Securities Appellate Tribunal
Jermyn Capital Llc vs Securities And Exchange Board Of India on 6 September, 2006
Equivalent citations: [2007]74SCL246(SAT)
JUDGMENT
N.K. Sodhi, J. (Presiding Officer)
1. Whether the appellant is a fit and proper person in terms of the criteria set out in Regulation 3 of the Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004 (hereinafter called the Regulations) is the short question that arises for our consideration in this appeal filed under Section 15T of the Securities and Exchange Board of India Act, 1992 (for short the Act). Facts giving rise to this appeal are these:
2. Jermyn Capital LLC, the appellant is a limited liability company incorporated in Dubai in September 2003 (hereinafter called the Dubai Co.). It is registered with the Securities and Exchange Board of India (for short the Board) as a foreign institutional investor as a foreign corporate sub-account of Taib Bank EC. It was granted registration as a sub-account on July 2, 2004. This company has the following directors.
1) H.H. Juma Maktoum Juma Al-Maktoum
2) Hugh Hamilton Andrews a British national (hereinafter called Andrews)
3) Mihir D. Kapadia
4) Amit Shah.
It has three shareholders namely, H. H. Juma Maktoum Juma Al-Maktoum (51%), Andrews (40%) and Mihir D. Kapadia (9%). It is common case of the parties that the Articles of Association of the Dubai Co. provide that the management of the Company shall vest with Andrews. By letter dated November 30, 2005 addressed to Taib Bank, the Board directed the former to stop trading in the Indian securities market on behalf of the sub-account i.e. Dubai Co. as it was in receipt of credible information that the sub-account did not meet the criteria for fit and proper person which was mandatory for all registrants to adhere to through out the period of validity of their registration. The Board further directed the foreign institutional investor to provide information in regard to the following:
1) Beneficial ownership of the investments made by Dubai Co. till the date of the communication.
2) Proof of adequate and proper background verification of the investors and shareholders of Dubai Co. prior to sponsoring their application for registration as a sub-account.
3) The Board had received some information indicating that the Dubai Co. had close links with Jermyn Capital Partners Plc, a company incorporated in England (hereinafter referred to as the UK Co.) and Taib Bank had been called upon to explain the relationship between the Dubai Co. and the UK Co. Taib Bank gave its reply by letter dated December 6, 2005 and the Dubai Co. also furnished its reply to the Board denying all the allegations and simultaneously requested the Board to withdraw the stop trading order. While the Board was yet to consider the replies and pass orders thereon, the appellant filed Appeal No. 204 of 2005 before this Tribunal challenging the stop trading order which came up for hearing on 21.12.2005. We disposed of the appeal on that day with a direction to the Board to examine the material and information supplied by the appellant and pass a final order in accordance with law and place a copy of the said order on the record.
3. It is relevant to mention at this stage that one Ketan Parekh, his brother Kartik K. Parekh and his seven companies including Classic Credit Ltd. were involved in a securities market scam in the year 2001 and the Board found that they had all rigged the market in a big way and executed fictitious, circular and non-genuine transactions by distorting the exchange mechanism with a view to artificially increase the trading volumes in the scrips of some of the Companies with which they dealt. By a detailed order dated 12.12.2003 passed by the Board they were all debarred from associating with the securities market for a period of 14 years. They had also been prohibited from buying, selling or dealing in securities in any manner directly or indirectly. This order has been recently upheld by this Tribunal on 14.7.2006 holding that if Ketan Parekh and his entities are allowed to continue with their operations they would pose a serious threat to the integrity of the securities market and endanger the interests of the investors.
4. In pursuance to the directions issued by this Tribunal on December 21, 2006, the Board issued to the appellant a show cause notice dated January 5, 2006 alleging that the appellant prima facie did not satisfy the criteria of fit and proper person in view of the close links between the Dubai Co. and the UK Co. through Dharmesh Doshi and the aforesaid Ketan Parekh. It was also alleged that in order to circumvent the prohibitions imposed on Ketan Parekh and his related entities, a new entity had been incorporated in September 2003 by the name of Jermyn Capital LLC for dealing in the Indian securities market. The Board was also of the view that because of the links between the Dubai Co. and Dharmesh Doshi/ Ketan Parekh and in order to ensure that Ketan Parekh related entities do not access the Indian stock market directly or indirectly, it was necessary to issue urgent orders to restrain the Dubai Co. from accessing the securities market to safeguard the interest of the investors. It was called upon to show cause why it should not be restrained from accessing the capital market. The appellant filed its detailed reply denying all the allegations. The Board has ordered detailed investigations under Section 11C of the Act which are still pending. On a consideration of the material that the Board could collect pending final investigations it found prima facie that the appellant did not satisfy the criteria of fit and proper person. The Board also found that investigations were being conducted by other intelligence agencies and that the CBI had launched prosecution against Dharmesh Doshi, Ketan Parekh and several others including Triumph Internationals Finance (India) Ltd. (for short TIFIL) in the Court of Chief Metropolitan Magistrate, Ahmedabad under Sections 120-B, 409 and 420 IPC. Since the investigations ordered by the Board and those conducted by other investigating agencies are still pending, the Board has not passed a final order and instead by its order dated 13.1.2006 restrained the appellant as an interim measure from accessing the capital market pending the conclusion of the investigations. It is against this order that the present appeal has been filed.
5. We have heard the learned senior counsel for the parties and are of the view that the impugned order deserves to be upheld. It is admitted by the appellant that the UK Co. is its associate. It is also not in dispute that the UK Co. has five directors two of whom are directors of the Dubai Co. as well. Andrews and Mihir D. Kapadia are the common directors. 100% shares in the UK Co. are owned by Andrews alone and Dharmesh Doshi is the executive director of the UK Co. It is further admitted by all concerned that Andrews who owns 100% shares in the UK Co. has also contributed to the extent of 40% in the Dubai Co. and he is the common Chairman of the two companies. While he is managing the Dubai Co., he has entrusted the management of his UK Co. to Dharmesh Doshi, the executive director. It is common ground between the parties that Dharmesh Doshi has been assigned the vital functions to perform in the UK Co. after seeking approval from the Financial Services Authority (FSA) which is the market regulator in UK. It is quite legitimate to infer from the aforesaid admitted facts that Andrews and Dharmesh Doshi are extremely close to each other and that Andrews has full confidence in Dharmesh Doshi otherwise he would not have entrusted to him the management of his company in UK.
6. There is yet another admitted fact which establishes close proximity between Andrews and Dharmesh Doshi. The UK Co. was formerly known as Triumph Securities UK Plc which was a 100% subsidiary of TIFIL. Dharmesh Doshi is the managing director of TIFIL and also of Triumph Securities Plc. Ketan Parekh and his brother Kartik K. Parekh were both directors on the Board of Directors of TIFIL along with Dharmesh Doshi. After the securities market scam was discovered in the year 2001, the Board by its interim orders dated 4.4.2001 and 10.4.2001 debarred Ketan Parekh and Kartik K. Parekh and their stock broking entities including TIFIL from undertaking any business as a stock broker in the market. Thereafter TIFIL sold in March 2002 its 100% shareholding in Triumph Securities UK Plc to Andrews who then changed the name of this company from Triumph Securities UK Plc to Jermyn Capital Partners Plc the UK Co. in June 2002. On purchasing the UK Co. from TIFIL, Andrews retained Dharmesh Doshi and made him the executive director though he was the managing director prior to its takeover by Andrews obviously because he had complete confidence in him. Close association between Andrews and Dharmesh Doshi, thus, stands established on the aforesaid facts which are not in dispute. It is relevant to mention here that TIFIL was a registered broker with the Board and its registration certificate stands cancelled by order dated 16.5.2002 and its certificate of registration as a merchant banker has not been renewed since the year 2003.
7. We shall now examine whether there is any direct link or association between Dharmesh Doshi and Ketan Parekh who, admittedly, has been held as a scamster by the Board and has been debarred from accessing the securities market for a period of 14 years which finding has been upheld in appeal. It is true that the Board has not been able to collect any direct evidence showing a link between the two but in our opinion there is enough material on the record to show there is closeness between them which in turn would adversely affect the reputation of not only Dharmesh Doshi but also of the appellant. There is on record a charge sheet which the CBI has filed in the Court of Chief Metropolitan Magistrate, Ahmedabad against Dharmesh Doshi, Ketan Parekh and several others under Sections 405, 406, 408, 409, 420 and 120B IPC and Section 35(a) of Banking Regulation Act in which it is alleged that Dharmesh Doshi, Ketan Parekh and several others were share and stock brokers and were maintaining their accounts with Madhavpura Merchantile Co-operative Bank, Ahmedabad (for short the Bank). They were allowed overdraw facilities and it is alleged that they defrauded the Bank in connivance with some of its directors and caused undue pecuniary advantage to themselves. It is also the case of the CBI that out of 19 accounts opened with the Bank by the accused, 10 were controlled by Ketan Parekh and that he was the major beneficiary of the conspiracy. It is also stated in the charge sheet that Dharmesh Doshi through his company TIFIL transferred the overdrawals in its account to the account of Classic Credit Ltd. of Ketan Parekh. The accused have been charged with the offence of cheating and criminal conspiracy. The matter is pending before the Chief Judicial Magistrate in which the process has been issued to the accused. Dharmesh Doshi is absconding and has not appeared though Ketan Parekh was arrested in this case and subsequently released on bail. Admittedly, Dharmesh Doshi is living in England and is looking after the affairs of the UK Co. which is one of the intermediaries of the securities market in England. Dharmesh Doshi holds an Indian passport which, according to the file as produced by the Board during the course of the hearing, indicates that it has been revoked. The Board has also filed a criminal complaint in the Court of Additional Chief Metropolitan Magistrate, Mumbai for the violations of Regulation 7 of the Securities and Exchange Board of India (Prohibition of Fraudulent & Unfair Trade Practices relating to Securities Market) Regulations, 1995. TIFIL, Dharmesh Doshi and Ketan Parekh are co-accused in this complaint as well along with others. The complaint is pending in the Court since July 2004. Not only this, the Enforcement Directorate has found the directors of TIFIL viz. Dharmesh Doshi, Ketan Parekh and others to have violated the provisions of Sections 3(a) and 10(6) of the Foreign Exchange Management Act, 1999 (FEMA) read with Regulations 6(1) of Foreign Exchange Management (Realization, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 in as much as they together misutilised 3,50,000 US $ in contravention of the permission granted by the Reserve Bank of India and monetary penalties have been imposed on them. This fact is not disputed by the appellant.
8. From the aforesaid facts, what stands established is that Andrews who is carrying on the operations on behalf of the Dubai Co. in the Indian securities market is closely associated with Dharmesh Doshi, who in turn appears to be a close associate of Ketan Parekh who has been debarred from accessing the capital market. Dharmesh Doshi and Ketan Parekh are co-accused in two criminal cases which are pending against them and that Dharmesh Doshi is absconding. They have also been fined for violating the provisions of FEMA. The question that arises for our consideration is whether in this background could the appellant be said to be a fit and proper person. The criteria for fit and proper person as set out in Regulation 3 of the Regulations reads as under:
3. (1) For the purpose of determining as to whether an applicant or the intermediary seeking registration under any one or more of the relevant regulations is a fit and proper person, the Board may take account of any consideration as it deems fit, including but not limited to the following criteria
(a) financial integrity;
(b) absence of convictions or civil liabilities;
(c) competence;
(d) good reputation and character;
(e) efficiency and honesty; and
(f) absence of any disqualification to act as an intermediary as stipulated in these regulations.
(2) A person shall not be considered as a" fit and proper person" for the purpose of grant or renewal of certificate to act as an intermediary or to continue to act as an intermediary under any one or more of the relevant regulations, if he incurs any of the following disqualifications -
(a) the applicant or the intermediary, as the case may be or its whole time director or managing partner has been convicted by a Court for any offence involving moral turpitude, economic offence, securities laws or fraud;
(b) an order for winding up has been passed against the applicant or the intermediary;
(c) the applicant or the intermediary, or its whole time director, or managing partner has been declared insolvent and has not been discharged;
(d) an order, other than an order of suspension of certificate of registration as an intermediary, restraining, prohibiting or debarring the applicant or the intermediary, or its whole time director or managing partner from dealing in securities in the capital market or from accessing the capital market has been passed by the Board or any other regulatory authority and a period of three years from the date of the expiry of the period specified in the order has not elapsed;
(e) an order canceling the certificate of registration of the applicant or the intermediary has been passed by the Board on the ground of its indulging in insider trading, fraudulent and unfair trade practices or market manipulation and a period of three years from the date of the order has not elapsed;
(f) an order withdrawing or refusing to grant any license / approval to the applicant or the intermediary, or its whole time director or managing partner which has a bearing on the capital market, has been passed by the Board or any other regulatory authority and a period of three years from the date of the order has not elapsed;
Provided that the Board may for reasons to be recorded in writing, allow the applicant or the intermediary, to seek registration before the lapse of three years as specified in Clauses (d), (e) and (f).
(g) the applicant or the intermediary, is financially not sound;
(h) any other reason, to be recorded in writing by the Board, which in the opinion of the Board, renders such applicant or the intermediary, or its whole time director or managing partner unfit to operate in the capital market.
9. A reading of the aforesaid provisions of the Regulations makes it abundantly clear that the concept of a fit and proper person has a very wide amplitude as the name fit and proper person itself suggests. The Board can take into account any consideration as it deems fit for the purpose of determining whether an applicant or an intermediary seeking registration is a fit and proper person or not. The framers of the Regulations have consciously given such wide powers because of their concern to keep the market clean and free from undesirable elements. It can take into account the financial integrity of the applicant and its competence. Absence of convictions or civil liabilities would be another relevant consideration which could weigh with the Board. Good reputation and character of the applicant is a very material consideration which must necessarily weigh in the mind of the Board in this regard. Reputation is what others perceive of you. In other words, it is the subjective opinion or impression of others about a person and that, according to the Regulations, has to be good. This impression or opinion is generally formed on the basis of the association he has with others and/or on the basis of his past conduct. A person is known by the company he keeps. In the very nature of things, there cannot be any direct evidence in regard to the reputation of a person whether he be an individual or a body corporate. In the case of a body corporate or a firm, the reputation of its whole time director(s) or managing partner(s) would come into focus. The Board as a regulator has been assigned a statutory duty to protect the integrity of the securities market and also interest of investors in securities apart from promoting the development of and regulating the market by such measures as it may think fit. It is in the discharge of this statutory obligation that the Board has framed the Regulations with a view to keep the market place safe for the investors to invest by keeping the undesirable elements out. The Regulations apply across to all sets of regulations and all intermediaries of the securities market including those who associate themselves with the market and they all have to satisfy the criteria of fit and proper person before they could be registered under any of the relevant regulations and this criteria they must continue to satisfy through out the period of validity of their registration and through out the period they associate with the market. The purpose of the Regulations is to achieve the aforesaid objects and make the securities market a safe place to invest. One bad element can, not only pollute the market but can play havoc with it which could be detrimental to the interests of the innocent investors. In this background, the Board may, in a given case, be justified in keeping a doubtful character or an undesirable element out from the market rather than running the risk of allowing the market to be polluted. We may hasten to add here that when the Board decides to debar an entity from accessing the capital market on the ground that he/it is not a fit and proper person it must have some reasonable basis for saying so. The Board cannot give the entity a bad name and debar it. When such an action of the Board is brought to challenge, it (the Board) will have to show the material on the basis of which it concluded that the entity concerned was not a fit and proper person or that it did not enjoy a good reputation in the securities market. The basis of the action will have to be judged from the point of view of a reasonable and prudent man. In other words, the test would be what a prudent man concerned with the securities market thinks of the entity. In the instant case we are satisfied that the Board was justified in debarring the appellant as a temporary measure pending final investigations and keeping it out of the market by not allowing it to access the same because of its close association with Dharmesh Doshi and Ketan Parekh who, in the perception of the Board and in our view rightly, do not enjoy good reputation in the context of the securities market. This association, in the circumstances of the case, would be enough to hold that the appellant is not a fit and proper person.
10. To sum up, Andrews who is running the show in India on behalf of the appellant is a close associate of Dharmesh Doshi who is the managing director of TIFIL which has been debarred to function as a broker in the Indian securities market. Dharmesh Doshi also appears to be a close associate of Ketan Parekh as well as it appears from the charge sheet which CBI has filed against Dharmesh Doshi and Ketan Parekh. CBI is a premier investigating agency in the country and therefore the Board on noticing the allegations levelled against Dharmesh Doshi and Ketan Parekh in the charge sheet could have perceived as a prudent person that they do not enjoy a good reputation which is very important for any intermediary or person associated with the securities market to have before he/it could be held to be a fit and proper person. We have already held earlier that Andrews is a very close associate of Dharmesh Doshi. Because of this business/professional association it is legitimate to infer that Andrews too does not enjoy a good reputation. It is interesting to note that Dharmesh Doshi has knowledge and experience of the securities market in India where as Andrews who is a British national is managing the operations of the Dubai Co. in India and he has no such experience. It is paradoxical that Andrews has deputed Dharmesh Doshi in England to manage the operations of the UK Co. there where he may or may not be having enough knowledge of the market and is himself managing the operations from Dubai in India where he has no knowledge/experience. There appears to be some hidden plan and may be this has been done with a view to avoid regulatory detection. The learned senior counsel appearing for the appellant was right in contending that there was no material on the record to show that Ketan Parekh or Dharmesh Doshi were actually influencing the operations in India. That may be so, but what we are required to see at this stage is whether the applicant represented by Andrews enjoys a good reputation or not. As already observed earlier, his close association and links with Dharmesh Doshi and through him with Ketan Parekh stand established prima facie. The suspicion in the mind of the Board is reasonably strong and could have led any prudent person to believe that Andrews, Doshi and Ketan Parekh are hand in glove with each other and for this reason none of them enjoys a good reputation in the context of the Indian securities market. This conclusion cannot be said to be far fetched as was sought to be contended by the learned senior counsel for the appellant. Moreover, we cannot lose sight of the fact that in view of the policies pursued by the Government of India, the Board as a regulator would, in the normal course, encourage foreign investors to come and invest in the Indian securities market and unless it has good reasons it would not deny access to any such investor. Now that the Dubai Co. has been denied access which is an exception rather than the general rule, we have to be careful in scrutinizing the impugned order and unless it is shown to be wholly arbitrary, we may not be justified in interfering.
11. We may now refer to the two judgements cited by the learned senior counsel for the appellant in support of the plea that the appellant in the circumstances of the case is a fit and proper person and could not be debarred from accessing the securities market. In Singh and Kaur v. Kirkcaldy District Licensing Board 1988 SLT 286, alcoholic liquor was sold to a youth in the premises of which S. was the licence holder. The licence was transferred to a firm in which K. & S. were partners. S. was later convicted for selling alcohol to the youth. The Licensing Board suspended the licence for six months on the ground that Singh was not a fit and proper person. In appeal the decision was reversed which order was upheld by the Court of Session. The argument that merely because one partner was unfit to hold a licence would not make the partnership unfit was accepted particularly because K. was the person who was responsible for the day to day running of the premises. This case in our view does not advance the cause of the appellant because it is not clear as to whether there was a criteria for fit and proper person similar to the one that has been prescribed in the Regulations before us. Moreover, Andrews and Dharmesh Doshi are the ones carrying on the day to day affairs of the Dubai Co. and the UK Co. In R v. Crown Court at Knightsbridge (1981) 2 All ER 417, three companies were running casinos in London and it was found that they operated in a manner which contravened the Gaming Act, 1968. The police and the gaming board applied for the cancellation of their licences. The licences were cancelled holding that they were not fit and proper persons to hold the same. The companies filed an appeal to the Crown Court. During the pendency of the appeal the companies were completely restructured with new shareholders and management. The appeal was dismissed and it was observed that the question whether the companies were fit and proper person could only be judged by their past conduct. A further appeal was taken to the Divisional Court. The appeal was allowed holding that the companies were at the time of the hearing of appeal fit and proper persons to hold a gaming licence and that the Court below ought to have taken into account the restructuring of the companies. The ratio of this case has no applicability to the facts of the case before us. We may mention that Shri Janak Dwarkadas, learned senior counsel for the appellant had cited some more decisions of the Courts in India including those of the Supreme Court. We have carefully gone through those decisions and find that there is no quarrel with the law laid down therein. We have taken note of the law laid down in those cases and it is on that basis that we have reached our conclusions. It is, therefore, not necessary to discuss those cases separately.
12. In view of our findings recorded hereinabove we uphold the impugned order and dismiss the appeal leaving the parties to bear their own costs.