SEBI Imposes Penalty of Rs23 Lakh on 3 for Misrepresentation of Funds
Moneylife Digital Team 16 June 2022
Market regulator Securities and Exchange Board of India (SEBI) has imposed penalties totalling Rs23 lakh on three individuals in a case related to misrepresentation in the financial details of Indian Infotech and Software Ltd (IISL).
 
In its latest order, the market regulator has levied a fine of Rs8 lakh each on Kamal Nayan Sharma and Harish Joshi, and Rs7 lakh on Mukund Bhardwaj for violating provisions of fraudulent trading, listing conditions and other disclosure lapses.
 
SEBI was in receipt of a letter from the ministry of corporate affairs (MCA) wherein MCA had annexed a list of 331 shell companies for initiating necessary action as per SEBI laws and regulations. IISL was on this list. On 9 August 2017, SEBI advised Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE) to submit a report after seeking auditor's certificate, from all such listed companies, providing the status of certain aspects of the company like company's compliance with Companies Act, whether company is a going concern, its business model, status of compliance  with  listing  requirements, etc. 
 
Earlier, in an interim order on 21 September 2017, SEBI had directed BSE and NSE to appoint an independent forensic auditor to verify the misrepresentations, including in financials/business of IISL and misuse of funds/books of account. SEBI passed a confirmatory order in the matter on 8 February 2018, confirming the directions contained in the interim order. BSE appointed M/s Chokshi & Chokshi LLP as auditors for conducting forensic audit of IISL.The forensic auditor requested IISL to provide contact details of the company officials for conducting the forensic audit. However, it was found that IISL failed to cooperate with the forensic auditor appointed by the BSE.
 
BSE advised IISL to provide required documents/ clarifications and to cooperate with the forensic auditor, failing which further action would be taken in the matter. Despite various correspondences by the forensic auditor and BSE, it was noted that IISL failed to furnish the information and documents to the forensic auditor. 
 
On account of continuous non-cooperation by IISL, BSE issued show-cause notice to IISL on 30 August 2018 to show cause why further action, as deemed fit, should not be taken against IISL for its failure to provide necessary documents / clarifications to the forensic auditor for the purpose of forensic audit. Subsequently, BSE conducted a site inspection at the registered office of IISL on 19 October 2018 and submitted its inspection report to SEBI on 23 October 2018.
 
On the basis of the examination of the inspection report of BSE, annual reports of IISL for the financial years 2014-15 and 2015-16 and replies/submissions filed by the IISL after the interim order, it was observed by SEBI that IISL and its directors, namely, Varsha Murarka, Kamal Nayan Sharma, Harish Joshi and Mukund Bhardwaj, had violated following provisions of SEBI Act, 1992, Securities Contracts (Regulation) Act 1956 (SCRA),  SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR  Regulations) and SEBI (Prohibition on Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations,2003 (PFUTP Regulations). Mr Sharma and Mr Joshi were directors of IISL during FY15-16, while Mr Bhardwaj was its chief financial officer (CFO).
 
IISL was appearing under the category ‘Investment Company’ on the Reserve Bank of India (RBI) website as on 31 August 2017. However, statutory auditor certificate (SAC) says that the company is a loan company. Further, their annual report for FY2015-16 says  that  approximately 85% of  the  turnover of  the company is from IT and software products. IISL stated that it is a non-banking financial company (NBFC) carrying business as a loan company and it had also submitted the memorandum of association (MOA) & articles of association (AOA) of the company  along  with  the  RBI  certificate  and  SAC submitted to RBI in which also it is clearly mentioned that the company is loan company.
 
The certificate of registration was granted to IISL by RBI to carry on the business of NBFC without accepting the public deposits. Further, as per the MOA of the company, the main object of the company is “To carry on the business of buying, selling, leasing, letting on hire, hire purchase or easy  payment system, all types of  industrial, agricultural, commercial and household apparatus, plant equipment,  machinery, vehicles, vessels, carriers, household goods and materials, buildings and real estate and to finance industrial enterprise and to promote companies engaged in industrial and trading business.” 
 
It was noted that neither the certificate granted by RBI nor the MOA of the company specifies that IISL is a loan company. It was revealed that there were significant contradictions in respect of the claimed business of the company and, hence, IISL had misrepresented its business.
 
IISL had failed to present true and fair financial statements and had executed transactions which were non-genuine in nature tantamount to misrepresentation of the accounts/ financials  statement  and  misuse of books of account/ funds of the company. Further, IISL had  misused  funds/  misrepresented books of accounts which are detrimental to the interests of genuine investors and thus, such  acts  are fraudulent in nature. IISL did not cooperate with  the forensic auditor and failed to furnish requisite information and documents sought under Sections 11(2)(i) and 11(2)(ia) of the SEBI Act.
 
In its 34-page order, SEBI said that these individuals are responsible for the failure of IISL to present true and fair financial statements and executing transactions, which were non-genuine in nature resulting in misrepresentation of the financial statements and misuse of accounts of the company which would tantamount to fraud.
 
The misrepresentations in the financial statements of IISL were not disclosed by the noticees, the SEBI order added.
 
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