2025 (11) TMI 1039 - AT - SEBI

Appeal dismissed; no interim interference with IPO approval as disclosures and investor informed consent prevailed; s.15T left open

Infrastructure Watchdog Versus Securities and Exchange Board of India, Mumbai, Smartworks Coworking Spaces Limited, Delhi, Ghanshyam Sarda, Kolkata, NS Niketan LLP, Kolkata, SNS Infrarealty LLP, Kolkata, Neetish Sarda, Kolkata

The AT dismissed the appeal, refusing interim interference with the IPO approval. The Tribunal held the income-tax report was indicative and the company ... Infusion or routing of unaccounted money - shell/benami entities and inadequate disclosures in relation to investigations against the Company by various authorities - maintainability of the appeal - whether any interference is called for at this stage - Appellant’s grievance is that SEBI has not carried out investigations pertaining to non-disclosures in the DRHP and RHP and proceeded to approve the IPO of Smartworks thereby failing to discharge its statutory duty of protecting the interests of investors - Per : Justice P.S. Dinesh Kumar, Presiding Officer - HELD THAT:- The Income Tax department has noted in the report that the findings are indicative in nature and detailed efforts need to be made during the course of assessment to ascertain actual quantum of concealed income. We note that the Addendum to RHP dated July 11, 2025 has referred to the Appellant’s letter dated May 21, 2025 and the fact regarding the internal reports of the income tax department stands disclosed. Admittedly, appellant has described itself as an NGO. It has not made any investments. IPO was opened between July 10 to 14, 2025. The anchor investors have invested a day prior to IPO i.e. on July 9, 2025. As on the date of hearing, i.e. July 15, 2025, the issue was oversubscribed by 13 times. It was urged by the respondents that if this Tribunal were to interfere at this stage, the same will have serious adverse consequences on the share price. In our considered view, the Respondents are right in their submission. We say so because of the overwhelming subscription by the investors of which the Qualified Institutional Buyers (QIBs), Foreign Institutional Investors and the mutual funds account for more than 50%. We are convinced that the investors subscribing to the issue have made informed decision as the response has been more positive after the issue of Addendum. Therefore, in our considered view, any interference at this stage would adversely affect the investors and accordingly the answer the question formulated by us in the negative. Maintainability is concerned, having regard to the peculiar facts, we have considered the matter on merits. Therefore, the question of maintainability of an appeal under Section 15T of the SEBI Act, is kept open for consideration in an appropriate case and we make it clear that this decision shall not be treated as a precedent. No interference is called for, we do not find it necessary to record detailed findings with regard to other grounds, namely, the mala-fides of the appellant and its locus. The question of locus by a non-investor is also kept open. Per Dr. Dheeraj Bhatnagar, Technical Member - HELD THAT:- I concur with the order per the Hon’ble Presiding Officer. In continuation of the same, I am adding the following paragraphs. Any information, which may have been subject-matter of a complaint, is shared with the taxpayer through such statutory notices only and not otherwise. The SEBI (ICDR) Regulations require disclosure of such pending proceedings for assessment/reassessment or outstanding claim of tax demand, since the same may have a bearing on the company/investors. No evidence was brought before us suggesting issue of any statutory notice for examining the contents of the complaint, based on information contained in the internal documents of income tax department, pending statutory action. Similarly, no notice of demand pending compliance by appellant was brought before us. Without prejudice, the findings of the report of the Income Tax department shows it as indicative in nature, based on which, further assessment/ reassessment proceedings could be initiated, subject to satisfaction of due process for initiating assessment/reassessment proceeding. In the absence of this, no show-cause notice could be issued and no claim of tax demand be created. Accordingly, till such time such a notice for inquiry is issued, or such inquiry results in notice of demand, no disclosure is called for in terms of Clause 12(A)(1) of Part A of ICDR Regulation. We are informed that the company, through the RHP, has nevertheless made due disclosure in respect of contents of such complaints and given its response, and made it available for inspection for public. Thus, the respondent No. 1 cannot be held to have failed in its duty in respect of compliance by respondent no. 2 with the disclosure requirements under the provisions of Clause 12(A)(1) of Part-A of ICDR Regulation. Appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether interference with an ongoing IPO process is warranted where complaints allege non-disclosure of investigations, routing of unaccounted funds through shell/benami entities and reliance on internal income-tax department reports not reflected as statutory demands. 2. Whether the statutory disclosure regime under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) required disclosure in the offer documents of internal income-tax reports and/or investigatory materials that do not amount to a notice of demand under Section 156 of the Income-tax Act, 1961. 3. Whether SEBI's conduct in approving the Red Herring Prospectus/RHP without taking specific action on the appellant's complaints amounted to failure to discharge its statutory duty to protect investors and warranted intervention. 4. Ancillary: Maintainability of the appeal under Section 15T of the SEBI Act and locus/bona fides of the appellant - whether these grounds bar relief at the interlocutory IPO stage. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether to interfere with the ongoing IPO process in view of allegations of non-disclosure and routing of funds Legal framework: The Tribunal considered its supervisory role vis-à-vis disclosures in offer documents and the need to balance investor protection against the potential market prejudice caused by injunctive intervention in an IPO that has opened/closed and is substantially subscribed. Precedent treatment: The Tribunal referenced its prior approach declining to stall IPOs where the offer document complied with disclosure norms and the public had sufficient information to make informed decisions (principles from earlier Tribunal rulings rejecting intervention in IPO processes). Interpretation and reasoning: The Tribunal examined the timing of complaints, the publication of an addendum to the RHP referring to the complaints and internal reports, and the market response post-addendum (noting material oversubscription across categories including QIBs and marquee anchor investors). It reasoned that (a) the material complained