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ASSIGNMENT
ON
Laws on Securities and Financial Markets

TOPIC: State Bank of India v. Securities and Exchange Board of India

Submitted To:
ASST.PROF.SRIDEVI. D. SHET

Submitted By-:
SIDDHARTH DAS
(Corporate and Commercial Law)

ACKNOLEDGEMENT
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I Siddharth Das would like to express my special thanks of gratitude to my professor SRIDEVI. D.
SHET who gave me the golden opportunity to do this assignment on the topic “Rajesh Gupta v.
Securities and Exchange Board of India”
Secondly, I would like to thank my friends and parents who helped me in doing this assignment
within the limited frame work.
Above all, I thank the Almighty without whom this won’t be a success.

It is stated in the order that the Respondent had received certain allegations against the activities
relating public issues made by certain companies viz. (1) Karan Finance Ltd. (KFL) (2) Mahanivesh
(India) Ltd. (MIL) (3) Geefcee Finance Ltd. (GFL) and (4) Kalyani Finance Ltd. (KAL). M/s
Sungrow Datasoft Pvt. Ltd. (SDPL) formerly known as the Elite Computer Technics Pvt. Ltd.
(ECTL) was Registrar to the Issue and Transfer Agent (RTA) to the public issues made by the said
four companies. One of the complaints was that Shri Rajesh Gupta, a director of the said RTA had
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colluded with one Tarun Goyal and played an active role in defrauding the investors in the public
issues. The impugned order was issued in the light of the conclusion arrived at by the respondent
after conducting an equity in the matter.
The parties have filed their written submission and also made oral submissions.
Shri V. M. Jindal, learned Counsel appearing for the Appellant submitted that the Appellant was
one of the directors of ECTL. The said ECTL was granted a certificate of registration by the
Respondent in March, 1994 to act as Category 1 RTA for a period of one year, and the registration
thereafter on the expiry of said one year, was renewed for a further period of 3 years. The learned
Counsel submitted that RTI's activities have been specified in rule 2(e) of the Securities &
Exchange Board of India (Registrar to an Issue and Share Transfer Agents)
Rules, 1993. The activities of a Registrar to an Issue are restricted to
(i) collecting applications from investors in respect of an issue
(ii) keeping a proper record of applications and monies received from investors or paid to seller
of the securities; and
(iii) assisting body corporate or person / group of persons in determining the basis of allotment
of securities in consultation with the stock exchange
(iv) Finalising the list of persons entitled to allotment of securities
(iv) Processing and despatching allotment letters, refund orders or certificates and other related
documents in respect of the issue.

The learned Counsel submitted that ECTL was not concerned with any of the irregularities
and allegations made against the four-issuer companies mentioned in the impugned order.
He submitted that a RTA had no role in the incorporation or management of the issue
company, or liable for any mis-statement of facts made in the prospectus. The irregularities
and defaults pointed out by the Respondent were not known to the Appellant. Had such
defaults and irregularities been known to ECTL it would have taken prompt action to
withdraw from the said four public issues. Its role was restricted to issue related matters
under rule 2(2) of the rules. The Appellant vide his letter dated 15.10.1999 had explained his
views in the matter in response to the show cause notice issued by the respondent to him. He
further submitted though the respondent had scheduled a personal hearing, the appellant
could not be present on the appointed day as he was indisposed. Even though he sought
postponement of the hearing, the request was not heeded to and the impugned order was
issued on 6.4.2000 without hearing him. He further submitted that the Appellant was not an
active director of ECTL since 1996 and he had ceased to be a director on resignation from
the Board of Directors, on 29.11.1999.

Explaining the Appellant's inability to produce the agreements entered into with the 4 issuer
companies referred to in the order called for the respondent, the learned Counsel submitted that
since the Regulations provided for preserving the records only for a period of 3 years the records
were destroyed as the preservation period had already lapsed by the time the requisition dated
14.10.1999 from the respondent reached the appellant. The appellant, therefore, could not produce
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the records. But the fact that the Appellant did not produce the same before the respondent did not
suggest that the agreement was not executed. He submitted that along with the prospectus, the
agreement was also produced before the Registrar of Companies and the Respondent. But for filing
the same, these agencies would not have cleared issuance of the prospectus, he submitted.
It was also submitted that RTA was not required to interact with the directors or promoters of the
issuer companies very often and as such had no occasion to judge them. Since, the RTA attends to
clerical job, the interaction was mainly with the subordinate officials of the issuer company and not
with the Board of Directors.

Shri Ranganayakulu, learned representative for the respondent started his submission with a
preliminary objection that the matter under challenge in the appeal being a direction issued under
section 11B of the SEBI Act, is not appealable under Section 15T of the Act, as directions are not
orders. He submitted that since the expression direction has been used in the Act, in
contradistinction to the word "order" in several sections of the SEBI Act, such as 12(3), Chapter VI
etc., the "direction" has to be distinguished from order and treated separately. Since, the direction
being not an "order" the same cannot be challenged, he submitted. The learned representative
submitted that in the light of the facts and circumstances stated in the respondent's order, the
appellant was found to be associated with Shri Tarun Goyal in defrauding the investors and Section
11B could reach him as he was the director of the concerned RTA, which is a registered capital
market intermediary. Refuting the allegation that the respondent did not follow the rules of natural
justice, the learned representative submitted that the appellant was given more than sufficient
opportunity to present his case and that he had submitted his written reply explaining the charges
and never sought a personal hearing. Despite the fact that there was no such request for personal
hearing, the respondent still gave him an opportunity to orally present his case in case desired so.
Apparently, he was not interested in making any oral submission. It is clear from his conduct that he
was not keen to avail the chance. The submission that he did not get the notice of hearing is
unconvincing as the letter was addressed to him to the same address to which the earlier
communications and subsequent communications were sent which he had received. The learned
representative submitted that it can hardly be a coincidence that ECTL handled all the four issues in
which Tarun Goyal was involved. The letters from DSE and NSE annexed to the reply, was relied
on by the learned representative to establish the nexus of the ECTL and Tarun Goyal and the gravity
of the charges. Before proceeding with the appeal on merits, it is considered necessary to examine
the preliminary objection raised by the respondents that the direction is not an order and hence not
appealable under section 15T of the SEBI Act. It is rather strange that this sort of an objection has
been raised by the respondent now, after having explicitly admitted in several cases that order
includes direction as well. Section 20 of the Act, originally incorporated in the SEBI Act with effect
from 1992, provided for appeal by any person aggrieved by an order of the Board to the Central
Government. By the amendment effected to 15T of the Act, in December 1999 only the forum of
appeal has been shifted from Central Government to the Tribunal. Several appeals challenging
directions issued by Respondent under Section 11B had been preferred by the aggrieved persons
during the last 7 years before the Central Government and the respondent had submitted to that
appellate regime. It appears that the respondent has conveniently forgotten the fact that they had in
their regulation admitted that the order includes directions. To quote one such regulation is,
regulation 67 of the SEBI (Collective Investment Schemes) Regulations, 1999, therein it has been
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stated an order of the competent authority or the Board issuing directions under regulations 65 is
appealable. The appeal provision is contained only in Section 20/15T of the SEBI Act. Similar is the
provision available under section 12 of the Insider Trading Regulations notified by the respondent,
which provides for appeal against the directions issued by the Board. Again it can be done under
section 20/15T. The respondent cannot ignore a concept, which is statutorily recognised. The
learned representative during the course of argument had submitted that since the expression
'direction' has not been defined in the SEBI Act and that the expression 'order' has been used in
contradistinction, the two expressions are not synonymous. It is true that the word 'direction' has not
been defined in the Act. But then it is neither possible nor necessary to define all the words in the
statute. The purpose of incorporating a definition section in an act, Rule or Regulation is not to
provide a parallel dictionary of words and idioms. Only those expressions, which need by
specifically defined in the context in which legislation, are defined. Those words, which are to be
understood in literary sense, are not defined. Since the expression 'direction / order' have not been
defined in the Act these words have to be understood in the literary sense. According to the
commonly accepted standard dictionaries the expressions 'direction' and 'order' are synonymous
having the same meaning. In this context the respondent should be aware of the view taken by
various High Courts, which had occasion to examine the scope of the directions issued under
Section 11B. To quote one, is the view taken by the Gujarat High Court in SEBI v/s Alka Synthetics
Ltd. (1999) 19 SCL 460 (Guj). In the said case the issue was about the scope of section 11B which
enabled the respondent to issue direction. In that case the Court viewed 'direction' synonymous with
'order'. This is not an isolated case. There are several decisions, which had treated directions issued
under Section 11B of the SEBI Act as order for the purpose of Section 20/15t. The preliminary
objection has been raised by the respondent without appreciating the legal position ignoring the
stand / view already taken by them, the express provisions contained in their own regulations and
the views taken by the Courts. For the reasons stated above, the preliminary objection fails. Now I
propose to proceed with the merit of the case. According to the version of the respondent, as
recorded in the order the Appellant has been debarred from associating with the capital market
related activities, dealings in securities, accessing the capital market and associating with any of the
intermediaries in the capital market, in view of his conduct as a director of ECTL, which was the
RTA to public issue of shares, made by the 4 companies i.e. KFL, MIL, GFL and KAL. These
public issues were opened in a span of almost one-year as could be seen from the date of opening of
these issues stated below: KFL 7.3.1995 MIL 16.3.1995 GFL 21.3.1995 KAL 2.4.1996 It has been
established that one Tarun Goyal was the man behind the formation of these companies and the
public issues. Serious charges have been leveled against these four companies and Shri Tarun Goyal
