SEBI imposes penalty for the violation of SEBI Act, 1992 and PFUTP Regulations

SEBI imposes penalty for the violation of SEBI Act, 1992 and PFUTP Regulations

The Securities and Exchange Board of India (SEBI) has imposed a penalty of Twenty lakh upon Mr. Ajay Kumar Dalmia, (Noticee No. 5) for the violation of the provisions of Section 12A (a), (b), (c) of SEBI Act, 1992 read with Regulations 3(a), (b), (c), (d) and 4(1) of PFUTP Regulations in the matter of Bhoruka Aluminium Limited (Company /BAL).

SEBI had conducted investigations into the alleged irregularities in the GDR (Global Depository Receipts) Issue by the Company during the period from November 1, 2010 to December 31, 2010 (Investigation Period).

The investigations revealed that BAL had issued 1.12 million GDRs (amounting to USD 10.38 million) on December 3, 2010, equivalent to1,12,26,280 equity shares of Rs. 10 each, and the said issue was subscribed by one entity viz. Vintage FZE.

It was observed that the directors of BAL in its board meeting had passed board resolution authorizing the opening of an account with EURAM Bank for the purpose of receiving subscription money in respect of the GDR issue of BAL and also for using the funds deposited in the said bank account as security in connection with loans, if any.

BAL had signed a pledge agreement with EURAM Bank pledging GDR proceeds as collateral against the loan availed by Vintage, executed by Mr. Ajay Kumar Dalmia (Noticee), Chief Financial Officer (CFO)of BAL. Vide the said loan agreement, BAL had pledged the GDR proceeds against the loan availed by Vintage FZE for subscribing to GDRs of BAL, thus securing Vintage FZE's loan.

It was alleged that the scheme of issuance of GDRs was fraudulent. It was observed that the Noticee had attended the board meeting when the aforementioned resolution was passed.

Further, the Noticee had signed the pledge agreement on behalf of BAL which had acted as the security for the loan taken by Vintage from the EURAM Bank for subscribing to the GDRs of BAL. It was alleged that the Noticee had acted as a party to the fraudulent scheme of self-financing of the GDR issue of BAL.

The Adjudicating Officer (AO) noted that the Noticee had specifically admitted in his written submissions that he was a Director of BAF (Bhoruka Aluminium FZE), till September 3, 2012, i.e, during and even beyond the period when the fraudulent scheme of self-financing of GDR issue was executed by BAL.

It was again noted that the Noticee in his written submissions, had nowhere disputed the inferences drawn in the earlier order about the fraud been committed by BAL through the aforesaid scheme of self-financing of its GDR issue. He had merely tried to absolve himself from the liability ofthe said fraudulent scheme by pleading his ignorance of the same.

The submission of the Noticee that he was not aware of the activities being undertaken, despite being a Director of the entity, was wholly untenable when his role was looked in totality. It could not be reasonably possible that the Noticee who was the head of the financial operations of BAL due to his position as the CFO therein, did not know or understand the fraudulent scheme of BAL, had signed the pledge agreement without understanding the meaning and purport of the same in the arrangement of the GDR subscription and despite being the Director of BAF, which was the recipient of the GDR proceeds from BAL, did not understand the scheme of self-financing of GDRs.

The ignorance as sought to be pleaded by the Noticee in all these counts was per se unacceptable. It was held that the Noticee was an important part of the aforesaid fraudulent scheme and he had the means and resources to understand the nature of the said scheme and despite that, he had aided and abetted the execution of the said scheme.

His pleadings to the effect that he had merely acted in his capacity as an employee also was not accepted as participation in a fraudulent scheme related to the securities market, cannot be condoned merely because the concerned person was "acting the capacity of anemployee",despite having the means to understand the fraudulent nature of the transactions being undertaken by BAL, especially when he was holding a senior and significant position in the company and was an "officer in default".

Also, the Noticee had signed the Pledge Agreement for and on behalf of BAL and the seal of BAL was also affixed thereon. Vide this pledge agreement, Euram Bank was explicitly authorized to use the funds of BAL as security in connection with loan obtained by Vintage (subscriber of GDR issue of BAL) from the Euram Bank.

As such, the Noticee was not only a part of the fraudulent arrangement of BAL but also played an active role in executing the pledge agreement which actually facilitated the subscription of GDR issue of BAL. Thus, the charge of violation of Section 12A(a), (b), (c) of SEBI Act, 1992 read with Regulations 3(a), (b), (c), (d) and 4(1) of PFUTP Regulationsby the Noticee stood established and made himliable for imposition of penalty.