2016 (5) TMI 1596 - AT - SEBI

Tribunal Overturns Excessive Punishment, Partially Allows Appeal

The Tribunal found that although there were some valid concerns regarding the Appellant's lack of disclosure of related party transactions and ICDs, the ... Due diligence obligations of a Book Running Lead Manager - Disclosure of related party transactions in offer documents in accordance with Accounting Standard (AS) 18 - Disclosure of interim corporate borrowings (ICDs) and duty to examine bank statements - Interpretation and application of the ICDR Regulations in vetting offer documents - Proportionality of regulatory punishment imposed by SEBIDisclosure of related party transactions in offer documents in accordance with Accounting Standard (AS) 18 - Due diligence obligations of a Book Running Lead Manager - Whether the transaction with Gadeo and Mrs. Richa Mittal amounted to a related party transaction under AS 18 and whether the BRLM failed in its due diligence by not treating it as such. - HELD THAT: - The ICDR requires disclosures of related party transactions in the offer document to be made in accordance with AS 18, and certified by auditors; once certified and reproduced, the ICDR's due diligence requirements are considered met (paras 27-29). AS 18 confines 'relative' to the exhaustive list in para 10.9 and defines related parties by control or significant influence (paras 27, 29-31). Applying AS 18 to the facts, Mrs. Richa Mittal (97.5% partner in Gadeo) is not within the statutory list of relatives (sister in law) and therefore does not, on that basis alone, qualify as a related party under AS 18; the minority 2.5% partner (R.K. Mittal) likewise lacks the 20% threshold for 'substantial interest' (paras 30-31). The director, Mr. Sanjeev Mittal, is key management personnel and relatives of such personnel are relevant; however, the record showed no explicit documentary source placing Mrs. Richa Mittal within the AS 18 definition and peer review auditors had not treated the transaction as related (paras 30-33). Although certain indicia (same address, disclosure of partnership profit ratio) ought to have put the BRLM on inquiry, the BRLM had obtained and relied upon multiple primary source documents and undertakings from the issuer and had conducted extensive checks identified in accepted due diligence practice (paras 26, 32-35). Those factors were treated as mitigating and, on the law of AS 18 as applied, the BRLM's omission did not amount to a breach so grave as to sustain the full measure of regulatory condemnation. [Paras 31, 32, 33, 34, 35]The transaction with Gadeo did not, on the materials and under AS 18, clearly qualify as a related party transaction; the BRLM had carried out material steps of due diligence and the omission to classify it as related was a mitigating lapse rather than a culpable failure.Disclosure of interim corporate borrowings (ICDs) and duty to examine bank statements - Due diligence obligations of a Book Running Lead Manager - Whether the BRLM failed to discharge due diligence by not discovering and disclosing ICDs taken by the issuer prior to filing of the RHP and between filing of the RHP and the Prospectus. - HELD THAT: - The ICDR requires disclosure of means and source of financing including bridge loans/financial arrangements and any interim financing after filing of RHP must be disclosed (para 11). The Tribunal noted that examination of bank statements would have revealed ICDs and that, although not mandatorily required, a merchant banker should examine bank statements as part of prudent due diligence - a point reinforced by the Tribunal's prior reasoning (para 36). The BRLM held numerous meetings and procured undertakings and documents from the issuer, but did not peruse bank statements for the relevant unaudited period; that omission made the non disclosure of ICDs a valid criticism (paras 11, 36). [Paras 11, 36]The failure to examine bank statements and thereby to detect and disclose ICDs was an omission in the due diligence exercise, but one that, in the facts of this case, constituted a culpable lapse of limited gravity rather than a gross dereliction.Proportionality of regulatory punishment imposed by SEBI - Interpretation and application of the ICDR Regulations in vetting offer documents - Whether the penalty imposed by SEBI (prohibition from taking up new assignments for six months) was proportionate and should be sustained. - HELD THAT: - The Tribunal examined comparative SEBI decisions where serious findings against BRLMs did not result in suspension/cancellation of registration but attracted monetary penalties or shorter prohibitions (paras 38-40). Taking into account that the issuer itself had provided misleading information and took steps to conceal facts from the BRLM, the extent of the BRLM's lapses (non disclosure classification and non perusal of bank statements) were held to be mitigated. Considering the nature of the infractions and precedent, the Tribunal found that the punishment already undergone by the appellant was in excess of what was warranted (paras 37-41). [Paras 38, 39, 40, 41, 42]The remaining prohibition imposed by the Impugned Order is quashed as excessive; the appeals are partly allowed and the remnant punishment is set aside.Final Conclusion: Appeals partly allowed. The Tribunal found that (a) the Gadeo transaction did not, on the record and under AS 18, clearly amount to a related party transaction and the BRLM had performed material steps of due diligence, (b) the BRLM's omission to peruse bank statements and thereby detect ICDs was an actionable but limited lapse, and (c) having regard to mitigating circumstances and precedent, the remaining prohibition imposed by SEBI was disproportionate and is quashed; appeals disposed of with no order as to costs. Issues Involved:1. Alleged failure to exercise due diligence in relation to the disclosure of related party transactions.2. Non-disclosure of Inter-Corporate Deposits (ICDs) taken by the Issuer Company.3. Failure to carry out an independent valuation of assets.Issue-wise Detailed Analysis:1. Alleged Failure to Exercise Due Diligence in Relation to the Disclosure of Related Party Transactions:The Appellant was accused of not exercising reasonable skill and care as a Book Running Lead Manager (BRLM) for the IPO of Bhartiya Global Infomedia Limited, specifically regarding the disclosure of 'Gadeo Electronics' (Gadeo) as a related party and the relationship between Mrs. Richa Mittal and Mr. Sanjeev Kumar Mittal. The Appellant argued that the transaction was for taking over the partnership of Gadeo, not for purchasing land/property, and relied on multiple documents, including auditor reports and declarations from the Issuer Company, which did not indicate any related party transactions. The Respondent contended that the Appellant followed a casual approach and failed to disclose the relationship between Mrs. Richa Mittal and Mr. Sanjeev Kumar Mittal, which should have been apparent from the partnership deeds. The Tribunal noted that the Appellant had conducted due diligence by examining financial statements, auditor reports, and other documents, but did not find any indication of related party transactions. The Tribunal also considered the definitions and requirements under Accounting Standard 18 (AS-18) and concluded that Mrs. Richa Mittal, being the sister-in-law of Mr. Sanjeev Mittal, did not qualify as a related party under AS-18. However, the Tribunal acknowledged that the relationship should have raised suspicion, but the information provided by the Issuer Company and the absence of explicit pointers in the documents mitigated the Appellant's responsibility.2. Non-Disclosure of Inter-Corporate Deposits (ICDs) Taken by the Issuer Company:The Appellant was accused of failing to disclose ICD loans taken by the Issuer Company before and after filing the Red Herring Prospectus (RHP). The Respondent argued that the Appellant did not satisfy itself about the adequacy and accuracy of the information provided by the Issuer Company, thereby failing to comply with the regulations. The Tribunal noted that the Appellant held multiple meetings with the Issuer Company and analyzed several documents, but did not examine the bank statements, which would have revealed the ICDs. The Tribunal held that while the Appellant should have examined the bank statements, the oversight was not so grave to warrant severe punishment.3. Failure to Carry Out an Independent Valuation of Assets:The Respondent initially alleged that the Appellant failed to carry out an independent valuation of assets. However, the Tribunal noted that the Appellant relied on valuation reports provided by statutory auditors and that there was no specific allegation in the Show Cause Notice regarding the valuation of assets. Consequently, this charge was dropped, and the Tribunal did not address this issue in its judgment.Conclusion:The Tribunal concluded that while there was some merit in the charges against the Appellant regarding non-disclosure of related party transactions and ICDs, the punishment already undergone by the Appellant was far in excess of what was deserved. The Tribunal quashed the remaining punishment imposed by the Impugned Order and partly allowed the appeal. All appeals were disposed of with no order as to costs.