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SECURITIES
AND EXCHANGE BOARD OF ORDER IN THE
MATTER OF APPLICATION BY SMIFS CAPITAL MARKETS LTD., FOR RENEWAL OF CERTIFICATE
OF REGISTRATION, AS A MERCHANT BANKER WTM/TMN/MIRSD/ /2004 1.
SMIFS Capital Markets
Ltd., a company (hereinafter referred to as ‘the applicant company’) having its
registered office at Vaibhav
(4F), 4 Lee Road, Kolkata- 700 020 submitted an
application dated December 12, 2002 for renewal of certificate of registration
under Securities and Exchange Board of India (Merchant Bankers) Regulations,
1992 (hereinafter referred to as ‘the said regulations’) to Securities and
Exchange Board of India (hereinafter referred to as ‘SEBI’) for the purpose of carrying on the activities
as a Merchant Banker. 2.
While
considering the application, it was noted that Shri. Utsav
Parekh who is a director of the applicant company is
also a director of its associate SMIFS Securities Limited. Further it was also
noted that enquiries were initiated against SMIFS Securities Ltd. in the matter
of DSQ Software Ltd. and in the matter of DSQ Industries Ltd. for the alleged
violation of the Securities and Exchange Board of India Act, 1992 (hereinafter
referred to as ‘the SEBI Act’), SEBI (Stock Brokers and Sub-Brokers) Rules
& Regulations 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Markets) Regulations, 1995 and the enquiries
are in progress. 2.1
SEBI also
initiated an enquiry vide order dated March 31, 2004 against SMIFS Securities
Ltd., to enquire into certain alleged violations like irregularities in
issuance of contract notes, discrepancies in client registration forms,
non-segregation of client/own funds, non exercise of due skill and care and
funding of the client. 2.2
SEBI initiated
another enquiry against SMIFS Securities Ltd. vide order dated April 08, 2004
in the case of South East Asia Marine Engineering and Construction Ltd. for the
alleged violation of the provisions of SEBI (Stock Brokers and Sub-Brokers)
Regulations, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Markets) Regulations, 1995. 2.3
Pursuant to
adjudication proceedings in the matter of BSL Ltd, vide order dated 2.4
An
administrative warning was also issued against the applicant company in the
matter of KHSL Industries Ltd. 3
In view of the
above, SEBI formed a prima facie view that the certificate of registration may
not be granted to the applicant company and the applicant company was informed
accordingly by SEBI vide letter dated May 19, 2004. Vide the said letter, the applicant was
informed that in case it is aggrieved by the decision, it may avail an
opportunity of hearing before the Board as per the provisions of the said
regulations and it was further informed that the applicant’s decision to avail
the opportunity of hearing shall be intimated to SEBI within 15 days of receipt
of the letter. 3.1
The applicant
company vide letter dated 4.
An opportunity
of hearing was granted to the applicant company on 5.
I have perused
the application for the certificate of registration filed by the applicant, the
material available on record, the replies of the applicant company dated 5.1
The main
contentions raised during the personal hearing and in the written submissions
made by the applicant company are the following: (a) The pending enquiries against SMIFS Securities Ltd.
cannot be the ground to reject the applicant’s application for registration as
no order has been passed and outcome of the enquiry is pending. (b) With regard to the adjudication proceedings against
the applicant and its associates, SMIFS Capital Services Ltd in BSL Ltd. case,
the order dated (c) The applicant company did large number of Merchant
banking and underwriting assignments in the
interest of investors and renewing their certificate of registration would be
in the interest of investors. (d) Regulation 6 (h) of the SEBI (Merchant Bankers)
Regulations, 1992 and Regulation 3 (2) (h) of SEBI (Criteria
for Fit and Proper Person) Regulations, 2004 have no co-relation with each
other. They do not and cannot operate in
similar fields and reference / or recourse to Regulation 3 (2) (h) is wholly
unwarranted when examining the criteria specified in Regulation 6 (h) of the
SEBI (Merchant Bankers) Regulations, 1992.
In such circumstances, clause 3(2)(h) of SEBI (Criteria for Fit and
Proper Person) Regulations, 2004 cannot be invoked against the applicant as
clause 6(h) of the SEBI (Merchant Bankers) Regulations, 1992 is not concerned
with the criteria of a ‘fit and proper’ person. (e) Pendency of any enquiry against any of the associates
cannot be and is not a ground for invoking
Regulation 6(h) of the SEBI (Merchant Bankers) Regulations, 1992 or Regulation
3(2)(h) of SEBI (Criteria for Fit and Proper Person) Regulations, 2004 against
the applicant. (f) The matter pertaining to the associates including
enquiries being conducted against such associates and
adjudications made by the SEBI against such associates, are wholly irrelevant
considerations for determining as to whether there should be a renewal of certificate
as a merchant banker in favour of the applicant under the SEBI (Merchant
Bankers) Regulations, 1992. It would be
evident from an ex facie perusal of
Regulations (a), (aa), (b), (e), (f), (gg) and (h) that the same are concerned with only the applicant
and do not, in any manner, concern with any of its associates. Only Regulation 6(c)
of the Regulations, is concerned with an associate of the applicant. It is evident, therefore, that where matter
concerning an associate of an applicant were to be the subject of consideration,
the same have been expressly provided for in the SEBI (Merchant Banker)
Regulations, 1992. In such
circumstances, the reference of associates in the Show Cause notice is wholly
irrelevant and in excess of and without jurisdiction. (g) Under the SEBI (Underwriters) Regulations, 1993 there
are similar criteria for renewal as provided in SEBI (Merchant
Bankers) Regulations, 1992. In spite of
pendency of the enquiries and adjudications referred to in the show cause
notice of which SEBI is and was at all material times aware, they were granted
renewal of the underwriting certificate on an application made on 20.02.2003 by
them which was subsequent to the application made under the SEBI (Merchant
Bankers) Regulations, 1992 for renewal of certificate as merchant banker, which
was made on 12.12.2002. The company was
issued certificate no. INU000000829 dated 22.05.2003 granting renewal of the
underwriting registration when the enquiries and adjudications referred to in
the show cause notice were pending. In
such circumstances, the Board Viz., SEBI is estopped
from refusing to renew certificate in its favour under the SEBI (Merchant
Bankers) Regulations, 1992. 6.
With regard to
the above contentions raised by the applicant it is noted that in terms of regulation
6 of the said regulations, the board has to take into account for considering
the grant of the certificate, all matters that are relevant to the activities
in the merchant banker and in particular whether the applicant is a fit and proper
person. In this regard, it is noted that
number of enquiries are in progress against one of the associates of the
applicant company SMIFS Securities Ltd whose director is also on the board of
the applicant company. It is noted that the allegations against SMIFS
Securities Ltd are serious in nature pertaining to violation of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities
Markets) Regulations, 1995. 6.1
Further, I find that monetary penalties were
imposed by the adjudicating officer of SEBI on the applicant company and its
associates pursuant to adjudication proceedings. It is noted that the applicant
company challenged the said adjudication order before the Hon’ble Securities Appellate
Tribunal and the Hon’ble Tribunal vide order dated 6.2
With regard to
the applicant company’s contention that they were granted certificate of
registration under SEBI (Underwriters) Regulations, 1993, inspite
of the pendency of the enquiries and adjudication pending against the applicant
company and its associates, I am of the view that every application for
registration with the Board has to be considered on its merits looking into the
role to be played by the particular intermediary in the securities market. It
is noted that at the time of granting renewal of registration to the applicant
as an Underwriter, only one enquiry was pending against its associate SMIFS
Securities Ltd. Subsequently more
enquiries were initiated against SMIFS Securities Ltd. Hence the applicant’s
contention that SEBI is estopped from refusing to
renew certificate of registration of the applicant in view of the registration
granted to the applicant as an Underwriter, cannot be accepted. Further it can be seen that the role of a
merchant banker in the securities market is very important in the process of
issue management in various capacities as a manager, consultant, adviser, or
rendering advisory service in relation to issue management. Hence it is very
important that the various responsibilities associated with issue management
mainly those of disclosures, due diligence etc., have to be discharged with
care and caution. Hence only persons who follow the rules and
regulations scrupulously can be entrusted with such responsibilities. 6.3
With regard to
the applicant’s contention that regulation 6(h) of the said regulations and regulation
3(2) (h) of the SEBI (Criteria for Fit and Proper Person) Regulations, 2004
have no relation with each other, it is noted that the provisions of regulation
3 of the SEBI (Criteria for Fit and Proper Person) Regulations, 2004, lay down
the criteria for determining whether the applicant is a fit and proper person
for granting registration under the relevant regulations. Regulation 6(h) of the said regulations
stipulate that the Board shall, while considering the application for
registration has to satisfy itself that the grant of certificate to the
applicant is in the interest of investors.
In this regard, it may be noted that the conduct of the applicant and
its associates are relevant factors for determining whether the grant of
certificate to the applicant is in the interest of investors. Hence apparently there is no contradiction
between the two provisions and it is noted that the said provisions supplement
each other. 7.
An intermediary
in the securities market plays an important role and hence if the intermediary
is not a fit and proper person, it may act to the detriment of the interest of
the investors. In view of the pending
proceedings against the associates of the applicant, it is felt that grant of
certificate of registration to the applicant company to act as merchant banker
may prove to be detrimental to the interest of the investors. In view of the foregoing, pursuant to the
powers conferred upon me under Section 19 of Securities and Exchange Board of
India Act 1992 read with regulation 6 (h) and10 of SEBI (Merchant Bankers)
Regulations, 1992, and regulation 3(2) (h) of the SEBI ( Criteria for Fit and
Proper Person) Regulations 2004, I
hereby reject the application submitted by SMIFS Capital Markets Ltd. for renewal
of certificate of registration as a Merchant Banker. T. M. Nagarajan Member Securities
and Exchange Board of Place: Mumbai Date: August 06, 2004 |
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