Order against Almondz Global Securities Limited

8/9/2019 Order against Almondz Global Securities Limited

1/23

Page 1 of 23

WTM/SR/EFD/DRA-IV/58/03/2015

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAICORAM: S. RAMAN, WHOLE TIME MEMBER

ORDER

UNDER SECTION 12(3) OF THE SECURITIES AND EXCHANGE BOARD OFINDIA ACT, 1992 READ WITH REGULATION 28(2) OF THE SECURITIES AND

EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008.

IN THE MATTER OF INITIAL PUBLIC OFFERING OF PG ELECTROPLASTLIMITED.

IN RESPECT OF M/S ALMONDZ GLOBAL SECURITIES LIMITED, MERCHANTBANKER [SEBI REGISTRATION NO.: INM000000834].

Background –

1. PG Electroplast Limited ("PGEL"), a company incorporated under the Companies Act,

1956, came out with an Initial Public Offering ("IPO") of 57,45,000 equity shares of 10

each for cash at a price of 210 per equity share. The Issue opened on September 7,

2011 and closed on September 12, 2011. The shares of PGEL, issued in its IPO, were

listed on the Bombay Stock Exchange of India Limited ("BSE") and the National Stock

Exchange of India Limited ("NSE") on September 26, 2011. Almondz Global SecuritiesLimited (" Almondz"), a Category – I Merchant Banker, was the Book Running Lead

Manager ("BRLM") for the IPO; Mr. Vinay Mehta was the Chief Executive Officer

("CEO") and Managing Director ("MD") of Almondz and Mr. Sanjay Dewan was the

authorised signatory for the Due-Diligence Certificate issued by Almondz in respect of

PGEL's IPO.

2. Upon noticing fluctuations in the share price of PGEL on the days immediately

following its listing, Securities and Exchange Board of India ("SEBI") conducted an

investigation in the IPO of the aforesaid company. The preliminary findings of theinvestigation prima facie revealed suppression of material facts and mis-statements in the

RHP and Prospectus of PGEL; siphoning off and diversion of IPO proceeds by the

company for the purpose of purchase of its own shares.

Brought to you by http://StockViz.biz


2/23


3/23

Page 3 of 23

Enquiry Proceedings against Almondz –

6.1 Simultaneously, SEBI initiated proceedings against Almondz, a registered intermediary,

in terms of the Securities and Exchange Board of India (Intermediaries) Regulations,

2008 ("Intermediaries Regulations") and appointed a Designated Authority ("DA ") inrespect thereof, vide Communication of Proceeding of Whole Time Member dated

October 8, 2012. The DA issued a Show Cause Notice ("SCN") dated December 14,

2012. The DA enquired into the alleged violation of the following provisions of law, viz. –.

i. Regulations 64(1) and 8(2)(b), (e)–(f) of the ICDR Regulations;

ii.

Regulation 13 read with Clauses 1–4, 6–7 and 21 of the Code of Conduct

prescribed under Schedule III of the Merchant Bankers Regulations.

6.2

The abovementioned provisions alleged to have been violated by Almondz are reproducedhereunder:

"ICDR Regulations

Regulation 8 - Documents to be submitted before opening of the issue.

8. (2) The lead merchant bankers shall submit the following documents to the Board after issuance of

observations by the Board or after expiry of the period stipulated in sub-regulation (2) of regulation 6 if

the Board has not issued observations:

(b) a due diligence certificate as per Form C of Schedule VI , at the time of registering the

prospectus with the Registrar of Companies;

(e) a due diligence certificate as per Form D of Schedule VI , immediately before the opening of the

issue, certifying that necessary corrective action, if any, has been taken;

(f) a due diligence certificate as per Form E of Schedule VI , after the issue has opened but before

it closes for subscription.

Regulation 64. (1) The lead merchant bankers shall exercise due diligence and satisfy himself about

all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents.

Merchant Banker Regulations

Regulation 13. Every merchant banker shall abide by the Code of Conduct as specified in Schedule

III.

Code of conduct.

1. A merchant banker shall make all efforts to protect the interests of investors.



4/23

Page 4 of 23

2. A merchant banker shall maintain high standards of integrity, dignity and fairness in the conduct of

its business.

3. A merchant banker shall fulfil its obligations in a prompt, ethical, and professional manner.

4. A merchant banker shall at all times exercise due diligence, ensure proper care and exercise

independent professional judgment.6. A merchant banker shall ensure that adequate disclosures are made to the investors in a timely

manner in accordance with the applicable regulations and guidelines so as to enable them to make a

balanced and informed decision.

7. A merchant banker shall endeavour to ensure that the investors are provided with true and adequate

information without making any misleading or exaggerated claims or any misrepresentation and are

made aware of the attendant risks before taking any investment decision.

21. A merchant banker shall maintain an appropriate level of knowledge and competence and abide by

the provisions of the Act, regulations made thereunder, circulars and guidelines, which may be

applicable and relevant to the activities carried on by it. The merchant banker shall also comply withthe award of the Ombudsman passed under the Securities and Exchange Board of India

(Ombudsman) Regulations, 2003."

6.3 In his report dated May 16, 2013 ("Enquiry Report"), the DA found that Almondz had

contravened all the abovementioned provisions of law.

6.4 In view of the above, the DA recommended that Almondz be prohibited from taking up

any new assignment as a Merchant Banker for a period of two years.

Post – Enquiry SCN dated May 28, 2013 –

7.1 After considering the Enquiry Report, Post–Enquiry SCN [under Regulation 28(1) of the

Intermediaries Regulations] dated May 28, 2013 (enclosing therein a copy of the Enquiry

Report), was issued to Almondz for the alleged violation of Regulation 8(2)(b), (e)–(f)

and Regulation 64(1) of the ICDR Regulations and Regulation 13 read with Clauses 1–4,

6–7 and 21 of the Code of Conduct prescribed under Schedule III of the Merchant

Banker Regulations.

7.2 As per the Post–Enquiry SCN read with the Enquiry Report, Almondz was alleged to

have committed the following violations –

i. Failure to ensure disclosure of material facts in the RHP and Prospectus, such as –



5/23

Page 5 of 23

a. Funds raised by PGEL through Inter Corporate Deposits ("ICDs"), which

were in the nature of a bridge loan.

b. Purchase orders placed by PGEL for plant and machinery.

c. Suppliers and Agreements for purchase of plastic granules.

d.

Agreements and Memorandum of Understandings entered into by PGEL withcertain entities for purchase of land.

ii. Made contradictory disclosures regarding Term–loan alongwith line of credit availed

by PGEL.

7.3 It is noted that on December 27, 2012, Almondz filed a consent application in terms of

the SEBI Circular No. CIR/EFD/1/2012 dated May 25, 2012. However, the consent

application was rejected by SEBI and the aforesaid fact was communicated to Almondz

vide letter dated May 30, 2013.

7.4 Thereafter, Almondz filed their reply to the Post–Enquiry SCN vide letter dated June 19,

2013 and also requested for an opportunity of personal hearing. Pursuant to receipt by

SEBI of the aforesaid reply to the Post–Enquiry SCN, an opportunity of personal

hearing before the Designated Member (“DM”) was granted to Almondz on July 11,

2013. During the aforesaid hearing, the authorised representatives for Almondz i.e. Mr.

Vinay Mehta and Mr. Sanjay Dewan, reiterated the submissions made in its aforesaid

reply to the Post–Enquiry SCN.

8.

Submissions made by Almondz.

8.1 In its reply to the Post–Enquiry SCN, Almondz inter alia submitted that –

i. The Prospectus is a replication of the RHP and effectively requires no updation

other than price and number of securities offered.

ii.

It was not aware of the moneys raised through ICDs by PGEL and the subsequent

fund transactions with various entities by PGEL.

iii.

The Board of Directors of PGEL did not permit the raising of moneys throughICDs and the Loan Committee was not authorised to permit raising of moneys

through ICDs either.

iv. It relied on the certifications and undertakings given by PGEL as well as the Comfort

Letter provided by the Statutory Auditor of PGEL, which confirmed that except for

the disclosures made in the RHP by PGEL, there was no material change in share



6/23

Page 6 of 23

capital, increase in current liabilities, secured and unsecured loans, deferred payment

liabilities, contingent liabilities or total liabilities or decrease in current assets, loans

and advances, fixed assets or net worth of PGEL, etc. The Comfort Letter provided by

the Statutory Auditor, on which reliance was placed by them, were unqualified,

comprehensive and in accordance with the specimen format prescribed by theInstitute of Chartered Accountants of India ("ICAI").

v. It was not aware of the purchase orders placed by PGEL with Modi Alloys Pvt. Ltd.

(“Modi Alloys”) and Aggarwal Steel Rolling Mills and Metal Industries (“ Aggarwal

Steel”).

vi. During the due diligence process, PGEL had neither referred to Nimbus Industries

Ltd. ("Nimbus") and Supreme Communications Ltd. ("SCL") being their suppliers,

nor informed it of any agreement entered into with them.

vii. In respect of long term supply Agreements for purchase of plastic granules, the list

of suppliers extended by Almondz in the RHP was based on the informationsupplied to it by PGEL and verified by it from its record. It is also borne out by

SEBI's own observation in its Interim Order dated December 28, 2011, that the

names of Nimbus and SCL do not appear in the list of its suppliers provide by

PGEL in its offer document.

viii. Details of the Land Agreements entered into by PGEL with Saptrishi Suppliers Pvt.

Ltd ("Saptrishi"), Safeco Projects Pvt. Ltd. ("Safeco"), Realnet Infraprojects Pvt.

Ltd. ("Realnet") and Eastern Resorts Pvt. Ltd. ("Eastern Resorts") were not

disclosed to it by PGEL.

ix.

All the Agreements entered into by PGEL and various entities for purchase of land,

plastic granules, etc. underlying the alleged non–disclosures were not genuine and

were in all probability contrived as afterthoughts.

x. Due Diligence carried out by Almondz was also in accordance with the "Due Diligence

Manual" brought out by the Association of Investment Bankers of India.

xi. The details relating to existence of the underlying Agreements, or purchase orders,

or ICDs were never disclosed to Almondz and no public notices were placed by the

Issuer. Rather to the contrary, Almondz was given a specific undertaking by PGEL

that no material adverse changes had taken place after the filing of the RHP.

