DSK Legal represented B. Ramalinga Raju and B. Rama Raju before the SAT
DSK Legal represented B. Ramalinga Raju and B. Rama Raju before the SAT
DSK Legal advised, assisted and represented its clients B. Ramalinga Raju and B. Rama Raju before the Securities Appellate Tribunal (SAT) challenging the order passed by the Whole Time Member, SEBI against them. The impugned order dated November 2, 2018 ("Impugned Order") has been passed against Ramalinga Raju, Rama Raju, B. Suryanarayana Raju and SRSR Holdings Pvt. Ltd.
The directions against B. Rama Raju and B. Ramalinga Raju were:
(i) prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of 14 years.
(ii) disgorge an amount of Rs. 26,62,50,000/- (Rupees Twenty-Six Crore Sixty-Two Lac and Fifty Thousand Only) with simple interest at the rate of 12% per annum from 7th January 2009.
(iii) jointly and severally along with B. Suryanarayana Raju and SRSR Holdings Pvt. Ltd. disgorge an amount of Rs. 813,40,69,658/- (Rupees Eight Hundred and Thirteen Crore Forty Lac Sixty-Nine Thousand, Six Hundred and Fifty-Eight Only) with simple interest at the rate of 12% per annum from January 7, 2009.
It was the clients' case that the Impugned Order, while computing the amount of disgorgement has inter alia incorrectly held that the Appellant has made an illegal gain of Rs. 26,62,50,000/- (Rupees Twenty-Six Crore Sixty-Two Lac and Fifty Thousand Only), which amount is to be disgorged. The Impugned Order erred by inter alia (i) rejecting the Appellant's contentions that the sale of 6 lac shares was for philanthropic purposes; (ii) failing to provide reasons and/or a basis for its determination of the amount to be disgorged by the Appellant; and (iii) interpreting the Tribunal's Order in a narrow manner and rejecting the Appellant's contentions as to intrinsic value of the shares.
The Securities Appellate Tribunal held that the approach of the Whole Time Member was patently erroneous and cannot be sustained because no reason has been given as to why the magic figure of 14 years of restraint was appropriate and no reason was given or any discussion made with regard to the restraint of 14 years against Ramalinga Raju and Rama Raju.
On the disgorgement issue, the Securities Appellate Tribunal observed that the Whole Time Member had adopted the "net profit" method, namely, the difference between the cost of acquisition of shares and the amount realized by sale less statutory taxes. It further observed that while computing the unlawful gain in the matter of Ramalinga Raju and Rama Raju, the Whole Time Member held that they did not provide any information regarding the cost of acquisition and, therefore, an adverse inference was drawn and the value of the shares was taken as 'nil' as a result, the entire sale value was taken as the unlawful gain. The Securities Appellate Tribunal has held this entire approach of the Whole Time Member is patently erroneous as the burden to quantify unlawful gains is on the SEBI and they cannot shift this burden.
The Securities Appellate Tribunal observed that in cases where shares purchased were historic and includes bonus shares and these shares have grown in value over the years, in such cases, the calculation of unlawful gain by taking the value of the original cost of acquisition would not be the appropriate method. It further observed that taking the original cost of acquisition without taking into consideration the market value of the shares, would lead to a faulty calculation of unlawful gain. The Securities Appellate Tribunal held that the Whole Time Member fell in error in not considering the intrinsic value of shares.
The Securities Appellate Tribunal held that the direction of the Whole Time Member to disgorge the amount jointly and severally also cannot be sustained and that the unlawful gains against each appellant has to be calculated separately which amount is required to be paid individually by the appellant.
The Securities Appellate Tribunal has set aside the order of disgorgement and directed the Whole Time Member to decide the issue of disgorgement afresh on merits. The Tribunal has observed that interest becomes payable after the computation of the disgorgement is made. Once the amount of disgorgement was set aside, the imposition of interest on it was automatically set aside.
All the appeals have been allowed by the Securities Appellate Tribunal, matters have been remitted back to the Whole Time Member with directions to pass a fresh order within four months after giving opportunity of hearing to all the appellants on the following issues:
1. The Whole Time Member will consider the intrinsic value while calculating the unlawful gain.
2. The unlawful gain, if any, will be calculated individually for all the appellants by the Whole Time Member.
3. The Whole Time Member will consider the issue on interest.
4. The Whole Time Member will reconsider the issue on period of restraint afresh for all the appellants.
5. The Whole Time Member will reconsider the issue on pledge of shares.
The team comprised of Sr. Advocate Gaurav Joshi for Ramalinga Raju and Sr. Advocate Ashok Gupta for Rama Raju.
The DSK Legal team comprised of Nirav Shah, Partner.
