Order in the matter of Taneja Aerospace and Aviation Limited – in respect of (1) Mr. Salil Taneja and (2) Mr. C. S. Kameswaran[SAT Appeal No.:261/2016]

WTM/RKA/EFD-DRA-II/12/2016 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under sections 11(4) and 11B of the SEBI Act, 1992 read with section 12A of Securities Contract (Regulation) Act, 1956 in the matter of Taneja Aerospace and Aviation Limited – in respect of (1) Mr. Salil Taneja and (2) Mr. C. S. Kameswaran.

1. Taneja Aerospace and Aviation Limited (TAAL) is a company incorporated under Companies Act, 1956. The shares of TAAL are listed on Bombay Stock Exchange Ltd. (BSE). TAAL is engaged in the business of aircraft sales, services, aircraft manufacturing, maintenance, airfield services, repair and overall facility for commercial aircrafts. TAAL Technologies Private Limited (TTPL) was incorporated as a private limited company in November 2000 and was engaged in the business of providing engineering and design services to its clients in aviation and aerospace sectors and also sectors like transport, energy and utilities. Both these companies had common promoters and directors. Mr. Salil Taneja and Mr. C. S. Kameswaran are Chairman and Managing Director, respectively of TAAL and they were the only shareholders of TTPL during relevant period. 2. Securities and Exchange Board of India (SEBI) issued a Show Cause Notice (SCN) dated 30th December, 2013 to Mr. Salil Taneja and Mr. C. S. Kameswaran in the following background:- i. TTPL was a group company of TAAL. On 29th October 2007, board of directors of TAAL had approved capital infusion of up to ₹5 crore into TTPL by subscribing to equity shares or by way of loans, deposits, advances or any other form convertible into equity shares of TTPL. During the period from 1st April 2007 to 27th June 2009, TAAL had infused ₹ 9.7019 crore in TTPL, in instalments, in the form of advance against share capital although approval was for infusion of only up to ₹ 5 crore in TTPL. Thus, there was no board of directors' approval for additional infusion of additional approx ₹4.7 crore during April 2007 to June 2009. It was only later on 30th July 2009 that the board of directors of TAAL approved investments up to ₹10 crore in the share capital of TTPL at a premium of ₹90 per share. ii. Despite infusing aforesaid amount, TAAL did not get any share in TTPL until the advance was converted into shares on 27th October, 2009 and in the interim period the monies infused by TAAL as mentioned above, remained with TTPL for a period ranging from four months to two and half years. Over 50 % of the advances remained with TTPL for over 1 year and over 90% of the advances

In the matter of Taneja Aerospace and Aviation Limited remained with TTPL for over 6 months. TAAL kept interest free money worth ₹ 9.7019 crore with TTPL for these periods and without indicating any intention to subscribe to the share capital of TTPL. The name of TTPL, for the outstanding advances of TAAL in TTPL, was not disclosed in the audited financial statements / annual accounts of TAAL for the FY2006-07 and FY2007-08. Until 27th October, 2009 such advance by TAAL was in substance an interest free loan by it to TTPL. iii. During the period when the aforesaid advance was given, the authorised as well as the issued share capital of TTPL was only ₹1 lac divided into 10,000 shares of ₹10 each. Thus, during the said period, TTPL was not authorised to issue additional share without increasing its authorised capital. Despite receipt of the said advance, TTPL did not increase its authorised share capital at any time during this period. It was only after the infusion of entire monies by TAAL, the board of directors of TTPL on 21st October 2009 and its shareholders on 22nd October 2009 approved the increase in its authorised share capital from ₹1 lac (divided into 10,000 shares of ₹10 each) to ₹101 lac (divided into 10.1lac shares of ₹10 each).

On 27th October 2009, the board of directors of TTPL approved the proposal to issue 10 lac equity shares ₹10 each with premium of ₹90 to TAAL. iv. The issue whether "Advance against Share Capital" would be refunded by TTPL to TAAL or it would be converted into share capital in future was decided by both the companies only on 30th July 2009 when board of directors of TAAL approved increased investments up to ₹10 crore in the share capital of TTPL and on 27th October 2009 when the board of directors of TTPL approved the issuance of 10 lac equity shares to TAAL. Hence, until October 2009, when board of directors and shareholders of TTPL increased its authorised share capital and board of directors of both the companies reached a common decision regarding conversion of the said advance into share capital, such advance was, in substance, an interest free loan by TAAL to TTPL. v. When TAAL gave aforesaid advances to TTPL, it did not have any stake in the business of TTPL which was a non-operational company with almost 'nil' net worth. Further, said advances did not result in any income stream for TAAL either through dividends/ profits of TTPL or otherwise except causing benefit to TTPL and its shareholders i.e. Mr. Salil Taneja and Mr. C. S. Kameswaran who owned TTPL.

Thus, Mr. Salil Taneja and Mr. C. S. Kameswaran used aforesaid money of shareholders of the listed company TAAL for their own personal benefits. vi. Pursuant to the approval of its board of directors dated 20th January 2009, TAAL had acquired the entire share capital of TTPL from Mr. C. S. Kameswaran and Mr. Salil Taneja on 19th March 2009 and 15th July 2009, respectively, for consideration of ₹ 50,000, each towards acquisition of 5,000 shares of TTPL from each of them.

Thus, as opposed to advance of ₹ 9.7019 crore by TAAL in TTPL, Mr. Salil Taneja and Mr. C. S. Kameswaran, had together infused only ₹1lac in TTPL since its incorporation, of which TTPL had already lost over ₹95,000 till 31st March 2007. Further, none of them infused any additional money in TTPL after 31st March 2007. The only beneficiary of such advance was TTPL and ultimately its shareholders i.e. Mr. Salil Taneja and Mr. C. S. Kameswaran, in spite of the fact that they had infused nothing in TTPL as compared to the infusion of ₹ 9.7019 crore by TAAL in TTPL. Had TTPL earned profit on the aforesaid advance, Mr. Salil Taneja and Mr. C. S. Kameswaran only would have enjoyed such profits because TAAL was nothing more than a lender of interest free loan and these two directors of TAAL were the only shareholders in TTPL. vii. During April 2007 - June 2009 TTPL had lost approximately ₹8.03 crore out of said ₹ 9.7019 crore. Further, TTPL's debtors also included bad debts of approximately ₹1.08 crore which were still to be written off until June 2009. Hence, after considering the said bad debts, TTPL had lost almost entire amount, i.e. over ₹9 crore, of the money advanced by TAAL till June 2009. As on 30th June 2009 TTPL had negative net worth of approx. ₹9.1 crore.

Hence, the Net Asset Value (NAV) of TTPL was approx. negative ₹9,100 per share as on 30th June 2009. Thus, TAAL had acquired the entire shares of TTPL (10,000 shares) at ₹10 per share in spite of such negative NAV and net worth of TTPL and had also paid ₹1 lac to Mr. Salil Taneja and Mr. C. S. Kameswaran, for acquiring TTPL. As a result of the said transactions, TAAL paid ₹1 lac to its own directors for acquiring net liabilities worth approx. ₹9.1 crore from them. viii. Mr. C. S. Kameswaran, who was an interested directors in the proposal of infusing up to ₹5 crore into TTPL by TAAL because of his shareholding in TTPL had put forth the proposal before the board of directors of TAAL in the meeting held on 29th October 2007. Further, Mr. Salil Taneja, who was also an interested director because of his shareholding in TTPL had put forth the proposal to board of directors of TAAL for acquisition of shares of TTPL by it as aforesaid in the meeting held on 20th January, 2009. The basis of valuing TTPL at ₹1 lac, was not discussed in the meeting held on 20th January, 2009. The names of Mr. Salil Taneja and Mr. C. S. Kameswaran were not disclosed to the board of directors in the meeting held on 20th January 2009. Neither did Mr. Salil Taneja and Mr. C. S. Kameswaran disclose their interest in TTPL to the board of directors of TAAL nor did they abstain from voting on the said proposals in spite of the fact that both of them were the ultimate beneficiaries of such interest free advances and acquisition of shares of TTPL by TAAL.

Mr. B.R. Taneja, father of Mr. Salil Taneja and one of the directors of TTPL also did not disclose his interest because of his son's shareholding in TTPL. Yet, the presence of these three directors was also considered for the purpose of arriving at the quorum for the proposals in the said board meetings in spite of their clear interest in the proposals. Hence, these three directors failed to ensure compliance with provisions of section 299 and section 300 of the Companies Act, 1956. ix. Mr. Salil Taneja and Mr. C. S. Kameswaran were key managerial persons managing the day-to-day affairs of TAAL in their capacity as Chairman and Managing Director, respectively, of TAAL. They were also members of the Finance Committee of board of TAAL. Being in such positions they were also instrumental in additional and unauthorised infusion of approx. ₹ 4.7 crore by TAAL into TTPL. Mr. Salil Taneja and Mr. C. S. Kameswaran in their capacity as members of the Finance Committee or Chairman and Managing Director, respectively, of TAAL were instrumental in proposing and approving the aforesaid infusion of ₹ 5 crore in TTPL, a company owned by them.

Further, misusing their powers as Chairman and Managing Director, respectively, in TAAL, they proposed and approved acquisition of TTPL by TAAL from themselves with an intent to safeguard themselves from losses and transferred their personal liabilities worth ₹9.1 crore to the public shareholders of TAAL. x. In the above context of the conversion of TAAL's advances against share capital, it has been further alleged that: (a) As on 30th June 2009 TTPL had net liability of approx. ₹9.1 crore of comprising of worth ₹60 lac and liability of ₹9.7019 crore from the advances received from TAAL. Until TTPL was taken over by TAAL on 15th July, 2009, Mr. Salil Taneja and Mr. C. S. Kameswaran were liable to infuse money to the tune of approx. ₹9.1 crore and then repay the entire advance of ₹ 9.7019 crore to TAAL i.e. lender of TTPL. (b) When on 15th July, 2009 TAAL became holding company of TTPL, by virtue of holding 100% shares in TTPL, the liability on account of net liabilities /negative reserves devolved upon TAAL and as such it became liable to infuse money in TTPL and repay itself the outstanding loans of ₹ 9.7019 crore.

(c) It would have been difficult for TAAL to recover its outstanding advances from TTPL until TAAL first capitalised TTPL for net asset deficit to the tune of approx. ₹9.1 crore and then repay itself the outstanding advances. To avoid this and also the write off of the said outstanding advances, TAAL decided to convert the advances into share capital of TTPL. xi. Following disclosures with respect to above were not made: (a) The significant decision of board of directors of TAAL taken in board meeting held on 30th July 2009 and or the outcome of its meeting was not disclosed to the shareholders of TAAL or on BSE.

(b) The net worth of TAAL was approx. ₹88 crore, ₹88 crore and ₹118 crore as at 30th June 2007, 31st March 2008 and 30th June 2009, respectively (during the financial years over which the said advances were infused in TTPL). However, TAAL neither disclosed the said advances to its shareholders nor made any such announcement on BSE. Hence, the board of directors of TAAL failed to apprise its shareholders of the fact that ₹ 9.7019 crore of TAAL were deployed for the personal benefits of Mr. Salil Taneja and Mr. C. S. Kameswaran. (c) The net worth of TAAL as on 30th June 2009 was approx. ₹118 crore. The acquisition of liabilities worth approx. ₹9.1 crore from its directors resulted in erosion of TAAL's net worth by approx. ₹9.1 crore. However, TAAL did not make any announcement with regard to acquisition of shares of TTPL from Chairman and Managing Director on 19th March 2009 and 15th July, 2009. (d) Pursuant to the aforesaid acquisitions of the shares, TTPL became wholly owned subsidiary of TAAL on 15th July 2009. It made announcement on BSE on 30th July 2009 that TTPL had become its wholly owned subsidiary. The fact that it acquired shares from its own Chairman and Managing Director and that TTPL was having net liability of approx. ₹9.1 crore at the time of the acquisitions was not disclosed by TAAL on BSE. xii. Subsequently, on 28th October 2009 (i.e. a day after allotment of shares of TTPL to TAAL), the board of directors of TAAL approved a draft scheme of arrangement ("the scheme") between TAAL and TTPL for merging TTPL into TAAL. The proposal in this regard along with the draft scheme, was put forth by Mr. Salil Taneja. The scheme was filed before the Hon'ble High Court of Madras in November 2009 and was approved by the Hon'ble High Court on 28th January 2010 with effect from 24th February 2010 and appointed date was 1st April 2008.

xiii. While implementing the scheme, the board of directors of TAAL re-valued its already held land by approx. ₹45 crore during Financial Year 2008-09. Subsequently, the board of directors utilised revaluation profits of approx. ₹47.5 crore (comprising of aforementioned revaluation profits of approx. ₹45 crore and opening balance of revaluation profits during FY 2008-09 of approx. ₹2.5 crore) for the Financial Years 2008-09 to FY 2010-11 in the following manner: Utilisation of Revaluation Reserves Particulars ₹ (in crore) Write off of Deficit of TTPL's Assets over Liabilities on Merger 9.12 Write off of TAAL 's Assets 19.39 Write off of TAAL's expenses 5.91

Total Write offs against revaluation reserves (A) 34.42

Transfer to General Reserves and P&L Account (B) 12.97 Total (A + B) 47.39 xiv. The land so re-valued was already owned and held by TAAL prior to the scheme and did not have any connection with the scheme of amalgamation or the amalgamated entity TTPL. Thus, the revaluation of land could have been done in the ordinary course of business, without including it in the draft scheme, in compliance with Accounting Standard (AS) 10, especially in light of the fact that such a revaluation exercise in normal course of business would not have required approvals from statutory bodies and regulators and could have been done only with requisite approvals of board of directors and the requisite approval of the shareholders, if required.

xv. The board of directors of TAAL, failed to ensure that the accounting proposals with respect to utilization of revaluation reserves are in compliance with the Generally Accepted Accounting Principles ("GAAP") (esp. AS 10 and Guidance Note 3). As per the GAAP (AS 10 and GN 3), the amount available in Revaluation Reserves cannot be transferred to General Reserve or cannot be considered as ordinary profits available for distribution until the fixed asset in question is retired or disposed off. In the instant case, the TAAL still owned the land which was revalued and the same land still appeared in its financial statements. xvi. The utilization of Revaluation Reserves for writing off the deficit arising on merger, for writing off company's assets and expenses and the transfer of Revaluation reserves to General Reserve, was inappropriate and not in accordance with GAAP in light of the facts that these revaluation profits were notional in nature and were still not realized by the company since the land which was revalued was still owned and held by the company.

xvii. The manner in which the scheme was accounted in the financial statements of TAAL was not in compliance with GAAP. xviii. In this regard, the auditors of TAAL had, inter alia had qualified in the Auditor's Report that TAAL had transferred ₹ 20,00,00,000/- from Revaluation Reserve to Profit and Loss Account. This amount had been utilised for prior year write offs/provisions amounting to ₹15,20,94,875/- and current period adjustments of ₹ 4,26.03.010/- and balance was carried over. Further, such treatment was not in accordance with generally accepted accounting principles and had effect of overstatement of profit for the period by ₹ 20,00,00,000/- xix. Thus, TAAL had proposed the accounting treatment (especially the accounting for revaluation of land and the manner of utilization of revaluation reserves) as a part of the scheme and its board of directors, while approving the draft scheme, failed to ensure that the accounting proposals with respect to utilization of revaluation reserves are in compliance with the GAAP (esp. AS 10 and Guidance Note 3). It appears that TAAL intended to utilize the revaluation reserves in a manner which is prohibited as per the GAAP (esp.

AS 10 and GN 3) and thus, presented an incorrect and rosy picture of its financial affairs to its stakeholders. xx. Further, though all the accounting treatments with respect to the scheme were given effect during the accounting period 'July 2009 – March 2010' (i.e. only after the approval of the scheme by the Hon'ble High Court on 28th January, 2010) but only the accounting treatment with respect to the revaluation of land and utilization of revaluation reserves to the extent of ₹ 20 crore was given effect during the accounting period ‘April 2008 - June 2009’ itself. The annual accounts for the said period were approved by board of directors on 5th December, 2009, i.e. even before the date of hearing of the scheme (i.e. 18th December, 2009) and the date of approval of the scheme (i.e. 28th January, 2010) by the Hon'ble High Court. Thus, such accounting treatment for the revaluation of land and utilization of revaluation reserves for the Financial Year ‘April 2008 - June 2009’ was given by TAAL in its ordinary course of business and not consequent to the scheme. xxi. On account of the aforementioned mis-utilization of the revaluation reserves in violation of the GAAP, TAAL wrote off approx. ₹34.42 crore against the notional revaluation profits, which, in the ordinary course of business, should have been written off against the profits available for distribution as per the GAAP.

Further, TAAL transferred the remaining balance of approx. ₹ 12.97 crore from the revaluation reserves to General Reserves and Profit & Loss Account though as per the GAAP (esp. AS 10 and GN 3), the amount available in revaluation reserves cannot be transferred to General Reserve until the Fixed Asset in question is retired or disposed off. The said transfer was made in spite of the fact that TAAL still owned the revalued land which was appearing in its financial statements. This resulted in over-statement of the profits available for distribution by approx. ₹ 47.40 crore. If the Revaluation Reserves had not been mis-utilized in the aforementioned manner, the balance in the General Reserves would have been 'Nil' instead of approx.₹12.44 crore and Profit & Loss Account balance would have been approx. negative ₹20.42 crore instead of approx. ₹14.53 crore as at the end of 31st March 2011. xxii. Hence, it appears that to hide the adverse impact of the merger with TTPL and aforementioned write offs of its assets and expenses on TAAL's profits available for distribution and on its financial statements, the company directly wrote off the deficit on merger as well as its assets and expenses against the notional revaluation profits (i.e. profits which are not freely available for distribution).

TAAL, thus, presented an incorrect and misleading picture of its financial affairs to its stakeholders. 3. As described in the SCN ' In this respect, it appears that the aforesaid entire exercise was carried out primarily with a purpose of hiding the losses on advances of ₹ 9.7019 crore made by TAAL to TTPL which ideally should have been borne by Mr. Salil Taneja and Mr. C. S. Kameswaran, who were the only two shareholders and owners of TTPL when the said losses were incurred by TTPL'. Further, Mr. Salil Taneja and Mr. C. S. Kameswaran, acting as Chairman and Managing Director of TAAL, respectively, were instrumental in proposing and approving all the aforementioned activities and have thus played an active role in the exercise. The SCN further states that -'It thus appears that the aforementioned acts of Mr. Salil Taneja and Mr. C. S. Kameswaran are prohibited under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations), in particular regulation 2(1)(c), regulation 3 and regulation 4(2)(e) of the said Regulations.

Further, the non disclosure and concealment of the facts noted in aforementioned paragraphs appear to be in violation of Clause 36 of the Listing Agreement which mandates disclosure of material information and price sensitive information relating to that of a company'. 4. In view of the same, the SCN called upon Mr. Salil Taneja and Mr. C. S. Kameswaran (the noticees) to show cause as to why suitable directions under sections 11(4), 11B of the SEBI Act, 1992 and under section 12A of Securities Contract (Regulation) Act, 1956, (SCRA) read with regulation 2(1)(c), regulation 3 and regulation 4 of the PFUTP Regulations including but not restricted to the following direction should not be issued against them: (i) Repayment of funds, to TAAL, by Mr. Salil Taneja and Mr. C. S. Kameswaran, that were misappropriated for personal benefits and equivalent to TTPL's net liabilities taken over by TAAL on account of TAAL's acquisition of TTPL's shares from Mr. Salil Taneja and Mr. C. S. Kameswaran, along with interest at the rate of 15% p.a. for the period from the date of acquisition of TTPL's shares by TAAL to the date of repayment, within a period of six months.

(ii) Debarring Mr. Salil Taneja & Mr. CS Kameswaran from accessing capital market and dealing in securities, directly or indirectly, except for the purpose of repayment, for a period of 5 years or the date until entire repayment amount (including interest) has been paid, whichever is later. 5. The noticees filed their replies to the SCN vide a common letter dated 24th February, 2014, 17th June, 2014 and 11th December, 2014. Opportunities for hearing were given to the noticees on 17th June, 2014, 27th November 2014 and 24th September 2015, when Mr. Kumar Desai, Advocate and others appeared on behalf of the noticees and made oral submissions on the lines of written replies on record. Vide their letter dated

14th October, 2015, the noticees filed their written submissions in the matter. The noticees have made inter alia following submissions: i. The noticees have denied all the allegations made in the SCN. ii. The SCN, in effect revolves around the following three basic sets of facts: a) Amounts aggregating to ₹ 9.7019 crore in several instalments/ tranches over a period of two years (from April 2007 to June 2009) were received by TTPL from TAAL as advance against share applications; b) Purchase of all shares of TTPL held by the two noticees (being TTPL's only shareholders) by TAAL at ₹ 10 per share (i.e. at the same price at which the two noticees had acquired the shares in 1999-2000). As a result of the aforesaid transaction, TTPL became a 100% subsidiary of TAAL; and c) Amalgamation of TTPL with TAAL under a scheme of amalgamation under sections 391-394 of the Companies Act (the Scheme) sanctioned by the Hon'ble High Court of Madras after the same had been approved inter alia by the Registrar of Companies, Chennai Official Liquidator appointed by the Hon'ble Madras High Court, Auditor appointed by Official Liquidator and the BSE under clause 24(f) of the Listing Agreement. iii.

Contracts for purchase and sale of shares of a private limited company i.e. TTPL are not 'securities' as defined under the SCRA and the SEBI Act. SEBI has no jurisdiction to enquire into any of the facts referred above, as they revolve around dealing of the shares of a private company i.e., TTPL. iv. At no point of time, the noticees have committed any act, expression, omission or concealment while 'dealing in securities' in order to induce another person to deal in securities listed or proposed to be listed on a recognised stock exchange as is envisaged under regulation 2(1)(c), 3 and 4 of the PFUTP Regulations. Any transaction that has taken place in this case is not even undertaken in fraudulent manner. The securities dealt with in this matter are that of a private limited company and not covered within the definition of fraud under PFUTP Regulations. As the term fraud has been defined in the PFUTP Regulations, SEBI cannot use the definition of fraud provided under any other enactment or in common law. v. There is no material in the SCN to support the allegation of violation of regulation 3 and 4(2)(e) of the PFUTP Regulations.

No specific allegations have been made in respect of contraventions under the regulations 3 and 4(2)(e). The SCN is thus vague and arbitrary. The SCN merely contains bald allegations without substantiating the same with any evidence whatsoever. The SCN merely relies upon incorrect conjectures and surmises.

vi. The Listing Agreement is a contract between a listed company and the stock exchange on which the securities of that company are listed. It would, therefore, follow that only a listed company could be held liable for breach of any clause of the Listing Agreement including clause 36 thereof. The SCN has not been issued to TAAL for having allegedly breached clause 36 of the Listing Agreement. In such circumstance the violation of clause 36 of Listing Agreement cannot be attributed to the noticees without charging TAAL for the same. vii. The alleged non – disclosure of certain information on BSE was not done as it was in the ordinary course of business and those information did not have any material bearing on the operation/performance of TAAL and were not price sensitive information, which did not warrant a disclosure under clause 36 of the Listing Agreement. viii. At the time of incorporation of TTPL, the initial subscribers to the Memorandum and Article of Association of TTPL were Mr. Salil Taneja and Mr. Arvind Nanda, who were also Director and Managing Director, respectively of TAAL.

They subscribed to 100 shares each. Consequent to the resignation of Mr. Arvind Nanda from TAAL, the share held by him TTPL were acquired by Mr. C. S. Kameswaran, the then Managing Director of TAAL. Consequent to Companies (Amendment) Act, 2000, TTPL was required to have a minimum paid up capital of ₹1,00,000. Mr. Salil Taneja and Mr. C. S. Kameswaran, who were the shareholder of TAAL therefore, acquired 4,900 equity shares each at which time they were also the Director and Managing Director of TAAL respectively. Thus, Mr. Salil Taneja and Mr. C. S. Kameswaran became the shareholder of TTPL only in their capacity of being the promoter / director of TAAL the parent company of TTPL with the bona fide intention of benefiting the shareholder of TAAL. ix. Further, TTPL has been disclosed as an associate of TAAL in the Annual Report of TAAL in the relevant period. Thus, clearly there was a link as being an associate company and the long term vision of benefitting the TAAL shareholders post the gestation period. Engineering Design Services is complimentary to the existing business of TAAL. Investments were made by TAAL as 'Advance against Share Capital ' to TTPL which were eventually converted into the share capital of TTPL.

The SCN has accepted the fact that the investments were 'Advances against Share Capital' of TTPL but based on erroneous understanding of law has alleged them to be interest free loans. x. With respect to the advances made by TAAL to TTPL, TAAL did not get any corresponding equity shares in TTPL until the advance was converted into share capital on 27th October, 2009 and that, in the interim period the money infused by TAAL over a period of time remained with TTPL as interest free loan, it has been submitted that under the Companies Act, 1956 there is no restriction on a private company in receiving advances towards the share capital. Further, Companies Act does not mandate a private company to complete the allotment within any stipulated time after receipt of advances towards share capital. xi. Further, authorised capital can be altered by obtaining shareholders approval in terms of section 94 of the Companies Act. The law does not prohibit a private company from receiving an advance for the issuance of shares. Any compliance in respect of issuance of shares, not prior to receipt of the advance for the issuance of shares.

Eventually the shares were subscribed to at a premium on 27th October, 2009. However, prior to that, TAAL acquired the shares of the then shareholders of TTPL at face value without receiving any dividends from TTPL. Thus, there was no gain to the directors either by way of any alleged interest free advance or by acquisition of the shares. xii. In terms of section 299 of the Companies Act, 1956 a general notice in the form of prescribed under Form 24AA of the Companies General Rules and Forms, 1956 was given every year by “interested directors” which was noted in a meeting of the board of directors of TAAL dated 28th June, 2007 and 30th April, 2008 and inter alia contained disclosure of directorship/shareholding in TTPL. The fact that the noticees were “interested directors” was clearly known to the board of directors of TAAL. Further, the resolution for proposal of infusing funds into TTPL was considered business decision approved by a full quorum of Directors of TAAL. The votes of the non interested directors were also sufficient to validly pass the aforesaid resolution. When the said proposal was put to vote, the noticees abstained from voting.

In fact, there is nothing on record to show that the noticees voted on the proposal of infusing funds into TTPL. xiii. Further, since the Finance Committee had authorised further investment of an amount not exceeding ₹ 10 crore which was noted, approved and ratified by the board of directors on 31st October, 2008, TAAL had adequate authority for the additional investment of ₹ 4.7 crore. Such ratification is valid as has been observed by Hon'ble Supreme Court in the matter of Maharashtra State Mining Corporation vs. Sunil AIR 2006 SC 1923. xiv. With respect to the allegation that during the period from April 2007 to June 2009, TTPL made a loss of ₹ 8.03 crore. On inclusion of bad debts of about ₹1.08 crore, the aggregate loss was over ₹ 9 crore. Such instances are not uncommon in the life cycle of an Engineering Design Service Business. However, the sales of TTPL have ground from ₹32.16 lac for period April 2007 – June 2008 to ₹1995.73 Lac in 2013. Initial Investment in such venture is high and gestation period is also quite high. However, the investment has been justified as the Engineering Design Services business has been performing quite well and business is now a valuable asset of TAAL.

xv. After merger of TTPL with TAAL, there had been significant contribution of the erstwhile business of TTPL to the business of TAAL. TAAL has now become a global company with two locations in India and extensive presence in Europe and North America. For the Financial Year 2014-15, the profit before tax of the erstwhile business of TTPL was ₹54.77 Lac and the profit after tax was ₹ 31.38 Lac. The net worth of the erstwhile business of TTPL on 31st March, 2015 was ₹ 2.44 crore. xvi. TTPL is limited liability company and the liability of its members / shareholders is limited to contribution to the assets of TTPL up to the face value of shares held by them. Therefore, even if liability of TTPL exceeds its assets, the noticees’ liability was limited to 10,000 fully paid up shares of ₹ 10 each of TTPL aggregating to ₹ 1,00,000/-.Therefore, the interference drawn in the SCN about the alleged transfer of the noticees personal liabilities of approximately ₹9.1 Crore to the public shareholders of TAAL is completely unfound. TTPL was a valuable asset and, therefore, the inference should be that of transfer of assets rather than transfer of liabilities.

There is neither description nor any evidence indicated in the SCN as to how the advance was used for personal benefits of noticees. The SCN is vague in this regard and is based on wrong understanding. There was no personal benefit at all to the noticees from the said investment of TAAL. The noticees had held the shares of TTPL for over 8 years and had not received dividend during the said period. Subsequently they had sold their shares in TTPL to TAAL and on a going concern basis at the price at which they had acquired such shares of TTPL. The noticees had not gained anything from their holding in TTPL. xvii. On the one hand, the SCN alleges that it was the obligation of the noticees to infuse approx. ₹9.1 crore in TTPL and repay ₹ 9.7019 crore to TAAL on other it has been alleged that when on 15th July, 2009 TAAL became holding company of TTPL, the liability on account of net liabilities /negative reserves devolved upon TAAL and as such it became liable to infuse money in TTPL and repay itself the outstanding loans of ₹ 9.7019 crore. The SCN is contradictory, vague and is based on conjectures. xviii.

Further, such transactions were undertaken by the board of directors of TAAL after due consideration and are commercial decisions in line with the long term vision of the board of directors of TAAL. The transaction were based on well informed business decisions which were taken by the board of directors in the best interest of TAAL and its shareholders. The principle of non-interference by courts/regulators with the business decision taken by directors of a company is well established.

xix. The noticees have undertaken no activities that may be construed as fraudulent and have diligently adhered to their duties as directors of TAAL including being the directors of associate company i.e. TTPL, assisting TAAL with its operations (including that of the TTPL as a part of TAAL) and helping it in its growth. In this regard, all the noticees' actions have been aimed at ensuring enhancement of value of the shareholders of TAAL to whom they are responsible. At no point of time have the noticees intended to benefit or avoid personal loss at the cost of the shareholders of TAAL. xx. The accounting treatment followed by TAAL for the said merger was in accordance with the accounting treatment prescribed in clause 6 of the Scheme. As per section 211(3B) of the Companies Act, where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in their profit and loss account and balance sheet (a) the deviation from the accounting standards; (b) the reason for such deviation; and (c) the financial effect, if any, arising due to such deviation.

The statutory auditor had audited the books of TAAL and qualified their report in respect of any deviation from the Accounting Standards, which was even published in the annual reports provided to all the shareholders and subsequently approved the same in a general meeting. Further, such accounting practice as has been followed by TAAL and as prescribed in clause 6 of the Scheme is a market practice, which have been followed by various other companies as well. xxi. The fact that the merger was done following the due process of law is undeniable. On 28th October, 2009, the board of directors approved a draft Scheme of arrangement between TAAL and TTPL which was approved by the High Court on 28th January, 2010. The effective date of the merger was 24th February, 2010 and the appointed date was 01st April, 2008. For the preparation of the financial statement, recognition and disclosure requirement as laid down under the Companies Act, Accounting Standards and any other mandatory guidance notes or other specific regulations is followed to the extent possible. There were no specific observations by the statutory auditor in regard to the non compliance of Accounting Standards.

Further, as TAAL has appropriately disclosed the revaluation, there is no non compliance with AS 10. With regards the guidance note on treatment of reserve created on revaluation of fixed assets (“GN3”), it cannot be absolutely applied to the revaluation of land as it is not a standalone revaluation done in isolation. In any event, SEBI has no jurisdiction in respect of specifying adherence to a specific accounting standard. xxii. In respect to the merger the following was specifically disclosed: a) Disclosure prior to the meeting of the board of directors of TAAL in respect of the proposed Scheme;

b) Disclosure regarding the outcome of the meeting of the board of directors of TAAL in respect of the proposed Scheme; and c) Advertisement of petition in newspaper informing all persons desirous of supporting or opposing the Scheme regarding the action to be undertaken by them. xxiii. The shareholders including the complainant (who is also a shareholder), other stakeholders, creditors had a right to object to any aspect of the said Scheme while ROC, the Regional Director, Ministry of Company Affairs, BSE etc. were required to give their observations in respect of all aspect of the said Scheme including the revaluation and other financial aspects. However, no objection was raised by any party and other shareholder of TAAL. Subsequently, the Hon'ble High Court was pleased to approve the said Scheme on 28th January, 2010. Even the audited accounts for fifteen month period ended on 30th June, 2009 were approved and adopted by the shareholders of TAAL without any objection on 31th December, 2009. xxiv. In view of the above aspects of the Scheme including revaluation of land was undertaken in accordance with the Scheme, which had not been questioned by the shareholders nor any of the regulators including the ROC, the Regional Director, Ministry of Company Affairs, BSE and /or the Hon'ble High Court.

Now SEBI by its actions as suggested in the SCN, is seeking to go behind the order of the Hon'ble High Court by raising questions in regard to the Scheme sanctioned by the Hon'ble High Court. xxv. The proceedings appear to have been undertaken as a result of the complaint filed by one shareholder of TAAL who has made multiple and baseless allegations against TAAL since two years; to multiple agencies including Registrar of Companies (RoC). After due examination of the complaint filed by the complainant, the RoC had in a letter dated May 30, 2013 informed the complainant not to indulge in unhealthy practice and not to exceed his right beyond the scope of the Companies Act. The same individual has written to SEBI which has now formed the basis for this inquiry. Assuming whilst denying that the allegations made in the SCN is at the behest of an isolated shareholder are true, the same could be at best considered as a violation under the provisions of the Companies Act,1956. xxvi. TAAL has always been in compliance of the requirement of appointing an adequate number of independent directors on the board of directors.

In this regard, Mr. S. K. Newlay an independent director was a member of the Finance Committee constituted by the board of directors and was a part of the meeting of the finance committee of TAAL in which the decision of investment in TTPL was taken.

xxvii. Debarring the noticee from accessing the capital markets and dealing in securities would adversely impact the shareholders of TAAL. The SCN is based upon the mis-appreciation of law as the liabilities of a private limited company has been equated and held to be the liabilities of the noticees, which in fact and law are incorrect. Since the present matter is not of misappropriation of funds or personal benefit, any order for repayment of funds by the noticees to TAAL should not be passed. 6. I have carefully considered the SCN, the replies/submissions of the noticees and the relevant material available on record. Before dealing with the charges against the noticees and their submissions, I deem it necessary to refer to the provisions of the PFUTP Regulations which are alleged to have been violated by the noticees. The said provisions are reproduced hereinafter: PFUTP REGULATIONS. Definition of “fraud” – Regulation 2(1)(c). (c)“fraud” includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include— (1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; (2) a suggestion as to a fact which is not true by one who does not believe it to be true; (3) an active concealment of a fact by a person having knowledge or belief of the fact; (4) a promise made without any intention of performing it; (5) a representation made in a reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent; (7) deceptive behaviour by a person depriving another of informed consent or full participation; (8) a false statement made without reasonable ground for believing it to be true; (9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price.

And “fraudulent” shall be construed accordingly; …………………………………………………………………………………..” “3. Prohibition of certain dealings in securities No person shall directly or indirectly— (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under”.

4. Prohibition of manipulative, fraudulent and unfair trade practices “(1)........................................................................................................................... (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- (e) any act or omission amounting to manipulation of the price of a security;.....” Listing Agreement Clause 36. "Apart from complying with all specific requirements as above, the issuer will intimate to the Stock Exchanges, where the company is listed immediately of events such as strikes, lock outs, closure on account of power cuts, etc. and all events which will have a bearing on the time of occurrence of the event and subsequently after the cessation of the event in order to enable the security holders and the public to appraise the position of the issuer and to avoid the establishment of a false market in its securities." 7. The noticees have contended that the basis of charge in the SCN is the dealing in shares of TTPL (a private unlisted company) by TAAL a listed company.

According to them the shares of the private unlisted company are outside jurisdiction of SEBI to enquire into or pass any directions in respect of the violations alleged in the SCN. It has been further contended that by virtue of definition of a 'private company' under section 3(1)(iii) of the Companies Act, 1956, TTPL was a private unlisted company having initially a minimum share capital of 1 lac and it had restrictions on the right to transfer its shares. Thus, its shares were not marketable so as to be covered within the definition of 'securities' under the SCRA and SEBI Act. In this regard, I note that the allegation against the noticees in the SCN is that they used their position in TAAL, which is a public listed company, for their personal benefit and to avoid their personal loss in TTPL by transferring an amount of ₹ 9.7019 crore from TAAL to TTPL, a company owned by them. I, therefore, find that the basic issue to be decided in the present proceedings is whether the noticees used a plan, device or artifice to fraudulently gain or avoid their personal loss at the cost of interest of shareholders of TAAL, which is a public listed company.

8. Section 11(1) of the SEBI Act casts the duty on SEBI to protect the interests of the investors, promote development of and regulate the securities market, by such 'measures' as it thinks fit. Apart from this plenary power, section 11(2) of the SEBI Act enumerates illustrative list of measures that may be provided for by SEBI in order to achieve its objective. One of the measures enumerated in 11(2)(e) is "prohibiting fraudulent and unfair trade practices relating to securities markets". The word 'measure' has not been defined or explained under the SEBI Act. It is well settled position that this word has to be understood in the sense in which it is generally understood in the context of the powers conferred upon the concerned authority. According to Corpus Juris Secundum, 'measure ' means- 'anything desired to be done with a view to the accomplishment of a purpose, a plan or course of action intended to obtain some object, any course of action proposed or adopted by the Government'. Measure is also understood 'as a means to an end'. From the provisions of section 11, it is clear that the purpose of section 11(2)(e) of the SEBI Act is to prohibit all fraudulent and unfair trade practices relating to the securities market and the Board may take any 'measures' in order to achieve this purpose.

9. On careful reading of the above provisions of the SEBI Act, I note that the only circumference around SEBI’s powers under section 11 and 11B is the duty to protect the interest of investors and promotion/ regulation of the securities market as mandated in SEBI Act itself. To this end, the 'measures' and the directions under section 11 and 11B of the SEBI Act can be taken / issued for prohibiting the fraudulent and unfair trade practices relating to securities market. From the scheme of the SEBI Act it is very clear that the provisions of section 11 and 11B are not limited as sought to be contended by the noticees. If, on facts, it is established that the noticees employed any fraudulent device, artifice for their personal benefits or to the detriment of a listed company and its shareholders the acts and omissions in that regard would definitely be covered under the jurisdiction of SEBI under section 11, and 11B of the SEBI Act. 10. Another preliminary contention of the noticees is that in order to fall in the definition of 'fraud' under regulation 2(1)(c) of the PFUTP Regulations one should deal in securities in order to induce another person or his agent to deal in securities.

I note that the definition of “fraud” in regulation 2(1)(c) is an inclusive one. It is inclusive with respect to act, expression, omission or concealment committed by any person whether in deceitful manner or not, while dealing in securities in order to induce another person. The definition is also inclusive with respect to knowing misrepresentation, concealment of material fact, suggestion to an untrue fact, active concealment of fact with knowledge, promise without intention to perform, reckless and careless representations, deceptive behaviour, false statement, etc. as listed in points (1) to (8) of regulation 2(1)(c). The activities listed in regulation 2(1)(c) (1) to (8) are not connected or related with dealing in securities by a person to induce another person to deal in securities as contended by the noticees. In my view, the acts or omissions to divert funds of the listed company to the benefit of the directors or to cover their personal losses would be covered in the definition and such act, omissions could be construed as fraudulent if found so on merits. 11. Regulation 3 of the PFUTP Regulations prohibit employment of any ‘device’, ‘scheme’ or ‘artifice’ to defraud in connection with dealing in securities”; and 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”.

The words ‘device’, ‘scheme’ or ‘artifice’ have not been defined in the SEBI Act or in the PFUTP Regulations. According to the Black’s Law Dictionary,- “device” means (a) an invention or contrivance; any result of design; (b) a scheme to trick or deceive; a stratagem or artifice, as in the law relating to fraud.

“scheme” means(a) a systemic plan; a connected or orderly arrangement, especially of related concepts; (b) an artful plot or plan, usually to deceive others or a scheme to defraud creditors. “artifice” means a clever plan or idea, especially one intended to deceive. 12. In my view, the acts or omissions to divert funds of the listed company to the benefit of the directors or to cover their personal losses would be covered in the definition and such act, omissions could be construed as fraudulent would be covered within the scope of the expressions 'device' or 'artifice' or 'scheme'. The words in connection with dealing in securities” in regulation 3 of the PFUTP Regulations do not signify that the person employing the device and engaging in act, practice, etc. should actually buy or sell securities. In my view, any fraudulent or deceptive device, scheme, act, practice which has the potential to induce sale or purchase of securities of the listed company or to influence the investment decisions of the investors in such securities would be covered in the prohibitions of regulation 3 of the PFUTP Regulations.

I note that indulging in any fraudulent or unfair trade practice in securities is prohibited in regulation 4(1). In terms of regulation 4(2) dealing is securities shall be deemed to be fraudulent or unfair trade practice if it involves fraud. Regulation 4(2) further provides inclusive list of certain acts which do not necessarily require buying, selling or dealing in securities so as to be covered in the prohibited activities in regulation 4. I, therefore, do not agree with the contentions of the noticees in this regard. However, it is noted that the specific charge in this regard in SCN is violation of regulation 4(2)(e) which is separately dealt in the later part of this order. 13. The noticees have also contended that the Listing Agreement is a contract between a listed company and the stock exchange on which the securities of that company are listed. In such circumstances the noticees cannot be charged with violation of clause 36 of the Listing Agreement without charging the company i.e. TAAL. In this regard, that in terms of section 21 of the SCRA, the liability to comply with the conditions of Listing Agreement is cast upon the person on whose applications the securities are listed on the recognized stock exchange.

It is matter of common knowledge that securities of a company are listed on the recognized stock exchange on the application made by the company. Thus, the obligations under the Listing Agreement are primarily on the listed company. In this case, therefore, if the relevant decisions of board of directors contained price sensitive information contemplated in clause 36 of the Listing Agreement, the disclosures should have been made by TAAL in terms of said clause. 14. It is relevant to mention that a company, being a legal person having separate and independent existence than its shareholders, acts through its board of directors who individually and collectively hold the position of trust and have fiduciary duties towards the company, the shareholders and other stakeholders. I note that, in case of Managing Director, courts have usually held that he is, prima facie, deemed to be in charge and responsible for the conduct of business and management of the company and, therefore, liable for defaults.{Garda Chemical Pvt Ltd vs. R. Parthasarthy, Asst. Collector Central Excise [1984] 2 ECC 384 [Bom]}.

In this case, Mr. Salil Taneja and Mr. C. S. Kameswaran were Chairman and Managing Director, respectively of TAAL. They both were actively involved in all the decisions taken in TAAL and had proposed relevant resolutions. Therefore, they cannot escape liability for the omissions of TAAL if established in this case. However, while alleging vicarious liabilities on the directors for such violations, the company should also be proceeded with for its defaults (U.P. Pollution Control Board vs. Modi Distillary AIR 1998 SC 1128). In this case, no SCN has been issued to TAAL for the alleged violation of cause 36 of the Listing Agreement. Further, though non compliance of clause 36 has been alleged, there is no charged against the noticees for the purpose of directions contemplated under the SCN. 15. The noticees have further contended that SEBI cannot adjudicate upon any non compliance of section 299, 300 and 391-394 of the Companies Act, 1956 as they are not delegated to it under section 55A thereof. In this regard, I note that the SCN has though alleged non compliance of section 299 and 300 of the Companies Act, 1956 by noticees, it has not charged the noticees for violation of these sections for the purpose of directions contemplated in the SCN.

The said non-compliance has been mentioned in the SCN as a matter of sequence of circumstances so as to indicate alleged intention of the noticees. Further, the SCN has not charged the noticees for violations of 391-394 of the Companies Act, 1956 while dealing with scheme approved by Hon'ble High Court of Madras. 16. Having dealt with the preliminary objections of the noticees, I now proceed to deal with the merit of the case. I have carefully considered the SCN, replies and submissions of the noticees and materials available on record. In this case, the noticees have been charged to have indulged in fraudulent activities prohibited under the PFUTP Regulations. The noticees have not disputed the transactions described in the SCN. They have contended that TAAL had taken a business decision to diversify the company into Design Engineering Services through TTPL. Since inception there was a link between TAAL and TTPL which was to benefit TAAL and its shareholders. TTPL was considered as the Engineering Division Service division and the same was complimentary to the existing business of TAAL.

The investments of TAAL in TTPL were 'Advances against Share Capital' of TTPL and the same were eventually converted into equity shares capital of TTPL in accordance with law. SEBI cannot question the business decisions taken by the board of directors. 17. In this case, it is admitted position that TAAL infused ₹ 9.7019 crore in TTPL in instalments over a period from 1st April, 2007 to 27th June 2009 in the form of 'Advance against Share Capital'. Mr. Salil Taneja and Mr. C. S. Kameswaran were Chairman and Managing Director, respectively of TAAL during this period and were the sole shareholders of TTPL. TAAL had purchased the shareholding of these noticees in TTPL on 19th March 2009 and 15th July 2009. Consequently, TTPL had become wholly owned subsidiary of TAAL with effect from 15th July, 2009. 18. It is also admitted fact that the board of directors of TAAL had passed a resolution on 29th October 2007 and decided to diversify into Design Engineering Services through TTPL and make investments in it, pursuant to section 372A of the Companies Act, 1956, of an amount of ₹5 crore by subscribing to equity shares or by loan, deposit, etc. or in any other convertible securities of TTPL.

I note from the said resolution that, on the same day, the board of directors of TAAL had also passed resolution and decided 'to acquire the entire or part of equity share capital of TTPL from its existing promoters'. Thus, it is clear that TAAL had on 29th October 2007 itself decided to infuse funds to the tune of ₹5 crore to subscribe to share capital of TTPL and to acquire its entire shareholding. It is further noted that TTPL had disclosed such advance as 'Advance Subscription in Share Capital' in its Annual Report /Financial Statements for Financial Years 2007-2008 and 2008 -2009. From these facts and circumstances, it is inferred that both the companies had understanding for subscription of shares of TTPL by TAAL against aforesaid 'Advance against Share Capital' since October 2007. 19. It is also admitted fact that on 30th July, 2009 the board of directors of TAAL had approved total investment of ₹10 crore in the TTPL. The noticees have demonstrated that the Finance Committee of board of directors of TAAL had, in its meeting held on 17th October 2008, approved investment not exceeding ₹10 crore by subscribing to inter alia equity shares of TTPL.

Further, the proceedings of Finance Committee meeting held on 17th October 2008 was placed before the board of directors of TAAL in its meeting held on 31st October 2008 and the board of directors had taken note of it and continued the investment in TTPL for additional amounts against 'Advance against Share Capital'. As held by Hon'ble Supreme Court in the matter of Maharashtra State Mining Corporation v. Sunil AIR 2006 SC 1936 a company can subsequently ratify even an invalid act and such subsequent ratification of an act is equivalent to a prior authority to perform such act. In this case, the total amount of ₹ 9.7019 crore towards 'Advance against Share Capital' was given to TTPL as per decision of board of directors of TAAL taken on 29th October 2007, its decision dated 17th/31st October 2008 and approval/ratification dated 30th July 2009. I, therefore, find that no fault can be found about authority of TAAL to increase the amount of investment and make investments beyond the limit approved on 29th October 2007. 20. It is also undisputed fact that TTPL was not authorised to issue additional shares when the aforesaid amount of ₹ 9.7019 crore was invested by TAAL in instalments from April 2007 to June 2009. Later, on 21st/22nd October, 2009, TTPL had increased its authorised share capital.

Consequently, the allotment of shares was made by TTPL to TAAL on 27th October 2009 on which date TTPL had authority to issue additional shares. Thus, the allotment of shares against the said advance was made by TTPL after around 4 months from the last instalment of advance. In this regard, I note that no time line has been prescribed by law for a private limited company to make allotment against advance against its share capital. Legally, the investee company should have authority to issue additional shares at the time of allotment of shares. I have perused the judgment of ITAT Pune bench in the matter of Sharad Holding Leasing P Ltd. V. Asst. Commissioner of IT (MANU/IP/5020/2004) relied upon the noticees in this regard. I note that in Sharad Holding case, the ITAL was deciding the appeal arising from an order of the Commissioner of Income Tax (CIT) wherein learned CIT had found that 'the amount shown to be received in excess of authorised share capital would automatically cease to be share application money" and had held such investment as loan. Deciding the appeal, ITAT rejected the finding/basis of CIT and held that such investment was not loan.

Taking into account the positions held in that case, I am of the view that in order to see the character of transaction in the present case also the purpose of receipt of money need to be seen. If the initial character of money is accepted as towards share capital, the transaction cannot be given colour of loan. I find that to this extent, the facts of present case are similar to that of Sharad Holding case relied upon by the noticees. In the present case, the SCN has, at several places, accepted the investment as "Advance against Share Capital". It is matter of common knowledge that a loan is normally given at the instance of the borrower and it is for the benefit of the borrower. In this case, it has been established on preponderance of probability that the 'Advance against Share Capital' was for TAAL's diversification into Design Engineering Services through TTPL and against the said advance TTPL had allotted its equity shares to TAAL in October 2009.

21. The noticees have submitted that aforesaid fund infusion by TAAL in TTPL was a well informed business decision taken by board of directors of TAAL in the best interests of the company and the same cannot be questioned as sought to be done in the SCN. The noticees have also claimed that after merger of TTPL with TAAL, there had been significant contribution of the erstwhile business of TTPL to the business of TAAL. In this regard, the noticees have cited judgement of Hon'ble High Court of Kerala in the matter of Cochin Malabar Estate and Industries Ltd. and Anr. vs. P. V. Abdul Khader and Anr, 203(2) KLJ1 wherein it has inter alia been held that "... The judges are ill -equipped to make business judgements. The Court cannot as a rule adjudicate upon the commercial judgement of board of directors...........Even a commercial misjudgement would not amount to oppression or mismanagement. The board of directors may err, every error cannot be a ground for action and the company court is not correctional court for all errors....." They have also relied upon following observations of Hon'ble Securities Appellate Tribunal ( SAT) in the matter of D-Link (India) Ltd. V SEBI [2008] 85 SCL 385 (SAT): "the company and its board of directors are best judges of the interest of their shareholders and it was primarily a business decision which the company took and neither the Board nor we can substitute our own views for theirs..... This is not a matter which affects the securities market.

The Board is primarily a market regulator and its duty is to ensure that the market remains a safe place for the investors to invest. It cannot interfere with the business decisions taken by the company so long as they do not prejudicially affect the securities market" 22. From, the above judgements, I note that business decisions of board of directors normally cannot be found fault by regulator unless such decision is found fraudulent or it affects integrity of securities market. In this case, TTPL was, at relevant time, an associate/group company of TAAL and it later became its 100% subsidiary and ultimately merged in TAAL. Admittedly, TAAL was in business of Maintenance Repair and Overhaul of Commercial Aircraft and TTPL was in business of Design Engineering Services. Thus, TTPL's business was complementary to TAAL's main business. From the minutes of board meeting of TAAL held on 29th October 2007 which read: "towards this end, the Company has already formed a company, TAAL Technologies Limited which has already recruited a Chief Executive Officer and has started building operations" it is noted that board of directors of TAAL had decided to venture into business of Design Engineering Services through TTPL.

In my opinion, to accomplish this purpose, the genuine possible option available to board of directors of a company would be either to start a new company/ subsidiary and make investment in it or to do said business through its already existing associate/group company. Immediate profitability of such subsidiary/ associate/group company is not sine qua non for starting a business venture through it. However, if the said business decision of board of directors of TAAL and consequent acts such as - infusion of funds of TAAL in TTPL, subsequent sale of 100% shares of TTPL by noticees to TAAL and allotment of shares by TTPL to TAAL against aforesaid advance, though permitted by law, are found to be part of any device or plan of noticees for their personal gain or avoidance of personal losses at the cost of or to the detriment of TAAL and its shareholders, the same can be questioned by SEBI. 23. In this connection, it has been inter alia alleged in the SCN that TAAL's money to the tune of ₹ 9.7019 crore was deployed for the personal benefit of the noticees. Further, the noticees, misusing their powers as Chairman and Managing Director of TAAL, proposed and approved acquisition of 100% stake of TTPL from themselves with intent to safeguard themselves from the losses and net liabilities of approx. ₹9.1 crore and, thus, transferred their personal liabilities to that extent to the public shareholders of TAAL.

In order to deal with allegations in this regard the facts and circumstances needs to be considered in totality and charge has to be established on higher degree of probability. 24. In the present case, it is undisputed fact that out of its paid up share capital of ₹1 lac, TTPL had already lost over ₹95,000 till 31st March 2007 i.e. before TAAL started making investments in it. I note that the noticees were the sole shareholders holding 5,000 shares of ₹10 each of TTPL till 19th March, 2009 when Mr. C.S. Kameswaran had sold his shares in TTPL to TAAL. Thus, by virtue of such purchase of shares,

TAAL became a shareholder of TTPL on March 19, 2009. I note that at the relevant times when decisions to give 'Advance against Share Capital" of TTPL was taken and investments were made as aforesaid, TTPL was a non -operational company. Till 19th March, 2009 only the noticees could have interests in profits, if any, earned by TTPL on account of business. TTPL had not made any profits during this period. In fact, during ‘April 2007 - June 2009’ when TAAL was making investments as aforesaid, TTPL was making losses and it had lost approximately ₹8.03 crores out of approximately ₹9.7019 crores infused by TAAL and its net worth had become negative to the extent of over ₹ 9.1 crores till June 2009. But TAAL continued making additional investments in TTPL when it was making losses and later in the meeting of board of directors of TAAL on 30th July, 2009, wherein the noticees had participated, the additional investment was ratified. By virtue of their shareholding in TTPL as discussed above, the noticees were concerned and interested in the arrangement of investment by TAAL in TTPL and acquisition of noticees shares in TTPL by TAAL as proposed by them in relevant board meetings.

It has been alleged in the SCN that being interested directors the noticees failed to disclose their interest in TTPL to the board of directors of TAAL in board meetings dated 29th October 2007 and 20th January 2009 in terms of section 299 of the Companies Act, 1956 nor did they abstain from voting on the respective proposals as required under section 300 of the Companies Act, 1956. Relying upon the copies of Form 24AA filed by them on 31st march 2007 and 31st March 2008 under section 299, the noticees have contended that they had declared their interest in TTPL to TAAL in the said board meetings. I note that in terms of section 299(2)(a) of the Companies Act, a general notice given by a director in Form 24AA is deemed sufficient disclosure of interest of the director. From the copies of said Forms 24AA it is noted that the noticees had disclosed the nature of their concern or interest in TTPL by general notice and the same was sufficient compliance of section 299 of the Companies Act, 1956. It has been alleged in the SCN that the names of the noticees was not disclosed to the board of directors in the board meeting held on 20th January 2009. It is noted that one of the directors, other than the noticees, is father of one of the noticees.

The noticees are Chairman and Managing Director of TAAL, respectively. They had been regularly attending the board meetings and meetings of Finance Committee along with other directors. Hence, it can reasonably be presumed that the board of directors of TAAL was aware of names of the noticees. 25. As regards, compliance of section 300 of the Companies Act, 1956, the noticees have claimed that they had not voted or taken part in the discussions at board of directors meetings. However, they have failed to give any evidence in support of this claim. I, therefore, find that the noticees have failed to prove that they did not vote on the said meetings as claimed by them. I further note that section 300 not only prohibits interested director from voting but also from taking part in discussions on a contract or arrangement with a company wherein he has concern or interest. From the minutes of relevant board meetings it is noted that the noticees had attended those board meetings. Further, their presence was also counted for quorum of respective board meetings as alleged in the SCN. In fact, they had proposed and taken part in discussion, deliberations and decisions on proposed resolutions in the said board meetings and meetings of Finance Committee of board of directors.

Thus, they had failed to comply with provisions of 300 of the Companies Act, 1956 on this count alone. I, therefore, find that the noticees were instrumental in making proposals and in approval of initial investment of 5 crore, additional investment of approx. ₹4.7crore by TAAL into TTPL and proposing and approving purchase of their shares in TTPL by TAAL. As matter of corporate governance and observance of fiduciary duties towards shareholders of listed company, the noticee were expected to avoid such conflict of interest which apparently they did not do. 26. Admittedly, the aforesaid decisions of board of directors i.e. to make investments in and acquire TTPL, a company wherein the noticees had interest; to increase the limit of investment and later to acquire shares of TTPL from the noticees i.e. Chairman and Managing Director of TAAL on 19th March 2009 and 15th July, 2009, when it was incurring losses were not disclosed to shareholders or BSE and these facts remained within knowledge of board of directors including the noticees. Later, only on 30th July, 2009, the TAAL had made disclosure at BSE to the effect that:- "Taneja Aerospace & Aviation Ltd has informed BSE that TAAL Technologies Pvt. Ltd has become a Wholly Owned Subsidiary of the Company".

Apparently, such disclosures are not sufficient to indicate to shareholders or BSE that the TAAL had made investment to the tune of ₹ 9.7019 crore in TTPL when it had incurred losses and then acquired its entire shareholding from its Chairman and Managing Director till 15th July, 2009 when TTPL was having net liability of approx. ₹9.1 crore.

27. It is also noted that in the Annual Report of TAAL for the Financial Year 2006-2007 while other transactions upto 30th June 2007 have been disclosed, the instalments of 'Advance for Share Application' in share capital of TTPL disbursed till June 2007 have not been disclosed. Further, in the Annual Report for the Financial Year 2007-08 at para. 14 at page 26 under head 'disclosures in respect of related parties pursuant to AS 18', it was disclosed by TAAL that it had given to its 'associates' an amount of ₹3 crore as 'advance for share application'. It is further noted that in the said para 14 of this Annual Report TAAL had disclosed, amongst others, TTPL also as its one of associates. These disclosures in this Annual Report do not specifically indicate whether the said advance of ₹3 crore made till 31st March 2008 was for share application in TTPL or in any other disclosed associate. In its balance sheet as on 31st March 2008 under head "Loans and Advances"(as shown at page 19 of the said Annual Report for the Financial Year 2007-2008), TAAL had disclosed an amount of ₹ 4,74,13,343 as 'Advance recoverable in cash or kind or for value to be received'.

Subsequently, in its balance sheet as on 30th June 2009 attached with Annual Report for the Financial Year 2008- 09 at page 37, TAAL had shown ₹3 crore as 'share application money in TTPL' and ₹1,74,13,347 as 'Advance recoverable in cash or kind or for value to be received' as on 31st March 2008. From the cumulative reading of such disclosures in balance sheets for the said two Financial Years it can safely be inferred that the advance of ₹3 crore as on 31st March 2008 was part of the aforesaid total amount of ₹4,74,13,343 given as 'Advance recoverable in cash or kind or for value to be received' thereby giving impression that the said amount could be recovered. None of the decisions of board of directors with regard to the aforesaid invest was in public domain so as to be known to shareholders of TAAL. It is observed that only after allotment of shares by TTPL to TAAL against the aforesaid advance of ₹9.7019 crore the disclosures to shareholders of TAAL were made on 05th December, 2009 in the Annual Report of TAAL for the Financial Year 2008-09 to the effect that the said amount was invested in TAAL towards share application money.

Thus, till 05th December, 2009 the shareholders of TAAL were not aware of the aforesaid state of affairs in TAAL. 28. The noticees have contended that all the business decisions of board of directors need not be disclosed to shareholders and these information were not price sensitive, therefore, were not required to be disclosed. Considering the facts and circumstances as described in the SCN; particularly the net worth of TAAL, net worth and continuous losses of TTPL during respective Financial Years and the sequence of events regarding infusion money to the tune of ₹9.7019 crore in TTPL, a company owned by directors (noticees); in my view, the decisions of board of directors were significant so as to have bearing on the interests of shareholders of TAAL. The directors who were in charge of affairs of TAAL and who were interested party to the transaction owed fiduciary duty to disclose relevant and material information to shareholders in true and fair manner so as to give them clear picture about above transaction at appropriate time. Therefore, the TAAL should have disclosed such decisions to its shareholders at least in its Annual Reports.

29. In my view, considering the net worth of TAAL at relevant time, the decisions of diversification of business of TAAL and to make substantial investments in an associate company owned by the Chairman and the Managing Director and acquire its business would have potential to influence the price of shares of TAAL. Further, in view of the fact that TTPL having incurred huge losses and its net worth was effectively negative as on the relevant dates, the information with respect acquisition of business of TTPL by purchasing the shareholding of noticees and subscription of shares of TTPL could have influenced prices of shares of TAAL had these information been disclosed on BSE under clause 36 of the Listing Agreement. In this case, apparently the relevant disclosures were not made at appropriate time and whatever was disclosed in the balance sheets/Annual Reports, it did not give clear picture of such investments by TAAL in TTPL to shareholders of TAAL. In this case, the relevant and significant information about investments as described above remained within the knowledge of board of directors including the noticees till 05th December, 2009 after entire transaction was concluded.

30. The facts and circumstances of the case such as : a) the investments in an initially loss making company wholly owned by the Chairman and the Managing Director; b) the interested directors taking active part in the relevant decisions in both the companies; c) TAAL not making disclosures/ making incomplete disclosures of relevant and material information to its shareholders with regard to its investments. d) TAAL not subscribing to shares of TTPL after infusing ₹5 crore as approved on 27th October 2007 and not becoming shareholder of TTPL till 19th March 2009 so that it could have any interest in the eventuality of TTPL making profits rather continuing to infuse funds beyond the approved limit when TTPL was still making losses; e) TAAL acquiring entire shareholdings in TTPL only after infusion of the advance of ₹9.7019 crore and thereby noticees remaining only shareholders of TTPL till 19th March 2009 and one of them continuing till 15th July 2009; if seen in totality create suspicion about intention on the part of the noticee to gain undue benefits of investments of TAAL in TTPL as its shareholders.

31. However, it is pertinent to mention here that in order to establish an allegation of fraud in such case as the present one, mere suspicion of intention of making undue profit or avoidance of loss is not sufficient to make good the charge of fraudulent plan or device or artifice in connection with issue, purchase or sale of or dealing in securities. The charge in this regard has to be made out on the basis of higher degree of preponderance of probability so as to attract prohibitions under regulation 3 and/or 4 of the PFUTP Regulations. In this regard, it is admitted fact that the money infused by TAAL as aforesaid was not diverted /siphoned off or misappropriated, directly or indirectly by the noticees for their personal benefits. Admittedly, shares of TTPL were allotted against the money so infused. Based on possibilities and hypothesis, the SCN has sought to allege that :- (i) TAAL's money to the tune of ₹ 9.7019 crore was deployed for the personal benefit of the noticees. (ii) Had TTPL earned profit on the aforesaid advance, noticees only would have enjoyed such profits because they were the only shareholders in TTPL.

(iii) The entire exercise was carried out primarily with a purpose of hiding the losses on advances of ₹9.7 crore made by TAAL to TTPL, which ideally should have been borne by the noticees. The loss of approx. ₹9.1 crore of TTPL was a personal loss of the noticees, which they were to make up before TTPL could have been acquired by TAAL. (iv) The noticees, misusing their powers as Chairman and Managing Director of TAAL, proposed and approved acquisition of 100% stake of TTPL from themselves with intent to safeguard themselves from the losses and net liabilities of approx. ₹9.1 crore and thus transferred their personal liabilities to that extent to the public shareholders of TAAL. (v) TAAL was supposed to recover its outstanding advance and noticees were required to repay the said amount of ₹ 9.7019 crore to TAAL. (vi) It was the obligation of the noticees to infuse approx. ₹9.1 crore in TTPL and repay ₹ 9.7019 crore to TAAL. (vii) When on 15th July, 2009 TAAL became holding company of TTPL, the liability on account of net liabilities /negative reserves devolved upon TAAL and as such it became liable to infuse money in TTPL and repay itself the outstanding loans of ₹ 9.7019 crore.

32. It is noted that the SCN does not describe as to how the aforesaid funds were deployed for the personal benefits of the noticees. In fact, the SCN has raised a hypothetical question in this regard on the basis of probability that had TTPL earned profit on the aforesaid advance, noticees only would have enjoyed such profits because they were the only shareholders in TTPL. Admittedly, in this case, the funds received from TAAL as 'Advance against Share Capital' were infused in TTPL, a separate and distinct legal entity which had allotted its shares to TAAL against said funds. Subsequently, TTPL had merged with TAAL pursuant to a scheme of merger sanctioned by Hon'ble High Court of Madras. Thus, those funds were not at all deployed for any personal benefits of the noticees as alleged. From the material brought on record, I note that the only money that the noticees received, in this case, was in the form of consideration (i.e., ₹ 50,000 each) of sale of their shares to TAAL at par value at which they had initially subscribed to the shares of TTPL. There is no allegation in the SCN that noticees manipulated valuation of shares of TTPL, an unlisted company, for selling them at par to TAAL when net worth of TTPL was negative.

Since TTPL had not earned any profit out of the investment of TAAL and had not declared any dividend, etc. during the period prior to transfer of its shares by the noticees to TAAL, the question of earning any profit on the aforesaid investment of TAAL by noticees does not arise. 33. It is pertinent to note that TTPL being a limited liability company, the personal liability of the noticees was limited to the extent of their shareholding in TTPL. It is established position of law that the loss of a company or its negative net worth cannot be termed as personal liability of its shareholders who have limited liability to the extent of their shareholding. The SCN is also vague to the extent that it has not made out as to how the noticees were liable to make up the negative net worth of TTPL by infusing approx. ₹9.1 crore. Legally, the shareholders/directors of the loss making company are not liable to replenish the business losses incurred by such company as sought to be alleged in the SCN. In my view, it is incorrect to allege that negative net worth of TTPL to the tune of approx. ₹9.1 crore was personal liabilities of the noticees and they had transferred their personal liabilities to the public shareholders of TAAL.

In view of these findings, it is also established that the noticees were not required to make disclosure to the effect that ₹ 9.7019 crore of TAAL were deployed for their personal benefits as alleged in the SCN. I, therefore, do not accept the proposition suggested in the SCN that noticees were liable to infuse money of approx. ₹9.1 crore in TTPL and then repay ₹9.7019 crore to TAAL. In the facts and circumstances of this case as found hereinabove, the other proposition in SCN that on account of acquisition of shares of TTPL from the noticees, TAAL became liable to infuse further money to the tune of approx. ₹9.1 crore in TTPL and then repay itself the funds given to TTPL as 'Advance against Share Capital' is also not correct. 34. Another facet of this allegation in the SCN is with regard to the merger of TTPL with TAAL pursuant to the scheme of amalgamation sanctioned by Hon'ble High Court of Madras on 28th January 2010. It has been alleged that while implementing the aforesaid scheme - (i) the board of directors of TAAL re-valued its already held land by approx. ₹45 crore during the Financial Year 2008-09; (ii) subsequently, during Financial Year 2008-09 to Financial year 2010-11, they utilised the revaluation profits of approx. ₹47.5 crores (i.e. aforesaid revaluation profit of ₹45 crores + opening balance of ₹2.5 crores for the Financial Year 2008- 09) as described in the SCN.

35. It is noted that in this regard the SCN proceeds on premise that TAAL should have done the revaluation of its already held land in its ordinary course of business rather than making it part of scheme. However, the accounting treatment for utilisation of aforesaid revaluation profits was given effect for the accounting period April 2008 - June 2009 by the board of directors in the ordinary course of business before the sanction of the scheme. Further, in these regards the board of directors have not complied with GAAP (AS 10 and GN 3). It is noted that on one hand, the SCN finds fault with approach of TAAL in revaluation of its land as part of the scheme instead of doing it in the ordinary course of business on the other hand it contradicts with such stand and alleges that the revaluation of land was not the consequence of the scheme instead it was done by TAAL in its ordinary course of business.

36. I am of the view that the only contentious issue that remains for my consideration in this regard is whether the revaluation of land and utilisation of the revaluation reserves was in non -compliance of AS10 and GN3 and whether these acts as alleged was done by TAAL with intention to present an incorrect and rosy picture of its financial affairs to its stakeholders and to hide the adverse impact of the merger. It is noted that the noticees have not disputed the facts described in the SCN in this regard and have submitted that the relevant financial statements were prepared in accordance with the scheme. Further, the financial statements of TAAL for the period from April 2008 to June 2009 had been approved by the shareholders of TAAL and they had not raised any objections in this regard either in Annual General Meeting or before Hon'ble High Court (pursuant to the notice of petition published in newspaper).

37. Admittedly, the revaluation of land as alleged was part of the scheme. I note from the SCN that the scheme allowed inter alia the following-: (i) The assets of TAAL to be re-valued by such value as may be determined by the board of directors of TAAL. (ii) The revaluation profits of the aforementioned revaluation to be inter-alia utilised to write off all the amounts debited to P&L Account pursuant to the scheme and also to write off any diminution in the value of assets and appreciation in the value of liabilities of TAAL and TTPL. (iii) The balance of excess revaluation profits to be transferred to General Reserve. 38. From the above it is noted that the board of directors were authorised to revalue assets of TAAL by such value as may be determined by them. If the board of directors could revalue the land of TAAL in the ordinary course of business as stated in the SCN, no fault can be found if such authority is made part of the scheme. It is further noted that the sanctioned scheme permits revaluation profits to be used to write off all the amounts debited to P&L Account and also to write off any diminution in the value of assets and appreciation in the value of liabilities of TAAL and TTPL.

Also, the balance of excess revaluation profits can be transferred to General Reserve. I, therefore find that the revaluation of land, utilisation of the revaluation reserved to set off the loss pursuant to merger of TTPL in TAAL and transfer of remaining revaluation profits to General Reserves, etc. are part of the scheme sectioned/approved by the Hon'ble High Court of Madras although the accounting treatment thereof were not in compliance with AS 10 and GN3. 39. In terms of section 211(3B) of the Companies Act, 1956, in case of any deviation from the accounting standards; the company should disclose the reason for such deviation and the financial effect, if any, arising due to such deviation. In this regard, the noticees have submitted that the statutory auditor had qualified the financial statements in respect of such deviation from the Accounting Standards, which was published in the Annual Report. I note that, in the present case, the qualified statement of statutory auditor of TAAL to the effect that the aforesaid accounting treatment was not in accordance with GAAP and had effect of overstatement of profit for the period by ₹ 20,00,00,000/- was disclosed in the Annual Report of TAAL dated 5th December 2009 for the Financial Year 2008-09.

Thus, all concerned had opportunity to object to such accounting treatment before the scheme was sanctioned by the Hon'ble High Court. In this case, the shareholders of TAAL and the concerned stock exchange had approved such arrangement of revaluation, etc along with the proposed scheme before it was approved by Hon'ble High Court under section 391-394 of the Companies Act, 1956.

40. From the provisions of section 391 to 394 of Companies Act, 1956 it is noted that they provide a system of checks and balances to promote reconstruction and amalgamation of companies taking into account the interests of its shareholders, creditors and other stakeholders. The provisions envisage approval of shareholders, interventions/objections by creditors, Central Government, Official Liquidator, before the scheme is sanctioned by the concerned High Court. Over and above the provisions of the Companies Act, 1956, clause 24(a) of the Listing Agreement requires in-principle approval of the concerned stock exchange on the draft scheme involving a listed company before the scheme is filed with the concerned High Court. This additional requirement is with the intent to ensure that the draft scheme proposed by the listed company is in conformity with corporate governance norms and applicable securities laws and is not prejudicial to the interests of investors in securities of the listed company. As regards the role of the Hon'ble High Court in sanctioning the scheme of amalgamation, following observations of Hon'ble Supreme Court in the matter of Sesa Industries Ltd. V. Krishna Bajaj [AIR2011SC1070] is relevant to mention- “… while it is trite to say that the court called upon to sanction a scheme of amalgamation would not act as a court of appeal and sit in judgment over the informed view of the concerned parties to the scheme, as the same is best left to the corporate and commercial wisdom of the parties concerned, yet it is clearly discernible from a conjoint reading of the aforesaid provisions that the Court before whom the scheme is placed, is not expected to put its seal of approval on the scheme merely because the majority of the shareholders have voted in favour of the scheme.

Since the scheme which gets sanctioned by the court would be binding on the dissenting minority shareholders or creditors, the court is obliged to examine the scheme in its proper perspective together with its various manifestations and ramifications with a view to finding out whether the scheme is fair, just and reasonable to the concerned members and is not contrary to any law or public policy… the Court has to see that the provisions of the Act have been duly complied with; the statutory majority has been acting bona fide and in good faith and are not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purport to represent and the scheme as a whole is just, fair and reasonable from the point of view of a prudent and reasonable businessman taking a commercial decision.” 41. It is undisputed fact that the scheme had approval of the shareholders of TAAL and concerned stock exchange and that the Hon'ble High Court of Madras had sanctioned the scheme as per the procedure prescribed in the Companies Act, 1956 including with regard to objections by creditors, Central Government and report of Official Liquidator under section 394(2).

Presumably, the Hon'ble High Court has sanctioned the scheme, in this case, considering that the board of directors and majority shareholders had acted in bona fide manner without adversely affecting the interests of minority shareholders. It is noted that the scheme of amalgamation, once sanctioned by the concerned Hon'ble High Court, it is binding on all concerned. The scheme in question has been implemented and the matter is fait accompli at this stage. If at all any objection or grievance with regard to the sanctioned scheme were to be raised, the same should have been done before the Hon'ble High Court of Madras or before the Hon'ble Supreme Court by filing the relevant petition. If the scheme sanctioned by Hon'ble High Court permitted the revaluation of land of TAAL and utilisation of revaluation reserves as done by TAAL in this case, it would be improper to question the same at this stage. 42. It is settled position that for holding a person guilty of having been indulged in fraudulent and unfair trade practices as alleged in this case, the finding must be sustained by a higher degree of proof than that required in any other civil default.

There must be convincing preponderance of probability to support the allegation of fraudulent and unfair trade practices. Merely, probablising or endeavouring to prove the fact on the basis of preponderance of probability and incomplete circumstantial evidence is not sufficient to establish a serious charge of fraudulent transaction [Padola Veera Reddy Vs. State of Andhra Pradesh AIR 1990 SC 79; Sterlite Industries Vs. SEBI (2001) 34 SCN 485 (SAT)]. 43. In this case, the allegations of fraudulent act has been alleged against the noticees on the basis of prima facie possibilities. The suspected intention of the noticees have not been found to be suggesting that they have diverted or misappropriated the funds infused by TAAL into TTPL. In fact the SCN even does not allege any such diversion or misappropriation. It has also been found that the noticees have not deployed those funds for their personal benefits or to avoid their personal losses. It is admitted position that the shares have been allotted to TAAL against the advance given by it to TTPL which has subsequently merged with TAAL in terms of the scheme of amalgamation sanctioned by Hon'ble High Court of Madras.

There is no material on record to suggest that the value of TAAL has been eroded on account of any fraudulent activity rather than on account of a business decision of the board of directors. The noticees have brought on record that, post merger, there has been positive contribution from the erstwhile business of TTPL to the business of TAAL. In view of the facts that the revaluation of land of TAAL was part of the scheme and accounting treatment with regard to utilisation of revaluation profits was disclosed in the Annual Report and was within the ambit of the scheme which has been approved by shareholders, concerned stock exchange and ultimately by the Hon'ble High Court and the same has already been implemented, the question of non observance of AS 10 and GN 3 with suspected intention to present incorrect and rosy picture of financial affairs of TAAL is rendered academic at this stage. 44. Taking into account the above position and considering the facts and circumstances of this case, I find that the charge of violation of regulation 3 and 4 of PFUTP Regulations has not been established in this case.

As regards specific charge of violation of regulation 4(2) (e), it has not made out in SCN as to how the noticees indulged in manipulation of price of any security. The charge in the SCN in this regard also is nothing but merely probablising and endeavouring to state something which is not supported by any basis. As regards, possible violation of clause 36 of the Listing Agreement as found hereinabove, I find that the directions contemplated in SCN will not be commensurate with such violation apart from being in disconnect with the findings on violations. Further, the SCN has not been issued to TAAL for such non compliance so as to consider any other possible direction to it under section 11, 11B of the SEBI Act or section 12A of the SCRA. 45. Considering the above facts and circumstances of the case, I do not think this case fit to pass any direction under 11(4), 11B of the SEBI Act, 1992 and under section 12A of Securities Contract (Regulation) Act, 1956 in respect of Mr. Salil Taneja and Mr. C. S. Kameswaran as contemplated in the SCN. The present proceedings are disposed of accordingly.

46. Without prejudice to the above, SEBI reserves right to initiate adjudication proceedings under section 23I of the SCRA for the possible violation of clause 36 of the Listing Agreement in this case. 47. This order shall come into force with immediate effect.

Sd/- DATE: January 11th, 2016 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA