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29. Chapter 2 deals with Common Conditions for Public Issues and Rights Issues. Regulation 4 contained in this chapter provides for initial steps to be taken and conditions to be fulfilled by an issuing company before the filing of the draft offer document. This regulation needs to be read with regulations 25 and 26. Regulation 25 states that on the day of filing the draft offer document with SEBI and with the ROC, all conditions prescribed in Chapter 3 should be met with. Regulation 26 Regulation 26 puts forth certain conditions which need to be satisfied by the IC before an IPO can be made. Regulation 5 enshrined in Chapter 2 provides for the Appointment of Merchant Bankers and other intermediaries which lays down that the Issuer Company shall appoint merchant bankers, one of whom shall be a lead merchant banker. The Issuer Company shall also appoint other intermediaries registered with SEBI in consultation with the lead merchant banker. It shall be the duty of the MB to independently evaluate the intermediaries and accordingly advise the IC regarding their appointment. Regulation 6 deals with the Filing of Offer Documents and puts forth that an IC shall be eligible to make a public issue or a rights issue only after a draft offer document has been filed with SEBI for tis comments through the MB 30 days prior to filing it with the ROC or filing the letter of offer with the designated stock exchange in question. Once the changes as proposed by SEBI have necessarily been incorporated in the offer document by the IC and the MB, it is registered with the ROC, while simultaneously filing it with SEBI. As per Regulation 7, in-principle approval should be obtained from all stock exchanges in which certain specified securities are proposed to be listed.

30. Regulation 8 stipulates that along with the draft offer document the MB shall also provide SEBI with other documents such as, inter alia, a copy of the agreement entered into between the issuer and the lead merchant bankers; a due diligence certificate as per Form A of Schedule VI; a certificate in the format specified in Part D of Schedule VII, confirming compliance with the conditions mentioned therein. Further, once SEBI has issued its comments, or the time period within which SEBI ought to have issued comments as per Regulation 6(2) has expired, the MB shall submit the following documents to SEBI: a statement certifying that all changes, suggestions and observations 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 the public's comments, the merchant bankers shall file with SEBI a statement giving information of the comments received by them or the IC on the draft offer document during that period and the consequential changes, if any, to be made in the draft offer document.

47. However, for this lapse in judgment, a punishment of five years of debarment is extremely harsh and highly disproportionate. It is settled law that due diligence means reasonable diligence expected from a Merchant Banker. A Merchant Banker cannot be expected to start a due diligence exercise with a presumption of fraud or mischief to be committed by a company whose IPO is to be issued through the Merchant Banker. A Merchant Banker cannot be expected to act like an investigating agency and start with a note of suspicion as regards the bona fides of the company, on whose behalf it is entrusted with the task of drafting and preparing the DRHP, RHP and the Prospectus, etc. After the signing of a Memorandum of Understanding by the MB with the the Issuer Company to draft and finalise the offer documents required for the IPO, a relationship of trust and confidence ensues between the two and cannot be unilaterally breached by any of the parties from the date of signing of the Memorandum of Understanding till the conclusion of the IPO. The Memorandum of Understanding has to be signed as per Regulation 5 read with Schedule II of the ICDR Regulations and includes, inter alia, certain undertakings to be given by the the Issuer Company to the MB from time to time to be relied upon by the MB for disclosure purposes. Accordingly, the Appellant entered into such a Memorandum of Understanding, the salient features delineating the respective responsibilities of both the Appellant as well as the the Issuer Company are as follows: