Securities Appellate Tribunal
Prospect Capital Ltd. & Anr. Vs. Sebi & ... vs Sebi on 21 March, 2022
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved On: 15.12.2021
Date of Decision : 21.03.2022
Misc. Application No. 201 of 2020
And
Appeal No. 214 of 2020
Nithish Bangera
C/304, Aishwarya Enclave
Yashwantrao Tawde Marg,
Near Dahisar Bridge,
Dahisar (W),
Mumbai- 400 068 ...Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai- 400 051 ...Respondent
Mr. Nithish Bangera, PCS for the Appellant.
Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody,
Mr. Arnav Misra and Mr. Mayur Jaisingh, Advocates i/b K.
Ashar & Co. for the Respondent.
WITH
Appeal No. 286 of 2020
Sanjay Aggarwal
D-901, Usha Nagar,
Bhandup
Mumbai- 400 078 ...Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai- 400 051 ...Respondent
2
Ms. Aishwarya Shubhangi, Advocate i/b Triad Law Chambers
for the Appellant.
Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody,
Mr. Arnav Misra and Mr. Mayur Jaisingh, Advocates i/b K.
Ashar & Co. for the Respondent.
WITH
Appeal No. 351 of 2020
European American Investment Bank AG
Schottenring 18,
1010 Vienna, Austria ...Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai- 400 051 ...Respondent
Mr. Dharam Jumani, Advocate with Mr. Jenil Shah, Advocate
i/b Ganesh and Co. and Mr. Shoryendu Ray, Advocate i/b
Wadhwa Law Office for the Appellant.
Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody,
Mr. Arnav Misra and Mr. Mayur Jaisingh, Advocates i/b K.
Ashar & Co. for the Respondent.
WITH
Appeal No. 527 of 2021
Farmax India Limited
Survey No. 658,
Bowrampet Village,
Qutubullapur Mandal,
(Sub-Urban of Hyderabad),
Ranga Reddy, Hyderabad- 500 043 ...Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai- 400 051 ...Respondent
3
Mr. M.J. Bhatt, Advocate for the Appellant.
Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody,
Mr. Arnav Misra and Mr. Mayur Jaisingh, Advocates i/b K.
Ashar & Co. for the Respondent.
WITH
Appeal No. 528 of 2021
Mr. M. Srinivasa Reddy, M.D.
Farmax India Ltd.,
MIG 397, KPHB Colony,
Kukatpally,
Hyderabad- 500 072 ...Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai- 400 051 ...Respondent
Mr. M.J. Bhatt, Advocate for the Appellant.
Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody,
Mr. Arnav Misra and Mr. Mayur Jaisingh, Advocates i/b K.
Ashar & Co. for the Respondent.
AND
Appeal No. 632 of 2021
1. Prospect Capital Ltd.
23 Berkeley Square
London WIJ6HE
2. John Behar
Chief Executive- Prospect Capital Ltd.
23 Berkeley Square
London WIJ6HE ...Appellants
4
Versus
1. Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai- 400 051
2. Farmax India Limited
Survey No. 658,
Bowrampet Village,
Qutubullapur Mandal,
(Sub-Urban of Hyderabad),
Ranga Reddy, Hyderabad- 500 043
3. Mr. M. Srinivasa Reddy
MIG 397, KPHB Colony,
Kukatpally,
Hyderabad- 500 072
4. Arun Pachariya
J-04, Emirates Hills
Jhulnar Street-2,
Emirates Hills, Dubai,
United Arab Emirates
5. Vintage FZE
J-04, Emirates Hills
Jhulnar Street-2,
Emirates Hills, Dubai,
United Arab Emirates
6. Mr. Sanjay Aggarwal
D-901, Usha Nagar,
Bhandup,
Mumbai- 400 078
7. Mr. Mukesh Chauradiya
02 Adinath Nagar,
Opp. Rita Park Society
Girdharnagar Shalibaug
Ahmedabad- 380 004
8. Mr. Nithish Bangera
C/304, Aishwarya Enclave
Yashwantrao Tawade Marg,
Near Dahisar Bridge,
Dahisar (W),
Mumbai- 400 068
5
9. India Focus Cardinal Fund
C/o Cardinal Capital Partners,
Suite No. 501, St. James Court,
St. Dennis Street,
Port Louis,
Mauritius
10. Highblue Sky Emerging Market Fund
C/o Aurisse International Ltd,
2nd Floor, Wing A Cyber Tower,
Ebene Cyber City,
72201, Ebene, Mauritius
11. European American Investment Bank AG
Palais Esterhazy
Wallnerstrassee 4,
1010 Vienna, Austria
12. Cardinal Capital Partners
Suite 501, St. James Court
St. Dennis Street,
Port Louis, Mauritius ...Respondents
Ms. Ranjana Roy Gawai, Advocate with Ms. Prachi Golechha,
Advocate i/b RRG & Associates for the Appellant.
Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody,
Mr. Arnav Misra and Mr. Mayur Jaisingh, Advocates i/b K.
Ashar & Co. for the Respondent.
Order Reserved On: 03.02.2022
Date of Decision : 21.03.2022
Appeal No. 33 of 2022
Farmax India Limited ...Appellant
Survey No. 658,
Bowrampet Village,
Qutubullapur Mandal,
(Sub-Urban of Hyderabad),
Ranga Reddy, Hyderabad- 500 043
Versus
6
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai- 400 051 ...Respondent
Mr. M. J. Bhatt, Advocate for the Appellant.
Mr. Sumit Rai, Advocate with Mr. Mihir Mody, Mr. Arnav
Misra and Mr. Mayur Jaisingh, Advocates i/b. K. Ashar & Co.
for Respondent SEBI.
AND
Appeal No. 34 of 2022
Mr. M. Srinivasa Reddy, M.D.
Farmax India Ltd.,
MIG 397, KPHB Colony,
Kukatpally,
Hyderabad- 500 072 ...Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai- 400 051 ...Respondent
Mr. M. J. Bhatt, Advocate for the Appellant.
Mr. Sumit Rai, Advocate with Mr. Mihir Mody, Mr. Arnav
Misra and Mr. Mayur Jaisingh, Advocates i/b. K. Ashar & Co.
for Respondent SEBI.
CORAM: Justice Tarun Agarwala, Presiding Officer
Justice M. T. Joshi, Judicial Member
Per: Justice M. T. Joshi, Judicial Member
7
1. All the present appeals are arising out of the same issue of
Global Depository Receipts (hereinafter referred to as "GDRs")
by the appellant Farmax India Ltd. (hereinafter referred to as
"Farmax") in two tranches on June 29, 2010 and August 14,
2010 in the amount of US$ 71.91 million. According to
respondent SEBI, in fact issuing these GDRs and thereafter
converting those GDR by way of cancellation into equity shares
in the Indian market was nothing but a fraudulent scheme
hatched by the present appellants along with other co-noticees
i.e. Mr. Arun Panchariya, Vintage FZE (hereinafter referred to
as "Vintage), Mr. Mukesh Chauradiya and three other noticees
i.e. India Focus Cardinal Fund (hereinafter referred to as
"IFCF"), Highblue Sky Emerging Market Fund and Cardinal
Capital Partners. These other entities had not filed any appeal
against the order passed by the learned Whole Time Member
(hereinafter referred to as "WTM") of the Securities and
Exchange Board of India (hereinafter referred to as "SEBI")
dated July 14, 2020. On the same set of fact, two separate
independent orders are passed by the learned Adjudicating
Officer ("hereinafter referred to as "AO") of respondent SEBI
against appellant Farmax and the appellant Mr. M. Srinivasa
Reddy dated October 29, 2020 and November 12, 2020. Under
these orders appellant Farmax was directed to pay penalty of
8
Rs. 12 crore, while the appellant Mr. M. Srinivasa Reddy was
directed to pay Rs. 50 lakh. It is alleged that there is a violation
of the provisions of Section 12A(a), (b), (c) of the SEBI Act,
1992 (hereinafter referred to as "SEBI Act") read with
regulations 3(a), (b),(c),(d) and 4(1), (2)(f), (k), (r) of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market), Regulations, 2003 (hereinafter referred to as
"PFUTP Regulations).
2. The learned WTM directed the appellant Farmax to pursue
the measures to bring back the outstanding amount of US$
72.20 million. The appellant Mr. M. Srinivasa Reddy,
Managing Director was also directed to ensure the compliance
of this direction. The appellant Farmax was restrained from
accessing the securities market and further prohibited from
buying, selling or dealing in securities, directly or indirectly, in
any manner whatsoever or being associated with the securities
market in any manner, whatsoever, for a period of five years
from the date of the order. The appellant Mr. M. Srinivasa
Reddy was similarly restrained for a period of five years. The
appellant Sanjay Aggarwal was restrained in similar manner for
a period of two years from accessing the securities market. The
appellant Prospect Capital Ltd. and its Chief Executive
9
appellant John Behar were barred from rendering services in
connection with instruments as defined as securities in Section
2(h) of Securities Contracts (Regulations) Act, 1956 in the
Indian market or in any way dealing with them, directly or
indirectly, for a period of two years. The appellant Nithish
Bangera, was restrained from accessing the securities market in
any manner for a period of two years. Appellant European
American Investment Bank AG (hereinafter referred to as
"EURAM Bank") was warned to ensure that all its future
dealings in the Indian securities market be done strictly in
accordance with law. Different directions were issued to other
entities who had not appealed against the directions.
3. As can be seen from the impugned the orders the matter
concerns the same modus operandi applied in issue of GDRs by
different companies regarding which this Tribunal had already
passed many orders wherein similar orders were challenged by
the parties therein concerning different companies and different
entities.
4. So far as the present episode is concerned, according to
respondent SEBI the facts are as under:-
10
5. On June 29, 2010 and August 14, 2010 the GDRs were
issued by appellant Farmax. Immediately after issuing the
GDRs the appellant Farmax made corporate announcements to
Bombay Stock Exchange Limited ("BSE Limited") that the
company had successfully concluded placement of all GDRs.
The fact that there was a sole subscriber to the GDR was not
disclosed. The facts however revealed that Vintage - the wholly
owned entity of Arun Panchariya had solely subscribed to those
GDR. For that purpose, Vintage had availed a loan from the
appellant EURAM Bank vide a loan agreement dated May 05,
2010. Not only this, in the loan agreement it was agreed that
all the GDR would be transferred to the account of appellant
Farmax to be opened with the bank. The appellant Farmax had
opened the account with EURAM Bank wherein the GDR
proceeds were agreed to be deposited. Further, appellant
Farmax had executed a pledge agreement with appellant
EURAM Bank signed by appellant M. Srinivasa Reddy-
Managing Director. Under this agreement appellant Farmax
had agreed that the entire proceeds shall be pledged to secure
the loan granted by EURAM Bank to Vintage owned by Arun
Panchariya. The loan was sanctioned by appellant EURAM
Bank to Vintage solely for the purpose of subscribing to the
GDR and in turn the GDR proceeds received by the appellant
11
Farmax was pledged for securing the loan advance to Vintage.
Thus GDR issue was managed and structured by Arun
Panchariya through loan agreement signed between appellant
EURAM Bank and Vintage and pledge agreement signed
between EURAM Bank and appellant Farmax. The documents
shows that even before issuance of GDR the appellant Farmax
had pledged GDR proceeds to secure the rights of appellant
EURAM Bank against the loan being advanced to Vintage. In
the circumstances, though the appellant Farmax had issued
GDR for raising capital for it but the same did not remain at its
disposal as the same was kept as collateral with Vintage even
prior to the issuance of the same. Thereafter, Vintage repaid
part of the loan in installments and equal/ less amount only was
thereafter released by the appellant EURAM Bank from the
appellant Farmax account to the appellant Farmax India / it's
subsidiaries UAE account on the same day. It would thus show
that the GDR proceeds were not at the disposal of appellant
Farmax. Thus, the transaction effectively was to finance the
purchase of its own GDR as the GDR proceeds were deposited
as a collateral for the loan extended by EURAM Bank to
Vintage. Upon making partial repayment by Vintage to the
EURAM Bank as detailed in the order, the funds were
transferred in that proportion, to the various entities i.e. overseas
12
subsidiaries of appellant Farmax. However, this diversion of
funds has caused loss to the appellant Farmax to the extent of
US$ 15.60 million. The GDRs were thereafter converted into
equity shares and sold in the Indian stock market. Cancellation
of GDR started from August 09, 2010 and continued till
December 04, 2010. Vintage transferred 12,58,000 GDRs to
India Focus Cardinal Fund and 3,85,865 GDRs to Clariden Leu
AG. The depository to the GDR was the Bank of New York
Mellon. Upon sale of equity shares converting the GDRs in
Indian market, said bank issued Termination Notice to appellant
Farmax on March 16, 2015. Shares worth Rs. 53.48 crore
were sold pre and post termination of GDR scheme in Indian
securities market. Vintage however had defaulted in making
repayment of loan to the extent of US$ 56.60 million. Thus,
share sold by two funds i.e. India Focus Cardinal Fund and
Highblue Sky Emerging Market Fund were the shares which
were issued without proper consideration i.e. even though some
of the GDR proceeds were appropriated by EURAM Bank upon
default of payment by Vintage to the above extent. The role of
each of the entities including the present appellants is detailed in
the impugned.
13
6. All the contesting noticees as well as the appellant denied
the allegations or blamed noticee no. 3 Mr. Arun Panchariya for
the episode.
7. The learned WTM as well as the AO however did not
agree with the defense and therefore the impugned orders came
to be passed.
8. We have heard the Mr. Nithish Bangera, PCS,
Ms. Aishwarya Shubhang, Mr. Dharam Jumani, Mr. M.J. Bhatt,
Ms. Ranjana Roy Gawai, learned counsel for the appellants and
Mr. Shyam Mehta, the learned senior counsel and Mr. Sumit
Rai, the learned counsel for the respondent.
9. In nutshell the allegations qua each of the noticees is that
while appellant Farmax and its Managing Director, appellant
Mr. Srinivasa Reddy had raised the amount under the GDR as
detailed (supra), they in connivance with other relevant parties
like noticee no. 3 Mr. Arun Panchariya, noticee no. 4 Vintage
had pledged the GDR proceeds with appellant EURAM bank as
a security for the loan advanced to appellant Vintage. Appellant
Sanjay Aggarwal and his sole employee, appellant Nithish
Bangera, Managing Director and employee respectively of La
14
Richesse Advisors Private Limited ("hereinafter referred to as
"La Richesse") who were the Indian Advisor to appellant
Farmax to GDR issues had connection with Mr. Arun
Panchariya and with the connivance they helped appellant
Farmax in issuing the GDRs. The appellant Prospect Capital
Ltd. was the Lead Manager to the said issue of GDR. The
appellant no. 2 John Behar in this appeal of Prospect Capital
Ltd. is the Chief Executive of the said entity. While appellant
Vintage defaulted on part of repayment of loan, appellant
EURAM bank released part of the pledged security from the
account of appellant Farmax to the extent of US$ 56.57 million.
Some of the GDRs subscribed by Vintage were transferred by it
to original noticee no. 10 India Focus Cardinal Fund and noticee
no. 11 Highblue Sky Emerging Market Fund. These two
entities also were connected to noticee Arun Panchariya. They
had converted the underlying equity shares and sold them into
the Indian securities market. Ultimately, the GDR facility was
terminated by bank of New York w.e.f June 16, 2015. After
this termination bank of New York sold remaining underlying
security i.e. 9,61,00,000 shares of appellant Farmax in Indian
market. It is alleged that all rest of the noticees except appellant
Farmax and its Managing Director Mr. Srinivasa Reddy were
connected to noticee no. 3 Arun Panchariya in one way or the
15
other and retail investors in the securities market as well as
appellant Farmax the Company suffered from the same. This
takes to consider the cases of the entities who had filed appeal
before us.
Appeals of Farmax India Limited and Mr. M.
Srinivasa Reddy, M.D.
10. The appellant Mr. Srinivasa Reddy submitted that he had
signed blank documents and handed over them to appellant
Sanjay Aggarwal and another noticee no. 6 Mr. Mukesh
Chauradiya for the purposes of GDR issue. It was also claimed
that his signatures were forged. The learned WTM, therefore,
noted that contradictory stands were taken by this appellant.
The resolution passed by Farmax dated January 30, 2010 would
show that it has authorized the use of the funds in the bank
account as a security in connection with loans if any. The
learned WTM, therefore, concluded that the proceeds of the
GDR could not have been used for security in connection with
any loan and in fact there was no loan obtained by Farmax from
appellant EURAM Bank and, therefore, the very Board
Resolution according to the learned WTM would show that
these appellants were very well aware of the transactions to
follow. These appellants have submitted that when the funds
did not reach appellant Farmax they made efforts to proceed
16
against appellant EURAM Bank as well as First Information
Report ("FIR") was filed concerning the said issue. The learned
WTM has observed that the said FIR was filed on October 29,
2013 after taking legal opinion in June 2013 while the entire
issue had occurred in the year 2010. The silence of these
entities for three years along with the very existence of the
Board Resolution as detailed (supra) made the learned WTM to
disbelieve the case of these appellants that they made efforts to
bring back the amount. In our view, the very stand of the
appellant Mr. Srinivasa Reddy that he was credulous enough to
sign blank documents; further he-the Managing Director of
Farmax being instrumental in obtaining a Board Resolution as
detailed (supra), the defense taken by him and Farmax is merely
an eyewash. Millions of US$ were involved in the transaction.
Their silence for a period of three years would clearly show the
involvement of these appellants in the entire episode. The
appeals filed by these appellants therefore fail.
11. The Learned AO while imposing the penalty has taken
into consideration the extent of the amount which was adjusted
by EURAM Bank from the account of appellant Farmax to the
extent Vintage had defaulted in making the payment. The AO
vide order dated order dated October 29, 2020 had imposed a
17
penalty of Rs. 12 crore on appellant Farmax. It should however
be noted that appellant Farmax on its own has not indulged into
fraudulent activity but the activities is imputed to it as the Board
of Directors and the Managing Director had indulged into the
same. Since the penalty would be in fact on the shareholders of
the company in our view, imposition of penalty of Rs. 12 crore
would be excessive. In the circumstances, the Appeal No. 527
of 2021 challenging the order of the AO needs to be partly
allowed and the penalty needs to be reduced from Rs. 12 crore
to Rs. 5 crore.
Sanjay Aggarwal
And
Nithish Bangera
12. It was alleged in the show cause notice that appellant
Sanjay Aggarwal and appellant Nithish Bangera were
responsible for creating the entire infrastructure for Farmax and
Arun Panchariya to bring out the fraudulent GDR issue. They
had provided formats for Board Resolution filing with the stock
exchanges. They also helped in transferring the funds from
account of Farmax with appellant EURAM Bank to Farmax
subsidiary in UAE and from that subsidiary to other accounts,
etc. Thus, according to the show cause notice they acted as
single point of contact in India between these entities. Draft of
the disclosure to be made to the stock exchanges, seeking copies
18
of Memorandum of Association etc. of appellant Farmax,
obtaining photos of directors etc. were the activities those were
carried by these appellants. The appellant Nithish Bangera was
also a recipient of the emails in connection with the above
activities.
The appellant Sanjay Aggarwal had submitted that the draft
Resolution provided by him did not contain the term of pledging
of the bank account where GDR proceeds were to be kept. He
however, did not place the copy of the email sent by him to the
appellant Farmax in this regard. The appellant Sanjay
Aggarwal had sent email seeking blank TT slips with signatures
of the concerned and directed that the same be forwarded to
noticee no. 6 Mr. Mukesh Chauradiya, the entity connected with
noticee Arun Panchariya. The learned WTM observed that an
advisor to a company would not seek blank transfer slips from
the issuer company and this fact alone would have raised
reasonable apprehension of wrongdoing in the mind of appellant
Sanjay Aggarwal, if he was not involved in any fraudulent
scheme. It was further observed that as a reasonable person and
most definitely as 'advisor' to the issue this should have been a
red flag for appellant Sanjay Aggarwal. In all these
circumstances the learned WTM concluded that appellant
Sanjay Aggarwal who is a chartered accountant by profession
19
and was working as advisor was definitely involved in the entire
scheme relating to the GDR issue.
13. Appellant Sanjay Aggarwal submitted as under :-
He was a chartered accountant and had a record of working as
employee of reputed firms like Price Waterhouse Cooper, Ernst
& Young, Dubai International Financial Exchange, Jefferies,
and other reputed corporations. The findings in the impugned
order are not supported by any evidence or material on record.
These are merely conjecture and surmises. The role of this
appellant was merely limited to assisting and coordinating with
counsels, depository bank, listing agents and opening of
ESCROW accounts etc. He was not aware of any loan
agreement, pledge agreement entered into by appellant Farmax
on its own terms. There is nothing on record to show that he at
any time consulted noticee Arun Panchariya who devised and
structured the fraudulent scheme. He was merely carrying a
single point coordination between the related entities like
merchant bankers and the appellant Farmax. It was submitted
that the impugned order (paragraph 52) itself substantiate that
the email exchanged between the appellant and Farmax mainly
deals with certain documents.
20
14. Upon hearing both the sides however the very fact that the
appellant provided a draft of disclosure to be made by the
Farmax to the exchanges that the issue of the GDR was
successfully subscribed; that he has forwarded the draft
Resolution to be passed by the appellant Farmax which
culminated in authorizing the pledge of GDR proceeds; seeking
of signatures on blank documents from appellant Farmax would
clearly shows that the appellant did not act simply as a bonafide
coordinator between the company and the Lead Manager etc.
The appeal of the appellant Sanjay Aggarwal, therefore fails.
15. As regards the appellant Nithish Bangera, he was sole
employee of La Richesse owned by appellant Sanjay Aggarwal.
The learned WTM noted that the email exchanged between
appellant Farmax and this appellant are in the nature of raising
an invoice regarding write up on the directors, forwarding the
invoice from lead manage, seeking copies of certain documents
related to the directors and seeking copies of memorandum of
association, article of association etc. According to the
appellant he ceased to be an employee of La Richesse w.e.f
March 03, 2010. He had submitted a letter to that effect issued
by La Richesse. The WTM however noted that even after this
purported resignation from La Richesse, he had sent an email
21
dated June 28, 2010 to Farmax seeking copies of it's
Memorundum of Association etc. and further appellant Sanjay
Aggarwal sent an email on this date that this appellant Nithish
Bangera would be travelling to Hyderabad to collect certain
documents from the Officials of Farmax. The WTM, therefore,
observed that had the appellant Nithish Bangera ceased to be
employee of La Richesse it would not have been possible for
him to travel to Hyderabad to collect documents on behalf of La
Richesse. Therefore, the WTM concluded that this appellant
Nithish Bangera continued to work for La Richesse. The WTM
further observed that the very fact that this appellant was also
recipient of earlier emails wherein appellant Sanjay Aggarwal
had directed Farmax to forward blank signed transfer slips to
noticee no. 6 Mr. Mukesh Chauradiya who was connected to
noticee Arun Panchariya, is a proof of involvement of this
appellant in the fraudulent scheme.
16. As regard the email dated June 28, 2010, after he ceased to
be the employee of appellant Sanjay Aggarwal, he submitted
that in fact his email was hacked on June 28, 2010 and therefore
merely on the strength of said email it cannot be concluded that
the appellant continued to be in service with appellant Sanjay
Aggarwal as on June 28, 2010. The learned WTM however
22
observed that the appellant had not produced any evidence to
support this claim of hacking.
The appellant also raised a plea of a mistaken identity but did
not dispute that he was an employee of Sanjay Aggrawal.
Therefore this claim was rejected by the learned WTM. The
manner of seeking detailed documents from SEBI this appellant
was also considered a material to hold him guilty.
17. The learned WTM in all these circumstances concluded
that it gives rise to a reasonable inference that this appellant
Nithish Bangera played a role in the fraudulent scheme
perpetrated by Farmax and other entities.
18. The learned counsel for the appellant submitted that
respondent SEBI did not provide inspection of original email
which is in the eye of the storm. It also did not show original
email from computer system. CPC of the email was not
provided to him. His request to cross-examine appellant
Shrinivasa Reddy, was not accepted by respondent SEBI,
though this Tribunal vide order dated December 03, 2019 in
Appeal No. 485 of 2019 had directed for the same. In the said
order this Tribunal had however noted the submissions of the
23
learned counsel for the respondent SEBI that all the grievances
of the appellant can be made before the WTM.
19. It was submitted by the learned counsel for the respondent
SEBI that the appellant himself has cancelled the cross-
examination of appellant Mr. Srinivasa Reddy, Managing
Director of Farmax. This statement according to the appellant
is a false statement. It was further pointed out that the appellant
Sanjay Aggarwal had accepted the fact that the present appellant
has resigned from his job w.e.f. March 31, 2010 and the GDR
issue was open in August 2010.
Upon hearing both sides, in our view the impugned order of the
WTM passed against the appellant in this regard cannot be
sustained for the following reasons.
20. The WTM drawn the inference of involvement of the
present appellant in the fraudulent scheme issue of GDR on the
ground that the copies of email sent by appellant Sanjay
Aggarwal were also forwarded to this appellant which included
seeking signature on certain blank documents etc. Other work
of the appellant like raising invoice, correspondence for write
up on directors etc. was the insignificant and routine activity.
The appellant was merely an employee of appellant Sanjay
24
Aggarwal and the observation made by the learned WTM as
regard the appellant Sanjay Aggarwal that he was an "advisor"
and responsible chartered accountant would not be applicable in
this case. One email forwarded to him seeking blank TT slips
from the Farmax would not lead to believe that this appellant
was aware of the entire fraudulent scheme of GDR issue. The
evidence in this regard is lacking. The appeal therefore
deserves to be allowed as regard the present appellant.
Prospect Capital Ltd. and John Behar
21. While the appellant Prospect Capital Ltd. has acted as a
Lead Manager to the GDR issue, the appellant no. 2 Mr. John
Behar, was the Chief Executive of the appellant Prospect
Capital Ltd. According to SEBI both these appellants were
aware that GDR issue was subscribed by only one entity i.e.
Vintage and that deliberately an incorrect list of investors was
provided by them to Farmax vide letter dated June 28, 2010 as a
part of the fraudulent scheme. The appellant Prospect Capital
Ltd. has made submissions that in fact the copy of this letter was
not provided by SEBI to it. SEBI however replied that the copy
of the said letter was never asked for by appellant Prospect
Capital Ltd. or John Behar. It is the case of these appellants that
in normal course of business as a Lead Manager the appellants
25
had merely provided the services. The imputation of knowledge
regarding the fraudulent activity either of noticee Arun
Panchariya, Farmax or others merely on the basis of the so
called letter, copy of which was never provided/ supplied to the
appellant would be wrong. Additionally, it was submitted that
SEBI has no jurisdiction qua both the appellants as they are
based in United Kingdom ("UK") and beyond the jurisdiction of
SEBI.
22. As regard the first issue i.e. as to whether the appellants
had played part in the fraudulent scheme of issuing GDR with
an ulterior motive it is to be seen that Prospect Capital Ltd. was
the Lead Manager to the GDR issue. Beside this, it is an
admitted fact that appellant John Behar had connection with
another noticee Arun Panchariya, who had structured the
scheme. During the period August 30, 2006 to September 29,
2011 the appellant John Behar was a Director of Pan Asia
Advisors Ltd. He was also Director of Pan Asia Advisors Ltd.
from April 28, 2006 to April 01, 2008. Both these entities are
of noticee Arun Panchariya.
23. The role of the Lead Manager has been summarized by the
Supreme Court of India in the case of SEBI vs Pan Asia
26
Advisors Ltd. and Anr. (2015) 14 SCC 71. The said case had
also arisen out of the similar GDR issue made in a fraudulent
manner. In paragraph no. 99 and 100 it was pointed as under:-
"99. For the purpose of ascertaining the role
played by the respondents as Lead Managers,
it will be worthwhile to refer to the statement
contained in the counter-affidavit filed on
behalf of the first respondent, wherein in para
E(ii) the functions of the first respondent in
relation to any GDR has been mentioned as
under:
"The functions of the first respondent in
relation to any GDRs include:
(a) conducting due diligence in collecting
and evaluating all possible information which
may have a bearing on the issue for the
purpose of the listing of GDR issue aboard
'outside of territory and jurisdiction of India';
(b) assessing the market for the purpose
of the issue and marketing the issue;
(c) obtaining confirmation of acceptance
of subscription acceptance from the initial
investors to the GDR issues;
(e) receipt of confirmation of
subscription monies received in the requisite
company's escrow account opened/
maintained by the company with the escrow
account holding bank;
(f) receipt of depository's (depository's
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 GDRs issue;
(g) ensuring that the issuer company
complies with applicable non-Indian legal
formalities in respect of the same."
"100. It is true that if in the discharge of its
functions as Lead Managers, the respondents
had confined to their activities to any of the
procedures set out in the said paragraph, it
will be for the respondents to demonstrate
27
before the appellant and come out unscathed.
However, if under the guise of performing
those functions as Lead Managers, if as
pointed out by the appellant, the respondents
had indulged in any activities which were
contrary to the provisions of the SEBI Act,
1992 read along with the SCR Act, 1956,
which provided scope for proceeding against
them for having acted against the interests of
the Indian Investors in securities and the
security market or were involved in collusion
with any alleged act of the issuing company in
violation of the statutory prescriptions of the
SEBI Act, 1992, the SCR Act, 1956, the 2000
Regulations read along with the 1993
Scheme, it is the bounden duty of the
respondents to demonstrate before the
appellant and now before the Tribunal that no
such involvement by the respondents is made
out in order to proceed against them as has
been decided and orders passed by the
appellant in its order dated 20.06.2013."
24. It could thus be seen that Lead Manager is not merely a
post office between the company issuing GDR and the investors
investing in the same. The Lead Manager has to conduct due
diligence in collecting and evaluating all information. It has to
obtain confirmation of acceptance of subscription from the
initial investors to the GDR issue etc. The Lead Manager has to
show that it has carried its activity as per the procedure as set
out in paragraph no. 99 as quoted above.
25. On the other hand, even if we ignore the alleged fact of
issuing a false letter as alleged by SEBI, the very fact that the
28
appellants failed to show that they had confined their activity
only to the procedure correctly, would lead us to believe that
they were involved in the clandestine scheme. Further the fact
that appellant no. 2 John Behar is closely connected to another
noticee Arun Panchariya is an added factor in this direction. It
was further submitted by SEBI that ESCROW agreement dated
May 05, 2010 entered into between Farmax, EURAM Bank and
Prospect Capital Ltd. noted that Prospect Capital Ltd. had
agreed with Farmax "to procure investors for the subscription of
GDRs". However instead of procuring investors these
appellants procured sole investor i.e Vintage which is an entity
of Arun Panchariya connected both the appellants. Therefore
our view, on facts, the order of SEBI as regards these appellants
cannot be faulted with.
26. As regard the issue of jurisdiction of SEBI concerning the
appellants, we find the answer in the very same judgement of
Supreme Court of India in the case of SEBI vs. Pan Asia
Advisors Ltd. (Supra). Pan Asia Advisors Ltd. also had
challenged the jurisdiction of SEBI on the ground that it was an
entity based in United Kingdom (UK). The majority members
of Securities Appellate Tribunal had accepted the said challenge
and, therefore, SEBI had challenged the said decision before the
29
Supreme Court. Therefore, the Supreme Court was required to
mainly deal with the issue of jurisdiction of SEBI in such
matters.
In paragraph no. 30.5 the Supreme Court has noted the
challenge of Pan Asia Advisors Ltd. and Arun Panchariya that
they are the authorities which were subject to the control of
Financial Conduct Authority (UK) and SEBI has no jurisdiction
over them. The Supreme Court considered the rival
submissions and various statutory provisions relating to the
issue of GDR. In paragraph no. 80 following observations were
made:-
"80. Having thus noted the statutory
prescription relating to the issuance of GDR
based on the underlying shares of the issuing
company, the manner in which such GDRs
were being traded in the global market with
the support and assistance of Lead Manager,
the scope of construing GDRs as "securities"
falling under the definition of "securities" as
defined under Section 2(h) of the SCR Act,
1956 required to be noted. The extent of duties
and powers vested with SEBI, namely, the
protection of the interest of investors in
securities and securities market and also the
prohibitive measures as well as penal action
that can be taken by SEBI whenever it comes
across any fraud committed by any person
relating to the interest of the investors in
securities and securities market are very
wide."
30
27. The issue was further dealt with vide paragraph no. 83 as
under:-
"83. On the other hand according to the
respondents, since cradle to grave GDRs are
dealt with outside country in the global market,
SEBI lacks jurisdiction in proceeding against
the respondents. When we consider the above
respective submissions, we are convinced that
the stand of the appellant that having regard to
the statutory prescription under the SEBI Act,
1992, the SCR Act, 1956, the 2000
Regulations, the 1993 Scheme as well as the
2003 Regulations is well justified. Having
regard to the nature of the allegations against
the respondents, it possesses every jurisdiction
to proceed against the respondents...............
28. Further in paragraph no. 107 of the Pan Asia Advisors Ltd.
the Supreme Court quoted its decision in the case of Republic of
Italy vs. Union of India (2013) 4 SCC 721 and finally declared
as under:-
"107. ....We fully concur with the said view
expressed by the learned Judge and applying
the said principle, even if the law applies to
persons who are not corporeally present within
the territory of India, even if they are citizens
abroad when such persons commit acts which
affects the legitimate interest of this country
which would include such legitimate interest in
the case on hand of the investors in India at the
stock market, it must be held that the appellant
would be fully empowered to proceed against
such persons as provided under the provisions
of the SEBI Act, 1992."
29. In view of the above facts, the appeal of Prospect Capital
Ltd. as well as John Behar (Appeal No. 632 of 2021) fails.
31
European American Investment Bank AG
30. The learned WTM had issued warning to the appellant
vide the impugned order to ensure that all its future dealings in
the Indian Securities Market be done strictly in accordance with
law.
The WTM recorded the following facts to come to the
conclusion that the present appellant has also violated the
relevant provisions of PFUTP Regulations, 2003.
Though loan to subscribe to the GDR was granted to Vintage,
the present appellant did not ask for any collateral security from
Vintage. However, before any GDR proceeds could be received
by Farmax, vide the pledge agreement the future GDR proceeds
of Farmax were accepted by this appellant EURAM Bank as a
security for the loan made to Vintage. The learned WTM
observed that the structure of the transaction thus speak for
volume in itself. It was also found that the present appellant
EURAM Bank was found involved in the various other GDR
issues of the Indian Companies investigated by SEBI. Further,
the connection of the appellant EURAM Bank with noticee
Arun Panchariya was also noted. It was found that they had a
joint venture in the year 2009 i.e. EURAM Bank Asia Limited.
Thus, the learned WTM inferred that these two entities knew
32
each other well enough to trust each other to pursue common
business interests. Further, when Farmax had made some
enquiry with the EURAM Bank vide email dated November 25,
2010 this appellant - it's banker, instead of answering the said
query had replied vide an email, that Farmax should contact
noticee Arun Panchariya for any bank related query. The
learned WTM noticed that this appellant has not provided any
explanation for this email. In all these facts the WTM
concluded that the present appellant EURAM Bank was well
aware and also part of the fraudulent scheme. As appellant
EURAM Bank was registered as Foreign Investment Institute
(FII) with SEBI during November 28, 2008 to November 20,
2011 it had only client i.e., noticee no. 10 India Focus Cardinal
Fund. In the circumstance, the above warning came to be issued.
31. The learned counsel for the appellant submitted that in fact
the present appellant was earlier proceeded against by the
respondent SEBI in relation to the GDR issued by six Indian
companies. The then learned WTM had passed order in the said
proceeding. The appellant came to be discharged by the WTM
vide order dated September 05, 2017 and even the appellant's
exercise of providing full information was commended by the
then learned WTM. It was therefore vehemently submitted that
33
the principle of issue estoppel would arise in the present case.
Therefore, relying on the various judgements regarding the res-
judicata and the principle of issue estoppel, the appellant wanted
that the appeal be allowed.
32. On merit of the case, it was submitted that the appellant as
well as noticee Arun Panchariya had been thoroughly
investigated by Austrian authorities and it was found that the act
of the present appellant providing finances for subscription of
various GDRs issued by various companies in India is according
to law. Not only this, the issue of having the joint venture
between the appellant and Arun Panchariya in Dubai has been
examined by the Dubai Financial Services Authority (DFSA)
which concluded that there was no tactical understanding or
relationship between this appellant and Arun Panchariya. The
appellant was thus given a clean cheat by this authority also.
The appellant had nothing to do with fraudulent activity, if any,
in subscription of GDR or in issue of the same. There is
nothing uncommon in seeking a collateral security from a third
party instead of the borrower. Hence it wanted the order be set
aside. Further defense of lack of jurisdiction of SEBI was
taken.
34
33. On the issue of jurisdiction of SEBI over this Austrian
entity, the learned counsel for the respondent SEBI however
submitted that since the appellant was registered as FII in India,
the impugned order i.e. the warning is also issued regarding the
activities in India and, therefore, SEBI has every jurisdiction to
pass such order.
34. Before dealing with the arguments the alleged fraudulent
activity of the appellant and the question as to whether principle
of issue estoppel would arise it would be fruitful to first deal
with the issue of jurisdiction. As already observed in the case of
appellant Prospect Capital Ltd. (Supra) we find that the
Supreme Court of India in the case of SEBI vs Pan Asia
(Supra) had already finally concluded that respondent SEBI has
jurisdiction to deal with the foreign entities in case their
activities causes an effect in the Indian securities market.
Therefore respondent SEBI has every jurisdiction to pass the
impugned order.
35. As regard the principle of issue estoppel, we have gone
through the order passed by another WTM dated September 05,
2017 in the case of issue of GDRs by six other companies. We
find that, in that case the investigation was not directed to probe
35
the role of the present appellant of providing finances for GDR
subscription by accepting pledge of the GDR proceedings from
the respective companies. The show cause notice and the
interim direction dated September 21, 2011 in that case was
dealing with "EURAM American Investment Bank AG
registered as a Foreign Institutional Investor (EURAM-FII)".
The role of EURAM-FII was highlighted as foreign investment
institute which had another entity (which is also another noticee
in the present case) being it's sole sub-account holder. In that
proceeding EURAM-FII had replied to the show cause notice
and defended that it cannot be held liable for any breach by
India Focus Cardinal Fund of the PFUTP Regulations. The
allegations therein against the FII were that it has violated
regulation 13(A)(1) of the FII regulations read with certain
clauses of Code of Conduct specified under the said regulations.
The learned WTM in that order noted that no specific adverse
inference was drawn against the EURAM-FII in the show cause
notice itself. Therefore, EURAM-FII was exonerated in the said
case. While exonerating the said entity the learned WTM had
made a remark that said EURAM-FII as well as the present
appellant EURAM Bank (not a party in that proceeding) have
fully cooperated with the investigation conducted by SEBI.
36
36. This comment by the learned WTM commending the
present appellant is taken as an issue estoppel by the appellant
in the present case. The entire reading of the order of the
learned WTM in that case would show that the EURAM-FII's
role as a foreign investment institute was investigated and
examined by respondent SEBI. Its role as a banker providing
finances to subscribers to the GDR and accepting collateral of
the GDR proceeds from the respective companies was not
examined. The principle of issue estoppel therefore would not
at all be applicable in the present case.
As regard the fact of the case, it is an admitted fact the
appellant had advanced loan to Vintage for subscribing to the
GDR of the Farmax as a sole subscriber. The Vintage is owned
by noticee Arun Panchariya. Present appellant had joint venture
with Arun Panchariya as detailed supra. The appellant did not
explain as to why no collateral security could be obtained from
Vintage or Arun Panchariya. However, the GDR proceeds to be
received in future were accepted as a pledge by EURAM Bank.
Thus, it was nothing but a case of making two entries in two
accounts i.e. one in the account of Vintage of granting loan and
another in the account of Farmax of receiving the GDR
proceeds and holding the same as a security for the loan
advance to Vintage. In the process, appellant EURAM had
37
earned interest and the loan remained fully secured by the GDR
proceeds. It would be naive to believe that EURAM Bank did
not know the purpose for which the GDRs are issued and
whether the pledging of the GDR proceeds for a stranger could
be an object or purpose of issuing GDR.
37. The learned counsel for the appellant relying on the case
of Dilip S. Pendse vs SEBI Appeal No. 80 of 2009 decided on
November 19, 2009 submited that the preponderance of
probability to prove the charge of fraud is higher than the
regular one. Considering the status of the appellant as an
International Bank; that it was registered as a foreign investment
institute in India, having connection with the noticee Arun
Panchariya, in our view the above test is satisfied in the present
case.
38. In the result, the present appeal also fails.
39. Hence the following order:
ORDER
Appeal No. 214 of 2020 filed by Nithish Bangera is hereby allowed without any order as to costs. The order of learned WTM as regard Nithish Bangera is hereby set aside. Misc. Application is accordingly disposed of. 38
Appeal No 527 of 2021 is hereby partly allowed without any order as to costs. The penalty imposed by the AO of Rs. 12 crore is hereby reduced to Rs. 5 crore.
Appeal Nos. 33 of 2022, 34 of 2022, 286 of 2020, 632 of 2021, 351 of 2020 and 528 of 2021 are dismissed without any orders as to costs.
40. This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Certified copy of this order is also available from the Registry on payment of usual charges.
Justice Tarun Agarwala Presiding Officer Justice M. T. Joshi RAJALA Digitally by signed Judicial Member 21.03.2022 KSHMI RAJALAKSHMI H NAIR PK Date: 2022.03.28 H NAIR 09:58:19 +05'30'