2025 (7) TMI 646 - Board - SEBI

Diversion of funds through a connected entity - Violation of SEBI rules - misleading disclosures to investors - Utilization of funds by promotors - HELD THAT - As observed that Gensol and its promoters/promoter related entities have funded Wellray for trading in the scrip of Gensol which is a violation of the restrictions contained in section 67 of the Companies Act 2013. As is also apparent from the trading in the shares of Gensol by Wellray the latter made handsome gains from the transactions. Disclosures made by the Company - Company had made a disclosure dated January 28 2025 to the exchanges that it had received pre-orders for 30, 000 of its newly launched electric vehicles unveiled at the Bharat Mobility Global Expo 2025. However when relevant documents were called for from the Company and examined it was noted that the Orders in question were Memorandum of Understandings (MOUs) entered with 9 entities for 29, 000 cars. The MOUs were in the nature of an expression of willingness with no reference to the price of the vehicle or delivery schedules. Therefore it prima facie appeared that the Company was making misleading disclosures to investors. Prima facie violations found against the Noticees - Prima facie findings have shown mis-utilization and diversion of funds of the Company in a fraudulent manner by its promoter directors Anmol Singh Jaggi and Puneet Singh Jaggi who are also the direct beneficiaries of the diverted funds as has been detailed above. The Company has attempted to mislead SEBI the CRAs the lenders and the investors by submitting forged Conduct Letters purportedly issued by its lenders. In view of these prima facie findings the Noticees 1 2 and 3 are alleged to have violated the provisions of Section 12A(a) (b) and (c) of the SEBI Act 1992 and Regulations 3(b) (c) and (d) 4(1) and 4(2)(f) (k) (r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003. Paragraphs in this Order have also shown how the promoters and their related parties / relatives benefitted from the funds of Gensol a listed company through layered transactions such transactions qualified to be related party transactions in terms of Regulation 2(zc) of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations 2015). Accordingly such transactions were required to be disclosed as per the provisions of Regulation 4 and 48 of the LODR Regulations 2015 read with applicable accounting standards which Gensol has allegedly failed to do. In the instant case prima facie evidence of blatant violation of rules of corporate governance is writ large over the workings of the Company. The diversion of funds of the Company by promoter entities reflects a culture of weak internal control where even ring-fenced borrowings from institutional creditors were rerouted at the total discretion of the promoters. The internal controls at Gensol appear to be loose and through the quick layering of transactions funds have seamlessly flowed to multiple related entities/individuals. The promoter holding in the Company has already come down substantially and there is a risk of the promoters (Noticees 2 and 3) further off-loading the shares on gullible investors. Thus investors need to be made aware of the alleged wrongdoings detailed above through regulatory action. At the same time allowing Noticees 2 and 3 to remain at the helm of affairs as directors or KMPs in the Company is likely to do further damage to the interests of the Company. It must be mentioned that Gensol recently announced stock split of its shares in the ratio of 1 10 which is likely to attract more retail investors to the scrip. At this stage allowing this Corporate Action may not be in the interest of the investors. Directions - In exercise of the powers conferred upon me under Sections 11 11(4) and 11B (1) read with Section 19 of the SEBI Act 1992 hereby issue by way of this interim order the following directions which shall be in force until further orders - (a) Noticees 2 and 3 are restrained from holding the position of a director or a Key Managerial Personnel in Gensol until further orders. (b) Noticees 1 2 and 3 are restrained from buying selling or dealing in securities either directly or indirectly in any manner whatsoever until further orders. If the said Noticees have any open position in any exchange-traded derivative contracts as on the date of the Order they can close out /square off such open positions within 7 days from the date of the Order or at the expiry of such contracts whichever is earlier. The Noticees are permitted to settle the pay-in and pay-out obligations in respect of transactions if any which have taken place before the close of trading on the date of this Order. (c) Noticee 1 is directed to put on hold the stock split announced by it. (d) SEBI shall appoint a forensic auditor to examine the books of accounts of Gensol and its related parties. The forensic auditor/ audit firm so appointed as per this Order shall submit a Report to SEBI within six months from the date of appointment. The foregoing prima facie observations contained in this Order are made on the basis of the material available on record. The concerned Noticees may within 21 days from the date of receipt of this Order file their reply/objections if any to this Order and may also indicate whether they desire to avail an opportunity of personal hearing on a date and time to be fixed in that regard.

Summary

Issues Presented and Considered

The core legal questions examined by the Tribunal include:

• Whether the Company and its promoters engaged in mis-utilization and diversion of funds obtained through term loans from financial institutions, in violation of applicable securities laws and regulations.
• Whether the Company submitted forged or falsified documents (Conduct Letters and No Objection Certificates) to Credit Rating Agencies and SEBI, thereby misleading regulators and investors.
• Whether the promoters and related parties engaged in transactions that qualify as related party transactions under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and if so, whether such transactions were properly disclosed.
• Whether the promoters and related entities violated provisions of the SEBI Act and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 by manipulating share price and engaging in unfair trade practices.
• Whether the promoters' conduct and corporate governance failures warrant interim regulatory directions to protect investor interests and market integrity.
• Whether the preferential issue of shares was funded through routed transactions involving related parties, raising concerns on genuineness and compliance with disclosure norms.
• Whether the trading in the Company's shares by a related entity (Wellray) using funds routed from the Company and promoters violated Section 67 of the Companies Act, 2013, which restricts a company from providing financial assistance for purchase of its own shares.
• Whether the Company made misleading disclosures to stock exchanges regarding orders and strategic tie-ups, thereby violating disclosure obligations under securities laws.
• Whether the invocation of pledged shares by lenders could further dilute promoter shareholding, impacting control and investor interests.

Issue-wise Detailed Analysis

1. Mis-utilization and Diversion of Funds Obtained from Lenders

Legal Framework and Precedents: The SEBI Act, 1992, and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, impose duties on listed entities and their promoters to maintain transparency and prohibit fraudulent conduct including diversion of funds. Further, disclosure norms under SEBI Master Circular require timely reporting of defaults on loans.

Court's Interpretation and Reasoning: The Tribunal examined detailed bank statements and fund flow analyses which revealed that loans amounting to approximately Rs. 977.75 Crore were availed from IREDA and PFC primarily for procurement of 6,400 electric vehicles (EVs). However, only 4,704 EVs were procured, costing Rs. 567.73 Crore, leaving a substantial unaccounted amount of Rs. 262.13 Crore.

Further, the funds transferred to the EV supplier (Go-Auto) were routed back to the Company or to entities related to the promoters, including Capbridge Ventures LLP, Matrix Gas and Renewable Ltd., and others. These funds were used for personal expenses of promoters (including purchase of luxury real estate), benefit to promoter-related entities, and other unrelated purposes.

Key Evidence and Findings: The Tribunal relied on bank statements, lender confirmations denying issuance of Conduct Letters, statements of related entities, and admissions by Go-Auto's Managing Director regarding dues. It was found that the Company repeatedly submitted "No Default Statements" certifying timely loan servicing despite multiple defaults documented by lenders.

Application of Law to Facts: The diversion of funds and submission of false statements constituted violations of SEBI regulations prohibiting fraudulent and unfair trade practices. The failure to disclose defaults as required under SEBI Master Circular further compounded the violations.

Treatment of Competing Arguments: The Company denied involvement in falsification claims, but lender denials and documentary evidence disproved these assertions. The Tribunal found the Company's explanations insufficient and inconsistent with the evidence.

Conclusions: The Tribunal concluded that there was prima facie mis-utilization and diversion of funds by the promoters and the Company, with funds routed through related parties for non-business and personal use.

2. Submission of Forged Documents and Misleading Disclosures

Legal Framework: Under SEBI Act and PFUTP Regulations, submission of forged or falsified documents to regulators or market intermediaries is prohibited and constitutes fraudulent conduct.

Reasoning and Findings: The Company submitted Conduct Letters and No Objection Certificates purportedly issued by IREDA and PFC to Credit Rating Agencies, which were later denied by these lenders. This act was a deliberate attempt to mislead CRAs, SEBI, lenders, and investors about the Company's debt servicing status.

Application: Such conduct violates Sections 12A(a), (b), (c) of the SEBI Act and Regulations 3(b), (c), (d), 4(1), and 4(2)(f), (k), (r) of the PFUTP Regulations.

Conclusion: The Tribunal found prima facie evidence of submission of forged documents and misleading disclosures.

