Jindal Cotex Limited & Ors. vs Sebi

Order Reserved On: 23.01.2020 Date of Decision : 05.02.2020

Appeal No. 376 of 2019

1.

Jindal Cotex Limited V.P.O. Jugiana, G. T. Road, Ludhiana, Punjab- 141 420

2. Mr. Sandeep Jindal House No. B-1-980/2A, Opposite Police Lines, Civil Lines, Ludhiana, Punjab- 141 001

3. Mr. Rajinder Jindal House No. B-1-979/2A, Opposite Police Lines, Civil Lines, Ludhiana, Punjab- 141 001

4. Mr. Yash Paul Jindal House No. B-1-980/2A, Opposite Police Lines, Civil Lines, Ludhiana, Punjab- 141 001 ...Appellants

Versus

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

Mr. Somasekhar Sundaresan, Advocate with Ms. Yugandhara Khanwilkar and Mr. Druheen Mohanty, Advocates i/b Corporate Professionals for Appellants.

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

2

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

Per: Dr. C.K.G. Nair

1. This appeal has been filed aggrieved by the order of the

Whole Time Member ("WTM" for convenience) of Securities

and Exchange Board of India ("SEBI" for convenience) dated

April 24, 2019. By the said order, by invoking powers

conferred under Section 19 read with Sections 11(1), 11(4) and

11B of the SEBI Act, 1992, the appellants have been prohibited

from associating with the securities market directly or indirectly

for a period of five years from the date of the order.

2. M/s. Jindal Cotex Limited ("JCL" for convenience),

Appellant No. 1 is a company which came out with an allegedly

vitiated issue of Global Depository Receipts ("GDRs" for

convenience) in 2010. Appellant No. 2, 3 and 4 were Managing

Director, Whole Time Director and Chairman of JCL at the

relevant time.

3. Facts relevant to the matter are the following:-

a) SEBI conducted an investigation relating to

issuance of 5 million GDRs valued at US$ 3

38.75 million by JCL on June 30, 2010. The

said GDRs were listed on the Luxembourg

Stock Exchange and the proceeds from the

issue were deposited with European American

Investment Bank ("EURAM Bank").

b) During the investigation it was revealed that

Vintage FZE ("Vintage") was the only entity

that subscribed the entire issue of 5 million

GDR and the subscription amount was paid by

obtaining a loan from EURAM Bank.

c) On June 11, 2010 JCL provided security in the

form of a Pledge Agreement between JCL and

EURAM Bank for the loan obtained by

Vintage from EURAM Bank. By this Pledge

Agreement JCL pledged the proceeds from the

GDR issue against the loan availed by Vintage.

d) Appellant No. 2, the Managing Director of JCL,

executed the said Pledge Agreement with

EURAM Bank. Further this Pledge Agreement

was also an integral part of the Loan Agreement 4

entered into between Vintage and EURAM

Bank on the same date of the Pledge Agreement

i.e. on June 11, 2010.

e) Accordingly, these two agreements "Pledge

Agreement" and the "Loan Agreement" enabled

Vintage to obtain the loan and to use that loan

amount to fully subscribe the 5 million GDR

issue by JCL.

4. On June 30, 2010 JCL reported to the Bombay Stock

Exchange ("BSE") that "...the Board of Directors of the

Company at its meeting held on June 30, 2010 has concluded

the placement of 5,000,000 Global Depository Receipts/ Shares

at US$ 7.75 per Global Depository Receipts/ Shares

(Representing 20,000,000 equity shares of Rs. 10/- each)

totaling USD 38.75 million...". In the show cause notice issued

by SEBI on May 21, 2018 it was also alleged that JCL provided

a false list of GDR subscribers. Therefore, it was alleged that

the entire scheme involving a Pledge Agreement and the

announcement that the GDRs were successfully subscribed

without disclosing the Pledge Agreement to the investors

resulted in misleading information to the public and thereby 5

adversely impacting the investors and, therefore, the scheme of

issuance of GDRs was fraudulent violating the provisions of

Section 12A(a), (b), (c), of SEBI Act, 1992 read with

Regulations 3(a), (b), (c), (d), 4(1), 4(2)(f), (k), (r) of SEBI

(Prohibition of Fraudulent and Unfair Trade Practice relating to

Securities Market) Regulations, 2003 ("PFUTP Regulations,

2003" for convenience), Therefore, Appellant Nos. 2,3,4 also

have violated Section 12A(a), (b), (c) of SEBI Act, 1992 read

with Regulations 3(a), (b), (c), (d) and 4(1) of PFUTP

Regulations, 2003.

5. It is the contention of Shri Somasekhar Sundaresan,

learned counsel appearing on behalf of the appellants that the

impugned order suffers from the vice of disregarding natural

justice to the extent that the investigation started five years after

the issue of GDRs when the entire information was in public

domain and available to SEBI in 2010; the show cause notice

was issued eight years after the issue of GDRs and the

impugned order is passed without considering the submissions

made by the appellants. Further it was contended by the learned

counsel that the impugned order is not a remedial action as

contemplated under Sections 11(1), 11(4) and 11B of the SEBI

Act, but a penal action despite an adjudication procedure has 6

also been launched separately. Therefore, restraining the

appellants from accessing or dealing in the securities market

directly or indirectly for a period of five years and that too after

nine years of the alleged violations becomes a highly arbitrary

and harsh punishment on the appellant-company which has

come back to the rails after several years of concerted efforts.

6. As regards the contention that the submissions made by

the appellants have not been considered in the impugned order,

the learned counsel for the appellants submitted that unlike the

issue of GDRs in a manipulative manner by certain other

entities, JCL had done a genuine GDR issue. No GDRs were

sold in the domestic market before the entire money was

withdrawn by the appellant-company from its account with

EURAM Bank. Similarly, the entire issue proceeds were

received by the appellant-company and utilized for the purpose

for which the GDR issue was made. The only allegation,

according to the learned counsel for the appellants, that could be

pressed is that the Pledge Agreement was not disclosed to the

Stock Exchange (BSE). This was, it was contended, because

there was no requirement for disclosing the Pledge Agreement

under the Listing Agreement. As regards the list of subscribers

of GDRs it was contended that the appellant(s) submitted the 7

list as received from the Lead Manager and, therefore, they

were not privy to the fact that the subscription was made fully

by Vintage. Given these facts, the learned counsel for the

appellants submitted that the appellant(s) deserves substantial

mitigation as there was no fraud or even intention to commit

any fraud involved in this matter and, therefore, the restraint of

five years or at least the remaining period of restraint should go.

7. We have also heard Shri Shyam Mehta, learned senior

counsel appearing on behalf of respondent SEBI who

specifically highlighted paragraph 14 of the impugned order

which clearly explains the diversion between the minutes of the

Board Resolution dated April 26, 2010 as provided to the

EURAM Bank signed by Appellant No. 2 to 4 and the original

minutes of the said Board meeting as provided by JCL to SEBI

during the investigation. For facility paragraph no. 14 is

extracted below:-

"14. I note that a certified copy of the Board resolution dated April 26, 2010 was provided to the EURAM Bank by JCL, wherein an authorization has been given to Noticee no. 2 & 3 for opening of bank account with EURAM Bank and EURAM Bank was authorized to use the funds in the account as security in 8

connection with loans etc. The said resolution was certified by the Noticee nos. 2 to 4. I also note that Noticee no.1 has vide letter dated October 10, 2017 (sent to SEBI during investigation, vide email dated October 10, 2017), enclosed as Annexure 1, the copy of original minutes of the Board meeting of the Noticee No.1 held on April 26, 2010. On perusal of the said minutes of the Board meeting, I note that no such resolution to open account with EURAM Bank and use the funds in such account as security in connection with loan .etc., was stated in the said minutes.

Neither was there any agenda item, nor any discussion took place in the meeting of Board of Directors on April 26, 2010 in respect of the purported resolution. I also note that, even though the Noticees have filed detailed reply/written submissions dated February 05, 2019 along with many other enclosures, but conveniently not furnished, either the minutes, agenda or Board resolution (as submitted with EURAM Bank) of the meeting of the Board of Directors dated April 26, 2010."

8. It was further submitted by the learned senior counsel that

on June 30, 2010 disclosure made by the Board of Directors of

the company to BSE did not make any mention as to whom the

GDRs were allotted to, or subscribed by and, therefore, it was a 9

calibrated message to convey that the GDRs were subscribed to

in a normal course of business by normal investors in the

foreign jurisdiction.

9. We do not agree with the submissions made by the learned

counsel for the appellants. This Tribunal had passed a number

of orders relating to manipulations and fraudulent behavior from

the part of a few companies and several connected entities

including Vintage. EURAM Bank has also been one of the

entities found to be part of those transactions. Such judgements

include PAN Asia Advisors Limited and Anr. vs. SEBI (Appeal

No. 126 of 2013 decided on 25.10.2016) and Cals Refineries

Limited vs. SEBI (Appeal No. 04 of 2014 decided on

12.10.2017). The modus operandi adopted in all such cases

have been similar i.e. the subscriber to the GDR issue (Vintage

here) taking a loan from a foreign bank/ investment bank

(EURAM Bank here) enabled by a Pledge Agreement signed

between the issuer company (JCL here) and the loaner bank.

This arrangement itself vitiates the entire issue of GDR as it is

through an artificial arrangement supported by the company

itself which enables the subscription to the GDR. Therefore, the

contention in the order that it is a fraudulent scheme created by

the appellants along with some other entities cannot be faulted. 10 In this context, it is relevant to note that in our order in the

matter of PAN Asia Advisors Limited (Supra) (Lead Manager)

and Vintage (subscriber) whose beneficial owner was Arun

Panchariya were all found to be guilty of the violations of

Indian Securities Laws under the PFUTP Regulations, 2003. The same has been the modus operandi in respect of Cals

Refineries Limited (Supra) though the entities connected therein

were different.

10. The contention that Pledge Agreement was not required to

be disclosed under the Listing Agreement is not correct as the

Listing Agreement, which forms the very basis of a disclosure

based regulatory regime, requires every material information to

be disclosed to the Stock Exchange at the earliest, sometime in a

matter of minutes and others in a matter of days. When the

company has lent the entire proceeds of the GDR issue to the

tune of US$ 38.75 million as security for a third party abroad to

avail a loan on the basis of that security and thereby potentially

jeopardizing the entire proceeds is not a non-event but an

important material information affecting all the stakeholders.

We would hold that such events have to be disclosed in bold

letters so that the investors of the company as well as those who 11

are subscribing to its GDR issue etc. should be fully aware of

those highly material facts.

11. Arguments on delay in investigation and consequently

affecting natural justice are also devoid of any merit in the

matter since this Tribunal is aware of the complexity involved

in the entire manipulative GDR issue; how long it took SEBI to

gain information relating to the various entities from multiple

jurisdictions in the matter of PAN Asia Advisors Limited

(Supra) and Cals Refineries Limited (Supra) etc. We also do

not find any deficiency in the finding in the impugned order that

money has been brought in fully by the company starting from

December 14, 2010 and ending January 04, 2012 and, therefore,

full repayment of loan taken by Vintage was done without

resorting to sale in the Indian market as irrelevant. The basic

question to be answered is whether the issue was subscribed by

a loan taken by Vintage on the basis of pledging the proceeds of

the GDR issue as security for the said loan taken by a third party

and that too a party located abroad and whether sufficient

disclosures of material events associated with the issue was

properly done. We are of the considered view that the method

adopted by the appellants was vitiated through fraud and hence

finally whether the money has come back or not is relevant in 12

the facts and circumstances. There has been no allegation of any

diversion of money nor any direction relating to the same in the

form of disgorgement etc. as in the case of Cals Refineries

Limited in related appeals i.e. Gagan Rastogi vs. SEBI (Appeal

No. 91 of 2015) and Asia Texx Enterprises Limited vs. SEBI

(Appeal No. 219 of 2015) both decided by this Tribunal on

12.07.2019. In any case, we are of the opinion that imposition

of the restraint on the appellants herein has been done taking all

the relevant factors into account as in similar matters like Cals

Refineries Limited (Supra) the period of restraint imposed on

the appellants was 10 years while in the instant matter restraint

is only for 5 years.

12. In the result, the appeal fails and is dismissed. No orders

on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 05.02.2020 Prepared & Compared By: PK