WTM/GM/EFD DRA-1/12/FEB/2017. Case: In Re: Brooks Laboratories Ltd. Vs. Securities and Exchange Board of India

Case NumberWTM/GM/EFD DRA-1/12/FEB/2017
Party NameIn Re: Brooks Laboratories Ltd. Vs
JudgesG. Mahalingam, Whole Time Member
IssueSecurities And Exchange Board Of India Act, 1992 - Sections 12(3), 19
Judgement DateFebruary 09, 2017
CourtSecurities and Exchange Board of India

Order:

G. Mahalingam, Whole Time Member

Background:

1. Hon'ble Securities Appellate Tribunal vide order dated March 3, 2015, in Appeal No. 189 of 2014, set aside SEBI order dated 10th June, 2014 against D & A Financial Services (P) Limited on the following ground:-

".....the Appellant was not put to notice regarding some of the issues which are held against the Appellant in the impugned order, the impugned order may be quashed and set aside and the matter may be remanded back for fresh decision to be passed by the WTM of SEBI after issuing a fresh show-cause notice to the Appellant."

2. In compliance with the aforesaid direction of Hon'ble Securities Appellate Tribunal, SEBI issued a fresh Show Cause Notice (SCN) dated March 3, 2016 enclosing a copy of report dated May 15, 2013 submitted by the Designated Authority (DA) against D & A Financial Services Private Limited in the matter of Brooks Laboratories Limited (Brooks/company). D&A Financial Services Private Ltd. (hereinafter referred to as "Noticee") was the Book Running Lead Manager ("BRLM") for the IPO of Brooks.

3. In the SCN dated March 3, 2016, it was stated that the DA in his report found that the noticee has violated Regulation 64 (1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ('ICDR Regulations') and Regulation 13 read with Clause 4 of the Code of Conduct as specified under Schedule III of SEBI (Merchant Bankers) Regulations, 1992 ('Merchant Bankers Regulations') by relying on the unsigned draft minutes and not independently exercising due care and diligence to verify the same. The DA accordingly recommended that the noticee may be warned not to repeat such irregularity in future.

4. In the said SCN, it was further stated that though the DA has given the benefit of doubt with respect to other allegations contained in the SCN dated December 21, 2012, upon considering the records and the report of the DA, the Competent Authority was of the prima facie view that the recommendation of the DA as given in the report dated May 15, 2013 was not commensurate with the gravity of the alleged lapses and violations of securities laws by noticee and a higher penalty was warranted. In view of the same, it was alleged afresh in the aforesaid SCN that the noticee has violated Regulations 64 (1) and 8 (2) (b), (e) and (f) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and regulation 13 read with Clauses 1, 2, 3, 4, 6, 7 & 21 of the Code of Conduct as specified under Schedule III of SEBI (Merchant Bankers) Regulations, 1992.

5. In response to the SCN dated March 3, 2016, the noticee sent a reply dated September 21, 2016 and appeared for personal hearing on December 15, 2016 during which the noticee was represented by Mr. Dinesh Agnani, Senior Advocate alongwith Ms. Leena Tuteja, Advocate, Mr. M.K. Doogar, the Promoter - Director of the noticee, Mr. Dinesh Kaushik, the Representative of the noticee and Mr. Balakrishnan Iyer, the Manager of the noticee.

Charges alleged by DA in the SCN dated December 21, 2012:

6. Primarily the allegations against the noticee in the SCN dated December 21, 2012 are as follows:-

"(a) The Noticee as BRLM for the IPO of Brooks prepared the Red Herring Prospectus (RHP) dated August 3, 2011 by relying on the unsigned draft minutes of Brooks in respect of Inter Corporate Deposits (ICDs). It was alleged that the noticee merely relied upon the documents provided by Brooks and failed to independently exercise due care and diligence to verify the facts regarding the issue of ICDs.

(b) The Noticee has disclosed, in the RHP dated August 3, 2011, the names of the suppliers who are based in India. The name of Neo Power, a foreign supplier, to whom the contract was given later on was not mentioned in the RHP. This is despite the fact that Brooks changed the procurement process from indigenous suppliers to a foreign supplier and paid ` 13.97 crore in advance before the RHP dated August 3, 2011. The Noticee did not disclose such important information in the RHP/Prospectus which misled the investing public. The Noticee, therefore, had not adopted the established professional way of functioning and failed to exercise due care and diligence.

(c) M/s. Syal & Associates had given a quotation of ` 12.20 crores for construction of building and the same was disclosed in the offer document. Despite this quotation being lower, the management of Brooks went ahead and appointed Suryamukhi Projects Pvt. Ltd. (Suryamukhi) as a project contractor in place of Syal & Associates, and paid the whole of ` 15.30 crores in advance to it for project work, without the infrastructure being developed at the project site. The Noticee did not disclose such information in the RHP/Prospectus that the project work was awarded to Suryamukhi.

(d) Further it is alleged that the noticee issued three due diligence certificates during the process of IPO which were not in consonance with the aforesaid facts:

(i) The Noticee vide letter dated August 3, 2011 has submitted the due diligence certificate under Regulation 8(2)(b) of ICDR Regulations, stating that - "the said Red Herring Prospectus contains all the material disclosures in respect of the issuer as on the said date."

(ii) The Noticee vide letter dated August 12, 2011 has submitted the due diligence certificate under Regulation 8(2)(e) of ICDR Regulations, stating that - "This is to certify that all the material disclosures in respect of the issuer as on the date of opening of the issue have been made through the Red Herring Prospectus registered with the Registrar of Companies on August 3, 2011."

(iii) The Noticee vide letter dated August 18, 2011 has submitted the due diligence certificate under Regulation 8(2)(f) of ICDR Regulations, stating that - "This is to certify that all the material disclosures in respect of the issuer as on the date of the issue have been made through the Red Herring Prospectus registered with the Registrar of Companies on August 3, 2011."

In view of the above, it was alleged in the SCN dated December 21, 2012 that the noticee had violated regulations 8 (2) (b), (e) & (f) and 64 (1) of the...

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