TMI Blog2013 (3) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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." 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 the Chartered Accountants did not categorically state that it is based on the audited accounts for the 5 years preceding the date of application, the Board certainly had the power to direct the respondent to produce the audited accounts. That being so, under Regulation 6, it was the duty of the Board to have rejected the application of the respondent. Surprisingly, however, the Board continued to grant further time to the respondent to remove the objections even beyond the maximum sixty days permissible under the proviso to Regulation 6. It appears that the enquiries continued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 of the SEBI Act, the appellant is duty bound to protect the interest of investors in securities and promote the development of, and to regulate, the securities market, by such measures as it thinks fit. Section 11(2) specifically enables SEBI to take the necessary measures to provide for inter alia registration and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other interme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the respondent was advised to offer comments on the aforesaid discrepancy and submit the requisite net worth certificate in compliance with the relevant provisions of the CRA Regulations, 1999. 8. The respondent through its letter dated 21st August, 2009 submitted the reply to the aforesaid discrepancy pointed out by the appellant. The respondent stated that M/s. Coment (Mauritius) Limited has invested in the appellant company through its associate company M/s. ACE Step Management Ltd., which was holding 3,65,000 (Three Lac Sixty Five Thousand) 10.84% equity shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment 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 15th September, 2009 directed the respondent to furnish an undertaking as to whether the promoter of respondent or any associate of the respondent are registered with any regulatory agency abroad and also directed the respondent to have Audited Annual Accounts of the promoters for the 5 years prior to filing of the application. 11. The respondent by a letter dated 21st September, 2009 stated that it would furnish the Balance Sheet for five years period as soon as they were received by the respondent. The appellant by his letter dated 21st October, 2009 further directed the respondent to furnish the Audited Annual Accounts and detailed profile of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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) Limited for the periods ending 31st December, 2003 to 31st December, 2007. On its request, the respondent was also granted a personal hearing by the Whole Time Member of SEBI on 10th June, 2011. However, even during the personal hearing, the respondent was advised to file the Audited Accounts of M/s. Coment (Mauritius) Limited for the years 2009 and 2010. Again on 24th June, 2011, the Whole Time Member of the appellant directed the respondent to indicate as to which entity is its promoter(s) along with the basis of considering the entity as such and to submit Audited Annual Accounts of the promoter(s) for the last five years along with computation of ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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" Reiterating its earlier view, the SAT further observed: "It is doubtful whether the Board could have asked for this information without doubting the veracity or correctness of the certificate of the Chartered Accountant that accompanied 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." Apart from the above, it is also noticed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 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 enquiry under Regulation 4(e) and various clauses of Form A. He emphasised that such an information could not be called for under Regulation 7. According to the learned senior counsel that even for the five years preceding the date of application, the respondent is required only to look at the certificate of the Chartered Accountant which has been duly submitted by the respondent. However, in order to comply with the directions issued by the appellant, the respondent has already submitted the audited accounts for the five years preceding the date of application. Therefore, at this stage, there should be no hurdle to the registration of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: "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 the purpose. Regulation 3(3) provides that such application shall be made to the Board in Form A of the Schedule of the Regulations. Regulations 4, 5, 6 and 7 which are relevant for the decision of the legal issue involved in this case are as under:- "Promoter of credit rating agency 4. The Board shall not consider an application under regulation (3) unless the applicant is promoted by a person belonging to any of the following categories, namely: (a) a public financial institution, as defined in section 4 A of the Companies Act, 1956 (1 of1956); (b) a scheduled commercial bank included for the time being in the second schedule to the Reserve Bank of India Act, 1934 (2 of 1934); (c) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connected with the applicant has in the past been - (i) refused by the Board a certificate under these regulations or (ii) subjected to any proceedings for a contravention of the Act or of any rules or regulations made under the Act. Explanation: For the purpose of this clause, the expression "directly or indirectly connected person" means any person who is an associate, subsidiary, inter-connected or group company of the applicant or a company under the same management as the applicant. (j) the applicant, in all other respects, is a fit and proper person for the grant of a certificate; (k) grant of certificate to the applicant is in the interest of investors and the securities market. Applicability of Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004. 5A. The provisions of the Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004 shall, as far as may be, apply to all applicants or the credit rating agencies under these regulations. Application to conform to the requirements 6. Any application for a certificate, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is provided that the Board shall not consider any application for the grant of a certificate under Regulation 3 unless the applicant satisfies the conditions set out therein. Regulation 6 provides that any application for a certificate which is not complete in all respects or does not conform to the requirements of Regulation 5 or instructions specified in Form A shall be rejected by the Board. It is, however, necessary that before rejecting any such application, the applicant shall be given an opportunity to remove, the objections indicated by the Board within a period of 30 days of the receipt of communication of the objections by the Board to the applicant. This period can be further extended at the discretion of the Board on sufficient reason being shown by the applicant for a further period not exceeding 30 days. 24. A reading of Regulations 4, 5 and 6 together leaves no manner of doubt that the SEBI has no discretion not to reject the application if it does not satisfy the conditions laid down in Regulations 4 and 5. In fact, Regulation 4 mandates that the Board shall not consider an application for registration under Regulation 3 unless the applicant is promoted by a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has 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 with the Board. Clause 2 of Form A provides the "Eligibility Criteria". Under Clause 2(1), the applicant has to indicate the category to which the promoters of the applicant company belong under Regulation 4, which in this case was 4(e). Clause 2(3) provides that the applicant shall "enclose a Chartered Accountant's certificate certifying the continuous net worth of Rs.100 crores for five years, in case the promoter referred to in Regulation 4(e)". As noticed above, Regulation 4(e) postulates that the proof of net worth on the basis of the audited accounts for five years prior to the filing of the application has to be given. It is not disputed before us that the applicant has submitted the Chartered Accountant's certificate certifying the continuous net worth of Rs.100 crores for five years on the basis of M/s. Coment (Mauritius) Limited bankers certificate. It is noticed by the SAT in the impugned order that the certificate was accepted by the Board and no clarification was sought from the respondent in regard to the certificate f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertainly had the power to direct the respondent to produce the audited accounts. That being so, under Regulation 6, it was the duty of the Board to have rejected the application of the respondent. 28. Surprisingly, however, the Board continued to grant further time to the respondent to remove the objections even beyond the maximum sixty days permissible under the proviso to Regulation 6. It appears that the enquiries continued from 20th August, 2009 till March 1, 2011 when the show cause notice was issued to the respondent. The application of the respondent is not rejected till 21st July, 2011. The delay in the rejection of the application of the respondent was wholly unwarranted. It allowed the respondent a latitude not permissible under the regulations. Taking advantage of this latitude, the respondent has provided the Audited Accounts for the five years preceding the date of application. Not only this, we are informed that by now the respondent has even produced before this Court in a sealed cover the Audited Accounts of M/s. Coment (Mauritius) Limited for the subsequent two years upto 31st December, 2010 also. 29. Since the Board had extended the time to the respondent, eve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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