2015 (5) TMI 14 - AT - Companies Law

Appeal against order of SEBI - Six of its Directors along with the Chief Financial Officer (CFO) restrained from accessing the securities market - Prohibition from buying, selling and otherwise dealing in securities directly or indirectly for a period of three years. Non disclosure of material information relating to those subsidiaries/ associates in the prospectus - Violation of SEBI (Disclosure and Investor Protection) Guidelines 2000 ('DIP Guidelines') Contravention of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ('ICDR Regulations') and SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ('PFUTP Regulations') - Section 11, 11A & 11B of SEBI Act. Held that - It is true that when 100% shares of a company are acquired by third parties it is not mandatory that the existing Board of Directors and authorized signatories must be replaced and it is open to the third parties to run the company through the existing Board of Directors and authorized signatories. However in the present case, the three house wives who had acquired 100% shares of Felicite from the subsidiaries of DLF (consequently shares of Shalika and Sudipti) had categorically stated that they were not involved in the running of Felicite. Therefore, in the facts of present case, it is evident that since the three house wives who acquired 100% shares of Felicite were not involved in the running of Felicite, it is abundantly clear that DLF continued to run Felicite (consequently Shalika and Sudipti) even after divestment of shares through the Board of Directors appointed by DLF. Thus, it is beyond doubt that DLF had adopted a modus operandi of divesting shares of Felicite, Shalika and Sudipti with a view to camouflage its association with Felicite, Shalika and Sudipti as dissociation. Once it is held that the transactions of share transfer that took place on 29-30/11/2006 were sham transactions entered into with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation, the question then to be considered is, whether such sham transactions amount to violating the provisions contained under the DIP Guidelines. Argument of DLF that the net financial losses incurred by Felicite, Shalika and Sudipti during the year 2006-2007 being approximately ₹ 8 lac compared to the total profit of DLF during the same period amounting to ₹ 1941 crore, failure to include aforesaid losses in the consolidated financial statements of DLF would not make any material difference is without any merit, because, if the law commands that loss/profit of the subsidiaries/associates to be taken into account in the consolidated financial statements of the parent company, then, irrespective of the fact that the quantum of loss/profit is negligible, the said loss/profit must be taken into account in the consolidated financial statements of the parent company. Hence the argument that even if the negligible loss incurred by the three companies in the offer documents it would have no material effect on the investor decision cannot be accepted. From the impugned order it is apparent that the Investigating Authority had failed to investigate the plea of DLF that filing of FIR against Sudipti came to its knowledge only on 25/06/2007. Failure on part of the Investigating Authority to investigate the above issue inspite of specific directions given by the WTM of SEBI to that effect in his order dated 20/10/2011, amounts to gross misconduct and dereliction of duty. As rightly contended by the counsel for SEBI, decision of the Apex Court in case of N. Narayanan 2013 (4) TMI 652 - SUPREME COURT , is applicable to the present case, because, the directors/CFO of DLF took decision to divest the shares of three subsidiary/associate companies of DLF by way of sham transactions with a view to avoid disclosing material information relating to those three companies in the offer documents and then represented to the investors by signing a declaration in the offer documents to the effect that the statements made therein are true and correct. In such a case, the directors of DLF cannot contend that they have not committed any violations and that no direction need be passed against them under Section 11/11B of SEBI Act. The preliminary objection raised by DLF to the effect that the impugned order has been passed without following the procedure prescribed under the PFUTP Regulations cannot be sustained. Once it is held that due procedure prescribed under PFUTP Regulations have been followed, then reliance placed by counsel for DLF on decisions of the Apex Court in case of Ramachandra Keshav Adke 1975 (3) TMI 132 - SUPREME COURT and in case of Hukum Chand Shayam Lal 1975 (12) TMI 168 - SUPREME COURT in support of the contention that where a power is required to be exercised by a certain authority in a certain manner, then the said power should be exercised in that manner or not or at all would have no relevance to the facts of present case, because, requisite procedure has been followed by SEBI in the present case. Resorting to sham transaction of share transfer with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation and thereby misleading the investors by not disclosing material information relating to Felicite, Shalika and Sudipti in the offer documents is no doubt highly objectionable. Such a dubious method adopted by DLF is highly detrimental to the investors/general public in the securities market. Therefore, with a view to send stern message to DLF and to other listed companies that such dubious methods are not adopted again, it was necessary for SEBI to take remedial action under Section 11/11B of SEBI Act. In such a case, fact that considerable time has been taken in investigating the matter and in passing the impugned order, cannot be a ground to hold that in view of passage of time no action need be taken under Section 11/11B of the SEBI Act. Similarly, fact that in the present case, no investor is found to have been prejudiced by the violations committed by the appellants cannot be a ground to hold that no action need be taken under Section 11/11B, because, to ensure that no such dubious method is adopted again, SEBI must act immediately and SEBI cannot wait till the investors are actually prejudiced on account of adopting such dubious method hereafter. In these circumstances decision of SEBI in taking remedial measures under Section 11/11B of SEBI Act cannot be faulted. Final conclusion - Decision of SEBI that DLF has resorted to sham transaction of divesting shares of Felicite, Shalika and Sudipti with a view to camouflage association of DLF with those three companies as dissociation cannot be faulted. - By resorting to sham transaction DLF has avoided disclosing material information relating to those three companies in the offer documents and thereby failed to disclose true and adequate material information relating to those three companies in violation of Clause 6.2 of DIP Guidelines. - Once it is held that by resorting to sham transaction, DLF has failed to disclose material information in violation of Clause 6.2 of DIP Guidelines, it obviously follows that various material information s specified in different Clauses in Chapter VI of DIP Guidelines have not been complied with.- Similarly, decision of SEBI, that DLF has concealed material information relating to the three companies by resorting to sham transaction and misled the investors by signing a declaration that the information disclosed in the offer documents are true and adequate in violation of PFUTP Regulations cannot be faulted. - Directors/CFO of DLF who were directly involved in the day to day running of DLF were the persons responsible for DLF to resort to sham transaction and therefore they are equally guilty of violating DIP Guidelines/PFUTP Regulations. - Order to the extent it holds that DLF was aware about the filing of FIR prior to 25/06/2007 and that the DLF has actively concealed the FIR in the offer documents is unsustainable and accordingly quashed and set aside. In matter of whether DLF had knowledge about the filing of FIR prior to 25/06/2007. Despite that specific direction, the Investigating Officer of SEBI has failed and neglected to investigate that issue which was an important issue having direct bearing on the merits of the case. Thus, the Investigating Officer of SEBI is guilty of gross misconduct and dereliction of duty and failure on his part to comply with the directions contained in the order dated 20/10/2011 has led to miscarriage of justice. - Since the impugned order is held to be partially unsustainable and there are several mitigating factors in favour of the appellants as more particularly set out herein above, the restraint/prohibitory order imposed on the appellants for a period of three years is reduced to a period of six months commencing from the date of passing the impugned order on 10.10.2014. - Decided partly in favour of appellant.

Summary

Issues Involved:
1. Whether the share transfer process in Sudipti, Shalika, and Felicite was a sham transaction and whether DLF continued to control these companies.
2. Whether DLF failed to ensure that the RHP/Prospectus contained all material information which was true and adequate for investors.
3. Whether DLF actively and knowingly suppressed material information and facts in the RHP/Prospectus to mislead and defraud investors.
4. Whether DLF and its directors/CFO violated various clauses of the DIP Guidelines and PFUTP Regulations.
5. Whether the penalties imposed by SEBI were proportionate and justified.

Issue-wise Detailed Analysis:

1. Sham Transaction and Control Over Subsidiaries:
The tribunal found that the share transfers of Sudipti, Shalika, and Felicite were sham transactions designed to camouflage DLF's continued control over these companies. The tribunal noted that the share transfers were made to the wives of DLF employees, who were not involved in the companies' operations. The directors and authorized signatories of these companies remained the same, and the companies continued to operate from the same premises as DLF. The tribunal concluded that DLF retained control over these companies through its employees, who were directors and authorized signatories.

2. Adequacy and Truthfulness of Information in RHP/Prospectus:
The tribunal held that DLF failed to ensure that the RHP/Prospectus contained all material information that was true and adequate. The tribunal emphasized that the material information regarding the association and control over Sudipti, Shalika, and Felicite was not disclosed, which was crucial for investors to make informed decisions. The tribunal rejected DLF's argument that the divestment of shares made these companies irrelevant, as the divestment itself was found to be a sham.

3. Suppression of Material Information:
The tribunal found that DLF actively and knowingly suppressed material information and facts in the RHP/Prospectus. This suppression was aimed at misleading and defrauding investors. The tribunal highlighted that the non-disclosure of the association with Sudipti, Shalika, and Felicite, and the failure to disclose the FIR filed against Sudipti, were significant omissions that misled investors.

4. Violations of DIP Guidelines and PFUTP Regulations:
The tribunal concluded that DLF and its directors/CFO violated various clauses of the DIP Guidelines, including Clauses 6.2, 6.9.6.6, 6.10.2.3, 6.11.1.2, 6.15.2, and 9.1. The tribunal also found violations of PFUTP Regulations, specifically Sections 12A(a), (b), and (c) of the SEBI Act, and Regulations 3(a), (b), (c), (d), 4(1), 4(2)(f), and 4(2)(k) of the PFUTP Regulations. The tribunal emphasized that the actions of DLF and its directors/CFO amounted to fraudulent and unfair trade practices.

5. Proportionality and Justification of Penalties:
The tribunal considered the penalties imposed by SEBI and found them to be disproportionate. The tribunal noted several mitigating factors, including the fact that no investors were found to have been prejudiced by the violations and that the material information relating to the three companies was insignificant. The tribunal reduced the restraint/prohibitory order from three years to six months, emphasizing that the objective of the penalties should be to ensure compliance and not to stifle the company.

Conclusion:
The tribunal quashed the impugned order dated 10.10.2014 and allowed the appeals, reducing the restraint/prohibitory order to six months. The tribunal emphasized the importance of ensuring true and adequate disclosures in the RHP/Prospectus and condemned the use of sham transactions to mislead investors. The tribunal also highlighted the need for SEBI to act promptly and proportionately in enforcing compliance with securities laws.