TaxTMI 
TaxTMI 
2015 (5) TMI 14
X X X X Extracts X X X X
X X X X Extracts X X X X
....g and otherwise dealing in securities directly or indirectly for a period of three years. The Impugned Order has been passed pursuant to a Show Cause Notice ('SCN') dated 25th June, 2013. All these appeals have been heard together and Appeal No. 331/2014 (DLF Ltd. v. SEBI) has been taken as the lead case in which detailed and exhaustive arguments have been advanced and its decision shall govern the fate of connected seven appeals. 2. Antecedental facts leading to the issuance of the SCN as well as passing of the Impugned Order are relevant and hence succinctly narrated herein below: 3. The Appellant is a Public Limited Company, registered under the Companies Act, 1956, with effect from 4th July, 1963, at New Delhi. It is mainly engaged in the business of real estate development since then. For the purpose of consolidation of fragmented pieces of land into a bigger chunk for development, the Appellant floats many subsidiaries or associate-companies which are divested after achieving the business objective. The appellant intended to make a public issue of 1,75,00,000 (one crore, seventy five lac) Equity shares of Rs. 2/- each for cash at a price of Rs. 525/- per equity ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le deeds were executed between Sudipti as a Vendee and Shri Pramod Jain and M/s. Mahavir Global Coal Private Limited as the Vendors for purchasing a piece of land. All this was done with the good offices extended by KKS as the Conforming Vendor. As a consideration for this transaction, KKS received Rs. 34,27,31,188/- (Rupees :Thirty Four Crore, Twenty Seven Lac, Thirty One Thousand, One Hundred and Eighty Eight only) by way of cheque from Sudipti. This payment seems to be in addition to the sum of Rs. 6.34 crore paid by different cheques to the vendors separately by Sudipti. After acquiring the land in question, Sudipti entered into a Development agreement with DLF Commercial Project Corporation ('DCPC') on 09.10.2006 whereby DCPC acquired the rights to substantially all the revenues from the development of the land, the exclusive right to develop as well as to control the use and disposition of land and the authority to transfer the title to the land. 6. KKS filed a criminal complaint on 26th March, 2007, mainly accusing Sudipti, its Directors and its authorized signatory of duping him of about Rs. 34 crore which he allegedly gave to Sudipti in cash and he got an FIR re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7, alleging that Sudipti, which was a sister concern of DLF Home and DLF Estate, had duped him of Rs. 34 Crore and that the Appellant was misguiding gullible investors by not following the law. KKS had also lodged an FIR with the Police on 26th April, 2007. Said complaint dated 4th June, 2007 of KKS was forwarded by the Respondent to the Appellant's Merchant Banker for appropriate action and the Merchant Banker, in turn, forwarded the said complaint to the Appellant on 25th June, 2007. The Appellant as well as the Merchant Bankers on 11th July, 2007 and 19th July, 2007, respectively replied to the Respondent to the effect that the complaint made by KKS was frivolous and hollow inasmuch as the three subsidiaries, i.e., Sudipti, Shalika and Felicite were not the subsidiaries of DLF Home, DLF Estate and DLF Retail after 30th November, 2006, and hence, there was no question of erstwhile subsidiaries or associates being mentioned in the second and fresh DRHP filed with the Respondent on 2nd January, 2007. Similarly, the claim for payment of about Rs. 34 crore in cash by KKS to Sudipti was also vehemently denied. Being dissatisfied, KKS approached the Hon'ble Delhi High Court by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecial emphasis to mention that we have not expressed any opinion, even remotely, on the merits of the case. The appeals are accordingly disposed of without any order as to costs." 9. In response to the above said directions dated 21st July, 2011, the Whole Time Member (1st WTM) of the Respondent, namely - Mr. Prashant Sharan, heard the parties and by order dated 20th October, 2011, directed an investigation into the complaints of KKS in respect of the Appellant and Sudipti. The operative portion of this order reads as under : "16. In view of the foregoing, the following decision is taken in respect of the complaints dated June 4, 2007 and July, 19, 2007. I. The Securities and Exchange Board of India shall investigate into the allegations levelled by the Complainant, Mr. Kimsuk Krishna Sinha in respect of DLF Limited and Sudipti Estates Private Limited. II. The said investigation shall focus on the violations, if any, of the provisions of the erstwhile Securities and Exchange Board of India (Disclosure and Investors Protection) Guidelines, 2000 read with the relevant provisions of the Companies Act, 1956. 17. A formal order would be issued appointing the Investigating....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rection of the '2nd WTM'. After a lapse of around nine months, the '2nd WTM' has passed the Impugned Order in question, which has led to the present appeal being preferred. 12. Before we deal with the respective contentions of the parties, it would be appropriate to take notice of a few factual developments, concerning the present dispute, which have taken place in the meanwhile. The FIR lodged by KKS on 26th April, 2007 was found to be false and meritless after thorough investigation into the allegations against the Appellant levelled by KKS. It was found by the Police that the allegation in the complaint against the Appellant was mainly advanced with a view to avoid liability to pay Short Term Capital Gains tax by KKS. Accordingly, the Police filed a Closure Report in the matter of such FIR before the Metropolitan Magistrate, who was pleased to dismiss the protest petition filed by KKS and to uphold the filing of the Closure Report by order dated 27th August, 2009. It appears that KKS has taken up the matter before the Appellate Authority and the same is pending. 13. Even while the proceedings before the Respondent against the Appellant were going on pursuan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ugned Order, being primarily punitive in nature, has been passed in excess of SEBI's jurisdiction. The Inquiry Officer erred in placing a restraint on the Appellant on an immediate basis when the alleged violations took place in the year 2007 without serving any public purpose. As far as materiality of information is concerned, it is stated that, as per clause 6.2 of the DIP Guidelines, materiality would be sufficient if the information, on being true and adequate, leads to an informed decision being made by the investors. In this context, it is contended that even if the Appellant had incorrectly shown the three companies as related parties, it would not have contributed in any way to the investors' decision. This is because the Appellant had accounted for its interest in Sudipti's land by delineating its sole development right on Sudipti's land in the Prospectus. The Impugned Order ignores and is also silent on the fact that investors have not come forward with any kind of grievance regarding any alleged wrong or inadequate disclosure in the Offer Documents. Neither has the Appellant benefitted in any way from the alleged inadequate disclosure nor has any loss bee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mission to come out with the IPO by way of the Second DRHP. 19. Turning to another important limb of his arguments on the question of "Control" of the Board of Shalika, Sudipti and Felicite despite their disinvestment by the Appellant-Company, it is submitted by Shri Janak Dwarkadas that under the Companies Act, 1956, the test of "Control" is referable to the composition of the Board of Directors by controlling appointment thereto and removal therefrom and not otherwise. There is nothing in the Impugned Order to substantiate the allegation that the Appellant exercised any kind of control over Shalika, Sudipti and Felicite even after the transfer of shares was effectuated. This has been alleged purely on the basis that the employees of the Appellant's subsidiaries were on the boards of these three companies. The term "control" as envisaged in Section 4 of the Companies Act, 1956, does not include the meaning that SEBI is purporting to give to it. There are two tests provided in the Section, viz., (i) the controlling company should hold more than half of the share capital of the other, and (ii) the controlling company should control the composition of the board of directors of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... became co- terminus with the employment of their respective spouses with the Appellant- Company. It is not barred by either Section 4 of the Companies Act, 1956, and/or AS-21, particularly, for determining the parent-subsidiary relationship. It is also denied by the Appellant that money to purchase shares of Felicite was funded by the respective husbands of transferees who were the KMPs of the Appellant-Company. In this connection, it is submitted that the spouses who ventured to invest in the shares of Felicite or other companies of the Appellant did it by employing funds available from the joint accounts they held with their husbands, and there cannot be any legal bar on such expenditure by the wife from out of any such joint account. 22. Further, referring to the allegations regarding the provisions of Clause 6.10.2.3 of the DIP Guidelines, it is submitted on behalf of the Appellant that the said Clause pertains to the disclosure with respect to the Financial Statement of the Issuer Company. In terms of Clause 6.10.2.1, a Prospectus is required to contain a report by the Auditors of the Issuer Company. In this connection, Shri Dwarkadas, Learned Sr. Counsel, has reiterated f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the Appellant guilty of violating the PFUTP Regulations and section 12A of the SEBI Act. The Respondent has failed to appreciate that the definition of "dealing in securities" does not encompass "buying, selling or subscribing pursuant to any issue of securities or agreeing to buy, sell or subscribe to any issue of any securities". And hence would not attract Regulations 3 and 4 of the Regulations. The respondent has erred in holding the Appellant guilty of contravention of the PFUTP Regulations, including "fraud", purely on the premise that the definition of "fraud" in the PFUTP Regulations is inclusive. The Impugned Order wrongly holds the Appellant guilty of contravention of Clause 9.1 of the DIP Guidelines. The Appellant submits that the order dated 21st July, 2011 passed by the Hon'ble Delhi High Court required SEBI to examine only the complaints made by KKS to the Respondent dated 4th June, 2007 and 19th July, 2007. 25. The Respondent has filed a detailed affidavit on 01.12.2014 before this Tribunal seeking to justify the impugned action. Shri Rafique Dada, Learned Senior Counsel, also advanced lengthy, strenuous and meaningful arguments in support thereof. It is m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vely. It is argued by Shri Dada that the applicant did not provide any break up of amounts to show that the payment towards the purchase of shares of Shalika was a component of the composite payments made by Felicite. 28. Next, the Respondent contends that the equity share holding of Felicite, i.e., holding company of Shalika and Sudipti was bought by Mrs. Madhulika Basak, Mrs. Padmaja Sanka and Mrs. Niti Saxena, respectively, who happened to be the wives of Mr. Surojit Basak, Mr. Ramesh Sanka and Mr. Joy Saxena, working under the Appellant. It is also contended that the payments for this purchase of shares to Felicite were made by these housewives from the bank accounts held by them jointly with their respective husbands. Therefore, the three payments of Rs. 30,000/-, Rs. 40,000/- and Rs. 30,000/- were, in fact, made by Mr. Surojit Basak, Mr. Ramesh Sanka and Mr. Joy Saxena to "DLF-Home", DLF Retail and DFL Estate respectively as consideration for the equity shares of Felicite, and hence were all sham transactions. 29. Respondent further contends that even after the alleged transfer of control of Felicite to the three housewives, Felicite received a payment of Rs. 2,00,00,00....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by it to the Respondent for the purpose of its IPO. 32. On the strength of the above submissions, Shri Dada, Ld. Sr. Counsel for the Respondent, submits that being entities controlled by the Appellant, the three companies were related parties in terms of AS-18 as the same were squarely covered by the definition of related party, related party transactions and significant influence as provided in the Accounting Standards. Shri Dada has drawn our attention towards the definitions of Related Party Transaction, Control, Significant Influence, etc. as occurring in AS-18. Shri Dada has submitted that a joint reading of the aforesaid definitions would clearly show that the three companies were related parties of the Appellant within the terms of AS-18, as the Appellant had the ability to control and exercise significant influence on the three companies in the making of financial and/or operating decisions. The failure to make disclosures with regard to the related party transactions pertaining to the three companies is a clear violation of Clause 6.9.6.6 of the DIP Guidelines. As the three companies were the subsidiaries of the Appellant under Clause 6.10.2.3 of DIP Guidelines, 2000, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r Documents with a view to mislead and defraud the investors in securities market in the matter of issuing shares to prospective investors makes it a fit case for invoking Section 12-A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations, 2003. The Respondent contends that the alleged plan to camouflage the association of the Appellant with the three subsidiaries through a series of sham transactions amounts to fraud. The Respondent, thus, alleges that the Appellant, in its Offer Documents, had failed to make disclosure on various counts like related party transactions, financial details of subsidiaries and outstanding litigation of subsidiaries thereby violating clauses 6.2, 6.9.6.6, 6.10.2.3, 6.11.1.2, 6.15.2 and 9.1 of the DIP Guidelines, 2000. 35. We have also heard Shri B.M. Chatterjee, Ld. Sr. Counsel on behalf of Shri KKS in Appeal No. 331/2014 pursuant to the directions of Hon'ble Supreme Court. Shri Chatterjee, Ld. Sr. Counsel, fairly adopted the arguments of Sebi in defending the impugned order. He, however, intended to file certain documents, which he had not brought to the notice of the Hon'ble Delhi High Court or the 1st WTM, who had offered KKS ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng on behalf of the Appellants also espoused the arguments advanced by Ld. Sr. Counsel for DLF in an effective and crisp manner and submitted that in the absence of any provision under the SEBI Act making the Directors/CFO automatically liable for the offences allegedly committed by the company, Sebi is not justified in passing the impugned order against the Directors/CFO of DLF. In support of the above submission reliance is placed on the decisions of the Hon'ble Apex Court in the case of Maksud Saiyed v. State of Gujarat [2008] 5 SCC 668, CCE v. Brindavan Beverages (P.) Ltd. [2007] 5 SCC 388 and Collector of Customs v. Tin Plate Co. of India Ltd. [1997] 10 SCC 538. Reliance is also placed on decision of the Apex Court in Sunil Bharti Mittal v. CEB [Criminal Appeal No. 34 of 2015, dated 9-1-2015] in support of the contention that liability for offending acts of a company can be foisted on its directors only when the applicable statute specifically provides for vicarious liability contained in the statute, there has to be a specific act attributable to a director so as to hold such director responsible for the offending acts committed by or on behalf of the company. Relying on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lled upon Sebi to examine the complaints dated 4th June, 2007 and 19th July, 2007, preferred by KKS and take a decision after hearing the parties. Pursuant thereto, a WTM of Sebi, namely, Shri Prashant Sharan, (1st WTM) held certain hearings in the matter and after affording an opportunity of being heard to the parties and in the light of the directions of Hon'ble Division Bench of High Court, passed an order dated 20th October, 2011, directing an investigation to be conducted into the allegations levelled by KKS in respect of DLF and Sudipti, focusing on violations, if any, of the provisions of DIP Guidelines, 2000, read with relevant provisions of the Companies Act, 1956. The SCN dated 25th June, 2013 and the Impugned Order dated 10th October, 2014, passed by the "2nd WTM", Shri Rajiv Agarwal, however, expanded the scope of the enquiry by incorporating alleged the violation of the PFUTP Regulations by the Appellant which was conspicuously missing in the order passed by a Division Bench of Hon'ble High Court of Delhi and also in the order dated 20th October, 2011 passed by the "1st WTM". 40. The SCN dated 25th June, 2013, states that DLF, its Directors and its Chief Fin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d and defraud the investors in the securities market in connection with the issue of shares of DLF? 42. Issue No. 1 mainly concerns with the allegation that the transaction of transfer of shares by Appellant in the three companies was not genuine and that the Appellant continued to control the same despite divestment. In paragraph 18(e) of the Impugned Order the "2nd WTM" has himself noted that on the date of filing of the second DRHP with Sebi, i.e., on 2nd January, 2007, as a result of the transfer of shares by the Appellant, the three companies, i.e., Shalika Sudipti and Felicite were no longer the subsidiaries of DLF. Therefore, the question to be considered, as regards Issue No. 1 enumerated herein-above, is the genuineness of the transactions leading to divestment of the three companies. The determination of this question will tell us whether DLF continued its control over these three companies post-divestment and if it is so, whether DLF violated Clause 6.10.2.3 of the DIP Guidelines, read with other clauses, by not disclosing the same in the "Offer Documents". This is the main allegation levelled against the Appellant as regards Issue No. 1. In order to decide Issue No. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsequently also of Company A, by virtue of clause (c) above, and so on. (2) For the purposes of sub-section (1), the composition of a company's Board of directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships ; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect to which any of the following conditions is satisfied, that is to say - (a) that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid ; (b) that a person's appointment thereto follows necessarily from his appointment as director or manager of, or to any other office or employment in, that other company ; or (c) that the directorship is held by an individual nominated by that other company or a subsidiary thereof. "SAST Regulations, 1997 (i.e., the Takeover Code) Regulation 2 (1)(c):- "Control" shall include the right ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... statement may indicate the nature of provision or adjustments made or are yet to be made). 6.10.2.2 If the issuer company has no subsidiaries, the report shall: (a) so far as regards profits and losses, deal with the profits or losses of the issuer company (distinguishing items of a non- recurring nature) for each of the five financial years immediately preceding the issue of the Prospectus; and (b) so far as regards assets and liabilities, deal with the assets and liabilities of the issuer company at the last date to which the accounts of the issuer company were made up. 6.10.2.3 If the issuer company has subsidiaries, the report shall: (a) so far as regards profits and losses, deal separately with the issuer company's profits or losses as provided by 6.10.2.2 and in addition, deal either: (i) as a whole with the combined profits or losses of its subsidiaries, so far as they concern the members of the issuer company; or (ii) individually with the profits or losses of each subsidiary, so far as they concern the members of the issuer company; or, instead of dealing separately with the issuer company's profits or losses, deal as a whole with the profits ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve no application in the context of unlisted companies which propose to undertake an Initial Public Offering (IPO) since the purport and intent of the same is restricted to the context of takeovers, public offers and acquisition of shares in the listed companies. Therefore, reference made to the definition of 'Control' under the Takeover Code reflects a complete non-application of mind in this regard. This act of the Respondent to shop for clauses and provisions in different statutes, in an arbitrary manner, needs to be condemned. In fact, the pari materia principle ought to be invoked to promote uniformity and predictability in law in order to supplement and not supplant a rule of law by another. 46. Similarly, Accounting Standards are written/policy documents issued by expert accounting bodies, such as, the Institute of Chartered Accountants of India (ICAI), covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statements by the companies. The basic objective of the Accounting Standards is to standardize the diverse accounting policies and practices with a view to eliminate to the largest ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al statement of such companies. This is evident from the provisions of Section 227 of the Companies Act, 1956 as well. The Hon'ble Supreme Court in the case of J.K. Industries Ltd. v. Union of India [2007 (13) SCC 673] has held that these rules of 2006 are a legitimate aid to construction of the Companies Act as contemporanea expositio. 48. The present case is not one where the Statutory Auditors or Merchant Bankers, on whose shoulders lie the primary responsibility of making true and adequate disclosures, are sought to be proceeded against by the Respondent. The Appellant was bound by law to engage/hire their professional services for drafting and presenting the Offer Documents to Sebi for finalisation before the IPO could be actually opened up for public subscription after registering the same with the ROC. This is how the shares are finally listed on Stock Exchanges. In fact, Merchant Bankers and Auditors are mandatorily required to be engaged by a company to prepare and present Offer Documents to Sebi. They discharge their respective functions in bringing out an IPO on behalf of a company under the parameters statutorily prescribed by the Respondent itself and in case of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bition of the incorrectness of the findings of the Accountants and Merchant Bankers, which can be done only by investigating the conclusions arrived at by these entities and the procedures undertaken by them in arriving at such conclusions. Records clearly reveal that the Appellant had engaged the professional and specialized services of 8 to 10 Merchant Bankers and Auditors of national and international repute to advice, draft and float the Offer Documents. None of them has been proceeded against by the Respondent. Auditors can be said to be akin to gatekeepers. If the conclusions reached by them are liable to be ignored in such a callous manner, without at first finding any fault with the Auditors'/ Merchant Bankers' conduct, one wonders whether any purpose is served by having the Offer Documents audited to begin with. 50. The Respondent, if convinced that the information in the second DRHP was, in any manner, inadequate or untrue, in all fairness should have called upon the Merchant Bankers to incorporate additional facts about the three companies in question, in the second DRHP dated 2nd January, 2007, when it directed them vide letter dated 7th May, 2007, to include....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities. The definition makes it clear that both the conditions need to be present for control to be established. However, before attempting to determine whether or not the two ingredients of the definition have been satisfied in this case, we first need to deal with whether the three companies concerned can even be considered as subsidiaries of the Appellant in the first place. Only once this crucial aspect is decided does the question of control arise. The fact of the matter is that once a policy decision had been taken by DLF to divest all of its subsidiaries, followed by actual divestment of its interest in about 281 companies, there was no occasion for the Appellant to mention the three companies, in question, as subsidiaries or associates as that would have been a patently false statement on the part of the Appellant. And this factum was duly brought on record by the Appellant before Sebi. Another point to note is that hundreds of such so-called associates or subsidiaries sailing in the same boat were left untouched by Sebi. 52. Before holding that at the relevant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any such influence being exerted. So there is clearly no existence of the component of "significant influence" in this case. Therefore, the "2nd WTM" has totally misdirected himself in applying the definition of 'Control' as sitting in AS-23 to establish the charge of 'Control' against the Appellant-Company. 54. Even otherwise, the scheme, as envisaged under AS-23 mainly pertains to accounting for investment in associates in the preparation and presentation of consolidated financial statements by an Investor and the definition of associate in para 3.1 excludes subsidiary of an enterprise. Therefore, AS-23 cannot have any application in the present case where the Respondent itself is contending that the three companies, i.e., Shalika, Sudipti and Felicite were the subsidiaries of the Appellant-Company. Therefore, the finding in the Impugned Order to the effect that despite transfer of shares by DLF-Estate, DLF-Home and DLF-Retail, the three companies, namely - Shalika, Sudipti and Felicite continued to be the subsidiaries of the Appellant-Company for the purpose of AS-23 and, hence, ought to have been disclosed, as required by Clause 6.10.2.3, etc. of the DIP Guid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ebi were mandatorily to be complied with by the Appellant. The observations also ex-facie show that Sebi had conducted a threadbare analysis of the second DRHP, running into only about 500 pages, and compared it with the first DRHP. If the appellant had any intention to withhold from Sebi or from the public the factum of Shalika, Sudipti and Felicite being subsidiaries, it would not have mentioned the same in the second DRHP altogether. But this was not the case and, on the contrary, this factual aspect was duly brought to the notice of Sebi by the Appellant. This was the right time for Sebi was to have called upon the Appellant and rather its Merchant Bankers in the first instance to incorporate some more facts about Shalika, Sudipti and Felicite, if it felt that the relationship of the holding and the subsidiary company still persisted between them. This was not done for obscure reasons. 57. Sebi, therefore, cannot suddenly be allowed to take a somersault after seven years and come to a contrary view, particularly, at the instance of a complainant who had his own vested interest in the matter, and was not a share-holder of the Appellant or even an investor in the IPO or in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Directors of these three companies and not otherwise. Nothing is brought on record by the Respondent which could conclusively demonstrate that DLF had such unbridled discretion and that it ever attempted to appoint or remove any of the Directors of the three companies after their divestment. We find that the Impugned Order is full of incorrect inferences based on surmises, conjectures and some faint corroboration to support faulty and forced conclusions. 59. Furthermore, any attempt by DLF to remove the earlier Directors of the three companies in question post their divestment would have contravened the provisions of sub-section (2) of Section 4 of the Companies Act, 1956. Continuance of the earlier Board of Directors by an erstwhile subsidiary of a Holding-Company is an issue to be wholly addressed by such subsidiary or its share-holders and unless the erstwhile holding-company is shown to have exerted any sort of influence to keep unchanged the original Directors on the Board of the erstwhile subsidiaries or even remotely attempt to introduce its own nominees on the Board of such subsidiaries, the holding-company cannot be said to be exercise of control over the subsidiary de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....were composite payments made by Felicite to these three companies and included the above said considerations of Rs. 30,000/- each in the case of DLF-Estate and DLF-Home and Rs. 40,000/- in case of DLF-Retail. There is no reason to disbelieve this factual matrix of payment brought on record by the Appellant by way of affidavit duly annexing Statutory Auditors' certificate in respect thereof. If Sebi, at any time, thought this factum to be untrue, it could have very well asked DLF to produce account statement/ledger book entry to satisfy itself that the payment of Rs. 24,80,000/-; Rs. 24,80,000/-; and Rs. 10,20,000/- received by DLF-Estate, DLF-Home and DLF-Retail from Felicite also included the amounts payable by Felicite towards the consideration for purchasing 100% shares of Shalika. Even otherwise, these are not the criteria mentioned in the Companies Act, 1956 or the DIP Guidelines for determining control of a company over another. Once the challenged divestment went through, the Appellant stopped bothering itself with the goings-on in the three companies in question. It is ludicrous to try and find fault with the Appellant in a situation such as this, especially in the abse....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Thus, the mere fact that the Directors on the Board of the three companies who might have been the employees of the Appellant-Company or its wholly owned subsidiaries were not removed by the share-holders of these three erstwhile subsidiaries would not lead to an inference of decisive control over the composition of the Board of such companies by the Appellant-Company. We, therefore, hold that the Appellant did not control either the composition of the Board of Directors of these three companies or in any manner attempt to appoint or remove the earlier Directors which was the task of the share-holders of the three erstwhile subsidiaries post the total divestment of shares. A holding company, after it has sold its 100% shares in a subsidiary, practically becomes functus-officio qua the management and control of the erstwhile subsidiary. The finding on Issue No. 1 in the Impugned Order is, thus, unsustainable in law and on fact. Indeed, it is also not the Respondent's case that various share transfers, as reflected in the SCN itself were not legally effectuated. It is a matter of record that all these transactions did convey a complete and legal title on the respective transfer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oduced herein below for the sake of convenience : "31. The Patna High Court has cited this Court's judgment in Jodha Mal's case and also number of other judgments of the different High Courts. The High Court had also gone into the concept of "ownership" and referred to passages from G.W. Paton on Jurisprudence, Dias on Jurisprudence, Stroud's Judicial Dictionary and Pollock on Jurisprudence. We may use-fully extract certain passages from the judgment of the Patna High Court. 