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2016 (5) TMI 1505
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....a "Fit and Proper Person" as defined under Schedule II of the SEBI (Intermediaries) Regulations, 2008 ("Intermediaries Regulation") and hence rejecting the Appellant's application for renewal of registration as Merchant Banker ("MB"). 2. Further, the Appellant has filed three Miscellaneous Applications all in which the Applicant had acted as a BRLM. These are as follows: • MA No. 130 of 2015 in Appeal No. 275 of 2014 for staying the operation of Impugned Order dated March 21, 2014 passed by SEBI against the Appellant under Sections 11(1), 11(14) and 11(b) of the SEBI Act, in the matter of the IPO of PG Electroplast Limited; • MA No. 117 of 2015 in Appeal No. 129 of 2014 for staying the operation of Impugned Order dated March 3, 2014 passed by SEBI against the Appellant under Sections 11(1), 11(14) and 11(b) of the SEBI Act, in the matter of the IPO of Bharati Global Infomedia Limited; and • MA No. 118 of 2015 in Appeal No. 187 of 2014 for staying the operation of Impugned Order dated April 11, 2014 passed by SEBI against the Appellant under Section 12(3) of the SEBI Act read with Regulation 28(2) of SEBI (Intermediaries) Regulations, 20....
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....in both these cases the Appellant had failed to exercise due and reasonable care while conducting its due diligence operations at various stages on the two IPOs, which resulted in inaccurate/inadequate disclosures in the RHP/Prospectus. Order dated March 3, 2014 passed in the matter of BGIL barred the Appellant from indulging in the securities market in any manner for a period of five years from the date of the order. 9. Further, order dated March 21, 2014 prohibited the Appellant from taking up any new assignment or involvement in a new issue of capital, including IPO, follow-on issue, etc. in the securities market for a period of five years. Further, Order dated April 11, 2014 was passed by SEBI suspending the certificate of registration of the Appellant as MB for a period of six months from March 3, 2014. 10. SEBI issued a show cause notice ("SCN") dated June 16, 2014 to the Appellant on the ground that the Appellant did not satisfy the criteria for "Fit and Proper Person" as understood under Regulation 8 read with Regulations 6A and 8A(5) of the SEBI (Merchant Bankers) Regulations, 1992 and Schedule II of the Intermediaries Regulations, 2008. The Appellant responded to th....
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.... the Respondent from relying on them in order to conclude that the Appellant is not a fit and proper person in accordance with the MB Regulations read with Schedule II of the Intermediaries Regulations. 14. Coming to the MAs mentioned above, it has been submitted by the Appellants in the aforementioned MAs that SEBI is constantly ignoring the fact that the above-mentioned three impugned orders have been challenged before this Tribunal and are pending merely because no order has been passed by the Tribunal staying the operation of the three impugned orders. 15. It is submitted that SEBI cannot assume that the Appeals filed by the Appellants will be dismissed and the three impugned orders in the respective Appeals would attain finality. Additionally, the impugned orders cannot be the basis for an allegation that the Appellant is not a "Fit and Proper Person" under the Intermediaries Regulations, especially in light of the possibility that they may be quashed by this Tribunal. 16. It is further submitted that the Appellant's business as an MB has been practically shut down by SEBI on the basis of the three impugned orders and now SEBI is proceeding a step further to ensur....
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....to the activities relating to merchant banker and in particular the applicant complies with the following requirements, namely:-- ...(gg) the applicant is a fit and proper person." "Regulation 6A of the MB Regulations" "Criteria for fit and proper person. 6A. For the purpose of determining whether an applicant or the merchant banker is a fit and proper person the Board may take into account the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008." "Schedule II of the Intermediaries Regulation" "Criteria for determining a 'fit and proper person' For the purpose of determining as to whether an applicant or the intermediary is a 'fit and proper person' the Board may take account of any consideration as it deems fit, including but not limited to the following criteria in relation to the applicant or the intermediary, the principal officer and the key management persons by whatever name called- (a) integrity, reputation and character; (b) absence of convictions and restraint orders; (c) competence including financial solvency and ne....
