Order against Saatal Katha and Chemicals Ltd

ORDER UNDER SECTION 11B OF SEBI ACT READ WITH REGULATION 40 (3) OF SEBI (Merchant Bankers) REGULATION 1992 AGAINST M/S CENTRAL BANK OF INDIA, A SEBI REGISTERED MERCHANT BANKER IN THE CASE OF M/S SAATAL KATHA AND CHEMICALS LTD.

M/s. Central Bank of India is registered with SEBI as a Merchant Banker for the period 01/10/99 to 30/09/2002 with Registration No.-INM000003069. It has been alleged that M/s Central Bank of India had failed to discharge the responsibility undertaken by it while acting as a Lead Manager in the Public Issue of M/s Saatal Katha and Chemicals Ltd. M/s Saatal Kattha came out with a public issue of 21,50,000 equity shares of Rs.20/- each aggregating to Rs.430,00,000. The public issue opened for public subscription on 30/1/95 and closed for subscription on 2/2/95. Central Bank of India acted as a pre-issue Lead Manager and Rajashree Fiscal Services Ltd. acted as the post-issue Lead Manager. SEBI received anonymous complaints alleging that the company had fraudulently changed the NRI subscription from competitive basis to firm basis in its public issue without the requisite approval with a malafide intention to harm the investors.

SEBI vide its letter dated July 11, 1997 had forwarded the copy of the complaint to the Central bank of India, Merchant Banking Division (pre-issue Lead Manager) asking for their comments. Central Bank of India vide their letter dated July 29, 1997 had furnished their comments. It was replied that the draft prospectus (of Saatal Katha and Chemicals Ltd.)was submitted to SEBI vide letter no. CO:MBD:MJ:94-95:1972 dated 1/9/94. After incorporating the necessary observations made by SEBI, an acknowledgement card was issued by SEBI vide letter dated November 02, 1994. As per the draft prospectus submitted to SEBI under capital structure, 4,00,000 equity shares were reserved for preferential allotment to NRI’s /OCB’s/FII’s on competitive basis, RBI approval for the same was received vide their letter no. CO:FID(II)4754.10.02.40(5136)/94-95 dated 24/10/1994.

The company appears to have changed the basis of reservation for NRI from "competitive" to "firm" basis in its prospectus dated November 23, 1994.The company appears to have printed separate application forms inviting subscription from NRI’s on firm basis. The same was done without the knowledge or approval of the pre-issue lead manager. Further, the application form does not contain reference about date of the prospectus, date of opening of issue, etc. application number or the name of the designated Bank branch where the applications were to be deposited.

The company opened a current A/c with Central Bank of India, Churchgate Branch and deposited NRI applications along with the remittances from certain NRIs. This A/c was opened on 31/01/1995 i.e. one day after the Public Issue had already opened for subscription. It was seen that Central Bank of India has also acted as a Banker to the Issue for which its Mumbai Main Branch was the controlling branch. Central Bank of India, Mumbai Main Branch which was also the controlling branch had issued consolidated final certificate on March 20, 1995 on behalf of 28 designated branches. The said certificate did not indicate any collection received from NRIs by Central Bank of India. However, the company obtained a certificate dated 7/4/1995 from Central Bank of India, Churchgate Branch(where NRI applications were deposited) to the effect that Rs.80 lacs have been received as NRI subscription.

Investigations brought out that this certificate was unauthorisedly used by the Company to show receipt of subscription from NRIs on firm basis. On the basis of this certificate the allotment was decided, which was approved by the Regional Stock Exchange of Indore on 08/04/1995. The basis of allotment was decided on the basis of Certificate of Churchgate Branch, though this Branch was not a Banker to the Issue and merely one of the collecting branches and any certificate issued by the branch other than Bankers to Issue is irrelevant. This Certificate of Churchgate Branch should not have been considered for the purpose of finalising the basis of allotment, as only certificate issued by Banker to the Issue is relevant for deciding the basis of allotment.

It was found that two cheques accompanying the applications made by NRI were not honoured and were returned unpaid in clearing. Central Bank of India brought to the notice of the issuer company this fact i.e net amount received from NRI subscription was Rs.32.94 lacs only and not Rs.80 lacs as mentioned in the certificate issued by Churchgate branch. It was claimed by the bank that these facts were not brought to the notice of committee deciding the allotment by the issuer company i.e Saatal Katha & Chemicals.

On the basis of these findings of investigation, it prima facie appeared that the pre-issue Lead Manager failed to exercise due diligence and care in handling the mandate since the pre-issue Lead Manager is liable for any irregularity in drafting the prospectus. An enquiry was initiated to look into the alleged violations of Schedule III of the Code of conduct, compliance of which is mandatory as per Regulation 13 of the SEBI (Merchant Bankers) Regulations, 1992 and Regulation 36 (1) (I),(ii) (b) & (v) of SEBI (Merchant Bankers) Regulations, 1992.

Enquiry officer conducted the proceedings and looked into the allegations. From the facts of the case and from the submissions of the bank, the Enquiry Officer held that the Churchgate branch of the Bank in respect of its merchant banking activities violated clause 1 of the Code of Conduct prescribed in Schedule III of Regulation 13 and Regulation 36(1)(v) of SEBI (Merchant Bankers) Regulations, 1992 and has recommended that the Churchgate Branch of Mumbai be suspended for a period of 4 months. Enquiry Officer also suggested that the bank should install systems to ensure that the branches of the bank do not unauthorisidely act on their own in respect of matters relating to public issues and merchant banking. The bank should have systems to identify the lapses and as a regulatory measure, the bank should take action against the branch as well as the concerned officials, who dare to violate the system by acting in an unauthorised manner. The bank did not have the required system and in absence of this system, the Churchgate branch of the Bank could unauthorisedly issue a factually incorrect certificate of collection.

A show cause was sent to the Lead Manager asking it why action, as recommended by the Enquiry Officer, not be imposed on it. The Lead Manager replied to the show cause stating that mistakes were there on the part of the erring officials though the bank as an institution was working within the guidelines framed by SEBI. The Bank has also since then issued comprehensive guidelines containing detailed procedure to be followed to ensure compliance of SEBI directives. It was stated that the Chief Manager, Churchgate Branch has been warned following charge sheet being issued to him and it was also conveyed that he has been denied promotion.

An opportunity for personal hearing was given to the Bank and Shri V K Bhandari-GM and Shri U Mahapatra appeared on behalf of the Bank and made submissions. They requested that a lenient view should be taken. They pleaded that the bank as an institution was working within the guidelines framed by SEBI, and only an official failed to observe the guidelines framed by SEBI and issued unauthorisedly a certificate to the company. Further, it was stated that Chief Manager, Churchgate Branch has been warned following charge sheet being issued to him and it was also conveyed that he has been denied promotion and systems have been put in place to ensure that this type of mistake is not repeated in future.

In view of the submissions made by the Bank, I am of the view that the Bank as a whole was not guilty and mistake was committed by an official who acted unauthorisedly. It was further submitted that action has been taken by the Bank against the erring official. I am of the view that ends of justice would be met if a warning is issued to M/s. Central Bank of India. I, therefore in exercise of powers given to me under Section 4(3) read with Section 11B of SEBI Act and SEBI (Bankers to an Issue) Regulations issue a warning to M/s. Central Bank of India directing it to be cautious in future and adhere to all the Rules, Regulations, Circulars and Guidelines issued by SEBI strictly. The bank be also informed that a serious view would be taken of any future violations.

G. N. BAJPAI