2022 (8) TMI 1465 - AT - SEBI

Offences by companies - Preferential allotment of shares - public shareholding of atleast 25% not followed - Restrain orders against Director,Executive Chairman and Non-Executive Director - allotment to the assignee companies was not a genuine consequence or outcome of the Assignment Deeds was based on the fact that the three companies had no business activity and their net worth was nowhere close to the assigned amounts - WTM found that the preferential allotment to the three assignee companies was not a genuine assignment and, therefore, the shareholding of the assignee companies has to be clubbed together with the shareholding of the promoter group which taken together would reach 87.27% and, therefore Falcon which had time till June 03, 2013 to achieve the minimum public shareholding of 25% as mandated under Rule 19(A)(1) of the SCRR was not achieved. HELD THAT - A loan was given by Manali/ Stephens which is not disputed and if the loan is not repaid Falcon/ Dunlop in their wisdom allotted shares to the assignee companies through preferential allotment of shares in order to square off the loan amount which is permissible in law. The three assignee companies are not promoter group companies of Falcon or Dunlop. Similarly, there is no evidence to show that the three assignee companies were group companies/ subsidiary companies of Manali/ Stephens. In the absence of any such evidence coming on record the WTM committed a manifest error in clubbing the shareholding of the three assignee companies, namely, Regus, Suncap and Sulputri with the shareholdings of Manali/ Stephens respectively and then clubbing it as the group shareholding with Falcon/ Dunlop. Such clubbing of shares, in our opinion, was not permissible in the eyes of law. We are of the view, that the company had rightly shown the shareholdings of the three assignee companies as public shareholdings. We are further of the view, that the shareholdings of the assignee companies cannot be clubbed together with the shareholding of the promoter group of Falcon or Dunlop respectively. The appellant as an Independent Director has been penalized for non-compliance of the MPS requirement under Clause 40A of the Listing Agreement read with Rule 19(A) of the SCRR. As stated earlier, the obligation to comply with the MPS requirement is upon the company, namely, Dunlop. In the instant case, Dunlop has not been made a party. No show cause notice has been issued to Dunlop and, consequently, in the absence of the company being made a party, no proceedings can be initiated against the Director of the Company. As if an offence is committed by the company then every person who was responsible to the company for the conduct of the business of the company would be guilty of the offence. Thus, violation of Clause 40A of the Listing Agreement read with 19(A) of the SCRR has to be first found against the company and only thereafter SEBI can proceed against the Directors who were responsible for the conduct of the business of the company at the time when the violation was committed. Thus, we are of the confirmed opinion, that no proceedings could have been initiated against the appellant Mohan Lall Chauhan without first initiating proceedings against its company Dunlop. The impugned order against the appellants cannot be sustained and to that extent the order is quashed. The appeals are allowed with no order as to costs. The misc. application is disposed of accordingly.

Summary

Issues Involved:
1. Restraint from accessing the securities market.
2. Investigation into the acquisition of shares through preferential allotment.
3. Allegations of collusion to avoid Minimum Public Shareholding (MPS) requirements.
4. Validity and genuineness of the assignment of loans and subsequent share allotment.
5. Compliance with Section 21 of SCRA and Rule 19(A) of SCRR.
6. Liability of the company and its directors for non-compliance with MPS requirements.

Issue-wise Detailed Analysis:

1. Restraint from accessing the securities market:
The appellants were restrained from accessing the securities market for two years and prohibited from buying, selling, or dealing in securities. Additionally, they were barred from associating with any listed company or SEBI registered intermediary in any capacity for two years.

2. Investigation into the acquisition of shares through preferential allotment:
SEBI conducted an investigation into the acquisition of shares of Falcon Tyres Limited and Dunlop India Limited by certain entities through preferential allotment. A show cause notice was issued to Falcon Tyres Limited, Pawan Kumar Ruia, Sunil Bhansali, S. Ravi, Mohan Lall Chauhan, and Damodar Prasad Dani.

3. Allegations of collusion to avoid Minimum Public Shareholding (MPS) requirements:
The show cause notice alleged that the scheme of loan assignment and subsequent conversion into equity shares was done in collusion with group companies and preferential allottees to avoid MPS requirements under Clause 40A of the Listing Agreement and Rule 19(A) of the SCRR.

4. Validity and genuineness of the assignment of loans and subsequent share allotment:
The WTM concluded that the preferential allotment was not genuine, as the assignee companies had no business activity and their net worth was insufficient. The assignment was without collateral securities, indicating a fraudulent device to circumvent MPS requirements.

5. Compliance with Section 21 of SCRA and Rule 19(A) of SCRR:
Section 21 of the SCRA mandates compliance with listing agreement conditions. Rule 19(A) of the SCRR requires a listed company to maintain a public shareholding of at least 25%. The WTM found that Falcon and Dunlop did not achieve the required MPS by the stipulated deadline.

6. Liability of the company and its directors for non-compliance with MPS requirements:
The Tribunal found that the loan given by Manali to Falcon was a genuine transaction, and the subsequent assignment and preferential allotment were permissible in law. The three assignee companies were not promoter group companies, and their shareholdings should be considered public shareholdings. The WTM erred in clubbing the shareholdings of the assignee companies with the promoter group.

The appellant Mohan Lall Chauhan, an Independent Director, was penalized for non-compliance with MPS requirements. However, the Tribunal noted that the obligation to comply with MPS requirements lies with the company. Since Dunlop was not made a party to the proceedings, no action could be taken against its director without first initiating proceedings against the company.

Conclusion:
The Tribunal quashed the impugned order against the appellants, allowing the appeals with no order as to costs. The Tribunal emphasized that the company must first be found in violation before proceeding against its directors.