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2014 (2) TMI 1312 - AT - Companies LawMisleading information for IPO - Inadequacy of disclosures in the offer document - violation of provisions of SEBI (Disclosure and Investor Protection) Guidelines, 2000 - Held that - 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 certainly no way to exercise due diligence and we cannot but agree with the Whole Time Member of the Board that the appellant had violated regulation 24(4) of the Takeover Code and clauses 1, 2 and 7 of the code of conduct for merchant bankers. From the foregoing, it is no doubt that Appellant had failed to exercise due diligence which resulted in lack in veracity and inadequacy of disclosures in the offer document, which did not provide investors with a reliable document did mis-lead investors to invest in shares of ESL and hence such non-disclosure had the potential to disturb securities market equilibrium and hence Respondent has rightly held Appellant to failed to comply with clauses 5.1 (5.1.1 and 5.1.2), 5.3.3.2(ii) under chapter V of SEBI (DIP) Guidelines, 2000 read with Regulation 111 of SEBI (ICDR) Regulations, 2009. Regarding quantum of penalty provisions of section 15J of SEBI Act were applied by Respondents and are of the view that investigation report has not quantified profit/loss for the nature of violations committed by Appellant and no quantifiable figures are made available on record to assess the disproportionate gain or unfair advantage and amount of loss caused to an investor or group of investors, and hence penalty of ₹ 10,00,000/- has been imposed considering failure to comply with SEBI (DIP) Guidelines read with SEBI (ICDR) Regulations, 2009. From the above paragraph, it is seen that loss caused to an investor or to a group of investors cannot be quantified but it is certain that investors, as a whole, incurred huge losses as a result of IPO, yet, though Appellant is not wholly responsible for the losses to investors, since there are others who played their role in causing loss to investors, the responsibility of Appellant was major, since he plays the coordinating role in bringing out IPO and is conceived to be the one who certifies veracity and adequacy of all disclosures and had the responsibility of bringing out all relevant fact and to ensure that no material information/fact is withheld is under obligation and has authority to call for all relevant information from company seeking IPO and is expected to carry out due diligence to bring our truth and adequacy of information in IPO at all stages. The penalty is, therefore, upheld and appeal against the impugned order is dismissed. No costs.
Issues Involved:
1. Alleged failure of due diligence by the Appellant in the IPO of ESL. 2. Adequacy and veracity of disclosures in the prospectus. 3. Responsibility and liability of the Book Running Lead Manager (BRLM). 4. Impact of non-disclosure of Inter-Corporate Deposits (ICDs) and purchase orders on investors. 5. Quantum of penalty imposed by SEBI. Detailed Analysis: 1. Alleged Failure of Due Diligence by the Appellant in the IPO of ESL: The Appellant, Keynote Corporate Services Ltd., was accused of failing to exercise due diligence as the Book Running Lead Manager (BRLM) for the Initial Public Offering (IPO) of Edserv Softsystems Ltd. (ESL). The Securities and Exchange Board of India (SEBI) held that the Appellant did not maintain satisfactory standards in all aspects of the offering, including the veracity and adequacy of disclosures in the prospectus. The Appellant was found to have failed to incorporate details of Inter-Corporate Deposits (ICDs) availed by ESL and certain purchase orders in the prospectus, which were crucial for investor decision-making. 2. Adequacy and Veracity of Disclosures in the Prospectus: The Appellant was required to ensure that all material disclosures were made in the prospectus. However, the Appellant failed to disclose ICDs amounting to Rs. 4 crores taken by ESL between January 20, 2009, and February 05, 2009, and the subsequent repayment of these ICDs from IPO proceeds. This omission was deemed a significant lapse in due diligence, as it misled investors regarding the financial status of ESL. The Appellant's defense that ESL did not provide this information was not accepted, as the BRLM is expected to actively verify and ensure the accuracy of all material disclosures. 3. Responsibility and Liability of the BRLM: The BRLM's responsibility extends beyond the pre-issue stage and includes post-issue activities. The Appellant's claim that it was only responsible for pre-issue activities was refuted by the inter-se allocation of responsibilities, which showed that the Appellant had post-issue responsibilities as well. The Appellant was required to issue fresh due diligence certificates at various stages, including before the opening of the issue and after it had opened but before it closed for subscription. The Appellant failed to ensure that the prospectus was updated with material disclosures, thereby violating SEBI (DIP) Guidelines and SEBI (ICDR) Regulations. 4. Impact of Non-Disclosure of ICDs and Purchase Orders on Investors: The non-disclosure of ICDs and purchase orders was considered material information that could significantly impact investor decisions. The Appellant's failure to disclose these details in the prospectus misled investors and affected their ability to make informed decisions. The Tribunal emphasized that due diligence involves actively seeking out material information and not merely relying on the issuer company to provide updates. The Appellant's passive approach and reliance on declarations from ESL were inadequate and unprofessional. 5. Quantum of Penalty Imposed by SEBI: SEBI imposed a penalty of Rs. 10,00,000 on the Appellant for failing to comply with SEBI (DIP) Guidelines and SEBI (ICDR) Regulations. The Tribunal upheld this penalty, considering the Appellant's major role in coordinating the IPO and certifying the veracity and adequacy of disclosures. Although the exact loss to investors could not be quantified, it was evident that the non-disclosure had caused significant harm to investors and the securities market. The Tribunal dismissed the appeal and emphasized the need for higher standards of professionalism and due diligence from intermediaries like the Appellant. The judgment underscores the critical role of BRLMs in ensuring accurate and complete disclosures in IPO documents and the severe consequences of failing to exercise due diligence.
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