The Securities Appellate Tribunal (SAT) has given relief to six merchant banks for alleged lapses during the maiden public offering of rating agency Credit Analysis & Research Ltd (CARE) in 2012.
The book running lead managers to the issue were Kotak Mahindra Capital Company Ltd, DSP Merrill Lynch Ltd, Edelweiss Financial Services Ltd, ICICI Securities Ltd, IDBI Capital Markets and Securities Ltd and SBI Capital Markets Ltd.
The case is related to initial public offering (IPO) of CARE, where the six investment bankers were penalised on the grounds that they failed to ensure that true and adequate material disclosure was made in the Red Herring Prospectus (RHP).
In November 2014, the capital market regulator Securities and Exchange Board of India (SEBI) fined each of the six entities Rs 1 crore for the lapses in the disclosures.
However, Kotak Mahindra Capital along with other bankers challenged the order in the appellate tribunal last year. Two of the three-member bench of SAT ruled in favour of the bankers.
The genesis of the dispute dates back to an RBI letter to the rating agency CARE, which approved the exemption of non-resident investors from the requirement of obtaining no objection certificate (NOC) from regulators before participating in the IPO. However, the rating agency had to adhere to the minimum capitalisation norms applicable to non-banking financial companies (NBFCs).
CARE had informed RBI that such capitalisation norms would not be applicable to it since the foreign investors who are participating in an IPO would not qualify as foreign direct investment (FDI). However, capital market regulator SEBI fined the merchant bankers in the IPO saying that they failed to disclose the conditional nature of RBI’s exemption.
Two presiding officers, Justice JP Devadhar and a member of the quorum CKG Nair observed that no fault can be found with CARE for not disclosing the norms which were not applicable to the investors to whom the offer was made in the RHP dated November 24, 2012, said the tribunal in its 58-page order.
“Once it is held that there was no infirmity in the RHP of CARE, then it cannot be said that the appellants without exercising due diligence have issued certificate to the effect that the RHP of CARE contains true and adequate information. Consequently, appellants cannot be said to have violated the Merchant Bankers Regulations,” the tribunal noted.
According to the order, the argument that the appellants (bankers) have violated the provisions contained in the ICDR Regulations and Merchant Bankers Regulations cannot be sustained.
The third member of the three member division bench Jog Singh, who upheld the ground taken by the SEBI, said in his order that the condition based on the strict compliance of which the exemption was granted also should have been properly disclosed.
“Accordingly, I hold that the Appellants failed to exercise proper due diligence in the matter of the IPO of CARE by not disclosing true and adequate factual position in the offer document in question,” Singh said.
In the case, senior counsel Darius Khambatta and law firm Cyril Amarchand Mangaldas were representing Kotak Mahindra Capital and other bankers while the regulator was being represented by senior advocate Kevic Setalwad and the law firm K Ashar & Co.
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