2023 (11) TMI 18 - AT - SEBI

Ex-parte ad interim order - Appropriation of a fixed deposit - squaring off the loans of related parties - diversion of funds and its circuitous routing which was solely for the benefit of the promoter group as the appellant was the Managing Director and was not only in control over ZEEL but, being a key managerial personnel, was also in control of the seven associate entities - investigation revealed that Axis Bank instead of squaring off the credit facility of EGML had adjusted the fixed deposit against the credit facility given to seven related entities of ZEEL - restraint order passed by the respondent pursuant to the ad interim order and the confirmatory order restraining the appellant to function as a Managing Director HELD THAT - As round tripping of funds happened in a few minutes. Can it be said that each of the transaction was a sham or a fictitious transaction? There was a reason for making the payments. Everyone owed someone, the receptionist paid his debt, the chef paid his debt, the wife paid her debt and the milkman paid his debt. Everything works on credit and through the aforesaid payments everyone was happy. This is how the system works. Can it be said that the entire transaction done by the aforesaid entities was a sham transaction on account of proximity of time? We find that the transaction between the ZEEL and the first entity was validly explained and therefore, at this stage, it was not necessary to go into the context of a larger transaction involving the circular rotation of funds. The decisions cited by the respondent in this regard are not applicable at this stage. Chairperson has proceeded on the presumption that the appellant was involved in the affairs of the Essel Group companies including the borrower entities other than ZEEL. We find that this finding is based on pure surmises and conjectures. There is no material whatsoever which would demonstrate that the appellant was involved in the alleged transactions. The finding that Essel Group companies were involved in the layering of the funds transactions and were under the influence / control of the appellant by virtue of its shareholding and shareholding of his family members is patently erroneous. There is nothing on record to show that the appellant had participated in the affairs of the borrower entities or any other Essel Group entity. We find that the appellant is neither an authorized signatory nor a director in the borrower entities and was not involved in the operation, financing or day to day management of the affairs of the borrower entities. In the absence of any active role of the appellant in Essel Group companies / borrower entities, the presumption drawn by the Chairperson that the appellant had exercised control over borrower entities is patently erroneous. The word control has been mostly used by the Chairperson to show that the appellant had an active role in the borrower entities Essel Group companies which is based on presumptions. Finding that the appellant exercised control over the borrower entities / Essel Group companies was based on presumptions in the absence of any material evidence to show that the appellant was actually in positive control of the Essel Group companies / borrower entities. The finding that the appellant had exercised control over Sprit Infrapower Multiventures Private Limited Churu Enterprises LLP through shareholding interest and designated partners is again stretching the matter a bit too far in the absence of material evidence to show that the appellant was actively involved in the day to day management of these two entities. We further find that the direction that if the appellant is allowed to continue as the Managing Director in ZEEL it would impede or tamper with the investigation is erroneous in as much as we do not find any single incident to show that the appellant has obstructed in the investigation conducted so far. We are also of the opinion that the impugned order relies upon the bank statement which cannot be tampered and which cannot be changed and therefore the presumption that if the appellant is allowed to continue as Managing Director in ZEEL it would impede or tamper with the investigation is patently erroneous. The finding that the appellant should be kept away from the helm of affairs of ZEEL so that the appellant may not exercise his influence over relevant entities to misdirect the course of investigation is patently erroneous. We also find that the Chairperson has applied different yardstick regarding the alleged transaction arising out of ZEEL. On one hand the Chairperson has based its finding on a preponderance of probability while on the other hand has refused to accept the evidence filed by the appellant and has rejected the same on the ground that the documents do not prove the genuineness of the transaction beyond a reasonable doubt. This contrary stand taken by the Chairperson is, in our opinion, arbitrary. In any case, an incorrect application of the principles of preponderance of probability has been applied. Whether a proper balance has been made by the impugned directions on the rights, liberties or interest of the person keeping in mind the purpose which it was intended to serve? - Doctrine of proportionality has not been correctly applied and a correct balance has not been made. Considering the genuineness of the documents so produced by the appellant, the first leg of the transaction was validly explained which indicates that the funds moved pursuant to a long standing commercial business relationship. The entries in the bank statement are not fictitious or sham transactions and therefore proceeding and issuing directions on the basis of preponderance of probabilities is, in our opinion, at this stage arbitrary and excessive. The directions ex facie, is punitive and not preventive and is based on incorrect apprehensions and on the basis of preponderance of probabilities. Ex-parte ad interim order could have been passed in extreme urgent cases and that such power should be exercised sparingly and should not be exercised in a routine manner. Considering the facts and circumstances of the present case, we do not find that any extreme urgent situation existed in 2023 which warranted the WTM to pass an ex-parte ad interim order with regard to a certain set of transactions which occurred in the year 2019. We find that 99.97% of the shareholders of ZEEL had reposed complete faith in the appellant as recent as into 2022 to continue as Managing Director and Chief Executive Officer of the merged entity between ZEEL and Sony. Pursuant to the ex-parte ad interim order NCLT has approved the scheme of amalgamation in which the appellant would hold the post of a Managing Director of the merged entity. This aspect has wrongly been construed by the Chairperson that it will wield substantial power of management of the affairs of the merged company upon the appellant which he cannot be permitted to do so. In our opinion such approach is unwarranted apart from the fact that there is no evidence to show that the appellant exercised positive control over the borrowed entities. The fact that greater responsibility (if any) has come upon the appellant pursuant to the merger, then all the more reason that the appellant should be allowed to continue rather than putting the merger to continue headless when 99.97% of the shareholders reposed faith in the appellant to continue as Managing Director of the merged entity. Structure of the merged entity is that Sony Group would have the majority shareholding in the merged entity and will also have majority members in the board of directors and would have right to appoint key managerial personnel like Chief Financial Officer, Chief Compliance Officer, Company Secretary etc. the appellant would be just one of the nine directors of the merged entity. Hence, his continuation as the Managing Director in the merged entity would have no impact on the investigation. Chairperson while confirming the ad interim order directed the investigation to be completed in eight months. No reason was given as why eight months is required to complete the investigation especially when only bank transactions are to be looked into. During the course of arguments, it has been stated by the respondent that other LoCs given by the promoter group of the appellant including the LoC given by the father of the appellant to the tune of Rs. 4210 crore are now being scrutinized and therefore comprehensive investigation is being done and consequently these five transactions which is impugned in the order is only part of the wider investigation. In view of the aforesaid, we are of the view that prima facie the diversion of funds has not as yet been proved. Sufficient explanation backed by genuine document have been shown by the appellant and having validly discharged their burden. The investigation is going on and considering the track record of SEBI for which we take judicial notice, no investigation is completed within the stipulated period. We have seen that on numerous occasions whenever this Tribunal or the superior Court has directed SEBI to complete the investigation within a stipulated period, the same has not been done and applications after applications are being filed by SEBI seeking time to extend the period of investigation. The impugned order cannot be sustained and is quashed insofar as it relates to the appellant. The restraint order passed by the respondent pursuant to the ad interim order and the confirmatory order restraining the appellant to function as a Managing Director and as directed in paragraph 108(ii) of the impugned order is set aside. The appeal is allowed. The appellant shall, however, cooperate in the investigation.

Summary

Issues involved:

1. Legitimacy of the confirmatory order by SEBI.
2. Examination of transactions leading to the resignation of ZEEL's Independent Directors.
3. Analysis of the 'Letter of Comfort' and its implications.
4. Investigation into the alleged siphoning of funds by ZEEL.
5. Validity of interim directions issued by SEBI.
6. Proportionality of the restraint order against the appellant.

Summary:

1. Legitimacy of the Confirmatory Order by SEBI:

The appellant challenged the confirmatory order dated August 14, 2023, passed by SEBI's Chairman, which confirmed the ex-parte ad interim order dated June 12, 2023, with modifications. The Tribunal found that the confirmatory order was based on presumptions and assumptions without establishing foundational facts, and thus, could not be sustained.

2. Examination of Transactions Leading to the Resignation of ZEEL's Independent Directors:

The investigation revealed that a 'Letter of Comfort' was issued by Subhash Chandra to Yes Bank Ltd., ensuring a fixed deposit of Rs. 200 crore from ZEEL for loans availed by Essel Green Mobility Ltd. and other related entities. The Board of Directors was unaware of this letter, violating Regulation 4 of SEBI's LODR Regulations.

3. Analysis of the 'Letter of Comfort' and Its Implications:

The 'Letter of Comfort' led to Yes Bank appropriating ZEEL's fixed deposit for loans of related entities. SEBI issued a show cause notice and rejected a settlement application by the appellants. The Tribunal found that the foundational fact that funds originated from ZEEL and moved through group companies was not established.

4. Investigation into the Alleged Siphoning of Funds by ZEEL:

The investigation indicated that funds paid by related entities to ZEEL were sourced from ZEEL or other listed companies of Essel Group, creating an impression of repayment. However, the Tribunal found the transactions were genuine, backed by agreements, invoices, and audit committee approvals, and not sham transactions.

5. Validity of Interim Directions Issued by SEBI:

The interim directions by SEBI included the cessation of the appellant's role as a director or Key Managerial Personnel in any listed company. The Tribunal found that the urgency in passing the ex-parte ad interim order was not justified, as the transactions in question were from 2019, and there was no imminent urgency.

6. Proportionality of the Restraint Order Against the Appellant:

The Tribunal held that the restraint order was harsh and disproportionate, especially since the appellant had validly explained the first leg of transactions. The Tribunal emphasized that the doctrine of proportionality was not correctly applied, and the directions were punitive rather than preventive.

Conclusion:

The impugned order was quashed insofar as it related to the appellant. The restraint order preventing the appellant from functioning as Managing Director was set aside, and the appellant was directed to cooperate in the ongoing investigation. The Tribunal clarified that its observations were prima facie and would not influence the investigation.