of was disclosed in the RHP and by addendum; (b) QIBs and institutional investors - expected to exercise professional due diligence - subscribed heavily; and (c) intervention at that stage would likely harm investors and market stability, particularly where the disclosure regime and lead-manager diligence mechanisms operate to place relevant material before prospective investors. Ratio vs. Obiter: Ratio - where material allegations and issuer responses are disclosed in offer documents/addenda and sophisticated investors have had opportunity to consider them (manifested by substantial oversubscription), the Tribunal will not ordinarily intervene to stay or derail an IPO absent clear evidence of nondisclosure of a statutory demand or procedurally established claim affecting the company's obligations. Obiter - observations on the adverse consequences to share price and market effects of late intervention. Conclusion: No interference with the IPO was called for at that stage; injunctive relief to restrain the IPO was refused. Issue 2 - Whether ICDR Regulations required disclosure of internal income-tax department reports and analogous investigatory documents absent a statutory notice of demand Legal framework: Clause 12(A)(1) of Part A, Schedule VI of the ICDR Regulations (disclosure of 'Outstanding Litigations and Material Developments') was applied. It distinguishes: (i) actions by statutory/regulatory authorities and (ii) claims related to direct/indirect taxes (to be disclosed as consolidated claims and amounts). The Income-tax Act mechanism (Section 156 demand notice following assessment/reassessment) was treated as the operative event constituting a 'claim' or demand for disclosure under tax items. Precedent treatment: The Tribunal relied on statutory interpretation of the ICDR disclosure items rather than overruling precedent: it aligned with the principle that only pending proceedings or claims having crystallized into demands or show-cause/statutory notices ordinarily require disclosure as per the ICDR schema. Interpretation and reasoning: The Tribunal accepted SEBI and respondent submissions that internal or indicative communications within the tax department, which expressly state that findings are 'indicative in nature' and require further verification by the Assessing Officer, do not amount to a statutory claim or demand. Disclosure items (a) require show-cause / assessment/reassessment proceedings or demand notices to exist before tax claims must be disclosed as 'claims related to direct and indirect taxes'; and (b) require disclosure of actions by regulatory/statutory authorities where such actions have crystallized into statutorily issued proceedings. The Tribunal noted the addendum nevertheless disclosed the appellant's complaints and the issuer's response and that no notice under Section 156 or equivalent statutory demand was shown to be pending. Ratio vs. Obiter: Ratio - internal/informal or indicative income-tax department reports which do not give rise to a statutory notice of demand or show-cause notice ordinarily do not trigger disclosure obligations under Clause 12(A)(1)(iv) (tax claims) or (ii) (actions by statutory authorities) of the ICDR Regulations; disclosure obligations crystallize when statutory proceedings/demands are initiated. Obiter - comments on privacy protections under Section 138 of the Income-tax Act and the irregularity of how internal tax documents reached third parties. Conclusion: The ICDR Regulations did not require disclosure of the internal income-tax reports in the offer document in the absence of statutory demands or proceedings; the RHP and addendum adequately addressed the complaints and responses for disclosure purposes. Issue 3 - Whether SEBI failed in its statutory duty by approving the RHP without acting on the appellant's complaints Legal framework: SEBI's regulatory supervisory role over disclosure and the IPO process, and the lead manager's due diligence obligations under the ICDR Regulations, were considered in assessing whether SEBI's action or inaction warranted judicial interference. Precedent treatment: The Tribunal applied established principles that SEBI is not required to act as a fact-finding criminal investigatory authority in respect of every complaint prior to approval of an RHP where disclosure obligations have been met and no statutory proceedings exist. Interpretation and reasoning: The Tribunal observed that SEBI had forwarded the appellant's May 21 complaint to the lead manager, the issuer issued an addendum addressing the complaint and internal reports, and the RHP already contained disclosure of earlier complaints and responses. SEBI's decision not to refer the matter to investigative agencies or reject the DRHP was treated as reasonable in the IPO context because (a) the specific reliefs sought by appellant (referral to ED/MCA or rejection) were not appropriate steps in the IPO approval process; and (b) there was no material showing actionable statutory proceedings had been withheld from investors. Ratio vs. Obiter: Ratio - SEBI's approval of an RHP will not be treated as a failure to discharge duty warranting intervention where the offer documents (including addenda) disclose the complaints and responses, and no statutory proceedings/demands have been established which should have been disclosed; SEBI's discretion not to initiate or refer for criminal/regulatory investigations in the IPO approval context is not per se reviewable absent clear error. Obiter - remarks on SEBI's role vis-à-vis investigatory agencies and the appropriateness of referrals. Conclusion: SEBI was not held to have failed in its duty; no relief against SEBI's conduct was granted. Issue 4 - Maintainability, locus and bona fides of the appellant raised by respondents (incidental) Legal framework: Section 15T (appeals to the Tribunal by a 'person aggrieved') was noted as the statutory provision governing maintainability, and prior authority stating an appeal must ordinarily be directed against an order was referenced. Precedent treatment: The Tribunal acknowledged precedent requiring an impugned order for an appeal under Section 15T, but - given the facts and urgency - proceeded to decide the matter on merits and expressly left maintainability and locus questions open for future appropriate cases. Interpretation and reasoning: The Tribunal found it unnecessary to determine extensively the appellant's locus or bona fides because the appeal was dismissed on merits; it also observed materials and oral submissions alleging mala fides and familial/personal motivation but did not rest its decision on such findings. Ratio vs. Obiter: Obiter - the Tribunal's reservation of the maintainability and locus questions for another case, and its statement that this decision shall not be treated as precedent on those points. Ratio - none, since these issues were left open and not decided. Conclusion: Maintainability, locus and bona fides were not decided; the Tribunal dismissed the appeal on merits and kept those questions open for determination in a suitable case.