Order in the matter of Almondz Global

WTM/RKA/IVD/ 15 /2014 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 against Almondz Global Securities Ltd. (SEBI Registration No. INM000000834). In the matter of M/s. Bharatiya Global Infomedia Limited. 1. Bharatiya Global Infomedia Limited (hereinafter referred to as "BGIL") made an Initial Public Offer ("IPO") through the book building route in the price band of ₹ 75 to ₹ 82 for 67.2 lakh equity shares having face value of ₹ 10 each. BGIL, in consultation with Almondz Global Securities Ltd. (hereinafter referred to as "Almondz"), the Book Running Lead Manager for the IPO, decided to issue and allot the shares in its IPO at the price of ₹ 82 per share. An amount of ₹ 55.104 crore was raised by BGIL through the IPO. The allotment of shares in IPO was completed on July 21, 2011 and thereafter the shares of BGIL were listed and admitted for dealings on NSE and BSE on July 28, 2011. It was noted that on July 28, 2011 (i.e. on the day of listing of shares of BGIL), the scrip price plunged from ₹ 81.9 (opening price) to ₹ 29.90 (closing price) at BSE, and from ₹ 84 (day’s high) to ₹ 30.95 (closing price).

2. In this background, Securities and Exchange Board of India ("SEBI") undertook a preliminary investigation in the matter. It was prima facie observed, inter alia, that BGIL had utilised the IPO proceeds in a substantially different manner from the 'objects of the issue/identified vendors/time lines' disclosed in the Red Herring Prospectus ("RHP"). In addition thereto, several instances of untrue, incorrect and misleading disclosures in the RHP were also observed. It was alleged that Almondz being the Book Running Lead Manager (" BRLM") in the IPO "has also prima facie failed to exercise the required due diligence and have aided and abetted the fraud committed by BGIL and its directors/officials and thereby violated 3(b), 3(c) and 3(d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. Further, the BRLM has also prima facie violated the provision of SEBI (ICDR) Regulations, 2009 and SEBI (Merchant Bankers) Regulations, 1992." 3. Based on the above prima facie findings, SEBI vide its ad-interim ex-parte order dated December 28, 2011("interim order"), inter-alia, issued directions prohibiting Almondz from taking up any new assignment or involvement in any new issue of capital including IPO, follow-on issue, etc. in the securities market in any manner whatsoever from the date of Order in respect of Almondz Global Securities Ltd.

the order till further directions. These directions were confirmed vide SEBI's order dated September 21, 2012 ("confirmatory order"). 4. After completion of investigation in the matter, SEBI proceeded with the proceedings under section 11, 11(4) read with 11A and 11B of the Securities and Exchange Board of India ("SEBI Act") and issued a show cause notice dated September 4, 2013 to Almondz. Simultaneously with the aforesaid proceedings, SEBI initiated proceedings against Almondz under Chapter V of the SEBI (Intermediaries) Regulations, 2008 ("Intermediaries Regulations") and appointed a Designated Authority ("DA") in respect thereof. In both these proceedings, there was no charge of violation of PFUTP Regulations against Almondz. It was alleged in both the proceedings that Almondz had violated the provisions of regulations 8(2)(b), (e), (f) and 64(1) of SEBI (Issuance of Capital and Disclosure Requirements) Regulations, 2009 ("ICDR Regulations") and regulation 13 of SEBI (Merchant Bankers) Regulations, 1992 ("Merchant Bankers Regulations") read with clause (1), (2), (3), (4), (6), (7) and (21) of the Code of Conduct prescribed under schedule III thereof as it did not exercise due skill, care and diligence in the IPO of BGIL.

These allegations against Almondz were made on the basis of following facts which were revealed during the investigation: I. Wrong disclosure of the relationship-details with respect to the transaction between BGIL and Gadeo Electronics ("Gadeo"): a) It was disclosed in the RHP dated June 28, 2011 and the Prospectus dated July 16, 2011 of BGIL that ₹3.96 crore were to be paid to Gadeo out of the IPO proceeds. It was described in the RHP and Prospectus that BGIL had entered into MoU with Gadeo to take over the said firm having immovable property at Noida for total consideration of ₹ 5.96 crore. Out of the said sum, BGIL had already allotted 2 lakh shares at a price of ₹ 100 per share as part consideration. b) Gadeo is a partnership firm consisting of two partners namely, Mrs. Richa Mittal (95% share) and Mr. R. K. Mittal (5% share). Mrs. Richa Mittal is wife of Mr. Rajeev Mittal (who is the brother of Sanjeev Kumar Mittal, director of BGIL). Mr. R. K. Mittal is the father of Mr. Sanjeev Kumar Mittal. c) While the draft offer document relating to the IPO was pending, SEBI, vide letter dated January 21, 2011, had asked a specific clarification from Almondz as to whether Gadeo is an entity related to BGIL/ its promoters /promoter group companies.

In response thereto, Almondz vide its letter dated February 8, 2011 stated that Mrs. Richa Mittal is not related to the promoter / directors / promoter group companies. d) In the RHP and Prospectus of BGIL, it was disclosed that:-“Mrs. Richa Mittal is wife of Mr. Rajeev Mittal and a resident of A-147-148, Sector 55, Noida, Uttar Pradesh, and is not related to our Company, our Promoters / Directors or Promoter Group Companies".

e) Further, the RHP and Prospectus of BGIL did not disclose the 'related party transactions' entered with Gadeo by BGIL under the heading of "related party transactions". f) It was observed during investigation that Almondz, while preparing the draft RHP for the IPO of BGIL had relied upon the copy of the partnership deeds of Gadeo wherein it was apparent that: i. The original partners of Gadeo were Mr. Sanjeev Kumar Mittal, (son of Mr. Ram Kishan Mittal) and Mrs. Richa Mittal. ii. At the time of processing of RHP and prospectus in IPO of BGIL, Mrs. Richa Mittal (wife of. Mr. Rajeev Kumar Mittal) and Mr. Ram Kishan Mittal were the partners of the Gadeo. iii. Mrs. Richa Mittal and Mr. Sanjeev Kumar Mittal are having the same address at - D-51(B), Sector-26, Noida. iv. The partnership deed was witnessed by the Chairman and Managing Director of BGIL, Mr. Rakesh Bhatia and Mr. Rajeev Agarwal, Manager (Finance) of BGIL. g) Thus, it was apparent that Mrs. Richa Mittal was related to Mr. Sanjeev Kumar Mittal, director of BGIL, as sister-in-law. However, the RHP and Prospectus contained wrong and misleading statements. It was alleged that Almondz being BRLM for IPO of BGIL facilitated BGIL to disclose wrong and misleading statements in its RHP and Prospectus. II. Non disclosure of Inter-Corporate Deposit (ICD) amounts raised and payments made by BGIL to various entities. a) Both RHP and Prospectus of BGIL contained the disclosure that “our company has not raised any bridge loan against the proceeds of the present issue”. However, it was noted during investigation that BGIL had taken ICD loans of ₹ 15 crore as described in the following Table: S. Amount in ₹ Party Name Received Date No crore Prior to the date of filing of RHP 1 Krishna trade & Commerce 21.6.2011 2 2 AachmanVanijya Pvt. Ltd. 22.6.2011 2 Pvt. Ltd. 3 SajalImpex Pvt. Ltd. 22.6.2011 0.475 4 Dinosour Tradelink Pvt. Ltd. 27.6.2011 1 5 Divyadrishti Traders Pvt. Ltd. 27.6.2011 0.525 6 Subhshree Hirise Pvt. Ltd. 27.6.2011 1 After the date of filing of RHP but before the date of filing of Prospectus 7 Skylight Distributors Pvt. Ltd. 29.6.2011 1 8 Times tradelink Pvt. Ltd. 30.6.2011 1 9 Makesworth Projects 04.7.2011 1 Developers Pvt. Ltd.

04.7.2011 1 10 Affluent Dealcom Pvt. Ltd. 05.7.2011 0.5 11 Abhilasha Exports Pvt. Ltd. 06.7.2011 1 ETL Infrastructure Finance 05.7.2011 1.5 12 07.7.2011 1 Ltd. Total 15 b) The above ICD loans of ₹ 7 crore raised by BGIL prior to date of RHP were not disclosed therein. Further the facts about raising 8 crore of ICD loans after the date of filing of RHP but before the date of filing of Prospectus were neither disclosed in the Prospectus nor did BGIL issue any public notice in that regard. Thus, above disclosure in RHP and prospectus was allegedly a wrong and misleading disclosure. c) Had these ICD loans of ₹ 15 crore been added to the total liabilities of BGIL, its current liabilities as on March 31, 2011 would have increased by 100%. These high value transactions that were also reflected in the bank statements of BGIL should have raised doubt about the nature of transactions to a prudent merchant banker. However, admittedly, Almondz even did not collect the bank statements of BGIL. d) These ICD loans' amounts were used to pay various vendors whose details were also not disclosed in the RHP / Prospectus.

Subsequently, the ICD loans were repaid by BGIL from its IPO proceeds. e) As per regulation 57 (2)(a) read with clause VII (G) of Part A of Schedule VIII of the ICDR Regulations, BGIL was under an obligation to disclose in the RHP and Prospectus under the heading of “Sources of funds already deployed - the means and sources of financing, including details of bridge loan or other financial arrangements, which may be repaid from the proceeds of the issue." However, no such disclosures were made in the RHP and Prospectus of BGIL. f) It is alleged that the understatement of the liabilities of BGIL, by not adding the ICD loans in current liabilities and not disclosing the same in RHP/Prospectus, gave a rosy picture about BGIL and influenced the decision of the investors regarding the IPO of BGIL. It is further alleged that Almondz's failure to notice the high value transactions of BGIL indicates that they had facilitated BGIL in concealing the correct position in the RHP / Prospectus of its liabilities, other related details and bridge loans by way of ICD loans. III. Failure to carry out Independent Valuation. a) During investigation Mr. Sanjay Dewan had, in his statement dated November 26, 2011, inter alia, admitted on behalf of Almondz that it had not done any independent valuation of the software which was shown in RHP and Prospectus as assets of BGIL.

Further, he did not give details for a specific query regarding the contents as per their verification about the purchase of hardware / software for ₹ 1.5 crore entered in the fixed assets register for computer / software of BGIL on June 21, 2010. b) In respect of debtors, Almondz had admitted that it had only verified the invoices of top 10 debtors from the records submitted by BGIL and did not carry out any independent verification. It also admitted that sundry creditors too were not independently verified. 5. In terms of regulation 64 of the ICDR Regulations, the lead merchant banker should exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosures in RHP. It has been alleged that non-disclosures / incorrect disclosures by BGIL in its RHP and Prospectus as observed above show an extremely poor standard of due-diligence by Almondz. It has been further alleged that Almondz did not exercise due diligence about the veracity and adequacy of the disclosures made in the RHP. Further, it had submitted wrong/false due diligence certificate to SEBI stating, inter-alia, that the disclosures made in the draft RHP/draft Prospectus were true, fair and adequate.

6. While the aforesaid proceedings under section 11, 11(1) read with 11A and 11B of the SEBI Act were independently in progress, the DA submitted his report dated December 10, 2013. The observations made by the DA in his report are summarized as under: a. As regards the allegation of wrong disclosure of the relationship-details with respect to the transaction between BGIL and Gadeo, the DA observed that Almondz ion its reply accepted the fact that the verification with respect of Gadeo's ownership documents was not done by it independently. Almondz wholly relied on the disclosures and information as certified by the peer review auditors and the same is reproduced in the offer document of BGIL. The DA observed that this clearly shows that Almondz, being the BRLM, has not taken steps to verify the authenticity of the information as certified by the auditors. On the basis thereof, the DA rejected the submission made by Almondz in its defence for the said non-disclosure. Further, the DA observed that though Mrs. Richa Mittal is not covered within the definition of 'relative' as per AS-18, her relationship with Mr. Sanjeev Kumar Mittal (i.e. sister-in-law) is still capable of having an influence on him.

