Market regulator Securities and Exchange Board of India (SEBI) has banned the directors of Sterling Biotech Ltd from accessing the securities market in a matter pertaining to fraudulent issuance of global depositories receipts (GDR) by the company.
The directors who have been banned are: Nitin Sandesara, Chetan Sandesara, Rajbhushan Dixit, Vilas Joshi and Priyadarshan B Mehta. They are facing debarment from the securities market for periods ranging from three years to five years each.
Nitin Sandesara and Chetan Sandesara have been restrained from accessing the securities market, and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, and associating with the securities market in any manner, whatsoever, for a period of five years.
They have also been restrained from holding any position of director or key managerial personnel in any listed company or any intermediary registered with SEBI during the period of restraint.
SEBI had launched an investigation into the issuances of GDR in overseas markets by Indian companies, allegedly with the intention of defrauding Indian investors. During the investigation, it came to SEBI’s knowledge that there were several other GDR issues where loan was taken by a foreign entity and the security of the loan was provided by the GDR issuing company by signing an account charge agreement. One such company was Sterling Biotech Ltd.
The focus of investigation was to ascertain whether the shares underlying the GDRs were issued with proper consideration and whether appropriate disclosures, if any, were made by Sterling with respect to GDRs issued by it on 1 October 2003. The period under investigation was the period around the issuance of GDRs by the Company from 1 September 2003 to 31 October 2003.
Sterling Biotech came out with the GDR issuance of 2.32 million amounting to $15.37 million on 1 October 2003. SEBI’s investigations found that the scheme of issuance of GDRs was fraudulent as the firm had entered into an account charge agreement with Banco Efisa Bank for a loan that was availed by Fresia Worldwide Ltd towards the subscription of GDR.
Further, the account charge agreement was also not disclosed to the stock exchanges which made the investors believe that the said GDR issue was genuinely subscribed by the foreign investors. Fresia was a party to this fraudulent scheme. The GDR proceeds were also pledged as security against the loan.
"Sterling in connivance with Fresia devised a fraudulent scheme whereby Fresia received GDRs without paying any consideration for 80% of the GDRs, at the cost of shareholders and investors of Sterling," SEBI concluded.
Nitin Sandesara, who was the chairman and managing director of Sterling, signed an account charge agreement with Banco and pledged GDR proceeds as collateral against loan availed by Fresia from Banco for subscribing to GDRs of Sterling. The other noticees Chetan Sandesara, Rajbhushan Dixit, Narendra Patel, Vilas Joshi and PB Mehta were directors on the board of Sterling. In the board meeting on 9 August 2003 these directors authorised Nitin Sandesara to sign the agreement pledging the GDR proceeds, which acted as security in connection with loan availed by Fresia. They directors also authorised Banco to use GDR proceeds as security against the loan.
It was observed during investigation that, on 6 May 2004, an amount of $12,200,000 was transferred by Sterling to Fresia, the entity which had subscribed to nearly 96.65% of the GDR issue. Considering that Fresia was one of the subscribers to the GDR issue and the company transferred nearly 80% of GDR proceeds back to Fresia, it was concluded that the GDRs, and the underlying equity shares in turn, to the tune of $12.27 million, were effectively issued by Sterling to Fresia without any consideration, at the cost of shareholders/investors of Sterling. This is the fraudulent scheme that had been conceived.
Modus Operandi and Fund Flow:
Fresia entered into a credit agreement dated 29 September 2003 with Banco for a term loan facility up to USD 15 million, with the purpose of subscribing to the GDRs being issued by Sterling.
On 9 August 2003, the board of directors of Sterling passed a resolution (signed by Kirtidev Khatri, company secretary and Nitin Sandesara, chairman of Sterling) resolving that a bank account to be opened with any Branch of Banco for the purpose of receiving subscription money in respect of the GDR issue of this company, and authorising Banco to use the GDR proceeds as security against loan availed by Fresia.
Consequent to the above, an account charge agreement was executed between Sterling and Banco and was signed by Nitin Sandesara, CMD of Sterling. As per account charge agreement, Sterling shall deposit in its designated account with Banco an amount not exceeding loan availed by Fresia for subscription of GDRs of Sterling as security for all the obligations of Fresia under the credit agreement.
The aforesaid account charge agreement was an integral part of loan agreement entered into between Fresia and Banco and vice versa and both were executed concurrently. The account charge agreement had the reference to the credit agreement entered into between Fresia and Banco by virtue of which Banco provided loan to Fresia for the purpose of subscribing to the GDR of Sterling. The GDR issue would not have been subscribed in its entirety had the company not given security towards the loan taken by Fresia through account charge agreement. Sterling had pledged GDR proceeds to secure the rights of Banco against the loan given to Fresia for subscription to GDR issue.
As already stated, the GDR proceeds to the tune of USD 15.37 million were deposited in the company’s bank account No. 6127685.15.001 maintained with Banco. Subsequent to the deposit of the proceeds in the said bank account, amounts were transferred from the company’s bank account to various beneficiaries.
Pursuant to the findings of investigation report, a common show-cause notice (SCN) dated 5 March 2018 was issued to all of them and a supplementary show-cause notice dated 3 April 2019 was issued to Sterling Biotech.
The market regulator held the chairman and managing director Nitin Sandesara and director Chetan Sandesera liable for the fraudulent scheme as they were fully involved in the day-to-day activities of the company.
"The directors, namely Vilas Joshi, P B Mehta, Narendra Patel and Rajbhushan Dixit, who even though were Non executive Independent Directors, had clear knowledge of the terms of the Credit Agreement and the Account Charge Agreement,"SEBI’s order added.
SEBI noted that Sterling Biotech is in liquidation and that Fresia Worldwide Ltd has been dissolved, thereby, proceedings against the two entities have been disposed.
Narendra Patel, noticee No. 6, has passed away. Hence, proceedings against him have also been disposed without passing any directions.
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