IN RE,
CELESTIAL BIOLABS LIMITED AND OTHERS, 2018 INDLAW SEBI 173
|
NAME OF
THE CASE |
IN RE,
CELESTIAL BIOLABS LIMITED AND OTHERS V. SEBI |
|
CITATION |
2018INDLAW
SEBI 173 |
|
DATE OF
JUDGMENT |
OCTOBER
05, 2018 |
|
APPELLANT |
IN RE,
CELESTIAL BIOLABS LIMITED AND OTHERS |
|
RESPONDENT |
SECURITIES
AND EXCHANGE BOARD OF INDIA |
|
BENCH |
MADHABI
PURI BUCH (WHOLE
TIME MEMBER) |
|
STATUES
INVOLVED |
Under Sections 11,
11(4), and 11(B) of the Securities and Exchange Board of India Act, in 1992 In Re: Securities
and Exchange Board of India (Prohibition of Fradulent and Unfair Trade
Practices Relating to Securties Market) Regulations, 2003. |
|
REFERRED
CASES |
a)
Official Liquidator v. PA Tendolkar-(1973) 1 SCC 602 b)
N. Narayanan v. SEBI Adjudicating Officer.
(2013) 12 SCC 152 c)
State of Bombay v. P M Hegde AIR 1954 Mad 1080 d)
Leeds Estate, Building & Investment Co. v. Shepherd--(1887) 36 Ch D 787 |
FACTS AND PROCEDURAL HISTORY
“CBL / company / Notice No. 1” refers to
Celestial Biolabs Limited, a biopharmaceutical firm that is principally
involved in the development of biopharmaceutical products. The company’s
business strategy is primarily focused on the development, manufacture, and
distribution of biotechnological goods and services. Formulating and
manufacturing ayurvedic unique goods for the home market is the primary focus
of CBL. In 2006, CBL launched an initial public offering (IPO) to generate
capital in the sum of around ‘30 crores. The firm is traded on the Bombay Stock
Exchange (BSE) and the National Stock Exchange of India Ltd.
Dr. A. N. Singh serves as the company’s
Chairman and Managing Director in addition to his other roles. As of March 31,
2017, he and his family had a 37.31 percent stake in the corporation, which is
known as the Promoter Group. According to the information provided by the
corporation in its Annual Reports, the following is the board’s makeup. All
other Directors, with the exception of Dr. A. N. Singh and his wife, Mrs. Padma
Singh, are listed as Independent Non-Executive Directors on the company’s
website.
According to the Securities and Exchange
Board of India (hereafter referred to as ‘SEBI’), the Office of the
Commissioner of Customs, Central Excise and Service Tax filed a referral
against CBL on May 19, 2015, which was received by SEBI. After conducting an
investigation, it was discovered that the company’s books of accounts had been
tailored to a significant extent, and that various fictitious transactions had
been recorded in the name of Bio-IT Services in order to present a rosy picture
of the company’s financial position to its shareholders.
As a result, according to the SCN,[1]
Notice No. 1 was engaged in accounting fraud, the use of questionable and
inconsistent methods, and the use of fraudulent devices. As a result, it was
claimed that the Non-Independent Directors of Notice 1, No. 2 and No. 3, were
responsible for accounting irregularities as well as using deceptive methods in
order to deceive investors. The company’s auditor, Notice No. 4, was also to
blame for a lack of professional scepticism in the audit of its books for the
financial years 2010-11 and 2011-12.
When the promoter director repurchased the
business’s stock, he sold 25 million shares and transferred the money to the
company as an unsecured loan from others. According to the company’s most
recent audited financial statement, unsecured loans total 4.27 crore. The money
was utilised to pay off a bank term loan that the firm still owed. Preferential
shares will be issued to the company’s promoters in order to expand their
holdings. In the Notice, the Noticer provided the bank statements for the sale
of the firm’s stock by the business’s founders, as well as the monies that were
brought into the company. There was also a copy of the audited financial
statements that showed the unsecured loan from others.
ISSUES OF THE CASE
(i)
The SCN (Show Cause Notice) claims that CBL misrepresented its financial
statements, used questionable and inconsistent accounting standards, and used
deceptive methods to mislead investors.
(ii)
Who all are accountable for falsification of accounts and the use of
questionable and inconsistent techniques in drawing up accounts, as well as
devices to mislead investors?
(iii)
Is there any evidence that the Noticees have broken any of the
provisions of the SEBI Act?
(iv)
Has CBL breached the LODR Regulations by Dr. A.N. Singh, and Padma
Singh?
REASONING
OF THE CASE
(i) The SCN claims that CBL
misrepresented its financial statements, used questionable and inconsistent
accounting standards, and used deceptive methods to mislead investors.
CBL’s claim that it has an oral arrangement
with pharma firms to provide clinical data management services has been found
to be unsubstantiated by any documented proof. As a result, it is believed that
CBL’s sales figures for 2010-11 and 2011-12 do not accurately reflect the
company’s Bio-IT revenue.
In this scenario, it is assumed that CBL was
offering clinical data management services to pharmaceutical firms that were
researching novel medications for human use. As soon as CBL begins selling its
services for clinical data management to other pharmaceutical firms, it no
longer qualifies as R&D spending since the costs paid in creating the tools
for clinical data management are no longer considered R&D investment.
Although Noticee No. 1’s clinical data management tools may have been developed
concurrently with the selling process, the entire proceeds of sale cannot be
considered as product development costs resulting in an intangible asset, as
the particular sales figure also reflects the compensation paid by pharma
companies for the services availed of by Notice No. 1.
(ii) Who all are accountable for
falsification of accounts and the use of questionable and inconsistent
techniques in drawing up accounts, as well as devices to mislead investors?
Prior texts concluded that no evidence of
sales of clinical data management services to pharmaceutical corporations was
found. The corporation was able to predict exaggerated revenue, profit, and
receivable statistics as a result of these fictitious transactions. In
accordance with the Apex Court’s judgement, the Directors are responsible for
preparing the Annual Reports so that they portray a “true and fair picture”.
When it comes to clinical data testing sales numbers in Bio-IT, the deceitful
device/scheme used by Dr. A.N. Singh and Ms. Padma Singh, the company’s
directors, to manufacture and make fraudulent disclosures, they have failed
miserably in their duties. As a result, it is determined that Dr. A.N. Singh
and Ms. Padma Singh is accountable for financial reporting errors, for using
questionable and inconsistent accounting processes, and for using deceptive
techniques to deceive investors.
As a further indication that this omission
was not a mistake, the auditor failed to independently verify Bio-IT sales
figures despite being made aware of the pharma businesses’ payment defaults by
the company. Before the auditor classified the alleged bad debts under Product
Development Expenditure by considering them as intangible assets, the business
and other chartered accountants addressed the topic.
(iii) Is there any evidence that the
Noticees have broken any of the provisions of the SEBI Act?
In light of all that has come to light, I’ve
come to the conclusion that the Noticees committed these violations on purpose
as part of a larger scheme to manipulate and deceive the public. Fraud is
developing on the market/investors when the image is taken in its whole.
Serious abnormalities that jeopardise market integrity and order need
regulatory involvement to safeguard investors’ interests. Consequently, the
CBL, Dr. A.N. Singh, Ms. Padma Singh, and M/S Lakshmi Purna & Associates
were deemed to have breached Section 12A (b) of the SEBI Act and Regulations
3(c), (a), (e), (f) and (k) and (r) of the PFUTP Regulations, respectively.
(iv) Has CBL breached the LODR
Regulations by Dr. A.N. Singh, and Padma Singh?
The firm was found to have reported
fictitious sales of ‘677 lakh in 2010-11 and’395 lakh in 2011-12, as stated in
the previous paragraph. Therefore, it is determined that the CBL has breached
the provisions of the LODR Regulations included in subsections 4(1) (a) through
(j)[2] as
well as subparagraphs 4(1)c through d).
Board of Directors of listed companies are
responsible for ensuring the integrity of the accounting and financial
reporting systems in accordance with LODR Regulations 4 (2) (f) (ii) (7).
Furthermore, under Regulation 4 (2) (f) (ii) (8) of the LODR Regulations, the
Board of Directors is also responsible for overseeing the disclosure and
communication process.
For this reason, it is logical and fair to
apply the same limits to the definition of “offence” in the SEBI Act as in
Section 68 of the Foreign Exchange Regulation Act, 1973 in light of this Apex
Court ruling and Section 27 of SEBI Act. Previous paragraphs said that Dr. AN
Singh and his wife, Padma Singh, were Directors of Bio-IT and failed in their
obligation to exercise due care and attention, as well as being part of a plot
to fake sales numbers and make misleading declarations. As a result, they are
found in violation of LODR Regulations 4(1)(a), (b), (c), (d), (e), (g), and
(j).[3]
DECISION/ JUDGMENT
SCN dated January 5, 2018, included a glaring
omission: a charge of violating LODR Regulations was dropped against the
corporation. As a result, unless the firm submits its objections within 30 days
of the date of delivery of this judgement, this order will become the final
order against the company with regard to the findings under the LODR
Regulations. Until then, the injunctions against the corporation will serve
only as temporary measures to ensure compliance. There are no challenges to
this order’s findings under LODR regulations regarding the corporation in
question. Following an objection, the corporation will be subject to the terms
of this order unless and until the objections are resolved.
According to the ruling, this order does not
preclude SEBI from taking any additional action under the securities
legislation.
EVALUATION OF THE CASE
PRESENT LAW
Section 2 (1) (c) of PFUTP Regulations[4]
define “fraud” as any act, expression, omission, or concealment made while
dealing in securities to induce another person or his agent to engage in such
dealings, whether or not there is any wrongful gain or avoidance of any loss by
oneself or by another person with his or her consent or by his or her agent.
Regulation 3[5] of
the PFUTP prohibits certain securities transactions.
Directly or indirectly- no one is allowed to
do this.
(c) any method, plan or artifice to cheat in
conjunction with trading or issuance of securities that are recognised stock
exchanges.
4. Prohibition of unfair and deceptive
activities in the marketplace.[6]
(1) Without limiting Regulation 3, no one may
engage in fraudulent or unfair trading conduct in securities of any kind.
(2) A fraudulent or unfair business conduct
in the securities market includes any or all of the following: —
(a) engaging in an act that gives the
appearance of trading in securities that is false or deceptive.
(e) any action or omission that may be
construed as price manipulation.
(f)Publishing or causing to be published or
reported by a person, as well as reporting or reporting by a person.
CASES REFERRED
Official Liquidator v. PA Tendolkar[7] held that a director may be shown to have
been placed and also been so closely associated personally with management of
the company, that he will be considered not only cognizant of, but also liable
for fraud in the conduct of the company’s business, even if no specific dishonesty
is provided against him personally. Everyone who has even a cursory look at the
company’s finances will see what he can’t ignore.
India’s Supreme Court has ruled in the case
of N. Narayanan v. SEBI Adjudicating Officer.[8]
The Supreme Court ruled as follows: Directors
are responsible for preparing yearly records and reports, and those accounts
must give a “true and fair perspective” of the company’s operations. Directors
must only accept the financial statements if they are certain that they
accurately reflect the company’s earnings or losses for the relevant period and
its current financial state.
State of Bombay v. P M Hegde[9] (April 30, 1954) addressed whether the
auditor’s responsibility is to check that the values in the balance sheet are
consistent with those in Bank accounts.
As evidence of the auditor’s lack of
accountability, the Hon’ble High Court alluded to the following examples in its
decision:
Leeds Estate, Building & Investment Co.
v. Shepherd[10] at page 802. It was Stirling J.’s opinion
that auditors should not only verify that a balance sheet is accurate
numerically, but that they should also verify that it contains all of the
information specified in the articles of incorporation (and thus a proper
income and expenditure account) and that it is properly drawn up, so that it
contains a true representation of the company’s financial condition.”
SYNTHESIS OF THE CASE
Because of the deception, this case is a good
candidate for lifting the corporate veil and revealing the real state of
affairs about non-compliance with the LODR Regulations in question. Because
once the corporate veil is penetrated, the failure to comply with the LODR
Regulations in issue would take on the character of a failure on the part of
the promoters and directors involved.
As a result, author believe that this is an
appropriate case in which it should be regarded that the Promoter/Directors, as
a result of their fraud, have failed to perform the LODR obligations in
question, and that they should be held jointly and severally liable for
non-compliance with the LODR obligations in question with the Company. Taking
the opposite view would only facilitate the controlling promoters/directors to
put on the mask of personality of the company and claim that they are not
responsible because they are separate from the corporate entity, and taking the
opposite view would only bring to actuality the fear expressed by the Hon’ble
SAT in the Sahara judgement, which is as follows. “Without such authority, the
Securities and Exchange Board of India (SEBI) would be a quiet spectator to
many of the corporate wrongdoing that may threaten the interests of investors.”
When it comes to protecting the interests of investors in the securities
market, SEBI is statutorily entitled to raise the corporate veil and dig for
the truth whenever the interests of investors are threatened or are likely to
be threatened, according to the mission of the regulator.
[1] Show Cause Notice (Hereinafter
referred as SCN)
[2]
(Listing Obligations and Disclosure Requirements) Regulations,
2015, (Herinafter referred as LODR) Section.
[3]
Ibid.
[4]
SEBI (Prohibition of Fraudulent and Unfair Trade
Practices relating to the Securities Market) Regulations, 2003, s
2(1) (c).
[5]
Ibid. Regulation 3.
[6]
Ibid. Regulation.
[7]
Official Liquidator v. PA Tendolkar (1973) 1 SCC 602
[8]
N. Narayanan v. SEBI Adjudicating
Officer, (2013) 12 SCC
152
[9]
State of Bombay v. P M Hegde, AIR 1954 Mad 1080
[10]
Building & Investment Co. v. Shepherd (1887) 36 Ch D 787.
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