Jaltarang Motels Limited v. Union of India — 1998 DIGILAW 363 (GUJ)

JUDGMENT : H.L. Gokhale, J. 1. Heard Mr. Jhaveri for the petitioner. Mr. S. N. Shelat, Additional Advocate-General for respondent No. 2; Mr. Puj, intervener for the applicant in Civil Application No. 5229 of 1998; Ms. Advani for the applicant in Civil Application No. 6889 of 1998. The petitioner-company floated a public issue of 36 lakhs equity shares of Rs. 10 each. The issue was opened for subscription on December 21, 1995, and was oversubscribed by nearly 12 times. However, a large number of applications totalling to 2,11,26,300 shares were withdrawn before the allotment was made. Respondent No. 2, the Securities and Exchange Board of India (SEBI), received a complaint in regard to this public issue. It issued a notice to the petitioner-company and an inquiry was held. After the inquiry, (wherein amongst others Mr. Atul Shah, managing director of the petitioner was heard), a report was submitted, which established the involvement of Mr. Atul Shah, with one Mr. Shantilal Gandhi, which led to this oversubscription and subsequent withdrawal of the applications. An agreement entered into between Atul Shah and Shantilal Gandhi, which guaranteed the payment of Rs. 21 lakhs by Mr. Atul Shah to Mr. Shantilal Gandhi, for these gray market operations to illegally boost the prices of the said shares was also brought on record. In view of the report, a notice was given to the petitioner on May 17, 1996, and, thereafter, on hearing the petitioner and Atul Shah, an order was passed on December 19, 1996, directing Atul Shah to refund the subscription received from public issue of Jaltarang Motels Ltd. The petitioner preferred an appeal against that order. During the course of that appeal, an application was given by the petitioner that their advocate was not available on the date on which hearing was fixed. In view of that application, the matter was adjourned to the next day and, thereafter, by one day more. The appellate authority, thereafter, proceeded to decide the appeal on the merits and dismissed the same. 2. After this order an application for review was filed and on that being rejected, the appellate order as well as the order in review has come to be challenged by this petition. There was another development side by side, namely, that the listing of the shares of the petitioner-company was declined by the Bombay Stock Exchange. 2. After this order an application for review was filed and on that being rejected, the appellate order as well as the order in review has come to be challenged by this petition. There was another development side by side, namely, that the listing of the shares of the petitioner-company was declined by the Bombay Stock Exchange. Against that order also an appeal was filed and that came to be rejected by the SEBI by its order dated December 24, 1996. That order is also challenged in this petition. 3. Mr. Jhaveri, appearing for the petitioner, submitted that the first order passed by the appellate authority confirming the order of refund is an order violating the principles of natural justice inasmuch as the petitioner's advocate was not available and the matter ought not to have been proceeded with in that manner. The second submission of Mr. Jhaveri is that the complaint was proceeded with against the petitioner, in view of the alleged agreement with the above referred Mr. Shantilal Gandhi. Mr. Jhaveri submits that the signature of Mr. Atul Shah of the petitioner-company on that agreement is a forged signature and since the action is based on a forged document, it is naturally uncalled for. He also states that a complaint has been filed with the Ahmedabad Metropolitan Magistrates Court against Mr. Gandhi. (The directors of Jaltarang Club are the same as the directors of the petitioner-company as stated by Mr. Jhaveri). Mr. Jhaveri states that the concerned cheque book was issued two days subsequent to the alleged agreement. It is, however, not explained as to why Rs. 21 lakhs were given to this Mr. Gandhi. 4. The third submission of Mr. Jhaveri with respect to the order of the Bombay Stock Exchange and the appellate order is that the appellate order is a mechanical order, which dismissed the appeal because the other appeal was already dismissed. 5. As far as the summary hearing of the appeal against refund is concerned, rule 15 of the Securities and Exchange Board of India (Appeal to Central Government) Rules, 1993, provides that "on the day fixed or any other to which the hearing may he adjourned, the appellant shall be heard in support of the appeal". 5. As far as the summary hearing of the appeal against refund is concerned, rule 15 of the Securities and Exchange Board of India (Appeal to Central Government) Rules, 1993, provides that "on the day fixed or any other to which the hearing may he adjourned, the appellant shall be heard in support of the appeal". Sub-rule (2) of rule 15 provides that "in case the appellant does not appear in person or through authorised representative when the appeal is called for hearing, the Central Government may dispose of the appeal on merits." The requirement of an appropriate hearing through an advocate is normally expected to be followed, but, it cannot be permitted to be misused by a litigant, who wants the opportunity of hearing to be used to the detriment of the parties, which are not before that authority. In the instant case after a preliminary inquiry and a full-fledged original proceeding wherein the petitioner had participated, the petitioner was in terms directed to refund the subscription received from the public issue of Jaltarang Motels Ltd. The petitioner had every right to file the appeal, but at the same time the least that was expected of the petitioner was to keep the fund intact and not to divert it. After the matter came up before this court, initially an ad interim relief in terms of prayer clause 6(b) was granted which prevented the execution of the impugned orders. After the matter came before me, the petitioner was asked as to what he had done with the amounts which had been realised from the subscription. A statement was filed for that purpose in this court accepting that properties have been purchased at village Vekaria Kishol, Taluka Viramgam at village Vasna near Ahmedabad and in Jamalpur, Ward-II in Ahmedabad. An amount of Rs. 67,60,000 was diverted to the Jaltarang Motels Club for the utility service of health club and entry road. This Jaltarang Club is supposed to be a sister concern of the petitioner as stated in the affidavit of Mr. Atul Shah, in paragraph 4 affirmed on July 29, 1998, and it is accepted by Mr. Jhaveri that the directors of the club and the petitioner are the same persons. 6. As stated above, the petitioner had every right of appeal but it was also expected to keep the corpus intact. That has not been done. Atul Shah, in paragraph 4 affirmed on July 29, 1998, and it is accepted by Mr. Jhaveri that the directors of the club and the petitioner are the same persons. 6. As stated above, the petitioner had every right of appeal but it was also expected to keep the corpus intact. That has not been done. The other aspect of the matter is that out of the two stock exchanges, the Bombay Stock Exchange had declined listing of the shares of this company. When the prospectus of the company states that permission is applied for from more than one stock exchanges and where the company fails to obtain permission from any one of such stock exchange, the entire allotment is held to be void, vide the Supreme Court decision in Rishyashringa Jewellery Ltd. v. Stock Exchange [1996] 85 Comp Cas 479. Mr. Jhaveri submits that the order of non-listing by the Bombay Stock Exchange is not final inasmuch as appeal was preferred therefrom. As narrated above, that appeal has been dismissed by the SEBI for the reason that the other appeal against the order of refund had come to be dismissed and the appeal against the order of the stock exchange had become infructuous. 7. In the circumstances narrated above, it is clear that the petitioner has diverted the funds with respect to which there was an order of the SEBI which directed it to refund the amounts. The documents of the purchase of land effected thereafter have been made available and they show that all these lands are purchased subsequent to the original order passed by the SEBI. A party which wants to be heard is not expected to utilise the time for such diversion of funds. 8. In the circumstances stated above, the proper course will be that the petitioner can be given an opportunity to be heard once again in both the appeals, but that will be on stringent terms. In fact, the petitioner ought to refund the entire amount, and restore the status quo ante. Mr. Shelat states that they should at least deposit Rs. 50,00,000 since admittedly they have diverted Rs. 67,60,000 to their sister concern and Mr. Atul Shah should give personal undertaking to refund the remaining amount, if required. In the meanwhile the petitioner should create a charge in favour of the SEBI on the properties purchased. The suggestion of Mr. Mr. Shelat states that they should at least deposit Rs. 50,00,000 since admittedly they have diverted Rs. 67,60,000 to their sister concern and Mr. Atul Shah should give personal undertaking to refund the remaining amount, if required. In the meanwhile the petitioner should create a charge in favour of the SEBI on the properties purchased. The suggestion of Mr. Shelat deserves acceptance in the interest of justice. In the circumstances, the two appeals shall stand revived, if : (a) The petitioner deposits an amount of Rs. 50,00,000 with the SEBI and Mr. Atul Shah gives a personal undertaking to this court that he will pay the remaining amount if the decisions in the appeals go against him. Mr. Jhaveri states that the petitioner has only Rs. 6 lakhs available in the bank and only that much deposit be directed. It is not possible to accept this suggestion though if he deposits these Rs. 6 lakhs with the SEBI, the same will be adjusted towards the deposit of Rs. 50 lakhs. In the meanwhile he shall not withdraw any amount from these Rs. 6 lakhs. (b) The petitioner will create a charge on the properties purchased out of these funds mentioned in his affidavit, filed in this court affirmed on July 29, 1998. 9. The petitioner is given the time of four weeks to take the necessary steps within which period the execution of the impugned order will remain stayed. During this period, however, the petitioner and Mr. Atul Shah will not deal with, part with, alienate or encumber any of these properties mentioned in the affidavit. Mr. Atul Shah will also instruct the Jaltarang Club, to stop its activities forthwith inasmuch as they have obviously run out of the diverted fund of Rs. 67,60,000 that will enable him to raise the deposit of Rs. 50,00,000 as well. Mr. Jhaveri states that it is a separate entity but no further particulars about it are being given. He accepted that the directors are the same persons. No prejudice will be caused if the activities of the club are not run for a period of four weeks. 10. Respondent No. 2, SEBI, is at liberty to take appropriate action with respect to the recovery of amounts either from these properties or from the club or from the bankers to the issue in the meanwhile short of execution of the impugned orders. 10. Respondent No. 2, SEBI, is at liberty to take appropriate action with respect to the recovery of amounts either from these properties or from the club or from the bankers to the issue in the meanwhile short of execution of the impugned orders. In the event, the petitioner complies with the above terms, within a period of four weeks, these appeals will stand revived. In the event he does not comply, within the period of four weeks, the orders passed by the original authority will stand confirmed. The above conditions imposing restriction on the petitioner will, however, stand withdrawn after a period of four weeks. 11. Mr. Jhaveri states that it is Mr. Gandhi, who was to investigate into the complaint against him and take appropriate action. The SEBI is also expected to take action against the bankers to the issue. As held by my brother M. S. Shah J. in Rich Paints Ltd. v. Vadodara Stock Exchange Ltd. [1998] 92 Comp Cas 282 (Guj) "the bankers to the issue hold the application moneys in the nature of trust fund". The SEBI will, therefore, find out whether the bankers are responsible in this and take appropriate action. Mr. Jhaveri applies for stay of the order vis-a-vis the conditions on the club. The request is rejected. This is because the opportunity of being heard is being given on the conditions stated above and with stay of execution of the impugned orders in the meanwhile. The conditions are necessary in the facts of the present case. In case the petitioner does not want to accept these conditions, he may inform the SEBI accordingly in which case the SEBI will be at liberty to execute the orders. 12. This petition is accordingly disposed of in terms of the above order.