2023 (7) TMI 1440 - AT - SEBI

Defalcation of the proceeds from the preferential issue - allegation of mis-utilization of the proceeds - inordinate delay in the issuance of the show cause notice - show cause notice alleged that there was deviation from the object of the issue and, therefore, the appellants have violated Clause 43 of the Listing Agreement / Regulation 32 of the SEBI-LODR Regulations - As per AO company had deviated from the object of the issue and did not utilize the proceeds from the preferential issue as per the objects and that subsequent ratification by the shareholders of the company will not make any difference to the violation of the Clause 43 of the Listing Agreement. The AO accordingly imposed the penalties. HELD THAT - There is an inordinate delay in the issuance of the show cause notice. The preferential issue was made in August 2013 and the show cause notice was issued on January 5, 2023. The issuance of the preferential issue was known to the stock exchange as well as to SEBI and, therefore, there is no justification for issuance of show cause notice at this belated stage. We are of the opinion that the impugned order in so far as it relates to the appellants cannot be sustained. Even otherwise we find that admittedly there was a deviation in the object of the issue and the money was utilized for some other purposes by the company. The matter was placed before the shareholders in the extra ordinary general meeting of the company and the object of the issue was ratified by the shareholders on September 29, 2017. Thus, prior to the issuance of the show cause notice, the alleged deviation by the company was ratified and, therefore, in our opinion, there was no violation of any provisions of the LODR Regulations or of the listing agreement on the date when the show cause notice was issued. Ratification made by the shareholders of the company validates an act already done and even though the company initially utilized the proceeds of the preferential issue for a different purpose in variance of the objects specified, nonetheless, the variance in the utilization of the proceeds should ratified and became authorized pursuant to the special resolution passed by the shareholders on September 29, 2017. We are of the view that no penalty could be imposed for the alleged deviation. We also find that there is no charge of defalcation of the proceeds from the preferential issue. Thus, the impugned order in so far as it relates to the appellants cannot be sustained and is quashed. The appeals are allowed.

Summary

Issues:
1. Delay in issuance of adjudication proceedings
2. Alleged violation of regulations and listing agreement
3. Ratification of deviation in object of issue by shareholders

Issue 1: Delay in issuance of adjudication proceedings
The Tribunal noted an inordinate delay in the issuance of the show cause notice, highlighting that the preferential allotment was made in August 2013, but the notice was issued in January 2023. Emphasizing the principle of reasonable time for exercising powers, the Tribunal referred to various precedents, including the case of Ashlesh Gunvantbhai Shah vs. SEBI, to establish that the authority must act within a reasonable period. The Tribunal concluded that the delay in this case was unreasonable, leading to the decision that no penalty could be imposed due to the delayed adjudication proceedings.

Issue 2: Alleged violation of regulations and listing agreement
The show cause notice alleged a deviation from the object of the issue, citing violations of Clause 43 of the Listing Agreement, LODR Regulations, and PFUTP Regulations. The Adjudicating Officer imposed penalties on the company and a director based on evidence of deviation from the issue's object. However, the Tribunal found that the shareholders had ratified the deviation in an extraordinary general meeting, validating the act retrospectively. Referring to the case of Terrascope Ventures Limited vs. SEBI, the Tribunal explained the concept of ratification and concluded that the ratification by the shareholders authorized the variance in utilization of proceeds, thereby quashing the penalties imposed.

Issue 3: Ratification of deviation in object of issue by shareholders
The Tribunal emphasized that the ratification by the shareholders validated the act of utilizing proceeds for a different purpose, despite the initial deviation from the specified objects. Noting the absence of defalcation charges, the Tribunal held that no penalty could be imposed for the alleged deviation. Ultimately, the impugned order concerning the appellants was deemed unsustainable and quashed, with the appeals allowed and no costs awarded. The order was directed to be digitally signed by the Private Secretary, and certified copies were made available from the Registry upon payment of usual charges.