SEBI | ‘Diligence is due diligence done diligently’-Impliedly volumed | Recommendations revised attributing to the gravity of the lapses

Securities Exchange Board of India (SEBI): G Mahalingam, (Whole Time Member) while revising the recommendations made by the Designated Authority (DA) considering the serious lapses of the Noticee (Book Running Lead Manager) in regards with carrying out due diligence, were taken note of. Resultantly, Noticee is prohibited from accepting any new clients for a period of three months.

The present matter was brought out from an investigation carried out by SEBI into the IPO of Sudar Industries Ltd. (SIL), for which Ashika Capital Limited (Noticee) was the Book Running Lead Manager (BRLM), in which certain lapses were found on account of BRLM. In the instant case the Delegated Authority had observed that the issuer company did not disclose the transactions of Addon Exports, A R Fabrics, Elim Traders, RJ Traders and Shalom Fashion, which were proprietorship firms of employees of SIL and persons connected to it, in the related party transaction. The Noticee contended that there was nothing on record that could have raised an iota of suspicion that the proprietorships in question were connected with the employees and there were no standard guidelines for the due diligence process.

Issues raised were:

  1. Non-disclosure of Independent director’s involvement in key strategic and financial decisions
  2. Heavy dependence on few buyers/suppliers and non-disclosure of the buyers and suppliers being related to the promoters and the promoter group
  3. Wrong disclosures made in the offer document regarding KMPs
  4. Non – Disclosure of Related Party Transactions

The enquiry report indicated clearly that SIL was very much dependent on its clients for around 80% of its revenues and further established a cogent pecuniary relationship.

It was thus held, “…It was further noted that the Noticee had merely relied on an undertaking and information given by the issuer company instead of independently verifying the facts by examination of documents. Thus, the merchant banker in the present case has mechanically disclosed the information provided by the issuer without exercising reasonable diligence to ensure adequate, true and fair disclosures in the prospectus. The Noticee by not independtly exercising adequate diligence has deprived the investors of material information to enable them to make a balanced and well informed decision, which clearly breached the obligations imposed…”.

While stressing on the need for diligence, a landmark judgment of the Supreme Court was referred to, Chander Kanta Bansal V. Rajinder Singh Anand (2008) 5 SCC 117 “…According to Oxford Dictionary (Edn. 2006),the word “diligence” means careful and persistent application or effort. “Diligent” means careful and steady in application to one’s work and duties, showing care and effort. As per Black’s law Dictionary (18thEdn), “Due Diligence” means the diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation. According to Words and Pharses by Drain-Dyspnea (PermanentEdn.13-A)“due diligence”, in law, means doing everything reasonable, not everything possible.“ Due Diligence” means reasonable diligence. It means such diligence as a prudent man would exercise in the conduct of his own affairs…”.

Further stated that, “…I find that the recommendation is not commensurate with the gravity of the lapses/acts of negligence attributable to the Noticee. Hence, I am inclined to appropriately revise the recommendation and pass suitable directions…”.

[Sudar Industries Limited, In re, 2021 SCC OnLine SEBI 62, decided on 17-03-2021]

Join the discussion

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.