2023 (9) TMI 574 - AT - SEBI

Fraudulent issuance of GDRs by the Company - Company had misled the investors in believing that the GDR issue was successful whereas there was only one subscriber - penalty of Rs. 1 crore for violation of Section 12A of SEBI on ex-managing director of the company as filled this appeal - HELD THAT - We find that the proceeds of the GDR issue were received by the Company belatedly and was utilized for the purpose for which the GDR was issued. There is no diversion of funds and no wrongful dealings in securities other than the fact that amount was received belatedly. The AO has himself given a finding that no disproportionate gain is attributed to the appellants nor any finding that any loss was caused to the shareholders or investors. Whether the penalty imposed by the AO was harsh and excessive? - As the appellant had resigned on January 14, 2008. The money raised through GDRs has been received by the Company and has not been misappropriated. The same has been utilitised for the purpose for which the GDR was issued which fact has not been disputed. Thus, it is not a case of defalcation of the funds. Thus, the imposition of penalty upon the appellant after 12 years from date of resigning is excessive. In a large number of cases we have reduced the penalty to Rs. 10 lakh. While affirming the order of the AO for the violations committed by the Company we reduce the penalty from Rs. 1 crore to Rs. 10 lacs. The appeal is partly allowed. In the circumstances of the case, parties shall bear their own costs.

Summary

Issues Involved:
1. Fraudulent scheme in issuance of GDRs.
2. Misleading investors and non-disclosure.
3. Proportionality of penalty imposed.

Summary:

1. Fraudulent Scheme in Issuance of GDRs:
The appeal was filed by the ex-managing director of Maars Software International Ltd. against the SEBI AO's order imposing a penalty of Rs. 1 crore for violating Section 12A of the SEBI Act and PFUTP Regulations. The company devised a fraudulent scheme involving the issuance of GDRs, with a resolution passed to open a bank account with EURAM Bank and authorize the appellant to execute necessary documents. A loan agreement was made with Vintage FZE to subscribe to 73,80,000 GDRs, secured by a pledge agreement.

2. Misleading Investors and Non-Disclosure:
SEBI's investigation found that Vintage was the sole subscriber to the GDRs, and the company did not disclose this fact, misleading investors. The loan and pledge agreements were not disclosed to the stock exchange or shareholders. A show cause notice was issued for violating Section 12A(a), (b), (c) of the SEBI Act and PFUTP Regulations. The company reported misleading information to the stock exchange, indicating successful GDR subscription, which was actually subscribed by one entity through a loan.

3. Proportionality of Penalty Imposed:
The AO rejected the appellant's contentions, holding the company guilty of misleading investors and committing fraud. However, it was noted that the GDR proceeds were used for their intended purpose without any diversion of funds or wrongful dealings in securities. The appellant argued that the penalty was harsh and excessive. The tribunal referred to the doctrine of proportionality, emphasizing that penalties should not be disproportionate to the offense. Comparative penalties in similar cases were considered, and it was found that the penalty imposed on the appellant was excessive and discriminatory. The tribunal reduced the penalty from Rs. 1 crore to Rs. 10 lakh, considering the appellant's resignation in 2008 and the proper utilization of GDR funds. The appeal was partly allowed, with each party bearing their own costs.