2023 (11) TMI 65 - AT - SEBI

Fraudulent Scheme of using the GDR proceeds to fund a subscriber - GDR issue was fully subscribed was misleading as the investors were not informed that the GDR was subscribed by only one entity - fraudulent scheme and violative of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations - AO found that the GDR was subscribed by one entity, namely, Vintage - AO further found that on account of the pledge created by the Company with EURAM Bank the funds were not made available at the Company s disposal and the same became available in tranches as and when the loan amount was repaid by Vintage. Further, the loan agreement was not disclosed to the stock exchange and to the Indian investors. HELD THAT - We find that this modus operandi in the instant appeals is the same as 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. Further, the 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. See Sibly Industries Ltd. vs SEBI . 2022 (7) TMI 1478 - SECURITIES APPELLATE TRIBUNAL, MUMBAI , Aksh Optifibre Ltd. 2022 (6) TMI 1441 - SECURITIES APPELLATE TRIBUNAL, MUMBAI and Praveen Kumar Hastimal Shah 2022 (7) TMI 1477 - SECURITIES APPELLATE TRIBUNAL, WTM and the AO while admitting that the appellant was a non-executive independent director and had resigned on February 7, 2012 found that he was a member of audit committee and was required to ensure all the transfer of the GDR proceeds to the accounts of the Company in India - The finding given by the WTM and the AO cannot be accepted. There is nothing on record to indicate that the matter relating to GDR issue was placed by the Company before the audit committee. In the absence of any evidence the finding that it was the responsibility to monitor the end use of the funds is patently erroneous. We are of the opinion that Section 177(4) of the Companies Act, 2013 cannot be applied in the instant case inasmuch as the said provision only came into existence when the Companies Act, 2013 was enacted. n the absence of any finding that the GDR issue was placed before the audit committee we are of the opinion that members of the audit committee cannot be held responsible for the alleged violation. Further, the finding that there was a long association with the Company is purely based on surmises and conjectures. We also are of the opinion that there is no finding that the appellant was involved in the day to day affairs of the Company merely attending board meetings cannot lead to a conclusion that the appellant was involved in the day to day affairs of the Company. 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 In view of the aforesaid, the impugned orders passed by the WTM and AO cannot be sustained and are quashed insofar as it relates to the appellant. The appeals are allowed.

Summary

Issues involved: Appeal against SEBI orders imposing penalty and debarring from securities market for fraudulent scheme related to GDR proceeds.

Issue 1: Allegations of fraudulent scheme related to GDR proceeds:
The appellant filed two appeals against SEBI orders imposing penalties and debarring from the securities market. The issue arose from a resolution passed by the Company's Board of Directors to open a bank account with EURAM Bank for depositing GDR proceeds. The investigation revealed that a loan agreement was executed between Vintage and EURAM Bank based on a pledge agreement, which was not disclosed to the stock exchange, investors, or shareholders. The appellant challenged the orders on grounds of non-disclosure and misleading corporate announcements.

Issue 2: Responsibility of non-executive independent director:
The appellant, a non-executive independent director, argued that he was not involved in day-to-day affairs and was unaware of key details regarding the GDR issue. However, SEBI found him responsible as a member of the audit committee and due to his long association with the Company. The appellant contested this finding, stating that the Companies Act, 2013 provisions could not be retroactively applied to actions taken in 2010-11. The Tribunal held that independent directors cannot be penalized for matters not within their purview.

In the judgment, the Securities Appellate Tribunal in Mumbai addressed the issues raised in the appeals. The Tribunal noted that the modus operandi in this case was similar to previous matters involving GDR issues, where non-disclosure of agreements was deemed fraudulent and violative of regulations. The Tribunal emphasized that the Company and its Managing Directors were aware of the agreements and misled SEBI and investors. Despite the appellant's contentions of lack of involvement, the Tribunal ruled in favor of the appellant, stating that there was no evidence of his direct responsibility for the violations. The Tribunal highlighted that the audit committee's role was limited to matters placed before it and that the appellant's attendance at board meetings did not imply day-to-day involvement in the Company's affairs. Citing precedents, the Tribunal concluded that independent directors cannot be penalized for actions beyond their scope. As a result, the Tribunal quashed the SEBI orders against the appellant, allowing the appeals. The order was to be digitally signed and parties were directed to act accordingly.