BEFORETHESECURITIESAPPELLATETRIBUNAL

MUMBAI

Dateofdecision:15/01/2015

AppealNo.91of2013

PurshottamBudhwani
B2,HimalayaSociety,
MilindNagar,Asalfa,
Ghatkopar(W),Mumbai400084.

Appellant

Versus

SecuritiesandExchangeBoardofIndia
SEBIBhavan,PlotNo.C4A,GBlock,
BandraKurlaComplex,
Bandra(E),Mumbai400051.

Respondent

Mr.SunitShah,AdvocateandMr.H.D.Dave,AdvocatefortheAppellant

Mr.ShirazRustomjee,SeniorAdvocatewithMr.RushinKapadia,Advocate
i/bK.Ashar&Co.fortheRespondent.

CORAM: JusticeJ.P.Devadhar,PresidingOfficer

A.S.Lamba,Member

Per:A.S.Lamba

1.
This is an appeal filed by Purshottam Budhwani (Appellant) Vs. The
Whole Time Member, SEBI (Respondent) against impugned order
No.WTM/MSS/ISD/98/2011 dated May 23, 2011 passed by Ld. Whole Time
Member, ordering Appellant to disgorge Rs.9,39,38,030/, comprising
Rs.5,87,11,269 towards unlawful gain made by Appellant and Rs.3,52,26,761
towardssimpleinterestattherateof10%perannumforsixyears(200511)
on unlawfulgains, within 15 daysfrom dateoforder.Thedisgorgement is

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-2-

arisingduetocertainactivitiesofAppellantduring2005whichwillbedealt
subsequentlyinconnectionwithInitialPublicOffer(IPO)of13companies.

2.

ActivitiesofAppellantrelatingtoIPOof13companiesare:

Additionofnamesofseveralactualexistingpersonswhocould
beidentifiedandtheiraddressverifiedonbasisoftheirelection
votingcards,asjointaccountholderstohisexistingornewly
open bank accounts, stating address of joint account holder as
his own address and obtaining welcome letter from concerned
bankforjointaccountholder.

Break different parts of name of each joint account holder,

including title, and combine these parts and title to engineer
multiplenamesforeachjointholder.

Use welcome letter from bank in name of joint account holder

andvariousengineerednamestoopenmultipledemataccounts
for each actual existing joint account holder, with Karvy Stock
Broking Pvt.Ltd.a depository participant (DP)of CDSLand
PrateekStockVisionPvt.Ltd.anotherDPofCDSL.

Multiple Applications for allotment of shares in IPOs of 13

companies,weremadebyAppellant,basedoneachapplicants
bank account held jointly with himself and numerous
engineered demat accounts and by availing of finance from
eitherDushyantDalal(Dushyant)afinancer;orusinghisown
finances.

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On allocation of shares against various multiple applications

made by Appellant, which were always much less than shares

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applied for Appellant transferred each and every allotted

sharesinresponsetomultipleapplicationstohisvariousdemat
accounts, invariably before listing of share in stock exchanges
and utilized refunds received from IPO issues due to lesser
allocation of shares than applied for to return funds to
Dushyantorusedtheserefundsforapplicationsinsubsequent
IPOsandalsotransferredpartofsharesofIPOavailableinhis
demat accounts, to Duyshyant or a nominee of Dushyant or
sold the shares in offmarket transactions or sold shares in
market or retained some of these shares in his various demat
accounts.

3.

InviewofApplicants,abovementionedactivities,Appellantwasable

to make undue profits/gains, since he controlled all joint accounts and

engineered demat accounts, since he made all multiple applications in IPOs
himselfperhapshimselfappendingsignaturesofapplicantsasseenfrom
similarity of signatures of all signatures in form and styleand since he
controlled finance including the refunds from IPO Applications money,
AppellantwasheldviolativeofSection12(A)(a),(b)and(c)ofSecuritiesand
ExchangeBoardofIndiaAct,1992(SEBIAct)andRegulations3(a),(b),(c)and
(d) and 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices
Relating to Securities Markets) Regulations, 1993 (PFUTP Regulations).
Appellant

was

called

upon

to

show

cause

vide

letter

No.ISD/SR/VB/SCN/OW/6119/2010 dated May 20, 2010, as to why suitable

directions under Section 11(4) read with Section 11 and Section 11B of SEBI
Act, be not issued to restrain Appellant from buying, selling or dealing in

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-4-

securities, to disgorge an amount of Rs.7,78,62,010 with interest and

appropriate directions to realize shares in his frozen demat accounts for
purposeofmeetingdirectionsfordisgorgement.

