Order with respect to D&A Financial Services P. Ltd. in the matter of Brooks Laboratories Ltd.

IN THE MATTER OF BROOKS LABORATORIES LTD. In respect of D&A Financial Services (P) Ltd. and Mr. Dinesh R. Kaushik, Director of D&A Financial Services (P) Ltd. Date of hearing: February 27, 2012 Appearances: For Noticees: Mr. Dinesh Agnani, Advocate Mr. Atul Sharma, Managing Partner, Link Legal Ms. Raj Rani Bhalla, Partner, Link Legal Ms. Vanessa Singh, Associate, Link Legal Mr. M.K. Doogar, Director, D&A Financial Services (P) Ltd. Mr. Dinesh R. Kaushik, Director, D&A Financial Services (P) Ltd. Mr. O.P. Bhandari, Director, D&A Financial Services (P) Ltd. Mr. Balakrishnan Iyer, Manager, D&A Financial Services (P) Ltd. For SEBI: Mr. Siddhesh Lotlikar, Assistant General Manager Mr. Benoy Melshiyar, Presenting Officer ORDER UNDER SECTION 11, 11(4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 1. The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’), vide an ex-parte ad interim order dated December 28, 2011 (hereinafter referred to as ‘interim order’), in the matter of Brooks Laboratories Ltd. (hereinafter referred to as ‘Brooks’/‘the company’), inter-alia prohibited D&A Financial Services (P) Ltd. (hereinafter referred to as ‘D&A’) and Dinesh R. Kaushik, Director of D&A 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, till further directions.

D&A, as Book Running Lead Manager (hereinafter referred to as ‘BRLM’) to the public issue of Brooks, was prima facie found to have not made proper disclosure in a timely manner and thereby failed in its responsibility to conduct proper due diligence into the affairs of Brooks. The persons against whom interim order was passed were advised that they may file their objections, if any, within twenty one days from the date of the said order and also of an opportunity of personal hearing, if they so desire. 2. Pursuant to the passing of the interim order, D&A vide letter dated January 16, 2012 inter alia denied the allegations leveled against it and vide separate letter dated January 16, 2012 requested that it may be permitted to inspect the documents relied upon by SEBI to arrive at the conclusions in the interim order. Pursuant to the inspection of the documents on January 25, 2012 and on being furnished with the copies of the relevant documents to Dinesh Kaushik, had filed its written objections to the interim order vide letter dated February 22, 2012 and also requested for an opportunity of personal hearing.

Subsequently, D&A filed its written submissions vide letter dated March 3, 2012. 3. Thereafter, an opportunity of personal hearing was granted to D&A and Dinesh Kaushik on February 27, 2012. On the date fixed Dinesh Agnani, Advocate and Atul Sharma, Managing Partner, Link Legal amongst other partners of Link Legal and directors and officials of D&A appeared before me and relied upon their replies. The submissions are as under: A. On inter corporate deposits (ICDs) D&A has submitted that Brooks at no point of time informed about availing ICDs from any entity since the date of signing of the engagement letter. It also stated that  The entities to which such payments were made, out of the issue proceeds, were also never disclosed by Brooks nor was there any indication of any such ICDs having been taken or utilized by the company. Brooks was under an obligation to utilize these issue proceeds towards the objects of the issue and not for any other purpose.  Clause 3 of the issuer agreement unambiguously records the undertaking given by the issuer company to the lead merchant banker with respect to the veracity and completeness of all information made available to the lead merchant banker and any statement made in the offer document.  The copies of minutes of the board meetings held on May 25, 2011 and June 8, 2011 provided by Brooks nowhere indicate the resolution or decision for taking of ICDs by the company even though as per SEBI findings, Brooks has already availed ICDs of Rs. 7 crores as on May 30, 2011 and Rs. 8 crores as on June 2, 2011.

B. On procurement of plant & machinery for the project D&A has submitted that it was only informed of the proposed suppliers till the date of filing of the DRHP when the BRLM had done its due diligence and confirmed the existence, capability, quality, market presence of the said suppliers. D&A also submitted that  It was kept in dark about the change in the supplier as well as the change in consideration for the said purchase of plant & machinery. It relied upon the certificate dated August 2, 2011 given by the Statutory Auditor regarding the expenditure incurred on the project up to July 31, 2011 which does not anywhere mention the payment of Rs. 13.97 crores.  The company had actively concealed not only from SEBI and the investors but also from BRLM, the constitution of such core technical team, the details of so called report dated June 27, 2011 of the said core technical team which allegedly recommended purchase of imported machineries instead of the indigenous machineries.

C. On civil works for the project With regard to civil works for the project, it is submitted that  The company had proposed to award the work to Syal and Associates for a consideration of Rs.12.20 crores and signed copy of estimated cost of civil works were provided to it and the same was disclosed in the offer document.  However, it appears that subsequent to the filing of the DRHP, the company unilaterally without any advice or consultation with BRLM proceeded to award the work to Suryamukhi Projects P. Ltd. (hereinafter referred to as ‘Suryamukhi’) for consideration of Rs.15.30 crores. It has also stated that  The alleged agreement with Suryamukhi executed on June 1, 2011 was neither informed to it nor a copy thereof was supplied to it post its execution. The alleged payment of Rs.15.30 crores made to Suryamukhi for the civil work also do not find any mention under the heading ‘expenditure incurred on the project’ in the certificate dated August 2, 2011 of the statutory auditor.

D. On quotation of plant & machinery With regard to quotations of plant and machinery being received through emails, without proper signature and mismatching of quotation, it is submitted that  These quotations, though unsigned were on letter heads of the respective suppliers and also indicated the name and designation of the officials concerned and were duly certified by the management of the company. Before incorporating the details of these quotations in the DRHP, the BRLM had checked the websites of the respective suppliers and found them to be genuine and existing entities.  Having satisfied itself regarding the reputations of the said suppliers, the BRLM incorporated their quotations in the offer document. Further, in the computer era, all business correspondence is done through emails which do away with the physical signatures on the files attached with the emails.  The mismatch of the quotations is probably because SEBI has probably taken into account the basic price ex taxes, installation charges, transit insurance, freight & forwarding charges, etc. whereas the BRLM had given the prices of the items after inclusion of the excise duty (@10.30%), sales tax (@2%), packing, freight and forwarding charges (@5%).

E. On examination of bank statements With regard to examination of bank statements, it is submitted that the same should actually be applicable to the Statutory Auditors who have to go into the inflow and outflow of funds, sources of income as well as documentary proof for the flow of the said funds in order to prepare the financial statements. As per Schedule VIII, Part A, Clause IX(B) of the ICDR Regulations, the BRLM is required to annex the report of the statutory auditor in the offer document. BRLM having acted on the certificate of Auditor cannot be held responsible for not verifying bank statements.

F. Thus, D&A has stated that  It has carried out the duties and acted with due diligence to the best extent possible and tried to make true, fair and adequate disclosures on the basis of the information provided by the company and made available to them.  The role and responsibility of a BRLM is not of an investigator but of ensuring that all the disclosures as made available to it are duly made in the DRHP in a manner which is concise and at the same time, the same is true, adequate and fair.  It is impossible for a BRLM to investigate into the authencity and veracity of various books of accounts and other corporate records as all records and documents are the property of the company and effective control in respect thereto is with the Board of Directors of the company.

 The obligation of the merchant banker to ascertain the disclosures being true, adequate and fair is limited by the information provided by the issuer company to the merchant banker who has no special investigative powers and to that extent the role of a merchant banker is in the nature of an adviser and an intermediary between the issuer, SEBI and the investors.  In this very case, it is apparent that information of vital nature has been intentionally suppresses/ not disclosed to the BRLM for the reasons best known to the issuer company.

4. I have considered the replies/ objections filed by the parties, the submissions made on their behalf during the personal hearing and relevant the material available on record. The limited issue to be considered in this Order is to decide whether, based on the available material on record and after considering the submissions made by the parties, the directions issued by SEBI vide interim order needs to be continued, revoked or modified in any manner, in so far as it relates to the parties.

5. I note the contention of the noticee that it was not informed by the company that it has raised funds through ICDs. I also note the contention of the noticee that the minutes of the board meeting dated May 25, 2011 submitted by SEBI, where the resolution for raising of ICDs was passed, is different from the minutes submitted by the company. In order to authenticate the contention of the noticee, the noticee was advised to furnish the said minutes. I have perused the said minutes and prima facie observe that the minutes is in a form of a draft. Further, these minutes are also not signed by the board of directors of the company. It is common knowledge that signatures are official requirement of validity of all legal documents. Hence, the unsigned documents are not considered valid. Therefore, I find that D&A as a BRLM, failed to conduct to conduct proper due diligence for verifying the documents relating to raising of ICDs. D&A relied on unsigned and draft minutes for verification which clearly indicates that enough efforts were not put in the verification of ICDs and the process was completed just by relying on the submission by the management.

6. With regard to quotations of plant and machinery being received through emails and without proper signature, I do not agree with the defense put up by the noticee that they received the quotations on letter heads of the respective suppliers and also indicated the name and designation of the officials concerned and were duly certified by the management of the company for the simple reason that this is not the accepted/ approved professional way of functioning and goes against the established norms of the business which is not expected especially of a BRLM who is required to, inter alia, exercise due diligence, ensure proper care and exercise independent professional judgment. I further note that if the argument of the noticee were to be accepted then the basis of regulatory requirement of appointing a merchant banker for conducting due diligence in an issue, would become redundant and would also naturally raise the basic question on the raison d'être of the merchant banker.

7. I also note that D&A had verified the credibility of plant & machinery suppliers from the suppliers’ website. It is reasonably expected of a merchant banker to atleast independently verify the credibility of the suppliers rather than solely rely on the websites of these suppliers which once again exhibits failure on the part of the merchant banker to discharge its duties with the required degree of professionalism.

8. I note that the common defense of the noticee is that all the alleged wrongdoing is done only by the company by not disclosing the material developments to them or by giving incomplete information to them or the developments taking place after the due diligence was done by the noticee. However, I do not agree with the arguments of the noticee in as much as they are trying to shift their lack of due diligence and professional conduct onto the company in order to come clean in this matter. While the prime responsibility of the disclosures given in the prospectus is that of the directors of the company, the merchant banker is expected to undertake proper due diligence as their assessments of various assets and liabilities of the company are consumed by the investing public for making investment decisions.

9. I am of the considered opinion that at the present stage, it would not be appropriate to give any conclusive findings as to any facts or submissions made by the parties. The objections made by the parties, the actual due diligence done by the noticee etc would be considered in detail by the investigation before coming to any conclusion in respect of them in the matter. Therefore, at the present state, as the investigations in the matter is in progress, I do not find it fit to modify/ revoke the ad interim directions issued vide Order dated December 28, 2011, till the completion of investigation in the matter.

10. In view of the foregoing, I, in exercise of the powers conferred upon me in terms of section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11, 11(4) and 11B thereof, hereby confirm the directions issued against D&A Financial Services (P) Ltd. and its director Dinesh R. Kaushik vide ex-parte ad interim Order dated December 28, 2011 in the matter of Brooks Laboratories Ltd.

PLACE: MUMBAI PRASHANT SARAN DATE: 05/SEP/2012 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA