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TMI Blog2017 (10) TMI 1512X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and control of the person or body of persons was so intense that a corporation could be said to think and act through the person or the body of persons controlling its affairs. In the present case, the liability imposed on Cals is a civil liability and not a criminal liability. Sometime in May/June, 2007, Sanjay Malhotra, one of the promoters of Spice Energy group approached Goorha (promoter director of Cals) with a proposal to take over Cals for implementing the refinery project of SRM which was a Spice Energy group company. As Cals had virtually become a defunct company, the BoD of Cals in its meeting held on 23/7/2007 approved the proposal and accordingly 4 nominees of the Spice Energy group viz. Kansagra, Chilikuri, Roy and Sundararajan were appointed as additional directors of Cals. It was inter alia resolved in the said meeting that for implementing the refinery project, Cals would raise funds through issuance of GDR/FCCB. Accordingly, Cals had issued GDRs amounting to USD 200 million. According to SEBI, by opening an account with Banco and executing the Account Charge Agreement, Cals has financed subscription of its own GDRs which is prohibited under the Securiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion drawn by SEBI that opening a bank account with Banco and executing the Account Charge Agreement were the acts done by Cals through its directors to finance Honor for subscribing the GDRs issued by Cals in gross violation of Section 77(2) of the Companies Act, 1956 and the provisions contained in the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ( PFUTP Regulations for convenience), cannot be faulted. In the facts of present case, involvement of Cals controlled by the Spiece Energy group is so intense that it can be easily seen that the fraudulent acts and deeds were executed by Cals through its directors. In these circumstances, argument that Cals was not aware of the actions of its directors cannot be accepted. Consequently, the finding recorded in the impugned order that Cals and its directors had financed for the subscription of its own GDRs in gross violation of Section 77(2) of the Companies Act, 1956 and the provisions contained in the SEBI Act and the PFUTP Regulations cannot be faulted. It is interesting to note that Cals (controlled by the Spice Energy group) not only financed Honor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the error corrected in the subsequent Board meeting. However, in the meeting of BoD of Cals held on 19/1/2008, the minutes of BoD meeting dated 30/10/2007 as recorded in the minute book of Cals was approved. Very fact, that Sundararajan who was present in the BoD meeting dated 19/1/2008 did not take any steps to get the alleged error in the minutes of meeting dated 30/10/2007 rectified, clearly shows the mala fide intention on part of Sundararajan. Sundararajan has also admitted that he had sent an e-mail to Goorha on 13/11/2007 expressing his inability to go to London for executing the documents on behalf of Cals and requested Goorha to sign necessary documents on behalf of Cals. Accordingly, Goorha had signed the Account Charge Agreement on 12/11/2007 (as per the date in London). Apart from signing the Account Charge Agreement, no other agreement was signed on behalf of Cals on 12/11/2007. These facts clearly demonstrate that Sundararajan was clearly aware that the document to be executed on behalf of Cals at London on 12/12/2007 was the Account Charge Agreement. Therefore, argument of Sundararajan that he did not know anything about the Account Charge Agreement is a blatant l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7(2) of the Companies Act, 1956 and in violation of the SEBI Act and the regulations made thereunder. 4. Appellants in all these appeals do not dispute that above violations are committed in relation to the GDR issue of Cals. However, each appellant claims to be a victim of that fraud and not a vehicle of fraud. 5. Facts relevant for disposal of all these appeals are as follows:- (a) Cals Limited was originally incorporated on 25/7/1984 as Computer Aided Learning System Pvt. Ltd. and was converted into a public limited company on 22/9/1992. The name of the company was changed to Cals Limited on 25/2/1994. In September, 1994, Cals Ltd. came out with a public issue and was initially listed on the Bombay Stock Exchange (BSE) and other exchanges. Cals Ltd. did not have any business since 1997 and it had incurred heavy losses and debt in its operation. By the year 2007, Cals Ltd. had become virtually a defunct company with huge losses. Mr. Sarvesh Goorha, original promoter of Cals Ltd. claims that he himself had discharged the debts and other liabilities of Cals Ltd. to a great extent. (b) Sometime in May/June, 2007, Sanjay Malhotra one of the promoters of the Spice Energy G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree unsecured loan of ₹ 87 lac to Cals to meet the general and corporate expenses, hence Cals proposes to issue on preferential basis 8,70,000 equity shares of ₹ 10 each at par against the money brought in by SRM. (v) Mr. Sarvesh Goorha, promoter of Cals had extended interest-free unsecured loan of ₹ 10.19 lac to Cals to meet the general and corporate expenses, hence Cals proposes to issue on preferential basis 1,01,900 equity shares of ₹ 10 each at par against the money brought in by Mr. Goorha. (vi) In order to implement the refinery projects, Cals would raise USD 500 million by issuance of GDR/FCCB. (vii) The Audit Committee and remuneration committee of Cals shall be reconstituted by including Roy and Sundararajan along with the existing member Mr. Mohan Lal Garg. (e) In the AGM of Cals held on 12/9/2007, appointment of Kansagra, Chilikuri, Roy and Sundararajan (nominees of Spice Energy group) as Directors of Cals was approved. Further it was resolved that the authorized share capital of Cals be increased from ₹ 60 crore to ₹ 2000 crore divided into 200 crore equity shares of ₹ 10 each. Preferential allotment of 1,01,900 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be opened with Banco Efisa S.A. Lisbon ('the Bank') or any of branch of Banco Efisa S.A. including Offshore Branch outside India for the purpose of receiving subscription money in respect of Global Depository Receipt issue of the Company. RESOLVED FURTHER THAT Mr. Sarvesh Goorha, Director and Mr. D. Sundararajan, Director be and are hereby severally authorized to sign, execute any application, agreement, escrow agreement, document, undertaking, confirmation, declaration and any other paper(s) from time to time as may be required by the Bank and to carry and affix, Common Seal of the Company thereon, if and when so required. RESOLVED FURTHER THAT Mr. Sarvesh Goorha, Director and Mr. D. Sundararajan, Director be and are hereby severally authorized to draw cheques and other documents and to give instruction from time to time as may be necessary to the said Banco Efisa S.A. or any other branch of Banco Efisa S.A. Lisbon including Offshore Branch, for the purpose of operation of and dealing with the said account and carry out other relevant and necessary transactions and generally to take all such steps and to do such things as may be required from time to time on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, Cals may withdraw from its account the equivalent amount. In other words, as per the Account Charge Agreement, Cals could withdraw the GDR subscription amount of USD 200 million, only to the extent loan of USD 200 million taken by Honor from Banco for subscribing to the GDRs of Cals was repaid. (n) In the BoD meeting of Cals held on 12/12/2007, it was inter alia resolved to open a current account with Axis Bank Ltd. at its branches at New Delhi and Mumbai. In the said meeting, inter alia, Sundararajan, Roy and Deep Kumar Rastogi ( Deep Rastogi ) were authorized to draw cheques, bill of exchange and promissory notes drawn, accepted or made on behalf of Cals. It is relevant to note that on 12/12/2007 Deep Rastogi was not even a director of Cals. (o) On 12/12/2007 BBS Capital Partners, Switzerland, the Lead Manager to the GDR issue, informed Cals that the GDR issue was subscribed by 10 foreign investors. On 12/12/2007 Cals informed BSE that GDR issue of USD 200 million has been fully subscribed by foreign investors. (p) On 14/12/2007, the GDR of Cals worth USD 200 million were listed on the Luxembourg Stock Exchange. (q) In the BoD meeting of Cals held on 19/1/2008, min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Banco. (x) On 27/3/2009 Cals paid USD 92 million to Asia Texx (USD 90 million as advance under agreement dated 5/2/2009 + USD 2 million towards dismantling charges). (y) On 9/7/2009 Asia Texx transferred 2,50,00,000 GDRs to Gagan Rastogi free of cost. (z) On 28/7/2009 Sundararajan resigned from the Board of Cals and thereafter rejoined the Board of Cals as Managing Director on 5/2/2011. (aa) On 15/3/2011 a Deed of Novation Amendment relating to the Asia Texx Cals Agreement dated 5/2/2009 was entered into by and between Cals, Asia Texx and Amber Enerji Makina Logistics Ltd. incorporated in Seychelles ( Amber for convenience). The said agreement records that Cals wishes to be released and discharged from the obligations under the agreement dated 5/2/2009 and Asia Texx wishes to release and discharge Cals from the obligations under the agreement dated 5/2/2009 and further records that the parties have agreed that the rights, obligations and liabilities of Cals under the agreement dated 5/2/2009 shall be novated to Amber. By the said Novation Agreement, the purchase price of plant and machinery set out in the agreement dated 5/2/2009 was reduced from USD 290 million ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions or outside the scope of employment. In support of above submission, Counsel for Cals has relied on various decisions rendered by Courts in England and Canada. (c) We see no merit in the above arguments advanced on behalf of Cals. As rightly contended by Counsel for SEBI, Apex Court s decision in case of Iridium India Telecom Ltd. vs. Motorola Inc. Ors. reported in (2011) 1 SCC 74, which is binding on this Tribunal, clearly postulates that criminal liability of a corporation would arise when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs. In such a case, what is to