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he matter of A.L. No. 169 of 2020 - Amalendu Mukherjee v. SEBI
Factual and Procedural Background
The present appeal arises from an impounding order dated 17/03/2020 passed by the Whole Time Member (WTM) of the Securities and Exchange Board of India (SEBI), directing the appellant, Amalendu Mukherjee, and a public company, Fourth Dimension Solutions Limited (FDSL), to deposit Rs. 2,30,34,010/- in an escrow account. Following this order, the appellant’s bank and demat accounts were seized.
FDSL, in which the appellant was a director but is currently suspended, was involved in trading shares of Ricoh India Limited during a period under investigation (14/08/2014 to 17/11/2015). Suspicious transactions were identified by Ricoh’s statutory auditors in 2015, leading to a forensic audit by PwC. Ricoh publicly admitted to misleading financial statements in 2016. PwC’s forensic audit revealed that FDSL traded and liquidated shares of Ricoh at a suspicious time.
SEBI issued an ex-parte restraining order against the appellant on 12/02/2018, confirmed later that year. A subsequent forensic report by Pipara & Co. in 2019 implicated the appellant in fictitious transactions involving Ricoh. This culminated in the impounding order of 17/03/2020, which also directed the appellant to show cause why disgorgement should not be ordered.
SEBI later learned that FDSL was under insolvency proceedings with an Interim Resolution Professional appointed by the National Company Law Tribunal in July 2019. Consequently, SEBI issued an addendum on 30/03/2020 placing its order against FDSL in abeyance during the moratorium period.
The appellant filed the present appeal challenging the impounding order.
Legal Issues Presented
- Whether the ex-parte impounding order dated 17/03/2020 passed by SEBI’s WTM against the appellant and FDSL was justified and in accordance with principles of natural justice.
- Whether the appellant qualifies as an insider or was in possession of unpublished price sensitive information (UPSI) under SEBI regulations.
- Whether the appellant’s bank and demat accounts were lawfully seized and whether interim relief to defreeze these accounts should be granted.
- The procedural propriety of passing an ex-parte order without the appellant having filed a reply to the show cause notice.
Arguments of the Parties
Appellant's Arguments
- The impugned order was passed ex-parte violating principles of natural justice.
- The appellant is not an insider as defined under SEBI (Prohibition of Insider Trading) Regulations and had no access to UPSI.
- The order was based on suspicion without evidentiary basis.
- The trading in Ricoh shares was conducted by FDSL through its demat account, and appellant was only authorized by the Board of Directors; no evidence shows appellant personally benefited.
- An earlier forensic report by C.S. Nanda & Co. was not considered by SEBI.
- Freezing of appellant’s bank and demat accounts was unjustified, especially during the pandemic, warranting interim relief to defreeze accounts.
- Relied on precedents including Hindustan Lever Ltd vs SEBI (1998), Rakesh Agarwal vs SEBI, and Samir C Arora vs SEBI to argue against ex-parte orders based on suspicion.
- Economic Offences Wing submitted a report indicating lack of evidence of fraud against the appellant.
Respondent's Arguments (SEBI)
- The impugned order also serves as a show-cause notice, to which the appellant has not responded.
- The appellant’s challenge to the earlier restraining order was dismissed by the Securities Appellate Tribunal (SAT), and the confirmatory order was not challenged.
- The forensic report of Pipara & Co., though not yet filed, would demonstrate the appellant’s central role in transactions involving Ricoh and knowledge of false financial statements.
- The appellant was an insider with access to UPSI and traded shares for unlawful gain.