Consideration of Issues and Findings –

9.1

I have considered the Post–Enquiry SCN issued to Almondz alongwith the Enquiry

Report provided therein, its reply to the Post–Enquiry SCN alongwith the submissions



7/23

Page 7 of 23

made during the personal hearing before me and all other relevant material available on

record.

9.2 SEBI has been served with a Notice of Motion (L) No. 18 of 2015 in Writ Petition (L) No.

34/2015 – Almondz Global Securities Ltd. vs. Securities and Exchange Board of India & Ors.,filed before the Hon'ble Bombay High Court. However, the said Writ Petition is yet to

be admitted by the Hon'ble Bombay High Court.

9.3 In light of the same, I shall now proceed to deal with the charges levelled against

Almondz, in the Post–Enquiry SCN read with the Enquiry Report.

10. Non–disclosure in the Prospectus of funds raised by PGEL through ICDs, which

were in the nature of a bridge loan.

10.1 As per the Post–Enquiry SCN read with the Enquiry Report, Almondz was alleged to have

failed in ensuring disclosure of material facts regarding funds raised by PGEL through

ICDs, which were in the nature of a bridge loan.

10.2 In this regard, I note that –

i.

PGEL had raised funds through ICDs aggregating to approximately 52.02 Crores

(i.e. approximately 43% of the IPO size) from 7 entities, viz. Jainex Securities Pvt.

Ltd. (" Jainex"), Prraneta Industries Ltd. ("Prraneta"), Agarwal Holdings Ltd.

(" Agarwal Holdings"), JRI Industries and Infrastructure Ltd. (" JRI Industries"),

Vineet Capital Services Pvt. Ltd. (" Vineet Capital"), Jay Poly Chem (India) Ltd.

(" Jay Poly") and Urmi Computers Pvt. Ltd. ("Urmi") vide various Agreements,

details of which are provided below:



8/23

Page 8 of 23

ii. The date of receipt of funds by PGEL (prior to September 14, 2011 i.e. date of the

Prospectus) in respect of the abovementioned ICDs, is provided in the following

page:

Entity Date of Agreement

Amountagreed as

per Agreement

( Crores)

InterestRate(Per

Annum)

Tenure ofICD

Actualamountreceivedby PGEL

( Crores)

Nature ofICD -

Secured/Unsecured

Date ofrepayment

of ICD

Amountrepaid

from IPO proceed

( Crores)

JainexSecurities Pvt.Ltd.

22.08.2011 30.00 13.5% 31 days -22.09.2011

28.75 Unsecured 22.09.2011 28.7

PrranetaIndustries Ltd.

10.09.2011 16.00 13.5% 31 days -11.10.2011

15.65 Unsecured 22.09.2011 15.6

AgarwalHoldings Ltd.(Now knownas WagendInfra Venture

Ltd.)

29.08.2011 2.00 13.5% 31 days -29.09.2011

2.00 Unsecured 22.09.2011 2.0

JRI Industries&InfrastructureLtd.

24.08.2011 1.00 10.5% 6 months -24.02.2012

0.92 Unsecured 15.09.2011

Vineet CapitalServices Pvt.Ltd.

29.08.2011 2.00 10.5% 21 days -19.09.2011

2.00 Unsecured 20.09.2011

Jay Poly Chem(India) Ltd.

29.08.2011 2.50 10.5% 6 months -29.02.2012

2.50 Unsecured 20.09.2011

Urmi

ComputersPvt. Ltd.

31.08.2011 0.20 13.5% 21 days -

21.09.2011

0.20 Unsecured 20.09.2011

Total 53.70 52.02 46.4



9/23

Page 9 of 23

10.3.1 Almondz had relied on the certification ( Comfort Letter ) given by the Statutory Auditors.

In this context, from the Comfort Letter dated September 13, 2011, the following is noted:

a.

The Statutory Auditor mentioned that "… we are unable to express and do not express anopinion on the financial position, results of operations or cash flows of the company for any period

subsequent to March 31, 2011 [emphasis supplied]."

b. The Statutory Auditor mentioned that they had read the un-audited financial

statements of PGEL for the period from April 1, 2011 to August 31, 2011, furnished

to it by the management of PGEL.

Entity Date of Agreement

Actual amountreceived by PGEL

( Crores)

Amount received byPGEL prior to

September 14, 2011

( Crores)

Date of repaymentof ICD

Jainex SecuritiesPvt. Ltd.

22.08.2011 28.75 23.08.2011 – 0.7024.08.2011 – 2.2026.08.2011 – 6.1029.08.2011 – 7.50

22.09.2011

Prraneta IndustriesLtd.

10.09.2011 15.65 Not applicable 22.09.2011

Agarwal HoldingsLtd. (Now knownas Wagend Infra Venture Ltd.)

29.08.2011 2.00 3.09.2011 – 2.00 22.09.2011

JRI Industries &Infrastructure Ltd.

24.08.2011 0.92 27.08.2011 – 0.92 15.09.2011

Vineet CapitalServices Pvt. Ltd.

29.08.2011 2.00 6.09.2011 – 0.258.09.2011 – 1.00

12.09.2011 – 0.50

20.09.2011

Jay Poly Chem(India) Ltd.

29.08.2011 2.50 1.09.2011 – 1.002.09.2011 – 1.003.09.2011 – 0.50

20.09.2011

Urmi ComputersPvt. Ltd.

31.08.2011 0.20 5.09.2011 – 0.20 20.09.2011

Total 52.02 ** 23.87

** Amount of 23.87 Crores was received by PGEL in 2 Bank Accounts, viz.i. SBI A/c no. 00000010642214872ii. HDFC Bank A/c no. 00880330001203



10/23

Page 10 of 23

c. For the period from September 1 to September 13, 2011, the Statutory Auditor had

inquired from Mr. Vishal Gupta (Executive Director - Finance), Mr. M. P. Gupta

(Assistant General Manager - Accounts) and Mr. Naveen Chandra Joshi (Assistant

General Manager - Accounts) for any material change in the financial position of

PGEL.d. The Statutory Auditor had qualified that the Comfort Letter was solely for the

information of the addressees therein. (i.e. Board of Directors of PGEL and

Almondz) and to assist Almondz in conducting and documenting their investigation

of the affairs of PGEL.

10.3.2

From the above, it is clearly evident that the Comfort Letter submitted by the Statutory

Auditor and relied on by Almondz, was essentially a qualified and limited opinion, which

itself was dependent on the information furnished by the management of PGEL.

Therefore, Almondz's contention that it did not know inter alia about the existence offunds raised through ICDs by PGEL because it relied on the Comfort Letter provided by

the Statutory Auditor, is unacceptable.

10.4 As regards the ICDs (indicated in a tabular format on page 8), a sum of 46.40 Crores

was repaid from the IPO proceeds (an amount of 104.41 Crores was received as IPO

proceeds on September 22, 2011) towards Jainex, Prraneta and Agarwal Holdings on the

very date of receipt of such proceeds. In its Prospectus dated September 14, 2011 (Point

No. 15 on page 27), PGEL stated: 'Our Company has not raised any bridge loan against the

proceeds of the present Issue … No other circumstances have arisen, since the date of the last financial

statement until the date of filing of this Prospectus with SEBI, which materially and adversely affect or is

likely to affect the operations or profitability of our Company, or value of its assets, or its ability to pay

its liability within twelve months .' The aforementioned statements in PGEL's Prospectus

clearly reveal that the liability arising from the repayment of ICDs towards Jainex,

Prraneta and Agarwal Holdings (i.e. 46.40 Crores - amount paid from the IPO

proceeds), which was effectively tagged to the IPO proceeds, was not disclosed by

Almondz.

10.5

As discussed in paragraph 10.3.1–10.3.2 above, I find that the Comfort Letter submitted by

the Statutory Auditor and relied on by Almondz, was essentially a qualified and limited

opinion which itself was dependent on the information furnished by the management of

PGEL. I also note that a simple perusal of the bank account statements of PGEL for the

period at least after March 31, 2011 (the date of the last audited balance sheet) – to



11/23

Page 11 of 23

September 14, 2011 (date of Prospectus), would have revealed funds flows on account of

raising of funds through ICDs, which effectively amounted to a bridge loan (amount

received by PGEL indicated in a tabular format on page 9).

10.6

In view of the above, I find that the charge vis-à-vis Almondz in respect of failure toensure disclosure of material facts regarding funds raised by PGEL through ICDs, which

were in the nature of a bridge loan, stands established.

11. Non–disclosure in the Prospectus of purchase orders placed by PGEL for plant &

machinery.


have failed in ensuring disclosure of material facts in the Prospectus regarding purchase

orders placed by PGEL for plant & machinery.


i. At page 43 of its Prospectus under the heading ‘Objects of the Issue’, PGEL had stated:

"We have not yet placed any orders for purchase of plant & machineries and utilities for our

proposed expansion project under Phase II."

ii. Purchase orders worth 52.23 Crores (approximately) were placed by PGEL during

the period between August 30, 2011 and September 5, 2011, with several suppliers

of machinery, equipment and utilities, including Modi Alloys and Aggarwal Steel.

iii.

A study of the bank account statements of PGEL revealed that PGEL paid 7.85

Crores to Modi Alloys ( 5 Crores on August 20, 2011, 1.85 Crores on August 24,

2011 and 1 Crore on August 29, 2011) even before placing purchase orders with

the latter. Similarly, payment of 1 Crore was observed to have been made to

Aggarwal Steel on August 23, 2011, even before PGEL placed purchase orders with

the latter.

iv. Almondz have submitted that they were not aware of the purchase orders, or the

alleged fund transfers to Modi Alloys and Aggarwal Steel, and that the disclosures

made in the RHP were on the basis of information provided by PGEL.



12/23

Page 12 of 23

v. I am unable to accept the contentions of Almondz. As per Regulation 64 (1) of the

ICDR Regulations, the Merchant Bankers "shall exercise due diligence and satisfy himself

about all the aspects of the issue including the veracity and adequacy of disclosure in the offer

documents." Further, as per Clause 4 of the Code of Conduct for Merchant Bankersread with Regulation 13 of the Merchant Banker Regulations, "(a) merchant banker

shall at all times exercise due diligence, ensure proper care and exercise independent professional

judgment." Almondz have submitted no material to show that it had made any

attempt to go even slightly beneath the surface of the statements furnished by

PGEL, the certification/Comfort Letter given by the Statutory Auditors of PGEL or

the due diligence reports given by the Legal Advisors to the Issue. As a Merchant

Banker is required to exercise due diligence with respect to the IPO process,

Almondz could at least have verified the bank account statements of PGEL for the

period after March 31, 2011 (the date of the last audited balance sheet) – toSeptember 14, 2011 (date of Prospectus), for major funds flows. Such independent

verification by Almondz would surely have revealed funds flows which did not

correspond with the information made available by PGEL. It would also have

revealed the mis-statements and non-disclosures made by PGEL regarding inter alia

the purchase orders placed by PGEL. Even if Almondz had relied on the Comfort

Letter provided by the Statutory Auditor of PGEL, such reliance could not have

been such a total and absolute reliance.

vi.

Almondz have stated that the Comfort Letter provided by the Statutory Auditor, on

which reliance was placed by them, was unqualified, comprehensive and in

accordance with the specimen format prescribed by ICAI. However, I find that the

Comfort Letter dated September 13, 2011, is a qualified and limited opinion, as

expressly indicated in paragraphs H and I of the said Comfort Letter . Further, the

Comfort Letter clearly mentions in paragraph G that the procedures followed for the

purpose of the letter – including reading of financial statements of PGEL, and

making inquiries of persons responsible for financial and accounting matters of

PGEL – "do not constitute an audit conducted in accordance with generally accepted auditingstandards in India. In addition, they would not necessarily reveal matters of significance with respect

to the comments in the following paragraph. Accordingly, we (the statutory auditors) make no

representation about the sufficiency of the foregoing procedure for your purposes" . This has to be

considered alongwith the fact that the Comfort Letter in this case was intended only 'to

assist the BRLM in conducting and documenting their investigation of the affairs of PGEL' .



13/23

Page 13 of 23

Thus, the Comfort Letter is a clearly qualified and limited opinion and is evidently not

intended to be a document for absolute reliance on the same by the Merchant

Banker. The Comfort Letter could not remotely have been a full and total substitute

for independent verification and exercise of Due Diligence by Almondz in the

matter.

vii. In view of the above, I find that the charge vis-à-vis Almondz in respect of failure to

make disclosure of material facts in the Prospectus regarding purchase orders placed

by PGEL for plant & machinery, stands established.

12.

Contradictory disclosures regarding Term–loan alongwith line of credit availed by

PGEL.

12.1

As per the Post–Enquiry SCN read with the Enquiry Report, Almondz was alleged tohave failed in preventing misrepresentation in the RHP and Prospectus in respect of

Term-loan alongwith line of credit availed by PGEL.


i. It has been mentioned in the RHP and the Prospectus under the head of "Objects of

the Issue" that PGEL had raised 24.10 Crores for ‘Prepayment of the portion of term loan

and line of credit facility proposed to be availed by our company for the expansion under Phase I.’

Further, Page 29 of the RHP and Prospectus states: "For part financing the expansion

under Phase I, our Company has received the sanction for availing 2,350 Lakhs as term loan

and of US$ 3 million ( 1,410 Lakhs based on conversion rate of 1US$ = 47/-) as Line of

Credit from Standard Chartered Bank vide its sanction letter dated September 14, 2010. We have

already availed disbursement of the entire sum sanctioned to us" . However, in the table on

Page 30 of the RHP as well as Prospectus, with respect to the term loan and letter of

credit, it was stated - ‘Amount availed as on the date of this RHP – NIL.’

ii.

I find that contradictory statements pertaining to term-loan alongwith line of creditavailed by PGEL have been made in the RHP and Prospectus of PGEL. The

abovementioned statements in the RHP and Prospectus [reproduced at paragraph

12.1(i)], were thus misleading. I find that the incorrect disclosure in the RHP was not

rectified in the Prospectus, which is supposed to be the main updated document

which is relied upon by investors during and after the IPO. This error is therefore a



14/23

Page 14 of 23

significant lapse on the part of Almondz, and reflects a lack of diligence on their

part.

iii. In the Enquiry Report, the DA has referred to the reply made by Almondz in

proceedings before that Authority wherein it highlighted various instances such ason pages no. 40, 86 & 87 and 171 & 172 of the RHP, where disclosures regarding

sources of finances for expenditure, term loan, etc. were made. The DA has

considered the aforesaid and has noted that there was no other evidence to suggest

that Almondz had 'intentionally' given wrong disclosures. Accordingly, the DA has

given Almondz the benefit of doubt stating that disclosure relating to disbursement

of term loan alongwith line of credit appearing in the RHP, was inadvertently

mentioned as "NIL" . The DA has nonetheless observed that Almondz should have

been more diligent and exercised proper care in avoiding such lapses in the RHP and

Prospectus of PGEL, which may mislead investors.

iv. As a Merchant Banker, Almondz was obligated to undertake all reasonable efforts

for carrying out thorough due diligence to ensure adequate and truthful disclosures

in the RHP and Prospectus of PGEL. This obligation involved examining

everything required for giving a true account of the facts in the RHP and Prospectus

of PGEL, which would affect the interest of investors. The investors would have

decided to invest in PGEL on the faith that Almondz would have conducted due

diligence with utmost sincerity and because it failed to act diligently, the investors

were put to grave danger. In view of the aforesaid, I find that Almondz cannot be

said to have fulfilled its obligation as a Merchant Banker through contradictory and

inaccurate disclosures in the RHP and Prospectus of PGEL. I, therefore, am unable

to agree with the benefit of doubt accorded by the DA to Almondz, in respect of the

instant charge.

v.

In view of the above, I find that the charge vis-à-vis Almondz in respect of failure to

prevent misrepresentation in the RHP and Prospectus in respect of amount of

Term-loan alongwith line of credit availed by PGEL, stands established.



15/23

Page 15 of 23

13. Non–disclosure of names of certain companies in the list of suppliers for plastic

granules, their agreements alongwith financial transactions.


have failed in ensuring disclosure of material facts in the Prospectus regarding names ofcertain companies in the list of suppliers for plastic granules, their agreements alongwith

financial transactions.


i.

During the investigation conducted by SEBI, PGEL provided a copy of the

following additional Agreements, which reveal the existence of additional suppliers

of raw materials to the company, viz. –

a. Agreement dated August 31, 2011 with Nimbus, for purchase of plastic granules

valued upto 3.50 Crores.

b. Agreement dated August 31, 2011 with SCL for purchase of plastic granules

valued upto 5 Crores.

ii.

The list of suppliers, as disclosed by PGEL at page 76 of the Prospectus, contained

the names of LG Polymers, BASF, Supreme Petrochem, etc. However, the names of

Nimbus and SCL do not appear in the said list of suppliers. Considering that the

combined value of the above Agreements dated August 31, 2011, with Nimbus and

SCL was 8.50 Crores, the same was undoubtedly material information which was

required to have been disclosed in the Prospectus.

Entity Payments made by PGEL prior to September 14, 2011

( Crores)Nimbus Industries Ltd. 5.09.2011 – 2.35

8.09.2011 – 0.40

Supreme Communications Ltd. 8.09.2011 – 1.50

Total ** 4.25

** Amount of 4.25 Crores was paid by PGEL through 4 Bank Accounts, viz.i. SBI A/c no. 00000031765471877ii. SBI A/c no. 00000031765482416iii. SBI A/c no. 00000010642214872iv. HDFC Bank A/c no. 00880330001203



16/23

Page 16 of 23

iii. Almondz have submitted that PGEL had neither referred to Nimbus and SCL as

being its suppliers, nor informed Almondz of any purchase agreement entered into

with Nimbus or SCL.

iv. Considering that the combined value of the Agreements dated August 31, 2011 with

Nimbus and SCL was 8.5 Crore, the same was material information which was

required to have been disclosed in the Prospectus. The Post–Enquiry SCN read with

the Enquiry Report mentions that PGEL transferred funds amounting to 2.35

Crores and 40 Lakhs to Nimbus on September 5, 2011 and September 8, 2011,

respectively. Further, the Post–Enquiry SCN read with the Enquiry Report also

mentions that PGEL transferred funds amounting to 1.50 Crores to SCL on

September 8, 2011. As the Merchant Banker responsible for ensuring accurate and

adequate disclosures in the RHP and Prospectus, Almondz was under an obligation

to undertake reasonable efforts to verify the accuracy of the information submitted

by PGEL for disclosure in its RHP and Prospectus. Instead, Almondz relied

completely on the certifications and undertakings of PGEL, as well as the Comfort

Letter provided by the Statutory Auditor. If only Almondz had at least looked into

the bank statements of PGEL for the period after March 31, 2011 (the date of the

last audited balance sheet) – to September 14, 2011 (date of Prospectus) (payment

details indicated in a tabular format on page 16), substantial funds flows including

transfer of a total of 4.25 Crores before September 14, 2011, to Nimbus and SCL, would have been easily noticed. I find that the contentions of Almondz in defence

of its omission to ensure disclosure of the names of Nimbus and SCL in the list of

suppliers of raw material in the Prospectus, are not acceptable.

v. In view of the above, I find that the charge vis-à-vis Almondz in respect of failure to

make disclosure of material facts in the Prospectus regarding names of certain

companies in the list of suppliers for plastic granules, their agreements and the

financial transactions stands established.



17/23

Page 17 of 23

14. Non–disclosure of Agreements and Memorandum of Understandings entered

into by PGEL with certain entities for purchase of land.


have failed in ensuring disclosure of material facts in the Prospectus regarding Agreements/Memorandum of Understandings ("MOUs") entered into by PGEL with

certain entities for purchase of land.

14.2 In this regard, I note that PGEL was alleged to have entered into Agreements/MOUs

for purchase of land with Saptrishi, Safeco, Realnet and Eastern Resorts for a total

consideration value of approximately 80 Crores, which is almost 66% of the Issue size

of 120.64 Crores. The details of the Agreements/MOUs entered into by PGEL for

purchase of land are as follows:



18/23

Page 18 of 23

Nameof

entity

Date ofMOU

Location of land Totalconsideration

value ( Crores)

Payments made by PGEL priorto September 14, 2011

( Crores)Saptrishi 21.09.2011 Tamil Nadu 18 Not applicable

Safeco 27.08.2011 Karnataka 25 25.08.2011 – 7.0026.08.2011 – 3.0027.08.2011 – 2.505.09.2011 – 2.50

Realnet 2.09.2011 As per MOU, Realnet would

locate and procure land onbehalf of PGEL in GreaterNoida

12 – 15 The amount wasnot mentioned inthe MOU. Amount indicatedis as per PGEL’sletter dated

10.04.2012.

6.09.2011 – 2.00

EasternResortsPvt.Ltd.

26.08.2011 As per MOU, EasternResorts has 80 acres in ViratNagar (Jaipur) and is inprocess of acquiring 45acres.Further, as per MOU,PGEL would purchaseentire 2nd Floor of theproposed building.

25 26.08.2011 – 2.001.09.2011 – 1.002.09.2011 – 1.009.09.2011 – 1.00

** Total – 22.00

** Amount of 22 Crores was paid by PGEL through 3 Bank Accounts, viz.

i. SBI A/c no. 00000010642214872ii. Standard Chartered Bank A/c no. 52205923018iii. HDFC Bank A/c no. 00880330001203

14.3 I note that –

i. At page 83 of the RHP, it was mentioned that " there is no property which our

company has acquired or propose to purchase or acquire which is to be paid wholly,

or in part, from the net proceeds of the Issue or the purchase of acquisition of which has not beencompleted as on the date of filing of this RHP with SEBI…" . At page 83 of the Prospectus,

it was mentioned that – ‘Except as stated in section titled “Objects of the Issue” appearing on

page no. 28 of this Prospectus, there is no property which our Company has

purchased or acquired or propose to purchase or acquire which is to be paid



19/23

Page 19 of 23

wholly, or in part, from the net proceeds of the Issue or the purchase or acquisition of

which has not been completed as on the date of filing of this Prospectus with SEBI…".

ii. Almondz have submitted that PGEL did not inform them about details pertaining

to land deals at the time when the Prospectus was being finalized. Almondz havealso submitted that PGEL specifically affirmed vide Underwriting Agreement

dated September 13, 2011 and letter dated September 14, 2011 that no material

developments have taken place after August 17, 2011. It was also submitted that

the Statutory Auditor vide Comfort Letter dated September 13, 2011, had confirmed

that there were no material developments after the date of filing of the RHP i.e.

August 17, 2011. It was also contended by Almondz that the Statutory Auditor's

letter was based on the format specified by ICAI. However, I observe that PGEL

made advance payments of upto 2 Crores to Eastern Resorts on the date of the

MOU i.e. August 26, 2011, and 10 Crores to Safeco even before the MOU

dated August 27, 2011, as consideration for purchase of land. Thus, I find that if

only Almondz had at least looked into the bank statements of PGEL for the

period after March 31, 2011 (the date of the last audited balance sheet) – to

September 14, 2011 (date of Prospectus) (payment details indicated in a tabular

format on page 18), irregularities in funds flows would have been easily noticed,

and investors could have been prevented from being misled by inaccurate

disclosures in the Prospectus dated September 14, 2011. Therefore, I find that

Almondz failed to adhere to the high standards of service and due diligence

required of a Merchant Banker.

iii. In view of the above, I find that the charge vis-à-vis Almondz in respect of failure to

make disclosure of material facts in the Prospectus regarding Agreements/MOUs

entered into by PGEL with certain entities for purchase of land, stands established.

Conclusion.

15.1

The issue to be considered is whether, in the facts of this case, Almondz exercisedreasonable care and diligence as a Merchant Banker.

15.2 I note that Regulation 64(1) of the ICDR Regulations refers to the duty of the lead

Merchant Banker to ensure "veracity and adequacy of disclosure in the offer documents" . An 'offer

document' as defined in Regulation 2(1)(x) of the ICDR Regulations "means a red herring



20/23

Page 20 of 23

prospectus, prospectus or shelf prospectus and information memorandum…" . Therefore the

requirements for accurate and adequate disclosures as stipulated in the ICDR Regulations

are applicable as much to the Prospectus as to an RHP. Regulations 8(2)(b), (e)–(f) of the

ICDR Regulations require the lead Merchant Banker to file Due Diligence Certificates as

stipulated in Forms C, D and E in Schedule VI of the ICDR Regulations. Forms C, Dand E require the Merchant Banker to submit due diligence certificates to SEBI,

certifying that all material disclosures at the time of registering the RHP or the

Prospectus with the Registrar of Companies, as well as immediately before opening of

the issue, and after opening of issue but before closure of subscription, are made and

updated for the respective applicable dates. Thus, the Prospectus has to contain accurate

and adequate disclosures in all respects, as on the date of registration of RHP as well as

the Prospectus.

15.3

I note that the following due–diligence Certificates were submitted by Almondz –

i. Vide letter dated September 1, 2011, Almondz submitted the due–diligence

Certificate under Regulation 8(2)(b) of the ICDR Regulations, wherein it was

stated – 'the said Red Herring Prospectus contains all the material disclosures in respect of the

Issuer Company as on the said date.'

ii. Vide letter dated September 6, 2011, Almondz submitted the due–diligence

Certificate under Regulation 8(2)(e) of the ICDR Regulations, wherein it was

stated – 'This is to certify that all the material disclosures in respect of the Issuer as on the date

of opening of the Issue have been made through the Red Herring Prospectus.'

iii. Vide letter dated September 9, 2011, Almondz submitted the due–diligence

Certificate under Regulation 8(2)(f) of the ICDR Regulations, wherein it was

stated – 'This is to certify that all the material disclosures in respect of the Issuer as on date

have been made through the Red Herring Prospectus.'

15.4

As discussed in the preceding paragraphs in respect of each allegation levelled vis-à-vis

Almondz, a complete failure to carry out reasonable due diligence has been observed.

Reasonable efforts on the part of Almondz to at least check the bank accountstatements of PGEL for the period after March 31, 2011 (the date of the last audited

balance sheet) – to September 14, 2011 (date of Prospectus) and the complete minutes of

PGEL's Board meeting dated August 17, 2011, would surely have revealed that the

undertakings and letters of PGEL did not correspond with the funds flows in its bank

accounts. Due diligence carried out in compliance with the ICDR Regulations and the



21/23

Page 21 of 23

Merchant Banker Regulations could have prevented the mis-statements and non-

disclosures in the RHP and Prospectus of PGEL.

16.1 A Merchant Banker is appointed for the purpose of managing the issue of an IPO of a

Company and co-ordinates the activities of the Company, the Regulatory Bodies, and theInvestors. The Merchant Banker has responsibilities towards the Company, to manage

the entire process of issue of its IPO, and to investors to present the Company's

information before them in a concise and unambiguous form. The Merchant Banker is

therefore expected to exercise due diligence to ensure the adequacy and appropriateness

of the disclosures made in offer document. Due diligence does not merely mean that the

Merchant Banker will passively report all that has been reported to him but to examine

everything that is required to give a true account of the facts in the prospectus. It is

about making an active effort to find out material developments that would affect the

interest of the investors. It is on the faith that the Merchant Banker would haveconducted the due diligence with utmost sincerity that the investing public goes forward

and decides to invest in a particular company. If the Merchant Banker fails to act

diligently and comply strictly with the letter and spirit of the regulations, the investors are

put to grave danger.

16.2 In this regard, it may be pertinent to note the observations of the Hon'ble Securities

Appellate Tribunal in the matter of HSBC Securities and Capital Markets (India) Private Ltd.

vs. SEBI, SAT Appeal No. 99 of 2007, where it held that "ensuring the truth and correctness of

the letter of offer is a fundamental responsibility of the merchant banker which he has to discharge by

exercising due diligence." Further, the Hon'ble Supreme Court in the matter of Chander Kanta

Bansal vs. Rajinder Singh Anand [(2008) 5 SCC 117] had discussed the concept of 'due

diligence' and observed that due diligence meant 'reasonable diligence; …such diligence as a

prudent man would exercise in the conduct of his own affairs.'

17.

Considering the important role of a Merchant Banker in the public issue of a company,

Almondz in the present case cannot take refuge under the Comfort Letter issued by the

Statutory Auditor and certifications/undertakings by PGEL. Further, the procedural AIBI Due Diligence Manual cited by Almondz would not be of any help unless the

Merchant Banker takes proactive and prudent steps to independently verify the material

details and circumstances surrounding the Public Issue. If the contention regarding

absolute reliance placed by Almondz on the comfort letter of the Statutory Auditor is

accepted, it will negate the very requirement of a Merchant Banker in any Public Issue.



22/23

Page 22 of 23

Therefore, Almondz cannot seek to evade its primary responsibility (as a Merchant

Banker) of undertaking all reasonable efforts to carry out thorough due diligence for

ensuring accurate and complete disclosures in the 'offer document' .

18.

Passive and absolute reliance on undertakings and letters of PGEL and the Statutory Auditor were not enough for Almondz to discharge its legal obligations under the

ICDR Regulations and the Merchant Banker Regulations. The due diligence exercise

conducted by Almondz was completely lacking in thoroughness, thus rendering it

liable for total dereliction of duty as Merchant Banker in the IPO of PGEL.

Therefore, I find that Almondz fell well short of exercising reasonable diligence and

care, to satisfy themselves of the veracity and adequacy of disclosures in the RHP and

Prospectus of PGEL, and thus violated the Regulations 8(2)(b), (e)–(f) and 64(1) of the

ICDR Regulations and Regulation 13 read with Clauses 1–4, 6–7 and 21 of the Code of

Conduct prescribed under Schedule III of the Merchant Banker Regulations.

19. Enquiry proceedings are mainly disciplinary proceedings initiated against intermediaries

registered with SEBI. Section 12(3) of the SEBI Act provides that: "The Board may, by

order, suspend or cancel a certificate of registration in such manner as may be determined by

regulations…". I find that the violations committed by Almondz (as detailed in the

preceding paragraphs) were part of a larger scheme, which affected the integrity of the

securities market and deprived gullible investors of material information for making an

informed decision in respect of PGEL's IPO. SEBI had earlier taken necessary steps vide

Interim Order against Almondz and was justified in doing so considering the prima facie

gravity of offences committed in PGEL's IPO inter alia by Almondz. On considering the

totality of the facts and circumstances and the interest of securities market, I am of the

considered view that the following Order would meet the ends of justice.

Order –

20.1 I note that vide the Interim Order dated December 28, 2011 (later confirmed through

the Confirmatory Order on September 11, 2012), Almondz was "prohibited from taking upany new assignment or involvement in any new issue of capital including IPO, follow-on issue etc. from

the securities market in any manner whatsoever, from the date of this order till further directions."



23/23

Order against Almondz Global Securities Limited

Documents

Transcript of Order against Almondz Global Securities Limited