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TMI Blog2020 (1) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... urities market for a period of four years from the date of the order. They were further prohibited from associating themselves with any listed Company or partners in a partnership firm with effect from 1st February, 2019 and appellant Arvind Gala and Appellant Bhavi Gala were warned to exercise due care and diligence. The appellant Company went into an Initial Public Offer of equity shares in July and August, 2011. The Red Herring Prospectus was published on 12th July, 2011. Opening date of issue was 20.7.2011. Closing date was 22.7.2011. Prospectus was issued on 27.7.2011 and the shares were listed on BSE and NSE on 4th August, 2011. 2. It was a public issue of 70 lakh equity shares of Rs. 10 each at a price of Rs. 117 per equity aggregating to Rs. 8190 lakhs. The objects of the issue as per the prospectus were:- (1) Investment in subsidiary Inventure Finance Pvt. Ltd. (hereinafter referred to as 'IFPL') amounting to Rs. 30 crores. (2) Augmenting long term capital requirement of Rs. 20 crores. (3) General corporate purposes Rs. 27.65 crores and public issue expenses Rs. 4.25 crores. It was declared in the prospectus that no bridge loan was raised/scheduled to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Certain additional documents were called for in view of the explanation given in the reply. After hearing the parties, the WTM came to the conclusion that except the charge of mis-utilisation of IPO proceeds contrary to the intent of augmenting the interim working capital all other charges are established. Therefore, the impugned order came to be passed. Hence the present appeals. 5. The learned counsel for the respective appellants made submissions in the light of the explanation given by them before the WTM as well as the submissions made in the appeal. The learned Senior counsel for the respondent Mr. Mustafa Doctor, supported the reasoning of the WTM on the basis of the material on the record. We propose to deal with the submission firstly to find as to whether there is any breach as detailed supra and if yes as to whether all the appellants or any of them is liable for the same. 6. Non utilization of the IPO proceeds towards the stated object of IFPL of advance money against shares, securities. In the show cause notice, it was alleged that the prospectus revealed that IFPL was advancing money solely against shares, securities and that too only to the clients of IGSL and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in IFPL is in line with its strategy of expanding its core businesses and will also help us to strengthen the respective balance sheets... To enable clients to take greater participation in different segments of capital market, IFPL provides loan against shares to various clients, including our broking clients. Through such financing clients pay a partial sum of stock price and the balance is then funded by IFPL at an interest.... IFPL is RBI registered NBFC and is in the business of advancing loans to clients for acquisition of shares/stock/ bonds/ debentures/ securities issued by government or local authority or other securities of like marketable nature. This facility provides the clients with the opportunity to buy shares listed on the stock exchanges on credit." 9. The Company in its reply at para no.5 has adverted the attention of the WTM towards the various sentences, clauses in prospectus and contended that the business of IFPL was explained and it was also clearly declared that considering the competitive and dynamic nature of the industry the Company would have discretion to revise its finance strategy from time to time. It therefore sought to explain that it was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the charge on this count is substantiated. It is to be noted that though at one place in the prospectus as extracted by the WTM in its impugned order a message was conveyed that an amount of Rs. 30 crores would be invested in IFPL for use of lending against share as detailed in the extract, there are other ample references regarding the object of IFPL. 13. More particularly at page no.68 the following disclaimer below the object of the issue can be found. "Our management, in response to the competitive and dynamic nature of the industry, will have the discretion to revise its business plan from time to time and consequently our funding requirement and deployment of funds may also change. This may, subject to compliance with applicable laws and regulations, also include rescheduling the proposed utilization of Issue Proceeds and increasing or decreasing expenditure for a particular object vis-à-vis the utilization of Issue Proceeds. In case of variations in the actual utilization of funds earmarked for the purposes set forth above, increased fund requirements for a particular purpose may be financed by surplus funds, if any, available in respect of the other purposes for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time in the normal course of business. The clients fund being "amount due to clients" was in the range of 20 to 30 crores and the certificate attached to the reply at Exhibit I would show that on 30th July, 2011 Rs. 47 crores available balance in this account. Out of these specific four entities, from K.R. Shoppers Pvt. Ltd. (hereinafter referred to as KRSPL) a short term loan was availed as working capital which was immediately paid but not from the IPO funds. The rest of the three entities were in fact prospective clients and their funds were lying with the Company in the clients account. However, the contract could not be fructified for various reasons like KYC compliance and, therefore, the amount that was deposited by them in the clients account was repaid from the clients account and not from the IPO funds. The same therefore cannot be called as a bridge loan. The WTM held that credit of monies from these three entities in the BSE client account itself become suspect as crediting amount in such accounts whose credentials at the given point of time were not provided. Merely, crediting amount in the client account would not automatically mean that the said entities can be cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment personnel exercise significant influence". Further in the financial year 2009-2010 too the said KR Shoppers had provided temporary funds of Rs. 2 Crores on which an interest of Rs. 13.4 Lakhs was paid. Being an entity where one of the management personnel exercises significant influence, it had paid Rs. 3 Crores to us, which was returned on August 3, 2011. However no interest was paid on the said funds. It is humbly submitted that this transaction is also not in the nature of bridge loan but a loan from director's entity." It is, thus, established that a short term loan was availed by the Company which was returned on 3rd August, 2011. According to the Company, the repayment was without any interest and, therefore, it was not bridge loan but a loan from the director entity as it is related to one of the director. Black's Law Dictionary defines bridge loan as under:- "Bridge loan - A short-term loan that is used to cover costs until more permanent financing is arranged or to cover a portion of costs that are expected to be covered by an imminent sale - also termed bridge financing; swing loan". 19. In financial world, bridge loan is understood as a short term accomm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch 31, 2010 and Rs. 20.65 crores as on March 31, 2011. This amount of Rs. 20.65 crores remained payable to these non corporate entities. 22. It was, therefore, alleged in the show cause notice that such deposits were accepted by the Company in violation of Section 58A of the Companies Act, 1957. It was also alleged that since the outstanding amount of Rs. 20.65 crore as on 31st March, 2011 was more than 25% of the issue proceeds, the Company was required to disclose the existence of the security deposit in its prospectus to the investors enabling them to take informed investment decision. However as Company failed to disclose the same, contravention of the ICDR Regulations had occurred. 23. In reply to the show cause notice in para 43 onwards Exhibit 'C' the Company replied afresh, as under:- "43. We humbly submit that the Mrs. Heena Sanjay Shah (Client Code 8038 from May 25, 2008) and Mrs. Usha Atul Shah (Client Code 5543 from April 30, 2008) are our registered client trading through us for a long time. They are also related to a few other clients as well who regularly trade through us. The funds were received from them as clients and the fact that the same was repai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard lies with the Central Government. SEBI itself has referred the issue to the Ministry of Corporate Affairs and no adverse action has been taken as on the date against the Company by the ministry and, therefore, no further action was warranted from SEBI in this regard. Mr. Modi further submitted that in fact the amount was not a security deposit but merely adjustment against debit balances of Bishaka Diamonds Pvt. Ltd. & Anchor Leasing Pvt. Ltd i.e. the related account as quoted above. 25. The WTM held that though the issue of security deposit in view of the provisions of Section 55A of the Companies Act, the jurisdiction would lie with the Central Government, for the purposes of disclosure of the deposit under ICDR Regulations the SEBI would have jurisdiction. Upon hearing both sides, in our view, the finding of the WTM cannot be faulted with. During investigation the Company emphatically came with a case that all these transactions were security deposits. It is clear that Rs. 21.61 crores was repaid post IPO. Only when the show cause notice was issued the Company came with a case that it was not a security deposit but an amount kept in an account for adjustment towards the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in Appeal no.49, 49A, 49B, 49C and 49D of 2003 decided on 11th February, 2005, Appeal no.133 of 2003 decided on 15th September, 2004, in the case of Bhardwaj Thuiruvenkata Venkatavraghavan v. Ashok Arora [2017] SCC Online Del 7416 of Delhi High Court and decision of another Whole Time Member of SEBI dated 13th January, 2016. The decisions are regarding various aspect of the liability of independent directors or director qua a particular act being a criminal offence or a liability under the Companies Act etc. In many of the above cases on facts, finding that the particular director had no knowledge of the day to day affairs of the Company their plea was accepted. 31. More particularly, in Appeal no.49 and others decided by this Tribunal on 11th February, 2005 the issue related to certain non disclosures made in the prospectus, misutilisation of the proceeds of the public issue which are similar to the present case. 32. In para no.5 of the decision, this Tribunal has noted that the appellant therein were independent directors and were not involved in the day to day management and control of the Company. In the circumstances, the argument of the respondent SEBI that they had p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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