Kii Ltd. vs Sebi

Order Reserved On: 16.05.2018 Date of Decision : 08.06.2018

Appeal No. 317 of 2017

KII Limited CIM CORPORATE SERVICES LTD., Les Cascades Building, Edith Cavell Street, Port Louis, Mauritius ...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

Mr. Mustafa Doctor, Senior Advocate with Ms. Divya Mundra and Mr. Asadulla Thangal, Advocate i/b AZB & Partners for the Appellant.

Mr. P. N. Modi, Senior Advocate with Mr. Nishant Upadhyay, Advocate i/b K. Ashar & Co. for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar

1.

This appeal is filed to challenge the order passed by the Whole

Time Member ("WTM" for short) of Securities and Exchange Board of

India ("SEBI" for short) on 05.09.2017. By the said order, appellant was

prohibited from accessing the securities market directly or indirectly for a

period of six years, however, the period of prohibition already undergone 2

pursuant to the interim order dated 21.09.2011 was permitted to be

reduced while computing the prohibition of six years.

2. It is not in dispute that appellant has already undergone the

prohibition of six years and as such the appeal has virtually become

infructuous. However, the appellant wants to pursue the appeal for the

reason that the said order passed by SEBI is erroneous and that erroneous

order is affecting the credibility of the appellant in the international

market and therefore, it is necessary to contest the appeal on merits.

3. Facts relevant for the present appeal are as follows:-

a) Appellant is a private company incorporated in

Mauritius, holding a Category I Global Business

Licence. Appellant is also a registered sub-account

with SEBI under the foreign institutional investor

registration of Credo Capital Plc since November

2003. Credo Capital Plc is incorporated in England

and Wales.

b) The appellant was originally established in October

2002 by a client of Credo Capital Plc for the purpose

of carrying out Global Depository Receipts ("GDRs")

/ ADR arbitrage transactions in the Indian market, i.e.

inter alia buying of GDRs, converting them and

selling the underlying shares in India at a profit. 3

c) Dispute in the present case relates to the fraudulent

arrangement regarding subscription of GDRs issued

by 6 Indian Companies during the period from

31.03.2007 to 06.11.2009 and then converting the said

GDRs and selling the underlying shares in the Indian

securities market. The fraudulent arrangement was in

relation to the subscription of GDRs issued by the

following Issuer Companies:-

a) Asahi Infrastructure & Projects Ltd.

b) Avon Corporation Ltd.

c) CAT Technologies Ltd.

d) IKF Technologies Ltd.

e) K Sera Sera Productions Ltd.

f) Maars Software International Ltd.

d) PAN Asia Advisors Ltd. (PAN Asia) was the Lead

Manager to the GDRs issued by the aforesaid six

Issuer Companies. Mr. Arun Panchariya, a Non-

resident Indian (NRI) was the Promoter and Managing

Director of PAN Asia and held 100% shares of PAN

Asia.

e) Prior to the issuance of GDRs by the aforesaid Issuer

Companies, Vintage FZE ('Vintage'), a Dubai based

company which is also 100% owned and controlled 4

by Mr. Arun Panchariya entered into a loan agreement

with Europian American Investment Bank AG

('Euram Bank') by which Euram Bank advanced

millions of USD worth of loans to Vintage expressly

for purchasing the GDRs to be issued by the six Issuer

Companies.

f) Similarly each of the said six Issuer Companies

opened accounts with Euram Bank for the purpose of

crediting the GDR issue proceeds in their respective

accounts with Euram Bank and each of the said six

Issuer Companies pledged the said accounts to Euram

Bank as security for the loans given by Euram Bank

to Vintage to buy the GDRs. Pledge Agreements

were also executed by each of the six Issuer

Companies simultaneously along with the respective

loan agreement.

g) Thus, Vintage cornered entire GDRs of all six Issuer

Companies by obtaining loan from Euram Bank and

the six Issuer Companies credited the GDR issue

proceeds to their respective accounts with Euram

Bank and pledged their accounts to Euram Bank as

security for the loan taken by Vintage from Euram

Bank to buy the GDRs.

5

h) The GDRs so acquired by Vintage were thereafter

sold/ transferred to FIIs and their sub-accounts such as

India Focus Cardinal Fund ('IFCF') which was 100%

controlled by Mr. Arun Panchariya and Others such as

the appellant herein.

i) IFCF and also the appellant converted the GDRs

acquired by them into underlying shares which were

then sold in the Indian securities market. It is not in

dispute that most of the underlying shares sold by

IFCF and the appellant were purchased by the counter

parties who were related to Mr. Arun Panchariya.

j) On the basis of above facts revealed during the

investigation, SEBI initiated proceedings and by an

order dated 20.06.2013 held that PAN Asia and

Mr. Arun Panchariya being persons associated with

the securities market have acted detrimental to the

interests of investors by entering into prohibited

arrangement with the promoters of the six Issuer

Companies. Accordingly, SEBI debarred PAN Asia

and Mr. Arun Panchariya from rendering services in

connection with instruments that are defined as

'securities' under Section 2(h) of Securities Contracts

(Regulation) Act, 1956 ("SCRA" for short) in the

Indian market or in any way dealing with them 6

directly or indirectly for a period of 10 years and

further prohibited them from accessing capital market

directly or indirectly for a period of 10 years.

k) On appeal filed by PAN Asia and Mr. Arun

Panchariya, this Tribunal by a majority decision dated

30.09.2013 set aside the decision of SEBI dated

20.06.2013 on ground that SEBI had no jurisdiction

over the creation and issuance of GDRs abroad.

l) On further appeal filed by SEBI, the Apex Court by

its decision reported in (2015) 14 SCC 71 set aside the

majority decision of Tribunal dated 30.09.2013 by

holding that SEBI had jurisdiction to pass the order

dated 20.06.2013 and restored the appeal filed by

PAN Asia and Mr. Arun Panchariya for fresh decision

on merits.

m) Accordingly, the appeal filed by PAN Asia and

Mr. Arun Panchariya against the decision of SEBI

dated 20.06.2013 was heard afresh and by a decision

dated 25.10.2016 this Tribunal dismissed the appeal

and upheld the decision of SEBI dated 20.06.2013.

n) In the meantime, by an ad-interim ex-parte order

dated 21.09.2011, SEBI had restrained the entities 7

named therein including the appellant from dealing in

securities or instrument with Indian securities as

underlying in any manner whatsoever until further

orders. The said ad-interim ex-parte order was

confirmed against the appellant by an order dated

23.01.2013.

o) Thereafter, on completion of investigation, show

cause notice was issued to various entities including

the appellant and after considering the reply and the

submissions made by them including the appellant,

SEBI passed the impugned order on 05.09.2017

against several entities including the appellant. By the

impugned order, amongst others appellant has been

prohibited from accessing the capital market directly

or indirectly, and dealing in securities or instruments

with Indian securities as underlying, in any manner

whatsoever, for a period of six years from the date of

the said order. However, the period of prohibition

already undergone by the appellant pursuant to the

interim order dated 21.09.2011 was directed to be

reduced while computing the period of prohibition

imposed by the impugned order.

p) As noted earlier, appellant has already undergone the

prohibition for six years. However, the appellant 8

wants to contest the matter on merits, because

according to the appellant the impugned order was

passed erroneously and the said erroneous order

continues to affect the reputation of the appellant in

the international market.

4. According to SEBI, fraud in the present case is committed on the

investors in India, in two stages. Firstly, Mr. Arun Panchariya, Managing

Director of PAN Asia (Lead Manager) in connivance with the six Issuer

Companies subscribed to their GDRs through Vintage which was wholly

owned by Mr. Arun Panchariya. Thus, the investors in India were falsely

made to believe that the foreign investors have shown keen interest in the

scrip of the six Issuer Companies when in fact the GDRs were not

subscribed by foreign investors but by Mr. Arun Panchariya through

Vintage, which was wholly owned by Mr. Arun Panchariya. Secondly,

the GDRs so acquired were then transferred to IFCF (an entity controlled

by Mr. Arun Panchariya) and the appellant who converted the GDRs into

underlying shares and sold the said shares in the Indian securities market

to the counter parties who were the entities controlled by Mr. Arun

Panchariya. These transactions gave an impression that the investors in

India have started subscribing to the shares of Issuer Companies when in

fact the shares were sold and acquired by the entities controlled by

Mr. Arun Panchariya.

5. During the course of arguments counsel for SEBI fairly stated that

the appellant is not involved in the first stage of the fraud committed by 9

Mr. Arun Panchariya. In fact, nowhere in the impugned order it is stated

that the appellant was aware of the loan taken by Vintage from Euram

Bank for subscribing to the GDRs of the six Issuer Companies.

Similarly, it is not stated in the impugned order that the appellant was

aware of the agreement between the six Issuer Companies and Euram

Bank wherein the six Issuer Companies agreed to deposit the entire GDR

proceeds in the accounts opened with Euram Bank and pledge that

account as security for the loan taken by Vintage for subscribing to the

GDRs of the six Issuer Companies. Thus, it is not the case of SEBI that

the appellant was involved in the first stage of fraud planned and

executed by Mr. Arun Panchariya in connivance with the six Issuer

Companies.

6. However, by the impugned order it is held that the appellant is

involved in the second stage fraud committed by Mr. Arun Panchariya as

the appellant had acquired GDRs on behalf of Mr. Arun Panchariya and

on conversion of GDRs sold the underlying shares in the Indian securities

market to the entities controlled by Mr. Arun Panchariya. Question,

therefore, to be considered is, whether SEBI is justified in holding that

the appellant was related to Mr. Arun Panchariya on account of the

appellant acquiring GDRs belonging to Mr. Arun Panchariya and after

converting the GDRs selling the underlying shares to the entities

connected to Mr. Arun Panchariya and thereby create an artificial

liquidity in the scrip of six Issuer Companies in violation of PFUTP

Regulations.

10

7. Appellant is held to be related to Mr. Arun Panchariya basically for

the reasons recorded in para 5.1.33 of the impugned order which reads

thus:-

"

 KII is a subsidiary of Credo Investments Holding Limited ("Credo").

 Credo Investments entered into Agreements with Vintage for obtaining loans, which were in turn lent to KII. These Agreements were signed on behalf of Vintage by Shri Arun Panchariya.

 As agreed upon in the aforesaid Agreements, the loan taken by KII from Vintage through Credo Investments was used by KII to purchase GDRs of the Issuer Companies from Vintage and thereafter, these GDRs were converted into shares and sold in the Indian securities markets.

 According to the said Agreements, the market risks of these transactions were borne by Vintage. Thus, the dealings of KII in the GDRs of the Issuer Companies were under substantial influence of Vintage who used KII to convert and dump the shares obtained from the conversion of the GDRs on the Indian investors."

8. On the basis of aforesaid facts, SEBI has inferred that the second

stage fraud was committed by Mr. Arun Panchariya with the assistance of

the appellant by adopting the following modus operandi:- 11

a) Vintage (controlled by Mr. Arun Panchariya) gave

Millions of USD as loan to Credo to pass on the same

to the appellant and the appellant agreed to use such

funds to buy GDRs of the Issuer Companies from

Vintage through Euram Bank, thereafter convert the

GDRs into shares and sell the same in Indian markets

and use the sale proceeds to repeat the same process

again and again. As per the loan agreement, the

profits of such trading and balance remaining funds, if

any, with the appellant were to be handed over to

Vintage.

b) The underlying shares sold by the appellant were

purchased by counter parties who were the entities

controlled by Mr. Arun Panchariya. Thus, the

appellant bought the GDRs belonging to Mr. Arun

Panchariya from the loan provided by Mr. Arun

Panchariya and, thereafter, sold the underlying shares

to the entities controlled by Mr. Arun Panchariya.

Aforesaid transactions gave a false impression that the

investors in India have started showing keen interest

in the shares of six Issuer Companies, when in fact the

shares were bought and sold by the entities controlled

by Mr. Arun Panchariya, and therefore it is held that

the appellant was connected/ related to Mr. Arun

Panchariya.

12

9. Fact that the loan agreement between Vintage and Credo was

signed by Mr. Arun Panchariya on behalf Vintage under which loan was

given by Vintage to Credo for being given to the appellant to buy the

GDRs and sell the underlying shares in the Indian market cannot be a

ground to presume that the appellant was privy to the fraud sought to be

committed by Mr. Arun Panchariya, because, it is neither the case of

SEBI that the said loan agreements were entered into in contravention of

law nor it is the case of SEBI that the transactions permitted under the

loan agreement were impermissible in law. Therefore, mere fact that

Vintage controlled by Mr. Arun Panchariya had given loan to the

appellant through Credo for buying the GDRs and selling the underlying

shares cannot be a ground to presume that the appellant was privy to the

fraud sought to be committed by Mr. Arun Panchariya on the investors in

India.

10. Specific case of the appellant before SEBI was that Vintage

controlled by Mr. Arun Panchariya was the client of Credo/ appellant for

the past several years and as per the past experience, appellant had no

reason to doubt the credibility of Mr. Arun Panchariya. That plea of the

appellant is not doubted by SEBI. In such a case, mere fact that the loan

agreement between Vintage and Credo was signed by Mr. Arun

Panchariya for being given to the appellant for trading in GDRs under the

loan agreement between Credo and the appellant could not be a ground to

presume that the appellant was aware that the transactions under the said

loan agreements were intended by Mr. Arun Panchariya to defraud the

investors in India.

13

11. In any event, very fact that the WTM of SEBI has discharged the

show cause noticed issued to Credo by holding (see para 5.1.45 of the

order) that sufficient proof has not been made available to show direct

involvement of Credo in the fraud perpetrated through the GDR issue,

clearly shows that the WTM of SEBI has committed an error in arriving

at a contrary conclusion in case of the appellant. If Credo who had taken

loan from Vintage under the loan agreement signed by Mr. Arun

Panchariya for being given to the appellant was not involved in the fraud,

then by the same yard stick the appellant who got loan from Credo could

not be said to have involved in the fraud. Between Credo and the

appellant, Credo was directly connected to Mr. Arun Panchariya,

because, he had signed the loan agreement as authorized representative of

Vintage. In such a case, giving the benefit of doubt to Credo but denying

the benefit of doubt to the appellant who was indirectly connected with

Mr. Arun Panchairya is wholly unjustified. In other words, WTM of

SEBI is not justified in holding in one breath that signing of the loan

agreement between Vintage and Credo by Mr. Arun Panchariya on behalf

of Vintage does not show direct involvement of Credo in the fraud

perpetrated through the subscription/ trading in GDRs and in another

breath holding that signing of the loan agreement by Mr. Arun

Panchariya on behalf of Vintage in the loan agreement between Vintage

and Credo was sufficient to hold the appellant (not a party to the contract

between Vintage and Credo) was privy to the fraud sought to be

perpetrated by Mr. Arun Panchariya on the investors in India. 14

12. Fact that on conversion of GDRs the underlying shares of the six

Issuer Companies sold by the appellant in the Indian Market were bought

mainly by the entities controlled by Mr. Arun Panchariya could not be a

ground to hold that the appellant was privy to the fraud committed by

Mr. Arun Panchariya on the investors in India, because, firstly, nowhere

in the impugned order it is alleged that the appellant was aware or had

known any of the counter parties to the transactions executed on the

Stock Exchanges. Secondly, none of trades executed on the Stock

Exchanges by and between the appellant and the counter parties

controlled by Mr. Arun Panchariya have been held to have been executed

in violation of the securities laws. Thirdly, even in the orders passed by

SEBI against the counter parties controlled by Mr. Arun Panchariya it is

not held that there was an unholy nexus between the appellant and the

counter parties controlled by Mr. Arun Panchariya. Therefore, mere fact

that the counter parties to the trades executed by appellant were the

entities controlled by Mr. Arun Panchariya could not be a ground to hold

that the appellant was privy to the fraud sought to be committed by

Mr. Arun Panchariya on the investors in India.

13. Fact that the appellant did not challenge the ex-parte order dated

21.09.2011 does not mean that the appellant had accepted the prima facie

view of SEBI. Very fact that the appellant cooperated with SEBI at all

times clearly shows that the appellant believed that as a market regulator

SEBI would consider merits of the case put forth by Credo and the

appellant in the proper perspective. Unfortunately, for the appellant SEBI 15

has taken views in case of Credo and the appellant which are mutually

contradictory.

14. During the course of arguments it was contended on behalf of

SEBI that transfer of funds from Vintage to Credo and from Credo to the

appellant were put in place to evade the law of Mauritius. However, we

refrain from commenting on the said argument because that is not the

finding recorded in the impugned order and there is nothing on record to

suggest that the Mauritian authorities have held that the fund movements

in the instant case were in contravention of Mauritian law.

15. Similarly, fact that the appellant instead of buying GDRs on the

Luxemburg Stock Exchange, bought them from Vintage through Euram

Bank and fact that the accounts between the appellant and Vintage has

not been settled till date cannot be a ground to presume that the appellant

was privy to the fraud committed by Mr. Arun Panchariya on the

investors in India, because, neither the acquisition of GDRs from Euram

Bank was prohibited nor there was any obligation on part of the appellant

to terminate the contract which is found to be legal.

16 Fact that the appellant on acquisition of GDRs converted them into

underlying shares and sold them in the Indian market could not be a

ground to hold that the appellant had dumped the shares of the six Issuer

Companies, because, in law the appellant was entitled to convert the

GDRs and sell the underlying shares in the Indian market. 16

17. It is interesting to note that in the order passed in case of M/s Mavi

Investment Fund Limited ("Mavi") on 25.09.2013, SEBI has held that

acquisition of the GDRs of the six Issuer Companies and selling the

underlying shares in the Indian market by Mavi to the counter parties

controlled by Mr. Arun Pancharia, do not decisively establish that Mavi

was privy to the fraud committed by Mr. Arun Panchariya and

accordingly gave benefit of doubt to Mavi.

18. According to SEBI benefit of doubt given to Mavi cannot be

extended to the appellant for the following reasons:-

a) Mavi's trading was neither funded by Vintage nor by

Mr. Arun Panchariya, whereas appellant's trades were

admittedly funded by Vintage controlled by Mr. Arun

Panchariya.

b) Mavi had no contract with Vintage, whereas appellant

had contract with Vintage via Credo.

c) Mavi brought GDRs of only two Issuer Companies,

whereas, appellant bought the GDRs of all the six

Issuer Companies.

d) Mavi bought the GDRs from the Luxemburg Stock

Exchange, whereas appellant bought the GDRs Over

The Counter (OTC) from Vintage through Euram

Bank.

17

e) Mavi and all other FIIs who traded in the GDRs of the

Issuer Companies stopped trading in such GDRs by

June 2009, whereas IFCF (controlled by Mr. Arun

Panchariya) and the appellant started trading in the

GDRs from June 2009 onwards.

19. In our opinion, decision of SEBI based on aforesaid facts that the

case of Mavi is different from the case of the appellant is wholly

unjustified, because, SEBI has neither demonstrated that receiving funds

by the appellant from Vintage for the trades set out in the loan

agreements were contrary to law nor SEBI has demonstrated that the

terms of the loan agreements directly or indirectly indicate the fraudulent

intention on part of Mr. Arun Panchariya in entering into the said

transactions. Therefore, when funds were received under a contract

which is in accordance with law, it could not be presumed that the funds

were received by the appellant for committing fraud on the investors in

India. Similarly fact that Mavi bought GDRs of only two Issuer

Companies from Luxemburg Stock Exchange, whereas, appellant bought

GDRs of all the six Issuer Companies from Vintage through Euram Bank

could not be a ground to presume that the appellant was privy to the fraud

sought to be committed by Mr. Arun Panchariya, because, acquisition of

GDRs from Euram Bank was neither barred nor prohibited.

20. In any event, it is not in dispute that counter parties to the trades of

Mavi as also the counter parties to the trades of the appellant were the

entities controlled by Mr. Arun Panchariya. In such a case, having given

benefit of doubt to Mavi, SEBI is not justified in denying such benefit to 18

the appellant and holding, that the appellant was privy to the fraud,

because, counter parties to the trades of the appellants were the entities

controlled by Mr. Arun Panchariya.

21. Strong reliance was placed by counsel for SEBI on the decisions of

this Tribunal and the decision of the Apex Court in case of Pan Asia

reported in (2015) 14 SCC 71 in support of the contention that IFCF and

the appellant were connected to Mr. Arun Panchariya. At the outset it is

relevant to note that the said observations were merely reiteration of the

stand taken by SEBI that IFCF and the appellant were related to

Mr. Arun Panchariya and not a finding recorded after considering the

plea of the appellant. In fact, appellant was not a party to the appeal filed

by Pan Asia before this Tribunal. Therefore, it cannot be said that in the

case of Pan Asia this Tribunal had recorded a finding that both IFCF and

appellant were related to Mr. Arun Panchariya.

22. It is not in dispute that IFCF was controlled by Mr. Arun

Panchariya, whereas, the relationship of Vintage (controlled by Mr. Arun

Panchariya) and the appellant was only a contractual relationship which

is neither held to be illegal nor contrary to law. Therefore, fact that IFCF

has been found to be privy to the fraud committed by Mr. Arun

Panchariya on the investors in India could not be a ground to hold that

the appellant was also privy to the said fraud committed by Mr. Arun

Panchariya.

23. For all the aforesaid reasons, we hold that SEBI is not justified in

refusing to extend the benefit of doubt given to Credo to the appellant. 19

Accordingly, we quash and set aside the impugned order dated

05.09.2017 qua the appellant and as in the case of Credo, appellant is

directed to ensure that all their future dealings in the Indian securities

market are done strictly in accordance with law.

24. Appeal is disposed of in the aforesaid terms with no order as to

costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 08.06.2018 Prepared & Compared By: PK