2021 (9) TMI 1518 - AT - SEBI

Fraudulent and Unfair Trade Practices relating to Securities Market - issuance of the GDRs - inadequate disclosures to the investors - Investigation revealed that the Company made selective disclosure to Bombay Stock Exchange (BSE) and suppressed material information, namely, that Euram Bank was authorized to use the proceeds in connection with a loan and that the execution of the loan agreement and the pledge agreement was not disclosed - Penalty imposed - HELD THAT - The company is now under liquidation. The loan taken by Vintage has been repaid to the company. US 8.3 million was transferred to the account of the company and US 6 million was transferred to its subsidiary in UAE as per the GDRs offering. Thus, a genuine GDRs issue was made by the company which was not fraudulent nor the proceeds of the GDRs has been diverted to a third entity. In fact, there is no specific allegation about the non-utilization of the GDRs in the show cause notice. Thus, there cannot be any violation of any fraud or inducement under Regulations 3 and 4 of the PFUTP Regulations. AO while considering the factors under Section 15J of the SEBI Act found that there is nothing on record to show or indicate any disproportionality given or unfair advantages made by the appellants nor anything has come on record to show any loss suffered by the investors. In view of this specific finding coupled with the fact that no fraudulent scheme was initiated by the company, we are of the opinion that the findings given by the WTM and the AO against the appellants Pradip Mundhra and Sanjay Taparia relating to the penalty is excessive and arbitrary and is required to be modified. Appeals of Jaiprakash Kabra, Gopaldas Maheshwari and Rajesh Jhunjhunwala being covered by the decision of this Tribunal in Praful Shah 2021 (6) TMI 1159 - SECURITIES APPELLATE TRIBUNAL, MUMBAI the impugned orders of the AO in so far as it relates to these appellants are quashed. Their appeals are allowed with no order as to costs. In so far as the appeals of Pradip Mundhra and Sanjay Taparia are concerned, they being on the helm of the affairs of the the company on a day to day basis, they are responsible for nondisclosure of vital information. However, the penalty imposed by the AO and the WTM are disproportionate and excessive, therefore, while affirming the findings of violation in so far as it relates to nondisclosure, the penalty of Rs. 50 lac imposed by the AO is reduced to Rs. 20 lac each and debarment of five years made by the WTM is reduced to two years and six months. The appeals of Pradip Mundhra and Sanjay Taparia are partly allowed.

Summary

Issues:
Challenges to orders by Whole Time Member and Adjudicating Officer of SEBI, non-disclosure in GDR issuance, penalties and debarment imposed, role of directors in fraudulent scheme, applicability of past tribunal decisions, excessive penalties, liquidation of company.

Analysis:
The judgment involved challenges to orders by the Whole Time Member (WTM) and the Adjudicating Officer (AO) of SEBI regarding non-disclosure in the issuance of Global Depository Receipts (GDRs). The appellants were imposed penalties and debarment for their roles in the fraudulent scheme. The company issued GDRs without disclosing crucial information, leading to selective disclosure to the Bombay Stock Exchange (BSE) and suppression of material facts. Both the WTM and the AO found the scheme violative of SEBI Act and PFUTP Regulations, resulting in penalties and debarment.

The appellants, non-executive independent directors, challenged the charges, arguing they were not involved in day-to-day affairs and had no specific role in GDR issuance. The respondent contended that the directors' responsibility stemmed from their signatory roles in the board resolution. Past tribunal decisions were cited, but the tribunal found reliance on those decisions misplaced. The tribunal emphasized that mere presence at the board resolution did not imply involvement in fraudulent activities.

Regarding the appeals of two other appellants, the tribunal found that the managing director and chief executive officer were responsible for non-disclosures and violations of the listing agreement. However, it noted that the company was now under liquidation, the GDR proceeds were utilized appropriately, and no specific fraud or inducement was alleged. The tribunal found the penalties imposed excessive and arbitrary, reducing them for these appellants.

Ultimately, the tribunal quashed the orders against some appellants based on past tribunal decisions, while partially allowing the appeals of others by reducing penalties and debarment periods. The judgment highlighted the importance of fairness, transparency, and proportionality in penalties, considering the circumstances of the case and the responsibilities of the individuals involved.