Securities Appellate Tribunal
Adesh Jain vs Sebi on 6 January, 2023
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date of Hearing: 16.11.2022
Date of Decision: 06.01.2023
Appeal No.217 of 2020
Adesh Jain
61, Vaishali,
Pitampura, New Delhi-110088. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (E),
Mumbai - 400 051. ...Respondent
Mr. Ravichandra S. Hegde, Advocate with Mr. Samyak
Pati, Advocate i/b. Parinam Law Associates for the
Appellant.
Mr. Venkatesh Dhond, Senior Advocate with Mr. Mihir
Mody, Mr. Arnav Misra and Mr. Mayur Jaisingh,
Advocates i/b. K. Ashar & Co. for the Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Ms. Meera Swarup, Technical Member
Per: Justice Tarun Agarwala, Presiding Officer
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1.The present appeal has been filed against the order dated March 6, 2020 passed by the Whole Time Member („WTM‟ for short) of Securities and Exchange Board of India („SEBI‟ for short) debarring the appellant from accessing the securities market for a period of 5 years. By the said order the appellant‟s securities in the form of shares, mutual funds etc. has also been frozen for the same period.
2. The facts leading to the filing of the present appeal is, that the MPS Infotecnics Ltd. („MPS‟ for short) is a listed company and the shareholders in the extraordinary general meeting held on January 30, 2007 resolved and approved the issuance of Global Depository Receipts („GDR‟ for short). Based on the aforesaid resolution, the process of issuance of GDR was initiated and, on October 19, 2007, a resolution of the board of directors was passed resolving to open a bank account with Lisbon Bank for the purpose of receiving the subscription money in respect of GDR. 3 The resolution also authorized Mr. Rajinder Singh Negi, a director of the Company to sign all documents and process the necessary transactions in relation to the GDR issue. The resolution further authorized Banco Efisa, S.F.E., S.A. („Banco‟ for short) a bank based in Lisbon "to use the subscription money as security in connection with loans if any".
3. It transpires that thereafter on October 29, 2007 the Credit Agreement was executed between Clifford Capital Partners A.G.S.A. („Clifford‟ for short) with Banco wherein Banco agreed to give a loan to Clifford. On October 30, 2007, Account Charge Agreement was executed by the director of the Company Mr. Rajinder Singh Negi with Banco on the basis of which it enabled Clifford to avail a loan from Banco for subscribing to the GDR. Based on the Credit Agreement and Account Charge Agreement, a loan was availed by Clifford from Banco which was used to subscribe to the GDR issue of the Company for which the circular was issued on 4 December 4, 2007 and the public announcement was made on BSE Limited („BSE‟ for short) on December 5, 2007. GDR of 4.65 million was issued amounting to US $ 9.99 million. Further, Clifford was the sole subscriber to the GDR issue on the basis of a loan taken under the Credit Agreement.
4. After 11 years, a show cause notice dated January 31, 2018 was issued to various noticees including the appellant alleging that Clifford was the sole subscriber to the GDR issued by the Company and that the subscription amount was paid by obtaining a loan under a Credit Agreement dated October 29, 2007 from Banco and that Mr. Rajinder Singh Negi signed an Account Charge Agreement dated October 30, 2007 which was an integral part of the Credit Agreement and on the basis of this agreement Clifford availed loan from Banco for subscribing the GDR issue. It was further alleged that the Company did not inform BSE about the execution of the Account Charge Agreement 5 or the Credit Agreement and alleged that the GDR proceeds were diverted to the extent of US $ 8.90 million. This act of concealing and suppressing the material facts was in violation of the provisions of Section 12A of SEBI Act, 1992 and Regulation 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 („PFUTP Regulations‟ for short).
5. The WTM, after considering the matter, passed the impugned order directing the company to take steps for refund of the money from Banco and also debarred the appellant from accessing the securities market for a period of 5 years.
