Durga Shankar Maity vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Order Reserved On: 06.03.2018 Date of Decision : 21.03.2018

Appeal No. 246 of 2015

1.

Brooks Laboratories Ltd.

2. Mr. Atul Ranchal

3. Mr. Rajesh Mahajan 502, 5th Floor, Kanakia Atrium-2, Next to Hotel Courtyard Marriott, Andheri Kurla Road, Andheri (East), Mumbai- 400 093 ...Appellants

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. P. N. Modi, Senior Advocate with Mr. Vinay Chauhan, Ms. Kalpana Desai and Mr. K. C. Jacob, Advocates i/b Corporate Law Chambers India for Appellants.

Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent.

WITH Appeal No. 322 of 2015

Durga Shankar Maity 502, 5th Floor, Kanakia Atrium-2, Next to Hotel Courtyard Marriott, Andheri Kurla Road, Andheri (East), Mumbai- 400 093 ...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 2

Mr. Vinay Chauhan, Advocate with Mr. K. C. Jacob, Advocate i/b Corporate Law Chambers India for the Appellant.

Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent.

WITH Appeal No. 323 of 2015

Ketan Shah 350/5, Sharda Niwas, Jawahar Nagar, Goregaon (W), Mumbai- 400 062 ...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, Advocate with Mr. K. C. Jacob, Advocate i/b Corporate Law Chambers India for the Appellant.

Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K. Ashar & Co. for the Respondent.

AND Appeal No. 324 of 2015

Parvinder Kaur R/o. # 433, HMT Colony, Pinjore, Dist. Panchkula- 134113 ...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, Advocate with Mr. K. C. Jacob, Advocate i/b Corporate Law Chambers India for the Appellant.

Mr. Shyam Mehta, Senior Advocate with 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 common order

passed by the Adjudicating Officer ("AO" for short) of Securities and

Exchange Board of India ("SEBI" for short) on January 12, 2015. By the

said order individual penalty on each appellant in all aggregating to

` 11.80 crore has been imposed under Section 15HA/ 15HB of SEBI Act

for violating SEBI (Prohibition of Fraudulent and Unfair Trade Practice

relating to Securities Market) Regulations, 2003 ("PFUTP Regulations"

for short) and SEBI (Issue of Capital and Disclosure requirements)

Regulations, 2009 ("ICDR Regulations" for short). Since the dispute in

all these appeals arise from the common order passed by the AO, all

these appeals are heard together and disposed of by this common

decision.

2. Brooks Laboratories Limited ("company" for convenience) is

engaged in research and manufacture of wide range of pharmaceutical

products catering to the critical care segment. Mr. Atul Ranchal and Mr.

Rajesh Mahajan (Appellant Nos. 2 & 3 in Appeal No. 246 of 2015) are

Chairman & Managing Director of the company. Mr. Durga Shankar

Maity (Appellant in Appeal No. 322 of 2015), Mr. Ketan Shah

(Appellant in Appeal No. 323 of 2015) and Ms. Parvinder Kaur

(Appellant in Appeal No. 324 of 2015) are the Chief Executive Officer,

Chief Financial Officer and Company Secretary of the company

respectively.

4

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

a) In the year 2009, the company decided to expand its

business by setting up an additional plant in JB SEZ

at Panoli, Gujarat.

b) On 01.06.2010, company paid ` 63,30,169/- as 10%

advance for acquiring a plot in JB SEZ.

c) Sometime in May 2010, D&A Financials Ltd., a

Merchant Banker suggested to the company to raise

funds for the above expansion project through the

Initial Public Offer ("IPO") and assured that they

would handle all the formalities. Accordingly, the

company appointed D&A Financial Ltd., as the

Merchant Banker for the IPO.

d) On 25.11.2010 Draft Red Herring Prospectus

("DRHP") was filed by the Merchant Banker before

SEBI.

e) Pursuant to an application made on 26.11.2010,

Bombay Stock Exchange Ltd., ("BSE") & National

Stock Exchange of India Limited ("NSE") granted in-

principle approval on 23.12.2010 & 03.02.2011

respectively for listing the shares of the company after

the IPO.

5

f) In the Annual Budget presented in February 2011, the

Government of India proposed to cut tax incentives

for new industries in Special Economic Zone (SEZs)

and proposed a deadline of 31.03.2012 for setting up

the manufacturing units in SEZs to avail the tax

incentives.

g) On 04.04.2011 JB SEZ called upon the company to

pay 20% of the purchase price of the plot as per the

Memorandum of Understanding ("MOU") entered

into by and between them. By letter dated 07.04.2011

the company refused to pay any amount by stating

that it will not pay until the infrastructure required to

start the plant was ready.

h) To avail the benefits of tax holiday as per the annual

budget, it was necessary for the company to ensure

that the new plant was set up in JB SEZ before

31.03.2012. Since the DRHP was still pending

clearance from SEBI, the company started exploring

options for short term funding for purchase of plant

and machinery /civil work for the new plant and

started short listing suppliers/ contractors for supply

of plant and machinery/ civil work. A Chartered

Accountant brought lenders who were agreeable to

give Inter Corporate Deposits ('ICD's') to the

company on interest.

6

i) On 25.05.2011 the Board of Directors of the company

passed a resolution to raise funds through ICD's from

(i) Shitalnath Buildcon Pvt. Ltd. (Shitalnath), (ii) Blue

Print Securities Ltd. (Blue Print), (iii) Konark

Commerce & Industries Ltd. (Konark), & (iv)

Shardaraj Trade Fin Ltd (Shardaraj). Similar

resolution were passed subsequently on 02.07.2011

and 21.07.2011 for raising funds through ICDs from

other parties. Thus the company raised ` 30.40 crore

by way of ICDs during the period from 30.05.2011 to

25.07.2011.

j) On 01.06.2011 the company entered into a contract

with Suryamukhi Projects Pvt. Ltd. ("Suryamukhi")

for supply of design, engineering, planning, civil

work, electrical work etc., for the new project.

Between 01.06.2011 to 04.06.2011 the company paid

` 15.30 crore to Suryamukhi so that they could

procure materials and tie up with sub-contractors for

commencing the work.

k) After the Chairman and Managing Director of the

company attended an International Conference in

China relating, inter alia, to Pharma Machinery and

equipment in June 2011, the company decided that for

the purpose of ensuring that the products 7

manufactured by the company meet the stringent

requirements for exports to the developed countries it

would be just and proper to import the machineries

for the new project rather than using the indigenous

machinery. Accordingly, on receiving proforma

invoice dated 20.06.2011 from Neo Power Universal

FZ LLC, UAE ('Neo Power'), the company paid

` 13.97 crore to Neo Power between 05.07.2011 to

30.08.2011 for importing the requisite machinery.

l) After SEBI Approved the DRHP dated 25.11.2010 on

01.08.2011, Red Herring Prospectus (RHP) was filed

by the company on 03.08.2011. Thereafter, the IPO

opened on 16.08.2011 and closed on 18.08.2011. The

prospectus was filed by the company with SEBI/

Registrar of Companies on 22.08.2011.

m) On 2/3.09.2011 the company received ` 61.03 crore

as the IPO proceeds from the Merchant Banker (after

deducting the issue related expenses). On 05.09.2011

the shares of the company were listed on the stock

exchanges.

n) Out of the IPO proceeds so received, the company

repaid ` 30.40 crore (along with interest after

deducting TDS) towards the ICDs availed by the

company. Further the company parked ` 14.40 crore 8

in fixed deposit and the remaining balance IPO

proceeds were temporarily utilized by the company

for the purposes in consonance with disclosures made

in the prospectus.

o) Sometime in October 2011 the promoters of the

company visited JB SEZ site to assess the

infrastructure development work and found that it was

too slow and it would not be possible to meet the

31.03.2012 deadline and accordingly requested

Suryamukhi & Neo Power not to commence work or

deliver any machineries.

p) On 17.12.2011 the Board of Directors of the company

passed a resolution to shift the project from JB SEZ in

Panoli to Domestic Tariff Zone (DTZ) in Vadodara

and secure the approval of the shareholders of the

company through postal ballot in that regard.

q) In the meantime, SEBI formed a prima facie opinion

that utilization of the IPO proceeds towards

repayment of ICD amounted to siphoning of funds.

