2016 (5) TMI 1596 - AT - SEBI

Tribunal Overturns Excessive Punishment, Partially Allows Appeal

Almondz Global Securities Ltd. and Ors. Versus Securities and Exchange Board of India

The Tribunal found that although there were some valid concerns regarding the Appellant's lack of disclosure of related party transactions and ICDs, the ... Issue of IPO - Role of Book Running Lead Manager - Appellant had not employed reasonable skill and care while conducting its due diligence exercise in respect of the IPO of Issuer Company in its capacity as Book Running Lead Manager ('BRLM') - non-disclosure as a related party transaction - Appellant had failed to exercise due diligence with respect to the Issuer Company's IPO which had resulted in certain incorrect and inadequate disclosures in the RHP - Appellant was thus prohibited from taking up any new assignment in the securities market in any manner for a period of six months from the date of the order for allegedly violating provisions of Regulation 64(1) of the SEBI (Issue of Capital and Disclosure) Regulations, 2009 - HELD THAT:- As in accordance with the provisions of the ICDR, the disclosure on Related Party Transactions is to be submitted as a part of the overall financial information to be certified by the auditors. Once the information is so certified, and this certified financial information is reproduced in the offer document, the ICDR's requirements of Due Diligence are considered to be met. As noted above, disclosures on related party transactions need to be made as per para (B)(12) of section IX of the ICDR Regulations which, in turn, states that they must be made in accordance with AS 18. It, therefore, falls to us to consider and decide whether Gadeo or Richa Mittal qualify as related parties in accordance with AS 18. It is evident from a plain reading of the definition of 'relative' as provided under para 10.9 of AS 18 that the relatives covered under the definition are, quite categorically put, the spouse, son, daughter, brother, sister, father and mother who may be expected to influence the key management personnel of the reporting enterprise, in this case, the Issuer Company. This definition is exhaustive in nature. It does not leave scope for the inclusion of relatives by extending the list of relatives to other people. The intention of the law maker in this regard is crystal clear viz., only those relatives particularly mentioned in para 10.9 will be relevant for determining related party transactions. Mrs. Richa Mittal being the sister-in-law of Mr. Sanjeev Mittal is not covered under AS 18. In keeping with AS 18, as per the records, even the peer review auditors have not treated the transaction with Gadeo as a related party transaction. As all documents were duly analysed by the Appellants and there was no information in any of these indicating that the transaction with Gadeo was a related party transaction. It appears that the factum of Mrs. Richa being the sister-in-law of Mr. Sanjeev Mittal was not properly conveyed to the appellant. This is evidenced from the fact that on receiving SEBI's query regarding Richa Mittal's stature with respect to the Issuer Company, the Appellant pointedly asked the Issuer Company whether Mrs. Richa Mittal was connected with the Issuer Company in any manner, and the Issuer Company replied in the negative vide letter dated February 7, 2011 -despite the presence of certain pointers in the information that the Appellants possessed with themselves, it is a matter of fact that nothing was contained in the partnership deed that explicitly pointed towards a relationship between Mr. Sanjeev Mittal and Mrs. Richa Mittal or indicated that she was married to Mr. Sanjeev Mittal's brother. This combined with the fact that AS 18 does not mention a sister-in-law as a relative and that Mrs. Richa Mittal did after all own 97.5% of Gadeo, dwarfing the 2.5% owned by Mr. R.K. Mittal, must be construed as a mitigating factor. Non-disclosure of the taking of ICDs by the Issuer Company - As after analyzing the concept of due diligence in detail in Appeal No. 275 of 2014, we have already held that an MB should also examine bank statement of the issuer company though mandatorily not required. Relying upon the same reasoning we note that had the Appellant looked at the bank statements of the relevant period, the ICDs would have come to light and the Appellant would have been able to reflect the same in the RHP and the Prospectus. Albeit, it is not necessary for a BRLM to look into the bank statements it would have been prudent for the Appellant to peruse the bank statements instead of merely relying on the Statutory Auditor's Report and the statement of the Issuer Company. Although, there is some merit in the charges leveled against the Appellants, as far as non-perusal of Bank statements of the Issuer Company and disclosure of related party transactions is concerned, in view of the fact that the punishment already undergone is far in excess of the punishment which the Appellants deserved against the charges in question, we quash the remnant punishment imposed vide the Impugned Order and partly allow the Appeal. 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.