TMI Blog2015 (4) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation in the RHP/Prospectus of DLF and actively concealed the fact about filing of FIR against Sudipti and others. In the facts and circumstances of this case, I find that the case of active and deliberate suppression of any material information so as to mislead and defraud the investors in the securities market in connection with the issue of shares of DLF in its IPO is clearly made out in this case. I am satisfied that the violations as found in this case are grave and have larger implications on the safety and integrity of the securities market. In my view, for the serious contraventions as found in the instant case, effective deterrent actions to safeguard the market integrity. It, therefore, becomes incumbent to deal with contraventions, digression and demeanour of the erring Noticees sternly and take appropriate actions for effective deterrence. In this regard, the observation of the Honble Supreme Court, as a word of caution, in the matter of N. Narayanan [2013 (4) TMI 652 - SUPREME COURT]is worth mentioning. I note that clause 6.10.2.3 of DIP Guidelines requires an issuer to disclose financial details relating to its subsidiaries. As already found hereinabove, Sudip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the said IPO, DLF had filed its draft Red Herring Prospectus (DRHP) dated January 2,2007 with SEBI. Before the said IPO, DLF had filed a DRHP dated May 11, 2006 ( first DRHP ) which was withdrawn by DLF and subsequently it filed the second DRHP dated January 2, 2007 ( second DRHP ) SEBI issued its observations on the second DRHP on May 7, 2007. Thereafter, DLF issued the RHP dated May 25, 2007. The issue opened on June 11, 2007 and closed on June 14, 2007. The Prospectus was filed with filed with Registrar of Companies on June 18, 2007. After the completion of allotment in the IPO, the shares of DLF were listed on Bombay Stock Exchange Ltd. and National Stock Exchange of India Ltd. on July 5, 2007. 2. With regard to the above IPO of DLF, one Mr. Kimsuk Krishna Sinha ( Mr. Sinha ) had filed two complaints with SEBI on June 4, 2007 and July 19, 2007. Mr. Sinha in his complaint dated June 4, 2007, inter alia, stated that Sudipti Estates Private Limited ( Sudipti ) and certain other persons had duped him of ?34 crore (approx.) in relation to a transaction between them for purchase of land, and he had registered an FIR No. 249/2007 dated April 26, 2007 at Police Station, C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Mr. Sinha in his complaints dated June 4, 2007 and July 19, 2007. The purpose of the investigation was to ascertain the violations, if any, of the provisions of SEBI (Disclosure and Investor Protection) Guidelines, 2000 ( DIP Guidelines ) read with corresponding provisions of SEBI (Issuance of Capital and Disclosure Requirements) Regulations, 2009 ( ICDR Regulations ) and the relevant provisions of the Companies Act, 1956 ( Companies Act ). 5. Pursuant to the investigation, SEBI issued a Show Cause Notice dated June 25, 2013 (hereinafter referred to as the SCN ) to DLF, Mr. K. P. Singh (Executive Chairman of DLF), Mr. Rajiv Singh (Vice Chairman), Mr. T.C. Goyal (Managing Director), Ms. Pia Singh (Whole Time Director), Mr. Kameshwar Swarup (Executive Director-Legal), Mr. G. S. Talwar (Director) and Mr. Ramesh Sanka (CFO). All these persons are hereinafter collectively referred to as the Noticees and individually by their respective names. 6. The facts and circumstances described in the SCN and the allegations leveled against the Noticees therein are, inter alia, as under: a) Mr. K. P. Singh, Mr. Rajiv Singh, Mr. T. C. Goyal, Ms. Pia Singh, Mr. Kameshwar Swarup, Mr. G. S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;holding-subsidiary' under section 4 of the Companies Act, it has been alleged in the SCN that :- (i) Even after the sale of entire shareholding in Sudipti, Shalika and Felicite by the wholly owned subsidiaries of DLF, there was no change in the composition of the Board of directors of these three companies. The directors in Sudipti, Shalika and Felicite, who were employees of DLF, continued to be the directors of these companies even after the aforesaid sale of shareholding. These directors were subject to the control of DLF due to their employee and employer relationship?. Due to this set of arrangement, DLF was in a position to control the boards of these three companies. Therefore, it has been alleged that in terms of SAST Regulations, these three companies were under the control of DLF even after November 29-30, 2006 i.e. after the date of claimed dissociation. Therefore, Sudipti, Shalika and Felicite were related parties of DLF in terms of AS-18. It has been alleged that DLF has failed to disclose its related party transactions. (ii) The three