SEBI also formed prima facie opinion that the

company and its Book Running Lead Manager

(BRLM) to the IPO had failed to disclose material

information in the DRHP/ prospectus. Accordingly by

an ad interim order dated 28.12.2011 the Whole Time 9

Member ("WTM" for short) of SEBI prohibited the

company and its promoters from accessing the

securities market until further orders and directed the

company to call back the advances given to

Suryamukhi and Neo Power and further directed that

unutilized IPO proceeds be deposited in an ESCROW

account.

r) By its letter dated 03.01.2012 the company called

upon Suryamukhi and Neo Power to return the

advance amount paid to them. However, Suryamukhi

informed the company that it cannot return the money

as it had already tied up with sub-contractors and had

procured raw materials required for the construction

work as contracted and that they were ready to start

the construction work whenever asked by the

company. Similarly, Neo Power informed the

company, that refund of advance amount was not

possible as it had already procured the machinery

and the same were ready for shipment at any time

desired by the company.

s) Between 28.01.2012 & 01.02.2012 postal ballot

resolution was duly passed by the shareholders of the

company to shift the project from JB SEZ to

Vadodara. On 03.02.2012 the company informed the

stock exchanges about the said resolution. 10

t) On 09.03.2012 the company bought 23,573 Sq. m. of

land at Vadodara for the new project. Immediately,

thereafter on 10.03.2012 the sub-contractor of

Suryamukhi commenced the development work and on

10.03.2012 itself the Ground Water Testing work at

Vadodara was undertaken by the sub-contractor of

Suryamukhi. Thereafter, on completion of other civil

work, Neo Power delivered 1st consignment of the

imported machinery to the appellant on 17.05.2012.

It is not in dispute that Suryamukhi and Neo Power

have discharged their obligation in relation to the

new project at Vadodara for which advance payments

were made to them in June-July 2011. It is also not in

dispute that new project at Vadodara is fully

functional.

u) On 09.07.2013 confirmatory order was passed by

SEBI thereby confirming the directions contained in

the ex-parte order dated 28.11.2011 until further

orders. Thereafter, show cause notice was issued to

the appellants and after considering the reply filed by

the appellants and after giving an opportunity of

hearing to the appellants, the AO of SEBI has passed

the impugned order on 12.01.2015. By the said order

it is held that the appellants are guilty of violating the

PFUTP Regulations and ICDR Regulations and 11

accordingly individual penalty has been imposed

under Section 15HA/15HB of SEBI Act in all

aggregating to ` 11.80 crore.

v) To complete the narration of facts we may also note

that the WTM of SEBI initiated proceedings against

the appellants for the same violations and passed an

order on 10.09.2015 thereby debarring the appellants

from accessing the securities market for 5 years from

the date of the ex-parte order dated 28.12.2011. The

WTM of SEBI has also permitted the company to use

the IPO funds of ` 14.40 crore kept in ESCROW

account for the purposes set out in the prospectus.

Appellants had filed appeal against the order of WTM

dated 10.09.2015. However, before the appeal could

be disposed of on merits the appellants suffered the

debarment specified in the order passed by the WTM

on 10.09.2015. Hence, the appeal became infructuous

and was disposed of accordingly.

4. Mr. Modi learned Senior Advocate and Mr. Chauhan, learned

counsel for appellants and Mr. Mehta learned Senior Advocate for SEBI

have extensively argued before us on behalf of their respective clients.

5. By the impugned order dated 12.01.2015 the AO of SEBI has

imposed penalty on the appellants on ground that the appellants have

committed the following violations:- 12

a) Appellants have fraudulently in complicit with

Suryamukhi indulged in round tripping of funds and

ultimately siphoned of ` 8 crore from the IPO

proceeds in the guise of repaying the ICDs.

b) Appellants transferred ` 2.50 crore from the IPO

funds to Overall Financial Consultants P. Limited

("Overall" for convenience) through layers of several

entities which were ultimately utilized by Overall to

trade in the scrip of the company and thus the losses

incurred by Overall were adjusted through the IPO

proceeds resulting in misutilization of IPO proceeds

to the extent of ` 2.5 crore.

c) Appointment of Suryamukhi for the project work and

advance payment of ` 15.30 crore to Suryamukhi for

the project work was a material information and a

risk factor required to be disclosed under the PFTUP

Regulations and under the ICDR Regulations.

However, the same were not disclosed. Moreover,

even after making advance payment of ` 15.30 crore

to Suryamukhi it was falsely stated in the RHP/

Prospectus that the cost of construction was ` 12.20

crore. Therefore, failure to disclose material facts

and making false and misleading statements in the

RHP/ Prospectus relation to the cost of construction 13

was in gross violation of the PFUTP Regulations and

ICDR Regulations.

d) Neither the appointment of Neo Power for supply of

plant and machinery nor advance payment of ` 13.97

crore made to Neo Power for supply of plant and

machinery was disclosed in the RHP/Prospectus.

Moreover, even after appointing Neo Power for

supply of plant and machinery and making advance

payment to Neo Power it was falsely stated in the

RHP/Prospectus that the company has not entered

into definitive agreement for supply of plant and

machinery. Thus, failure to disclose material facts,

and making false/ misleading statements in the RHP/

Prospectus in relation to supply of plant and

machinery was in violation of the PFUTP/ICDR

Regulations.

e) Raising funds by way of ICD to the extent of ` 30.40

crore to be repaid with interest from the IPO

proceeds was a material information required to be

disclosed under the PFUTP/ ICDR Regulations,

however, the said information was not disclosed in the

RHP/ Prospectus. On the contrary, it was falsely

stated in the RHP/ Prospectus that the company had

not entered into any bridge loan facility that would be 14

repaid from the IPO funds, which was in violation of

the PFUTP/ ICDR Regulations.

For all the aforesaid reasons, the AO has deemed it fit to impose

penalty on each appellant in all aggregating to ` 11.80 crore.

6. In our opinion, decision of the AO that the appellants have

indulged in round tripped of funds deserves to be upheld in view of facts

and for the reasons set out herein below:-

a) During May-July 2011 the Board of Directors of the

company resolved to borrow funds through ICDs from

several entities including Shitalnath, Blue Print,

Konark, Shardaraj and Sunshine.

b) Accordingly, on 30.05.2011 the company received ` 4

crore as ICD from Shitalnath.

c) On 01.06.2011 the company entered into an

agreement with Suryamukhi for supply of design,

engineering, planning, civil work, electrical work for

the new project and paid ` 4 crore to Suryamukhi as

advance even though there was no infrastructure

available for commencing the project work at JB SEZ.

d) On June 1 / 2, 2011, Suryamukhi transferred total

sum of ` 3.5 crore to Blue Print (through

Mangalmayee Hirise Pvt. Ltd.), Shardaraj, sunshine 15

Housecon Ltd. (Sunshine) and Konark (through

Pushpanjali Hirise Pvt. Ltd. and Balram Tie-up) and

on 02.06.2011 itself Blue Print, Shardaraj, Sunshine

and Konark paid to the company ` 3.50 crore by way

of ICDs. Thus, out of the amount of ` 4 crore paid by

the company to Suryamukhi,` 3.5 crore came back as

ICDs through Blue Print, Sunshine, Shardaraj, and

Konark.

e) Thereafter, on 02.06.2011 the company received

additional amount of ` 3 crore as ICD from

Shitanath.

f) On 03.06.2011 the company transferred ` 6 crore to

Suryamukhi and on 03.06.2011 itself Suryamukhi

transferred ` 4.5 crore to Konark and on the same

day Konark in turn transferred ` 4.5 crore as ICD to

the company.

g) Thereafter, on receipt of IPO proceeds, the company

repaid the ICDs with interest inter alia to Konark,

Blue Print, Shardaraj and Sunshine from the IPO

proceeds.

h) Aforesaid facts clearly show that the amounts

transferred by the company to Suryamukhi came back

to the company by way of ICD through four connected 16

entities, viz., Blue Print, Shardaraj, Sunshine and

Konark.

i) It is an admitted fact that till October 2011

infrastructure was not available at JB SEZ for

commencing the project work. In such a case, giving

advance amount to Suryamukhi on 01.06.2011 for the

project work cannot be said to be a bonafide decision

taken by the appellants.

j) Apart from the above, as per the agreement dated

01.06.2011 the project cost was to be paid to

Suryamukhi in installments. Thus, making advance

payment to Suryamukhi was not in consonance with

the agreement dated 01.06.2011 entered into by and

between the company and Suryamukhi.

k) On 04.04.2011 JB SEZ had called upon the company

to pay 20% of the purchase price, however, the

company declined to pay any amount till the

infrastructure was made available. Thus, the company

on one hand declined to pay any amount to JB SEZ

till the infrastructure was made available and on the

other hand made advance payment to Suryamukhi

even though infrastructure was not available for

commencing the project work.

17

l) It is interesting to note that on 01.06.2011 itself

Suryamukhi transferrered ` 3.50 crore to Blue Print,

Shardaraj, Sunshine and Konark, who in turn paid

that amount of ` 3.50 crore to the company on

02.06.2011 as by way of ICD.

m) Similarly, 03.06.2011 the company transferred ` 6

crore to Suryamukhi as advance. On the same day

Suryamukhi transferred ` 4.50 crore to Konark and

Konark in turn transferred ` 4.50 crore to the

company as and by way of ICD on the same day.

n) Thus, funds received from Shitalnath were rotated

through Suryamukhi and the four connected entities

viz., Konark, Sunshine, Blue Print and Shardaraj who

had common directors and had common address. In

these circumstances, the AO was justified in holding

that the appellants had indulged in round tripping of

funds.

7. Decision of the AO that ` 8 crore paid from the IPO funds to the

four connected entities towards repayment of the ICDs amounts the

siphoning of the IPO funds cannot be sustained for the following

reasons:-

a) Since the four connected entities viz., Konark,

Sunshine, Shardaraj and Blue Print had paid ` 8 18

crore by way of ICD only after receiving funds from

Suryamukhi, the AO arrived at a conclusion that the

said amount of ` 8 crore represented fictitious ICDs

and accordingly held that repayment of the said

amount of ` 8 crore from IPO funds amounts to

siphoning of the IPO funds.

b) It is relevant to note that the total amount raised by

the company by way of ICDs was ` 30.40 crore which

included ICD of ` 8 crore received from the four

connected entities. Out of the amount of ` 30.40

crore raised through ICDs, ` 15.30 crore was paid by

the company as advance payment to Suryamukhi

towards the project work. It is not in dispute that

Suryamukhi commenced the project work at Vadodara

on 10.03.2012 and utilized entire amount of ` 15.30

crore for completing the said project and it is not in

dispute that the said project is fully operational. Since

the entire amount of ` 15.30 crore paid by the

company to Suryamukhi from the funds received

through ICDs has been fully utilized for the project

work, the AO is not justified in holding that the ICDs

to the extent of ` 8 crore received from the four

connected entities were fictitious ICDs. 19

c) Although AO has held, in the impugned order that

Suryamukhi submitted bills only to the extent of

` 14.09 crore, counsel for the appellants

demonstrated before us, that Suryamukhi had also

done the electrical installation work at the project site

and the AO has failed to consider bills relating to

electrical installation work submitted by Suryamukhi.

It is not in dispute that if the bills relating to electrical

installation work given by Suryamukhi is taken into

consideration, the total amount utilized for the project

work at Vadodara by Suryamukhi would be ` 15.30

crore.

d) Fact that Suryamukhi before commencing the project

work on 10.03.2012, had paid ` 8 crore to four

connected entities and the said connectecd entities in

turn had paid that amount of ` 8 crore as ICDs to the

company cannot be a ground to hold that the amount

of ` 8 crore received by the company from the four

entities were fictitious because, admittedly, entire

amount of ` 15.30 crore paid as advance has been

used by Suryamukhi for the project work. In such a

case, fact that Suryamukhi, before commencing the

project work had advanced ` 8 crore to four

connected entities and the said four connected entities

had advanced ` 8 crore by way of ICDs cannot be a

ground to hold that the ICDs to the extent of ` 8 crore 20

were fictitious and illusory. Consequently, repayment

of the said amount of ` 8 crore from the IPO proceeds

cannot be said to be siphoning of IPO proceeds. In

these circumstances, decision of the AO that ` 8 crore

has been siphoned-off from the IPO proceeds cannot

be sustained.

8. Decision of the AO that the appellants have misutilized IPO funds

by financing ` 2.50 crore to Overall through layers of several entities is

also unsustainable for the following reasons:-

a) Admittedly, the company has not paid ` 2.50 crore to

Overall. In fact, the company had paid ` 2.50 crore

from the IPO proceeds to Konark and Shardaraj

towards repayment of ICDs given by them. Konark

and Shardaraj thereupon paid ` 2.50 crore to Overall

which was utilized by Overall for trading in the scrip

of the company and thereby incurred loss of ` 2.19

crore.

b) In the impugned order the AO has recorded a clear

finding that there is no connection between the

company and Overall. In such a case, fact that

Konark and Shardaraj on receiving ` 2.50 crore as

repayment of ICDs, gave that amount to Overall for

buying/ selling the shares of the company, cannot be a

ground to hold that ` 2.50 crore was paid by the 21

appellants from the IPO funds to finance Overall to

trade in the shares of the company.

c) Fact that the company had raised ` 2.50 crore from

Konark and Shardaraj by way of ICDs is not in

dispute. Having received ` 2.50 crore from Konark

and Shardaraj the company was obliged to repay

` 2.50 crore with interest to Konark and Shardaraj.

Accordingly, on receipt of IPO proceeds the company

was justified in repaying ` 2.50 crore with interest

from the IPO proceeds to Konark and Shardaraj.

Fact that Konark and Shardaraj on receiving ` 2.50

crore from the company paid that amount to Overall

could not be considered as payment by the company

to overall through Konark and Shardraj especially

when no connection is established between the

company and Overall. In these circumstances,

decision of the AO that repayment of ` 2.50 crore

from the IPO proceeds amounts to siphoning of ` 2.50

crore from the IPO proceeds cannot be sustained.

Consequently, payment of ` 2.50 crore to Konark and

Shardaraj from IPO funds cannot be said to be

misutilization of IPO funds.

9. Decision of the AO that the appellants have failed to disclose

appointment of Suryamukhi for the project work, failed to disclose 22

advance payment of ` 15.30 crore made to Suryamukhi and further made

false/ misleading statement in the RHP/ Prospectus relating to the cost of

the project and thereby violated the PFUTP Regulations and ICDR

Regulations deserves acceptance for the following reasons:-

a) Awarding the project work to Suryamukhi and giving

advance amount of ` 15.30 crore was a material

information and hence required to be disclosed to the

investors. While it was open to the appellants to

reject the lower offer given by Syal and Associates

and accept the offer given by Suryamukhi, once the

offer given by Suryamukhi was accepted and an

agreement was entered into for the project work, the

appellants were obliged to disclose the same to the

investors in the RHP/ Prospectus.

b) It is relevant to note that advance payment of ` 15.30

crore was made to Suryamukhi between 1st June, 2011

to 4th June 2011 whereas RHP was filed subsequently

on 03.08.2011 and the prospectus was filed thereafter

on 22.08.2011. Thus, it is evident that in the RHP/

Prospectus material fact relating to advance payment

of ` 15.30 crore to Suryamukhi has not been

disclosed.

23

c) Apart from the above, it was wrongly stated in the

RHP/ Prospectus that the cost of construction of the

project was ` 12.20 crore. Since, ` 15.30 crore was

already paid to Suryamukhi towards the cost of

construction before filing of RHP/ Prospectus, it is

apparent that the appellants have made false and

misleading statement in the RHP/ Prospectus in

relation to the cost of construction.

d) Making advance payment of ` 15.30 crore to

Suryamukhi even when there was no infrastructure

available at JB SEZ for developing the project was

clearly a risk factor in terms of Clause 1(iv) of Part A

of Schedule VII of the ICDR Regulations and was

therefore, required to be disclosed in the

RHP/Prospectus. Moreover, in Section III of the

RHP/ Prospectus, especially in para 6 thereof, it was

stated that the company has not entered into any

definitive agreement to utilize the net proceeds of the

IPO funds, which was clearly a false statement.

Under, Clause 1(VII) (F) of the ICDR Regulations

deployment of funds are required to be disclosed in

the RHP/ Prospectus. In the table containing the

details of deployment of funds at Page 77 of the

RHP/Prospectus it was stated that no amount has

been spent towards civil works/ construction as on

31.07.2011 and that the estimated amount was 24

` 12.20 crore which was a false and misleading

statement because in June 2011 the appellants had

paid advance amount of ` 15.30 crore to Suryamukhi

towards civil works/ cost of construction.

e) Argument advanced on behalf of the appellants that

advance payments were made to Suryamukhi so that

they are ready to commence work immediately on

being told to do is without any merit, because, firstly,

there was no infrastructure available for commencing

project work and JB SEZ immediately and there was

no reason to believe that the infrastructure would be

made available at JB SEZ in the near future.

Secondly, even the agreement entered into with

Suryamukhi on 01.06.2011 did not provide for

advance payment. Thirdly, having declined to give

advance amount to JB SEZ for providing

infrastructure, there was no reason for the appellants

to make advance payment to Suryamukhi. In any event

above material facts ought to have been disclosed in

the prospectus. Argument that the Merchant Banker

was responsible for the above lapses has no merit,

because, under the regulations framed by SEBI

appellants were equally responsible to ensure that

true and all material information were disclosed in

the RHP/ Prospectus.

25

f) For the aforesaid reasons, decision of the AO that the

appellants have failed to disclose material facts

relating to appointment of Suryamukhi, failed to

disclose advance payment of ` 15.30 crore made to

Suryamukhi and further made false and misleading

statements in the RHP/ Prospectus in gross violation

of PFUTP Regulations and ICDR Regulations cannot

be faulted.

10. Decision of the AO that the appellants have failed to disclose

appointment of Neo Power for supply of plant and machinery, failed to

disclose advance payment of ` 13.97 crore made to Neo Power and

further made false and misleading statement in the RHP/Prospectus

relating to supply of plant and machinery, in violation of PFUTP

Regulations and ICDR Regulations deserves acceptance for the following

reasons:-

a) Admittedly, appellants in June-July 2011 had placed

orders with Neo Power for supply of plant and

machinery and had made advance payments to Neo

Power on 5th July, 21st July, 25th July and 2nd August,

2011 in all amounting ` 13.97 crore. However, in

the RHP and the prospectus subsequently filed on

03.08.2011 and 22.08.2011 respectively these facts

were not disclosed. Appointing Neo Power (Foreign

Supplier) for supplying plant and machinery and

paying advance amount of ` 13.97 crore to Neo 26

Power even when there was no infrastructure

available for commencing the project work at JB SEZ,

was a material information and also a risk factor

which ought to have been disclosed as per the PFUTP

Regulations and the ICDR Regulations.

b) Apart from the above, in Section III of the RHP (Pg.

13) and particularly in para 6 thereof (Pg. 15) it was

expressly stated that the company has not entered into

any definitive agreement to utilize the net proceeds to

the issue and had not placed any order for purchase

of plant and machinery required for the project. It

was further stated that the company has received

certain quotations from the Indian Suppliers for

supply of plant and machinery. Since, the appellants

had already appointed Neo Power (Foreign Supplier)

and had paid ` 13.97 crore to Neo Power for supply

of plant and machinery, it is apparent that false and

misleading statements were made in the RHP/

Prospectus that no agreement has been entered into

for utilizing the IPO proceeds and no order has been

placed for purchase of plant and machinery.

c) Assuming that the plant and machinery supplied by

Neo Power are of superior quality and by awarding

contract to Neo Power the company has saved

substantial amount, these facts being material 27

information could not be suppressed in the RHP/

Prospectus.

d) Therefore, in the facts of present case, decision of the

AO that the appellants have failed to disclose material

information relating to appointment of Neo power,

failed to disclose advance payment of ` 13.97 crore to

Neo Power and made false/ misleading statement in

the RHP/ Prospectus relating to purchase of plant and

machinery in violation of the PFUTP/ ICDR

Regulations cannot be faulted.

11. Decision of the AO that the appellants are guilty of not disclosing

funds raised through ICDs and thereby violated PFUTP Regulations and

ICDR Regulations deserves acceptance for the following reasons:-

a) Fact that the company pursuant to the resolutions

passed by the Board of Directors received ICDs

aggregating to ` 30.40 crore from several parties

during the period from May to July 2011 not in

dispute. Raising such funds with interest liability was

clearly a material information required to be

disclosed. However, neither in the RHP filed on

03.08.2011 nor in the prospectus filed on 22.08.2011

above facts were disclosed.

28

b) This tribunal in the case of P. G. Electroplast Ltd. V/s

SEBI (Appeal No. 144 of 2014 decided on

30.08.2016) has held that raising funds through ICD

was in the nature of a bridge loan and hence,

required to be disclosed in the RHP/Prospectus.

c) Even under the ICDR Regulations, particularly

Clause 2(VII)(F) of Part-A of Schedule VIII thereof,

the sources of funds for a project are required to be

disclosed in the offer document.

d) Moreover, in the RHP/ Prospectus filed by the

company it was stated that the company has not

entered into any bridge loan facility that would be

repaid from the IPO fund. Having raised ` 30.40

crore by way of ICDs to be repaid through IPO

proceeds, the appellants could not have stated in the

RHP/ Prospectus that the company has not entered

into any bridge loan to be repaid from the IPO

proceeds.

e) Argument that the merchant banker is responsible for

not disclosing the ICDs in RHP/ Prospectus is without

any merit. Appellants were equally responsible to

ensure that all material information was disclosed

and further ensure that false/ misleading statements

were not made in the RHP/ Prospectus.

29

f) Therefore, in the facts of present case, decision of the

AO that the appellants have failed to disclose material

information relating to funds raised through ICDs

and further made false statement in the RHP /

Prospectus that they have not entered into any bridge

loan to be repaid from the IPO funds, was in gross

violation of PFUTP Regulations and ICDR

Regulations cannot be faulted.

12. To sum up,

a) Decision of the AO that the appellants have indulged

in round tripping of funds is upheld.

b) Decision of the AO that receipt of ` 8 crore by way of

ICDs from the four connected entities was a fictitious

and illusory ICD and hence repayment of ` 8 crore to

the four connected entities amounts to siphoning of

IPO funds cannot be sustained.

c) Decision of the AO that the appellants have

misutilized ` 2.50 crore from IPO funds by financing

Overall through layer of entities, to trade in the

shares of the company cannot be sustained.

d) Decision of the AO that failure to disclose material

information relating to appointment of Suryamukhi 30

for the project work and failure to disclose advance

payment of ` 15.30 crore made to Suryamukhi was

in violation of the PFUTP Regulations and ICDR

Regulations is upheld.

e) Decision of the AO that false and misleading

statements were made in the RHP and Prospectus

relating to the cost of construction in violation of the

PFUTP Regulations and ICDR Regulations is upheld.

f) Decision of the AO that failure to disclose

appointment of Neo Power for supply of plant and

machinery and failure to disclose advance payment of

` 13.97 crore made to Neo Power was in violation of

PFUTP Regulations and ICDR Regulations is upheld.

g) Decision of the AO that even after appointing Neo

Power for supply of plant and machinery, false and

misleading statements were made in the RHP and

Prospectus relating to the purchase of plant and

machinery, in violation of PFUTP Regulations and

ICDR Regulations is upheld.

h) Decision of the AO that the appellants have failed to

disclose raising of funds amounting to ` 30.40 crore

through ICDs in the RHP and the Prospectus in

violation of PFUTP Regulations and ICDR

Regulations is upheld.

31

i) Decision of the AO that false and misleading

statements were made in the RHP/Prospectus that the

company has not raised any bridge loan to be repaid

from the IPO proceeds in violation of PFUTP

Regulations and ICDR Regulations is upheld.

13. Question then to be considered is, whether, the AO is justified in

imposing individual penalty in all aggregating to ` 11.80 crore on the

appellants.

14. Failure to disclose material information and making false/

misleading statements in the RHP/ Prospectus constitutes serious

violation of the PFUTP/ ICDR Regulations. Appellants who are

Chairman, Managing Director, Chief Executive Officer, Chief Financial

Officer and Company Secretary of the Company cannot escape penal

liability for the aforesaid violations by merely stating that they had relied

on the merchant banker. Appellants were equally responsible to ensure

that all material facts were disclosed and further ensure that false and

misleading statements were not made in the RHP/ Prospectus. Penalty

imposable for such violations is up to ` 25 crore under Section 15HA and

up to ` 1 crore under Section 15HB of SEBI Act.

15. After considering all mitigating factors, the AO has imposed

individual penalty in all aggregating to ` 11.80 crore. However, as we

have held that the decision of the AO that repayment of ICDs amounting

to ` 10.50 crore (` 8 crore + ` 2.50 crore) from the IPO proceeds 32

amounts to siphoning of ` 10.50 crore from the IPO proceeds cannot be

sustained, penalty imposed on the appellants to that extent deserves to be

deleted.

16. Thus, considering the fact that though belatedly the project at

Vadodara is fully operational and the appellants have already undergone

debarment for 5 years, we modify the impugned order and direct each

appellant to pay penalty as follows:-

a) Brooks Laboratories Ltd., shall pay consolidated

penalty of ` 15 lac to SEBI within one month from

today.

b) Mr. Atul Ranchal (Chairman), Mr. Rajesh Mahajan

(Managing Director) & Durga Shankar Maity

(CEO)of Brooks Laboratories Ltd., shall pay

consolidated penalty of ` 35 lac each to SEBI within

one month from today.

c) Mr. Ketan Shah (CFO) and Ms. Parvinder Kaur

(Company Secretary) of Brooks Laboratories Ltd.,

shall pay consolidated penalty of ` 5 lac each to SEBI

within one month from today.

17. If the appellants fail to pay the aforesaid penalty within one month

from today, then SEBI shall be entitled to recover the above penalty from

each appellant with interest as provided under the SEBI Act. 33

18. All four appeals are disposed of in the aforesaid terms with no

order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 21.03.2018 Prepared & Compared By: PK