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d) Whether the AO is justified in holding that failure on part of appellants to disclose in the RHP of CARE, information relating to strict compliance of the minimum capitalization norms stipulated in the letter of RBI dated 26.09.2012 constitutes failure to exercise due diligence and therefore, the appellants are guilty of violating the provisions contained in the ICDR Regulations and Merchant Bankers Regulations.

5. Thus, it is evident that in the impugned order the appellants are held guilty of violating ICDR Regulations and Merchant Bankers Regulations primarily on the ground that in the RHP of CARE, the conditions imposed in the letter of RBI dated 26.09.2012 for exempting the non-resident investors participating in the offer of CARE from the requirement of obtaining NOC from their respective regulators has not been disclosed. The conditions imposed by RBI in its said letter dated 26.09.2012 were, firstly, minimum capitalization norms applicable to NBFCs be strictly adhered to. Secondly, the post issue pattern of shareholding of the company be submitted by CARE to RBI on completion of the process. Thirdly, the reporting formalities in terms of RBI Circular No: 63 dated 22.04.2009 read with Circular No: 43 dated 04.11.2011 be adhered to.

21. During the course of hearing we had called upon SEBI to place on record any instance in the past to show that minimum capitalization norms have been made applicable to non-resident investors covered under Schedule 2 & 8 of FEMA Regulations. Counsel for SEBI, fairly stated that SEBI is not in a position to show that at any time in the past minimum capitalization norms have been applied to non-resident investors covered under Schedule 2 & 8 of FEMA Regulations. Even in the letter of RBI dated 01.08.2016 (annexed to the Additional Affidavit of SEBI dated 26.08.2016) it is clearly stated that no data is available with RBI to show that minimum capitalization norms have been made applicable in the past to investments by non-resident investors covered under Schedule 2 & 8 of the FEMA Regulations. Thus, the aforesaid letter of RBI dated 01.08.2016 establishes beyond any shadow of doubt that there is no provision in law by which minimum capitalization norms have been made applicable to non-resident investors covered under Schedule 2 & 8 and for the first time RBI by its letter dated 06.12.2012 sought to apply minimum capitalization norms to investments made by non-resident investors covered under Schedule 2 & 8 of the FEMA Regulations. In these circumstances, merely because CARE in the facts of the present case agreed to apply minimum capitalization norms to non- resident investors covered under Schedule 2 & 8 as directed by RBI vide letter dated 06.12.2012, it cannot be inferred that RBI vide its letter dated 26.09.2012 had directed CARE to apply minimum capitalization norms to non-resident investors covered under Schedule 2 & 8 of FEMA Regulations and consequently hold that non-disclosure of the above information was in violation of ICDR Regulations and Merchant Bankers Regulations. It is equally important to note, that in the letter dated 06.12.2012 it is not stated that RBI in its earlier letter dated 26.09.2012 had called upon CARE to apply the minimum capitalization norms to non-resident investors covered under Schedule 2 & 8 of the FEMA Regulations. Thus, it is clear, that RBI by its letter dated 06.12.2012, for the first time called upon CARE to comply minimum capitalization norms in relation to investments by non-resident investors covered under Schedule 2 & 8 and on CARE seeking time to comply, RBI readily granted six months time. It is not in dispute that CARE has complied with the directions contained in the letter of RBI dated 06.12.2012 within the stipulated time. In these circumstances, the AO is not justified in holding that the appellants have failed to disclose material information in the RHP and thereby violated the provisions contained in the ICDR Regulations and Merchant Bankers Regulations. Consequently, penalty imposed against the appellants cannot be sustained.

3. As per the ICDR Regulations, a company which intends to float an IPO cannot directly do this on its own but only through merchant bankers/BRLMs registered with and regulated by SEBI. Regulation 5 enshrined in Chapter 2 of the ICDR Regulations provides for the appointment of Merchant Bankers and other intermediaries and lays down that the Issuer Company shall appoint merchant bankers to carry out all obligations in respect of the issue of securities floated by the issuer company. It is, therefore, necessary, before dealing with the submissions of both the parties, to list the various regulations involved in the present matter for the sake of convenience :-

6. Although Part A of Schedule VIII captures what comprises of disclosures, there is no exact definition of "material" in the ICDR Regulations. The Black's Law Dictionary (Tenth Edition) defines 'Material' inter alia as 'Of such a nature that knowledge of the item would affect a person's decision making; significant; essential.' Therefore, it needs to be noted that the word 'material' means 'important'. However, purely by virtue of being important, the information may not per se be complete in all respects. Regulation 57 of the ICDR distinguishes between material disclosure on one hand, and true and adequate information in an attempt to strike a balance between information on the other, which is important and complete. From an investor's standpoint, an RHP is the source of all information required in order to make an investment decision. Consequently, investors expect real facts to be mentioned in the RHP in order to assess the situation before putting their money in the market. Hence, disclosures in the RHP should be based on actual facts at the time of the issue and not on speculation or hypotheses. Having said that, a clear picture of facts as they stand on the date of the RHP, must be provided in the said offer document. Regulation 8 of the ICDR Regulations states that at the time of registering the offer document with the Registrar of Companies or filing the letter of offer with the designated stock exchange, the merchant banker submits a due diligence certificate to SEBI certifying inter alia that the comments of SEBI have been updated and that all "material information" has been disclosed.