TMI Blog2014 (2) TMI 1312X X X X Extracts X X X X X X X X Extracts X X X X ..... egulation 24(4) of the Takeover Code and clauses 1, 2 and 7 of the code of conduct for merchant bankers.” From the foregoing, it is no doubt that Appellant had failed to exercise due diligence which resulted in lack in veracity and inadequacy of disclosures in the offer document, which did not provide investors with a reliable document did mis-lead investors to invest in shares of ESL and hence such non-disclosure had the potential to disturb securities market equilibrium and hence Respondent has rightly held Appellant to failed to comply with clauses 5.1 (5.1.1 and 5.1.2), 5.3.3.2(ii) under chapter V of SEBI (DIP) Guidelines, 2000 read with Regulation 111 of SEBI (ICDR) Regulations, 2009. Regarding quantum of penalty provisions of section 15J of SEBI Act were applied by Respondents and are of the view that investigation report has not quantified profit/loss for the nature of violations committed by Appellant and no quantifiable figures are made available on record to assess the disproportionate gain or unfair advantage and amount of loss caused to an investor or group of investors, and hence penalty of ₹ 10,00,000/- has been imposed considering failure to comply with SEB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RLM, and thus failed to exercise due diligence, since details of Inter-Corporate Deposits (ICDs) availed by ESL and purchase orders issued to certain entities by ESL, availed by ESL between January 12, 2009 to January 23, 2009 were not incorporated by Appellant in prospectus dated February 17, 2009 and filed on February 20, 2009 and hence Appellant failed to comply with clauses 5.1 (5.1.1, 5.1.2), 5.3.3.2 (ii) under chapter 5 of SEBI (DIP) Guidelines, 2000 read with Regulation 111 of SEBI (ICDR) Regulations, 2009. 3. BRLM is required to exercise due diligence at all stages of issue of IPO and after issue of IPO for post issue activities and following submissions were made by BRLM when show cause notice was issued to BRLM by Respondent for non compliance with due diligence requirement for its role in IPO issue of ESL. 4. Appellant denied that it had failed to exercise due diligence and maintain satisfactory standard in all aspects of offering, veracity and adequacy of disclosures in offer document. 5. Appellant has always complied with Rules and Regulations as laid down by SEBI from time to time and has an impeccable track record. 6. Regarding use of proceeds of IPO, pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on them. 11. Show Cause Notice has not established any violations committed by Appellant. 12. Appellant submitted that it was pre-issue BRLM in IPO of ESL while post issue BRLM was Ashika Capital Ltd. Appellant further submitted that in IPO of ESL RHP was filed on January 20, 2009 and final Prospectus was filed with ROC, Chennai on February 20, 2009. In between these two dates, ESL received ICDs from entities mentioned in SCN and no communication was received by Appellant from ESL for updating statements made in RHP. Appellant stated that he has already submitted copies of undertaking given by Directors of ESL that statements made in prospectus were true. Appellant also submitted that when he handles IPO, he carries out random checks to verify authenticity of entities mentioned in the prospectus and has submitted documents in support of same. Appellant submitted that in IPO of ESL entities Rajesh Service Centre, Krishna Enterprises, Shiv Impexs and Mahadev Impexs were not mentioned in prospectus he has not dealt with them and thus did not verify their authenticity. 13. Vide letter dated November 11, 2011 Appellant submitted copies of inter-se allocation of responsibilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use 6.3, or clause 6.39 are applicable, certify that the issuer company is complying with conditions (a) and (b) laid down in 2nd proviso to clause 6.3 or with conditions (a), (b) and (c) laid down in clause 6.39, as the case may be; (ib)) certify that all amendments suggestion or observations made by Board have been incorporated in the offer document; (ii) furnish a fresh due diligence certificate at the time of filing the prospectus with the Registrar of Companies as per the format specified at Schedule IV. (iii) furnish a fresh certificate immediately before the opening of the issue that no corrective action on its part is needed as per the format specified at Schedule V. (iv) furnish a fresh certificate after the issue has opened but before it closes for subscription as per the format specified at Schedule VI. SEBI (ICDR) Regulations, 2009 Repeal and Savings. 111. (1) On and from the commencement of these regulations, the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 shall stand rescinded. (2) Notwithstanding such rescission: (a) anything done or any action taken or purported to have been done or take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally incorrect in view of ICDs/ loans taken by ESL between January 20, 2009 and February 05, 2009. Thus, adequate disclosures regarding the ICDs taken by ESL were not made in Prospectus and this points towards inadequate due diligence on the part of Appellant. 18. According to Clauses 5.3.3.2 and 5.3.3.2 (ii) under Chapter V of SEBI (DIP) Guidelines, Appellant, as the BRLM for issue was under obligation to issue fresh due diligence certificates in prescribed formats at various stages in addition to the due diligence certificate furnished along with the draft offer document: i) at time of filing offer document with Registrar of Companies, ii) immediately before opening of issue and iii) after issue has opened but before it closes for subscription., 19. In present case, ICDs were taken from January 20, 2009 and the RHP was also filed with ROC, Chennai on January 20, 2009. Thus, the due diligence certificate dated January 20, 2009 filed by Appellant at time of filing RHP with ROC, Chennai has not been taken into account for present proceedings. In format of due diligence certificate to be given by BRLM immediately before opening of the issue the BRLM has to certify that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the veracity and adequacy of disclosure in the offer documents. . 25. In view of above, it was incumbent upon Appellant that as BRLM to satisfy itself that all disclosures made in Prospectus were correct, adequate, etc. In the present case BRLM failed to verify adequacy of disclosures in offer document and failed to update offer document regarding ICDs amounting to ₹ 4 crores availed by ESL in spite of its due diligence certificates dated February 04, 2009 and February 06, 2009. Further, Prospectus of ESL in page no. 106 states that: The Book Running Lead manager, Keynote Corporate Services Ltd. have certified that the disclosures made in the offer document are generally adequate and are in conformity with SEBI (DIP) guidelines as for the time being in force. This requirement is to facilitate investors to take an informed decision for making an investment in the proposed issue In spite of above-mentioned statement in Prospectus, Appellant had failed to ensure that adequate disclosures were made in Prospectus of ESL and thus failed to facilitate investors to take an informed decision for making an investment in IPO of ESL. Appellant s plea that the information r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEBI (DIP) Guidelines. In order to provide correct, appropriate, relevant and all material disclosures to investors it was incumbent upon Appellant to carry out due diligence and Appellant should have exercised its right to call for documents instead of awaiting information from ESL to verify veracity of the disclosures made in offer document. Moreover, Appellant could also have sought copies of Purchase Orders placed by ESL above a certain value for period of at least one month before filing of the two due diligence certificates mentioned in paras 20 and 22. Thus, Appellant s stand that ESL did not update Appellant regarding ICDs as well as the Purchase Orders and that it was duty of ESL to inform Appellant regarding any changes in disclosures in offer document is not convincing. In view of same, Appellant s contentions at paras 4-13 are not accepted. 29. The entire case of Respondent against Appellant is that Appellant as BRLM/ Merchant Banker to ESL in matter of issue of IPO during 2009 when it failed in its duty of satisfying itself about all aspects of the issue, including veracity and adequacy of disclosures in the offer document i.e. prospectus, since there was requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be correct for what it is stated in it, but it is not for stating what Debt/Short Term Debt/Long Term Debt exists in the company i.e. ESL as on 12th February, 2009. 32. Since it has already been stated that statement of Appellant that he carries out random checks to verify authenticity of entries mentioned in prospectus and undertook to submit documents in support of same, but from only two document- submitted by Appellant nothing material can be inferred, since first is a declaration from Board of Directors that all statements in offer document are correct and another a certificate from Chartered Accountant, which is misleading, since it deals with capitilization of debt and not existence of debt. Reliance of such documents, which is effect do not convey anything material or are misleading, infact, strengthens the case of Respondent that Appellant has done nothing to carry out due diligence and has been a passive actor, waiting for documents/information to come to him, whereas he should have been active in looking into various aspects of functioning of ESL, scrutiny of functioning of ESL, scrutiny of all relevant documents- including bank statements and order book position e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responsibilities in IPO of ESL. Thus this contention of Appellant that it was only pre-issue BRLM in IPO of ESL, is not correct. 36. The case law submitted by learned counsel appearing for Appellant of JM Mutual Fund and JM Capital Management Pvt. Ltd. in Appeal no.39/04 and 39A/04 dated 22.11.2004 before SAT due diligence has been taken as such a measure of prudence, activity or assiduity, as is properly to be expected, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but depending on the relative acts of the special case- as defined in Black s Law Dictionary. 37. In the matter of Imperial Corporate Finance and Services Pvt. Ltd. vs. SEBI in Appeal no.56/2003 dated 30.7.2004 submitted by Appellant s counsel, it was held by this Tribunal that we do not find any justification for holding the Appellant guilty of violating any Regulations or provisions of the Act, and in this was in context of Appellant, being the lead manager to rights issue of Gammon (India) Ltd was alleged that Appelalnt did not take a immediate action when it received information of a Director of Gammon (India) Ltd to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO and this standard of professionalism should be higher than a reasonable man with ordinary prudence will demonstrate in the matter of due diligence but in present case no mark of professionalism can be seen from Appellant, who was merely a certificate issue machine on dates when it was due, without undertaking any due diligence whatsoever. 42. Case law cited by Respondent are discussed below: In case of World Link Finance Limited vs. SEBI in appeal no.36 of 2007 decided on April 24, 2007 by SAT, Appellant was not held to not have exercised due diligence when it certified that promoters held 5,33,800 shares but should have known at the time of issue of prospectus that this was not the case since promoters shares were non-transferrable for five years but did not have non transferrable stamp. 43. In another case law referred by Respondent HSBC Securities and Capital Markets vs. SEBI decided by SAT in appeal no.99 of 2007 dated February 20, 2008, where it was held that it is the responsibility of the merchant banker to ensure that the contents of the letter of offer are true, fair and adequate. The learned senior counsel for the appellant argued that non-disclosure in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendently verify the information available. No specific query in this respect was made from the right sources of such information namely the target company and the stock exchanges though it was known that information about the listing of the shares of the target company in each stock exchange was specifically required to be disclosed in the letter of offer. Instead, the appellant made a presumption that all shares were listed in the four stock exchanges of Chennai, Mumbai, Delhi and Ahmedabad and left it to others to point out if that was not the fact. This is certainly no way to exercise due diligence and we cannot but agree with the Whole Time Member of the Board that the appellant had violated regulation 24(4) of the Takeover Code and clauses 1, 2 and 7 of the code of conduct for merchant bankers. 44. From the foregoing, it is no doubt that Appellant had failed to exercise due diligence which resulted in lack in veracity and inadequacy of disclosures in the offer document, which did not provide investors with a reliable document did mis-lead investors to invest in shares of ESL and hence such non-disclosure had the potential to disturb securities market equilibrium and hence Re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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