3. Related Party Transactions and Non-Disclosure

Legal Framework: Regulation 2(zc), 4, and 48 of SEBI (LODR) Regulations, 2015, require disclosure of related party transactions and adherence to accounting standards.

Findings: The promoters and related entities received diverted funds through layered transactions. These transactions qualified as related party transactions but were not properly disclosed by the Company.

Conclusion: The Company violated disclosure norms under SEBI LODR Regulations.

4. Violation of Section 67 of Companies Act, 2013 - Funding Purchase of Own Shares

Legal Framework: Section 67 prohibits companies from providing financial assistance, directly or indirectly, for purchase of its own shares.

Findings: Wellray, a related party, traded extensively in the Company's shares using funds routed from Gensol and promoters. The funds used for trading were largely sourced from Gensol and related entities.

Conclusion: This conduct prima facie violated Section 67 by facilitating purchase of the Company's shares through indirect financial assistance.

5. Misleading Disclosures to Stock Exchanges

Legal Framework: SEBI Listing Regulations mandate timely, accurate, and non-misleading disclosures.

Findings: The Company's disclosures regarding pre-orders for EVs were based on MOUs lacking pricing and delivery schedules, thus misleading investors. Similarly, announcements about strategic tie-ups and sale of subsidiaries lacked substantive backing and were withdrawn subsequently.

Conclusion: The disclosures were prima facie misleading and violated SEBI disclosure obligations.

6. Corporate Governance Failures and Need for Interim Directions

Legal Framework: SEBI's regulatory powers under Sections 11, 11(4), 11B(1), and 19 of the SEBI Act enable it to issue interim directions to protect investors and market integrity.

Reasoning: The Tribunal noted a complete breakdown of internal controls and governance at the Company. Promoters treated the Company's funds as their own, diverting substantial amounts to personal and related party uses. The promoter shareholding had significantly diluted, with pledges invoked by lenders threatening further loss of control. The Company's stock split announcement risked attracting retail investors unaware of underlying risks.

Conclusion: Interim directions were warranted to restrain promoters from managerial positions, prohibit trading by the Company and promoters, hold the stock split, and appoint forensic auditors.

Significant Holdings

"The prima facie findings have shown mis-utilization and diversion of funds of the Company in a fraudulent manner by its promoter directors, who are also the direct beneficiaries of the diverted funds."

"The Company has attempted to mislead SEBI, the Credit Rating Agencies, the lenders and the investors by submitting forged Conduct Letters purportedly issued by its lenders."

"The promoters were running a listed public company as if it were a proprietary firm, routing Company funds to related parties and using them for unconnected expenses, ultimately resulting in losses to investors."

"The internal controls at the Company appear to be loose and through quick layering of transactions, funds have seamlessly flowed to multiple related entities and individuals."

"Allowing the promoters to remain at the helm of affairs is likely to do further damage to the interests of the Company and investors."

"The Company and promoters have violated provisions of Section 12A(a), (b), (c) of the SEBI Act and Regulations 3(b), (c), (d), 4(1), and 4(2)(f), (k), (r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003."

"The promoters and related parties benefitted from the funds of the Company through layered transactions constituting related party transactions, which were not disclosed as required under SEBI LODR Regulations."

"The trading in the Company's shares by a related party using funds routed from the Company and promoters violates Section 67 of the Companies Act, 2013."

"The Company made misleading disclosures to the stock exchanges regarding orders and strategic tie-ups, thereby violating disclosure obligations."

"Pending detailed investigation, immediate interim directions are necessary to safeguard investor interests and preserve market integrity."

Final Determinations on Each Issue

• There is prima facie evidence of diversion and mis-utilization of funds obtained through loans from financial institutions, in violation of SEBI regulations.
• The Company submitted forged documents to Credit Rating Agencies and SEBI, misleading regulators and investors.
• The promoters and related parties engaged in undisclosed related party transactions violating SEBI LODR Regulations.
• Funds routed to a related entity for trading in the Company's shares violated Section 67 of the Companies Act, 2013.
• The Company made misleading disclosures to stock exchanges, violating disclosure norms.
• Corporate governance failures and promoter conduct warranted immediate interim regulatory intervention.
• Interim directions were issued restraining promoters from managerial roles, prohibiting trading by the Company and promoters, holding the stock split, and ordering forensic audit.