Order in the matter of First Global (UK) Ltd

ORDER 1. First Global (UK) Limited (hereinafter referred to as ‘applicant’), is a private company limited by shares, incorporated in United Kingdom and operating as a member of London Stock Exchange for buying and selling stock for institutional and other clients on agency basis, advising on and arranging financial transaction for capital market professional clients.

2. The applicant has applied for grant of certificate of registration as a Foreign Institutional Investor (hereinafter referred to as ‘FII’) with Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’). The application was considered by SEBI in accordance with the provisions of SEBI (Foreign Institutional Investors) Regulations, 1995 (hereinafter referred to as ‘FII Regulations’).

3. In the meantime, the applicant preferred appeal before Hon’ble Securities Appellate Tribunal (hereinafter referred to as ‘SAT’) with a prayer to direct, SEBI to grant certificate of registration as FII to the applicant. This appeal of applicant was disposed off on November 06, 2009, by the Hon’ble SAT, considering the submission of SEBI that the final decision in the matter shall be communicated to the appellant on or before November 30, 2009.

4. Subsequently, in accordance with the requirement of Regulation 11(2) of the FII Regulations, a letter dated November 19, 2009 was issued to the applicant communicating thereby that prima-facie, it is not a ‘fit and proper person’ for grant of registration as FII, for the reasons stated therein and registration as a FII should not be granted to it as it was not fulfilling the requirements of Regulation 6(1)(f) of the FII Regulations. It was inter alia stated that Mr. Shankar Sharma, the Director on the board of applicant has been prohibited from associating with the Indian securities market for a period of one year vide SEBI order dated February 13, 2009 and further prosecution proceedings have been initiated against First Global Stockbroking Pvt. Ltd. (hereinafter referred to as ‘FGSB’), Mr. Shankar Sharma, Smt. Devina Mehra, and others. Vide this letter applicants were advised to make submissions, if any, within a period of 10 days from the date of receipt of the said letter.

5. The applicant vide its email dated November 27, 2009, requested SEBI for extension of time for filing the submissions and requested for an opportunity of personal hearing. Accordingly, an opportunity of personal hearing was granted to the applicant on January 05, 2009 before me. On the date fixed, Mr. Neeraj Khanna, Group CFO and Ms. Sonal Parekh, Company Secretary appeared before me on behalf of the applicant and made submissions. Applicant also filed written submissions dated January 02, 2010 during the hearing, which were taken on record.

6. I have carefully considered the application, facts and circumstances of the case and submissions made by the applicant. The submissions of the applicant in brief are:

- As per the provisions of FII Regulations, SEBI is statutorily bound to grant the certificate of registration within 3 months after the information called for was furnished by it. - First Global group enjoys high credibility in India as well as abroad. The group, through various companies, undertakes various securities related business across the world. Mr. Shankar Sharma and Ms. Devina Mehra are common directors on the board of various companies of the First Global group. - SEBI order dated February 13, 2009 has no relevance for the FII application made by applicant since the said order has been passed against Mr. Shankar Sharma in his individual capacity and does not concern the applicant or FGSB. - Once certificate is granted Mr. Shankar Sharma will in no way be involved in the day to day workings of the applicant. - FGSB and others have filed a revision petition before the Hon’ble Bombay High Court, against the prosecution proceedings for non-compliance of summons issued by SEBI and the proceedings have been stayed. As regards other prosecution which were solely based on the SEBI order dated September 12, 2002 against FGSB and Vruddhi Confinvest Pvt. Ltd. The said order has been set aside by Hon’ble SAT and the prosecution proceedings should have been withdrawn suo moto.

7. Before proceeding further, the argument of the applicant that SEBI is statutorily bound to grant the certificate of registration within 3 months after the information called for was furnished by it, required to be considered. I note that certificate of registration is for acting as FII is not a matter of right. The registration granted under the FII Regulations is subject to the Board taking into account all matters which are relevant to the grant of certificate and in particular, the regulations lay down certain requirements which include applicant’s track record, regulatory status and its constitution. Two of the matters cited in Regulation 6(1) viz. 6(1)(e) and 6(1)(f) are of particular importance, whether the grant of certificate to the applicant is in the interest of the development of the securities market and whether the applicant is a fit and proper person. It is thus clear that grant of certificate of registration under Regulation 6(1) of FII Regulations is not a mechanical process which has to happen if a certain set of documents are furnished, but involves consideration on the part of the Board, whether grant of such certificate will be in the interest of securities market and whether the applicant is a fit and proper person.

8. It is observed that SEBI, vide its order dated February 13, 2009, had restrained Mr. Shankar Sharma from buying, selling or dealing in securities and prohibited him from associating in securities market in any manner whatsoever for a period of one year. I note that Mr. Shankar Sharma had preferred an appeal before Hon’ble SAT. Hon’ble SAT after considering the material available, vide its order dated October 28, 2009 upheld the order passed by SEBI and dismissed the appeal. Mr. Shankar Sharma, aggrieved by this order of Hon’ble SAT, preferred an appeal before the Hon’ble Supreme Court of India. Hon’ble Supreme Court, vide its order dated February 01, 2010 upheld the order of Hon’ble SAT and dismissed the appeal, thereby confirming the SEBI order dated February 13, 2009. I note that this restraint order of SEBI was on account of Mr. Shankar Sharma having violated the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.

9. In addition to the restraint order against Mr. Shankar Sharma, I observe that two prosecutions have also been initiated by SEBI against FGSB and its associates including Mr. Shankar Sharma and Ms. Devina Mehra for non-compliance of summons and violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations. However, the applicant has contended that the prosecution proceedings for non compliance of summons have been stayed by the Hon’ble Bombay High Court. Further as regards the prosecution launched for violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations is required to be withdrawn by SEBI, suo moto after the setting aside of the SEBI order dated September 12, 2002 by Hon’ble SAT. I observe that the Court of Magistrate, after satisfying itself on evidences produced before it, has taken cognizance in these two prosecution matters and these proceedings are still pending.

10. I note that it is not in dispute that applicant is a wholly owned subsidiary of FGSB and that Mr. Shankar Sharma and Ms. Devina Mehra are the directors on board of applicant and FGSB. Further, as per the submission made by the applicant, Mr. Shankar Sharma and Ms. Devina Mehra are the common directors on the board of various First Global group companies. Hence, it can be inferred that Mr. Shankar Sharma, directly and indirectly (through FGSB) is the driving force behind the applicant. In view of this, the SEBI order dated February 13, 2009 and other prosecution matters have relevance for considering the application of the applicant. I find no merits in the submission of the applicant that after the registration as FII, Mr. Shankar Sharma will in no way be involved in its day to day workings.

11. I note that as per Regulation 6(1) of FII Regulations, while granting a certificate of registration the Board has to take into consideration various facts. Regulation 6(1)(f) of FII Regulations, requires that the applicant should be a ‘fit and proper person’. Further, as per Regulation 6A of FII Regulations (as applicable prior to the amendment dated May 26, 2008) for determining whether an applicant is a fit and proper person, the provisions of SEBI (Criteria for Fit and Proper Person) Regulations, 2004, were applicable. Pursuant to the repeal of SEBI (Criteria for Fit and Proper Person) Regulations, 2004 with effect from May 26, 2008, the criteria for fit and proper person as required by Regulation 6A of FII Regulations is being considered as per Schedule II of the SEBI (Intermediaries) Regulations, 2008 which reads as under:

“For the purpose of determining as to whether an applicant or the intermediary is a ‘fit and proper person’ the Board may take account of any consideration as it deems fit, including but not limited to the following criteria in relation to the applicant or the intermediary, the principal officer and the key management persons by whatever name called – (a) integrity, reputation and character; (b) absence of convictions and restraint orders; (c) competence including financial solvency and networth”

12. A reading of the above provisions of fit and proper person applicable at the relevant points of time, makes it amply clear that while considering any application for grant of registration as any intermediary, the applicant has to pass the test of ‘fit and proper person’. For the purpose of performing such test on a body corporate, it is necessary to apply the criteria on the applicant entity as well as the persons who hold responsible positions in the body corporate and are in a position to influence the decision making process. At this juncture, I place reliance upon the order of Hon’ble SAT in the matter of Jermyn Capital LLC Vs. SEBI (Appeal No. 21/2006), wherein it was observed that: “Good reputation and character of the applicant is a very material consideration which must necessarily weigh in the mind of the Board in this regard. Reputation is what others perceive of you. In other words, it is the subjective opinion or impression of others about a person and that, according to the Regulations, has to be good. This impression or opinion is generally formed on the basis of the association he has with others and/or on the basis of his past conduct. A person is known by the company he keeps. In the very nature of things, there cannot be any direct evidence in regard to the reputation of a person whether he be an individual or a body corporate. In the case of a body corporate or a firm, the reputation of its whole time director(s) or managing partner(s) would come into focus. The Board as a regulator has been assigned a statutory duty to protect the integrity of the securities market and also interest of investors in securities apart from promoting the development of and regulating the market by such measures as it may think fit. It is in the discharge of this statutory obligation that the Board has framed the Regulations with a view to keep the market place safe for the investors to invest by keeping the undesirable elements out.”

13. Considering the above discussion in light of the application of the applicant, it shall be prudent if the past track record of the applicant and its associate entities be assessed in terms of its business conduct and adherence to law. I observe that SEBI with an objective to maintain a fair and transparent securities market, in the interest of investors, may take into consideration the factors of adverse track record, initiation of proceedings, adverse perception and atmosphere of mistrust against the entity concerned while applying the test of ‘fit and proper person’.

14. I note that, it is the duty of SEBI to keep the markets fair and free from undesirable elements. As envisaged in the ‘fit and proper person’ criteria, SEBI has to take into account the financial integrity, honesty, good reputation and character of the applicant. The role of FII as a market intermediary is very crucial. As a watchdog of the securities market and the protector of investor’s interest SEBI cannot take it lightly, when restraint order and prosecution proceedings are pending against the persons ultimately controlling or influencing the applicant. I also note that keeping applicant out from the securities market will not adversely affect the interest of investors in any way. But keeping, the applicant in mainstream market after considering the past behavior of its associate entities may cause prejudice to the interest of investors and the safety and integrity of the securities market. In view of the above, I am of the opinion that the applicant is not a fit and proper person to act as FII in the Indian securities market.

15. Therefore, taking into record the observations and material available on record, I, in exercise of the powers conferred to upon me in terms of Section 19 of SEBI Act, 1992 read with Regulation 11 (4) of the SEBI (Foreign Institutional Investors) Regulations, 1995, I hereby reject the application submitted by First Global (UK) Ltd. dated February 18, 2008, for grant of certificate of registration as Foreign Institutional Investor.

DATE : 04.03.2010 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA