2015 (10) TMI 324 - AT - Companies Law

Challenge the decision of SEBI for setting up of SRO for distributers of mutual fund products Petitioner contends that the Respondent was not eligible to apply as the same is not a Company registered under Section 25 of the Companies Act as on the cut-off date which is mandatory as per the SRO Regulations - Petitioner further holds that as per Regulation 10 of the SRO Regulations it should have got an opportunity of being heard before rejecting the application Further contended by the Petitioner that SEBI was biased in favour of Respondent even before inviting applications for being recognized as SRO Respondent contends that the said Company was holding license under Section 25(1) of the Companies Act on the date of submitting the application and registration was obtained by the appellant within the time stipulated under regulation 6 Respondent further holds that opportunity of hearing under regulation 10 is relatable to the stage of rejecting the application of an applicant to whom in-principle approval is granted under regulation 4A. Held That - Since the Respondent held license under Section 25(1) of the 1956 Act on the date of submitting the application under regulation 3 the same was eligible to apply and therefore SEBI was justified in entertaining the application submitted by Respondent First contention held in favour of the Respondent. SEBI has failed to comply with the requirements of regulation 10, the same is quashed and set aside the impugned decision of SEBI - Directed SEBI to select an applicant afresh for grant of certificate of recognition in respect of distributors of mutual fund products Court did not go onto the merits of the third contention held by the Petitioner Petition disposed of as such Second contention decided in favour of the Petitioner.

Issues Involved:
1. Eligibility of respondent no. 2 to apply for SRO recognition under regulation 3 of the SRO Regulations.
2. Compliance with regulation 10 of the SRO Regulations regarding the rejection of the appellant's application without a hearing.
3. Allegations of bias by SEBI in favor of respondent no. 2.

Detailed Analysis:

1. Eligibility of Respondent No. 2:
The appellant argued that respondent no. 2 was ineligible to apply for SRO recognition because it was not registered under Section 25 of the Companies Act, 1956 by the cut-off date. The appellant contended that SEBI should have rejected respondent no. 2's application as it was a non-existent entity on the relevant date. The appellant emphasized that under regulation 3, only a company registered under Section 25(2) could apply, and respondent no. 2 was only registered on 02.08.2013, after the cut-off date of 31.07.2013.

The tribunal rejected this argument, stating that regulation 3, when read with regulation 2(1)(e) and Section 25(1) of the 1956 Act, indicates that a company eligible to apply is one to which a license under Section 25(1) has been granted for registration under Section 25(2). Since respondent no. 2 held a license under Section 25(1) on the date of application and obtained registration under Section 25(2) within the extended time permitted, SEBI was justified in entertaining its application.

2. Compliance with Regulation 10:
The appellant argued that SEBI violated regulation 10 by not providing a hearing before rejecting its application. Regulation 10 mandates that SEBI must give a reasonable opportunity of being heard before rejecting an application and must communicate the grounds for rejection.

SEBI contended that regulation 10 did not apply in the context of selecting a single SRO from multiple applicants and that the rejection contemplated in regulation 10 involved some kind of stigma on the applicant's merits. SEBI also argued that the opportunity of hearing could be provided at the stage of final rejection of the certificate or if sought by the applicant after communication of in-principle approval to another applicant.

The tribunal found no merit in SEBI's arguments, stating that regulation 10 applies to any rejection of an application and mandates a hearing before such rejection. The tribunal emphasized that the hearing must be a personal hearing and not merely an opportunity to submit documents. Since SEBI did not provide a hearing before rejecting the appellant's application, it violated regulation 10.

3. Allegations of Bias:
The tribunal did not delve into the merits of the appellant's allegations of bias by SEBI in favor of respondent no. 2, as it found sufficient grounds to quash the impugned decision based on the first two issues.

Conclusion:
The tribunal concluded that SEBI was justified in entertaining respondent no. 2's application as it held a license under Section 25(1) on the relevant date. However, SEBI violated regulation 10 by not providing a hearing before rejecting the appellant's application. Consequently, the tribunal quashed SEBI's decision and directed SEBI to select an applicant afresh for the grant of a certificate of recognition, ensuring compliance with regulation 10. The appeal was disposed of without any order as to costs.

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