Mukesh Chauradiya vs Sebi

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

Mr. Piyush Chhajed, Chartered Accountant with Mr. Devendra Dhanesha, Chartered Accountant i/b M/s. Chhajed and Doshi Advisors LLP and Mr. Mukesh Chauradiya, Appellant in person for the Appellant.

Mr. Shyam Mehta, Senior Advocate with Ms. Nidhi Singh, Ms. Kinjal Bhatt and Mr. Hersh Choudhary, Advocates i/b Vidhii Partners for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per: Dr. C.K.G. Nair, Member 2

1.

This appeal has been preferred challenging the order of the

Adjudicating Officer („AO‟ for short) of Securities and

Exchange Board of India („SEBI‟ for short) dated July 28, 2020

whereby the appellant has been held to have violated

Regulations 3 and 4 of SEBI (Prohibition of Fraudulent and

Unfair Trade Practices relating to Securities Market),

Regulations, 2003 („PFUTP Regulations‟ for short) and

therefore imposing a penalty of Rs. 10 lakh under Section 15HA

of the SEBI Act, 1992.

2. The matter pertains to an issue of Global Depository

Receipts („GDR‟ for short) by M/s. Winsome Yarns

Limited („Winsome‟ for short) on March 29, 2011 for an

amount of USD 13.24 million, which has been found to

have been vitiated by the fact that the entire GDR issue was

subscribed by Vintage FZE, an entity owned and controlled

by Arun Panchariya, using loan taken by Vintage by

providing security of the very same GDR proceeds of the

company Winsome. In connection with the same an

investigation was conducted by SEBI and a show cause

notice dated September 11, 2019 was issued to the

appellant. During the investigation it was found that the

appellant had signed a loan agreement with European 3

American Investment Bank AG („Euram Bank‟ for short)

dated March 22, 2011 and thereby became part of the chain

in facilitating the fraud committed in defrauding the

investors in Winsome. The relevant details of the said loan

agreement signed by the appellant and as given in the

impugned order is as follows:-"14.

Loan Agreement:

15. Vintage FZE („Vintage‟) opened a loan account having number 540012-51-3 with EURAM Bank and Winsome opened a retail account having number 5800400101 with EURAM Bank. Vintage obtained loan of USD 13.24 million by entering into a Loan Agreement dated March 22, 2011 with Euram Bank. The Loan Agreement was signed by Mukesh Chauradiya, in capacity of Managing Director of Vintage for subscription of GDRs of Winsome.

16. The Loan Agreement inter-alia states as follows:-

2. "Nature and purpose of facility" "To provide funding enabling Vintage FZE to take down GDR issue of 1,994,125 Luxemburg public offering and may only be transferred to EURAM account nr. 580040, WINSOME Yarns Ltd."

6. Security: ......it is hereby irrevocably agreed that the following securities and any other securities which may be required by the Bank from time to time shall be given to the Bank as provided herein or in any other form or manner as may be demanded by the Bank:

4 1) Pledge of certain securities held from time to time in the Borrower's a/c no. 540012 at the Bank as set out in a separate pledge agreement which is attached hereto as Annex 2 and which forms an integral part of this Loan Agreement.

2) Pledge of the account no. 580040 held with the Bank as set out in a separate pledge agreement which is attached hereto as Annex 2 and which forms an integral part of this Loan Agreement."

17. As per the Know Your Customer documents (singed on June 06, 2007) of Vintage available with EURAM Bank, it was observed that Noticee was the beneficial owner and Managing Director of Vintage as on June 06, 2007. Documents received from EURAM Bank show that Alkarni Holding Limited was the sole shareholder of Vintage FZE and Noticee was the sole shareholder of Alkarni Holding Ltd."

3. After that the investigation further revealed that a pledge

agreement, also dated March 22, 2011 was entered into between

Winsome and the Euram Bank. The relevant details of which is

given in the impugned order is as follows:-

"18. Pledge Agreement:

a) A Pledge Agreement dated March 22, 2011 was entered into between Winsome (as Pledgor) and EURAM Bank (as Bank). The pledge Agreement was signed by Manish Bagrodia, Managing Director on behalf of Winsome.

b) The preamble of the Pledge Agreement states:

5 "By Loan Agreement K210311-002 (hereinafter referred to as the "Loan Agreement") dated 22 March 2011, the Bank granted a loan (hereinafter referred to as the "Loan") to Vintage FZE, AAH-213, Al Ahamadi House, Jebel Ali Free Trade Zone, Jebel Ali, Dubai, United Arab Emirates (the "Borrower") in the amount of USD 13,240,990- The pledger has received a copy of the Loan Agreement No. K210311-002 and acknowledge and agrees to its terms and conditions."

c) The Pledge Agreement pledged all of the pledgor‟s (Winsome) rights, title and interest in and to the securities deposited from time to time at present or hereafter (hereinafter referred to as the "Pledged Securities") and the balance of funds up to the amount USD 13,240,990 existing from time to time at present or hereafter on the securities account(s) no. 580040 held with the Bank; and all of its right, title and interest in and to, and the balance of funds existing from time to time at present or hereafter on the account(s) no. 580040 kept by the Bank and all amounts credited at any particular time therein...

19. Further, conditions were put in the Pledge Agreement for realization of the pledge which permitted the Euram Bank to apply the funds in the Pledged Account to settle the Obligations and to realize the Pledged Securities (i) at a public auction for those items or Pledged Securities for which no market price is quoted or which are not listed on a recognized stock exchange or (ii) in a private sale pursuant to the provisions of Section 376 Austrian Commercial Code.

20. Thus, Winsome opened a bank account (A/c no. 580040) with EURAM Bank to keep the GDR proceeds and pledged its GDR proceeds 6

before issuance of GDRs to secure the rights of EURAM Bank against the loan given by EURAM Bank to Vintage for subscription of GDR issue of Winsome. It was observed from the pledge agreement that Winsome was aware of the loan agreement and initial subscriber and the source of funding. "

4. Subsequent to filing his reply and after providing an

opportunity of hearing etc. the impugned order has been issued

holding that the appellant is party to the fraud by signing the

loan agreement in the capacity of managing director of Vintage

FZE. The fraud in the matter led to a single entity Vintage FZE

subscribing the full GDR issue of USD 13.24 million on the

basis of a loan agreement and a pledge agreement and in finally

not transferring USD 6.05 million of the GDR proceeds to the

Company Winsome.

5. Paragraph 31 of the impugned order substantively captures

these findings:-

"In this regard, it first needs to be established that the scheme for GDR subscription by Vintage FZE was a fraudulent scheme. The material on record shows that Vintage FZE was on the only subscriber to the Winsome GDR issue on March 29, 2011 for an amount of USD 13.24 million. Material on record also established that the source of funding for this GDR issue came from a loan taken by Vintage FZE from Euram Bank through a Loan Agreement dated March 22, 2011. It is also established that this loan was secured by way of a Pledge 7

Agreement signed between Winsome and Euram Bank dated March 22, 2011which placed the entire GDR proceeds as security with Euram Bank. Thus, material on record has established that the entire subscription to the GDR issue by Vintage FZE was through a fraudulent scheme, where the funds raised by the company through the issue were pledged by the company in favour of the subscriber, who had taken them as loan from Euram Bank, and the funds remained with Euram Bank itself. Vintage FZE subsequently defaulted on the loan to the tune of USD 6.05 million,and hence the company never received the GDR proceeds to this extent."

6. The learned counsel Shri Piyush Chhajed appearing on

behalf of the appellant submits that the appellant was never a

managing director of Vintage FZE; he was initially only a

Manager and later on a General Manager. It was contended that

he was never a beneficial owner of the Company Vintage FZE

and he has never benefited anything in the alleged violation as

he was only a salaried employee of Vintage FZE. In order to

support his contentions the learned counsel produced documents

issued by Jebel Ali Free Zone Authority (JAFZA) and the

residency permit details as given in his passport wherein the

designation of General Manager only has been given against the

appellant. Moreover, in the certificate given by JAFZA dated

December 28, 2010 the following entities are named in relation

to Vintage FZE:-

8

 Shareholder: Alkarni Holdings Limited (an entity 100% owner and controlled by Mr. Arun Panchariya);

 Directors: Mr. Ashok Ramswarup Panchariya (Brother of Mr. Arun Panchariya);

 Manager: Mr. Mukesh Babulal Chauradiya (the Appellant);

 Secretary: Mr. Ashok Ramswarup Panchariya

7. Accordingly, the learned counsel contended that being

only an employee of Vintage FZE the appellant is not liable for

any violation even if other parties involved might have

committed those violations.

8. We have also heard Shri Shyam Mehta, the learned senior

counsel appearing on behalf of the respondent SEBI who

summarized several fraudulent schemes perpetuated by Vintage

FZE, Arun Panchariya, Euram Bank and several other entities,

including the appellant herein, in multiple matters. He also

highlighted that the appellant signed as Managing Director of

Vintage FZE not only in this matter before us but also while

signing loan agreements for subscribing to the GDR issue of

Rasoya Proteins Ltd., Southern Ispat and Energy Ltd. and Aqua

Logistics Ltd.; all signed during February - April 2011, and on

which separate proceedings have been initiated/completed by

SEBI.

9

9. Having heard the learned counsel for the parties through

video conference and having perused the documents we find no

merit in the appeal. Paragraph 21 of the impugned order clearly

explains the role of the appellant as Managing Director of

Vintage FZE while signing several loan agreements.

"21. Noticee had long association with Arun Pancharia. Noticee worked as director in Ramsai Investment Holdings P. Ltd wherein Arun Pancharia was director and holding 99.98% shares through Vintage. Further, Noticee signed Loan Agreement dated March 22, 2011 for subscription of Winsome's GDR issue as Managing Director of Vintage and signed redemption requests of loan account as authorised signatory. Noticee also signed the Loan Agreements dated February 14, 2011, April 28, 2011 and February 03, 2011 in capacity of the Managing Director of Vintage for subscription of the GDR issue of Rasoya Proteins Ltd, Southern Ispat and Energy Ltd and Aqua Logistics Ltd. Vintage's default on repayment of balance loan amount affected Winsome to the tune of USD 6.05 million. From the above, it is clear that Noticee acted as aid to Arun Pancharia and acted as party to fraudulent scheme."

10. It is an undisputed fact that the appellant has signed

as Managing Director as we also note at page 94 of the

Memo of appeal. It is not that he signed "for managing

director" or "on behalf of managing director" etc.

Therefore, irrespective of the dispute relating to the

designation as contended by the appellant, the appellant 10

was undoubtedly having the power to sign as managing

director. In the certificate given by the JAFZA only 3

names [and 4 designations, with the sole Director, being

named as the Secretary also] are indicated who are

responsible people in Vintage FZE and appellant was one

of them. Therefore, the dispute as to what was the exact

designation of the appellant is irrelevant in the context that

admittedly the appellant signed as Managing Director of

Vintage FZE. It is also important to clarify here that using

a designation in other jurisdictions, such as UAE in the

instant case, or elsewhere, for comparison to similar

designations in India is also not relevant because

designations vary widely even with respect to similarly

placed officials across multiple jurisdictions. What is

relevant is only whether the appellant was holding a

position in which he could put his signature, that too in a

loan agreement for USD 13.24 million with a bank under

the designation of Managing Director. In any case

designation of a person and whether a person is "an officer

in default" in an organization etc are irrelevant when the

charge is that of aiding and abetting fraud under the

PFUTP Regulations, which is the case herein. 11

11. It is also held in the impugned order that the

appellant was also a director of Ramsai Investment

Holdings P. Ltd. wherein Arun Panchariya was also a

director holding 99.98% of shares through Vintage FZE.

This clearly demonstrates appellant‟s strong connection

with Panchariya. Appellant‟s stated lack of awareness

relating to details of the loan or other operations of

Vintage is clearly feigning ignorance as the appellant has

been working at senior level since 2005 and is admittedly

signatory to many such agreements. In the instant matter

the loan agreement clearly spells out that it is for the

purpose of subscribing to the Winsome GDR and the

amount of GDR issue and the amount of loan matches

indicating that Vintage is going to be the sole subscriber of

the GDRs in question. Pledge Agreement was annexed to

the loan agreement, as given in the impugned order quoted

in para 2 of this Order.

12. The appellant‟s contention that he was/is not a beneficial

owner of Vintage FZE has no merit as the impugned order has

directed him to pay a penalty amount of only Rs. 10 lakh for

aiding and abetting fraud by Vintage and thereby by violating 12

the stated PFUTP Regulations. It is neither an impounding order

nor a disgorgement order where beneficial ownership or profits

illegally earned or loss avoided etc. become relevant. On these

issues separate Orders have been passed by SEBI against other

entities involved. Moreover, under Section 15HA of the SEBI

Act, fraudulent and unfair trade practices attract a minimum

amount of penalty of Rs. 5 lakh which may extend up to Rs. 25

crore or 3 times the amount of profits made out by such

practices, whichever is higher. In the light of this, penalty of Rs.

10 lakh imposed on the appellant is neither harsh nor

disproportionate.

13. This Tribunal is fully aware of the modus operandi, as in

the impugned matter, used by various entities in the

manipulation of several GDR issues by Indian Companies as

held in various orders passed by us such as in Pan Asia

Advisors Ltd. (another Panchariya entity), Cals Refineries etc.

14. Given the above reasons, we do not find any merit in the

appeal and the appeal is dismissed with no order as to costs. The

appellant is directed to pay the penalty amount within 30 days

from the date of this order.

13

15. The present matter was heard through video conference

due to Covid-19 pandemic. At this stage it is not possible to sign

a copy of this order nor a certified copy of this order could be

issued by the registry. In these circumstances, this order will be

digitally signed by the Private Secretary on behalf of the bench

and all concerned parties are directed to act on the digitally

signed copy of this order. Parties will act on production of a

digitally signed copy sent by fax and/or email.

Justice Tarun Agarwala RAJALAKS Digitally signed by RAJALAKSHMI H Presiding Officer HMI H NAIR Date: 2021.01.07 NAIR 15:36:46 +05'30'

Dr. C.K.G. Nair Member

Justice M.T. Joshi Judicial Member 07.01.2021 msb