In the Matter of Rajesh Exports Limited

 SECURITIES AND EXCHANGE BOARD OF INDIA

Directions under section 11 B of the SEBI Act, 1992 against Merbanc Financial Services Ltd in the matter of Rajesh Exports Ltd.

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.

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.

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 :
   1. 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.
   2. 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.
   3. 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.
   4. 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.

Pursuant to the above an opportunity of an oral hearing was granted to Merbanc on 21^st October 2002 which was postponed to October 29^th 2002. Merbanc vide its letter dated 16/10/2002 received on 20^th November 2002 has sought for postponement of the hearing in view of the absence of its Vice President. Accordingly a fresh date of hearing i.e. 20^th November 2002 was given to Merbanc vide letter dated 29^th October 2002. Nobody appeared for Merbanc in the said hearing. However, vide letter 16/11/2002 Merbanc had sought for adjournment of the hearing scheduled for 20^th November 2002 on the ground that its Vice President is not available. An adjournment of hearing was already granted at its request in the past. In view of the same I am not inclined to grant any further opportunity of hearing as adequate opportunity was given to Merbanc. Hence I proceed to pass this order after duly considering the submissions made by Merbanc vide its letter dated 2^nd September 2002.

I have carefully considered the findings of the Investigation, Enquiry Report and the submissions made by Merbanc. I find that

The investigations revealed that there were large variations in the provisional and final figures reported by various collecting branches of the Bankers to the Issue. A request was made to RBI to carry out inspection of the bank branches where various provisional and final subscription figures were reported. The Inspection was requested for in order to ascertain as to whether there were any instance of acceptance of late applications by the banks.

From the inspection report of RBI and from the various materials available on record it is seen that State Bank of India, Ashram Road, Ahmedabad had issued 200 stockinvests for an aggregate amount of Rs.17.50 lacs. From the information/documents furnished by the bank, it has been observed that the stockinvests were issued from 2 accounts with the bank, one of Narendra Parmar and the other of Mayur N Desai & Ila Desai. The extracts from the Stockinvest Issue Register furnished by the bank shows that while stockinvest nos. 24751 to 24808 and 24813 to 24904 were issued on 24/11/95, stockinvest nos. 011501 to 011550 were issued on 11/12/95. Since the Issue had closed for subscription on 18/11/95, all these 200 stockinvests were antedated. Hence, all applications accompanied by such stockinvests were received after the closure of the Issue and were invalid in terms of Clause 12 of the "Procedure for Payment by Stockinvest and Disposal of Application Money" of REL’s Propectus dated 13/10/95. Applications accompanied by these ante-dated stock invests were received by Canara Bank, Bhadra Branch, Ahmedabad after the closure of the issue. Details of these stockinvests are as follows:
 

Investigations revealed that Tamilnadu Mercantile Bank, BVK Iyengar Road Branch, Bangalore had received 3800 applications for an aggregate of 31,20,000 shares of REL with Viswapriya Financial Services & Securities Ltd. (VFSL) as Power of Attorney holders for the applicants. These applications were accompanied with stockinvest instruments numbered 121933 to 125732 issued by Central Bank of India, Adyar, Chennai. Central Bank of India, Adyar, Chennai, has submitted that these stockinvests were issued on 5/12/95 and 6/12/95 to 3800 persons who had applied for stockinvests aggregating Rs. 3.90 crores through Prime Advance & Investors, their Power of Attorney holders. The stockinvests were issued against 2 FDRs taken in the name of Prime, which were opened on 1/12/95 and 5/12/95. With the issue having closed for subscription on 18/11/95, all these stockinvests were antedated and all applications accompanied by these stockinvests were received after the closure of the Issue.

Subsequently, REL allotted shares against these applications which were received, by TamilNadu Mercantile Bank, after the closure of the issue. Out of the 3800 applications (for Rs.3.90 crores), accompanied by ante-dated stock invests issued by Central Bank of India, Adyar Branch, Chennai, shares were allotted to 2278 applicants (2,27,800 shares). Apart from these, shares were also allotted to the 200 applicants who had applied through ante-dated stock invests issued by State Bank of India, Ashram Road Branch and these applications were received after the closure of the issue by Canara Bank. All these applications were received after the closure of the issue. Such allotments were done at the cost of genuine applicants who had applied for shares when the issue was open for subscription. Thus, the entire allotment process had been irregular and which facilitated grey market operations and artificial benchmarking of prices.

In terms of SEBI Circular No.RMB GI Series Circular No.1(92-93) dated 1/3/93, Lead Manager responsible for post-issue activities shall maintain close co-ordination with the Registrar and arrange to depute its officer at regular intervals after the closure of issue to monitor the flow of applications from collecting branches, processing of applications including those accompanied by stock invests and other matters till the basis of allotment is decided, dispatch completed and listing done. It was also noticed that Karvy Consultants (Registrar to the Issue), vide their letter dated 21.11.95 to Merbanc had given a copy of the 3 day monitoring report wherein it was shown that 13303 applicants have been received from the public (i.e. subscription of 7.74 times) as on 18.11.95. However, from the 78-Day Post Issue Monitoring Report, dated 6.2.96, signed by Merbanc it is seen that a total of 22028 applications have been received (22.75 times subscription level). Merbanc failed to ascertain the reasons for such huge difference in the collection figures. Had Merbanc tried to find out the reasons they could have identified the late applications accompanied by ante-dated stock invests. Instead it is shifting the responsibility on other intermediaries in the public issue.

In view of the above, I find that

1. Merbanc Failed to verify acceptance of late applications by Tamilnadu Mercantial Bank, BVK Iyengar Road branch and Canara Bank, Bhadra Branch.
2. Merbanc failed to prevent REL from making irregular allotments to applicants whose applications were received late (after the closure of the issue) at the cost of genuine applicants.
3. Merbanc failed to oversee that allotments were done only to genuine applicants and not to applicants who had applied for shares after the closure of the issue.
4. Merbanc failed to verify the reasons for reasons for the difference in the subscription figures between the 3^rd day and 78^th day post issue monitoring report. Merbanc had consciously overlooked these discrepancies and hence failed to exercise due care, diligence and skill in the discharge of its professional duties as a lead Manager to the issue in terms of SEBI (Merchant Bankers) Regulations, 1992.

The above acts of Merbanc had resulted in allotments being made to invalid applicants. The conduct of Merbanc is, therefore, detrimental to the interests of investors and the healthy development of the securities market. I have noted that Merbanc is no longer a registered intermediary with SEBI.Therefore, in exercise of the powers conferred upon me under Section 4(3) of the SEBI Act, 1992 read with Section 11B, I place on record the lapses committed by Merbanc in the public issue of REL and direct that the same should be taken into consideration for assessing Merbanc and its directors as fit and proper persons, if Merbanc or its directors approaches for renewal of registration or for fresh registration in any name.