Order in respect of Chartered Capital and Investment Limited[SAT Appeal No.:342/2015]

WTM/RKA/EFD-DRA-II/37/2015 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under section 12(3) of the Securities and Exchange Board of India Act, 1992 read with regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008: In respect of Chartered Capital and Investment Limited (Merchant Banker) (SEBI Registration No. INM000004018): In the matter of the IPO of RDB Rasayans Ltd. 1. RDB Rasayans Limited ("RDB"), a company based in Kolkata, came out with an Initial Public Offering ("IPO") for 45,00,000 equity shares of face value of `10 each in the price band of `72 - `79 per share during the period 21-23 September, 2011 through 100% book building route. The issue size was `35.55 crore. Brickworks Rating had assigned IPO Grade of 2, i.e., 'Below Average Fundamentals' to the said IPO. The IPO was successfully subscribed and the shares were allotted at a upper price band of `79 each to the subscribers. The shares allotted in the IPO were listed on the Bombay Stock Exchange Ltd. ("BSE") on October 07 2011. Chartered Capital Investment Limited (hereinafter referred to as 'CCIL' or 'the Noticee') having SEBI Registration No. “INM000004018” acted as the Book Running Lead Manager (BRLM/ lead merchant banker) for the said IPO.

2. Securities and Exchange Board of India (“SEBI”) observed volatility in the price and volume of the scrip of RDB on the day of listing and conducted a preliminary investigation in respect of trading in the scrip. Based on preliminary findings, SEBI passed an 'ad interim ex-parte' order dated December 28, 2011(hereinafter referred to as the "interim order") in the matter of RDB and inter alia, prohibited CCIL, and its Managing Director Mr. Mohib Noman Khericha (PAN: AGMPK8152H) and its Vice President - Merchant Banking & Company Secretary, Mr. Manoj Kumar Ramrakhyani (PAN: AGFPR0472E) from taking up any new assignment or involvement in any new issue of capital, including IPO, follow-on issue, etc., from the securities market in any manner whatsoever, from the date of the said interim order till further directions. 3. Subsequently, while the investigation in the matter was underway, vide its order dated September 07, 2012 (hereinafter referred to as the “confirmatory order”) SEBI confirmed these directions against CCIL, and its Managing Director Mr. Mohib Noman Khericha and its Vice President - Merchant Banking & Company Secretary, Mr. Manoj Kumar Ramrakhyani.

In the interim order as well as in the confirmatory order there was no charge of Order in respect of Chartered Capital and Investment Ltd.

violation of the Securities and Exchange Board (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (the PFUTP Regulations) against the aforementioned entities. 4. The confirmatory order was challenged by CCIL by filing an appeal before the Hon’ble Securities Appellate Tribunal (Hon’ble SAT) wherein, vide its order dated October 25, 2012, Hon’ble SAT set aside the confirmatory order and directed SEBI to complete the investigation and take appropriate decision qua the appellants by December 31, 2012. 5. After completion of the investigations, SEBI initiated proceedings against CCIL under section 12(3) of the Securities and Exchange Board of India Act, 1992 (SEBI Act)read with Securities and Exchange Board of India (Intermediaries) Regulations, 2008 ('Intermediaries Regulations') and appointed a Designated Authority (hereinafter referred to as the “DA”) in the matter. 6. After completion of the proceedings, the DA submitted a Report dated May 09, 2014 (hereinafter referred to as the “Report”). In the Report, the DA, inter alia, observed that CCIL had:

(a) failed to make disclosures regarding the inter corporate loans given by RDB to its group company RDB Reality and Infrastructure Limited (hereinafter referred to as ‘RDBRIL’) in the Red Herring Prospectus (RHP) and in the Prospectus of RDB; (b) failed to disclose/update the Prospectus regarding the board meeting of RDB held on September 12, 2011 wherein it was decided to grant loans up to the extent of `50 crores to RDBRIL; and (c) failed to point out to RDB to obtain updated quotations of plant and machinery.

7. For the above failures by CCIL, the DA observed that CCIL has violated regulations 60(4)(a) read with 8(2)(b) and 64(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (hereinafter referred to as the ‘ICDR Regulations’) and has not complied with clauses 1, 4 and 7 of the Code of Conduct specified in Schedule III of regulation 13 of the SEBI (Merchant Bankers) Regulations, 1992 (hereinafter referred to as the ‘Merchant Bankers Regulations’). In view of the same, the DA has recommended that the Noticee may be prohibited from taking up any new assignment or contact for a period of three months. 8. After considering the Report, a Show Cause Notice (SCN) dated July 18, 2014 was issued to CCIL(the Noticee) calling upon it to show cause as to why action as recommended by the DA should not be taken against it or a higher penalty as deemed fit should not be imposed upon it. The Noticee, vide its letter dated August 08, 2014, submitted its reply to the SCN. A personal hearing was granted to the Noticee before me on September 16, 2014 when its managing director Mr. Mohib Noman Khericha and director Mr. Deepak Singhvi appeared and made oral submissions.

Vide its letter dated September 23, 2014, the Noticee filed additional reply. 9. In its replies, the Noticeee has raised a preliminary objection that SEBI has not followed the direction of the Hon’ble SAT in its order dated October 25, 2012 whereby it had ordered SEBI to complete the investigation and take appropriate decision qua the appellants, i.e. the Noticee by December 31, 2012. So, legally the direction issued by the WTM dated February 7, 2013 and the notices dated July 26, 2013 and July 18, 2014 have no legal validity as they were issued well after the deadline set by the Hon’ble SAT. 10. The Noticee has further submitted that there is no allegation in this case that the Noticee has connived or colluded with RDB or its promoters/directors in any fraudulent, deceitful and manipulative device, plan, scheme or artifice, etc. or of violation of the PFUTP Regulations, 2003 against CCIL. The only charge against the CCIL is that it has not exercised due diligence while acting as BRLM in the IPO of RDB. The reply/submission of the Noticee on merits are summarised in the following paragraphs.

11. Failure to make disclosures regarding the inter corporate loans in its Red Herring Prospectus (RHP) and in the Prospectus: (1) Regulation 60(4)(a) which CCIL is alleged to have violated is not applicable the Noticee as this regulation provides obligation of the issuer (RDB, in the instant case) and not the merchant banker to make fair disclosures. Merchant Banker being a different entity cannot be expected to know about such material development taking place at the end of the issuer on real time basis. It is only the issuer who can be expected to know about the material development taking place at their end during such period and therefore responsibility of making such disclosure has been cast upon the issuer and not the merchant banker. (2) Regulation 60(4)(a) is not applicable in the present facts and circumstances of the case as it only covers the period between registration of RHP with the Registrar of Companies (ROC) till the date of allotment. None of the transactions, i.e., the board meeting of RDB held on September 12, 2011, dates of quotations or inter corporate loans of `7.28 crores are covered during the aforesaid period except a part of inter corporate loans during the period between the date of registering the RHP with the Registrar of Companies (RoC) and the date of allotment of shares.

(3) Regulation 60(4) does not require disclosure in the RHP or Prospectus but by issuing public notices in newspapers that too by the issuer. The allegation leveled against the Noticee regarding non-disclosure of Inter corporate loans/Inter Corporate Deposits (ICDs) between RDB to RDBRIL in the RHP/Prospectus, is without any basis and substance in the facts and circumstances of the present case. Considering the date of transaction, this regulation requires disclosure by RDB by issuing public notices in newspapers and not by disclosing the same in RHP/Prospectus and least of all by the merchant banker. (4) There is a specific provision in the ICDR Regulations which governs the disclosure/updation in financial information in offer documents after the date of last audited financial statements and that provision obligates the directors of the issuer, and not the merchant banker, for such disclosure. CCIL believes that while framing the ICDR Regulations, all intricacies and happening of events while the issuer is coming for IPO was clearly envisaged. It appears that said regulation has wisely taken care of such instances and happenings in best possible manner and thereby prescribed the disclosure requirements in the Offer Documents and for the subsequent period till the date of allotment with obligation of respective entities to comply with the same.

As it emanates and germane to the affairs of the issuer, it appears to have been viewed that the issuer and its directors would be the best person to be made accountable for its due and proper compliance of provision of law and not the merchant banker like the Noticee in the present case. (5) Unlike rest of the SEBI orders in the IPO matters on merchant banker relating to ICDs (including in respect of Keynote Corporate Services Ltd. which the DA has relied upon in its Enquiry Report) this particular transaction is non-material because the main difference between other cases and RDB is that in case of RDB, the money given by RDB to its group company as ICD was its own surplus money and not the money raised through the IPO and does not have any connection with the IPO money. (6) The Noticee has disclosed all the similar transactions in financial statement and a risk factor specifically mentioning the past transactions as well as future possibility of such transactions. This risk factor was mentioned over and above the mandatory risk factors as per the ICDR Regulations. This act and conduct on the part of the Noticee clearly and in absolute unambiguous terms establishes its intention to not to hide or to suppress any information.

When the Noticee has disclosed similar past transaction and its possible future occurrence along with its consequences, the Noticee would have disclosed these transactions also had it been material in the opinion of the directors or the auditor of the issuer. Even directors and auditor of the RDB were of the opinion that these transactions were not material and it is proven that their opinion was correct as the entire ICDs were repaid alongwith the interest. (7) These transactions in isolation do not even require the approval of shareholders as per erstwhile the Companies Act, 1956 and only the approval of board of directors of the issuer is sufficient. So even from the point of view of the Companies Act, 1956 it is not even that material to take approval from the existing shareholders then how can it be material for the prospective shareholders. RDB did not take even approval/noting of either audit committee or board of directors as and when these transactions happened from April 2011 onwards taking plea that it is in the ordinary course of business and is not material. (8) The only reason SEBI provided in its Investigation Report why the merchant banker should have disclosed these ICDs was based on a misconception that if the funds are transferred to the related parties and are returned before audit of the accounts then the concerned transactions might not get disclosed in the audited accounts.

