TMI Blog2004 (7) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... d a complaint not with the appellant but with SEBI. The complaint was that the Chairman and Managing Director of the company, Mr. Abhijit Rajan, did not disclose in the letter of offer with respect to a case pending against him. On 18.10.2001, SEBI forwarded the complaint to the lead manager (the appellant). The complaint by the complainant did not state particulars of the criminal case pending against Abhijit Rajan. The letter of the complainant sent to SEBI, inter alia, reads as follows: The criminal case No.553 of 1996 at the Court of District Magistrate at Varanasi; 5. On the very next day on 19.10.2001 the appellant sought clarification from Rajan with regard to the criminal case. The letter dated 19.10.01 reads as follows: Dear Mr. Rajan M/s. Prashant Glass Works Pvt. Ltd. has complained to Mr. D.R. Mehta, Chairman, Securities Exchange Board of India (SEBI), regarding omission of certain facts in the Offer Document issued by the company in connection with the on going Rights Issue. In response to this SEBI has sought comments from us immediately. We have enclosed a copy of the letter received from SEBI for your perusal. As we are required to give our comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vember 2001, which, for the first time, gave details of the criminal case. Therefore the time that began to run was from 12th of November. We must carefully study the steps taken by the appellant after 12th of November to know whether the appellant had lacked in due diligence as a Lead Manager. On 12.11.2001, the appellant made it very clear that corrective measures should be taken. 8. In fact on 13.11.2001 the appellant wrote to SEBI that corrective measures like disclosure must be made forthwith. The relevant portion of the letter reads as follows: Corrective Action Proposed We are advising the issuer Company to send letters to all the individual shareholders immediately disclosing details of pending litigation against Mr. Abhijit Rajan and giving option to withdraw if they desire so. A copy of the letter will be submitted to you for records. However, we will abide by your directions in this regard. Further, we confirm that the registrations of all the Intermediaries named in the offer document are valid as on date and that none of these intermediaries have been debarred from functioning by any regulatory authority as on date. We also confirm that the securities p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chant Bankers) Regulations, 1992 for contravention of regulations 23, and 13 read with items 2, 5(b), 7(a) and 9 of the Code of Conduct contained in Schedule III of the SEBI (Merchant Bankers) Regulations. 10. The appellant submitted its reply. On 22nd of July 2002, again instead of closing the matter, the Enquiry Officer issued notice to the appellant on the same allegation. The appellant submitted a reply to the notice sent by the Enquiry Officer on 21st of August 2002. A lot more time was wasted for issuing the second show cause notice on 5th of December 2002. According to the second show cause notice, the Enquiry Officer exonerated the appellant holding that it is the company that had not disclosed the pendency of the criminal case during the discussion with the merchant banker. But a further allegation was levelled against the appellant that the appellant should have acted immediately when the written complaint reached it on 19th of October 2002, when the issue was open. We are unable to comprehend how the appellant could have acted on the written complaint and aborted the issue without verification from Mr. Abhijit Rajan. 11. Let us recall that the complaint was addres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on 19th of October 2001 from Abhijit Rajan. Abhijit Rajan on 10th of November 2001 informed the appellant that he could not respond to the letter and admitted that one criminal case was pending in Varanasi against him in his personal capacity and that he did not disclose this in the due diligence discussion with the appellant. Mr. Rajan had no intention of suppressing the same. When the letter was received on 12th of November, the appellant wrote a letter to Rajan to give details of the criminal complaint to take corrective steps. On the very next day, on 13th of November 2001, the appellant wrote to SEBI about the corrective steps to be taken. In fact, on 29th of November 2001 a draft letter to be circulated to the shareholders was sent to SEBI for approval. SEBI waited till 5th of December before approving the draft letter giving the shareholders an exit option and on 6th and 7th of December the letters were sent to the shareholders giving them the option to exit in view of the non-disclosure with respect to Abhijit Rajan. When a question was posed to the senior counsel to the respondent whether SEBI or the appellant, Lead Manager, had any power to stop the issue before closu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Enquiry Officer is categorical that it was Mr. Rajan, who did not disclose this information to the appellant. If that be so, it is not known how the appellant could have been faulted. 15. The finding of the Enquiry Officer on this aspect of the matter reads as follows: Although the company has not disclosed regarding the pendency of the criminal case during their discussion with the merchant banker, the merchant banker should have acted immediately atleast when the written complaint had reached him on 19/10/2001 when the issue was opened which contained verifiable facts as aforesaid. Thus, from the facts and circumstances, it is concluded that the merchant banker did not exercise due diligence, more so, when the criminal case is of serious nature disclosing serious offences of cheating and forgery against CMD of the issuer company. 16. The learned counsel for the respondent submits, rather curiously, that as soon as the incomplete information was received from the complainant, the Lead Manager should have flown to Varanasi and found out whether any case was pending instead of asking Mr. Rajan. We cannot subscribe to such methods. The proper person that the Lead Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant, it took corrective steps as expeditiously as possible with a sense of responsibility. We say with the sense of responsibility since the appellant took corrective steps on his own without verifying from the company and its directors as soon as the correct information was brought to the notice of the appellant by SEBI. 18. By no stretch of imagination can the conduct of the appellant be described as lacking in due diligence. A lot of time of the Enquiry Officer, the Chairman and this Tribunal has been taken in this case. This time could have been more profitably used for catching hold of the big sharks in security market who attempt to ruin the economy of the country. In this case, it appears, no action has been taken against the very person who did not disclose the information, which he ought to have disclosed, or against the company and yet action is taken against the Lead Manager, who promptly advised the exit option for non-disclosure. We are not suggesting that action be taken against Mr. Rajan or the company as it might have been a bona fide mistake. But what can the lead Manager do if Mr. Rajan or the company fails to provide the information. 19. As stated earlier, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtered Accountant under the Chartered Accountants Act. The Delhi High Court made a reference to a judgment of the Privy Council reported in AIR 1930 PC 144. The Privy Council pronounced that as a broad principle charges of professional misconduct must be clearly proved and should not be inferred from mere ground for suspicion however reasonable or what may be a mere error of judgment or indiscretion. The Privy Council further held that an enquiry in a serious case of professional misconduct should proceed on formulated charges not only in fairness to the person charged with professional misconduct but in order that the evidence may relevantly bear on the particular issue and the evidence should be carefully taken and judged according to the ordinary standard of proof. The Delhi High Court also relied on other pronouncements of court and came to the conclusion that there must be strong proof packed by evidence to hold a person guilty of misconduct as a Chartered Accountant. No other pronouncement of any court has been brought to our notice on the definition of due diligence but it can be safely said that lack of due diligence should run from the facts of each case and ultimately t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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