32. The learned Judges observed at page 361 : "The emphasis, therefore, in this statutory provision is that the tax under the Section is in respect of ownership. But this matter is not as simple as it looks. This leaves us to a more vexed question as to what is ownership. Should the assessment be made at the hands of the person who has the bare husk of the legal title or at the hands of the person who has the rights of an owner of a property in a practical sense? Enjoyment as an owner only in a practical sense can be attributed to the term "owner" in the context of this Section - a person who can exercise the rights of the owner and is entitled to the income from the property for his own be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....other person with the power of a residual ownership when such contingency arises which is not a case even here.' Thus, the concept of 'Dual Ownership' is not alien to law. By no stretch of the imagination can it be said that the Appellant did not have the total development rights in respect of the piece of land (35 acres) in question belonging to Sudipti. The Appellant did not, in any manner, defraud or mislead the prospective investors. We, therefore, hold that the finding on Issue No. 1 in the Impugned Order is perverse and liable to be set aside. 67. Regarding the remaining two issues, the main plank of arguments advanced by Shri Rafiqueue Dada, Ld. Sr. Counsel, centers around violation of certain other provisions of DIP Guidelines, 2000 by the Appellant as regards the non-disclosure of the three companies, i.e., Sudipti, Shalika and Felicite, as its subsidiaries and the FIR lodged by KKS on 26th April, 2007, against Sudipti/Pravin Kumar with Delhi Police. It is, therefore, essential to broadly analyze the scheme of DIP Guidelines, 2000, so as to appreciate the philosophy underlying these Guidelines and the arguments advanced by the Ld. Sr. Counsel, Shri Rafiqu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sue Obligations and Regulation 5.1 mandates that the Lead Merchant Banker shall exercise due diligence by satisfying himself about all aspects of the offering, veracity and adequacy of disclosure in the offer documents. This liability of a Merchant Banker continues even after the completion of the issue process. In addition, the lead Merchant Banker is also required to pay few crores of rupees towards the requisite fee as mentioned in Regulation 24-A of the SEBI (Merchant Bankers) Rules and Regulations, 1992, along with the Draft Offer to SEBI for processing the same. Regulation 5.3.1 also requires a Memorandum of Understanding (MOU) to be entered into between the Lead Merchant Banker and the Issuer Company, specifying their mutual rights, liabilities and obligations relating to the issue. This MOU is also required to be submitted to SEBI. Similarly, a Merchant Banker is required to furnish a 'Due Diligence' certificate to SEBI in the prescribed format and reflected in Schedule III along with the Draft Prospectus. There are other formalities which the lead Merchant Banker is required to perform in respect of the contents, etc. of the Offer Documents. Regulation 5.6 also pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r Document contains all information with regard to the Issuer Company and the Issue which is material in the context of the issue. Said information should be true and correct and/or not misleading in any material respect. Similarly, Regulation 6.7.1 provides that risk factors, other than those mentioned in Regulation 6.4.2.2 (a) (iv), (v) and (vi) shall be printed in clear readable font. The shall factor shall be determined on the basis of their materiality which, in turn, shall be decided taking into various factors mentioned in 6.7.4.1, 2, 3 and so on. Regulation 6.9 deals with the details of the Issuer Company and requires the company to give its Industry as well as Business Overview. Regulation 6.9.2.3 deals with the details of 'Property' or 'Purchase of Property'. Regulation 6.9.5 is an important clause and has many sub-clauses. It deals with management and includes composition of the Board of Directors and the details and interest of Directors, Managing Director, Whole Time Directors, etc. Regulation 6.9.5.8 deals with 'Key Management Personnel' and requires a paragraph on the "Key Managerial Personnel" to be incorporated in the Prospectus with full de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Indian Depository Receipts; Chapter VII deals with Post Issue Obligations.; Chapter VIII deals with Other Issue Requirements and Chapter VIII-A deals with the Green Shoe Option and have no bearing upon the issue involved in the case in hand. As such, the same are not being dealt with in any detail. 68.6 Chapter IX deals with guidelines on advertisement and only Regulation 9.1 is pressed into service by the Respondent in the SCN and it states that an Issue advertisement shall be truthful, fair and clear and shall not contain any statement which is untrue or misleading. 68.7 Chapter X deals with guidelines for Issue of Debt Instruments; Chapter XI deals with guidelines on Book Building. Chapter XII deals with Guidelines for Issue of Capital by Designated Financial Institutions. Chapter XII-A deals with Shelf Prospectus. Chapter XIII deals with Guidelines for Preferential Issues; Chapter XIII-A deals with Guidelines for Qualified Institutions Placement; Chapter XIV deals with Guidelines for Over the Counter Exchange of India Issues; Chapter XV deals with guidelines for Bonus Issues and Chapter XVI deals with Operational Guidelines, none of which find any place in the SCN. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....idiaries; and shall indicate as respects the assets and liabilities of the subsidiaries, the allowance to be made for persons other than the members of the issuer company." Clause 6.11.1.2 - "The information about outstanding litigations as per clause 6.11.1.1 (e) shall be furnished in respect of subsidiaries of the issuer company (if applicable)." Clause 6.15.2 - "Declaration - (a) The draft Prospectus (in case of issues other than fast track issues), red herring Prospectus and Prospectus shall be approved by the Board of Directors of the issuer and shall be signed by all Directors, the Chief Executive Officer, i.e., the Managing Director or Manager within the meaning of the Companies Act, 1956 and the Chief Financial Officer, i.e., the whole-time Finance Director or any other person heading the finance function and discharging that function. (b) The signatories shall further certify that all disclosures made in the Prospectus are true and correct.)" Clause 9.1 - "Guidelines on advertisement : 9.1.0 - An issue advertisement shall be truthful, fair and clear and shall not contain any statement which is untrue or misleading." 69.1 It is a matter of record that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Such litigations would also include disputed tax liabilities and prosecution under any enactment in respect of Schedule XIII of the Companies Act, 1956. Such a requirement of disclosing outstanding litigation is also cast upon the subsidiaries of the Issuer Company. A reading of the various ingredients of clause 6.11.1.2 read with clause 6.11.1.1(e) of the DIP Guidelines reveals that the mandate of law, regarding disclosure by an Issuer Company, has not been violated by the Appellant in any respect. 71. Although we have already held that Sudipti had ceased to be a subsidiary of the Appellant-Company as on the date of the IPO, assuming that it was still a subsidiary at the relevant point and that it was required to be disclosed in the Offer Document, we have to now analyze whether there is any evidence on record to show that DLF itself had knowledge of the FIR and its contents on the date of filing of the DRHP or later on the date of the IPO. The Appellant has submitted that it came to know about the filing of FIR against Sudipti and Mr. Pravin Kumar only on 25th June, 2007 when it received a complaint of KKS dated 4th June, 2007 through its Merchant Bankers. In fact, SEBI itself....
X X X X Extracts X X X X
X X X X Extracts X X X X
....High Court, in the case of Killick Nixon Ltd. v. Dhanraj Mills (P.) Ltd. [Manu/MH/003/1981] has held that knowledge of the directors of a company cannot be construed to be the knowledge of the company itself. If the knowledge of the directors is not the knowledge of the company, then the knowledge of a relative of a director can certainly not be the knowledge of the company. The SCN made the conjecture that DLF knew of the FIR before the Issue closed without any factual basis. 75. Next, in this regard we note that the FIR in any case does not amount to litigation in law, because in the case of a criminal proceeding, a case can be said to be initiated only when a competent court takes cognizance of the offence alleged in the charge sheet and not on the mere filing of an FIR. Therefore, the mere registration of an FIR does not lead to the inference that a case is instituted, which would mean "litigation" for the purposes of Clause 6.11.1.1(e) of the DIP Guidelines. In the case of Jamuna Singh v. Bhadhai Shah AIR 1964 SC 1541, the Hon'ble Supreme Court held that the scope of right of appeal as enshrined under Section 417(3) of the Criminal Procedure Code was limited to cases in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Issuer company. Therefore, the findings in this regard by the WTM are totally perverse because such an FIR which appears to have been filed for an individual's own interest and, particularly, for settling a claim of Rs. 34 crore cannot be said to have the propensity of jeopardizing the sole and exclusive development right acquired by the Appellant through DCPC so as to affect its larger operations and finances of developing thousands of acres of land in the case in hand. 78. Lastly, in the context of the FIR dated 27th April, 2007 lodged by KKS, Shri Janak Dwarkadas, Ld. Sr. Counsel for the Appellant, submitted that the police on a thorough investigation found the complaint to be bogus and unacceptable. The motivating factor for preferring such FIR by KKS was to create a safe cover for not paying the short term gains tax which he had earned in the sale of land to M/s. Sudipti Estate Private Limited. It is argued that the police, therefore, submitted a cancellation/closure report before the Additional Chief Metropolitan Magistrate. Finally, the Magistrate accepted the closure report by way of a detailed order dated 27th August, 2009. It seems that KKS has taken up this matte....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... these agreements give us the right to substantially all the revenues from the development, and we would also have the authority to transfer the title to the land..." (Ref. Page 73 of the Prospectus) (ii) "....In stocks we include the cost of land to which we own sole development rights. In respect of lands which we own sole development rights, we have all the benefits and rights in respect of the developments on such land, i.e., we have the exclusive right to develop as well as control its use and dispositions and should we develop plots on the whole or part of such land, we have the absolute right to sell the land to prospective purchasers on such terms and conditions as may be deemed fit and proper by us. Further, we are entitled to all the revenues from the development, including rent, net, in the case of a large number of our sole development agreements of a payment of Rs. 5 lac per acre to the grantor of the rights...." (Ref. Page 393 of the Prospectus). 81. The above disclosures cannot be termed as inadequate or untrue for the purpose of DIP Guidelines, particularly Clause 6.2, which requires that a Prospectus shall contain all material information which should be true....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r productive value, except the legal ownership over Sudipti's land. It was rightly argued by Shri Janak Dwarkadas, Ld. Sr. Counsel for the Appellant that divestment of these companies by the Appellant in favour of outsiders, who happened to be the wives of the Appellant's employees, was done, as a business strategy because these companies were no longer commercially relevant to the Appellant. It seems logical that such transferees were less likely to thwart the effectuation of the terms and conditions of the development agreement, mitigating the completion risk which could be faced by the Appellant in the development agreement. Such a way of transfer of shares/divestment is perfectly acceptable, not being prohibited by any law, rule or regulation. Moreover, the Prospectus had detailed such risk inherent in the business of the Appellant in para 10 at page 110 of the Prospectus itself. Therefore, once the Appellant's economic interest on Sudipti's land through the acquisition of a bundle of rights in relation thereof had been duly disclosed in the Offer Documents, it is difficult to accept the Respondent's finding that the Appellant was obliged to disclose Shalika....
X X X X Extracts X X X X
X X X X Extracts X X X X
....relationships; and secondly, transactions between a reporting enterprise and its related parties. The scope of the standard itself is limited by sub- paragraphs (a) to (e) of paragraph 3 of AS-18, which read as under : "(a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries); (b) associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture;Related Party Disclosures 273 (c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual; (d) key management personnel and relatives of such personnel; and (e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a mem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings with the reporting enterprise. Holding company - a company having one or more subsidiaries. Subsidiary - a company: (a) in which another company (the holding company) holds, either by itself and/or through one or more subsidiaries, more than one-half in nominal value of its equity share capital; or (b) of which another company (the holding company) controls, either by itself and/or through one or more subsidiaries, the composition of its board of directors. 88. The issue, in this regard, which falls for our consideration is whether there was any reportable related party relationship between the Appellant and the three companies which would have mandated disclosure of the three companies as Related Party in the Financial Statement? We would like to analyze the issue in the context of the five-part test laid down in sub-para (a) to (e) of para 3 of AS-18. The requirement laid down in sub-para (a) talks of 'control' by a company over others. We have already held in great detail herein above that the Appellant did not have any control over the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uments for the relevant period that such persons were not KMPs of the Appellant, for the purpose of AS-18 but Key Managerial Personnel of the Appellant, as per clause 6.9.5.8 of the DIP Guidelines and the same was duly disclosed in the Prospectus at pages 122 to 127 thereof under the title "Key Managerial employees." 90. There is a difference between the two categories, i.e., 'Key Managerial Personnel' as per Clause 6.9.5.8 of the DIP Guidelines on the one hand and the 'Key Management Personnel' of the Appellant, for the purpose of AS-18, who could exert significant influence over the three companies on the other. 'Key Management Personnel' under AS-18 is defined as those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. For example, in the case of a company, the managing director(s), whole time director(s), manager and any person in accordance with whose directions or instructions the board of directors of the company is accustomed to act, are usually considered key management personnel; whereas, 'Key Managerial Personnel' under the DIP Guidelines simply lays down....
X X X X Extracts X X X X
X X X X Extracts X X X X
....closure or wrong disclosure or inadequate disclosure. The two complaints in question were not registered by investors but by KKS and his complaint was to enforce his own alleged claim of Rs. 34 Crore against Sudipti. The impugned order caused such an adverse impact on the market that various shareholders, whose interest the impugned order claims to protect, lost Rs. 7 to 8 thousand crores in one day alone. This can never be compensated by anybody except the market mechanism, which takes its own time to do so. Creating such chaos in the capital market by passing a seemingly innocuous order, if not reckless, cannot be said to satisfy the twin objectives underlying the Sebi Act, 1992. Therefore, the finding on Issue Nos. 2 and 3 by the 2nd WTM are held to be misconceived and deserve to be quashed. 94. The invocation of the PFUTP Regulations in the present case was seriously contested by Shri Janak Dwarkadas with Shri J. J. Bhatt and Shri Saurabh Joshi, all Ld. Sr. Advocates, who appeared for various Appellants. Shri Rafique Dada, Ld. Sr. Advocate for Respondent, vehemently opposed the proposition put forth by the Appellant that in the light of the Hon'ble Delhi High Court's....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions are a self-contained code and prescribe a detailed procedure for investigation of any fraudulent act by a person and imposition of penalty, if any, on allegations being proved. Regulation 5 categorically lays down that PPFUTP would trigger where the Chairman, a Member or the Executive Director of Sebi has "reasonable ground to believe" that certain transactions in the Securities are taking place in violation of the PPFUTP Regulation and more importantly in a manner detrimental to the investors' interest. Once such a satisfaction is arrived at "by an order in writing" the Appointing Authority, i.e., the Chairman, Member or Executive Director can direct appointment of an Investigating Authority not below the rank of the Divisional Chief. Next, on completion of such investigation by the Investigating Officer, he is required to submit a report to the Board under Section 11-C of the Sebi Act, 1992, read with Regulations 9 and 10 of the PFUTP Regulations. Regulation 10 specifically provides for consideration of the report by the Board and granting a reasonable opportunity of being heard to the persons likely to be affected by such consideration and issue necessary directions or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n application before Additional Tenancy Aval Karkun, Miraj, against the landlord and his transferees claiming to be the tenant-in-possession and that the so called surrender was a sham transaction. Said application was dismissed by the Additional Tenancy Aval Karkun, Miraj, and hence the applicant filed Tenancy Appeal before a Special Deputy Collector, Sangli, who held that the impugned order relating to the surrender of tenancy was not passed by a Mamlatdar, as required by the tenancy law and consequently it was without jurisdiction and hence void. 98. The landlord then preferred two Revision Applications before the Maharashtra Revenue Tribunal, which were dismissed by the Tribunal. Similarly, the High Court of Bombay also dismissed two writ petitions filed by the landlord under Article 227 of the Constitution of India. The matter, thus, reached the Hon'ble Supreme Court, which held that the whole process of verification and recording of statements of landlord and tenants and the consequent surrender of land by the tenant to the landlord must have been recorded before the mamlatdar and not before the Circle Officer. Therefore, the orders of Deputy Collector, Tenancy Tribuna....
X X X X Extracts X X X X
X X X X Extracts X X X X
....951, and disconnected the telephones on similar grounds as the Administrator of the Delhi Government had already done. On being challenged, the High Court of Delhi allowed the Writ Petition and quashed the impugned order and further directed restoration of the telephones to the petitioners. Union of India, feeling aggrieved by the order of the High Court, carried a Special Appeal to the Appellate Bench of the High Court. The subscribers (original petitioners), inter alia, contended before the appellate bench of the High Court that the Divisional Engineer did not apply his mind and record his own reasons about the correspondence of 'any emergency' and, as such, there was contravention of Rules 421 and 422 of the Telegraph Rules. It was argued that the emergency contemplated by Rule 422 is not the same as a 'public emergency' declared under Section 5, but it is an emergency arising out of the breakdown of the telecommunications due to a technical defect, labour trouble, viz. major fire or the like, the existence of which was to be established to the satisfaction of the Divisional Engineer and not any extraneous authority. Stress was laid, in this connection, on the fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was not germane to an action under that rule, vitiates the impugned order, particularly when it is manifest that in making the impugned order, the General Manager was influenced more by this ground and less, if at all, by the existence of 'public emergency' certified by the Delhi Administration." 100. Similarly, in a recent case , J. Jayalalithaa v. State of Karnataka [2014] 2 SCC 401, the Hon'ble Supreme Court has revisited the entire jurisprudence beginning from the case of Taylor v. Taylor [1875] 1 Ch. D 426 has held that the principle behind the rule is that if these were not so, the statutory provision might as well not have been enacted. In para 34 of the said judgment, the Hon'ble Apex Court has specifically held that "There is yet an uncontroverted legal principle that when the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. In other words, where a statute requires to do a certain thing in a certain way, the thing must be done in that way and not contrary to it at all. Other methods or mode of performance are impliedly and necessarily forbidden. The aforesaid s....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Sr. Counsel for the appellant, to impress upon two points :- firstly, that object of an issue in the capital market is primarily to build up capital by involving public. Therefore, as held in para 33 of Morgan Stanley Mutual Fund (supra), it is not a practice relating to carrying on any trade. Para 33 of the said judgment reads as under : "33. Certainly, clause (iii) and (iv) of Section 2 (1)(c) of the Act do not arise in this case. Therefore, what requires to be examined is, whether any unfair trade practice has been adopted. The expression 'unfair trade practice' as per rules shall have the same meaning as defined under Section 36-A of Monopolies and Restrictive Trade Practices Act, 1969. That again cannot apply because the company is not trading in shares. The share means a share in the capital. The object of issuing the same is for building up capital. To raise capital, means making arrangements for carrying on the trade. It is not a practice relating to the carrying of any trade. Creation of share capital without allotment of share does not bring shares into existence. Therefore, our answer is that a prospective investor like the respondent or the association is n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther before being listed on the Stock Exchanges but no actual investor ever complained of any inadequacy of information in the Offer Documents which could have disabled the person to take an informed decision in the matter of investment in the IPO floated by the Appellant- Company pursuant to 2nd DRHP dated 2nd January, 2007. During this long process, neither did Sebi nor did any investor raise any objection as to the inadequacy or the alleged untrue nature of the disclosures in the Offer Documents. The records also reveal that Sebi did find all the disclosures made by the Appellant in the Offer Documents to be satisfactory before the actual listing of the Appellant's shares on Stock Exchanges. 105. Furthermore, 'Fraud' is defined in Regulation 3 (c) of the PFUTP Regulation as under : "3(c) 'fraud' includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....It provides that an act of an Issuer of a security would be fraud if a mis-information affects the market price of the security. There is no discussion in the SCN or in the Impugned Order about this aspect. Next, the 2nd WTM is not sure as to what the specific charge of fraud against the Appellant is, for which it is being condemned as guilty of fraud. Elaborating further this point, we make it clear that the Respondent has levelled no specific allegation of violation of any sub-section of Section 12 of Sebi Act, 1992 or any particular regulation or sub-regulation of PFUTP Regulations out of the many instances of fraud mentioned in the definition itself in the Impugned Order, except a bundle of legal provisions. The alleged manner in which that bundle of legal provisions has been violated is left completely unexplained by the Respondent. The Impugned Order is absolutely ambiguous in applying facts as to which specific act of the Appellant allegedly fits into the parameters of fraud prescribed by a particular sub-regulation or regulation of the PFUTP Regulations or that of Section 12 of the SEBI Act, 1992. The charge in the SCN as well as the findings in this regard in the impugned ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n) prohibits circular transactions between intermediaries which are mainly intended to increase commission and also to provide a false appearance of trading in that 11 security. Paras 12 to 15 of the Impugned Order deal with the allegedly manipulative way in which the trades in question were synchronized. xxx xxx xxx xxx xxx xxx xxx 12. Thus, a perusal of the above stated provisions of Regulation 4 and its sub-regulations reveals that the allegation of fraud can be levelled against a person/entity only for good reasons and on the basis of clear and unambiguous evidence. Such an allegation of fraud may shake the very foundation of the business of the entity in question and may adversely affect the same. Therefore, the onerous task of proving such a serious allegation lies on the person levelling such accusation on the basis of preponderance of probability. A minute reading of the Adjudicating Officer's Impugned Order dated December 14, 2012 does not demonstrate the manner in which the Appellant's actions have led to the creation of a false market and the basis on which the Appellant has 13 been condemned for the commission of fraud, that too in connivance with others. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he second DRHP along in a Delta View document truly giving all the details. Sebi issued observations, running into more than 90 pages, to the Merchant Bankers of the Appellant on 7th May, 2007 for compliance before the second DRHP could actually be converted into the RHP so as to enable the Appellant to file it before the ROC, which is the pre-requisite for getting its shares listed on the Stock Exchange. Pursuant to the letter dated 7th May, 2007 issued by the Sebi, the Appellant converted its DRHP into RHP after complying with the requirements provided in the said letter and filed it before the ROC and the IPO was opened for subscription between 11th and 14th June, 2007. Thereafter, the final prospectus was filed by the Appellant with the ROC on 18th June, 2007 and, thus, the shares were listed on 5th July, 2007. 110. The complaint dated 4th June, 2007, filed by KKS before Sebi did contain the allegation of filing of FIR over and above the main complaint of him being allegedly duped of Rs. 34 Crores by Sudipti and Mr. Pravin Kumar. Sebi did not feel it appropriate to take any action against the Appellant on the complaint dated 4th June, 2007, except seeking some clarification ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tainment of the Rule of Law. For the fault of a few, the glorious and glittering name of the judiciary cannot be permitted to be made ugly. It is the policy and purpose of law, to have speedy justice for which efforts are required to be made to come to the expectation of the society of ensuring speedy, untainted and unpolluted justice." In the same judgment, para 38 further states that : "In 1961, a learned Judge of the Patna High Court expressed his anguish when a Magistrate took nine months to pronounce a judgment. The words used by him for expressing his judicial wrath are the following: The Magistrate who cannot find time to write judgment within reasonable time after hearing arguments ought not do any judicial work at all. This Court strongly disapproves the Magistrates making such a tremendous delay in the delivery of his judgments." 112.1 We, therefore, safely conclude that an undue delay of about nine months in writing the Impugned Order in the present case is fatal to the concept of fair hearing, rule of law and even violative of Article 21 of the Constitution of India read with Article 14 thereof. Prejudice to a litigant is inherent and writ large due to such ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....C 152. It is misplaced inasmuch as the present case is totally distinguishable from the facts of Narayanan's case. In the case of Narayanan, specific role of directors to inflate figures of the companies revenue-profits and security deposits etc., for personal gain was duly investigated and there was also a definite finding to that effect in that case. A punishment, therefore, cannot be imposed for the sake of imposition. We may, however, observe that every law seeks to lay down a norm which is required to be followed by all the citizens. Any violation of such a law framed by the Legislature has to be viewed seriously. Various such interconnected norms, laid down by the Parliament or a delegate, provide for certain coercive techniques to secure compliance. A punishment primarily seeks to cause a loss or a deprivation of a right or a privilege or an advantage hitherto freely enjoyed by a person. Therefore, imposition of any punishment on a violator has to be precise, specific and a well thought-of measure, purely with a view to seek the ends of justice. If the punishment proves to be counter-productive and manifestly causes more harm than benefit to the members of society, whose....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of rules framed by the Respondent, has a distinct rationale behind it. The blurring of lines between different laws and regulations cannot lead to any desirable outcome. Yet, the second WTM, who passed the Impugned Order, has applied the PFUTP Regulations in total disregard of the due procedure incorporated in the said Regulations for alleging and proving a charge of fraud against a company. The allegation of fraud against any company is an extremely serious matter and cannot be pressed into service in a casual manner, as has been done in the present case. 117. Once the business modality of the appellant in floating various associate companies or subsidiaries is not faulted with by the respondent on any legal standard laid down in this regard either in the Companies Act or in the Regulations framed by the respondent under SEBI Act, 1992, the Respondent is not justified in condemning the appellant for adopting such a business model. The respondent seems to have diverted the issue by leaving out Kimsukh Sinha's main complaint of him being duped of Rs. 34 Crore and making it a case of the appellant duping investors. In order to reach this conclusion of the Appellant misguiding ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O in question. 118. The jumbling up of Rules, Regulations and various provisions occurring and operating in different fields, by the respondents, in the Impugned Order, has led to a grave miscarriage of justice in the present case, inasmuch as the investors have suffered a loss to the tune of thousands of crores of rupees in the capital market on the day following the passing of the order making it a case of "over-regulation". This is certainly not the objective of conferring wide discretionary powers upon Sebi. It has to apply its mind to every set of facts dispassionately without being influenced by any whistle blower. It is pertinent to mention here that while Sebi was being conferred with vast powers in the year 2000 by way of a thorough amendment of the SEBI Act, 1992, the Dhanuka Committee, which had recommended the conferment of such powers, had itself warned against their abuse in clear terms by stating that "Sebi and its officers are often called upon to act both as Regulators and adjudicators of the first instance and consequently there is a considerable scope of mixing up of these rules and for enthusiastic interpretation and enforcement, sometimes without having due ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing in securities directly or indirectly in any manner whatsoever for a period of three years under Section 11, 11A & 11B of SEBI Act. 122. Facts relevant for deciding the issues raised in these appeals are as follows:- (a) DLF is a public limited company engaged in the business of real estate development. (b) In the year 2006 DLF decided to invite public to subscribe to the securities offered by it through 'Initial Public Offer' ('IPO' for short). (c) As is required in law, DLF filed before SEBI 'Draft Red Herring Prospectus' ('DRHP') on May 11, 2006 wherein it was inter alia disclosed that Sudipti Estates Pvt. Ltd. ('Sudipti') , Shalika Estate Developers Pvt. Ltd. ('Shalika') and Felicite Builders and Construction Pvt. Ltd. ('Felicite') were 'associate companies' of DLF. (d) Before SEBI could consider the said DRHP, DLF withdrew the said DRHP on August 31, 2006 and filed fresh DRHP (second DRHP) on January 2, 2007. In the second DRHP, Sudipti, Shalika and Felicite were not disclosed as 'Associate Companies' as according to DLF, the said three companies had by then ceased to be associates of DLF....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Companies Act, 1956 as well as the SEBI Guidelines. (h) DLF complied with the observations made by SEBI on the DRHP and issued the Red Herring Prospectus (RHP) on 25.5.2007. Thereafter the IPO opened for public subscription on 11.6.2007 and closed on 14.6.2007. The final prospectus was filed with the Registrar of Companies on 18.6.2007 and shares of DLF were listed on the Bombay Stock Exchange (BSE) and National Stock Exchange ('NSE') on 5.7.2007. (i) In the meantime, on 15.6.2007 SEBI received a complaint dated 4.6.2007 from Mr. K. K. Sinha wherein contents of FIR dated 26.4.2007 were reiterated and it was alleged that Sudipti is a subsidiary of DLF and since Sudpti had duped Mr. K. K. Sinha, SEBI was requested to investigate DLF and take steps against DLF so that gullible investors are not lured into investing in the shares of DLF which are being offered to the investors through the IPO. On 25/06/2007 SEBI forwarded the complaint dated 04/06/2007 to DLF through its Merchant Banker for its comments. (j) As there was delay on part of SEBI in taking action against DLF, Mr. K. K. Sinha filed another complaint on 19.7.2007 and also initiated proceedings in that beha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ice is yet to be adjudicated. (m) the appellants filed their reply to the show cause notice dated 25/06/2013 denying the allegations made in the show cause notice. Thereafter, personal hearing was offered to the appellants on 04/12/2013 and 15/01/2014. (n) by the impugned order passed on 10/10/2014 the appellants are held guilty of violating DIP Guidelines and PFUTP Regulations and accordingly appellants are restrained from accessing the securities market and prohibited from buying, selling or dealing in securities in any manner whatsoever for a period of three years. Challenging the impugned order, all these appeals are filed. 123. Mr. Dwarkadas, Mr. Bhatt, Mr. Joshi, learned senior Advocates and Mr. Parekh, learned Advocate appearing on behalf of respective appellants submitted that the impugned order passed after about 9 months from the last date of personal hearing suffers from various infirmities and the said order has been passed by totally ignoring and misconstruing the arguments advanced on behalf of the appellants. It is submitted that even though DLF was disassociated with Sudipti, Shalika and Felicite prior to the filing of second DRHP due to divestment of the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....authority to transfer the said land. Thus, by virtue of above development agreement, DLF (through DCPC) acquired Sole Development Rights over Sudipti's land and by that development agreement Sudipti granted DCPC the right to develop the land for a fixed consideration of Rs. 5 lac per acre. Apart from the above, under the aforesaid Development Agreement, DCPC had the absolute right to sell the said land to prospective purchasers on such terms and conditions as DCPC deemed it fit and proper. (e) On 29.11.2006 entire shareholding of Felicite held by DHDL (30%), DEDL (30%) and DRDL (40%) were sold to Mrs. Madhulika Basak, Mrs. Niti Saxena and Mrs. Padmaja Sanka, who happened to be wives of Mr. Surojit Basak, Mr. Joy Sexana and Mr. Ramesh Sanka respectively who were employees of DLF. (f) On 30.11.2006, 100% shares of Shalika held by DHDL (30%), DEDL (30%) and DRDL (40%) were sold to Felicite. On the same day 100% shares of Sudipti held by DHDL (50%) and DEDL (50%) were sold to Shalika. Thus, as a result of above transactions that took place on 29th and 30th November, 2006 Sudipti became subsidiary of Shalika and Shalika became subsidiary of Felicite. In other words from 30.11.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ded in the impugned order are summarized as follows:- Violation of clause 6.2 of DIP Guidelines 128. Counsel for DLF submits that decision of SEBI in holding that divestment of shares of Felicite, Shalika and Sudipti by DLF (through its subsidiaries) was with a view to camouflage association of DLF with those three companies as dissociation and consequently, failure to disclose material information relating to those three companies in the offer documents amounts to violating clause 6.2 of DIP Guidelines cannot be sustained for the following reasons:- (a) As per clause 6.2 of DIP Guidelines, the prospectus should contain all material information which shall be true and adequate so as to enable the investors to make informed decision on the investment in the issue. In the present case, on the date of filing second DRHP on 2.1.2007, Sudipti, Shalika and Felicite had ceased to be subsidiaries/related parties and therefore there was no requirement of disclosing the said three companies in the prospectus and in fact disclosing the same in the prospectus would have been a misstatement in itself. (b) Without prejudice to the above and in the alternative, it is submitted that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t concept of dual ownership is recognised in India where the legal title remains with the owner whilst another person may be entitled to all benefits, advantages and privileges arising out of such land. In the present case, after the execution of development agreement, although legal title in respect of 35 acres of land remained with Sudipti, all rights flowing therefrom were vested with DLF Ltd and since that material information was disclosed, SEBI is not justified in holding that the appellants have suppressed material information. (iv) After execution of the Development Agreement which effectively transferred all benefits, advantages and privileges in Sudipti's 35 acre land in favour of DLF (through DCPC), the three companies were virtually rendered as shells, with no real economic or productive value in them except the legal ownership over Sudipti's land. The divestment of the shares of the three companies by DLF in favour of outsiders (which turned out to be wives of DLF's employees) were undertaken because the said three companies were no longer commercially relevant to DLF and the divestment of shares was not with a view to exercise control over those three c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....securities market are absent in the present case. The main object of the said provision is to safeguard the market and not to penalise persons for any violation. Section 11/11B are not penal provisions but are preventive and remedial in nature. In the absence of any evidence on record to suggest that any member of the public was misled into investing in the IPO of DLF, SEBI is not justified in passing the impugned order against the appellant. In support of the above contention reliance is placed on decisions in the case of Indian Bank Mutual Fund & Ors vs. SEBI [Manu/DE/2648/2006], UBS Securities Asia Ltd. vs. SEBI [(2005) SAT 96], Ritesh Aggarwal and Anr. Vs. SEBI [(2008) 8 SCC 205], BPL Ltd. vs. SEBI [(2002) SAT 19], Chairman vs. Shriram Mutual Funds [(2006) 5 SCC 361] and Bharjatiya Steel Industries vs. CST [(2008) 11 SCC 617]. (viii) The impugned order completely fails to address the issue of complete absence of any investor prejudice as a result of the alleged discrepancies in DLF's offer documents. Thus the impugned order is conspicuously silent on the fundamental issue of whether DLF's actions led to any investor prejudice. It is a serious infirmity in the impugne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tifying how the purported non disclosures were material and worse still how the prospective investors could be potentially misled or defrauded. Similarly, Para 48 of the impugned order records that "... I am satisfied that the violations as found in this case are grave and have larger implications on the safety and integrity of the securities market...". There is no basis for such sweeping statement and the said finding is entirely unsubstantiated. Violation of clause 6.10.2.3 of DIP Guidelines 129. Counsel for DLF submitted submit that the findings recorded in para 37 of the impugned order that by failing to disclose in the offer documents the financial details relating to its subsidiaries, DLF has violated clause 6.10.2.3 of DIP Guidelines, cannot be sustained for the following reasons:- (a) Clause 6.10.2.3 of DIP Guidelines is relatable to the report to be prepared by the auditors of the issuer company. In the present case, neither the report prepared by the auditors is questioned nor adverted to it in the show cause notice and therefore, the allegation of contravention of clause 6.10.2.3 is simply not maintainable against DLF. (b) Post divestment of shares by DEDL, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the shareholders of Felicite, Shalika and Sudipti could not appoint directors without permission/approval by DLF. Thus the three companies were not subsidiaries of DLF and therefore were not included as such in the report of the auditor in the offer documents. Moreover, even assuming for the sake of argument that such facts and circumstances exist, even then the legal tests specified under Section 4 of the Companies Act, 1956 are not met with. (f) Allegation in the show cause notice (para 15.7) that under AS-23, the three companies ought to have been disclosed as subsidiaries of DLF Limited is without any merit, because, AS-23 relates to Accounting for Investments in Associates in the Consolidated Financial Statements. The definition of 'associates' in para 3.1 of AS-23 specifically excludes subsidiary/joint venture of the investor. Therefore, AS-23 can have no application to the present case where SEBI is contending that Felicite, Shalika and Sudipti were subsidiaries of DLF. In any event, the three companies cannot be reckoned as associates of DLF (post divestment) because there is nothing to show that post divestment DLF Limited had 'significant influence' ov....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (i) Decision of SEBI that even after the divestment of shares, DLF 'controlled' Felicite, Shalika and Sudipti as contemplated under Section 4 of the Companies Act, 1956 cannot be sustained for the following reasons:- (i) fact that post divestment, the spouses of shareholders of Felicite, were employees of DLF does not fulfil the test of 'control' under Section 4 of Companies Act. Moreover, the spouses of shareholders of Felicite were not Key Management Personnel but were Key Managerial Employees of DLF as disclosed in the offer documents in accordance with clause 6.9.5.8 of the DIP Guidelines. As per AS-18, Key Management Personnel are those persons who have authority for planning, directing and controlling the activities of DLF. Therefore, fact that the spouses of employees of DLF were Key Managerial Employees of DLF under clause 6.9.5.8 of DIP Guidelines could not be a ground for SEBI to consider them to be Key Management Personnel under AS-18 and accordingly hold them to be subject to control of DLF due to their employee-employer relationship. (ii) Allegation that the spouses of Key Managerial Employees continued to be shareholders of Felicite only till th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the ingredients of control over the composition of Board of Directors prescribed under Section 4(2) of the Companies Act, 1956 and AS 21. (v) Relying on a decision of the Kerala High Court in case of M. Velayudhan (supra), decision of the Delhi High Court in case of Oriental Industrial Investment Corpn. Ltd. (Supra). 487 and a decision of the Allahabad High Court in Manmohan Sharma (supra) it is contended that in the absence of any evidence to suggest even remotely that post divestment on 29-30 November, 2006 the shareholders of Felicite, Shalika and/or Sudipti could have appointed or removed a director without affirmation of DLF, it could not be held that post divestment DLF continued to control the three companies. There is no allegation that DLF on its own and/or its subsidiaries had any power in law to appoint/remove the directors of Felicite, Shalika and Sudipti. Fact that the shareholders of Felicite, Shalika and Sudipti did not change the prior Board of Directors of the three companies does not imply decisive control of DLF over the Board of Directors of those three companies as contemplated under Section 4(2) of the Companies Act, 1956 and AS 21. Similarly, mere fact tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the name of Sudipti so as to avoid exorbitant demands from sellers of land which DLF was desirous of developing and Sudipti was one of the vehicles to acquire land. Post acquisition of land, Sudipti transferred the development rights over the land in favour of DLF (through DCPC). There is, therefore, nothing questionable in DLF directly/indirectly financing the purchase of land by Sudipti. (xiii) Fact that DLF and Sudipti have filed simultaneous appeals against orders of Delhi High Court would not fulfil the test of Section 4 of the Companies Act, 1956 and AS 18. At any rate, DLF and Sudipti had engaged their own separate lawyers. Hence, decision of SEBI that even after divestment of shares, DLF continued to control, Felicite, Shalika and Sudipti is without any merit. (j) The financial statement i.e. balance sheet of DLF for the year ending March 31, 2007, was scrutinized by its statutory auditors who after applying themselves to the relevant facts and circumstances and the applicable test of parent/subsidiary relationship had not included the financials of Felicite, Shalika and Sudipti in the report prepared in accordance with clause 6.10.2.3. The same statutory auditor ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce the management decisions of any other company is not a test for reckoning control under Section 4 of the Companies Act, 1956. (m) Impugned order erroneously concludes in para 25 that .... "DLF through its employees was involved in day to day operations of these three companies and was associated with these three companies even after November 29-30, 2006...." on the basis of the fact that various persons who were employees of DLF became bank account signatories of Shalika, Sudipti and/or Felicite after November 30, 2006, overlooking DLF's submission that such appointment had no relationship whatsoever with their employment with DLF. (n) Findings recorded in para 24 to 32 of the impugned order viz. no change in the authorized bank account signatories/registered office address/statutory auditors of the three companies post November 30, 2006, allegation that shares of Sudipti were purchased by Shalika from the funds advanced by DEDL and DHDL and the findings relating to purchases made by Mrs. Basak, Mrs. Sanka and Mrs. Saxena etc. do not satisfy the test of control prescribed by Section 4 of Companies Act, 1956. The impugned order fails to appreciate that the law (i.e. Se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion the basis on which those certificates were issued and when, neither the Merchant Bankers, auditors nor the legal advisors were called upon to participate in the proceedings against DLF nor asked to explain/certify the contents of their certificates, SEBI is not justified in holding that DLF is guilty of not disclosing material fact relating to the said three companies. (q) M/s Walker, Chandiok & Co., statutory auditor of DLF were also auditors of DEDL for the Financial Year 2006-2007 i.e. the year in which the divestment took place. It cannot, therefore, be said that the statutory auditor was unaware of the circumstances surrounding the divestment. In fact, even after issuance of the show cause notice, the said statutory auditor has issued reconfirmatory opinion, which was placed before SEBI along with the reply to the show cause notice. Similarly, even after commencement of investigation by SEBI, 4 out of the 8 Merchant Bankers in the IPP have not expressed any reservations on the disclosures regarding the subsidiaries of DLF in the IPP documents. Contravention of clause 6.9.6.6 of DIP Guidelines 130. Clause 6.9.6.6 of DIP Guidelines provide that the offer document s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....alika and Felicite neither in terms of ownership over the voting power nor in terms of control over the composition of Board of Directors nor DLF had any interest in the voting power of Sudipti, Shalika and Felicite and there is nothing to indicate that DLF had the power to direct by statute or agreement the financial and/or operating policies of the three companies. (d) Impugned order overlooks the fact that the expression 'significant influence' as appearing in clause 10.4 of AS-18 is defined differently from the word 'control' as defined in clause 10.2 of AS-18. Therefore, it was obligatory for SEBI to show in the show cause notice through objective facts, in what manner DLF was in a position to exercise 'significant influence' over the affairs of Sudipti, Shalika and Felicite. SEBI has completely failed to discharge this burden of proof. Therefore, the allegation that DLF has violated clause 6.9.6.6 of the DIP Guidelines is wholly unsustainable. Contravention of clause 6.11.1.2 of the DIP Guidelines 134. Clause 6.11.1.1(e) of the DIP Guidelines provides that 'outstanding litigations', defaults etc. pertaining to matters likely to affe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gned order, it could not be held that DLF was aware of the filing of the FIR at the time of issuing the offer documents. (c) Fact that Mr. Praveen Kumar is the nephew of the Chairman of DLF cannot be a ground to assume that DLF would have been aware of the filing of FIR at any time before receipt of the letter dated June 25, 2007 from SEBI. In other words, Mr. Praveen Kumar's knowledge of the registration of the FIR (assuming that he himself was aware of the registration of the FIR prior to June 25, 2007) cannot be a ground to hold that DLF was aware of the FIR prior to June 25, 2007. (d) Relying on a decision of the Bombay High Court in the case of Killick Nixon Ltd. (Supra) it is submitted on behalf of DLF that knowledge of the directors of a company cannot be construed to be knowledge of the company itself. If the knowledge of the directors is not the knowledge of the company, then the knowledge of a relative of a director cannot certainly be knowledge of the company. (e) Without prejudice to the aforesaid submissions it is submitted that the FIR was not required to be disclosures in the offer documents for the following reasons:- (i) There was no requirement of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the land owned by Sudipti over which DLF had sole development rights. At any rate, the said FIR did not negatively impact the acquisition and continuance of the sole development rights in favour of DLF so as to be covered by clause 6.11.1.1(e) of the DIP Guidelines. Alternatively and without prejudice to the above, it is submitted that the mere lodgement of an FIR could never be said to have the propensity of jeopardizing the sole development rights acquired by DLF (through DCPC) so as to have effect on the 'operations and finances' of DLF. This would be more so since the sole development rights acquired from Sudipti constituted less than 0.05% of land bank of DLF as on the date of the offer documents. (vi) Since cognizance of the FIR was not even taken by a Competent Court, it does not become material and consequently does not become liable for disclosure just because one of the accused therein is a director in one or more subsidiaries of the issuer company. (vii) Clauses 6.11.1.1 and 6.11.1.2 of the DIP Guidelines do not require disclosure of litigation against the directors of subsidiaries of the issuer company. (viii) Findings recorded in para 41 of the impu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anker to ensure compliance of the said Guidelines by the Issuer Company. Clause 1.2.1 (iii) of the DIP Guidelines define the expression 'Advertisement' to include notices, brochures, pamphlets, circulars, show cards, catalogues, hoardings, playcards, posters, insertions in newspapers, pictures, films, cover pages of offer documents or any other print medium, radio, television programmes through any electronic medium. Without disclosing as to how DLF had contravened clause 9.1 of the DIP Guidelines it is alleged in the show cause notice that the appellants have violated clause 9.1 of the DIP Guidelines on ground that the appellants (a) employed a scheme by camouflaging the association of Sudipti with DLF as disassociation (b) failed to ensure that the offer document contained all material information which is true and adequate so as to enable the investors to make an informed investment decision in the issue (c) actively and knowingly suppressed certain material information and facts in the offer documents leading to misstatements in the offer documents so as to mislead and defraud the investors in securities market. In para 44 of the impugned order it is held that since the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ying the accuracy of the disclosures in the offer documents. They acted in a manner any prudent Board of a company would have acted. Therefore, since the Directors and the CFO acted honestly and bona fide on the basis of expert opinion, it cannot be said that they have violated clause 6.15.2 of the DIP Guidelines. Violations of PFUTP Regulations. 141. Counsel for DLF submitted that in the impugned order it is held that DLF by failing to ensure that the offer documents contain all material informations which are true and adequate so as to enable the investors to make an informed investment decision in the issue, and by actively and knowingly suppressing several material information and facts in the offer documents leading to misstatements in the offer documents with a view to mislead and defraud the investors in the securities market, DLF has violated Section 12A of the SEBI Act and PFUTP Regulations. It is submitted that the aforesaid findings are unsustainable for the following reasons: (a) PFUTP Regulation is a self-contained code and lays down the procedure for investigation and imposition of penalty for violating the said Regulations. Regulation 5 provides for appointm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o "dealing in securities" and hence would not attract Regulation 4(2). (d) "Dealing in Securities" as defined under Regulation 2(b) of PFUTP Regulations is an essential ingredient of the definition of "fraud" as defined under Regulation 2(c) of PFUTP Regulations. In the instant case it cannot be said that any act, omission or concealment was caused by DLF while "dealing in securities" which would satisfy the definition of "fraud" for the purposes of PFUTP Regulations. (e) Charge levelled against DLF relates to dissociation of Sudipti by the subsidiaries of DLF. In view of the fact that transfer of shareholding in Sudipti by DLF's subsidiaries being consummated by November 30, 2006, i.e. much prior to DLF's second DRHP, the alleged non-disclosure of association with Sudipti has no bearing or correlation to the securities market. (f) Assuming for the sake of argument that DLF could be said to be "dealing in securities" in connection with the IPO, even then DLF cannot be alleged to have committed "fraud" under Regulation 2(c) of PFUTP Regulations. This is for the reason that in order to constitute fraud, the impugned act, expression, omission or concealment should be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e satisfied in the present facts since DLF has demonstrated that it acted bona fide on the advise of experts such as merchant bankers, auditors and legal advisors while finalizing the offer documents. Since the offer documents had been rigorously scrutinized and approved by such independent external experts, none of whom pointed out any material discrepancy or non-compliance with applicable regulations while approving the offer documents, an allegation of deceitful contrivance and/or deliberate manipulation is hardly made out against DLF. The fact that DLF gained absolutely no benefit or advantage as a result of the allegedly "fraudulent practice" also operates as a strong presumption against the tenability of the aforesaid charges against DLF. (i) DLF's bona fides are further established by the fact that while filing the second DRHP on January 02, 2007, it had filed documents (delta view) indicating all differences between First DRHP and Second DRHP including differences in relation to the related party disclosure. This document is mentioned in the covering letter filed along with the Second DRHP. SEBI had reviewed all documents filed along with the Second DRHP, including t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... inspection of the correspondence between SEBI and the Merchant Bankers of DLF. Inspection of those documents would have thrown light on the discussions between SEBI and Merchant Bankers on disclosure in the offer documents. 143. It is submitted by the counsel for appellant that in the present case, the violations alleged against DLF are technical and venial in nature, because, the alleged suppression of Felicite, Shalika and Sudipti as subsidiaries/related parties in the offer documents would at the highest amount to suppression of aggregate loss of about Rs. 8 lac (approx.) from the consolidated accounts of DLF for the year 2006-07. Assuming while denying that the disclosure of three companies was material to the protection of investor's decision, there is nothing in the show cause notice or in the impugned order to establish that by means of the above alleged suppression, investors have lost in the IPO of DLF/its directors have gained in any manner. Similarly, assuming that the alleged suppression of the FIR constitutes non-disclosure, it is again a technical and venial breach and neither in the show cause notice nor in the impugned order it is recorded that by reason of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the knowledge of general public, the market capitalization of the DLF was reduced by about Rs. 7,500 crores (consequent to steep fall of 30% in the share price of DLF). Neither the show cause notice nor the impugned order justify how the said ban on the appellant company can either be in the interest of investors or securities market. 148. It is further submitted by the counsel for DLF that the phrase 'dealing in securities' appearing in the operative paragraph of the impugned order (para 50) is being interpreted by SEBI to include dealing by DLF in its own investments made in the shares of its unlisted subsidiaries as well as investments made in the Mutual Funds. Thus, in effect, the impugned order stifles DLF. The impugned order has also restricted the ability of DLF to reduce its debts through equity financing. This not only stretches the financial capacity of DLF but also acts as a burden on the banking system. Further, DLF has been incapacitated from floating bonds, debentures and like financial instruments. 149. Mr. J. J. Bhatt, learned counsel appearing on behalf of the appellants, while adopting the arguments advanced by counsel for DLF submitted that in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aterial information required to be disclosed being in fact disclosed, SEBI is not justified in holding that DLF and its directors are guilty of violating the norms laid down by SEBI. Moreover, the impugned order which is passed belatedly after 9 months of giving personal hearing suffers from serious infirmities and deserves to be quashed and set aside in view of the judgement of the Apex Court in case of Feroze Dotivala (Supra) & Anil Rai (Supra). 151. Mr. Dada, learned Senior Advocate, appearing on behalf of respondent, on the other hand, supported the impugned order by referring to various documents annexed to the show cause notice issued to DLF and also made detailed submissions on findings recorded in the impugned order which are considered in the subsequent paragraphs of this decision. 152. Mr. Chatterjee, learned Senior Advocate appearing on behalf of Mr. K. K. Sinha who is permitted to be heard in the matter pursuant to an order passed by the Apex Court, sought to tender an affidavit in reply containing several additional documents which are not on record. Mr. Chatterjee submitted that Mr. K. K. Sinha could not tender those documents earlier as he was not allowed to pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r. G. S. Talwar (Non-Executive Director of DLF) benefit of doubt ought to be extended to the appellant in Appeal No. 415 of 2014. 155. We have carefully considered rival submissions. 156. Basic question that is to be considered in these appeals is, whether DLF/its directors/CFO have resorted to sham transfer of shares with a view to camouflage association of DLF with Felicite, Shalika and Suditpi as dissociation and if so, whether failure to disclose material information/facts relating to those three companies in the offer documents filed by DLF constitutes violation of DIP Guidelines/ICDR Regulations and PFUTP Regulations. If the answer to the above question is in the affirmative, then the question to be considered is, whether in the facts of present case, SEBI is justified in restraining the appellants from accessing the securities market and prohibiting them from buying, selling or dealing in securities for a period of three years under Section 11,11A &11B of SEBI Act read with relevant provisions of DIP Guidelines/ICDR Regulations and PFUTP Regulations framed by SEBI. 157. Section 11A of SEBI Act provides that without prejudice to the provisions contained in the Compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aken only when it is established that the interest of investors were in fact prejudicially affected by the violations committed. Secondly, Guidelines/Regulations are framed with a view to protect the interests of investors and violating the said Guidelines/Regulations itself would be detrimental to the interest of investors/securities market and in such a case, SEBI would be justified in taking such remedial action under Section 11/11B of SEBI Act as it deems fit in the interest of investors/securities market whenever the violations are committed. Thirdly, Section 11(4) of SEBI Act contemplates passing of restraint/ prohibitory order in the interest of investors either pending investigation or on completion of investigation. Thus, the emphasis is primarily on protecting the interests of investors and not on investors being actually prejudiced due to violations. Fourthly, fact that the powers conferred upon SEBI to take remedial/preventive measures under Section 11/11B of SEBI Act are discretionary in nature does not mean that those provisions are to be invoked only when the interest of investors are actually prejudiced on account of the violations committed. 160. Accepting the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....son. In all those cases either it is held that there are no violations or it is held depending on facts of each case, that the remedial/preventive measure taken by SEBI without establishing that the interest of investors are prejudiced cannot be sustained. In none of those cases it is held that before passing restrain/prohibitory order under Section 11/11B, SEBI must mandatorily establish that the interest of investors are actually prejudiced on account of violations committed. Thus, none of the aforesaid decisions support the case of appellants. 163. Considerable arguments were advanced by counsel on both sides on certain observations made by this Tribunal in case of Pyramid Saimira Theatre Ltd. v. SEBI(Appeal No. 242 of 2009 decided on 07/04/2010). In that case, this Tribunal held that the ratio laid down by the Apex Court in case of Shriram Mutual Fund (Supra) while dealing with Chapter VIA of SEBI Act, would apply to all the provisions of SEBI Act. That observation was made while dealing with the argument, that a company being a juristic person does not have a mind of its own and in the absence identifying the responsible officer who has committed the fraudulent act, the sai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ures under Section 11/11B must be taken against a person who has violated the Guidelines/Regulations framed by SEBI, even when there was no mens rea in committing such violations. In other words, what is held in case of Pyramid Saimira Theatre Ltd. (supra) is that, whenever a person is found to violate the SEBI Guidelines/Regulations, it is open to SEBI to take remedial/preventive measures under Section 11/11B, even if there is no mens rea in committing such violations. 165. Now, turning to the merits of the case, first question, to be considered herein is, whether SEBI is justified in holding that the transaction of transferring shares of Felicite, Shalika and Sudipti by DLF (through its subsidiaries) were sham transactions devised and undertaken with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation thereby giving false impression to the investors that DLF was not connected with the said three companies. 166. Admittedly, on the date of filing first DRHP, entire shares of Felicite, Shalika and Sudipti were held by three 100% subsidiaries of DLF (DEDL, DHDL and DRDL) and therefore it was obligatory on part of DLF to disclose the names ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ident [Finance] of DLF), Mr. Joy Saxena (Senior Vice President [Finance] of DLF and CEO- Retail of DLF) and Ramesh Sanka (Group CFO of DLF) respectively. Mr. Basak, Mr. Saxena and Mr. Sanka were also directors of several other group companies of DLF. Thus, on 29/11/2006, 100% shares of Felicite held by 100% subsidiaries of DLF were transferred to three house wives whose spouses were Key Managerial employees of DLF. (c) even though the three house wives purchased 100% shares of Felicite on 29/11/2006, consideration in respect thereof was paid by them to DHDL, DRDL and DEDL belatedly on 2/12/2006, 7/12/2006 and 13/12/2006 respectively. Above payments were made from the bank accounts held by them jointly with their respective husbands. (d) on 30/11/2006, Felicite purchased 100% shares of Shalika from DLF (through its subsidiaries) and on the same day Shalika purchased 100% shares of Sudipti from DLF (through its subsidiaries). Thus on 29/11/2006 DLF (through its subsidiaries) divested shares of Felicite to three house wives and on 30/11/2006 DLF (through its subsidiaries) divested shares of Shalika to Felicite and divested shares of Sudipti to Shalika. In other words, the modus ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in the Red Herring Prospectus) was a common authorized bank account signatory for Felicite, Shalika and Sudipti. (i) Subsequent to the alleged transfer of shares, registered office of Felicite, Shalika and Sudipti were shifted along with a number of other DLF companies to 1E, Jhandenwala Extension, which is the address where various DLF companies are situated. (j) Shares of Felicite held by Niti Saxena were sold to DHDL on 19/06/2008 as her husband Mr. Joy Saxena (Key Managerial employee of DLF) was due to retire in August 2008. Similarly, shares of Felicite held by Mrs. Seema Sethi were sold on 04/04/2007 as her husband Mr. Sanjay Sethi (Key Managerial employee of DLF) retired in March 2007. Mrs. Seema Sethi had sold the shares of Felicite to Mrs. Rima Hinduja, wife of Mr. Gaurav Monga, who was the Vice-President, Finance of DLF. Thus, Mrs. Niti Saxena and Mrs. Seema Sethi continued to be the shareholders of Felicite as long as their spouses continued to be the Key Managerial employee of DLF. (k) The personal loans taken by the spouses of the shareholders of Felicite in November/December 2006 were repaid by them in November 2009, except by Joy Saxena and Sanjay Sethi w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on money in respect of the shares Shalika that were purchased on 26/03/2006. (d) Two cheques for Rs. 50,000/- each issued by Shalika on 30/11/2006 to DEDL and DHDL were encashed by them on 20/12/2006 (after 21 days) and 03/04/2007 (more than 90 days from date of issuing the cheque) respectively. (f) According to DLF, 100% shares of Shalika held by DEDL (30%) DHDL (30%) and DRDL (40%) were sold to Felicite on 30/11/2006 for Rs. 30,000/-, Rs. 30,000/- and Rs. 40,000/-respectively. From the bank statements of Felicite it is seen that on 7/12/2006, 13/12/2006 and 8/12/2006 DEDL, DHDL and DRDL received amount of Rs. 24,80,000/-, Rs. 24,80,000/- and Rs. 10,20,000/- respectively by way of cheque payment from Felicite. According to DLF the said payments made by Felicite to DEDL, DHDL and DRDL were composite payments and the said payments included payment of Rs. 30,000/- Rs. 30,000/- and Rs. 40,000/- being the price for purchasing 100% shares of Shalika from DEDL, DHDL and DRDL by Felicite. Except claiming that the above payments were composite payments, DLF has not produced any account statement/ledger/book entry to substantiate that the amount of Rs. 24,80,000/-, Rs. 24,80,000/- and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i has been rejected in the impugned order by holding that the process of transferring shares of Sudipti was a sham transaction in view of following facts:- (a) Sudipti was incorporated on 24/3/2006 with DEDL and DHDL (100% subsidiaries of DLF) each holding 50% shares of Sudipti. (b) In September-October 2006, Sudipti purchased about 35 Acres of land through 6 separate registered sale deeds from Mr. Pramod Jain and Mahavir Global Coal Pvt. Ltd. with Mr. K. K. Sinha as the confirming vendor. (c) Between 14/09/2006 and 06/10/2006 Sudipti was funded by DLF's subsidiary and associate companies through Vikram Electrical Equipments Pvt. Ltd. ('Vikram' for short) to the extent of Rs. 37.41 crore and out of that amount, Rs. 34.25 crore was paid by Sudipti to Mr. K. K. Sinha who was the confirming vendor for acquiring 35 Acres of land from Pramod Jain and Mahavir Global Coal Pvt. Ltd. (d) On 9/10/2006 Sudipti entered into a development agreement with DCPC (subsidiary of DLF) for development of above 35 Acres of land and on 9/10/2006 Sudipti received Rs. 45 crore as performance deposit from DCPC under the aforesaid development agreement. (e) On 26/04/2007 Mr. K. K. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (j) After transferring 100% shares of Sudipti by DEDL and DHDL in favour of Shalika, the registered office of Sudipti was shifted to 1E, Jhandenwala Extension along with Shalika and Felicite and many other subsidiaries/associates of DLF. (k) M/s. Chandra Gupta and associates who were statutory Auditors of Sudipti before transfer of shares continued to be statutory auditors even after the transfer of shares. (l) As per bank account statement, Sudipti had zero bank balance on 15/06/2006 and during the years 2006-2007 and 2007-2008 there were no expenses accounted towards cost of establishment like rent, electricity, telephone charges, property taxes or salary whereas, it had only an inventory of about Rs. 45 crores worth of land as on 31/03/2007. 171. Whether on the basis of above facts on record, SEBI is justified in holding that divestment of shares of Sudipti, Shalika and Felicite by DLF were sham transactions undertaken with a view to camouflage association of DLF with Sudipti, Shalika and Felicite as dissociation and thereby avoid disclosing material information relating to those three companies in the offer documents, is the question. 172. As rightly contended by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....F (through DCPC) and Sudipti had received Rs. 45 crore from DCPC as performance deposit towards performance of aforesaid Development Agreement. 175. Ordinarily, it would have been prudent for DLF to continue its association with Sudipti at least till 35 Acres of land belonging to Sudipti were developed by DLF as per Development Agreement dated 09/10/2006 and more particularly when DLF had supplied funds to Sudipti for acquisition of 35 Acres of land and DLF (through DCPC) had deposited Rs. 45 crore with Sudipti as performance deposit to ensure development of the said land as per Development Agreement dated 09/10/2006. Assuming that the business model of DLF required DLF to dissociate itself from Sudipti on execution of the Development Agreement dated 09/10/2006 on ground that Sudipti had become a shell company, in the present case, instead of divesting the shares of Sudipti to third parties, DLF on 29/11/2006 has chosen, first to divest the shares of Felicite to three house wives whose spouses were all Key Managerial employees of DLF, thereafter, divested 100% shares of Shalika to Felicite on 30/11/2006 and on the same day divested 100% shares of Sudipti to Shalika. In the absen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ika and Sudipti appointed by DLF prior to 29/11/2006 continued to be the Board of directors/ bank account signatories of Felicite, Shalika and Sudipti even after 29/11/2006. Since, the three house wives who had acquired 100% shares of Sudipti on 29/11/2006 were not involved in the running of Felicite, it is obvious that DLF continued to run Felicite (consequently Shalika & Sudipti) through the Key Managerial employees of DLF appointed as Board of Directors of Felicite by DLF. (d) Since the three house wives (whose spouses were Key Managerial employees of DLF) have categorically stated that they were not involved in the running of Felicite even after acquiring 100% shares of Felicite (consequently Shalika and Sudipti), it is impossible to believe that from 29/11/2006 the Board of Directors of Felicite, Shalika and Sudipti who were all employees of DLF started running Felicite, Shalika and Sudipti independently without being controlled either by DLF or by three house wives. In other words, it is impossible to believe that after 29/11/2006 the Key Managerial employees of DLF were controlled by DLF to the extent they were discharging duties as employees of DLF and they were acting i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an of Rs. 20 lac were sanctioned to Mr. Joy Saxena, Mr. Ramesh Sanka and Mr. Surojit Basak on 07/11/2006, 10/11/2006 and 15/12/2006, even before the shares of Felicite were acquired by their respective wives on 29/11/2006 and decision to increase the share capital of Felicite was taken by the shareholders of Felicite viz: the three house wives on 14/12/2006. Thus, it is evident that the three house wives who acquired 100% shares of Felicite from DLF on 29/11/2006 were only name lenders to show on record that on divestment of shares on 29-30/11/2006, DLF ceased to be associated with Felicite, Shalika and Sudipti, when in fact, DLF continued to be associated with those three companies even after divestment of shares and in fact DLF was running those three companies through the Board of Directors appointed by DLF who are all employees of DLF. 177. It is true that when 100% shares of a company are acquired by third parties it is not mandatory that the existing Board of Directors and authorized signatories must be replaced and it is open to the third parties to run the company through the existing Board of Directors and authorized signatories. However in the present case, the three h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....veral financial transactions between Felicite and DLF/its subsidiaries viz DEDL, DHDL and DRDL and DLF Housing, which indicates continued relationship of DLF with Felicite even after the claimed dissociation. From the bank statements it is seen that as a result of increase in share capital, Felicite received Rs. 2 crore (at the rate of Rs. 20 lac) from each of the three house wives who had purchased 100% shares of Felicite from DLF and also from seven house wives to whom shares of Felicite were allotted after increasing the share capital. It is not in dispute that thereafter, almost entire amount of Rs. 2 crore was transferred by Felicite to DLF and its subsidiaries. In its reply to the show cause notice, DLF had stated that the aforesaid financial transactions related to 'commercial transactions in the ordinary course of business' and that such transactions cannot create any presumption in law of a 'continued relationship' between Felicite, DLF and its subsidiaries resulting in Felicite being a subsidiary/associate of DLF. During the course of arguments, DLF for the first time sought to place on record certificates issued by its auditor as well as the auditors of i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2/01/2007 the three companies had ceased to be subsidiary/related parties on account of divestment of shares and therefore there was no requirement of disclosing material information relating to those three companies in the offer documents. That argument would have been acceptable if it was found that the divestment of shares was a bona fide transaction. However, in the present case, facts set out herein above lead to inescapable conclusion that divestment of shares was not a bonafide transaction, but a sham transaction entered into obviously with a view to avoid disclosing material information relating to the three companies in the offer documents. Where the material information required to be disclosed in the offer documents are not disclosed by resorting to sham transactions, then it would amount to failing to disclose material information which is true and adequate and thereby violate Clause 6.2 of DIP Guidelines. 183. Argument of DLF based on the decision of the Apex Court in case of Podar Cement (P.) Ltd. (Supra) and Dr. K.A. Dhairyavan (Supra) that in view of concept of duel ownership being recognised in India, disclosing interests of DLF in 35 Acres of land belonging to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt of shares continued to acquire shell companies of DLF, gives credence to the inference drawn by SEBI that even after divestment of shares, Felicite was run by DLF through the Board of Directors of Felicite who are employees of DLF. This conclusion is further fortified by the statement of three house wives that they were not running Felicite. If three house wives who acquired 100% shares of Felicite were not running Felicite, then obviously Felicite was run by DLF through the Board of Directors who were all employees of DLF. Since, the Board of Directors of Felicite, Shalika and Sudipti consisting of employees of DLF continued even after divestment of shares it is apparent that DLF was running Felicite, Shalika and Sudipti even after divestment of shares. 185. It is contended on behalf of DLF that the divestment of shares of Felicite (consequently divestment of shares of Shalika and Sudipti) to three house wives whose spouses were employees of DLF was with a view to ensure that there was less chance of thwarting the effectuation of the terms and conditions of the Development Agreement between Sudipti and DLF (through DCPC) and mitigate to some extent the completion risk faced ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....6 (related party transactions), Clause 6.10.2.3 (financial particulars relating to subsidiaries), Clause 6.11.1.2 (information relating to outstanding litigation) Clause 9.1 (Guidelines on advertisement). 188. Although considerable arguments were advanced by counsel on both sides on the question as to whether DLF violated Clauses 6.9.6.6, 6.10.2.3, 6.11.1.2 and Clause 9.1 of DIP Guidelines, it is relevant to note that all those Clauses deal with the material information which are required to be disclosed in the offer documents. It is the case of DLF that material information relating to Felicite, Shalika and Sudipti were not required to be disclosed due to divestment of shares of those three companies. Once it is held that divestment of shares is a sham transaction executed with a view to avoid disclosing material information relating to those three companies in the offer documents, then, it follows as a natural corollary that material information set out in various Clauses in Chapter VI of DIP Guidelines are not complied. In such a case, it becomes academic to go into the question as to how many Clauses specified in Chapter VI of DIP Guidelines have been violated. Therefore, wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, there is a heading titled 'subsidiary entities at any time during the year'. It is contended that in the first DRHP filed on 11/05/2006, the auditors of DLF instead of disclosing the names of Felicite, Shalika and Sudipti under the heading 'subsidiary entities at any time during the year' had included the names of those three companies under the heading 'Associates'. However, in the second DRHP dated 02/01/2007 or in the RHP dated 25/05/2007 or in the final prospectus dated 18/06/2007, neither the names of Felicite, Shalika and Sudipti were included under the heading 'subsidiary entities at any time during the year' nor included under the heading 'Associates'. Relying on Clause 22 of AS-21, it is contended on behalf of SEBI that even assuming that DLF had dissociated itself from Felicite, Shalika and Sudipti on 29-30/11/2006, the result of operation of those three companies with DLF till the date of cessation of the relationship ought to have been included in the consolidated statement of profit and loss account of DLF and failure to do so constitutes failure to disclose material information relating to those three companies in the offer d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he argument that even if the negligible loss incurred by the three companies in the offer documents it would have no material effect on the investor decision cannot be accepted. 193. Next question to be considered is, whether, SEBI is justified in holding that DLF has actively concealed the fact about filing of FIR by Mr. K. K. Sinha against Sudipti and others and whether, failure to disclose FIR in the offer documents amounts to suppressing outstanding litigation in the offer documents in violation of Clause 6.11.1.2 of DIP Guidelines. 194. In the present case, since inception DLF has been contending that the FIR filed by Mr. K. K. Sinha on 26/04/2007 against Sudipti and others including Mr. Praveen Kumar came to its knowledge on 25/06/2007 and by that time IPO process was completed and hence DLF cannot be said to have failed to disclose filing of FIR in the offer documents. 195. Before considering the question as to whether the filing of FIR constitutes outstanding litigation, it would be appropriate to consider the question as to whether SEBI is justified in rejecting the contention of DLF that the FIR filed by Mr. K. K. Sinha came to its knowledge on 25/06/2007. 196....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isconduct and dereliction of duty. 199. It is equally surprising to note that by the impugned order, the WTM of SEBI has held that DLF knew about the filing of FIR, solely based on the prima facie observations contained in the order dated 20/10/2011 which was passed before investigation. Merely because the Investigating Authority had failed to comply with the directions contained in the order dated 20/10/2011, the WTM of SEBI could not have proceeded to reject the contention of DLF solely based on the prima facie observations made in the order passed before investigation. Without ascertaining the date on which Sudipti or Mr. Praveen Kumar were served with a copy of the FIR, without ascertaining the date on which they were interrogated by the police authorities and in the absence of any other evidence which falsifies the claim of DLF, the WTM of SEBI could not have rejected the contention of DLF that the FIR came to their knowledge on 25/06/2007. It was totally improper on part of WTM of SEBI to rely on the prima facie observations made in the order dated 20/10/2011, especially when it was specifically recorded in the said order that the investigation be carried without being inf....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the filing of FIR. 202. Assuming that registration of a case referred to in the communication dated 01/05/2007 is referable to registering an FIR, then, without knowing the contents of the said FIR it is impossible to assume that Mr. Praveen Kumar/Sudipti, were aware about the contends of the FIR and that through them DLF must have acquired knowledge about the contents of FIR and therefore DLF ought to have disclosed about the filing of FIR in the offer documents. Fact that Sudipti in its letter dated 16/06/2010 has not disputed receipt of FIR does not mean that Sudipti had received copy of the FIR before 25/06/2007 as it could have been received on or after 25/06/2007. In these circumstances, since the final prospectus was filed on 18/06/2007 and there is no evidence to show that DLF had knowledge about the filing of FIR against Sudipti prior to 25/06/2007, the WTM of SEBI was not justified in rejecting the contention of DLF that filing of FIR came to its knowledge on 25/06/2007. Once it is held that there is no basis to disbelieve the claim of DLF that filing of FIR against Sudipti came to its knowledge on 25/06/2007, then the question as to whether FIR constitutes outstanding....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed declaration and once that stage has passed and thereafter if the declaration was found to contain false/incorrect statements, then, it was for the Reserve Bank/the Director of Enforcement to take penal action and it was not open to the customs authorities to take penal action. In the present case, SEBI is the authority to ensure compliance of the Guidelines issued by it and SEBI is the authority to take action if the Guidelines are violated. Thus, the decision of the Apex Court in case of Rai Bahadur Shreeram Durga Prasad (P.) Ltd. (Supra) is distinguishable on facts and has no relevance to the facts of the present case. 207. It was contended by the Counsel for Mr. Sanka that, Mr. Sanka was only a Key Managerial employee and not a Key Managerial Personnel and therefore, Clause 6.9.5.8 of DIP Guidelines which requires details of the shareholding if any, of the wives of Key Managerial Personnel could not be held against Mr. Sanka. It was further contended that Clause 6.9.6.6 of DIP Guidelines read with AS-18 relates to Promoters/Principle shareholders and since Mr. Sanka was neither a Promoter nor a Principle shareholder, it could not be said that Mr. Sanka had violated Clause ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion in the offer documents to the effect that the statements made therein are true and correct. In such a case, the directors of DLF cannot contend that they have not committed any violations and that no direction need be passed against them under Section 11/11B of SEBI Act. 209. Question then to be considered is, whether SEBI is justified in holding that the appellants have violated PFUTP Regulations. It is contended by way of preliminary objection that without following the due procedure prescribed under regulations 5, 9 & 10 of PFUTP Regulations, SEBI could not have held that DLF has violated PFUTP Regulations. There is no merit in the above contention because, firstly, the directions given in the order dated 20/11/2006 to the Investigating Officer to focus the investigation relating to the violations if any, under the DIP Guidelines cannot be construed to mean that the Investigating Officer was prohibited from investigating into the possible violation under the PFUTP Regulations. Secondly, SEBI has filed an affidavit stating therein that the investigation report submitted by the Investigating Officer after completion of investigation which included report on violation commit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t must be shown that the alleged non-disclosure was intended to induce another person or his agent to deal in securities and in the present case there is nothing to show that the dissociation of Felicite, Shalika and Sudipti by DLF and the omission to disclose material information in respect of those companies in the offer documents was intended to induce (or resulted in inducing) investors and general public to buy/subscribe to DLF's shares in the IPO and therefore, DLF cannot be held guilty of committing fraud under PFUTP Regulations. As rightly contended by the counsel for SEBI, expression 'fraud' under regulation 2(c) of PFUTP Regulations is an inclusive definition and is not restricted to the categories specified therein. Moreover, under regulation 2(c), any act, expression, omission or concealment committed whether in a deceitful manner or not would constitute 'fraud'. Therefore, plain reading of the above provision makes it abundantly clear that intention to deceive is not an essential requirement for constituting 'fraud' under regulation 2(c) of PFUTP Regulations and any representation made to the investors by resorting to sham transactions would....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n issue of shares would constitute 'fraud' as defined under regulation 2(c) and consequently would be covered under various prohibited categories specified under regulation 3 and regulation 4(1) and 4(2) (f) & (k) of PFUTP Regulations. 214. Argument of DLF that it acted bona fide on the advice of experts such as Merchant Bankers, auditors and legal advisors is fallacious. It is not the case of DLF that sham transactions were executed as per the advice given by any Merchant Banker, auditor/expert professional or legal advisor. It is not the case of DLF Ltd. that but for the advice given by the Merchant Banker/auditor/legal advisor, sham transactions would not have taken place. In the absence of any investigation conducted/any finding recorded against the Merchant Bankers, auditors/expert professional or legal advisor in the impugned order and in the absence of categorical assertion on part of DLF that entering into sham transaction and the consequences thereof are solely attributable to Merchant Banker, auditors or the legal advisors, it is not possible to accept the contention of DLF that divestments of shares were undertaken by DLF under the bonafide advice given by Mer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ies market and prohibiting them from buying, selling and dealing in securities for a period of three years. 218. Appellants are restrained from accessing the securities market and prohibited from buying, selling or otherwise dealing in securities for a period of three years on ground that by resorting to sham transactions they have violated Clauses 6.2, 6.9.6.6, 6.10.2.3, 6.11.1.2, 6.15.2 & 9.1 of the DIP Guidelines and regulations 3(a), (b), (c), (d), 4(1), 4(2) (f) & (k) of PFUTP Regulations. As noted earlier, violation of Clause 6.2 of DIP Guidelines is the basic violation committed by the appellants and violation of other Clauses is nothing but different facets of the very same violation. From the impugned order, it is apparent that the restraint/prohibitory order for three years is passed against the appellants by taking into consideration different facets of the very same violation. Apart from the above, there are several other mitigating factors which are in favour of the appellants viz: (a) although resorting to sham transaction deserves stern action, in the facts of present case, since the material information relating to Felicite, Shalika and Sudipti were insignific....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Clause 6.2 of DIP Guidelines, it obviously follows that various material informations specified in different Clauses in Chapter VI of DIP Guidelines have not been complied with. (d) Similarly, decision of SEBI, that DLF has concealed material information relating to the three companies by resorting to sham transaction and misled the investors by signing a declaration that the information disclosed in the offer documents are true and adequate in violation of PFUTP Regulations cannot be faulted. (e) Directors/CFO of DLF who were directly involved in the day to day running of DLF were the persons responsible for DLF to resort to sham transaction and therefore they are equally guilty of violating DIP Guidelines/PFUTP Regulations. (f) Decision of SEBI that DLF had knowledge about the filing of FIR prior to 25/06/2007 and that DLF has actively concealed the same in the offer documents is baseless and devoid of any merit as there is no material whatsoever, to show that DLF was aware about the filing of FIR prior to 25/06/2007. Hence, the impugned order to the extent it holds that DLF was aware about the filing of FIR prior to 25/06/2007 and that the DLF has actively concealed th....