SEBI Imposes Rs 3 Lakh Penalty On Mediaone's Merchant Banker For Due Diligence Lapses In Open Offer

The Securities and Exchange Board of India (SEBI) has imposed a Rs 3 lakh penalty on merchant banker Kunvarji Finstock Private Limited for lapses in due diligence and disclosure during an open offer involving Chennai-based media company Mediaone Global Entertainment Limited.

Mediaone operates across film production, distribution, theatre management, television content, and event management, producing content in multiple languages including Tamil and Hindi. Notable films produced by the company include Kochadaiiyaan, Cheeni Kum, Om Shanti Om, and Provoked.

In an order passed by Adjudicating Officer Jai Sebastian, the regulator observed that the obligations of the merchant banker acting as manager to the open offer is a standalone one unaffected by the conduct of its client (Acquirer). The regulator further noted that the merchant banker, being a professional body, is required to ensure regulatory compliance with reference to the public offer and, therefore it is expected to carry out utmost care and compliance with the regulations applicable to the public offer.

However, in the present case, the regulator observed that the merchant banker failed to ensure compliance with the applicable regulations in the offer letter, thereby failing to discharge its duties under SEBI Regulations. 

"In view of the foregoing, I am of the opinion that Noticee No.1 had failed to ensure that the contents of the LOF were true fair and adequate in all material aspects, not misleading in any material particular and based on reliable sources and it also failed to exercise diligence and thus violated regulation 27(2) and 27(5) of the SAST Regulations and regulation 13 and clause 4 of Schedule III of Merchant Bankers Regulations."

The case arose after UK-based PPG International Limited signed a Share Purchase Agreement on July 29, 2022, to acquire 51.32% of Mediaone Global Entertainment. The Draft Letter of Offer (DLOF) was filed on August 17, 2022, and the Letter of Offer (LOF) on January 3, 2023.

Kunvarji Finstock, acting as the manager to the offer, submitted that J Murali Manohar, the acquirer's director, as a promoter, also holds 100% shares of Acquirer. However, public records indicated that he had transferred all shares to Gheetha Ammasee on June 1, 2022, prior to the filings, which SEBI alleged the merchant banker failed to account for through fresh due diligence.

SEBI found that Kunvarji Finstock had failed to ensure that the contents of the LOF were true fair and adequate in all material aspects, not misleading in any material particular and based on reliable sources and it also failed to exercise diligence. The AO clarified that the primary issue was factual accuracy, stating that to ascertain the information provided in the LOF is true, fair and accurate or not.

Meanwhile, Manohar was exonerated, with SEBI noting that there was no violation of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

The regulator fined Kunvarji Finstock Rs 3 lakh for lapses in disclosure and due diligence during an open offer, citing violations of SEBI rules for merchant bankers and takeover regulations. The adjudication proceedings against Dr Murali Manohar were disposed of without penalty. 

"I hereby impose a monetary penalty of Rs. 3,00,000/- (Rupees Three Lakh) on Noticee No. 1, i.e., Kunvaji Finstock Private Limited under section 15HB of SEBI Act for the violation of regulation 27(2) and 27(5) of the SAST Regulations and regulation 13 and clause 4 of Schedule III of Merchant Bankers Regulations. The adjudication proceedings initiated against Noticee No. 2 is hereby disposed of without imposition of any penalty"

SEBI noted that while there was no evidence of disproportionate gain or loss to investors, the failure of a SEBI-registered intermediary to meet statutory obligations warranted the penalty.

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