Mis-statement in the Prospectus – SEBI Order – Eshwars
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Mis-statement in the Prospectus – SEBI Order

Authored by Vignesh Kumar


The Securities and Exchange Board of India (hereinafter “SEBI”) vide order dated 23rd October 2020 debarred Birla Pacific Medspa Ltd. (hereinafter “the Company”), its Directors and key managerial personnel (hereinafter collectively referred to as “the Noticees”) from accessing the securities market and dealing in securities directly or indirectly for a period of two years in connection with diversion, misutilisation and siphoning of funds raised through Initial Public Offer (“IPO”). This comes at the backdrop of the investigation by SEBI conducted covering the period July 07, 2011 to July 15, 2011 (hereinafter “Investigation Period”).


The Company which operated health care centres made an IPO in 2011 for establishing 55 more healthcare centres which was expressly stated as the primary object in prospectus. The issue size of Rs. 65.17 crores issue was oversubscribed by 1.18 times, and the shares on day of trading i.e. 7th July 2011 increased by 154% more than the opening price.


1. IPO proceeds worth Rs. 14 Crores were diverted and mis-utilized by the Company to support the price of its own shares on the listing day. The proceeds were channelled through two layers of entities.

2. IPO proceeds worth about Rs. 33.4 Crores were disbursed to certain entities under the pretext of advances towards work contracts for IPO objectives, but in fact, no substantial work contracts were executed, rather the funds disbursed remained unreturned to the Company and thus it was alleged that the said proceeds were mis-utilized and siphoned off.

3. Proceeds of IPO worth about Rs. 31 Crores were disbursed to group companies as ICD’s [at interest of 15% repayable on demand in seven (7) days], the decision for which was taken at a board meeting held four (4) days after the IPO, [citing adverse macro-economic factors as reason for not establishing 55 more health care centres] which was in contrast to the objects of IPO or the interim use of funds as stated in the Prospectus. The Prospectus permitted interim deployment of proceeds as investment in liquid instruments only and did not permit such deployment of funds as ICD’s. Hence, it was alleged that the act of approving the deployment of funds as ICD’s in the board meeting held 4 days after the IPO tantamounted to mis-statement in prospectus and diversion and mis utilisation of IPO proceeds.

4. Thus, it was alleged that the conduct of the Company amounted to mis-statement in prospectus to defraud the investors and the Company and signatories to the Prospectus were alleged to have violated Regulation 57(1)[1], Regulation 57(2)(a)[2] r/w Clause 2 (XVI) (B) (2) of Part A of Schedule VIII[3] of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 [ “SEBI (ICDR) Regulations”].

[Note: With respect to the alleged violations specified in 1 and 2 above, separate adjudication proceedings were commenced by SEBI, and in this Order was limited to examine if there was a violation of the above provisions in respect of the decision taken at the board meeting to provide ICDs to group companies.]


1. There were 12 Noticees in all in the SCN. The Company did not respond on the merits of the SCN, the Chairman had raised certain contentions to the allegations in the SCN. It was only the other Noticees amongst whom was a MD, General Counsel of the group companies, Independent Directors & Company Secretary, who had responded to the SCN on merits.

2. The summary of defences here are those by the 10 Noticees who responded to the SCN.

3. ICD’s can be construed as a liquid instrument since they are issued on the condition that such ICD’s are repayable on demand by giving notice of 7 days.

4. As stated in the prospectus money pending utilisation from IPO would be invested in interest or dividend bearing liquid instruments including deposits with banks etc. The word “including” in the IPO objects bear a wider meaning and include all types of instruments which can have character of liquidity and thus the objects of the IPO should be understood and construed with wider interpretation.

5. Some of Noticees contended that the “Risk Factors” heading in prospectus contemplated that IPO proceeds can be deployed by the management of the Company as ICDs to the group companies.

6. Few Noticees who were non-executive directors defended that they were not involved in the day to day decision making of the Company, and that SEBI (ICDR) Regulations does not provide vicarious liability (on acts of the company) on independent or non-executive directors, and it is only section 27 of SEBI Act, which provides vicarious liability in respect of criminal offences.


1. The SCN relied on the prospectus and minutes of the board meeting as the principal evidence to level the charge on mis-statement in prospectus, the contents of which were not disputed by the Noticees.

2. The Prospectus had contained a statement that the management doesn’t intend to provide loans to group companies, except in case of exigencies.

3. Financial exigency ought to be seen from the perspective of the group company and thus advancing ICD’s to group companies citing macro-economic factors did not substantiate a crisis of exigency.

4. The board of the Company, citing macro-economic conditions decided to defer setting up of healthcare centres, within 12 days of signing the Prospectus.

5. The Prospectus did not state the fact that unutilised funds shall be invested in ICD’s of companies, and it was only in the minutes the term corporates was used.

6. ICD’s do not qualify to be liquid assets and financial instruments, and they are private lending and borrowing arrangements between entities.

7. 50% of the IPO proceeds were deployed as ICD’s.

8. The allegation in the SCN pertains to matters decided at the board meeting, and it is not necessary for a director to be involved in the day to day affairs of the Company.

9. For the years 2011-12 and 2012-13, the board of the Company has as part of its financial results submitted report on progress of utilisation of the IPO proceeds, and shows as if expenditure was being incurred towards fulfilling the IPO objects. This statement did not reveal that ICD’s were made by the Company.

10. The auditor of the Company has stated in his report that there was no sufficient audit evidence to verify end use of funds.

11. The audit committee which under Clause 49(II)D5A of the erstwhile Listing Agreement had the specific responsibility of reviewing the statement of utilisation of funds raised through public issue, and the audit committee had also reviewed the quarterly financial results. Hence those directors who were on the audit committee cannot claim that they did not have knowledge of diversion of funds by the executive management.

12. The Company was to have set-up 15 healthcare centres by March 2012, but it had not set-up even one. None of the Independent /Non-executive directors had raised any concern about this at the board meetings, nor reported the same to the auditors or the regulators.

13. The Noticees were not being held responsible vicariously but were held responsible for having signed the Prospectus that contained mis-statements, and for failure to make material disclosures in it.

14. One of the Directors had resigned from the board in about 40 days of the IPO. The Company Secretary was found to have had knowledge about the irregularities in the IPO fund deployment, but was found not to have had the decision making power to approve resolutions of the board, and hence was considered on a different footing from other Noticees.


1. The Whole-time Member distinguished the reliance placed by few Noticees to the decision of SAT in P.G. Electroplast Ltd. v. Securities and Exchange Board of India (Appeal No. 281 of 2017 decided on August 2, 2019), wherein specific non-disclosure of ICD’s in interim use of funds was construed to be `partial non-disclosure of material information’ and a mere technical violation, inter alia on the ground that the merchant banker who was informed of the same failed to incorporate it in the prospectus, which was not the case in the Company, as the board had passed a resolution to give ICD’s.

2. The Whole-time Member concluded that the statements made in the Prospectus relating to `Objects of issue’ were not true, as no healthcare centre was set-up, even though Prospectus specified setting up such centres, and that the Prospectus was materially deficient on disclosure of `interim use of funds’, he held that the Prospectus contained untrue statements to that extent.

3. Except for the director who had resigned in about 40 days of the IPO, the WTM restrained the other directors from accessing the/dealing in the securities market for a period of 2 years. The company secretary was also restrained for a shorter duration of 6 months, and hence guilty of violation of Regulation 57(1), Regulation 57(2)(a) r/w Clause 2 (XVI) (B) (2) of Part A of Schedule VIII of SEBI (ICDR) Regulations, 2009.

[1] Regulation 57(1)The offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision.

[2] Regulation 57(2)(a)  – The red-herring prospectus, shelf prospectus and prospectus shall contain the disclosures specified in Schedule II of the Companies Act, 1956 and the disclosures specified in Part A of Schedule VIII, subject to the provisions of Parts B and C thereof.

 [3] Clause 2 (XVI) (B) (2) of Part A of Schedule VIII – The signatories shall further certify that all disclosures made in the offer document are true and correct.


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