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TMI Blog2013 (3) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... or the two years ending December, 2010. 2. We may notice here the skeletal facts which are necessary for the determination of the limited legal issue involved in this appeal. 3. On 11th June, 2009, the respondent submitted an application to SEBI under Regulation 3 of the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 ("the CRA Regulations, 1999") seeking registration as a CRA. The respondent company was incorporated on 23rd June, 1986. The promoters of the respondent are stated to be: (a) M/s. Coment (Mauritius) Limited through M/s. ACE Step Management Ltd. (b) M/s. V. Malik & Associates, Chartered Accountants - Consortium Member for all the Accounting and Management backup. (c) Infomerics India Foundation - Consortium Member as Policy Making Board. 4. The appellant (SEBI) is a Statutory Board established under the SEBI Act to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto. Under Section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant was supplied by the respondent. Further undertakings and confirmations as required by the appellant were also provided. By letter dated 20th August, 2009, the appellant required the respondent to furnish complete details of his promoters, confirm the status of their eligibility under Regulation 4(e) of the CRA Regulations, 1999, offer comments on a discrepancy noted in the promoter's net worth certificate etc. In the aforesaid letter, it was pointed out that under Regulation 4(e) of the CRA Regulations, 1999, the applicant is required to show that its promoters have a continuous net worth of minimum Rs.100 crores as per its Audited Annual Accounts for the previous five years prior to filing of the application with the Board for grant of certificate under the CRA Regulations, 1999. It is pointed out that although M/s. ACE Step Management Ltd., as a promoter of the respondent, has the continuous net worth of minimum Rs.100 crores as per its Audited Annual Accounts for the previous five years prior to the filing of the application, yet the net worth certificate dated 29th May, 2009, certified by the accountants in this regard pertains to M/s. Coment (Mauritius) Limited. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. ACE Step Management Ltd. is promoted by M/s. Coment (Mauritius) Limited. The above information is given in strictest confidence at the request of our client and is without responsibility or engagement on the part of the Bank and/or any of its officers or employees for its content or any reliance made upon it. The letter does not constitute any guidance on the part of the bank. Yours faithfully, Sd/- Nitin Bhatnagar Director & Head South Asia Team" 9. The letter further pointed out that "since the Coment (Mauritius) Ltd. Balance sheet is not a public document though in terms of holding in our company it is 10.84 % but in their terms it is a small investment made they may not like to share balance sheet with us. However, their bankers have confirmed that as per certificate it is within the compliance of SEBI regulation." In view of the confirmation given by the bankers of M/s. Coment (Mauritius) Ltd. Promoter Company, the respondent requested the appellant to rely on the bankers certificate. 10. It is further pointed out that in any event the respondent had submitted the annual accounts for the last 5 years. However, inspite of aforesaid, the appellant vide its letter dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard during the course of processing of the application for registration in accordance with the provisions of the CRA Regulations, 1999. The respondent pointed out in its reply to the Show Cause Notice dated 4th March, 2011 that the appellant had enquired about the status of M/s. Coment (Mauritius) Limited directly from the Mauritius Regulatory Authority and collected all the details to cross check their credentials. In spite of the aforesaid, the appellant was still insisting upon the same information which in fact is not a precondition for registration under the SEBI law or regulations. It is pointed out that even though the information was not required to be provided under the regulations, the investor company and the applicant still agree to furnish the Balance Sheet only to enhance their credibility and as a mark of their respect to SEBI. The respondent in fact protested that it was not being given equal treatment under law as others had been granted registrations without submission of any Annual Accounts of investor companies. Thereafter, the respondent by its letters dated 15th March, 2011 and 18th March, 2011 submitted the Audited Annual Accounts of M/s. Coment (Mauritius) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s five years prior to the filing of the application. As already mentioned above, Form A prescribes that the applicant should produce a certificate from a Chartered Accountant to substantiate the fact regarding the net worth of its promoter which was done and the Board has at no stage questioned its veracity. Without doing so it (the Board) could not have asked for the annual accounts of the promoter." 16. It is further observed that an application for the grant of a certificate is to be made in Form A as prescribed in the First Schedule to the Regulations. According to the eligibility criteria prescribed therein, the applicant is required to enclose a Chartered Accountant's certificate, certifying the continues net worth to be of Rs. 100 crores for five years in the case of promoter referred to Regulation 4(e). With regard to the directions issued by the appellant to the respondent to produce the Annual Accounts of one of its promoters for the five years preceding the date of application, the SAT observed:- "It is pertinent to mention here that neither the regulations nor the eligibility criteria in Form A requires the applicant to produce the annual accounts of the promoter" Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artered Accountant should be filed for this purpose. Therefore, it is held that the information sought by the appellant with regard to the additional two years was beyond the scope of the regulations and Form A, hence without jurisdiction. 18. Mr. C.U. Singh, learned senior counsel appearing for the appellant submitted that at this stage, it would not have been necessary to press the appeal on merits, but for the observations made by the SAT that without questioning the veracity of the certificate submitted by the Chartered Accountant, the Board could not have asked for the Annual Accounts of the promoter. He submitted that these observations would seriously curtail the powers of SEBI into requiring the applicant to furnish all relevant information while considering the application for registration as a CRA. For this limited purpose, learned senior counsel submitted that it is necessary for this Court to examine the correctness of the order passed by the SAT. 19. On the other hand, Mr. Suri, learned senior counsel appearing for the respondent submitted that necessary information having been furnished to the Board, the demand for an additional two years was beyond the scope of enq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion with relatives, owns or controls shares carrying not less than ten percent of the voting rights of the credit rating agency, or (ii) in respect of whom the credit rating agency, directly or indirectly, by itself, or in combination with other persons, owns or controls shares carrying not less than ten percent of the voting rights, or (iii) majority of the directors of which, own or control shares carrying not less than ten percent of the voting rights of the credit rating agency, or (iv) whose director, officer or employee is also a director, officer or employee of the credit rating agency; Regulation 2(p) defines net worth as under: "net-worth means the aggregate value of the paid up equity capital and free reserves (excluding reserves created out of revaluation), reduced by the aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written of" 21. Regulation 3(1) provides that any person proposing to commence any activity as a credit rating agency shall make an application to the Board for the grant of a certificate of registration for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulations; (e) the applicant and the promoters of the applicant, referred to in regulation 4 have professional competence, financial soundness and general reputation of fairness and integrity in business transactions, to the satisfaction of the Board; (f) neither the applicant, nor its promoter, nor any director of the applicant or its promoter, is involved in any legal proceeding connected with the securities market, which may have an adverse impact on the interests of the investors; (g) neither the applicant, nor its promoters, nor any director, of its promoter has at any time in the past been convicted of any offence involving moral turpitude or any economic offence; (h) the applicant has, in its employment, persons having adequate professional and other relevant experience to the satisfaction of the Board; (i) neither the applicant, nor any person directly or indirectly connected with the applicant has in the past been - (i) refused by the Board a certificate under these regulations or &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the grant of a certificate." 22. Form A of the First Schedule has to be submitted by the applicant together with the supporting documents along with the application. This was duly filled and furnished by the respondent. 23. A bare perusal of the regulations makes it clear that an applicant to be eligible to be registered as a credit rating agency has to be a person/entity promoted by a person belonging to any of the categories enumerated in Regulation 4. Categories 4(a), (b) and (c) are financial institutions as defined in Section 4(a) of the Companies Act; Schedule Commercial Banks included in the Second Schedule to the Reserve Bank of India Act, 1934 and foreign banks operating in India with the approval of the Reserve Bank of India. Foreign Credit Rating Agency recognized by or under any law for the time being in force in the country of incorporation having at least five years experience in rating securities fall within category 4(d). The respondent falls within category 4(e), which relates to any company or a body corporate having continuous net worth of minimum Rs.100 crores as per its Audited Annual Accounts for the previous five years, prior to the filing of the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocessing of the application, the information/material for removal of objections has to be provided within the time stipulated by Board. But the maximum period provided is sixty days. There is no scope under the regulations for the time to be extended any further. The information sought must be in relation to the five years preceding the date of the application. In this view of the matter, we are of the opinion that the directions issued by the SAT that the Board could not have directed the respondent to produce the Audited Accounts for the two years beyond the date of the application, are in consonance with the provisions of the regulations. Under Regulation 7, the Board would have the power to seek further information or clarification for the purpose of processing of the application. This further information would relate only to the basic information with regard to the Audited Accounts for the five years preceding the date of the application. Therefore, the observations made by SAT as noticed above are perfectly justified. 25. This now brings us to the final submission made by Mr. C.U. Singh that the Board was within its power to ask for the Audited Accounts of the applicant for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of filing application before Securities and Exchange Board of India. FOR M/S RAJNISH & ASSOCIATES CHARTERED ACCOUNTANTS Certified True Copy Sd/- (PARTNER) Membership No. 081180 Place : New Delhi Date: 29.05.2009" 27. We are satisfied that the aforesaid certificate did not conform to the provisions contained in the regulations which requires that the certificate of the Chartered Accountant should be in confirmation of the Audited Accounts of the promoters/applicant for the five years preceding the date of the application. We are unable to approve the observations made by SAT that "neither the regulations nor the eligibility criteria in Form A requires the applicant to produce the annual accounts of the promoter." We are also unable to approve the observations of SAT that "it is doubtful whether the Board could have asked for this information without doubting the veracity or the correctness of the certificate of the Chartered Accountant that accompanied the application." The certificate of the Chartered Accountant is evidence of the required net worth of the promoter. Therefore, it has to be in strict conformity with Regulation 4(e). Since the certificate issued by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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