4.

InresponsetoSCNdatedMay20,2010AppellantappearedbeforeLd.

WTMonMarch1,2011andmadepreliminarysubmissionsandsoughttime
forwrittensubmission,whichhedidvideletterdatedMarch7,2011,butdid
notappearbeforeLd.WTMafterappearanceonMarch1,2011,despiteample
opportunities, and accordingly Ld. WTM disposed off proceedings in terms
ofSCNandAppellantswrittensubmissions.

5.

Appellanthadinhispreliminarysubmissions,submittedthat;(i)heis

not a person associated with securities market, either as intermediary or

otherwise,andhencepowersunderSection11and11BofSEBIActcannotbe
invokedagainsthim;(ii)SEBIdoesnothavepowertoholdanyinvestigation
or enquiry under Section 11, 11(4) and 11(B) of SEBI Act and hence SCN
under these Sections is bad in law; (iii) The matter is pending before
Adjudicating Officer for inquiry and SEBI cannot initiate parallel inquiry
under Section 11, 11(4) and 11(B) of SEBI Act and pass orders for
disgorgement;(iv)SEBIdoesnothavepowersofdisgorgementunderSection
11,11(4)or11(B)ofSEBIAct,sinceasperSection15HAofSEBIAct,penalty
up to 3 times of profit can be imposed, and power of disgorgement, under
Section11&11(B),wouldresultindoublejeopardy;(v)Section11&11(B)of
SEBIAct,whicharenotpenalprovisions,cannotbeusedtoimposepenalty,
(vi)SameauthorityshouldhaveissuedtheSCN,aswellasdirectionsunder
Section11and11B,butininstantcase,directionshavebeenissuedbyWTM,
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whileSCNwasissuedbyanOSD,whichisnotpermissible;(vii)Principlesof

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Natural Justice have not been complied with, as inspection of various

documentsandcrossexaminationdenied.

6.

Ld. WTM has dealt with each of these preliminary objections, ad

seriatim,asfollows:
(i)

Appellant made applications for thousands of demat account

holders, arranged funds, transferred shares from these
thousands of demat accounts to his own demat accounts and
disposedofsaidsharesorretainedtheseinhisdemataccounts,
which activities make him a person associated with securities
market; since Honble High Court of Gujarat has in the matter
of Karnavati Fincap Ltd. and Alka Spinners Ltd. vs. SEBI has
held buyers and sellers of scrips, as persons associated with
securitiesmarket,onthesamefootingasintermediaries.

(ii)

SAT had, in the matter of Karvy Stock Broking Ltd. vs. SEBI,
held that it is clear from language of Section 11(4) of SEBI Act
thatthemeasuresthatSEBImaytakeintheordersitmaypass
would be either pending investigation or enquiry or on
completion of such investigation or enquiry, thus Section 11B
explicitlyenablesSEBItoissuesuitabledirectionsaftermaking
anenquiryalso.

(iii)

SEBI Act empowers SEBI to initiate appropriate proceedings

like 11B, adjudication, prosecution, etc. or any combination of
these, as may be warranted in the circumstances, to deal with
violations of SEBI Act, Rules and Regulations made under

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these, and conclusion of one proceeding does not have to wait

-6-

for conclusion of another and can proceed in parallel and

independent of another, since these multiple proceedings are
notexpectedtoresultinsamefindingsorsamedirections.
(iv)

Itiswellsettled principle that a person, whounjustly enriches

himselfbyunlawfulmeansshouldberequiredtogiveupunjust
enrichment,aswasheldbySATinKarvyStockBrokingLtd.Vs.
SEBIandDhavalMehtaVs.SEBIandreiteratedinShriShadilal
ChopraVs.SEBI,DushyantN.DalalVs.SEBIandMs.Puloma
DalalVs.SEBI.

