Learnings from the SAT order: in the matter of routing of funds to the Indian Securities Market using overseas bank accounts.

?SAT vide its order dated June 21, 2024 disposed off the allegations against Mr. Satish Chandra and Mr. Ajay Chandra (‘Noticees’) concerning allegations by the Securities and Exchange Board of India ('SEBI') on account of findings under suo-moto investigation on the routing of funds for investment in securities of Unitech Limited (‘listed company’).

Interesting facts provided in the investigations:

i)??Connection between overseas investing companies and listed companies: Facts such as the Noticees being non-executive directors in the overseas investing companies were brought. Further, the listed company held a meager stake of 4.52% in the overseas investing company/ies. Further, the Listed Company and Investing Company/ies had a JV arrangement for a project through an SPV for certain projects.

ii)???Email communication: extracts of employees communicating the intention to open bank accounts in Zurich and investments in a PCC structure in Mauritius [Note: this may be communication in the usual course as well, however, certain conclusions have been inferred from such communications]

Allegations:

Basis communications and review of bank account statements, it was alleged that Noticees transferred the funds from the Indian account of the Listed Company to its overseas subsidiary. Subsequently, these funds were transferred among the other foreign subsidiaries of the Listed Company, including the connected/related entity viz. UCP/its subsidiaries using UBS accounts (wealth accounts) in different countries. Thereafter, these parked funds in the accounts in the name of subsidiaries/related entities of the Listed Company, were ultimately routed to a PCC vehicle in Mauritius which were then directly or indirectly invested/used to buy the shares of the Listed Company.

?It was alleged that the Noticees violated the provisions of Regulations 3(a), (b), (d) and 4(2)(f) of PFUTP Regulations which covers following violations:

Reg.3(a), (b) & (d) of PFUTP :

No person shall directly or indirectly—

a) buy, sell or otherwise deal in securities in a fraudulent manner;

b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;

?d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on are cognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

?4(2)(f). Dealing in securities shall be deemed to be a manipulative fraudulent or an unfair trade practice if it involves any of the following—

?f) knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities.

SAT conclusions:

Certain interesting points which can be drawn from the SAT order:

?i)??? SAT stated that the inference drawn in the investigation that Noticees have regularly transferred funds to foreign subsidiaries for routing of funds cannot be justified as the said inference has been simply drawn based on only one transaction of USD 8 mn between Listed Company and its overseas Subsidiary and the end use of the same has also not been traced in the absence of the details of bank transactions or without any other supporting documentary evidence on the same.

ii)???Investment by Mauritius PCC Vehicle in the scrip of the listed company, happened much before the transfer of funds of USD 8 mn from the Listed Company to its overseas subsidiary, which is contrary to the alleged scheme of routing of funds as stated in the investigation report.

iii)?????SAT interalia relied on certain case laws, specifically in the matter of Narendra Ganatra v/s SEBI, Hon’ble Securities Appellate Tribunal on 29.07.2011 observed that:

?“We should not lose sight of the fact that the charge against the appellant is of conniving with the group entities in creating false and misleading appearance of trading in the market and artificially raising the price of the scrip and for such a serious charge, higher degree of probability is required. Such a charge cannot stand on surmises and conjectures.”

?

Conclusion: While disposal of matter was not a reason of interest. It was how the investigation was conducted by SEBI and the documentary evidence produced for the Investigation Report. It is pertinent to note that email communications (however cryptic between employees and external parties) is a source of evidence during investigations.

While it is a usual presumption, that the moment a pooled vehicle / fund is interposed it provides a shield to the investors for indirect exposure to the listed company since it is being independently managed by an Investment Manager. However, the risk of investment managers acting in coalition with the investor increases if they hold a reasonable stake in the Fund. The investment managers should ensure that the vehicle is not a conduit for indirect investments for promoters and key persons in the listed company. Hence, certain checks and balances should be put in place, while onboarding such clients.