Securities Appellate Tribunal
Carnation Industries Ltd & Ors. vs Sebi on 12 July, 2024
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved on: 12.06.2024
Date of Decision: 12.07.2024
Misc. Application No. 1769 of 2024
And
Appeal No.107 of 2023
1.Carnation Industries Ltd.
9/C Kumar Para Road, 2nd Floor, Liluah, Howrah, West Bengal-711204, India.
2. Mr. Ravindra Prakash Sehgal Flat No.2C, 222, Acharya Jagadish, Chandra Bose Road, Kolkata-700017, India.
3. Suvobrata Saha 3/1, Puddapukar Road, Regent Park, Kolkata-700092.
4. Mr. Arun Kumar Bose 16/2, Naba Bose Lane, Kolkata-700085.
5. Sephali Roy FE 393, Sector III, Saltlake, Kolkata-7000106.
6. Biplab Ganguly 56/7, Deshpran Sasmal Road, Kadamtala, Howrah-711101.
7. Mr. Somnath Pradhan 222, Acharya Jagadish, Chandra Bose Road, Kolkata-700017, India. ...Appellants 2 Versus The Adjudicating Officer Securities and Exchange Board of India SEBI Bhavan, Plot No.C-4A, G-Block, Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051. ...Respondent Dr. S.K. Jain, PCS i/b. S.K. Jain & Co. for the Appellants. Mr. Sumit Rai, Advocate with Mr. Pratham Masurekar, Mr. Nishit Dhruva, Ms. Shefali Shankar and Ms. Rasika Ghate, Advocates i/b. MDP & Partners for the Respondent. CORAM: Justice P.S. Dinesh Kumar, Presiding Officer Ms. Meera Swarup, Technical Member Dr. Dheeraj Bhatnagar, Technical Member Per: Justice P.S. Dinesh Kumar, Presiding Officer
1. This appeal is presented by Carnation Industries Ltd ('CIL' for short) and 6 others with a prayer inter alia to set aside the order bearing No.Order/AA/NS/2022-23/18623- 18629 dated August 26, 2022 (Exhibit-A) passed by the Adjudicatig Officer, SEBI1.
2. We have heard Dr. S.K. Jain, PCS for the appellants and Mr. Sumit Rai, Advocate assisted by Mr. Pratham Masurekar, 1 Securities and Exchange Board of India 3 Mr. Nishit Dhruva, Ms. Shefali Shankar and Ms. Rasika Ghate, Advocates for the Respondent.
3. By the impugned order, the Adjudicating Officer, 'SEBI2' has imposed a penalty of Rs.5 lacs on the first appellant Company and Rs.1 lakh each on appellants No.2 to 7 for failure to comply with the provisions of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred to as the 'LODR Regulations').
4. Briefly stated the facts of the case are, investigation by SEBI had revealed that subsequent to declaration of CIL's account as an NPA3 during 2017-18, CIL had reversed the interest expense on loan provided in the F.Y4 - 2017-18 and stopped providing for interest expenses in the subsequent financial years contrary to the accounting standards. Notices were issued to the Directors of CIL, the 'CFO5' of the Company for the period 2017-18 and the subsequent incumbent CFO.
5. By the notice dated July 22, 2020 noticees were called upon them to show cause as to why an enquiry should not be 2 Securities Exchange Board of India 3 Non-Performing Asset 4 FY - Financial year 5 CFO - Chief Financial Officer 4 held and penalty imposed upon them for violation of various provisions of Securities and Exchange Board of India Act, 1992 ('SEBI Act' for short), Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ('PFUTP Regulations' for short) and LODR Regulations mentioned in para no.9 of the notice.
6. The credit facilities extended to the company by its lenders namely, SBI6 and PNB7 (collectively referred as banks) were classified as NPAs during FY 2017-18. The banks had recalled the credit facilities and served notices under section 13(2) of the SARFAESI Act, 2002 to the Company the Noticee No.1. Thereafter, the Company was not making provision for interest payable to the SBI & PNB. Further, in FY 2017-18, the Company had reversed certain provisions earlier made for payment of interest. The statutory auditors of the Company, M/s. Jain Saraogi & Co., Chartered Accountants, had qualified in their audit reports for FY 2017- 18 & FY 2018-19 and limited review reports for the quarters ending June 30, 2019 & September 30, 2019. 6 State Bank of India 7 Punjab National Bank 5
7. The Company took a stand in its reply that it was not possible to calculate the interest due to technicality involved with the nature of loan and the floating rate of interest.
