Order against Cals Refineries Ltd in the matter of Market Manipulation using GDR issues.[SAT Appeal No.04 /2014]

WTM/SR/ISD/27/2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: S. RAMAN, WHOLE TIME MEMBER ORDER Under sections 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 read with Regulation 11(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, in the matter of Cals Refineries Ltd.

1. Vide an ad interim ex-parte Order dated September 21, 2011 (hereinafter referred to as "Interim Order"), Securities and Exchange Board of India (hereinafter referred to as "SEBI") directed Cals Refineries Ltd (hereinafter referred to as "Cals") not to issue equity shares or any other instrument convertible into equity shares or alter their capital structure in any manner till further directions, in view of the irregularities observed in the issuances of Global Depository Receipts (hereinafter referred to as "GDRs") of Cals. The aforementioned Interim Order was confirmed on December 30, 2011 (hereinafter referred to as "Confirmatory Order").

2. Cals filed an appeal (Appeal No. 153 of 2013), before the Hon’ble Securities Appellate Tribunal (hereinafter referred to as "SAT"). The Hon’ble SAT disposed of the appeal vide its Order dated August 28, 2013, stating that "final order after issuing show cause notice and after hearing the appellant would be passed within a period of eight weeks from today."

3. Consequent to the abovementioned Order of the Hon’ble SAT, SEBI issued a Show Cause Notice (hereinafter referred to as "SCN") dated September 19, 2013, to Cals, based on the findings of its investigation in the matter of market manipulation using GDR Issues. The allegations against Cals in the SCN were inter alia as follows – i. As the authorised signatory of Cals, Sarvesh Goorha (Promoter and Director of Cals) (hereinafter referred to as "Goorha") signed an Account Charge Agreement with Banco Efisa, a Portugal based bank (hereinafter referred to as "Banco"). The aforesaid Account Charge Agreement was an integral part of another agreement viz. Credit Agreement signed between Honor Finance Limited (hereinafter referred to as "Honor") and Banco. Honor was beneficially owned by Sanjay Rai Malhotra (hereinafter referred to as "Sanjay Malhotra"). These agreements enabled Honor to avail a loan of US $200 million from Banco for subscribing to the GDR issue of Cals. ii. In terms of the Account Charge Agreement, Cals deposited the GDR subscription proceeds received from the subscriber i.e. Honor, as security for the loan availed by Honor from Banco.

The Account Charge Agreement contained a clause to the effect that all communications to be given under the Agreement were to be addressed to either Goorha or Devanathan Sundararajan (Director of Cals) (hereinafter referred to as "Sundararajan"). Goorha and Sundararajan were also authorised signatories for Cals. iii. As the Account Charge Agreement was expiring, an Extension Agreement was signed between Cals and Banco on January 13, 2009. The said Extension Agreement was signed by Ravi Chilikuri (Director and authorised signatory of Cals) (hereinafter referred to as "Chilikuri") on behalf of Cals. iv. The effect of these Agreements resulted in Cals itself financing the subscription of its GDR issue. Such an arrangement was specifically prohibited under Indian law in terms of Section 77(2) of the Companies Act, 1956 (hereinafter referred to as "Companies Act"). Further, this fraudulent arrangement resulting in full subscription of GDRs of the Issuer Company acted as an inducement for other persons to offer to buy the shares of such Company in the Indian securities market. v. Even though the GDR issuance was by means of an illegal and fraudulent arrangement and no genuine capital was raised in the process, Cals informed Bombay Stock Exchange Limited (hereinafter referred to as "BSE") that GDR issue of US $200 million was fully subscribed.

The names of initial investors provided by Cals to BSE and SEBI were false and misleading as the only subscriber to the GDRs issue was Honor.

vi. Cals made repeated announcements regarding setting up of refinery in India and securing investment from foreign investors for this purpose through GDR issuances. However, the general public was not aware that the GDR subscription proceeds were locked with Banco and utilization of the same by Cals was totally dependent on the repayment of loan by Honor. Cals has therefore caused false information to be published and disclosed to the stock exchange (BSE in the instant case) in India that GDR issuances were successfully subscribed by foreign investors, and used this artifice and misleading information to induce the investors in India to deal in the shares of Cals. vii. Cals paid US $92 million to a promoter controlled entity viz. Asia Texx Enterprises Limited, Hong Kong (hereinafter referred to as "Asia Texx"). The beneficial owner of Asia Texx was Gagan Rastogi (hereinafter referred to as "Gagan"), who was one of the Promoters of Cals. Gagan is also the son of Deep Kumar Rastogi (hereinafter referred to as "Deep Kumar"), who was a Director of Cals. This related party transaction was required to be disclosed to the stock exchange by Cals, in terms of Clause 32 of the Listing Agreement. However, such disclosure was not made by Cals. viii. The transactions between Cals and Asia Texx are summarized below: Date Event 05-Feb-2009 Cals signs agreement with Asia Texx for sale of plants and machinery 26-Mar-2009 Asia Texx purchases 2,50,00,000 GDRs from Honor and pays USD 9,20,00,000 to Honor 27-Mar-2009 Honor repays the outstanding loan amount of USD 9,18,00,000 to Banco 27-Mar-2009 Cals pays USD 9,20,00,000 to Asia Texx ostensibly for purchase of refinery equipments. 09-Jul-2009 Asia Texx transfers 2,50,00,000 GDRs to Shri Gagan Rastogi free of cost.

ix. The above transaction between Cals and Asia Texx was fraudulent as the transaction was structured to enrich the promoters of Cals at the expense of other investors. Gagan obtained 25 million GDRs of Cals by using the funds of Cals. No refinery equipments have been received from Asia Texx. The money was ultimately used by Honor (owned by Sanjay Malhotra-promoter of Cals) to repay the outstanding loan to Banco. The entire transaction effectively amounted to siphoning of funds of Cals into the account of the promoters under the pretext of payment for refinery parts. The transaction between Cals and Asia Texx was structured to settle the outstanding liability of Honor to Banco using funds of Cals. x. Cals had furnished misleading submissions to SEBI and also concealed material information from SEBI.

4. Cals filed its reply to the SCN vide letter dated October 3, 2013. Subsequent to filing of the aforesaid reply to the SCN, an opportunity of personal hearing was granted to Cals on October 11, 2013. In its aforementioned reply and during the aforesaid hearing, the authorised representative of Cals, inter alia made the following submissions:

i. SEBI does not have any jurisdiction to investigate or impose any penalty in relation thereto. This has been conclusively held by the SAT in Pan Asia Advisors and Arun Panchariya v. SEBI (SAT order dated September 30, 2013) (the "Arun Panchariya Decision"). ii. Cals denies that it had anything whatsoever to do with Sanjay Malhotra's ownership of Honor or with Honor's borrowing, if any, from Banco. Cals denies that Honor was the sole subscriber to the GDR. SEBI has not verified the authenticity of documents submitted by Banco. iii. SEBI's persistent refusal to examine Sanjay Malhotra and to supply copies of his statement to Cals materially prejudices Cals' ability defend itself. iv. Cals denies any knowledge of the Account Charge Agreement and the Extension Agreement. Cals stated that it had not passed any board resolution in this regard. v. As can be clearly seen from the bank statement, there were frequent debits from the GDR proceeds at different points in time for the Company's needs. None of these transactions would have been possible if the GDR proceeds were under a charge. vi.

Perusal of the Account Charge Agreement reveals material discrepancies. For example, the Account Charge Agreement (as annexed to the SCN) indicates that it was notarized at London on November 19, 2007 and apostilled on November 20, 2007 whereas the document is dated December 11, 2007. The Credit Agreement between Honor and Banco appears to be notarized at London on December 3, 2007. vii. Sundararajan is not aware of the Account Charge Agreement. Even assuming that Sundararajan was aware of the Account Charge Agreement, his knowledge cannot be imputed to Cals as he was only a non-executive director of Cals at that time. viii. Cals furnished the list of initial subscribers based on the communication from the lead manager. ix. Section 77 of the Companies Act applies only to shares and not to GDRs. SEBI is artificially applying SEBI Act, 1992 (hereinafter referred to as "SEBI Act") to this alleged violation. x. There was no illegality in the disclosure made by the Company about the GDR issue being fully subscribed. It is denied that disclosures about the refinery project in the annual reports of the Company were false. xi.

Cals has never stated that the contracts with Ventech and Asia Texx have been terminated. The Company had made enormous efforts to salvage these contracts. But for the unfounded order of SEBI dated September 21, 2011, banning the Company from raising further equity, these equipments would have arrived and installed in the refinery project of the Company. xii. The Company denies that the transaction between Asia Texx and the Company was a related party transaction. xiii. The transaction between Cals and Asia Texx was not structured to settle the outstanding liability of Honor to Banco using funds of Cals. The Company had a genuine need for equipment that Asia Texx could supply. The reason that transaction did not materialize is because SEBI prevented the Company from raising the further equity that was required. xiv. Cals has never furnished wrong information to SEBI.

5. A Supplementary SCN dated October 11, 2013, was issued to Cals, wherein the following violations were alleged: – i. Cals had claimed in its reply to SEBI that the frequent debits from the account of Cals maintained with Banco as per the needs of Cals would not have been possible if the account was pledged as charged in the SCN. However, on examining the debits made from the said bank account of Cals, it is found that Cals had always withdrawn money after part repayment of loan by Honor. At no point of time was Cals able to withdraw money in excess of the amount repaid by Honor to Banco further evidencing that the withdrawal of GDR proceeds by Cals was dependent on the loan repayment by Honor. ii. Under Clause 32 of the Listing Agreement, Cals was liable to disclose to the exchanges the related party transaction of US $92 million between Asia Texx and Cals. However, Cals failed to disclose the same to the exchanges.

