2013 (3) TMI 431 - SC - Companies Law

SEBI's Extension of Compliance Time for CRA Registration Challenged and Upheld by Supreme Court

Securities & Exchange Board of India Versus Informetics Valuation & Rating (P.) Ltd.

The Supreme Court upheld the Securities Appellate Tribunal's decision that the Securities and Exchange Board of India (SEBI) could request audited annual ... Eligibility Criteria for Seeking registration as a Credit Rating Agency ('CRA') - rejection of application as to produce Audited Annual Accounts of the respondent's promoters for the two years ending December, 2010 - appellant submitted that the certificate of the Chartered Accountant submitted by him is evidence of the required net worth of the promoter, in strict conformity with Regulation 4(e) of the SEBI (Credit Rating Agencies) Regulations, 1999 - whether the Board was within its power to ask for the Audited Accounts of the applicant for the 5 years preceding the date of the application - SAT has remanded the matter back to the appellant to consider the application of the respondent seeking registration - Held that:- The certificate of Chartered Accountant did not conform to the provisions contained in the regulations which requires that the certificate should be in confirmation of the Audited Accounts of the promoters/applicant for the five years preceding the date of the application. Unable to approve the observations made by SAT that 'neither the regulations nor the eligibility criteria in Form A requires the applicant to produce the annual accounts of the promoter.' Also unable to approve the observations of SAT that 'it is doubtful whether the Board could have asked for this information without doubting the veracity or the correctness of the certificate of the Chartered Accountant that accompanied the application.' The certificate of the Chartered Accountant is evidence of the required net worth of the promoter. Therefore, it has to be in strict conformity with Regulation 4(e). Since the certificate issued by the Chartered Accountants did not categorically state that it is based on the audited accounts for the 5 years preceding the date of application, the Board certainly had the power to direct the respondent to produce the audited accounts. That being so, under Regulation 6, it was the duty of the Board to have rejected the application of the respondent. Surprisingly, however, the Board continued to grant further time to the respondent to remove the objections even beyond the maximum sixty days permissible under the proviso to Regulation 6. It appears that the enquiries continued from 20th August, 2009 till March 1, 2011 when the show cause notice was issued to the respondent. The application of the respondent is not rejected till 21st July, 2011. The delay in the rejection of the application of the respondent was wholly unwarranted. It allowed the respondent a latitude not permissible under the regulations who taking advantage of this latitude has provided the Audited Accounts for the five years preceding the date of application. Not only this, by now the respondent has even produced before this Court in a sealed cover the Audited Accounts of M/s. Coment (Mauritius) Limited for the subsequent two years upto 31st December, 2010 also. Since the Board had extended the time to the respondent, even though not permissible in law, we are not inclined to modify the directions issued by the SAT. Especially in view of the submission of Mr. Suri that respondent is willing at this stage to produce the Audited Accounts of the promoter even for the subsequent two years. Issues Involved:1. Requirement of Audited Annual Accounts for CRA Registration.2. Interpretation of SEBI Regulations and Form A.3. Powers of SEBI to Request Additional Information.4. Compliance with SEBI Regulations by the Applicant.Issue-wise Detailed Analysis:1. Requirement of Audited Annual Accounts for CRA Registration:The core issue revolves around whether the applicant must submit audited annual accounts of its promoters for the five years preceding the application date for CRA registration. The respondent argued that they had provided a Chartered Accountant's certificate confirming the promoter's net worth, which should suffice under SEBI regulations. SEBI, however, insisted on the submission of the actual audited annual accounts.2. Interpretation of SEBI Regulations and Form A:The SAT interpreted Regulation 4(e), Regulation 7, and Form A, concluding that SEBI could not demand audited annual accounts without questioning the veracity of the Chartered Accountant's certificate. The SAT stated, 'Form A prescribes that the applicant should produce a certificate from a Chartered Accountant to substantiate the fact regarding the net worth of its promoter which was done and the Board has at no stage questioned its veracity.' The SAT further observed that neither the regulations nor the eligibility criteria in Form A required the applicant to produce the annual accounts of the promoter.3. Powers of SEBI to Request Additional Information:SEBI argued that it had the authority under Regulation 7 to request further information necessary for processing the application. The SAT, however, held that such further information should relate to the basic information already provided, specifically the audited accounts for the five years preceding the application date. The SAT noted, 'It is doubtful whether the Board could have asked for this information without doubting the veracity or correctness of the certificate of the Chartered Accountant that accompanied the application.'4. Compliance with SEBI Regulations by the Applicant:The respondent provided a Chartered Accountant's certificate and later submitted audited accounts for the five years preceding the application. Despite this, SEBI continued to request additional audited accounts for subsequent years, which the SAT deemed beyond the scope of the regulations. The SAT's view was that the respondent had complied with the necessary requirements by providing the Chartered Accountant's certificate and the audited accounts for the relevant period.Final Judgment:The Supreme Court examined the correctness of the SAT's order, particularly focusing on whether SEBI could request audited annual accounts beyond the stipulated period. The Court concluded that the certificate provided by the Chartered Accountant should be based on audited accounts. Since the certificate did not explicitly confirm this, SEBI had the authority to request the audited accounts. However, the Court noted that SEBI had extended the time for compliance beyond the permissible period, which was not in accordance with the regulations. Given that the respondent had eventually provided the audited accounts, the Court upheld the SAT's direction to consider the application without requiring additional accounts for subsequent years. The appeal was dismissed, and the respondent's application for CRA registration was to be reconsidered by SEBI.