2021 (6) TMI 1159 - AT - SEBI

Fraudulent issue of GDRs - Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market - Responsibility of directors - officers in default - Investigation in the issuance of the GDR revealed that the GDR was not issued with a proper consideration and without making adequate disclosure under the Listing Agreement - As alleged account charge agreement was an integral part of the loan agreement which allowed Whiteview to avail the loan in order to subscribe to the GDR issue which was fraudulent - charge against the appellant was that he was a Director and was part of the resolution by which the first resolution was passed by the Board of Directors for issuance of the GDR and for opening an account with Banco - HELD THAT - Merely because the appellant was present when the resolution dated July 27, 2006 was passed, no conclusion can be drawn that this was the starting point of the fraudulent arrangement for issuance of GDR and for opening a bank account. Resolution does not given any indication that the appellant had knowledge beforehand that the GDR issue was the purpose to manipulate the price or the market or that a fraud would be played upon the shareholders and the investors. Finding of the WTM that the resolution of the Board of Directors dated June 27, 2006 provides execution of a pledge or execution of a charge agreement is wholly erroneous, perverse and based on no evidence. The resolution also does not stipulate that the proceeds could be utilized by the bank as security in connection with a loan taken by another entity. Appellant cannot be debarred only on the basis of being present in the resolution of the Board of Directors dated July 27, 2006. In the absence of any evidence that the appellant had a role to play in the issuance of the GDR, the mere presence of the appellant in the resolution of the Board of Directors dated July 27, 2006 does not make him liable for the alleged fraud that had been committed by the Company. After the judgment was reserved, the respondent have submitted a short note contending that the appellant was also chairman of the audit committee and remuneration committee which fact is reflected in the annual report of 2009-10 - As per MCA circular dated March 2, 2020 civil or criminal proceedings should not be unnecessarily initiated against the independent directors or non executive directors unless sufficient evidence exists to the contrary. We also find that Reserve Bank of India issued a circular dated April 23, 2015 indicating that non-whole time director should not be considered as a defaulter unless it is conclusively established that the default had taken place with his consent or connivance. Cogent evidence must come forward to the effect that a non executive non promoter independent director was aware of the fraud that had been played by the Company or that he was involved in the issuance of the GDR or that GDR was being issued with his connivance. Only then such non executive non promoter independent directors should be booked. Merely because he was part of the resolution of the Board of Directors would not make him liable. In the light of the aforesaid, the impugned order insofar as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed. In the circumstances of the case, parties shall bear their own costs.

Issues Involved:
1. Debarring the appellant from accessing the securities market for one year.
2. Violation of Section 12A of the SEBI Act, 1992.
3. Violation of Regulation 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations).
4. Adequacy of disclosure under the Listing Agreement.
5. Role and liability of a non-executive non-promoter independent director.

Issue-wise Detailed Analysis:

1. Debarring the appellant from accessing the securities market for one year:
The appellant was debarred from accessing the securities market for a period of one year by the WTM of SEBI for his alleged involvement in the fraudulent issuance of GDRs by the Company. The WTM concluded that the appellant, as a director, did not act diligently and failed to object to the authorization of the pledge agreement executed by the Company.

2. Violation of Section 12A of the SEBI Act, 1992:
The WTM found that the issuance of GDRs was a fraud on investors, violating Section 12A of the SEBI Act. The section prohibits employing any manipulative or deceptive device, scheme, or artifice to defraud in connection with the issue, purchase, or sale of securities.

3. Violation of Regulation 3 and 4 of the PFUTP Regulations:
The WTM held that the Company violated Regulation 3 and 4 of the PFUTP Regulations. These regulations prohibit dealing in securities in a fraudulent manner, using manipulative or deceptive devices, and engaging in practices that operate as fraud or deceit upon any person.

4. Adequacy of disclosure under the Listing Agreement:
The investigation revealed that the GDR issuance was not disclosed adequately under the Listing Agreement. The loan agreement and account charge agreement with Banco, which facilitated the GDR subscription by Whiteview, were not disclosed to the Stock Exchange, violating Clause 49 of the Listing Agreement.

5. Role and liability of a non-executive non-promoter independent director:
The appellant contended that he was a non-executive non-promoter independent director with limited involvement in the Company's day-to-day affairs and decision-making processes related to the GDR issue. The Tribunal found that there was no evidence to suggest that the appellant had any role in the fraudulent GDR issuance. The resolution passed by the Board of Directors did not indicate any fraudulent intent or knowledge on the appellant's part.

The Tribunal referred to previous decisions, such as Adi Cooper vs. SEBI, Adesh Jain vs. SEBI, and Chromatic India Limited vs. SEBI, which established that merely being a part of a resolution authorizing the opening of a bank account for GDR proceeds does not imply involvement in fraud. The Tribunal concluded that the appellant's presence in the resolution meeting did not make him liable for the alleged fraud.

The Tribunal also noted that the Ministry of Corporate Affairs and Reserve Bank of India had issued circulars emphasizing that independent directors should not be held liable unless there is conclusive evidence of their involvement in fraud. The Tribunal found no such evidence against the appellant.

Conclusion:
The Tribunal quashed the impugned order against the appellant, holding that there was no evidence to suggest his involvement in the fraudulent GDR issuance. The appeal was allowed, and the appellant was not held liable for the alleged fraud based solely on his presence in the resolution meeting. The Tribunal emphasized that non-executive non-promoter independent directors should not be held liable without cogent evidence of their involvement in fraud.

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