Omaxe Limited & Ors. vs Securities And Exchange Board Of India

Per: Justice P.S. Dinesh Kumar, Presiding Officer This appeal is directed against order dated 30.07.2024 passed by the CGM^{11.Chief General Manager}, SEBI^{22.Securities and Exchange Board of India} restraining the appellants from accessing the securities market for a period of two years, prohibiting Noticee Nos.2 to 6 from holding any position as a Director or KMP^{33.Key Managerial Personnel} and imposing monetary penalties.

The impugned order is against 16 Noticees. This appeal is filed by Noticee Nos.1, 2, 3, 5 and 6.

We have heard Mr. Pradeep Sancheti, learned Senior Advocate for the appellants and Mr. Suraj Chaudhary, learned Advocate for the SEBI.

Brief facts of the case are, first appellant, Omaxe Limited („Omaxe/Company‟ for short) is a listed company. Second appellant, Rohtas Goel („Rohtas‟ for short) is its promoter, Chairman and Non-Executive Director. Third appellant, Mohit Goel („Mohit‟ for short) is its Managing Director. Fourth appellant, Arun Kumar Pandey („Arun‟ for short) and fifth appellant Vimal Gupta („Vimal‟ for short) who were Company‟s CFOs at different times.

SEBI received a complaint against the Company with allegations of fraudulent transactions, siphoning funds, misrepresentation in financial statements, inflated turnover etc. SEBI conducted a forensic audit for the period between 01.04.2018 and 31.03.2021. The investigation report revealed that the Company was reporting false and manipulated financial statements. An SCN was issued to 16 Noticees calling upon them to show cause as to why suitable directions should not be issued against them under Sections 11(1), 11(4), 11(4A), 11B(1), 11B(2), read with Sections 15A(a), 15HA, 15HB of SEBI Ac^{44.Securities and Exchange Board of India Act,1992}t and Rule 4(1) of SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules 1995. In the SCN, following allegations were levelled:

The Company submitted its reply and other appellants adopted the same. Appellant Nos.1 to 3 attended the personal hearing and appellant Nos.4 and 5 did not. The CGM has held that the appellants had violated the securities laws by recording thus:

Mr. Sancheti, learned Senior Advocate for the appellants urged two points.

Firstly, the appellants have suo motu refrained themselves from accessing the securities market, though the direction in para 41(i) of the impugned order was stayed by this Tribunal vide order dated 01.10.2024. The debarment period of two years expires on 30.07.2026. Since the appellants have voluntarily refrained from accessing the securities market, this Tribunal may hold that the appellants have suffered the debarment and the direction in para 41(i) of the impugned order stands complied.

Secondly, with regard to the monetary penalties, he submitted that the same are grossly disproportionate and prayed that this Tribunal may suitably modify the quantum of penalty by applying the principle of doctrine of proportionality. He submitted that Company‟s two fully owned subsidiaries, namely Garv^{55.Garv Buildtech Private Limited (presently, Omaxe Garv Buildtech Private Limited)} and Pancham^{66.Pancham Realcon Private Limited} have entered into separate valid contracts with the UP Government to acquire large parcels of land and to develop as housing colonies in Lucknow^{77.Lucknow Hi-tech City} and Allahabad^{88.Allahabad Hi-tech City}. After acquiring the lands, the said subsidiaries have entered into valid contracts with the Company and agreed to sell the housing plots in bulk. In turn, the Company has entered into various memoranda of understanding with another entity called „JBPL^{99.Jeet Builders Private Limited}‟ agreeing to sell those plots in bulk. The JBPL, has sold its rights back to Garv and Pancham. He submitted that all these transactions are valid in law, however, SEBI has incorrectly held that the revenue earned by JBPL and the Company have not been treated as per the Accounting Standards and mis-construed that the appellants have violated LODR^{1010.SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015} and PFUTP^{1111.SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003} Regulations.

He submitted that the allegations listed in (i), (ii), (iv), (viii) and (x) are unfounded qua the appellants. The other violations are venial in nature.