shareholders who, pursuant to purchase of shares of Felicite from DHDL, DEDL and DRDL on November 29, 2006, became 100% sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licite were and are subsidiaries of DLF. In terms of the provisions of DIP Guidelines and AS-23, names of these subsidiary companies should have been disclosed in the RHP/Prospectus of DLF, which it has failed to do. DIP Guidelines also required DLF to provide certain disclosures with respect to its subsidiaries, e.g. history and nature of business of subsidiaries and their financial information. DLF's Prospectus dated June 18, 2007 did not provide any such information of the aforesaid subsidiaries. Therefore, it has been alleged that DLF has violated provisions of clause 6.10.2.3 of the DIP Guidelines. (viii) Both Sudipti and Shalika did not account for any expenses on account of operations, cost of establishment/personnel, rent, electricity, telephone, property tax or salary in their books of accounts during the financial year 2006-07 and 2007-08. It has been alleged that some other entity was incurring /absorbing such costs. (ix) Sudipti had entered into a development agreement during the year 2006 with DLF Commercial Projects Corporation (DCPC) a partnership firm of DLF. Pursuant to the said agreement, DCPC had provided performance deposit amounting to ?45 crore durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated the provisions of clauses 6.2, 6.9.6.6., 6.10.2.3, 6.11.1.2, 6.15.2 and 9.1 of DIP Guidelines read with regulation 111 of ICDR Regulations and section 11 of the Securities and Exchange Board of India Act, 1992 ( SEBI Act ) and also the provisions of section 12 A(a), (b) and (c) of SEBI Act read with regulations 3 (a), (b), (c), (d), 4(1), 4 (2)(f) and (k) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 ( PFUTP Regulations ). The relevant portion of these provisions of the SEBI Act, PFUTP Regulations, ICDR Regulations and DIP Guidelines are reproduced as under: SEBI Act, 1992 Functions of Board. 11. (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. 12A. No person shall directly or indirectly - (a) use or employ, in connection with the issue, purchase or sale of any securities listed or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading or that contains information in a distorted manner and which may influence the decision of the investors. DIP Guidelines, 2000 6. About the Issuer Company 6.2 The prospectus shall contain all material information which shall be true and adequate so as to enable the investors to make informed decision on the investments in the issue. 6.9.6 Promoters/ Principal Shareholders 6.9.6.6 Related party transactions as per the Financial Statements 6.10 Financial Statements 6.10.2.3 If the issuer company has subsidiaries, the report shall: (a) so far as regards profits and losses, deal separately with the issuer company?s profits or losses as provided by 6.10.2.2 and in addition, deal either: (i) as a whole with the combined profits or losses of its subsidiaries, so far as they concern the members of the issuer company; or (ii) individually with the profits or losses of each subsidiary, so far as they concern the members of the issuer company; or, instead of dealing separately with the issuer company?s profits or losses, deal as a whole with the profits or losses of the issuer company, and, so far as they concern the members of the issuer company, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the Board under the said Guidelines and pending before it shall be deemed to have been filed or made under the corresponding provisions of these regulations. 9. By the SCN, the Noticees have been called upon to show cause as to why suitable directions under sections 11(1), 11(4), 11A and 11B of the SEBI Act read with clause 17.1 of DIP Guidelines and regulation 111 of ICDR Regulations including a direction to debar them from accessing the securities market and prohibit them from buying, selling or dealing in securities for a particular duration should not be issued against them. 10. Vide letter dated November 1, 2013, DLF submitted its reply to the SCN and the other Noticees also filed their separate replies on different dates. Opportunities of personal hearing were granted to the Noticees on December 4, 2013 and January 15, 2014. On the said dates, the representatives of the Noticees appeared and made their submissions. Pursuant to the hearing, vide letter dated January 29, 2014, DLF filed additional written submissions. The other Noticees also filed their additional written submissions pursuant to the hearing vide separate letters. The replies / written submissions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erchant Banker of DLF and SEBI at the time of processing of DLF's IPO was denied. Non-furnishing of such documents impairs the ability of DLF to fully respond to the charges leveled in the SCN and consequently the same is in violation of the principles of natural justice. 4) While processing the second DRHP of DLF, SEBI reviewed all the documents filed along with the second DRHP including the delta view document and in exercise of its power as a market regulator, SEBI also issued comments on the disclosures in the DRHP on several occasions. DLF, thus, had the legitimate expectation that SEBI, while acting in its regulatory capacity and issuing comments, has reviewed all the documents placed before it, and having already applied its mind to the disclosures and the sufficiency thereof for the IPO, it is not open for SEBI to contend otherwise. 5) No prejudice has been caused to any investor of DLF as a consequence of any purported non-disclosure in the RHP/Prospectus nor has any investor lodged any complaint with SEBI with regard to the veracity of the disclosures in the RHP/Prospectus or the same adversely affecting his/her interest. The SCN also does not contain any allega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (whether they should invest in the IPO) would not have been affected in any manner even if names of Sudipti ,Shalika and Felicite were disclosed as subsidiaries / related parties in the RHP/Prospectus. The relevance of Sudipti to DLF, from a commercial view-point, was merely the developmental rights in the land owned by Sudipti that DLF procured through DLF Commercial Projects Corporation ( DCPC ). The RHP/Prospectus also fairly disclosed the risk relating to the said development rights constituting 37.9% of the total land reserves of DLF. This percentage of 37.9% included the sole development rights procured from Sudipti by DCPC. These commercials pertaining to risk factors, land reserve disclosure, etc. would not have changed even if the names of Sudipti, Shalika and Felicite were disclosed as subsidiaries or related parties. Such development rights gave DLF substantially the right to all revenues from development and the authority to transfer title to the land. Therefore, the transfer was done because these companies were no longer commercially relevant to DLF and not because by such transfer DLF would have continued to exercise control over these companies. 11) At page 72 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land became irrelevant. 12) Pursuant to a development agreement between Sudipti and DCPC, Sudipti had received a sum of ?45 crore from the latter. This amount was indicated as an outstanding liability in the books of account of Sudipti. As a consequence, as on the date of the transfer of the shares of Sudipti, its net asset value was less than ? 10 per share, as a reason of the outstanding liability towards DCPC. Accordingly, DEDL and DHDL transferred its shares at face value. SEBI has while considering the assets of Sudipti for the purposes of valuation, failed to take into account the outstanding liabilities of Sudipti, which exceeded the value of its assets. 13) The allegation that Shalika did not have the funds to purchase the shares of Sudipti and its own original shareholders advanced the monies to it in the garb of share subscription money is farcical. The cheques in respect of the consideration for purchase of shares of Sudipti were issued by Shalika itself and it had the requisite monies in its account to honour the said cheques. Further, Shalika being the beneficial interest owner had paid for all shares, including that held by it jointly with Mr. Gautam. The subscr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dipti's and Shalika?s incorporation and November 30, 2006 when they came to be held by Felicite, they did not have any business which would require it to incur substantial operational expenses. DLF is not privy to the operational expenses and financial position of Sudipti and Shalika post November 30, 2006, and is thus unable to comment on the same. DLF is neither incurring nor absorbing the operational expenses that are being incurred by Sudipti and Shalika. Additionally, DLF is not privy to the reason for non-shifting of the office address of Shalika. 18) The SCN does not indicate why DLF would go through the various processes set out in the SCN merely to avoid disclosure of Sudipti as its subsidiary. The SCN does not allege any motive behind the alleged acts of DLF and its personnel. 19) Annexure XXI of the auditors certificate, as included in the RHP/Prospectus, contain clear and unequivocal recordal of the related parties and Key Management Personnel for the purposes of AS-18 and also enterprises under the control of KMPs and their relatives. It is respectfully submitted that the certificates and compliance documentation prepared in accordance with the Companies Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce provisions of Securities Contracts (Regulation) Act, 1956, DLF has duly conducted an Institutional Placement Program by way of issuance of shares. This offering of shares, after the initial IPO in June, 2007 amounts to a regulatory waiver and acquiescence in favor of DLF, its promoters and directors. 24) Whether a company constitutes a subsidiary of another has to be determined under Section 4 of the Companies Act, 1956 read with AS 21. In the present case from November 29-30, 2006, DLF was neither holding, directly or indirectly, any equity share capital in Felicite, Shalika and/or Sudipti nor enjoying any voting rights, directly or indirectly, qua these three companies. As a matter of law, from and with effect from November 29- 30, 2006, Felicite became the ultimate holding company (parent) of both Shalika and Sudipti. It is neither SEBI?s case nor can it be countenanced on the basis of facts on record that the shareholders of Felicite, were holding the shares of Shalika (or Sudipti) beneficially for or on behalf of DLF. Thus, Felicite, Shalika and/or Sudipti cannot be regarded as subsidiaries of DLF under section 4(1)(b) and 4(1)(c) of the Companies Act, 1956 or under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(a) of the Companies Act, 1956 and AS-21 is relatable to the composition of the Board of directors of a company and not the actual working and decision making of the Board of directors. Therefore, the purported employer-employee relationship? between the directors of Felicite, Shalika and/or Sudipti on the one hand and DLF/its subsidiaries on the other cannot give rise to any inference of control over the composition of Board of directors in terms of Section 4 of the Companies Act, 1956 and AS-21. 27) The three entities (Felicite, Shalika and Sudipti), pursuant to the divestment of equity stake by DEDL, DHDL and DRDL, ceased to be a related party? to DLF. Further, there is nothing to show that DLF had the power to direct the financial and/or operating policies of the three companies. In the present case, the tests of related party , control or key management personnel provided under AS-18 are not satisfied 28) On a composite reading of the definitions of the expressions 'related party', 'significant influence' and 'control' under AS-18 it emerges that Felicite, Shalika and Sudipti were not related parties of DLF as on the date of the Second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, there is no basis in law to foist deemed knowledge of the FIR on DLF without there being even a shred of evidence that DLF or any of its directors had actual knowledge of the FIR. The fact that Mr. Praveen Kumar is the nephew of Mr. K.P. Singh, the promoter/chairman of DLF and one of the Key Managerial Employee (as distinguished from a Key Management Personnel under AS-18) is also wholly insufficient to conclude that DLF was aware of the FIR registered against Sudipti. 31) Since, the above three entities, at the relevant time, were not the subsidiaries of DLF, no disclosures were required to be made in the RHP/Prospectus about them. Therefore, DLF has not violated provisions of Clauses 6.2, 6.10.2.3, 6.11.1.2, 6.15.2, 9.1 of the SEBI (DIP), Guidelines. 32) The gravamen of the allegations of SEBI is disassociation of Sudipti by the subsidiaries of DLF. In view of the fact that the transfer of shareholding in Sudipti by DLF?s subsidiaries stood consummated on November 30, 2006 i.e. much prior to DLF?s second DRHP, the said act bears no correlation to the securities market. Further, dealing in securities? (as defined under regulation 2(b) of the FUTP Regulations) is an es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plexity and specialized nature of the process of IPO of DLF and his advanced age of 82 years, he heavily relied on the advice of various experts involved in the process such as Merchant Bankers and acted bona fide on such expert advice. III. Mr. Rajiv Singh, vide letters dated November 27, 2013 and January 30, 2014 adopted the replies submitted by DLF. He submitted that SEBI rejected his request for inspection of IPO papers including the correspondence exchanged between the Merchant Banker and SEBI, and other relevant documents and the same was in violation of the principles of natural justice. Further, the show cause notice affixes the liability on him solely on account of the fact that he was the director of DLF and there is no evidence whatsoever of hi complicity with such the alleged contraventions. The SCN is silent on setting out the particulars of the purported contraventions. He also submitted that while approving the Financial Statements contained in the Offer Document, he was largely guided by expert advice required, and the contents of the Offer Document had been certified to be true, correct and in due compliance with all disclosure requirements by relevant expert ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the DLF limited were duly reviewed and recommended by the audit committee of DLF prior to being tabled before the Board of Directors after having been audited by its Statutory Auditors. DLF had, for the purposes of the IPO, appointed eminent Merchant Bankers, lawyers and other advisors to ensure that detailed due diligence is undertaken with regard to all aspects of the company for the purposes of ensuring due disclosure of information. He also submitted that at the relevant point of time he was also a director in DHDL, DEDL and DRDL and these companies had divested their equity interest in Felicite, Shalika and Sudipti in November, 2006 and thereafter no agenda items were presented before the Board of Directors of DEDL, DHDL and DRDL pertaining to Sudipti, Shalika and Felicite till such time he was a director in DHDL, DRDL and DEDL. Further, his wife Mrs. Padmaja Sanka was a 'Housewife' with an independent source of income. The decisions of Mrs. Padmaja Sanka were independent of his employment with DLF. He was never a KMP of DLF within the meaning of AS-18 and therefore the transaction was not disclosed in the financial statements of DLF. VIII. Mr. G.S. Talwar, vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the investigation into the allegations leveled by Mr. Sinha against DLF, Sudipti and others in respect of the IPO of DLF. In view of the above, I find that the said investigation ordered by SEBI was in full compliance of the order of Hon'ble Delhi High Court and was also within the ambit and powers given to SEBI under the SEBI Act in this regard. I, therefore, do not find any merit in this contention of the Noticees and reject the same. 14. The second preliminary contention of the Noticees is that SEBI cannot invoke the provisions of PFUTP Regulations since the Order dated October 20, 2011 passed by SEBI had confined the investigation to the violations of DIP Guidelines read with relevant provisions of Companies Act. In this regard, it is pertinent to mention that the investigation ordered by SEBI vide order dated October 20. 2011 had to focus on the probable violations of DIP Guidelines and Companies Act because the complaints filed by Mr. Sinha related to certain alleged non-disclosures in the Prospectus filed by DLF in respect of its IPO. I note that SEBI's investigation powers under the SEBI Act are wide enough to include any possible violation of SEBI Act and Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities in the IPO processes, even if noticed or revealed after the issuance of RHP/Prospectus, as provided in the SEBI Act/Regulations and the Companies Act would follow. 17. Having dealt with the preliminary contentions of the Noticees, I now proceed to deal with the allegations and charges leveled against the Noticees in the SCN. On careful perusal of the SCN, it is inferred that, in this case, the SCN raises the following allegations/issues: (i) Whether entire share transfer process in Sudipti, Shalika and Felicite was executed through sham transactions by DLF and they continued to be subsidiaries of DLF? And, if yes, whether the Noticees employed a scheme by camouflaging the association of Sudipti with DLF as dissociation? (ii) Whether the Noticees have failed to ensure that the RHP/ Prospectus contained the material information which is true and adequate, so as to enable the investors to make an informed investment decision in the IPO of DLF? and (iii) Whether the Noticees actively and knowingly suppressed several material information and facts in the RHP/Prospectus so as to mislead and defraud the investors in securities market in connection with the issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this allegation is that the aforesaid transfers of shareholding of DLF's wholly owned subsidiaries viz. DEDL, DHDL and DRDL in Sudipti, Shalika and Felicite were sham as DLF continued to control them within the scope of definition of the word 'control' under regulation 2(1)(c) of the SAST Regulations, clause 3.3(b) of AS-23 and section 4(1)(a) of the Companies Act. These provisions relied upon in the SCN are reproduced as under: Companies Act, 1956- Section 4. MEANING OF HOLDING COMPANY AND SUBSIDIARY (1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only if, - (a) that other controls the composition of its Board of directors ; or (b) .. (2) For the purposes of sub-section (1), the composition of a company's Board of directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships ; but for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are pari materia with respect to determining control from the ability of a company to control the composition of the Board of directors of the other by virtue of right of former to appoint or remove majority of directors from the Boards of the later without the consent or concurrence of any other person. 21. It is relevant to mention here that whether a company has ability to control the composition of Board of directors of another company by virtue of its right to appoint or remove majority of directors in the later depends upon facts and circumstances of each case. In light of above provisions, I now proceed to examine the facts on the basis of which the SCN alleges that even after the transfer of shareholding of three subsidiaries of DLF in Sudipti, Shalika and Felicite, DLF remained in 'control' over these three companies and thus they remained its subsidiaries. Directors of the three companies were the employees of DLF/its subsidiaries and were subject to the control of DLF. 22. It is an undisputed fact that following employees of DLF or its subsidiaries were the directors of Sudipti, Shalika and Felicite before and after November 29-30, 2006 i.e. the dates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd was associated with these three companies even after Novwember 29- 30 , 2006. It is undisputed fact that that there was no change in the registered office, statutory auditors of Sudipti, Shalika and Felicite even after the transfer of shareholding in them by the wholly owned subsidiaries of DLF. I also note that Sudipti and Shalika did not account for any expenses on account of operations, cost of establishment/personnel, rent, electricity, etc. during the financial years 2006-07 and 2007-08 which indicates that some other entity was incurring/absorbing such costs.These facts and circumstances further corroborate the inference that DLF did not lose association with Sudipti, Shalika and Felicite even after such transfer of shareholdings in them. 26. In addition to the above facts, the SCN narrates another fact that during the period September-October, 2006, Sudipti was funded by DLF?s subsidiaries / associates through a series of transactions through Vikram and these funds were used for purchase of land and creation of development rights on the land so acquired. It is noted that this transaction was prior to issuance of RHP/DRHP when Sudipti was admittedly a subsidiary of DLF. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al commercial practice consolidated payments for such purchases were made by Felicite to DEDL, DHDL and DRDL. The Noticees have further submitted that the said amounts received by DEDL, DHDL and DRDL from Felicite included payment towards purchase of shares of Shalika. Though the Noticees have claimed that DHDL, DEDL and DRDL had received consideration for sale of shares of Shalika as a part of consolidated payment from Felicite, but they have failed to substantiate such claim by any evidence. I, therefore, am not inclined to agree with the contentions of the Noticees in this regard. Control of DLF through its KMPs over Felicite. 29. Admittedly, on November 29, 2006, the entire shareholding of Felicite was purchased by three 'Housewives' viz. Mrs. Madhulika Basak, Mrs. Padmaja Sanka and Mrs. Niti Saxena. Further, pursuant to transfer of shares on November 30, 2006 in Shalika and Sudipti, Felicite came in control of Shalika and Sudipti as it held 100% shareholding of Shalika which in turn held 100% shareholding of Sudipti. It has been alleged in the SCN that the purchases of shares of Felicite by these three 'Housewives' were funded by their respective husban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er clause 6.9.5.8. 31. It is an undisputed fact that for the purchases of shares of Felicite by said three 'Housewives' the payments were made from the bank accounts held by them jointly with their respective husbands. It is further noted that these 'Housewives' were not regular investors/traders in the securities market and they did not have any income of their own. In order to deal with the contentions of the Noticees in this regard, it is relevant to mention the following facts found during investigation a. on November 29, 2006 entire shareholding of DHDL, DRDL and DEDL in Felicite was sold to the following persons- b. In the bank account statements of the aforesaid buyers, the fund flow is noted as under: i. Madhulika Basak (Canara Bank a/c no. 1046): This bank account was in her name jointly with her husband Mr. Surojit Basak. Considering that the said purchaser is a Housewife , it is observed that the aforesaid payment of ₹ 30,000/- towards her purchase of shares of Felicite was made by her husband Mr. Surojit Basak to DHDL. There was one credit entry of ₹ 20 lakhs on December 16, 2006, making a balance of ₹ 21, 98,944.28 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 2.0 crores vide 10 credits of ₹ 20 lakhs each during the period November 29, 2006 to December 19, 2006 from 10 persons. d. From the communication dated 08-15/05/2013 from Kotak Mahindra Bank (Kotak Bank) it is noted that it had granted personal loans of about ₹ 20 lakhs each to the aforesaid KMPs of DLF viz. Mr. Joy Saxena, Ramesh Sanka, Surojit Basak on November 07,2006, November 10,2006 and December 15, 2006, respectively. These KMPs, in turn, transferred the said amounts of ₹ 20 lakh each to their own bank accounts jointly held with their spouses on November 28,2006, November 10, 2006 and December 16, 2006, respectively. From these bank accounts money was transferred to ICICI bank account no. 000705016461 of Felicite. e. Similar loans were granted by Kotak Bank to other KMPs of DLF/Director of DLF Group Company's viz. Adesh Gupta, Saurabh Chawla, Shiv Kumar Gupta, Manik Khanna, Vipen Jindal, Atul Goyal and Sanjay Sethi. The confirmations from Citibank dated May 09, 2013, have revealed that a sum of ₹ 20 lakhs each was transferred to Felicite from the bank accounts of Adesh Gupta (jointly held with his wife Meenakshi Gupta) and Atul Goyal (joi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholding in Shalika, which in turn held 100% shareholding in Sudipti. Therefore, it has been alleged that DLF never lost control of Felicite, Shalika and Sudipti. k. Due to increase in the share capital of Felicite on December 14, 2006, holding of Padmaja Sanka, Madhulika Basak and Niti Saxena was reduced to about 10.10% each. The remaining shares were held by Mrs. Meenakshi Gupta, Mrs. Ritu Chawla, Mrs. Sangeeta Gupta, Mrs. Saroj Khanna, Mrs. Mukta Jindal, Mrs. Nishi Goyal and Mrs. Seema Sethi (9.95% each). Thus, the entire shareholding in Felicite remained with the 'Housewives' of KMPs of DLF. Further, the employees of DLF/its subsidiaries, who were subject to the control of DLF/its subsidiaries due to their employee and employer relationship?, continued on the Board of Felicite as discussed above. Therefore, DLF never lost control of Felicite, Shalika and Sudipti. l. Subsequently, Niti Saxena sold her shares in Felicite to DHDL on June 19, 2008 and, in turn, as on June 19, 2008 DHDL was holding 10.10% shares of Felicite. Thus, those shares held by Niti Saxena were once again held in the name of DHDL the wholly owned subsidiary of DLF. Mr. Joy Saxena was KMP of DL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e done merely on the basis of an isolated fact. In view of the cumulative and combined facts and circumstances as described hereinabove, I find that DLF continued to be in control of the Board of directors of Sudipti, Shalika and Felicite and, therefore, they continued to be its subsidiaries even after the purported transfer of shareholding in them on November 29/30, 2006. In the above facts and circumstances, I am of the view that that in the entire process of the purported transfer of shareholdings in Sudipti, Shalika and Felicite the shareholding/voting rights and control, directly or indirectly, remained with DLF through its subsidiaries and its/ its subsidiaries' employees. I, therefore, find that the purported transfers of shareholding in the said three companies were sham transactions devised as a plan, scheme, design and device to camouflage the association of DLF with these three companies as holding -subsidiary. This view is further strengthened by the fact that broadly similar pattern was employed by DLF in case of 355 subsidiary companies- out of which 281 (including Sudipti) became subsidiaries of Felicite as mentioned in para 32(o) above- to give a false impressio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been defined in clause 10.4 of AS-18 as participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies . In the present case, due to the facts and circumstances described hereinabove, DLF also had the ability to exercise 'significant influence' over Sudipti, Shalika and Felicite in relation to their financial or operational decisions. I, therefore, find that for the purposes of above clause 10.1 of AS-18, DLF and the said three companies were 'related parties'. Accordingly, DLF was required to disclose the 'related party transactions' pertaining to these three companies. I, therefore, find that the charge of violation of clause 6.9.6.6 against the Noticees is established in the present case. Non- Disclosure of financial details relating to subsidiaries. 37. I note that clause 6.10.2.3 of DIP Guidelines requires an issuer to disclose financial details relating to its subsidiaries. As already found hereinabove, Sudipti, Shalika and Felicite continued to be subsidiaries of DLF consequent to the sale of shareholding by the wholly owned subsidiaries of DLF in them and on the relevant dates there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ha had complained that Sudipti had duped him of ₹ 34 crores. In the instant case as found hereinabove, Sudipti continued to be a subsidiary of DLF after the above mentioned transfer of shareholding on November 29-30, 2006 . As disclosed in the RHP/Prospectus the object of IPO of DLF was inter alia acquisition of land and development rights /development and constructions for existing projects. Admittedly, DLF had acquired sole development rights in the land owned by Sudipti, which DLF procured through DCPC (a Partnership in which DLF held 76% interest). Such development rights gave DLF substantially the right to all revenues from development including rent and the authority to transfer title to the land. RHP/Prospectus also disclosed the risk relating to the sole development rights constituting 37.9% of the total land reserves of DLF which included the sole development rights procured from Sudipti by DCPC. I, therefore, am of the view that at the relevant time the FIR in question had a direct bearing on the activities of DLF for which the subscriptions were invited in its IPO. 40. It is further noted that for the purposes of disclosures of details of KMPs, Mr. Praveen Kumar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from this fact, other factors such as he being a 'key managerial employee' of DLF reporting directly to its Board of directors, as disclosed in the Prospectus and his interrogation by the Police in relation to the aforesaid FIR lead to conclusion that the Board of directors of DLF cannot feign ignorance of this FIR on the date of signing/ issuing the RHP. Therefore, the fact of filing of aforesaid FIR that was subsisting on the date of issuance of RHP/Prospectus, should have been disclosed therein. 42. I further note that in its RHP, DLF had disclosed an FIR filed by one Harish Kumar Puri against DLF and its directors. Further, in its DRHP filed on January 04, 2007 it had proposed to disclose an FIR no. 381/05 filed by one Leelu Ram, Surpanch of village Nathupur against J.L. Malik, Chief Manager (security) of DLF, despite the fact that the name of Mr. J.L. Malik, Chief Manager (security) of DLF does not appear in the list of its Key Managerial Employees. Thus, on the one hand it had proposed to disclose the FIR filed against an employee who is not a KMP, it chose to hide the one filed against its subsidiary and KMP. This fact clearly indicates a design to conceal the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities in order to induce another person. The definition is also inclusive with respect to knowing misrepresentation, concealment of material fact, suggestion to an untrue fact, active concealment of fact with knowledge, promise without intention to perform, reckless and careless representations, deceptive behaviour, false statement, etc. as listed in points (1) to (8) of regulation 2(1)(c). Further the expression 'dealing in securities' as defined in regulation 2(1)(b) includes an act of buying, selling or subscribing pursuant to any issue of securities or agreeing to buy, sell or subscribe any issue of any security. I, therefore, find that active and known/deliberate suppression of material information and facts in a RHP/Prospectus so as to mislead and defraud the investors in securities market in connection with the issue of shares would be covered within the scope of section 12A of the SEBI Act and regulation 3 and 4 of the PFUTP Regulations. I, therefore, do not agree with the contentions of the Noticees in this regard. 47. In this case, I have already found that the process of share transfer of three subsidiaries of DLF in Sudipti, Shalika and Felicite was throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place in the securities market of this country and market security? is our motto. People with power and money and in management of the companies, unfortunately often command more respect in our society than the subscribers and investors in their companies. Companies are thriving with investors? contributions but they are a divided lot. SEBI has, therefore, a duty to protect investors individual and collective, against opportunistic behavior of Directors and Insiders of the listed companies so as to safeguard market?s integrity. 49. I note that the SCN has been issued to six directors and CFO of DLF on account of alleged violations by DLF as they were in charge of the affairs of DLF at the relevant time and were involved in the process of preparation of the RHP/Prospectus. In this case, the Noticees had authorised the RHP/Prospectus and signed the declarations certifying the compliance of DIP Guidelines, etc. and they cannot escape liability for the acts and omissions found in this case. In this regard, Mr. G.S. Talwar has submitted that while the other non-executive directors of DLF have been left out in the SCN, allegations have been leveled in the SCN only against Mr. Talwar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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