Corporate Strategic Allianz Ltd. vs Sebi

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."

6

Regulation 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