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Off-loading of dematerialized shares issued in excess of authorized capital was a serious fraud: SAT

June 12, 2018[2018] 94 taxmann.com 165 (SAT)/[2018] 148 SCL 544 (SAT)
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Where promoter of company 'SCCL' not only issued shares in excess of its paid up capital but also dematerialized those unauthorized excess shares and subsequently sold them in market to investors through appellant, SEBI debarred promoter of 'SCCL' from accessing securities market for 10 years and also imposed penalty on appellant for alleged violating Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, since, same was a serious fraud on securities market and depositories were equally responsible for issuing excess dematted shares, in such case SEBI was unjustified in not initiating any action against depositories and in not initiating any penalty proceedings against promoter of company who was main culprit

• SEBI conducted investigation in scrip of company 'SCCL'. During investigation period, SCCL issued 44,73,450 shares in excess of its paid up capital and out of said excess shares, 37,58,450 shares were dematted by 'M' who was promoter of company and said excess shares were sold in market to gullible and innocent investors through various entities.

• Appellant was one of persons who had acquired shares of SCCL from 'M' in off market and sold them on-market by receiving an amount of 25 paise per share.

• SEBI held that appellant through aforesaid transactions aided and abetted 'M' in fraudulently off-loading excess dematted shares of SCCL and accordingly imposed penalty of Rs. 1 lakh on appellant on ground that appellant had violated Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. On appeal, Tribunal set aside said ex-parte order and directed SEBI to pass fresh order on merits after hearing appellant. SEBI by impugned order enhanced penalty from 1 lakh to 16 lakh on appellant.

• Grievance of appellant was that firstly, just because ex-parte order initially passed by imposing penalty of 1 lakh had been set aside by Tribunal and remanded for fresh decision, SEBI was not justified in enhancing penalty up to Rs.16 lakh. Secondly, having not taken any action against depositories who were equally responsible for issuing excess dematted shares and having not initiated any penalty proceedings against 'M' who was main culprit in present case, SEBI was not justified in imposing penalty of Rs.16 lakh on appellant.

• Issuing shares in excess of authorised share capital and further dematting those unauthorized excess shares and allowing those shares to be sold on-market to innocent investors is a serious fraud on securities market. In such a case, SEBI is unjustified in not initiating any action against depositories.

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