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2021 (7) TMI 1433 - AT - SEBIGDR issue to sole subscriber - misleading information was given to the shareholders and the investors that the GDRs were subscribed by many entities - loan obtained by Vintage through a pledge agreement given by the Company was a fraudulent act which was not disclosed to the stock exchange - HELD THAT - We find that the controversy involved in the present appeal is squarely covered by a recent decision of this Tribunal in Prafull Anubhai Shah 2021 (6) TMI 1159 - SECURITIES APPELLATE TRIBUNAL, MUMBAI held that merely because the appellant was present when the resolution dated July 27, 2006 was passed, no conclusion can be drawn that this was the starting point of the fraudulent arrangement for issuance of GDR and for opening a bank account. The resolution does not given any indication that the appellant had knowledge beforehand that the GDR issue was the purpose to manipulate the price or the market or that a fraud would be played upon the shareholders and the investors. We are further of the opinion that finding of the WTM that the resolution of the Board of Directors provides execution of a pledge or execution of a charge agreement is wholly erroneous, perverse and based on no evidence. The resolution also does not stipulate that the proceeds could be utilized by the bank as security in connection with a loan taken by another entity. In the light of the aforesaid, we are of the view that the appellant cannot be debarred only on the basis of being present in the resolution of the Board of Directors. The impugned order of the AO as well as the WTM in so far as it relates to the appellants cannot be sustained and is quashed. The appeals are allowed.
Issues Involved:
1. Legitimacy of the resolution for issuance of Global Depository Receipts (GDRs). 2. Alleged fraudulent activities and nondisclosure related to the GDR issuance. 3. Role and liability of Independent Non-Executive Directors in the fraudulent scheme. 4. Validity of penalties and prohibitions imposed by the Adjudicating Officer (AO) and Whole Time Member (WTM). Detailed Analysis: Legitimacy of the Resolution for Issuance of GDRs The case revolves around the resolution passed by the Board of Directors of a company on 29th October 2009, which authorized the issuance of GDRs and the opening of an account with the European American Investment Bank AG (Euram Bank). The resolution also allowed the use of GDR proceeds as security for a loan. Based on this resolution, two GDR issues were made on 27th January 2010 and 9th July 2010, amounting to 20.01 million USD and 53.53 million USD, respectively. Alleged Fraudulent Activities and Nondisclosure Related to the GDR Issuance Investigations revealed that the GDRs were issued without proper consideration and adequate disclosure under the listing agreement. It was found that Vintage FZE was the sole subscriber to the GDRs, with the subscription amount paid by Euram Bank under a loan agreement. A pledge agreement was also executed between the company and Euram Bank to provide securities for the loan obtained by Vintage. These agreements were not disclosed to the stock exchange, leading to allegations of fraud under Section 12A of the Securities and Exchange Board of India Act, 1992, and Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. Role and Liability of Independent Non-Executive Directors in the Fraudulent Scheme The appellants, who were Independent Non-Executive Directors, contended that they were not involved in the day-to-day affairs of the company and had no role in the decision-making process related to the GDR issue. They argued that their involvement was limited to attending the board meeting where the resolution was passed. The WTM and AO, however, concluded that the appellants were part of a fraudulent scheme, as they were present during the resolution's passing and failed to act diligently. Validity of Penalties and Prohibitions Imposed by the AO and WTM The AO imposed a penalty of Rs. 20 lakhs on the appellants, while the WTM debarred them from accessing the securities market for one year and froze their securities, including mutual funds. The appellants challenged these orders, arguing that they had no specific role in the fraudulent activities. Tribunal's Findings: The Tribunal referenced several previous decisions, including Prafull Anubhai Shah vs. SEBI, Adi Cooper vs. SEBI, Adesh Jain vs. SEBI, and Chromatic India Limited vs. SEBI. These cases established that merely being a signatory to a resolution authorizing the opening of a bank account for GDR proceeds does not imply involvement in fraudulent activities. The Tribunal found no evidence that the appellants had any role in the issuance of the GDRs or were aware of the fraudulent scheme. The Tribunal concluded that the presence of the appellants at the board meeting where the resolution was passed does not make them liable for the fraud committed by the company. The findings of the WTM and AO that the appellants were part of a fraudulent scheme were deemed erroneous and not supported by evidence. Conclusion: The impugned orders of the AO and WTM were quashed concerning the appellants. The appeals were allowed, and no costs were imposed. The Tribunal emphasized that the mere presence of the appellants in the board meeting does not constitute participation in the fraudulent scheme, thereby invalidating the penalties and prohibitions imposed on them.
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