2016 (12) TMI 1202 - AT - Companies Law

Security market fraud - Order passed by the Whole Time Member of SEBI - persons connected to the Indian Securities Market debarred from rendering services in connection with instruments defined as securities under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 for a period of 10 years and prohibited from accessing the capital market directly or indirectly for a period of 10 years - Held that - Whether the Loan Agreement/ Pledge Agreement were validly entered into or not, proceedings could be initiated against AP if the very act of AP in subscribing to the GDRs through his connected entities constituted fraud on the investors in India. In such a case, the entities which issued the GDRs viz. Overseas Depository Banks or the entities who were parties to the Loan Agreement/ Pledge Agreement are not required to be impleaded as parties to the proceedings initiated against AP for committing fraud on the investors in India. Therefore, the argument of the appellants that without impleading the Overseas Depository Banks/ parties to Loan Agreement & Pledge Agreement as parties to the proceedings initiated against the appellants, no order could be passed against the appellants cannot be accepted. instead of ensuring that the foreign investors subscribe to the GDRs of Asahi, AP as Managing Director of PAN Asia planned to subscribe to the GDRs of Asahi through Vintage and in fact as Managing Director of Vintage took loan of 5.98 Million USD from Euram Bank for subscribing to the GDRs of Asahi and made Asahi to pledge to the Euram Bank the GDR subscription amount of 5.98 Million USD as security for the loan taken by Vintage. Similar modus operandi was adopted in case of other issuer companies. Thus, the investors in India were made to believe that in the global market the issuer companies have acquired high reputation in terms of investment potential and hence the foreign investors have fully subscribed to the GDRs, when in fact, the GDRs were subscribed by AP through Vintage which was wholly owned by AP. In other words, PAN Asia as a Lead Manager and AP as Managing Director of PAN Asia attempted to mislead the investors in India that the GDRs have been subscribed by foreign investors when in fact the GDRs were subscribed by AP through Vintage. Any attempt to mislead the investors in India constitutes fraud on the investors under the PFUTP Regulations. Fact that the appellants had not informed the Stock Exchanges about the GDRs being fully subscribed cannot be a ground for the appellants to avoid action being taken for misleading the investors in India, because, under the PFUTP Regulations, action can be taken even against a person who has caused the investors in India to believe in something which is not true. In the present case, it is apparent that prior to the issuance of GDRs, AP as Managing Director of PAN Asia had designed a plan to subscribe to the GDRs of Asahi and in implementation of that plan AP took loan of 5.98 Million USD as Managing Director of Vintage specifically for subscribing (take down) GDRs of Asahi and in fact on issuance GDRs, 5.98 Million USD was transferred to the account of Asahi with Euram Bank as GDR subscription amount. Thus, AP as Managing Director of PAN Asia was the root cause in creating artificial impression that the GDRs have been subscribed by foreign investors when in fact GDRs were purchased by AP through Vintage. Such an act is clearly prohibited under the PFUTP Regulations. Findings recorded in the impugned order that the names of initial subscribers exist only in fiction and that the appellants have artificially sought to create an impression that the GDRs were initially subscribed by foreign investors other than Vintage cannot be faulted. Decision of SEBI that the appellants attempted to committed fraud on the investors in India by introducing fictitious initial subscribers cannot be faulted.. Creating artificial impression with a view to mislead the investors in India either directly or indirectly is a serious offence and in the present case, since AP holding 100% shares of PAN Asia has committed fraud on the investors in India in relation to GDRs of several issuer companies, we see no reason to interfere with the debarment order passed against the appellants.

Summary

Issues Involved:
1. Jurisdiction of SEBI to initiate proceedings.
2. Allegations of fraud and misrepresentation.
3. Procedural fairness and principles of natural justice.
4. Validity of the GDR issuance process.
5. Role and responsibilities of the Lead Manager.
6. Connection and involvement of various entities.
7. Consequences of the fraudulent activities.

Detailed Analysis:

1. Jurisdiction of SEBI to Initiate Proceedings:
The appellants challenged the jurisdiction of SEBI to initiate proceedings against them concerning their role as Lead Managers to the Global Depository Receipts (GDRs) issued by Indian companies outside India. Initially, the Tribunal set aside SEBI's decision on jurisdictional grounds. However, the Apex Court reversed this decision, affirming SEBI’s jurisdiction to initiate proceedings if the appellants violated SEBI Act provisions and related regulations.

2. Allegations of Fraud and Misrepresentation:
The appellants were accused of creating an artificial impression that the GDRs were fully subscribed by foreign investors when, in fact, they were subscribed by entities controlled by the appellants. This was deemed fraudulent under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). The Tribunal found that the appellants, through a series of transactions involving loans and pledges, misled Indian investors into believing that there was significant foreign interest in the GDRs, constituting fraud.

3. Procedural Fairness and Principles of Natural Justice:
The appellants argued that SEBI’s proceedings were flawed due to the non-inclusion of other entities allegedly involved in the fraud. The Tribunal rejected this argument, stating that under the PFUTP Regulations, SEBI could proceed against any person whose actions constituted fraud on the securities market, even if other involved entities were not part of the proceedings.

4. Validity of the GDR Issuance Process:
The investigation revealed that the GDRs were subscribed by an entity (Vintage) controlled by the appellants, using funds obtained through a loan, which was secured by pledging the GDR proceeds. This process was found to be designed to create a false impression of foreign investor interest. The Tribunal upheld SEBI’s findings that the appellants' actions in the GDR issuance process were fraudulent.

5. Role and Responsibilities of the Lead Manager:
As Lead Manager, PAN Asia (controlled by the appellants) was responsible for ensuring that the GDRs were subscribed by genuine foreign investors. Instead, the appellants used their entity, Vintage, to subscribe to the GDRs, thereby misleading the market. The Tribunal concluded that the appellants failed in their duties as Lead Manager and engaged in fraudulent activities.

6. Connection and Involvement of Various Entities:
The Tribunal found that the appellants were connected with various entities involved in the GDR transactions, including Vintage, IFCF, and KII Ltd. These connections were used to manipulate the market and create a false impression of foreign investor interest. The investigation also revealed that some of the alleged initial subscribers were non-existent entities, further supporting the fraud allegations.

7. Consequences of the Fraudulent Activities:
The Tribunal upheld SEBI’s decision to debar the appellants from rendering services related to securities and from accessing the securities market for ten years. The appellants' actions were found to have created an artificial market and misled investors, justifying the severe penalties imposed.

Conclusion:
The appeal was dismissed, and SEBI’s order was upheld. The Tribunal found that the appellants had committed fraud on Indian investors by creating a false impression of foreign interest in the GDRs, violating the PFUTP Regulations. The penalties imposed by SEBI were deemed appropriate given the severity of the fraudulent activities.