2019 (10) TMI 1047 - AT - SEBI

Unjust/ unlawful gains to the tune of US 92 million - violations noticed by SEBI relating to the issue of Global Depository Receipts ( GDRs ) by Cals Refineries Limited ( Cals ), a listed Indian company - HELD THAT - Appellants claim that they were not associated with the GDR issue is untenable. An issue process is over only when the proceeds from the issue is fully utilized as planned. GDR issue is akin to an IPO or FPO, except that in this case of GDR it is issued to investors abroad. In the case of IPO/FPO utilization of proceeds are also monitored by SEBI and in case of violation penal and remedial action are taken. We agree with the submission (as well as the judgments relied on by the appellants) that equitable remedy demands that disgorgement has to be made from the point of unjust enrichment or where the chickens come to roost. We cannot accept the arguments that no such unjust enrichment has been made by the appellants nor disgorgement has to be made from where the unjust enrichment rests finally. If one entity who has unjustly enriched knowingly transferring those proceeds further to some other entity does not prevent the authorities from disgorging the same from the original beneficiary of unjust enrichment. The choice is clearly that of the authority to pursue and disgorge an illegal gain from any point of a chain, if such a chain exists. Tracing to the last point of the chain is an exercise in futility and is not needed. When the proof of unjust enrichment is right before the eyes of an authority chasing the mirage of further transfers itself cannot be supported. Apart from submitting that US 92 million just got transferred from one account to another and to a third party on the same day, appellants have no real explanation as to how 25 million GDRs of Cals worth US 92 million has come to rest on Asia Texx account and why it was further transferred and that too free of cost to Gagan Rastogi. It is also on record that Gagan Rastogi has sold a part of these GDRs, 2.8 million, and received US 8.96 million in November 2011. This finding and now admitted fact is against the stand of the appellants in their reply to SEBI dated October 9, 2013 that neither him (Gagan Rastogi) nor Asia Texx had ever converted a single GDRs of Cals into equity shares and continue to hold the entire 25 million GDR. Therefore, it is clearly evident and admitted that GDRs worth US 92 million was transferred by Honor to the account of Asia Texx on March 26, 2009, who in turn transferred the same to the account of Gagan Rastogi free of cost on July 9, 2009. Accordingly, the money transferred from the account of Cals to the account of Asia Texx got accrued to Asia Texx and in turn to Gagan Rastogi in the form of 25 million GDR to the tune of the same value of US 92 million with each GDR being worth US 3.68 at that time. Since the amount involved was US 92 million which come into the hands (account) of the Asia Texx and thereafter to Gagan Rastogi this amount is unjust enrichment in their hands. Therefore, direction to disgorge this amount jointly and severally from the appellants as held in the impugned order does not suffer from any legal infirmity. In the matter before us we hold that the appellants have made unjust/ unlawful gains to the tune of US 92 million beyond any doubt. Given the circuitous scheme adopted by the appellants using the proceeds of the Cals GDR issue and in making unlawful gain the finding in the impugned order that the appellants have violated Section 12A of SEBI Act and PFUTP Regulations, 2003 cannot be faulted. In the instant matter it is quite clear from the fact that the appellants have made wrongful gain in terms of the US 92 million received as advance from Cals since the Agreement to supply refinery machinery was not implemented nor the said amount was returned to Cals, by Asia Texx. US 92 million is exactly the same amount of wrongful gain made which has been directed to be disgorged by the entities who directly benefited from the wrongful gains. Therefore, there is no conflict between the explanation under Section 11B of the SEBI Act and what is directed by the impugned order. Argument of the appellant that the economic reality needs to be considered while imposing penalty or directing disgorgement etc. because the GDRs have declined in value over time as the market conditions, including that of Cals, have changed over the years. While on the face of it, it appears a sound argument, such an argument cannot be accepted for reason that if the economic conditions had changed positively more than the unlawful gained could not be disgorged. Such an approach would vitiate the very foundation of disgorgement as an equivalent amount of unlawful gain to be disgorged which itself is one of the defenses put forth by the appellants. Therefore, changes in the economic conditions in the given context has to be accepted as a business risk of the appellants, not to be vitiated in the application of the legal principle on disgorgement. Hence the submission of the appellants that they are willing to surrender the remaining GDRs or the underlying shares, instead of US 92 million cannot be accepted. Finding that the agreement between Cals and Asia Texx dated February 05, 2009 is nothing but a scheme or artifice to siphon off the funds of Cals for the unlawful gain of Gagan Rastogi and Asia Texx, entities related to Cals stands fully sustained. Here it is pertinent to reiterate that the appellant Gagan Rastogi was a promoter of Cals through his 33% holdings in SRM Exploration Pvt. Ltd. as well as being son of Deep Rastogi, who was a Director of Cals at the relevant time. Given the above facts and position of law we uphold the impugned order. Both the Appeals are dismissed with no orders on costs. Consequently, appellants are directed to jointly and severally pay SEBI an amount of US 92 million, along with simple interest at the rate of 6% per annum from March 27, 2009 till the date of payment, within 30 days from today.

Summary

Issues Involved:

1. Delay in filing the appeal.
2. Challenge to SEBI's order directing disgorgement and market restraint.
3. Alleged fraudulent GDR issue and subsequent transactions.
4. Determination of wrongful gain and unjust enrichment.
5. Legal principles and precedents applicable to disgorgement.

Detailed Analysis:

1. Delay in Filing the Appeal:
The Tribunal noted a delay of 14 days in filing the appeal. The cause shown for the delay was deemed sufficient, and the delay condonation application was allowed.

2. Challenge to SEBI's Order:
The appeals were filed against SEBI's order dated December 31, 2014, which directed the appellants to disgorge US $92 million with interest and restrained them from accessing the capital markets for 10 years. The appellants contested only the disgorgement direction, as the restraint order had already attained finality.

3. Alleged Fraudulent GDR Issue and Subsequent Transactions:
The case involved a GDR issue by Cals Refineries Limited in December 2007, where Honor Finance Limited subscribed to the GDRs using a loan from Banco Effisa. The proceeds were used in a circular manner to repay the loan. In 2009, Cals entered into an agreement with Asia Texx for refinery machinery, paying US $92 million, which was round-tripped back to Banco through Honor. No machinery was received by Cals, and Asia Texx transferred 25 million GDRs to Gagan Rastogi, the beneficial owner of Asia Texx.

4. Determination of Wrongful Gain and Unjust Enrichment:
The appellants argued that no wrongful gain was made as the funds were round-tripped and never left Banco's possession. They contended that the entire GDR issue was fictitious and that they did not hold the US $92 million. SEBI's investigation, however, revealed that the transaction was structured to settle Honor's loan using Cals' funds, thereby unjustly enriching Asia Texx and Gagan Rastogi.

5. Legal Principles and Precedents Applicable to Disgorgement:
The Tribunal emphasized that disgorgement is an equitable remedy aimed at preventing unjust enrichment. It rejected the appellants' argument that no real funds were received, noting that Asia Texx received 25 million GDRs worth US $92 million, which were transferred to Gagan Rastogi. The Tribunal upheld SEBI's order, stating that the appellants were unjustly enriched and must disgorge the amount.

Conclusion:
The Tribunal dismissed the appeals, upholding SEBI's order for disgorgement of US $92 million with interest. It found that the appellants were unjustly enriched through a fraudulent scheme and directed them to pay the amount within 30 days. The Tribunal also dismissed the related miscellaneous applications.