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2023 (4) TMI 1269
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....ively, as on March 31, 2018 and by Rs. 1,479.34 Crore and Rs. 1,331.47 Crore respectively, as on April 1, 2017. 2. Pursuant to the above, Securities and Exchange Board of India (hereinafter referred to as SEBI) sought information in the matter in order to examine as to whether or not there were any violations of the provisions of securities laws, etc. by the Company and its Directors / Promoters, during the period 2016-2019. In this regard, vide a letter dated August 26, 2019, the Company submitted a copy of the preliminary Investigation Report prepared by M/s Vaish Associates, an independent law firm appointed by the Company to conduct an investigation on certain transactions. Thereafter, SEBI had sought responses inter alia from the Chairman (Gautam Thapar), past Directors (Madhav Acharya, B. Hariharan) and CFO (V. R. Venkatesh) of CG Power. 3. Subsequently, SEBI, vide an Interim Order dated September 17, 2019, restrained the following persons, who were prima facie found to have perpetrated certain irregularities in CG Power in the nature of fraud, from accessing the securities market as well as from being associated with any intermediary registered with SEBI or any listed ....
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....and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003. 6. Thus, based on the aforesaid findings, SEBI decided to initiate Adjudicating Proceedings under Section 15HA of the SEBI Act for the above mentioned alleged violations by the Noticees. APPOINTMENT OF ADJUDICATING OFFICER 7. Initially, SEBI vide order dated July 14, 2021, appointed Shri Parag Basu, Chief General Manager as the Adjudicating Officer (hereinafter referred to as AO) in the matter. However, pursuant to his transfer, vide order dated March 11, 2022, the undersigned was appointed as the AO, under Section 15 I (1) of the SEBI Act and Rule 3 of SEBI (Procedure for Holding Inquiry and imposing penalties) Rules, 1995 (hereinafter referred to as "Adjudication Rules") to enquire into and adjudge the aforesaid violations alleged to have been committed by the Noticees, as stated in para 5 above, under Section 15HA of SEBI Act. SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING 8. Two separate Show Cause Notices bearing number SEBI/EAD-2/PB/AS/OW/ 28953/1/2021 and SEBI/EAD-2/PB/AS/OW/28954/1/2021 dated October 18, 2021 (hereinafter referred to as "SCN") were issued to Noticee No.1 and Noticee No.2 respectively in....
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....d transactions' pertaining to 'Nashik property' and 'Kanjurmarg property' was not known to them i.e. no 'mens rea'. d) While levying allegations against them, the SCN overlooked the contemporaneous documents on record with SEBI which demonstrates their innocence. e) The SCN admits the fact that the Circular dated 18.10.2019 was not applicable during the F.Y. 2016-17. f) The handwritten Note dated January 16, 2018 seems to be a forged document, the Hon'ble Whole Time Member, SEBI in his order dated 04.10.2022 has already disregarded allegations arising out of it. For the said reason as well as for the reasons elaborated by them in this response, the handwritten Note deserves to be disregarded. g) The SCN deserves to be disposed of since the amended provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 have been applied retrospectively. h) Since they are not dealing in Securities Market, the provisions of Section 12(A)(a),(b) and (c) of SEBI Act, 1992 are not applicable to them under these proceedings. i) The SCN deserves to be disp....
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.... the Noticees to reply to the SCN and appear for hearing. ISSUES FOR CONSIDERATION, EVIDENCE AND FINDINGS 16. After perusal of the replies made by the Noticees and material available on record, I have the following issues for consideration: ISSUE I: Whether Noticee No. 1 and 2 have violated provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003? ISSUE II: Does the violation, if any, on part of the Noticees attract penalty under Section 15HA of the SEBI Act? ISSUE III: If so, how much penalty should be imposed on the Noticees taking into consideration the factors mentioned in Section 15J of the SEBI Act? 17. Before I proceed further with the matter, it is pertinent to mention the relevant provisions of SEBI Act, 1992 and PFUTP Regulations, 2003, which read as under: SEBI Act, 1992 12A. No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contraventi....
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....ies market. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely: - (f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities; FINDINGS 18. Considering the facts and circumstances of the case, submission of the Noticee and material available on record, I record my findings hereunder. 19. Before proceeding to deal with the merits of the case, I wish to settle the following two preliminary objections raised in this proceeding by Noticee No.1: a) there is an inordinate delay in issuing the SCN i.e. about 5-6 years old. b) Inspection and copies of certain documents sought was not provided. Noticee has also relied on the judgement of Hon'ble Supreme Court in the matte of T. Takano vs SEBI and others. 20. With regard to the contention of Noticee No.1 that there is an inordinate delay in issuing the SCN, it is to be noted that, there is no provision under SEBI A....
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....that the said contention of Noticee No.1 in this regard is without merits. 23. With regard to the other contention of Noticee No.1 that inspection and copies of certain documents sought was not provided and its reliance on the judgment of Hon'ble Supreme Court in the matter of T. Takano vs SEBI, I note that the relied upon and relevant documents in the present matter were duly provided to Noticee during the course of instant proceedings which are in line with the principle pronounced via the aforesaid judgment of Hon'ble Supreme Court. It is pertinent to note that the question before the Hon'ble Supreme Court in the aforesaid judgment was whether an investigation report under Regulation 9 of the PFUTP Regulations must be disclosed to the person whom a notice to show cause is issued, when all the relied upon documents have been furnished to the Noticee. In this context, the Apex court has opined at para 39 of the judgment that "the actual test is whether the material that is required to be disclosed is relevant for the purpose of adjudication". The Apex Court also relied on test for the standard of 'relevancy' laid down by a four judge Bench of the Hon'ble....
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....1, 2018 and by Rs. 601.83 Crore and Rs. 401.83 Crore, respectively as on April 1, 2017. It was also noted that advances to related and unrelated parties of the Company and the Group were understated by Rs. 1,990.36 Crore and Rs. 2,806.63 Crore respectively, as on March 31, 2018 and by Rs. 1,479.34 Crore and Rs. 1,331.47 Crore respectively, as on April 1, 2017. 27. I further note that SEBI sought information in the matter in order to examine as to whether or not there were any violations of the provisions of securities laws, etc. by the Company and its Directors / Promoters, during the period 2016-2019. In this regard, vide a letter dated August 26, 2019, the Company submitted a copy of the preliminary Investigation Report prepared by M/s Vaish Associates, an independent law firm appointed by the Company to conduct an investigation on certain transactions. Thereafter, SEBI sought responses inter alia from the Chairman (Gautam Thapar), past Directors (Madhav Acharya, B. Hariharan) and CFO (V. R. Venkatesh) of CG Power. 28. It is also noted that subsequently, SEBI vide an Interim Order in the matter dated September 17, 2019, observed as under: "Examination of The Pre....
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.... f) The amount so raised by Blue Garden and the onward lending to Avantha Holdings and Acton were not reflected/recorded in the financial statements of the Company. .... .... ii. Sale of Kanjurmarg property to Blue Garden a) CG Power had earlier entered into an Agreement ("Evie Sale Agreement") to sell a property it owned in Kanjurmarg ("Kanjurmarg Property") to Evie Real Estate Private Limited ("Evie") for a consideration of Rs. 498 Crore. The Company had received Rs. 11 Crore from Evie, as initial consideration. The sale was to be completed before October 27, 2019. However, even before the aforesaid transaction could get terminated, CG Power entered into an Memorandum of Understanding in February 2017 ("MOU") with Blue Garden for transfer of the same property for a consideration amount of Rs. 498 Crore (Rs. 189 Crore to be paid in advance) with a condition that the MOU will take effect only upon the failure of the Evie Sale Agreement. b) For payment of a part of the consideration amount, Blue Garden took a loan of Rs. 190 Crore from ABFL. When the aforesaid amount was received by Blue Garden in February 2017, it was immediately paid as....
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....er of KKM, in the matter. In this regard I note that KKM was the Statutory Auditor of the Company as appointed in 81st Annual General Meeting of the Company dated September 28, 2018, till January 25, 2020. 31. I further note that subsequent to the above, SEBI conducted investigation in the matter and observed as under: CAS was the joint statutory auditor of CG Power along with M/s Sharp & Tannan for the FY 2016-17. CAS was inducted as the statutory auditor because M/s Sharp & Tannan was due for rotation under the Companies Act, 2013. As per the division of scope of work between the auditors, the corporate accounts of the Company under which the loans were given and taken were audited by CAS for the FY 2016-17. During the FY 2017-18, CAS became the sole statutory auditor, but it resigned, vide letter dated April 27, 2018 with immediate effect before completing the statutory audit for the year. The reason for the resignation, as stated in its letter, was that the Company, vide letter dated April 26, 2018, had informed CAS that it wanted to appoint one of the 'Big Four firms' as a statutory auditor due to a condition put by the lenders in their proposed lending agr....
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.... on behalf of Blue Garden and Mr. V. R.Venkatesh on behalf of CG Power. However, it is contrary to the fact that Mr.V.R. Venkatesh had never been a director of CG Power. Further, he had taken charge as Chief Financial Officer of CG Power from Mr.Madhav Acharya only on August 11, 2017 i.e. subsequent to the aforesaid agreement stated to have been executed on March 27, 2017. Even Mr. Bhimrao Venkataramana, who had signed the agreement dated March 27, 2017 on behalf of Blue Garden was appointed as a Director of Blue Garden only on April 15, 2017. It was therefore observed that the aforesaid facts clearly indicate that the agreement dated March 27, 2017 between CG Power and Blue Garden was created merely to provide some basis to the transactions between CG Power and Blue Garden. It was further observed that the agreement was dated only 4 days prior to the end of the FY 2016-17 while the transactions between CG Power and Blue Garden had begun since May 2016. Therefore, it was observed that CAS, who was the statutory auditor of the company, though admitted to have examined the said transaction, had not examined the aforesaid irregularities and did not brought out in the audit report for ....
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....katesh during the statement recording by SEBI on February 05, 2021 admitted that there had been a meeting held in this regard at the premises of CAS which was attended by Mr. Gagan Chaturvedi, Mr. Parag Mehta and another senior Partner of CAS. It was found that the proposal of Mr. Venkatesh was partly implemented by writing off fake inventory and debtors. However, the attempt to reduce the balance of CG PSOL from Rs. 1,370 Crore as on January 16, 2018 to Rs. 30 Crore as on March 31, 2018 was not successful. g) This apart, the events viz. immediate resignation of CAS on April 27, 2018 upon receiving the letter dated April 26, 2018 from C G Power and quick appointment of KKM in the place of CAS on April 28, 2018 were seems to be unusual in nature. While the reason for resignation stated by CAS in its letter dated April 27, 2018 was that the Company wanted to appoint one of the Big Four firms as a statutory auditor, the resignation of CAS was accepted and KKM were appointed immediately upon resignation of CAS to complete the statutory audit of CG Power for the FY 2017-18. Further, while SRBC & Co. LLP (one of the Big Four firms) was appointed as a statutory auditor later in 2....
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.... Power issued a show cause notice to KKM under Section 140(1) of the Companies Act, 2013 and provided KKM with an opportunity of being heard. However, no submissions were made by KKM in respect of the aforesaid show cause notice.. After due consideration, the Board of Directors of CG Power determined that KKM could not be considered unrelated party to the company. Accordingly, the Board decided to seek approval of the Central Government for removal of KKM as the joint statutory auditor of the Company and, subject to such approval beinggranted, seek approval of the shareholders under section 140(1) of the Companies Act, 2013. Upon communication of this decision of the Board, KKM, on 25 January 2020, resigned as the joint statutory auditor of the Company with immediate effect. b) It was observed that the events of immediate resignation of CAS on April 27, 2018 upon receiving the letter dated April 26, 2018 from CG Power and appointment of KKM in place of CAS on April 28, 2018 by passing a circular resolution by the Board of Directors of CG Power instead of holding a Board meeting were unusual. Further, it was observed that even though KKM was appointed on April 28, 2018, it ....
