The Securities Appellate Tribunal (SAT) has issued its decision overturning an order of SEBI’s adjudicating officer that had found Enam Securities to have violated securities laws in connection with the IPO of Yes Bank.
One of the key issues in contention was whether Rabobank ought to have been disclosed as a “promoter” of Yes Bank. On facts, while the application to the Reserve Bank of India (RBI) for a banking licence recognised Rabobank as a co-promoter of the issuing bank, the prospectus filed with SEBI pursuant to which securities where issued did not disclose Rabobank as a promoter. After analysing the provisions of the erstwhile SEBI (Disclosure and Investor Protection) Guidelines, 2000, SAT came to the conclusion that the disclosure was indeed appropriate. It noted:
The appellant has been successful in demonstrating as to why Rabobank was shown as a co-promoter in its application for banking license with the RBI. Simply because Rabobank was shown as a copromoter of Yes Bank for getting a banking license from the RBI will not ipso facto make it a promoter for the purposes of DIP guidelines or other regulations issue by the Board. To bring Rabobank within the promoter category, it must satisfy the definition of promoter as given in the DIP guidelines. There is no general definition of promoter in the DIP guidelines.
Although the SAT’s reasoning largely involves analysis of the erstwhile DIP Guidelines, they are likely to continue to have some impact under the SEBI (ICDR) Regulations that currently govern disclosures.
The fact that SEBI had not raised its concern while reviewing the draft red herring prospectus or other subsequent filings regarding the company seemed to weigh heavily on SAT:
If the Rabobank falls within the promoter category, we fail to understand how such a vital aspect escaped notice of the regulator while clearing the DRHP where Rabobank is not shown as a promoter. We also fail to understand as to why the regulator continued to accept financial statements, quarter after quarter, year after year, without Rabobank being shown in the promoters’ category and why no action was initiated against Yes bank for making incorrect disclosure in the financial statements. In this background, no fault can be found with the merchant banker of exercising due care and diligence when Rabobank was not shown in the promoter category.
Such an approach likely places a heavier burden on SEBI to scrutinize draft offer documents more carefully when filed with it.
SAT also did not find a failure on the part of Enam Securities on other aspects of the IPO process involving Yes Bank, including on discretionary allocation of shares in the qualified institutions category and other alleged irregularities in the allotment process.
Simply because Rabobank was shown as a copromoter of Yes Bank for getting a banking license from the RBI will not ipso facto make it a promoter for the purposes of DIP guidelines or other regulations issue by the Board – interesting that the regulators are so divorced – that a representation to one is not necessarily a representation to the other. So one could potentially take diametrically opposite stances and not be penalised for it.
Reaction (strong, albeit impromptu)
"Such an approach likely places a heavier burden on SEBI to scrutinize draft offer documents more carefully when filed with it."
Going by one's instant understanding, having regard to the seriousness of the failure on the part of the concerned regulatory authority as per the findings given, the SAT can only be regarded to have recorded its disapproval in the mildest terms possible.
This is noted to bring to focus two very good but intriguing points of poser: –
1. why the significance of compliance with any so-called 'disclosure' requirement, as envisaged and laid down by law/ in a rule of law, in a statute, or even in any rule or regulation having the same force as a statute, having a specific laudable objective, ought not to have been ignored or overlooked but been seriously / diligently taken care of, and been strictly followed /enforced?
2. is this not one of such piquant instances where a regulatory authority has failed to realize as to why any failure on its part to exercise the utmost diligence, as expected of it in the discharge of its vested onerous duties and responsibilities, could result in the defeat , suicidal in nature, of the very objective underlying any such 'rule' in place in its own rules book ?.
in this context, one is obliged to sadly recall several such bizarre instances that have come to light lately, of dereliction of duty on the part of, besides SEBI, several other regulatory authorities as well, floated and in existence.
Point to ponder: Does the idea of a super regulatory authority, for overseeing such regulatory authorities so as to having an effective control by closely monitoring their functioning, as known to have been mooted in certain quarters, deserves a serious consideration, sooner than later ?
(to be continued)
It is one thing for people and organisations to ask for copies or filings but entirely another thing to ensure what is received or filed is intelligently scrutinized and commented or acted upo. Perhaps time to think of building or strengthening capacity in regulatory agencies.
Prof Bala
@Prof. Bala:
Beg your pardon! I, for one, am unable to connect and reason out or decipher as to how “building or strengthening capacity in regulatory agencies." as advocated for, could in any way help in ensuring that "people and organisations" do not fail to "what is received or filed is intelligently scrutinized and commented or acted upon".
May I expect and hope to be enlightened on the nagging point of doubt!
A million apologies if my brief post did not fully convey what I intended. Agreeing with the Sat order and also Mr Swamy's detailed analysis. I meant to say that with adequate and appropriate capacity, Sshave oils have avoided it's defective order and also it's continuing acceptance without comment the bank's quarterly filings. I am reminded of the extensive work done by the Chief Accoqfdutnt's office and oth such functions at SEC in monitoring filings and other financial reportsa of listed companies fain the US. I was oaf flay suggesting that regulators like SEBI should strengthen their professional and forensic capabilities to cope with the kind of effective regulatory ovsight and disciplining that capital markets will continue to require. I hope this clarifies my comments.i
Thanks to Professor for the helpful clarification.I now realize that both not being on the same wave length was the cause of my confusion and doubt raised. Sorry! I have no knowledge of or have, as always been the case with me,means of knowing the 'extensive work done', in house @RBI or SEBI, or elsewhere. That is seen to explain the difference in wave length.