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TMI Blog2022 (3) TMI 1539X X X X Extracts X X X X X X X X Extracts X X X X ..... lged into the same. Since the penalty would be in fact on the shareholders of the company in our view, imposition of penalty of Rs. 12 crore would be excessive. In the circumstances, the Appeal challenging the order of the AO needs to be partly allowed and the penalty needs to be reduced from Rs. 12 crore to Rs. 5 crore. Sanjay Aggarwal And Nithish Bangera - The very fact that the appellant provided a draft of disclosure to be made by the Farmax to the exchanges that the issue of the GDR was successfully subscribed; that he has forwarded the draft Resolution to be passed by the appellant Farmax which culminated in authorizing the pledge of GDR proceeds; seeking of signatures on blank documents from appellant Farmax would clearly shows that the appellant did not act simply as a bonafide coordinator between the company and the Lead Manager etc. The appeal of the appellant Sanjay Aggarwal, therefore fails. Nithish Bangera, he was sole employee of La Richesse owned by appellant Sanjay Aggarwal.The appellant was merely an employee of appellant Sanjay Aggarwal and the observation made by the learned WTM as regard the appellant Sanjay Aggarwal that he was an advisor and responsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GDR of the Farmax as a sole subscriber. The Vintage is owned by noticee Arun Panchariya. Present appellant had joint venture with Arun Panchariya as detailed supra. The appellant did not explain as to why no collateral security could be obtained from Vintage or Arun Panchariya. However, the GDR proceeds to be received in future were accepted as a pledge by EURAM Bank. As it was nothing but a case of making two entries in two accounts i.e. one in the account of Vintage of granting loan and another in the account of Farmax of receiving the GDR proceeds and holding the same as a security for the loan advance to Vintage. In the process, appellant EURAM had earned interest and the loan remained fully secured by the GDR proceeds. It would be naive to believe that EURAM Bank did not know the purpose for which the GDRs are issued and whether the pledging of the GDR proceeds for a stranger could be an object or purpose of issuing GDR. Appellant relying on the case of Dilip S. Pendse vs SEBI Appeal No. 80 of 2009 decided on November 19, 2009 submitted that the preponderance of probability to prove the charge of fraud is higher than the regular one. Considering the status of the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities had not filed any appeal against the order passed by the learned Whole Time Member (hereinafter referred to as WTM ) of the Securities and Exchange Board of India (hereinafter referred to as SEBI ) dated July 14, 2020. On the same set of fact, two separate independent orders are passed by the learned Adjudicating Officer ( hereinafter referred to as AO ) of respondent SEBI against appellant Farmax and the appellant Mr. M. Srinivasa Reddy dated October 29, 2020 and November 12, 2020. Under these orders appellant Farmax was directed to pay penalty of Rs. 12 crore, while the appellant Mr. M. Srinivasa Reddy was directed to pay Rs. 50 lakh. It is alleged that there is a violation of the provisions of Section 12A(a), (b), (c) of the SEBI Act, 1992 (hereinafter referred to as SEBI Act ) read with regulations 3(a), (b),(c),(d) and 4(1), (2)(f), (k), (r) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market), Regulations, 2003 (hereinafter referred to as PFUTP Regulations). 2. The learned WTM directed the appellant Farmax to pursue the measures to bring back the outstanding amount of US$ 72.20 million. The appellant Mr. M. Srinivasa Reddy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... May 05, 2010. Not only this, in the loan agreement it was agreed that all the GDR would be transferred to the account of appellant Farmax to be opened with the bank. The appellant Farmax had opened the account with EURAM Bank wherein the GDR proceeds were agreed to be deposited. Further, appellant Farmax had executed a pledge agreement with appellant EURAM Bank signed by appellant M. Srinivasa Reddy- Managing Director. Under this agreement appellant Farmax had agreed that the entire proceeds shall be pledged to secure the loan granted by EURAM Bank to Vintage owned by Arun Panchariya. The loan was sanctioned by appellant EURAM Bank to Vintage solely for the purpose of subscribing to the GDR and in turn the GDR proceeds received by the appellant Farmax was pledged for securing the loan advance to Vintage. Thus GDR issue was managed and structured by Arun Panchariya through loan agreement signed between appellant EURAM Bank and Vintage and pledge agreement signed between EURAM Bank and appellant Farmax. The documents shows that even before issuance of GDR the appellant Farmax had pledged GDR proceeds to secure the rights of appellant EURAM Bank against the loan being advanced to Vint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. We have heard the Mr. Nithish Bangera, PCS, Ms. Aishwarya Shubhang, Mr. Dharam Jumani, Mr. M.J. Bhatt, Ms. Ranjana Roy Gawai, learned counsel for the appellants and Mr. Shyam Mehta, the learned senior counsel and Mr. Sumit Rai, the learned counsel for the respondent. 9. In nutshell the allegations qua each of the noticees is that while appellant Farmax and its Managing Director, appellant Mr. Srinivasa Reddy had raised the amount under the GDR as detailed (supra), they in connivance with other relevant parties like noticee no. 3 Mr. Arun Panchariya, noticee no. 4 Vintage had pledged the GDR proceeds with appellant EURAM bank as a security for the loan advanced to appellant Vintage. Appellant Sanjay Aggarwal and his sole employee, appellant Nithish Bangera, Managing Director and employee respectively of La Richesse Advisors Private Limited ( hereinafter referred to as La Richesse ) who were the Indian Advisor to appellant Farmax to GDR issues had connection with Mr. Arun Panchariya and with the connivance they helped appellant Farmax in issuing the GDRs. The appellant Prospect Capital Ltd. was the Lead Manager to the said issue of GDR. The appellant no. 2 John Behar in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned WTM has observed that the said FIR was filed on October 29, 2013 after taking legal opinion in June 2013 while the entire issue had occurred in the year 2010. The silence of these entities for three years along with the very existence of the Board Resolution as detailed (supra) made the learned WTM to disbelieve the case of these appellants that they made efforts to bring back the amount. In our view, the very stand of the appellant Mr. Srinivasa Reddy that he was credulous enough to sign blank documents; further he-the Managing Director of Farmax being instrumental in obtaining a Board Resolution as detailed (supra), the defense taken by him and Farmax is merely an eyewash. Millions of US$ were involved in the transaction. Their silence for a period of three years would clearly show the involvement of these appellants in the entire episode. The appeals filed by these appellants therefore fail. 11. The Learned AO while imposing the penalty has taken into consideration the extent of the amount which was adjusted by EURAM Bank from the account of appellant Farmax to the extent Vintage had defaulted in making the payment. The AO vide order dated order dated October 29, 202 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able person and most definitely as advisor to the issue this should have been a red flag for appellant Sanjay Aggarwal. In all these circumstances the learned WTM concluded that appellant Sanjay Aggarwal who is a chartered accountant by profession and was working as advisor was definitely involved in the entire scheme relating to the GDR issue. 13. Appellant Sanjay Aggarwal submitted as under :- He was a chartered accountant and had a record of working as employee of reputed firms like Price Waterhouse Cooper, Ernst Young, Dubai International Financial Exchange, Jefferies, and other reputed corporations. The findings in the impugned order are not supported by any evidence or material on record. These are merely conjecture and surmises. The role of this appellant was merely limited to assisting and coordinating with counsels, depository bank, listing agents and opening of ESCROW accounts etc. He was not aware of any loan agreement, pledge agreement entered into by appellant Farmax on its own terms. There is nothing on record to show that he at any time consulted noticee Arun Panchariya who devised and structured the fraudulent scheme. He was merely carrying a single point coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hauradiya who was connected to noticee Arun Panchariya, is a proof of involvement of this appellant in the fraudulent scheme. 16. As regard the email dated June 28, 2010, after he ceased to be the employee of appellant Sanjay Aggarwal, he submitted that in fact his email was hacked on June 28, 2010 and therefore merely on the strength of said email it cannot be concluded that the appellant continued to be in service with appellant Sanjay Aggarwal as on June 28, 2010. The learned WTM however observed that the appellant had not produced any evidence to support this claim of hacking. The appellant also raised a plea of a mistaken identity but did not dispute that he was an employee of Sanjay Aggrawal. Therefore this claim was rejected by the learned WTM. The manner of seeking detailed documents from SEBI this appellant was also considered a material to hold him guilty. 17. The learned WTM in all these circumstances concluded that it gives rise to a reasonable inference that this appellant Nithish Bangera played a role in the fraudulent scheme perpetrated by Farmax and other entities. 18. The learned counsel for the appellant submitted that respondent SEBI did not provide i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ants were aware that GDR issue was subscribed by only one entity i.e. Vintage and that deliberately an incorrect list of investors was provided by them to Farmax vide letter dated June 28, 2010 as a part of the fraudulent scheme. The appellant Prospect Capital Ltd. has made submissions that in fact the copy of this letter was not provided by SEBI to it. SEBI however replied that the copy of the said letter was never asked for by appellant Prospect Capital Ltd. or John Behar. It is the case of these appellants that in normal course of business as a Lead Manager the appellants had merely provided the services. The imputation of knowledge regarding the fraudulent activity either of noticee Arun Panchariya, Farmax or others merely on the basis of the so called letter, copy of which was never provided/ supplied to the appellant