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of <h1>Lead Manager Exonerated in Due Diligence Case | SEBI Criticized for Wrongful Penalty</h1> The Tribunal set aside the order against the Lead Manager, finding they acted with due diligence and promptitude in addressing the non-disclosure of a ... - Issues Involved:1. Non-disclosure of criminal case against the Chairman and Managing Director in the offer document.2. Alleged lack of due diligence by the Lead Manager.3. Corrective measures taken by the Lead Manager.4. SEBI's response and actions.5. Enquiry Officer's findings and subsequent actions.6. Legal standards for professional misconduct and due diligence.Issue-wise Detailed Analysis:1. Non-disclosure of Criminal Case Against the Chairman and Managing Director:The appellant, acting as Lead Manager for the rights issue of Gammon (India) Ltd., faced a complaint from Prashant Glass Works Pvt. Ltd. alleging non-disclosure of a criminal case against the company's Chairman and Managing Director, Mr. Abhijit Rajan. The complaint was lodged with SEBI on 17.10.2001, and SEBI forwarded it to the appellant on 18.10.2001. The appellant sought clarification from Mr. Rajan on 19.10.2001. Mr. Rajan admitted the existence of the criminal case on 12.11.2001, stating it was an oversight.2. Alleged Lack of Due Diligence by the Lead Manager:The core issue was whether the appellant failed in exercising due diligence. The appellant argued that it acted promptly upon receiving the complaint and sought verification from Mr. Rajan. The Tribunal noted that due diligence does not mean acting on unverified information but involves prompt and diligent verification. The appellant's actions were found to be in line with the required standards of due diligence as they sought clarification from Mr. Rajan and subsequently informed SEBI.3. Corrective Measures Taken by the Lead Manager:Upon confirmation of the criminal case on 12.11.2001, the appellant proposed corrective measures to SEBI on 13.11.2001, suggesting disclosure to shareholders and offering an exit option. The appellant sent a draft letter to SEBI for approval on 29.11.2001, which SEBI approved on 5.12.2001. The appellant promptly dispatched letters to shareholders on 6th and 7th December 2001, offering the exit option before the allotment of shares.4. SEBI's Response and Actions:SEBI issued a show cause notice to the appellant on 11.01.2002, alleging non-disclosure of material facts and lack of due diligence. Despite the appellant's detailed response and corrective actions, SEBI proceeded with the enquiry. The Tribunal criticized SEBI for not recognizing the appellant's prompt actions and for wasting time by issuing a second show cause notice on 05.12.2002.5. Enquiry Officer's Findings and Subsequent Actions:The Enquiry Officer acknowledged that the non-disclosure was due to Mr. Rajan's failure to inform the appellant during the due diligence process. However, the officer still faulted the appellant for not acting immediately upon receiving the complaint on 19.10.2001. The Tribunal found this reasoning flawed, emphasizing that the appellant could not have acted on unverified information and had no power to halt the issue without proper verification.6. Legal Standards for Professional Misconduct and Due Diligence:The Tribunal referenced various legal standards, including SEBI (Merchant Bankers) Regulations, which mandate prompt, efficient, and cost-effective professional dealings and providing true and adequate information to investors. The Tribunal also cited judgments emphasizing that charges of professional misconduct must be clearly proved with a higher degree of proof than required in civil suits but less than in criminal prosecutions. The Tribunal concluded that the appellant acted with due diligence and there was no convincing preponderance of evidence to prove otherwise.Conclusion:The Tribunal set aside the impugned order against the appellant, stating that the appellant had acted with due diligence and promptitude. The Tribunal criticized SEBI for not taking action against the actual defaulter, Mr. Rajan, and the company, and for unnecessarily penalizing the Lead Manager. The appellant was exonerated of all charges, and the order of the Enquiry Officer was overturned. There was no order as to costs.
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