Securities Appellate Tribunal
Prayag Infotech Hi-Rise Ltd & Ors. vs Sebi on 2 March, 2022
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order reserved : 10.12.2021
Date of Decision: 02.03.2022
Appeal No.166 of 2018
1. Prayag Infotech Hi-Rise Ltd.
P-45, Bhupen Roy Road,
Kolkata-700034, West Bengal.
2. Mr. Basudeb Bagchi
C/o. Prayag Infotech Hi-Rise Ltd.
P-45, Bhupen Roy Road,
Kolkata-700034, West Bengal.
3. Mr. Lakshmi Kant
C/o. Prayag Infotech Hi-Rise Ltd.
P-45, Bhupen Roy Road,
Kolkata-700034, West Bengal. ...Appellants
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
'G' Block, Bandra Kurla Complex,
Bandra (East), Mumbai - 400051. ...Respondent
Mr. Nimay Dave, Advocate with Mr. Ankur Loona, Ms.
Aparna Wagle and Ms. Swapna Roopavate, Advocates
i/b. Alliance Law for the Appellant.
2
Mr. Shyam Mehta, Senior Advocate with Mr. Manish
Chhangani, Mr. Ravishekhar Pandey and Ms. Samreen
Fatima, Advocates i/b. The Law Point for the
Respondent.
With
Appeal No.485 of 2018
1. Prayag Infotech Hi-Rise Ltd.
P-45, Bhupen Roy Road,
Kolkata-700034, West Bengal.
2. Mr. Basudeb Bagchi
C/o. Prayag Infotech Hi-Rise Ltd.
P-45, Bhupen Roy Road,
Kolkata-700034, West Bengal.
3. Mr. Avik Bagchi
C/o. Prayag Infotech Hi-Rise Ltd.
P-45, Bhupen Roy Road,
Kolkata-700034, West Bengal.
4. Ms. Swapna Bagchi
C/o. Prayag Infotech Hi-Rise Ltd.
P-45, Bhupen Roy Road,
Kolkata-700034, West Bengal.
5. Mr. Lakshmi Kant
C/o. Prayag Infotech Hi-Rise Ltd.
P-45, Bhupen Roy Road,
Kolkata-700034, West Bengal. ...Appellants
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
3
'G' Block, Bandra Kurla Complex,
Bandra (E), Mumbai - 400051. ...Respondent
Mr. Nimay Dave, Advocate with Mr. Ankur Loona, Ms.
Aparna Wagle and Ms. Swapna Roopavate, Advocates
i/b. Alliance Law for the Appellant.
Mr. Shyam Mehta, Senior Advocate with Mr. Manish
Chhangani, Mr. Ravishekhar Pandey and Ms. Samreen
Fatima, Advocates i/b. The Law Point for the
Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Justice M.T. Joshi, Judicial Member
Per: Justice M.T. Joshi, Judicial Member
1. Both the present appeals are arising in connection
with the issue of making offer of Redeemable
Preference Shares ('RPS' for short) by the appellant
no.1 Prayag Infotech Hi-Rise Ltd (hereinafter referred
to as the 'Company') of which the rest of the
appellants were Directors during the relevant period.
Respondent Securities and Exchange Board of India
(hereinafter referred to as 'SEBI') had received a letter
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from Registrar of Companies (RoC), Kolkata in respect
of issue of RPS without complying with the provisions
of the Companies Act, 1956 (hereinafter referred to as
the 'Companies Act'), the Securities and Exchange
Board of India Act, 1992 (hereinafter referred to as the
'SEBI Act') and Securities and Exchange Board of
India (Disclosure and Investor Protection) Guidelines,
2000 (hereinafter referred to as the 'DIP Guidelines')
and Securities and Exchange Board of India (Issuance
of Capital and Disclosure Requirements) Regulations,
2009 (hereinafter referred to as the 'ICDR
Regulations'). During the enquiry, respondent SEBI
found that the Company had made an offer of RPS in
the years 2007-08 and 2008-09 by which it raised an
amount of Rs.24.95 crores from 24,237 allottees.
During inspection further similar offers were also
discovered. It was found to be deemed public issue of
securities under the first proviso of Section 67(3) of the
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Companies Act, 1956 and, thus, violating the
requirements under Section 60 read with Section 2(36),
Section 56, Sections 73(1), 73(2) and 73(3) of the
Companies Act read with Section 27(2) of the SEBI
Act. In view of the same, interim directions cum show
cause notice was issued to the appellants by the
respondent SEBI on 30th September, 2013 which were
ultimately confirmed by the impugned order of the
learned WTM dated 30th August, 2018. Against this
order appeal no.485 of 2018 is preferred.
2. It appears that during the course of the investigation
as referred supra, various summonses were issued to
the Company and other appellants' dated 1st January,
2014, 17th January, 2014 and 27th January, 2014. Vide
the said summonses the appellants were directed to
produce documents listed in the said summonses. As
per SEBI the appellants failed to give complete
information. Therefore last of the summons was issued
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to produce the documents and to appear before the
officer of SEBI. However as neither the necessary
documents were produced not the appellants appeared
in person. therefore a separate show cause notice was
issued on 18th January, 2017 calling upon the
appellants to show cause as to why penalty shall not
be imposed under Section 15A of the SEBI Act for the
alleged violation of Section 11C(3) and 11C(5) of the
SEBI Act. It appears that the appellants did not appear
in the proceedings, did not file any reply nor remained
present for personal hearing and, therefore, the learned
Adjudicating Officer taking into consideration the
material available on record vide order dated 17th
March, 2018 imposed a penalty of Rs.1 crore upon all
the appellants to be paid jointly and severally.
Aggrieved by the said order appeal no.166 of 2018 has
arisen.
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3. In the circumstances, though both the cases had
arisen out of the same episode the subject matter being
different those would have to be dealt with separately.
Appeal no.485 of 2018
4. It is an admitted fact that the appellant Company had
issued RPS as detailed supra. After passing the interim
order SEBI had conducted an inspection and as
detailed supra sought further information from the
appellants. As according to SEBI, the appellants failed
to appear and give the information, respondent SEBI
conducted an inspection on 11th July, 2014. During
inspection it was found that the appellant had issued
additional preference shares during 2009-2010, 2010-
11 and 2011-12 and additionally mobilised the amount
of Rs.106.42 crores by issuing RPS in violation of the
provisions as quoted above. In view of the same, a
show cause notice dated 18th January, 2017 was issued.
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5. The appellants submitted before the learned WTM
that the RPS issued in the year 2007-2009 were not in
violation of any regulatory requirement. In order to
ensure that the issuance of RPS would be regular or not
the appellant Company has approached RBI as well as
SEBI seeking their guidance. The RBI vide its letter
dated 13th August, 2008 and SEBI vide its letter dated
27th January, 2009 had communicated that the offer of
RPS can be made. Further, the RPS were issued for
private circulation with a specific condition that those
are redeemable in nature and did not provide any
option for conversion into preference shares.
Appellant Company was neither a listed Company nor
was it making any public issue therefore it did not
approach SEBI for compliance of the DIP Regulations.
When the appellants approached SEBI no query was
made with regard to the number of allottees. Since
RPS were issued by way of private placement, the non-
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compliance of provisions pertaining to non-compliance
had occurred due to ignorance of the said provisions.
It was submitted that this technical default deserves to
be viewed leniently as the appellants have not caused
any loss or inconvenience to the investors.
Additionally, it was submitted that the appellants have
not committed any breach of DIP Guidelines and
ICDR Regulations as those were not applicable to the
issue of RPS. In compliance with Section 75(1) of the
Companies Act, the Company had even filed return of
allotment with the RoC in prescribed format no.2. In
the meantime, repayment to majority of the preference
shareholders was made. The same being below
Rs.20,000/- and as many preference shareholders were
not having any bank account, the Company had made
cash payment to such shareholders. The auditors have
verified the authenticity of such payments and
certificate to that effect dated 19th Decmber, 2013 was
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issued. Though such repayment is not reflected as
redemption in the books of account, the Company has
in fact made repayment of Rs.11,59,61,136. While the
SEBI has alleged in the show cause notice that the
appellant had not refunded an amount of Rs. 106.42
crore of the next issue, the appellant submitted that
though the appellant had obtained the shareholders'
approval for issuance of 2,50,00,000 RPS of Rs.10
each no allotment of the same was made. An amount
of Rs.1,02,11,98,400/- as application money was
refunded in the year 2011-12. Therefore, the said
amount was shown as current liabilities in the balance
sheet as on 31st March, 2011. It was submitted that had
SEBI given the correct guidance the appellants would
not have gone ahead with private issue. The RBI also
did not raise any objection though guidance was sought
and, therefore, the appellant wanted that they be
discharged from the proceedings.
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6. The learned WTM, however, did not accept these
submissions and the impugned order wherein various
directions were issued vide para no.67 directing the
appellant to refund the amount with interest at 15%
p.a. payable only through bank demand draft or pay
order. It was further directed that the appellants have
to provide fully inventory of their assets. It was
directed that all the assets of the Company shall be sold
only for the purpose of making the refund and while all
the appellants were directed to make refund in personal
capacity the holding of appellant no.2 to 5 other than
Company were prevented from selling their assets etc.
as detailed in the order.
As in the meantime the High Court of Kolkata in
various writ petitions as detailed in para 68 of the
impugned order had appointed one man committee of
Justice (Retd.) Shailendra Prasad Talukdar for sale of
the Company's assets and distribution of the sale
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proceeds. The learned WTM therefore made his
directions subject to the orders of the High Court or
any other decision of Justice S.P. Talukdar.
7. Heard Mr. Nimay Dave, Advocate with Mr. Ankur
Loona, Ms. Aparna Wagle and Ms. Swapna
Roopavate, Advocates for the Appellant and Mr.
Shyam Mehta, Senior Advocate with Mr. Manish
Chhangani, Mr. Ravishekhar Pandey and Ms. Samreen
Fatima, Advocates for the Respondent.
8. It was submitted before us that RPS are not the
securities within the meaning of Section 67 of the
Companies Act. Further, neither the DIP Guidelines
nor ICDR Regulations are applicable. This issue,
however, is squarely covered by the landmark decision
of Supreme Court in the case of Sahara vs. SEBI and
Anr.
9. Section 67(3) reads as under:
"67. Construction of references to offering shares
or debentures to the public, etc.-
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(3) No offer or invitation shall be treated as made
to the public by virtue of sub- section (1) or sub-
section (2), as the case may be, if the offer or
invitation can properly be regarded, in all the
circumstances-
(a) as not being calculated to result, directly or
indirectly, in the shares or debentures becoming
available for subscription or purchase by persons
other than those receiving the offer or invitation; or
(b) otherwise as being a domestic concern of the
persons making and receiving the offer or
invitation.
Provided that nothing contained in this sub-section
shall apply in a case where the offer or invitation to
subscribe for shares or debentures is made to fifty
persons or more:
Provided further that nothing contained in the first
proviso shall apply to the non-banking financial
companies or public financial institutions specified
in section 4A of the Companies Act, 1956 (1 of
1956)."
First proviso to Sub section 3 above declares that
offer or invitation for issue of securities if is made
to fifty or more persons then the exemption from
treating the issue as public shall not be available.
10. While dealing with the issue as to whether
invitation to more than 49 investors would invoke the
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provisions of Section 73(1), in para no.104 the
Supreme Court declared as under:-
"104. Section 73(1) of the Act casts an obligation
on every company intending to offer shares or
debentures to the public to apply on a stock
exchange for listing of its securities. Such
companies have no option or choice but to list their
securities on a recognized stock exchange, once
they invite subscription from over forty nine
investors from the public. If an unlisted company
expresses its intention, by conduct or otherwise, to
offer its securities to the public by the issue of a
prospectus, the legal obligation to make an
application on a recognized stock exchange for
listing starts. Sub-section (1A) of Section 73 gives
indication of what are the particulars to be stated
in such a prospectus. The consequences of not
applying for the permission under sub-section (1)
of Section 73 or not granting of permission is
clearly stipulated in sub-section (3) of Section 73.
Obligation to refund the amount collected from the
public with interest is also mandatory as per
Section 73(2) of the Act."
11. As regards the issue as to whether RPS would be
securities, the definition of the same Companies Act,
provides that the definition of it given in Section 2(h)
of the SCRA Act would be applicable. While dealing
with similar issue, in para nos.128, 129 and 130 of the
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Sahara judgment cited supra, the Supreme Court
declared as under:
"128. The scope of the definition of Section 2(h) of
SCR Act came up for consideration before this
Court in Sudhir Shantilal Mehta v. Central Bureau
of Investigation (2009) 8 SCC 1 and the Court
stated that the definition of securities under the
SCR Act is an inclusive definition and not
exhaustive. The Court held that it takes within its
purview not only the matters specified therein, but
also all other types of securities, thus it should be
given an expansive meaning. In Naresh K.
Aggarwala & Co. v. Canbank Financial Services
Ltd. and Anr. (2010) 6 SCC 178, while referring to
the definition of the term "securities" defined
under SCR Act and the applicability of a Circular
issued by the Delhi Stock Exchange, the Court
endorsed the view of the Special Court and noted
that the perusal of the above quoted definition
showed that they did not make any distinction
between listed securities and unlisted securities
and, therefore, it was clear that the circular would
apply to the securities which were not listed on the
stock exchange.
129. Section 2(h) of the SCR Act gives emphasis
to the words "other marketable securities of a like
nature", which gives a clear indication of the
marketability of the securities and gives an
expansive meaning to the word securities. Any
security which is capable of being freely
transferrable is marketable. The definition clause
in Section 2(h) of SCR Act is a wide definition, an
inclusive one, which takes in hybrid also, which I
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have already indicated, defined vide Section 2(19A)
of the Companies Act.
130. OFCDs issued have the characteristics of
shares and debentures and fall within the definition
of Section 2(h) of SCR Act, which continue to
remain debentures till they are converted. In other
words, OFCDs issued by Saharas are debentures in
presenti and become shares in futuro. Even if
OFCDs are hybrid securities, as defined in Section
2(19A) of the Companies Act, they shall remain
within the purview of the definition of "securities"
in Section 2(h) of SCR Act. Further, it may be noted
that Saharas have treated OFCDs only as
debentures in the IM, RHP, application forms and
also in their balance sheet. The terms "Securities"
defined in the Companies Act has the same
meaning as defined in the SCR Act, which would
also cover the species of "hybrid" defined under
Section 2(19A) of the Companies Act. Since the
definition of "securities" under Section 2(45AA) of
the Companies Act includes "hybrids", SEBI has
jurisdiction over hybrids like OFCDs issued by
Saharas, since the expression "securities" has been
specifically dealt with under Section 55A of the
Companies Act."
12. Though the issue in Sahara case was as to whether
Optionally Fully Convertible Debentures (OFCDs)
would be securities, the interpretation of Section
2(h)(2) made by the Supreme Court in para 129 above
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squarely applies to the RPS also. Section 2(h) of the
SCRA Act defining securities is as under:
"2(h) "securities" include--
(i) shares, scrips, stocks, bonds, debentures,
debenture stock or other marketable securities of a
like nature in or of any incorporated company or
other body corporate;
(ia) derivative;
(ib) units or any other instrument issued by any
collective investment scheme to the investors in
such schemes;
(ic) security receipt as defined in clause (zg) of
section 2 of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security
Interest Act, 2002;
(id) units or any other such instrument issued to the
investors under any mutual fund scheme;
Explanation.- For the removal of doubts, it is
hereby declared that "securities" shall not include
any unit linked insurance policy or scrips or any
such instrument or unit, by whatever name called,
which provides a combined benefit risk on the life
of the persons and investment by such persons and
issued by an insurer referred to in clause (9) of
section 2 of the Insurance Act, 1938 (4 of 1938);
(ie) any certificate or instrument (by whatever
name called), issued to an investor by any issuer
being a special purpose distinct entity which
possesses any debt or receivable, including
mortgage debt, assigned to such entity, and
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acknowledging beneficial interest of such investor
in such debt or receivable, including mortgage
debt, as the case may be;
(ii) Government securities;
(iia) such other instruments as may be declared by
the Central Government to be securities; and
(iii) rights or interest in securities."
13. In the circumstances RPS would be securities.
Therefore, there is no escape to a listed or unlisted
company from the applicability of the relevant
provisions of the Companies Act once an invitation to
more than 49 investors is made.
14. As regards the applicability of DIP Guidelines and
ICDR, while the appellant relies on certain statements
made in certain notes of SEBI, there is nothing in any
of these instruments which would show that RPS are
excluded from the application of either the DIP
Guidline or ICDR Regulations.. Besides this, similar
contention of the appellant in Sahara case was rejected
by the Supreme Court in para nos.115 and 116 which
are extracted as under:-
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"115. The Senior counsels appearing for Saharas
also raised a contention that DIP Guidelines were
only departmental instructions, not having the
sanction of law and, therefore, would not apply to
the OFCDs issued. This argument, in my view, has
no basis.
116. The DIP Guidelines had statutory force since
they were framed by SEBI in exercise of its powers
conferred on it under Sections 11 and 11A of the
SEBI Act. The powers have been conferred on SEBI
to protect the interests of the investors in securities
and regulate the issue of prospectus, offer
documents or advertisement soliciting money
through the issue of prospectus. Section 11 of the
Act, it may be noted has been incorporated,
evidently to protect the interests of investors whose
securities are legally required to be listed. The DIP
Guidelines were implemented by SEBI with regard
to the listed and unlisted companies, which made
public offer, until it was replaced by 2009 ICDR."
15. There is no denial to the fact that invitation to more
than 49 investors was made while issuing the RPS
during the years 2007 to 2009. As regards next of the
invitation made to the public later on in the year
between the years 2009-2012. Admittedly, the
invitation was made to more 49 investors and,
therefore, the contention will have to be rejected.
20
16. As regards the statement that communication was
made to SEBI as well as RBI before carrying the above
exercise does not hold any water as merely advice was
sought without explaining that the invitation would be
to more than 49 investors.
17. As regards alleged repayment made by the
appellant Company to the investors, the impugned
order itself takes care of repayment, if any, made as
one man committee appointed by Kolkata High Court
as detailed supra is also looking in the same aspect and
the impugned order is declared to be subject to the
direction passed by the Kolkata High Court and the
decisions to be taken by the one man committee in this
regard. We, therefore, find no merit in this appeal.
The appeal therefore fails.
Appeal no.166 of 2018
18. It is an admitted fact that SEBI issued summonses
on 1st January, 2014, 7th January, 2014 and 27th
21
January, 2014. Ultimately, according to it, since all the
relevant documents were not submitted SEBI
conducted inspection of the appellant Company on 11th
July, 2014. During that inspection SEBI found that
additional preference shares were issued from the year
2009 to 2012 for the amount of Rs.106.42 crores in
violations of the provisions detailed supra.
19. To the summons dated 1st January, 2014 issued by
SEBI calling for the documents, information
mentioned at annexure 1 to the summons , vague reply
of the appellant Company was that the key managerial
persons including the managing directors, promoters
etc. were travelling and, therefore, they required time
for filing the information as required by SEBI . On
14th January, 2014, the Company replied to the 7th
January, 2014 summons. The appellant Company
responded that the final account for the year ended
March, 2013 was not completed and the corporate
22
office of the Company was sealed for over four months
due to court order. However, in the earlier reply there
was no mention of inability to produce the documents.
Next of the summons was issued by SEBI on 17th
January, 2014. The appellant Company replied to the
said summons vide letter dated 22nd January, 2014
wherein it was communicated that the registered and
corporate office of the Company was sealed for over
four months due to court order, many record of the
Company is misplaced or not readily available. The
third reason was the appellant Mr. Basudeb Bagchi
who was having full knowledge of the facts was out
of the city.
20. SEBI thereafter issued summons dated 27th
January, 2014 not only for production of documents
but also to appear before the investigating authority. In
response to this summons some information was
provided and request was made to give more time to
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furnish the remaining information and even to
reschedule the date of personal hearing. It was also
asked that the venue of personal hearing be changed
from Mumbai to Kolkata. In this background,
respondent SEBI had carried out inspection wherein
not only information regarding the earlier issue of RPS
was collected but also the information regarding the
additional preference share allotment process of the
year 2009-2012 mobilising the amount of Rs.106.42
crores was found.
21. The appellant's contention that information could
not be supplied due to the sealing of the office of the
appellant Company on the orders 0f the Kolkata high
Court for the period of four months, cannot be
accepted because the sealing was not a permanent one
and various pretext were forwarded as detailed supra
for not providing the information.
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22. Considering the background of the case that crores
of rupees were collected by the appellants illegally in
the flagrant violation of the law as stated supra and for
refund of the said amount Kolkata High Court was
required to take action and to appoint a committee to
oversee the repayment, we do not find that non
submission of the information by the appellant in
response to the summonses issued by the SEBI was a
bonafide act.
23. In the result, the following order:-
ORDER
Both the appeals are hereby dismissed with no order as to costs.
24. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the registry. In these circumstances, this order will be 25 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. Parties will act on production of a digitally signed copy sent by fax and/or email.
Justice Tarun Agarwala Presiding Officer Justice M.T. Joshi Judicial Member RAJALA Digitally by signed 2.3.2022 KSHMI NAIR RAJALAKSHMI H Date: 2022.03.03 RHN H NAIR 17:46:17 +05'30'