2023 (11) TMI 64 - AT - SEBI

Unfair Trade Practices relating to Securities Market - scheme of using the GDR proceeds to fund a subscriber to the GDR issue was a fraudulent scheme and violative of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations - non-disclosure of the loan agreement and the pledge agreement was violative of Clause 36 of the Listing Agreement as well as Section 21 of the SCRA Act read with Clause 32 and 50 of the Listing Agreement - penalty imposed on company and directors and MCDs HELD THAT - We find that this modus operandi in the instant appeals is the same and has been dealt with by this Tribunal in a large number of matters relating to the GDR issue wherein the Tribunal has held that non-disclosure of the loan agreement and the pledge agreement was totally fraudulent and violative of the Listing Agreement. This Tribunal also held that the company and its MDs were aware of the execution of the pledge agreement as well as loan agreement and it was no longer open to them to deny the existence of the said agreements. This Tribunal also held that the company and its Directors misled SEBI into believing that there were more subscribers to the issue and not one subscriber. We also held that company and its MDs were aware of the pledge agreement, non-disclosure of the pledge agreement and loan agreement invited penalty. Corporate announcement did not disclose the fact that the subsisting pledge agreement facilitated the subscribers to subscribe to the GDR issue. The corporate announcement was misleading and presented a distorted version to the investors and created a false version inducing the investors to deal in securities - in the light of the aforesaid decisions the findings against the appellants in the instant appeals does not require any interference nor we require to give elaborate reasons. The findings of the AO are upheld. Quantum of penalty and on the issue of proportionality - SEBI has passed various orders against company and its directors imposing different penalties for identical / similar offences. In a large number of penalties ranging from Rs. 25 lakh to Rs. 1.25 crore have been imposed upon the companies which we have appropriately reduced to Rs. 25 lakh. Similarly, for managing director considering the factor in each of the case the penalties have been reduced to Rs. 10 lakh and Rs. 20 lakh. Similarly, in many cases the penalty ranging from Rs. 5 lakh and Rs. 10 lakh have been imposed upon the directors. In a large number of cases, we have exonerated independent directors. Thus without going into the specific details, in the instant case, we find that penalty imposed against the company is appropriate as in many other cases we have been reduced the penalty against the company to Rs. 25 lakh. Thus, the penalty imposed by the AO against the company noticee nos. 1 needs no interference. Similarly, we find that the penalty of Rs. 25 lakh imposed upon the noticee nos. 2 who is the CMD is also appropriate and commensurate with the alleged violation as he was the signatory to the account charge agreement / pledge agreement. In so far as noticee nos. 3, 4, 5 and 6 are concerned, we find that noticee nos. 3 was non-executive director and noticee nos. 4, 5 and 6 were independent directors. There is no evidence to show that all these noticees apart from being signatory to the resolution of the board of directors were not involved in the day-to-day affairs of the company nor were they aware or monitor the issuance of the GDR issue. Independent directors cannot be penalized when they are not part of day-to-day affairs of the company . See Prafull Anubhai Shah vs SEBI 2021 (6) TMI 1159 - SECURITIES APPELLATE TRIBUNAL, MUMBAI and Rajesh Shah vs SEBI 2021 (7) TMI 1433 - SECURITIES APPELLATE TRIBUNAL, MUMBAI - Thus the penalty imposed upon notice nos. 3 to 6 to the tune of Rs. 10 lakh each are set aside.

Summary

Issues Involved:
1. Violation of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations.
2. Violation of Section 21 of the SCRA read with Clauses 36 and 50 of the Listing Agreement.
3. Quantum of penalty and proportionality of the imposed penalties.

Judgment Summary:

1. Violation of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations:
The appeal was filed against the order imposing penalties for violations of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations. The company, Kaashyap Technologies Ltd., issued GDRs based on a resolution to open a bank account with Banco Efisa for depositing GDR proceeds. The GDRs were subscribed by Clifford Capital Partners, and SEBI's investigation revealed that the proceeds were used as security for a loan to Clifford, which was not disclosed to the stock exchange. The AO found this scheme fraudulent and violative of the SEBI Act and PFUTP Regulations, as the company misled investors by not disclosing the true nature of the GDR subscription.

2. Violation of Section 21 of the SCRA read with Clauses 36 and 50 of the Listing Agreement:
The non-disclosure of the loan and pledge agreements was found to be in violation of Clause 36 of the Listing Agreement and Section 21 of the SCRA read with Clauses 32 and 50. The AO noted that the company's announcement that the GDR issue was fully subscribed was misleading, as it did not inform investors that Clifford was the sole subscriber. The Tribunal upheld these findings, emphasizing that the company and its directors were aware of the agreements and had misled SEBI and investors.

3. Quantum of penalty and proportionality of the imposed penalties:
The Tribunal examined the proportionality of the penalties imposed. It referenced the doctrine of proportionality, which suggests penalties should not be disproportionate to the offense. The Tribunal noted that SEBI had imposed varying penalties in similar cases and had often reduced penalties for companies and managing directors while exonerating independent directors. In this case, the Tribunal upheld the penalties of Rs. 25 lakh on the company and Rs. 25 lakh on the CMD but set aside the penalties of Rs. 10 lakh each on the independent directors (noticee nos. 3 to 6), as they were not involved in the day-to-day affairs of the company.

Conclusion:
The appeals of the company and its managing director were dismissed, while the appeals of the independent directors were allowed. The Tribunal found no reason to interfere with the AO's findings but adjusted the penalties to ensure proportionality and fairness.