D. Sundararajan vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of Decision: 12/10/2017 Order reserved on: 15/09/2017

Appeal No.4 of 2014

Cals Refineries Limited 21, Basant Lok Complex, Vasant Vihar, New Delhi - 110 057. ... 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. Pradeep Sancheti, Senior Advocate a/w Ms. Faiza Dhanani, Advocate i/b Dhruve Liladhar & Co. for the Appellant.

Mr. Shiraz Rustomjee, Senior Advocate a/w Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent.

WITH Appeal No.141 of 2015

Sarvesh Kumar Goorha A-26, Press Enclave, Saket, New Delhi - 110 017. ... 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. R.R. Bhonsale, Advocate i/b Ms. Smita Gaidhani, Advocate for the Appellant.

Mr. Aditya Mehta a/w Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent. 2

WITH Appeal No.155 of 2015

D. Sundararajan 601, 6th Floor, Griselda, Plot No.35, 5th Road, Off Bhau Daji Road, Matunga (East), Mumbai - 400 019. ... 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. Vinay Chauhan a/w Mr. K.C. Jacob, Advocates i/b Corporate Law Chambers India for the Appellant and Mr. D. Sundararajan, the Appellant in person.

Mr. Aditya Mehta a/w Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent.

WITH Appeal No.220 of 2015

Deep Kumar Rastogi 1/25, Shanti Niketan, New Delhi - 110 021. ... 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. Pradeep Sancheti, Senior Advocate a/w Ms. Faiza Dhanani, Advocate i/b Dhruve Liladhar & Co. for the Appellant.

Mr. Shiraz Rustomjee, Senior Advocate a/w Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent. 3

CORAM : Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per : Justice J.P. Devadhar

1.

Appellants in all these appeals are aggrieved by the orders passed by

the Whole Time Member (for short, 'WTM') of Securities and Exchange Board

of India (for short, 'SEBI') on 23rd October, 2013 and on 31st December, 2014

('Impugned Orders') respectively.

2. By order dated 23rd October, 2013, the WTM of SEBI has directed Cals

Refineries Limited ('Cals' for short) not to issue equity shares or any other

instruments convertible into equity shares or any other security for a period

of 10 years. By order dated 31st December, 2014, the WTM of SEBI has

prohibited other appellants who at the relevant time were the Directors of

Cals, from accessing the capital market, directly or indirectly, and dealing in

securities or instruments with Indian securities as underlying, in any manner

whatsoever, for a period of 10 years. Since the violations held to have been

committed by the appellants relate to facts which are common, all these

appeals are heard together and disposed of by this common decision.

3. Impugned Orders are passed against Cals and its directors basically

for the reason that Cals aided by its directors who are appellants herein had

employed fraudulent arrangement with regard to the subscription of the

Global Depository Receipt ('GDR' for short) issue of Cals and that they had

misled the investors by making false announcements regarding successful

subscription of GDRs and also failed to disclose 'related party transaction',

which were in violation of Section 77(2) of the Companies Act, 1956 and in

violation of the SEBI Act and the regulations made thereunder. 4

4. Appellants in all these appeals do not dispute that above violations are

committed in relation to the GDR issue of Cals. However, each appellant

claims to be a victim of that fraud and not a vehicle of fraud.

5. Facts relevant for disposal of all these appeals are as follows:-

(a) Cals Limited was originally incorporated on 25/7/1984 as

Computer Aided Learning System Pvt. Ltd. and was converted

into a public limited company on 22/9/1992. The name of the

company was changed to Cals Limited on 25/2/1994. In

September, 1994, Cals Ltd. came out with a public issue and was

initially listed on the Bombay Stock Exchange (BSE) and other

exchanges. Cals Ltd. did not have any business since 1997 and

it had incurred heavy losses and debt in its operation. By the

year 2007, Cals Ltd. had become virtually a defunct company

with huge losses. Mr. Sarvesh Goorha, original promoter of Cals

Ltd. claims that he himself had discharged the debts and other

liabilities of Cals Ltd. to a great extent.

(b) Sometime in May/June, 2007, Sanjay Malhotra one of the

promoters of the Spice Energy Group approached Goorha,

promoter-director of Cals and submitted that SRM Exploration

Pvt. Ltd. ('SRM' for short), which was a Spice Energy group

company had undertaken a refinery project for which SRM had

already entered into arrangement/contracts with various foreign

companies for buying Refinery Equipments and that the Spice

Energy group wanted to take over a defunct listed Indian

Company so as to implement the refinery project through that 5

listed company by raising funds from the investors in India and

abroad.

(c) The proposal put up by Sanjay Malhotra to Cals was as follows:-

i) Spice Energy group would first come in as a strategic

investor and appoint its nominees as majority directors

on the Board of Cals and take over complete control of

Cals. Thereafter, the refinery project of SRM would be

assigned to Cals and implemented by Cals by raising

funds from the investors.

ii) Sarvesh Goorha shall continue as a figure head/non-

Executive Director on the Board of Cals during the

transitional period as he was aware of the pending legal

cases and Goorha would complete the due diligence

process with the legal advisors and agencies appointed

by SRM.

iii) Interest free unsecured loan of Rs.10.19 lac advanced by

Goorha would be converted into equity shares with a

lock-in period of 3 years as per SEBI guidelines.

iv) Change of management resolution would be passed via

ballot or at the AGM wherein Goorha/other old

promoters of Cals would exit Cals and the Spice Energy

group would officially take over as new promoters of

Cals.

(d) Above proposal was considered by the Board of Directors (BoD)

of Cals on 23/7/2007 and the minutes of the said meeting as per

the Minute Book of Cals, inter alia, records the following:- 6

(i) Name of Cals Limited be changed as Cals Refineries

Limited.

(ii) Mr. Sarvesh Goorha ('Goorha'), Chairman of the meeting

informed the members of the Board that Cals which is in

a defunct position since last several years is venturing

into a refinery business with the help of SRM belonging

to the Spice Energy Group as a strategic investor.

(iii) Resolved to appoint Mr. Bhupendra Kansagra

('Kansagra), Mr. Ravi Chilikuri ('Chilikuri), Mr.

Manabendra Guha Roy ('Roy') and Mr. D. Sundararajan

('Sundararajan'), nominees of Spice Energy Group as

Additional Directors of Cals.

(iv) SRM (strategic investor) had extended interest-free

unsecured loan of Rs.87 lac to Cals to meet the general

and corporate expenses, hence Cals proposes to issue on

preferential basis 8,70,000 equity shares of Rs.10 each at

par against the money brought in by SRM.

(v) Mr. Sarvesh Goorha, promoter of Cals had extended

interest-free unsecured loan of Rs.10.19 lac to Cals to

meet the general and corporate expenses, hence Cals

proposes to issue on preferential basis 1,01,900 equity

shares of Rs.10 each at par against the money brought in

by Mr. Goorha.

(vi) In order to implement the refinery projects, Cals would

raise USD 500 million by issuance of GDR/FCCB. 7

(vii) The Audit Committee and remuneration committee of

Cals shall be reconstituted by including Roy and

Sundararajan along with the existing member Mr. Mohan

Lal Garg.

(e) In the AGM of Cals held on 12/9/2007, appointment of

Kansagra, Chilikuri, Roy and Sundararajan (nominees of Spice

Energy group) as Directors of Cals was approved. Further it

was resolved that the authorized share capital of Cals be

increased from Rs.60 crore to Rs.2000 crore divided into 200

crore equity shares of Rs.10 each. Preferential allotment of

1,01,900 share and 8,70,000 shares to Goorha and SRM

respectively were also approved in the AGM dated 12th

September, 2007. In the said AGM, Mr. M.S. Ramachandran,

former Chairman of Indian Oil Corporation was co-opted as an

Additional Director of Cals. In the said AGM, the Board was

inter alia, authorized to issue GDRs/FCCB for an aggregate sum

of USD 500 million.

(f) As a result of inducting aforesaid four directors, Spice Energy

group had majority directors on the BoD of Cals. However, in

the AGM of Cals held on 12/9/2007, resolution relating to

'Change of Management' was deferred at the instance of newly

appointed directors to avoid making a 'public offer' as required

under the regulations framed by SEBI. According to Goorha, he

had insisted that the resolution relating to the change of

management be included in the said AGM, however,

Sundararajan, director, nominated by the Spice Energy group 8

and in-charge of the GDR issue, prevailed upon Goorha. This

fact was recorded by Goorha in his email dated 2/8/2007

addressed to Sundararajan with a copy to Mr. Deep Kumar

Rastogi of the Spice Energy group.

(g) In the BoD meeting of Cals held on 17/10/2007, Mr.

Ramachandran was appointed as an additional director of Cals

and was later on made Chairman of Cals. Issuance of 8,70,000

shares (14.5% of equity) to SRM (Spice Energy group) and

conversion of interest-free loan given by Goorha into 1,01,900

equity shares of Cals was also confirmed in the said meeting.

(h) In the BoD meeting of Cals held on 30/10/2007 Roy (director)

informed the members of the Board that all the agreements

entered by SRM in connection with the refineries would be

assigned to Cals by executing Assignment Agreements.

Sundararajan (director) informed the members of the Board that

the total cost of the refinery project is USD 950 million and cost

of the said project would be partly met by raising issue of GDR

amounting to USD 200 million.

(i) It is interesting to note that the minute book maintained by Cals

does not record passing of any resolution on 30/10/2007 to open

a bank account with Banco Efisa S.A. Lisbon ('Banco' for

convenience) or any other bank for the purpose of receiving the

GDR subscription amount. However, extract of the minutes of

the meeting dated 30/10/2007 duly certified by Mr. Sundararajan

and sent by Cals to Banco records the following:-

9

"RESOLVED THAT a bank account be opened with Banco Efisa S.A. Lisbon ("the Bank") or any of branch of Banco Efisa S.A. including Offshore Branch outside India for the purpose of receiving subscription money in respect of Global Depository Receipt issue of the Company.

RESOLVED FURTHER THAT Mr. Sarvesh Goorha, Director and Mr. D. Sundararajan, Director be and are hereby severally authorized to sign, execute any application, agreement, escrow agreement, document, undertaking, confirmation, declaration and any other paper(s) from time to time as may be required by the Bank and to carry and affix, Common Seal of the Company thereon, if and when so required.

RESOLVED FURTHER THAT Mr. Sarvesh Goorha, Director and Mr. D. Sundararajan, Director be and are hereby severally authorized to draw cheques and other documents and to give instruction from time to time as may be necessary to the said Banco Efisa S.A. or any other branch of Banco Efisa S.A. Lisbon including Offshore Branch, for the purpose of operation of and dealing with the said account and carry out other relevant and necessary transactions and generally to take all such steps and to do such things as may be required from time to time on behalf of the Company.

RESOLVED FURTHER THAT the Bank be and is hereby authorized to use the funds so deposited in the aforesaid bank account as security in connection with loans, if any, as well as to enter into any Escrow Agreement or similar arrangements if and when so required."

(j) Goorha in para 5.16 of his Memo of Appeal admits that in the

Board meeting of Cals held on 30/10/2007 Goorha and

Sundararajan were authorized by the Board to open an account

with Banco. Sundararajan also admits that on 30/10/2007 the

Board had passed resolutions for opening bank account with

Banco Efisa, Portugal to park the proceeds of the GDR issue.

Sundararajan has explained the discrepancy in the minutes

recorded in the minute book of Cals and the minutes certified

by him by stating that since the account opening form from 10

Banco was not received at the time when the Board meeting was

held on 30/10/2007, above resolution was not recorded. As the

account opening form from Banco was received immediately

after the meeting, Sundararajan had asked the Company

Secretary and Goorha to include the above resolution relating to

opening a bank account with Banco, in the minutes of the Board

meeting dated 30/10/2007 itself by briefing other directors,

however, the Company Secretary forgot to include the same in

the minutes dated 30/10/2007.

(k) On 10/12/2007 Cals informed BSE that the GDR issue of USD

200 million would open for subscription on 12/12/2007.

(l) On 11/12/2007 Honor Finance Ltd. ('Honor' for short)

incorporated and registered in the British Virgin Islands on

5/10/2007, which is wholly owned by Sanjay Malhotra

(promoter of Spice Energy group) entered into a Credit

Agreement with Banco for availing loan of USD 200 million to

subscribe to the GDR issue of Cals which was to be listed on

Luxembourg Stock Exchange.

(m) On the same day i.e., on 11/12/2007 itself an Account Charge

Agreement was executed by and between Cals and Banco as a

result of which the GDR subscription amount of USD 200

million to be deposited in the designated account of Cals with

Banco stood secured by Cals in favour of Banco for all the

obligations of Honor under the Credit Agreement dated

11/12/2007. The said Account Charge Agreement signed by

Goorha on behalf of Cals, inter alia, contains a clause that upon 11

payment of all or part of the amounts due to Banco by Honor

under the Credit Agreement, Cals may withdraw from its

account the equivalent amount. In other words, as per the

Account Charge Agreement, Cals could withdraw the GDR

subscription amount of USD 200 million, only to the extent loan

of USD 200 million taken by Honor from Banco for subscribing

to the GDRs of Cals was repaid.

(n) In the BoD meeting of Cals held on 12/12/2007, it was inter alia

resolved to open a current account with Axis Bank Ltd. at its

branches at New Delhi and Mumbai. In the said meeting, inter

alia, Sundararajan, Roy and Deep Kumar Rastogi ('Deep

Rastogi') were authorized to draw cheques, bill of exchange and

promissory notes drawn, accepted or made on behalf of Cals. It

is relevant to note that on 12/12/2007 Deep Rastogi was not even

a director of Cals.

(o) On 12/12/2007 BBS Capital Partners, Switzerland, the Lead

Manager to the GDR issue, informed Cals that the GDR issue

was subscribed by 10 foreign investors. On 12/12/2007 Cals

informed BSE that GDR issue of USD 200 million has been fully

subscribed by foreign investors.

(p) On 14/12/2007, the GDR of Cals worth USD 200 million were

listed on the Luxembourg Stock Exchange.

(q) In the BoD meeting of Cals held on 19/1/2008, minutes of the

meeting held on 30/10/2007 and 12/12/2007 were approved by

the BoD. In the said meeting, Deep Rastogi was appointed as a

non-executive director of Cals and Sanjay Malhotra was 12

appointed as an advisor to Cals on a lump sum payment of

Rs.15 lac per month. In the said meeting it was also resolved to

open an account with Punjab National Bank (International) Ltd.,

London, and also to open a current account with Axis Bank

Ltd., Golpark Branch, Kolkata.

(r) On 27/6/2008, a special resolution was passed by Cals wherein it

was resolved that Cals has accorded its consent for change in

control of Cals in favour of Spice Energy group represented by

SRM and that the Spice Energy group represented by SRM and

its affiliates be recognized and known as the new promoter

having control over Cals.

(s) It is interesting to note that during the period from 27/12/2007 to

27/3/2009 Cals withdrew the GDR subscription amount in

several installments and withdrawals made by Cals were

proportionate to the loan repaid by Honor to Banco under the

Credit Agreement from time to time, which clearly shows that

the GDR subscription amounts were withdrawn by Cals in

terms of the Account Charge Agreement.

(t) On 13/1/2009, Extension Agreement to the Account Charge

Agreement dated 11/12/2007 was executed between Cals and

Banco. As a result of the said Extension Agreement, the GDR

subscription amount which was given as security by Cals for

the loan taken by Honor from Banco for subscribing to the

GDRs of Cals stood extended up to the period specified therein.

The Extension Agreement was signed by Chilikuri on behalf of

Cals.

13

(u) Pursuant to the Board resolution dated 23/1/2009, Cals on

5/2/2009 entered into an agreement with Asia Texx Enterprises

Ltd. ('Asia Texx' for convenience) for purchase of plant and

machinery required for the refinery project at a cost of USD 290

million. Asia Texx was controlled by Gagan Rastogi, son of

Deep Rastogi (director in Cals). As per the said agreement, USD

90 million was to be paid by Cals to Asia Texx as advance

immediately on signing the agreement. Sundararajan had

signed the said agreement dated 5/2/2009 as director of Cals.

(v) On 26/3/2009 Asia Texx purchased 2,50,00,000 GDRs from

Honor and paid USD 92 million to Honor.

(w) On 27/3/2009 Honor repaid the outstanding loan amount of

USD 9,18,00,000 under the Credit Agreement to Banco.

(x) On 27/3/2009 Cals paid USD 92 million to Asia Texx (USD 90

million as advance under agreement dated 5/2/2009 + USD 2

million towards dismantling charges).

(y) On 9/7/2009 Asia Texx transferred 2,50,00,000 GDRs to Gagan

Rastogi free of cost.

(z) On 28/7/2009 Sundararajan resigned from the Board of Cals and

thereafter rejoined the Board of Cals as Managing Director on

5/2/2011.

(aa) On 15/3/2011 a Deed of Novation & Amendment relating to the

Asia Texx - Cals Agreement dated 5/2/2009 was entered into by

and between Cals, Asia Texx and Amber Enerji Makina

Logistics Ltd. incorporated in Seychelles ('Amber' for

convenience). The said agreement records that Cals wishes to be 14

released and discharged from the obligations under the

agreement dated 5/2/2009 and Asia Texx wishes to release and

discharge Cals from the obligations under the agreement dated

5/2/2009 and further records that the parties have agreed that

the rights, obligations and liabilities of Cals under the

agreement dated 5/2/2009 shall be novated to Amber. By the

said Novation Agreement, the purchase price of plant and

machinery set out in the agreement dated 5/2/2009 was reduced

from USD 290 million to USD 90 million.

(bb) On 21/9/2011 WTM of SEBI passed an ex-parte order inter alia

directing Cals not to issue equity shares or any other instrument

convertible into equity shares or alter its capital structure in any

manner till further direction.

(cc) On 30/12/2011 an order was passed by the WTM of SEBI,

confirming the ex-parte order dated 21/9/2011.

(dd) By show-cause notice dated 19/9/2013 and supplementary

show-cause notice dated 11/10/2013 Cals and various entities

including the directors of Cals who are appellants herein were

inter alia called upon to show-cause as to why action should not

be taken against them for the alleged violations set out therein.

(ee) After hearing the entities, the WTM of SEBI has passed the

impugned orders on 23/10/2013 and 31/12/2014 against various

entities including the appellants herein.

(ff) Appellants have filed these appeals to challenge the impugned

orders dated 23/10/2013 and 31/12/2014.

15

6. Since each appellant claims to be a victim of fraud and not a vehicle of

fraud, it would be just and proper to consider argument of each appellant

independently.

CALS (APPEAL NO. 4 OF 2014)

7. Argument of Cals that it is a victim of fraud and not a vehicle of fraud

is unsustainable as can be seen from the following:-

(a) Basic argument advanced on behalf of Cals is that fraud relating

to the GDR issue of Cals has been committed by few

conspirators, namely, Sanjay Malhotra, Chilikuri, Goorha and

Sundararajan against whom there is direct evidence. It is

contended that Cals at the relevant time had no knowledge and

therefore, the acts and knowledge of the persons who had

committed fraud on Cals cannot be attributed to Cals and made

basis for holding that Cals is guilty of committing offences

under the Companies Act, 1956 and also guilty of violating the

SEBI Act, 1992 and the regulations framed thereunder.

(b) It is further contended on behalf of Cals that the 'Doctrine of

Attribution' generally permits the acts and knowledge of the

directors or employees of a company to be attributed to the

company itself, however, fraud is an exception to that principle,

under which the company is not held and/or made liable for

acts and/or knowledge of the directors and employees who (i)

were committing fraud on the company (ii) were acting

throughout for their own benefit and (iii) were acting contrary

to instructions or outside the scope of employment. In support 16

of above submission, Counsel for Cals has relied on various

decisions rendered by Courts in England and Canada.

(c) We see no merit in the above arguments advanced on behalf of

Cals. As rightly contended by Counsel for SEBI, Apex Court's

decision in case of Iridium India Telecom Ltd. vs. Motorola Inc.

& Ors. reported in (2011) 1 SCC 74, which is binding on this

Tribunal, clearly postulates that criminal liability of a

corporation would arise when an offence is committed in

relation to the business of the corporation by a person or body

of persons in control of its affairs. In such a case, what is to be

ascertained is, whether the degree and control of the person or

body of persons was so intense that a corporation could be said

to think and act through the person or the body of persons

controlling its affairs.

(d) At the outset, it is relevant to note that in the present case, the

liability imposed on Cals is a civil liability and not a criminal

liability. Sometime in May/June, 2007, Sanjay Malhotra, one of

the promoters of Spice Energy group approached Goorha

(promoter & director of Cals) with a proposal to take over Cals

for implementing the refinery project of SRM which was a Spice

Energy group company. As Cals had virtually become a

defunct company, the BoD of Cals in its meeting held on

23/7/2007 approved the proposal and accordingly 4 nominees of

the Spice Energy group viz. Kansagra, Chilikuri, Roy and

Sundararajan were appointed as additional directors of Cals. It

was inter alia resolved in the said meeting that for 17

implementing the refinery project, Cals would raise funds

through issuance of GDR/FCCB. Accordingly, Cals had issued

GDRs amounting to USD 200 million.

(e) According to SEBI, by opening an account with Banco and

executing the Account Charge Agreement, Cals has financed

subscription of its own GDRs which is prohibited under the

Securities laws. Since Cals denies the above charges, the

question to be considered is, whether Cals had passed any

resolution to open a bank account with Banco for depositing the

GDR subscription amount and whether Cals had authorized

any person to execute the Account Charge Agreement on

11/12/2007 so that the GDR subscription amount of USD 200

million deposited in its account with Banco is kept as security

towards the loan of USD 200 million taken by Honor from

Banco for subscribing to the GDRs of Cals.

(f) Fact that the minutes as per the minute book of Cals does not

contain any resolution to open a bank account with Banco

cannot be a ground to infer that Cals had not intended to open

an account with Banco because, firstly, on the basis of the Board

resolution dated 30/10/2007 certified by Sundararajan, director

of Cals, an account was in fact opened in the name of Cals with

Banco for depositing the GDR subscription amount. Secondly,

on issuance of GDRs, the GDR subscription amount was in fact

deposited in the said account of Cals with Banco. Thirdly, apart

from the Board resolution dated 30/10/2007 certified by

Sundararajan, there is no other resolution passed by Cals to 18

open an account for depositing the GDR subscription amount.

Fourthly, the GDR subscription amount deposited in the said

bank account with Banco has been withdrawn by Cals in

installments from time to time which is in consonance with the

Account Charge Agreement executed by Cals. Without opening

a bank account, Cals could not have opened the GDR issue.

Very fact that Cals operated the account opened with Banco on

the basis of resolution dated 30/10/2007 certified by

Sundararajan clearly falsifies the case put up by Cals that it had

not authorized any one to open an account with Banco for

depositing the GDR subscription amount.

(g) Similarly, argument that Cals had never authorized any person

to sign any Account Charge Agreement is also without any

merit, because, the Account Charge Agreement was signed by

Goorha promoter-director of Cals. The Account Charge

Agreement provides that all communications in relation thereto

should be addressed either to Goorha or Sundararajan as they

were the two authorized signatories to operate the Bank account

of Cals with Banco. It is relevant to note that Goorha was the

founder, promoter, director of Cals, whereas, Sundararajan was

the director of Cals nominated by the Spice Energy group which

had taken over Cals with a view to implement its refinery

project through Cals by raising funds through issuance of

GDRs. Admittedly, Sundararajan was in-charge of the entire

GDR process. Thus, the bank account with Banco for depositing

the GDR subscription amount was opened by Sundararajan, 19

director representing the Spice Energy group and the Account

Charge Agreement was signed by Goorha, director representing

the promoter group of Cals. In these circumstances, the

conclusion drawn by SEBI that opening a bank account with

Banco and executing the Account Charge Agreement were the

acts done by Cals through its directors to finance Honor for

subscribing the GDRs issued by Cals in gross violation of

Section 77(2) of the Companies Act, 1956 and the provisions

contained in the SEBI Act and the SEBI (Prohibition of

Fraudulent and Unfair Trade Practices Relating to Securities

Market) Regulations, 2003 ('PFUTP Regulations' for

convenience), cannot be faulted.

(h) The Spice Energy group (through its promoter, Malhotra) took

over control of Cals with a view to implement its refinery

project through Cals by raising funds from investors by issuing

GDR/FCCB. Before issuance of GDRs, Malhotra, promoter of

Spice Energy group got incorporated and registered a company

called Honor Finance Ltd. ('Honor' for convenience) in the

British Virgin Islands on 5/10/2007. Malhotra was the only

registered shareholder and ultimate beneficial owner of Honor.

On 11/12/2007, Malhotra as an authorized signatory of Honor

entered into a Credit Agreement with Banco to avail loan of

USD 200 million for subscribing to the GDRs of Cals subject to

Honor furnishing security for that amount. On the same day i.e.

on 11/12/2007 itself, Goorha, authorized signatory of Cals

controlled by Spice Energy group executed the Account Charge 20

Agreement in favour of Banco according to which the GDR

subscription amount of USD 200 million was to remain as

security till the loan of USD 200 million given by Banco to

Honor for subscribing to the GDRs of Cals was repaid by Honor

to Banco. Thus, the Spice Energy group, through 'Honor'

controlled by one of its promoters (Malhotra) sought to

subscribe to the GDRs by availing loan of USD 200 million from

Banco and made Cals controlled by the Spice Energy group to

execute the Account Charge Agreement so that USD 200 million

deposited by Honor as GDR subscription amount in the account

of Cals was kept as security till the loan of USD 200 million

taken by Honor for subscribing to the GDRs of Cals was repaid.

It is not in dispute that the GDR subscription amount

withdrawn by Cals (except the last withdrawal) was always to

the extent of loan repaid by Honor to Banco. Thus, in the facts of

present case, involvement of Cals controlled by the Spiece

Energy group is so intense that it can be easily seen that the

fraudulent acts and deeds were executed by Cals through its

directors. In these circumstances, argument that Cals was not

aware of the actions of its directors cannot be accepted.

Consequently, the finding recorded in the impugned order that

Cals and its directors had financed for the subscription of its

own GDRs in gross violation of Section 77(2) of the Companies

Act, 1956 and the provisions contained in the SEBI Act and the

PFUTP Regulations cannot be faulted.

21

(i) Similarly, finding recorded in the impugned order that Cals had

furnished false information to the Stock Exchange regarding the

initial subscribers to its GDR issue cannot be faulted. Argument

that Cals furnished the information based on the information

received from the Merchant Banker to the GDR issue, is without

any merit, because, the finding of fact recorded in the impugned

order is that GDR subscription amount was received by Cals

from Honor and not from the alleged 10 initial subscribers. If

the initial subscribers to the GDRs were persons other than

Honor, then Cals would have received GDR subscription

amount from those 10 foreign investors and not from Honor.

Very fact that Cals received USD 200 million from the loan

account of Honor with Banco and Cals secured the loan of USD

200 million taken by Honor from Banco, clearly shows that Cals

made false statement to the Stock Exchange that the GDRs have

been fully subscribed by foreign investors and thereby made the

investors in India to believe that foreign investors have shown

great interest in the GDRs of Cals and the GDRs have been

subscribed by foreign investors on the first day itself. Neither in

the Memo of Appeal nor during the course of arguments, Cals

has disputed the finding of fact recorded in the impugned order

that USD 200 million was received by Cals from Honor and not

from the alleged 10 foreign investors. In these circumstances,

decision of SEBI that by furnishing false information to the

Stock Exchange that the GDRs have been fully subscribed by 10 22

foreign investors, Cals has misled the investors in India cannot

be faulted.

(j) Similarly, finding recorded in the impugned order that the

transaction between Cals and Asia Texx Enterprises Ltd., Hong

Kong (Asia Texx) was a 'related party transaction' and failure to

disclose the said related party transaction to the exchanges was

in violation of Clause 32 of the Listing Agreement cannot be

faulted. Asia Texx was beneficially owned by Gagan Rastogi,

who was also one of the promoters of Spice Energy group. Deep

Rastogi, father of Gagan Rastogi became director of Cals with

effect from 19/1/2008. On 5/2/2009 Cals entered into an

agreement with Asia Texx for acquiring plant and machinery

required for the refinery project. According to SEBI, Deep

Rastogi had significant influence over Cals and therefore as per

AS-18, Cals was liable to disclose to the exchanges about the

related party transaction between Cals and Asia Texx.

(k) Argument of Cals that the transaction between Cals and Asia

Texx was not a related party transaction and under the

provisions contained in AS-18, Deep Rastogi could not be said

to have significant influence over Cals is without any merit.

Although Deep Rastogi did not hold any shares of Cals,

admittedly, Deep Rastogi was a director of Cals controlled by

the Spice Energy group on the date on which Cals entered into

agreement with Asia Texx. It is not in dispute that Asia Texx

was wholly owned by Gagan Rastogi (son of Deep Rastogi) who

was also one of the promoters of the Spice Energy group. In 23

these circumstances, inference drawn in the impugned order

that Deep Rastogi had significant influence over Cals as

contemplated under AS-18 cannot be faulted. Consequently,

findings recorded in the impugned order that the transaction

between Cals and Asia Texx was a related party transaction and

failure to disclose the same to the Stock Exchanges was in

violation of Clause 32 of the Listing Agreement cannot be

faulted.

(l) No doubt that some of the directors of Cals have been let off by

SEBI by merely giving a warning which in our opinion was

totally wrong. Having recorded a finding in para 30(2) of the

order dated 31/12/2014 that other directors of Cals cannot be

said to be unaware of the activities of Cals, the WTM of SEBI

could not have let off some of the directors of Cals merely

because they had not signed any document and there is no

direct evidence to show their involvement in the fraud. Very

fact that they were part of the BoD of Cals which indulged in

committing various violations in relation to the GDR issue, was

sufficient to hold them liable for the violations. However, fact

that some of the directors of Cals have been erroneously let off

by the WTM of SEBI cannot be a ground for Cals to escape

liability for the fraud committed on the investors in India

especially when the fraud was committed by Cals controlled by

the Spice Energy group and even today, admittedly, Cals is

controlled by the Spice Energy group.

24

(m) Argument advanced on behalf of Cals that Guha Roy and

Ramachandran (directors of Cals) had contended that on

30/10/2007, the Board of Cals did not discuss or approve

execution of the Account Charge Agreement and since they are

let off with a warning, Cals should also be let off is without any

merit. In fact, argument of Ramcachandran recorded in para

10(xvi) of the order dated 31/12/2014 is that in the meeting held

on 30/10/2007 Sundararajan had informed the Board that the

GDR issue of Cals was for USD 200 million and that there was

commitment from the investors for subscribing the GDRs.

Aforesaid submission of Ramachandran read with the Board

resolution dated 30/10/2007 certified by Sundararajan clearly

shows that as on 30/10/2007 the BoD of Cals knew as to who

would be subscribing to the GDRs and that the GDR

subscription amount so received would have to be secured in

connection with the loan to be taken. Alternate argument of

Cals that by resolution dated 30/10/2007 certified by

Sundararajan, Cals intended to give GDR subscription amount

as security to the loan that may be taken by Cals cannot be

accepted, because, firstly, as on that date there was no proposal

by Cals to take any loan and secondly, the entire USD 200

million raised for the refinery project could not be used for any

other purpose. Thus, the submission made by Ramachandran,

in fact, supports the conclusion drawn in the impugned order

that even before issuance of GDRs, Cals knew as to who would

be the initial subscribers to the GDRs. In these circumstances, 25

the decision of SEBI that Cals financed Honor for subscribing to

its own GDRs cannot be faulted.

(n) It is interesting to note that Cals (controlled by the Spice Energy

group) not only financed Honor (owned by Malhotra, promoter

of the Spice energy group) for subscribing to the GDRs of Cals,

but also resolved in its BoD meeting held on 19/1/2008 to

appoint Malhotra as an advisor to Cals for setting up the

refinery in Haldia on a monthly consultancy charge of Rs.15 lac.

Thus, it is evident that Malhotra was not a stranger to Cals and

all acts done by Cals in relation to the GDRs were at the instance

of Malhotra, promoter of the Spice Energy group. As the

promoter directors of Cals have also participated in the fraud

committed in relation to the GDRs, Cals cannot escape liability

for the misdeeds committed by its entire BoD.

(o) For all the aforesaid reasons, the findings recorded and the

directions issued against Cals in the impugned order dated

23/10/2013 cannot be faulted.

SARVESH KUMAR GOORHA (APPEAL NO. 141 OF 2015)

8. Arguments advanced on behalf of Goorha, promoter-director of Cals is

that by 23rd July, 2007 the Spice Energy group had taken over the

management of Cals and thereafter all decisions relating to the refinery

project and the GDR issue were taken by the majority directors of Cals

nominated by the Spice Energy group. It is contended that Goorha was only

a figurehead and was not involved in the day-to-day management of Cals,

nor did he have any role to play, nor was he party to any dispute in respect of 26

the refinery project or the GDR issue. Relying on various decisions of the

Apex Court, it is contended on behalf of Goorha that in the absence of facts

relating to fraud unequivocally stated, SEBI is not justified in holding that

Goorha was party to the fraud committed by Malhotra and majority directors

of Cals nominated by the Spice Energy group. It is further submitted that

mere fact that Goorha had signed the Account Charge Agreement could not

be a ground to hold that Goorha was aware of the fraud being committed.

Goorha had submitted that the Account Charge Agreement was signed by

him reluctantly and without any knowledge of its contents, only because,

Sundararajan had requested Goorha to execute the Account Charge

Agreement. It is submitted that the impugned decision is based on

conjectures and surmises and not on any factual basis which is sufficient to

sustain the charge levelled against Goorha.

9. In our opinion, fact that Goorha had signed the Account Charge

Agreement on behalf of Cals is sufficient to hold that he was privy to the fact

that Cals controlled by the Spice Energy group was financing subscription of

its GDRs in gross violation of the Securities laws. Goorha does not dispute

the resolution dated 30/10/2007 certified by Sundararajan, according to which

Cals had authorized the Board to open an account with Banco for depositing

the GDR subscription amount of USD 200 million and that amount could be

kept as security for any loan that may be taken. Since the Account Charge

Agreement of Cals is executed by Goorha, it is apparent that Goorha signed

the Account Charge Agreement on the basis of the resolution dated

30/10/2007 duly certified by Sundararajan.

10. Argument of Goorha that he signed the Account Charge Agreement

without knowing the contents of that agreement is ex facie untenable because, 27

the very name of the document 'Account Charge Agreement' itself suggests

that the amounts in the account of Cals would stand charged as per the terms

set out in the Account Charge Agreement. At the relevant time, there was

only one account of Cals with Banco for depositing the GDR subscription

amount and there was no proposal on part of Cals to take any loan from

Banco. Thus, the title of the document 'Account Charge Agreement' itself

indicates the object with which it is being executed and to ascertain the object

it was not necessary to read the entire document. Therefore, argument of

Goorha that he signed the Account Charge Agreement without knowing its

contents is wholly unsustainable. In these circumstances, the findings

recorded against Goorha and the directions issued against Goorha in the

impugned order cannot be faulted. Accordingly, we find no merit in the

appeal filed by Goorha.

D. SUNDARARAJAN (APPEAL NO.155 OF 2015)

11. Findings recorded in the impugned order against Sundararajan is that

he was involved in the fraud perpetrated in relation to the GDR issue of Cals

and was aware of the execution of Account Charge Agreement and Credit

Agreement. It is further held that Sundararajan was responsible for

submitting false information to SEBI regarding the initial subscribers to the

GDRs issued by Cals. It is also held that Sundararajan was aware of the fact

that the transaction between Cals and Asia Texx which was a related party

transaction, however failed to take steps to disclose the same. For the

aforesaid violations, Sundararajan is prohibited from accessing the capital

market directly or indirectly and dealing in securities or instruments with

Indian securities as underlying in any manner whatsoever for a period of 10

years.

28

12. Basic argument advanced on behalf of Sundararajan is that he was not

aware of the execution or contents of the alleged Account Charge Agreement

entered into between Cals and Banco. It is submitted that the BoD resolution

dated 30/10/2007 certified by Sundararajan neither refers to execution of the

Account Charge Agreement nor authorizes that the GDR proceeds be kept as

security to the loan availed by a third party i.e. Honor. It is submitted that

the resolution passed on 30/10/2007 was intended to cover as security for any

loan that Cals may avail from Banco from time to time. Therefore, the finding

recorded in the impugned order that the BoD of Cals on 30/10/2007 had

authorized Sundararajan and Goorha to sign the Account Charge Agreement

so as to secure the GDR subscription amount as security in connection with

loans taken by Honor is factually incorrect. It is submitted that merely

because the Account Charge Agreement contains a clause that any notice or

communication in relation to the Account Charge Agreement be issued in the

name of Sundararajan, it could not be inferred that Sundararajan had

knowledge about the Account Charge Agreement. Similarly, it is submitted

that the GDR subscription amount was withdrawn as and when required for

the business purposes of Cals and therefore, the inference drawn that the

withdrawals were made in consonance with the terms of the Account Charge

Agreement is wholly unjustified.

13. With reference to the finding that Sundararajan had furnished false

information relating to the initial subscribers to the GDRs, it is submitted that

Sundararajan was neither aware of the credit agreement nor aware of the

Account Charge Agreement and he had submitted information on the basis of

the information relating to initial subscribers received from the Merchant 29

Banker/Lead Manager to the GDRs. In these circumstances, it is submitted

that Sundararajan could not be held guilty of submitting false information.

14. As regards the non-disclosure of related party transaction, it is

submitted that Sundararajan had no knowledge about the significant

influence of Gagan Rastogi in Asia Texx and that the transaction between

Cals and Asia Texx was a related party transaction. It is submitted that when

the said contract was executed, Sundararajan was only a non-Executive

Director of Cals and thus he was never involved in the due diligence or

negotiation of the proposal and finalization of the contract with Asia Texx. It

is submitted that just because Sundararajan was a director of Cals, it could

not be presumed that he was aware of the related party transaction between

Cals and Asia Texx. It is submitted that the GDR process got over in the year

2007 and the agreement with Asia Texx was executed by Cals in the year

2009. Merely because Sundararajan had signed the agreement on behalf of

Cals, knowledge of beneficial ownership of Asia Texx by Gagan Rastogi

cannot be attributed to Sundararajan. In these circumstances, it is submitted

that Sundararajan cannot be said to have concealed information relating to

the related party transaction.

15. As regards the findings recorded in para 27 of the impugned order that

Sundararajan had failed to provide correct information in response to the

summons issued under Section 11C(3) of the SEBI Act, it is submitted that

Sundararajan was not aware that the transaction between Cals and Asia Texx

was a related party transaction and therefore it could not be said that

Sundararajan had concealed any information in response to the summons

issued under Section 11C(3).

30

16. We see no merit in the above contentions. Admittedly, Sundararajan

was in-charge of the GDR issue and as per the BoD resolution of Cals, dated

30/10/2007 certified by Sundararajan, the GDR proceeds were liable to be kept

as security to the loans, if any. Argument of Sundararajan that the above

resolution was intended to cover as security for any loan that Cals may avail

from Banco from time to time is totally dishonest to say the least, because,

firstly, amount of USD 200 million were raised through GDRs for the refinery

project and the said amounts could be utilized only for the refinery project

and could not be kept as security for any loan that may be taken. Secondly, as

on 30/10/2007 there was no proposal whatsoever on part of Cals to take any

loan outside India for any purpose. Therefore, in the facts of present case, it is

abundantly clear that as on 30/10/2007 Sundararajan, nominee of Spice

Energy group knew that the GDR subscription amount was liable to be kept

as security for the loan taken by Honor owned by Malhotra, promoter of the

Spice Energy group. Thirdly, fact that Banco under the Credit Agreement

dated 11/12/2007 agreed to give loan of USD 200 million to Honor (owned by

a promoter of Spice Energy group) for subscribing to the GDRs of Cals and on

the same day i.e. on 11/12/2007 itself Cals (controlled by Spice Energy group)

executed an Account Charge Agreement thereby agreeing to keep the GDR

subscription amount of USD 200 million as security for the loan of USD 200

million taken by Honor from Banco, leave no manner of doubt that the

resolution passed on 30/10/2007 was intended to secure the loan taken by

Honor for subscribing to the GDRs of Cals.

17. Explanation given by Sundararajan relating to the discrepancy in the

resolution dated 30/10/2007 recorded in the minute book of Cals and the

resolution dated 30/10/2007 certified by him is not worthy of acceptance 31

because, assuming that there was lapse on part of the Company Secretary of

Cals to record the said resolution in the minute book of Cals on 30/10/2007,

then, Sundararajan would have got the error corrected in the subsequent

Board meeting. However, in the meeting of BoD of Cals held on 19/1/2008, the

minutes of BoD meeting dated 30/10/2007 as recorded in the minute book of

Cals was approved. Very fact, that Sundararajan who was present in the BoD

meeting dated 19/1/2008 did not take any steps to get the alleged error in the

minutes of meeting dated 30/10/2007 rectified, clearly shows the mala fide

intention on part of Sundararajan.

18. Prior to joining Cals, Sundararajan was Group CFO of the Spice

Energy group. Pursuant to the resolution passed by the BoD of Cals on

23/7/2007, 4 nominees of Spice Energy group including Sundararajan were

appointed as directors of Cals. As a result of inducting 4 nominees of the

Spice Energy group, control of Cals stood vested in the Spice Energy group

from 23/7/2007. This fact, according to Goorha, was not recorded in the

minutes of Cals dated 23/7/2007 at the instance of Sundararajan and the same

was recorded in the e-mail sent by Goorha to Sundararajan on 2/8/2007 with a

copy to Deep Rastogi. During the course of arguments, Sundararajan has

admitted before us that he had received the aforesaid e-mail of Goorha dated

2/8/2007. These facts on record clearly show that Sundararajan was

instrumental in keeping investors in dark about the Spice Energy group

taking over the control of Cals from 23/7/2007.

19. During the course of arguments, Sundararajan has also admitted that

he had sent an e-mail to Goorha on 13/11/2007 expressing his inability to go to

London for executing the documents on behalf of Cals and requested Goorha 32

to sign necessary documents on behalf of Cals. Accordingly, Goorha had

signed the Account Charge Agreement on 12/11/2007 (as per the date in

London). Apart from signing the Account Charge Agreement, no other

agreement was signed on behalf of Cals on 12/11/2007. These facts clearly

demonstrate that Sundararajan was clearly aware that the document to be

executed on behalf of Cals at London on 12/12/2007 was the Account Charge

Agreement. Therefore, argument of Sundararajan that he did not know

anything about the Account Charge Agreement is a blatant lie.

20. Once it is held that Sundararajan was instrumental in opening a bank

account of Cals with Banco for depositing the GDR subscription amount of

USD 200 million and that he was instrumental in executing the Account

Charge Agreement by Cals for securing the loan of USD 200 million taken by

Honor from Banco for subscribing to GDRs of Cals and in fact USD 200

million was deposited by Banco in the account of Cals from the bank account

of Honor with Banco, it becomes crystal clear that the sole subscriber to the

GDRs of Cals was Honor and no one else. In these circumstances, argument

of Sundararajan that he had given information to the Stock Exchange

regarding the initial subscribers to the GDRs of Cals, on the basis of

information received from the Merchant Banker/Lead Manager clearly shows

that it was stage managed to mislead the investors in India. Having opened

an account on behalf of Cals with Banco for depositing the GDR subscription

amount of USD 200 million and having made Goorha to sign the Account

Charge Agreement so as to secure the loan taken by Honor for subscribing to

the GDRs of Cals, it does not lie in the mouth of Sundararajan to contend that

he honestly believed that foreign investors other than Honor had subscribed

the GDRs of Cals. In these circumstances, the finding recorded in the 33

impugned order that Sundararajan concealed the information in relation to

initial subscribers to the GDRs of Cals in response to the summons issued

under Section 11C(3) of SEBI Act cannot be faulted.

21. Argument of Sundararajan that he was not aware that the transaction

between Cals and Asia Texx was a related party transaction is without any

merit because the agreement between Cals and Asia Texx was signed by

Sundararajan as authorized representative of Cals on 5/2/2009. Deep Rastogi

was involved in the affairs of Cals even before he became a director of Cals is

evident from the e-mail of Goorha (promoter-director of Cals) dated 2/8/2007

and the minutes of BoD of Cals dated 12/12/2007. Moreover, Asia Texx was

beneficially owned by Gagan Rastogi (son of Deep Rastogi) who was also one

of the promoters of the Spice Energy group. In these circumstances, inference

drawn in the impugned order that Sundararajan was aware of the fact that

Deep Rastogi had significant influence over Cals as contemplated under AS-

18 and failure to disclose the related party transaction between Cals and Asia

Texx was in violation of the Securities laws, cannot be faulted.

22. For all the aforesaid reasons, we see no merit in the appeal filed by

Sundararajan.

DEEP KUMAR RASTOGI (APPEAL NO.220 OF 2015)

23. Basic argument advanced on behalf of Deep Rastogi is that he became

director of Cals on 19/1/2008 that is, after the GDRs were issued by Cals on

12/12/2007 and, therefore, Deep Rastogi cannot be said to be a party to the

fraud committed by Cals in relation to the GDR issue. It is submitted that

Deep Rastogi had no knowledge of the Credit Agreement or the Account 34

Charge Agreement and that the transaction of Cals with Asia Texx was not a

related party transaction, because, Cals had no significant influence over Asia

Texx.

24. Involvement of Deep Rastogi in the affairs of Cals even before his

becoming director of Cals on 19/1/2008 is evident from the e-mail sent by

Goorha on 2/8/2007 addressed to Sundararajan with a copy to Deep Rastogi.

In the said e-mail, Goorha has specifically stated that on induction of four

Spice Energy group nominees as directors of Cals, there was change of

management which ought to have been recorded in the minutes of the AGM

held on 23/7/2007, however, at the instance of Sundararajan nominated by

Spice Energy group and in-charge of the GDR issue, the said resolution has

not been recorded. Very fact that Goorha, promoter-director of Cals had sent

a copy of an e-mail dated 2/8/2007 to Deep Rastogi, when he was not even a

director of Cals, clearly shows that Deep Rastogi had significant influence

over Cals even before becoming a director of Cals.

25. Apart from the above, BoD of Cals on 12/12/2007 resolved to permit

Deep Rastogi to operate the bank account of Cals to be opened with the Axis

Bank Ltd. Thus, Deep Rastogi was permitted to operate the bank account of

Cals when he was not a director of Cals which clearly falsifies the claim made

by Deep Rastogi that he was not concerned with the affairs of Cals prior to

becoming director of Cals on 19/1/2008.

26. It is relevant to note that in para 6.9(c) of the Memo of Appeal, Deep

Kumar Rastogi has admitted that Sundararajan and Chilikuri deliberately

misled him by stating that the transaction of Cals with Asia Texx was an

arms-length transaction requiring no disclosure. This admission made by 35

Deep Rastogi clearly shows that at all times Deep Rastogi knew that

transaction between Cals and Asia Texx was a related party transaction

requiring disclosure, however, other directors prevailed on him and hence no

disclosure was made. In these circumstances, the findings recorded in the

impugned order that Deep Rastogi had significant influence over Cals and

that he had failed to disclose related party transaction between Cals and Asia

Texx cannot be faulted. Accordingly, we see no merit in the appeal filed by

Deep Rastogi.

27. In the result, all four appeals are dismissed with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

12/10/2017 prepared & compared by-dg