2016 (12) TMI 1202 - AT - Companies Law

SEBI's jurisdiction upheld in appeal, appellants debarred for fraud in GDR issuance.

The appeal was dismissed, and SEBI's order was upheld by the Apex Court. SEBI was found to have jurisdiction to initiate proceedings against the ... Fraud under the PFUTP Regulations - misleading the securities market by creating artificial impression of foreign subscription - liability of a lead manager for acts which induce Indian investors to deal in securities - impeachment of orders without impleading alleged co-conspirators - debarment from securities market as a protective/regulatory measureImpeachment of orders without impleading alleged co-conspirators - fraud under the PFUTP Regulations - Whether SEBI was precluded from proceeding against the appellants for alleged fraud on Indian investors because other persons alleged to have connived were not impleaded - HELD THAT: - The Tribunal held that the concept of 'fraud' under the PFUTP Regulations is broader than the contractual concept of fraud and extends to any act or omission by a person which causes investors in India to believe in something untrue so as to induce them to deal in securities. Consequently, SEBI is empowered to proceed against a person whose acts induce such belief in India even if other foreign entities who participated in related overseas transactions are not impleaded. Whether overseas loan or pledge agreements or the legality of GDR issuance stand independently valid is not a precondition to initiate proceedings against the person whose conduct is alleged to have misled Indian investors. Decisions cited by the appellants on impleading co conspirators were found distinguishable on facts, and this Tribunal concluded that non-impleading of overseas entities did not vitiate SEBI's proceedings against the appellants. [Paras 13, 14, 15, 16, 17]SEBI was not precluded from proceeding against the appellants for alleged fraud on Indian investors merely because other alleged participants were not impleaded; the objection is without merit.Fraud under the PFUTP Regulations - misleading the securities market by creating artificial impression of foreign subscription - liability of a lead manager for acts which induce Indian investors to deal in securities - debarment from securities market as a protective/regulatory measure - Whether the appellants, as Lead Manager and its managing director, committed fraud on Indian investors in relation to the GDR issues and whether SEBI was justified in imposing a ten year debarment and market access prohibition - HELD THAT: - The Tribunal applied the PFUTP Regulations' definition of 'fraud' and the Apex Court's observations on the purpose and market effect of GDR creation. Findings of the investigation-viz., that Vintage (controlled by the managing director) borrowed funds to subscribe to GDRs, that purported initial subscribers were fictitious or non existent and immediately transferred GDRs to Vintage, and that Vintage and entities connected to the managing director thereafter caused conversion/sale and on market acquisition by connected Indian entities-were held to establish an artificial scheme designed to create the impression of genuine foreign subscription. The Tribunal found that the appellants, through planning and implementation (loan, pledge, use of fictitious subscribers, transfers to connected FIIs and domestic purchasers), caused Indian investors to be misled about genuine global investor interest in the issuers. SEBI's inference that the appellants induced the Indian market and thereby committed fraud under the PFUTP Regulations was sustained. The Tribunal further held that the protective regulatory step of debarment and prohibition from market access was not interfered with, having regard to prior contraventions and the seriousness of the established scheme. [Paras 26, 27, 28, 29, 30]The appellants committed fraud on Indian investors under the PFUTP Regulations by creating an artificial impression of foreign subscription and manipulating subsequent transfers/conversions; SEBI's debarment and market access prohibition were justified and are upheld.Final Conclusion: The appeal is dismissed. The Tribunal upholds SEBI's finding that the appellants, acting as Lead Manager and through connected entities, perpetrated a scheme that misled Indian investors and amounted to fraud under the PFUTP Regulations; SEBI was entitled to proceed without impleading foreign co participants and the ten year debarment and market access prohibition are sustained. Issues Involved:1. Jurisdiction of SEBI to initiate proceedings.2. Allegations of fraud and misrepresentation.3. Procedural fairness and principles of natural justice.4. Validity of the GDR issuance process.5. Role and responsibilities of the Lead Manager.6. Connection and involvement of various entities.7. Consequences of the fraudulent activities.Detailed Analysis:1. Jurisdiction of SEBI to Initiate Proceedings:The appellants challenged the jurisdiction of SEBI to initiate proceedings against them concerning their role as Lead Managers to the Global Depository Receipts (GDRs) issued by Indian companies outside India. Initially, the Tribunal set aside SEBI's decision on jurisdictional grounds. However, the Apex Court reversed this decision, affirming SEBI’s jurisdiction to initiate proceedings if the appellants violated SEBI Act provisions and related regulations.2. Allegations of Fraud and Misrepresentation:The appellants were accused of creating an artificial impression that the GDRs were fully subscribed by foreign investors when, in fact, they were subscribed by entities controlled by the appellants. This was deemed fraudulent under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). The Tribunal found that the appellants, through a series of transactions involving loans and pledges, misled Indian investors into believing that there was significant foreign interest in the GDRs, constituting fraud.3. Procedural Fairness and Principles of Natural Justice:The appellants argued that SEBI’s proceedings were flawed due to the non-inclusion of other entities allegedly involved in the fraud. The Tribunal rejected this argument, stating that under the PFUTP Regulations, SEBI could proceed against any person whose actions constituted fraud on the securities market, even if other involved entities were not part of the proceedings.4. Validity of the GDR Issuance Process:The investigation revealed that the GDRs were subscribed by an entity (Vintage) controlled by the appellants, using funds obtained through a loan, which was secured by pledging the GDR proceeds. This process was found to be designed to create a false impression of foreign investor interest. The Tribunal upheld SEBI’s findings that the appellants' actions in the GDR issuance process were fraudulent.5. Role and Responsibilities of the Lead Manager:As Lead Manager, PAN Asia (controlled by the appellants) was responsible for ensuring that the GDRs were subscribed by genuine foreign investors. Instead, the appellants used their entity, Vintage, to subscribe to the GDRs, thereby misleading the market. The Tribunal concluded that the appellants failed in their duties as Lead Manager and engaged in fraudulent activities.6. Connection and Involvement of Various Entities:The Tribunal found that the appellants were connected with various entities involved in the GDR transactions, including Vintage, IFCF, and KII Ltd. These connections were used to manipulate the market and create a false impression of foreign investor interest. The investigation also revealed that some of the alleged initial subscribers were non-existent entities, further supporting the fraud allegations.7. Consequences of the Fraudulent Activities:The Tribunal upheld SEBI’s decision to debar the appellants from rendering services related to securities and from accessing the securities market for ten years. The appellants' actions were found to have created an artificial market and misled investors, justifying the severe penalties imposed.Conclusion:The appeal was dismissed, and SEBI’s order was upheld. The Tribunal found that the appellants had committed fraud on Indian investors by creating a false impression of foreign interest in the GDRs, violating the PFUTP Regulations. The penalties imposed by SEBI were deemed appropriate given the severity of the fraudulent activities.