Inventure Growth And Securities Ltd. vs Sebi

as to whether all the appellants or any of them is liable for the

same.

6. Non utilization of the IPO proceeds towards the stated

object of IFPL of advance money against shares, securities.

In the show cause notice, it was alleged that the

prospectus revealed that IFPL was advancing money solely

against shares, securities and that too only to the clients of

IGSL and this business actually was to be expanded by

deploying the proceeds of the IPO in the amount as stated 9

above. During investigation the information was sought from

the Company in this regard. The information is tabulated in

the impugned order as below:-

TABLE 3

S. No Details of Money 31.03.2011 30.09.2011 31.03.2012 advanced (`.)

1 Secured against Shares 37,05,10,904 46,96,52,024 26,33,07,089 2 Less: Amount 34,41,12,654 33,98,17,133 22,26,91,810 borrowed against shares 3 Net amount lent against 2,63,98,250 12,98,34,891 4,06,15,279 shares 4 Secured against - 88,31,007 2,37,44,825 equipment 5 Secured against gold - - 7,30,000 6 Unsecured loans 3,51,85,939 47,54,76,785 40,21,43,430 7 Sub-total (4+5+6) 3,51,85,939 48,43,07,792 42,66,18,255

7. From this table WTM found that before IPO, IFPL had

advanced money against shares in the amount of Rs.37 crores

Five lakh and odd which was marginally increased to

Rs.46.96 crores immediately after IPO but decreased in the

month of March, 2012 to Rs.26.33 crores. As against this,

unsecured loans started increasing and a new segment of

advance against gold and advance against equipment was

started by IFPL.

8. To show that in the prospectus a different picture of

object of IPO in this regard was painted by the Company the 10

WTM quoted from clause (a) of the object of the issue which

is as under:-

"IFPL's lending business includes providing loans secured by shares held by customers of IFPL. Our Company [IGSL] is mainly engaged in the broking business, and IFPL helps our customers to leverage their equity market positions to take increased exposure. Thus, revenues are generated via two verticals; firstly interest income by IFPL's lending activities for providing leverage to the clients to undertake additional market exposures and secondly these additional exposures generate additional brokerage income for our Company [IGSL]. IFPL's lending business is complementary to our Company's broking business and it helps improve customer retention and source additional one. This leads to growth in terms of clients as well as revenues of both the companies.... The customer funding is provided against a margin of approximately 25-50% and is available only for purchase of shares which form part of our "Approved List of securities".... Our Company [IGSL] believes that such investment in IFPL is in line with its strategy of expanding its core businesses and will also help us to strengthen the respective balance sheets... To enable clients to take greater participation in different segments of capital market, IFPL provides loan against shares to various clients, including our broking clients. Through such financing clients pay a partial sum of stock price and the balance is then funded by IFPL at an interest.... IFPL is RBI registered NBFC and is in the business of advancing loans to clients for acquisition of shares/stock/ bonds/ debentures/ securities issued by government or local authority or other securities of like marketable nature. This facility provides the clients with the opportunity to buy shares listed on the stock exchanges on credit."

9. The Company in its reply at para no.5 has adverted the

attention of the WTM towards the various sentences, clauses 11

in prospectus and contended that the business of IFPL was

explained and it was also clearly declared that considering

the competitive and dynamic nature of the industry the

Company would have discretion to revise its finance strategy

from time to time. It therefore sought to explain that it was

not informed to the investors through RHP that deployment

of Rs.30 crore to IFPL would solely and unexceptionally

would be for advancing money against the share only.

10. The WTM upon considering the response observed that

the dominant message that can be deducted from the

prospectus, was to convey to the potential subscriber that

IFPL was primarily engaged in lending against shares and

such infusion in fund by IGSL would directly and indirectly

benefit the shareholders of IGSL.

11. Mr. P.N. Modi, learned Senior Counsel for the

appellant Company and its directors in Appeal no.361 of

2018 submitted that the term 'dominant message' has been

newly invented by WTM. It could not be found in the show

cause notice. If the prospectus is read as a whole, he submits

that the message that was conveyed to the investors was that

IFPL was a non banking financial Company. It was dealing

in various non banking finance transactions including 12

advancing money against the shares to the customers. These

customers would be the clients of the Company. He submits

that money being fungible and the market being dynamic, the

statistics of day or a month as found in the above table would

not show that there was any violation of the object of the IPO

proceeds. He submits that the company had every right to

withdraw the earlier funding lent to its subsidiaries IFPL and

infuse the funds received from IPO proceeds as can be seen

from the table. He therefore submits that the market

dynamics would have to be understood and it has to be

appreciated that advance of money towards the shares would

depend on the market condition generally. He therefore

submitted that the appeal be allowed in this regard.

Mr. P.N. Modi further points towards the description of

IFPL given at page no.137 of the prospectus which runs as

under:-

"Mahajay Investment Private Limited was registered with the Reserve Bank of India as a non banking financial company with effect from November 18, 2000. The name of IFPL was endorsed on registration certificate with effect from October 8, 2008. IFPL has been incorporated inter alia with the main objects of managing investment and to act as brokers, merchant bankers, commission agents, managers and advisers to the issue and to make investments to moveable and immovable properties."

13 12. Upon hearing both sides, in our view, the learned WTM

ought not to have found that the charge on this count is

substantiated. It is to be noted that though at one place in the

prospectus as extracted by the WTM in its impugned order a

message was conveyed that an amount of Rs.30 crores would

be invested in IFPL for use of lending against share as

detailed in the extract, there are other ample references

regarding the object of IFPL.

13. More particularly at page no.68 the following

disclaimer below the object of the issue can be found.

"Our management, in response to the competitive and dynamic nature of the industry, will have the discretion to revise its business plan from time to time and consequently our funding requirement and deployment of funds may also change. This may, subject to compliance with applicable laws and regulations, also include rescheduling the proposed utilization of Issue Proceeds and increasing or decreasing expenditure for a particular object vis-à-vis the utilization of Issue Proceeds. In case of variations in the actual utilization of funds earmarked for the purposes set forth above, increased fund requirements for a particular purpose may be financed by surplus funds, if any, available in respect of the other purposes for which funds are being raised in this Issue. If surplus funds are unavailable, the required financing will be through our internal accruals and/or debt."

14. Learned Senior counsel for the respondent SEBI Mr.

Mustafa Doctor points towards the paragraph at page no.69

of the prospectus which reads as under:- 14

"IFPL has the appropriate risk management systems in place to monitor the finance provided. For this purpose IFPL performs a credit worthiness assessment of each of its clients before extending finance to them. The customer funding is provided against a margin of approximately 25-50% and is available only for purchase of shares which form part of our "Approved List of securities". This list is decided by the management and reviewed from time to time."

15. Upon hearing both the sides in our view the charge

cannot be sustained. It should be noted that pre IPO period

as per the table put by the WTM in the impugned order, IFPL

the subsidiary of the Company had advanced 37.5 crores of

loan against the shares. Thereafter in post IPO, as on 30th

September, 2011, it went to around Rs.48 crores. The

submissions of Mr. Modi that the Company was entitled to

withdraw the earlier investment made in IFPL cannot be

disputed. WTM in the impugned order at page no.25 at table

no.7 had taken efforts to show that IFPL continues to reduce

advancing loans against shares but increasing the same

against unsecured loans. However, what would be the

market constraint for the subsequent period cannot be gauged

and the same are not part of the present enquiry. In the

circumstances, in our view, this charge of making a

wrong/false disclosure in the ICDR of funding Rs.30 crores

to IFPL for advancing loan against shares holds no water. 15

Undisclosed Bridge loan

16. The next charge for consideration is non disclosure of

bridge loans. The Company had declared in the prospectus

that it had not raised any bridge loan which would be repaid

from IPO proceeds. In the investigation it was found that

between 13th July and 20th July, 2011 an amount of Rs.20

crores and odd was received by the Company from four

entities and on the date of receipt of the IPO proceeds i.e on

3rd August, 2011 the whole amount was repaid to the said

entities.

The Company in this respect explained that during the

period of IPO the Company had over 35000 clients whose

funds were lying with the Company from time to time in the

normal course of business. The clients fund being "amount

due to clients" was in the range of 20 to 30 crores and the

certificate attached to the reply at Exhibit I would show that

on 30th July, 2011 Rs.47 crores available balance in this

account. Out of these specific four entities, from K.R.

Shoppers Pvt. Ltd. (hereinafter referred to as KRSPL) a short

term loan was availed as working capital which was

immediately paid but not from the IPO funds. The rest of the

three entities were in fact prospective clients and their funds 16

were lying with the Company in the clients account.

However, the contract could not be fructified for various

reasons like KYC compliance and, therefore, the amount that

was deposited by them in the clients account was repaid from

the clients account and not from the IPO funds. The same

therefore cannot be called as a bridge loan.

The WTM held that credit of monies from these three

entities in the BSE client account itself become suspect as

crediting amount in such accounts whose credentials at the

given point of time were not provided. Merely, crediting

amount in the client account would not automatically mean

that the said entities can be considered as clients.

The timing of repayment was held to be a suspicious

transaction i.e. immediately after receipt of IPO proceeds. In

the circumstances, it was held that as against the declaration

in the prospectus the Company has raised the bridge loan and

repaid the amount from the proceeds of the issue.

Mr. Modi, the learned Senior counsel submitted that

there is no case that IPO proceeds was utilized for the

payment of the amount. The impugned order itself accepts

that the amount was lying in the BSE clients account and the 17

same was paid from the very same account. No diversion of

funds is found or even alleged.

17. The documents filed by the appellant clearly showed

that an amount of Rs.47 crores was lying in its client account

at the time of IPO. The amount of three entities was also

lying in the BSE client account and the same was paid from

the same account only. There are no allegations that funds

from IPO proceeds were diverted from the proceeds. Hence

the suspicion of the WTM on the basis of period of

transaction would not amount to proof of the same. In our

view therefore the transactions regarding these three entities

cannot be termed as a bridge loan repaid from the IPO

proceeds.

As regards the fourth entity namely KRSPL transaction,

it was explained by the Company, that the amount was taken

as a short term loan as a working capital. Therefore,

according to it the said loan cannot be considered as a bridge

loan. It was a loan from director for that purpose. WTM

held that this infact is an admission of the existence of

interim financial arrangement. This was not disclosed in the

prospectus and, therefore, amounted to the failure to make

disclosure according to the provisions of ICDR Regulations. 18

According to the WTM infact the money received as an

interim financing would be a bridge loan since the Company

has repaid the same from IPO proceeds.

18. From the record it is established that an amount of Rs.3

crores was repaid to KRSPL on 19th July, 2011 i.e.

immediately after the IPO proceeds were received by the

Company. In the show cause notice an explanation for the

same was sought. In its reply the Company replied at para

no.35 as under:

"With regards to our transaction with KR Shoppers Pvt. Ltd. we humbly submit that it is also registered with us as a client and apart from that the prospectus disclosed as an "Enterprises where key management personnel exercise significant influence". Further in the financial year 2009-2010 too the said KR Shoppers had provided temporary funds of Rs.2 Crores on which an interest of Rs.13.4 Lakhs was paid. Being an entity where one of the management personnel exercises significant influence, it had paid Rs.3 Crores to us, which was returned on August 3, 2011. However no interest was paid on the said funds. It is humbly submitted that this transaction is also not in the nature of bridge loan but a loan from director's entity."

It is, thus, established that a short term loan was availed

by the Company which was returned on 3rd August, 2011.

According to the Company, the repayment was without any

interest and, therefore, it was not bridge loan but a loan from 19

the director entity as it is related to one of the director.

Black's Law Dictionary defines bridge loan as under:-

"Bridge loan - A short-term loan that is used to cover costs until more permanent financing is arranged or to cover a portion of costs that are expected to be covered by an imminent sale - also termed bridge financing; swing loan".

19. In financial world, bridge loan is understood as a short

term accommodation availed by an entity awaiting the

permanent financial resources. In the present case, as per the

Company itself short term accommodation was sought from

KRSPL and the same was repaid on 3rd August, 2011 i.e. post

receipt of IPO money. These facts itself clarify that the

bridge loan was raised by the Company. However, in the

prospectus it was positively declared that the Company has

not raised any bridge loan. Thus on this count it can clearly

be declared that a false/wrong declaration was made in the

prospectus in violation of ICDR Regulations.

Security Deposits

20. During investigation it was found that in the month of

August, 2011 the Company had paid a sum of Rs.7.51 crores

to Mrs. Heena Sanjay Shah and Mrs. Usha Atul Shah each.

The prospectus revealed that Mrs. Usha had been a

shareholder of the Company. When these facts were put to 20

the Company during investigation, it explained these

transactions vide letter dated 27th January, 2016. It explained

that the money was received in September, 2010 as a security

deposit/advance and refunded back in August, 2011 (para 20

of the SCN). During investigation therefore further details

were sought vide letter dated 1st February, 2016. The

Company explained as under:-

"For reference of your honour, we clarify that money was deposited by them in advance to explore their future opportunities in bullish/bearish market in share/securities business but they did not entered in to any transaction and money was refunded back when they demanded. These money had been received appox a year prior to IPO money realization for doing securities transaction, but they could not order any type of buying or selling of securities in their family name and further the same have been refunded, when they had put up such request to company.

21. In the show cause notice it was alleged that all these

facts would show that the amounts were in the nature of

security deposit from others and not from clients as tried to

be explained by subsequent letter of the Company dated 9 th

February, 2016. This amount was not deposited on any other

heads available in the account statement i.e. margin from

clients/security deposit, security deposit from rent. In view

of these facts further details were sought regarding the

deposit. The Company gave further reply and it was revealed 21

that the Company had accepted an amount of Rs.6.39 crores

as on March 31, 2010 and Rs.20.65 crores as on March 31,

2011. This amount of Rs.20.65 crores remained payable to

these non corporate entities.

22. It was, therefore, alleged in the show cause notice that

such deposits were accepted by the Company in violation of

Section 58A of the Companies Act, 1957. It was also alleged

that since the outstanding amount of Rs.20.65 crore as on

31st March, 2011 was more than 25% of the issue proceeds,

the Company was required to disclose the existence of the

security deposit in its prospectus to the investors enabling

them to take informed investment decision. However as

Company failed to disclose the same, contravention of the

ICDR Regulations had occurred.

23. In reply to the show cause notice in para 43 onwards

Exhibit 'C' the Company replied afresh, as under:-

"43. We humbly submit that the Mrs. Heena Sanjay Shah (Client Code 8038 from May 25, 2008) and Mrs. Usha Atul Shah (Client Code 5543 from April 30, 2008) are our registered client trading through us for a long time. They are also related to a few other clients as well who regularly trade through us. The funds were received from them as clients and the fact that the same was repaid without any interest thereon supports our contention. It is extremely unreasonable to expect that such amounts will be repaid without any interest if they were in the form of loans.

22 44. Categorization as "Security Deposit Other" or any other head does not change the colour of the fund and the fact remains that it was received from our registered clients.

45. Further it is submitted that Mrs. Heena Sanjay Shah and Mrs. Usha Atul Shah are wives of promoters of Bishakha Diamonds Pvt. Ltd. and Anchor Leasing Pvt. Ltd. which had debit balances as under during the period when the funds remained with us:

Client Client Name Highest Debit Date Code Balance

HNI010 Bishakha Diamonds Pvt. Ltd. 9,62,14,993.46 April 26, 2011 HNI008 Anchor Leasing Pvt. Ltd. 2,19,42,609.96 May 26, 2011 TOTAL 11,81,57,603.42

Relevant extract of ledger for the month of April 2011 of these clients is attached as Annexure 2.

As per accepted practice and approved, the credit of these clients (Heena Sanjay Shah & Usha Atul Shah) was available with us for adjusting it against the debit balance of their related accounts also. As a result it can be safely inferred that the amount was not in the form of a bridge loan, but was for the dealings in securities.

46. Further it is submitted that Security Deposit Others, Security Deposit for Margin, Client Deposit or any other nomenclature were all deposits from clients and the allegation that we have violated Section 58A of Companies Act is grossly denied. A complete list of accounts along with client codes is annexed herewith as Annexure 3 reflecting the breakup of Rs.20.65 Crores and Rs.6.30 Crores wrongly alleged to be in the form of deposit. As there was no non-compliance, the question of disclosing it in the prospectus does not arise.

47. Even further, it is humbly submitted that Mrs. Usha Atul Shah was a shareholder of our Company and hence assuming but not accepting that the amount was in the form of a loan, it would have been a loan from 23

the shareholders and was thus not a violation of any of the provisions of Companies Act or SEBI Act and Regulations."

24. Before the Adjudicating Officer as well as before this

Tribunal the appellant submitted as under:-

That SEBI has no jurisdiction over accepting security

deposits regulated under Section 58A of the Companies Act.

The jurisdiction in this regard lies with the Central

Government. SEBI itself has referred the issue to the

Ministry of Corporate Affairs and no adverse action has been

taken as on the date against the Company by the ministry

and, therefore, no further action was warranted from SEBI in

this regard. Mr. Modi further submitted that in fact the

amount was not a security deposit but merely adjustment

against debit balances of Bishaka Diamonds Pvt. Ltd. &

Anchor Leasing Pvt. Ltd i.e. the related account as quoted

above.

25. The WTM held that though the issue of security deposit

in view of the provisions of Section 55A of the Companies

Act, the jurisdiction would lie with the Central Government,

for the purposes of disclosure of the deposit under ICDR

Regulations the SEBI would have jurisdiction. 24

Upon hearing both sides, in our view, the finding of the

WTM cannot be faulted with. During investigation the

Company emphatically came with a case that all these

transactions were security deposits. It is clear that Rs.21.61

crores was repaid post IPO. Only when the show cause

notice was issued the Company came with a case that it was

not a security deposit but an amount kept in an account for

adjustment towards the debit balance of the related accounts.

It is, however, a fact that the amount was repaid after the IPO

proceeds were received.

26. As found, the deposits were more than 25% of the IPO

proceeds and was therefore material information under the

ICDR Regulations. The decision of the WTM that the

Company failed to disclose the deposits in the prospectus

and, therefore, violated the Regulation therefore needs no

interference.

27. To conclude, the charge that the Company has

misulitised part of the fund by failing to appropriate the

necessary amount towards money advanced by its

subsidiaries specifically cannot be sustained. The charge of

bridge loan is proved to the extent of the aspect of raising the 25

same from KRSPL. The next charge of non disclosure of

security deposit in the prospectus also stands proved.

28. In Appeal no.361 of 2018 at para 5.3 describe

appellant no.2 Nagji K. Rita as a Chairman and Managing

Director. Appellant no.3 Virendra D. Singh as a Whole time

Director. Appellant no.4 Kanji B. Rita and Appellant no.5

Vinod K. Shah as Executive Directors. Appellant no.6

Arvind Gala Chief Financial Officer and Appellant no.7

Bhavi Gandhi as a Company Secretary during the relevant

period.

29. In Appeal No.362 of 2018 appellant Arun N. Joshi and

Appellant no.2 Srinivasaiyer Jambunathan both were the

independent directors during the relevant period. In Appeal

no.363 of 2018 appellant Pravin Gala was non executive

director during the relevant period. While in Appeal no.361

of 2018 the issue of non liability was not anywhere raised

during argument in the rest of the appeal the sole thrust of the

appellants was regarding their liability.

30. In Appeal no.362 of 2018 it was strenuously urged that

the appellants being independent director had no knowledge

of the relevant non disclosures. They merely relied on the

Chartered Accountant's report and signed the prospectus was 26

the submission. On the other hand, the learned Senior

Counsel for respondent SEBI submitted that these two

appellants had signed the prospectus and therefore they

cannot escape the liability.

Learned counsel for the appellant relied on master

circular on prosecution of Directors issued by Ministry of

Corporate Affairs on 29th July, 2011. He further relied on the

decision in the case of Ionic Metalliks v. Union of India

(2014) SCC Online Guj High Court 10066, the decision of

this Tribunal in Appeal no.49, 49A, 49B, 49C and 49D of

2003 decided on 11th February, 2005, Appeal no.133 of 2003

decided on 15th September, 2004, in the case of Bhardwaj

Thuiruvenkata Venkatavraghavan vs. Ashok Arora (2017)

SCC Online Del 7416 of Delhi High Court and decision of

another Whole Time Member of SEBI dated 13th January,

2016. The decisions are regarding various aspect of the

liability of independent directors or director qua a particular

act being a criminal offence or a liability under the

Companies Act etc. In many of the above cases on facts,

finding that the particular director had no knowledge of the

day to day affairs of the Company their plea was accepted. 27

31. More particularly, in Appeal no.49 and others decided

by this Tribunal on 11th February, 2005 the issue related to

certain non disclosures made in the prospectus, misutilisation

of the proceeds of the public issue which are similar to the

present case.

32. In para no.5 of the decision, this Tribunal has noted that

the appellant therein were independent directors and were not

involved in the day to day management and control of the

Company. In the circumstances, the argument of the

respondent SEBI that they had put their signatures in the

prospectus were taken into consideration. It was finally

concluded that disclosures could not be attributed to them as

they were independent director and they were not associated

in the day to day management or control over the Company.

In the circumstances, the appeal was allowed.

33. The appellants in Appeal no.362 of 2018 are also

independent directors. In Appeal no.361 of 2018, we find the

Company had Whole Time Directors, Managing Directors

etc. Considering all these facts on record in our opinion

appellant in Appeal no.362 of 2018 cannot be held

responsible for the non disclosure as detailed above. 28

In Appeal no.363 of 2018 the appellant was the non

executive director during the relevant period. He was also

neither responsible for the day to day affairs of the Company

nor for the transaction of raising of bridge loan under the

name of short term accommodation or deposit which was

sometimes described by responsible director as security

deposit or claiming the account for debit balance of other

clients. Considering all these facts the Appeal no.363 of

2018 will also have to be allowed.

34. Since one out of three charges against the appellants in

Appeal no.361 of 2018 is not sustainable the directions

against them also deserves to be mitigated. Accordingly we

reduce the period of restraint imposed on Appellant no.1

Company from four years to three years from the date of the

impugned order and limit the restrictions on associating as

Directors or KMPs etc as in para 44(ii) on Appellant nos.2 to

5 in as far as holding any fresh position in such capacity for a

period of three years from January 1, 2019.

35. In the result the following order:-

Appeal no.361 of 2018 is accordingly partly allowed.

Appeal no.362 and 363 of 2018 are hereby allowed. The

impugned order passed against the appellants in so far as 29

Appeal no.362 and 363 of 2018 is hereby set aside. Misc.

Application No.299 of 2018 in Appeal no.363 of 2018 has

become infructuous and is therefore disposed of

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member

10.10.2019 Prepared and compared by RHN