Sebi slaps Rs1-cr fine on 6 merchant bankers for disclosure lapses in CARE IPO

Capital market regulator Securities and Exchange Board of India (Sebi) has imposed a Rs1-crore penalty on the merchant banking arms of SBI, ICICI, Kotak Mahindra, IDBI, DSP Merrill Lynch and Edelweiss groups for ''suppression of material facts'' during the public offer of rating agency CARE two years ago.

Sebi in its order took a strong view about the violation of norms as also the code of conduct for merchant banks and book-running lead managers (BRLMs) for public issues, by making selective disclosures by the book-running lead managers.

The lead managers failed to disclose in the prospectus the RBI rule that FIIs investing in public issues of non-banking financial companies undertaking non-fund-based activities, which include credit rating agencies, should bring in $0.5 million upfront irrespective of the level of investment brought in by the foreign entity.

It was thus observed that the disclosure in the Red Herring Prospectus did not mention the conditional nature of the exemption granted by the RBI to non-resident investors while exempting them from obtaining a NOC from their respective regulators before participating in the offer.

It was also observed that even the factual aspect of filing of letter dated 5 October 2012 with RBI subsequent to receipt of RBI's letter dated 26 September 2012, wherein it was brought out that the investment by the FIIs, NRIs and QFIs participating in the offer shall not be FDI and the conditions applicable to FDI, including minimum capitalisation norms, shall not be applicable to the offer, was also not disclosed in the RHP. 

The six merchant banks have been asked to shell out Rs1 crore, which is the maximum penalty applicable for violation of disclosure related norms in IPO documents, within 45 days.

''While making disclosures in the Red Herring Prospectus, the BRLMs cannot pick and choose some material facts that they prefer to disclose and suppress some material facts,'' Sebi said in its 86-page order.

''If material facts are suppressed or distorted as in the extant case, the very safety and integrity of the securities market would become a cause of concern for the regulators and the investors.''

The IPO came in December 2012, prior to which these six bankers had filed a red herring prospectus for the public issue involving sale of nearly 7.2 million shares.

In this case, the bankers had made disclosure of one of the conditions under the FDI route in the RHP, terming it as ''a material disclosure'' because CARE had specifically sought such approval from RBI.