SAT Applies Doctrine of Proportionality: Reduces SEBI's Penalty on Zenith Birla to Rs 25 Lakh in GDR Manipulation Case

SAT Applies Doctrine of Proportionality: Reduces SEBI's Penalty on Zenith Birla to Rs 25 Lakh in GDR Manipulation Case

The Securities Appellate Tribunal (SAT), reduced the penalty imposed by Securities Exchange Board of India (SEBI) on Zenith Birla India Ltd (ZBIL) to Rs 25 lakh from Rs 10 crore in a matter related to manipulation of Global Depository Receipt (GDR) case. ZBIL is now known as Zenith Steel Pipes and Industries Ltd.

The division member bench comprising of Justice Tarun Agarwala (Presiding Officer) and Ms. Meera Swarup (Technical Member) were adjudicating six appeals filed by Zenith Steel Pipes and Industries Limited and its Directors against two orders dated March 30, 2021 passed by the Whole Time Member ('WTM' for short) and order dated June 16, 2022 passed by the Adjudicating Officer ('AO' for short) in the matter relating to issuance of Global Depositories Receipts ('GDRs' for short). Another appeal has been filed by European American Investment Bank AG ('Euram Bank' for short) against the order of the WTM.

The WTM by the impugned order restrained the Company Zenith Birla (India) Ltd. (hereinafter referred to as the 'Company'), Chairman and its Managing Director from accessing the securities market for a period of three years and one year respectively. The AO by the impugned order imposed a sum of Rs.10 crore upon the Company and Rs.10 lakh each upon the Chairman and Managing Director. The WTM warned Euram Bank to ensure that all future dealings in the Indian Securities Market is done strictly in accordance with law.

The facts leading to the filing of the present appeal was, that the matter arose in respect of the issuance of GDRs by the Company whereby a fraudulent scheme was devised by the Company and its Directors. The Company issued 1.81 million GDRs for USD 22.99 million in May 2010 and the issue was subscribed by Vintage FZE after getting a loan from EURAM Bank to subscribe to the GDRs. Arun Panchariya had signed the loan agreement on the behalf of Vintage as its MD and the issue was subscribed only by Vintage.

SEBI was of the view that Company had violated the provisions of Section 12A(a), (b), (c) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the 'SEBI Act') read with Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as 'PFUTP Regulations'), by misleading the Indian retail investors and induced investors to deal in the shares of the Company in the Indian capital market and, therefore, the scheme of issuance of GDR was fraudulent.

According to SEBI, ZBIL had pledged its entire GDR proceeds with Euram Bank as a security against the loan availed by Vintage for subscribing to the GDRs. It was also found that all the 1.81 million GDRs were cancelled and converted into equity shares. After cancellation, it was noticed that 4.77 crore shares of Zenith on conversion of 13.77 lakh GDRs were sold in the securities market through India Focus Cardinal Fund (IFCF).

The SAT noted that there was no diversion of funds and no wrongful dealings in securities other than the fact that the portion of amount deducted by the Euram Bank for default committed by Vintage. The only ground urged by the learned counsel for the appellants was that the directions imposed by the WTM and the penalty imposed by the AO was harsh and excessive

The bench remarked that the doctrine of proportionality is now well established in our jurisprudence and is a recognized facet of Article 14 of the Constitution of India. It observed, "Undoubtedly, the doctrine of proportionality is now well established in our jurisprudence and is a recognized facet of Article 14 of the Constitution of India Article 14 of the Constitution of India. We are of the opinion that in the rapid growth of administrative law it has become the need and necessity to control possible abuse of discriminatory power by administrative authorities."

The SAT emphasized that where the punitive measure is harsh or disproportionate to the offence which shocks the conscience it is within the discretion of the Court to exercise the doctrine of proportionality and reduce the quantum of punishment to ensure that some rationality is brought to make unequals equal.

"The Company is a running concern. Penalising the Company with such heavy penalty is in fact penalising the shareholders which is not justifiable especially for a running company. Further, the money raised through GDRs has been received by the Company and has not been misappropriated. The same has been utilitised for the purpose for which the GDR was issued which fact has not been disputed. Thus, it is not a case of defalcation of the funds," observed the bench.

Thus, the SAT opined, that the penalty imposed was excessive and disproportionate to the violation and was also discriminatory.

While affirming the order of the AO for the violations committed by the Company, SAT reduced the penalty against the Company to Rs. 25 lakh. The penalty against the Chairman and Managing Director was affirmed.

Insofar as the appeal of Euram Bank was concerned, the WTM had issued a warning to the said appellant to ensure that all its future dealings in the Indian securities market is done strictly in accordance with law. This finding has been challenged by the said appellant contending that the dealings done by the appellant was done strictly in accordance with laws of Austria. Further, Dubai Financial Services Authority also undertook an investigation into the role and activities of the appellant. After investigation, the said Authority had closed the investigation concluding that the appellant had not committed any wrongdoings. It was, thus, contended that these aspects were not considered by the WTM while passing the impugned order.

The SAT noted that the appellant bank Euram Bank was registered as a Foreign Institutional Investor (FII) with SEBI in the year 2008 and that an entity known as India Focus Cardinal Fund (IFCF) was registered with SEBI as a sub account of the appellant. The role played by Euram Bank while granting a fraudulent structured loan to Vintage was dubious.

The SAT took consideration of the WTM findings that IFCF undertook the role of off-loading the converted shares of GDR in the Indian market which was done with the active role of the appellant bank and the fraudulent scheme of the sub account IFCF could not have been completed and the shares of Zenith could not have been sold in the Indian market but for the active participation of the appellant bank.

The SAT affirmed the WTM's findings that there were sufficient reasons to hold the acts of the appellant bank amounted to transgression of Section 12A of the SEBI Act read with Regulation 3 and 4 of the PFUTP Regulations.

In light of the aforesaid, the debarment was reduced to the period of undergone and penalty was reduced from Rs. 10 crore to Rs. 25 lakh and the appeals of Yashovardan Birla, Euram Bank, and Mahendra Singh Arora were dismissed by the SAT.