(v)

SAT had observed in Karvy Stock Broking Ltd. Vs. SEBI that
disgorgement is not a penalty but monetary equitable remedy
andthusdoesnotamounttodoublejeopardy,ifanentityhasto
pay penalty under Section 15HA of SEBI Act and at the same
time the same entity has to disgorge unlawful gains under
Section 11(B) of SEBI Act, for the same act of violation of
SecuritiesLaws.

(vi)

Ld. WTM has not found any illegality, or even irregularity in

theact,whereSCNwasissuedbyOSDandorderunderSection
11,11(B),11(4)ofSEBIActpassedbyLd.WTM,sinceSCNand
directions are issued by the functionaries, who have been
delegatedpowerstodoso.Ld.WTMhasfounditdesirablethat
allegations(presumablySCN)aremadebyafunctionarylower
inGradewhilethedeterminationoftheallegationsasmadeby
afunctionaryhigherinGrade,whichisthecasehere.Further,
it is stated by Ld. WTM that SEBI follows a practice that a

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WTM, who does not supervise that Department which has

-7-

issued SCN, determines the allegations made in SCN, which

bringsouthigherobjectivityinquasijudicialproceedings.
(vii) It is stated by Ld. WTM that Appellant sought examination of
witnesses but did not justify its need and that allegations in
SCN are based on transactions in bank and demat accounts of
the Appellant and not on any statement of any person. Ld.
WTM has further stated that request for inspection of
documentshasnobearingonthemattersinceinspectionofall
documentsreliedonforSCNhasbeenprovidedtoappellant.

7.

This Tribunal agrees with all findings of Ld. WTM, relating to

preliminaryobjectionsofAppellant,exceptregardingissuanceofSCNbyan
OSDandissuanceofdirectionsbyLd.WTMandinthiscontentionLd.WTM
may confirm that OSD, who issued SCN had authority to issue SCN, in
writing,fromcompetentauthorityunderrelevantSectionofSEBIAct,1992or
regulations framed thereunder, to issue SCN and that SEBI Act, 1992 or
regulations framed thereunder allows issuance of SCN by one functionary
anditsadjudicationbyanotherfunctionary.

8.

On merits of the case, the Appellant has submitted that, (i) same

address was mentioned in all applications for subscription in IPOs and

registrar/issuer could have used the address field to reject multiple
applications, (ii) no retail investor has grievance against him and (iii) in
absence of any express provision, doctrine of joint and several liabilities
cannotbeinvokedandAppellantcannotbeheldliableforbenefitsaccruedto
third parties; besides stating that expenses incurred on interest, income tax
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liability and other expenses, needs to be excluded from disgorgement

-8-

amount, and amount to be disgorged should be Rs.5,09,34,014 and not

Rs.7,78,62,010asinSCN.

9.

Regarding due diligence of registrar/issuer to detect multiple

applications, with same address, Ld. WTM has stated that due diligence of
Registrar/Issuer is not expected to detect all kinds of frauds, including one
perpetratedbyAppellantanditdoesnotabsolveAppellantofmanipulative
charge against the Appellant. While accepting that Registrar/Issuer is not
expected to detect all kinds of frauds in concerned IPO, yet a fraud of the
kindperpetratedbyAppellantbymaking235to5884applicationseachin13
IPOs, which were signed in same form and style, which were having one
common address, all applications were numbered serially, perhaps
applications in some cases were submitted in floppies and not in material
form, and all these applications were printed and not handwritten, leaves
one wondering why Registrar/Issuer could not detect a fraud of this
magnitude,perpetratedinnotonebutin13IPOsandAppellantwasnotthe
only key operator carrying out these kinds of activities in relation to IPOs
from20032005,buttherewereseveralotherkeyoperatorsintheseIPOs,who
perpetrated the same kind of fraud in all these IPOs, though with a little
variationhereandthereandthattooinengineeringnamesforopeningdemat
accountsbymakingdifferentcombinationsbycombiningonesurnamewith
50names,etc.,wasnotdictatedbyRegistrar/IssuerofIPOthenwhatsortof
frauddetectionsystemsexistedwithRegistrar/IssuersofIPOs,whichmakes
atotalmockeryofduediligencesystemofIssuer/RegistraroftheseIPOs.

