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Financial Planning Supervisory Foundation Versus Securities and Exchange Board of India, Mumbai

2015 (10) TMI 324 - SECURITIES APPELLATE TRIBUNAL MUMBAI

Challenge the decision of SEBI for setting up of SRO for distributers of mutual fund products – Petitioner contends that the Respondent was not eligible to apply as the same is not a Company registered under Section 25 of the Companies Act as on the cut-off date which is mandatory as per the SRO Regulations - Petitioner further holds that as per Regulation 10 of the SRO Regulations it should have got an opportunity of being heard before rejecting the application – Further contended by the Petiti .....

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whom in-principle approval is granted under regulation 4A.

Held That:- Since the Respondent held license under Section 25(1) of the 1956 Act on the date of submitting the application under regulation 3 the same was eligible to apply and therefore SEBI was justified in entertaining the application submitted by Respondent – First contention held in favour of the Respondent.

SEBI has failed to comply with the requirements of regulation 10, the same is quashed and set aside th .....

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Mr. Anil Choudhary and Mr. Rajneesh Deka, Advocates i/b Finsec Law Advisors For The Respondent : Mr. Fredun Devitre, Senior Advocate with Mr. Shiraz Rustomjee, Senior Advocate, Mr. Nishit Dhruva, Mr. Chirag Bhavsar and Ms. Khushbu Chajjed, Advocates i/b MDP & Partners, Mr. Somasekhar Sundaresan, Advocate with Mr. Paras Parekh and Mr. Dhaval Kothari, Advocates i/b J. Sagar Associates ORDER J.P. Devadhar, J. - This appeal is filed to challenge the communication of the Securities and Exchange B .....

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t 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, res .....

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f hearing before rejecting the application submitted by the appellant under regulation 3. Admittedly, opportunity of hearing was not given before rejecting the application submitted by the appellant under regulation 3 and therefore, the impugned decision of SEBI is liable to be quashed and set aside. Thirdly, it is contended that SEBI was biased in favour of respondent no. 2 even before inviting applications for being recognized as SRO and hence the impugned decision of SEBI is liable to be quas .....

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y Financial Planning Standards Board India ("FPSB" for short) an association of intermediaries, and a public-private enterprise, which is also a not for profit company registered under Section 25 of the 1956 Act. FPSB focuses on distribution, improvements, investment advisory and financial planning in securities and other financial products with full disclosure and regulated practices. FPSB is established by forty seven (47) leading financial institutions in both public and private sec .....

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ies etc.) engaged in the pursuit of the well being of consumers of financial products that are manufactured, advised and sold by the industry. It is the licensing agency for the globally known Certified Financial Planner (CFP) mark that puts the interests of the customer above that of the industry. FPSB is the only professional body that is not an industry association or an NGO, but has a representation across the consumer facing financial sector. FPSB is essentially based on a voluntary self re .....

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l 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 .....

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cial Gazette appoint. Accordingly, a notification was published in the Official Gazette on January 08, 2013, whereby SEBI appointed that day i.e. January 08, 2013 as the date on which the SRO Regulations shall come into force in relation to distributors engaged by asset management companies of mutual funds and distributors engaged by portfolio managers. (h) On March 21, 2013 a public notice was uploaded on the SEBI website inviting applications from any group or association of intermediaries des .....

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r 17, 2013 SEBI called upon the officers of the appellant and sought certain clarification in respect of its application for being recognized as an SRO. The appellant by its letters dated September 20, 2013, November 20, 2013 and November 21, 2013 provided all the necessary clarifications and information sought, to the satisfaction of SEBI. (l) By the impugned letter dated February 6, 2014, appellant was informed that there were three applicants viz the appellant, respondent no. 2 (IMFI) and Org .....

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anted 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 .....

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t 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 and ought not to have entertained the application filed by such a non-existent entity. In support of the above argument Mr. Khambata submitted as follows:- (a) Without the certificate of incorporation an entity does not become a company either under Section 34 or under Section 25 of the 1956 Act. Regula .....

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pplication submitted by a non-existent entity being invalid, SEBI ought to have rejected the application submitted by respondent no. 2 at the threshold itself. (b) Section 25 of the 1956 Act makes a clear distinction between grant of a license under Section 25(1) and registration of a company under Section 25(2) of the 1956 Act. A license under Section 25(1) does not direct the Registrar of Companies ('ROC' for short) to register an association as an incorporated company. Rather, it dire .....

