SAT reduces Sebi’s penalty on Zenith Birla to ₹25 lakh in GDR manipulation case

The Securities Appellate Tribunal has reduced the penalty imposed by Sebi on Zenith Birla (India) Ltd (ZBIL) to ₹25 lakh from ₹10 crore in a matter related to manipulation of global depository receipt (GDR) case.

ZBIL is now known as Zenith Steel Pipes & Industries Ltd.

In its ruling on Tuesday, the tribunal said, "In our opinion, the penalty imposed is "excessive" and disproportionate to the violation and is also discriminatory.

"There are public shareholders and workers. The company is a running concern. Penalising the firm with such heavy penalty is in fact penalising the shareholders, which is not justifiable especially for a running company."

However, the appeals of Yashovardan Birla, European American Investment Bank AG (EURAM Bank), and Mahendra Singh Arora were dismissed by the SAT.

The tribunal ruling comes after ZBIL, Birla, EURAM and Arora challenged both the orders passed by Sebi in March 2021 and June 2022.

In March 2021, Sebi's whole-time member (WTM) has barred six individuals and seven entities from the securities markets for varying periods and directed some of them to disgorge illegal gains in the GDR manipulation case.

In addition, it had imposed a three-year ban on ZBIL and a one-year ban each on Yash Birla and M S Arora who were company's chairman and managing director, respectively.

Further, the WTM directed India Focus Cardinal Fund (an entity registered with Sebi as a sub-account of EURAM Bank) and others to disgorge ₹59.06 crore.

In another order, passed on June 2022, Sebi imposed a penalty of ₹10 crore on ZBIL and ₹10 lakh each on Yash Birla and M S Arora.

The case pertains to issuance of GDRs by Zenith Birla. It had issued 1.81 million GDRs for USD 22.99 million in May 2010 and the issue was subscribed by Vintage FZE after getting a loan from EURAM Bank to subscribe to the GDRs.

Arun Panchariya had signed the loan agreement on the behalf of Vintage as its MD and the issue was subscribed only by Vintage.

As per Sebi, ZBIL had pledged its entire GDR proceeds with Euram Bank as a security against the loan availed by Vintage for subscribing to the GDRs.

It was also found that all the 1.81 million GDRs were cancelled and converted into equity shares. After cancellation, it was noticed that 4.77 crore shares of Zenith on conversion of 13.77 lakh GDRs were sold in the securities market through India Focus Cardinal Fund (IFCF).

Panchariya was also a director at Pan Asia Advisors Ltd, which was the lead manager of Zenith's GDR issue.

However, SAT in its order noted that the "money raised through GDRs has been received by the firm and has not been misappropriated. The same has been utilised for the purpose for which the GDR was issued, which fact has not been disputed. Thus, it is not a case of defalcation of the funds."

Affirming the order of the Sebi's Adjudicating Officer for the violations committed by the company, it said "we reduce the penalty against the ZBIL to ₹25 lakh and the debarment of the firm for a period of three years is reduced to the penalty undergone."

"The penalty against the Chairman and Managing Director is affirmed, while debarring them for 1 year is neither excessive nor arbitrary. We accordingly confirm the directions issued by the WTM," SAT said.