SECURITIES APPELLATE TRIBUNAL, MUMBAI
v.
Securities and Exchange Board of
JUSTICE N.K. SODHI, PRESIDING OFFICER,
ARUN BHARGAVA AND UTPAL BHATTACHARYA, MEMBER,
APPEAL NO. 404 OF 2004
NOVEMBER 15, 2007
Regulation 4 of SEBI (Prohibition of Fraudulent and unfair
Trade Practices Relating of Securities Market) Regulations, 1995, read with
sections 154, 15HA and 15J of Securities and Exchange Board of India Act, 1992
Prohibition of manipulative, fraudulent and unfair trade practices A who
was employed as Chief Investment Officer of appellant mutual fund, was
rending investment services in respect of funds equity schemes and equity
portion of its balanced schemes Board ordered investigations into affairs of
management and conduct of Fund, wherein it was found that A managed funds in
a non-transparent manner Investigation further revealed that appellant fund
had invested substantially in mid cap companies having high promoter holding
and low floating stock From trading pattern, it was inferred that A had
utilized his substantial holdings in low floating stock mid-cap companies to
indulged in manipulative trades giving unfair advantage to appellant fund at
cost of investors of fund Adjudicating officer found A guilty of violating
Regulations 4(a) to 4(d) and 5 Accordingly, A was prohibited from dealing
in securities in any manner directly or indirectly for a period of five years
Since investigations found that appellants were acting in concert and that they
were responsible for acts of commission and ommission of A, adjudicating
authority initiated adjudication proceedings against them as well Having
considered reply of appellants, adjudicating officer invoked provisions of
section 15J and imposed penalty under sections 15G and 15HA of 1992 Act On
instant appeal, it was seen that earlier A had filed appeal against order of
adjudicating officer wherein Tribunal had held that charge of professional
misconduct as framed against A was not made out against him Besides, charge
that had A violated Regulations 4(a) to 4(d) and 5 also failed in its
entirety Whether in case where master is sought to be made vicariously liable
for acts of his servants, first question that needs to be answered is whether
servant is liable, if not, then master can never be held liable Held, yes
Whether since in instant case A had already been absolved of charges leveled
against him and had been honorably exonerated, appellants as employers of A
could not be held vicariously liable Held, yes Whether, therefore, impugned
order was to be set aside Held, yes
FACTS
The appellant
No. 1 was a mutual fund registered with the Securities and Exchanges Board of
India (for short the Board) under the Securities and Exchange Board of India
(Mutual Funds) Regulation, 1996. The asset manager of the Fund was appellant
no. 24 ACAML. ACAML was a subsidiary of the Mauritius Company. The Mauritius Company was a subsidiary of
ACMD. ACMD was the sponsor of the Fund and the former was a subsidiary of
appellant no. 3 i.e. ACM. ACM was a foreign institutional investor registered
as such with the Board and it made investments in Indian securities on behalf
of its sub-accounts which were also registered with the Board. The sub-accounts were international entities
and were institutional investors and they had made investments in several
Indian Securities. ACAML was incorporated in the year 1994 and the Fund
launched the first of its 13 schemes in 1995.
As the asset manager, ACAML exclusively managed all the schemes of the
Fund. During the initial years of its operations form 1995 to 1998, one A was
employed by ACAML as its chief investment officer. In that capacity A was
rendering investment services in respect of the Funds equity schemes and the
equity portion of its balanced schemes.
The Board ordered investigations into the affairs of the management and
conduct of the Fund wherein it was revealed that A managed the funds in a
non-transparent manner. It was also
revealed that the fund had invested substantially in mid-cap companies having
high promoter holding and low floating stock. From the trading pattern it was
inferred that A had utilized his substantial holdings in these low floating
stock mid-cap companies to include in manipulative trades giving unfair
advantage to ACM and its sub-accounts at the cost of the investors of the
Fund. The Board held and inquiry against
A under section 11B and found that all the charges stood established against
him. Accordingly, A was prohibited
from buying selling or dealing in securities in any manner, directly or
indirectly, for a period of five years.
Since the
investigations found that appellants were acting in concert and that they were
responsible for the acts of commission and omission of A who at the relevant
time was the Chief Investment Officer of ACAML (Appellant no. 2), the Board
initiated adjudication proceedings against them. In reply to the show cause notices the
appellants filed their detailed replies controverting the findings recorded by
the investigating officer. It was categorically denied by the appellants that
A had indulged in manipulative transactions in various scrips referred to
earlier or that be benefited the appellants or the sub-accounts of ACM at the cost
of Indian unit holders of the Fund.
On a
consideration of the replies filed by the appellants and on the basis of the
material on the record and after affording an opportunity of personal hearing
to the appellants, the adjudicating officer came to the conclusion that A had
violated regulations 4(a) to 4(d) and 5 of FUTP Regulations as he was entrusted
with the equity funds of ACM, its sub-accounts and also those of the Fund and
he compromised the interests of the Indian unit holders for benefiting the
parent company ACM.
After
recording these findings, the adjudicating officer as per his own understanding
of the provisions of section 15J calculated the amount of penalty payable by
the appellants Nos. 2 and 3 and quantified the same at Rs. 15 crores. Even though the Fund was found vicariously
liable of the acts omissions of A, the adjudicating officer did not issue any
direction to it to pay the penalty as that, according to him, would be
detrimental to the interests of its unit holders. However ACM and ACAML were
held liable to pay jointly and severally the aforesaid amount of penalty.
On appeal:
HELD
It was
pertinent to mention that feeling aggrieved by the order of adjudicating
officer, A filed appeal before this Tribunal which was allowed on 15-10-2004
reversing the findings on all the charges levelled against him. For the
detailed reasons given in its order, it was held that the charge of
professional misconduct as framed against A was not made out against him. The
charge that A had violated Regulations 4(a) to 4(d) and 5 of the FUTP
Regulations also failed in its entirety. The charge of insider trading also met
with the same fate. [
From the
findings recorded by the investigating officer which had been reproduced in the
earlier part of the order, it was clear that the appellants were being liable
for the various acts of omission and commission of A Reference therein had
been made to Regulation 25(3) of the MF Regulation which provides that the
management company shall be responsible for the acts of omission and commission
by its employees or the persons whose services have been procured by the asset
management company. It was not in dispute that at the relevant time A was
acting as the Chief Investment Officer of ACAML. If the appellant as the
masters of A were to be held vicariously liable for his acts, it had first to
be established that the servant A was liable. In cases where a master is
sought to be made vicariously liable for the acts of his servants, the first
question that needs to be answered is whether the servant is liable. If not,
the master can never be held liable. In other words, the masters liability can
arise only when the servant is liable. In the instant case A had already been
absolved of the charges levelled against him and had been honourabley
exonerated. In that view of the matter, the appellant as the employers of A
could not be held vicariously liable. The appeal must, therefore, succeed on
that ground.
Having gone
through the facts of the instant case and the impugned order and the order
passed in As case, there was no doubt that the issues involved in the two
cases were the same and that the appellants had been found guilty only on
account of their vicarious liability. [
Having regard
to aforesaid view, it was not necessary to decide whether the penalty was
properly quantified. [
In the result, the appeal was to be
allowed and the impugned order was to be set aside. [