Adjudication Order in the matter of M/s Electrosteel Steels Limited and M/s Electrosteel Castings...

8/18/2019 Adjudication Order in the matter of M/s Electrosteel Steels Limited and M/s Electrosteel Castings Limited.

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______________________________________________________________________________________ Adjudication Order in the matter of M/s. Electrosteel Steels Ltd. and M/s. Electrosteel Castings Ltd. Page 2 of 140

referred to as ‘ESL’), at Kodolibad, Jharkhand was rejected by the Ministry of

Environment and Forest (presently Ministry of Environment, Forest & Climate Change

‘MoEF&CC’) (hereinafter referred to as ‘MoEF ’), however, the fact thereof was not

disclosed in the Red Herring Prospectus of Initial Public Offer (IPO) of ESL and also to

the shareholders and financial institutions.

2. SEBI sought comments from ESL and the Book Running Lead Managers, viz. Axis Capital

Ltd., SBI Capital Markets Ltd. and Edelweiss Financial Services Ltd. (hereinafter

collectively referred to as ‘ BRLMs ’) for failing to ensure disclosure in the Draft Red

Herring Prospectus (hereinafter referred to as ‘DRHP’) / Red Herring Prospectus

(hereinafter referred to as ‘ RHP ’) /Prospectus of ESL 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 thematerial event viz. rejection of forest clearance for iron ore mine by MoEF to the stock

Exchanges for onward dissemination to the shareholders in accordance with clause 36

of the Listing Agreement.

3. From the replies, it was inter alia observed that the in-principle approval for ECL’s

proposal for diversion of forest land for Kodolibad Iron Ore Mine was rejected by MoEF,

and MoEF vide letter dated November 04, 2008 had communicated the same to the

Government of Jharkhand. It was further observed that post the said rejection, ECL videletter dated May 27, 2009 had requested the State Government to recommend its

proposal to MoEF again, and the State Government vide its letters dated July 10, 2009

and September 18, 2009 had requested MoEF to reconsider the proposal. Subsequently,

MoEF vide its letter dated February 13, 2012 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 stated in the said letter.

4. It was observed that as on the date of filing of the prospectus with RoC i.e. September29, 2010, in absence of a positive decision from MoEF, the rejection of the proposal for

forest clearance for Kodolibad Iron Ore Mine was a material event requiring disclosure

in the DRHP/ RHP/ Prospectus of ESL. The BRLMs and ESL stated that various

disclosures regarding pendency of the proposal with MoEF and risk factors were

included in the prospectus. However, it was observed that the BRLMs/ ESL had failed to


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disclose the fact of rejection of ECL’s proposal of forest clearance for Kodolibad Iron Ore

Mine in the DRHP/ RHP/ Prospectus of ESL. It was also observed that ECL had inter alia

stated that allocation of mine would help ECL in achieving cost effectiveness and

reducing the cost of production.

5. It was inter alia alleged that the BRLMs had failed to ensure adequate disclosures of the

fact of rejection of the proposal for forest clearance of Kodolibad iron ore mine in the

DRHP/ RHP/ Prospectus of ESL and had, therefore, violated the provisions of

Regulation 57(1), Regulation 57(2)(a)(ii) and Regulation 64(1) of SEBI (Issue of Capital

and Disclosure Requirement) Regulations, 2009 (hereinafter referred to as ‘ICDR

Reg ulations’ ) and Regulation 13 of SEBI (Merchant Bankers) Regulations, 1992

(hereinafter referred to as ‘ Merchant Bankers Regulations’ ). Further, it was alleged

that ESL had failed to disclose the fact of rejection of the proposal for forest clearance ofKodolibad iron ore mine in the DRHP/ RHP/ Prospectus of ESL and had, therefore,

violated the provisions of Regulation 57(1), Regulation 57(2)(a)(ii) of ICDR Regulations.

It was also alleged that by omitting to disclose the said material information in the RHP,

the disclosures made by BRLMs and ESL in the RHP dated September 29, 2010 were

misleading. Also, that by not disclosing the rejection of forest clearance for Kodolibad

Iron Ore Mine to the stock exchanges, it was alleged that ECL had violated Clause 36 of

the Listing Agreement read with Section 21 of the Securities Contract (Regulation) Act,

1956 (hereinafter referred to as ‘SCRA’).

APPOINTMENT OF ADJUDICATING OFFICER

6. The undersigned was appointed as the Adjudicating Officer vide Order dated August 16,

2013 under rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by

Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘Rules’ ) read with sub-

section (2) of Section 15I of SEBI Act to inquire into and adjudge under Section 15HB of

the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI

Act ’) for the alleged violation of the provisions of ICDR Regulations and Merchant

Bankers Regulations by the BRLMs and for the alleged violation of the provisions of

ICDR Regulations by ESL. The undersigned was also appointed as Adjudicating Officer

vide order dated August 16, 2013 under rule 4 of Securities Contract (Regulation)

(Procedure for Holding Inquiry and Imposing Penalties by Adjudication Officer) Rules,


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2005 (hereinafter referred to as ‘SCR Rules’ ) read with sub-section (1) of Section 23 I of

SCRA to inquire into and adjudge under Section 23A(a) and 23E of the SCRA for the

alleged violation of the provisions of Listing Agreement read with Section 21 of the

SCRA by ECL.

SHOW CAUSE NOTICE, HEARING AND REPLY

7. Show Cause Notice No. EAD-6/AK/VS/24165/2013, EAD-6/AK/VS/24165/2013 and

EAD-6/AK/VS/24168/2013 dated September 20, 2013 (hereinafter referred to as

‘SCN1 ’) were issued to the BRLMs respectively under rule 4 of the Rules to show cause

as to why an inquiry should not be held and penalty be not imposed under Section 15HB

of SEBI Act for the alleged violation specified in the said SCN. Show Cause Notice No.

EAD-6/AK/VS/24161/2013 and EAD-6/AK/VS/24159/2013 dated September 20, 2013(hereinafter referred to as "SCN2" and "SCN3" ) were issued to ESL and ECL

respectively, under rule 4 of the Rules and Rule 4 of SCR Rules, to show cause as to why

an inquiry should not be held and penalty be not imposed under Section 15HB of SEBI

Act against ESL and under 23A(a) and 23E of the SCRA against ECL for the alleged

violations specified in the said SCN. The said SCN was delivered and acknowledged by

the BRLMs, ESL and ECL.

8. The BRLMs vide common letter dated October 10, 2013 inter alia sought time for fourweeks for filing reply to the SCN. Similarly, ESL and ECL vide individual letters each

dated October 08, 2013 inter alia sought time of thirty days for filing reply to the SCN.

Subsequent to the same, vide letter dated November 01, 2013, J. Sagar Associates on

behalf of the BRLMs requested for grant of an opportunity to undertake inspection of

documents and records in relation to the SCN. Vide individual letters dated November

19/ 21, 2013, the BRLMs informed that they have appointed J. Sagar Associates,

Advocates and Solicitors, Authorised Representatives (hereinafter referred to as ‘AR of

BRLM’) for undertaking inspection of documents and to carry out all related deeds with

respect to the extant adjudication proceedings against the BRLMs. Also, vide individual

letters dated November 4, 2013, ESL and ECL requested to undertake the inspection of

documents in relation with the notice and provide copies of the same. Vide the said

letters, ESL and ECL also inter alia informed that they had appointed Khaitan & Co. as

their legal counsel(s), Authorised Representatives (hereinafter referred to as ‘AR of


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ESL/ECL ’) to represent them in the matter and undertake inspection of documents. Vide

email dated November 11, 2013, the BRLMs were advised to specify the documents for

which the inspection was sought. Vide letter dated November 15, 2013, AR of BRLMs

inter alia stated that it may not be possible to specify or list out the documents required

for inspection, since the BRLMs are not aware of the documents in possession of SEBI.AR of BRLMs vide the said letter requested that an opportunity to inspect all the records

& documents which SEBI possesses and which led to the issuance of the SCN may be

provided along with their copies. Further, vide email dated November 11, 2013, ESL and

ECL were also advised to specify the documents for which the inspection was sought.

Vide individual letters dated November 14, 2013, ESL and ECL also requested to seek

inspection of all the documents and records in SEBI ’s possession, leading to the issuance

of the SCN along with the copies of the documents. Accordingly, an opportunity of

inspection was provided to the BRLMs, ESL and ECL on December 10, 2013.

9. Inspection of following documents and copies thereof were given to the BRLMs:

a) Order communicating appointment of Adjudicating Officer dated August 20, 2013;

b) Copies of the Complaints dated August 24, 2011, September 16, 2011 and November

23, 2011;

c) Copy of SEBI letter dated March 25, 2013 issued to ESL;

d) Copy of SEBI letter dated March 25, 2013 issued to BRLMs;

e) Copy of letter dated April 18, 2013 received from ESL;f) Copy of letter dated April 18, 2013 received from BRLMs.

10. Inspection of following documents and copies thereof were given to ESL and ECL:

a) Order communicating appointment of Adjudicating Officer dated August 20, 2013;

b) Copies of the Complaints dated August 24, 2011, September 16, 2011 and November

23, 2011;

c) Copy of SEBI letter dated March 25, 2013 issued to ESL;

d)

Copy of SEBI letter dated March 25, 2013 issued to ECL;e) Copy of SEBI letter dated March 25, 2013 issued to BRLMs;

f) Copy of letter dated April 18, 2013 received from ESL;

g) Copy of letter dated April 17, 2013 received from ECL;

h) Copy of letter dated April 18, 2013 received from BRLMs.


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11. Vide letter dated December 16, 2013, BRLMs requested to confirm that there are no

other documents other than the above in possession of SEBI, whether relied upon or

otherwise. Vide email dated December 18, 2013, it was informed that all relevant

documents relied upon while issuing the SCN had been provided as an annexure to the

SCN and vide inspection dated December 10, 2013.

12. The BRLMs filed their replies to the SCN vide individual letters dated December 31,

2013, the details of which have been brought out at the later part of this order. ESL and

ECL filed individual replies dated December 27, 2013, the details of which have also

been brought out at the later part of this order. In the interest of natural justice, an

opportunity of hearing was provided to the BRLMs, ESL and ECL on January 07, 2014

vide individual hearing notices dated December 30, 2013. Vide individual letters dated

January 02/03, 2014, the BRLMs requested for rescheduling the hearing to any dateduring or after the fourth week of January, as their legal counsels were pre-occupied on

January 07, 2014. Similarly, ESL and ECL requested for grant of four weeks time for

preparing their submissions and presenting the matter. Vide email dated January 06,

2014, the BRLMs were informed that their request for postponement of the hearing has

been acceded to, and they were given another opportunity for personal hearing on

January 28, 2014. Similarly, vide email dated January 06, 2014, ESL and ECL were

informed that their request for postponement of the hearing has been acceded to, and

they were given another opportunity for personal hearing on January 27, 2014.

13. Mr. Somasekhar Sundaresan, Mr. Ravichandra S. Hegde and Ms. Aashni Dalal from J

Sagar Associates (AR (JSA)); Mr. Anay Khare, Mr. M. Natarajan and Ms. Lakha Nair from

Axis Capital Ltd.; Ms. Sunita Kumari and Mr. Bhaskar Chakraborty from SBI Capital

Markets Ltd.; Mr. B. Renganathan, Mr. Sachin Khandelwal and Mr. Sumeet Lath from

Edelweiss Financials Ltd. (hereinafter collectively referred to as Authorised

Representatives – ‘ ARs of BRLMs) ’) appeared on behalf of the BRLMs. The AR of the

BRLMs reiterated in detail the submissions made vide letters dated December 31, 2013.

During the hearing, the following documents were submitted: Copies of the following Case Laws:

o Order of the Hon'ble Securities Appellate Tribunal (hereinafter referred to as

‘ SAT ’) in the matter of JM Mutual Fund & JM Capital Management Pvt. Ltd. Vs.

SEBI dated November 22, 2004 ;


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o Order of the Hon'ble SAT in the matter of Imperial Corporate Finance &

Services Pvt. Ltd. Vs. SEBI dated July 30, 2004 ;

List of correspondence and events between the date of the alleged rejection of

proposal (October 04, 2008) and the date of in-principle approval received for

diversion of forest land submitted by ECL.The ARs of BRLMs stated that they would make further submissions by February 14,

2014. The ARs of BRLMs were inter alia also advised to submit past non-compliance of

SEBI Act and Regulations made thereunder by any of the BRLMs and action taken by

SEBI in the past, if any, against any of the BRLMs during the last five years.

14. Mr. P N Modi - Senior Counsel, Mr. Neville Lashkari - Counsel, Ms. Tushna Thapliyal from

Khaitan & Co. and Shri Arun Gadoria from ECL (hereinafter referred to as Authorised

Representatives - "ARs of ESL/ECL" ) appeared on behalf of ESL and ECL. During thehearing, ARs of ESL/ ECL reiterated in detail the submissions made vide letter dated

December 27, 2013 and submitted copies of following case laws: Hon'ble SAT Order - M/s Vijay Textiles Ltd Vs SEBI dated April 28, 2011 Order of the Whole Time Member dated September 13, 2013 in the matter of

M/s. Gennex Laboratories Ltd.

During the hearing ARs of ESL/ ECL submitted the summary of the reply dated

December 27, 2013. ARs of ESL/ ECL were advised to submit the supporting documents

for the instances mentioned in Annexure-A to the aforesaid submission. The ARs ofESL/ECL were also advised to submit the information/documents and further

submissions by February 10, 2014 and were informed to submit past non-compliance of

SEBI Act and Regulations made thereunder by ESL/ECL and action taken by SEBI in the

past, if any, against them in the past five years.

15. Vide letter dated February 14, 2014, AR of BRLMs forwarded Note on Submissions

containing the submissions made by them on behalf of the BRLMs at hearing held on

January 28, 2015, which are dealt in the later part of the Order. Along with the said Note

on Submissions, a detail of past regulatory actions taken by SEBI against the BRLMs was

also forwarded. Similarly, ESL and ECL vide letter dated February 10, 2014, filed further

written submissions through its AR, which are dealt in the later part of the order.


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16. During the proceedings, it was observed that vide letter dated January 16, 2009, MoEF

had unconditionally also rejected ECL’s proposal for Environment Clearance for the

Kodolibad Iron Ore Mining Project of ECL. In the said letter, MoEF had inter alia noted

that the proposed project was located within the core area of the Singbhum Elephant

Reserve, which is critical to wildlife conservation, and that the Forest AdvisoryCommittee (hereinafter referred to as ‘FAC’) had rejected the proposal for diversion of

the forestland for the said project. Hence, letter Ref: EAD-6/AK/VS/9580/2014, EAD-

6/AK/VS/9581/2014 and EAD-6/AK/VS/9593/2014 dated March 28, 2014 were

further issued to the BRLMs and letter Ref: EAD-6/AK/VS/9605/2014 and EAD-

6/AK/VS/9593/2014 dated March 28, 2014 were further issued to ESL/ ECL, wherein it

was inter alia pointed out that the disclosures made in the RHP gave an appearance to

the investing public that environment clearance was received with respect to the iron

ore mine, whereas, the fact of the matter was that the same was unconditionallyrejected by MoEF vide letter dated January 16, 2009. The BRLMs and ESL/ ECL were

advised to offer their comments, if any, in the matter. Further vide the said letter dated

March 28, 2013, it was also clarified to the BRLMs that they had violated Regulation 13

of Merchant Bankers Regulations read with the following clauses of Code of Conduct for

Merchant Bankers as specified in Schedule III:

Clause 1 - A merchant banker shall make all efforts to protect the interests of investors;

Clause 4 - A merchant banker shall at all times exercise due diligence, ensure proper

care and exercise independent professional judgment;Clause 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;

Clause 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;

Clause 20 - A merchant banker shall not make untrue statement or suppress any

material fact in any documents, reports or information furnished to the Board.

