9911796707
TMI Blog2023 (4) TMI 1269X X X X Extracts X X X X X X X X Extracts X X X X ..... ,479.34 Crore and Rs. 1,331.47 Crore respectively, as on April 1, 2017. 2. Pursuant to the above, Securities and Exchange Board of India (hereinafter referred to as SEBI) sought information in the matter in order to examine as to whether or not there were any violations of the provisions of securities laws, etc. by the Company and its Directors / Promoters, during the period 2016-2019. In this regard, vide a letter dated August 26, 2019, the Company submitted a copy of the preliminary Investigation Report prepared by M/s Vaish Associates, an independent law firm appointed by the Company to conduct an investigation on certain transactions. Thereafter, SEBI had sought responses inter alia from the Chairman (Gautam Thapar), past Directors (Madhav Acharya, B. Hariharan) and CFO (V. R. Venkatesh) of CG Power. 3. Subsequently, SEBI, vide an Interim Order dated September 17, 2019, restrained the following persons, who were prima facie found to have perpetrated certain irregularities in CG Power in the nature of fraud, from accessing the securities market as well as from being associated with any intermediary registered with SEBI or any listed entity or its material unlisted subsidiary, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid findings, SEBI decided to initiate Adjudicating Proceedings under Section 15HA of the SEBI Act for the above mentioned alleged violations by the Noticees. APPOINTMENT OF ADJUDICATING OFFICER 7. Initially, SEBI vide order dated July 14, 2021, appointed Shri Parag Basu, Chief General Manager as the Adjudicating Officer (hereinafter referred to as AO) in the matter. However, pursuant to his transfer, vide order dated March 11, 2022, the undersigned was appointed as the AO, under Section 15 I (1) of the SEBI Act and Rule 3 of SEBI (Procedure for Holding Inquiry and imposing penalties) Rules, 1995 (hereinafter referred to as "Adjudication Rules") to enquire into and adjudge the aforesaid violations alleged to have been committed by the Noticees, as stated in para 5 above, under Section 15HA of SEBI Act. SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING 8. Two separate Show Cause Notices bearing number SEBI/EAD-2/PB/AS/OW/ 28953/1/2021 and SEBI/EAD-2/PB/AS/OW/28954/1/2021 dated October 18, 2021 (hereinafter referred to as "SCN") were issued to Noticee No.1 and Noticee No.2 respectively in terms of Rule 4 of SEBI Adjudication Rules, calling them to show cause as to why an inq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levying allegations against them, the SCN overlooked the contemporaneous documents on record with SEBI which demonstrates their innocence. e) The SCN admits the fact that the Circular dated 18.10.2019 was not applicable during the F.Y. 2016-17. f) The handwritten Note dated January 16, 2018 seems to be a forged document, the Hon'ble Whole Time Member, SEBI in his order dated 04.10.2022 has already disregarded allegations arising out of it. For the said reason as well as for the reasons elaborated by them in this response, the handwritten Note deserves to be disregarded. g) The SCN deserves to be disposed of since the amended provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 have been applied retrospectively. h) Since they are not dealing in Securities Market, the provisions of Section 12(A)(a),(b) and (c) of SEBI Act, 1992 are not applicable to them under these proceedings. i) The SCN deserves to be disposed of since section 15HA as quoted in SCN does not exist in SEBI Act, 1992. j) Quarterly audit committee presentations reveal that the auditors highlighted various issues and concerns in every ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oticee No. 1 and 2 have violated provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003? ISSUE II: Does the violation, if any, on part of the Noticees attract penalty under Section 15HA of the SEBI Act? ISSUE III: If so, how much penalty should be imposed on the Noticees taking into consideration the factors mentioned in Section 15J of the SEBI Act? 17. Before I proceed further with the matter, it is pertinent to mention the relevant provisions of SEBI Act, 1992 and PFUTP Regulations, 2003, which read as under: SEBI Act, 1992 12A. No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of dealing in securities; FINDINGS 18. Considering the facts and circumstances of the case, submission of the Noticee and material available on record, I record my findings hereunder. 19. Before proceeding to deal with the merits of the case, I wish to settle the following two preliminary objections raised in this proceeding by Noticee No.1: a) there is an inordinate delay in issuing the SCN i.e. about 5-6 years old. b) Inspection and copies of certain documents sought was not provided. Noticee has also relied on the judgement of Hon'ble Supreme Court in the matte of T. Takano vs SEBI and others. 20. With regard to the contention of Noticee No.1 that there is an inordinate delay in issuing the SCN, it is to be noted that, there is no provision under SEBI Act which prescribes a time limit for taking cognizance of a breach of the provision of SEBI Act and Rules and Regulations made thereunder. Further, as per Section 11C of SEBI Act, SEBI can initiate investigation at any point of time, for any period of alleged violation or any period of alleged transactions. In this regard, I note that SEBI initiated the investigation as soon as information regarding the issue c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of instant proceedings which are in line with the principle pronounced via the aforesaid judgment of Hon'ble Supreme Court. It is pertinent to note that the question before the Hon'ble Supreme Court in the aforesaid judgment was whether an investigation report under Regulation 9 of the PFUTP Regulations must be disclosed to the person whom a notice to show cause is issued, when all the relied upon documents have been furnished to the Noticee. In this context, the Apex court has opined at para 39 of the judgment that "the actual test is whether the material that is required to be disclosed is relevant for the purpose of adjudication". The Apex Court also relied on test for the standard of 'relevancy' laid down by a four judge Bench of the Hon'ble Supreme Court in Khudiram Das vs. State of West Bengal (1975) 2 SCC 81. The test is a two prong test where; firstly, the material must have nexus with the order and secondly, the material might have influenced the decision of the authority. The Black's Law Dictionary defines "nexus" as "a connection or link, often a casual one". Since, all relevant material relied upon in the instant proceedings have been provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder to examine as to whether or not there were any violations of the provisions of securities laws, etc. by the Company and its Directors / Promoters, during the period 2016-2019. In this regard, vide a letter dated August 26, 2019, the Company submitted a copy of the preliminary Investigation Report prepared by M/s Vaish Associates, an independent law firm appointed by the Company to conduct an investigation on certain transactions. Thereafter, SEBI sought responses inter alia from the Chairman (Gautam Thapar), past Directors (Madhav Acharya, B. Hariharan) and CFO (V. R. Venkatesh) of CG Power. 28. It is also noted that subsequently, SEBI vide an Interim Order in the matter dated September 17, 2019, observed as under: "Examination of The Preliminary Investigation Report And Audit Report And Findings .... 4.1 An examination of the Preliminary Investigation Report revealed certain prima facie irregularities, which have been summarized as under: i) Sale of Nashik property to Blue Garden Estate Private Limited ("Blue Garden"). a) In 1979, Maharashtra Industries Development Corporation ("MIDC") had leased a property it owned in Nashik ("Nashik property") to CG Power for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitial consideration. The sale was to be completed before October 27, 2019. However, even before the aforesaid transaction could get terminated, CG Power entered into an Memorandum of Understanding in February 2017 ("MOU") with Blue Garden for transfer of the same property for a consideration amount of Rs. 498 Crore (Rs. 189 Crore to be paid in advance) with a condition that the MOU will take effect only upon the failure of the Evie Sale Agreement. b) For payment of a part of the consideration amount, Blue Garden took a loan of Rs. 190 Crore from ABFL. When the aforesaid amount was received by Blue Garden in February 2017, it was immediately paid as an advance by Blue Garden to the Company in terms of the MOU. CG Power thereafter advanced the money to Acton (Rs. 192 Crore) without charging any interest. Acton in turn, utilised the aforementioned amount towards payment against the liability owed by BILT Graphic Paper Products Limited ("BILT") to ABFL. c) At the time of execution of the MOU, there was a charge in the form of negative lien created in favour of Yes Bank Limited ("Yes Bank") on the Kanjurmarg Property. Despite such prior charges, a Power of Attorney was created in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the corporate accounts of the Company under which the loans were given and taken were audited by CAS for the FY 2016-17. During the FY 2017-18, CAS became the sole statutory auditor, but it resigned, vide letter dated April 27, 2018 with immediate effect before completing the statutory audit for the year. The reason for the resignation, as stated in its letter, was that the Company, vide letter dated April 26, 2018, had informed CAS that it wanted to appoint one of the 'Big Four firms' as a statutory auditor due to a condition put by the lenders in their proposed lending agreement. Subsequent to resignation of CAS on April 27, 2018, KKM was appointed as the statutory auditor of CG Power on April 28, 2018 to fill the casual vacancy, and further, KKM completed the statutory audit of CG Power for the FY 2017-18. A. Observations w.r.t. M/s Chaturvedi & Shah: a) I note from the IR that during the audit period of Noticee No.1 i.e. during 2016-17, the transactions relating to a Nashik Property and a Kanjurmarg Property involving receipts of Rs. 390 crore by CG Power from Blue Garden and lending of Rs. 245 crore and Rs. 145 crore by CG Power to Acton Global Pvt Ltd (hereinafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent dated March 27, 2017 between CG Power and Blue Garden was created merely to provide some basis to the transactions between CG Power and Blue Garden. It was further observed that the agreement was dated only 4 days prior to the end of the FY 2016-17 while the transactions between CG Power and Blue Garden had begun since May 2016. Therefore, it was observed that CAS, who was the statutory auditor of the company, though admitted to have examined the said transaction, had not examined the aforesaid irregularities and did not brought out in the audit report for the FY 2016-17. It clearly indicates that CAS facilitated the company to make such entries in the books of account and hence the awareness of the transactions relating to Nashik Property and Kanjurmarg Property involving Blue Garden to facilitate the scheme of cleaning up the books of accounts of CG Power also cannot be ruled out. d) Further, I note from IR that CG Power, vide letter dated December 09, 2019, submitted that while collating information/documents for the forensic investigation commissioned by the Company, certain forged resolutions, handwritten notes and approvals, which pointed to the involvement of Mr.V.R.Ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and quick appointment of KKM in the place of CAS on April 28, 2018 were seems to be unusual in nature. While the reason for resignation stated by CAS in its letter dated April 27, 2018 was that the Company wanted to appoint one of the Big Four firms as a statutory auditor, the resignation of CAS was accepted and KKM were appointed immediately upon resignation of CAS to complete the statutory audit of CG Power for the FY 2017-18. Further, while SRBC & Co. LLP (one of the Big Four firms) was appointed as a statutory auditor later in 2018 during the Annual General Meeting, KKM continued as the joint statutory auditor along with SRBC & Co. LLP. These events indicate that CAS could have completed the statutory audit for the FY 2017-18 before tendering their resignation. However, Noticee No. 1 simply accepted the communication of the company with regards to appointment of KKM in its place and accordingly resigned as the statutory auditor of CG Power, vide letter dated April 27, 2018, with immediate effect. h) In this regard, I also note that auditor resignation was a red flag event, and further SEBI, vide Circular dated October 18, 2019, had also directed listed companies to ensure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard, KKM, on 25 January 2020, resigned as the joint statutory auditor of the Company with immediate effect. b) It was observed that the events of immediate resignation of CAS on April 27, 2018 upon receiving the letter dated April 26, 2018 from CG Power and appointment of KKM in place of CAS on April 28, 2018 by passing a circular resolution by the Board of Directors of CG Power instead of holding a Board meeting were unusual. Further, it was observed that even though KKM was appointed on April 28, 2018, it was able to complete the statutory audit of CG power for the FY 2017-18 by May 30, 2018, i.e. within the prescribed time limits of 60 days from the end of financial year. It was observed from letter dated September 04, 2020 from Mr Ashwin Mankeshwar (Managing Partner of KKM), that he had been a Director of Blue Garden and Acton (holding company of Blue Garden) for the period of January 25, 2017 to March 14, 2017. Further, while he claimed that he did not draw any remuneration/ benefits and did not attend any meeting in the aforesaid letter, it was observed that the MoU between Blue Garden and CG Power for assigning, sale and transfer of rights of Kanjurmarg Property was enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... den and Acton, by passing a circular resolution by the Board of Directors of CG Power instead of holding a Board meeting. They completed the statutory audit of CG power for the FY 2017-18 and issued the audit report by May 30, 2018, i.e., within a month from their appointment. * The facts that KKM received substantial remuneration from Avantha Group and were quickly appointed as the statutory auditor of CG Power upon resignation of CAS showed their close ties with Avantha Group entities who had been the beneficiaries of the fraudulent transfers from CG Power. d) Further, with regards to the allegation of writing off Rs.156 crore by making fake journal vouchers signed by Mr.V. R Venkatesh on March 31, 2018, as detailed in para 31(A) above, it was observed that KKM issued the audit report of CG Power for the FY 2017-18 without any qualified opinion wherein the fake inventory balance of Rs. 156 Crore, as mentioned by Mr.V. R. Venkatesh in the note dated January 16, 2018, was written off. 32. On the basis of the aforesaid detailed facts, I observe that the Noticees have participated and acted against the fiduciary capacity, and that CAS and KKM, instead of working in the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing regarding the netting off between two different entities, Noticee No.1 submitted that they only seen the net amount appearing in the final books of accounts for FY 2016-17 and not each of the individual entry and the alleged netting off. 35. This apart, it is also noted with regards to the advance of Rs.28 crores by CG Power to Blue Garden during FY 2016-17 for the claimed consultancy services between them, that the said transaction was admittedly known to and examined by Noticee No.1. In this regard, I further note that the balance confirmation as on March 31, 2017 on behalf of CG power was signed by Mr. Madhav Acharya of Blue Garden and on behalf of Blue Garden, was signed by Mr. Bhimrao Venkataramana Rao of Blue Garden. It is also noted that the agreement dated March 27, 2017 was signed by Mr. V. R. Venkatesh of CG Power on behalf of CG Power and Mr. Bhimrao Venkataramana Rao for Blue Garden. However, it is interesting to note that Mr.V. R. Venkatesh had never been a director of CG Power. But he had taken charge as Chief Financial Officer of CG Power from Mr. Madhav Acharya only on August 11, 2017 i.e. subsequent to the aforesaid agreement stated to have been executed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, given the fact that just the land alone had been agreed to be sold under the arrangement with ABFL through Blue Garden, the FAR observed that this demonstrates that there was no actual intention to sale, but was just a loan agreement, which ABFL didn't want to give directly as loan to CG Power and wanted to give it as an advance for sale of land through a SPV. It was further observed that no approval was obtained from the Board of CG Power for the execution of Memorandum Of Understanding between CG power and Blue Garden for transfer of Kanjurmarg property for a consideration amount of Rs. 498 Crore. I note that the aforesaid factors were also not considered by Noticee No.1 in its audit report. 39. I further note that the FAR has also observed as below: "From all the above points collectively, it can be presumed that the auditors had the knowledge of the transaction of Rs.257.69 crore as mentioned above and the corresponding writing off of goods worth Rs.155.67 crore and also the sales of Rs.120 crore, which had eventually turned bad. Hence, the auditors ought to have observed that the entire trail of transactions was designed in a manner to reduce the outstanding advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Noticee has submitted that the allegation is totally vague and bereft of any details. That simply a photocopy of a handwritten note dated January 16, 2018 has been put and it has been stated the Noticee approved a scheme. Noticee no. 7 has further submitted that the original document namely the purported note allegedly approved by him is not even made available and in the absence of the document being made available the allegation is this regard is denied. Further, that it is not even indicated in the SCN as to what exactly was wrong with the said purported note, or for that matter if the same was implemented. In this regard, I am inclined to agree with the submissions of the Noticee, as I note that no details have been provided in the SCN with regard to the said allegation against Noticee no. 7 in approving the hand written note dated January 16, 2018. In view of the above, I find that the aforesaid allegation against Noticee no. 7 is not made out." 42. In view of the above mentioned facts, I note that no concrete conclusion can be drawn against Noticee No. 1 based on the aforesaid handwritten note dated January 16, 2018. However, looking into the involvement of Noticee No.1 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was appointed as a director. In this regard, it is pertinent to mention that a MoU between Blue Garden and CG Power for assigning, sale and transfer of rights of Kanjurmarg Property was entered into on February 1, 2017 and the funds amounting to Rs. 190 Crore received by Blue Garden as loan from ABFL in this regard were transferred to CG Power on February 16 and 17, 2017. From the same, it is clear that it happened during the tenure of Mr. Ashwin Mankeshwar as director in Blue Garden and just after his appointment. FAR also states that Blue Garden and Acton were Special Purpose Vehicles, which were incorporated for effecting the transactions relating to Nashik Property and Kanjurmarg Property. I further note from FAR that KKM provided multiple services to Avantha Group and received substantial remuneration from them and were quickly appointed as the statutory auditor of CG Power upon resignation of CAS, which indicates their close ties with Avantha Group entities who had been the beneficiaries of the fraudulent transfers from CG Power. Further, the fact that Mr. Ashwin Mankeshwar did not receive any remuneration from Blue Garden and Acton during the period of January 25, 2017 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , unfair and manipulative acts covered within the definition of "fraud" and "fraudulent" under regulation 2(1)(c) of the PFUTP Regulations which reads as follows-: Definition of 'fraud" -Regulation 2(1)(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 as any other law specifically declares to be fraudulent, (7) Deceptive behavior by a person depriving another of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct or wrong information in a letter of offer or other similar documents issued for the benefit of investors in general could lead to serious consequences including loss of credibility for the market operators and for the regulatory system. This kind of failure has to be taken very seriously by the market regulator". 50. At this juncture, I find it relevant to quote the observations of Hon'ble High Court of Andhra Pradesh in the matter of The Institute of Chartered Accountants of India Vs. Shri Mukesh Gang, Chartered decided on September 26, 2016 wherein the Court observed as follows: "The Chartered Accountant is a professional whose expertise in accountancy is acknowledged. He is a member of an expert body and of a premier institute in India. The certificate issued by an Auditor has its own impact on the public at large, as it is largely on the basis of this certificate that the general public subscribe to the shares of the company. Reckless certification by an Auditor, which has resulted in the public being misled into subscribing to the shares of the company in the public issue, would undoubtedly amount to gross negligence. Large sections of society rely on the certificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnish information, return, etc. 15HA. If any person, who is required under this Act or any rules or regulations made thereunder, - (b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less; ISSUE III: If so, how much penalty should be imposed on the Noticees taking into consideration the factors mentioned in Section 15J of the SEBI Act? 54. While determining the quantum of penalty under Section 15HA of the SEBI Act, it is important to consider the factors relevantly as stipulated in Section 15J of the SEBI Act, which reads as under: 15J -Factors to be taken into account by the adjudicating officer While adjudging quantum of penalty under section 15?I, the adjudicating officer shall have due regard to the following factors, namely:- (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, 2003 Rs.5,00,000/- (Rupees Five Lakh Only/-) 2. M/s K. K. Mankeshwar & Co. Rs.5,00,000/- (Rupees Five Lakh Only/-) 57. The Noticees shall remit / pay the said amount of penalty within 45 days of receipt of this order through online payment facility available on the website of SEBI, i.e., www.sebi.gov.in on the following path, by clicking on the payment link: ENFORCEMENT → Orders → Orders of AO → PAY NOW. In case of any difficulties in payment of penalties, Noticees may contact the support at [email protected]. 58. The Noticee shall remit / pay the said amount of penalty within 45 days of receipt of this order either by way of Demand Draft in favour of "SEBI - Penalties Remittable to Government of India", payable at Mumbai, OR through online payment facility available on the SEBI website www.sebi.gov.in on the following path, by clicking on the payment link: ENFORCEMENT → Orders → Orders of AO → PAY NOW 59. The said confirmation of e-payment made in the format as given in table below should be sent to "The Division Chief, EFD-I DRA -V, Securities and Exchange Board of India, SEBI Bhavan, Plot no. C-7, "G" Block, Bandra Kur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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