Interim Order cum Show Cause Notice in respect of Scient Capital Private Limited

Under Sections 11(1), 11(4) and 11B (1) of the Securities and Exchange Board of India Act, 1992 read with Regulation 35 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008

In respect of – S. No. Name of the Noticee Registration No. PAN No. 1. SCIENT CAPITAL PRIVATE LIMITED INP000005166 AAWCS3001J

Background 1. Scient Capital Private Limited (hereinafter referred to as the “Noticee”/ “Scient”), is registered with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) as a ‘Portfolio Manager’ in terms of Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (hereinafter referred to as “Portfolio Managers Regulations”) bearing registration No. INP000005166. An examination of the Noticee was carried out by SEBI for the period from January 1, 2023 till December 31, 2024 (hereinafter referred to as “Examination Period”) based on its offsite inspection. Subsequently, vide email dated August 21, 2024, various details with respect to its net worth and Principal Officer were sought from the Noticee. Pursuant to the examination, various non-compliances including failure to maintain the minimum net worth as required, under the Portfolio Managers Regulations were observed against the Noticee.

Interim Order cum Show Cause Notice in respect of Scient Capital Private Limited

2. Before discussing the findings of the examination, it would be relevant to mention the applicable regulatory provisions:

SEBI (Portfolio Managers) Regulations, 2020 Regulation 7- Consideration of application (1) For considering the grant of certificate of registration to the applicant, the Board shall take into account all matters which it deems relevant to the activities relating to portfolio management. (2) Without prejudice to the generality of the foregoing provisions, the Board shall consider whether: - …. (d) the principal officer of the applicant has– … (iii) the relevant NISM certification as specified by the Board from time to time. … Provided further that a fresh NISM certification shall be obtained before expiry of the validity of the existing certification to ensure continuity in compliance with the certification requirements … (g) the applicant fulfills the net worth requirement specified in regulation 9 Regulation 9- Net worth Requirement (9) The net worth referred to in clause (g) of regulation 7 shall not be less than five crore rupees: Provided that a portfolio manager, who was granted a certificate of registration prior to the commencement of the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020, shall raise its net worth to not less than five crore rupees within thirty-six months from such commencement: Provided further that the portfolio manager shall fulfill the net worth requirements under these regulations, separately and independently, of the capital adequacy requirements, if any, for each activity undertaken by it under the relevant regulations: …

Regulation 11- Conditions of registration … (e) the portfolio manager shall maintain the networth specified in regulation 9 at all times during the period of the certificate.

SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007

Obligation to obtain certificate 3 (1) The Board may by notification in the Official Gazette require such categories of associated persons to obtain requisite certificate for engagement or employment with such classes of intermediaries and from such date as may be specified in the notification:

Provided that an associated person employed or engaged by an intermediary prior to the date specified by the Board may continue to be employed or engaged by the intermediary if he obtains the certificate within two years from the said date.

Powers and functions of NISM 7 (2) Without prejudice to the generality of the foregoing provisions and the activities of NISM under its articles, the functions of NISM in respect of certification for associated persons in the securities market shall include putting in place and implementing the certification process, procedure and policies.

Notification under SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007- NISM-Series-XXI-B: Portfolio Managers Certification Examination

1.The associated persons functioning as principal officer of a Portfolio Manager or employee(s) of the Portfolio Manager having decision making authority related to fund management, shall obtain certification from the National Institute of Securities Markets by passing the NISM-Series-XXI-B: Portfolio Managers Certification Examination as mentioned in the communiqué No. NISM/Certification/Series-XXI- B: Portfolio Managers (PM) Certification/2021/01 dated June 15, 2021 issued by the National Institute of Securities Markets.

2.The Portfolio Managers shall ensure that all such associated persons who are principal officers or employees having decision making authority related to fund management as on the date of this notification obtain the certification by passing the NISM-Series-XXI-B: Portfolio Managers Certification Examination within two years from the date of this notification:

Provided that a Portfolio Manager, who engages or employs any such associated person who is a principal officer or an employee having decision making authority related to fund management, after the date of this notification, shall ensure that such person obtains certification by passing the NISM-Series-XXI-B: Portfolio Managers Certification Examination within one year from the date of their employment.

