Securities Appellate Tribunal
Arun Panchariya vs Sebi on 29 November, 2023
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date of Hearing : 17.05.2023
Date of Decision : 29.11.2023
Misc. Application No. 1306 of 2021
And
Misc. Application No. 313 of 2022
And
Appeal No. 745 of 2021
Arun Panchariya
J 04 Emirates Hills,
Jhulnar Street - 2,
Dubai - United Arab Emirates. ..... Appellant
Versus
Securities & Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai - 400 051. ... Respondent
Mr. Sandeep Wadhawan, Advocate with Mr. Suvir Tondon,
Advocate for the Appellant.
Mr. Sumit Rai, Advocate with Ms. Nidhi Singh, Ms. Deepti Mohan,
Ms. Hubab Sayed, Mr. Raghav Taneja, Advocates i/b Vidhii Partners
for the Respondent.
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CORAM : Justice Tarun Agarwala, Presiding Officer
Ms. Meera Swarup, Technical Member
Per : Justice Tarun Agarwala, Presiding Officer
1.The present appeal has been filed against the order dated October 29, 2020 passed by the Adjudicating Officer (hereinafter referred to as 'AO') of Securities and Exchange Board of India (hereinafter referred to as 'SEBI') imposing a penalty of Rs. 25 crore under Section 15HA of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'SEBI Act') for violation of Section 12A of the SEBI Act read with Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as 'PFUTP Regulations').
2. The facts leading to the filing of the present appeal is, that the board of directors of the company known as Winsome Yarns Ltd. passed a resolution on September 3, 2010 for opening a bank account with European American Investment Bank AG (hereinafter referred to as 'EURAM Bank') for depositing the GDR proceeds. By the said resolution, the managing director was also authorised to sign and 3 execute an agreement as may be required by the bank and take such steps from time to time on behalf of the company. The resolution further resolved to use the funds so deposited in the aforesaid bank account as security in connection with loan, if any, as well as to enter into any escrow agreement or similar arrangements if and when so required.
3. The resolution approved by the board of directors resolved that a bank account would be opened with EURAM Bank for the purpose of receiving the subscription money in respect of GDR issue. Further, Mr. Manish Bagrodia, managing director of the company was authorised to sign and execute an agreement as may be required by the bank and take such steps from time to time on behalf of the Company. The resolution further resolved to use the funds deposited in the aforesaid bank account as security in connection with the loan, if any as well as to enter into any escrow account or similar arrangement if and when so required.
4. Based on the aforesaid resolution, the Company issued 1.99 million GDRs for USD 13.24 million dated March 29, 2011. The aforesaid GDR was subscribed by one entity, namely, Vintage FZE 4 (hereinafter referred to as 'Vintage') and a corporate announcement was made by the company that the entire issue was subscribed.
5. SEBI conducted an investigation pertaining to the issue of GDR by the Company. Based on the investigation, a show cause notice dated September 11, 2019 was issued to the company, its directors and other entities to show cause as to why suitable directions under Section 11 and 11B should not be issued for violation of Section 12A(a), (b), (c) of the SEBI Act read with Regulation 3(a), (b), (c), (d) and 4(1), 4(2)(f), (k), (r) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as 'PFUTP Regulations'), Section 21 of the Securities Contracts (Regulations) Act, 1956 (hereinafter referred to as the 'SCR Act') read with Clauses 32, 36(7) and 50 of the Listing Agreement and Section 23E of the SCR Act.
6. The show cause notice alleged that pursuant to the resolution dated September 3, 2010 not only a bank account was opened with EURAM Bank but the managing director executed a pledge agreement dated March 22, 2011 on behalf of the company based on which a loan agreement dated March 22, 2011 was executed between 5 Vintage and EURAM Bank in which the proceeds of the GDR was to be kept as security with EURAM Bank. The show cause notice further alleged that the pledge agreement and the loan agreement was not disclosed to the stock exchange and, consequently, the investors and shareholders were kept in the dark. The show cause notice further alleged that based on the pledge agreement and the loan agreement EURAM Bank advanced USD 13.24 million to Vintage which amount was utilised by Vintage to subscribe to the entire issue. The GDR proceeds were pledged as security till such time the loan was repaid by Vintage. It was also alleged that the fact that Vintage was the sole subscriber was not intimated to the stock exchange and to the Indian investors and, accordingly, the company and its directors were charged with violation of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations.
7. The AO after considering the evidence on record found that the entire scheme of using the GDR proceeds to fund a subscriber to the GDR issue was a fraudulent scheme and violative of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations. The AO found that the GDR was subscribed by one entity, namely, Vintage and not by six entities as disclosed by the company vide its 6 letter dated July 6, 2015. The AO further found that on account of the pledge created by the company with EURAM Bank the funds were not made available at the company's disposal and the same became available in tranches as and when the loan amount was repaid by Vintage. Further, the loan agreement was not disclosed to the stock exchange and to the Indian investors. Further, the disclosure made by the company to the stock exchange that the GDR issue was fully subscribed was misleading as the investors were not informed that the GDR was subscribed by only one entity and, therefore, the scheme hatched by the company and its directors was violative of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations.
8. The AO found that the non-disclosure of the loan agreement and the pledge agreement was violative of Clause 36 of the Listing Agreement as well as Section 21 of the SCRA Act read with Clause 32 and 50 of the Listing Agreement since the company had not complied with the accounting standards and since the balance lying in the EURAM Bank was not free cash. The AO, however, found that Vintage repaid the loan amount over a period of time in instalments.
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9. Against the said order of the AO dated May 28, 2021, Appeal Nos. 716 and 717 of 2021 were filed by M/s. Winsome Yarns Ltd. and its managing director. This Tribunal by its order dated July 19, 2022 affirmed the order of the AO for the violations committed by the company. However, the penalty imposed upon the company and the managing director was reduced and their appeals were partly allowed.
10. In so far as the appellant Arun Panchariya is concerned, he was noticee nos. 9 in the show cause notice. The facts against him are stated hereunder :-
(i) The company came out with an issue of 19,94,125 GDRs amounting to USD 13.24 million on 29.03.2011. Pan Asia Advisors Limited (now known as Global Finance and Capital Limited), was the Lead Manager to the issue.
(ii) Vintage FZE (now known as Alta Vista International FZE) was the sole subscriber of the GDR issue of the company.8
(iii) In order to finance the subscription of the GDRs of the company, Vintage availed a loan of USD 13.24 million from EURAM Bank under a loan agreement dated 22.03.2011.
(iv) The aforesaid loan was secured by the company by way of pledge of the GDR proceeds under the Pledge Agreement dated 22.03.2011. The pledge agreement authorised Euram Bank to apply the GDR proceeds to settle the obligations of Vintage under the loan agreement.
(v) Out of total loan amount of USD 13.24 million, Vintage defaulted in the repayment of the loan to the extent of USD 6.05 million and thereby the GDR proceeds to that extent were adjusted by Euram Bank. Hence, Vintage acquired GDRs of the company to the tune of USD 6.05 million free of cost.
(vi) Thereafter, the appellant is alleged to have sold the GDR to Foreign Institutional Investor (hereinafter 9 referred to as 'FII') which, in turn, sold the converted equity shares in the Indian securities market. It was alleged that the appellant noticee nos. 9 was connected with Golden Cliff and its two sub-accounts Aspire Emerging Fund (hereinafter referred to as 'Aspire') and Highblue Sky Emerging Market Fund (hereinafter referred to as 'HSEMF') who acted as a conduit to the appellant noticee nos. 9 in selling converted equity shares of the company and acted as party to the fraudulent scheme. In this way, the equity shares sold by HSEMF and Aspire were acquired by Vintage free of cost and caused a loss of USD 6.5 Million i.e. loan default to the shareholders of noticee nos. 1 i.e. the company.
(vii) It was also alleged that the two sub-accounts Aspire and HSEMF sold 54.36 lakh converted equity shares amounting to Rs. 69.21 lakh in the Indian securities market.
(viii) The show cause notice alleged that the appellant was a key person in devising and structuring the 10 fraudulent scheme relating to the GDR issue by the company and was directly or indirectly connected to all the noticees involved at every stage and aspect of the GDR issue i.e. from the start of issuance of the GDR through its lead manager Pan Asia and thereafter subscribing to the GDR through Vintage as the sole subscriber and subsequent conversion of the GDR into equity shares and sale of such equity shares in the Indian securities market through Golden Cliff, Aspire and HSEMF.
(ix) The show cause notice also alleged that the appellant was connected to all these noticees.
11. The AO after considering the material evidence on record held that the appellant noticee nos. 9 devised and structured fraudulent scheme with the GDR issuer company i.e. Winsome and through his connected entities involving Vintage, Pan Asia Advisors Ltd. Mukesh Chauradiya, HSEMF, Aspire and Golden Cliff. Vintage subscribed to GDR issue by entering into loan agreement with EURAM Bank for which Winsome pledged its GDR proceeds 11 as security. Vintage subsequently defaulted on repayment of balance loan amount of USD 6.05 million. Therefore, GDRs to the extent of USD 6.05 million were issued free of cost to Vintage. FII sub- accounts, namely, HSEMF and Aspire who were connected to the appellant received and converted GDRs and sold the converted equity shares of Winsome in the Indian securities market. The FII, namely, Golden Cliff who was also connected to the appellant facilitated HSEMF and Aspire in conversion of GDRs and sale of converted equity shares. Thus, noticee no. 9, i.e. the appellant devised GDR scheme alongwith Winsome wherein Winsome misled the Indian investors by concealing the information of entering into pledge agreement and informing GDR related news in a distorted manner to the stock exchanges which made investors believe that GDRs were genuinely subscribed.
12. The AO further found that the GDR subscription was structured in a manner whereby the noticee no. 9 controlled subscriber, Vintage, acquired the GDRs without spending a penny, through pledge of the GDRs and GDR proceeds against the loan used for subscription. Thus, no funds actually flowed to the company, until Vintage repaid the loans. While Vintage repaid part of the loan, 12 and funds to that extent did flow to Winsome, an amount of USD 6.05 million was defaulted by Vintage. Hence, Winsome did not get equivalent funds against the equity it had issued, leading to a loss of USD 6.05 million to Winsome shareholders, whose valuation were diluted by the expanded equity capital, without any funds flowing to the company. In INR, this amount works out to approximately Rs. 27 crore at an exchange rate of Rs. 45.
13. The AO found that noticee no. 9, i.e. the appellant devised a GDR scheme alongwith Winsome wherein Winsome misled the Indian investors by concealing the information of entering into pledge agreement and informing GDR related news in a distorted manner to stock exchanges which made investors believe that GDRs were genuinely subscribed. Through this scheme, noticee obtained GDRs worth USD 6.05 million / Rs. 27 crore free of cost. Subsequently, 60% of the GDRs were converted into equity shares. 47% of the converted equity was sold by noticee related entities HSEMF and Aspire in Indian market for Rs. 69.21 lakh.
14. The AO also found that the appellant was connected to various entities who were noticees to the show cause notice and were part of scheme. The AO found that the appellant was connected to 13 Vintage, Pan Asia Advisors Ltd., India Focus Cardinal Fund, EURAM Bank Austria, EURAM Bank Asia Ltd., Mr. Mukesh Chauradiya, Mr. Anant Kailash Chandra Sharma, HSEMF, Golden Cliff and Aspire.
15. We have heard Mr. Sandeep Wadhawan, the learned counsel with Mr. Suvir Tondon, the learned counsel for the appellant and Mr. Sumit Rai, the learned counsel with Ms. Nidhi Singh, Ms. Deepti Mohan, Ms. Hubab Sayed, Mr. Raghav Taneja, the learned counsel for the respondent.
16. The learned counsel for the appellant contended that the AO has failed to consider various submissions made by the appellant which are captured in the reply to the show cause notice. It was contended that the appellant is not the beneficiary nor is the perpetrator of the alleged irregularities. It was contended that the GDR was issued by the issuer company who had appointed its own custodian bank who, in turn, informed the depository bank that it has received the certificate and the same was in its custody. The depository bank, in the instant case, was bank of New York Mellon. The job of the lead manager was to facilitate the listing of the GDR over the stock exchange abroad and its purpose was to find a foreign 14 subscriber for which the lead manager charged a fee. In the instant case, Pan Asia did not charge any fee. It was further contended that the sole subscriber Vintage had purchased the GDR for valuable consideration. Further, the termination of the GDR and thereafter converted it in shares and thereafter sale in the Indian market had nothing to do with the appellant. The appellant had no connection with the alleged entities and the finding given by the AO is patently erroneous.
17. It was urged that the entire money which was subscribed through GDR was received by the company Winsome and consequently, the allegation that Vintage got the GDR without any cost is incorrect. It was urged that the fact that the money has been received back by Winsome has been acknowledged by this Tribunal in its order dated July 19, 2022 in Appeal Nos. 716 and 717 of 2021 and, consequently, this finding of the AO that Vintage got the GDR free of cost is without any basis. It was urged that the show cause notice contained 29 annexures and that annexure 29 related to the connection of the appellant with other entities. It was contended that a perusal of Annexure 29 would indicate certain connections of the appellant with certain entities which were referred to in different 15 annexures which annexures were not part of the show cause notice nor the said annexures were supplied. Consequently, it was urged that reliance by the respondent on Annexure 29 showing the connection with the other entities without producing the relevant annexures was patently erroneous. It was further contended that the appellant had no connection directly or indirectly with any of the entities who had converted the GDRs into equity shares and sold it in the Indian market. Further, there is no proof that the proceed of the shares sold in the Indian market was received by the appellant.
18. Having heard the learned counsel for the parties, we are of the view that the entire scheme which has been depicted in the show cause notice and in the impugned order can be safely divided into two parts. The first part related to the issuance of the GDR with the Winsome and the second part relates to the conversion of the GDR into equity shares which were subsequently sold to the investors in the Indian market.
19. In so far as the first part is concerned, the contention that the appellant had no role to play in the issuance of the GDR or the fact that he was not involved in the manipulative scheme or the fact that he was not the beneficiary cannot be accepted.
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20. We find that Pan Asia was the lead manager for the GDR issue of the company. The appellant was the 100% shareholder of Pan Asia and was also the managing director. The appellant was, thus, the beneficial owner and in-charge of the affairs of the Pan Asia during the period of investigation and during the period when the company came out with the GDR issue. The contention that the appellant had resigned and, therefore, was not responsible for the GDR issue is erroneous. The appellant had resigned not on its own volition but on account of the fact that the appellant was restrained by an interim order passed by SEBI.
21. The appellant was also the beneficial owner of Vintage and was the managing director of Vintage as on June 7, 2010. Alkarni Holdings Ltd. (hereinafter referred to as 'Alkarni') was the 100% shareholder of Vintage as on December 28, 2010 and the appellant was the sole shareholder and director of the Alkarni as on April 21, 2014. Therefore, directly and indirectly the appellant was the beneficial owner of Vintage and Vintage was fully controlled by the appellant through 99.94% shareholding control. The fact that the appellant was owner of Vintage was also found by this Tribunal in its judgment in Pan Asia Advisors Ltd. & Anr. vs. SEBI Appeal No. 17 126 of 2013 decided on October 25, 2016, whereas this Tribunal held as under :-
"(h) Till October 2010, 100% shares of Vintage were held by Arun Pancharia (AP) and thereafter 100% shares of Vintage are held by Alkarni Holdings Ltd. It is not in dispute that 100% shares of Alkarni Holdings Ltd.
are held by AP and his relatives."
22. In addition to the aforesaid, Vintage was the sole subscriber of the GDR issues. Vintage obtained a loan from Euram Bank. Euram Bank and Pan Asia had a joint venture in UAE in the name of Euram Bank Asia Ltd. in which Euram Bank held 51% of the shareholding and Pan Asia held 49% of the shareholding. The appellant was the Director and President of this joint venture in UAE and only resigned when an interim order was passed by SEBI.
23. The role of the appellant in connection with the issue of GDR by a set of six companies was also considered by this Tribunal in Pan Asia Advisors Ltd. & Anr. (supra), wherein this Tribunal held that the acts of the appellant amounted to fraud under the provisions of the SEBI Regulations. This Tribunal held as under :- 18
"18. Question then to be considered is, whether SEBI is justified in holding that the appellants have committed fraud on the investors in India. Admittedly, PAN Asia was appointed as a Lead Manager to the GDR issue and as a Lead Manager it was the duty of PAN Asia to make reasonable endeavours to procure investors outside India and inform the ESCROW agent in writing of any deposit made by the investors in the ESCROW account. It is not in dispute that prior to the issuance of GDRs of Asahi, AP as a Managing Director and Authorized Signatory of Vintage had entered into a Loan Agreement dated 21.04.2009 with Euram Bank and had obtained loan of 5.98 Million USD to take down the GDRs of Asahi. Thus, AP on the one hand as Managing Director of PAN Asia got the GDRs of Asahi issued for subscription by foreign investors and on the other hand as Managing Director of Vintage took loan to take down entire GDRs of Asahi."
"21. Thus, instead of ensuring that the foreign investors subscribe to the GDRs of Asahi, AP as Managing Director of PAN Asia planned to subscribe to the GDRs of Asahi through Vintage and in fact as Managing Director of Vintage took loan of 5.98 Million USD from Euram Bank for subscribing to the GDRs of Asahi and made Asahi to pledge to the Euram Bank the GDR subscription amount of 5.98 Million USD as security for the loan taken by Vintage. Similar modus operandi was adopted in case of other issuer companies. Thus, the investors in India were made to believe that in the global market the issuer companies have acquired high reputation in terms of investment potential and hence the foreign investors have fully subscribed to the GDRs, when in fact, the GDRs were subscribed by AP through Vintage which was wholly owned by AP. In other words, PAN Asia as a Lead Manager and AP as Managing Director of PAN Asia attempted to mislead the investors in India that the GDRs have been subscribed by foreign investors when in fact the GDRs were subscribed by AP through Vintage. Any 6 attempt 19 to mislead the investors in India constitutes fraud on the investors under the PFUTP Regulations."
"22. Fact that the appellants had not informed the Stock Exchanges about the GDRs being fully subscribed cannot be a ground for the appellants to avoid action being taken for misleading the investors in India, because, under the PFUTP Regulations, action can be taken even against a person who has caused the investors in India to believe in something which is not true. In the present case, it is apparent that prior to the issuance of GDRs, AP as Managing Director of PAN Asia had designed a plan to subscribe to the GDRs of Asahi and in implementation of that plan AP took loan of 5.98 Million USD as Managing Director of Vintage specifically for subscribing (take down) GDRs of Asahi and in fact on issuance GDRs, 5.98 Million USD was transferred to the account of Asahi with Euram Bank as GDR subscription amount. Thus, AP as Managing Director of PAN Asia was the root cause in creating artificial impression that the GDRs have been subscribed by foreign investors when in fact GDRs were purchased by AP through Vintage. Such an act is clearly prohibited under the PFUTP Regulations."
24. These findings are equally applicable in the instant case. A total fraud was played by Arun Panchariya. He was the 100% shareholder in Pan Asia who advised the company to subscribe to the issuance of GDR. Pan Asia was the lead manager of which Arun Panchariya was the beneficial owner and found a subscriber, namely, Vintage in which the appellant was the beneficial owner. Euram Bank gave a loan to Vintage and the lead manager advised the 20 company to give a guarantee to the loan to be taken by the subscriber, namely, Vintage and, accordingly, a pledge agreement was executed, based on which the company pledged its shares to Euram Bank. Thus, the appellant as managing director of Pan Asia got the GDR of company issued for the subscription by foreign investors and, on the other hand, as beneficial owner of Vintage took a loan to subscribe the entire GDR of the company. Vintage was the sole subscriber and used the loan given to it by Euram Bank which loan was acquired by a pledge given by the company. On account of 100% subscription of the GDR, the investors in India were made to believe that in the global market the issuer company had acquired a high reputation in terms of investment potential and hence the foreign investor / investors had fully subscribed to the GDR, when in fact, the GDR was subscribed by the appellant through Vintage.
25. Thus, in our view, the appellant through Pan Asia as a lead manager attempted to mislead the investors in India that the GDR had been subscribed by the foreign investors when in fact the GDR was subscribed by the appellant through Vintage. Such attempt to mislead the investors in India, in our opinion, constitutes a fraud on investors under the PFUTP Regulations.
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26. Consequently, we are in agreement with the findings given by the AO to the effect that the scheme adopted by the appellant in the issuance of the GDR and in the subscription of the GDR by Vintage and the loan taken by Vintage through the pledge agreement issued by the company were fraudulent and violative of Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations.
27. We also find that the appellant, by virtue of his ownership and directorship in Pan Asia (Lead Manager to the GDR Issue) and Vintage (sole subscriber) was in collusion with the Issuer company along with other entities closely related and connected with the appellant, had implemented and executed a fraudulent scheme regarding subscription of GDRs of the company wherein a false and misleading impression was made upon the investors in India that the company had acquired a high reputation in the global market in terms of investment potential and hence the foreign investors have fully subscribed to the GDRs, when in fact, the GDRs were subscribed by Vintage, a company owned and managed by the appellant, thereby constituting fraud under the provisions of the SEBI Act read with the PFUTP Regulations.
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28. The Hon'ble Supreme Court in its judgment in Securities Exchange Board of India v. Pan Asia Advisors Ltd. & Anr. [(2015) 14 SCC 71] has elaborated on the effect of GDRs on the local investors and how the global performance of the issuing company lures local investors to make investments at a higher price on account of the investment made by the foreign investors. The Hon'ble Supreme Court held :-
"60. ... To put it differently, by artificial creation of global level investment operation, either the issuing company on its own or with the aid of its Lead Manager cannot attempt to make it appear as though there is scope for trading GDRs at the global level while in reality there is none. The above fact has to be kept in mind when dealing with an issue relating to creation of GDRs, in as much as, when the GDRs gets fully subscribed at the global level providing scope for huge foreign investment, the same will have a serious impact at the internal investment market in the form of high appreciation of share value whereby the issuing company and the investor will be greatly benefited mutually. Such a real growth structurally and financially is the underlying principle in the creation and trading of GDRs at the global level."
29. We may, however, add that the finding of the AO that the default made by Vintage in the repayment of the loan to the tune of USD 6.05 million and, therefore, Vintage acquired the GDR free of 23 cost is incorrect in as much as a specific plea was raised by the company Winsome to the effect that the subscription money was received by the company through proper channels though belatedly. This fact was found to be correct by this Tribunal in our order dated July 19, 2022 passed in Appeal Nos. 716 and 717 of 2021 filed by Winsome and its managing director. Thus, the finding on this issue is incorrect.
30. With regard to the second leg of transaction, we find that the AO has only dealt with this area in one paragraph, namely, paragraph no. 48 which is extracted hereunder :-
"48. Material on record shows that subsequently, FII sub-accounts namely HBSF and ASPIRE, which were connected to the Noticee as shown above, received and converted 11,99125 GDRs into equity shares numbering 11,991,250 equity shares. They sold 56,35,847 converted equity shares of Winsome in Indian securities market for a value at Rs. 69.21 lakhs. Noticee connected FII namely Golden Cliff facilitated HBSF and ASPIRE in conversion of GDRs and sale of converted equity shares."
31. The basis of connection which is alleged has been depicted in paragraph no. 40. Prima-Facie, the connection shown in paragraph no. 40 of the impugned order is vague. It is the alleged 24 that the basis of connection as can be culled out from paragraph nos. 40 of the impugned order is that one Reema Narayan Shetty was an authorized signatory for the bank account of India Focus Cardinal Fund (hereinafter referred to as 'IFCF') in which the appellant was a director. Reema Shetty was also a director of Golden Cliff which is the FII. The sub-accounts of Golden Cliff were HSEMF and Aspire and Reema Shetty is shown to be the beneficial owner of HSEMF. On this basis, the connection of the two sub-accounts of Golden Cliff is alleged to be connected to Arun Panchariya.
32. Paragraph nos. 48 of the impugned order shows that the two sub-accounts, namely, HSEMF and Aspire received GDR which were converted into equity shares. From whom the sub-accounts received the shares is not known i.e. whether the sub-accounts received the shares from Vintage or from Winsome. The show cause notice indicates that the sub-accounts purchased the shares for valuable consideration. Paragraph nos. 48 of the impugned order indicates that the sub-accounts sold it in the Indian market for Rs. 69.21 lakh. It is not known who received this money, namely, whether it remained with the sub-accounts or the money found its way to Winsome or to Vintage.
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33. In the absence of any clarity on this aspect, we are of the view that linking the second leg of transaction with Arun Panchariya is vague and connection has not been fully justified.
34. Further, we find that the show cause notice contained 29 annexures. Annexure 29 related to connection of the appellant with the connected entities. A copy of annexure 29 has been filed by the respondent. Annexure 29 indicates the connection of the appellant with various entities. For example, at serial no. 3, connection of appellant has been shown with IFCF and the relevant document is annexure 31. Similarly, connection with Euram Bank Austria is shown at serial no. 4 and supporting document is annexure 32. Similarly, connection with HSEMF is at serial no. 8 and the supporting document is annexure 37. Connection with Golden Cliff is at serial no. 9 and the supporting document is annexure 37. The connection with Aspire is at serial no. 10 and the supporting document is at annexure 38. These annexures 32 to 38 are not part of the show cause notice. But the connection as depicted in annexure 29 is being relied upon by the AO without considering the supporting documents and without supplying the supporting documents to the appellant. Thus, in our view, the connection of the appellant with the 26 entities in the second leg of the transaction has not been proved and the findings are in violation of the principles of the natural justice, since relevant documents have not been supplied.
35. In view of the aforesaid, we are of the view that the finding of the AO with regard to the violation committed by the appellant in the first leg of the transaction does not suffer from any error of law and the same is affirmed by us for the reasons stated in the earlier part of our order. The connection of the appellant with the entities in the second leg of the transaction is not proved and the relevant documents have not been considered nor supplied to the appellant and, therefore, to that extent the impugned order cannot be sustained.
36. On account of the aforesaid, the imposition of penalty to the extent of Rs. 25 crore also cannot be sustained. We are also of the view that in view of the fact that the GDR proceeds eventually came back to the company, the finding that the Vintage acquired certain GDR free of cost cannot be sustained and, therefore, the question of quantum of penalty is required to be reconsidered.
37. In view of the aforesaid, the appeal is partly allowed. The impugned order in so far as it relates to the first leg of the transaction 27 is affirmed. The impugned order relating to the second leg of the transaction is set aside. The matter is remitted to the AO to redecide the matter in the light of the observations made above after giving due opportunity of hearing and after supplying the necessary documents contained in annexure 29 to the show cause notice.
38. In the circumstances of the case, parties shall bear their own costs.
Justice Tarun Agarwala Presiding Officer Ms. Meera Swarup Technical Member 29.11.2023 MADHUKAR Digitally signed by MADHUKAR PTM SHAMRAO SHAMRAO BHALBAR Date: 2023.11.29 BHALBAR 16:04:40 +05'30'