- No case exists for interim relief; the appellant should file a reply to the show cause notice which will be decided after hearing.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Hindustan Lever Ltd vs SEBI, (1998) 18 SCL 311 (AA) | Prohibition of passing ex-parte orders based on suspicion without evidence. | Appellant cited this to argue against the impugned ex-parte order; the court noted the appellant’s reliance but found the case context different due to facts not disclosed by appellant. |
| Rakesh Agarwal vs SEBI (Appeal No.33 of 2001) | Principles of natural justice and necessity of evidence before ex-parte orders. | Appellant cited to support argument against impugned order; court considered but emphasized the appellant’s management role and undisclosed facts. |
| Samir C Arora vs SEBI (Appeal No.83 of 2004) | Requirement of fair opportunity and evidence before restraining orders. | Referenced by appellant; court acknowledged but maintained that the WTM is empowered to pass ex-parte orders to protect market interests in appropriate cases. |
Court's Reasoning and Analysis
The court examined the appellant’s role as Managing Director and majority shareholder (54%) of FDSL, facts which were not disclosed in the appeal. This status entails significant management powers and responsibility under Sections 2(54) and 2(60) of the Companies Act, 2013.
The court noted the prima facie involvement of the appellant in transactions related to Ricoh, the apparent servicing of Ricoh insiders, and possession of inside information concerning false financial statements. These facts, coupled with the absence of the Pipara & Co. forensic report before the Tribunal, led the court to conclude that it was premature to grant interim relief.
The court emphasized that questions of insider status and possession of UPSI are factual issues to be addressed by the WTM upon consideration of all evidence and after hearing the appellant’s reply.
The WTM’s power to pass ex-parte impounding orders was acknowledged as necessary to protect the securities market and investors, preventing dissipation of funds pending final adjudication.
The court directed the appellant to file a reply to the show cause notice by 15/06/2020, with the WTM required to decide the matter within three weeks thereafter, providing an opportunity of hearing either physically or via video conferencing.
The court clarified that its observations were tentative and should not be used as evidence or precedent.
Holding and Implications
The court denied interim relief sought by the appellant to defreeze his bank and demat accounts.
The impugned ex-parte impounding order dated 17/03/2020 stands, subject to the appellant filing a reply to the show cause notice and the WTM deciding the matter expeditiously after hearing the appellant.
The decision underscores the WTM’s authority to pass ex-parte orders to protect market integrity and investors, while balancing the appellant’s right to a hearing before final adjudication. No new legal precedent was established; the order primarily affects the parties involved and directs procedural compliance.
BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of Decision : 27.05.2020 Misc. Application No.136 of 2020 (urgency application) Misc. Application No.137 of 2020 (interim application) Appeal (L) No.169 of 2020 Amalendu Mukherjee Appellant Versus Securities and Exchange Board of India . Respondent Mr. Dinesh Kumar Sabharwal, Advocate for the Applicant. Mr. Gaurav Joshi, Sr. Advocate a/w Mr. Abhiraj Arora, Mr. Vivek Shah, Advocates i/b ELP for the Respondent, and Mr. Pradeep Kumar, DGM, SEBI. CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C. K. G. Nair, Member Justice M.T. Joshi, Judicial Member Per : Justice Tarun Agarwala, Presiding Officer
1. Considering the facts and circumstances pointed out in the application, the Urgency Application No.136 of 2020 is allowed and disposed off.
2. The present appeal has been filed against an impounding order of the Whole Time Member (WTM for short) of Securities and Exchange Board of India (SEBI for short) dated 17/03/2020 directing the appellant and a public company, namely, Fourth Dimension Solutions Limited (FDSL) to deposit a sum of Rs.2,30,34,010/- in an escrow account. Pursuant to the said order, the bank accounts and the demat accounts of the appellant was seized on the next day.
3. The facts leading to the filing of the present appeal is, that FDSL was incorporated as a public company in which the appellant has disclosed in his appeal that he was a director, but at the present moment, is a suspended director.
