2016 (6) TMI 805 - AT - Companies Law

IPO - lapse of due diligence - whether the steps taken by the Appellant in light of various provisions of the ICDR Regulations and the Code of Conduct towards the due diligence of the affairs of the Issuer Company are sufficient and adequate in law? - non disclosure of suppliers and agreements for purchase of granules - fund raising through ICDs and their subsequent deployment - Held that - On a perusal of Order dated 3rd September 2012 passed by the Respondent it emerges that an independent Director of the Issuer Company who was a signatory to the RHP as well as the Prospectus however made the following statements on record; firstly that the loan committee had a term of reference limited only to availing of various credit facilities from the banks. The Loan Committee had no authority to borrow money through ICDs and secondly; that no such proposal regarding availing of loans through ICDs was tabled at the meeting of the Board of Directors dated 17th August 2011. In light of these factual revelations it is evident that the Loan Committee could not have permitted the raising of money through ICDs since this was not part of its mandate. In the absence of any evidence to the contrary we therefore find that the Appellant was only supplied with an extract and not the minutes of the Board Meeting dated 17th August 2011 by the the Issuer Company. In this factual backdrop the Appellant cannot be condemned for not disclosing the matter regarding the raising of funds through ICDs by the Issuer Company in the Offer Documents. Appellant could not have incorporated such a fact of giving ICDs to the three companies taken by the Issuer Company after the conclusion of the IPO in the DRHP RHP or even in the Prospectus. This charge therefore can also not be sustained against the Appellant. However it must be said that the Appellant seems to have acted in a hurry to issue the RHP on the same date. It should have been more vigilant and careful in filing the RHP on August 17 2011 itself. As such we would hasten to add that the filing of Prospectus which was done two days after the closure of the Issue on 14th September 2011 issue opened on 7th and closed on 12th September 2011 the Appellant could have detected all these developments had it undertaken inspection of the Bank accounts of the the Issuer Company. To this extent we are in agreement with the finding in the Impugned Order that the Appellant did not perform its duty properly in the matter of due diligence. Except non-examination of the bank statement of the Issuer Company we do not find any major lapse / flaw in the process of due diligence carried out by the Appellant. Albeit it is not mandatory for an MB to look into the bank statements it would have been prudent for the Appellant to peruse the bank statements instead of merely relying on the Statutory Auditor s Report and the statement of the the Issuer Company. Although there is some merit in the charges levelled against the Appellants as far as non-perusal of Bank statements of the Issuer Company and disclosure of related party transactions ) is concerned in view of the fact that the punishment already undergone is far in excess of the punishment which the Appellants deserved against the charges in question we quash the remnant punishment imposed vide the Impugned Order.

Summary

Issues Involved:
1. Failure to ensure disclosure of material facts in the RHP and Prospectus.
2. Failure to prevent misrepresentation in respect of the amount of term loan availed by the Issuer Company.
3. Non-disclosure of suppliers and agreements for purchase of granules.
4. Non-disclosure of agreements for purchase of land.
5. Non-disclosure of purchase orders placed by the Issuer Company for plant and machinery.
6. Decision to invest IPO proceeds in ICDs of other companies.
7. Failure to conduct due diligence by the Merchant Banker.

Issue-wise Analysis:

1. Failure to ensure disclosure of material facts in the RHP and Prospectus:
The primary allegation was that the Appellant failed to disclose funds raised by the Issuer Company through Inter Corporate Deposits (ICDs), which were in the nature of bridge loans. The Appellant argued that they were only provided with an extract of the Resolution passed in the Board Meeting held on 17th August 2011 and not the full Minutes. They relied on various Statutory Auditors’ Certificates and conducted their own exhaustive enquiries. The Tribunal found that the Appellant could not be condemned for not disclosing the matter regarding the raising of funds through ICDs by the Issuer Company in the Offer Documents, as the Appellant was not provided with the full Minutes of the Board Meeting.

2. Failure to prevent misrepresentation in respect of the amount of term loan availed by the Issuer Company:
The Appellant disclosed the amount of term loan and line of credit availed by the Issuer Company in multiple places in the RHP, indicating no intention of concealment. The Tribunal concluded that the misrepresentation was an inadvertent oversight rather than intentional concealment.

3. Non-disclosure of suppliers and agreements for purchase of granules:
The Issuer Company did not enter into any long-term supply agreements for plastic granules, and the names of certain companies were not mentioned in the list of suppliers provided by the Issuer Company. The Tribunal found that the Issuer Company had not disclosed these agreements to the Merchant Banker, and thus, the Appellant could not have incorporated them despite any degree of due diligence.

4. Non-disclosure of agreements for purchase of land:
The details of agreements for the purchase of land were neither available in the public domain nor in the minutes of the company’s Board Meetings. The Tribunal found that the Merchant Banker could not have been expected to anticipate the execution of such agreements, which the Issuer Company concealed.

5. Non-disclosure of purchase orders placed by the Issuer Company for plant and machinery:
The Appellant disclosed details of quotations received for procurement of plant and machinery in the RHP. The Tribunal found that the Appellant did not have any means of knowing the existence of any purchase orders except those disclosed in the Offer Document.

6. Decision to invest IPO proceeds in ICDs of other companies:
The Tribunal found that the decision to invest IPO proceeds in ICDs was a post-IPO transaction, which the Appellant could not have controlled. The Appellant was not privy to the Issuer Company’s intentions, and the Appellant’s conduct was unimpeachable in this regard.

7. Failure to conduct due diligence by the Merchant Banker:
The Tribunal acknowledged that the Appellant conducted independent due diligence, obtained various certifications and undertakings, and relied on Comfort Letters issued by the Statutory Auditors. However, the Appellant should have analyzed the bank accounts of the Issuer Company for the relevant period. The Tribunal concluded that the Appellant did not perform its duty properly in the matter of due diligence but found the punishment of five years of debarment to be extremely harsh and disproportionate.

Conclusion:
The Tribunal found some merit in the charges against the Appellant regarding non-perusal of bank statements and disclosure of related party transactions. However, considering the punishment already undergone, the Tribunal quashed the remnant punishment imposed. All appeals were partly allowed with no order as to costs.