9911796707
TMI Blog2012 (2) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case, in brief, are M/s. Enam Securities Pvt. Ltd., the appellant before us, is a merchant banker registered with the Board under Section 12 of the Act and is said to be in the business of providing merchant banking services for more than two decades. The Board conducted an inspection of the books and records of the appellant in August 2005 to examine the role of the appellant as a merchant banker in the context of management of initial public offerings, rights issues, open offers etc. A copy of the inspection report was made available to the appellant on June 28, 2006 for its comments. After considering the comments offered by the appellant, the Board issued a show cause notice dated June 14, 2007 alleging violation of certain provisions of the merchant bankers regulations and the DIP guidelines. In the show cause notice, the appellant was alleged to have committed five violations. The appellant made detailed submissions on the alleged violations vide its letter dated July 9, 2007 and denied all the allegations. The adjudicating officer, after considering the reply filed by the appellant, dropped two charges and held the appellant guilty of remaining three violations, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding or exaggerated claims and to render best possible advise to the clients. A merchant banker is required to maintain high standards of integrity, dignity and fairness in the conduct of its business and is required to promptly inform the Board any violation or non compliance of the regulatory framework that come to its notice. A merchant banker is also required to submit to the Board complete particulars of the transactions of acquisition of securities of any body corporate as required by regulation 27 and also make disclosures to the Board relating to its activities, as required under regulation 28 of the merchant bankers regulations. In a way, a merchant banker is an expert body which is also a point of contact between the regulator i.e. the Board and the corporate entity on whose behalf it is working. Therefore, a merchant banker is the eyes and ears of the regulator whose responsibility is to ensure that the corporate entity utilizing its services is acting in accordance with the laid down norms and in case of violation, bring the violation to the notice of the regulator for appropriate action. It is in this context that the code of conduct for merchant bankers prescribes tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank and, therefore, not disclosed as promoter in the prospectus. The Rabobank was called a co-promoter in the application before the RBI for the purpose of a banking license. The intention of Rabobank to participate with the Indian promoters of the Yes Bank as a technical participant has been clearly brought out in the initial application made by the Indian promoters as well as Rabobank s letter to the RBI. The prospectus filed with the Board contained the disclosure relating to Rabobank being a co-promoter in the application made for the purpose of banking license. It also contains necessary disclosure relating to Rabobank holding a minimum of 20% shares of Yes Bank. It is, therefore, incorrect to say that any false statement was made or any misrepresentation was made in the prospectus depriving the investing public of taking an informed decision about the Yes Bank IPO. It is also the case of the appellant that the Rabobank has never been treated as a promoter of the Yes Bank as is evident from the quarterly financial statements filed with the Board/stock exchanges and it has never been objected to. Even the draft read hearing prospectus (DRHP) was cleared by the Board without r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by incorporating the information in this regard till the time of filing the prospectus with the Registrar of Companies. (iii) the maximum and minimum price at which purchases and sales referred to in (ii) above were made along with the relevant dates. (l) In the event of it not being possible to obtain information regarding sales and purchase of securities by any relative of the promoters, a statement to that effect shall be made in the prospectus on the basis of the transfers recorded in the books of the issuer company. Explanation I under clause 6.8.3 gives an inclusive definition of the term promoter which read as under :- Explanation I: For the purpose of sub-clauses (k) and (l) above, the term 'Promoter' shall include: (a) the person or persons who are in over-all control of the company; (b) the person or persons who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public; (c) the persons or persons named in the prospectus as promoters(s): Provided that a director/ officer of the issuer company or person, if they are acting as such merely in their professional capacity shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for carrying out the business of banking, 49% of the pre-issue share capital will be locked in and this includes the share capital of Rabobank also. The shareholding of Rabobank has been shown under the column equity shares held by top 10 shareholders . Similarly, on page 15 of the prospectus, shareholding of the Rabobank is shown not under promoters quota, but under the category of other shareholders. A note has also been appended therein stating that Rabobank has indicated its intention to maintain its shareholding at 20% of the post-issue equity as mandated by the RBI approval and it may make applications for allotment of equity shares in the issue and subsequent market purchases subject to compliance with the dilution requirements as stated in the banking license. 6. It is, thus, clear if a person falls within the definition of promoter, as discussed above, only then his name will appear in the note indicating the aggregate shareholding of the promoter group. The Rabobank had two nominee directors in the Board of Yes Bank in a total composition of 12 directors. They were not instrumental in the formation of plan or programme pursuant to which the securities were offered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l funds were considered under this category and no financial institutions or banks were found eligible in this category. According to the Board while allotting the shares under QIB category, the appellant exercised its discretion in a manner that majority of shares were allotted to foreign institutional investors and the applications of banks/mutual funds appear to have been overlooked during the allotment. It is the case of the appellant that the DIP guidelines permitted discretion in allotment under the QIB category and while exercising its discretion, it had followed certain norms. In the absence of any guidelines in the regulation as to how allotment under discretionary quota is to be made, the Board cannot question the allotment under discretionary quota on the basis of norms that were followed by the appellant. The appellant has also relied on the observations of the primary market advisory committee of the Board which reviewed the DIP guidelines and which read as under :- In case of allocation to QIBs, various factors were to be considered including the quality of investor, commitment to specific sector, investment objectives, prior track record etc. These factors could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o fault can be found with the merchant banker on this count as well. 8. The last violation on which the appellant has been found guilty is that it has failed to properly monitor the flow of applications and other matters pursuant to the closure of the public issue. It is alleged that in the Yes Bank IPO, shares were allotted to applicants having non existing DP IDs, multiple applications having same address, allotment of shares being made to the applicants having same name, same address but different DP details etc. According to the Board, the registrar and share transfer agent to the issue (RTA) had failed to detect and withhold these applications. The merchant banker was required to exercise due diligence and was responsible for post-issue activities till the subscribers received the shares/debentures. It was also incumbent on the appellant to depute officials, as required by 7.4.1 of the DIP guidelines, to monitor the flow of applications and the allotment of the shares. According to the Board, the appellant has failed to discharge his duty as a merchant banker which resulted in allotment of shares to multiple/fictitious and benami applicants. We have considered the rival sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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