17. BRLMs and ESL/ ECL were given fifteen days time to offer their comments. Vide letter

dated April 07, 2014, AR of BRLMs sought additional period of four weeks upto May 13,

2014 for filing its reply to the aforesaid letter. Vide email dated April 23, 2014, the


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BRLMs were granted time till May 09, 2014 to file their reply. Vide emails/ letters dated

April 16, 2014 and April 21, 2014, ESL and ECL sought time till May 30, 2014 to file their

reply to letter dated March 28, 2014. Vide email dated April 21, 2014, ESL and ECL were

also granted time till May 09, 2014.

18. Vide letter dated May 09, 2014, the BRLMs filed detailed individual replies to letter

dated March 28, 2014 which have been dealt with in the later part of the Order.

However, the broad issues brought out by the BRLMs through their submissions are

mentioned below:

(a) That whether a disclosure in relation to permissions, approvals and its status with

respect to the parent company of the issuer was at all required to be made, when

admittedly the same did not form a part of the objects of the issue?

(b) That if the disclosure was indeed required, whether such disclosures pertaining tothe approvals were appropriately disclosed?

(c) That if the disclosures were not appropriately disclosed as alleged, whether such non

disclosures pertained to the material adverse factors of the Issuer Company, which

had a significant influence on the decision making of the Investor?

(d) That whether their professional judgment in making appropriate disclosures to the

extent of what ought to be disclosed was faulty or blameworthy, which had a

potential bearing on the investment decision?

(e) That whether the disclosures made did not at all cover the risks associated with non-obtaining of the permissions?

(f) That whether at all there has been a rejection in real sense, especially considering

the controversy surrounding the issues relating to environment and forest approvals

within the Ministry?

(g) That did they as merchant bankers, at any point of time, had any reasons to believe

that the required p ermissions wouldn’t come through?

(h) That did the applicable rules and regulations of the regulator mandate detailed

disclosures even for non- issuer companies?

(i) That even assuming, there had been a difference between the professional judgment

exercised by them as merchant bankers and the judgment supposedly required to be

exercised as per SEBI’s expec tation, whether at all there had been any loss caused to

the investors, in as much as the investors would not have invested in the Issuer


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Company had they exercised and disclosed such factors, which in the opinion of SEBI

was required?

19. On May 9, 2014, ESL and ECL filed individual detailed replies to letter dated March 28,

2014, which are dealt in the later part of the order.

20. Thereafter vide hearing notice dated May 21, 2014, the BRLMs were given another

opportunity of personal hearing on June 06, 2014. Similarly, vide hearing notice dated

May 21, 2014, ESL and ECL were given another opportunity of personal hearing on June

05, 2014. The BRLMs vide individual letters dated May 26/29, 2014 requested to

reschedule the hearing to any date during or after fourth week of June. This request of

the BRLMs was acceded to and the personal hearing was rescheduled to June 27, 2014.

Also, ESL and ECL vide emails/ letters dated May 29, 2014 requested to reschedule thehearing to a date after June 15, 2014. This request of ESL and ECL too was acceded to

and the personal hearing was accordingly rescheduled to June 26, 2014.

21. Mr. Somasekhar Sundaresan, Mr. Ravichandra S. Hegde and Ms. Aashni Dalal from J

Sagar Associates, Mr. Anay Khare, Mr. M. Natarajan and Ms. Lakha Nair from Axis

Capital Ltd.; Ms. Sunita Kumari from SBI Capital Markets Ltd.; Mr. Sachin Khandelwal

from Edelweiss Financials Ltd., the Authorised Representatives (ARs of BRLMs)

appeared on behalf of the BRLMs. The ARs reiterated the submissions made vide lettersdated May 09, 2014. The ARs stated that they would make further submission by July

11, 2014. Vide letter dated July 11, 2014, ARs on behalf of the BRLMs forwarded a Note

on Submissions containing the submissions at the personal hearing held on June 27,

2014.

22. Ms. Tushna Thapliyal from Khaitan & Co. and Shri. Arun Gadoria from ECL (ARs of

ECL/ESL) appeared on behalf of ESL and ECL. The ARs of ECL/ESL reiterated in detail

the submissions made vide letter dated May 09, 2014 and submitted the following

documents:

i) Copies of Case law – Shiva Cement Limited vs. Union of India dated March 4,

2014 ;

ii) MoEF Notification dated September 14, 2006.


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23. During the hearing, clarification was sought from ARs of ESL/ ECL as to whether ECL

had reverted back to the MoEF with regard to the rejection of Environment Clearance by

MoEF, despite Expert Appraisal Committee (hereinafter referred to as "EAC") of MoEF

recommending the project for Environment Clearance, subject to obtaining prior

clearance from wild life angle. In response, the ARs of ESL/ECL informed that since ECLwas pre-occupied with pursuing the matter with MoEF for Forest Clearance, ECL did not

revert back to MoEF with respect to rejection of Environment Clearance communicated

by MoEF vide letter dated January 16, 2009. ARs of ESL/ECL requested that they desired

to make further submissions in the matter. The ARs of ESL/ECL were advised to make

their submissions by July 11, 2014. Vide letter dated July 11, 2014, AR's filed the written

submissions which are dealt in the later part of the order.

24. On a perusal of correspondence annexed by the BRLMs/ ESL/ECL along with theirindividual submissions, it was noted that ECL in its letter dated November 17, 2010 to

the Hon’ble Chief Minister of Jharkhand had inter alia mentioned that the Forest

Diversion Proposal of Kodolibad Iron Ore mine was twice rejected by the FC Division of

MoEF and sent back to the State Government. Hence vide email dated October 10, 2014,

the BRLMs/ESL/ECL were inter alia requested to provide a copy of the letter of MoEF

rejecting the proposal on second occasion. The BRLMs were also requested to update

the status of the conditions imposed by MoEF while granting in-principle approval for

diversion of forest land vide letter dated February 13, 2012 and provide thesubscription and allotment details category-wise.

25. The BRLMs vide their individual letters dated October 30, 2014, after re-confirming

with the issuer company ESL as well as the promoter of the issuer company i.e. ECL,

inter alia clarified that the two letters referred in the subject letter dated November 17,

2010 refer to letters from MoEF dated November 04, 2008 and January 16, 2009. It was

further also stated that the extract referred to by SEBI of ECL’s letter of November 17,

2010, issued after closure of IPO of ESL, ought not to be read in isolation and without

reference to the other contents of the said letter as well as the entire factual context

pertaining to ECL’s proposal for diversion of f orestland. The BRLMs also informed that

ECL had complied with all conditions imposed by MoEF while granting in-principle

approval. The relevant details regarding subscription and allotment were also provided.


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26. ESL vide letter dated October 14, 2014 and ECL vide letter dated October 13, 2014

informed that they will provide the necessary information and data by November 10,

2014. Subsequently, ESL and ECL vide individual replies dated October 30, 2014 inter

alia also clarified that the twice rejected referre d to in ECL’s letter dated November 17,

2010 to the Chief Minister of Jharkhand are references to MoEF’s letter dated November04, 2008 and January 16, 2009. ESL also informed that ECL had complied with all the

conditions imposed by MoEF while granting in-principle approval.

27. It was, thus, noted that the BRLMs/ESL/ECL had clarified that the “twice rejected”

referred to in ECL’s letter dated November 17, 2010 to the Chief Minister of Jharkhand

were references to MoEF’s letters dated November 04, 2008 and J anuary 16, 2009. On

perusal of the said two MoEF’s letters , it was noted that MoEF’s letter dated November

04, 2008 addressed to the Government of Jharkhand was for communicating therejection of proposal of diversion of 55.79 ha forest land for mining of Iron Ore in favour

of ECL in West Singbhum District of Jharkhand. However, letter dated January 16, 2009

was the letter addressed by MoEF to ECL communicating the rejection of ECL’s proposal

for environment clearance by MoEF. On the contrary, it was noted that ECL’s letter

dated November 17, 2010 addressed to the Hon’ble Chief Minister of Jharkhand had

inter alia brought to the notice of the Hon’ble Chief Minister that the forest diversion

proposal of Kodolibad Iron Ore Mine itself was twice rejected by the FC division and

sent back to the State Government. Thus, it was noted from the same that ECL vide letterdated November 17, 2010 had pointed out that the forest diversion proposal itself was

twice rejected by the FC division of MoEF. However, BRLMs/ESL/ECL appeared to

clarify rejection of the forest diversion proposal as one occasion and rejection of the

environment clearance as the second occasion.

28. It was further also observed from Vol III of the ‘First Report on Illegal Mining of Iron and

Manganese Ore s in the State of Jharkhand’ of the Justice M.B.Shah Commission available

in public domain that ECL’s proposal for forest diversion was again considered in the

meeting of FAC dated September 10, 2010. From a copy of FAC Minutes of the said

meeting annexed to the said Report and available in public domain, it was noted that the

FAC Minutes had recorded that as no new fact or material in addition to what had been

submitted earlier had been brought to the notice of the FAC, the Committee again

recommended the proposal for rejection. As per the said minutes, the Committee had


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noted that a detailed report on the present status of all mines located in the core of

Singhbhum Elephant Reserve was awaited from the State Government. The Committee

had also noted therein that the proposal of ECL was recommended for rejection on

account of being part of core zone of Singhbhum Elephant Reserve and that the opening

of this proposed site for mining will lead to disturbances to wildlife, pollution to therivers and fragmentation & depletion of forest resources in this region as per Wild Life

Institute of India (WII) ’s observation in its report dated October 03, 2008.

29. In view of the above, letters Ref: EAD-6/AK/RSL/31241/2014, EAD-6/AK/RSL/

31239/2014 and EAD-6/AK/RSL/31243/2014 dated November 03, 2014 were sent to

BRLMs. Also letter Ref: EAD-6/AK/RSL/31237/2014 dated November 03, 2014 and

letter Ref: EAD-6/AK/RSL/31233/2014 dated November 03, 2014 were sent to ESL and

ECL respectively. Vide the said letters, BRLMs/ ESL/ ECL were again requested to clarifythe discrepancies noted as above between their individual replies dated October 30,

2014 and ECL’s lett er dated November 17, 2010, as also vis-à-vis information available

in public domain (Vol III of the ‘First Report on Illegal Mining of Iron and Manganese

Ores in the State of Jharkhand’ of the Justice M.B.Shah Commission) that the forest

diversion proposal of ECL itself was twice rejected by FAC of MoEF – once in 2008 and

again in 2010.

30. In response, the BRLMs vide their individual letters dated November 10, 2014 inter alia pointed out that prospectus of ECL was dated September 29, 2010 and the subject

Minutes of the Meeting of the FAC as referred to in the clarification were signed after the

date of the Prospectus (i.e. October 1, 2010). It was also pointed out that the Minutes of

the said meeting do not appear to be available on the MoEF website as on date. Further

it was also pointed out that details sought referred to a letter dated November 17, 2010,

which too was a date well after completion of the issue. BRLMs stated that therefore any

inference or findings drawn on the basis of such documents after the closure of the issue

would be incorrect and inappropriate and irrelevant to the present proceedings.

Without prejudice to the above, the BRLMs vide their individual letters dated November

10, 2014 inter alia reiterated the submissions made in their individual replies dated

October 30, 2014. It was further stated that on enquiring with ESL and ECL, they were

informed that ECL had not participated in such meeting, nor, any correspondence in this

regard was ever received by ECL.


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31. ESL and ECL vide individual letters dated November 10, 2014 inter alia denied that FAC

Minutes of September 10, 2010 are in public domain and/ or were in public domain at

the relevant point of time. It was inter alia further placed on record vide the said letters

that only upon receipt of letter/ email dated November 03, 2014 and Annexure thereofthat they saw the FAC minutes of September 10, 2010 i.e. four years after the event,

however, authenticity or correctness of the information cannot be verified. Vide the said

letters, ESL and ECL inter alia, therefore, sought any mat erial in SEBI’s possession that

MoEF rejected the forest diversion proposal in 2010 including any correspondence

between MoEF and the State Government, as the minutes of FAC meeting of September

10, 2010 are/ were not available on MoEF’s website.

32. Hence, vide letter dated February 09, 2015, the following details were sought directlyfrom MoEF by invoking sub-section 2 of section 15-I of SEBI Act and under sub-section

2 of section 23-I of SCRA:

i) When did the rejection by FAC of MoEF in its meeting held on September 09, 2010

became known to ECL/ the State Government?

ii) Copy of the MoEF’s letter communicating the aforesaid rejection to ECL/ the State

Government;

iii) Whether the said rejection was otherwise available in public domain and details

thereof;iv) Copy of letter received by MoEF from Principal Secretary of Ministry of Steel;

v) Copies of ECL’s letters dated August 13, 2010, August 11, 2010 and September 20,

2010 annexed to the said letter received by MoEF from Principal Secretary of

Ministry of Steel;

vi) Copy of reply sent by MoEF to Principal Secretary of Ministry of Steel, if any;

vii) Any other related document/ information.

33. In response, MoEF vide letter dated March 27, 2015 sent some document copies.However, since the specific information/ details sought vide letter dated February 09,

2015 were not received, MoEF was requested to provide the same vide letter dated

April 21, 2015. The same was followed up with MoEF vide letters dated May 18, 2015

and June 09, 2015. MoEF sent its reply vide letter dated June 15, 2015 annexing

therewith certain document copies.


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34. On perusal of the aforesaid letters of MoEF and document copies provided therewith,

the following was inter alia noted: that the FAC of MoEF in its meeting held on September 10, 2010 had again

recommended for rejection the proposal of ECL for diversion of forest land for

Kodolibad Iron Ore Mine project; that the recommendations of FAC dated September 10, 2010 were not

communicated to the State Gov ernment. However, MoEF’s reply was silent as

regards communication, if any, directly with ECL; that from ECL’s letter dated August 11, 2010 to MoEF, it was noted that directors of

MoEF had held meeting with Secretary, MoEF on August 09, 2010 in the matter of

rejection of forest diversion proposal of ECL for Kodolibad Iron Ore Mine, just prior

to the FAC meeting held on September 09, 2010;

that further ECL vide letter dated November 17, 2010 addressed to the Hon’ble

Chief Minister of Jharkhand had inter alia mentioned that the forest diversion for

Kodolibad Iron Ore Mine was twice rejected by the FC division and sent back to the

State Government;

that ECL, just prior to the opening of IPO of ESL for subscription on September 21,

2010, had itself acknowledged the actual fact at the point of time that the forest

diversion proposal for its Kodolibad Iron Ore Mine was rejected by FAC of MoEF

vide its letter no. F.No. 8-35/2008-FC dated November 04, 2008, by stating as so in

its correspondence dated August 11, 2010 with MoEF. However, this factual aspect

that the proposal of forest diversion was rejected at the In-Principle stage itself was

not disclosed as such in the prospectus of ESL by the BRLMs.

35. It was also noted that the Hon’ble Supreme Court vide Order dated August 04, 2006 in

I.A. No. 1598 to 1600 (T. N. Godavarman Thirumulpad v. Union of India ) had

observed that: “in case MoEF disagrees with the recommendations of the FAC, it shall

record in writing and communicate to the said FAC. The FAC may after considering allsuch reasons, pass such further orders as it thinks fit; provided where the Government still

disagrees with the order passed by FAC, it may seek appropriate direction from the Hon’ble

Supreme Court.”


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36. Thus, it was observed that inspite of the fact that the recommendation of FAC played a

crucial role in proposals for forest diversion, the BRLMs failed to disclose to the

investors the MoEF/ FAC’s decision of rejection of the forest diversion pro posal at the

in-principle stage itself. This was also despite MoEF having concurred with the views of

FAC and communicated the same to the State Government and ECL.

37. In view of the above, additional comments, if any, based on the aforesaid facts that

emerged from MoEF letters dated March 27, 2015 and June 15, 2015 and the document

copies provided therewith were sought from the BRLMs vide letter Ref: EAD-

6/AK/8825/2015/1/2/3 dated July 06, 2015 and from ESL and ECL vide letters Ref:

EAD-6/AK/RSL/18821/2015 and EAD-6/AK/RSL/18823/2015 dated July 06, 2015

respectively.

38. In response, BRLMs vide individual letters dated July 24, 2015 inter alia stated that the

process adopted of issuing repeated letters/ e-mails which are in effect supplementary

allegations and notices in the garb of clarificatory letters/ supplementary materials is

incorrect and impermissible in law. In the matter, the BRLMs referred to Order dated

January 15, 2015 passed by the Hon’ble Securities Appellate Tribunal (SAT) in the

matter of Purshottam Budhwani v SEBI (Appeal No. 53 of 2013) , wherein a similar

procedure had been found to be improper and baseless. It was also pointed out by the

BRLMs vide their aforesaid individual letters that Section 15 I of the SEBI Act, underwhich the Adjudicating Officer is appointed by SEBI, enables the Adjudicating Officer to

only look into the merits of the matter placed before the officer by SEBI and the

responses provided by the BRLMs, and thereafter to adjudicate the controversy

between SEBI and the Noticees. However, in the present case, the Adjudicating Officer

had taken the task of investigating into the matter which ought to have been done by

SEBI before the issuance of the SCN and not after receipt of the reply and submissions in

the matter. Vide the said individual letters, the BRLMs inter ali a also sought an

opportunity of inspection of new documents and records to enable them to prepare

their response.

39. As regards the BRLMs contention inter alia regarding conducting investigation process

under the garb of adjudication proceedings, it was clarified vide letter dated July 30,

2015 that the information / details / documents were sought from MoEF vide letters


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dated February 09, 2015 and April 21, 2015 by invoking the powers available to the

adjudicating officer under sub-section 2 of section 15-I of SEBI Act, 1992. Further, that

as a principle of natural justice, information / details / documents received from MOEF

were provided to the BRLMs seeking additional comments of the BRLMs, if any, based

on facts that emerged from MOEF letters dated March 27, 2015 and June 15, 2015 anddocument copies provided therewith. Also, vide the said letter, an opportunity to

inspect new documents i.e. the letters / documents which were provided as annexures

to letter dated July 06, 2015 was provided on August 10, 2015. Accordingly on August

10, 2015, the AR on behalf of the BRLMs undertook inspection of documents in

connection with letter dated July 06, 2015 issued to them. The AR on behalf of the

BRLMs undertook to make further submissions by August 25, 2015 in the matter.

40. Vide individual letters dated August 25, 2015, the BRLMs while reiterating their earliersubmissions, inter alia further stated that the issue raised in the letter dated July 06,

2015 were based on assumptions, conjecture and surmise and thereby unsustainable.

That as a result of contradictory, conflicting, fragmented and inconsistent allegations

made in a piecemeal manner vide multiple notices, letters and emails, SEBI has

rendered it impossible for the BRLMs to understand the allegations against it and

effectively provide a response to the same. It was also inter alia stated that the quoted

observations made by the Hon’ble Supreme Court in Order dated August 4, 2006 (I.A.

No. 1598 to 1600) (T. N. Godavarman Thirumulpad v. Union of India ) referred to inthe letter under reply, were made by the Hon’ble Supreme Court in relation to a peculiar

situation concerning the issuance of temporary working permissions in cases of

renewal of mining leases & the said procedure prescribed therein, and cannot be

applied gener ally to all cases. Particularly, the said observations of the Hon’ble Supreme

Court have no application to the facts and circumstances of the present case.

41. In this regard, the BRLMs cited the judgment dated March 24, 2014 passed by the

Hon’ble National Green Tribunal in Appeal No. 73/2012 (Sudiep Shrivastava v. State

of Chattisgarh & Ors. ), wherein the Hon’ble Tribunal was inter alia seized of the issue

as to “ whether the advice rendered by FAC is binding on the Minister dealing with the

proposal for granting approval to the forest clearance ” and also considered the

observations of the Hon’ble Apex Court in the T.N. Godavarman case as referred to by


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SEBI in the letter under reply. In this regard, the BRLMs have stated that the following

observations of the Hon’ble Tribunal are relevant:

“15. To meet the submissions of the respondents, learned counsel for the appellant has

placed reliance on the order dated 4th

August 2006 passed by the Hon’ble Supreme Court inI.A No. 1598-1600 in WP(C) no. 202/1995: T.N Godawaramn Thirumulkapad Versus Union

of India and others:(2010)13SCC 740. He particularly invited our attention to the

following directions at Para 20(x) to (xii) in the Said order:

[…]

16. It is pointed out to us by the respondents that the Hon’ble Sup reme Court was

considering a peculiar situation arising out of issuance of temporary working permissions

(TWP) in cases of renewal of mining leases without following the procedure under the FC

Act and had laid down the pre-conditions and procedure for gran t of TWP’s vide para 20

in said judgment. It is correct that the Hon’ble Supreme Court was not dealing with the

case of grant of approval for fresh mining licenses and was dealing with the peculiar

situation before it. This is apparent from a bare perusal of the order:

““18. On considerations thereof, the conditions precedent for the grant of TWP’s as well as

the procedure for their grant shall be as provided hereinafter. At the outset, it is clarified

that TWPs shall be granted only where the following conditions are satisfied.

Preconditions:

19.(i) TWPs can only be granted for the renewal of mining leases, and not where the lease

is being granted for the first time to the applicant user agency:

(ii) The mine is not located inside any national park/sanctuary notified under sections 18,

26- A or 35 of the Wild Life (Protection) Act, 1972…”

[…]

19. In the entire scheme of FC Act and the rules made therein there is no provision which

give the meaning of the word ‘advice’ or makes the acceptance of the advice tendered by

the FAC obligatory. The formation of the FAC is for the purposes of ensuring the fair and

fully informed decision by the Minister without any arbitrariness in the matter of grant of

approval under Section 2 of the FC Act. […]


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20. Given a proper meaning to the word “Advise” used in section 3 of the FC Act and the

rules framed there under, it is not difficult to see that the function of FAC is to give advice

or to make recommendations to the Central Government (MoEF) which the Central

Government is under obligation to consider but is free to take such decision granting

approval to the proposal with or without conditions or rejecting the same after such further enquiry as it may consider necessary. In other words, considering the scheme of the

FC Act and the Rules made thereunder, in our considered view, such an advice is not

binding stricto senso on the Central Government (Minister of State Environment and

Forest) but the Central Government remains under obligation to duly consider the advice

of the FAC and pass a reasoned order either accepting with or without condition or

rejecting the same based on facts, studies and such other authoritative material, if

necessary gathered from further enquiry. ”

[Emphasis supplied]

42. Further, vide the said individual letters dated August 25, 2015, BRLMs have stated that

the allegations in letter dated July 06, 2015 are recorded on the basis of minutes of the

meeting held by FAC on September 10, 2010. The BRLMs have pointed out that the

minutes of the FAC meeting dated September 10, 2010 were never shared with them,

nor were they available in the public domain. It has been stated further that such

minutes were provided to them for the first time along with letter dated July 06, 2015,

however, it did not change the scope of the proceedings, nor, the submissions made

earlier. The BRLMs have also stated that it is also a matter of record from the perusal of

the correspondence provided that the minutes of the FAC were never in the public

domain. In the matter, the BRLMs have emphasized that MoEF also clarified that it did

not inform the State Government of the decision taken at FAC meeting on September 10,

2010. Also, that MoEF did not even make a mention of the FAC meeting held in

September 2010 while providing the status update to the Planning Commission.

43. Further, in response to letter dated July 06, 2015, ESL and ECL vide individual letters

dated July 27, 2015 submitted their replies. ESL/ ECL vide the said reply while

reiterating their earlier submissions has inter alia further stated that the present

enquiry is a random and roving enquiry and unconnected to the allegations in the SCN.

It has been stated that ECL’s letter to the Chief Minister dated November 17, 2010 and/


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or the recommendations of FAC are of no relevance to the allegations raised in the SCN,

which were restricted to alleged non-disclosure in ESL’s IPO/ under clause 36 of Listing

Agreement (in respect of forest clearance for Kodolibad Iron Ore Mine). Further, both

ESL/ ECL in addition to submissions made earlier, have denied that FAC minutes of

September 2010 were in public domain. Also, ESL/ ECL too have stated that reference todirections passed by the Hon’ble Supreme Court on August 04, 2006 in I.A. no. 1598 -

1600 are of no relevance to the present case as they were passed in the context of

mining activity inside national parks/ sanctuaries and issue of Temporary Working

Permissions for renewal of mining lease, and are not applicable when considering grant

of approval for fresh mining lease. Further, ESL/ ECL have denied that ECL was aware of

the second rejection by FAC in September 2010 by way of any communication with

MoEF, other than by means of written correspondence. Further, it has been pointed out

that it is MoEF’s own assertion that MoEF did not communicate the recommendation ofFAC dated September 10, 2010 to the State Government.

44. In the aforesaid letter dated July 06, 2015 sent to ESL/ ECL, another opportunity of

hearing was granted to ESL/ ECL on August 06, 2015. Ms Tushna Thapliyal and Mr.

Arun Gadoria (ARs) appeared on behalf of ESL and ECL. The ARs reiterated the

submissions made vide individual letters dated July 27, 2015. Further, during the

personal hearing the ARs submitted the following case laws:

Tolaram Relumal and Ano v State of Bombay – (1955) 1 SCR 158 Sudiep Srivastava v State of Chattisgarg and Others – Judgment dated

March 24, 2014. Appeal no. 73/2012 before the National Green Tribunal,

New Delhi;

Tourist Hotel v. State of Andhra Pradesh and Ano. – (1975) 1 LLJ 211 AP Copy of the Forest (Conservation) Act, 1980 Copy of the Forest Conservation Rules, 2003 Copy of the Clause 36 of the Listing Agreement

45. Further, during the personal hearing, it was pointed out to the ARs of ESL/ ECL that vide

individual letters dated November 10, 2014 of ESL and ECL, in response to letter dated

November 03, 2014, ECL and ESL had inter alia stated that “twice rejected” in ECL’s

letter dated November 17, 2010 to Chief Minister refers to MoEF’s letters dated

November 04, 2008 and January 16, 2009. However from records, it was noted that


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November 17, 2010 letter of ECL to the Chief Minister referred to the fact that forest

diversion proposal of Kodolibad Iron Ore mine was twice rejected by the FC division,

whereas letter dated January 16, 2009 is with respect to rejection of environment

clearance and not with respect to forest diversion proposal.

46. Vide hearing notice dated September 04, 2015, another opportunity of personal hearing

was granted to the BRLMs on September 22, 2015. Mr. Somasekhar Sundaresan, Mr.

Ravichandra S. Hegde and Ms. Aashni Dalal from J. Sagar Associates, Mr. Anay Khare, Mr.

M. Natarajan and Ms. Lakha Nair from Axis Capital Ltd., Mr. Bhaskar Chakraborty from

SBI Capital Markets Ltd., Ms. Bhavana Kapadia from Edelweiss Financial Services Ltd.

(Authorized Representatives – ARs of BRLMs ) appeared on behalf of the BRLMs. The

ARs reiterated the submissions made vide individual letters dated July 24, 2015 and

August 25, 2015. The BRLMs were requested to submit copy of the letter dated August13, 2010 and/ or September 20, 2010 of ECL addressed to the MoEF, Ministry of Steel or

any other authority in the matter of forest clearance of Kodolibad Iron Ore Mine Project,

if any.

47. Vide letter dated October 06, 2015, the AR on behalf of the BRLMs submitted a Note on

Submissions summarizing the key submissions made under instructions from and on

behalf of the BRLMs in the matter. It was also submitted by the AR that as per

instructions, no letter dated August 13, 2010 and/ or September 20, 2010 of ECLaddressed to MoEF, Ministry of Steel, or, any other authority in the matter of forest

clearance of Kodolibad iron ore mine project is available with the BRLMs. Also that the

BRLMs reconfirmed with the issuer company ESL and were informed that no such letter

is available in their records as well. Similar individual emails dated September 10, 2015

were also received from each of ECL and ESL confirming that as per their records, there

is no letter from ECL to Ministry of Steel dated September 20, 2010. Further while

reiterating the submissions already made, the Note on Submissions from BRLMs also

pointed to the fact that uploading of the minutes of the FAC on the website of MoEF had

commenced pursuant to the Order of the Hon’ble Supreme Court requiring

transparency in conduct of affairs of FAC. It was stated therein that therefore prior to

July 06, 2011 i.e. the date of the Hon’ble Supreme Court Order, the minutes of FAC’s

proceedings were not available in public domain.


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CONSIDERATION OF ISSUES AND FINDINGS

48. I have carefully perused the written submissions wherever submitted by the BRLMs,

ESL and ECL as well as by AR of BRLMs on behalf of the BRLMs and by AR of ECL/ESL on

behalf of ECL/ESL, the facts put forth during the hearings and the documents availableon record. The allegation against the BRLMs is of failing to ensure adequate disclosure

of the fact of rejection of proposal of forest clearance for Kodolibad Iron Ore Mine in the

DRHP/ RHP/ Prospectus of ESL, and therefore violating the provisions of Regulation

57(1), Regulation 57(2)(a)(ii) and Regulation 64(1) of the ICDR Regulations and

Regulation 13 of Merchant Bankers Regulations. The allegation against ESL is of failing

to disclose the fact of rejection of proposal of forest clearance for Kodolibad Iron Ore

Mine in the DRHP/ RHP/ Prospectus of ESL, and therefore violating the provisions of

Regulation 57(1) and Regulation 57(2)(a)(ii) of the ICDR Regulations. Further, theallegation against ECL is of failing to disclose the fact of rejection of proposal of forest

clearance for Kodolibad Iron Ore Mine to the Stock Exchanges and therefore violating

the provisions of Clause 36 of the Listing Agreement read with Section 21 of the SCRA.

49. The relevant provisions referred above reads as follows:

Regulation 57 (1), 57 (2) (a) (ii) of the ICDR Regulations

Manner of disclosures in the offer document57 (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) Without prejudice to the generality of sub-regulation (1):

(a) the red-herring prospectus, shelf prospectus and prospectus shall contain:

(ii) the disclosures specified in Part A of Schedule VIII, subject to the provisions

of Parts B and C thereof.

Due diligence.

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.


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Regulation 13 of the Merchant Bankers Regulations

Code of conduct.

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

III. The specific provisions are:a. Clause 1 - A merchant banker shall make all efforts to protect the interests of

investors.

b. Clause 4 - A merchant banker shall at all times exercise due diligence, ensure

proper care and exercise independent professional judgment.

c. Clause 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.

d. Clause 7 - A merchant banker shall endeavour to ensure that the investors areprovided 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.

e. Clause 20 - A merchant banker shall not make untrue statement or suppress any

material fact in any documents, reports or information furnished to the Board.

Clause 36 of Listing Agreement

"…..The Company will also immediately inform the Exchange of all the events which will

have bearing on the performance/ operations of the company as well as price sensitive

information.….."

Section 21 of SCRA

Conditions for Listing

21 Where securities are listed on the application of any person in any recognized stock

exchange, such person shall comply with the conditions of the listing agreement with that

stock exchange.

50. Before proceeding to examine the issues involved in the matter, from MoEF’s reply

dated June 15, 2015, I have taken note of the fact that the recommendation of FAC dated

September 10, 2010 of rejection of the forest diversion proposal for the Kodolibad Iron


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Ore Mine of ECL on a second occasion was not communicated to the State Government.

Also that MoEF has started uploading the minutes of the FAC meetings, only in

pursuance to directions contained in Hon’ble Supreme Court Order dated July 06, 2011.

Hence, there is no record pertaining to uploading of the minutes of FAC meeting dated

September 10, 2010 on the website of MoEF (presently MoEF&CC). Thus, I find fromthe available records that there is nothing on record to suggest that the rejection of

ECL’s pro posal for forest diversion by FAC in September 2010 on a second occasion was

officially communicated to the State Government/ ECL by MoEF. This issue arose

because on a perusal of ECL’s letter dated November 17, 2010 to the Hon’ ble Chief

Minister of Jharkhand, it came to be realized that ECL had inter alia highlighted therein

that the Forest Diversion Proposal of its Kodolibad Iron Ore mine was twice rejected by

the FC (Forest Conservation) Division of MoEF and sent back to the State Government.

However, I note here that the BRLMs, the issuer company ESL as well as the promoter ofthe issuer company i.e. ECL have all inter alia clarified that the two letters referred in

the subject letter dated November 17, 2010 refer to – (i) letter from MoEF dated

November 04, 2008 to the State Government and (ii) letter from MoEF dated January

16, 2009 addressed to ECL. On perusal of the said two letters issued by MoEF, I note that

letter dated November 04, 2008 was issued by the FC division i.e. the Forest

Conservation division of MoEF, however, letter dated January 16, 2009 was issued by IA

division i.e. the Environmental Impact Assessment division of MoEF, and not the FC

division. Further, I find that MoEF has not commented as regards communication, if any,directly with ECL. However, in the absence of any evidence to support the prima facie

impression gathered from reading of ECL’s letter dated November 17, 2010, I accept the

contention of the BRLMs, the issuer company ESL and the promoter listed company ECL

that the minutes of the FAC meeting held on September 10, 2010 again recommending

rejection of forest diversion proposal for Kodolibad Iron Ore Mine of ECL on a second

occasion were never shared with ECL, nor, available in public domain. In view of the

same, I do not propose to take forward the issue with regard to the rejection by FAC

of the forest diversion proposal for Kodolibad Iron Ore Mine of ECL on a second

occasion in September 2010 and will proceed with the matter at hand accordingly.

51. Further, I find that the BRLMs have cited Order dated January 15, 2015 passed by the

Hon’ble Securities Appellate Tribunal (SAT) in the matter of Purshottam Budhwani

v SEBI (Appeal No. 53 of 2013) to state that issuing repeated letters/ e-mails in the


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garb of clarificatory letters/ supplementary materials is incorrect and impermissible in

law, and that the Hon’ble SAT had considered a similar procedure followed in the

aforesaid cited case to be improper and baseless. Unlike the case of Purshottam

Budhwani v SEBI, where reply based on SCN and not on ‘supplementary material letters’

was considered, in the extant case, I find that all submissions made by the BRLMs, theissuer ESL and its promoter ECL have been taken on record. Also, as can be seen from

above, at every stage, an opportunity of personal hearing was given to BRLMs, issuer

ESL and its promoter ECL. Thus, the proceedings were conducted as per the principles

of natural justice. Hence, the facts in the extant case are different from the aforesaid case

referred by the BRLMs. Besides, even in the said case of Purshottam Budhwani v SEBI

referred by the BRLMs, I note that the Hon’ble SAT has remanded back to SEBI for issue

of fresh SCN by incorporating all the details. Further, I find that this concern was raised

by the BRLMs after issue of letters in the matter of purported second rejection by FACon September 2010. However, in view of the fact that I do not propose to take forward

the issue with respect to second rejection by FAC in September 2010, the contention

itself is no longer relevant.

52. With this in place, we now move ahead to examine one by one the issues involved in the

matter. The issues that arise for consideration in the present case are:

a) What is to be considered as ‘material disclosure’ from the investors point of view

and what is t he significance of the phrase ‘ offer document shall contain all materialdisclosures which are true and adequate’ as per Regulation 57(1), Regulation

57(2)(a)(ii) and Regulation 64(1) of the ICDR Regulations?

b) In which case, whether the actual status of the forest diversion proposal of

Kodolibad Iron Ore Mine of ECL was material disclosure required to be disclosed in

the Initial Public Offer (hereinafter referred to as ‘IPO’) of ESL so that the investors

investing in the IPO of ESL could take an informed investment decision?

c) If so, whether the disclosure made in the DRHP/ RHP and prospectus of IPO of ESL

with respect to the status of ‘forest clearance’ and ‘environmental clearance’ for the

Kodolibad Iron Ore Mine of ECL were true and adequate as per Regulation 57(1),

Regulation 57(2)(a)(ii) and Regulation 64(1) of the ICDR Regulations, as applicable

to the BRLMs/ issuer ESL?

d) If not, whether the BRLMs and the issuer ESL suppressed material facts regarding

rejection of ‘forest clearance’ and ‘environment clearance’ by MoEF with respect to


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the Kodolibad Iron Ore Mine of ECL in the RHP of IPO of ESL and thereby misled the

investors who invested in the issue by concealing the factual status of the

clearances from them?

e) If so, did the BRLMs fail to exercise proper due-diligence on their part in violation

of Clause 1 of Form C of Schedule VI of Regulation 57(1), Regulation 57(2)(a)(ii)and Regulation 64(1) of the ICDR Regulations and Regulation 13 of the Merchant

Bankers Regulations read with clauses 1, 4, 6, 7 and 20 of Code of Conduct for

Merchant Bankers as specified in Schedule III?

f) Does the violation, if any, on the part of the BRLMs attract monetary penalty under

Section 15HB of the SEBI Act?

g) If so, what would be the monetary penalty under Section 15HB of SEBI Act against

the BRLMs and the issuer ESL taking into consideration the factors mentioned in

Section 15J of the SEBI Act?h) Further, what constitutes events having a bearing on the performance/ operations

of a company as well as price sensitive information, which are required to be

immediately disclosed to the stock exchanges in accordance with Clause 36 of the

Listing Agreement?

i) In which case, whether the rejection of the proposal for forest clearance for

Kodolibad Iron Ore Mine of ECL by MoEF was a event having a bearing on the

performance/ operations of ECL as well as a price sensitive information, which was

required to be immediately disclosed to the stock exchanges in accordance withClause 36 of the Listing Agreement read with Section 21 of SCRA?

j) If so, whether such disclosure was made by ECL to the concerned stock Exchanges

where the shares of the company were listed?

k) Does the violation, if any, on the part of ECL attract monetary penalty under Section

23A(a) and 23E of the SCRA?

l) If so, what would be the monetary penalty under Section 23A(a) and 23E of the

SCRA against ECL taking into consideration the factors mentioned in Section 23J of

the SCRA?

53. I note that the BRLMs, ESL and ECL have inter alia denied all allegations made in

the complaints and the SCN/ letters issued to them. ESL has inter alia also stated

that the contentions, allegations and averments in the complaints, SEBI’s letter and

SCNs are contrary to and inconsistent with events that transpired leading to receipt


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of in-principle approval by ECL from the Central Government. Further, the BRLMs

have inter alia stated that there was no independent enquiry or any investigation

conducted by SEBI in the present case. The BRLMs have stated that without any

independent evaluation of facts and records, selectively recording the

acknowledgement made by the BRLMs without appreciating the content of the saidresponses, such acknowledgment cannot in any manner be construed as admission

of fault by the BRLMs. The BRLMs vide letter dated December 31, 2013 have inter

alia stated that the word ‘rejection/ rejected’ in their earlier response cannot be

construed to be an acknowledgement of rejection as alleged in the complaint

letters filed with SEBI, as the word rejection was coined in the reply in context of

the letter of SEBI which was under reply. The BRLMs have stated that the

Adjudicating Officer, hence, ought to consider all submissions made without

limiting to or relying only upon the documents relied upon and annexed to the SCN,and, follow the adversarial system to consider whethe r at all SEBI’s observations &

allegations are sustainable to warrant the initiation of the present proceedings. The

BRLMs have also stated that ESL in its reply has pointed out that the complainants

were neither investors nor shareholders of the company.

54. In the matter, all submissions made by the BRLMs, ESL and ECL both written and at

the personal hearing, as well as documents placed on record, are given due

consideration. I find that SCN is generally issued based on an investigation or

preliminary inquiry conducted by SEBI, and an adjudicating officer so appointed, is

required to conduct a quasi-judicial enquiry and accordingly penalize or acquit the

persons charged. Further, as regards the suggestion of the BRLMs of following the

adversarial system, I note here that fairness to the BRLMs is better protected in the

adversarial system. However, some of the good features of the Inquisitorial system

can also be adopted to strengthen the adversarial system and make it more

effective. This includes leading evidence with the object of seeking the truth and

focusing on justice to the investors. Further, I find that Courts have alsoconsistently opined that though trials in India are adversarial, there are instances

where shades of the inquisitorial system seep in, like in Public Interest Litigations

and examination of witnesses. The Hon’ble Supreme Court in Makhan Lal Bangal

v. Manas Bhunia & Ors (2001) 2 Supreme Court Cases 652 has held as follows:

“Though the trials in India are adversarial, the power vesting in the court to ask any


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question to a witness at any time in the interest of justice gives the trial a little touch

of its being inquisitorial. ” Similarly, in Manohar Joshi v. State of Maharashtra

reported in MANU/SC/1218/2011, the Hon’ble Supreme Court held as follows:

“By its very nature the PIL is inquisitorial in character. Access to justice being a

Fundamental Right and citizen's participatory role in the democratic process itselfbeing a constitutional value, accessing the Court will not be readily discouraged.”

Taking all of the same into consideration, the Order is being passed by following

the adversarial system and exercising the powers available to the Adjudicating

Officer under Section 15I(2) of the SEBI Act and Rule 4(6) of SEBI (Procedure for

Holding Inquiry and imposing Penalties by Adjudicating Officer) Rules, 1995.

55. Further, it is a settled law that where an authority makes an Order in exercise of

a quasi-judicial function, it must record its reasons in support of the Order itmakes. Every quasi-judicial order has to be supported by reasons. Similarly, in the

extant case, I propose to pass a speaking Order giving reason in support and after

observing the principles of natural justice.

56. I further note that vide letter dated December 31, 2013, the BRLMs have inter alia

stated that to hold them guilty of the alleged violations, it is important that each of

the grounds mentioned below will have to be dismissed by the Adjudicating Officer

with justifiable reasons: That there was no “rejection” of the Proposal made by ECL and it was merely a

communication issued by the MoEF which inter alia informed the inability of the

FAC to recommend acceptance of the Proposal;

That there is no provision for rejection of Proposal, more particularly by the FAC

which is a mere recommending body to assist the MoEF, under the applicable rules

and regulations formulated by MoEF as amended from time to time;

That the same Proposal which was submitted by ECL in 2007, was considered by

the MoEF (which is the deciding authority) and in-principle approval was granted

by the Central Government on February 13, 2012. No fresh Proposal had ever been

submitted;

That the reconsideration of the Proposal cannot mean conside ring a “rejected”

Proposal. Without prejudice to the above, it is to be noted that, even if the Proposal

were to have been rejected by MoEF, such rejection would not have been fatal to

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the public issue made by the Issuer Company save and except the cost factors as

mentioned in the Risk Factors;

That the Proposal and the underlying events pertained to ECL and not the Issuer

Company. Adequate disclosures and risk factors pertaining to the Issuer Company

have been admittedly provided in the Prospectus; That even assuming without admitting that there was indeed a rejection of

Proposal, the said rejection is not fatal to the object and purpose of the public

issue, and therefore lacks “materiality”;

That it is incorrect to state that there was no visible event that had taken place

indicating a reversal of the initial decision of rejection;

That they have taken all necessary care and exercised due diligence in the conduct

of their affairs in the matter as expected from the merchant banker or any

regulatory bodies.

57. I note here that the BRLMs, ESL and ECL have all endeavoured to provide a

complete chronology of events in the matter, the scheme of the applicable law

along with all necessary records in support thereof. Taking the same into

consideration, we will now move ahead to examine one by one each of the issues

listed as above at Para 52 above.

A) The first issue for consideration is what is to be considered as ‘materialdisclosure’ from the investors point of view and what is the

significance of the phrase ‘ offer document shall contain all material

disclosures which are true and adequa te’ as per Regulation 57(1),

Regulation 57(2)(a)(ii) and Regulation 64(1) of ICDR Regulations?

58. BRLMs Submission vide letter dated December 31, 2013 in the matter: That the ICDR Regulations do not provide for any cut and dried formula to

identify materiality of information in any offer document; The word materiality is also not defined in the ICDR Regulations. Therefore, it is

prudent and reasonable that the materiality of a given fact be judged on the

basis of the following criterion:

Whether the failure to disclose such fact has resulted in providing

inadequate information to the shareholders;


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Whether the failure to disclose such fact has resulted in depriving the

shareholders to take an informed decision;

Whether such fact, when disclosed would have changed the decision of the

investors who would have taken a different decision than what was taken in

the absence of disclosure of such fact.

59. I note that ICDR Regulations under Regulation 57(1) states that 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. Thus, I note that disclosure

of all material facts in the RHP is a matter of legal obligation. However, as pointed

out by the BRLMs, what is ‘material disclosure’ has not been defined under the

ICDR Regulations. It is based on the disclosures made in the prospectus that an

investor decides whether to invest in a particular company or not. I agree with thesubmissions made by BRLMs as above. I note that ‘material disclosure’ has to be

determined objectively from the view point of a reasonable investor. Accordingly, I

note that the assessment of the materiality of an event or development requires a

contextual determination that takes into account all of the relevant circumstances,

including the nature of the event or development and its consequences to the

issuer's business.

60. Here it, however, needs to be noted that the word ‘material’ means ‘important’. TheBlack's Law Dictionary (Tenth Edition) defines 'Material' inter alia as 'Of such a

nature that knowledge of the item would affect a person's decision making;

significant; essential.' Further, Materiality is not the same as completeness. One

might possess all material information without necessarily possessing all true and

adequate information. Hence, I find that the ICDR Regulations has tried to strike a

balance by requiring issuers to disclose in the offer document all material

disclosures which are true and adequate, so as to enable the investors to take an

informed investment decision.

61. Now to examine what constitutes material disclosures that are true and adequate

from the investors’ point of view, we need to look at the aspect of what investors

expect in a disclosure. Investors, in general, expect explicit statements bringing out

the real facts and how it would affect their investments or that of the issuer


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company. Hence, disclosures in prospectus should be based on actual facts at the

time of the issue and not based on some speculation or hypothesis. In case any

event or outcome happens, which may directly or indirectly affect the issuer

company and / or investors, an investor has the right to know and the issuer/

BRLMs is required to inform the investors all the facts necessary to ensure theunderstanding of what has occurred. Concern regarding what impact such truthful

disclosure would have on an investor should not weigh in the mind of the issuer

while making disclosures in the prospectus. Further, the subjective views of the

issuer, if any, thus, does not factor into this analysis. Thus, true and adequate

disclosure is said to be made, if the disclosure is accurate and not misleading and

does not omit a fact that is either material itself or is necessary to understand the

facts that have been disclosed, so as to enable the investors investing in the issue to

take an informed investment decision.

62. Besides, I note that Regulation 57(2)(a)(ii) of the ICDR Regulations states that the

RHP, shelf prospectus and prospectus shall contain disclosures specified in Part A

of Schedule VIII subject to the provisions of Parts B and C thereof. Also as per 64(1)

of the ICDR Regulations, BRLMs are required to exercise due diligence and satisfy

themselves about all the aspects of the issue including the veracity and adequacy of

disclosure in the offer documents.

B) In which case, the next issue for consideration is whether the factual

status of the forest diversion proposal of Kodolibad Iron Ore Mine of

ECL was a material disclosures required to be disclosed in the IPO of

ESL, so that the investors investing in the IPO of ESL could take an

informed investment decision?

63. BRLMs Submission vide letter dated December 31, 2013 in the matter: that the information pertaining to the rejection of proposal by an advisory

committee pertains to the approval to be obtained from ECL and not ESL;

that rejection or approval of the Proposal would not have any material

bearing on the Issuer Company ESL, except to the limited extent of increasing

the cost of procuring the raw materials, which cannot, by any stretch of


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imagination, be construed as a material factor affecting the business of the

Issuer Company ESL or its working;

That the fact that the Proposal was pending approval from MoEF was a fact

clearly borne out from the facts mentioned in various letters;

That in addition to the same, the Prospectus contained several Risk Factorswhereby, the possibility of the Proposal being rejected was also accounted for.

Further, the Risk Factors also intimated the investors that alternative

arrangements by Issuer Company would have to be made to procure the raw

materials in the event of the rejection of forest clearance. Therefore, the

disclosure or non-disclosure of the alleged rejection cannot have any material

bearing on the decision of the investors.

64. ESL’s Submission vide letter dated February 10, 2014 in the matter: The so called rejection as per records was only an initial response as a part of

the process and was certainly not a final decision;

The initial so called rejection

Adjudication Order in the matter of M/s Electrosteel Steels Limited and M/s Electrosteel Castings...

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