SEBI Vs. RAJESH EXPORTS LTD
LAWS(SB)-2003-1-18
SECURITIES APPELLATE TRIBUNAL
Decided on January 21,2003

Appellant
VERSUS
Respondents

JUDGEMENT

G.N.Bajpai, - (1.) RAJESH Exports Ltd. (REL) came out with a Public Issue of 20 lac equity shares of Rs.10/- each for cash at a premium of Rs.40/- per share aggregating Rs.10 crores. Out of the said issue, the net offer to Resident Indian Public was of 18.5 lac shares aggregating to Rs. 9.25 crores. The issue opened for public subscription on November 13, 1995 and closed on November 18, 1995. Investigations were initiated by SEBI into alleged irregularities in the Public Issue of REL. Investigations revealed that REL had made irregular allotments in the issue by allotting shares against applications received after the closure of the issue.
(2.) It was alleged that Merbanc Financial Services Ltd (hereinafter referred to as Merbanc) had failed to exercise due diligence in the above public issue. An Enquiry Officer was appointed on 26.4.2000 under the SEBI (Merchant Bankers) Regulations, 1992, to enquire into the possible violation of the provisions of the said Regulations. The Enquiry Officer submitted a Report dated 24.9.2001 finding that there is a lapse on the part of the Lead Manager in monitoring the public issue, flow of applications and allotment. The Enquiry Officer recommended for a warning to be issued to Merbanc. Pursuant to the same, a show cause notice was issued to Merbanc on 17.4.2002 alongwith a copy of the Enquiry Report and asking it to show cause in terms of Regulation 40 (1) of the said Regulations as to why the penalty as considered appropriate by the Board should not be imposed on Merbanc.
(3.) MERBANC vide its letter dated May 6, 2002, replied to the above show cause inter alia stating that it, as the post issue Lead Manager, had acted with diligence and care and in close coordination with the Registrar to the issue. It had submitted that under the circumstances explained in its letter dated 16.1.2001 to the Enquiry Officer, it had no reason to suspect that there were late applications in the public issue. Subsequently, an opportunity of oral hearing was given to MERBANC on August 24, 2002 which was adjourned to August 26, 2002. In the meantime, it appears that the registration of MERBANC as a Merchant Banker had expired and it did not apply for renewal. In view of the same, proceedings were initiated under Section 11 B of SEBI Act, 1992 read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Act relating to securities market) Regulations, 1995 vide show cause notice dated August 26, 2002. In the show cause notice, it was also alleged that MERBANC had violated Regulation 3 and 6 (a) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Act relating to securities market) Regulations, 1995. MERBANC and its directors were called upon to show cause why suitable directions under Section 11 B of SEBI Act, 1992, read with Regulation 11 of the said Regulations including directions for debarring MERBANC and its Directors from accessing the capital market and dealing in securities for a suitable period should not be initiated. The irregularities committed in the said public issue were also spelt out in details in the aforesaid show cause notice. MERBANC vide its letter dated September 2, 2002 replied to the said show cause wherein it had submitted as follows : 1. It is not clear why second show cause notice was issued when they had already appeared for a personal hearing pursuant to the Enquiry Officer's report. 2. SEBI (Prohibition of Fraudulent and Unfair Trade Practices Act relating to securities market) Regulations, 1995 are not applicable to MERBANC which had only acted as a Merchant Banker and not involved buying or selling or otherwise dealing in securities. 3. MERBANC has also replied to the four charges that are made in the above show cause notice dated 26/08/2002 which is summarised below in seratim : a. As a post issue Lead Manager they relied on the final certificate issued by the Banks which have been designated for collection of applications to the Registrars. It is the responsibility of the banks to abide by the rules strictly and they should not have accepted the late applications. b. The applications were processed as per the procedure and all the applications which were in order were considered for allotment. If the applications are in order in all respects and either applications are accompanying stock invests do not bear any date subsequent to the closure of the issue, it is impossible to suspect their genuineness and reject the same. c. In the absence of any scope for suspicion regarding acceptance of late applications by the banks, all the valid applications were considered for allotment and MERBANC have not violated any of the SEBI Regulations. The banks should have exercised care and should not have accepted the late applications. d. The third day report is based on the provisional figures orally submitted by the collecting bankers to the registrars and such figures in almost all cases are oversubscribed public issues vary from the final collection reports submitted by the banks in writing. Therefore, MERBANC has submitted that they did not have the reason to suspect any unusual feature in the public issue. 4. The enquiry officer has also conquered the defence furnished by MERBANC and has reflected the same in his findings.;


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