In a major clampdown for “suppression of material facts” in IPO documents, Sebi today penalised merchant banking arms of SBI, ICICI, Kotak Mahindra, IDBI, DSP Merrill Lynch and Edelweiss groups for lapses during the public offer of rating agency CARE two years ago.
The six merchant banks have been asked to pay a fine of Rs 1 crore — the maximum penalty applicable for violation of disclosure related norms in IPO documents — within 45 days.
Taking a strong view about the violation of Sebi norms as also the Code of Conduct for merchant banks and book-running lead managers (BRLMs) for public issues, Sebi said in its 86-page order: “While making disclosures in the Red Herring Prospectus, the BRLMs cannot pick and choose some material facts that they prefer to disclose and suppress some material facts.
“If material facts are suppressed or distorted as in the extant case, the very safety and integrity of the securities market would become a cause of concern for the regulators and the investors.”
The IPO came in December 2012, prior to which these six bankers had filed a Red Herring Prospectus for the public issue involving sale of nearly 72 lakh shares.
In this case, the bankers had made disclosure of one of the conditions under the FDI route in the RHP, terming it as “a material disclosure” because CARE had specifically sought such approval from RBI.
At the same time, they omitted the disclosure of another condition applicable to the Offer under the FDI route (though the compliance of the same was specifically directed by RBI while granting exemption to non-resident investors participating in the Offer) by unilaterally assuming the non-applicability of the said condition.
The proposed IPO of CARE (Credit Analysis and Research Ltd) was through the offer for sale route.
It was observed that CARE had received a letter in September 2012 from the RBI agreeing to exempt non-resident investors participating in the offer for sale, from the requirement of obtaining a No Objection Certificate from their respective regulators.
One of the conditions stipulated by RBI while exempting non-resident investors participating in the offer from obtaining NoCs was that the minimum capitalisation norms applicable to Non Banking Financial Companies (NBFCs) are strictly adhered to by CARE.
Subsequently, CARE had written to RBI stating that investment by Foreign Institutional Investors, NRIs and Qualified Foreign Investors in the offer would not be foreign direct investment (FDI).
It has also said that relevant regulations and the conditions applicable for FDI including minimum capitalisation norms prescribed would not be applicable to the company in respect of the offer.
The market regulator observed that CARE and the merchant bankers had proceeded with the issue in the absence of any response from RBI and that limited disclosures were made in the prospectus.
According to Sebi, the disclosure in the RHP did not mention the conditional nature of the exemption granted by RBI to the non-resident investors.
The market regulator noted that “it was only since RBI on the penultimate day of the closing of CARE’s Offer for Sale permitted six months time to CARE to comply with the minimum capitalisation norm and further granted extension up to September 30, 2013, the FIIs who participated in the Offer prior to the issue of the addendum by the BRLMs did not end up contravening FEMA [Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations]”.
It added: “Nevertheless, this cannot undermine the act of the BRLMs to misrepresent/ suppress material facts in the prospectus with respect to RBI’s letter dated September 26, 2012 to CARE, which was against the interest of the non- resident investors participating in the Offer.”
