Final Order in the matter of Eskay Knit India Ltd.[SAT Appeal No.:688/2021 & Misc. App. No. 1225/2021 & Misc. App. No. 1226/2021]

Under Sections 11(1), 11(4), 11(4A),11A, 11B (1), 11B(2) and 15I of the Securities and Exchange Board of India Act, 1992 read with Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 and Sections 12A(1), 12A(2) and 23I of Securities Contracts (Regulations) Act, 1956 read with Rule 5 of the Securities Contracts (Regulation) (Procedure for Holding Inquiry and Imposing Penalties) Rules, 2005.

Noticee No. Name of Noticees PAN

1. M/s. Eskay K‘n’it India Limited AABCS1363G 2. Ms. Manasi Indrajit Wadkar AAQPW9443B 3. Mr. Naresh Chandra Sharma ADWPS6154J 4. Mr. Manmohan Ahluwalia AGDPA0642F

5. Mr. Narayan Ghumatkar AKKPG0652L

6. Ms. Neha Nilesh Patil AMDPP3594P 7. Mr. Trivendra Shambhu Singh BEEPS9764J 8. M/s Rishi Sekri & Associates Chartered BLXPS6226F Accountants 9. M/s A F Khasgiwala Chartered Accountants AABPK7712J

In the matter of Eskay K’n’it India Limited (Aforesaid entities are hereinafter individually referred to as by their respective name or noticee number and collectively as “the Noticees”.)

1. The present proceeding emanates from three show cause notices, all dated August 28, 2020 (hereinafter collectively referred to as “the SCNs”), issued to the Noticees by the Securities and Exchange Board of India (hereinafter referred to as “SEBI”), details whereof are as given hereunder: i. The first show cause notice (hereinafter referred to as “SCN 1”) was issued to Noticee nos. 1 to 7 asking them to show cause as to why suitable directions be issued and/or penalty be not imposed, as deemed fit under Sections 11(1), 11(4), 11(4 A), 11A and 11B(1) and 11B(2) read with Sections 15A(a), 15HA and 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act, 1992”) and Section 12A(1) and 12A(2) read with Section 23E and Section 23H of Securities Contracts (Regulations) Act, 1956 (hereinafter referred to as “SCRA, 1956”) against them. The SCN 1 alleged that the Noticee nos. 1 to 7 have failed to present true and fair financial statements of the company Eskay K‘n’it India Limited (hereinafter referred to as “EKIL” or “the company”), executed transactions which are non-genuine in nature thereby resulting in misrepresentation of the accounts/financial statements and misuse of account/funds of the company during the period April 01, 2015 till December 31, 2017 (hereinafter referred to as the “investigation period”) and that such acts were found to be fraudulent in nature as they induced the investors to trade in the securities of the company and had the potential to mislead the investors.

The SCN 1 also alleged that the directors of the company (Noticee nos. 2 to 7) have failed to exercise duty of care by misrepresenting the financial statements/misusing the funds of the company. Based on the same, the SCN 1 alleged that the company (Noticee no.1) has violated Section 12A(a),(b) and (c) and Section 11(2)(i) and 11(2)(ia) of the SEBI Act, 1992 and Regulation 3(b), (c) and (d) and Regulation 4(1) and 4(2) (f) and (r) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as “PFUTP Regulation, 2003”), Regulations 4(1)(a), (b), (c), (e), (g), (h), (i) & (j), 4(2) (f)(ii)(6), (7), (8), 4(2)(f)(iii)(3), (6) &(12), 6(1), 30(3), 33(2)(a) and 48 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred to as “LODR Regulations”) read with Section 21 of SCRA, 1956. The SCN 1 further alleged that the company’s directors, (ii) Ms. Manasi Indrajit Wadkar (Noticee no. 2), (iii) Mr. Naresh Chandra Sharma (Noticee no. 3), (iv) Mr. Manmohan Ahluwalia (Noticee no.4), (v) Mr. Narayan Ghumatkar (Noticee no. 5), (vi) Ms. Neha Nilesh Patil (Noticee no. 6), and (vii) Mr. Trivendra Shambhu Singh (Noticee no. 7) have violated Section 12A(a) (b) and (c) and Section 11(2)(i) and 11(2)(ia) of the SEBI Act, 1992 and Regulation 3(b), (c) and (d) and Regulation 4(1) and 4(2) (f) & (r) of the PFUTP Regulations, 2003, Regulations 4(1)(a), (b), (c), (e), (g), (h), (i) & (j), 4(2)(f)(ii)(6), (7) & (8), 4(2)(f)(iii)(3), (6) & (12) of LODR Regulations read with Section 27 of SEBI Act, 1992, Regulations 6(1), 30(3), 33(2)(a) and 48 of LODR Regulations read with Section 21 of SCRA, 1956.

ii. The second show cause notice (hereinafter referred to as “SCN 2”) was issued to Noticee no. 8 asking it to show cause as to why suitable directions be issued and/or penalty be not imposed, as deemed fit under Sections 11,

11B and 11D of the SEBI Act, 1992. The SCN 2 alleged that Noticee no. 8 who was the statutory auditor of the company for the financial years 2017- 18, has been negligent in performance of its duties as it has not carried out proper due diligence in its audit report. Further, the SCN 2 alleged that since the company has not complied with AS-9, AS-18, AS-12, AS-13 and such non-compliance have not been pointed out in the audit report of the company, therefore, the books of accounts and financial statements of the company are incorrect, irregular and misleading. The SCN 2 further states that an unqualified audit opinion stating that financial statements give the information required by the Companies Act, 2013 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, has been given by the statutory auditor in the audit report of the company and that such certification of financial statements by the statutory auditor has resulted in not only the shareholders but also the public being misled about the financial health of the company. Based on the same, the SCN 2 has alleged that Noticee no. 8 has violated Section 12A (a), (b) & (c), Section 11(2)(i) and 11(2)(ia) of the SEBI Act, 1992 and Regulation 3(b) (c) & (d) and Regulation 4(1) and 4(2), (a), (e), (f) & (r) of the PFUTP Regulations, 2003.

iii. The third show cause notice (hereinafter referred to as “SCN 3”) was issued to Noticee no. 9 asking it to show cause as to why suitable directions be issued and/or penalty be not imposed, as deemed fit under Sections 11, 11B and 11D of the SEBI Act, 1992. The SCN 3 alleged that Noticee no. 9 who was the statutory auditor of the company for the financial years 2015- 16 and 2016-17, has been negligent in performance of its duties as it has not carried out proper due diligence and has not reported these findings in its audit report. Further, the SCN 3 alleged that since the company has not complied with AS-9, AS-18, AS-12, AS-13 and such non-compliance have not been pointed out in the audit report of the company, therefore, the books of accounts and financial statements of the company are incorrect, irregular and misleading. The SCN 3 further states that an unqualified audit opinion stating that financial statements give the information required by the Companies Act, 2013 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, has been given by the statutory auditor in the audit report of the company and that such certification of financial statements by the statutory auditor has resulted in not only the shareholders but also the public being misled about the financial health of the company. Based on the same, the SCN 3 has alleged that Noticee no. 9 has violated Section 12A (a), (b) & (c), of the SEBI Act, 1992 and Regulation 3(b) (c) & (d) and Regulation 4(1) and 4(2), (a), (e), (f) & (r) of the PFUTP Regulations, 2003.

2. The brief facts of the case, as mentioned in the SCN are as follows:

2.1. SEBI passed an interim order on November 21, 2017 (hereinafter referred to as “interim order”), inter alia, directing that the promoters and the directors (Noticee no. 2 to 7) of EKIL were permitted to only buy the securities of EKIL and that the shares held by them in the company shall not be allowed to be transferred for sale by depositories. Further, vide the said interim order, the stock exchange was directed to appoint an independent forensic auditor to inter alia, further verify:

a) Misrepresentation including of financials and/or business of EKIL, if any; b) Misuse of the funds/books of accounts of EKIL, if any.

2.2. The company was advised to file its reply/objections within 30 days from the date of the interim order and also indicate whether it desired to avail an opportunity of personal hearing. The company was provided with ample opportunities to provide documents/information during the course of proceedings preceding the interim order. EKIL did not file its reply/objections to the interim order of SEBI, within 30 days from the date of the interim order. Accordingly, the preliminary findings of the interim order and ad-interim directions of the interim order stood confirmed.

2.3. The forensic audit report (hereinafter referred to as “FAR”) was submitted to SEBI by the stock exchange and the findings of the forensic audit report from the period April 01, 2015 till December 31, 2017 (hereinafter referred to as “Investigation period”) were examined by SEBI.

2.4. The investigation by SEBI, inter alia, mainly revealed the following, which is discussed in detail in later paragraphs:

I. Misrepresentation including of financials and misuse of funds/books of accounts: a. Misrepresentation of sales, Purchases and expenses of Everlong Trading Pvt Ltd (hereinafter referred to as “ETPL”) recorded in the books of EKIL were leading to violation of Accounting Standard 9- Revenue Recognition; b. Discrepancies related to loans and advances and non-disclosure of related party transactions in annual report leading to violation of Accounting Standard 18- Related party disclosure; c. Subsidy receivable (but not yet eligible) shown as assets leading to overvaluation of assets by 11.89 crores; d. Provision not made for diminution in the value of investment leading to violation of AS 13; e. Non-disclosure of material information to exchange;

f. Non routing the purchases and sales through bank and transfer of payments to related parties on the same day of receipt; g. Misstatements related to long term and short term borrowings; h. Analysis of trade receivables of the company; i. Incorrect submission to SEBI regarding the trade receivables;

II. Violation of LODR Regulations: As per secretarial audit report the company has not appointed CFO for FY 2015-16 and FY 2016-17 and has not appointed compliance officer for FY 2015-16. As per Regulation 6(1) of LODR 2015, “A listed entity shall appoint a qualified company secretary as the compliance officer”. Hence, the company has violated Regulation 6(1) of LODR 2015.

III. Non furnishing of information by the company in response to forensic auditor and SEBI interim order queries.

2.5. Thus, the SCNs alleged that the company had failed to present true and fair financial statements and had executed transactions which are non-genuine in nature which tantamount to misrepresentation of the accounts/ financial statements and misuse of account/ funds of the company. It was further observed that EKIL had misused funds/ misrepresented books of accounts which are detrimental to the interests of genuine investors and are fraudulent in nature. Based on the same, the charges against the Noticees in the three SCNs, as mentioned in para 1 were made.

3. SCN 1, SCN 2 and SCN 3 contained the same annexure, which were the following: Annexure no. Particulars Annexure 1 Interim Order

Annexure 2 Forensic Audit Report

4. The SCN was delivered to the Noticees. Noticee no. 9 submitted its reply vide letter dated September 17, 2020 stating as follows: 4.1. The approach to statutory audit and forensic audit are very different. In case of statutory audit the company prepares its final accounts and presents it to the auditor for checking and verification while in forensic audit there would be specific observations with respect to the company which has to be investigated deeply. Thus the two cannot be equated. 4.2. They had carried out their audit as per law and applicable accounting standards and are yet to receive their audit fees for the audit of EKIL. 4.3. Regarding allegation related to non-reporting of related party transactions, Noticee no. 9 has submitted that the transactions mentioned in the SCN 3 does not qualify under the definition of related party transactions and thus was not reported accordingly. 4.4. Regarding reporting of subsidy receivable for which EKIL was actually not eligible, Noticee no. 9 has stated that the management of EKIL was very sure that the subsidy would be received and thus it was reported. 4.5. Regarding diminution in the value of investment, Noticee no. 9 stated that this issue had been raised during audit by them and the management of the company stated that the investments would at least fetch its cost price and thus the same was reported accordingly.

5. Noticee no. 3 submitted his reply to the SCN dated September 15, 2020 wherein he submitted as follows: 5.1. It is on record that the he ceased to be a Director on the Board of the company with effect from February 08, 2018. The last meeting that he attended was in the year 2017. He is not in touch with the Company or its officials or its promoters for about the last three years and has therefore no idea of the investigations or forensic audit that was being conducted against the company at the instance of SEBI or the manner in which the company or its officials/ promoters have responded or replied to these investigations or forensic audit queries. 5.2. He was in no way connected to or responsible for the alleged acts of impropriety or malfeasance mentioned in the SCN, on the part-of the Company, its whole time Directors or Key Managerial Personnel (KMPs) or its promoters. 5.3. He was only an Independent Director on the Board of EKIL till he resigned as Independent Director with effect from February 08, 2018.As Independent Director he was being paid a nominal amount as sitting fee per meeting and such meetings were held four times in a year in each quarter.

He does not own a single share or any position of profit in the Company or for that matter in any company of the group promoters. As an Independent Director he is also not part of the KMP team of the Company. 5.4. As an Independent Director the undersigned, while attending meetings of the Board, had to depend on the agenda papers placed before by the management. The agenda papers, no doubt reflected the unsatisfactory financial performance of the company, but the explanation offered by the management or representative of the promoters was, that the company was passing through difficult times on account of the general downturn in the economy of the country and that negotiations were continuing with lender banks to make them realize the genuineness of the company’s difficulties. An auditor was invariably present in these meetings and he also did not on any occasion red flag any particular issue of concern. The transactions related to related parties were also never referred to the Board or included in the agenda items of the Board meetings. As an Independent Director one can only raise questions on the basis of figures and data placed before the Board.

In view of the limited information and interaction available to him as an Independent Director, it would appear unreasonable and unjustified to hold him responsible for the alleged misconduct on the part of the company, its whole time Directors or promoters. 5.5. A distinction also needs to be made between the role and responsibility of an Independent Director and a Whole Time Director or a member of the Key Managerial Team (KMP) or a promoter. Realizing the need for this distinction the Ministry of Corporate Affairs, Government of India, has issued a circular (General Circular No.1/2020) on March 02 ,2020 the subject of which is “Clarification on prosecutions filed or internal adjudication proceedings initiated against Independent Directors, non promoters and non KMP non-Executive Directors” 5.6. As long as he was an Independent Director on the Board of the company, he performed his responsibilities sincerely and diligently on the basis of papers that were placed before the board by asking relevant questions and raising relevant issues.

6. Vide separate letters dated October 07, 2020, Noticee nos. 4 and 6 sought inspection of documents. Vide separate letters dated October 17, 2020, Noticee nos. 5, 7, 2 sought inspection of documents. Vide letter dated October 19, 2020, the Noticee no. 1 sought an inspection of documents. Vide an email dated November 01, 2020, Noticee no. 9 sought documents relied upon in the SCN. Vide an email dated November 09, 2020, Noticee no. 9 was informed that relevant documents that have been relied upon in the SCN has been already shared with the Noticee. A request for inspection of documents dated December 29, 2020 was also received from Noticee no. 8. An opportunity of inspection of documents was provided to Noticee nos. 1, 2, 4, 5, 6, 7 and 8 on December 31, 2020 which they availed.

7. Vide a letter dated December 21, 2020, Noticee no. 1 submitted as follows: 7.1. Bank of India has filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) before the Hon’ble National Company Law Tribunal (hereinafter referred to as “NCLT”), Ahmedabad against the Noticee no.1. Pursuant to the said petition C.P (I.B) No. 420/NCLT/ AHM/2018, the vide order dated February 17, 2020 passed by the Hon’ble NCLT, Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) has been initiated against Noticee no. 1. Vide the said order Interim Resolution Professional (hereinafter “IRP”) has also been appointed with respect to Noticee no.1. As mentioned in the said order of the Hon’ble NCLT and in view of initiation of CIRP against Noticee no.1, a moratorium has been declared prohibiting all the following, in terms of Section 14 (1) of IBC: (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

7.2. Thus, in accordance with Section 14(1) of IBC the institution of any legal proceedings initiated by SEBI should be at a standstill. 7.3. As per Section 17 of IBC, the power of the Board of Directors of Noticee no.1 stands suspended and such powers vest with IRP. 7.4. Noticee no. 1 vide letter dated October 19, 2020 had sought various necessary documents which has not been provided by SEBI. The company does not have access to documents and are coordinating with IRP to get access to the same. 7.5. Noticee no. 1 made a request to not proceed against the company while the moratorium is in effect.

8. An opportunity of hearing was granted to all Noticees on December 30, 2020. On the said date Noticee no. 3 appeared in person and made submissions. In order to comply with the principles of natural justice another opportunity of hearing was granted to the remaining Noticees on February 26, 2021. Vide a letter dated February 23, 2021, Noticee no. 9 submitted that he had already filed a preliminary reply and requested for 6 weeks’ time to appear for hearing. Vide a letter dated February 24, 2021, Noticee no. 8 sought an adjournment to the hearing. Vide letter dated February 25, 2021, Noticee no. 1 informed that vide order dated February 17, 2020 passed by the Hon’ble National Company Law Tribunal (hereinafter referred to as Hon’ble NCLT), Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) has been initiated against it under the provisions of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) and sought an adjournment of the hearing. Vide a letter dated February 24, 2021, Noticee no. 8 sought an adjournment citing non-availability of counsel.

9. Another opportunity of hearing was granted to all Noticees except Noticee no. 3 on May 06, 2021. Vide a letter dated May 05, 2021, Noticee no. 9 sought an adjournment of 4 weeks citing ill health and the pandemic. Noticee no.1, vide email dated May 06, 2021 acknowledged the receipt of hearing notice but requested for an adjournment of 4 weeks due to the pandemic and demise of Noticee no. 2. The Authorized Representative of Noticee nos. 1, 2, 4, 5, 6 and 7 also, vide letter dated May 06, 2021, informed about the demise of Noticee no. 2 on May 02, 2021 and stated that CIRP had been initiated against Noticee no.1 and thus, relevant documents were not available with them at that point in time and based on the same, sought an adjournment of 4 weeks. Noticee no. 8, vide an email dated May 06, 2021 sought an adjournment of 21 days due to the pandemic.

10. Thereafter, a last and final opportunity of hearing was granted to all Noticee (except Noticee no. 3) on June 09, 2021. However, no one appeared for hearing on the said date. Since, sufficient opportunities had been provided to all Noticees, which were not availed by them on the one pretext or other, thus, the hearing was concluded qua all Noticees.

Consideration of submissions and findings: 11. I have considered the SCN, replies received, and submissions made by Noticee no. 3 during the personal hearing. The SCN alleges the violation of the following provisions of law by the Noticees:

Relevant extract of the provisions of SEBI Act, 1992:

“Functions of Board. 11. (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.

(2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for: …… (i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market;

(ia) calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in securities; ……………………………………………….

Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control.

12A. No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; ………………………………………………….. Offences by companies. 27. (1) Where an offence has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. (2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. Explanation : For the purposes of this section,- (a) “company” means any body corporate and includes a firm or other association of individuals; and (b) “director”, in relation to a firm, means a partner in the firm……………….”

Relevant extract of provisions of SCRA, 1956:

“Conditions for listing. 21. Where securities are listed on the application of any person in any recognized stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.”

Relevant extract of the provisions of PFUTP Regulations, 2003:

“3. Prohibition of certain dealings in securities No person shall directly or indirectly— (a) ……..; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;

(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- (a) indulging in an act which creates false or misleading appearance of trading in the securities market; …. (e) any act or omission amounting to manipulation of the price of a security; ….. (f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities; ….. (r) planting false or misleading news which may induce sale or purchase of securities. …………………………………….”

Relevant extract of the provisions of LODR Regulations:

“Principles governing disclosures and obligations. 4. (1) The listed entity which has listed securities shall make disclosures and abide by its obligations under these regulations, in accordance with the following principles: (a) Information shall be prepared and disclosed in accordance with applicable standards of accounting and financial disclosure.

(b) The listed entity shall implement the prescribed accounting standards in letter and spirit in the preparation of financial statements taking into consideration the interest of all stakeholders and shall also ensure that the annual audit is conducted by an independent, competent and qualified auditor. (c) The listed entity shall refrain from misrepresentation and ensure that the information provided to recognised stock exchange(s) and investors is not misleading. (d) …... (e) The listed entity shall ensure that disseminations made under provisions of these regulations and circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple language. (f) … (g) The listed entity shall abide by all the provisions of the applicable laws including the securities laws and also such other guidelines as may be issued from time to time by the Board and the recognised stock exchange(s) in this regard and as may be applicable. (h) The listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders. (i) Filings, reports, statements, documents and information which are event based or are filed periodically shall contain relevant information. (j) Periodic filings, reports, statements, documents and information reports shall contain information that shall enable investors to track the performance of a listed entity over regular intervals of time and shall provide sufficient information to enable investors to assess the current status of a listed entity.

(2) The listed entity which has listed its specified securities shall comply with the corporate governance provisions as specified in chapter IV which shall be implemented in a manner so as to achieve the objectives of the principles as mentioned below. …… (f) Responsibilities of the board of directors: The board of directors of the listed entity shall have the following responsibilities: ……. (ii) Key functions of the board of directors- …… (6) Monitoring and managing potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions. (7) Ensuring the integrity of the listed entity’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.

(8) Overseeing the process of disclosure and communications. … (iii) Other responsibilities: …. (3) Members of the board of directors shall act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the listed entity and the shareholders. …. (6) The board of directors shall maintain high ethical standards and shall take into account the interests of stakeholders. ….. (12) Members of the board of directors shall be able to commit themselves effectively to their responsibilities. …..

Compliance Officer and his Obligations. 6.(1) A listed entity shall appoint a qualified company secretary as the compliance officer.

Disclosure of events or information. 30. (3) The listed entity shall make disclosure of events specified in Para B of Part A of Schedule III, based on application of the guidelines for materiality, as specified in sub-regulation ……

Financial results.

33. (2) The approval and authentication of the financial results shall be done by listed entity in the following manner: (a) The quarterly financial results submitted shall be approved by the board of directors: Provided that while placing the financial results before the board of directors, the chief executive officer and chief financial officer of the listed entity shall certify that the financial results do not contain any false or misleading statement or figures and do not omit any material fact which may make the statements or figures contained therein misleading. ………………………………………… Accounting Standards. 48. The listed entity shall comply with all the applicable and notified Accounting Standards from time to time…………………….”

12. Before proceeding on the merit of the matter, it will be relevant to discuss the background of the present proceedings.

13. SEBI received a letter no. F. No. 03/73/2017-CL-II dated June 9, 2017 from the Ministry of Corporate Affairs (hereinafter referred to as “MCA”) vide which MCA had annexed a list of 331 shell companies for initiating necessary action as per SEBI laws and regulations. MCA had also annexed the letter of Serious Fraud Investigation Office, dated May 23, 2017 which contained the list of shell companies along with their inputs. In respect of listed shell companies including EKIL, vide its letter dated August 7, 2017, SEBI advised the stock exchanges to place trading restrictions on promoters/directors so that they do not exit these listed companies. SEBI vide the said letter dated August 7, 2017 also advised the stock exchanges to place the scrip in the trade-to-trade category with limitation on the frequency of trade and to impose a limitation on the buyer by way of 200% deposit on the trade value. Thereafter, BSE vide notice dated August 7, 2017 issued to all its market participants-initiated actions envisaged in the SEBI letter dated August

7, 2017 in respect of all the listed companies, as identified by MCA and communicated by SEBI, with effect from August 8, 2017. On August 09, 2017, SEBI further advised the Exchanges to submit a report after seeking auditor's certificate, from all such listed companies, providing the status of certain aspects of these companies like compliance with Companies Act, whether company is a going concern and its business model, status of compliance with listing requirements, etc.

14. In the meantime, aggrieved by the aforesaid letters dated August 7, 2017 issued by SEBI and BSE, EKIL filed an appeal No. 267 of 2017 before the Hon’ble Securities Appellate Tribunal, Mumbai (hereinafter referred to as “Hon’ble SAT”). The Hon’ble SAT vide order dated October 06, 2017, directed the following: “.......... 2.Counsel for the appellants state that the WTM of SEBI has agreed to give a personal hearing to the appellants on October 11, 2017 and on that day appellants would appear and submit a representation to the WTM, setting out the reasons as to why the order passed against the appellants deserve to be quashed. 3. In these circumstances, we dispose of both the appeals by directing SEBI to pass appropriate order on the representation to be filed by the appellants within a period of four weeks from the date of receiving the representation.....”

15. Pursuant to SEBI’s letter dated August 9, 2017, BSE submitted its report dated October 09, 2017 stating that, the company has submitted the auditor certificate from A. F. Khasgiwala & Company, Chartered Accountants. As per the Auditor Certificate, the company had filed annual income tax returns for the last 3 years, the company had complied with Companies Act and LODR Regulations and the company is a going concern and is engaged in the business of textile industries and manufacturing of yarn. The company has made default to bank amounting to Rs. 299.32 crores. The bank account of the company was declared as NPA in the year 2013. Thereafter, the banking facility had been stopped and then the company started working on barter system. Net worth of the company was eroded, thereafter, reference was filed before BIFR, and company was registered as sick industrial unit. However, no specific recommendation was made by BSE. 16. Thereafter, in compliance with the aforesaid order dated October 06, 2017 passed by Hon’ble SAT, after hearing EKIL, SEBI passed an interim order dated November 21, 2017 (hereinafter referred to as “interim order”) wherein following directions were issued: “…………………………. i. The trading in securities of EKIL shall be reverted to the status as it stood prior to issuance of letter dated August 7, 2017 by SEBI. ii. Exchange shall appoint an independent forensic auditor inter alia to further verify: a. Misrepresentation including of financials and/or business by EKIL, if any; b. Misuse of the books of accounts / funds including facilitation of accommodation entries or compromise of minority shareholder interest, if any. iii. The promoters and directors in EKIL are permitted only to buy the securities of EKIL. The shares held by the promoters and directors in EKIL shall not be allowed to be transferred for sale, by depositories. iv. The other actions envisaged in SEBI’s letter dated August 07, 2017 in para1 (d), as may be applicable, and the consequential action taken by Stock Exchanges shall continue to have effect against M/s Eskay K’n’it (India) Limited. ………………………………………..”

17. The interim order also clarified that the ‘directors’ for the purpose of direction issued in the interim order shall mean and include:

(a) the persons who are acting as directors on the date of the interim order, or (b) the persons who are acting as directors of the company as on August 07, 2017, who cease to be director, by way of disqualification by any other authority, or by way of resignation or by any other means, on or after August 07, 2017.

18. The interim order also advised EKIL to file its reply/objections to the interim order within 30 days from the date of receipt of the said order. EKIL was also advised to indicate in the reply whether it desired to avail an opportunity of personal hearing on a date and time to be fixed on a specific request made in that regard, if any. The interim order also stated that in the event of EKIL failing to file reply or requesting for an opportunity of personal hearing in its reply within the said 30 days, the preliminary findings of the interim order and ad-interim directions shall stand confirmed automatically, without any further orders. Since, the Noticees did not file any reply to the interim order, the directions contained in the interim order were confirmed against the Noticees.

19. As directed in the interim order, a forensic auditor, C. P. Jain & Co., Chartered Accountants, was appointed by BSE vide letter dated December 22, 2017 to conduct forensic audit of EKIL. On June 12, 2019, forensic auditor appointed by BSE submitted a Forensic Audit Report (hereinafter referred to as “FAR”) to BSE. Thereafter, based on the FAR which was forwarded by BSE to SEBI on June 13, 2019, SEBI carried out an investigation in the matter. Based on the findings of investigation, SCNs were issued on August 28, 2020 and thereafter, after receipt of reply from Noticees, it was decided to proceed further in the matter. Accordingly, a date of personal hearing was fixed in the matter.