be ascertained is, whether the degree and control of the person or body of persons was so intense that a corporation could be said to think and act through the person or the body of persons controlling its affairs. (d) At the outset, it is relevant to note that in the present case, the liability imposed on Cals is a civil liability and not a criminal liability. Sometime in May/June, 2007, Sanjay Malhotra, one of the promoters of Spice Energy group approached Goorha (promoter director of Cals) with a proposal to take over Cals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied by Sundararajan clearly falsifies the case put up by Cals that it had not authorized any one to open an account with Banco for depositing the GDR subscription amount. (g) Similarly, argument that Cals had never authorized any person to sign any Account Charge Agreement is also without any merit, because, the Account Charge Agreement was signed by Goorha promoter-director of Cals. The Account Charge Agreement provides that all communications in relation thereto should be addressed either to Goorha or Sundararajan as they were the two authorized signatories to operate the Bank account of Cals with Banco. It is relevant to note that Goorha was the founder, promoter, director of Cals, whereas, Sundararajan was the director of Cals nominated by the Spice Energy group which had taken over Cals with a view to implement its refinery project through Cals by raising funds through issuance of GDRs. Admittedly, Sundararajan was in-charge of the entire GDR process. Thus, the bank account with Banco for depositing the GDR subscription amount was opened by Sundararajan, director representing the Spice Energy group and the Account Charge Agreement was signed by Goorha, director representin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t can be easily seen that the fraudulent acts and deeds were executed by Cals through its directors. In these circumstances, argument that Cals was not aware of the actions of its directors cannot be accepted. Consequently, the finding recorded in the impugned order that Cals and its directors had financed for the subscription of its own GDRs in gross violation of Section 77(2) of the Companies Act, 1956 and the provisions contained in the SEBI Act and the PFUTP Regulations cannot be faulted. (i) Similarly, finding recorded in the impugned order that Cals had furnished false information to the Stock Exchange regarding the initial subscribers to its GDR issue cannot be faulted. Argument that Cals furnished the information based on the information received from the Merchant Banker to the GDR issue, is without any merit, because, the finding of fact recorded in the impugned order is that GDR subscription amount was received by Cals from Honor and not from the alleged 10 initial subscribers. If the initial subscribers to the GDRs were persons other than Honor, then Cals would have received GDR subscription amount from those 10 foreign investors and not from Honor. Very fact that Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances, inference drawn in the impugned order that Deep Rastogi had significant influence over Cals as contemplated under AS-18 cannot be faulted. Consequently, findings recorded in the impugned order that the transaction between Cals and Asia Texx was a related party transaction and failure to disclose the same to the Stock Exchanges was in violation of Clause 32 of the Listing Agreement cannot be faulted. (l) No doubt that some of the directors of Cals have been let off by SEBI by merely giving a warning which in our opinion was totally wrong. Having recorded a finding in para 30(2) of the order dated 31/12/2014 that other directors of Cals cannot be said to be unaware of the activities of Cals, the WTM of SEBI could not have let off some of the directors of Cals merely because they had not signed any document and there is no direct evidence to show their involvement in the fraud. Very fact that they were part of the BoD of Cals which indulged in committing various violations in relation to the GDR issue, was sufficient to hold them liable for the violations. However, fact that some of the directors of Cals have been erroneously let off by the WTM of SEBI cannot be a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the instance of Malhotra, promoter of the Spice Energy group. As the promoter directors of Cals have also participated in the fraud committed in relation to the GDRs, Cals cannot escape liability for the misdeeds committed by its entire BoD. (o) For all the aforesaid reasons, the findings recorded and the directions issued against Cals in the impugned order dated 23/10/2013 cannot be faulted. SARVESH KUMAR GOORHA (APPEAL NO. 141 OF 2015) 8. Arguments advanced on behalf of Goorha, promoter-director of Cals is that by 23rd July, 2007 the Spice Energy group had taken over the management of Cals and thereafter all decisions relating to the refinery project and the GDR issue were taken by the majority directors of Cals nominated by the Spice Energy group. It is contended that Goorha was only a figurehead and was not involved in the day-to-day management of Cals, nor did he have any role to play, nor was he party to any dispute in respect of the refinery project or the GDR issue. Relying on various decisions of the Apex Court, it is contended on behalf of Goorha that in the absence of facts relating to fraud unequivocally stated, SEBI is not justified in holding that Goorha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst Goorha in the impugned order cannot be faulted. Accordingly, we find no merit in the appeal filed by Goorha. D. SUNDARARAJAN (APPEAL NO.155 OF 2015) 11. Findings recorded in the impugned order against Sundararajan is that he was involved in the fraud perpetrated in relation to the GDR issue of Cals and was aware of the execution of Account Charge Agreement and Credit Agreement. It is further held that Sundararajan was responsible for submitting false information to SEBI regarding the initial subscribers to the GDRs issued by Cals. It is also held that Sundararajan was aware of the fact that the transaction between Cals and Asia Texx which was a related party transaction, however failed to take steps to disclose the same. For the aforesaid violations, Sundararajan is prohibited from accessing the capital market directly or indirectly and dealing in securities or instruments with Indian securities as underlying in any manner whatsoever for a period of 10 years. 12. Basic argument advanced on behalf of Sundararajan is that he was not aware of the execution or contents of the alleged Account Charge Agreement entered into between Cals and Banco. It is submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party transaction between Cals and Asia Texx. It is submitted that the GDR process got over in the year 2007 and the agreement with Asia Texx was executed by Cals in the year 2009. Merely because Sundararajan had signed the agreement on behalf of Cals, knowledge of beneficial ownership of Asia Texx by Gagan Rastogi cannot be attributed to Sundararajan. In these circumstances, it is submitted that Sundararajan cannot be said to have concealed information relating to the related party transaction. 15. As regards the findings recorded in para 27 of the impugned order that Sundararajan had failed to provide correct information in response to the summons issued under Section 11C(3) of the SEBI Act, it is submitted that Sundararajan was not aware that the transaction between Cals and Asia Texx was a related party transaction and therefore it could not be said that Sundararajan had concealed any information in response to the summons issued under Section 11C(3). 16. We see no merit in the above contentions. Admittedly, Sundararajan was in-charge of the GDR issue and as per the BoD resolution of Cals, dated 30/10/2007 certified by Sundararajan, the GDR proceeds were liable to be kep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Energy group. Pursuant to the resolution passed by the BoD of Cals on 23/7/2007, 4 nominees of Spice Energy group including Sundararajan were appointed as directors of Cals. As a result of inducting 4 nominees of the Spice Energy group, control of Cals stood vested in the Spice Energy group from 23/7/2007. This fact, according to Goorha, was not recorded in the minutes of Cals dated 23/7/2007 at the instance of Sundararajan and the same was recorded in the e-mail sent by Goorha to Sundararajan on 2/8/2007 with a copy to Deep Rastogi. During the course of arguments, Sundararajan has admitted before us that he had received the aforesaid e-mail of Goorha dated 2/8/2007. These facts on record clearly show that Sundararajan was instrumental in keeping investors in dark about the Spice Energy group taking over the control of Cals from 23/7/2007. 19. During the course of arguments, Sundararajan has also admitted that he had sent an e-mail to Goorha on 13/11/2007 expressing his inability to go to London for executing the documents on behalf of Cals and requested Goorha to sign necessary documents on behalf of Cals. Accordingly, Goorha had signed the Account Charge Agreement on 12/11/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 2/8/2007 and the minutes of BoD of Cals dated 12/12/2007. Moreover, Asia Texx was beneficially owned by Gagan Rastogi (son of Deep Rastogi) who was also one of the promoters of the Spice Energy group. In these circumstances, inference drawn in the impugned order that Sundararajan was aware of the fact that Deep Rastogi had significant influence over Cals as contemplated under AS-18 and failure to disclose the related party transaction between Cals and Asia Texx was in violation of the Securities laws, cannot be faulted. 22. For all the aforesaid reasons, we see no merit in the appeal filed by Sundararajan. DEEP KUMAR RASTOGI (APPEAL No. 220 OF 2015) 23. Basic argument advanced on behalf of Deep Rastogi is that he became director of Cals on 19/1/2008 that is, after the GDRs were issued by Cals on 12/12/2007 and, therefore, Deep Rastogi cannot be said to be a party to the fraud committed by Cals in relation to the GDR issue. It is submitted that Deep Rastogi had no knowledge of the Credit Agreement or the Account Charge Agreement and that the transaction of Cals with Asia Texx was not a related party transaction, because, Cals had no significant influence over Asia Te ..... 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