2022 (3) TMI 1539 - AT - SEBI

Offence under SEBI Act - fraudulent scheme of issuing GDR with an ulterior motive - whether the appellants had played part in the fraudulent scheme of issuing GDR with an ulterior motive? - HELD THAT - Appeals of Farmax India Limited and Mr. M. Srinivasa Reddy, M.D. - Very stand of the appellant Mr. Srinivasa Reddy that he was credulous enough to sign blank documents; further he-the Managing Director of Farmax being instrumental in obtaining a Board Resolution as detailed (supra), the defense taken by him and Farmax is merely an eyewash. Millions of US were involved in the transaction. Their silence for a period of three years would clearly show the involvement of these appellants in the entire episode. The appeals filed by these appellants therefore fail. Appellant Farmax on its own has not indulged into fraudulent activity but the activities is imputed to it as the Board of Directors and the Managing Director had indulged into the same. Since the penalty would be in fact on the shareholders of the company in our view, imposition of penalty of Rs. 12 crore would be excessive. In the circumstances, the Appeal challenging the order of the AO needs to be partly allowed and the penalty needs to be reduced from Rs. 12 crore to Rs. 5 crore. Sanjay Aggarwal And Nithish Bangera - The very fact that the appellant provided a draft of disclosure to be made by the Farmax to the exchanges that the issue of the GDR was successfully subscribed; that he has forwarded the draft Resolution to be passed by the appellant Farmax which culminated in authorizing the pledge of GDR proceeds; seeking of signatures on blank documents from appellant Farmax would clearly shows that the appellant did not act simply as a bonafide coordinator between the company and the Lead Manager etc. The appeal of the appellant Sanjay Aggarwal, therefore fails. Nithish Bangera, he was sole employee of La Richesse owned by appellant Sanjay Aggarwal.The appellant was merely an employee of appellant Sanjay Aggarwal and the observation made by the learned WTM as regard the appellant Sanjay Aggarwal that he was an advisor and responsible chartered accountant would not be applicable in this case. One email forwarded to him seeking blank TT slips from the Farmax would not lead to believe that this appellant was aware of the entire fraudulent scheme of GDR issue. The evidence in this regard is lacking. The appeal therefore deserves to be allowed as regard the present appellant. Prospect Capital Ltd. and John Behar Lead Manager is not merely a post office between the company issuing GDR and the investors investing in the same. The Lead Manager has to conduct due diligence in collecting and evaluating all information. It has to obtain confirmation of acceptance of subscription from the initial investors to the GDR issue etc. The Lead Manager has to show that it has carried its activity as per the procedures devied. On the other hand, even if we ignore the alleged fact of issuing a false letter as alleged by SEBI, the very fact that the appellants failed to show that they had confined their activity only to the procedure correctly, would lead us to believe that they were involved in the clandestine scheme. As fact that appellant no. 2 John Behar is closely connected to another noticee Arun Panchariya is an added factor in this direction -as submitted by SEBI that ESCROW agreement dated May 05, 2010 entered into between Farmax, EURAM Bank and Prospect Capital Ltd. noted that Prospect Capital Ltd. had agreed with Farmax to procure investors for the subscription of GDRs . However instead of procuring investors these appellants procured sole investor i.e Vintage which is an entity of Arun Panchariya connected both the appellants. Therefore our view, on facts, the order of SEBI as regards these appellants cannot be faulted with.The appeal of Prospect Capital Ltd. as well as John Behar fails. European American Investment Bank AG - The entire reading of the order of the learned WTM in that case would show that the EURAM-FII s role as a foreign investment institute was investigated and examined by respondent SEBI. Its role as a banker providing finances to subscribers to the GDR and accepting collateral of the GDR proceeds from the respective companies was not examined. The principle of issue estoppel therefore would not at all be applicable in the present case. As regard the fact of the case, it is an admitted fact the appellant had advanced loan to Vintage for subscribing to the GDR of the Farmax as a sole subscriber. The Vintage is owned by noticee Arun Panchariya. Present appellant had joint venture with Arun Panchariya as detailed supra. The appellant did not explain as to why no collateral security could be obtained from Vintage or Arun Panchariya. However, the GDR proceeds to be received in future were accepted as a pledge by EURAM Bank. As it was nothing but a case of making two entries in two accounts i.e. one in the account of Vintage of granting loan and another in the account of Farmax of receiving the GDR proceeds and holding the same as a security for the loan advance to Vintage. In the process, appellant EURAM had earned interest and the loan remained fully secured by the GDR proceeds. It would be naive to believe that EURAM Bank did not know the purpose for which the GDRs are issued and whether the pledging of the GDR proceeds for a stranger could be an object or purpose of issuing GDR. Appellant relying on the case of Dilip S. Pendse vs SEBI Appeal No. 80 of 2009 decided on November 19, 2009 submitted that the preponderance of probability to prove the charge of fraud is higher than the regular one. Considering the status of the appellant as an International Bank; that it was registered as a foreign investment institute in India, having connection with the noticee Arun Panchariya, in our view the above test is satisfied in the present case. Present appeal also fails.

Summary

Issues Involved:
1. Issuance and conversion of Global Depository Receipts (GDRs) by Farmax India Ltd.
2. Alleged fraudulent scheme involving various parties.
3. Penalties imposed by SEBI.
4. Role and actions of individual appellants and entities.
5. Jurisdiction of SEBI over foreign entities.

Detailed Analysis:

1. Issuance and Conversion of GDRs by Farmax India Ltd.:
The appeals concern the issuance of GDRs by Farmax India Ltd. in two tranches on June 29, 2010, and August 14, 2010, amounting to US$ 71.91 million. SEBI alleged that the issuance and subsequent conversion of these GDRs into equity shares in the Indian market constituted a fraudulent scheme involving Farmax and other co-noticees.

2. Alleged Fraudulent Scheme:
SEBI contended that the GDR issuance was part of a fraudulent scheme orchestrated by Farmax, Arun Panchariya, Vintage FZE, and other entities. Vintage, wholly owned by Arun Panchariya, was the sole subscriber to the GDRs, having availed a loan from EURAM Bank. Farmax had pledged the GDR proceeds to secure this loan, indicating that the GDR proceeds were not at Farmax's disposal but were used as collateral for Vintage's loan.

3. Penalties Imposed by SEBI:
The Whole Time Member (WTM) of SEBI directed Farmax to bring back the outstanding amount of US$ 72.20 million and restrained it from accessing the securities market for five years. Managing Director Mr. Srinivasa Reddy was similarly restrained. Sanjay Aggarwal and Nithish Bangera faced two-year prohibitions. Prospect Capital Ltd. and John Behar were barred from rendering services in connection with securities for two years. EURAM Bank was warned to ensure future compliance with Indian securities laws.

4. Role and Actions of Individual Appellants and Entities:

Farmax India Limited and Mr. M. Srinivasa Reddy:
Mr. Srinivasa Reddy claimed he signed blank documents handed over to Sanjay Aggarwal and Mukesh Chauradiya. The WTM noted contradictory stands and concluded that Farmax and Mr. Reddy were aware of the transactions, as evidenced by a Board Resolution authorizing the use of funds as security. The appeals by Farmax and Mr. Reddy were dismissed, but the penalty on Farmax was reduced from Rs. 12 crore to Rs. 5 crore.

Sanjay Aggarwal and Nithish Bangera:
Sanjay Aggarwal and Nithish Bangera were found to have facilitated the fraudulent GDR issue. Aggarwal provided drafts for Board Resolutions and sought blank transfer slips, indicating his involvement. Bangera, despite claiming to have resigned, was found to have continued involvement. Aggarwal's appeal was dismissed, while Bangera's appeal was allowed, and the order against him was set aside.

Prospect Capital Ltd. and John Behar:
Prospect Capital Ltd., as the Lead Manager, and John Behar were found to have provided incorrect investor lists and failed to procure genuine investors. Their connection with Arun Panchariya and failure to adhere to due diligence were noted. Their appeals were dismissed.

European American Investment Bank AG (EURAM Bank):
EURAM Bank was found to have accepted GDR proceeds as collateral for a loan to Vintage, indicating its involvement in the fraudulent scheme. Despite previous exoneration in another case, the principle of issue estoppel was not applicable. The appeal by EURAM Bank was dismissed.

5. Jurisdiction of SEBI Over Foreign Entities:
The Supreme Court of India in SEBI vs. Pan Asia Advisors Ltd. established that SEBI has jurisdiction over foreign entities if their actions affect the Indian securities market. This precedent confirmed SEBI's authority to proceed against the appellants in this case.

Conclusion:
The appeals by Farmax India Ltd., Mr. M. Srinivasa Reddy, Sanjay Aggarwal, Prospect Capital Ltd., John Behar, and EURAM Bank were dismissed, affirming SEBI's findings and penalties, except for the reduction in the penalty imposed on Farmax. The appeal by Nithish Bangera was allowed, setting aside the order against him.