2016 (9) TMI 216 - AT - Companies Law

IPO - failure to disclose items which amounted to material information and ought to have been disclosed in the offer documents - Held that - Appellant has partially failed to ensure proper disclosure of material information which was required for the investors in order to enable them to take an informed decision to invest or not to invest in the IPO in question. However, there are certain facts which remain undisputed. One, that there is no connivance or connection for that matter which has been established between the Appellant itself and entities further down in the line of transfer which eventually purchased the Appellant s shares and dealt in its scrip once it was listed on the stock exchange. There is no commonality of directors, or registered addresses or any other incidents which can lead to such an inference that the Appellant was involved in the transfer of funds to certain such entities which, inter-alia, bought the Appellant s share in the IPO. Further, invoices and other documents have been produced by the Appellant for the purchase of raw materials and equipments required to run the business, and their validity is not in question. It is pertinently noted that most of the money which the Respondent alleges to have been transferred has been returned to the Appellant. The Respondent has fairly submitted that the Auditor appointed by SEBI itself has in its report dated January 25, 2016 noted that an amount of ₹ 80 crore has been successfully recalled by the Appellant and the Respondent has scrutinized the utilization thereof. It is also a fact that the Appellant has already recalled moneys recoverable owing to ICDs, cancelled contracts pertaining to land purchase, except an amount of ₹ 3.77 crore as explicated hereinabove with respect to which the Appellant has initiated the winding up of the company called Supreme. It shows the respect for and earnest desire of the Appellant to abide by SEBI s regulatory directions. Further, it remains undisputed that ICDs which were given out of the IPO Proceeds to the tune of ₹ 32 crore given as ICDs to Saptrishi, Raw Gold and Wattkins. Today, however, this amount of ₹ 32 crore has been received by the Appellant, albeit with certain amount of delay. It is also to be noted that minutes of the annual general meeting held on September 12, 2012, attached as Exhibit F2 of the Appeal clarify that unequivocal permission was granted to the Board of the Appellant, as per Section 61 of the Companies Act, 1956, to alter the utilization of the IPO Proceeds and to use the proceeds as the directors deemed fit. Therefore, looking into the totality of the facts and circumstances of the case in hand, the Respondent should not have imposed the punishments of debarment from the market for a long period of one decade. Given that, some of the Respondent s allegations levelled in the Impugned Order, and particularly dealt with in this order in paragraphs no. 40, 45, and 50 cannot be sustained in law or on fact as elucidated, this Tribunal is of the opinion that in order to meet the ends of justice the period of debarment from the securities market of ten years imposed upon the Appellant should be reduced to seven years as the Appellant has already suffered by remaining out of the market for a period of more than four and half years by now. Ordered accordingly. As far as the money lying in the escrow account is concerned, the Appellant shall be at liberty to use for the objects of the IPO as per law.

Summary

Issues Involved:
1. Non-disclosure of certain material information in the offer documents.
2. Diversion of IPO Proceeds and other funds to entities which purchased the Appellant’s shares to ensure full subscription to the IPO of the Appellants.

Issue-wise Detailed Analysis:

1. Non-disclosure of certain material information in the offer documents:

a. Non-disclosure of ICDs:
The Appellant executed ICD agreements with seven entities after filing the RHP but before filing the Prospectus. The Appellant failed to disclose these bridge loans in the offer documents, which is mandatory under Clause 2(VII)(G) of Part A. Although the Merchant Banker was informed, the disclosure was not made. The Tribunal held that the non-disclosure of bridge loans stands proved.

b. Non-disclosure of Board Resolution:
The Appellant did not disclose the Board Resolution dated August 17, 2011, which decided to invest IPO proceeds in ICDs. Although the Prospectus mentioned investment in high-quality interest-bearing liquid instruments, it did not specifically mention ICDs. The Tribunal found that the Appellant should have disclosed this information.

c. Purchase Orders for Plant and Machinery:
The Respondent's claim that the Appellant failed to disclose purchase orders for plant and machinery was found unsustainable as the RHP and Prospectus contained the names of the suppliers.

d. Suppliers of Plastic Granules:
The omission of Nimbus and Supreme from the list of suppliers was considered an inadvertent omission rather than a deliberate non-disclosure, as the list was not exhaustive and focused on manufacturers.

e. Agreements for Purchase of Land:
The Appellant failed to disclose agreements and MOUs for the purchase of land, aggregating to around ?80 crore, in the Prospectus. The Tribunal found that this non-disclosure was significant and upheld the Respondent's findings.

2. Diversion of IPO Proceeds and other funds:

a. Repayment of ICDs:
The Appellant repaid ?44.40 crore towards ICDs taken from Jainex and Prraneta immediately after the IPO closed. The funds were eventually returned to the Appellant. The Tribunal noted that the IPO proceeds were used to pay entities that either bought the Appellant's shares or transferred the money to others who did.

b. Investment in ICDs:
The Appellant transferred ?32 crore to Saptrishi, Raw Gold, and Wattkins, which was then diverted to entities that bought the Appellant's shares. The Tribunal found it hard to accept the Appellant's claim that it needed funds for day-to-day business, given the timing of the ICDs.

c. Purchase Orders:
The Appellant's dealings with Modi Alloys and Aggarwal Steels were alleged to be for diverting money to entities buying the Appellant's shares. The Tribunal found the transactions genuine as the Appellant produced invoices and delivery challans, and no evidence suggested these documents were fabricated.

d. Plastic Granules:
The agreements with Nimbus and Supreme were canceled, and the Tribunal noted that ?3.77 crore transferred to Supreme was from the Appellant's own funds, not IPO proceeds. The Tribunal found no connection between the Appellant and entities receiving money from Nimbus and Supreme.

e. Land Deals:
The Appellant's agreements for land purchase with Saptrishi, Safeco, Realnet, and Eastern Resorts were found genuine. The Tribunal noted that the agreements were canceled, and most advance payments were refunded. The Respondent's arguments were deemed inadequate to establish a serious charge of violation of PFUTP Regulations.

Conclusion:
The Tribunal found that the Appellant partially failed to ensure proper disclosure of material information. However, no connection was established between the Appellant and entities buying its shares, and most funds were returned. The punishment of ten years’ debarment was deemed disproportionate and reduced to seven years. The Appellant was allowed to use the money in the escrow account for the IPO's objects as per law.