Proceeding against IL & FS Financial Services Limited dropped

Proceeding against IL&FS Financial Services Limited dropped

In the Proceeding against Infrastructure Leasing & Financial Services Limited (IFIN/Noticee), under Regulation 28(2) of the Securities And Exchange Board Of India(Intermediaries) Regulations,2008, the Serious Fraud Investigation Office (SFIO) had conducted an investigation into the affairs of IL&FS and its subsidiary companies responsible for the credit crisis.

Accordingly, SFIO had submitted its report to Ministry of Corporate Affairs (MCA) and subsequently, the Report was forwarded to SEBI 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, 1934and the regulations made thereunder, leading to raising of integrity issues in respect of the Noticee.

Consequently , the Designated Authority(DA) appointed by SEBI submitted his report 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.

The Noticee has submitted that pursuant to the proceedings initiated by Union of India acting through the MCA on the grounds inter alia that the erstwhile board of IL&FS had prima facie mismanaged the affairs of IL&FS, the Hon'ble NCLT, Mumbai Branch, suspended the erstwhile board of directors of IL&FS and appointed new directors on the board of IL&FS. 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.

The Noticee has not undertaken any underwriting business since January and therefore, the registration obtained by it under the Underwriters Regulations was never effectively operationalized.

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. 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.

It has been observed, by SEBI in this order, that 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.

It has been ascertained that the fit and proper person requirement shave 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 also reiterated 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.

It has been elucidated 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.