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Almondz Global Securities Ltd. and Others Versus Securities and Exchange Board of India, Mumbai

2016 (6) TMI 805 - SECURITIES APPELLATE TRIBUNAL MUMBAI

IPO - lapse of due diligence - whether the steps taken by the Appellant in light of various provisions of the ICDR Regulations and the Code of Conduct towards the due diligence of the affairs of the Issuer Company are sufficient and adequate in law? - non – disclosure of suppliers and agreements for purchase of granules - fund raising through ICDs and their subsequent deployment - Held that:- On a perusal of Order dated 3rd September, 2012 passed by the Respondent, it emerges that an independent .....

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. - In light of these factual revelations, 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 regard .....

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nd 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 undertaken inspection of the Bank accounts of the the Issuer Company. To this extent, we are in agreement with the finding in the Impugned Order that the Appellant did not perform i .....

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rit in the charges levelled against the Appellants, as far as non-perusal of Bank statements of the Issuer Company and disclosure of related party transactions ) is concerned, in view of the fact that the punishment already undergone is far in excess of the punishment which the Appellants deserved against the charges in question, we quash the remnant punishment imposed vide the Impugned Order. - Appeal No. 275 of 2014, Appeal No. 276 of 2014, Appeal No. 301 of 2014, Appeal No. 207 of 2015 - Date .....

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heard together and being disposed of by this common order taking the facts of Appeal No. 275 of 2014 as the lead case. "APPEAL Nos.: 275, 276 and 301 of 2014" 2. Appeal No. 275 of 2014 has been preferred by the company (hereinafter referred to as the Appellant ), Appeal No. 276/2014 has been filed by the Compliance Officer of the Appellant, namely - Mr. Sanjay Dewan, and Appeal No. 301/2014 has been preferred by the Managing Director-cum-Chief Executive Officer of the Appellant against .....

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(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 ban .....

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ith the Registrar of Companies; (c) ….…………………………………………………..; (d) ………………………………………………………; (e) a due diligence certificate as per Form D of Schedule VI, immediately before the opening of the issue, certifying that ne .....

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III. [ Merchant banker not to associate with any business other than that of the securities market.] : Schedule III Code of Conduct for Merchant Bankers Clause 1. A merchant banker shall make all efforts to protect the interests of investors. Clause 2. A merchant banker shall maintain high standard of integrity, dignity and fairness in the conduct of its business. Clause 3. A merchant banker shall fulfill its obligations in a prompt, ethical, and professional manner. Clause 4. A merchant banker .....

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7. A merchant banker shall endeavour to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision. Clause 8. to Clause 20 …………………………….…….. Clause 21. A merchant banker shall maintain an appropriate level of knowledge and competence and .....

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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 consequ .....

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t appeal i.e. Appeal No. 207/2015 may also be disposed of on the basis of arguments advanced in the lead Appeal No. 275/2014. For the reasons recorded in our order in Appeal No. 275/2014, as more particularly set out hereinbelow, we uphold the decision of WTM that the charges levelled against the appellant stand partly established. Since the WTM of SEBI has not imposed any additional penalty, we uphold the order of WTM which is impugned in Appeal No. 207 of 2015. Misc. Application No. 130 in App .....

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the Impugned Order dated 21st March, 2014 by which the Appellant was found to be lacking in carrying out reasonable due diligence in the matter of IPO of above said the Issuer Company Company while acting as a BRLM. The Show Cause Notice dated 7th January, 2015, under Regulation 25 (1) of Intermediaries Regulation, 2008, seems to have been issued in response to an application dated 7th February, 2014, preferred by the the Appellant to the respondents seeking renewal of Merchant Banking registra .....

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ing finally decided today itself between the same parties. The relevant regulations are reproduced hereinbelow for the sake of convenience : SEBI (Merchant Banker) Regulations, 1992 Consideration of application. 6. The Board shall take into account for considering the grant of a certificate, all matters which are relevant to the activities relating to merchant banker and in particular the applicant complies with the following requirements, namely :- [(a) the applicant shall be a body corporate o .....

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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) Regulatio .....

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ificate of permanent registration 8A. (1) to (4) …………………………………………… (5) The application for permanent registration made under sub-regulation (1) or (2) shall be dealt with in the same manner as if it were a fresh application for grant of a certificate of initial registration. SEBI (Intermediaries) Regulations, 2008 Schedule II For the purpose of determining as to whether an appli .....

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riteria to be taken into consideration while judging an application for registration as MB on its merits. Regulation 8 makes provisions for the grant of initial registration to an entity satisfying the requirements of Regulation 6. Further Regulation 8A speaks of the grant of permanent registration for which another application is required to be made. Regulation 6A lays down that every entity applying for registration as an MB shall be a fit and proper person in terms of Schedule II of the Inter .....

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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 grant .....

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, 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 Company, thus, came to be listed on the Bombay Stock Exchange ( BSE ) and the National Stock Exchange ( NSE ). 9. After listing of the shares of the Issuer Company on the Stock Exchanges, SEBI found certain fluctuations in the share price and undertook an investigation. Noticing prima facie violation of ICDR and M. B. R .....

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the Appellant. 10. The debarment of five years imposed on the Appellant by the Impugned Order dated 21st March, 2014, has been primarily premised on the finding that there was complete failure to carry out reasonable due diligence while preparing the RHP and the Prospectus of the the Issuer Company for the purposes of IPO in question. 11. We have heard the learned senior counsel Shri Devitre and Shri Ankit Lohia, Mr. Ajai Achuthan, learned counsel for the Appellants and Shri Rustomjee along with .....

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er is in the negative, the next question that would arise for our consideration is whether the punishment of debarment imposed upon the Appellants for a rather long period of 5 years is just and proper in the facts and circumstances of the case ? The purposes of the IPO in question, as seen in the Prospectus, were as mentioned below :- • Prepayment of the portion of the term loan and line of credit facility proposed to be availed by the Issuer Company for expansion under phase 1 - (Rs. 24.1 .....

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e 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 gra .....

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lant to ensure disclosure of inter-corporate deposits (ICDs) received by the Issuer Company, i.e., the Bridge Loans received by it. The case of the respondent, in this regard, is that this aspect should have been disclosed in the RHP/Prospectus to enable the investors to take an informed decision to invest in the IPO or not. Shri Devitre, learned senior counsel for the Appellant, dealt with this aspect in a threadbare manner and submitted that the Appellant was only provided with an extract of t .....

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s Certificates, including Certificate dated 13th September, 2011, to the effect that they had read the Minutes of the Meetings of the Board of Directors and of the Committees up to 10th September, 2011, and, in addition, had also read the unaudited financial statements for the period 1st April, 2011 to 31st August, 2011 and found no material change in the share capital, liabilities, loans, etc. of the Issuer Company. Therefore, there was no reason for the Appellant to develop any suspicion as re .....

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ertificates, undertakings and affirmations certifying that there was no material change before presenting the draft RHP to the Respondent. 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, product .....

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us 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 in respect of the disclosures made in the Offer Document at various stages of the IPO as required by the Regulations. At the time of obtaining the certifications and und .....

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ns on general corporate information, management, promoters and promoter group, IPO related agencies, manpower, website, share capital, statutory records and registers, corporate governance, operations, branches & offices, financial data, immovable properties and fixed assets, intellectual property rights, contracts and commitments, insurance, taxation (direct and indirect), litigations and claims, regulations and policies, government approvals and licensing arrangements, competition and trad .....

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Advisor to discuss the various aspects of legal duediligence conducted by them. These meetings were jointly conducted at the Issuer Company s office and also on a one to one basis at the office of the Legal Advisor and at the Appellant s offices. The outcome of these efforts was that all adverse observations were either rectified or appropriately disclosed in the offer documents, as pointed out by SEBI or otherwise. 20. The Statutory Auditor of the Issuer Company completed restatement of audite .....

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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 asse .....

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own due diligence expected of an MB in respect of matters known to it and contained in the RHP/Prospectus. 21. To reinforce its argument, the Appellant has also relied upon a manual issued by the Association of Investment Bankers of India (the AIBI Manual) to the effect that the reliance on Comfort Letter placed by the Appellant in the course of the process of due diligence was valid. It is submitted that AIBI is a self regulating organization of the investment bankers of India, as recognized by .....

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the finding in the Impugned Order that the Appellant should not have relied upon the Auditors Comfort Letters is erroneous. 22. In the context of the first charge, it is lastly submitted by the Learned Senior Counsel for the Appellant, Shri Devitre that the non disclosure of the Loan Committee in the RHP / Prospectus was inconsequential inasmuch as Schedule VIII Part-A and VIII(E)(7) of the ICDR Regulation and the Listing Agreement do not have any requirement to do so. Moreover, the Loan Committ .....

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ll these four meetings, the discussion revolved around availing credit facilities from the Banks. It was, therefore, not within the reasonable apprehension of the Appellant as a Merchant Banker that the Loan Committee would conduct itself in this manner at its fifth meeting on 17th August, 2011. 23. Per contra, 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 na .....

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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 identical .....

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to invest in the ICDs of other Companies out of the IPO Project. 24. In this connection, it is further submitted on behalf of the respondent that the Minutes of the Meeting of the Board of Directors on 14th November 2011, inter alia, contain the following in Sl. No. 7 : 7. TO TAKE NOTE OF THE INTER CORPORATE DEPOSITS MADE BY THE COMPANY The chairman informed the Board that in the initial public offering of the Company there was some surplus funds which were not required to be deployed immediatel .....

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eds, inter alia, in ICDS, and during the meeting of 14th November 2011 the Board of Directors took note of the specific ICD Agreements which had been entered into by the Company in pursuance of the earlier Board Resolution. The fact that on 14th November 2011 the Board took note of the specific investments in ICDs which had been made does not mean that the board had not discussed investment in ICDs earlier. 25. Regarding the Comfort Letters issued by the Statutory Auditors and reliance placed by .....

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ntioned 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 affai .....

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em been called into question by the Respondent. • The Issuer Company did not provide the Appellant with minutes of the Board meeting held on August 20, 2011. This has been admitted by the Respondent in its order dated September 3, 2012. In fact it is also admitted in the same order that no proposal for raising of funds through ICDs was brought before the Board on August 17, 2011. The Appellant was instead provided with the extract of the Board Resolution, which admittedly did not contain an .....

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be conducted. These are the ICDR Regulations, the MB Regulations and the Intermediaries Regulations. One of the statutory measures by which SEBI is required to protect the interests of the investors in the securities market is specifically provided in Section 11(2)(b) i.e., by registering and regulating the working of a number of intermediaries including the MBs. Chapter V of the SEBI Act, 1992 deals with the Registration Certificate. Section 12 provides that various intermediaries, including an .....

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Requirements) Regulations, 2009 consist of 11 Chapters and 20 Schedules. Chapter 1 deals with Preliminary issues and provides for definitions etc. Some of the definitions provided in Regulation 2 are relevant for the present purpose and are dealt with hereinafter. Regulation 2(1)(f) explains book building as the process whereby the demand and price of certain securities is assessed and determined. Regulation 2(1)(g) defines a book runner as an appointed by the issuing company to undertake the bo .....

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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 t .....

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ll also appoint other intermediaries registered with SEBI in consultation with the lead merchant banker. It shall be the duty of the MB to independently evaluate the intermediaries and accordingly advise the IC regarding their appointment. Regulation 6 deals with the Filing of Offer Documents and puts forth that an IC shall be eligible to make a public issue or a rights issue only after a draft offer document has been filed with SEBI for tis comments through the MB 30 days prior to filing it wit .....

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e MB shall also provide SEBI with other documents such as, inter alia, a copy of the agreement entered into between the issuer and the lead merchant bankers; a due diligence certificate as per Form A of Schedule VI; a certificate in the format specified in Part D of Schedule VII, confirming compliance with the conditions mentioned therein. Further, once SEBI has issued its comments, or the time period within which SEBI ought to have issued comments as per Regulation 6(2) has expired, the MB shal .....

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of the issue; a certificate from a Chartered Accountant, before opening of the issue, certifying 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 a .....

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l 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 associations and Self Certified Syndicate Banks in advance on the MB. Regulation 13 provides for underwriting obligations to be imposed upon merchant bankers and book running lead managers. It lays down that if the b .....

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in Public Issue. Regulation 28 states that an issuer may determine the price of securities either in consultation with the lead MB or through the book building process as per schedule XI. As per Regulation 30, the IC may cite a price or price band in the prospectus of red herring prospectus and then determine the price later before filing it with the ROC. Regulation 31 lays down the method to be followed by an IC to fix the face value of equity shares for the purposes of an IPO. Regulation 32 o .....

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apter 3 lays down that the minimum offer to the public in an IPO should be either 10% or 25% of the post issue capital. Regulation 44 puts forth the concept of a safety net arrangement wherein the IC provides such an arrangement under which a person offers to purchase specified securities from the original allottees at the issue price. Regulation 45 delineates the green-shoe option and lays down the conditions and parameters within which such an option can be made available in an effort to stabi .....

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n 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 upd .....

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Issue and Rights Issue. As per Regulation 63, the IC shall appoint a compliance officer who shall be responsible for monitoring the compliance of the securities laws and for redressal of investors grievances. In accordance with Regulation 64, the lead merchant banker shall exercise due diligence and assure himself about all the aspects of the issue including the accuracy and satisfactoriness of disclosure in the offer documents. The MB shall further call upon the issuer, its promoters or directo .....

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f issue. Also, the lead merchant banker shall submit a due diligence certificate as per the format specified in Form G of Schedule VI, along with the final post issue report. Regulation 68 stipulates that the merchant banker shall be responsible for ensuring that the information contained in the offer document and the particulars as per audited financial statements in the offer document are not more than six months old from the date on which the issue opened. 35. Further, the rest of the chapter .....

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at hand we note that a list of suppliers was disclosed in the RHP on page 76 and page 44, based on the information provided by the Issuer Company, which was duly verified by the Appellant thereafter from the Issuer Company s records. It appears that the names 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 Industrie .....

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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 the appellant s submission that the bonafides of .....

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rn Resorts Pvt. Ltd., as well as the one between the Issuer Company and Safeco Projects Pvt. Ltd. were neither available in the public domain nor in the minutes of the company s Board Meetings. Further, the Merchant Banker submits that while performing its due diligence exercise, it did not come across any plan of the Issuer Company for expansion or any project which would require the purchase of land, and hence, the MB in all reasonableness could not have been expected to go to the extent of im .....

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tails have been duly mentioned by the Merchant Banker on pages 42 and 43 of the RHP. It appears that in the absence of any other disclosures made by the Issuer Company, the Merchant Banker did not have any means of knowing the existence of any purchase orders except the ones disclosed in the Offer Document. Furthermore, we find nothing in the SCN or the Impugned Order to suggest the contrary. The Offer Document does not mention the Purchase Orders placed on Modi Alloys or Aggarwal Steel nor does .....

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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. .....

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f the RHP. Therefore, adequate disclosures regarding the availment of cash credit limit have been made in the RHP in a number of places. Given the reiteration and consistency of these disclosures, we conclude that there was no underlying intention of concealment or non- disclosure but rather an inadvertent oversight of the Appellant. 41. Let us now turn our attention to the main allegation pertaining to the fund raising through ICDs and their subsequent deployment. Intimately connected with this .....

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various credit facilities from the banks. The Loan Committee had no authority to borrow money through ICDs and secondly; • that no such proposal regarding availing of loans through ICDs was tabled at the meeting of the Board of Directors dated 17th August, 2011. 42. In light of these factual revelations, 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. 43. On an appreciation of the above rival submissio .....

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Board Meeting on 17th August, 2011, but also prepared the minutes on the same date to be supplied to the Appellant for the purpose of filing the RHP before the appropriate authority. Had the minutes of the meeting actually been supplied to the Appellant on August 17, 2011 itself, there would have been no occasion for the the Issuer Company to provide an extract of the Board Meeting dated 17th August, 2011, over and above the minutes. This would have been superfluous. It would lead to the errone .....

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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 accou .....

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t identically worded agreements on September 20, 2011 to invest in the three companies, namely, Saptshri, Raw Gold and Watkins, a substantial amount of the IPO by giving ICDs these three companies. From a perusal of the Ex-parte Order of SEBI dated 28th December, 2011 it is borne out that the Issuer Company s Board of Directors was informed of the execution of said ICD agreements only at the meeting held on 14th November 2011, ie, after the receipt of SEBI s letter dated November 9, 2011. Paragr .....

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. 45. In this context it is pertinently noted that that all the crucial events or developments with respect to the IPO in question were over before the Issuer Company decided to invest the IPO proceeds on September 20, 2011 in the three companies mentioned above by way of ICDs. These events, which are as under, may be recapitulated even at the cost of repetition : • September 23, 2010 - DRHP filed with SEBI by the Appellant after concluding a thorough Due Diligence exercise. • December .....

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for public subscription. • September 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 clea .....

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n 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 undertaken inspection of the Bank accounts of the the Issuer Company. To this extent, we are in agreement with the finding in the Impugned Order that the Appellant did not perform its duty properly in the matter of due diligence. 47. However, for this lapse in .....

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s regards the bona fides of the company, on whose behalf it is entrusted with the task of drafting and preparing the DRHP, RHP and the Prospectus, etc. After the signing of a Memorandum of Understanding by the MB with the the Issuer Company to draft and finalise the offer documents required for the IPO, a relationship of trust and confidence ensues between the two and cannot be unilaterally breached by any of the parties from the date of signing of the Memorandum of Understanding till the conclu .....

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s follows: • Clause 4 lays down all the duties of the the Issuer Company with respect to the issue. For instance, clause 4.2 states that the the Issuer Company undertakes to provide relevant information to the BRLM to cause the BRLM to file such reports as required by law; clause 4.4 states that the the Issuer Company undertakes to provide the BRLM with all information required to prepare the offer documents in accordance with legal requirements; vide clause 4.5 the Issuer Company declared .....

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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 in .....

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Banker continues from the date of DRHP till the allotment of shares and even the discharge of the funds in the Escrow account, but this does not mean that a Merchant Banker would remain stationed at the premises of the company to watch each and every movement of the Promoters / Directors or its officers for the purpose of due diligence. There is no especially prescribed manner or procedure under the MB Regulations or for that matter under any other law in force according to which the MB is suppo .....

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the Legal Adviser to the IPO of the Issuer Company dated September 17, 2010 and August 16, 2011 respectively. • Various Certifications and undertakings were obtained from the the Issuer Company from time to time. • Various Comfort Letters obtained from Statutory Auditors dated at different stages of the IPO as required by the ICDR Regulations. 50. Undoubtedly, a Comfort Letter issued by a Statutory Auditor cannot be a complete substitute for the exercise of due diligence by the Appella .....

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uestion the materiality of a Comfort Letter obtained from a Statutory Auditor particular in light of the fact that Statutory Auditors are also governed and regulated by SEBI. Although, a Comfort Letter cannot be treated as an excuse for an independent 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 (Co .....

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ot 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 out that the Issuer Company informed them that no financia .....

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ptember 2011. The expression current liabilities would undoubtedly include ICDs. Further, we have compared the Comfort Letter as provided to the Appellant with the format prescribed by the ICAI and it is evident that the Statutory Auditors have followed the format in its entirety. Therefore, it emerges that there was no reason for the Appellant to doubt the Comfort Letter issued under the signature of the Statutory Auditors. 52. This takes us once again to the very principle of due diligence. Th .....

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to be determined in each case as per the existing facts and circumstances. Hon ble Supreme Court in the case of Chander Kanta Bansal Vs. Rajender Singh Anand reported in 2008 (5) SCC 117 that due diligence in law means reasonable diligence and doing everything reasonable, not everything possible . 53. In the case of Chander Kanta Bansal, the Appellant and the Respondent, being the Members of a common co-operative housing society were jointly allotted a plot in New Delhi in the year 1981, and bo .....

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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 .....

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d duties, showing care and effort. As per Black s Law Dictionary (18th Edn.), Due Diligence means the diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation. According to Words and Phrases by Drain Dyspnea (Permanent Edn. 13-A) due diligence , in law, means doing everything reasonable, not everything possible. Due Diligence means reasonable diligence, it means such diligence as a prudent man would exercise .....

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19 read with section 12 (3) of the SEBI Act, 1992, and also Regulation 28 (2) of the SEBI (Intermediaries) Regulations, 2008, disposed of the show cause notice against the Merchant Banker without any further directions and held that ……On and from the date of operation of this order, the directions issued vide the interim order dated 28th December, 2011, read with the confirmatory order dated 7th September, 2012, would not continue further against the noticee and Mr. L.P. Agarwal. .....

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disclosures about the presence of employees across various office of TSL in the offer documents; C. failed to make disclosure on utilization of IPO proceeds for repayment of IDCs raised by TSL; D. made incorrect disclosures about buy back arrangement of shares of TSL; E. failed to make disclosure of related party transactions in the offer document of TSL F. made incorrect disclosures of the business over view of TSL. G. failed to carry out due diligence while verifying the address of Mr. Ramaswa .....

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nt 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 punishm .....

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this Tribunal. Facts of Keynote as reflected in this Tribunal s order dated 19th February, 2014, given in para 2 of the order and read as under :- 2. Appellant was Book Running Lead Manager (hereinafter referred to as BRLM or Merchant Banker), alongwith Ashika Capital Limited ( Ashika ) as co-Book Running Lead Manager for IPO of ESL during 2009 and Respondent have held that Appellant failed to maintain satisfactory standards in all aspect of offering, veracity, and adequacy of disclosures in pr .....

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with Regulation 111 of SEBI (ICDR) Regulations, 2009. 59. We have gone through the judgment of Keynote. It is true that the Merchant Banker s Appeal was dismissed in that case. However, every case must be judged on its own facts. We find that the Keynote case is distinguishable and does not help the case of the Respondent for the reasons elucidated hereinafter except that the Bank statements of the the Issuer Company should be examined by an MB during the course of a due diligence exercise. Now .....

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rimarily 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 .....

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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 since the date of last financial statements of the company , included in the RHP and prospectus, there has not been any material change in share capital, increase in current liabilities, secured and unsecured loans, deferred payment liabilities, contingent liabilities or total liabilities, or decrease in .....

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s otherwise disclosed. • Underwriting Agreement signed by the Issuer Company confirming that there has been no material adverse change in the company s position. • Four Comfort Letters were sought and received from Statutory Auditors about no material change in the Company s financial position. • MB had several meetings with the Promoters, the CFO, Compliance Officer to enquire about the changes in the position of the company. 61. It would have been, however, better if the Appella .....

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vations in completely accepting this argument in the present case. We must adopt a more pragmatic approach in this regard. Analysing the fund flow in the the Issuer Company s accounts for the relevant period, ie, from the signing of the Memorandum of Understanding till the conclusion of the IPO, would have revealed the true financial position of the the Issuer Company s financial dealings to prospective investors more vividly. Such a disclosure is useful and hence essentially needs to be made in .....

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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 I .....

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as a Merchant Banker was guilty of lack of due diligence or not, held that the Appellant was at fault in not conducting due diligence as was required in that case. According to the Prospectus, in that case, the Promoters of the the Issuer Company were holding 5,33,800 shares which were allotted on 20th March, 1992, with a lock-in period of five years. In fact, these shares had already been allotted by the Company to 26000 share holders in the year 1992 on private placement basis to various fina .....

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et them transferred to their name because, in fact, the shares did not belong to the Promoters of the the Issuer Company. In this background, even while finding the Appellant guilty of lack of due diligence, this Tribunal reduced the period of debarment from three years to six months and held that :- The question that now arises is - what penalty should be imposed on the appellant? The Securities and Exchange Board of India has debarred the appellant from dealing in securities or associating wit .....

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