SAT restrains MDs of a company from accessing security market for fraudulently issuing GDRSs

Case details: Govind Das Pasari v. Securities and Exchange Board of India - [2021] 128 taxmann.com 25 (SAT - Mumbai)

Judiciary and Counsel Details

• • Justice Tarun Agarwala | Presiding Officer and M.T. Joshi | Judicial Member
  • Somasekhar Sundaresan, Adv. for the Appellant.
  • Kumar Desai, Mihir Mody and Arnav Misra, Advs. for the Respondent.

Facts of the Case

The Appellant company had issued Global Depository Receipts (GDRs) and GDR proceeds were deposited with a foreign bank (EURAM Bank). It was, however, found that a single entity namely Vintage FZE presently known as Alta International FZE (hereinafter referred to as ‘Vintage’) having registered office in Dubai was the only subscriber to the GDR issue. It has subscribed to the GDR by obtaining a loan from EURAM.

As pointed earlier, the GDR subscription was to be deposited in the same Bank. However, the loan sanctioned to Vintage was secured by the appellant-Company itself by pledging the entire GDR proceeds with the same EURAM Bank by executing an account charge agreement. Thus, the proceeds were not utilized for the objective of the GDR but merely a show was made that the GDRs issued by the Company were subscribed immediately upon its listing.

The GDRs were later converted into equity shares and those shares were sold in the Indian securities market. The cancellation of GDR started from February 2011 and continued till January 2016 by which time all the GDRs were converted into shares.

The Market Regulator, SEBI by impugned order restrained all appellant-directors from accessing securities market in any manner for a period of five years and imposed a penalty on appellants for violation of regulations 3 and 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003.

In reply, the appellants submitted that they are not liable for the transactions and they were deceived by the Lead Manager to the issue of GDRs. And hence they claimed discharge of the proceedings.

SAT Held

However, the SAT held that appellants were parties to resolution in which GDRs were issued and they did not take any action when GDR proceeds did not reach the coffers of the company later on and remained silent throughout the period which would show that all of them were guilty.

Since instant was a case of violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003, role if any of an entity either a director or non-director, in fraud played would have to be assessed to fasten any liability. Thus, a whole-time director could not escape liability and he would be liable for any default committed by the company.