Application No. 2 of 1999 and 6 of 1998
 

In the matter of

State Bank of Indore                                                     Appellant

Vs.

Securities & Exchange Board of India                        Respondent
 

Present:

Shri T.V.S. Rao
Chief Manager (Law)
State Bank of Indore

Shri A.K. Pradhan
AGM, IR & MB
State Bank of Indore

Shri Vinod Kulkarni
Dy. Manager
State Bank of Indore                                                for the Appellant

Shri Santosh K Shukla
Legal Officer
Securities & Exchange Board of India                for the Respondent
 
 

State Bank of Indore, the Appellant herein is an associate bank of State Bank of India. It has been granted registration under the Securities and Exchange Board of India Act, 1992 to act as Banker to an Issue. Since the registration was granted on December 12, 1994 and the currency of registration being 3 years, on expiry of the same in December, 1997 the Appellant sought renewal by submitting the requisite particulars in the prescribed manner with the Respondent. However, the Respondent on examination of the particulars so furnished, prima facie felt that the Appellant had not complied with the condition subject to which the registration was granted in as much as no agreement in the prescribed manner was found entered into by the Appellant with the bodies corporate issuing securities for whose behalf it had acted as Bankers to Issue. The matter was referred to the Adjudicating Officer for enquiry and adjudication vide Respondent�s order dated March 31, 1998. The Adjudicating officer, issued notice to the Appellant, asking to show cause as to why penal action provided under section 15B of the Act, should not be taken against it for the alleged non compliance of the requirements of regulation 14 of the Securities and Exchange Board of India (Bankers to an Issue) Regulations, 1994. The Appellant replied to the said notice and also made oral submissions before the Adjudicating Officer denying the charge. However, the Adjudicating Officer, after enquiry came to the conclusion that the appellant was guilty of the charge and imposed a sum of Rs. 40, 000/- as penalty. The present appeal is directed against the order dated November 9, 1998 made by the Adjudicating Officer.
 

Application No.6 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.2 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.
 

Appeal No.5 of 1998

Shri T.V.S. Rao, authorised officer of the Appellant reiterated various submissions made in the appeal. He narrated the procedure followed by the Appellant on its appointment as Banker to an Issue and subsequent conduct of business in that capacity. According to him the process starts with the receipt of an offer from the Issuer Company to act as a Banker to the Issue followed by communicating the acceptance of the offer. The Appellant while communicating its willingness to act as Banker to the Issue, informs the issuer company as to the terms and conditions and also furnishes the list of collection centres available for the purpose. Thereafter other specifics are informed by the Registrar to the issue or the lead manager to the issue, for compliance. These are all standard instructions made in tune with the regulations made by SEBI. He admitted that the Appellant had not entered into any formal agreement as such with the Issuer Company encompassing all the requirements of rule 4(a) and Regulation 14. But the covenants were settled by way of correspondence between the Bank and Issuer Company or the lead managers to the issue, thereby in essence fulfilling the requirements of regulation 14. With reference to the specific provisions required to be incorporated in the agreement in terms of sub regulation (2) of regulation 14, he stated that the requisite statements of applications and application monies received, etc. are forwarded to the Issue Registrar within the time frame mutually agreed upon and the daily statement of receipt of applications etc. is also forwarded to the Registrar punctually in accordance with the instructions received for the purpose from the intermediaries. He further submitted that since the parties had already acted upon in the manner required, there was an implied agreement. He reiterated that since there existed a legally binding agreement created through exchange of letters, the absence of a formal agreement should not be a matter of concern or be considered as a default under regulation 14 to attract penalty under Section 15B of the Act. He further submitted that the practice followed by the Appellant was in tune with the practice followed before making the regulations and that many bankers were following that practice even after notification of the regulation. He submitted that the practice did work satisfactorily and there were no complaints of any sort against the Appellant. He stated that non-execution of formal agreement was only an inadvertent lapse of technical nature and as a result thereof the investing public had not been put to any loss. He urged that the Adjudicating Officer before imposing penalty should have taken into consideration the fact that the Appellant is a public sector bank and that it had not committed any serious violation of the law to suffer the penalty.
 

Shri Santosh K Shukla, Officer, SEBI appearing for the Respondent submitted that by the Appellant�s own version no formal agreement had been entered into and the said admission itself is sufficient to uphold the impugned order. He submitted that any person who has been granted a certificate to act as Banker to an issue, is bound to comply with the requirements of the Act and rules and regulations made thereunder, in terms of the condition attached to the registration. He further submitted that regulation 14 attached to the registration. He further submitted that regulation 14 mandates an agreement on the lines required under rule 4(a) including additional particulars as required under regulation 14(2). Since the regulation requires an agreement with the Issuer Company incorporating therein the specific details, agreement in any other form with any other person is not sufficient. Letters/ correspondence exchanged by the parties as substitute for the formal agreement as envisaged under regulation 14 cannot be treated as valid agreements. Shri Shukla referred to the public issue made by three companies viz. Sanghvi Asbestos Cements Ltd, Tips and Toes Cosmetics (India) Ltd. and Dewas Metal Sections Ltd, specified in the adjudication order and stated that in all these cases the Appellant had entered into correspondence with other intermediaries by way of exchange of letters to certain extent covering therein the requisite time frame etc. referred to in sub regulation 2 of regulation 14. He submitted that correspondence with other intermediaries is not sufficient compliance for the purpose of the regulation. He said that the Adjudicating Officer had after enquiry come to the conclusion that the Appellant was guilty of non compliance of regulation 14 in the case of three public issues to which the Appellant had acted as Banker, and that in terms of section 15B each such failure was punishable with penalty not exceeding Rs.5 lakhs. However, Adjudicating Officer had imposed only a lumpsum penalty of Rs. 40, 000/-, which is very meager and not unreasonable.
 

It is seen that the show cause notice issued to the Appellant by the Adjudicating Officer was lacking in material information required to be normally furnished, to enable the appellant to effectively counter the charge. The notice did not even specify the public issues to which the Appellant had acted as Banker to an issue relatable to the offence. However, as could be seen from the adjudication order the Appellant was informed about the specific cases of contravention and given sufficient opportunity to present its case. Therefore, it cannot be said that the principles of natural justice were not followed in the enquiry. So the deficiency in the show cause notice is not that fatal in this case.
 

The offence is related to public issues made by the following companies viz. (I) Sanghvi Asbestos Cements Ltd, (ii) Tips and Toes Cosmetics (India) Ltd., (iii) Dewas Metal Sections Ltd., and (iv) Jain Plastics and Chemicals Ltd., to which the Appellant had acted as Banker. The Adjudicating Officers has not given any finding in the case of Jain Plastics & Chemicals Ltd., and as such the Appellant cannot be considered guilty of default in the case of documentation relating to the public issue made by the said Jain Plastics and Chemicals Ltd. Scope of the impugned order is, therefore, limited to the nature of compliance of regulation 14 with reference to the public issues by the other three companies mentioned above.
 

In all fairness, the Appellant had admitted that no formal agreement as such had been entered into with the issuer companies. But it had claimed substantial compliance of the requirements of the regulation stating that the letters exchanged between the issuer company/ lead managers to the issue were of binding nature and served as agreement in every sense. Appellant�s representative had laboured considerably to demolish the Respondent�s version that exchange of letters do not create any agreement. Thrust of his submission was that for all practical purposes, the parties had by their conduct recognised the duties and responsibilities normally expected of them to honour in a public issue, and as such the alleged technical default was of little consequences to attract any penalty.
 

Banker to an Issue is an important capital market intermediary as it is entrusted with the task of receiving applications, and application monies from the applicants, refund of monies etc. in public issue of securities. SEBI had notified Securities and Exchange Board of India (Banker to an Issue) Regulations, 1994 specifying certain requirements to be followed so as to discipline the Bankers.
 

Conditions for granting certificate of registration by SEBI is prescribed in the Securities and Exchange Board of India (Banker to an Issue) Rules, 1994 made by the Central Government. The said rules stipulate that no person shall carryon any activity as a Banker to an issue unless he holds a certificate for the purpose granted by SEBI. One of the conditions stipulated for grant or renewal of such certificate is that the 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 a Banker to an issue (rule 4(a)). Regulation 14 of the Securities and Exchange Board of India (Bankers to an Issue) Regulation, 1994 requires every Banker to an Issue to enter into an agreement with the body corporate for which he is acting as a Banker to an Issue, stating therein matters such as the number of centres at which applications from investors will be accepted and the time within which statements regarding applications and application monies received from investors will be sent to the Registrar to the issue by the designated controlling branch of the Banker, etc. It is clear that the agreement referred to in regulation 14 is required to spell out the duties and responsibilities between the parties i.e. Banker and the issuer company, as mentioned in rule 4(a) and also incorporate those specific matters referred to in regulation 14(2). It is also clear that the agreement is required to be entered into between the Banker to the Issue and the issuer body corporate. I am, therefore, inclined to agree with the view that an agreement with a third party who is not authorised to enter into such an agreement on behalf of the Issuer Company, is not the agreement in terms of regulation 14.
 

The Appellant had relied on certain letters, exchanged between it and the issuer companies, and certain Board resolutions passed by the three issuer companies. I have perused these materials and find none of them specifying the duties and responsibilities referred to in rule 4(a) or the specific matters under regulation 14(2). It is true that the Appellant had consented to act as Banker to the issues in response to the offer made by these companies. But there is nothing in these offer letters or consent letters specifying the duties and responsibilities between the Appellant and the Issuer Company. The Appellant could not produce any evidence to show the existence of a document covering the specific details of regulation 14(2).
 

I am not suggesting that an agreement cannot be spelt out from correspondence exchanged between the parties, if from the correspondence it clearly emerges that the parties were ad idem to the terms. Law on this point is ver clear. There is no difficulty in accepting the suggestion that the appointment based on the offer made by the Issuer Company as accepted by the Banker is an agreement. But that alone would not suffice. For the purpose of regulation 14 such an agreement should contain the duties and responsibilities between the Banker and the Issuer Company and also the details required under regulation. Any agreement short of these requirements is not an agreement for the purpose of regulation 14.
 

I am unable to agree to the proposition that the contents of the letters exchanged by the Appellant with third parties like Registrar to the issue, and the lead manager to the issue, would be binding on the Issuer Company. Correspondence with the Issue Registrar, lead managers to the issue etc. in the absence of proof that they had acted on valid authorisation from the Issuer Company, cannot be treated as part of an agreement with the company. Appellant had not produced any evidence to show that these intermediaries were specifically authorised to enter into requisite agreement for and on behalf of the Appellant and that the instructions from these intermediaries were at the behest of the Appellant. Taking a view that the Issuer Company, Registrar to the issue and lead managers to the issue are one and the same identity would defeat the very purpose of the regulation. In any case such a view cannot legally sustain. The fact that the Registrar/ lead manager and other intermediaries are exercising certain duties related to the public issue of securities of a company does not, in the absence of specific authorisation, mean that these entities are empowered to execute agreement with the Banker to an issue on behalf of the issuer company. It is seen from the copy of the letters produced by the Respondent that not the issuer companies but only intermediaries like Registrar to the issue/ lead manager to the issue, had issued instructions to the Appellant specifying the requirements provided in regulation 14(2). These instructions are not to be treated as substitute for the mandatory provisions required to be put in the agreement between the Bankers and the Issuer Company. These instructions cannot be considered as part of an agreement entered into by the Appellant with the issuer companies. These instructions are not legally binding on the issuer companies and the Banker, as these were issued by the intermediaries in their individual capacity and not on behalf of the issuer companies. Adjudicating Officer in para 5.1, 5.2 and 5.3 of the impugned order has stated the nature of the correspondence and its source in the case of public issues made by Sanghvi Asbestos Cements Ltd., Tips and Toes Cosmetics (India) Ltd., and Dewas Metals Sections Ltd. Factual position stated therein remains unrebutted. The Appellant had also stated that detailed instructions were issued to the Banker by the Registrar to the issue etc. It is evident that the appellant had entered into the requisite agreement with the three issuer companies incorporating therein the matters required in regulation 14. The Appellant�s submission that it was following the then prevailing practice as followed by other bankers as a defense is not acceptable.
 

I have considered the Appellant�s plea that non-execution of requisite agreement being an inadvertent lapse having not caused any loss to the investing public, imposition of penalty is unwarranted. In this context it is pertinent to mention that section 15B of the Act, provides for a maximum penalty of Rs.5 lakhs for each failure against any person who is registered as an intermediary and is required under the Act or any rules or regulations made thereunder to enter into an agreement with his client, fails to enter into such agreement. Since the Appellant had failed to enter into the requisite agreement with the three issuer companies, penal provision of section 15B is attracted. However, the Adjudicating Officer in his wisdom decided to impose a lumpsum penalty of Rs. 40, 000 as against the maximum penalty of Rs.5 lakhs provided against each such offence in the Act. The Adjudicating Officer is supposed to be guided by the factors for the purpose of adjudging the quantum of penalty provided in section 15J of the Act. Therefore I do not consider it necessary to interfere with the quantum of penalty decided by him.
 

For the reasons stated above, I do not find any merit in this appeal.
 

The appeal is dismissed.