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TMI Blog2016 (8) TMI 968X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 3 crore imposed on all the appellants, it may be noted that the said penalty is imposed for the following reasons:- a) Penalty of ₹ 1 crore is imposed under Section 15HB of SEBI Act, because the appellants as directors of RDB did not disclose all material information in the offer document that are true and adequate as contemplated under the ICDR Regulations and misutilized the IPO proceeds by giving loan to RDBRIL in violation of the ICDR Regulations. b) Penalty of ₹ 1 crore is imposed under Section 15HA of SEBI Act on ground that apart from violating ICDR Regulations, the appellants are also guilty of violating the PFUTP Regulations. c) Penalty of ₹ 1 crore is imposed under Section 15HA of SEBI Act on ground that the appellants, in violation of PFUTP Regulations have routed IPO proceeds in a circuitous manner so as to provide funds to four trading clients who had traded in the shares of RDB on the first day of listing RDB shares and had incurred huge losses. Violation of ICDR Regulations - Held that:- Argument of the appellants that giving loan by RDB to RDBRIL would amount to placing surplus funds from one pocket to another cannot be accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing material information from the investors by resorting to manipulative and deceitful devices was in violation of regulation 3 and 4 of the PFUTP Regulations cannot be faulted. Penalty provisions - Held that:- We uphold the penalty of ₹ 1 crore imposed on appellants under Section 15HB of SEBI Act for violating the ICDR Regulations and penalty of ₹ 1 crore imposed under Section 15HA of SEBI Act for violating PFUTP Regulations. Similarly, penalty of ₹ 5 lac imposed on appellant for violating Clause 49 of the Listing Agreement is also upheld. However, penalty of ₹ 1 crore imposed under Section 15HA of SEBI Act on ground that RDB transferred IPO proceeds in a circuitous manner to four trading clients is deleted. Accordingly, appellant is directed to pay ₹ 5 lac and all appellants are directed to pay ₹ 2 crore jointly and severally to SEBI within a period of four weeks from today. If the appellants fail to pay the aforesaid penalty within the time set out herein above, SEBI would be entitled to recover that amount from the appellants with interest at the rate of 12% per annum from the date of the order passed by the AO of SEBI on 06.08.2014 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s manufacturing activities at Haldia, Kolkata through Initial Public Offer ( IPO for short). c) On 12.09.2011 SEBI granted its approval to the DRHP filed by RDB. Accordingly, the IPO opened on 21.09.2011 and the IPO closed on 23.09.2011. d) On 05.10.2011 IPO funds to the tune of ₹ 34.25 crore was credited to the bank account of RDB. e) On 07.10.2011 at about 11:00 A.M. Audit Committee Meeting of RDB was held and in that meeting the committee decided to recommend to the Board of RDB to utilize the IPO funds by investing in high quality interest bearing instruments for the profitability of the company. It also decided to recommend to the Board for giving secured loan to the group companies of RDB. f) It is not in dispute that at 5:00 P.M. on 07.10.2011 Board meeting was held, whereby the Directors of RDB were authorized to invest the unutilized IPO proceeds of RDB in high quality interest bearing instruments. It was further resolved to authorize RDB to enter into loan agreement with RDBRIL and the draft loan agreement placed before the Board was approved with certain modifications with consent of both parties. g) It is also not in dispute, that on 07.10.2011 its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted to the appellants and by the impugned order dated 06.08.2014 penalty aggregating to ₹ 3 crore is imposed on the appellants with a direction that the said penalty be paid by the appellants jointly and severally. Additional penalty of ₹ 5 lac was imposed on the appellant in Appeal No. 404 of 2014. Challenging the said order of AO, these four appeals are filed by the appellants. 5. At the outset, we would like to consider the penalty of ₹ 5 lac imposed on Mr. Sandeep Baid (Appellant in appeal No. 404 of 2014). 6. In the impugned order it is held that Mr. Sandeep Baid who was the Whole Time Director of RDB chaired the Audit Committee Meeting of RDB on 07.10.2011 in violation of Clause 49 of the Listing Agreement. 