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....nuary 25, 2017 to March 14, 2017, while he was holding the position of Director in these companies, showed his close proximity with these companies and the nature of transactions in which these companies were involved. * As stated in the Forensic Audit Report dated March 18, 2020, KKM provided multiple services to Avantha Group and CG Power Group entities during the FY 2016-17 and the FY 2017-18 apart from the statutory audit and received substantial remuneration in this regard. * KKM were appointed as the statutory auditor of CG Power on April 28, 2018 immediately after the resignation of CAS on April 27, 2018, whose Managing Partner viz. Mr Ashwin Mankeshwar had earlier been a Director of Blue Garden and Acton, by passing a circular resolution by the Board of Directors of CG Power instead of holding a Board meeting. They completed the statutory audit of CG power for the FY 2017-18 and issued the audit report by May 30, 2018, i.e., within a month from their appointment. * The facts that KKM received substantial remuneration from Avantha Group and were quickly appointed as the statutory auditor of CG Power upon resignation of CAS showed their close ties w....
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....in such a way to net off the assets and liabilities of different entities i.e. debit balance of one entity netted off with credit balance of other entity in the books of account of CG Power which may not show the correct financial position of CG Power. In accounting norms, generally the netting of balance i.e. debit and credit of the same entity is permitted and not between the different entities. But in the present matter, the auditor did not raise question on the same and instead certified the same as true and fair in the auditor's report for the year 2016-17, which indicates the auditor's direct involvement on making such entries in the books of accounts of the company. In this regard, when specifically questioned during the hearing regarding the netting off between two different entities, Noticee No.1 submitted that they only seen the net amount appearing in the final books of accounts for FY 2016-17 and not each of the individual entry and the alleged netting off. 35. This apart, it is also noted with regards to the advance of Rs.28 crores by CG Power to Blue Garden during FY 2016-17 for the claimed consultancy services between them, that the said transaction was ad....
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....pany, despite being aware of the aforesaid irregularities, certified the financial statements of the company as true and fair which shows the auditor's direct involvement on such misstatements of the company. Therefore, I find no merit in the above contention of the Noticee. 38. It is also imperative to note that no approval/consent of MIDC was obtained before sale of the Nashik property. Further, the land at Nashik was not a barren unused piece of land but home to a huge and fully operational factory owned by CG Power, which is a major contributor to CG Powers business and provides employment to a large number of people. It was clear that the land cannot be transferred as a standalone asset, separate from the operational factory and hence, given the fact that just the land alone had been agreed to be sold under the arrangement with ABFL through Blue Garden, the FAR observed that this demonstrates that there was no actual intention to sale, but was just a loan agreement, which ABFL didn't want to give directly as loan to CG Power and wanted to give it as an advance for sale of land through a SPV. It was further observed that no approval was obtained from the Board of CG ....
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.... said handwritten note has the date, time and place of the said meeting nor there is any signed minute of the meeting. Further, there is no supporting documents on record, establishing that the suggestions mentioned in the said handwritten note were actually recommended by Mr. Gagan Chaturvedi of CAS. I further note that in the order no. WTM/AB/CFID/CFID_1/20149/2022-23 dated October 4, 2022 in the same matter, Hon'ble Whole Time Member of SEBI held that "With regard to the 10th transaction, the SCN has alleged that Noticee no. 7 approved a scheme for reducing the balances of inventory, debtors, and supplier advances in the books of CG Power by various means, as proposed by Noticee no. 5, vide hand-written note dated January 16, 2018. In this regard, the Noticee has submitted that the allegation is totally vague and bereft of any details. That simply a photocopy of a handwritten note dated January 16, 2018 has been put and it has been stated the Noticee approved a scheme. Noticee no. 7 has further submitted that the original document namely the purported note allegedly approved by him is not even made available and in the absence of the document being made available the allegat....
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....Meeting. Further, after its appointment on April 28, 2018, KKM submitted audit report for 2017-18 on May 30, 2018 i.e. almost in a month. In view of the aforesaid facts, I find no merit in the submissions made by Noticee No. 2 that it highlighted certain points w.r.t. the irregularities in its audit report of 2018-19. 44. Noticee No. 2 has further contended that Mr. Ashwin Mankeshwar (Managing partner of Noticee No. 2) was inducted as an additional director in the Blue Garden and Acton on 25.01.2017 and he resigned from the said companies on 14.03.2017. It had further contended that he did not attend any meeting of both the companies nor was he privy to any transaction entered into by these companies and that no remuneration was drawn by him during the period he was appointed as a director. In this regard, it is pertinent to mention that a MoU between Blue Garden and CG Power for assigning, sale and transfer of rights of Kanjurmarg Property was entered into on February 1, 2017 and the funds amounting to Rs. 190 Crore received by Blue Garden as loan from ABFL in this regard were transferred to CG Power on February 16 and 17, 2017. From the same, it is clear that it happened....
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....ed upon by the investors to be true and fair and accordingly, instead of working in the interest of shareholders of CG Power, facilitated the scheme of cleaning up the books of accounts of CG Power. These facts cannot be construed as mere negligence in part of the Noticees as a statutory auditor. I note that the act of facilitating in such a way to show the books of account of CG power as true and fair which is contrary to the actual facts is against the fiduciary role of the Noticees. I, therefore, find that by the aforesaid acts and omissions the Noticees aided and abetted CG Power in disseminating the false information in the Audit Report to wrongfully influence the decision of the investors and, thus, their acts and omissions amount to aiding and abetting in the fraudulent, unfair and manipulative acts covered within the definition of "fraud" and "fraudulent" under regulation 2(1)(c) of the PFUTP Regulations which reads as follows-: Definition of 'fraud" -Regulation 2(1)(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....
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...."... we are satisfied that the provisions of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market), Regulations, 2003 were violated. These regulations, among others, prohibit any person from employing any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on an exchange. They also prohibit persons from engaging in any act, practice, and course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities that are listed on stock exchanges." 49. Further, the Hon'ble SAT, in the matter of HSBC Securities and Capital Markets (India) Private Ltd. v. SEBI, SAT Appeal No. 99 of 2007, observed that "an incorrect or wrong information in a letter of offer or other similar documents issued for the benefit of investors in general could lead to serious consequences including loss of credibility for the market operators and for the regulatory system. This kind of failure has to be taken very seriously by the market regulator". 50. At th....
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....d fair by certifying the same in its audit report for 2016-17 and 2017-18 respectively. Accordingly, I note that by doing so, they have violated the provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003. ISSUE II: Does the violation, if any, on part of the Noticees attract penalty under Section 15HA of the SEBI Act? 52. I note from the above findings that the alleged violation of the provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003 stands established against the Noticees and accordingly the Noticees are liable for monetary penalty under Section 15HA of the SEBI Act. 53. The provisions of Section 15HA of the SEBI Act reproduced as under: SEBI Act, 1992 Penalty for failure to furnish information, return, etc. 15HA. If any person, who is required under this Act or any rules or regulations made thereunder, - (b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return ....
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....and in exercise of the powers conferred upon me under section 15-I of the SEBI Act, read with Rule 5 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, I hereby impose following penalty on the Noticees viz. M/s Chaturvedi & Shah (Noticee No.1) and M/s K. K. Mankeshwar and Co. (Noticee No. 2) in the proceedings initiated vide Show Cause Notice No. SEBI/EAD- 2/PB/AS/OW/ 28953/1/2021 and SEBI/EAD-2/PB/AS/OW/ 28954/1/2021 dated October 18, 2021 respectively, under Section 15HA of the SEBI Act, for the violation of provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003: S. No. Name of the Noticee Violation Penalty amount 1. M/s Chaturvedi & Shah Sections 12A(a), (b) and (c) of the SEBI Act, 1992; and Regulations 3(b), (c) and (d), 4(1) and 4(2)(f) of the PFUTP Regulations, 2003 Rs.5,00,000/- (Rupees Five Lakh Only/-) 2. M/s K. K. Mankeshwar & Co. Rs.5,00,000/- (Rupees Five Lakh Only/-) 57. The Noticees shall remit / pay the said amount of penalty within 45 days of recei....