Sebi slaps Rs 50 lakh fine on Farmax India MD for GDR manipulation

Markets regulator Sebi on Thursday imposed a fine of Rs 50 lakh on Farmax India Ltd Managing Director Srinivasa Reddy in a matter related to manipulation in issuance of global depository receipts (GDRs) by the firm.

Sebi noted that Reddy was part of the fraudulent scheme and arrangement of Farmax India in executing the scheme of financing its own GDR issue.

Farmax India Ltd (FIL) had issued GDRs amounting to USD 59.92 million in June 2010 and USD 11.98 million in August 2010 under green shoe option, an investigation conducted by Sebi observed.

The entire GDR issue was subscribed by one entity -- Vintage FZE, now known as Alta Vista International.

Vintage had availed a loan from European American Investment Bank (EURAM) Bank to subscribe to the GDRs of FIL.

The security for the loan was provided by FIL by pledging the proceeds of the GDR issue.

The arrangement "allowed FIL to effectively finance the purchase of its own GDRs since it deposited the GDR proceeds as collateral for the loan extended by EURAM Bank to Vintage which was the sole subscriber to the GDR issue of FIL", Sebi said.

"Since the underlying of GDRs i.e., equity shares resulted in an increase of capital of the company without proper consideration, such arrangement was fraudulent in nature. Moreover, the same was not disclosed to the shareholders and investors," Sebi added.

FIL, through corporate announcements, created a false impression in the minds of the investors that the GDR issue was fully subscribed, the regulator said.

Reddy also diverted USD 15.6 million to UAE subsidiary of FIL, and thereafter to other entities related to Arun Pachariya, the beneficial owner and MD of Vintage.

"This artificial arrangement for the issuance and subscription of the GDR issue of FIL was fraudulent and would not have been possible without the participation of the Noticee," Sebi said.

Noticee refers to Srinivasa Reddy.

Sebi also said that the actions of FIL and Reddy, being MD of FIL, were in the furtherance of the fraudulent scheme of issue of GDRs and resulted in "fraud".

Accordingly, it slapped a fine of Rs 50 lakh on Reddy for violating market norms.

For similar actions, Sebi, through an order in July 2020, had barred Reddy from accessing securities market for five years.