AI Drafter 
TaxTMI 
TaxTMI 
2016 (12) TMI 1202
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....he appellants are prohibited from accessing the capital market directly or indirectly for a period of 10 years. 2. Initially, by a majority decision of this Tribunal dated 30.09.2013 the appeal was allowed and the impugned decision of the WTM of SEBI was set aside on ground that SEBI had no jurisdiction to initiate proceedings against the appellants in relation to the role played by appellants as Lead Managers to the Global Depository Receipts ("GDRs" for short) issued by several Indian Companies outside India. 3. On appeal filed by SEBI, the Apex Court by its decision dated 06.07.2015 set aside the majority decision of this Tribunal and held that SEBI had jurisdiction to initiate proceedings against the appellants if the appellants as Lead Managers to the GDRs had violated the provisions of SEBI Act and the Regulations framed thereunder and remanded the matter for fresh decision on merits. Accordingly, the appeal is heard afresh and disposed of by this decision. 4. Facts relevant for this appeal as per the documents available on record are as follows:- a) Mr. Arun Panchariya, Appellant No. 2 ("AP" for short), a Non- resident Indian was the Promoter/Managing Director of....
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.... of 21,91,000 GDRs having total value of 5.98 Million USD. The above GDRs issued by Asahi were fully subscribed and closed on 29.04.2009 itself. f) Eight days prior to the issuance of GDRs i.e. on 21.04.2009 Vintage FZE ("Vintage" for convenience) an entity situate at Dubai entered into a loan agreement with European American Investment Bank AG ("Euram Bank" for convenience). It is relevant to note that the object of the loan was to fund Vintage with 5.98 Million USD to take down GDR issue of Asahi and the said loan amount was to be transferred to the Euram A/c No. 540030. To secure the Euram Bank's claims and entitlements against Vintage, arising on account of the said loan liability or any future liability, Vintage agreed to pledge the securities held by it in its Account No. 540030 with the Euram Bank. It is equally important to note that Vintage was controlled by AP and in fact the loan agreement between Euram Bank and Vintage was signed by AP on 22.04.2009 as Managing Director of Vintage. g) On the same day i.e. on 21.04.2009 apart from the Loan Agreement between Vintage and Euram Bank, Asahi entered into a Pledge Agreement with Euram Bank wherein it was recorded that Vi....
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....y certain Foreign Institutional Investors/ sub accounts viz:- i) India Focus Cardinal Fund. ('IFCF' for convenience) ii) KII Ltd. k) Investigation carried out by SEBI further revealed that equity shares generated on conversion of GDRs sold by above FIIs/sub accounts were bought by a set of clients, viz:- i) Alka India Ltd. ("Alka" for short) ii) Basmati Securities. ("Basmati" for short) iii) S.V. Enterprises. ("SV" for short) iv) JMP Securities. ("JMP" for short) v) Oudh Finance and Investments Ltd. ("Oudh" for short) Investigation carried out by SEBI further revealed that AP was connected with IFCF and KII Ltd. which converted GDRs into equity shares and AP was also connected with the above entities which purchased the shares generated out of conversion of GDRs in the Indian Securities Market. Thus, the investigation revealed that AP, as Managing Director of PAN Asia got the GDRs issued, as Managing Director of Vintage subscribed to the GDRs and thereafter transferred the GDRs to the entities controlled by AP and on conversion of GDRs into equity shares ensured that the said equity shares of the issuer companies ....
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....appellants have violated Section 77(2) of the Companies Act, 1956 is now admitted to be beyond the show cause notice and hence not pressed by SEBI. Similarly, during the course of arguments, counsel for SEBI has not pressed the charge that in fact it is the Indian Investors who actually funded the GDR issue which is most crucial allegation on merits as well as on the aspects of SEBI exercising jurisdiction for investor protection. Similarly, the allegation that there were dealings between the subsidiaries of the issuer companies and the entities belonging to AP are exfacie based on conjectures and surmises. In these circumstances, it is submitted that the impugned order is liable to be quashed and set aside. b) It is settled in law that where the allegation of fraud is to be adjudicated, all concerned persons/ parities to the fraud must be before the Court/Concerned Authority. Deciding the issue of fraud in the absence of all parties allegedly involved in the fraud would be in breach of the principles of natural justice. Moreover, if separate proceedings are initiated against the persons allegedly involved in the fraud, there is likelihood that different conclusions may be drawn....
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....nt with Euram Bank and admittedly GDR subscription amounts were deposited in those accounts. Merely because two or more entities had bank account in the same bank and funds were transferred from one entity to another it cannot be said that there is no receipt of payment on issuance of GDRs and the entries are merely book entries. e) In the impugned order it is erroneously held that the source of funding for the GDRs were done by converting the GDRs into equity shares and after selling the said equity shares in the Indian Market, the sale proceeds were repatriated abroad to repay the loan taken by Vintage. In fact in case of Asahi only 10.57% GDRs were sold and converted into shares and therefore, there is no justification for drawing a conclusion that it is only upon conversion of GDRs and sale of shares released on conversion of GDRs in the Indian Market, the sale proceeds were repatriated for repaying the loan taken by Vintage. It is not in dispute that the GDRs issued by the Indian Companies have two way fungibility i.e. conversion of equity shares into GDRs and conversion of GDRs into equity shares. In the absence of any restriction on sale and purchase of GDRs and/or conver....
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....ter subscribing to the GDRs pledged the GDRs in favour of Euram Bank and non disclosure of the fact that the issuer companies had pledged the funds received from GDRs in favour of Euram Bank constitutes fraud on the Indian Investors. This finding of SEBI is unsustainable, because, firstly, these transactions were entered into outside India and no fault has been found with those transactions by the regulators under whose jurisdiction the said transactions took place and even RBI has not found any fault with those transactions. Secondly, SEBI has ignored the opinion of the solicitors of the relevant Countries and has failed to prove that the said transactions were in fact illegal as per the applicable Foreign Law. Thirdly, the practice of taking a loan for 'take down' of an issue of securities like GDRs and to pledge the proceeds of the same is legal and permitted under the relevant law. Fourthly, no action has been taken against the banks which are part of the alleged illegal loan truncations and yet the impugned order is passed against the appellants holding them guilty of fraud. Fifthly, neither the appellants have given any guarantee for the loans availed by Vintage nor the appel....
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....vestors were the initial subscribers of the GDRs. The above finding is clearly incorrect and misleading, because, firstly under the applicable law/regulation, the appellants were not required to communicate with the Indian Stock Exchanges or make any announcements in India regarding the GDR subscription. Secondly, as a matter of fact appellants have not made any such announcement before any authority. Thirdly, the Apex Court in its judgement dated 06.07.2015 has recorded that in fact Asahi had provided information to BSE that the entire GDRs were allotted to foreign entities, namely Greenwich & Tradetec and accordingly BSE gave that information to public/retail investors on BSE website. Thus, the finding recorded in the impugned order that the appellants furnished false information is wholly unsustainable. m) Under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993, GDRs are created and issued by the Overseas Depository Banks. In the present case, the Overseas Depository Banks were Deutsche Bank and Bank of New York, Mellon who had created and issued the GDRs. Therefore, any verification relating to issuance and....
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.... any fraudulent scheme or design to deceive the investors in India. r) The Apex Court in para 74 of its judgement has enumerated the case put forth by SEBI alleging various violations committed by the appellants. In the impugned order, some of the allegations as reported to the Apex Court by SEBI are not to be found. Some of the allegations which are recorded in the impugned order are not pressed before this Tribunal. In these circumstances, the impugned order which is based on conjectures and surmises is liable to be quashed and set aside. 8. On careful consideration of the aforesaid submissions made on behalf of the appellants, we see no merit in the aforesaid submissions. 9. Object of creating and trading in GDRs outside India has been succinctly summarized by the Apex Court in para 60 of its judgement dated 06.07.2015 which read thus:- "60. On a consideration of the 2000 Regulations, the 1993 Scheme and the Master Circular issued by RBI periodically one can discern that for creation of GDRs which can be traded only at the global level, the issuing company should have developed a reputation at a level where the marketability of its investment creation potential will ....
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.... whom the appellants are alleged to have colluded. It is contended on behalf of the appellants that if fraud is allegedly committed by the appellants in collusion with the issuer companies, Euram Bank, Overseas Depository Banks, Vintage and various other entities, then, unless all those entities were made parties to the show cause notice issued against the appellants, the impugned order could not be passed against the appellants. 12. There is no merit in the above contention. Concept of "fraud" in relation to the parties to the contract set out under Section 17 of the Indian Contract Act is different from the concept of "fraud" set out in the PFUTP Regulations, 2003. The expression "fraud" is defined under the PFUTP Regulations as follows:- "(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 include27 (1) a knowing misrepresentation of the truth or concealment of m....
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....a through the entities with which AP was connected, then, even if the GDRs were validly issued and even if the Loan Agreement/ Pledge Agreement were valid, proceedings could be initiated against AP for committing fraud on the investors in India without impleading the entities who issued the GDRs and without impleading the entities who were parties to the Loan Agreement/ Pledge Agreement. In other words, whether the Loan Agreement/ Pledge Agreement were validly entered into or not, proceedings could be initiated against AP if the very act of AP in subscribing to the GDRs through his connected entities constituted fraud on the investors in India. In such a case, the entities which issued the GDRs viz. Overseas Depository Banks or the entities who were parties to the Loan Agreement/ Pledge Agreement are not required to be impleaded as parties to the proceedings initiated against AP for committing fraud on the investors in India. Therefore, the argument of the appellants that without impleading the Overseas Depository Banks/ parties to Loan Agreement & Pledge Agreement as parties to the proceedings initiated against the appellants, no order could be passed against the appellants cannot....
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....In other words, what is held in the impugned order is that PAN Asia and AP (Managing Director of PAN Asia) by their acts made the investors in India to believe that foreign investors have found it prudent to invest in the GDRs of issuer companies when in fact the GDRs were subscribed by an entity wholly owned by AP. Therefore, the decision of the Apex Court in case of Manohar Joshi has no relevance to the facts of present case. Similarly, other decisions of the Apex Court and other Courts relied upon by the counsel for appellants are also distinguishable on facts. 17. Strong reliance was placed by counsel for the appellants on the decision of this Tribunal in case of BPL Ltd. (Supra). That decision is also distinguishable on facts. In that case, SEBI had held that BPL Ltd. had created a false market and manipulated the price of its scrip in connivance with Shri Harshad Mehta and accordingly debarred BPL Ltd. from accessing the securities market for a period of four years. This Tribunal noticed that nowhere in the order impugned therein it was recorded that BPL Ltd. had transacted in its shares either directly or indirectly. It was further noticed, that BPL Sanyo Finance Ltd. ("B....
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....ay thereafter become payable by Vintage to Euram Bank. 20. In the reply to the show cause notice issued by SEBI, AP had categorically stated that Vintage intended to make profit through a take down of the GDRs issued by the Indian Companies and at the same time ensure successful placement of the GDRs with the investors outside India. It is further stated by AP that for the aforesaid purpose Vintage took loan from Euram Bank and upon closure of the GDR issue, Vintage paid the take down amount to the issuer companies by transferring the loan proceeds from Euram Bank to the ESCROW accounts of the issuer companies which was then transferred to the accounts of issuer companies. 21. Thus, instead of ensuring that the foreign investors subscribe to the GDRs of Asahi, AP as Managing Director of PAN Asia planned to subscribe to the GDRs of Asahi through Vintage and in fact as Managing Director of Vintage took loan of 5.98 Million USD from Euram Bank for subscribing to the GDRs of Asahi and made Asahi to pledge to the Euram Bank the GDR subscription amount of 5.98 Million USD as security for the loan taken by Vintage. Similar modus operandi was adopted in case of other issuer companies....
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.... have acquired 50.15% GDRs of Asahi. Investigation revealed that immediately after subscribing to the GDRs, both Greenwich and Tradetec are supposed to have transferred all the GDRs to Vintage and on the same day Vintage transferred the loan amount of 5.98 Million USD to the account of Asahi. If Vintage had actually acquired GDRs of Asahi from Greenwich and Tradetec, then Vintage would have paid the loan amount of 5.98 Million USD to Greenwich and Tradetec and would not have transferred the loan amount to the account of Asahi. Very fact that AP as Managing Director of Vintage got the loan amount transferred to the account of Asahi clearly shows that Greenwich & Tradetec were not the initial subscribers and the initial subscriber to the GDRs of Asahi was Vintage (wholly owned by AP). 24. It is equally interesting to note from the investigation carried out by SEBI that the alleged initial subscribers to the GDRs were nonexistent entities because, e-mails and summons issued to those entities were return back undelivered. Moreover, the respective securities market regulators of the Countries in which the alleged initial subscribers were supposed to be situated have informed SEBI tha....
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....nd doubt that some of the addresses of the alleged initial subscribers itself do not exist. If the address itself is not existent it obviously means that even the initial subscribers were non-existent. Apart from above, it is established by SEBI through the Regulatory Authorities of the Countries in which the alleged initial subscribers were situated that the names of those initial subscribers do not exist in the official directory of those Countries. These facts conclusively establish that Vintage was the initial subscriber to the GDRs and names of fictitious entities were introduced only to make it appear that the GDRs have been subscribed by various foreign investors. 27. It is equally important to note that immediately after subscribing to the GDRs, Vintage (controlled by AP) sold some of the GDRs to FIIs/sub accounts such as IFCF & KII which were also controlled by AP. IFCF & KII admittedly converted GDRs into underlying equity shares of the issuer companies from the domestic custodian bank in India and sold the said shares on the Stock Exchanges in India. It is also recorded in the impugned order that the shares sold by IFCF and KII were bought by entities such as Alka, Ou....
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....present case, findings recorded by SEBI that in reality there was no fund movement after the GDRs were subscribed, cannot be faulted. 29. Argument of the appellants that the AO has erroneously held that source of funding for the GDRs were done by converting the GDRs and thereafter selling the shares in the Indian Market and repatriating the sale proceeds to repay the loan taken by Vintage is not entirely correct. It is a matter of record that Vintage by a Loan Agreement entered into with Credo Investment Holdings Ltd. ("Credo" for short) advanced loan of 2 Million USD for on-lending it to its associate company KII Ltd. so as to enable KII to purchase GDRs of the issuer companies, convert the GDRs into equity shares and sell those shares in the Indian Market and utilize the sale proceeds to buy further GDRs on the Luxembourg Stock Exchange and repeat the said process until KII elects to terminate such activities. Admittedly, KII acquired GDRs from Vintage and after converting the GDRs in to equity shares sold the equity shares in the Indian Market. In that context it was held that source of funding the GDRs was by converting the GDRs and selling the shares in the Indian Securitie....