Order in respect of PNB Investment Services Ltd

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 PNB Investment Services Ltd., Merchant Banker, (SEBI Registration No. INM000011617)

In the matter of Initial Public Offer of Taksheel Solutions Ltd.

Appearances for the Noticee: 1. Mr. R. S. Loona, Advocate 2. Mr. Ankur Loona, Advocate 3. Mr. Sunil Sethi 4. Mr. Mahesh Peswani 5. Mr. D. Subramanyam

1. Taksheel Solutions Ltd. (hereinafter referred to as 'TSL'') made an Initial Public Offer (IPO) of 55,00,000 shares during the period September 29, 2011 to October 04, 2011. The shares allotted by TSL in the said IPO were listed on the Bombay Stock Exchange Ltd. ("BSE") and National Stock Exchange Ltd. ("NSE") on October 19, 2011. PNB Investment Services Ltd. (hereinafter referred to as the "Noticee") having SEBI Registration No. INM000011617 acted as the Book Running Lead Manager (BRLM) for the said IPO. 2. Securities and Exchange Board of India (“SEBI”) observed volatility in the price and volume of the scrip of TSL 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 TSL and inter alia, prohibited the Noticee and its Managing Director and Chief Executive Officer, Mr. L. P. Agarwal from taking up any fresh assignment or involvement in any new issue of capital including IPO, follow on issue etc., in the securities market in any manner whatsoever till further directions. 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 the Noticee and Mr. L. P. Agarwal. In both these proceedings, there was no charge of violation of the Securities and Exchange Board (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 against the Noticee.

In respect of PNB Investment Services Ltd.

3. Pursuant to the investigations, SEBI initiated proceedings against the Noticee under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (the Intermediaries Regulations) and appointed the Designated Authority (hereinafter referred to as the “DA”) in respect thereof. While initiating the said proceedings it was also decided that the directions issued vide the interim order read with the confirmatory order would continue against the Noticee and Mr. L.P. Agarwal till disposal of the instant proceedings. SEBI also conducted an inspection of the Noticee with regard to IPO of TSL while the proceedings before the DA were underway. After completion of the proceedings, the DA submitted his Report dated January 31, 2014 (hereinafter referred to as the “Report”) wherein he has also taken into consideration the findings of the inspection. In his Report, the DA observed that the Noticee has: A. failed to make disclosure of cancellation of land allotted to TSL by Andhra Pradesh Industrial Infrastructure Corporation Ltd. (hereinafter referred to as “APIICL”), at Warangal in the offer document; B. made incorrect disclosures about the presence of employees across various office of TSL in the offer document; C. failed to make disclosure on utilisation of IPO proceeds for repayment of ICDs raised by TSL; D. made incorrect disclosures about buy back arrangement of shares of TSL; E. failed to make disclosure of related party transactions in the offer document of TSL.

F. made incorrect disclosures of the business overview of TSL. G. failed to carry out due diligence while verifying the address of Mr. Ramaswamy Kuchana, Director of TSL. 4. For the violations as stated above, the DA, in his Report, observed that the Noticee has contravened the provisions of regulations 8(2) (b), (e) and (f) and 64(1) of the ICDR Regulations, regulations 14(1)(e) and 13 read with clauses 1, 2, 3, 4, 6, 7 and 21 of the Code of Conduct for Merchant Bankers specified under Schedule III of the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 (the Merchant Bankers Regulations) by the Noticee. In view of the same, the DA has recommended that the certificate of registration of the Noticee as a Merchant Banker be suspended for a period of six months. 5. After considering the Report, a Show Cause Notice (SCN) dated February 12, 2014 was issued to 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 March 06, 2014 submitted its reply to the said SCN.

A personal hearing was granted on April 16, 2014 when Mr. R. S. Loona, Advocate, appeared alongwith Mr. Ankur Loona, Advocate and made oral submissions on behalf of the Noticee. The reply/submission of the Noticee on the findings of the DA in the Report, are as follows: A. Non-disclosure of cancellation of land allotted to TSL by APIICL: (1) The lead merchant banker is required to exercise due diligence to verify the veracity and adequacy of disclosures in the offer document. „Due diligence’ as interpreted by the Hon‟ble

Supreme Court in the matter of Chander Kanta Bansal v. Rajinder Singh Anand (2008) 5 SC 117 as a prudent man would exercise in the conduct of his own affairs, means doing everything reasonable and not everything possible. (2) TSL did not disclose or inform the cancellation of land allotment by APIICL vide order dated Aug 27, 2008. (3) As its client, it was the duty of TSL to provide fair picture to the Noticee so that Noticee could include relevant details in the offer document. On the contrary, by giving a false reply, not only has TSL committed a breach of client-merchant banker relationship but it has also misguided the Noticee and tried to keep the Noticee in the dark. Further, TSL had failed to inform its board of directors and its legal advisors who were conducting legal due diligence on the immovable properties of TSL. This shows that TSL has, with a clear malicious intent, hidden the fact of cancellation of APIICL land at every possible stage. (4) The assumption of the DA that “seeking extension of time for more than 5 years is suspicious” and that such extension should have been a ground to sense that something is amiss, is incorrect as there is nothing on record available with TSL to suggest that delay in implementation of project had resulted in or was likely to result in cancellation of land allotment.

(5) Vide letter dated October 10, 2008, the Chief General Manager of APIICL, by whose order land allotment was cancelled, had also issued instructions for immediately giving power connection to TSL at the said land after cancellation order. Subsequent meetings on December 15, 2010 and April 28, 2011 further indicated that the State Government/ APIICL had no intention to implement the cancellation order and was willing to consider TSL request for extension of time. Subsequently, the cancellation order was revoked by APIICL on November 28, 2011 on payment of monetary penalty and condonation fees. (6) Since TSL had continued to remain in possession of the land in question despite the said cancellation order and the non SEZ software development centre at the said site had commenced its operation on June 29, 2011, there was no material on record which could give rise to the suspicion about the cancellation of allotment of APIICL land. (7) Further, vide its letter dated September 23, 2009 TSL had informed the Noticee about the development of facilities at Industrial Park Warangal and sent along with it copies of certain photos taken at the site, electricity bill and telephone bill.

(8) The Noticee has conducted numerous cross-checks at various points during its process of due diligence as also collected various documents from TSL including documents addressed to TSL by the governmental authorities such as APIICL. Mere Absence of direct enquiry with APIICL about the status of land allotment cannot be viewed as failure to conduct proper due diligence particularly when TSL was in possession of the land and was constructing building/facilities for implementing the project. (9) The fact of the cancellation of allotment of APIICL land was concealed by TSL and hence in the given facts and circumstances, the Noticee cannot be held liable for such non disclosure.

B. Incorrect disclosures about the presence of employees across various office of TSL in the offer document: (1) The Notice had verified all the necessary documents pertaining to TSL's employees including attendance register, resume of key managerial personnel, appointment letters of key managerial employees, etc. (2) In order to verify TSL's claim regarding its overseas offices, TSL's office address at New Jersey, USA was verified by perusing the relevant lease agreement dated November 15, 2010 for the said premises. (3) The Noticee was informed by TSL that it had opened a branch office in Singapore on February 15, 2011 though its operation had not yet started. This fact was verified by the Noticee through the website of Singapore Government (www. psi.gov.sg). (4) Establishment of office prima facie indicates the operation thereof by certain employees. This impression was further buttressed by the fact that the TSL's officials including Mr. Pavan Kuchana had been regularly travelling abroad for business meetings. In fact, Mr. Pavan Kuchana regularly flew to the TSL's office in New Jersey to manage TSL's matters there.

(5) All the aforesaid factors made the Noticee to believe that TSL had its offices in New Jersey, USA and Singapore. (6) The only other way to verify presence of overseas office would be to physically visit such offices, which in the given time and expense involved was not practically possible. (7) With regard to the claim of TSL regarding overseas office at New Jersey, the DA has observed that it has been verified to the extent of reasonable possibility. (8) The disclosure in the offer document regarding presence of TSL employees in the United States of America, Europe and other countries subject to obtaining necessary visas and work permits appears to have been made with good intentions to apprise the investors about risk involved in procuring the necessary visas and work permits for its employees who may be deployed in the overseas offices. (9) The word "Europe" appears to have been inadvertently mentioned in the external risk factor. C. Non-disclosure of utilisation of IPO proceeds for repayment of ICDs raised by TSL: (1) TSL never informed the Noticee regarding raising of funds by way of the ICDs before the RHP and there was no material on record to indicate or even to raise suspicion.

(2) At the time of RHP, TSL had furnished auditor‟s certificates dated July 16, 2011 and August 16, 2011 towards deployment of funds and three more certificates all dated October 09, 2011 towards deployment of funds, IPO expenditure and Restated Schedule for Capitalization. None of these certificates disclosed either raising funds by way of ICDs by TSL or deployment of the IPO proceeds for repayment of such ICDs. (3) The board of directors of TSL furnished certificates dated September 10, 2011 and October 08, 2011 confirming inter alia that there has been no material development during the period post filing the Draft Red Herring Prospectus (DRHP) and RHP.

(4) Further, minutes of the board meetings held around the time of raising of funds by way of the ICDs did not reveal any proposal in this regard before the board of TSL for its consideration/approval. (5) TSL had been borrowing money without approval of the board in utter disregard of the provisions of the Companies Act, 1956. When TSL did not keep its own board of directors informed about the ICDs how could it have informed the Noticee. (6) The DA has found the Noticee guilty on the basis that it had not verified the bank account statement of TSL. However, verification of the bank account statements by a lead manager is not a mandatory requirement and the Noticee, among other things, had relied upon the auditor's certificate which was supposed to be given after such verification. (7) Due Diligence certificate given by the Noticee was based on examination of all relevant documents, discussions with TSL, its directors and other officers, various agencies and independent verification of disclosures, etc. and hence no fault can be found with due diligence conducted by the Noticee. D. Incorrect disclosures about buy back arrangement of shares of TSL: (1) The allegation "such an existing buy back arrangement at the time of IPO is prima facie in violation of the specific prohibition of any buy back arrangement as provided under ICDR Regulations", is based on incorrect appreciation of the factual position and the provisions of relevant law.

(2) The SPA was entered between Mr. Dinesh Singhi and TSL way back on November 24, 2007, and not at the time of IPO. Further, such buy back arrangement related only to the unlisted shares of TSL prior to IPO and no buy back right is contemplated under the SPA in favour of Mr. Dinesh Singhi after the IPO. (3) From provisions of the said SPA it is clear that Mr. Dinesh Singhi was given the option of buy-back if TSL failed to come out with an IPO within 18 months from the date of allotment of 10 lakh shares to him. As per the SPA, if Mr. Dinesh Singhi did not exercise the option of buy-back on expiry of 18 months and TSL comes out with an IPO (where he has consented by putting his shares under lock-in), he was not entitled to exercise the option of buy-back. Mr. Dinesh Singhi did not exercise such option on expiry of the said period of 18 months. Therefore, as per the terms of SPA, after the IPO he was entitled to dispose off his shares in the secondary market at such times as he may deem fit. The disclosure made in the risk factor is correct, appropriate and adequate. E. Non-disclosure of related party transactions in the offer documents: (1) The Noticee was informed by TSL that its management does not have any direct or indirect relation with the directors of VBSL.

(2) The Noticee visited the website of the Ministry of Corporate Affairs (MCA) to verify the nature of relationship between TSL and its promoters/directors/key managerial persons with VBSL. But the information could not be extracted from the MCA website due to non-compliance of certain secretarial matters by VBSL.

(3) TSL had submitted its list of shareholders and other details to the Noticee vide its letter dated September 19, 2011. In the said list VBSL is shown as having 22,63,750 shares in the category of “Body corporate other than the promoter and promoter group”. (4) TSL with deliberate and mala fide intentions did not provide the correct information specifically sought by the Noticee with respect to VBSL. (5) The Noticee had made reasonable efforts to ascertain the connection, if any, between the promoters of TSL and VBSL, including verification of the information from the MCA website. (6) Lack of due diligence will arise only if the merchant banker was furnished with information or notified about the relation between VBSL and TSL and the Noticee failed to disclose such information or had suppressed such information in the offer document. F. Incorrect disclosures in the business overview of TSL: (1) During the due diligence process, the Noticee was informed by TSL about its future plans for expanding business in the areas of captive BPO and KPO offerings, in financial services and telecom sectors.

TSL informed the Noticee that this assessment was based on positive feedback received from its customers. (2) Since the disclosures regarding business overview of TSL do not refer to any written communication from the TSL's customers, the question of providing any documents in support thereof does not arise. (3) Therefore, the observation of the DA that the Noticee has made incorrect disclosures in the RHP regarding business overview of TSL is erroneous and misguided. (4) There is no way to ascertain whether a company has received a feedback from its customers by way of oral feedback or otherwise. Such information is not available in the public domain and the Noticee had no choice but to rely on the statements of TSL. (5) The observation of DA that "Target customers without doubt, signifies an indicative list of customers", is incorrect. The list of target customers formed part of end customers, who purchased/used the company's products. Therefore, the statement "target customer" was used to represent actual end customers of TSL and is not merely indicative list of customer. G. Incorrect disclosures and non-disclosures of director/promoter details: (1) With respect to observation of the DA regarding mis-match of address of Mr. Ramaswamy Kuchana (director of TSL, father of Mr. Pavan Kuchana), the Noticee has submitted that it was given to understand that Mr. Ramaswamy Kuchana resides with his son Mr. Pavan Kuchana and as such the address of Mr. Ramaswamy Kuchana as given in RHP reflects the correct factual position.

