TMI Blog2013 (9) TMI 1231X X X X Extracts X X X X X X X X Extracts X X X X ..... Board of India ( SEBI ), in case any allegations of irregularity/illegality are leveled against the Lead Manager registered in the UK. 2. The appeal is preferred by two Appellants against the impugned order dated June 20, 2013 passed by the Respondent. Appellant no. 1, namely, Pan Asia Advisors Limited is a company registered under the laws of the UK having its registered office at 42, Mincing Lane, London. It is registered with the Financial Services Authority, the federal financial regulator in the UK and is mainly in the business of advising investors in relation to financial products outside India, including services offered in relation to issuance of GDRs abroad in the capacity of an International Corporate Advisor or a Lead Manager. Appellant no. 2, namely, Mr. Arun Panchariya, is a non-resident Indian residing in Dubai, UAE who was looking after the affairs of Appellant no. 1 till September 2011, when he is stated to have resigned in the wake of the ad interim order of SEBI dated September 21, 2011. 3. Impugned order dated June 20, 2013 restrains the Appellants from accessing the securities market for 10 years for the violation of Regulations 12A(a)-(c) of the SEBI Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces relating to Securities Market), Regulations, 2003 were violated. These regulations, among others, prohibit any person from employing any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on an exchange. They also prohibit persons from engaging in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities that are listed on stock exchanges. These regulations also prohibit persons from indulging in a fraudulent or unfair trade practice in securities which includes publishing any information which is not true or which he does not believe to be true. Any advertisement that is misleading or contains information in a distorted manner which may influence the decision of the investors is also an unfair trade practice in securities which is prohibited. The regulations also make it clear that planting false or misleading news which may induce the public for selling or purchasing securities would also come within the ambit of unfair trade practice in securities . 17. I note that the provisions of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d passed an order dated November 13, 2009 imposing monetary penalty for creating false and misleading appearance of trading in Alka and his involvement in publication of premature/misleading positive announcements. In view of the repetitive acts of Panchariya and the gravity of the offence that has been perpetrated by him as brought in the foregoing paragraphs, I am of the opinion that stern measures need to be taken against Panchariya and Pan Asia. 20. In view of the foregoing, I, therefore, in exercise of the powers conferred upon me by virtue of section 19 read with section 11(4) and 11B of the SEBI Act and regulation 11(1) of the PFUTP Regulations, hereby direct as follows i. Pan Asia and Panchariya as persons connected to the Indian Securities market are barred from rendering services in connection with instruments that are defined as securities (as in section 2(h) of SCRA, 1956) in the Indian market or in any way dealing with them, directly or indirectly, for a period of 10 years, from the date of this order. ii. Pan Asia and Panchariya are prohibited from accessing the capital market directly or indirectly, for a period of 10 years, from the date of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to decide other issues. If such fact does not exist, a court, tribunal or authority cannot act. Also, a court or a tribunal cannot wrongly assume existence of jurisdictional fact and proceed to decide a matter. The underlying principle is that by erroneously assuming existence of a jurisdictional fact, a subordinate court or an inferior tribunal cannot confer upon itself jurisdiction which it otherwise does not possess. The existence of a jurisdictional fact is thus a sine qua non or condition precedent to the assumption of jurisdiction by a court or tribunal. There is a plethora of rulings supporting this proposition of law but the same have not been dealt with for the sake of brevity. 8. It is the Appellants case that the Respondent s jurisdiction is limited to the territory of India and acts or omission committed by a party therein. It does not extend to transactions executed by the Appellants in countries outside India with respect to the issuance of GDRs since the same are governed by the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipts Mechanism) Scheme, 1993 ( the GDR Scheme ) issued by the Ministry of Finance, Government of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent has not taken up the matter with them even for the sake of clarification. If this has in fact been done by the Respondent, the outcome has not been brought on record. 11. The Appellants further submit that the GDRs were in reality legitimately sold and transferred to IFCF, KII and the rest. The loans availed from Euram Bank were repaid and the loan/pledge agreements were terminated. Vintage did not have a joint account with any Issuer Company. The Issuer Companies pledged their cash account in which the GDR subscription funds were deposited while Vintage pledged the account in which the GDRs were held. Moreover, no pledge agreement between Euram Bank and any Issuer Company was ever invoked. And the reliance placed by the Respondent on the agreement between Euram and Vintage is totally erroneous since the agreement itself is beyond its purview. 12. Regarding the Respondent s allegation that Indian investors have ultimately paid for the GDRs, it is argued by the Appellants that large quantities of GDRs have not even been converted into shares, and a sizeable portion of those converted has not been traded in the Indian securities market. The Appellants submit that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the GDR subscription funds received by the Issuer Companies could not be used by them since they were pledged to Euram Bank to secure the loan availed by Vintage, the Appellants state that pledging the funds would itself amount to usage of the funds. It was pointed out that only that could be pledged which belonged to oneself. The Respondent is, therefore, wrong in alleging that no foreign capital was raised by the Issuer Companies to be used for their benefit. 16. The Appellants forcefully submit that it is incorrect to state that the GDRs have been issued from the authorised capital of the company, when in actuality the shares underlying the GDRs held by the Domestic Custodian Bank form part of the authorised share capital of the Indian Companies. So long as the GDRs remain unconverted into shares, no trading can be said to have been done in the Indian market with respect to the underlying shares. 17. Per contra, the Respondent states that it noticed that several FIIs/Sub-accounts were converting GDRs held by them in certain companies into shares for sale in the Indian market. Appellant no. 2 can be said to be connected with a few of these entities, namely, Alkarni H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned a loan agreement with Euram Bank which was collateralized by pledging the GDR proceeds received by the Issuer Companies which allegedly made Vintage the sole subscriber to GDRs. The Respondent s case, thus, appears to be that upon buying shares from the afore-mentioned FIIs the Indian investors seem to have assisted the Issuer Companies in releasing the GDR subscription proceeds from all encumbrances. 21. Further, it is submitted that the loan agreement and the pledge agreement cannot exist exclusively of each other. Due to the pledge agreement entered into by Asahi, which is one of the Issuer Companies, it was not able to utilize the GDR proceeds till the loan taken by Vintage from Euram Bank was repaid, which took nearly eight months. Via the pledge agreement, the Issuer Companies pledge the GDR proceeds as collateral for the loan availed by Vintage. Such an arrangement is not allowed by law in India. Existing shareholders of the Issuer Companies, while appreciating the fact that foreign capital was being raised through issuance of GDRs, were not aware of this design of the Appellants. 22. We have heard the learned counsel for both parties at length and perused the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been admitted. A fact admitted in terms of Section 58 of the Evidence Act need not be proved. 24. Facts of the above case are clearly distinguishable and do not help the Appellants since in the present matter we are dealing with a statutory Appeal. Moreover, the learned senior counsel for the Respondent, Shri Shyam Mehta, had argued the matter on the basis of the impugned order for almost two days in the presence of the learned senior counsel for the Appellants, who had even availed of an opportunity granted to him to meet out the contentions of the Respondent made during the oral arguments by way of rejoinder arguments. Therefore, it cannot be said that mere non-filing of reply in affidavit by the Respondent would amount to an admission of the submissions/contentions raised in the Appeal by the Appellants. This plea of the Appellants, being misconceived, is hereby repelled in the facts and circumstances of the present case. However, we feel that had a reply been filed by the Respondent in the case in hand, it would have definitely helped the Tribunal as well as the Appellants to comprehend the whole matter in a shorter span of time and with better precision. 25. Durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28. The conception of GDRs may be traced back to the early 1990 s when various steps of economic liberalization relating to foreign investment and foreign trade were undertaken by the Government of India and drastic changes were made in the then existing law by bringing in new rules and regulations, including revisiting the entire Foreign Exchange Regulations Act, 1973 ( FERA ). A Task Force was constituted under the supervision of the RBI to undertake a fresh exercise and suggest a new law in this regard. Finally, it was suggested that the FERA should be repealed altogether. As such, new legislation called the Foreign Exchange Management Bill was introduced in the Parliament, which ultimately took the shape of the Foreign Exchange Management Act, 1999. Simultaneously, a detailed scheme for the issuance of GDRs as well as FCCBs i.e Foreign Currency Convertible Bonds was issued by the Ministry of Finance, Government of India in the year 1993, i.e., the GDR Scheme of 1993, with the object of facilitating the issue of FCCBs and GDRs abroad by companies registered in India. The Government of India s policy with regard to GDRs is primarily reflected in the following - I. Issue of F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purview of SEBI. Clause (6) mentions that GDRs can only be listed and freely traded on a foreign stock exchange. Similarly, Clause 7 stipulates the mechanism for conversion of GDRs into shares. Clause 8 further stipulates that even bonus and rights shares, if any, should be locked in with the Domestic Custodian Bank. The Overseas Depository Bank shall then issue corresponding GDRs to the GDR subscribers abroad. Further, Clarification 22 for the first time introduced the concept of two way fungibility of GDRs. Clause (e) expressly provides that since conversion of shares into GDRs, in keeping with this principle of two way fungibility, would involve a secondary market transaction, the acquisition of such shares through an intermediary on behalf of the overseas investors would fall within the regulatory purview of SEBI. However, it is pertinent to note that here again the second tranche of the issuance of the GDRs is to be monitored by the RBI alone. It is, thus, evident that wherever the law makers wish to entrust SEBI with any kind of role in the matter of GDRs, the same is expressly provided for. 31. A perusal of the provisions dealt with above leaves no room for doubt reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EMA has already been discussed hereinabove. Section 1 of FEMA deals explicitly with extraterritorial jurisdiction, stating in no unclear terms that the act extends not only to India but also offices and agencies outside India which happen to be owned or controlled by an Indian resident. It also applies to contraventions committed outside India by any person to whom the act applies. Section 6(3) of the said Act, which stipulates that RBI would regulate the transfer or issue of security outside India, reads as under :- 6(3) Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank may, be regulations, prohibit, restrict or regulate the following:- (a) transfer or issue of any foreign security by a person resident in India; (b) transfer or issue of any security by a person outside India; (c) transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India; (d) any borrowing or lending in foreign exchange in whatever form or by whatever name called; (e) any borrowing or lending in rupees in whatever form or by whatever name called between a person residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the RBI and not SEBI. So much so that there is a separate, distinct and exhaustive regulatory system for controlling issues connected with GDRs in FEMA which belies the contention of the Respondent that it has jurisdiction in the matter. 37. Furthermore, Section 1 of the SEBI Act, 1992 itself makes it crystal clear that the SEBI Act extends solely to the whole of India. The natural interpretation of the provisions of Section 1 would be that it does not apply to activities pertaining to the capital market outside the country. As far as jurisdiction goes, it is a settled position that in the Indian politico-legal set up, jurisdiction on any entity, such as the Respondent, maybe conferred only by the Parliament and no one else. It cannot be acquired, assumed or exercised in any other manner by any governmental agency. 38. In this connection, it is pertinent to note the observations of the Kania Committee which submitted its report in 2005. It was observed that the SEBI Act is bereft of any substantive provisions which, in the opinion of members of the Committee, ought to be given an overriding effect over other laws. Moreover, in places in the SEBI Act where certain subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Hon ble Supreme Court pertinently observed as under :- 120. The courts should always be very careful when vast powers are being claimed, especially when those claims are cast in terms of enactment and implementation of laws that are completely beyond the pale of judicial scrutiny and which the constitutional text does not unambiguously support. To readily accede to demands for a reading of such powers in the constitutional matrix might inevitably lead to a destruction of the complex matrix that our Constitution is. Take the instant case itself. 41. Keeping in view the spirit of GVK, it is evident that the Parliament has already stepped in and made law governing GDRs in the form of FEMA, 1999 and connected regulations. This has been done deliberately by the Parliament duly taking note of the nexus between creation and issuance of GDRs abroad and its conversion into underlying shares in India. Thus, the Parliament has, as a matter of policy, conferred majorly upon the RBI the jurisdiction pertaining to the creation and issuance of GDRs abroad because of foreign exchanges being involved in the process. SEBI cannot assume jurisdiction vested with the RBI when its role ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Maharashtra, who also held the post of Minister for Urban Development, regarding allotment of land. Now, the Chief Minister noted the words please put up on five out of the six applications. The applications were forwarded to the relevant authority, i.e., the City and Industrial Development Corporation (CIDCO). The Chief Minister s role ended after the endorsement of the five applications. Allotments were made to six co-operative housing societies by CIDCO. These were challenged by way of a writ petition on the ground that the Chief Minister favored five of those applications by endorsing them. The Hon ble High Court of Bombay set aside the allotments without calling for any explanation from the Chief Minister or making him a party to the case. Certain adverse remarks were made against the Chief Minister by the Hon ble High Court. After hearing both parties, the Hon ble Supreme Court came to the conclusion that the remarks/strictures passed against the Chief Minister were illegal, incorrect and unwarranted, being against the principles of natural justice, particularly audi alteram partem since the Chief Minister had not been given an opportunity to put forth his case before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tock exchanges and Indian investors in the form of artificial inflated accounts. In this case, however, no information has been provided to the public or the stock exchanges, whatsoever by the Appellants as that particular job belonged to the Issuer Companies. 47. The case of Alka India Ltd. decided by this Tribunal on May 6, 2010 in Appeal Nos. 44 of 2010 etc. has been relied upon by the Respondent to impress upon the point that the Appellant no. 2 has adopted similar modalities in the case in hand. We have minutely read the judgment of Alka India Ltd. and we note that it pertains to certain reportings by the said company i.e., Alka India Ltd. of the financial results in the year 2003. The same were alleged to have been inflated by not making any provision of tax payment etc. There were certain misleading corporate announcements which also formed part of the allegations. This Tribunal, therefore, concluded that such an act on the part on the company disseminated certain non-accounting information to the shareholders and the public at large, which was price sensitive. The company was, therefore, debarred from accessing the Indian securities market for a period of 6 months. Certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presented itself before the Gujarat High Court was whether investors who have purchased shares listed on a recognized stock exchange can be included within the meaning of the expression other persons associated with the securities market in Section 11(2) (i) of the SEBI Act and that the said expression is not limited to persons listed in Section 11(2). The petitioners before the Hon ble High Court had dealt in the scrip of Mr. Madanlal B. Purohit listed on the BSE. They argued that purely on the basis of the fact that they had executed transactions with respect to shares listed on the BSE, SEBI did not have the right to summon the petitioners or institute an enquiry against them or call for any information from them. It was also contended that an in-depth reading of Section 11(2) (i) read with Sections 11 B and 12 of the SEBI Act leads to the conclusion that SEBI could regulate only stock exchanges, mutual funds, other persons associated with the securities market and intermediaries and self- regulatory organizations in the securities market. However, the Hon ble High Court held that the buyer of shares would fall within the purview of the class enumerated in clause (i) as a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that certain allegations, i.e., allegations relating to Section 77 of the Companies Act, 1956, allegations with respect to the judgment in the case of Gammon India Limited and allegations in respect of the FEMA Guarantees Regulations, made their first appearance in the impugned order and are conspicuously missing in the show cause notice. This itself vitiates the impugned order, being violative of natural justice. From a perusal of the second chart it is seen that the total value of GDRs sold by Vintage to IFCF and KII was US $ 2,79,84,972 (Rs. 139.92 crores when $1= ₹ 50) and the total value of shares sold by IFCF and KII in the Indian market was ₹ 120.17 crore, which shows actual loss to Vintage. From the two charts provided, it cannot be conclusively proved that prices of scrips of some Issuer Companies involved, for which GDR s were issued by the Appellants went up, or that Indian investors were put to any loss. In fact, from sale values of GDRs in USD and sale realization of these GDRs in the Indian security market, it can be clearly seen that there was a financial loss to the Appellants. 54. Be that as it may, in our considered opinion, GDRs seem to be sown, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of some violations of its regulations, the said Issuer Company cannot issue any GDRs. Therefore, the ban comes at the threshold itself. Secondly, if an issuer company intends to issue an IPO, i.e., Initial Public Offerings of its shares in the Indian capital market and simultaneously, intends to float GDRs abroad, SEBI is empowered to look into the aspect of the issue of IPOs only. Barring these couple of exceptions, there does not seem to be any other provision either made by the Parliament, Ministry of Finance, RBI or even by SEBI under which SEBI might have acted and looked into any alleged fraudulent or wrong methodology/modus operandi adopted by any party in the matter of creation and issuance of some GDRs abroad. Being the appellate authority over SEBI and also keeping in view its excellent performance so far, we would ourselves wish for SEBI to have vast and extensive powers to deal with issues pertaining to the capital market. However, we would hasten to add that looking at the changing economic scenario at the national and international levels, the concerned authority shall have to be a bit proactive in empowering SEBI with wider jurisdiction from time to time. 57 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moter/Director of appellant no.1 holding 100% shares of appellant no.1. Appellant no.2 has stepped down as Managing Director of appellant no.1 with effect from 29/9/2011, after ad-interim ex-parte order was passed against him by SEBI on 21/9/2011. 4. Relevant facts are that, SEBI on receiving alerts from its regulatory system, conducted investigation in respect of trading in scrips of certain companies during the period from January 1, 2009 to May 31, 2010 ( investigation period for short). Preliminary investigation revealed that during the investigation period, average daily volume of trading in shares of certain companies had increased significantly. It was noticed that the shares of the companies under investigation were sold by a set of FIIs/sub-accounts and bought by a set of clients. Based on preliminary investigation, SEBI was prima facie of the opinion that Arun Panchariya (appellant no.2) the then Managing Director of appellant no.1 was the mastermind for issuance of structured Global Depository Receipts ( GDRs for short) on behalf of companies under investigation. It was found that the GDRs of those companies were subscribed to by entities controlled by Arun Panchari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RA in the Indian market or in any way dealing with them directly or indirectly for a period of 10 years and further prohibited appellants from accessing the capital market directly or indirectly for a period of 10 years. Challenging the aforesaid order, present appeal is filed. 8. With this background, first question raised in this appeal may be considered viz., whether SEBI has jurisdiction to initiate proceedings under SEBI Act, 1992 against appellants on the ground that appellants had committed fraud on the investors in India in relation to sale/purchase of underlying shares released on redemption of GDRs in India. 9. Arguments advanced by Mr. Modi, learned Senior Advocate appearing on behalf of appellants, on the above question may be summarized as follows:- (a) Jurisdiction of SEBI as per Section 1 of SEBI Act, 1992 is limited to the territory of India. GDRs are issued outside India under Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993 ( 1993 Scheme for short) framed by the Central Government. Under the 1993 Scheme, Indian companies desirous of raising foreign funds through GDR mechanism are require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat relevant contract notes under two way fungibility of GDRs need not be submitted to SEBI and as and when required, SEBI shall requisition the custodians to provide copies of the contract notes. This clarification further supports contention of appellants that regulating GDR mechanism is with DEA/RBI and the role of SEBI is limited to the extent noted earlier and therefore SEBI could not have investigated role of appellants as lead manager to GDR issue. (e) RBI, in exercise of powers conferred upon it under FEMA 1999, has issued Master Circular on Foreign Investments in India which contains regulatory framework and instruction governing foreign investment in India. Under that Master Circular, an Indian company issuing GDRs is required to furnish to the Reserve Bank, full details of GDR issue in the prescribed form within 30 days from the date of closing of the issue. The Master Circular further requires the company to furnish a quarterly return in the prescribed form to the Reserve Bank within 15 days of the close of the calendar quarter and continue to submit such quarterly returns till the entire amount raised through GDR mechanism is either repatriated to India or utilize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regulate, the securities market by such measures as it thinks fit. Expression such measures as it thinks fit in Section 11(1) of SEBI Act, 1992 clearly shows that Parliament has conferred upon SEBI absolute discretion in the matter of protecting interests of investors in securities and in the matter of promoting and regulating securities market. 13. Scope of the expression by such measures as it thinks fit in Section 11(1) of SEBI Act, 1992, as pointed out by counsel for respondent, was considered by the Apex Court in the case of Sahara India Real Estate Corporation Ltd. vs. SEBI wherein Apex Court has inter alia, held thus: 303.1 Sub-section (1) of Section 11 of the SEBI Act casts an obligation on SEBI to protect the interest of investors in securities, to promote the development of the securities market, and to regulate the securities market, by such measures as it thinks fit . It is therefore apparent that the measures to be adopted by SEBI in carrying out its obligations are couched in open-ended terms having no prearranged limits. In other words, the extent of the nature and the manner of measures which can be adopted by SEBI for giving effect to the functions as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit to protect interests of investors in India. In such a case, jurisdiction vested in SEBI to take action against those who have committed fraud on the investors in India, does not get divested merely because the fraudulent intention on their part existed at every stage of the GDR process. 16. Power of SEBI, under Section 11(1) and 11(4) of SEBI Act, 1992, is wide enough to take such measures as it deems fit and extends to restrain not only persons involved in the transaction from accessing the securities market, but also prohibit any person associated with securities market to buy, sell or deal in securities. Therefore, if SEBI on investigation arrives at a conclusion that appellants were persons associated with transaction of sale/purchase of underlying shares in India and those transactions were detrimental to interests of inventors in India, then SEBI would be justified in invoking jurisdiction under Section 11(1) and 11(4) of SEBI Act, 1992. 17. Entire case of appellants is that no action could be taken against appellants who acted as lead managers to GDRs which were created and issued outside India, subscribed to by investors outside India and traded on stock exchanges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the matter of protecting interests of investors in India, SEBI has absolute powers under SEBI Act, 1992. Fact that not all GDRs but only part of GDRs held by entities controlled by appellants were in fact converted and underlying shares were sold in the Indian securities market makes no difference, because, for invoking jurisdiction under SEBI Act, 1992, it is not necessary that all GDRs must be converted and if the transactions carried out after conversion of GDRs were found to be detrimental to the interests of investors in India, SEBI would be within its powers to invoke jurisdiction under SEBI Act, 1992. 19. Specific finding recorded in the impugned order is that appellants caused false information to be published on the website of stock exchanges regarding subscription of GDRs by foreign investors, when in fact, appellants had entered into prohibitory arrangement with issuer companies in India, under which, ordinary shares raised through GDR mechanism were under the control of Arun Panchariya (appellant no.2) at all stages and ultimately some of those shares were sold/purchased in the securities market in India by entities controlled by Arun Panchariya. Since these trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... einafter referred to as SV ). 5.2 The basis for the abovementioned connection was on account of the following factors, viz. Sr. No. Name of Entity Basis of Connection 1. Alkarni Panchariya alongwith his family members were shareholders. 2. Alka Panchariya along with his family members were Promoters. 3. IFCF Panchariya was a 100% shareholder in IFCF indirectly through Cardinal Capital Partners and was its Chief Investment Officer. Further, the major investor in Class A shares of IFCF was Vintage, whose owner was Alkarni. Alkarni has Panchariya and his family members as shareholders. 4. Vintage Panchariya controlled Vintage and was its authorised signatory. 5. KII Vintage signed a loan agreement with Credo, parent company of KII,wherein it provided loan to Credo to further lend it to KII so that KII can purchase GDRs of Issuer Companies and convert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in and to, and the balance of funds existing from time to time at present or hereafter on the account no ... (GDR Account) kept by Bank (Euram) and all amounts credited at any particular time therein. 5.3.2.4 Further, the Pledge Agreement is also part of the Loan Agreement and vice versa. The Pledge Agreement in its preamble states that ...The Pledgor (Issuer Company) has received a copy of the Loan Agreement and acknowledges and agrees to its terms and conditions. 5.3.2.5 The following is also secured as per the Loan Agreement * ...In order to secure all and any of the Bank's claims and entitlements against the Borrower (Vintage).......... it is hereby irrevocably agreed that the following securities and any other securities which may be required by the Bank from time to time shall be given to the Bank as provided herein or in any other form or manner as may be demanded by the Bank..... * Pledge of certain securities held from time to time in the Borrower's account no ... at the Bank as set out in a separate pledge agreement which is attached hereto as Annex which forms an integral part of this Loan Agreement. * Pledge of the GDR Account of the Bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e financial statement of the company, which is misleading. In reality, few book entries result in large surge in the capital of the company. Thus, these GDRs are created without any purchase transactions or for any cost (apart from interest and commission earned by Euram). 5.3.2.10 The initial investors to the GDRs appear to be just fictitious/front entities created by Panchariya and Pan Asia. Efforts to contact these original investors were futile. Emails sent have bounced. Letters sent to these investors have also returned undelivered. SEBI also sought help of regulators of respective jurisdiction where these investors have been stated to be based. Foreign regulators have been unable to locate these investors. 5.3.2.11 Following are the details of the GDRs issued by the companies examined by SEBI. 5.3.2.12 From the above table, it is clear that the amount of capital raised via issuing GDRs is significantly large when compared to existing capital of the companies. 5.3.2.13 For the purpose of subscription of the GDRs of the aforementioned Issuer Companies, loan agreements were signed by various entities with the banks. This loan was then utilised for subscribing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge) and vice versa. 5.3.3.7 These Sub-Accounts then dump the shares of the Issuer companies received post cancellation in Indian Stock Markets and realize the proceeds. The sale of such shares by Sub-Accounts in Indian Markets is the only step where funds/proceeds have been provided by entities not under control of Panchariya i.e. Indian investors. Thus, it is the Indian Investors, and not the foreign investors, who have ultimately paid for the GDRs. 5.3.3.8 Investigations have revealed that all the Issuer Companies have utilised majority of the GDR issue proceeds through their foreign subsidiaries in other countries. Majority of these foreign subsidiaries have following common aspects a. Most of these are based in free zones of U.A.E. b. In almost all the case, the major portion of the GDR issue (100% in one of the case viz. CAT) is directly transferred to foreign subsidiary and is not repatriated to India. c. Mostly, these have been incorporated during or after the period of GDR issue. d. These are mostly trading companies generally dealing in commodities/ products unrelated to the business of parent company. e. They have financial transactions with Vintage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital through GDRs which have been fully subscribed by foreign investors, when, in fact, there were no genuine subscribers to the GDRs nor there was genuine raising of capital and that the entire arrangement in relation to subscription of GDRs was fraudulent. (c) Further investigation revealed that underlying shares sold/purchased in the Indian securities market were originally issued under the 1993 Scheme involving issuance of ordinary shares through GDR mechanism for which appellant no.1 was the lead manager. Investigation revealed that stock exchanges in India were informed that GDRs of issuer companies have been subscribed by various initial subscribers, when in fact, GDRs were subscribed by Vintage, a company controlled by Arun Panchariya. Further investigation revealed that the entities which were claimed to be initial investors were fictitious/non-existent entities, save and except Rexflec Ltd. (later on name changed to Pan Asia Management Ltd.) which was an entity controlled by Arun Panchariya. Though appellants had not furnished list of initial subscribers to the stock exchanges, in view of collusion between appellants and issuer companies in raising shares through GDR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence that the same has been admitted. In the present case, based on the investigation report and after hearing appellants, impugned order has been passed. Correctness of impugned order has to be judged on basis of reasons recorded therein and not on basis of reply to memorandum of appeal. Therefore, reliance placed on the decision of Apex Court in the case of N. Venkataramana Hebbar (supra) is misplaced. 26. On merits of the case, it is contended on behalf of appellants that neither the appellants have published/reported nor caused to be published/reported any advertisement or planted any news and hence appellants could not be said to have violated Regulation 4(2)(f), (k) and (4) of PFTUP Regulations. It is contended that BSE accepts only Corporate Announcements that are made by listed companies and not by any third parties such as appellants. As regards discrepancy relating to list of initial subscribers to GDRs, it is contended that appellants have not furnished any list of initial subscribers to the stock exchanges. It could have been supplied to stock exchanges either by issuer companies or by Overseas Depository Banks. In the present case, Overseas Depository Banks were D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt No.:540030, Asahi Infrastructure Projects Ltd. Clause 6 of the loan agreement provides that security for the loan would be Pledge Agreement attached as Annexure 2 to the loan agreement forming part of the loan agreement. It is not in dispute that Pledge Agreement (page 215 of the paperbook) has been executed by and between Euram Bank and Asahi (issuer company) on April 21, 2009 itself as per Annexure 2, wherein it is recorded that all the amounts lying in Account No:540030 with Euram Bank would stand pledged. Clause 6.1 of Pledge Agreement provides that Euram Bank was entitled to apply funds lying in the Account pledged by issuer company, towards settlement of its dues in the event Vintage not repaying the loan amount to Euram Bank and redeem the pledge. Clause 1 of the Pledge Agreement dated April 21, 2009 between Euram and Asahi expressly records that Asahi acknowledges and agrees to the terms and conditions contained in the loan agreement between Euram and Vintage signed by Arun Panchariya as authorized signatory. Thus, Arun Panchariya as authorized signatory of Vintage having secured loans from Euram Bank for subscription of GDRs of issuer companies and getting Pledge Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed by foreign investors. In these circumstances, collusion between appellants and issuer companies is apparent and therefore, inference drawn by SEBI that appellants were involved at every stage from raising ordinary shares through GDR mechanism up to the stage of sale/purchase of underlying shares in the Indian securities market were liable to be treated as persons associated with the transaction in question in the securities market and accordingly liable for action under SEBI Act, 1992 and regulations made thereunder cannot be faulted. 31. Loan agreement/pledge agreement as also issuance of GDRs may not be per se illegal. But by informing investors in India that GDRs are fully subscribed by investors outside India and by selling/buying through the entities controlled by Arun Panchariya, investors are made to believe that with huge foreign funds the issuer companies have bright future, when actual facts are to the contrary. No doubt, Vintage is a foreign investor, but Vintage was admittedly controlled by Panchariya and even before GDRs were issued, Arun Panchariya got GDR subscription amount pledged by issuer companies in favour of Euram Bank from whom Vintage had obtained lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is relevant to note that as per the pledge agreement between Euram and Asahi dated April 21, 2009, Euram Bank was entitled to apply the funds lying in the account pledged by Asahi, toward settlement of its dues in the event Vintage not repaying the loan amount due and payable by Vintage to Euram Bank and redeeming the pledge. Thus GDR subscription amount was not available to the issuer companies till loan amount was repaid by Vintage to Euram Bank and the pledge was redeemed. It appears that in some cases Vintage has repaid the loan after considerably log period. Fact that SEBI could not find out as to how funds in Euram Account No:540030 Asahi Infrastructure Projects Ltd. were utilized after the pledge under Pledge Agreement was redeemed, does not in any way support the case of appellants, because, action is taken against appellants for colluding with issuer companies and misrepresenting the investors in India that foreign funds are available to issuer companies on account of GDRs being fully subscribed by investors outside India, when in fact no such funds were available. It is difficult to accept the contention of appellants that pledging GDR subscription amount towards sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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