9911796707
TMI Blog2015 (10) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... ), SEBI has selected and granted in-principle approval to the respondent no. 2 for setting up the Self Regulatory Organization ('SRO' for short) for distributors of mutual fund products. 2. Appellant challenges the aforesaid decision of SEBI basically on three grounds. Firstly, it is contended that under regulation 3 of the SRO Regulations, application for being considered as SRO for distributors of mutual fund products could only be made by a company registered under Section 25 of the Companies Act, 1956 ('1956 Act' for short). Since respondent no. 2 was not registered under Section 25 of the 1956 Act till 31.07.2013 which was the cut- off date for submitting the applications, respondent no. 2 was ineligible to apply till 31.07.2013 and therefore SEBI ought to have rejected the application filed by respondent no. 2 on 29.07.2013. Secondly, assuming that the respondent no. 2 was eligible to apply, decision of SEBI in selecting and granting in-principle approval to the respondent no. 2 amounts to rejecting the application filed by the appellant under regulation 3 in violation of regulation 10 because, under regulation 10, SEBI was mandatorily required to give opport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion across the consumer facing financial sector. FPSB is essentially based on a voluntary self regulatory mechanism, which is reflected by virtue of its Code of Ethics and Rules of professional conduct which is mandated for all its members. (d) Respondent no. 2 (IMFI), a Section 25 Company was incorporated on August 2, 2013. Respondent no. 2 is promoted by Association of Mutual Funds in India (AMFI), an association to promote the interests of Mutual Fund in asset management companies. (e) Under Section 11(1) and 11(2)(c) & (d) of the SEBI Act it is the duty of SEBI to regulate the Mutual Fund Industry and also to promote and regulate the Self Regulatory Organizations. Accordingly, SEBI (Self Regulatory Organizations) Regulations, 2004 ("SRO Regulations" for short) have been framed by SEBI in exercise of the powers conferred by Section 30 read with Section 11(2)(d) of SEBI Act. The SRO Regulations published in the Gazette of India on February 19, 2004 were to come into force on such date as may be specified by the Board. (f) SEBI in its board meeting held on August 16, 2012 approved the proposal to set up an SRO for the distributors of securities such as Mutual Fund products, por ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranted to such an applicant who was a non-existent entity on the date of submitting the application. On the same day i.e. on February 10, 2014 appellant addressed a letter to the Secretary, Government of India, Department of Economic Affairs seeking intervention of the Ministry of Finance in the matter. A reminder letter was also sent to the Secretary, Government of India on March 14, 2014. As there was no response either from SEBI or from the Ministry of Finance, appellant has filed the present appeal. 4. Although in its affidavit in reply SEBI has raised a plea regarding the maintainability of the appeal against the impugned communication dated February 06, 2014, Mr. Devitre learned Senior Advocate appearing on behalf of SEBI fairly stated that the appeal may be heard on merits on the footing that the appeal is maintainable. Accordingly, the appeal is heard on merits on the footing that the appeal is maintainable against the impugned decision of SEBI. 5. First and the foremost argument put forth by Mr. Khambata, learned Senior Advocate appearing on behalf of the appellant is that the respondent no. 2 was a non-existent entity on the relevant date and therefore, SEBI could not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 2013 ('2013 Act' for short). Under Section 8 of 2013 Act the Central Government is empowered to issue a license to a person or association allowing such person or association to be registered as a limited company without the word 'Limited' or the words 'Private Limited'. Dispute in the present case, relates to the period prior to the 2013 Act and therefore, application under regulation 3 could be made only by a company registered under Section 25(2) of the 1956 Act. (e) Use of the words 'a company registered under Section 25 of the Companies Act, 1956.... may make an application' under regulation 3, clearly postulates that a company which is duly registered under Section 25(2) of the 1956 Act alone is eligible to submit an application under regulation 3. Second proviso to regulation 3(1) inserted with effect from 18.11.2013 merely provides that there shall be only one SRO from distributors of mutual fund products and that proviso cannot govern the interpretation of regulation 3(1) which has been in existence since inception. (f) Very fact that regulation 3(3) provides that the application under regulation 3(1) shall be signed on behalf of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no. 2 and cover up SEBI's contravention of SRO Regulations. As the eligibility criteria prescribed under the SRO Regulations which are to be fulfilled at the time of making the application were not met by the respondent no. 2 till the cut off date i.e. till July 31, 2013, SEBI ought to have rejected the application of respondent no. 2 as ineligible. (i) Argument of SEBI that the requirements of regulations 3&4 of the SRO Regulations are directory in nature and not mandatory is untenable, because, a qualification or eligibility criteria can never be directory in nature. The object of prescribing the eligibility criteria is to ensure that only qualifying persons are permitted to make an application. In fact, averments made in para 9 and para 16 (xv) of the affidavit in reply filed by SEBI clearly establish that the application filed by respondent no. 2 was incomplete and that the respondent no. 2 became eligible to apply on being registered under Section 25 of the Companies Act, 1956 on 02.08.2013 i.e. after the cut off date for submitting the application on 31.07.2013. Even the understanding of respondent no. 2 was that the application under regulation 3 could be made only by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A do not lay down that contrary to regulation 3, application could be made by an unincorporated entity and therefore, granting any such relaxation or opportunity to the ineligible to become eligible, would be ultra virus the powers of SEBI. (m) SEBI is not justified in treating the objections raised by the appellant as mere technical objections, because, for any valid application to be made under the public notice dated March 21, 2013, the applicant was required to comply with the conditions and the procedure prescribed under the SRO Regulations. All regulations made by SEBI under the SEBI Act are tabled before both the Houses of Parliament and treating explicit requirements under such regulations as mere technical requirements is untenable and undermines the sanctity of SRO regulations. Committing violation of the dictates of SRO Regulations highlight a significant policy level lapse in the regulatory approach adopted by SEBI. (n) Under Section 149(3) of the 1956 Act it was obligatory on part of respondent no. 2 as a public company to obtain a 'Certificate of Commencement of Business' prior to undertaking any transaction/business activity. Prior to obtaining such certif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 2(1)(e), 3, 4 & 6 of the SRO Regulations "Definitions 2.(1) In these regulations, unless the context otherwise requires,- (a) to (d)** ** ** (e) "company" means a company which has been granted license under section 25 of the Companies Act, 1956 (1 of 1956); Recognition of Self Regulatory Organization 3.(1) Any group or association of intermediaries, which is desirous of being recognized as a Self Regulatory Organization, may form a company registered under section 25 of the Companies Act, 1956 and such company may make an application to the Board for grant of certificate of recognition as a Self Regulatory Organization. Provided that for the purpose of this sub-regulation a distributor shall be deemed to be in intermediary. Provided further that the Board may, in case of distributors engaged by asset management companies of mutual funds, grant certificate of recognition to only one group or association making an application under this regulation. [Second proviso to regulation 3(1) was inserted with effect from 18.11.2013] (2) Every ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Emphasis supplied) 9. No doubt that regulation 3 of the SRO Regulations when read in isolation, it appears that a company registered under Section 25(2) of the 1956 Act is eligible to apply for being recognized as an SRO for distributors of mutual fund products. However, regulation 3 when read with regulation 2(1)(e) of SRO Regulations and Section 25(1) of the 1956 Act it becomes evident that for the purposes of SRO Regulations a company comes into existence when license is granted under Section 25(1) with a direction for being registered under Section 25(2) of 1956 Act. Since regulation 2(1)(e) defines the expression 'Company' for the purposes of SRO Regulations to mean a company to which a license is granted under Section 25(1) of 1956 Act and license under Section 25(1) of 1956 Act is granted with a direction to register it under Section 25(2), it is apparent that a company to which license is granted under Section 25(1) of the 1956 Act for being registered under Section 25(2) of the 1956 Act would be eligible to make an application under regulation 3 for being recognized as an SRO for distributors of mutual fund products. 10. Above reasoning is further fortified by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld certificate of registration/incorporation under Section 25 (2) of the 1956 Act would mean rendering the eligibility criteria prescribed under regulation 4(a) redundant and otiose, because, the applicant holding registration under Section 25(2) obviously holds license under Section 25(1) of the 1956 Act and in such a case, prescribing the eligibility criteria that while considering the application submitted under regulation 3, must hold license under Section 25(1) would be totally redundant and otiose. In other words, if registration is held to be mandatory while submitting application under regulation 3, then it would be redundant to prescribe eligibility criteria under regulation 4(a) that while considering the application submitted under regulation 3, the applicant must hold license under regulation 25(1), because registration under Section 25(2) is granted only after grant of license under Section 25(1). Therefore, the interpretation of regulation 3 put forth by the appellant which purports to render regulation 4(a) of SRO Regulations redundant and otiose cannot be accepted. 12. Apart from the above, regulation 6 of the SRO Regulations completely negates the argument advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icense granted to a company under Section 25(1) is revoked, then the company would continue to be incorporated under Section 34 of the 1956 Act but ceases to enjoy the exemption granted under Section 25 of the 1956 Act. Thus, under Section 25 of the 1956 Act holding license is of paramount consideration and registration under Section 25(2) of 1956 Act follows grant of license under Section 25(1) of the 1956 Act. Therefore, reading various provisions of SRO Regulations together, it becomes abundantly clear that any group or association of intermediaries holding a license under Section 25 of the 1956 Act with a direction for being registered as a company under Section 25(2) of the 1956 Act is eligible to apply under regulation 3 of the SRO Regulations and it is obligatory for such company to obtain registration under Section 25(2) within the extended time that may be granted by SEBI under regulation 6 of SRO Regulations. 14. Various decisions of the Apex Court relied upon by the counsel for the appellant in support of the contention that a company does not exist prior to its incorporation have no bearing to the facts of present case, because of regulation 2(1)(e) of SRO Regulations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 2. 17. Argument of the appellant that the application submitted by respondent no. 2 under regulation 3 of the SRO Regulations even before obtaining a 'Certificate of Commencement of Business', is in violation of Section 149 of the 1956 Act is without any merit, because, as per SRO Regulations an entity holding license under Section 25(1) of 1956 Act is a company eligible to submit application for being recognized as SRO for distributors of mutual fund products. Since regulation 3 of the SRO Regulations permit a company holding license under Section 25(1) to submit application for being recognized as an SRO, appellant is not justified in relying on general provisions contained in Section 149 of 1956 Act and contending that the application submitted by respondent no. 2 under regulation 3 of SRO Regulations is in contravention of Section 149 of 1956 Act. SEBI Act and the regulations framed thereunder are special provisions intended to cater to the needs of the securities market and therefore in the facts of present case, in the absence of any challenge to the SRO Regulations, appellant is not justified in contending that the application submitted under regulation 3 of SRO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 10 has no application in the present case because, SRO Regulations were framed in the year 2004 wherein multiple SRO's were envisaged. However, by amending the SRO Regulations in the year 2013, it is provided that in case of distributors of mutual fund products there would be only one SRO. In such a case, where selection of one out of the several applicants is to be made, following the procedure prescribed under regulation 10 does not arise at all. Several alternate submissions in writing were also made on behalf of SEBI. 21. For sake of convenience, verbatim written submission of SEBI in relation to the applicability of regulation 10 to the facts of present case is set out herein below:- (i) Regulation 10 was retained as part of the SRO Regulations even after the amendment of November 2013 whereby the process of 'recognition' of multiple SROs was now made into a 'selection' of a single SRO. No amendment to regulation 10 was considered necessary since on its correct construction, it would not apply to the amended 'selection of one SRO' situation. (ii) In selecting one of several applicants, there is no "rejection" of the other applicants within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is not granted 10. (1) If, after considering an application made under regulation 3 or regulation 9, as the case may be, the Board is of the opinion that a certificate should not be granted or renewed, it may, after giving the applicant a reasonable opportunity of being heard, reject the application within a period of thirty days of receipt of such application complete in all respects or within thirty days of receipt of further information or clarification sought under regulation 7. (2) If any application is rejected under sub-regulation (1), the fact shall be communicated to the applicant forthwith, stating the grounds for such rejection." 23. Under the SEBI Act which came into force in the year 1992, SEBI has been empowered to promote and regulate Self Regulatory Organizations. Accordingly, SRO Regulations were framed by SEBI in the year 2004 that is after lapse of about 12 years from the date of SEBI Act, 1992 coming into force. Even after framing the SRO Regulations in the year 2004, SEBI deemed it fit not to bring SRO Regulations into force for about nine years. It is only in the year 2013 SEBI decided to bring into force the SRO Regulations with effect from 08.01.2013 li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder which the opportunity of hearing should be given to the applicant whose application is being rejected. Regulation 10, simply provides that if SEBI after considering the application submitted under regulation 3 is of the opinion that a certificate should not be granted to the applicant, then SEBI may, after giving an opportunity of hearing reject the application. Obviously, opportunity of hearing under regulation 10 would have to be given when application made under regulation 3 is to be rejected on any ground whatsoever. Therefore, argument of SEBI that the 'rejection' contemplated in regulation 10 is restricted only to a 'pejorative' rejection involving some kind of 'stigma' on the merits of the applicant and that regulation 10 would not apply in case of selecting one out of several applicants being contrary to the plain language used in regulation 10, cannot be sustained. Similarly, argument of SEBI that opportunity of hearing under regulation 10 does not mean only personal hearing and hearing could also be by giving opportunity to place all material on record is also without any merit, because, it is only after all material facts are placed on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nication of the grant of in-principle approval to one of the applicants is totally absurd to say the least. Under regulation 10 obligation is cast on SEBI to give opportunity of hearing to the applicant to whom SEBI is of the opinion that the certificate should not be granted and there is no obligation cast on the applicant to seek opportunity of hearing when that applicant is intimated that in-principle approval is granted to some other applicant. In any event, in the present case, after receiving the impugned communication appellant did make representation against rejection of its application. However, there was no response from SEBI and hence the present appeal is filed. 27. Last alternate submission of SEBI is that opportunity of hearing under regulation 10 is to be given to the applicants only at the stage of final 'rejection' of the certificate and not before or at the stage of granting the in-principle approval. In this alternate submission, contrary to its earlier stand, SEBI has acknowledged its obligation to give opportunity of hearing under regulation 10 to the applicants whose applications SEBI wants to reject. 28. However, argument of SEBI that opportunity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEBI cannot approbate and reprobate in its stand by contending on one hand that the applicant to whom in-principle approval is granted must set up SRO within the stipulated time and on the other hand contend that grant of in-principle approval does not necessarily mean that certificate would be granted to that applicant, because, after hearing the unsuccessful applicants under regulation 10, SEBI may select one of the unsuccessful applicants. Such an argument of SEBI which brings-in total uncertainty would be detrimental to the interests of mutual fund market and hence, cannot be accepted. 30. Therefore, on a correct interpretation of regulation 10, it would be just and proper to hold that opportunity of hearing has to be given to the unsuccessful applicants at the time of selecting and granting in-principle approval to the successful applicant. 31. In these circumstances, without going into the merits of the third contention raised by the appellant that SEBI was biased in favour of respondent no. 2, we hold that SEBI is not justified in granting in-principle approval to the respondent no. 2 before granting opportunity of hearing to the appellant as contemplated under regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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