WTM/PS/01/IVD/ID-08/APR/2016

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA

CORAM: PRASHANT SARAN, WHOLE TIME MEMBER
Order in the matter of notice dated June 15, 2015 issued to Mr. Harishchandra Gupta
and Ms. Ramkishori Gupta
________________________________________________________________________
Date of hearing:
October 08, 2015
Appearance:
For applicant:

Mr. Harishchandra Gupta

For SEBI:

Ms. Soma Majumdar, General Manager,

Dr. Anitha Anoop, General Manager,
Mr. Pradeep Kumar, Assistant General Manager and
Mr. Bharat Sachdeva, Assistant Manager.

1.

Securities and Exchange Board of India (hereinafter referred to as SEBI) in

compliance with the directions of Honble Securities Appellate Tribunal (hereinafter
referred to as SAT) dated November 17, 2014, had considered the complaint of Mr.
Harishchandra Gupta and Ms. Ramkishori Gupta (hereinafter collectively
referred to as applicants) in the matter of Vital Communication Limited (hereinafter
referred to as Vital). Upon consideration of the complaint, SEBI vide its order dated
December 16, 2014, had directed the Investigations Department of SEBI to examine
the feasibility of quantifying the ill-gotten gains, if any, and issue the requisite notice
of disgorgement. Vide the said order, it was also directed that the restitution, on merits,
in the case of applicants should also be considered in accordance with the provisions
of the SEBI Act, 1992 (hereinafter referred to as SEBI Act) and the regulations
framed thereunder.

2.

In compliance with the order dated December 16, 2014, Investigations Department
conducted the re-examination in the matter with a focus of determining the ill-gotten
gains in the scrip of Vital. On completion of the investigation, the findings thereof
were communicated to the applicants vide letter dated June 15, 2015.

Page 1 of 17

3.

Before proceeding further, it will be appropriate to discuss the facts in the matter of
Vital as also noted in the SEBI order dated July 31, 2014. The same are also relevant
for the trades of the applicants:
a. Vital had come out with an initial public offering (IPO) of 20,00,000 equity shares of
10 each in December 1995. Thereafter, Vital had convened an Extra-ordinary
General Meeting on November 18, 1999 and proposed to raise the capital by way of
preferential allotment of 72,00,000 equity shares of 10 each, at a premium of 2.50
amounting to 9 crore. During this time, Mr. Vijay Jhindal, Mr. Anup Das, Mr. Ashok
Kumar Sharma, Mr. B.L. Bhawan, Mr. Gurudas Sarkar, Mr. J.P. Madan and Mr. Vinay
Talwar were the promoter-directors of Vital. Later on December 14, 1999, Vital had
allotted 72 lakh equity shares on preferential basis to 15 entities. The details of such
preferential allotment are as under:
Table A
S.No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Preferential Allottees
Anupama Communications Pvt. Ltd. (Anupama)
Brut Finance (India) Pvt. Ltd. (Brut Finance)
Chankya Apparels Pvt. Ltd. (Chanakya Apparels)
Chankya Overseas Pvt. Ltd. (Chankya Overseas)
Cosmo Corporate Services Ltd. (Cosmo Corporate)
Fashion Tech India Ltd. (Fashion Tech)
Flair Finance (India) Ltd. (Flair Finance)
Heritage Corporate Services Ltd. (Heritage Corporate)
Perfect Car Scanners Pvt. Ltd. (Perfect Car)
Rajat Stock Investments Pvt. Ltd. (Rajat Stock)
Troop Trac Chits Pvt. Ltd. (Troop Trac Chits)
Troop Trac Exports Pvt. Ltd. (Troop Trac Exports)
Troop Trac Electrodes Pvt. Ltd. (Troop Trac Electriodes)
Troop Trac Marketing Pvt. Ltd. (Troop Trac Marketing)
Wisdom Publishing Pvt. Ltd. (Wisdom Publishing)
Total

Shares Allotted
2,00,000
5,00,000
5,00,000
500,000
5,00,000
5,00,000
5,00,000
5,00,000
5,00,000
5,00,000
5,00,000
5,00,000
5,00,000
5,00,000
5,00,000
72,00,000

b. The allotment money for the preferential allotment was to be paid within 45 days of
the allotment (i.e. by January 28, 2000). It was found that the preferential allottees were
connected to each other and had financial transactions among themselves and with
Vital. Vital had directly provided 30.50 lakh and indirectly 1.68 crore to the
preferential allottees for subscription of its own shares in the preferential allotment.
Vital had also given more than 1 crore to one CBS System Limited [connected to Mr.
Page 2 of 17

Vijay Jhindal (promoter/ director of Vital and Master Finlease Pvt. Limited)] as
advances, part of which in turn was transferred to certain preferential allottees. SEBI
order dated July 31, 2014 also observed as under:
Vital prior to the preferential issue had transferred 58.75 lakh to Anupama (a

preferential allottee where Mr. Vijay Jhindal was authorized to operate the bank
account), who in turn had transferred 43.75 lakh to other preferential allottees
(namely Chankya Apparels, Chanakya Overseas, Cosmo Corporate, Heritage
Corporate, Perfect Car, Rajat Stock, Troop Trac Chits, Troop Trac Electrodes and
Wisdom Publishing). Such funds were used by these preferential allottees including
Anupama as application money for the preferential issue.
Vital had also transferred 6.5 lakh to two other preferential allottees, namely,

Rajat Stock and Cosmo Corporate on January 11, 2000.

-

Certain preferential allottees had also received the money from the entities related
to Vital in cash during the month of December 1999 and January 2000.

After the preferential issue i.e. December 06, 1999 to January 29, 2000, Vital had
transferred 2.1 crore to Anupama who in turn had transferred 1.2 crore to other
preferential allottees. The said money was then transferred to Vital by the
preferential allottees as call money.

c. During the months of May July, 2002, Vital had issued a spate of advertisements.
The details of these are as under:
-

buyback of its shares i.e. 10,00,000 shares at the price of 30 (dated May 20,
2002),

preferential issue of 20,00,000 shares @ 35 (dated May 27, 2012) and

issue of bonus shares in the ratio of 8:10 (dated June 17, 2002).

Vital later intimated the stock exchanges that its board of directors had rejected the
proposals of buy-back and issue of bonus shares, while the preferential allotment was
made at just 10 per share and not at 35 (as was advertised by Vital).
d. The investigation had revealed that Vital was not eligible for issuing bonus shares as
its paid up capital had consisted of partly paid up shares. For buyback, Vital had
proposed using reserves of 7 crore. However, its balance sheet for the financial year
Page 3 of 17

ending March 31, 2002, had showed reserves of just 4.68 crores. Thereby, the
Company was not in a position to comply with the financial and legal requirements of
buyback of the shares or the issue of bonus shares. The advertisement regarding the
preferential allotment had represented increase in turnover, earnings per share, profit
and FII shareholding. However, it was found that the income, profit after tax and
earnings per share of Vital had decreased in the financial year 2001-02, compared to
the previous year.
In view of the same, the advertisements were found to be a ploy to mislead the
investors by benchmarking the price of the scrip at around 30, when the scrip was
actually being traded around 3 to 12. Further, the information regarding the
rejections of the proposals for buyback and bonus issue were also not disseminated to
the public.
e. During the period when such advertisements were being issued by Vital from May 02,
2002 to July 31, 2002, a total of 71.14 lakh shares were sold by certain preferential
allottees, namely, Fashion Tech, Perfect Car, Anupama, Rajat Stock, Troop Trac
Exports and one S.V. Stockland (an entity who had received the shares of Vital in offmarket from 10 preferential allottees) into the market. It was observed from the bank
statements of these preferential allottees that part of the sale proceeds of such shares
was transferred into the account of one Master Finlease Pvt. Limited (hereinafter
referred to as MFL), an entity owned by Mr. Vijay Jhindal (director of Vital), his wife
Ms. Shubha Jhindal and his mother.
f. On completion of the investigation, SEBI issued show cause notices (hereinafter
referred to as SCNs) dated May 24, 2005 (to Vital, Ms. Shubha Jhindal, Mr. Vinay
Talwar, Mr. Vijay Jhindal, MFL, Mr. J.P. Madaan and Mr. R.K. Garg) and September
17, 2007 (to Vital, Ms. Shubha Jhindal, Mr. Vinay Talwar, Mr. Vijay Jhindal, MFL, Mr.
J.P. Madaan, Mr. R.K. Garg, CBS System, Anupama, Brut Finance, Chanakya
Apparels, Chanakya Overseas, Cosmo Corporate, Fashion Tech, Flair Finance,
Heritage Corporate, Perfect Car, Rajat Stock, Troop Trac Chits, Troop Trac Exports,
Troop Trac Electrodes, Wisdom Publishing, Troop Trac Marketing). Thereafter, SEBI
vide its order dated February 20, 2008, had restrained Vital and its directors, namely,
Page 4 of 17

