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SEBI | Not informing Stock Exchanges about entering into agreements whereby proceeds of GDR were pledged, would amount to fraud under PFUTP Regulations, 1995

Securities and Exchange Board of India (SEBI): Ananta Barua, (Whole Time Member) by order, prohibited the Managing Director of Morepen Laboratories from accessing the securities market, directly or indirectly, and also restrained him from buying, selling or otherwise dealing in the securities including units of mutual funds, either directly or indirectly or in any other manner whatsoever, for a period of one year.

Securities and Exchange Board of India noticed some arrangements being perpetrated by certain persons/entities in respect of issuance of Global Depository Receipts (“GDRs”) and therefore, conducted investigation into the GDR issue of various companies including Morepen Laboratories.

During the investigation, it was found that the GDRs of Morepen were subscribed by two entities namely; Solsec Company Limited and Seviron Company Limited. Investigation also found that these two entities Solsec and Seviron had obtained a loan of USD 7 million and USD 8 million, respectively, through credit agreement from the Banco Efisa, S.F.E., S.A., a bank based in Lisbon and, further, Morepen had secured the loan obtained by Solsec and Seviron from Banco by pledging the GDR proceeds through Account Charge agreement with Banco. The investigation also found that the managing director (CMD) of Morepen had executed the Account Charge agreement and three other directors of Morepen, during the relevant time were aware of such a transaction. Show cause notices were issued to all their directors for violation of provisions under the SEBI Act, 1992 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

The show-cause notices alleged that Morepen did not inform to the Stock Exchanges about entering into Account Charge Agreement whereby proceeds of the GDR were pledged as collateral for the loan availed by the subscribers to subscribe its GDR issue provided misleading information about the successful subscription of GDRs and accordingly, investors in India were misled. Such misleading statements had the potential to induce the investors to trade in the shares of Morepen because investors believed that the GDR issue of Morepen was successfully subscribed by the overseas investors.

The Tribunal held that even though the alleged violation of Regulations in respect of fraud could not be made out, the charges in relation to misleading information were maintainable. Since Morepen did not inform BSE about the execution of Account Charge agreement with Banco which acted as a security for the loans availed by the subscribers and also that the GDR issue was subscribed by only two entities i.e. Solsec and Seviron and instead, Morepen vide announcement made to BSE on March 31, 2003, and April 04, 2003 made a misleading disclosure that the issue of GDRs was successfully subscribed. Thus, by making such misleading disclosure, Morepen violated the provisions of Regulation 4(2)(f), (k) and (r) of the PFUTP Regulations, 2003. It was observed that the second supplementary show cause notice SCN also made a similar allegation of misleading disclosure made by Morepen which resulted in violation of Regulation 5(1) of the PFUTP Regulations, 1995.

Therefore, in respect of allegation for making misleading disclosures by Morepen, the charging provisions of the regulation of PFUTP Regulations, 2003 and PFUTP Regulations, 1995 were in pari materia.

With regard to the diversion of funds, there were two versions, one alleged in the SCN and the other in the Annual Report of the Morepen.

The Tribunal held that in terms of Section 177(4) (viii) of the Companies Act, 2013, audit committee has to monitor the end-use of funds raised through public offers and, therefore, the audit committee may look into the correctness of information provided in the Annual Report of Morepen and report the same to the Board of Directors of Morepen for taking appropriate corrective action, if any.[ Morepen Laboratories Ltd., In Re; 2019 SCC OnLine SEBI 146; decided on 24-09-2019]

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