Indus Weir Industries Limited vs Sebi

Order Reserved on : 07.01.2019

Date of Decision : 17.01.2019

Appeal No. 85 of 2018

Indus Weir Industries Limited 44/1, West Guru Angad Nagar, Vikas Marg, Laxmi Nagar, East Delhi - 110092, India ..... Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...... Respondent

Ms. Vidisha Krishan, Advocate with Ms. Bindi Parekh, Advocate i/b MV Kini Law Firm for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Vivek Shah, Advocate for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member

Per : Dr. C.K.G. Nair, Member

1.

This appeal has been filed challenging the order of the Adjudicating

Officer ('AO' for short) of Securities and Exchange Board of India ('SEBI'

for short) dated January 15, 2018 whereby a penalty of ` 1,00,00,000/-

(Rupees One Crore only) has been imposed on the appellant under Section

15HB of SEBI Act for violation of Regulations 4(2) and 16 of SEBI (Issue

and Listing of Non-Convertible Redeemable Preference Shares)

Regulations, 2013 ( "Issue and Listing Regulations 2013" for short).

2. Appellant, a Company registered under the Companies Act mobilized

funds through issuance of Redeemable Preference Shares ("RPS" for short) 2

during 2010-11 to 2013-14. Admittedly, the appellant collected an amount

of ` 33,39,86,230/- from 32,454 investors during this period of 4 years. The

year-wise break-up of the amount and number of investors etc. are also part

of the impugned order. However, since these facts are admitted we are not

going into details of the same. Since the number of investors from whom

money was collected by the appellant through issuance of RPS exceeded 49

in each of the 4 years, it is held in the impugned order that the appellant has

violated Regulation 4(2) and 16 of the Issue and Listing Regulations, 2013.

This act of collecting funds from more than 49 investors is tantamount to a

deemed public issue which has been done without following the procedure

as stipulated by the regulations for such public issue and listing, and hence

the violations.

3. For ready reference Regulation 4(2) and 16 are reproduced below:-

"ISSUE REQUIREMENTS FOR PUBLIC ISSUES

General Conditions

Regulation 4 (2). No issuer shall make a public issue of non-convertible redeemable preference shares unless the following conditions are satisfied, as on the date of filing of draft offer document and final offer document as provided in these regulations, -

(a) it has made an application to one or more recognized stock exchanges for listing of such securities therein: Provided that where the application is made to more than one recognized stock exchanges, the issuer shall choose one of them as the designated stock exchange:

Provided further that where any of such stock exchanges have nationwide trading terminals, the issuer shall choose one of them as the designated stock exchange;

Explanation: For any subsequent public issue, the issuer may choose a different stock exchange as a designated stock exchange subject to the requirements of this regulation;

(b) it has obtained in-principle approval for listing of its non-convertible redeemable preference shares on 3

the recognized stock exchanges where the application for listing has been made;

(c) it has obtained a credit rating from at least one credit rating agency registered with the Board and is disclosed in the offer document: Provided that where credit ratings are obtained from more than one credit rating agencies, all the ratings, including the unaccepted ratings, shall be disclosed in the offer document;

(d) it has entered into an arrangement with a depository registered with the Board for

dematerialization of the non convertible redeemable preference shares that are proposed to be issued to the public, in accordance with the Depositories Act, 1996 and regulations made thereunder;

(e) the minimum tenure of the non-convertible redeemable preference shares shall not be less than three years; and

(f) the issue has been assigned a rating of not less than "AA-" or equivalent by a credit rating agency registered with the Board.

LISTING OF NON-CONVERTIBLE REDEEMABLE PREFERENCE SHARES

Mandatory listing.

16. (1) An issuer desirous of making an offer of non-convertible redeemable preference shares to the public shall make an application for listing to one or more recognized stock exchanges in terms of sub-

section (1) of section 73 of the Companies Act, 1956.

(2) The issuer shall comply with conditions of listing of such non-convertible redeemable preference shares as specified in the Listing Agreement with the stock exchange where such non-convertible redeemable preference shares are sought to be listed.

(3) Where the issuer has disclosed the intention to seek listing of nonconvertible redeemable preference shares issued on private placement basis, the issuer shall forward the listing application along with the disclosures specified in Schedule I to the recognized stock exchange within fifteen days from the date of allotment of such non-convertible redeemable preference shares."

4. Learned Counsel Ms. Vidisha Krishan appearing for the appellant

fairly admits that an amount of ` 33,39,86,230/- has been collected from 4

32,454 investors during the relevant time. She further submits that the

appellant only provided all these information to SEBI on September 12,

2013 shortly after a communication dated August 13, 2013 was received

from SEBI. Moreover, even before that communication from SEBI was

received the appellant had stopped all the schemes with effect from July 31,

2013. While admitting that certain violations have been made the Counsel

further submits that, it was unintentional and without being fully aware of

the Regulations and once the appellant came to know about the Sahara

Judgment of the Apex Court legal advice was taken and all schemes were

stopped with effect from July 31, 2013 and the entire amount collected has

been refunded to all the investors. The audit report of the Company

corroborates that the monies collected have been refunded to all the

investors. Further, SEBI itself appointed an external auditor, B.R.

Maheswari & Co. who also certified that the entire money collected from

the investors have been refunded either through cheques / demand drafts or

in cash. Therefore, given the facts that the appellant has suo motu closed all

the schemes and refunded the monies collected from the investors the

maximum penalty of ` 1,00,00,000/- (Rupees One Crore only) imposed

under section 15HB of SEBI Act is too harsh. Though the appellant accepts

that certain violations have been committed, the behavior of the appellant in

providing all the information to SEBI, closing the schemes even before

receiving any communication from SEBI and making all refunds to the

investors show that the appellant has been trying to comply with the

Regulations though belatedly. As such, it is not a case for imposing the

maximum possible penalty and these facts should have come to the help of

the appellant as mitigating factors under section 15J of SEBI Act which the

AO has not considered. Therefore, the counsel for the appellant prays for a

substantial reduction in the amount of penalty imposed on the appellant. 5

5. Learned Senior Counsel Shri Gaurav Joshi appearing on behalf of the

respondent SEBI submits that the seriousness of the violation is writ large as

the appellant has collected more than 33 crore rupees from 32,454 gullible

investors who are mostly poor and uneducated residing in the far flung areas

of the country. He further submits that even after the Sahara Judgment

which was passed on August 31, 2012 the appellant continued to collect

funds from investors through RPS for another year and in fact in March

2013 a resolution was passed by the Board of the appellant Company for

further collection and also by printing large number of forms etc. The

contention that the appellant stopped collection of monies immediately after

the Sahara judgment is therefore not correct and the appellant cannot take

shelter under ignorance of law in any case even prior to that and once the

violation is admitted, which is the case here, the consequences have to

follow. Therefore, considering the seriousness of the violation in terms of

the amount collected, the number of investors from whom money was

collected and repeated nature of the offence even after the widely publicized

Judgment of the Hon'ble Apex Court in the matter of Sahara rightly led the

AO to impose the maximum penalty available to him under section 15HB of

SEBI Act. He further submits that though the appellant claims to have

refunded the entire amount collected from all the investors it is neither

verified nor verifiable since admittedly the appellant paid in cash to about

90% of the investors and the verification done by the SEBI appointed

auditor is only on a sample basis taking 500 investors on random basis.

6. We note that the crux of the argument made by the Counsel for the

appellant is that though certain violations have been admittedly made since

the schemes were stopped before receiving any communication from SEBI

and all the investors have been repaid, the appellant deserves some

consideration of these facts. We also note that the appellant had cooperated 6

in providing the information to SEBI soon after receiving the first

communication dated August 13, 2013 and it is based on the information

submitted by the appellant that the admitted factual matrix has been laid out

in the impugned order. Further, not having satisfied with the audited balance

sheet for the financial year ending March 31, 2015, which, among other

things, discloses the repayment made by the appellant company to the

investors, SEBI has appointed another auditor to verify the accounts of the

company with specific mandate. This mandate was to verify the number of

investors and the amount collected / mobilized; to verify whether a

resolution was passed to stop issue of RPS and to start redemption; to verify

whether the company has refunded certain amount back to the investors and

details thereof and to verify the latest status of repayment. In the report

dated April 30, 2015 submitted to SEBI the SEBI appointed auditor

answered these questions affirmatively. They have also stated that they did

only a sample verification on random basis by taking 500 investors. When

the auditor has stated that they have done verification only on a sample basis

it was upto SEBI to ask the auditor to verify further either taking the full

population (total number of investors) or to take a larger sample etc for

more effective verification. Neither SEBI has done that nor any explanation

for the same is provided. On the other hand, the impugned order is silent on

this report submitted by the SEBI appointed auditor. Further, SEBI has not

produced any records relating to any pending investor grievances before us.

In the light of these facts, we are of the view that the submissions made by

the appellant deserve some consideration. In any case it is not disputed that

the appellant stopped collection with effect from July 31, 2013 though a

year after the Judgment of the Apex Court in the Sahara matter. Since the

mobilization of money was suo motu stopped by the appellant and their

claim of refund is not effectively refuted the loss to the investors is not

crystallized in the impugned order come to the aid of the appellant. 7

Therefore, given these factual matrix we are of the view that this is not a fit

case for imposing the maximum penalty under section 15HB of the SEBI

Act. At the same time, given that an amount of more than ` 33 crore has

been collected from 32,454 investors over a period of 4 years and these facts

are admitted by the appellant we cannot underestimate the seriousness of the

offence.

7. On balance, a penalty of ` 50 lakh would meet the ends of justice in

the matter. Accordingly, while upholding the impugned order on merit, we

reduce the amount of penalty imposed on the appellant from ` 1 crore to `

50 lakh. Appellant is directed to pay the penalty of ` 50 lakh to SEBI within

a period of 4 weeks from the date of this order. In the event, the appellant

fails to deposit the penalty within the stipulated period of 4 weeks SEBI is at

liberty to recover the amount of ` 50 lakh along with interest @ 12% p.a.

from the date of the impugned order.

8. Appeal is partly allowed and is disposed of on above terms with no

order as to costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

17.01.2019 Prepared and compared by:msb