Securities Appellate Tribunal
Jignesh Shah vs Sebi on 15 April, 2021
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved:22.2.2021
Date of Decision:15.4.2021
Misc. Application No.538 of 2020
And
Appeal No.500 of 2020
63 Moons Technologies Ltd.
Registered Office
Shakti Tower-1, 7th Floor, 766, Anna
Salai, Thousand Lights,
Chennai 600002, India.
Corporate Office
FT Tower, CTS 256 and 257,
Suren Road, Chakala, Andheri (West),
Mumbai - 400093. ...Appellants
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
G Block, Bandra Kurla Complex,
Bandra (E), Mumbai-400051. ...Respondent
Mr. Somasekhar Sundaresan, Advocate with Ms.
Priyanka Vora, Mr. Nooruddin Dhilla, Mr. Zubin
Narielwala and Mr. Ashish Kakade Advocates i/b Hariani
and Co. for the Appellant.
Mr. Shiraz Rustomjee, Senior Advocate with Ms. Shreya
Parikh, Mr. Abhiraj Arora and Mr. Karthik Narayan,
Advocates i/b. ELP for the Respondent.
2
With
Appeal No.55 of 2021
Jignesh Shah,
R-Square, Plot No.29,
Jai Hind Society, N.S. Road No.12,
JPVD, Vile Parle West, Mumbai-400049. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A,
G Block, Bandra Kurla Complex,
Bandra East, Mumbai-400051. ...Respondent
Mr. Vikram Nankani, Senior Advocate with Mr. Arvind
L., Mr. Joby Mathew and Mr. Anshuman Sugla,
Advocates i/b. Joby Mathew and Associates for the
Appellants.
Mr. Shiraz Rustomjee, Senior Advocate with Ms. Shreya
Parikh, Mr. Abhiraj Arora and Mr. Karthik Narayan,
Advocates i/b. ELP for the Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Justice M.T. Joshi, Judicial Member
Per: Justice Tarun Agarwala, Presiding Officer
1.Two appeals have been filed questioning the order dated 3rd December, 2020 passed by the Executive Director rejecting the application for renewal granted under Securities and Exchange Board of India (STP 3 Centralised Hub and STP Service Providers) Guidelines, 2004 (hereinafter referred to as 'Guidelines, 2004) and are being decided together.
2. The appellant 63 Moons Technologies Ltd. was formerly known as Financial Technologies (India) Limited ('FTIL' for short) and is a listed Company. The appellant Jignesh Shah in appeal no.55 of 2021 is the promoter, founder and Chairman Emeritus of 63 Moons Technologies Ltd.
3. The Company is engaged in the business of providing software and software related services. One of the software related services is called "Straight Through Processing" (STP) service provider which enables a comprehensive processing of transactions from the start to the end thereby minimizing errors that occurs through human intervention. It is alleged that the appellant 63 Moons Technologies Ltd is a pioneer of such automation of trade processing in India and has been providing STP services for a long time. 4
4. The respondent granted recognition on 30th June, 2004 for a period of three years under the guidelines of 2004. This recognition/approval was extended from time to time for a period of three years each by orders of the respondent dated 8th May, 2008, 23rd June, 2010 and 23rd May, 2013. The last such approval was valid till 29th June, 2016. Prior to the expiry of the said period the Company applied vide letter/application dated 25th April, 2016 for renewal/approval. This application was processed and certain queries were raised by the respondent but thereafter no steps were taken to pass any appropriate order on it as a result even after the expiry of the period of recognition/ approval the appellant Company continued to carry on its business.
5. On 17th April, 2018, the guidelines of 2004 were amended and clause (iii) was inserted in clause 3(2) of the guidelines. By this amendment the criteria of 'fit and proper person' was brought into existence for grant of approval under the guidelines of 2004. 5
6. Based on this circular, a show cause notice was issued to the Company on 12th June, 2018 to show cause as to why the application for recognition of registration as STP provider should not be rejected in terms of clause 3(2)(iii) and 5(1) of the Guidelines, 2004 on the ground that its founder and Chairman does not satisfy the criteria of 'fit and proper person' as per Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (hereinafter referred to as the Intermediaries Regulations), namely,
(i) that Forward Markets Commission ('FMC' for short) by an order dated 17th December, 2013 has held that the Company and Jignesh Shah are not 'fit and proper person' and continues to be a shareholder of more than 2% of the paid-up equity capital of Multi Commodity Exchange ('MCX' for short);
(ii) SEBI vide order dated 19th March, 2014 held that the appellant Company was not a 'fit and proper person' under Regulation 20(1)(b)(v) read 6 with Regulation 19 of the Securities Contracts (Regulation) (Stock Exchange and Clearing Corporation) Regulations, 2012 (hereinafter referred to as 'SECC Regulations'), which order was upheld by this Tribunal on 9th July, 2014;
(iii) Jignesh Shah also does not satisfy the criteria of 'integrity, reputation and character' in view of his arrest by the Enforcement Department on 12th July, 2016 for suspected money laundering; and
(iv) The Economic Offence Wing of the Mumbai Police attached the property of Jignesh Shah worth Rs.200 crores on 18th July, 2016.
7. In response to the show cause notice, the Company filed its reply and was given a personal hearing on 29th October, 2020 and, thereafter, the impugned order was passed on 3rd December, 2020 holding that the appellant is not a 'fit and proper person' under the guidelines of 2004 and that the amendment made in the guidelines would be partly applicable for the period 17th April, 2018 onwards till 29th June, 2019. The 7 authority further held that Jignesh Shah does not carry a good reputation or character and that his integrity is also doubtful. The authority, thus, held that the application for renewal of the registration cannot be granted.
8. We have heard Shri Mr. Somasekhar Sundaresan, Advocate of the appellant in the appeal of 63 Moons Technologies Ltd. and Shri Vikram Nankani, Senior Advocate in the appeal of Jignesh Shah and Shri Shiraz Rustomjee, Senior Advocate for the respondent.
9. Before we proceed further it would be appropriate to take a look at the guidelines dated 26th May, 2014. For facility the entire guidelines is extracted hereunder:
"CHIEF GENERAL MANAGER DERIVATIVES AND NEW PRODUCTS DEPARTMENT DNPD/Cir-24/04 May 26, 2004 All Exchanges, Clearing Corporation/Clearing House, Depositories, Custodians, AMFI, STP service providers and STP Centralized Hub Sub: Straight Through Processing Service in the Indian Securities Market Dear Sir, 8
1) This is in continuation to our previous circular no. DNPD/Cir-9/04 dated February 3, 2004 & circular no. SEBI/MRD/SE/Cir-11/2004 dated February 25, 2004 streamlining the issuance of electronic contract notes as a legal document like the physical contract note for the equity and debt segments, circular no. DNPD/Cir-22/2004 dated April 1, 2004 mandating the use of the Straight Through Processing (STP) system for all institutional trades w. e. f. July 1, 2004 and circular no. DNPD/Cir-23/04 dated April 27, 2004 prescribing the detailed system flow of the STP system.
2) SEBI in order to regulate the STP service is hereby issuing the SEBI (STP centralised hub and STP service providers) Guidelines, 2004 (herein referred to as "STP Guidelines") which also prescribes the model agreement between the STP centralised hub and the STP service providers.
3) The STP guidelines prescribes the eligibility criteria and conditions of approval for the STP centralised hub and the STP service providers, obligations and responsibilities of the STP centralised hub and the STP service providers and code of conduct for the STP service providers. The STP centralised hub and the STP service providers shall abide by these Guidelines.
4) To prescribe contractual obligations between the STP centralised hub and the STP service providers and to facilitate standardisation of service, a model agreement between the STP centralised hub and the STP service providers has also been prescribed by SEBI and is prescribed as Schedule II of the STP Guidelines.
The agreement between the STP centralised hub 9 and the STP service provider shall include the provisions included in the model agreement.
5) This circular is being issued in exercise of powers conferred by section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with section 10 of the Securities Contracts(regulation) Act 1956, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
Yours sincerely, N. PARAKH Encl.
1) SEBI (STP centralised hub and STP service providers) Guidelines, 2004.
SECURITIES AND EXCHANGE BOARD OF INDIA (STP CENTRALISED HUB AND STP SERVICE PROVIDERS) GUIDELINES, 2004
1) PRELIMINARY (1) These Guidelines shall be called the Securities and Exchange Board of India (STP Centralised Hub and STP Service Providers) Guidelines, 2004.
(2) These Guidelines are being issued under section 11 of the Securities and Exchange Board of India Act, 1992 to promote the development of the securities market.
10(3) They shall come into force on 26th day of May, 2004.
2) DEFINITIONS (1) In these Guidelines, unless the context otherwise requires:-
(a) "Act" means the Securities and Exchange Board of India Act, 1992;
(b) "Certifying Authority" means a certifying authority who has been granted a license under section 24 of the Information Technology Act, 2000;
(c) "SEBI" means the Securities and Exchange Board of India established under Section 3 of the Act;
(d) "STP" means straight through processing;
(e) "STP centralised hub" means an infrastructure set-up by a person or entity for the purpose of rendering STP service by providing a platform for communication between different STP service providers;
(f) "STP message" means and includes all the messages for electronic trade processing with a common messaging standard as may be defined by SEBI from time to time;
(g) "STP service" means the setting up and maintaining of infrastructure to create an electronic communication network to facilitate information exchange with respect to securities market transactions between various market participants from the stage of trade initiation to 11 final settlement through a STP system flow as may be determined by SEBI from time to time;
(h) "STP service provider" means a person or entity providing STP service to STP users to the extent of conveying messages between a STP user and the STP centralised hub and/or between two STP users;
(i) "STP user" means all the users of the STP service and includes such users as are stipulated by SEBI; and,
(j) "TRAI" means the Telecom Regulatory Authority of India established under the Telecom Regulatory Authority of India Act, 1997.
(2) Words and expressions used and not defined in these Guidelines, but defined in the Act or in the Securities Contracts (Regulation) Act, 1956 or in any rules or regulations made thereunder, shall have the meanings respectively assigned to them in such Acts, rules or regulations.
3) ELIGIBILITY CRITERIA FOR STP CENTRALISED HUB AND STP SERVICE PROVIDERS (1) No person shall act as an STP centralised hub or a STP Service provider unless it obtains approval from SEBI to provide such service.
(2) For the grant of a certificate of approval SEBI shall take into account the following:
i. whether the applicant is a person or entity with a minimum networth as may be prescribed from time to time.12
ii. whether the applicant has adequate infrastructure facilities setup in India like office space, equipment and manpower with adequate experience in dealing in securities market and adequate expertise in providing necessary services and software solutions.
4) OBLIGATIONS AND RESPONSIBILITIES OF STP CENTRALISED HUB (1) The STP centralised hub shall comply with the following:-
i. The STP centralised hub shall at all times comply with the requirement of eligibility criteria, specified by SEBI.
ii. The STP centralised hub shall abide by all the provisions of the Act, Rules, Regulations, Guidelines, Resolutions, Notifications, Directions, Circular, etc. as may be issued by the Government of India/TRAI/Department of Telecommunications and SEBI from time to time as may be applicable to the STP centralised hub.
iii. The STP centralised hub shall obtain such approval/s from such authorities as may be necessary to function as a centralised hub.
iv. The STP centralised hub shall obtain a digital signature certificate from a Certifying Authority and shall ensure that such digital signature certificate is valid and in force at all times. A copy of the certificate shall be submitted to all the recognized STP service providers.
v. The STP centralised hub shall deliver a consistent and secure communication platform 13 and shall establish continuous connectivity with all the recognized STP service providers to the best of its ability.
vi. The STP centralised hub shall verify the digital signature certificate furnished by the STP Service Provider before connecting it to the STP centralized hub.
vii. The STP centralised hub shall confirm authenticity, integrity and non-reputability of all messages submitted by the STP Service Provider.
viii. The STP centralised hub shall ensure that the message received from the STP service provider is in the specified messaging standard.
ix. The STP centralised hub shall promptly deliver the messages to the recipient STP service provider and shall ensure that only the intended STP Service Provider receives the message.
x. The STP centralised hub shall digitally sign all messages sent to the STP service provider.
xi. The STP centralised hub shall maintain a directory of all STP service providers and STP users.
xii. The STP centralised hub shall maintain a complete record of the flow of messages processed. The records of the STP centralised hub shall be open for inspection by SEBI or any other person duly authorised by SEBI for this purpose.14
xiii. The STP centralised hub shall not modify / amend the communication protocol without consulting all the approved STP service providers.
xiv. The STP centralised hub shall ensure that the message is not misused or tampered with while in its possession.
xv. The STP centralised hub shall maintain confidentiality of information about its users and shall not divulge the same to other clients, the press or any other person except in accordance with law or as per the directions of any court of law or of SEBI.
xvi. The STP centralised hub may charge reasonable fees from the STP service providers.
5) OBLIGATIONS AND RESPONSIBILITIES OF STP SERVICE PROVIDER (1) The STP Service provider shall comply with the following:-
i. The STP service provider shall at all times comply with the requirement of eligibility criteria, specified by SEBI.
ii. The STP service provider shall establish connectivity with the STP centralised hub before providing STP service to its users.
iii. The STP service provider shall provide the necessary details of the STP users connected with it and all its details to the STP centralised hub for the purpose of creating and maintaining a directory of STP service providers and STP users.15
iv. The STP service provider shall comply with the minimum specifications specified by the STP centralised hub and as may be mutually agreed upon.
v. The STP service provider shall abide by the service standards as may be specified by SEBI and/or the STP centralised hub in consultation with the STP service providers.
vi. The STP Service Provider shall obtain a digital signature certificate from a Certifying Authority and submit a copy of the Certificate to the STP centralised hub.
vii. The STP Service Provider shall ensure that the digital signature certificate is valid and in force.
viii. The STP service providers shall deliver a consistent and secure communication platform and shall establish continuous connectivity with the STP centralised hub to the best of its ability.
ix. The STP service provider shall ensure that the message sent to the STP centralised hub is in the prescribed messaging standard.
x. The STP service provider shall verify the digital signature certificate furnished by the STP centralised hub before connecting itself to the STP centralised hub.
xi. The STP service provider shall confirm authenticity, integrity and non-repudiability of all messages submitted to the STP centralised hub. The STP service provider 16 shall keep complete track of the flow of messages for record and audit.
xii. The STP service providers may charge reasonable fees from the STP users.
xiii. The STP service provider shall exchange messages between other STP service providers only through the STP centralised hub. Provided that in force majuere measures or any other circumstances due to which the connectivity of the STP centralised hub is not available, the STP service providers after mutual discussion may exchange messages directly among themselves for such period.
xiv. The STP service providers shall digitally sign all messages sent from it to the STP centralised hub.
xv. The STP service provider shall enter into an agreement with all its STP users which shall also specify the fees payable by the STP user for the services.
xvi. The STP service provider shall maintain a directory of the STP users connected to it.
xvii. The STP service provider shall maintain a complete record of the flow of messages handled. The records of the STP service provider shall be open for inspection by SEBI or any other person duly authorised by SEBI for this purpose.
xviii. The STP Service Provider shall verify the Digital signature on the message of the 17 STP user connected to the STP Service Provider.
xix. The STP service provider shall ensure that the message from the STP user is in the specified messaging format.
xx. The STP service provider shall promptly deliver messages to and from the STP user.
xxi. In respect of inter STP service provider messages, the STP service provider shall perform all actions to the best of its ability in the same manner, diligence, speed and with all checks and balances as if the message is to be delivered / received by the same service provider.
(2) Nothing in these guidelines shall exempt the STP service provider from discharging any obligations placed on it by any law, regulations and guidelines.
6) CONDITIONS OF APPROVAL FOR STP CENTRALISED HUB AND STP SERVICE PROVIDERS (1) Terms of approval:
i. The approval by SEBI shall be for an initial period of five years for STP centralised hub and for a period of three years for STP service providers and must be renewed periodically.
ii. The STP centralised hub and STP service provider must ensure continuous validity of approval by SEBI in order to function as a STP service provider.18
iii. The Board shall have the right to suspend/ cancel the approval of the STP centralised hub and/or STP service provider in case of violation of the terms of the guidelines.
7) CODE OF CONDUCT FOR STP SERVICE PROVIDERS Every STP service provider shall abide by the Code of Conduct as specified in Schedule I.
8) MODEL AGREEMENT The STP centralised hub shall enter into an agreement with every STP service provider on the lines of the Model Agreement given in Schedule II."
10. The guidelines provide a mechanism to regulate the STP services. The guidelines prescribes the eligibility criteria and conditions for approval for the STP service providers which has been given in clause 3, namely, that the applicant should have a net worth and adequate infrastructure. Clause 5 of the guidelines provides various obligations which are required to be followed by an STP provider. Clause 6 gives conditions for grant of approval and also gives power to the authority to suspend or cancel the approval so granted if there is violation of the terms of the guidelines. 19
11. The guidelines were amended on 17th April, 2018 and clause (iii) was inserted in 3(2). Clause 3(2) is as follows:
"Whether the applicant is a 'fit and proper person' based on the criteria specified in Schedule II of the Intermediaries Regulations, 2008.
12. Schelude II of the SEBI Intermediaries Regulations, 2003 is extracted hereunder:-
"SCHEDULE II SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008 (See regulations 7) Criteria for determining a 'fit and proper person' For the purpose of determining as to whether an applicant or the intermediary 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 in relation to the applicant or the intermediary, the principal officer, the director, the promoter and the key management persons by whatever name called -
(a) integrity, reputation and character;
(b) absence of convictions and restraint orders;
(c) competence including financial solvency and networth;20
(d) absence of categorization as a wilful defaulter."
13. In the light of the aforesaid provisions a contention was raised that the amendment made on 17th April, 2018 is prospective in nature and will not apply to the application which had been filed for extension of the approval on 25th April, 2016. It was contended that since the application for approval was filed prior in time, the guidelines which stood on the date of the application is required to be considered and, therefore, the amendment which was made on 17th April, 2018, being prospective, cannot be taken into consideration. It was urged that the finding of the authority that the circular would apply for part period from 17th April, 2018 to 29th June, 2019 is wholly erroneous and cannot be sustained.
14. In this regard, having perused the guidelines and the insertion made in 2018, we are of the opinion that the guidelines are procedural in nature and is not substantive. The procedure for grant of the approval as an STP provider was amended by insertion of clause 21
(iii) on 17th April, 2018. This clause is also procedural and, therefore, such procedure which has been amended would apply to all pending application. Thus, on the date when the guidelines were amended in 2018, the application of the Company for renewal of the registration was pending and, therefore, the guidelines as amended would equally apply to the application of the appellant Company. The contention of the appellant that the amendment is prospective and cannot be taken into consideration is wholly erroneous and cannot be accepted.
15. In Nani Gopal Mitra vs. State of Bihar AIR 1970 SC 1636 the Supreme Court held:
"The effect of the application of this principle is that pending cases although instituted under the old Act but still pending are governed by the new procedure under the amended law, but whatever procedure was correctly adopted and concluded under the old law cannot be opened again for the purpose of applying the new procedure."
16. Section 11B of the SEBI Act was inserted by Act no.9 of 1995 with effect from 25th January, 1995. A question arose as to whether the insertion of Section 22 11B would apply to pending proceedings even though this insertion came into effect from 25th January, 1995. The Supreme Court in SEBI vs. Ajay Agarwal (2010) 3 SCC 765 held:
"Provisions of Section 11-B being procedural in nature can be applied retrospectively. The appellate Tribunal made a manifest error by not appreciating that Section 11-B is procedural in nature. It is a time-honoured principle if the law affects matters of procedure, then prima facie it applies to all actions, pending as well as future."
17. In SEBI vs. Classic Credit Ltd. (2018) 13 SCC 1 the Supreme Court held that procedural amendment are presumed to be retrospective in application, unless the amending statute expressly or impliedly provides otherwise.
18. Thus the authority fell in error in coming to the conclusion that the application of the appellant for extension of approval could be considered as per the amended guidelines for the period of 17th April, 2018 till 29th June, 2019. In our opinion, the entire application as a whole was required to be considered as per the amended guidelines.
23
19. On the issue as to whether the party is a 'fit and proper person' as per Schedule II of the Intermediaries Regulations, 2008 it is clear that in view of the FMC's order as well as the SEBI's order, the Company is not a 'fit and proper person'. Even though SEBI's order was passed under Regulation 20(1)(b)(v) read with Regulation 19 of the SECC Regulations, 2012 nonetheless its principle can always be culled out and applied to the facts of the given case. We find that the provisions relating to 'fit and proper person' criteria as given under the SECC Regulations 2012 or as per the guidelines of 2004 or as per clause (ii)(e) of note 2 of the Guidelines on the Equity Structure of the Nationwide Commodities Exchanges issued under the Forward Market Commission Act are more or less the same with no major distinguishable factors. In this regard, para 15.1 of the FMC's order dated 17th December, 2013 is extracted hereunder:
"15.1.4 Keeping in view the foregoing observations and the facts which reveal misconduct, lack of integrity and unfair practices on the part of FTIL in planning, directing and 24 controlling the activities of its subsidiary company, NSEL, we conclude that FTIL, as the anchor investor in the Multi-Commodity Exchange Ltd., (MCX) does not carry a good reputation and character, record of fairness, integrity or honesty to continue to be a shareholder of the aforesaid regulated exchange. Therefore, in the public interest and in the interest of the Commodities Derivatives Market which is regulated under FCRA, 1952, the Commission holds that Financial Technologies (India) Ltd (FTIL) is not a 'fit and proper person' to continue to be a shareholder of 2% or more of the paid-up equity capital of MCX as prescribed under the guidelines issued by the Government of India for capital structure of commodity exchanges post 5-years of operation.
It is further ordered that neither FTIL, nor any company/entity controlled by it, either directly or indirectly, shall hold any shares in any association/Exchange recognised by the Government or registered by the FMC in excess of the threshold limit of the total paid-up equity capital of such Association/Exchange as prescribed under the commodity exchange guidelines and post 5-year guidelines."
20. The said decision is still in force and has not been set aside by any superior forum. A specific finding has been given that the Company does not carry a good reputation, character, integrity or honesty. We have also perused the orders of FMC as well as of SEBI and we find that there was malafide intention on the part of the promoters of the Company to use the trading 25 platform of its subsidiary companies for illicit gains away from the eyes of the regulator. The Company and its promoters have been found to have committed a massive fraud involving Rs.5,550 crores which has the potential effect of eroding the trust and confidence in the financial market. Such Company is definitely not a 'fit and proper person' as well as its promoter Jignesh Shah. In view of the clear finding it is not necessary to go into any other aspect as argued by the appellants.
21. It was contended that the order passed by FMC dated 17th December, 2013 is only valid for a period of three years and after the expiry of three years it will cease to operate. In this regard, the learned counsel placed reliance on clause (ii)(e) of note 2 of the of the Guidelines on the Equity Structure of the Nationwide Commodities Exchanges. For facility, the said provision is extracted hereunder.
For the purpose of these guidelines, a person shall be deemed to be a fit and proper person if 26
(i) ...
(ii) Such person has not incurred any of the following disqualifications-
(a)...
(b)...
(c)...
(d)...
(e) any other order against the person or any of its whole time directors or managing partners which has a bearing on the commodities market, has been passed by any regulatory authority and a period of three years from the date of the order has not elapsed;
(f)...
22. The submissions of the learned counsel for the appellant is patently misconceived. The aforesaid provision only comes into picture when there is a bar of disqualification. The order passed by any other regulatory authority could have been considered under the FMC guidelines for holding a person as not 'fit and proper person' only if the period of three years from the date of the order has not elapsed. It does not mean that the order passed by FMC declaring a person as not 'fit and proper person' would have a validity period of three years only.
27
23. Shri Nankani, learned senior counsel for the appellant in the connected appeal Jignesh Shah contended that an opportunity of hearing should have granted and that the impugned order is akin to a case of blacklisting. It was contended that where the reputation, integrity and character of appellant Jignesh Shah was under consideration it was essential for the respondent to issue a show cause notice and also to give him an opportunity of hearing. The submission at the outset appears to be attractive but cannot be accepted for the reason that the appellant is the director, founder and Emeritus Chairman of the Company. It is not a case that the appellant was unaware of the proceedings that was initiated against the Company. When the Company in which the appellant Jignesh Shah holds a majority of the shares and still has a say in the functioning of the company, it cannot be said that he was unaware of the proceedings. The application for renewal was filed on behalf of Company and, while considering the reputation, 28 integrity and character as per Schedule II of the Regulation of 2008 it was required to consider the reputation, integrity and character of the shareholders, directors and key managerial person and, in that relationship, the Company was also heard on behalf of the promoters as well. Thus, separate notices or opportunity of hearing was not required to be given individually in this regard. It was sufficient for the respondent to give an opportunity of hearing to the appellant Company which was adequately given. In this regard, we find that both FMC and SEBI in their orders have given a categorical finding that Jignesh Shah is not a 'fit and proper person' and does not have the character, integrity, and reputation. The findings given by the authority in this regard needs no interference by this Tribunal.
24. In this regard, the expression integrity, reputation and character has been examined by this Tribunal in the case of Jermyn Capital LLC vs. SEBI decided on 6th September, 2006 wherein this Tribunal held:- 29
"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 30 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 throughout the period of validity of their registration and throughout 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 cannot 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"31
25. From the aforesaid, it is clear that good reputation and character is a material consideration which is gathered on the basis of the association which the incumbent has with others and/or on the basis of his past conduct. As the saying goes a person is known by the company he keeps. The evidence that has come on record in the instant case clearly indicates that reputation, integrity and character of the appellant Jignesh Shah has been heavily tarnished on account of the massive fraud which he played as is depicted in the FMC's order. Further, Jignesh Shah continues to be the torch bearer of the Company and holds 45% stake as a shareholder. He is virtually controlling the Company and has a significant say in the Company.
26. The purity and integrity of the securities market has to be maintained at all times. It cannot be allowed to be tarnished by unscrupulous persons. Persons of doubtful character or undesirable persons should be kept out of the securities market. There is no place for them. In the instant case, there is sufficient material for the 32 respondent to come to a conclusion that the appellant is not a fit and proper person.
27. We are of the opinion that the concept of integrity, reputation and character is very wide and cannot be given a restrictive meaning. The basic behaviour can be taken into consideration and considering the misconduct and the fraud that was committed by Jignesh Shah in the FMC market is an indicator to the authority to reject the renewal application. We do not find any error in this regard.
28. In this regard, the learned senior counsel Shri Nankani contended that the insertion of clause (iii) on 17th April, 2018 in the guidelines of 2004 was a reference by incorporation and, therefore, the word 'reputation, integrity and character' only applies to the Company and is not applicable upon Jignesh Shah. This contention is totally erroneous. A perusal of the amendment dated 17th April, 2018 makes it clear that the criteria specified in Schedule II of the SEBI Intermediaries Regulations, 2008 would apply to the 33 applicant being a 'fit and proper person'. Schedule II indicates the categories of the applicant and it is not only the Company but also includes the key managerial persons, promoters etc. Thus, Jignesh Shah being a promoter, his reputation, integrity and character was rightly considered in the impugned order.
29. It was urged that in the amendment of 17th April, 2018 only the criteria specified in the IInd Schedule could be considered and not the entire Schedule II. This submission is patently misconceived. We are of the opinion that when an amendment is made and it is a reference by way of incorporation the whole of Schedule II of the SEBI Intermediaries Regulation 2008 is required to be taken into consideration and not in piecemeal.
30. The contention raised by the respondent that the appeal of Jignesh Shah is not maintainable as the order has been passed only against the Company and not against Jignesh Shah is erroneous. Section 15T provides that 'any person aggrieved by an order of 34 SEBI may prefer an appeal to the Tribunal'. In the instant case, the appellant being the founder, promoter and emeritus chairman and holding a substantial portion of the shares of the Company and whose reputation, integrity and character is at stake, is in our opinion, an aggrieved person and has a right to file an appeal. The objection raised by the respondent is rejected.
31. In the light of the aforesaid, we do not find any manifest error in the impugned order. The appeals fail and are dismissed with no order as to costs. Misc. Application no.538 of 2020 is also disposed of accordingly.
32. The authority while rejecting the application for renewal of his registration had found that the Company was providing STP services to 300 brokers, 15 custodians and 170 fund houses. The authority further held that by not giving approval of the renewal application the activities of these market participants would get disrupted due to the refusal to renew the 35 registration which would not be in the interest of the securities market. The authority accordingly allowed the Company to provide necessary services for a period of three months to enable the user of these services to make alternative arrangement. In view of the aforesaid, we allowed this arrangement to continue during the pendency of the appeal after we reserved the judgment. Since we are dismissing the appeal, we permit the appellant Company to provide necessary services till 15th May, 2021. Within a week from today the appellant Company will intimate all the users of such services to make alternate arrangement and intimate them that no further services would be provided by the appellant Company from 15th May, 2021 onwards.
33. In view of the aforesaid, parties shall bear their own costs.
34. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a 36 certified copy of this order could be issued by the registry. In these circumstances, this order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally signed copy sent by fax and/or email.
Justice Tarun Agarwala Presiding Officer Justice M.T. Joshi Judicial Member RAJALA Digitally signed 15.4.2021 by RAJALAKSHMI KSHMI HDate:
NAIR RHN 2021.04.15 H NAIR 18:02:59 +05'30'