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application. (c) In support of the contention that prior to incorporation/ registration a company does not exist and consequently no application could be submitted in the name of the non-existent company, reliance is placed on decisions of the Apex Court in case of CIT v. City Mills & Distributors (P) Ltd. (AIR 1996 SC 2888) and A.P. Tourism Development Corporation v. Pampa Hotels Ltd. (AIR 2010 SC 1806). (d) The discretion vested in the ROC in directing registration under Section 25(2) aft .....

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r 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 .....

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of the 1956 Act is entitled to submit application under regulation 3 of the SRO Regulations. (g) It is only on incorporation, a company manifests into a completely unique legal personality distinct from its constituent individuals. It is only on incorporation a company becomes eligible to enter into contract with others and use a common seal. The eligibility criteria set out in regulation 4(a) of the SRO Regulations that SEBI shall not consider an application for grant of a certificate unless t .....

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entity being a legal impossibility, SEBI is not justified in entertaining the application and granting in-principle approval to the respondent no. 2 which was admittedly not an existing entity till the cut off date for submitting the applications. (h) Argument of SEBI that the eligibility requirements are relevant only at the point of time when applications are actually taken up for consideration is incorrect and contrary to the specific provision contained in regulation 3(1) of the SRO Regulati .....

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hat the application of respondent no. 2 was incomplete is admitted by SEBI in its affidavit in reply. Contrary argument now put forth by SEBI is a means to accommodate the application of respondent 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 reject .....

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EBI 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 company registered under Section 25 of the 1956 Act and therefore, in its letter addressed to the .....

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on the cut off date. (j) Fact that regulation 4A of the SRO Regulations empowers SEBI to grant in-principle approval to an applicant by granting extension of time to comply with the provisions of clauses (c) (d) or (h) of regulation 4 does not in any way affect or alter the eligibility criteria prescribed under regulation 3 which is required to be met at the time of submitting the application under regulation 3. Regulation 4A inserted with effect from 18.11.2013 does not seek to amend the eligi .....

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ve such objections as may be indicated by the Board. However, that proviso would not apply to an applicant like respondent no. 2 who being non-existent was disqualified from even submitting an application before the cut off date. Thus, regulation 6, imposes a primary obligation on the regulator to 'reject' any application which does not conform to the requirements under the SRO Regulations. Granting additional time for compliance under regulation 6 is restricted to cases where there are .....

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e, 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 re .....

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icate respondent no. 2 could not even submit application under regulation 3 of SRO Regulations. The Certificate of Commencement of Business was granted to the respondent no. 2 on March 15, 2014, whereas, the respondent no. 2 had commenced business activities 340 days prior to obtaining a Certificate of Commencement of Business in violation of Section 149 of the 1956 Act. (o) Relying on certain file noting made by the officials of the Department of Economic Affairs, Ministry of Finance, Governmen .....

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Mr. Sundaresan learned counsel appearing on behalf of respondent no. 2, the entity eligible to apply for being recognized as an SRO for distributors of mutual fund products under regulation 3 of SRO Regulations would be an entity to which license under Section 25(1) of the 1956 Act has been granted for being registered as a company under Section 25(2) of the 1956 Act. 8. Above reasoning can be better understood by referring Section 25(1) and (2) of the 1956 Act as also regulation 2(1) (e), 3, 4( .....

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, direct that the association may be registered as a company with limited liability, without the addition to its name of the word "Limited" or the words "Private Limited". (2) The association may thereupon be registered accordingly; and on registration shall enjoy all the privileges, and (subject to the provisions of this section) be subject to all the obligations, of limited companies. Regulation 2(1)(e), 3, 4 & 6 of the SRO Regulations "Definitions 2.(1) In these r .....

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ant 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 application .....

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ed; b. the powers and duties of the office bearers of Self Regulatory Organization; c. the admission into the Self Regulatory Organization of members, agents, their qualifications for membership, and the exclusion, suspension, expulsion and readmission of members therefrom or therein to; (3) Every application under sub-regulation (1) shall be signed on behalf of the applicant under authority of its Board of Directors by its Chairman, Managing Director, Chief Executive Officer or whole time direc .....

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granted license under section 25 of Companies Act, 1956; Application to conform to the requirements 6. Subject to the provisions of regulation 4A, any application for a certificate, which is not complete in all respects or does not conform to the requirements of these regulations and particularly regulations 3, 4 and 5 or instructions specified in Form A shall be rejected by the Board: Provided that, before rejecting any such application, the Board shall give an opportunity to the applicant to r .....

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gistered 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 expressio .....

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rs of mutual fund products. 10. Above reasoning is further fortified by the eligibility criteria prescribed under regulation 4 of the SRO Regulations. Regulation 4(a) of the SRO Regulations mandates that SEBI shall not consider an application made under regulation 3 for grant of a certificate, unless the applicant is a company to which license is granted under Section 25 of the 1956 Act. As noted above license under Section 25(1) of 1956 Act is granted to an applicant who fulfils the conditions .....

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olds license under Section 25(1) of the 1956 Act and in such a case, prescribing the eligibility criteria that at the time of considering the application, the applicant must be a company holding license under Section 25(1) would be meaningless. In other words, if it is held that the eligibility criteria for an applicant to submit application under regulation 3 is to hold registration under Section 25(2), then it would be meaningless to prescribe the eligibility criteria under regulation 4 that w .....

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ulation 3, 4 & 4A of the SRO Regulations together, it is apparent that an applicant to whom license is granted under Section 25(1) with a direction that the said applicant be registered as a company under Section 25(2) of the 1956 Act would be eligible to apply under regulation 3 for being recognized as an SRO for distributors of mutual fund products. 11. Accepting the argument of the appellant that an applicant seeking to submit application under regulation 3, must hold certificate of regis .....

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s, 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 r .....

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; 5 of the SRO Regulations shall be rejected only if the applicant fails to comply with the requirements set out in those provisions within the time extended by SEBI as specified under regulation 6 under the SRO Regulations. Question of SEBI extending time to comply with the requirements of regulation 3 would arise only after the application is submitted under regulation 3. Extension of time permissible under regulation 6 is not restricted to any particular requirement of regulation 3. Therefore .....

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levant to note that a company incorporated under Section 34 of the 1956 Act is not entitled to the exemption available under Section 25 of the 1956 Act unless that company is registered under Section 25(2) of the 1956 Act. Registration under Section 25(2) is granted subsequent to grant of license under Section 25(1) of the 1956 Act. In fact Section 25(3) of the 1956 Act provides that a company duly incorporated under Section 34 of the 1956 Act may also make an application for grant of registrati .....

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ted under Section 25(2) of the 1956 Act. As per Section 25(7) of 1956 Act, if license 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. There .....

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egulations. 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 which defines the expression 'Company' to mean a company to which a license is granted under Section 25(1) of the 1956 Act. Thus, for the purposes of SRO Regulations, a company is deemed to have come into existence .....

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ention of SRO Regulations is to motivate group/ association of intermediaries to form a company under Section 25 of 1956 Act so that such company registered under Section 25 of the 1956 Act could be granted certificate of recognition to act as SRO for distributors of mutual fund products. With this background when regulation 3 is read with regulation 2(1)(e),4,4A & 6 of SRO Regulations it becomes clear that the applicant submitting application under regulation 3 need not be registered under .....

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gistered as a company under Section 25(2) of the 1956 Act subject to fulfilling the conditions set out therein. Admittedly, on compliance of those conditions, the respondent no. 2 has been registered under Section 25(2) of the 1956 Act on 02.08.2013 that is within the time prescribed under regulation 6. Therefore, in the facts of present case, since respondent no. 2 was holding license under Section 25(1) of the 1956 Act on the date of submitting the application on 29.07.2013 and registration wa .....

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ng 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 Regul .....

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ociation of intermediaries holding license under Section 25(1) of the 1956 Act is eligible to submit an application for being recognized as an SRO under the SRO Regulations, then, all other arguments to the contrary advanced on behalf of the appellant must fail. In particular, the appellant is not justified in contending that regulation 6 of SRO Regulations ought to be construed narrowly, when the language used in regulation 6 do not even remotely suggest that the said regulation ought to be con .....

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no. 2 having license under Section 25(1) of the 1956 Act was eligible to submit application under regulation 3 of SRO Regulations and therefore no fault can be found with the decision of SEBI in entertaining the application submitted by the respondent no. 2 on 29.07.2013. 19. Second argument advanced on behalf of the appellant is that the decision of SEBI in selecting and granting in-principle approval to the respondent no. 2 amounts to rejecting the application submitted by the appellant witho .....

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for rejecting the application submitted by the appellant under regulation 3 and therefore, the impugned decision of SEBI being in violation of regulation 10 of SRO Regulations is liable to be quashed and set aside. 20. On behalf of SEBI it is inter alia contended that regulation 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 i .....

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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 the meaning of tha .....

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personal hearing. The opportunity to place all materials on record for consideration is sufficient compliance with the requirements of regulation 10. All applicants were given this opportunity and availed of it, between July and December 2013. Even the appellants make no grievance in the appeal regarding denial of personal hearing. Their allegation is that there was no formal interview. (iv) Alternately, even in the amended situation of selection of one SRO, the opportunity of hearing contempla .....

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sought after communication to them of the grant of in principle approval to one of the applicants, and before grant of the final certificate of recognition to the successful applicant under regulation 5, and not otherwise. (vi) Alternately, regulation 10 contemplates an opportunity of hearing only at the stage of a final "rejection" of the "certificate" and not before or at the stage of the 'in principle' approval. That stage has not yet been reached. This is clear f .....

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ion 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 fac .....

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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 limited only to the distributors of mutual fund products wherein multiple SRO's could be appointed in respect of distributors of mutual fund products. Thereafter, SEBI deemed it fit that there should be only one SRO for distributors of mutual fund products, and accordingly, effected amendments to the SRO Regulations with effect from 18.11.2013 so as to .....

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m 08.01.2013 limited only to the distributors of mutual fund products and having taken a decision not amend regulation 10 even after amending various provisions of SRO Regulations in view of its decision that there would be only one SRO for distributors of mutual fund products, it is not open to SEBI to contend that regulation 10 of SRO Regulations would not apply while selecting a single SRO for distributors of mutual fund products. 24. No doubt that in a selection process, where one out of man .....

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ecting single SRO for distributors of mutual fund products. In other words, having taken a decision that there should be a single SRO for distributors of mutual fund products under the SRO Regulations which are specifically brought into force limited only to the distributors of mutual fund products, SEBI cannot avoid its obligation to comply with the procedure prescribed under regulation 10 of the SRO Regulations in relation to applications received under regulation 3 of SRO Regulations. Regulat .....

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cation 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 opportun .....

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urnished by the appellant within the stipulated time. Thereafter, on consideration of the application/documents furnished by the appellant, if SEBI was of the opinion that a certificate should not be granted to the appellant, at that stage it was obligatory on part of SEBI to grant opportunity of hearing to the appellant under regulation 10 and in such a case, the opportunity of hearing would only be by granting personal hearing and not be any other mode. Admittedly, no opportunity of hearing wa .....

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ion 4A. There is no merit in the above contention, because, the in-principle approval is granted to an applicant only when that applicant is selected and consequently all other applicants are rejected. Regulation 10 contemplates granting opportunity of hearing to an applicant whose application is being rejected and not to an applicant who is selected and to whom in-principle approval is granted. Therefore, argument of SEBI that opportunity of hearing under regulation 10 is to be given while reje .....

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lternate argument of SEBI is that regulation 10 contemplates grant of hearing to the unsuccessful applicants only if it is sought after communication 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 wh .....

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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 hearing under regulation 10 to the applicants whose applications SEBI intends to reject, has to be given not at the time of selecting and granting in-principle .....

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have adequate infrastructure for discharging functions as an SRO & (iii) must have in its employment persons having adequate professional and other relevant experience to the satisfaction of SEBI. Obviously, these requirements are to be fulfilled by an applicant who is selected by SEBI for discharging the functions of an SRO. Thus, in-principle approval is granted to an applicant when that applicant is selected for discharging the duties as an SRO. Since in-principle approval is granted by s .....

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nity of hearing under regulation 10 is not an empty formality, it is possible that in a given case, SEBI after hearing the unsuccessful applicant may change its opinion and decide to select that applicant. In that case, the applicant who was initially selected and to whom in-principle approval was g ranted would be left high and dry. Moreover, in such a case grave prejudice would be caused to the applicant to whom in-principle approval was initially granted, because, during the interregnum that .....

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sarily 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 .....

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