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Authored by Aishwarya Lakshmi VM


      i.         L&T FINANCE HOLDINGS LTD.,



Date of the order: 31stAugust, 2020.

Provisions invoked

(a) Sections 12A (a), (b) and (c) of the SEBI Act, 1992.[i]

(b) Regulation 3 (a), (b), (c), (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 [ii]

(c) Regulation 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.[iii]

(d) Section 2(i)(a) read with Sections 13, 16 and 18 of the Securities Contract Regulation Act, 1956.[iv]

(e) Section 15HA of the SEBI Act, 1992.[v]

(f) Section 23H of the SCRA, 1956.[vi]

(g) Section 15J of the SEBI Act, 1992 r/w rule 5(2) of the AO Rules, 1995 and Section 23J of the SCRA, 1956 r/w rule 5(2) of the AO Rules, 2005.[vii]

Facts of the case:

1. SEBI received a Suspicious Transaction Report (“STR”) from the Financial Intelligence Unit (FIU) stating that one of the Noticees to whom show cause notice was issued (“Noticee 36”) received 19,431 shares from L&T Finance Holdings Ltd. through off-market transactions from 55 entities who were allotted shares at the time of IPO of L&T Finance Holdings.

2. Investigating Authority (IA) was appointed and investigation was carried on in this matter from May 10, 2011 to December 31, 2011, and it was concluded that Pankaj J Shah HUF (“Noticee 1”) was used as a tool by Noticee 2-the Karta of the HUF, and father of Noticee 36, to corner the shares meant for Retail Individual Investor(“RII”) category in the IPO of L&T Finance Holdings Ltd., Tree House Education Ltd. and Future Ventures India Ltd.

3. Noticees 3 to 37 were all, either family friends or relatives of Noticee 2.

4. The allegation was that Noticee 2 provided minimal interest loans to Noticees 3 to 37, opened demat accounts in their names, and purchased shares in the IPO under the RII category, and later, the shares or the proceeds of the sale of the shares were transferred to Noticee 36.

5. The report of the IA contained details that

a. date of opening of demat accounts were just before the IPOs;

b. the KYC was done using the same address and phone number; and

c. the same person (who was a clerk in the school run by Noticee 2) was appointed as an agent to operate the demat accounts for majority of the Noticees.

Noticee’s defence

(a) Delay in initiation of proceedings: Noticee 1 and 2 in their reply had stated that the transactions purporting to 2011 were rekindled by SEBI in 2019 – 2020 which is almost more than nine years. Since most statutes mention a document retention period of only 7 to 8 years, the Noticees were gravely jeopardized from responding accurately, with evidential backing.

(b) Lack of opportunity to inspect supporting documents: SEBI did not permit the Noticees to examine the (i) investigation report, (ii) suspicious transaction report received by SEBI from Financial Intelligence Unit, and (iii) authority letters of various noticees authorizing the clerk to operate the demat accounts. This is neither fair nor just and fundamentally impairs the ability of a person to defend himself.

(c) Contrary to Principles of Natural Justice: Levying charge on both the HUF and Karta of the HUF in individual capacities when in fact, HUF is only a legal fiction tantamounts to the contravention of natural justice principles.

(d) Common Practice in Security Markets: Commonly, the head of the family funds the accounts of their children/ spouse/ in laws to participate in the securities market. Extrapolating any other view i.e. SEBI holding that a head of family funding account of the family is in violation of PFUTP Regulations, then the securities market will come to a standstill.

(e) Standard of Proof to establish Fraud: Fraud being a serious offence the standard of proof is of a higher degree and mere conjectures and surmises will not be sufficient to hold a person liable for fraud. However, SEBI has not established fraud beyond reasonable doubt.

(f) Element of Intent: The precondition to fraud, i.e. ill-intent is not established by SEBI.

(g) Shares re-transferred by Noticee 36: Since Noticee 36 wanted to trade in F&O, she was obliged to offer collaterals for which she used the shares lent by Noticee 1 (the HUF she was a part of), and Noticee2, (her father).However, she was not able to arrange the margin money and hence she re-transferred the shares. This clearly indicates that there was no actual buying.

(h) Refuting the allegation: A handful of Noticees refuted the allegation that they authorised the clerk to operate their bank account. They argued that they personally operated or engage their spouse to operate the respective accounts.

(i) Transaction between Family Members: Some of the Noticees were blood relatives to Noticee 36 like mother, grand-mother and brother hence the requirement of consideration is not needed.

Decision of the AO

1. The Adjudicating Officer accepting only the defence of natural justice rejected all other defences taken by the Noticees stating that:

a. There is no prescribed time limit under the SEBI Act, 1992 or the SCRA, 1956 to initiate proceedings.

b. The contents of the STR have not been referred to in the SCN at all, and hence there is no duty cast upon the AO to disclose or provide all the documents in his possession especially when such documents are not being relied upon.

c. The KYC details contradict the contention that there is no connection between the parties and therefore fraud is not established. Whether an act or practice is unfair is to be determined by all the facts and circumstances surrounding the transaction. In this case all available evidence points to the contravention.

d. Once contravention is established penalty is sure to follow.

e. Shares transferred by the family friends and relatives were higher in value than what was owed by them to Noticee 1. Also there was no entry in the ledger showing that their loan had been repaid by transfer of shares. Moreover, neither Noticees 1, 2 nor Noticee 36 had paid the price for the spot delivery contract on the day of the transaction or the next day. Hence, it is an outright violation of the SCRA, 1956.

2. The contraventions having been established clearly, the AO levied penalty considering the lack of disproportionate gain or unfair advantage, relatively lesser amount of loss caused to an investor or group of investors and previous track record.

3. Penalty of Rs.35,00,000/- (Rupees Thirty Five Lakh Only) was levied jointly and severally on all the 37 Noticees. In addition, Noticee 36 was levied penalty of Rs.2,50,000/- (Rupees Two Lakh and Fifty Thousand Only) and all other Noticees were individually levied a penalty of Rs.25,000/- (Rupees Twenty Five Thousand Only).

Regulatory issues that are to be noted from this decision of AO
1. Law of limitation is not applicable for SEBI to initiate proceedings in case of allegation of any fraud.

2. KYC norms stand proof to the authenticity of the person trading. Hence, it is to be followed diligently.

3. HUF cannot be used as a tool to commit fraudulent and unfair trade practices.


[i]Section 12A, SEBI Act, 1992: Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control: No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a RSE, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) Employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a RSE;

(c) Engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder.

[ii]Section 3, PFUTP Regulations, 2003: Prohibition of certain dealings in securities: No person shall directly or indirectly—

(a) buy, sell or otherwise deal in securities in a fraudulent manner;

(b), (c) and (d) are respectively similar to (a), (b) and (c) of S.12A, SEBI Act, 1992 as provided above.

[iii]Section 4(1), PFUTP Regulations, 2003: Prohibitionof manipulative, fraudulent and unfair trade practices: Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.

[iv]Section 2(i) SCRA, 1956: “spot delivery contract” means a contract which provides for, — (a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality; Sections 13, 16 & 18 empower the Central Government to regulate such contracts.

[v]Section 15HA, SEBI Act, 1992: If any person indulges in FUTP relating to securities, he shall be liable to a penalty twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher.

[vi]Section 23H, SCRA, 1956: Whoever fails to comply with any provision of this Act, the rules or articles or byelaws or the regulations of the RSE or directions issued by SEBI for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

[vii]Section 15J, SEBI Act, 1992 and Section 23J, SCRA, 1956: While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely: – (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; (c) the repetitive nature of the default

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