Order Against Smifs Capital Markets Ltd

SECURITIES AND EXCHANGE BOARD OFINDIA 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 officeat 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.

2.1SEBI 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. 2.2SEBI 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. 2.3Pursuant to adjudication proceedings in the matter of BSL Ltd, vide order datedApril 15, 2004, the adjudicating officer of SEBI imposed a consolidated penalty of Rs. 3 crores on the applicant company and its associate for violation of the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. 2.4An administrative warning was also issued against the applicant company in the matter of KHSL Industries Ltd. 3In 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.

3.1The applicant company vide letter datedMay 25, 2004, interalia submitted that no order was passed by SEBI in the aforesaid enquiry proceedings against SMIFS Securities Ltd. Further, as regards the adjudication against the applicant company and its wholly owned subsidiary SMIFS Capital Services Ltd., in the matter of BSL Ltd, it filed an appeal against the order datedApril 15, 2004passed by the adjudicating and enquiry officer before the Securities Appellate Tribunal onMay 25, 2004. 4.An opportunity of hearing was granted to the applicant company onJune 24, 2004.Shri Utsav Parekh, Chairman and Smt. Pinki Shah, an officer of the applicant company appeared before me and made submissions on behalf of the applicant company.They also filed their written submissions datedJune 23, 2004. 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 datedMay 25, 2004andJune 23, 2004and the submissions made by the representatives of the applicant company during the personal hearing granted to the applicant.

5.1The 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 datedApril 14,2004passed by the Adjudicating and Enquiry Officerimposing a penalty on the applicant was stayed in appeal bearing no. 82/2004 by the Hon’ble Securities Appellate Tribunal onJune 18, 2004. (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 similarcriteria 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. 6.1Further, 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 datedJune 18, 2004granted interim relief sought by the appellant subject to the appellant depositing a sum of Rs. 5,00,000 with the respondent SEBI. It is noted that subsequently the applicant company vide its letter datedJuly 20, 2004deposited the said sum of Rs. 5,00,000 with SEBI as per the terms of the order passed by the Hon’ble Tribunal. 6.2With 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. 6.3With 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 Date: August 06, 2004 WHOLE TIME MEMBER Place: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA