Securities and Exchange Board of India (SEBI) has imposed a fine of Rs41 lakh on Alps Motor Finance Ltd (AMFL) and Brij Bhushan Sabharwal, the company's former whole-time director and Himanshu Agarwal, former non-executive and non-independent director, for mis-utilising funds collected from the preferential allotment.
In an order, Amit Kapoor, adjudicating officer (AO) of SEBI, says, "Mr Sabharwal and Mr Agarwal were signatories of the bank account of AMFL in which proceeds of the issue were collected, and the loans were disbursed. The annual report for FY13-14 was signed by Mr Sabharwal and Mr Agarwal, and they were also present in 16 and 15 board meetings of AMFL out of the 16 meetings which took place. Mr Sabharwal and Mr Agarwal have, interalia, submitted that they had ensured compliance with the law by AMFL during their tenure and that after their resignation, they had no connection with AMFL or its management. However, I note that the preferential allotment and disbursal of loans out of the proceeds of the preferential issue took place during their tenure of them as directors and that they were signatories of the bank account in which allotment proceeds were received and from which disbursal of loans was done. Hence, Mr Sabharwal and Mr Agarwal were vicariously responsible for the act of AMFL."
SEBI imposed a penalty of Rs20 lakh on Mr Sabharwal, Rs15 lakh on Mr Agarwal and Rs6 lakh on AMFL.
The case is related to Rs7.01 crore raised through preferential allotment by AMFL and loans provided to six entities from the proceeds.
Chander Bhusan and Dream Procon Pvt Ltd were allotted Rs1 crore and Rs4 crore, respectively, without interest for opening a showroom and vehicle finance. Pioneer Buildstates Pvt Ltd was given a loan of Rs36 lakh without interest to improve its business relationship. Bulwark Partner (Rs1.5 crore), MLAP Commodities (Rs18 lakh) and Nanda Parbat Finlease Ltd (Rs46 lakh) was given the loan with an interest of 10% pa (per annum). However, only Pioneer Buildstates and Bulwark Partner repaid the loan.
SEBI says, "The very act of giving loans out of proceeds of the issue amounts to deviation from the stated objectives of the issue. Further, upon analysis of the loans to the six entities, it is amply clear that the said loans were given in a suspicious manner, and the scope of enforcement of the loan agreements in case of non-repayment of the said loans was severely limited. Evidently, four of the six entities failed to repay the loans, amounting to Rs5.64 crore."
"…there is a clear pattern in which it is seen that the majority of the loans granted have not been repaid, given without due diligence, were not aligned with objects of the issue and were granted in a lackadaisical manner, without taking necessary steps to ensure that the investor's money, already at deviation from the objects of the issue, was invested prudently," the AO says.
The market regulator also held Mr Sabharwal and Mr Agarwal responsible for the acts of AMFL and violating the PFUTP (prohibition of fraudulent and unfair trade practices) rules.
SEBI says AMFL failed to furnish a quarterly statement to the exchange indicating the losses it suffered due to how the proceeds of the preferential issues were disbursed, which prevented the shareholders from getting vital information about the company's profitability.