CHAPTER 4 CASE STUDY NAME OF PARTIES: SMIFS CAPITAL LTD.CO VS SEBI 2004 SUBJECT: RENEWAL OF CERTIFICATE 1.

SMIFS Capital Markets Ltd., a company (the applicant company) applied for December renewal of certificate of registration under Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 to 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, (Stock Brokers and Sub-Brokers) Rules & Regulations 1992 and SEBI (Prohibition of Fraudulent an d 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. 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. 2.2 Pursuant to adjudication proceedings in the matter of BSL Ltd, vide order dated April 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. 2.3 An administrative warning was also issued against the applicant company in the matter of KHSL Industries Ltd.

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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 applicants 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 May 25, 2004, 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 dated April 15, 2004 passed by the adjudicating and enquiry officer before the Securities Appellate Tribunal on May 25, 2004. 4. An opportunity of hearing was granted to the applicant company on June 24, 2004. 5. 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 applicants 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 April 14,2004 passed by the Adjudicating and Enquiry Officer imposing a penalty on the applicant was stayed in appeal bearing no. 82/2004 by the Honble Securities Appellate Tribunal on June 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
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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
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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, 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 Honble Securities Appellate Tribunal and the Honble Tribunal vide order dated June 18, 2004 granted 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 dated July 20, 2004 deposited the said sum of Rs. 5,00,000 with SEBI as per the terms of the order passed by the Honble Tribunal. 6.2 With regard to the applicant companys contention that they were granted certificate of registration under SEBI (Underwriters) Regulations, 1993, in spite of the pendency of the enquiries and adjudication pending against the applicant company and its associates, 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 applicants 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.

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6.3 With regard to the applicants 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 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, so the application submitted by SMIFS Capital Markets Ltd. for renewal of certificate of registration as a Merchant Banker was rejected.

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SAT REVERSES SEBI ORDER AGAINST ENAM, 2011 RaboBank not a Promoter of Yes Bank Limited Introduction The Securities Appellate Tribunal (SAT) in its recent ruling in the matter of Enam Securities Private Limited v. the Securities and Exchange Board of India (SEBI) has set aside the order dated December 31, 2010 passed by the Adjudicating Officer of SEBI (SEBI Order) vide which a penalty of INR 2.5 million was imposed on Enam Securities Private Limited (Enam) for violation of Regulation 13 of SEBI (Merchant Bankers) Regulations, 1992 read along with relevant provisions of the erstwhile SEBI (Disclosure and Investor Protection) Guidelines, 2000 (DIP Guidelines). Facts An appeal challenging the SEBI Order was filed before the SAT, by Enam and consequently the following observations made under the SEBI Order were examined by and challenged before the SAT: 1. That Enam had failed to exercise due diligence while making certain disclosures in relation to Rabobank International Holding B.V. (Rabobank), and failure to mention Rabobank as a promoter of Yes Bank Limited (Yes Bank) in the prospectus for the Initial Public Offer (IPO) of Yes Bank. 2. That Enam had failed to make disclosures pertaining to the allocation of shares to qualified institutional buyers (QIB) and preferential treatment was conferred to certain foreign institutional investors. 3. That Enam had failed to suitably monitor the flow of applications and other matters connected to the closure of the public issue of Yes Bank. After considering the contentions raised on behalf of both the parties and the specific roles and responsibilities of a merchant banker as stipulated under the SEBI (Merchant Bankers) Regulations, 1992, SAT decided to set aside the SEBI Order on the following grounds.

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1. Rabobank not a Promoter of Yes Bank It was observed by SEBI that in order to meet the minimum promoters contribution, around 20% share capital held by Rabobank was taken into account and the same was locked in for a period of 5 years. However, Rabobank was not specifically classified as a promoter elsewhere in the prospectus, which was filed on behalf of Yes Bank. On the contrary, the counsel on behalf of Enam contended that Rabobank was not a promoter of Yes Bank and it was merely named as a co-promoter in the application made to RBI for the purpose of procuring a banking license. Necessary disclosures in this regard and also with respect to the fact that Rabobank holds a minimum of 20% shares of Yes Bank had been made in the prospectus filed with SEBI, which was sufficient information for the investors to make an informed investment decision. Further, upon being brought to the notice that Rabobank was never named as a promoter in any of the financial statements/ draft red herring prospectus filed with the stock exchanges/ SEBI, SAT failed to appreciate the fact that SEBI did not object to this omission while clearing the draft red herring prospectus. Relying on the definition of the term Promoter as provided under the DIP Guidelines and marrying the same with the circumstantial evidence at hand (i.e; Rabobank could nominate only two out of twelve directors of Yes Bank and was not instrumental in the formation of plan or programme pursuant to which securities are offered to the public and Rabobank has not represented itself as the promoter of Yes Bank) SAT conceded with Enam that Rabobank could not be classified as a promoter of Yes Bank. In view of the aforesaid submissions, SAT held that Enam cannot be made liable for making inadequate disclosures in the prospectus or for making misrepresentations or false statements thereunder. 2. Discretion exercised in allotment of shares is not arbitrary SEBI contended that while allotting the shares under the QIB category, Enam did not exercise its discretion judiciously and consequently majority of shares under the QIB category were allotted to foreign institutional investors and the banks/ mutual funds received negligible shares. While placing on record the criteria followed by Yes Bank in allotment of shares under the discretionary quota, the counsel on behalf of Enam contended that in the absence of any prescribed guideline to be followed while exercising discretion in the allotment under the
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QIB category, Enam advised Yes Bank on the best possible allocation to QIBs. However, since allotment of equity shares in a public issue is a purely commercial decision, the final decision with regard to this was taken by the Board of directors of Yes Bank. After considering the contentions on behalf of both parties, SAT held that the parameters laid down by Yes Bank for the exercise of the aforementioned discretionary powers are indeed questionable, however since Enam has placed on record the criteria followed by Yes Bank in allotment of shares, Enam could not be held responsible for such acts of non-complaince. 3. Enam has not failed to discharge its duties in relation to redressing investor grievances and other matters pursuant to closure of the public issues There were certain inconsistencies in the Yes Bank IPO, which was brought to light by SEBI and which included allotment of shares to certain applicants having non-existing DP-IDs, having the same address and same name but different DP IDs. It is pertinent to note that SEBI alleged that though the registrar and share transfer agent to the issue failed to identify these inconsistencies, it was the primary responsibility of Enam to manage the flow of applications and the post issue activities (including the allotment of shares). Enam, on the other hand submitted that it is not obligated to play the registrar and share transfer agent role. However, while pursuing its duty to supervise the registrar and share transfer agent, it had appointed duly qualified officers post closure of the offer for the purpose of proper scrutiny and verification of applications and it was vehemently contended by Enam that at the time of such scrutiny, there was no irregularity that was brought to the notice of such deputed officials, which in the mind of Enam was required to be reported to SEBI. In view of the aforesaid, SAT absolved Enam of any penalty for contravention/ noncompliance of the provisions of the DIP Guidelines. Analysis SAT by way of this order has reiterated the statutory duties and obligations of a merchant banker which require a merchant banker to maintain high standards of integrity, dignity and fairness in the conduct of its business and promptly notify SEBI in case of any noncompliance of the regulatory framework that comes to its notice. Due consideration was

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given to the activities and conduct of Enam before giving a reasoned judgement on the subject. SAT by overruling the SEBI Order has established the fact that though the merchant bankers are expected to exercise due care and diligence in the management of public issues (and allied activities), SEBI is vested with the responsibility to closely monitor the functioning of other nodal agencies involved in the process (including the registrar and share transfer agents) so as to ensure that there is smooth co-ordination of activities between the various agencies involved in the IPO process. Further, the SAT order has also clarified that going forward SEBI is expected to be slightly more cautious while scrutinizing draft red herring prospectus of the issuer companies such that the discrepancies (if any) be communicated to the issuer companies well within the stipulated time period, which would also allow the companies sufficient window to rectify the discrepancies.

Public offers: SEBI bars 2merchant banks

SEBI acts as a responsible authority to maintain law and order within the capital market, it keeps vigilance on the working of its intermediaries and where it finds some disturbances it takes immediate actions for example recently in Dec 2012 SEBI barred two merchant banks and some of their senior executives from taking up new assignments related to public offers, after finding them guilty in irregularities related to IPOs of Taksheel Solutions and RDB Rasayans. SEBI also asked the concerned investigation officers to expeditiously complete the probes in the two cases where a number of other entities have also faced penal actions. In addition, SEBI also restrained RDB Rasayan IPO's merchant bank Chartered Capital and Investment Ltd and its MD Mohib Nomen Khericha and Vice President Manoj Kumar Ramrakhyani from being involved in new public offers from the securities market.

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