Markets

Debate rages over SEBI’s ‘not fit & proper’ order on commodity players in NSEL scam

PALAK SHAH Mumbai | Updated on March 06, 2019 Published on March 06, 2019

Many raise eyebrows over fixing responsibility on firms only, instead of officials as well

Commodity arms of leading brokerage houses were declared ‘not fit and proper’ by SEBI last week for their role in the NSEL scam, but the fact that similar strictures were not passed by the regulator against key management persons responsible for the company’s action has raised eyebrows.

A company on its own may not be ‘dishonest’ or carry adverse reputation but it is the responsibility of the key management or board that needs to be assessed, especially when they are part of another company handling client money in capital market, experts told BusinessLine. In the past, when SEBI declared entities ‘not fit and proper’ in high-profile cases involving Sahara India and Financial Technologies, the regulator further studied the role of its management and board to accord them a similar tag, securities lawyers said. Sahara’s billionaire promoter Subrata Roy was called the ‘mastermind’ for raising ₹24,000 crore from investors and was forced to exit mutual fund business.

Recently, the commodity arms of Anand Rathi, Motilal Oswal, IIFL Geofin Comtrade and Philip Capital were declared ‘unfit’. The SEBI order was mainly based on observations against the brokers by court, serious fraud investigation office and police. Legal experts say, SEBI should go into details of allegations to hold individuals responsible too, as it did in the past.

“Ideally, SEBI may determine the role of people at the helm of the entity that was declared unfit and ensure that those responsible disassociate themselves from management of other regulated entities, too. Fit and proper cases also take into account ‘general reputation’ of individuals associated with the company declared ‘unfit’. At least in big scams this should be looked at but the regulator has (its) own discretion,” said Tejesh Chitlangi, Senior Partner, IC Universal Legal, who spoke on the general concept and not a specific case.

Schedule II of Intermediaries Regulations under SEBI Act specifies ‘fit and proper’ criteria for entities. Among other things, it specifies integrity, reputation and character as key for being ‘fit and proper’. In October 2018, the Bombay High Court said, “Perusal of the Regulation 7 read with Schedule II would reveal that while making an inquiry to find as to whether the applicant is “fit and proper person” the board (SEBI) is entitled to conduct an inquiry not only about the applicant intermediary, but also its principal officer, director, promoter and the key management persons, with regard to their integrity, character, absence of conviction and restraint orders, competence including financial solvency and net worth, absence of categorisation as a wilful defaulter.” The court made these observations while presiding over an application by brokerage IIFL relating to the NSEL matter. Anticipating adverse SEBI orders, most large brokers had themselves applied to cancel their commodity registration certificate, making SEBI’s current order redundant, experts said. “Be it RBI, SEBI or IRDA, it is important for any regulator in a ‘fit and proper’ case to check on individuals who could be directly responsible for the working of companies,” said Sanjay Asher, Senior Partner, Crawford Bayley & Co.

No response yet to email

SEBI did not reply to an email query. A source close to the regulator said more orders may be put out in the matter on various show-cause notices issued.

Published on March 06, 2019
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