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2016 (5) TMI 1505 - AT - SEBIApplication for renewal of registration as Merchant Banker ( MB ) denied - Order passed by the Respondent - SEBI, declaring that Almondz Global Securities Limited ( Appellant ) is not a Fit and Proper Person as defined under Schedule II of the SEBI (Intermediaries) Regulations, 2008 ( Intermediaries Regulation ) - HELD THAT - 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 environment where intermediaries act cautiously and responsibly under the overall supervision of the market regulator. The punishment should not only be reasonable but must fit the violation or breach of law for which the entity is sought to be penalized. It is true that neither can a straitjacket formula be prescribed nor can a general pattern of reasonableness be laid down to be invariably applied in all cases. No consistency in the orders passed by SEBI in terms of the punishment imposed upon Merchant Bankers for their misconduct. The punishments range from just a warning or token punishment for a day to the imposition of a fine of ₹ 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 the imagination can it be said that the Appellant is not a fit and proper person for carrying on business as a Merchant Banker.
Issues Involved:
1. Delay in filing the appeal. 2. Determination of the Appellant's status as a "Fit and Proper Person." 3. Allegations of negligence in IPO processes. 4. SEBI's restraint orders and their impact. 5. Consistency and proportionality of SEBI's punitive actions. Detailed Analysis: 1. Delay in Filing the Appeal: There is a delay of 25 days in filing this appeal. For the reasons stated in the miscellaneous application, delay is condoned. Miscellaneous Application No. 163 of 2015 is disposed of accordingly. 2. Determination of the Appellant's Status as a "Fit and Proper Person":The present Appeal has been filed against Order dated January 20, 2015 ("Impugned Order") passed by the Respondent - SEBI, declaring that Almondz Global Securities Limited ("Appellant") is not 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"). 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 this SCN on July 18, 2014. SEBI, in turn, issued another SCN on January 7, 2015, based on an extreme allegation that the Appellant did not comply with the criteria for "Fit and Proper Person" required for continuing as a registered stock broker/depositary participant. Finally, the Impugned Order declaring the Appellant to be unfit to indulge in the securities market came to be passed on January 20, 2015. 3. Allegations of Negligence in IPO Processes:The Impugned Order was passed on the basis of the impugned orders dated March 3, 2014, March 21, 2014, and April 11, 2014 owing to negligence committed during the process of the IPO in respect of two Issuer Companies. With respect to the IPO of PGEL, SEBI made the following allegations: Failure to ensure disclosure of material facts in the RHP and Prospectus viz., funds raised by the Issuer Company through Inter Corporate Deposits which were in the nature of a bridge-loan; decision by the Board of Directors of the Issuer Company to invest in ICDs of other companies; purchase orders placed by the Issuer Company for plant and machinery; names of certain companies in the list of suppliers of plastic granules; agreements and Memorandum of Understandings entered into by the Issuer Company with certain entities for purchase of land; and Failure to prevent misrepresentation in respect of amount of term-loan availed by the Issuer Company. With respect to the IPO of BGIL the two primary allegations against the Appellants were as follows: Incorrect/inadequate disclosures in the RHP and Prospectus regarding related party transactions, ostensibly being a transaction for the purchase of land between Gadeo Electronics, a partnership comprised of Richa Mittal and R.K. Mittal, the sister-in-law and father respectively of Sanjeev Mittal, Director of BGIL; Non-disclosure of two ICD loans aggregating to ? 15 crore. 4. SEBI's Restraint Orders and Their Impact:As a result of these alleged infractions, the Respondent concluded that 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. 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. 5. Consistency and Proportionality of SEBI's Punitive Actions:We have heard the counsel for both parties and closely perused the Appeal, along with other documents placed before us. On a bare perusal of the provisions cited above, it is borne out that an MB has to fulfill the criteria for a Fit and Proper Person as provided under Schedule II of the Intermediaries Regulations. Six criteria have been specifically laid down by the Intermediaries Regulations as those which ought to be satisfied before an entity can be designated as a Merchant Banker. In order to understand the true import of the concept of Fit and Proper Person, we need to look at it from a historical perspective and also analyse the context in which it has come to be used against the Appellant. It is pertinent to note that regulations dedicated to the criteria for fit and proper person, namely, SEBI (Criteria for Fit and Proper Person) Regulations, 2004 ("Regulations of 2004") were first crafted by the Respondent to clearly delineate the criteria to be satisfied for a person to be considered fit and proper. It seems that this was the first instance wherein the concept of Fit and Proper Person was introduced in the legal scheme of the structure of the securities market. Regulation 3 of the erstwhile regulations laid down the criteria. Further, these were repealed by SEBI through the Intermediaries Regulation w.e.f. May 26, 2008. Regulation 3 of the erstwhile Regulations of 2004 has been reproduced hereinafter: On an analysis of Regulation 3, it emerges that Regulation 3(1) had provided for 6 criteria to be kept in mind while considering whether a person related to the securities market is a fit and proper person. These criteria were financial integrity, absence of convictions or civil liabilities, competence, good reputation and character, efficiency and honesty, and the absence of any disqualification to act as an intermediary. As mentioned above, these criteria have now been incorporated in the Intermediaries Regulations. The Regulations of 2004, however, additionally, also prescribed certain mandatory disqualifications which would render an entity unfit for the purpose of grant or renewal of a certificate to act as an intermediary or to continue to act as an intermediary. It is pertinent to note that Regulation 3(2)(d), however, particularly excluded certain orders from the ambit of the Regulations of 2004 with the result that the orders mentioned in the same would not incur the disqualification of being declared unfit. These excluded orders were as follows: Suspension of the certificate of registration as an intermediary; or Restraining the applicant or the intermediary from dealing in the securities market; or Prohibiting the applicant or the intermediary from dealing in the securities market; or Debarring the applicant or the intermediary from dealing in the securities market. 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). 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 were considered to be mandatory disqualifications under the Regulations of 2004. On an examination of the eight events which necessarily disqualified a person from being a fit and proper person, we note that these were instances of moral turpitude, securities law fraud, insolvency, indulgence in unfair trade practices, insider trading etc. In other words, offences which were considered to be particularly serious and injurious to the growth of a healthy capital market and hence undeserving of any opportunity of redemption to be given to the committer of these grave infringements. Furthermore, while listing down these mandatory disqualifications, the suspension of the intermediary's registration certificate was particularly excluded from the purview of the Regulations of 2004 because it was rightly recognized by SEBI that such trivial wrongdoings did not warrant such a heavy penalty as being declared unfit under the Intermediaries Regulations. We now turn our attention to the Intermediaries Regulations, Schedule II of which currently incorporates the criteria for a fit and proper person. At first glance, it emerges that the words used in the Schedule are "the Board may" which have the effect of leaving the criteria to be employed by SEBI at its discretion. The disqualifications have been deleted in their entirety. Schedule II only retains the six criteria, among others, to be kept in mind while determining the criterion of fit and proper. These criteria are not exhaustive in nature and SEBI is free to have resort to other criteria it might deem fit depending on the facts and circumstances of a given case. The way the criteria have been listed in Schedule II of the Intermediaries Regulations, it is evident that in fact these criteria were all considered to be equally important. The Regulations are silent regarding the process to be followed when five out of six criteria are duly met by the intermediary, as in this case. The Appellant's conduct, as is clear from the facts of the matter at hand, has not been fraudulent or dishonest or unfair in any manner. In the last 10 ten years of the functioning of the Appellant, it has come out with around 120 public offerings without any complaint from any investor or SEBI for that matter. Its conduct so far has been exemplary, barring the IPOs of the two Issuer Companies alone wherein the MB failed to examine 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 appellant. We, therefore, find in the facts of present case that, the fact that the restraint order passed against the appellant has been upheld cannot be a ground to hold that the appellant is not a fit and proper person to seek renewal of registration as a Merchant Banker. It is not the case of SEBI that in every case where a restraint order is passed against any person, that person must be held to be not a fit and proper person. In fact counsel for the appellant brought to our notice following decisions of SEBI wherein, inspite of the restraint order passed against a person, that person has not been held to be not a fit and proper person. 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 ? 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. To sum up, the appellant has been subjected to numerous proceedings, under various Regulations and consequent different punishments for the same charge of lack of due diligence in respect of the two IPOs pertaining to the two issuer companies almost during the same period. These punishments are:- 5 years in case of the IPOs of PGEL under the ICDR Regulations read with the MB Regulations by order dated March 21, 2014. 5 years in case of the IPOs of BGIL under the ICDR Regulations read with the MB Regulations by order dated March 3, 2014. 2 years under the Intermediaries Regulations by order dated March 20, 2015. Suspension of the registration as MB for a period of 6 months by order dated April 11, 2014. Rejection of request for continuance as MB under the Intermediaries Regulations vide order dated January 20, 2015 on the basis of it allegedly not being fit and proper. SCN dated January 7, 2015 seeking cancellation of the appellant's registration even from the Membership of the Stock Exchanges and as Depository Participant. No rationale is brought on record by the respondent to justify the multiple punishments sought to be imposed on the appellant almost on similar sets of facts in preparing and presenting the offer document to the concerned authorities in respect of the two IPOs pertaining to the two companies in question. Although the respondent is empowered to take action under different provisions of law/regulations against any particular entity but such actions in imposing multiple punishments must be supported by reasons to be recorded by the respondent before embarking upon such a path, especially when the cause of action remains the same. No cogent or convincing reasons are forthcoming from the pleadings and documents brought on record by the respondent. Similarly, the object sought to be achieved by such a plurality of actions remains totally obscure. In addition, as earlier noted, there is no consistency in imposing different punishments on the same entity in an indiscriminate manner for the same violation. Therefore, we are of the considered view that the present Impugned Order cannot be sustained in law. We shall now deal with cases cited by SEBI in support of its submission that the Appellant is not a fit and proper person. Aryaman Financial Services Ltd., holding a category 1 MB registration, applied for registration as debenture 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. 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 pertinent to note that 80,800 fake share certificates were issued by Parsoli, signatures of genuine investors were forged on transfer documents, fraudulent transfer and dematerialization of those fake share certificates was approved in favour of 22 promoter/front entities, resulting in blatant violation of Regulations 3 and 4 of the PFUTP Regulations. Therefore, order dated July 27, 2010 restrained Parsoli from accessing the securities market in any manner for a period of seven years. A monetary penalty of ? 4.05 crore was further imposed upon Parsoli. Consequently, its application to be registered as an MB was rejected by SEBI, and rightly so. Moreover, in 2013, Parsoli was declared to have not fulfilled the criterion of fit and proper and was not fit to act as a market intermediary as per the Intermediary Regulations. This case was one of flagrant violations wherein regulations were flouted with impunity. This case cannot be compared to an oversight of the Appellant of not analysing the bank statements of the two Issuer Companies. These two cases stand on two very different footings. We now deal with the only instance brought on record wherein an erstwhile MB has been declared to not have satisfied the criterion of fit and proper person. Altius Finserv Private Limited was appointed as an MB by SEBI on June 10, 2010. Mr. Pawan Bansal, the Managing Director of Altius was also its KMP. The CBI filed an FIR against Mr. Basal on August 1, 2014 and subsequently arrested him regarding the sanction of External Commercial Borrowings by Syndicate Bank for Prakash Industries, in relation to which Mr. Bansal was a named intermediary. The CBI levelled accusations against the employees of Syndicate Bank which had allegedly sanctioned the ECBs with a few procedural irregularities. Mr. Bansal was released from judicial custody on October 1, 2014 on bail. Vide order dated March 17, 2016, SEBI held
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