TaxTMI 
TaxTMI 
2025 (8) TMI 1234
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....n 41 of SEBI (Portfolio Managers) Regulations, 2020 ("PMS Regulations") and Section 12(3) of the SEBI Act, 1992 ("SEBI Act") were initiated against the Noticee and a Designated Authority (hereinafter referred to as "DA") was appointed on March 07, 2024 to enquire into the alleged violations by the Noticee. The DA issued a show cause notice dated March 15, 2024 to the Noticee under regulation 25 of Intermediaries Regulations to show cause as to why appropriate recommendation should not be made against it in terms of Regulation 26 of the Intermediaries Regulations for the alleged violations given in the table below. Table 1 S. No. Alleged violations Regulatory Provisions 1. Failure to submit improvement in Corporate Governance Report. Regulation 33 of PMS Regulations read with clauses 5.2.1.1, 5.2.1.2, 5.2.2.4, and 5.3.1 of Master Circular. 2. Failure to submit Certificate of compliance with PMS Regulations and circulars issued thereunder. 3. Failure to submit Report on audit of firm level performance data. 4. Failure to submit Certification of Net worth 5. Failure to fulfil 'fit and proper' person criteria Regulation 7(2)(j) and ....
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....n the AR by way of email/ letter on March 13, 2025. 8. Though an opportunity of personal hearing was granted to the Noticee on April 29, 2025, the AR sought adjournment. Subsequently, another opportunity of personal hearing was granted to the Noticee on June 04, 2025. On the said date, the AR appeared before me and reiterated the submissions made vide letter dated June 02, 2025. 9. The contentions raised in the written submission dated June 02, 2025 are summarised below. 9.1. The DA SCN dated March 15, 2024 was not received by the Noticee nor was it informed about the enquiry proceedings. The Noticee had filed appeals before the Hon'ble SAT challenging SEBI 11B Order dated August 6, 2021 and Adjudication order dated April 28, 2022. These appeals were filed on March 31, 2022 and September 15, 2022 respectively; pleadings are complete in these appeals and this is known to SEBI, which is the Respondent in the appeals. 9.2. SEBI was well aware of the correspondence address of the Noticee and its MD when the DA SCN was issued. SEBI was also well aware from the pleadings in the appeals and through other means that the office address of the Noticee was no longer va....
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....ss of the Noticee came to a standstill and also are aware that in the above circumstances, the Noticee could not have responded to their emails or notices sent on the "last known address", yet the Ld. DA failed to consider such extenuating circumstances while considering the alleged failure to submit certificates and report for FYs 2021-22 and 2022-23 and alleged non response to communication from SEBI and BSE. 9.6. Since the Noticee has no clients or business on the portfolio management side, compliance reports and audit reports on performance are not meaningful and at best it could have submitted "nil" reports. Therefore, no harm or prejudice has been caused to investors or to the regulatory function of SEBI by non- submission of reports by them. The Noticee has prayed that the recommendation of the DA may not be accepted and no penalty or adverse regulatory action may be imposed on it. 9.7. The Noticee has submitted that considering the Noticee's adverse financial position, its severely damaged reputation and the directions passed against it vide 11B order, it does not foresee any possibility of starting business as a Portfolio Manager and hence, wishes to surr....
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....ant certifying the net- worth as on March 31, every year based on audited account within 6 months from the end of Financial Year. 5.2.1.2 A certificate of compliance with PM Regulations and circulars issued thereunder, duly signed by the Principal Officer, within 60 days of end of each financial year. Further, details of non-compliance along with the corrective actions, if any, duly approved by Board of the Portfolio Manager. .......... 5.2.2 Submission of Corporate Governance Report: .......... 5.2.2.4 Portfolio Managers shall report to SEBI on compliance with the provisions of the above guidelines while submitting the annual reports. The report should reach SEBI within thirty days from the end of the financial year. 5.2.3 Firm-level performance reporting by Portfolio Managers 5.2.3.1 The firm-level performance data of Portfolio Managers shall be audited annually. Confirmation of compliance with paragraph 4.5.3 of this Master Circular shall be reported to SEBI within sixty days of end of each financial year. The said report to SEBI shall be certified by the Directors/ Partners of the Portfolio Manager or by person(s) a....
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.... fact remains that the Enquiry Report is only recommendatory in nature, and that principles of natural justice have been fully adhered to in the quasi-judicial proceedings before me. Therefore, I find that there is no prejudice caused to the Noticee and I do not find any merit in the aforesaid contention. 13. I shall now proceed to adjudicate the violations alleged in the SCN one by one. I. Failure to submit periodical reports and certificates to SEBI for FY 2021- 22 and FY 2022-23: 14. I note that Regulation 33 of PMS Regulations provides that SEBI may ask a Portfolio Manager to disclose any information as and when required. In this regard, vide Master Circular, SEBI inter alia mandated Portfolio Managers to submit the following certificates/ reports within the specified timelines: 14.1. 'Net worth certificate' as of March 31 of each financial year from a qualified Chartered Accountant, based on audited accounts, within six months from the financial year-end. 14.2. Certificate of 'compliance with PMS Regulations and circulars', within 60 days of the end of the financial year, including details of non-compliance and corrective actions. 14.3....
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....portfolio managers which do not have any clients. Thus, even in the absence of active business, the Noticee was obligated to file net worth certificate and 'NIL' compliance reports with SEBI. These periodic reports are essential for assessing capital adequacy, ongoing compliance and market transparency. Hence, avoiding submission of such reports on the grounds that it is 'meaningless', is unjustified and without merit. 19. Accordingly, I find that the failure of the Noticee to submit the reports/ certificates as detailed above for FY 2021-22 and 2022-23 constitutes a violation of Regulation 33 of PMS Regulations, read with clauses 5.2.1.1, 5.2.1.2, 5.2.2.4 and 5.3.1 of Master Circular. II. Failure to fulfil 'fit and proper' person criteria: 20. Regulation 7(2)(j) and 8 of PMS Regulations stipulate that every registered entity must meet the 'fit and proper' person criteria specified in Schedule II of Intermediaries Regulations. The DA has concluded that the Noticee is no longer a 'fit and proper person' for holding a certificate of registration as a Portfolio Manager, due to the following observations. 20.1. Noticee's repeated non-compliance with regulatory reporti....
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.... but not limited to the following: (a) Integrity, honesty, ethical behavior, reputation, fairness and character of the person; (b) the person not incurring any of the following disqualifications: ...... (iii) an order of restraint, prohibition or debarment has been passed against such person by the Board or any other regulatory authority or enforcement agency in any matter concerning securities laws or financial markets and such order is in force; (iv) recovery proceedings have been initiated by the Board against such person and are pending; ..... 23. I note that SEBI had passed 11B Order dated August 6, 2021, Enquiry Order dated November 14, 2022, and adjudication order dated April 28, 2022, against the Noticee for the same violations detailed at paragraph 20.4 above. The Noticee has argued that the findings of the Enquiry Order are under challenge before SAT on account of pending appeal against the SEBI 11B Order and the adjudication order. Therefore, the Noticee has contended that the basis for determining the Noticee as "fit and proper" is not final and the present proceeding to be in violation of the principle of res jud....