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TMI Blog2015 (5) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... irectly or indirectly for a period of three years. The Impugned Order has been passed pursuant to a Show Cause Notice ('SCN') dated 25th June, 2013. All these appeals have been heard together and Appeal No. 331/2014 (DLF Ltd. v. SEBI) has been taken as the lead case in which detailed and exhaustive arguments have been advanced and its decision shall govern the fate of connected seven appeals. 2. Antecedental facts leading to the issuance of the SCN as well as passing of the Impugned Order are relevant and hence succinctly narrated herein below: 3. The Appellant is a Public Limited Company, registered under the Companies Act, 1956, with effect from 4th July, 1963, at New Delhi. It is mainly engaged in the business of real estate development since then. For the purpose of consolidation of fragmented pieces of land into a bigger chunk for development, the Appellant floats many subsidiaries or associate-companies which are divested after achieving the business objective. The appellant intended to make a public issue of 1,75,00,000 (one crore, seventy five lac) Equity shares of Rs. 2/- each for cash at a price of Rs. 525/- per equity share. With this objective in mind, the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dee and Shri Pramod Jain and M/s. Mahavir Global Coal Private Limited as the Vendors for purchasing a piece of land. All this was done with the good offices extended by KKS as the Conforming Vendor. As a consideration for this transaction, KKS received Rs. 34,27,31,188/- (Rupees :Thirty Four Crore, Twenty Seven Lac, Thirty One Thousand, One Hundred and Eighty Eight only) by way of cheque from Sudipti. This payment seems to be in addition to the sum of Rs. 6.34 crore paid by different cheques to the vendors separately by Sudipti. After acquiring the land in question, Sudipti entered into a Development agreement with DLF Commercial Project Corporation ('DCPC') on 09.10.2006 whereby DCPC acquired the rights to substantially all the revenues from the development of the land, the exclusive right to develop as well as to control the use and disposition of land and the authority to transfer the title to the land. 6. KKS filed a criminal complaint on 26th March, 2007, mainly accusing Sudipti, its Directors and its authorized signatory of duping him of about Rs. 34 crore which he allegedly gave to Sudipti in cash and he got an FIR registered on 26th April, 2007, by naming one Mr. P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DLF Home and DLF Estate, had duped him of Rs. 34 Crore and that the Appellant was misguiding gullible investors by not following the law. KKS had also lodged an FIR with the Police on 26th April, 2007. Said complaint dated 4th June, 2007 of KKS was forwarded by the Respondent to the Appellant's Merchant Banker for appropriate action and the Merchant Banker, in turn, forwarded the said complaint to the Appellant on 25th June, 2007. The Appellant as well as the Merchant Bankers on 11th July, 2007 and 19th July, 2007, respectively replied to the Respondent to the effect that the complaint made by KKS was frivolous and hollow inasmuch as the three subsidiaries, i.e., Sudipti, Shalika and Felicite were not the subsidiaries of DLF Home, DLF Estate and DLF Retail after 30th November, 2006, and hence, there was no question of erstwhile subsidiaries or associates being mentioned in the second and fresh DRHP filed with the Respondent on 2nd January, 2007. Similarly, the claim for payment of about Rs. 34 crore in cash by KKS to Sudipti was also vehemently denied. Being dissatisfied, KKS approached the Hon'ble Delhi High Court by way of Writ Petition (C) No. 7976 of 2007 on 29th Oct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, even remotely, on the merits of the case. The appeals are accordingly disposed of without any order as to costs." 9. In response to the above said directions dated 21st July, 2011, the Whole Time Member (1st WTM) of the Respondent, namely - Mr. Prashant Sharan, heard the parties and by order dated 20th October, 2011, directed an investigation into the complaints of KKS in respect of the Appellant and Sudipti. The operative portion of this order reads as under : "16. In view of the foregoing, the following decision is taken in respect of the complaints dated June 4, 2007 and July, 19, 2007. I. The Securities and Exchange Board of India shall investigate into the allegations levelled by the Complainant, Mr. Kimsuk Krishna Sinha in respect of DLF Limited and Sudipti Estates Private Limited. II. The said investigation shall focus on the violations, if any, of the provisions of the erstwhile Securities and Exchange Board of India (Disclosure and Investors Protection) Guidelines, 2000 read with the relevant provisions of the Companies Act, 1956. 17. A formal order would be issued appointing the Investigating Authority. The said Officer shall investigate the matter without being p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;2nd WTM' has passed the Impugned Order in question, which has led to the present appeal being preferred. 12. Before we deal with the respective contentions of the parties, it would be appropriate to take notice of a few factual developments, concerning the present dispute, which have taken place in the meanwhile. The FIR lodged by KKS on 26th April, 2007 was found to be false and meritless after thorough investigation into the allegations against the Appellant levelled by KKS. It was found by the Police that the allegation in the complaint against the Appellant was mainly advanced with a view to avoid liability to pay Short Term Capital Gains tax by KKS. Accordingly, the Police filed a Closure Report in the matter of such FIR before the Metropolitan Magistrate, who was pleased to dismiss the protest petition filed by KKS and to uphold the filing of the Closure Report by order dated 27th August, 2009. It appears that KKS has taken up the matter before the Appellate Authority and the same is pending. 13. Even while the proceedings before the Respondent against the Appellant were going on pursuant to SCN dated 25th June, 2013, KKS approached the Hon'ble High Court of Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdiction. The Inquiry Officer erred in placing a restraint on the Appellant on an immediate basis when the alleged violations took place in the year 2007 without serving any public purpose. As far as materiality of information is concerned, it is stated that, as per clause 6.2 of the DIP Guidelines, materiality would be sufficient if the information, on being true and adequate, leads to an informed decision being made by the investors. In this context, it is contended that even if the Appellant had incorrectly shown the three companies as related parties, it would not have contributed in any way to the investors' decision. This is because the Appellant had accounted for its interest in Sudipti's land by delineating its sole development right on Sudipti's land in the Prospectus. The Impugned Order ignores and is also silent on the fact that investors have not come forward with any kind of grievance regarding any alleged wrong or inadequate disclosure in the Offer Documents. Neither has the Appellant benefitted in any way from the alleged inadequate disclosure nor has any loss been caused to the investors. 17. The fact that the miniscule parcel of land concerned was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limb of his arguments on the question of "Control" of the Board of Shalika, Sudipti and Felicite despite their disinvestment by the Appellant-Company, it is submitted by Shri Janak Dwarkadas that under the Companies Act, 1956, the test of "Control" is referable to the composition of the Board of Directors by controlling appointment thereto and removal therefrom and not otherwise. There is nothing in the Impugned Order to substantiate the allegation that the Appellant exercised any kind of control over Shalika, Sudipti and Felicite even after the transfer of shares was effectuated. This has been alleged purely on the basis that the employees of the Appellant's subsidiaries were on the boards of these three companies. The term "control" as envisaged in Section 4 of the Companies Act, 1956, does not include the meaning that SEBI is purporting to give to it. There are two tests provided in the Section, viz., (i) the controlling company should hold more than half of the share capital of the other, and (ii) the controlling company should control the composition of the board of directors of the other company. It is the contention of the Appellant that purely on the basis of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not barred by either Section 4 of the Companies Act, 1956, and/or AS-21, particularly, for determining the parent-subsidiary relationship. It is also denied by the Appellant that money to purchase shares of Felicite was funded by the respective husbands of transferees who were the KMPs of the Appellant-Company. In this connection, it is submitted that the spouses who ventured to invest in the shares of Felicite or other companies of the Appellant did it by employing funds available from the joint accounts they held with their husbands, and there cannot be any legal bar on such expenditure by the wife from out of any such joint account. 22. Further, referring to the allegations regarding the provisions of Clause 6.10.2.3 of the DIP Guidelines, it is submitted on behalf of the Appellant that the said Clause pertains to the disclosure with respect to the Financial Statement of the Issuer Company. In terms of Clause 6.10.2.1, a Prospectus is required to contain a report by the Auditors of the Issuer Company. In this connection, Shri Dwarkadas, Learned Sr. Counsel, has reiterated factual matrix to repel the Respondent's allegation that despite divestment of equity interest by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt has failed to appreciate that the definition of "dealing in securities" does not encompass "buying, selling or subscribing pursuant to any issue of securities or agreeing to buy, sell or subscribe to any issue of any securities". And hence would not attract Regulations 3 and 4 of the Regulations. The respondent has erred in holding the Appellant guilty of contravention of the PFUTP Regulations, including "fraud", purely on the premise that the definition of "fraud" in the PFUTP Regulations is inclusive. The Impugned Order wrongly holds the Appellant guilty of contravention of Clause 9.1 of the DIP Guidelines. The Appellant submits that the order dated 21st July, 2011 passed by the Hon'ble Delhi High Court required SEBI to examine only the complaints made by KKS to the Respondent dated 4th June, 2007 and 19th July, 2007. 25. The Respondent has filed a detailed affidavit on 01.12.2014 before this Tribunal seeking to justify the impugned action. Shri Rafique Dada, Learned Senior Counsel, also advanced lengthy, strenuous and meaningful arguments in support thereof. It is mainly submitted by Shri Dada that the Impugned Order has been passed after taking a decision on a cumulativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment towards the purchase of shares of Shalika was a component of the composite payments made by Felicite. 28. Next, the Respondent contends that the equity share holding of Felicite, i.e., holding company of Shalika and Sudipti was bought by Mrs. Madhulika Basak, Mrs. Padmaja Sanka and Mrs. Niti Saxena, respectively, who happened to be the wives of Mr. Surojit Basak, Mr. Ramesh Sanka and Mr. Joy Saxena, working under the Appellant. It is also contended that the payments for this purchase of shares to Felicite were made by these housewives from the bank accounts held by them jointly with their respective husbands. Therefore, the three payments of Rs. 30,000/-, Rs. 40,000/- and Rs. 30,000/- were, in fact, made by Mr. Surojit Basak, Mr. Ramesh Sanka and Mr. Joy Saxena to "DLF-Home", DLF Retail and DFL Estate respectively as consideration for the equity shares of Felicite, and hence were all sham transactions. 29. Respondent further contends that even after the alleged transfer of control of Felicite to the three housewives, Felicite received a payment of Rs. 2,00,00,000/- vide 10 credit entries of Rs. 20,00,000/- each between 29th November, 2006 to 19th December, 2006, i.e., immedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel for the Respondent, submits that being entities controlled by the Appellant, the three companies were related parties in terms of AS-18 as the same were squarely covered by the definition of related party, related party transactions and significant influence as provided in the Accounting Standards. Shri Dada has drawn our attention towards the definitions of Related Party Transaction, Control, Significant Influence, etc. as occurring in AS-18. Shri Dada has submitted that a joint reading of the aforesaid definitions would clearly show that the three companies were related parties of the Appellant within the terms of AS-18, as the Appellant had the ability to control and exercise significant influence on the three companies in the making of financial and/or operating decisions. The failure to make disclosures with regard to the related party transactions pertaining to the three companies is a clear violation of Clause 6.9.6.6 of the DIP Guidelines. As the three companies were the subsidiaries of the Appellant under Clause 6.10.2.3 of DIP Guidelines, 2000, the Appellant was bound to disclose the financial details of the subsidiaries in its Offer Documents and its failure to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive investors makes it a fit case for invoking Section 12-A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations, 2003. The Respondent contends that the alleged plan to camouflage the association of the Appellant with the three subsidiaries through a series of sham transactions amounts to fraud. The Respondent, thus, alleges that the Appellant, in its Offer Documents, had failed to make disclosure on various counts like related party transactions, financial details of subsidiaries and outstanding litigation of subsidiaries thereby violating clauses 6.2, 6.9.6.6, 6.10.2.3, 6.11.1.2, 6.15.2 and 9.1 of the DIP Guidelines, 2000. 35. We have also heard Shri B.M. Chatterjee, Ld. Sr. Counsel on behalf of Shri KKS in Appeal No. 331/2014 pursuant to the directions of Hon'ble Supreme Court. Shri Chatterjee, Ld. Sr. Counsel, fairly adopted the arguments of Sebi in defending the impugned order. He, however, intended to file certain documents, which he had not brought to the notice of the Hon'ble Delhi High Court or the 1st WTM, who had offered KKS an opportunity of hearing. The contents of the impugned order reveal that Sebi itself has not paid any heed to the alleged clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that in the absence of any provision under the SEBI Act making the Directors/CFO automatically liable for the offences allegedly committed by the company, Sebi is not justified in passing the impugned order against the Directors/CFO of DLF. In support of the above submission reliance is placed on the decisions of the Hon'ble Apex Court in the case of Maksud Saiyed v. State of Gujarat [2008] 5 SCC 668, CCE v. Brindavan Beverages (P.) Ltd. [2007] 5 SCC 388 and Collector of Customs v. Tin Plate Co. of India Ltd. [1997] 10 SCC 538. Reliance is also placed on decision of the Apex Court in Sunil Bharti Mittal v. CEB [Criminal Appeal No. 34 of 2015, dated 9-1-2015] in support of the contention that liability for offending acts of a company can be foisted on its directors only when the applicable statute specifically provides for vicarious liability contained in the statute, there has to be a specific act attributable to a director so as to hold such director responsible for the offending acts committed by or on behalf of the company. Relying on a decision of the Hon'ble Apex Court in case of Union of India v. Rai Bahadur Shreeram Durga Prasad (P) Ltd. 1969 (1) SCC 91 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he parties. Pursuant thereto, a WTM of Sebi, namely, Shri Prashant Sharan, (1st WTM) held certain hearings in the matter and after affording an opportunity of being heard to the parties and in the light of the directions of Hon'ble Division Bench of High Court, passed an order dated 20th October, 2011, directing an investigation to be conducted into the allegations levelled by KKS in respect of DLF and Sudipti, focusing on violations, if any, of the provisions of DIP Guidelines, 2000, read with relevant provisions of the Companies Act, 1956. The SCN dated 25th June, 2013 and the Impugned Order dated 10th October, 2014, passed by the "2nd WTM", Shri Rajiv Agarwal, however, expanded the scope of the enquiry by incorporating alleged the violation of the PFUTP Regulations by the Appellant which was conspicuously missing in the order passed by a Division Bench of Hon'ble High Court of Delhi and also in the order dated 20th October, 2011 passed by the "1st WTM". 40. The SCN dated 25th June, 2013, states that DLF, its Directors and its Chief Financial Officer had "... employed a scheme of camouflaging the association of Sudipti with DLF as disassociation. The noticees have failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egation that the transaction of transfer of shares by Appellant in the three companies was not genuine and that the Appellant continued to control the same despite divestment. In paragraph 18(e) of the Impugned Order the "2nd WTM" has himself noted that on the date of filing of the second DRHP with Sebi, i.e., on 2nd January, 2007, as a result of the transfer of shares by the Appellant, the three companies, i.e., Shalika Sudipti and Felicite were no longer the subsidiaries of DLF. Therefore, the question to be considered, as regards Issue No. 1 enumerated herein-above, is the genuineness of the transactions leading to divestment of the three companies. The determination of this question will tell us whether DLF continued its control over these three companies post-divestment and if it is so, whether DLF violated Clause 6.10.2.3 of the DIP Guidelines, read with other clauses, by not disclosing the same in the "Offer Documents". This is the main allegation levelled against the Appellant as regards Issue No. 1. In order to decide Issue No. 1 against the Appellant, not only has the "2nd WTM" considered the concept of 'Control' as appearing in Section 4 of the Companies Act, 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships ; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect to which any of the following conditions is satisfied, that is to say - (a) that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid ; (b) that a person's appointment thereto follows necessarily from his appointment as director or manager of, or to any other office or employment in, that other company ; or (c) that the directorship is held by an individual nominated by that other company or a subsidiary thereof. "SAST Regulations, 1997 (i.e., the Takeover Code) Regulation 2 (1)(c):- "Control" shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, deal with the profits or losses of the issuer company (distinguishing items of a non- recurring nature) for each of the five financial years immediately preceding the issue of the Prospectus; and (b) so far as regards assets and liabilities, deal with the assets and liabilities of the issuer company at the last date to which the accounts of the issuer company were made up. 6.10.2.3 If the issuer company has subsidiaries, the report shall: (a) so far as regards profits and losses, deal separately with the issuer company's profits or losses as provided by 6.10.2.2 and in addition, deal either: (i) as a whole with the combined profits or losses of its subsidiaries, so far as they concern the members of the issuer company; or (ii) individually with the profits or losses of each subsidiary, so far as they concern the members of the issuer company; or, instead of dealing separately with the issuer company's profits or losses, deal as a whole with the profits or losses of the issuer company, and, so far as they concern the members of the issuer company, with the combined profits or losses of its subsidiaries; and (b) so far as regards assets and liabilities, deal separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of shares in the listed companies. Therefore, reference made to the definition of 'Control' under the Takeover Code reflects a complete non-application of mind in this regard. This act of the Respondent to shop for clauses and provisions in different statutes, in an arbitrary manner, needs to be condemned. In fact, the pari materia principle ought to be invoked to promote uniformity and predictability in law in order to supplement and not supplant a rule of law by another. 46. Similarly, Accounting Standards are written/policy documents issued by expert accounting bodies, such as, the Institute of Chartered Accountants of India (ICAI), covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statements by the companies. The basic objective of the Accounting Standards is to standardize the diverse accounting policies and practices with a view to eliminate to the largest extent possible the non-comparability of financial statements and ultimately make them more reliable. Accounting Standards, like AS-18, AS-23, AS-24, give their own, and rather slightly different, definition of the expression "Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that these rules of 2006 are a legitimate aid to construction of the Companies Act as contemporanea expositio. 48. The present case is not one where the Statutory Auditors or Merchant Bankers, on whose shoulders lie the primary responsibility of making true and adequate disclosures, are sought to be proceeded against by the Respondent. The Appellant was bound by law to engage/hire their professional services for drafting and presenting the Offer Documents to Sebi for finalisation before the IPO could be actually opened up for public subscription after registering the same with the ROC. This is how the shares are finally listed on Stock Exchanges. In fact, Merchant Bankers and Auditors are mandatorily required to be engaged by a company to prepare and present Offer Documents to Sebi. They discharge their respective functions in bringing out an IPO on behalf of a company under the parameters statutorily prescribed by the Respondent itself and in case of default, they are amenable to the jurisdiction of Sebi for action since the primary responsibility for true and adequate disclosure lies with them. In fact, Merchant Bankers are responsible for laying down the foundation of an IPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usions. Records clearly reveal that the Appellant had engaged the professional and specialized services of 8 to 10 Merchant Bankers and Auditors of national and international repute to advice, draft and float the Offer Documents. None of them has been proceeded against by the Respondent. Auditors can be said to be akin to gatekeepers. If the conclusions reached by them are liable to be ignored in such a callous manner, without at first finding any fault with the Auditors'/ Merchant Bankers' conduct, one wonders whether any purpose is served by having the Offer Documents audited to begin with. 50. The Respondent, if convinced that the information in the second DRHP was, in any manner, inadequate or untrue, in all fairness should have called upon the Merchant Bankers to incorporate additional facts about the three companies in question, in the second DRHP dated 2nd January, 2007, when it directed them vide letter dated 7th May, 2007, to include several other facts in the Offer Document. The Respondent failed to do the needful at that stage even after brooding over the second DRHP from 2nd January, 2007 to 7th May, 2007. The Respondent could have, at the threshold, issued sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re attempting to determine whether or not the two ingredients of the definition have been satisfied in this case, we first need to deal with whether the three companies concerned can even be considered as subsidiaries of the Appellant in the first place. Only once this crucial aspect is decided does the question of control arise. The fact of the matter is that once a policy decision had been taken by DLF to divest all of its subsidiaries, followed by actual divestment of its interest in about 281 companies, there was no occasion for the Appellant to mention the three companies, in question, as subsidiaries or associates as that would have been a patently false statement on the part of the Appellant. And this factum was duly brought on record by the Appellant before Sebi. Another point to note is that hundreds of such so-called associates or subsidiaries sailing in the same boat were left untouched by Sebi. 52. Before holding that at the relevant time Shalika, Sudipti and Felicite were or were not the subsidiaries of the Appellant and that there was no control as defined in AS-23, one has to look into the Scheme of AS-23 and its real purport. We would like to make note of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in AS-23 to establish the charge of 'Control' against the Appellant-Company. 54. Even otherwise, the scheme, as envisaged under AS-23 mainly pertains to accounting for investment in associates in the preparation and presentation of consolidated financial statements by an Investor and the definition of associate in para 3.1 excludes subsidiary of an enterprise. Therefore, AS-23 cannot have any application in the present case where the Respondent itself is contending that the three companies, i.e., Shalika, Sudipti and Felicite were the subsidiaries of the Appellant-Company. Therefore, the finding in the Impugned Order to the effect that despite transfer of shares by DLF-Estate, DLF-Home and DLF-Retail, the three companies, namely - Shalika, Sudipti and Felicite continued to be the subsidiaries of the Appellant-Company for the purpose of AS-23 and, hence, ought to have been disclosed, as required by Clause 6.10.2.3, etc. of the DIP Guidelines, has no legs to stand on. 55. Now, if we look at the scope of Clause 6.10.2.3 of DIP Guidelines under which the Appellant is alleged to have made disclosure of the subsidiaries because of the alleged control over them, we note that Cl. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had any intention to withhold from Sebi or from the public the factum of Shalika, Sudipti and Felicite being subsidiaries, it would not have mentioned the same in the second DRHP altogether. But this was not the case and, on the contrary, this factual aspect was duly brought to the notice of Sebi by the Appellant. This was the right time for Sebi was to have called upon the Appellant and rather its Merchant Bankers in the first instance to incorporate some more facts about Shalika, Sudipti and Felicite, if it felt that the relationship of the holding and the subsidiary company still persisted between them. This was not done for obscure reasons. 57. Sebi, therefore, cannot suddenly be allowed to take a somersault after seven years and come to a contrary view, particularly, at the instance of a complainant who had his own vested interest in the matter, and was not a share-holder of the Appellant or even an investor in the IPO or in the capital market in general. Once an informed and well considered decision has been arrived at by the Respondent, the threat of that decision being overturned, after a lapse of an inordinately long period, cannot be allowed to hover over the heads of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he three companies after their divestment. We find that the Impugned Order is full of incorrect inferences based on surmises, conjectures and some faint corroboration to support faulty and forced conclusions. 59. Furthermore, any attempt by DLF to remove the earlier Directors of the three companies in question post their divestment would have contravened the provisions of sub-section (2) of Section 4 of the Companies Act, 1956. Continuance of the earlier Board of Directors by an erstwhile subsidiary of a Holding-Company is an issue to be wholly addressed by such subsidiary or its share-holders and unless the erstwhile holding-company is shown to have exerted any sort of influence to keep unchanged the original Directors on the Board of the erstwhile subsidiaries or even remotely attempt to introduce its own nominees on the Board of such subsidiaries, the holding-company cannot be said to be exercise of control over the subsidiary despite transfer of total shares. Therefore, the finding in the Impugned Order that the Appellant-Company controlled the fate of the three companies in question, through originally appointed Directors, even post divestment, cannot withstand the scrutiny o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trix of payment brought on record by the Appellant by way of affidavit duly annexing Statutory Auditors' certificate in respect thereof. If Sebi, at any time, thought this factum to be untrue, it could have very well asked DLF to produce account statement/ledger book entry to satisfy itself that the payment of Rs. 24,80,000/-; Rs. 24,80,000/-; and Rs. 10,20,000/- received by DLF-Estate, DLF-Home and DLF-Retail from Felicite also included the amounts payable by Felicite towards the consideration for purchasing 100% shares of Shalika. Even otherwise, these are not the criteria mentioned in the Companies Act, 1956 or the DIP Guidelines for determining control of a company over another. Once the challenged divestment went through, the Appellant stopped bothering itself with the goings-on in the three companies in question. It is ludicrous to try and find fault with the Appellant in a situation such as this, especially in the absence of any shred of evidence which points towards there being any modicum of control. In law, there are many situations in which a hypothetical situation is put forward to justify certain measures. Such a hypothesis, however, needs to be buttressed by evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nference of decisive control over the composition of the Board of such companies by the Appellant-Company. We, therefore, hold that the Appellant did not control either the composition of the Board of Directors of these three companies or in any manner attempt to appoint or remove the earlier Directors which was the task of the share-holders of the three erstwhile subsidiaries post the total divestment of shares. A holding company, after it has sold its 100% shares in a subsidiary, practically becomes functus-officio qua the management and control of the erstwhile subsidiary. The finding on Issue No. 1 in the Impugned Order is, thus, unsustainable in law and on fact. Indeed, it is also not the Respondent's case that various share transfers, as reflected in the SCN itself were not legally effectuated. It is a matter of record that all these transactions did convey a complete and legal title on the respective transferees, i.e., Shalika, Sudipti and Felicite. Therefore, once the share transfers are accepted as legally valid transactions, the Respondent could not have condemned such legally binding transactions as sham transactions or camouflage. It is a matter of record that pursu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to passages from G.W. Paton on Jurisprudence, Dias on Jurisprudence, Stroud's Judicial Dictionary and Pollock on Jurisprudence. We may use-fully extract certain passages from the judgment of the Patna High Court. 32. The learned Judges observed at page 361 : "The emphasis, therefore, in this statutory provision is that the tax under the Section is in respect of ownership. But this matter is not as simple as it looks. This leaves us to a more vexed question as to what is ownership. Should the assessment be made at the hands of the person who has the bare husk of the legal title or at the hands of the person who has the rights of an owner of a property in a practical sense? Enjoyment as an owner only in a practical sense can be attributed to the term "owner" in the context of this Section - a person who can exercise the rights of the owner and is entitled to the income from the property for his own benefit. It is well- settled, and learned counsel for either side were not at loggerheads, that the section cannot be so construed as to make it an instrument of oppression, to use the language of Hegde, J., in the case of Jodha Mal, (1971) 82 ITR 570 (SC) xxx xxx xxx xxx xxx xxx ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in respect of the piece of land (35 acres) in question belonging to Sudipti. The Appellant did not, in any manner, defraud or mislead the prospective investors. We, therefore, hold that the finding on Issue No. 1 in the Impugned Order is perverse and liable to be set aside. 67. Regarding the remaining two issues, the main plank of arguments advanced by Shri Rafiqueue Dada, Ld. Sr. Counsel, centers around violation of certain other provisions of DIP Guidelines, 2000 by the Appellant as regards the non-disclosure of the three companies, i.e., Sudipti, Shalika and Felicite, as its subsidiaries and the FIR lodged by KKS on 26th April, 2007, against Sudipti/Pravin Kumar with Delhi Police. It is, therefore, essential to broadly analyze the scheme of DIP Guidelines, 2000, so as to appreciate the philosophy underlying these Guidelines and the arguments advanced by the Ld. Sr. Counsel, Shri Rafique Dada. 68. The DIP Guidelines have been framed by SEBI under powers conferred by Section 11 of the SEBI Act, 1992, and not under section 30, which lays down due procedure to be followed by Sebi for framing proper Regulations, after seeking approval of the Government and after laying down the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue process. In addition, the lead Merchant Banker is also required to pay few crores of rupees towards the requisite fee as mentioned in Regulation 24-A of the SEBI (Merchant Bankers) Rules and Regulations, 1992, along with the Draft Offer to SEBI for processing the same. Regulation 5.3.1 also requires a Memorandum of Understanding (MOU) to be entered into between the Lead Merchant Banker and the Issuer Company, specifying their mutual rights, liabilities and obligations relating to the issue. This MOU is also required to be submitted to SEBI. Similarly, a Merchant Banker is required to furnish a 'Due Diligence' certificate to SEBI in the prescribed format and reflected in Schedule III along with the Draft Prospectus. There are other formalities which the lead Merchant Banker is required to perform in respect of the contents, etc. of the Offer Documents. Regulation 5.6 also provides that the Offer Document is to be made public by the lead Merchant Banker at least for a period of 21 days from the date of filing with the SEBI. Schedule III, inter alia, requires the lead Merchant Banker to submit a certificate stating that various documents, including those relating to litiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in Regulation 6.4.2.2 (a) (iv), (v) and (vi) shall be printed in clear readable font. The shall factor shall be determined on the basis of their materiality which, in turn, shall be decided taking into various factors mentioned in 6.7.4.1, 2, 3 and so on. Regulation 6.9 deals with the details of the Issuer Company and requires the company to give its Industry as well as Business Overview. Regulation 6.9.2.3 deals with the details of 'Property' or 'Purchase of Property'. Regulation 6.9.5 is an important clause and has many sub-clauses. It deals with management and includes composition of the Board of Directors and the details and interest of Directors, Managing Director, Whole Time Directors, etc. Regulation 6.9.5.8 deals with 'Key Management Personnel' and requires a paragraph on the "Key Managerial Personnel" to be incorporated in the Prospectus with full details. Sub-para (e) of Regulation 6.9.5.8 provides that any change, except by way of retirement, in the 'Key Senior Managerial Personnel' particularly in-charge of Production, Planning, Finance and Marketing shall also be disclosed in the Prospectus. Similarly, a Lead Merchant Banker is also re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 Chapter IX deals with guidelines on advertisement and only Regulation 9.1 is pressed into service by the Respondent in the SCN and it states that an Issue advertisement shall be truthful, fair and clear and shall not contain any statement which is untrue or misleading. 68.7 Chapter X deals with guidelines for Issue of Debt Instruments; Chapter XI deals with guidelines on Book Building. Chapter XII deals with Guidelines for Issue of Capital by Designated Financial Institutions. Chapter XII-A deals with Shelf Prospectus. Chapter XIII deals with Guidelines for Preferential Issues; Chapter XIII-A deals with Guidelines for Qualified Institutions Placement; Chapter XIV deals with Guidelines for Over the Counter Exchange of India Issues; Chapter XV deals with guidelines for Bonus Issues and Chapter XVI deals with Operational Guidelines, none of which find any place in the SCN. 68.8 Chapter XVII which deals with 'Miscellaneous' aspects, inter alia, provides for directions which could be issued in case of a violation of the DIP Guidelines by SEBI in the interest of the Securities Market as well as those of Investors. SEBI is, inter alia, empowered to direct the persons concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (if applicable)." Clause 6.15.2 - "Declaration - (a) The draft Prospectus (in case of issues other than fast track issues), red herring Prospectus and Prospectus shall be approved by the Board of Directors of the issuer and shall be signed by all Directors, the Chief Executive Officer, i.e., the Managing Director or Manager within the meaning of the Companies Act, 1956 and the Chief Financial Officer, i.e., the whole-time Finance Director or any other person heading the finance function and discharging that function. (b) The signatories shall further certify that all disclosures made in the Prospectus are true and correct.)" Clause 9.1 - "Guidelines on advertisement : 9.1.0 - An issue advertisement shall be truthful, fair and clear and shall not contain any statement which is untrue or misleading." 69.1 It is a matter of record that the DIP Guidelines, 2000 have since been rescinded and replaced by ICDR Regulations, 2009. However, regulation 111, which is in the nature of repeal and savings clause, is also reproduced herein below : "Repeal and Savings. 111. (1) On and from the commencement of these regulations, the Securities and Exchange Board of India (Disclosure and Invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DIP Guidelines reveals that the mandate of law, regarding disclosure by an Issuer Company, has not been violated by the Appellant in any respect. 71. Although we have already held that Sudipti had ceased to be a subsidiary of the Appellant-Company as on the date of the IPO, assuming that it was still a subsidiary at the relevant point and that it was required to be disclosed in the Offer Document, we have to now analyze whether there is any evidence on record to show that DLF itself had knowledge of the FIR and its contents on the date of filing of the DRHP or later on the date of the IPO. The Appellant has submitted that it came to know about the filing of FIR against Sudipti and Mr. Pravin Kumar only on 25th June, 2007 when it received a complaint of KKS dated 4th June, 2007 through its Merchant Bankers. In fact, SEBI itself appears to have received this complaint of KKS, which talks about lodging of an FIR dated 26th April, 2007 by him only on 15th June, 2007. 72. No evidence has been brought on record by Sebi to the effect that Appellant had the actual knowledge of the FIR or its contents prior to 25th June, 2007, during the course of the enquiry against the Appellant by allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company. The SCN made the conjecture that DLF knew of the FIR before the Issue closed without any factual basis. 75. Next, in this regard we note that the FIR in any case does not amount to litigation in law, because in the case of a criminal proceeding, a case can be said to be initiated only when a competent court takes cognizance of the offence alleged in the charge sheet and not on the mere filing of an FIR. Therefore, the mere registration of an FIR does not lead to the inference that a case is instituted, which would mean "litigation" for the purposes of Clause 6.11.1.1(e) of the DIP Guidelines. In the case of Jamuna Singh v. Bhadhai Shah AIR 1964 SC 1541, the Hon'ble Supreme Court held that the scope of right of appeal as enshrined under Section 417(3) of the Criminal Procedure Code was limited to cases instituted upon a complaint before the Magistrate and was not applicable to cases instituted in the Magistrate Court on a Police report. While doing so, the Hon'ble Supreme Court also considered the meaning of the words "institution of a case" and observed that although the Code does not contain any definition of the words "institution of a case", yet an examinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to affect its larger operations and finances of developing thousands of acres of land in the case in hand. 78. Lastly, in the context of the FIR dated 27th April, 2007 lodged by KKS, Shri Janak Dwarkadas, Ld. Sr. Counsel for the Appellant, submitted that the police on a thorough investigation found the complaint to be bogus and unacceptable. The motivating factor for preferring such FIR by KKS was to create a safe cover for not paying the short term gains tax which he had earned in the sale of land to M/s. Sudipti Estate Private Limited. It is argued that the police, therefore, submitted a cancellation/closure report before the Additional Chief Metropolitan Magistrate. Finally, the Magistrate accepted the closure report by way of a detailed order dated 27th August, 2009. It seems that KKS has taken up this matter to a higher forum in appeal. Be that as it may. We are not concerned with the alleged bogus or frivolous nature of an FIR, rather our focus is on the question whether the FIR should have been mentioned in the Offer Documents, and that issue has already been answered in favour of the Appellant herein above. 79. Secondly, we look into the argument advanced by Shri Rafique ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in respect of the developments on such land, i.e., we have the exclusive right to develop as well as control its use and dispositions and should we develop plots on the whole or part of such land, we have the absolute right to sell the land to prospective purchasers on such terms and conditions as may be deemed fit and proper by us. Further, we are entitled to all the revenues from the development, including rent, net, in the case of a large number of our sole development agreements of a payment of Rs. 5 lac per acre to the grantor of the rights...." (Ref. Page 393 of the Prospectus). 81. The above disclosures cannot be termed as inadequate or untrue for the purpose of DIP Guidelines, particularly Clause 6.2, which requires that a Prospectus shall contain all material information which should be true and adequate so as to enable the investors to make an informed opinion as to the investment of the issue. We, therefore, see no force in the allegation in the SCN and finding in the Impugned Order that by transferring the shares of Felicite in favour of the three housewives, the Appellant sought to retain control over Shalika, Sudipti and Felicite. The materiality envisaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Appellant. It seems logical that such transferees were less likely to thwart the effectuation of the terms and conditions of the development agreement, mitigating the completion risk which could be faced by the Appellant in the development agreement. Such a way of transfer of shares/divestment is perfectly acceptable, not being prohibited by any law, rule or regulation. Moreover, the Prospectus had detailed such risk inherent in the business of the Appellant in para 10 at page 110 of the Prospectus itself. Therefore, once the Appellant's economic interest on Sudipti's land through the acquisition of a bundle of rights in relation thereof had been duly disclosed in the Offer Documents, it is difficult to accept the Respondent's finding that the Appellant was obliged to disclose Shalika, Sudipti and Felicite as its subsidiaries. No additional commercial or financial disclosure in the Prospectus would have been required even if these companies were mentioned as subsidiaries/related parties, which in fact would have been incorrect. 83. We do not find any legal infirmity in purchasing equity stakes by the three women entrepreneurs by utilizing the funds from the joint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is includes holding companies, subsidiaries and fellow subsidiaries); (b) associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture;Related Party Disclosures 273 (c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual; (d) key management personnel and relatives of such personnel; and (e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise." 87. Paragraph 4 provides that certain entities shall not be deemed to be related parties simply because the two companies have a Director in common. Exemption from compliance is also granted to a single customer, supplier, franchiser, distributor, providers of finance, trade unions, government departments, etc. The disclosure requirements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) of which another company (the holding company) controls, either by itself and/or through one or more subsidiaries, the composition of its board of directors. 88. The issue, in this regard, which falls for our consideration is whether there was any reportable related party relationship between the Appellant and the three companies which would have mandated disclosure of the three companies as Related Party in the Financial Statement? We would like to analyze the issue in the context of the five-part test laid down in sub-para (a) to (e) of para 3 of AS-18. The requirement laid down in sub-para (a) talks of 'control' by a company over others. We have already held in great detail herein above that the Appellant did not have any control over the composition of the Board of Directors of Shalika, Sudipti and Felicite in terms of Section 4 of the Companies Act, 1956. In the said paragraphs we have already declined to accept the applicability of the concept of control occurring in AS-23. The test regarding control set out in para 3 (a) of AS-18 is also not met with. Sub-para 3(b) of AS-18 talks of associates and joint venture of the reporting enterprise. The whole show cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the DIP Guidelines on the one hand and the 'Key Management Personnel' of the Appellant, for the purpose of AS-18, who could exert significant influence over the three companies on the other. 'Key Management Personnel' under AS-18 is defined as those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. For example, in the case of a company, the managing director(s), whole time director(s), manager and any person in accordance with whose directions or instructions the board of directors of the company is accustomed to act, are usually considered key management personnel; whereas, 'Key Managerial Personnel' under the DIP Guidelines simply lays down the requirement that "a paragraph on the key managerial personnel shall be incorporated giving full details of the personnel recruited as on the date of filing of the Prospectus with the Board indicating name, date of joining, qualification, details of previous employment, etc." The difference, therefore, between the aforesaid two categories clearly establishes that the two connotations are not only different as concepts but they diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ybody except the market mechanism, which takes its own time to do so. Creating such chaos in the capital market by passing a seemingly innocuous order, if not reckless, cannot be said to satisfy the twin objectives underlying the Sebi Act, 1992. Therefore, the finding on Issue Nos. 2 and 3 by the 2nd WTM are held to be misconceived and deserve to be quashed. 94. The invocation of the PFUTP Regulations in the present case was seriously contested by Shri Janak Dwarkadas with Shri J. J. Bhatt and Shri Saurabh Joshi, all Ld. Sr. Advocates, who appeared for various Appellants. Shri Rafique Dada, Ld. Sr. Advocate for Respondent, vehemently opposed the proposition put forth by the Appellant that in the light of the Hon'ble Delhi High Court's order and the consequent order of 1st WTM dated 20th October, 2011, the Respondent was obliged to look into the violation of DIP Guidelines only and not the PFUTP. We have patiently heard both the sides on this issue. We note that there was undoubtedly no direction in the order of the Hon'ble High Court or in the order of the 1st WTM to enquire into the two complaints of KKS in the light of the PFUTP Regulations and rather it was treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re importantly in a manner detrimental to the investors' interest. Once such a satisfaction is arrived at "by an order in writing" the Appointing Authority, i.e., the Chairman, Member or Executive Director can direct appointment of an Investigating Authority not below the rank of the Divisional Chief. Next, on completion of such investigation by the Investigating Officer, he is required to submit a report to the Board under Section 11-C of the Sebi Act, 1992, read with Regulations 9 and 10 of the PFUTP Regulations. Regulation 10 specifically provides for consideration of the report by the Board and granting a reasonable opportunity of being heard to the persons likely to be affected by such consideration and issue necessary directions or take appropriate action only thereafter and in accordance with the Regulations. 96. We note with concern that the above said due procedure established in the PFUTP Regulations has been blatantly violated by the Respondent. Formation of opinion/belief by the Board by an order in writing before invoking PFUTP Regulations on certain existing grounds is a pre-requisite. It is pertinent to note that no such "order in writing" as to the satisfaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mamlatdar, as required by the tenancy law and consequently it was without jurisdiction and hence void. 98. The landlord then preferred two Revision Applications before the Maharashtra Revenue Tribunal, which were dismissed by the Tribunal. Similarly, the High Court of Bombay also dismissed two writ petitions filed by the landlord under Article 227 of the Constitution of India. The matter, thus, reached the Hon'ble Supreme Court, which held that the whole process of verification and recording of statements of landlord and tenants and the consequent surrender of land by the tenant to the landlord must have been recorded before the mamlatdar and not before the Circle Officer. Therefore, the orders of Deputy Collector, Tenancy Tribunal and High Court were upheld. The Hon'ble Supreme Court in para 25 very pertinently held that : "25. A century ago, in Taylor v. Taylor, Jassel, M. R. adopted the rule that where a power is given to do a certain thing in a certain way, the thing must be done in that way or not at all and that other methods of performance are necessarily forbidden. This rule has stood the test of time. It was applied by the Privy Council, in Nazir Ahmed v. Emperor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s), inter alia, contended before the appellate bench of the High Court that the Divisional Engineer did not apply his mind and record his own reasons about the correspondence of 'any emergency' and, as such, there was contravention of Rules 421 and 422 of the Telegraph Rules. It was argued that the emergency contemplated by Rule 422 is not the same as a 'public emergency' declared under Section 5, but it is an emergency arising out of the breakdown of the telecommunications due to a technical defect, labour trouble, viz. major fire or the like, the existence of which was to be established to the satisfaction of the Divisional Engineer and not any extraneous authority. Stress was laid, in this connection, on the fact that the word "emergency" in Rule 422 is not qualified by the prefix "public", instead, the words used are "any emergency." 99.2 The appellate bench of the High Court, however, set aside the decision of the Learned Single Judge of the High Court and upholding the orders of disconnection of telephones in question, dismissed the writ petition. On appeal before the Hon'ble Supreme Court, the judgment of Appellate Court of High Court was quashed and set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce beginning from the case of Taylor v. Taylor [1875] 1 Ch. D 426 has held that the principle behind the rule is that if these were not so, the statutory provision might as well not have been enacted. In para 34 of the said judgment, the Hon'ble Apex Court has specifically held that "There is yet an uncontroverted legal principle that when the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. In other words, where a statute requires to do a certain thing in a certain way, the thing must be done in that way and not contrary to it at all. Other methods or mode of performance are impliedly and necessarily forbidden. The aforesaid settled legal proposition is based on a legal maxim expressio unius est exclusio alterius, meaning thereby that if a statute provides for a thing to be done in a particular way, then it has to be done in that manner and in no other manner and following any other course is not permissible." 101. In this context, Shri Janak Dwarkadas, Ld. Sr. Counsel for the Appellant, also relied upon a judgment in Morgan Stanley Mutual Fund v. Kartick Dasreported in 1994 (4) SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined is, whether any unfair trade practice has been adopted. The expression 'unfair trade practice' as per rules shall have the same meaning as defined under Section 36-A of Monopolies and Restrictive Trade Practices Act, 1969. That again cannot apply because the company is not trading in shares. The share means a share in the capital. The object of issuing the same is for building up capital. To raise capital, means making arrangements for carrying on the trade. It is not a practice relating to the carrying of any trade. Creation of share capital without allotment of share does not bring shares into existence. Therefore, our answer is that a prospective investor like the respondent or the association is not a consumer under the Act." 101.4 Secondly, the Ld. Sr. Counsel has drawn our attention towards observation of Hon'ble Supreme Court while imposing a cost of Rs. 25,000/- on the petitioner, Dr. Arvind Gupta, to the effect that - "There is an increasing tendency on the part of litigants to indulge in speculative and vexatious litigation and adventurism which the fora seem readily to oblige. We think such a tendency should be curbed. Having regard to the frivolous na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Offer Documents. The records also reveal that Sebi did find all the disclosures made by the Appellant in the Offer Documents to be satisfactory before the actual listing of the Appellant's shares on Stock Exchanges. 105. Furthermore, 'Fraud' is defined in Regulation 3 (c) of the PFUTP Regulation as under : "3(c) 'fraud' includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include- (1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; (2) a suggestion as to a fact which is not true by one who does not believe it to be true; (3) an active concealment of a fact by a person having knowledge or belief of the fact; (4) a promise made without any intention of performing it; (5) a representation made in a reckless and careless manner whether it be true or false; (6) any such act or omission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bi Act, 1992 or any particular regulation or sub-regulation of PFUTP Regulations out of the many instances of fraud mentioned in the definition itself in the Impugned Order, except a bundle of legal provisions. The alleged manner in which that bundle of legal provisions has been violated is left completely unexplained by the Respondent. The Impugned Order is absolutely ambiguous in applying facts as to which specific act of the Appellant allegedly fits into the parameters of fraud prescribed by a particular sub-regulation or regulation of the PFUTP Regulations or that of Section 12 of the SEBI Act, 1992. The charge in the SCN as well as the findings in this regard in the impugned order are, therefore, totally vague and unsustainable in the eyes of law and on fact. 107. Paragraphs 45, 46 and 47 of the impugned order deal with serious allegations of violations of the PFUTP Regulations without adducing an iota of evidence or a single fact amounting to a violation of a particular regulation or particular sub-section of Section 12 of the Sebi Act. The Appellant has presented an exhaustive reply before the 2nd WTM on the question of fraud but the same has been entirely ignored. Without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ood reasons and on the basis of clear and unambiguous evidence. Such an allegation of fraud may shake the very foundation of the business of the entity in question and may adversely affect the same. Therefore, the onerous task of proving such a serious allegation lies on the person levelling such accusation on the basis of preponderance of probability. A minute reading of the Adjudicating Officer's Impugned Order dated December 14, 2012 does not demonstrate the manner in which the Appellant's actions have led to the creation of a false market and the basis on which the Appellant has 13 been condemned for the commission of fraud, that too in connivance with others. No evidence has been brought on record to establish a connection between the Appellant and the alleged fraudulent transactions undertaken by Shri Nitin R. Patel. It is a matter of record that the alleged default is the first and only aspersion cast on the Appellant with respect to its business and, heretofore, has not had any of its acts called into question by any authority, regulatory or otherwise. Moreover, it is evident from the Impugned Order that the Appellant has enjoyed no unfair advantage or benefit of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plying with the requirements provided in the said letter and filed it before the ROC and the IPO was opened for subscription between 11th and 14th June, 2007. Thereafter, the final prospectus was filed by the Appellant with the ROC on 18th June, 2007 and, thus, the shares were listed on 5th July, 2007. 110. The complaint dated 4th June, 2007, filed by KKS before Sebi did contain the allegation of filing of FIR over and above the main complaint of him being allegedly duped of Rs. 34 Crores by Sudipti and Mr. Pravin Kumar. Sebi did not feel it appropriate to take any action against the Appellant on the complaint dated 4th June, 2007, except seeking some clarification from the Merchant Bankers and the Appellant. KKS filed Writ Petition on 29th October, 2007, seeking a direction to the Sebi to investigate into the allegations raised in the complaint. Thus, the point to be noted is that from 15th June, 2007 to 29th October, 2007, Sebi did not deem it necessary to take any action against the Appellant or the Merchant Bankers so as to rectify the alleged inadequate or incomplete disclosure regarding Shalika, Sudipti and Felicite and some other connected disclosures. Sebi has not shown an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds used by him for expressing his judicial wrath are the following: The Magistrate who cannot find time to write judgment within reasonable time after hearing arguments ought not do any judicial work at all. This Court strongly disapproves the Magistrates making such a tremendous delay in the delivery of his judgments." 112.1 We, therefore, safely conclude that an undue delay of about nine months in writing the Impugned Order in the present case is fatal to the concept of fair hearing, rule of law and even violative of Article 21 of the Constitution of India read with Article 14 thereof. Prejudice to a litigant is inherent and writ large due to such unnatural and unexplained delay. It is rightly said that human memory has a short-shelf life and even judges are prone to forgetting arguments of the parties due to long lapse of time. 113. Lastly, terming the Impugned Order as totally unjust, unfair, arbitrary and even irrational, learned senior counsel for the appellant Shri Janak Dwarkadas cited few cases in support of his arguments while stating that the impugned order is not only liable to be quashed and set aside on the ground of the Wednesbury principle of unreasonableness bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. Any violation of such a law framed by the Legislature has to be viewed seriously. Various such interconnected norms, laid down by the Parliament or a delegate, provide for certain coercive techniques to secure compliance. A punishment primarily seeks to cause a loss or a deprivation of a right or a privilege or an advantage hitherto freely enjoyed by a person. Therefore, imposition of any punishment on a violator has to be precise, specific and a well thought-of measure, purely with a view to seek the ends of justice. If the punishment proves to be counter-productive and manifestly causes more harm than benefit to the members of society, whose interest the punishment ostensibly claims to subserve, it has to be discarded and termed as an unusual punishment . Such punishment can seriously impair one's business and also affect millions of investors adversely by creating a chaotic situation in the market. Keeping a person out of the market for few years after a long lapse of time when things seem to have settled down in the market, particularly when the company's scrip is showing a definite and positive upward movement, is definitely unjust, unfair and detrimental to the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present case. 117. Once the business modality of the appellant in floating various associate companies or subsidiaries is not faulted with by the respondent on any legal standard laid down in this regard either in the Companies Act or in the Regulations framed by the respondent under SEBI Act, 1992, the Respondent is not justified in condemning the appellant for adopting such a business model. The respondent seems to have diverted the issue by leaving out Kimsukh Sinha's main complaint of him being duped of Rs. 34 Crore and making it a case of the appellant duping investors. In order to reach this conclusion of the Appellant misguiding the investors, the respondent has taken into consideration a maze of transactions among the three erstwhile subsidiaries of about 281 associate companies/subsidiaries of the appellant. Such an exercise was, undoubtedly, undertaken by the respondent earlier at the time of considering the DRHP before the shares of the appellant were listed on the stock exchanges. It cannot be denied that the Respondent had cleared the Offer Documents after due application of mind before the same were converted into Final Prospectus for public's consumption. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery set of facts dispassionately without being influenced by any whistle blower. It is pertinent to mention here that while Sebi was being conferred with vast powers in the year 2000 by way of a thorough amendment of the SEBI Act, 1992, the Dhanuka Committee, which had recommended the conferment of such powers, had itself warned against their abuse in clear terms by stating that "Sebi and its officers are often called upon to act both as Regulators and adjudicators of the first instance and consequently there is a considerable scope of mixing up of these rules and for enthusiastic interpretation and enforcement, sometimes without having due regard to settled constitutional law propositions. There is, thus, very heavy responsibility on the Appellate Tribunal to function with independence and provide the necessary expertise required to act as Securities Appellate Tribunal. Having regard to the wide range of powers now conferred upon Sebi and its officers, the Committee earnestly hopes for and would expect independent, unbiased functioning of the Appellate Tribunal, distanced from Sebi and having due regard to the principles of Administrative Law." 119. The Respondent has completely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; ('DRHP') on May 11, 2006 wherein it was inter alia disclosed that Sudipti Estates Pvt. Ltd. ('Sudipti') , Shalika Estate Developers Pvt. Ltd. ('Shalika') and Felicite Builders and Construction Pvt. Ltd. ('Felicite') were 'associate companies' of DLF. (d) Before SEBI could consider the said DRHP, DLF withdrew the said DRHP on August 31, 2006 and filed fresh DRHP (second DRHP) on January 2, 2007. In the second DRHP, Sudipti, Shalika and Felicite were not disclosed as 'Associate Companies' as according to DLF, the said three companies had by then ceased to be associates of DLF. Alongwith the second DRHP, the Merchant Bankers of DLF had filed a 'delta view' document indicating all the differences between the second and the first DRHP including the crossed out names of Felicite, Shalika and Sudipti. (e) On March 29, 2007 Merchant Bankers of DLF certified accuracy of the disclosures made in the DRHP dated January 2, 2007 and stated that the disclosures made in the said DRHP were sufficient to enable the investors to make an informed investment decision. (f) On 26.4.2007 Mr. K. K. Sinha filed FIR 249/07 at a Police Station at Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of FIR dated 26.4.2007 were reiterated and it was alleged that Sudipti is a subsidiary of DLF and since Sudpti had duped Mr. K. K. Sinha, SEBI was requested to investigate DLF and take steps against DLF so that gullible investors are not lured into investing in the shares of DLF which are being offered to the investors through the IPO. On 25/06/2007 SEBI forwarded the complaint dated 04/06/2007 to DLF through its Merchant Banker for its comments. (j) As there was delay on part of SEBI in taking action against DLF, Mr. K. K. Sinha filed another complaint on 19.7.2007 and also initiated proceedings in that behalf before the Delhi High Court, which culminated into several rounds of litigation before the Delhi High Court. Ultimately, pursuant to the directions given by the Delhi High Court, the WTM of SEBI heard the parties in relation to the veracity of the complaints filed by Mr. K.K. Sinha and by an order dated October 20, 2011 directed SEBI to investigate into the allegations levelled by Mr. K.K. Sinha against DLF and Sudipti. By the said order SEBI was directed to focus its investigation on the violations, if any, of the provisions of the erstwhile DIP Guidelines read with rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order, all these appeals are filed. 123. Mr. Dwarkadas, Mr. Bhatt, Mr. Joshi, learned senior Advocates and Mr. Parekh, learned Advocate appearing on behalf of respective appellants submitted that the impugned order passed after about 9 months from the last date of personal hearing suffers from various infirmities and the said order has been passed by totally ignoring and misconstruing the arguments advanced on behalf of the appellants. It is submitted that even though DLF was disassociated with Sudipti, Shalika and Felicite prior to the filing of second DRHP due to divestment of the shares of the said three companies held by 100% subsidiaries of DLF, in the impugned order it is erroneously held that the above share transfer process was sham and that DLF continued to exercise control over the said three companies even after the divestment of shares. 124. Counsel for DLF submitted that the back-ground facts which led to association and subsequent disassociation of DLF with the said three companies are as follows:- (a) As a business policy, DLF engaged in real estate development has been establishing various 100% subsidiaries/associates for the purpose of acquiring lands a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Saxena and Mrs. Padmaja Sanka, who happened to be wives of Mr. Surojit Basak, Mr. Joy Sexana and Mr. Ramesh Sanka respectively who were employees of DLF. (f) On 30.11.2006, 100% shares of Shalika held by DHDL (30%), DEDL (30%) and DRDL (40%) were sold to Felicite. On the same day 100% shares of Sudipti held by DHDL (50%) and DEDL (50%) were sold to Shalika. Thus, as a result of above transactions that took place on 29th and 30th November, 2006 Sudipti became subsidiary of Shalika and Shalika became subsidiary of Felicite. In other words from 30.11.2006, Felicite became the ultimate holding company of Shalika and Sudipti. In view of the transfer of shares that took place on 29th and 30th November, 2006, Felicite, Shalika and Sudipti ceased to be 'Associates' of DLF and therefore in the second DRHP filed on 2.1.2007 Felicite, Shalika and Sudipti were not shown as associates of DLF. 125. Counsel for DLF submitted that without considering aforesaid facts in proper perspective, in the impugned order, the WTM of SEBI has held that all the three issues framed therein stand established against the appellants. The three issues framed in the impugned order by the WTM of SEBI read t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich shall be true and adequate so as to enable the investors to make informed decision on the investment in the issue. In the present case, on the date of filing second DRHP on 2.1.2007, Sudipti, Shalika and Felicite had ceased to be subsidiaries/related parties and therefore there was no requirement of disclosing the said three companies in the prospectus and in fact disclosing the same in the prospectus would have been a misstatement in itself. (b) Without prejudice to the above and in the alternative, it is submitted that the show cause notice did not set out any adverse effect on investors as a consequence of purported non disclosure and in the absence of making such fundamental enquiry as to whether the investors were prejudicially affected or not, which is the core question to be considered before exercising powers under section 11/11B of SEBI Act, SEBI is not justified in holding the appellants to be guilty of violating clause 6.2 of DIP Guidelines. (c) While investing in DLF's IPO, the investors were guided only by what was stated in the prospectus. The alleged non disclosure of Felicite, Shalika and Sudipti in the offer documents, therefore, played no role in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s 35 acre land in favour of DLF (through DCPC), the three companies were virtually rendered as shells, with no real economic or productive value in them except the legal ownership over Sudipti's land. The divestment of the shares of the three companies by DLF in favour of outsiders (which turned out to be wives of DLF's employees) were undertaken because the said three companies were no longer commercially relevant to DLF and the divestment of shares was not with a view to exercise control over those three companies. It is submitted that transferees in question were less likely to thwart effectuation of the terms and conditions of the Development Agreement and this mitigated to some extent, the completion risk faced by DLF in executory contracts such as the Development Agreement. (v) Economic interest of DLF on Sudipti's land through the acquisition of bundle of rights in relation thereto being disclosed in the offer documents, it would not have made any difference, even if Felicite, Shalika and Sudipti were shown as subsidiaries/related parties of DLF. Therefore, the commercial and financial disclosures in the offer documents would not have undergone a change even i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCC 205], BPL Ltd. vs. SEBI [(2002) SAT 19], Chairman vs. Shriram Mutual Funds [(2006) 5 SCC 361] and Bharjatiya Steel Industries vs. CST [(2008) 11 SCC 617]. (viii) The impugned order completely fails to address the issue of complete absence of any investor prejudice as a result of the alleged discrepancies in DLF's offer documents. Thus the impugned order is conspicuously silent on the fundamental issue of whether DLF's actions led to any investor prejudice. It is a serious infirmity in the impugned order which goes to the root of the matter and renders the impugned order entirely unsustainable. (ix) In the context of materiality of the FIR filed against Sudipti, the impugned order in para 39 notices the Development Agreement between Sudipti and DCPC and further observes that.... "such Development rights gave DLF substantially the right to all revenues from development including rent and the authority to transfer title to the land...". Consequent to that finding, the impugned order holds the FIR to be material in as much as it had the propensity to 'jeopardize' the development rights and concludes that ".... I therefore find that at the relevant point of time t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidiaries, DLF has violated clause 6.10.2.3 of DIP Guidelines, cannot be sustained for the following reasons:- (a) Clause 6.10.2.3 of DIP Guidelines is relatable to the report to be prepared by the auditors of the issuer company. In the present case, neither the report prepared by the auditors is questioned nor adverted to it in the show cause notice and therefore, the allegation of contravention of clause 6.10.2.3 is simply not maintainable against DLF. (b) Post divestment of shares by DEDL, DHDL and DRDL, Felicite, Shalika and Sudipti ceased to be subsidiaries of DLF. Clause 1.3 of DIP Guidelines provide that words and expressions not defined in the said Guidelines will bear the meaning assigned to them under the Companies Act, 1956 and/or the Securities Contracts (Regulations) Act, 1956 (SCRA). The term 'subsidiary' is neither defined under the DIP Guidelines nor under the SCRA. Therefore, recourse is required to be made to the provision of Companies Act, 1956 to reckon whether a company is subsidiary of another or not. (c) Under Section 4 of the Companies Act, 1956 a company can be said to be a subsidiary of another, when, firstly, either the latter holds more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial Statements. The definition of 'associates' in para 3.1 of AS-23 specifically excludes subsidiary/joint venture of the investor. Therefore, AS-23 can have no application to the present case where SEBI is contending that Felicite, Shalika and Sudipti were subsidiaries of DLF. In any event, the three companies cannot be reckoned as associates of DLF (post divestment) because there is nothing to show that post divestment DLF Limited had 'significant influence' over Felicite, Shalika and Sudipti as contemplated under para 3.2 of AS 23, because, neither DLF had the power to participate in the financial and/or operating policy decisions nor had control over the policies of those three companies post divestment. (g) In para 19 & 20 of the impugned order reference is made to the definition of the expression 'control' under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ('SAST Regulations') to substantiate the finding that DLF had control over the three companies post divestment. That allegation is totally misplaced, because, SAST Regulations have no application in the context of unlisted companies and scope of that regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d controlling the activities of DLF. Therefore, fact that the spouses of employees of DLF were Key Managerial Employees of DLF under clause 6.9.5.8 of DIP Guidelines could not be a ground for SEBI to consider them to be Key Management Personnel under AS-18 and accordingly hold them to be subject to control of DLF due to their employee-employer relationship. (ii) Allegation that the spouses of Key Managerial Employees continued to be shareholders of Felicite only till their husbands (Key Managerial Employees) were in the employment of DLF is incorrect. The records of Felicite indicate that Mrs. Rima Hinduja continued to be shareholder of Felicite even though her husband, Gaurav Monga ceased to be an employee of DLF. Shareholdings of the wives were independent of their husband's employment with DLF. Without prejudice to the above, it is submitted that even if the shareholding of the shareholders of Felicite was coterminous with the employment of their respective spouses with DLF, it does not fulfil the legal tests laid down in Section 4 of the Companies Act and/ or AS 21 for determination of parent/ subsidiary relationship. (iii) There is no disability in law against a housewif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no allegation that DLF on its own and/or its subsidiaries had any power in law to appoint/remove the directors of Felicite, Shalika and Sudipti. Fact that the shareholders of Felicite, Shalika and Sudipti did not change the prior Board of Directors of the three companies does not imply decisive control of DLF over the Board of Directors of those three companies as contemplated under Section 4(2) of the Companies Act, 1956 and AS 21. Similarly, mere fact that an employee of one company is sitting on the Board of another company does not create any legal inference of control of the latter company by the former much less make the latter subsidiary of the