2015 (8) TMI 528 - AT - Companies Law

Restraining from Accessing securities Several complaints from investors regarding non receipt of Composite Application Forms for subscribing to rights issue of company and several other discrepancies were noticed by which access to security was stayed Held that - Since appellant No.1 had floated rights issue, it was primary responsibility of appellant No.1, to ensure that CAFs were dispatched in manner specified under regulation 54(1) of ICDR Regulations, 2009 Since appellant No.1 failed to discharge that responsibility, appellant cannot escape from liability Admittedly advertisement was issued and verified by appellant No.1 therefore appellant no. 1 was liable for error in advertisement Further 2 out of 4 cheques of appellant No.2 aggregating to ₹ 23.75 crore bounced despite knowing fully well that funds were insufficient SEBI was empowered under Section 11(4) of SEBI Act, 1992 to restrain persons found violating regulations framed by SEBI Appeal dismissed Decided against appellant.

Issues Involved:
1. Restraint from accessing the securities market.
2. Failure to dispatch Composite Application Forms (CAFs) as per regulations.
3. False and misleading advertisements.
4. Concealment of refund instructions.
5. Non-publication of material developments.
6. Lack of valid agreement with the Registrar to the Issue (RTI).
7. Failure to hand over records to RTI.
8. Responsibility of the promoter in regulatory compliance.
9. Violation of principles of natural justice.

Detailed Analysis:

1. Restraint from accessing the securities market:
The appellants were restrained by SEBI from accessing the securities market for two years due to violations of various regulations. This decision was upheld by the Tribunal, noting that SEBI has the authority under Section 11(4) of the SEBI Act to restrain violators from entering the securities market.

2. Failure to dispatch Composite Application Forms (CAFs) as per regulations:
Regulation 54(1) of the ICDR Regulations mandates that CAFs must be dispatched by registered post or speed post at least three days before the opening of the rights issue. In this case, it was admitted that CAFs were sent under certificate of posting, not by registered post or speed post, which was a violation. The Tribunal held that the primary responsibility for this violation lay with the appellant company, not the RTI.

3. False and misleading advertisements:
The appellant company approved an advertisement stating that CAFs were dispatched by registered post/speed post, which was false. The Tribunal found that this false statement was intended to benefit the promoter (appellant No.2) by allowing him to subscribe to unsubscribed shares. The Tribunal upheld SEBI's decision to penalize the appellant company for this false advertisement.

4. Concealment of refund instructions:
The appellant company made a voluntary corporate announcement about refunding subscription amounts without disclosing that it was done on SEBI's instructions. The Tribunal noted that a more accurate statement should have been made, but this was considered a minor issue compared to the other violations.

5. Non-publication of material developments:
The appellant company did not publish advertisements in newspapers about material developments in the rights issue. The Tribunal held that the aborted rights issue was a material development that should have been disclosed to investors.

6. Lack of valid agreement with the Registrar to the Issue (RTI):
The appellant company entered into an MoU with Knack (RTI) instead of a formal agreement as required by Regulation 5(5) of the ICDR Regulations. The Tribunal found this to be a violation, although it was considered a minor issue.

7. Failure to hand over records to RTI:
The Tribunal noted that the appellant company did not provide proof of handing over signature records to Knack, as required by regulation and SEBI circular. This failure was considered a violation, but again, it was a minor issue compared to the other charges.

8. Responsibility of the promoter in regulatory compliance:
Appellant No.2, the promoter, was found to have played a major role in the rights issue and benefited from the false advertisement and non-dispatch of CAFs. The Tribunal upheld SEBI's decision to restrain the promoter from accessing the securities market, noting his close connection with Knack and his attempt to consolidate his shareholding through dubious methods.

9. Violation of principles of natural justice:
The appellants argued that they were not given an opportunity to cross-examine Vivro, Knack, and postal authorities. The Tribunal found no merit in this argument, noting that there was no written request for cross-examination, and the admission of non-dispatch of CAFs and false advertisement made cross-examination irrelevant.

Conclusion:
The Tribunal dismissed the appeal, upholding SEBI's decision to restrain the appellants from accessing the securities market for two years. The Tribunal found that the appellants violated multiple regulations, and SEBI's actions were within its authority under the SEBI Act.

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