2020 (2) TMI 609 - AT - SEBI

Fraud scheme of issuance of GDRs - Pledge Agreement and the announcement that the GDRs were successfully subscribed without disclosing the Pledge Agreement to the investors resulted in misleading information to the public and thereby adversely impacting the investors - violation of Section 12A(a), (b), (c) of SEBI Act, 1992 read with Regulations 3(a), (b), (c), (d) and 4(1) of PFUTP Regulations, 2003 - HELD THAT - Contention in the order that it is a fraudulent scheme created by the appellants along with some other entities cannot be faulted. In this context, it is relevant to note that in our order in the matter of PAN Asia Advisors Limited 2016 (12) TMI 1202 - SECURITIES APPELLATE TRIBUNAL MUMBAI (Lead Manager) and Vintage (subscriber) whose beneficial owner was Arun Panchariya were all found to be guilty of the violations of Indian Securities Laws under the PFUTP Regulations, 2003. The same has been the modus operandi in respect of Cals Refineries Limited 2017 (10) TMI 1512 - SECURITIES AND EXCHANGE BOARD OF INDIA though the entities connected therein were different. The contention that Pledge Agreement was not required to be disclosed under the Listing Agreement is not correct as the Listing Agreement, which forms the very basis of a disclosure based regulatory regime, requires every material information to be disclosed to the Stock Exchange at the earliest, sometime in a matter of minutes and others in a matter of days. When the company has lent the entire proceeds of the GDR issue to the tune of US 38.75 million as security for a third party abroad to avail a loan on the basis of that security and thereby potentially jeopardizing the entire proceeds is not a non-event but an important material information affecting all the stakeholders. We would hold that such events have to be disclosed in bold letters so that the investors of the company as well as those who are subscribing to its GDR issue etc. should be fully aware of those highly material facts. Arguments on delay in investigation and consequently affecting natural justice are also devoid of any merit in the matter since this Tribunal is aware of the complexity involved in the entire manipulative GDR issue. We also do not find any deficiency in the finding in the impugned order that money has been brought in fully by the company starting from December 14, 2010 and ending January 04, 2012 and, therefore, full repayment of loan taken by Vintage was done without resorting to sale in the Indian market as irrelevant. The basic question to be answered is whether the issue was subscribed by a loan taken by Vintage on the basis of pledging the proceeds of the GDR issue as security for the said loan taken by a third party and that too a party located abroad and whether sufficient disclosures of material events associated with the issue was properly done. We are of the considered view that the method adopted by the appellants was vitiated through fraud and hence finally whether the money has come back or not is relevant in the facts and circumstances. We are of the opinion that imposition of the restraint on the appellants herein has been done taking all the relevant factors into account as in similar matters like Cals Refineries Limited 2017 (10) TMI 1512 - SECURITIES AND EXCHANGE BOARD OF INDIA the period of restraint imposed on the appellants was 10 years while in the instant matter restraint is only for 5 years.

Summary

Issues:
1. Prohibition from associating with the securities market for five years.
2. Allegations of fraudulent scheme in the issuance of Global Depository Receipts (GDRs).
3. Violation of SEBI Act and PFUTP Regulations.
4. Natural justice concerns and delay in investigation.
5. Disclosure requirements under the Listing Agreement.
6. Consideration of submissions and mitigating factors.
7. Discrepancies in Board resolutions and minutes.
8. Applicability of restraint period based on similar cases.

Prohibition from associating with the securities market for five years:
The appeal was filed against an order by SEBI prohibiting the appellants from associating with the securities market for five years. This prohibition was imposed under Sections 11(1), 11(4), and 11B of the SEBI Act, 1992. The appellants argued that the order was arbitrary and harsh, considering the alleged violations occurred nine years prior, and the company had made efforts to rectify its conduct.

Allegations of fraudulent scheme in the issuance of GDRs:
The case involved the issuance of GDRs by a company, with the allegation that the scheme was fraudulent. The investigation revealed that the GDRs were subscribed by a single entity using a loan obtained by pledging the GDR proceeds. The failure to disclose the Pledge Agreement to investors was deemed misleading, violating SEBI Act provisions and PFUTP Regulations. The appellants contended that the issue was genuine, emphasizing that the funds were utilized as intended, with the only lapse being the non-disclosure of the Pledge Agreement.

Violation of SEBI Act and PFUTP Regulations:
The SEBI order accused the appellants of violating SEBI Act provisions and PFUTP Regulations due to the alleged fraudulent scheme in the GDR issuance. The failure to disclose material information, including the Pledge Agreement, was considered misleading to investors. The appellants argued that they did not intend to commit fraud and deserved mitigation as the issue proceeds were appropriately utilized.

Natural justice concerns and delay in investigation:
The appellants raised concerns about natural justice, citing delays in the investigation and issuance of the show cause notice years after the GDR issuance. They argued that the order did not consider their submissions and was penal rather than remedial. However, the tribunal found no merit in these contentions, considering the complexity of the manipulative GDR issue and the need for thorough investigation.

Disclosure requirements under the Listing Agreement:
The tribunal emphasized the importance of disclosing material information promptly under the Listing Agreement to ensure transparency for stakeholders. The non-disclosure of the Pledge Agreement, which significantly impacted the GDR issuance, was deemed a crucial omission that misled investors. The tribunal held that such events should have been disclosed to protect the interests of investors and market integrity.

Consideration of submissions and mitigating factors:
The appellants argued that they had not committed fraud and highlighted mitigating factors such as the full utilization of issue proceeds. They contended that the restraint period was excessive given the circumstances. However, the tribunal found the appellants' actions to be vitiated through fraud, rejecting the argument for substantial mitigation based on the lack of fraudulent intent.

Discrepancies in Board resolutions and minutes:
The tribunal noted significant discrepancies between the Board resolutions provided to different entities, indicating potential misrepresentations. The failure to disclose crucial information, as evidenced by conflicting documents, raised concerns about the transparency and accuracy of the GDR issuance process.

Applicability of restraint period based on similar cases:
The tribunal referenced previous cases involving similar fraudulent schemes in GDR issuances to justify the restraint period imposed on the appellants. Comparisons with past judgments highlighted the seriousness of the violations and the need for consistent enforcement measures. The tribunal upheld the five-year restraint period, considering the gravity of the fraudulent scheme.

In conclusion, the tribunal dismissed the appeal, emphasizing the fraudulent nature of the GDR scheme and the importance of transparency and disclosure in securities market transactions.