In reply, Mr. Chaudhary, learned Advocate for the SEBI argued in support of the impugned order contending inter alia that the Company, its subsidiaries and JBPL have indulged in illegal transactions and made circular movement of funds to book profits. Amplifying his contention, he submitted that initially funds were provided by the Company to Grav and Pancham to acquire the lands. Grav and Pancham agreed to sell the right, title and interest in the housing plots to the Company in bulk. The Company entered into MoUs with another entity „JBPL‟. JBPL sold its rights to Grav and Pancham. All financial transactions have taken place by round tripping the funds. To substantiate this argument, he adverted to Table No.5 in para 29.1.1.8 in the impugned order and submitted that on 30.03.2017, Company paid ₹23.25 Crore to Garv and Garv paid to JBPL to purchase JBPL‟s rights. In turn, JBPL paid to the Company as consideration payable under the MoU between the Company and JBPL. He submitted that similar modus operandi has been adopted to move funds in a circular manner on 19.05.2017, 22.05.2018 and 13.06.2018 and in all a sum of ₹647.73 Crore has been shown as the consideration received by the Company from JBPL. He argued that the subsidiaries had acquired lands by using Company‟s funds. The subsidiaries entered into MoUs with the Company itself offering to sell the lands. In turn, Company has sold its rights to JBPL and JBPL sold its rights to the original owners, namely Grav and Pancham. These transactions are wholly unnatural and carried out to mislead the investors of the listed company. He vehemently contended that the violation of securities laws is writ large on the face and prayed that the appeal may be dismissed.

We have carefully considered rival contentions and perused the records.

Undisputed facts of the case are, Omaxe Limited is a listed entity. Garv and Pancham are its wholly owned subsidiaries. They have acquired land from UP Government in Lucknow^{1212.Lucknow Hi-tech City} and Allahabad^{1313.Allahabad Hi-tech City}, by using Omaxe‟s funds. They have entered into MoUs with Omaxe. One of the MoUs between Grav and Omaxe dated 24.10.2013 is produced as Exhibit – C and it reads as follows:

A careful analysis of the above MoU shows that in consideration of ₹8.77 Crore, Garv agreed to sell 130 plots to Omaxe. Omaxe, in turn, entered into several MoUs with JBPL offering to sell the housing plots to JBPL.

What is surprising is, JBPL in turn offered to sell its rights to the original owners, namely the Grav and Pancham with a premium. It was argued by Mr. Sancheti that there is no illegality in such transactions.

JBPL was holding an agreement/MoU to purchase plots from Omaxe. If JBPL had sold its rights to any third party, it is a normal transaction. Appellants‟ argument is, Garv and Pancham had agreed to buy-back their rights from JBPL. This is wholly unnatural.

SEBI has alleged in the SCN that JBPL is a related party of Omaxe. However, that charge has been dropped. The resultant position is, JBPL is an independent third party. Garv and Pancham were the owners of the plots and funding was made by the parent company Omaxe. Accounts of Garv and Pancham have been consolidated with Omaxe. Table No.5 in the impugned order relied upon by Mr. Chaudhary, clearly shows that there has been round tripping of money on the very same day between Omaxe to Garv, Garv to JBPL and JBPL to Omaxe and similarly between Omaxe to Pancham, Pancham to JBPL and JBPL to Omaxe. The table 5 is as follows:

On 30.03.2017, Omaxe has transferred ₹23.25 Crore to Garv. Garv has transferred₹23.25 Crore to JBPL. Further, JBPL has transferred ₹23.25 Crore to Omaxe. All transactions have happened on the same day.

Similarly, on 19.05.2017, Omaxe has transferred ₹200 Crore to Garv and ₹150 Crore to Pancham. Garv has transferred ₹200 Crore to JBPL and Pancham has transferred ₹148.50 Crore to JBPL. Further, JBPL has transferred ₹331.40 Crore to Omaxe. All transactions have happened on the same day.

Similarly, on 22.05.2018, Omaxe has transferred ₹101.25 Crore to Garv and ₹98.50 to Pancham. In turn, Garv and Pancham transferred exactly the same amounts to JBPL and further, JBPL has transferred ₹200.87 Crore to Omaxe. All transactions have happened on the same day.

Similarly, on 13.06.2018, Omaxe has transferred ₹74.50 Crore to Garv and ₹25.47 Crore to Pancham. In turn, Garv and Pancham transferred exactly the same amounts to JBPL and further, JBPL has transferred ₹92.21 Crore to Omaxe. All transactions have happened on the same day.

A careful analysis of the above transactions shows that Garv and Pancham have paid premium to JBPL to purchase its rights. But interestingly, that money was funded by their parent company Omaxe and JBPL has transferred that money to Omaxe. The first allegation is, misstatement/ misrepresentation in consolidated financial statements of Omaxe with respect to transactions with JBPL, Garv, Pancham. The round tripping of movement of funds is conspicuous. The ostensible revenue sought to be projected by Omaxe based on the sale of rights to JBPL and JBPL‟s claim of revenue receipts based on the ostensible sale of rights to Garv and Pancham is nothing but a result of camouflaged sham transactions and hence, the first charge stands established.

The second charge is with regard to overstatement of sale transactions with Pullback Apparels Private Limited („Pullback‟ for short). Mr. Sancheti for appellants submitted that on 11.01.2021, the Company entered into an agreement to sell, whereby land was purchased by Pullback and on the same day, full consideration amount was paid by Pullback to Omaxe. On 16.01.2021, Omaxe handed over possession of plots to Pullback and executed the sale deed on 25.06.2021 in favour of Pullback. It was argued that the transaction cannot be questioned on the basis of accounting treatment given by the buyer (Pullback). He contended that a deed of conveyance and its registration is only a formality and not a precondition for revenue recognition. With these submissions, Mr. Sancheti contended that CGM‟s finding on this allegation is untenable.

In reply, Mr. Chaudhary submitted that in FY 2020-21, Omaxe has recorded sale of land to Pullback based on an agreement to sell. The payment was received on 11.01.2021 and possession letter was given on 15.01.2021. The sale deed has been executed on 25.06.2021. Pullback‟s financial statement for that financial year has categorised this transaction as „advance given for land‟. He submitted that para 6 of ICAI guidance note makes it clear that revenue from sale of land should be recognised when all conditions in para 4.2 are fulfilled. Para 4.2 of the note states that completion of revenue recognition is identified when the entity has transferred to the buyer, the significant risk and rewards of ownership. In substance, he contended that sale deed was executed after 31.03.2021 and therefore, the receipt of money could not have been considered as sale consideration.

It is settled in law that the rights and obligations in an immovable property are transferred only upon execution of a deed of conveyance which is registered within the prescribed time limit provided in the Indian Registration Act, 1908. Admitted position is, sale deed was executed on 25.06.2021. Further, admitted position is Pullback has recognised the money transferred to Omaxe as „advance sale consideration‟. Thus, it is clear that Pullback treated the money paid as advance sale consideration and sale deed was executed only after 31.03.2021. Hence, Omaxe could not have shown the receipt of money as income in FY 2020-21. Hence, the second charge stands established.

With regard to charges at (iv), (vii) and (x), it was urged by Mr. Sancheti that this Tribunal may take a lenient view and reduce the penalty by considering the doctrine of proportionality. We may record that in the written submissions filed on behalf of the appellants, it is stated thus:

Thus, in their written submissions appellants have restricted their prayer only with regard to quantum of penalty.

This is one of the classic cases in which gullible investors are induced to invest by misrepresentation of financials. The round tripping of money between Omaxe, its subsidiaries and JBPL recorded hereinabove establishes that the transactions were not genuine and designed to dress up the financial results to give a false impression that the listed company had good financials. It is shocking to note that Omaxe‟s subsidiary companies which acquired lands from the State Government of Uttar Pradesh sought to sell the lands to their parent company, which in turn sought to sell them to a third party company, JBPL. There are no deeds of conveyances transferring the immovable properties from Garv, Pancham to Omaxe. Hence, Omaxe had no title, yet dealt with the immovable properties by offering to sell the plots to JBPL. It is further shocking to note that JBPL, without having any title offered to sell the properties back to Garv and Pancham, to whom the lands were allotted by the Government. This is nothing but a series of fraudulent „make believe‟ financial transactions. The PFUTP violation is largely writ on the face of each transaction. Hence, the prayer made by Mr. Sancheti to take a lenient view is only noted to be rejected.

In the result, the following: