India (SEBI), has imposed a penalty of `2.5 million (US$55,000) on investment bank Enam Securities Private Limited (Enam), for failing to exercise due diligence as book running lead manager in relation to Yes Bank’s initial public offering.
SEBI conducted an inspection of Enam’s books and records in August 2005 to examine its role in public issues. In June 2007, based on this inspection, a notice was issued to Enam requiring it to show cause as to why an inquiry should not be held against it and why it should not be penalized under section 15HB of the SEBI Act, 1992, for violating the provisions of regulation 13 of the SEBI (Merchant Bankers) Regulations, 1992 and the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (DIP Guidelines).
During the course of proceedings, Enam filed written responses on various occasions in 2009 and 2010 and was then given the opportunity for personal hearings. Enam’s submissions were considered by SEBI in its order for a penalty. SEBI observed that Enam failed to disclose that Rabobank International Holding BV was a promoter in connection with Yes Bank’s IPO. It also observed that Enam accorded preferential treatment to certain foreign institutional investors for the allotment of shares pursuant to the IPO by Yes Bank.
In addition, SEBI noted that Enam did not fulfil its duties as a post-issue lead merchant banker to the public issue of Bharti Shipyard and failed to redress investor grievances as it was supposed to have done.
It is important to note that the SEBI’s order discusses in detail “promoter” issues, which have always remained a matter of debate.
It remains to be seen whether the order will develop jurisprudence on the subject. While regulations applicable to merchant bankers help police and govern these bankers, it is through orders like this that SEBI clearly highlights its view on the role and responsibility of merchant bankers at the time of public issues.
From SEBI’s perspective, merchant bankers such as Enam should be able to balance the aspirations of an issuer company while also fulfilling their duty of protecting the interest of the public at large by exercising due care and caution.
While this order may still be challenged in the Securities Appellate Tribunal, it signals the securities regulator’s intent to strengthen its role towards investor protection and also underscores the obligations of market intermediaries when dealing with public issues.
The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
