IPO disclosure due diligence lapses require materiality and proportionality review before imposing market restraint.

A merchant banker's due diligence in IPO disclosures must be assessed by the materiality of the omitted information, the checks actually undertaken, and the proportionality of any sanction. The tribunal noted that the Gadeo transaction raised a disclosure concern because the issuer's materials did not make the family linkage obvious, although the lead manager had reviewed financial records, registers, forms and board minutes and sought clarifications. It also treated the failure to examine bank statements, which could have revealed ICD borrowings, as a lapse in diligence. However, the remaining restraint was found disproportionate in light of the issuer's own incomplete disclosures, and the residual punishment was quashed.

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Issues: (i) whether the book running lead manager failed to exercise due diligence in relation to disclosure of the Gadeo transaction as a related party transaction in the offer documents; (ii) whether the non-disclosure of ICD loans in the offer documents constituted a due diligence failure; and (iii) whether the restraint imposed on the book running lead manager was warranted in the circumstances.

Issue (i): whether the book running lead manager failed to exercise due diligence in relation to disclosure of the Gadeo transaction as a related party transaction in the offer documents.

Analysis: The disclosure regime under the offer document regulations required material related party transactions to be disclosed in accordance with the accounting standard governing related party disclosures. On the facts, the transaction with Gadeo was examined against the concepts of related party, control, significant influence, substantial interest and key management personnel. The relationship of the concerned director's relative fell within the relevant disclosure framework, but the materials supplied by the issuer company did not expressly reveal the family linkage in a manner that would make the connection obvious. The book running lead manager had examined financial statements, registers, forms and board minutes and had also sought clarifications from the issuer company. At the same time, the combination of the partnership structure, shareholding pattern and shared address created suspicion and should have prompted greater caution.

Conclusion: The issue was answered against the book running lead manager only to the extent that additional caution was expected, but the omission was treated as a mitigating lapse rather than a grave violation.

Issue (ii): whether the non-disclosure of ICD loans in the offer documents constituted a due diligence failure.

Analysis: The regulations required disclosure of material financing arrangements and interim financing affecting the issue. The record showed that the book running lead manager had not examined the issuer company's bank statements, and such scrutiny would likely have revealed the ICD borrowings. This amounted to an omission in the diligence process, but it was assessed in the overall context of the issuer company's incomplete disclosures and the stage at which the offer documents had already been substantially processed.

Conclusion: The non-perusal of the bank statements was found to be a lapse, but not one justifying the full severity of the original restraint.

Issue (iii): whether the restraint imposed on the book running lead manager was warranted in the circumstances.

Analysis: The Tribunal compared the present lapses with regulatory action in similar IPO matters and noted that even serious disclosure violations had attracted monetary or limited sanctions rather than prolonged exclusion from the market. The misconduct found here was not treated as so grave as to justify the remaining period of prohibition, especially when the restraint already undergone exceeded what was considered proportionate.

Conclusion: The residual punishment was quashed and the appeal was partly allowed.

Final Conclusion: The order on liability was not fully set aside, but the remaining penal consequence was removed because the lapses did not merit continuation of the restraint in the circumstances.

Ratio Decidendi: A merchant banker's due diligence lapse in IPO disclosures, though actionable, must be assessed for materiality and proportionality of sanction in light of the issuer's own non-disclosures and the extent of diligence actually undertaken.

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