2025 (7) TMI 646 - Board - SEBI

Company and promoter directors face restrictions for fund diversion, false vehicle order disclosures, governance violations

In Re. : Gensol Engineering Limited, Anmol Singh Jaggi and Puneet Singh Jaggi

In Re. : Gensol Engineering Limited, Anmol Singh Jaggi and Puneet Singh Jaggi - TMI Issues Presented and ConsideredThe core legal questions examined by the Tribunal include:Whether the Company and its promoters engaged in mis-utilization and diversion of funds obtained through term loans from financial institutions, in violation of applicable securities laws and regulations.Whether the Company submitted forged or falsified documents (Conduct Letters and No Objection Certificates) to Credit Rating Agencies and SEBI, thereby misleading regulators and investors.Whether the promoters and related parties engaged in transactions that qualify as related party transactions under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and if so, whether such transactions were properly disclosed.Whether the promoters and related entities violated provisions of the SEBI Act and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 by manipulating share price and engaging in unfair trade practices.Whether the promoters' conduct and corporate governance failures warrant interim regulatory directions to protect investor interests and market integrity.Whether the preferential issue of shares was funded through routed transactions involving related parties, raising concerns on genuineness and compliance with disclosure norms.Whether the trading in the Company's shares by a related entity (Wellray) using funds routed from the Company and promoters violated Section 67 of the Companies Act, 2013, which restricts a company from providing financial assistance for purchase of its own shares.Whether the Company made misleading disclosures to stock exchanges regarding orders and strategic tie-ups, thereby violating disclosure obligations under securities laws.Whether the invocation of pledged shares by lenders could further dilute promoter shareholding, impacting control and investor interests.Issue-wise Detailed Analysis1. Mis-utilization and Diversion of Funds Obtained from LendersLegal Framework and Precedents: The SEBI Act, 1992, and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, impose duties on listed entities and their promoters to maintain transparency and prohibit fraudulent conduct including diversion of funds. Further, disclosure norms under SEBI Master Circular require timely reporting of defaults on loans.Court's Interpretation and Reasoning: The Tribunal examined detailed bank statements and fund flow analyses which revealed that loans amounting to approximately Rs. 977.75 Crore were availed from IREDA and PFC primarily for procurement of 6,400 electric vehicles (EVs). However, only 4,704 EVs were procured, costing Rs. 567.73 Crore, leaving a substantial unaccounted amount of Rs. 262.13 Crore.Further, the funds transferred to the EV supplier (Go-Auto) were routed back to the Company or to entities related to the promoters, including Capbridge Ventures LLP, Matrix Gas and Renewable Ltd., and others. These funds were used for personal expenses of promoters (including purchase of luxury real estate), benefit to promoter-related entities, and other unrelated purposes.Key Evidence and Findings: The Tribunal relied on bank statements, lender confirmations denying issuance of Conduct Letters, statements of related entities, and admissions by Go-Auto's Managing Director regarding dues. It was found that the Company repeatedly submitted 'No Default Statements' certifying timely loan servicing despite multiple defaults documented by lenders.Application of Law to Facts: The diversion of funds and submission of false statements constituted violations of SEBI regulations prohibiting fraudulent and unfair trade practices. The failure to disclose defaults as required under SEBI Master Circular further compounded the violations.Treatment of Competing Arguments: The Company denied involvement in falsification claims, but lender denials and documentary evidence disproved these assertions. The Tribunal found the Company's explanations insufficient and inconsistent with the evidence.Conclusions: The Tribunal concluded that there was prima facie mis-utilization and diversion of funds by the promoters and the Company, with funds routed through related parties for non-business and personal use.2. Submission of Forged Documents and Misleading DisclosuresLegal Framework: Under SEBI Act and PFUTP Regulations, submission of forged or falsified documents to regulators or market intermediaries is prohibited and constitutes fraudulent conduct.Reasoning and Findings: The Company submitted Conduct Letters and No Objection Certificates purportedly issued by IREDA and PFC to Credit Rating Agencies, which were later denied by these lenders. This act was a deliberate attempt to mislead CRAs, SEBI, lenders, and investors about the Company's debt servicing status.Application: Such conduct violates Sections 12A(a), (b), (c) of the SEBI Act and Regulations 3(b), (c), (d), 4(1), and 4(2)(f), (k), (r) of the PFUTP Regulations.Conclusion: The Tribunal found prima facie evidence of submission of forged documents and misleading disclosures.3. Related Party Transactions and Non-DisclosureLegal Framework: Regulation 2(zc), 4, and 48 of SEBI (LODR) Regulations, 2015, require disclosure of related party transactions and adherence to accounting standards.Findings: The promoters and related entities received diverted funds through layered transactions. These transactions qualified as related party transactions but were not properly disclosed by the Company.Conclusion: The Company violated disclosure norms under SEBI LODR Regulations.4. Violation of Section 67 of Companies Act, 2013 - Funding Purchase of Own SharesLegal Framework: Section 67 prohibits companies from providing financial assistance, directly or indirectly, for purchase of its own shares.Findings: Wellray, a related party, traded extensively in the Company's shares using funds routed from Gensol and promoters. The funds used for trading were largely sourced from Gensol and related entities.Conclusion: This conduct prima facie violated Section 67 by facilitating purchase of the Company's shares through indirect financial assistance.5. Misleading Disclosures to Stock ExchangesLegal Framework: SEBI Listing Regulations mandate timely, accurate, and non-misleading disclosures.Findings: The Company's disclosures regarding pre-orders for EVs were based on MOUs lacking pricing and delivery schedules, thus misleading investors. Similarly, announcements about strategic tie-ups and sale of subsidiaries lacked substantive backing and were withdrawn subsequently.Conclusion: The disclosures were prima facie misleading and violated SEBI disclosure obligations.6. Corporate Governance Failures and Need for Interim DirectionsLegal Framework: SEBI's regulatory powers under Sections 11, 11(4), 11B(1), and 19 of the SEBI Act enable it to issue interim directions to protect investors and market integrity.Reasoning: The Tribunal noted a complete breakdown of internal controls and governance at the Company. Promoters treated the Company's funds as their own, diverting substantial amounts to personal and related party uses. The promoter shareholding had significantly diluted, with pledges invoked by lenders threatening further loss of control. The Company's stock split announcement risked attracting retail investors unaware of underlying risks.Conclusion: Interim directions were warranted to restrain promoters from managerial positions, prohibit trading by the Company and promoters, hold the stock split, and appoint forensic auditors.Significant Holdings'The prima facie findings have shown mis-utilization and diversion of funds of the Company in a fraudulent manner by its promoter directors, who are also the direct beneficiaries of the diverted funds.''The Company has attempted to mislead SEBI, the Credit Rating Agencies, the lenders and the investors by submitting forged Conduct Letters purportedly issued by its lenders.''The promoters were running a listed public company as if it were a proprietary firm, routing Company funds to related parties and using them for unconnected expenses, ultimately resulting in losses to investors.''The internal controls at the Company appear to be loose and through quick layering of transactions, funds have seamlessly flowed to multiple related entities and individuals.''Allowing the promoters to remain at the helm of affairs is likely to do further damage to the interests of the Company and investors.''The Company and promoters have violated provisions of Section 12A(a), (b), (c) of the SEBI Act and Regulations 3(b), (c), (d), 4(1), and 4(2)(f), (k), (r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.''The promoters and related parties benefitted from the funds of the Company through layered transactions constituting related party transactions, which were not disclosed as required under SEBI LODR Regulations.''The trading in the Company's shares by a related party using funds routed from the Company and promoters violates Section 67 of the Companies Act, 2013.''The Company made misleading disclosures to the stock exchanges regarding orders and strategic tie-ups, thereby violating disclosure obligations.''Pending detailed investigation, immediate interim directions are necessary to safeguard investor interests and preserve market integrity.'Final Determinations on Each IssueThere is prima facie evidence of diversion and mis-utilization of funds obtained through loans from financial institutions, in violation of SEBI regulations.The Company submitted forged documents to Credit Rating Agencies and SEBI, misleading regulators and investors.The promoters and related parties engaged in undisclosed related party transactions violating SEBI LODR Regulations.Funds routed to a related entity for trading in the Company's shares violated Section 67 of the Companies Act, 2013.The Company made misleading disclosures to stock exchanges, violating disclosure norms.Corporate governance failures and promoter conduct warranted immediate interim regulatory intervention.Interim directions were issued restraining promoters from managerial roles, prohibiting trading by the Company and promoters, holding the stock split, and ordering forensic audit.