Appeal fails against SEBI's five-year bar after misstatements on Principal Officer's experience under Regulation 7(2)(d)(ii)

SAT upheld SEBI's rejection of the appellant company's application for registration as Portfolio Manager and its declaration, along with its directors, as not "fit and proper," including the bar on re-applying for five years. SAT found that SEBI correctly concluded the proposed Principal Officer lacked the requisite five years' relevant experience under Regulation 7(2)(d)(ii) and that false and misleading information was provided regarding his employment history, undermining integrity, reputation, and character. The tribunal rejected the plea of denial of natural justice, holding that adequate opportunity to respond had been given, and dismissed as unsubstantiated the allegations of vengeance against SEBI. The appeal was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the securities regulator had the authority and scope under the applicable regulations to seek additional information and assess the applicant and its directors/promoters on the 'fit and proper' criteria while considering an application for registration as Portfolio Manager.

1.2 Whether the proposed Principal Officer satisfied the eligibility requirement of having at least five years' experience in "related activities in the securities market" under Regulation 7(2)(d)(ii) of the SEBI (Portfolio Managers) Regulations, 2020, and whether the work experience disclosures were accurate and reliable.

1.3 Whether, on the basis of the material regarding the Principal Officer's work experience and conduct, the applicant company and its directors/promoters could be held not to be 'fit and proper' persons for grant of registration as Portfolio Manager.

1.4 Whether the process adopted by the regulator in rejecting the registration application and declaring the applicant and its directors/promoters as not 'fit and proper' was vitiated by violation of principles of natural justice.

1.5 Whether the impugned order was actuated by vengeance or mala fides on account of complaints made by the applicant against officials of the regulator.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Scope of regulatory power to seek information and assess 'fit and proper' status

Legal framework (as discussed):

2.1 The Tribunal noted that the SEBI (Portfolio Managers) Regulations, 2020 provide for: (i) calling for further information (Regulation 6); (ii) consideration of all matters relevant to Portfolio Manager activities (Regulation 7(1)); (iii) experience criteria for the Principal Officer (Regulation 7(2)(d)(ii)); (iv) requirement that the applicant be a 'fit and proper' person (Regulation 7(2)(j)); and (v) linkage of the 'fit and proper' criteria to Schedule II of the SEBI (Intermediaries) Regulations, 2008, including "integrity, reputation and character".

Interpretation and reasoning:

2.2 The Tribunal held that the regulator has "wide powers" to call for information and documents to determine whether an applicant seeking registration as Portfolio Manager, or any other intermediary, is a 'fit and proper' person.

2.3 Reliance was placed on earlier Tribunal observations (as referred in the impugned order) to reaffirm that the fitness and propriety assessment legitimately extends to directors/promoters and is not confined to technical eligibility alone.

Conclusions:

2.4 The Tribunal concluded that the regulator acted within the four corners of the statutory and regulatory framework in seeking verification of work experience, calling for additional documents, and applying the 'fit and proper' criteria to the applicant and its directors/promoters.

Issue 2 - Compliance with experience requirement and veracity of work experience disclosures

Legal framework (as discussed):

2.5 The Tribunal referred to Regulation 7(2)(d)(ii) of the SEBI (Portfolio Managers) Regulations, 2020 mandating that the Principal Officer must have at least five years' experience in "related activities in the securities market including in a portfolio manager, stock broker, investment advisor, research analyst or as a fund manager".

Interpretation and reasoning:

2.6 The Tribunal identified the "main area of contention" as the work experience of the proposed Principal Officer, who also held 80% equity in the applicant company, and held that this was a "crucial eligibility criteria" requiring absence of ambiguity.

2.7 It noted that the initial application did not disclose the alleged work experience with Maco Securities Pvt. Ltd., a broking firm, which would fall within "related activities in the securities market". The omission, without satisfactory explanation, was treated as suspicious and requiring verification.

2.8 The regulator's verification from a previous employer (SPIL) revealed that during part of the period claimed for Maco employment, the Principal Officer had been shown as working with two different CA firms at Delhi. The applicant did not dispute the information supplied by SPIL.

2.9 The Tribunal recorded that the applicant's explanation that the Principal Officer had worked simultaneously in different entities located in different cities was implausible, and that the key question remained why the simultaneous Maco employment had not been disclosed initially.

2.10 In view of the unexplained omission and conflicting records, the Tribunal agreed that the work experience disclosure furnished to the regulator regarding Maco employment was "false and misleading".

Conclusions:

2.11 The Tribunal held that the Principal Officer's experience record, as presented, did not reliably establish the requisite five years' related experience, and that the disclosures made in support of the experience claim were not credible.

2.12 It upheld the regulator's assessment that the experience disclosure was false and misleading and that the eligibility criteria based on experience were not satisfactorily met.

Issue 3 - Determination that the applicant and its directors/promoters were not 'fit and proper'

Legal framework (as discussed):

2.13 The Tribunal noted that Regulation 7(2)(j) of the SEBI (Portfolio Managers) Regulations, 2020 requires that an applicant be a 'fit and proper' person, and that the criteria for such determination are drawn from Schedule II of the SEBI (Intermediaries) Regulations, 2008, including "integrity, reputation and character".

Interpretation and reasoning:

2.14 The Tribunal accepted that, in applying the 'fit and proper' test to the applicant company, the regulator was justified in extending this assessment to its directors/promoters, including the proposed Principal Officer and another director/promoter.

2.15 The Tribunal endorsed the regulator's conclusion that submission of false and misleading information regarding work experience adversely impacted the assessment of "integrity, reputation and character".

2.16 The Tribunal also noted the general conduct of the Principal Officer, including multiple criminal cases/complaints against officials of the regulator, as part of the broader assessment underpinning the regulator's conclusion on fitness and propriety.

Conclusions:

2.17 The Tribunal upheld the finding that the applicant and its directors/promoters failed to satisfy the 'fit and proper' criteria and that the rejection of registration, along with the direction restraining the applicant from applying for fresh registration for five years, was justified.

Issue 4 - Alleged violation of principles of natural justice

Interpretation and reasoning:

2.18 The Tribunal examined the process followed: the regulator's repeated calls for information and documents, issuance of show cause notice, grant of sufficient time to file replies, provision of inspection of documents, and opportunity of personal hearing.

2.19 On the contention that personal hearing should have been granted after supply of certain documents, the Tribunal noted that the applicant had written back to the regulator on those documents, demonstrating that the applicant had adequate opportunity to present its views and explanations.

Conclusions:

2.20 The Tribunal held that "more than adequate opportunities" had been provided and that the principles of natural justice had been complied with. No procedural infirmity was found in the manner in which the impugned order was passed.

Issue 5 - Allegation of vengeance or mala fides by the regulator

Interpretation and reasoning:

2.21 The Tribunal considered the allegation that the impugned order was prompted by vengeance due to complaints made by the applicant to higher authorities.

2.22 It found that these allegations remained "totally unsubstantiated" both in oral argument and written submissions, and were unsupported by any material.

2.23 The Tribunal characterised such "bald allegations" against a regulator and its officials as indicative of irresponsible and immature behaviour by the applicant, which did not warrant any consideration.

Conclusions:

2.24 The Tribunal rejected the plea of mala fides or vengeance and affirmed that the impugned order was based on the material on record and a reasoned application of the regulatory framework.

2.25 Consequently, finding no infirmity in the impugned order on any of the grounds urged, the Tribunal dismissed the appeal and affirmed the rejection of registration and the consequential directions.

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