Pan Asia Advisors Limited (Now Known As ... vs Sebi

Order Reserved On : 14.09.2016 Date of Decision : 25.10.2016

Appeal No. 126 of 2013

1.

PAN Asia Advisors Limited (now known as Global Finance and Capital Limited) International Corporate Finance Minster House, 42 Mincing Lane, London, United Kingdom

2. Mr. Arun Panchariya Villa No. 29, Street No. 2, The Meadows-6, Emirates Hills Living III, Dubai, UAE ...Appellants

Versus

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

Mr. Pradeep Sancheti, Senior Advocate with Ms. Mona Vora, Advocate i/b Joby Mathew & Associates for Appellants.

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

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

Per: Justice J.P. Devadhar

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

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

India ("SEBI" for short) on 20.06.2013. By that order appellants as 2

persons connected to the Indian Securities Market are debarred from

rendering services in connection with instruments that are defined as

securities under Section 2(h) of the Securities Contracts (Regulation) Act,

1956 ("SCRA" for short) for a period of 10 years and further the

appellants are prohibited from accessing the capital market directly or

indirectly for a period of 10 years.

2. Initially, by a majority decision of this Tribunal dated 30.09.2013

the appeal was allowed and the impugned decision of the WTM of SEBI

was set aside on ground that SEBI had no jurisdiction to initiate

proceedings against the appellants in relation to the role played by

appellants as Lead Managers to the Global Depository Receipts ("GDRs"

for short) issued by several Indian Companies outside India.

3. On appeal filed by SEBI, the Apex Court by its decision dated

06.07.2015 set aside the majority decision of this Tribunal and held that

SEBI had jurisdiction to initiate proceedings against the appellants if the

appellants as Lead Managers to the GDRs had violated the provisions of

SEBI Act and the Regulations framed thereunder and remanded the

matter for fresh decision on merits. Accordingly, the appeal is heard

afresh and disposed of by this decision.

4. Facts relevant for this appeal as per the documents available on

record are as follows:-

a) Mr. Arun Panchariya, Appellant No. 2 ("AP" for

short), a Non- resident Indian was the 3

Promoter/Managing Director of Appellant No. 1, i.e.

PAN Asia Advisors Limited, now known as Global

Finance and Capital Limited ("PAN Asia" for

convenience) holding 100% shares of PAN Asia. AP

has stepped down as Managing Director of PAN Asia

with effect from 29.09.2011.

b) PAN Asia was appointed as Lead Manager to the

GDRs issued by six entities namely; (i) Asahi

Infrastructure & Projects Ltd. ("Asahi" for short), (ii)

IKF Technologies Ltd. ("IKF" for short), (iii) Avon

Corporation Ltd. ("Avon" for short), (iv) K Sera Sera

Ltd. ("K Sera" for short), (v) Cat Technologies Ltd.

("Cat" for short) and (vi) Maars Software

International Ltd. ("Maars" for short). All these

companies are hereinafter referred to as 'issuer

companies'.

c) Since the appellants had adopted the same modus

operandi in all the six companies, for convenience, we

set out facts relating to the GDRs of Asahi. Prior to

the GDR issue, Asahi had issued 3,71,96,000 fully

paid up equity shares. By appointing PAN Asia as

Lead Manager, Asahi decided to raise funds from

investors outside India through the issuance of GDRs. 4

d) Appellants have contended before the Apex Court

(see para 89 of the judgement dated 06.07.2015) that

the role played by PAN Asia as Lead Manager to the

GDRs were, inter-alia,

i) Conducting due diligence in collecting

and evaluating all possible information

which may have a bearing on the issue

for the purpose of listing the GDRs

abroad.

ii) Assessing the market for the purpose of

the issue and marketing the issue.

iii) Obtaining confirmation of acceptance of

subscription from the initial investors to

the GDR issue.

iv) Assisting the issuer company at all stages

from preparing the documentation,

making investor presentation selection of

other managers etc.

v) Receipt of confirmation of subscription

monies received in the issuer companies

ESCROW account, opened/maintained

by the companies with the ESCROW

account holding bank.

5

vi) Receipt of Depository Banks

confirmation of issue of instructions to

the clearing systems of the GDR

subscribers and confirmation from the

requisite foreign stock exchange of the

listing of the GDRs issue.

vii) Ensuring that the issuer companies

comply with applicable legal formalities

of the countries where the GDRs are

listed.

e) On 29.04.2009 Asahi issued 29,91,00,000 equity

shares which resulted in allotment of 21,91,000 GDRs

having total value of 5.98 Million USD. The above

GDRs issued by Asahi were fully subscribed and

closed on 29.04.2009 itself.

f) Eight days prior to the issuance of GDRs i.e. on

21.04.2009 Vintage FZE ("Vintage" for convenience)

an entity situate at Dubai entered into a loan

agreement with European American Investment Bank

AG ("Euram Bank" for convenience). It is relevant to

note that the object of the loan was to fund Vintage

with 5.98 Million USD to take down GDR issue of

Asahi and the said loan amount was to be transferred 6

to the Euram A/c No. 540030. To secure the Euram

Bank's claims and entitlements against Vintage,

arising on account of the said loan liability or any

future liability, Vintage agreed to pledge the securities

held by it in its Account No. 540030 with the Euram

Bank. It is equally important to note that Vintage was

controlled by AP and in fact the loan agreement

between Euram Bank and Vintage was signed by AP

on 22.04.2009 as Managing Director of Vintage.

g) On the same day i.e. on 21.04.2009 apart from the

Loan Agreement between Vintage and Euram Bank,

Asahi entered into a Pledge Agreement with Euram

Bank wherein it was recorded that Vintage has

borrowed 5.98 Million USD from Euram Bank under

a loan agreement dated 21.04.2009 and that Asahi

acknowledges and agrees to the terms and conditions

of the said loan agreement. By the said Pledge

Agreement, Asahi pledged to the Euram Bank

following assets as collateral security to the Bank i.e.-

i) All rights, title and interest of Asahi in

the securities deposited by Vintage in its

securities Account No. 540030 (referred

as 'Pledged Securities Account") up to

the amount of 5.98 Million USD existing 7

at the time of executing the Pledge

Agreement or thereafter.

ii) All right, title and interest of Asahi in

and to the balance of funds existing on

the date of the said agreement or

thereafter in the Account No. 540030

(referred to as "Pledged Time Deposit

Account").

