G V Films Limited & Ors. vs Sebi
- CitationAppeal No. 1043 of 2022
Ratio decidendi
The rule this decision rests on
The court was not a mere order of the WTM; the appeal decides several points, each resting on stated reasoning. Failure to furnish information to a forensic auditor, where the record contains no evidence that the requisite information was supplied, is a failure to cooperate with the investigation and is sustained on the basis of the WTM's categorical finding that the information was withheld and the investigation hampered. Where the Whole Time Member has made a categorical finding that there was no misappropriation or diversion of funds, no manipulation of the scrip price, and no violation of Section 12A of the SEBI Act or the PFUTP Regulations, and no fraud, disproportionate gain, unfair advantage or specific loss to any investor has been caused, a debarment and penalty founded solely on violation of the LODR Regulations is harsh and excessive and must be moderated in proportion to the nature of the violation. Non-executive directors who are not involved in the day-to-day affairs and management of the company, and chief financial officers who were not involved in preparing the books of account or in the misrepresentation of financials, are not liable for penalty merely by reason of membership of the audit committee or by being signatories to the Annual Report approved by the Board; such penalties cannot be sustained in the absence of awareness of or participation in the misrepresentation. A chief financial officer who gave an annual certificate under Part B and Schedule II of the LODR Regulations, 2015, pursuant to a Board direction, is in violation of Regulation 17(8) of those Regulations, but a penalty for that breach must be proportionate and reduced accordingly. A director who is responsible for the affairs of the company and in charge of its day-to-day running bears responsibility for the company's non-compliance and may be penalised on that basis, the quantum being fixed with regard to the extent of his role.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
BEFORE THE SECURITIES APPELLATE TRIBUNALMUMBAIDate of Decision : 06.01.2023Misc. Application No. 1634 of 2022AndAppeal No. 1043 of 20221.G V Films Limited521/5, Anna Salai, Nandanam,Chennai - 600 035.2. Balakumar Vethagiri Giri1401, Tower A, Esquire Towers,Oberoi Garden City,Mohan Gokhle Road,Goregaon (East),Mumbai - 400 063.3. Navalpakkam Kuppan RajendiranQ-Block, S 1, 2nd Floor,3/27, 16th Street, Anna Nagar,Chennai - 600 040.4. Thangavelu Pitchandi5 (Old No. 544), 14th Street,4 RT Sector, K K Nagar,Chennai - 600 078.5. Sudhakar Mallappa ShettyA-202, Ashoka Tower,Versova, Andheri (W),Mumbai - 400 061.6. Dinesh M. NaikTalukdar Chawl, Jawahar Nagar,Saibaba Road, Room No. 4,Khar (E), Mumbai - 400 051.7. Shivkuar B Singh505, Sunder Tower,T.J. Road, Sewri,Mumbai - 400 015.28. Suresh AminD/6/47, Greenfields, JV Link Road,Opposite Majas Depot,Jogeshwari (East),Mumbai - 400 093.9. S.P. DhanrajB4, Mowbrays Garden,17A TT K Road,Next to Raj Park, Tevnampet,Tamilnadu - 600 018......AppellantsVersusSecurities and Exchange Board of IndiaSEBI Bhavan, Plot No. C-4A, G-Block,Bandra-Kurla Complex, Bandra (East),Mumbai - 400 051. ...RespondentMr. Aditya Thanvi, Advocate i/b Triad Law Chambers for theAppellant.Mr. Vyom Shah, Advocate with Ms. Karishma Motla andMr. Aditya Sarangarajan, Advocates i/b Mansukhlal Hiralal&Co. for the Respondent.CORAM : Justice Tarun Agarwala, Presiding OfficerMs. Meera Swarup, Technical MemberPer : Justice Tarun Agarwala, Presiding Officer (Oral)1. There is a delay in the filing of the appeal. For thereasons stated in the application, the delay is condoned. Theapplication is allowed.32. The present appeal has been filed against the order dated26th August, 2022 passed by the Whole Time Member("WTM" for short) restraining the appellants from accessingthe securities market and further prohibiting them frombuying, selling or otherwise dealing in securities directly orindirectly or being associated with the securities market, inany manner, whatsoever for a period of one year. In additionto the above, the WTM also imposed penalties of differentamounts totaling Rs. 54 lakhs.3. The facts leading to the filing of the present appeal is,that on 9th June, 2017 the Ministry of Corporate Affairs issueda letter annexing a list of 331 shell companies and requestingSEBI to take appropriate action under the Securities andExchange Board of India Act, 1992 (hereinafter referred to asthe "SEBI Act") and its regulations.4. Based on the said letter, SEBI issued an order dated 7thAugust, 2017 placing trading restrictions on the appellantCompany, its Directors and promoters. The Company made arepresentation and also filed appeal no.211 of 2017 whichwas disposed of by this Tribunal by an order of 29 th August,2017 directing SEBI to decide the representation.45. Subsequently, based on further investigation SEBIpassed an ex-parte ad-interim order dated 4th September, 2017which included a direction for appointment of a forensicauditor to verify misrepresentations including financial andmisuse of funds in books of accounts of the Company. Aconfirmatory order dated 17th January, 2018 was subsequentlypassed.6. Based on the forensic audit report and furtherinvestigation made by SEBI, a show cause notice was issued.The broad charges in the show cause notice are as follows:"A. Misrepresentation including of financials andmisuse of funds/books of accounts in violationof LODR Regulations, 2015;B. Non furnishing of information/Noncooperationby the Company with the forensic auditor;C. Violation of PFUTP Regulations, 2003."7. The WTM after considering the replies of the appellantsand the material evidence on record concluded that theappellant Company misrepresented its financials and violatedthe accounting standards. The WTM found that variousprovisions of LODR Regulations were not complied withduring the three financial years and there were lapses on thepart of the Company in not making the disclosures within the5stipulated period. The WTM further found that non-furnishingof information to the forensic auditor was violative of Section11(2)(i) of the SEBI Act. The WTM further found that therewas no violation of Section 12A of the SEBI Act andSecurities and Exchange Board of India (Prohibition ofFraudulent and Unfair Trade Practices Relating to SecuritiesMarkets) Regulations, 2003 (hereinafter referred to as"PFUTP Regulations") as there was no misappropriation ofthe funds nor the Company nor its Directors had played afraud upon the investors nor was there any disproportionategain or unfair advantage nor any specific loss was incurred byany investor. The WTM accordingly for the above violationsdebarred the appellant from accessing the securities marketfor specified periods and imposed different amounts ofpenalties on the appellants.8. We have heard Shri Aditya Thanvi, the learned counselfor the appellant and Shri Vyom Shah, the learned counsel forthe respondent.9. On the issue of failure to furnish information to theforensic auditor we find from the impugned order that acategorical finding has been given that the appellant not onlyfailed to co-operate but also did not furnish the relevant6information to the forensic auditor and, thus, hampered theinvestigation. The contention that necessary information wassupplied is bereft of merit as no evidence of any sort has beenfiled to show that the appellants had furnished the requisiteinformation to the forensic auditor. In view of the aforesaid,we do not find any error in the order passed by the WTM onthis score.10. The WTM has gone into detail and came to theconclusion that there has been misrepresentation including offinancials and, consequently, violation of the LODRRegulations. In this regard the WTM found discrepancies inthe expenses incurred by related parties of the appellantcompany incurring expenses on behalf of the Company,misrepresentation with regard to Foreign CurrencyConvertible Bonds, misrepresentation with regard to litigationexpenses, misrepresentation of foreign exchange fluctuationloss etc. The WTM found that the findings given in theforensic audit report were correct and the Company haddisclosed incorrect transactions in the books of accounts andthereby violated Regulation 48 of the LODR Regulations,2015.711. We thus find that the Company had made certain lapsesand failed to comply with the LODR Regulations.12. We also find that the entire enquiry was initiated withregard to the allegation that the Company was a shellCompany which fact was found to be false. Further, the WTMhas given a clear finding that there was no violation of thePUTP Regulations and there was no diversion of funds northere was any manipulation in the price of the scrip and,consequently, no fraud or unfair advantage was caused to anyshareholder or investor. In the absence of any specific lossbeing caused to anyone it was contended that the penaltyimposed in the given circumstances was totallydisproportionate to the alleged violation apart from beingharsh and excessive.13. Admittedly, a clear finding has been given by WTM thatthere is no misappropriation of funds of the Company northere is any manipulation in the price of the scrip. The WTMhas given a categorical finding that Section 12A of the SEBIAct or PFUTP Regulations have not been violated.14. In the absence of any finding of any fraudulent activitiesor misappropriation of funds or diversion of funds, we are of8the opinion that direction of debarment and the penalty givenfor violation of the LODR Regulations appears to be harshand excessive. We also find that directions of debarment andimposition of penalties have also been imposed upon theappellants.15. In the instant case, we find that the violation of theLODR Regulations gave no disproportionate gain to anyonenor created any unfair advantage to the appellant nor anyspecific loss was caused to any investors and, therefore, in ouropinion the direction of debarment and penalty imposed forviolation of the LODR Regulations appears to be harsh andexcessive.16. We find that the Appellants no. 3,4,5,6 and 7 were non-executive directors and Appellants no. 8 and 9 were chieffinancial officers. They were not involved in the day to dayaffairs and management of the Company and are therefore notconcerned with the alleged misrepresentations of thefinancials. Merely because Appellants no. 3 to 7 were part ofthe audit committee does not mean that the said appellantswere aware of the misrepresentations made by the Company.The imposition of penalty upon them is, thus, whollyerroneous in view of various decisions passed by this Tribunal9from time to time. Similarly, we find that Noticee no. 13worked as CFO w.e.f. 22nd May, 2017 and was not involvedin the preparation of the books of account nor involved in themisrepresentation of the financials of the Company for the FY2016-17. The Annual Report is approved by the Board ofDirectors and the Noticee no. 13 was only a signatory to theAnnual Report. He, thus, cannot be found guilty of thecharges. However, Noticee no. 12 was the CFO of theCompany for FY 2015-16 and 2016-17 and gave annualcertificate in terms of Part B and Schedule II of LODRRegulations, 2015. Such certification was, however, givenpursuant to the direction of the Board of Directors. In ourview, Noticee no. 12 has violated Regulation 17(8) of LODRRegulations, 2015 but the penalty imposed is excessive.We, however, find that Appellant no. 2 being a director wasresponsible for the affairs of the Company and was in-chargeof the day to day running of the Company.17. Accordingly, while affirming the violation committedby the Company with regard to noncompliance of the LODRRegulation, we direct that the period undergone towardsdebarment of the appellants is sufficient for the aforesaidviolations and, consequently, the period is reduced to the10period underwent by the appellants. In addition to theaforesaid, we reduce the penalty in the following manner:(a) Appellant no. 1 - Rs. 20 lakhs;(b) Appellant no. 2 - Rs. 5 lakh;(c) Appellant no. 8 - Rs. 1 lakh(d) Penalties against Appellants no. 3 to 7 and 9 areset aside.18. This order will be digitally signed by the PrivateSecretary on behalf of the bench and all concerned parties aredirected to act on the digitally signed copy of this order.Certified copy of this order is also available from the Registryon payment of usual charges.
Justice Tarun Agarwala Presiding Officer
Ms. Meera Swarup Technical Member 06.01.2023 MADHUKAR Digitally signed by MADHUKAR SHAMRAO SHAMRAO BHALBAR msb BHALBAR Date: 2023.01.11 16:41:16 +05'30'
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