2019 (4) TMI 595 - AT - SEBI

Tribunal Upholds Finding of Violation in IPO Disclosures

The Tribunal upheld the Adjudicating Officer's finding of a violation of Regulation 57 due to inadequate disclosures and lack of due diligence by the ... Non Disclosures in Prospectus for IPO - Unsecured bridge loan taken not disclosed in the Prospectus for the IPO - violation of provisions of Regulation 64(1) of the ICDR Regulations holding that a crucial fact was not disclosed in the prospectus and therefore the Adjudicating Officer imposed a penalty u/s 15HB of the SEBI Act - HELD THAT:- Admittedly a loan of ₹ 5.94 crores was taken immediately before the issuance of the IPO which admittedly was not disclosed in the prospectus. The means and sources of this loan was not disclosed to the public in the prospectus. In the absence of this material fact the investors were unaware of this financial liability as well as the fact that this loan would be paid from the IPO proceeds. Such information was required to be disclosed in the prospectus. Non disclosure was in violation of Regulation 60(4) of the ICDR Regulations which requires disclosure of all material developments. Loans taken prior to the issuance of the IPO has a bearing in as much as the said loan was eventually paid from the IPO proceeds. Non disclosure was in violation of Regulation 60(4) of the ICDR Regulations which requires disclosure of all material developments. Loans taken prior to the issuance of the IPO has a bearing in as much as the said loan was eventually paid from the IPO proceeds. In our opinion, this was a material fact which was required to be disclosed in the prospectus. Thus, the Adjudicating was justified in holding that there was a violation of Regulation 57 of the ICDR Regulations. We find that quite apart from the fact that the loan taken was not disclosed in the prospectus, a wrong statement was made in the prospectus that the Company had not raised any bridge loan against the proceeds of this issue. This statement was factually incorrect as the loan of ₹ 5.94 crores was clearly a bridge loan. The Merchant Banker is required to present the Company’s information to the investors in a fair, concise and unambiguous form. By not furnishing full disclosures and in fact allowing false information to creep in the disclosures has misled the investors. Thus, we are of the opinion that the appellant did not exercise due diligence and did not disclose fairly in the offer document. We are, thus, of the opinion that the imposition of penalty which could extend up to ₹ 1 crore under Section 15HB imposed by the Adjudicating Officer in the given facts is just and reasonable. In the light of the aforesaid, we do not find any error in the impugned order. The appeal fails and is dismissed. Issues:Violation of Regulation 64(1) of ICDR Regulations and Regulation 13 of Merchant Bankers Regulations by Appellant.Analysis:The appeal was filed against an order imposing a penalty under Section 15HB of the SEBI Act for violations of Regulation 64(1) of the ICDR Regulations and Regulation 13 of Merchant Bankers Regulations. The appellant, a Merchant Banker and Book Running Lead Manager for an IPO, failed to disclose an unsecured bridge loan in the prospectus, leading to the penalty. The Adjudicating Officer found the appellant in violation of Regulation 64(1) of the ICDR Regulations and imposed a penalty of Rs. 8,00,000. The appellant argued that disclosures were adequate as a loan was mentioned in the prospectus and claimed the undisclosed loan was immaterial. However, the respondent contended that the appellant violated Regulation 57 of the ICDR Regulations, indicating lack of diligence.The Tribunal referred to Regulation 57 of the ICDR Regulations, emphasizing the need for full disclosures in the offer document to enable informed investment decisions. It was noted that the undisclosed loan taken before the IPO was a material fact affecting investors' understanding and should have been disclosed. The non-disclosure violated Regulation 60(4) of the ICDR Regulations, which mandates disclosure of all material developments. The Tribunal upheld the Adjudicating Officer's finding of a violation of Regulation 57 due to inadequate disclosures and lack of due diligence by the appellant.Regarding the loan classification, the Tribunal rejected the appellant's argument that the loan was not a bridge loan but a general loan. It clarified that a loan of less than one year, like the undisclosed loan, is typically considered a bridge loan. The Tribunal found the Adjudicating Officer's classification of the loan as a bridge loan to be correct, dismissing the appellant's contention.The Tribunal further addressed the penalty imposed, emphasizing the importance of accurate disclosures in IPOs. It highlighted the Merchant Banker's fiduciary role in ensuring fair and complete disclosures to investors. The failure to provide full disclosures and allowing false information to be included was deemed misleading to investors. The Tribunal concluded that the penalty imposed by the Adjudicating Officer, despite being higher than that on the Company and its Directors, was justifiable given the severity of the violations. Consequently, the appeal was dismissed, affirming the penalty imposed on the appellant.