Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Industry / Banking/  Sebi fines six merchant banks for disclosure lapses in CARE IPO
BackBack

Sebi fines six merchant banks for disclosure lapses in CARE IPO

Kotak Mahindra Capital, DSP Merrill Lynch, Edelweiss Financial Services, ICICI Securities, IDBI Capital Market Services and SBI Capital Markets penalized

The six merchant banks have been asked to pay a fine of Rs1 crore—the maximum penalty applicable for violation of disclosure related norms in IPO documents—within 45 days. Photo: MintPremium
The six merchant banks have been asked to pay a fine of Rs1 crore—the maximum penalty applicable for violation of disclosure related norms in IPO documents—within 45 days. Photo: Mint

Mumbai: The Securities and Exchange Board of India (Sebi) has penalized six leading merchant bankers for alleged suppression of material facts when they managed the initial public offer (IPO) of rating company Credit Analysis and Research Ltd (CARE Rating) in 2012.

The capital market watchdog has imposed the maximum penalty of 1 crore prescribed under Section 15 HB of the Sebi Act against Kotak Mahindra Capital Co. Ltd, DSP Merrill Lynch Ltd, Edelweiss Financial Services Ltd, ICICI Securities Ltd, IDBI Capital Market Services Ltd and SBI Capital Markets Ltd.

The bankers will be jointly and severally liable to pay the monetary penalty, which implies that either one entity pays the full amount or all can share the burden.

“While making disclosures in the RHP (red herring prospectus), the BRLMs (book running lead managers) cannot pick and choose some material facts that they prefer to disclose and suppress some material facts," said the order.

The so-called red herring prospectus is a preliminary document filed by a company with the market regulator before an IPO.

According to Sebi, CARE Rating received a letter from the Reserve Bank of India (RBI) in September 2012, agreeing to exempt non-resident investors from the requirement of obtaining a No Objection Certificate (NoC) from their respective regulators before participating in the IPO, subject to certain conditions.

One of the conditions was that CARE Rating will have to adhere to the minimum capitalization norms applicable to non-banking financial companies (NBFCs).

Subsequent to RBI letter, CARE Rating responded by stating that investments by foreign institutional investors (FIIs), non-resident investors and qualified foreign investors (QFIs) will not be deemed foreign direct investment (FDI) and that minimum capitalization norms for NBFCs would not be applicable to the company.

A limited disclosure to this effect was made in the red herring prospectus, which stated that RBI had exempted non-resident investors from obtaining NoC from their respective regulators before participating in the offer.

Sebi has highlighted the fact that the conditional nature of the exemption granted by RBI to non-resident investors was not disclosed in the RHP. Also, the fact that the company wrote to RBI saying investments by FIIs, QFIs and non-resident investors would not be considered as FDI was not disclosed.

According to the Sebi order, the bankers had been of the view that conditions related to minimum capitalization norms were not relevant for disclosure in the prospectus and disclosure about the exemption for eligible non-resident investors from having to obtain an NoC was sufficient for investors to take an informed investment decision.

The order may be an indication that the regulator has decided to take sterner action against merchant bankers for deliberately suppressing material information, said Vaneesa Abhishek, a lawyer and a former legal officer at Sebi.

“The two-fold test for due diligence laid down by the adjudicating officer hinges on reasonableness and clearly defines the due diligence obligation on merchant bankers. We will have to wait and see if Sebi applies this test in other cases," said Abhishek.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 28 Nov 2014, 06:08 PM IST
Next Story footLogo
Recommended For You
Banking Stocks
₹1,053.6-0.5%
₹1,440.70.52%
₹1,0841.08%
₹122.751.3%
₹734.052.53%
Switch to the Mint app for fast and personalized news - Get App