2009 (11) TMI 502 - HC - Companies Law

Duties of Merchant Banker - Held that - The Banking Regulation Act, 1949, under sections 35(a) and 36, vests powers in the Reserve Bank of India to give directions to the Banks. Therefore, we had given a direction to the Reserve Bank of India to regulate the functioning of the Banks, as to act as a Loan Arranger, in our view, is not a part of the duties of Merchant Banker and the same is alien to banking system as per the provisions of various statutes. The grievance of the applicant that the observations made by us and the directions issued are detrimental to his interest, is unfounded. Hence, there is no merit in the present review application and the same is dismissed with no order as to costs.

Issues Involved:
1. Legitimacy of commission payment to the Loan Arranger.
2. Jurisdiction of SEBI vs. CBI/RBI in investigating Merchant Bankers.
3. Accuracy of facts and inferences in the original judgment.
4. Role and definition of Merchant Bankers under SEBI regulations.
5. Procedural fairness in not hearing the applicant before adverse comments.

Detailed Analysis:

1. Legitimacy of Commission Payment to the Loan Arranger:
The Punjab State Electricity Board raised a loan of Rs. 300 crore from Punjab National Bank and paid a commission of Rs. 1.62 crore to the Loan Arranger. The applicant, M/s. A.K. Capital Services Ltd., argued that arranging term loans and receiving commissions are recognized activities for Merchant Bankers by SEBI and are in line with prevailing financial sector norms. However, the court noted that the Comptroller and Auditor General (Commercial) and the Superintendent of Police (Economic Offences Wing) had indicted the Electricity Board and Bank officials for collusion and payment of this commission.

2. Jurisdiction of SEBI vs. CBI/RBI in Investigating Merchant Bankers:
The applicant contended that any examination of their conduct should fall under SEBI's jurisdiction, as SEBI has a complete mechanism to regulate Merchant Bankers, including the Securities Appellate Tribunal and the Supreme Court. The court, however, held that the Reserve Bank of India has the authority to regulate banking operations and directed the CBI to conduct a preliminary inquiry into the transaction to investigate potential criminal misconduct by public servants.

3. Accuracy of Facts and Inferences in the Original Judgment:
The applicant criticized the original judgment for inaccuracies, such as the timing of the loan's approval and the role of the Loan Arranger. The court clarified that the facts were accurately noted, including the sequence of events leading to the loan's approval and the involvement of the Loan Arranger. The court maintained that the Arranger's role did not demonstrate any special financial expertise that justified the commission paid.

4. Role and Definition of Merchant Bankers Under SEBI Regulations:
The court examined the definition of Merchant Bankers under the SEBI (Merchant Bankers) Rules, 1992, and the SEBI Act, 1992. It noted that Merchant Bankers are primarily involved in issue management related to securities and stock exchange activities. The court highlighted that syndication of rupee term loans, as mentioned in SEBI guidelines, refers to loans involving multiple banks, not a single bank transaction like the one in question. Therefore, the applicant's role as a Loan Arranger did not fall within the permissible activities of a Merchant Banker under SEBI guidelines.

5. Procedural Fairness in Not Hearing the Applicant Before Adverse Comments:
The applicant argued that they were not made a party to the writ petition and were not given an opportunity to be heard before adverse comments were made. The court responded that the CBI was only directed to conduct a preliminary inquiry and not to register an FIR straightaway. It cited precedents indicating that the accused need not be heard before the registration of an FIR. The court emphasized that its observations should not be construed as final and were made to initiate an inquiry.

Conclusion:
The court dismissed the review application, affirming that the commission payment to the Loan Arranger was questionable, the role of Merchant Bankers did not include arranging term loans from single banks, and the procedural fairness argument was unfounded. The court's directions to the CBI and RBI were upheld, and all connected Civil Misc. Applications were disposed of accordingly.

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