Appeal No.76, 77 & 78/04

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In the matter of:

Coram:

����������� Justice Shri Kumar Rajaratnam, Presiding Officer

����������� Dr. B. Samal, Member

����������� N.L. Lakhanpal, Member

Per:� Justice Kumar Rajaratnam, Presiding Officer

����������� The appeals are taken up with the consent of parties.� The appellants challenge an order passed by respondent dated 16^th of January 2004.� The appeals have been filed by one Ashok K. Sardana.� It is alleged that he is the promoter of a company known as Indian Finance Guaranty Ltd.� The appeal filed by Ashok Kumar Sardana is appeal No.78 of 2004.

2.�������� Appeal 76 of 2004 has been filed by� Indian Finance Guaranty Ltd. (hereinafter referred to as �company�).

3.�������� It appears appeal 77 of 2004 has been filed by the Director, Ashok Kumar Sardana, on behalf of the company.

4.�������� Since all the appeals relate to common questions of fact and law, these appeals are taken up and disposed of by consent by a single order.

5.�������� The matter relates to alleged siphoning of funds out of the Bhubaneshwar Stock Exchange to the tune of Rs.1.3 crores.

6.�������� An Enquiry Authority conducted an enquiry in accordance with rule 11 of the Securities Contracts (Regulation) Rules, 1957 to look into the allegations of the affairs of the Bhubaneshwar Stock Exchange.

7.�������� Basically allegations were:

A.������� The Exchange had neither sought permission nor sent any intimation to SEBI regarding the formation of the Trust.� They were unable to produce any documents to prove that approval of SEBI was obtained for the formation of the trust.

B.�������� As per the Trust Deed, the number of trustees of that trust shall not be less than three and more than five.� It was observed that the trustees have always been from among the elected members of the exchange.� The President and the Treasurer of the exchange are also the Chairman and Treasurer of the Trust respectively.� No Public Representative and SEBI nominee Director was made a Trustee.� The Executive Director of the exchange was present in meetings of the Trust as a special invitee without having any say in the decision for grant of loan by the trust to the members of the exchange.

C.������� The Rules of the Trust initially stipulated that �in case of temporary financial difficulty in making payment of dues to the Clearing House of the Exchange, a maximum of Rs.2,00,000/- shall be paid as loan which shall be recovered in 5 equal instalments along with 24% p.a. simple interest� and that �a member shall not be entitled to avail loan under this facility more than two times in a year.�

D.������� Thereafter, the Council of Management of the exchange at its meeting held on November 29, 1997 amended the Rules of the Trust to provide that �In case of temporary financial difficulty in making payment of dues to the Clearing House of the Exchange, a loan up to Rs.5 lacs or if the circumstances so warrant, such other higher amount as may be decided by the Trustees may be sanctioned which shall be ordinarily recovered within a period of two months along with the simple interest of 24% per annum.� The trustees, however, may extend the aforesaid period of two months in appropriate cases from time to time as may be deemed fit�

E.�������� As on the date of inquiry (1.10.2001 � 3.10.2001), out of total outstanding loan of Rs.95,83,782 (excluding interest), a sum of Rs.94,13,782 (i.e. Approx 98% of the total outstanding loans) was due from members who were either office bearers of the exchange or the trustee of the Trust.� Further out of the total loan outstanding (excluding interest), one Shri Babulal Sharma�s outstanding loan amount (excluding interest) constitutes 92.5% of the total loan outstanding (Rs.9583782/-).� Further, out of the total outstanding loan of Rs.95,83,782, loan of Rs.90,99,620/- (i.e. 95%) was granted to meet the members� pay in liabilities.� Further it was also observed that in some cases, it was observed that loans were sanctioned without proper security.

Although no specific allegations have been made against the appellants, it is stated that a news item dated 21.8.2002 indicated that one Tulsi D. Bhayana, one of the promoters of the company, was involved in a murder case.� It involved the murder of a stock broker.� On the basis of this report and on the basis of material available, the SEBI passed an order on 29^th October 2002 that the company be prohibited from buying, selling or otherwise dealing in the securities market until further orders.

8.�������� The operative portion of the order dated 29^th October 2002 at paragraph 8.1 reads as under:

�Hence after taking into consideration the above mentioned facts and circumstances of the case, in exercise of the powers conferred upon me under section 4(3) of the SEBI Act, 1992, read with Sections 11 and 11B of the SEBI Act, 1992, I hereby direct that Indian Finance Guaranty Limited, Member of National Stock Exchange (SEBI Registration Number- INB230880637) and member of OCTCEI (SEBI Registration Number INB200591231) be prohibited from buying, selling or otherwise dealing in the securities market.� These directions shall remain operative till further orders.� It is made clear that M/s Indian Finance Guarantee Limited is entitled to a personal hearing before me in this regard and the same would be granted upon request from them.�

9.�������� This order is purportedly passed under sections 11 and 11B of the SEBI Act.� There is no doubt that SEBI could have passed this order pending enquiry.� The SEBI passed a further order on 16^th of January 2004 both against the company as well as against the Director on identical terms once again purportedly u/ss. 11 and 11B of the Act.� This order dated 16^th January 2004 is impugned in these appeals.� The impugned order curiously is again passed u/ss. 11 and again bars the appellants from the security market until further orders.� Two orders u/ss.11 and 11B of the SEBI Act, one dated 29^th of October 2002 and the other dated 16^th of January 2004, are purportedly passed pending enquiry u/ss. 11 and 11B.� It is not known whether it is permissible to have an open-ended enquiry from 29^th of October 2002 and continue with the enquiry by a fresh order dated 16^th of January 2004 and all the time barring the appellants from having access to the market pending enquiry.

10.������ It was argued by the respondent that the first order was directed against the Stock Exchange and in the course of that enquiry, the company was barred.� According to the respondent, the second order dated 16^th of January 2004 although passed u/ss. 11 and 11B, is specifically directed against the appellants.

11.������ We are unable to persuade ourselves to accept this submission because even the first order in 2002 also suspends the appellants from dealing in the market until further orders.� This order is passed purportedly u/s. 11.� The same order is repeated in the order passed in 2004 purportedly again passed u/s. 11.

12.������ The learned counsel for the appellant vehemently submitted that this open-ended enquiry applies only to the appellants and persons who are directly involved in the siphoning of funds of the Members� Welfare Trust Fund have been given suspension orders, which are far less severe.� The learned senior counsel for the appellants brought to our notice the recommendation of the Enquiry Officer with regard to the persons who were indicted in the Bhubaneshwar Stock Exchange scandal and the period of suspension given to them by SEBI.� The order of SEBI with regard to punishment reads as follows:

13.������ On 30^th of April 2002, show cause notice was issued to the main culprits. According to the appellants, they have all been suspended between two years and one year.� As far as the appellants are concerned, they have been kept under suspension on the basis of this open ended enquiry since 2002 and a further order has been passed in 2004 saying that the enquiry will continue and pending enquiry the appellants have been directed not to associate with the market.�

14.������ Although it was not necessary to deal with the facts of the case, since we intend to dispose of the matter directing the respondent to complete the enquiry within two months, it is necessary to refer to the submissions made by the senior counsel for the appellants:

a)������� It is submitted that in the year 2001, an inquiry was conducted by the respondent on the allegations of mismanagement and misappropriation of the Bhubaneshwar Member Welfare Trust (hereinafter called �MWT�) by the trustees to the tune of Rs.1.3 crores.� It was also alleged that MWT had granted loans amounting to Rs.88,25,000/- during the period starting from 7.6.1999 to 13.1.2000 to a certain member of Bhubaneshwar Stock Exchange, who was also one of the trustees.� This person was identified as Mr. Babulal Sharma, and out of the above mentioned amount, Rs.40 lacs had been used to make payment to the appellants against the trade dues of the appellants.� Furthermore the appellants had fully co-operated with the Inquiry Officer and furnished the complete details along with documentary evidence to the Inquiry Officer.�

b)������� It was further submitted that the inquiry report so submitted by the Inquiry Officer upheld such allegations and held that in fact the aforementioned amount had been misappropriated by some trustees.� It further stated that the entire matter of sanctioning and payment of loan amounts was kept very secret by the Trustees and the office bearers of the Exchange.� Further, the investigation report did not indict the appellants or any of the Directors of the company.� That, based on the inquiry, the respondent gave direction to the council of management of the Bhubaneshwar Stock Exchange to suspend the indicted members vide their letter dated 30.4.2002, for a period of 2 to 3 years, after giving proper show cause notice and opportunity of hearing.

c)�������� It was further argued that the books of accounts of the appellants were also inspected by the team of the respondent in august 2002, but they failed to produce anything incriminating against the appellants and it was held that the books of the appellants were correct and also that the money so received by the appellants was duly accounted for.

d)������� Based on the said report, the respondent passed an initial order dated 20.10.2002, whereby it prohibited the appellants from functioning as stock brokers.� The said order also relied upon extraneous evidence in the form of newspaper report that one of the promoters of the appellant-company, Mr. T.D. Bhayana, had been arrested in a murder case.

e)�������� Finally it was argued that although the inquiry report had not indicted the appellants, the only link between the appellants and Mr. Anjani Kumar Singh, who was the main accused, was brought out in the said order and it was made the basis of said order that part of the loan amount so misappropriated had been utilised by Mr. Anjani Kumar Singh to clear part of his dues with the appellants, and was thus paid by him to the appellants against his trade liabilities towards the appellants.

f)�������� On 23.11.2002 the appellants were granted an opportunity of hearing by the respondent, wherein the appellants once again pleaded their innocence and produced the entire documentary evidence, which clearly highlighted that the appellants was not in any manner involved in the misappropriation of funds of MWT.

g)������� After the final hearing on 23.11.2002, the appellants did not receive any communication from the respondent, but kept writing regularly to the respondent.� The appellants further vide their representation dated 28.1.2003� requested the respondent to set aside the order dated 29.10.2002 as it was affecting the working of the appellant-company.� The appellants also submitted that Mr. T.D. Bhayana, in the wake of the criminal case so filed against him, had resigned as the Director of the appellant-company on 26.11.2002.�

h)������� It was further stated that the Bhubaneshwar Stock Exchange along with the MWT also filed a recovery suit against the errant members/trustees, however neither the appellant-company nor its Directors have been arrayed as Defendants in the said suit.� The contents of the suit clearly state that the trust at its various meetings had sanctioned the said loan to the member by an account payee cheque in his name.

i)�������� On 3.2.2004 the appellants were appalled to receive the impugned order so passed by the respondent after a gap of 13 months from having concluded the proceedings, whereby it upheld its earlier decision of 29.10.2002 and prohibited the appellants from dealing in securities and from being associated with the securities market as a stock broker.

16.������ This is an unfortunate case where enquiry has been completed with respect to the other members allegedly involved in the scam but the appellants have been suspended until further orders with effect from 2002.

17.������ � Mr. Kumar Desai, counsel for SEBI submitted that if others have suffered penalties, the concept of proportionaility will also be taken into account in punishing the appellants, if found guilty.� But the fact of the matter is the appellants have already suffered two years of suspension without even a show cause notice been given.� The appellants also have submitted that they have a very good case on merits and that they have nothing to do with the scam.

18.������ The learned counsel for the appellants relied on a number of pronouncements of the Supreme Court and submitted that the inordinate delay in the enquiry would vitiate the enquiry proceedings.� Reliance was placed on pronouncements of the Supreme Court in Criminal Appeal No.665 of 1989 dated 8.9.1993 in Biswanath Prasad Singh vs. State of Bihar and Criminal Appeal No.385 of 1988 dated 18.7.1988 in Srinivas Gopal vs. Union Territory of Arunachal Pradesh (Now State).� These judgments are matters relating to criminal trial but the fact of the matter is that a trial or enquiry cannot go on indefinitely, more so when during the pendency of the enquiry there is an embargo on the person in any way associating himself from the market.� The right of the appellant for a speedy trial cannot be overstated in the facts and circumstances of the case.

19.������ � In these circumstances, we feel it appropriate, on a broad consensus, that the only way to dispose of the appeals is to direct the respondent to complete the enquiry within a period of two months from the date of receipt of this order and pass appropriate orders in accordance with law.� Needless to say that all contentions are left open.� The appellants undertake before this Tribunal to fully co-operate with the respondent by promptly responding to the show cause notice.� Needless to say that any penalty imposed on the appellants, if found guilty, would take into account the punishment rendered by SEBI with respect to the co-delinquents as per the order dated 30^th of April 2002.� Needless also to say that any penalty, if so imposed, shall also take into account the period of suspension suffered by the appellants pending enquiry.� Accordingly, the appeals are disposed of with a direction directing the respondent to complete the enquiry and pass appropriate orders with respect to the appellants in all the cases within two months from the date of receipt of this order.� The appellants have agreed to co-operate with the enquiry.� If the respondent is not able to complete the enquiry, the interim ban shall stand vacated pending enquiry.� All the appeals are disposed of accordingly.

20.������ No order as to cost.

Place: Mumbai

Date:� 30^th June 2004

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