Merchant banker penalized for lack of due diligence in public issue prospectus, debarment reduced on appeal.

The appellant, a merchant banker, was found guilty of lack of due diligence in a case involving misleading information in a public issue prospectus. The appellant certified false statements, leading to innocent investors purchasing shares that could not be transferred, resulting in financial loss. The Securities and Exchange Board of India imposed a penalty of debarment from securities dealings for three years. The tribunal upheld the penalty but reduced the debarment period to six months, emphasizing the importance of due diligence in protecting investors and market integrity.

---

---

Issues involved: Whether the appellant as a merchant banker has been guilty of lack of "due diligence" u/s 15T of the Securities and Exchange Board of India Act, 1992.

Summary:

Issue 1: Lack of Due Diligence by the Appellant

The case involved a public issue by M/s Baroda Agro Industries Ltd. in 1994, where the prospectus contained misleading information regarding the lock-in period of shares held by promoters. The shares were actually allotted to non-promoters in 1992 on a private placement basis. The shares were not stamped as non-transferable for the mandatory five-year lock-in period. The appellant, as a merchant banker, certified the misleading statement as true and correct, showing a lack of due diligence. This lack of diligence led to innocent investors purchasing shares that could not be transferred, resulting in financial loss.

Issue 2: Penalty Imposed on the Appellant

The Securities and Exchange Board of India debarred the appellant from dealing in securities or engaging in capital market activities for three years. The appellant argued for a lesser penalty, citing lack of due diligence as the only fault. However, the tribunal found that the lack of due diligence had serious consequences for investors who suffered financial losses. Due diligence is a primary responsibility of a merchant banker, and the appellant's failure warranted a penalty. The tribunal reduced the debarment period to six months, considering no collusion with the company to suppress facts.

In conclusion, the appeal was disposed of with a modified order reducing the debarment period to six months, emphasizing the importance of due diligence in protecting investors and maintaining market integrity.

---