Securities Appellate Tribunal
Corporate Strategic Allianz Ltd. vs Sebi on 29 March, 2019
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved on: 14.3.2019
Date of Decision : 29.3.2019
Appeal No.224 of 2017
Corporate Strategic Allianz Ltd.
101, Prerak Apartments,
61, Pritamnagar, B/h Hope
Hospital, Ellisbridge,
Ahmedabad - 380006. ..... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot C4-A,
G Block, Bandra-Kurla Complex,
Bandra (E), Mumbai - 400 051. ...... Respondent
Mr. Deepak R. Shah, Advocate for the Appellant.
Mr. Karan Bhosale, Advocate with Mr. Shantanu Mitra and Mr.
Nishant Upadhyay, Advocate i/b. Desai & Diwanji for the
Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Dr. C.K.G. Nair, Member
Per : Justice Tarun Agarwala
1.The Appellant has filed the present appeal against an order dated 12th May, 2017 passed by the Adjudicating Officer of Securities and Exchange Board of India (referred to hereinafter 2 as 'SEBI') under Section 15-I of the Securities and Exchange Board of India Act, 1992 (referred to hereinafter as 'SEBI Act') read with Rule 5 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 whereby the Adjudicating Officer has imposed penalty of Rs.8,00,000/- under Section 15HB of the SEBI Act for violation of Regulation 64(1) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (referred to hereinafter as 'ICDR Regulations') as well as Regulation 13 of Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 (referred to hereinafter as 'Merchant Bankers Regulations') read with Clauses 1 to 7 and 21 of the Code of Conduct for Merchant Bankers specified in Schedule III of the Merchant Bankers Regulations.
2. The facts leading to the filing of the present appeal is, that the appellant is a Merchant Banker and was the Book Running Lead Manager (BRLM) to the Initial Public Offer (referred to hereinafter as 'IPO) of a company known as Rushil Decor Ltd. (referred to hereinafter as 'the Company'). The said Company came up with an IPO of 54,00,000 equity shares of face values of Rs.10/- at an issue price of Rs.72/- per share. The Red 3 Herring Prospectus was filed on June 8, 2011 and the prospectus was filed on June 28, 2011. The bids opened on June 20, 2011 and closed on June 23, 2011. A show cause notice was issued indicating that the Company had taken unsecured bridge loan of Rs.7,06,00,000/- which was not disclosed in the Prospectus for the IPO and in fact the Prospectus categorically stated that the Company had not raised any bridge loan against the proceeds of this issue. Accordingly, the appellant was charged that it did not exercise due diligence as it did not verify the adequacy of the disclosures and that it failed to verify the truthfulness and completeness of the aforesaid disclosures and, therefore, violated Regulation 64(1) of the ICDR Regulations as well as Regulation 13 of Merchant Bankers Regulations read with Clauses 1 to 7 and 21 of the Code of Conduct for Merchant Bankers specified in Schedule III of the Merchant Bankers Regulations.
3. Pursuant to the reply filed by the appellant, the Adjudicating Officer found that the appellant had violated the provisions of Regulation 64(1) of the ICDR Regulations holding that a crucial fact was not disclosed in the prospectus and therefore the Adjudicating Officer imposed a penalty of Rs.8,00,000/- under Section 15HB of the SEBI Act. 4
4. We have heard Mr. Deepak R. Shah, Advocate for the appellant and Mr. Karan Bhosale, Advocate assisted by Mr. Shantanu Mitra and Mr. Nishant Upadhyay for the respondent. It was urged by the learned counsel for the appellant that the appellant had exercised due diligence and had verified the adequacy of the disclosures. It was contended that a loan of Rs.10.14 crores taken by the Company was shown in the prospectus and it was also indicated that the said loan would be paid off from the IPO proceeds and, therefore, the correct picture had been indicated in the prospectus. It was admitted that the loan of Rs.5.94 crores was not disclosed but submitted that it did not have a material bearing as it did not affect the disclosure that was required to be made in the IPO. It was further contended that the finding given by the Adjudicating Officer that the loan of Rs.5.94 crore taken shortly before the IPO was a bridge loan is incorrect as in fact it was a general loan.
5. On the other hand, the learned counsel for the respondent strenuously contended that the Adjudicating Officer had clearly found that the appellant had violated the provisions of Regulation 57 of the ICDR Regulations and, therefore, was not 5 diligent and consequently also violated Regulation 64(1) of the ICDR Regulations.
6. Having heard the learned counsel for the parties it would be appropriate to refer to certain provisions of the ICDR Regulations. Regulation 57 of the ICDR Regulations provides as under:
"Manner of disclosures in the offer document.
57. (1) The offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision.
(2) Without prejudice to the generality of sub-regulation (1):
(a) the red-herring prospectus, shelf prospectus and prospectus shall contain: (i) the disclosures specified in Schedule II of the Companies Act, 1956; and
(ii) the disclosures specified in Part A of Schedule VIII, subject to the provisions of Parts B and C thereof."
Clause 2(VII) (G) and (XVI) (B)(2) of Part A of Schedule VIII read with regulation 57(2)(a). 2(VII)(G)- Sources of financing of funds already deployed: The means and source of financing, including details of bridge loan or other financial arrangement, which may be repaid from the proceeds of the issue.
2(XVI)(B)(2) - The signatories shall further certify that all disclosures made in the offer document are true and correct."
6Regulation 64 of the ICDR Regulations which relates to due diligence reads as under:
"Due diligence
64. (1) The lead merchant bankers shall exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents."
7. From a perusal of the Regulation 57 it is apparently clear that the offer document is required to contain all material disclosures so as to enable the applicant to take an informed investment decision. Schedule VIII clearly indicates that the means and sources of financing including details of bridge loan or other financial arrangement are specifically required to be indicated in the prospectus.
8. In the present case, admittedly a loan of Rs.5.94 crores was taken immediately before the issuance of the IPO which admittedly was not disclosed in the prospectus. The means and sources of this loan was not disclosed to the public in the prospectus. In the absence of this material fact the investors were unaware of this financial liability as well as the fact that this loan would be paid from the IPO proceeds. Such information was required to be disclosed in the prospectus. Non disclosure was in violation of Regulation 60(4) of the ICDR 7 Regulations which requires disclosure of all material developments. Loans taken prior to the issuance of the IPO has a bearing in as much as the said loan was eventually paid from the IPO proceeds. In our opinion, this was a material fact which was required to be disclosed in the prospectus. Thus, the Adjudicating was justified in holding that there was a violation of Regulation 57 of the ICDR Regulations.
9. In the light of violation of the provisions of Regulation 57 we find that the appellant did not exercise due diligence nor satisfied himself with regard to all aspects of the issue including the veracity and adequacy of disclosure in the offer document. We find that quite apart from the fact that the loan taken was not disclosed in the prospectus, a wrong statement was made in the prospectus that the Company had not raised any bridge loan against the proceeds of this issue. This statement was factually incorrect as the loan of Rs.5.94 crores was clearly a bridge loan. The contention of the learned counsel for the appellant that the said loan was not a bridge loan but a general loan is misconceived in as much as we are of the opinion that a loan which is of less than one year is generally called a bridge loan. A bridge loan is generally taken as an interim measure "to bridge the gap" during the times when financing is needed but is 8 not available. In the instant case, it was urged that the said loan was taken in order to pay off the earlier loan which therefore clearly proves that the loan taken comes under the category of a bridge loan. In our view, the finding arrived at by the Adjudicating Officer that the loan of Rs.5.94 crores is nothing else but a bridge loan does not suffer from any error of law.
10. It was urged that whereas the Company and its Directors were penalized a sum of Rs.1,00,000/- each a similar penalty should have been imposed upon the appellant instead of penalizing it to the tune of Rs.8,00,000/-. The learned counsel submitted that the imposition of penalty is thus discriminatory. In the first flush, the argument appears to be attractive but, on a closer scrutiny, we find that the said submission cannot be accepted. Making accurate disclosure is the cornerstone of the IPO process. No lapse of accuracy could be tolerated in this regard in as much as it is on the strength of the disclosures made in the prospectus that the investors take a decision to invest. The prospectus requires that full and fair disclosure of the state of affairs of the Company should be disclosed and that the Merchant Banker is required to conduct due diligence in respect of the disclosures. A Merchant Banker is appointed for the purpose of managing the issue of an IPO of a Company and, 9 therefore, plays a fiduciary role by coordinating the activities of the Company, the Regulatory Bodies, and the Investors. The Merchant Banker is required to present the Company's information to the investors in a fair, concise and unambiguous form. By not furnishing full disclosures and in fact allowing false information to creep in the disclosures has misled the investors. Thus, we are of the opinion that the appellant did not exercise due diligence and did not disclose fairly in the offer document. We are, thus, of the opinion that the imposition of penalty which could extend up to Rs.1 crore under Section 15HB imposed by the Adjudicating Officer in the given facts is just and reasonable. In the light of the aforesaid, we do not find any error in the impugned order. The appeal fails and is dismissed. In the circumstances of the case, parties shall bear their own costs.
Sd/-
Justice Tarun Agarwala Presiding Officer Sd/-
Dr. C. K. G. Nair Member 29.3.2019 Prepared and compared by RHN