SC Pulls Up SEBI for Issuing a Show-cause Notice after 10-year Probe in AMFL Case
Moneylife Digital Team 27 October 2023
While criticising the Securities and Exchange Board of India (SEBI) for issuing a show-cause notice (SCN) to a company 10 years after conducting an investigation, the Supreme Court has directed the market regulator to hold an inquiry into the delay and submit a report. In the case of alleged misuse of funds raised through preferential allotment by Alps Motor Finance Ltd (AMFL), SEBI had challenged an order passed by the securities appellate tribunal (SAT). The tribunal also pointed out the inordinate delay by SEBI in issuing the SCN and initiating adjudication in the case that goes back to 2013.
In an order, the bench of justice Sanjiv Khanna and justice Bela M Trivedi says, "The appellant (SEBI) will file an affidavit of the executive director, investigation, SEBI stating the date on which SEBI received information regarding the allegations, The date on which the investigation under the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules was initiated,  the date on which the investigation was completed, the date on which the adjudicating officer was appointed, the date on which the SCN was issued and the date on which the adjudicatory order was passed."
"With regard to the dates, if there is any delay and/or default, an in-house inquiry will be held. Affidavit and the report of the in-house inquiry will be filed atleast ten days before the next date of hearing," the bench says.
The next hearing in the case is scheduled for February next year.
The case is related to Rs7.01 crore raised through preferential allotment by AMFL and loans provided to six entities from the proceeds. 
In 2013, SEBI investigated six preferential allotments made by Alps Motor Finance for possible misutilisation of proceeds. The investigation revealed that Chander Bhusan and Dream Procon Pvt Ltd were allotted Rs1 crore and Rs4 crore, respectively, without interest in opening a showroom and vehicle finance. Pioneer Buildstates Pvt Ltd was given a loan of Rs36 lakh without interest to improve its business relationship. Bulwark Partner (Rs1.5 crore), MLAP Commodities (Rs18 lakh) and Nanda Parbat Finlease Ltd (Rs46 lakh) were given the loan with an interest of 10%pa (per annum). However, only Pioneer Buildstates and Bulwark Partner repaid the loan. 
In January this year, SEBI issued a SCN to AMFL. Later in May, it imposed a fine of Rs41 lakh on AMFL and Brij Bhushan Sabharwal, the company's former whole-time director and Himanshu Agarwal, former non-executive and non-independent director, for mis-utilising funds collected from the preferential allotment. 
In an order, Amit Kapoor, adjudicating officer (AO) of SEBI, says, "Mr Sabharwal and Mr Agarwal were signatories of the bank account of AMFL in which proceeds of the issue were collected, and the loans were disbursed. The annual report for FY13-14 was signed by Mr Sabharwal and Mr Agarwal, and they were also present in 16 and 15 board meetings of AMFL out of the 16 meetings which took place. Mr Sabharwal and Mr Agarwal have, interalia, submitted that they had ensured compliance with the law by AMFL during their tenure and that after their resignation, they had no connection with AMFL or its management. However, I note that the preferential allotment and disbursal of loans out of the proceeds of the preferential issue took place during their tenure of them as directors and that they were signatories of the bank account in which allotment proceeds were received and from which disbursal of loans was done. Hence, Mr Sabharwal and Mr Agarwal were vicariously responsible for the act of AMFL."
SEBI imposed a penalty of Rs20 lakh on Mr Sabharwal, Rs15 lakh on Mr Agarwal and Rs6 lakh on AMFL.
SEBI says, "The very act of giving loans out of proceeds of the issue amounts to deviation from the stated objectives of the issue. Further, upon analysis of the loans to the six entities, it is amply clear that the said loans were given in a suspicious manner, and the scope of enforcement of the loan agreements in case of non-repayment of the said loans was severely limited. Evidently, four of the six entities failed to repay the loans, amounting to Rs5.64 crore."
"…there is a clear pattern in which it is seen that the majority of the loans granted have not been repaid, given without due diligence, were not aligned with objects of the issue and were granted in a lackadaisical manner, without taking necessary steps to ensure that the investor's money, already at deviation from the objects of the issue, was invested prudently," the AO says.
AMFL challenged the SEBI order before SAT. While setting aside the SEBI order, the tribunal stated there was an inordinate delay in issuing a SCN to the company. 
In its order on 20 July 2023, the SAT bench of justice Tarun Agarwala (presiding officer) and Meera Swarup (technical member) says, "We are of the opinion that there is an inordinate delay in the issuance of the adjudication proceedings. Preferential allotment was made in August 2013. This fact was known to the stock exchange and to SEBI. No action whatsoever was taken. BSE itself took cognisance of the alleged violation in 2016, in spite of which it took SEBI another five years to issue a SCN in 2023."
"In our view, there is an inordinate delay in issuing the SCN. The preferential issue was made in August 2013, and the SCN was issued on 5 January 2023. The issuance of the preferential issue was known to the stock exchange as well as to SEBI and, therefore, there is no justification for issuance of SCN at this belated stage," SAT says.
However, SEBI challenged the SAT order before the apex court.
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