SUPREME COURT OF INDIA
N. Narayanan
Versus
Adjudicating Offficer, SEBI
K.S. RADHAKRISHNAN AND DIPAK MISRA, JJ.
CIVIL APPEAL Nos. 4112-4113 of 2013
D.No. 201 of 2013
APRIL 26, 2013
JUDGMENT
K.S. Radhakrishnan, J.
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.
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 Theater 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 (Theater), 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 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 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 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 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. 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 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:
