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2023 (2) TMI 1243 - AT - SEBIFraudulent scheme for issuance of GDRs by the Company - SEBI found that Vintage was the sole subscriber to the GDR and that the Company did not disclose this fact with clarity that only one entity had subscribed to the entire GDR and, therefore, misled the investors and loan agreement and the pledge agreements were not disclosed to the stock exchange or to the shareholders of the Company - WTM restrained the Company, Chairman and its Managing Director from accessing the securities market for a period of three years and one year respectively and imposed a sum of Rs.10 crore upon the Company and Rs.10 lakh each upon the Chairman and Managing Director - whether directions imposed by the WTM and the penalty imposed by the AO was harsh and excessive? HELD THAT - Where the punitive measure is harsh or disproportionate to the offence which shocks the conscience it is within the discretion of the Court to exercise the doctrine of proportionality and reduce the quantum of punishment to ensure that some rationality is brought to make unequals equal. In our opinion, the penalty imposed is excessive and disproportionate to the violation and is also discriminatory. Excessive penalty imposed upon the Company does not make any sense. In the instant case, there are public shareholders and workers. The Company is a running concern. Penalising the Company with such heavy penalty is in fact penalising the shareholders which is not justifiable especially for a running company. Further, the money raised through GDRs has been received by the Company and has not been misappropriated. The same has been utilitised for the purpose for which the GDR was issued which fact has not been disputed. Thus, it is not a case of defalcation of the funds. While affirming the order of the AO for the violations committed by the Company we reduce the penalty against the Company to Rs. 25 lakh. The penalty against the Chairman and Managing Director is affirmed. For the same reason, debarring the Chairman and Managing Director for 1 year is neither excessive nor arbitrary. We accordingly confirm the directions issued by the WTM. Further, in the circumstances of the case, the debarment of the Company for a period of 3 years is reduced to the penalty undergone. Appeal of Euram Bank is concerned, the WTM has issued a warning to the said appellant to ensure that all its future dealings in the Indian securities market is done strictly in accordance with law - Appellant Euram Bank was registered as a Foreign Institutional Investor (FII) with SEBI in the year 2008 and that an entity known as India Focus Cardinal Fund (IFCF) was registered with SEBI as a sub account of the appellant. The role played by Euram Bank while granting a fraudulent structured loan to Vintage was dubious. The pledge agreement executed by Euram Bank with the Company pledging the GDR shares prior to its actual issuance for the purpose of securing the loan given to Vintage was totally dubious. WTM also found that IFCF undertook the role of off-loading the converted shares of GDR in the Indian market which was done with the active role of the appellant bank and the fraudulent scheme of the sub account IFCF could not have been completed and the shares of Zenith could not have been sold in the Indian market but for the active participation of the appellant bank. On these findings the WTM held that there was sufficient reasons to hold the acts of the appellant bank amounted to transgression of Section 12A of the SEBI Act read with Regulation 3 and 4 of the PFUTP Regulations. In spite of coming to the aforesaid conclusion the WTM has only issued a warning on the strength of the observation that the appellant subsequently took corrective steps in removing Arun Panchariya as Director from its joint venture Euram Bank Asia Ltd. (EBAL). Considering the findings given by the WTM we are of the opinion that the warning given by the WTM to the appellant bank does not suffer from any manifest error. Violations found against the Company and the Directors are affirmed. Appeal of the Company, Zenith Steel Pipes and Industries Limited are partly allowed. The debarment is reduced to the period undergone and penalty is reduced from Rs. 10 crore to Rs. 25 lakh.
Issues Involved:
1. Fraudulent scheme in the issuance of Global Depository Receipts (GDRs). 2. Non-disclosure of key agreements and misleading information to investors. 3. Proportionality of penalties imposed by the Whole Time Member (WTM) and Adjudicating Officer (AO). 4. Role and conduct of European American Investment Bank AG (Euram Bank) in the fraudulent scheme. Analysis of Judgment: 1. Fraudulent Scheme in the Issuance of GDRs: The case involves Zenith Steel Pipes and Industries Limited and its Directors, who were accused of devising a fraudulent scheme in the issuance of GDRs. The Board of Directors authorized Euram Bank to receive subscription money for the GDRs and allowed Mr. P.V.R. Murthy, Director, to execute necessary documents. Subsequently, a loan agreement was made between Euram Bank and Vintage FZE for subscribing to 1.81 million GDRs, with the proceeds pledged as collateral for the loan. 2. Non-disclosure of Key Agreements and Misleading Information to Investors: SEBI's investigation revealed that Vintage was the sole subscriber to the GDRs, and the Company failed to disclose this fact, misleading investors. The loan and pledge agreements were not disclosed to the stock exchange or shareholders. The Company reported successful closure of the GDR issue without mentioning that it was subscribed by one entity through a loan secured by the Company's funds, thus misleading investors. 3. Proportionality of Penalties Imposed by WTM and AO: The WTM and AO found the Company and its Directors guilty of misleading investors and violating Section 12A of the SEBI Act and PFUTP Regulations. The Company was restrained from accessing the securities market for three years, and penalties were imposed. However, the Tribunal noted that the proceeds were received by the Company and utilized for the intended purpose, with no misappropriation. The penalties were deemed excessive and disproportionate compared to similar cases. The penalty against the Company was reduced from Rs. 10 crore to Rs. 25 lakh, while the penalty against the Chairman and Managing Director was affirmed. 4. Role and Conduct of Euram Bank: Euram Bank was warned by the WTM for its role in the fraudulent scheme. The Bank facilitated a structured loan to Vintage and executed a dubious pledge agreement. Despite these findings, the WTM issued only a warning, considering the Bank's subsequent corrective actions. The Tribunal upheld the WTM's warning, finding no manifest error. Conclusion: The Tribunal affirmed the violations against the Company and its Directors but reduced the penalties imposed on the Company. The debarment period was reduced to the period already undergone. The appeals by the Company and its Directors were partly allowed, while the appeal by Euram Bank was dismissed. The Tribunal emphasized the need for proportionality in punitive measures and the importance of not imposing excessive penalties that could harm shareholders of a running company.
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