On April 17, the Securities Appellate Tribunal passed an order in the matter of Penta Gold Limited v. National Stock Exchange setting aside the decision taken by NSE, under which the share allotment made by the Company was rejected on the ground that an underwriter, in order to discharge its underwriting obligations, cannot procure subscription applications from third parties.

The Company, being a SME as per the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations), had entered in an underwriting agreement with its merchant banker (Inventure Merchant Banker Services Pvt. Ltd.) and underwriter (GCM Securities Ltd.), wherein the former had underwritten 15% of the issue size and the latter had underwritten the rest 85%, as required under Regulation 106P of ICDR Regulations. The underwriting agreement was in line with the Model Underwriting Agreement (MUA) prescribed by SEBI. Since the issue was undersubscribed, the underwriter was called upon to fulfil its obligations. The underwriter procured applications from eight other investors who agreed to subscribe to the rest of the issue. However, NSE was of the view that the underwriter itself should have subscribed to undersubscribed portion and thus, rejected the basis of allotment.

Where the underwriter or other nominated investors fail to discharge their obligation by subscribing to the unsubscribed portion, Regulation 106P(4) obligates the merchant banker to subscribe to such unsubscribed portion. However, as per the MUA, underwriters also have the option to procure applications from third parties for fulfilling their underwriting obligations, as was done in the present matter.

SAT noted that an inherent conflict existed between the substantive provision under the ICDR Regulations and the MUA. However, in this case, since the NSE had vetted the underwriting agreement of the Company without raising any objections, SAT allowed Company’s appeal. It directed the Company to ascertain whether the underwriter is ready to subscribe to the remaining portion of the issue and in case it is not, the Company can allot the shares to other eight investors and no action will be taken against the said underwriters. SAT also directed SEBI to absolve the inconsistencies between the ICDR Regulations and the MUA.