2016 (5) TMI 1505 - AT - SEBI

SEBI Tribunal Quashes Restraint Orders and Penalties, Emphasizes Discretionary Criteria

Almondz Global Securities Ltd. Versus Securities and Exchange Board of India

The Tribunal held that the appellant met the criteria to be considered a 'Fit and Proper Person' under SEBI regulations, emphasizing the discretionary ... Application for renewal of registration as Merchant Banker ('MB') denied - Order passed by the Respondent - SEBI, declaring that Almondz Global Securities Limited ('Appellant') is not a 'Fit and Proper Person' as defined under Schedule II of the SEBI (Intermediaries) Regulations, 2008 ('Intermediaries Regulation') - HELD THAT:- SEBI's aim in imposing punishments upon companies should be to make companies law-compliant so as to ensure that the interests of the securities market are secured. SEBI should not view punishments from a perspective of thinning the herd, rather it should help in fostering a healthy environment where intermediaries act cautiously and responsibly under the overall supervision of the market regulator. The punishment should not only be reasonable but must fit the violation or breach of law for which the entity is sought to be penalized. It is true that neither can a straitjacket formula be prescribed nor can a general pattern of reasonableness be laid down to be invariably applied in all cases. No consistency in the orders passed by SEBI in terms of the punishment imposed upon Merchant Bankers for their misconduct. The punishments range from just a warning or token punishment for a day to the imposition of a fine of ₹ 1 crore. Further, in cases where there are repeated offences, registration has been denied. However, in the facts of the present case, since the fault of the Appellant is limited in as much as the Appellant has relied upon the Statutory Auditor's reports and the statements issued by the two Issuer Companies, instead of looking into the banks statement, by no stretch of the imagination can it be said that the Appellant is not a fit and proper person for carrying on business as a Merchant Banker. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the appellant, Almondz Global Securities Limited, satisfies the criteria for being a 'Fit and Proper Person' under Schedule II of the SEBI (Intermediaries) Regulations, 2008, and SEBI (Merchant Bankers) Regulations, 1992.Whether the restraint orders and penalties imposed by SEBI on the appellant for alleged negligence in IPOs of PG Electroplast Limited (PGEL) and Bhartiya Global Infomedia Limited (BGIL) were justified.Whether SEBI's decision to reject the appellant's application for renewal of registration as a Merchant Banker was appropriate.Whether the multiple penalties imposed on the appellant for the same alleged infractions were justified and proportionate.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Fit and Proper Person CriteriaRelevant legal framework and precedents: The criteria for determining a 'Fit and Proper Person' are outlined in Schedule II of the SEBI (Intermediaries) Regulations, 2008, which include integrity, reputation, character, absence of convictions and restraint orders, and competence.Court's interpretation and reasoning: The Tribunal noted that the criteria are discretionary and not exhaustive. The appellant's conduct in previous IPOs was exemplary, and the alleged infractions in the two IPOs did not demonstrate fraud or dishonesty.Key evidence and findings: The appellant had a track record of handling around 120 public offerings without complaints. The alleged negligence in the two IPOs was due to reliance on statutory auditor reports and issuer company statements.Application of law to facts: The Tribunal found that the appellant met most of the criteria under Schedule II and that the restraint orders should not automatically disqualify the appellant as a 'Fit and Proper Person.'Treatment of competing arguments: The Tribunal considered SEBI's argument that ongoing restraint orders were decisive but found that such orders did not necessarily indicate that the appellant was unfit.Conclusions: The Tribunal concluded that the appellant should not be declared unfit based on the restraint orders alone and that the decision to reject the renewal of registration was not justified.Issue 2: Justification of Restraint Orders and PenaltiesRelevant legal framework and precedents: The SEBI Act and associated regulations provide for penalties and restraint orders for violations.Court's interpretation and reasoning: The Tribunal emphasized the need for proportionality in penalties and noted inconsistencies in SEBI's approach to similar cases.Key evidence and findings: The appellant faced multiple penalties for the same alleged infractions, which the Tribunal found excessive and disproportionate.Application of law to facts: The Tribunal held that the penalties imposed were not commensurate with the appellant's alleged negligence.Treatment of competing arguments: SEBI's rationale for multiple penalties was not supported by sufficient reasoning or evidence.Conclusions: The Tribunal quashed the restraint orders and penalties, finding them excessive and not justified.Issue 3: Rejection of Renewal ApplicationRelevant legal framework and precedents: SEBI regulations require that an applicant be a 'Fit and Proper Person' for renewal of registration.Court's interpretation and reasoning: The Tribunal found that the rejection of the renewal application was based on an incorrect assessment of the appellant's fitness.Key evidence and findings: The Tribunal noted the appellant's satisfactory track record and the lack of fraud or dishonesty in the alleged infractions.Application of law to facts: The Tribunal concluded that the appellant met the criteria for renewal and that the rejection was unwarranted.Treatment of competing arguments: SEBI's reliance on ongoing restraint orders was deemed insufficient to justify rejection.Conclusions: The Tribunal set aside the rejection of the renewal application.Issue 4: Multiple Penalties for Same InfractionsRelevant legal framework and precedents: The principle of proportionality in administrative actions and penalties.Court's interpretation and reasoning: The Tribunal criticized SEBI's imposition of multiple penalties for the same infractions, finding it arbitrary and inconsistent.Key evidence and findings: The penalties included suspension, restraint orders, and rejection of registration, all for similar alleged negligence.Application of law to facts: The Tribunal found the multiple penalties excessive and not supported by sufficient rationale.Treatment of competing arguments: SEBI's justification for multiple penalties was found lacking in consistency and reasoning.Conclusions: The Tribunal quashed the multiple penalties, emphasizing the need for proportionality and consistency.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The punishment should not only be reasonable but must fit the violation or breach of law for which the entity is sought to be penalized.'Core principles established: The principle of proportionality in penalties, the discretionary nature of the 'Fit and Proper Person' criteria, and the need for consistency in SEBI's enforcement actions.Final determinations on each issue: The Tribunal quashed the restraint orders and penalties, set aside the rejection of the renewal application, and emphasized the need for proportionality and consistency in SEBI's actions.