8. In addition to the above charge of not providing for the interest after the accounts having been declared as NPS, it was also alleged in the show cause notices that the Company and the notices had violated Regulations 4(1)(a), 4(1)(b), 33(1), 34(3) and 48 of the LODR Regulations as the applicable and notified Indian Accounting Standards (herein after referred to as 'IND AS') were not followed.
9. The noticees submitted replies dated September 14, 2020 and October 15 and 21, 2020 contending inter alia;
(1) that CIL had not reversed anything in its books of account; it had considered the balance in the bank account as at March 31, 2018 and debited whatever interest the bank had debited;
(2) On August 2019, SBI gave approval for payment of Rs.27 crores as final settlement amount. In November, 2019 the CIL sold Company's property and repaid the debts payable to SBI and Punjab National Bank; and 6 (3) In normal practice the industries do not provide for interest once the account of the Company had been declared non-performing asset.
10. After providing an opportunity of hearing the Adjudicating Officer has passed the impugned order.
11. Shri S.K. Jain, learned representative for the appellants mainly urged that once the accounts are declared as NPA, the normal practice in the industries is not to make provision for the interest because the interest is not quantified by the Banks. He also argued that in similar cases, SEBI has accepted the plea urged by other entities and not taken any punitive action.
12. In substance, appellants do not dispute that provision was not made for the interest. But, they seek to justify their stand contending that the Banks did not quantify the interest amount and in the normal industry practice provision is not made.
13. Shri Sumit Rai, Advocate for the SEBI submitted that CIL is governed by the provisions of the Companies Act, 2013 (hereinafter referred to as the 'Companies Act'). Section 129 of the Companies Act mandates that the financial statements shall give a true and fair view of the state of affairs of the Companies and comply with the accounting standards notified 7 in Section 133 of the Companies Act. He further submitted that the Ministry of Corporate Affairs has notified the Indian Accounting Standards under Section 133 of the Companies Act read with Companies (Indian Accounting Standards) Rules 2015 which has been made applicable to listed entities since 2017. Therefore, appellant was duty-bound to make provision for the interests. In support of his contention, he placed reliance on Girish Chandra Tiwari vs. UCO Bank Lucknow8.
14. We have carefully considered the rival contentions and perused the records.
15. It is not in dispute that CIL is governed by the Companies Act, 2013. As per Section 129 of the Companies Act, the financial statement shall give a true and fair view of the state of affairs of the Company and they shall comply with accounting standards notified in Section 133 of the Companies Act. It is also not in dispute that CIL was required to follow Indian Accounting Standards AS 32. The Adjudicating Officer has considered various provisions in the Indian Accounting Standards and rightly held that the interest on loan which is a 8 2014 SCC Online All 9134 decided on September 6, 2014 8 borrowing cost is required to be recognized as an expense under AS 32.
16. In any event, the interest accruing on the principal will have to be repaid as per the contractual rate which is notified at the time of sanctioning the loan. The liability to repay the interest does not get extinguished unless the Company is liquidated or the loan account is settled in the manner known to law.
17. In Girishchandra Tiwari relied upon by Shri Sumit Rai, learned Advocate for SEBI it is held as follows:
"From a perusal of the aforesaid provision, it is clear that charging of interest on an asset declared as NPA does not cease rather, for the convenience of the bank and particularly for the accounting purposes the amount of interest due in the loan account declared NPA, is not shown in the loan account and details thereof are to be maintained in a separate account. Since the interest accrued to the bank is treated as income for the bank, therefore, after the loan is declared as NPA, the recovery of interest is not likely to take place, as such the amount of interest due is not reflected in the loan account. The interest in the loan account nevertheless remains payable under the loan agreement and the circulars of the Reserve Bank of India, and the bank would be clearly entitled to realise the interest from the borrower once the loan account is regularised."
(emphasis supplied) 9
18. Therefore, the main contention urged on behalf of the appellants' that the provision was not made for payment of interest as per the industry practice is untenable as it runs counter to Section 129 and 133 of the Companies Act.
19. It was also argued by the appellant that as per 'industry practice' no provision is made for payment of interest after an account is declared as 'NPA'. We may record that, no material is placed to substantiate this contention.
20. In view of the admitted position that provision for payment of interest has not been made by the CIL and the Appellants' No.2 to 5 being the directors and Appellant nos.6 and 7 being the CFOs who are responsible for the acts of the Company, we find no merit in this appeal and it is accordingly dismissed. All interlocutory application stand disposed of. No costs.
Justice P.S. Dinesh Kumar Presiding Officer Ms. Meera Swarup Technical Member Dr. Dheeraj Bhatnagar Technical Member RAJALAK Digitally signed by SHMI 12.7.2024 RAJALAKSHMI HARISH HARISH NAIR Date: 2024.07.15 RHN NAIR 14:04:46 +05'30'