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.... may be or its whole time director or managing partner has been convicted by a Court for any offence involving moral turpitude, economic offence, securities laws or fraud; (b) an order for winding up has been passed against the applicant or the intermediary; (c) the applicant or the intermediary, or its whole time director, or managing partner has been declared insolvent and has not been discharged; (d) an order, other than an order of suspension of certificate of registration as an intermediary, restraining, prohibiting or debarring the applicant or the intermediary, or its whole time director or managing partner from dealing in securities in the capital market or from accessing the capital market has been passed by the Board or any other regulatory authority and a period of three years from the date of the expiry of the period specified in the order has not elapsed; (e) an order cancelling the certificate of registration of the applicant or the intermediary has been passed by the Board on the ground of its indulging in insider trading, fraudulent and unfair trade practices or market manipulation and a period of three years from the date of the ....
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....ng in the securities market or accessing the securities market. 26. The case of the Appellant would have been squarely covered within the four corners of the very first excluded order being the suspension of the certificate of registration as an intermediary, and by virtue of this exclusion, the appellant could not have been declared unfit thus, if the Regulations of 2004 had been in force when the order against the Appellant had been passed, the Appellant would've been excluded from being considered as unfit in accordance with Regulation 3(2)(d). 27. Therefore, the intention of the law-maker with respect to the criteria for fit and proper persons can be traced back to the Regulations of 2004 wherein certain orders, with respect to entities whose wrongdoings or lapses in judgment were condonable, were deliberately kept out of the purview of the said regulations. From an analysis of the scheme of the Regulations of 2004 it is borne out that the underlying philosophy of the regulations was to ensure that trespasses of a serious nature would not go unpunished and that undesirable elements would be kept out of the securities market. This is evident from the wrongdoings that w....
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.... the bank statements of the two entities and fell prey to their clandestine scheme of working. It is, in fact, correct to say that the first five criteria provided under Schedule II of the ICDR viz. financial integrity; absence of convictions or civil liabilities; competence; good reputation and character; efficiency and honesty have been consistently fulfilled by the Appellant in all other cases. Although, we have quashed the remainder of the punishment imposed vide Impugned Orders dated March 3, 2014 and March 21, 2014 in Appeal Nos. 275 of 2014 and 129 of 2014 respectively, by partially upholding the aforesaid orders, we are not inclined to uphold the decision impugned in the present appeals, because, the orders dated March 3, 2014 and March 21, 2014 were passed on the footing that after undergoing the penalty imposed therein the appellant would be entitled to carry on business as usual. In our orders passed in Appeal Nos. 275 and 129 of 2014, the punishment imposed vide Impugned Orders dated March 21, 2014 and March 3, 2014 we have held that the penalty imposed is excessive and the penalty already undergone is far in excess and disproportionate to the violation committed by the....
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....nts Pvt. Ltd. by the inspection team for the period April 2003 to August 2005. SEBI did not proceed in this matter anymore and settled the same on J.M. Financial Consultants Pvt. Ltd. remitting a sum of Rs. 4 lac in favour of SEBI by way of consent mechanism. The adjudication proceedings initiated against J.P. Financial Consultants Pvt. Ltd. (formerly known as JM Morgan Stanley Pvt. Ltd.) were accordingly disposed off. C. In the case of Edelweiss Capital Ltd., the MB was charged of failure to exercise due diligence by not adopting independent professional judgments in verifying the records/visiting the places of issuer company, not providing the correct information and/or misleading information in the offer document, failed to supervise the activities of Syndicate Member Registrars, etc. by order dated 11th May 2011. The MB was accused of committing Clause 4, 6, 7 of Code of Conduct as stipulated in Regulation 13 of MB Regulations; SEBI Circular dated 27th April, 2008; Clauses 5.1.1, 5.1.2, 5.4.3.1, 7.3.1, 7.4.1, 7.7.7 and 16.2.2.2 of erstwhile DIP Regulations and Regulation 18(2) of SAST Regulations. This matter was also resolved by SEBI preferring settlement of Rs. 15 la....
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.... of a penalty of Rs. 1 lakh by the MB. G. In PNB Investment Services Limited, the MB had failed to disclose ICD transactions in the offer documents alongwith making certain incorrect disclosures. Several regulations of the ICDR Regulations were alleged to be violated. While the DA recommended the suspension of the certificate of registration of the MB for 6 months, the WTM ultimately exonerated the MB vide order dated August 5, 2014. 30. As noted above, the punishment imposed by SEBI in similar cases range from just a warning or token punishment for a day to the imposition of a fine of Rs. 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 imagination can it be said that the Appellant is not a fit and proper person for carrying on business as a Merchant Banker. 31. To sum up, the appellant has been subjected to numerous proceedings, under various R....
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....ebenture trustee as per Regulation 3 of the SEBI (Debenture Trustees) Regulations, 1993. Vide order dated September 20, 2002, the WTM, while citing several instances wherein Aryaman had failed to exercise due diligence while managing issues and also submitted incorrect information in the declaration furnished to SEBI along with offer documents of the issuing companies such as Rich Paints Ltd., Tabassum International Ltd., Shine Computech Ltd., Gurukul Technologies Ltd., to name a few issuing companies, held that Aryaman had an unsatisfactory track record as MB in exercising proper due diligence. Therefore, Aryaman's application was rejected. This case is therefore different from the Appellant's, since Aryaman had acted unsatisfactorily as an MB on a number of occasions and had failed to meet the criterion of being a fit and proper person repeatedly. 34. We now come to the case of Parsoli Corporation Limited, a stock broker with NSE and BSE, and also a depositary participant of CDSL. Parsoli was found to have fraudulently transferred and dematerialized fake shares in favour of its promoter/front entities. Several orders were passed against Parsoli and its directors. It is....
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....as it may, this case cannot be compared with that of the Appellant since there is no allegation of any criminal activity associated with the Appellant. 36. In the case of Sahara Asset Management Company Pvt. Ltd. (Sahara AMC), the company was granted Portfolio Manager registration which was valid till October 15, 2012. On consideration of their application for renewal of the registration, SEBI informed Sahara AMC that it was not a fit and proper person as per the Portfolio Managers Regulations read with the Intermediary Regulations and hence was not eligible for renewal. This conclusion was arrived at by SEBI owing to the egregious conduct of Mr. Subroto Roy Sahara who is even today under judicial custody due to wrongdoings committed through his companies, namely, Sahara Commodity Services Corporation Limited and Sahara Housing Investment Corporation Limited. Two criminal complaints were also filed by SEBI against the companies and their directors/promoters. These companies were directed by SEBI to refund the money collected from subscribers of Optionally Fully Convertible Debentures with interest at 15% p.a. from the date of receipt of money till the date of repayment. Further,....
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....e to the spirit of the statute or legal provision the authority strives to implement. In this case, SEBI is trying to ensure the implementation of Schedule II of the Intermediaries Regulation which spells out the criteria to be satisfied before a person can be deemed to be a fit and proper person. As stated above, to say that a person does not fulfill these criteria, SEBI must be absolutely certain that by not doing so, irreparable harm would be caused to the securities market for the simple reason that this punishment of being declared unfit is the ultimate punishment that can be imposed upon an intermediary. Therefore, this weapon in SEBI's arsenal must be wielded sparingly only in cases of repeated offences committed with impunity by intermediaries. 39. In such a situation we need to look at the true rationale behind the imposition of punishments on companies. In our considered opinion, 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 en....
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.... country has to be tested on the principle of proportionality, just as it is done in the case of main legislation. This, in fact, is being done by the courts. Administrative action in India affecting the fundamental freedom has always been tested on the anvil of the proportionality in the last 50 years even though it has not been expressly stated that the principle that is applied is the proportionality principle." 40. Furthermore, the Hon'ble Supreme Court elaborated upon the exact import of the doctrine of proportionality by holding in paragraph 46 as follows: "46. By proportionality, it is meant that the question whether while regulating exercise of fundamental rights, the appropriate or least restrictive choice of measures has been made by the legislature or the administrator so as to achieve the object of the legislation or the purpose of the administrative order, as the case may be. Under the principle, the court will see that the legislature and the administrative authority. "maintain a proper balance between the adverse effects which the legislation or the administrative order may have on the rights, liberties or interests of person keeping in mind the purpo....