7. Admittedly, Clause 49 of the Listing Agreement provides that Chairman of the Audit Committee shall be an Independent Director and on 07.10.2011 even though an Independent Director of RDB was available to chair the Audit Committee, the said meeting was chaired by the appellant in Appeal No. 404 of 2014 who was the Whole Time Director. It is contended by the counsel that the Whole Time Director chaired the Audit Committee Meeting on 07.10.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir business purpose and the said loan was repayable on demand as per the terms and conditions as may be mutually decided between the management of both the companies. In the impugned order it is held that the above information was a material information which ought to have been disclosed and failure to disclose that information constitutes violation of regulation 57(1), 57(2)(a) read with Scheduled VIII Part A(16)(b) and regulation 60(4)(a) of the ICDR Regulations. 11. It is contended by the counsel for the appellants that RDBRIL had requested for financial assistance and therefore, it was resolved on 12.09.2011 to give some of its surplus funds as loan to RDBRIL from time to time up to a maximum of ₹ 50 crore. It was not a resolution to give loan of ₹ 50 crore to RDBRIL, but it was a resolution enabling RDB to give loan to RDBRIL as and when surplus funds were available. There was no preconceived intention to give IPO proceeds to RDBRIL and on 12.09.2011 when the resolution was passed, the IPO was not even opened and there was no certainly that the IPO would be successful. Thus, on 12.09.2011, there was no intention to give IPO proceeds as loan to RDBRIL and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of RDB in transferring ₹ 31.60 crore out of the IPO proceeds amounting to ₹ 34.25 crore to RDBRIL even before the Board of RDB authorized giving loan to RDBRIL and even before the draft loan agreement was approved at 5.00 P.M. on 07.10.2011, clearly shows that the resolution passed on 12.09.2011 to give loan up to ₹ 50 crore to RDBRIL was with reference to the IPO proceeds. Utilizing the IPO proceeds for a purpose other than the purpose specified in the IPO being a material information ought to have been disclosed as contemplated under the ICDR Regulations. Failure to do so, constitutes violations of ICDR Regulations. 14. Argument of the appellants that the disclosure made in the prospectus that pending utilization of the proceeds of the issue, we intend to invest such proceeds in high quality interest bearing liquid instruments entitled RDB to utilize IPO proceeds by giving loan to RDBRIL is without any merit. Investing surplus funds in high quality liquid instruments cannot be equated with giving loan to a group company. Investment in liquid instruments is done without any security as it involves minimum risk and can be accessed easily. However, giving loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as SEBI approval for the IPO was received, RDB chose to invest surplus fund by way of loan to RDBRIL up to the extent of ₹ 50 crore in one or more tranches, even though no such funds were available. Very fact that on 12.09.2011 itself RDB resolved that along with the Annual General Meeting ( AGM for short) scheduled on 28.09.2011, Extra Ordinary General Meeting ( EOGM for short) of RDB shall also be called on 28.09.2011 to seek approval from the pre IPO shareholders of RDB to grant loan to RDBRIL by curtailing the notice period from 21 days to 15 days by invoking Section 171(2) of the Companies Act, 1956, clearly shows that RDB and its directors were in great hurry to seek approval from pre IPO shareholders to give loan up to ₹ 50 crore even though there were no funds for giving the loan. Obviously the hurry was on account of the fact that IPO was commence with effect from 21.09.2011 and if 21 days notice for EOGM was adhered to, then post IPO shareholders would step in and therefore to avoid seeking approval from post IPO shareholders, RDB and its directors chose to suppress resolution dated 12.09.2011 and call EOGM by curtailing the notice period so that approval t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Act, 1956 empowers a company to give shorter period of notice to the shareholders and Section 192 of the Companies Act permits filing of the resolution up to 30 days and therefore, no fault can be found with RDB in invoking shorter period of notice and filing the resolution within 30 days. In the impugned order it is not held that RDB and its directors have violated Section 171(2) and Section 192 of the Companies Act, 1956. What is held in the impugned order is that the motive in curtailing the notice period for calling EOGM from 21 days to 15 days by invoking Section 171(2) was with a view to avoid taking consent of post IPO shareholders to give loan up to ₹ 50 crore to RDBRIL. Similarly, it is held that filing of EOGM resolution dated 28.09.2011 was delayed till 19.10.2011, so that during the interregnum allotment of IPO shares are made and once the shares are allotted the question of withdrawing from the offer does not arise even if the subscriber intends to withdraw from the offer on account of RDB giving loan up to ₹ 50 crore to RDBRIL. Fact that apart from IPO proceeds, RDB did not have any other surplus funds to give as loan to RDBRIL and the fact that immedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to be a routine matter, especially when IPO proceeds were the only available funds that could be transferred as loan to RDBRIL. Fact that giving loan up to ₹ 50 crore to RDBRIL was three times the net worth of RDB and out of the IPO proceeds of ₹ 34.25 crore, ₹ 31.60 crore was transferred to RDBRIL even before the Board of RDB authorized such transfer and even before the draft loan agreement between RDB and RDBRIL was approved by the Board of RDB, conclusively establish that from the date of passing resolution on 12.09.2011 till transferring IPO proceeds to RDBRIL, RDB and its directors adopted manipulative and deceitful method so as to keep the investors as also the book running lead manager in dark about transferring IPO proceeds as loan to RDBRIL. 22. It is contended on behalf of the appellants that the promoter group held 63.34% shareholding of RDB and 61.5% shareholding of RDBRIL even post IPO and therefore the ownership and control of both companies being with the same promoter group, the level of control and confidence was the highest and therefore, giving loan by RDB to RDBRIL amounted to investing in high quality, interest bearing liquid instrumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween RDB and Axis Bank only to highlight that in a bid to transfer IPO proceeds by way of loan to RDBRIL, RDB not only suppressed material facts from the investors but also suppressed material facts from the Axis Bank. In these circumstances, decision of the AO that the conduct of RDB and its directors (appellants) in suppressing material information from the investors by resorting to manipulative and deceitful devices was in violation of regulation 3 and 4 of the PFUTP Regulations cannot be faulted. Penalty for violating the provisions contained in the ICDR Regulations and PFUTP Regulations. 24. Penalty for violating ICDR Regulations under Section 15HB of SEBI Act is up to ₹ 1 crore and penalty for violating PFUTP Regulations under Section 15HA of SEBI Act is ₹ 25 crore. Once it is held that the appellants as directors of RDB are guilty of suppressing material facts from the investors and misutilized the IPO proceeds in contravention of statements made in the offer documents and thereby violated regulation 57(1), 57(2)(a) and regulation 60(4) of the ICDR Regulations and committed those violations by adopting manipulative and deceitful method in violation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection is established between RDB / its Directors and the four trading clients to whom the funds are allegedly held to have been transferred by RDB through RDBRIL and various other entities. Moreover, the appellants had tendered a ledger statement of RDBRIL to show that the funds transferred by RDBRIL to Namokar Duplicating Pvt. Ltd. ( Namokar for short) was by way of refunding the amount already received by RDBRIL from Namokar. In the impugned order, the ledger statement furnished by RDBRIL is disbelieved on ground that the said ledger statement is not certified and there is no other evidence furnished by the appellants. In our opinion, there was no reason to disbelieve the ledger statement of RDBRIL especially when RDBRIL is a listed company. Moreover, the appellants have annexed to the Memo of Appeal a certificate issued by S.M. Daga Co., Chartered Accountants which clearly certifies that the amount paid by RDBRIL to Namokar was in fact refund of the amount already received by RDBRIL from Namokar. Sanctity of the said certificate is not doubted by SEBI. In such a case, it is apparent that the amount paid by RDBRIL to Namokar was by way of refunding the amount already rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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