TaxTMI 
TaxTMI 
2016 (5) TMI 1596
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....y") in its capacity as Book Running Lead Manager ("BRLM"). The 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 ("ICDR") and Regulation 13 of the SEBI (Merchant Bankers) Regulations, 1992 read with Clauses (1) to (7) and (21) of the Code of Conduct prescribed under Schedule III thereof. 3. The facts leading up to the present Appeal are such that the Appellant is a registered Category 1 Merchant Banker with the Respondent. The Appellant was appointed as BRLM for the IPO of the Issuer Company on 28th September 2010 as per a Memorandum of Understanding executed between the Appellant and the Issuer Company. Draft Red Herring Prospectus ("DRHP") was filed by the Appellant with SEBI for its approval on 10th November, 2010. SEBI issued a letter to the Appellant dated 21st January, 2011 seeking certain clarifications pertaining to the DRHP. One such clarification revolved around whether Mrs. Richa Mittal, who had received a preferential allotment of 200,000 shares....
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....y, the IO came to be passed on 3rd March, 2014. Hence, the present Appeal. 5. The Appellant submit that they are being falsely accused of failing to exercise due diligence and ensuring the veracity of disclosures as is required by a BRLM under the ICDR Regulations and Merchant Banker Regulations, specifically in two matters pertaining to the IPO of the Issuer Company i.e. the disclosure of "Gadeo Electronics" ("Gadeo") as a related party and the disclosure of the additional ICD loans taken by the Issuer Company. 6. In response to the Respondent's erroneous allegation for failure on part of the BRLM to disclose the relationship between Mrs. Richa Mittal, majority partner at Gadeo and Mr. Sanjeev Kumar Mittal, Director of the Issuer Company as a related party transaction with respect to the supposed purchase of land/property, the Appellant submits that the transaction was in fact for taking over the partnership of Gadeo by the Issuer Company, and not for the purchase of land/property. It is also argued by the Appellant that it has correctly relied on multiple documents, the absence of which would have alerted the BRLM to the direct or indirect relationship between the Membe....
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....tain any untrue statement or material omission and there was no material change in respect of the financial position or short term or long term debt since the date of the last balance sheet. 8. Based on the aforesaid facts, the Appellant submits that the BRLM is not required to operate with the assumption that its clients are dishonest. 9. Per Contra, the Respondent submits that the Appellant has failed to exercise due diligence on various counts while preparing the RHP and Prospectus and ensuring correct disclosures therein. The first allegation pertains to the non-disclosure of the relationship of the entity from which the issuer had acquired land/property and the disclosure of transactions as related party transactions in the RHP/Prospectus. It is contended that the Appellant has followed a casual and passive approach while verifying the information furnished by the Issuer Company and mechanically disclosing the same in the RHP and Prospectus. The Appellants failed to disclose the related party transactions entered into by the Issuer Company with Gadeo under the heading of 'related party transactions' in the RHP and the Prospectus with respect to Mrs. Richa Mittal ....
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.... exercise significant influence, are covered for the purpose of related party disclosures. 11. The second allegation pertains to the non-disclosure of ICD loans of Rs. 7 crore prior to the date of filing of RHP and Rs. 8 crore after filing the RHP but before the date of filing of Prospectus. The Respondent brings attention to the responsibilities of the BRLM with respect to the IPO viz., inter alia, to exercise due diligence at each and every stage of the IPO; to confirm that it has examined various documents and other material in connection with the finalization of the RHP and Prospectus and give confirmation and certifications on the basis of the same; to certify that the disclosures made in the RHP and Prospectus are true, fair and adequate to enable investors to make a well informed decision and that the disclosures are in accordance with the requirements of the Companies Act and the ICDR regulations; to certify that applicable disclosures mandated under the ICDR regulations have been made in addition to the disclosures which, in its view, are fair and adequate to enable investors to make a well informed decision; to comply with the regulations pertaining to advertisement un....
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....to our notice that the Issuer Company tried to hoodwink the Appellant time and again and did not make true disclosures and in fact took active measures to keep the Appellant in dark as is evidenced by a number of actions on part of the Issuer Company. In particular, letter dated 21st January, 2011 issued to the Appellant by the Issuer Company which specifically stated that Mrs. Richa Mittal was not related to the Promoters or Directors of the Issuer Company. 14. We have heard the learned senior counsels for both the parties and analysed the appeal, the written submissions and other documents put forth during the course of the hearing before us. 15. Before we delve into an analysis of the submissions made before us, it may not be out of place for us to mention here that every offer document, including the DRHP in the present case, is required to be presented to SEBI for its vetting, approval and concurrence before it is filed before the ROC. Every draft document is to be filed by an MB on behalf of the Issuer Company for public consumption, however, this is done only after SEBI issued exhaustive comments, after duly vetting the draft document and requiring the MB to incorporat....
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....on Conditions for Public Issues and Rights Issues. Regulation 4 contained in this chapter provides for initial steps to be taken and conditions to be fulfilled by an issuing company before the filing of the draft offer document. This regulation needs to be read with regulations 25 and 26. Regulation 25 states that on the day of filing the draft offer document with SEBI and with the ROC, all conditions prescribed in Chapter 3 should be met with Regulation 26. Regulation 26 puts forth certain conditions which need to be satisfied by the IC before an IPO can be made. Regulation 5 enshrined in Chapter 2 provides for the Appointment of Merchant Bankers and other intermediaries which lays down that the Issuer Company shall appoint merchant bankers, one of whom shall be a lead merchant banker. The Issuer Company shall also appoint other intermediaries registered with SEBI in consultation with the lead merchant banker. It shall be the duty of the MB to independently evaluate the intermediaries and, accordingly, advise the IC regarding their appointment. Regulation 6 deals with the Filing of Offer Documents and puts forth that an IC shall be eligible to make a public issue or a rights issue....
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....f 21 days as per Regulation 9 for the public's comments, the merchant bankers shall file with SEBI a statement giving information of the comments received by them or the IC on the draft offer document during that period and the consequential changes, if any, to be made in the draft offer document. 20. Regulation 12 puts the responsibility of dispatching the offer document and other issue material including forms for ASBA to the designated stock exchange, syndicate members, underwriters, bankers to the issue, investors' associations and Self Certified Syndicate Banks in advance on the MB. Regulation 13 provides for underwriting obligations that if the book building process is adopted to be imposed upon merchant bankers and book running lead managers. It lays down , such issue shall be underwritten by book runners or syndicate members. The issuer shall enter into underwriting agreement with the book runner, who, in turn, shall enter into underwriting agreement with syndicate members. If the syndicate members fail to fulfill their underwriting obligations, the lead book runner shall fulfill the underwriting obligations. 21. Chapter 3 deals with Provisions as to Public Is....
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....ssue is released to the IC as per section 73 of the Companies Act, 1956. Finally, Regulation 51A provides that the information provided in the offer document shall be updated annually by the IC in accordance with the manner prescribed by SEBI. 22. Chapter 5 deals with Manner of Disclosures in the Offer Documents. Regulation 57 thereof deals with the manner of disclosures in the offer document and lays down that the offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision. 23. Chapter 6 deals with General Obligations of Issuer and Intermediaries with respect to Public Issue and Rights Issue. As per Regulation 63, the IC shall appoint a compliance officer who shall be responsible for monitoring the compliance of the securities laws and for redressal of investors' grievances. In accordance with Regulation 64, the lead merchant banker shall exercise due diligence and assure himself about all the aspects of the issue including the accuracy and satisfactoriness of disclosure in the offer documents. The MB shall further call upon the issuer, its promoters or directors to fulfill their....
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....es of taking over the partnership firm, Gadeo. We have perused the Memorandum of Understanding and it appears that the Issuer Company was purchasing the property in possession of the firm, i.e., immovable property situated at B-60, Sector 57, Noida by taking over Gadeo for a total consideration of Rs. 5.6 Crore. c) Out of the Rs. 5.6 Crores, part payment was made to Mrs. Richa Mittal through the transfer of 2,00,000 shares in her favour. d) Further, the Memorandum of Understanding dated September 1, 2009 was only a Memorandum of Understanding and not a fully executed agreement. In fact, as evidenced by Clause 3(e) of the Memorandum of Understanding, the parties agreed to execute a final agreement giving effect to the intention of selling the property in question, as envisioned in the Memorandum of Understanding. For all intents and purposes, this was an understanding to execute an agreement, and not itself a transaction transferring the said property. e) It is a matter of fact that Memorandum of Understanding dated September 28, 2010 executed between the Appellant and the Issuer Company whereby the Appellant was appointed as Lead Manager. As per the Memor....
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....ppellants from Mr. Sanjeev Mittal stating that the Issuer Company had not purchased any property in the foregoing two years and did not intend to purchase any property in which Mr. Sanjeev Mittal had or will have a direct or indirect interest or in respect of any payment made thereof. h) Undertaking dated June 11, 2011 given to the Appellant by the Issuer Company that the Appellant would be apprised of any changes in the functioning or status of the company. i) An Underwriting Agreement dated July 16, 2011 was entered into between the Appellant and the Issuer Company as per provisions of the ICDR Regulations which contains the following unequivocal undertakings: * Clause 9.1(a)(i) - There shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business, management, properties or operations of the Company, that, in the judgment of the Underwriter, are material and adverse and that makes it, in the judgment of the Underwriter, impracticable to market the Shares or to enforce contracts for the sale of the Shares on the terms and in the manner contemplated in the Red ....
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....Company included in the Red Herring Prospectus and the Prospectus to be filed with the RoC have been prepared, and will be prepared, in accordance with the applicable provisions of the Companies Act and applicable provisions of the SEBI (ICDR) Regulations. The Auditors who have certified such financial statements are independent chartered accountants within the rules of the code of professional ethics of the Institute of Chartered Accountants of India. The summary of and selected financial data of the Company contained in Red Herring Prospectus, and the Prospectus to be filed with the RoC, have been derived from such financial statements. * Clause 11.1(z) - The representations and warranties made by the Company in this Agreement are true and correct. j) Letter dated January 21, 2011 from SEBI seeking clarification from the Appellant regarding certain information provided in the DRHP, of which item No. 5 enquired about the status of Mrs. Richa Mittal and her connection with, if any, to any Directors/Promoters of the Issuer Company. k) The Issuer Company's response dated February 7, 2011 was issued to the Appellants stating categorically that Mrs. Richa....
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....General Notice for Disclosure of Interest of Directors were examined by the Appellants, specifically including the ones submitted by Mr. Sanjeev Mittal for the financial years ending March 31, 2010 and March 31, 2011 and even this were conspicuously silent regarding Mr. Sanjeev Mittal's relationship with Mrs. Richa Mittal or for that matter, regarding any interest in Gadeo. e) The Appellants even inspected the minutes of the Board meetings of the Issuer Company held on August 19, 2009 and May 25, 2010, in which there was nothing to suggest that Mr. Sanjeev Mittal had any interest in the transaction with Gadeo. 27. Having, thus, recapitulated the facts as are borne out from the records, we now turn our attention to the legal provisions dealing with the disclosure of related party transactions in offer documents. Section IX of Part A of Schedule VIII of ICDR provides for the guidelines regarding disclosures on financial statements. It is stipulated therein that all the financial information sought as per these provisions must be certified by auditors who hold a valid certificate issued by the Peer Review Board of the ICAI. Para (B)(12) of Section IX deals specifically....
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.... 18 defines "Relative" as under: 10.9. Relative - in relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings with the reporting enterprise." "Para 12 of AS 18": "12. An enterprise is considered to have a substantial interest in another enterprise if that enterprise owns, directly or indirectly, 20 per cent or more interest in the voting power of the other enterprise. Similarly, an individual is considered to have a substantial interest in an enterprise, if that individual owns, directly or indirectly, 20 per cent or more interest in the voting power of the enterprise." "Para 14 defines "Key Management Personnel as under": "14. Key management personnel are those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. For example, in the case of a company, the managing director(s), whole time director(s), manager and any person in accordance with whose directions or instructions the board of directors of the company is accustomed to ac....
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.... 3(d) of AS 18 while arguing that even R.K. Mittal's interest in Gadeo would bring the transaction with Gadeo within "related party relationships". However, it is pertinently noted, as argued by the Appellants, that clause 3(e) of AS 18 attempts to explicate the import of clause 3(d) by putting forth that the persons covered by 3(d) must exert significant influence over the Issuer Company. R.K. Mittal with a 2.5% ownership at Gadeo cannot be said to exert such influence. This conclusion is buttressed by clause 12 of AS 18 which states that a person would be seen as having substantial interest in another only if its voting power amounts to 20% or more. It follows, therefore, that it is Richa Mittal's relationship with the persons who hold a controlling interest in the Issuer Company or with the key management personnel at the Issuer Company that would legally determine the status of Gadeo as a related party to the Issuer Company. Applying the law to the facts at hand, we notice that in terms of para 14 of AS 18, Mr. Sanjeev Mittal, owing to his position at as a whole time director at the Issuer Company, falls under the category of Key Management Personnel of the reporting en....
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....that information regarding vested interests vis-à-vis relatives is not available anywhere in the public domain and necessarily needs to be supplied by the company. The modus operandi adopted by the Appellant in this case therefore is acceptable insofar as there is no source in the public domain that provides independent information to establish such an interest and the information provided to the Appellant by the Issuer Company was indeed the primary source of information regarding related party transactions. Furthermore, we have already listed the independent actions undertaken by the Appellants regarding the transaction with Gadeo and we are satisfied that even though the Issuer Company was the primary source as far as the relationship of Mrs. Richa Mittal and Mr. Sanjeev Mittal is concerned, the Appellants did conduct their own due diligence to satisfy themselves regarding the same. 34. Be that as it may, we have noted hereinabove that it has been disclosed in the RHP that Mrs. Richa Mittal and Mr. R.K. Mittal were partners at Gadeo with a profit sharing ratio of 97.5:2.5 respectively. This information, coupled with the fact that both Mr. Sanjeev Mittal, the erstwhile ....
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....ure of the taking of ICDs by the Issuer Company. From a perusal of the documents on record, we note that there are no minutes of board meetings which make a note of any decision of the Board of the Issuer Company to take ICDs. Further, as is clear from Annexure C of the Written Submissions of the Appellants, in an effort to do justice to the exercise of due diligence undertaken by the Appellant, it held around 30-35 meetings with representatives of the Issuer Company between August 6, 2010 and July 19, 2011. This was done in addition to the analysis of several other documents received from the Issuer Company, along with undertakings received from the directors of the same as has been noted above while dealing with the first submission of the Respondent, viz., the one with respect to related party transactions. In relation to this it has been submitted by the Appellant that once the Appellant had concluded its due diligence before the filing of the RHP with SEBI on June 14, 2011, it would have been impossible for the Appellant to conduct yet another extensive exercise of due diligence purely to effect the modifications suggested by the ROC. In this context, after analyzing the conce....
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....CL". Even after recording such a grave finding against the BRLMs, none of the entities faced suspension/cancellation of their certificates of registration. On the contrary, only a monetary penalty of Rs. 1 crore in total was levied on them. 39. Further, on April 6, 2016 an order was passed by SEBI against Keynote Corporate Services Limited (Keynote) and Keynote Capital Ltd. (Keynote capital) in relation to an IPO floated by Emmbi Polyarns Ltd. Keynote was the BRLM for the issue and Keynote Capital was the stock broker and syndicate member and they were both underwriters to the issue. The issue in the matter was regarding allegations made against Keynote and Keynote Capital to the effect that the two noticees had been aiding other known entities such as Concept and Team India to subscribe to the IPO in sizeable quantities. In the absence of this help, the WTM reasoned, the IPO would have most likely remained undersubscribed leading to the triggering of the underwriting obligation of the two noticees or it would have failed resulting in Emmbi having to make refunds to investors. The WTM, therefore, held that unfair and manipulative devices had been used by the noticees to ensure s....