2022 (7) TMI 1478 - AT - SEBI

GDR fraud case penalties reduced despite SEBI violations under Section 12A and PFUTP Regulations being upheld

Sybly Industries Ltd., Mr. Umesh Kumar Mittal Laxmi Niwas, Mr. Mahendra Kumar Gupta, Mahesh Chand Mittal Laxmi Niwas, Mr. Subodh Kumar Goel, Mr. Mahendra Kumar Gupta Versus Securities and Exchange Board of India, Mumbai.

Securities Appellate Tribunal, Mumbai allowed appeals partly in GDR fraud case. While affirming SEBI violations under Section 12A and PFUTP Regulations, ... Fraudulent GDR issue - Vintage was the sole subscriber was not intimated to the stock exchange and to the Indian investors and, accordingly, the Company and its Directors were charged with violation of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations - Penalty imposed on directors - HELD THAT:- We are of the opinion that since the loan has been repaid and the GDR proceeds have been utilized in accordance with the objects of the GDR the finding that a fraud was committed by the Company is patently erroneous. We are of the opinion that when the proceeds have come into the Company and have been utilized by the subsidiary and have been ulitized for the purpose of which the GDR was issued the debarment of the Non-Executive Director for five years and penalty of Rs. 10 lakhs only on the basis that they were signatories to the resolution of the Board of Directors dated 31st March, 2008 appears to be excessive as well as unjustified. Other than this there is no evidence that they were part and parcel in the issuance of the GDR. A categorical statement has been made by these Directors that they were not involved in the day to day affairs of the Company. In the absence of any finding, merely because they were signatories to the resolution these Non-Executive Directors cannot be held to be part of the fraudulent scheme. The imposition of penalty and the debarment cannot be sustained. A penalty of Rs. 20 lakhs has been imposed upon the Directors of the Company. We find that in similar circumstances in the case of Visu International Ltd. a penalty of Rs. 10 lakhs was imposed upon the Directors and in Govind Das Pasari a penalty of Rs. 15 lakhs was imposed - penalty of Rs. 20 lakhs is excessive. Considering the fact that they have already undergone debarment for more than three years we think it fit and proper if the penalty is reduced to Rs. 10 lakhs each to be paid by the Directors. Consequently, while affirming the order of the WTM and AO of the aforesaid violations committed by the Company we reduce the debarment period of the Company and the Managing Director, Director and Independent Director from five years to the period undergone. In so far as the penalty imposed by the AO is concerned, the penalty against the Company is reduced to Rs. 25 lakhs. The penalty against the Managing Director and Director is reduced to Rs. 10 lakhs. The penalty imposed against the Independent Director is quashed. The appeals are partly allowed. Issues Involved:1. Validity of the resolution passed by the Board of Directors.2. Legitimacy of the GDR issue and the subscription by Vintage FZE.3. Disclosure obligations under SEBI regulations and the Listing Agreement.4. Fraudulent scheme allegations.5. Proportionality of penalties imposed by SEBI.Detailed Analysis:1. Validity of the Resolution Passed by the Board of Directors:The resolution dated 31st March 2008, passed by the Board of Directors of Sybly Industries Ltd., authorized the opening of a bank account with EURAM Bank for receiving subscription money for the GDR issue. It also authorized the Managing Director and a Director to sign necessary documents and use the funds as security for loans. The resolution was foundational for subsequent actions, including the issuance of 1.5 million GDRs worth USD 6.99 million.2. Legitimacy of the GDR Issue and the Subscription by Vintage FZE:The GDRs were issued on 9th June 2008 and subscribed entirely by Vintage FZE. SEBI's investigation revealed that the proceeds were used as security for a loan from EURAM Bank to Vintage, which then used the loan to subscribe to the GDRs. This arrangement was not disclosed to the stock exchange or investors, raising questions about the legitimacy of the subscription process.3. Disclosure Obligations under SEBI Regulations and the Listing Agreement:The company failed to disclose the pledge agreement and the loan agreement to the stock exchange, violating Clause 36 of the Listing Agreement and Section 21 of the SCRA Act. The non-disclosure misled investors about the true nature of the GDR subscription and the financial arrangements behind it. The company's announcement that the GDR issue was fully subscribed was found to be misleading as it did not reveal that only one entity, Vintage, was the subscriber.4. Fraudulent Scheme Allegations:The WTM and AO concluded that the use of GDR proceeds to fund the subscriber was a fraudulent scheme, violating Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations. The appellants argued they were unaware of the pledge and loan agreements, attributing the actions to the Lead Manager. However, the tribunal found that the appellants were aware of and had signed the agreements knowingly, thus participating in the fraudulent scheme.5. Proportionality of Penalties Imposed by SEBI:The tribunal considered the penalties imposed by SEBI excessive and discriminatory compared to similar cases. The company and its directors were debarred for five years, and penalties ranged from Rs. 10 lakhs to Rs. 10.30 crores. The tribunal noted that other companies with similar violations received lesser penalties and shorter debarment periods. It emphasized the doctrine of proportionality, which requires penalties to be commensurate with the offense and not arbitrary or excessive.Conclusion:The tribunal affirmed the violations committed by the company but reduced the penalties and debarment periods. The debarment period for the company and its directors was reduced to the period already undergone. The penalty against the company was reduced to Rs. 25 lakhs, and the penalties against the Managing Director and Director were reduced to Rs. 10 lakhs each. The penalties against the Independent Directors were quashed, as their involvement was limited to being signatories to the board resolution without evidence of participation in the fraudulent scheme. The appeals were partly allowed, and the tribunal emphasized the need for proportionality in punitive measures.