Order in the matter of Investigation in the matter of disclosures by Farmax India Ltd. in respect of its GDR issue

BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER: EAD-9/VKV/GSS/2020-21/9575]
 

UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES) RULES, 1995.
 

In respect of:-

Mr. M. Srinivasa Reddy, M.D. of Farmax India Limited (PAN: AFTPM5606G)
In the matter of Farmax India Limited
BACKGROUND OF THE CASE

1. Securities and Exchange Board of India ("SEBI") had conducted investigation against several Indian companies that had issued Global Depository Receipts ("GDR") in overseas markets. In this regard, on an enquiry with European American Investment Bank ("EURAM Bank") about the loan taken by initial GDR subscribers, it was informed that in respect of GDR issue of Farmax, M/s. Vintage FZE ("Vintage"), now known as Alta Vista International, had availed loan against the GDR proceeds of Farmax India Limited (“FIL / Farmax”). Accordingly, SEBI had investigated the issue of loan taken against the GDR proceeds of Farmax during the issuance of GDR i.e. June 01, 2010 to August 31, 2010 (hereinafter referred to as "Investigation Period ("IP")) to ascertain as to whether:

a. GDRs were issued with the intention of defrauding Indian investors

b. Shares underlying GDRs were issued with proper consideration and

c. Appropriate disclosures with respect to Listing Agreement , if any were made

2. During the investigation, following facts were observed, which was basis the for issuance of SCN;

a) Farmax issued 4.25 million Global Depository Receipts (hereinafter referred to as “GDRs”) amounting to US$59.925 million on June 29, 2010 and further issued 0.85 million GDRs amounting to US$11.985 million on August 14, 2010 under green shoe option. Summary of the GDR issue (in two tranches) as provided by the Noticee is tabulated below:

b) On perusal of corporate announcements made by Farmax to Bombay Stock - Exchange (hereinafter referred to as “BSE”) during the period December, 2009 to August, 2010, it was observed that the company had informed BSE on April 27, 2010 that the Board of Directors of the Company at its meeting held on April 27, 2010 had approved issue of GDRs.

c) Further, on June 29, 2010, Farmax informed BSE that, “… the Company has successfully concluded placement of 4,250,000 Global Depository Receipts at US$ 14.1 per Global Depository Receipt”.

d) Prospect Capital Ltd. was the Lead Manager of GDR issue of Farmax.

e) From the examination of Loan Agreement, Pledge Agreement and ESCROW account statement, investigation established that all

f) Investigation also observed that Vintage had availed of loan facility to the extent of USD 71.91 million from EURAM Bank to subscribe to the GDRs of Farmax. The loan amount was same as the GDR size of Farmax.

g) From examination of KYC documents, investigation observed that Arun Pachariya (AP) was the beneficial owner and Managing Director of Vintage as on June 06, 2007. From Vintage’s letter dated December 30, 2010, it was further observed that Mr. Mukesh Chauradiya was its director. Vintage’s letter dated April 27, 2011 and February 23, 2012 also show that Mukesh Chauradiya was Authorized Signatory of Vintage.

h) It was further observed that on the same day of the signing of the Loan Agreement, i.e. May 05, 2010, a Pledge Agreement was also signed between Farmax (as Pledgor) and EURAM Bank (as Bank).

i) Vintage had entered into Loan agreement with EURAM Bank as per which Vintage would be provided a loan only for the purpose of subscribing to the GDRs of Farmax. The Loan Agreement mentioned that the loan amount “… may only be transferred to EURAM account No.580018 Farmax India Ltd…”.

Therefore, investigation observed that subscription of GDRs was done through loan availed by Vintage from EURAM Bank and the security for the Loan Agreement was provided by pledging the proceeds of the GDR issue.

j) It was also observed that Farmax pledged GDR proceeds even before issuance of GDRs to secure the rights of EURAM Bank against the loan given by EURAM Bank to Vintage for subscription to GDR issue (as mentioned in Loan Agreement). Further, on perusal of the Pledge Agreement and Loan Agreement, investigation observed that bank account in which GDR proceeds were held, was in the name of the Farmax but the amount deposited in the account was not at the disposal of the company as same was kept as collateral even prior to issuance of GDRs for the loan availed by Vintage.

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