TMI Blog2016 (9) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase of raw materials and equipments required to run the business, and their validity is not in question. It is pertinently noted that most of the money which the Respondent alleges to have been transferred has been returned to the Appellant. The Respondent has fairly submitted that the Auditor appointed by SEBI itself has in its report dated January 25, 2016 noted that an amount of ₹ 80 crore has been successfully recalled by the Appellant and the Respondent has scrutinized the utilization thereof. It is also a fact that the Appellant has already recalled moneys recoverable owing to ICDs, cancelled contracts pertaining to land purchase, except an amount of ₹ 3.77 crore as explicated hereinabove with respect to which the Appellant has initiated the winding up of the company called Supreme. It shows the respect for and earnest desire of the Appellant to abide by SEBI’s regulatory directions. Further, it remains undisputed that ICDs which were given out of the IPO Proceeds to the tune of ₹ 32 crore given as ICDs to Saptrishi, Raw Gold and Wattkins. Today, however, this amount of ₹ 32 crore has been received by the Appellant, albeit with certain amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of ten years. The Appellant was also directed by the Impugned Order dated March 11, 2014 to recall all the moneys, which were not recovered by the Appellant till March 11, 2014 and submit report to the Respondent. In fact, the Appellant had already been directed to recover an amount of ₹ 32 crore from certain entities and deposit it in an escrow account by ad-interim exparte order dated December 28, 2011. 2. The Appellant, which is a company incorporated under the Companies Act, 1956, in the process of floating an IPO filed its Red Herring Prospectus dated August 17, 2011 and Prospectus dated September 14, 2011 and came out with an IPO of 57,45,000 equity shares of ₹ 10/- each for cash at a price of ₹ 210/- per equity share. The IPO opened and closed on September 7, 2011 and September 12, 2011 respectively. The Appellant s shares were listed on BSE and NSE on September 26, 2011 . SEBI noticed fluctuations in the price of the Appellant s scrip following the day of listing and, therefore, launched an investigation into the IPO. Interim Order dated December 28, 2011 was passed since SEBI came to a prima facie conclusion that manipulative device ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sclosure of certain material information in the offer documents; and 2) Diversion of IPO Proceeds and other funds to entities which purchased the Appellant s shares to ensure full subscription to the IPO of the Appellants. 6. The case of the Respondent as set out in the SCN is that several material facts have been allegedly intentionally suppressed in the offer documents pertaining to the IPO with respect to the utilization of the IPO Proceeds, agreements for purchase of land and raw material. Information has not been disclosed regarding ICDs, placement of purchase orders and with respect to utilization of the IPO Proceeds for general corporate purposes. It is alleged that the fact of taking and providing ICDs was not disclosed in the offer document, along with the non-disclosure of agreements executed with Nimbus and Supreme for the purchase of raw materials, and agreements for the purchase of land. It is also an allegation levelled in the SCN that Board Resolution dated August 17, 2011 in which the decision regarding ICDs was taken was not disclosed in the RHP. 7. Further, a principal part of the IPO Proceeds has been allegedly diverted by the Appellant for transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Appellant and, therefore, it was paramount that the debt be paid off and simultaneously the equity of the Appellant company be increased. The Appellant wished to enhance the company s business activities but realized that the contractors / suppliers would not begin work or supply raw material without advance payments. This led to the Appellant having to avail of finance through ICDs obtained from NBFCs and other companies in the interregnum. The Appellant states in its Reply to the SCN that SEBI has failed to take account of the fact that the Lead Manager to the Issue advices the company regarding disclosures and also prepares the RHP and Prospectus. Moreover, the RHP itself is considered by SEBI before the Prospectus is filed and, therefore, the allegation that adequate disclosures have not been made by the Appellant is erroneous. 10. The Appellant also submitted that SEBI in the SCN had failed to establish that the Appellant itself was connected to the entities which had purchased the Appellant s shares in the IPO or that the Appellant was in the know regarding the use of the funds supplied by it to its raw material providers and through ICDs and land deals. SEBI has fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and again that the ICDs have been recalled by the Appellant and legal proceedings have been initiated to recover the same. The agreements with Nimbus and Supreme were entered into for purposes of the expansion of business of the Appellant, as well as the discount offered by them for the supply of raw materials. In any event, these agreements were cancelled by Nimbus and Supreme in light of the Interim Order dated December 28, 2011 passed by the Respondent tainting the reputation and goodwill of the Appellant company. It is vociferously denied that money paid to entities in pursuance of purchase orders and land deals was in any way meant to aid the subscription to the IPO of the Appellant. 14. Having summarized the incidents that have led up to the passing of the Impugned Order dated March 11, 2014 for the sake of clarity, we shall now deal with the submissions of the parties in greater detail and give our findings thereon. 15. At the outset learned Senior Counsel for the Appellant, Mr. Shyam Mehta, submits that all allegations and charges as made out in the SCN and Impugned Order have been exaggerated in pursuit of the Appellant company. With respect to the charge of diversi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in case the ICDs had been raised earlier than two months from the date of the offer document being registered with the ROC. As far as Regulation 57(1) of the ICDR Regulations is concerned, it is also submitted that the said Regulation only covers those transactions which enable applicants to make an informed investment decision. 18. In response to SEBI s allegation regarding the diversion of IPO Proceeds through investment in ICDs, it is reiterated by the Appellant that there is no connection between the entities which purchased the Appellant s shares and the Appellant itself. There is no allegation in the SCN, nor is there a finding to the effect in the Impugned Order that the Appellant had any knowledge that the money invested by the Appellant with Saptrishi, Raw Gold and Wattkins would be used to purchase its shares in the IPO. The Appellant has, in any event, recovered the ICD amounts deposited with the three entities. The three entities in question are NBFCs registered with RBI and there is nothing untoward in them accepting and extending funds from and to other entities. 19. The reason for entering into ICD agreements dated September 20, 2011 with Saptrishi, Raw Gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er been found nor alleged between the Appellants and the entities through which the money is said to have been routed, viz., Modi Alloys, Agarwal Steel, Nimbus and Supreme. It is, thus, submitted by the Appellant that it could not have reasonably contemplated that the money used to purchase plastic granules would be used to buy the Appellant s own shares. It is pointed out by the Appellant that the Respondent has not analysed the underlying transactions and particularly failed to appreciate that the purchase of plant and machinery was a duly disclosed object in the Appellant s Prospectus. It is wrong to allege that the Appellant made payments a year in advance of the supply of machinery since the supply in fact began 4-5 months after the payments were made as is evidenced by delivery challans and other receipts adduced before this Tribunal. 22. With respect to allegations of the Respondent that agreements entered into with Nimbus and Supreme appeared to be untrue, the Appellant submits that agreements executed with both entities were provided to SEBI on November 21, 2011 and, therefore, the Respondent s allegation in this respect does not hold good. However, due to the Respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submission that the land purchased from Saptrishi has not been independently valued by the Respondent, nor has the cost of construction of the factory to be constructed on the said land been verified and hence it is not open to the Respondent to question agreements entered into by the Appellant in the ordinary course of business when the said agreements are clearly within the four corners of law. Even in respect of land deals, SEBI has been unable to conduct an analysis of the underlying transactions which would reveal that the transactions were conducted for bonafide purposes and without any ulterior motive on the part of the Appellant whatsoever. 25. The Appellant submits that the Respondent s written submissions travel beyond the scope of the SCN and the Impugned Order with a view to improve the Respondent s case. None of the money paid to Eastern, Safeco and Realnet was utilized for the purchase of the Appellant s shares and that transactions executed by the Appellant are genuine. For instance, the payment made to Aggarwal Steel in lieu of plant and machinery was, as alleged by SEBI, apparently routed to Wonder Vincom, Pranneta, Pushpanjali and Rakesh Industries. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... around the same point in time. In relation to the invoices furnished by the Appellant to substantiate the Appellant s claim that it did in fact use the ICDs to purchase plant and machinery, the Respondent submits that the invoices do not help prove the Appellant s case. It is further submitted, on behalf of the Respondent, that in view of the vast scope of the instant matter, SEBI did not consider it feasible to conduct a detailed inquiry into each of the Appellant s transactions before proceeding against the latter particularly when the facts on record establish a strong case against the Appellant. 28. The Respondent submits that Board Resolution dated August 17, 2011 to invest in ICDs of other companies was not disclosed in the RHP and Prospectus. The Appellant executed identical ICD Agreements, each dated September 20, 2011 with three entities, viz., Saptrishi for an amount of ₹ 15 crore, Raw Gold for an amount of ₹ 7 crore, Wattkins for an amount of Rs. ₹ 10 crore, aggregating to a total of ₹ 32 crore. There is allegedly no reference to such an investment in ICDs anywhere in the offer documents. The failure to make the required disclosures is contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us Industries Ltd. and Supreme Communications Ltd. in the list of suppliers for plastic granules even though two agreements dated August 31, 2011 each were executed with these two entities for purchase of plastic granules amounting to ₹ 3.5 crore and ₹ 5 crore respectively. By failing to disclose this information, the Appellant violated the ICDR Regulations which mandate disclosure of material information. It is also submitted that the distinction between a manufacturer as a supplier of raw material and a trader as a supplier of raw material does not emanate from any law. 30. Moreover, payments purportedly made in the name of purchasing plastic granules were diverted through Nimbus and Supreme to entities which then allegedly further transferred moneys to other companies which ultimately purchased the Appellant s shares. In response to the Appellant s submissions that transactions with Nimbus and Supreme were genuine transactions, the Respondent states that the agreements did not specify the quality or quantity of the granules to be supplied. The Appellant also failed to disclose agreements and MOUs entered into by PGEL with certain entities for purchase of land, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he RHP. The Appellant failed to abide by the Interim Order to the extent that the Appellant failed to recall the ₹ 32 crore given in respect of ICDs to Saptrishi, Raw Gold and Wattkins and as on the date of the Impugned Order ₹ 4.84 crore had been deposited in the Escrow Account created as per the Respondent s instructions. Although, by the time the appeal came up for hearing before this Tribunal the Appellant had already recovered the amounts as directed by SEBI by the Impugned Order dated March 11, 2014 except an amount of ₹ 3.77 crore. 32. We have heard the learned senior counsel for both parties at length and perused the Appeal and all documents annexed therewith, along with the Written Submissions of both the parties. Before delving into the submissions of both parties, it is imperative that we look at the Regulations which are alleged to have been violated by the Appellant :- Section 12A(a), (b) and (c) of SEBI Act, 1992 Prohibition of manipulative and deceptive devices, insider trading an substantial acquisition of securities or control 12A. No person shall directly or indirectly (a) use or employ, in connection with the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or misleading appearance of trading in the securities market; (b) and (c) (d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or money s worth for inducing such person for dealing in any security with the object of inflating, depressing, maintaining or causing fluctuation in the price of such security; (e) any act or omission amounting to manipulation of the price of a security; (f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities; (g) to (j) (k) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors; Manner of disclosures in the offer document 57.(1) The offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision. Public communications, publicity materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e statement. (d) The figures appearing under this section shall be consistent with the figures appearing under the section Cost of the Project . . 2(XVI)(B)(2). The signatories shall further certify that all disclosures made in the offer document are true and correct. . Manner of disclosures in the offer document. 57.(2)(a) the red-herring prospectus, shelf prospectus and prospectus shall contain: (i) the disclosures specified in Schedule II of the Companies Act, 1956; and (ii) the disclosures specified in Part A of Schedule VIII, subject to the provisions of Parts B and C thereof; 33. On a perusal of the PFUTP Regulations, we note that Regulations 3(a)-(d) speak of prohibition of certain types of dealings in securities which are fraudulent in nature and which attempt to use unscrupulous and manipulative devices in connection with the sale of securities. Market players are also prohibited from acting in any manner which would operate as a fraud upon any person dealing in securities. Regulation 4(1) prohibits the indulgence in fraudulent or unfair trade practices. Regulation 4(2)(a) prohibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of bridge loans. A bridge loan in financial parlance is nothing but a short-term loan availed of by companies to meet their immediate fiscal requirements, this is precisely what an inter-corporate deposit represents. Clause 2(VII)(G) of Part A mandates the disclosure of bridge loans or any other financial arrangement which the concerned company intends to repay out of the proceeds of the issue. As per the facts of the case, the Appellant executed ICD agreements with seven entities, namely Jainex, Prraneta, Agarwal Holdings Ltd., JRI Industries and Infrastructure Ltd., Vineet Capital Services Pvt. Ltd., Jay Polychem (India) Pvt. Ltd., and Urmi Computers Pvt. Ltd. It is pertinent to note that all these seven agreements, vide which the Appellant received an aggregate of around ₹ 52 crore, were executed after the filing of the RHP, but before the filing of the Prospectus i.e., between August 17, 2011 and August 31, 2011. A perusal of the Impugned Order dated March 11, 2014 clearly points out that the Appellant could not have disclosed this information in the Draft RHP, which was filed on September 23, 2010 or even in the RHP which was filed, after incorporating SEBI s suggest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Appellant failed to disclose the placement of purchase orders for plant and machinery is not sustainable in view of the fact that it is evident from the records that the RHP and Prospectus do contain the names of these very suppliers whose quotations had already been disclosed and the machinery was purchased from these suppliers in fact. 42. The Respondent has submitted before us that the list of suppliers of plastic granules to the Appellant, as disclosed in the offer documents, omits the names of Nimbus and Supreme and that this amounts to non-disclosure of material information. From the facts it is borne out that the Appellant entered into two separate agreements with both entities on August 31, 2011. The value of the agreement executed with Nimbus was ₹ 3.5 crore and that of the agreement executed with Supreme was ₹ 5 crore. The reasons put forth by the Appellant regarding this omission are that firstly, the list was not exhaustive and secondly, the list disclosed names of manufacturers of raw materials and since Nimbus and Supreme were traders and not manufacturers, the list did not include their names. Thus, the purpose underlying the principle of disclosu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it becomes clear from a perusal of the documents produced before us that the IPO Proceeds were used to pay entities which either bought the Appellant s shares themselves or transferred the money further along to other entities which then dealt in the Appellant s scrip. The Appellant also transferred ₹ 7 crore to Raw Gold which paid ₹ 5 crore to MJ Commodities and Padamprabhu both of which bought the Appellant s shares. ₹ 9.5 crore was also paid by the Appellant through Wattkins to Eden Financial Services and Adcon. Eden paid some money to Pushpanjali who, in turn, transferred it to Cellworth and Jaimini, both of which traded in the Appellant s scrip on the date of listing. Further, Adcon transferred money to its broker in order to buy the Appellant s shares. In this context, it is noted that the ICDs were placed by the Appellant and taken around the same time. Therefore, it is indeed hard to accept the Appellant s submission that it was in need of funds for running its day to day business and hence the finding in the impugned order in this regard cannot be upset. 45. The third allegation levelled against the Appellant is regarding diversion of funds through pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds that an amount of ₹ 3.77 crore which was transferred to Supreme was not transferred from the IPO Proceeds but from the Appellant s own funds. The Appellant submits that it has initiated winding up proceedings against Supreme since it has been unable to get a refund of the said amount. This is the only amount that has yet to be recovered by the Appellant and the process for the same is stated to be currently underway. 48. Further, it is a matter of fact that there is no connection between the Appellant itself and any of the entities to which money was paid by Modi, Aggarwal, Nimbus or Supreme. The respondent has not taken note of the fact, in this regards, that the IPO was fully underwritten by the Lead Merchant Banker as per law by way of a separate contract, and hence, there was no need for the Appellant to have indulged in such a scheme of diverting the funds. Thus, the Respondent s plea that money was diverted through purchase orders seems a bit far-fetched and we, therefore, hold that the Appellant was merely engaging in its usual commercial activities while transacting business with Modi, Aggarwal, Nimbus and Supreme who would have bought shares in the IPO in quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need to be arranged for the same according to the update provided. j) Letter dated December 25, 2012 from Safeco to the Appellant stating that Safeco had been debarred from the securities market owing to allegations of siphoning off funds received from the Appellant and are, therefore, refunding the advance payment made to them by the Appellant. k) Cancellation deed dated March 20, 2012 executed between the Appellant and Safeco. 50. An analysis of the abovesaid documents reveals that the Appellant s dealings with Saptrishi, as far as the agreement for the purchase of land is concerned, are genuine and not illegal or fabricated. It is argued by Shri Rustomjee, learned senior counsel for the Respondent, that the Appellant entered into an MOU with Realnet which did not mention the total amount to be paid for the land and that even though Realnet conducted its business primarily in Mumbai and it was vested with the responsibility of locating land for the Appellant in Noida. These arguments of the Respondent are without any basis since there is nothing in law or on fact to lead to any inference that because Realnet was conducting its business in Mumbai it would be unable to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsure proper disclosure of material information which was required for the investors in order to enable them to take an informed decision to invest or not to invest in the IPO in question. However, there are certain facts which remain undisputed. One, that there is no connivance or connection for that matter which has been established between the Appellant itself and entities further down in the line of transfer which eventually purchased the Appellant s shares and dealt in its scrip once it was listed on the stock exchange. There is no commonality of directors, or registered addresses or any other incidents which can lead to such an inference that the Appellant was involved in the transfer of funds to certain such entities which, inter-alia , bought the Appellant s share in the IPO. Further, invoices and other documents have been produced by the Appellant for the purchase of raw materials and equipments required to run the business, and their validity is not in question. It is pertinently noted that most of the money which the Respondent alleges to have been transferred has been returned to the Appellant. The Respondent has fairly submitted that the Auditor appointed by SEBI itse ..... 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