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TaxTMI 
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2017 (10) TMI 1512
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....or any other instruments convertible into equity shares or any other security for a period of 10 years. By order dated 31st December, 2014, the WTM of SEBI has prohibited other appellants who at the relevant time were the Directors of Cals, from accessing the capital market, directly or indirectly, and dealing in securities or instruments with Indian securities as underlying, in any manner whatsoever, for a period of 10 years. Since the violations held to have been committed by the appellants relate to facts which are common, all these appeals are heard together and disposed of by this common decision. 3. Impugned Orders are passed against Cals and its directors basically for the reason that Cals aided by its directors who are appellants herein had employed fraudulent arrangement with regard to the subscription of the Global Depository Receipt ('GDR' for short) issue of Cals and that they had misled the investors by making false announcements regarding successful subscription of GDRs and also failed to disclose 'related party transaction', which were in violation of Section 77(2) of the Companies Act, 1956 and in violation of the SEBI Act and the regulations made thereunder. ....
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.... equity shares with a lock-in period of 3 years as per SEBI guidelines. iv) Change of management resolution would be passed via ballot or at the AGM wherein Goorha/other old promoters of Cals would exit Cals and the Spice Energy group would officially take over as new promoters of Cals. (d) Above proposal was considered by the Board of Directors (BoD) of Cals on 23/7/2007 and the minutes of the said meeting as per the Minute Book of Cals, inter alia, records the following:- (i) Name of Cals Limited be changed as Cals Refineries Limited. (ii) Mr. Sarvesh Goorha ('Goorha'), Chairman of the meeting informed the members of the Board that Cals which is in a defunct position since last several years is venturing into a refinery business with the help of SRM belonging to the Spice Energy Group as a strategic investor. (iii) Resolved to appoint Mr. Bhupendra Kansagra ('Kansagra), Mr. Ravi Chilikuri ('Chilikuri), Mr. Manabendra Guha Roy ('Roy') and Mr. D. Sundararajan ('Sundararajan'), nominees of Spice Energy Group as Additional Directors of Cals. (iv) SRM (strategic investor) had extended interest-free unsecured loan of Rs. 87 lac to C....
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....nd was later on made Chairman of Cals. Issuance of 8,70,000 shares (14.5% of equity) to SRM (Spice Energy group) and conversion of interest-free loan given by Goorha into 1,01,900 equity shares of Cals was also confirmed in the said meeting. (h) In the BoD meeting of Cals held on 30/10/2007 Roy (director) informed the members of the Board that all the agreements entered by SRM in connection with the refineries would be assigned to Cals by executing Assignment Agreements. Sundararajan (director) informed the members of the Board that the total cost of the refinery project is USD 950 million and cost of the said project would be partly met by raising issue of GDR amounting to USD 200 million. (i) It is interesting to note that the minute book maintained by Cals does not record passing of any resolution on 30/10/2007 to open a bank account with Banco Efisa S.A. Lisbon ('Banco' for convenience) or any other bank for the purpose of receiving the GDR subscription amount. However, extract of the minutes of the meeting dated 30/10/2007 duly certified by Mr. Sundararajan and sent by Cals to Banco records the following:- 'RESOLVED THAT a bank account be opened ....
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....meeting dated 30/10/2007 itself by briefing other directors, however, the Company Secretary forgot to include the same in the minutes dated 30/10/2007. (k) On 10/12/2007 Cals informed BSE that the GDR issue of USD 200 million would open for subscription on 12/12/2007. (l) On 11/12/2007 Honor Finance Ltd. ('Honor' for short) incorporated and registered in the British Virgin Islands on 5/10/2007, which is wholly owned by Sanjay Malhotra (promoter of Spice Energy group) entered into a Credit Agreement with Banco for availing loan of USD 200 million to subscribe to the GDR issue of Cals which was to be listed on Luxembourg Stock Exchange. (m) On the same day i.e., on 11/12/2007 itself an Account Charge Agreement was executed by and between Cals and Banco as a result of which the GDR subscription amount of USD 200 million to be deposited in the designated account of Cals with Banco stood secured by Cals in favour of Banco for all the obligations of Honor under the Credit Agreement dated 11/12/2007. The said Account Charge Agreement signed by Goorha on behalf of Cals, inter alia, contains a clause that upon payment of all or part of the amounts due to Banco by ....
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....amounts were withdrawn by Cals in terms of the Account Charge Agreement. (t) On 13/1/2009, Extension Agreement to the Account Charge Agreement dated 11/12/2007 was executed between Cals and Banco. As a result of the said Extension Agreement, the GDR subscription amount which was given as security by Cals for the loan taken by Honor from Banco for subscribing to the GDRs of Cals stood extended up to the period specified therein. The Extension Agreement was signed by Chilikuri on behalf of Cals. (u) Pursuant to the Board resolution dated 23/1/2009, Cals on 5/2/2009 entered into an agreement with Asia Texx Enterprises Ltd. ('Asia Texx' for convenience) for purchase of plant and machinery required for the refinery project at a cost of USD 290 million. Asia Texx was controlled by Gagan Rastogi, son of Deep Rastogi (director in Cals). As per the said agreement, USD 90 million was to be paid by Cals to Asia Texx as advance immediately on signing the agreement. Sundararajan had signed the said agreement dated 5/2/2009 as director of Cals. (v) On 26/3/2009 Asia Texx purchased 2,50,00,000 GDRs from Honor and paid USD 92 million to Honor. (w) On 27/3/2009 H....
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....just and proper to consider argument of each appellant independently. CALS (APPEAL NO. 4 OF 2014) 7. Argument of Cals that it is a victim of fraud and not a vehicle of fraud is unsustainable as can be seen from the following:- (a) Basic argument advanced on behalf of Cals is that fraud relating to the GDR issue of Cals has been committed by few conspirators, namely, Sanjay Malhotra, Chilikuri, Goorha and Sundararajan against whom there is direct evidence. It is contended that Cals at the relevant time had no knowledge and therefore, the acts and knowledge of the persons who had committed fraud on Cals cannot be attributed to Cals and made basis for holding that Cals is guilty of committing offences under the Companies Act, 1956 and also guilty of violating the SEBI Act, 1992 and the regulations framed thereunder. (b) It is further contended on behalf of Cals that the 'Doctrine of Attribution' generally permits the acts and knowledge of the directors or employees of a company to be attributed to the company itself, however, fraud is an exception to that principle, under which the company is not held and/or made liable for acts and/or knowledge of the director....
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....11/12/2007 so that the GDR subscription amount of USD 200 million deposited in its account with Banco is kept as security towards the loan of USD 200 million taken by Honor from Banco for subscribing to the GDRs of Cals. (f) Fact that the minutes as per the minute book of Cals does not contain any resolution to open a bank account with Banco cannot be a ground to infer that Cals had not intended to open an account with Banco because, firstly, on the basis of the Board resolution dated 30/10/2007 certified by Sundararajan, director of Cals, an account was in fact opened in the name of Cals with Banco for depositing the GDR subscription amount. Secondly, on issuance of GDRs, the GDR subscription amount was in fact deposited in the said account of Cals with Banco. Thirdly, apart from the Board resolution dated 30/10/2007 certified by Sundararajan, there is no other resolution passed by Cals to open an account for depositing the GDR subscription amount. Fourthly, the GDR subscription amount deposited in the said bank account with Banco has been withdrawn by Cals in installments from time to time which is in consonance with the Account Charge Agreement executed by Cals. Without....
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....te beneficial owner of Honor. On 11/12/2007, Malhotra as an authorized signatory of Honor entered into a Credit Agreement with Banco to avail loan of USD 200 million for subscribing to the GDRs of Cals subject to Honor furnishing security for that amount. On the same day i.e. on 11/12/2007 itself, Goorha, authorized signatory of Cals controlled by Spice Energy group executed the Account Charge Agreement in favour of Banco according to which the GDR subscription amount of USD 200 million was to remain as security till the loan of USD 200 million given by Banco to Honor for subscribing to the GDRs of Cals was repaid by Honor to Banco. Thus, the Spice Energy group, through 'Honor' controlled by one of its promoters (Malhotra) sought to subscribe to the GDRs by availing loan of USD 200 million from Banco and made Cals controlled by the Spice Energy group to execute the Account Charge Agreement so that USD 200 million deposited by Honor as GDR subscription amount in the account of Cals was kept as security till the loan of USD 200 million taken by Honor for subscribing to the GDRs of Cals was repaid. It is not in dispute that the GDR subscription amount withdrawn by Cals (except the las....
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....ction between Cals and Asia Texx Enterprises Ltd., Hong Kong (Asia Texx) was a 'related party transaction' and failure to disclose the said related party transaction to the exchanges was in violation of Clause 32 of the Listing Agreement cannot be faulted. Asia Texx was beneficially owned by Gagan Rastogi, who was also one of the promoters of Spice Energy group. Deep Rastogi, father of Gagan Rastogi became director of Cals with effect from 19/1/2008. On 5/2/2009 Cals entered into an agreement with Asia Texx for acquiring plant and machinery required for the refinery project. According to SEBI, Deep Rastogi had significant influence over Cals and therefore as per AS-18, Cals was liable to disclose to the exchanges about the related party transaction between Cals and Asia Texx. (k) Argument of Cals that the transaction between Cals and Asia Texx was not a related party transaction and under the provisions contained in AS-18, Deep Rastogi could not be said to have significant influence over Cals is without any merit. Although Deep Rastogi did not hold any shares of Cals, admittedly, Deep Rastogi was a director of Cals controlled by the Spice Energy group on the date on which ....
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....0/10/2007 the BoD of Cals knew as to who would be subscribing to the GDRs and that the GDR subscription amount so received would have to be secured in connection with the loan to be taken. Alternate argument of Cals that by resolution dated 30/10/2007 certified by Sundararajan, Cals intended to give GDR subscription amount as security to the loan that may be taken by Cals cannot be accepted, because, firstly, as on that date there was no proposal by Cals to take any loan and secondly, the entire USD 200 million raised for the refinery project could not be used for any other purpose. Thus, the submission made by Ramachandran, in fact, supports the conclusion drawn in the impugned order that even before issuance of GDRs, Cals knew as to who would be the initial subscribers to the GDRs. In these circumstances, the decision of SEBI that Cals financed Honor for subscribing to its own GDRs cannot be faulted. (n) It is interesting to note that Cals (controlled by the Spice Energy group) not only financed Honor (owned by Malhotra, promoter of the Spice energy group) for subscribing to the GDRs of Cals, but also resolved in its BoD meeting held on 19/1/2008 to appoint Malhotra as a....
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....pute the resolution dated 30/10/2007 certified by Sundararajan, according to which Cals had authorized the Board to open an account with Banco for depositing the GDR subscription amount of USD 200 million and that amount could be kept as security for any loan that may be taken. Since the Account Charge Agreement of Cals is executed by Goorha, it is apparent that Goorha signed the Account Charge Agreement on the basis of the resolution dated 30/10/2007 duly certified by Sundararajan. 10. Argument of Goorha that he signed the Account Charge Agreement without knowing the contents of that agreement is ex facie untenable because, the very name of the document 'Account Charge Agreement' itself suggests that the amounts in the account of Cals would stand charged as per the terms set out in the Account Charge Agreement. At the relevant time, there was only one account of Cals with Banco for depositing the GDR subscription amount and there was no proposal on part of Cals to take any loan from Banco. Thus, the title of the document 'Account Charge Agreement' itself indicates the object with which it is being executed and to ascertain the object it was not necessary to read the entire docu....
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....ted that the GDR subscription amount was withdrawn as and when required for the business purposes of Cals and therefore, the inference drawn that the withdrawals were made in consonance with the terms of the Account Charge Agreement is wholly unjustified. 13. With reference to the finding that Sundararajan had furnished false information relating to the initial subscribers to the GDRs, it is submitted that Sundararajan was neither aware of the credit agreement nor aware of the Account Charge Agreement and he had submitted information on the basis of the information relating to initial subscribers received from the Merchant Banker/Lead Manager to the GDRs. In these circumstances, it is submitted that Sundararajan could not be held guilty of submitting false information. 14. As regards the non-disclosure of related party transaction, it is submitted that Sundararajan had no knowledge about the significant influence of Gagan Rastogi in Asia Texx and that the transaction between Cals and Asia Texx was a related party transaction. It is submitted that when the said contract was executed, Sundararajan was only a non-Executive Director of Cals and thus he was never involved in the d....
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....wned by a promoter of Spice Energy group) for subscribing to the GDRs of Cals and on the same day i.e. on 11/12/2007 itself Cals (controlled by Spice Energy group) executed an Account Charge Agreement thereby agreeing to keep the GDR subscription amount of USD 200 million as security for the loan of USD 200 million taken by Honor from Banco, leave no manner of doubt that the resolution passed on 30/10/2007 was intended to secure the loan taken by Honor for subscribing to the GDRs of Cals. 17. Explanation given by Sundararajan relating to the discrepancy in the resolution dated 30/10/2007 recorded in the minute book of Cals and the resolution dated 30/10/2007 certified by him is not worthy of acceptance because, assuming that there was lapse on part of the Company Secretary of Cals to record the said resolution in the minute book of Cals on 30/10/2007, then, Sundararajan would have got the error corrected in the subsequent Board meeting. However, in the meeting of BoD of Cals held on 19/1/2008, the minutes of BoD meeting dated 30/10/2007 as recorded in the minute book of Cals was approved. Very fact, that Sundararajan who was present in the BoD meeting dated 19/1/2008 did not tak....
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....or and no one else. In these circumstances, argument of Sundararajan that he had given information to the Stock Exchange regarding the initial subscribers to the GDRs of Cals, on the basis of information received from the Merchant Banker/Lead Manager clearly shows that it was stage managed to mislead the investors in India. Having opened an account on behalf of Cals with Banco for depositing the GDR subscription amount of USD 200 million and having made Goorha to sign the Account Charge Agreement so as to secure the loan taken by Honor for subscribing to the GDRs of Cals, it does not lie in the mouth of Sundararajan to contend that he honestly believed that foreign investors other than Honor had subscribed the GDRs of Cals. In these circumstances, the finding recorded in the impugned order that Sundararajan concealed the information in relation to initial subscribers to the GDRs of Cals in response to the summons issued under Section 11C(3) of SEBI Act cannot be faulted. 21. Argument of Sundararajan that he was not aware that the transaction between Cals and Asia Texx was a related party transaction is without any merit because the agreement between Cals and Asia Texx was signed....