By the said Pledge Agreement Asahi agreed to

deposit with the Euram Bank all dividends,

interest and other payments, distributions of

cash or other property resulting from the

pledged securities and funds. Thus, Asahi by

executing the Pledge Agreement on 21.04.2009

secured the loan of 5.98 Million USD taken by

Vintage on 21.04.2009 from the Euram Bank

for taking down the GDRs of Asahi valued at

5.98 Million USD.

h) Till October 2010, 100% shares of Vintage were held

by Arun Pancharia (AP) and thereafter 100% shares

of Vintage are held by Alkarni Holdings Ltd. It is not

in dispute that 100% shares of Alkarni Holdings Ltd.

are held by AP and his relatives. Thus, AP on one

hand got GDRs of Asahi (valued at 5.98 Million 8

USD) issued as Lead Manager and on the other hand

as a Shareholder, Managing Director and Authorized

Signatory of Vintage took loan of 5.98 Million USD

from Euram Bank for subscribing (take down) to

GDRs to be issued by Asahi and made Asahi to sign a

Pledge Agreement, whereby Asahi inter alia agreed to

secure the loan of 5.98 Million USD taken by Vintage

from Euram Bank for subscribing to the GDRs of

Asahi.

i) On 01.06.2009 Asahi informed BSE about the

creation and allotment of 29,91,00,000 equity shares

which were converted into 29,91,000 GDRs valued at

5.98 Million USD and that the said GDRs were

claimed to have been fully subscribed by foreign

investors.

j) Investigation carried out by SEBI revealed that during

the investigation period there was heavy trading in the

scrip of above six issuer companies due to conversion

of GDRs into equity shares by certain Foreign

Institutional Investors/ sub accounts viz:-

i) India Focus Cardinal Fund. ('IFCF' for

convenience)

ii) KII Ltd. 9

k) Investigation carried out by SEBI further revealed that

equity shares generated on conversion of GDRs sold

by above FIIs/sub accounts were bought by a set of

clients, viz:-

i) Alka India Ltd. ("Alka" for short)

ii) Basmati Securities. ("Basmati" for short)

iii) S.V. Enterprises. ("SV" for short)

iv) JMP Securities. ("JMP" for short)

v) Oudh Finance and Investments Ltd.

("Oudh" for short)

Investigation carried out by SEBI further revealed that

AP was connected with IFCF and KII Ltd. which

converted GDRs into equity shares and AP was also

connected with the above entities which purchased the

shares generated out of conversion of GDRs in the

Indian Securities Market. Thus, the investigation

revealed that AP, as Managing Director of PAN Asia

got the GDRs issued, as Managing Director of

Vintage subscribed to the GDRs and thereafter

transferred the GDRs to the entities controlled by AP

and on conversion of GDRs into equity shares ensured

that the said equity shares of the issuer companies are

bought by the entities with whom AP was connected. 10

l) In view of above facts SEBI had initially passed an

ad-interim ex-parte order on 21.09.2011 thereby

restraining the appellants from entering the securities

market. Thereafter, confirmatory order was also

passed on 17.01.2012. On conclusion of investigation

show cause notice was issued to the appellants and by

the impugned order passed on 20.06.2013 appellants

are debarred from rendering services in connection

with instruments defined as securities under SCRA

for 10 years and the appellants are also debarred from

entering the securities market for a period of 10 years.

m) As noted earlier, this Tribunal by a majority decision

set aside the impugned order on ground that SEBI had

no jurisdiction to initiate action against appellants in

relation to GDRs issued outside India. Apex Court by

its order dated 06.07.2015 reversed the majority

decision of this Tribunal and held that SEBI has

jurisdiction in such cases to pass debarment order if

the allegations levelled against the appellants fall

within the scope of Section 12A(a), (b) & (c) of SEBI

Act and under the SEBI (Prohibition of Fraudulent

and Unfair Trade Practices relating to Securities

Market) Regulations, 2003 ("PFUTP Regulations,

2003" for convenience) and to determine the aforesaid 11

question, the Apex Court remanded the matter to this

Tribunal.

5. Accordingly, we have heard counsel on both sides extensively on

the question as to whether the appellants have violated the provisions

contained in the SEBI Act read with SCRA and the Regulations framed

thereunder as also the question as to whether SEBI is justified in

debarring the appellants from rendering services in relation to securities

defined under the SCRA for 10 years and further debarring the appellants

from accessing the securities market for a period of 10 years.

6. Mr. Sancheti learned Senior Advocate argued on behalf of the

appellants and Mr. Mehta learned Senior Advocate argued on behalf of

the respondent.

