ORDER
1. Manu Finlease Ltd. (MFL) made a public issue of 21 lakh equity shares
of Rs. 10 each for cash at par. The issue was opened on 14-10-1995 and closed on 18-10-1995. The issue was over-subscribed by several limes. The appellant was the lead manager to the said public issue. However, in the aftermath of the public issue, the respondent came to know about certain malpractices allegedly indulged in the public issue and conducted an investigation to ascertain the truth or otherwise of the allegations. The investigation was subsequently followed up by an inquiry by an officer appointed by the respondent. The inquiry officer found the appellant guilty of violating certain provisions of the concerned regulations and recommended suspension of the appellant’s certificate of registration for a period of six months. However, the Chairman, SEBI (the Respondent), as required under the regulations provided the appellant an opportunity of being heard. The appellant availed of the opportunity and submitted its version before the Chairman. Based on the assessment of the facts before him the appellant was absolved of certain charges, certain charges were found to sustain. He did not accept the recommendation of the inquiry officer to suspend the appellant’s certificate of registration for 6 months. He decided to suspend the certificate of registration for two months. As per the order the appellant was found wanting in exercising due diligence and professional judgment on the following :–
“1. *****
2. Lack of exercise of due diligence, ensuring proper care and exercise of independent professional judgment in respect of the following:
(a) Not explaining variations in the subscription levels reported in 3rd day and 78th day reports.
(b) *****
(c) Reasons for subscriptions to the public issue mainly by way of applications accompanied by stock invest (77.56%) and that too by big applications (61.39 times for above 1000 shares category.)
(d) Irregular allotments arising out of (i) applications accompanied by stock invests issued after close of public issue, (ii) applications accompanied by stock invest of a lesser amount, (iii) multiple applications accompanied by same stock invest, (iv) multiple applications accompanied by cheques or stock invest running in serial numbers issued from same bank account or bank respectively.
(e) Allotment of shares and despatch of share certificates/allotment advice/refund orders without realisation of stock invest.
(f) Receipt of application money by way of DDs after allotment of shares and despatch of share certificates in those cases where stock invests were not sent for realisation.
(g) Non-printing of refund bank particulars on the refund orders.
4. Failure to monitor the flow of applications from collecting bank branches, processing of the applications including those accompanied by stock invest, failure to ensure compliance with SEBI’s circular dated 2-11 -1992 by the RTI regarding stock invest and lack of co-ordination with other intermediaries as per SEBI’s circular dated 1-3-1993.”
2. Sum and substance of the charge against the appellant as per the order is that the appellant ‘had failed to exercise due diligence, proper care and independent professional judgment as required to be exercised by it in terms of clause 2 of Schedule III of regulation 13 of the 1992 Regulations’ and it ‘had also failed to comply with the positive obligations as stipulated in detail vide SEBI circulars dated 2-11-1992 and 1-3-1993 in this regard’.
3. Shri Dinesh Agnani, the learned counsel for the appellant stated that the appellant was asked to show cause vide notice dated 15-2-2000 for violation of certain provisions of the SEBI (Merchant Bankers) Regulations, 1992 (the 1992 Regulations) and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995 (the 1995 Regulations). He submitted that since the 1995 Regulations were notified only on 25-10-1995, the same could not have any application to the case, as the public issue of HFL relates to the pre-notification period. Shri Agnani further stated that as per sub-regulation (3) of regulation 40 of the 1992 regulations there is a mandate on the Board to pass orders in the following words that ‘the Board after considering the reply to the show-cause notice, if received, shall as soon as possible but not later than thirty days from the receipt of the reply, if any, pass such order as it deems fit’. Shri Agnani pointed out that admittedly the reply to the show-cause notice dated 4-11-2000 was received by the Board on or around 5-11 -2000 and the impugned order was passed on 15-1-2001, beyond the statutory period of 30 days, and as such the impugned order is liable to be set aside. Shri Agnani further stated that the two inquiry officers appointed by the Chairman issued two separate show-cause notices. Second notice issued by Shri Barua, as it could be seen therefrom, was a parallel notice and not one superseding the one earlier issued by Shri P. Sri Sairam, that there is no provision to issue a second notice and proceed de nova when there was already an inquiry in progress on the same charges.
4. The learned counsel, with reference to the allegation at 2(a) above, submitted that the explanation with respect to variation in subscription levels in 3 days and 78 days report was based on the statement of the Bankers to the issue, that as per the SEBI circular the appellant was not required to explain the variations while sending the report and when the respondent called for a report vide letter dated 2-7-1996, the same was furnished vide letter dated 8-7-1996 and 29-7-1996. Referring to the charge at 2(c) the learned counsel stated that the appellant, a merchant banker cannot give any reason as to why the public had subscribed
through stock invest, that stock invest also is a legal and authorised means for subscribing at the time of public issue. Therefore it was not proper to hold that not giving reasons as to why the public applied through stock invest is a failure to exercise due diligence, ensure proper care and independent professional judgment by the appellant. As the process involved at that stage was really transmission of the report to the Board there was no scope for exercising due diligence and professional judgment. According to the learned counsel, the finding at item 2(e), that not reporting serious irregularities such as receipt of the applications without proper stock invest and payment of application money by DD after allotment etc. is without appreciating the fact that the receipt of applications, stock invest etc. come under the purview of the duties assigned to the Bankers to the issue, and Registrar to the issue and none of them has been proceeded against for the alleged failure, that merely because the appellant was the Merchant Banker to the issue it cannot be held liable for faults committed by Bankers to the issue and the Registrar. Stock invests were received by the Bankers to the issue and not by the appellant. And applications were received and processed by the Registrar. With reference to the charge of non-printing of refund bank particulars on the refund orders, the learned counsel submitted that it was only due to computer error at the time of printing of the refund order and in any case as a result of such a technical omission, no prejudice has been caused to any person, to penalise the appellant. He also stated that furnishing refund bank details on the refund orders was not a requirement at that point of time.
5. The learned counsel submitted that since the competent authority had come to the conclusion that the appellant had not indulged in any serious acts such as creation of false market etc. and that having come to the conclusion that there have been only some technical and administrative lapses of no serious consequence, suspension of the appellant’s certificate of registration for two months was not called for. Shri Agnani submitted that the appellant is a reputed Merchant Banker operating in the field for the last several years. So far the appellant has handled about 140 public issues involving crores of rupees and there was not even a single complaint against it.
6. Shri Ranganayakulu, the learned representative of the respondent briefly explained the background of the case. He explained the duties and functions of the lead bank as provided in the 1992 Regulations. He stated that as per regulation 13, every Merchant Banker has to abide by the code of conduct specified in Schedule III to the Regulations. In terms of clause 2 of the said Schedule a Merchant Banker is required to render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. He also referred to various circulars issued by the respondent and in particular the one dated 1-3-1993 therein it was mentioned that “The lead Manager responsible for post issue activities shall maintain close coordination with the Registrar’s
to the issue, and arrange to depute its officers to the offices of various intermediaries at regular intervals after the closure of the issue to monitor the flow of applications from the collecting bank branches, processing of the applications including those accompanied by stock invest and other matters till the basis of allotment is finalised, despatch completed and listing done. Any act of omission or commission on the part of any such intermediaries noticed during such visits should be duly reported to SEBI. ….. As regards handling of stock invest by the Registrars, lead managers shall ensure compliance with the instructions contained in SEBI circular No. PMD/CIR/110 06/92, dated November 2, 1992 addressed to the Registrars to the issue.”
7. Referring to the appellant’s contention that the order is barred by limitation in terms sub-regulation (3) of regulation 40 of the 1992 Regulations, the learned representative submitted that the order was passed well within time, as after the written reply was filed, the appellant had requested for an oral hearing, that the oral hearing was granted and that the order was made after the oral hearing. Therefore, it cannot be said that the order was issued belatedly. Issuance of the order was deferred to provide the appellant an opportunity of being heard, as sought for. Shri Ranganayakulu submitted that since no charge indulging in any unfair trade practices has been made out against the appellant in the order, the question of application of the provision of the 1995 Regulations do not arise. Referring to the appointment of 2 inquiry officers, Shri Ranganayakulu submitted that there was no parallel enquiry. Shri Barua in his letter had clearly stated the circumstances under which Shri Sairam relinquished and Shri Barua stepped in as inquiry officer.
8. The learned representative submitted that as per the 3 days report furnished by the appellant, the public issue of MFL was over-subscribed by 2.81 times, and as per the 78th day report the public issue was over subscribed by 50.43 times, which indicated that the appellant failed to monitor the subscription and was not aware of actual subscription figures, that it also leads to the conclusion that the appellant merely acted in a mechanical manner and functioned like a post office restricting its role to just forward the reports. Substantial variation in the collection figures should have attracted the appellant’s attention and called for the exercise of carefulness and due obligence whereas the appellant failed to exercise the same in spite of the positive obligations on the Merchant Banker to act vigilantly, in terms of the circulars issued by the appellant on 2-11-1992 and 1-3-1993. The learned representative submitted that the appellant’s submission that it was not required to explain the variation while sending the report docs not hold good in the light of the fact that the Merchant Banker is a key market intermediary in the process of public issue and it cannot shirk its responsibility and abdicate itself of its obligations. He submitted that the failure on the part of the two bankers to the issue has been reported to the Reserve Bank of India for taking
action against them and the concerned Registrar has been denied renewal of registration certificate.
9. Shri Ranganayakulu submitted that on the irregularities committed by the appellant vis-a-vis the applications accepted without proper stock invest and payment of application money by DD after allotment, the appellant’s contention is not sustainable, though the said activities are basically to be undertaken by Bankers to the issue and Registrars. According to him as per the circular dated 2-11-1992/1-3-1993, the appellant was under obligation to depute its officers to the offices of various intermediaries for monitoring the flow of applications from collecting branches, processing of the applications, etc. and any act or omission or commission on the part of any such intermediaries noticed during such visits should have duly reported to the respondent, that though the appellant had stated that it had deputed Mr. Pankaj Prakash, it had not reported any irregularity to the Board.
10. Referring to the appellant’s version of not printing ‘the refund bank particulars’ on the refund orders attributing to computer error, the learned representative submitted that as a lead manager, the appellant had a responsibility to ensure that subscribes to the issue to whom refund was due, are required to be provided with all the requisite information, and any negligence in providing the same, cannot be viewed leniently.
11. Shri Ranganayakulu submitted that as could be seen from the order, the Chairman had taken into consideration all the relevant aspects, while ordering suspension of the appellant’s registration certificate, otherwise he would not have reduced the duration of the suspension period of 6 months recommended by the inquiry officer to 2 months. According to him the order is just and reasonable and need be upheld.
12. I have carefully considered the rival contention and the material facts before me.
13. The appellant’s contention that the 1995 Regulations are not applicable to the case is correct which the respondent has also admitted as the order has not charged the appellant for any violation of the said regulations. On bar of limitation on the ground that the order was issued after 30 days from the date of receipt of the reply to the show-cause notice, it is to be noted that the scope of the expression ‘reply’ in sub-regulation (3) of regulation 40 cannot be restricted only to written reply to the show-cause notice. Oral submissions are also to be treated as replies. Since, the order was issued, within 30 days of the completion of the oral submissions, it cannot be said that the order was issued beyond the time-limit prescribed in regulation 40(3) of the 1992, Regulations. The appellant’s contention that two inquiry officers were conducting parallel inquiries as the earlier show-cause notice was not superceded is baseless. From Shri Barua’s letter it is clear that he was appointed in the place of Shri Sri Sairam.
14. The Respondent has not rebutted the appellant’s claim that the appellant was discharging the functions of Merchant Banker for several years and that it had acted as Merchant Banker in about 140 public issues, that there was not even a single complaint against it, and had no adverse record against it.
15. Conduct of Merchant Bankers in public issue etc. is governed by SEBI (Merchant Bankers) Regulations, 1992 notified by the respondent. According to regulation 18, ‘all issues should be managed by at least one merchant banker functioning as the lead merchant banker’. The responsibilities of lead managers have been provided under regulation 20 as follows :
“20. Responsibilities of lead managers.–(1) No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement specifying such responsibilities is furnished to the Board at least one month before the opening of the issue for subscription:
Provided that, where there are more than one lead merchant bankers to the issue the responsibilities of each of such lead merchant bankers shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the Board at least one month before the opening of the issue for subscription.
(2) No lead merchant banker shall agree to manage the issue made by any body corporate, if such body corporate is an associate of the lead merchant banker.”
16. Regulation 23 is on submission of due diligence certificate, which is as under:
“23. Submission of due diligence certificate.–The lead merchant banker, who is responsible for verification of the contents of a prospectus or the Letter of Offer in respect of an issue and the reasonableness of the views expressed therein, shall submit to the Board at least two weeks prior to the opening of the issue for subscription, a due diligence certificate in Form C.”
17. Regulation 24, is on documents to be furnished to the board which is as under:
“24. Documents to be furnished to the Board–(1) The lead manager responsible for the issue shall furnish to the Board, the following documents, namely:–
(i) particulars of the issue;
(ii) draft prospectus or where there is an offer to the existing shareholders, the draft letter of offer;
(iii) any other literature intended to be circulated to the investors, including the shareholders; and
(iv) such other documents relating to prospectus or letter of offer as the case may be.”
18. Regulation 25 is on continuance of association of the lead manager with an issue, which is as under :
“25. Continuance of association of lead manager with an issue.–The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any issue shall continue to be associated with the issue till the subscribers have received the share or debenture certificate or refund of excess application money :
Provided that where a person other than the lead manager is entrusted with the refund or allotment of securities in respect of any issue, the lead manager shall continue to be responsible for ensuring that such other person discharges the requisite responsibilities in accordance with the provisions of the Companies Act and the listing agreement entered into by the body corporate with the stock exchange.”
19. The adjudicating authority has not found any thing wanting in the appellant as far as compliance of the above cited specific requirements are concerned. The appellant has been charged only on the ground that has failed to comply with the requirements of clause (2) of the code of conduct to be followed by the lead manager, In Schedule III to the regulations, ‘code of conduct for Merchant Bankers’ has been listed. According to clause (2) of the code referred to in the impugned order: “A merchant banker shall render at all times high standards of service exercise due diligence, ensure proper care and exercise professional judgment. He shall wherever necessary, disclose to the clients, possible sources of conflict of duties and interests while providing unbiased services.”
20. Regulation prescribes the circumstances under which suspension of registration can be imposed. In terms regulation 36(1)(f) a penalty of suspension of registration of a merchant banker may be imposed where the merchant banker violates the provisions of the Act, rules or regulations.
21. The respondent has taken recourse to the said regulation 36(1)(f) in the instant case alleging that the appellant had failed to, ‘exercise due diligence’ and ‘professional judgment’, as required in terms of the code of conduct.
22. Suspension of the certificate of registration of a market intermediary is a major penalty as it disables the concerned person from carrying on the business activities for a specific period. This is a major penalty for the reason that it affects the livelihood of the persons concerned, even though it could be for a short period. Duration of the period of suspension is also very relevant. By the impugned order the appellant’s certificate of registration was suspended for 2 months.
23. It is to be noted that several agencies arc associated with a public issue. Every body has been given an assigned role. There is nothing on record to show that the appellant had failed to discharge the specific duties assigned to it in its capacity as lead manager. The appellant has explained the reason fur not submitting any report suo motu in the matter referred to in 2(a) and (c). But, on the respondent asking for the report readily it had furnished the same. Similarly as the matter relating to stock invest the primary source of information is the Banker to the issue and the Registrar and the lead manager has to normally depend on the information furnished by them. A lead manager is reasonably justified in saying that it cannot be expected to know as to why the subscribers preferred to opt to use stock invest to subscribe for the shares. The respondent has not refuted the appellant’s version that at the relevant point of lime it was not required to specially ‘mention refund bank particulars’, on the refund orders and that the same would have been furnished, but for the computer problem. The appellant’s version that it had deputed its officer to inspect the collection/ processing etc. remains undisputed. The appellant had stated that it was not practically possible to inspect the entire records in a short period and as such inspection, as is the normal practice, was earned out only on a sample basis and the samples inspected did not reveal any thing wrong to be reported to the Board. It is not the case of the respondent that the omissions and commissions attributed to the appellant are of any serious consequences to the investors in the public issue of the MFL. It is also not the case of the respondent that the appellant had intentionally suppressed material facts. On a perusal of the alleged failures and the reply of the appellant, it is difficult to hold that the omissions and commissions should attract suspension of the certificate of registration for two months.
24. In fact there was no scope for the appellant to exercise any professional judgment in the mailer referred to by the appellant. No doubt a little more care was expected from the appellant while forwarding the reports from the Registrars/Bankers to the issue to the Board, as any normal person would have been curious to know as to why such discrepancy appeared in the subscription figures. On noticing such discrepancy, naturally further inquiries should have been caused.
25. The only point on which the appellant can be blamed is its lack of alertness in noticing the abnormal variation in the reports and not pointing out the same to the Board, with its views. The appellant should not have remained passive and functioned like a post office. It should have made some attempt of its own to find out the reasons for variations and reported the same to the respondent; even before the respondent asked for the same.
26. I agree that for the blatant failure of other agencies like Bankers to the issue and the Registrar, the appellant cannot be blamed and punished. But at the same time it is to be remembered that the appellant was the lead manager to the issue.
27. Taking into consideration the facts and circumstances of the case I am of the view that it would be sufficient if the suspension period is allowed to run for one month instead of two months. The order is accordingly modified restricting the period of suspension to one month.
28. The impugned order thus modified is upheld.
29. Appeal is disposed of accordingly.