TaxTMI 
TaxTMI 
2014 (2) TMI 1312
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....nafter referred to as ESL) in 2009. 2. Appellant was Book Running Lead Manager (hereinafter referred to as BRLM or Merhant Banker), alongwith Ashika Capital Limited ("Ashika") as co- Book Running Lead Manager for IPO of ESL during 2009 and Resondent have held that Appellant failed to maintain satisfactory standards in all aspect of offering, veracity and adequacy of disclosures in prospectus of ESL, in their role as BRLM, and thus failed to exercise due diligence, since details of Inter-Corporate Deposits (ICDs) availed by ESL and purchase orders issued to certain entities by ESL, availed by ESL between January 12, 2009 to January 23, 2009 were not incorporated by Appellant in prospectus dated February 17, 2009 and filed on February 20, 2009 and hence Appellant failed to comply with clauses 5.1 (5.1.1, 5.1.2), 5.3.3.2 (ii) under chapter 5 of SEBI (DIP) Guidelines, 2000 read with Regulation 111 of SEBI (ICDR) Regulations, 2009. 3. BRLM is required to exercise due diligence at all stages of issue of IPO and after issue of IPO for post issue activities and following submissions were made by BRLM when show cause notice was issued to BRLM by Respondent for non compliance with due ....
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....ed and signed by all members of Board of Directors of ESL. 10. Though liability of merchant banker continues after completion of issue process, it may be in relation to disclosures/contents of offer document and not in relation to acts or deeds of ESL after the completion of issue. It may be noted that Ashika capital Ltd. was acting as co-BRLM in the issue with a post-issue responsibility and co-ordination cast upon them. 11. Show Cause Notice has not established any violations committed by Appellant. 12. Appellant submitted that it was pre-issue BRLM in IPO of ESL while post issue BRLM was Ashika Capital Ltd. Appellant further submitted that in IPO of ESL RHP was filed on January 20, 2009 and final Prospectus was filed with ROC, Chennai on February 20, 2009. In between these two dates, ESL received ICDs from entities mentioned in SCN and no communication was received by Appellant from ESL for updating statements made in RHP. Appellant stated that he has already submitted copies of undertaking given by Directors of ESL that statements made in prospectus were true. Appellant also submitted that when he handles IPO, he carries out random checks to verify authenticity of enti....
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....anker shall satisfy himself about all the aspects of offering, veracity and adequacy of disclosure in the offer documents. 5.1.2 The liability of the merchant banker as referred to clause 5.1.1 shall continue even after the completion of issue process." ..... "5.3.3.2 In addition to the due diligence certificate furnished along with the draft offer document, the Lead Merchant Banker shall also: (ia) Where the second proviso to clause 6.3, or clause 6.39 are applicable, certify that the issuer company is complying with conditions (a) and (b) laid down in 2nd proviso to clause 6.3 or with conditions (a), (b) and (c) laid down in clause 6.39, as the case may be; (ib)) certify that all amendments suggestion or observations made by Board have been incorporated in the offer document; (ii) furnish a fresh "due diligence" certificate at the time of filing the prospectus with the Registrar of Companies as per the format specified at Schedule IV. (iii) furnish a fresh certificate immediately before the opening of the issue that no corrective action on its part is needed as per the format specified at Schedule V. (iv) fur....
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....P in IPO was filed on January 20, 2009 and final Prospectus was filed with the ROC, Chennai on February 20, 2009. In between these two dates, i.e. from January 20, 2009 to February 05, 2009 certain ICDs were taken by ESL and money was paid to entities. However, in Prospectus dated February 17, 2009 and filed on February 20, 2009, it has been stated that "Bridge Loan We have not entered into any bridge loan facility that will be repaid from the Net Proceeds." It is observed from material made available on record that this statement was factually incorrect in view of ICDs/ loans taken by ESL between January 20, 2009 and February 05, 2009. Thus, adequate disclosures regarding the ICDs taken by ESL were not made in Prospectus and this points towards inadequate due diligence on the part of Appellant. 18. According to Clauses 5.3.3.2 and 5.3.3.2 (ii) under Chapter V of SEBI (DIP) Guidelines, Appellant, as the BRLM for issue was under obligation to issue fresh due diligence certificates in prescribed formats at various stages in addition to the due diligence certificate furnished along with the draft offer document: i) at time of filing offer document with Registra....
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....and Purchase Orders placed). Appellant as BRLM in IPO of ESL as per MOU between Appellant and ESL had obligation of ensuring that offer document contains true and correct disclosures and does not contain any statement or information that is false or misleading, or contain any material omission and Appellant had failed to carry out its obligation in this matter. 24. According to the ICDR Regulations due diligence has been explained as follows: "Due diligence. 64. (1) The lead merchant bankers shall exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents....." 25. In view of above, it was incumbent upon Appellant that as BRLM to satisfy itself that all disclosures made in Prospectus were correct, adequate, etc. In the present case BRLM failed to verify adequacy of disclosures in offer document and failed to update offer document regarding ICDs amounting to Rs. 4 crores availed by ESL in spite of its due diligence certificates dated February 04, 2009 and February 06, 2009. Further, Prospectus of ESL in page no. 106 states that: "The Book Running Lead....
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.... correct and not misleading." 28. Thus, it was incumbent upon Appellant to ask for any documents from ESL to verify correctness of statements/ disclosures made in offer document. Had Appellant exercised its right as per MOU to call for at least bank account statement of ESL for period of one month before filing the two due diligence certificates discussed in paras 22 and 23 it would have come to light of BRLM that ESL had taken ICDs amounting to Rs. 4 crores. It was responsibility of Appellant to carry out fresh due diligence at both stages before filing RHP with ROC as per Clauses 5.3.3.2 and 5.3.3.2 (ii) under Chapter V of SEBI (DIP) Guidelines. In order to provide correct, appropriate, relevant and all material disclosures to investors it was incumbent upon Appellant to carry out due diligence and Appellant should have exercised its right to call for documents instead of awaiting information from ESL to verify veracity of the disclosures made in offer document. Moreover, Appellant could also have sought copies of Purchase Orders placed by ESL above a certain value for period of at least one month before filing of the two due diligence certificates mentioned in paras 20 and 22....
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....lable at page 135 of Memorandum of Appeal) from Board of Directors of ESL, which stated that "All the statements in this offer document are true and correct". Appellant also states that he had also relied on certificate dated February 12, 2009 issued by Raj and Ravi Chartered Accountant (available at page 428 of MOA) which stated that no Debt/Short Term Debt/long term debt existed. However, a closer look at this certificate, makes it apparent that this certificate is statement of capitalization and brings out if any debt whether long term/short term has been capitalised. This certificate is for a totally different purpose and may be correct for what it is stated in it, but it is not for stating what Debt/Short Term Debt/Long Term Debt exists in the company i.e. ESL as on 12th February, 2009. 32. Since it has already been stated that statement of Appellant that he carries out random checks to verify authenticity of entries mentioned in prospectus and undertook to submit documents in support of same, but from only two document- submitted by Appellant nothing material can be inferred, since first is a declaration from Board of Directors that all statements in offer document are cor....
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.... is stating that Appellant has filed in his duty to carry out due diligence, at any stage of IPO of ESL and had failed not only the investors in this issue but has done considerable harm to security markets, at large. 35. Dealing with another pleading of Appellant that he is responsible for pre-issue BRLM in IPO of ESL and that post issue BRLM was Ashika Capital Ltd. but inter-se allocation of responsibilities between Lead Managers, as mentioned in prospectus, show that Appellant has been referred to as Book Running Lead Manger and Ashika Capital ltd. as Co-Book Running Lead Manager to the issue and Appellant had post-issue responsibilities in IPO of ESL. Thus this contention of Appellant that it was only pre-issue BRLM in IPO of ESL, is not correct. 36. The case law submitted by learned counsel appearing for Appellant of JM Mutual Fund and JM Capital Management Pvt. Ltd. in Appeal no.39/04 and 39A/04 dated 22.11.2004 before SAT due diligence has been taken as "such a measure of prudence, activity or assiduity, as is properly to be expected, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but....
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....ed totally on documents/furnished to him by others, even when these documents were meant to convey different facts than what they were taken to be conveying, a professional person having wide knowledge and experience in bringing out 125 IPOs during its existence, is expected to show better professionalism than was shown by Appellant. In the circumstances, this Tribunal expects better standards of performance from professionals, who charge reasonably good fee from clients and who bring out documents (prospectus in this case), which are relied on by investors, at large, to take informed decisions regarding investments in scrips/IPO and this standard of professionalism should be higher than a reasonable man with ordinary prudence will demonstrate in the matter of due diligence but in present case no mark of professionalism can be seen from Appellant, who was merely a certificate issue machine on dates when it was due, without undertaking any due diligence whatsoever. 42. Case law cited by Respondent are discussed below: In case of World Link Finance Limited vs. SEBI in appeal no.36 of 2007 decided on April 24, 2007 by SAT, Appellant was not held to not have exercised due diligen....
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....ess of the letter of offer is a fundamental responsibility of the merchant banker which he has to discharge by exercising due diligence. In fact, an incorrect or wrong information in a letter of offer or other similar documents issued for the benefit of investors in general could lead to serious consequences including loss of credibility for the market operators and for the regulatory system. This kind of failure has to be taken very seriously by the market regulator. In this case, there is no material before us to show that the appellant had taken any proactive step at all to find out the correct information or to independently verify the information available. No specific query in this respect was made from the right sources of such information namely the target company and the stock exchanges though it was known that information about the listing of the shares of the target company in each stock exchange was specifically required to be disclosed in the letter of offer. Instead, the appellant made a presumption that all shares were listed in the four stock exchanges of Chennai, Mumbai, Delhi and Ahmedabad and left it to others to point out if that was not the fact. This is certai....