2015 (8) TMI 381 - AT - Companies Law

SEBI ruling upheld on fit and proper person status for stock exchanges. Appeal dismissed, extension granted.

The majority view upheld SEBI's decision that the appellant was not a fit and proper person to hold shares in certain stock exchanges based on the FMC ... Fit and proper criteria for holding shares – By impugned order SEBI declared appellant not “fit and proper person” to acquire or hold any equity shares without any basis of its own but solely on order of Forward Market Commission disqualifying appellant from holding commodity shares – Held that:- order passed by FMC would have bearing on securities market, because both FMC and SEBI were regulating trades executed on respective exchanges – Fit and proper person criteria for person to acquire or hold shares of exchanges in commodity market is comparable with criteria framed by SEBI for securities market – Therefore, if person was declared by FMC to be not fit and proper person to acquire or hold commodity shares, then that person shall be deemed to be not fit to hold shares of exchanges operating under securities market – Order passed by one regulator would ipso facto have to be applied by another regulator, because, very object of imposing such stringent condition was to set high standards for exchanges operating in both financial markets – Impugned decision of SEBI holding appellant not ‘fit and proper person’ to hold shares of stock exchanges based on decision of FMC cannot be faulted – Appeal dismissed – Difference of opinion – Majority order – Decided against appellant. Issues Involved:1. Whether SEBI was justified in declaring the appellant as not a 'fit and proper person' based on the FMC order.2. The maintainability of the appeal against SEBI's order.3. The relevance and bearing of the FMC order on the securities market.4. The procedural fairness in issuing the show cause notice and conducting the adjudication.Issue-wise Detailed Analysis:1. Justification of SEBI's Declaration:The primary issue was whether SEBI could declare the appellant not a 'fit and proper person' to hold shares in certain stock exchanges based solely on an FMC order. The appellant argued that SEBI's decision was premature and based on an order that had not attained finality, as it was still under challenge in the Bombay High Court. The appellant also contended that their shareholding in the relevant entities was minuscule and did not affect the securities market. SEBI, however, maintained that the FMC order had a bearing on the securities market and justified their decision under Regulation 20(1)(b)(v) of the SECC Regulations, which allows SEBI to rely on orders from other regulatory authorities. The majority view upheld SEBI's decision, stating that both FMC and SEBI regulate interconnected facets of the financial market, and an order by FMC would indeed have a bearing on the securities market.2. Maintainability of the Appeal:SEBI contended that the appeal was not maintainable based on Regulation 20(2) of the SECC Regulations, which states that SEBI's decision on whether a person is fit and proper is final. However, the Tribunal rejected this preliminary objection, citing Section 15T(1) of the SEBI Act, which permits appeals against SEBI orders. The Tribunal emphasized that regulations cannot override the substantive provisions of the SEBI Act.3. Relevance and Bearing of the FMC Order:The appellant argued that SEBI did not demonstrate how the FMC order had a bearing on the securities market. They pointed out that the FMC order related to the commodity market, not the securities market, and thus should not automatically affect their status in the securities market. The Tribunal, however, noted that both markets are components of the broader financial market and that integrity standards in one market are relevant to the other. The Tribunal concluded that the FMC order did have a bearing on the securities market, as both markets require high standards of integrity and governance.4. Procedural Fairness:The appellant challenged the procedural fairness of the show cause notice and the adjudication process. They argued that the show cause notice did not provide sufficient grounds or material to substantiate SEBI's allegations. The minority view supported this contention, criticizing SEBI for not providing detailed reasoning in the show cause notice and for introducing new reasoning during the adjudication process. The minority view also highlighted that SEBI failed to demonstrate the bearing of the FMC order on the securities market adequately.Majority View:The majority upheld SEBI's decision, emphasizing that the interconnected nature of the financial markets justified SEBI's reliance on the FMC order. They noted that the appellant's challenge to the FMC order was still pending, and as long as the FMC order remained in effect, SEBI's decision was valid. The majority also dismissed the argument that the appellant's minuscule shareholding was irrelevant, stating that once a person is deemed not fit and proper, they cannot hold any shares in the relevant entities.Minority View:The minority view, however, set aside SEBI's decision, citing procedural lapses and the lack of clear reasoning connecting the FMC order to the securities market. The minority criticized SEBI for not providing sufficient grounds in the show cause notice and for failing to demonstrate the bearing of the FMC order on the securities market convincingly.Conclusion:The appeal was dismissed by the majority, upholding SEBI's decision that the appellant was not a fit and proper person to hold shares in the relevant entities. However, the minority view favored allowing the appeal due to procedural shortcomings and insufficient demonstration of the FMC order's bearing on the securities market. The Tribunal extended the time for the appellant to disinvest their shares by four weeks.