BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date of Decision : 17.04.2018
Appeal No. 116 of 2018
Penta Gold Limited
30, 1st Floor, Champa Gully,
Zaveri Bazar,
Mumbai – 400 002. Maharashtra …Appellant
Versus
[[
National Stock Exchange of India Limited
Exchange Plaza, Plot No. C/1, G Block,
Bandra Kurla Complex,
Bandra (East),
Mumbai – 400 051. …Respondent
Mr. P.N. Modi, Senior Advocate with Mr. Neville Lashkari, Ms. Purti
Minawala, Ms. Poornima Balasubramaniam and Mr. Kunal Mehta,
Advocates i/b Crawford Bayley and Co. for the Appellant.
Mr. Rashid Boatwalla, Advocate with Mr. Rahul Jain, Advocate i/b MKA &
Co. for the Respondent.
Mr. Vishal Kanade, Advocate with Mr. Mihir Mody and Mr. Nishant
Upadhyay, Advocates i/b K Ashar & Co. for SEBI on notice.
CORAM : Justice J.P. Devadhar, Presiding Officer
Dr. C.K.G. Nair, Member
Per : Justice J.P. Devadhar (Oral)
1. Where a public issue is undersubscribed, whether, the underwriters to
the public issue are entitled to discharge their obligation contained in
regulation 106P of the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR
Regulations’ for short) by procuring applications from third parties is the
basic question raised in this appeal.
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2. In the present case, Inventure Merchant Banker Services Private
Limited (‘Merchant Banker’ for short) was appointed to act as its lead
Merchant Banker to the public issue of the appellant company. Under the
public offer, 36 Lakh equity shares of the company having face value of Rs.
10 each at a price of Rs. 37 per share aggregating to Rs. 1332.00 Lakh were
offered to the public in terms of Chapter XB of ICDR Regulations. On
September 26, 2017 an Underwriting Agreement was executed between the
appellant company, the merchant banker and GCM Securities Ltd.
(underwriter and market maker) wherein the merchant banker had
underwritten 15% of the issue size and GCM Securities Ltd. had
underwritten 85% of the issue size.
3. The public issue of the appellant company opened for subscription on
March 23, 2018 and closed on March 27, 2018 wherein the issue was
subscribed only to the extent of 55.42%. With a view to determine the
underwriters obligation in relation to unsubscribed shares and to determine
the basis for allotment of shares, a meeting was held on April 5, 2018
between the company, merchant banker and Karvy Computershare Pvt. Ltd.
(Registrar to the Issue). In the minutes of the meeting dated April 5, 2018 it
was recorded that unsubscribed portion comes to 16,14,000 shares and that
the underwriters had subscribed to those 16,14,000 shares by procuring
applications from 8 investors named therein.
4. On furnishing a copy of the minutes of the meeting dated April 5,
2018, Mr. Lokesh Bhandari, Manager of National Stock Exchange of India
Limited (‘NSE’ for short) sought explanation from the appellant as to why
the undersubscribed portion of the issue has been subscribed by 8 investors
and not by the underwriters themselves. The appellant explained that as per
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the Model Underwriting Agreement prescribed by SEBI it was open to the
underwriters to procure subscription from the investors. In support of the
above contention reliance was placed on the decision of BSE in case of
Powerhouse Fitness and Realty Ltd. wherein BSE had allowed such
procurement of subscription by the investors.
5. Rejecting the contention of the appellant, the Manager of NSE by the
impugned communication dated April 6, 2018 informed the appellant that
the Exchange has not approved the basis of allotment because
undersubscribed shares have been subscribed by 8 investors and not by the
underwriters themselves as set out in the offer document. Challenging the
said communication, present appeal is filed.
6. Before considering the rival contentions, it would be appropriate to
quote Regulation 106P of the ICDR Regulations which reads thus:-
Underwriting by merchant bankers and underwriters.
“[106P]. (1) The issue made under this Chapter shall be
hundred per cent. underwritten.
Explanation- The underwriting under this regulation shall be
for the entire hundred percent of the offer through offer
document and shall not be restricted upto the minimum
subscription level.
(2) The merchant banker/s shall underwrite at least fifteen
per cent of the issue size on his/ their own account/s.
(3) The issuer in consultation with merchant banker may
appoint underwriters in accordance with Securities and
Exchange Board of India (Underwriters) Regulations, 1993
and the merchant banker may enter into an agreement with
nominated investor indicating therein the number of specified
securities which they agree to subscribe at issue price in case
of under-subscription.
(4) If other underwriters fail to fulfill their underwriting
obligations or other nominated investors fail to subscribe to
unsubscribed portion, the merchant banker shall fulfill the
underwriting obligations.
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(5) The underwriters other than the merchant banker and the
nominated investors, who have entered into an agreement for
subscribing to the issue in case of under-subscription, shall
not subscribe to the issue made under this Chapter in any
manner except for fulfilling their obligations under their
respective agreements with the merchant banker in this
regard.
(6) All the underwriting and subscription arrangements made
by the merchant banker shall be disclosed in the offer
document.
(7) The merchant banker shall file an undertaking to the
Board that the issue has been hundred per cent. underwritten
along with the list of underwriters and nominated investors
indicating the extent of underwriting or subscription
commitment made by them, one day before the opening of
issue.”
7. In the present case, the underwriting agreement executed on
September 26, 2017 in accordance with the model underwriting agreement
prescribed by SEBI specifically records that the underwriters agree to
underwrite and/or procure subscription for the issue of shares in case the
issue is undersubscribed. Admittedly the said underwriting agreement was
vetted by NSE before the public issue was opened.
8. Thus on one hand, regulation 106P(2) of ICDR Regulations require
the merchant banker to underwrite at least 15% of the issue size on his own
account and further regulation 106P(4) provides that if the other
underwriters or the nominated investors fail to fulfill their obligation then
the merchant banker shall fulfill their underwriting obligations. On the other
hand, the model underwriting agreement prescribed by SEBI in the year
1993 which continues to be in force till date permits the underwriters to
procure applications from the investors to subscribe to the unsubscribed
shares if the issue is undersubscribed. The model underwriting agreement
prescribed by SEBI further provides that in the event of failure by the
underwriters to subscribe to the shares, the issuer company shall be free to
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make arrangement with one or more persons to subscribe to such shares
without prejudice to the rights of the issuer company to take such measures
and proceedings as may be available to it against the underwriters including
the right to claim damage for any loss suffered by the company by reason of
failure on part of the underwriters to subscribe to the shares.
9. In the present case the underwriting agreement executed by and
between the appellant and the underwriters was in accordance with the
model underwriting agreement prescribed by SEBI and the said
underwriting agreement was admittedly vetted by NSE. Having vetted the
underwriting agreement executed by the appellant company and the
underwriters which is in consonance with the model underwriting agreement
prescribed by SEBI, NSE is not justified in rejecting the basis of allotment
submitted by the appellant on ground that the underwriters have failed to
subscribe to the unsubscribed shares as contemplated under regulation 106P
of the ICDR Regulations.
10. In these circumstances, in the interest of investors and securities
market, we dispose of the appeal by passing the following order:-
(a) The impugned communication of NSE dated April 6, 2018 is
quashed and set aside;
(b) Appellant is at liberty to ascertain from the underwriters
within 3 days from today as to whether they are ready and
willing to discharge their obligation set out in regulation 106P
of the ICDR Regulations and intimate the same to the NSE
immediately thereafter.
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(c) If the underwriters express their inability to discharge their
obligation under the ICDR Regulations, then the appellant
company be permitted to take into consideration the shares
subscribed by the 8 investors and proceed to complete the
public issue process.
(d) If the underwriters agree to discharge their obligation set out
in the ICDR Regulations, then, in the peculiar facts of present
case, no action need be taken against the underwriters.
11. Before concluding we deem it proper to bring to the notice of SEBI
that there is no clarity between the ICDR Regulations and the model
underwriting agreement prescribed by SEBI in the year 1993 (which is still
in operation) in relation to the obligations to be discharged by the
underwriters. Therefore, it would be just and proper that SEBI addresses
itself on the above issue expeditiously and ensure that there is clarity in
relation to the obligations to be discharged by the underwriters.
12. Appeal is disposed of in the above terms with no order as to costs.
Sd/-
Justice J.P. Devadhar
Presiding Officer
Sd/-
Dr. C.K.G. Nair
Member
17.04.2018
Prepared and compared by:msb
