Shanker Sharma vs Directorate Of Enforcement
2002 Latest Caselaw 30 Del

JUDGMENT

S.K. Agarwal, J.

1. The petitioner by this petition under Section 439 of the Code of Criminal Procedure, 1973 (for short 'Cr.P.C.') is seeking bail in the case under Sections 8(1), 19(1)(b) of Foreign Exchange Regulation Act, 1973 (fort short 'FERA') read with Sub-sections (3) & (4) of Section 49 of Foreign Exchange Management Act, 1999 (for short' FEMA').

2. Prosecution allegations in brief are that after noticing abnormal outflow of foreign exchange from the stock market. Enforcement Directorate, Mumai Zonal Office made enquiries from the Securities and Exchange Board of India Act, 1992 (for short 'SEBI') vide their letter dated 7th March, 2001. On receipt of information, the department took up investigation and sought information from First Global Stock Broking Private Limited (for short 'FGSBPL') of which petitioner is the director. On 3rd October, 2001, reference was received from the Income-tax. Department regarding sale of shares of Himachal Futuristic Communication Ltd. (for short 'HFCL') by FGSBPL, to Foreign Institutional Investors (for short 'FIIs') and their sub-accounts, at half the prevailing market rates. Earlier on Ist October, 2001, reference from Reserve Bank of India (for short 'RBI') was also received regarding irregularities in overseas investments by FGSBPL. Since the transaction of sale of shares of HFCL took place on 3rd March, 2000, inquiries under FERA were also initiated and summon was issued to the petitioner to join investigations on 23rd October, 2001. The Petitioner through his advocates asked about the nature of investigations before filing replies to the queries of the department. It is alleged that despite seven opportunities and summons, neither the petitioner nor his wife Mrs. Devina Mehra, who is also a director in said company joined the investigations. Therefore, a complaint was filed for their prosecution for non-compliance of the summons under Section 56 of the FERA read with Sub-sections (3) and (4) of Section 49 of the FEMA in the Court of CMM, Mumbai on 26th November, 2001. The Court took cognizance and issued summons for appearance of the petitioner on 26th February, 2002. show cause notices for non-compliance of summons were also issued on 19th November, 2001. In the third week of November, 2001, the Enforcement Directorate received copies of documents pertaining to the transactions in HFCL shares from the Income-tax Department. On scrutiny of these documents search of the premises connected with FGSBPL was conducted between 24th and 26th November, 2001. Some computer hard discs, floppies, Indian currency and other incriminating documents were seized. However, residential premises of the petitioner at Mumbai could not be searched as none was available and same had to be sealed. On 27th November, 2001, petitioner sent a communication through the layers stating that they are sending keys of their house at Mumbai through their employee Hitesh Kavelkar and Pankaj Walia, who shall represent them at the time of search. However, they also did not turn up.

3. Enquiries were also made form RBI on the issue of sale of shares of HFCL acquired on private placement basis by group of companies of the petitioner to FIIs. RBI in their letter dated 11th December, 2001 confirmed that the sale of said shares by the group of companies of the petitioner and the purchase by the FIIs under sub-accounts was violative of the provisions of FERA. Thereafter, on 17th December, 2001, Department conducted search of company's premises at Delhi under Section 37 of FERA, where petitioner was staying. Statement of the petitioner was recorded under Section 40 of FERA and on t December, 2001, on finding that a prime facie case for violation of Sections 19(1)(b) of FERA having been made out, he was put under arrest and is in judicial custody.

4. It is further alleged that investigations have revealed: (i) that on 16th March, 2000, RBI, Mumbai granted permission to HFCL under Section 19(1)(b) of FERA for issue of 27,04,350 equity shares of Rs. 10/- each for cash, at a premium of Rs. 1040/- to the FIIs (as per list submitted by HFCL) on repatriation basis by way of preferential allotment out of the total new issue of 70 lac shares of HFCL (nominal value Rs. 7.0 crores). This permission was also to be treated as the permission to FIIs under Section 29(1)(b) of FERA for acquiring the said 27,04,350 equity shares of company on repatriation basis; (ii) M/s. First Global Finance Pvt. Ltd., one of the group companies of the petitioner, acted as the lead arranger/book runner for the said issue of HFCL, and they received fee of Rs. 19.0 crores (approx.) form HFCL for the same; (iii) In pursuance of the said RBI permission, HFCL issued 70 lakhs preferential shares to 205 entitles including 27.04,350 shares to the FIIs. This included 8 entities belonging to the group of companies of the petitioner, to whom 10,69,275 shares were allotted; (iv) Out of these, Companies of the petitioner sold 5,92,950 shares to the 16 FIIs/their sub-accounts through their custodians in India, outside the stock exchange 'without the permission of the RBI at a price ranging from Rs. 1060.50 to Rs. 1075.0 per share when the prevailing market rate was between Rs. 1951.0 to Rs. 2211.0 per share; and, (v) The Deutsche Bank, Mumbai one of the custodians of the FIIs to whom shares were sold by the FGSBPL on 25th March, 2000 wrote to SEBI inter alia, the following

"xxx xxx xxx

* The trades have been executed by the broker on a DVP Spot basis.

* The price at which the contract is executed is much less than the market price of Himachel Futuristic on 22/03. The purchase contract is executed at a price of Rs. 1060.50 per share against a closing price of Rs. 1790.0 on March 22nd on the BSE.

We would request you to let us know whether the above contracts are permissible as per the SEBI guide-lines for Foreign Institutional Investors. Because of the lack of clarity regarding the validity of these traders, we have not reported these as part of daily reporting to SEBI. These trades continue to be unsettled in our books due to the aforementioned reason."

5. On 10th December, 2001, Deutsche Bank informed the department that FGSBPL had executed trades of 2,37,600 shares of HFCL on 3rd March, 2000 in respect of four FIIs. These contracts were cancelled because of the absence of RBI approval, which was necessary as the investment was in the unlisted company. It is thus alleged that sale of the above-noted unlisted shares by FGSBPL to the FIIs outside the stock exchange without permission of the RBI was in violation to the provisions of Section 19(1)(b) of FERA. Instead of availing the direct route, the petitioner being lead arranger had adopted circuitous route with a view to earn profits in violation of the provisions of FERA.

6. I have heard Shri Shanti Bhushan, learned Senior Advocate for petitioner and Shri Harish N. Salve, learned S.G. for the respondent and have been taken through the record.

7. Learned Senior Advocate for the petitioner, at the outset, argued that petitioner and his wife have excellent past professional record. Their company FGSBPL is the first Indian non-Japanese Asian company which operates on the London Stock Exchange and is a member of NASDAQ USA; that they are one of the highest tax-payers in the country and that petitioner is being victimised because of his association with M/s. Buffalo Network Private Limited (Tehelka.com), which was instrumental in exposing corruption relating to the defense deals on 13th March, 2001. He argued that petitioner's company as a part of its multifarious investments holds only 14.5% shares of their company but he did not hold any managerial or editorial position in the same. He further argued that there was never any case of regulatory infraction or tax dispute. The harassment to the petitioner and his wife started only after 13th March, 2001. Learned Solicitor General contested the allegations while opposing the bail application and argued that the allegations against the petitioner are grave and that the investigations are at a crucial stage and release of the petitioner on bail, at this juncture, would hamper investigations, therefore, petitioner is not entitled to be released on bail.

8. In my considered view the material on record clearly suggests that the investigations, in this case, were initiated by office of the respondent at Mumbai on 7th March, 2001 when they enquired form the SEBI, after noticing abnormal outflow of foreign exchange from the stock market. Further the petitioner in his statement before the SEBI himself claimed that on 13th March, 2001, he had advised Mr. Tarun Tej Pal Sing not to release the story as it might affect his pending transaction with SEBI and jeopardise FGSBPL cases which were under investigation and that it may lead to unnecessary speculation of his involvement, which shows that investigations against the petitioner's company were already pending. Thus the argument that the petitioner is being harassed only because of tehelka. com episode is, prima facie, without substance and cannot be accepted.

9. Learned counsel for petitioner argued (i) that FGSBPL acted as a stock broker for sale and purchase of shares including that of FIIs. The transaction had prior approval of RBI and the SEBI. Neither the petitioner not his company had any obligation to get any approval from RBI or to inform the RBI for any FII transaction. The FII (foreign entity) and the Custodian Banks were responsible for approval and reporting to RBI and SEBI. Every transaction done by an FII in India is reported with full details of the contract to both the RBI and SEBI by the custodian banks by the end of the same day. Reliance was placed on 10B.4 of RBI Exchange Control Manual & SEBI Regulations for FIIS. It is thus argued that violations of the provisions of FERA, if any, would be either by FII or their Custodian Banks and not by the petitioner; (ii) petitioner's company as the lead arranger/book runner for the reputed FIIS had sought to acquire the shares in HFCL in terms of the notification and the guide-lines of the RBI. Their bids were duly accepted and they had purchased shares at the same price as the Government financial institutions, such as, UTI, GIC, LIC etc. The SEBI had fixed the minimum price of Rs. 400/- and the bid price for the share quoted/agreed was far more than this. The relevant date for pricing was 30 days prior to Board meeting which was held on 5th January, 2000 and the price of listed HFCL shares on 6th December, 1999 went to a maximum of Rs. 480.25 per share and even on the date of the Board meeting the price was around Rs.790/-. Even after the enquiries were initiated, FII confirmed their purchases of shares at DVP. These confirmations are being deliberately ignored by the investigating agency. Thus is was argued that there can be no question of violation of any provision of FERA under Section 8 or 19. Learned Solicitor General argued to the contrary.

10. As noticed above, the enquiries from the RBI regarding the sale of HFCL shares acquired on private placement basis by the group companies of the petitioner to the FIIs have been confirmed to be in violation of provisions of FERA. Relevant portion of the letter of RBI dated 11th December, 2001 reads:

"We advise that in terms of the permission granted by Reserve Bank of India under FERA/FEMA, the FIIs can purchase/sell securities on Stock Exchanges. For transactions outside Stock Exchange, the FIIs seek Reserve Bank's approval.

We also hereby confirm that we have not received any application from M/s. First Global Stock Broking (P) Ltd., for the sale of HFCL shares to various FIIs/Sub-Accounts or from the concerned FIIs/Sub-Accounts for purchase of such shares."

11. In view of the above, I am unable to accept the contention that even if the allegations are assumed to be true, no offence against the petitioner is made out. As the investigations are still in progress, any detailed discussion on merits is not called for.

12. Learned Senior Counsel for petitioner lastly argued that grant of bail is the rule and refusal is the exception. Petitioner is a professional person having deep rots in the society and there is no likelihood of his absconding or tampering with evidence, therefore, he is entitled to be released on bail. Reliance was placed on the decision of the Supreme Court in Shri Gurbaksh Singh Sibbia and Ors. v. State of Punjab, . There could be no dispute about this proposition of law. Each case depends on its own facts. Here the investigations are still in progress. The judgment relied upon by learned Senior Counsel is not applicable to the facts of this case.

13. For the foregoing reasons, looking into the nature and seriousness of the allegations, in my considered view release of the petitioner on bail at this stage may frustrate the effort of investigating agency to collect evidence. Investigations into the white collar crimes are always complex and take more time particularly when these are also required to be carried out abroad. Hence, no case for grant of bail, at this stage, is made out and the application is dismissed. Any observation made therein shall not affect the merits of the case during the trial.