6. In its reply to the abovementioned supplementary SCN, Cals vide letter dated October 15, 2013, submitted as follows – i. Cals' utilization of the GDR proceeds was solely in the course of its genuine business requirements. The Company was unaware of Honor's transaction with Banco and that the utilization of the GDR proceeds bore no relationship with transaction(s) between Honor and Banco. ii. Cals submitted that as per Accounting Standard 18 (hereinafter referred to as “AS– 18”), related parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decision. Cals had no influence over Asia Texx at the time when the contract was entered into between them. Further AS-18 provides that it is to be presumed that one party does not have significant influence on a reporting enterprise if it holds, directly or indirectly less than 20% of the voting power of the enterprise. Neither Gagan nor Asia Texx had any significant influence on Cals at the time of its contract with Asia Texx and therefore there was no obligation upon Cals to treat it as 'related party transaction'.

7. Thereafter, SEBI vide letter dated October 18, 2013, forwarded a certified copy of an extract from the Minutes of the Meeting of the Board of Directors of Cals Refineries Limited on October 30, 2007 to Cals and Sundararajan for their comments. The said extract authorized Goorha and Sundararajan to sign, execute any application, document on behalf of Cals. The extract also authorized Banco to use the funds deposited in bank account as security in connection with loans, if any. This extract has been received from Goorha as well as Banco (through the financial regulator of Portugal i.e. Comissão do Mercado de Valores Mobiliários).

8. Cals replied vide e-mail dated October 21, 2013, that the minute books, which were prepared when the Company was under the management of Goorha himself, do not contain the purported resolution and the company disclaims these resolutions and denies any knowledge of them. However, Sundararajan and Goorha have both confirmed that these issues were discussed in the Board Meeting on October 30, 2007.

Consideration of Issues and Findings –

9. I have considered the material available on record i.e. Investigation Report, Summons, SCN and Supplementary SCN issued to Cals; its replies to the Summons, SCN and Supplementary SCN alongwith the submissions made during the personal hearing before me. In light of the same, I shall now proceed to deal with the charges levelled against Cals in the SCN and Supplementary SCN.

10. In its replies, Cals submitted that SEBI does not have any jurisdiction to investigate or impose any penalty in relation to GDR issues. In this regard, I note that – i. The issuance of GDRs is from the authorised share capital of a company listed in Indian stock exchanges. Any structuring or manipulation related to GDRs has a direct impact on securities of companies trading in Indian market. Further, the underlying of the GDRs are shares of Indian companies with two–way fungibility, which allows for conversion of GDRs in Indian market and vice versa. Hence, the impact of such issuance, cancellation/conversion and sale/transfer of shares so converted has direct bearing on the securities market in India. Such issuance, etc. of GDRs by Indian companies also greatly influences decision-making by investors in the securities market. In view of the same, it is seen that the issuance of GDRs cannot be regarded as an exclusive activity totally insulated from and not impacting the securities market in India.

ii. Under the SEBI Act, SEBI has been mandated with the task of investor protection alongwith the development and regulation of the securities market. In furtherance of the aforesaid mandate, powers have been conferred upon SEBI inter alia under the SEBI Act to prevent any fraudulent or manipulative activity being carried out which is detrimental to interests of investors in India. If any such activity is observed by SEBI, then it would be justified in invoking various powers conferred under such Act, Rules and Regulations made thereunder and take appropriate measures as it deems fit. Considering the same, any manipulation through issuance of GDR by a listed Indian Company with underlying shares will impact the Indian securities market. In such cases, SEBI indeed has full jurisdiction to look into the matter.

iii. Reliance is also placed on the observations of the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Ltd. & Ors. vs. SEBI reported in (2013) 1 SCC 1, wherein it inter alia held: “303.1 Sub‐section (1) of Section 11 of the SEBI Act casts an obligation on SEBI to protect the interest of investors in securities, to promote the development of the securities market, and to regulate the securities market, “by such measures as it thinks fit”. It is therefore apparent that the measures to be adopted by SEBI in carrying out its obligations are couched in open‐ended terms having no prearranged limits. In other words, the extent of the nature and the manner of measures which can be adopted by SEBI for giving effect to the functions assigned to SEBI have been left to the discretion and wisdom of SEBI. It is necessary to record here that the aforesaid power to adopt “such measures as it thinks fit” to promote investors’ interest, to promote the development of the securities market and to regulate the securities market, has not been curtailed or whittled down in any manner by any other provisions under the SEBI Act, as no provision has been given overriding effect over sub‐section (1) of Section 11 of the SEBI Act.”

iv. Further, in the matter of GVK Industries Limited & Anr. vs. the Income Tax Officer & Anr.[(2011) 197 Taxman 337 (SC)], while deciding as to whether the laws enacted by the Parliament can have extra-territorial effect, the Hon'ble Supreme Court had observed: “…the Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes, - events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like, that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians.” In accordance with these observations, where the impact of actions/omissions, etc. of an entity are felt in the securities market in India, such entity would be amenable to regulatory jurisdiction of SEBI.

v. In view of the aforementioned paragraphs, I am of the considered view that SEBI has full jurisdiction to issue directions against Cals if it has reason to believe that Cals had acted fraudulently to the detriment of the investors in the Indian securities market.

vi. I note that Cals has placed reliance on the Arun Panchariya decision to substantiate its submission. In this regard and with due respect to the Order passed by the Hon'ble Tribunal, it is pertinent to mention that as the matter has raised important questions of law which has a bearing on many matters before SEBI including the instant matter, SEBI has filed an appeal against the Arun Panchariya decision in the Hon'ble Supreme Court of India.

11. In its replies, Cals inter alia denied that it had anything to do with Sanjay Malhotra's ownership of Honor or the loan availed by Honor. Further, Cals inter alia denied any knowledge of the Account Charge Agreement or its extension through the Extension Agreement. In this regard, I note that –

11.1.1 The Spice Energy Group comprising of Sanjay Malhotra alongwith Mr. Bhulo Kansagra, Chilikuri and Deep Kumar had agreed to subscribe in Cals as a strategic investor for the purpose of implementing the 'Refinery Project' i.e. setting up of an oil refinery of 520 MMTPA in Haldia, West Bengal, India. Pursuant to the same, a preferential allotment of 870,000 shares of Cals (14.50% of total share capital) was made to SRM Exploration Pvt. Ltd. (hereinafter referred to as "SRM Exploration") on October 17, 2007.

11.1.2 Prior to the abovementioned preferential allotment, the shareholders of Cals had approved GDR/ADR/FCCB issue aggregating to US $500 million for the purpose of raising funds for the 'Refinery Project' in September 2007. Subsequently, in December 2007, Cals completed the GDR issue of 78,80,000 GDRs, each representing 100 equity shares of face value of ₹10 each, amounting to US $200 million (₹788 Crores). Accordingly, for ensuring effective implementation of the 'Refinery Project', the Spice Energy Group represented by SRM Exploration was recognized and classified as the new promoter of Cals post–GDR Issue. The aforesaid fact was informed by Cals to the BSE on June 27, 2008.

11.2.1 A Credit Agreement dated December 11, 2007, was executed between Banco (as the Bank) and Honor (as the Borrower). As per the aforesaid Credit Agreement, – a. Banco shall make available to Honor a Dollar term loan facility of US $200 million for the purpose of subscription to GDRs issued by Cals. b. Banco shall not be under any obligation to make the Dollar term loan facility available to Honor unless it has notified Honor that it has received all the documents listed in Schedule 1 of the Credit Agreement, which includes inter alia certified copies of board minutes and resolutions of Cals approving and authorizing the execution, delivery and performance by it of each Security Document (Deposit Charge i.e. Charge over the deposit made by Cals with Banco dated on or around the date of the Credit Agreement, and any other guarantee or document creating, evidencing or acknowledging security in respect of any of the obligations and liabilities of Honor and Cals under the Credit Agreement, etc.) to which it is a party on the terms and conditions of those documents and authorizing person(s) to sign or otherwise attest the due execution of those documents and any other documents to be executed by it pursuant to those documents together with a certificate of a duly authorised officer of Cals setting out the names and signatures of the persons authorised to sign such documents on its behalf.

11.2.2 In addition to the above, from the Know Your Customer Declaration and other Client Documents (hereinafter referred to as "KYC Declaration") in respect of Honor's bank account with Banco, it is observed that – a. Honor was incorporated on October 5, 2007 and registered in the British Virgin Islands. b. The only registered shareholder and ultimate beneficial owner of Honor was Sanjay Malhotra. c. The main objective for Honor's bank account (Account No. 6344189) with Banco was to avail loan facility and invest in GDRs. The ultimate beneficial owner of the account was Sanjay Malhotra.

11.2.3 An Account Charge Agreement was also executed between Cals and Banco. As per the aforesaid Account Charge Agreement, – a. Cals shall deposit in its designated account with Banco, an amount not exceeding US $200 million as security for all the obligations of Honor under the Credit Agreement (which was signed between Banco and Honor by which Banco agreed to lend Honor the maximum amount of US $200 million), which amount shall in turn be assigned and charged in favour of Banco as a continuing security for the due and punctual payment and discharge of the aforementioned obligations of Honor, subject to the terms of the Account Charge Agreement. b. Upon payment of all or part of the amounts due under the Credit Agreement, Cals may withdraw from the Account the equivalent amount. c. Each and every notice or other communication to be given under the Agreement shall be made by letter or fax to: Cals Refineries Ltd., Address: E44/13, Okhala Phase 2 New Delhi 110020, India. Attention: Mr. Sarvesh Kumar Goorha or Mr. Devanathan Sundararajan. d. The Account Charge Agreement was signed on behalf of Cals by Goorha.

11.2.4 In addition to the above, from the Deposit Account Application and other Client Documents in respect of Cals' bank account with Banco, it is observed that – a. The authorised signatories for the operation of the bank account were Goorha and Sundararajan, who were Directors of Cals. b. Goorha and Sundararajan had irrevocably authorised Banco to carry out, as soon as practicable upon receipt, instructions transmitted by Telephone, Telefax and/or email, without waiting for a written confirmation by letter thereof.

11.2.5 Since the expiration date of the Account Charge Agreement signed between Cals and Banco was December 15, 2008, an Extension Agreement was signed between Cals and Banco on January 13, 2009, for extension of the Account Charge Agreement. The said Extension Agreement was signed on behalf of Cals, by Chilikuri who was also a Director of Cal.

11.2.6 Upon a consideration of the abovementioned paragraphs, I find it difficult to accept Cals' submission that it had nothing to do with the loan availed by Honor and that it had no knowledge of the Account Charge Agreement and Extension Agreement. In this context, the following is noted: – a. The Credit Agreement, Account Charge Agreement alongwith the KYC Declaration, Deposit Account Application, etc. were obtained by SEBI from the financial regulator of Portugal i.e. Comissão do Mercado de Valores Mobiliários. I am inclined to rely on the authenticity of the aforesaid documents.

b. From the preceding paragraphs 11.1.1–11.1.2, it is observed that Sanjay Malhotra was one of the promoters of SRM Exploration, which in turn was subsequently recognized and classified as the new promoter of Cals post–GDR Issue. The Dollar term loan facility pursuant to the Credit Agreement executed between Banco and Honor (wherein Sanjay Malhotra was also the only registered shareholder and ultimate beneficial owner of Honor) was made available conditional to inter alia receipt, by Banco, of certified copies of board minutes and resolutions of Cals approving and authorizing the execution, delivery and performance by it of each Security Document.

c. The obligations of Honor under the Credit Agreement were secured by Cals through the Account Charge Agreement whereby it deposited an amount of US $200 million with Banco i.e. GDR subscription proceeds received from the subscriber – Honor, which amount was assigned and charged in favour of Banco as a continuing security. Further, on examining the debits made from the said bank account of Cals and Honor, it is found that it was only after part payment by Honor of the amounts due under the Credit Agreement that Cals was able to withdraw funds from its bank account with Banco, in accordance with the terms of the Account Charge Agreement. The series of transactions in the account of Cals clearly indicate that Cals was never able to remit any amount from its account in excess of the amount paid by Honor to Banco. Therefore, the remittance by Cals always followed repayment of loan by Honor and never preceded it. This is a clear indication that the withdrawal of GDRs proceeds by Cals was dependent on the repayment by Honor under the Credit Agreement. This is illustrated in the table provided below:

Cumulative Loan Cumulative Loan repaid by Amount utilised repaid by Honor as Amount utilised by Date Honor ($) by Cals in ($) on date ($) Cals as on date ($) 27-12-2007 6,50,00,000 6,50,00,000 28-12-2007 4,93,51,000 6,50,00,000 4,93,51,000 28-12-2007 87,09,000 6,50,00,000 5,80,60,000 02-01-2008 2,50,00,000 9,00,00,000 5,80,60,000 03-01-2008 1,00,000 9,00,00,000 5,81,60,000 03-01-2008 25,000 9,00,00,000 5,81,85,000 03-01-2008 75,000 9,00,00,000 5,82,60,000 31-01-2008 44,45,400 9,00,00,000 6,27,05,400 11-02-2008 72,70,000 9,00,00,000 6,99,75,400 29-02-2008 1,52,50,000 9,00,00,000 8,52,25,400 04-03-2008 35,00,000 9,35,00,000 8,52,25,400 11-03-2008 11,35,000 9,35,00,000 8,63,60,400 09-04-2008 11,35,000 9,35,00,000 8,74,95,400 05-05-2008 8,50,000 9,43,50,000 8,74,95,400 18-06-2008 35,00,000 9,78,50,000 8,74,95,400 19-06-2008 11,35,000 9,78,50,000 8,86,30,400 11-07-2008 1,00,000 9,79,50,000 8,86,30,400 22-07-2008 79,50,000 79,55,000 10,59,00,000 9,65,85,400 05-09-2008 23,00,000 1,50,000 10,82,00,000 9,67,35,400 12-09-2008 1,33,534 10,82,00,000 9,68,68,934 27-03-2009 9,18,00,000 9,20,00,000 20,00,00,000 18,88,68,934 Total 20,00,00,000 18,88,68,934 d. From the certified copy of an extract from the Minutes of the Meeting of the Board of Directors of Cals held on October 30, 2007 (certified by Sundararajan, then a Director and currently Managing Director), which was received from Banco (through the financial regulator of Portugal i.e. Comissão do Mercado de Valores Mobiliários), the following is observed:

"RESOLVED THAT a bank account be opened with Banco Efisa S. A. Lisbon ("the Bank") or any branch of Banco Efisa S. A. including Offshore Branch outside India for the purpose of receiving subscription money in respect of Global Depository Receipt issue of the Company. RESOLVED FURTHER THAT Mr. Sarvesh Goorha, Director and Mr. D. Sundararajan, Director be and are hereby severally authorised to sign, execute, any application, agreement, escrow agreement, document, undertaking, confirmation, declaration and any other paper(s) from time to time as may be required by the Bank and to carry and affix, Common Seal of the Company thereon, if and when so required. RESOLVED FURTHER THAT Mr. Sarvesh Goorha, Director and Mr. D. Sundararajan, Director be and are hereby severally authorised to draw cheques and other documents and to give instructions from time to time as may be necessary to the said Banco Efisa S. A. or any other branch of Banco Efisa S. A., Lisbon including Offshore Branch, for the purpose of operation of and dealing with the said account and carry out other relevant and necessary transactions and generally to take all such steps and to do such things as may be required from time to time on behalf of the Company. RESOLVED FURTHER THAT the Bank be and is hereby authorised to use the funds so deposited in the aforesaid bank account as security in connection with loans, if any, as well as to enter into any Escrow Agreement or similar arrangements if and when so required."

e. I note that while Cals has denied any knowledge of the abovementioned resolutions since they were not in the minutes book of the company, it is clearly evident from the document furnished by Goorha and Banco i.e. the certified copy of an extract from the Minutes of the Meeting of the Board of Directors of Cals held on October 30, 2007, that the Board of Directors of Cals had authorized Sundararajan and Goorha to sign the Account Charge Agreement and to use the funds so deposited in its bank account with Banco, as security in connection with loans. In addition, I note that the wording in the aforesaid extract makes it clear that Cals had authorized Banco to use the funds deposited in the bank account as security in connection with loans. From the certified copy of the Minutes of the Meeting of the Board of Directors of Cals held on December 12, 2007 (provided by Cals to SEBI), I note that its Board had also authorized its directors to sign the documents related to GDRs. I note that the Extension Agreement executed between Cals and Banco was signed by Chilikuri, the authorised signatory on behalf of Cals. As stated in the preceding paragraphs, events subsequent to the execution of the Account Charge Agreement revealed that Cals did use the funds deposited in its bank account as security for obligation of Honor. Considering the aforesaid, the inescapable conclusion that can be drawn is that Cals had in fact authorized Goorha and Sundararajan for signing the Account Charge Agreement for operating the bank account otherwise there was no reason for Cals to act as per the terms of such Agreement.

f. Cals has submitted that there are material discrepancies in the Account Charge Agreement since even though the same was notarized in London on November 19, 2007 and apostilled on November 20, 2007; it was however dated December 11, 2007. I note from the aforesaid Agreement that the same was notarized and apostilled only in respect of the signature of Goorha. I find it is possible that the Account Charge Agreement between Cals, an Indian Company and Banco, acting through its branch in Portugal, was given effect subsequently on the date Banco signed such Agreement i.e. December 11, 2007, despite Goorha having signed the same on behalf of Cals, on an earlier date i.e. November 19, 2007. The aforesaid also gains credence from the Account Charge Agreement, which provided that the date of its execution was only on the date set out therein. I, therefore, fail to see any discrepancy in the Account Charge Agreement as submitted by Cals.

g. In addition to the above, Cals was very much aware of the Account Charge Agreement and Extension Agreement as evident from its conduct. In this regard, I note that – i. From the Deposit Account Application and other Client Documents in respect of Cals' bank account with Banco, the authorised signatories for the operation of Cals' bank account with Banco were Goorha and Sundararajan, who were Directors of Cals. ii. Further, Goorha and Sundararajan had irrevocably authorised Banco, on behalf of Cals, to carry out instructions transmitted by Telephone, Telefax and/or email, without waiting for a written confirmation by letter thereof.

iii. Each and every notice or other communication to be given under the Agreement shall be made by letter or fax to Mr. Sarvesh Kumar Goorha or Mr. Devanathan Sundararajan. iv. The Extension Agreement for extension of the Account Charge Agreement was signed on behalf of Cals by Chilikuri, who was also a Director of Cals. v. The withdrawal of GDRs proceeds by Cals from its bank account with Banco was dependent on the repayment by Honor under the Credit Agreement.

h. Cals has inter-alia submitted that even if it is assumed that Sundararajan was aware of the Account Charge Agreement, his knowledge cannot be imputed to Cals as he was only a Non-Executive Director of Cals at that relevant time. Such a submission cannot be accepted since Sundararajan, by his own admission had certified the document which enabled Cals to open the bank account with Banco i.e. the certified copy of an extract from the Minutes of the Meeting of the Board of Directors of Cals held on October 30, 2007. Sundararajan was also admittedly an authorised signatory of Cals for operating its bank account maintained with Banco. To classify a director as non-executive and thereby attempt to disclaim all responsibility cannot be accepted when it is clear that the same person was Cals' authorised signatory and inter alia operated its bank account in accordance with the Account Charge Agreement.

i. It is noted from the contentions raised by Cals that it was not aware of the actions of its Directors and Promoters viz. Sundararajan, Goorha and Sanjay Malhotra (promoter through SRM Exploration). In this regard, it is axiomatic that the company does not have a mind of its own but rather acts through its Board of Directors. In the present case, Cals is trying to distance itself from the actions of its Directors and Promoters including the present Managing Director i.e. Sundararajan. It is absolutely beyond reason to believe that Cals was not aware of the actions of its own Directors and Promoters, who, as authorised signatories had signed the Account Charge Agreement on behalf of Cals. Further, the Extension Agreement was also signed by Chilikuri who was a Director of Cals at the time of execution of the said Agreement. The contentions of Cals to distance itself from the actions of the signatories to the aforementioned Agreements are nothing but an afterthought aimed solely at denying its own actions. Further, the actions of Cals have been in accordance with the terms of the aforementioned Agreements.

12. Cals has also stated in its reply that SEBI's persistent refusal to examine Sanjay Malhotra and to supply copies of his statement to Cals materially prejudices Cals' ability to defend itself. In this regard, I note that SEBI has produced a copy of the Credit Agreement signed by Honor as well as evidence of Sanjay Malhotra being the beneficial owner of Honor to Cals. Further, since SEBI has not recorded any statement of Sanjay Malhotra in relation to the proceedings arising from the SCN, the question of non-production of Sanjay Malhotra's statement to Cals does not arise. I am therefore of the opinion that no prejudice has been caused to Cals in this regard.

13. In its replies, Cals has submitted that Section 77 of the Companies Act applies only to shares and not to GDRs and SEBI is artificially applying the SEBI Act to the alleged violation. In this regard, I note that – i. As per section 77(2) of the Companies Act, 1956, “No public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company”. From the preceding paragraphs, it is clear that the Account Charge Agreement entered into between Cals and Banco form an integral part of the other Bi-partite agreement viz. Credit Agreement entered into between Honor and Banco. The arrangement resulting from the aforesaid Agreements allowed for Cals to effectively finance the purchase of its own shares since it deposited the proceeds of GDR subscription as collateral for the Dollar term facility provided by Banco to Honor. Such arrangement is specifically prohibited under Indian laws in view of Section 77(2) of the Companies Act.

ii. If Cals' submission that Section 77(2) of the Companies Act is limited only to shares (to the exclusion of GDRs) were to be accepted, it would imply that any company would be able to finance the purchase of its own shares through issue of GDRs in contravention of the aforesaid provision. In my view, since the underlying of the GDRs are equity shares and issue of GDRs would also result in an increase in capital of the company, the provisions of Section 77(2) of the Companies Act would clearly be attracted in any issue of GDRs.

iii. Cals has further submitted that SEBI is artificially applying SEBI Act to this alleged violation. In this regard, I note that in the matter of Gammon India Limited vs. SEBI (Order dated June 20, 2008), the Hon'ble SAT had observed that providing funds to entities by the company for the purpose of buying its own shares amounted to a violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as "PFUTP Regulations").

iv. I therefore, find full merit in the charge that through this mechanism, Cals has violated the PFUTP Regulations and the SEBI Act, Section 77(2) read with Section 77(4) of the Companies Act.

14.1 In its replies, Cals has contended that it had not submitted any false information regarding the initial subscribers to its GDR Issue. In this regard, I note that since Cals was aware of the Account Charge Agreement, it was aware that Honor was the sole subscriber to the GDR Issue as the Credit Agreement between Honor and Banco was an integral part of the Account Charge Agreement. I find from the Account Charge Agreement that Cals had deposited in its designated account with Banco an amount of US $200 million as security in respect of all the obligations of Honor under the Credit Agreement. In the information provided to BSE and SEBI, Cals had submitted a list of initial subscribers to its GDR Issue. It is pertinent to note that in the aforesaid list provided by Cals, the name of Honor was not mentioned. However, as stated before, Honor was the initial subscriber to the GDR Issue of Cals by virtue of the Credit Agreement and Account

Charge Agreement. Hence, Cals’ submission that Honor was not the initial subscriber to the GDR Issue is incorrect. In view of the same, I find that Cals had indeed provided false information in respect of the initial subscribers to its GDR Issue.

14.2 In its replies, Cals has denied that the transaction between Asia Texx and Cals was a 'related party transaction'. Cals has submitted that as per AS–18, related parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decision. Cals had no influence over Asia Texx at the time when the contract was entered into between them. Further, Cals has submitted that the transaction between Asia Texx and Cals was not structured to settle the outstanding liability of Honor to Banco using funds of Cals. In this regard, I note that – i. Under Clause 32 of the Listing Agreement, Cals was liable to disclose to the exchanges the related party transaction of US $92 million between Asia Texx and Cals. However, Cals failed to disclose the same to the exchanges.

ii. I note that Paragraph 3(a) to 3(e) of AS-18 defines the applicability of related party relationships. Paragraphs 3(c) to Paragraphs 3(e) of AS-18 reads as follows:

"3(c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual; (d) key management personnel and relatives of such personnel; and (e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise."

iii. From the above, it is clear that if one person (Deep Kumar, Director of Cals) has a significant influence or is responsible for directing the reporting enterprise (Cals) and the other party (Asia Texx) is an enterprise controlled by his relative (Gagan - Deep

Kumar’s son), such relationships would come under the ambit of related party relationships. On perusal of the Annual Report of Cals for the year 2008-2009, I find that it is Cals' admitted position that Deep Kumar, as director had significant influence over Cals at the time the Agreement with Asia Texx was signed. It is also not in dispute that Gagan, son of Deep Kumar was the beneficial owner of Asia Texx. In my view, Asia Texx was clearly an enterprise owned and significantly influenced by relative of the director and key management personnel of Cals viz. Deep Kumar and thus the transaction between Cals and Asia Texx clearly meets the definition of 'related party' as defined in AS-18 read with Clause 32 of the Listing Agreement. Cals was therefore required to disclose this 'related party transaction' but failed to do so. Instead such transaction was falsely portrayed as a normal arms length commercial transaction.

iv. It is, therefore, very clear that Cals has deliberately concealed material information and sought to mislead SEBI by failing to disclose such material 'related party transaction', as has been brought out in Paragraph 5 of the SCN.

14.3 Further, the 'related party transaction' has resulted in enriching the promoter (Gagan–son of Deep Kumar) who gained 25 million of GDRs at the expense of the company and thus at the expense of other investors. I note that by virtue of such transaction, Cals had effectively financed the purchase of its own shares by funding the purchase of GDRs by Gagan, which is in violation of the provisions of Section 77(2) read with Section 77(4) of the Companies Act. The abovementioned transaction was structured to further enable Honor (held by another promoter-Malhotra) to repay the loan to Banco. The entire transaction effectively amounted to siphoning of funds of Cals into the account of the promoters under the pretext of payment for machinery for setting up the ‘Refinery Project’. In this context, since Cals has raised the issue of jurisdiction, I am of the opinion that the issue of enriching its own promoters by a listed company through fraudulent means clearly falls in SEBI's jurisdiction.

15. Cals has claimed that the transaction in Asia Texx was at an arms length basis and that it could not pay the entire money to Asia Texx due to SEBI’s Interim Order barring Cals from raising money through further equity. I observe that the Agreement with Asia Texx was dated February 5, 2009 and that Cals was required to pay the entire amount of US $290 million to Asia Texx within 180 days of the Agreement i.e. by August 4, 2009. In this context, I note that SEBI’s Interim Order was dated September 21, 2011 i.e. more than two years later. In light of the same, I find that Cals' aforesaid claim is beyond any acceptable logic and cannot be accepted.

16. On careful consideration of the issues and replies of Cals, I find that the violations alleged against Cals stand fully established. In view of the same, I am of the considered opinion that Cals has violated Section 77(2) read with Section 77(4) of the Companies Act, 1956, Clause 32 of the Listing Agreement, SEBI Act read with the PFUTP Regulations. I note that the provisions of section 12A(a)–(c) of the SEBI Act read with regulations 3(b–(d) of the PFUTP Regulations, inter alia prohibit buying, selling or dealing in securities in a fraudulent manner; employment of any manipulative/deceptive device, scheme or artifice to defraud in connection with dealing in securities; engaging in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with dealing in securities. Further, regulations 4(1) and 4(2)(c), 4(2)(f), 4(2)(k), 4(2)(r) of the PFUTP Regulations, inter alia prohibit fraudulent and unfair trade practices in securities through various acts, omissions stated therein. In my view, any fraudulent or deceptive device, scheme, act, omission, etc. which has the potential to inter alia induce sale/purchase of securities of any company; influence investment decisions of investors in such company; or result in wrongful gain, etc. would be covered within the prohibition under the aforementioned provisions of law.

17. SEBI has been entrusted with the important mandate of protecting investors and safeguarding the integrity of the securities market. In this regard, necessary powers have been conferred upon it under the securities laws. It is, therefore, necessary that SEBI exercise these powers firmly and effectively to insulate the market and its investors from the fraudulent actions of any of the participants in the securities market, thereby fulfilling its legal mandate. A basic premise that underlines the integrity of securities market is that persons connected with securities market conform to standards of transparency, good governance and ethical behaviour prescribed in securities laws and do not resort to fraudulent activities. In this case, I find that Cals by employing fraudulent arrangement with regard to the subscription of the GDR Issue and thereafter misleading investors by making false announcements regarding successful subscription of GDRs and also failing to disclose ‘related party transaction’ and enriching its promoter at the cost of the other investors has clearly acted in a manner which is fraudulent and deceptive to the detriment of the interests of investors in the Indian securities market.

18. As noted above, the modus operandi adopted by Cals in conceiving the fraudulent arrangement of GDR issue to defraud investors and also facilitating the unjust enrichment of its promoter at the expense of investors has been fraught with mala fides at every stage of its execution. The consequences resulting from violations committed by Cals are of very grave nature and are prejudicial to the interests of investors in the securities market. In view of the same, I am of the view that stringent measures are warranted in the instant case for dealing with such violations. Accordingly, the measures must be commensurate with the gravity of the violations so that it would act as an effective deterrent.

Order –

19. In view of the foregoing, I, therefore, in exercise of the powers conferred upon me by virtue of section 19 read with section 11(4) and 11B of the SEBI Act and regulation 11(1) of the PFUTP Regulations, 2003, hereby direct Cals not to issue equity shares or any other instrument convertible into equity shares or any other security, for a period of ten years. 20. I note that vide the Interim Order dated September 21, 2011 (later confirmed through the Confirmatory Order on December 30, 2011), Cals was directed not to issue equity shares or any other instrument convertible into equity shares or alter their capital structure in any manner till further directions. In this context, I note that Cals has already undergone the prohibition imposed vide the Interim Order for a period of approximately two years. In view of this factual situation, it is clarified that the prohibition already undergone by Cals pursuant to the aforementioned SEBI Order shall be reduced while computing the period in respect of the prohibition imposed vide this order.

21. This Order shall come into force with immediate effect.

Place: Mumbai S. RAMAN Date: October 23, 2013 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA