BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 39 of 2011
Date of decision: 15.2.2012 M/s Enam Securities Private Limited
24, Rajabahdhur Compound, Ambalal
Doshi Marg, Mumbai – 400001.
……Appellant Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
…… Respondent
Mr. Somasekhar Sundaresan, Advocate with Mr. Ravichandra Hegde, Ms. Delna
Aga, Advocates for the Appellant.
Mr. Darius Khambatta, Additional Solicitor General with Mr. Madhur Baya,
Ms. Aparna Kalluri, Advocates for the Respondent.
CORAM : P. K. Malhotra, Member
S. S. N. Moorthy, Member
Per : P. K. Malhotra, Member
This appeal is directed against the order dated December 31, 2010
passed by the adjudicating officer of the Securities and Exchange Board of India
(for short the Board) holding the appellant guilty of violating regulation 13 of the
Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992
(for short merchant bankers regulations) and certain sub-clauses of clause 5 and 7
of the Securities and Exchange Board of India (Disclosure and Investors
Protection Guidelines) 2000 (for short the DIP guidelines) and imposing a penalty
of ` 25 lacs under Section 15HB of the Securities and Exchange Board of India
Act, 1992 (for short the Act).
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- The facts of the case, in brief, are M/s. Enam Securities Pvt. Ltd., the
appellant before us, is a merchant banker registered with the Board under Section
12 of the Act and is said to be in the business of providing merchant banking
services for more than two decades. The Board conducted an inspection of the
books and records of the appellant in August 2005 to examine the role of the
appellant as a merchant banker in the context of management of initial public
offerings, rights issues, open offers etc. A copy of the inspection report was
made available to the appellant on June 28, 2006 for its comments. After
considering the comments offered by the appellant, the Board issued a show cause
notice dated June 14, 2007 alleging violation of certain provisions of the merchant
bankers regulations and the DIP guidelines. In the show cause notice, the
appellant was alleged to have committed five violations. The appellant made
detailed submissions on the alleged violations vide its letter dated July 9, 2007
and denied all the allegations. The adjudicating officer, after considering the
reply filed by the appellant, dropped two charges and held the appellant guilty of
remaining three violations, which read as under :-
“(i) The noticee had failed to exercise due diligence with
reference to certain disclosures made in the offer
documents. For example, the noticee had failed to
make disclosures in respect of the entity Rabobank
International Holding B.V. (hereinafter referred to as
Rabobank) and certain other entities as promoters in
the public issue of Yes Bank Ltd./the Bank/ the
Company.
(iii) The noticee had failed to exercise due diligence with
reference to disclosures pertaining to the allocation of
shares to QIBs etc, for instance no Indian Financial
Institution or Banks are considered eligible in
‘Platinum Category’ and preferential treatment was
given to few entities. It was alleged that FII such as
Goldman Sachs, BSMA, UBS etc. have been given
preferential treatment in allotment of shares. It is
further alleged that there is no consistency in
allotment of shares within the same category. In this
regard it was also alleged that the noticee had failed
to fulfill its obligations as a merchant banker in a
professional and diligent manner
(v) The noticee had failed to exercise due diligence in
properly monitoring the flow of applications and
other matters pursuant to closure of the public issues.
For example, in the Yes Bank IPO shares were 3
allotted to applicants having non existing DP IDs and
other irregularities. Registrar to an issue failed to
detect the same and the noticee as post issue LM
failed to notice and report the same to the Board
thereby alleged to have violated the provisions of
Guideline 7.4.1 of SEBI (Disclosure & Investor
protection) Guidelines, 2000.”
Hence this appeal.
- We have heard Mr. Somashekhar Sundaresan, learned counsel for the
appellant and Mr. Darius Khambatta, learned Additional Solicitor General on
behalf of the respondent Board at length who have also taken us through the
records. Before we deal with the specific issues, it is necessary to have a look at
the obligations and responsibilities of a merchant banker under the merchant
bankers regulations. Regulation 13 of the merchant bankers regulations provides
that every merchant banker will abide by the code of conduct as specified in
Schedule III thereof. It places an onerous duty on a merchant banker not only of
protecting the interest of the investors but also of ensuring that adequate
disclosures are made in a timely manner without making any misleading or
exaggerated claims and to render best possible advise to the clients. A merchant
banker is required to maintain high standards of integrity, dignity and fairness in
the conduct of its business and is required to promptly inform the Board any
violation or non compliance of the regulatory framework that come to its notice.
A merchant banker is also required to submit to the Board complete particulars of
the transactions of acquisition of securities of any body corporate as required by
regulation 27 and also make disclosures to the Board relating to its activities, as
required under regulation 28 of the merchant bankers regulations. In a way, a
merchant banker is an expert body which is also a point of contact between the
regulator i.e. the Board and the corporate entity on whose behalf it is working.
Therefore, a merchant banker is the eyes and ears of the regulator whose
responsibility is to ensure that the corporate entity utilizing its services is acting in
accordance with the laid down norms and in case of violation, bring the violation
to the notice of the regulator for appropriate action. It is in this context that the 4
code of conduct for merchant bankers prescribes that a merchant banker shall, at
all times, exercise due diligence, ensure proper care and exercise independent
professional judgment. In the above background that we have to consider the
rival submissions to see whether the adjudicating officer was right in arriving at
the conclusion that the appellant had violated regulation 13 of the merchant
bankers regulations and certain sub-clauses of clause 5 and 7 of the DIP
guidelines.
- We will first deal with the charge that the appellant had failed to exercise
due diligence in not disclosing Rabobank International Holding B. V. (for short
Rabobank) as a promoter of Yes Bank Ltd. in its (Yes Bank) prospectus for the
Initial Public Offer (IPO). During the course of investigation, the Board found
that Yes Bank Ltd. was incorporated as a public limited company under the
Companies Act, 1956 on November 21, 2003. It was granted license by the
Reserve Bank of India (RBI), under Section 22(1) of the Banking Regulation Act,
1949 on May 24, 2004 to commence banking operation on certain terms and
conditions. One of the conditions was that the promoters’ contribution shall be
maintained at a minimum of 49% of the paid up capital at all points of time which
will be locked in for a period of five years. It was observed by the Board that to
meet 49% of the promoters’ contribution requirement, 29% of share capital held
by Mr. Rana Kapoor and Mr. Ashok Kapur and 20% of share capital held by
Rabobank were taken into account and the same was locked in for a period of five
years i.e. up to May 24, 2009. In the prospectus for the Yes Bank IPO, it was
stated that the requirement of 49% of pre-issue capital held by promoters
(domestic and foreign) has been made by locking in equity shares representing
29% of the share capital held by Rana Kapoor and Ashok Kapur and 20% of the
share capital held by Rabobank. However, under the heading ‘share capital
holding pattern’ as on May 24, 2005 post-issue promoters and promoter groups
shareholding, Rabobank was not classified as promoter and this, according to the
Board, has resulted in misrepresentation of fact whereby the investors have been 5
deprived of taking an informed decision for making investments in the Yes Bank
IPO. According to the Board, the appellant had failed to exercise due care and
diligence in this regard. It is the case of the appellant that Rabobank was not a
promoter of Yes Bank and, therefore, not disclosed as promoter in the prospectus.
The Rabobank was called a co-promoter in the application before the RBI for the
purpose of a banking license. The intention of Rabobank to participate with the
Indian promoters of the Yes Bank as a technical participant has been clearly
brought out in the initial application made by the Indian promoters as well as
Rabobank’s letter to the RBI. The prospectus filed with the Board contained the
disclosure relating to Rabobank being a co-promoter in the application made for
the purpose of banking license. It also contains necessary disclosure relating to
Rabobank holding a minimum of 20% shares of Yes Bank. It is, therefore,
incorrect to say that any false statement was made or any misrepresentation was
made in the prospectus depriving the investing public of taking an informed
decision about the Yes Bank IPO. It is also the case of the appellant that the
Rabobank has never been treated as a promoter of the Yes Bank as is evident
from the quarterly financial statements filed with the Board/stock exchanges and
it has never been objected to. Even the draft read hearing prospectus (DRHP)
was cleared by the Board without raising any objection on this issue. The
Rabobank was shown as a co-promoter in its application before the Reserve Bank
of India for a banking license to comply with the basic licensing conditions of the
Reserve Bank of India to maintain the minimum promoters’ shareholding of 49%
but that does not make the Rabobank a promoter within the meaning of DIP
guidelines and hence Rabobank was not shown as a promoter in the prospectus of
the Yes Bank IPO.
- We have given our thoughtful consideration to the rival submissions and
are inclined to agree with learned counsel for the appellant that the charge of not
exercising due care and diligence is not made out. The basis of holding the
appellant guilty of this violation is the correspondence with the RBI, application 6
made before the RBI for securing a banking license and the clarification sought
by the Board from the RBI. Obviously, RBI will furnish clarification to the Board
only with reference to the application that was submitted by the promoters of the
Yes Bank for a banking license. The appellant has been successful in
demonstrating as to why Rabobank was shown as a co-promoter in its application
for banking license with the RBI. Simply because Rabobank was shown as a co-
promoter of Yes Bank for getting a banking license from the RBI will not ipso
facto make it a promoter for the purposes of DIP guidelines or other regulations
issue by the Board. To bring Rabobank within the promoter category, it must
satisfy the definition of promoter as given in the DIP guidelines. There is no
general definition of promoter in the DIP guidelines. Clause 6.8.3 of the DIP
guidelines prescribes the manner in which capital structure of the company is to
be presented in the DRHP for IPO. Clause 6.8.3.1 thereof provides the manner in
which authorised, issued, subscribed and paid up capital is to be presented.
Clause 6.8.3.2 makes provision for notes that shall be incorporated with the
details of capital structure. Paras (k) and (l) thereof read as under :-
“( k) The details of:
(i) the aggregate shareholding of the promoter group and of
the directors of the promoters, where the promoter is a
company.
(ii) the aggregate number of securities purchased or sold by
the promoters group and the directors of the promoter
during a period of six months preceding the date on which
the draft prospectus is filed with Board and to be updated
by incorporating the information in this regard till the time
of filing the prospectus with the Registrar of Companies.
(iii) the maximum and minimum price at which purchases
and sales referred to in (ii) above were made along with the
relevant dates.
(l) In the event of it not being possible to obtain information
regarding sales and purchase of securities by any relative of
the promoters, a statement to that effect shall be made in the
prospectus on the basis of the transfers recorded in the books
of the issuer company.”
Explanation I under clause 6.8.3 gives an inclusive definition of the term
‘promoter’ which read as under :-
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“Explanation I: For the purpose of sub-clauses (k) and (l) above, the term ‘Promoter’ shall include:
(a) the person or persons who are in over-all control of the
company;
(b) the person or persons who are instrumental in the
formulation of a plan or programme pursuant to which the
securities are offered to the public;
(c) the persons or persons named in the prospectus as
promoters(s):
Provided that a director/ officer of the issuer company or
person, if they are acting as such merely in their professional
capacity shall not be included in the Explanation.
Explanation II: 'Promoter Group' shall include: (a) the promoter;
(b) an immediate relative of the promoter (i.e., any spouse of
that person, or any parent, brother, sister or child of the person
or of the spouse);
(c) in case promoter is a company:
(i) a subsidiary or holding company of that company;
(ii) any company in which the promoter holds 10% or
more of the equity capital or which holds 10% or more of
the equity capital of the promoter;
(iii) any company in which a group of individuals or
companies or combinations thereof who holds 20% or more
of the equity capital in that company also holds 20% or
more of the equity capital of the issuer company; and
(d) in case the promoter is an individual:
(i) any company in which 10% or more of the share
capital is held by the promoter or an immediate relative of
the promoter or a firm or HUF in which the promoter or
any one or more of his immediate relative is a member;
(ii) any company in which a company specified in (i)
above, holds 10% or more, of the share capital;
(iii) any HUF or firm in which the aggregate share of the
promoter and his immediate relatives is equal to or more
than 10% of the total; and
(e) all persons whose shareholding is aggregated for the
purpose of disclosing in the prospectus under the heading
“Shareholding of the promoter group”.
Explanation III : The Financial Institution, Scheduled Banks,
Foreign Institutional Investors (FIIs) and Mutual Funds shall not
be deemed to be a promoter or promoter group merely by virtue of
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the fact that 10% or more of the equity of the issuer company is
held by such institution:
Provided that the Financial Institutions, Scheduled Banks and
Foreign Institutional Investors (FIIs) shall be treated as promoters
or promoter group for the subsidiaries or companies promoted by
them or for the mutual fund sponsored by them .”
We have also looked into the final prospectus dated June 24, 2005 issued by the
Yes Bank Ltd. after it was cleared by the Board. In the portion dealing with the
capital structure of the company, the share capital held by Ashok Kapoor and
Rana Kapur as promoters amounting to 20% has been shown to be locked in for a
period of 3 years as per the Sebi guidelines. It is further stated therein that in
accordance with the terms and the license issued by the RBI for carrying out the
business of banking, 49% of the pre-issue share capital will be locked in and this
includes the share capital of Rabobank also. The shareholding of Rabobank has
been shown under the column ‘equity shares held by top 10 shareholders’.
Similarly, on page 15 of the prospectus, shareholding of the Rabobank is shown
not under promoters’ quota, but under the category of other shareholders. A note
has also been appended therein stating that Rabobank has indicated its intention to
maintain its shareholding at 20% of the post-issue equity as mandated by the RBI
approval and it may make applications for allotment of equity shares in the issue
and subsequent market purchases subject to compliance with the dilution
requirements as stated in the banking license.
- It is, thus, clear if a person falls within the definition of promoter, as
discussed above, only then his name will appear in the note indicating the
aggregate shareholding of the promoter group. The Rabobank had two nominee
directors in the Board of Yes Bank in a total composition of 12 directors. They
were not instrumental in the formation of plan or programme pursuant to which
the securities were offered to the public and the Rabobank had not represented
itself on promoter of Yes Bank to be called as promoter in the RHP as per the DIP
guidelines. In none of the documents, other than the application made before the 9
RBI for getting a baking license, Yes Bank has shown Rabobank in the promoter
category. If the Rabobank falls within the promoter category, we fail to
understand how such a vital aspect escaped notice of the regulator while clearing
the DRHP where Rabobank is not shown as a promoter. We also fail to
understand as to why the regulator continued to accept financial statements,
quarter after quarter, year after year, without Rabobank being shown in the
promoters’ category and why no action was initiated against Yes bank for making
incorrect disclosure in the financial statements. In this background, no fault can
be found with the merchant banker of exercising due care and diligence when
Rabobank was not shown in the promoter category. The conditions under which
Rabobank was shown as a co-promoter by the Indian promoters for obtaining a
banking license were disclosed in the prospectus and their shareholding pattern
was also shown which appears to be sufficient information for the investors to
take an informed decision for their investment in the IPO of the Yes Bank.
Rabobank has never been treated as a promoter by the Yes Bank and the Board
has not come to a conclusive finding to the effect that Rabobank falls within the
definition of promoter as given in explanation 1 under clause 6.8.3.2. It is treating
Rabobank as a promoter of Yes Bank solely on the basis of the application filed
before the Reserve Bank of India for a banking license. In the absence of any
findings on the part of the Board that the Rabobank is promoter within the
meaning of explanation 1 under the clause 6.8.3.2, the findings of the Board on
this charge cannot be upheld.
- The next violation alleged against the appellant is that it failed to
exercise due diligence with regard to disclosures for allocation of shares to
qualified institutional buyers (QIB). The Board observed that a large chunk of
shares under this category had been allotted to foreign institutional investors and
other categories like, mutual funds and banks received negligible shares in this
category. The appellant considered 19 foreign institutional investors eligible for
platinum category whereas only two mutual funds were considered under this 10
category and no financial institutions or banks were found eligible in this
category. According to the Board while allotting the shares under QIB category,
the appellant exercised its discretion in a manner that majority of shares were
allotted to foreign institutional investors and the applications of banks/mutual
funds appear to have been overlooked during the allotment. It is the case of the
appellant that the DIP guidelines permitted discretion in allotment under the QIB
category and while exercising its discretion, it had followed certain norms. In the
absence of any guidelines in the regulation as to how allotment under
discretionary quota is to be made, the Board cannot question the allotment under
discretionary quota on the basis of norms that were followed by the appellant.
The appellant has also relied on the observations of the primary market advisory
committee of the Board which reviewed the DIP guidelines and which read as
under :-
“In case of allocation to QIBs, various factors were to be
considered including the quality of investor, commitment to
specific sector, investment objectives, prior track record etc.
These factors could vary from one issue to another. As such
exhaustive disclosure of all parameters would be difficult. In the
absence of discretion, any QIB investor, irrespective of quality,
investment objectives etc, could get the shares allocated, which
arguably may not be in the best interest of the issuer, the market
and the investor.”
It was further submitted by the appellant that final decision on allotment of equity
shares in a public offering vest with the company’s Board of Directors and the
company has its own commercial considerations which have to be recognized for
the purpose of allocation. According to the appellant, its role is limited to
advising and recommending the desirable allocation to QIBs and final decision
for allocation is determined by the Board of the issuer company. Learned
Additional Solicitor General, while admitting that the DIP guidelines at the
relevant time permitted the allotment to be made on discretionary basis under the
QIB quota, emphasised that there was nevertheless a requirement that the
discretion be exercised in such a manner to ensure that the allotment is made on a
fair and proper basis. According to him, the appellant has failed to indicate the
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parameters and has provided no justification for including foreign institutional
investors and certain mutual funds in the platinum category. Therefore, according
to the learned Additional Solicitor General, placing certain entities under platinum
category was done in arbitrary, subjective and whimsical manner and allotment on
that basis is in breach of the requirements of the DIP guidelines. We are unable to
agree with the submissions made by the learned Additional Solicitor General in
this regard. Once the company is given discretion for allotment of shares under
QIB, it is for the company to decide, in consultation with the merchant bankers, as
to how that discretion is to be exercised. It is not a case where no parameters
were laid down by the company for exercising this discretion. What is being
questioned here is that the parameters laid down by the company for exercise of
its discretion are arbitrary. If that argument is accepted, then the discretion given
to the company in allotting equity shares under the QIB category loses its
significance. The appellant has placed on record the criteria followed by the
company in allotment of shares under discretionary quota and, therefore, no fault
can be found with the merchant banker on this count as well.
- The last violation on which the appellant has been found guilty is that it
has failed to properly monitor the flow of applications and other matters pursuant
to the closure of the public issue. It is alleged that in the Yes Bank IPO, shares
were allotted to applicants having non existing DP IDs, multiple applications
having same address, allotment of shares being made to the applicants having
same name, same address but different DP details etc. According to the Board,
the registrar and share transfer agent to the issue (RTA) had failed to detect and
withhold these applications. The merchant banker was required to exercise due
diligence and was responsible for post-issue activities till the subscribers received
the shares/debentures. It was also incumbent on the appellant to depute officials,
as required by 7.4.1 of the DIP guidelines, to monitor the flow of applications and
the allotment of the shares. According to the Board, the appellant has failed to
discharge his duty as a merchant banker which resulted in allotment of shares to 12
multiple/fictitious and benami applicants. We have considered the rival
submissions and are unable to accept the Board’s contention on this issue as well.
It is not a case where the appellant has not deputed its officials to the RTA.
Admittedly, it is the primary responsibility of the RTA to scrutinize these
applications and the job of the merchant bankers is to ensure that RTA has
performed its duties. In its reply, the appellant has categorically stated that it had
deputed experienced officers post closure of the offer to the registered office and
on selective basis the applications were verified alongwith the complete
verification of top 100 allottees. During its inspection, the officials did not notice
any omission or commission which were required to be reported to the Board and
in this view of the matter, we do not find the appellant guilty of violating the
regulatory framework as alleged.
In the result, we allow the appeal and set aside the impugned order with no
order as to costs. Sd/-
P. K. Malhotra
Member
Sd/-
S. S. N. Moorthy
Member
15.2.2012
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