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2019 (10) TMI 1050 - AT - SEBINon-disclosure of certain material information in the offer documents - Diversion of IPO proceeds and other funds to entities which purchased the appellants shares to ensure full subscription to the IPO of the appellants - Penalty for contravention where no separate penalty has been provided u/s 15HB - HELD THAT - The Tribunal while considering the aforesaid two charges found that the appellant had partially failed to ensure proper disclosure of material information in the prospectus. It was not a case of complete non-disclosure of material information and, as we have found that the partial nondisclosure, was at best, a technical violation. In one instance, the information was given to the Merchant Banker who failed to disclose it in the RHP and, in the two other instances, the disclosure was made in the prospectus but not at the relevant place. Thus, it cannot be said that there was complete nondisclosure of material information in the prospectus. Insofar as the second charge of diversion of IPO proceeds is concerned the Tribunal in its earlier order held that the charge of violating PFUTP Regulations was not established by any cogent reasoning or convincing evidence. The Tribunal also found that the purchase of land by the appellant was genuine and not illegal or fabricated Since the appellant had already undergone a considerable period of debarment pursuant to the order of SEBI, the Tribunal reduced the debarment from ten years to seven years for the partial disclosure of information in the prospectus. In the ultimate analysis, the order of debarment was for violation of partial disclosure in the prospectus and not for violation of PFUTP Regulations. The AO while imposing the penalty has not factored this debarment while fixing the quantum of penalty. Further, in our opinion, the factors contemplated under Section 15J was also not considered by the AO in the right perspective. Penalty can be imposed for failure to carry out a statutory obligation under the SEBI s Act. Factors contemplated under Section 15J are required to be taken into consideration before imposing a penalty. If it is found that a party has not acted deliberately, then the authority has a discretion, to be exercised judicially, whether in a given case, after taking into consideration of all the relevant circumstances, as to whether a penalty should be imposed or not. Even if a minimum penalty is prescribed, the authority, after considering the circumstances of the case and other factors enumerated in Section 15J would be justified in refusing to impose penalty when there is a technical or venial breach of the provisions of the Act. The direction of the AO to penalize all the directors is wholly unwarranted. Merely because the appellants are directors does not make them liable. The AO must give a specific finding that all the appellants as Directors were responsible for the alleged violation and were in charge of the affairs of the Company. In the instant case, there is no shred of evidence to show that the alleged act was committed by any of the Directors from which a reasonable inference could be drawn that the said Directors could also be vicariously liable. Vicarious liability can be inferred against a Company and its Directors only if the requisite assertions / allegations are averred in the Show Cause Notice so as to make the Company and its Directors vicariously liable for the violation of the provisions of the Act and its Regulations. The assertions / allegations should also include that the Director / Directors were in charge of and responsible for the business of the Company and by virtue of their position they are liable for penalty. In the instant case, no such allegations has been made in the SCN. This is a fit case where no penalty could be imposed and the question of imposing the maximum penalty in the given facts and circumstance does not arise. The AO has clearly exceeded its power in imposing the maximum penalty. The AO has misinterpreted the order of Securities Appellate Tribunal (SAT). Maximum penalty of ₹ 1 crore each imposed upon the appellants is grossly disproportionate to the violation. In our view the order of debarment which was reduced by this Tribunal from ten years to seven years was more than sufficient penalty to cover the technical violation for imposition of penalty for violating the provision of Section 11C of the SEBI Act, 1992 and the ICDR Regulations. 23. In the light of the aforesaid, the appeal is allowed. The imposition of penalty of ₹ 1 crore each on the appellants is set aside
Issues Involved:
1. Non-disclosure of certain material information in the offer documents. 2. Diversion of IPO proceeds and other funds to entities which purchased the appellants' shares to ensure full subscription to the IPO. Issue-wise Analysis: 1. Non-disclosure of Certain Material Information in the Offer Documents: The Tribunal identified that the appellants were guilty of inadequate disclosure of material information in the offer documents. Specifically, it was found that there was a failure to disclose: - ICD agreements, which were in the form of bridge loans. - The Board Resolution dated August 17, 2011, to invest IPO proceeds in ICDs of other companies. - Agreements for the purchase of land executed with other entities. The Tribunal clarified that the non-disclosure of ICD agreements was due to the Merchant Banker’s failure to incorporate this information in the prospectus after being informed by the Board of Directors. Hence, the non-disclosure was deemed technical. Regarding the non-disclosure of the Board's resolution, the Tribunal noted that the prospectus mentioned the intention to invest IPO proceeds in interest-bearing liquid instruments but did not specifically mention ICDs. This was seen as a technical omission rather than a complete non-disclosure. For the agreements related to land purchase, the Tribunal found that while these were disclosed in the prospectus, they were not placed in the appropriate section. This was again considered a case of improper disclosure rather than non-disclosure. 2. Diversion of IPO Proceeds and Other Funds: The Tribunal found no evidence of connivance or connection between the appellants and other entities regarding the purchase of the appellants’ shares. There was no commonality of directors or registered addresses that could infer involvement in fund transfers to entities that bought the appellants' shares in the IPO. The Tribunal also noted that most of the money alleged to have been transferred had been returned to the appellants. An auditor appointed by SEBI confirmed that an amount of ?80 crore had been successfully recalled by the appellants, and the appellants had shown earnest compliance with SEBI’s regulatory directions. Adjudicating Officer’s Findings and Penalty: The Adjudicating Officer (AO) reviewed the Tribunal's findings and concluded that the appellants had violated the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, and Section 11C(2) and (3) of the SEBI Act, 1992. Consequently, the AO imposed a penalty of ?1 crore each on the appellants under Section 15HB of the SEBI Act, 1992. The Tribunal, however, found that the AO misinterpreted its earlier order. The Tribunal emphasized that the partial non-disclosure was technical and did not warrant the maximum penalty. The Tribunal also criticized the AO for penalizing all directors without specific findings of their individual responsibility. Conclusion: The Tribunal concluded that the penalty imposed by the AO was grossly disproportionate to the violation. The debarment period reduced from ten years to seven years was deemed sufficient. The Tribunal set aside the imposition of the ?1 crore penalty on each appellant, emphasizing that the debarment already served was adequate punishment for the technical violations. The appeal was allowed, and no costs were ordered.
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