Pranav B Prem

The Securities and Exchange Board of India (SEBI) has imposed a ₹3 lakh penalty on Kunvarji Finstock Private Limited, a SEBI-registered merchant banker, for lapses in due diligence and disclosure obligations while managing an open offer involving Mediaone Global Entertainment Limited, a Chennai-based media and entertainment company. The order was passed by Adjudicating Officer Jai Sebastian under Section 15HB of the SEBI Act, 1992, finding that Kunvarji Finstock failed to exercise adequate due diligence and ensure factual accuracy in the Letter of Offer (LOF) filed in relation to the acquisition of Mediaone’s shares by PPG International Limited, a UK-based company.

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Background

Mediaone Global Entertainment Limited operates in the areas of film production, distribution, theatre management, television content, and event management. The company has produced several well-known films, including Kochadaiiyaan, Cheeni Kum, Om Shanti Om, and Provoked. The case arose after PPG International Limited, incorporated in the UK, executed a Share Purchase Agreement (SPA) on July 29, 2022, to acquire 51.32% shareholding in Mediaone Global Entertainment Limited. As per the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations), the acquirer was required to make an open offer to the public shareholders of the company. Kunvarji Finstock Private Limited was appointed as the manager to the open offer, and the Draft Letter of Offer (DLOF) was filed with SEBI on August 17, 2022, followed by the Letter of Offer (LOF) on January 3, 2023.

SEBI’s Findings

SEBI noted that Kunvarji Finstock had represented in the LOF that Dr. J. Murali Manohar, the acquirer’s director, also held 100% shareholding in PPG International Limited. However, SEBI’s investigation revealed that public records indicated otherwise — Dr. Manohar had transferred his entire shareholding in the acquirer company to Ms. Gheetha Ammasee on June 1, 2022, well before the open offer documents were filed. The Adjudicating Officer observed that Kunvarji Finstock failed to conduct independent verification or carry out fresh due diligence to ensure the correctness of the acquirer’s shareholding structure before filing the LOF. This resulted in an incorrect disclosure being made to investors.

The order stated: “The obligations of the Merchant Banker acting as Manager to the Open Offer are standalone and unaffected by the conduct of its client (Acquirer). The Merchant Banker, being a professional body, is required to ensure regulatory compliance with utmost care and diligence.”  It further observed: “Noticee No.1 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. It also failed to exercise diligence, thereby violating Regulation 27(2) and 27(5) of the SAST Regulations, 2011, and Regulation 13 and Clause 4 of Schedule III of the SEBI (Merchant Bankers) Regulations, 1992.”

Merchant Banker’s Defence

Kunvarji Finstock submitted that the incorrect statement regarding the acquirer’s shareholding was based on information and representations provided by the acquirer, Dr. J. Murali Manohar, and that the merchant banker had acted bona fide. It argued that there was no willful negligence, and that SEBI should not attribute the acquirer’s omissions to the merchant banker. However, the Adjudicating Officer held that the duty to verify information independently lies with the merchant banker, who must act as a regulatory gatekeeper ensuring the accuracy of disclosures made in offer documents. The order clarified that the merchant banker’s obligations are independent of the acquirer’s conduct, and cannot be diluted merely because the client provided incorrect information.

Findings on Acquirer

While holding Kunvarji Finstock liable, SEBI exonerated Dr. Murali Manohar, finding that there was no evidence of violation of the SAST Regulations by him. The order stated that the primary issue was limited to the accuracy of disclosures made in the LOF, which fell within the merchant banker’s domain of responsibility.

Considering the lapse to be a procedural deficiency and not one causing any quantifiable investor loss, SEBI imposed a monetary penalty of ₹3,00,000 on Kunvarji Finstock Private Limited for violation of Regulations 27(2) and 27(5) of the SAST Regulations, 2011, and Regulation 13 read with Clause 4 of Schedule III of the SEBI (Merchant Bankers) Regulations, 1992. The Adjudicating Officer concluded: “I hereby impose a monetary penalty of ₹3,00,000 on Noticee No.1, i.e., Kunvarji Finstock Private Limited, under Section 15HB of the SEBI Act, 1992, for failure to exercise due diligence in ensuring the accuracy of disclosures in the Letter of Offer. The adjudication proceedings against Noticee No.2, Dr. J. Murali Manohar, are disposed of without imposition of any penalty.”  While SEBI noted that there was no evidence of disproportionate gain or loss to investors, it emphasized that lapses by a SEBI-registered intermediary undermine market integrity and therefore warrant regulatory action.

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The order underscores SEBI’s position that merchant bankers, as professional intermediaries, have an independent and non-delegable responsibility to ensure that all disclosures made in public offer documents are true, fair, and complete. Accordingly, Kunvarji Finstock Private Limited was fined ₹3 lakh for due diligence failures in the open offer of Mediaone Global Entertainment Limited, while Dr. Murali Manohar was exonerated of any regulatory breach.