former. Moreover, directors of Felicite, Shalika and Sudipti were not Key Management Personnel of DLF. (vi) No adverse inference could be drawn from the fact that shares of Sudipti were sold at par, because, admittedly, the amount of Rs. 45 crore received by Sudipti as performance deposit under the Development Agreement from DCPC was an outstanding liability in the books of account of Sudipti and as a consequence, Sudipti's net asset was less than Rs. 10/- per share. (vii) SEBI has incorrectly assumed that DEDL, DHDL and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka and Sudipti is without any merit. (j) The financial statement i.e. balance sheet of DLF for the year ending March 31, 2007, was scrutinized by its statutory auditors who after applying themselves to the relevant facts and circumstances and the applicable test of parent/subsidiary relationship had not included the financials of Felicite, Shalika and Sudipti in the report prepared in accordance with clause 6.10.2.3. The same statutory auditor had issued a reconfirmatory opinion confirming the disclosures in the report annexed to the offer documents. Moreover, M/s Haribhakti & Co. in their independent professional capacity have also opined that Felicite, Shalika and Sudipti did not meet the legal parameters laid down by Section 4 of the Companies Act, 1956 and AS 21. Since experts in the field of accountancy have confirmed the accuracy of the financial statements and conformity thereof with relevant accounting practices, SEBI is not justified in speculating to the contrary. DLF had acted bona fide on the basis of advice received from renowned Merchant Bankers and legal advisors who had minutely and rigorously scrutinized the offer documents to ensure compliance with all applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt signatories/registered office address/statutory auditors of the three companies post November 30, 2006, allegation that shares of Sudipti were purchased by Shalika from the funds advanced by DEDL and DHDL and the findings relating to purchases made by Mrs. Basak, Mrs. Sanka and Mrs. Saxena etc. do not satisfy the test of control prescribed by Section 4 of Companies Act, 1956. The impugned order fails to appreciate that the law (i.e. Section 4 of the Companies Act, 1956 and AS 21) prescribes an objective test for reckoning a parent-subsidiary relationship and subjective tests applied in the impugned order cannot be relied on to reckon a relationship of parent-subsidiary. Therefore, the findings arrived at para 33 of the impugned order that the... "purported transfers of shareholding in the said three companies were Sham transactions, devised an a plan, scheme, design and device to camouflage the association of DLF with these three companies as holding-subsidiary..." is flawed and legally infirm. SEBI has erred in drawing an analogy with certain other 355 companies since the enquiry in the show cause notice was limited to Felicite, Shalika and Sudipti alone. (o) Assuming while d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y opinion, which was placed before SEBI along with the reply to the show cause notice. Similarly, even after commencement of investigation by SEBI, 4 out of the 8 Merchant Bankers in the IPP have not expressed any reservations on the disclosures regarding the subsidiaries of DLF in the IPP documents. Contravention of clause 6.9.6.6 of DIP Guidelines 130. Clause 6.9.6.6 of DIP Guidelines provide that the offer document shall inter alia contain 'Related party transactions as per financial statements'. In terms of Section 211(3A) of the Companies Act 1956, financial statements/balance sheets of a company have to be drawn up in accordance with the applicable Accounting Standards. The applicable Accounting Standard for the purpose of reckoning related party transaction is AS-18. As per paragraph 10.1 of AS-18, parties are considered to be related ('related party') if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. 131. Paragraph 10.2 of AS 18 defines 'control' as follows:- "(a) Ownership, directly or indirectly, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shalika and Felicite. SEBI has completely failed to discharge this burden of proof. Therefore, the allegation that DLF has violated clause 6.9.6.6 of the DIP Guidelines is wholly unsustainable. Contravention of clause 6.11.1.2 of the DIP Guidelines 134. Clause 6.11.1.1(e) of the DIP Guidelines provides that 'outstanding litigations', defaults etc. pertaining to matters likely to affect operations and finances of the issuer company (in the present case of DLF) including disputed tax liabilities, prosecution under any enactment in respect of Schedule XIII to the Companies Act, 1956 etc. shall be disclosed. Clause 6.11.1.2 of the DIP Guidelines provides that the information about outstanding litigations as per clause 6.11.1.1(e) shall be furnished in respect of subsidiaries of the issuer company (if applicable). 135. In para 39 of the impugned order it is held that since the offer documents included the sole development rights procured from Sudipti by DCPC.... " the FIR in question had a direct bearing on the activities of DLF...". In para 40 of the impugned order it is held "since the charges alleged in the said FIR, if proved against Mr. Praveen Kumar would have affected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company itself. If the knowledge of the directors is not the knowledge of the company, then the knowledge of a relative of a director cannot certainly be knowledge of the company. (e) Without prejudice to the aforesaid submissions it is submitted that the FIR was not required to be disclosures in the offer documents for the following reasons:- (i) There was no requirement of making any disclosure under clause 6.11.1.2 since Sudipti was not a subsidiary of DLF at the relevant time. (ii) FIR does not amount to litigation in law. This is because in the case of the criminal proceeding, a case can be said to be instituted only when a Competent Court takes cognizance of the offence alleged in the charge sheet and not on the mere filing of the FIR. Therefore, the mere registration of an FIR does not lead to the inference that a case is instituted, which would be 'litigation' for the purpose of clause 6.11.1.1(e) of DIP Guidelines. In support of the above contentions reliance is placed on decisions of the Apex Court in the case of General Officer Commanding, Rashtriya Rifles (supra), Jamuna Singh (supra). (iii) Clause 6.11.1.1(e) of the DIP Guidelines requires discloser of onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd consequently does not become liable for disclosure just because one of the accused therein is a director in one or more subsidiaries of the issuer company. (vii) Clauses 6.11.1.1 and 6.11.1.2 of the DIP Guidelines do not require disclosure of litigation against the directors of subsidiaries of the issuer company. (viii) Findings recorded in para 41 of the impugned order that Mr. Praveen Kumar was Key Managerial Employee of DLF reporting directly to its Board of Directors is totally incorrect. It is submitted that the fact that Mr. Praveen Kumar was a Key Managerial Employee of the appellant at the relevant time is wholly insufficient in law to make his knowledge that of DLF. If the knowledge of the directors of a company cannot be construed to be the knowledge of the company, the knowledge of a Key Managerial Employee of the company can certainly not be attributed to the company. (ix) In para 41 of the impugned order reference is made to the purported interrogation of Mr. Praveen Kumar by the Police which fact is brought out in the impugned order for the first time and the same never formed part of the allegations in the show cause notice. At any rate it is submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uate so as to enable the investors to make an informed investment decision in the issue (c) actively and knowingly suppressed certain material information and facts in the offer documents leading to misstatements in the offer documents so as to mislead and defraud the investors in securities market. In para 44 of the impugned order it is held that since the offer documents contained misleading disclosures with regard to the material information and the offer documents did not contain fair and clear disclosures with regard to those material information, the appellants have violated clause 9.1 of the DIP Guidelines. 138. Counsel for DLF submitted that aforesaid findings are completely bald and without any basis. Neither in the show-cause notice nor in the impugned order it is indicated as to which sub clause of clause 9.1 had been violated by DLF and in what manner. As a matter of general practice, list of subsidiaries/related parties and pending legal proceedings are never advertised by the issuer company and therefore findings on alleged contravention of clause 9.1 of the DIP Guidelines must fail. 139. Counsel for DLF further submitted that even otherwise, clause 9.1 does not cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LF has violated Section 12A of the SEBI Act and PFUTP Regulations. It is submitted that the aforesaid findings are unsustainable for the following reasons: (a) PFUTP Regulation is a self-contained code and lays down the procedure for investigation and imposition of penalty for violating the said Regulations. Regulation 5 provides for appointment of an Investigating Authority by the Appointing Authority. Regulation 9 provides for submission of report by the Investigating Authority to the Appointing Authority. Regulation 10 provides that the Board shall consider the report submitted under Regulation 9 and after giving reasonable opportunity of hearing to the persons concerned issue such directions or take such action as mentioned in Regulations 11 and 12 of PFUTP Regulations. (b) While appointing the Investigating Officer to investigate the complaints against DLF, the WTM of SEBI in his order dated October 20, 2011 had not issued any direction to investigate the violations, if any, under the PFUTP Regulations. In any event, there is nothing on record to suggest that the report of Investigating Authority in relation to the alleged PFUTP violations were submitted to the Appointing Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the sake of argument that DLF could be said to be "dealing in securities" in connection with the IPO, even then DLF cannot be alleged to have committed "fraud" under Regulation 2(c) of PFUTP Regulations. This is for the reason that in order to constitute fraud, the impugned act, expression, omission or concealment should be directed "to induce another person or his agent to deal in securities". In the present case, it cannot be said (nor is there even a faint suggestion to that effect in the show cause notice or in the impugned order) that the disassociation of Sudipti, Shalika and Felicite by DLF and/or the omissions of the names of these companies from the offer documents was intended to induce (or had result of inducing) investors and general public to buy/subscribe to DLF's shares in the IPO. (g) Additionally, DLF's issue would not amount to "trade practice" within the scope of Regulations 4 of PFUTP Regulations which prohibits "manipulative, fraudulent and unfair trade practices". Regulation 4(1) provides that without prejudice to the provisions of Regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. Regulation 4(2) ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t had filed documents (delta view) indicating all differences between First DRHP and Second DRHP including differences in relation to the related party disclosure. This document is mentioned in the covering letter filed along with the Second DRHP. SEBI had reviewed all documents filed along with the Second DRHP, including the "delta view" document. In exercise of its powers as the market regulator, SEBI has also issued comments on the disclosures made in the Second DRHP. DLF therefore, had the legitimate expectation that SEBI while acting in its regulatory capacity and issuing comments had reviewed all documents placed before it along with the Second DRHP. SEBI in its affidavit in reply dated December 1, 2014 to the present appeal has taken the position that SEBI does not approve offer documents in terms of clause 6.4.2.2(a)(v) the offer document and therefore, no reliance can be placed on the delta view document filed by the appellant. This assertion loses sight of DLF's argument that the submission of the delta view document exhibited its bona fides in the matter and that DLF had not carried out the divestment in a clandestine manner, as alleged in the show cause notice. (j) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uppression, investors have lost in the IPO of DLF/its directors have gained in any manner. Similarly, assuming that the alleged suppression of the FIR constitutes non-disclosure, it is again a technical and venial breach and neither in the show cause notice nor in the impugned order it is recorded that by reason of non-disclosure of FIR, investors have lost in the IPO or DLF/its directors have gained in any manner. 144. It is submitted by counsel for DLF that even though para 15.13 of the show cause notice alleges that facts were suppressed in the offer document, neither the show cause notice nor the impugned order disclose any mens rea. In the absence of mens rea, Sections 11, 11A, 11(4) and 11B of the SEBI Act could not be invoked which are discretionary, remedial and not punitive in nature. It is well settled law that punishment must fit the crime, otherwise it will be hit by Wednesbury principle of unreasonableness and rule of proportionality. It is well settled law that no penalty ought to be imposed for a technical and venial breach of statutory obligations. In support of the above contentions reliance is placed on the decision of the Apex Court in Bharjatiya Steel Industrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F but also acts as a burden on the banking system. Further, DLF has been incapacitated from floating bonds, debentures and like financial instruments. 149. Mr. J. J. Bhatt, learned counsel appearing on behalf of the appellants, while adopting the arguments advanced by counsel for DLF submitted that in the absence of any provision under the SEBI Act making the Directors/CFO automatically liable for the offences allegedly committed by the company, SEBI is not justified in passing the impugned order against the Directors/CFO of DLF. In support of the above submission reliance is placed on the decisions of the Apex Court in the case of Maksud Saiyed (Supra), Brindavan Beverages (P.) Ltd. (Supra) and Tin Plate Co. of India Ltd. . (Supra). Reliance is also placed on decision of the Apex Court in Sunil Bharti Mittal (Supra) in support of the contention that liability for offending acts of a company can be foisted on its directors only when the applicable statute specifically provides for vicarious liability of directors for the actions of the company. It is further contended that in the absence of a provision for vicarious liability contained in the statute, there has to be a specific ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmitted to be heard in the matter pursuant to an order passed by the Apex Court, sought to tender an affidavit in reply containing several additional documents which are not on record. Mr. Chatterjee submitted that Mr. K. K. Sinha could not tender those documents earlier as he was not allowed to participate in the investigation carried out by SEBI. We have declined to accept the affidavit in reply because, accepting additional documents at this stage would amount to enlarging the scope of the appeal. Moreover, in an appeal, correctness of an order has to be decided on the basis of documents on record and not by introducing new documents and that too at the instance of a person who is not a party to the proceedings. 