by National Stock Exchange. The Appellant's name has also been mentioned in the complaint. The
Appellant was the director of ECTL, which was the RTA of all 4 public issues referred above. It is
on record that ECTL had amitted the role of the Appellant's role in the issue through Shri Tarun
Goyal. They, in their letter dated 14.09.1999 to the respondent had mentioned that "we had been
appointed as the RTI in the case of the above issues by the companies through Mr. Tarun Goyal
who was the professional friend of Rajesh Gupta, director of our company. The agreements were
signed and fees were decided by Mr. Rajesh Gupta through Mr. Tarun Goyal… The fees as decided
between Mr. Gupta and Goyal was received". It has been stated in the order that the respondent had
been informed by NSE that the Appellant "had very close business links with Shri Tarun Goyal,
who is suspected to be a person behind large scale frauds committed in public issues of KFL, MIL,
KAL and GFL which has been confirmed by DSE also.
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As per the Appellant's own version, the Appellant was associated with the four public issuer
companies in the public issues. It is an admitted fact that the Appellant and Shri Goyal were actively
involved in the public issues and that the Appellant had signed the requisite agreement from the
RTA side with the issuer companies. It is also to be believed that his was the dominant voice in the
ECTL, as is evident from the submission that even the fee was decided between the said Goyal and
the Appellant. It is also possible to accept the version that all the four companies were linked and
Shri Goyal was connected with them. As the Appellant had rightly pointed out that the Registrar to
an Issue, cannot, in the absence of evidence, said to be associated with incorporation of the issuer
company, its conversion or opening of a bank account, etc. RTA's role is normally in respect of
issue related matter specified in rule 2(e) referred to above. This does not mean that the people
behind RTA cannot be associated with the pre issue activities of the Issuer Company. They can. But
then, it is not a functional relationship as in the case of RTA and the Issuer Company, but a
relationship required to be proved with reasonable evidence. There is nothing on record before me
supporting the conclusion drawn by the respondent stated in para of the material extracted from the
order furnished above. The appellant's submission that he had only professional relationship with
Shri Goyal and that he was not aware of the undesirable activities attributed to him is difficult to
accept. It cannot be considered as a mere coincidence that Shri Goyal was connected with all 4
companies and these companies had linkage to each other and that ECTL was RTA in the public
issues made by all the 4 companies. It is also pertinent to say that all these 4 companies had raised
capital during the span of about a year. By the Appellant's own version, ECTL had acted as RTA in
about 40 companies. One can hardly believe that such an experienced entity would accept any issuer
as its client without verifying the antecedents / history of the promoters, if not to protect the interest
of the investors, atleast to ensure its own interest and to ensure prompt payment of fee. The
argument that the ECTL had no accession to know the directors of the Issuer Company and that the
interaction was with the subordinate staff is difficult to accept. In fact this admission goes against
the Appellant in as much as it shows that the Appellant had not exercised due diligence required of
him in the matter and adopted a routine casual approach. They abdicated their duties and
obligations. The appellant's submission that the necessary agreements were executed with issuer
companies but the same were destroyed immediately after the requisite preservation period of three
years was over, cannot be accepted as plain truth. May be that SEBI regulations prescribe only a
three-year period for preservation of the issue records. But that does not mean that the records
should be destroyed in a lightning speed at the nick of expiry of the said 3 year period. There are
other legislations like Companies Act, etc., under which the books of accounts and other documents
are required to be kept for atleast 8 years. The agreement with Issuer Company being a document
relating to receipt of fees is a document coming under the purview of section 209 of the Companies
Act for which the preservative period is 8 years. Similarly, the records are required to be preserved
till the income tax assessment is over. Non production of the document on the ground of non-
availability of the same due to expiry of preservation period under regulation is not acceptable. In
this context, it is possible to view the Appellant's action as an alibi to claim execution of the
agreement but at the same time an attempt to deny access to the agreement and thereby suppress
material information from the scrutiny of the respondent. It is evident that the Appellant had
accepted the role of RTA in the public issue of all the 4 companies, and ECTL was only a nominal
front for the purpose. The Appellant himself had admitted that Shir Tarun Goyal had referred the
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issue work to him, as he was also a professional. This itself shows the issue work was taken up by
him. Therefore, it was his duty to ascertain the full facts. Since the Appellant had taken up the
assignments without verifying and ascertaining the full facts relating to these companies and their
management, it can be said that he had not exercised due diligence and care as required under the
Regulation. Public issue is a team action and everybody involved has a role to play vigilantly. There
is no room for complacency. The appellant's contention that other players in these public issues
have been left untouched has been denied by the respondent. The Tribunal was informed by the
learned representative of the respondent that as a sequel to those public issues registration of ectl has
not been renewed. Directions have been issued to Tarun Goyal and others. In any case the question
as to whether other players in the game have been suitably dealt with or not is not a matter to be
looked into for dealing with the conduct of the Appellant. His role has to be adjudged with reference
to his conduct. All that is required to be established is that whether the Appellant had been found
guilty or not. The respondents have established the fact that the Appellant had not acted diligently.
Since it has been established at a reasonable level that the Appellant had failed to exercise due
diligence, the impugned order sustains. The appeal is accordingly dismissed.