A recent judgment by the Delhi High Court in Kimsuk Krishna Sinha v. SEBI (MANU/DE/0743/2010) throws interesting light on the role of SEBI in ensuring correct disclosure in offer documents and actions that SEBI can or should take in case there is misstatement in prospectus.
The case pertains to the IPO of DLF Limited in mid 2007. The case of the appellant was that a criminal case filed by him against one of the group companies was not disclosed in the red herring prospectus and the reply that the concerned company was not a group company was not satisfactory since the promoters of DLF Limited continued to be associated with the concerned company.
High Court disposed the matter by directing SEBI to undertake an investigation into the complaints filed by the appellant, and on its way to passing the final order made some interesting observations.
High Court observed that “the purpose of inserting Section 55A in the Companies Act was to empower the SEBI to take both corrective and preventive action. This is perhaps because as a regulatory body SEBI gets to see the draft prospectus preceding a public issue by a company even before the public gets to see the RHP. SEBI is enabled and empowered to examine the DRHP and insist on complete and truthful disclosure of all relevant facts therein. The very purpose of having an independent regulatory authority like SEBI, and vesting it with statutory powers of inquiry, is to enable it to take prompt action in matters relating to issue and transfer of shares. Particularly, SEBI is expected to be the sentinel, read the fine print of prospectuses keeping the investors' interests in view. It has both a preventive and corrective role to perform. Therefore, it is not possible to place a narrow interpretation on the words "issue and transfer of securities" occurring in Section 55-A of the Companies Act. Given the object and purpose of the provision, it should be broadly construed”. It also held that “…merely because the public issue was closed, SEBI could not be relieved of its statutory duty to conduct an enquiry into the complaint and into the veracity of the statements made in the prospectus (RHP). There are enough powers vested in it under the SEBI Act for this purpose” and that “SEBI Act expects SEBI to act as an institution accountable to the investor public and be both accessible and responsive to complaints.”
These observations make it compelling for one to analyse in greater detail as to what exactly is the nature and role of SEBI as a regulator. Should it just play a facilitative role by allowing issuers and investors to weed out the informational asymmetry that exists, and in case of any wrongdoing, leave the matter to be governed by sections 62 and 63 of the Companies Act in case of misstatements? Or should SEBI assume a much higher responsibility and “read the fine print of prospectuses”? To what extent is SEBI justified in relying on the due diligence carried on by the merchant bankers?
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