SEBI | GDR| Catches the principal architect in activation & orchestration of the fraudulent scheme –Leaves one being ‘under liquidation’, rest restrained from accessing the market

Securities and Exchange Board of India (SEBI)-G Mahalingam, Whole Time Member, restricted the entities from the securities market, involved in the fraudulent issuance of GDRs without appropriate disclosures. However, the Tribunal disposed of the proceedings against Noticee 1 without any directions since was already ‘under liquidation’. The Tribunal stated,

“…that Hiran Orgochem in connivance with Vintage FZE devised a fraudulent scheme whereby Vintage FZE received GDRs without paying any consideration, at the cost of the shareholders / investors of Hiran Orgochem. Further, the Director of Hiran Orgochem i.e. Kantilal Hiran, is liable for the above mentioned fraudulent scheme as he was fully involved in the day–to–day activities of the Company, and had complete knowledge of the activities of the Company during the process of issuance of GDRs”.

In the pertinent matter the question under scrutiny was whether the shares underlying the GDRs were issued with proper consideration and with appropriate disclosures with respect to the GDRs issue. The show cause notice alleged that issuance of GDRs by Hiran Orgochem (Noticee 1) was fraudulent as the Company had entered into a Pledge Agreement with EURAM Bank for a loan that had been availed by Vintage FZE towards the subscription of GDRs issued by the Company. The Pledge Agreement was not disclosed to the stock exchanges which, the SCN alleges, made the investors believe that the said GDR Issue was genuinely subscribed to by the foreign investors.

The Tribunal considering the chronology of events believed that it clearly brought out the fact that there was an understanding between Hiran Orgochem and Vintage FZE. The Tribunal was of the opinion,

“…from a conjoint reading of the above mentioned terms of the Loan Agreement and the Pledge Agreement, it is quite clear that the pledging of the proceeds of the GDR Issue by way of a Pledge Agreement to allow the said deposit account to be used as security for all the obligations of Vintage FZE under the Loan Agreement, was a pre–condition for the grant of loan to Vintage FZE. The simultaneous execution of both the Loan Agreement and the Pledge Agreement indicates that Hiran Orgochem was itself financing the subscription of its GDR Issue”.

After considering the relevant facts and the entire scheme of fraudulent activities, the Tribunal concluded that Arun Panchariya, the Director of Vintage FZE was not only instrumental but was the principal architect in activation and orchestration of the fraudulent scheme and benefitted the most from the same being the beneficial owner of Vintage FZE, resultantly was restricted from accessing the securities market for 10 years. Kantilal Hiran was restricted from holding any key managerial position and from the market for three years. Similarly, Vintage FZE was part of the fraudulent scheme as a consequence of which, it received a large number of GDRs without payment of consideration, and hence was restricted from the market for eight years. Restricted Noticee 5, Mukesh Chauradiya for three years, Noticees 6 and 7 for 10 years and Noticees 8,9,10 for two years.[GDR Issue of Hiran Orgochem Ltd., In re, 2021 SCC OnLine SEBI 225, decided on 06-10-2021]

Agatha Shukla, Editorial Assistant has reported this brief.

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