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Libord Finance Ltd. Versus Whole Time Member, Securities and Exchange Board of India

2008 (3) TMI 737 - SECURITIES APPELLATE TRIBUNAL, MUMBAI

Appeal No.38 of 2008 - Dated:- 31-3-2008 - N.K. Sodhi, Arun Bhargava and Utpal Bhattacharya, JJ. ORDER N.K. Sodhi, J. 1. Mazda Fabrics and Processors Limited (for short 'Mazda') is a company incorporated under the provisions of the Companies Act, 1956. It came out with an Initial Public Offer (IPO) in January 1996. In terms of the circulars issued by the Securities and Exchange Board of India (for short the 'Board'), the appellant-company which was then a merchant banker entered .....

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unded. It is further alleged that the promoters of Mazda had undertaken to buy back the shares from the allottees and pay interest to them for the period of investment. Investigations carried out by the Board revealed that 50 applications had been received for 1000 shares each accompanied by cheques which were in continuous serial numbers from the same account maintained with State, Bank of Indore, Raipur. It is claimed that the continuous cheque numbers for different applications should have al .....

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the issue. In view of these allegations it was alleged that the appellant as a merchant banker had violated Clauses 1, 2 and 9 of the code of conduct prescribed in Schedule III to the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 (hereinafter called the 'Regulations'). The Board was also of the opinion that in view of the aforesaid irregularities/illegalities, the appellant had violated Circular No. 1, dated 1-3-1993 issued to the registered merchant banker .....

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ptember 2000, the appellant had ceased to be a merchant banker. The allegations made in the show-cause notice were emphatically denied. The Board took almost another four years to complete the enquiry under Section 11B of the Act and on a consideration of the material collected during that enquiry came to the conclusion that the appellant had violated the code of conduct prescribed for merchant bankers and also the circular dated 1-3-1993. By order dated 18-2-2008 the Board has issued directions .....

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tted by the appellant. Penalty of suspension of registration as a merchant banker could be imposed if a merchant banker violated the provisions of the Act, rules or regulations and the circumstances under which registration could be suspended were specified in Regulation 36. Regulation 37 provided for cases where the penalty of cancellation of registration could be imposed. These provisions read as under: 36. Suspension of registration.- (1) A penalty of suspension of registration of a merchant .....

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give a satisfactory reply to the Board in this behalf; (iv) the merchant banker indulges in manipulating or price rigging or cornering activities; (v) the merchant banker is guilty of misconduct or improper or unbusiness like or unprofessional conduct which is not in accordance with the Code of Conduct specified in Schedule III; (vi) the merchant banker fails to maintain the capital adequacy requirement in accordance with the provisions of Regulation 7; (vii) the merchant banker fails to pay the .....

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deteriorates to such an extent that the Board is of the opinion that his continuance as merchant banker is not in the interest of investors; (iii) the merchant banker is guilty of fraud, or is convicted of a criminal offence; (iv) in case of repeated defaults of the nature mentioned in Regulation 36 provided that the Board furnishes reasons for cancellation in writing. Regulation 38 provided that no order of penalty of suspension or cancellation, as the case may be, could be imposed except after .....

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ure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (for short Enquiry Regulations). It would also be relevant to refer to the provisions of Section 11B of the Act under which action has been taken against the appellant for violating the code of conduct prescribed by the Regulations. It reads as under: 11B. Power to issue directions.- Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necess .....

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ompany in respect of matters specified in Section 11A, as may be appropriate in the interests of investors in securities and the securities market. A reading of the aforesaid provisions would make it clear that in the year 1996 when the appellant is alleged to have committed the aforementioned irregularities, the Regulations provided that the only penalty that could be imposed on a delinquent was either suspension of its certificate of registration as a merchant banker or its cancellation. It wo .....

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rket intermediaries for carrying on different activities for which they obtain different registration certificates. In other words, the same entity could wear different hats and quite often it does. Section 11B of the Act, on the other hand, entitles the Board to issue directions to any intermediary of the securities market or any other person associated therewith if it thinks it is necessary in the interests of the investors or orderly development of securities market or to prevent the affairs .....

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e. If action were to be taken against a delinquent merchant banker prior to 27-9-2002, the Board had to hold an enquiry in terms of Regulation 39 and after that date an enquiry is required to be held in terms of the Enquiry Regulations and, if found guilty, any appropriate penalty could be imposed. Obviously, the object of imposing penalty is to punish the wrongdoer. If the nature of the misconduct is such which is likely to affect adversely the securities market or the interest of the investors .....

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consequences to the entity to whom those are issued but that would be only incidental. The purpose or the basis of the order or the directions would nevertheless be to protect the securities market and the interest of the investors. In other words, the order or the directions under Section 11B have to be regulatory in nature and not punitive. If the Board wishes to punish the delinquent merchant banker for any of its misdeeds, it should proceed against it either under the Regulations or under t .....

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ions, as the case may be. If proceedings under the Enquiry Regulations or the Regulations had been initiated and the appellant had been found guilty, then one of the penalties referred to in those Regulations could be imposed and the maximum that could happen was cancellation of its certificate of registration as a merchant banker (though the facts of this case do not warrant such action). In that event it could continue with its activities other than the business as a merchant banker. The sweep .....

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eight years and by the time it decided to issue a show-cause notice in June 2004, regulations 36 to 39 had been deleted. It could still proceed under the Enquiry Regulations but in its wisdom it chose to proceed under Section 11B. Under the Enquiry Regulations too, the maximum penalty was cancellation of its certificate of registration as a merchant banker but under Section 11B, a much harsher penalty has been imposed. This could not be done. We cannot, therefore, uphold the impugned order. 3. T .....

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more. Where was then a need to issue directions to it restraining it from accessing the securities market. As already observed, Section 11B is an enabling provision entitling the Board to issue directions to an intermediary or any other person with a view to protect the interest of the investors or to protect the integrity of the market or to ensure its orderly development. The object of issuing directions can only be to regulate the market and not to punish the delinquent intermediary. There a .....

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