TMI Blog2015 (5) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... rized signatories. However in the present case, the three house wives who had acquired 100% shares of Felicite from the subsidiaries of DLF (consequently shares of Shalika and Sudipti) had categorically stated that they were not involved in the running of Felicite. Therefore, in the facts of present case, it is evident that since the three house wives who acquired 100% shares of Felicite were not involved in the running of Felicite, it is abundantly clear that DLF continued to run Felicite (consequently Shalika and Sudipti) even after divestment of shares through the Board of Directors appointed by DLF. Thus, it is beyond doubt that DLF had adopted a modus operandi of divesting shares of Felicite, Shalika and Sudipti with a view to camouflage its association with Felicite, Shalika and Sudipti as dissociation. Once it is held that the transactions of share transfer that took place on 29-30/11/2006 were sham transactions entered into with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation, the question then to be considered is, whether such sham transactions amount to violating the provisions contained under the DIP Guidelines. Argument o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by counsel for DLF on decisions of the Apex Court in case of Ramachandra Keshav Adke [1975 (3) TMI 132 - SUPREME COURT] and in case of Hukum Chand Shayam Lal [1975 (12) TMI 168 - SUPREME COURT] in support of the contention that where a power is required to be exercised by a certain authority in a certain manner, then the said power should be exercised in that manner or not or at all would have no relevance to the facts of present case, because, requisite procedure has been followed by SEBI in the present case. Resorting to sham transaction of share transfer with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation and thereby misleading the investors by not disclosing material information relating to Felicite, Shalika and Sudipti in the offer documents is no doubt highly objectionable. Such a dubious method adopted by DLF is highly detrimental to the investors/general public in the securities market. Therefore, with a view to send stern message to DLF and to other listed companies that such dubious methods are not adopted again, it was necessary for SEBI to take remedial action under Section 11/11B of SEBI Act. In such a case, fact that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e about the filing of FIR prior to 25/06/2007. Despite that specific direction, the Investigating Officer of SEBI has failed and neglected to investigate that issue which was an important issue having direct bearing on the merits of the case. Thus, the Investigating Officer of SEBI is guilty of gross misconduct and dereliction of duty and failure on his part to comply with the directions contained in the order dated 20/10/2011 has led to miscarriage of justice. - Since the impugned order is held to be partially unsustainable and there are several mitigating factors in favour of the appellants as more particularly set out herein above, the restraint/prohibitory order imposed on the appellants for a period of three years is reduced to a period of six months commencing from the date of passing the impugned order on 10.10.2014. - Decided partly in favour of appellant. - Appeal Nos. 331,392 to 396 and 415 of 2014 - - - Dated:- 13-3-2015 - J.P. Devadhar, Jog Singh and A.S. Lamba, JJ. Janak Dwarkadas, Gaurav Joshi, Vikram Nankani, Sr. Advocates Ms. Anannya Ghosh, Ms. Ritu Bhalla, Dhruv Dewan, Kostubh Devnani, Rajbeer Sachdeva, Advs. Rafique Dada, Sr. Advocates Mrs. Poornima Advani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DIP Guidelines framed by Sebi prescribe exhaustive modalities and conditionalities for preparing and filing draft and final Prospectus, known as Offer Documents, with Sebi for its concurrence. 4. It is worthwhile to note that the appellant had three wholly owned subsidiaries namely - DLF Estate Developers Limited ('DLF Estate'); DLF Home Developers Limited ('DLF Home') and DLF Retail Developers Limited ('DLF Retail') and many associate companies and/or subsidiaries mainly created for the purpose of consolidation of small pieces of land to be developed at a later stage. These three wholly owned subsidiaries, however, incorporated three more companies, namely - Sudipti Estates Private Limited ('Sudipti') and Felicite Builders and Constructions Private Limited ('Felicite') on 24.03.2006 whereas Shalika Estate Developers ('Shalika') on 26.03.2006. Pertinently, on 29th and 30th of November, 2006, i.e., more than a month before the second DRHP was filed on 02.01.2007, DLF Estate, DLF Home and DLF Retail transferred their shares in Shalika to Felicite, while DLF Estate and DLF Home transferred their shares in Sudipti to Shalika. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29th March, 2007, the appellant's Merchant Bankers certified the accuracy and adequacy of the disclosures made in the Offer Documents as per the norms laid down by the respondent. It was, inter alia, certified that such disclosures made by the appellant were sufficient to enable prospective investors to make an informed investment decision. Thereafter, the respondent, having applied its mind to the Offer Documents for a few months, finally issued a letter dated 7th May, 2007, to the following Merchant Bankers/Lead Managers - Kotak Mahindra Capital Company Limited, DSP Merrilynch Limited, CITI Group Global Markets India Private Limited, Duetsche Equities India Private Limited, ICICI Securities Limited, Lehman Brothers Securities Private Limited, UBs Securities India Private Limited and SBI Capital Market Limited, calling upon them to ensure that various changes, as prescribed by SEBI in its letter dated 7th May, 2007, must be incorporated before the RHP could be filed with the Stock Exchange/ROC. The respondent made exhaustive observations for making suitable modifications in the offer document in accordance with DIP Guidelines, 2000, read with 13 circulars issued by SEBI from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the affidavits and additional affidavits filed by the Petitioner in the instant case. The said inquiry will be undertaken in accordance with law by the SEBI and completed within a period of three months from today. The SEBI will communicate to the Petitioner a copy of report of investigation together with its decision thereon within a further period of two weeks thereafter. If it comes to a conclusion that any consequential action is to be taken the SEBI will do so without awaiting further directions. 27. It is clarified that this Court has not pronounced on the merits of the contentions of the parties. The SEBI will proceed in the matter independent of any observations that may have been made by this Court in its previous orders or this order. It will be open to any of the parties, if aggrieved by the decision of the SEBI to seek appropriate remedies that are available to them in law. 28.The petition and the pending applications are disposed of. However, the appellant as well as the Respondent, both filed Letters Patent Appeals before the Division Bench of Delhi High Court which was initially pleased to stay the said order of Learned Single Bench by its order dated 21s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. The Writ Petition as well as LPA filed by the appellant against the Respondent's order dated 20th October, 2011, came to be dismissed by the Hon'ble High Court of Delhi on 3rd January, 2012 and 20th November, 2012, respectively. Thereafter, the Respondent issued the SCN dated 25th June, 2013, to the Appellant primarily alleging that the appellant had violated Clauses 6.2 (Material Information), 6.9.6.6 (Related Party Transaction), 6.10.2.3 (Regarding the subsidiaries), 6.11.1.2 (Information about outstanding litigation), 6.15.2 (Declaration) and 9.1 (Guidelines on advertisement) of the DIP Guidelines, 2000, read with Regulation 111 of Issue of Capital and Disclosure Requirement (ICDR) Regulations, 2009, further read with Sections 11, 12 A(a), (b) and (c) of SEBI Act, 1992, read with Regulations 3(a), (b), (c), (d), 4(1), 4(2) (f) and 4(2)(k) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) (PFUTP) relating to Securities Market Regulations, 2003, and called upon the Appellant to show cause as to why appropriate directions may not be issued against it under Sections 11(1), 11(4), 11A and 11B of the SEBI Act, 1992, read with Clause 17(1) of the DIP G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Court by indulging in such frivolous and unwarranted litigation. 14. Having, thus, completed the narration of factual events leading up to the present dispute, we now turn to the respective contentions raised by the parties before us. 15. Learned Senior Counsel, Shri Janak Dwarkadas, appearing for the appellant, submitted that the appellant, being in the business of real estate development since last many decades, is required to float associate companies or subsidiaries to acquire small parcels of land at a comparatively lower cost and once that has been done, the appellant starts the process of aggregation of land by consolidating such small pieces into a larger contiguous plot. There is no legal bar of any kind in adopting this business strategy on the basis of the rationale that lower the price of the land, the higher the profit to shareholders of the Appellant-Company. As regards the allegations in the SCN and findings in the Impugned Order against the appellant to the effect that the appellant failed to ensure that the Offer Documents contained all material informations which were true and adequate so as to enable the investors to make an informed investment decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposition attempted to be built up by Shri Dwarkadas, in this regard is that the economic interest of the Appellant-Company in Sudipti's land through the acquisition of a bundle of rights in relation thereto had been duly disclosed by the Appellant in the Offer Documents. This could not have been challenged even if Shalika, Sudipti and Felicite were shown as subsidiaries/related parties of Appellant. The commercial and financial disclosure in the Offer Documents would not have undergone a change even if these companies were mentioned in the financial statement as subsidiaries/related parties. It is, thus, submitted by the Learned Sr. Counsel for appellant that showing Shalika, Sudipti and Felicite as subsidiaries/related parties in the Offer Documents would have been incorrect since these companies had already ceased to be the subsidiaries/related parties of the Appellant-Company, and this fact had been duly verified by the Statutory Auditors. Therefore, the purported non-disclosure of these three companies was not material in the making of investment decisions by the prospective investors. 18. The Appellant submits that in calling the transfer of shares by DLF Estate, DL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares of Sudipti by Shalika was funded by the sellers of the said shares, who were wholly owned subsidiaries of the Appellant. This is incorrectly presumed by relying on the proximity of making payments of the same amounts by DLF Home and DLF Estate to Shalika and the delay of 7 months in making payments for the share subscription in question. Similarly, the importance given to purchase of shareholding of Felicite by the wives of KMPs of DLF to prove that control was retained by DLF is uncalled for. As regards the share holding of Felicite by the spouses of certain employees and/or Key Managerial Personnel (KMP) of DLF, the Ld. Sr. Counsel has further submitted that the concept of KMP, as occurring in AS-18 (Clause 10.8), is different from that mentioned in Clause 6.9.5.8 of the DIP Guidelines. It is also submitted that the SCN commits an error in treating the spouses of shareholders of Felicite and the Directors of Felicite, Shalika and/or Sudipti as the KMPs of the Appellant. Advancing further his submission, it is submitted by the Ld. Sr. Counsel that such persons were not KMPs of DLF for the purpose of AS-18 but KMPs of DLF under clause 6.9.5 which is clearly disclosed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated party transactions pertaining to Shalika, Sudipti and Felicite. However, there was no need to show these companies as related parties since a statement to that effect would have been incorrect as at the time the disclosures were made, the Appellant had already disassociated itself from these companies. As far as disclosures in general are concerned, the Appellant acted on the expert advice of prominent Merchant Bankers, Statutory Auditors and Lawyers who provided their expert advice on the Offer Documents and certified the information provided therein as accurate. 23. Similarly, it is contended that the Impugned Order is wrong in holding that the Appellant contravened Clause 6.11.1.2 of the DIP Guidelines by not disclosing that there was an FIR registered by KKS against Sudipti. The appellant submits in this respect that the Respondent has refused to appreciate the fact that the Appellant was completely unaware of the FIR having been lodged against Sudipti at the time the Offer Documents were prepared. The FIR came to the knowledge of the Appellant on 25th June, 2007 when the complaint dated 4th June, 2007 was made available to the Appellant by the Respondent through Mercha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the equity holding of these three companies, there was no change in the composition of the Board of Directors. These Directors were appointed by DLF-Home , DLF-Estate and DLF Retail and they constituted employees, Directors and KMPs of the Appellant-Company. 26. Similarly, it is contended by Shri Dada that the registered office, the statutory auditors, and the authorized bank signatories of these three companies also remained the same. The three companies in question did not show any expenses on account of operation, cost of establishment, personnel, rent, electricity, etc. for the years 2006-2007 and 2007-2008. It is, therefore, presumed that the expenses for these companies were being absorbed/incurred by other entities. 