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TMI Blog2015 (10) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. - APPEAL NO. 65 OF 2014 - - - Dated:- 30-9-2015 - J.P.DEVADHAR AND JOG SINGH, JJ. For The Appellant : Mr. Darius J. Khambata, Senior Advocate with Mr. Sandeep Parekh, Mr. Anil Choudhary and Mr. Rajneesh Deka, Advocates i/b Finsec Law Advisors For The Respondent : Mr. Fredun Devitre, Senior Advocate with Mr. Shiraz Rustomjee, Senior Advocate, Mr. Nishit Dhruva, Mr. Chirag Bhavsar and Ms. Khushbu Chajj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- (a) Appellant is a 'not for profit company' duly registered under Section 25 of the 1956 Act. License under Section 25(1) of the 1956 Act was granted to the appellant by the Registrar of Companies, Mumbai on July 26, 2013 and certificate of incorporation under Section 25(2) of the 1956 Act was granted to the appellant on July 28, 2013. (b) Appellant is promoted by Financial Planning Standards Board India ( FPSB for short) an association of intermediaries, and a public-private enterprise, which is also a not for profit company registered under Section 25 of the 1956 Act. FPSB focuses on distribution, improvements, investment advisory and financial planning in securities and other financial products with full disclosure and regulated practices. FPSB is established by forty seven (47) leading financial institutions in both public and private sector across all asset classes in personal finance including LIC, SBI, UTI AMC, ICICI Bank, Axis Bank, Deutsche Bank AG, Kotak Mahindra Bank, L T Finance Holdings, Reliance AMC, Religare Enterprises etc. who support the financial planning movement. FPSB is registered under Section 12A, Section 10(23C)(vi) as also under Section 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to distributors engaged by asset management companies of mutual funds and distributors engaged by portfolio managers. (h) On March 21, 2013 a public notice was uploaded on the SEBI website inviting applications from any group or association of intermediaries desirous of being recognised as an SRO for distributors of Mutual Fund products in terms of the SRO Regulations. (i) By a public notice dated June 27, 2013, SEBI declared that July 31, 2013 shall be the last date for receiving applications from eligible applicants desirous of being recognized as an SRO for distributors of Mutual Fund products. (j) On July 29, 2013 appellant submitted its application before SEBI for being recognized as an SRO for distributors of mutual fund products. (k) On September 17, 2013 SEBI called upon the officers of the appellant and sought certain clarification in respect of its application for being recognized as an SRO. The appellant by its letters dated September 20, 2013, November 20, 2013 and November 21, 2013 provided all the necessary clarifications and information sought, to the satisfaction of SEBI. (l) By the impugned letter dated February 6, 2014, appellant was inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regulation 3 of SRO Regulations was 31.07.2013. Thus, on 29.07.2013 when respondent no. 2 submitted its application for being recognised as an SRO, it was a non-existent entity and therefore such an application submitted by a non-existent entity being invalid, SEBI ought to have rejected the application submitted by respondent no. 2 at the threshold itself. (b) Section 25 of the 1956 Act makes a clear distinction between grant of a license under Section 25(1) and registration of a company under Section 25(2) of the 1956 Act. A license under Section 25(1) does not direct the Registrar of Companies ('ROC' for short) to register an association as an incorporated company. Rather, it directs the ROC that if it does decide to register the proposed company or association, it would be bound to exclude the word 'Limited' or the words 'Private Limited' from the name of the proposed company. Since regulation 3 refers to submitting application by a company registered under Section 25 of the 1956 Act, SEBI could not have entertained the application filed by respondent no. 2 which was admittedly not registered under Section 25 of the 1956 Act on the date of submitting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4(a) of the SRO Regulations that SEBI shall not consider an application for grant of a certificate unless the applicant is a company to which license has been granted under Section 25 of the 1956 Act, does not in any way affect the mandatory requirement contained in regulation 3 that an applicant must be a company registered under Section 25 of the 1956 Act. Regulation 4(a) merely reiterates that SEBI shall consider the application made under regulation 3 only if the applicant holds a license under Section 25 of the 1956 Act. Therefore, submitting application under regulation 3 by an un-incorporated entity being a legal impossibility, SEBI is not justified in entertaining the application and granting in-principle approval to the respondent no. 2 which was admittedly not an existing entity till the cut off date for submitting the applications. (h) Argument of SEBI that the eligibility requirements are relevant only at the point of time when applications are actually taken up for consideration is incorrect and contrary to the specific provision contained in regulation 3(1) of the SRO Regulations. In the public notice issued on March 21, 2013 inviting applications, it was unambigu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble entity on the cut off date. (j) Fact that regulation 4A of the SRO Regulations empowers SEBI to grant in-principle approval to an applicant by granting extension of time to comply with the provisions of clauses (c) (d) or (h) of regulation 4 does not in any way affect or alter the eligibility criteria prescribed under regulation 3 which is required to be met at the time of submitting the application under regulation 3. Regulation 4A inserted with effect from 18.11.2013 does not seek to amend the eligibility criteria prescribed under regulation 3. Therefore, the application filed by respondent no. 2 which does not satisfy the eligibility criteria prescribed under regulation 3 could not have been entertained by SEBI. (k) Under regulation 6 of SRO Regulations, any application which is not complete in all respects or does not conform to the requirements of regulations 3, 4 5 are liable to be rejected. First proviso to regulation 6 provides for giving an opportunity to the applicant to remove such objections as may be indicated by the Board. However, that proviso would not apply to an applicant like respondent no. 2 who being non-existent was disqualified from even submittin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company having certificate of incorporation under Section 25 of the 1956 Act before 31st July 2013, SEBI ought to have entertained the application submitted by the appellant and SEBI is totally unjustified in entertaining the ineligible application submitted by respondent no. 2. 6. There is no merit in the above contentions. 7. As rightly contended by Mr. Devitre learned Senior Advocate appearing on behalf of SEBI and Mr. Sundaresan learned counsel appearing on behalf of respondent no. 2, the entity eligible to apply for being recognized as an SRO for distributors of mutual fund products under regulation 3 of SRO Regulations would be an entity to which license under Section 25(1) of the 1956 Act has been granted for being registered as a company under Section 25(2) of the 1956 Act. 8. Above reasoning can be better understood by referring Section 25(1) and (2) of the 1956 Act as also regulation 2(1) (e), 3, 4(a) 6 of the SRO Regulations, which read thus:- Section 25(1) (2) of 1956 Act 25. (1) Where it is proved to the satisfaction of the Central Government that an association- (a) is about to be formed as a limited company for promoting commerce, art, science ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of members, agents, their qualifications for membership, and the exclusion, suspension, expulsion and readmission of members therefrom or therein to; (3) Every application under sub-regulation (1) shall be signed on behalf of the applicant under authority of its Board of Directors by its Chairman, Managing Director, Chief Executive Officer or whole time director. (4) Every application under sub-regulation (1) shall be made to the Board in Form A of the first schedule and shall be accompanied by a non-refundable application fee, as specified in Part A of the second schedule, to be paid in the manner specified in Part B thereof. Eligibility criteria 4. The Board shall not consider an application for grant of a certificate under regulation 3 unless the applicant satisfies the following conditions, namely:- (a) the applicant is a company which has been granted license under section 25 of Companies Act, 1956; Application to conform to the requirements 6. Subject to the provisions of regulation 4A, any application for a certificate, which is not complete in all respects or does not conform to the requirements of these regulations and particularly regulations 3, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n contained in the license issued under Section 25(1) of the 1956 Act. If it is held that while submitting the application under regulation 3 the applicant must be registered under Section 25(2) of the 1956 Act, then, it obviously means that at the time of submitting the application, the applicant holds license under Section 25(1) of the 1956 Act and in such a case, prescribing the eligibility criteria that at the time of considering the application, the applicant must be a company holding license under Section 25(1) would be meaningless. In other words, if it is held that the eligibility criteria for an applicant to submit application under regulation 3 is to hold registration under Section 25(2), then it would be meaningless to prescribe the eligibility criteria under regulation 4 that while considering the application submitted under regulation 3 the applicant must hold license under Section 25(1), because registration under Section 25(2) is granted after grant of license under Section 25(1) of 1956 Act. Regulation 4A inserted to SRO Regulations with effect from 18.11.2013 further makes it clear that the eligibility criteria prescribed under regulation 4 are the eligibility crit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 would arise only after the application is submitted under regulation 3. Extension of time permissible under regulation 6 is not restricted to any particular requirement of regulation 3. Therefore, reading regulation 3 with regulation 6 it is imperative to hold that under regulation 3 a company to which license is granted under Section 25(1) of 1956 Act is eligible to apply for being recognized as an SRO for distributors of mutual fund products and it is obligatory on part of the applicant to obtain registration under Section 25(2) of 1956 Act within the extended time permitted under regulation 6 of the SRO Regulations, failing which the application is liable to be rejected. 13. It is relevant to note that a company incorporated under Section 34 of the 1956 Act is not entitled to the exemption available under Section 25 of the 1956 Act unless that company is registered under Section 25(2) of the 1956 Act. Registration under Section 25(2) is granted subsequent to grant of license under Section 25(1) of the 1956 Act. In fact Section 25(3) of the 1956 Act provides that a company duly incorporated under Section 34 of the 1956 Act may also make an application for grant of registrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the 1956 Act and apply for being recognized as an SRO under regulation 3 of SRO Regulations. Dominant intention of SRO Regulations is to motivate group/ association of intermediaries to form a company under Section 25 of 1956 Act so that such company registered under Section 25 of the 1956 Act could be granted certificate of recognition to act as SRO for distributors of mutual fund products. With this background when regulation 3 is read with regulation 2(1)(e),4,4A 6 of SRO Regulations it becomes clear that the applicant submitting application under regulation 3 need not be registered under Section 25 of the 1956 Act and if the applicant holds license under Section 25(1) of the 1956 Act, it would be a company eligible to apply regulation 3, subject to the condition that the said company obtains registration under Section 25(2) of 1956 Act within the time permitted by SEBI under regulation 6 of the SRO Regulations. 16. In the present case, license under Section 25(1) of the 1956 Act was granted to the respondent no. 2 on July 23, 2013 with a direction that the respondent no. 2 be registered as a company under Section 25(2) of the 1956 Act subject to fulfilling the conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to be construed narrowly. On the contrary the words 'any application for a certificate, which is not complete in all respects or does not conform to the requirements of these regulations and particularly regulation 3' used in regulation 6 unequivocally suggests that every requirement of regulation 3 could be removed within the extended time provided under regulation 6 of SRO Regulations. For all the above reasons, we reject the first contention raised by the appellant and hold that the respondent no. 2 having license under Section 25(1) of the 1956 Act was eligible to submit application under regulation 3 of SRO Regulations and therefore no fault can be found with the decision of SEBI in entertaining the application submitted by the respondent no. 2 on 29.07.2013. 19. Second argument advanced on behalf of the appellant is that the decision of SEBI in selecting and granting in-principle approval to the respondent no. 2 amounts to rejecting the application submitted by the appellant without following the procedure prescribed under regulation 10 of the SRO Regulations and hence bad in law. Submission is that, under regulation 10 it is mandatory for SEBI to grant personal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufficient compliance with the requirements of regulation 10. All applicants were given this opportunity and availed of it, between July and December 2013. Even the appellants make no grievance in the appeal regarding denial of personal hearing. Their allegation is that there was no formal interview. (iv) Alternately, even in the amended situation of selection of one SRO, the opportunity of hearing contemplated by regulation 10 relates to the stage of rejection of the applicant who has been granted the 'in principle' approval under regulation 4A. If such an applicant is rejected after the grant of the 'in principle approval', then an opportunity to be heard is required to be given under regulation 10 to a person to whom 'in principle approval' was granted. (v) Alternately, regulation 10 contemplates a hearing to the 'unsuccessful' applicants only if it is sought after communication to them of the grant of in principle approval to one of the applicants, and before grant of the final certificate of recognition to the successful applicant under regulation 5, and not otherwise. (vi) Alternately, regulation 10 contemplates an opportunity of hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und products on 08.01.2013 nor while amending various provisions of SRO Regulations with effect from 18.11.2013 SEBI has deemed it fit to amend regulation 10 of SRO Regulations. Therefore, having brought into force the SRO Regulations 2004 for the first time with effect from 08.01.2013 limited only to the distributors of mutual fund products and having taken a decision not amend regulation 10 even after amending various provisions of SRO Regulations in view of its decision that there would be only one SRO for distributors of mutual fund products, it is not open to SEBI to contend that regulation 10 of SRO Regulations would not apply while selecting a single SRO for distributors of mutual fund products. 24. No doubt that in a selection process, where one out of many is to be selected, ordinarily there would be no question of granting opportunity of hearing to the applicants whose applications are to be rejected. However, SRO Regulations framed in the year 2004 which includes regulation 10 having been brought into force in the year 2013 for the first time, limited only to the distributors of mutual fund products wherein single SRO is to be selected, it is not open for SEBI to cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under regulation 10 and in such a case, the opportunity of hearing would only be by granting personal hearing and not be any other mode. Admittedly, no opportunity of hearing was given to the appellant after deciding to reject the application of the appellant and after deciding to select and grant in-principle approval to the respondent no. 2 and thus SEBI has contravened regulation 10. 25. Having realized the inconsistency in its above argument, it is contended by SEBI, as an alternative argument, 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. There is no merit in the above contention, because, the in-principle approval is granted to an applicant only when that applicant is selected and consequently all other applicants are rejected. Regulation 10 contemplates granting opportunity of hearing to an applicant whose application is being rejected and not to an applicant who is selected and to whom in-principle approval is granted. Therefore, argument of SEBI that opportunity of hearing under regulation 10 is to be given while rejecting the applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation 4 require that the applicant (i) must have networth of one crore rupees (ii) must have adequate infrastructure for discharging functions as an SRO (iii) must have in its employment persons having adequate professional and other relevant experience to the satisfaction of SEBI. Obviously, these requirements are to be fulfilled by an applicant who is selected by SEBI for discharging the functions of an SRO. Thus, in-principle approval is granted to an applicant when that applicant is selected for discharging the duties as an SRO. Since in-principle approval is granted by selecting one amongst many, it is just and proper to hold that opportunity of hearing to the non-selected applicants has to be given at the time of granting in-principle approval to the selected applicant. 29. If the argument of SEBI is accepted it would mean that opportunity of hearing to the unsuccessful applicants would have to be given under regulation 10 at the time of granting final certificate of recognition to the selected applicant to whom in-principle approval was granted. Since opportunity of hearing under regulation 10 is not an empty formality, it is possible that in a given case, SEBI after h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first two issues raised by the appellant as follows:- (a) Regulation 3 of SRO Regulations, permits any group or association of intermediaries holding license under Section 25(1) of the 1956 Act to submit application for being recognized as an SRO for distributors of mutual fund products. Since respondent no. 2 held license under Section 25(1) of the 1956 Act on the date of submitting the application under regulation 3 of the SRO Regulations, respondent no. 2 was eligible to apply and therefore SEBI was justified in entertaining the application submitted by respondent no. 2. (b) Argument of SEBI that regulation 10 contemplates granting opportunity of hearing to the unsuccessful applicants at the time of granting final certificate of recognition to the applicant to whom in-principle approval was granted is devoid of any merit. In our opinion, regulation 10 requires SEBI to give opportunity of hearing to the unsuccessful applicant at the time of selecting and granting in-principle approval to an applicant. Since SEBI has failed to comply with the requirements of regulation 10, we quash and set aside the impugned decision of SEBI dated 06.02.2014 and direct SEBI to select an app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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