P. K. Malhotra (Oral)
1. The appellants in this appeal are aggrieved by the order dated September 7, 2012 passed by the whole time member of the Securities and Exchange Board of India (the Board) confirming earlier ex-parte ad interim order dated December 28, 2011 restraining the appellants from taking up any new assignment or involvement on any new issue of capital including Initial Public Offerings (IPO), follow-on issue etc. in the securities market, in any manner, till further directions. It is prayed that the directions contained in the impugned order against the appellants be set aside and pending the hearing and final disposal of the appeal, the operation and implementation of the impugned order may be stayed.
2. The facts leading to the passing of the impugned order, in brief, are that RDB Rasayans Limited (the company) came out with an IPO of shares during the period September 21, 2011 to September 23, 2011. The Board noticed wide fluctuations in the share price of the company on the first day of listing of its shares. The preliminary investigations carried out by the Board interalia revealed that the company had deviated from the stated objectives of the IPO. It was also noticed by the Board that the offer document contained various misstatements and some vital information was missing. It was also noticed by the Board that the company had mis-utilized the IPO proceeds to fund trading clients who had incurred losses on account of their trading in the shares of the company on the day of listing.
3. The appellant no. 1 is registered with the respondent Board as a category one merchant banker and was merchant banker for the IPO of the company and acted as the lead manager to the issue. Appellant no. 2 is the Managing Director and appellant no. 3 is the Vice-President and Company Secretary of appellant no. 1. It is alleged by the Board that there is failure on the part of appellant no. 1 to exercise due diligence and failure to maintain satisfactory standards in all the aspects of the offering, veracity and adequacy of the disclosures in the prospectus of the company. The Board found that the company, in its board meeting dated September 12, 2011 had passed a resolution to grant some of its surplus funds by way of loan to RDB Realty, one of its group company, to the extent of ` 50 crores for the business purpose. The consent of shareholders was also accorded in the extra ordinary general meeting held on September 28, 2011. This fact was not disclosed in the RHP and the prospectus. The Board came to a prima-facie conclusion that this omission amounts to lack of due diligence on the part of the appellants in discharging its duty as a merchant banker and, therefore, pending investigation, it passed an ex-parte ad interim order on December 28, 2011 prohibiting the appellants from taking up any new assignment or involvement in any new issue of capital including IPO, follow-on issue etc. from the securities market until further directions. The said order also contains certain directions under Section 11, 11A and 11B of the Securities and Exchange Board of India Act, 1992 (the Act) against the company as well as certain other entities. The order was also treated as a show cause notice and the appellants were given an opportunity to file their objections.
4. Inspite of the reply filed by the appellants and personal hearing granted to them, the Board failed to pass any order. The appellants approached this Tribunal for setting aside the impugned order. By our order dated August 29, 2012, we disposed of the appeal directing the Board to complete the investigations, qua the appellants, within a period of two weeks and pass appropriate orders. In compliance with the said directions, the Board passed an order on September 7, 2012, confirming the directions against the appellants issued vide ex-parte ad interim order dated December 28, 2011.
5. It is the case of the appellants that the impugned order merely confirmed the interim order on the ground that investigations are pending. No reasons are recorded by the respondent Board for continuation of the interim order apart from repetition of what was said in the ex-parte ad interim order. The order suffers from non application of mind and fails to consider relevant material and submissions made by the appellants. The impugned order does not furnish any evidence or material to justify continuation of the interim order. Learned counsel for the appellants submitted that despite the fact that nine months have elapsed since passing of the order stating that the investigations are pending, the respondent Board has failed to bring any material on record to prove the charge of negligence or non exercise of due diligence by the appellants in its duty as a merchant banker in handling the IPO of the company. It was further stated that the whole time member of the Board himself has acknowledged that there is an omission on the part of the company to inform the merchant banker about the board meeting held on September 12, 2011 and the extra ordinary general meeting held on September 28, 2011. The appellants have already been deprived to do their business in the garb of interim order for a long period and there is no justification to continue the impugned order pending investigations.
6. Learned senior counsel for the respondent Board supported the order passed by the whole time member on the ground that the submissions made by the appellants in response to the show cause notice were considered before passing the impugned order. The investigation is still on and a final view on further course of action in the matter will be taken by December 31, 2012. Therefore, no interference in the impugned order is call for.
7. After hearing learned counsel for the parties and perusing the material available on record, we find that a large number of parties are involved in the matter and the investigation in the matter is continuing, therefore, we are, not inclined to intervene in the investigation at this stage. However, in so far as continuation of the interim order against the appellants is concerned, we find that the only lapse noted against the appellants relates to information regarding the board meeting of the company held on September 12, 2011 and extra ordinary general meeting held on September 28, 2011. The impugned order itself records that the company had failed to bring it to the notice of the appellants. It is further seen that the draft red herring prospectus was filed by the appellants as early as on March 20, 2010 i.e. much prior to the happening of these events. The appellants have already undergone a restraint for more than nine months pursuant to the interim order. A final view on the conduct of the appellants can be taken on completion of investigation. It is settled legal position that interim orders are passed on the basis of prima facie findings which are tentative and such orders are passed as a temporary arrangement to preserve the status quo till the matter is decided finally to ensure that the matter does not become either infructuous or a fait accompli before the final hearing. No such case is made out against the appellants in the impugned order. There is an acknowledgment on the part of the Board that the information about the board meeting of the company, held on September 12, 2011 and extra ordinary general meeting held on September 28, 2011 was not provided by the company to the appellants. The appellants have already suffered restraint for a period of nine months and if ultimately found guilty of not exercising due diligence, appropriate order can be passed against them on conclusion of the proceedings. The balance of convenience, therefore, lies in favour of the appellants. Having regard to the facts and circumstances of the case, the equity of the case demands that the interim order against the appellants be vacated pending investigation by the Board. We, therefore, set aside the impugned order confirming the ex-parte ad interim order against the appellants. The Board is directed to complete the investigation and take appropriate decision qua the appellants by December 31, 2012. We may make it clear that nothing stated herein should be taken as an expression of opinion by us on any of the issues raised before us by the parties.
No costs.