(1.) ORDER passed by the Chairman, Securities and Exchange Board of India, the Respondent herein, on 24.10.2002, under section 11B of the Securities and Exchange Board of India Act, 1992 is under challenge in the present appeal. The Respondent by the said order had disqualified the Appellant "from holding any public position in any capital market related institution for a period of one year" with effect from the date of communication of the order. The order was communicated to the Appellant on 26.10.2002.
(2.) The background of the order, as revealed in the order is that in the wake of sudden payment crisis in the month of June, 1998 on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) the Respondent had carried out investigations. Since there were certain allegations about the involvement of Shriram mutual fund (SMF) the role of the said mutual fund was also investigated. The investigation report revealed certain irregularities in the matter of investments committed by SMF. In that context the Respondent issued notice to the Shri Ram Asset Management Company (SAM) which was the Asset Management Company of SMF, seeking explanation as to why investment of funds by SAM was not carried out in the best interest of the unit holders of SMF and why it failed to ensure that its acts did not give any undue or unfair advantage to entities having association with sponsors. SAM was also asked to explain why it acted contrary to the provisions of the trust deed and mutual fund regulations notified by the Respondent. SAM replied to the notice and also made oral submissions before the Respondent. The Respondent adjudicated the notice. SEBI in its adjudication held the Appellant, who was the Managing Director of SAM also responsible to the omissions and commissions of SAM in the matter. In that context SEBI directed inter alia that "Shri Gadgil shall not be eligible to hold any public position in any capital market related public institution for a further period of 3 years from the date of the order. The order was issued on 1.2.2000. Shri Gadgil challenged the said order by filing an appeal in the Tribunal. The main thrust of his attack against the order was that it was passed without giving him sufficient notice/opportunity of being heard. The Tribunal after hearing the Counsel for the parties and considering all the relevant aspects decided to remand the matter to SEBI. Accordingly vide its order dated 11.8.2000 the Tribunal "remanded the matter for denovo consideration by the Respondent after affording the Appellant a fair and reasonable opportunity of being heard." SEBI, thereafter issued a notice to the Appellant on 6.11.2000 asking to show cause as to why directions should not be issued against him by issuing directions declaring him ineligible for holding any office as trustee/fund manager of the Mutual Fund or of Director/Senior functionary of public financial institution -- ICIC, IDBI, UTI/ Stock Exchange/Depositories like CDSL or NSDL for a sufficient period". The Appellant responded to the notice. During the course of the proceedings the Appellant requested the Respondent to cross examine one Jaysukhlal Jagjivan and Nitin Doshi of a broker firm viz. Jaysukhlal Jagjivan Stock Brokers P. Ltd., (JSBL) on that ground that their cross examination was necessary since SEBI had relied on their statements in its order. Lot of correspondence moved to and fro on this issue. Ultimately SEBI declined permission to cross examine the said two persons and adjudicated the show cause notice on 24.10.2002. SEBI issued the order under section 11B of the SEBI Act directing "that Shri D.A. Gadgil shall not be eligible to hold any public position in any capital market related institution for a period of one year".
Claiming to be aggrieved by the order the Appellant preferred the present appeal. In this context before proceeding further in the matter it is felt that it would be advantageous to know the bases on which SEBI has held the Appellant guilty of the charges. SEBI has stated that :
"In response to the aforesaid show-cause notice, Shri Gadgil sent a reply on December 11, 2000 denying all the charges leveled against him. Shri Gadgil in his reply sent through his lawyer stated that the decision to purchase or sell shares was always taken by an investment committee at SAMC. As regards the allegation that the decision to purchase the shares at a rate higher than the market price, it was stated in the reply that the same was taken by the investment committee at SAMC at a time when the price was around Rs. 170-175 in the beginning of June, 1998 and hence the purchase was in the interest of all unit holders.
Pursuant, to the above, Shri Gadgil was granted opportunity of hearing before ex-chairman vide letter No.IES/ID2/RKK/21821/2001 dated January 18, 2001 to which he replied vide letter dated 24, January, 2001 stating that the date was not convenient for him and also expressed his desire to examine Mr. Jaysukhlal Jagjivan and Mr. Nitin Doshi of JSBL during such hearing. Thereafter another letter dated February 23, 2001 was issued to him affording him an opportunity of personal hearing on March 1, 2001. He had repeated his request for cross-examination through another letter of his dated 27th February, 2001. On March 01, 2001 Shri Gadgil alongwith his lawyer had appeared before the ex-Chairman and argued on the right for cross-examination. In the course of the hearing, Chairman directed Shri Gadgil to submit written submissions. Thereafter, a letter dated 7 March, 2001 was sent by the lawyer for Shri Gadgil wherein he submitted a note in support of his right to cross examine in which he repeatedly insisted for an opportunity to cross examine. In the note submitted, he had cited cases in favour of his right for cross examination. However, no written submissions on merits or other aspects was submitted by him. After having waited till October 17, 2001, SEBI sent a letter to the Advocates for Shri Gadgil, M/s. Bhaishankar Kanga and Girdharlal asking them to file written submissions. In response to the said letter, the Advocate for Shri Gadgil sent another letter dated October 19, 2001 referring to their note attached to the earlier letter of theirs dated March 7, 2001 on cross-examination. They had also attached a copy of their correspondence dated March 7, 2001.
On January 22, 2002 SEBI had issued a letter to the Advocate for Shri Gadgil asking them to clarify how Shri Gadgil would be prejudiced in the absence of an opportunity to cross-examine. A copy of the same was sent to Shri Gadgil also. A letter dated January 22, 2002 was issued to Shri Gadgil stating that a personal hearing was scheduled before the Chairman, SEBI on February 15, 2002, a copy of which was also sent to his Advocate. SEBI received a communication dated 28.01.2002 from the advocate for Shri Gadgil asking for confirmation for the presence of Shri Nitin Doshi and Shri Jaysukhlal Jagjivan during the hearing. Again another letter dated January 30, 2002 was sent to SEBI in which it was said that if SEBI proceeds by relying on the statements made by Shri Nitin Doshi and Jaysukhlal Jagjivan, it would cause prejudice to the client if they are not afforded an opportunity to cross-examine those witnesses. A letter dated February 11, 2002 was sent to Shri Gadgil stating that the hearing has been adjourned to February 15, 2002. Since the Ex-Chairman, had retired on February 20, 2002 there was a change in the date of hearing and it was kept for May 30, 2002 which was communicated to Shri Gadgil vide letter dated April 24, 2002. In response thereof, another letter dated 17 May 2002 was sent by the Advocate for Shri Gadgil asking for an adjournment of hearing. Thereafter, a communication was sent by SEBI informing about the date of hearing being scheduled for August 24, 2002 which was again rescheduled for August 26, 2002. This was communicated vide letter dated August 16, 2002. By letter dated august 23, 2002 SEBI had informed the Advocate for Shri Gadgil that in the scheduled hearing, they may submit their arguments with reference to cross-examination and also on the merits of the case since there was a change in the hearing authority. The hearing took place on August 28, 2002. Shri Gadgil appeared with his counsel. The counsel argued on their right to cross-examine Shri Nitin Doshi and Shri Jaysukhlal Jagjivan and insisted for a ruling on the issue of cross-examination. I advised the counsel to make submissions on the merits of the case also so that I can take a decision and pass an appropriate order in the matter. However, he insisted on the stand and did not make any submission on the merits of the case. In view of this I advised them to file written submissions, which they agreed. The written submissions were submitted by the counsel vide the letter September 4, 2002 which was received by SEBI by September 6, 2002.
The main contentions of Shri Gadgil as expressed in the written replies and during the hearing were that he was not afforded an opportunity to examine the witnesses. It is a settled principle of law that if the adjudicating authority is of opinion that particular statements are not relied upon, an opportunity for cross-examination need not be given. True that in the procedure for exercising powers under section 11B, SEBI is required to observe the principles of natural justice. However, it varies from case to case and in the present case the right of cross examination does not exist. Another important aspect to be seen is whether the denial of cross-examination would prejudice the person. In the present case, there is sufficient proof in so far as the date of purchase is concerned. The contract note itself is sufficient to implicate Shri Gadgil. The fact that he had entered into such deal for a price higher than the prevailing market rate endangering the interests of all the unit holders is in itself sufficient to warrant action.
The actual transaction took place on June 24, 1998. therefore the argument that such decision to purchase shares was taken early cannot be believed. In a fluctuating market one cannot make decision and then wait for long to implement the same so far as investments are concerned. The contention of Shri Gadgil that the contract notes are not relevant so far as the dates are concerned also has no basis and hence cannot be accepted. It has again been reiterated by Shri Gadgil in his reply that the transaction took place on June 19, 1998 and not on June 24, 1998 as indicated in the show cause. However, this is also not true since there are sufficient proof to show that the transaction took place on June 24, 1998. The order as passed against SAMC stands and they have undergone their period of punishment and also complied with the directions of SEBI. The charges against Shri Gadgil have been framed in the light of such basic facts that led to the finding against SAMC and there is no doubt about their reliability.
The contentions Shri Gadgil raised against the Regulations being not applicable to him also do not hold good. By making an investment decision prejudicial to the interests of unit holders as the managing director of SMF and the Chairman of the investment committee, he is responsible for the violation of Regulation 25(1), (2) (10) and (16) and Code of Conduct of SEBI (MF) Regulations, 1996. Shri Gadgil was the Managing Director of Shriram Mutual Fund and also the Chairman of the Investment Committee that has taken the decision to purchase the impugned shares and hence cannot evade the responsibility for the huge loss caused to the unit holders. As regards the arguments on the powers under Section 11B of SEBI Act, the action proposed to be taken is remedial or rather preventive in nature and not as a penalty. The argument of SAT having allowed the appeal by Videocon has no relevance since the facts remain undisputed in the instant case.
Further, it does not make any difference whether Shri Gadgil alone or the investment committee of SAMC took the decision to purchase the shares on June 24, 1998 as a prudent fund manager, the investments made has to be in the interest of unit holders. Whereas the same was not only against the interests of unit holders. It was highly detrimental to the unit holders since the price at which the purchase was done was too high when compared to the prevailing market price. SEBI had mainly relied on the contract note and the date of purchase as entered in the system. The statements of Shri Nitin Doshi or Shri Surin Usgaonkar or Jaysukhalal Jagjivan only corroborates the facts. SEBI's findings, show cause notice and the previous order are all based on these basic facts and there is nothing to disprove the same. At no point has, the show cause notice or SEBI for that matter, treated the date of dealing as 19-06-1998.
Therefore, it is clear that acts of omission and commission of Shri Gadgil, who was at the relevant time the managing director of SAMC were prejudicial to the interest of the Unit holders of the SMF and that such acts amount to breach of trust, since Shri Gadgil's action were in fiduciary capacity. As such Shri Gadgil
a) failed to ensure that the investment of the funds was carried out as a prudent businessman and in the best interest of the unit holders;
b) failed to ensure that investment of the funds did not give any undue or unfair advantage to entities having association with the sponsors and Shri Gadgil managed the portfolio of the scheme of the SMF in the interest of associates of the sponsors and not in the interest of ordinary unit holders;
c) failed to exercise due diligence to ensure that the investment of funds is not contrary to the provisions of trust deed and SEBI (Mutual Fund) Regulations;
d) purchase of the shares was for extraneous consideration of bailing out the brokers facing payment problems for their trading in Videocon shares and in pursuance of clandestine buy back arrangement with Videocon group;
e) Shri Gadgil tried to create false documentary evidence with a view to mislead the Investigations by preparing ante dated correspondence between SMF and the broker to give an impression that the shares were purchased on a date different from the actual date of transaction;"
(3.) SHRI Pradeep Sancheti learned Counsel appearing for the Appellant made the following submissions:
The Respondent had passed the Impugned Order on 24.10.2002 against the Appellant holding him ineligible to hold any public position in any capital market related institution for a period of one year on certain untenable grounds. In this context he referred to the so called omissions and commissions of the Appellant stated in the order.;