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Mr. Sandeep Baid and Others Versus Securities and Exchange Board of India, Mumbai

Violation of Clause 49 of the Listing Agreement - whole Time Director chaired the Audit Committee Meeting - Held that:- When the Listing Agreement specifically provides that the Chairman of the Audit Committee shall be an Independent Director, the Whole Time Director could not have chaired the Audit Committee Meeting held on 07.10.2011 especially when an Independent Director was available on that day to chair the Audit Committee. There is no basis for the alleged bonafide belief entertained by t .....

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t be faulted. - Turning to the aggregate penalty of ₹ 3 crore imposed on all the appellants, it may be noted that the said penalty is imposed for the following reasons:- - a) Penalty of ₹ 1 crore is imposed under Section 15HB of SEBI Act, because the appellants as directors of RDB did not disclose all material information in the offer document that are true and adequate as contemplated under the ICDR Regulations and misutilized the IPO proceeds by giving loan to RDBRIL in vio .....

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RDB on the first day of listing RDB shares and had incurred huge losses. - Violation of ICDR Regulations - Held that:- Argument of the appellants that giving loan by RDB to RDBRIL would amount to placing surplus funds from one pocket to another cannot be accepted, because, RDB and RDBRIL are two separate and distinct legal entities. Moreover, an investor who wants to invest funds in the IPO of RDB may not prefer to invest in the IPO of RDB if informed that IPO funds are being transferred as .....

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that giving loan to RDBRIL amounts to placing IPO funds from one pocket to another. Thus, in the facts of present case, resolution passed on 12.09.2011 to give loan up to ₹ 50 crore to RDBRIL being a resolution relating utilization of IPO proceeds was a material information which ought to have been disclosed. Apart from the above, when statement was made in the offer documents that the IPO proceeds would be invested in high quality interest bearing liquid instruments, utilizing the IPO pr .....

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Axis Bank subsequently enhanced the loan limit and granted extension of time to repay the said loan cannot be a ground for the appellants to contend that no action be taken against RDB and its directors for violating the ICDR Regulations and PFUTP Regulations. In the impugned order, reference is made to the breach of the loan agreement between RDB and Axis Bank only to highlight that in a bid to transfer IPO proceeds by way of loan to RDBRIL, RDB not only suppressed material facts from the inve .....

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CDR Regulations and penalty of ₹ 1 crore imposed under Section 15HA of SEBI Act for violating PFUTP Regulations. Similarly, penalty of ₹ 5 lac imposed on appellant for violating Clause 49 of the Listing Agreement is also upheld. However, penalty of ₹ 1 crore imposed under Section 15HA of SEBI Act on ground that RDB transferred IPO proceeds in a circuitous manner to four trading clients is deleted. - Accordingly, appellant is directed to pay ₹ 5 lac and all appellants .....

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2016 - J.P. Devadhar and Dr. C.K.G. Nair, JJ. For The Appellant : Mr. P. N. Modi, Senior Advocate with Mr. Vinay Chauhan, Advocate i/b Corporate Law Chambers India For The Respondent : Mr. Kumar Desai, Advocate with Mr. Saurabh Bachhawat and Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. Per: Justice J.P. Devadhar Appeal Nos. 404, 403, 402 & 432 of 2014 1. Appellants in these four appeals are aggrieved by the common order passed by the Adjudicating Officer ( AO for short) of Securit .....

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ionally penalty of ₹ 5 lac is imposed on Mr. Sandeep Baid (Appellant in Appeal No. 404 of 2014) under Section 23H of Securities Contracts (Regulation) Act, 1956 ( SCRA for short) for not complying with clause 49 of the Listing Agreement read with Section 21 of SCRA. 3. At the relevant time Mr. Sandeep Baid (Appellant in Appeal No. 404 of 2014) was the Whole Time Director of RDB Rasayans Ltd. ( RDB for short) Mr. Sunder Lal Dugar (Appellant in Appeal No. 403 of 2014) was the Promoter and Ch .....

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DB group engaged in the business of real estate and infrastructure. RDBRIL is a listed company whose shares are listed on BSE and NSE. b) In March 2010 RDB filed a Draft Red Herring Prospectus (DRHP) with SEBI to raise funds for expanding its manufacturing activities at Haldia, Kolkata through Initial Public Offer ( IPO for short). c) On 12.09.2011 SEBI granted its approval to the DRHP filed by RDB. Accordingly, the IPO opened on 21.09.2011 and the IPO closed on 23.09.2011. d) On 05.10.2011 IPO .....

