2017 (3) TMI 337 - AT - Companies Law

False and inadequate material disclosures made in the Red Herring Prospectus - minimum capitalization norms applicable to NBFCs not adhered - non informed investment decision - penalty of ₹ 1 crore on the appellants under Section 15HB of the SEBI Act, 1992 - Held that - Decision of the AO that disclosing the letter of RBI dated 26.09.2012 in the RHP, but not disclosing in the RHP that RBI by the said letter dated 26.09.2012 had sought strict compliance of minimum capitalization norms applicable to NBFCs amounts to suppressing material information in the RHP and thus violative of the provisions contained in the ICDR Regulations and Merchant Bankers Regulations cannot be sustained, because, minimum capitalization norms were not applicable to the investors permitted to participate in the offer of CARE and the said norms had no bearing on the investors permitted to participate in the offer of CARE to take an informed investment decision. No fault can be found with CARE for not disclosing the norms which were not applicable to the investors to whom the offer was made in the RHP dated 24.11.2012. Fact that subsequent to the RHP dated 24.11.2012, RBI by its letter dated 06.12.2012 directed CARE to apply minimum capitalization norms to non-resident investors covered under Schedule 2 & 8 and CARE in the circumstances of the case complied with the said direction cannot be a ground to hold that information relating compliance of minimum capitalization norms were suppressed in the RHP dated 24.11.2012. Once it is held that there was no infirmity in the RHP of CARE, then it cannot be said that the appellants without exercising due diligence have issued certificate to the effect that the RHP of CARE contains true and adequate information. Consequently, appellants cannot be said to have violated the Merchant Bankers Regulations. In the result, decision of the AO that the appellants have violated the provisions contained in the ICDR Regulations and Merchant Bankers Regulations cannot be sustained. Consequently, penalty of ₹ 1 crore imposed on the appellants cannot be sustained.

Summary

Issues Involved:

1. Whether the condition imposed in the RBI letter dated 26.09.2012 regarding compliance with minimum capitalization norms was material information required to be disclosed in the RHP of CARE.
2. Whether the appellants were justified in not disclosing the RBI's condition on the grounds that it was not applicable to the investors permitted to participate in the offer.
3. Whether the failure to disclose the RBI's condition constituted suppression of material facts and an attempt to mislead investors.
4. Whether the appellants failed to exercise due diligence by not disclosing the RBI's condition, thereby violating the ICDR Regulations and Merchant Bankers Regulations.

Detailed Analysis:

1. Material Information Disclosure:

The primary issue was whether the condition imposed by RBI for compliance with minimum capitalization norms was material information that needed to be disclosed in the RHP. The judgment emphasized that under FEMA Regulations, minimum capitalization norms apply only to investments by non-resident investors covered under Schedule 1. The RHP of CARE restricted investments to non-resident investors covered under Schedules 2, 4, and 8, to whom these norms were not applicable. Thus, the condition imposed by RBI was not material for the investors permitted to participate in the offer, as it did not affect their decision-making process.

2. Justification for Non-Disclosure:

The appellants argued that since the minimum capitalization norms were not applicable to the investors allowed to participate in the offer, the non-disclosure of this information in the RHP did not violate the provisions of the ICDR Regulations and Merchant Bankers Regulations. The judgment supported this view, stating that the condition imposed by RBI was only relevant if non-resident investors covered under Schedule 1 were permitted to participate, which was not the case here.

3. Suppression of Material Facts:

The AO held that failure to disclose the RBI's condition constituted suppression of material facts and an attempt to mislead investors. However, the judgment refuted this, stating that the condition was not applicable to the investors permitted to participate in the offer, and thus, its non-disclosure did not amount to suppression of material facts. The judgment clarified that the object of disclosure provisions is to ensure that the offer document contains all material disclosures that are true and adequate for the investors to make an informed decision.

4. Due Diligence and Regulatory Compliance:

The AO's decision that the appellants failed to exercise due diligence by not disclosing the RBI's condition was also contested. The judgment highlighted that the appellants had advised CARE to restrict the offer to non-resident investors covered under Schedules 2, 4, and 8, thereby eliminating the applicability of the minimum capitalization norms. Thus, the appellants exercised due diligence by ensuring that the offer document contained true and adequate information relevant to the investors permitted to participate in the offer.

Majority View:

The majority view concluded that the appellants did not violate the ICDR Regulations and Merchant Bankers Regulations. The judgment emphasized that the minimum capitalization norms were not applicable to the investors allowed to participate in the offer, and thus, their non-disclosure did not constitute a violation.

Minority View:

The minority view disagreed, asserting that the appellants failed to ensure true and adequate disclosure by not including the RBI's condition in the RHP. The minority opinion held that the appellants should have sought clarification from RBI and disclosed all relevant information to ensure that investors had a complete understanding of the offer.

Conclusion:

The appeal was allowed by the majority decision, setting aside the impugned order with no order as to costs. The minority decision upheld the impugned order, dismissing the appeal.