2016 (12) TMI 1202 - SECURITIES APPELLATE TRIBUNAL MUMBAI - Corporate Laws

Head Note / Extract:
Security market fraud - Order passed by the Whole Time Member of SEBI - persons connected to the Indian Securities Market debarred from rendering services in connection with instruments defined as securities under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 for a period of 10 years and prohibited from accessing the capital market directly or indirectly for a period of 10 years - Held that:- 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 be accepted. 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. Thus, the investors in India were made to believe that in the global market the issuer companies have acquired high reputation in terms of investment potential and hence the foreign investors have fully subscribed to the GDRs, when in fact, the GDRs were subscribed by AP through Vintage which was wholly owned by AP. In other words, PAN Asia as a Lead Manager and AP as Managing Director of PAN Asia attempted to mislead the investors in India that the GDRs have been subscribed by foreign investors when in fact the GDRs were subscribed by AP through Vintage. Any attempt to mislead the investors in India constitutes fraud on the investors under the PFUTP Regulations. Fact that the appellants had not informed the Stock Exchanges about the GDRs being fully subscribed cannot be a ground for the appellants to avoid action being taken for misleading the investors in India, because, under the PFUTP Regulations, action can be taken even against a person who has caused the investors in India to believe in something which is not true. In the present case, it is apparent that prior to the issuance of GDRs, AP as Managing Director of PAN Asia had designed a plan to subscribe to the GDRs of Asahi and in implementation of that plan AP took loan of 5.98 Million USD as Managing Director of Vintage specifically for subscribing (take down) GDRs of Asahi and in fact on issuance GDRs, 5.98 Million USD was transferred to the account of Asahi with Euram Bank as GDR subscription amount. Thus, AP as Managing Director of PAN Asia was the root cause in creating artificial impression that the GDRs have been subscribed by foreign investors when in fact GDRs were purchased by AP through Vintage. Such an act is clearly prohibited under the PFUTP Regulations. Findings recorded in the impugned order that the names of initial subscribers exist only in fiction and that the appellants have artificially sought to create an impression that the GDRs were initially subscribed by foreign investors other than Vintage cannot be faulted. Decision of SEBI that the appellants attempted to committed fraud on the investors in India by introducing fictitious initial subscribers cannot be faulted.. Creating artificial impression with a view to mislead the investors in India either directly or indirectly is a serious offence and in the present case, since AP holding 100% shares of PAN Asia has committed fraud on the investors in India in relation to GDRs of several issuer companies, we see no reason to interfere with the debarment order passed against the appellants.