2025 (11) TMI 1723 - AT - SEBI

Appeals fail against three-year market and director bans for company benefiting from sham GDR subscription arrangement

Mr. Ajay Goenka, Sangeeta Goenka Versus Securities and Exchange Board of India, Mumbai

AT dismissed the appeals concerning restrictions imposed for three years on accessing the securities market and holding positions as Director or KMP in ... Restrictions from accessing the securities market and from holding the position of a Director or KMP Key Managerial Person in any listed Company - Irregularities into the Global Depository Receipts (GDRs) - denial of execution of the pledge agreement - initiated proceedings u/s 15HA - modus operandi - whether appellants were involved in the GDR scheme? HELD THAT:- After investigation, a Show Cause Notice (‘SCN’) dated 16.03.2018 was issued. After adjudication, the WTM vide order dated 26.10.2021, has restrained the appellants from accessing the securities market and from holding the position as a Director or KMP in a listed entity for a period of three years. The period of restriction imposed by the WTM has since expired on 25.10.2024, Appeal is rendered infructuous. Appellants admit that they have issued GDRs and it was entirely subscribed by Vintage - Their only grievance is that they have not executed the pledge agreement. The appellants’ sole and principal argument that they have not executed the resolution and the pledge agreement is wholly untenable and liable to be rejected firstly, because the table mentioned in paragraph 38 of the impugned order contains five columns. The first column contains the date, the second and third columns show the repayment of loan by Vintage to EURAM and columns 4 and 5 show the transfer of money from Rainbow’s EURAM account during the period 19.01.2010 and 28.07.2011. As recorded hereinabove, if the subscription of GDRs were to be genuine, the entire subscription money ought to have been received by Rainbow by one single transfer. GDRs are issued to raise funds for specific purposes and for the benefit of the Company. The tabular column in para 38 shows that Rainbow has received money in bits and pieces in 32 tranches. Secondly, though it was strenuously contended by the learned Advocate for the appellant that the pledge agreement was not signed by the appellant No: 1, surprisingly, no action such as lodging an FIR has been taken by the appellants. Any prudent person alleged of such serious charge, would have taken appropriate remedial measures to vindicate his stand. Moreover, appellant’s company is the beneficiary of the GDR proceeds and therefore there is no reason to presume that an unrelated person would affix appellant’s signature on pledge documents. No merit in these appeals. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the appellants were involved in, and had knowledge of, the GDR scheme funded through the loan from EURAM Bank to Vintage FZE. 1.2 Whether the pledge agreement and related documents (including the board resolution) relied upon by the regulator were forged or unauthorised, thereby exonerating the appellants from liability. 1.3 Whether, in the facts established, the regulatory orders imposing market access restraints and monetary penalties on the appellants called for interference by the Tribunal. 1.4 Whether the appeal against the order of restraint, whose operative period had already expired, survived for adjudication. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Involvement and knowledge of the appellants in the GDR scheme funded through EURAM Bank Interpretation and reasoning 2.1.1 The Tribunal noted that the entire GDR issue of 1.02 million GDRs amounting to USD 27.02 million was subscribed by a single entity, Vintage FZE, and that, in the ordinary course, the issuer company should receive the full subscription amount in a single transfer. 2.1.2 The loan agreement between EURAM Bank and Vintage explicitly recorded that the facility was granted 'to provide funding enabling Vintage FZE to take down GDR issue' of the issuer company and that the funds 'may only be transferred' to the issuer's EURAM account, establishing a direct nexus between the loan and the GDR subscription. 2.1.3 The Tribunal relied heavily on the tabular data discussed in the adjudicating authority's order, showing that: (a) columns 2 and 3 reflected repayment of the loan by Vintage to EURAM Bank; and (b) columns 4 and 5 reflected transfers from the issuer's EURAM account. The amounts and dates cross-matched such that, as and when Vintage repaid the loan, the issuer's EURAM account received corresponding transfers. 2.1.4 The pattern of funds flow in 32 tranches, rather than a single upfront receipt of the subscription amount, was considered inconsistent with a genuine GDR subscription for the benefit of the company and consistent with a structured arrangement linked to the loan repayments. 2.1.5 The Tribunal inferred that the issuer company, and thus the appellants, were beneficiaries of the GDR proceeds channelled through this arrangement, supporting the conclusion that the appellants were involved in and aware of the scheme. Conclusions 2.1.6 The Tribunal held that the appellants were involved in the GDR scheme financed by EURAM Bank through Vintage FZE and that their plea of total ignorance of the underlying funding arrangement was untenable. 2.2 Alleged forgery or unauthorised execution of the pledge agreement and related documents Interpretation and reasoning 2.2.1 The appellants denied execution of the pledge agreement in favour of EURAM Bank and the related board resolution, contending that their signatures were not genuine and that the regulator, having obtained the documents from EURAM Bank, bore the burden of proving their authenticity. 2.2.2 The Tribunal noted that the pledge agreement, produced by the appellants themselves, recited that: (a) EURAM Bank had granted a loan to Vintage FZE in the amount of USD 27,021,601.20 under a specific loan agreement; and (b) the pledgor had received a copy of that loan agreement and acknowledged and agreed to its terms and conditions. This internal consistency linked the pledge to the loan used for the GDR subscription. 2.2.3 The Tribunal found the appellants' contention that the pledge agreement was forged to be unsupported by any corroborative action, observing that despite the seriousness of the allegation, the appellants had not lodged any FIR or taken other legal steps to challenge the alleged forgery. 2.2.4 The Tribunal also reasoned that, since the issuer company was the beneficiary of the GDR proceeds, it was unreasonable to presume that an unrelated person would forge the appellants' signatures on the pledge documents for no apparent adverse consequence to the company. 2.2.5 The cross-matching of loan repayments by Vintage with corresponding transfers from the issuer's EURAM account further undermined the claim that the pledge and related documents were fabricated or executed without the appellants' knowledge. Conclusions 2.2.6 The Tribunal rejected the appellants' defence that the pledge agreement and related documents were forged or unauthorised, holding that this plea was wholly untenable and liable to be rejected. 2.3 Justification for regulatory sanctions and scope for appellate interference Interpretation and reasoning 2.3.1 Having affirmed the appellants' involvement in the GDR scheme and rejected their defence of non-execution/forgery of the pledge agreement, the Tribunal found no infirmity in the findings of the whole time member and the adjudicating officer. 2.3.2 The Tribunal accepted the regulator's theory of the scheme and the modus operandi, including the role of the intermediary entity and the link between loan repayments and transfers from the issuer's account, and held that these facts remained uncontroverted by the appellants. Conclusions 2.3.3 The Tribunal concluded that there was no merit in the challenge to the monetary penalties imposed, and upheld the order imposing penalties on the appellants. 2.4 Effect of expiry of the period of market access restraint Interpretation and reasoning 2.4.1 The Tribunal recorded that the period of restraint imposed by the whole time member, namely three years from 26.10.2021, had already expired on 25.10.2024 by the time of adjudication of the appeal. Conclusions 2.4.2 The Tribunal held that, in view of the expiry of the restraint period, the appeal against the whole time member's order had been rendered infructuous and dismissed it on that ground, while separately dismissing the penalty appeal on merits.