17.In coming to the aforesaid conclusion it is observed by the SAT that wherever the regulations wanted the applicant to produce the Annual Accounts, a specific provision in that regard had been made in the regulations. On the other hand, for the purpose of substantiating the fact that the promoter of the applicant had a net worth of Rs. 100 crores for the previous five years, regulations do not require the Annual Accounts of the promoter to be produced. The regulations read with Form A prescribed that a certificate from the Chartered Accountant should be filed for this purpose. Therefore, it is held that the information sought by the appellant with regard to the additional two years was beyond the scope of the regulations and Form A, hence without jurisdiction.
18.Mr. C.U. Singh, learned senior counsel appearing for the appellant submitted that at this stage, it would not have been necessary to press the appeal on merits, but for the observations made by the SAT that without questioning the veracity of the certificate submitted by the Chartered Accountant, the Board could not have asked for the Annual Accounts of the promoter. He submitted that these observations would seriously curtail the powers of SEBI into requiring the applicant to furnish all relevant information while considering the application for registration as a CRA. For this limited purpose, JUDGMENTlearned senior counsel submitted that it isnecessary for this Court to examine the correctness of the order passed by the SAT.
19.On the other hand, Mr. Suri, learned senior counsel appearing for the respondent submitted that necessary information having been furnished to the Board, the demand for an additional two years was beyond the scope of enquiry under Regulation 4(e) and various clauses of Form A. He emphasised that such an information could not be called for under Regulation 7. According to the learned senior counsel that even for the five years preceding the date of application, the respondent is required only to look at the certificate of the Chartered Accountant which has been duly submitted by the respondent. However, in order to comply with the directions issued by the appellant, the respondent has already submitted the audited accounts for the five years preceding the date of application. Therefore, at this stage, there should be no hurdle to the registration of the respondent as CRA by the appellant.
20.We have considered the entire material and the submissions made by the learned senior counsel for the parties. The controversy raised herein revolves around the interpretation of the provisions contained in RegulationJUDGMENT4(e), Form A read with Regulation 7 of theCRA Regulations, 1999. In order to appreciate the true scope and ambit of the aforesaid provisions, it is necessary to take a bird’s eye view of the SEBI Act and the CRA Regulations, 1999. As noticed earlier, the regulations have been made in exercise of the powers conferred on the Board by Section 30 read with Section 11 of the SEBI Act. Section 30 empowers the Board by notification to make regulations consistent with the Act and to carry out the purposes of SEBI Act. Section 30 (2)(d) empowers the Board to make regulations with regard to the conditions subject to which certificate of registration is to be issued, the amount of fee to be paid for the certificate of registration and the manner of suspension or cancellation of certificate of registration under Section 12. Section 11 empowers the SEBI to take measures to protect the interest of investors and to regulate the security market, inter alia by regulating and registering the working of stock progress and other intermediaries such as credit rating agencies, who may be associated with the securities market in any manner. Regulation 2(h) defines a CRA as a body corporate, which is engaged in or proposes to be engaged in the business of rating of securities offered by way of public or rights issue. Regulation 2(b) defines an associate in relation to a credit rating agency to include a person: (i) who, directly or indirectly, by himself, or in combination with relatives, owns or controls shares carrying not less than ten percent of the JUDGMENT voting rights of the credit rating agency, or (ii) in respect of whom the credit rating agency, directly or indirectly, by itself, or in combination with other persons, owns or controls shares carrying not less than ten percent of the voting rights, or (iii) majority of the directors of which, own or control shares carrying not less than ten percent of the voting rights of the credit rating agency, or (iv) whose director, officer or employee is also a director, officer or employee of the credit rating agency; Regulation 2(p) defines net worth as under: "net-worth means the aggregate value of the paid up equity capital and free reserves (excluding reserves created out of revaluation), reduced by the aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written of”
21.Regulation 3(1) provides that any person proposing to commence any activity as a credit rating agency shall make an application to the Board for the grant of a certificate of registration for the purpose. Regulation 3(3) provides that such application shall be made to the Board in Form A of the Schedule of the Regulations. Regulations 4, 5, 6 and 7 which are relevant for the decision of the legal issue involved in this case are as under:- “Promoter of credit rating agency
4.The Board shall not consider an application JUDGMENT under regulation (3) unless the applicant is promoted by a person belonging to any of the following categories, namely: (a) a public financial institution, as defined in section 4 A of the Companies Act, 1956 (1 of1956); (b) a scheduled commercial bank included for the time being in the second schedule to the Reserve Bank of India Act, 1934 (2 of 1934); (c) a foreign bank operating in India with the approval of the Reserve Bank of India; (d) a foreign credit rating agency recognised by or under any law for the time being in force in the country of its incorporation, having at least five years experience in rating securities; (e) any company or a body corporate, having continuous net worth of minimum rupees one hundred crores as per its audited annual accounts for the previous five years prior to filing of the application with the Board for the grant of certificate under these regulations. Eligibility criteria 5. The Board shall not consider an application for the grant of a certificate under regulation 3, unless the applicant satisfies the following conditions, namely: (a) the applicant is set up and registered as a company under the Companies Act, 1956; (b) the applicant has, in its Memorandum of Association, specified rating activity as one of its main objects; (c) the applicant has a minimum net worth of rupees five crores. Provided that a credit rating agency existing at the commencement of these regulations, with a net worth of less than rupees five crores, shall be deemed to JUDGMENThavenet worthsatisfiedto thethissaidcondition,minimumif withinit increasesa periodits of three years of such commencement. (d) the applicant has adequate infrastructure, to enable it to provide rating services in accordance with the provisions of the Act and these regulations; (e) the applicant and the promoters of the applicant, referred to in regulation 4 have professional competence, financial soundness and general reputation of fairness and integrity in business transactions, to the satisfaction of the Board; (f) neither the applicant, nor its promoter, nor any director of the applicant or its promoter, is involved in any legal proceeding connected with the securities market, which may have an adverse impact on the interests of the investors; (g) neither the applicant, nor its promoters, nor any director, of its promoter has at any time in the past been convicted of any offence involving moral turpitude or any economic offence; (h) the applicant has, in its employment, persons having adequate professional and other relevant experience to the satisfaction of the Board; (i) neither the applicant, nor any person directly or indirectly connected with the applicant has in the past been – (i) refused by the Board a certificate under these regulations or (ii) subjected to any proceedings for a contravention of the Act or of any rules or regulations made under the Act.
Explanation: For the purpose of this clause, the expression "directly or indirectly connected person" means any person who is an associate, subsidiary, inter-connected or group company of the applicant or a JUDGMENTcompanythe applicant.under the same management as (j) the applicant, in all other respects, is a fit and proper person for the grant of a certificate; (k) grant of certificate to the applicant is in the interest of investors and the securities market.
Applicability of Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004. 5A. The provisions of the Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004 shall, as far as may be, apply to all applicants or the credit rating agencies under these regulations. Application to conform to the requirements
6.Any application for a certificate, which is not complete in all respects or does not conform to the requirement of regulation 5 or instructions specified in Form A shall be rejected by the Board: Provided that, before rejecting any such application, the applicant shall be given an opportunity to remove, within thirty days of the date of receipt of relevant communication, from the Board such objections as may be indicated by the Board.
Provided further, that the Board may, on sufficient reason being shown, extend the time for removal of objections by such further time, not exceeding thirty days, as the Board may consider fit to enable the applicant to remove such objections.
Furnishing of information, clarification and personal representation
7.(1) The Board may require the applicant to furnish such further information or clarification as the Board may consider necessary, for the purpose of processing of the application. (2) The Board, if it so desires, may ask the applicant or its authorised representative to appear before the Board, for personal representation in connection with the grant of a certificate.”
22.Form A of the First Schedule has to be submitted by the applicant together with the supporting documents along with the application. This was duly filled and furnished by the respondent.
23.A bare perusal of the regulations makes it clear that an applicant to be eligible to be registered as a credit rating agency has to be a person/entity promoted by a person belonging to any of the categories enumerated in Regulation 4. Categories 4(a), (b) and (c) are financial institutions as defined in Section 4(a) of the Companies Act; Schedule Commercial Banks included in the Second Schedule to the Reserve Bank of India Act, 1934 and foreign banks operating in India with the approval of the Reserve Bank of India. Foreign Credit Rating Agency recognized by or under any law for the time being in force in the country of incorporation having at least five years experience in rating securities fall within category 4(d). The respondent falls within category 4(e), which relates to any company or a body corporate having continuous net worth of minimum Rs.100 crores as per its Audited Annual Accounts for the previous five years, prior to the filing of the application with the Board for the grant ofcertificate under the Regulation. Regulation 5 provides for the eligibility criteria. It is provided that the Board shall not consider any application for the grant of a certificate under Regulation 3 unless the applicant satisfies the conditions set out therein. Regulation 6 provides that any application for a certificate which is not complete in all respects or does not conform to the requirements of Regulation 5 or instructions specified in Form A shall be rejected by the Board. It is, however, necessary that before rejecting any such application, the applicant shall be given an opportunity to remove, the objections indicated by the Board within a period of 30 days of the receipt of communication of the objections by the Board to the applicant. This period can be further extended at the discretion of the Board on sufficient reason being shown by the applicant for a further period not exceeding 30 days.
24.A reading of Regulations 4, 5 and 6 together leaves no manner of doubt that the SEBI has no discretion not to reject the application if it does not satisfy the conditions laid down in Regulations 4 and 5. In fact, Regulation 4 mandates that the Board shall not consider an application for registration under Regulation 3 unless the applicant is promoted by a person belonging to any of the categories mentioned therein. Similarly, Regulation 5 categorically mandates that the Board shall not consider an application for thegrant of a certificate under Regulation 3 unless the applicant satisfies all the conditions which are set out under Clause 5. Regulation 6 again is mandatory in nature, which provides that an application which is not complete in all respects or does not conform to the requirement of Regulation 5 or instructions specified in Form A shall be rejected by the Board. It appears, therefore, that the intention of the legislature, as expressed through the regulations, is to put a closure to the consideration of the application on the basis of the information submitted on the date of application. The Board has the minimal discretion to extend the period for removal of objections upon hearing the applicant firstly for 30 days and thereafter for another 30 days. In other words, Regulation 7 enables the Board to ask for further information within the extended time stipulated in Regulation 6. For the purpose of processing of the application, the information/material for removal of objections has to be provided within the time stipulated by Board. But the maximum period provided is sixty days. There is no scope under the regulations for the time to be extended any further. The information sought must be in relation to the five years preceding the date of the application. In this view of the matter, we are of the opinion that the directions issued by the SAT that the Board could not have directed the respondent to produce the Audited Accounts for the two years beyond the date of the application, are inconsonance with the provisions of the regulations. Under Regulation 7, the Board would have the power to seek further information or clarification for the purpose of processing of the application. This further information would relate only to the basic information with regard to the Audited Accounts for the five years preceding the date of the application. Therefore, the observations made by SAT as noticed above are perfectly justified.
25.This now brings us to the final submission made by Mr. C.U. Singh that the Board was within its power to ask for the Audited Accounts of the applicant for the 5 years preceding the date of the application. It is true that under Regulation 4(e), an applicant has to show that it has continuous net worth of minimum Rs.100 crores as per its Audited Annual Accounts for the previous five years prior to the filing of the application with the Board. Clause 2 of Form A provides the “Eligibility Criteria”. Under Clause 2(1), the applicant has to indicate the category to which the promoters of the applicant company belong under Regulation 4, which in this case was 4(e). Clause 2(3) provides that the applicant shall “enclose a Chartered Accountant’s certificate certifying the continuous net worth of Rs.100 crores for five years, in case the promoter referred to in Regulation 4(e)”. As noticed above, RegulationJUDGMENT4(e) postulates that the proof of networth on the basis of the audited accounts for five years prior to the filing of the application has to be given. It is not disputed before us that the applicant has submitted the Chartered Accountant’s certificate certifying the continuous net worth of Rs.100 crores for five years on the basis of M/s. Coment (Mauritius) Limited bankers certificate. It is noticed by the SAT in the impugned order that the certificate was accepted by the Board and no clarification was sought from the respondent in regard to the certificate furnished by the Chartered Accountant. Mr. C.U. Singh submitted that the certificate submitted by the Chartered Accountant was issued on the basis of the certificate of ING Private bank dated 29th May, 2009 confirming that M/s. Coment (Mauritius) Limited had a continued net worth of over Rs.100 crores as per its Annual Accounts for the previous five years. It is not certified on the basis of the Audited Accounts, therefore, the certificate did not satisfy the requirements under the regulations.
26.We are of the opinion that the submission made by Mr. C.U. