2025 (11) TMI 81 - AT - SEBI

Appeals dismissed; fraudulent GDR issuance and amended pledge acceptance upheld, three-year market ban and penalties affirmed under PFUTP

D.B. Jain and. B.G. Jain Versus Securities and Exchange Board of India, Mumbai

AT dismissed the appeals, upholding that the company fraudulently issued GDRs to create impression of USD 24.25 million foreign subscription. Tribunal ... Fraudulent issuance of Global Depository Receipts (GDRs) - pledge disclosed to the stock exchange, which made the investors believe that the GDR issue was genuinely subscribed by foreign investors - SEBI restraining the appellants from accessing the securities market for a period of three years from the date of order - monetary penalty for violation of Section 12A(a),(b),(c) of SEBI Act,1992 read with Regulations 3(a), (b), (c), (d), 4(1) of SEBI (PFUTP) Regulations, 2003 - Nakoda entered into a pledge agreement with EURAM Bank for a loan that was availed by an entity company called ‘Vintage FZE’ (‘Alta Vista International FZE’) - name of Vintage FZE is not found in the board resolution - HELD THAT:- It is relevant to note that Nakoda has acceded to the change in the rate of interest by accepting the amendment to the pledge agreement dated November 12, 2010. The said document is signed by the first appellant before a notary public in Surat. The amendment has taken place on December 27, 2011, after more than one year after executing the pledge agreement. After a further lapse of eight months i.e. on August 9, 2012 the company secretary has conveyed to the EURAM Bank to remit the interest amount. Thus, a combined reading of documents extracted lead us to an irrefutable conclusion that the company had issued the GDRs only to give an impression to the investors that USD 24.25 million was invested by foreign investors. The contention urged by the learned Advocate for the appellant that Nakoda had raised its concern with regard to the pledge agreement with the EURAM Bank is noted only to be rejected. We say so because the first appellant has accepted the change in the terms of pledge agreement by signing the document (Annexure – 9) before a notary public and the company secretary has requested transfer of only the interest portion, two years after issuance of GDRs. The other contention urged by the appellant that the name of Vintage FZE is not found in the board resolution is far too fragile to be countenanced, particularly in view of the undisputed stark facts narrated hereinabove. The companies like Nakoda by indulging in such activities give an impression to the gullible investors in India that foreign investors have invested in their companies. it is an admitted position that though Nakoda made an announcement that its GDRs were subscribed, not a penny is received by it. Therefore, we answer the first point in the affirmative and the second point in the negative. We find no legal infirmity in the impugned order. These appeals are devoid of merits and must fail. ISSUES PRESENTED AND CONSIDERED 1. Whether the issuer of Global Depository Receipts (GDRs) had pledged its GDRs with the bank as security to enable a subscriber/related entity to avail a loan, thereby rendering the subscription a sham. 2. Whether the issuer actually received any foreign investment proceeds from the GDR subscription or whether the subscription was illusory (i.e., funds remained in escrow and were not available to the issuer). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the GDRs were pledged as security to enable the loan Legal framework: Alleged violations raised under Section 12A(a),(b),(c) of the SEBI Act, 1992 read with Regulations 3(a),(b),(c),(d) and 4(1) of SEBI (PFUTP) Regulations, 2003; directions under Sections 11, 11B, 11(4) of the SEBI Act and penalty under Section 15HA were also invoked in the show cause notices. Precedent treatment: The decision does not rely on, distinguish, or overrule prior case law; the Tribunal's conclusion rests on documentary and factual matrix rather than any specific precedent. Interpretation and reasoning: The Tribunal examined contemporaneous documentary evidence including (a) the pledge agreement dated 12/11/2010 or its alleged variants; (b) an issuer letter (dated 13/09/2012) acknowledging an executed agreement and alleging discrepancies; (c) an amendment to the pledge agreement effected by the issuer's authorized signatory before a notary (changing interest rate) and acknowledged by the issuer; (d) email correspondence concerning transfer of interest only; and (e) an empowering board resolution authorising directors to sign/execute escrow/pledge-related documents. From these documents the Tribunal drew the following inferences: (i) an authorised representative of the issuer had signed an agreement relating to the pledge (admitted in issuer correspondence); (ii) the issuer subsequently accepted an amendment to the pledge terms and the amendment was signed by the authorised signatory before a notary public, evidencing knowledge and acquiescence; (iii) communications with the bank regarding transfer of only interest (and the bank's assertion that accounts were pledged) corroborated that the account was treated as security by the bank; and (iv) the board resolution granted authority to sign required banking/escrow/pledge documents, supporting the inference that the issuer's corporate organ had empowered execution of such arrangements. The Tribunal rejected the issuer's later protestations that (a) the issuer was not named as pledgor in the executed document and (b) the subscriber's name was absent from the board resolution, observing those contentions as insufficient in view of the documentary admissions and conduct. Ratio vs. Obiter: The conclusion that the GDRs were pledged to secure the loan is treated as ratio decidendi based on the contemporaneous documentary evidence and the conduct of the issuer; related commentary about the impropriety of such market practices operates as explanatory ratio reinforcing the regulatory finding. Conclusions: The Tribunal answered Issue 1 in the affirmative - the issuer's GDRs were pledged with the bank as security to enable Vintage FZE/related entity to obtain a loan, and the issuer's contemporaneous conduct and executed documents establish knowledge and participation in the arrangement. Issue 2 - Whether the issuer actually received the foreign investment proceeds Legal framework: Same statutory and regulatory provisions as Issue 1 govern the conduct complained of - in particular, PFUTP Regulations and Section 12A provisions aimed at prohibiting fraudulent or unfair trade practices and misleading disclosures to the securities market. Precedent treatment: No precedent was invoked; the finding rests on documentary proof and admissions. Interpretation and reasoning: The Tribunal considered undisputed facts: (a) subscription amount was placed in an escrow account upon issuance of GDRs (26/11/2010); (b) the issuer did not receive any of the subscription monies; (c) issuer correspondence and bank communications show that only interest (and not principal subscription proceeds) was considered transferable while principal remained pledged; (d) acceptance by the issuer of an amendment to pledge terms and subsequent request to remit interest further demonstrate lack of receipt of subscription proceeds by the issuer; and (e) public disclosures by the issuer announcing full subscription contrasted with the documentary reality that proceeds were not available to the issuer. On this evidence the Tribunal concluded that the issuer did not actually receive foreign investment proceeds and that the subscription announcement was misleading. Ratio vs. Obiter: The determination that no foreign investment was actually received is core to the holding and constitutes ratio; observations on the detrimental effect on retail/investor confidence and the need for strict regulatory response are integral to the Court's reasoning and operative in effect. Conclusions: The Tribunal answered Issue 2 in the negative - the issuer did not receive the foreign investment proceeds and the GDR subscription was effectively illusory, thereby rendering the disclosure of subscription false/misleading. Regulatory and remedial implications - Court's assessment of sanctions and public interest Legal framework and reasoning: Given the findings on Issues 1 and 2, the Tribunal endorsed the regulator's view that such conduct constitutes fraudulent/unfair trade practice under the PFUTP Regulations and contravenes Section 12A of the SEBI Act. The Tribunal observed that issuance of GDRs in the manner found creates a false impression of foreign investment, thereby attracting investors on a misleading basis and undermining market integrity. Interpretation and reasoning: The Tribunal found no legal infirmity in the impugned orders - namely, market-access restraint imposed by the regulator for three years and the monetary penalties imposed by the adjudicating officer - and held that such cases must be dealt with firmly to protect investor interests. The Tribunal rejected the appellants' explanations as inadequate in light of documentary admissions and conduct. Ratio vs. Obiter: The endorsement of regulatory measures and the necessity of strict enforcement is given as part of the operative reasoning (ratio) supporting dismissal of the appeals; pronouncements on policy and deterrence function as supplementary ratio emphasizing regulatory objectives. Conclusions: The Tribunal upheld the regulatory orders restraining market access and imposing monetary penalty, finding the appeals devoid of merit and dismissing them; the Tribunal also emphasised the need for robust regulatory action in similar cases to protect investors and market integrity. Cross-references Findings on Issue 1 and Issue 2 are interlinked: documentary admission of executed/acknowledged pledge documents, acceptance of amendment by issuer, board authorisation to execute escrow/pledge documents, and communications restricting transfer to interest collectively underpin both conclusions that (a) GDRs were pledged to secure a loan and (b) the issuer did not receive subscription proceeds.