(2) The said discrepancy in the address details of Mr. Ramaswamy Kuchana is not material enough so as to adversely affect the investors and neither would it have influenced their decision to invest in TSL.

6. In addition to the above, the Noticee has, inter alia, submitted as under: (1) In its order dated July, 3, 2004, the Hon‟ble Securities Appellate Tribunal (the SAT) in the matter of Imperial Corporate Finance & Services Ltd. vs SEBI (order dated July 03, 2004) has held that a lead manager is required to employee 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. (2) In order that the allegations made against it should hold good there must be sufficient preponderance of evidence convincing enough to point out any voluntary intention or carelessness on part of the Noticee. (3) The Noticee has exercised reasonable diligence and has not suppressed or failed to disclose any information which was provided or available to it or which was brought to its attention. (4) The Noticee has been operating as a merchant banker since January 12, 2010 and is a wholly-owned subsidiary of a public sector bank, namely, Punjab National Bank.

Being a subsidiary of public sector undertaking it does not cherish any selfish interest for making undue profits or intentionally causing loss to the investors. (5) Interim directions passed under the interim order and thereafter order dated September 07, 2012 are still operating against the Noticee and it has not been able to take up any fresh assignment involving issue of capital by way of IPO, follow-on issue, etc. for a period of around two and a half years. Considering these factors, the recommendation of the DA for further suspension of the Noticee‟s certificate of registration is very harsh and disproportionate to the gravity of the alleged violations. 7. I have carefully considered the Report, the SCN issued pursuant thereto, submissions of the Noticee and other relevant material available on record. I note that in his Report the DA has found the Noticee guilty on account of incomplete/inaccurate/failure of disclosure in the offer document of the abovestated seven (7) facts/information and has observed contravention of regulations 8(2) (b), (e) and (f) and 64(1) of the ICDR Regulations, regulations 14(1)(e) and 13 read with clauses 1, 2, 3, 4, 6, 7 and 21 of the Code of Conduct for Merchant Bankers specified under Schedule III of the Merchant Bankers Regulations by the Noticee.

The relevant provisions of the ICDR Regulations and the Merchant Banker Regulations read as under:- The 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;

(e) 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; (f) a due diligence certificate as per Form E of Schedule VI, after the issue has opened but before it closes for subscription. 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.” The Merchant Bankers Regulations “13. Every merchant banker shall abide by the Code of Conduct as specified in Schedule III. 14. (1) Every merchant banker shall keep and maintain the following books of account, records and documents namely:- (e) Records and documents pertaining to due diligence exercised in pre-issue and post-issue activities of issue management and in case of takeover, buyback and delisting of securities.”

SCHEDULE III [Regulation 13] “CODE OF CONDUCT FOR MERCHANT BANKERS 1. A merchant banker shall make all efforts to protect the interests of investors. 2. A merchant banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business. 3. A merchant banker shall fulfil its obligations in a prompt, ethical, and professional manner. 4. A merchant banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment. 6. A merchant banker shall ensure that adequate disclosures are made to the investors in a timely manner in accordance with the applicable regulations and guidelines so as to enable them to make a balanced and informed decision. 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. 21. A merchant banker shall maintain an appropriate level of knowledge and competence and abide by the provisions of the Act, regulations made thereunder, circulars and guidelines, which may be applicable and relevant to the activities carried on by it. The merchant banker shall also comply with the award of the Ombudsman passed under the Securities and Exchange Board of India (Ombudsman) Regulations, 2003.”

8. I note that there is no allegation in this case that the noticee connived or colluded with TSL or its promoters/directors in any fraudulent, deceitful and manipulative device, plan, scheme or artifice, etc. The charge against the noticee is that it has not exercised due diligence while acting as Merchant Banker in the IPO of TSL. It is a settled position that the standard of due diligence expected from an intermediary depends upon the facts of the case. 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." 9. Reference is also drawn to the interpretation made by the Hon‟ble Supreme Court in the matter of Chander Kanta Bansal V. Rajinder Singh Anand MANU/SC/7310/2008 : (2008) 5 SCC 117 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.” 10. In view of the above, the due diligence expected from the merchant banker is reasonable diligence. 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. Accordingly, the obligation of the Noticee in this case has to be examined keeping in mind the above principles. 11. I, hereinafter, proceed to deal with the reply/submissions of the Noticee on each issue separately. In order to deal with the allegations of the noticee it is also relevant to mention the following important dates with regard to the Draft Red Herring Prospectus (DRHP), Red Herring Prospectus (RHP) and Prospectus in this case: DRHP December 27, 2010

RHP September 19, 2011 Prospectus October 10, 2011 A. Non-disclosure of cancellation of land allotted to TSL by APIICL in DRHP/RHP/Prospectus : (1) It is undisputed fact that on February 23, 2006 TSL had entered into an agreement with APIICL for purchase of 5 acre of land for use and development as IT parks/industry. However, vide its order dated August 27, 2008, APIICL cancelled the said allotment on account of lack of progress of work towards land development by TSL. The allotment was later on restored on November 28, 2011 i.e. after the date of the Prospectus. It is also undisputed fact that in the DRHP/RHP/Prospectus the fact about such cancellation was not disclosed. The TSL had made disclosures in the DRHP/RHP/Prospectus about execution of the aforesaid agreement and had stated that; ".... In terms of the said Agreement, our Company is required to commence and complete the construction work within the time specified therein, failing which the allotment may be cancelled. Our Company has though commenced the construction at this Non-SEZ site; it has not been able to adhere to the specified timelines.

Our Company has applied to APIICL for extension of time line for construction work and is awaiting the approval. Our Company has paid the consideration to Andhra Pradesh Industrial Infrastructure Corporation Limited and has been paying the relevant dues in respect of the said land. Our Company is completed the construction work which will be funded through the internal accruals and is awaiting the approval from APIICL for delay in construction and registration formalities. (2) It is apparent that the above disclosure by TSL that the allotment of land may be cancelled in case of non commencement and non-completion of the work within the specified timelines was false and misleading since as on the date of DRHP/RHP/Prospectus the said allotment had already been cancelled and was not renewed. (3) In this case, there is nothing on record to suggest that the information regarding cancellation of land allotment by APIICL was disclosed by TSL to the Noticee. Vide letter dated October 10, 2008, the same Chief General Manager of APIICL, who had ordered the cancellation of the allotment of land, had also issued instructions for immediately giving power connection to TSL at the said land.

Several other disclosures in the DRHP/RHP/Prospectus and correspondences available on record show that the TSL was in correspondence with APIICL for extension of time. In the facts and circumstances of his case, I find merit in the submission of the Noticee that at the relevant time it could not suspect anything amiss about the status of the land allotment in the instant case. B. Incorrect disclosures about the presence of employees across various office of TSL in the offer document: (1) TSL has disclosed in the offer document that it had Indian nationals, as its employees, working in the United States, Europe and other countries. This statement gives an impression that TSL had a pan-global presence and had its employees working in various projects and clients location across the world. However, vide its letter dated November 24, 2011, TSL has categorically stated that it does not have employees other than those at Hyderabad and Warangal and has not placed/deployed any employee anywhere else other than at Hyderabad and Warangal during last one year. In view of the above, the disclosures regarding presence of TSL employees at overseas location as contained in the prospectus, was factually incorrect.

(2) The Notice has contended that it had verified all the necessary documents pertaining to TSL's employees including attendance register, resume of key managerial personnel, appointment letters of key managerial employees, etc. Further, it had taken all reasonable steps to verify TSL's claim regarding its overseas offices, at New Jersey, USA and Singapore. The Noticee has submitted that the presence of office of TSL at the said locations prima facie indicates the operation thereof by certain employees. This impression was further buttressed by the fact that officials of TSL including Mr. Pavan Kuchana had been regularly travelling abroad for business meetings. In fact, Mr. Pavan Kuchana regularly flew to the TSL's office in New Jersey to manage TSL's matters there. The only other way to verify presence of overseas office would have been physically visit such offices, which in the given time and expenses involved was practically not possible. As regards the use of the word “Europe" in the offer document, the Noticee has admitted that it was inadvertently used. (3) I note that the DA has taken divergent views in this regard.

While on the one hand, the DA has, regarding overseas office of TSL at New Jersey and Singapore, held that the Noticee has verified to the extent of reasonable possibility, on the other hand, relying on the submission of TSL vide letter dated November 24, 2011, he has held that any prudent person would have concluded that none of the offices outside India are functional. I note that this submission has been made by TSL much after the due diligence process and even after the IPO process. Therefore, the Noticee did not have any occasion to base his prudence on the information submitted by TSL vide letter dated November 24, 2011. In view of the above, I give benefit of doubt to the Noticee with regard to this allegation. C. Non-disclosure of utilisation of IPO proceeds for repayment of ICDs: (1) In its RHP, TSL has disclosed details regarding its requirements of funds and schedule of deployments of funds. As disclosed in the RHP, TSL had earmarked `24.11 crore (almost 29.22% of the issue size) for expenses towards “General Corporate Purposes”, `12.80 crore towards “Financing Incremental Working Capital” and `22 crore towards “Acquisition and Other Strategic Initiatives”.

I note from the records that TSL had raised a sum of `34.50 crore through ICDs from different entities, during May, 2011 – June, 2011 and September, 2011, the details of which are as under:

Name of entity Address of entity Date of Interest Tenure Actual amount Secured/ agreement rate p.a. (in days) received unsecured (`in crore) Amarnath 1/104, Sarthak, opp. C.T. Centre, May 03, 2011 14% 180 20 Unsecured Securities Ltd. Behind Swastik Cross Rd., Ahmedabad. Gujarat Tool 402, Sheel Complex,4th Floor, Mayur May 29, 2011 14% 180 7.5 Unsecured Room Ltd. Colony Near Mithakali Underbridge, Navrangpura, Ahmedabad Shitalnath 402, Sheel Complex,4th Floor, Mayur June 07, 2011 14% 180 2.50 Unsecured Buildcon Pvt. Ltd. Colony Near Mithakali Underbridge, Navrangpura, Ahmedabad Swastik Securities 33, C.R. Avenue, 9th Floor, Room No. Sept 11, 2011 14% 180 2 Unsecured & Finance Ltd. 909, Kolkata.

Rohan Finance & 29A, Weston Street, 3rd Floor, Room Sept 11, 2011 14% 180 2.5 Unsecured Securities Ltd. No.C-2, Kolkata. Total 34.50 (2) I also note that immediately after raising above ICDs, TSL transferred `30.16 crore to various vendors of TSL and thereafter, TSL retired ICDs worth `34.50 crore out of the IPO proceeds. The amount incurred by TSL in the repayment of ICDs far exceeds the total “Working Capital Requirements” for 2011-12 as well as the entire “General Corporate Purposes Expenses” disclosed/indicated by TSL for 2011-12 and 2012-13 in its offer document. Further, there was no disclosure in the offer document regarding repayment of ICDs out of IPO proceeds. Admittedly, the Noticee had not verified the bank account statement of TSL and had relied upon the auditor's certificate which was supposed to be given after such verification. The Noticee has contended that verification of the bank account statements by a lead manager is not a mandatory requirement. Further, even the minutes of the board meetings held around the time of fund raising by way of the ICDs did not reveal any proposal in this regard before the board of TSL for its consideration/ approval.

Therefore, TSL had been borrowing money without approval of the board in utter disregard of the provisions of the Companies Act, 1956. (3) As regards the non-disclosure of fund raising through ICDs, the DA has found merit in the submission of the Noticee and has concluded that the Noticee cannot be held guilty for such non-disclosure on the ground that the evidence in support of such findings were tampered by TSL. The allegation regarding fund raising by way of ICDs is not before me for consideration. I, therefore, do not find need to further dwell into it. The issue for consideration before me is the non-disclosure of utilization of IPO proceeds towards repayment of ICDs for which the DA has charged the Noticee. In the instant case, the Noticee admittedly had relied on the certificates of auditors and the board of directors of TSL, and the information submitted by TSL for carrying out due diligence in respect of the financials of TSL. The DA, while exonerating the Noticee for non-disclosure of fund raising by way of ICDs in the offer document, has held the Noticee responsible for non-disclosure of utilisation of IPO proceeds for repayment of ICDs in the offer document.

The Noticee has relied on the observations of the DA in respect of fund raising by way of ICDs to contend that by the same logic it cannot be held responsible for non-disclosure of utilization of IPO proceeds for the repayment of ICDs. In this regard, I note that the findings of the DA in this regard are divergent. In view of these facts and circumstances and the divergent view of the DA, I give benefit of doubt to the Noticee as regards this allegation. D. Incorrect disclosures about buy back arrangement of shares of TSL: (1) I note that the offer document of TSL contains the following disclosure under the heading “the Risk Factor”: "TSL has entered into share purchase agreement dated November 24, 2007 ("SPA") with Mr. Dinesh Kumar Singhi, in terms of which the said Mr. Dinesh Kumar Singhi subscribed to 10,00,000 shares of our company constituting 6.12% of the pre share capital of our company at a price of `100/-per equity share. The total amount invested by the said Mr, Dinesh Kumar Singhi was `10 crores. As per the terms agreed in the SPA, in case our company fail to conclude IPO with 18 months from the date of allotment, then our company is required to buy back the shares held by the said Mr. Dinesh Kumar Singhi at ` 170/- per equity share aggregating to `1700 lac.

In case our company cannot buy back the shares from the said Mr. Dinesh Kumar Singhi then the shares may be sold to a person mutually agreed. If the purchase price paid by the third party purchaser is less than the `170/- per equity shares then in that event our company shall be liable to pay the difference to the said Mr. Dinesh Kumar Singhi. The period of 18 months has elapsed. However, the said Mr. Dinesh Kumar Singhi has not exercised the rights available to him under the SPA. In case this issue is not concluded then there cannot be any assurance that the Mr. Dinesh Kumar Singhi will not exercise his rights under the SPA and call upon our company to buy back the shares held by him. We are in receipt of lock-in-consent letter from Mr. Dinesh Kumar Singhi vide letter dated December 27, 2010 consenting to lock-in of the shares for a period of one year from the date of listing, which over rides the buy back.” (2) The Noticee has contended that the SPA was entered between Mr. Dinesh Singhi and TSL on November 24, 2007, and not at the time of IPO and related only to the unlisted shares of TSL prior to IPO.

Further, the SPA contemplates that Mr. Dinesh Singhi can avail the option of buy-back if TSL failed to come out with an IPO within 18 months from the date of allotment of 10 lakh shares to him. Mr. Dinesh Singhi cannot exercise the option of buy-back later, if he did not exercise the option of buy-back within the said period and TSL comes out with an IPO. Since, Mr. Dinesh Singhi did not exercise such option on expiry of the said period of 18 months, he was entitled to dispose off his shares in the secondary market after the IPO. (3) As discussed above, the disclosure in the offer document suggests that in case the issue is not concluded then Mr. Dinesh Singhi may still exercise his right under the SPA and call upon the company to buy back the shares held by him. However, in the latter part it is disclosed that Mr. Dinesh Singhi had consented to lock-in of the shares for a period of one year from the date of listing and as such this proposal overrides the buyback clause. However, as has been contended by the Noticee, the above disclosure nowhere suggests that if Mr. Dinesh Singhi does not exercise the option of buy back on expiry of 18 months and TSL comes out with an IPO, then he is no more entitled to exercise the right of buy back.

(4) Therefore, the contention of the Noticee that after the IPO Mr. Dinesh Singhi was only entitled to dispose off his shares in the secondary market is without any basis. In view of these facts, I find that the disclosure in the offer document is contradictory and ambiguous and as such there is a mis-representation of facts with respect to arrangement of TSL with Mr. Dinesh Singhi regarding the buyback of equity shares of TSL. I, therefore, agree with the findings of the DA in this regard. E. Non-disclosure of related party transactions in the offer document: (1) I note that pursuant to an agreement dated October 01, 2009, TSL had allotted 50,00,000 shares to VBSL on October 01, 2009 in lieu of a software product called “Mobile Virtual Network Enabler” the valuation of which was shown as `10 crore. The said agreement was signed by one Ms. G. Lalitha. Ms. G. Lalitha, Mr. Gudimalla Janardhan Rao and Ms. Mandadi Sarojana were shown as directors of VBSL. Admittedly, Ms. G. Lalitha and Mr. Gudimalla Janardhan Rao are related to Mr. Pavan Kuchana, the Chairman and Managing Director of TSL.

Further, VBSL and Ms. K. Bhagyalakshmi (wife of Mr. Ramaswamy Kuchana and mother of Mr. Pavan Kuchana) share a common address. In view of the above, I agree with the findings of DA that VBSL is connected to the promoter/directors of TSL. (2) I note that the connection between VBSL is connected to the promoter/directors of TSL have not been disclosed in the offer document. Further, the transaction between VBSL and TSL being a related party transaction has not been disclosed in the offer document. The Noticee has contended that it had attempted to extract information from MCA website to find out the details of VBSL, but the details were not available on the website as certain secretarial matters were not complied by VBSL. In support of its claim, the Noticee has submitted a print out of the screen shot of the MCA website (well after passing of the interim order). (3) Admittedly, beyond seeking information from the MCA website, the Noticee did not make any further attempt to find out about VBSL and its connection with TSL. The Noticee also failed to take note of allotment of 50,00,000 shares to VBSL for purchase of a product valued at `10 crore.

In view of these facts, I agree with the findings of the DA that it is unacceptable that TSL had allotted 50 lakh shares for purchase of a product valued at `10 crore to an entity that neither the Noticee nor the TSL had any information and the credibility of directors/promoters of VBSL had been accepted by the Noticee merely on the words of TSL. F. Incorrect disclosures regarding the business overview of the company: (1) It was disclosed in the RHP of TSL under the head "Our Business Overview" that after concentrating on its core business activities for the last 11 years TSL is planning to expand its business through providing captive BPO and KPO offerings in Financial Services and Telecom areas and TSL has received requests from its existing and satisfied customers in this regard. It was also disclosed in the RHP that TSL offers solutions to banks, asset and investment managers, brokerage houses, insurance, hedge funds, trusts and family offices. (2) The said statement is significant in two respects: first, it reflects that the existing customers of TSL were satisfied with the services tendered by TSL to them; and second, it indicates that the existing customers wanted TSL to provide captive BPO and KPO offerings in Financial Services and Telecom sectors.

This statement clearly bases the expansion plans of TSL on the requests and feedback received by TSL from its customers and is extremely important from the point of view of the prospective subscribers to the IPO. It was, therefore, the responsibility of the Noticee to check the veracity of such claim before stating the same in the RHP. (3) With regard to failing to submit the list of clients serviced by the issuer to substantiate its claims that they offer solutions to various clients, the Noticee has contended that the contents of RHP under “Wealth Management Solutions” at page 82 of RHP deserve to be read with the contents on page 69 of the RHP under the "Wealth Management Market" where the reasons for TSL's focus on wealth management solutions market have been elaborately given and it is, inter alia, stated that the wealth management market players are its target customers. The Noticee has further contended that TSL has a practice of entering into sub-contractor services agreement/ sub-contractor consulting agreement with certain parties where TSL provides service to the clients of such parties and the clients include banks, assets and investment managers, brokerage houses, insurance, hedge funds, trusts and family offices and accordingly submitted copies of 13 such agreements with clients.

(4) From reply of the Noticee, it is evident that it did not verify if TSL had indeed received any such requests for expansion, and merely relied on the submissions of TSL in this regard. Further, the Noticee failed to furnish the list of clients serviced by TSL to substantiate the aforesaid claim and has merely submitted that such clients comprised of banks, assets and investment managers, brokerage houses, insurance, hedge funds, trusts and family offices. Further, the term "Target customers" clearly signifies the prospective customers of TSL and does not imply that the said target group has actually been serviced by it. I, therefore, agree with the findings of the DA in this regard.

G. Failure to carry out due diligence while verifying the address of Mr. Ramaswamy Kuchana, Director of TSL: I note that the address of Mr. Ramaswamy Kuchana mentioned in the RHP did not match with that mentioned in the latest CIBIL report obtained by the Noticee and was also different from the addresses mentioned in the various proofs obtained by the Noticee. Admittedly, the address of Mr. Ramaswamy Kuchana was entered in the RHP by the Noticee after receiving oral confirmation from him that he resides with his son Mr. Pavan Kuchana. In the peculiar facts of the case and the relationship between Mr. Ramaswamy Kuchana and Mr. Pavan Kuchana, it is possible that the address of Mr. Ramaswamy Kuchana, as mentioned in various official records is different from that disclosed in the RHP. In these facts of the case, I do not find that the alleged discrepancy in the address details of Mr. Ramaswamy Kuchana could have adversely affected the investors or could have influenced their investment decisions. In view of the above, I give benefit of doubt to the Noticee. 12. An additional charge against the Noticee as found in the Report of the DA is with regard to violation of regulation 14(1)(e) of the Merchant Banker Regulations. I note that as per the said regulation, every merchant banker is required to keep and maintain the books of account, records and documents pertaining to due diligence exercised in pre-issue and post-issue activities of issue management and in case of takeover, buy back and delisting of securities. I note from the Report that it is silent as to which books of account, records and documents the Noticee failed to maintain. I, therefore, do not deem it necessary to consider this as violation of regulation 14(1)(e) of the Merchant Bankers Regulations by the Noticee. 13. In the instant case, out of 8 charges in the SCN and the Report, the Noticee has been found to be non-compliant with regard to 3 charges i.e. with respect to incorrect disclosures regarding arrangements for buy back of shares of TSL, non-disclosure of related party transactions and incorrect disclosures regarding the business overview of TSL in its offer document. Considering these facts and circumstances, I do not agree with recommendation of DA to suspend the certificate of registration of the Noticee for a period of 6 months.

14. It is important to note in the instant case that the Noticee is a wholly owned subsidiary of a public sector bank, namely, Punjab National Bank. Further, the Noticee and its Managing Director and Chief Executive Officer, Mr. L. P. Agarwal were 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 vide the interim order and the said directions were confirmed vide the confirmatory order. This restraint against the Noticee and Mr. L. P. Agarwal continues to be in operation till date. Considering these facts and circumstances, I am of the view that the Noticee has already undergone debarment since December 28, 2011 till date, which has the same effect and consequence of suspension of the certificate of its registration. I, therefore, do not think this case fit for any further action such as suspension of certificate of registration of the Noticee.

15. 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 February 12, 2014 without any further direction in the matter. On and from the date of operation of this order, the directions issued vide the interim order dated December 28, 2011 read with the confirmatory order dated September 07, 2012 would not continue further against the Noticee and Mr. L. P. Agarwal. 16. This order shall come into force with immediate effect.

DATE: AUGUST 5TH, 2014 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA