 "Sebi imposes Rs 2.5 cr fine on Electrosteel, IPO bankers")
Electrosteel group incidentally has also been named in the coal scam and the Sebi order follows its probe into complaints that the company did not disclose in IPO documents that its proposal for an iron ore mine in Jharkhand was rejected by the Ministry of Environment and Forest.
The matter pertains to the IPO of Electrosteel Steels Ltd (ESL), promoted by Electrosteel Castings Ltd, in September 2010, for which Axis Capital, SBI Capital Markets and Edelweiss Financial Services were the Book Running Lead Managers. Sebi has imposed a fine of Rs 1 crore on the three bankers, a penalty of another Rs 1 crore on the issuer company ESL and of Rs 50 lakh on the listed promoter company ECL.
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After receiving complaints, Sebi had sought comments from ESL and the BRLMs for failing to ensure disclosure in IPO papers regarding rejection of the proposal for forest clearance of Kodolibad Iron ore mine.
Further comments were also sought from ECL, the listed promoter company of ESL, for the failure to disclose the material event regarding rejection of forest clearance for iron ore mine by MoEF to the stock Exchanges for onward dissemination to the shareholders.
From the replies, it was observed that the in-principle approval for ECL's proposal for diversion of forest land for Kodolibad Iron Ore Mine was rejected by MoEF. It was further observed that post the said rejection, ECL had requested the State Government to recommend its proposal to MoEF again, and subsequently, MoEF had granted in-principle approval to ECL for diversion of forest land for the purpose of the iron ore mine, subject to fulfillment of 29 conditions.
In their submissions before Sebi, ECL and ESL stated the merchant bankers advised and considered that "it was not required to disclose the said interim rejection, since the same was not a final decision and was only an interim step in the process involved".
Sebi, however, ruled that the obligation "to make true and adequate disclosure of all material information" is equally applicable to issuers and merchant bankers handling the issue and therefore ESL and ECL cannot "shake itself free of the legal obligation imposed on it to make true and adequate disclosures in the Red Herring Prospectus, by merely stating that they went by the merchant banker's advice".
The bankers submitted that even the worst case scenario of implication of final approval not being granted by MoEF was disclosed through appropriate risk factors.
Sebi, however, said "disclosing through risk factors that an untoward event may occur when an event is contingent is prudent, but, to caution only through risk factor that it is possible for an unfavourable event to happen, when the event has already occurred, is to deceive".
"In fact, such misinformation by the issuer company and its merchant bankers results in creating a misinformed investor, thereby reducing the investor protection measures to a farce.
"There was no reason for the BRLMs and the issuer company ESL to keep the investing public in the dark about the factual status of the forest diversion proposal of Iron Ore Mine of ECL, when it was imperative and obligatory on their part to disclose all material developments having impact on performance and prospects of the issuer," Sebi said.
Passing a detailed 140-page order, Sebi's Adjudicating Officer Anita Kenkare said, "To sum up, I note that the BRLMs and the issuer ESL chose to ignore the important facts for trivial technicalities and undisclosed hypothetical presumptions, so as to mislead a reasonable investor investing in the IPO of ESL.
"In the matter, I find that it has been claimed that investors did not suffer any loss. However, I note here that the raw material linkage with ECL resulting in low cost of production formed one of the fundamental basis for the issue price, in absence of any quantitative factors available for the issuer company ESL.
"Further at this juncture, I neither find it necessary nor feasible to go into the mechanics of how the investors/ shareholders would have taken a decision on investing, etc, if they were made aware of the facts that were concealed.
"I find that in the extant case, not only was there a deviation from facts on record, the reason for such deviation too was not made known to the investors."
Imposing a fine of Rs 1 crore on bankers, Sebi said that the default on the part of the BRLMs has been repetitive in nature and "such repetitive default by market intermediaries can undermine the effectiveness of securities regulation, hence needs to be viewed seriously".