WWW.LIVELAW.

IN

BEFORE THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Order Reserved on: 25.06.2019

Date of Decision : 02.08.2019

Appeal No. 281 of 2017

1. P.G. Electroplast Ltd.

P-4/2, 4/3, 4/4, 4/5, 4/6, Site B,
UPSIDC Industrial Area,
Surajpur, Greater Noida,
Uttar Pradesh – 201 306.

2. Promod Gupta
P-4/2, 4/3, 4/4, 4/5, 4/6, Site B,
UPSIDC Industrial Area,
Surajpur, Greater Noida,
Uttar Pradesh – 201 306.

3. Anurag Gupta
P-4/2, 4/3, 4/4, 4/5, 4/6, Site B,
UPSIDC Industrial Area,
Surajpur, Greater Noida,
Uttar Pradesh – 201 306.

4. Vishal Gupta
P-4/2, 4/3, 4/4, 4/5, 4/6, Site B,
UPSIDC Industrial Area,
Surajpur, Greater Noida,
Uttar Pradesh – 201 306.

5. Vikas Gupta
P-4/2, 4/3, 4/4, 4/5, 4/6, Site B,
UPSIDC Industrial Area,
Surajpur, Greater Noida,
Uttar Pradesh – 201 306. ….. Appellants

Versus
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Securities and Exchange Board of India

SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
…. Respondent
Mumbai – 400 051.

Mr. Shyam Mehta, Senior Advocate with Ms. Rishika Harish

and Ms. Akshaya Bhansali, Advocates i/b Mindspright Legal
for Appellants.

Mr. Mustafa Doctor, Senior Advocate with Mr. Mihir Mody

and Mr. Sushant Yadav, Advocates i/b K. Ashar & Co. for the
Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer

Dr. C.K.G. Nair, Member
Justice M.T. Joshi, Judicial Member

Per : Justice Tarun Agarwala, Presiding Officer

1. P.G. Electroplast Ltd. (‘PGEL’ for short) had come out

with Initial Public Offering (IPO) in August, 2011 for issue of

57,45,000 equity shares of face value of Rs. 10/- each. When

the shares was listed on the BSE Limited (‘BSE’ for short)

and National Stock Exchange of India Limited (‘NSE’ for

short) platform in September, 2011, Securities and Exchange

Board of India (‘SEBI’ for short) noticed fluctuation in the

price of the scrips of the Company following the day of listing

and consequently initiated an investigation into the said scrip.

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Based on the preliminary findings an ad-interim ex-parte

order was passed on December 28, 2011 which was

confirmed on October 31, 2012. Subsequently, a Show Cause

Notice (SCN) was issued on January 16, 2013 alleging non-

disclosure of certain information such as amount raised

through Inter Corporate Deposits (ICDs), board resolution

dated August 17, 2011, purchase orders for plant and

machinery, names of certain suppliers etc. Diversion of IPO

proceeds and diversion of funds through purchase orders was

also alleged. The Whole Time Member (‘WTM’ for short)

after giving an opportunity of hearing and after considering

their replies passed an order dated March 11, 2014 prohibiting

the appellants from raising any capital from the securities

market and further restrained them from dealing in the

securities market in any manner for a period of ten years. The

appellants were also directed to recover all the monies which

were not recovered by the appellants and submit a report to

SEBI. The appellants were also directed that the monies so

recovered should be deposited in the escrow account. The

appellant being aggrieved filed an appeal before this Tribunal.

2. The charges levelled against the appellants, for the sake

of convenience, can be clubbed into two heads, namely:-

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(a) Non-disclosure of certain material information in

the offer documents and;

(b) Diversion of IPO proceeds and other funds to

entities which purchased the appellants’ shares to

ensure full subscription to the IPO of the

appellants.

3. The Tribunal by its order dated August 30, 2016

allowed the appeal in part holding that the appellants were

guilty of inadequate disclosure of certain material information

in the offer documents. The Tribunal further found that the

appellants were not guilty of the provisions of SEBI

(Prohibition of Fraudulent and Unfair Trade Practices relating

to the Securities Market) Regulations, 2003 (‘PFUTP

Regulations’ for short). The Tribunal held:-

“To sum up, the Appellant has partially failed to

ensure proper disclosure of material information
which was required for the investors in order to
enable them to take an informed decision to invest
or not to invest in the IPO in question. However,
there are certain facts which remain undisputed.
One, that there is no connivance or connection for
that matter which has been established between
the Appellant itself and entities further down in
the line of transfer which eventually purchased
the Appellant’s shares and dealt in its scrip once
it was listed on the stock exchange. There is no
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commonality of directors, or registered addresses

or any other incidents which can lead to such an
inference that the Appellant was involved in the
transfer of funds to certain such entities which,
inter-alia, bought the Appellant’s share in the
IPO. Further, invoices and other documents have
been produced by the Appellant for the purchase
of raw materials and equipments required to run
the business, and their validity is not in question.
It is pertinently noted that most of the money
which the Respondent alleges to have been
transferred has been returned to the Appellant.
The Respondent has fairly submitted that the
Auditor appointed by SEBI itself has in its report
dated January 25, 2016 noted that an amount of
` 80 crore has been successfully recalled by the
Appellant and the Respondent has scrutinized the
utilization thereof. It is also a fact that the
Appellant has already recalled moneys
recoverable owing to ICDs, cancelled contracts
pertaining to land purchase, except an amount of
` 3.77 crore as explicated hereinabove with
respect to which the Appellant has initiated the
winding up of the company called Supreme. It
shows the respect for and earnest desire of the
Appellant to abide by SEBI’s regulatory
directions.

Further, it remains undisputed that ICDs which

were given out of the IPO Proceeds to the tune of
` 32 crore given as ICDs to Saptrishi, Raw Gold
and Wattkins. Today, however, this amount of
` 32 crore has been received by the Appellant,
albeit with certain amount of delay. It is also to be
noted that minutes of the annual general meeting
held on September 12, 2012, attached as Exhibit
F2 of the Appeal clarify that unequivocal
permission was granted to the Board of the
Appellant, as per Section 61 of the Companies
Act, 1956, to alter the utilization of the IPO
Proceeds and to use the proceeds as the directors
deemed fit. Therefore, looking into the totality of
the facts and circumstances of the case in hand,
the Respondent should not have imposed the
punishments of debarment from the market for a
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long period of one decade. Given that, some of the

Respondent’s allegations levelled in the Impugned
Order, and particularly dealt with in this order in
paragraphs no. 40, 45, and 50 cannot be
sustained in law or on fact as elucidated, this
Tribunal is of the opinion that in order to meet the
ends of justice the period of debarment from the
securities market of ten years imposed upon the
Appellant should be reduced to seven years as the
Appellant has already suffered by remaining out
of the market for a period of more than four and
half years by now. Ordered accordingly. As far as
the money lying in the escrow account is
concerned, the Appellant shall be at liberty to use
for the objects of the IPO as per law.”

4. The Tribunal found that it was not a case of non-

disclosure of material information but was a case of

inadequate disclosure at the relevant place in the Red Herring

Prospectus (RHP). The Tribunal further found that there was

no connivance or connection between the appellants and other

entities with regard to the purchase of appellant’s share nor

there was any commonality of the Directors with other

entities which could lead to an inference that the appellant

was involved in the transfer of funds to certain entities which

bought the appellant’s share in the IPO. The Tribunal further

found that most of the money which had been transferred was

returned to the appellant and that the auditor appointed by

SEBI had certified that an amount of Rs. 80 crore has been

successfully recalled by the appellants and further had

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cancelled the contracts pertaining to land purchase. In fact,

the Tribunal found that the appellants had shown an earnest

desire to abide by SEBI’s regulatory directions. The Tribunal

considering the aforesaid factors and considering the fact that

the appellants had already undergone debarment for several

years pursuant to the order of SEBI reduced the debarment

from ten years to seven years.

5. While the proceedings were going before the WTM, the

Adjudicating Officer (‘AO’ for short) also initiated

proceedings under the SEBI Act, 1992. The AO considering

the show cause notice and the order of the Tribunal found that

the following issues arose for consideration, namely:-

(a) Non-disclosure of certain material information in

the offer documents

(b) Diversion of IPO proceeds and other funds to

entities which purchased the shares of the

company to ensure full subscription to the IPO.

6. The AO considered the findings of the Tribunal and

found the appellants guilty of the following:-

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(a) Non-disclosure of ICD agreements which were in

the form of bridge loan in the prospectus.

(b) Non-disclosure of its Board Resolution dated

August 17, 2011 to invest the IPO proceeds in

ICDs of other companies and

(c) Disclosure of agreements for purchase of land

executed with other entities.

