TMI Blog2010 (4) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... s Limited ( DREDL ), both of whom were wholly-owned subsi-diaries of DLF Limited. SEPL is stated to have been incorporated on 24-3-2006. The promoter companies are stated to be a part of the DLF Group of which the flagship company is DLF Limited, respondent No. 3. 3. It appears that in connection with its proposed public issue, the DLF Limited filed a Draft Red Herring Prospectus ( DRHP ) with the SEBI on 12-5-2006. In the said DRHP it was indicated that SEPL was one of the joint ventures of DLF Ltd. However, the said DRHP was subsequently withdrawn by the merchant bankers of DLF Limited and a fresh DRHP was submitted on 2-1-2007 in which SEPL was not mentioned as being associated with DLF Limited. It is stated that the merchant bankers of DLF Limited explained to SEBI that the shares of SEPL which had been held by DHDL and DREDL, the wholly-owned subsidiaries of DLF Limited, had been sold in 2006. Thus, SEPL ceased to be an associate company of DLF Limited by the time the revised DRHP was filed in January 2007. Even in the final Red Herring Prospectus ( RHP ) submitted by DLF Limited on 25-5-2007, the name of SEPL did not figure. Thereafter, the issue opened, shares were subsc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade public for a period of 21 days from 2-1-2007. In terms of clause 5.6-1 of the SEBI Guidelines complaints/comments, if any, had to be filed during the said period of 21 days. The petitioner did not make any complaint during that period. Thereafter, the SEBI issued its observation on the DRHP on 7-5-2007 and the RHP dealing with the observations was filed by DLF Ltd., with the Registrar of Companies (RoC) on 30-5-2007. It is stated that the petitioner s complaint dated 4-6-2007 was received only thereafter on 15-6-2007 by the SEBI. Since as on the date of DRHP, i.e., 2-1-2007, on the basis of the information available with the SEBI, SEPL was not a subsidiary of the respondent No. 3-DLF Limited or associated with it in any manner, there was no occasion for the SEBI to take action to prevent the public issue. 8. In para 22 of its counter-affidavit dated 11-7-2008, the SEBI stated as under : "22. In any eventuality, the answering respondent had vide letter dated 25th June, 2007 sought the comments from the Merchant Bankers/Lead Managers of the public issue brought out by respondent No. 3. The concerned Merchant Bankers vide reply dated 12th July, 2007 had clarified that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 11B of the SEBI Act which vests the SEBI with power to make an inquiry and issue directions to any company in respect of matters specified in section 11A of the SEBI Act. Mr. Sibal submits that this has to be read along with the SEBI Guidelines. In particular a reference is drawn to clause 6.10-3.3 which requires disclosure of reasons if the promoters cease to be associated with any of the companies or firms during the preceding three years. A reference is made to clause 6.11-1.3 concerning outstanding litigation involving the promoter and group companies. Emphasising the mandatory nature of the above provisions, Mr. Sibal relies on the judgment of the Supreme Court in SEBI v. Ajay Agarwal [2010] 98 SCL 424 . 11. Appearing on behalf of the SEBI, Mr. Neeraj Malhotra, learned counsel submitted that the SEBI acted on the basis of the information given by the merchant bankers of respondent No. 3 and the decision taken by the SEBI was in the circumstances a reasonable one which did not call for interference by this Court under Article 226 of the Constitution. He nevertheless on instructions stated that the SEBI was empowered in terms of sections 62 and 63 of the Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owers. If SEBI was itself not empowered to investigate into the ownership of the shares of the above companies, it could write to the Central Government to activate its powers under section 247 of the Companies Act. Mr. Sibal points out that given the fact that its primary business of DLF Ltd. is real estate and it actually holds only 0.5 per cent of its land reserves, it is obvious that the remaining lands are held by it indirectly through its subsidiaries and other entities over which it has a de facto control. It was, therefore, important for SEBI to investigate the case thoroughly to expose the real nature of these transactions. He further points out that there has been no change in the SEBI Guidelines between the time when the merchant bankers wrote to the SEBI and the present date. Therefore, the SEBI was bound to comply with those guidelines to examine the complaint. There was nothing to show that the petitioner s complaint was received by SEBI only on 15-6-2007. There was no suppression of facts since the petitioner had enclosed the replies sent to the petitioner by the DLF Limited in which it was disclosed that earlier DRHP made in 2006 was withdrawn. Drawing attention t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter dated 11-12-2008 is annexed herewith as Annexure R2) stated that the companies, whose names had not been disclosed in the RHP and which are also mentioned in additional affidavit filed by the petitioner, had ceased to be associated with respondent No. 3 (DLF Limited) on the date of filing of the RHP, i.e., 25-5-2007 on account of ( a ) transfer of shareholding and ( b ) reduction in percentage of shares held on account of further allotment." 17. The letter dated 11-12-2008 addressed by the merchant bankers to SEBI in regard to shareholding of respondent No. 3 confirms that Shalika ceased to be an associate company of DLF Ltd., with effect from 30-11-2006 and Felicite ceased to be an associate company of DLF Ltd. with effect from 29-11-2006. This by itself should have altered the SEBI in terms of clause 6.10-3.3 of the SEBI (DIP) Guidelines which reads as under: "6.10-3.3 If the promoters have disassociated themselves from any of the companies/firms during preceding three years, the reasons therefor and the circumstances leading to the disassociation shall be furnished together with the terms of such disassociation." It hardly needs to be stated that the SEBI (DIP) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity for any loss or damage under section 62 may be restricted to persons who subscribed for shares on the faith of the prospectus, section 63 can be set in motion by any person including SEBI. The purpose of inserting section 55A in the Companies Act was to empower the SEBI to take both corrective and preventive action. This is perhaps because as a regulatory body SEBI gets to see the draft prospectus preceding a public issue by a company even before the public gets to see the RHP. SEBI is enabled and empowered to examine the DRHP and insist on complete and truthful disclosure of all relevant facts therein. The very purpose of having an independent regulatory authority like SEBI, and vesting it with statutory powers of inquiry, is to enable it to take prompt action in matters relating to issue and transfer of shares. Particularly, SEBI is expected to be the sentinel, read the fine print of prospectuses keeping the investors interests in view. It has both a preventive and corrective role to perform. Therefore, it is not possible to place a narrow interpretation on the words "issue and transfer of securities" occurring in section 55A of the Companies Act. Given the object and purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the need for immediate action cannot be over emphasized given the unwarranted popularity of M/s. DLF Limited and the likelihood of innocent gullible investors being influenced to blindly invest in M/s. DLF Limited oblivious of the criminal conduct of the persons actually controlling that company." 23. In view of the above categorical statements it is not, therefore, possible for this Court to agree with the submission of Mr. Chaudhary that there was nothing set out in the complaint dated 4-6-1997 which should have altered the SEBI to the statements in the DRHP. Interestingly, in reply to the above complaint-respondent No. 3 stated in its letter dated 11-7-2007 that "our company and/or its subsidiaries have, as on date, no connection with M/s. Sudipti Estates Pvt. Limited." Therefore, DLF Ltd. impliedly did not deny that at some point in time prior to that date the situation was that SEPL was an associate of DLF Ltd. In the letter dated 19-7-2007 addressed by the petitioner to the SEBI, he referred to DLF s letter dated 11-7-2007 and thereafter stated as under : "Annexed herewith as Annexure A is a copy of the document dated 11-5-2006 submitted by the company in pursuance of i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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