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Securities Appellate Tribunal (SAT): The Coram of Tarun Agarwala, J. (Presiding Officer), Dr C.K.G Nair (Member) and M.T. Joshi, J. (Judicial Member) allowed an appeal against the order of delisting the company as a shell company by Bombay Stock Exchange (BSE) and Securities and Exchange Board of India (SEBI).

An appeal was brought against the order of BSE and SEBI against their order of listing the company as shell companies as directed by the Ministry of Corporate Affairs.

The facts of the case were a list of shell companies was prepared by the SEBI with the request to initiate the necessary action as per the SEBI rules and regulations. Further instructions were given to stock exchanges to place the Companies in Graded Surveillance Measures (GSM) Stage VI with immediate effect, and thereafter initiate a process of verifying credentials/fundamentals of such Companies and appoint an independent auditor to conduct an audit or forensic audit of such listed companies. Moreover, a list of document to be verified during the process was also provided in order to seek the fundamentals of the company.

Ram Upadhyay, counsel for the appellant submitted that appellant was kept in the delisting company against which a representation before the respondent contending that their action in keeping them in the list of the suspected shell companies was wholly erroneous as well as their action in placing them in the GSM Stage VI and consequently requested to take immediate remedial action so that their reputation is salvaged and the hardships caused to the investors are removed.  Despite the entire requirement being fulfilled on time the name of the appellant was not removed, thus an appeal was preferred by the appellant.

Gaurav Joshi, counsel for the respondent argued that the balance sheet of the company did not reflect the true and fair position of the company and considering the fact that the company had suspended its operations the entire assets should be written off. It was further submitted the expenses were marked under the wrong head which created the illusion that the company had a huge asset base which was incorrect.

The Tribunal after the submission held that approach adopted by SEBI as well as by BSE was totally erroneous. The court submitted that direction given by the SEBI to place the companies under GSM stage VI without verifying their credentials was wholly illegal and in violation of the principle of natural justice.  It was further submitted that BSE could not pick holes in the balance sheet nor were they competent to hold whether any expenditure should be revenue expenditure or capital expenditure, for which an independent auditor should be appointed which was not complied with. The court further submitted that “the objective of the SEBI Act is to promote the development of, and to regulate the healthy growth of securities market as well as to protect the interest of the investors. It has the power to issue necessary direction if it is satisfied upon an inquiry that such direction is necessary for the interest of the investors.” Thus allowed the appeal and directed to take the action in accordance with the law.[SVC Industries Ltd. v. SEBI, 2019 SCC OnLine SAT 77, decided on 27-05-2019]

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Securities and Exchange Board of India (SEBI): The Board comprising G. Mahalingam as Whole Time Member, granted Wipro exemption from the prohibition on the public announcement of buy-back during the pendency of an amalgamation scheme.

Wipro approved a scheme of amalgamation of four of its subsidiaries with itself and the said scheme was pending sanction of the National Company Law Tribunal.

Regulation 24(ii) of the Securities and Exchange Board of India (Buy–back of Securities) Regulations, 2018 prohibits public announcement of buy-back during the pendency of any scheme of amalgamation. The instant application was filed by Wipro seeking exemption/relaxation from strict enforcement of the said requirement pleading that in view of the backlog of cases at NCLT, it could not anticipate the time for completion of the merger.

In its application, Wipro submitted that relaxation from the requirement of Regulation 24(ii) would enable it to place a proposal for buy–back of equity shares for the consideration of the Board of Directors of the company; and such proposed buy–back inter would be in the interests of investors as shareholders of the company would benefit from return of surplus cash through the buy–back program.

The Board noted that vide Circular No. CFD/DIL3/CIR/2017/21 dated 10-03-2017 and Regulation 37(6) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI had exempted schemes involving the merger of a wholly owned subsidiary with holding company from various compliances. Further, Regulation 28 of the Buy–back Regulations empowers SEBI to relax strict enforcement of any requirement of the said Regulations, in the interest of investors and the securities market, on the satisfaction that the requirement is procedural in nature or if it might cause undue hardship to investors.

In view of the above, Wipro’s application was allowed.[Buy-back of securities in Wipro Ltd., In re, 2019 SCC OnLine SEBI 1, Order dated 15-02-2019]

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Securities Exchange Board of India (SEBI), Mumbai: A Whole Time Member G. Mahalingam passed directions exercising his powers under Section 19 read with Sections 11(1), 11(4) and 11B of the SEBI Act, 1992 in a case of diversion of funds.

The facts of the case were that SEBI initiated examining the case of Fortis Healthcare Limited on the basis of an article published on Bloomberg where promoters of FHL was alleged to have taken at least Rs.5 billion out of the company. After meeting the auditors of the company and conducting the preliminary examination in the matter, SEBI found that FHL through Fortis Health Management Limited had granted loans to 3 Indian Companies in the form of Inter Corporate Deposits. For investigating the same the accounts of the 3 borrower companies and the promoter and promoter connected entities were required to be examined. A Forensic Auditor was appointed for examining the alleged diversion of funds from FHL and its subsidiaries for the benefit of promoter and promoter connected entities. FHsL had issued a number of short-term loans for the benefit of promoters where the loans were repaid by channeling the funds through various companies. It was observed that the ultimate beneficiary of loan given by FHsL to Best (an unrelated entity) was RHC, a promoter entity of FHL and the similar pattern or method was seen with loan to various other unrelated entity which showed the issuance of loans for the sole purpose of benefiting Promoter and its entities.

The alleged diversion of funds through an unrelated entity showed the prima facie role of FHL and FHsL. Thereby, all the entities involved in the aforementioned diversion of funds were found to have acted in a fraudulent manner by misrepresentation of financial position and artificial inflation of bank balance of FHsL and non-disclosure of material information in their books of accounts thereby violating Section 12A(a), (b) and (c) of the SEBI Act, 1992 and Regulations 3(b), (c) and (d) and 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

SEBI, in order to protect the interest of the investors and the integrity of Security Market, issued directions that FHL ought to take necessary steps to recover the amount along with the interest within 3 months of this order and the other entities to repay the amount with interest, jointly and severally. [In the matter of Fortis Healthcare Limited,2018 SCC OnLine SEBI 166, order dated 17-10-2018]