7. The AO on the aforesaid basis passed the impugned

order holding that the appellants had violated the SEBI (Issue

of Capital and Disclosure Requirements) Regulations, 2009

(‘ICDR Regulations’ for short) and Section 11C(2) and (3)

the SEBI Act, 1992 and consequently imposed a penalty of

Rupees One Crore each on the appellants under Section 15HB

of the SEBI Act, 1992. The appellants being aggrieved by the

said order has filed the present appeal.

8. We have heard Shri Shyam Mehta, the learned senior

counsel alongwith Ms. Rishika Harish, the learned counsel for

the appellants and Shri Mustafa Doctor, the learned senior

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counsel alongwith Shri Mihir Mody, the learned counsel for

the respondent.

9. With regard to the findings arrived at by the AO we are

of the opinion that the Tribunal’s earlier order on the very

same issues need to be looked into.

10. On the issue of non-disclosure of ICD agreements which

were in the form of bridge loan in the prospectus the Tribunal

found that, the bridge loan could not be shown in the draft

RHP, in as much as, the bridge loan was executed after the

filing of the RHP and that the Board of Directors in its

resolution on August 17, 2011 had communicated to its

Merchant Banker the information relating to the bridge loan.

The Tribunal found that when the board resolution was

intimated to the Merchant Banker it was then the duty of the

Merchant Banker to incorporate the factum of bridge loan in

the prospectus. The Tribunal further found that the Merchant

Banker appeared to be in a great hurry to file the RHP on the

same date on account of which the information relating to

bridge loan was not mentioned in the RHP or the prospectus.

Thus, even though the non-disclosure was vital, the Tribunal

in clear terms indicated that once Board’s resolution was sent

to the Merchant Banker it became the onerous duty of the

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Merchant Banker to incorporate the factum of the bridge loan

in the prospectus. Thus, in our view the non-disclosure is only

technical. The Tribunal in its earlier order on this issue held:-

“The first instance of non-disclosure relates to

ICDs taken by the Appellant in the nature of
bridge loans. A bridge loan in financial parlance
is nothing but a short-term loan availed of by
companies to meet their immediate fiscal
requirements, this is precisely what an inter-
corporate deposit represents. Clause 2(VII)(G) of
Part A mandates the disclosure of bridge loans or
any other financial arrangement which the
concerned company intends to repay out of the
proceeds of the issue. As per the facts of the case,
the Appellant executed ICD agreements with
seven entities, namely Jainex, Prraneta, Agarwal
Holdings Ltd., JRI Industries and Infrastructure
Ltd., Vineet Capital Services Pvt. Ltd., Jay
Polychem (India) Pvt. Ltd., and Urmi Computers
Pvt. Ltd. It is pertinent to note that all these seven
agreements, vide which the Appellant received an
aggregate of 26 around ` 52 crore, were executed
after the filing of the RHP, but before the filing of
the Prospectus i.e., between August 17, 2011 and
August 31, 2011. A perusal of the Impugned
Order dated March 11, 2014 clearly points out
that the Appellant could not have disclosed this
information in the Draft RHP, which was filed on
September 23, 2010 or even in the RHP which
was filed, after incorporating SEBI’s suggestions
and on being approved by the Company’s Board
of Directors on August 17, 2011. This Board
Resolution was communicated by the Appellant to
its Merchant Banker on August 17, 2011 itself
whose duty it was to incorporate this factum of
bridge loan in the Prospectus. The Merchant
Banker seems to have a great hurry to file the
RHP on the same date due to which the bridge
loan aspect did not find a mention either in the
RHP or the Prospectus.”
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11. On the issue of non-disclosure of the Board’s resolution

dated August 17, 2011 to invest the IPO proceeds in ICDs of

other companies, the Tribunal in its earlier order found that

the appellant had disclosed in the prospectus that the

Company intends to invest the IPO proceeds in interest

bearing liquidity instruments, and thus the Tribunal held that

the appellant satisfied the disclosure requirements as per the

ICDR Regulations. The Tribunal was, however, of the view

that the appellant should have disclosed in categorical terms

that the IPO proceeds were to be invested in ICDs. The

Tribunal found that the expression “ICD” was absent in the

prospectus though the appellant had fairly disclosed the

relevant information in the prospectus. In our view it is not a

case of non-disclosure and non indication of the expression

“ICD” in the prospectus is only technical. In this regard the

finding of the Tribunal in its earlier order is extracted

hereunder:-

“The second allegation of non-disclosure in the

RHP and Prospectus relates to the non-disclosure
of the Company’s Board Resolution dated August
17, 2011 to invest the IPO Proceeds in ICDs of
other companies. In pursuance thereof, three ICD
agreements were entered into between the
Appellant and the concerned parties for amounts
of ` 15 crore, ` 7 crore and ` 10 crore. Although
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by disclosing in the Prospectus that the Appellant

intends to invest the IPO Proceeds in interest
bearing liquid instruments, the Appellant satisfied
the disclosure requirements as per the ICDR
Regulations, the Appellant did not in categorical
terms disclose that it wished to invest the IPO
Proceeds in ICDs. We note that even though the
Prospectus did state that the Appellant would be
investing the IPO proceeds in high-quality
interest bearing liquid instruments, the expression
‘ICD’ is absent from the disclosure. The
Appellant should, therefore, have fairly disclosed
the abovesaid relevant information, if not
material, regarding ICDs in the RHP and
Prospectus filed with the Respondent.”

12. Lastly, on the third issue, namely, disclosure of

agreements for purchase of land executed with other entities,

in this regard, the Tribunal in its earlier order found that

agreements for purchase of land were executed with several

entities aggregating Rs. 80 crore between the date of filing of

the RHP and date of filing of the prospectus. This detail was

mentioned in the prospectus but not at the appropriate place.

Thus, again we are of the opinion that it is not a case of non-

disclosure but a case of improper disclosure at the wrong

place in the prospectus. In this regard, the finding of the

Tribunal in its earlier order is extracted hereunder:-

”Finally, the Appellant has been held guilty by the

Respondent for allegedly not disclosing
agreements and MOUs entered into for the
purchase of land. Agreements for the purchase of
land were executed with Saptrishi, Safeco,
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Realnet and Eastern Resorts, aggregating to an

amount of ` 80 crore between the date of filing of
the RHP and the date of filing the Prospectus. Out
of the ` 80 crore (approximate value), around
` 37 crore was paid in advance to the
aforementioned entities in pursuance of the said
land deals, however, the details regarding the
same were not mentioned at the appropriate place
in the Prospectus. The Appellant, however, stated
that it had “not entered into any commitment for
any strategic initiatives…” which as per the
Respondent is a misstatement. The Appellant’s
defense that the aforesaid agreements did not
need to be disclosed since they fell under the
“General Corporate Purpose” head cannot be
accepted because the money allocated towards
general corporate purposes was only ` 21.4 crore
as opposed to the ` 80 crore which was sought to
be spent on the land purchase agreements. In this
regard, therefore, the Impugned Order does not
carry any legal infirmity.”

13. After considering the aforesaid findings given by the

Tribunal, the AO held that the allegations regarding non-

disclosure of ICD agreements which were in the form of

bridge loan, non-disclosure of its Board resolution dated

August 17, 2011 to invest the IPO proceeds in ICDs of other

companies and, non-disclosure of agreements for purchase of

land executed with other entities were upheld by the Tribunal

and therefore imposed the maximum penalty of Rs. 1 crore

each on the appellant. In our opinion, the AO has completely

misinterpreted the order of this Tribunal. The penalty imposed

is also grossly disproportionate to the alleged misconduct.

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14. At this stage and, for the sake of repetition, the charge

against the appellant was non-disclosure of material

information in the offer document and diversion of IPO

proceeds. The second charge, namely, diversion of IPO

proceeds was far more serious than the charge of non-

disclosure. The Tribunal while considering the aforesaid two

charges found that the appellant had partially failed to ensure

proper disclosure of material information in the prospectus. It

was not a case of complete non-disclosure of material

information and, as we have found that the partial non-

disclosure, was at best, a technical violation. In one instance,

the information was given to the Merchant Banker who failed

to disclose it in the RHP and, in the two other instances, the

disclosure was made in the prospectus but not at the relevant

place. Thus, it cannot be said that there was complete non-

disclosure of material information in the prospectus.

15. Insofar as the second charge of diversion of IPO

proceeds is concerned the Tribunal in its earlier order held

that the charge of violating PFUTP Regulations was not

established by any cogent reasoning or convincing evidence.

The Tribunal also found that the purchase of land by the

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appellant was genuine and not illegal or fabricated and

consequently came to a conclusion:-

“An analysis of the abovesaid documents reveals

that the Appellant’s dealings with Saptrishi, as far
as the agreement for the purchase of land is
concerned, are genuine and not illegal or
fabricated……There has to be sufficient material
to bring home such a severe charge against the
Appellant. The charge relating to violation of
PFUTP Regulations is a serious charge and
hence a higher degree of proof is required to
sustain it. In the instant case, such a charge has
not been established against the Appellant by
adducing cogent reasoning and convincing
evidence.”

16. Since the appellant had already undergone a

considerable period of debarment pursuant to the order of

SEBI, the Tribunal reduced the debarment from ten years to

seven years for the partial disclosure of information in the

prospectus. In the ultimate analysis, the order of debarment

was for violation of partial disclosure in the prospectus and

not for violation of PFUTP Regulations. The AO while

imposing the penalty has not factored this debarment while

fixing the quantum of penalty. Further, in our opinion, the

factors contemplated under Section 15J was also not

considered by the AO in the right perspective.

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17. Under Section 15HB a maximum penalty of Rs. 1 crore

can be imposed. For facility, the said provision is extracted

hereunder:-

“15HB. Penalty for contravention where no

separate penalty has been provided.- Whoever
fails to comply with any provision of this Act, the
rules or the regulations made or directions issued
by the Board thereunder for which no separate
penalty has been provided, shall be liable to a
penalty which may extend to one crore rupees.”

18. Penalty can be imposed for failure to carry out a

statutory obligation under the SEBI’s Act. Factors

contemplated under Section 15J are required to be taken into

consideration before imposing a penalty. If it is found that a

party has not acted deliberately, then the authority has a

discretion, to be exercised judicially, whether in a given case,

after taking into consideration of all the relevant

circumstances, as to whether a penalty should be imposed or

not. Even if a minimum penalty is prescribed, the authority,

after considering the circumstances of the case and other

factors enumerated in Section 15J would be justified in

refusing to impose penalty when there is a technical or venial

breach of the provisions of the Act. The above was precisely

held by the Supreme Court in M/s. Hindustan Steel Ltd. vs.

State of Orissa, 1969(2) SCC 627.

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19. In Adjudicating Officer, Securities and Exchange

Board of India vs. Bhavesh Pabari, (2019) 5 SCC 90, the

Supreme Court held that the provisions of Clauses (a), (b) and

(c) of Section 15-J are illustrative in nature and have to be

taken into account whenever such circumstances exist. The

Supreme Court further held that factors other than those

enumerated in Clauses (a), (b) and (c) of Section 15-J can also

be considered by the Adjudicating Officer.

20. Further, we are also of the opinion that the direction of

the AO to penalize all the directors is wholly unwarranted.

Merely because the appellants are directors does not make

them liable. The AO must give a specific finding that all the

appellants as Directors were responsible for the alleged

violation and were in charge of the affairs of the Company. In

the instant case, there is no shred of evidence to show that the

alleged act was committed by any of the Directors from

which a reasonable inference could be drawn that the said

Directors could also be vicariously liable. Vicarious liability

can be inferred against a Company and its Directors only if

the requisite assertions / allegations are averred in the Show

Cause Notice so as to make the Company and its Directors

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vicariously liable for the violation of the provisions of the Act

and its Regulations. The assertions / allegations should also

include that the Director / Directors were in charge of and

responsible for the business of the Company and by virtue of

their position they are liable for penalty. In the instant case,

no such allegations has been made in the SCN.

21. In our view this is a fit case where no penalty could be

imposed and the question of imposing the maximum penalty

in the given facts and circumstance does not arise. The AO

has clearly exceeded its power in imposing the maximum

penalty. The AO has misinterpreted the order of Securities

Appellate Tribunal (SAT).

22. Considering the aforesaid, we are of the opinion that the

maximum penalty of Rs. 1 crore each imposed upon the

appellants is grossly disproportionate to the violation. In our

view the order of debarment which was reduced by this

Tribunal from ten years to seven years was more than

sufficient penalty to cover the technical violation for

imposition of penalty for violating the provision of Section

11C of the SEBI Act, 1992 and the ICDR Regulations.

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23. In the light of the aforesaid, the appeal is allowed. The

imposition of penalty of Rs. 1 crore each on the appellants is

set aside. In the circumstances of the case, there shall be no

order on costs.

Sd/-
Justice Tarun Agarwala
Presiding Officer
]

Sd/-
Dr. C.K.G. Nair
Member

Sd/-
Justice M.T. Joshi
Judicial Member

02.08.2019
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