2023 (11) TMI 65 - AT - SEBI

GDR issue deemed fraudulent scheme under Section 12A SEBI Act for misleading investors about subscribers and fund availability

The Securities Appellate Tribunal Mumbai held that a GDR issue constituted a fraudulent scheme violating Section 12A of the SEBI Act and PFUTP ... Liability of non executive independent director for disclosure violations - misleading corporate announcement and non disclosure of pledge and loan arrangements - application of fiduciary/monitoring duties of audit committee members - temporal inapplicability of Companies Act, 2013 provisions to transactions predating the statute - penalty and debarment under securities law for fraudulent scheme and market manipulationLiability of non executive independent director for disclosure violations - penalty and debarment under securities law for fraudulent scheme and market manipulation - Whether the appellant, a non executive independent director, could be held liable and subjected to penalty and debarment by SEBI/WTM for the alleged fraudulent GDR scheme, non disclosure of pledge and loan agreements, and misleading corporate announcement. - HELD THAT: - The Tribunal examined the AO's and WTM's findings that the GDR issue was effectively subscribed by a single entity and that the company and its directors had executed and failed to disclose a pledge and a loan arrangement, thereby misleading investors and violating securities laws. However, as regards the appellant, the Tribunal found no material on record to show that the GDR matter was placed before the audit committee or that the appellant participated in day to day management. The WTM/AO's reliance on the appellant's membership and later chairmanship of the audit committee and on Section 177(4)(viii) of the Companies Act, 2013 to fasten responsibility was unsupported by evidence and legally misplaced because the relevant Board resolution and the GDR issuance occurred in 2010 11, prior to the enactment of the 2013 Act. The Tribunal also relied on its earlier decisions holding that independent directors who are not part of day to day affairs cannot be held liable for such disclosure violations. On these findings, the Tribunal concluded that the impugned orders of penalty and debarment could not be sustained insofar as they related to the appellant and therefore must be quashed. [Paras 13, 14, 16]Impugned orders of the WTM and AO imposing penalty and debarment are quashed insofar as they relate to the appellant.Application of fiduciary/monitoring duties of audit committee members - temporal inapplicability of Companies Act, 2013 provisions to transactions predating the statute - Whether Section 177(4)(viii) of the Companies Act, 2013 or the audit committee membership could be invoked to fasten responsibility on the appellant for the GDR transactions executed in 2010 11. - HELD THAT: - The Tribunal held that Section 177(4) of the Companies Act, 2013 could not be applied to events and resolutions that occurred in 2010 11 because the provision did not exist at that time. Further, there was no evidence that the GDR issue was placed before the audit committee under the earlier regime; absent such a factual foundation, mere attendance at board meetings or subsequent association with the company cannot be equated with participation in day to day affairs or a duty to monitor the end use of funds. The finding that the appellant had a 'long association' with the company was based on surmise and conjecture and therefore unsustainable. [Paras 14]Section 177(4) of the Companies Act, 2013 and audit committee membership cannot be invoked to hold the appellant liable for the 2010 11 GDR transactions.Final Conclusion: The appeals are allowed; the orders of debarment and penalty passed by the WTM and the AO are quashed insofar as they pertain to the appellant, because there is no evidence that the appellant, a non executive independent director, was involved in day to day affairs or that the post 2013 statutory duties could be applied retroactively to the 2010 11 transactions. Issues involved: Appeal against SEBI orders imposing penalty and debarring from securities market for fraudulent scheme related to GDR proceeds.Issue 1: Allegations of fraudulent scheme related to GDR proceeds:The appellant filed two appeals against SEBI orders imposing penalties and debarring from the securities market. The issue arose from a resolution passed by the Company's Board of Directors to open a bank account with EURAM Bank for depositing GDR proceeds. The investigation revealed that a loan agreement was executed between Vintage and EURAM Bank based on a pledge agreement, which was not disclosed to the stock exchange, investors, or shareholders. The appellant challenged the orders on grounds of non-disclosure and misleading corporate announcements.Issue 2: Responsibility of non-executive independent director:The appellant, a non-executive independent director, argued that he was not involved in day-to-day affairs and was unaware of key details regarding the GDR issue. However, SEBI found him responsible as a member of the audit committee and due to his long association with the Company. The appellant contested this finding, stating that the Companies Act, 2013 provisions could not be retroactively applied to actions taken in 2010-11. The Tribunal held that independent directors cannot be penalized for matters not within their purview.In the judgment, the Securities Appellate Tribunal in Mumbai addressed the issues raised in the appeals. The Tribunal noted that the modus operandi in this case was similar to previous matters involving GDR issues, where non-disclosure of agreements was deemed fraudulent and violative of regulations. The Tribunal emphasized that the Company and its Managing Directors were aware of the agreements and misled SEBI and investors. Despite the appellant's contentions of lack of involvement, the Tribunal ruled in favor of the appellant, stating that there was no evidence of his direct responsibility for the violations. The Tribunal highlighted that the audit committee's role was limited to matters placed before it and that the appellant's attendance at board meetings did not imply day-to-day involvement in the Company's affairs. Citing precedents, the Tribunal concluded that independent directors cannot be penalized for actions beyond their scope. As a result, the Tribunal quashed the SEBI orders against the appellant, allowing the appeals. The order was to be digitally signed and parties were directed to act accordingly.