Order in the matter of Taneja Aerospace and Aviation Limited in respect of (1) Mr. Salil Taneja and...

7/26/2019 Order in the matter of Taneja Aerospace and Aviation Limited in respect of (1) Mr. Salil Taneja and (2) Mr. C. S.

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In the matter of Taneja Aerospace and Aviation Limited Page 1 of 32

WTM/RKA/EFD-DRA-II/12/2016

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA

ORDER

Under sections 11(4) and 11B of the SEBI Act, 1992 read with section 12A of

Securities Contract (Regulation) Act, 1956 in the matter of Taneja Aerospace and

Aviation Limited in respect of (1) Mr. Salil Taneja and (2) Mr. C. S. Kameswaran.

1. Taneja Aerospace and Aviation Limited (TAAL) is a company incorporated under

Companies Act, 1956. The shares of TAAL are listed on Bombay Stock Exchange

Ltd. (BSE). TAAL is engaged in the business of aircraft sales, services, aircraft

manufacturing, maintenance, airfield services, repair and overall facility forcommercial aircrafts. TAAL Technologies Private Limited (TTPL) was incorporated

as a private limited company in November 2000 and was engaged in the business of

providing engineering and design services to its clients in aviation and aerospace

sectors and also sectors like transport, energy and utilities. Both these companies had

common promoters and directors. Mr. Salil Taneja and Mr. C. S. Kameswaran are

Chairman and Managing Director, respectively of TAAL and they were the only

shareholders of TTPL during relevant period.

2.

Securities and Exchange Board of India (SEBI) issued a Show Cause Notice (SCN)dated 30th December, 2013 to Mr. Salil Taneja and Mr. C. S. Kameswaran in the

following background:-

i. TTPL was a group company of TAAL. On 29thOctober 2007, board of directors

of TAAL had approved capital infusion of up to 5 crore into TTPL by

subscribing to equity shares or by way of loans, deposits, advances or any other

form convertible into equity shares of TTPL. During the period from 1 st April

2007 to 27thJune 2009, TAAL had infused 9.7019 crore in TTPL, in instalments,

in the form of advance against share capital although approval was for infusion of

only up to 5 crore in TTPL. Thus, there was no board of directors' approval for

additional infusion of additional approx 4.7 crore during April 2007 to June 2009.

It was only later on 30thJuly 2009 that the board of directors of TAAL approved

investments up to 10 crore in the share capital of TTPL at a premium of 90 per

share.

ii. Despite infusing aforesaid amount, TAAL did not get any share in TTPL until the

advance was converted into shares on 27thOctober, 2009 and in the interim period

the monies infused by TAAL as mentioned above, remained with TTPL for a

period ranging from four months to two and half years. Over 50 % of theadvances remained with TTPL for over 1 year and over 90% of the advances


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remained with TTPL for over 6 months. TAAL kept interest free money worth

9.7019 crore with TTPL for these periods and without indicating any intention to

subscribe to the share capital of TTPL. The name of TTPL, for the outstanding

advances of TAAL in TTPL, was not disclosed in the audited financial statements

/ annual accounts of TAAL for the FY2006-07 and FY2007-08. Until 27th

October, 2009 such advance by TAAL was in substance an interest free loan by it

to TTPL.

iii. During the period when the aforesaid advance was given, the authorised as well as

the issued share capital of TTPL was only 1 lac divided into 10,000 shares of 10

each. Thus, during the said period, TTPL was not authorised to issue additional

share without increasing its authorised capital. Despite receipt of the said advance,

TTPL did not increase its authorised share capital at any time during this period. It

was only after the infusion of entire monies by TAAL, the board of directors of

TTPL on 21stOctober 2009 and its shareholders on 22ndOctober 2009 approved

the increase in its authorised share capital from 1 lac (divided into 10,000 shares

of 10 each) to 101 lac (divided into 10.1lac shares of 10 each). On 27thOctober

2009, the board of directors of TTPL approved the proposal to issue 10 lac equity

shares 10 each with premium of 90 to TAAL.

iv. The issue whether "Advance against Share Capital" would be refunded by TTPL to

TAAL or it would be converted into share capital in future was decided by both

the companies only on 30thJuly 2009 when board of directors of TAAL approved

increased investments up to 10 crore in the share capital of TTPL and on 27th

October 2009 when the board of directors of TTPL approved the issuance of 10

lac equity shares to TAAL. Hence, until October 2009, when board of directors

and shareholders of TTPL increased its authorised share capital and board of

directors of both the companies reached a common decision regarding conversion

of the said advance into share capital, such advance was, in substance, an interest

free loan by TAAL to TTPL.

v. When TAAL gave aforesaid advances to TTPL, it did not have any stake in the

business of TTPL which was a non-operational company with almost 'nil' networth. Further, said advances did not result in any income stream for TAAL either

through dividends/ profits of TTPL or otherwise except causing benefit to TTPL

and its shareholders i.e. Mr. Salil Taneja and Mr. C. S. Kameswaran who owned

TTPL. Thus, Mr. Salil Taneja and Mr. C. S. Kameswaran used aforesaid money of

shareholders of the listed company TAAL for their own personal benefits.

vi. Pursuant to the approval of its board of directors dated 20 thJanuary 2009, TAAL

had acquired the entire share capital of TTPL from Mr. C. S. Kameswaran and Mr.

Salil Taneja on 19thMarch 2009 and 15thJuly 2009, respectively, for consideration

of 50,000, each towards acquisition of 5,000 shares of TTPL from each of them.


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Thus, as opposed to advance of 9.7019 crore by TAAL in TTPL, Mr. Salil Taneja

and Mr. C. S. Kameswaran, had together infused only 1lac in TTPL since its

incorporation, of which TTPL had already lost over 95,000 till 31stMarch 2007.

Further, none of them infused any additional money in TTPL after 31 st March

2007. The only beneficiary of such advance was TTPL and ultimately itsshareholders i.e. Mr. Salil Taneja and Mr. C. S. Kameswaran, in spite of the fact

that they had infused nothing in TTPL as compared to the infusion of 9.7019

crore by TAAL in TTPL. Had TTPL earned profit on the aforesaid advance, Mr.

Salil Taneja and Mr. C. S. Kameswaran only would have enjoyed such profits

because TAAL was nothing more than a lender of interest free loan and these two

directors of TAAL were the only shareholders in TTPL.

vii. During April 2007 - June 2009 TTPL had lost approximately 8.03 crore out of

said 9.7019 crore. Further, TTPL's debtors also included bad debts of

approximately 1.08 crore which were still to be written off until June 2009.

Hence, after considering the said bad debts, TTPL had lost almost entire amount,

i.e. over 9 crore, of the money advanced by TAAL till June 2009. As on 30thJune

2009 TTPL had negative net worth of approx. 9.1 crore. Hence, the Net Asset

Value (NAV) of TTPL was approx. negative 9,100 per share as on 30th June

2009. Thus, TAAL had acquired the entire shares of TTPL (10,000 shares) at 10

per share in spite of such negative NAV and net worth of TTPL and had also

paid 1 lac to Mr. Salil Taneja and Mr. C. S. Kameswaran, for acquiring TTPL. As

a result of the said transactions, TAAL paid 1 lac to its own directors for

acquiring net liabilities worth approx. 9.1 crore from them.

viii. Mr. C. S. Kameswaran, who was an interested directors in the proposal of infusing

up to 5 crore into TTPL by TAAL because of his shareholding in TTPL had put

forth the proposal before the board of directors of TAAL in the meeting held on

29thOctober 2007. Further, Mr. Salil Taneja, who was also an interested director

because of his shareholding in TTPL had put forth the proposal to board of

directors of TAAL for acquisition of shares of TTPL by it as aforesaid in the

meeting held on 20thJanuary, 2009. The basis of valuing TTPL at 1 lac, was not

discussed in the meeting held on 20th

January, 2009. The names of Mr. Salil Tanejaand Mr. C. S. Kameswaran were not disclosed to the board of directors in the

meeting held on 20th January 2009. Neither did Mr. Salil Taneja and Mr. C. S.

Kameswaran disclose their interest in TTPL to the board of directors of TAAL

nor did they abstain from voting on the said proposals in spite of the fact that both

of them were the ultimate beneficiaries of such interest free advances and

acquisition of shares of TTPL by TAAL. Mr. B.R. Taneja, father of Mr. Salil

Taneja and one of the directors of TTPL also did not disclose his interest because

of his son's shareholding in TTPL. Yet, the presence of these three directors was

also considered for the purpose of arriving at the quorum for the proposals in thesaid board meetings in spite of their clear interest in the proposals. Hence, these


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three directors failed to ensure compliance with provisions of section 299 and

section 300 of the Companies Act, 1956.

ix. Mr. Salil Taneja and Mr. C. S. Kameswaran were key managerial persons managing

the day-to-day affairs of TAAL in their capacity as Chairman and Managing

Director, respectively, of TAAL. They were also members of the Finance

Committee of board of TAAL. Being in such positions they were also instrumental

in additional and unauthorised infusion of approx. 4.7 crore by TAAL into

TTPL. Mr. Salil Taneja and Mr. C. S. Kameswaran in their capacity as members of

the Finance Committee or Chairman and Managing Director, respectively, of

TAAL were instrumental in proposing and approving the aforesaid infusion of 5

crore in TTPL, a company owned by them. Further, misusing their powers as

Chairman and Managing Director, respectively, in TAAL, they proposed and

approved acquisition of TTPL by TAAL from themselves with an intent to

safeguard themselves from losses and transferred their personal liabilities worth

9.1 crore to the public shareholders of TAAL.

x. In the above context of the conversion of TAAL's advances against share capital, it

has been further alleged that:

(a)As on 30th June 2009 TTPL had net liability of approx. 9.1 crore of

comprising of worth 60 lac and liability of 9.7019 crore from the

advances received from TAAL. Until TTPL was taken over by TAAL on

15thJuly, 2009, Mr. Salil Taneja and Mr. C. S. Kameswaran were liable to

infuse money to the tune of approx. 9.1 crore and then repay the entire

advance of 9.7019 crore to TAAL i.e. lender of TTPL.

(b)When on 15th July, 2009 TAAL became holding company of TTPL, by

virtue of holding 100% shares in TTPL, the liability on account of net

liabilities /negative reserves devolved upon TAAL and as such it became

liable to infuse money in TTPL and repay itself the outstanding loans of

9.7019 crore.

(c) It would have been difficult for TAAL to recover its outstanding advances

from TTPL until TAAL first capitalised TTPL for net asset deficit to the

tune of approx. 9.1 crore and then repay itself the outstanding advances.To avoid this and also the write off of the said outstanding advances,

TAAL decided to convert the advances into share capital of TTPL.

xi. Following disclosures with respect to above were not made:

(a)The significant decision of board of directors of TAAL taken in board

meeting held on 30thJuly 2009 and or the outcome of its meeting was not

disclosed to the shareholders of TAAL or on BSE.


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(b)The net worth of TAAL was approx. 88 crore, 88 crore and 118 crore

as at 30th June 2007, 31st March 2008 and 30th June 2009, respectively

(during the financial years over which the said advances were infused in

TTPL). However, TAAL neither disclosed the said advances to its

shareholders nor made any such announcement on BSE. Hence, the boardof directors of TAAL failed to apprise its shareholders of the fact that

9.7019 crore of TAAL were deployed for the personal benefits of Mr. Salil

Taneja and Mr. C. S. Kameswaran.

(c)The net worth of TAAL as on 30thJune 2009 was approx. 118 crore. The

acquisition of liabilities worth approx. 9.1 crore from its directors

resulted in erosion of TAAL's net worth by approx. 9.1 crore. However,

TAAL did not make any announcement with regard to acquisition of

shares of TTPL from Chairman and Managing Director on 19 th March

2009 and 15thJuly, 2009.

(d) Pursuant to the aforesaid acquisitions of the shares, TTPL became wholly

owned subsidiary of TAAL on 15thJuly 2009. It made announcement on

BSE on 30thJuly 2009 that TTPL had become its wholly owned subsidiary.

The fact that it acquired shares from its own Chairman and Managing

Director and that TTPL was having net liability of approx. 9.1 crore at

the time of the acquisitions was not disclosed by TAAL on BSE.

xii.

Subsequently, on 28th

October 2009 (i.e. a day after allotment of shares of TTPLto TAAL), the board of directors of TAAL approved a draft scheme of

arrangement ("the scheme") between TAAL and TTPL for merging TTPL into

TAAL. The proposal in this regard along with the draft scheme, was put forth by

Mr. Salil Taneja. The scheme was filed before the Hon'ble High Court of Madras

in November 2009 and was approved by the Hon'ble High Court on 28thJanuary

2010 with effect from 24thFebruary 2010 and appointed date was 1stApril 2008.

xiii.While implementing the scheme, the board of directors of TAAL re-valued its

already held land by approx. 45 crore during Financial Year 2008-09.Subsequently, the board of directors utilised revaluation profits of approx. 47.5

crore (comprising of aforementioned revaluation profits of approx. 45 crore and

opening balance of revaluation profits during FY 2008-09 of approx. 2.5 crore)

for the Financial Years 2008-09 to FY 2010-11 in the following manner:

Utilisation of Revaluation Reserves

Particulars (in crore)

Write off of Deficit of TTPL's Assets over Liabilities on Merger 9.12

Write off of TAAL 's Assets 19.39

Write off of TAAL's expenses 5.91


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Total Write offs against revaluation reserves (A) 34.42

Transfer to General Reserves and P&L Account (B) 12.97

Total (A + B) 47.39

xiv.

The land so re-valued was already owned and held by TAAL prior to the schemeand did not have any connection with the scheme of amalgamation or the

amalgamated entity TTPL. Thus, the revaluation of land could have been done in

the ordinary course of business, without including it in the draft scheme, in

compliance with Accounting Standard (AS) 10, especially in light of the fact that

such a revaluation exercise in normal course of business would not have required

approvals from statutory bodies and regulators and could have been done only

with requisite approvals of board of directors and the requisite approval of the

shareholders, if required.

xv. The board of directors of TAAL, failed to ensure that the accounting proposals

with respect to utilization of revaluation reserves are in compliance with the

Generally Accepted Accounting Principles ("GAAP") (esp. AS 10 and Guidance

Note 3). As per the GAAP (AS 10 and GN 3), the amount available in Revaluation

Reserves cannot be transferred to General Reserve or cannot be considered as

ordinary profits available for distribution until the fixed asset in question is retired

or disposed off. In the instant case, the TAAL still owned the land which was

revalued and the same land still appeared in its financial statements.

xvi.The utilization of Revaluation Reserves for writing off the deficit arising on

merger, for writing off company's assets and expenses and the transfer of

Revaluation reserves to General Reserve, was inappropriate and not in accordance

with GAAP in light of the facts that these revaluation profits were notional in

nature and were still not realized by the company since the land which was

revalued was still owned and held by the company.

xvii.The manner in which the scheme was accounted in the financial statements of

TAAL was not in compliance with GAAP.

xviii.In this regard, the auditors of TAAL had, inter aliahad qualified in the Auditor's

Report that TAAL had transferred 20,00,00,000/- from Revaluation Reserve to

Profit and Loss Account. This amount had been utilised for prior year write

offs/provisions amounting to 15,20,94,875/- and current period adjustments of

4,26.03.010/- and balance was carried over. Further, such treatment was not in

accordance with generally accepted accounting principles and had effect of

overstatement of profit for the period by 20,00,00,000/-

xix.

Thus, TAAL had proposed the accounting treatment (especially the accounting forrevaluation of land and the manner of utilization of revaluation reserves) as a part


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of the scheme and its board of directors, while approving the draft scheme, failed

to ensure that the accounting proposals with respect to utilization of revaluation

reserves are in compliance with the GAAP (esp. AS 10 and Guidance Note 3). It

appears that TAAL intended to utilize the revaluation reserves in a manner which

is prohibited as per the GAAP (esp. AS 10 and GN 3) and thus, presented anincorrect and rosy picture of its financial affairs to its stakeholders.

xx. Further, though all the accounting treatments with respect to the scheme were

given effect during the accounting period 'July 2009 March 2010' (i.e. only after

the approval of the scheme by the Hon'ble High Court on 28 thJanuary, 2010) but

only the accounting treatment with respect to the revaluation of land and

utilization of revaluation reserves to the extent of 20 crore was given effect

during the accounting period April 2008 -June 2009itself. The annual accounts

for the said period were approved by board of directors on 5thDecember, 2009, i.e.

even before the date of hearing of the scheme (i.e. 18thDecember, 2009) and the

date of approval of the scheme (i.e. 28 thJanuary, 2010) by the Hon'ble High Court.

Thus, such accounting treatment for the revaluation of land and utilization of

revaluation reserves for the Financial Year April 2008 - June 2009 was given by

TAAL in its ordinary course of business and not consequent to the scheme.

xxi. On account of the aforementioned mis-utilization of the revaluation reserves in

violation of the GAAP, TAAL wrote off approx. 34.42 crore against the notional

revaluation profits, which, in the ordinary course of business, should have been

written off against the profits available for distribution as per the GAAP. Further,TAAL transferred the remaining balance of approx. 12.97 crore from the

revaluation reserves to General Reserves and Profit & Loss Account though as per

the GAAP (esp. AS 10 and GN 3), the amount available in revaluation reserves

cannot be transferred to General Reserve until the Fixed Asset in question is

retired or disposed off. The said transfer was made in spite of the fact that TAAL

still owned the revalued land which was appearing in its financial statements. This

resulted in over-statement of the profits available for distribution by approx.

47.40 crore. If the Revaluation Reserves had not been mis-utilized in the

aforementioned manner, the balance in the General Reserves would have been'Nil' instead of approx. 12.44 crore and Profit & Loss Account balance would

have been approx. negative 20.42 crore instead of approx. 14.53 crore as at the

end of 31st March 2011.

xxii.Hence, it appears that to hide the adverse impact of the merger with TTPL and

aforementioned write offs of its assets and expenses on TAAL's profits available

for distribution and on its financial statements, the company directly wrote off the

deficit on merger as well as its assets and expenses against the notional revaluation

profits (i.e. profits which are not freely available for distribution). TAAL, thus,


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presented an incorrect and misleading picture of its financial affairs to its

stakeholders.

3. As described in the SCN 'In this respect, it appears that the aforesaid entire exercise was carried

out primarily with a purpose of hiding the losses on advances of 9.7019 crore made by TAAL to

TTPL which ideally should have been borne by Mr. Salil Taneja and Mr. C. S. Kameswaran, who

were the only two shareholders and owners of TTPL when the said losses were incurred by TTPL'.

Further, Mr. Salil Taneja and Mr. C. S. Kameswaran, acting as Chairman and

Managing Director of TAAL, respectively, were instrumental in proposing and

approving all the aforementioned activities and have thus played an active role in the

exercise. The SCN further states that -'It thus appears that the aforementioned acts of Mr.

Salil Taneja and Mr. C. S. Kameswaran are prohibited under the SEBI (Prohibition of

Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP

Regulations), in particular regulation 2(1)(c), regulation 3 and regulation 4(2)(e) of the said

Regulations. Further, the non disclosure and concealment of the facts noted in aforementioned

paragraphs appear to be in violation of Clause 36 of the Listing Agreement which mandates

disclosure of material information and price sensitive information relating to that of a company'.

4. In view of the same, the SCN called upon Mr. Salil Taneja and Mr. C. S. Kameswaran

(the noticees) to show cause as to why suitable directions under sections 11(4), 11B of

the SEBI Act, 1992 and under section 12A of Securities Contract (Regulation) Act,

1956, (SCRA) read with regulation 2(1)(c), regulation 3 and regulation 4 of the PFUTP

Regulations including but not restricted to the following direction should not be

issued against them:

(i) Repayment of funds, to TAAL, by Mr. Salil Taneja and Mr. C. S.

Kameswaran, that were misappropriated for personal benefits and equivalent

to TTPL's net liabilities taken over by TAAL on account of TAAL's

acquisition of TTPL's shares from Mr. Salil Taneja and Mr. C. S. Kameswaran,

along with interest at the rate of 15% p.a. for the period from the date of

acquisition of TTPL's shares by TAAL to the date of repayment, within a

period of six months.

(ii) Debarring Mr. Salil Taneja & Mr. CS Kameswaran from accessing capital

market and dealing in securities, directly or indirectly, except for the purpose

of repayment, for a period of 5 years or the date until entire repayment

amount (including interest) has been paid, whichever is later.

5. The noticees filed their replies to the SCN vide a common letter dated 24thFebruary,

2014, 17thJune, 2014 and 11thDecember, 2014. Opportunities for hearing were given

to the noticees on 17th June, 2014, 27th November 2014 and 24th September 2015,

when Mr. Kumar Desai, Advocate and others appeared on behalf of the noticees and

made oral submissions on the lines of written replies on record. Vide their letter dated


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14th October, 2015, the noticees filed their written submissions in the matter. The

noticees have made inter aliafollowing submissions:

i. The noticees have denied all the allegations made in the SCN.

ii. The SCN, in effect revolves around the following three basic sets of facts:

a) Amounts aggregating to 9.7019 crore in several instalments/ tranches over a

period of two years (from April 2007 to June 2009) were received by TTPL

from TAAL as advance against share applications;

b) Purchase of all shares of TTPL held by the two noticees (being TTPL's only

shareholders) by TAAL at 10 per share (i.e. at the same price at which the

two noticees had acquired the shares in 1999-2000). As a result of the aforesaid

transaction, TTPL became a 100% subsidiary of TAAL; and

c) Amalgamation of TTPL with TAAL under a scheme of amalgamation under

sections 391-394 of the Companies Act (the Scheme) sanctioned by the

Hon'ble High Court of Madras after the same had been approved inter alia by

the Registrar of Companies, Chennai Official Liquidator appointed by the

Hon'ble Madras High Court, Auditor appointed by Official Liquidator and the

BSE under clause 24(f) of the Listing Agreement.

iii. Contracts for purchase and sale of shares of a private limited company i.e. TTPL

are not 'securities' as defined under the SCRA and the SEBI Act. SEBI has no

jurisdiction to enquire into any of the facts referred above, as they revolve around

dealing of the shares of a private company i.e., TTPL.

iv. At no point of time, the noticees have committed any act, expression, omission or

concealment while 'dealing in securities' in order to induce another person to deal

in securities listed or proposed to be listed on a recognised stock exchange as is

envisaged under regulation 2(1)(c), 3 and 4 of the PFUTP Regulations. Any

transaction that has taken place in this case is not even undertaken in fraudulent

manner. The securities dealt with in this matter are that of a private limited

company and not covered within the definition of fraud under PFUTP

Regulations. As the term fraudhas been defined in the PFUTP Regulations, SEBIcannot use the definition of fraud provided under any other enactment or in

common law.

v. There is no material in the SCN to support the allegation of violation of regulation

3 and 4(2)(e) of the PFUTP Regulations. No specific allegations have been made in

respect of contraventions under the regulations 3 and 4(2)(e). The SCN is thus

vague and arbitrary. The SCN merely contains bald allegations without

substantiating the same with any evidence whatsoever. The SCN merely relies

upon incorrect conjectures and surmises.


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vi. The Listing Agreement is a contract between a listed company and the stock

exchange on which the securities of that company are listed. It would, therefore,

follow that only a listed company could be held liable for breach of any clause of

the Listing Agreement including clause 36 thereof. The SCN has not been issued

to TAAL for having allegedly breached clause 36 of the Listing Agreement. In suchcircumstance the violation of clause 36 of Listing Agreement cannot be attributed

to the noticees without charging TAAL for the same.

vii. The alleged nondisclosure of certain information on BSE was not done as it was

in the ordinary course of business and those information did not have any material

bearing on the operation/performance of TAAL and were not price sensitive

information, which did not warrant a disclosure under clause 36 of the Listing

Agreement.

viii.

At the time of incorporation of TTPL, the initial subscribers to the Memorandum

and Article of Association of TTPL were Mr. Salil Taneja and Mr. Arvind Nanda,

who were also Director and Managing Director, respectively of TAAL. They

subscribed to 100 shares each. Consequent to the resignation of Mr. Arvind Nanda

from TAAL, the share held by him TTPL were acquired by Mr. C. S. Kameswaran,

the then Managing Director of TAAL. Consequent to Companies (Amendment)

Act, 2000, TTPL was required to have a minimum paid up capital of 1,00,000.

Mr. Salil Taneja and Mr. C. S. Kameswaran, who were the shareholder of TAAL

therefore, acquired 4,900 equity shares each at which time they were also the

Director and Managing Director of TAAL respectively. Thus, Mr. Salil Taneja andMr. C. S. Kameswaran became the shareholder of TTPL only in their capacity of

being the promoter / director of TAAL the parent company of TTPL with the

bona fideintention of benefiting the shareholder of TAAL.

ix. Further, TTPL has been disclosed as an associate of TAAL in the Annual Report

of TAAL in the relevant period. Thus, clearly there was a link as being an associate

company and the long term vision of benefitting the TAAL shareholders post the

gestation period. Engineering Design Services is complimentary to the existing

business of TAAL. Investments were made by TAAL as 'Advance against ShareCapital' to TTPL which were eventually converted into the share capital of TTPL.

The SCN has accepted the fact that the investments were 'Advances against Share

Capital' of TTPL but based on erroneous understanding of law has alleged them to

be interest free loans.

x. With respect to the advances made by TAAL to TTPL, TAAL did not get any

corresponding equity shares in TTPL until the advance was converted into share

capital on 27thOctober, 2009 and that, in the interim periodthe money infused by

TAAL over a period of time remained with TTPL as interest free loan, it has been

submitted that under the Companies Act, 1956 there is no restriction on a private


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company in receiving advances towards the share capital. Further, Companies Act

does not mandate a private company to complete the allotment within any

stipulated time after receipt of advances towards share capital.

xi. Further, authorised capital can be altered by obtaining shareholders approval in

terms of section 94 of the Companies Act. The law does not prohibit a private

company from receiving an advance for the issuance of shares. Any compliance in

respect of issuance of shares, not prior to receipt of the advance for the issuance of

shares. Eventually the shares were subscribed to at a premium on 27 thOctober,

2009. However, prior to that, TAAL acquired the shares of the then shareholders

of TTPL at face value without receiving any dividends from TTPL. Thus, there

was no gain to the directors either by way of any alleged interest free advance or by

acquisition of the shares.

xii.

In terms of section 299 of the Companies Act, 1956 a general notice in the form of

prescribed under Form 24AA of the Companies General Rules and Forms, 1956

was given every year by interested directors which was noted in a meeting of the

board of directors of TAAL dated 28 thJune, 2007 and 30thApril, 2008 and inter alia

contained disclosure of directorship/shareholding in TTPL. The fact that the

noticees were interested directors was clearly known to the board of directors of

TAAL. Further, the resolution for proposal of infusing funds into TTPL was

considered business decision approved by a full quorum of Directors of TAAL.

The votes of the non interested directors were also sufficient to validly pass the

aforesaid resolution. When the said proposal was put to vote, the noticeesabstained from voting. In fact, there is nothing on record to show that the noticees

voted on the proposal of infusing funds into TTPL.

xiii. Further, since the Finance Committee had authorised further investment of an

amount not exceeding 10 crore which was noted, approved and ratified by the

board of directors on 31stOctober, 2008, TAAL had adequate authority for the

additional investment of 4.7 crore. Such ratification is valid as has been observed

by Hon'ble Supreme Court in the matter of Maharashtra State Mining Corporation vs.

SunilAIR 2006 SC 1923.

xiv.With respect to the allegation that during the period from April 2007 to June 2009,

TTPL made a loss of 8.03 crore. On inclusion of bad debts of about 1.08 crore,

the aggregate loss was over 9 crore. Such instances are not uncommon in the life

cycle of an Engineering Design Service Business. However, the sales of TTPL have

ground from 32.16 lac for period April 2007 June 2008 to 1995.73 Lac in

2013. Initial Investment in such venture is high and gestation period is also quite

high. However, the investment has been justified as the Engineering Design

Services business has been performing quite well and business is now a valuableasset of TAAL.


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xv. After merger of TTPL with TAAL, there had been significant contribution of the

erstwhile business of TTPL to the business of TAAL. TAAL has now become a

global company with two locations in India and extensive presence in Europe and

North America. For the Financial Year 2014-15, the profit before tax of the

erstwhile business of TTPL was 54.77 Lac and the profit after tax was 31.38

Lac. The net worth of the erstwhile business of TTPL on 31stMarch, 2015 was

2.44 crore.

xvi.TTPL is limited liability company and the liability of its members / shareholders is

limited to contribution to the assets of TTPL up to the face value of shares held by

them. Therefore, even if liability of TTPL exceeds its assets, the noticees liability

was limited to 10,000 fully paid up shares of 10 each of TTPL aggregating to

1,00,000/-.Therefore, the interference drawn in the SCN about the alleged transfer

of the noticees personal liabilities of approximately 9.1 Crore to the public

shareholders of TAAL is completely unfound. TTPL was a valuable asset and,

therefore, the inference should be that of transfer of assets rather than transfer of

liabilities. There is neither description nor any evidence indicated in the SCN as to

how the advance was used for personal benefits of noticees. The SCN is vague in

this regard and is based on wrong understanding. There was no personal benefit at

all to the noticees from the said investment of TAAL. The noticees had held the

shares of TTPL for over 8 years and had not received dividend during the said

period. Subsequently they had sold their shares in TTPL to TAAL and on a going

concern basis at the price at which they had acquired such shares of TTPL. The

noticees had not gained anything from their holding in TTPL.

xvii.On the one hand, the SCN alleges that it was the obligation of the noticees to

infuse approx. 9.1 crore in TTPL and repay 9.7019 crore to TAAL on other it

has been alleged that when on 15 thJuly, 2009 TAAL became holding company of

TTPL, the liability on account of net liabilities /negative reserves devolved upon

TAAL and as such it became liable to infuse money in TTPL and repay itself the

outstanding loans of 9.7019 crore. The SCN is contradictory, vague and is based

on conjectures.

xviii.Further, such transactions were undertaken by the board of directors of TAAL

after due consideration and are commercial decisions in line with the long term

vision of the board of directors of TAAL. The transaction were based on well

informed business decisions which were taken by the board of directors in the best

interest of TAAL and its shareholders. The principle of non-interference by

courts/regulators with the business decision taken by directors of a company is

well established.


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xix.The noticees have undertaken no activities that may be construed as fraudulent and

have diligently adhered to their duties as directors of TAAL including being the

directors of associate company i.e. TTPL, assisting TAAL with its operations

(including that of the TTPL as a part of TAAL) and helping it in its growth. In this

regard, all the noticees' actions have been aimed at ensuring enhancement of valueof the shareholders of TAAL to whom they are responsible. At no point of time

have the noticees intended to benefit or avoid personal loss at the cost of the

shareholders of TAAL.

xx. The accounting treatment followed by TAAL for the said merger was in

accordance with the accounting treatment prescribed in clause 6 of the Scheme. As

per section 211(3B) of the Companies Act, where the profit and loss account and

the balance sheet of the company do not comply with the accounting standards,

such companies shall disclose in their profit and loss account and balance sheet (a)

the deviation from the accounting standards; (b) the reason for such deviation; and

(c) the financial effect, if any, arising due to such deviation. The statutory auditor

had audited the books of TAAL and qualified their report in respect of any

deviation from the Accounting Standards, which was even published in the annual

reports provided to all the shareholders and subsequently approved the same in a

general meeting. Further, such accounting practice as has been followed by TAAL

and as prescribed in clause 6 of the Scheme is a market practice, which have been

followed by various other companies as well.

xxi.

The fact that the merger was done following the due process of law is undeniable.On 28th October, 2009, the board of directors approved a draft Scheme of

arrangement between TAAL and TTPL which was approved by the High Court on

28thJanuary, 2010. The effective date of the merger was 24thFebruary, 2010 and

the appointed date was 01st April, 2008. For the preparation of the financial

statement, recognition and disclosure requirement as laid down under the

Companies Act, Accounting Standards and any other mandatory guidance notes or

other specific regulations is followed to the extent possible. There were no specific

observations by the statutory auditor in regard to the non compliance of

Accounting Standards. Further, as TAAL has appropriately disclosed therevaluation, there is no non compliance with AS 10. With regards the guidance

note on treatment of reserve created on revaluation of fixed assets (GN3), it

cannot be absolutely applied to the revaluation of land as it is not a standalone

revaluation done in isolation. In any event, SEBI has no jurisdiction in respect of

specifying adherence to a specific accounting standard.

xxii.In respect to the merger the following was specifically disclosed:

a) Disclosure prior to the meeting of the board of directors of TAAL in

respect of the proposed Scheme;


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b) Disclosure regarding the outcome of the meeting of the board of directors

of TAAL in respect of the proposed Scheme; and

c) Advertisement of petition in newspaper informing all persons desirous of

supporting or opposing the Scheme regarding the action to be undertaken

by them.

xxiii.The shareholders including the complainant (who is also a shareholder), other

stakeholders, creditors had a right to object to any aspect of the said Scheme while

ROC, the Regional Director, Ministry of Company Affairs, BSE etc. were required

to give their observations in respect of all aspect of the said Scheme including the

revaluation and other financial aspects. However, no objection was raised by any

party and other shareholder of TAAL. Subsequently, the Hon'ble High Court was

pleased to approve the said Scheme on 28 th January, 2010. Even the audited

accounts for fifteen month period ended on 30th June, 2009 were approved and

adopted by the shareholders of TAAL without any objection on 31 th December,

2009.

xxiv.In view of the above aspects of the Scheme including revaluation of land was

undertaken in accordance with the Scheme, which had not been questioned by the

shareholders nor any of the regulators including the ROC, the Regional Director,

Ministry of Company Affairs, BSE and /or the Hon'ble High Court. Now SEBI by

its actions as suggested in the SCN, is seeking to go behind the order of the

Hon'ble High Court by raising questions in regard to the Scheme sanctioned by the

Hon'ble High Court.

xxv.The proceedings appear to have been undertaken as a result of the complaint filed

by one shareholder of TAAL who has made multiple and baseless allegations

against TAAL since two years; to multiple agencies including Registrar of

Companies (RoC). After due examination of the complaint filed by the

complainant, the RoC had in a letter dated May 30, 2013 informed the complainant

not to indulge in unhealthy practice and not to exceed his right beyond the scope

of the Companies Act. The same individual has written to SEBI which has now

formed the basis for this inquiry. Assuming whilst denying that the allegationsmade in the SCN is at the behest of an isolated shareholder are true, the same

could be at best considered as a violation under the provisions of the Companies

Act,1956.

xxvi.TAAL has always been in compliance of the requirement of appointing an

adequate number of independent directors on the board of directors. In this

regard, Mr. S. K. Newlay an independent director was a member of the Finance

Committee constituted by the board of directors and was a part of the meeting of

the finance committee of TAAL in which the decision of investment in TTPL was

taken.


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xxvii.Debarring the noticee from accessing the capital markets and dealing in securities

would adversely impact the shareholders of TAAL. The SCN is based upon the

mis-appreciation of law as the liabilities of a private limited company has been

equated and held to be the liabilities of the noticees, which in fact and law are

incorrect. Since the present matter is not of misappropriation of funds or personal

benefit, any order for repayment of funds by the noticees to TAAL should not be

passed.

6. I have carefully considered the SCN, the replies/submissions of the noticees and the

relevant material available on record. Before dealing with the charges against the

noticees and their submissions, I deem it necessary to refer to the provisions of the

PFUTP Regulations which are alleged to have been violated by the noticees. The said

provisions are reproduced hereinafter:

PFUTP REGULATIONS.

Definition of fraud Regulation 2(1)(c).

(c)fraud includes any act, expression, omission or concealment committed whether in a deceitfulmanner or not by a person or by any other person with his connivance or by his agent while dealingin securities in order to induce another person or his agent to deal in securities, whether or not thereis any wrongful gain or avoidance of any loss, and shall also include

(1) a knowing misrepresentation of the truth or concealment of material fact in order that anotherperson may act to his detriment;

(2) a suggestion as to a fact which is not true by one who does not believe it to be true;

(3) an active concealment of a fact by a person having knowledge or belief of the fact;

(4) a promise made without any intention of performing it;

(5) a representation made in a reckless and careless manner whether it be true or false;

(6) any such act or omission as any other law specifically declares to be fraudulent;

(7) deceptive behaviour by a person depriving another of informed consent or full participation;

(8) a false statement made without reasonable ground for believing it to be true;

(9) the act of an issuer of securities giving out misinformation that affects the market price of thesecurity, resulting in investors being effectively misled even though they did not rely on the statementitself or anything derived from it other than the market price.

And fraudulent shall be construed accordingly;

..3. Prohibition of certain dealings in securities

No person shall directly or indirectly

(a) buy, sell or otherwise deal in securities in a fraudulent manner;

(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be

listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in

contravention of the provisions of the Act or the rules or the regulations made there under;

(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of

securities which are listed or proposed to be listed on a recognized stock exchange;

(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit

upon any person in connection with any dealing in or issue of securities which are listed or proposed

to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules

and the regulations made there under.


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4. Prohibition of manipulative, fraudulent and unfair trade practices

(1)................................................. ..........................................................................

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it

involves fraud and may include all or any of the following, namely:-

(e) any act or omission amounting to manipulation of the price of a security;.....

Listing Agreement

Clause 36.

"Apart from complying with all specific requirements as above, the issuer will intimate to

the Stock Exchanges, where the company is listed immediately of events such as strikes,

lock outs, closure on account of power cuts, etc. and all events which will have a bearing on

the time of occurrence of the event and subsequently after the cessation of the event in order

to enable the security holders and the public to appraise the position of the issuer and to

avoid the establishment of a false market in its securities."

7. The noticees have contended that the basis of charge in the SCN is the dealing in

shares of TTPL (a private unlisted company) by TAAL a listed company. According

to them the shares of the private unlisted company are outside jurisdiction of SEBI to

enquire into or pass any directions in respect of the violations alleged in the SCN. It

has been further contended that by virtue of definition of a 'private company' under

section 3(1)(iii) of the Companies Act, 1956, TTPL was a private unlisted company

having initially a minimum share capital of 1 lac and it had restrictions on the right to

transfer its shares. Thus, its shares were not marketable so as to be covered within the

definition of 'securities'under the SCRA and SEBI Act. In this regard, I note that the

allegation against the noticees in the SCN is that they used their position in TAAL,

which is a public listed company, for their personal benefit and to avoid their personal

loss in TTPL by transferring an amount of 9.7019 crore from TAAL to TTPL, a

company owned by them. I, therefore, find that the basic issue to be decided in the

present proceedings is whether the noticees used a plan, device or artifice to

fraudulently gain or avoid their personal loss at the cost of interest of shareholders of

TAAL, which is a public listed company.

8. Section 11(1) of the SEBI Act casts the duty on SEBI to protect the interests of the

investors, promote development of and regulate the securities market, by such

'measures' as it thinks fit. Apart from this plenary power, section 11(2) of the SEBI Act

enumerates illustrative list of measures that may be provided for by SEBI in order to

achieve its objective. One of the measures enumerated in 11(2)(e) is "prohibiting

fraudulent and unfair trade practices relating to securities markets". The word 'measure' has not

been defined or explained under the SEBI Act. It is well settled position that this

word has to be understood in the sense in which it is generally understood in the

context of the powers conferred upon the concerned authority. According to Corpus

Juris Secundum, 'measure ' means- 'anything desired to be done with a view to the accomplishment

of a purpose, a plan or course of action intended to obtain some object, any course of action proposed oradopted by the Government'. Measure is also understood 'as a means to an end'. From the


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provisions of section 11, it is clear that the purpose of section 11(2)(e) of the SEBI

Act is to prohibit all fraudulent and unfair trade practices relating to the securities

market and the Board may take any 'measures'in order to achieve this purpose.

9.

On careful reading of the above provisions of the SEBI Act, I note that the onlycircumference around SEBIs powers under section 11 and 11B is the duty to protect

the interest of investors and promotion/ regulation of the securities market as

mandated in SEBI Act itself. To this end, the 'measures' and the directions under

section 11 and 11B of the SEBI Act can be taken / issued for prohibiting the

fraudulent and unfair trade practices relating to securities market. From the scheme of

the SEBI Act it is very clear that the provisions of section 11 and 11B are not limited

as sought to be contended by the noticees. If, on facts, it is established that the

noticees employed any fraudulent device, artifice for their personal benefits or to the

detriment of a listed company and its shareholders the acts and omissions in that

regard would definitely be covered under the jurisdiction of SEBI under section 11,

and 11B of the SEBI Act.

10. Another preliminary contention of the noticees is that in order to fall in the definition

of 'fraud' under regulation 2(1)(c) of the PFUTP Regulations one should deal in

securities in order to induce another person or his agent to deal in securities. I note

that the definition of fraud in regulation 2(1)(c) is an inclusive one. It is inclusive

with respect to act, expression, omission or concealment committed by any person

whether in deceitful manner or not, while dealing in securities in order to induce

another person. The definition is also inclusive with respect to knowingmisrepresentation, concealment of material fact, suggestion to an untrue fact, active

concealment of fact with knowledge, promise without intention to perform, reckless

and careless representations, deceptive behaviour, false statement, etc. as listed in

points (1) to (8) of regulation 2(1)(c). The activities listed in regulation 2(1)(c) (1) to (8)

are not connected or related with dealing in securities by a person to induce another

person to deal in securities as contended by the noticees. In my view, the acts or

omissions to divert funds of the listed company to the benefit of the directors or to

cover their personal losses would be covered in the definition and such act, omissions

could be construed as fraudulent if found so on merits.

11. Regulation 3 of the PFUTP Regulations prohibit employment of any device,

scheme or artifice to defraud in connection with dealing in securities ; and engaging in

any act, practice , course of business which operates or would operate as fraud or

deceit upon any person in connection with dealing in securities. The words device,

scheme or artifice have not been defined in the SEBI Act or in the PFUTP

Regulations. According to the Blacks Law Dictionary,-

devicemeans (a) an invention or contrivance; any result of design; (b) a scheme

to trick or deceive; a stratagem or artifice, as in the law relating to fraud.


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scheme means(a) a systemic plan; a connected or orderly arrangement,

especially of related concepts; (b) an artful plot or plan, usually to deceive others

or a scheme to defraud creditors.

artificemeans a clever plan or idea, especially one intended to deceive.

12. In my view, the acts or omissions to divert funds of the listed company to the benefit

of the directors or to cover their personal losses would be covered in the definition

and such act, omissions could be construed as fraudulent would be covered within the

scope of the expressions 'device' or 'artifice'or 'scheme'. The words in connection with dealing

in securitiesin regulation 3 of the PFUTP Regulations do not signify that the person

employing the device and engaging in act, practice, etc. should actually buy or sell

securities. In my view, any fraudulent or deceptive device, scheme, act, practice which

has the potential to induce sale or purchase of securities of the listed company or to

influence the investment decisions of the investors in such securities would becovered in the prohibitions of regulation 3 of the PFUTP Regulations. I note that

indulging in any fraudulent or unfair trade practice in securities is prohibited in

regulation 4(1). In terms of regulation 4(2) dealing is securities shall be deemed to be

fraudulent or unfair trade practice if it involves fraud. Regulation 4(2) further provides

inclusive list of certain acts which do not necessarily require buying, selling or dealing

in securities so as to be covered in the prohibited activities in regulation 4. I, therefore,

do not agree with the contentions of the noticees in this regard. However, it is noted

that the specific charge in this regard in SCN is violation of regulation 4(2)(e) which is

separately dealt in the later part of this order.

13. The noticees have also contended that the Listing Agreement is a contract between a

listed company and the stock exchange on which the securities of that company are

listed. In such circumstances the noticees cannot be charged with violation of clause

36 of the Listing Agreement without charging the company i.e. TAAL. In this regard,

that in terms of section 21 of the SCRA, the liability to comply with the conditions of

Listing Agreement is cast upon the person on whose applications the securities are

listed on the recognized stock exchange. It is matter of common knowledge that

securities of a company are listed on the recognized stock exchange on the application

made by the company. Thus, the obligations under the Listing Agreement areprimarily on the listed company. In this case, therefore, if the relevant decisions of

board of directors contained price sensitive information contemplated in clause 36 of

the Listing Agreement, the disclosures should have been made by TAAL in terms of

said clause.

14. It is relevant to mention that a company, being a legal person having separate and

independent existence than its shareholders, acts through its board of directors who

individually and collectively hold the position of trust and have fiduciary duties

towards the company, the shareholders and other stakeholders. I note that, in case ofManaging Director, courts have usually held that he is, prima facie, deemed to be in


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charge and responsible for the conduct of business and management of the company

and, therefore, liable for defaults.{Garda Chemical Pvt Ltd vs. R. Parthasarthy, Asst.

Collector Central Excise [1984] 2 ECC 384 [Bom]}.In this case, Mr. Salil Taneja and Mr.

C. S. Kameswaran were Chairman and Managing Director, respectively of TAAL.

They both were actively involved in all the decisions taken in TAAL and hadproposed relevant resolutions. Therefore, they cannot escape liability for the

omissions of TAAL if established in this case. However, while alleging vicarious

liabilities on the directors for such violations, the company should also be proceeded

with for its defaults (U.P. Pollution Control Board vs. Modi Distillary AIR 1998 SC 1128).

In this case, no SCN has been issued to TAAL for the alleged violation of cause 36 of

the Listing Agreement. Further, though non compliance of clause 36 has been alleged,

there is no charged against the noticees for the purpose of directions contemplated

under the SCN.

15.

The noticees have further contended that SEBI cannot adjudicate upon any non

compliance of section 299, 300 and 391-394 of the Companies Act, 1956 as they are

not delegated to it under section 55A thereof. In this regard, I note that the SCN has

though alleged non compliance of section 299 and 300 of the Companies Act, 1956 by

noticees, it has not charged the noticees for violation of these sections for the purpose

of directions contemplated in the SCN. The said non-compliance has been mentioned

in the SCN as a matter of sequence of circumstances so as to indicate alleged

intention of the noticees. Further, the SCN has not charged the noticees for violations

of 391-394 of the Companies Act, 1956 while dealing with scheme approved by

Hon'ble High Court of Madras.

16. Having dealt with the preliminary objections of the noticees, I now proceed to deal

with the merit of the case. I have carefully considered the SCN, replies and

submissions of the noticees and materials available on record. In this case, the

noticees have been charged to have indulged in fraudulent activities prohibited under

the PFUTP Regulations. The noticees have not disputed the transactions described in

the SCN. They have contended that TAAL had taken a business decision to diversify

the company into Design Engineering Services through TTPL. Since inception there

was a link between TAAL and TTPL which was to benefit TAAL and itsshareholders. TTPL was considered as the Engineering Division Service division and

the same was complimentary to the existing business of TAAL. The investments of

TAAL in TTPL were 'Advances against Share Capital' of TTPL and the same were

eventually converted into equity shares capital of TTPL in accordance with law. SEBI

cannot question the business decisions taken by the board of directors.

17. In this case, it is admitted position that TAAL infused 9.7019 crore in TTPL in

instalments over a period from 1stApril, 2007 to 27thJune 2009 in the form of 'Advance

against Share Capital'. Mr. Salil Taneja and Mr. C. S. Kameswaran were Chairman and

Managing Director, respectively of TAAL during this period and were the sole


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shareholders of TTPL. TAAL had purchased the shareholding of these noticees in

TTPL on 19th March 2009 and 15th July 2009. Consequently, TTPL had become

wholly owned subsidiary of TAAL with effect from 15thJuly, 2009.

18.

It is also admitted fact that the board of directors of TAAL had passed a resolution on29thOctober 2007 and decided to diversify into Design Engineering Services through

TTPL and make investments in it, pursuant to section 372A of the Companies Act,

1956, of an amount of 5 crore by subscribing to equity shares or by loan, deposit,

etc. or in any other convertible securities of TTPL. I note from the said resolution

that, on the same day, the board of directors of TAAL had also passed resolution and

decided 'to acquire the entire or part of equity share capital of TTPL from its existing promoters'.

Thus, it is clear that TAAL had on 29thOctober 2007 itself decided to infuse funds to

the tune of 5 crore to subscribe to share capital of TTPL and to acquire its entire

shareholding. It is further noted that TTPL had disclosed such advance as 'Advance

Subscription in Share Capital' in its Annual Report /Financial Statements for Financial

Years 2007-2008 and 2008 -2009. From these facts and circumstances, it is inferred

that both the companies had understanding for subscription of shares of TTPL by

TAAL against aforesaid 'Advance against Share Capital'since October 2007.

19. It is also admitted fact that on 30th July, 2009 the board of directors of TAAL had

approved total investment of 10 crore in the TTPL. The noticees have

demonstrated that the Finance Committee of board of directors of TAAL had, in its

meeting held on 17thOctober 2008, approved investment not exceeding 10 crore by

subscribing to inter alia equity shares of TTPL. Further, the proceedings of Finance

Committee meeting held on 17th October 2008 was placed before the board of

directors of TAAL in its meeting held on 31 st October 2008 and the board of

directors had taken note of it and continued the investment in TTPL for additional

amounts against 'Advance against Share Capital'. As held by Hon'ble Supreme Court in

the matter of Maharashtra State Mining Corporation v. Sunil AIR 2006 SC 1936 a

company can subsequently ratify even an invalid act and such subsequent ratification

of an act is equivalent to a prior authority to perform such act. In this case, the total

amount of 9.7019 crore towards 'Advance against Share Capital'was given to TTPL as

per decision of board of directors of TAAL taken on 29 thOctober 2007, its decisiondated 17th/31st October 2008 and approval/ratification dated 30th July 2009. I,

therefore, find that no fault can be found about authority of TAAL to increase the

amount of investment and make investments beyond the limit approved on 29 th

October 2007.

20. It is also undisputed fact that TTPL was not authorised to issue additional shares

when the aforesaid amount of 9.7019 crore was invested by TAAL in instalments

from April 2007 to June 2009. Later, on 21st/22ndOctober, 2009, TTPL had increased

its authorised share capital. Consequently, the allotment of shares was made by TTPLto TAAL on 27thOctober 2009 on which date TTPL had authority to issue additional


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shares. Thus, the allotment of shares against the said advance was made by TTPL

after around 4 months from the last instalment of advance. In this regard, I note that

no time line has been prescribed by law for a private limited company to make

allotment against advance against its share capital. Legally, the investee company

should have authority to issue additional shares at the time of allotment of shares. Ihave perused the judgment of ITAT Pune bench in the matter of Sharad Holding

Leasing P Ltd. V. Asst. Commissioner of IT (MANU/IP/5020/2004) relied upon the

noticees in this regard. I note that in Sharad Holdingcase, the ITAL was deciding the

appeal arising from an order of the Commissioner of Income Tax (CIT) wherein

learned CIT had found that 'the amount shown to be received in excess of authorised share

capital would automatically cease to be share application money" and had held such investment

as loan. Deciding the appeal, ITAT rejected the finding/basis of CIT and held that

such investment was not loan. Taking into account the positions held in that case, I

am of the view that in order to see the character of transaction in the present case also

the purpose of receipt of money need to be seen. If the initial character of money is

accepted as towards share capital, the transaction cannot be given colour of loan. I

find that to this extent, the facts of present case are similar to that of Sharad Holding

case relied upon by the noticees. In the present case, the SCN has, at several places,

accepted the investment as "Advance against Share Capital". It is matter of common

knowledge that a loan is normally given at the instance of the borrower and it is for

the benefit of the borrower. In this case, it has been established on preponderance of

probability that the 'Advance against Share Capital'was for TAAL's diversification into

Design Engineering Services through TTPL and against the said advance TTPL had

allotted its equity shares to TAAL in October 2009.

21. The noticees have submitted that aforesaid fund infusion by TAAL in TTPL was a

well informed business decision taken by board of directors of TAAL in the best

interests of the company and the same cannot be questioned as sought to be done in

the SCN. The noticees have also claimed that after merger of TTPL with TAAL, there

had been significant contribution of the erstwhile business of TTPL to the business of

TAAL. In this regard, the noticees have cited judgement of Hon'ble High Court of

Kerala in the matter of Cochin Malabar Estate and Industries Ltd. and Anr. vs. P. V. Abdul

Khader and Anr, 203(2) KLJ1 wherein it has inter aliabeen held that "... The judges are ill -equipped to make business judgements. The Court cannot as a rule adjudicate upon the commercial

judgement of board of directors...........Even a commercial misjudgement would not amount to

oppression or mismanagement. The board of directors may err, every error cannot be a ground for

action and the company court is not correctional court for all errors....." They have also relied

upon following observations of Hon'ble Securities Appellate Tribunal ( SAT) in the

matter of D-Link (India) Ltd. V SEBI [2008] 85 SCL 385 (SAT):

"the company and its board of directors are best judges of the interest of their shareholders and it

was primarily a business decision which the company took and neither the Board nor we cansubstitute our own views for theirs..... This is not a matter which affects the securities market.


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The Board is primarily a market regulator and its duty is to ensure that the market remains a

safe place for the investors to invest. It cannot interfere with the business decisions taken by the

company so long as they do not prejudicially affect the securities market"

22. From, the above judgements, I note that business decisions of board of directors

normally cannot be found fault by regulator unless such decision is found fraudulent

or it affects integrity of securities market. In this case, TTPL was, at relevant time, an

associate/group company of TAAL and it later became its 100% subsidiary and

ultimately merged in TAAL. Admittedly, TAAL was in business of Maintenance

Repair and Overhaul of Commercial Aircraft and TTPL was in business of Design

Engineering Services. Thus, TTPL's business was complementary to TAAL's main

business. From the minutes of board meeting of TAAL held on 29 th October 2007

which read: "towards this end, the Company has already formed a company, TAAL Technologies

Limited which has already recruited a Chief Executive Officer and has started building operations"it

is noted that board of directors of TAAL had decided to venture into business of

Design Engineering Services through TTPL. In my opinion, to accomplish this

purpose, the genuine possible option available to board of directors of a company

would be either to start a new company/ subsidiary and make investment in it or to

do said business through its already existing associate/group company. Immediate

profitability of such subsidiary/ associate/group company is not sine qua non for

starting a business venture through it. However, if the said business decision of board

of directors of TAAL and consequent acts such as - infusion of funds of TAAL in

TTPL, subsequent sale of 100% shares of TTPL by noticees to TAAL and allotment

of shares by TTPL to TAAL against aforesaid advance , though permitted by law, arefound to be part of any device or plan of noticees for their personal gain or avoidance

of personal losses at the cost of or to the detriment of TAAL and its shareholders, the

same can be questioned by SEBI.

23. In this connection, it has been inter aliaalleged in the SCN that TAAL's money to the

tune of 9.7019 crore was deployed for the personal benefit of the noticees. Further,

the noticees, misusing their powers as Chairman and Managing Director of TAAL,

proposed and approved acquisition of 100% stake of TTPL from themselves with

intent to safeguard themselves from the losses and net liabilities of approx. 9.1 croreand, thus, transferred their personal liabilities to that extent to the public shareholders

of TAAL. In order to deal with allegations in this regard the facts and circumstances

needs to be considered in totality and charge has to be established on higher degree of

probability.

24. In the present case, it is undisputed fact that out of its paid up share capital of 1 lac,

TTPL had already lost over 95,000 till 31st March 2007 i.e. before TAAL started

making investments in it. I note that the noticees were the sole shareholders holding

5,000 shares of

10 each of TTPL till 19th

March, 2009 when Mr. C.S. Kameswaranhad sold his shares in TTPL to TAAL. Thus, by virtue of such purchase of shares,


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TAAL became a shareholder of TTPL on March 19, 2009. I note that at the relevant

times when decisions to give 'Advance against Share Capital" of TTPL was taken and

investments were made as aforesaid, TTPL was a non -operational company. Till 19th

March, 2009 only the noticees could have interests in profits, if any, earned by TTPL

on account of business. TTPL had not made any profits during this period. In fact,during April 2007 - June 2009 when TAAL was making investments as aforesaid,

TTPL was making losses and it had lost approximately 8.03 crores out of

approximately 9.7019 crores infused by TAAL and its net worth had become

negative to the extent of over 9.1 crores till June 2009. But TAAL continued making

additional investments in TTPL when it was making losses and later in the meeting of

board of directors of TAAL on 30thJuly, 2009, wherein the noticees had participated,

the additional investment was ratified. By virtue of their shareholding in TTPL as

discussed above, the noticees were concerned and interested in the arrangement of

investment by TAAL in TTPL and acquisition of noticees shares in TTPL by TAALas proposed by them in relevant board meetings. It has been alleged in the SCN that

being interested directors the noticees failed to disclose their interest in TTPL to the

board of directors of TAAL in board meetings dated 29 th October 2007 and 20th

January 2009 in terms of section 299 of the Companies Act, 1956 nor did they abstain

from voting on the respective proposals as required under section 300 of the

Companies Act, 1956. Relying upon the copies of Form 24AA filed by them on 31st

march 2007 and 31stMarch 2008 under section 299, the noticees have contended that

they had declared their interest in TTPL to TAAL in the said board meetings. I note

that in terms of section 299(2)(a) of the Companies Act, a general notice given by a

director in Form 24AA is deemed sufficient disclosure of interest of the director.

From the copies of said Forms 24AA it is noted that the noticees had disclosed the

nature of their concern or interest in TTPL by general notice and the same was

sufficient compliance of section 299 of the Companies Act, 1956. It has been alleged

in the SCN that the names of the noticees was not disclosed to the board of directors

in the board meeting held on 20 thJanuary 2009. It is noted that one of the directors,

other than the noticees, is father of one of the noticees. The noticees are Chairman

and Managing Director of TAAL, respectively. They had been regularly attending the

board meetings and meetings of Finance Committee along with other directors.

Hence, it can reasonably be presumed that the board of directors of TAAL was aware

of names of the noticees.

25. As regards, compliance of section 300 of the Companies Act, 1956, the noticees have

claimed that they had not voted or taken part in the discussions at board of directors

meetings. However, they have failed to give any evidence in support of this claim. I,

therefore, find that the noticees have failed to prove that they did not vote on the said

meetings as claimed by them. I further note that section 300 not only prohibits

interested director from voting but also from taking part in discussions on a contract

or arrangement with a company wherein he has concern or interest. From the minutesof relevant board meetings it is noted that the noticees had attended those board


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meetings. Further, their presence was also counted for quorum of respective board

meetings as alleged in the SCN. In fact, they had proposed and taken part in

discussion, deliberations and decisions on proposed resolutions in the said board

meetings and meetings of Finance Committee of board of directors. Thus, they had

failed to comply with provisions of 300 of the Companies Act, 1956 on this countalone. I, therefore, find that the noticees were instrumental in making proposals and in

approval of initial investment of 5 crore, additional investment of approx. 4.7crore

by TAAL into TTPL and proposing and approving purchase of their shares in TTPL

by TAAL. As matter of corporate governance and observance of fiduciary duties

towards shareholders of listed company, the noticee were expected to avoid such

conflict of interest which apparently they did not do.

26.Admittedly, the aforesaid decisions of board of directors i.e. to make investments in

and acquire TTPL, a company wherein the noticees had interest; to increase the limit

of investment and later to acquire shares of TTPL from the noticees i.e. Chairman

and Managing Director of TAAL on 19thMarch 2009 and 15thJuly, 2009, when it was

incurring losses were not disclosed to shareholders or BSE and these facts remained

within knowledge of board of directors including the noticees. Later, only on 30thJuly,

2009, the TAAL had made disclosure at BSE to the effect that:- "Taneja Aerospace &

Aviation Ltd has informed BSE that TAAL Technologies Pvt. Ltd has become a Wholly Owned

Subsidiary of the Company".Apparently, such disclosures are not sufficient to indicate to

shareholders or BSE that the TAAL had made investment to the tune of 9.7019

crore in TTPL when it had incurred losses and then acquired its entire shareholding

from its Chairman and Managing Director till 15thJuly, 2009 when TTPL was having

net liability of approx. 9.1 crore.

27. It is also noted that in the Annual Report of TAAL for the Financial Year 2006-2007

while other transactions upto 30thJune 2007 have been disclosed, the instalments of

'Advance for Share Application' in share capital of TTPL disbursed till June 2007 have

not been disclosed. Further, in the Annual Report for the Financial Year 2007-08 at

para. 14 at page 26 under head 'disclosures in respect of related parties pursuant to AS 18', it

was disclosed by TAAL that it had given to its 'associates' an amount of 3 crore as

'advance for share application'. It is further noted that in the said para 14 of this Annual

Report TAAL had disclosed, amongst others, TTPL also as its one of associates.

These disclosures in this Annual Report do not specifically indicate whether the said

advance of 3 crore made till 31stMarch 2008 was for share application in TTPL or in

any other disclosed associate. In its balance sheet as on 31stMarch 2008 under head

"Loans and Advances"(as shown at page 19 of the said Annual Report for the

Financial Year 2007-2008), TAAL had disclosed an amount of 4,74,13,343 as

'Advance recoverable in cash or kind or for value to be received'.Subsequently, in its balance

sheet as on 30thJune 2009 attached with Annual Report for the Financial Year 2008-

09 at page 37, TAAL had shown 3 crore as 'share application money in TTPL' and


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1,74,13,347 as 'Advance recoverable in cash or kind or for value to be received' as on 31st

March 2008. From the cumulative reading of such disclosures in balance sheets for

the said two Financial Years it can safely be inferred that the advance of 3 crore as

on 31stMarch 2008 was part of the aforesaid total amount of 4,74,13,343 given as

'Advance recoverable in cash or kind or for value to be received'thereby giving impression thatthe said amount could be recovered. None of the decisions of board of directors with

regard to the aforesaid invest was in public domain so as to be known to shareholders

of TAAL. It is observed that only after allotment of shares by TTPL to TAAL against

the aforesaid advance of 9.7019 crore the disclosures to shareholders of TAAL were

made on 05thDecember, 2009 in the Annual Report of TAAL for the Financial Year

2008-09 to the effect that the said amount was invested in TAAL towards share

application money. Thus, till 05thDecember, 2009 the shareholders of TAAL were not

aware of the aforesaid state of affairs in TAAL.

28. The noticees have contended that all the business decisions of board of directors need

not be disclosed to shareholders and these information were not price sensitive,

therefore, were not required to be disclosed. Considering the facts and circumstances

as described in the SCN; particularly the net worth of TAAL, net worth and

continuous losses of TTPL during respective Financial Years and the sequence of

events regarding infusion money to the tune of 9.7019 crore in TTPL, a company

owned by directors (noticees); in my view, the decisions of board of directors were

significant so as to have bearing on the interests of shareholders of TAAL. The

directors who were in charge of affairs of TAAL and who were interested party to the

transaction owed fiduciary duty to disclose relevant and material information to

shareholders in true and fair manner so as to give them clear picture about above

transaction at appropriate time. Therefore, the TAAL should have disclosed such

decisions to its shareholders at least in its Annual Reports.

29. In my view, considering the net worth of TAAL at relevant time, the decisions of

diversification of business of TAAL and to make substantial investments in an

associate company owned by the Chairman and the Managing Director and acquire its

business would have potential to influence the price of shares of TAAL. Further, in

view of the fact that TTPL having incurred huge losses and its net worth waseffectively negative as on the relevant dates, the information with respect acquisition

of business of TTPL by purchasing the shareholding of noticees and subscription of

shares of TTPL could have influenced prices of shares of TAAL had these

information been disclosed on BSE under clause 36 of the Listing Agreement. In this

case, apparently the relevant disclosures were not made at appropriate time and

whatever was disclosed in the balance sheets/Annual Reports, it did not give clear

picture of such investments by TAAL in TTPL to shareholders of TAAL. In this case,

the relevant and significant information about investments as described above

remained within the knowledge of board of directors including the noticees till 05th

December, 2009 after entire transaction was concluded.


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30. The facts and circumstances of the case such as :

a) the investments in an initially loss making company wholly owned by the

Chairman and the Managing Director;

b)

the interested directors taking active part in the relevant decisions in both thecompanies;

c) TAAL not making disclosures/ making incomplete disclosures of relevant and

material information to its shareholders with regard to its investments.

d) TAAL not subscribing to shares of TTPL after infusing 5 crore as approved

on 27thOctober 2007 and not becoming shareholder of TTPL till 19thMarch

2009 so that it could have any interest in the eventuality of TTPL making

profits rather continuing to infuse funds beyond the approved limit when

TTPL was still making losses;

e) TAAL acquiring entire shareholdings in TTPL only after infusion of the

advance of 9.7019 crore and thereby noticees remaining only shareholders

of TTPL till 19thMarch 2009 and one of them continuing till 15thJuly 2009;

if seen in totality create suspicion about intention on the part of the noticee to gain

undue benefits of investments of TAAL in TTPL as its shareholders.

31. However, it is pertinent to mention here that in order to establish an allegation of

fraud in such case as the present one, mere suspicion of intention of making undue

profit or avoidance of loss is not sufficient to make good the charge of fraudulent

plan or device or artifice in connection with issue, purchase or sale of or dealing insecurities. The charge in this regard has to be made out on the basis of higher degree

of preponderance of probability so as to attract prohibitions under regulation 3

and/or 4 of the PFUTP Regulations. In this regard, it is admitted fact that the money

infused by TAAL as aforesaid was not diverted /siphoned off or misappropriated,

directly or indirectly by the noticees for their personal benefits. Admittedly, shares of

TTPL were allotted against the money so infused. Based on possibilities and

hypothesis, the SCN has sought to allege that :-

(i) TAAL's money to the tune of 9.7019 crore was deployed for the personal benefit

of the noticees.(ii) Had TTPL earned profit on the aforesaid advance, noticees only would have

enjoyed such profits because they were the only shareholders in TTPL.

(iii)The entire exercise was carried out primarily with a purpose of hiding the losses on

advances of 9.7 crore made by TAAL to TTPL, which ideally should have been

borne by the noticees. The loss of approx. 9.1 crore of TTPL was a personal loss

of the noticees, which they were to make up before TTPL could have been

acquired by TAAL.

(iv)The noticees, misusing their powers as Chairman and Managing Director of

TAAL, proposed and approve

Order in the matter of Taneja Aerospace and Aviation Limited in respect of (1) Mr. Salil Taneja and...

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Transcript of Order in the matter of Taneja Aerospace and Aviation Limited in respect of (1) Mr. Salil Taneja and...