown were turned out to be not
genuine but mere book entries to hide receivables in the balance
sheet.
32. Responsibility is cast on the Directors to prepare the annual
records and reports and those accounts should reflect ‘a true and
fair view’. The over-riding obligation of the Directors is to approve
the accounts only if they are satisfied that they give true and fair
view of the profits or loss for the relevant period and the correct
financial position of the company.
33. Company though a legal entity cannot act by itself, it can act
only through its Directors. They are expected to exercise their
power on behalf of the company with utmost care, skill and
diligence. This Court while describing what is the duty of aPage 25
25
Director of a company held in Official Liquidator v. P.A.
Tendolkar (1973) 1 SCC 602 that a Director may be shown to be
placed and to have been so closely and so long associated
personally with the management of the company that he will be
deemed to be not merely cognizant of but liable for fraud in the
conduct of business of the company even though no specific act of
dishonesty is provide against him personally. He cannot shut his
eyes to what must be obvious to everyone who examines the
affairs of the company even superficially.
34. The facts in this case clearly reveal that the Directors of the
company in question had failed in their duty to exercise due care
and diligence and allowed the company to fabricate the figures
and making false disclosures. Facts indicate that they have
overlooked the numerous red flags in the revenues, profits,
receivables, deposits etc. which should not have escaped the
attention of a prudent person. For instance, profit as on quarter
ending June 2007 was three times more than the preceding
quarter, it doubled in the quarter ending December 2007 over the
preceding quarter. Further, there was disproportionate increase inPage 26
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the security deposits i.e. Rs. 36.05 crore in September 2007 to Rs.
270.38 crore in December 2007 as compared to increase in the
number of theatres during the same period. They have
participated in the board meetings and were privy to those
commissions and omissions.
Securities Market – Market abuse
35. Prevention of market abuse and preservation of market
integrity is the hallmark of Securities Law. Section 12A read with
Regulations 3 and 4 of the Regulations 2003 essentially intended
to preserve ‘market integrity’ and to prevent ‘Market abuse’. The
object of the SEBI Act is to protect the interest of investors in
securities and to promote the development and to regulate the
securities market, so as to promote orderly, healthy growth of
securities market and to promote investors protection. Securities
market is based on free and open access to information, the
integrity of the market is predicated on the quality and the manner
on which it is made available to market. ‘Market abuse’ impairs
economic growth and erodes investor’s confidence. Market abuse
refers to the use of manipulative and deceptive devices, giving out
incorrect or misleading information, so as to encourage investorsPage 27
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to jump into conclusions, on wrong premises, which is known to be
wrong to the abusers. The statutory provisions mentioned earlier
deal with the situations where a person, who deals in securities,
takes advantage of the impact of an action, may be manipulative,
on the anticipated impact on the market resulting in the “creation
of artificiality’. The same can be achieved by inflating the
company’s revenue, profits, security deposits and receivables,
resulting in price rice of scrip of the company. Investors are then
lured to make their “investment decisions” on those manipulated
inflated results, using the above devices which will amount to
market abuse.
36. We have, on facts, clearly found that the Directors of the
company have “created artificiality” by projecting inflated figures
of the company’s revenue, profits, security deposits and
receivables and that the manipulation in the financial results of the
company resulted in price rise of the scrip of the company and the
promoters of the company then pledged their shares to raise
substantial funds from financial institutions. The conduct of the
appellant and others was, therefore, fraudulent and the practicesPage 28
28
they had adopted, relating to securities, were unfair, which
attracted the penalty provisions contained in Section 15 HA read
with 15J of the SEBI Act.
Disclosure and Transparency:
37. Gower and Davies on Principles of Modern Company Law, 9th
Edition (2012) at page 751, reiterated their views on the scope
and rationale of annual reporting required under the Companies
Acts, as follows:
“On the basis that “forewarned is forearmed” the
fundamental principle underlying the Companies Act
has been that of disclosure. If the public and the
members were enabled to find out all relevant
information about the company, this, thought the
founding fathers of our company law, would be a sure
shield. The shield may not have proved quite so
strong as they had expected and in more recent times,
it has been supported by offensive weapons.”

 

Page 29
29
38. The Companies Act casts an obligation on the company
registered under the Companies Act to keep the Books of accounts
to achieve transparency. Previously, it was thought that the
production of the annual accounts and it preparation is that of the
Accounting Professional engaged by the company where two
groups who were vitally interested were the shareholders and the
creditors. But the scenario has drastically changed, especially
with regard to the company whose securities are traded in public
market. Disclosure of information about the company is,
therefore, crucial for the accurate pricing of the company’s
securities and for market integrity. Records maintained by the
company should show and explain the company’s transactions, it
should disclose with reasonable accuracy the financial position, at
any time, and to enable the Directors to ensure that the balancesheet and profit and loss accounts will comply with the statutory
expectations that accounts give a true and fair view. Companies
(Amendment) Act, 2000 has added clause (a)(iii) under which SEBI
has also been given the power of inspection of listed companies or
companies intending to get listed through such officers, as may be
authorized by it.

 

Page 30
30
39. So far as the company in question is concerned, books of
accounts were maintained in the Tally accounting software and for
the financial year 2007-08 separate books of accounts were
maintained for each region/unit. Books of accounts were
reportedly maintained by the regions in their respective regional
office and at the end of the year for the preparation of annual
financial statement and for auditing purpose, those books of
accounts were brought to the companies registered office. The
auditors had informed that those books were audited at the
registered office of the company. As already indicated, after the
declaration of financial results on January 31, 2008, containing
inflated profits, revenues for the quarter ended on 31.12.2007, the
Managing Directors of the company, his wife and the appellant had
together pledged 72,75,455 shares of the company with various
banks and financial institutions and raised 97.30 crores as loans.
We have noticed that the Directors and the Chief Financial Officers
of the company had caused to publish forged and misleading
results of the company, various quarterly financial results and the
annual results for the year 2007-08, were reported to the stock exchanges containing inflated figures of the company’s revenue,

 

Page 31
31
profits, security deposits and receivables and those financial
statements which were relied upon by investors in making
investment decisions, which did not reflect a true and fair view of
the state of affairs of the company.
40. The appellant has taken the stand, as already stated, that
even though he was a whole time Director he was not conversant
with the accounts and finance and was only dealing with the
human resource management of the company, hence, he had no
fraudulent intention to deceive the investors. We find it difficult to
accept the contention. The appellant, admittedly, was a whole
time Director of the company, as regards the preparation of the
annual accounts, the balance-sheet and financial statement and
laying of the same before the company at the Annual General
Meeting and filing the same before the Registrar of the Companies
as well as before SEBI, the Directors of the company have greater
responsibility, especially when the company is a registered
company. Directors of the companies, especially of the listed
companies, have access to inside knowledge, such as, financial
position of the company, dividend rates, annual accounts etc.
Directors are expected to exercise the powers for the purposes for

 

Page 32
32
which they are conferred. Sometimes they may misuse their
powers for their personal gain and makes false representations to
the public for unlawful gain.
41. We have indicated, so far as this case is concerned, the
subsequent conduct of pledging their shares at artificially inflated
prices, based on inflated financial results and raising loan on them
would indicate that they had deliberately and with full knowledge
committed the illegality and hence the principle of “acta exteriora
indicant interiora secreta” (meaning external actions reveals inner
secrets) applies with all force, a principle which this Court applied
in Sahara’s case.
42. Above being the factual and legal position, we are of the view
that the SEBI has rightly restrained the appellant for a period of
two years from the date of that order from buying, selling or
dealing with any securities, in any manner, or accessing the
securities market, directly or indirectly and from being Director of
any listed company and that the adjudicating officer has rightly
imposed a penalty of Rs.50 lakhs under Section 15HA of SEBI Act.

 

Page 33
33
The appeals are, therefore, dismissed. However, there will be no
order as to costs.
A word of caution:
43. SEBI, the market regulator, has to deal sternly with
companies and their Directors indulging in manipulative and
deceptive devices, insider trading etc. or else they will be failing in
their duty to promote orderly and healthy growth of the Securities
market. Economic offence, people of this country should know, is
a serious crime which, if not properly dealt with, as it should be,
will affect not only country’s economic growth, but also slow the
inflow of foreign investment by genuine investors and also casts a
slur on India’s securities market. Message should go that our
country will not tolerate “market abuse” and that we are governed
by the “Rule of Law”. Fraud, deceit, artificiality, SEBI should
ensure, have no place in the securities market of this country and
‘market security’ is our motto. People with power and money
and in management of the companies, unfortunately often
command more respect in our society than the subscribers and
investors in their companies. Companies are thriving with
investors’ contributions but they are a divided lot. SEBI has,

 

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therefore, a duty to protect investors, individual and collective,
against opportunistic behavior of Directors and Insiders of the
listed companies so as to safeguard market’s integrity.
44. Print and Electronic Media have also a solemn duty not to
mislead the public, who are present and prospective investors, in
their forecast on the securities market. Of course, genuine and
honest opinion on market position of a company has to be
welcomed. But a media projection on company’s position in the
security market with a view to derive a benefit from a position in
the securities would amount to market abuse, creating artificiality.
SEBI has the duty and obligation to protect ordinary genuine
investors and the SEBI is empowered to do so under the SEBI Act
so as to make security market a secure and safe place to carry on
the business in securities.
……………………………..J.
(K.S. Radhakrishnan)
……………………………..J.
(Dipak Misra)
New Delhi,Page 35
35
April 26, 2013.

 

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