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2025 (3) TMI 1071 - AT - SEBICancellation of IPO - misstatement in the prospectus regarding the procurement of software from a vendor with questionable credentials - Refund the subscription amounts to the successful investors and to cancel shares allotted to them pursuant to the Initial Public Offer (IPO) of the company - HELD THAT - In our considered view safeguarding the interests of the public shareholders particularly the retailers is of paramount importance for all stakeholders of the capital market in a large country like India with significant asymmetry in capital and financial literacy. In view of this adequacy and correctness of disclosure in Public Offers cannot be compromised. The appellant Company while going for Initial Public Offer for inviting subscription from public at large was duty bound to obtain quotation from a genuine software provider entity for the purpose of vendor selection for an important software which in their scheme of things was going to be integral object of the Issue. Despite being in the ITS sector the company did not make desired professional efforts to evaluate whether the quotation by OCPL was genuine or not. We find that the quotation was received on May 16 2024 and within two days on May 18 2024 the Board of directors of the Company noted and approved procurement of ICCC software from the said vendor even though in the DRHP dated May 30 2024 in the notes to the Deployment of proceeds segment it has been qualified that no definitive agreement was signed with the said vendor and the Company may change vendor or quotation per se. We also note that the decision of the Board of directors of the Company in approving the purchase of software without due verification of credentials of the vendor and in utter disregard to its own purchase policy which provides for taking at least three quotes for such an indent did not the desired corporate governance norms. Surprisingly the purchase committee of the company which ought to have examined the credentials of the vendor in details and assessed whether the vendor had deserved capability to provide ICCC software in the given time-frame cleared the quote merely on the basis of GST returns filed for last two months which obviously are of no technical assistance for deciding purchase of software. The committee also ignored that there was no business of OCPL during the FY 2020 and FY 2021 for which financials were available and turned blind eye on the absence of financials for the last 2 financial years i.e. FY2022 and FY 2023. We find that even the merchant banker has not done proper due diligence and has merely gone by the decision of the Board of directors for carrying out due diligence with regard to the Oasis. If an established software player follows such a methodology to reach out to an entity with doubtful credentials with an offer of commission of Rs. 50 lakhs for procuring quote from a Third Party in our considered view it cannot be treated as genuine quotation and therefore we are not persuaded to accept the argument that the Company had made the disclaimer that such a quote was for budgetary estimate only. Therefore we hold that the company s claim with regard to its adequacy and correctness of disclosure in the prospectus was not bonafide and satisfactory. In the disclaimer section of the prospectus it is stated that the Company is responsible for adequacy correctness and accuracy of the facts disclosed . Considering the above we of the view that the respondent is right in holding that the said disclosure in respect of quotation from an entity such as OCPL was a mis-statement. A listed entity has additional responsibility to its shareholders and when it comes with an Issue for public at large it is required to ensure that the disclosures made in the prospectus are not only adequate and correct but genuine. The appellant Company has failed to meet the said requirements. Therefore we do not find merit in the alternative plea that the IPO may be allowed to proceed further subject to monitoring of the deployment of proceeds by an agency to be appointed by SEBI/ BSE.
1. ISSUES PRESENTED and CONSIDERED
The core issues considered in this judgment are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Scope of the Show Cause Notice The appellant argued that the directions in the impugned order exceeded the scope of the show cause notice, which proposed providing investors with an option to withdraw their subscription. The appellant relied on precedents such as the Gorkha Security Services case to argue that the principles of natural justice were violated as the notice did not explicitly mention the cancellation of the IPO. The respondent countered that the show cause notice included language allowing for "suitable directions" under the relevant sections of the SEBI Act, which could encompass the directions given in the impugned order. The Tribunal agreed with the respondent, noting that the language of the notice was broad enough to cover the directions issued. Issue 2: Allegations Outside the Show Cause Notice The appellant contended that the impugned order was based on allegations not included in the show cause notice. The appellant highlighted that the notice limited the proceedings to "material misstatement in the prospectus," while the order addressed other aspects such as intent to divert funds and concealment of material facts. The Tribunal found that the core finding of "material misstatement in the prospectus" was consistent with the show cause notice. The Tribunal noted that the appellant failed to rebut the allegations of misstatement effectively and that the impugned order was justified based on the inquiry conducted. Issue 3: Material Misstatement in the Prospectus The appellant argued that there was no misstatement in the prospectus regarding the procurement of software, as the quotation from OCPL was disclosed as a budgetary estimate and not a definitive agreement. The appellant also pointed to an alternative quotation from another vendor in a similar price range. The Tribunal found that the appellant failed to conduct due diligence in verifying the credentials of OCPL, a company with no background in software development. The Tribunal noted that the quotation from OCPL was obtained through questionable means, involving a commission for providing a quote. The Tribunal concluded that the disclosure in the prospectus was misleading and constituted a material misstatement. Issue 4: Violation of SEBI Regulations The Tribunal considered whether the appellant's actions violated SEBI regulations, particularly regarding the adequacy and correctness of disclosures in the prospectus. The Tribunal emphasized the importance of safeguarding public shareholders' interests and found that the appellant failed to meet the disclosure requirements under the SEBI regulations. 3. SIGNIFICANT HOLDINGS The Tribunal upheld the impugned order, finding no merit in the appellant's arguments. The Tribunal emphasized the following principles:
The Tribunal dismissed the appeal and upheld the order directing the refund of subscription amounts and cancellation of shares allotted in the IPO. No costs were awarded.
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