Adesh Jain vs 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.

12

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