Sebi slaps Rs 40 lakh fine on three individuals in GDR manipulation case

Markets regulator Sebi on Wednesday imposed a total penalty of Rs 40 lakh on three individuals for indulging in fraudulent schemes for subscription of GDR issuance by Kemrock Industries & Exports Ltd.

A fine of Rs 10 lakh each has been levied on Kaushik Bhatt and Mukund Baksh, and Rs 20 lakh fine has been imposed on Kalpesh Patel.

The Securities and Exchange Board of India (Sebi) had conducted an investigation in the matter of Kemrock Industries & Exports Ltd (KIEL) during the period from April to May 2010.

Sebi noted that in April 2010, KIEL had issued 4.83 million GDRs amounting to USD 50 million and Vintage FZE (Vintage) was the only entity to have subscribed to the entire issue.

It was observed that the subscription amount was paid by Vintage by obtaining a loan from European American Investment Bank AG (EURAM Bank) and the company had pledged the entire GDR proceeds as collateral against the loan availed by Vintage from EURAM Bank.

The same was carried out through a loan agreement entered between Vintage and EURAM Bank, and a pledge agreement entered between Kemrock and EURAM Bank.

Further, Sebi noted that Patel had signed the pledge agreement on the behalf of the company.

Also, it was observed that KIEL did not inform stock exchanges regarding entering into the pledge agreement with EURAM Bank and pledging of GDR proceeds against the loan availed by Vintage which were price sensitive information and could have impacted the price of the scrip.

The loan agreement and pledge agreement were inextricably connected in a manner that clearly points out that KIEL (the pledgor) had consciously facilitated the loan to Vintage so as to ensure success of issuance of GDR, so as to create a good market impact about the stock of the company, knowing well that the GDR proceeds cannot be put to its business use, until and unless the repayment is made by the borrower (Vintage), Sebi said.

Thus, the investors were not aware about the artifice created by KIEL through which it enforced the successful subscription to its GDR, it added.

The individuals were independent directors on the board of the company during the relevant time of issuance of GDRs and were present in the board meeting where the pledge agreement was signed, as per the order.

By doing so, they violated the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) norms.