7. Argument of Mr. Sancheti, learned Senior Advocate appearing on

behalf of appellants may be summarized as follows:-

a) Allegations held proved against the appellants in the

impugned order remain unsubstantiated in as much as,

there is no finding recorded in respect of the said

allegations in the impugned order. In fact, finding

recorded in the impugned order that the appellants

have violated Section 77(2) of the Companies Act,

1956 is now admitted to be beyond the show cause

notice and hence not pressed by SEBI. Similarly,

during the course of arguments, counsel for SEBI has 12

not pressed the charge that in fact it is the Indian

Investors who actually funded the GDR issue which is

most crucial allegation on merits as well as on the

aspects of SEBI exercising jurisdiction for investor

protection. Similarly, the allegation that there were

dealings between the subsidiaries of the issuer

companies and the entities belonging to AP are ex-

facie based on conjectures and surmises. In these

circumstances, it is submitted that the impugned order

is liable to be quashed and set aside.

b) It is settled in law that where the allegation of fraud is

to be adjudicated, all concerned persons/ parities to

the fraud must be before the Court/Concerned

Authority. Deciding the issue of fraud in the absence

of all parties allegedly involved in the fraud would be

in breach of the principles of natural justice.

Moreover, if separate proceedings are initiated against

the persons allegedly involved in the fraud, there is

likelihood that different conclusions may be drawn

and it is possible that there may be conflicting

decisions as to the alleged commission of fraud. In

the impugned order it is held that the appellants have

committed fraud on Indian Investors in collusion with

the issuer companies, Euram Bank and Overseas

Depository Banks (Viz:- Bank of New York, Mellon 13

and Deutsche Bank). Since none of these entities

were parties to the show cause notice issued to the

appellants and since the impugned order is passed

without impleading the aforesaid parties to the

proceedings initiated against the appellants, the

impugned order is liable to be quashed and set aside.

In support of the above contentions counsel for

appellants placed reliance on the decisions of the

Apex Court in case of Mutha Associates & Ors. vs.

State of Maharashtra & Ors. reported in (2013) 14

SCC 304, Manohar Joshi vs. Nitin Bhaurao Patil &

Anr. reported in (1996) 1 SCC 169, J. Jose Dhanapaul

vs. S. Thomas & Ors. reported in (1996) 3 SCC 587,

decision of the Madras High Court in the case of P.

Vinmani vs. The General Manager, SBI reported in

2011 (2) CTC 260 and Oswal Agro Mills Ltd. vs. The

custodian & Ors. reported in 2004 (2) All MR 491.

c) The impugned order suffers from manifest errors, in

an much as, proper investigation has not been carried

out with reference to the records of the concerned

overseas Depository Banks viz. Bank of New York,

Mellon & Deutsche Bank to find out as to who were

the original subscribers or original allottees of GDRs

when issued. Admittedly, no action has been initiated

against those depository banks and no enquiry has 14

been initiated in respect of initial subscribers to whom

GDRs were issued. Similarly, no investigation has

been carried out with Euram Bank to ascertain as to

how the issuer companies were able to make 'a Time

Deposit' from the GDR issue amounts and who

received the accruals/ benefits by way of interest etc.

on such fixed deposits. Relying on a decision of this

Tribunal in case of BPL Ltd. vs. SEBI reported in

(2002) SAT 19 it is submitted that failure to

investigate all entities involved in the alleged fraud

has materially affected the outcome of the

investigation and hence the impugned order cannot be

sustained.

d) In the impugned order it is erroneously held that

except by way of few book entities there is no real

movement of funds from the GDR issue. Admittedly,

each issuer company had a bank account with Euram

Bank and admittedly GDR subscription amounts were

deposited in those accounts. Merely because two or

more entities had bank account in the same bank and

funds were transferred from one entity to another it

cannot be said that there is no receipt of payment on

issuance of GDRs and the entries are merely book

entries.

15

e) In the impugned order it is erroneously held that the

source of funding for the GDRs were done by

converting the GDRs into equity shares and after

selling the said equity shares in the Indian Market, the

sale proceeds were repatriated abroad to repay the

loan taken by Vintage. In fact in case of Asahi only

10.57% GDRs were sold and converted into shares

and therefore, there is no justification for drawing a

conclusion that it is only upon conversion of GDRs

and sale of shares released on conversion of GDRs in

the Indian Market, the sale proceeds were repatriated

for repaying the loan taken by Vintage. It is not in

dispute that the GDRs issued by the Indian

Companies have two way fungibility i.e. conversion

of equity shares into GDRs and conversion of GDRs

into equity shares. In the absence of any restriction on

sale and purchase of GDRs and/or conversion of

GDRs into shares or vice versa and/or sale and

purchase of shares, merely because, some of the

GDRs have been converted and sold cannot be a

ground to hold that the GDRs were issued

fraudulently from inception.

f) Findings recorded in the impugned order that the

alleged fraudulent arrangement resulting in full

subscription of GDRs of the issuer companies acted as 16

an inducement for other persons to buy the shares of

the issuer companies in the Indian Market is clearly

misconceived, because, firstly, in the present case,

GDRs were in fact issued and the issuer companies

have received requisite funds and GDRs have

thereafter been listed on the Stock Exchanges outside

India and continue to be listed. Secondly, till date,

SEBI has not initiated any action for cancellation of or

to nullify the GDRs on ground of alleged fraudulent

arrangement. Thirdly, the issuer companies have

retained the funds and continue to have the benefits of

the funds received under the GDR process without

having been called upon to refund or repay the same

or called upon to pay any amount to Euram Bank

towards alleged loan repayment. Fourthly, Vintage

has repaid its loan to Euram Bank on its own and not

through the sale of shares in the Indian Market.

Therefore, the AO of SEBI is not justified in holding

that the appellants by fraudulent arrangement have

induced investors in Indian Market to buy shares of

issuer companies.

g) Names of persons who initially subscribed to the

GDRs and whether such persons had subscribed to the

GDRs out of their own funds or out of borrowed

funds is of no consequence. After subscribing to the 17

GDRs, it was open to subscribers either to sell the

GDRs or to seek conversion of GDRs into equity

shares and sell the said shares in the Indian Securities

Market. There is no requirement in law that the

subscriber must disclose the details of loan availed or

such other facts to the issuer company or to any other

person. Equally, there is no requirement for the issuer

company to disclose any such information to public at

large. In any event, in the absence of any particulars

to establish that the shares sold on conversion of

shares has affected the equity market, SEBI is not

justified in passing the impugned order against the

appellants.

h) In the impugned order it is held that not disclosing to

the investors that Vintage took loan from Euram Bank

and after subscribing to the GDRs pledged the GDRs

in favour of Euram Bank and non disclosure of the

fact that the issuer companies had pledged the funds

received from GDRs in favour of Euram Bank

constitutes fraud on the Indian Investors. This finding

of SEBI is unsustainable, because, firstly, these

transactions were entered into outside India and no

fault has been found with those transactions by the

regulators under whose jurisdiction the said

transactions took place and even RBI has not found 18

any fault with those transactions. Secondly, SEBI has

ignored the opinion of the solicitors of the relevant

Countries and has failed to prove that the said

transactions were in fact illegal as per the applicable

Foreign Law. Thirdly, the practice of taking a loan for

'take down' of an issue of securities like GDRs and to

pledge the proceeds of the same is legal and permitted

under the relevant law. Fourthly, no action has been

taken against the banks which are part of the alleged

illegal loan truncations and yet the impugned order is

passed against the appellants holding them guilty of

fraud. Fifthly, neither the appellants have given any

guarantee for the loans availed by Vintage nor the

appellants have provided any funds to the issuer

companies to buy their own shares. Thus, in the

absence of any illegality committed under the Indian

Laws, SEBI is not justified in passing the impugned

order against the appellants.

i) There was no obligation on part of the appellants to

make disclosure of the loan taken by Vintage or the

pledge created by the issuer companies and it is not

the case of SEBI that the appellants have misled the

issuer companies. In the ordinary course, the issuer

companies would in their quarterly/yearly results have

shown the mortgage/pledge created by them and 19

therefore, there is no question of such information

being suppressed. Grant of loan for 'take down' of

GDRs by creating pledge is not per se illegal and in

fact such transactions are openly permitted and hence

SEBI is not justified in treating the transactions to be

fraudulent transactions.

j) Fact that Vintage effectively became the sole

subscriber of the GDRs issued by the issuer

companies cannot be a ground to hold that Vintage

became the major shareholder of the issuer companies

(as the GDRs accounted for a major portion of the

capital of the issuer companies) because, firstly GDR

holders do not have any voting rights. Secondly, there

is no allegation of any nexus between the promoters

of the issuer companies and the appellants as to

management rights/ controlling interest/ takeover

code, valuation etc.

k) In para 5.3.3.9 of the impugned order it is recorded

that none of the issuer companies have provided SEBI

with adequate explanation in relation to transfer of

funds to their foreign subsidiaries and as such detailed

investigation could not be carried out. Fact that the

issuer companies failed to furnish information could

not be a ground to presume that financial transactions 20

between the foreign subsidiaries and entities

controlled by AP could be a route for the issuer

companies to compensate AP. Thus, the impugned

decision is based on conjectures and surmises and

hence cannot be sustained. In support of the above

submission reliance is placed on the decisions of the

Apex Court in case of Mutha & Associates vs. State

of Maharashtra reported in (2013) 14 SCC 304 &

M.S. Bindra vs. Union of India reported in (1998) 7

SCC 310.

l) In the impugned order it is held that Pan Asia had

deliberately provided false information to the effect

that certain other foreign investors were the initial

subscribers of the GDRs. The above finding is clearly

incorrect and misleading, because, firstly under the

applicable law/regulation, the appellants were not

required to communicate with the Indian Stock

Exchanges or make any announcements in India

regarding the GDR subscription. Secondly, as a

matter of fact appellants have not made any such

announcement before any authority. Thirdly, the

Apex Court in its judgement dated 06.07.2015 has

recorded that in fact Asahi had provided information

to BSE that the entire GDRs were allotted to foreign

entities, namely Greenwich & Tradetec and 21

accordingly BSE gave that information to public/retail

investors on BSE website. Thus, the finding recorded

in the impugned order that the appellants furnished

false information is wholly unsustainable.

m) Under the Issue of Foreign Currency Convertible

Bonds and Ordinary Shares (through Depository

Receipt Mechanism) Scheme 1993, GDRs are created

and issued by the Overseas Depository Banks. In the

present case, the Overseas Depository Banks were

Deutsche Bank and Bank of New York, Mellon who

had created and issued the GDRs. Therefore, any

verification relating to issuance and subscription of

GDRs could be made through the Overseas

Depository Banks. Having failed to make any such

enquiry, SEBI is not justified in drawing adverse

inference against the appellants.

n) Alleged dispute regarding the names of initial

subscribers has resulted in catch 22 situation for the

appellants, because, if it was informed to the BSE that

Vintage having taken loan was the initial subscriber,

then, it could be alleged that actual/ initial subscribers

were some other persons and hence the information

furnished was not correct. On the other hand, if

names of other persons are shown as the initial 22

subscribers, then, it would be alleged that in substance

Vintage had subscribed to the GDRs. Fact that the

initial subscribers after receipt of GDRs immediately

transferred the GDRs to the demat account of Vintage

cannot change the factual position as to who were the

initial subscribers. Assuming that Vintage was the

initial subscriber, that cannot and does not amount to

a charge of misdisclosure, because, the names of the

subscriber per se are not shown to be of any

consequence in the context of investors being

fraudulently misled.

o) Assuming that instead of giving the name of Vintage,

fake names were given as initial subscribers, there is

no reason as to how giving such wrong information

has misled the investors. It is not the case of SEBI

that the initial subscribers were such persons like

Tata's or Birlas or Ambani's who could induce the

investors in buying the shares of issuer companies.

p) Without prejudice, it is submitted that out of the total

15 initial subscribers to the GDRs of six issuer

companies, three initial subscribers were not available

at the addresses provided and the fact that the address

of two other initial subscribers were not be found 23

could be a ground to conclude that all the initial

subscribers were fictitious entities.

q) As a Lead Manager, the appellants were not required

to physically verify as to who were the initial

subscribers and what was their addresses. Moreover,

due to efflux of time, it is possible that original

subscribers might have changed their addresses. Thus,

in the present case, all transactions were genuine and

in fact, foreign capital was genuinely received by the

issuer companies and the same is available till date for

their use and benefit. Therefore, SEBI is not justified

in holding that there was any fraudulent scheme or

design to deceive the investors in India.

r) The Apex Court in para 74 of its judgement has

enumerated the case put forth by SEBI alleging

various violations committed by the appellants. In the

impugned order, some of the allegations as reported to

the Apex Court by SEBI are not to be found. Some of

the allegations which are recorded in the impugned

order are not pressed before this Tribunal. In these

circumstances, the impugned order which is based on

conjectures and surmises is liable to be quashed and

set aside.

24

8. On careful consideration of the aforesaid submissions made on

behalf of the appellants, we see no merit in the aforesaid submissions.

9. Object of creating and trading in GDRs outside India has been

succinctly summarized by the Apex Court in para 60 of its judgement

dated 06.07.2015 which read thus:-

"60. On a consideration of the 2000 Regulations, the 1993

Scheme and the Master Circular issued by RBI

periodically one can discern that for creation of

GDRs which can be traded only at the global level,

the issuing company should have developed a

reputation at a level where the marketability of its

investment creation potential will have a demand at

the hands of the foreign investors. Simultaneously,

having regard to the development of the issuing

company in the market and the confidence built up

with the investors both internally as well as at global

level, the issuing company's desire to raise foreign

funds by creating GDRs should have the appreciation

of investors for them to develop a keen interest to

invest in such GDRs. Mere desire to raise foreign

investments without any scope for the issuing

company to develop a market demand for its GDRs by

increasing the share capital for that purpose is not the

underlying basis for creation of GDRs. In fact for 25

creating of GDRs apart from the desire of the issuing

company to raise foreign funds, the marketability of

such shares in the form of GDRs should have an

applicable potential at the global level. To put it

differently, by artificial creation of global level

investment operation, either the issuing company on

its own or with the aid of its Lead Manager cannot

attempt to make it appear as though there is scope for

trading GDRs at the global level while in reality there

is none. The above fact has to be kept in mind when

dealing with an issue relating to creation of GDRs, in

as much as, when the GDRs gets fully subscribed at

the global level providing scope for huge foreign

investment, the same will have a serious impact at the

internal investment market in the form of high

appreciation of share value whereby the issuing

company and the investor will be greatly benefited

mutually. Such a real growth structurally and

financially is the underlying principle in the creation

and trading of GDRs at the global level."

10. In the light of the aforesaid decision of the Apex Court, the

question to be considered is, whether the appellants as Lead Managers to

the GDR issue, either on their own or with the aid of issuer companies

attempted to make it appear to the investors in India that in the global

market foreign investors have found great investment potential in the 26

issuer companies and accordingly subscribed to the GDRs of Asahi

valued at 5.98 Million USD and similarly subscribed to the GDRs of

other issuer companies.

11. Before considering the aforesaid question, it would be appropriate

to deal with the preliminary issue raised by the appellants viz. SEBI

could not have proceeded against the appellants in the absence of other

persons with whom the appellants are alleged to have colluded. It is

contended on behalf of the appellants that if fraud is allegedly committed

by the appellants in collusion with the issuer companies, Euram Bank,

Overseas Depository Banks, Vintage and various other entities, then,

unless all those entities were made parties to the show cause notice issued

against the appellants, the impugned order could not be passed against

the appellants.

12. There is no merit in the above contention. Concept of "fraud" in

relation to the parties to the contract set out under Section 17 of the

Indian Contract Act is different from the concept of "fraud" set out in the

PFUTP Regulations, 2003. The expression "fraud" is defined under the

PFUTP Regulations as follows:-

"(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-

27

(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;"

13. From the aforesaid definition it is absolutely clear that if a person

by his act either directly or indirectly causes the investors in the securities

market in India to believe in something which is not true and thereby

induces the investors in India to deal in securities, then that person is said

to have committed fraud on the investors in India. In such a case, action

can be taken under the PFUTP Regulations against the person

committing the fraud, irrespective of the fact any investor has actually 28

become a victim of such fraud or not. In other words, under the PFUTP

Regulations, SEBI is empowered to take action against any person if his

act constitutes fraud on the securities market, even though no investor has

actually become a victim of such fraud. In fact, object of framing PFUTP

Regulations is to prevent fraud being committed on the investors dealing

in the securities market and not to take action only after the investors

have become victims of such fraud. Therefore, in the facts of present

case, if fraud is committed by the appellants on the investors in India,

then without making the investors as party to the proceedings, SEBI

could take action against the appellants.

14. Similarly, if fraud is said to have been committed by AP on the

investors in India by subscribing to the GDR outside India by entering

into Loan Agreement/ Pledge Agreement outside India through the

entities with which AP was connected, then, even if the GDRs were

validly issued and even if the Loan Agreement/ Pledge Agreement were

valid, proceedings could be initiated against AP for committing fraud on

the investors in India without impleading the entities who issued the

GDRs and without impleading the entities who were parties to the Loan

Agreement/ Pledge Agreement. In other words, whether the Loan

Agreement/ Pledge Agreement were validly entered into or not,

proceedings could be initiated against AP if the very act of AP in

subscribing to the GDRs through his connected entities constituted fraud

on the investors in India. In such a case, the entities which issued the

GDRs viz. Overseas Depository Banks or the entities who were parties to

the Loan Agreement/ Pledge Agreement are not required to be impleaded 29

as parties to the proceedings initiated against AP for committing fraud on

the investors in India. Therefore, the argument of the appellants that

without impleading the Overseas Depository Banks/ parties to Loan

Agreement & Pledge Agreement as parties to the proceedings initiated

against the appellants, no order could be passed against the appellants

cannot be accepted.

15. Reliance placed by the appellants on the decision of the Apex

Court in case of Mutha Associates (Supra) is misplaced. In that case,

land acquisition proceedings initiated by the State Government for the

benefit of APMC were sought to be withdrawn without giving an

opportunity of hearing to APMC. On facts of that case, the High Court

while holding that the withdrawal of the acquisition without giving an

opportunity of hearing to APMC was bad in law held that the order

passed by the Minister withdrawing the acquisition was actuated by

malafides. In that context, while upholding the decision of the High

Court that the withdrawal of the acquisition was bad in law, the Apex

Court held that when the charge of malafides was levelled against the

Minister, it was mandatory to implead the Minister as a party to the

proceedings and give an opportunity to refute the charge against the

Minister. As no such opportunity was given, the charge against the

Minister was set aside. In the present case, the appellants were called

upon to show cause as to why action should not be taken against the

appellant for committing fraud on investors and opportunity of hearing

was granted to the appellants. Therefore, the decision of the Apex Court

in case of Mutha Associates has no bearing on the facts of present case. 30

16. Similarly, decision of the Apex Court in case of Manohar Joshi

(Supra) is distinguishable on facts. In that case, in an Election Petition,

the returned candidate was alleged to be guilty of a corrupt practice in the

commission of which another person was alleged to have participated

with him. In that context it was held that the returned candidate can be

held vicariously liable for a corrupt practice committed by any other

person with his consent only at the end of the trial i.e. after the trial

against the returned candidate and trial against the other person with

whose consent the returned candidate had committed the corrupt practice.

In the present case, findings recorded in the impugned order regarding

the legality of GDRs issued and legality of the Loan Agreement and

Pledge Agreement were in the context of AP committing fraud on the

investors in India by subscribing the GDRs meant to be sold to foreign

investors. It is not the case of SEBI that the GDRs were issued illegally

or that the Loan Agreement/ Pledge Agreements were per se illegal. In

other words, what is held in the impugned order is that PAN Asia and AP

(Managing Director of PAN Asia) by their acts made the investors in

India to believe that foreign investors have found it prudent to invest in

the GDRs of issuer companies when in fact the GDRs were subscribed by

an entity wholly owned by AP. Therefore, the decision of the Apex

Court in case of Manohar Joshi has no relevance to the facts of present

case. Similarly, other decisions of the Apex Court and other Courts

relied upon by the counsel for appellants are also distinguishable on facts.

17. Strong reliance was placed by counsel for the appellants on the

decision of this Tribunal in case of BPL Ltd. (Supra). That decision is 31

also distinguishable on facts. In that case, SEBI had held that BPL Ltd.

had created a false market and manipulated the price of its scrip in

connivance with Shri Harshad Mehta and accordingly debarred BPL Ltd.

from accessing the securities market for a period of four years. This

Tribunal noticed that nowhere in the order impugned therein it was

recorded that BPL Ltd. had transacted in its shares either directly or

indirectly. It was further noticed, that BPL Sanyo Finance Ltd. ("BSFL"

for short) an associate company of BPL Ltd. was found to be involved in

the matter. Since BSFL was not investigated and since no action was

taken against BSFL, this Tribunal held that the said omission has

materially affected the outcome of the investigation and accordingly set

aside the debarment order passed against BPL Ltd. In the present case, it

is the case of SEBI that the appellants by their acts have committed fraud

on the investors in India and accordingly action is taken against the

appellants. Thus, the decision of this Tribunal in case of BPL Ltd. has no

bearing on the present case. Accordingly, we see no merit in the

contention of the appellants that SEBI could not have proceeded against

the appellants without impleading the entities involved in issuing t he

GDRs or the entities involved in the Loan Agreement/ Pledge

Agreement.

18. Question then to be considered is, whether SEBI is justified in

holding that the appellants have committed fraud on the investors in

India. Admittedly, PAN Asia was appointed as a Lead Manager to the

GDR issue and as a Lead Manager it was the duty of PAN Asia to make

reasonable endeavours to procure investors outside India and inform the 32

ESCROW agent in writing of any deposit made by the investors in the

ESCROW account. It is not in dispute that prior to the issuance of GDRs

of Asahi, AP as a Managing Director and Authorized Signatory of

Vintage had entered into a Loan Agreement dated 21.04.2009 with

Euram Bank and had obtained loan of 5.98 Million USD to take down the

GDRs of Asahi. Thus, AP on the one hand as Managing Director of

PAN Asia got the GDRs of Asahi issued for subscription by foreign

investors and on the other hand as Managing Director of Vintage took

loan to take down entire GDRs of Asahi.

19. Apart from taking loan of 5.98 Million USD from Euram Bank

under the Loan Agreement dated 21.04.2009, a Pledge Agreement dated

on 21.04.2009 was executed between Asahi and Euram Bank, wherein

Asahi agreed to abide by the terms and conditions of the Loan Agreement

dated 21.04.2009 between Euram and Vintage and further agreed to

pledge all its right, title and interest in and to the securities deposited in

the pledged securities account and Pledged Time Deposit account so as to

secure the present and future obligation of Vintage to the Euram Bank to

the Extent of 5.98 Million USD or any other amount that may thereafter

become payable by Vintage to Euram Bank.

20. In the reply to the show cause notice issued by SEBI, AP had

categorically stated that Vintage intended to make profit through a take

down of the GDRs issued by the Indian Companies and at the same time

ensure successful placement of the GDRs with the investors outside

India. It is further stated by AP that for the aforesaid purpose Vintage 33

took loan from Euram Bank and upon closure of the GDR issue, Vintage

paid the take down amount to the issuer companies by transferring the

loan proceeds from Euram Bank to the ESCROW accounts of the issuer

companies which was then transferred to the accounts of issuer

companies.

21. Thus, instead of ensuring that the foreign investors subscribe to the

GDRs of Asahi, AP as Managing Director of PAN Asia planned to

subscribe to the GDRs of Asahi through Vintage and in fact as Managing

Director of Vintage took loan of 5.98 Million USD from Euram Bank for

subscribing to the GDRs of Asahi and made Asahi to pledge to the

Euram Bank the GDR subscription amount of 5.98 Million USD as

security for the loan taken by Vintage. Similar modus operandi was

adopted in case of other issuer companies. Thus, the investors in India

were made to believe that in the global market the issuer companies have

acquired high reputation in terms of investment potential and hence the

foreign investors have fully subscribed to the GDRs, when in fact, the

GDRs were subscribed by AP through Vintage which was wholly owned

by AP. In other words, PAN Asia as a Lead Manager and AP as

Managing Director of PAN Asia attempted to mislead the investors in

India that the GDRs have been subscribed by foreign investors when in

fact the GDRs were subscribed by AP through Vintage. Any attempt to

mislead the investors in India constitutes fraud on the investors under the

PFUTP Regulations.

34

22. Fact that the appellants had not informed the Stock Exchanges

about the GDRs being fully subscribed cannot be a ground for the

appellants to avoid action being taken for misleading the investors in

India, because, under the PFUTP Regulations, action can be taken even

against a person who has caused the investors in India to believe in

something which is not true. In the present case, it is apparent that prior

to the issuance of GDRs, AP as Managing Director of PAN Asia had

designed a plan to subscribe to the GDRs of Asahi and in implementation

of that plan AP took loan of 5.98 Million USD as Managing Director of

Vintage specifically for subscribing (take down) GDRs of Asahi and in

fact on issuance GDRs, 5.98 Million USD was transferred to the account

of Asahi with Euram Bank as GDR subscription amount. Thus, AP as

Managing Director of PAN Asia was the root cause in creating artificial

impression that the GDRs have been subscribed by foreign investors

when in fact GDRs were purchased by AP through Vintage. Such an act

is clearly prohibited under the PFUTP Regulations.

23. It is interesting to note that even though AP through Vintage had

subscribed to the GDRs of Asahi by taking loan of 5.98 Million USD

from Euram Bank, PAN Asia had informed SEBI that initial subscribers

to the GDRs of Asahi were foreign investors other than Vintage.

Investigation carried out by SEBI revealed that in the records Greenwich

Management Inc ("Greenwich for convenience) and Tradetec

Corporation ("Tradetec" for convenience) were shown as the initial

subscribers to the GDRs of Asahi. Greenwich situated at Hong Kong is

supposed to have acquired 49.85% GDRs of Asahi and Tradetec situated 35

at Hong Kong is supposed to have acquired 50.15% GDRs of Asahi.

Investigation revealed that immediately after subscribing to the GDRs,

both Greenwich and Tradetec are supposed to have transferred all the

GDRs to Vintage and on the same day Vintage transferred the loan

amount of 5.98 Million USD to the account of Asahi. If Vintage had

actually acquired GDRs of Asahi from Greenwich and Tradetec, then

Vintage would have paid the loan amount of 5.98 Million USD to

Greenwich and Tradetec and would not have transferred the loan amount

to the account of Asahi. Very fact that AP as Managing Director of

Vintage got the loan amount transferred to the account of Asahi clearly

shows that Greenwich & Tradetec were not the initial subscribers and the

initial subscriber to the GDRs of Asahi was Vintage (wholly owned by

AP).

24. It is equally interesting to note from the investigation carried out

by SEBI that the alleged initial subscribers to the GDRs were non-

existent entities because, e-mails and summons issued to those entities

were return back undelivered. Moreover, the respective securities market

regulators of the Countries in which the alleged initial subscribers were

supposed to be situated have informed SEBI that the addresses of the

initial subscribers are either non-existent or do not belong to those

entities. In case of Tradetec the address shown was 'level 47, Prudential

Tower, 30 Cecil Street, Singapore, 049712'. Investigation carried out by

SEBI through the Monetary Authority of Singapore revealed that there

was no level 47 and the highest floor of Prudential Tower was level 30

and that Tradetec is not even listed in the office directory of Singapore. 36

One of the alleged initial subscriber known as Rexflex Ltd. was found to

be controlled by AP and admittedly the name of Rexflex Ltd. has now

been changed PAN Asia Management Ltd. Even in case of other issuer

companies, the WTM of SEBI has recorded a finding in para 15 of the

impugned order that those entities do not exist at the given address and

the names of those entities do not exist in the official directory of the

Countries in which the said entities were supposed to be situated. In

these circumstances, findings recorded in the impugned order that the

names of initial subscribers exist only in fiction and that the appellants

have artificially sought to create an impression that the GDRs were

initially subscribed by foreign investors other than Vintage cannot be

faulted.

25. It is apparent that the appellants knew that if the investors in India

come to know that the GDRs of the issuer companies have not been

subscribed by foreign investors but by the entities controlled by the

Managing Director (AP) of PAN Asia, then it would not generate interest

in minds of the investors in India to subscribe to the shares of issuer

companies. Therefore, in order to create an artificial impression that

global investors have shown keen interest in investing in the issuer

companies by subscribing to the GDRs, appellants by a dubious method

introduced fictitious and non-existent initial subscribers to the GDRs of

the issuer companies so as to mislead the investors in India in believing

that the global investors have shown keen interest in investing in the

GDRs of issuer companies. In these circumstances, decision of SEBI 37

that the appellants attempted to committed fraud on the investors in India

by introducing fictitious initial subscribers cannot be faulted.

26. Argument of the appellants that due to efflux of time the initial

subscribers might have changed their address is unsustainable, because, it

is established beyond doubt that some of the addresses of the alleged

initial subscribers itself do not exist. If the address itself is not existent it

obviously means that even the initial subscribers were non-existent.

Apart from above, it is established by SEBI through the Regulatory

Authorities of the Countries in which the alleged initial subscribers were

situated that the names of those initial subscribers do not exist in the

official directory of those Countries. These facts conclusively establish

that Vintage was the initial subscriber to the GDRs and names of

fictitious entities were introduced only to make it appear that the GDRs

have been subscribed by various foreign investors.

27. It is equally important to note that immediately after subscribing to

the GDRs, Vintage (controlled by AP) sold some of the GDRs to FIIs/sub

accounts such as IFCF & KII which were also controlled by AP. IFCF &

KII admittedly converted GDRs into underlying equity shares of the

issuer companies from the domestic custodian bank in India and sold the

said shares on the Stock Exchanges in India. It is also recorded in the

impugned order that the shares sold by IFCF and KII were bought by

entities such as Alka, Oudh, Basmati & SV with which AP was

connected. Thus, at every stage of the GDR issue i.e. from the stage of

issuing GDRs, subscribing to the GDRs, transferring the GDRs to FII/sub 38

accounts for conversion of GDRs into equity shares and acquiring the

said shares through the Stock Exchanges in India, Managing Director of

PAN Asia was involved. In other words, apart from making it artificially

appear that GDRs have been subscribed by foreign investors when in fact

the GDRs were subscribed by AP through Vintage, AP ensured that the

GDRs were sold by Vintage to the entities controlled by AP and further

ensured that the equity shares generated on conversion of GDRs were

acquired by the entities with which AP was connected. Even though all

GDRs were not converted and sold, it is apparent that the modus

operandi adopted by the appellants was not only to create an artificial

impression that the GDRs have been subscribed by foreign investors, but

also to create an impression that after the GDR issue, investors in India

have started subscribing to the shares of issuer companies when in fact

the shares were sold and acquired by the entities controlled by AP. In

these circumstances inference drawn by SEBI that at every stage of the

GDR issue, the acts committed by the appellants constituted fraud on the

investors in India cannot be faulted.

28. Argument of the appellants that the AO was not justified in

holding that there was no fund movement after the GDR issue is without

any merit. Even though 5.98 Million USD was transferred by Vintage to

the account of Asahi as GDR subscription amount, on account of Asahi

pledging the aforesaid amount to secure the loan of 5.98 Million USD,

taken by Vintage from Euram Bank under the Pledge Agreement dated

21. 04. 2009, Asahi could not utilize that amount till the loan was repaid

by Vintage to Euram Bank. Whether Asahi and other issuer companies 39

were justified in entering into a Pledge Agreement with Euram Bank is a

question that would be decided in the proceedings initiated against Asahi

and other issuer companies. Thus, there can be no dispute that the GDR

subscription amounts running into several Million USD were not

available to the issuer companies till the loan taken by Vintage for

subscribing to GDRs were repaid to Euram Bank. Admittedly, the loans

were repaid by Vintage after a long period of time. Therefore, in the

facts of present case, findings recorded by SEBI that in reality there was

no fund movement after the GDRs were subscribed, cannot be faulted.

29. Argument of the appellants that the AO has erroneously held that

source of funding for the GDRs were done by converting the GDRs and

thereafter selling the shares in the Indian Market and repatriating the sale

proceeds to repay the loan taken by Vintage is not entirely correct. It is a

matter of record that Vintage by a Loan Agreement entered into with

Credo Investment Holdings Ltd. ("Credo" for short) advanced loan of 2

Million USD for on-lending it to its associate company KII Ltd. so as to

enable KII to purchase GDRs of the issuer companies, convert the GDRs

into equity shares and sell those shares in the Indian Market and utilize

the sale proceeds to buy further GDRs on the Luxembourg Stock

Exchange and repeat the said process until KII elects to terminate such

activities. Admittedly, KII acquired GDRs from Vintage and after

converting the GDRs in to equity shares sold the equity shares in the

Indian Market. In that context it was held that source of funding the

GDRs was by converting the GDRs and selling the shares in the Indian 40

Securities Market. It is not the case of SEBI that all the GDRs of all the

issuers companies were converted into equity shares and sold in the

Indian Market and the sale proceeds were utilized for repaying the loan

taken by Vintage.

30. Fact that some of the findings recorded in the impugned order have

not been pressed by SEBI cannot be a ground for the appellants to escape

action being taken for the fraud committed on the investors in India. It is

on record that even in the past AP has been found to be violating the

Securities Laws and in fact by an order dated 13.11.2009 monetary

penalty has been imposed on AP. Creating artificial impression with a

view to mislead the investors in India either directly or indirectly is a

serious offence and in the present case, since AP holding 100% shares of

PAN Asia has committed fraud on the investors in India in relation to

GDRs of several issuer companies, we see no reason to interfere with the

debarment order passed against the appellants.

31. For all the aforesaid reasons we see no merit in the appeal and the

same is hereby dismissed with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G. Nair Member 25.10.2016 Prepared & Compared By: PK