Vijayraj Surana vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

The appellant has challenged the order of the Whole Time Member (“WTM” for convenience) of the Securities and Exchange Board of India (“SEBI” for convenience) dated September 07, 2018 restraining the appellant from accessing the securities market and from holding any position in any listed company for a period of 5 years. The appellant has also challenged the order of the Adjudicating Officer (“AO” for convenience) dated June 26, 2020 wherein a penalty of Rs. 25 lakhs has been imposed. Since the issue is common in both the appeals as it arises from the same investigation, consequently, both the appeals are being decided together by a common order.

The facts leading to the filing of the present appeal is, that a search was conducted by the Directorate of Revenue Intelligence (“DRI” for convenience) in the premises of Surana Corporation Limited (“SCL” for convenience) on October 13, 2014. In the search it was noted that gold stocks at the factory as per the records maintained at the factory was 1147.988 kgs whereas, gold stock at the same factory as per the records maintained by the show room was 106.988 kgs. Upon physical verification it was found that there was no gold stock at the factory.

Based on this search, the DRI made a reference to SEBI on January 21, 2015 against SCL regarding discrepancies found in the financial statements and documents pertaining to sale and purchase of gold and stock of goods. Based on this reference, SEBI started an investigation. On February 03, 2016 an explanation was sought from the Company regarding falsification of gold purchase and sales in the books of the Company. The Company replied on February 26, 2016 stating that the stocks of 1147.988 kgs of gold as shown in the record of the factory was a dry run data and not on official record. However, the appellant who was the Managing Director of the Company and along with another Director Devarajan appeared before the investigating authority on May 20, 2016 and submitted that the stock of 1147.988 kgs of gold was sent for marketing through various customers. The appellant along with Devarajan again appeared before the investigating authority on June 09, 2016 and submitted that 106 kgs of gold was in the form of wastage at the factory premises and the balance was under marketing and was not available at the factory premises.

Based on the investigation, a show cause notice was issued by the WTM on December 07, 2017 to show cause as to why suitable directions under Section 11 and 11B of the SEBI Act, 1992 should not be issued. The AO also issued show cause notice directing the appellant to show cause as to why appropriate penalty should not be imposed for violation of Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations” for convenience) read with Section 11A of the SEBI Act, 1992.

The basic charge against the appellant was falsification and manipulation of the books of accounts and misrepresentation of the financial results declared by the Company for the period 2013 to 2015.

The WTM after considering the material evidence on record and after considering the replies and the submissions made by the appellant found that there was falsification of gold stock record and there was falsification of sales/ purchase transactions entered by the Company by three entities, namely, Maruthi Corporation, Marudhar Trading and C&S Tools Private Limited. The WTM also found that there was reversal of sales to the tune of Rs. 83.22 crores. The WTM came to a conclusion that there was manipulation of the books of accounts and misrepresentation of the financial results declared by the Company for the period 2013 to 2015 and, therefore, the appellant, as the Managing Director, had violated Regulations 3 and 4 of the PFUTP Regulations read with Section 12A of the SEBI Act. The WTM accordingly debarred the appellant from accessing the securities market for a period of 5 years. In addition to the aforesaid findings, the AO also found in its order that the appellant has violated Clause 49(v) read with Clause 41 and 50 of the Listing Agreement for falsification of the financial statements of the Company and further violated Clause 36, 41, 48 and 50 of the Listing Agreement read with Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) and Section 21 of the Securities Contracts (Regulation) Act, 1956 (“SCRA”) for failure to disclose the seizure made by the DRI for the aforesaid violation the AO imposed a penalty of Rs. 25 lakhs.

We have heard Shri M.R. Venkatesh, the learned counsel for the appellants and Shri Shiraz Rustomjee, the learned senior counsel for the respondent.

During the course of hearing, the learned counsel for the appellant restricted his arguments to a limited issue, namely, that the findings of the WTM and the AO with respect to the falsification of the gold stock record was incorrect and that the finding of falsification of the gold stock record was made without considering the cogent material provided by the appellant to show the existence of the gold stock. In this regard reliance was placed on Form JJs.

It was contended that a perusal of Form JJ would indicate the existence of the physical stock of gold and, therefore, the finding of the WTM and the AO that no gold existed in the factory is patently erroneous.

We have perused Form JJ and we find that there are corrections made by hand on Form JJ which cast a doubt on the genuineness of the document. There is no stamp which has been affixed on behalf of the consignee nor any proof of Form JJ has been filed to show that it was filed before the relevant authority. We also find that the Company in the said Form JJs was shown as the consigner but no details of the consignee have been indicated. Further, on a perusal of the Tamil Nadu Value Added Tax Act, 2006 and Tamil Nadu Value Added Tax Rules, 2007 one finds that Form JJ is required to be filed up by the consignor himself with a concomitant entry is to be made in the register maintained by the Company for the purpose of keeping the record of the entry and exit of specified goods from the factory of a Company. Such register was not produced for cross verification and in the absence of such register, production of Form JJ in which the consignee’s name is not shown is not a definite proof of the fact that such goods actually existed or were owned/ possessed by the Company. We are of the opinion, that the entries in such forms is required to be corroborated by further evidence such as ledgers of gold stock maintained with the consignee along with the confirmation from various show rooms, certification by an independent auditor which has not been done. Thus, we are not satisfied that Form

JJ indicates the existence of gold in the premises of the Company. We are satisfied that there is no proof that 1147.988 kgs of physical gold was at different marketing locations of the Company.

Apart from copies of Form JJ no other document has been provided to support its submission that the remaining gold was in transit and for making ornaments or were sent to the show room. We find that even before this Tribunal no details have been provided of the alleged locations where the gold was purportedly sent nor any ledger of the gold stock being maintained at such show room were provided.

From a perusal of the impugned order a specific finding has been given by the WTM that the explanation that stock of 1147.988 kgs was sent from marketing to various customers was disbelieved in the absence of any supportive evidence. The WTM further noted in its order that several opportunities was given to the appellant to substantiate that the gold was sent to various locations but no details of the marketing locations, name and address of the consignee was provided. In the absence of any documentary proof, the WTM clearly held that no proof was provided by the appellant to show that 1147.988 kgs of gold were at different market locations.

We also find that during the course of hearing before the WTM, the appellant was directed to provide documentary proof such as bank statements, ledger entries, tax returns, confirmation from CBI to the effect that gold stock was held in custody and third party confirmation but the appellant failed to provide the same.

It is not disputed by the Company as well as by the appellant that 1147.988 kgs of physical gold was mentioned in the books of accounts maintained at the factory premised of the Company on the date when the DRI conducted the search. The same figure was also mentioned in the closing stock of inventory at the factory as well as in the stock summary. We find that the appellant has failed to provide documents to show the existence of the physical stock of gold. Admittedly, the physical stock was not found at the factory premises at the time when the search was conducted. The appellant has given contradictory explanation and which also goes to show that the records were not properly maintained by the Company.

In view of the aforesaid, the Company had no actual gold stock and merely falsified such stocks in the books of accounts and inflated its asset position with respect to gold stocks to the tune of Rs. 294.23 crores. This false statement was in violation of Regulations 3 and 4 of the PFUTP Regulations read with Section 12A of the SEBI Act.

Considering the aforesaid, we do not find any error in the impugned order. The appeals fail and are dismissed with no order as to costs. The misc. application is disposed of accordingly.