10.

RegardingsubmissionofAppellantofnoinvestorsgrievanceagainst

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him,argumentofLd.WTMisaccepted.Itisalsostatedthatfraudcommitted

-9-

byAppellantwasagainstsecuritiesmarketinparticularandnotagainstany
individualinvestororgroupofinvestorsbutagainstallinvestors,ingeneral
and,asexpected,noinvestorcomplainedorexpressedhisgrievanceagainst
this kind of fraud by Appellant, although genuine investors did suffer by
lesserallocationofsharesinIPOsthantheirentitlementsduetoallocationof
sharesagainstapplicationsengineeredbyappellant.

11.

ThisTribunalalsoagreeswithLd.WTMregardingsetoffofexpenses

ofinperpetratingfraudfromdisgorgementamountandthattheseexpenses
have not been allowed and should not be allowed. Regarding setoff for
income tax paid on unlawful gains, this Tribunal is of the view that same
cannotbeallowedandAppellanthastheviableoptionofclaimingrefundof
same,fromincometax,authorities.

12.

ThisbringsustothelastsubmissionofAppellantregardingdeducting

deductionsof(i)interestondisgorgement,(ii)profitoffinancer,(iii)Natural
gains,itwillbebettertofirstlookathowthedisgorgementamounthasbeen
gotbuiltup,beforeconsideringreliefssoughtbyAppellant.

13.

For TCS shares it is seen that 20 shares were allotted for 602

applications each and 17 shares were allotted for 1939 applications, which
addupto45003shares,against44994sharesatpage8ofSCN.Similarlyfor
GokuldasExport,itisstatedthatpage11ofSCNthatnumberofapplications
was1425andeachapplicationwasallotted15shares,onfirmallotmentbasis,
andhencenumberofsharestransferredfrom1425applicantstoAppellants
demat should be 21325; whereas number of applications is shown as 956
applications and total shares transferred to demat account of Appellant as

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-10-

14340.Noofapplicationsat1425isalsoborneoutfromamountinvestedfor
application money for 1425 applications at Rs..6,35,90,625 @ Rs.44,625 per
application.SimilarlyforNectarLifesciences,numberofapplicationsis1500,
as at page 13 of SCN, for which amount of applications is Rs.7,20,00,000 @
Rs.48,000for1500applications.Firmallotmentforeachapplicationis25and
hencenumberofsharestransferredtodemataccountsofAppellantshouldbe
37,500, whereas in table at page 9 of SCN is shown as 18,950 shares against
1074applications.

14.

DiscrepanciesintotalavailabilityofsharesforTCS,GokuldasExports

andNectarLifesciencesneedstobereconciled.

15.

Similarly in page 12 of SCN relating to TCS shares, sale of shares in

marketis8200andoffmarketsaleis36,794,whereaselsewhere8200issalein
offmarket,whilesaleinmarketis36,794.Thisneedsreconciliation.

16.

In case of IDFC shares, offmarket transfer to Chavda and three

transfereesafterthat,isonfouroccasions,atpricesrangingfromRs.37to50
from 08/08/2005 to 18/08/2005, when market price was higher and these
transfers were at instance of Dushyant Dalal. As per formula in extent for
calculating gains these prices should be calculated at closing price of
concerned scrip on day of listing and hence this price has to be taken into
account for these four offmarket sale, for calculating unlawful gain of
Appellant.

17.

In case of IDFC, Appellant made 8554 applications and was allotted

266 shares against applications, thus 15,65,144 shares were allotted and
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transferred to demat accounts of Appellant, whereas total number of shares

-11-

indemataccounts(atpage9ofSCN)is9,77,180(CDSL)and588,644(NSDL)
whichaddupto15,65,824.Thishastobereconciled.

18.

Inpara8dofImpugnedOrder(page9),itisstatedthat,asperSCN,

AppellantisliableforillegalgainsofRs.7.78crore,andhasnotbeenaskedto
disgorge illegalgainofRs.0.87, whichhefacilitatedothersto make.Asa
matteroffact,thisisillgottengainofDushyant,asshownatpage14ofSCN
(Rs.87,78,724 to be enact) and Dushyant is not in others to make and this
amount is not included in amount of Appellant for disgorgement but
Dushyant has been asked to disgorge, in a separate order of disgorgement
againsthim.OthersinotherstomakeareChavdaornotnamedandall
such transactions are in respect of shares of various scrips in offmarket
transactionsandincludedinamountfordisgorgementagainstAppellantand
not included in amount to be disgorged from Dushyant and since these
others have not been asked to disgorge separately, which add to
Rs.2,12,31,078, inclusion of this amount in amount to be disgorged by
Appellant,incorrect.

19.

TheamountofRs.2,12,31,078hasbeenarrivedatafterincluding20,000

shares transferred to Dushyant in the scrip of Shopper Stop, which is

included in 22000 shares sold in off market, but Dushyant is not shown as
havingreceived20,000ofthese22,000share,whichareinfactshownagainst
Dushyantatpage14ofSCNandincludedfordisgorgementfromDushyant.
Asamatteroffact,thisamountisfordisgorgementfromDushyantforthese
20,000sharescomestoRs.29,61,200@Rs.134.60profitpershare.

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-12-

20.

Inanycase,takingunlawfulgainofothersfrom23850ofShopperStop

transferred in offmarket by Appellant at Rs.32,10,210; amount shown for

disgorgement occurring to third parties, comes to Rs.2,12,31,078 +
Rs.32,10,210 i.e. Rs.2,44,41,288, which is still short of Rs. 2,69,27,996/ as
claimedbyAppellant.

21.

Nowcomingtopara8cofImpugnedOrderatpages9and10,itisnot

at all clear how the figure of relief of Rs.1,91,50,741 as against disputed

amount of Rs.2,69,27,996, has been arrived at. In the case of TCS, no. of
sharestransferredoffmarketbyAppellantis8200inSCNpage8andinhis
replytoSCNdated7thMarch,2011(Page179ofMOA),Appellanthasshown
transactionof7709sharestofinancers,namelyLLPhulwani(595shares),LL
Phulwani(264shares)andDushyant(6850shares).ThereafterAppellanthas
shownreceiptoffundsfromthefinancersandrepaymentofsameinmoney
terms and kind (transfer of shares of TCS) along with interest and thus has
claimed that for Dushyant it is Rs.5,8,22,500, for 6850 shares. It may be
mentioned that illgotten profit per share is Rs.968.47 Rs.850 is Rs.118.47
and not Rs.850, as shown in calculation by Appellant. Hence, basis of
disputedclaimandworkingoutreliefbyLd.WTMisnotclearduetothefact
thatmarketandoffmarkettransactionsforTCSasonpage12ofSCNandat
page8ofSCNhavebeeninterchangedandalsothatnumberofsharesofTCS
transferredtoaccountofAppellantshouldbe45003andnot44,994asinSCN
andimpugnedorder.

22.

NowcomingtocaseofGokuldasExport,inwhichitisstatedthat,out

of14,340transferredtodemataccountofAppellant,1299sharesweresoldin
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market and 13041 sold in offmarket and these offmarket transfers are to

-13-

others(i.e.notDushyant).Appellantisstatingthat hehadtransferred7787
sharesofGokuldastoDushyant.Thisclaimmaybeacceptedbutithastobe
considered that while arriving at illgotten gain, Appellant has taken sale
priceofshareatRs.425,whichisthesameasissueprice;whichmeansshares
were transferred in offmarket. Since Appellant has not disputed shares
transferredofsharesasshowninSCNinmarketoroffmarket,itcanbe
consideredthatsharestransferredtoDushyantwereoffmarketandincluded
in 14,340 transferred in offmarket. This cannot be otherwise, since shares
transferred in market in this case is only 1299, whereas shares claimed
transferredtoDushyantis7887.

23.

Itisalsoseenfromtableatpage14ofSCNthatDushyanthasnotbeen

accounted for illgotten gains from Gokuldas shares. Hence it may be that
Appellanthadsold7887sharesofGokuldastoDushyant,butstillitisnota
caseofdoublecounting.

24.

Now coming to Yes Bank disputed amount, it is seen that Appellant

claimstohavesold2000sharestoLLPhulwani,320toLLPulwani(HUF)and
63,975toDushyant,forwhichillgottengainsforYesBank,isdisputed.These
three sales total to 66,295 shares. Besides these three, Appellant also claims
thathesold20,000sharestoRajKumarJain@Rs.57pershare,butdoesnot
stateifthesesharesareoffmarketoronmarket,butdifferenceisonlyRs.3.80
between rate of illgotten profit, worked out by Ld. WTM and illgotten
profit, claimed by Appellant i.e. Rs.76,000 only. In this case also, it is seen
thatmajorchunkofsaletothreefinancersistoDushyantandDushyantill
gottenprofitdoesnotincludeonlyillgottenprofitfromsaleofYesBank.For
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othertwofinancers,theyhavenotbeenaskedtodisgorgeandhencegainto

-14-

financersinoffmarketsale,isnotbeingcountedtwice.CaseofRajukumar
Jainisnotclear,asstatedearlier.

25.

However,inreliefgrantedtoAppellantbyLd.WTMofRs.1,91,50,741

as against Rs.2,69,27,996 claimed by Appellant, it is seen that major

contributiontoreliefisonaccountofIDFCsharesaleinoffmarketanditis
possibletojustifythesameordenyit,sincecaseofIDFC,startingfromtotal
numberofsharestransferredtohisdemat,asworkedbyLd.WTMandasper
understandingofthisTribunaliswideandhencenoattemptisbeingmadeto
seeifclaimofdisputedclaimbyAppellantfromIDFCsharesandasworked
outbyLd.WTM,isjustifiedornot.

26.

However,stillthefollowingfactsarenotcleartothisTribunalandon

this,thefollowingcommentsareoffered:

MajorityofdisputedclaimbyAppellantwasonaccountofsale
of shares by Appellant to other parties, which did not include
Dushyant, who have not been asked to disgorge and hence
claim of disgorgement from Appellant, on behalf of this other
parties was justified and cannot be termed double
disgorgement.

Ld.WTM has made no attempt to consider the undisputed

claim, in any depth, and even not justified the relief by any
reasoning,letalonerationalandacceptablereasoning.

IncaseLd.WTMissatisfiedthatthereismeritingrantingrelief,
based on reasons, he is entitled to grant relief, to the extent
justified but this fiftyfifty approach is not appreciated, since

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disgorgement isbasedon illgotten/unlawfulgains andshould

-15-

not based on irrational or unjustified reasoning and similarly

thereliefshouldbejustified,basedonsoundreasoning,which
isnotthecaseinImpugnedOrder.

27.

Duringthecourseofhearing,Ld.CounselforAppellantstatedthathis

clienthasbeenaskedtodisgorgeillgottengainonsharesofthesevarious13
scrips in his demat account, which are part of total transferred shares from
variousdemataccountsandnowavailablewithhim,aftertransferringothers
shares in market and offmarket transactions. These shares in Appellants
demat account have been frozen by Respondent and Appellant represented
thathecannotpayillgottengainsofsharesofthese13scrips,sincehisdemat
accountholdingtheseshares,iffrozenbyRespondent.Tribunalfeelsinthis
respect that this submission has merit and Respondent is also directed that
thissubmissionofAppellantbeconsideredappropriately,sothatAppellant
isabletosellhissharesforpaymentofdisgorgementamount.

28.

In view of above and other reasons, detailed supra, the Impugned

Order is set aside and case is remanded back to Respondent for taking
necessaryactionanddecidingthematter,afteraffordinghearingtoAppellant
andmostimportantlytopassanorderbasedonsoundreasoning,logicand
rationalconsiderations.

15/01/2015
Prepared&Comparedby
Ddg/PTM

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Sd/
JusticeJ.P.Devadhar
PresidingOfficer
Sd/
A.S.Lamba
Member