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TMI Blog2008 (2) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... by Enquiry Officer and Imposing Penalty) Regulations, 2002 (Enquiry Regulations, for short). 2. A share purchase agreement was executed on 5th September, 2000 between Global Green Company Ltd (the acquirer, for short) and three other companies namely, Tata Tea Ltd, Tata Coffee Ltd and Conscofe Investments Ltd (the sellers, for short) for the acquisition of 1,56,47,630 shares of Saptarishi Agro Industries Ltd (target company, for short). In terms of regulation 10 of the Takeover Code, the acquirer made a public offer to the shareholders of the target company to acquire 20% of its voting capital following the share purchase agreement. The appellant was appointed the merchant banker for the open offer. The charge in the enquiry proceedings was that the appellant as a merchant banker had failed to comply with regulation 24(4) of the Takeover Code and Clauses 1, 2, 7 and 9 of the Code of Conduct prescribed in Schedule III to the Merchant Bankers Regulations in as much as in the letter of offer dated 15 September, 2000 there was a wrong disclosure that all 2,44,94,200 issued equity shares of the target company were listed on the stock exchanges of Chennai, Mumbai, Delhi and Ahmedabad w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etter of offer or any other related literature is made available to the investors at the time of issue or the offer. 9. A merchant banker shall not discriminate amongst its clients, save and except on ethical and commercial considerations. Regulation 24(4) of the Takeover Code The merchant banker shall ensure that the contents of the public announcement of offer as well as the letter of offer are true, fair and adequate and based on reliable sources, quoting the source wherever necessary. 4. The appellant did not at any stage deny that the disclosure regarding listing of the shares was incorrect. The main thrust of the appellant's submissions was that it had exercised due diligence in obtaining adequate information from reliable sources based upon which disclosures were made in the letter of offer dated 15 September 2000. According to the appellant, it had studied and relied upon the following documents none of which disclosed that any share of the target company was unlisted. (a) Share Purchase Agreement dated 5 September, 2000. (b) Annual Reports of the target company for 1997-98 and 1998-99. (c) Annual Reports of the sellers (all three companies) for 1999-2000 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is own basic responsibility. Such a passive and indirect approach can only be seen as an effort on the part of the appellant to shift the onus of due diligence on to the shoulders of others. Moreover, a perusal of the identical letters sent to the target company and the stock exchanges shows that these were written as the fulfillment of a regulatory requirement. The letters do not indicate that the sender expected any response; none was solicited in any case. The common text of the letters is reproduced below to make this point clear. We have been appointed as Managers to the Offer vide regulation 13 of the SEBI (Substantial Acquisition of Shares and Takeovers) regulations, 1997 and subsequent amendments thereof, by Global Green Company Limited for their captioned Open Offer. Global Green has signed a Memorandum of Understanding dated September 5, 2000, with Conscofe Investments limited, Tata Tea Limited and Tata Coffee Limited to acquire 15,647,630 fully paid up equity shares of ₹ 10/- constituting 63.88% of the paid up equity capital of Saptarishi Agro Industries Limited. Enclosed please (sic) the Draft Offer Letter that has to be sent to you under Regulation 22(2) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tement indicates that the appellant had basically presumed that all the issued shares of the target company would be listed. It had also expected that if that was not the case, someone else would point out the error. 11. The learned senior counsel for the appellant submitted that in the show cause notice issued by the Enquiry Officer on 18 March, 2004 the appellant had been charged with violation of Regulation 24(4) of the Takeover Code and Clauses 1, 2, 7 and 9 of the code of conduct for merchant bankers. The Enquiry Officer, however, gave the finding that it had violated Clauses 1, 2, 4, 6, and 7 of the code of conduct for merchant bankers and Regulation 24(4) of the Takeover Code. The Whole Time Member of the Board found the appellant to have violated Regulation 24(4) of the Takeover Code and only Clauses 1, 2 and 7 of the code of conduct for merchant bankers. The learned senior counsel argued that in view of the fact that the appellant has not been found to have violated Clauses 4 and 6 of the code of conduct, it can not be held to have violated Clause 7. This seems to us to be a very restrictive view of the code of conduct. The clauses of the code of conduct overlap one anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocuments issued for the benefit of investors in general could lead to serious consequences including loss of credibility for the market operators and for the regulatory system. This kind of failure has to be taken very seriously by the market regulator. In this case, there is no material before us to show that the appellant had taken any proactive step at all to find out the correct information or to independently verify the information available. No specific query in this respect was made from the right sources of such information namely the target company and the stock exchanges though it was known that information about the listing of the shares of the target company in each stock exchange was specifically required to be disclosed in the letter of offer. Instead, the appellant made a presumption that all shares were listed in the four stock exchanges of Chennai, Mumbai, Delhi and Ahmedabad and left it to others to point out if that was not the fact. This is certainly no way to exercise due diligence and we cannot but agree with the Whole Time Member of the Board that the appellant had violated regulation 24(4) of the Takeover Code and Clauses 1, 2 and 7 of the code of conduct fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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