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DLF Limited and Others Versus Securities and Exchange Board of India

2015 (5) TMI 14 - SECURITIES APPELLATE TRIBUNAL MUMBAI

Appeal against order of SEBI - Six of its Directors along with the Chief Financial Officer (CFO) restrained from accessing the securities market - Prohibition from buying, selling and otherwise dealing in securities directly or indirectly for a period of three years.

Non disclosure of material information relating to those subsidiaries/ associates in the prospectus - Violation of SEBI (Disclosure and Investor Protection) Guidelines 2000 ('DIP Guidelines') – Contravention of SE .....

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hird parties to run the company through the existing Board of Directors and authorized 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 run .....

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6 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 of DLF that the net financial losses incurred by Felicite, Shalika and Sudipti during the year 2006-2007 being approximately ₹ 8 lac compared to the total profit of DLF during the same period amount .....

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ents of the parent company. Hence the argument that even if the negligible loss incurred by the three companies in the offer documents it would have no material effect on the investor decision cannot be accepted.

From the impugned order it is apparent that the Investigating Authority had failed to investigate the plea of DLF that filing of FIR against Sudipti came to its knowledge only on 25/06/2007. Failure on part of the Investigating Authority to investigate the above issue inspite .....

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ng material information relating to those three companies in the offer documents and then represented to the investors by signing a declaration in the offer documents to the effect that the statements made therein are true and correct. In such a case, the directors of DLF cannot contend that they have not committed any violations and that no direction need be passed against them under Section 11/11B of SEBI Act.

The preliminary objection raised by DLF to the effect that the impugned o .....

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ertain 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 .....

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ing the impugned order, cannot be a ground to hold that in view of passage of time no action need be taken under Section 11/11B of the SEBI Act. Similarly, fact that in the present case, no investor is found to have been prejudiced by the violations committed by the appellants cannot be a ground to hold that no action need be taken under Section 11/11B, because, to ensure that no such dubious method is adopted again, SEBI must act immediately and SEBI cannot wait till the investors are actually .....

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rial information relating to those three companies in the offer documents and thereby failed to disclose true and adequate material information relating to those three companies in violation of Clause 6.2 of DIP Guidelines. - Once it is held that by resorting to sham transaction, DLF has failed to disclose material information in violation of Clause 6.2 of DIP Guidelines, it obviously follows that various material information’s specified in different Clauses in Chapter VI of DIP Guidelines have .....

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efore they are equally guilty of violating DIP Guidelines/PFUTP Regulations. - Order to the extent it holds that DLF was aware about the filing of FIR prior to 25/06/2007 and that the DLF has actively concealed the FIR in the offer documents is unsustainable and accordingly quashed and set aside. – In matter of 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 issu .....

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itory 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. Advoc .....

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the Chief Financial Officer (CFO) have been restrained from accessing the securities market and in addition to it, have also been prohibited from buying, selling and otherwise dealing in securities directly or indirectly for a period of three years. The Impugned Order has been passed pursuant to a Show Cause Notice ('SCN') dated 25th June, 2013. All these appeals have been heard together and Appeal No. 331/2014 (DLF Ltd. v. SEBI) has been taken as the lead case in which detailed and exha .....

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n of fragmented pieces of land into a bigger chunk for development, the Appellant floats many subsidiaries or associate-companies which are divested after achieving the business objective. The appellant intended to make a public issue of 1,75,00,000 (one crore, seventy five lac) Equity shares of ₹ 2/- each for cash at a price of ₹ 525/- per equity share. With this objective in mind, the appellant approached various experts, including Auditors, Advocates and Merchant Bankers and with .....

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paring 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 lat .....

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halika to Felicite, while DLF Estate and DLF Home transferred their shares in Sudipti to Shalika. Furthermore, DLF Estate transferred its equity stake in Felicite to Mrs. Neeti Saxena; DLF Home to Mrs. Madhulika Basak and DLF Retail to Mrs. Padmaja Sanka, who happened to be the wives of DLF employees. This entire exercise led to Sudipti becoming the subsidiary of Shalika and Shalika becoming the subsidiary of Felicite, which finally became the holding-company of about 281 subsidiaries/associate .....

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. As a consideration for this transaction, KKS received ₹ 34,27,31,188/- (Rupees :Thirty Four Crore, Twenty Seven Lac, Thirty One Thousand, One Hundred and Eighty Eight only) by way of cheque from Sudipti. This payment seems to be in addition to the sum of ₹ 6.34 crore paid by different cheques to the vendors separately by Sudipti. After acquiring the land in question, Sudipti entered into a Development agreement with DLF Commercial Project Corporation ('DCPC') on 09.10.2006 .....

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ming one Mr. Pravin Kumar, who happened to be the nephew of the Chairman of the appellant and also its Key Managerial Employee ('KMP'). In the said FIR, KKS claimed that he had made cash payment to Sudipti on the basis of an oral understanding that Sudipti would undertake joint development of properties with him and that Sudipti later reneged. The appellant was not a party to this complaint and hence the appellant came to know of the lodging of the complaint on 25th June, 2007. 7. On 29t .....

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erchant 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 Ex .....

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ne, 2007. Similarly, the final Prospectus was filed by the Appellant with the ROC on 18th June, 2007 and the shares of the Appellant were ultimately listed on BSE and NSE on 5th July, 2007. 8. In the meanwhile, the seeds of the present controversy appear to have been sown by KKS when the Respondent received a complaint dated 4th June, 2007 on 15th June, 2007, alleging that Sudipti, which was a sister concern of DLF Home and DLF Estate, had duped him of ₹ 34 Crore and that the Appellant was .....

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t the complaint made by KKS was frivolous and hollow inasmuch as the three subsidiaries, i.e., Sudipti, Shalika and Felicite were not the subsidiaries of DLF Home, DLF Estate and DLF Retail after 30th November, 2006, and hence, there was no question of erstwhile subsidiaries or associates being mentioned in the second and fresh DRHP filed with the Respondent on 2nd January, 2007. Similarly, the claim for payment of about ₹ 34 crore in cash by KKS to Sudipti was also vehemently denied. Bein .....

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igation into the aforementioned complaints made by the Petitioner and also the averments made in 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 conclusio .....

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he 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 21st July, 2011 and finally issued the following directions : "In view of the aforesaid, the order passed by the learned single Judge is set aside in entirety, SEBI shall examine the complaints and take a de .....

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have not expressed any opinion, even remotely, on the merits of the case. The appeals are accordingly disposed of without any order as to costs." 9. In response to the above said directions dated 21st July, 2011, the Whole Time Member (1st WTM) of the Respondent, namely - Mr. Prashant Sharan, heard the parties and by order dated 20th October, 2011, directed an investigation into the complaints of KKS in respect of the Appellant and Sudipti. The operative portion of this order reads as unde .....

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vestors Protection) Guidelines, 2000 read with the relevant provisions of the Companies Act, 1956. 17. A formal order would be issued appointing the Investigating Authority. The said Officer shall investigate the matter without being prejudiced by any observations made herein above and shall complete the same as expeditiously as possible. If any violations are brought out in the investigation, the Securities and Exchange Board of India shall proceed in accordance with law. As directed by the Hon .....

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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 Re .....

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llant, by its letter dated 13th August, 2013, sought inspection of the files pertaining to its case, including the correspondence exchanged between the Respondent and the Appellant's Merchant Bankers. The Appellant filed its reply dated 1st November, 2013 to the SCN without getting complete inspection of documents, which were in the possession and custody of the Respondent. The Appellant was, however, afforded personal hearing on 4th December, 2013, and 15th January, 2014, and written submis .....

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as found to be false and meritless after thorough investigation into the allegations against the Appellant levelled by KKS. It was found by the Police that the allegation in the complaint against the Appellant was mainly advanced with a view to avoid liability to pay Short Term Capital Gains tax by KKS. Accordingly, the Police filed a Closure Report in the matter of such FIR before the Metropolitan Magistrate, who was pleased to dismiss the protest petition filed by KKS and to uphold the filing .....

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ot; with the appellant and seeking copies of various SCNs. The present Respondent appears to have filed a counter-affidavit on 10th September, 2014 vehemently opposing the Writ Petition by stating that the Petitioner, i.e., KKS "has abused the process of law besides wasting the time of the 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 contenti .....

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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 and als .....

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f. 16. The Appellant further submits that under Sections 11, 11A and 11B of the SEBI Act, SEBI's power is purely remedial and preventive, not punitive. The Impugned Order, being primarily punitive in nature, has been passed in excess of SEBI's jurisdiction. The Inquiry Officer erred in placing a restraint on the Appellant on an immediate basis when the alleged violations took place in the year 2007 without serving any public purpose. As far as materiality of information is concerned, it .....

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velopment right on Sudipti's land in the Prospectus. The Impugned Order ignores and is also silent on the fact that investors have not come forward with any kind of grievance regarding any alleged wrong or inadequate disclosure in the Offer Documents. Neither has the Appellant benefitted in any way from the alleged inadequate disclosure nor has any loss been caused to the investors. 17. The fact that the miniscule parcel of land concerned was owned by Sudipti in name could not be considered .....

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lant-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, .....

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18. The Appellant submits that in calling the transfer of shares by DLF Estate, DLF Home and DLF Retail in Sudipti, Shalika and Felicite a 'sham' and 'a scheme of camouflaging', the Respondent has lost sight of the fact that none of these transfers suffers from any legal infirmity. On the contrary, these transfers convey a complete and valid legal title on the transferees. In such a situation when the act of transfer of shares is legally permissible, the Respondent cannot call s .....

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t-Company, it is submitted by Shri Janak Dwarkadas that under the Companies Act, 1956, the test of "Control" is referable to the composition of the Board of Directors by controlling appointment thereto and removal therefrom and not otherwise. There is nothing in the Impugned Order to substantiate the allegation that the Appellant exercised any kind of control over Shalika, Sudipti and Felicite even after the transfer of shares was effectuated. This has been alleged purely on the basis .....

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ny. It is the contention of the Appellant that purely on the basis of the fact that there was no change in the constitution of the Board of Directors of Shalika Sudipti and Felicite, the Impugned Order wrongly seeks to establish retention of control by the Appellant over the three companies in question. 20. It is also stated that the reliance on AS-23 and SAST Regulations is misplaced since neither of the two has any bearing on the present situation. The Impugned Order wrongly assumes that the p .....

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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 Appell .....

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a Hinduja continued to be a shareholder of Felicite even though her husband, namely - Saurabh Monga, ceased to be the employee of the Appellant Company. It is, therefore, contended on behalf of the Appellant that the respective shareholding by wives was independent of their husbands' employment with the Appellant Company, even if in some cases the shareholders of Felicite became co- terminus with the employment of their respective spouses with the Appellant- Company. It is not barred by eith .....

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ld with their husbands, and there cannot be any legal bar on such expenditure by the wife from out of any such joint account. 22. Further, referring to the allegations regarding the provisions of Clause 6.10.2.3 of the DIP Guidelines, it is submitted on behalf of the Appellant that the said Clause pertains to the disclosure with respect to the Financial Statement of the Issuer Company. In terms of Clause 6.10.2.1, a Prospectus is required to contain a report by the Auditors of the Issuer Company .....

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fers that the Appellant violated Clause 6.9.6.6 of the DIP Guidelines by allegedly not disclosing related 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 o .....

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pellant 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 Merchant Bankers. Further, Clause 6.11.1.1(e) of the DIP Guidelines requires disclosures of proceedings which are likely to affect the operation and finances of the Issuer Company. The FIR could not be constr .....

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lating the PFUTP Regulations and section 12A of the SEBI Act. The Respondent has failed to appreciate that the definition of "dealing in securities" does not encompass "buying, selling or subscribing pursuant to any issue of securities or agreeing to buy, sell or subscribe to any issue of any securities". And hence would not attract Regulations 3 and 4 of the Regulations. The respondent has erred in holding the Appellant guilty of contravention of the PFUTP Regulations, inclu .....

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it on 01.12.2014 before this Tribunal seeking to justify the impugned action. Shri Rafique Dada, Learned Senior Counsel, also advanced lengthy, strenuous and meaningful arguments in support thereof. It is mainly submitted by Shri Dada that the Impugned Order has been passed after taking a decision on a cumulative consideration of various factors. The three companies, namely - Shalika, Sudipti, and Felicite were still subsidiaries and in control of the Appellant within the meaning of Section 4(1) .....

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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. .....

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yment of ₹ 50,000/- each to "DLF-Home" and "DLF-Estate", which were encashed later on 20th December, 2006 and 3rd April, 2007 respectively. In this context Shri Rafique Dada, Ld. Sr. Counsel for the Respondent submits that no proof of payment of consideration by Felicite for the purchase of Equity Shares of Shalika has been furnished by the Appellant. It is submitted that the Appellant has only stated that payment of equity shares of Shalika was made by Felicite through .....

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e holding of Felicite, i.e., holding company of Shalika and Sudipti was bought by Mrs. Madhulika Basak, Mrs. Padmaja Sanka and Mrs. Niti Saxena, respectively, who happened to be the wives of Mr. Surojit Basak, Mr. Ramesh Sanka and Mr. Joy Saxena, working under the Appellant. It is also contended that the payments for this purchase of shares to Felicite were made by these housewives from the bank accounts held by them jointly with their respective husbands. Therefore, the three payments of ₹ .....

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ch between 29th November, 2006 to 19th December, 2006, i.e., immediately post the transfer of equity share capital of Felicite to the housewives of the permanent employees/KMPs of the Appellant through accounts jointly held by the KMPs and their wives. 30. Further, the Respondent contends that the exact sum of ₹ 20,00,000/- each was received in the joint accounts from the individual bank accounts of the KMPs, where the said sum had been received by them by availing a personal loan of ͅ .....

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ands 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 Felici .....

