9911796707
TMI Blog2016 (5) TMI 1596X X X X Extracts X X X X X X X X Extracts X X X X ..... in the offer document, the ICDR's requirements of Due Diligence are considered to be met. As noted above, disclosures on related party transactions need to be made as per para (B)(12) of section IX of the ICDR Regulations which, in turn, states that they must be made in accordance with AS 18. It, therefore, falls to us to consider and decide whether Gadeo or Richa Mittal qualify as related parties in accordance with AS 18. It is evident from a plain reading of the definition of 'relative' as provided under para 10.9 of AS 18 that the relatives covered under the definition are, quite categorically put, the spouse, son, daughter, brother, sister, father and mother who may be expected to influence the key management personnel of the reporting enterprise, in this case, the Issuer Company. This definition is exhaustive in nature. It does not leave scope for the inclusion of relatives by extending the list of relatives to other people. The intention of the law maker in this regard is crystal clear viz., only those relatives particularly mentioned in para 10.9 will be relevant for determining related party transactions. Mrs. Richa Mittal being the sister-in-law of Mr. Sanje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and partly allow the Appeal. - Appeal Nos. 129, 187, 211 and 300 of 2014 - - - Dated:- 13-5-2016 - J.P. DEVADHAR, J. (PRESIDING OFFICER) AND JOG SINGH, MEMBER For the Appellant : Ajai Achuthan, Advocate For the Respondent : J.P. Sen, Senior Advocate, Mihir Mody and Saurabh Bachhawat, Advocates i/b K. Ashar Co. ORDER Jog Singh, Member 1. In this bunch of four Appeals, the Appellants have raised a common question of law and fact and, hence, with the consent of the parties, these Appeals are being disposed of by this common order taking the facts of Appeal No. 129 of 2014 as the lead case. 2. The appeals have been filed against Order dated 3rd March, 2014 ( Impugned Order ) passed by SEBI under sections 11(1), 11(4) and 11B of the SEBI Act, 1992, holding that the Appellant had not employed reasonable skill and care while conducting its due diligence exercise in respect of the IPO of Bhartiya Global Infomedia Limited ( the Issuer Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt were also discharged on this date. Subsequently, the Issuer Company's shares came to be listed and traded on the BSE and the NSE on 28th July, 2011. 4. An ad-interim ex-parte order was passed by SEBI against the Appellant on 28th December, 2011 alleging that the Appellant had failed to exercise due diligence with respect to the Issuer Company's IPO which had resulted in certain incorrect and inadequate disclosures in the RHP. The Appellant was also prohibited from indulging in new assignments till further directions. Reply dated 21st March, 2012 to this order was filed with SEBI which elucidated the process of due diligence as followed by the Appellant. The Appellant then filed Appeal No. 179 of 2012 before this tribunal. In the meanwhile, SEBI issued a confirmatory order dated 21st September, 2012. A Show Cause Notice dated 4th September, 2013 ( SCN ) was finally passed by SEBI under sections 11(1), 11(4), 11A and 11B of the SEBI Act, the Merchant Banker Regulations and the ICDR. On 27th September, 2013, the Appellant filed its reply to the SCN. A personal hearing was granted to the Appellant on 21st October, 2013 at which the Appellant made its submissions. Finally, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Interest in Form 24AA dated 31.3.2010 and 25.4.2011 as filed by Mr. Sanjeev Mittal, by which he was required to disclose his interest, did not disclose that he or his relatives had any interest in Gadeo. 7. The Appellant puts forth that the provisions of Clause (IV)(H)(18) on one hand and provisions Para B(12) of Section IX of Schedule VII on the other hand of the ICDR Regulations must not be read in isolation. The latter expressly requires the disclosures of related party transactions in accordance with AS-18, thereby, undermining the reliance of the Respondent on the Companies Act to conclude that Mrs. Richa Mittal is a related Party. The Appellant thus submits that complete verification of financials was undertaken at the time of drafting the DRHP and several undertakings were obtained from the Issuer Company obligating the Issuer Company to promptly inform the BRLM of any material changes. However, the Issuer Company certified that there had been no material change vide its letter dated 19.7.2011. Furthermore, in the Underwriting agreement dated 16.7.2011, the Issuer Company restated that the RHP and the Prospectus did not contain any untrue statement or material omissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts made thereof, seemingly without question. 10. At the time of processing of the RHP and Prospectus, Mrs. Richa Mittal and Mr. Ram Kishan Mittal (father of Sanjeev Kumar Mittal who was the Director of the Issuer Company) were the partners at Gadeo. Further, in the absence of definitions of the words 'relative' and 'relation' under the ICDR regulations, the Respondents have relied on definitions in the Companies Act, 1956, which include 'father', 'brother' and 'brother's wife'. In response to the Appellant's contention that 'related party transactions' should be disclosed in accordance with AS-18 issued by the ICAI as provided in clause IX(B)(12) of Part A of schedule VIII of the ICDR Regulations, the Respondents have cited clause 10.9 of AS-18, where although 'sister-in-law' is not mentioned in the definition of 'relative', 'father' is included. Additionally, according to clause 3(d) and (e) of AS-18, the relationships of key management personnel and their relatives, and an enterprise over which such key management personnel or his/her relative is able to exercise significant influence, are covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out an independent valuation of assets, being software and fixed assets. However, owing to the expertise of Chartered Accountants in matters relating to valuation of assets, the Appellant's reliance on the valuation reports provided by statutory auditors of the Issuer Company and the lack of any specific allegation in the SCN regarding the valuation of assets of the Issuer Company disclosed in the RHP, the benefit of the doubt has been given to the Appellant by the Respondent itself and, as such, this charge stands dropped against the Appellant. We shall, therefore, not be dealing with this issue in our judgment. 13. To sum up, the learned Senior Counsel for the Respondent has urged that the degree of due diligence which was required to be adhered to by the Appellant, was not maintained by the Appellants in certain aspects of the process of floating the Issuer Company's IPO. The Appellant was unable to responsibly oversee the observance of regulatory compliances by the Issuer Company, which as put forth by the Respondent is one of its principal duties owed to the securities market at large. The Respondent has, however, fairly brought to our notice that the Issuer Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consist of 11 Chapters and 20 Schedules. Chapter 1 deals with Preliminary issues and provides for definitions etc. Some of the definitions provided in Regulation 2 are relevant for the present purpose and are dealt with hereinafter. Regulation 2(1)(f) explains book building as the process whereby the demand and price of certain securities is assessed and determined. Regulation 2(1)(g) defines a book runner as an appointed by the issuing company to undertake the book building process. Regulation 2(1)(r) defines issuer as any person, meaning any judicial entity, making an offer of securities. Regulation 2(1)(x) defines the term 'offer document' as red herring prospectus, prospectus, shelf prospectus and information memorandum in case of a public issue and letter of offer in case of a rights issue. Regulation 2(1)(zc) defines public issue as initial public offer and further public offer. Regulation 2(2) states that all words and expression not defined in the ICDR Regulations shall be the ascribed meaning as per the Companies Act, the SCRA and the Depositaries act, and rules and regulations made thereunder. 18. Chapter 2 deals with Common Conditions for Public Issues and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the Board have been incorporated in the offer document; a due diligence certificate as per Form C of Schedule VI, at the time of registering the prospectus with the Registrar of Companies; a copy of the resolution passed by the board of directors of the issuer for allotting specified securities to promoters towards amount received against promoters' contribution, before opening of the issue; a certificate from a Chartered Accountant, before opening of the issue, certifying that promoters' contribution has been received in accordance with these regulations, accompanying therewith the names and addresses of the promoters who have contributed to the promoters' contribution and the amount paid by each of them towards such contribution; a due diligence certificate as per Form D of Schedule VI, immediately before the opening of the issue, certifying that necessary corrective action, if any, has been taken; a due diligence certificate as per Form E of Schedule VI, after the issue has opened but before it closes for subscription. Once the offer document has been displayed on the websites of SEBI and the stock exchanges for a period of 21 days as per Regulation 9 for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty net arrangement wherein the IC provides such an arrangement under which a person offers to purchase specified securities from the original allottees at the issue price. Regulation 45 delineates the green-shoe option and lays down the conditions and parameters within which such an option can be made available in an effort to stabilize the post-listing price of the securities offered in a public issue. Regulation 46 prescribes the minimum and maximum period for which a public issue must be kept open for subscription, viz., 3 days and 10 days respectively. Regulation 49 stipulates that the IC shall stipulate in the offer document, the minimum application size in terms of number of specified securities which shall fall within the range of minimum application value of ten thousand rupees to fifteen thousand rupees. Regulation 50 lays down that the allotment procedure shall be spelt out by the managing director along with the lead post-issue MBs in a fair and proper manner in accordance with Schedule XV of the ICDR Regulations. Regulation 51 stipulates that the post-issue lead merchant banker shall ensure that the amount received in respect of the issue is released to the IC as per se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Indian Depositary Receipts. Chapter 11 deals with certain Miscellaneous provisions. 25. We shall now turn our attention to the first and primary leg of the Respondent's submission in the present matter, viz., the non-disclosure as a related party transaction of the transaction with Gadeo to take over the partnership firm, which possessed certain immoveable property, being property situated at B-60, Sector 57, Noida. This was done in consideration of a part-payment of 2,00,000 shares priced at ₹ 100 each in favour of Mrs. Richa Mittal, who owned 97.5% of Gadeo and was hence the majority owner. Let us now recapitulate certain undisputed facts pertaining to this issue: a) Gadeo was originally formed with three partners, namely, Mr. Sanjeev Mittal, Mrs. Richa Mittal and Mr. R.K. Mittal, Mr. Sanjeev Mittal's father. Vide partnership deed dated April 1, 2008, Mr. Sanjeev Mittal retired and Richa Mittal, along with Mr. R.K. Mittal remained as Gadeo's partners. This fact was duly disclosed in the RHP. b) The Issuer Company entered into an Memorandum of Understanding with Gadeo dated September 1, 2009 for the purposes of taking over the partnership firm, Gade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... likely to mislead the investors in the Issue. Clause 4.9 - The Company shall update the information provided to the BRLM and duly communicate to the BRLM in case of any material change of the same subsequent to the submission of the Draft Red Herring Prospectus to SEBI and upto the listing of Equity Shares of the Company. Also, until the listing of the Equity Shares of the Company on all the stock exchange where listing is contemplated, the Company undertake to promptly notify the BRLM of any information, corporate event or any decision whatsoever, which would or is likely to have material bearing on the ability of the investor or prospective investor to take an investment decision to participate in the Issue. f) An exhaustive Due Diligence Checklist was provided to the Issuer Company seeking detailed and verbose information regarding the operation and financial status of the company which included queries pertaining to details of bridge loans and related party transactions entered into between the parties. g) An Undertaking-cum-Indemnity dated November 6, 2010 was obtained by the Appellants from Mr. Sanjeev Mittal stating that the Issuer Company had not purchased any pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date, and (iv) that since the date of the last balance sheet included in the Prospectus to be filed with the RoC, there has not been any change in the capital stock, or increase in short-term debt or long-term debt of the Company, except in all instances for changes, increases or decreases that the Prospectus to be filed with the RoC disclose have occurred or may occur. Clause 11.1(a) - The Red Herring Prospectus and the Prospectus as of their respective dates did not/will not contain any untrue statement of material fact or did not/will not omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Clause 11.1(i) - There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business, management or operations of the Company from that set forth in the Red Herring Prospectus. Clause 11.1(u) - The financial statements of the Company included in the Red Herring Prospectus and the Prospectus to be filed with the RoC have been prepared, and will be prepared, in ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed to start and run the business of manufacturing.....with profit sharing ratio of 97.5:2.5 between Mrs. Richa Mittal and Mr. R.K. Mittal. 26. It is a matter of record that the following actions were undertaken by the Appellants to verify the status of Mrs. Richa Mittal vis- -vis. the Issuer Company: a) The Appellants examined the financial statements for the preceding five financial years which were also audited by the statutory auditor and found no mention of Mrs. Richa Mittal or Gadeo as a related party transaction. b) The Appellants scrutinized audited and restated statements provided by the peer review auditor which did not bear any reference to any transaction with Mrs. Richa Mittal or Gadeo as a related party transaction. c) Similarly, on an examination of the Register of Contracts of the Issuer Company, no information was found regarding any director's/promoter's interest in the transaction with Gadeo. d) Copies of Form 24AA, viz., General Notice for Disclosure of Interest of Directors were examined by the Appellants, specifically including the ones submitted by Mr. Sanjeev Mittal for the financial years ending March 31, 2010 and March 31, 2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber of key management in common with the reporting enterprise. Para 10.1 of AS 18 defines Related Party : 10.1. Related party - parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. Para 10.3 of AS 18 defines Control : 10.3. Control - (a) ownership, directly or indirectly, of more than one half of the voting power of an enterprise, or (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise, or (c) a substantial interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise. Para 10.9 of AS 18 defines Relative as under: 10.9. Relative - in relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings with the reporting enterprise. Para 12 of AS 18 : 12. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives of directors/promoters of such enterprise, or to key management personnel of the Issuer Company and relatives of such personnel. In particular, Clause 10.1 defines 'related party' in somewhat uncompromising terms, stating that for the purposes of disclosures as per AS 18, parties shall be construed as being related only if one has the ability to control or significantly influence the other, being the reporting entity. Moreover, clause 10.3 defines control in a manner which includes control over the Board of Directors or owning more than half the voting power of the reporting enterprise or the power to direct the policies of such an enterprise. 30. Now, in Gadeo, Mrs. Richa Mittal possesses the overwhelming majority of 97.5% in the partnership with Mr. R.K. Mittal owning a measly 2.5%. The Respondent has relied upon clause 3(d) of AS 18 while arguing that even R.K. Mittal's interest in Gadeo would bring the transaction with Gadeo within related party relationships . However, it is pertinently noted, as argued by the Appellants, that clause 3(e) of AS 18 attempts to explicate the import of clause 3(d) by putting forth that the persons covered by 3(d) must exert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Appellant that the Due Diligence Manual of the Association of Investment Bankers of India, we note that in relation to determining related party transactions, a BRLM must inspect the Minutes of various committees of the Board of the last five years; Form 24AA for the other directorships of the current directors; Related Party Transactions Statement in financial statements and Register of Contracts under section 301 of the Companies Act; and Minutes of the Board Meetings for the last two years to identify interest of directors in any property acquired by the reporting entity within the last 2 years. As noted above, all these documents were duly analysed by the Appellants and there was no information in any of these indicating that the transaction with Gadeo was a related party transaction. 33. It may also be pertinently mentioned that information regarding vested interests vis- -vis relatives is not available anywhere in the public domain and necessarily needs to be supplied by the company. The modus operandi adopted by the Appellant in this case therefore is acceptable insofar as there is no source in the public domain that provides independent information to establish su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Company, the Appellant reviewed the outcome of their own extensive diligence, as described hereinabove in the preceding paragraphs, to cover Mrs. Richa Mittal relationship to the Issuer Company. However, despite the presence of certain pointers in the information that the Appellants possessed with themselves, it is a matter of fact that nothing was contained in the partnership deed that explicitly pointed towards a relationship between Mr. Sanjeev Mittal and Mrs. Richa Mittal or indicated that she was married to Mr. Sanjeev Mittal's brother. This combined with the fact that AS 18 does not mention a sister-in-law as a relative and that Mrs. Richa Mittal did after all own 97.5% of Gadeo, dwarfing the 2.5% owned by Mr. R.K. Mittal, must be construed as a mitigating factor. 36. We now turn to the issue of the non-disclosure of the taking of ICDs by the Issuer Company. From a perusal of the documents on record, we note that there are no minutes of board meetings which make a note of any decision of the Board of the Issuer Company to take ICDs. Further, as is clear from Annexure C of the Written Submissions of the Appellants, in an effort to do justice to the exercise of due dil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were BRLMs for the IPO. It was held that they had failed to disclose material information regarding rejection of the proposal for forest clearance of Kodolibad Iron ore mine in the RHP and also to the Stock Exchanges for dissemination of the information by them to the shareholders in violation of Clause 36 of the Listing Agreement. In fact SEBI went to the extent of categorically holding that the BRLMs knowingly suppressed the issue of rejection of the proposal regarding the mines in Kodolibad and misled investors by concealing information from them. The BRLMs accordingly were said to have failed in their duty to exercise proper due diligence in violation of the ICDR Regulations and the MB Regulations by keeping investors in the dark about the factual aspect regarding the forest diversion proposal of the Iron Ore Mine of ECL . Even after recording such a grave finding against the BRLMs, none of the entities faced suspension/cancellation of their certificates of registration. On the contrary, only a monetary penalty of ₹ 1 crore in total was levied on them. 39. Further, on April 6, 2016 an order was passed by SEBI against Keynote Corporate Services Limited (Keynote) and ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
