SAT reduces penalty for not finding GDR issue fraudulent but a violation of disclosure norms

Case details: Jaiprakash Kabra v. Securities and Exchange Board of India - [2021] 132 taxmann.com 79 (SAT - Mumbai)

Judiciary and Counsel Details

• • Justice Tarun Agarwala, Presiding Officer and M.T. Joshi, Judicial Member
    
  • Pritesh Burad and Chinmay Paradkar, Advs. for the Appellant. 
  • Sharan Jagtiani, Sr. Adv. Ms. Nidhi Singh and Ms. Aditi Palnitkar, Advs. for the Respondent.

Facts of the Case

Pursuant to an investigation by SEBI, it was found that company ‘T’ and its directors had issued Global Depository Receipts (GDR) which was subscribed by a single entity, namely, ‘V’. That amount was secured by ‘V’ by obtaining credit from EURAM Bank.

However, company T had pledged its entire GDR proceeds to EURAM Bank as a security against loan availed by ‘V’ for subscribing to GDR. The investigation also revealed that the company had not disclosed to the Stock Exchange the material information that EURAM bank was authorized to use proceeds in connection with a loan and that execution of loan agreement and pledge agreement were not disclosed.

The SEBI, on the other hand, came to the conclusion that scheme floated by a company for issuance of GDRs was a fraudulent scheme to mislead the public and investors and thus, by impugned order restrained directors of ‘T’ including appellant from accessing the securities market in any manner for a period of five years and penalty of Rs. 50 lakh had been imposed for violating regulations 3 and 4 of PFUTP Regulations.

It was noted that the company was now under liquidation and the loan taken by ‘V’ had been repaid, which showed that the GDRs issue made by the company was not fraudulent. Further, proceeds of GDRs had not been diverted to any third party and there was nothing on record to indicate any unfair advantages made by appellants nor anything had come on record to show any loss suffered by investors. Thus, there could not be any violation of any fraud or inducement under regulations 3 and 4.

Therefore, while affirming the finding of violation insofar as it related to non-disclosure, a penalty of Rs. 50 lac was to be reduced to Rs. 20 lac and debarment of five years was to be reduced to two years.

Case Review

• • Adesh Jain v. SEBI [2021] 123 taxmann.com 163/164 SCL 138 (SAT – Mum.) (para 11)
  • Adi Cooper v. SEBI [Appeal No. 124 of 2019, dated 5-11-2019] (para 11)
  • Govind Das Pasari v. SEBI [2021] 128 taxmann.com 25/166 SCL 452 (SAT – Mum.) (para 11)
  • Praful Shah v. SEBI [Appeal No. 389 of 2021, dated 8-6-2021](para 11) followed.

List of Cases Referred to

• • Chromatic India Ltd. v. SEBI [Appeal No. 393 of 2020, 12-5-2021] (para 9)
  • Mohandas Shenoy Adige v. SEBI [Appeal No. 511 of 2020, dated 28-7-2021] (para 9)
  • Adesh Jain v. SEBI [2021] 123 taxmann.com 163/164 SCL 138 (SAT – Mum.) (para 11)
  • Adi Cooper v. SEBI [Appeal No. 124 of 2019, dated 5-11-2019] (para 11)
  •  Govind Das Pasari v. SEBI [2021] 128 taxmann.com 25/166 SCL 452 (SAT – Mum.) (para 11)
  • Praful Shah v. SEBI [Appeal No. 389 of 2021, dated 8-6-2021] (para 11)