Mahendra Pratap Singh vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Order Reserved On: 14.07.2016 Date of Decision : 26.07.2016

Appeal No. 404 of 2014

Mr. Sandeep Baid Basudebpur Dakshin Palli 1 No., Purbo Haldia Mecheda Rasta, Haldia Durgachak, Purbo Medinipur- 721 602 ...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. P. N. Modi, Senior Advocate with Mr. Vinay Chauhan, Advocate i/b Corporate Law Chambers India for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Saurabh Bachhawat and Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. for the Respondent. WITH Appeal No. 403 of 2014

Mr. Sunder Lal Dugar RDB Rasayans Ltd. Room No. 9, 3rd Floor, Bikaner Building 8/1, Lalbazar Street, Kolkata 700 002 ...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. Vinay Chauhan, Advocate i/b Corporate Law Chambers India for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Saurabh Bachhawat and Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. for the Respondent. 2

WITH Appeal No. 402 of 2014

Mahendra Pratap Singh 1003 ODYSSEY I, Hiranandani Gardens, Powai, Mumbai- 400 076 ...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. Vinay Chauhan, Advocate i/b Corporate Law Chambers India for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Saurabh Bachhawat and Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. for the Respondent.

AND Appeal No. 432 of 2014

Mr. Sachin Shridhar A-1/20, Safdarjang Enclave, New Delhi- 110 029 ...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. Vinay Chauhan, Advocate i/b Corporate Law Chambers India for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Saurabh Bachhawat and Mr. Harekrishna Ashar, Advocates 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 3

Appeal Nos. 404, 403, 402 & 432 of 2014

1.

Appellants in these four appeals are aggrieved by the common

order passed by the Adjudicating Officer ("AO" for short) of Securities

and Exchange Board of India ("SEBI" for short) on 06.08.2014. Hence

all these appeals are heard together and disposed of by this common

decision.

2. By the impugned order dated 06.08.2014, appellants are held liable

to pay penalty jointly and severally under Section 15HA & Section 15HB

of the Securities and Exchange Board of India Act, 1992 ("SEBI Act" for

short) aggregating to ` 3 crore for violating the provisions contained in

the SEBI Act and the Regulations made thereunder. Additionally penalty

of ` 5 lac is imposed on Mr. Sandeep Baid (Appellant in Appeal No. 404

of 2014) under Section 23H of Securities Contracts (Regulation) Act,

1956 ("SCRA" for short) for not complying with clause 49 of the Listing

Agreement read with Section 21 of SCRA.

3. At the relevant time Mr. Sandeep Baid (Appellant in Appeal No.

404 of 2014) was the Whole Time Director of RDB Rasayans Ltd.

("RDB" for short) Mr. Sunder Lal Dugar (Appellant in Appeal No. 403

of 2014) was the Promoter and Chairman of RDB. Mr. Mahendra Pratap

Singh, Mr. Prabir Kumar Sarkar and Mr. Sachin Shridhar, (Appellants in

Appeal Nos. 402, 401 & 432 of 2014) were the Independent Directors of

RDB.

4. Facts relevant for the purpose of these appeals are as follows:- 4

a) At the relevant time RDB was a public limited

company engaged in the manufacture of PP Tape, PP

woven sacks, Woven Fabrics, Industrial woven fabric

etc. RDB Realty & Infrastructure Ltd. ("RDBRIL" for

short) is a group/sister company of the RDB group

engaged in the business of real estate and

infrastructure. RDBRIL is a listed company whose

shares are listed on BSE and NSE.

b) In March 2010 RDB filed a Draft Red Herring

Prospectus (DRHP) with SEBI to raise funds for

expanding its manufacturing activities at Haldia,

Kolkata through Initial Public Offer ("IPO" for short).

c) On 12.09.2011 SEBI granted its approval to the

DRHP filed by RDB. Accordingly, the IPO opened

on 21.09.2011 and the IPO closed on 23.09.2011.

d) On 05.10.2011 IPO funds to the tune of ` 34.25 crore

was credited to the bank account of RDB.

e) On 07.10.2011 at about 11:00 A.M. Audit Committee

Meeting of RDB was held and in that meeting the

committee decided to recommend to the Board of

RDB to utilize the IPO funds by investing in high

quality interest bearing instruments for the

profitability of the company. It also decided to 5

recommend to the Board for giving secured loan to

the group companies of RDB.

f) It is not in dispute that at 5:00 P.M. on 07.10.2011

Board meeting was held, whereby the Directors of

RDB were authorized to invest the unutilized IPO

proceeds of RDB in high quality interest bearing

instruments. It was further resolved to authorize RDB

to enter into loan agreement with RDBRIL and the

draft loan agreement placed before the Board was

approved with certain modifications with consent of

both parties.

g) It is also not in dispute, that on 07.10.2011 itself loan

of ` 31.60 crore out of the amount of ` 34.25 crore

received from IPO were transferred by RDB to

RDBRIL at about 2:47 P.M. i.e. even before the

Board approved transfer of funds from RDB to

RDBRIL.

h) On 28.12.2011 the Whole Time Member ("WTM" for

short of SEBI passed an ad-interim ex-parte order

prohibiting various individuals/entities including the

appellants from buying, selling or dealing in the

securities until further orders and further directed

RDB to call back loan of ` 31.60 crore from RDBRIL 6

and deposit the same in an escrow account till further

orders.

i) Accordingly, RDB recalled the demand loan and it is

not in dispute that during the period from January to

31.03.2012, RDB received total amount of ` 33.43

crore (` 31.60 crore being the loan amount + ` 1.83

crore being interest) and intimated it to the Stock

Exchange.

j) Challenging the aforesaid ad-interim ex-parte order

RDB filed a writ petition before the Calcutta High

Court wherein partial relief was granted to RDB.

Challenging the Calcutta High Court order, SEBI filed

an SLP before the Apex Court. On 22.09.2014, by

consent SLP was disposed of, whereby, the writ

petition filed by RDB before the Calcutta High Court

stood withdrawn and SEBI was required to pass

orders within three months and till then, RDB was

directed not to alienate fixed assets up to the value of

` 6.5 crore and it was directed that the amounts lying

in the escrow account shall continue to remain in the

escrow account.

k) On 19.12.2014 the WTM of SEBI passed final order

whereby the RDB and its Directors including the

appellants were debarred from entering into the 7

securities market till 28.12.2015. Appellants as also

RDB have filed appeals to challenge the said order of

WTM dated 19.12.2014 by filing Appeal Nos. 514 of

2015 and 532, 533 & 534 of 2015 which are all being

heard along with these appeals.

l) On 30.07.2013 a show cause notice was issued by AO

of SEBI calling upon the appellants herein to show

cause as to why inquiry should not be held against the

appellants and why penalty should not be imposed

under Section 15HA and 15HB of SEBI Act for

violating the provisions contained in the SEBI Act

and the regulations framed thereunder.

m) Appellants filed their reply to the show cause notice

denying the allegations made therein. Thereafter

personal hearing was granted to the appellants and by

the impugned order dated 06.08.2014 penalty

aggregating to ` 3 crore is imposed on the appellants

with a direction that the said penalty be paid by the

appellants jointly and severally. Additional penalty of

` 5 lac was imposed on the appellant in Appeal No.

404 of 2014. Challenging the said order of AO, these

four appeals are filed by the appellants.

5. At the outset, we would like to consider the penalty of ` 5 lac

imposed on Mr. Sandeep Baid (Appellant in appeal No. 404 of 2014). 8

6. In the impugned order it is held that Mr. Sandeep Baid who was

the Whole Time Director of RDB chaired the Audit Committee Meeting

of RDB on 07.10.2011 in violation of Clause 49 of the Listing

Agreement.

7. Admittedly, Clause 49 of the Listing Agreement provides that

Chairman of the Audit Committee shall be an Independent Director and

on 07.10.2011 even though an Independent Director of RDB was

available to chair the Audit Committee, the said meeting was chaired by

the appellant in Appeal No. 404 of 2014 who was the Whole Time

Director. It is contended by the counsel that the Whole Time Director

chaired the Audit Committee Meeting on 07.10.2011 under the bonafide

belief that he can chair it and thus it being a technical mistake merited no

penalty.

8. We see no merit in the above contention. When the Listing

Agreement specifically provides that the Chairman of the Audit

Committee shall be an Independent Director, the Whole Time Director

could not have chaired the Audit Committee Meeting held on 07.10.2011

especially when an Independent Director was available on that day to

chair the Audit Committee. There is no basis for the alleged bonafide

belief entertained by the Whole Time Director and therefore, to chair the

Audit Committee by the Whole Time Director on 07.10.2011 was in

violation of Clause 49 of the Listing Agreement. Although, penalty

imposable for such violation under Section 23H of the SCRA could

extend up to ` 1 crore, the AO after considering all mitigating factors has 9

deemed it fit to impose penalty of ` 5 lac which cannot be said to

unreasonable or excessive. Accordingly, imposition of ` 5 lac penalty on

the appellant in Appeal No. 404 of 2014 cannot be faulted.

9. Now, turning to the aggregate penalty of ` 3 crore imposed on all

the appellants, it may be noted that the said penalty is imposed for the

following reasons:-

a) Penalty of ` 1 crore is imposed under Section 15HB

of SEBI Act, because the appellants as directors of

RDB did not disclose all material information in the

offer document that are true and adequate as

contemplated under the ICDR Regulations and

misutilized the IPO proceeds by giving loan to

RDBRIL in violation of the ICDR Regulations.

b) Penalty of ` 1 crore is imposed under Section 15HA

of SEBI Act on ground that apart from violating

ICDR Regulations, the appellants are also guilty of

violating the PFUTP Regulations.

c) Penalty of ` 1 crore is imposed under Section 15HA

of SEBI Act on ground that the appellants, in

violation of PFUTP Regulations have routed IPO

proceeds in a circuitous manner so as to provide funds

to four trading clients who had traded in the shares of 10

RDB on the first day of listing RDB shares and had

incurred huge losses.

Violation of ICDR Regulations.

10. In the present case, the DRHP filed by RDB in March 2010 was

approved by SEBI on 12.09.2011 and on the same day RDB passed a

resolution approving grant of loan up to ` 50 crore to RDBRIL in one or

more tranches for their business purpose and the said loan was repayable

on demand as per the terms and conditions as may be mutually decided

between the management of both the companies. In the impugned order it

is held that the above information was a material information which

ought to have been disclosed and failure to disclose that information

constitutes violation of regulation 57(1), 57(2)(a) read with Scheduled

VIII Part A(16)(b) and regulation 60(4)(a) of the ICDR Regulations.

11. It is contended by the counsel for the appellants that RDBRIL had

requested for financial assistance and therefore, it was resolved on

12.09.2011 to give some of its surplus funds as loan to RDBRIL from

time to time up to a maximum of ` 50 crore. It was not a resolution to

give loan of ` 50 crore to RDBRIL, but it was a resolution enabling RDB

to give loan to RDBRIL as and when surplus funds were available. There

was no preconceived intention to give IPO proceeds to RDBRIL and on

12.09.2011 when the resolution was passed, the IPO was not even opened

and there was no certainly that the IPO would be successful. Thus, on

12.09.2011, there was no intention to give IPO proceeds as loan to

RDBRIL and therefore, it cannot be said that the resolution dated 11

12.09.2011 was a material information relating to transfer of IPO

proceeds so as to disclose the same in the offer document.

12. We see no merit in the above contentions. Admittedly, the reserves

and surplus funds of RDB for the financial year ending on March 2010

and March 2011 were ` 2.8 crore and ` 4.6 crore respectively. Although

SEBI had approved IPO of RDB on 12.09.2011, in view of the labour

unrest at Haldia, it was known that RDB would not be in a position to

utilize the IPO proceeds for the purpose specified in the IPO and thus the

IPO proceeds would be rendered surplus. There is nothing on record to

suggest that on 12.09.2011 when RDB passed resolution to give loan of

` 50 crore in one or more tranches, apart from receiving IPO funds, there

were no other funds to be received by RDB which could be treated as

surplus. Therefore, on 12.09.2011 when RDB passed a resolution to give

loan up to ` 50 crore to RDBRIL after receiving the SEBI approval, it is

apparent that the resolution to give loan was with reference to the IPO

proceeds to be received by RDB.

13. Above conclusion is corroborated from the fact that on 12.09.2011

itself RDB decided to call Extra Ordinary General Meeting (EOGM) on

28.09.2011 by curtailing the notice period of 21 days so as to seek

approval for giving loan to RDBRIL from the pre IPO shareholders. In

the EOGM held on 28.09.2011 (after the IPO closed on 23.09.2011 and

before allotment of shares) the pre IPO shareholders approved giving

loan up to ` 50 crore to RDBRIL. Even on 28.09.2011, apart from the

IPO proceeds there were no other funds that could be treated as surplus 12

and transferred to RDBRIL by way of loan. It is relevant to note that on

05.10.2011 IPO funds of ` 34.25 crore was credited to the RDB's bank

account and on 07.10.2011 at 11.00 A.M. the Audit Committee of RDB

recommended to the Board that the unutilized IPO funds should be

invested in high quality interest bearing instruments and further

recommended giving loan to the RDB group companies which would be

repayable on demand. However, before the Board of RDB could consider

the above recommendation of the Audit Committee at 5.00 P.M. on

07.10.2011 and approve the draft loan agreement, RDB transferred

` 31.60 crore to RDBRIL at 2.37 P.M. on 07.10.2011. Thus, the conduct

of RDB in transferring ` 31.60 crore out of the IPO proceeds amounting

to ` 34.25 crore to RDBRIL even before the Board of RDB authorized

giving loan to RDBRIL and even before the draft loan agreement was

approved at 5.00 P.M. on 07.10.2011, clearly shows that the resolution

passed on 12.09.2011 to give loan up to ` 50 crore to RDBRIL was with

reference to the IPO proceeds. Utilizing the IPO proceeds for a purpose

other than the purpose specified in the IPO being a material information

ought to have been disclosed as contemplated under the ICDR

Regulations. Failure to do so, constitutes violations of ICDR Regulations.

14. Argument of the appellants that the disclosure made in the

prospectus that 'pending utilization of the proceeds of the issue, we

intend to invest such proceeds in high quality interest bearing liquid

instruments' entitled RDB to utilize IPO proceeds by giving loan to

RDBRIL is without any merit. Investing surplus funds in high quality

liquid instruments cannot be equated with giving loan to a group 13

company. Investment in liquid instruments is done without any security

as it involves minimum risk and can be accessed easily. However,

giving loan involves maximum risk and hence loan is ordinarily given

subject to security. In the present case, RDB has utilized the IPO

proceeds to give loan to RDBRIL instead of investing the IPO proceeds

in high quality interest bearing liquid instruments by obtaining security of

valuable assets and post dated cheques. Fact that IPO proceeds have

been utilized by giving loan with security, cannot be construed to mean

that IPO proceeds have been invested in liquid funds. Hence, decision of

the AO that instead of investing IPO proceeds in liquid instruments RDB

misutilized the IPO proceeds by giving loan to RDBRIL cannot be

faulted.

15. Argument of the appellants that giving loan by RDB to RDBRIL

would amount to placing surplus funds from one pocket to another

cannot be accepted, because, RDB and RDBRIL are two separate and

distinct legal entities. Moreover, an investor who wants to invest funds

in the IPO of RDB may not prefer to invest in the IPO of RDB if

informed that IPO funds are being transferred as loan to RDBRIL. In

para 24 of the impugned order the AO has recorded a finding that prior to

the IPO, RDBRIL had taken ` 7.28 crore from RDB as inter corporate

loan at an interest rate of 15% per annum and since RDBRIL could not

repay the said loan within the stipulated time RDBRIL had sought

extension of time in the last week of August 2011 and accordingly RDB

had granted 90 days time to RDBRIL for repayment of loan. With these

facts on record, it is not open to the appellants to contend that giving loan 14

to RDBRIL amounts to placing IPO funds from one pocket to another.

Thus, in the facts of present case, resolution passed on 12.09.2011 to give

loan up to ` 50 crore to RDBRIL being a resolution relating utilization of

IPO proceeds was a material information which ought to have been

disclosed. Apart from the above, when statement was made in the offer

documents that the IPO proceeds would be invested in high quality

interest bearing liquid instruments, utilizing the IPO proceeds by giving

loan to RDBRIL amounts to misutilizing the IPO funds in violation of

ICDR Regulations.

Violation of PFUTP Regulations.

16. Failure to disclose aforesaid material information to the investors

and misutilizing the IPO funds contrary to the statement made in the offer

document was with a manipulative and deceitful intention is evident from

the fact that as soon as SEBI approval for the IPO was received, RDB

chose to invest surplus fund by way of loan to RDBRIL up to the extent

of ` 50 crore in one or more tranches, even though no such funds were

available. Very fact that on 12.09.2011 itself RDB resolved that along

with the Annual General Meeting ("AGM" for short) scheduled on

28.09.2011, Extra Ordinary General Meeting ("EOGM" for short) of

RDB shall also be called on 28.09.2011 to seek approval from the pre

IPO shareholders of RDB to grant loan to RDBRIL by curtailing the

notice period from 21 days to 15 days by invoking Section 171(2) of the

Companies Act, 1956, clearly shows that RDB and its directors were in

great hurry to seek approval from pre IPO shareholders to give loan up to 15

` 50 crore even though there were no funds for giving the loan.

Obviously the hurry was on account of the fact that IPO was commence

with effect from 21.09.2011 and if 21 days notice for EOGM was

adhered to, then post IPO shareholders would step in and therefore to

avoid seeking approval from post IPO shareholders, RDB and its

directors chose to suppress resolution dated 12.09.2011 and call EOGM

by curtailing the notice period so that approval to give IPO proceeds as

loan to RDBRIL is obtained from pre IPO shareholders and not from post

IPO shareholders.

17. It is contended on behalf of the appellants that the resolution

passed on 12.09.2011 to give loan up to ` 50 crore to RDBRIL in one or

more tranches did not envisage transferring IPO proceeds as loan to

RDBRIL. There is no merit in the above contention because, as on

12.09.2011 apart from receiving IPO funds between 21.09.2011 to

23.09.2011 there was no other source from whether RDB could get funds

which could be given as loan to RDBRIL. Although the resolution dated

12.09.2011 does not refer to giving IPO proceeds as loan to RDBRIL,

very fact that the said resolution was passed immediately on receiving

approval from SEBI for the IPO, very fact that RDB chose to curtail the

notice period from 21 days to 15 days so as to seek approval of the pre

IPO shareholders to give loan up to ` 50 crore to RDBRIL and fact that

on 07.10.2011 more than 90% of the IPO proceeds were transferred as

loan to RDBRIL, even before giving of loan and loan agreement was

approved by the Board of RDB, clearly establish that the object of

passing the resolution on 12.09.2011 was to transfer IPO funds as loan to 16

RDBRIL and by curtailing the notice period from 21 days to 15 days,

RDB chose to seek approval from the pre IPO shareholders for giving

IPO proceeds as loan to RDBRIL. Thus, RDB and its directors resorted

to manipulative and deceitful method to suppress material information

from the offer documents which in violation of PFUTP Regulations.

18. It is also relevant to note that on 28.09.2011 the AGM and EOGM

of RDB were held and filing in relation to AGM was made before the

Registrar of the Companies ("ROC" for short) on 28.09.2011 itself,

whereas, filing in relation to EOGM dated 28.09.2011 was made before

the ROC on 19.10.2011 i.e. much after the allotment of shares to the IPO

subscribers. Since the EOGM resolution dated 28.09.2011 related to the

approval given by the pre IPO shareholders to give loan up to ` 50 crore,

inference drawn by the AO that the filing relating to EOGM resolution

dated 28.09.2011 was withheld till 19.10.2011 with a view to suppress

vital information from the investors till the shares were allotted to the

IPO subscribers cannot be faulted.

19. It is contended on behalf of the appellants that Section 171(2) of

Companies Act, 1956 empowers a company to give shorter period of

notice to the shareholders and Section 192 of the Companies Act permits

filing of the resolution up to 30 days and therefore, no fault can be found

with RDB in invoking shorter period of notice and filing the resolution

within 30 days. In the impugned order it is not held that RDB and its

directors have violated Section 171(2) and Section 192 of the Companies

Act, 1956. What is held in the impugned order is that the motive in 17

curtailing the notice period for calling EOGM from 21 days to 15 days by

invoking Section 171(2) was with a view to avoid taking consent of post

IPO shareholders to give loan up to ` 50 crore to RDBRIL. Similarly, it

is held that filing of EOGM resolution dated 28.09.2011 was delayed till

19.10.2011, so that during the interregnum allotment of IPO shares are

made and once the shares are allotted the question of withdrawing from

the offer does not arise even if the subscriber intends to withdraw from

the offer on account of RDB giving loan up to ` 50 crore to RDBRIL.

Fact that apart from IPO proceeds, RDB did not have any other surplus

funds to give as loan to RDBRIL and the fact that immediately on

receiving IPO proceeds amounting to ` 34.25 crore, RDB transferred IPO

proceeds to the extent of `31.60 crore to RDBRIL, even before the Board

of RDB approved giving such loan and even before the Board of RDB

approved the draft loan agreement, leaves no manner of doubt that RDB

and its directors adopted manipulative and deceptive devices to suppress

material facts from the investors which is gross violation of Section 12A

of SEBI Act and regulation 3 & 4 of PFUTP Regulations.

20. It is equally important to note that on 07.10.2011 the Audit

Committee of RDB was chaired by the Whole Time Director instead of

Independent Director as mandated by Clause 49 of the Listing

Agreement. The said Audit Committee chaired by the Whole Time

Director in violation of Clause 49 of the Listing Agreement

recommended to the Board to give loan to RDBRIL. However, even

before the Board met at 5.00 P.M. on 07.10.2011 to approve the giving of 18

loan and approve the draft loan agreement, RDB transferred IPO

proceeds amounting to ` 31.60 crore to RDBRIL at 2.47 P.M. on

07.10.2011. Moreover, it is not in dispute that all the above material

information was not disclosed even to the book running lead manager. In

these circumstances, the inference drawn by the AO that RDB and its

directors in a manipulative and deceptive manner suppressed material

facts from investors and misutilized the IPO proceeds by giving loan to

RDBRIL instead of investing the IPO proceeds in high quality interest

bearing liquid funds as represented to the investors in the offer document,

cannot be faulted.

21. Argument of the appellants that IPO process was completed before

the AGM / EOGM held on 28.09.2011 is without any merit, because,

admittedly no allotments were made till 28.09.2011 and if requisite

disclosures were promptly made, it was open to any investor who had

applied for shares to withdraw from the offer before the allotments were

made. Fact that no investor has made any grievance cannot be a ground

for RDB to escape from penal liability for suppressing material facts in

the offer documents in violation of PFUTP Regulations. By no stretch of

imagination resolution passed on 12.09.2011 to give loan up to ` 50 crore

to RDBRIL and the resolution dated 28.09.2011 wherein 5 out of 10 pre

IPO shareholders of RDB approved giving loan up to ` 50 crore RDBRIL

could be said to be a routine matter, especially when IPO proceeds were

the only available funds that could be transferred as loan to RDBRIL.

Fact that giving loan up to ` 50 crore to RDBRIL was three times the net

worth of RDB and out of the IPO proceeds of ` 34.25 crore, ` 31.60 19

crore was transferred to RDBRIL even before the Board of RDB

authorized such transfer and even before the draft loan agreement

between RDB and RDBRIL was approved by the Board of RDB,

conclusively establish that from the date of passing resolution on

12.09.2011 till transferring IPO proceeds to RDBRIL, RDB and its

directors adopted manipulative and deceitful method so as to keep the

investors as also the book running lead manager in dark about

transferring IPO proceeds as loan to RDBRIL.

22. It is contended on behalf of the appellants that the promoter group

held 63.34% shareholding of RDB and 61.5% shareholding of RDBRIL

even post IPO and therefore the ownership and control of both companies

being with the same promoter group, the level of control and confidence

was the highest and therefore, giving loan by RDB to RDBRIL amounted

to investing in high quality, interest bearing liquid instruments. There is

no merit in the above contention. If the confidence level was so high then

there was no reason for the appellants to suppress utilization of IPO

proceeds by giving loan to RDBRIL. Very fact that RDB resorted to

suppressing material facts from the investors in relation to the loan to be

given to RDBRIL till the allotments were made and the fact that RDB

transferred IPO proceeds to the extent of ` 31.60 crore as loan to

RDBRIL on the basis of the recommendations of Audit Committee

resolution dated 07.10.2011 (chaired by Whole Time Director in

violation of Clause 49 of the Listing Agreement) and even before the said

recommendations and the draft loan agreement forwarded by the Audit

Committee were approved by the Board of RDB, leave no manner of 20

doubt the RDB and its directors resorted to prohibited methods for

suppressing material facts from the investors. It is a matter of record that

when RDBRIL was asked to return the entire amount of loan of ` 31.60

with interest RDBRIL could not repay the said amount at one go and

repaid the same in several installments and the entire loan with interest

was paid by 31st March, 2012. In these circumstances, findings recorded

by the AO in the impugned order that RDBRIL was not financially sound

on account of its inability to repay the entire loan amount at one go

cannot be faulted. Assuming that RDBRIL was financially sound on

account of assets held by it, very fact that RDBRIL could not repay the

loan on demand and repaid it in installments clearly supports the view

taken by the AO that giving loan to RDBRIL could not be said to be an

investment in high quality interest bearing liquid instruments.

23. Apart from the above, RDB had taken loan from the Axis Bank

and as per the loan agreement it was obligatory on part of RDB to take

prior permission of Axis Bank before giving loan to RDBRIL.

Admittedly, no such permission was taken from Axis Bank by RDB.

Fact that Axis Bank did not deem it fit to take action for the said breach

of the contract and the fact that the Axis Bank subsequently enhanced the

loan limit and granted extension of time to repay the said loan cannot be

a ground for the appellants to contend that no action be taken against

RDB and its directors for violating the ICDR Regulations and PFUTP

Regulations. In the impugned order, reference is made to the breach of

the loan agreement between RDB and Axis Bank only to highlight that in

a bid to transfer IPO proceeds by way of loan to RDBRIL, RDB not only 21

suppressed material facts from the investors but also suppressed material

facts from the Axis Bank. In these circumstances, decision of the AO

that the conduct of RDB and its directors (appellants) in suppressing

material information from the investors by resorting to manipulative and

deceitful devices was in violation of regulation 3 and 4 of the PFUTP

Regulations cannot be faulted.

Penalty for violating the provisions contained in the ICDR

Regulations and PFUTP Regulations.

24. Penalty for violating ICDR Regulations under Section 15HB of

SEBI Act is up to ` 1 crore and penalty for violating PFUTP Regulations

under Section 15HA of SEBI Act is ` 25 crore. Once it is held that the

appellants as directors of RDB are guilty of suppressing material facts

from the investors and misutilized the IPO proceeds in contravention of

statements made in the offer documents and thereby violated regulation

57(1), 57(2)(a) and regulation 60(4) of the ICDR Regulations and

committed those violations by adopting manipulative and deceitful

method in violation of regulation 3 and 4 of the PFUTP Regulations, the

penalty imposable on appellants would be up to ` 26 crore (` 1 crore

under Section 80HB and ` 25 crore under Section 80HA of SEBI Act).

However, after taking into consideration all mitigating factors the AO has

deemed it fit to impose penalty of ` 1 crore under Section 15HB and

penalty of ` 1 crore under Section 15HA of SEBI Act which cannot be

said to be unreasonable or excessive.

22

Additional penalty of ` 1 crore under Section 15HA of SEBI Act.

25. In the impugned order additional penalty of ` 1 crore is imposed

on appellants under Section 15HA of SEBI Act on ground that IPO

proceeds have been routed in a circuitous manner by RDB to four trading

clients who had traded in the shares of RDB on the first day of listing and

had incurred huge losses.

26. This finding, in our opinion, cannot be sustained because, once it is

held that transfer of IPO proceeds as loan to RDBRIL amounts to

misutilization of IPO proceeds in contravention of the PFUTP

Regulations and accordingly penalty of ` 1 crore is imposed, then fact

that part of the amounts given by RDB as loan to RDBRIL changed

several hands and finally the said amount was in the hands of four trading

clients who had traded in the shares of RDB on the first day of trading

and incurred losses, cannot be an independent ground to hold that the

IPO proceeds have been routed in a circuitous manner so as to fund four

trading clients, because, firstly, SEBI has not disbelieved the case of the

appellants that transfer of IPO proceeds by RDB to RDBRIL was by way

of loan. AO cannot hold on one hand that IPO proceeds were transferred

as loan to RDBRIL and on the other hand hold that IPO proceeds were

circuitously routed to four clients through RDBRIL. Secondly, by

31.03.2012, entire loan amount with interest has been received back by

RDB from RDBRIL. With these facts on record it is not open to SEBI on

one hand to contend that RDB gave IPO proceeds as loan to RDBRIL in 23

violation of ICDR Regulations/ PFUTP Regulations and on the other

hand contend that the IPO proceeds have been transferred in a circuitous

manner so to fund four trading clients who had traded in the shares of

RDB on the first day of listing.

27. Apart from the above, as rightly contended by the counsel for

appellants, in the impugned order no link or connection is established

between RDB / its Directors and the four trading clients to whom the

funds are allegedly held to have been transferred by RDB through

RDBRIL and various other entities. Moreover, the appellants had

tendered a ledger statement of RDBRIL to show that the funds

transferred by RDBRIL to Namokar Duplicating Pvt. Ltd. ("Namokar"

for short) was by way of refunding the amount already received by

RDBRIL from Namokar. In the impugned order, the ledger statement

furnished by RDBRIL is disbelieved on ground that the said ledger

statement is not certified and there is no other evidence furnished by the

appellants. In our opinion, there was no reason to disbelieve the ledger

statement of RDBRIL especially when RDBRIL is a listed company.

Moreover, the appellants have annexed to the Memo of Appeal a

certificate issued by S.M. Daga & Co., Chartered Accountants which

clearly certifies that the amount paid by RDBRIL to Namokar was in fact

refund of the amount already received by RDBRIL from Namokar.

Sanctity of the said certificate is not doubted by SEBI. In such a case, it

is apparent that the amount paid by RDBRIL to Namokar was by way of

refunding the amount already received by RDBRIL and therefore, the 24

finding recorded by AO that RDB transferred IPO proceeds to four

trading clients through RDBRIL, Namokar and various other entities

cannot be sustained. Consequently, penalty of ` 1 crore imposed under

Section 15HA of SEBI Act on ground that RDB transferred IPO proceeds

to four trading clients through RDBRIL and other entities in violation of

PFUTP Regulations cannot be sustained.

28. In the result, we uphold the penalty of ` 1 crore imposed on

appellants under Section 15HB of SEBI Act for violating the ICDR

Regulations and penalty of ` 1 crore imposed under Section 15HA of

SEBI Act for violating PFUTP Regulations. Similarly, penalty of ` 5 lac

imposed on appellant in Appeal No. 404 of 2014 for violating Clause 49

of the Listing Agreement is also upheld. However, penalty of ` 1 crore

imposed under Section 15HA of SEBI Act on ground that RDB

transferred IPO proceeds in a circuitous manner to four trading clients is

deleted.

29. Accordingly, appellant in Appeal No. 404 of 2014 is directed to

pay ` 5 lac and all appellants are directed to pay ` 2 crore jointly and

severally to SEBI within a period of four weeks from today. If the

appellants fail to pay the aforesaid penalty within the time set out herein

above, SEBI would be entitled to recover that amount from the appellants

with interest at the rate of 12% per annum from the date of the order

passed by the AO of SEBI on 06.08.2014 till payment. 25

30. All four appeals are 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 26.07.2016 Prepared & Compared By: PK