Per: Justice Kumar Rajaratnam, Presiding Officer
The appeal is taken up with consent of parties for final disposal.
2. The appellant was a Lead Manager and is aggrieved by the order of the respondent dated 10.4.2003, wherein the respondent has directed the appellant not to deal in securities as an intermediary for a period of 15 days. The facts are curious and are as follows.
3. The appellant was appointed as Lead Manager to the rights issue of shares issued by Gammon (India) Ltd.(hereinafter referred to as “the company”). On 24.9.2001, the company after completing all the formalities, the rights issue letter came to be issued offering the shareholders 63,20,572 shares of Rs.10 each at a premium of 20 in the ratio of 1:1. The issue opened on 15.10.2001 and closed on 15.11.2001.
4. On 17.10.2001, one Prashant Glass Works Pvt. Ltd. lodged a complaint not with the appellant but with SEBI. The complaint was that the Chairman and Managing Director of the company, Mr. Abhijit Rajan, did not disclose in the letter of offer with respect to a case pending against him. On 18.10.2001, SEBI forwarded the complaint to the lead manager (the appellant). The complaint by the complainant did not state particulars of the criminal case pending against Abhijit Rajan. The letter of the complainant sent to SEBI, inter alia, reads as follows:
“The criminal case No.553 of 1996 at the Court of District Magistrate at Varanasi;”
5. On the very next day on 19.10.2001 the appellant sought clarification from Rajan with regard to the criminal case. The letter dated 19.10.01 reads as follows:
“Dear Mr. Rajan
M/s. Prashant Glass Works Pvt. Ltd. has complained to Mr. D.R. Mehta, Chairman, Securities & Exchange Board of India (SEBI), regarding omission of certain facts in the Offer Document issued by the company in connection with the on going Rights Issue. In response to this SEBI has sought comments from us immediately. We have enclosed a copy of the letter received from SEBI for your perusal.
As we are required to give our comments immediately to SEBI, I need the following information from you:
(1) Whether there is any criminal case pending against you in the Varanasi Court as alleged by Prashant Glass Works Pvt. Ltd.
During the course of due diligence, it was confirmed to us that there are no pending litigation’s/ cases against you except those furnished in the offer document dated September 24, 2001.
(2) It was confirmed to us by your Share Department that M/s. Prashant Glass Works Pvt. Ltd. is holding 62,527 shares as on 24/9/1999. But the complainant has alleged that it’s a gross misrepresentation in the Offer Document as the correct holding should be 80,627 shares.
We appreciate your immediate attention.”
6. On 29.10.2001 the appellant wrote to Abhijit Rajan stating very clearly that during the course of the due diligence enquiry conducted by the appellant, he confirmed that there was no case pending against the promoters and directors other than those revealed in the letter of offer and sought for clarification with regard to the letter from complainant. It is in these circumstances the appellant called for an explanation from Abhijit Rajan for clarification with regard to the criminal case. A letter dated 10th November from Abhijit Rajan received on 12th November informed the appellant that as he was out of station, he could not respond to the appellant’s letter. Mr. Rajan also admitted that there was a criminal case pending against him and by oversight he did not bring it to the notice of the appellant. The complainant in the criminal case and the complainant before SEBI were the same.
7. On 12th of November 2001 SEBI forwarded to the appellant a copy of another letter by the complainant dated 9th of November 2001. In this letter of the 9th of November 2001 received on 12th of November 2001 by the appellant it was for the first time the details and number of the criminal case pending in Varanasi were brought to the notice of the appellant. Once the details were available on 12th of November, the appellant forwarded the letter from SEBI, which was received from the complainant, to Mr. Rajan. Therefore it is clear that on the 12th of November 2001 Mr. Rajan had informed that a criminal case was pending against him in Varanasi. Equally it is correct to state that on 12th of November 2001 SEBI forwarded a letter from the complainant dt. 9th of November 2001, which, for the first time, gave details of the criminal case. Therefore the time that began to run was from 12th of November. We must carefully study the steps taken by the appellant after 12th of November to know whether the appellant had lacked in due diligence as a Lead Manager. On 12.11.2001, the appellant made it very clear that corrective measures should be taken.
8. In fact on 13.11.2001 the appellant wrote to SEBI that corrective measures like disclosure must be made forthwith. The relevant portion of the letter reads as follows:
“Corrective Action Proposed
We are advising the issuer Company to send letters to all the individual shareholders immediately disclosing details of pending litigation against Mr. Abhijit Rajan and giving option to withdraw if they desire so. A copy of the letter will be submitted to you for records. However, we will abide by your directions in this regard.
Further, we confirm that the registrations of all the Intermediaries named in the offer document are valid as on date and that none of these intermediaries have been debarred from functioning by any regulatory authority as on date.
We also confirm that the securities proposed to form part of promoters’ contribution and subject to lock-in, have not been disposed / sold / transferred by the promoters during the period starting from the date of filing the draft Letter of Offer with SEBI till date – (Not Applicable)”
9. On 29th of November 2001, the appellant went one step further and sent a draft letter to SEBI for approval to be circulated to the shareholders for exit option for non-disclosure. It was only on 5th of December 2001 SEBI approved the draft letter to be circulated giving shareholders an exit option on account of the full disclosure not being made by Mr. Abhijit Rajan. As soon as the reply came on the 5th of December 2001, on the very next day on 6th of December 2001 it was despatched to the shareholders giving exit option and all such letters were despatched between 6th and 7th of December 2001. These letters were despatched to the shareholders much before the allotment of shares. It was not possible for the appellant to have taken corrective measures till the sample of the draft exist offer was approved by SEBI. Although the draft letter was sent on 29th of November by the appellant, SEBI approved the draft letter to be circulated to the shareholders giving exit option only on 5th of December. From 29th of November 2001 to 5th of December 2001 SEBI there was no response from SEBI. As soon as the draft was approved by SEBI on 5th of December, by 6th and 7th exit options were given to the shareholders. In spite of all this, instead of SEBI sending for the appellant and satisfying itself that the appellant acted with alacrity, it issued a show cause notice dated 11th of January 2002, the relevant portion of which reads as follows:
“In the letter of offer of the said rights issue, you failed to disclose the fact that a criminal complaint had been filed against Shri Abhijit Rajan, the CMD of the issuer company before the IVth Additional Chief Judicial Magistrar, Varanasi, on 15.10.96, regarding the offences of forgery and that Shri Rajan is on bail since 1998. This fact was only disclosed in response to certain complaints in this regard. Your action has thus amounted to non-disclosure of material fact regarding the issuer company.
You are therefore, called upon to explain why action should not be initiated against you in accordance with Regulations 35 & 36(1)(I), (ii)(b), (v) and (ix) of the SEBI (Merchant Bankers) Regulations, 1992 for contravention of regulations 23, and 13 read with items 2, 5(b), 7(a) and 9 of the Code of Conduct contained in Schedule III of the SEBI (Merchant Bankers) Regulations.”
10. The appellant submitted its reply. On 22nd of July 2002, again instead of closing the matter, the Enquiry Officer issued notice to the appellant on the same allegation. The appellant submitted a reply to the notice sent by the Enquiry Officer on 21st of August 2002. A lot more time was wasted for issuing the second show cause notice on 5th of December 2002. According to the second show cause notice, the Enquiry Officer exonerated the appellant holding that it is the company that had not disclosed the pendency of the criminal case during the discussion with the merchant banker. But a further allegation was levelled against the appellant that the appellant should have acted immediately when the written complaint reached it on 19th of October 2002, when the issue was open. We are unable to comprehend how the appellant could have acted on the written complaint and aborted the issue without verification from Mr. Abhijit Rajan.
11. Let us recall that the complaint was addressed to SEBI on 17th of October 2001 from one Prashant Glass Works Pvt. Ltd. stating that a case was pending against Abhijit Rajan, Chairman and Managing Director of the company, which was not disclosed in the letter of offer by the company. SEBI sent the letter to the appellant on 18th. On 19th itself the appellant sought clarification from Abhijit Rajan. Mr. Abhijit Rajan, by letter dated 10th of November received by the appellant on 12th of November, stated that he was out of station and could not respond to the appellant’s letter and admitted that a criminal case was pending against him in Varanasi in his individual capacity and that it missed his attention and that he forgot to disclose it to the appellant during the appellant’s due diligence discussion with him. Mr. Rajan stated that it was a bona fide mistake. On 12th of November 2001, SEBI forwarded another letter dated 9th of November 2001. In this letter details of the criminal case was given. Why SEBI kept the letter from 9th of November 2001 to 12th of November 2001 is not clear. But as far as the appellant is concerned, on 12th of November itself the appellant sent a letter to Mr. Rajan informing Mr. Rajan that the directions of SEBI should be complied with in the matter of allotment. On 13th of November the appellant wrote to SEBI that corrective steps have been advised. On 29th of November even the draft letter was sent to SEBI. The appellant had to wait till 5th of December for the approval of the draft letter, which gave the shareholders an exit option (This is not to find fault with SEBI). By 6th and 7th of December, all the shareholders were informed about the exit option for the non-disclosure.
12. Even the finding of the Enquiry Officer was that it was the company and Abhijit Rajan who did not disclose the pendency of the criminal case during the due diligence enquiry with the appellant. The charge against the appellant was that the written complaint had reached the appellant on 19th of October 2001 and that the appellant did not act promptly. The respondent forgot that the issue opened on 15th of October and closed on 15th of November 2001. The appellant could not have jumped the gun and made a suo moto disclosure by way of corrective action to the shareholders without verifying the details. As soon as the letter was received on 18th of October, the appellant sought clarification on 19th of October 2001 from Abhijit Rajan. Abhijit Rajan on 10th of November 2001 informed the appellant that he could not respond to the letter and admitted that one criminal case was pending in Varanasi against him in his personal capacity and that he did not disclose this in the due diligence discussion with the appellant. Mr. Rajan had no intention of suppressing the same. When the letter was received on 12th of November, the appellant wrote a letter to Rajan to give details of the criminal complaint to take corrective steps. On the very next day, on 13th of November 2001, the appellant wrote to SEBI about the corrective steps to be taken. In fact, on 29th of November 2001 a draft letter to be circulated to the shareholders was sent to SEBI for approval. SEBI waited till 5th of December before approving the draft letter giving the shareholders an exit option and on 6th and 7th of December the letters were sent to the shareholders giving them the option to exit in view of the non-disclosure with respect to Abhijit Rajan. When a question was posed to the senior counsel to the respondent whether SEBI or the appellant, Lead Manager, had any power to stop the issue before closure, it was stated that there was no power to stop the issue and the only power was to add the extra information to the shareholders and give an exit option to all the shareholders. When SEBI itself had no power to stop the issue, it is not known how it was possible for the Lead Manager like the appellant to stop the issue, which was to close on 15th of November 2001. A lot of time of the Tribunal has been unnecessarily wasted by passing the impugned order when neither SEBI nor the appellant had any power to stop the letter of offer midway. All that could have been done was to give an exit option with the fresh disclosure, which was done by the appellant promptly.
13. A brief mention needs to be made of the duties of a merchant banker in so far as it relates to the present case. SEBI (Merchant Bankers) Regulation, 1992 deals with the “due diligence” aspect of the matter. Regulation 5(b) reads as follows:
“A merchant banker shall always endeavour to ensure that all professional dealings are effected in a prompt, efficient and cost effective manner.”
Regulation 7(a) reads as follows:
“A merchant banker shall always endeavour to ensure that the investors are provided with true and adequate information without making any misguiding or exaggerated claims and are made aware of attendant risks before any investment decision is taken by them."
Regulation 9 reads as follows:
“A merchant banker shall abide by the provisions of the Act, rules and Regulations and which may be applicable and relevant to the activities carried on by the merchant banker.”
14.. We have carefully perused the letter of offer of the company and not less than 20 to 25 pieces of information have been mentioned in the letter of offer under the heading Management Perception. Therefore it is quite possible that this one item of one case pending at Varanasi against Rajan may not have been known even to the company. But it is clear from the order of the Enquiry Officer that it is Rajan who did not disclose the information and yet no action is taken against Mr. Rajan or the company but action is sought to be taken against the Lead Manager, the appellant herein, who has acted with promptitude and due diligence. No Lead Manager can be safe in such circumstances. If there was any fault, the fault lies entirely with the company and Mr. Rajan for not giving the information. The finding of the Enquiry Officer is categorical that it was Mr. Rajan, who did not disclose this information to the appellant. If that be so, it is not known how the appellant could have been faulted.
15. The finding of the Enquiry Officer on this aspect of the matter reads as follows:
“Although the company has not disclosed regarding the pendency of the criminal case during their discussion with the merchant banker, the merchant banker should have acted immediately atleast when the written complaint had reached him on 19/10/2001 when the issue was opened which contained verifiable facts as aforesaid. Thus, from the facts and circumstances, it is concluded that the merchant banker did not exercise due diligence, more so, when the criminal case is of serious nature disclosing serious offences of cheating and forgery against CMD of the issuer company.”
16. The learned counsel for the respondent submits, rather curiously, that as soon as the incomplete information was received from the complainant, the Lead Manager should have flown to Varanasi and found out whether any case was pending instead of asking Mr. Rajan. We cannot subscribe to such methods. The proper person that the Lead Manager should get in touch with is the company and the director against whom the case was pending. One must not carry the concept of “due diligence” to ridiculous levels. If the appellant had immediately taken it for granted that the information sent by the complainant is the gospel truth without verifying from the company or Mr. Rajan, it would have been guilty of due diligence. “Due diligence” means what it simply means. You have to be prompt and diligent in verifying the details. Diligence does not mean jumping the gun and complicating matters without verification. The learned counsel for the respondent rather curiously submitted that the disclosure should have been made before the issue closed on 15th of November 2001. If that was done without verification, as stated earlier the appellant would have been guilty of lack of due diligence. The job of the appellant is not to accept every allegation on face value but to verify from the company and person who has failed to disclose the information that is required to be disclosed as expeditiously as possible. That is due diligence. If the appellant had made a disclosure on its own without getting confirmation from Mr. Rajan and it turned out to be an erroneous information, the appellant certainly would have been liable for damages. SEBI ought to have known that the appellant had done everything within its power forthwith to verify the information given to it and SEBI also ought to have known, on a perusal of the letter of offer, that 30-40 disclosures have been made in the letter of offer. These are all entirely within the knowledge of the company and its directors. Lack of due diligence will arise only when the appellant was furnished with an information and that was suppressed in the letter of offer. No such material has been placed before the Tribunal. On the contrary, the finding of the Enquiry Officer clearly indicates that the appellant was not apprised of the criminal case during the due diligence enquiry with the company and its directors. The number of disclosures in the letter of offer also indicates that the appellant had done a good job.
17. We have carefully perused the letter of offer and every detail of the litigation amounting to 30 or 40 instances has been disclosed in the letter of offer of the company except for this case at Varanasi. As soon as this was brought to the notice of the appellant, it took corrective steps as expeditiously as possible with a sense of responsibility. We say with the sense of responsibility since the appellant took corrective steps on his own without verifying from the company and its directors as soon as the correct information was brought to the notice of the appellant by SEBI.
18. By no stretch of imagination can the conduct of the appellant be described as lacking in due diligence. A lot of time of the Enquiry Officer, the Chairman and this Tribunal has been taken in this case. This time could have been more profitably used for catching hold of the big sharks in security market who attempt to ruin the economy of the country. In this case, it appears, no action has been taken against the very person who did not disclose the information, which he ought to have disclosed, or against the company and yet action is taken against the Lead Manager, who promptly advised the exit option for non-disclosure. We are not suggesting that action be taken against Mr. Rajan or the company as it might have been a bona fide mistake. But what can the lead Manager do if Mr. Rajan or the company fails to provide the information.
19. As stated earlier, 12th of November 2001 is the cut off date. On 12th of November 2001 Mr. Rajan informs the appellant about the pendency of the criminal case with details. SEBI also writes a letter dated 9th of November, which reaches the appellant on 12th of November giving details of the criminal case. Therefore, we say 12th of November is the date from which the appellant has complete knowledge of the criminal case. The issue closed on 15th of November. On 13th of November the appellant wrote to the respondent to approve the draft letter of exit option. It was on 5th of December SEBI approved the draft letter. Immediately on 6th and 7th of December exit options were given to all the shareholders. If we count the period to run from 12th of November with regard to the full details of the criminal case, we do not see any lack of due diligence in the conduct of the appellant. It has acted with great promptitude right from 13th of November. The issue closed on 15th of November 2001 and the letter of SEBI approving the draft of the letter dated 29th of November 2001 came in the hands of the appellant on 5th of December. On the very next days, 6th and 7th of December letters were sent to all the shareholders offering an exit option on account of the non-disclosure by one of the directors of one criminal case. We are unable to hold that there was any fault with the Lead Manager. In fact, the Lead Manager has acted with due diligence and if anybody is to be faulted it is the company and Mr. Abhijit Rajan. Curiously no action is taken against them. A Lead Manager is required to employ reasonable skill and care but he is not required to begin with suspicion and to proceed in a manner of trying to detect a fraud or lie unless such information excites his suspicion or ought to excite his suspicion as a professional man of reasonable competence.
20. The Supreme Court with reference to disciplinary proceedings of the Bar Council of India and the State Bar Council pronounced that disciplinary proceedings must be sustained by higher degree of proof than that required in a civil suit, yet falling short of the proof required to sustain a conviction in criminal prosecution. There should be convincing preponderance of evidence.
21. A reference was also made to the judgment of the Delhi High Court reported in AIR
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1968 Delhi 283. The matter related to disciplinary proceedings against a Chartered Accountant under the Chartered Accountants Act. The Delhi High Court made a reference to a judgment of the Privy Council reported in AIR 1930 PC 144. The Privy Council pronounced that as a broad principle charges of professional misconduct must be clearly proved and should not be inferred from mere ground for suspicion however reasonable or what may be a mere error of judgment or indiscretion. The Privy Council further held that an enquiry in a serious case of professional misconduct should proceed on formulated charges not only in fairness to the person charged with professional misconduct but in order that the evidence may relevantly bear on the particular issue and the evidence should be carefully taken and judged according to the ordinary standard of proof. The Delhi High Court also relied on other pronouncements of court and came to the conclusion that there must be strong proof packed by evidence to hold a person guilty of misconduct as a Chartered Accountant. No other pronouncement of any court has been brought to our notice on the definition of “due diligence” but it can be safely said that lack of due diligence should run from the facts of each case and ultimately there can be no hard and fast rule as to what constitutes lack of due diligence. It depends entirely on the facts of each case. We however hold that before any person is found to have violated the concept of “due diligence”, there must be an enquiry and the finding must be sustained by a higher degree of proof than that required in a civil suit, yet falling short of the proof required to sustain a conviction in a criminal prosecution. There must be convincing preponderance of evidence (see AIR 1984 SC 110). This we state because a Lead Manager, if found guilty of lack of due diligence, can suffer penal consequences, which could adversely affect his business. 22. In the present case before us although the appellant had an interim order in its favour, it was submitted that he declined to do business as a Lead Manager during pendency of the appeal since the appellant wished to clear its name of the smear. 23. For the reasons stated above, we do not find any justification for holding the appellant guilty of violating any Regulation or provisions of the Act. We, accordingly, set aside the impugned order passed by the respondent and the order passed by the Enquiry Officer. 24. There will be no order as to costs.