2016 (8) TMI 968 - AT - Companies Law

Violation of Clause 49 of the Listing Agreement - whole Time Director chaired the Audit Committee Meeting - Held that - When the Listing Agreement specifically provides that the Chairman of the Audit Committee shall be an Independent Director, the Whole Time Director could not have chaired the Audit Committee Meeting held on 07.10.2011 especially when an Independent Director was available on that day to chair the Audit Committee. There is no basis for the alleged bonafide belief entertained by the Whole Time Director and therefore, to chair the Audit Committee by the Whole Time Director on 07.10.2011 was in violation of Clause 49 of the Listing Agreement. Although, penalty imposable for such violation under Section 23H of the SCRA could extend up to ₹ 1 crore, the AO after considering all mitigating factors has deemed it fit to impose penalty of ₹ 5 lac which cannot be said to unreasonable or excessive. Accordingly, imposition of ₹ 5 lac penalty on the appellant cannot be faulted. Turning to the aggregate penalty of ₹ 3 crore imposed on all the appellants, it may be noted that the said penalty is imposed for the following reasons - a) Penalty of ₹ 1 crore is imposed under Section 15HB of SEBI Act, because the appellants as directors of RDB did not disclose all material information in the offer document that are true and adequate as contemplated under the ICDR Regulations and misutilized the IPO proceeds by giving loan to RDBRIL in violation of the ICDR Regulations. b) Penalty of ₹ 1 crore is imposed under Section 15HA of SEBI Act on ground that apart from violating ICDR Regulations, the appellants are also guilty of violating the PFUTP Regulations. c) Penalty of ₹ 1 crore is imposed under Section 15HA of SEBI Act on ground that the appellants, in violation of PFUTP Regulations have routed IPO proceeds in a circuitous manner so as to provide funds to four trading clients who had traded in the shares of RDB on the first day of listing RDB shares and had incurred huge losses. Violation of ICDR Regulations - Held that - Argument of the appellants that giving loan by RDB to RDBRIL would amount to placing surplus funds from one pocket to another cannot be accepted, because, RDB and RDBRIL are two separate and distinct legal entities. Moreover, an investor who wants to invest funds in the IPO of RDB may not prefer to invest in the IPO of RDB if informed that IPO funds are being transferred as loan to RDBRIL. In para 24 of the impugned order the AO has recorded a finding that prior to the IPO, RDBRIL had taken ₹ 7.28 crore from RDB as inter corporate loan at an interest rate of 15% per annum and since RDBRIL could not repay the said loan within the stipulated time RDBRIL had sought extension of time in the last week of August 2011 and accordingly RDB had granted 90 days time to RDBRIL for repayment of loan. With these facts on record, it is not open to the appellants to contend that giving loan to RDBRIL amounts to placing IPO funds from one pocket to another. Thus, in the facts of present case, resolution passed on 12.09.2011 to give loan up to ₹ 50 crore to RDBRIL being a resolution relating utilization of IPO proceeds was a material information which ought to have been disclosed. Apart from the above, when statement was made in the offer documents that the IPO proceeds would be invested in high quality interest bearing liquid instruments, utilizing the IPO proceeds by giving loan to RDBRIL amounts to misutilizing the IPO funds in violation of ICDR Regulations. Violation of PFUTP Regulations - Held that - RDB had taken loan from the Axis Bank and as per the loan agreement it was obligatory on part of RDB to take prior permission of Axis Bank before giving loan to RDBRIL. Admittedly, no such permission was taken from Axis Bank by RDB. Fact that Axis Bank did not deem it fit to take action for the said breach of the contract and the fact that the Axis Bank subsequently enhanced the loan limit and granted extension of time to repay the said loan cannot be a ground for the appellants to contend that no action be taken against RDB and its directors for violating the ICDR Regulations and PFUTP Regulations. In the impugned order, reference is made to the breach of the loan agreement between RDB and Axis Bank only to highlight that in a bid to transfer IPO proceeds by way of loan to RDBRIL, RDB not only suppressed material facts from the investors but also suppressed material facts from the Axis Bank. In these circumstances, decision of the AO that the conduct of RDB and its directors (appellants) in suppressing material information from the investors by resorting to manipulative and deceitful devices was in violation of regulation 3 and 4 of the PFUTP Regulations cannot be faulted. Penalty provisions - Held that - We uphold the penalty of ₹ 1 crore imposed on appellants under Section 15HB of SEBI Act for violating the ICDR Regulations and penalty of ₹ 1 crore imposed under Section 15HA of SEBI Act for violating PFUTP Regulations. Similarly, penalty of ₹ 5 lac imposed on appellant for violating Clause 49 of the Listing Agreement is also upheld. However, penalty of ₹ 1 crore imposed under Section 15HA of SEBI Act on ground that RDB transferred IPO proceeds in a circuitous manner to four trading clients is deleted. Accordingly, appellant is directed to pay ₹ 5 lac and all appellants are directed to pay ₹ 2 crore jointly and severally to SEBI within a period of four weeks from today. If the appellants fail to pay the aforesaid penalty within the time set out herein above, SEBI would be entitled to recover that amount from the appellants with interest at the rate of 12% per annum from the date of the order passed by the AO of SEBI on 06.08.2014 till payment.

Summary

Issues Involved:
1. Imposition of penalty on Mr. Sandeep Baid for violation of Clause 49 of the Listing Agreement.
2. Imposition of aggregate penalty on all appellants for violating ICDR and PFUTP Regulations.
3. Additional penalty for routing IPO proceeds in a circuitous manner to trading clients.

Issue-wise Detailed Analysis:

1. Imposition of Penalty on Mr. Sandeep Baid for Violation of Clause 49 of the Listing Agreement:

The judgment addressed the penalty of ?5 lakh imposed on Mr. Sandeep Baid for chairing the Audit Committee Meeting of RDB on 07.10.2011, in violation of Clause 49 of the Listing Agreement, which mandates that the Chairman of the Audit Committee must be an Independent Director. Despite an Independent Director being available, Mr. Baid, the Whole Time Director, chaired the meeting. The tribunal found no merit in the contention that this was a technical mistake made under a bona fide belief. The tribunal upheld the penalty, noting that the AO had already considered mitigating factors and imposed a reasonable penalty.

2. Imposition of Aggregate Penalty on All Appellants for Violating ICDR and PFUTP Regulations:

Violation of ICDR Regulations:

The tribunal examined the facts surrounding the IPO of RDB, including the resolution passed on 12.09.2011 to grant a loan of up to ?50 crore to RDBRIL. This resolution was deemed material information that should have been disclosed in the offer document. The tribunal rejected the appellants' argument that the resolution did not pertain to IPO proceeds and found that the resolution was indeed related to the IPO funds, given the financial context and subsequent actions. The tribunal concluded that the failure to disclose this information and the misutilization of IPO proceeds constituted violations of the ICDR Regulations.

Violation of PFUTP Regulations:

The tribunal found that the appellants' actions, including the hurried approval process and the suppression of material facts, were manipulative and deceitful, violating the PFUTP Regulations. The tribunal noted that the appellants' conduct in transferring IPO proceeds to RDBRIL before obtaining proper authorization and approval was indicative of a manipulative intent. The tribunal upheld the AO's findings that the appellants had violated the PFUTP Regulations by suppressing material information and misutilizing IPO proceeds.

Penalty for Violating ICDR and PFUTP Regulations:

The tribunal upheld the penalties imposed for violating the ICDR and PFUTP Regulations, amounting to ?1 crore under Section 15HB and ?1 crore under Section 15HA of the SEBI Act. The tribunal found these penalties to be reasonable and not excessive, considering the gravity of the violations.

3. Additional Penalty for Routing IPO Proceeds in a Circuitous Manner to Trading Clients:

The tribunal did not sustain the additional penalty of ?1 crore imposed for allegedly routing IPO proceeds in a circuitous manner to four trading clients. The tribunal found that once the transfer of IPO proceeds as a loan to RDBRIL was established, the subsequent movement of funds could not serve as an independent ground for additional penalties. The tribunal noted the lack of evidence linking the appellants directly to the four trading clients and found no basis for the additional penalty.

Conclusion:

The tribunal upheld the penalties of ?1 crore each for violating ICDR and PFUTP Regulations and the ?5 lakh penalty on Mr. Sandeep Baid for violating Clause 49 of the Listing Agreement. However, it deleted the additional penalty of ?1 crore for routing IPO proceeds in a circuitous manner. The appellants were directed to pay the upheld penalties within four weeks, failing which SEBI could recover the amount with interest. The appeals were disposed of with no order as to costs.