Application No. 3 of 1999 and 5 of 1998
 

In the matter of :

Karnataka Bank Ltd.                                                Appellant

Vs.

Securities and Exchange Board of India             Respondent
 

Present:

Shri Raghupathy Acharya
Manager, International Divn.,
Karnataka Bank Ltd.                                         for the Appellant

Shri Santosh K. Shukla
Legal Officer, SEBI                                        for the Respondent
 

Karnataka Bank Ltd., the Appellant herein is aggrieved by the order dated November 9, 1998 made by the Adjudicating Officer, imposing a penalty of Rs. 25,000/- under section 15B of the Securities and Exchange Board of India Act, 1992.
 

The Appellant, a Scheduled Bank engaged in banking business, is registered with the Securities and Exchange Board of India as Banker to an Issue. Banker to an Issue has an important role to play in public issue of securities, as it is entrusted with the task of receiving applications alongwith application money from the applicants, through its designated branches on behalf of the issuer company and in view of this the Banker is fastened with certain obligations to ensure accountability and thereby an element of safety to the investing public. Securities and Exchange Board of India, for the purpose had notified Securities and Exchange Board of India (Bankers to an Issue) Regulations, 1994. These regulations are binding on the Bankers to Issues and any failure thereof on their part would visit with penal consequences as provided in the Act.
 

The Appellant was granted registration as a Banker to an Issue on 23.1.1995, for a period of three years. On expiry of currency of the said registration the Appellant applied for renewal of the same. However, from the particulars submitted for the purpose, the Respondent noticed that the Appellant had failed to comply with the requirements of regulation 14 of the Securities and Exchange Board of India (Banker to an Issue) Regulations, 1994 and referred the matter to the Adjudicating Officer for inquiry and adjudication vide its order dated March 31, 1998. The Adjudicating Officer vide his letter dated May 21, 1998 asked the Appellant to show cause as to why action should not be taken against it by way of imposing penalty in accordance with section 15B and section 15I of the Act, for contravention of the said regulation 14. The Appellant filed a written reply thereto and also made oral submissions before the Adjudicating Officer denying the charges. However, the Adjudication Officer after enquiry, came to the conclusion that the Appellant was guilty of the charge and imposed a monetary penalty of Rs. 25,000/- vide his order dated November 9, 1998. The present appeal is against the said order.
 

Application No. 5 of 1998

In terms of Rule 9, the Appellant is required to deposit the amount of penalty, as a precondition for entertaining the appeal, unless the Tribunal waives the requirement for sufficient reasons. The Appellant has sought waiver of the requirement vide the application. However, when the matter was taken up, both the parties said that they were ready with the main appeal itself. The Respondent has already filed written reply to the main appeal. Since the appeal itself is being taken up for final disposal, the question of considering the waiver application on merits at this stage does not arise. Waiver is the only alternative left with, viewed from the practical angle. Accordingly the application is allowed.
 

Application No. 3 of 1999

By this application the Respondent has sought condonation of a short delay of 12 days involved in filing the reply on the ground that the delay was due to reasons beyond its control. Appellant has no objection. Delay is condoned.
 

Application No. 4 of 1998

Shri R. S. Acharya, officer representing the Appellant reiterating the submissions made in the appeal stated that the Bank had fulfilled the requirements of regualation 14 by entering into requisite agreement with the issuer companies encompassing all the specific requirements of the regulation and as such the finding of the Adjudicating Officer that the Appellant was in default is erroneous. He drew the Tribunal�s attention to the copy of the agreements, entered into by the Appellant with the concerned issuer companies referred to in the adjudication order, in support of his contention. According to him, on receiving the offer from the issuer company to act as a Banker, a legally binding agreement clearly spelling out the duties and obligations, is entered into with the issuer company and thereafter letters are exchanged in terms thereof and acted upon with mutual consent. The agreement provides the detailed frame work. Regarding the requirement of specifying the collection centres in the agreement he said that in terms of the agreement, list of collection centres with the approval of the issuer company is drawn out and forwarded to the compay and Issue Registrar by a separate letter. He submitted that the letter forwarding the approved collection branches to the company is nothing but a part of the agreement for the reason that it is done in terms of the agreement and that the list so drawn out is as accepted by the issuer company. He reiterated that in view of the fact that particulars are spelt out in the correspondence / letter exchanged on matters as agreed to in the agreement, there is sufficient compliance of the regulation. He stated that regulation 14(2) does not specify that the obligations listed therein are required to be incorporated in one formal document, and all that the regulation requires is a legally enforceable and binding agreement. According to him correspondence or letters exchanged on matters mutually accepted is also legally binding agreement. He further submitted that since the Respondent is insisting for inclusion of these details in the text of the agreement itself, instead of supplementing through correspondence, the Appellant is ready to do so in future. He further submitted that even if it is assumed that any particular detail was lacking and there was a technical violation, imposition of penalty in the absence of any injury to others or any malafide intention on the part of the Appellant, was not justified.
 

Shri Santhosh Shukla, Officer, SEBI, representing the Respondent reiterated the grounds adduced in the written reply to the appeal. He submitted that the Appellant was granted registration as Banker to an Issue subject to condition that requirements of the Act, Rules and Regulations would be complied with, that regulation 14 requires the Banker to enter into an agreement with the issuer company incorporating the clauses specified under sub regulation 2, and that failure to do so would attract the penal provisions of section 15B of the Act. He submitted that the Appellant having not complied with the said statutory requirement should face the penal consequences. According to him supply of list of collection branches to the company, by separate letter or prescribing time limit for forwarding application / application money etc. through letters is not in tune with the requirements of regulation 14 as the regulation mandates inclusion of the same in the text of the agreement itself and not in any other mode. Referring to the 3 specific cases examined in the adjudication order Shri Shukla stated that though the agreement entered into with IDBI was found to be in compliance with the provisions of rule 14, the agreements in the remaining two cases were incomplete as the same did not contain the clauses required under regulation 14(2). He further stated that since the Appellant had failed to comply with the specific provisions of the law, the penalty of Rs. 25,000/- imposed, as against the maximum penalty of Rs. 5 lakhs provided in the Act, was not unreasonable.
 

It is seen from the show cause notice dated May 21, 1998, issued by the Adjudicating Officer that the Appellant was charged with the offence of non-compliance of regulation 14, which requires the Banker to enter into a legally binding agreement with the issuer company, stating therein the duties and responsibilities attendant to the assignment and in particular those matters specified in sub regulation (2) of regulation 14.
 

However, it is seen that the said show cause notice merely stated contravention of regulation 14 by the Appellant, without any case specific particulars enabling the Appellant to defend itself. A show cause notice which is vague is not a notice proper. However, it is seen from the impugned order that this defect was made good and the principles of natural justice were followed by disclosing the particular cases to the Appellant at the inquiry stage giving the Appellant sufficient opportunity to answer the charges. The Appellant did make use of this opportunity. The Appellant�s conduct vis-à-vis the provisions of regulation 14, as Banker to public issues made by Industrial Development Bank of India, ATF Aishwarya Finance Ltd. and Hydro S&S Industries Ltd., it was concluded that the specific particulars required under regulation 14(2) were not incorporated in the agreement. He has cited clause 17 of the agreement (terms of the agreements are identical in both the cases) and stated that the provision that "the branches of the Bank as agreed upon shall be the collection centres" itself cannot be considered as compliance of regulation 14(2)(a), as the regulation requires listing of identified collection centres in the agreement. He has also cited clause 9 of the agreement binding the Banker to comply with the detailed instructions from the Issue Registrar duly approved by the company, as not enough compliance of the sub regulations 2(b) and 2(c). On this basis he has come to the conclusion that Appellant had only partially complied with the requirements of Regulation 14 by entering into an agreement with the issuer companies but not fully as the particulars required under regulation 14(2) were not incorporated in the text of the agreement. In this connection it is pertinent to have a look at the following observations made by the Adjudicating Officer in his order with reference to compliance in the case of public issue made by IDBI.
 
 

"From the copy of stamped agreement dated 18.5.1995 between the bank and IDBI regarding the public issue of IDBI Equity Shares, it is seen that Clause 3 of Schedule I and Clause 5 of Schedule I, respectively, dealt with the requirement of daily reports by the Bank of collection figures to the Registrar and final certificate by the Bank of collections to the Registrar. The Annexure to the agreement which formed part of the agreement gave a list of the collecting branches. This agreement is in order and it complies with the requirements of Regulation 14 of SEBI (Bankers to an Issue) Regulations 1994".

It is not the Respondent�s contention that the Appellant had not entered into any agreement with the issuer companies. The grievance is that the agreement is lacking in material terms of the regulation 14(2) an dexchange of letters cannot supplement the agreement. Clause 17 of both the agreements clearly stipulates that "the branches of the Bank as agreed upon shall be collection centres for the issue." In terms of this clause a list of collection centres was drawn out and communicated to the company and the company approved the same. This fact remains unrebutted. The fact that the list was made subsequently, does not in any way suggest that it is outside the agreement. There are umpteen number of court decisions holding that an agreement can be spelt out from correspondence exchanged between the parties even if it is not in the form of a single document signed by them, provided it is unequivocally and clearly emerges from the correspondence that the parties were ad idem to the terms. In a recent decision in Rickmers Verwaltung GMH Vs Indian Oil Corporation Ltd. ( AIR 1999 SC 504 ) the Supreme Court had reiterated this principle. I am therefore inclined to agree with the Appellant�s submission that the mutually agreed list of collection branches drawn out in terms of clause 17 of the agreement should be treated as a part and parcel of the agreement, meeting with the requirement of regulation 14(2)(a).
 

The Adjudicating Officer has observed that "Clause 9 of the agreement provides that the bank agrees to undertake and to comply with the detailed instruction to the bankers which may be forwarded by the Registrar to the issue duly approved by the company. This is not adequate compliance of the Regulation". Having already expressed his views on compliance of regulation 14(2)(a) as discussed above this observation is obviously with reference to compliance of the requirements of regulation 14(2)(b) & (c). It appears that clause 6 of the agreement and Schedule � I referred to therein considered relevant in the context had escaped notice of the Adjudicating Officer. Clause 6 of the agreement reads as follows :
 
 

"The company and the Bank agree to their respective functions, duties and obligations pertaining to the assignment in respect of each activity as specified in Schedule � I hereunder written. The Company and the Bank may include further activities agreed upon but all the activities pertaining to the assignment shall be listed and agreed upon".

Duties of the Banker Period of completion

Reporting of daily Daily during the pendency collection figures to the of the issue.

Registrars.

Preparation of schedules 7 days from the closure of and final certificate and issue.
Submission of the same to the Registrars.
 

In this context it is pertinent to mention that clauses 3 and 5 in the Schedule � I to the agreement of May 18, 1995 entered into between the Appellant and the IDBI are substantially identical to clauses 3 & 5 in the Schedule � I to the agreements entered into by the Appellant with the 2 subject companies. The Adjudicating Officer has accepted those clauses in the agreement with IDBI as sufficient compliance of the requirements of sub regulation 2(b) and 2(c) of the regulation. During the course of the enquiry proceedings, Schedule � I referred to in clause 6 of the agreements was not available to the Adjudicating Officer as the Appellant had failed to annex the same with the agreements filed before him. So he had no occasion to examine the same. The relevant agreements with schedules were called for and examined by me during the course of the appeal proceedings. I find contents of the schedule adequately taking care of the requirements of sub regulations 2(b) and (c) of regulation 14. I do not see any reason to ignore the schedule as it is an integral part of the agreement.
 

The very object of the regulation insisting that every Banker to an Issue shall enter into a legally binding agreement with the body corporate for or on whose behalf he is acting as Banker to an issue stating therein the duties and responsibilities between himself and the body corporate for the issue for which he is acting as Banker is to pin down the responsibilities on the respective parties to avoid any confusion or uncertainty, to the detriment of the investing public. It cannot be said that the agreements in the instant cases supplemented by letters exchanged between the parties do not serve the object of the regulation or are legally unenforceable. Supplementing an existing agreement by exchanging letters is a well accepted practice, recognized by law.
 

It is evident from the material available before me that the Appellant had complied with the requirements of regulation 14(1) and 14(2) while acting as Banker to the public issues made by ATF Aishwarya Finance Ltd. and Hydro S&S Industries Ltd. The Respondent�s contention that letters exchanged between the parties to the agreement supplementing the terms of the agreement in the two cases referred above as not sufficient compliance of the regulation, is not acceptable as it is not legally tenable. It is also to be understood that a schedule to an agreement is an integral part of that agreement.
 

For the reasons stated above I hold that the conclusion drawn by the Adjudicating Officer and the consequential order imposing penalty cannot sustain. Accordingly the impugned order is set aside.
 

Appeal is allowed.