SEBI imposes penalty of Rs. 50 Lakhs upon M.D. of Farmax India LimitedThe Securities and Exchange Board of India (SEBI), has imposed a penalty of Rs. 50 lakhs upon the MD of Farmax India Limited for the violation of Section 12A(a), (b), (c) of Securities and Exchange Board of India Act, 1992 read with Regulations 3(a), (b), (c), (d) and 4(1)of SEBI Prohibition of Fraudulent and...
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SEBI imposes penalty of Rs. 50 Lakhs upon M.D. of Farmax India Limited
The Securities and Exchange Board of India (SEBI), has imposed a penalty of Rs. 50 lakhs upon the MD of Farmax India Limited for the violation of Section 12A(a), (b), (c) of Securities and Exchange Board of India Act, 1992 read with Regulations 3(a), (b), (c), (d) and 4(1)of SEBI Prohibition of Fraudulent and Unfair Trade Practices Regulations ,2003 (PFUTP Regulations).
Herein, the Securities and Exchange Board of India (SEBI) had conducted investigation against several Indian companies that had issued Global Depository Receipts (GDR) in overseas markets. In this regard, on an enquiry with European American Investment Bank (EURAM Bank) about the loan taken by initial GDR subscribers, it was informed that in respect of GDR issue of Farmax, M/s. Vintage FZE (Vintage), now known as Alta Vista International, had availed loan against the GDR proceeds of Farmax India Limited (FIL / Farmax).
Accordingly, SEBI had investigated the issue of loan taken against the GDR proceeds of Farmax during the issuance of GDR i.e. June 01, 2010 to August 31, 2010 (Investigation Period (IP).
It was observed in the Investigation that Farmax, in connivance with its associates transferred USD 15.60 million from its EURAM bank account to the account of Farmax International FZE and Vintage colluded with Farmax to divert the funds which caused loss to the Farmax as well as its shareholders to the extent of USD 15.60 million and the claim of Farmax that it was not aware of such transfers was false.
It was also found in the investigation that loan default by Vintage to the extent of USD 56.60 million was paid from the proceeds of GDR issue of Farmax. The investigation also concluded that shares sold by India Focus Cardinal Fund and High blue Sky Emerging Market Fund were the shares which were issued without proper consideration.
The Adjudicating Officer(AO) observed that the corporate announcements made by FIL on June 29, 2010 and August 14, 2010 regarding allotment of GDR issues had the potential to mislead the investors and/or influence the price of the scrip of FIL and/ or created a false impression in the minds of the investors that the GDR issue was fully subscribed.
The FIL itself had facilitated subscription of its GDR issue wherein the subscriber i.e. Vintage obtained loan from EURAM Bank for subscribing to the GDR issue of FIL, and FIL secured that loan by pledging the GDR proceeds with from EURAM Bank and, in this connection, FIL did not receive GDR proceeds to the extent of USD 56.66 million from EURAM Bank as Vintage defaulted on the repayment of loan as a consequence of which EURAM Bank invoked its pledge on the remaining GDR proceeds of FIL.
As per the AO, FIL and its MD i.e. the Noticee also diverted USD 15.60 million to UAE subsidiary of FIL, Farmax International FZE and thereafter to other entities related to Arun Pachariya (beneficial owner and Managing Director of Vintage).
The AO also found that in addition to make misleading disclosures, FIL failed to make material disclosures regarding execution of loan agreement and pledge agreement dated May 05, 2010.
FIL had not disclosed the contingent liability for amount kept with EURAM Bank in fixed deposit. The AO was of the view that FIL should have mentioned its contingent liability in the form of the Pledge Agreement dated May 05, 2010 between FIL and EURAM Bank.
There also appeared to be a post-facto disclosure which had been made by FIL after the GDR proceeds had been realized by EURAM Bank and after FIL's shareholders had suffered the loss it was noted that the actions of the FIL and the Noticee, being MD of FIL were in the furtherance of the fraudulent scheme of issue of GDRs and had resulted in 'fraud' as defined under the PFUTP Regulations, 2003.
The AO also noted that the Noticee had participated in the Board meeting of FIL on April 27, 2010, wherein approvals were made to, among other, authorizing the Euram bank to use the GDR proceeds as security in connection with the loan and the same was acted upon by FIL in which the Noticee had signed and executed the pledge agreement on behalf of FIL.
Further, the Noticee had continued to be on the board of Directors of FIL during the entire process of issue of GDRs, receipt of such proceeds, routing of the said proceeds to the Sharjah based subsidiary of FIL and so, was part of the fraudulent scheme and arrangement of FIL in executing the scheme of financing its own GDR issue.
Thus, it was concluded that the violation of Section 12A(a), (b), (c) of SEBI Act, 1992 read with Regulations 3(a), (b), (c), (d) and 4(1)of PFUTP Regulations, 2003 by the Noticee made him liable for imposition of penalty under Section 15HA of the SEBI Act, 1992.