Translate
Text Highlighter

Bookmark

PDF

Share

Report a problem
AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • G. Mahalingam, Whole Time Member
Acts
  • provisions of the Indian Penal Code (IPC), Companies Act, 1956, the Companies Act, 2013 and the RBI Act, 1934
  • Section 12(3) of the SEBI Act read with Regulation 23(a) of Intermediaries Regulations and Regulation 25
  • Regulation 9A(1)(e) of the Underwriters Regulations read with Section 12(1) of the SEBI Act,
  • Section 12 (3) read with Section 19 of the SEBI Act and Regulation 28(2)
  • Section 241(2)(k) of the Companies Act, 2013
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Click here to upload
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • G. Mahalingam, Whole Time Member
Acts
  • provisions of the Indian Penal Code (IPC), Companies Act, 1956, the Companies Act, 2013 and the RBI Act, 1934
  • Section 12(3) of the SEBI Act read with Regulation 23(a) of Intermediaries Regulations and Regulation 25
  • Regulation 9A(1)(e) of the Underwriters Regulations read with Section 12(1) of the SEBI Act,
  • Section 12 (3) read with Section 19 of the SEBI Act and Regulation 28(2)
  • Section 241(2)(k) of the Companies Act, 2013
See more information ...
Smart Summary

Structured Summary of the SEBI Order in respect of M/s. IL & FS Financial Services Limited (WTM/GM/EFD-I/DRA-II/45/202021)

Factual and Procedural Background

M/s. IL & FS Financial Services Limited (referred to in the opinion as "IFIN" or the "Noticee") is a SEBI-registered underwriter. The Serious Fraud Investigation Office (SFIO) investigated IL&FS and its group companies and submitted a report dated May 28, 2019 to the Ministry of Corporate Affairs (MCA). The MCA forwarded that report to SEBI to determine whether IFIN, being a 100% subsidiary of IL&FS, continued to qualify as a "fit and proper person" to remain a SEBI-registered intermediary. The SFIO report identified apparent irregularities and integrity issues and noted that a charge sheet against the Noticee had been filed and admitted in the sessions court of Mumbai.

On the basis of the SFIO report, SEBI initiated proceedings under the SEBI (Intermediaries) Regulations, 2008, alleging violation of Regulation 6(f) read with 6A of the SEBI (Underwriters) Regulations, 1993, and provisions of Schedule II of the Intermediaries Regulations relating to the fit and proper criteria. SEBI appointed a Designated Authority (DA) to inquire under Section 12(3) of the SEBI Act and relevant intermediary regulations. The DA issued a show cause notice, held a hearing, and submitted a report dated May 18, 2020 concluding that the Noticee was no longer a fit and proper person and recommending cancellation of its certificate of registration.

Following the DA's report, SEBI issued a post-enquiry Show Cause Notice dated July 6, 2020 under Regulation 28(1) of the Intermediaries Regulations enclosing the DA's report and inviting submissions. The Noticee replied by email dated August 20, 2020, was granted a personal hearing on September 18, 2020 (attended by the Noticee's CEO and others), and submitted further written submissions on September 25, 2020.

Legal Issues Presented

  1. Whether, in light of the SFIO report and the DA's findings, the Noticee (IFIN) continued to satisfy the "fit and proper person" criteria required for an underwriter registered with SEBI.
  2. Whether the certificate of registration of the Noticee should be cancelled (as recommended by the DA) for non-compliance with Regulations 6(f) and 6A of the Underwriters Regulations read with Schedule II of the Intermediaries Regulations.
  3. Whether proceedings initiated by SEBI should continue despite the Noticee's prior request to surrender its certificate of registration (request dated June 4, 2019), which pre-dated the initiation of SEBI proceedings (noted as initiated on November 20, 2019 in the opinion).

Arguments of the Parties

Noticee's Arguments (as recorded in the opinion)

  • The MCA had initiated corporate proceedings under Section 241(2)(k) of the Companies Act, 2013 against IL&FS; the NCLT suspended the erstwhile IL&FS board and appointed new directors, who were empowered to replace directors of IL&FS subsidiaries (including IFIN). IFIN's board was reconstituted on October 26, 2018.
  • IFIN originally obtained underwriter registration on January 28, 2009, and permanent registration under Regulation 8A by SEBI correspondence dated February 6, 2014, but it has not undertaken any underwriting business since the grant of registration.
  • Because IFIN never operated as an underwriter, the newly constituted board surrendered the underwriting licence on June 4, 2019 (Board resolution dated May 15, 2019) and wrote to SEBI requesting confirmation of surrender (follow-up letter dated November 14, 2019).
  • The SFIO/statutory investigations have no bearing on the underwriting licence because IFIN never solicited clients or conducted underwriting activities under that licence.
  • The NCLAT had granted a moratorium (order dated October 15, 2018) staying institution or continuation of suits and other proceedings against IL&FS and its group companies (including IFIN); the moratorium was confirmed by NCLAT on March 12, 2020.
  • The new IFIN board is functioning as part of the Government-mandated restructuring for public benefit, and an adverse finding from SEBI at this stage may have unintended consequences for the Noticee.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The adjudicating officer (the Whole Time Member) reviewed the record, the DA's report, the SFIO report, and the Noticee's submissions. The analysis proceeded by:

  1. Recognizing the basis for the proceedings: the SFIO report alleging apparent irregularities and integrity concerns, and the DA's conclusion (May 18, 2020) that the Noticee was not fit and proper and recommending cancellation of registration.
  2. Noting the relevant statutory/regulatory framework: the opinion cites Regulation 9A(1)(e) of the Underwriters Regulations read with Section 12(1) of the SEBI Act to emphasize that an underwriter must abide by SEBI regulations and may only engage in securities transactions in accordance with the conditions of its certificate of registration. The opinion also notes that fit-and-proper requirements are a continuous condition of registration (sub-regulation (f) of Regulation 6 of the Underwriters Regulations) and that SEBI has the power to take actions including suspension or cancellation where the intermediary fails to meet these requirements.
  3. Highlighting key factual findings from the record relevant to the decision:
    • Although IFIN had been registered as an underwriter since January 2009, it had never undertaken underwriting assignments since registration.
    • IFIN itself requested surrender of its certificate of registration by letter dated June 4, 2019; the SEBI proceedings were initiated subsequently (noted as November 20, 2019 in the opinion), i.e., after SEBI had already received IFIN's surrender request.
  4. Assessing the consequence of these facts: because the Noticee had not acted as an underwriter since its registration and had already sought to surrender the certificate before the initiation of the instant proceedings, the adjudicator concluded that continuing the proceedings would not serve any meaningful purpose.
  5. Reaching the procedural outcome without deciding on the substantive merits: the adjudicator expressly states that, without going into the merits of whether the Noticee satisfied the fit-and-proper criteria in light of the SFIO report, he was inclined to drop the proceedings for the reasons stated.
  6. Exercising statutory authority: the order notes the exercise of powers under Section 12(3) read with Section 19 of the SEBI Act and Regulation 28(2) of the Intermediaries Regulations in disposing of the proceedings.

Holding and Implications

Core Ruling: The adjudicator disposed of the instant proceedings against M/s. IL & FS Financial Services Limited without issuing any direction against the Noticee.

Implications and consequences:

  • Direct effect on the parties: The proceedings initiated by SEBI in this matter were dropped and no punitive or restrictive directions were issued against the Noticee by this order dated October 23, 2020 (signed by G. Mahalingam, Whole Time Member, SEBI; Place: Mumbai).
  • Scope of the decision: The order does not decide the substantive question of whether the Noticee satisfied the fit-and-proper criteria in light of the SFIO report; rather, the proceedings were closed on procedural and factual grounds (non-operation as an underwriter and prior surrender request). The opinion does not state or assert that it sets any binding precedent beyond the immediate disposal of these proceedings.

Source: This summary is based exclusively on the text of the SEBI order addressed to M/s. IL & FS Financial Services Limited (WTM/GM/EFD-I/DRA-II/45/202021), dated October 23, 2020, as provided. No external information or inferences beyond the opinion text have been included.

Show full summary ...
To access the original judgment, please Sign In or Subscribe.

    Order in the matter of IL&FS Financial Services Ltd

    ________________________________________________________________________________________________ Order in respect of M/s. IL & FS Financial Services Limited WTM/GM/EFD-I/DRA-II/45 /202021 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER REGULATION 28(2) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008. IN RESPECT OF NOTICEE M/S. IL & FS FINANCIAL SERVICES LIMITED UNDERWRITER [SEBI REGN NO. INU000001298] BACKGROUND

    1. M/s. IL & FS Financial Services Limited (IFIN / Noticee) is a SEBI registered Underwriter.

    2. Serious Fraud Investigation Office (SFIO) had conducted an investigation into the affairs of Infrastructure Leasing & Financial Services Limited (IL&FS) and its subsidiary companies responsible for the credit crisis. Accordingly, SFIO had submitted its report dated May 28, 2019 (the Report) to Ministry of Corporate Affairs (MCA) and subsequently, the Report was forwarded to SEBI by the MCA to ascertain, inter alia, whether the Noticee, which is a 100% subsidiary of IL&FS, was qualified to be a fit and proper person to continue as a SEBI registered intermediary. The Report has pointed out various irregularities, showing apparent violation of various provisions of the Indian Penal Code (IPC), Companies Act, 1956, the Companies Act, 2013 and the RBI Act, 1934 and the regulations made thereunder, leading to raising of integrity issues in respect of the Noticee. It was also noted that SFIO had already filed a charge sheet against the Noticee and the same has been admitted in the session court of Mumbai. ________________________________________________________________________________________________ Order in respect of M/s. IL & FS Financial Services Limited

    3. In view of the above, SEBI has initiated proceedings under the SEBI (Intermediaries) Regulations, 2008 (Intermediaries Regulations) against the Noticee for alleged violation of the provisions of Regulation 6(f) read with 6A of the SEBI (Underwriters) Regulations, 1993 (Underwriters Regulations) read with the provisions of Schedule II of the Intermediaries Regulations, which pertain to fulfilment of fit and proper person criteria by a registered underwriter. Accordingly, SEBI appointed a Designated Authority (DA) in the matter to enquire into the aforesaid alleged violations under Section 12(3) of the SEBI Act read with Regulation 23(a) of Intermediaries Regulations and Regulation 25 of the Intermediaries Regulations. The DA issued a show cause notice to the Noticee under Regulation 25(1) of the Intermediaries Regulation. Thereafter, upon a consideration of the facts before him and after granting an opportunity of hearing, the DA submitted his report dated May 18, 2020, under Regulation 27 of the Intermediaries Regulations, concluding that the Noticee was no longer a fit and proper person as required under Regulations 6(f) and 6A of the Underwriters Regulations read with the provisions of Schedule II of the Intermediaries Regulations. Further, the DA in his report recommended that the certificate of registration of the Noticee be cancelled. SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING

    4. A Show Cause Notice dated July 06, 2020 (postenquiry SCN) under Regulation 28(1) of the Intermediaries Regulations was issued by SEBI enclosing therewith a copy of the report of the DA and calling upon the Noticee to show cause as to why the action as recommended by the DA or passing of any other direction, as considered appropriate by the Competent Authority, should not be taken against it in terms of Regulation 28(2) of the Intermediaries Regulations. ________________________________________________________________________________________________ Order in respect of M/s. IL & FS Financial Services Limited

    5. Pursuant to receipt of postenquiry SCN, the Noticee vide email dated August 20, 2020 replied to the post-enquiry SCN. The Noticee was granted personal hearing before me on September 18, 2020 which was attended by Mr. Kaushik Modak (CEO of IFIN) and others. During the personal hearing, the Noticee reiterated its submissions made earlier. Subsequently, the Noticee submitted written submissions dated September 25, 2020.

    6. The Noticee vide email dated August 20, 2020 and letter dated September 25, 2020 has submitted inter alia the following: (a) The Union of India acting through the MCA had initiated proceedings against IL&FS and its group companies under Section 241(2)(k) of the Companies Act, 2013 on the grounds inter alia that the erstwhile board of IL&FS had prima facie mismanaged the affairs of IL&FS. Pursuant to the said Proceedings, the Honble National Company Law Tribunal (NCLT), Mumbai Branch, suspended the erstwhile board of directors of IL&FS and appointed new directors as recommended by the Union of India on the board of IL&FS vide its order dated October 01, 2018, October 03, 2018 and December 21, 2018. Further, vide the order passed by the NCLT on October 09, 2018, the new board was empowered to replace the directors of subsidiary companies of IL&FS (which also include IFIN / Noticee). Accordingly, the board of directors of IFIN were reconstituted on October 26, 2018. (b) The Noticee had originally obtained registration as an underwriter on January 28, 2009. Subsequently, the Noticee had been granted a permanent registration in terms of Regulation 8A of the Underwriters Regulations vide SEBI letter dated February 06, 2014. The Noticee has not undertaken any underwriting business since January ________________________________________________________________________________________________ Order in respect of M/s. IL & FS Financial Services Limited 28, 2009 and therefore, the registration obtained by it under the Underwriters Regulations was never effectively operationalized. (c) IFIN has never undertaken any business pursuant to the Underwriting License and as such, the newly constituted board of directors of IFIN surrendered the Underwriting Licence on June 04, 2019 vide Board Resolution dated May 15, 2019. Accordingly, a letter dated June 04, 2019 was sent to SEBI, which was followed up by a request letter dated November 14, 2019 to SEBI requesting for confirmation on the surrender of the Underwriting License. (d) The investigation conducted by the statutory agencies has no bearing on the Underwriting License issued to IFIN as IFIN has never done any business or solicited any client / customer for carrying out any business activities permitted under the said license. (e) The Honble National Company Law Appellate Tribunal (NCLAT) vide its order dated October 15, 2018 (Moratorium Order), granted a stay on institution or continuation of suits or any other proceedings by any party or person against IL&FS and its group companies, which include the Noticee. Subsequently, the Moratorium Order was confirmed by the Honble NCLAT vide order dated March 12, 2020. (f) The IFIN s new board is working in furtherance of the Government mandate for the benefit of the public at large. At this stage, any finding by SEBI that the Noticee is not fit and proper person will have unintended consequences for the Noticee. ________________________________________________________________________________________________ Order in respect of M/s. IL & FS Financial Services Limited CONSIDERATION AND FINDINGS

    7. I have examined the facts of the case, the charges against the Noticee and the submissions of the Noticee in respect of the same. I note that the instant proceedings have been initiated against the Noticee on the basis of report of SFIO which brought out apparent irregularities on the part of the Noticee. As per Regulation 9A(1)(e) of the Underwriters Regulations read with Section 12(1) of the SEBI Act, an underwriter has to abide by the regulations made under the SEBI Act in respect of the activities carried on by it as an underwriter and it cannot buy, sell or deal in securities except, and in accordance with the conditions of the certificate of registration obtained from SEBI. In this regard, I note that the fit and proper person requirements have to be met on a continuous basis, since compliance with the same is mentioned as one of the conditions for grant of registration under sub-regulation (f) of Regulation 6 of the Underwriters Regulations. It is needless to reiterate that SEBI is empowered to take suitable action as it may deem fit, including suspension and cancellation of registration in the event the intermediary fails to comply with the said requirement.

    8. Having observed as above, before proceeding to decide whether, in light of the SFIOs report, the Noticee remains compliant with the fit and proper person criteria or not, I deem it important to highlight the following facts from the records: (a) The Noticee, though registered as an underwriter with SEBI since January 2009, has never undertaken assignments in such capacity since the grant of registration itself. (b) The Noticee vide letter dated June 04, 2019 had itself made a request to SEBI for surrendering its certificate of registration as an underwriter, whereas the instant ________________________________________________________________________________________________ Order in respect of M/s. IL & FS Financial Services Limited proceedings have been initiated against the Noticee on November 20, 2019, which is much after the said request was received by SEBI.

    9. Having considered the above-mentioned facts and circumstances, I am of the view that since the Noticee has never undertaken activities as an underwriter from the date of grant of certificate of registration and had submitted a request to SEBI for surrender of certificate of registration prior to initiation of the proceedings, no meaningful purpose would be served by continuing with the instant proceedings against the Noticee. Hence, without going into the merit of the issue at hand, I am inclined to drop the instant proceedings against the Noticee. ORDER

    10. In view of the above, I, in exercise of powers conferred on me under Section 12 (3) read with Section 19 of the SEBI Act and Regulation 28(2) of the Intermediaries Regulations, and upon consideration of the facts and circumstances as above, hereby dispose of the instant proceedings without issuing any direction against the Noticee. PLACE: MUMBAI G. MAHALINGAM DATE: OCTOBER 23, 2020 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

    Use AI to get other relevant cases.
    Try AI Pro free for 7 days Upgrade to AI Pro

    Comments

    Order in the matter of IL&FS Financial Services Ltd
    (Oct 23, 2020)