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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 ..... uiry 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 whereas 1,40,30,000 shares were, in fact, not listed on the Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision. 8. A merchant banker shall endeavor to ensure that copies of the prospectus, offer document, letter 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter would be independently determined by them in the light of the applicable Rules and Regulations. It would be one thing if any of them did point out any error or omission in the draft offer letter but the merchant banker was definitely ill advised to depend upon any such response for discharging his 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 li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the event such applications were not made by SAL or accepted by the Exchanges, the same should have been disclosed to HSBC as an inaccuracy in the letter of offer dated 15. 09.2000. (SAL is the target company) 10. Mr. AV appeared before the Enquiry Officer as the Head of Compliance of the appellant and his statement 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares. However, we agree with the learned Counsel for the Board that ensuring the truth and correctness of the letter of offer is a fundamental responsibility of the merchant banker which he has to discharge by exercising due diligence. In fact, and incorrect or wrong information in a letter of offer or other similar documents 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, Mu ..... 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