TMI Blog2016 (6) TMI 805X X X X Extracts X X X X X X X X Extracts X X X X ..... it is evident that the Loan Committee could not have permitted the raising of money through ICDs since this was not part of its mandate. In the absence of any evidence to the contrary, we, therefore, find that the Appellant was only supplied with an extract, and not the minutes of the Board Meeting dated 17th August, 2011, by the the Issuer Company. In this factual backdrop the Appellant cannot be condemned for not disclosing the matter regarding the raising of funds through ICDs by the Issuer Company in the Offer Documents. Appellant could not have incorporated such a fact of giving ICDs to the three companies taken by the Issuer Company after the conclusion of the IPO in the DRHP, RHP or even in the Prospectus. This charge, therefore, can also not be sustained against the Appellant. However, it must be said that the Appellant seems to have acted in a hurry to issue the RHP on the same date. It should have been more vigilant and careful in filing the RHP on August 17, 2011 itself. As such, we would hasten to add that the filing of Prospectus, which was done two days after the closure of the Issue on 14th September, 2011, issue opened on 7th and closed on 12th September, 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 11B of the SEBI Act, 1992, prohibiting the three Appellants from taking up any new assignment or involvement in a new issue of capital, including Initial Public Offering (IPO), follow-on issue, etc. in the Securities Market for a period of five years. 3. The impugned order dated 21st March 2014 has been, inter alia , passed for the alleged violation of Regulations 8(2)(b), (e)-(f); 64(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, hereinafter referred to as ICDR Regulations , and violation of Regulation 13 read with Clauses 1-4, 6-7 and 21 of the Code of Conduct prescribed under Schedule-III of the SEBI (Merchant Banker) Regulations, 1992. The abovesaid regulations and provisions are reproduced herein for the sake of convenience : SEBI (Issue of Capital Disclosure Requirements) Regulations, 2009 8(2). The lead merchant bankers shall submit the following documents to the Board after issuance of observations by the Board or after expiry of the period stipulated in subregulation (2) of regulation 6 if the Board has not issued observations : (a) ; (b) a due diligence certificate as per Form C of Schedule V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India (Ombudsman) Regulations, 2003. APPEAL No. 207/2015 4. In addition to the debarment of five years imposed on the company the Appellant along with its Compliance Officer and the M.D.-cum-C.E.O., SEBI simultaneously initiated proceedings against the Appellant for violation of the provisions of SEBI (Intermediaries) Regulations, 2008, hereinafter referred to as Intermediaries Regulations and imposed a punishment of prohibition of two years on the same entities in a vague manner. Relying upon the report submitted by the Designated Authority D.A , the Learned WTM of SEBI passed Impugned Order dated 20th March, 2015, by practically agreeing with the D.A. and observing that the effect and consequence of the two years' prohibition recommended by D.A. to be imposed on the Appellant would be substantially the same as contained in order dated 21st March, 2014, and held that while finding Almondz guilty of contravening the provisions of ICDR Regulations and the Merchant Banker Regulations, I, however, find that no further direction needs to be issued in these proceedings since Almondz has already been prohibited for the aforesaid misconduct. Counsel for both par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to merchant banker and in particular the applicant complies with the following requirements, namely :- [(a) the applicant shall be a body corporate other than a non-banking financial company as defined under clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), as amended from time to time : [ Provided that the merchant banker who has been granted registration by the Reserve Bank of India to act as a primary or satellite dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit;] Grant of certificate of initial registration 8. (1) The Board, on being satisfied that the applicant is eligible, shall grant a certificate of initial registration in Form B and shall send an intimation to the applicant. (2) The certificate of initial registration granted under subregulation (1) shall be valid for a period of five years from the date of its issue to the applicant. (3) The merchant banker who has already been granted certificate of registration by the Board, prior to the commencement of the Securities and Exchange Board of India (Merchant Bankers) (Amendment) Regulations, 2011, and has not com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case are that the Appellant was incorporated as a Company in June, 1994, and since then it has been dealing in various branches of the Securities Market, including acting as Merchant Banker. The Appellant was appointed as Book Running Lead Manager BRLM to the IPO of P.G. Electroplast Limited the Issuer Company on 7th June, 2010. A Draft Red Herring Prospectus DRHP was, accordingly, filed on behalf of the Issuer Company by the Appellant on 23rd September, 2010. On 29th December, 2010, SEBI granted the clearance/approval for opening of the IPO of the Issuer Company. On approval of the said Red Herring Prospectus RHP by the Board of Directors of the Issuer Company on 17th August, 2011, the same day it was immediately filed with SEBI, and with the Registrar of Companies, NCT of Delhi and Haryana ROC . 8. After completion of the above said formalities, the IPO of the Issuer Company was opened on 7th September, 2011 for Public Subscription and was closed on 12th September, 2011. Accordingly, the Prospectus was filed with the ROC as per the requirement of law on 15th September, 2011. The very next day the Prospectus was also filed with SEBI. The shares of the Issuer Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter Noida under phase 2 (Rs. 13.84 Crore) Expansion of manufacturing facility at Unit IV, Ahmednagar under phase 2 (Rs. 37.31 Crore) Meeting long-term working capital requirements (Rs. 15.00 Crore) General Corporate Purposes (Rs. 21.39 Crore) Issue Expenses (Rs. 9 Crore) 13. A perusal of the SCN and the Impugned Order shows that all the violations, alleged to have been committed by the three Appellants, can be summarised as under : (1) Failure to ensure disclosure of material fact in the RHP and Prospectus, such as :- (i) Funds raised by the Issuer Company through Inter Corporate Deposits ICDs , which were in the nature of a bridge-loan. (ii) Decision by the Board of Directors of the Issuer Company to invest in ICDs of other companies. (iii) Purchase orders placed by the Issuer Company for plant and machinery. (iv) Names of certain companies in the list of suppliers of plastic granules. (v) Agreements and Memorandum of Understandings entered into by the Issuer Company with certain entities for purchase of land; and (2) Failure to prevent misrepresentation in respect of amount of termloan availed by the Issuer Company. 14. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, during the due diligence process, Appellant had periodic meetings with the promoters and management of the Issuer Company wherein Appellant, inter alia , discussed with them the business of the Issuer Company, their experience, visited various premises of the Issuer Company including its manufacturing units to better understand their products, production processes and, plant and machinery etc. All this was done purely with a view to keep a tab on the progress of the objects of their proposed IPO. Appellant had also verified various documents relating to the business, properties, capital structure, litigation, objects of the issue, government approvals, management, promoter and promoter group entities, etc. of the Issuer Company. During the process of due diligence of the Issuer Company, Appellant had also sought from the Issuer Company various documents/information as per the Appellant s exhaustive checklist and had properly verified and documented the same in the data room. 18. It is further submitted by the Learned Counsel for the Appellant that the Appellant had also, inter alia , relied upon the various certifications and undertakings given by the Issuer Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending 31st March, 2011, based on the updated report of the Statutory Auditor. As part of the due diligence process, the Appellant had also relied upon the confirmations/submissions of the Issuer Company s Statutory Auditor (Comfort Letters) specifically intended to provide an update of any material developments in the Issuer Company, subsequent to the date of the last audited financial statements. Further, in respect to the material disclosures, the Comfort Letters issued by the Statutory Auditor categorically confirmed that except as disclosed in the RHP, no material change was there in share capital, increase in current liabilities, secured and unsecured loans, deferred payment liabilities, contingent liabilities or total liabilities or decrease in current assets, loans and advances, fixed assets, total assets or net worth of the Issuer Company, etc. In addition to the above, Appellant had periodic discussions with the Statutory Auditor at various stages during the due diligence process. The Appellant submits that the Statutory Auditor s certificates in the nature of limited review of quarterly financial statements are recognized by the stock exchanges as required in the listin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Rustomjee, learned senior counsel for the Respondent has firstly submitted that the Appellant could not ensure disclosure of funds raised by the Issuer Company through ICDs in the nature of a Bridge Loan, i.e., the loan taken by the Issuer Company through ICDs in the form of a Bridge Loan, which would bridge the gap until it arises. Secondly; Shri Rustomjee submitted that the RHP and Prospectus did not disclose the Board s decision to invest the IPO proceeds in the ICDs of other companies. The Appellant s failure to ensure disclosure of these facts regarding taking and decision to grant loans through ICDs would amount to lack of due diligence. Therefore, the finding in the Impugned Order that the Appellant, as a Merchant Banker of the Issuer Company, for the IPO in question, had failed to ensure genuine and true disclosure of material facts regarding the decision of the Issuer Company to make such investments cannot be faulted with. This would allegedly have been clear to the Appellant had it gone into the Minutes of the Meeting of the Board of Directors held on 17th August, 2011. Pursuant to such a Board decision, the the Issuer Company had entered into identically worded ICD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts to be revealed in the RHP/Prospectus for public consumption. Various qualifications mentioned in the Statutory Auditors certificate negate their value in the eyes of law. 26. At this stage we deem it appropriate to summarise the basic submissions of the Appellant as under : That the scope of due diligence is to conduct the review and examination of information provided by the Issuer Company to a practical and reasonable extent. The Respondent has not managed to point out any red flag in its investigation which should have aroused the suspicion of the Appellant in the affairs of the Issuer Company. In 2012, the AIBI published its Due Diligence Manual basically comprising of the standards of the banking industry which had been adhered to so far while conduct such due diligence exercised by MBs in general. The Manual clearly identifies that the reports of Statutory Auditors and legal advisors are fundamental to the process of conducting the due diligence. No action has been taken against the Statutory Auditors, nor have the Comfort Letters issued by them been called into question by the Respondent. The Issuer Company did not provide the Appellant with minute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess. Regulation 2(1)(r) defines issuer as any person, meaning any judicial entity, making an offer of securities. Regulation 2(1)(x) defines the term offer document as red herring prospectus, prospectus, shelf prospectus and information memorandum in case of a public issue and letter of offer in case of a rights issue. Regulation 2(1)(zc) defines public issue as initial public offer and further public offer. Regulation 2(2) states that all words and expression not defined in the ICDR Regulations shall be the ascribed meaning as per the Companies Act, the SCRA and the Depositaries act, and rules and regulations made thereunder. 29. Chapter 2 deals with Common Conditions for Public Issues and Rights Issues. Regulation 4 contained in this chapter provides for initial steps to be taken and conditions to be fulfilled by an issuing company before the filing of the draft offer document. This regulation needs to be read with regulations 25 and 26. Regulation 25 states that on the day of filing the draft offer document with SEBI and with the ROC, all conditions prescribed in Chapter 3 should be met with. Regulation 26 Regulation 26 puts forth certain conditions which need to be sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that promoters contribution has been received in accordance with these regulations, accompanying therewith the names and addresses of the promoters who have contributed to the promoters contribution and the amount paid by each of them towards such contribution; a due diligence certificate as per Form D of Schedule VI , immediately before the opening of the issue, certifying that necessary corrective action, if any, has been taken; a due diligence certificate as per Form E of Schedule VI , after the issue has opened but before it closes for subscription. Once the offer document has been displayed on the websites of SEBI and the stock exchanges for a period of 21 days as per Regulation 9 for the public s comments, the merchant bankers shall file with SEBI a statement giving information of the comments received by them or the IC on the draft offer document during that period and the consequential changes, if any, to be made in the draft offer document. 31. Regulation 12 puts the responsibility of dispatching the offer document and other issue material including forms for ASBA to the designated stock exchange, syndicate members, underwriters, bankers to the issue, investors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubscription, viz., 3 days and 10 days respectively. Regulation 49 stipulates that the IC shall stipulate in the offer document, the minimum application size in terms of number of specified securities which shall fall within the range of minimum application value of ten thousand rupees to fifteen thousand rupees. Regulation 50 lays down that the allotment procedure shall be spelt out by the managing director along with the lead post-issue MBs in a fair and proper manner in accordance with Schedule XV of the ICDR Regulations. Regulation 51 stipulates that the post-issue lead merchant banker shall ensure that the amount received in respect of the issue is released to the IC as per section 73 of the Companies Act, 1956. Finally, Regulation 51A provides that the information provided in the offer document shall be updated annually by the IC in accordance with the manner prescribed by SEBI. 33. Chapter 5 deals with Manner of Disclosures in the Offer Documents. Regulation 57 thereof deals with the manner of disclosures in the offer document and lays down that the offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ames Nimbus Industries Ltd. or Supreme Communications Ltd have not been mentioned anywhere in the list. This fact has been corroborated by SEBI s observations in its ad interim order dated 28th December 2011 stating the names of Nimbus Industries Ltd. and Supreme Communications Ltd. do not appear in the list of its suppliers provided by the Issuer Company in the offer document . It is thus borne out that the Issuer Company had never entered into any longterm supply agreement for purchase of plastic granules. This has been reinforced by the Issuer Company in their response letter dated 3rd December 2011 wherein they have stated that There are no sale/purchase agreements with our customers and suppliers, we receive periodical orders from our customers on the basis of which we place orders to our suppliers . SEBI has rightly observed in its ad interim order dated 28th December 2011 that the reply of the Issuer Company in relation to this is in contradiction to the documents provided by it. The Issuer Company s decision of radically altering it s purchasing pattern for a routine commodity immediately after the filing of the RHP, combined with the facts, seems to be consistent with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany in the post-IPO stage and hence, in our considered opinion, the Appellant could not have incorporated the same despite any degree of DD that could have been applied. SEBI itself has accepted that the Appellant was not privy to the Issuer Company s intentions, and the Appellant s conduct to that extent is undisputedly unimpeachable. As held hereinabove, the Appellant ought to have perused the bank statements of the company, particularly regarding the period in respect of which even the Statutory Auditors had not gone through the unaudited accounts of the company i.e. ranging from 1st September, 2011 to the date of discharge of Escrow. 40. Moving on to the contradictory disclosure regarding Term Loan alongwith Line of Credit availed by the Issuer Company, undoubtedly, the Appellant has mentioned in the table on page 30 that the amount disbursed by the Bank was NIL . However, disclosures by the Issuer Company to the Merchant Banker regarding the amounts availed as term loan and line of credit have been duly captured by the Appellant in the RHP on multiple occasions as can be verified from page numbers 29, 40, 87, 171 and 172 of the RHP. Therefore, adequate disclosures regardi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have been superfluous. It would lead to the erroneous conclusion that RHP was approved in the same meeting held on 17th August, 2011 in which the ICDs were allegedly approved by the Board. This situation, if accepted, would lead to an inherent dichotomy inasmuch as it is unfathomable that the ICDs were approved in the same meeting wherein the RHP, without containing this factum regarding approval of ICDs, was also approved. In the absence of any evidence to the contrary, we, therefore, find that the Appellant was only supplied with an extract, and not the minutes of the Board Meeting dated 17th August, 2011, by the the Issuer Company. In this factual backdrop the Appellant cannot be condemned for not disclosing the matter regarding the raising of funds through ICDs by the Issuer Company in the Offer Documents. 44. As far as the decision of deployment of funds through ICDs is concerned, it appears from the facts of the case that this was only done once the IPO proceeds had been transferred from the Escrow Account to the company s account, i.e. this was a post-IPO transaction which the Appellant could not have had any control over whatsoever. As per regulation 16 of the ICDR, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12, 2011 The public subscription was closed. September 14, 2011 Thereafter, the final Prospectus after incorporating the changes suggested by the ROC as per the requirement of law. September 16, 2011 The Prospectus was preferred before SEBI as well. September 16, 2011 Shares were, thus, allotted to the public investors. September 26, 2011 Shares listed on BSE and NSE. 46. The above chronology makes it abundantly clear that the Appellant could not have incorporated such a fact of giving ICDs to the three companies taken by the Issuer Company after the conclusion of the IPO in the DRHP, RHP or even in the Prospectus. This charge, therefore, can also not be sustained against the Appellant. However, it must be said that the Appellant seems to have acted in a hurry to issue the RHP on the same date. It should have been more vigilant and careful in filing the RHP on August 17, 2011 itself. As such, we would hasten to add that the filing of Prospectus, which was done two days after the closure of the Issue on 14th September, 2011, issue opened on 7th and closed on 12th September, 2011, the Appellant could have detected all these developments had it undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithheld; vide clause 4.9 the the Issuer Company undertook to update the information provided to the BRLM in case of any material change subsequent to the submission of the DRHP and upto the listing of the Equity Shares of the company. Clause 5 puts forth provisions regarding independent verification to be conducted by the BRLM to ascertain the true state of affairs of the the Issuer Company. Clause 8 provides for duties of the BRLM and states that the BRLM shall follow the code of conduct as provided in the MB Regulations. Further, the BRLM shall also perform all duties stemming from the Memorandum of Understanding. 48. From the abovesaid, it is evident that the the Issuer Company is primarily responsible for making complete and accurate disclosures in the Offer Documents through the MB. Undoubtedly, the MB has to employ its own independent Due Diligence, but in effect an MB relies upon the information / documents / records furnished by the Issuer Company to be included in the Offer Documents at various stages of the IPO. It is pertinent to mention here that the MB will conduct its due diligence based on the material brought before it by the the Issuer Company, but it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent due diligence to be undertaken by a Merchant Banker, yet it is a statutorily recognized step in furtherance of due diligence undertaken by an M.B. and, hence, its value cannot be undermined. The requirement of the Statutory Auditors Certificate (Comfort Letter) flows from Schedule VIII Section IX of the ICDR Regulations and it is provided therein that audited statements for the purposes of the Offer Document are needed for periods above six months and not before. The Comfort Letters obtained by the MB have been for specifically those periods which had not been covered in the last audit, which had been conducted less than six months ago. It is the admitted position that 4 Comfort Letters were provided by the Statutory Auditors which have not been assailed in any manner, nor have the Statutory Auditors been called upon to explain the statements made therein by the Respondent. 51. In fact, a perusal of the Comfort Letters, in question, clearly reveals that the Statutory Auditor did take into account and definitely read the unaudited accounts of the company till September. As mentioned in Point I of Comfort Letter dated September 13, 2011, the Statutory Auditors have pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted between the parties in the year 1982. The Trial Court allowed the amendment subject to certain cost but the High Court, in appeal, reversed the same. This is how the matter eventually reached the Apex Court. While interpreting Order 6 Rule 17 of the Code of Civil Procedure, the Hon ble Supreme Court noted that Rule 17 makes it clear that amendment of pleadings is permitted at any stage of the proceeding, but the proviso imposes certain restrictions and provides that after the commencement of trial no application for amendment shall be allowed. However, if it is established that in spite of due diligence , the party could not have raised the matter before the commencement of trial depending on the circumstances, the court is free to order such application. 54. In this context, elaborating the concept of due diligence, Hon ble Supreme Court has pertinently held as under :- ..The words due diligence have not been defined in the Code of Civil Procedure, 1908. According to Oxford Dictionary (Edn. 2006), the word diligence means careful and persistent application or effort. Diligent means careful and steady in application to one s work and duties, showing care and ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TSL. G. failed to carry out due diligence while verifying the address of Mr. Ramaswamy Kuchana, Director of TSL. 56. Further, in paragraph 10 of SEBI s order dated 5th August, 2014, it has been categorically held by the learned WTM while exonerating a similarly situated Merchant Banker, namely PNB Investment Services Limited, held as under :- 10. ..In view of the above, the due diligence expected from the merchant banker is reasonable diligence. Such obligation has to be enquired into and found out on the higher degree of preponderance of probability taking into account the facts and circumstances of the case. The merchant banker cannot be expected to look into each and every statement and information provided by the issuer with suspicion unless the facts and circumstances at the relevant time demand so. Accordingly, the obligation of the Noticee in this case has to be examined keeping in mind the above principles . 57. From the above-said we can conclude that SEBI itself has not taken as harsh a view as in the Appellant s case in imposing the punishment on a somewhat similarly situated entity, namely, PNB Investment Services Limited. 58. In this connection, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n primarily two points. The first being a declaration for the Board of Directors stating simply that all statements in the approved offer document were true and correct. Secondly, Keynote relied on the Capitalisation Statement received from a Statutory Auditor, which did not fulfill the requirements of a Comfort Letter as understood from a reading of the relevant provisions of the ICDR as discussed above. In the case of Keynote, it was evident that nothing concrete was done to verify the statements of the Board of Directors and that everything as portrayed by ESL was accepted without question. Even after such a serious misconduct had been established against Keynote, it was penalized only with a monetary penalty of ₹ 10 lac. In this case however, it cannot be said that the Appellant did not take any proactive measure. 60 In fact, it is pertinent to point out, even at the cost of repetition, that the Appellant took the following steps to confirm the information provided to it by the Issuer Company: Detailed undertaking/confirmation obtained from the Issuer Company in respect of no material change or adverse events. It was further certified by the Issuer Company that si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformed decision regarding investment in the upcoming IPO. The purpose for which the disclosures are required to be made will, thus, be frustrated if the same were inaccurate or untrue or incomplete. 62. Again, in the case of PNB Investment Securities Limited, it was clearly stated by the WTM that the MB could not be expected to look into each and every bank statement with suspicion unless there is a red flag which propels the Merchant banker to do so. However, apart from vital and material developments, there may be some trivial insignificant aspects which may be inadvertently overlooked by an M.B. without any mala fide intentions. In the absence of any connivance with the the Issuer Company, an M.B., therefore, cannot and should not be held liable for alleged lapses which may not have any effect on the decision-making process of the investors to invest or not to invest in the upcoming IPO. 63. Except, non-examination of the bank statement of the Issuer Company, we do not find any major lapse / flaw in the process of due diligence carried out by the Appellant. In fact, even here, there is no allegation that there was any collusion of the Appellant with the Issuer Company. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares as stated above. To carry out due diligence is the primary responsibility of the merchant banker and since the appellant failed in discharging that duty, we are of the view that it deserves to be debarred from dealing in securities or in carrying out any activities relating to the capital market. The ends of justice, in our view, would be adequately met if the period of debarment is reduced from three years to six months. We order accordingly. We have reduced this period keeping in view the fact that there is no allegation that the appellant had colluded with the company in deliberately suppressing the true facts. The appeal is disposed of with a direction that the impugned order shall stand modified as stated above. There is no order as to the costs. 64. Albeit, it is not mandatory for an MB to look into the bank statements it would have been prudent for the Appellant to peruse the bank statements instead of merely relying on the Statutory Auditor s Report and the statement of the the Issuer Company. Although there is some merit in the charges levelled against the Appellants, as far as non-perusal of Bank statements of the Issuer Company (Appeal No. 275 of 2014) and d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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