153. On being permitted to argue on behalf of Mr. K. K. Sinha, without filing the affidavit in reply, Mr. Chatterjee, fairly stated that he would adopt the arguments advanced by Mr. Dada learned Senior Advocate for SEBI, who has dealt with the merits of the case extensively. However, Mr. Chatterjee sought to rely on three communications which according to him would establish beyond doubt that the appellants were aware of filing FIR prior to 25/06/2007. Although we have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in securities for a period of three years under Section 11,11A &11B of SEBI Act read with relevant provisions of DIP Guidelines/ICDR Regulations and PFUTP Regulations framed by SEBI. 157. Section 11A of SEBI Act provides that without prejudice to the provisions contained in the Companies Act 1956, SEBI may, for the protection of investors, inter alia frame regulations on matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matters shall be disclosed by the companies. Section 11B of SEBI Act interalia empowers SEBI to issue such directions in the interest of investors or orderly development of the securities market as it deems fit to any company in respect of matters specified in Section 11A. Section 11(4) of SEBI Act provides that without prejudice to the provisions contained in Section 11(1),(2),(2A) & 3 and Section 11B of SEBI Act, SEBI may, in the interest of investors or securities market pass an order in writing either pending investigation/inquiry or on completion of such investigation/inquiry, inter alia, restraining a person from accessing the securities market and also prohibiting any person asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon SEBI to take remedial/preventive measures under Section 11/11B of SEBI Act are discretionary in nature does not mean that those provisions are to be invoked only when the interest of investors are actually prejudiced on account of the violations committed. 160. Accepting the argument of the appellants that the remedial/preventive measures under Section 11/11B of SEBI Act could be invoked only when the interest of investors/securities market were in fact prejudiced by the violations, would in effect mean, construing those provisions narrowly which is not warranted from the words used in those provisions. Very fact that Section 11/11B, empowers SEBI to take remedial/preventive measures even before establishing any violations, clearly shows that SEBI has very wide powers and the said powers can be invoked even before establishing any violations. In such a case, construing the provisions of Section 11 & 11B narrowly, as suggested by the appellants would amount to defeating the object with which those provisions are enacted and hence argument advanced by the appellants cannot be accepted. 161. It is true that in a given case, fact that no investors were not prejudiced by the viol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would apply to all the provisions of SEBI Act. That observation was made while dealing with the argument, that a company being a juristic person does not have a mind of its own and in the absence identifying the responsible officer who has committed the fraudulent act, the said fraudulent act or the guilty state of mind could not be attributed to the company. While holding that the theory of 'the directing mind' evolved in criminal proceedings would not apply to the Civil action taken by SEBI against the company therein for the wrong committed, this Tribunal, relying on a decision of the Bombay High Court in case of SEBI v. Cabot International Capital Corpn. reported in (2004) 51 SCL 307 which is approved by the Apex Court is case of Shriram Mutual fund (Supra), held that the ratio laid down by the Apex Court in case of Shriram Mutual Fund (supra) rendered in the context of Chapter VIA of SEBI Act would apply to all the provisions of SEBI Act and Regulations framed by SEBI. Apex Court in case of Shriram Mutual Fund has held that unless the language of the statute indicates the need to establish the presence of mens rea, it is wholly unnecessary to ascertain as to whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected with the said three companies. 166. Admittedly, on the date of filing first DRHP, entire shares of Felicite, Shalika and Sudipti were held by three 100% subsidiaries of DLF (DEDL, DHDL and DRDL) and therefore it was obligatory on part of DLF to disclose the names of Felicite, Shalika and Sudipti in the DRHP issued for the purposes of its IPO and disclose material information relating to those three companies. Accordingly, in the first DRHP filed on 11/05/2006 DLF had disclosed the names of Felicite, Shalika and Sudipti as 'associates' instead of disclosing them as subsidiaries of DLF. Since the dispute in the present case relates to disclosing information/facts relating to these three companies in the offer documents issued by DLF either as 'subsidiaries' or 'associates', it is not necessary to go in to the question as to whether the three companies ought to have been disclosed as 'Subsidiaries' instead of disclosing them as 'associates' of DLF. 167. On 31/08/2006, DLF withdrew the first DRHP filed on 11/05/2006 and filed second DRHP on 02/01/2007. In the second DRHP, neither the names of Felicite, Shalika and Sudipti nor material inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Thus on 29/11/2006 DLF (through its subsidiaries) divested shares of Felicite to three house wives and on 30/11/2006 DLF (through its subsidiaries) divested shares of Shalika to Felicite and divested shares of Sudipti to Shalika. In other words, the modus operandi adopted by DLF in divesting the shares of Felicite, Shalika and Sudipti was a first to divest the shares of Felicite to three house wives whose spouses were Key Managerial employees of DLF, and thereafter divest the shares of Shalika to Felicite and divest the shares of Sudipti to Shalika. (e) Felicite (acquired by three house wives on 29/11/2006) increased its share capital on 14/12/2006 and allotted increased shares to seven house wives whose spouses were all Key Managerial employees of DLF. As a result, the shareholding of three house wives in Felicite stood reduced from 40%, 30% and 30% to 10.1% each and the balance 70% shares (approx) were held by seven house wives whose spouses were all Key Managerial employees of DLF. Thus, the three house wives who acquired 100% shares of Felicite on 29/11/2006 got their shareholding reduced from 100% to 30% (10% each approximately) on 14/12/2006 by resorting to increase in sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir spouses continued to be the Key Managerial employee of DLF. (k) The personal loans taken by the spouses of the shareholders of Felicite in November/December 2006 were repaid by them in November 2009, except by Joy Saxena and Sanjay Sethi who repaid the same in June 2008 and May 2007, respectively. Thus, the personal loans taken by the respective spouses were utilized to buy shares of Felicite in the names of their respective wives and the loans were repaid at the time of their retirement. (l) From the bank account statement of Felicite, it is seen that out of the amount of Rs. 2 crore received by Felicite on account of increase in the share capital, almost entire amount of Rs. 2 crore was transferred by Felicite to DLF, DEDL, DHDL and DRDL. Thus, the money that came to Felicite from the joint accounts of Key Managerial employees of DLF through their wives, went back to DLF and its subsidiaries, even after the claimed date of dissociation. (m) In the year 2006-2007 Felicite had no fixed assets or inventory. As per the P&L account of Felicite, in the year 2006-2007, Felicite had acquired 281 companies of DLF (including Shalika) and had incurred total loss of about Rs. 8 lac ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L, DHDL and DRDL by Felicite. Except claiming that the above payments were composite payments, DLF has not produced any account statement/ledger/book entry to substantiate that the amount of Rs. 24,80,000/-, Rs. 24,80,000/- and Rs. 10,20,000/- received by DEDL, DHDL and DRDL from Felicite included the amount of Rs. 30,000/-,Rs. 30,000/- and Rs. 40,000/- being the price payable by Felicite for purchasing 100% shares of Shalika from DEDL, DHDL and DRDL respectively. (g) Prior to transfer of 100% shares of Shalika held by DEDL, DHDL and DRDL (100% subsidiaries of DLF) Mr. Lovekush Sharma and Mr. Rajendra Gupta, both employees of DLF were the directors of Shalika. They were also directors in various other subsidiaries of DLF. These two directors continued to be directors of Shalika even after 100% shares of Shalika were transferred by DEDL, DHDL and DRDL to Felicite on 30/11/2006. (h) Prior to 30/11/2006, bank account signatories of Shalika were Mr. Arun Kumar Bhagat (director in two subsidiaries of DLF and also authorized signatory of Sudipti), Surojit Basak (Senior Vice President of DLF, director of various subsidiaries of DLF and also authorized signatory of Felicite), Mr. Praveen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DLF) for development of above 35 Acres of land and on 9/10/2006 Sudipti received Rs. 45 crore as performance deposit from DCPC under the aforesaid development agreement. (e) On 26/04/2007 Mr. K. K. Sinha filed FIR No. 249/2007 at Connaught Place Police Station, Delhi alleging that Sudipti and its directors and Shri Praveen Kumar and others named therein have duped him to the tune of Rs. 34 crore after Sudipti acquired 35 Acres of land with Mr. K. K. Sinha as the confirming vendor. (f) In between, on 29/11/2006, DLF (through its subsidiaries) divested shares of Felicite to three house wives, on 30/11/2006 divested shares of Shalika to Felicite and divested its 100% shareholding in Sudipti to Shalika. There is no explanation as to why 100% shares of Sudipti held by two subsidiaries of DLF (DEDL and DHDL) were transferred to Shalika on 30/11/2006, when 100% shares of Shalika were held by DEDL, DHDL and DRDL who are all 100% subsidiaries of DLF. (g) Sudipti was funded through a series of transactions involving DLF's partnership firm, subsidiaries, associates and Key Management employees for the purpose of acquiring aforesaid lands. Shalika had zero bank balance on 29/11/2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Felicite as dissociation and thereby avoid disclosing material information relating to those three companies in the offer documents, is the question. 172. As rightly contended by counsel for SEBI, the expression 'sham transaction' (as discussed in London and West Riding Investment Ltd. (Supra) means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual rights and obligations (if any) which the parties intend to create. 173. It is contended that the business model adopted by DLF was to first incorporate subsidiary/associate companies for acquiring lands at cheaper rates and once the lands are acquired, the said subsidiary/associate companies would transfer the development rights in respect of those lands in favour of DLF. Once the development rights are transferred, it is contended that the said subsidiary/associate companies become shell companies and therefore, the shares of the said subsidiary/associate companies are divested by transferring the shares of those companies to third par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Key Managerial employees of DLF, thereafter, divested 100% shares of Shalika to Felicite on 30/11/2006 and on the same day divested 100% shares of Sudipti to Shalika. In the absence of any explanation as to why shares of Felicite and Shalika were divested even before those two companies had acquired any lands (for being developed by DLF) which was the object for which they were incorporated, and in the absence of any explanation as to why shares of Sudipti (a shell company according to DLF) were divested to Shalika (also a shell company according to DLF) it is apparent that the divestment of shares of Felicite, Shalika were not bonafide transactions carried out in the ordinary course of business. 176. If divestment of shares of Felicite, Shalika and Sudipti by DLF were bona fide transactions, then, on divestment of shares, DLF would have been totally dissociated with Felicite, Shalika and Sudipti. However, the events that took place on 29-30/11/2006 and even thereafter, leave no manner of doubt that DLF continued to be associated with Felicite, Shalika and Sudipti as can be seen from the following:- (a) decision of DLF to divest 100% shares of Felicite held by DEDL, DHDL even bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve that after 29/11/2006 the Key Managerial employees of DLF were controlled by DLF to the extent they were discharging duties as employees of DLF and they were acting independently while discharging their duties in their capacity as Board of directors of Felicte, Shalika and Sudipti. (e) Divestment of shares was a game plan adopted by DLF is evident from the fact that on 29/11/2006, the bank balance of Shalika was zero and till 29/11/2006 Shalika had not even obtained cheque book. On 29/11/2006 DLF (through its subsidiaries) provided funds to Shalika so that Shalika could acquire shares of Sudipti on 30/11/2006 from the subsidiaries of DLF. Thus, on the one hand, DLF sold the shares of Sudipti to Shalika and on the other hand DLF supplied funds to Shalika for purchasing the shares of Sudipti. It is true that funds provided by the subsidiaries of DLF to Shalika on 29/11/2006 were towards the share subscription money. However, the very fact that the share subscription amount which was required to be paid in March 2006 was paid on 29/11/2006 leaves no manner of doubt that the said payment was made with a view to facilitate acquisition of shares of Sudipti by Shalika. (f) If the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 178. Argument of DLF that transfer of shares of Felicite (consequently shares of Shalika and Sudipti) by DLF in favour of the wives of its employees were for administrative convenience and maintenance of continued confidentiality for acquisition of any contiguous parcels of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociate of DLF. During the course of arguments, DLF for the first time sought to place on record certificates issued by its auditor as well as the auditors of its subsidiaries to demonstrate that Felicite had paid the above amounts to DLF and its subsidiaries as and by way of consideration for selling shares of various DLF companies by them to Felicite. Correctness of the said certificates are seriously disputed by SEBI. For the purposes of present appeals it is wholly immaterial as to whether the amounts were received by DLF and its subsidiaries from Felicite on account of commercial transactions or on account of share transfer. What is relevant to note is, that Felicite continued to acquire various DLF companies even after the alleged dissociation, which clearly justifies the inference drawn by SEBI that even after divestment of shares Felicite was run by DLF through the Board of Directors who are all employees of DLF. Similarly, Shalika and Sudipti were run by DLF through the Board of Directors who are all employees of DLF. In other words, assuming that the divestment of shares are not per se illegal, fact that the said divestments have been made to camouflage association of DLF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Dhairyavan (Supra) that in view of concept of duel ownership being recognised in India, disclosing interests of DLF in 35 Acres of land belonging to Sudipti amounts to disclosing material information relating to Sudipti cannot be accepted, because, assuming that the total land held by DLF under the head 'Sole Development Rights' includes 35 Acres of land belonging to Sudipti, that does not amount to disclosing Sudipti as 'subsidiary/associate' of DLF. Object of various Clauses in the DIP Guidelines (now ICDR Regulations) is to ensure that various information set out therein are disclosed in the offer documents and not merely to included the lands belonging to the subsidiaries/associates. Therefore, assuming that the 35 Acres of land belonging to Sudipti was included in the total land that could be developed by DLF, it would not amount to disclosing true and adequate material information as contemplated under the DIP Guidelines. Hence, aforesaid decisions do not support the contention of DLF. 184. Argument of DLF that after executing the Development Agreement in respect of 35 Acres of land in favour of DLF (through DCPC) Sudipti had become commercially irrelevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the terms and conditions of the Development Agreement between Sudipti and DLF (through DCPC) and mitigate to some extent the completion risk faced by DLF in executing the Development Agreement. This argument of DLF, precisely contradicts its claim that on execution of Development Agreement, Sudipti had become a shell company and hence the shares of Sudipti were divested. Even according to DLF, inspite of executing Development Agreement, there was a possibility of the development of the lands in question being scuttled if there was total dissociation on account of divestment of shares, of Sudipti, Therefore, DLF adopted a modus operandi of sham divestment of shares through three house wives whose spouses were Key Managerial employees of DLF. Admittedly the three house wives were not running Felicite (consequently, Shalika and Sudipti) and hence, it is evident that DLF continued to run Felicite, Shalika and Sudipti even after the divestment of shares, through the Board of Directors of the respective companies, who were also Key Managerial employees of DLF. Thus, in violation of Clause 6.2 of DIP Guidelines DLF has resorted to sham transaction of divesting shares with a view to avoid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t becomes academic to go into the question as to how many Clauses specified in Chapter VI of DIP Guidelines have been violated. Therefore, without going into the merits of rival contentions on the issue as to whether DLF has violated Clauses 6.9.6.6, 6.10.2.3, 6.11.1.2 & 9.1 of DIP Guidelines it is held that by resorting to sham transaction of divesting shares of Felicite, Shalika and Sudipti, DLF has avoided making disclosure of material information relating to those three companies in the offer documents in violation of Clause 6.2 of DIP Guidelines and consequently violated various other Clauses in Chapter VI of the DIP Guidelines which relate to disclosing material information in the offer documents. It was strongly contended by the Counsel for DLF that on divestment of shares it could not be said that DLF had 'control' over Felicite, Shalika and Sudipti as contemplated under Section 4 of the Companies Act, 1956. As rightly contended by the Counsel for SEBI, the basic question to be considered herein is, whether, entering into sham transactions with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation and thereby avoid disclosing mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s account of DLF and failure to do so constitutes failure to disclose material information relating to those three companies in the offer documents. 190. Counsel for DLF apart from submitting that the above contentions which were neither raised in the show cause notice nor dealt with in the impugned order cannot be allowed to be urged at this belated stage, submitted that there is no merit in the above contention of SEBI, because, in the present case, the parent subsidiary relationship between DLF and Sudipti was a temporary relationship and therefore, as per para 11 of AS-21, DLF was not required to comply with para 22 of AS-21. 191. It is well established in law that correctness of an order is to be decided only on the basis of reasons set out in the impugned order and not on the basis of reasons which are not be found in the impugned order. Since the financial statements are prepared by the auditors and the auditors of DLF have not been questioned by SEBI on the above aspects of the matter, it would not be proper to express any opinion behind the back of the auditors of DLF. Although, above argument sought to be raised by SEBI for the first time before this Tribunal is an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justified in rejecting the contention of DLF that the FIR filed by Mr. K. K. Sinha came to its knowledge on 25/06/2007. 196. The WTM of SEBI by his order dated 20/10/2011, while appointing the Investigating Authority to investigate into the allegations levelled by Mr. K. K. Sinha against DLF, had recorded his prima facie observation that in all probability DLF was aware of the FIR registered against Sudipti, because Mr. Praveen Kumar (one of the accused in the FIR) was closely associated with DLF and Mr. Praveen Kumar and others against whom the FIR was filed were interrogated by the police authorities in connection with FIR. However, in view of the plea that DLF came to know about the filing of FIR on 25/06/2007, the WTM of SEBI directed the Investigating Authority to investigate the matter and find out as to whether there is any truth in the contention of DLF that filing of FIR came to its knowledge on 25/06/2007. In para 17 of the said order it was specifically recorded that the Investigating Authority shall investigate the matter without being prejudiced by the prima facie observation made in the said order. 197. In para 41 of the impugned order, which is passed after the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, especially when it was specifically recorded in the said order that the investigation be carried without being influenced by the prima facie observations made therein. Thus, the impugned decision of WTM of SEBI in so far as it holds that despite knowledge, DLF has failed to disclose FIR in the offer documents is based on conjectures and surmises and hence cannot be sustained. 200. During the course of arguments, Mr. Chatterjee, learned counsel appearing on behalf of Mr. K. K. Sinha (complainant) sought to tender three communication dated 01/05/2007, 02/05/2007 and 26/05/2007 which according to him clearly establish that DLF was aware about the filing of FIR prior to 25/06/2007 and the claim made by DLF to the contrary is false. 201. Counsel for appellants apart from doubting genuineness of the aforesaid three communications have submitted that the said three communications ought not to be entertained at this belated stage. However, in the interest of justice, we deemed it proper to look into those three communications. First communication dated 01/05/2007 is the summons issued by the Investigating Officer, Police Station, Connaught Place, New Delhi calling upon Mr. Praveen Kum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst Sudipti came to its knowledge on 25/06/2007, then the question as to whether FIR constitutes outstanding litigation which ought to have been disclosed in the offer documents becomes academic and hence not answered. 203. Question thereafter to be considered is, whether SEBI is justified in holding that the directors and the CFO of DLF have violated Clause 6.15.2 of the DIP Guidelines. 204. Counsel for the directors of DLF have argued that in the absence of any specific provision under the SEBI Act making the directors/CFO automatically liable for the offences allegedly committed by the company, the directors cannot be made liable for the offences allegedly committed by the company by applying the principles of vicarious liability. There is no merit in the above contentions, because, in the present case, the directors and the CFO are not held vicariously liable, but are held individually and directly liable for the misstatements in the offer documents. Hence, various decisions relied upon in support of the contention that the directors cannot be made vicariously liable for the misdeeds of the company would have no bearing on the facts of present case. 205. The Board of Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther a Promoter nor a Principle shareholder, it could not be said that Mr. Sanka had violated Clause 6.9.6.6 of DIP Guidelines. Both these arguments are without any merit, because, as noted above, Mr. Sanka is primarily held liable for being party to the sham transactions of divesting shares with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation and thereby avoid disclosing material information relating to those three companies in the offer documents. Once it is held that the Board of Directors/CFO are guilty of resorting to sham transactions with a view to avoid disclosing material information relating to aforesaid three companies, then it follows as a matter of course that material information required to be disclosed as more particularly set out in various Clauses of DIP Guidelines have not been complied with. In such a case it becomes academic to go into the question as to how many Clauses of DIP Guidelines which enumerate the material information required to be disclosed in the offer documents have been violated. Similarly, the argument that the benefit of doubt given to Mr. G. S. Talwar must also be extended to other directors who are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Investigating Officer after completion of investigation which included report on violation committed under the PFUTP Regulations was considered by the appointing authority namely the WTM of SEBI on 17/05/2013 and thereafter, show cause notice in accordance with the power delegated to Deputy General Manager duly approved by Executive Director was issued by the Chief General Manager, who is a person holding two ranks superior to that of Deputy General Manager. It is further stated in the affidavit filed by SEBI that after issuance of show cause notice, the matter was referred to Mr. Rajeev Kumar Agarwal, WTM of SEBI who as per office note issued by the Chairman SEBI on 23/01/2013 was designated as a member to hear and decide Section 11B & 11(4) matters which arise from the investigations conducted by the Investigation Department Division 6 to 10 and since the investigation in the present case was carried out by Division 7, the same was heard and decided by Mr. Rajeev Kumar Agarwal, WTM of SEBI. These submissions are not controverted and moreover, there is no reason to disbelieve the above statements made by SEBI in their affidavit. Hence the preliminary objection raised by DLF to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulations and any representation made to the investors by resorting to sham transactions would amount to committing 'fraud' under regulation 2(c) of PFUTP Regulations. 212. Similarly, argument of DLF that in the present case, no act, expression, omission or concealment was caused by DLF while 'dealing in securities' as contemplated under regulation 3 read with regulation 2(b) of PFUTP Regulations is also without any merit, because, expression 'dealing in securities' under regulation 2(b) is an inclusive definition and is not restricted to the categories specified therein. Therefore, any act, omission or concealment in the offer documents issued to the investors/general public for the purpose of subscribing shares of a company in the IPO would be an act, omission or concealment while dealing in securities. To accept the argument of DLF would mean that a company which has indulged in committing fraudulent act, omission or concealment in the offer documents issued to the investors/general public for subscribing to the shares of that company in the IPO, cannot be proceeded against under PFUTP Regulations on ground that there is no dealing in securities. Offering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat divestments of shares were undertaken by DLF under the bonafide advice given by Merchant Bankers, auditors and legal advisors which are now found to be sham transactions. In other words, it is possible that the Merchant Bankers/Auditors may have issued the certificates/reports under the bonafide belief that the facts furnished to them are true and correct. However, if the facts furnished to them by DLF is distorted or sham, it is not open to DLF to contend they acted bonafide on the basis of the certificates/reports submitted by the Merchant Bankers/Auditors/legal advisors. 215. Question then to be considered is, whether in the facts of present case, initiating remedial/preventive action under Section 11/11B of SEBI Act is warranted and if so, whether the action taken against the appellants by SEBI is proportionate to the violations committed by the appellants. 216. 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 objectionab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial information relating to Felicite, Shalika and Sudipti were insignificant, even if the same were disclosed in the offer documents, it would have had little impact on the investor decision to invest in the shares of DLF. (b) there is nothing on record to suggest that the investors were prejudiced on account of DLF failing to disclose material information relating to Felicite, Shalika and Sudipti. (c) there is nothing on record to suggest that failure to disclose material information relating to three companies in violation of various Clauses under Chapter VI of DIP Guidelines/PFUTP Regulations has led to any direct or indirect benefit or advantage to DLF or its directors. (d) DLF has already borrowed huge funds for acquiring lands/development rights and further funds would be necessary for development of the said lands. If DLF is restrained/prohibited from accessing the securities market for a long period, it would seriously cripple the functioning of DLF and consequently, the interests of 4.5 lac investors in DLF would be seriously prejudiced. Object of passing restraint/prohibitory order under Section 11/11B of SEBI Act is to ensure that no such violations are committed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25/06/2007 and that the DLF has actively concealed the FIR in the offer documents is unsustainable and accordingly quashed and set aside. (g) By order of WTM of SEBI dated 20/10/2011, the Investigating Officer of SEBI was specifically directed to investigate as to 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. (h) resorting to sham transaction with a view to camouflage association of DLF with three companies as dissociation being a dubious method adopted by appellants it was necessary for SEBI to send stern message to DLF and other listed companies by taking remedial action under Section11/11B of SEBI Act so that such dubious methods are not adopted hereafter. (i) Since the impugned order is held to be partially unsustainable and there are seve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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