Master Circular for Portfolio Managers-SEBI/HO/IMD/IMD-POD-1/P/CIR/2024/80 dated June 07, 2024 Clause 1.7 Certificate of associated persons in the Securities Markets 1.7.1. For employees of Portfolio Managers 1.7.1.1. The associated persons functioning as principal officer of a Portfolio Manager or employee(s) of the Portfolio Manager having decision making authority related to fund management, shall obtain certification from the National Institute of Securities Markets by passing the NISM Series-XXI-B: Portfolio Managers Certification Examination as mentioned in the communiqué No. NISM/ Certification/Series-XXI-B: Portfolio Managers (PM) Certification/2021/01 dated June 15, 2021 issued by the National Institute of Securities Markets. 1.7.1.2. The Portfolio Managers shall ensure that all such associated persons who are principal officers or employees having decision making authority related to fund management as on the date of this notification obtain the certification by passing the NISM-Series-XXI-B: Portfolio Managers Certification Examination within two years from the date of the notification: Provided that a Portfolio Manager, who engages or employs any such associated person who is a principal officer or an employee having decision making authority related to fund management, after the date of the Gazette Notification No. SEBI/LAD-NRO/GN/2021/49, shall ensure that such person obtains certification by passing the NISM- Series-XXI- B: Portfolio Managers Certification Examination within one year from the date of their employment.

5.2 Submission of compliance reports by Portfolio Manager 5.2.1. With effect from Financial Year 2019-20, Portfolio Managers are required to submit the following information to SEBI:

5.2.1.1. A certificate from the qualified Chartered Accountant certifying the networth as on March 31, every year based on audited account within 6 months from the end of Financial Year. 5.2.1.2. A certificate of compliance with PM Regulations and circulars issued thereunder, duly signed by the Principal Officer, within 60 days of end of each financial year. Further, details of non-compliance along with the corrective actions, if any, duly approved by Board of the Portfolio Manager.

FINDINGS: Non-maintenance of minimum net worth

3. The extant Portfolio Managers Regulations, 2020 came into force w.e.f. January 16, 2020. Regulation 9 of these Regulations stipulates that any applicant seeking registration as a portfolio Manager is required to meet the net worth, which shall not be less than ₹ 5 Crores. However, in terms of proviso to Regulation 9, a Portfolio Manager, who was granted a certificate of registration prior to the commencement of the said Regulations, was required to raise its net worth to not less than ₹ 5 Crores within thirty-six months from such commencement. Further, in terms of Regulation 11(e) of the Portfolio Managers Regulations, any certificate of registration granted under regulation 10 is, inter alia, subject to the portfolio manager maintaining the net worth specified in regulation 9 at all times during the period of the certificate. Thus, the obligation to maintain the net worth requirement is on a continuous basis.

4. The Noticee was granted registration as a Portfolio Manager by SEBI on June 09, 2016 i.e. prior to January 16, 2020. Therefore, it was required to raise its net worth to not less than ₹ 5 Crores latest by January 15, 2023. Based on the submissions made by the Noticee in offsite inspection with SEBI, further information was sought from it and based on net worth certificate provided by the Noticee, its net worth was noted to be only ₹ 4.26 Crores for FY ending March 31, 2023. In order to verify its financials, its filings with Ministry of Corporate Affairs (MCA) were checked and it was observed that the Noticee had submitted its net worth as ₹ 3.04 Crores under section ‘financial parameters – Balance sheet items’, and ₹ 2.02 Crores under section ‘reporting of Corporate Social Responsibility’. Thus, even in its MCA filings, its net worth was noted to be less than ₹ 5 Crores.

5. For the year ending March 31, 2024 as per the net worth certificate provided by the Noticee, its net worth is noted to be only ₹ 3.47 Crores. In its MCA filings for FY ending March 31, 2024, its net worth as noted under section ‘Financial parameters - Balance sheet items’ is ₹ 2.00 Crores and under section ‘Reporting of Corporate Social Responsibility’ is ₹ 3.05 Crores. Further, the Noticee vide email dated January 28, 2025 informed that it is in the midst of fund raising and would provide a new net worth certificate, once the process is completed. The same was reiterated by the Noticee vide email dated February 03, 2025 in response to SEBI’s email of the same date. In light of the above, I note that the Noticee has not been able to raise its net worth upto the minimum stipulated limit of ₹ 5 Crores which has to be maintained on a continuous basis. Thus, the Noticee has continuously failed to maintain the minimum net worth from January 15, 2023 in non-compliance with the regulatory requirements.

Incorrect submission of compliance reports:

6. In terms of clause 5.2 of the Master Circular for Portfolio Managers dated June 07, 2024, every Portfolio Manager is required to submit: (1) A certificate from the qualified Chartered Accountant certifying the net worth as on March 31 every year (2) A certificate of compliance with Portfolio Managers Regulations and circulars issued thereunder, duly signed by the Principal Officer, within 60 days of end of each financial year. It is noted that the Noticee vide its filings with SEBI vide letter(s) dated June 14, 2023 and May 30, 2024 had submitted the report on compliance with Portfolio Managers Regulations for the Financial Year 2022-23 and 2023-24 respectively and certified and confirmed that it had complied with Portfolio Manager Regulations and other guidelines and Circulars issued by SEBI. However, as noted earlier, as per its own filings discussed in the previous paragraphs, its net worth for the year ending March 31, 2024 was less than ₹ 5 Crores. Thus, I find that the Noticee submitted an incorrect and misleading report on compliance with the Portfolio Managers Regulations in violation of the express provisions of the Master Circular dated June 07, 2024 during the period of examination.

Non-compliance with NISM Certification Requirements

7. In terms of Portfolio Managers Regulations, for considering the grant of certificate of registration to the applicant, in terms of Regulation 7, SEBI is inter alia required to examine whether the Principal Officer of the applicant has the relevant NISM certification as specified by SEBI from time to time. Further, it provides that a fresh NISM certification shall be obtained by the applicant before expiry of the validity of the existing certification to ensure continuity in compliance with the certification requirements. In terms of Clause 1.7 of the Master Circular dated June 07, 2024, the associated person(s) functioning as Principal Officer of a Portfolio Manager or employee(s) of the Portfolio Manager having decision making authority related to fund management, shall obtain certification from NISM by passing the NISM Series- XXI-B: Portfolio Managers Certification Examination as mentioned in the communiqué No. NISM/ Certification/Series-XXI-B: Portfolio Managers Certification/2021/01 dated June 15, 2021 issued by NISM. Furthermore, the Portfolio Managers shall ensure that all such associated persons who are Principal Officers or employees having decision making authority related to fund management as on the date of this notification1 obtain the certification by passing the NISM-Series-XXI-B: Portfolio Managers Certification Examination within two years from the date of the notification (September 07, 2021). Thus, the Noticee was required to ensure that its Principal Officer obtained the necessary NISM certification by September 07, 2023.

1 Notification No. SEBI/LAD-NRO/GN/2021/49 dated September 07, 2021 under Securities and Exchange Board of India (Certification of Associated Persons in the Securities Markets) Regulations, 2007.

8. In this regard, it is noted that the Noticee’s Principal Officer i.e. Mr. Ramesh Rachuri appointed as Principal Officer in January 2020 bearing PAN AGHPR7682N has not passed the required NISM certification till date as verified from NISM Skills Registry Portal as on date. Thus, the Noticee continues to be in violation of the regulatory provisions with respect to NISM certification from September 07, 2023 till date.

Need for interim directions:

9. As detailed in the above paragraphs, the Noticee acted as a registered Portfolio Manager without meeting the minimum capital adequacy requirement (net worth of ₹5 Crores) as mandated under the Portfolio Managers Regulations. It is noteworthy that despite lapse of more than two years since the end of timeline for meeting the regulatory requirement of net worth (i.e., January 15, 2023), the Noticee has shown no progress towards compliance. This persistent failure indicates an unacceptable state of affairs. Moreover, the Noticee submitted incorrect and misleading reports on compliance with Portfolio Managers Regulations with SEBI for FY 2022-23 and FY 2023-24 as its net worth was not meeting the regulatory threshold for both the years. Furthermore, the Noticee was in violation of the statutory requirement of ensuring that its Principal Officer has the required NISM certification for the period from September 07, 2023 till date.

10. Every registered intermediary is required to comply with the statutory requirements laid down by SEBI. Non-compliance with the obligations under the Portfolio Managers Regulations and the SEBI Circulars, weakens the regulatory framework. Net worth requirements are critical for ensuring operational solvency and safeguarding client interests. These requirements ensure that the entity retains sufficient assets to meet operational liabilities, contingent obligations and potential financial disruptions. Such safeguards are essential to preserve market integrity, ensure continuity of service and upholding client’s confidence in the entity’s financial soundness.

11. In this regard, I find it pertinent to refer to the following observations made by Hon’ble High Court of Gujarat in the matter of Nikhil T Parikh - sole Proprietor of Parikh & Parikh & Ors. vs Union of India & Ors:2 “…Net worth requirement is meant for determining the financial health of the company/organization. It is required to ensure that only serious and sound players who can provide the required infrastructure for capital market can enter the market. The impact on the net worth could be very high in extreme scenarios…”

12. The preceding observations are particularly relevant to SEBI Registered Portfolio Managers, given the significance of net worth in safeguarding client interests, ensuring operational efficiency and preserving financial integrity.

13. In the instant case, it is noted that while remaining non-compliant with net worth requirements, the Noticee had 124 clients with Assets under Management (AUM) of ₹92.44 Crores at the beginning of the examination period and as on December 2024, its AUM was ₹ 66.8 Crores with 86 clients. Its clients include corporates, non-corporates as well as non-resident foreign clients. Considering the interest of the clients, immediate preventive action by issuance of interim directions is required to be taken against the Noticee to avert potential risks to its clients.

Directions 14. Accordingly, I, in exercise of the powers conferred upon me under Sections 11(1), 11 (4), 11B (1) read with Section 19 of Securities and Exchange Board of India Act, 1992 and Regulation 35 of the Intermediaries Regulations, 2008, hereby by way of the present interim order-cum-show cause notice, issue the following directions:

a. The Noticee is directed to comply with the regulatory requirement with respect to maintenance of the minimum net worth within a period of 15 days from the date of this order;

2 Special Civil Application No. 17040 Of 2012 With Writ Petition (PIL) No. 211 Of 2012 b. The Noticee is prohibited from on-boarding any new client and to accept additional funds or securities from its existing clients till it meets the applicable net worth requirement; c. If the Noticee fails to comply with the direction at (a) above, appropriate proceedings as deemed fit by SEBI including proceedings for cancellation or suspension of its registration may be initiated against it in terms of the provisions of Intermediaries Regulations, 2008.

15. This Order shall come into force with immediate effect. Further, the Noticee shall bring this Order to the notice of all its clients.

16. The observations/findings contained in this order are made on the basis of the material available on record. The order shall also be treated by the Noticee as a Show Cause Notice under Sections 11(1), 11(4), 11(4A), 11B(1), 11B(2) of the SEBI Act 1992, read with SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995, calling upon it to show cause as to why directions including the following shall not be issued against it: a. Direction to transfer its activities to another registered portfolio manager to carry on such activity or allow its clients or investors to withdraw or transfer their securities or funds held in its custody or to withdraw any assignment given to it, without any additional cost to such client or investor; b. Direction not to access the securities market or deal in securities or associate with any intermediary or with any capital market related activity for an appropriate period; c. Directions for imposition of penalty under Section 11B(2) and 11(4A) read with Section 15A(b) and 15HB of the SEBI Act, 1992.

17. The Noticee may file its reply to the present interim order-cum-show cause notice within 21 days from the date of receipt of this order and avail an opportunity of personal hearing in the matter, if it so desires.

18. This order is without prejudice to any other action that SEBI may initiate under the securities laws, as deemed appropriate, against the Noticee.

Sd/- DATE: FEBRUARY 17, 2025 AMARJEET SINGH PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA