SEBI Vs. SHRIYAM BROKING INTERMEDIARY LTD
LAWS(SB)-2003-11-6
SECURITIES APPELLATE TRIBUNAL
Decided on November 05,2003

Appellant
VERSUS
Respondents

JUDGEMENT

A.K. Batra, Whole Time Member - (1.) 1 M/s Shriyam Broking Intermediary Ltd. (hereinafter referred to as Shriyam) is registered with SEBI as a Merchant Banker under SEBI (Merchant Bankers) Regulations, 1992 (hereinafter referred to as MB Regulations) bearing SEBI registration no. INM 00000 2160. Shriyam acted as lead manager in the offer for sale of securities of Home Trade Ltd. (hereinafter referred to as 'HTL'). 2. HTL was originally incorporated in the name of M/s. Lloyds Brokerage (P) Ltd. in the year 1993 and the name of the Company was changed to M/s. Lloyds Brokerage Ltd on 02/07/1993. The name was once again changed to M/s Euro Asian Securities Ltd on 31/07/1998. Subsequently, the name of the company was changed to M/s. Home Trade Ltd. on 24/11/1999. 3. Euro Offshore Investments Ltd. one of the promoters of Euro Asian Securities Ltd.(EASL) had come out with an offer for sale of 59,90,250 equity shares of Rs. 10/- each for cash at a price of Rs. 50/- per share aggregating to Rs. 29.95 crores during October, 1999 (hereinafter called as the said offer). The said offer for sale opened on 27th October 1999 and closed on 30th October 1999. The registered office of HTL shown in the prospectus for offer was at 124 A, Sohrab Hall, 21, Sasoon road, Pune 411001 and the administrative office was shown to have been located at 143, Mittal Court, A Wing, Nariman Point, Mumbai 400021. HTL also had an office at International Infotech Park, Vashi, Navi Mumbai. As per the said prospectus the main object of HTL is to carry on business as share and stock brokers, finance brokers, underwriters, sub-underwriters, agents and brokers for taking hold dealing in, converting stocks, shares and securities of all kinds, brokers for units of Unit Trust of India, brokers for debenture, bonds, Government Securities, National Savings Certificates, Small Savings Schemes and generally for securities of all kinds and to carry on the business in India or abroad. 4. The details of the shareholding pattern of EASL as per the offer document was as under: JUDGEMENT_540_TLSB0_20030.htm 5. The Offer for Sale of HTL for 59,90,250 shares representing 25% of the equity capital was offered by the promoter group during 27-30 October 1999 @ Rs.50/- per share. The offer for sale opened on 27th October 1999 and closed on 30th October 1999. Subsequently, the shares of HTL were listed on Pune Stock Exchange and Bangalore Stock Exchange and trading started on15th November, 99. The paid up capital constituted of 2,39,61,000 shares of Rs.10 each amounting to Rs. 23.96 crores. During September 2000, HTL sub-divided each share having face value of Rs. 10/- into 5 shares of face value of Rs. 2/- each. It was seen that the promoters were holding 75% of the post-issue capital under the category promoter's holding. From the details submitted by stock exchange and registrar to the offer for sale it was observed that certain individuals made applications for large quantity of shares in the offer for sale of shares of HTL. Shriyam acted as lead manager to the said offer. 6. An investigation into the affairs of Shriyam, among others, pertaining to the said Offer and the subsequent listing and trading of this scrip at Pune and Bangalore Stock Exchanges was initiated. The alleged violations against Shriyam are as under: 6.1 It was alleged that Shriyam failed to exercise independent professional judgment in ensuring that the issuer of securities recast the accounts as per the format in Annexure A of SEBI Clarification number XIV dated 1st March, 1996 to the DIP Guidelines so that the accounts reflect a true and fair view of the state of affairs of HTL. 6.2 As per the offer document, HTL ('EASL' at the time of offer for sale) had shown profit before tax of Rs. 45.53 lakhs for the year 1996-97, by not providing for a liability of Rs. 1.02 crs. This amount was payable as interest towards ICDs/unsecured loans, totaling to Rs. 5.79 crs availed from associate companies. Had this interest liability been provided for, HTL would have shown loss in the financial year 1996-97. Accordingly, the accounts of HTL were required to be recast in the offer document as per the format in Annexure "A" of SEBI clarification no. XIV dated 1st March, 1996 to the DIP Guidelines. It was alleged that lead manager had accepted the management's perception that the recasting of accounts is not required instead of exercising independent professional judgment in the matter. It was therefore, alleged that the merchant acting as lead manager violated Clause 2 of the Code of Conduct for Merchant Bankers specified in Schedule III, read with Regulation 13 of SEBI (Merchant Bankers) Regulations, 1992. 6.3 In the Offer Document (OD), Sanjay Agarwal, Rakesh Chandak, Dhananjay Agarwal, Virendra Kr Surana, Dilip Jain and Manoj Chandok were mentioned as directors of HTL. Further, M/s. Sanjay Agarwal, Ketan Sheth and N.S. Trivedi were also mentioned as Directors of HTL (the offeror) and its three subsidiaries, detailed in table above. Besides, Mr. Subodh Bhandari is mentioned as Director of Dalhousie Securities Ltd. Some of the aforesaid Promoters / Directors applied in the offer for sale and were also allotted shares in the public category as detailed below : JUDGEMENT_540_TLSB0_20031.htm Ketan Sheth & family members, with same postal address 6.4 The allotment of 3,553,150 shares to the aforesaid M/s. Sanjay Agarwal, Trivedi, Bhandari and Ketan Sheth, constituting 14.83% of HTL's equity, was included under the public category, which is highly irregular as they were Promoters / Directors, as elaborated earlier. Although 5,990,250 shares of HTL were offered to public as per the OD, the allotment of shares to the extent of 14.83% to Promoters / Directors has defeated the purpose of Rule 19 (2) (b) of the SCR Rules 1957, which requires that 25% of the company's equity be offered to the public and that applications received in pursuance of such offer were allotted fairly. If the shares offered and allotted to the Promoters / Directors are excluded, the net offer of shares to the public is only 2,437,100 shares, constituting 10.71% of EASL's equity. 6.5 As the lead manager to the issue Shriyam was responsible for determining the basis of allotment and finalizing the list of persons entitled to allotment. As detailed in the preceding paragraphs, the basis of allotment and the persons entitled to allotment were finalized highly irregularly, constituting dereliction of responsibility and this was in violation of Clause 2, of the Code of Conduct for Merchant Bankers specified in Schedule III, read with Regulation 13 of MB Regulations, 1992. 6.6 In view of the allotment of shares to the promoter /directors under the public category as aforesaid, their aggregate holding went upto 89.83% of HTL's equity as against the requirement of 75%. (It is alleged that Shriyam had facilitated concentration of this huge holding with the Promoters / Directors and created conditions for the price rigging of the scrip. It may be noted that the price of the scrip of HTL was rigged on low trading volumes as under, immediately after listing). 7. In response to the offer for sale there were 85 valid applications, seeking shares in excess of 1000 shares. The allotment advice, refund orders and shares allotted to these entities were hand delivered by R&D Consultants, Registrars to the issue, to Mr. Trivedi, Finance director and Company Secretary of HTL, on 13th November 1999. 7.1 In terms of Clause 4(A)(i) of the mandatory obligation of RTI/STA of SEBI Instructions to Registrars to an Issue /share Transfer Agents read with Rule 2(e)(iii)(c) of SEBI (Registrars to an issue and Share Transfer Agents) Rules, 1993, the Registrar to the issue is prohibited from handing over the allotted shares to the company and the shares are required to be delivered to the allotees by Registered Post. 7.2 Being the lead manager to the issue, Shriyam was required to ensure compliance with the aforesaid provisions, by deputing his officer to the Registrar's office at regular intervals till the certificates were dispatched and the securities were listed, in terms of SEBI Circular No.PMD/Cir no. 2178 91/92 dated 24.12.1992 {Guidelines 7.4.1 of Chapter VII of SEBI (Disclosure and Investor Protection) Guidelines, 2000. 7.3 It was alleged that Shriyam had not exercised due diligence to ensure that the Registrar delivers the share certificates to the allotees by registered post, which was in violation of Clause 2 of the Code of Conduct for Merchant Bankers specified in Schedule III, read with Regulation 13 of MB Regulations. 8. An enquiry was therefore instituted against Shriyam under Regulation 39 of MB Regulations. The Enquiry Officer submitted his report on 30.05.2003. In his report, taking into account the gravity of irregularities that have been established, EO recommended suspension of certificate of registration of Shriyam as Merchant Banker for a period of 6 months. The Enquiry Officer held Shriyam guilty of the following violations: 8.1 Shriyam failed to ensure that the basis of allotment is done in a fair and equitable manner in allotting shares Shri Sanjay Aggarwal, Shri N S Trivedi, Shri Ketan Sheth and Mr. Subodh Bhandari who are connected with the offeror which constituted 14.83% and the very purpose of Rule 19 (2) (b) was given a go-by. Hence Shriyam was responsible for creating conditions for subsequent price manipulation because of high concentration of the shares in a few individuals. This is in violation of Clause II of the Code of Conduct for Merchant Banker specified in Schedule III read with Regulations 13 of MB Regulations and regulation 6(a) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. 8.2 Shriyam had not exercised due diligence to ensure that the Registrar delivers the share certificates to the allottees by Regd. Post and instead relied on the self-certification of the Registrar without verifying the postal expenditure which would have thrown light on the irregularities. Thus, Shriyam contravened clause II of the Code of Conduct for Merchant Banker specified in Schedule III read with regulation 13 of MB Regulations, 1992 besides, the DIP Guidelines. 9. Consequent upon above, in terms of regulation 13(2) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as 'the said regulations') a show cause notice dated 25.06.2003 was issued to Shriyam to show cause as to why the penalty as recommended by the enquiry officer should not be imposed on it. The merchant banker was advised to submit its reply, if any, within 15 days of the receipt of the show cause notice failing which it would be presumed that the merchant banker has no explanation to offer. The merchant banker was also asked to intimate along with the reply whether it desires a personal hearing. The merchant banker vide letter dated 24.07.2003 replied to the said showcause notice dated 25.06.2003 and made, inter-alia, the following submissions: 9.1 Shriyam submitted that the Enquiry Officer failed to follow general principles which apply and which need to be applied by an adjudicating officer while imposing any penalty. Shriyam relied on the case of Hindustan Steel Ltd. Vs. State of Orissa (reported in (1972) 83 ITR 26) for the purpose of dealing with an order imposing penalty. 9.2 Shriyam submitted that both in relation to alleged irregularities in allotment of shares and alleged failure in ensuring compliance by the Registrar of dispatch of Share Certificates, there was no finding by the Enquiry Officer that Shriyam acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or that had acted in conscious disregard of their obligations. Therefore, Shriyam submitted that on this ground also the Show Cause Notice should not be proceeded with and the penalty recommended therein should be rejected. 9.3 Shriyam further submitted that Regulation 13(6) of the Penalty Regulations states that major penalties may be imposed only in the specific circumstances set out in Clause (a) to Clause (e) of the said Regulation 13(6). Shriyam submitted that the investigation attached to the show cause notice does not contain any finding that Shriyam or any of its whole time Directors was guilty of (i) price or market manipulation of any scrip or index or (ii) assisting any such manipulation; or (iii) insider trading. Shriyam therefore contended that Clause (a) to Regulation 13(6) has no application. 9.4 Shriyam further submitted that since there is no finding in the Enquiry Report of price or market manipulation by Shriyam or of assisting any such manipulation, SEBI is precluded from imposing a major penalty as recommended. Shriyam submitted that the Enquiry Officer relied on subsequent events of alleged market manipulation, post closing of the issue and post allotment of shares and that a Merchant Banker did not have and cannot be expected to have any role in such alleged subsequent market manipulation. Moreover, at the time the allotment of shares was made, a Merchant Banker cannot be held to be liable as having assisted such manipulation, which manipulation (if at all) took place subsequently. 9.5 Shriyam submitted that section 15J of the Securities and Exchange Board of India Act, 1992 ("SEBI Act") applies in relation to adjudicating quantum of penalty levied under Section 15I of the SEBI Act, i.e. relating to penalty adjudicated under Section 15A to Section 15HB (both inclusive) of the SEBI Act. It is submitted that the principle underlying Section 15J of the SEBI Act is liable to be taken into account by the Enquiry Officer while making the recommendation of penalty. Shriyam further submitted that the Enquiry Officer failed to appreciate the factors laid down in Section 15J of the SEBI Act particularly that (a) no gain or advantage was received by the Merchant Banker; (b) no loss has been caused to investors or group of investors; and (c) the matters alleged against the Merchant Banker are not of a repetitive nature. 9.6 Shriyam submitted that in the circumstances, based on this preliminary submission the show cause notice ought not to be proceeded with and the penalty recommended therein should be rejected. 9.7 Shriyam contended that rule 19(2)(b) does not refer to the allotment of securities made pursuant to such offer to the public for subscription and that the Enquiry Officer however had arrived at a conclusion which was not borne out by the language of Rule 19(2)(b) of the SCR Rules. Shriyam argued that the conclusion of the allotment of shares to certain persons "militates against Rule 19(2) (b) and the same "makes a mockery of Rule 19(2)(b)" unfounded and seeks to place an interpretation on Rule 19(2)(b) of the SCR Rules which is not borne out by the language of Rule 19(2)(b). Shriyam submitted that "offer" and "allotment" are two separate events and Rule 19(2)(b) relates only to offer of the stipulated percentage of securities to the public for subscription. It was argued that such an "offer" was duly made, Rule 19(2)(b) must be considered as having been duly complied with. The allotment of securities is a subsequent event which was decided by the Board of Directors of the concerned company in consultation with the Regional Stock Exchange. That a plain reading of the above Rule requires that at least 25% of the securities must be "offered to the public for subscription". It was contended that the only obligation on the merchant banker's part was to make an offer and not to allot. There is a clear distinction between the word "offer" and "Allot". 9.8 Shriyam argued that it is now well settled that the cardinal rule of interpretation is that the statute must be construed according to its plain language and neither should anything be added nor subtracted there from unless there are adequate grounds to justify the inference that the Legislature clearly so intended. 9.9 Shriyam further contended that the primary responsibility of ensuring "proper allotment of securities" is that of the Registrar as is borne out by Clause 6(b) of Code of Conduct being Schedule III to the SEBI (Registrars to an Issue) Regulations, 1993 and further that the Clause 13 of Item II (Issue Work) of Schedule I to the Agreement format prescribed by SEBI between an issuer company and the Registrar stated that "Finalizing basis of allotment after approval of the Stock Exchange" is a function of the Registrar. 9.10 With respect to the violation on the ground that the share certificates in relation to 85 valid applications were delivered by hand by the Registrar rather than by Registered Post as required by SEBI guidelines, Shriyam submitted that the Enquiry Officer accepted the fact that delivery of share certificates was duly made by the Registrar and duly received by the concerned allottees and that there was no finding that there was any non-delivery of share certificates to the persons entitled thereto or that there was any delay in delivery of the share certificates to the persons entitled thereto. 9.11 Shriyam contended that the Enquiry Officer concluded that the Merchant Banker "has not exercised due diligence" to ensure that the Registrar delivers the Share Certificates to the allottees by Registered Post. Shriyam argued that the share certificates were duly delivered by the Registrar to the respective allottees and there was no complaint in this behalf from the respective allottees. Shriyam submitted that the alleged absence of exercise of due diligence could not amount to 'willful default' by the Merchant Banker in discharging its obligations and responsibilities. 9.12 Shriyam stated that Rule 19(2) (b) of the SCR Rules required that atleast 25 per cent of the securities must be "offered to the public" for subscription. Shriyam submitted that there is a clear distinction in law between "offer" and "allotment"- allotment being an act of acceptance to be performed after the offer is complete and that there is nothing in Rule 19(2)(b) which requires that the whole of the offer of 25 per cent of a particular class or kind of security must be allotted to any particular section of the public. It was argued that to be an accepted proposition in law that "public" includes any section of the public, which is recognized by Section 67 of the Companies Act, 1956. It was therefore contended that the circumstances was open to any persons to apply for shares under the Offer for Sale made by the Offerer. 9.13 Shriyam submitted that the applications made by Sanjay Agarwal, Ketan Sheth, N.S. Trivedi and Subodh Bhandari were made simultaneously alongwith all members of the public as they themselves constituted a section of a public. Shriyam further submitted that no allotment was made to Sanjay Agarwal, Ketan Sheth, N.S. Trivedi and Subodh Bhanari in preference to applications from other members of the public or that any applications form other members of the public were rejected in order to make allotment of shares to Sanjay Agarwal, Ketan Sheth, N.S. Trivedi and Subodh Bhandari. 9.14 Shriyam stated that Ketan Sheth and N.S.Trivedi were directors of the Offerer in their professional capacity and therefore they could not be regarded as "Promoters" within the meaning of that term under the SEBI guidelines, in terms of which a director/officer of the issuer company or a person acting merely in his professional capacity is excluded from the definition of the term "promoter"/"promoter group". Apart from this, neither Ketan Sheth nor N.S. Trivedi are part of the Promoter Group as disclosed. Moreover, the Investigating Officer felt it correct to exclude shares allotted to Sanjay Agarwal and Subodh Bhandari from shares issued to the public in the investigation report which means that even the Investigating Officer was satisfied that the shares allotted to persons other than those two persons could be treated as part of the 25% offered to the public in terms of Rule 19(2)(b). 9.15 Shriyam submitted that the allotment of shares to the aforesaid four persons was permitted by law and in any case not prohibited by law and that Enquiry Officer failed to give a finding as to the basis why such allotment is alleged to be not fair or equitable. Shriyam contended that the Registrars had followed the OSD, which was approved by various authorities, in the process of finalization of basis of allotment. It was contended that the only restrictions on allotment which a Merchant Banker is obliged to adhere to in any public offering are as set out in Annexure B and the allotment can be regarded as being unfair or unequitable only if the benefit was conferred on the said four persons with the corresponding deprivation of benefit to some other set of persons - this is not the case, in fact and there is no finding to this effect by the enquiry officer. 9.16 Shriyam contended that the Enquiry Officer was totally inclined by events which took place subsequently and after listing of the shares i.e. after 15th November 1999, when the shares were listed. It was argued that on listing, the responsibilities of the merchant banker come to an end and the happening of subsequent events of alleged price manipulation cannot be attributed to the merchant banker and there is no basis for the Enquiry Officer to allege that it was the Merchant Banker who was responsible for creating conditions for subsequent price manipulation. Shriyam further argued that there was no basis for the Enquiry Officer to allege that such alleged subsequent price manipulation took place because of high concentration of the shares in a few individuals and that the high concentration of shares is entirely unrelated to the allotment of shares which was made to the said four persons viz. sanjay Agarwal, Ketan Sheth, N S Trivedi and Subodh Bhandhari. 9.17 Shriyam contended further that the allotment of shares to the said persons was a matter entirely within the realm of the Board of Directors of the company and the Pune Stock Exchange and the Merchant Banker had no right to question such allotment of shares in a public offering whether an IPO or an offer for sale, is to be guided by the norms for rejection issued by SEBI and the stock exchanges while the allotment is being finalized. 9.18 Shriyam submitted that the merchant banker duly ensured full compliance with the requirements of Rule 19(2)(b) which required that atleast 25 percent of the securities must be "offered to the public" for subscription. In fact, this has not been controverted or disputed by the Enquiry Officer but has been duly accepted by him. However, the Enquiry Officer sought to interpret Rule 19(2)(b) to mean that offer to the public includes allotments to the public and that such allotment excludes allotment to promoters/directors. Hence the conclusion of the Enquiry Officer is not tenable in law. 9.19 Shriyam submitted that the requirement of delivery by Registered Post is purely to ensure due delivery of the share certificates to the rightful allottee and that the same is more in the nature of an investor protection requirement. This is apparent from Circular No. F.No.8/15/SE 86-B dated 3rd June 1986 issued by Dept. of Economic Affairs, stock exchange division addressed to all stock exchanges which stated that the objective of sending refund orders/allotment letters/certificates by registered post was to maintain confidence of investors in the capital marker. Shriyam submitted that due delivery is the object of dispatch by registered post but where due delivery has been duly ensured (by taking acknowledgement of receipt against hand delivery) and delivery actually duly affected, the absence of dispatch by Regd. Post cannot become a ground to post - facto alleged breach by the merchant banker or for that matter, the Registrar itself. 9.20 Shriyam submitted that the enquiry officer erred in mixing of the issue pertaining to the allotment of shares to certain persons and that the enquiry officer cannot allege irregularities in allotment of shares to conclude failure and delivery of the share certificates, as the two matters are entirely independent and each have to be dealt with on a stand alone basis. The merchant banker while submitting as above requested for a personal hearing in the matter before any final order is passed. 10. Subsequently, an opportunity of personal hearing was given to Shriyam on 27.8.03. Shri Janak Dwarakadas, Senior Advocate, Shri Gagan Chaturvedi, Chartered Accountant representing Shriyam attended the hearing and made their submissions. Shriyam filed their written submissions dated 4.9.2002. In the said letter, the merchant banker reiterated the submissions. 11. I have carefully examined the facts and circumstances of the case. I have also carefully considered the Enquiry Report and submissions of Shriyam vide letters dated 24.07.2003 and 4.9.2003 and also the case laws quoted therein. On appreciating the facts and circumstances of the case the following issues will arise for consideration : 12. Whether Shriyam violated the Code of Conduct as prescribed in the Merchant Bankers Regulations. With respect to irregularities in allotment of shares I find that the shares were allotted to the following persons as under: JUDGEMENT_540_TLSB0_20032.htm 12.1 Mr. Sanjay Aggarwal, Director in HTL applied for 6 lakh shares and was allotted 5,97,000 shares constituting 9.97% of the offer for sale of securities in the public category. The offer document at Page 22 states that the company is managed by a group professionals headed by Mr. Sanjay Aggarwal who is the Chief Executive Officer of the Company and a whole time director. Mr. N.S. Trivedi was shown in the prospectus as the key management person designated as Director - Finance & Company Secretary. He is also a director in HTL, the offeror of securities and its three wholly owned subsidiaries namely Ways India Ltd. Euro Allied Ltd. and Euro Discover Ltd. Mr. N.S. Trivedi, Mr. Ketan Sheth and Mr. Sanjay Aggarwal are Directors in the Offeror for sale i.e. HTL and its three subsidiaries. Mr. Subodh Bhandari is mentioned as Director of M/s. Dalhousie Securities Ltd. which was shown as promoter of HTL in the prospectus and distribution schedule of the company, HTL at page 5 of the offer document. Mr. Subodh Bhandari was holding around 99% of the shareholding of M/s. Dalhousie Securities Ltd. As per the information submitted by the company to BSE alongwith the application for listing of shares of HTL on the exchange, it was stated that Shri Subodh Bhandari was the Senior Vice President of the company. Mr. Viraf Katrak also knows that Mr. Bhandari is an employee of HTL and director of Dalhousie Securities Ltd and was co-ordinating with Mr. N.S. Trivedi regarding offer for sale issue as per his own statement dated 21.6.2002. The statement further states that Mr. N.S. Trivedi approached him with a proposal to lead manage the sale. Mr. Bhandari has applied for 1,31,300 shares constituting 2.18% of the securities offered for sale. 12.2 Mr. N.S. Trivedi had applied for 4,10,000 shares and was allotted 4,08,000 shares constituting 6.81% to offer for sale. Thus, Mr. Sanjay Aggarwal, Mr. N.S. Trivedi and Mr. Subodh Bhandari have in total applied for 11,41,000 shares of HTL for Rs.5,70,50,000 and were allotted 11,35,300 shares constituting 18.95% of the total offer for sale of the shares of HTL. Mr. Ketan Sheth and his family members have applied for 24,30,000 shares and were allotted 24,17,850 shares constituting 40.36% to offer for sale and 10.09% of total equity. Therefore, it is clear from the above mentioned details that the promoters / directors who applied in the offer for sale were allotted shares in the public category. 12.3 Regarding the above violation, the gist of Shriyam's submissions are that rule 19(2)(b) does not refer to the allotment of securities made pursuant to such offer to the public for subscription and that the Enquiry Officer has arrived at a conclusion which is not borne out by the language of Rule 19(2)(b) of the SCR Rules. The Enquiry Officer has concluded that the allotment of shares to certain persons "militates against Rule 19(2) (b) and the same "makes a mockery of Rule 19(2)(b)." Shriyam contended that this finding of the Enquiry officer was unfounded and it sought to place an interpretation of Rule 19(2)(b) of the SCR Rules which is not borne out by the language of Rule 19(2)(b). Shriyam submitted that "offer" and "allotment" were two separate events and Rule 19(2)(b) relates only to offer of the stipulated percentage of securities to the public for subscription and that once such an "offer" is duly made, Rule 19(2)(b) must be considered as having been duly complied with. Shriyam argued that the allotment of securities is a subsequent event which is decided by the Board of Directors of the concerned company in consultation with the Regional Stock Exchange and that a plain reading of the above Rule requires that at least 25% of the securities must be "offered to the public for subscription". Shriyam contended that the only obligation on Shriyam's part was to make an offer and not to allot. There is a clear distinction between the word "offer" and "Allot". 12.4 Shriyam's submission that it had complied with Rule 19(2)(b) of SC(R) Rules, 1957 if accepted would defeat the very concept of public issue. Rule 19 (2) (b) stipulates as under: Rule 19(2)(b) At least twenty-five per cent of each class or kind of securities issued by the company was offered to the public for subscription through advertisement in newspapers for a period not less than [two days] and that applications received in pursuance of such offer were allotted fairly and unconditionally: 12.5 The submission of Shriyam cannot be acceded to in light of the fact that the Rule cannot provide allotment also simultaneously. The logic that can be attributed for not providing allotment in the provision being the fact that if the issue fails there could not be any allotment. If the allotment is provided as a condition then the provision would itself be self defeating. Therefore, it is prescribed that the applications received in pursuance of such offer were allotted fairly and unconditionally. Further, the role and the responsibility of the merchant banker as an intermediary is more specifically defined in the SEBI Act, 1992 and the rules and regulations made thereunder. The merchant banker is also bound by the directions issued by SEBI from time to time. In this regard, the Disclosure and investor protection guidelines not only emphasize a crucial role for the merchant banker but also lays down various criteria for the unlisted companies which come out with the public issue. Explanation to Guideline 3.4 under chapter III, which is relevant to be quoted here, stipulates as follows: Explanation: The net offer to the public means the offer made to the Indian public and does not include firm allotments or reservations or promoter's contributions. Explanation I to Guideline 6.4.2 under Chapter VI specifies as follows: Explanation I For the purpose of sub-clauses (i) to (iii) of Clause k 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, it they are acting as such merely in their professional capacity shall not be included in the explanation. 12.6 Chapter V prescribes the responsibilities of the merchant banker: Guideline 5.1 prescribes that the lead merchant banker shall exercise due diligence 5.1.1 The standard of due diligence shall be such that the merchant banker shall satisfy himself about all the aspects of offering, veracity and adequacy of disclosure in the offer document 5.1.2 The liability of the merchant banker as referred to in clause 5.1.1 shall continue even after the completion of issue process. 12.7 In light of the above provisions the argument of the merchant banker that it had complied with Rule 19(2)(b) of SC(R) Rules, 1957 would be a proposition which cannot be accepted. The subsequent events in the matter bear the testimony to such interpretation. 12.8 I agree that there is no requirement of minimum subscription in the case of offer for sale of securities as per Clarification No. XVI of the Guidelines on DIP, 2000 issued by SEBI RMB (DIP) Series, Circular No. (96-97) dated July 17, 1996 which states that the requirement of 90% minimum subscription in the offer for sale of securities shall not be mandatory. The issue in the present case is not whether the minimum subscription is received or not but allotment of shares in the public category to the promoters/Directors of the offeror company, HTL and its three wholly owned subsidiaries and/or HTL., Shri Sanjay Aggarwal, Shri N S Trivedi and others. 12.9 Therefore, it is apparent that Shriyam had failed to ensure that the basis of allotment is done in a fair and equitable manner by allotting shares to the aforesaid four persons who are connected with the offeror which constituted 14.83%. Thereby, the very purpose of Rule 19(2)(b) was given a go-by therefore Shriyam was responsible for creating conditions for subsequent price manipulation because of high concentration of the shares in few individuals. This is in violation of Clause 2 of the Code of Conduct for Merchant Banker specified in Schedule III read with Regulation 13 of Merchant Bankers Regulations, 1992. Clause 2 of the Code of Conduct A merchant banker shall render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgement. He shall wherever necessary, disclose to the clients, possible sources of conflict of duties and interests, while providing unbiased services. It is apparent that Shriyam failed to show high standards, failed to exercise independent professional judgement. 13. Whether Shriyam violated Regulation 6(a) of SEBI (Prohibition of Fraudulent and Unfair Trade relating to Securities Markets) Regulations, 1995 13.1 It is very clear from the provisions of Disclosure and Investor Protection Guidelines that the net offer to the public means the offer made to the Indian public and does not include promoter's contributions. The term promoter also includes 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. It is to be noted here that Mr. Sanjay Aggarwal is the Chief Executive Officer of the Company and a whole time director. Mr. N.S. Trivedi was shown in the prospectus as the key management person designated as Director - Finance & Company Secretary. He is also a director in HTL, the offeror of securities and its three wholly owned subsidiaries namely Ways India Ltd. Euro Allied Ltd. and Euro Discover Ltd. Mr. N.S. Trivedi, Mr. Ketan Sheth and Mr. Sanjay Aggarwal are Directors in the Offeror for sale i.e. HTL and its three subsidiaries. Mr. Subodh Bhandari is mentioned as Director of M/s. Dalhousie Securities Ltd. which was shown as promoter of HTL in the prospectus and distribution schedule of the company, HTL at page 5 of the offer document. Mr. Subodh Bhandari was holding around 99% of the shareholding of M/s. Dalhousie Securities Ltd. Therefore, the argument of merchant banker that the aforesaid promoters/Directors also form part of the public is fallacious and cannot be accepted. Further, the argument that if the shares allotted to the promoters if excluded would be 10.71% and may get listed cannot be accepted as the allotment to promoters/directors in public category is without any restrictions to trade and leads to concentration of the shares in the hands of the promoters to create mischief in the market. The subsequent events in the present matter proved the very fact. 13.2 I find that there is no sufficient material available on record to show that Shriyam had connived with the offeror for manipulation, therefore, it may not be appropriate to hold that Shriyam had violated Regulation 6(a) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. As already stated, it is certain that Shriyam had failed to abide by the code of conduct and such failure enabled HTL to manipulate the market and play fraud on the investors but making Shriyam also liable for manipulation is a difficult proposition in the absence of any material to hold the merchant banker along with HTL. Therefore, a benefit of doubt can be conferred to Shriyam. 14. Whether Shriyam exercised due diligence to ensure that the Registrar delivers the share certificates to the allottees by Regd. Post 14.1With respect to failure in ensuring compliance by Registrar of the dispatch of share certificates etc., in response to the offer for sale, there were 85 applications seeking more than 1000 shares. The allotment advice, refund orders and shares allotted to these entities were hand delivered by the Registrar to Mr. N.S. Trivedi, Director -Finance of HTL on 13.5.1995 instead of sending it by Registered Post as per rules. 14.2 I agree with the Enquiry Officer that while it is true that the responsibility of dispatch of share certificates, refund orders etc. is with the RTI, Shriyam also has certain responsibilities in this regard and has to ensure compliance with the dispatch requirements of share certificates by deputing his officer to the Registrar's office till the certificates are dispatched and shares allotted in terms of SEBI Circular PMD/ICIR/2178/91/92 dated 24.12.92 (Guidelines 7.4.1 of Chapter 7 of SEBI (DIP) Guidelines 2000. 14.3 Shriyam's argument that due delivery is the object of dispatch by registered post but where due delivery has been duly ensured (by taking acknowledgement of receipt against hand delivery) and delivery actually duly affected, the absence of dispatch by Regd. Post cannot become a ground to post - facto alleged breach by the merchant banker or for that matter, the Registrar itself, cannot be accepted as it is a breach of responsibility cast on Shriyam. 14.4 Therefore, Shriyam has not exercised due diligence to ensure that the Registrar delivers the share certificates to the allottees by Regd. Post and instead relied on the self certification of the Registrar without verifying itself which would have thrown light on the irregularities. Thus, Shriyam has contravened clause 2 of the Code of Conduct for merchant banker specified in Schedule III read with Regulations 13 of the Merchant Bankers Regulations, 1992 besides, the DIP Guidelines cited earlier. 15.1 I find that the Enquiry Officer found several violations committed by Shriyam. They are irregularities in allotment of shares and Failure in ensuring compliance by Registrar of the dispatch of share certificates. Incidentally, the Enquiry Officer had also given a finding that Shriyam apart from violating code of conduct specified for the Merchant Bankers, it also violated Regulation 6(a) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities marker) Regulations, 1995. 15.1.1 The purposes of the SEBI Act include protection of the interests of the investors. Chapter IV of the Act enumerates powers and functions of the Board for achieving the purposes of the Act. Sub section (1) of section 11 provides that "subject to the provisions of the Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit". 15.1.2 Sub section (2), provides without prejudice to the generality of sub section (1) certain specific measures for the purpose. One of the specific measures provided therein is the provision for registering and regulating the working of several types of capital market intermediaries including Merchant Bankers. SEBI had made several regulations to regulate the conduct of the business of the intermediaries, in the specified areas. The regulation binding on Merchant Bankers is Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992. 15.1.3 SEBI had also issued under section 11 of the Act, the SEBI (Disclosure and Investors Protection) Guidelines, providing extensive guidelines to be followed for accessing the market. The guidelines are quite exhaustive from the disclosure point of view. It also deals with the obligations cast on the merchant banker and certain other issue requirements. 15.1.4 In terms of Regulation 18 of the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 all public issues should be managed by at least one Merchant Banker functioning as lead Merchant Banker. Only a Merchant Banker holding a valid registration with the Board is eligible to act as a Merchant Banker. One of the conditions of registration is that the Merchant Banker shall abide by the rules and regulations made under the Act in respect of the activities carried on by the Merchant Banker. 15.1.5 The regulations prescribe that the Lead Manager, responsible for the issue is required to furnish to the Board various documents/reports with respect to the issue which includes due diligence certificate. Regulation 13 of the Merchant bankers regulations prescribe code of conduct as specified in Schedule III of the regulations. For failure on the part of the Merchant Banker in complying with the requirements of the regulations, penalty has been provided, which includes even cancellation of the registration itself. Such a severe penalty for default is indicative of the extent of the responsibility vested in the Merchant Banker in dealing with public issues. 16. I have taken into consideration all the facts and circumstances of the case including the Enquiry Report and the submissions of Shriyam. In light of my findings as above, I am of the considerate view that a minor penalty of two months would suffice in the matter. 17. Therefore, in exercise of the powers conferred upon me by Section 19 of SEBI Act, 1992 read with sub-regulation (4) of Regulation 13 of the said Regulations, I hereby suspend the certificate of registration of M/s Shriyam Broking Intermediary Ltd. as a merchant banker for a period of two months. This order shall come into force after 3 weeks from the date of the order.;


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