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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. The

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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

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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 the

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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 or

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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.

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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 and

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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 31

st

March 2007 to the quarter ended 31

st

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 10

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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 the

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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,

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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. The

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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 and

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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.

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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;

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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. SEBI

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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:

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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.

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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 , 25

th

Edition (2010), Volume 2 at page 11097

states: “Market manipulation is normally regarded as the

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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 , 9

th

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 penalty

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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, the

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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.

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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.

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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.

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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 a

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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 in

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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 investors

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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 practices

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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, 9

th

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 balance-

sheet 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,

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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

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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.

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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,

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April 26, 2013.