BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI
Appeal No.132/2003
Date of Hearing: 12th April, 2004
Date of decision:12th April, 2004
In the matter of
M/s. Keynote Corporate
Services Ltd., Appellants – Represented by
Shri D. J. Khambata, i/b
Dhru & Co.,
Versus
Securities and Exchange
Board of India Respondent – Represented by
Shri Kumar Desai, Advocate
Ms. Daya Gupta, Advocate
Coram:
Justice Shri Kumar Rajaratnam, Presiding Officer
Dr. B. Samal, Member
Shri N. L. Lakhanpal, Member
Per : Dr. B. Samal, Member
The appellant is a company incorporated under the Companies Act, 1956. The Appellant has been associated with several public issues, right issues, takeover offers and buy back offers.
The present appeal has been filed by the Appellant under section 15T of the Securities and Exchange Board of India Act, 1992 against the order dated September 26, 2003 passed by SEBI. By the impugned order SEBI has suspended the Appellant’s certificate of registration to act as a Merchant Banker for a period of 2 months with effect from October 16, 2003. The impugned order has been passed under Regulation 13 of the SEBI (Procedure for Holding Inquiry by Inquiry Officer and Imposing Penalty) Regulations, 2002. By the impugned order, the Appellant is held guilty for having failed to exercise diligence inter alia, by not filing the requisite 90 day and 120 day reports which it was allegedly required to file under the provisions of SEBI (Merchant Banker) Regulations , 1992.
The Appellant submitted that since its registration as a Category I Merchant Banker with effect from December 1993 it has successfully handled 93 public issues, 16 rights issues, 24 open offers under the SEBI Takeover guidelines and 3 buy back offers under the SEBI Buy Back Guidelines. The volume of issues handled by the Appellant is more than Rs.725 crores. It was also submitted that as on date, the Appellant is one of the few prominent capital market intermediaries engaged in various non fund based activities such as issue management, mergers and acquisitions, loan and/or lease syndication etc.
Maha Chemicals Ltd., (MCL) is a company incorporated under the Companies Act, 1956 having its registered office at Ahmedabad. In or around 1994, MCL came out with a public issue of 32,00,000 equity shares of Rs.10/- each for cash at par aggregating to Rs.320 crores. In respect of this public issue PNB Capital Services Ltd., Ahmedabad was initially appointed as the lead merchant banker. Considering that the shares of MCL were proposed to be listed also on the Bombay Stock Exchange and that SEBI had its office in Mumbai both MCL as well as PNB Capital Services Ltd., decided to have a co-ordinator in Mumbai. Accordingly MCL along with PNB Capital Services Ltd., approached the Appellant (who was already one of the under writers to the issue) to act as a co lead managers to the public issue primarily for the purpose of marketing of the issue in Mumbai and co-coordinating the post issue formalities and activities vis-à-vis SEBI in Mumbai. The Appellant submitted that as this was one of its first opportunities to act as a lead manager, though for limited purpose, the Appellant agreed to the same. By its letter dated March 1, 1994 MCL appointed the Appellant as the other lead manager in respect of its proposed public issue.
The issue opened on 4/4/1994 and closed on 7/4/2004. As already stated Keynote were the lead managers to the issue and as per the inter se allocation of duties as informed to SEBI, Keynote was responsible for marketing and for post issue activities at Mumbai. The shares were allotted on 9/6/1994 and listed on the Stock Exchange, Mumbai and Stock Exchange Ahmedabad.
The investigation conducted by SEBI revealed that minimum subscription in the public issue was made by taking into account applications that were submitted after closure of issue i.e. late application. It is also noted by them that 90 day and 120 day reports were not submitted to SEBI. Accordingly show cause notice was issued to the appellant on 17th July, 2001 by the Respondent advising them to furnish reply to the allegation that Keynote had failed in discharging, in diligent manner, the responsibilities undertaken by them and that thereby they had violated regulation 25 and Code of Conduct of the SEBI (Merchant Banker) Regulations, 1992. Personal hearing was granted on 12th June, 2003 wherein Keynote appeared and also subsequently made further submissions vide its letter dated 11th July, 2003.
The learned Counsel for the Respondent submitted that PNB Caps was the lead manager to the issue and they had obtained acknowledgement card dated 11th February, 94 from SEBI in this regard. Subsequently MCL vide letter dated 1st March, 1994 appointed Keynote also as a lead manager and PNB Caps and vide their letter dated 7th March, 1994 informed SEBI about the same. The role of Keynote was restricted to certain aspects of marketing and joint responsibility in respect of post issue activities at Mumbai. The Inquiry officer in his report has observed that although Keynote furnished a copy of the letter dated 7th March, 2003 it did not furnish a copy of the inter se allocation of duties. Further the Enquiry officer has also observed that during the investigations PNB Caps had taken a stand that post issue activities were the responsibility of Keynote and post issue reports submitted by Keynote had been signed by them and did not bear the signatures of PNB Caps. The Respondent has also found that Keynote was having responsibility of post issue activities. As post issue merchant banker Keynote was responsible for finalization of basis of allotment, weeding of multiple applications, listing of instruments and for follow up with various agencies connected with post issue such as Registrar and Bankers to the issue. The Respondent vide its circular dated 1st March, 1993 had directed that the post merchant banker has to maintain close co-ordination with the Registrar to the Issue and arrange to depute its officers to the offices of various intermediaries at regular intervals after closure of issue so as to monitor the flow of application from collecting bank to branches. The investigations of SEBI revealed that minimum subscription in the public issue of MCL was said to have been obtained by bringing in late applications which amount to 33% of the issue size. Of these late applications those accompanied by Stock Invests constituted 17% of the issue size. As post issue merchant banker it was the responsibility of the Appellant to ensure that late applications were not taken into account while arriving at collection figure to compute subscription receipt and to ensure that the allotment was not made to the late applicants.
The learned Counsel for the Appellant had submitted that the said public issue was one of the first assignments undertaken by them after their registration as Category I Merchant Banker. He also submitted that in view of their past association with PNB Caps they were under the honest impression that PNB Caps being the named merchant banker would oversee the activities relating to allotment and listing since they were located at Ahmedabad. Hence the Appellant has submitted that the lapse on their part was unintentional and on account of faith reposed in the main merchant banker. They submitted that the ban of two months will hurt them financially as a number of issues are still being handled buy them. The Appellant submitted an affidavit indicating that in 11 issues they are now working in one capacity or the other in capital market and sudden ban of two months will hurt them in their reputation.
After hearing the counsel for the Respondent, the Appellant was asked to submit a list of issues which are on hand with them at present.
ORDER
After hearing the Counsels for both the parties and perusing the available documents, the Appellant is directed not to negotiate, accept or act upon in any new assignment except the one viz. Escorts Finance Ltd., (Delisting) as Merchant Banker during this ban period of two months including the ban period of 5 days of 17th to 21st October, 2003 which the Appellant has already undergone.
The order of the Respondent is modified to the above extent.
No order as to costs.
(Pronounced in Court)
Sd/-
Justice Kumar Rajaratnam
Presiding officer
Sd/-
Dr. B. Samal,
Member
Sd/-
N. L. Lakhanpal,
Member
Place: Mumbai
Date: April 21, 2004.