WTM/GA/157/MIRSD/3/07
BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: G. ANANTHARAMAN, WHOLE TIME MEMBER
ORDER
UNDER REGULATION 13(4) OF SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002 AGAINST M/S. HSBC SECURITIES & CAPITAL MARKETS (INDIA) PRIVATE LIMITED, MERCHANT BANKER.
Date of Hearing: September 05, 2006
Appearances:
For noticee : Shri. V V Tulzapurkar, Senior advocate
Shri S. Balakrishnan Advocate,
Shri. Abadaan Viccaji and Shri Ashok Mittal
For Securities and Exchange Board of India: Shri P K Kuriachen, General Manager,
1.0 BACKGROUND
1.1 The facts giving rise to the present proceedings, in brief are as follows. An agreement dated September 05, 2000 was entered into between Global Green Company Limited (hereinafter referred to as the acquirer), on one hand and three other companies namely, Conscofe Investments Limited, Tata Coffee Limited, Tata Tea Limited, on the other hand to acquire 1,56,47,630 equity shares (representing 63.88% of the equity share capital ) of Saptarishi Agro Industries Ltd. (hereinafter referred to as the target company). As the aforesaid agreement had triggered the provisions of Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers) Regulations, 1997 (hereinafter referred to as the Takeover Regulations), an open offer was made by the acquirer in respect of the acquisition upto 48,98,900 equity shares of the target company constituting 20% of its equity capital, under the provisions of the Takeover Regulations. The shares of the target company were listed on the Madras Stock Exchange Ltd., Delhi Stock Exchange Association Ltd. and Ahmedabad Stock Exchange Ltd.
1.2 In terms of the provisions of the Takeover Regulations, the acquirer had appointed HSBC Securities & Capital Market (India) Ltd, a merchant banker registered with Securities and Exchange Board of India (hereinafter referred to as SEBI) with registration no. INM 000010353, as its manager to the Offer. The said HSBC Securities & Capital Market (India) Ltd is hereinafter referred to as the Merchant Banker. Accordingly, a letter of offer dated September 15, 2000 was filed by the Merchant Banker with SEBI. In the said letter of offer, SEBI had noticed certain wrong disclosures and one of the wrong disclosures was that the details regarding the unlisted shares of the target company were not mentioned in the said letter of offer. In the said letter of offer it was disclosed, inter alia, that all the issued equity shares (2,44,94,200) of the target company were listed at all the exchanges. At that point of time 1,40,30,000 shares of the target company issued on a preferential basis were not listed on the Bombay Stock Exchange Ltd. and another 59,80,000 shares of the target company (allotted on August 31, 1999) were not listed on any exchanges. The above discrepancy came to the notice of SEBI, much after the closure of the aforesaid open offer, when SEBI had received another letter of offer filed by Indbank Merchant Banking Services Ltd. (a merchant banker registered with SEBI) during January 2003, in respect of the acquisition of shares of the target company by Calibre Rehabs Ltd.
1.3 In the above facts and circumstances, it has been alleged that the Merchant Banker had failed to comply with the obligations cast on it, in terms of the provisions of the Takeover Regulations and under the provisions of Securities and Exchange Board of India (Merchant Bankers) Regulations, 1996 (hereinafter referred to as the said Regulations).
2.0 APPOINTMENT OF ENQUIRY OFFICER
2.1 SEBI vide order dated August 12, 2003 appointed an Enquiry Officer, under regulation 5(1) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as the Enquiry Regulations) to enquire into the possible violations of provisions of the Takeover Regulations and the said Regulations in respect of the letter of offer dated September 15, 2000 filed by the Merchant Banker on behalf of the acquirer in respect of the acquisition of the shares of the target company. Accordingly, a notice dated March 18, 2004 was issued to the Merchant Banker by the Enquiry Officer asking it to show cause as to why appropriate directions/actions as stipulated under regulation 13 of the Enquiry Regulations should not be recommended against it. The Merchant Banker filed its reply to the said show cause notice and thereafter, appeared before the Enquiry Officer and made its submissions.
2.2 The Enquiry Officer concluded the enquiry in terms of the Enquiry Regulations and vide his report dated September 15, 2004 recommended for a penalty of censure against the Merchant Banker. The Enquiry Officer had inter alia observed that the Merchant Banker had not made any effort to ascertain the status of the listed shares of the target company in the respective stock exchanges. It was further observed in the Enquiry Report that the non-disclosure regarding listing amounted to withholding of material information and that the Merchant Banker had violated the provisions of clauses 1, 2, 4, 6, 7 of regulation 13 of the Code of Conduct for Merchant Bankers and the provisions of regulation 24(4) of the Takeover Regulations.
3.0 CONSIDERATION OF ISSUES AND FINDINGS.
3.1 Pursuant to the recommendation of the Enquiry Officer, a show cause notice dated September 28, 2004 was issued to the Merchant Banker under regulation 13(2) of the Enquiry Regulations, asking it to show cause as to why the penalty as recommended by the Enquiry Officer should not be imposed upon it. A copy of the Enquiry Report was also forwarded to the Merchant Banker with the said show cause notice.
3.2 The Merchant Banker submitted its reply vide letter dated October 12, 2004 and inter alia submitted that there was no violation on its part to comply with the obligations specified under the Takeover Regulations and that it had exercised due care in the conduct of its activities as a merchant banker. It was further contended that though the allegations leveled in the show cause notice dated March 18, 2004 were only Clauses 1,2,7 and 9 of the Code of the Conduct specified under the said Regulations, in the Enquiry Report it was held that the Merchant Banker had violated Clauses 1,2,4,6 and 7 of the Code of Conduct. The Merchant Banker further claimed that the Enquiry Officer had disregarded the submissions made by it vide letters dated April 01, 2004, May 25, 2004 and May 28, 2004 and also failed to appreciate its relevance.
3.3 The Merchant Banker clarified that, in terms of regulation 22(2) of the Takeover Regulations, it had sent a copy of the draft letter of offer to the target company and also to the stock exchanges and that a duty was cast upon the target company to review the draft letter of offer and to ensure that the disclosures made therein were factually accurate in all respects. However, the Merchant Banker had not received any communication from the target company in relation to its unlisted shares on the stock exchanges. The Merchant Banker further stated that it had also not received any comments from the stock exchanges in response to the draft letter of offer, despite the fact that one such disclosure was in relation to the listing of the equity shares of the target company.
3.4 It was submitted by the Merchant Banker that the stock exchanges had provided certain information to it, regarding the trading details. However, while providing the said information, the stock exchanges had not indicated about the shares which were not listed. It was submitted that even the agreement dated September 05, 2000 entered into between the acquirer and the person from whom it had bought the shares of the target company did not disclose any information relating to the unlisted shares of the target company. The Merchant Banker stated that, even the acquirer had not given any comments on the draft Letter of Offer with respect to the unlisted shares of the target company.
3.5 The Merchant Banker further stated that, subsequent to the hearing dated May 12, 2004 (before the Enquiry Officer) informed the Enquiry Officer through a letter dated May 25, 2004 certain issues relating to (a) the correspondence entered into between it and the target company with respect to the shareholding and listing of equity shares, (b) correspondence with third parties. The Merchant Banker also stated that the additional ground set out in the above letter dated May 25, 2004, established that a disclosure in relation to the equity shares which were not listed on the stock exchanges should not in any manner have affected or impacted the decision of the shareholder of the target company to tender his equity shares in the open offer. The Merchant Banker also stated that the Enquiry Officer had failed to consider the proof of delivery of its letter dated September 27, 2000, addressed to the target company enclosing therewith a copy of the draft letter of offer.
3.6 The Merchant Banker stated that vide letter dated May 28, 2004, it had brought on record the letter dated May 24, 2004 received from the acquirer and further claimed that it was evident from the said letter that it had not received any information from those sources from which it could have known that some of the equity shares of the target company were unlisted at the relevant time. Merchant Banker claimed that, as per the above letter, even the acquirer was not aware upto 2002 of the fact that certain shares of the target company acquired from the sellers were unlisted. It was also stated that the annual report of Tata Tea Limited for the financial year 1999-2000, which included the accounts for subsidiary companies viz. Tata Coffee Limited and Conscofe Investments Limited, reflected the investments of the said companies in the equity shares of the target company as ‘Quoted Investment’, thereby indicating that the said equity shares were listed. The Merchant Banker further stated that no injury was caused to the investors and no complaints had been received with regard to the aforesaid offer made by it and that it had also ensured that the contents of the letter of offer and the public announcement were true, fair and adequate and were based on reliable sources. It was stated that the Enquiry Officer had wrongly concluded that in respect of the letter dated September 27, 2000 (addressed by it to the target company) in compliance of regulation 22 of the Takeover Regulations, no proof of delivery was made available, whereas it had submitted the proof of delivery received from Blue Dart Company to the Enquiry Officer. In the aforesaid circumstances, the Merchant Banker stated that the show cause notice issued to it, be discharged and the report as well as the recommendations made by the Enquiry Officer in his report dated September 15, 2004 be set aside and quashed.
3.7 The Merchant Banker was also granted an opportunity of hearing on September 05, 2006, in which Shri V V Tulzapurkar, Sr. Advocate made submissions on behalf of the Merchant Banker, along with others as mentioned in page 1 of this order. The learned senior advocate representing the Merchant Banker reiterated the submissions made by the Merchant Banker vide its reply dated October 12, 2004 (as detailed above) and further stated that the price of the shares of the target company in the said open offer was Rs.1.10/- per share against the book value of Rs.1.07.
3.8 I have examined the Enquiry Report, show cause notice September 28, 2004 issued to the Merchant Banker, its reply dated October 12, 2004 to the said show cause notice, the oral submissions made on behalf of the Merchant Banker at the time of the hearing and other relevant materials available on record.
3.9 In the facts and circumstances of the case, the issues to be considered are:
I. whether the Merchant Banker has violated the provisions of:-
a) Clauses 1, 2 and 7 of the Code of Conduct specified in Schedule III of the said Regulations.
b) Clauses 4 and 6 of the Code of Conduct specified in Schedule III of the said Regulations.
c) regulation 24(4) of the Takeover Regulations.
3.10 At the outset, I note that the show cause notice dated March 18, 2004 issued by the Enquiry Officer refers to the alleged violations of the provisions of clauses 1,2,7 and 9 of the Code of Conduct specified under regulation 13 of the said Regulations and the provisions of regulation 24(4) of the Takeover Regulations. It appeared that the above charges were framed by the Enquiry Officer against the Merchant Banker as it had failed to give correct disclosures and true status of listed shares of the target company in the letter of offer filed by it on behalf of the acquirer in respect of the acquisition of the shares of the target company. However, in his report dated September 15, 2004, the enquiry officer found that the merchant banker had violated clauses 1,2,4,6 and 7 of the said Regulation and regulation 24 (4) of the Takeover Regulations.
3.11 For the sake of reference, I reproduce schedule III of the Code of Conduct specified under the said Regulations as stated below.
“Code of conduct for merchant bankers
1. A merchant banker shall make all efforts to protect the interests of investors.
2. A merchant banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business.
3. A merchant banker shall fulfil its obligations in a prompt, ethical, and professional manner.
4. A merchant banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment.
5. A merchant banker shall endeavour to ensure that—
(a)inquiries from investors are adequately dealt with;
(b)grievances of investors are redressed in a timely and appropriate manner;
(c)where a complaint is not remedied promptly, the investor is advised of any further steps which may be available to the investor under the regulatory system.
6. A merchant banker shall ensure that adequate disclosures are made to the investors in a timely manner in accordance with the applicable regulations and guidelines so as to enable them to make a balanced and informed decision.
7. A merchant banker shall endeavour to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision.
8. A merchant banker shall endeavour to ensure that copies of the prospectus, offer document, letter of offer or any other related literature is made available to the investors at the time of issue or the offer.”
9. A merchant banker shall not discriminate amongst its clients, save and except on ethical and commercial considerations.
3.12 In terms of the provisions of the aforesaid Code of Conduct, a merchant banker inter alia has to exercise due care and diligence and maintain high standards of integrity in the conduct of his business. Further, it is the duty of the Merchant Banker to see that the investors are provided with the true and adequate information in a timely manner. In the present case, the allegation against the Merchant Banker has been that, in the letter of offer it had failed to mention the details about the unlisted shares of the target company on the stock exchanges. In the context of the facts and circumstances, it is to be examined as to whether the Merchant Banker had taken proper care as an ordinary prudent man in a similar situation.
3.13 The Merchant Banker had produced the copy of its letter dated September 05, 2000 addressed to the target company. On a perusal of the copy of the said letter, it appears that the Merchant Banker had enclosed the draft pubic announcement which had to be made in terms of regulation 15(3) of the Takeover Regulations. The Merchant Banker further enclosed the copy of the letter dated May 21, 2004 and the computerized proof of delivery statement received from its courier company, Blue Dart Express Ltd. The same is a confirmation of the shipment delivered and indicates one consignment against the name of the target company on September 7, 2000. However, there is no description in the computerized statement to confirm that the letter dated September 05, 2000 was the subject matter of delivery on September 07, 2000.
3.14 The Merchant Banker also produced the copy of its letter (an unsigned letter) dated September 27, 2000 to the target company. It appeared that it had forwarded the copy of the draft letter of offer, in terms of regulation 22(2) of the Takeover Regulations. The Merchant Banker in order to prove that the said letter was delivered to the target company produced a copy of the letter dated May 13, 2004 received from the aforesaid courier company enclosing a computerized statement. First of all, I note that the copy of the said letter dated September 27, 2000 produced was unsigned one and therefore, the contents of the said letter cannot be relied upon. Further, it is not clear as to whether the said letter was the one delivered to the target company, in the absence of any description in the computerized statement of courier.
3.15 The Merchant Banker also filed copies of its letters dated September 27, 2000 addressed to the Madras Stock Exchange Ltd., Bombay Stock Exchange Ltd., Ahmedabad Stock Exchange Ltd. and Delhi Stock Exchange Association Ltd. The said copies of letters were also unsigned and the computerized statement of the courier company (as submitted by the Merchant Banker) in the absence of any other description did not reveal whether the said letters were delivered to the target company.
3.16 The case of the Merchant Banker rests on the assertion that they have made reasonable efforts to ascertain the correctness of disclosures in the offer document, by writing to acquirer, target company and the stock exchanges. Since the acquirer reportedly did not have any shares of the target company, it would be difficult to expect them to have knowledge about the said unlisted shares. The target company could have had definite information about the said unlisted shares. As per record, the target company did not respond to the letter dated September 07, 2000 of the Merchant Banker. The intriguing question in this regard is whether the target company was in receipt of the said letter from the Merchant Banker. The proof made available from the computerized statement from the courier company is not convincing, in as much as the data and the description available in the computerized statement does not help confirm, the handling of the very letter by the courier. Further, the copy of the letter produced is unsigned, thereby leaving the entire question open.
3.17 Yet another argument of the Merchant Banker is that the Enquiry Officer had gone beyond the show cause notice by relying on clause 4 and 6 of the Code of Conduct specified in the said Regulations. Even assuming it to be so, it is not clear how the same will shore up the case of the Merchant Banker charged with a duty that it shall endeavourer to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision. The various clauses in the code of conduct are meant to be illustrative in nature and can not be construed in a manner which could be totally inconsistent with the basic role of a merchant banker to protect the interest of the investors at all cost. To me, such a technical interpretation does not appeal, since the basic duty cast upon the merchant banker is far more encompassing than such a straight jacketed view.
3.18 Instead of seeking to justify its conduct in terms of the balance sheet data which appears to be incorrect , the Merchant Banker could have attempted what Indbank Merchant Banking Services Ltd. (a merchant banker registered with SEBI) demonstrated with a tell - tale effect during January 2003 in respect of the acquisition of shares of the target company by Calibre Rehabs Ltd. In other words, the Indbank Merchant Banking Services Ltd. could establish the correct position regarding the unlisted shares subsequently and the same should not have been a matter of insuperable difficulty for the Merchant Banker in the instant case. To that effect, the effort, if any, has not been reasonable enough to demonstrate their commitment to the code of conduct.
3.19 The further argument of the Merchant Banker that the entire pack of unlisted shares (allotted on August 31, 1999) were held by three Tata companies with whom the acquirer entered into an agreement and that the listed shares were with the public rendering the non disclosure of the unlisted shares immaterial is highly specious, seeking to impart its own spin to the materiality of the disclosure. In my view, the shareholder is entitled to total and complete information for taking informed decision and the materiality of the same has to be judged from the standpoint of the shareholder and not the issuer/ merchant banker.
3.20 The role of the Merchant Banker is important while preparing and filing the offer document as the general investors are carried away by the contents of the said offer document and accordingly a decision is taken by them. The prospectus should contain all the information about the company. Typically, the merchant banker is required to verify the content of the issue prospectus and to exercise 'due diligence' in the process. The Merchant Banker has a duty not only to the target company but also towards the general investors and the securities market in general. In view of the above, the contention of the Merchant Banker that it was the duty of the target company to set out the correct facts cannot be accepted. When letters were issued by the Merchant Banker to stock exchange, target company and the acquirer, it should have followed up with them in order to ascertain the true and correct information considering the overall interest of the securities market.
3.21 A merchant banker holds a position of great trust and responsibility and the investors depend on the actions of the merchant banker for safeguarding of their interests. In view of the above, it can be held that non disclosure of information pertaining to the unlisted shares is withholding of material information and therefore it is fairly established that the Merchant Banker failed to maintain high standards of integrity, dignity and fairness in the conduct of its business and that it had also failed to ensure that the investors were provided with true and adequate information and thereby violated clauses 1, 2 and 7 specified in schedule III of the Merchant Banker Regulations and regulation 24(4) of the Takeover Regulations.
3.22 In view of the above, I do not find any reason to differ with the recommendations made by the Enquiry Officer.
4.0 ORDER
4.1 In view of the foregoing, I, in exercise of the powers conferred under regulation 13(4) read with regulation 13(1) (a) (i) of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, hereby impose a minor penalty of censure on the certificate of registration of HSBC Securities and Capital Markets (India) Ltd., Merchant Banker registered with SEBI (Registration No. INB 000010353)
G. ANANTHARAMAN
WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA
Place: Mumbai
Date: 07-03-2007