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10.2011 Board meeting was held, whereby the Directors of RDB were authorized to invest the unutilized IPO proceeds of RDB in high quality interest bearing instruments. It was further resolved to authorize RDB to enter into loan agreement with RDBRIL and the draft loan agreement placed before the Board was approved with certain modifications with consent of both parties. g) It is also not in dispute, that on 07.10.2011 itself loan of ₹ 31.60 crore out of the amount of ₹ 34.25 crore re .....

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ill further orders. i) Accordingly, RDB recalled the demand loan and it is not in dispute that during the period from January to 31.03.2012, RDB received total amount of ₹ 33.43 crore (Rs. 31.60 crore being the loan amount + ₹ 1.83 crore being interest) and intimated it to the Stock Exchange. j) Challenging the aforesaid ad-interim ex-parte order RDB filed a writ petition before the Calcutta High Court wherein partial relief was granted to RDB. Challenging the Calcutta High Court ord .....

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hereby the RDB and its Directors including the appellants were debarred from entering into the securities market till 28.12.2015. Appellants as also RDB have filed appeals to challenge the said order of WTM dated 19.12.2014 by filing Appeal Nos. 514 of 2015 and 532, 533 & 534 of 2015 which are all being heard along with these appeals. l) On 30.07.2013 a show cause notice was issued by AO of SEBI calling upon the appellants herein to show cause as to why inquiry should not be held against the .....

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e appellants jointly and severally. Additional penalty of ₹ 5 lac was imposed on the appellant in Appeal No. 404 of 2014. Challenging the said order of AO, these four appeals are filed by the appellants. 5. At the outset, we would like to consider the penalty of ₹ 5 lac imposed on Mr. Sandeep Baid (Appellant in appeal No. 404 of 2014). 6. In the impugned order it is held that Mr. Sandeep Baid who was the Whole Time Director of RDB chaired the Audit Committee Meeting of RDB on 07.10.2 .....

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2011 under the bonafide belief that he can chair it and thus it being a technical mistake merited no penalty. 8. We see no merit in the above contention. When the Listing Agreement specifically provides that the Chairman of the Audit Committee shall be an Independent Director, the Whole Time Director could not have chaired the Audit Committee Meeting held on 07.10.2011 especially when an Independent Director was available on that day to chair the Audit Committee. There is no basis for the allege .....

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lac penalty on the appellant in Appeal No. 404 of 2014 cannot be faulted. 9. Now, turning to the aggregate penalty of ₹ 3 crore imposed on all the appellants, it may be noted that the said penalty is imposed for the following reasons:- a) Penalty of ₹ 1 crore is imposed under Section 15HB of SEBI Act, because the appellants as directors of RDB did not disclose all material information in the offer document that are true and adequate as contemplated under the ICDR Regulations and misu .....

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ding clients who had traded in the shares of RDB on the first day of listing RDB shares and had incurred huge losses. Violation of ICDR Regulations. 10. In the present case, the DRHP filed by RDB in March 2010 was approved by SEBI on 12.09.2011 and on the same day RDB passed a resolution approving grant of loan up to ₹ 50 crore to RDBRIL in one or more tranches for their business purpose and the said loan was repayable on demand as per the terms and conditions as may be mutually decided be .....

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give some of its surplus funds as loan to RDBRIL from time to time up to a maximum of ₹ 50 crore. It was not a resolution to give loan of ₹ 50 crore to RDBRIL, but it was a resolution enabling RDB to give loan to RDBRIL as and when surplus funds were available. There was no preconceived intention to give IPO proceeds to RDBRIL and on 12.09.2011 when the resolution was passed, the IPO was not even opened and there was no certainly that the IPO would be successful. Thus, on 12.09.2011, .....

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n 12.09.2011, in view of the labour unrest at Haldia, it was known that RDB would not be in a position to utilize the IPO proceeds for the purpose specified in the IPO and thus the IPO proceeds would be rendered surplus. There is nothing on record to suggest that on 12.09.2011 when RDB passed resolution to give loan of ₹ 50 crore in one or more tranches, apart from receiving IPO funds, there were no other funds to be received by RDB which could be treated as surplus. Therefore, on 12.09.20 .....

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e EOGM held on 28.09.2011 (after the IPO closed on 23.09.2011 and before allotment of shares) the pre IPO shareholders approved giving loan up to ₹ 50 crore to RDBRIL. Even on 28.09.2011, apart from the IPO proceeds there were no other funds that could be treated as surplus and transferred to RDBRIL by way of loan. It is relevant to note that on 05.10.2011 IPO funds of ₹ 34.25 crore was credited to the RDB s bank account and on 07.10.2011 at 11.00 A.M. the Audit Committee of RDB reco .....

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.60 crore out of the IPO proceeds amounting to ₹ 34.25 crore to RDBRIL even before the Board of RDB authorized giving loan to RDBRIL and even before the draft loan agreement was approved at 5.00 P.M. on 07.10.2011, clearly shows that the resolution passed on 12.09.2011 to give loan up to ₹ 50 crore to RDBRIL was with reference to the IPO proceeds. Utilizing the IPO proceeds for a purpose other than the purpose specified in the IPO being a material information ought to have been discl .....

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oan to a group company. Investment in liquid instruments is done without any security as it involves minimum risk and can be accessed easily. However, giving loan involves maximum risk and hence loan is ordinarily given subject to security. In the present case, RDB has utilized the IPO proceeds to give loan to RDBRIL instead of investing the IPO proceeds in high quality interest bearing liquid instruments by obtaining security of valuable assets and post dated cheques. Fact that IPO proceeds hav .....

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l entities. Moreover, an investor who wants to invest funds in the IPO of RDB may not prefer to invest in the IPO of RDB if informed that IPO funds are being transferred as loan to RDBRIL. In para 24 of the impugned order the AO has recorded a finding that prior to the IPO, RDBRIL had taken ₹ 7.28 crore from RDB as inter corporate loan at an interest rate of 15% per annum and since RDBRIL could not repay the said loan within the stipulated time RDBRIL had sought extension of time in the la .....

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the above, when statement was made in the offer documents that the IPO proceeds would be invested in high quality interest bearing liquid instruments, utilizing the IPO proceeds by giving loan to RDBRIL amounts to misutilizing the IPO funds in violation of ICDR Regulations. Violation of PFUTP Regulations. 16. Failure to disclose aforesaid material information to the investors and misutilizing the IPO funds contrary to the statement made in the offer document was with a manipulative and deceitfu .....

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m the pre IPO shareholders of RDB to grant loan to RDBRIL by curtailing the notice period from 21 days to 15 days by invoking Section 171(2) of the Companies Act, 1956, clearly shows that RDB and its directors were in great hurry to seek approval from pre IPO shareholders to give loan up to ₹ 50 crore even though there were no funds for giving the loan. Obviously the hurry was on account of the fact that IPO was commence with effect from 21.09.2011 and if 21 days notice for EOGM was adhere .....

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or more tranches did not envisage transferring IPO proceeds as loan to RDBRIL. There is no merit in the above contention because, as on 12.09.2011 apart from receiving IPO funds between 21.09.2011 to 23.09.2011 there was no other source from whether RDB could get funds which could be given as loan to RDBRIL. Although the resolution dated 12.09.2011 does not refer to giving IPO proceeds as loan to RDBRIL, very fact that the said resolution was passed immediately on receiving approval from SEBI f .....

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the notice period from 21 days to 15 days, RDB chose to seek approval from the pre IPO shareholders for giving IPO proceeds as loan to RDBRIL. Thus, RDB and its directors resorted to manipulative and deceitful method to suppress material information from the offer documents which in violation of PFUTP Regulations. 18. It is also relevant to note that on 28.09.2011 the AGM and EOGM of RDB were held and filing in relation to AGM was made before the Registrar of the Companies ( ROC for short) on 2 .....

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res were allotted to the IPO subscribers cannot be faulted. 19. It is contended on behalf of the appellants that Section 171(2) of Companies Act, 1956 empowers a company to give shorter period of notice to the shareholders and Section 192 of the Companies Act permits filing of the resolution up to 30 days and therefore, no fault can be found with RDB in invoking shorter period of notice and filing the resolution within 30 days. In the impugned order it is not held that RDB and its directors have .....

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d once the shares are allotted the question of withdrawing from the offer does not arise even if the subscriber intends to withdraw from the offer on account of RDB giving loan up to ₹ 50 crore to RDBRIL. Fact that apart from IPO proceeds, RDB did not have any other surplus funds to give as loan to RDBRIL and the fact that immediately on receiving IPO proceeds amounting to ₹ 34.25 crore, RDB transferred IPO proceeds to the extent of ₹ 31.60 crore to RDBRIL, even before the Boar .....

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mandated by Clause 49 of the Listing Agreement. The said Audit Committee chaired by the Whole Time Director in violation of Clause 49 of the Listing Agreement recommended to the Board to give loan to RDBRIL. However, even before the Board met at 5.00 P.M. on 07.10.2011 to approve the giving of loan and approve the draft loan agreement, RDB transferred IPO proceeds amounting to ₹ 31.60 crore to RDBRIL at 2.47 P.M. on 07.10.2011. Moreover, it is not in dispute that all the above material inf .....

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eted before the AGM / EOGM held on 28.09.2011 is without any merit, because, admittedly no allotments were made till 28.09.2011 and if requisite disclosures were promptly made, it was open to any investor who had applied for shares to withdraw from the offer before the allotments were made. Fact that no investor has made any grievance cannot be a ground for RDB to escape from penal liability for suppressing material facts in the offer documents in violation of PFUTP Regulations. By no stretch of .....

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4.25 crore, ₹ 31.60 crore was transferred to RDBRIL even before the Board of RDB authorized such transfer and even before the draft loan agreement between RDB and RDBRIL was approved by the Board of RDB, conclusively establish that from the date of passing resolution on 12.09.2011 till transferring IPO proceeds to RDBRIL, RDB and its directors adopted manipulative and deceitful method so as to keep the investors as also the book running lead manager in dark about transferring IPO proceeds .....

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el was so high then there was no reason for the appellants to suppress utilization of IPO proceeds by giving loan to RDBRIL. Very fact that RDB resorted to suppressing material facts from the investors in relation to the loan to be given to RDBRIL till the allotments were made and the fact that RDB transferred IPO proceeds to the extent of ₹ 31.60 crore as loan to RDBRIL on the basis of the recommendations of Audit Committee resolution dated 07.10.2011 (chaired by Whole Time Director in vi .....

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same in several installments and the entire loan with interest was paid by 31st March, 2012. In these circumstances, findings recorded by the AO in the impugned order that RDBRIL was not financially sound on account of its inability to repay the entire loan amount at one go cannot be faulted. Assuming that RDBRIL was financially sound on account of assets held by it, very fact that RDBRIL could not repay the loan on demand and repaid it in installments clearly supports the view taken by the AO .....

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subsequently enhanced the loan limit and granted extension of time to repay the said loan cannot be a ground for the appellants to contend that no action be taken against RDB and its directors for violating the ICDR Regulations and PFUTP Regulations. In the impugned order, reference is made to the breach of the loan agreement between RDB and Axis Bank only to highlight that in a bid to transfer IPO proceeds by way of loan to RDBRIL, RDB not only suppressed material facts from the investors but a .....

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Act is up to ₹ 1 crore and penalty for violating PFUTP Regulations under Section 15HA of SEBI Act is ₹ 25 crore. Once it is held that the appellants as directors of RDB are guilty of suppressing material facts from the investors and misutilized the IPO proceeds in contravention of statements made in the offer documents and thereby violated regulation 57(1), 57(2)(a) and regulation 60(4) of the ICDR Regulations and committed those violations by adopting manipulative and deceitful met .....

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f Rs. 1 crore under Section 15HA of SEBI Act. 25. In the impugned order additional penalty of ₹ 1 crore is imposed on appellants under Section 15HA of SEBI Act on ground that IPO proceeds have been routed in a circuitous manner by RDB to four trading clients who had traded in the shares of RDB on the first day of listing and had incurred huge losses. 26. This finding, in our opinion, cannot be sustained because, once it is held that transfer of IPO proceeds as loan to RDBRIL amounts to mis .....

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nts, because, firstly, SEBI has not disbelieved the case of the appellants that transfer of IPO proceeds by RDB to RDBRIL was by way of loan. AO cannot hold on one hand that IPO proceeds were transferred as loan to RDBRIL and on the other hand hold that IPO proceeds were circuitously routed to four clients through RDBRIL. Secondly, by 31.03.2012, entire loan amount with interest has been received back by RDB from RDBRIL. With these facts on record it is not open to SEBI on one hand to contend th .....

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are allegedly held to have been transferred by RDB through RDBRIL and various other entities. Moreover, the appellants had tendered a ledger statement of RDBRIL to show that the funds transferred by RDBRIL to Namokar Duplicating Pvt. Ltd. ( Namokar for short) was by way of refunding the amount already received by RDBRIL from Namokar. In the impugned order, the ledger statement furnished by RDBRIL is disbelieved on ground that the said ledger statement is not certified and there is no other evid .....

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