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TMI Blog2025 (3) TMI 1071X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 11(1) & (4) and Section 11B of the SEBI Act SEBI Act - Securities & Exchange Board of India Act, 1992 passed by the Ld. WTM WTM - Whole Time Member of SEBI SEBI - Securities & Exchange Board of India, whereby the appellant company has been directed, inter-alia, to refund the subscription amounts to the successful investors and to cancel shares allotted to them pursuant to the Initial Public Offer (IPO) of the company on September, 16, 2024. 2. Brief facts of the case are as under:- The appellant is a public limited company engaged in providing Intelligent Transportation Systems (ITS) and automation solution for traffic management using latest technology including an Integrated Command Control Centre Software (ICCCS) for Highway segment. The company is one of the 4 companies eligible to bid for Government contracts for Intelligent Transport Systems (ITS) and its order book includes several projects of Government and PSU, including Advance Traffic management systems (ATMS) projects. Based on its experience and knowledge of ICCCS, the company planned to participate in the Government's flagship Smart City Project and in the expectation of being able to serve as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thereafter, SCN was issued on November 14, 2024 and after conducting inquiry and allowing the appellant an opportunity to cross-examine the witnesses, the final order was passed on December 3, 2024, which is impugned in this appeal. 3. Before us, Mr. Pradeep Sancheti, learned senior Advocate with Mr. Sumit Agrawal, Mr. Rushin Kapadia, Mr. Kavish Garach, Ms. Aditi Sahu, Mr. Akarsh Tripathi, Ms. Mahima Jayan, learned advocates for the appellant and Mr. Gaurav Joshi, learned senior advocate with Mr. Manish Chhangani, Mr. Atul Agrawal, Mr. Abhay Chauhan and Mr. Sumit Yadav, learned advocates for the SEBI and Mr. Tomu Francis, learned advocate with Ms. Zarnaab Aswad, Mr. Apoorva Upadhyay and Mr. Tarun Toprani, learned advocates for the respondent BSE made detailed submissions. 4. Before us, the learned Senior Advocate for the appellant Shri Pradeep Sancheti made the detailed submissions on the following principal grounds:- a) directions in the impugned order are beyond the action proposed in the show cause notice dated November 14, 2024; b) the impugned order is also premised on the allegations, which are admittedly not part of the show cause notice; and c) there is no misstat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se notice to "material misstatement in the prospectus concerning the object of the issue identified during the investigation." It was submitted that the same position has been reiterated in the impugned order in para no. 7 and 8 and the following other two aspects of the investigation have not been addressed: i. intent of diversion of funds through misleading object of the issue; and ii. concealment of the material facts in the prospectus. The learned senior advocate contended that these other aspects may have weighed with the learned WTM in justifying the impugned order, which is an error apparent on the face of the order since the issues which were expressly out of the scope of the show cause notice, found place in the reasoning given by learned WTM (even though not decided in the order). 4.4 With regard to merit of the issue, Mr. Sancheti pleaded that there is no misstatement in the prospectus as alleged in the impugned order, based on which refund of proceeds and cancellation of IPO has been directed. He submitted that the directions have been issued by the learned WTM only by casting doubts on genuineness of the quotation received from M/s OCPL disclosed in the prospect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimates. ............. 4. Details of the objects of the issue : 1. Purchase of Software. The Company is in need of an Integrated Software Control Centre (ICCC) to function as the core operational hub for smart cities. This ICCC will act as the central nervous system, seamlessly integrating various subsystems to optimize urban operations. Offering capabilities such as real-time monitoring, data analytics, and coordinated responses, it aims to elevate governance standards and citizen services. ........ Below is the estimated cost towards purchase of software - Sr. No. Particulars Type Quotation Details Units Quotation Amount (in Lakhs) 1. Computer Application Software with IPR. ICCC Platform for Smart Projects Including Configuration & Integration of ICCC With Various Smart City Applications Like Intelligent Traffic Management, City Surveillance, Digital Services, E-Health Services E-Gov Applications, IOT Controls and Comprehensive AI Based Analytics and Dashboard, to Provide Integrated Workflow For Smart City Functions. Software Quotation Date - May 16, 2024 Quotation from :- OASIS CORPCARE PVT. LTD. Quotation Reference No.: TITPL/PL/01 Validity:- 4 mont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was a charge of non-disclosure of this quotation but the same does not find place in the impugned order. The learned Senior Advocate submitted that the allegation made in the show cause notice that the disclosure made in the prospectus regarding "acquisition" of software from M/s. OCPL was misleading, is factually incorrect as in the prospectus, there was no disclosure regarding "acquisition" of software from M/s. OCPL. With regard to the allegation that the management of appellant company may have been aware of doubtful credentials of OCPL, it was submitted that the appellant had only forwarded the same as also the credentials of the promoters of OCPL, as received from OCPL. 4.6 Mr. Sancheti submitted that no doubts were ever raised against the credentials of noticee company. Even in the impugned order, it is observed that the company has sound credentials, which is evident by the fact that it is already providing Intelligent Traffic Solutions (ITS) for a number of highway projects of the government and its order book is rich with good number of projects from government/government companies. Further, he submitted that the company's profits have been growing at an impressive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OCPL is allegedly a shell company. The learned senior advocate, in this regard, relied upon the decision of this Tribunal in the case of Arshad Warsi & Anr. vs. SEBI Appeal No. 254 of 2023 decided on March 27, 2023 and contended that action cannot be taken on the basis of mere conjunctures and surmises. Relying upon Order 30, Rule 5 of CPC 1908, it was submitted that it is well established that such a preventive measure cannot be undertaken in routine manner and has to be taken only in extreme circumstances. The learned senior advocate submitted that the impugned order will not be in the interest of the investors and will cause irreparable damage to the business of the appellant company. The learned Senior Advocate also pleaded that the order was passed by the same WTM, who was the author of ad-interim ex-parte order and, therefore, the impugned order cannot be considered to be free of bias. 4.9 Keeping in view the above, he urged to consider following alternative pleas as under:- i. Allowing the investors to withdraw their bids as was directed by the NSE in coordination with SEBI, in case of the IPO of C2S Advance System Ltd., where a complaint was filed. ii. Alternatively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o room for doubt that the proposed action of debarring the appellants from accessing the securities market was not exhaustive and that such other directions which the Board is competent to issue under these provisions could also be issued if the allegations enumerated in paragraphs 3 to 23 of the show cause notice were established. We have already observed that the Board is competent to issue such directions as may be necessary to protect the interests of the investors." 5.1.3 Learned senior advocate argued that disclosure is the rule without there being any exception and even a half-truth intended to deceive investors in a prospectus is no better than complete falsehood and submitted that a Regulatory Body like SEBI is fully empowered to take both preventive and corrective actions against such misstatements. In this regard, reliance was placed on the following decisions:- 1. Pramatha Nath Sanyal v. Kali Kumar Dutt [1924 SCC OnLine Cal 115], 2. M.K. Srinivasan &Anr. v. Emperor [1943 SCC OnLine Mad 33]; 3. Kismukh Krishna Sinha v. SEBI [2010 SCC OnLine Del 1448]; 4. Electrosteel Steels Ltd. v SEBI [2019 SCC OnLine SAT 244]; 5. Sandeep Baid v. SEBI [2016 SCC OnLine SAT 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out to OCPL, a company of doubtful credentials with no background in software and in fact met the owner of OCPL only after the respondent had initiated the action for deferring the listing. (iv) The profile of OCPL and its Directors in no way suggests that they are in the business of software making and during the course of inquiry, the entities to which OCPL claims to have supplied software, denied having known OCPL or having any business relation with it. 5.4 The learned counsel submitted that purchase of the software was the major object of the Issue, the importance of which may be gathered by the Board Resolution of the appellant dated May 18, 2024, which states that the said software "shall form an integral part of the object of the issue proposed to be raised through the public issue of the company", however the company's management reached out to an entity with no credentials in software sector, despite themselves being an established software application company in transport sector. 5.5 Regarding the credibility of OCPL, the learned Sr. Advocate drew our attention to the statement on oath of Mr. Kishanlal Kumhar, the erstwhile 100% shareholder of OCPL, who had clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso pointed out that there was inconsistency in the reply of appellant dated October 17, 2024 with the submission of the Merchant Banker M/s Ekadrisht (ECPL) and the Board Resolution dated May 18, 2024. It was brought to our notice that the Merchant Banker in the reply dated September 18, 2024 to BSE had submitted that the decision to 'purchase ICCC Platform Software' was made collaboratively by the management and the purchase department following their purchase policy and vendor selection process, which was relied upon by the Board of Director. Similarly, in the Resolution passed by the Board of Directors dated May 18, 2024 the Board had 'taken note and approved to purchase a highly specialized computer application software ICCC platform for smart city projects from the IPO proceeds'. However, in its reply dated October 17, 2024 the appellant had submitted that 'Trafiksol wanted to outsource some modules of the development work and jointly develop the ICCC software with a professional software company". The learned senior advocate submitted that the same was also not disclosed in the prospectus. Regarding appellant's submission vide email dated October 17, 2024 stating that 'com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the credentials of the appellant company is of no assistance in the matter. On the other hand, company's experience and knowledge of transport related software puts greater onus on it in selecting the right software provider. (ii) As per the provisions of paragraph (9) of Schedule-VI of the ICDR Regulations, 2018, evidently disclosure of date of a quotation in the prospectus is needed, where contract has not been awarded and hence the claim by the appellant that such a quotation was for budgetary estimate purposes is not considered as unusual. Further, the validity of such a quotation was for four months out from the date of the quotation i.e. May 16, 2024 which would have expired on September 15, 2024. The appellant claims to have an alternative quotation from M/s. Logicial dated August 29, 2024, though the same was not disclosed in the DRHP or the final prospectus filed. The appellant has vehemently argued that it is in negotiations with the said company, whose quotation of Rs. 15.50 crore (Ex-GST) was in similar vicinity to quotation by M/s. OCPL. (iii) It appears that BSE did not make any deeper scrutiny other than ticking the boxes in respect of DRHP, whereas a specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany may change vendor or quotation per se. 6.3 We also note that the decision of the Board of directors of the Company in 'approving' the purchase of software without due verification of credentials of the vendor and in utter disregard to its own purchase policy, which provides for taking at least three quotes for such an indent, did not the desired corporate governance norms. Surprisingly the purchase committee of the company, which ought to have examined the credentials of the vendor in details and assessed whether the vendor had deserved capability to provide ICCC software in the given time-frame, cleared the quote merely on the basis of GST returns filed for last two months, which obviously are of no technical assistance for deciding purchase of software. The committee also ignored that there was no business of OCPL during the FY 2020 and FY 2021 for which financials were available and turned blind eye on the absence of financials for the last 2 financial years i.e. FY2022 and FY 2023. We find that even the merchant banker has not done proper due diligence and has merely gone by the decision of the Board of directors for carrying out due diligence with regard to the Oasis. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal responsibility to its shareholders and when it comes with an Issue for public at large, it is required to ensure that the disclosures made in the prospectus are not only adequate and correct but genuine. The appellant Company has failed to meet the said requirements. 6.7 With regard to the other arguments of the appellant Company that the impugned order has exceeded the scope of SCN, the learned Senior Advocate for the respondent is right in his submission that the language of show cause notice fully covers any suitable directions which could also include the directions to refund the subscription amount to the successful allottees and hold that the reliance placed by the learned Senior Advocate of the appellant on the Gorkha (supra) and other decisions, is misplaced. We have also taken note of the various decisions cited by Shri Joshi, learned Senior Advocate with regard to powers of SEBI under Section 11B to issue directions for refund and find merit in relying upon them. 6.8 The appellant has submitted that instead of directing mandatory refund of the money and cancelling the shares, investors may be given an option to withdraw and those who want to continue with the Compan ..... 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