However, in that case also it has to be mandatorily disclosed in the audited accounts as per Accounting Standard 18 which is evident from the fact that it is disclosed in the Annual Report for the year 2011-12. Further, while making such allegation, investigating officer assumes that money will return in the same year so he is contradicting himself as on one side he doubts RDBRIL ability to repay and on the other side he assumes that money will return in the same year. 12. Failure to make disclosure/update the Prospectus regarding the board meeting held on September 12, 2011: (1) Either there was no such meeting on that date or RDB deliberately concealed it from the Noticee. A merchant banker can conduct a due diligence of something in existence but if something does not exist or is deliberately concealed/suppressed from it then even with the best efforts, the merchant banker cannot detect it. (2) Since RDB had already uploaded Form 23 in respect of AGM on September 28, 2011 itself and shared with the Noticee the draft notice of the AGM, RDB had to show another general meeting, i.e., EGM on the same day.

Similarly, since RDB had already shared with the Noticee the resolution of board meeting dated September 13, 2011 at 10.30 am, they had to show another board meeting on September 12, 2011 at 4.30 pm. The matters approved in both the meetings were not that much urgent and were known to them in advance so it could have been accommodated in only one meeting rather than holding two back to back board meetings on consecutive days specially when two of the directors came to attend the meetings from Mumbai and Delhi. (3) The DA has expected the Noticee that had it exercised its right as per the Memorandum of Understanding to visit RDB or had interacted with the Chairman or the Managing Director or CEO, the Noticee could have found out about the board meeting. However, the Noticee’s employees visited RDB’s premises thrice during the issue; the last visit was in May, 2011. Even meeting between the officials of the Noticee and RDB was also held at Ahmedabad on September 19, 2011 at the time of Press and Broker Meet at Ahmedabad which was attended by Mr. Shanti Lal Baid (Managing Director) and Mr. Prabir Kumar Sarkar (Independent Director) of RDB.

Then there were meetings at the office of the Registrar to the Issue and at BSE at the time of finalization of basis of allotment on September 28, 2011 and September 29, 2011, respectively. On all the occasions, there was neither any mention regarding the said board meeting or EGM nor any indication of this nature was made to the Noticee. Even when the meeting was going on at 4.30 pm on September 12, 2011, the Noticee had a telephonic conversation with the company at 4.44 pm but there was no indication/mention of any such meeting. (4) The Noticee was in constant touch with RDB and was being updated by it about every development taking place at their end by their officials including the Managing Director. It took several meetings between these parties, more than 2000 emails communication, hundreds of phone calls and couriers and more than 33 back up documents files to conduct the due diligence for the IPO of RDB. The fact proves beyond any doubt that there was a constant communication and interaction between the BRLM and issuer. (5) It is noteworthy that RDB had otherwise been in constant communication with the Noticee to discuss all the developments at their end, for the entire period spanning preparation of the Draft Red Herring Prospectus (DRHP) and its filing, the RHP and its filing, the Prospectus and its filing, right until completion of the Issue, which continued for more than two years.

Even ordinary and irrelevant information/documents were shared with the Noticee. (6) RDB had informed about and sent relevant resolutions for the board meeting preceding September 12, 2011, i.e., August 05, 2011 as well as succeeding September 12, 2011, i.e., September 13, 2011. (7) On one side SEBI in its order against the directors of RDB concluded that “It is also observed from the IR that RDB had not informed book running lead manager, CCIL of its Board meeting held on September 12, 2011 and the EGM. It clearly shows an attempt on the part of the company to keep the information about EGM privy to the company and its pre IPO members only” and on the other side SEBI is penalising CCIL for not updating the prospectus for board meeting of RD held on September 12, 2011, i.e., for not disclosing something which was concealed from the Noticee. 13. Failure to point out to RDB to obtain updated quotations of plant and machinery: (1) The purpose of mentioning the date and other details of quotations in the offer document is not to give an “exact” figure of a particular item of expenditure but to give an “estimate” of the cost to be incurred.

The word “cost estimates” here itself shows that what is supposed to be disclosed here is not the exact cost but cost estimates. (2) It is not mandatory that the estimates of the cost of the project should only be based on the quotations. It is noteworthy that the estimates of the cost of the project can also be made on the basis of the management estimates. In the case of RDB also CCIL has mentioned on page 24-25 of the Prospectus that cost of 18 items amounting to `4.12 Crore were based on the management estimates only. So where the cost of project can be estimated based on the management estimates what is the significance of the date of quotations.

(3) There is always a possibility of variation in the cost of machineries and precisely for that purpose only provision of contingency is provided in the cost of project itself. In the case of RDB also, a provision for contingency has been provided. If cost is always based on quotations which are valid, there is no possibility of variation in the cost of machineries and no need for such provision of contingency. However, actually in the cost of every project, a provision for contingency is always provided. (4) Moreover, prices of machineries are not highly price sensitive like equity shares and therefore there is no possibility of any significant change in their cost. Updation in the quotations in the prospectus was not required as the time lapse was not substantial between the date of RHP and Prospectus, which can be inferred by the fact that cost of machineries changed marginally from `2358.65 lacs in the DRHP to `2433.64 lacs in the RHP, i.e., approximately 3% only (even this was mainly due to change in excise duty rate) against which a contingency of 5% (amounting to `119.56 Lacs) already provided in the cost of the project.

(5) These quotations, alleged to be outdated by SEBI, could not have enabled the public to correctly gauge the cost of project if there has been a significant change in the price of any machinery. However, SEBI has not alleged/proved that the price of any of 43 machineries has changed significantly during this period because of which public was not able to gauge the correct cost of project. In the absence of any allegation / evidence to this effect, SEBI cannot penalize the BLRM only on the basis of lapse of time more particularly when there is no provision in the ICDR Regulations which prescribes any such time limit. (6) The Noticee has followed what is being followed by all the merchant bankers in the industry and that is what other merchant bankers also think about the word “estimate”. 14. I have carefully considered the Report, the SCN issued pursuant thereto, submissions of the Noticee and other relevant material available on record. Before dealing with the allegations/charges against the Noticee I have considered the preliminary objection raised by it regarding the legal validity of the instant proceedings in view of the order of the Hon’ble SAT dated October 25, 2012 whereby it had ordered SEBI to complete the investigation and take appropriate decision qua the Noticee by December 31, 2012. In this regard, I note that SEBI had completed investigation in the matter by December 27, 2012 within the time line stipulated in aforesaid order of the Hon’ble SAT.

Thereafter, after considering the Investigation Report, the proposed action against the Noticee was approved on January 14, 2013 and a DA was appointed by the Competent Authority vide office order dated February 11, 2013. As the prohibitions and restraint imposed by SEBI vide the interim order dated December 31, 2011 and confirmatory order dated September 07,2012 had been set aside by Hon'ble SAT vide its order dated October 25,2012, I find that no prejudice has been caused if DA was appointed on February 11, 2013 and, therefore, such appointment of DA after December 31, 2012 does not vitiate the instant proceedings. 15. Coming to the merits of the case, I note that there is no allegation/charge in this case that the Noticee connived or colluded with RDB or its promoters/directors in any fraudulent, deceitful and manipulative device, plan, scheme or artifice, etc. The limited charge against the Noticee is that it has not exercised due diligence while acting as merchant banker in the IPO of RDB with regard to the incomplete/inaccurate disclosures and failure of disclosures in the RHP and Prospectus of RDB in respect of aforesaid three issues as alleged in the SCN/Report.

In this background, the Noticee is alleged to have contravened the provisions of regulations 60(4) (a) read with regulations 8(2)(b) and 64(1) of the ICDR Regulations and clauses 1, 4 and 7 of the Code of Conduct specified in Schedule III of regulation 13 of the Merchant Bankers Regulations. The provisions read as under:- ICDR Regulations:- “8. (2) The lead merchant bankers shall submit the following documents to the Board after issuance of observations by the Board or after expiry of the period stipulated in sub-regulation (2) of regulation 6 if the Board has not issued observations: (a)................................................................................................; (b) a due diligence certificate as per Form C of Schedule VI, at the time of registering the prospectus with the Registrar of Companies; ....................................................................................................” “60 (4) The issuer shall make prompt, true and fair disclosure of all material developments which take place during the following period mentioned in this sub-regulation, relating to its business and securities and also relating to the business and securities of its subsidiaries, group companies, etc., which may have a material effect on the issuer, by issuing public notices in all the newspapers in which the issuer had issued pre-issue advertisement under regulation 47 or regulation 55, as the case may be: (a) in case of public issue, between the date of registering final prospectus or the red herring prospectus, as the case may be, with the Registrar of Companies, and the date of allotment of specified securities; .........................................................................................................”.

“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.” Merchant Bankers Regulations:- “13. Every merchant banker shall abide by the Code of Conduct as specified in Schedule III.” SCHEDULE III [Regulation 13] “CODE OF CONDUCT FOR MERCHANT BANKERS 1. A merchant banker shall make all efforts to protect the interests of investors.

4. A merchant banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment. 7. A merchant banker shall endeavour to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision.” 16. For considering the case under above regulations, I deem it necessary to consider the standard of 'due diligence' expected from a merchant banker in issue process as settled by Hon'ble SAT and Hon'ble Supreme Court of India in several cases. In this regard, the following observations of the Hon'ble SAT in the matter of Imperial Corporate Finance and Services Private Limited Vs. SEBI [2005] 61 SCL 197 (SAT) is worth mentioning:- "It can be safely said that lack of due diligence should run from the facts of each case and ultimately there can be no hard and fast rule as to what constitutes lack of due diligence. It depends entirely on the facts of each case. We however hold that before any person is found to have violated the concept of "due diligence", there must be an enquiry and the finding must be sustained by a higher degree of proof than that required in a civil suit, yet falling short of the proof required to sustain a conviction in a criminal prosecution.

There must be convincing preponderance of evidence (see AIR 1984 SC 110). A Lead Manager is required to employ reasonable skill and care but he is not required to begin with suspicion and to proceed in a manner of trying to detect a fraud or lie unless such information excites his suspicion or ought to excite his suspicion as a professional man of reasonable competence." 17. Hon’ble Supreme Court of India, in the matter of Chander Kanta Bansal V. Rajinder Singh Anand MANU/SC/7310/2008: (2008) 5 SCC 117 has held as under : “The words “due diligence” have not been defined in the Code of Civil Procedure, 1908. According to Oxford Dictionary (Edn. 2006), the word “diligence” means careful and persistent application or effort. “Diligent” means careful and steady in application to one’s work and duties, showing care and effort. As per Black’s law Dictionary (18th Edn), “Due Diligence” means the diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation. According to Words and Pharses by Drain-Dyspnea (Permanent Edn.

13-A) “due diligence”, in law, means doing everything reasonable, not everything possible. “Due Diligence” means reasonable diligence; it means such diligence as a prudent man would exercise in the conduct of his own affairs.” 18. In the matter of Keynote Corporate Services Ltd. Vs SEBI (order dated February 19, 2014) Hon'ble SAT has held as following:- “..Due diligence on part of Merchant Banker does not mean passively reporting whatever is reported to it but to find out everything that is worth finding out. It is about making an active effort to find out material developments that would affect interest of investors. It is on faith that intermediary has conducted due diligence with utmost sincerity that investing public goes forward and decides to invest in a particular company.….” 19. In the abovementioned Keynote Corporate Services Ltd., Hon'ble SAT has laid down further principles regarding the role of a merchant banker in the issue process as under: “…As a matter of fact he is responsible for adequacy and veracity of all disclosures in all documents pertaining to issue of IPO, since as BRLM / Merchant Banker solemn duties are cast on him and for justifying the same he has to play a pro-active role by looking into authenticity of various matters/disclosures/statements, etc. contained in prospectus;.......

BRLM has to bring out documents pertaining to IPO so that investors can take judicious and informed decisions on subscription to IPO and thus he is responsible for failing investor’s trust in prospectus of ESL for IPO and for doing considerable higher damage to securities market.… ...... this Tribunal expects better standards of performance from professionals, who charge reasonably good fee from clients and who bring out documents (prospectus in this case), which are relied on by investors, at large, to take informed decisions regarding investments in scrips / IPO and this standard of professionalism should be higher than a reasonable man with ordinary prudence will demonstrate in the matter of due diligence....... ...... ensuring the truth and correctness of the letter of offer is a fundamental responsibility of the merchant banker which he has to discharge by exercising due diligence. In fact, an incorrect or wrong information in a letter of offer or other similar documents issued for the benefit of investors in general could lead to serious consequences including loss of credibility for the market operators and for the regulatory system.

This kind of failure has to be taken very seriously by the market regulator..." 20. From the above position pronounced by Hon'ble SAT and Hon'ble Supreme Court, I note that the standard of due diligence expected from a merchant banker is of reasonable diligence and it depends upon the facts and circumstances of the case. Such obligation has to be enquired into and found out on the higher degree of preponderance of probability taking into account the facts and circumstances of the case. The merchant banker cannot be expected to look into each and every statement and information provided by the issuer with suspicion unless the facts and circumstances at the relevant time demand so. However, considering the professional role in the issue process, the merchant banker is expected not to passively disclose whatever is given to it by the issuer but to exercise reasonable diligence and find out everything which is worth finding and to ensure adequate, true and fair disclosures in the RHP/Prospectus.

21. Taking into account the above principles, I proceed to deal with the allegations against the Noticee. In order to deal with these allegations it is relevant here to mention the following important dates with regard to the IPO of RDB:

DRHP March 20, 2010 The board meeting to decide ICDs to RDBRIL September 12, 2011 RHP September 13, 2011 Prospectus September 26, 2011 Annual General Meeting( AGM) of RDB September 28, 2011 Extra-ordinary General Meeting (EGM) of RDB to September 28, 2011 seek consent of shareholders for giving loan to RDBRIL Finalization of the basis of allotment September 29, 2011

22. The first allegation against the Noticee is that it had failed to make disclosures regarding the inter corporate loans given by RDB to its group company RDBRIL in the RHP and the Prospectus. It is admitted position that between April 16, 2011 to October 01, 2011 RDB had extended inter corporate loans of `7.28 crore to its group company RDBRIL on 5 different instances. The DA has found that as part of its due diligence obligations in finalising the RHP the Noticee must have actively checked and verified such loans from the bank accounts of RDB or from the Register of Inter Corporate Loans maintained under section 372A of the Companies Act, 1956 (as applicable) by RDB. The Noticee has contended that regulation 60(4) (a) as alleged in this regard is not applicable to it as that regulation casts obligation on the issuer and not on the merchant banker. Further, this regulation does not require disclosure in the RHP or Prospectus but mandates the issuer to issue public notices in newspapers. It has further contended that this regulation only covers the period between registration of RHP with the Registrar of Companies (ROC) till the date of allotment and in this case the inter corporate loans of `7.28 crores, except a part of it, were not covered during the aforesaid period.

23. I note that in terms of regulation 60(4)(a) of the ICDR Regulations, an issuer making an IPO is obligated to ‘make prompt, true and fair disclosure of all material developments’, which ‘may have material effect on the issuer’ and take place between date of registering the RHP with ROC and the date of allotment of shares in the IPO. Such disclosures have to be promptly made by the issuer by issuing public notices in all news papers in which pre-issue advertisement was made. I note that the provision of this regulation has no ambiguity about the obligation of the issuer, the reference time for making disclosures required therein and manner of such disclosures. In this case, admittedly, the inter corporate loans (`7.28 crores), except a part thereof was extended by RDB to its group company RDBRIL prior to the date of RHP. I find merit in submission that regulation 60(4)(a) is not relevant for the charging the Noticee in this case. However, in the facts and circumstances of this case, the issue remains to be examined whether these inter corporate loans to related party constitute material information and were thus required to be disclosed in RHP and Prospectus of RDB and if so, whether the Noticee failed to exercise due diligence in this regard.

24. It is trite to say that in an issue process, the BRLM/lead merchant banker plays a very important and vital role. In terms of regulation 8(1)(c) of the ICDR Regulations the lead merchant banker is required to submit to SEBI a due diligence certificate in the prescribed format confirming inter alia that - (i) the draft offer document is in conformity with the documents and materials relevant to the issue; (ii) the disclosure made in the offer document is true, fair and adequate to enable the investors to make well informed decision as to the investment in the proposed issue; and (iii) all the legal, requirements connected with the issue have been duly complied with. 25. Further, in terms of regulation 64 of the ICDR Regulations, the lead merchant banker (BRLM) should exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosures in RHP. While exercising such due diligence the lead merchant banker is expected to examine documents and other material in connection with the finalisation of the draft RHP, hold discussions with the issuers, its directors/officers and other agencies and independently verify the statements and contents of the documents.

The lead merchant banker is also obligated under regulation 64(2) to call upon the issuer, its promoters or its directors to fulfil their obligations as disclosed by them in offer document and as required under the ICDR Regulations. Thus, merchant banker's role assumes further significance on account of the confirmation given by him to SEBI and assurance given to the investors. 26. In this case, the 'Register of Inter Corporate Loan' maintained by RDB under section 372A of the Companies Act, 1956, clearly indicated that it had given part of aforesaid inter corporate loan to RDBRIL from April 2011 i.e. much prior to the date of RHP. However, the Noticee had failed to verify such material fact from this document. Further, the Noticee was reasonably expected to ascertain latest affairs of RDB as on the date of RHP and Prospectus by making visits RDB's office and meetings with its directors/officers and also to actively check and verify such transactions from the bank accounts of RDB. In this case, the Noticee had not taken any such proactive steps as expected from it as part of its due diligence.

27. It is relevant to mention here that in terms of the Companies Act and ICDR Regulations, the Prospectus should contain all material developments that have taken place after registration of RHP. Further, in terms of regulation 57 of the ICDR Regulations the RHP/Prospectus should contain all ‘material’ disclosures which are true and adequate so as to enable the applicants to take an informed investment decision. The word “material” in this regulation envisages anything which is likely to impact an investors’ investment decision. In my view, the test to determine whether a fact is ‘material’ depends upon facts and circumstances of each case. 28. In this case, it is noted that RDB had given the aforesaid inter corporate loan to its group company on five different instances starting from April 16, 2011 till October 01, 2011 at an interest rate of 15% per annum. Admittedly, a part of aforesaid inter corporate loan was extended by RDB after registration of RHP and same should have been disclosed in the Prospectus that was issued later on. The fact of such loan being extended to a related party i.e. a group company in close proximity of time before the date of RHP/Prospectus, in my view, was a material information.

The Noticee being a professional merchant banker should not have solely relied upon the opinion of directors or auditors of issuer as sought to be contended in this case. Subsequent repayment, if any, of the loans, cannot be reason to hold that the information about grant of aforesaid loan was not material at the relevant time. In my view, these material transactions whether audited or unaudited had to be disclosed in RHP/Prospectus so as to give the investors the true state of affairs in the issuer and Noticee should have take due care and should have been diligent. I, therefore, do not agree with contentions of the Noticee in this regard and hold that it did not exercise due diligence in this regard. 29. The second charge against the Noticee is with regard to failure to disclose/update the Prospectus regarding the board meeting of RDB held on September 12, 2011. It is noted that in the board meeting of RDB held on September 12, 2011 i.e. prior to the date of RHP, it was decided to grant loans up to the extent of `50 crores to RDBRIL. The said loan was repayable on demand. On September 13, 2011, the minutes of board meeting were confirmed.

Thus, the fact about this loan was within knowledge of RDB before the RHP date. These facts clearly establish that the RDB and its directors had plan to extend such loan to RDBRIL prior to the filing of RHP and the Prospectus and, thus, the disclosures about this loan was required in the RHP/Prospectus of RDB.

30. It is undisputed fact that the networth of RDB during the relevant period was `17.8 crore while the amount of loan proposed to be given by it to RDBRIL was around `50 crore, i.e., three times the net worth of RDB. It is further noted that at the relevant time, RDBRIL was not in a sound financial condition and its cash flows were negative. Such liability to the tune of about three times the networth of RDB was a material information on any standards so as to influence investment decision of investors in IPO of RDB. 31. In this case, it is established fact that RDB had not informed the Noticee about the decision taken in its board meeting held on September 12, 2011 to grant loans up to the extent of `50 crores to RDBRIL and the EGM held on the September 28, 2011 for according the consent of shareholders to the grant of said loan. It is further noted that Form No. 23 was filed by RDB in respect of the AGM held on September 28, 2011 on the same date but in respect of the EGM held on the September 28, 2011the RoC filing was done by RDB on October 19, 2011(with a gap of 3 weeks). It has been established in this case that RDB intended to keep the material information in the above regard to itself and its pre-IPO shareholders only and it actively concealed such material information from the Noticee as well as from the investors in its IPO.

32. However, in the facts and circumstances of this case, the question that needs to be determined in these proceedings is whether there was anything that could have excited suspicion/doubts in the minds of the Noticee and as part of its due diligence obligation, the Noticee was reasonably expected to find out the fact about the above decision of RDB and to disclose the same in RHP/Prospectus. In this regard, it is relevant to mention that the Memorandum of Understanding (MoU) (para 4 at page 2 and para 11 at page 3 of) signed between RDB and the Noticee, RDB was obligated to extend such facilities as may be called for by BRLM to enable him to visit the plant site, office of the company or such other places to ascertain the true state of affairs of the company and the company was obligated to furnish such information and particulars regarding the issue as may be required by BRLM in the context of RHP/Prospectus. 33. It is noted that the DRHP in this case was filed by the Noticee as early as on March 20, 2010 i.e. much prior to the aforesaid decision. It is admitted fact that, during the issue process, the employees of the Noticee had visited premises of RDB only till May 2011, i.e., about 4 months before the date of RHP and had been communicating with the issuer with regard to its IPO through email/telephone later on.

The Noticee has claimed that its officers had met the managing director and one independent director of RDB on September 19, 2011 in the context of Press and Broker Meet at Ahmedabad. Later on, it had met with the officials of RDB on September 28 and 29, 2011 at the time of finalisation of basis of allotment and at no point of time it was informed about the aforesaid board meeting dated September 12, 2011 or EGM dated September 28, 2011. The Noticee has not indicated as to whether it had asked during meeting on September 19, 2011, the concerned employee of RDB about any material development in affairs of RDB as on that date. Further, the meetings as claimed on September 28 and 29, 2011 were for finalisation of the basis of allotment, i.e., after the subscriptions were received from applicants on the basis of RHP and after filing of the Prospectus with RoC. These meetings, thus, cannot be considered as part of due diligence exercise by the Noticee for ensuring true, fair and adequate disclosures in RHP/Prospectus.

34. The charge against the Noticee is failure to exercise due diligence. Such charge has been leveled on the basis of finding that - "...There is no material on record to prove that the Noticee had taken any proactive step to find out the correct information or verify the information available. No specific query in this regard was made from the right sources for such information." Such charge, in my view, should be based on clear finding of facts taking into account the preponderance of probability in the facts and circumstances of the case. It is noted that, at the relevant time, RDB had complete and exclusive control on the information and its dissemination. It had deliberately and actively concealed the material information regarding granting loan to its group company from all concerned including the Noticee. There was no source, other than RDB, wherefrom such information could be gathered at the relevant time. Further, from the independent verification of the information that was available to the Noticee at the relevant time, nothing could be revealed about the decision of RDB to extend the loan as decided in its purported board meeting dated September 12, 2011. 35. The Noticee has further demonstrated that even on September 12, 2011 it had telephonic conversions with RDB at 04:44 pm (when the purported board meeting was going on) and has contended that there was no indication / mention of any such meeting by RDB during such conversation.

It is undisputed fact that the Noticee had not asked RDB about the aforesaid decision taken on September 12, 2011.The question that need to be determined in this regard is whether on September 12, 2011 or prior thereto the Noticee could suspect anything amiss on the part of RDB and should have raised queries from it as found by the DA. From the material available on record it is noted that in the resolutions dated August 05,2011 and September 13, 2011 there was no mention at all about aforesaid decision of RDB to extend loan to its group company. It is only in the resolution /minutes of board meeting dated September 12, 2011 and in the purported notice dated September 12, 2011 for EGM dated September 28, 2011 that RDB mentioned the aforesaid decision to extend loan to its group company. It is admitted position that RDB had shared with the Noticee the resolution of its board meeting dated August 05, 2011 i.e., before September 12, 2011 and subsequent board meeting held on September 13, 2011 but not the resolution/minutes for meeting held on September 12, 2011. Further, Form 23 regarding said EGM with RoC was filed much later on October 19, 2011. I, therefore, find that these information as available could not have excited the suspicion of any prudent person about the affairs of RDB at the relevant time.

36. In annexures to its reply the Noticee has filed a copy of a notice dated September 12, 2011 in respect the board meeting dated September 13, 2011. It is unclear whether RDB had shared a copy of this notice with the Noticee at the relevant time. From the said notice it is seen that the board meeting dated September 13, 2011 was inter alia to 'confirm the minutes of the previous board meeting'. Neither this notice nor the resolution/ minutes of board meeting dated September 13, 2011 clearly indicate the date of 'previous board meeting'. In these circumstances any person of reasonable prudence would assume this 'previous board meeting' is that of August 05, 2011 as he would not have any reasonable foresight that the company might be having back to back board meetings. There is no material which could even indicate suspicion in the mind of a professional merchant banker about a board meeting other than that dated August 05,2011 so as to necessitate query by the Noticee. Considering these facts and circumstances, I give benefit of doubt to the Noticee with regard to this charge. 37. The third charge against the Noticee is that it failed to point out to RDB to obtain updated quotations of plant and machinery.

This charge has been leveled in view of the fact that in the Prospectus of RDB some quotations were of 2009 and some were of May 2011 while the Prospectus was dated September 26, 2011. All these quotations were valid for 1-2 months only. The Noticee has contended that in terms of clause (VIII)(B)(1)(b)(ii) of Part A of Schedule VIII of the ICDR Regulations in case machines are yet to be delivered, the date of quotations relied upon for the “cost estimates” are to be mentioned. According to the Noticee exact figure of every quotation is not required under the said clause. The Noticee has further contended that the cost of machineries changed marginally from `2358.65 lacs (as disclosed in the DRHP) to `2433.64 lacs (as disclosed in the RHP), i.e., approximately 3% only and that too due to change in excise duty rate against which a contingency of 5% (amounting to `119.56 lacs) already provided in the cost of the project.

38. In this case, the DRHP was filed by the Noticee on March 20, 2010. The quotations for the machinery as disclosed in the Prospectus of RDB were old. In terms of the Companies Act and ICDR Regulations, the Prospectus should contain updated information. In terms of Clause 7 of Code of Conduct specified in Schedule III of the Merchant Bankers Regulations, a merchant banker shall endeavour to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision. The outdated information regarding cost estimates of plant and machinery, in my view, cannot be expected to give true and adequate information to the investing public. However, in this case, there was no substantial difference in the cost estimates disclosed by the Noticee in the DRHP and RHP and the Noticee has not been found to be making misleading / exaggerated claims or any misrepresentation. Considering the facts and circumstances of this case, I find such lapse venial. 39. It is noted that the DA has recommended that the Noticee be prohibited from taking up any new assignment or contract for a period of three months. In this regard, it is noted that by the interim order the Noticee had been prohibited from taking up any fresh assignment or involvement in any new issue of capital including IPO, follow on issue etc., from the securities market in any manner whatsoever. Thus, the Noticee has already undergone such restraint/prohibition imposed by the interim order (which has the same effect and consequence as recommended by the DA) for a period of more than nine months. Thus, the balance of convenience is in favour of the Noticee. 40. Considering the facts and circumstances of this case, I do not think this case fit for any further action on the Noticee. Accordingly, I, in exercise of powers conferred upon me by virtue of section 19 read with section 12(3) of the Securities and Exchange Board of India Act, 1992 and regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby dispose of the SCN dated July 18, 2014 without any further direction in the matter. 41. This order shall come into force with immediate effect.

Sd/- DATE: MAY 13TH, 2015 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA