Order in the matter of SMiFS Capital Markets Limited

WTM/MSS/MIRSD/20/2009 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: M. S. SAHOO, WHOLE TIME MEMBER IN THE MATTER OF APPLICATION BY SMIFS CAPITAL MARKETS LIMITED FOR RENEWAL OF CERTIFICATE OF REGISTRATION AS A MERCHANT BANKER Date of Hearing: September 15, 2009 Appearances: For Noticee: Mr. S. C. Pal, Vice President & Compliance Officer For SEBI: Ms. Chanda Saket, Legal Officer (Presenting Officer) Mr. Manoj Kumar, General Manager Mr. Rohit Dubey, Assistant General Manager Ms. Anju Mahendra, Legal Officer, and Ms. Kshama Wagherkar, Legal Officer. ORDER Under Regulation 10 of the SEBI (Merchant Bankers) Regulations, 1992

1. SMIFS Capital Markets Limited (SEBI Regn. No. INM000003952), a company having its registered office at Vaibhav (4F), 4, Lee Road, Kolkata- 700 020 (hereinafter referred to as ‘the applicant’) had submitted an application dated December 12, 2002 for renewal of its certificate of registration under the SEBI (Merchant Bankers) Regulations, 1992 (hereinafter referred to as ‘regulations’) to SEBI. Vide orders dated August 06, 2004 and September 23, 2004, SEBI rejected the application. While setting aside the said orders of SEBI, SAT, vide its order dated October 19, 2005, directed the applicant to file an affidavit within two weeks from the date of receipt of the order distancing itself from those entities against which enquiries were pending. It also directed SEBI to reconsider the matter in the light of the new policy within 8 weeks from the date of filing of the affidavit in accordance with law.

2. Accordingly, the applicant filed an affidavit dated November 09, 2005 before Hon’ble SAT stating: ‘Appellant’s application for registration as Merchant Banker should be considered and granted subject to the condition that the process of divestment be completed as early as possible, and not later than 24 months from the date of grant of renewal of registration’. SEBI reconsidered the application and granted renewal on January 20, 2006 subject to the condition that the divestment in the associate entity would be completed as early as possible, but not later than 24 months from the date, i.e. by January 19, 2008. The registration was accordingly renewed for the 3 year period, March 16, 2003 - March 15, 2006. The applicant applied for another renewal of registration vide application dated February 14, 2006. SEBI granted renewal vide letter dated April 04, 2006 for the 3 year period, March 16, 2006 - March 15, 2009 and reiterated the earlier condition that the divestment in the associate entity would be completed at the latest by January 19, 2008. The applicant thereafter sought extension of time twice for compliance with the condition and SEBI granted the same. Accordingly the applicant should have completed the divestment in the associated entity by January 19, 2008.

3. The applicant, however, failed to distance by January 19, 2008 and thereby failed to comply with the condition of registration. The renewed registration expired on March 15, 2009. The applicant, vide its letter dated December 10, 2008, sought renewal of the certificate of registration beyond March 15, 2009. SEBI formed a prima facie view that the registration of the applicant may not be renewed as it had failed to comply with the condition of renewal. Vide letter dated August 25, 2009, it informed the same to the applicant and offered an opportunity of hearing before me on September 15, 2009, as per regulation 10 of the regulations. The applicant filed written submissions dated September 12, 2009. On behalf of the applicant, its Vice- President and Compliance Officer, Mr. S. C. Pal appeared and made submissions before me.

4. I have perused the application for renewal of the certificate of registration filed by the applicant, the oral and written submissions of the applicant and the material available on record.

5. The applicant has essentially argued that it could not comply with the condition of registration, as it could not find a buyer who was prepared to pay a reasonable price for its investment in view of the continuing adverse market conditions, which is a supervening impossibility.

6. I note that the divestment was a condition of registration. This was also the commitment in the affidavit filed by the applicant before Hon’ble SAT. Based on this commitment, SEBI had granted renewal of registration. It extended time twice to enable the applicant to comply with the condition. The applicant got 3 years to comply with the condition, but it did not divest even one share in the associated entity. Thus, it failed to comply with the condition of renewal of registration. I thus note that the applicant enjoyed registration for 6 years (March 16, 2003 - March 15, 2009) merely on an affidavit which was never honoured.

7. I fail to appreciate the argument that the applicant could not comply with the condition in view of a supervening impossibility. He has argued that it did not get a buyer who was willing to pay a ‘reasonable’ price. ‘reasonable’ is a relative term. What is reasonable for the applicant may not be so for the buyer. A buyer would buy a stake only if he considers the price reasonable. If there was no buyer for the stake, it means that the applicant was asking for an unreasonable price. If it had aligned the price in line with the prevailing market conditions, it would have found buyer(s). If it sticks to a price which it considers reasonable but market does not consider so, there would be no buyer. By no stretch of imagination, such failure to divest at a price of its choice can be considered supervening impossibility. This may have made the performance unprofitable or more expensive, but it is not sufficient to excuse performance, for it has not become impossible or unlawful.

8. Regulation 9 read with regulation 6 of the regulations requires SEBI to take into account for considering the renewal of a certificate of registration, all matters relevant to the activities relating to merchant banker and in particular the applicant complies with certain requirements, including: (a) the applicant is a fit and proper person, and (b) renewal is in the interest of investors. Regulation 6A of the regulations read with Schedule II of the SEBI (Intermediaries) Regulations, 2008 requires SEBI to take in to account the integrity, reputation and character of the applicant for the purpose of determining as to whether it is a fit and proper person. Given the conduct of the applicant in terms of failure to comply with the conditions of renewal of registration for more than 3 years and its unwillingness to distance itself from associated entities, I consider the applicant not a fit and proper person to be a merchant banker and renewal of its license is not in the interest of investors.

9. 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 10 of the SEBI (Merchant Bankers) Regulations, 1992 and Schedule II of the SEBI (Intermediaries) Regulations, 2008, I hereby reject the application dated December 10, 2008 submitted by SMIFS Capital Markets Limited for renewal of certificate of registration as a merchant banker and direct it to stop carrying on the activities, if any, as a merchant banker with immediate effect.

10. This order shall come into force with immediate effect.

Date: October 01, 2009 M. S. SAHOO Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA