TMI Blog2016 (12) TMI 1202X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellants that without impleading the Overseas Depository Banks/ parties to Loan Agreement & Pledge Agreement as parties to the proceedings initiated against the appellants, no order could be passed against the appellants cannot be accepted. instead of ensuring that the foreign investors subscribe to the GDRs of Asahi, AP as Managing Director of PAN Asia planned to subscribe to the GDRs of Asahi through Vintage and in fact as Managing Director of Vintage took loan of 5.98 Million USD from Euram Bank for subscribing to the GDRs of Asahi and made Asahi to pledge to the Euram Bank the GDR subscription amount of 5.98 Million USD as security for the loan taken by Vintage. Similar modus operandi was adopted in case of other issuer companies. Thus, the investors in India were made to believe that in the global market the issuer companies have acquired high reputation in terms of investment potential and hence the foreign investors have fully subscribed to the GDRs, when in fact, the GDRs were subscribed by AP through Vintage which was wholly owned by AP. In other words, PAN Asia as a Lead Manager and AP as Managing Director of PAN Asia attempted to mislead the investors in India tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate with Mr. Harekrishna Ashar and Mr. Saurabh Bachhawat, Advocates i/b K. Ashar Co. Per: Justice J.P. Devadhar 1. This appeal is filed to challenge the order passed by the Whole Time Member ( WTM for short) of Securities and Exchange Board of India ( SEBI for short) on 20.06.2013. By that order appellants as persons connected to the Indian Securities Market are debarred from rendering services in connection with instruments that are defined as securities under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 ( SCRA for short) for a period of 10 years and further the appellants are prohibited from accessing the capital market directly or indirectly for a period of 10 years. 2. Initially, by a majority decision of this Tribunal dated 30.09.2013 the appeal was allowed and the impugned decision of the WTM of SEBI was set aside on ground that SEBI had no jurisdiction to initiate proceedings against the appellants in relation to the role played by appellants as Lead Managers to the Global Depository Receipts ( GDRs for short) issued by several Indian Companies outside India. 3. On appeal filed by SEBI, the Apex Court by its decision dated 06.07.2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on monies received in the issuer companies ESCROW account, opened/maintained by the companies with the ESCROW account holding bank. vi) Receipt of Depository Banks confirmation of issue of instructions to the clearing systems of the GDR subscribers and confirmation from the requisite foreign stock exchange of the listing of the GDRs issue. vii) Ensuring that the issuer companies comply with applicable legal formalities of the countries where the GDRs are listed. e) On 29.04.2009 Asahi issued 29,91,00,000 equity shares which resulted in allotment of 21,91,000 GDRs having total value of 5.98 Million USD. The above GDRs issued by Asahi were fully subscribed and closed on 29.04.2009 itself. f) Eight days prior to the issuance of GDRs i.e. on 21.04.2009 Vintage FZE ( Vintage for convenience) an entity situate at Dubai entered into a loan agreement with European American Investment Bank AG ( Euram Bank for convenience). It is relevant to note that the object of the loan was to fund Vintage with 5.98 Million USD to take down GDR issue of Asahi and the said loan amount was to be transferred to the Euram A/c No. 540030. To secure the Euram Bank s claims and entitlements agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 5.98 Million USD taken by Vintage from Euram Bank for subscribing to the GDRs of Asahi. i) On 01.06.2009 Asahi informed BSE about the creation and allotment of 29,91,00,000 equity shares which were converted into 29,91,000 GDRs valued at 5.98 Million USD and that the said GDRs were claimed to have been fully subscribed by foreign investors. j) Investigation carried out by SEBI revealed that during the investigation period there was heavy trading in the scrip of above six issuer companies due to conversion of GDRs into equity shares by certain Foreign Institutional Investors/ sub accounts viz:- i) India Focus Cardinal Fund. ( IFCF for convenience) ii) KII Ltd. k) Investigation carried out by SEBI further revealed that equity shares generated on conversion of GDRs sold by above FIIs/sub accounts were bought by a set of clients, viz:- i) Alka India Ltd. ( Alka for short) ii) Basmati Securities. ( Basmati for short) iii) S.V. Enterprises. ( SV for short) iv) JMP Securities. ( JMP for short) v) Oudh Finance and Investments Ltd. ( Oudh for short) Investigation carried out by SEBI further revealed that AP was connected with IFCF and KII Ltd. which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Senior Advocate argued on behalf of the appellants and Mr. Mehta learned Senior Advocate argued on behalf of the respondent. 7. Argument of Mr. Sancheti, learned Senior Advocate appearing on behalf of appellants may be summarized as follows:- a) Allegations held proved against the appellants in the impugned order remain unsubstantiated in as much as, there is no finding recorded in respect of the said allegations in the impugned order. In fact, finding recorded in the impugned order that the appellants have violated Section 77(2) of the Companies Act, 1956 is now admitted to be beyond the show cause notice and hence not pressed by SEBI. Similarly, during the course of arguments, counsel for SEBI has not pressed the charge that in fact it is the Indian Investors who actually funded the GDR issue which is most crucial allegation on merits as well as on the aspects of SEBI exercising jurisdiction for investor protection. Similarly, the allegation that there were dealings between the subsidiaries of the issuer companies and the entities belonging to AP are exfacie based on conjectures and surmises. In these circumstances, it is submitted that the impugned order is liable to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on such fixed deposits. Relying on a decision of this Tribunal in case of BPL Ltd. vs. SEBI reported in (2002) SAT 19 it is submitted that failure to investigate all entities involved in the alleged fraud has materially affected the outcome of the investigation and hence the impugned order cannot be sustained. d) In the impugned order it is erroneously held that except by way of few book entities there is no real movement of funds from the GDR issue. Admittedly, each issuer company had a bank account with Euram Bank and admittedly GDR subscription amounts were deposited in those accounts. Merely because two or more entities had bank account in the same bank and funds were transferred from one entity to another it cannot be said that there is no receipt of payment on issuance of GDRs and the entries are merely book entries. e) In the impugned order it is erroneously held that the source of funding for the GDRs were done by converting the GDRs into equity shares and after selling the said equity shares in the Indian Market, the sale proceeds were repatriated abroad to repay the loan taken by Vintage. In fact in case of Asahi only 10.57% GDRs were sold and converted into shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch other facts to the issuer company or to any other person. Equally, there is no requirement for the issuer company to disclose any such information to public at large. In any event, in the absence of any particulars to establish that the shares sold on conversion of shares has affected the equity market, SEBI is not justified in passing the impugned order against the appellants. h) In the impugned order it is held that not disclosing to the investors that Vintage took loan from Euram Bank and after subscribing to the GDRs pledged the GDRs in favour of Euram Bank and non disclosure of the fact that the issuer companies had pledged the funds received from GDRs in favour of Euram Bank constitutes fraud on the Indian Investors. This finding of SEBI is unsustainable, because, firstly, these transactions were entered into outside India and no fault has been found with those transactions by the regulators under whose jurisdiction the said transactions took place and even RBI has not found any fault with those transactions. Secondly, SEBI has ignored the opinion of the solicitors of the relevant Countries and has failed to prove that the said transactions were in fact illegal as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suer companies to compensate AP. Thus, the impugned decision is based on conjectures and surmises and hence cannot be sustained. In support of the above submission reliance is placed on the decisions of the Apex Court in case of Mutha Associates vs. State of Maharashtra reported in (2013) 14 SCC 304 M.S. Bindra vs. Union of India reported in (1998) 7 SCC 310. l) In the impugned order it is held that Pan Asia had deliberately provided false information to the effect that certain other foreign investors were the initial subscribers of the GDRs. The above finding is clearly incorrect and misleading, because, firstly under the applicable law/regulation, the appellants were not required to communicate with the Indian Stock Exchanges or make any announcements in India regarding the GDR subscription. Secondly, as a matter of fact appellants have not made any such announcement before any authority. Thirdly, the Apex Court in its judgement dated 06.07.2015 has recorded that in fact Asahi had provided information to BSE that the entire GDRs were allotted to foreign entities, namely Greenwich Tradetec and accordingly BSE gave that information to public/retail investors on BSE website ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As a Lead Manager, the appellants were not required to physically verify as to who were the initial subscribers and what was their addresses. Moreover, due to efflux of time, it is possible that original subscribers might have changed their addresses. Thus, in the present case, all transactions were genuine and in fact, foreign capital was genuinely received by the issuer companies and the same is available till date for their use and benefit. Therefore, SEBI is not justified in holding that there was any fraudulent scheme or design to deceive the investors in India. r) The Apex Court in para 74 of its judgement has enumerated the case put forth by SEBI alleging various violations committed by the appellants. In the impugned order, some of the allegations as reported to the Apex Court by SEBI are not to be found. Some of the allegations which are recorded in the impugned order are not pressed before this Tribunal. In these circumstances, the impugned order which is based on conjectures and surmises is liable to be quashed and set aside. 8. On careful consideration of the aforesaid submissions made on behalf of the appellants, we see no merit in the aforesaid submissions. 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it appear to the investors in India that in the global market foreign investors have found great investment potential in the issuer companies and accordingly subscribed to the GDRs of Asahi valued at 5.98 Million USD and similarly subscribed to the GDRs of other issuer companies. 11. Before considering the aforesaid question, it would be appropriate to deal with the preliminary issue raised by the appellants viz. SEBI could not have proceeded against the appellants in the absence of other persons with whom the appellants are alleged to have colluded. It is contended on behalf of the appellants that if fraud is allegedly committed by the appellants in collusion with the issuer companies, Euram Bank, Overseas Depository Banks, Vintage and various other entities, then, unless all those entities were made parties to the show cause notice issued against the appellants, the impugned order could not be passed against the appellants. 12. There is no merit in the above contention. Concept of fraud in relation to the parties to the contract set out under Section 17 of the Indian Contract Act is different from the concept of fraud set out in the PFUTP Regulations, 2003. The expressi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investors dealing in the securities market and not to take action only after the investors have become victims of such fraud. Therefore, in the facts of present case, if fraud is committed by the appellants on the investors in India, then without making the investors as party to the proceedings, SEBI could take action against the appellants. 14. Similarly, if fraud is said to have been committed by AP on the investors in India by subscribing to the GDR outside India by entering into Loan Agreement/ Pledge Agreement outside India through the entities with which AP was connected, then, even if the GDRs were validly issued and even if the Loan Agreement/ Pledge Agreement were valid, proceedings could be initiated against AP for committing fraud on the investors in India without impleading the entities who issued the GDRs and without impleading the entities who were parties to the Loan Agreement/ Pledge Agreement. In other words, whether the Loan Agreement/ Pledge Agreement were validly entered into or not, proceedings could be initiated against AP if the very act of AP in subscribing to the GDRs through his connected entities constituted fraud on the investors in India. In such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndidate and trial against the other person with whose consent the returned candidate had committed the corrupt practice. In the present case, findings recorded in the impugned order regarding the legality of GDRs issued and legality of the Loan Agreement and Pledge Agreement were in the context of AP committing fraud on the investors in India by subscribing the GDRs meant to be sold to foreign investors. It is not the case of SEBI that the GDRs were issued illegally or that the Loan Agreement/ Pledge Agreements were per se illegal. In other words, what is held in the impugned order is that PAN Asia and AP (Managing Director of PAN Asia) by their acts made the investors in India to believe that foreign investors have found it prudent to invest in the GDRs of issuer companies when in fact the GDRs were subscribed by an entity wholly owned by AP. Therefore, the decision of the Apex Court in case of Manohar Joshi has no relevance to the facts of present case. Similarly, other decisions of the Apex Court and other Courts relied upon by the counsel for appellants are also distinguishable on facts. 17. Strong reliance was placed by counsel for the appellants on the decision of this Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement dated 21.04.2009, a Pledge Agreement dated on 21.04.2009 was executed between Asahi and Euram Bank, wherein Asahi agreed to abide by the terms and conditions of the Loan Agreement dated 21.04.2009 between Euram and Vintage and further agreed to pledge all its right, title and interest in and to the securities deposited in the pledged securities account and Pledged Time Deposit account so as to secure the present and future obligation of Vintage to the Euram Bank to the Extent of 5.98 Million USD or any other amount that may thereafter become payable by Vintage to Euram Bank. 20. In the reply to the show cause notice issued by SEBI, AP had categorically stated that Vintage intended to make profit through a take down of the GDRs issued by the Indian Companies and at the same time ensure successful placement of the GDRs with the investors outside India. It is further stated by AP that for the aforesaid purpose Vintage took loan from Euram Bank and upon closure of the GDR issue, Vintage paid the take down amount to the issuer companies by transferring the loan proceeds from Euram Bank to the ESCROW accounts of the issuer companies which was then transferred to the account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Asahi by taking loan of 5.98 Million USD from Euram Bank, PAN Asia had informed SEBI that initial subscribers to the GDRs of Asahi were foreign investors other than Vintage. Investigation carried out by SEBI revealed that in the records Greenwich Management Inc ( Greenwich for convenience) and Tradetec Corporation ( Tradetec for convenience) were shown as the initial subscribers to the GDRs of Asahi. Greenwich situated at Hong Kong is supposed to have acquired 49.85% GDRs of Asahi and Tradetec situated at Hong Kong is supposed to have acquired 50.15% GDRs of Asahi. Investigation revealed that immediately after subscribing to the GDRs, both Greenwich and Tradetec are supposed to have transferred all the GDRs to Vintage and on the same day Vintage transferred the loan amount of 5.98 Million USD to the account of Asahi. If Vintage had actually acquired GDRs of Asahi from Greenwich and Tradetec, then Vintage would have paid the loan amount of 5.98 Million USD to Greenwich and Tradetec and would not have transferred the loan amount to the account of Asahi. Very fact that AP as Managing Director of Vintage got the loan amount transferred to the account of Asahi clearly shows that Gree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers to the GDRs of the issuer companies so as to mislead the investors in India in believing that the global investors have shown keen interest in investing in the GDRs of issuer companies. In these circumstances, decision of SEBI that the appellants attempted to committed fraud on the investors in India by introducing fictitious initial subscribers cannot be faulted. 26. Argument of the appellants that due to efflux of time the initial subscribers might have changed their address is unsustainable, because, it is established beyond doubt that some of the addresses of the alleged initial subscribers itself do not exist. If the address itself is not existent it obviously means that even the initial subscribers were non-existent. Apart from above, it is established by SEBI through the Regulatory Authorities of the Countries in which the alleged initial subscribers were situated that the names of those initial subscribers do not exist in the official directory of those Countries. These facts conclusively establish that Vintage was the initial subscriber to the GDRs and names of fictitious entities were introduced only to make it appear that the GDRs have been subscribed by various f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether Asahi and other issuer companies were justified in entering into a Pledge Agreement with Euram Bank is a question that would be decided in the proceedings initiated against Asahi and other issuer companies. Thus, there can be no dispute that the GDR subscription amounts running into several Million USD were not available to the issuer companies till the loan taken by Vintage for subscribing to GDRs were repaid to Euram Bank. Admittedly, the loans were repaid by Vintage after a long period of time. Therefore, in the facts of present case, findings recorded by SEBI that in reality there was no fund movement after the GDRs were subscribed, cannot be faulted. 29. Argument of the appellants that the AO has erroneously held that source of funding for the GDRs were done by converting the GDRs and thereafter selling the shares in the Indian Market and repatriating the sale proceeds to repay the loan taken by Vintage is not entirely correct. It is a matter of record that Vintage by a Loan Agreement entered into with Credo Investment Holdings Ltd. ( Credo for short) advanced loan of 2 Million USD for on-lending it to its associate company KII Ltd. so as to enable KII to purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X
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