4. It is alleged that SEBI conducted an investigation in the scrip of Ricoh India Limited (Ricoh for short) to ascertain whether or not suspected entities had traded in the scrip of Ricoh during the period 14/08/2014 to 17/11/2015. In September 2015, the statutory auditors of Ricoh found certain transactions between Ricoh and its vendors to be suspicious and, accordingly appointed PwC to submit a forensic audit report. In the meanwhile, Ricoh-company made a corporate announcement on 22/4/2016 intimating the public that the financial statements of Ricoh were not fair or true. PwC submitted a forensic audit report on 17/11/2016 and found, amongst other things, that FDSL had traded in the shares of Ricoh and liquidated its shares on 20/11/2015 when the statutory auditors found the transactions by the company through its vendors to be suspicious.
5. Accordingly, SBEI issued an ex-parte order on February 12, 2018 restraining the appellant from accessing the securities market. This order was confirmed on 16/8/2018. Subsequently another forensic audit report was submitted by Pipara & Co. on 25/10/2019 indicating the involvement of the appellant in the fictitious transactions being conducted by Ricoh with its vendors and also with regard to the sale and purchase of shares of Ricoh by the appellant and his company. Accordingly, an ex-parte impounding order dated 17/3/2020 was passed against the FDSL and the appellant directing them to deposit a sum of Rs.2,30,34,010/- in an escrow account pending final orders. By the same order, the WTM directed the appellant to show-cause as to why an order of disgorgement should not be passed.
6. It transpires that WTM subsequent to issuing the impugned order came to know that the company FDSL was under insolvency under the Insolvency and Bankruptcy Code and that an Interim Resolution Professional was already appointed by National Company Law Tribunal under Section 7 of the Insolvency and Bankruptcy Code, 2016 on 25/7/2019. Accordingly, an addendum order was issued by the WTM on 30/3/2020 keeping its order in abeyance against the company during the moratorium period.
7. The appellant being aggrieved by the impugned order dated 17/3/2020 has filed the present appeal.
8. We have heard Mr. Dinesh Kumar Sabharwal, learned Counsel for the appellant and Mr. Gaurav Joshi, Sr. Advocate assisted by Mr. Vivek Shah and Abhiraj Arora Advocates for the respondent.
9. The learned Counsel for the appellant submitted that the impugned order is an ex-parte order which has been passed in violation of the principles of natural justice. It was stated that based on the aforesaid order, the demat account and all the bank accounts of the appellant have been seized and which is in gross violation of the principles of natural justice. It was urged that the appellant is not an insider in terms of 2(1)(g) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 nor was he a privy to any unpublished price sensitive information (UPSI) as defined under regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. It was also urged that the impugned order is not based on any evidence and is only based on suspicion and, on such suspicion, such kind of impugned order could not be passed. It was also urged that trading of the shares of Ricoh-company was being done by FDSL through its demat account and the appellant was only authorized by the Board of Directors to trade in the shares of Ricoh. It was contended that the gains, if any, in the trading of the shares of Ricoh was made by FDSL and there is no evidence to show that the appellant was a beneficiary and, therefore, the order of impounding is illegal. It was also contended that earlier to the forensic report of Pipara & Co., there was another forensic report by C.S. Nanda & Co. which report has not been considered for reasons best known to the respondent. It was thus contended that freezing of the bank accounts and demat account of the appellant was wholly unjustified especially during the pandemic period and therefore prayed that an interim order should be passed directing the respondent to defreeze the bank accounts of the appellant. In support of his submissions, the learned Counsel for the appellant placed reliance on a decision in Hindustan Lever Ltd vs Sebi, (1998)18 SCL 311 (AA), Rakesh Agarwal vs Sebi in Appeal No.33 of 2001 and Samir C Arora vs Sebi in Appeal No.83 of 2004 to buttress his submission that no ex-parte order should be passed based on suspicion.
10. On the other hand, Shri Gaurav Joshi, learned Senior Counsel for SEBI contended that the impugned order is also a show-cause notice and, till date, the appellant has not filed any reply to the show cause notice. It was also contended that the ex- parte interim order dated 12/2/2018 was challenged before SAT and the appeal was dismissed. The confirmatory order was never challenged. The learned Senior Counsel contended that the forensic report of Pipara & Co. has not been filed and if an opportunity is given to the respondent, such report will be filed which will show that the appellant was the lynchpin and had his hands in every transaction/deal in Ricoh and that he was aware of the false financial statements which were being portrayed by the said company through its audited balance sheet. It was also stated that the appellant had knowledge of the financial statements of Ricoh and traded in those shares when the price of the same was rising and offloaded its shares when the appellant realized that the statutory auditors of Ricoh-company were finding certain transactions with its vendors to be suspicious. It was contended that the appellant was an insider and had unpublished price sensitive information which he utilized for ulterior purposes and unlawful gains. It was also contended that no case was made out for grant of an interim order and that the appellant should file a reply to the show-cause notice which will be decided by the WTM in accordance with law after giving an opportunity of hearing.
11. In rejoinder, Shri Sabharwal, learned Counsel for the appellant submitted that no fraud has been committed by the appellant and that Economic Offences Wing (EOW) also submitted a report indicating lack of evidence of fraud against the appellant. The learned Counsel urged that it was a fit case for grant of an interim order.
12. Having heard the learned counsel for the parties at some length through video conferencing, we found upon a query raised by us that the appellant was a major promoter in the public company FDSL to the extent of 54% of the total shareholding. The learned counsel for the appellant further informed that the appellant was also the Managing Director before he was suspended. In our opinion, these are crucial facts which were not disclosed by the appellant in his appeal for reasons best known to the appellant.
13. In the light of the fact that the appellant was the Managing Director in FDSL and had 54% shares coupled with the prima facie finding that the appellant was involved in the transactions of Ricoh and was servicing the insiders of Ricoh (which fact has not been disputed in the memo of appeal) and had inside information of the transactions and wrong financial statements being projected by Ricoh coupled futher with the fact that the forensic report of Pipara & Co. having not been filed, we are of the opinion that at this stage no case is made out for grant of an interim relief. Being a Managing Director, the appellant is entrusted with substantial powers of management of the affairs of the company and therefore responsible for its act as provided under Sec.2(54) &2(60) of the Companies Act 2013. The fact as to whether the appellant was an insider or was in possession of UPSI are questions of fact which should be raised by the appellant before the WTM. At this stage it is not appropriate for this Tribunal to decide such questions in the absence of the forensic report and other relevant documents.
14. We also find that by the impugned order the appellant had been directed to show cause and till date no reply has been filed. We are of the opinion that the WTM is empowered under the SEBI Act and the Regulations to pass an ex-parte order in order to protect the interests of securities market and the investors. If such impounding order is not passed, it may result in defeating the ultimate direction of disgorgement if any, as there would be chances of such monies being dissipated by the appellant. However, we are of the opinion that such order cannot be allowed to continue for an indefinite period and the matter has to be concluded at the earliest.
14. We accordingly direct the appellant to file a reply to the impugned order-cum-show cause notice dated 17/3/2020 on or before 15/6/2020. If such a reply is filed, the WTM will decide the matter finally within three weeks thereafter after giving an opportunity of hearing to the appellant either through physical hearing or through video conferencing as per the prevailing situation due to the pandemic. It is made clear that any observation made by are only tentative in nature and cannot be utilized by any party.
15. In view of the aforesaid, we are not inclined to grant any interim order at this stage and the stay application is accordingly disposed of. Let the appeal be listed for admission on 0707/2020 by which time the defects in the appeal should be removed and the court fees should be paid.
16. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the Registry. In these circumstances, this order will be digitally signed by the Presiding Officer on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally signed copy sent by fax and/or email. Sd/- Justice Tarun Agarwala Presiding Officer Sd/- Dr. C.K.G. Nair Member Sd/- Justice M.T. Joshi Judicial Member 27.05.2020
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