Mohib Noman Khericha vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Order Reserved On: 14.07.2016 Date of Decision : 26.07.2016

Appeal No. 229 of 2014

1.

Mohib Noman Khericha 711, Mahakant, Opp. V. S. Hospital, Ellisbridge, Ahmedabad- 380 006

2. Manoj Kumar Ramrakhyani 711, Mahakant, Opp. V. S. Hospital, Ellisbridge, Ahmedabad- 380 006 ...Appellants

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai -400 051 ...Respondent

Mr. Ravichandra Hegde, Advocate with Mr. Abishek Venkataraman and Ms. Aashni Dalal, Advocates i/b J. Sagar & Associates for Appellants. Mr. Kumar Desai, Advocate with Mr. Saurabh Bachhawat and Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar

1. Appellants herein are aggrieved by the order passed by the

Adjudicating Officer ("AO" for short) of Securities and Exchange Board

of India ("SEBI" for short) on 30.04.2014. By the said order penalty of

` 10 lac is imposed on each appellant under Section 15HB of the

Securities and Exchange Board of India Act, 1992 ("SEBI Act" for short)

for violating regulation 60(4)(a) read with regulation 8(2)(b) and 2

regulation 64(1) of the Securities And Exchange Board Of India (Issue

Of Capital And Disclosure Requirements) Regulations, 2009 ("ICDR

Regulations" for short).

2. Appellant No. 1 is the Managing Director and Appellant No. 2 is

the Vice President and Company Secretary of Chartered Capital and

Investment Limited ("CCIL" for short). CCIL was appointed as Lead

Manager to the Initial Public Offer ("IPO" for short) of RDB Rasayans

Limited ("RDB" for short).

3. Penalty of ` 10 lac is imposed on each appellant on ground that in

the IPO of RDB, the, appellants as officers of CCIL have violated the

provisions of ICDR Regulations by failing to disclose the following:-

a) Failed to disclose about the inter-corporate loan in the

Red Herring Prospectus ("RHP" for short) and in the

prospectus.

b) Failed to update the prospectus regarding the board

meeting of RDB held on 12.09.2011.

c) Failed to direct RDB to obtain updated quotations of

plant and machinery.

4. With reference to the first charge, it is held in the impugned order

that the appellants have failed to disclose in the RHP/prospectus of RDB

regarding the inter-corporation loan of ` 7.28 crore given by RDB to

RDB Realty and Infrastructure Limited ("RDBRIL" for short) which is a

RDB group company.

3

5. Appellants contend that fair and adequate disclosures were made in

the RHP/prospectus. As the directors of RDB had specifically confirmed

that during the relevant period no significant developments had taken

place which would materially or adversely affect the IPO of the company

and as there was no material which could arouse suspicion so as to make

further inquiry in the matter, appellants cannot be said to have failed to

make adequate disclosures in the RHP/ prospectus. It is further

submitted that since the Whole Time Member of SEBI in his order dated

13.05.2015 had given benefit of doubt to CCIL, the benefit of doubt must

also be given to the appellants who are officers of CCIL.

6. We see no merit in the above contentions. As held by this Tribunal

in the case of Almondz Global Securities Ltd. v/s SEBI (Appeal No. 275

of 2014 decided on 13.05.2016), the merchant banker/ lead manager

cannot solely depend upon the statement made by the directors of the

company and it would have been prudent on their part as merchant

banker/ lead manager to peruse the bank statements of the company

which in the present case would have revealed that during the relevant

period inter corporate loans of ` 7.28 crore were given by RDB to its

sister concern. Admittedly, no such exercise was carried out by the

appellants and hence the decision of AO that the appellants have failed to

disclose the inter-corporate loans in the offer documents cannot be

faulted. Fact that the WTM of SEBI has given benefit of doubt to CCIL

has no significance because, this Tribunal has consistently held that the

merchant banker/ lead manager cannot simply rely on the statement made

by the issuer company and must look into the bank statements for the 4

relevant period so to ascertain significant changes, if any, which could be

material information required to be disclosed in the offer documents.

Thus, the decision of the AO in respect of the first charge cannot be

faulted.

7. With reference to the second charge, it is a matter of record that

RDB and its directors had suppressed the said resolution dated

12.09.2011 from the book running lead manager i.e. CCIL. Appellants

who are officers of CCIL had no reason to believe that RDB and its

directors had passed a resolution on 12.09.2011 to give loan up to ` 50

crore to RDBRIL. Since, the appellants were kept in dark about the

12.09.2011 resolution by RDB and its directors and since there is

material on record which could arouse suspicious that any such resolution

may have been passed by RDB, in our opinion, the AO was not justified

in holding that the appellants have failed to update the prospectus

regarding the Board resolution of RDB dated 12.09.2011. It is equally

important to note that the resolution dated 12.09.2011 was only a

decision to give surplus funds as loan to RDBRIL as and when surplus

funds were available. In the resolution dated 12.09.2011 it is not stated

that IPO proceeds would be treated as surplus funds and it is only the

overall conduct of RDB and its directors after 12.09.2011 reveals that the

resolution dated 12.09.2011 was suppressed from the investors and also

CCIL. Since resolution dated 12.09.2011 was suppressed by RDB and its

directors and there was no reason to suspect that any such resolution

would have been passed, CCIL and its officers cannot be said to have 5

failed to disclose the resolution dated 12.09.2011. Hence the second

charge levelled against the appellants cannot be sustained.

8. With reference to the third charge, it is contended on behalf of the

appellants that furnishing cost of plant and machinery in the prospectus is

based on the estimated costs and therefore, in the absence of any specific

legal requirement to call for quotations from time to time so as to update

the DRHP/RHP/prospectus, the appellants cannot be said to have

committed any violations. It is further submitted that certain quotations

had in fact been updated during the period between the DRHP (March

26, 2010) and RHP (September 13, 2011) and further out of the 41 items

stated in the list of plant and machinery intended to be purchased by the

issuer company, quotations for 22 items given in October 2009 have been

updated with the details of new quotations in May 2011.

9. It is relevant to note that the RHP was filed by RDB in March

2010. The said RHP was approved by SEBI on 12.09.2011 and

immediately thereafter IPO opened on 21.09.2011 and closed on

23.09.2011. Admittedly, appellants had updated the price of some of the

plant and machinery to be acquired by RDB. No doubt that the

appellants ought to have taken steps to update the prices of all the plant

and machinery that were to be procured by RDB. It is relevant to note

that on 12.09.2011 while approving DRHP filed in March 2010, SEBI

had not recommended that updated cost of plant and machinery be called

for. Moreover, no provision is brought to our notice that the cost of

plant and machinery must be updated at regular intervals. Apart from the 6

above, in the facts of present case, there is nothing on record to suggest

that the change in the cost of plant and machinery was substantial and

failure to update the cost of plant and machinery had any bearing on the

IPO of RDB. In these circumstances, decision of the AO that the

appellants failed to direct RDB to call for fresh updates in respect of the

cost of plant and machinery cannot be sustained.

10. Thus, out of the three charges leveled against the appellants two

charges cannot be sustained. Since penalty of ` 10 lac is imposed on

each appellant in respect of three changes, we would have upheld the

penalty to the extent attributable to the first charge upheld against the

appellants. It is relevant to note that the Designated Authority of SEBI in

the present case had recommended that CCIL be prohibited from taking

any new assignment or contract for a period of three months. However,

the WTM of SEBI in his order dated 13.05.2015 passed against CCIL has

recorded that pursuant to the interim order, CCIL has undergone

prohibition from taking up any new assignment or contract for more than

nine months. Since appellants are Managing Director and Vice President

and Company Secretary of CCIL, it is apparent that the appellants have

also suffered excess prohibition than the facts of the case demanded.

11. In these circumstances, in the facts of present case, in our opinion,

for the first violation upheld against the appellants, it would be proper to

sustain the penalty of ` 1 lac on each appellant.

12. Accordingly, while upholding the decision of AO of SEBI in

relation to the first charge and setting aside the remaining two charges, 7

we modify the impugned order by reducing the penalty from ` 10 lac to

` 1 lac on each appellant, to be paid by appellants to SEBI within six

weeks from today.

13. If the penalty of ` 1 lac is paid by each appellant within six weeks

from today, SEBI shall accept the same in full and final settlement of the

impugned order. If the appellants fail to pay the penalty within six weeks

from today, SEBI would be entitled to recover the said penalty with

interest at the rate of 12 % per annum from the date of the order passed

by AO of SEBI till payment.

14. The appeal is disposed of in the above terms with no order as to

costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 26.07.2016 Prepared & Compared By: PK