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SAT explains “materiality” under ICDR Regulations

Finsec Law Advisors

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SAT, in its order dated September 30, 2016, has overturned an order of SEBI’s Adjudicating Officer where the lead manager to the IPO of Credit Analysis and Research Limited was held liable for non-disclosure of material information in the red herring prospectus. The point of discussion in the matter was whether the disclosure of the letter issued by RBI, imposing minimum capitalization norms on certain non-resident investors who were not eligible to subscribe for the securities in the given offer, was “material” information to be disclosed mandatorily in the offer document, under the ICDR regulations.

The majority held that any information which is important for an investor to make an informed decision is material information. However, as the information in question was relevant to a particular class of investors who were not eligible to participate in the issue, they concluded that the information was not material and the Issuer was not bound to disclose it.

However, one of the members of SAT expressed a dissenting view that all “important” information is material irrespective of its importance to the class of investors eligible to participate in the particular issue. However, mere satisfaction of this criterion is not a sufficient inference that the disclosures in the offer document are complete. Further, materiality is not based on the usage of information or reliance upon the information by the investor. If the issue manager is in doubt as to whether a particular information is material enough to be included in the offer document, then it should go in favor of disclosure, unless “cogent and strong” reasons exists for the contrary. In the present matter it was opined that if the information about grant of an exemption to the Issuer is material, then the condition imposed in the exemption letter is also material, irrespective of the application of such information on the specified class of investors who are eligible to apply for the issue.

SAT, in both majority and minority opinions, has pressed on the fact that mere disclosure of an information in an offer document is not a proof of its materiality; however, it is the “nature” of the information which makes it material.