SAT Sets Aside SEBI Findings Of Fraud Against NDTV Promoters; Reduces Penalties Imposed For Non-Disclosure Of Loan Agreement

SEBI had held that under the garb of a loan agreement, VCPL had acquired voting rights in NDTV in as much as the loan did not carry any interest and that the loan was repayable at the end of 10 years.

In the appeals preferred by Roys and RPPR Ltd., the SAT said,

"The finding that through these documents VCPL had acquired control over 52% of NDTV shares is nothing but a figment of its imagination and against the material evidence on record."

The SAT held that though the non-disclosure of the loan was a violation of the listing agreement, it said "such non-disclosure, in our opinion, is neither fraudulent nor found to be an unfair trade practice". 

It has thus set aside the order restraining the Roys from holding managerial or directorial posts for two years.

It has also reduced the penalty of Rs. 25 Crores imposed on RRPR Holdings  to Rs. 5 Crores and the penalty of Rs 5 crores imposed on NDTV to Rs 10 lakhs.

The SAT further held that the SEBI order which had barred Roys "from accessing the securities market or from accepting any position of a Director is totally out of context and does not commensurate with the alleged violation especially when no fraud has been committed nor does the loan agreement defraud the investors."

The SAT said that SEBI's finding that the loan agreement does not give any discretion to the promoters of NDTV with respect to exercise of their voting rights is "patently misconceived".

It further held that SEBI's finding that the borrowers and promoters have ceded their voting rights at least by 26% covered in the loan agreement and another 26% covered in the call option agreement is "patently erroneous".

"The loan agreement executed by the promoters with VCPL did not transfer control of NDTV to VCPL either directly or indirectly and, therefore, the findings given by the AO on the issue that the loan agreement is structured in such a way that in fact it transfers control to VCPL indirectly cannot be sustained," it held.

It added that Clause 20 of the agreement is an assurance that the voting rights of the promoters of RRPR and NDTV should be exercised to enable VCPL and the option holders to exercise their rights in terms of the agreement. It is not a case through which VCPL has acquired voting rights or control over RRPR or NDTV.

However, the Tribunal agreed with the Adjudicating Officer (AO) that minutes of the Boards' meeting on August 05, 2015 should have been disclosed under Clause 36 of the listing agreement. This was considering the peculiar structure of the loan agreement, coupled with the fact that the exercise of the warrant option or the call option if invoked would have a bearing on the performance/ operations of the company.

As per the SAT, the AO had imposed an "excessive" cost of Rs. 5 crores on the promoters under Section 23E of the Securities Contracts (Regulation) Act, 1956; whereas that provision has nothing to do with the violation of Clause 36 of the listing agreement.

It held that the penalty that can be imposed for violation of Clause 36 of the listing agreement is under Section 23A(a) which provides a maximum penalty of Rs. 1 Crore.

Thus, while confirming the order of the AO only with regard to the violation of the Clause 36 of the listing agreement, the SAT reduced the penalty to Rs. 10 lakhs.

It observed that the quantifiable gain or unfair advantage accrued to NDTV or extent of loss suffered by the investors as a result of the default cannot be computed. Consequently, the penalty for mere violation of non-disclosure under Clause 36 of the listing agreement cannot be penalized to the maximum amount quoted in the provision.

Case Background

The SAT was considering the appeals field by NDTV, Prannoy Roy, Radhika Roy, RRPR Holdings Pvt Ltd and VCPL against the orders passed by the SEB in June 2018, June 2019 and December 2020.

The 202 order was passed by the SEBI passed the order in a 2017 case filed by Quantum Securities Ltd, an NDTV shareholder, alleging that RRPR Holdings, Prannoy Roy and Radhika Roy didn't disclose information about loan agreements entered into by them with Vishvapradhan Commercial Private Ltd (VCPL) and ICICI. It also banned them from accessing securities market for years.

RRPR Holding Pvt. Ltd. took a loan of Rs. 350 crore from ICICI which carried interest at the rate of 19% p.a. Finding it difficult to repay the interest and principal amount RRPR Holding Pvt. Ltd. took two loans from Vishvapradhan Commercial Private Limited ('VCPL' for short) totaling approximately Rs. 400 crore in July 2009 and January 2010.Based on the loan taken from VCPL it was alleged that the loan of ICICI was liquidated.

It was alleged in the complaint that the VCPL was given a right of first refusal on 50% of the shares in the event the said shares are sold in the market. Further, a call option agreement was made whereby an option was given to two associates of VCPL for transfer of 30% of the shareholding of RRPR Holding Pvt. Ltd. to it at the price of Rs. 214.65 per share. It was stated that at the time when the loan agreement was executed the price of the NDTV share was Rs. 130 per share. It was also stated that the price of 214.65 per share was fixed in order to cover the loan amount of Rs. 403.85 crore. The agreement further stipulated that RRPR Holding Pvt. Ltd. would have the sole control and will not sell the shares without the right of the first refusal by the lender, namely, VCPL.

According to the SEBI, "the loan agreements were unmistakably structured as a scheme to defraud the investors by camouflaging the information about the adversarial terms and conditions impinging upon the interest of NDTV's shareholders, thereby inducing innocent investors to continue to trade in the shares of NDTV oblivious to such adversarial developments in the shareholding of NDTV"

Roys argued that the agreements were for taking private loans in exercise of their shareholding rights and that since shareholders rights are personal property, the agreements did not affect NDTV or its operations in any manner. They added that the loan agreements were private agreements in which NDTV was not a party, and hence, there was no requirement for them to make disclosure of the same to the stock exchanges.

But this was not accepted by the SEBI, which found that they had agreed "to transfer a substantial controlling stake in NDTV to the VCPL behind the back of the shareholders of NDTV".

It ruled that the loan agreements were used to deceitfully transfers shares of NDTV upto 30 percent to VCPL without the knowledge of Board or its shareholders, amounting to unfair trade practice and was in stark violation of Section 12A of SEBI Act and Regulations 3(a), 3(b) and 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations.

In December 2020, SEBI passed another order imposing Rs. 27 crore as penalty on the the Roys and RRPR Holdings Pvt Ltd for concealing "price sensitive information" related to the loan agreement from the shareholder.

Now, the SAT has partly allowed the appeals filed by NDTV and its promoters against these orders by setting aside the findings of fraud and by reducing the penalties imposed by SEBI.

Click here to read/download the order