Mr. J. P. Madaan, Mr. R.K. Garg, Mr. Vijay Jhindal, from accessing the securities
market and prohibit them from buying, selling and dealing in securities in any manner
for a period of two years. Another director of Vital namely Ms. Shubha Jhindal, was
also restrained from accessing the securities market and prohibited from buying, selling
and dealing in securities in any manner for a period of six months. Against the said
order of SEBI, an appeal was filed by the directors of Vital namely Mr. J. P. Madaan,
Mr. Vijay Jhindal and Ms. Shubha Jhindal before Hon'ble SAT. The Hon'ble SAT vide
its order dated August 28, 2008, remanded the matter back to SEBI with the following
observations:
The contents of the advertisements pertain to price sensitive issues and if they are false and
misleading as alleged by the Board, it shall be in the interest of the securities market and the
investors to find out as to who is responsible for the advertisements and those responsible need
to be dealt with appropriately. We are not happy with the impugned order particularly with
the manner in which the issues have been discussed. The appeals are accordingly allowed and
the impugned order qua the appellants set aside and the cases remanded to the Board with a
direction to issue fresh show cause notice(s) to the appellants herein who will file their replies,
if necessary.
4.

Thereafter, SEBI initiated further examination in the matter. In the meantime, the
applicants namely Mr. Harishchandra Gupta and Ms. Ramkishori Gupta vide
letter dated August 02, 2010, filed a request for grant of the compensation with SEBI.
SEBI upon consideration, vide its letter dated September 19, 2011, declined the
request of the applicants for grant of compensation and also intimated to these that
there is no provision under the SEBI Act to direct any company or its directors to pay
compensation to the investors. Against this, the applicants preferred an appeal before
the Honble SAT. Honble SAT vide its order dated April 30, 2013, directed SEBI to
look into the complaint relating to the alleged misleading and fraudulent
advertisements issued by Vital, along with the on-going investigation. Honble SAT
also directed that the outcome of such investigation be conveyed to the applicants and
in case SEBI finds Vital guilty of playing fraud on the investors, it may consider
directing the concerned entity or Vital to refund the actual amount spent by the
applicants on purchasing the shares in question and with appropriate interest.

5.

The subsequent examination/ investigation in the scrip of Vital, revealed unusual

movements in the price and volume during the period of April 01, 2002 and August
Page 5 of 17

31, 2002, i.e. the period when the advertisements pertaining to buyback, preferential
allotment and bonus shares were issued by Vital. It was found that during the period
of April 29, 2002 to May 20, 2002 (i.e. the 20 day period prior to the publication of the
advertisements), price and volume in the scrip of Vital had increased compared to the
price and volume prevailing during April 01, 2002 and April 28, 2002.
It was also found that Vital had published the advertisement regarding the buyback at
the proposal stage itself and the price/ quantity which in the normal course gets
decided in the board meeting and announced thereafter was mentioned in the
advertisements beforehand. For e.g. Vital on May 20, 2002, had made an advertisement
regarding buy back of shares, when the proposal for buyback was to be considered in
the board meeting to be held on June 04, 2002.
Further, the corporate actions (i.e. buyback, preferential allotment and bonus shares)
announced by Vital were also found to be contradictory in nature as the buyback
reduces the number of outstanding shares while the preferential allotment/ bonus
issue increases the number of outstanding shares. In view of the above, the
advertisements issued by Vital were found to be a ploy to mislead the investors by
benchmarking the price of the scrip at 30, with an objective to generate interest in
the scrip and induce more buying as investors/ shareholders would have envisage a
clear gain of around 20 per share. As a consequence of such advertisements, the
average volume of trading in the scrip had increased by 200%. However, the price of
the scrip of Vital went down after the advertisement period and thereby resulted in
losses to the investors.
6.

The major selling entities during the period of publication of advertisements were
found to be Anupama, Fashion Tech, Troop Trac Marketing, Rajat Stock and S.V.
Stockland. It is important to note that all these entities except S.V. Stockland (who had
received the shares from 10 preferential allottees in off market transactions) were
allotted preferential shares of Vital in the year 1999. These entities after the sale of
shares had transferred certain funds to MFL (an entity connected to Mr. Vijay Jhindal).

Page 6 of 17

7.

On completion of the investigation (initiated after the order of Honble SAT dated
August 28, 2008), SEBI issued SCNs dated July 06, 2012 and July 12, 2012. Thereafter,
SEBI in its order dated July 31, 2014, concluded that the preferential allotment during
December 1991 and their sale during May July 2002, were carried out as a devise to enable
fraudulent gains to the promoters and directors. The said order also observed as under:
35. In this case, Mr. Vijay Jhindal alongwith Mr. Vinay Talwar were involved in
allotting shares to 15 entities which were connected to VCL and its promoters, directors
during December 1999. These 15 entities were provided funds by VCL through another
two entities Anupama and CBS System. Further, the 15 preferential allottees sold these
shares during May-July 2002 after VCL published false, misleading advertisement
regarding buy back of its shares, bonus and preferential issue of shares under the directions
of Mr. Vijay Jhindal. The matter regarding buy back of shares, bonus and preferential issue
of shares were discussed in the board meetings chaired by Mr. J. P. Madaan and attended
by another director Mr. R. K. Garg. The sale proceeds of the shares held by these 15
preferential allottees was transferred to accounts of MFL a company promoted by Mr. Vijay
Jhindal and his family. Stock Land, which was not a preferential allottees however, got the
shares from some preferential allottees and sold them in the market subsequent to the issuance
of false, misleading advertisements by VCL. The sale proceeds received by Stock Land was
transferred to the accounts of MFL, an entity owned and controlled by Mr. Vijay Jhindal.
Vide the said order Vital, Mr. Vijay Jhindal, Mr. Vinay Talwar, Master Finlease Pvt.
Limited, Mr. J. P. Madaan, Mr. R. K. Garg, Mr. CBS Systems Limited, Anupama, Brut,
Chankya Apparels, Chankya Overseas, Cosmo Corporate, Fashion Tech, Flair
Finance, Heritage Corporate, Perfect Car, Rajat Stock, Troop TracChits, Troop Trac
Exports, Troop Trac Electrodes, Troop Trac Marketing, Wisdom Publishing and
Stock Land were restrained from accessing the securities market and prohibited from
buying, selling and dealing in securities in any manner for a period of three years.
Another director of Vital namely Ms. Shubha Jhindal, was also restrained from
accessing the securities market and prohibited from buying, selling and dealing in
securities in any manner for a period of one year. Vide the said order following
directions were also issued:

(b) direct that the preferentially allotted shares of VCL lying in the demat accounts of the
preferential allottees shall remain frozen;
(c) direct VCL not to give effect to transfer of any shares acquired and held by the preferential
allottees in the preferential allotment dated December 14, 1999;
(d) restrain the preferential allottees from exercising any voting rights (including through
nominee or proxy) or other rights attached to the shares acquired and held by them in the
preferential allotment dated December 14, 1999.
Page 7 of 17

8.

Against this order of SEBI, the applicants approached Honble SAT vide a
miscellaneous application with a grievance that SEBI has failed to comply with the
directions of Honble SAT issued vide order dated April 30, 2013 and as modified on
December 19, 2013. Honble SAT vide its order dated November 17, 2014, directed
as under:

2. In view of above grievance, counsel for SEBI on instruction states that the WTM of SEBI
would pass additional order dealing with the directions of this Tribunal set out
hereinabove. Accordingly, WTM of SEBI is permitted to pass additional order in relation
to grievances set out in Miscellaneous Application No. 145 of 2014 within a period of 4
weeks from today after giving a personal hearing to appellants.

9.

In compliance with the order of Honble SAT, SEBI passed an order dated December
16, 2014, while observing that the ill-gotten gain, if any, made by the persons/ entities
mentioned in the SEBI order dated July 31, 2014 had not been quantified during the investigation
and therefore, the same was not considered . The said order also stated as under:
in the facts and circumstances of the present case and after taking into account the
findings of SEBI in the order dated July 31, 2014, consider it a fit case to examine the
feasibility of quantifying the ill-gotten gains, if any, and disgorgement of the same and,
thereafter, consider restitution, on merits, in case of complainants, in accordance with the
provisions of the SEBI Act, 1992 and the regulations framed thereunder.
In view of the same, vide the said order, SEBI was directed to examine the feasibility
of quantifying the ill-gotten gains, if any, and issue the requisite notice of disgorgement
of the same, within three months.

10.

Thereafter, SEBI conducted the re-examination in the matter with a focus of

determining the ill-gotten gains in the scrip of Vital and vide letter dated June 15, 2015,
forwarded the findings of the investigation to the applicants. In the meantime, the
applicants again preferred an appeal before Honble SAT against the order of SEBI
dated December 16, 2014. Honble SAT vide its order dated August 27, 2015, took
cognizance of the findings of the investigation as forwarded to the applicants vide
letter dated June 15, 2015. Further, as the said letter had offered an opportunity of
personal hearing before the Competent Authority, the applicants withdrew the appeal.
Honble SAT disposed of the said appeal of the applicants with an observation that

Page 8 of 17

the SEBI shall pass appropriate order on merits after hearing the applicants as
expeditiously as possible.
11.

An opportunity of personal hearing was granted to the applicants on October 08, 2015,
when Mr. Harish Chandra Gupta appeared in person, for himself and his wife and
filed the written submissions dated October 08, 2015. The written submissions were
taken on record. Mr. Harish Chandra Gupta also made oral submissions, based on the
written submissions dated October 08, 2015. The submissions of the applicants, in
brief are as under:
a. The Honble SAT, while deciding the appeal no. 207 of 2012 vide order dated April
30, 2013, had inter alia passed the following direction:
Needless to say that in case SEBI finds VCL guilty of playing fraud on the investors, it
may consider directing the concerned entity or VCL to refund the actual amount spent by the
Appellants on purchasing the shares in question and with appropriate interest and as per
law.
Therefore, SEBI is obliged to obey and implement the aforesaid order of the Honble
SAT.
b. While deciding the review application of SEBI in appeal no. 207 of 2012 on December
19, 2013, Honble SAT had passed the order with several clarifications, without
touching the direction/ operative portion of its order dated April 30, 2013.
c. SEBI in the matter of the Sahara India Real Estate Corp. Limited & Ors. Vs. Securities
Exchange Board of India (Sahara case) had issued the direction on June 23, 2011, to
refund the money of the investors with 15% interest, till the date of payment of the
same for the violation of law.
d. The extent of the nature and the manner of measures which can be adopted by SEBI
for giving effect to the functions assigned to it, have been left to the discretion and
wisdom of the SEBI. Under Section 11(B) of the Securities Law (Amendment) Bill
2014, SEBI has the powers to pass disgorgement orders, which seek to recoup any
illegal gains reaped by corporate or market entities and compensate investors who may
have a rightful claim to the money.
e. SEBI is bound to take legal action against Vital, its promoter/ directors who were
found guilty of playing fraud upon the investors, as observed in SEBI order dated July
31, 2014. In view of the same, SEBI is bound to take legal action against them under
Section 15HA of SEBI Act, along with fixing the civil as well as criminal liabilities and
Page 9 of 17

issue direction for refund of the amount invested in the shares of Vital by the
applicants along with appropriate interest. Merely debarring Vital and its promoters/
directors from trading, does not in any manner comply with the order of Honble SAT
dated April 30, 2013, nor the purpose of establishing SEBI and the mandate provided
in the preamble of SEBI Act is met.
f. The first misleading advertisement shown on the website of BSE was on May 04, 2002,
when the share of Vital was around between 3 per share. The applicants had invested
in the shares of the Vital after being lured and induced by the false advertisements
issued by the Company and its directors. The then existing shareholders of the Vital,
who had sold the shares were coextensive to the Company and were also insider
traders and were well aware of financial position of Vital as in the AGM of the year
2001-2002, it was discussed that U.P.F.C. had acquired all the fixed assets of Vital
(consisting of land, building, plant and machinery) and the same was adjusted towards
the term loan. The applicants had invested an amount of 18,25,041 for purchasing
the shares of Vital believing in the false advertisement and corporate announcements,
displayed on the website of BSE and the newspapers. Such investment later resulted
in a loss of 51,53,190.
g. The words used in a beneficial or welfare statute when they are capable of two
constructions, the one which is more in consonance with the object of the Act and for
the benefit of the person for whom the Act was made should be preferred.
h. The purchase of securities from the sellers on the floor of the exchange is governed
by the theory of demand and supply. This theory and equilibrium is disturbed, if
extraneous circumstances like false and misleading advertisements are issued.
i. SEBI has failed to consider the observation made in the order dated December 16,
2014 and it has also failed to calculate the losses averted by the promoters/ directors/
the concerned entities as mentioned in the SEBI order dated July 31, 2014, which in
economic terms is equivalent to profit and can be said to be ill-gotten gain.
j. SEBI in its order dated July 31, 2014, has made it clear that the misleading
advertisement were an attempt to benchmark the price of the scrip to the level of 30
- 35, when the scrip was actually trading in the range of 3 to 12. The investigation
period was divided into four time periods on the basis of price volume data in the
scrip, i.e.:
Page 10 of 17

Table B
Period
Time Slot 1
Time Slot 2
Time Slot 3
Time Slot 4

April 1, 2002 to April 26, 2002

April 29, 2002 to May 20, 2002
May 21, 2002 to July 15, 2002
July 16, 2002 to August 31, 2002

Average Share
Price ( )
3.46
11.12
8.10
3.53

Average
Volume
16,795
3,44,216
10,29,090
40,440

Average no.
of Traders
57
910
1,965
131

k. The related entities had sold 71.14 lakh shares into the market between May 02, 2002
and July 31, 2002, by taking advantage of the artificial interest created by the misleading
advertisements. The concerned entities thus averted a loss of 5.44 crore [i.e. 71.14
lakh shares X 7.66], 7.66 (i.e. the loss averted) being the average of 11.12 3.46.
l. The concerned related entities had unloaded the shares in the market and had avoided
a loss of 9 per share, when the scrip was trading between 3 to 12. The price of the
scrip had later diminished to 0.50 paisa. In view of the same, an order for
disgorgement equal to 5.44 crore and appropriate interest along with the penalty of
amount as prescribed under Section 15(G) and 15 (HA) of the SEBI Act may kindly
be issued to the concerned entities.
12.

I have carefully considered the findings of the investigations, orders passed in the
matter of Vital, the directions issued by Honble SAT, submissions made by the
applicants and the material available on record. To proceed with, I note the following:
a. The applicants had traded in the scrip of Vital during the period of May 23, 2002 June 25, 2002 (i.e. during the time when Vital had issued advertisements regarding buyback of shares, issue of bonus shares and preferential issue of shares) and had invested
18,25,041 (by purchasing 1,71,773 shares).
b. I note that SEBI vide its order dated July 31, 2014, has found that the advertisements
issued by Vital were at the proposal stage only and there was no legal requirement for
their publication. The said order had also held that the advertisements issued by the
Company were misleading and was fraud on the investors. The relevant observations
of the said order, are as under:
As a consequence of the advertisements, the average volume of trading in the scrip increased
by 200% indicating that more investors had traded during the relevant period, ostensibly
considering this advertisement to be true. I note that the price of the scrip went down after the
advertisement period thereby resulting in loss to investors who bought shares expecting
Page 11 of 17

pecuniary gains, consequent to the advertisements. In view of these facts, I find that the
announcement of buy-back of shares was misleading and without any intention to fulfill and
its subsequent withdrawal resulted in a pecuniary loss to the investors who were influenced to
purchase shares on the basis of the advertisement.
c. The instant examination in the matter revealed that the promoter group was not
holding any shares of Vital, prior to the publishing of the misleading advertisements.
Therefore, the shares allotted to the preferential allottees were taken into consideration
for calculation of the ill-gotten gains. The details as to how these preferential allottees
had received the shares of Vital has been discussed in the paragraphs above. For the
sake of convenience, the same are being reproduced below with analysis:
i.

Vital had made preferential allotment of 72,00,000 shares in December 1999, to

fifteen entities (as noted in table A above) (who were found to be connected to
with each other, Vital, promoter and directors of Vital i.e. Mr. Vinay Talwar and
Mr. Vijay Jhindal).

ii.

SEBI vide its order dated July 31, 2014, has found that Vital had transferred funds
to the preferential allottees through layered transactions. The details of such fund
transfers by Vital to the connected preferential allottees are as under:
-

Vital had transferred 58.75 lakh to Anupama (a preferential allottee) which in

turn transferred 43.75 lakh to Chankya Apparels, Chanakya Overseas, Cosmo
Corporate, Heritage Corporate, Perfect Car, Rajat Stock, Troop Trac Chits,
Troop Trac Electrodes and Wisdom Publishing.

Vital had transferred 6.5 lakh to two preferential allottees, namely, Rajat Stock
and Cosmo Corporate on January 11, 2000.

Vital had given 1 crore to CBS System Limited as advance which was
transferred to some of the preferential allottees.

Vital had transferred 2.1 crore to Anupma, who in turn had transferred 1.2
crore to the preferential allottees. Such funds were then used by the
preferential allottees including Anupma, as call money to Vital for the shares
allotted in the preferential issue.

Page 12 of 17

Certain preferential allottees had also received the money in cash from the
entities related to Vital during the months of December 1999 and January
2000.

From the above, it is noted that Vital had provided finance to the preferential
allottees. It is important to note that the Company was supposed to receive 9
crore through the preferential allotment. As can be seen from above, instead of
procuring 9 crore through the preferential allotment, the Company had financed
atleast 3.07 crore to the preferential allottees. The preferential allottees had then
utilized the said amount for subscribing to the shares of Vital in the preferential
allotment. In relation to the same, the following observations of the order dated
July 31, 2014, is relevant to be noted:
25. On account of the repeated circulation of same money between different
preferential allottees, the receipt of substantial portion of allotment money for 72,00,000
equity shares was merely a book entry. Considering the facts and circumstances of this
case holistically, I find that Vital had issued 72,00,000 new equity shares for value of
9 crore in the names of the above mentioned 15 preferential allottees but had not
received full consideration as its preferential allotment was financed by Vital itself as
discussed hereinabove. I, therefore, find that the consideration for the shares allotted to
the respective allottees in the preferential allotment of VCL has not been fully paid by
the preferential allottees and the shares were allotted by VCL to the preferential allottess
under a fraudulent scheme, artifice and device employed by the VCL, its
promoters/directors and preferential allottes who acting in concert amongst themselves
and also with VCL and its promoters/directors, illegally and fraudulently acquired
70.25% shares in VCL. In this case, it is established that the payments made by VCL
to the preferential allottees passed through various entities, viz. CBS System and
Anupama to finally reach the subscriber bank account and in turn to VCL in the form
of application money for the preferential allotment.
As also noted earlier, the SEBI order dated July 31, 2014, has held that the scheme
of Vital, its promoters/ director and the preferential allottees as a ploy to defraud
the investors.
iii.

Later in the year 2002, Vital had started issuing advertisements (which have been
found to be misleading and fraud on the investors). During the period of May 02,
2002 to July 31, 2002, a total of 71.14 lakh shares of Vital were sold by the
preferential allottees, namely, Fashion Tech, Perfect Car, Anupama, Rajat Stock,
Troop Trac Exports and one S.V. Stockland (an entity who had received the shares
Page 13 of 17

in off-market transactions from the rest of the ten preferential allottees) into the
market. As per the available records, these entities had transferred the sale
proceeds of the shares so sold i.e. atleast 1.05 crore (amount which was traced by
the investigation) to one MFL (one of the promoter of Vital and an entity owned
by Mr. Vijay Jhindal and his relatives), which were later transferred to the bank
accounts of Mr. Vijay Jhindal and Ms. Subha Jhindal and other related entities.
d. The SEBI order dated July 31, 2014, has noted that entire chain of events in respect of
the buy back, bonus issue and preferential allotment described by VCL, the unwarranted
advertisement, large moneys spent, reasons for the proposed corporate actions, reasons for the proposal
being rejected, impact on the price/ volume of the shares suggests an orchestrated ploy on part of the
promoters to create an artificial demand for the shares of VCL and induce innocent investors for
purchasing shares so as to absorb sales by the promoter related entities.
The said order while making the following observations had concluded that the
preferential allotment during December 1999 and the sale of shares by the preferential
allottees during May - July 2002, were carried out as a device to enable fraudulent gains
to the promoters and directors of Vital:
-

Mr. Vijay Jhindal was director of Vital during the preferential allotment of shares to
fifteen entities in December 1999. These entities were connected to Vital and its
promoters/ directors and were provided funds by Vital through two entities Anupama
and CBS System. As per the SEBI order dated July 31, 2014, the newspaper
advertisements for buyback of shares, preferential allotment and bonus issues during
May-June, 2002 were issued under the instructions of Mr. Vijay Jhindal and the
payments for such advertisements were made by MFL and one Avisha Credit (both
promoted by Mr. Vijay Jhindal and his family members). Allottees in the preferential
issue of December 1999 had sold the shares during the period of May June 2002 and
the sale proceeds were transferred back into the account of MFL (an entity owned by
Mr. Vijay Jhindal and his family members).

Mr. Vinay Talwar was the Chairman and Managing Director of Vital at the time of
preferential allotment of shares in the year 1999 and he was also the introducer for the
preferential allottees namely Cosmo Corporate, Fashion Tech, Heritage Corporate,
Rajat Stock and Wisdom Publishing for opening the bank account. He was also aware
Page 14 of 17

of the actual purpose of the preferential allotment i.e. to cheat the investors. In view
of the same, Mr. Vinay Talwar knowingly indulged in an act which was a fraud on the
investors.
-

Mr. J.P. Madaan was the director of Vital, during the period February 28, 2000 to
March 31, 2007 i.e. during the period when the misleading advertisements were issued.
He and Mr. R. K. Garg (other director of Vital) were present in the board meetings of
Vital on June 04, 2002, June 14, 2002 and July 05, 2002 when the issue of buyback,
preferential allotment and bonus shares were discussed.

13.

In the light of the above discussion, while proceeding further, I note as under:
a. The Company had come out with a preferential allotment of 72,00,000 equity shares
and had allotted these shares to 15 entities (related to each other, Vital and its
promoters/ directors).
b. These 15 preferential allottees had received the finance of atleast 3.07 crore from
Vital. The said money was used by these preferential allottees for subscribing to the
shares of Vital. There is nothing on record to show that these preferential allottees had
brought in their own funds for the allotment of preferential shares.
c. The preferential allottees [Fashion Tech, Perfect Car, Anupama, Rajat Stock, Troop
Trac Exports and S.V. Stockland (who had received the shares from other 10
preferential allottees)] had sold 71.14 lakh shares in the year 2002 i.e. during the period
when the Company had issued misleading advertisement. The sale proceeds of such
sale i.e. atleast 1.05 crore was transferred to the account of MFL (an entity promoted
by Mr. Vijay Jindal and his family members).
d. The allotment of preference shares and issue of misleading advertisements was found
to be a fraudulent scheme, artifice and device employed by Vital and its promoters/
directors.

14.

At this stage, I refer to the SEBI notice dated June 15, 2015 and note that for
determining the ill-gotten gains, calculation were made from two different scenarios,
i.e.
a. Where the actual cost of acquisition was paid by the preferential allottees, during the
time of allotment and

Page 15 of 17

b. Where the notional cost of acquisition of the shares in the hands of preferential
allottees was considered as closing price of the scrip of Vital one day prior to the first
misleading advertisement.
I note that both the scenarios considers certain cost of acquisition in the hands of the
preferential allottees. However, considering the SEBI order dated July 31, 2014,
wherein, it has been noted that the preferential allottees (who were related to Vital)
had received atleast 3.07 crore from Vital, such funds were then used by the
preferential allottees for subscribing the shares of Vital in the preferential allotment. It
is important to note that there is no evidence of payment of actual cost, if any, from
the preferential allottees towards the acquisition of shares. Rather, the evidence on
record shows that money to the tune of 3.07 crore had come from the Company
itself and money had gone back to the Company, as consideration for the preferential
allotment.
15.

It is clear that the Company had funded its related preferential allottees for subscribing
its own shares. There is a clear trail for only 3.07 crore although the preferential
allotment was for 9 crore. From the above sequence of facts, it can be said that the
preferential allottees had not brought in their own funds for subscribing to the shares
of Vital and had acted as conduits for the Company. Later, the Company came out
with misleading advertisements and provided the exit opportunity to the preferential
allottees. These preferential allottees then sold the shares in the market and the sale
proceeds were transferred to MFL (an entity promoted by Mr. Vijay Jindal), a stranger
to the entire sequence of events. I note that SEBI vide its order dated July 31, 2014,
has already held that the preferential allotment and sale of such shares during the
period when misleading advertisements were issued by the Company was a fraud on
the investors.

16.

The act of fraud as found in the order dated July 31, 2014, threatens the market
integrity and orderly development of the market and call for regulatory intervention to
protect the interest of investors. These entities cannot be allowed to unjustly enrich
themselves at the cost of investors.

Page 16 of 17

17.

Considering the above, I note that SEBI while determining the ill-gotten gains in the
scrip of Vital, had proceeded on a hypothesis different from the findings in the SEBI
order dated July 31, 2014. In view of the above, as the ill-gotten gains are still to be
arrived at, it is appropriate to direct SEBI to look into the exact figure of ill-gotten
gains by Vital, its promoters/ directors, preferential allottees and MFL and initiate the
disgorgement proceedings against those who perpetrated fraud on the investors, at the
earliest. Further, it is also appropriate that the claims of the applicants be taken on
record and the same may be considered in accordance with the provisions of the
Securities and Exchange Board of India Act, 1992 and the Regulations framed
thereunder, on disgorgement of the ill-gotten gains.
In view of the foregoing, I in exercise of the powers conferred upon me under Section
19 of the Securities and Exchange Board of India Act, 1992, hereby order accordingly.

Date: April 01, 2016

Place: Mumbai

PRASHANT SARAN
WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA

Page 17 of 17