2017 (8) TMI 49 - SC - Companies Law

Proper status of a Promoter/Director of Sahara Sponsor who holds about 80% of its capital and who controls all Sahara Group Companies - Held that - In the instant case SEBI itself found that two group companies of Sahara and its Directors were not conducting their business following the rules relating to public issue and were restrained from associating themselves with any listed Company or Company which intends to raise money from the public. It was also found that one of the Promoters/Directors is prima facie holding absolute control over the group companies. Given these facts and circumstances, lifting the corporate veil to the extent of identifying the role of the Promoter/Director in the impugned order cannot be faulted. In this context, the order of this Appellate Tribunal in the matter of Financial Technologies India Ltd. vs. SEBI 2015 (8) TMI 381 - SECURITIES APPELLATE TRIBUNAL MUMBAI upholding the order of the WTM of SEBI holding the appellant company and directors therein not a fit and proper person solely based on the decision of the Forward Markets Commission is relevant. We also note that, though subsequent to the impugned order, the RBI has cancelled the certificate of registration granted to the Sahara Sponsor to carry on the activities of NBFC and has initiated steps to wind up the Sahara Sponsor under the RBI Act, with the Allahabad High Court (Lucknow Bench) restraining the Company from alienating its assets. In the result, we find no merit in the appeal. Accordingly, appeal is dismissed with no order as to costs. Consequently, Misc. Application No. 188 of 2017 becomes infructuous and the same is also disposed of accordingly.

Issues Involved:

1. Fit and proper status of the Sahara Sponsor and its Promoter-Director.
2. Impact of the Promoter-Director's status on the mutual fund and AMC.
3. Continuous obligation of the sponsor under SEBI regulations.
4. Authority of SEBI to lift the corporate veil.
5. Compliance with SEBI regulations and reporting requirements.
6. Legal precedents and judgments cited by both parties.

Issue-wise Detailed Analysis:

1. Fit and proper status of the Sahara Sponsor and its Promoter-Director:
The appellants challenged the SEBI order canceling the registration of Sahara Mutual Fund on the grounds that the Sahara Sponsor and its Promoter-Director were not fit and proper persons. SEBI's decision was based on the involvement of Mr. Subrata Roy Sahara in legal proceedings against two Sahara group companies, SIRECL and SHICL, which led to his being deemed unfit. The appellants argued that the fit and proper criteria should only apply at the time of application for registration and not continuously. However, the judgment emphasized that the fit and proper status is a continuous requirement under SEBI regulations, and the Promoter-Director's status directly affects the sponsor's eligibility.

2. Impact of the Promoter-Director's status on the mutual fund and AMC:
The judgment highlighted that Mr. Subrata Roy Sahara's significant shareholding and control over the Sahara Sponsor and its group companies meant that his unfit status impacted the fit and proper status of the mutual fund and AMC. Despite his resignation from the Board, his substantial equity holding allowed him to retain control, thus affecting the overall integrity and reputation of the mutual fund operations.

3. Continuous obligation of the sponsor under SEBI regulations:
The court rejected the appellants' argument that the sponsor's obligation to be fit and proper is limited to the registration stage. It cited various provisions of the Mutual Fund Regulations, 1996, which mandate continuous compliance by the sponsor, including compensating affected investors, maintaining stake-holding in new fund offers, and periodic disclosures to SEBI. This continuous obligation ensures the protection of investor interests and the integrity of the mutual fund industry.

4. Authority of SEBI to lift the corporate veil:
The judgment upheld SEBI's authority to lift the corporate veil to determine the true control and management of the sponsor and its group companies. This power is essential for SEBI to fulfill its mandate of protecting investor interests and ensuring market integrity. The court noted that lifting the corporate veil is justified when it is necessary to identify the real controlling persons behind a corporate entity, especially in cases involving regulatory compliance and investor protection.

5. Compliance with SEBI regulations and reporting requirements:
The appellants were found to have failed in their obligation to inform SEBI about changes in the status of the sponsor and its Promoter-Director, as required by the regulations. The court emphasized that the knowledge of SEBI about the status of the group companies does not absolve the sponsor from its duty to file periodic statements and declarations. The failure to report these changes was a violation of the Mutual Fund Regulations, justifying SEBI's action.

6. Legal precedents and judgments cited by both parties:
The appellants cited several judgments to argue that a company is a separate legal entity distinct from its promoters/directors and that corporate veil lifting is only permissible in cases of fraud. However, the court distinguished these cases from the present matter, emphasizing that SEBI's actions were justified under the specific regulatory framework governing the securities market. The court also referenced the order of this Appellate Tribunal in the matter of Financial Technologies India Ltd. vs. SEBI, which upheld SEBI's authority to determine the fit and proper status of entities based on regulatory compliance.

Conclusion:
The appeal was dismissed, affirming SEBI's decision to cancel the registration of Sahara Mutual Fund due to the unfit status of its sponsor and Promoter-Director. The judgment reinforced the continuous obligation of mutual fund sponsors to comply with fit and proper criteria and SEBI's authority to lift the corporate veil to protect investor interests. The appellants were granted a six-week stay to approach the Hon'ble Supreme Court.

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