would be wrong. Additionally, it was submitted that SEBI has no jurisdiction qua both the appellants as they are based in United Kingdom ( UK ) and beyond the jurisdiction of SEBI. 22. As regard the first issue i.e. as to whether the appellants had played part in the fraudulent scheme of issuing GDR with an ulterior motive it is to be seen that Prospect Capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. However, if under the guise of performing those functions as Lead Managers, if as pointed out by the appellant, the respondents had indulged in any activities which were contrary to the provisions of the SEBI Act, 1992 read along with the SCR Act, 1956, which provided scope for proceeding against them for having acted against the interests of the Indian Investors in securities and the security market or were involved in collusion with any alleged act of the issuing company in violation of the statutory prescriptions of the SEBI Act, 1992, the SCR Act, 1956, the 2000 Regulations read along with the 1993 Scheme, it is the bounden duty of the respondents to demonstrate before the appellant and now before the Tribunal that no such involvement by the respondents is made out in order to proceed against them as has been decided and orders passed by the appellant in its order dated 20.06.2013. 24. It could thus be seen that Lead Manager is not merely a post office between the company issuing GDR and the investors investing in the same. The Lead Manager has to conduct due diligence in collecting and evaluating all information. It has to obtain confirmation of acceptance of subscri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support and assistance of Lead Manager, the scope of construing GDRs as securities falling under the definition of securities as defined under Section 2(h) of the SCR Act, 1956 required to be noted. The extent of duties and powers vested with SEBI, namely, the protection of the interest of investors in securities and securities market and also the prohibitive measures as well as penal action that can be taken by SEBI whenever it comes across any fraud committed by any person relating to the interest of the investors in securities and securities market are very wide. 27. The issue was further dealt with vide paragraph no. 83 as under:- 83. On the other hand according to the respondents, since cradle to grave GDRs are dealt with outside country in the global market, SEBI lacks jurisdiction in proceeding against the respondents. When we consider the above respective submissions, we are convinced that the stand of the appellant that having regard to the statutory prescription under the SEBI Act, 1992, the SCR Act, 1956, the 2000 Regulations, the 1993 Scheme as well as the 2003 Regulations is well justified. Having regard to the nature of the allegations against the resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated November 25, 2010 this appellant it s banker, instead of answering the said query had replied vide an email, that Farmax should contact noticee Arun Panchariya for any bank related query. The learned WTM noticed that this appellant has not provided any explanation for this email. In all these facts the WTM concluded that the present appellant EURAM Bank was well aware and also part of the fraudulent scheme. As appellant EURAM Bank was registered as Foreign Investment Institute (FII) with SEBI during November 28, 2008 to November 20, 2011 it had only client i.e., noticee no. 10 India Focus Cardinal Fund. In the circumstance, the above warning came to be issued. 31. The learned counsel for the appellant submitted that in fact the present appellant was earlier proceeded against by the respondent SEBI in relation to the GDR issued by six Indian companies. The then learned WTM had passed order in the said proceeding. The appellant came to be discharged by the WTM vide order dated September 05, 2017 and even the appellant s exercise of providing full information was commended by the then learned WTM. It was therefore vehemently submitted that the principle of issue estoppel w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to probe the role of the present appellant of providing finances for GDR subscription by accepting pledge of the GDR proceedings from the respective companies. The show cause notice and the interim direction dated September 21, 2011 in that case was dealing with EURAM American Investment Bank AG registered as a Foreign Institutional Investor (EURAM-FII) . The role of EURAM-FII was highlighted as foreign investment institute which had another entity (which is also another noticee in the present case) being it s sole sub-account holder. In that proceeding EURAM-FII had replied to the show cause notice and defended that it cannot be held liable for any breach by India Focus Cardinal Fund of the PFUTP Regulations. The allegations therein against the FII were that it has violated regulation 13(A)(1) of the FII regulations read with certain clauses of Code of Conduct specified under the said regulations. The learned WTM in that order noted that no specific adverse inference was drawn against the EURAM-FII in the show cause notice itself. Therefore, EURAM-FII was exonerated in the said case. While exonerating the said entity the learned WTM had made a remark that said EURAM-FII as well ..... X X X X Extracts X X X X X X X X Extracts X X X X
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