Holding seven entities, including Yash Birla, for providing security towards the loan taken by Vintage for subscribing to global depository receipts (GDR) of Zenith Steel Pipes & Industries Ltd (erstwhile Zenith Birla (India) Ltd) -ZBIL, market regulator Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs10.80 crore on all of them.
In an order, G Ramar, adjudicating officer (AO) of SEBI, says, "The (European American Investment Bank AG -EURAM) bank account in which GDR proceeds were held was in the name of the company, but the amount deposited in the account was not at the disposal of the company as the same was pledged as security against the loan availed by Vintage FZE (now known as Alta Vista International FZE). Therefore, it was alleged that the scheme of issuance of GDRs was fraudulent."
"I am of the view that the way the directors of ZBIL have conducted themselves as directors of the board and have agreed to pass those board resolutions pertaining to the GDR issue, they have clearly allowed themselves to be a part of the fraudulent scheme and hence, do not deserve exoneration on that account only," the AO added.
SEBI has imposed a penalty of Rs10 crore on Zenith Steel Pipes & Industries, Rs20 lakh each on PVR Murthy (director) and Arun Panchariya (director of Pan Asia Advisors Ltd, lead manager to the issue). Others, including Yash Birla (director of ZBIL), MS Arora (managing director of ZBIL), AP Kurias (director of ZBIL), and Mukesh Chauradiya, have been levied a penalty of Rs10 lakh each.
According to the market regulator, on 28 October 2009, the (then) directors of ZBIL had passed a board resolution inter alia authorising the opening of an account with EURAM Bank for receiving subscription money of the GDR issue of ZBIL and authorising Mr Arora (managing director of ZBIL) and Mr Murthy (director of ZBIL) to sign the agreements relating to the GDR issue 'jointly' also for using the funds deposited in the said bank account as security in connection with loans, if any.
It was further observed that ZBIL directors Mr Murthy, Mr Birla, Mr Arora and Mr Kurias passed another resolution on 3 March 2010 superseding the earlier resolution of the opening of an account with EURAM Bank and authorising Mr Arora and Mr Murthy, jointly and severally to sign, execute, any application, agreement, escrow agreement and other paper(s) from time to time as may be required by EURAM Bank and to carry and affix the common seal of the company.
Following this, on 12 May 2010, ZBIL signed a 'pledge agreement' with EURAM Bank pledging GDR proceeds as collateral against the loan availed by Vintage vide 'loan agreement' dated 12 May 2010, which was executed by Mr Murthy, director and authorised signatory of ZBIL.
"In view of this, it was alleged that ZBIL had pledged the GDR proceeds against the loan availed by Vintage for subscribing to GDRs of ZBIL, thus securing Vintage's loan. The loan agreement and the pledge agreement enabled Vintage to avail loan from the EURAM Bank for subscribing to the GDRs of the company. The said GDR issue would not have been subscribed had the company not given such security towards the loan taken by Vintage," the SEBI order says.
SEBI investigation also found that the company did not share information on both the resolutions with the exchanges and investors. Further, "it was observed that ZBIL did not follow accounting standards –3 and 29 since it did not disclose or provide for potential liability for pledged GDR proceeds in its financial statements, presented its cash balance pledged with EURAM Bank as free cash and did not disclose the fact of signing of pledge agreement and pledging of GDR proceeds as the same are the items..."
Subsequently, Vintage defaulted on loan repayment of the GDR issue of US$14.50mn (million), including interest, and EURAM Bank adjusted the amount from the GDR proceeds of ZBIL as it had pledged GDR proceeds against this loan.
The AO observed that Mr Chauradiya submitted that he was never the director or MD of Vintage, as alleged in the SCN. He also tried to collect documents from Jebel Ali Free Zone Authority UAE (JAFZA) to prove that he was never director or MD of Vintage. However, the authority has denied him the information without a court order.
He says, "The GDRs acquired by Vintage was later cancelled and converted into shares and subsequently sold through sub-accounts of foreign institutional investors (FIIs) (related to Mr Panchariya) in the Indian market."
"Hence, it was alleged that the shares converted and sold of ZBIL include shares acquired by Vintage free of cost as they defaulted on the loan repayment, causing a loss to the tune of US$14.505 million to the shareholders of ZBIL," SEBI says.