The DA further noted that AS-18 cannot be interpreted in a narrow way but should be interpreted in the wide sense. The DA observed that Almondz was fully aware of the MOU between BGIL and Gadeo and the information with respect to the related party transaction, but it supported BGIL to suppress the information and thereby failed to observe due diligence which resulted in wrong and misleading disclosures in the RHP. b. As regards the allegation of non disclosure of ICD amounts raised and payments made by BGIL, the DA observed that collection of bank statements of BGIL was necessary for due diligence and if Almondz had checked the high value transactions entered into by BGIL, it could have easily identified the ICDs and payments made to new set of vendors. Almondz being the Merchant Banker of BGIL could have asked for certain documents from BGIL so as to verify and ascertain the details with respect to payments made to the new set of vendors and ICDs taken from various entities. The DA observed that Almondz took a passive and casual approach and purely relied on the information given to it without even making an effort of verifying the authenticity of the information.

On the basis of the above, the DA rejected the submission of Almondz that the said information was concealed by BGIL and therefore there was no source to ascertain the said information. c. As regards the allegation of failure to carry out independent valuation, the DA observed that without verifying the statements of the Statutory Auditor, Almondz blindly accepted the confirmation of the Auditor. The DA observed that the submission of Almondz that "it did not believe that independent verification of debtors and creditors was required" clearly shows the kind of approach it had with respect to the due diligence levels to be adhered. Further, Almondz blatantly and carelessly relied on the limited statements of the Statutory Auditor and disclosures of BGIL in carrying out its due diligence in the IPO of BGIL without making any effort on its part to even verify the assets of the company. 7. On the basis of the aforesaid findings, the DA concluded that the charges against Almondz on all the above three counts stood established, and recommended that the certificate of registration of Almondz as a Merchant Banker be suspended for a period of six months.

8. After consideration of the Report, a show cause notice dated December 17, 2013 was issued to Almondz 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. Almondz, vide its letter dated January 10, 2014 submitted its reply to the said show cause notice, inter alia, stating the following: a. Almondz submitted that certified copies of the MoU dated September 1, 2009 and supplementary MoU dated June 3, 2010 covering BGIL's purchase of factory from Gadeo were independently examined by it and the legal counsel to the issue and all necessary disclosures in relation to these documents were made in the RHP/ Prospectus in accordance with the ICDR Regulations. The examination of Gadeo's title in the title deeds could not have provided any additional information that this transaction was a related party transaction for BGIL. b. Section IX of part A of Schedule VIII of ICDR Regulations lays down that the financial information sought there under has to be certified by auditors who hold a valid certificate issued by the peer review board of the Institute of Chartered

Accountants of India ("ICAI") and the disclosure in respect of related party transactions is a part of the information sought under section IX, para B(12). Thus, once the overall financial information is certified and is reproduced in entirety in the offer documents, the ICDR's requirements of due diligence are met. In case of BGIL's IPO, its financial information certified by the auditor along with the peer review auditor's report was reproduced in the DRHP/RHP/Prospectus and the names of Gadeo or Mrs. Richa Mittal did not figure as related parties in the said financial information. c. ICDR Regulations require that the Merchant Banker strictly follows the requirements of AS-18. Thus, the DA's observation that the sister-in-law relationship is capable of having an influence on an individual may be true but the law does not provide the scope to Almondz to make such a subjective assessment. In terms of AS-18 (para 3, clause (c) and (d)) related party relationships apply only to those individuals who either own a controlling interest or significant influence over the enterprise and their relatives or to key management personnel of the enterprise or the relatives of such personnel.

Since Mrs. Richa Mittal has a overwhelming interest (97.5%) in the partnership of Gadeo, it is her relationship with the persons who had controlling interest in BGIL and with BGIL's KMPs (and not that of the minority partner, Mr. R K Mittal) that determines the status of Gadeo as a related party to BGIL. It is clear from the definition of "relative" under Para 10.9 of AS 18 that brother's wide i.e. sister-in-law is not deemed a relative under AS-18, which could be the reason why Gadeo has not been treated as a relative party by the statutory auditors. d. Almondz undertook a comprehensive set of due diligence measures to independently obtain and verify information on related party transactions. As there is no source in the public domain that provides information to establish an interest of directors or promoters of BGIL in the purchase of property from Gadeo, it had to necessarily rely on the information provided by the issuer and its promoters and directors as the primary source. However, it did not solely rely on the disclosures made by BGIL during the due diligence process, but also conducted the following diligence:: i. It examined the financial statements for preceding five financial years audited by the statutory auditors and found no mention of Mrs. Richa Mittal or Gadeo in a related party transaction.

It also examined the audited and restated statements provided by the peer reviewed auditors and the Register of Contracts but did not find any reference of such a transaction. ii. The undertaking-cum-indemnity dated November 6, 2010 furnished by Mr. Sanjeev Mittal stated that BGIL had not purchased any property in the preceding two years and did not propose to purchase any property in which Mr. Sanjeev Mittal had, have or will have a direct or indirect interest or in respect of any payment thereof.

iii. It had also examined the Form 24AA (General notice for disclosure of interest of directors) submitted by directors including Mr. Sanjeev Kumar Mittal for the years ending March 31, 2010 and March 31, 2011. The said forms also did not disclose the relationship with Mrs. Richa Mittal or any interest in Gadeo. iv. Mr. Sanjeev Mittal was also present in the Board Meetings in which the transaction with Gadeo was approved but he did not disclose any interest in the transaction even though he was required to do so by virtue of section 299 of the Companies Act, 1956. v. On June 11, 2011, BGIL issued a confirmation to Almondz that they had not purchased any property in which any of its directors had any direct or indirect interest. e. The fact of Mrs. Richa Mittal being the sister-in-law of Mr. Sanjeev Mittal, director of BGIL was withheld from Almondz and nothing in the record of BGIL or in the declarations and undertakings submitted by BGIL and its directors suggested otherwise. Prior to SEBI’s ad-interim order dated December 28, 2011, Almondz was not aware that Mrs. Richa Mittal was related to any of the promoters or directors of BGIL. f. The due diligence carried out by Almondz conformed to the best industry practices and were also in accordance with the "Due Diligence Manual" brought out by the Association of Investment Bankers of India g. The Board of BGIL continued to maintain all along that no material change had taken place in the information contained in the RHP.

BGIL had neither disclosed to Almondz its plans to raise ICDs nor did it reveal any details of the ICDs actually raised before the dates of RHP and the Prospectus. BGIL also did not inform Almondz about its plans to repay these ICDs from the issue proceeds. h. Under normal circumstances i.e. the circumstances that do not excite suspicion or raise doubts on the intention of the issuer, a due diligence process rarely extends to examination of bank account statements as one is apprehensive of fund movements by issuer post receipt of IPO proceeds and not prior to an IPO. Almondz had no reason to disbelieve BGIL at the time when it was carrying out the due diligence and there existed no information which could have excited suspicion such that it would have led to an examination of BGIL's bank statements. i. None of the items covered in the findings of the DA i.e. the historical valuation of the software in the books of BGIL, items comprising the hardware or other fixed assets, quantum of BGIL's sundry debtors or sundry creditors, are in dispute in the present case. j. Almondz relied on the audited statements and restated financial statements which were prepared by experts i.e. auditors on the basis of established accounting standards of ICAI.

In absence of any circumstances that aroused its suspicion with respect or the valuation of software or other assets, or with respect to recording of assets in the books of accounts, the need for independent valuation was not felt. Further, Almondz had accepted the value of debtors and creditors as stated in BGIL's audited accounts and as certified by their auditors and did not consider at that time that an independent verification of debtors or creditors was required. 9. I have considered the findings of the DA and the written reply/submissions made by Almondz in response to the SCN dated December 17, 2013. I note that the present proceedings under the Intermediaries Regulations arise out of the same facts and circumstances in which the proceedings under section 11, 11(4) read with 11A and 11B of the SEBI Act were initiated and concluded. Further, the same facts, allegations and charges are the cause of action in the present proceedings. I note that in those proceedings, Almondz was given a personal hearing to make its submissions and thereafter the order dated March 3, 2014 was passed thereby concluding the said proceedings.

In the present proceedings also an opportunity of being heard has been provided to Almondz in accordance with section 12(3) of the SEBI Act read with regulation 28 of the Intermediaries Regulations and it has filed its written submissions in these proceedings on the same lines as in the proceedings initiated under section 11, 11(4) read with 11A and 11B of the SEBI Act. I, therefore, am of the view that the procedures prescribed section 12(3) of the SEBI Act and Intermediaries regulations are complied with and the matter can be proceeded with on the basis of written reply/submissions of Almondz. 10. In my order dated March 3, 2014, I have given detailed findings on the allegations made against Almondz and the basis on which Almondz had been found to be guilty of the violations alleged in the show cause notice dated September 4, 2013. In the said order, I have held that Almondz has failed to exercise due-diligence in respect of wrong, false and misleading disclosures of relationship of Mrs. Richa Mittal and director of the BGIL, Mr. Sanjeev Kumar Mittal, his direct or indirect interest in the property that BGIL proposed to buy from Gadeo and nature of such interest, disclosure of transaction between BGIL and Gadeo as 'related party transaction' and also in respect of non-disclosure of ICD loans raised by BGIL in its RHP / Prospectus.

However, with regard to the third allegation of failure to carry out independent valuation, Almondz has been given benefit of doubt in absence of any circumstance that raised suspicion in respect of valuation of any specific assets of BGIL. Thus, Almondz has been found to have violated the provisions of regulation 64(1) of the ICDR Regulations and regulation 13 of the Merchant Bankers Regulations read with clause (1),(2),(3),(4),(6), (7) and (21) of the Code of Conduct prescribed under scheduled III thereof. I have also found that in view of failure to exercise due diligence as found in the facts and circumstances of the case, the due diligence certificate given by Almondz while filing the draft RHP with SEBI was not true and thus it also violated provisions of regulation 8(2)(b), (e) and (f) of the ICDR Regulations.

11. Accordingly, by the order dated March 3, 2014, Almondz has been prohibited from taking up any new assignment or involvement in any new issue of capital including IPO, follow-on issue, etc. in the securities market in any manner whatsoever for a further period of six months from the date of the order. Almondz has been further directed that during this period of six months, it shall not take up any assignment or involvement in buy-back of securities under SEBI (Buy-Back of Securities) Regulations, 1998, open offers under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and delisting of securities under the SEBI (Delisting of Equity Shares) Regulations, 2009. 12. In the present proceedings, the DA has given recommendation to suspend the certificate of registration of Almondz on the basis of his findings recored in the Report and discussed hereinabove. I have considered all the facts and circumstances which are the basis of instant proceedings and have given my findings thereon in the order dated March 03,2014 and my findings in the instant proceedings remain the same. In the facts and circumstances of this case, I agree with recommendation of the DA and hold that certificate of registration of Almondz be suspended for a period of six months. I find that the effect and consequence of suspension of the certificate of registration of Almondz will be substantially the same as that of the directions issued against it vide order dated March 3, 2014. Considering the same, I direct that the suspension of certificate of Almondz for a period of six months shall run concurrently with the directions issued against it vide order dated March 3, 2014. 13. The show cause notice dated December 17, 2014 is accordingly disposed off. 14. A copy of the order shall be served upon Almondz, stock exchanges and the depositories for ensuring compliance with the above directions.

Date: April 11th, 2014 RAJEEV KUMAR AGARWAL Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA