Thursday, November 13, 2014

SEBI Informal Guidance: Scope of Prohibition

[The following post is contributed by Supreme Waskar, partner at Sterling Associates, Mumbai]

Almondz Global Securities Limited (“AGSL”) is a stock broker and merchant banker registered with SEBI. On March 21, 2014 SEBI had prohibited AGSL from taking up any new assignment or involvement in any new issue of capital including an IPO, follow on issue etc, from the securities market in any manner whatsoever for a period of five years and in addition to this, on April 11, 2014 SEBI had also suspended certificate of registration of AGSL, as a merchant banker, for a period of 6 months (“Prohibition”). 

Further, AGSL through letters dated July 07, 2014 and subsequent clarifications thereto had requested SEBI for its informal guidance in form of interpretative letter (by virtue of interpretive letter, concerned department of SEBI gives an interpretation of any of the provisions of the SEBI Act, rules, etc., thereunder or of any Act being administered by SEBI.) on following issues:

1.         Whether AGSL as a stock broker, can handle any issue of debt securities offered on private placement basis;

2.         Whether regulation 4(3) of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 also applies to issue of debt securities on private placement basis: and    

3.         Whether any stock broker can handle issue of debt securities offered on private placement basis.

Without necessarily agreeing, SEBI took a view that firstly SCRR, 1957 prohibits a stock broker from being engaged as principal or employee in any business other than that of securities except as a broker or agent not involving any personal financial liability. Secondly the activities specified by AGSL i.e. handling issue of debt securities offered on private placement are in nature of activities carried out by a merchant banker and can be performed only by a registered merchant banker, therefore AGSL (stock broker) cannot perform the above activity. SEBI’s intention is clear from this interpretative letter that “one cannot seek to achieve some purpose which it is otherwise not competent to perform.”

Informal guidance is advance guidance on the interpretation of the provisions of SEBI Act, Rules, Regulations, and Circulars. It is a formal scheme launched by SEBI in the name of providing informal guidance. As the name suggests the guidance provided is 'informal' and is not to be construed as a conclusive decision of any question of law or fact by SEBI. SEBI’s informal guidance are views of SEBI, neither obligatory nor authority of law. Moreover, such letter giving informal guidance cannot even be construed as an order of the Board under section 15T of the SEBI Act and as such will not be appealable. However, one may always have a different view than SEBI’s view in its informal guidance.

The issue raised in this matter is whether the prohibition restricts AGSL from handling of issue debt securities on private placement basis in the context of SEBI (Issue and Listing of Debt Securities) Regulations, 2008 which do not require appointment of merchant banker for handling of issue debt securities on private placement basis, which is answered negatively by SEBI.

- Supreme Waskar


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