SEBI slaps fine on Merchant Banker for rule violation

SEBI slaps fine on Merchant Banker for rule violation

The Merchant Banker authenticates correctness of the information disclosed in the prospectus by enabling the Investors to take an informed decision

SEBI has imposed a penalty of Rs. 5 lakhs on the Noticee viz. Saffron Capital Advisors Pvt. Ltd. in terms of section 15HB of the SEBI Act, for the violation of the provisions of regulation 60(7)(a) and 64(1) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations), regulation 13 r/w clause 1, 2, 3, 4, 6, 7 and 20 of Code of Conduct for merchant bankers specified under Schedule III in Merchant Bankers Regulations.

Herein, the Securities and Exchange Board of India (SEBI) investigated the matter of Initial Public Offer (IPO) of Acropetal Technologies Limited (ATL/the Company).

The Adjudicating Officer(AO) opined that the Noticee had gone by the principle of assumption and relied on the certification by the statutory auditor. Noticee had not crosschecked that, where the funds of bridge loan were deployed and if they were genuinely utilized towards construction of the building and working capital.

The Noticee had all the rights to call for any reports, documents or information necessary from ATL to enable it to verify that the statements made in any communication by ATL to be true and to ensure that the same is not misleading and no omission has taken place in the disclosures.

Had the Noticee called for bank statement of ATL/or had enquired about the property were advance was given for construction of the building, it would have known that Rs. 7 crore as mentioned in the audited statement of funds deployed as "advance towards construction of building" was transferred to Equastone, which was a related entity of ATL.

Further, had ATL called for any details/documentary evidence for the usage of Rs. 13 crore mentioned as "Towards working capital", it would have known that the said amount was in fact transferred to companies abroad, which as per investigation report was observed as non –genuine and ATL did not comment on the same during the investigation. However, the Noticee did not play a pro-active role by looking into the authenticity of audited fund deployed statement.

The AO also noted that as BRLM (Book Running Lead Manager), it was the role of the Noticee to give importance to the materiality of the information involved and apply its independent judgment and effort to go beyond the documents provided before it by the issuer and its auditor. A look at the bank statements of ATL would have given the Noticee the necessary red flags to ask further pertinent questions in this regard to the ATL management, its KMPs and its statutory auditor.

It was also opined that no such step or effort was demonstrated to have been taken by the Noticee. As per the AO, the Noticee ought to have demonstrated better professionalism, care and skill as a SEBI registered Merchant Banker.

Lastly, it was observed that the Noticee, being BRLM should have made independent enquiries and examinations as part of its due diligence exercise to ensure that disclosures made in the offer documents were true, complete and adequate. Nothing had been brought on record by the Noticee to demonstrate that it had done any independent examination regarding verifying the correctness of the information to be disclosed in the prospectus.

Thus, the AO was of the opinion that the Noticee could not merely escape its responsibility by shifting the liability on issuer/auditors. It was further noted that the Noticee had merely relied on an undertaking and information given by the issuer company/auditor instead of verifying the facts with supporting documents.