6. The WTM found that the act of the Company in the GDR issue resulted in the commission of a fraud under PFUTP Regulations. The WTM further found that the resolution dated October 19, 2007 allowed Banco to use the funds as security in connection with the loan on which basis the loan was given to Clifford and such 6 transaction which was executed on the basis of the resolution dated October 19, 2007 amounted to a fraud under Regulation 3 and 4 of the PFUTP Regulations. The WTM further held that since the appellant was a signatory to the resolution dated October 19, 2007 the appellant as a director was responsible and equally guilty of the violation of Section 12A of SEBI Act and Regulation 3 and 4 of the PFUTP Regulations.
7. This Tribunal relying upon a decision in Adi Cooper v. SEBI, Appeal no.124 of 2019 decided on 5th November, 2019 allowed the appeal by order dated 19th November, 2020 and the impugned order in so far as it relates to the appellant was set aside.
8. SEBI being aggrieved by the decision of this Tribunal in Adi Cooper‟s case filed civil appeal no.380 of 2020 which was allowed and the order of this Tribunal was set aside by judgment of the Supreme Court dated 21st September, 2021.
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9. Against the order of this Tribunal dated 19th November, 2020 in the matter of Adesh Jain v. SEBI also SEBI filed civil appeal no.180 of 2021. The Supreme Court relying upon its decision in Adi Cooper‟s case set aside the order of this Tribunal in Adesh Jain by judgment dated 21st September, 2021 and remitted the matter to the Tribunal for reconsideration of the appeal afresh. The Supreme Court directed this Tribunal to advert to the specific role of the noticee Adesh Jain which was not dealt with by this Tribunal in its earlier order.
10. Accordingly, we have heard Shri Ravichandra S. Hegde, Advocate assisted by Mr. Samyak Pati, Advocate for the appellant and Mr. Venkatesh Dhond, Senior Advocate assisted by Mr. Mihir Mody, Mr. Arnav Misra and Mr. Mayur Jaisingh, Advocates for the respondent.
11. The appellant contended that he was a Non-
Executive Independent Director in the Company and 8 was not involved in the day to day affairs of the management of the Company. It was contended that the appellant was a practicing Chartered Accountant and was only involved in policy decisions of the Company. It was urged that the appellant was only a signatory to the resolution of 19th October, 2007 which only allowed for opening of a bank account with Lisbon based bank Banco for the purpose of receiving subscription money in respect of GDR. It was urged that the resolution which authorized to use the subscription money as security in connection with the loan, if any, only related to the loans taken by the Company and could not be stretched for the purpose of giving loan proceeds to a third party who did not exist on the date when the resolution was passed. It was also urged that the appellant was not in charge or responsible for the affairs of the Company and in the absence of any proof for charge of fraud no liability could be fixed upon the appellant nor any adverse 9 inference can be drawn merely for holding a position as an non-executive independent director. It was also urged that the appellant, being an Independent Director, the liability, if any, has to satisfy the requirements of Section 149(12) of the Companies Act 2013 which provides that an independent director and a non- executive director can only be held liable in respect of such acts of omission or commission by a Company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he has not acted diligently. It was further urged that the General Circular No.1/2020 issued by the Ministry of Corporate Affairs, Government of India on 2nd March, 2020 provides for clarifications on prosecutions or internal adjudication proceedings initiated against independent directors stating that liability can be canvassed only with respect to acts occurred with the knowledge and consent or connivance and/or lack of due diligence. It was also 10 urged that there has been an undue delay in the issuance of the show cause notice and therefore on the ground of undue delay the proceedings should be quashed.
12. On the other hand, Shri Venkatesh Dhond, the learned senior counsel for the respondent submitted that the appellant was a director in the Company for more than 10 years i.e. February 20, 2004 to May 29, 2014 during the period when the GDR was issued. The appellant was also the signatory to the resolution of the board of directors dated October 19, 2007 which allowed the Company to open a bank account with Lisbon bank and further authorized Banco "to use the subscription money as security in connection with the loan if any". It was contended that the use of the GDR proceeds as security for the loan by the resolution of October 29, 2017 was the starting point of the fraudulent arrangement through which the Company facilitated the financing of the GDR issue. It was urged that the appellant being a director in the Company for 11 more than 10 years was also the chairman of various committees such as remuneration committee, investors grievances committee, chairman of debt committee and thus was deemed to be involved in the day-to-day affairs and management of the Company. It was also contended that the appellant was signatory to various resolution of the board of directors and therefore the contention that the appellant only participated in policy decision matters was not correct. The learned senior counsel for the respondent, thus, urged that the fact that the appellant was involved in the day-today affairs and being a director for more than 10 years was deemed to have knowledge of the GDR issue and therefore was rightly found guilty of violating the provisions of the SEBI Act and PFUTP Regulations. The learned senior counsel, thus, urged that the appellant being a director cannot escape his liability under the SEBI Act and PFUTP Regulations.
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13. We find that the WTM noticed that the appellant was a non-executive independent director and had no role to play in the day to day business activities of the Company. The WTM also noticed the circular no.1 of 2011 dated 29th July, 2011 which provided as to when an independent director could be held liable under Section 149(12) of the Companies Act. The WTM further found that noticee no.3 was the Chairman and noticee no.4 was the Managing Director and that noticee no.8, Mr. Rajinder Singh was authorized to open the bank account. The WTM further found that the account charge agreement dated 30th October, 2017 was signed by Mr. Rajinder Singh, noticee no.8 who was authorized to open a bank account. In spite of noticing the aforesaid, the WTM in paragraph no.49 came to the conclusion that the appellant, being a member of the Board of Directors, was expected to ensure fairness and transparency in the dealings of the Company and when an act of omission and commission 13 occurs through board processes, then such non- executive directors which include the appellant can be held liable for such acts of omission/commissions of the Company if such directors had participated in the relevant board meetings and did not act diligently. The WTM came to the conclusion that in view of the resolution dated 19th October, 2007 which authorized Mr. Rajinder Singh to open a bank account, the appellant was, thus, aware of authorizing Mr. Rajinder Singh to execute a pledge and an account charge agreement and since the appellant did not raise any objections he had failed to act diligently and was thus liable to the violations alleged in the show cause notice.
14. In our opinion, the finding arrived at by the WTM is wholly erroneous and based on surmises and conjectures. We find that at the time when the resolution of October 19, 2007 was passed Clifford was nowhere in the picture and therefore the concept of fraud emerging through this resolution of October 19, 14 2007 did not arise. There is no finding of the WTM that the appellant was aware of this arrangement, namely, of giving a loan to Clifford or the fact that a Credit Agreement or an Account Charge Agreement would be executed in the future. In the absence of any finding, the charge of collusion and/or fraud is not been proved. Further, by a deeming fiction, liability and/or culpability cannot be fastened upon the appellant only on the basis of a resolution dated October 29, 2007.
15. We also find that there is no finding of the fact that the appellant was involved in the day-to-day affairs of the management of the Company. The submission of Shri Venkatesh Dhond, the learned senior counsel for the respondent that the appellant attended several board meetings and was chairman of various committees which can be found from the annual reports are submissions which are not borne out from the records. The learned senior counsel placed reliance upon the circular of the Reserve Bank of India dated 26th 15 September, 2000 and notifications dated 3rd May, 2000 issued under Foreign Exchange Management (Transfer or issue of security by person resident outside India) Regulations, 2000. The submissions so made are beyond the pleadings and cannot be taken into consideration. The respondent cannot be allowed to better their case and rely upon such documents which are not part of the record. There is no finding that the appellant, being a director for more than 10 years, was deemed to be involved in the day-to-day affairs and management of the Company nor there is any finding that the appellant was chairman of various committees and therefore deemed to be involved in the day-to-day affairs of the Company. There is no finding that the credit agreement and the account charge agreement were in the knowledge of the appellant. On the other hand, it is the consistent case of the appellant that he was a practicing chartered accountant and a non- executive independent director and was only involved 16 in policy decisions. These facts have not been disputed nor controverted by any documentary evidence before the WTM.
16. We are further of the opinion that liability cannot be mechanically fastened merely because the Appellant was an independent director and present in a board meeting. It is submitted that when a director is not in charge or responsible for the affairs of the company, no adverse inference can be drawn merely for attending a meeting.
17. We also find that the reliance of Section 27 of the SEBI Act is patently erroneous. Section 27 is not applicable if the offence is committed without the knowledge of the incumbent. We have already held that there is no finding given by the WTM that the appellant was involved in the day-to-day affairs and management of the Company. On the other hand, a specific case was stated by the appellant that the fraud was committed by the mastermind, namely, the chairman, 17 managing director and the authorized signatory/director Mr. Rajinder Singh Negi and that he had no knowledge of the violation committed under PFUTP Regulations. This fact has not been denied by the respondent. In our view, Section 27 of the SEBI Act has no application. Consequently, the decision relied upon by the respondent in N. Narayanan (supra) is distinguishable and not applicable to the present facts and circumstances of the case.
18. We also find that there is no finding that the appellant was aware of the execution of an account charge agreement or the credit agreement executed by Mr. Rajinder Singh. In the absence of any such finding, the charge of collusion and/or fraud against the appellant has not been proved. Further, liability and/or culpability cannot be fastened upon the appellant only on the basis of a resolution dated 19th October, 2007 especially in the absence of any finding that the 18 appellant was involved in the day to day affairs of the management of the Company.
19. We also find that on the same issue the AO by an order dated 16th December, 2020 has exonerated the appellant from the charge of violation of PFUTP Regulations and further held that the appellant was not liable for any monetary penalty.
20. In addition to the aforesaid, we find that in the instant case, the Company was involved in the issuance of 4.65 million GDRs amounting to USD 9.99 million.
21. In this regard, the appellants have produced various orders passed by SEBI against various companies and its Directors wherein different period of debarment have been given for similar/identical offence. For facility, a comparative table is given below:
Debarment Order Sr. Name of the Period Total Subscriber Period of Date of Order No. GDR issuer of GDR Amount Debarment company issue raised by GDR issue (USD) million
1. Morepan March- 15.25 Solsec and 1 year of 24th September, Laboratories 03 million Severon debarment 2019 Ltd.19
2. Vikas Metal April-11 11.99 Vintage 3 years of 29th September, & Power FZE debarment 2019 Ltd.
3. Aqua Feb-11 62.38 Vintage 3 years of 22nd July, 2021 Logistics FZE debarment Ltd.
4. Zenith Birla May-10 22.99 Vintage 3 years of 30th March, (India) Ltd. FZE debarment 2021
5. Aksh Opti- Sept 10 25 Vintage 5 years of 26th June, 2019 Fibre Ltd. FZE debarment
6. Sybly 9th June, 6.99 Vintage 5 years of 16th January, Industries 2008 million FZE debarment 2018 Ltd.
7. Winsome 29th 13.44 EURAM 5 years of 26th October, Yarns March, million Bank debarment 2021 2011
22. A perusal of the aforesaid table indicates that in the case of Aqua Logistics Ltd., the said Company had raised 62.38 million USD and the Company was debarred from accessing the securities market for a period of three years. Similarly, in the case of Zenith Birla (India) Ltd. the total amount raised through GDRs was 22.99 million USD and the Company was debarred for a period of three years. Whereas in the instant case, the appellant Company had raised 25 million USD but has been debarred for five years. Consequently, in our opinion, the debarment period against the appellants is excessive and discriminatory and not in consonance with the directions given in similar matters. In Sybly 20 Industries Ltd. vs. SEBI, appeal no.381 of 2019 by our order dated 14th July, 2022 we had reduced the debarment of five years to the period undergone. In Winsome Yarns, we had reduced the debarment of the Company from five years to two years and for the Managing Directors from three years to one year. In the case of the appellant, the total amount raised was USD 9.99 million and the period of debarment against the appellant is five years.
23. In addition to the aforesaid, this Tribunal in similar GDR issues have taken the view that non-executive independent directors cannot be found guilty for violation of PFUTP Regulations. These decisions are in Appeal no.389 of 2021, Prafull Anubhai Shah v. SEBI decided on 28th June, 2021; Appeal no.433 of 2021, Rajesh Shah v. SEBI decided on 5th July, 2021; Appeal no.58 of 2021, Jaiprakash Kabra v. SEBI decided on September 2, 2021; Appeal no.338 of 2021, H.S. Anand & Ors. v. SEBI decided on 20th 21 September, 2021 and Appeal no.211 of 2019, Govind Das Pasari v. SEBI decided on 30th April, 2021.
24. In addition to the aforesaid, we find that in the matter of B.M. Khanna, the AO passed an order dated 28th April, 2021 holding that the noticee being an independent director could not be held liable in respect of acts of omissions and commissions of the Company which had occurred without his knowledge. The AO held:
"38. Apart from being a signatory to the aforesaid resolution, no other material is placed on record regarding role of the Noticee in facilitating the GDR subscription scheme. Noticee was a non-executive independent director of Winsome at the time of its GDR issue and was not involved in the day-to-day management or affairs of the Company. No material is placed on record to establish that Noticee was involved in the day to day running of the Company. In this regard, I take note of the submission by the Noticee that Section 149(12) of the Companies Act, 2013 provides that an independent director and a nonexecutive director can only be held liable in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he has not acted diligently.22
39. In order for the Noticee to be held culpable for the charge of fraud or collusion in the GDR issuance and subscription scheme, it needs to be established that the Noticee was aware of the scheme and played a part in carrying out or facilitating the scheme. It can certainly be stated that Noticee failed to be diligent when he did not question the reason for the clause in the resolution related to authorizing use of funds in the account as security in connection with loans, if any. However, failure to be diligent by itself cannot be construed as being part of a fraudulent scheme. The resolution does not contain any details of the pledge agreement. Material on record does not establish that the Noticee was aware of the Pledge Agreement or authorized signing of Pledge Agreement to pledge GDR proceeds for third party use."
25. Similarly, the WTM in the matter of GDR issue of Cals Refineries Ltd. in its order dated 31st December, 2014 held:
"30.2 In this regard, I note that the abovementioned Directors have not signed the Account Charge Agreement or the Extension Agreement nor were they the authorized signatories on behalf of Cals for its bank account with Banco. Further, I note that the aforementioned Directors have not signed the Agreement entered into between Cals and Asia Texx (which resulted in the related party transaction). I also note that sufficient proof has not been made available to show their direct involvement in the GDR fraud perpetrated by Cals or the related party transaction with Asia Texx."23
26. Similarly, the WTM in the matter of GDR issue of CAT Technologies Ltd. (WTM Order dated April 3, 2019) has held:
"40. .... Therefore, I am inclined to give benefit of doubt to the Noticees no. 5 and 6. Similarly, even though Noticee no. 4 has not responded to the SCN and has not offered any explanation, she being a non-executive director on the Board of the Company and there being no evidence to suggest her involvement in the GDR issue, I cannot hold her liable for the issuance of GDR in a fraudulent manner. Accordingly the charge of fraud against Noticee no.4, Noticee no.5 and Noticee no.6 does not stand established."
27. In view of the aforesaid, there is no reason why the appellant should be given a different treatment. Consequently, we are of the opinion that the impugned order insofar as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed.
28. 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 24 available from the Registry on payment of usual charges.
Justice Tarun Agarwala Presiding Officer Ms. Meera Swarup Technical Member RAJALAK Digitally by signed SHMI RAJALAKSHMI HARISH NAIR HARISH Date:
6.1.2023 NAIR 2023.01.10 11:56:10 +05'30' RHN