2017 (10) TMI 1512 - Board - SEBI

Violations committed in relation to the GDR issue - WTM of SEBI has directed Cals Refineries Limited ( Cals ) not to issue equity shares or any other instruments convertible into equity shares or any other security for a period of 10 years - also prohibited other appellants who at the relevant time were the Directors of Cals, from accessing the capital market, directly or indirectly, and dealing in securities or instruments with Indian securities as underlying, in any manner whatsoever, for a period of 10 years - Argument of Cals that it is a victim of fraud and not a vehicle of fraud - HELD THAT - As rightly contended by Counsel for SEBI, Apex Court s decision in case of Iridium India Telecom Ltd. vs. Motorola Inc. Ors. reported in ( 2010 (10) TMI 85 - SUPREME COURT) , which is binding on this Tribunal, clearly postulates that criminal liability of a corporation would arise when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs. In such a case, what is to be ascertained is, whether the degree and control of the person or body of persons was so intense that a corporation could be said to think and act through the person or the body of persons controlling its affairs. In the present case, the liability imposed on Cals is a civil liability and not a criminal liability. Sometime in May/June, 2007, Sanjay Malhotra, one of the promoters of Spice Energy group approached Goorha (promoter director of Cals) with a proposal to take over Cals for implementing the refinery project of SRM which was a Spice Energy group company. As Cals had virtually become a defunct company, the BoD of Cals in its meeting held on 23/7/2007 approved the proposal and accordingly 4 nominees of the Spice Energy group viz. Kansagra, Chilikuri, Roy and Sundararajan were appointed as additional directors of Cals. It was inter alia resolved in the said meeting that for implementing the refinery project, Cals would raise funds through issuance of GDR/FCCB. Accordingly, Cals had issued GDRs amounting to USD 200 million. According to SEBI, by opening an account with Banco and executing the Account Charge Agreement, Cals has financed subscription of its own GDRs which is prohibited under the Securities laws - Fact that the minutes as per the minute book of Cals does not contain any resolution to open a bank account with Banco cannot be a ground to infer that Cals had not intended to open an account with Banco because, firstly, on the basis of the Board resolution dated 30/10/2007 certified by Sundararajan, director of Cals, an account was in fact opened in the name of Cals with Banco for depositing the GDR subscription amount. Secondly, on issuance of GDRs, the GDR subscription amount was in fact deposited in the said account of Cals with Banco. Thirdly, apart from the Board resolution dated 30/10/2007 certified by Sundararajan, there is no other resolution passed by Cals to open an account for depositing the GDR subscription amount. Fourthly, the GDR subscription amount deposited in the said bank account with Banco has been withdrawn by Cals in installments from time to time which is in consonance with the Account Charge Agreement executed by Cals. Without opening a bank account, Cals could not have opened the GDR issue. Very fact that Cals operated the account opened with Banco on the basis of resolution dated 30/10/2007 certified by Sundararajan clearly falsifies the case put up by Cals that it had not authorized any one to open an account with Banco for depositing the GDR subscription amount. Argument that Cals had never authorized any person to sign any Account Charge Agreement is also without any merit, because, the Account Charge Agreement was signed by Goorha promoter-director of Cals. The Account Charge Agreement provides that all communications in relation thereto should be addressed either to Goorha or Sundararajan as they were the two authorized signatories to operate the Bank account of Cals with Banco. It is relevant to note that Goorha was the founder, promoter, director of Cals, whereas, Sundararajan was the director of Cals nominated by the Spice Energy group which had taken over Cals with a view to implement its refinery project through Cals by raising funds through issuance of GDRs. Admittedly, Sundararajan was in-charge of the entire GDR process. Thus, the bank account with Banco for depositing the GDR subscription amount was opened by Sundararajan, director representing the Spice Energy group and the Account Charge Agreement was signed by Goorha, director representing the promoter group of Cals. In these circumstances, the conclusion drawn by SEBI that opening a bank account with Banco and executing the Account Charge Agreement were the acts done by Cals through its directors to finance Honor for subscribing the GDRs issued by Cals in gross violation of Section 77(2) of the Companies Act, 1956 and the provisions contained in the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ( PFUTP Regulations for convenience), cannot be faulted. In the facts of present case, involvement of Cals controlled by the Spiece Energy group is so intense that it can be easily seen that the fraudulent acts and deeds were executed by Cals through its directors. In these circumstances, argument that Cals was not aware of the actions of its directors cannot be accepted. Consequently, the finding recorded in the impugned order that Cals and its directors had financed for the subscription of its own GDRs in gross violation of Section 77(2) of the Companies Act, 1956 and the provisions contained in the SEBI Act and the PFUTP Regulations cannot be faulted. It is interesting to note that Cals (controlled by the Spice Energy group) not only financed Honor (owned by Malhotra, promoter of the Spice energy group) for subscribing to the GDRs of Cals, but also resolved in its BoD meeting held on 19/1/2008 to appoint Malhotra as an advisor to Cals for setting up the refinery in Haldia on a monthly consultancy charge of ₹ 15 lac. Thus, it is evident that Malhotra was not a stranger to Cals and all acts done by Cals in relation to the GDRs were at the instance of Malhotra, promoter of the Spice Energy group. As the promoter directors of Cals have also participated in the fraud committed in relation to the GDRs, Cals cannot escape liability for the misdeeds committed by its entire BoD. Neither in the Memo of Appeal nor during the course of arguments, Cals has disputed the finding of fact recorded in the impugned order that USD 200 million was received by Cals from Honor and not from the alleged 10 foreign investors. In these circumstances, decision of SEBI that by furnishing false information to the Stock Exchange that the GDRs have been fully subscribed by 10 foreign investors, Cals has misled the investors in India cannot be faulted. For all the aforesaid reasons, the findings recorded and the directions issued against Cals in the impugned order dated 23/10/2013 cannot be faulted. Liability of directors - Argument of Goorha that he signed the Account Charge Agreement without knowing the contents of that agreement is ex facie untenable because, the very name of the document Account Charge Agreement itself suggests that the amounts in the account of Cals would stand charged as per the terms set out in the Account Charge Agreement. At the relevant time, there was only one account of Cals with Banco for depositing the GDR subscription amount and there was no proposal on part of Cals to take any loan from Banco. Thus, the title of the document Account Charge Agreement itself indicates the object with which it is being executed and to ascertain the object it was not necessary to read the entire document. Explanation given by Sundararajan relating to the discrepancy in the resolution dated 30/10/2007 recorded in the minute book of Cals and the resolution dated 30/10/2007 certified by him is not worthy of acceptance because, assuming that there was lapse on part of the Company Secretary of Cals to record the said resolution in the minute book of Cals on 30/10/2007, then, Sundararajan would have got the error corrected in the subsequent Board meeting. However, in the meeting of BoD of Cals held on 19/1/2008, the minutes of BoD meeting dated 30/10/2007 as recorded in the minute book of Cals was approved. Very fact, that Sundararajan who was present in the BoD meeting dated 19/1/2008 did not take any steps to get the alleged error in the minutes of meeting dated 30/10/2007 rectified, clearly shows the mala fide intention on part of Sundararajan. Sundararajan has also admitted that he had sent an e-mail to Goorha on 13/11/2007 expressing his inability to go to London for executing the documents on behalf of Cals and requested Goorha to sign necessary documents on behalf of Cals. Accordingly, Goorha had signed the Account Charge Agreement on 12/11/2007 (as per the date in London). Apart from signing the Account Charge Agreement, no other agreement was signed on behalf of Cals on 12/11/2007. These facts clearly demonstrate that Sundararajan was clearly aware that the document to be executed on behalf of Cals at London on 12/12/2007 was the Account Charge Agreement. Therefore, argument of Sundararajan that he did not know anything about the Account Charge Agreement is a blatant lie. Inference drawn in the impugned order that Sundararajan was aware of the fact that Deep Rastogi had significant influence over Cals as contemplated under AS-18 and failure to disclose the related party transaction between Cals and Asia Texx was in violation of the Securities laws, cannot be faulted.

Summary

Issues Involved:
1. Validity of the orders passed by SEBI against Cals Refineries Limited and its directors.
2. Allegations of fraudulent arrangements in the subscription of Global Depository Receipts (GDRs).
3. Misleading investors and non-disclosure of related party transactions.
4. Individual defenses of appellants claiming to be victims rather than perpetrators of fraud.

Issue-Wise Detailed Analysis:

1. Validity of SEBI Orders:
The appellants challenged the orders dated 23rd October 2013 and 31st December 2014, issued by the Whole Time Member (WTM) of SEBI. These orders prohibited Cals Refineries Limited from issuing equity shares or any other instruments convertible into equity shares for 10 years and restricted the directors from accessing the capital market for the same period. The court upheld these orders, finding them justified based on the fraudulent activities and regulatory violations committed by Cals and its directors.

2. Fraudulent Arrangements in GDR Subscription:
The court examined the fraudulent scheme executed by Cals and its directors involving the subscription of GDRs. It was found that Cals, aided by its directors, employed a fraudulent arrangement by opening a bank account with Banco Efisa S.A. Lisbon and executing an Account Charge Agreement. This agreement secured the GDR subscription amount of USD 200 million as collateral for a loan taken by Honor Finance Ltd., a company controlled by one of the promoters of Spice Energy Group, to subscribe to the GDRs. This act was in violation of Section 77(2) of the Companies Act, 1956, and SEBI regulations.

3. Misleading Investors and Non-Disclosure of Related Party Transactions:
Cals was found to have misled investors by making false announcements regarding the successful subscription of GDRs and failing to disclose related party transactions. The court noted that the GDR subscription amount was received from Honor Finance Ltd. and not from the alleged 10 foreign investors. Furthermore, Cals entered into a transaction with Asia Texx Enterprises Ltd., controlled by a relative of one of the directors, without disclosing it as a related party transaction, violating Clause 32 of the Listing Agreement.

4. Individual Defenses of Appellants:
- Cals Refineries Limited: The argument that Cals was a victim of fraud rather than a perpetrator was rejected. The court held that the fraudulent acts were executed by Cals through its directors, and the company was aware of and complicit in the fraudulent scheme.

- Sarvesh Kumar Goorha: Goorha's defense that he was merely a figurehead and signed the Account Charge Agreement without knowledge of its contents was dismissed. The court found that Goorha, as a promoter-director, was privy to the fraudulent activities and had signed the agreement knowingly.

- D. Sundararajan: Sundararajan's claim of ignorance regarding the Account Charge Agreement and related party transactions was rejected. The court noted that Sundararajan was in charge of the GDR issue and had a significant role in executing the fraudulent scheme.

- Deep Kumar Rastogi: Rastogi's defense that he became a director after the GDR issue and was unaware of the fraudulent activities was dismissed. The court found evidence of his involvement in the affairs of Cals even before becoming a director and his failure to disclose the related party transaction with Asia Texx.

Conclusion:
The court dismissed all four appeals, upholding the SEBI orders and finding the appellants guilty of committing and being complicit in fraudulent activities related to the GDR issue, misleading investors, and failing to disclose related party transactions. The court emphasized the intense involvement of Cals and its directors in the fraudulent scheme and the substantial evidence supporting SEBI's findings.