2015 (4) TMI 65 - Board - Companies Law

Violation of provisions of SEBI DIP (Disclosure and Investor Protection) Guidelines, 2000 - Corresponding provisions of SEBI ICDR (Issuance of Capital and Disclosure Requirements) Regulations, 2009 - Violation of provisions of SEBI PFUTP (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 - Failed to include all material information in RHP/Prospectus - Suppression of several material informations and facts in RHP/Prospectus to mislead and defraud the investors - Non -disclosure of outstanding litigation against subsidiaries - Non- Disclosure of financial details relating to subsidiaries Held that - In this case, I have already found that the process of share transfer of three subsidiaries of DLF in Sudipti, Shalika and Felicite was through sham transactions as alleged in the SCN and that the Noticees employed a plan, scheme, design and device to camouflage the association of DLF with its three subsidiaries namely, Felicite, Shalika and Sudipti. In this case under such plan, scheme, design and device, the Noticees suppressed several material information in the RHP/Prospectus of DLF and actively concealed the fact about filing of FIR against Sudipti and others. In the facts and circumstances of this case, I find that the case of active and deliberate suppression of any material information so as to mislead and defraud the investors in the securities market in connection with the issue of shares of DLF in its IPO is clearly made out in this case. I am satisfied that the violations as found in this case are grave and have larger implications on the safety and integrity of the securities market. In my view, for the serious contraventions as found in the instant case, effective deterrent actions to safeguard the market integrity. It, therefore, becomes incumbent to deal with contraventions, digression and demeanour of the erring Noticees sternly and take appropriate actions for effective deterrence. In this regard, the observation of the Honble Supreme Court, as a word of caution, in the matter of N. Narayanan 2013 (4) TMI 652 - SUPREME COURT is worth mentioning. I note that clause 6.10.2.3 of DIP Guidelines requires an issuer to disclose financial details relating to its subsidiaries. As already found hereinabove, Sudipti, Shalika and Felicite continued to be subsidiaries of DLF consequent to the sale of shareholding by the wholly owned subsidiaries of DLF in them and on the relevant dates there was holding -subsidiary relationship between DLF and those three companies. I, therefore, find that the DLF failed to make disclosures in its RHP/Prospectus in terms of clauses 6.10.2.3 of the DIP Guidelines as alleged in the SCN. In terms of clause 6.2 of the DIP Guidelines, the Prospectus should contain 'all material information' which shall be true and adequate so as to enable the investors to make informed decision on the investments in the issue. The test of materiality of the information as envisaged in clause 6.2 of the DIP Guidelines is that the information should be true and adequate so as to enable the investors to make informed decision on the investments in the issue. In my view, this test depends upon facts and circumstances of each case. In this case, all the information which were not disclosed as found hereinabove, were material information. I, therefore, find that by not disclosing material information in the Prospectus and actively concealing them from the prospective investors, DLF misled them and violated clause 6.2 also Considering the above, I, in order to protect the interest of investors and the integrity of the securities market, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11, 11A and 11B thereof and regulation 11 of the PFUTP Regulations, clause 17.1 of DIP Guidelines and regulation 111 of the ICDR Regulations hereby restrain the following entities from accessing the securities market and prohibit them from buying, selling or otherwise dealing in securities, directly or indirectly, in any manner, whatsoever, for the period of three years.

Summary

Issues Involved:
1. Whether the share transfer process in Sudipti, Shalika, and Felicite was a sham transaction by DLF and if they continued to be subsidiaries of DLF.
2. Whether the Noticees failed to ensure that the RHP/Prospectus contained true and adequate material information for investors.
3. Whether the Noticees actively and knowingly suppressed material information and facts in the RHP/Prospectus to mislead and defraud investors.

Issue-wise Detailed Analysis:

1. Sham Transactions and Subsidiary Status:
The judgment scrutinized the share transfer process of Sudipti, Shalika, and Felicite and found that DLF did not lose control over these entities even after the purported transfer of shares. The directors of these companies remained employees of DLF, indicating DLF's continued influence. The registered office, statutory auditors, and authorized signatories of these companies did not change post-transfer, further suggesting DLF's control. The financial transactions indicated that the purchase of shares by Shalika was funded by DLF's subsidiaries, and the purchases of Felicite's shares by the wives of DLF's KMPs were funded by their husbands, who were DLF employees. These facts led to the conclusion that the transfer of shares was a sham transaction, and Sudipti, Shalika, and Felicite continued to be subsidiaries of DLF.

2. Failure to Disclose True and Adequate Information:
The Noticees were found to have violated several clauses of the DIP Guidelines by failing to disclose related party transactions, financial details of subsidiaries, and outstanding litigations. The judgment emphasized that Sudipti, Shalika, and Felicite were related parties and subsidiaries of DLF, necessitating disclosure of their financial transactions and litigations. The FIR against Sudipti and Mr. Praveen Kumar was material information that should have been disclosed in the RHP/Prospectus. The judgment found that the Noticees failed to ensure that the RHP/Prospectus contained true and adequate material information, violating clauses 6.2, 6.9.6.6, 6.10.2.3, 6.11.1.2, 6.15.2, and 9.1 of the DIP Guidelines.

3. Suppression of Material Information and Fraud:
The judgment concluded that the Noticees actively and knowingly suppressed material information and facts in the RHP/Prospectus, misleading and defrauding investors. The suppression of the FIR against Sudipti and Mr. Praveen Kumar, and the non-disclosure of related party transactions and financial details of subsidiaries were deliberate acts to mislead investors. This constituted a violation of section 12 A(a), (b), and (c) of the SEBI Act and regulations 3(a), (b), (c), (d), 4(1), 4(2)(f), and (k) of the PFUTP Regulations.

Conclusion:
The judgment restrained DLF Limited and its key personnel from accessing the securities market and prohibited them from buying, selling, or dealing in securities for three years. The order emphasized the importance of protecting investor interests and maintaining market integrity, highlighting the grave nature of the violations and the need for effective deterrent actions.