20. In its letter dated December 21, 2020, the Noticee no. 1 has submitted that certain documents were not furnished to the Noticee no.1. In this regard, I note that a Noticee is entitled to all the documents replied upon in the SCN. In the present case, I note that SCN 1 states that SEBI conducted an investigation in the matter. However, SCN 1 also state that the said investigation is based on the findings of FAR. I note that the copy of said FAR, along with annexure thereof, has been provided to the Noticees, as Annexure to the SCN. Therefore, in my view, the Noticees have been provided with the relevant material based on which the allegations in the SCN have been leveled against them. I note that the AR of Noticee no. 1 has also availed an opportunity of inspection of documents. Thus, I find that no prejudice has been caused to the Noticee no.1 in putting up an effective defense in the matter.

21. In its reply dated December 21, 2020, Noticee no.1 has submitted that vide order dated February 17, 2020, passed by the Hon’ble NCLT, CIRP has been initiated against Noticee no. 1 and that, vide the said order of the Hon’ble NCLT, IRP has also been appointed with respect to Noticee no.1 and a moratorium has been declared in terms of Section 14 (1) of IBC prohibiting inter alia continuation of pending suits or proceedings against the corporate debtor (Noticee no.1). The proceeding in the present case has been initiated under Section 11B(1) and 11B(2) of the SEBI Act, 1992 against the erstwhile directors of the corporate debtor (Noticee no. 2 to 7) and also against Noticee no. 1. The moratorium/ prohibition under IBC is on the pending suits or proceedings which are mainly in the nature of recovery of money from the corporate debtor which may further adversary affect its financial position in resolution process. There is no prohibition under Section 14 or 31 or 32A of IBC from proceeding against the erstwhile directors of the corporate debtor. Further, Section 29A(c) of IBC disallows those entities who managed or controlled or were promoter of an account of the corporate debtor which has been classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India, from submitting a resolution plan.

Similarly, Section 32A which prohibits certain proceedings against corporate debtor and the new management of corporate debtor also allows initiation of proceedings inter alia against erstwhile management or director of the corporate debtor who was in the management or control of the corporate debtor prior to the commencement of the CIRP or a related party of such directors. Therefore, action under Section 11B of SEBI Act, 1992 against Noticee nos. 2 to 7 (the directors of Noticee no. 1) which proposes debarment and/or imposition of penalty upon conclusion of the proceedings, which will be possible mainly after the determination of the violation or liability of Noticee no.1, can be pursued. The liability so determined with respect to Noticee no. 1 by the present proceedings under Section 11B of SEBI Act, 1992 will only be crystallized and the consequent penalty and directions may be liable to be enforced or imposed subject to the Resolution Plan of the Noticee no. 1 and/ or the relevant provisions of the IBC, as applicable, depending upon the outcome of the CIRP. The direction to be issued and/or penalty to be imposed (or consequent demand notice or recovery, etc.) after consummation of these proceedings will be given effect to depending on outcome of resolution process.

In the eventuality of failing of resolution plan or consequent initiation of liquidation proceedings, the liability so determined on consummation of these proceedings will stand crystalized and will enable lodging of claim as per water fall prescribed for distribution of liquidation estate of corporate debtor.

22. I observe that, in the SCNs, the allegations against the Noticee no. 2 to 9 flows from the allegations against Noticee no.1. Noticee nos. 2 to 7 have been charged in their capacity as directors of Noticee no.1 and Noticee nos. 8 and 9 have been charged as the auditors of Noticee no.1. The SCN 1 alleges that the Noticee nos. 1 to 7 have failed to present true and fair financial statements of the company, executed transactions which are non-genuine in nature thereby resulting in misrepresentation of the accounts/financial statements and misuse of account/funds of the company during the investigation period and that such acts were found to be fraudulent in nature as they induced the investors to trade in the securities of the company and had the potential to mislead the investors. The SCN 1 also alleged that the directors of the company (Noticee nos. 2 to 7) have failed to exercise duty of care by misrepresenting the financial statements /misusing the funds of the company. The SCN 2 and 3 allege that Noticee no. 8 and 9 who were the statutory auditors of the company for the FY 2017-18 and FY 2015 -17, respectively, has been negligent in performance of their duties as they had not carried out proper due diligence in their audit report.

23. The allegations as contained in the SCNs, are discussed below:

I. Misrepresentation including of financials and misuse of funds/books of accounts:

a. Sales, Purchases and expenses of Everlong Trading Pvt. Ltd. (hereinafter referred to as “ETPL”) recorded in the books of EKIL leading to violation of Accounting Standard 9- Revenue Recognition.

23.1. With respect to this allegation the SCNs state as follows (based on the findings of FAR): i) EKIL had leased all its plants to ETPL. However, it provided copy of lease agreements for of the plant at Bhilad & Dombivali only. ii) The clarification given by the management that the tenure of lease was for a period of 5 years extendable by further 5 years is contradictory as the lease agreement of the plant at Bhilad provided to forensic auditor specified the lease term of 2 years only. Further, the company has provided lease agreement only for two plants i.e. Bhilad and Dombivali, whereas as per the commissioner report all the plants are given on lease by EKIL to ETPL. Therefore, there is inconsistency in providing information to various agencies. iii) EKIL has taken unsecured loan of Rs 14.35 Crores from ETPL which is still outstanding till 31.12.2017. The loan is taken before 01.04.2015 as per books. EKIL has also reported sales of Rs 12.32 Crore. ETPL debited EKIL by Rs. 11.46 Crores towards expenses and adjusted the same from the sale of product by EKIL. Expenses of labour and other administrative expenses on behalf of EKIL, amounting to Rs. 8.66 Crores from April- 2015 to December-2017.Expenses paid against previously made provision of Rs. 2.80 Crores in the year 2016-17. EKIL received security deposit of Rs. 35,00,000 in the year 2015-16 as per books of accounts. M/s Everlong Trading (P) Ltd. is having multiple relationships with EKIL. i.e. lessee, customer, lender of unsecured loan. iv) EKIL is carrying out manufacturing business under barter system with its’ customers. The statutory audit reports do not support the submission of job work or any leasing of plants nor any mention of the same reflects in financial statements. v) The cost of material consumed, manufacturing expenses reported in the Profit & loss account of EKIL which is not the expense of EKIL but of ETPL. It reports Sales, Purchase, all expenses etc. in their books which is not in accordance with lease agreements. Thus EKIL over stated expense to the extent of Rs. 8.66 Crores during the period 1.04.2015 to 31.12.2017 leading to misrepresentation of the financials.

23.2. In addition to what is stated in the SCN, I note from the FAR that vide an email dated April 22, 2019 the company had submitted to the forensic auditor that, after classification of the account of EKIL as NPA by the lenders, the operations in the account were stopped and therefore, EKIL was forced to follow the practice of barter system for survival of manufacturing because there was not any alternate option and that, following this practice, it had entered into an agreement with ETPL inter alia permitting ETPL to run its mills on the various terms and conditions contained in the said agreements and that ETPL was allowed to run plant and machineries of the said mills of EKIL for a period of 5 years with an understanding that the said term would be renewed further for a period of 5 years on completion of initial term. The FAR mentions that the cost of material consumed, manufacturing expenses, which has been reported in the profit & loss account of EKIL is not the expense of EKIL but of ETPL. EKIL has reported the sales, purchase, all expenses etc. of ETPL in its own books of accounts and thus, EKIL over stated expense to the extent of Rs. 8.66 Crores during the investigation period.

23.3. I note from the details provided in the FAR that that ETPL was related to EKIL through multiple relationships i.e. as lessee (since ETPL had taken on lease EKIL’s Bhilad and Dombivali plants for a tenure of 2 years), as customer (buyer of yarn from EKIL) and as lender (given unsecured loan of Rs 14.35 Crores to EKIL). I also note that ETPL had taken on lease plants from EKIL which was being used by ETPL for manufacturing yarn. I note that EKIL also received security deposit of Rs. 35,00,000 from ETPL in the year 2015-16 as per books of accounts of EKIL for such lease. I also note from the FAR that the monthly lease rental from ETPL was reported as "Business Conducting Charges” in Profit & Loss account of EKIL amounting to Rs. 64,22,285 for the period April 01, 2015 to December 31, 2017 (2015-16: Rs. 23,93,891, 2016-17: Rs. 22,73,394, 1.4.2017 to 31.12.2017: Rs. 17,55,000). However, EKIL has also reported, sale of yarn of Rs. 12.32 crore made from these leased plants during the investigation period from which again ETPL has debited EKIL by Rs. 11.46 Crore, towards expenses and adjusted the same from the sale of product by EKIL to ETPL. I note that the FAR has rightly observed that expenses of ETPL was being wrongly reported as the expenses of EKIL in the profit and loss account of EKIL. Moreover, the sales of ETPL (who was the lessor of the plants of EKIL) were also being wrongly reported as the sales and purchase of EKIL. In view of the same, I find merit in the observations made in the FAR that EKIL has reported the sales, purchase and expenses of another company ETPL in its own profit and loss account pertaining to the investigation period as its own sales, purchase and expenses, without a reasonable basis and that proper books of account as required by law have not been kept by the company and this amounts to misstatements in the financials of EKIL to that extent.

b. Analysis of Loans and advances and non-disclosure of related party transactions in annual report leading to violation of Accounting Standard 18.

23.4. With respect to this allegation, I note that the observations in the SCN, which refers to the findings in the FAR, are as follows: i) The total corporate advances given by EKIL were Rs. 31.97 Crores and 26.65 Crores in the year 2016-17 and 2015-16, respectively. Details of observations on major advances are as under: 1) Kausar Textile Pvt. Ltd. EKIL had given unsecured loan of Rs 6.26 Crores to M/s Kausar Textile Pvt. Ltd. Loan has been given prior to 01.04.2015 and the same is still outstanding. There is no interest earned by EKIL on above loan. Also Kausar Textile Pvt. Ltd. is the company to whom plants are given on lease by EKIL.

2) M/s. Dhruvi Properties Pvt. Ltd.

EKIL had given unsecured loan of Rs 7.50 Crores to M/s Dhruvi Properties Pvt. Ltd. Loan has been given prior to 01.04.2015 and the same is still outstanding. There is no interest earned by EKIL on above loan. M/s. Dhruvi Properties Pvt. Ltd. is connected to EKIL through:  Mr. Rajendra Nagpal is common director with Akash Fabrics Pvt. Ltd. and M/s Dhruvi Properties Pvt Ltd. M/s. Akash Fabrics Pvt Ltd is Shareholder of EKIL holding 32199122 shares (11.47%).  Mr. Chanchal Singh is holding directorship in M/s Shanti Synthetic and Processors Pvt. Ltd which is holding 11.15% stake in EKIL.  EKIL has taken loan of Rs. 5 crores and Rs 1.00 Crore from M/s Conart Conpro Pvt. Ltd. and M/s Raves Tradex Pvt. Ltd., respectively which is also related company of M/s Dhruvi Properties Pvt. Ltd. through common directorship.

3) M/s. Madhu Crimpers Pvt. Ltd. EKIL has given loans & advances to Madhu Crimpers Pvt. Ltd. of Rs 6,65,08,482 as on 1.4.2015 which is connected with EKIL. The loan been given prior to 1.04.2015, only there were cash received of Rs. 44,207/-.The balance of Rs. 6,64,64,275 is still outstanding in the books of EKIL. M/s. Madhu Crimpers Pvt. Ltd. is connected to EKIL through:  Mr. Sunilkumar Kushwaha & Mr. Shailesh Thakur is common director with M/s. Gopala Holding Pvt. Ltd. and Madhu Crimpers Pvt. Ltd. M/s. Gopala Holding Pvt. Ltd. is Shareholder of EKIL holding 22,97,580 shares (0.82%). EKIL has taken loan of Rs. 28.20 Crores from M/s Gopala Holding Pvt. Ltd.

4) M/s. Vignaharta Corrugators Private Limited EKIL obtained unsecured Loan of Rs.10.46 Crores from M/s. Vignaharta Corrugators Private Limited which was still outstanding on 31.12.2017. The loan was taken before 01.04.2015. EKIL also made total purchase of Rs 3.20 Crores in the year 2017-18 (upto December 2017) and squared up the account by adjusting with loans & Advances. (Loans given in the year 2016-17) M/s. Vignaharta Corrugators Private Limited is connected to EKIL through  Mr. Shailesh Thakur (DIN: 02169511)  Mr. Shailesh Thakur is also holding directorship in M/s. Gopala Holding Pvt. Ltd. (Shareholder of EKIL) from whom EKIL has taken loan of Rs. 28.20 Crores. He is holding Directorship in M/s. Kaushal Logistics Pvt. Ltd. & and Madhu Crimpers Pvt. Ltd. to whom EKIL had given Loan of Rs. 6.25 Crores & Rs. 6.64 Crores. He is also holding directorship in M/s. Everlong Trading Pvt. Ltd. (lease, supplier, customer, paid expenses)  He is holding directorship in M/s. Devika Trading Pvt. Ltd. with whom EKIL had done purchase transaction of Rs 1.00 Crores.  Sumer Singh (DIN: 07360438)  Mr. Sumer Singh is holding directorship in M/s Tanvish Trading Pvt. Ltd. and M/s. Royal Comp Services Pvt. Ltd. EKIL had taken unsecured loan of Rs. 3.00 Crore and Rs 2.00

Crores respectively with both companies. He is also holding directorship in M/s. Abhinandan Multitrade Pvt. Ltd. with whom EKIL purchased material of Rs 93.25 Lakhs.

ii) EKIL has not received any interest on these loans nor executed any agreement while granting these loans & advances. There was no fixed repayment period and the loans remain unpaid since long. No board resolution was passed for granting loan as per knowledge of forensic auditor. EKIL has granted various inter-corporate loans in violation of Section 186 of Companies Act, 2013. Thus, the loans & advances given to various Corporates, balance outstanding worth Rs. 31.97 Crores as on 31.03.2017 on which no interest is earned by EKIL is against the interest of minority shareholders.

iii) The company has not disclosed these related party transactions in their annual reports of FY 2015-16, FY 2016-17 and FY 2017-18. Thus the company has violated AS 18- Related Party Disclosures.

iv) Further, on account of connection of Dhruvi Properties Pvt. Ltd. to promoter of EKIL, the submission of EKIL that no loans and advances were provided to related parties appears to be a false submission on part of EKIL as M/s Dhruvi Properties Pvt. Ltd. and M/s. Madhu Crimpers Pvt. Ltd. are connected to EKIL.

23.5. In this regard, I note that Regulation 2(1)(zb) and 2(1)(zc) of the LODR Regulations, at the relevant time stated as follows:

(zb)“related party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards: Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s);

(zc)“related party transaction” means a transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a "transaction" with a related party shall be construed to include a single transaction or a group of transactions in a contract: Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s);

23.6. Section 2(76) of the Companies Act, 2013 defines ‘related party’ as follows: “(76) "related party", with reference to a company, means— (i) a director or his relative; (ii) a key managerial personnel or his relative; (iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager or his relative is a member or director; (v) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital; (vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager; (vii) any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity; (viii) any company which is- (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary;

(ix) such other person as may be prescribed;”

23.7. I note from the FAR that the relationship of the four firms to/ from which loans and advances were taken/given by EKIL, as mentioned in the FAR, is as follows: i. Kausar Textile Pvt. Ltd. was a company to which plants were given on lease by EKIL. ii. With respect to M/s Dhruvi Properties Pvt. Ltd., the FAR has stated that this entity had two common directors (Mr. Rajendra Nagpal and Mr. Chanchal Singh) with entities which holds 11.47% and 11.15%. of the share capital of EKIL and were promoters of EKIL. iii. Madhu Crimpers Pvt. Ltd. have common directors, Mr. Sunilkumar Kushwaha and Mr. Shailesh Thakur with M/s. Gopala Holding Pvt. Ltd. which is a shareholder of EKIL holding 22,97,580 shares (0.82%) and EKIL has taken loan of Rs. 28.20 Crores from M/s Gopala Holding Pvt. Ltd. iv. M/s. Vignaharta Corrugators Private Limited has a director (Mr. Shailesh Thakur) who is also director with three entities, M/s. Gopala Holding Pvt. Ltd, Kaushal Logistics Pvt. Ltd. and Madhu Crimpers Pvt. Ltd. from whom EKIL has taken loan of Rs. 28.20 Crores, Rs. 6.25 Crores and Rs. 6.64 Crores respectively. He is also holding directorship in ETPL (lease, supplier, customer of EKIL and paid expenses of EKIL). Another director of M/s. Vignaharta Corrugators Private Limited (Mr. Sumer Singh) is also holding directorship with M/s Tanvish Trading Pvt. Ltd. and M/s. Royal Comp Services Pvt. Ltd. from whom EKIL had taken unsecured loan of Rs. 3.00 Crore and Rs 2.00 Crores respectively and in M/s. Abhinandan Multitrade Pvt. Ltd. from whom EKIL purchased material of Rs 93.25 Lakhs.

23.8. From a perusal of Section 2(76) of the Companies Act, 2013, I note that none of the four companies mentioned in the paragraph 23.7 above, falls within the definition of ‘related party’ as per the said section. I further note that the FAR does not give any particular facts with regard to whether a director, manager or Key Managerial Person of EKIL or his relative were directors in the four firms as required under Section 2(76) of the Companies Act, 2013 or Board of Directors, managing director or manager or Key Managerial Person of the four firms were accustomed to act in accordance with the advice, directions or instructions of a director or manager of EKIL as required under Section 2(76) of the Companies Act, 2013. Therefore, the question of applicability of Accounting Standard -18 which deals with related party transactions may not arise with respect to transactions of EKIL with these four entities.

23.9. I also note that although SCN states that “EKIL has not received any interest on these loans nor not executed any agreement while granting these loans & advances. There was no fixed repayment period and the loans remain unpaid since long. No board resolution passed for granting loan as per knowledge of forensic auditor.…”. I find that as mentioned in the FAR, the fact that no interest was being received by EKIL for the loans advanced to Kausar Textile Pvt. Ltd., M/s Dhruvi Properties Pvt. Ltd. and Madhu Crimpers Pvt. Ltd., and no attempt of recovery of these loans were made indicates that such loans and advances made by the company were not properly secured by the terms on which they have been made and can be considered to be prejudicial to the interests of the company.

c. Subsidy receivable (but not yet eligible) shown as assets leading to overvaluation of assets by 11.89 crores.

23.10. In this regard the SCN states as follows: i) During the course of hearing dated October 13, 2017, before the passing of the interim order and vide email dated October 16, 2017, SEBI had advised EKIL to clarify and provide the details of Rs. 11 crores, shown as “Subsidy Receivable” in the short term loans and advances, for the financial year 2015-2016. EKIL vide its reply dated October 30, 2017 stated that: “the company had availed term loans from various banks which were eligible for subsidy under Technology Upgradation Fund Scheme (TUFS), which allowed the company to claim subsidy from the government in case it surpluses certain bench mark as to production”. ii) Since the entity was classified as NPA in year 2013 itself the conditions did not exists where it was reasonably certain that the grants will be receivable, despite the company recognized in its financial statements leading to overvaluation of assets by Rs. 11.89 Crores. iii) Thus, the company has violated Accounting Standard 12 as well as misrepresented its financial statements by overvaluation of assets by Rs. 11.89 Crores. iv) The company has not submitted any documents showing the eligibility of the receipt of subsidy and bench mark production asked by SEBI in interim order and hence violated section 11(2)(i) and Section 11(2)(ia) read with sections 15A(a) and 15HB of SEBI Act, 1992.

23.11. I note that para 6.1 of Accounting Standard -12 states as follows: “Accounting for government grants: Government grants available to the enterprise are considered for inclusion in accounts: (i) where there is reasonable assurance that the enterprise will comply with the conditions attached to them; and (ii) where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be made.”

23.12. I note that during the forensic audit EKIL submitted that, while other banks in consortium claimed subsidy on such term loans under TUFS, Dena Bank did not claim any amount of the subsidy from the Government of India and thus said amount of unclaimed subsidy since inception of loan works out to Rs.11.89 crore.

23.13. I note from the interim order that, a preliminary reading of the TUFS, as per Ministry of Textiles Resolution No. 6/19/2013-TUFS dated October 04, 2013 reveals as follows: “Subsidy under TUFS is in the form of Reimbursement of Interest paid by the unit concerned to the Lending agencies for the loan disbursed and therefore the units are eligible for subsidy only in cases where loan has been disbursed and interest has been paid by the unit to the Lending Agency. Lending agencies shall submit the claims based on actual claims received from their branches.”

23.14. From the TUFS, mentioned above in para 21.13, I note that a pre-condition for the receipt of the subsidy under TUFs (which is in the form of reimbursement of interest paid by the company to the banks) are that: i) the loan should have been disbursed and ii) interest on the loan should have been paid by the company. Since, EKIL was classified as NPA in year 2013, I agree with the observation in the FAR that the conditions did not exist as EKIL did not pay interest on the loan it had taken from the banks (Dena Bank in this case). Since EKIL did not pay interest thus, the loan would not qualify under the TUFS scheme and therefore, EKIL may not be eligible to claim subsidy on the said loan. I note that no documents have been submitted by EKIL during these proceedings to show that interest was paid to Dena Bank. Therefore I note that EKIL failed to comply with Para 6.1 of Accounting Standard-12 which states that government grants available to the enterprise are considered for inclusion in accounts under certain conditions, one of which is that where there is reasonable assurance that the enterprise will comply with the conditions attached to them. Further, I note that EKIL did not submit the documents supporting the eligibility of the receipt of subsidy by it and benchmark production in support of calculation sheet provided by it. Thus, I agree with the observation of FAR that, the Rs. 11.89 crores, shown as “Subsidy Receivable” in the short term loans and advances for the financial year 2015-2016 by EKIL in its financial statements, was not disclosed in accordance with Accounting Standard 12 and the said subsidy was represented merely by book entries and amounts to a misstatement in the financial statements of EKIL to that extent.

d. Provision not made for diminution in the value of investment leading to violation of AS-13 in related party companies.

23.15. In this regard, the SCN states as follows (based on the findings of the FAR): i) EKIL has reported Non-Current Investment in equity shares in following companies: Table 1 Amount (in crores) Sr. Name of company 2015-16 2016-17 No. A Investment in Equity Instruments (i) Quoted Shares K- Lifestyle & industries Ltd (referred as KLIL) 13.99 13.99 Rs. 1/- each fully paid up* (ii) Unquoted Shares

Krishna Knitwear Technology Ltd (referred as 10.00 10.00 KKTL) Rs. 10/- each fully paid up Giriganga Investment Pvt. Ltd. of Rs. 100/- each 0.003 fully paid up B Bonds 13.5% I.D.B.I Bonds –Sixty Sixth Series (2003) 0.50 0.50 Total 24.49 24.49

1) K- Lifestyle & Industries Ltd. (KLIL)  EKIL is holding 32711500 (3.20%) equity shares in K- Lifestyle & industries Ltd. (EKIL). The Book value of shares of M/s. K- Lifestyle & Industries Ltd. as on 31.03.2017 is Rs. -1.60 per share (negative). However, as per the books of EKIL, investment in M/s. K- Lifestyle & Industries Ltd. is reported at Rs. 13.99 Crores comprises of 3,27,11,500 shares (i.e. 4.27 per share). The value of Investment is NIL. There is no revenue generation from the above investments.  Directors of M/s K- Lifestyle Industries Ltd. i.e. Mr. Narayan Ghumatkar, and Ms. Manasi Wadekar are also holding directorship in EKIL. It is observed major shareholders of both K- Lifestyle Industries Ltd. are common with EKIL. EKIL is related party, as confirmed by the management vide their letter dated 22/04/2019.

2) Krishna Knitwear Technology Ltd. (KKTL)  EKIL is holding 1,00,00,000 (2.89%) equity shares in Krishna Knitwear Technology Ltd. In turn Krishna Knitwear Technology Ltd. is also holding 40,65,456 (1.45%) equity shares of EKIL. The book value of shares of Krishna Knitwear Technology Ltd. as on 31.03.2017 is Rs. -27.48 per share (negative). However, as per the books of EKIL, investment in KKTL is reported at Rs. 10.00 Crores comprises of 1,00,00,000 shares (i.e. 10 per share). The value of Investment is NIL as per Balance sheet of KKTL as on 31.03.2017. There is no revenue generation from the above investments.  Directors of M/s Krishna Knitwear Technology Ltd. i.e. Ms. Manasi Wadekar and Mr. Trivendra Singh are also director in EKIL. Shareholders of M/s Krishna Knitwear Technology Ltd. namely M/s Archana Syntex Pvt. Ltd. and M/s. Shree Ganesh hosiery Mills Pvt. Ltd. is also holding 4.01% and 2.10% shareholding in EKIL. KKTL is related party, as confirmed by the management vide their letter dated 22/04/2019.

ii) The SCN observes that these investments were not disclosed in the Annual Reports for the F.Y. 2015-16 and 2016-17. Therefore, AS-18, “Related Party Disclosure” is violated. i) It is also noted in the SCN that K Lifestyle & Industries Ltd. is included in the ‘suspected 331 list’ of shell companies forwarded by MCA and an investigation of the said company had concluded misrepresentation and misutlisation of funds. ii) Thus, the SCN alleges that the company and its directors have misutilised the funds of the company as the investments are not generating any revenue and also misrepresented the books of accounts by not providing for diminution in the value of investment.

23.16. I note that the FAR states that the two companies K- Lifestyle & Industries Ltd. and Krishna Knitwear Technology Ltd. were ‘related parties’ of EKIL in terms of Section 2(76) of the Companies Act, 2013. The same has also been accepted by the company in its letter dated April 22, 2019 to SEBI. In this regard, I note that para 23 of Accounting Standard 18- Related Party Disclosures, states as follows: “If there have been transactions between related parties, during the existence of a related party relationship, the reporting enterprise should disclose the following: (i) the name of the transacting related party; (ii) a description of the relationship between the parties; (iii) a description of the nature of transactions; (iv) volume of the transactions either as an amount or as an appropriate proportion; (v) any other elements of the related party transactions necessary for an understanding of the financial statements; (vi) the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date; and (vii) amounts written off or written back in the period in respect of debts due from or to related parties”.

Further, para 24 of Accounting Standard 18 specifically mentions that financing in a related party enterprise has to be disclosed, which includes investment in equity. I further find that Regulation 23(2) of LODR Regulations stipulates that all related party transactions shall require prior approval of the audit committee. From a perusal of the financial statements of EKIL I note that these related party transactions, i.e. investments in equity of K- Lifestyle & Industries Ltd. and Krishna Knitwear Technology Ltd. were not disclosed in the financial statements of EKIL in a manner as given in the Accounting Standard 18 and no approval of audit committee, omnibus or otherwise was obtained for the same, resulting in violation of Regulation 23(2) of LODR Regulations. Therefore, I find that the financials of EKIL were not properly disclosed as required under Accounting Standard -18, as observed in FAR, and this amounts to a misstatement in the financials of EKIL to that extent.

23.17. I further note that para 32 of Accounting Standard 13- Accounting for Investments states as follows:

“Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.” As per the financial statement of EKIL for the year 2015-16 and 2016-17, EKIL reported total non-current investment of Rs. 23.99 Crores, out of which investment in M/s. K- Lifestyle & Industries Ltd. comprised of Rs.13.99 Crores and investment in Krishna Knitwear Technology Ltd. comprised of Rs. 10.00 Crore. I note from the FAR that the value of these investments of EKIL had depleted considerably. The book value of shares of Krishna Knitwear Technology Ltd. as on 31.03.2017 was Rs. -27.48 per share (negative) and the book value of shares of M/s. K- Lifestyle & Industries Ltd as on 31.03.2017 was Rs. -1.60 per share (negative). From the findings of FAR I note that as per the books of EKIL, investment in M/s. K- Lifestyle and Industries Ltd. is reported at Rs. 13.99 Crores which comprises of 3,27,11,500 shares (i.e. 4.27 per share) whereas the value of these shares as per the balance sheet of M/s. K- Lifestyle and Industries Ltd as on 31.03.2017 is NIL. Moreover, as per the books of EKIL, investment in Krishna Knitwear Technology Ltd. is reported at Rs. 10.00 Crores which comprises of 1,00,00,000 shares (i.e. 10 per share). However, the value of the said investment in the balance sheet of Krishna Knitwear Technology Ltd. is NIL. Thus, I agree with the observation of the FAR that the depletion in value of these shares have not been updated in the books of accounts of EKIL, as required under Accounting Standard 13.

e. Non-disclosure of material information to exchange

23.18. In this regard, the SCN which is based on the findings of FAR, states as follows: i) During the course of hearing dated October 13, 2017 held prior to passing of interim order in the matter, and vide email dated October 16, 2017, SEBI had advised EKIL to submit the details of any Notice/proceeding pending/initiated with any Government Agency/Regulatory body/investigating authority with respect to the company/directors of the company/promoters of the company, including any search proceedings initiated by the Income Tax Department. EKIL vide its reply dated October 30, 2017 has stated that investigation is pending before CBI BS & FC, Mumbai on the complaint of UCO Bank against the company and directors of the company. ii) Investigation pending before CBI for diversion and misutlisation of funds may be considered as a material event and should have been disclosed to the exchange as well as in annual report. The entity has not disclosed it to the exchange as well as not disclosed in annual report of FY 2015-16, FY 2016-17 and FY 2017-18. iii) Also, as per Regulation 30(5) of LODR 2015 “The board of directors of the listed entity shall authorize one or more Key Managerial Personnel for the purpose of determining materiality of an event or information and for the purpose of making disclosures to stock exchange(s) under this regulation and the contact details of such personnel shall be also disclosed to the stock exchange(s) and as well as on the listed entity's website.” iv) As informed by BSE the company has appointed Mr. Trivendra Shambhu Singh (Noticee no.7) for determining materiality of events for the purpose of making disclosure to the stock exchange. However, he did not disclose the same to the exchange.

23.19. I note that the FAR observes that EKIL vide emails dated November 02, 2017 and November 09, 2017 was asked to furnish the details of the investigation and the nature of complaint made by UCO Bank, however, EKIL has not submitted the said details till date. Further, SEBI vide email dated November 16, 2017 had requested to BSE to confirm whether EKIL had disclosed the information pertaining to the said investigation being carried out by CBI BS & FC, Mumbai. BSE vide mail dated November 17, 2017 confirmed that it had not received any disclosure pertaining to investigation being carried out by CBI from EKIL.

23.20. Regulation 30(3) of LODR Regulations states as follows:

“The listed entity shall make disclosure of events specified in Para B of Part A of Schedule III, based on application of the guidelines for materiality, as specified in sub-regulation (4).”

As per Para B of Part A of Schedule III of LODR Regulations, “Litigation(s) / dispute(s) / regulatory action(s) with impact” is considered as material event.

Regulation 30(4) of LODR Regulations states as follows: “(i) The listed entity shall consider the following criteria for determination of materiality of events/ information: (a)the omission of an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; or (b)the omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date; (c)In case where the criteria specified in sub-clauses (a) and (b) are not applicable, an event/information may be treated as being material if in the opinion of the board of directors of listed entity, the event / information is considered material”.

23.21. I find that the FAR states that as per news report in Times of India dated May 15, 2019, Enforcement Directorate had provisionally attached a shopping mall in Nagpur worth Rs.483 Crore in case of money laundering against Mumbai based Tayal group of companies which was promoted by Mr. Pravin Tayal, based on CBI FIRs in three cases against four Tayal firms, namely Actiff Corporation, Jaybharat Textile and Real Estate Ltd., KKTL and EKIL alleging diversion of Rs. 524 Crores taken from Bank of India and Andhra Bank in 2008. Additionally, I note that EKIL vide its reply dated October 30, 2017 has stated that investigation is pending before CBI BS & FC, Mumbai on the complaint of UCO Bank against the company and directors of the company. I observe that information of such nature related to action by an enforcement agency would fall under “Litigation(s)/dispute(s)/regulatory action(s) with impact” as mentioned in Para B of Part A of Schedule III of LODR Regulations read with Regulation 30(3) of LODR Regulations was likely to result in significant market reaction if the said omission came to light at a later date and was required to be disclosed to the market at large. In view of the same, EKIL was obliged to disclose information related to investigation / filing of FIR by CBI in the matter pursuant to various complaint filed by various banks against EKIL before CBI. I note that EKIL neither disclosed this information to the stock exchange nor disclosed it in its Annual Reports during the investigation period, attracting violation of Regulation 30(3) of LODR Regulations by EKIL.

f. Non routing the purchases and sales through bank and transfer of payments to related parties on the same day of receipt

23.22. In this regard, the SCN states as follows: i) The company had received Rs. 6,05,60,322 from PF commissioner on 07/10/2016 out of which Rs. 3,20,27,525 was transferred to Vignaharta Corrugators Private Limited and Rs. 2,84,72,475 was transferred to Coral Conpro Pvt. Ltd. on 10/10/2016. ii) Transactions with Vignaharta Corrugators Private Limited. The payment of Rs. 3,20,27,525 to Vignaharta Corrugators Private Limited on 10/10/2016 was adjusted by way of purchase transaction in next year (i.e. from 4/4/2017 to 27.06.2017). The decision of transferring the funds more than 6 months in advance in anticipation of purchase exactly for the same amount at a future date cannot be justified. Vignaharta Corrugators Private Limited is connected to EKIL through common director. iii) Transactions with Coral Conpro Pvt. Ltd. and Everlong Trading Pvt. Ltd. The receipt from Everlong Trading Pvt. Ltd. on 11/04/2016 of Rs. 1,54,50,000 was transferred to Coral Conpro Pvt. Ltd. on the same day. It is observed that EKIL has made purchases from Coral Conpro Pvt. Ltd. worth Rs.21.32 Crores and Sales worth Rs. 17.44 crores during the period 1.4.2015 to 31.12.2017. It is worth mentioning that Mr. Shailesh Kashinath Thakur is the common director between Vignaharta Corrugators Private Limited and Everlong Trading Pvt. Ltd. (to whom plant is given on lease). Vignaharta Corrugators Private Limited is connected to EKIL through common director. iv) Thus by not routing the purchases and sales through bank and transfer of payments to related parties on the same day of receipt raises suspicion about siphoning of the funds by the company.

23.23. In this regard, I observe that the FAR states that total turnover of EKIL, during the investigation period was Rs. 146.37 Crores. However, these transactions were not routed through bank, instead it was adjusted with expenses or purchases made with the same party. The consolidated sales and purchase of EKIL during the investigation period as detailed in the FAR are as follows:

Particulars Purchase Sales Expense Abhinandan Multitrade Pvt Ltd 9325145 0 0 Actiff Corp Ltd (Group Company) 0 960000 Bajrang Farming Pvt Ltd 0 1047916 Clematis Trading Co Pvt Ltd 0 520000 Coral Conpro Pvt Ltd 213265418 174443418 Devika Trading Pvt Ltd 10040305 0 Ennore Procon Pvt Ltd 0 835245 Express Suiting Pvt Ltd 162398728 154654380 Hari Om Agro Products Pvt Ltd 0 2229130 Wellworth Appearels Pvt Ltd 258072493 259586590 Asahi Industries Ltd (Group Company) 17708739 463085755 49418537 Avon Realcon Pvt Ltd 142302024 158271840 Bodal Conpro Pvt Ltd 76406360 119904344 Everlong Trading Pvt Ltd 0 123256426 86659213 Jaybharat Textile & Real Estate Ltd(Group Company) 0 2250000 Raghuveer Cotton Ind 0 2709012 Vignaharta Corrugators Private Limited 32027525 0 Total 921546737 1463754056 136077750 23.24. The FAR further states that during the audit period (1.04.2015 to 31.12.2017), total Bank banking transaction receipt & Payment was Rs. 10.50 Crores. Thus, the FAR observes that although the turnover of the company was Rs. 146.37 Crores it did not reflect in its bank transactions.

23.25. I observe that the SCN does not state whether EKIL has violated any provisions of law by adjusting its income with purchases from and expenses of its ‘customers’, as mentioned in the FAR nor has the FAR explained whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company. The SCN provides example of two transactions and alleges them to be suspicious but no further details related to these two transactions is available, except for the fact that these were transactions where certain receipts in the bank account of EKIL was thereafter transferred to other entities. With respect to the transaction with Coral Conpro Pvt. Ltd., I note that Rs. 1,54,50,000 received by EKIL from ETPL on April 11, 2016 was transferred by it to Coral Conpro Pvt. Ltd. on the same day. It is observed that EKIL has made purchases from Coral Conpro Pvt. Ltd. worth Rs. 21.32 Crores and Sales worth Rs. 17.44 crores during the period April 01, 2015 to December 31, 2017. I observe that no further details related to the said transaction by EKIL has been furnished to the forensic auditor which buttresses the view that this transaction was suspicious in nature.

23.26. I note that the FAR mentions that with respect to Vignaharta Corrugators Private Limited, the company has claimed that there were purchases made in the next year which was adjusted from the amount of Rs. 6,05,60,322 received by EKIL from PF Commissioner on October 07, 2016, six months in advance and thus, Rs. 3,20,27,525 was transferred to Vignaharta Corrugators Private Limited on October 10, 2016. I find that in the absence of further details like whether there was any agreement between EKIL and Vignaharta Corrugators Private Limited which provided for such advance payment, the said transaction prima facie appears to be suspicious. However, I note that FAR does not state that purchase transactions between EKIL and Vighnaharta Corrugators Private Limited, as claimed by EKIL, did not take place at all. I also note that Vignaharta Corrugators Private Limited and EKIL did not have a common director, as stated in the SCN. Vignaharta Corrugators Private Limited had a common director with ETPL which had taken on lease the plant of EKIL.

g. Analysis of long term and short term borrowings

23.27. In this regard, the SCN, which is based on the findings of FAR, states as follows: i) EKIL has not provided any details pertaining to repayment of Long Term and Short Term borrowing, detailed terms of unsecured loans taken along with the relationships with connected entities, documentary evidences except some ledger accounts of long term and short term borrowing to the forensic auditor. ii) The company has transferred Rs. 19,28,04,013 from Long Term and Short Term Borrowings to Accrued interest on loan Account. On analysis of ledger of Accrued interest on loan, it is observed that the company has adjusted subsidy receivable against it. Thus the company has indirectly adjusted its reduction of short term and long term borrowings against subsidy receivable which should not be recognized in books of accounts. By doing so, the company has understated its Long term and short term borrowings by 10.00 crores in FY 2015-16 leading to misrepresentation of the actual financial position of the company to the investors. iii) Also, as mentioned by the forensic auditor, the company has passed the entry of subsidy receivable through Profit and Loss Account thus overstating its revenue from operations by 10.00 crores. iv) Also, the fact that there is no change in unsecured long term borrowing amounting to Rs. 148.13 crores for continuous three years indicates that there have been no efforts on the part of the company to reduce such unsecured loans and may be detrimental to the shareholders in the long term.

23.28. In this regard, I find that, as discussed in paras above, Rs. 11.89 crores, was wrongly shown as “Subsidy Receivable” in the short term loans and advances for the financial year 2015-2016 by EKIL in its financial statements, which was not in the manner as required under Accounting Standard 12 and amounted to a misstatement in the financial statements of EKIL to that extent. Further, I agree with the FAR that EKIL adjusted the said amount from its Long and Short Term Borrowing in its Profit and Loss Accounts pertaining to the investigation period. In my view, since the subsidy itself was wrongly shown in the financials as receivable, therefore, any adjustments based on the said subsidy would also be incorrect. In view of the same, I find that EKIL has made misstatement to that extent in its Profit and Loss Account with respect to the amount of Long and Short Term Borrowing pertaining to the investigation period h. Analysis of trade receivables of the company

23.29. In this regard the SCN states as follows:

i) Analysis of transactions with Asahi Industries Limited (AIL) In the absence of any legal agreement between EKIL and AIL for the so called “barter arrangement” and related non-disclosures in the Annual Report clubbed with the fact that they are related parties raises suspicion regarding these transactions. It is reinforced by the fact that the total sales and payment were aggregating to Rs.46.48 crores during the period 01.04.2015 to 31.12.2017 against the amount received and expenses incurred of Rs.16.71 crores only. Thus, major part of sales made to a group company remained receivable to the extent of Rs.28.31 crores as on 31.12.2017, thereby misusing the funds of the company and also tantamount to diversion of funds. It is also noted that the company has written off the expenses debited by AIL (amounting to Rs. 8.64 Cr. out of the total amount of Rs. 13.58 Cr.) against provisions made in the previous year 2014-15.

ii) Analysis of transactions with Bodal Conpro Pvt. Ltd. EKIL reported sales of Rs 3.18 Crores to M/s. Bodal Conpro Pvt. Ltd. during F.Y 2015-16. However, on cross verification of balance sheet of M/s Bodal Conpro Pvt. Ltd. the forensic auditor has observed that they have reported total purchase only for Rs 0.26 Crores during the same period. Thus the company has overstated the sales to the extent of Rs. 2.92 crores.

iii) Analysis of transactions with Kanha Textiles Pvt. Ltd. & Shakti Procon Pvt. Ltd. Trade receivables of Rs. 36,24,751 & Rs. 52,56,738 respectively are outstanding since last 2 years. There is no recovery for more than 2 years and appears to be detrimental to the interest of the minority shareholders.

23.30. From the FAR, I note that EKIL, while replying to the query of BSE regarding Direct Expenses, had stated: “The Company meets its Direct Expenses like Power and Fuel, Labour Charges, Repairs and Maintenance directly through its customers to whom it supplies the finished goods. So, all these Direct Expenses are paid by our customers.” Further, as discussed in previous para, vide letter dated April 22, 2019, EKIL had submitted to SEBI that it was following ‘barter system’ with some of its customers and in the same letter EKIL had submitted that it sold material to AIL and in return requested AIL to pay EKIL’s expenses for power, fuel, salary, since, the operation of bank account of EKIL had been stopped due to EKIL accounts being declared as NPA. EKIL had also submitted that there is no agreement with AIL to that effect because AIL was part of the same group of companies and it was a mutual understanding between EKIL and AIL.

23.31. I note from the FAR that the FAR, on scrutinizing the ledger account of AIL in the books of EKIL, it was found that there was an opening credit balance of Rs. 1.48 Crores. Thereafter, EKIL made sale of Rs 46.30 Crores to AIL and purchase of Rs. 1.77 Crores from AIL during the period 1.04.2015 to 31.12.2017 and total sales proceeds were adjusted against expenses and purchase. The FAR notes that AIL debited EKIL by Rs. 13.58 Crores towards expenses and adjusted the same from the sale of product by EKIL. The calculation for the same was as follows: - Expenses of Power and Fuel Expenses and Salary & Wages expenses on behalf of EKIL, amounting to Rs. 4.94 Crores from April 2015 to December 2017 - Expenses paid against previously made provision of Rs. 8.64 Crores

23.32. Considering that AIL and EKIL had an understanding of ‘barter system’, I note from the FAR as follows:

a) It is observed that against the total sales and payment aggregating to Rs. 46.48 crores made by EKIL to AIL during the period April 01, 2015 to December 31, 2017, the amount received and expenses incurred is only Rs.16.71 crores. b) Thus, I note that a major part of the consideration for sales made to AIL by EKIL to the extent of Rs. 28.31 crores remained receivable as on December 31, 2017. This raises suspicion regarding the genuineness of the explanation provided by EKIL. Moreover, the arrangement that expenses of EKIL were being borne by AIL which AIL was adjusting from the amounts it owed to EKIL was not reported in the financial statements of EKIL pertaining to the investigation period. I find that the information that the company is not receiving consideration for its sales in money but in some other form is an important information which needed to be disclosed in the financial statements. In view of the same, I find that this amounted to a misstatement in the financial statements of EKIL to that extent pertaining to the investigation period. c) AIL is related party with EKIL but there was no mention of these transactions with AIL in the Annual Reports of EKIL pertaining to the investigation period which was not in accordance with Accounting Standard- 18. d) I note that no audit trail has been provided for the alleged diverted funds in the FAR and details as to the identity of the persons to whom the funds were diverted and whether the allegedly diverted funds were not used for the purpose of the company are not mentioned in the FAR and therefore, it cannot be established whether this was a case of diversion of funds.

23.33. With respect to M/s. Bodal Conpro Pvt. Ltd., I note that EKIL had explained the discrepancy in the sales figures pertaining to F.Y 2015-16 as reported in the financial statements of EKIL and as reported in the balance sheet of as follows:

“It is to state that EKIL made sales of Rs, 3.18 Crore to M/s Bodal Con pro Pvt. Ltd. during the F.Y. 2015 16. However, there was a dispute with regards to specific requirement of M/s Bodal Conpro Pvt. Ltd. and therefore M/s Bodal Conpro Pvt. Ltd. did not account for the said goods towards purchase during the F.Y, 2015-16. It is to further state the dispute was later on sorted out in F.Y 2016- 17 and M/s Bodal Conpro Pvt. Ltd. accepted the goods, which might have been accounted for by M/s Badal Conpro Pvt. Ltd. in its books of accounts during next financial year.”

23.34. I find that EKIL itself has accepted that the actual acceptance of the goods by M/s Bodal Conpro Pvt. Ltd. took place in 2016-17 and thus EKIL should have reported the sales in the financial statement of FY 2016-17. Thus, I find that EKIL misstated its sale amounting to Rs. 2.92 Crore to M/s Bodal Conpro Pvt. Ltd. in the financial statements pertaining to FY 2015-16.

i. Incorrect submission to SEBI regarding the trade receivable

23.35. The SCN alleges that the EKIL has submitted to SEBI that their major clients are Avon Realcon Pvt. Ltd. (Rs. 19.88 crores) and Bodal Conpro Pvt. Ltd. (Rs. 15.39 crores). However, as per the sales register of the company, the sales to Avon Realcon Pvt. Ltd. amounted to Rs.12.81 crores and sales to Bodal Conpro Pvt. Ltd. amounted to Rs. 6.06 crores. Thus, the SCN alleges that the company has submitted false information to SEBI. In this regard, I note that the sales register of the company is a more reliable source for sales figures since the register is maintained for the specific purpose and is updated monthly. I find that the discrepancy in sales figures between that captured in EKIL’s sales register and EKIL’s submission to SEBI leads to the inference that the information submitted by EKIL to SEBI was inaccurate.

II. Violation of SEBI LODR Regulations

23.36. The SCN alleges that as per secretarial audit report the company has not appointed CFO for FY 2015-16 and FY 2016-17 and has not appointed compliance officer for FY 2015-16.

23.37. In this regard, I note that Regulation 6(1) of LODR Regulations stipulates that:

“A listed entity shall appoint a qualified company secretary as the compliance officer”. Hence, I find that by not appointing a compliance officer for FY 2015-16, the company has violated Regulation 6(1) of LODR Regulations.

III. Non furnishing of information by the company in response to forensic auditor and SEBI interim order queries.

23.38. I note that the SCN states that EKIL had failed to submit reply to queries raised in the SEBI interim order during the forensic audit and failed to reply to the forensic auditor regarding details pertaining to repayment of Long term and Short Term borrowing, detailed terms of unsecured loans taken along with the relationships with connected entities and the contract and agreements with customers of the company. I note that BSE was directed to appoint a forensic auditor for carrying out forensic audit of EKIL vide SEBI order dated November 21, 2017. Thus, the forensic audit was being carried out pursuant to a direction of SEBI. Being a listed entity, non-cooperation with such an audit cannot be accepted. I also find that CIRP was initiated against EKIL in February, 2020, i.e. after the forensic audit took place. Thus, the company cannot take the plea that the relevant documents were in the custody of IRP during the forensic audit. In view of the same, I find that EKIL was failed to furnish information sought from it by SEBI as well as the forensic auditor. also note that Section 11(2) (i) and 11(2) (ia) of the SEBI Act, 1992 has been invoked against the Noticees. On a reading of these Sections, I observe that Section 11(1) of the SEBI Act, 1992 lays down the functions of SEBI, and in carrying out the said functions, SEBI is empowered, under 11(2) (i) and 11(2) (ia) of the SEBI Act, 1992, to call for records from intermediaries and other entities. In the facts and circumstances of the present case, a forensic auditor appointed through an order of SEBI who seeks information from an entity must be treated with the same seriousness as if the information is being sought by SEBI. In view of the non-furnishing of the information sought by the forensic auditor, I find that EKIL has violated Sections 11(2)(i) and (ia) of SEBI Act, 1992.

24. I note that the SCN alleges that EKIL has violated Regulations 4(1)(a), (b), (c), (e) & (g), 4(2)(f)(ii) (6) & (7) and 4(2)(f)(iii) (3), (6) & (12) of the LODR Regulations. From the discussions above, I find that EKIL has failed to comply with Regulations 6(1), 23(2), Clause B(2) of Schedule III read with Regulations 30(3) of the LODR Regulations. Moreover, since the financial statements of EKIL pertaining to the investigation period was not as per the Accounting Standard as discussed in the previous paras, therefore EKIL has also violated Regulation 48 of LODR Regulations, which mandates that the listed entity shall comply with all the applicable and notified Accounting Standards from time to time. Regarding the violations of Regulation 4, I note that Regulation 4 of LODR Regulations, lays down principles governing disclosures and obligations of the listed entity under the LODR Regulations. Specific clauses of Regulation 4(1), the violation of which has been alleged in the SCN, provides that the listed entity which has listed securities shall make disclosures and abide by its obligations under these regulations, in accordance with the following principles:

(a) Information shall be prepared and disclosed in accordance with applicable standards of accounting and financial disclosure. (b) The listed entity shall implement the prescribed accounting standards in letter and spirit in the preparation of financial statements taking into consideration the interest of all stakeholders and shall also ensure that the annual audit is conducted by an independent, competent and qualified auditor. (c) The listed entity shall refrain from misrepresentation and ensure that the information provided to recognised stock exchange(s) and investors is not misleading. (e) The listed entity shall ensure that disseminations made under provisions of these regulations and circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple language. (g) The listed entity shall abide by all the provisions of the applicable laws including the securities laws and also such other guidelines as may be issued from time to time by the Board and the recognised stock exchange(s) in this regard and as may be applicable. (h) The listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders. (i) The filings, reports, statements, documents and information reports of the listed entity shall contain information that shall enable investors to track the performance of a listed entity over regular intervals of time and shall provide sufficient information to enable investors to assess the current status of a listed entity.

25. As discussed in para 23 above, I find that EKIL has inter alia failed to comply with Regulations 6(1), 23(2), Clause B(2) of Schedule III read with 30(3) and 48 of the LODR Regulations and therefore, its disclosures were not in accordance with the principles laid down in the aforesaid clauses of Regulation 4(1) and hence, EKIL is also in violation of 4(1)(a), (b), (c), (e), (g), (h), (i) and (j) of LODR Regulations. Regarding the violations of Regulations 4(2)(f)(ii) (6) & (7) and 4(2)(f)(iii) (3), (6) & (12) of the LODR Regulations, as alleged in the SCN, I find that Regulation 4(2)(f) enlists the responsibilities of board of directors of listed entities. Clause (ii) of Regulation 4(2)(f) deals with key functions of the board of directors and Clause (iii) deals with other functions of the board of directors. Any liability arising out of the violation of these principles because of violation of disclosure or other obligation of the listed entity under the LODR Regulations, is of the board of directors of the listed entity. Therefore, I find that EKIL cannot be said to be in violations of Regulation 4(2)(f)(ii) (6) & (7) and 4(2)(f)(iii) (3), (6) & (12) of the LODR Regulations which pertain to obligations of the board of directors. I also note that Regulation 33(2) (a) provides that the CEO and CFO of the listed company shall certify that the financial results do not contain any false or misleading statement or figures or omit any material fact, which is a liability on the CEO or CFO and cannot be said to have been violated by EKIL. Further, since one of the condition which every issuer company, whose securities are listed on a recognised stock exchange, is required to comply with is compliance with LODR Regulations, and in the present case, EKIL has been found to be in violation of the provisions of the LODR Regulations, as discussed above, therefore, EKIL is in violation of the condition of the listing agreement and hence, is also in the violation of Section 21 of SCRA, 1956.

IV. Violations of PFUTP Regulations, 2003:

26. With regard to the allegation of violation of provisions of PFUTP Regulations, 2003 and Section 12A(a), (b) & (c) of the SEBI Act, 1992, I note that the scope of work, as was assigned to the forensic auditor by BSE, as stated in the FAR, was as follows:

I. Possible misrepresentation including its financials and/or businesses and/or violation of SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 (hereinafter referred to as "LODR Regulations") and/or II. Possible misusing of Books of Account/funds of the Company including facilitation of accommodation entries and/ or entering into transaction to the detriment of minority shareholders and controlling shareholders and key management person (KMP) The FAR sates that for the aforesaid reasons, the audit, inter alia will cover the following:

a) Suspicious transactions/items as provided in the SEBI/ Exchange Orders passed on the Company b) To examine the Books of Accounts and backup records of the company for the period of two years including the year of transactions referred in SEBI/ Exchange Order to: i. Cash flow analysis to trace source of funds and end use of funds on sample basis (as per Annual Report for last 2 years) ii. Assess genuineness of the debtors/ receivables and creditors I payables, iii. Reconciliation of debtors/ creditors as stated by the Company vis a-vis the actual position and the prospects of recovery (focus on top debtors) iv. Analysis of Related party transactions v. High value bank transactions to ascertain their relevance to the business of the company and to identify the potential round-tripping of funds or accommodation transactions vi. Assess genuineness of expenditure (capex as well as other goods and services) and review of top vendors I suppliers I customers vii. Investments made by the company in subsidiary companies along with the relevant fund flows, if any viii. Assess genuineness of investments both listed and unlisted with appropriateness of valuation and flow of funds ix. Assessment of utilization of funds lying as share premium, if any, in terms of provisions of Companies Act x. Comment on the shareholding pattern xi. Wherever applicable, the relevant funds flow including analysis of relevant bank statements (also source and utilization of funds) Verification/ discussions: i. Independent and /or physical verification of the underlying transactions ii. Background /reputation checks based on public domain information related to promoters, nature/ line of business, genuineness of business activities of the company iii. Discussions with key stakeholders like Promoters/ Senior Management Team/ Departmental heads, vendors, customers, company auditors, entities/persons involved in day to day affairs of the company, etc. iv. Business history, directorship searches and litigations v. Assessment of size and scope of business. v. Site visit as may be applicable for verifying existence of the company functional/ registered office, assets, place of execution of services, etc. In case of doubt, site visit to be carried out at plants I factories.

27. From a reading of the scope of work of the FAR, I note that it was mainly limited to examination of possible violation of LODR Regulations by EKIL and the misuse of books of accounts/ funds by EKIL. I find that the conclusion of the FAR are also on the same lines and gives conclusions regarding violation of LODR Regulations. It is observed that the Investigating Authority, after examining the FAR, incorporated the findings of FAR as part of investigation report, and consequently, the same was mainly reproduced in the SCN. However, the SCN additionally states as follows: “From the above, it was observed that the company (Noticee no.1), its directors (Noticee no. 2 to 7) have failed to present true and fair financial statements, executed transactions which are non-genuine in nature thereby resulting in misrepresentation of the accounts/financial statements and misuse of account/funds of the company and such acts were found to be fraudulent in nature as they induced the investors to trade in the securities of the company and had the potential to mislead the investors.”

Consequently, the SCN, inter alia, additionally, includes allegation of violation of provisions of Section 12A(a), (b) & (c) of the SEBI Act, 1992 and Regulations 3(b), (c) & (d), 4(1) and 4(2)(f) & (r) of (PFUTP Regulations, 2003. I observe that while including the above violations in the findings of the stated SEBI investigation and consequently, in the SCN, there is no additional facts or findings provided, which is not in the FAR. It is observed that these Noticees have been charged with the violation of Section 12A(a), (b) & (c) of the SEBI Act, 1992 and Regulations 3(b), (c) & (d) of PFUTP Regulations, 2003 which can be in relation to dealing in securities. However, no details of trading by these Noticees viz: name of the scrip traded, number of shares traded, price at which shares were traded, date of the trading, have been provided. Nor is there any analysis as to how each of the finding of FAR such as non-compliance with provisions of LODR Regulations or related party transactions without approval or misrepresentation such as of loans as trade receivables, attract each of the PFUTP Regulations, 2003, as alleged.

28. I note that Section 12A(a), (b), (c) of the SEBI Act, 1992 deals with fraud related to securities market and the provisions of Regulations 3(b), (c) & (d), 4(1) and 4(2)(f) & (r) of PFUTP Regulations, 2003 are also related to securities market fraud/manipulation/ unfair trade practices. Section 12A (a), (b) & (c) of the SEBI Act, 1992 may be invoked in cases where there exists any manipulative or deceptive device or contrivance, any device, scheme or artifice to defraud or any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, purchase or sale of any securities. In the SCN, there are no trading or order data or details of any purchase, sale or issue of securities by any of the Noticees.

29. It is further observed that Regulation 4(1) of PFUTP Regulations, 2003, at the relevant time, dealt with fraudulent and unfair trade practices relating to securities while Regulation 4(2) is nothing but an enumeration of specific instances of fraudulent and unfair trade practices relating to securities. The common thread through these provisions is that the ingredients of fraud/ manipulation/ unfair trade practices must be satisfied. In this regard, I note that the Explanation inserted to Regulation 4(1) of PFUTP Regulations, 2003 with effect from October 19, 2020 clarifies as follows:

“Explanation.–For the removal of doubts, it is clarified that any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company shall be and shall always be deemed to have been considered as manipulative, fraudulent and an unfair trade practice in the securities market.”

Thus, as per the aforesaid explanation also any device, scheme or artifice to manipulate the books of accounts or financial statement of a company, in order to be termed as manipulative, fraudulent and an unfair trade practice in the securities market must directly or indirectly result into manipulation of the price of securities of that company. In the present case, there is no allegation of manipulation of price shares of EKIL. I note that FAR does not allege any diversion/misutilisation of funds which as per the aforesaid explanation can be termed as manipulative, fraudulent and an unfair trade practice in the securities market without there being any direct or indirect manipulation of the price of the securities of the company. I note that there is no bar on taking action by SEBI on the basis of a FAR, invoking provisions of PFUTP Regulations, 2003 and other similar provision of SEBI Act, 1992 related to fraud, if, after examination of the matter, including the FAR, SEBI finds that there was impact on the securities market or the price of the scrip, which are ingredients to prove violations of PFUTP Regulations, 2003. I note that while in the FAR the mandate was included related to examination of misuse of funds but the conclusion did not mention the same. I further observe that the definition of fraud as given under Regulation 2(1) (c) and as interpreted by the Hon’ble Supreme Court of India in Securities and Exchange Board of India and Ors v. Kanaiyalal Baldevbhai Patel and Ors. (2017) 15 SCC 753, makes it clear that ‘inducement’ is required to constitute ‘fraud’ under PFUTP Regulations 2003 and must be made while ‘dealing in securities’ and must be made for the purpose ‘to induce others to deal in securities’. The allegations made in the SCN does not bring out findings or any facts relating to trading in securities by Noticees or these essential ingredients of ‘fraud’ such as ‘manipulation in securities’, ‘dealing in securities’, ‘inducement’, etc.

30. Therefore, I find that violations of PFUTP Regulations, 2003, as alleged in the SCN, are very general and vague in nature without making out any specific case containing necessary ingredients required to constitute these violations nor were the Noticees given opportunity to inspect or furnished any finding of examination relating to PFUTP Regulations 2003 violations which was additionally included while issuing the SCN. In my view, due to the aforesaid reasons, under the facts and circumstances of the present case, I find substantial merit in the submissions made by the Noticees that the allegations of violation of Section 12A(a), (b & (c) of the SEBI Act, 1992 and provisions of PFUTP Regulations, 2003 is not tenable against the Noticees. However, SEBI is at liberty to issue fresh SCN, if deemed fit, to pursue violations of PFUTP Regulations, 2003 by bringing out specific case/ingredients under PFUTP Regulations, 2003.

31. I find that, based on the defaults by EKIL discussed in the previous paras, the SCN1 has inter alia alleged that by virtue of the provision of Section 27 of the SEBI Act, 1992, Noticee no. 2 to 7, who were the directors of EKIL at the relevant time, including independent directors are also liable for the violations alleged to be committed by EKIL viz: Sections 12A(a),(b) & (c), 11(2)(i) and 11(2)(ia) of the SEBI Act, 1992 and Regulations 3(b), (c) & (d) and 4(1) and 4(2) (f) & (r) of the PFUTP Regulation, 2003, Regulations 4(1)(a), (b), (c), (e), (g), (h), (i) & (j), 4(2) (f)(ii)(6), (7) & (8), 4(2)(f)(iii)(3), (6) & (12), 6(1), 30(3), 33(2)(a) and 48 of LODR Regulations read with Section 21 of SCRA, 1956.

32. In this regard, I note that Noticee no. 2 passed away on May 02, 2021, and thus, the proceedings against her abate. Regarding applicability of the Section 27 of the SEBI Act, 1992, I note that during the relevant period (i.e. investigation period), Section 27 provided for the vicarious liability of certain persons who were in charge of and was responsible to the company where the offence is committed by a company. Section 27 at that time did not provide for the vicarious liability in respect of the civil liability of the company arising out of the violations committed by such company. However, after amendments made to Section 27 with effect from March 08, 2019, by the Finance Act, 2018, vicarious liability for civil liability of the company has been introduced by replacing the word “offence” with the word “contravention” in Section 27 of the SEBI Act, 1992. Therefore, Section 27 of the SEBI Act, 1992 does not create any vicarious liability of Noticee nos. 3 to7 for the alleged violations committed by EKIL during the investigation period, with reference to PFUTP Regulation, 2003 or LODR Regulations for which proceedings under Sections 11, 11(4), 11A, 11B(1) and Section 12 A(1) of SCRA, 1956 or monetary penalty has been proposed, which are civil in nature.

33. Now, the question remains whether Noticee nos. 3 to 7 can be held independently liable for the violations as alleged in SCN 1 without any reference to vicarious liability under Section 27 of the SEBI Act, 1992. I note that, with reference to the allegations of violation of fraud provisions, i.e. Section 12A(a), (b) & (c) of the SEBI Act, 1992 and Regulations 3(b), (c) & (d) of PFUTP Regulations, 2003 against these Noticees, as already discussed in the forgoing paras, liberty has been given to SEBI to further investigate and proceed with the matter and the role of directors qua these violations may also be examined by SEBI. In my view, due to the aforesaid reasons, under the facts and circumstances of the present case, the allegations of violation of Section 12A(a), (b & (c) of the SEBI Act, 1992 and provisions of PFUTP Regulations, 2003 is not tenable against the Noticee nos. 3 to 7.

34. SCN also alleges violation of Section 11(2)(i) and 11(2)(ia) of the SEBI Act, 1992 by the Noticee no. 2 to 8. The said violations has been alleged in view of the non-furnishing of information by EKIL to the forensic auditor. In this regard, I note that information was sought by the forensic auditor from EKIL and not from these directors or auditor in their capacity of the director/auditor of EKIL. In view of the inapplicability of Section 27 of SEBI Act, 1992, Noticee no. 2 to 7, being directors and Noticee no. 8 being auditor, cannot be held liable for violation of Section 11(2)(i) and 11(2) (ia) of SEBI Act, 1992, as alleged in the SCN. Further, Section 21 of SCRA which deals with non-compliance with listing conditions is applicable to a listed entity and thus, cannot be invoked against the Noticee nos. 2 to 7.

35. With respect to violation of provisions of LODR Regulations invoked against Noticee nos. 2 to 7 in the SCN 1, I note that Regulations 4(2)(f)(ii)(6), (7) and (8), 4(2)(f)(iii) (3), (6) & (12) and 33 of LODR Regulations create specific and direct liability of the board of directors of an issuer company. Clause (ii) of Regulation 4(2)(f) deals with key functions of the board of directors and Clause (iii) deals with other functions of the board of directors. Thus, board of directors is responsible for complying with these principles. Any liability arising out of the violation of these principles because of violation of disclosure or other obligation of the listed entity under the LODR Regulations, is fastened on the board of directors of the listed entity.

36. It is observed that as per the Annual Reports of EKIL, the details of the Board of Directors during the investigation period are as follows:

FY 2015-16 Name Designation Mrs. Manasi Indrajit Wadkar Chairperson (Non independent Non Executive) Mr. Trivendra Singh Managing Director Mr. Narayan Ghumatkar Independent Director Mr. Naresh Chandra Sharma Independent Director Mr. Manmohan Ahluwalia Independent Director FY 2016-17 Name Designation Mr. Narayan Ghumatkar Independent Director & Chairman Mr. Trivendra Singh Managing Director Mr. Naresh Chandra Sharma Independent Director Mr. Manmohan Ahluwalia Independent Director Mrs. Manasi Indrajit Wadkar Director Mrs. Neha Nilesh Patil Director

FY 2017-18 Name Designation Mr. Narayan Ghumatkar Independent Director & Chairman Mr. Trivendra Singh Managing Director Mr. Manmohan Ahluwalia Independent Director Mrs. Manasi Indrajit Wadkar Director Mrs. Neha Nilesh Patil Director

37. I note that Noticee no. 3 has submitted that he was an Independent Director and not responsible for the day to day running of the Noticee no. 1. In this regard, as discussed above, I note that Regulations 4(2)(f) and Regulation 33 creates specific duty on the board of directors without making any distinction with independent directors. Moreover, I find that Noticee no. 3 was a member of the Audit Committee of EKIL. The following are the details of independent directors who were members of Audit Committee and the meetings attended by them during the investigation period:

Name of Category 2017-18 2016-17 2015-16 directors Held Attended Held Attended Held Attended Naresh Independent NA NA 4 3 4 4 Chandra Director Sharma Manmohan Independent 4 4 4 4 4 4 Ahluwalia Director Trivendra Director 4 4 4 4 4 4 Singh Narayan Independent 4 1 NA NA NA NA Ghumatkar Director

*Mr. Naresh Chandra Sharma resigned from the post of Directorship w.e.f. 08th February, 2018 38. In this regard Section 177 (4) of the Companies Act, 2013 lays down as follows:

“Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include, - (i) …… (ii) examination of the financial statement and the auditors’ report thereon; (iii) approval or any subsequent modification of transactions of the company with related parties; (iv) scrutiny of inter-corporate loans and investments; (v) valuation of undertakings or assets of the company, wherever it is necessary; (vi) evaluation of internal financial controls and risk management systems; (vii) …...”

39. Regarding the liability of the independent directors for the acts of commission and omission of a company reference may be made to Regulation 25(5) of the LODR Regulations which provides that an independent director shall be held liable, only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge, attributable through processes of board of directors, and with his consent or connivance or where he had not acted diligently with respect to the provisions contained in these regulations. As discussed in previous paragraphs, the financials of EKIL were placed before the Audit Committee of EKIL during the investigation period were inaccurate and inadequate. In terms of Section 177 of the Companies Act, 2013 and Part C of Schedule II read with Regulation 18(3) of LODR Regulations, it was the duty of the Audit Committee of EKIL to examine the financials, scrutinize inter corporate loans and investments and related party transactions etc. With respect to the related party transactions, since, the same were not placed before the audit committee for approval, therefore, the liability for non-compliances with such related party transactions cannot be placed on the members of the audit committee. However, for the other instances of misstatement and noncompliance with accounting standards in the financials of EKIL pertaining to the investigation period, the Audit Committee will be responsible. In view of the same, I find that failure to raise any concern regarding the financials of EKIL, as member of the audit committee as well as the board of directors of EKIL, shows that these directors did not act diligently with respect to the provisions contained in the LODR Regulations.

40. I observe that in the previous paras, it has been found that the financial statements of EKIL for the investigation period contained misstatements and the same were not in line with the applicable accounting standards. I note that in terms of Regulation 33(2)(a) of LODR Regulations, the annual audited financial results are to be approved by the board of directors of the listed entity. As the financial of EKIL were misrepresented, as discussed above, therefore, Noticee no. 3 to 7 who approved the financial results of EKIL for the financial years 2015-16, 2016-17 and 2017-18 are in violation of Regulation 33(2)(a) of LODR Regulations. Further, since, the director of EKIL, i.e. Noticee nos. 3 to 7 did not exercise due diligence in approving the financials of EKIL they have violated Regulations 4(2)(f)(ii)(6), (7) and (8), 4(2)(f)(iii) (3), (6) & (12) of LODR Regulations. I also note that the Annual Report of the company for 2015-16 was certified by Noticee no. 2 (deceased), Noticee no. 7 and an additional director. I also note that the Annual Reports of 2016-17 and 2017-18 were certified by Noticee no. 7 and Noticee no. 6. Also, as informed by BSE, the company has appointed Noticee no. 7 for determining materiality of events for the purpose of making disclosure to the stock exchange and there was failure to disclose material event by the company. Therefore, Noticee nos. 6 and 7 have violated Regulation 33(2) (a) of LODR Regulations.

41. I note that Noticee no. 8 and 9, being the statutory auditors of EKIL during investigation period, have also been issued separate show cause notices i.e. SCN 2 and SCN 3, respectively, alleging that the statutory auditors have been negligent in performance of their duties and have not been diligent in issuance of unqualified audit opinion for EKIL for the FY 2015-16, 2016-17 and 2017- 18, thereby, violating provisions of Section 12A (a) (b) & (c), 11(2)(i) and 11(2)(ia) of the SEBI Act, 1992 and Regulations 3(b) (c), (d) and 4(1) and 4(2), (a), (e), (f) & (r) of the SEBI (PFUTP) Regulations, 2003. In this regard, before dealing with the liability of the statutory auditors, it would be appropriate to refer to the judgment of Hon’ble Bombay High Court in Writ Petition No. 5249 of 2010 (filed by Price Waterhouse, Bangalore) and Writ Petition No. 5256 of 2010 (filed by 10 CA firms alongwith their partners), dated August 13, 2010, wherein

Hon’ble Bombay High Court, with respect to SEBI’s jurisdiction over auditors has held as follows:

“25. …. In our view, the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry. It is true, as argued by the learned counsel for the petitioners, that the SEBI cannot regulate the profession of Chartered Accountants. This proposition cannot be disputed in any manner. It is required to be noted that by taking remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by the SEBI, it can never be said that it is regulating the profession of the Chartered Accountants. So far as listed Companies are concerned, the SEBI has all the powers under the Act and the Regulations to take all remedial and protective measures to safeguard the interest of investors and securities market. So far as the role of Auditors is concerned, it is a very important role under the Companies Act. As posited in Section 227 of the Companies Act, every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the Company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the Company such information and explanations as the auditor may think necessary for the performance of his duties.

The auditors in the Company are functioning as statutory auditors. They have been appointed by the shareholders by majority. They owe a duty to the shareholders and are required to give a correct picture of the financial affairs of the Company. ……. With a view to safeguard the interests of such investors, in our view, it is the duty of the SEBI to see that maximum care is required to be taken to protect the interest of such investors so that they may not be subjected to any fraud or cheating in the matter of their investments in the securities market. Normally, an investor invests his money by considering the financial health of the Company and in order to find out the same, one will naturally bank upon the accounts and balance-sheets of the Company. If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed Company.

In our view, the SEBI has got inherent powers to take all ancillary steps to safeguard the interest of investors and securities market. …..”

From the above-mentioned judgment of Hon’ble Bombay High Court, it is observed that for SEBI to exercise jurisdiction over an auditor, it has to be shown that the case pertains to an auditor who in connivance and in collusion with the officers or directors of a company has concocted false accounts. I note that in the present matter SCN 2 and SCN 3, as issued to Noticee no. 8 and 9, respectively, only allege that the statutory auditors were not diligent enough in the issuance of an unqualified audit opinion for the financial statements of EKIL. The SCN 2 and SCN 3 do not allege that the statutory auditors were in connivance with the promoters/ directors / management of EKIL to fudge the financial statements of EKIL. Moreover, as discussed in previous paras, I note that the charges of violation of provisions of SEBI Act, 1992 and PFUTP Regulations, 2003, pertaining to fraud, have not been made out even against the Noticee no. 1 to 7. Therefore, in view of the judgment of the Hon’ble Bombay High Court in PWC matter (supra) and allegation made in SCN 2 and SCN 3 against Noticee no. 8 and Noticee no. 9, are not made out.

42. In view of the aforesaid violations committed by Noticee nos. 1, 3 to 7, I find that directions under Sections 11(1), 11(4), 11A and 11B (1) of the SEBI Act, 1992 and Section 12A (1) of SCRA, 1956, needs to be issued.

43. Noticee no. 1, 2 to 7 have been called upon to explain as to why penalty should not be imposed upon them under Sections 15A(a), 15HA and 15HB of SEBI Act, 1992 and Section 23E and 23H of SCRA, 1956, for the violations alleged in the SCN. Relevant extract of these penalty provisions, as existing at the time of violations, is reproduced, hereunder:

Relevant extract of Section 15A (a) and 15HB of SEBI Act, 1992:

“Penalty for failure to furnish information, return, etc.

15A. If any person, who is required under this Act or any rules or regulations made thereunder,— (a) to furnish any document, return or report to the Board, fails to furnish the same he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;

Penalty for contravention where no separate penalty has been provided.

15HB. Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees.”

Relevant extract of Sections 23E and 23H of SCRA, 1956:

Penalty for failure to comply with provision of listing conditions or delisting conditions or grounds.

23E. If a company or any person managing collective investment scheme or mutual fund, fails to comply with the listing conditions or delisting conditions or grounds or commits a breach thereof, it or he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees.

Penalty for contravention where no separate penalty has been provided.

23H. Whoever fails to comply with any provision of this Act, the rules or articles or bye-laws or the regulations of the recognised stock exchange or directions issued by the Securities and Exchange Board of India for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees.

44. From the analysis of the aforesaid penalty provisions, I find that penalty under Sections 15A(a) and 15HB of the SEBI Act, 1992, only, is attracted and not the penalties under Section 15HA of SEBI Act, 1992 and Sections 23E and 23H of SCRA, 1956. I note that Section 15HA of the SEBI Act, 1992 provides for imposition of penalty in case of fraudulent and unfair trade practices committed by any person. As in the present case, it has been found that violations of Section 12A(a), (b) & (c) of SEBI Act, 1992 and provisions of PFUTP Regulations, 2003 have not been made out, therefore, penalty under Section 15HA of SEBI Act, 1992 is not attracted against the Noticees (i.e. Noticee no. 1 to 9). I also not that Section 23E of SCRA, 1956 provides for penalty for failure to comply with, inter alia, listing conditions by “a company or any person managing collective investment scheme or mutual fund”. In the present case, it has been found that EKIL is in violation of listing conditions, however, EKIL is not managing any collective investment scheme or mutual fund, so as to attract penalty under Section 23E of SCRA. I find that penalty under Section 23H of SCRA, 1956 is not attracted in the case of Noticee no. 3 to 7, as Section 23H provides for penalty for failure to comply with any provision of SCRA, 1956, the rules or articles or bye-laws or the regulations of the recognised stock exchange or directions issued by the Securities and Exchange Board of India for which no separate penalty has been provided. As the Noticee no. 3 to 7, being directors of EKIL, have been found to be in violation of LODR Regulations, which is a regulation framed under the SEBI Act, 1992 and SCRA, 1956 by SEBI and not the “regulation” of stock exchange, as contemplated under Section 23H, and there is no violation of direction of SEBI alleged against these Noticees, therefore, Section 23H is not attracted in the case of Noticee no. 3 to 7.

45. I find that for non-furnishing of information to forensic auditor, as found above, EKIL is liable for imposition of penalty under Section 15A(a) of the SEBI Act, 1992 which provides penalty for failure to furnish information, inter alia, sought by SEBI under the provisions of SEBI Act, 1992. For the violation of LODR Regulations, EKIL is liable for imposition of penalty under Section 15HB of the SEBI Act, 1992 which provides for penalty for failure to comply with any provision of SEBI Act, 1992, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided. Since, LODR Regulations are framed under SEBI Act, 1992 also and penalty provisions under SEBI Act, 1992 (i.e. 15A to 15HB) does not separately provide for any penalty for violation of LODR Regulations, therefore, for violation of LODR Regulations by EKIL, as found in this order, penalty under Section 15HB is attracted against EKIL. Similarly, Noticee no. 3 to 7 who are the directors of EKIL are liable for imposition of penalty, for the violations of LODR Regulations which are found to be committed by them, under Section 15HB of the SEBI Act, 1992.

46. For imposition of penalty under the provisions of the SEBI Act, 1992, Section 15J of the SEBI Act, 1992 provides as follows:

“Factors to be taken into account while adjudging quantum of penalty.

15J. While adjudging quantum of penalty under 15-I or section 11 or section 11B, the Board or the adjudicating officer shall have due regard to the following factors, namely: — (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; (c) the repetitive nature of the default.

Explanation. — For the removal of doubts, it is clarified that the power to adjudge the quantum of penalty under sections 15A to 15E, clauses (b) and (c) of section 15F, 15G, 15H and 15HA shall be and shall always be deemed to have been exercised under the provisions of this section.”

47. I find that material available on record does not mention the amount of disproportionate gain or unfair advantage made as a result of the default. I find that the material available on record does not indicate the amount of specific loss caused to investors or group of investors as a result of the default by the Noticees. However, I note that the violations have occurred over a period of three financial years. I also note that Noticee no. 3, 4 and 5 were the independent directors of EKIL. Noticee no. 5 was the Chairman of the Board of Directors of EKIL for the FY 2016-17 and 2017-18. I also note that Noticee no. 3 resigned from the post of Independent Director with effect from February 08, 2018 and did not attend any meetings of the Audit Committee in the FY 2017-18.

Directions:

48. In view of the aforesaid findings and having regard to the facts and circumstances of the case, I, in exercise of the powers conferred upon me under Sections 11(1), 11(4), 11(4A), 11A and 11B(1), 11B(2) and Section 12A(1) of SCRA, 1956 read with Section 19 and 11(2)(j) of the SEBI Act, 1992 and Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995, direct as under:

(i) For the violations committed by Noticee no. 1, as discussed in the previous paras of this order, Noticee no. 1 is liable to be restrained from accessing the securities market and further liable to be prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of one (1) year, from the date of this direction becoming effective against Noticee no.1, in accordance with observations made in para 21 of this order;

(ii) The Noticee no. 5 to 7, are restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of one (1) year, from the date of coming into force of this order;

(iii) The Noticee no. 3 and 4, are restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of six (6) months, from the date of coming into force of this order;

(iv) The Noticee no. 3 to 7, are hereby imposed with, the following penalties as specified:

Noticee Name of Noticee Provisions under Penalties No. which penalty imposed 1 Eskay K‘n’it India Section 15HB and Rs. 30,00,000/- (Rupees Limited⃰ Section 15A(a) of Thirty Lakh) and Rs. SEBI Act, 1992 10,00,000/- (Rupees Ten respectively Lakh) 3 Mr. Naresh Section 15HB of Rs. 2,00,000/- (Rupees Chandra Sharma SEBI Act, 1992 Two Lakh) 4 Mr. Manmohan Section 15HB of Rs. 3,00,000/- (Rupees Ahluwalia SEBI Act, 1992 Three Lakh)

5 Mr. Narayan Section 15HB of Rs. 3,00,000/- (Rupees Ghumatkar SEBI Act, 1992 Three Lakh)

6 Ms. Neha Nilesh Section 15HB of Rs. 15,00,000/- (Rupees Patil SEBI Act, 1992 Fifteen Lakh) 7 Mr. Trivendra Section 15HB of Rs. 15,00,000/- (Rupees Shambhu Singh SEBI Act, 1992 Fifteen Lakh)

⃰ The said penalty shall stand payable by Noticee no. 1 as per observations mentioned in para 21 of this order.

(v) The Noticees, except Noticee no. 1 are directed to pay their respective penalties within a period of forty-five (45) days, from the date of receipt of this order, by way of Demand Draft in favour of “SEBI -Penalties Remittable to Government of India”, payable at Mumbai or through online payment facility available on the website of SEBI, i.e. www.sebi.gov.in on the following path, by clicking on the payment link: ENFORCEMENT -> Orders -> Orders of Chairman/ Members -> PAY NOW. In case of any difficulties in online payment of penalties, the said Noticees may contact the support at portalhelp@sebi.gov.in. The demand draft or the details/ confirmation of e-payment should be sent to “The Division Chief, CFID-2, Securities and Exchange Board of India, SEBI Bhavan II, Plot no. C-7, “G” Block, Bandra Kurla Complex, Bandra (E), Mumbai -400 051” and also to e-mail id:- tad@sebi.gov.in in the format as given in table below:

Case Name Name of Payee Date of Payment Amount Paid Transaction No.

Payment is made for: (like penalties/ disgorgement/ recovery/ settlement amount/ legal charges along with order details)

(vi) Noticee no.1 shall pay the penalty determined with respect to it within a period of forty-five (45) days, from the date the penalty become payable by Noticee no. 1. (vii) The proceedings against Noticee no. 2 is disposed of for reasons stated in para 32.

49. During the period of restraint, as directed in para 48 above, the existing holding of securities including the units of mutual funds, of the concerned Noticees, shall remain under freeze.

50. The obligation of the Noticees, restrained/prohibited by this Order, in respect of settlement of securities, if any, purchased or sold in the cash segment of the recognized stock exchange(s), as existing on the date of this Order, are allowed to be discharged irrespective of the restraint/prohibition imposed by this Order. Further, all open positions, if any, of the Noticees, restrained/prohibited in the present Order, in the F&O segment of the recognised stock exchange(s), are permitted to be squared off, irrespective of the restraint/prohibition imposed by this Order.

51. This Order comes into force with immediate effect.

52. This Order shall be served on all the Noticees, Resolution Professional of Noticee no. 1, Recognized Stock Exchanges, Depositories and Registrar and Share

Transfer Agents and Banks to ensure necessary compliance. A copy of this order shall also be forwarded to ICAI for necessary action.

-Sd- Place: Mumbai ANANTA BARUA Date: August 11, 2021 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA