Securities Appellate Tribunal
Mr. Rakesh Dhingra & Ors. vs Sebi on 4 May, 2021
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date of Hearing : 30.04.2021
Date of Decision : 04.05.2021
Appeal No. 370 of 2019
Shri Anil Harish
13, CCI Chambers,
Dinshaw Waccha Road,
Churchgate, Mumbai - 400 020. ..... 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. Sharan Jagtiani, Senior Advocate with Ms. Rishika Harish,
Mr. Ishan J. Ravindranath, Advocates i/b Oasis Counsel & Advisory
for the Appellant.
Ms. Anubha Rastogi, Advocate with Mr. Nishit Dhruva, Mr. Chirag
Bhavsar, Advocates i/b MDP & Partners for the Respondent.
With
Appeal No. 371 of 2019
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Shri S. K. Misra
C-56, Nizamuddin East,
Ground Floor,
New Delhi - 110 013. ..... 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. Sharan Jagtiani, Senior Advocate with Ms. Rishika Harish,
Mr. Ishan J. Ravindranath, Advocates i/b Oasis Counsel & Advisory
for the Appellant.
Ms. Anubha Rastogi, Advocate with Mr. Nishit Dhruva, Mr. Chirag
Bhavsar, Advocates i/b MDP & Partners for the Respondent.
With
Misc. Application No. 496 of 2019
And
Appeal No. 405 of 2019
Unitech Advisors (India) Pvt. Ltd.
13th Floor, Tower - B, Signature Tower -I,
Sector - 30, South City - I,
Gurgaon - 122 001, Haryana. ..... Appellant
Versus
3
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai - 400 051. ... Respondent
Mr. Kunl Katariya, Advocate with Ms. Sourabhi Waknis,
Advocate i/b Mr. Aagam Doshi, Advocate for the Appellant.
Ms. Anubha Rastogi, Advocate with Mr. Nishit Dhruva, Mr. Chirag
Bhavsar, Advocates i/b MDP & Partners for the Respondent.
With
Misc. Application No. 497 of 2019
And
Appeal No. 406 of 2019
1.Mr. Rakesh Dhingra 324, Tarun Enclave, Pritampura, New Delhi - 110034.
2. Mr. Mahesh Kumar Sharma B-111, Shiv Vihar Apartment, Near Inder Enclave, New Rohtak Road, New Delhi - 110087.
3. Mr. Vijay Tulshyan F-741, 6th Avenue, Gaur City-I, Sector - 4, Greater Noida (West), Gautam Budh Nagar - 201309. ..... Appellants Versus Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, 4 Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ... Respondent Mr. Kunl Katariya, Advocate with Ms. Sourabhi Waknis, Advocate i/b Mr. Aagam Doshi, Advocate for the Appellants. Ms. Anubha Rastogi, Advocate with Mr. Nishit Dhruva, Mr. Chirag Bhavsar, Advocates i/b MDP & Partners for the Respondent. CORAM : Justice Tarun Agarwala, Presiding Officer Justice M. T. Joshi, Judicial Member Per : Justice Tarun Agarwala, Presiding Officer
1. Four separate appeals have been filed against a common order dated March 28, 2019 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. Since the issue is common, all the appeals are being decided together. For facility, the facts stated in the lead Appeal No. 370 of 2019 Anil Harish vs. SEBI is being taken into consideration.
2. CIG Realty Fund (CIG) is a venture capital funds registered under the Securities and Exchange Board of India (Venture Capital 5 Funds) Regulations, 1996 (hereinafter referred to as 'Venture Capital Funds Regulations'). The appellant is a trustee of this fund. The other appellants are also trustees except the appellant Unitech Advisors who is the Investment Advisor.
3. The following schemes were launched :
a. CIG Realty Fund - I - launched on October 6, 2006 which had a term of seven years i.e. up to October 5, 2013.
b. CIG Realty Fund - II - launched on September 28, 2007 and which also had a tenure of seven years.
4. Under the Private Placement Memorandum and Contribution Agreement, there was a provision to extend the term twice for one year each on the recommendation of the investment advisor.
5. When the term of CIG Realty Fund scheme was coming to an end in October 2013, certain discussions were held between the trustees and the officials of SEBI with regard to the possibility of giving a third extension to the scheme. It is alleged that no objections were placed by SEBI officials with regard to the proposal of the third extension. Accordingly, letters were sent to all the 6 contributors vide letter dated July 20, 2015, by e-mail as well as by courier requiring them to give their consent or otherwise with regard to the third extension within a period of one month. It is alleged that 75% of the contributors' gave their consent and, accordingly, as per the conditions contained in Private Placement Memorandum and Contribution Agreement, an amendment was made and the term of the scheme was extended for a period of three years up to October 5, 2015. Similarly, CIG Realty Fund - II was also extended for a period of three years.
6. SEBI issued a show cause notice dated November 30, 2018 alleging that the appellants illegally extended the term of the scheme for the third time which was violative of the Venture Capital Funds Regulations in as much as after the term of the scheme, it was compulsorily liable to be wound up under Regulation 23(1)(a) read with Regulation 16 of the Venture Capital Funds Regulations. It was also alleged that the appellants have failed to wind up the scheme after the third extension. The appellants filed their respective replies and after considering the matter, the AO passed the impugned order dated March 28, 2019 imposing respective penalties on each of the appellants.
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7. The stand of the appellant in the appeal of Anil Harish is, that before the expiry of the second extension, there were several discussions with the officials of SEBI with regard to the third extension. At no stage, the officials of SEBI objected to the proposed third extension else they could have taken steps immediately thereafter under Regulations 23(d) and 25(1) directing the appellants to wind up the scheme. It was, thus, contended that since no objection was raised nor did SEBI invoke the powers under Regulations 23(d) and 25(1), the issuance of show cause notice on November 30, 2018 after three years was grossly belated and the proceedings were liable to be quashed on the ground of laches.
8. It was also contended that prior to the third extension, the appellant had tendered his resignation on May 25, 2015, but the same was accepted on June 2, 2016 and, therefore, the appellant on this basis should be discharged.
9. It was also contended that under the Private Placement Memorandum / Contribution Agreement, there is an inherent power to extend the term of the scheme. The Private Placement Memorandum and the Contribution Agreement provides for making 8 such amendments, which provision was utilized and that 75% of the members had given their consent to extend the term of the scheme. It was contended that the AO committed a manifest error in holding that the life of the term of the scheme cannot be extended under the Private Placement Memorandum or Contribution Agreement in as much as the Regulation 23(1)(a) stipulates that the scheme has to be wound up after the expiry of the term meaning thereby that no extension was permissible after the expiry of the initial period of the scheme.
10. The other appellants have also adopted the same arguments.
11. On the other hand, the learned counsel for the respondent contended that the appellants had no power to extend the term of the scheme and that the regulation is very clear which provides that under no circumstances the term could be extended under Regulation 23(1)(a) read with Regulation 16 of the Venture Capital Funds Regulations. The learned counsel however contended that even assuming without admitting that the appellants had power to amend the term of the scheme, it was not done as per the conditions provided under the Private Placement Memorandum and the 9 Contribution Agreement. The learned counsel contended that the amendment is required to be carried out by 75% of the capital contribution and not by 75% of the contributors which is totally different and distinct. In this regard, the learned senior counsel placed reliance upon a document of the appellant dated September 14, 2015.
12. Having heard the learned counsel for the parties and in order to proceed further, it would be appropriate if we perused certain provisions of the Regulations and the Private Placement Memorandum and the Contribution Agreement. For facility, Regulation 16 and Regulation 23(1)(a) is extracted hereunder :-
"16. (1) The venture capital fund shall--
(a) issue a placement memorandum which shall contain details of the terms and conditions subject to which monies are proposed to be raised from investors; or
(b) enter into contribution or subscription agreement with the investors which shall specify the terms and conditions subject to which monies are proposed to be raised.
(2) The Venture Capital Fund shall file with the Board for information, the copy of the placement memorandum or the copy of the contribution or subscription agreement entered with the investors 10 along with a report of money actually collected from the investor."
"23. (1) A scheme of a venture capital fund set up as a trust shall be wound up,
(a) when the period of the scheme, if any, mentioned in the placement memorandum is over;
(b) if it is the opinion of the trustees or the trustee company, as the case may be, that the scheme shall be wound up in the interests of investors in the units;
(c) if seventy-five per cent of the investors in the scheme pass a resolution at a meeting of unit holders that the scheme be wound up; or
(d) if the Board so directs in the interests of investors.
(2) A venture capital fund set up as a company shall be wound up in accordance with the provisions of the Companies Act, 1956 (1 of 1956).
[(2A) A venture capital fund set up as a body corporate shall be wound up in accordance with the provisions of the statute under which it is constituted.] (3) The trustees or trustee company of the venture capital fund set up as a trust or the Board of Directors in the case of the venture capital fund is set up as a company (including body corporate) shall intimate the Board and investors of the circumstances leading to the winding up of the Fund or Scheme under sub regulation (1)."
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13. A perusal of Regulation 16 indicates that the Venture Capital Funds will issue a Placement Memorandum which shall contain details of the terms and conditions subject to which monies are proposed to be raised from investors. Regulation 23 provides that the scheme of the Venture Capital Funds set up as a trust shall be wound up when the period of the scheme mentioned in the Placement Memorandum comes to an end.
14. The Placement Memorandum as specified in Regulation 16 is the Private Placement Memorandum which has been executed by the appellant. In this memorandum, there is a provision for an amendment to the fund agreement which is extracted hereunder :-
"The Fund Agreements can be amended as per the terms of amendment contained in the respective Fund Agreement.
The Contribution Agreement to which each Contributor will be a party may be amended (other than the Investment Philosophy) only by the written consent of the Trustees (in consultation with the Investment Advisor) and of the Contributors representing 75% of the Capital Contributions of CIG Realty Fund-I. However, no such amendment which increases any Contributor's Capital Commitment, reduces a Contributor's share of the Fund's distribution, income and gains, increases a Contributor's share of the Fund's losses, increases the Advisory Fees or a 12 Contributor's share of the Advisory Fees, otherwise materially and adversely affect the rights or obligations of a Contributor or amends the amendment provisions of the Contribution Agreement will be made without the consent of such Contributor. The Trustees are permitted to unilaterally make amendments to the Contribution Agreement in the following circumstances:
(i) admitting Additional Contributors in accordance with the terms of the Contribution Agreement;
(ii) to reflect the transfer of an interest of a Contributor in accordance with the terms of the Contribution Agreement;
(ii) correct typographical errors or eliminate ambiguities;
(iv) relating to administrative matters and which do not have a material effect on the Scheme and/or Investment Advisor; or
(v) providing for alternative investment structures in accordance with the provisions of the Contribution Agreement."
15. A perusal of the aforesaid provision in the Private Placement Memorandum indicates that the Contribution Agreement to which each contributor is a party can be amended only by the written consent of the Trustee in consultation with the investment advisory and all the contributors representing 75% of the capital contributions of the CIG Realty Fund - I, i.e. the scheme.
16. Clause 16.3 of the Contribution Agreement provides as under :-
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"16.3. Amendments No modification or amendment to this Agreement and no waiver of any of the terms or conditions hereof shall be valid or binding unless made in writing and duly executed by the Parties."
17. The aforesaid provision indicates that any amendment to the agreement with regard to term of the condition shall be valid and binding only if it is made in writing and executed by the parties, namely, the contributors, investment advisor and the trustees.
18. The words "capital contribution" is defined under Section 8 of the Private Placement Memorandum which extracted hereunder :-
"Capital Contribution" means such portion of the Capital Commitment actually paid from time to time by a Contributor to the Trust in respect of a given Scheme, pursuant to Drawdown Notice(s) issued in that behalf."
19. Having heard the learned counsel for the parties at length, we are of the opinion that it is not necessary to dwell on the subject as to whether the appellants had the power to amend the contribution 14 agreement and extend the life of the term of the scheme as in our view, the controversy can be decided on another issue.
20. Assuming for a moment that the appellants had the power to amend the Contribution Agreement and extend the period of the term of the scheme, the same was required to be done in accordance with the provision relating to the amendment to the funds agreement as provided under the Private Placement Memorandum. The said provision relating to amendments to the fund agreement clearly provides that there has to be written consent from the contributors representing 75% of the capital contribution of the CIG Realty Fund. We find from the letter dated September 14, 2015 written by the investment advisor to SEBI that 75% of the contributors had consented to the extension of the scheme for three years. This fact as depicted in the letter dated September 14, 2015 is patently erroneous and against the terms contained in the amendments to the fund agreement under the Private Placement Memorandum. This letter of September 14, 2015 indicates that total number of contributors are 208 and only 74 contributors gave the response which is less than 50% and cannot be 75%. However, the percentage of the contributors is not the required norm under the Private Placement Memorandum for amending the fund agreement. What is essential is that the resolution is required to be passed by 75% of the capital contributors. The total capital contribution in the instant case was Rs. 350 crore. 75% of the total contribution would be Rs. 262.50 crore. The letter of September 14, 2015 indicates that 74 15 contributors who had given their consent had a total capital contribution of Rs.120.515 crore which far less than the prescribed Rs. 262.50 crore
21. Thus, in our view, even if the appellants had the power to extend the term of the scheme by amending the Contribution Agreement, the same was not done in accordance with the conditions contained in the Private Placement Memorandum which required that the amendment could be passed only by 75% of the capital contribution and not by 75% of the contributors. Since the appellants did not pass the amendment in accordance with the provisions stipulated in the Private Placement Memorandum, the term of the scheme was illegally extended.
22. The AO held the appellants to have violated the provision of the regulations from another angle. Nonetheless, in view of our finding as given aforesaid, we are of the opinion, the order of the AO does not require any interference.
23. The appeals accordingly fails and are dismissed with no order as to costs.
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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 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 04.05.2021 RAJALA Digitally by signed PTM KSHMI NAIR RAJALAKSHMI H Date: 2021.05.05 H NAIR 09:49:16 +05'30'