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TMI Blog2017 (10) TMI 1512X X X X Extracts X X X X X X X X Extracts X X X X ..... equity shares or any other security for a period of 10 years. By order dated 31st December, 2014, the WTM of SEBI has prohibited other appellants who at the relevant time were the Directors of Cals, from accessing the capital market, directly or indirectly, and dealing in securities or instruments with Indian securities as underlying, in any manner whatsoever, for a period of 10 years. Since the violations held to have been committed by the appellants relate to facts which are common, all these appeals are heard together and disposed of by this common decision. 3. Impugned Orders are passed against Cals and its directors basically for the reason that Cals aided by its directors who are appellants herein had employed fraudulent arrangement with regard to the subscription of the Global Depository Receipt ('GDR' for short) issue of Cals and that they had misled the investors by making false announcements regarding successful subscription of GDRs and also failed to disclose 'related party transaction', which were in violation of Section 77(2) of the Companies Act, 1956 and in violation of the SEBI Act and the regulations made thereunder. 4. Appellants in all these appeals do not dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement resolution would be passed via ballot or at the AGM wherein Goorha/other old promoters of Cals would exit Cals and the Spice Energy group would officially take over as new promoters of Cals. (d) Above proposal was considered by the Board of Directors (BoD) of Cals on 23/7/2007 and the minutes of the said meeting as per the Minute Book of Cals, inter alia, records the following:- (i) Name of Cals Limited be changed as Cals Refineries Limited. (ii) Mr. Sarvesh Goorha ('Goorha'), Chairman of the meeting informed the members of the Board that Cals which is in a defunct position since last several years is venturing into a refinery business with the help of SRM belonging to the Spice Energy Group as a strategic investor. (iii) Resolved to appoint Mr. Bhupendra Kansagra ('Kansagra), Mr. Ravi Chilikuri ('Chilikuri), Mr. Manabendra Guha Roy ('Roy') and Mr. D. Sundararajan ('Sundararajan'), nominees of Spice Energy Group as Additional Directors of Cals. (iv) SRM (strategic investor) had extended interest-free unsecured loan of Rs. 87 lac to Cals to meet the general and corporate expenses, hence Cals proposes to issue on preferential basis 8,70,000 equity shares of Rs. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01,900 equity shares of Cals was also confirmed in the said meeting. (h) In the BoD meeting of Cals held on 30/10/2007 Roy (director) informed the members of the Board that all the agreements entered by SRM in connection with the refineries would be assigned to Cals by executing Assignment Agreements. Sundararajan (director) informed the members of the Board that the total cost of the refinery project is USD 950 million and cost of the said project would be partly met by raising issue of GDR amounting to USD 200 million. (i) It is interesting to note that the minute book maintained by Cals does not record passing of any resolution on 30/10/2007 to open a bank account with Banco Efisa S.A. Lisbon ('Banco' for convenience) or any other bank for the purpose of receiving the GDR subscription amount. However, extract of the minutes of the meeting dated 30/10/2007 duly certified by Mr. Sundararajan and sent by Cals to Banco records the following:- 'RESOLVED THAT a bank account be opened with Banco Efisa S.A. Lisbon ('the Bank') or any of branch of Banco Efisa S.A. including Offshore Branch outside India for the purpose of receiving subscription money in respect of Globa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llion would open for subscription on 12/12/2007. (l) On 11/12/2007 Honor Finance Ltd. ('Honor' for short) incorporated and registered in the British Virgin Islands on 5/10/2007, which is wholly owned by Sanjay Malhotra (promoter of Spice Energy group) entered into a Credit Agreement with Banco for availing loan of USD 200 million to subscribe to the GDR issue of Cals which was to be listed on Luxembourg Stock Exchange. (m) On the same day i.e., on 11/12/2007 itself an Account Charge Agreement was executed by and between Cals and Banco as a result of which the GDR subscription amount of USD 200 million to be deposited in the designated account of Cals with Banco stood secured by Cals in favour of Banco for all the obligations of Honor under the Credit Agreement dated 11/12/2007. The said Account Charge Agreement signed by Goorha on behalf of Cals, inter alia, contains a clause that upon payment of all or part of the amounts due to Banco by Honor under the Credit Agreement, Cals may withdraw from its account the equivalent amount. In other words, as per the Account Charge Agreement, Cals could withdraw the GDR subscription amount of USD 200 million, only to the extent loan of USD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en as security by Cals for the loan taken by Honor from Banco for subscribing to the GDRs of Cals stood extended up to the period specified therein. The Extension Agreement was signed by Chilikuri on behalf of Cals. (u) Pursuant to the Board resolution dated 23/1/2009, Cals on 5/2/2009 entered into an agreement with Asia Texx Enterprises Ltd. ('Asia Texx' for convenience) for purchase of plant and machinery required for the refinery project at a cost of USD 290 million. Asia Texx was controlled by Gagan Rastogi, son of Deep Rastogi (director in Cals). As per the said agreement, USD 90 million was to be paid by Cals to Asia Texx as advance immediately on signing the agreement. Sundararajan had signed the said agreement dated 5/2/2009 as director of Cals. (v) On 26/3/2009 Asia Texx purchased 2,50,00,000 GDRs from Honor and paid USD 92 million to Honor. (w) On 27/3/2009 Honor repaid the outstanding loan amount of USD 9,18,00,000 under the Credit Agreement to Banco. (x) On 27/3/2009 Cals paid USD 92 million to Asia Texx (USD 90 million as advance under agreement dated 5/2/2009 + USD 2 million towards dismantling charges). (y) On 9/7/2009 Asia Texx transferred 2,50,00,000 GDRs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Malhotra, Chilikuri, Goorha and Sundararajan against whom there is direct evidence. It is contended that Cals at the relevant time had no knowledge and therefore, the acts and knowledge of the persons who had committed fraud on Cals cannot be attributed to Cals and made basis for holding that Cals is guilty of committing offences under the Companies Act, 1956 and also guilty of violating the SEBI Act, 1992 and the regulations framed thereunder. (b) It is further contended on behalf of Cals that the 'Doctrine of Attribution' generally permits the acts and knowledge of the directors or employees of a company to be attributed to the company itself, however, fraud is an exception to that principle, under which the company is not held and/or made liable for acts and/or knowledge of the directors and employees who (i) were committing fraud on the company (ii) were acting throughout for their own benefit and (iii) were acting contrary to instructions or outside the scope of employment. In support of above submission, Counsel for Cals has relied on various decisions rendered by Courts in England and Canada. (c) We see no merit in the above arguments advanced on behalf of Cals. As rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with Banco because, firstly, on the basis of the Board resolution dated 30/10/2007 certified by Sundararajan, director of Cals, an account was in fact opened in the name of Cals with Banco for depositing the GDR subscription amount. Secondly, on issuance of GDRs, the GDR subscription amount was in fact deposited in the said account of Cals with Banco. Thirdly, apart from the Board resolution dated 30/10/2007 certified by Sundararajan, there is no other resolution passed by Cals to open an account for depositing the GDR subscription amount. Fourthly, the GDR subscription amount deposited in the said bank account with Banco has been withdrawn by Cals in installments from time to time which is in consonance with the Account Charge Agreement executed by Cals. Without opening a bank account, Cals could not have opened the GDR issue. Very fact that Cals operated the account opened with Banco on the basis of resolution dated 30/10/2007 certified by Sundararajan clearly falsifies the case put up by Cals that it had not authorized any one to open an account with Banco for depositing the GDR subscription amount. (g) Similarly, argument that Cals had never authorized any person to sign a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the GDR subscription amount of USD 200 million was to remain as security till the loan of USD 200 million given by Banco to Honor for subscribing to the GDRs of Cals was repaid by Honor to Banco. Thus, the Spice Energy group, through 'Honor' controlled by one of its promoters (Malhotra) sought to subscribe to the GDRs by availing loan of USD 200 million from Banco and made Cals controlled by the Spice Energy group to execute the Account Charge Agreement so that USD 200 million deposited by Honor as GDR subscription amount in the account of Cals was kept as security till the loan of USD 200 million taken by Honor for subscribing to the GDRs of Cals was repaid. It is not in dispute that the GDR subscription amount withdrawn by Cals (except the last withdrawal) was always to the extent of loan repaid by Honor to Banco. Thus, in the facts of present case, involvement of Cals controlled by the Spiece Energy group is so intense that it can be easily seen that the fraudulent acts and deeds were executed by Cals through its directors. In these circumstances, argument that Cals was not aware of the actions of its directors cannot be accepted. Consequently, the finding recorded in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. On 5/2/2009 Cals entered into an agreement with Asia Texx for acquiring plant and machinery required for the refinery project. According to SEBI, Deep Rastogi had significant influence over Cals and therefore as per AS-18, Cals was liable to disclose to the exchanges about the related party transaction between Cals and Asia Texx. (k) Argument of Cals that the transaction between Cals and Asia Texx was not a related party transaction and under the provisions contained in AS-18, Deep Rastogi could not be said to have significant influence over Cals is without any merit. Although Deep Rastogi did not hold any shares of Cals, admittedly, Deep Rastogi was a director of Cals controlled by the Spice Energy group on the date on which Cals entered into agreement with Asia Texx. It is not in dispute that Asia Texx was wholly owned by Gagan Rastogi (son of Deep Rastogi) who was also one of the promoters of the Spice Energy group. In these circumstances, inference drawn in the impugned order that Deep Rastogi had significant influence over Cals as contemplated under AS-18 cannot be faulted. Consequently, findings recorded in the impugned order that the transaction between Cals and Asia Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an and secondly, the entire USD 200 million raised for the refinery project could not be used for any other purpose. Thus, the submission made by Ramachandran, in fact, supports the conclusion drawn in the impugned order that even before issuance of GDRs, Cals knew as to who would be the initial subscribers to the GDRs. In these circumstances, the decision of SEBI that Cals financed Honor for subscribing to its own GDRs cannot be faulted. (n) It is interesting to note that Cals (controlled by the Spice Energy group) not only financed Honor (owned by Malhotra, promoter of the Spice energy group) for subscribing to the GDRs of Cals, but also resolved in its BoD meeting held on 19/1/2008 to appoint Malhotra as an advisor to Cals for setting up the refinery in Haldia on a monthly consultancy charge of Rs. 15 lac. Thus, it is evident that Malhotra was not a stranger to Cals and all acts done by Cals in relation to the GDRs were at the instance of Malhotra, promoter of the Spice Energy group. As the promoter directors of Cals have also participated in the fraud committed in relation to the GDRs, Cals cannot escape liability for the misdeeds committed by its entire BoD. (o) For all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Argument of Goorha that he signed the Account Charge Agreement without knowing the contents of that agreement is ex facie untenable because, the very name of the document 'Account Charge Agreement' itself suggests that the amounts in the account of Cals would stand charged as per the terms set out in the Account Charge Agreement. At the relevant time, there was only one account of Cals with Banco for depositing the GDR subscription amount and there was no proposal on part of Cals to take any loan from Banco. Thus, the title of the document 'Account Charge Agreement' itself indicates the object with which it is being executed and to ascertain the object it was not necessary to read the entire document. Therefore, argument of Goorha that he signed the Account Charge Agreement without knowing its contents is wholly unsustainable. In these circumstances, the findings recorded against Goorha and the directions issued against Goorha in the impugned order cannot be faulted. Accordingly, we find no merit in the appeal filed by Goorha. D. SUNDARARAJAN (APPEAL NO.155 OF 2015) 11. Findings recorded in the impugned order against Sundararajan is that he was involved in the fraud perpetrated i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement and he had submitted information on the basis of the information relating to initial subscribers received from the Merchant Banker/Lead Manager to the GDRs. In these circumstances, it is submitted that Sundararajan could not be held guilty of submitting false information. 14. As regards the non-disclosure of related party transaction, it is submitted that Sundararajan had no knowledge about the significant influence of Gagan Rastogi in Asia Texx and that the transaction between Cals and Asia Texx was a related party transaction. It is submitted that when the said contract was executed, Sundararajan was only a non-Executive Director of Cals and thus he was never involved in the due diligence or negotiation of the proposal and finalization of the contract with Asia Texx. It is submitted that just because Sundararajan was a director of Cals, it could not be presumed that he was aware of the related party transaction between Cals and Asia Texx. It is submitted that the GDR process got over in the year 2007 and the agreement with Asia Texx was executed by Cals in the year 2009. Merely because Sundararajan had signed the agreement on behalf of Cals, knowledge of beneficial owners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n given by Sundararajan relating to the discrepancy in the resolution dated 30/10/2007 recorded in the minute book of Cals and the resolution dated 30/10/2007 certified by him is not worthy of acceptance because, assuming that there was lapse on part of the Company Secretary of Cals to record the said resolution in the minute book of Cals on 30/10/2007, then, Sundararajan would have got the error corrected in the subsequent Board meeting. However, in the meeting of BoD of Cals held on 19/1/2008, the minutes of BoD meeting dated 30/10/2007 as recorded in the minute book of Cals was approved. Very fact, that Sundararajan who was present in the BoD meeting dated 19/1/2008 did not take any steps to get the alleged error in the minutes of meeting dated 30/10/2007 rectified, clearly shows the mala fide intention on part of Sundararajan. 18. Prior to joining Cals, Sundararajan was Group CFO of the Spice Energy group. Pursuant to the resolution passed by the BoD of Cals on 23/7/2007, 4 nominees of Spice Energy group including Sundararajan were appointed as directors of Cals. As a result of inducting 4 nominees of the Spice Energy group, control of Cals stood vested in the Spice Energy gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan taken by Honor for subscribing to the GDRs of Cals, it does not lie in the mouth of Sundararajan to contend that he honestly believed that foreign investors other than Honor had subscribed the GDRs of Cals. In these circumstances, the finding recorded in the impugned order that Sundararajan concealed the information in relation to initial subscribers to the GDRs of Cals in response to the summons issued under Section 11C(3) of SEBI Act cannot be faulted. 21. Argument of Sundararajan that he was not aware that the transaction between Cals and Asia Texx was a related party transaction is without any merit because the agreement between Cals and Asia Texx was signed by Sundararajan as authorized representative of Cals on 5/2/2009. Deep Rastogi was involved in the affairs of Cals even before he became a director of Cals is evident from the e-mail of Goorha (promoter-director of Cals) dated 2/8/2007 and the minutes of BoD of Cals dated 12/12/2007. Moreover, Asia Texx was beneficially owned by Gagan Rastogi (son of Deep Rastogi) who was also one of the promoters of the Spice Energy group. In these circumstances, inference drawn in the impugned order that Sundararajan was aware ..... X X X X Extracts X X X X X X X X Extracts X X X X
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