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how the disassociation of the Appellant with these three companies. The contention of the respondent is that as the three companies were clearly the subsidiaries and within the control of the Appellant, the Appellant was bound within the framework of the DIP Guidelines, 2000 to make necessary and appropriate disclosures in the offer documents submitted by it to the Respondent for the purpose of its IPO. 32. On the strength of the above submissions, Shri Dada, Ld. Sr. Counsel for the Respondent, .....

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s would clearly show that the three companies were related parties of the Appellant within the terms of AS-18, as the Appellant had the ability to control and exercise significant influence on the three companies in the making of financial and/or operating decisions. The failure to make disclosures with regard to the related party transactions pertaining to the three companies is a clear violation of Clause 6.9.6.6 of the DIP Guidelines. As the three companies were the subsidiaries of the Appell .....

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FIR should have been 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 afor .....

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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 details and related party transactions of the subsidiaries in the Offer Documents, the Appellant has concealed material information from prospective investors in the IPO and has violated Clause 9.1 of DIP Guidelines, 2000, and the Offer Document filed with such anomalies cannot be t .....

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stors in securities market in the matter of issuing shares to prospective investors makes it a fit case for invoking Section 12-A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations, 2003. The Respondent contends that the alleged plan to camouflage the association of the Appellant with the three subsidiaries through a series of sham transactions amounts to fraud. The Respondent, thus, alleges that the Appellant, in its Offer Documents, had failed to make disclosure on various counts .....

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ded to file certain documents, which he had not brought to the notice of the Hon'ble Delhi High Court or the 1st WTM, who had offered KKS an opportunity of hearing. The contents of the impugned order reveal that Sebi itself has not paid any heed to the alleged claim of KKS regarding ₹ 34 crore qua Sudipti. This issue is otherwise also not pertaining to any of the alleged violations of Securities Laws, Regulations or Guidelines. Shri Chatterjee, Ld. Sr. Counsel for KKS produced 3 docume .....

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losed 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 Ad .....

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provided his comments on the litigation section of the Offer Documents in his capacity as a person looking after litigation. Apart from the above he had no role to play in the structure of holdings of shares in subsidiaries or in the formation of a plan and process for an IPO. In the absence of any material to show that the Appellant was involved in the subject matter, as held in the case of Mr. G. S. Talwar, benefit of doubt ought to be extended to the Appellant in Appeal No. 415 of 2014. 37. .....

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Hon'ble Apex Court in the case of Maksud Saiyed v. State of Gujarat [2008] 5 SCC 668, CCE v. Brindavan Beverages (P.) Ltd. [2007] 5 SCC 388 and Collector of Customs v. Tin Plate Co. of India Ltd. [1997] 10 SCC 538. Reliance is also placed on decision of the Apex Court in Sunil Bharti Mittal v. CEB [Criminal Appeal No. 34 of 2015, dated 9-1-2015] in support of the contention that liability for offending acts of a company can be foisted on its directors only when the applicable statute specif .....

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e, directors cannot be held liable for any technical violation in the Offer Documents. 38. Shri Gaurav Joshi, Learned Sr. Counsel, appearing on behalf of Mr. Sanka, the Appellant in Appeal No. 396 of 2014 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 c .....

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hareholder, 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 infirmities as already argued by Shri Janak Dwarkadas, Ld. Sr. Counsel, and deserves to be quashed .....

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e Delhi High Court, mainly at the instance of KKS, the Division Bench of the Hon'ble High Court, by its order dated 21.07.2011, called upon Sebi to examine the complaints dated 4th June, 2007 and 19th July, 2007, preferred by KKS and take a decision after hearing the parties. Pursuant thereto, a WTM of Sebi, namely, Shri Prashant Sharan, (1st WTM) held certain hearings in the matter and after affording an opportunity of being heard to the parties and in the light of the directions of Hon' .....

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incorporating alleged the violation of the PFUTP Regulations by the Appellant which was conspicuously missing in the order passed by a Division Bench of Hon'ble High Court of Delhi and also in the order dated 20th October, 2011 passed by the "1st WTM". 40. The SCN dated 25th June, 2013, states that DLF, its Directors and its Chief Financial Officer had "... employed a scheme of camouflaging the association of Sudipti with DLF as disassociation. The noticees have failed to ens .....

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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 an .....

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whole controversy in the form of following three issues, which, in turn, shaped the arguments advanced by the parties before us. (i) Whether the 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 disassociation. (ii) Whether the Noticees have failed to ensure that the RHP/Prospectus cont .....

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the three companies was not genuine and that the Appellant continued to control the same despite divestment. In paragraph 18(e) of the Impugned Order the "2nd WTM" has himself noted that on the date of filing of the second DRHP with Sebi, i.e., on 2nd January, 2007, as a result of the transfer of shares by the Appellant, the three companies, i.e., Shalika Sudipti and Felicite were no longer the subsidiaries of DLF. Therefore, the question to be considered, as regards Issue No. 1 enumer .....

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e No. 1 against the Appellant, not only has the "2nd WTM" considered the concept of 'Control' as appearing in Section 4 of the Companies Act, 1956, but has also applied the definition of 'Control' as given in the Substantial Acquisition of Shares and Takeovers Regulations, 1997, (SAST Regulations) and Accounting Standard 23 (AS-23). In addition, the impugned order also takes into account factors such as the Directors of the three companies being employees of DLF/its sub .....

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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, .....

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in nominal value of its equity share capital ; or (c) the first-mentioned company is a subsidiary of any company which is that other's subsidiary. ILLUSTRATION Company B is a subsidiary of Company A, and Company C is a subsidiary of Company B. Company C is a subsidiary of Company A, by virtue of clause (c) above. If Company D is a subsidiary of Company C, Company D will be a subsidiary of Company B and consequently also of Company A, by virtue of clause (c) above, and so on. (2) For the pur .....

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which any of the following conditions is satisfied, that is to say - (a) that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid ; (b) that a person's appointment thereto follows necessarily from his appointment as director or manager of, or to any other office or employment in, that other company ; or (c) that the directorship is held by an individual nominated by that other company or a subsidiary thereof. "SAST .....

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p, directly or indirectly through subsidiary(ies), of more than one-half 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 appea .....

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ass 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 dividends have been paid in respect of any class of shares for any of those years; and, if no accounts have been made up in respect of any part of the period of five years ending on a date three months before the issue of the Prospectus, containing a st .....

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tement may indicate the nature of provision or adjustments made or are yet to be made). 6.10.2.2 If the issuer company has no subsidiaries, the report shall: (a) so far as regards profits and losses, deal with the profits or losses of the issuer company (distinguishing items of a non- recurring nature) for each of the five financial years immediately preceding the issue of the Prospectus; and (b) so far as regards assets and liabilities, deal with the assets and liabilities of the issuer company .....

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so far as they concern the members of the issuer company; or, instead of dealing separately with the issuer company's profits or losses, deal as a whole with the profits or losses of the issuer company, and, so far as they concern the members of the issuer company, with the combined profits or losses of its subsidiaries; and (b) so far as regards assets and liabilities, deal separately with the issuer company's assets and liabilities as provided by 6.10.2.2 and in addition, deal either: .....

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cribe 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 basi .....

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SAST Regulations are commonly called the 'Takeover Code' and mainly deal with the takeover of one company by another and the merger as well as de-merger of companies. The present matter is, undoubtedly, not a case of take-over or merger and hence the reliance placed by the "2nd WTM" on the definition of control, occurring in the Takeover Code, 1997, appears to us to be misplaced. We have gone through the SAST Regulations and we note that the title of the Regulations itself is .....

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a complete non-application of mind in this regard. This act of the Respondent to shop for clauses and provisions in different statutes, in an arbitrary manner, needs to be condemned. In fact, the pari materia principle ought to be invoked to promote uniformity and predictability in law in order to supplement and not supplant a rule of law by another. 46. Similarly, Accounting Standards are written/policy documents issued by expert accounting bodies, such as, the Institute of Chartered Accountant .....

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nd rather slightly different, definition of the expression "Control", possibly to suit the context in which the definition of "Control" is made to sit. Therefore, we do not see much logic in looking to the definition of "Control" as occurring in various Accounting Standards to bring home the 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" .....

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l 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 dat .....

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es and Contingent Assets, etc. Thus, the composite scheme of disclosure, as envisaged in the Accounting Standards, makes it abundantly clear that they are primarily to be followed by Auditors while certifying the profit and loss account and balance sheet, etc. of the companies in the financial statement of such companies. This is evident from the provisions of Section 227 of the Companies Act, 1956 as well. The Hon'ble Supreme Court in the case of J.K. Industries Ltd. v. Union of India [2007 .....

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lisation before the IPO could be actually opened up for public subscription after registering the same with the ROC. This is how the shares are finally listed on Stock Exchanges. In fact, Merchant Bankers and Auditors are mandatorily required to be engaged by a company to prepare and present Offer Documents to Sebi. They discharge their respective functions in bringing out an IPO on behalf of a company under the parameters statutorily prescribed by the Respondent itself and in case of default, t .....

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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 fr .....

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the Sebi Act, 1992, with the previous approval of the Government. A Merchant Banker is, thus, a person who is directly concerned with the management of the IPO by acting as a Manager/Consultant/Advisor to the Issuer Company. It renders corporate advice before and after the issuance of the IPO. The Merchant Bankers are, thus, loaded with the obligation of ensuring compliance with the statutory requirement regarding disclosure because of their expertise in the securities market. They are expected .....

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estigating the conclusions arrived at by these entities and the procedures undertaken by them in arriving at such conclusions. Records clearly reveal that the Appellant had engaged the professional and specialized services of 8 to 10 Merchant Bankers and Auditors of national and international repute to advice, draft and float the Offer Documents. None of them has been proceeded against by the Respondent. Auditors can be said to be akin to gatekeepers. If the conclusions reached by them are liabl .....

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nd January, 2007, when it directed them vide letter dated 7th May, 2007, to include several other facts in the Offer Document. The Respondent failed to do the needful at that stage even after brooding over the second DRHP from 2nd January, 2007 to 7th May, 2007. The Respondent could have, at the threshold, issued show cause notices to the Merchant Bankers, etc., as well, so as to hold a comprehensive enquiry. This has not been done for years together and there is no explanation from the Responde .....

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e 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 ena .....

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e usage by the "2nd WTM" of the definition of "Control" as given in AS-23 and reproduced and relied upon in the impugned order in paragraph 19 thereof. "The 2nd WTM" has reproduced only clause 3.3 sub-clauses (a) and (b) which provide that - (a) The ownership, directly or indirectly through subsidiary(ies) of more than one-half of the voting power of an enterprise; and (b) control of the composition of the board of directors in the case of a company or of the compos .....

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. Only once this crucial aspect is decided does the question of control arise. The fact of the matter is that once a policy decision had been taken by DLF to divest all of its subsidiaries, followed by actual divestment of its interest in about 281 companies, there was no occasion for the Appellant to mention the three companies, in question, as subsidiaries or associates as that would have been a patently false statement on the part of the Appellant. And this factum was duly brought on record b .....

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quot;2nd WTM" has not looked at AS-23 in its totality, which deals with Accounting for Investments in Associates in Consolidated Financial Statements. Para 1 of AS-23 itself 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 "as .....

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entions 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 stating the obvious, "significant influence" does not am .....

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ite. In the absence of a 20% shareholding, it has to be clearly demonstrated that there was in fact influence exerted by the supposed parent company over the supposed subsidiary. Nothing in the Impugned Order points towards any such influence being exerted. So there is clearly no existence of the component of "significant influence" in this case. Therefore, the "2nd WTM" has totally misdirected himself in applying the definition of 'Control' as sitting in AS-23 to est .....

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ka, Sudipti and Felicite were the subsidiaries of the Appellant-Company. Therefore, the finding in the Impugned Order to the effect that despite transfer of shares by DLF-Estate, DLF-Home and DLF-Retail, the three companies, namely - Shalika, Sudipti and Felicite continued to be the subsidiaries of the Appellant-Company for the purpose of AS-23 and, hence, ought to have been disclosed, as required by Clause 6.10.2.3, etc. of the DIP Guidelines, has no legs to stand on. 55. Now, if we look at the .....

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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 .....

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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 2nd July, 2007 along with the "Delta View" document clearly indicating all the differences between the second DRHP and the first DRHP. The names of Shalika, Sudipti and Felicite were boldly crossed out in the second DRHP as is reflected from a perusal of pages 559 to 566 of Volume-III of the appeal. The delta view, which forms part of the second DRHP, disc .....

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ted a threadbare analysis of the second DRHP, running into only about 500 pages, and compared it with the first DRHP. If the appellant had any intention to withhold from Sebi or from the public the factum of Shalika, Sudipti and Felicite being subsidiaries, it would not have mentioned the same in the second DRHP altogether. But this was not the case and, on the contrary, this factual aspect was duly brought to the notice of Sebi by the Appellant. This was the right time for Sebi was to have call .....

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d was not a share-holder of the Appellant or even an investor in the IPO or in the capital market in general. Once an informed and well considered decision has been arrived at by the Respondent, the threat of that decision being overturned, after a lapse of an inordinately long period, cannot be allowed to hover over the heads of companies, except in circumstances where favourable treatment meted out to an erring company has led to a glaring miscarriage of justice by exponentially harming intere .....

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s 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 .....

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e Controlling entity or its subsidiary. The composition of the Directors of a Company shall be deemed to be controlled by another company only if that other company exercises power at its sole discretion to appoint or remove the Directors of the other company. Therefore, the Appellant-Company, i.e., DLF, could be said to control the three companies, namely - Shalika, Sudipti and Felicite, only if it can be proved that DLF had exclusive power or sole discretion to appoint or remove the Directors .....

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arlier Directors of the three companies in question post their divestment would have contravened the provisions of sub-section (2) of Section 4 of the Companies Act, 1956. Continuance of the earlier Board of Directors by an erstwhile subsidiary of a Holding-Company is an issue to be wholly addressed by such subsidiary or its share-holders and unless the erstwhile holding-company is shown to have exerted any sort of influence to keep unchanged the original Directors on the Board of the erstwhile .....

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an irrefutable conclusion that the two-pronged test laid down in, is not satisfied in the present case. The Appellant-Company did not hold 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 .....

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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. The SCN does not even level an allegation to this effect. In the absence of any charge in the SCN or cogent evidence on record in this regard, drawing help from triv .....

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from Felicite on 7th December, 2006, 13th December, 2006 and 8th December, 2006. These were composite payments made by Felicite to these three companies and included the above said considerations of ₹ 30,000/- each in the case of DLF-Estate and DLF-Home and ₹ 40,000/- in case of DLF-Retail. There is no reason to disbelieve this factual matrix of payment brought on record by the Appellant by way of affidavit duly annexing Statutory Auditors' certificate in respect thereof. If Seb .....

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uidelines for determining control of a company over another. Once the challenged divestment went through, the Appellant stopped bothering itself with the goings-on in the three companies in question. It is ludicrous to try and find fault with the Appellant in a situation such as this, especially in the absence of any shred of evidence which points towards there being any modicum of control. In law, there are many situations in which a hypothetical situation is put forward to justify certain meas .....

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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 .....

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mohan Sharma v. District Magistrate 2011 (7) ADJ 781. A similar view was expressed by the Division Bench of the Hon'ble Delhi High Court in Oriental Industrial Investment Corpn v. Union of India [1981] 51 Comp Cas 487 (Del) after taking into consideration the enunciation given in Palmer's Company Law (Vol. I, P. 746, 22nd Edn.) in the following words : "(20) As regards the control of the composition of the board of directors, this requirement is established only if the holding compa .....

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f decisive control over the composition of the Board of such companies by the Appellant-Company. We, therefore, hold that the Appellant did not control either the composition of the Board of Directors of these three companies or in any manner attempt to appoint or remove the earlier Directors which was the task of the share-holders of the three erstwhile subsidiaries post the total divestment of shares. A holding company, after it has sold its 100% shares in a subsidiary, practically becomes fun .....

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are accepted as legally valid transactions, the Respondent could not have condemned such legally binding transactions as sham transactions or camouflage. It is a matter of record that pursuant to a development agreement, the Appellant-Company secured a bundle of rights over Sudipti's land for development purposes. Therefore, there remained no substance 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 sche .....

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he 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 : "W .....

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property in his own right." 66. In the abovesaid case of Podar Cement (P.) Ltd. (supra), the Hon'ble Supreme Court approvingly cited Hon'ble Patna High Court's judgment in the case of Addl. CIT v. Sahay Properties & Investment Co. (P.) Ltd. reported in 1983 (144) ITR 357. The relevant observations are reproduced herein below for the sake of convenience : 31. The Patna High Court has cited this Court's judgment in Jodha Mal's case and also number of other judgments of .....

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this matter is not as simple as it looks. This leaves us to a more vexed question as to what is ownership. Should the assessment be made at the hands of the person who has the bare husk of the legal title or at the hands of the person who has the rights of an owner of a property in a practical sense? Enjoyment as an owner only in a practical sense can be attributed to the term "owner" in the context of this Section - a person who can exercise the rights of the owner and is entitled to .....

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ling 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 .....

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re 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 may remain a remainder man, say, at the end or extinction of the period of occupation after, again say, a thousand years? The answer to this question in favour of the assessee would not merely be doing palpable injustice but would cause absurd inconvenience and would make the Legislature to be dubbed as being a .....

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ership when such contingency arises which is not a case even here.' Thus, the concept of 'Dual Ownership' is not alien to law. By no stretch of the imagination can it be said that the Appellant did not have the total development rights in respect of the piece of land (35 acres) in question belonging to Sudipti. The Appellant did not, in any manner, defraud or mislead the prospective investors. We, therefore, hold that the finding on Issue No. 1 in the Impugned Order is perverse and l .....

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f DIP Guidelines, 2000, so as to appreciate the philosophy underlying these Guidelines and the arguments advanced by the Ld. Sr. Counsel, Shri Rafique Dada. 68. The DIP Guidelines have been framed by SEBI under powers conferred by Section 11 of the SEBI Act, 1992, and not under section 30, which lays down due procedure to be followed by Sebi for framing proper Regulations, after seeking approval of the Government and after laying down the same before the Parliament. No introductory remarks, prea .....

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panies 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' .....

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at an unlisted company may have to satisfy before making an IPO. Chapter III deals with Pricing by Companies Issuing Securities and Chapter IV deals with Promoters' Contribution and Lock-in Requirements. Regulation 4.1.1, inter alia, provides that promoters of an Unlisted Company, who wish to bring an IPO, shall have to contribute not less than 20% of the Post-Issue Capital. Regulation 4.11.1 provides that the lock-in period for Promoter's Contribution shall be at least a period of three .....

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e SEBI (Merchant Bankers) Rules and Regulations, 1992, along with the Draft Offer to SEBI for processing the same. Regulation 5.3.1 also requires a Memorandum of Understanding (MOU) to be entered into between the Lead Merchant Banker and the Issuer Company, specifying their mutual rights, liabilities and obligations relating to the issue. This MOU is also required to be submitted to SEBI. Similarly, a Merchant Banker is required to furnish a 'Due Diligence' certificate to SEBI in the pre .....

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ments, including those relating to litigations, like commercial disputes, patent disputes, disputes with collaborators, etc., and other materials, more particularly referred 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 fur .....

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erial 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 are supposed to be presented in the Prospectus. Regulation 6.4.2.2 specifically provides various details to be mentioned on the f .....

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quacy of the Offer Document. Similarly, there has to be a mention of the Issuer's Absolute Responsibility to the effect that the Offer Document contains all information with regard to the Issuer Company and the Issue which is material in the context of the issue. Said information should be true and correct and/or not misleading in any material respect. Similarly, Regulation 6.7.1 provides that risk factors, other than those mentioned in Regulation 6.4.2.2 (a) (iv), (v) and (vi) shall be prin .....

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t deals with management and includes composition of the Board of Directors and the details and interest of Directors, Managing Director, Whole Time Directors, etc. Regulation 6.9.5.8 deals with 'Key Management Personnel' and requires a paragraph on the "Key Managerial Personnel" to be incorporated in the Prospectus with full details. Sub-para (e) of Regulation 6.9.5.8 provides that any change, except by way of retirement, in the 'Key Senior Managerial Personnel' particu .....

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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." .....

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) to be furnished in respect of the subsidiaries of the Issuer Company, if applicable. Regulation 6.12.4 deals with a 'Disclaimer Clause' to the effect that SEBI should not be deemed or construed to have cleared or approved the submission of Offer Document as regards the disclosures contained therein. Further, Regulation 6.15.2 which deals with declaration provides that the Draft as well as final Prospectuses shall be approved by the Board of Directors of the Issuer Company and shall als .....

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hand. As such, the same are not being dealt with in any detail. 68.6 Chapter IX deals with guidelines on advertisement and only Regulation 9.1 is pressed into service by the Respondent in the SCN and it states that an Issue advertisement shall be truthful, fair and clear and shall not contain any statement which is untrue or misleading. 68.7 Chapter X deals with guidelines for Issue of Debt Instruments; Chapter XI deals with guidelines on Book Building. Chapter XII deals with Guidelines for Issu .....

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neous' aspects, inter alia, provides for directions which could be issued in case of a violation of the DIP Guidelines by SEBI in the interest of the Securities Market as well as those of Investors. SEBI is, inter alia, empowered to direct the persons concerned to refund any money collected under an Issue with or without interest. Similarly, persons concerned can be directed not to access the market for a particular period. Any other direction which SEBI may deem fit in the facts and circums .....

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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 sub .....

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liabilities, deal separately with the issuer company's assets and liabilities as provided by 6.10.2.2 and in addition, deal either: (i) as a whole with the combined assets and liabilities of its subsidiaries, with or without the issuer company's assets and liabilities; or (ii) individually with the assets and liabilities of each subsidiaries; 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 .....

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ng Director or Manager within the meaning of the Companies Act, 1956 and the Chief Financial Officer, i.e., the whole-time Finance Director or any other person heading the finance function and discharging that function. (b) The signatories shall further certify that all disclosures made in the Prospectus are true and correct.)" Clause 9.1 - "Guidelines on advertisement : 9.1.0 - An issue advertisement shall be truthful, fair and clear and shall not contain any statement which is untrue .....

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n: (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 dee .....

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mation 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 order regarding violation of DIP Guidelines by the Appellant are mainly two-fold. Firstly, regarding the non-disclosure of FIR dated 26th April, 2007 and secondly, regarding the Related Party Transactions. The case of the Respondent is that Sudipti, being a subsidiary of DLF at the relevant point of time, the FIR dat .....

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x liabilities and prosecution under any enactment in respect of Schedule XIII of the Companies Act, 1956. Such a requirement of disclosing outstanding litigation is also cast upon the subsidiaries of the Issuer Company. A reading of the various ingredients of clause 6.11.1.2 read with clause 6.11.1.1(e) of the DIP Guidelines reveals that the mandate of law, regarding disclosure by an Issuer Company, has not been violated by the Appellant in any respect. 71. Although we have already held that Sud .....

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d Mr. Pravin Kumar only on 25th June, 2007 when it received a complaint of KKS dated 4th June, 2007 through its Merchant Bankers. In fact, SEBI itself appears to have received this complaint of KKS, which talks about lodging of an FIR dated 26th April, 2007 by him only on 15th June, 2007. 72. No evidence has been brought on record by Sebi to the effect that Appellant had the actual knowledge of the FIR or its contents prior to 25th June, 2007, during the course of the enquiry against the Appella .....

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t. 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 t .....

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he FIR in question for proving violation of Clauses 6.11.1.2 read with 6.11.1.1(e) of DIP Guidelines is unacceptable to this Tribunal. The knowledge of Mr. Pravin Kumar about the registration of FIR against him and Sudipti, therefore, cannot be foisted on the Appellant on the basis of insufficient facts and evidence, particularly when the time of Mr. Pravin Kumar's examination by the police remained totally unexplained during the enquiry before the 2nd WTM as well as before this Tribunal. 74 .....

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out any factual basis. 75. Next, in this regard we note that the FIR in any case does not amount to litigation in law, because in the case of a criminal proceeding, a case can be said to be initiated only when a competent court takes cognizance of the offence alleged in the charge sheet and not on the mere filing of an FIR. Therefore, the mere registration of an FIR does not lead to the inference that a case is instituted, which would mean "litigation" for the purposes of Clause 6.11.1 .....

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ot; and observed that although the Code does not contain any definition of the words "institution of a case", yet an examination of the various provisions of Cr.P.C. makes it clear that when 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 .....

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d 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 "institution" has to be understood in the context of the scheme of the Act applicable i .....

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. The pre-requisite for holding a company guilty of violation of Clause 6.11.1.1(e) of the DIP Guidelines is the kind of litigation which is likely to affect the operations and finances of the Issuer company. Therefore, the findings in this regard by the WTM are totally perverse because such an FIR which appears to have been filed for an individual's own interest and, particularly, for settling a claim of ₹ 34 crore cannot be said to have the propensity of jeopardizing the sole and exc .....

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t paying the short term gains tax which he had earned in the sale of land to M/s. Sudipti Estate Private Limited. It is argued that the police, therefore, submitted a cancellation/closure report before the Additional Chief Metropolitan Magistrate. Finally, the Magistrate accepted the closure report by way of a detailed order dated 27th August, 2009. It seems that KKS has taken up this matter to a higher forum in appeal. Be that as it may. We are not concerned with the alleged bogus or frivolous .....

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s 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 .....

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s totally wrong. 80. As discussed herein above, the relationship of holding/subsidiary had come to an end on 29th/30th November, 2006 itself. There was no occasion for the Appellant to give a wrong picture in the Offer Documents. The required, true and adequate, in other words, material information, was available with the investors to make an informed decision to invest or not to invest in the IPO. Following disclosures in the Prospectus occurring at page 73 and 393 thereof are regarding the sol .....

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quot;….In stocks we include the cost of land to which we own sole development rights. In respect of lands which we own sole development rights, we have all the benefits and rights in respect of the developments on such land, i.e., we have the exclusive right to develop as well as control its use and dispositions and should we develop plots on the whole or part of such land, we have the absolute right to sell the land to prospective purchasers on such terms and conditions as may be deemed .....

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be true and adequate so as to enable the investors to make an informed opinion as to the investment of the issue. We, therefore, see no force in the allegation in the SCN and finding in the Impugned Order that by transferring the shares of Felicite in favour of the three housewives, the Appellant sought to retain control over Shalika, Sudipti and Felicite. The materiality envisaged in the DIP Guidelines relates to adequacy and not the arithmetic accuracy of material facts necessary for the purpo .....

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er 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 an .....

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e Offer Documents is in aid of Schedule II of the Companies Act, 1956, which mainly provides for matters to be specified in the Prospectus and reports to be set out therein. 82. Indeed, post the execution of the development agreement between DCPC and the three companies; all benefits, advantages and privileges in Sudipti's land effectively stood transferred in favour of the Appellant. The three companies had no real economic or productive value, except the legal ownership over Sudipti's .....

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tion risk which could be faced by the Appellant in the development agreement. Such a way of transfer of shares/divestment is perfectly acceptable, not being prohibited by any law, rule or regulation. Moreover, the Prospectus had detailed such risk inherent in the business of the Appellant in para 10 at page 110 of the Prospectus itself. Therefore, once the Appellant's economic interest on Sudipti's land through the acquisition of a bundle of rights in relation thereof had been duly discl .....

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funds from the joint accounts in question. It is trite 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 .....

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i 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 impugned order in paragraphs 35 and 36 simply by observing that the Appellant had an ability to control, directly or indirectly, the three companies in question under AS-23. The appellant also allegedly had the ability to exercise 's .....

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or disclosure of - firstly, related party relationships; and secondly, transactions between a reporting enterprise and its related parties. The scope of the standard itself is limited by sub- paragraphs (a) to (e) of paragraph 3 of AS-18, which read as under : "(a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subs .....

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(e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise." 87. Paragraph 4 provides that certain entities shall not be deemed to be related parties simply because the two companies have a Director in common. Exemption from compliance is also granted to a sin .....

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te-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 o .....

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he financial and/or operating policies of the enterprise. Significant influence - participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies. An Associate - an enterprise in which an investing reporting party has significant influence and which is neither a subsidiary nor a joint venture of that party. Key management personnel - those persons who have the authority and responsibility for planning, directing and controlling the activities .....

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its equity share capital; or (b) of which another company (the holding company) controls, either by itself and/or through one or more subsidiaries, the composition of its board of directors. 88. The issue, in this regard, which falls for our consideration is whether there was any reportable related party relationship between the Appellant and the three companies which would have mandated disclosure of the three companies as Related Party in the Financial Statement? We would like to analyze the i .....

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cept of control occurring in AS-23. The test regarding control set out in para 3 (a) of AS-18 is also not met with. Sub-para 3(b) of AS-18 talks of associates and joint venture of the reporting enterprise. The whole 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 enterpri .....

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i 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 referable to individuals only. Para 3(e) of AS-18 mainly centres around the ability of .....

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ad any influence over these three companies and the impugned order commits a grave error in this regard. As is evident from the Appellant's Financial Statements filed with the Offer Documents for the relevant period that such persons were not KMPs of the Appellant, for the purpose of AS-18 but Key Managerial Personnel of the Appellant, as per clause 6.9.5.8 of the DIP Guidelines and the same was duly disclosed in the Prospectus at pages 122 to 127 thereof under the title "Key Managerial .....

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tivities of the reporting enterprise. For example, in the case of a company, the managing director(s), whole time director(s), manager and any person in accordance with whose directions or instructions the board of directors of the company is accustomed to act, are usually considered key management personnel; whereas, 'Key Managerial Personnel' under the DIP Guidelines simply lays down the requirement that "a paragraph on the key managerial personnel shall be incorporated giving ful .....

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as 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 e .....

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order because of the use of the acronym "KMPs" interchangeably, which is a misinterpretation of the concept of "KMP" as envisaged in two different rules. We, therefore, hold that the charge of non-disclosure of related party transaction against the Appellant-Company is not established. 93. Further, it cannot be disputed that the predominant consideration for invoking powers under Section 11 of the Sebi Act, 1992 is the investors' interest and the regulation of the capital .....

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eged claim of ₹ 34 Crore against Sudipti. The impugned order caused such an adverse impact on the market that various shareholders, whose interest the impugned order claims to protect, lost ₹ 7 to 8 thousand crores in one day alone. This can never be compensated by anybody except the market mechanism, which takes its own time to do so. Creating such chaos in the capital market by passing a seemingly innocuous order, if not reckless, cannot be said to satisfy the twin objectives under .....

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n'ble Delhi High Court's order and the consequent order of 1st WTM dated 20th October, 2011, the Respondent was obliged to look into the violation of DIP Guidelines only and not the PFUTP. We have patiently heard both the sides on this issue. We note that there was undoubtedly no direction in the order of the Hon'ble High Court or in the order of the 1st WTM to enquire into the two complaints of KKS in the light of the PFUTP Regulations and rather it was treated as a case of violatio .....

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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 ß on the PFUTP Regulations except a mere mention at its fag end. Incidental .....

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chieve the objectives underlying the Sebi Act, 1992 and not otherwise. The moot question in this regard is whether the Appellant has committed any such culpable act in the course of bringing out the IPO which can be termed as 'fraud' within the meaning of PFUTP Regulations, 2003. The PFUTP Regulations have been framed to prohibit fraudulent and unfair trade practices relating to the securities market. The PFUTP Regulations are a self-contained code and prescribe a detailed procedure for .....

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uot;by an order in writing" the Appointing Authority, i.e., the Chairman, Member or Executive Director can direct appointment of an Investigating Authority not below the rank of the Divisional Chief. Next, on completion of such investigation by the Investigating Officer, he is required to submit a report to the Board under Section 11-C of the Sebi Act, 1992, read with Regulations 9 and 10 of the PFUTP Regulations. Regulation 10 specifically provides for consideration of the report by the Bo .....

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s a pre-requisite. It is pertinent to note that no such "order in writing" 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 all .....

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raud 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 certain thing in a certain way, the thing must be done in that way or not at all and that other methods of performance are necessarily forbidden". This has been specifically held by the Hon'ble Apex Court in Ramchand .....

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that land to other party. The tenant, in November, 1959, made an application before Additional Tenancy Aval Karkun, Miraj, against the landlord and his transferees claiming to be the tenant-in-possession and that the so called surrender was a sham transaction. Said application was dismissed by the Additional Tenancy Aval Karkun, Miraj, and hence the applicant filed Tenancy Appeal before a Special Deputy Collector, Sangli, who held that the impugned order relating to the surrender of tenancy was .....

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on and recording of statements of landlord and tenants and the consequent surrender of land by the tenant to the landlord must have been recorded before the mamlatdar and not before the Circle Officer. Therefore, the orders of Deputy Collector, Tenancy Tribunal and High Court were upheld. The Hon'ble Supreme Court in para 25 very pertinently held that : "25. A century ago, in Taylor v. Taylor, Jassel, M. R. adopted the rule that where a power is given to do a certain thing in a certain .....

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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 th .....

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nder Section 5 of the Telegraphs Act, 1885, by two separate orders authorized the police to take over temporary possession of the Petitioner's telephone allegedly used for "forward trading" (satta). Both these orders were challenged before the Delhi High Court by way of Writ Petition and a Bench of the High Court allowed both the petitions and quashed the two impugned orders on the ground that resort could not be had to Section 5(1) of the Telegraphs Act for taking temporary posses .....

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rieved by the order of the High Court, carried a Special Appeal to the Appellate Bench of the High Court. The subscribers (original petitioners), inter alia, contended before the appellate bench of the High Court that the Divisional Engineer did not apply his mind and record his own reasons about the correspondence of 'any emergency' and, as such, there was contravention of Rules 421 and 422 of the Telegraph Rules. It was argued that the emergency contemplated by Rule 422 is not the same .....

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s used are "any emergency." 99.2 The appellate bench of the High Court, however, set aside the decision of the Learned Single Judge of the High Court and upholding the orders of disconnection of telephones in question, dismissed the writ petition. On appeal before the Hon'ble Supreme Court, the judgment of Appellate 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. I .....

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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 tha .....

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lants were to be disconnected on the ground of misuse, then they had to give, in consonance with the principles of natural justice, opportunity to the appellants to explain their conduct before taking action under Rule 427 read with Rules 416 and 421. Resort to the wrong and more drastic course provided in Rule 422, on a ground which was not germane to an action under that rule, vitiates the impugned order, particularly when it is manifest that in making the impugned order, the General Manager w .....

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ted. In para 34 of the said judgment, the Hon'ble Apex Court has specifically held that "There is yet an uncontroverted legal principle that when the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. In other words, where a statute requires to do a certain thing in a certain way, the thing must be done in that way and not contrary to it at all. Other methods or mode of performance are impliedly .....

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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 appell .....

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nded 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 restraining the public issue from being floating but the High Court of Delhi stayed the order of Ld. Sub Judge on 04.01.1994. 101.2 On the same day, one Dr. Arvind Gupta, also filed a Writ Petition in the High Court, which was also dismissed on 04.01.1994 itself and he approached the Hon'ble Supreme Court by way of Civil Appeal No .....

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rstly, that object of an issue in the capital market is primarily to build up capital by involving public. Therefore, as held in para 33 of Morgan Stanley Mutual Fund (supra), it is not a practice relating to carrying on any trade. Para 33 of the said judgment reads as under : "33. Certainly, clause (iii) and (iv) of Section 2 (1)(c) of the Act do not arise in this case. Therefore, what requires to be examined is, whether any unfair trade practice has been adopted. The expression 'unfai .....

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re does not bring shares into existence. Therefore, our answer is that a prospective investor like the respondent or the association is not a consumer under the Act." 101.4 Secondly, the Ld. Sr. Counsel has drawn our attention towards observation of Hon'ble Supreme Court while imposing a cost of ₹ 25,000/- on the petitioner, Dr. Arvind Gupta, to the effect that - "There is an increasing tendency on the part of litigants to indulge in speculative and vexatious litigation and a .....

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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 vi .....

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ly held herein above and we reiterate that all relevant and material aspects about the Appellant-Company's affairs did find a place in the Offer Documents running into hundreds of pages and vetted by the Sebi in the beginning of the year 2007. 104. It is only after Sebi's clearance that the second DRHP was converted into RHP and only thereafter that the Prospectus was filed before the ROC and the shares of the Appellant-Company were listed on the two Stock Exchanges. The Offer Documents .....

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nature of the disclosures in the Offer Documents. The records also reveal that Sebi did find all the disclosures made by the Appellant in the Offer Documents to be satisfactory before the actual listing of the Appellant's shares on Stock Exchanges. 105. Furthermore, 'Fraud' is defined in Regulation 3 (c) of the PFUTP Regulation as under : "3(c) 'fraud' includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by a .....

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by a person having knowledge or belief of the fact; (4) a promise made without any intention of performing it; (5) a representation made in a 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 securi .....

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ty 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 event, fraud would mean "a false statement made without reasonable ground for believing it to be true." Similarly, a representation has to be made recklessly .....

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is pertinent to note that regulation 3(c)(9) specifically talks of fraud in the context of issuance of securities by a Company. It provides that an act of an Issuer of a security would be fraud if a mis-information affects the market price of the security. There is no discussion in the SCN or in the Impugned Order about this aspect. Next, the 2nd WTM is not sure as to what the specific charge of fraud against the Appellant is, for which it is being condemned as guilty of fraud. Elaborating furt .....

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absolutely ambiguous in applying facts as to which specific act of the Appellant allegedly fits into the parameters of fraud prescribed by a particular sub-regulation or regulation of the PFUTP Regulations or that of Section 12 of the SEBI Act, 1992. The charge in the SCN as well as the findings in this regard in the impugned order are, therefore, totally vague and unsustainable in the eyes of law and on fact. 107. Paragraphs 45, 46 and 47 of the impugned order deal with serious allegations of .....

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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 So .....

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d an unfair trade practice if it involves fraud and may include all or any of the ingredients enumerated in sub-sections (a),(b),(e),(g), and (n) of Regulation 4(2). Regulation 4(2)(a) deals with an act which creates a false impression with respect to trading in the securities market. Regulation 4(2)(b) deals with a situation where the securities are not intended to be transferred but operate only as a device to inflate or depress the price of such securities for wrongful gain or avoidance of lo .....

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des in question were synchronized. xxx xxx xxx xxx xxx xxx xxx 12. Thus, a perusal of the above stated provisions of Regulation 4 and its sub-regulations reveals that the allegation of fraud can be levelled against a person/entity only for good reasons and on the basis of clear and unambiguous evidence. Such an allegation of fraud may shake the very foundation of the business of the entity in question and may adversely affect the same. Therefore, the onerous task of proving such a serious allega .....

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ppellant and the alleged fraudulent transactions undertaken by Shri Nitin R. Patel. It is a matter of record that the alleged default is the first and only aspersion cast on the Appellant with respect to its business and, heretofore, has not had any of its acts called into question by any authority, regulatory or otherwise. Moreover, 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, .....

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te, 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 .....

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nd January, 2007. In the meanwhile, on 29th and 30th November, 2006, about 281 associate-companies or subsidaries were divested by the Appellant by selling and transferring its 100% stakes in those companies. This difference in the two Draft Red Herring Prospectus was duly highlighted and disclosed by the Appellant in the second DRHP along in a Delta View document truly giving all the details. Sebi issued observations, running into more than 90 pages, to the Merchant Bankers of the Appellant on .....

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7. Thereafter, the final prospectus was filed by the Appellant with the ROC on 18th June, 2007 and, thus, the shares were listed on 5th July, 2007. 110. The complaint dated 4th June, 2007, filed by KKS before Sebi did contain the allegation of filing of FIR over and above the main complaint of him being allegedly duped of ₹ 34 Crores by Sudipti and Mr. Pravin Kumar. Sebi did not feel it appropriate to take any action against the Appellant on the complaint dated 4th June, 2007, except seeki .....

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er 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 a .....

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nprofessional attitude adopted by Sebi is not appreciated by the Tribunal. 112. The Hon'ble Apex Court in the matter of Anil Rai Vs. State of Bihar reported in 2001 (7) SCC 318 held in para 9 that : "It is true, that for the High Courts, no period for pronouncement of judgment is contemplated either under the Code of Civil Procedure or the Criminal Procedure Code, but as the pronouncement of the judgment is a part of justice dispensation system, it has to be without delay. In a country .....

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ame of the judiciary cannot be permitted to be made ugly. It is the policy and purpose of law, to have speedy justice for which efforts are required to be made to come to the expectation of the society of ensuring speedy, untainted and unpolluted justice." In the same judgment, para 38 further states that : "In 1961, a learned Judge of the Patna High Court expressed his anguish when a Magistrate took nine months to pronounce a judgment. The words used by him for expressing his judicial .....

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f the Constitution of India read with Article 14 thereof. Prejudice to a litigant is inherent and writ large due to such unnatural and unexplained delay. It is rightly said that human memory has a short-shelf life and even judges are prone to forgetting arguments of the parties due to long lapse of time. 113. Lastly, terming the Impugned Order as totally unjust, unfair, arbitrary and even irrational, learned senior counsel for the appellant Shri Janak Dwarkadas cited few cases in support of his .....

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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 .....

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the scope of Sebi's power to impose punishment whenever any violation of Securities Laws is committed by a Company. We leave this question also open to be considered in future if any eventuality arises in a given case so also the question of proportionality. 115. For imposing impugned penalty on the Appellants in the present case, reliance has been placed by the Respondent on the ratio of Hon'ble Supreme Court judgment in the case of N. Narayanan v. Adjuducating Officer of SEBI reported .....

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own a norm which is required to be followed by all the citizens. Any violation of such a law framed by the Legislature has to be viewed seriously. Various such interconnected norms, laid down by the Parliament or a delegate, provide for certain coercive techniques to secure compliance. A punishment primarily seeks to cause a loss or a deprivation of a right or a privilege or an advantage hitherto freely enjoyed by a person. Therefore, imposition of any punishment on a violator has to be precise, .....

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out of the market for few years after a long lapse of time when things seem to have settled down in the market, particularly 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 .....

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997 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, gives any direction or observation which would have the consequence of entwining an element of fraud with the case of violation of DIP Guidelines in the issuance of the IPO in question. .....

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respective remedies. There is a reason that has not been done. Every Act of the Parliament, just like every set of rules framed by the Respondent, has a distinct rationale behind it. The blurring of lines between different laws and regulations cannot lead to any desirable outcome. Yet, the second WTM, who passed the Impugned Order, has applied the PFUTP Regulations in total disregard of the due procedure incorporated in the said Regulations for alleging and proving a charge of fraud against a c .....

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ndemning the appellant for adopting such a business model. The respondent seems to have diverted the issue by leaving out Kimsukh Sinha's main complaint of him being duped of ₹ 34 Crore and making it a case of the appellant duping investors. In order to reach this conclusion of the Appellant misguiding the investors, the respondent has taken into consideration a maze of transactions among the three erstwhile subsidiaries of about 281 associate companies/subsidiaries of the appellant. S .....

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as 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 sta .....

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s submitted by the appellant cannot be termed as an empty formality. The central theme underlying the DIP Guidelines, 2000 is "true and adequate disclosures" in the Offer Documents. It means there should be sufficient, and not arithmetically accurate, disclosures by a company intending to bring out an IPO in the Draft Prospectus and the Final Prospectus to enable the investors to take an informed decision as regards the investment in the said IPO. Facts and records clearly reveal that .....

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ss to the tune of thousands of crores of rupees in the capital market on the day following the passing of the order making it a case of "over-regulation". This is certainly not the objective of conferring wide discretionary powers upon Sebi. It has to apply its mind to every set of facts dispassionately without being influenced by any whistle blower. It is pertinent to mention here that while Sebi was being conferred with vast powers in the year 2000 by way of a thorough amendment of t .....

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s, very heavy responsibility on the Appellate Tribunal to function with independence and provide the necessary expertise required to act as Securities Appellate Tribunal. Having regard to the wide range of powers now conferred upon Sebi and its officers, the Committee earnestly hopes for and would expect independent, unbiased functioning of the Appellate Tribunal, distanced from Sebi and having due regard to the principles of Administrative Law." 119. The Respondent has completely failed to .....

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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 subsidiari .....

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nd Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ('PFUTP Regulations'). Consequently, with a view to protect the interest of investors and integrity of the securities market, the appellants are restrained from accessing the securities market and prohibited from buying, selling or otherwise dealing in securities directly or indirectly in any manner whatsoever for a period of three years under Section 11, 11A & 11B of SEBI Act. 122. Facts relevant for deciding .....

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pti') , Shalika Estate Developers Pvt. Ltd. ('Shalika') and Felicite Builders and Construction Pvt. Ltd. ('Felicite') were 'associate companies' of DLF. (d) Before SEBI could consider the said DRHP, DLF withdrew the said DRHP on August 31, 2006 and filed fresh DRHP (second DRHP) on January 2, 2007. In the second DRHP, Sudipti, Shalika and Felicite were not disclosed as 'Associate Companies' as according to DLF, the said three companies had by then ceased to be .....

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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 .....

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e 35 acres of land in the name of Sudipti for ₹ 34,27,31,188/- but also illegally and unauthorizedly induced the complainant to deliver to Sudipti ₹ 31,09,50,500/- in cash out of the sum of ₹ 34,27,31,188/- received by the complainant from Sudipti on the pretext of acquiring fresh land from third parties which could be developed jointly. As the accused persons failed to show that the amount of ₹ 31,09,50,500/- taken from the complainant has been used for purchase of fresh .....

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with the observations made by SEBI on the DRHP and issued the Red Herring Prospectus (RHP) on 25.5.2007. Thereafter the IPO opened for public subscription on 11.6.2007 and closed on 14.6.2007. The final prospectus was filed with the Registrar of Companies on 18.6.2007 and shares of DLF were listed on the Bombay Stock Exchange (BSE) and National Stock Exchange ('NSE') on 5.7.2007. (i) In the meantime, on 15.6.2007 SEBI received a complaint dated 4.6.2007 from Mr. K. K. Sinha wherein conte .....

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ing action against DLF, Mr. K. K. Sinha filed another complaint on 19.7.2007 and also initiated proceedings in that behalf before the Delhi High Court, which culminated into several rounds of litigation before the Delhi High Court. Ultimately, pursuant to the directions given by the Delhi High Court, the WTM of SEBI heard the parties in relation to the veracity of the complaints filed by Mr. K.K. Sinha and by an order dated October 20, 2011 directed SEBI to investigate into the allegations level .....

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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 de .....

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and (k) of PFUTP Regulations. Appellants were also called upon to show cause as to why suitable directions should not be issued against appellants under section 11(1), 11(4) and 11B of SEBI Act, 1992 read with clause 17.1 of DIP Guidelines read with regulation 111 of ICDR Regulations. (l) another, show cause notice dated 28.8.2013 was also issued under Rule 4 of the SEBI (Adjudication Rules) for imposition of penalty under section 15HA and 15HB of the SEBI Act. Admittedly, the said show cause n .....

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dealing in securities in any manner whatsoever for a period of three years. Challenging the impugned order, all these appeals are filed. 123. Mr. Dwarkadas, Mr. Bhatt, Mr. Joshi, learned senior Advocates and Mr. Parekh, learned Advocate appearing on behalf of respective appellants submitted that the impugned order passed after about 9 months from the last date of personal hearing suffers from various infirmities and the said order has been passed by totally ignoring and misconstruing the argume .....

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he back-ground facts which led to association and subsequent disassociation 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 .....

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06 it was disclosed that Sudipti, Shalika and Felicite were associates of DLF. (c) Sometime in September, 2006 Sudipti purchased about 35 acres of land situated at Gurgaon from Shri Pramod Jain and Mahavir Global Coal Pvt. Ltd as the vendors (with Mr. K. K. Sinha as the confirming vendor). Admittedly Mr. K. K. Sinha has received ₹ 34,27,31,188/- by way of cheques from Sudipti as confirming vendor and vendors viz. Pramod Jain & Mahavir Global Coal Pvt. Ltd. have separately received S .....

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sposition of the said land and the authority to transfer the said land. Thus, by virtue of above development agreement, DLF (through DCPC) acquired Sole Development Rights over Sudipti's land and by that development agreement Sudipti granted DCPC the right to develop the land for a fixed consideration of ₹ 5 lac per acre. Apart from the above, under the aforesaid Development Agreement, DCPC had the absolute right to sell the said land to prospective purchasers on such terms and conditi .....

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) and DEDL (50%) were sold to Shalika. Thus, as a result of above transactions that took place on 29th and 30th November, 2006 Sudipti became subsidiary of Shalika and Shalika became subsidiary of Felicite. In other words from 30.11.2006, Felicite became the ultimate holding company of Shalika and Sudipti. In view of the transfer of shares that took place on 29th and 30th November, 2006, Felicite, Shalika and Sudipti ceased to be 'Associates' of DLF and therefore in the second DRHP filed .....

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ns 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 fact .....

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at the offer document contain material information which is true and adequate, appellants have violated clauses 6.2, 6.9.6.6, 6.10.2.3, 6.11.1.2, 9.1 and 6.15.2 of DIP Guidelines. It is also held in the impugned order that the appellants actively and deliberately suppressed material facts in the offer documents so as to mislead and defraud investors and thus, the appellants have violated section 12A of SEBI Act read with regulations 3 and 4 of PFUTP Regulations. 127. Arguments advanced by the co .....

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close material information relating to those three companies in the offer documents amounts to violating clause 6.2 of DIP Guidelines cannot be sustained for the following reasons:- (a) As per clause 6.2 of DIP Guidelines, the prospectus should contain all material information which shall be true and adequate so as to enable the investors to make informed decision on the investment in the issue. In the present case, on the date of filing second DRHP on 2.1.2007, Sudipti, Shalika and Felicite had .....

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vestors were prejudicially affected 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 jud .....

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alika 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 three companies were not named in the offer documents as subsidiaries/related parties, DLF had fully and fairly accounted for its interest in Sudipti's land in the offer documents by detailing its 'Sole Development Rights' in Sudipti's land which formed part of 37.9% .....

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ti's land stood transferred to DLF. (iii) Relying on decisions of the Apex Court in case of Podar Cement (P.) Ltd (Supra) AND Dr. K.A. Dhairyavan v. J.R. Thakkar 1959 SCR 799 it is submitted that concept of dual ownership is recognised in India where the legal title remains with the owner whilst another person may be entitled to all benefits, advantages and privileges arising out of such land. In the present case, after the execution of development agreement, although legal title in respect .....

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r productive value in them except the legal ownership over Sudipti's land. The divestment of the shares of the three companies by DLF in favour of outsiders (which turned out to be wives of DLF's employees) were undertaken because the said three companies were no longer commercially relevant to DLF and the divestment of shares was not with a view to exercise control over those three companies. It is submitted that transferees in question were less likely to thwart effectuation of the ter .....

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losures 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 p .....

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urported non disclosures or misstatements have led to any direct or indirect benefits or advantage accruing to DLF by reason of such non disclosures or misstatements. Therefore, it becomes inconceivable as to why DLF would go through 'a scheme by camouflaging the association of Sudipti with DLF as disassociation' when DLF did not stand to gain any benefit or advantage from such non disclosure or wrong disclosure. In other words DLF had no motive to make the non disclosures as alleged, si .....

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entive and remedial in nature. In the absence of any evidence on record to suggest that any member of the public was misled into investing in the IPO of DLF, SEBI is not justified in passing the impugned order against the appellant. In support of the above contention reliance is placed on decisions in the case of Indian Bank Mutual Fund & Ors vs. SEBI [Manu/DE/2648/2006], UBS Securities Asia Ltd. vs. SEBI [(2005) SAT 96], Ritesh Aggarwal and Anr. Vs. SEBI [(2008) 8 SCC 205], BPL Ltd. vs. SEB .....

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goes to the root of the matter and renders the impugned order entirely unsustainable. (ix) In the context of materiality of the FIR filed against Sudipti, the impugned order in para 39 notices the Development 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 .....

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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 should be true and adequate so as to enable the investors to make informed decision .....

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s violated clause 6.2 of the DIP Guidelines is therefore misplaced and legally vitiated. (xi) Similarly, in para 47 of the impugned order it is observed that "....case of active and deliberate suppression of any material information so as to mislead and defraud the investors in the securities market in connection with the issue of shares of DLF in its IPO is clearly made out in this case...." without identifying how the purported non disclosures were material and worse still how the pr .....

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37 of the impugned order that by failing to disclose in the offer documents the financial details relating to its subsidiaries, DLF has violated clause 6.10.2.3 of DIP Guidelines, cannot be sustained for the following reasons:- (a) Clause 6.10.2.3 of DIP Guidelines is relatable to the report to be prepared by the auditors of the issuer company. In the present case, neither the report prepared by the auditors is questioned nor adverted to it in the show cause notice and therefore, the allegation .....

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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 financia .....

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, neither DLF held more than half of the shares capital nor controlled composition of the Board of Directors of Felicite, Shalika and Sudipti. (e) Under Section 4(2) of the Companies Act, a company shall be deemed to have power to appoint to a directorship of another company with respect to which any of the following conditions are satisfied, that is to say:- (1) that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid; (2) t .....

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show that the shareholders of Felicite, Shalika and Sudipti could not appoint directors without permission/approval by DLF. Thus the three companies were not subsidiaries of DLF and therefore were not included as such in the report of the auditor in the offer documents. Moreover, even assuming for the sake of argument that such facts and circumstances exist, even then the legal tests specified under Section 4 of the Companies Act, 1956 are not met with. (f) Allegation in the show cause notice ( .....

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es of DLF. In any event, the three companies cannot be reckoned as associates of DLF (post divestment) because there is nothing to show that post divestment DLF Limited had 'significant influence' over Felicite, Shalika and Sudipti as contemplated under para 3.2 of AS 23, because, neither DLF had the power to participate in the financial and/or operating policy decisions nor had control over the policies of those three companies post divestment. (g) In para 19 & 20 of the impugned or .....

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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 ' .....

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#39;Camouflage'. It is not in dispute that pursuant to the Development Agreement between Sudipti and DCPC, DLF secured bundle of rights over Sudipti's land over which the development was to be undertaken solely by DLF and it was only the shell of title that remained with Sudipti as legal owner. Therefore, it is inconceivable as to why DLF would go through 'a scheme by camouflaging the association of Sudipti with DLF as dissociation' when nothing could have been gained by DLF by m .....

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. Moreover, the spouses of shareholders of Felicite were not Key Management Personnel but were Key Managerial Employees of DLF as disclosed in the offer documents in accordance with clause 6.9.5.8 of the DIP Guidelines. As per AS-18, Key Management Personnel are those persons who have authority for planning, directing and controlling the activities of DLF. Therefore, fact that the spouses of employees of DLF were Key Managerial Employees of DLF under clause 6.9.5.8 of DIP Guidelines could not be .....

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Gaurav Monga 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 la .....

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ent 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 spouses of the transferees of Felicite shares. (iv) Under the Companies Act, 1956, the test of control is referable to composition of Board of Directors by controlling appointment thereto and removal there from, and not otherwise. SEBI's reliance on the fact that there was no change in the B .....

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tion 4(2) of Companies Act 1956 and AS 21. Furthermore, the fact that the directors on the Board of Felicite, Shalika and/or Sudipti were employees of DLF/ its subsidiaries does not satisfy the ingredients of control over the composition of Board of Directors prescribed under Section 4(2) of the Companies Act, 1956 and AS 21. (v) Relying on a decision of the Kerala High Court in case of M. Velayudhan (supra), decision of the Delhi High Court in case of Oriental Industrial Investment Corpn. Ltd. .....

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law to appoint/remove the directors of Felicite, Shalika and Sudipti. Fact that the shareholders of Felicite, Shalika and Sudipti did not change the prior Board of Directors of the three companies does not imply decisive control of DLF over the Board of Directors of those three companies as contemplated under Section 4(2) of the Companies Act, 1956 and AS 21. Similarly, mere fact that an employee of one company is sitting on the Board of another company does not create any legal inference of co .....

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quence, 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 .....

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perational expenses and financial position of Sudipti and Shalika post November, 2006. (x) Allegation that there was no change in any of the authorized signatories is not entirely correct and in any event, these facts do not satisfy the test of control under Section 4 of the Companies Act/or AS 21. (xi) Allegation that there is no conclusive evidence of payment received by DEDL, DHDL and DRDL from Felicite towards sale of shares of Shalika is without any merit, because, consolidated remittance o .....

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nt rights over the land in favour of DLF (through DCPC). There is, therefore, nothing questionable in DLF directly/indirectly financing the purchase of land by Sudipti. (xiii) Fact that DLF and Sudipti have filed simultaneous appeals against orders of Delhi High Court would not fulfil the test of Section 4 of the Companies Act, 1956 and AS 18. At any rate, DLF and Sudipti had engaged their own separate lawyers. Hence, decision of SEBI that even after divestment of shares, DLF continued to contro .....

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n confirming the disclosures in the report annexed to the offer documents. Moreover, M/s Haribhakti & Co. in their independent professional capacity have also opined that Felicite, 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 .....

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sional 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 10/10/2012 passed in case of Vakrangee Software's Ltd. (k) The impugned order in paras 20-21 recognizes the legal test of cont .....

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this employer-employee relationship DLF was in a position to influence the management decisions of these three companies even after the aforesaid transfer of shareholding in them…". (l) No basis is set out in the impugned order for arriving at the conclusion that DLF was influencing the 'management decision' of Felicite, Shalika and Sudipti. At any rate, the ability of a company to influence the management decisions of any other company is not a test for reckoning control und .....

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uch appointment had no relationship whatsoever with their employment with DLF. (n) Findings recorded in para 24 to 32 of the impugned order viz. no change in the authorized bank account signatories/registered office address/statutory auditors of the three companies post November 30, 2006, allegation that shares of Sudipti were purchased by Shalika from the funds advanced by DEDL and DHDL and the findings relating to purchases made by Mrs. Basak, Mrs. Sanka and Mrs. Saxena etc. do not satisfy the .....

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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 consolida .....

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re to be adjusted from the profits of DLF (Rs. 1941.300 crore), the net adjusted profit of DLF would have been varied only to the extent of 0.004%. Therefore, assuming that there is failure to disclose that the three companies were subsidiaries/associates of DLF, such failure would not have made any material difference to the decision of investors to invest in shares of DLF. (p) Merchant Bankers, legal advisors and auditors would have issued certificates only on being satisfied that the disclosu .....

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e above certificates, does not question the basis on which those certificates were issued and when, neither the Merchant Bankers, auditors nor the legal advisors were called upon to participate in the proceedings against DLF nor asked to explain/certify the contents of their certificates, SEBI is not justified in holding that DLF is guilty of not disclosing material fact relating to the said three companies. (q) M/s Walker, Chandiok & Co., statutory auditor of DLF were also auditors of DEDL .....

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ve not expressed any reservations on the disclosures regarding the subsidiaries of DLF in the IPP documents. Contravention of clause 6.9.6.6 of DIP Guidelines 130. Clause 6.9.6.6 of DIP Guidelines provide that the offer document shall inter alia contain 'Related party transactions as per financial statements'. In terms of Section 211(3A) of the Companies Act 1956, financial statements/balance sheets of a company have to be drawn up in accordance with the applicable Accounting Standards. .....

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ectly, 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:- "Particip .....

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ove findings recorded by SEBI for the following reasons:- (a) Reference in the impugned order to AS-23 to reckon whether Sudipti, Shalika and Felicite were the related parties of DLF is erroneous, because, the relevant Account Standard in relation to related parties in AS-18 and not AS-23. (b) In the show cause notice there was no allegation that DLF had the ability to exercise significant influence over Sudipti, Shalika and Felicite and therefore, finding in that behalf is in excess of and beyo .....

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ed order overlooks the fact that the expression 'significant influence' as appearing in clause 10.4 of AS-18 is defined differently from the word 'control' as defined in clause 10.2 of AS-18. Therefore, it was obligatory for SEBI to show in the show cause notice through objective facts, in what manner DLF was in a position to exercise 'significant influence' over the affairs of Sudipti, Shalika and Felicite. SEBI has completely failed to discharge this burden of proof. Th .....

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ct, 1956 etc. shall be 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 .....

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unsel 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, 2007, because, on that day DLF received from its Merchant Bankers a letter from SEBI enclosing therein a letter dated June 4, 2007 written by Mr. K.K. Sinha to SEBI which referred to the registration of the said FIR. Si .....

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indings recorded therein would not be binding on SEBI and the Investigating Officer was required to independently apply his mind and carry out the investigation. In the absence of any investigation carried out by the Investigating Officer, in the impugned order, it could not be held that DLF was aware of the filing of the FIR at the time of issuing the offer documents. (c) Fact that Mr. Praveen Kumar is the nephew of the Chairman of DLF cannot be a ground to assume that DLF would have been aware .....

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tors of a company cannot be construed to be knowledge of the company itself. If the knowledge of the directors is not the knowledge of the company, then the knowledge of a relative of a director cannot certainly be knowledge of the company. (e) Without prejudice to the aforesaid submissions it is submitted that the FIR was not required to be disclosures in the offer documents for the following reasons:- (i) There was no requirement of making any disclosure under clause 6.11.1.2 since Sudipti was .....

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lines. 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 f .....

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an Magistrate by his order dated August 27, 2009 accepted the closure report and permitted Mr. K. K. Sinha to prosecute the complaint as a private complaint. The filing of the closure report by the Police and its acceptance by the learned Magistrate by a reasoned order adds credence to DLF's submission that the FIR was in any case a misplaced and frivolous proceeding to begin with and therefore could not be said to be a material information. (v) Moreover FIR in question had no bearing on the .....

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development rights in favour of DLF so as to be covered by clause 6.11.1.1(e) of the DIP Guidelines. Alternatively and without prejudice to the above, it is submitted that the mere lodgement of an FIR could never be said to have the propensity of jeopardizing the sole development rights acquired by DLF (through DCPC) so as to have effect on the 'operations and finances' of DLF. This would be more so since the sole development rights acquired from Sudipti constituted less than 0.05% of la .....

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in para 41 of the impugned order that Mr. Praveen Kumar was Key Managerial Employee of DLF reporting directly to its Board of Directors is totally incorrect. It is submitted that the fact that Mr. Praveen Kumar was a Key Managerial Employee of 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 com .....

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e 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 inter alia alleged acts of criminal conspiracy, cheating, abuse .....

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he show cause notice, however, without considering the said facts impugned order is passed solely basis of the allegations made in the show cause notice. Accordingly, it is submitted that non-disclosure of the FIR did not amount to contravention of clauses 6.11.1.2 of the DIP Guidelines. Voilation of clause 9.1 of the DIP Guidelines 137. Clause 9.1 of the DIP Guidelines make it obligatory on the lead Merchant Banker to ensure compliance of the said Guidelines by the Issuer Company. Clause 1.2.1 .....

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ause 9.1 of the DIP Guidelines on ground that the appellants (a) employed a scheme by camouflaging the association of Sudipti with DLF as disassociation (b) failed to ensure that the offer document contained all material information which is true and adequate so as to enable the investors to make an informed investment decision in the issue (c) actively and knowingly suppressed certain material information and facts in the offer documents leading to misstatements in the offer documents so as to .....

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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 co .....

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. Contravention of clause 6.15.2 of DIP Guidelines 140. Counsel for DLF submitted that the findings recorded in para 44 of the impugned order to the effect that the Directors/CEO/CFO of DLF have failed to ensure that the disclosures in the offer documents were true and correct and thereby contravened clause 6.15.2 of the DIP Guidelines cannot be construed as contravention by DLF. The said finding demonstrates complete non-application of mind by SEBI more so since it speaks of certification by th .....

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ifying the accuracy of the disclosures in the offer documents. They acted in a manner any prudent Board of a company would have acted. Therefore, since the Directors and the CFO acted honestly and bona fide on the basis of expert opinion, it cannot be said that they have violated clause 6.15.2 of the DIP Guidelines. Violations of PFUTP Regulations. 141. Counsel for DLF submitted that in the impugned order it is held that DLF by failing to ensure that the offer documents contain all material info .....

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ons: (a) PFUTP Regulation is a self-contained code and lays down the procedure for investigation and imposition of penalty for violating the said Regulations. Regulation 5 provides for appointment of an Investigating Authority by the Appointing Authority. Regulation 9 provides for submission of report by the Investigating Authority to the Appointing Authority. Regulation 10 provides that the Board shall consider the report submitted under Regulation 9 and after giving reasonable opportunity of h .....

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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 Ramchandr .....

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ansacting in any way in any security by any person as principal, agent or intermediary referred to in section 12 of the Act." On a bare reading of the above definition, it is submitted that an issuer company issuing shares for the purposes of listing on a stock exchange would not come within the scope of Regulation 3. As a natural corollary, Regulation 4(2) which provides for the circumstances in which "dealing in securities shall be deemed to be a fraudulent or an unfair trade practic .....

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caused by DLF while "dealing in securities" which would satisfy the definition of "fraud" for the purposes of PFUTP Regulations. (e) Charge levelled against DLF relates to dissociation of Sudipti by the subsidiaries of DLF. In view of the fact that transfer of shareholding in Sudipti by DLF's subsidiaries being consummated by November 30, 2006, i.e. much prior to DLF's second DRHP, the alleged non-disclosure of association with Sudipti has no bearing or correlation to .....

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be said (nor is there even a faint suggestion to that effect in the show cause notice or in the impugned order) 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 .....

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s 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 would not amount to "trade practice". In this regard, it may be noted that the expression "trade practice& .....

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a),(b),(c),(d) 4(1), 4(2) (f) and (k) of the PFUTP Regulations read with Section 12 A (a), (b),(c) of the SEBI Act, 1992. The essential prerequisite under the aforestated statutory regime is intent to defraud, deceive or otherwise cause an intentional manipulative or misleading practice. The requirement of a positive intent to defraud, manipulative or mislead would in any case not be satisfied in the present facts since DLF has demonstrated that it acted bona fide on the advise of experts such a .....

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t of the allegedly "fraudulent practice" also operates as a strong presumption against the tenability of the aforesaid charges against DLF. (i) DLF's bona fides are further established by the fact that while filing the second DRHP on January 02, 2007, it had filed documents (delta view) indicating all differences between First DRHP and Second DRHP including differences in relation to the related party disclosure. This document is mentioned in the covering letter filed along with th .....

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he 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 .....

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tory manner. It merely notes the definition of 'fraud' and the definition of 'dealing in securities' and then holds that divestment of shares of Sudipti, Shalika and Felicite by DLF was sham and that DLF had suppressed several material information in the offer documents. On the above basis, the impugned order 'jumps' to the conclusion that DLF has actively and knowingly suppressed material information and facts in the offer documents so as to mislead and defraud the inves .....

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tion of the correspondence between SEBI and the Merchant Bankers of DLF. Inspection of those documents would have thrown light on the discussions between SEBI and Merchant Bankers on disclosure in the offer documents. 143. It is submitted by the counsel for appellant that in the present case, the violations alleged against DLF are technical and venial in nature, because, the alleged suppression of Felicite, Shalika and Sudipti as subsidiaries/related parties in the offer documents would at the h .....

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eged suppression of the FIR constitutes non-disclosure, it is again a technical and venial breach and neither in the show cause notice nor in the impugned order it is recorded that by reason of non-disclosure of FIR, investors have lost in the IPO or DLF/its directors have gained in any manner. 144. It is submitted by counsel for DLF that even though para 15.13 of the show cause notice alleges that facts were suppressed in the offer document, neither the show cause notice nor the impugned order .....

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ce 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 impugn .....

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pt making reference to the judgment of the Supreme Court in the case of N. Narayanan (Supra) which judgment has no application of facts of the present case. The N. Narayanan's case (supra) was a case where the directors of the company had inflated company's revenue profits, security deposits and receivables which were relied upon by investors while taking investment decisions. 147. It is also submitted by counsel for DLF that debarment order is not in the interest of the investors is see .....

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dealing in securities' appearing in the operative paragraph of the impugned order (para 50) is being interpreted by SEBI to include dealing by DLF in its own investments made in the shares of its unlisted subsidiaries as well as investments made in the Mutual Funds. Thus, in effect, the impugned order stifles DLF. The impugned order has also restricted the ability of DLF to reduce its debts through equity financing. This not only stretches the financial capacity of DLF but also acts as a bur .....

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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 direc .....

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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 appearing on behalf of Mr. Sanka (appellant in Appeal No. 396 of 2014) submitted that Mr. Sanka was Key Managerial Employee of DLF and not 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 .....

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andard 18 ('AS 18'). Since Mr. Sanka was not a Promoter/Principal shareholders, dealing in shares by Mr. Sanka's wife were 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 infirmities and deserv .....

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ee, learned Senior Advocate appearing on behalf of Mr. K. K. Sinha who is permitted to be heard in the matter pursuant to an order passed by the Apex Court, sought to tender an affidavit in reply containing several additional documents which are not on record. Mr. Chatterjee submitted that Mr. K. K. Sinha could not tender those documents earlier as he was not allowed to participate in the investigation carried out by SEBI. We have declined to accept the affidavit in reply because, accepting addi .....

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or 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 g .....

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hi, counsel for appellants, apart from opposing admission of above communications at this belated stage, submitted that the said communications do not support the claim sought to be raised against the appellants. 154. Mr. Kothari Counsel for appellant in Appeal No. 415 of 2014 submitted that the appellant therein was Executive Director-Legal at the relevant time and had only provided his comments on the litigation section of the offer document in his capacity as a person looking after litigation .....

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these appeals is, whether DLF/its directors/CFO have resorted to sham transfer of shares with a view to camouflage association of DLF with Felicite, Shalika and Suditpi as dissociation and if so, whether failure to disclose material information/facts relating to those three companies in the offer documents filed by DLF constitutes violation of DIP Guidelines/ICDR Regulations and PFUTP Regulations. If the answer to the above question is in the affirmative, then the question to be considered is, w .....

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ection of investors, inter alia frame regulations on matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which 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 withou .....

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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 initiating adjudication proceedings for imposition of penalty under chapter VIA of SEBI Act, it is open to SEBI to pass an order, in .....

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mation/facts relating to Felicite, Shalika and Sudipti in the offer documents, SEBI is not justified in passing restraint/prohibitory order under Section 11/11B of the SEBI Act. There is no merit in the above contentions, because, firstly, language used in Section 11/11B of SEBI Act do not even remotely suggest that the remedial steps enumerated therein could be taken only when it is established that the interest of investors were in fact prejudicially affected by the violations committed. Secon .....

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y order in the interest of investors either pending investigation or on completion of investigation. Thus, the emphasis is primarily on protecting the interests of investors and not on investors being actually prejudiced due to violations. Fourthly, fact that the powers conferred upon SEBI to take remedial/preventive measures under Section 11/11B of SEBI Act are discretionary in nature does not mean that those provisions are to be invoked only when the interest of investors are actually prejudic .....

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ing 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 .....

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sts of the investors/securities market were actually affected/ prejudiced on account of the violations committed. To put it simply, remedial/preventive measures can be taken in the interest of investors/securities market as and when Guidelines/Regulations are violated, even if it is not established that the investors were actually prejudiced by such violations. 162. Reliance placed by counsel for appellants on decisions of this Tribunal in case of UBS Securities Asia Ltd. (Supra), BPL Ltd. (Supr .....

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ld that there are no violations or it is held depending on facts of each case, that the remedial/preventive measure taken by SEBI without establishing that the interest of investors are prejudiced cannot be sustained. In none of those cases it is held that before passing restrain/prohibitory order under Section 11/11B, SEBI must mandatorily establish that the interest of investors are actually prejudiced on account of violations committed. Thus, none of the aforesaid decisions support the case o .....

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y being a juristic person does not have a mind of its own and in the absence identifying the responsible officer who has committed the fraudulent act, the said fraudulent act or the guilty state of mind could not be attributed to the company. While holding that the theory of 'the directing mind' evolved in criminal proceedings would not apply to the Civil action taken by SEBI against the company therein for the wrong committed, this Tribunal, relying on a decision of the Bombay High Cour .....

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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 ad .....

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mid Saimira Theatre Ltd. (supra) seeks to lay down a proposition that remedial/preventive measures must be mandatorily taken against a violator even if there is no mens rea. What is held in case of Pyramid Saimira Thedtre Ltd. (supra) is that, the principle laid down by the Apex Court in case of Shriram Mutual Fund (supra) that it is not necessary to establish mens rea for imposing penalty under Chapter VIA would equally apply for taking remedial/preventive measures under Section 11/11B. That do .....

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n committing such violations. 165. Now, turning to the merits of the case, first question, to be considered herein is, whether SEBI is justified in holding that the transaction of transferring shares of Felicite, Shalika and Sudipti by DLF (through its subsidiaries) were sham transactions devised and undertaken with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation thereby giving false impression to the investors that DLF was not connected with the said t .....

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d 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 31/08/2 .....

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ompanies. 168. Contention of DLF that on account of transferring entire shares of Felicite held by 100% subsidiaries of DLF in favour of three house wives on 29/11/2006, DLF stood dissociated from Felicite and hence DLF was not required to disclose material information/facts relating to Felicite has been rejected in the impugned order by holding that the entire process of transferring shares of Felicite was a sham transaction in view of following facts:- (a) entire shareholding of Felicite incor .....

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in Felicite to three ladies viz Mrs. Madhulika Basak, Mrs. Niti Saxena and Mrs. Padmaja Sanka who are house wives of Mr. Surojit Basak (Senior Vice President [Finance] of DLF), Mr. Joy Saxena (Senior Vice President [Finance] of DLF and CEO- Retail of DLF) and Ramesh Sanka (Group CFO of DLF) respectively. Mr. Basak, Mr. Saxena and Mr. Sanka were also directors of several other group companies of DLF. Thus, on 29/11/2006, 100% shares of Felicite held by 100% subsidiaries of DLF were transferred t .....

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the same day Shalika purchased 100% shares of Sudipti from DLF (through its subsidiaries). Thus on 29/11/2006 DLF (through its subsidiaries) divested shares of Felicite to three house wives and on 30/11/2006 DLF (through its subsidiaries) divested shares of Shalika to Felicite and divested shares of Sudipti to Shalika. In other words, the modus operandi adopted by DLF in divesting the shares of Felicite, Shalika and Sudipti was a first to divest the shares of Felicite to three house wives whose .....

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ox) 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 .....

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ployee cum-director of subsidiary/associate companies of DLF) were the directors of Felicite before the three house wives became 100% shareholders of Felicite and they continued to be the directors of Felicite even after the three house-wives became 100% shareholders of Felicite. (h) Mr. Surojit Basak and Mr. V.S. Khanna were not bank account signatory of Sudipti and Shalika before 30/11/2006 and Mr. Harshdeep Sachdeva, Mr. Joydeep Das Gupta and Mr. Debashis Mukherjee were not the bank account s .....

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F companies to 1E, Jhandenwala Extension, which is the address where various DLF companies are situated. (j) Shares of Felicite held by Niti Saxena were sold to DHDL on 19/06/2008 as her husband Mr. Joy Saxena (Key Managerial employee of DLF) was due to retire in August 2008. Similarly, shares of Felicite held by Mrs. Seema Sethi were sold on 04/04/2007 as her husband Mr. Sanjay Sethi (Key Managerial employee of DLF) retired in March 2007. Mrs. Seema Sethi had sold the shares of Felicite to Mrs. .....

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personal loans taken by the respective spouses were utilized to buy shares of Felicite in the names of their respective wives 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 joi .....

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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 of following facts:- (a) Shalika was incorporated on 26/3/2006 and on that day 100% shares of Shalika were held by DEDL (30%), DHDL (30%) and DRDL (40%). (b) Shalika received its first .....

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l amount in the account of Shalika was ₹ 70,000/-. On 30/11/2006 Shalika purchased 100% shares of Sudipti from DHDL & DEDL and issued two cheques for ₹ 50,000/- each to DHDL and DEDL being the consideration for purchasing 100% shares of Sudipti. (d) On 1/12/2006 Shalika received ₹ 30,000/- from DEDL being the share subscription money in respect of the shares Shalika that were purchased on 26/03/2006. (d) Two cheques for ₹ 50,000/- each issued by Shalika on 30/11/2006 .....

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₹ 24,80,000/- and ₹ 10,20,000/- respectively by way of cheque payment from Felicite. According to DLF the said payments made by Felicite to DEDL, DHDL and DRDL were composite payments and the said payments included payment of ₹ 30,000/- ₹ 30,000/- and ₹ 40,000/- being the price for purchasing 100% shares of Shalika from DEDL, DHDL and DRDL by Felicite. Except claiming that the above payments were composite payments, DLF has not produced any account statement/ledger .....

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loyees 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 s .....

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statutory Auditors of Shalika continued to be statutory Auditors even after 100% shares of Shalika were sold by DEDL, DHDL and DRDL to Felicite on 30/11/2006. (j) Subsequent to Felicite acquiring shares of Shalika, the registered office of Shalika was shifted along with Sudipti and Felicite and many other entities of DLF to 1E, Jhandenwala Extension. (k) During the years 2006-2007 and 2007-2008 no expenses were accounted for by Shalika towards cost of establishment such as rent, electricity, te .....

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ected in the impugned order by holding that the process of transferring shares of Sudipti was a sham transaction in view of following facts:- (a) Sudipti was incorporated on 24/3/2006 with DEDL and DHDL (100% subsidiaries of DLF) each holding 50% shares of Sudipti. (b) In September-October 2006, Sudipti purchased about 35 Acres of land through 6 separate registered sale deeds from Mr. Pramod Jain and Mahavir Global Coal Pvt. Ltd. with Mr. K. K. Sinha as the confirming vendor. (c) Between 14/09/2 .....

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t of above 35 Acres of land and on 9/10/2006 Sudipti received ₹ 45 crore as performance deposit from DCPC under the aforesaid development agreement. (e) On 26/04/2007 Mr. K. K. Sinha filed FIR No. 249/2007 at Connaught Place Police Station, Delhi alleging that Sudipti 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/ .....

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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 any assets/funds whatsoever, there wa .....

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agat (director in two subsidiaries of DLF and also authorized signatory of Shalika), Surojit Basak (Senior Vice President (Finance) DLF, director in several subsidiaries of DLF and also authorized signatory of Shalika and Felicite), Mr. Praveen Kumar (Managing Director of DEDL, director in 21 group companies of DLF and also director of Vikram), Mr. S.K. Gupta, Mr. Manik Khanna and Mr. V.S. Khanna. Even after transfer of 100% shares of Sudipti by DEDL and DHDL in favour of Shalika, these bank acc .....

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account statement, Sudipti had zero bank balance on 15/06/2006 and during the years 2006-2007 and 2007-2008 there were no expenses accounted towards cost of establishment like rent, electricity, telephone charges, property taxes or salary whereas, it had only an inventory of about ₹ 45 crores worth of land as on 31/03/2007. 171. Whether on the basis of above facts on record, SEBI is justified in holding that divestment of shares of Sudipti, Shalika and Felicite by DLF were sham transactio .....

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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 .....

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othing on record to suggest that Felicite and Shalika had acquired any lands till 29/11/2006. If Felicite and Shalika had not acquired lands till 29/11/2006, then Felicite and Shalika could not be said to have become shell companies and consequently divesting the shares of those two companies could not be said to be in accordance with the business model allegedly adopted by DLF. Since, there is no explanation as to why the shares of Felicite were divested to three house wives whose spouses are a .....

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n 09/10/2006 Sudipti had entered into a Development Agreement with DLF through DCPC under which all rights attached to 35 Acres of land were transferred to DLF (through DCPC) and Sudipti had received ₹ 45 crore from DCPC as performance deposit towards performance of aforesaid Development Agreement. 175. Ordinarily, it would have been prudent for DLF to continue its association with Sudipti at least till 35 Acres of land belonging to Sudipti were developed by DLF as per Development Agreemen .....

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ent case, instead of divesting the shares of Sudipti to third parties, DLF on 29/11/2006 has chosen, first to divest the shares of Felicite to three house wives whose spouses were all Key Managerial employees of DLF, thereafter, divested 100% shares of Shalika to Felicite on 30/11/2006 and on the same day divested 100% shares of Sudipti to Shalika. In the absence of any explanation as to why shares of Felicite and Shalika were divested even before those two companies had acquired any lands (for .....

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estment 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 a .....

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(b) it is relevant to note that one out of the three house wives who purchased shares of Felicite did not have demat account and none of them had acquired shares of any company prior to 29/11/2006. In such a case, it is difficult to believe that divestment of shares of Felicite by DLF to three house wives whose spouses were Key Managerial employees of DLF was not stage managed and was a bona fide transaction. (c) the three house wives who acquired 100% shares of Felicite on 29/11/2006 from DLF h .....

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11/2006 were not involved in the running of Felicite, it is obvious that DLF continued to run Felicite (consequently Shalika & Sudipti) through the Key Managerial employees of DLF appointed as Board of Directors of Felicite by DLF. (d) Since the three house wives (whose spouses were Key Managerial employees of DLF) have categorically stated that they were not involved in the running of Felicite even after acquiring 100% shares of Felicite (consequently Shalika and Sudipti), it is impossible .....

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heir capacity as Board 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 an .....

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e 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 100% subsidiaries of DLF on 30/11/2006 was an independent decision taken by the said three house wives, then it is inconceivable that within two weeks of their acquiring 100% shares of Felicite, they would on 14/12/2006 decide to increase the share capital of Felicite so as to reduce .....

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sferred to Felicite through the joint bank account held by the spouses of the respective house wives for the purpose of acquiring shares on increase in the share capital. Thus, personal loans taken by the Key Managerial employees were utilized to buy shares of Felicite in the name of their respective wives. It is equally interesting to note that loan of ₹ 20 lac were sanctioned to Mr. Joy Saxena, Mr. Ramesh Sanka and Mr. Surojit Basak on 07/11/2006, 10/11/2006 and 15/12/2006, even before t .....

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d to be associated with those three companies even after divestment of shares and in fact DLF was running those three companies through the Board of Directors appointed by DLF who are all employees of DLF. 177. It is true that when 100% shares of a company are acquired by third parties it is not mandatory that the existing Board of Directors and authorized signatories must be replaced and it is open to the third parties to run the company through the existing Board of Directors and authorized si .....

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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 an .....

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risk faced by DLF, clearly shows that DLF was aware of the serious consequences of divesting the shares of Sudipti to third parties. When development of 35 Acres of land belonging to Sudipti were yet to commence and moreover, DLF (through DCPC) had deposited ₹ 45 crore with Sudipti as performance deposit, it was not in the interest of DLF to effectuate any change in the management of Sudipti. But for unknown reasons, DLF chose to divest the shares of Felicite to three house wives and then .....

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LF/its subsidiaries viz DEDL, DHDL and DRDL and DLF Housing, which indicates continued relationship of DLF with Felicite even after the claimed dissociation. From the bank statements it is seen that as a result of increase in share capital, Felicite received ₹ 2 crore (at the rate of ₹ 20 lac) from each of the three house wives who had purchased 100% shares of Felicite from DLF and also from seven house wives to whom shares of Felicite were allotted after increasing the share capital .....

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ssociate of DLF. During the course of arguments, DLF for the first time sought to place on record certificates issued by its auditor as well as the auditors of its subsidiaries to demonstrate that Felicite had 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 .....

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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 transaction of divesting shares of Felicite, Shalika and Sudipti with a view to camouflage its a .....

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ced by ICDR Regulations) it was obligatory on part of DLF to ensure that offer documents contain all material information which is true and adequate, so as to enable the investors to make an informed investment decision. There can be no dispute that if shares of Felicite, Shalika and Sudipti were not divested, then DLF would have been required to disclose material information relating to those three companies in the offer documents as set out in various Clauses in DIP Guidelines. 182. Argument o .....

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t divestment of shares was not a bonafide transaction, but a sham transaction entered into obviously with a view to avoid disclosing material information relating to the three companies in the offer documents. Where the material information required to be disclosed in the offer documents are not disclosed by resorting to sham transactions, then it would amount to failing to disclose material information which is true and adequate and thereby violate Clause 6.2 of DIP Guidelines. 183. Argument of .....

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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 mater .....

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en divested. In the present case, instead of divesting the shares of Sudipti, DLF has resorted first to divest the shares of Felicite to three house wives whose spouses were Key Managerial employees of DLF and then divested the shares of Shalika to Felicite and thereafter divested shares of Sudipti to Shalika. Felicite could not be said to have become commercially irrelevant because, Felicite incorporated for the purpose of acquiring lands for DLF to develop had not acquired any land since incor .....

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vesting the shares of subsidiaries/associates of DLF which are claimed to have become shell companies. Very fact that Felicite even after divestment of shares continued to acquire shell companies of DLF, gives credence to the inference drawn by SEBI that even after divestment of shares, Felicite was run by DLF through the Board of Directors of Felicite who are employees of DLF. This conclusion is further fortified by the statement of three house wives that they were not running Felicite. If thre .....

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quently divestment of shares of Shalika and Sudipti) to three house wives whose spouses were employees of DLF was with a view to ensure that there was less chance of thwarting the effectuation of the terms and conditions of the Development Agreement between Sudipti and DLF (through DCPC) and mitigate to some extent the completion risk faced by DLF in executing the Development Agreement. This argument of DLF, precisely contradicts its claim that on execution of Development Agreement, Sudipti had .....

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icite (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 a .....

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s stipulated under Clause 6.2 of DIP Guidelines. In such a case it becomes academic to go into the question as to whether there was any motive for resorting to sham transactions and whether the investors were actually prejudiced by such violations. 187. Once it is held that DLF has resorted to sham transaction of share transfer with a view to camouflage its association with three companies as dissociation and thereby avoid disclosing material information relating to Felicite, Shalika and Sudipti .....

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sel on both sides on the question as to whether DLF violated Clauses 6.9.6.6, 6.10.2.3, 6.11.1.2 and Clause 9.1 of DIP Guidelines, it is relevant to note that all those Clauses deal with the material information which are required to be disclosed in the offer documents. It is the case of DLF that material information relating to Felicite, Shalika and Sudipti were not required to be disclosed due to divestment of shares of those three companies. Once it is held that divestment of shares is a sham .....

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o 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 d .....

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al 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 DLF controlled the three companies in violation of Section 4 of Companies Act, 1956. Since it is established that even after the divestment of shares, DLF continued to run those three companies through the Board of Directors of those three companies who are all employees of DLF and that conclusion is further corr .....

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ted under Section 4 of Companies Act, 1956 becomes academic and hence not considered. 189. At this stage, it would be appropriate to consider the additional argument sought to be canvassed by SEBI by filing an affidavit on 19/01/2015. In that affidavit it is contended for the first time that in the DRHP as also in the final prospectus, there is a heading titled 'subsidiary entities at any time during the year'. It is contended that in the first DRHP filed on 11/05/2006, the auditors of D .....

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cluded under the heading 'Associates'. Relying on Clause 22 of AS-21, it is contended on behalf of SEBI that even assuming that DLF had dissociated itself from Felicite, Shalika and Sudipti on 29-30/11/2006, the result of operation of those three companies with DLF till the date of cessation of the relationship ought to have been included in the consolidated statement of profit and loss account of DLF and failure to do so constitutes failure to disclose material information relating to t .....

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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, .....

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he impugned order ought to be sustained on the basis of additional argument raised before this Tribunal for the first time is not entertained in the facts of present case. 192. However, argument of DLF that the net financial losses incurred by Felicite, Shalika and Sudipti during the year 2006-2007 being approximately ₹ 8 lac compared to the total profit of DLF during the same period amounting to ₹ 1941 crore, failure to include aforesaid losses in the consolidated financial statemen .....

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companies in the offer documents it would have no material effect on the investor decision cannot be accepted. 193. Next question to be considered is, whether, SEBI is justified in holding that DLF has actively concealed the fact about filing of FIR by Mr. K. K. Sinha against Sudipti and others and whether, failure to disclose FIR in the offer documents amounts to suppressing outstanding litigation in the offer documents in violation of Clause 6.11.1.2 of DIP Guidelines. 194. In the present cas .....

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ustified in rejecting the contention of DLF that the FIR filed by Mr. K. K. Sinha came to its knowledge on 25/06/2007. 196. The WTM of SEBI by his order dated 20/10/2011, 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 .....

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stigating 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 regard, I note that SCN has sought to attribute knowledge of the aforesaid FIR on DLF and its directors not merely on the basis of relation .....

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bsisting on the date of issuance of RHP/Prospectus, should have been disclosed therein." 198. From the aforesaid findings recorded in the impugned order it is apparent that the Investigating Authority had failed to investigate the plea of DLF that filing of FIR against Sudipti came to its knowledge only on 25/06/2007. Failure on part of the Investigating Authority to investigate the above issue inspite of specific directions given by the WTM of SEBI to that effect in his order dated 20/10/2 .....

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on of DLF solely based on the prima facie observations made in the order passed before investigation. Without ascertaining the date on which Sudipti or Mr. Praveen Kumar were served with a copy of the FIR, without ascertaining the date on which they were interrogated by the police authorities and in the absence of any other evidence which falsifies the claim of DLF, the WTM of SEBI could not have rejected the contention of DLF that the FIR came to their knowledge on 25/06/2007. It was totally im .....

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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 no .....

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re, it cannot be said that by communication dated 01/05/2007 Mr. Praveen Kumar was made aware about the FIR filed against Sudipti and others including Mr. Praveen Kumar. Second communication dated 02/05/2007 is the letter addressed by Mr. Praveen Kumar to the Investigating Officer seeking three days time to appear before the Investigating Officer. Merely seeking time to attend the Police Station cannot be a ground to infer that on 02/05/2007 Mr. Praveen Kumar was aware about filing of FIR agains .....

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Mr. Praveen Kumar came to know about the filing of FIR and consequently the date on which DLF came to know about the filing of FIR. 202. Assuming that registration of a case referred to in the communication dated 01/05/2007 is referable to registering an FIR, then, without knowing the contents of the said FIR it is impossible to assume that Mr. Praveen Kumar/Sudipti, were aware about the contends of the FIR and that through them DLF must have acquired knowledge about the contents of FIR and the .....

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was not justified in rejecting the contention of DLF that filing of FIR came to its knowledge on 25/06/2007. Once it is held that there is no basis to disbelieve the claim of DLF that filing of FIR against Sudipti came to its knowledge on 25/06/2007, then the question as to whether FIR constitutes outstanding litigation which ought to have been disclosed in the offer documents becomes academic and hence not answered. 203. Question thereafter to be considered is, whether SEBI is justified in hol .....

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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 dir .....

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material information relating to those three companies in the offer documents in violations of SEBI Guidelines/Regulations, could not have represented to the investors by signing a declaration in the offer documents to the effect that all relevant provisions of the Act and the Guidelines issued by SEBI have been complied with and that all the statements made therein are true and correct. 206. Reliance placed by the counsel for appellants on the decision of the Apex Court in case of Rai Bahadur S .....

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SEBI is the authority to ensure compliance of the Guidelines issued by it and SEBI is the authority to take action if the Guidelines are violated. Thus, the decision of the Apex Court in case of Rai Bahadur Shreeram Durga Prasad (P.) Ltd. (Supra) is distinguishable on facts and has no relevance to the facts of the present case. 207. It was contended by the Counsel for Mr. Sanka that, Mr. Sanka was only a Key Managerial employee and not a Key Managerial Personnel and therefore, Clause 6.9.5.8 of .....

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a 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 ma .....

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lants before this Tribunal, because, there is no material to show that the said directors had participated or were involved in the day to day decision making of DLF is also without any merit, because Mr. G. S. Talwar being a non-executive director, it was possible that he may not have been involved in the day to day decision making process of DLF, but the same yardstick cannot be applied to directors who have filed appeals before this Tribunal as they constituted the Board of Directors and were .....

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rs/CFO of DLF took decision to divest the shares of three subsidiary/associate companies of DLF by way of sham transactions with a view to avoid disclosing material information relating to those three companies in the offer documents and then represented to the investors by signing a declaration in the offer documents to the effect that the statements made therein are true and correct. In such a case, the directors of DLF cannot contend that they have not committed any violations and that no dir .....

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in the order dated 20/11/2006 to the Investigating Officer to focus the investigation relating to the violations if any, under the DIP Guidelines cannot be construed to mean that the Investigating Officer was prohibited from investigating into the possible violation under the PFUTP Regulations. Secondly, SEBI has filed an affidavit stating therein that the investigation report submitted by the Investigating Officer after completion of investigation which included report on violation committed un .....

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arwal, 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 a .....

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t 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. 210. Question then to be considered is, whether on merits SEBI is justified in holding that DLF has violated PFUTP Regulations. Basic charge levelled and held against DLF is that DLF has .....

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n securities and in the present case there is nothing to show that the dissociation of Felicite, Shalika and Sudipti by DLF and the omission to disclose material information in respect of those companies in the offer documents was intended to induce (or resulted in inducing) investors and general public to buy/subscribe to DLF's shares in the IPO and therefore, DLF cannot be held guilty of committing fraud under PFUTP Regulations. As rightly contended by the counsel for SEBI, expression ' .....

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lations and any representation made to the investors by resorting to sham transactions would amount to committing 'fraud' under 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 r .....

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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 such a case, resorting to sham transactions with a view to camouflage the facts and thereby avoid disclosing material facts in the offer documents would constitute violation .....

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noted above, the entire device or game plan adopted by DLF was to indulge in sham transactions of share transfer 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. Though the said act of commission and omission may not amount to trade practice, the said act of commission and omission committed during the course of subscribing to an issue of sha .....

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rofessional or legal advisor. It is not the case of DLF Ltd. that but for the advice given by the Merchant Banker/auditor/legal advisor, sham transactions would not have taken place. In the absence of any investigation conducted/any finding recorded against the Merchant Bankers, auditors/expert professional or legal advisor in the impugned order and in the absence of categorical assertion on part of DLF that entering into sham transaction and the consequences thereof are solely attributable to M .....

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em 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 .....

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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 considerable time has been taken in investigating the matter and in passing the impugned order, cannot be a ground to hold that in view of passage of time no action need be taken under Section 11/11B of the SEBI Act. Similarly, fact that in the present case, no investor is found to have been prejudiced by the violations committed by the a .....

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se, SEBI is justified in restraining the appellants from accessing the securities market and prohibiting them from buying, selling and dealing in securities for a period of three years. 218. Appellants are restrained from accessing the securities market and prohibited from buying, selling or otherwise dealing in securities for a period of three years on ground that by resorting to sham transactions they have violated Clauses 6.2, 6.9.6.6, 6.10.2.3, 6.11.1.2, 6.15.2 & 9.1 of the DIP Guideline .....

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he above, there are several other mitigating factors which are in favour of the appellants viz: (a) although resorting to sham transaction deserves stern action, in the facts of present case, since the material information relating to Felicite, Shalika and Sudipti were insignificant, even if the same were disclosed in 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 prej .....

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ssary 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 th .....

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19. To sum up:- (a) Decision of SEBI that DLF has resorted to sham transaction of divesting shares of Felicite, Shalika and Sudipti with a view to camouflage association of DLF with those three companies as dissociation cannot be faulted. (b) By resorting to sham transaction DLF has avoided disclosing material information relating to those three companies in the offer documents and thereby failed to disclose true and adequate material information relating to those three companies in violation of .....

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y signing a declaration that the information disclosed in the offer documents are true and adequate in violation of PFUTP Regulations cannot be faulted. (e) Directors/CFO of DLF who were directly involved in the day to day running of DLF were the persons responsible for DLF to resort to sham transaction and therefore they are equally guilty of violating DIP Guidelines/PFUTP Regulations. (f) Decision of SEBI that DLF had knowledge about the filing of FIR prior to 25/06/2007 and that DLF has activ .....

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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 .....

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