CG Power Case: SAT Reserves Judgement On Maintainability Of SEBI’s Order Against Gautam Thapar
SAT has reserved its order on maintainability of SEBI’s order against Gautam Thapar and former officials of CG Power.
The Securities Appellate Tribunal has reserved its order on the maintainability of the market regulator’s order against Gautam Thapar and former officials of CG Power and Industrial Solutions Ltd.
Earlier this week, Gautam Thapar, Avantha Holdings Ltd. and three former officials of CG Power had moved SAT challenging the order passed by Securities and Exchange Board of India on the grounds that it had failed to provide an opportunity of hearing to them.
On Sept. 17, SEBI had passed an “ex parte ad interim” order barring Gautam Thapar and former officials of CG Power from accessing the capital markets, alleging that they had indulged in serious misstatement of accounts as well as diversion of funds while being at the helm of CG Power.
Here are the key arguments made by the parties:
SEBI’s Failure To Follow Principles Of Natural Justice
Thapar’s Arguments: Gautam Thapar’s counsel argued that by issuing an “ex parte ad interim” order against Gautam Thapar, Avantha Holdings and others, SEBI had failed to follow principles of natural justice, which require a regulator to provide an opportunity of hearing to a party before passing an order against it.
The market regulator’s order was not maintainable as it entirely relied on certain newspaper reports and investigation reports by a law firm and a third-party auditor which were full of “disclaimers and caveats”.
SEBI’s Rebuttal: Counsel representing SEBI rebutted the submissions by stating that the law does not require the market regulator to follow principles of natural justice when it issues ex-parte orders. It relied on the stock exchange filings made by CG Power before passing an order against Thapar and other officials of CG Power. Thus the allegations of sole reliance on media reports by the market regulator were incorrect.
SEBI’s Order Against Avantha Holdings
The market regulator had directed Avantha Holdings to retain funds to the extent of the amount receivable from it by CG Power. As per SEBI’s findings, CG Power had receivables of Rs 1,004 Crore from Avantha Holdings.
To ensure the recovery of receivables, SEBI had restrained Avantha Holdings from disposing, selling or alienating assets or diverting funds to the extent of receivables.
Avantha Holding’s Arguments: Counsel for Avantha Holdings argued that the order by the market regulator would be a “death warrant for Avantha Holdings”. The order passed by the market regulator amounted to a “decree cum execution” in the garb of an attachment order and would create operational issues for the company.
SEBI had not made a single reference to the Risk and Audit Committee approval in its investigation report.
SEBI’s Rebuttal: Counsel representing SEBI countered the allegations that the restraint order was necessary in order to safeguard the disgorgement of amount from Avantha in case a final order is passed against it.
Allegations Of Fund Diversion
The market regulator had noted in its order that “funds were fraudulently transferred” by manipulation of CG Power’s financials to Avantha Holdings and its connected companies. This, it said, was done without any approval of the board.
Thapar’s Arguments: Thapar’s counsel and former officials of CG Power argued that Madhav Acharya, who was director of CG Power till August 2017, had minutes of the board meeting to indicate that transaction up to Rs 1,000 crore with Avantha Holdings was approved by CG Power’s board as well as the Risk and Audit Committee. The loan extended to Avantha had an interest component. Therefore, the transfer of funds was in accordance with law and the company’s policies.
CG Power’s Rebuttal: CG Power’s counsel countered the allegations by stating that the investigation carried by an independent law firm and audit firm clearly revealed no interest payment obligation. The resolution of the board and RAC clearly indicated that moneys could be extended only to CG Power’s subsidiaries.
The promoters, however, siphoned funds against the end-use condition imposed by banks which allowed utilisation of funds solely for working capital needs. The promoters illegally utilised CG Power’s assets as collateral for benefit of third-party entities. The transactions were thus conceived to defraud them.
Failure To Provide Underlying Documents By CG Power
Thapar’s Arguments: CG Power had relied on certain documents to conclude that Gautam Thapar and other officials indulged in fraudulent fund diversions. The company failed to provide the underlying documents and the minutes of board meeting and the Risk and Audit Committee.
Gautam Thapar had requested the documents on issuance of notice. However, CG Power provided some documents only after passage of the order by the market regulator, thereby rendering them defenseless.
CG Power’s Rebuttal: Counsel for CG Power said that CG Power was in agreement to provide certain documents requested by Gautam Thapar and the other officers. Gautam Thapar was aware of the contents of the documents as he was part of the meeting where the documents relied upon by CG power were examined.
Janak Dwarkadas argued on behalf of Gautam Thapar, Avantha Holdings and former officials of CG Power. Iqbal Chagla represented SEBI and Amit Desai argued on behalf of CG Power.