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TMI Blog2016 (5) TMI 1505X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Misc. Application Nos. 117, 118, 130, 163, 165 of 2015 And Appeal No. 222 of 2015 - - - Dated:- 13-5-2016 - J.P. Devadhar, J. (Presiding Officer) And Jog Singh, Member For the Appellant : P.N. Modi, Senior Advocate, Joby Mathew, Deepak Dhane, N.P. Lashkari and Ramesh Gogawat, Advocates For the Respondent : J.P. Sen, Senior Advocate, Mihir Mody, Saurabh Bachhawat and Harekrishna Ashar, Advocates i/b K. Ashar Co. ORD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Banker with SEBI. The Appellant was appointed as Book Running Lead Manager ( BRLM ) for IPOs in relation to two companies - PG Electroplast Limited ( PGEL ) and Bhartiya Global Infomedia Limited ( BGIL ). 5. 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. 6. In particular, 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 avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugned Order is arbitrary, illegal, perverse and contrary to material on record. The orders on the basis of which the Show Cause Notice and later the Impugned Order have been passed are pending before this Tribunal for consideration and cannot be said to have been finalized. The restraint orders, around which the SCN and the Impugned Order are centered for SEBI to come to the inference that the Appellant is not a Fit and Proper Person as per Schedule II of the Intermediary Regulations, are not adequate for leveling and proving such a grave allegation against the Appellant. 12. Per Contra, the Respondent submits that Schedule II of the Intermediaries Regulations puts forth the absence of restraint orders as a criterion to be satisfied for the purposes of determining whether or not a person is fit and proper. It is also put forth that the Appellant has had three restraint orders passed against it, viz., orders dated March 3, 2014, March 21, 2014 and April 11, 2014. At the time of the passing of the Impugned Order, the order dated March 21, 2014 was in force. The Respondent therefore submits that an ongoing order is not only relevant in terms of the MB Regulations but in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. 17. Per Contra, with respect to the MAs the Respondent submits that with respect to the SCN sought to be challenged by the Appellant, this Tribunal vide order dated April 17, 2015 has already recorded a statement on behalf of SEBI that they would not act upon the said SCN during the pendency of the Appeals. Further, the Appellant has not challenged the SCN itself in any appeal and therefore, the reliefs sought in the MAs are not in aid of any final reliefs in the Appeals challenging the orders passed against the Appellant with respect to the IPOs of the two Issuer Companies. Since no order has been passed with respect to the SCN in question, the MAs are premature in nature. Further, an SCN should not be interfered with unless there are extraordinary circumstances which justify such interference, and in this case there are no such extraordinary circumstances which call for any intervention. 18. Moreover, it is submitted that the SCN calls upon the Appellants to explain why registration as a stock broker or a depositary participant should not be denied to it considering both the Depositaries Regulations as well as the Stock Broker Regulations require t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nated as a Merchant Banker. 22. 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. 23. 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: 3. Criteria for determining a 'fit and proper person' (1) For the purpose of determining as to whether an applicant or the intermediary seeking registration un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority and a period of three years from the date of the order has not elapsed; Provided that the Board may for reasons to be recorded in writing, allow the applicant or the intermediary, to seek registration before the lapse of three years as specified in clauses (d), (e) and (f). (g) the applicant or the intermediary, is financially not sound; (h) any other reason, to be recorded in writing by the Board, which in the opinion of the Board, renders such applicant or the intermediary, or its whole time director or managing partner unfit to operate in the capital market. 24. 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, additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 28. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. The said decisions are as follows:- A. In the case of Enam Securities Pvt. Ltd. by order dated 31st December 2010, SEBI found the MB guilty of non-disclosure of complete information in the offer documents in as much as the MB failed to make disclosure of various entities as promoters by exercising reasonable due diligence. Similarly, the MB failed to perform his duties in the matter of post-issue aspects as lead manager. Enam Securities was, therefore, found guilty of having violated Regulation 13 of SEBI (Merchant Bankers) Regulations, 1992 and clauses 5.1, 5.1.1, 5.1.2, 5.3.3, 7.3, 7.4.1, 7.7.7, 11.2(xxiii), 11.3.6(ii), 16.2.2.2 of erstwhile SEBI (DIP) Guidelines, 2000 issued under SEBI Act, 1992. Neither any prohibition was im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the present appellant, namely, Almondz has also preferred an application for consent mechanism which was declared by SEBI for unknown reasons. D. In the case of Kotak Mahindra Capital Co. Ltd., SEBI by its order dated 27th August, 2009 held that the MB had failed to exercise due diligence while handling various IPOs and lapses found by SEBI in their inspection. The MB was accused of violating provisions of Regulation 13 read with Schedule III of SEBI (Merchant Bankers) Regulations, 1992 and Clauses 5.1, 5.3.3.1, 6.9.2.1, 11.3.6, 7.3, 7.4.1, 7.7.7, 16.2.2.2 of erstwhile (DIP) Guidelines, 2000. The proposal of Kotak Mahindra Capital Co. Ltd. was settled by way of consent order and SEBI had accepted ₹ 5.50 lac as penalty. E. In the matter of DSP Merrill Lynch Limited, various lapses had been noted by SEBI while conducting their inspection. SEBI had accused the MB in question of not exercising due diligence with respect to disclosures in the offer documents in relation to allocation of shares to Qualified Institutional Buyers, and failing to act professionally and diligently as post-issue lead manager. No prohibition was imposed on the MB, on the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 32. 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 IPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuine 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. 35. 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 Fins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y listed public company and any public company intending to raise money from the public till the time of such repayment. The Sahara Group was forbidden from alienating any property; and all its bank accounts, including those of its promoters/directors were frozen. In this case as well, the conduct attributed to Mr. Subroto Roy cannot be equated with that of the Appellants at any level, doing so would be a monumental folly. 37. Grishma Securities Pvt. Ltd. (Grishma) was a stockbroker registered with SEBI. In 2011, Grishma facilitated one of its clients in indulging into trades worth ₹ 60 crore on the first day of the opening of the IPO of Tijaria Polypipes. However, no margin was collected for such trading, which exposed the entire market to risk. Vide order dated July 31, 2013, Grishma was restrained from dealing in the securities market in any manner for a period of five years. This Tribunal, while elucidating upon the prodigious oversight on the part of Grishma, upheld SEBI's order and concurred with SEBI's finding that Grishma had violated the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utiously 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. A certain degree of subjectivity is involved in the process of imposition of punishments on different persons depending upon the facts and circumstances of a case. At the same time, in its will to punish a person for a violation, an authority cannot lose sight of the principle of proportionality. In the famous case of E.P. Royappa vs. Tamil Nadu quoted in [1974 (4) SCC 3], it has been observed by the Hon'ble Supreme Court that in case an authority acts in an arbitrary manner, Article 14 of the Constitution of India would be attracted even in the matter of imposition of excessive punishment in departmental proceedings. In E.P. Royappa, the Hon'ble Supreme Court equated the doctrine of proportionality with the Wednesbury principle of reasonableness. Similarly, in the case of Teri Oat Estates (P. Ltd.) rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intended to serve. 41. Therefore, it is indeed saddening to note that there is 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. 42. The Impugned Order in Appeal No. 222 of 2015 is quashed and set aside. The Appeal, thus, stands allowed. Accordingly, MA No. 117/2015 in Appeal No. 129/2014 to stay Impugned Order dated March 3, 2014; MA No. 118/2015 in Appeal No. 187/2014 to stay Impugned Order dated April 11, 2014; and MA No. 130/2015 in Appeal No. 275/2015 to stay the Impugned Ord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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