Prospectus disclosure violations: false bridge-loan and security-deposit disclosures upheld, while independent directors escaped liability.

SAT held that alleged misutilisation of IPO proceeds for a subsidiary was not proved because the prospectus disclosed the subsidiary's broader business and allowed revision of fund deployment in the ordinary course. However, the statement that no bridge loan had been raised was false where short-term accommodation from a related entity had been taken and repaid after receipt of issue proceeds. The Tribunal also held that amounts received and later repaid as security deposits were material and should have been disclosed in the prospectus. Independent and non-executive directors were not liable, as there was no evidence of their participation in day-to-day management or the impugned transactions, and mere signing of the prospectus was insufficient.

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Issues: (i) Whether the company had misused IPO proceeds or made false disclosures in the prospectus by representing that the issue proceeds would be used for its subsidiary and working capital, including the alleged non-disclosure of a bridge loan and security deposits. (ii) Whether the independent and non-executive directors could be held liable for the disclosure violations.

Issue (i): Whether the company had misused IPO proceeds or made false disclosures in the prospectus by representing that the issue proceeds would be used for its subsidiary and working capital, including the alleged non-disclosure of a bridge loan and security deposits.

Analysis: The Tribunal held that the allegation of misutilisation of IPO proceeds for the subsidiary's lending business was not proved, since the prospectus contained broader disclosures about the subsidiary's business and permitted revision of deployment of funds in the course of business. On the bridge-loan allegation, the Tribunal found that short-term accommodation had been taken from a related entity and repaid after receipt of the issue proceeds, and the prospectus had stated that no bridge loan had been raised; this amounted to a false disclosure. On the security-deposit issue, the Tribunal held that the amounts received and later repaid were material and ought to have been disclosed in the prospectus, regardless of the later explanation offered by the company.

Conclusion: The charge of misutilisation of IPO proceeds failed, but the charges relating to bridge loan and non-disclosure of security deposits were upheld.

Issue (ii): Whether the independent and non-executive directors could be held liable for the disclosure violations.

Analysis: The Tribunal considered the role of the concerned directors and found that the independent directors and the non-executive director were not shown to have been involved in the day-to-day management or the transactions giving rise to the disclosure violations. Mere signing of the prospectus was not treated as sufficient, on these facts, to fasten responsibility for the non-disclosures on them.

Conclusion: The independent directors and the non-executive director were not held liable and the appeals by them were allowed.

Final Conclusion: The company's appeal was allowed only in part with the restraint modified, while the appeals of the independent and non-executive directors succeeded and the adverse order against them was set aside.

Ratio Decidendi: Liability for prospectus disclosure violations cannot be fastened on independent or non-executive directors absent material participation in the company's day-to-day management or the impugned transactions, while material borrowings or deposits affecting an IPO issue require disclosure in the offer documents.

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