27. It is further submitted that funds for acquiring the shares of Sudipti were also made available to Shalika, i.e., the acquirer by DLF-Estate and DLF Retail (i.e., the seller and the original share holder). DLF-Estate , DLF-Home and DLF Retail had also made payment to the tune of ₹ 30,000/-, ₹ 30,000/- and ₹ 40,000/-respectively on 29th November, 2006 and 1st December, 2006. It is only after receipt of these payments that Sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said sum had been received by them by availing a personal loan of ₹ 20,00,000/- each from Kotak Mahindra Bank without furnishing of any apparent collateral/security. A total of 2,00,000/- shares each was allotted to the three ladies and even after the transfer of complete shareholding on 30th November, 2006, and further subscription on 14th December, 2006, the shares of Felicite remained with the spouses of the employees, KMPs and Directors of the subsidiaries of the Appellant. The shares of Felicite were held by the wives of the KMPs till the time their husbands were the KMPs of the Appellant and were transferred at the time when their husbands ceased to be the KMPs of the Appellant. Respondent further contends that the personal loans taken by the KMPs were also repaid by them in November, 2009, and a pre-payment of the loan was only done by two KMPs at the time of ceasing of their status as KMPs. 31. A total of 281 companies out of 355 companies claimed to have been disassociated from the Appellant have ultimately become subsidiaries of the Felicite. It is, therefore, concluded by the Respondent that the three companies, Shalika, Sudipti and Felicite were still subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en clearly mentioned in the Offer Documents as the same would have reflected the position of Mr. Pravin Kumar as a Director and KMP of the subsidiaries of the Appellant. The Board of Directors of the Appellant was aware about the filing of the F.I.R. The conclusion with regard to the knowledge of the Board of Directors has been drawn by the Respondent on the basis that firstly, post the registration of FIR, Mr. Pravin Kumar was interrogated by the police in relation to the aforesaid FIR; secondly, that Mr. Pravin Kumar, was a Director in the subsidiaries of the Appellant and a KMP and representative of the Appellant's Board of Directors and thus he was duty bound to report the existence of this F.I.R. to the Board of Directors of the Appellant and thirdly, Mr. Pravin Kumar was also the nephew of the Chairman of the Appellant. It is further submitted by the Respondent that the Appellant has, by not disclosing the aforesaid F.I.R., violated Clause 6.11.1.2 read with Clause 6.2 of the DIP Guidelines, 2000. By not disclosing material information such as the holding-subsidiary relationship between the Appellant and the three companies and the disclosures like litigation, financial d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raveen Kumar; secondly, letter dated 2nd May, 2007, sent by Mr. Praveen Kumar to the Police seeking extension of time to appear before the Police and letter dated 26th May, 2007, issued by the Police to Mr. Praveen Kumar as a reminder. Through these letters Shri Chatterjee attempted to submit that DLF had the knowledge of FIR and its contents, therefore, this fact was liable to be disclosed in the Offer Documents. We have not allowed these documents to be brought on record, particularly, at the appellate stage. This would have enhanced the scope of the appeal at this belated stage of the incident after a lapse of about eight years. Similarly, KKS was duly granted an opportunity to appear before Sebi by the 1st WTM who ordered investigation pursuant to the direction of the Division Bench of Hon'ble Delhi High Court. It is a matter of record that KKS appeared through his Advocate before the 1st WTM but did not produce these documents before Sebi. This could have afforded an opportunity of rebuttal to the Appellant in tune with the principles of natural justice and fair play. 36. Shri Daval Kothari, Ld. Counsel for the Appellant in Appeal No. 415 of 2014 also fairly endorsed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 submitted that Mr. Sanka was a Key Managerial Employee of DLF and not a Key Management Personnel of DLF. Under Clause 6.9.5.8 of DIP Guidelines the lead Merchant Banker of the Issuer Company is required to give details of Key Management Personnel as more particularly set out therein. The said clause does not require the lead Merchant Banker to give details of the shareholding, if any, of the wives of Key Management Personnel. Clause 6.9.6 of DIP Guidelines deals with 'Promoters/Principal Shareholders' and clause 6.9.6.6 of the DIP Guidelines requires the lead Merchant Bankers to disclose in the prospectus the 'Related Party Transactions' as per financial statements. The financial statements are strictly drawn as per AS-18. Since Mr. Sanka was not a Promoter/Principal Shareholder, dealing in shares by Mr. Sanka's wife was not required to be disclosed. Therefore, material information required to be disclosed being in fact disclosed, SEBI is not justified in holding that DLF and its directors are guilty of violating the norms laid down by Sebi. Moreover, the Impugned Order which is passed belatedly after 9 months of giving personal hearing, suffers from serious i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s-statements in the RHP/Prospectus so as to mislead and defraud the investors in securities market in connection with the issue of securities of DLF. The SCN, thus, alleges that DLF has violated Clauses 6.2, 6.9.6.6, 6.10.2.3, 6.11.1.2, 6.1.5.2 and 9.1 of SEBI (Disclosure and Investor Protection) Guidelines, 2000, ( DIP Guidelines, 2000 ) read with Regulation 11 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, ( ICDR Rgulation, 2009 ) read with Section 11 of SEBI Act, 1992 and also Sections 12-A(a), (b) and (c) of SEBI Act, 1992, read with Regulations 3(a), (b), (c), (d), 4(1), 4(2)(f) and 4(2)(k) of SEBI (Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 ( PFUTP Regulations, 2003 ). The Appellant was, thus, called upon to show cause as to why appropriate directions may not be issued against it under Section 11(1), 11(4), 11A and 11B of the SEBI Act, 1992, read with Clause 17.1 of the DIP Guidelines and Regulation 111 of the ICDR Regulations. 41. We have carefully gone through the Impugned Order and we find that the 2nd WTM has himself crystallized the whole controversy in the form of following three issues, which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees of DLF/its subsidiaries and, therefore, subject to the control of DLF; the absence of change in the Registered Office (of) Statutory Auditor, of Authorized Signatory, etc.; and the incurring/absorbing of the operational costs of Sudipti and Shalika by some other entity; the funding of the purchase of shares of Sudipti by Shalika from DLF Estate and DLF Home, who were sellers of those shares; the receipt of funds by DLF-Estate, DLF-Home and DLF-Retail from Felicite; and the control of DLF through its KMPs over Felicite. 43. For the sake of convenience, we reproduce different definitions of Control which have been taken into consideration by the Respondent to bring home the allegation of 'Control' against the Appellant-Company in the Impugned Order: 'Companies Act, 1956 : 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) that other - (i) where the first-mentioned company is an existing company in respect of which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the voting power of an enterprise; or (d) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.' 44. Proper appreciation of the scope of Clause 6.10.2.3 is vital for deciding Issue No. 1 and, therefore, we reproduce some preceding clauses too as appearing in the SEBI (Disclosure Investor Protection) Guidelines, 2000. Financial Statements : 6.10.1 Selected Consolidated Financial and Operating data. 6.10.2 Financial Information of the issuer company. 6.10.2.1 A report by the auditors of the issuer company with respect to: (a) profits and losses and assets and liabilities, in accordance with clauses 6.10.2.2 or 6.10.2.3, as the case may require; and (b) the rates of dividends, if any, paid by the issuer company in respect of each class of shares in the issuer company for each of the five financial years immediately preceding the issue of the Prospectus, giving particulars of each class of shares on which such dividends have been paid and particulars of the cases in which no dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and liabilities; or (ii) individually with the assets and liabilities of each subsidiaries; (Updated upto February 24, 2009) Page 80 of 370 and shall indicate as respects the assets and liabilities of the subsidiaries, the allowance to be made for persons other than the members of the issuer company. 45. At the outset, it is noted that the DIP Guidelines do not prescribe the definition of expression such as Control , Subsidiary or an Associate- Company . There are about 30 definitions in Clause 1.2.1 of DIP Guidelines and only the definition of Company is enshrined in Clause 1.2.1 (vii). This definition states that the word 'company' means Company as defined in Section 3 of the Companies Act, 1956 . The word 'subsidiary', though undefined, occurs in Regulation 6.10 thereof, which basically pertains to the disclosures with respect to the financial statements of the Issuer Company. Every Prospectus is required to contain a report by the statutory auditors of the company, including profit or losses of its subsidiary, if any. In this regard, the 2nd WTM has made a feeble attempt to draw an analogy between the concept of 'control' as appearing in S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allegation of control against the Appellant. If there is any lacuna in the DIP Guidelines, the same cannot be replenished by introduction of the definition of control , which currently sits in AS-18, AS-23 and AS-24 in a different context altogether. DIP Guidelines are a piece of subordinate legislation authored by the Legislative Wing of Sebi. Hence, we would hope, at least binding on the adjudicatory wing of Sebi itself. 47. In fact, the Accounting Standards are generally issued by the ICAI and may or may not be accepted by the Government. Under section 211 (3-A) of the Companies Act, 1956, the Accounting Standards have now been framed by the National Advisory Committee on Accounting Standards constituted by the Government of India under Section 210-A of the Companies Act. Twenty nine out of thirty-one Accounting Standards have been notified by the Government on 7th December, 2006 as Companies (Accounting Standards) Rules, 2006 . These Rules, inter alia, cover various areas such as Disclosure of Accounting Policies; Valuation of Inventories; Cash Flow Statement; Contingencies and events occurring after the balance sheet date; Net profit or loss for the period, Prior peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49. It has been held by this Tribunal in the case of HSBC Securities (India) (P.) Ltd. v. SEBI [Appeal No. 99 of 2007, dated 20-2-2008] that it is the fundamental responsibility of the Merchant Bankers or a Lead Manager appointed from amongst the Merchant Bankers to ensure the truthfulness and adequacy of disclosures contained in the Offer Document. This onerous duty is cast upon the Merchant Bankers and becomes important for the protection of investors' interest by due disclosure by an Issuer Company because Sebi itself seeks to distance itself from the correctness of the disclosures in an IPO and perhaps rightly so. Therefore, in today's disclosure regime, the role of Merchant Bankers has become crucial. Merchant Bankers are also required to certify to the effect that disclosures in the Offer Documents are true, fair and adequate to enable the prospective investors to make an informed investment decision. The Merchant Bankers are registered under the regulations framed by Sebi in exercise of powers conferred upon it by Section 30 of the Sebi Act, 1992, with the previous approval of the Government. A Merchant Banker is, thus, a person who is directly concerned with the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action. It appears from the records that the Respondent did seek some clarification/explanation, etc. from the Merchant Bankers before issuing the show cause notice to the Appellant. The Merchant Bankers of the Appellant had duly certified the accuracy of the disclosures in the Offer Documents, confirming firstly, that the offer document forwarded to SEBI was in conformity with the documents, materials and papers relevant to the Issue; secondly, that all the legal requirements connected with the said Issue as also the guidelines, instructions, etc. issued by SEBI, the government or any other competent authority in this behalf, were duly complied with; and thirdly, that the disclosures made in the DRHP were true, fair and adequate to enable the investors to make a well informed decision as to the investment in the proposed Issue. A copy of the correspondence, despite repeated requests by the Appellant, was not provided to the Appellant so as to enable it to effectively defend its case. This correspondence, undoubtedly, pertained to the Appellant's case and, as such, supplying copies of relevant correspondence or part thereof, would have added a certain degree of credibility and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself makes it abundantly clear that the standard should be applied in accounting for investments in associate companies in the preparation and presentation of consolidated financial statements by an investor. Pertinently enough, Para 1 of AS-23 does not talk of subsidiaries but of investments made by investors in an associate company which is defined in para 3.1 of AS-23 as an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Significant influence is defined in para 3.2 of AS-23 as the power to participate in the financial and/or operating policy decisions of the investee but not control over those policies . Para 3.3 deals with the definition of 'Control' and para 3.4 mentions that a Subsidiary is an enterprise that is controlled by another enterprise known as the parent. Para 4 is important and it lays down a threshold for the determination of significant influence . For the purpose of presumption of significant influence under AS-23, an investor should hold, directly or indirectly, through subsidiaries, 20% or more of the voting power of the investee. 53. At the risk of statin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Information of the Issuer Company and Cl. 6.10.2.3 provides that if the Issuer Company has a subsidiary, the profits and losses should be separately dealt with in the Financial Statement with the Issuer Company's profits and losses. In addition, the financial statement should also deal with the combined profits or losses of the subsidiary as a whole. The whole chapter emphasizes the disclosure of material information in the Prospectus which should be true and adequate to enable the investors to make an informed decision to invest or not to invest in the IPO. Thus, it is abundantly clear from a bare reading of Cl. 6.10.2.3 and its placement in the Disclosure Guidelines that it is relatable to the Financial Statement and the report to be prepared by the Auditors of the Issuer Company. 56. In addition, the point to be considered here is that the first DRHP dated 11th May, 2006 which was withdrawn on 11th August, 2006 did mention Shalika, Sudipti and Felicite as associate-companies of the Appellant. This is evident from the extract of the first DRHP annexed by the Appellant with Volume II of the appeal at page 283 to 289. This was withdrawn and the second DRHP was filed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present matter, no loss was caused to the investors by Sebi first allowing the IPO proceed as planned. The losses occurred only after Sebi passed the adverse Impugned Order. The findings as regards violation of clause 6.10.2.3 arrived at by 2nd WTM are faulty, irrational and hence cannot be sustained in the facts and circumstances of the present case. 58. Turning to the concept of Control as envisaged in Sections 4(1)(a) and 4(2) of the Companies Act, we note that a Company shall, subject to the provisions of sub-section (3), be deemed to be the subsidiary of another only if that other controls the composition of Board of Directors. Section 4(1) of the Companies Act provides that a company can be a subsidiary of another when: firstly; the latter holds more than half of the share capital of the former; or secondly; the latter controls composition of the board of directors of the former. Section 4 (2) provides that control can be said to exist if, and only if:- firstly; a person can be appointed/removed as a Director by the controlling entity without the consent or concurrence of any other person; or secondly; a person cannot be appointed as a Director without exercise of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than half of the share capital of Shalika, Sudipti and Felicite post divestment. Once a legally sound divestment has taken place, which has been duly signed off by reputed Merchant Bankers and Auditors, such a divestment must be respected. As long as there is a provision of law which allows divestment of shares, such a divestment cannot be trifled with purely on the basis of hypothetical control issues. From November 29-30, 2006, neither was the Appellant-Company holding, directly or indirectly, any equity share capital in Felicite, Shalika and/or Sudipti nor was it enjoying any voting rights, directly or indirectly qua these three companies. 61. It is a matter of record that from November 29-30, 2006, the Appellant-Company did not have control over the composition of the Board of Directors of Shalika, Sudipti and Felicite as it had no powers to appoint/remove Directors in these three companies. There is also nothing to show that the shareholders of Shalika, Sudipti or Felicite could not appoint Directors without permission/approval by the Appellant-Company or that they wanted to appoint new Directors and the Appellant- Company prevented them in any manner from doing so. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ousted from the market for three years can be levied. 62. We, therefore, find that none of the above ingredients, as culled out of Sections 4(1) and (2) of the Companies Act, 1956, is shown to have been fulfilled in the present case. It would be pertinent to note that the Hon'ble High Court of Kerala in M. Velayudhan v. Registrar of Companies [MANU/KE/0053/1978 ( Velayudhan ) has held that the test of control over the composition of the Board of Directors of a company can only be reckoned by applying the conditions specified in Section 4(2) of the Companies Act, 1956. In this regard, the Hon'ble High Court held that : '10. The term controls the composition of board of directors is to be read in accordance with and only in accordance with Sub-section (2) of Section 4 of the Act and that Sub-section conceives of control if, but only if, the Company which claims control can appoint or remove holders of all or a majority of the directorship by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person....' 63. The ratio of M. Velayudhan case (supra) was followed with approval by the Division Bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance except the title to such land akin to the useless husk that remains once the grains have been sieved. This was immaterial in the larger scheme of disclosure, as envisaged in the DIP Guidelines, 2000, for investors to take an informed decision. Nothing is said to have been gained by the Appellant-Company merely by the non-disclosure of Sudipti, Shalika and Felicite as subsidiaries in the Offer Documents. 65. In the case of CIT v. Podar Cement (P.) Ltd. [1997] 5 SCC 482 the Hon'ble Supreme Court has recognized the concept of dual ownership over property. In this case, the assessee purchased four flats on Nepean Sea Road, Bombay. The possession of the flat was taken after payment of consideration and the flats were also let out to various persons. The legal title of the flats was, however, not conveyed to the assessee. In the circumstances, a question arose as to whether the assessee was liable under Section 22 of the Income Tax Act, 1961, to pay tax on account of income by renting out said four flats. The Hon'ble Supreme Court, after examining various judgments of different High Courts, held in para 55 that : We are conscious of the settled position that under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er persons from the use of handling of the thing ..But every owner does not possess all the rights set out above? - a particular owner's powers may be restricted by law or by an agreement he has made with another. (refer to G.W. Paton on Jurisprudence, 4th Edn., pp.517-18). While dealing with the concept of possession and enumerating the illustrative cases and rules in this respect, Paton says at p.577 in cl.(x): To acquire possession of a thing it is necessary to exercise such physical control over the thing as the thing is capable of, and to evince an intention to exclude others:... xxx xxx xxx xxx xxx xxx Thus the juristic principle from the view point of each one is to determine the true connotation of the term owner within the meaning of Section 22 of the Act in its practical sense, leaving the husk of the legal title beyond the domain of ownership for the purpose of this statutory provision. The reason is obvious. After all, who is to be taxed or assessed to be taxed more accurately - a person in receipt of money having actual control over the property with no person having better right to defeat his claim of possession or a person in legal parlance who m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded into seventeen chapters and XXX schedules annexed therewith. Chapter I deals with preliminary aspects. Regulation 1.2.1 gives about 30 definitions, including the definition of Advertisement, Company, Issuer Company, Merchant Banker, Public Issue, etc. Regulation 1.3 provides that words and expressions used in the DIP Guidelines, but not defined, shall have the same meanings as has been assigned to them in the Companies Act, 1956, or Securities, Contract (Regulation) Act. As per Regulation 1.4, DIP Guidelines are, inter alia, applicable to all Public Issues to be brought out by any company. Further, the Prospectus shall also contain the information and statements specified in this Chapter and shall as far as possible follow the order in which the requirements are listed in this Chapter and summarized in Schedule VII A. 68.1 Chapter II deals with Eligibility Norms for companies 'Issuing Securities'. Regulation 2.1.1 specifically provides that a company can float a Public Issue of Securities (IPO) only after submission of a Draft Prospectus with the SEBI through an eligible Merchant Banker, at least 21 days prior to the filing of Prospectus with the Registrar of Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to in the annexure annexed to Schedule-III. It also provides that the disclosure made in the Draft Prospectus should be true, fair and adequate to enable the Investors to make a well informed decision as to the investment in the proposed issue. Regulation 5.8 deals with 'No Complaints Certificate', which is to be furnished by the lead Merchant Banker to the SEBI after a period of 21 days from the date the Draft Offer Document is made public. 68.3 Chapter VI is important and deals with the Contents of the Offer Document. Regulation 6.1 provides that in addition to the disclosure specified in Schedule-II of the Companies Act, 1956, a Prospectus shall also contain certain more disclosures. In this regard, Regulation 6.2, which is one of the charges in the SCN, requires that the Prospectus shall contain all material information which shall be true and adequate so as to enable the investors to make an informed decision on the investment in the issue. It also provides that the Prospectus shall comply with various requirements as summarized in Schedule VII-A attached with the DIP Guidelines. Schedule VII-A minutely prescribes innumerable disclosures and the order in which they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails of Promoters/Share-holders to be given in the Prospectus. 68.4 Regulation 6.9.6.6 deals with Related party transactions as per the Financial Statements . Regulation 6.10 deals with financial statements and Regulation 6.10.2.1 requires a report by the Auditor of the Issuer Company with respect to the profits and losses, etc. to be submitted. Regulation 6.10.2.2 provides for the disclosures which are required to be made by the Issuer Company if it has no subsidiary. In case the Issuer Company has subsidiaries, Regulation 6.10.2.3 comes into play and requires the manner in which they should be disclosed. This is also one of the charges in the SCN regarding violation of DIP Guidelines. The next important Regulation is 6.11.1.1 which requires an Issuer Company to disclose about the outstanding litigations. There are various sub-clauses which provide the nature of litigation which could have a materially adverse effect on the position of the Issuer Company and hence are liable to be disclosed. But the main charge in the SCN relates to the violation of Regulation 6.11.1.2 which requires disclosure of the information regarding the outstanding litigations as per Clause 6.11.1.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to access the market for a particular period. Any other direction which SEBI may deem fit in the facts and circumstances can also be imposed after affording a reasonable opportunity of being heard to the persons concerned. 69. A perusal of the SCN as well as impugned order reveals that the Appellant is alleged to have violated only clauses 6.2, 6.9.6.6, 6.10.2.3, 6.11.1.2, 6.15.2 and 9.1 of the DIP Guidelines. The said clauses, as occurring in DIP Guidelines, are reproduced herein below for the sake of convenience : Clause 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. Clause 6.9.6.6 - Related party transactions as per the Financial Statements Clause 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch rescission: (a) anything done or any action taken or purported to have been done or taken including observation made in respect of any draft offer document, any enquiry or investigation commenced or show cause notice issued in respect of the said Guidelines shall be deemed to have been done or taken under the corresponding provisions of these regulations; (b) any offer document, whether draft or otherwise, filed or application made 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. 69.2 The foregoing exercise undertaken to analyze the DIP Guidelines in question reveals that the Guidelines are in the nature of directives to be followed by the Companies intending to bring out an IPO in the capital market; and of-course, to bring about uniformity and transparency therein. The concept of materiality envisaged in the DIP Guidelines requires companies to disclose true and adequate information as regards their business affairs to enable a prudent and reasonable investor to take a well informed investment decision in an upcoming IPO. 70. The findings in the impugned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order is based on a prima-facie inference drawn by the 1st WTM in its order dated 20th October, 2011 that the Appellant was aware of the filing of the FIR at the relevant time, i.e., prior to the closure of the issue on 14th June, 2007. The 2nd WTM seems to have relied verbatim on this prima-facie finding in holding the Appellant guilty of non-disclosure of the information regarding the FIR in the Offer Document. One prima-facie finding or inference by the 1st WTM and the second prima-facie finding by the 2nd WTM based on the prima-facie finding of the 1st WTM will not make it a case of conclusive proof of knowledge on the part of the Appellant of the FIR in question even if Mr. Pravin Kumar, who was named in the FIR happened to be a close relative of the Chairman of the Appellant-Company and even if he was on the board of Sudipti, etc. Unfortunately enough, we are not living in the Vedic ages, when the bonds between relatives were genuinely strong so that the knowledge of one could tantamount to the knowledge of another. Even in those times though, we highly doubt that such an assumption could be validly held. No evidence, whatsoever, was deemed to be summoned by the ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en a Magistrate takes cognizance of an offence upon receiving a complaint of facts which constitute such offence, a case is instituted in the Magistrate's Court. Such a case is one instituted on a complaint. Again, when a Magistrate takes cognizance of any offence upon a report in writing of such facts made by any police officer it is a case instituted in the Magistrate's Court on a police report. 76. Similarly, in the case of General Officer Commanding Rashtriya Rifles v. CBI [2012] 6 SCC 228, the Hon'ble Supreme Court has once again analysed the expression institution of a case and observed that the meaning of this term has to be ascertained taking into consideration the scheme of the Act / statute applicable. The expression may mean filing / presentation or received or entertained by the Court. The question does arise as to whether it simply means mere presentation / filing or something further where application of the mind of the Court is to be applied for passing an order. After considering this issue, the Hon'ble Supreme Court in paragraph 41 of the judgment has specifically noted that thus, in view of the above, it is evident that the expression instit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relationship with Shalika, Sudipti and Felicite due to the alleged control exercised by the Appellant as a result of the transfer being in the nature of Related Party transactions is material information and that it should have found a place in the Offer Documents. This allegation, being at the heart of the SCN as well as the Impugned Order, has been given our thoughtful consideration. Firstly, we would like to note that the only relevance of Shalika, Sudipti and Felicite for the purpose of disclosure in the Offer Documents and so also for the prospective investors was a parcel of land of about 35 acres held by Sudipti. A perusal of page 72 of the Prospectus clearly shows that the Appellant had fully, properly and fairly accounted for its interest in Sudipti's land in the Offer Document by detailing its sole development right on the piece of Sudipti's land in question. In fact, the Offer Document takes into account about 4575 acres out of 10,255 acres of the total land reserves of the Appellant-Company over which the Appellant had sole developmental rights. Therefore, to allege that Shalika, Sudipti and Felicite were not mentioned in the Offer Documents is totally wrong. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not the arithmetic accuracy of material facts necessary for the purpose of formulating a complete opinion by prospective investors to invest or not to invest in the IPO. Disclosure in the larger scheme of DIP Guidelines, which is required to be made in the Offer Documents, is one which, if concealed, would have a devastating effect on the decision making process of the investors, and without which the investors could not have formed a rational and fair business decision of investment in the IPO. If sufficient and adequate material is brought on record through Offer Documents, the same cannot be said to be hit by the provisions of DIP Guidelines in view of the concept of material information and truthfulness and adequacy incorporated in the DIP Guidelines, 2000. Therefore, terming the transactions as 'sham transactions' in the present case for bringing them under the clutches of DIP Guidelines is totally misconceived and an exceptional amount of effort on part of the Respondent to bring home the charge of non-disclosure and violation of DIP Guidelines against the Appellant. 'Sham' means a deliberate and intentional act of misguiding certain people or even the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law that joint account holders have equal rights to the money in the joint account and, hence, the three spouses cannot be condemned for utilizing the money from the joint accounts just by virtue of being housewives. No legal bar has been pointed out by the 2nd WTM in any law debarring women entrepreneurs from utilizing the money from joint accounts held with their husbands for investment purposes. Similarly, loans were obtained from the bank legally by the three ladies and no concurrence of a third agency was required for this purpose. 84. Allegations regarding violation of Cl. 6.10.2.3 have already been dealt with herein above, particularly in paras 44, 45 and 55 in the context of the definition of 'Accounting Standard-23' and it has been held that the allegation does not stand proved against the Appellant. 85. As regards the violation of Clause 6.9.6.6 of the DIP Guidelines, it is alleged that Shalika, Sudipti and Felicite were related parties of the Appellant in terms of Accounting Standard-18 (AS-18) and their non-disclosure violated the said clause. This is a vital allegation against the Appellant and has been sought to be proved by the 2nd WTM in the impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Standard are not to be enforced in many other cases involving confidentiality, etc., which might have been specified by a statute or a regulator or similar other authorities. Paragraph 10 of AS-18 is very important and provides the manner in which various terms such as related party transactions, control, significant influence, an associate-company, a relative, a subsidiary, etc. are to be understood for the purpose of this standard. Some of these definitions are relevant for the present purpose and are reproduced herein below : Related party - parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. Related party transaction - a transfer of resources or obligations between related parties, regardless of whether or not a price is charged. Control - (a) ownership, directly or indirectly, of more than one half of the voting power of an enterprise, or (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show cause notice as well as impugned order are based on the allegation that the Appellant had control over subsidiaries and not over associate- companies. Therefore, sub-para 3(b) is not applicable in the instant case. Para 10.5 of AS-18 defines an 'associate' as an enterprise in which an investing reporting party has significant influence and which is neither a subsidiary nor a joint venture of that party. Similarly, 'significant influence' has been defined as participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies. In the entire show cause notice or the Impugned Order there is nothing to suggest that the Appellant was participating either in the financial or operating policies of Shalika, Sudipti and Felicite after the divestment of the shareholding by the Appellant. These three companies are also not stated to be joint ventures of the Appellant. Therefore, para 3 of AS-18 is not attracted in the given case. 89. Similarly, other tests provided in para 3(c) and 3(d) of AS-18 are also not attracted because Shalika, Sudipti and Felicite are all corporate entities whereas sub-paragraphs 3(c) and 3(d) are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s but they differ in their scope, ambit and their applicability. 91. It is, thus, evident that 'Key Management Personnel' as defined under AS-18 is a person who has the authority for planning, directing and controlling the activities of the holding-company. Keeping this difference in mind, as far as AS-18 is concerned, the Appellant had duly disclosed names of certain persons as Key Management Personnel for the purpose of AS-18 at pages 291 to 339 of the Prospectus, namely, - Mr. K. P. Singh, Mr. Rajiv Singh, Mrs. Renuka Talwar, Mr. T. C. Goel, Mr. J. K. Chandra, Ms. Pia Singh and Mr. Kameshwar Swaroop. 92. The impugned order, therefore, proceeds on an erroneous footing that the test of reportable related party transaction applies to employees named pursuant to clause 6.9.5.8 of the DIP Guidelines when it is only reportable/referable to 'Key Management Personnel' covered under AS-18 because of the simple reason that clause 6.9.6.6 requires disclosure of 'Related Party Transaction' as per the Financial Statement which is to be drawn in accordance with the Accounting Standards. The confusion has arisen in the impugned order because of the use of the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions and rather it was treated as a case of violation of Disclosure Guidelines all along, which formed the basis of the dispute before the Hon'ble Delhi High Court as well as before the 1st WTM. In its order dated 20th October, 2011, the 1st WTM extensively dealt with various clauses of the Disclosure Guidelines which could have been prima-facie violated by the Appellant but fraud or unfair trade practice was not an issue till the first WTM passed the order for holding proper investigation into the allegations of KKS. It is also equally true that the complaint of KKS was more or less self-centered. The question of alleged violation of securities laws by the Appellant in the process of the IPO in question was an ancillary issue in his complaint. However, by the time the SCN dated 25th June, 2013 came to be issued to the Appellants, the Respondent came out with the allegation regarding the fraud played by the Appellant on the investors. The entire SCN is on the PFUTP Regulations except a mere mention at its fag end. Incidentally, the three issues framed by the 2nd WTM to adjudicate the allegations levelled in the SCN against the Appellant also do not find any mention of the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iting as to the satisfaction of the Appointing Authority regarding existence of certain grounds which could have led to the formation of belief that there was prima-facie violation of such regulations and the securities were being dealt with in a manner detrimental to the investors' interest is brought to our notice. Similarly, nothing was produced before us to show that the report, as required by law to level allegation of fraud against the Appellant, was considered by the Board and that a reasonable opportunity of being heard in consonance with the principles of natural justice was afforded to the Appellant before the impugned order could be passed. The idea in affording an opportunity of being heard to an entity by the Board, as envisaged in the PFUTP Regulations, has a purpose. And that purpose is to afford an effective chance to an entity to rebut even the prima-facie view regarding allegations of fraud nurtured by the Investigating Officer. The significance of such a vital opportunity can never be allowed to be undermined, as that would be a total negation of the principles of natural justice. 97. It is established by law that ....where a power is given to do a certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Council, in Nazir Ahmed v. Emperor and latter by this Court in several cases, to a magistrate making a record under Section 164 and 364 of the Code of Criminal Procedure, 1898. This rule squarely applies where, indeed, the whole aim and object of the Legislature would be plainly defeated if the command to do the thing in a particular manner did not imply a prohibition to do it in any other. The rule will be attracted with full force in the present case, because non-verification of the surrender in the requisite manner would frustrate the very purpose of this provision. Intention of the Legislature to prohibit the verification of the surrender in a manner other than the one prescribed, is implied in these provisions. Failure to comply with these mandatory provisions, therefore, had vitiated the surrender and rendered it non est for the purpose of Section 5(3)(b). 99. Similarly, in the case of Hukum Chand Shyam Lal v. Union of India [1996] 2 SCC 128, the Hon'ble Supreme Court has specifically held that where a power is conferred on a certain authority and is required to be exercised in a certain way, it should be exercised in that manner or not at all. It means, all other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court of High Court was quashed and set aside and the writ petitions were allowed by directing the respondents to restore the telephone connections to the appellants. In doing so, the Hon'ble Supreme Court held that the Divisional Engineer should have satisfied himself by convincing reasons as to the existence of any emergency as mentioned in Rule 422 of the Telegraph Rules. The expression any emergency in Rule 422 was construed by the Hon'ble Supreme Court wider than the public emergency used in Section 5 of the Telegraph Act. Therefore, the Divisional Engineer should have arrived at such satisfaction as to the existence of any emergency rationally on relevant material which may include any certificate or report of the appropriate Government so as to the occurrence of a 'public emergency'. The requirement of recording such satisfaction by the Divisional Engineer, with reasons, therefore, is implicit in the rule. That will be a minimal safeguard against arbitrary exercise of this drastic power.... In this background it has been laid down by the Hon'ble Supreme Court in para 18 of the said judgment that : 18. It is well settled that where a power is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Fund v. Kartick Dasreported in 1994 (4) SCC 225. In that case, the appellant company therein, namely, Morgan Stanely Mutual Fund, was a domestic mutual fund registered with Securities and Exchange Board of India (SEBI). Its investment management company was also registered with the SEBI. The Board of Trustees of the appellant, which manages the fund, approved a draft scheme (for floating public issue). The scheme was forwarded to SEBI, which approved it on 23.11.1993, after duly scrutinizing and examining the same. The appellant and its Investment Manager, thereafter, took necessary steps, to begin marketing the scheme by issuing advertisement on 13.12.1993, after the same had been approved by the SEBI. 101.1 A suit was filed by Mr. Piyush Agarwal before the Learned Sub-Judge, Tees Hazari, Delhi, seeking injunction restraining the public issue from being floated by the appellant on the ground that the appellant's Offering Circular was not approved by SEBI apart from other irregularities in the same. It was contended that the appellant was seeking to collect money by misleading the public through arbitrary, unfair and unjust means. The Ld. Sub-Judge passed an interim order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a tendency should be curbed. Having regard to the frivolous nature of the complaint, we think it is a fit case for award of costs, more so, when the appellant has suffered heavily. Therefore, we award cost of ₹ 25,000/- in favour of the appellant. 102. The Morgan Stanley Mutual Fund (supra) judgment is not of much assistance to the Appellant inasmuch as it was dealing with the expression 'unfair trade practice', etc.in the context of Section 36-A of Monopolies and Restrictive Trade Practices Act, 1969. However, the ratio in Ramchandra Keshav Adke (supra); Hukum Chand Shyamlal (supra) and J. Jayalalithaa (supra) is fully attracted in the present case and we hold that the action of mixing-up of PFUTP Regulations with DIP Guidelines in the manner in which it has been sought to be done, without affording the Appellant any opportunity of being heard in this regard before the 1st WTM, is unjust and a clear violation of principles of natural justice. No matter how wide the power of the Respondent as a regulator, it must follow the law. 103. After a thorough analysis of the facts, circumstances and material brought before us, we are fully convinced that the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent, (7) deceptive behaviour by a person depriving another of informed consent or full participation, (8) a false statement made without reasonable ground for believing it to be true. (9) The act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. 106. We have minutely looked into Sections 12(a), (b) and (c) of SEBI Act, 1992, along with Regulations 3(a), (b), (c), (d); 4(1), 4(2)(f) and (k) of PFUTP Regulations as well as the definition of fraud. First of all we note that a person could be held guilty of fraud only if he has done an act or omission with a view to induce another person to deal in securities. The Respondent has not been able to attribute any such conduct to the Appellant anywhere in the Impugned Order. Similarly, no false statement has been made by the Appellant in the Offer Documents or the Prospectus. In any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reply before the 2nd WTM on the question of fraud but the same has been entirely ignored. Without bringing out any piece of reliable or convincing evidence on record, the Appellant has been sought to be held guilty of the gravest possible allegation, leading to a harsh and stigmatic penalty. This Tribunal has consistently held that even if fraud is to be proved on the basis of probability and not the strict principles of evidence, it is incumbent upon the Respondent to bring out cogent, convincing evidence and prove the charge of fraud against a company only as per the procedure established in the PFUTP Regulations and above all, on the basis of a high degree of probability to prove the same. In the case of Ess Ess Intermediaries Anand Saurashtra Society v. SEBI reported in 2013 SAT 73, this Tribunal in paragraphs 11 and 12 specifically held as under : 11. We now deal with the main issue regarding whether or not the Appellant has violated Regulations 4(1) and 4(2),(a),(b),(e),(g) and (n) of the PFUTP Regulations, 2003. Regulation 4(1), as reproduced above, provides that no person shall indulge in fraudulent and unfair trade practice in securities. Regulation 4(2) provides that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is evident from the Impugned Order that the Appellant has enjoyed no unfair advantage or benefit of any nature owing to the execution of the trades in question, nor have the same resulted in any kind of loss suffered by investors in the scrip of AEL. This is evident from the fact that the Respondent has not received any complaint with respect to any of the allegedly manipulative acts of the Appellant. (Emphasis supplied). 108. On the question of long delay of about nine months in passing the Impugned Order by the second WTM after reserving the matter for orders and also the overall delay of about seven years in bringing finality to an issue, we note, even at the cost of repetition that an IPO is an extremely important technique devised for the purposes of capital raising in the securities market. Not only companies but public investors at large are involved in this economic process. Therefore, there has to be expediency and finality in the actions of an enlightened and reputed Regulator like Sebi. Indecisiveness, untimely and highly belated actions will only lead to uncertainty in the minds of companies, shareholders, investors and other intermediaries in the Capital Market. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete disclosure regarding Shalika, Sudipti and Felicite and some other connected disclosures. Sebi has not shown any satisfactory reason for its indifference and inaction for a period of four months. 111. The matter thereafter remained before the Hon'ble Delhi High Court till 21st July, 2011, when the Division Bench called upon Sebi to consider, and if found appropriate, to investigate the matter for violation of disclosure norms laid down by law. The SCN dated 25th June, 2013, was again issued after a lapse of about 35 months and for this unusual delay of about three years there is no explanation except that some investigation was undertaken for such a long period of three years. The matter does not rest here. Thereafter the show cause notice was issued to the Appellant on 25th June, 2013; the proceedings before the second WTM of Sebi stood closed on 15th January, 2014, and the final order in the form of Impugned Order dated 10th October, 2014, came to be passed only after an inordinate and absolutely unexplained delay of about nine months. This unprofessional attitude adopted by Sebi is not appreciated by the Tribunal. 112. The Hon'ble Apex Court in the matter of An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned order is not only liable to be quashed and set aside on the ground of the Wednesbury principle of unreasonableness but also on the ground of the principle of proportionality. Shri Rafique Dada, Ld. Sr. Counsel for the Respondent, has refuted this argument on the ground that the Appellant should have known from the stage of the SCN itself that such an extreme order could also be passed against it on culmination of the proceedings before Sebi. Shri Rafique Dada, Ld. Sr. Counsel further contends that the loss of ₹ 7000 or 8000 crore ought to have been contemplated by the Appellant since the inception of the case and that there was nothing unusual about debarring a company from entering the capital market for three years. 114. Since we are quashing the impugned order on the merits itself, we do not propose to enter into the niceties of other arguments advanced by Shri Janak Dwarkadas, Ld. Sr. Counsel, particularly regarding the powers of Sebi to pass only emergent remedial orders to protect the integrity of the market and investors' interest under Section 11, 11(b) and 11(4) of the SEBI Act, 1992. We leave this question open to be considered in an appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly when the company's scrip is showing a definite and positive upward movement, is definitely unjust, unfair and detrimental to the investors' interest. 116. To sum up, it is noted that the Respondent has made an all out effort to bring the charge of control against the Appellant over the three companies, viz. Shalika, Sudipti and Felicite, within the clutches of the provisions of Section 4(2) of the Companies Act, 1956, by unnecessarily stretching the issue to various irrelevant factors which are not germane to the overall scheme of 'control' and 'disclosure' envisaged in the Companies Act, 1956 and also in the DIP Guidelines, 2000. In quest of a more befitting definition of 'Control', the Respondent has gone astray by even applying the definition of 'Control' as given in an entirely different context in the Takeover Code, 1997 or even certain Accounting Standards, primarily meant for auditors to be followed. Neither the Division Bench of the Hon'ble High Court of Delhi nor the first WTM of Respondent, who ordered investigation pursuant to the Hon'ble Delhi High Court's direction for possible violation of DIP Guidelines, give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t had cleared the Offer Documents after due application of mind before the same were converted into Final Prospectus for public's consumption. It is also evident that Kimsukh Sinha's complaint dated June 4, 2007 was already on record with the respondent before the appellant was given the go-ahead with respect to the IPO. The Respondent has failed miserably to show that it was handicapped in any manner in not scrutinizing these aspects before permitting the appellant to publish the Final Prospectus. Detailed antecedents of all the erstwhile associate companies were duly analyzed by the respondent in 2006-2007 and no such shortcoming was found therein which could in any manner adversely affect the decision making process of investors. In fact, that was the correct stage when the respondent, as a responsible regulator, should have taken a view to protect the interest of Investors to regulate the market, if in its opinion the Appellant was not making proper disclosures. We have minutely perused the first DRHP; the second DRHP and the Prospectus. These documents were submitted by the appellant and scrutinized by the respondent before the listing of the Issue. Various steps taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the Appellate Tribunal, distanced from Sebi and having due regard to the principles of Administrative Law. 119. The Respondent has completely failed to approach the issue in the matter pragmatically. Viewed from any angle, the impugned order is like a troubled sea whose waters only cast up mire and dust and, therefore, the same is liable to be quashed and set aside. Ordered accordingly. The appeal, thus, stands allowed with no order as to costs. Accordingly, for the same reasons, the six connected appeals, i.e., Appeal Nos. 392, 393, 394, 395, 396 and 415 of 2014, also stand allowed but without any order as to costs. Per: Justice J.P. Devadhar 120. Appellants in all these appeals, viz DLF Ltd., its Directors/Chief Financial Officer (CFO), have challenged common order passed by the Whole Time Member (WTM) of Securities and Exchange Board of India (SEBI) on October 10, 2014. Hence all these appeals are heard together and disposed of by this common decision. 121. By the impugned order dated October 10, 2014 WTM of SEBI has held that DLF Ltd. ('DLF' for short) has resorted to sham transaction of divesting shares of its subsidiaries/ associates with a view to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said DRHP were sufficient to enable the investors to make an informed investment decision. (f) On 26.4.2007 Mr. K. K. Sinha filed FIR 249/07 at a Police Station at New Delhi alleging that Sudipti and other persons accused therein have cheated the complainant Mr. Sinha for a sum of ₹ 31,09,50,500/. It was further alleged in the FIR that Mr. Praveen Kumar, one of the accused, had represented to the complainant that he was related to the promoters of DLF and was also on the Board of many DLF Group companies including Sudipti and that the complainant would get high returns if 35 acres of land at Gurgaon which the complainant had agreed to purchase from third parties is developed by DLF Group. It was further alleged that Shri Praveen Kumar and Shri Pradeep Singh (accused no. 5) acting on behalf of Sudipti represented to the complainant that they would arrange suitable parcel of land in favour of the complainant which could be jointly developed by the complainant and the DLF Group. Thus the accused persons lured/induced the complainant not only to transfer the above 35 acres of land in the name of Sudipti for ₹ 34,27,31,188/- but also illegally and unauthorizedly induced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Mr. K.K. Sinha against DLF and Sudipti. By the said order SEBI was directed to focus its investigation on the violations, if any, of the provisions of the erstwhile DIP Guidelines read with relevant provisions of the Companies Act, 1956. (k) In compliance with the order of WTM dated October 20, 2011, investigation was carried out by SEBI and on the basis of investigation report a show cause notice was issued to the appellants on 25.6.2013 inter alia alleging that the appellants:- (i) had employed a scheme to camouflage association of Sudipti with DLF as disassociation. (ii) had failed to ensure that the RHP/prospectus ('offer documents' for convenience) contained all material information which is true and adequate so as to enable the investors to make an informed investment decision in the issue. (iii) had actively and knowingly suppressed several material information and facts in the offer documents leading to misstatements in the offer documents so as to mislead and defraud the investors in the securities market in connection with the issue of securities of DLF. Accordingly, by the said show cause notice, appellants were called upon to show cause as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of DLF with the said three companies are as follows:- (a) As a business policy, DLF engaged in real estate development has been establishing various 100% subsidiaries/associates for the purpose of acquiring lands at cheaper rates so that the said lands could ultimately be developed by DLF. (b) Sudipti, Shalika and Felicite were the three out of several associates of DLF. 100% shares of those three companies were held by DLF Estate Developers Ltd. ('DEDL'), DLF Home Developers Ltd. ('DHDL') and DLF Retail Developers Ltd. ('DRDL') which were 100% subsidiaries of DLF in the following manner:- i) Felicite DEDL (30%) DHDL (30%) DHDL (30%) ii) Shalika DEDL (30%) DHDL (30%) DRDL (40%) iii) Sudipti DEDL (50%) DHDL (50%) Thus, on the date of filing first DRHP on 11/05/2006 Sudipti, Shalika and Felicite were subsidiaries/associates of DLF and therefore in the first DRHP filed with SEBI on 11/05/2006 it was disclosed that Sudipti, Shalika and Felicite wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; of DLF and therefore in the second DRHP filed on 2.1.2007 Felicite, Shalika and Sudipti were not shown as associates of DLF. 125. Counsel for DLF submitted that without considering aforesaid facts in proper perspective, in the impugned order, the WTM of SEBI has held that all the three issues framed therein stand established against the appellants. The three issues framed in the impugned order by the WTM of SEBI read thus:- (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 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 the securities market in connection with the issue of shares of DLF? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected or not, which is the core question to be considered before exercising powers under section 11/11B of SEBI Act, SEBI is not justified in holding the appellants to be guilty of violating clause 6.2 of DIP Guidelines. (c) While investing in DLF's IPO, the investors were guided only by what was stated in the prospectus. The alleged non disclosure of Felicite, Shalika and Sudipti in the offer documents, therefore, played no role in the formation of investor judgment of whether to subscribe to the issue or not. (d) At any rate, alleged non disclosure of the names of the above three companies in the offer documents did not have any bearing on the formation of investor judgement whether to subscribe to the IPO or not. Moreover, it would be incorrect to suggest that if any of the disclosures allegedly suppressed in the offer documents had indeed been made, an investor would not have subscribed to the issue, because:- (i) the only relevance of Felicite, Shalika and Sudipti for the purpose of offer documents (and therefore to any prospective investor) was the land of about 35 acres held by Sudipti (and therefore indirectly by Felicite and Shalika). Even though the said thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LF in executory contracts such as the Development Agreement. (v) Economic interest of DLF on Sudipti's land through the acquisition of bundle of rights in relation thereto being disclosed in the offer documents, it would not have made any difference, even if Felicite, Shalika and Sudipti were shown as subsidiaries/related parties of DLF. Therefore, the commercial and financial disclosures in the offer documents would not have undergone a change even if the three companies were mentioned in the financial statements as subsidiaries/related parties (even though showing Felicite, Shalika and Sudipti as subsidiaries/ related parties would have been incorrect since, the three companies had ceased to be subsidiaries of DLF as verified by the statutory auditors). Therefore, purported non disclosure of Sudipti, Shalika and Felicite was not material for the investment decision by prospective investors. (vi) No investor has lodged any complaint with SEBI with regard to the veracity of the disclosures in the offer documents or alleged that the disclosures in the offer documents had adversely affected their interests even though the offer documents remained in public domain from Janua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment Agreement between Sudipti and DCPC and further observes that.... such Development rights gave DLF substantially the right to all revenues from development including rent and the authority to transfer title to the land... . Consequent to that finding, the impugned order holds the FIR to be material in as much as it had the propensity to 'jeopardize' the development rights and concludes that .... I therefore find that at the relevant point of time the FIR in question had a direct bearing on the activities of DLF for which the subscriptions were invited in its IPO.... . Thus, the impugned order is inherently contradictory in as much as it relies on the importance of development rights to hold the FIR to be material but chooses not to decide the issue of materiality of non disclosure of Sudipti in view of the self same grant of development rights (when as a matter of fact, the natural extension of above is that the purported non disclosure of Sudipti as subsidiary/related party was not material). (x) In para 43 of the impugned order, while holding that the test of materiality of the information as envisaged in clause 6.2 of DIP Guidelines is that the information s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m under the Companies Act, 1956 and/or the Securities Contracts (Regulations) Act, 1956 (SCRA). The term 'subsidiary' is neither defined under the DIP Guidelines nor under the SCRA. Therefore, recourse is required to be made to the provision of Companies Act, 1956 to reckon whether a company is subsidiary of another or not. (c) Under Section 4 of the Companies Act, 1956 a company can be said to be a subsidiary of another, when, firstly, either the latter holds more than half of the share capital of the former or secondly, the latter controls composition of the Board of Directors of the former. Section 211 (3A) of the Companies Act requires that financial statements/balance sheets of a company to be drawn up in accordance with the applicable Accounting Standards. Accounting Standard 21 ( AS-21 ) which provides for consolidation of accounts of subsidiaries for drawing up financial statements contains a like test for determination of parent subsidiary relationship. (d) In the present case, both the aforesaid tests specified under Section 4 of the Companies Act are not satisfied, because, post divestment of shares on November 29-30, 2006, neither DLF held more than half o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se three companies post divestment. (g) In para 19 20 of the impugned order reference is made to the definition of the expression 'control' under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ('SAST Regulations') to substantiate the finding that DLF had control over the three companies post divestment. That allegation is totally misplaced, because, SAST Regulations have no application in the context of unlisted companies and scope of that regulation is restricted to the context of takeovers, public offers and acquisition of shares in a listed company. In any event, even the tests laid down under regulation 2(1) (c) of SAST Regulations relating to the expression 'control' are not satisfied in the present case. (h) Allegation of SEBI that transfer of shares of Felicite, Shalika and Sudipti by DLF's wholly owned subsidiaries viz. DEDL, DHDL and DRDL was a 'Sham' and that DLF (and its executive directors) had employed 'a scheme of camouflaging' the association of Sudipti with DLF as a 'Disassociation' is totally misdirected. It is not the case of SEBI that various share transfers detailed in the show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ga ceased to be an employee of DLF. Shareholdings of the wives were independent of their husband's employment with DLF. Without prejudice to the above, it is submitted that even if the shareholding of the shareholders of Felicite was coterminous with the employment of their respective spouses with DLF, it does not fulfil the legal tests laid down in Section 4 of the Companies Act and/ or AS 21 for determination of parent/ subsidiary relationship. (iii) There is no disability in law against a housewife from investing in shares. There can be no adverse inference drawn merely because the purchase consideration has been advanced from the joint account held by transferee and her employed spouse. Mr. Ramesh Sanka, CFO of DLF, in his reply dated 27/11/2013 indicated that it was customary for his wife Mrs. Padmaja Sanka to fund her expenses out of their joint accounts. Mr. Sanka has further stated that Mrs. Padmaja Sanka's investment decisions were independent of his employment with DLF. Moreover, it is entirely irrelevant for the purposes of determining the parent/ subsidiary relationship as per Section 4 of Companies Act and/or AS 21, if any personal loan was taken by the spou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , directors of Felicite, Shalika and Sudipti were not Key Management Personnel of DLF. (vi) No adverse inference could be drawn from the fact that shares of Sudipti were sold at par, because, admittedly, the amount of ₹ 45 crore received by Sudipti as performance deposit under the Development Agreement from DCPC was an outstanding liability in the books of account of Sudipti and as a consequence, Sudipti's net asset was less than ₹ 10/- per share. (vii) SEBI has incorrectly assumed that DEDL, DHDL and/or DRDL funded Shalika for purchasing the shares of Sudipti. What was given was the share subscription money and delayed payment of shares subscription by signatories to the Memorandum/Articles of Association of a company is permissible in law. (viii) Transactions between Felicite and DLF and/or subsidiaries after the divestment were in the ordinary course of business and cannot create a presumption of continued relationship which would indicate that DLF was exercising control over Felicite. (ix) Fact that Sudipti and Shalika did not have operational expenses during 2006-2007 and 2007-2008 cannot be inferred against DLF, because, during the period from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cite, Shalika and Sudipti did not meet the legal parameters laid down by Section 4 of the Companies Act, 1956 and AS 21. Since experts in the field of accountancy have confirmed the accuracy of the financial statements and conformity thereof with relevant accounting practices, SEBI is not justified in speculating to the contrary. DLF had acted bona fide on the basis of advice received from renowned Merchant Bankers and legal advisors who had minutely and rigorously scrutinized the offer documents to ensure compliance with all applicable norms. In particular, the Merchant Bankers of DLF had certified the accuracy of the disclosures in the offer documents, by stating specifically that such disclosures were sufficient to enable investors to make an informed investment decision. Where a company has acted on professional advice, in the absence of sufficient evidence to establish the charge of misleading the public, it cannot be held that the said company has wilfully failed to disclose material information. In support of above contention, reliance is placed on a decision of this Tribunal in case of Sundaram Finance Ltd. v. SEBI reported in (2003) SAT 35 and order of SEBI dated 10/10/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parent-subsidiary. Therefore, the findings arrived at para 33 of the impugned order that the purported transfers of shareholding in the said three companies were Sham transactions, devised an a plan, scheme, design and device to camouflage the association of DLF with these three companies as holding-subsidiary is flawed and legally infirm. SEBI has erred in drawing an analogy with certain other 355 companies since the enquiry in the show cause notice was limited to Felicite, Shalika and Sudipti alone. (o) Assuming while denying that DLF ought to have disclosed Sudipti, Shalika and Felicite as subsidiaries and consolidated their accounts with the accounts of DLF as alleged in the show cause notice, the same would not have made any material difference to the decision of investors to invest in shares of DLF, because:- (i) net total loss of Sudipti, Shalika and Felicite in the Financial Year 2006-2007 was ₹ 8 lac (approximately). (ii) DLF's total consolidated profit for the year 2006-2007 as disclosed in the financial statements was ₹ 1941.300 crore. (iii) if loss of three companies (Rs. 8 lac) were to be adjusted from the profits of DLF (Rs. 1941.300 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accordance with the applicable Accounting Standards. The applicable Accounting Standard for the purpose of reckoning related party transaction is AS-18. As per paragraph 10.1 of AS-18, parties are considered to be related ('related party') if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. 131. Paragraph 10.2 of AS 18 defines 'control' as follows:- (a) Ownership, directly or indirectly, of more than one half of the voting power of an enterprise, or (b) Control of the composition of the Board of Directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise, or (c) A substantial interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise. 132. Paragraph 10.4 of AS-18 defines 'significant influence' as follows:- Participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies . 133. In the impugned order a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed. Clause 6.11.1.2 of the DIP Guidelines provides that the information about outstanding litigations as per clause 6.11.1.1(e) shall be furnished in respect of subsidiaries of the issuer company (if applicable). 135. In para 39 of the impugned order it is held that since the offer documents included the sole development rights procured from Sudipti by DCPC . the FIR in question had a direct bearing on the activities of DLF . In para 40 of the impugned order it is held since the charges alleged in the said FIR, if proved against Mr. Praveen Kumar would have affected his position as a director of the aforesaid promoter group company and subsidiaries of DLF which would have also had a material impact on the operations of these companies and consequently on the operations of the DLF . and FIR was material information irrespective of the fact whether Sudipti was subsidiary of DLF . 136. Counsel for DLF submitted that there is no merit in the aforesaid findings for the following reasons:- (a) Assuming without admitting that Sudipti was a subsidiary of DLF at the relevant point of time, FIR filed by Mr. K. K. Sinha against Sudipti was not known to DLF until June 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said to be instituted only when a Competent Court takes cognizance of the offence alleged in the charge sheet and not on the mere filing of the FIR. Therefore, the mere registration of an FIR does not lead to the inference that a case is instituted, which would be 'litigation' for the purpose of clause 6.11.1.1(e) of DIP Guidelines. In support of the above contentions reliance is placed on decisions of the Apex Court in the case of General Officer Commanding, Rashtriya Rifles (supra), Jamuna Singh (supra). (iii) Clause 6.11.1.1(e) of the DIP Guidelines requires discloser of only litigation which is 'likely to affect operations and finances' of the issuer company or at any rate the subsidiary in question. It is submitted that the FIR in question cannot be said to be one which could 'affect operations and finances' of DLF and/or Sudipti because the same would not have resulted in either DLF being deprived of the development rights over Sudipti's land or Sudipti itself loosing land parcel. (iv) Upon investigation of the FIR filed by Mr. K. K. Sinha against Sudipti, the Police did not find merit in the allegations made in the FIR and filed a closure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant at the relevant time is wholly insufficient in law to make his knowledge that of DLF. If the knowledge of the directors of a company cannot be construed to be the knowledge of the company, the knowledge of a Key Managerial Employee of the company can certainly not be attributed to the company. (ix) In para 41 of the impugned order reference is made to the purported interrogation of Mr. Praveen Kumar by the Police which fact is brought out in the impugned order for the first time and the same never formed part of the allegations in the show cause notice. At any rate it is submitted that the said finding is not borne out from the records of the matter and hence cannot be sustained. (x) The parity drawn in the impugned order between the FIR filed by Mr. K. K. Sinha and the FIR filed by Mr. Harish Kumar Puri and Mr. Leelu Ram (para 42) in order to contend that DLF ought to have disclosed the FIR filed by Mr. K. K. Sinha is completely wrong. It is submitted that the disclosure of the said two FIR's were not made pursuant to clause 6.11.1.2 read with clause 6.11.1.1(e) of DIP Guidelines. The complaint filed by Mr. Harish Kumar Puri against DLF and its directors i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... violated clause 9.1 of the DIP Guidelines. 138. Counsel for DLF submitted that aforesaid findings are completely bald and without any basis. Neither in the show-cause notice nor in the impugned order it is indicated as to which sub clause of clause 9.1 had been violated by DLF and in what manner. As a matter of general practice, list of subsidiaries/related parties and pending legal proceedings are never advertised by the issuer company and therefore findings on alleged contravention of clause 9.1 of the DIP Guidelines must fail. 139. Counsel for DLF further submitted that even otherwise, clause 9.1 does not create any obligation upon an Issuer Company to comply with the guidelines on Advertisement. On the contrary, as per clause 9.0, the responsibility to ensure compliance with the obligation under clause 9.1 is on the lead Merchant Banker and therefore, violation of clause 9.1 of DIP Guidelines cannot be held against DLF. At any rate allegation of employing sham transaction and allegation of actively and knowingly suppressing material information and facts in the offer documents are untenable in view of the submissions already made in that behalf. Contravention of clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsider the report submitted under Regulation 9 and after giving reasonable opportunity of hearing to the persons concerned issue such directions or take such action as mentioned in Regulations 11 and 12 of PFUTP Regulations. (b) While appointing the Investigating Officer to investigate the complaints against DLF, the WTM of SEBI in his order dated October 20, 2011 had not issued any direction to investigate the violations, if any, under the PFUTP Regulations. In any event, there is nothing on record to suggest that the report of Investigating Authority in relation to the alleged PFUTP violations were submitted to the Appointing Authority as provided under Regulation 9. There is nothing on record to suggest that the Board has considered the said report as provided under Regulation 10. Therefore, in the absence of following the procedure laid down under the PFUTP Regulations, any action commenced in violation of the procedures prescribed under the PFUTP Regulations cannot be sustained. In this connection reliance is placed on decision of the Apex Court in the case of Ramchandra Keshav Adke (Supra) and Hukum Chand Shyam Lal (Supra) (c) Without prejudice to the above, it is subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the disassociation of Sudipti, Shalika and Felicite by DLF and/or the omissions of the names of these companies from the offer documents was intended to induce (or had result of inducing) investors and general public to buy/subscribe to DLF's shares in the IPO. (g) Additionally, DLF's issue would not amount to trade practice within the scope of Regulations 4 of PFUTP Regulations which prohibits manipulative, fraudulent and unfair trade practices . Regulation 4(1) provides that without prejudice to the provisions of Regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. Regulation 4(2) indicates the circumstances in which dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud . Regulation 4(2) also provides instances amounting to a fraudulent or an unfair trade practice set out in clauses (a) to (r). SEBI has failed to appreciate that for the purposes of invocation of Regulation 4, an act must amount to a trade practice . In order to be so, it has to be repetitive in nature. Issuance of shares for the purposes of raising capital is not a trading activity and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting in its regulatory capacity and issuing comments had reviewed all documents placed before it along with the Second DRHP. SEBI in its affidavit in reply dated December 1, 2014 to the present appeal has taken the position that SEBI does not approve offer documents in terms of clause 6.4.2.2(a)(v) the offer document and therefore, no reliance can be placed on the delta view document filed by the appellant. This assertion loses sight of DLF's argument that the submission of the delta view document exhibited its bona fides in the matter and that DLF had not carried out the divestment in a clandestine manner, as alleged in the show cause notice. (j) It is settled law that imposing punishment under the PFUTP Regulations on the ground of commission of fraud requires clear and unambiguous evidence and a high degree of probability, which is lacking in the present case. In support of the above contention reliance is placed on decisions of this Tribunal in case of Ess Ess Intermediaries Anand Saurashtra Society (Supra) and decision of this Tribunal in case of Prashant J. Patel v. SEBI Manu/SB/0096/2010. (k) The impugned order deals with the above arguments in a circulatory manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts were suppressed in the offer document, neither the show cause notice nor the impugned order disclose any mens rea. In the absence of mens rea, Sections 11, 11A, 11(4) and 11B of the SEBI Act could not be invoked which are discretionary, remedial and not punitive in nature. It is well settled law that punishment must fit the crime, otherwise it will be hit by Wednesbury principle of unreasonableness and rule of proportionality. It is well settled law that no penalty ought to be imposed for a technical and venial breach of statutory obligations. In support of the above contentions reliance is placed on the decision of the Apex Court in Bharjatiya Steel Industries (supra), Maharashtra Land Development System v. State of Maharashtra [2011] 15 SCC 616 and Chairman All India Railway Recruitment Board v. K. Shyam Kumar [2010] 6 SCC 614 and Hindustan Steel Ltd (supra). 145. It is further submitted that DLF is a public limited listed company with about 4.5 lac shareholders, and has a constant need to access the capital market in order to carry on its business operations. By the impugned order harshest and most disproportionate punishment that could have been imposed under Section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Directors/CFO of DLF. In support of the above submission reliance is placed on the decisions of the Apex Court in the case of Maksud Saiyed (Supra), Brindavan Beverages (P.) Ltd. (Supra) and Tin Plate Co. of India Ltd. . (Supra). Reliance is also placed on decision of the Apex Court in Sunil Bharti Mittal (Supra) in support of the contention that liability for offending acts of a company can be foisted on its directors only when the applicable statute specifically provides for vicarious liability of directors for the actions of the company. It is further contended that in the absence of a provision for vicarious liability contained in the statute, there has to be a specific act attributable to a director so as to hold such director responsible for the offending acts committed by or on behalf of the company. Relying on a decision of the Apex Court in case of UOI v. Rai Bahadur Shreeram Durga Prasad (P.) Ltd. [1969] 1 SCC 91 it is contended that the obligation of the directors is to sign the offer documents and once that obligation is discharged bona fide, directors cannot be held liable for any technical violation in the offer documents. 150. Mr. Joshi learned Senior Advocate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Moreover, in an appeal, correctness of an order has to be decided on the basis of documents on record and not by introducing new documents and that too at the instance of a person who is not a party to the proceedings. 153. On being permitted to argue on behalf of Mr. K. K. Sinha, without filing the affidavit in reply, Mr. Chatterjee, fairly stated that he would adopt the arguments advanced by Mr. Dada learned Senior Advocate for SEBI, who has dealt with the merits of the case extensively. However, Mr. Chatterjee sought to rely on three communications which according to him would establish beyond doubt that the appellants were aware of filing FIR prior to 25/06/2007. Although we have not permitted Mr. Chatterjee to tender new documents, since it is contended that the said three communications ex-facie falsify the case of DLF Ltd. (Supra) we have deemed it proper to look at those three communications and give an opportunity to the appellant to comment on the said communications. The said three communications are (one) summons dated May 1, 2007 addressed by the Sub-Inspector of Police station at Connaught Place, New Delhi to Mr. Praveen Kumar, (two) letter dated May 2, 2007 addres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich such matters shall be disclosed by the companies. Section 11B of SEBI Act interalia empowers SEBI to issue such directions in the interest of investors or orderly development of the securities market as it deems fit to any company in respect of matters specified in Section 11A. Section 11(4) of SEBI Act provides that without prejudice to the provisions contained in Section 11(1),(2),(2A) 3 and Section 11B of SEBI Act, SEBI may, in the interest of investors or securities market pass an order in writing either pending investigation/inquiry or on completion of such investigation/inquiry, inter alia, restraining a person from accessing the securities market and also prohibiting any person associated with securities market to buy, sell or deal in securities for such period as it deems fit. Similar provisions are also contained in the Guidelines/Regulations framed by SEBI. Powers conferred upon SEBI under Section 11,11A 11B of SEBI Act are independent of the penalty and adjudication proceedings contained in Chapter VIA of SEBI Act. 158. From the aforesaid provisions, it is clear, that where a person violates the Guidelines/Regulations framed by SEBI, then, apart from initiatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, would in effect mean, construing those provisions narrowly which is not warranted from the words used in those provisions. Very fact that Section 11/11B, empowers SEBI to take remedial/preventive measures even before establishing any violations, clearly shows that SEBI has very wide powers and the said powers can be invoked even before establishing any violations. In such a case, construing the provisions of Section 11 11B narrowly, as suggested by the appellants would amount to defeating the object with which those provisions are enacted and hence argument advanced by the appellants cannot be accepted. 161. It is true that in a given case, fact that no investors were not prejudiced by the violations committed by a person may be a relevant factor to be taken into consideration while considering the quantum of remedial/preventive measure taken against that person. However, fact that no investors were found to be prejudiced by the violations committed, would not bar SEBI from taking remedial/preventive measures under Section 11/11B of SEBI Act. In other words, for passing restraint/ prohibitory order under Section 11/11B, it is not a condition precedent or mandatory for SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action taken by SEBI against the company therein for the wrong committed, this Tribunal, relying on a decision of the Bombay High Court in case of SEBI v. Cabot International Capital Corpn. reported in (2004) 51 SCL 307 which is approved by the Apex Court is case of Shriram Mutual fund (Supra), held that the ratio laid down by the Apex Court in case of Shriram Mutual Fund (supra) rendered in the context of Chapter VIA of SEBI Act would apply to all the provisions of SEBI Act and Regulations framed by SEBI. Apex Court in case of Shriram Mutual Fund has held that unless the language of the statute indicates the need to establish the presence of mens rea, it is wholly unnecessary to ascertain as to whether a person has committed violations intentionally or not. That decision continues to be good law and the said decision is not overruled by the Apex court in its subsequent decision in case of Bharjatiya Steel Industries (supra). In fact, after referring to the decision in Shriram Mutual Fund (supra) it is held by the Apex Court in case of Bharjatiya Steel Industries (supra) that where discretion is conferred upon the adjudicatory authority, the principle of mens rea would be held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed the names of Felicite, Shalika and Sudipti as 'associates' instead of disclosing them as subsidiaries of DLF. Since the dispute in the present case relates to disclosing information/facts relating to these three companies in the offer documents issued by DLF either as 'subsidiaries' or 'associates', it is not necessary to go in to the question as to whether the three companies ought to have been disclosed as 'Subsidiaries' instead of disclosing them as 'associates' of DLF. 167. On 31/08/2006, DLF withdrew the first DRHP filed on 11/05/2006 and filed second DRHP on 02/01/2007. In the second DRHP, neither the names of Felicite, Shalika and Sudipti nor material information in respect of those three companies were disclosed as according to DLF, 100% shares of those three companies held by DEDL, DHDL and DRDL were divested on 29-30/11/2006 and hence there was no obligation to disclose names of Felicite, Shalika and Sudipti or to disclose material information relating to those three companies. 168. Contention of DLF that on account of transferring entire shares of Felicite held by 100% subsidiaries of DLF in favour of three house w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LF, and thereafter divest the shares of Shalika to Felicite and divest the shares of Sudipti to Shalika. (e) Felicite (acquired by three house wives on 29/11/2006) increased its share capital on 14/12/2006 and allotted increased shares to seven house wives whose spouses were all Key Managerial employees of DLF. As a result, the shareholding of three house wives in Felicite stood reduced from 40%, 30% and 30% to 10.1% each and the balance 70% shares (approx) were held by seven house wives whose spouses were all Key Managerial employees of DLF. Thus, the three house wives who acquired 100% shares of Felicite on 29/11/2006 got their shareholding reduced from 100% to 30% (10% each approximately) on 14/12/2006 by resorting to increase in shares capital of Felicite. As a result of increase in the share capital, Felicite received ₹ 2 crore between 29/11/2006 to 19/12/2006 from ten house wives (including three house wives acquired 100% shares of Felicite on 29/11/2006) whose spouses were Key Managerial employees of DLF. (f) All the three house wives in their statement recorded before the Investigating Officer of SEBI stated that apart from acquiring shares of Felicite as invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives and the loans were repaid at the time of their retirement. (l) From the bank account statement of Felicite, it is seen that out of the amount of ₹ 2 crore received by Felicite on account of increase in the share capital, almost entire amount of ₹ 2 crore was transferred by Felicite to DLF, DEDL, DHDL and DRDL. Thus, the money that came to Felicite from the joint accounts of Key Managerial employees of DLF through their wives, went back to DLF and its subsidiaries, even after the claimed date of dissociation. (m) In the year 2006-2007 Felicite had no fixed assets or inventory. As per the P L account of Felicite, in the year 2006-2007, Felicite had acquired 281 companies of DLF (including Shalika) and had incurred total loss of about ₹ 8 lac (approx) 169. Contention of DLF that on account of transferring entire shares of Shalika held by 100% subsidiaries of DLF to Felicite on 30/11/2006, DLF stood dissociated from Shalika and therefore DLF was not required to disclose material information/facts relating to Shalika has been rejected in the impugned order by holding that the entire process of transferring shares of Shalika was a sham transaction in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30,000/- and ₹ 40,000/- being the price payable by Felicite for purchasing 100% shares of Shalika from DEDL, DHDL and DRDL respectively. (g) Prior to transfer of 100% shares of Shalika held by DEDL, DHDL and DRDL (100% subsidiaries of DLF) Mr. Lovekush Sharma and Mr. Rajendra Gupta, both employees of DLF were the directors of Shalika. They were also directors in various other subsidiaries of DLF. These two directors continued to be directors of Shalika even after 100% shares of Shalika were transferred by DEDL, DHDL and DRDL to Felicite on 30/11/2006. (h) Prior to 30/11/2006, bank account signatories of Shalika were Mr. Arun Kumar Bhagat (director in two subsidiaries of DLF and also authorized signatory of Sudipti), Surojit Basak (Senior Vice President of DLF, director of various subsidiaries of DLF and also authorized signatory of Felicite), Mr. Praveen Kumar (Managing Director of DEDL, director in 21group companies of DLF, nephew of Mr. K.P. Singh, Chairman of DLF) Mr. S.K. Gupta, Mr. Manik Khanna and Mr. V.S. Khanna. All these authorized signatories of Shalika continued to be authorized signatories of Shalika even after 100% shares of Shalika held by DEDL, DHDL and D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipti and its directors and Shri Praveen Kumar and others named therein have duped him to the tune of ₹ 34 crore after Sudipti acquired 35 Acres of land with Mr. K. K. Sinha as the confirming vendor. (f) In between, on 29/11/2006, DLF (through its subsidiaries) divested shares of Felicite to three house wives, on 30/11/2006 divested shares of Shalika to Felicite and divested its 100% shareholding in Sudipti to Shalika. There is no explanation as to why 100% shares of Sudipti held by two subsidiaries of DLF (DEDL and DHDL) were transferred to Shalika on 30/11/2006, when 100% shares of Shalika were held by DEDL, DHDL and DRDL who are all 100% subsidiaries of DLF. (g) Sudipti was funded through a series of transactions involving DLF's partnership firm, subsidiaries, associates and Key Management employees for the purpose of acquiring aforesaid lands. Shalika had zero bank balance on 29/11/2006 and from the date of incorporation in March 2006 till 30/11/2006 Shalika had not carried out any commercial transaction. When questioned as to why Shalika deemed it fit to acquire shares of Sudipti, (a husk company according to DLF) when Shalika itself was a husk company without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndon and West Riding Investment Ltd. (Supra) means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual rights and obligations (if any) which the parties intend to create. 173. It is contended that the business model adopted by DLF was to first incorporate subsidiary/associate companies for acquiring lands at cheaper rates and once the lands are acquired, the said subsidiary/associate companies would transfer the development rights in respect of those lands in favour of DLF. Once the development rights are transferred, it is contended that the said subsidiary/associate companies become shell companies and therefore, the shares of the said subsidiary/associate companies are divested by transferring the shares of those companies to third parties. Since, Felicite, Shalika and Sudipti were incorporated in March 2006 as subsidiary/associate companies of DLF, as per the business model they were to acquire lands which could be later on developed by DLF. There is nothing on record to suggest that Felicit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested even before those two companies had acquired any lands (for being developed by DLF) which was the object for which they were incorporated, and in the absence of any explanation as to why shares of Sudipti (a shell company according to DLF) were divested to Shalika (also a shell company according to DLF) it is apparent that the divestment of shares of Felicite, Shalika were not bonafide transactions carried out in the ordinary course of business. 176. If divestment of shares of Felicite, Shalika and Sudipti by DLF were bona fide transactions, then, on divestment of shares, DLF would have been totally dissociated with Felicite, Shalika and Sudipti. However, the events that took place on 29-30/11/2006 and even thereafter, leave no manner of doubt that DLF continued to be associated with Felicite, Shalika and Sudipti as can be seen from the following:- (a) decision of DLF to divest 100% shares of Felicite held by DEDL, DHDL even before Felicite could achieve the object with which it was incorporated is (acquiring land) is not only strange, but is also contrary to the 'business model' allegedly adopted by DLF. It is equally strange as to how, the three house wives wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of directors of Felicte, Shalika and Sudipti. (e) Divestment of shares was a game plan adopted by DLF is evident from the fact that on 29/11/2006, the bank balance of Shalika was zero and till 29/11/2006 Shalika had not even obtained cheque book. On 29/11/2006 DLF (through its subsidiaries) provided funds to Shalika so that Shalika could acquire shares of Sudipti on 30/11/2006 from the subsidiaries of DLF. Thus, on the one hand, DLF sold the shares of Sudipti to Shalika and on the other hand DLF supplied funds to Shalika for purchasing the shares of Sudipti. It is true that funds provided by the subsidiaries of DLF to Shalika on 29/11/2006 were towards the share subscription money. However, the very fact that the share subscription amount which was required to be paid in March 2006 was paid on 29/11/2006 leaves no manner of doubt that the said payment was made with a view to facilitate acquisition of shares of Sudipti by Shalika. (f) If the decision of three house wives to acquire entire shares of Felicite held by the subsidiaries of DLF on 29/11/2006 and thereafter making Felicite to acquire entire shares of Shalika and Shalika to acquire entire shares of Sudipti from the 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidiaries of DLF (consequently shares of Shalika and Sudipti) had categorically stated that they were not involved in the running of Felicite. Therefore, in the facts of present case, it is evident that since the three house wives who acquired 100% shares of Felicite were not involved in the running of Felicite, it is abundantly clear that DLF continued to run Felicite (consequently Shalika and Sudipti) even after divestment of shares through the Board of Directors appointed by DLF. Thus, it is beyond doubt that DLF had adopted a modus operandi of divesting shares of Felicite, Shalika and Sudipti with a view to camouflage its association with Felicite, Shalika and Sudipti as dissociation. 178. Argument of DLF that transfer of shares of Felicite (consequently shares of Shalika and Sudipti) by DLF in favour of the wives of its employees were for administrative convenience and maintenance of continued confidentiality for acquisition of any contiguous parcels of land which may be required in time clearly runs counter to the argument of DLF that divestment of shares were effected with a view to dissociate DLF from the three companies. Very fact that the shares of Felicite were dives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d paid the above amounts to DLF and its subsidiaries as and by way of consideration for selling shares of various DLF companies by them to Felicite. Correctness of the said certificates are seriously disputed by SEBI. For the purposes of present appeals it is wholly immaterial as to whether the amounts were received by DLF and its subsidiaries from Felicite on account of commercial transactions or on account of share transfer. What is relevant to note is, that Felicite continued to acquire various DLF companies even after the alleged dissociation, which clearly justifies the inference drawn by SEBI that even after divestment of shares Felicite was run by DLF through the Board of Directors who are all employees of DLF. Similarly, Shalika and Sudipti were run by DLF through the Board of Directors who are all employees of DLF. In other words, assuming that the divestment of shares are not per se illegal, fact that the said divestments have been made to camouflage association of DLF with the three companies as dissociation would render the transaction in question to be sham transactions. Therefore, in the facts of present case, decision of SEBI in holding that DLF resorted to sham tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion relating to Sudipti cannot be accepted, because, assuming that the total land held by DLF under the head 'Sole Development Rights' includes 35 Acres of land belonging to Sudipti, that does not amount to disclosing Sudipti as 'subsidiary/associate' of DLF. Object of various Clauses in the DIP Guidelines (now ICDR Regulations) is to ensure that various information set out therein are disclosed in the offer documents and not merely to included the lands belonging to the subsidiaries/associates. Therefore, assuming that the 35 Acres of land belonging to Sudipti was included in the total land that could be developed by DLF, it would not amount to disclosing true and adequate material information as contemplated under the DIP Guidelines. Hence, aforesaid decisions do not support the contention of DLF. 184. Argument of DLF that after executing the Development Agreement in respect of 35 Acres of land in favour of DLF (through DCPC) Sudipti had become commercially irrelevant and therefore, shares of Sudipti were divested is unbelievable, because, if Sudipti on execution of Development Agreement had become commercially irrelevant, then shares of Sudipti alone ought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This argument of DLF, precisely contradicts its claim that on execution of Development Agreement, Sudipti had become a shell company and hence the shares of Sudipti were divested. Even according to DLF, inspite of executing Development Agreement, there was a possibility of the development of the lands in question being scuttled if there was total dissociation on account of divestment of shares, of Sudipti, Therefore, DLF adopted a modus operandi of sham divestment of shares through three house wives whose spouses were Key Managerial employees of DLF. Admittedly the three house wives were not running Felicite (consequently, Shalika and Sudipti) and hence, it is evident that DLF continued to run Felicite, Shalika and Sudipti even after the divestment of shares, through the Board of Directors of the respective companies, who were also Key Managerial employees of DLF. Thus, in violation of Clause 6.2 of DIP Guidelines DLF has resorted to sham transaction of divesting shares with a view to avoid disclosing material information relating to Felicite, Shalika and Sudipti in the offer documents which are true and adequate. 186. Contention that there was no motive for DLF to make non disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the issue as to whether DLF has violated Clauses 6.9.6.6, 6.10.2.3, 6.11.1.2 9.1 of DIP Guidelines it is held that by resorting to sham transaction of divesting shares of Felicite, Shalika and Sudipti, DLF has avoided making disclosure of material information relating to those three companies in the offer documents in violation of Clause 6.2 of DIP Guidelines and consequently violated various other Clauses in Chapter VI of the DIP Guidelines which relate to disclosing material information in the offer documents. It was strongly contended by the Counsel for DLF that on divestment of shares it could not be said that DLF had 'control' over Felicite, Shalika and Sudipti as contemplated under Section 4 of the Companies Act, 1956. As rightly contended by the Counsel for SEBI, the basic question to be considered herein is, whether, entering into sham transactions with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation and thereby avoid disclosing material information relating to those three companies in the offer documents amount to violating various Clauses under the DIP Guidelines/PFUTP Regulations and not the question as to whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitting that the above contentions which were neither raised in the show cause notice nor dealt with in the impugned order cannot be allowed to be urged at this belated stage, submitted that there is no merit in the above contention of SEBI, because, in the present case, the parent subsidiary relationship between DLF and Sudipti was a temporary relationship and therefore, as per para 11 of AS-21, DLF was not required to comply with para 22 of AS-21. 191. It is well established in law that correctness of an order is to be decided only on the basis of reasons set out in the impugned order and not on the basis of reasons which are not be found in the impugned order. Since the financial statements are prepared by the auditors and the auditors of DLF have not been questioned by SEBI on the above aspects of the matter, it would not be proper to express any opinion behind the back of the auditors of DLF. Although, above argument sought to be raised by SEBI for the first time before this Tribunal is an interesting argument worth considering, since the views of the auditors who prepared the said financial statements of DLF is not available on record, in the facts of present case it woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /10/2011, while appointing the Investigating Authority to investigate into the allegations levelled by Mr. K. K. Sinha against DLF, had recorded his prima facie observation that in all probability DLF was aware of the FIR registered against Sudipti, because Mr. Praveen Kumar (one of the accused in the FIR) was closely associated with DLF and Mr. Praveen Kumar and others against whom the FIR was filed were interrogated by the police authorities in connection with FIR. However, in view of the plea that DLF came to know about the filing of FIR on 25/06/2007, the WTM of SEBI directed the Investigating Authority to investigate the matter and find out as to whether there is any truth in the contention of DLF that filing of FIR came to its knowledge on 25/06/2007. In para 17 of the said order it was specifically recorded that the Investigating Authority shall investigate the matter without being prejudiced by the prima facie observation made in the said order. 197. In para 41 of the impugned order, which is passed after the conclusion of investigation, the argument of DLF that the FIR dated 26/04/2007 came to its knowledge on 25/06/2007 has been rejected by recording thus:- In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made therein. Thus, the impugned decision of WTM of SEBI in so far as it holds that despite knowledge, DLF has failed to disclose FIR in the offer documents is based on conjectures and surmises and hence cannot be sustained. 200. During the course of arguments, Mr. Chatterjee, learned counsel appearing on behalf of Mr. K. K. Sinha (complainant) sought to tender three communication dated 01/05/2007, 02/05/2007 and 26/05/2007 which according to him clearly establish that DLF was aware about the filing of FIR prior to 25/06/2007 and the claim made by DLF to the contrary is false. 201. Counsel for appellants apart from doubting genuineness of the aforesaid three communications have submitted that the said three communications ought not to be entertained at this belated stage. However, in the interest of justice, we deemed it proper to look into those three communications. First communication dated 01/05/2007 is the summons issued by the Investigating Officer, Police Station, Connaught Place, New Delhi calling upon Mr. Praveen Kumar, Director of Sudipti to attend police station on 03/05/2007 in connection with a case registered on the compliant of Mr. K. K. Sinha. FIR was not enc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sclosed in the offer documents becomes academic and hence not answered. 203. Question thereafter to be considered is, whether SEBI is justified in holding that the directors and the CFO of DLF have violated Clause 6.15.2 of the DIP Guidelines. 204. Counsel for the directors of DLF have argued that in the absence of any specific provision under the SEBI Act making the directors/CFO automatically liable for the offences allegedly committed by the company, the directors cannot be made liable for the offences allegedly committed by the company by applying the principles of vicarious liability. There is no merit in the above contentions, because, in the present case, the directors and the CFO are not held vicariously liable, but are held individually and directly liable for the misstatements in the offer documents. Hence, various decisions relied upon in support of the contention that the directors cannot be made vicariously liable for the misdeeds of the company would have no bearing on the facts of present case. 205. The Board of Directors and the CFO who has signed the prospectus on behalf of all the directors are individually and directly held liable, because, they were the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rguments are without any merit, because, as noted above, Mr. Sanka is primarily held liable for being party to the sham transactions of divesting shares with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation and thereby avoid disclosing material information relating to those three companies in the offer documents. Once it is held that the Board of Directors/CFO are guilty of resorting to sham transactions with a view to avoid disclosing material information relating to aforesaid three companies, then it follows as a matter of course that material information required to be disclosed as more particularly set out in various Clauses of DIP Guidelines have not been complied with. In such a case it becomes academic to go into the question as to how many Clauses of DIP Guidelines which enumerate the material information required to be disclosed in the offer documents have been violated. Similarly, the argument that the benefit of doubt given to Mr. G. S. Talwar must also be extended to other directors who are appellants before this Tribunal, because, there is no material to show that the said directors had participated or were involved in the day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered by the appointing authority namely the WTM of SEBI on 17/05/2013 and thereafter, show cause notice in accordance with the power delegated to Deputy General Manager duly approved by Executive Director was issued by the Chief General Manager, who is a person holding two ranks superior to that of Deputy General Manager. It is further stated in the affidavit filed by SEBI that after issuance of show cause notice, the matter was referred to Mr. Rajeev Kumar Agarwal, WTM of SEBI who as per office note issued by the Chairman SEBI on 23/01/2013 was designated as a member to hear and decide Section 11B 11(4) matters which arise from the investigations conducted by the Investigation Department Division 6 to 10 and since the investigation in the present case was carried out by Division 7, the same was heard and decided by Mr. Rajeev Kumar Agarwal, WTM of SEBI. These submissions are not controverted and moreover, there is no reason to disbelieve the above statements made by SEBI in their affidavit. Hence the preliminary objection raised by DLF to the effect that the impugned order has been passed without following the procedure prescribed under the PFUTP Regulations cannot be sustain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder regulation 2(c) of PFUTP Regulations. 212. Similarly, argument of DLF that in the present case, no act, expression, omission or concealment was caused by DLF while 'dealing in securities' as contemplated under regulation 3 read with regulation 2(b) of PFUTP Regulations is also without any merit, because, expression 'dealing in securities' under regulation 2(b) is an inclusive definition and is not restricted to the categories specified therein. Therefore, any act, omission or concealment in the offer documents issued to the investors/general public for the purpose of subscribing shares of a company in the IPO would be an act, omission or concealment while dealing in securities. To accept the argument of DLF would mean that a company which has indulged in committing fraudulent act, omission or concealment in the offer documents issued to the investors/general public for subscribing to the shares of that company in the IPO, cannot be proceeded against under PFUTP Regulations on ground that there is no dealing in securities. Offering shares to the investors/general public under the IPO by issuing offer documents is one of the modes of dealing in shares and in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors which are now found to be sham transactions. In other words, it is possible that the Merchant Bankers/Auditors may have issued the certificates/reports under the bonafide belief that the facts furnished to them are true and correct. However, if the facts furnished to them by DLF is distorted or sham, it is not open to DLF to contend they acted bonafide on the basis of the certificates/reports submitted by the Merchant Bankers/Auditors/legal advisors. 215. Question then to be considered is, whether in the facts of present case, initiating remedial/preventive action under Section 11/11B of SEBI Act is warranted and if so, whether the action taken against the appellants by SEBI is proportionate to the violations committed by the appellants. 216. Resorting to sham transaction of share transfer with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation and thereby misleading the investors by not disclosing material information relating to Felicite, Shalika and Sudipti in the offer documents is no doubt highly objectionable. Such a dubious method adopted by DLF is highly detrimental to the investors/general public in the securities market. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the offer documents, it would have had little impact on the investor decision to invest in the shares of DLF. (b) there is nothing on record to suggest that the investors were prejudiced on account of DLF failing to disclose material information relating to Felicite, Shalika and Sudipti. (c) there is nothing on record to suggest that failure to disclose material information relating to three companies in violation of various Clauses under Chapter VI of DIP Guidelines/PFUTP Regulations has led to any direct or indirect benefit or advantage to DLF or its directors. (d) DLF has already borrowed huge funds for acquiring lands/development rights and further funds would be necessary for development of the said lands. If DLF is restrained/prohibited from accessing the securities market for a long period, it would seriously cripple the functioning of DLF and consequently, the interests of 4.5 lac investors in DLF would be seriously prejudiced. Object of passing restraint/prohibitory order under Section 11/11B of SEBI Act is to ensure that no such violations are committed in the future and not to stifle the violator. (e) Since the impugned order to the extent it holds that DLF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inable and accordingly quashed and set aside. (g) By order of WTM of SEBI dated 20/10/2011, the Investigating Officer of SEBI was specifically directed to investigate as to whether DLF had knowledge about the filing of FIR prior to 25/06/2007. Despite that specific direction, the Investigating Officer of SEBI has failed and neglected to investigate that issue which was an important issue having direct bearing on the merits of the case. Thus, the Investigating Officer of SEBI is guilty of gross misconduct and dereliction of duty and failure on his part to comply with the directions contained in the order dated 20/10/2011 has led to miscarriage of justice. (h) resorting to sham transaction with a view to camouflage association of DLF with three companies as dissociation being a dubious method adopted by appellants it was necessary for SEBI to send stern message to DLF and other listed companies by taking remedial action under Section11/11B of SEBI Act so that such dubious methods are not adopted hereafter. (i) Since the impugned order is held to be partially unsustainable and there are several mitigating factors in favour of the appellants as more particularly set out herein ..... X X X X Extracts X X X X X X X X Extracts X X X X
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