IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 36 of 2007
Date of decision: 24.04.2007
Worldlink Finance Ltd. Appellant
Versus
Dr. T C Nair, Whole Time Member Respondent
Securities & Exchange Board of India
Mr. Vineet Jagtap, Advocate for the appellant.
Mr. Devanshu P. Desai, Advocate for the respondent
CORAM
Justice N. K. Sodhi, Presiding Officer
R. N. Bhardwaj, Member
Per: Justice N. K. Sodhi, Presiding Officer (Oral)
Whether the appellant as a merchant banker has been guilty of lack of “due diligence” is the short question that arises for our consideration in this appeal filed under section 15T of the Securities and Exchange Board of India Act, 1992. Facts giving rise to this appeal are these:
M/s Baroda Agro Industries Ltd. (for short the company) came out with a public issue in the year 1994 and the prospectus issued contained, among others, the following statement-
“Notes:
(i) ……..
(ii) The details of Lock-in period in respect of promoters holding is as under:
|
290500
140000
533800
158300
39922
1,21,678
4,75,658
20
|
%of the paid up Capital after issue
6.46
3.11
11.86
3.52
0.89
2.70
10.57
Subscribers to
0.89
14.16
40.00%
A + B
|
Allotted on
16.5.1992
25.3.1992
20.3.1992
14.9.1991
3.04.91
3.4.1991
30.3.1990
Memorandum
6.3.1993
|
Lock-in Period
5 years
5 years
5 years
5 years
5 years
NIL
NIL
|
Commencing from
From the date of allotment in this issue or commencement of commercial production whichever is later
3 years from the date of allotment
|
When we read the aforesaid statement it is clear that according to the prospectus the promoters of the company were holding 5,33,800 shares which were allotted on 20th March, 1992 and they had a lock-in period of five years. It is common case of the parties that these shares, in fact, had already been allotted by the company to 26000 shareholders in the year 1992 on private placement basis. The learned counsel for the respondent informs us that this allotment was made to non-promoters and it appears to us to be so because in the reply filed by the appellant it has been stated that such allotments are generally made to financial institutions, mutual funds and others. It is not the case of the appellant that the allotment was made to the promoters. It is also not in dispute before us that these shares were held by the shareholders in physical form and that they had a lock-in period of five years. It is further admitted by the learned counsel for the parties that the shares in the physical form did not carry on their fact the stamp of being non-transferable for five years which is mandatory under the statutory regulations. It is, thus, clear that the statement contained in the prospectus that 5,33,800 shares stood in the name of the promoters was untrue. The appellant as a merchant banker had certified the statement as true and correct. If the appellant had carried out due diligence and verified the aforesaid statement from the records of the company at the time when the prospectus was issued, it would have been discovered that the shares allotted to the non-promoters in the year 1992 even though had a lock –in period of five years had not been stamped as non –transferable. This default had, obviously, been committed by the company and the appellant cannot be blamed but certainly there was lack of due diligence on the part of the appellant at the time of certifying the prospectus. After the public issue, the shares of the company were listed on different stock exchanges and it was then that some of the shareholders to whom allotment had been made in the year, 1992 on private placement basis had sold their shares in the market taking advantage of the fact that the share certificates did not contain a stamp to the effect that they were not transferable. Those shares were then returned by the stock exchanges as bad deliveries. In other words, the innocent investors who purchased those shares had been duped and made their investments against shares which could not have been transferred to them. As already observed, if the appellant had carried out due diligence and had been vigilant in the performance of its duties as a merchant banker the default committed by the company would have been discovered at an earlier stage and the innocent investors could have been saved from being put a loss. It is, thus, clear that the appellant was guilty of lack due diligence which resulted in loss being caused to some of the innocent investors who had purchased the shares from those to whom they had been allotted on private placement basis in the year, 1992.
The question that now arises is – what penalty should be imposed on the appellant? The Securities and Exchange Board of India has debarred the appellant from dealing in securities or associating with any of the activities in the capital market for a period of three years. This penalty, in the circumstances of the case, appears to be too harsh and disproportionate to the gravity of the default committed by the appellant. The learned counsel for the appellant, however, contends that at the most the appellant could be said to have been guilty of lack of due diligence and nothing more and, therefore, mere censure would be enough. We do not agree with this submission. It is true that the appellant is guilty only of lack of due diligence in the performance of its duties but that had serious consequences for some of the investors who have lost their money when they purchased the shares as stated above. To carry out due diligence is the primary responsibility of the merchant banker and since the appellant failed in discharging that duty, we are of the view that it deserves to be debarred from dealing in securities or in carrying out any activities relating to the capital market. The ends of justice, in our view, would be adequately met if the period of debarment is reduced from three years to six months. We order accordingly. We have reduced this period keeping in view the fact that there is no allegation that the appellant had colluded with the company in deliberately suppressing the true facts. The appeal is disposed of with a direction that the impugned order shall stand modified as sated above. There is no order as to the costs.
Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
R. N. Bhardwaj
Member