2021 (1) TMI 761 - AT - SEBI

SEBI Debarment Overturned: No Fraud Found

Adesh Jain Versus Securities And Exchange Board of India

The Tribunal quashed SEBI's debarment order against the appellant, finding no evidence of his involvement in fraudulent activities or day-to-day ... Fraud by the company - Liability of directors - Concealing and suppressing the material facts as in violation of the provisions of Section 12A of SEBI Act - Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market - WTM directing the company to take steps for refund of the money from Banco and also debarred the appellant from accessing the securities market for a period of 5 years - HELD THAT:- The submissions so made are beyond the pleadings and cannot be taken into consideration. The respondent cannot be allowed to better their case and rely upon such documents which are not part of the record. There is no finding that the appellant, being a director for more than 10 years, was deemed to be involved in the day-to-day affairs and management of the Company nor there is any finding that the appellant was chairman of various committees and therefore deemed to be involved in the day-to-day affairs of the Company. There is no finding that the credit agreement and the charge account agreement were in the knowledge of the appellant. On the other hand, it is the consistent case of the appellant that he was a practicing chartered accountant and a non-executive independent director and was only involved in policy decisions. These facts have not been disputed nor controvert by any documentary evidence before the WTM. Reliance of section 27 of the SEBI Act is patently erroneous. Section 27 is not applicable if the offence is committed without the knowledge of the incumbent. We have already held that there is no finding given by the WTM that the appellant was involved in the day-to-day affairs and management of the Company. On the other hand, a specific case was stated by the appellant that the fraud was committed by the mastermind, namelyly, the chairman, managing director and the authorized signatory/director Mr. Rajinder Singh Negi and that he had no knowledge of the violation committed by the masterminds of the PFUTP Regulations. This fact has not been denied by the respondent. In our view Section 27 of the SEBI Act has no application. The impugned order insofar as it relates to the appellant cannot be sustained and is quashed. Issues Involved1. Validity of the debarment order issued by SEBI.2. Interpretation of the resolution dated October 19, 2007.3. Appellant's involvement and liability in the alleged fraudulent activities.Detailed Analysis1. Validity of the Debarment Order Issued by SEBIThe appellant contested the SEBI's order dated March 6, 2020, which debarred the appellant from accessing the securities market for five years and froze his securities. SEBI's Whole Time Member (WTM) found that the appellant's actions in the GDR issue constituted fraud under the PFUTP Regulations. The WTM directed the company to refund the money from Banco and debarred the appellant based on the resolution dated October 19, 2007, which allowed Banco to use the funds as security for loans.2. Interpretation of the Resolution Dated October 19, 2007The resolution authorized the opening of a bank account with Banco Efisa S.A. for receiving subscription money for the GDR issue and allowed the bank to use the funds as security in connection with loans. The appellant argued that the term 'in connection with loans' referred only to loans taken by the company, not third parties. The appellant relied on the Tribunal's decision in Adi Cooper v. SEBI, which held that a similar resolution did not imply an intention to manipulate the market or commit fraud.3. Appellant's Involvement and Liability in the Alleged Fraudulent ActivitiesThe appellant argued that he was a non-executive independent director involved only in policy decisions and not in the day-to-day management of the company. SEBI contended that the appellant, being a director for over ten years and a signatory to the resolution, was involved in the fraudulent arrangement facilitating the GDR issue. The Tribunal found no evidence that the appellant was aware of or involved in the fraudulent activities. The Tribunal noted that the appellant's role was limited to policy decisions, and there was no finding that he was involved in the day-to-day affairs or aware of the Credit Agreement and Account Charge Agreement.JudgementThe Tribunal concluded that the controversy was covered by the decision in Adi Cooper's case, where it was held that the resolution did not imply an intention to commit fraud. The Tribunal found no evidence of the appellant's involvement in the day-to-day management or knowledge of the fraudulent activities. The Tribunal held that Section 27 of the SEBI Act, which deals with the liability of directors, was not applicable as there was no finding that the appellant had knowledge of the fraud. Consequently, the Tribunal quashed the SEBI's order insofar as it related to the appellant and allowed the appeal with no order as to costs.The Tribunal noted that the order would be digitally signed due to the Covid-19 pandemic, and parties were directed to act on the digitally signed copy.