Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): Madhabi Puri Buch, (Whole Time Member) imposed certain restrictions on GJ Advisory Services and Profit Ideas Advisory Services (“Noticees”) for indulging in unregistered Portfolio Management Services.

SEBI received several complaints against noticees alleging unregistered portfolio management activities. On examination, the Board noticed that the noticees had undertaken the management of funds as well as securities of their clients and the fees/funds were collected through the Banks Accounts of the noticees. It was found out that both the noticees were engaged in ‘portfolio management services. The Board observed that by virtue of providing unregistered Portfolio Management Services, the noticees had collected an amount of Rs 8,89,23,049 as fees towards the management of funds and securities of clients.  Thus, the activities noticees were prima facie, in violation of Section 12(1) of SEBI Act read with Regulation 3 of Portfolio Management Services (“PMS”) Regulations.

The Board opined that permitting the investors to receive a portfolio management service from an unregistered entity would cause irreparable injury to the development of the securities market as the objective of SEBI is not only the protection of investors but also orderly development of securities market. Hence, the Board held that Gourav Jain and Poonam Jain who were the proprietors of GJ advisory and Profit Ideas respectively, were liable for unregistered portfolio management services and, therefore, the Board issued following orders against the noticees:

  1. to cease and desist from acting as a portfolio manager and to solicit or undertake such activity or any other activities in the securities market.
  2. Not to divert any funds raised from investors.
  3. Not to dispose of or alienate any assets, or any interest or investment or charge on any of such assets held in their name, except with the prior permission of SEBI.
  4. Immediately withdraw and remove all advertisements, materials etc. in relation to their portfolio management activity or any other unregistered activity in the securities market.
  5. Not to access the securities market and buy, sell or otherwise deal in securities in any manner.

Consequently, the directions were made to the Banks not to allow any debits/ withdrawals and not to allow any credits to the accounts of the noticees, without permission of SEBI. The Depositories were also directed to ensure, till further directions, that no debit or credit be permitted in the demat accounts held by noticees. [GJ Advisory services and Profit Ideas Advisory Services, In Re., 2021 SCC OnLine SEBI 2, decided on 04-01-2021]

Business NewsNews

BACKGROUND

The financial position of The Lakshmi Vilas Bank Ltd. (the bank) has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth.

In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, the bank is also experiencing the continuous withdrawal of deposits and low levels of liquidity. It has also experienced serious governance issues and practices in recent years which have led to the deterioration in its performance. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019 considering the breach of PCA thresholds as on March 31, 2019.

REVIVAL EFFORTS

The Reserve Bank had been continually engaging with the bank’s management to find ways to augment the capital funds to comply with the capital adequacy norms. The bank management had indicated to the Reserve Bank that it was in talks with certain investors. However, it failed to submit any concrete proposal to Reserve Bank and the bank’s efforts to enhance its capital through the amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end. As such, the bank-led efforts through market mechanisms have not fructified. As bank-led and market-led revival efforts are a preferred option over a regulatory resolution, the Reserve Bank had made all possible efforts to facilitate such a process and gave enough opportunities to the bank’s management to draw up a credible revival plan, or an amalgamation scheme, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity.

MORATORIUM

After taking into consideration these developments, the Reserve Bank has come to the conclusion that in the absence of a credible revival plan, with a view to protecting depositors’ interest and in the interest of financial and banking stability, there is no alternative but to apply to the Central Government for imposing a moratorium under Section 45 of the Banking Regulation Act, 1949. Accordingly, after considering the Reserve Bank’s request, the Central Government has imposed moratorium for thirty days effective.

ASSURANCE TO THE DEPOSITORS

The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic. In terms of the provisions of the Banking Regulation Act, the Reserve Bank has drawn up a scheme for the bank’s amalgamation with another banking company. With the approval of the Central Government, the Reserve Bank will endeavour to put the Scheme in place well before the expiry of the moratorium and thereby ensure that the depositors are not put to undue hardship or inconvenience for a period of time longer than what is absolutely necessary.

The Reserve Bank has also issued certain directions to the bank under section 35 A of the Act ibid.


Reserve Bank of India

[Dt. 17-11-2020]

Legislation UpdatesNotifications

SEBI vide its Circular no. CIR/MRD/DRMNP/25/2014 dated August 27, 2014, has, inter alia, specified guidelines pertaining to Core Settlement Guarantee Fund and Default Waterfall for Clearing Corporations.

2. Pursuant to deliberations with the Risk Management Review Committee (RMRC) of SEBI and various stakeholders, it has been decided to amend the following provisions of the aforesaid Circular.

a. Clause 14 of the said Circular dated August 27, 2014 shall stand modified as under:

“Further Contribution to/ Recoupment of Core SGF

14) Requisite contributions to Core SGF by various contributors (as per clauses 7 and 8) for any month shall be made by the contributors before start of the month. In the event of usage of Core SGF during a calendar month, contributors shall, as per usage of their individual contribution, immediately replenish the Core SGF to MRC. However, such contribution towards replenishment of Core SGF by the members would be restricted to only once during a period of 30 calendar days regardless of the number of defaults during the period. The period of 30 calendar days shall commence from the date of notice of default by Clearing Corporation to market participants.

In case there is failure on part of some contributor(s) to replenish its (their) contribution, same shall be immediately met, on a temporary basis during the month, in the following order:

(i) By CC

(ii) By SE”

b. Layer VII of the default waterfall, as specified under clause 16 of the said Circular dated August 27, 2014, shall stand modified as under:

“VII. Capped additional contribution by non-defaulting members of the segment. **

**

(i) CC shall call for the capped additional contribution only once during a period of 30 calendar days regardless of the number of defaults during the period. The period of 30 calendar days shall commence from the date of notice of default by CC to market participants.

(ii) CCs shall have relevant regulations/provisions for non-defaulting members to resign un-conditionally within the abovementioned period of 30 calendar days, subject to member closing out/settling any outstanding positions, paying the capped additional contribution and any outstanding dues to SEBI. No further contribution shall be called from such resigned members.

(iii) The maximum capped additional contribution by non-defaulting members shall be lower of 2 times of their primary contribution to Core SGF or 10% of the Core SGF of the segment on the date of default in case of equity/ debt segments.

(iv) The maximum capped additional contribution by non-defaulting members shall be lower of 2 times of their primary contribution to Core SGF or 20% of the Core SGF of the segment on the date of default in case of derivatives segment.

(v) In case of shortfall in recovery of assessed amounts from non-defaulting members, further loss can be allocated to layer ‘VI’ with approval of SEBI.”

3. Clearing Corporations are directed to:

(i) put in place the adequate systems and issue the necessary guidelines for implementing the above decision.

(ii) make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

(iii) bring the provisions of this circular to the notice of the trading members/clearing members/custodians and also to disseminate the same on the website.

(iv) communicate to SEBI the status of implementation of the provisions of this circular through the Monthly Development Report.

4. This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.


Securities Exchange Board of India

[Circular dt. 03-01-2020]


Note:

A core Settlement Guarantee Fund (SGF) is a corpus used for settlement of trades during defaults and all intermediaries — stock exchanges, clearing corporations, and brokers — contribute towards it.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): Coram of Justice Tarun Agarwala (Presiding Officer), Justice M.T. Joshi (Judicial Member), and Dr C.K.G. Nair (Member), dismissed the appeal filed by the appellant and affirmed the order passed by the Whole Time Member (‘WTM’) of SEBI.

WTM had passed an order against the appellants under Section 11 and 11B of SEBI Act directing them to refund the money collected by the Company during their respective period of directorship through the issuance of Non-Convertible Debentures (‘NCDs’) including the application money collected from investors along with interest at the rate of 15% p.a. The appellants were appointed as directors from 2009 to 2013. During the financial years 2010-11, 2011-12, 2012-13, the Company made an offer of NCDs and raised an amount of Rs. 9.06 crores from 4,518 allottees. Since there was a violation of the SEBI Act, Companies Act, and Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations), SEBI passed an order of debarment and refund to investors against the Company and its directors/promoters. The appellants were directors of the company during the time when the NCDs were issued. Accordingly, an interim order was passed against the appellants and a show-cause notice was issued to show cause as to why suitable direction under Section 11 and 11B read with Section 73(2) of the Companies Act should not be passed against them. After giving an opportunity of hearing, the WTM found the appellants were involved in the issuance of the offer of NCDs during the time when they were directors which was in violation of the Companies Act and ILDS Regulations. Accordingly, the WTM issued directions for a refund of the money along with interest, etc.

The appellants contended that the said order was erroneous since there was no finding that the appellants were “officers in default” and consequently, the mandate provided under Section 73(2) of the Companies Act cannot be invoked. In support of this submission, the appellants have placed reliance upon Pritha Bag v. SEBI, 2019 SCC OnLine SAT 110.

The Tribunal held that the decision of the Tribunal in Pritha Bag case was not applicable to the facts and circumstances of the present case. The WTM came to the conclusion that the appellants were “officers in default” by relying on the definition as under Section 5(g) of the Companies Act. No evidence was filed to show that any of the officers set out in clauses (a) to (c) of Section 5 of the Companies Act was entrusted to discharge the obligation contained in Section 73 of the Companies Act. In Pritha Bag case, there was no finding that the appellant in that appeal was an “officer in default” and, therefore, the Tribunal had held that the mandate provided under Section 73(2) of the Companies Act could not be invoked. The said decision was also distinguishable on the ground that there was a managing director in that company who was responsible for the affairs of the company. Moreover, on perusal of the impugned order, the appellants had admitted before the WTM that they were aware of the collection of the money from the investors by the company and further submitted that the appellants were willing to make a refund to the investors. In the light of such admission, the appellants could not escape the liability of refund of the amount along with interest as directed by the WTM. [Saikat Brahmachari v. SEBI, 2019 SCC OnLine SAT 200, decided on 14-11-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal, Mumbai: The Coram of Tarun Agarwala, J., (Presiding Officer), Dr C.K.G. Nair, (Member), M.T. Joshi, J., (Judicial Member) dismissed the appeals which were filed against the order which imposed a penalty on the appellants for not following Regulation 7(2) (a) of the Securities and Exchange Board of India (Prohibition of Insider Trading (PIT) Regulations, 2015

The appellant was a promoter of a company incorporated under the Companies Act, 1956. As per Regulation 7(2)(a) of the PIT Regulations, 2015 every promoter, was required to disclose to the company the number of such shares acquired or disposed of within two trading days of such transaction if the value of the shares traded, whether in one transaction or a series of transactions over any calendar quarter, aggregated to a traded value in excess of 10 lakh rupees. The said Regulation was not followed by the appellant and accordingly a show cause notice was issued to him for having failed to make the relevant disclosure under the provisions of Regulation 7(2)(a) of the PIT Regulations. The Adjudicating Officer passed an order holding him guilty of violating the provision of Regulation 7(2)(a) of the PIT Regulations and accordingly imposed a penalty of Rs 5,00,000 under Section 15A(b) of SEBI Act. The said appellants being aggrieved by the imposition of penalty filed the appeal.

The Court found that no disproportionate gain or unfair advantage was made by the appellants while undertaking the transactions in the shares of the Company nor any loss was caused to the investors as a result of non-disclosure. Thus the violation was only technical in nature. The Court thus reduced the penalty by declaring it disproportionate and excessive. Further, it was held that imposition of higher penalty amounted to discrimination especially when it was the first offence made by them. The appellants had violated Regulation 7(2)(a) of the PIT Regulations and consequently, the minimum penalty was justifiable. These three appeals failed and were dismissed. [Nitin Agrawal v. SEBI, 2019 SCC OnLine SAT 18, decided on 25-03-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India: The Board comprising G. Mahalingam as  Whole Time Member, allowed Oil India’s application seeking exemption/relaxation from strict enforcement of the requirement contained under Regulation 24(i)(e) of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018.

The aforesaid application was necessitated on account of the transfer of 333,20,401 equity shares held by the promoter of the company, i.e., Government of India to the Asset Management Company (AMC) of Central Public Sector Enterprise Exchange Traded Fund (CPSE–ETF). This activity was carried out as a part of the government’s disinvestment process.

Oil India submitted that the proposed buy–back inter alia will help in optimizing its capital structure and improve its key financial ratios and would also lead to a reduction in outstanding shares, improvement in earnings per share and enhanced return on invested capital.

The Board noted that as per Regulation 28 of the Buy–back Regulations, SEBI may, in the interest of investors and the securities market, relax the strict enforcement of any requirement of aforesaid Regulations except the provisions incorporated from the Companies Act, if it is satisfied that the requirement is procedural in nature or the requirement may cause undue hardship to investors.

It opined that the strict enforcement of Regulation 24(i)(e) of Buy–Back Regulations against Oil India, at this point in time, may result in undue hardship to investors including shareholders of the company who may seek to participate in the proposed buyback. In view thereof, the exemption/relaxation sought for by Oil India was allowed.[Buy-back of securities in Oil India Ltd., In re, WTM/GM/CFD/87/2018–19, Order dated 31-01-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): Madhabi Puri Buch, a Whole-Time Member addressed the issue of global depository receipts issued by Transgene Biotek Ltd. in order to defraud investors.

SEBI received a complaint against Transgene Biotek Ltd. alleging of fraud by issuing global depository receipts and misutilisation of proceeds by transferring the same for undisclosed and ulterior purposes under the garb of consideration for technology transfer to defraud the investors. SEBI conducted inquiry in order to find the probable impact of allegations on the securities market in India and on the interests of investors. SEBI passed an ad-interim ex-parte order which was later confirmed where based on the preliminary inquiry, six entities were restrained from accessing the securities market and trading in securities.

SEBI conducted a detailed inquiry in the entire GDR issued by Transgene Biotek Ltd. to ascertain the violation of securities laws. It found no adverse evidence or finding in respect of violation of provisions of SEBI Act and PFUTP Regulations against 3 entities with respect to their role in the scheme of diverting of the GDR proceeds of TBL and their endeavor to legitimatize the proceeds was found. Thus the confirmation order was liable to be revoked and the proceeding against the other entities ought to be continued. Therefore, under Section 19 of the SEBI Act read with Sections 11, 11(4) and 11-B of the SEBI Act confirmatory order was revoked. [Transgene Biotek Limited, In re,2018 SCC OnLine SEBI 167, order dated 06-11-2018]

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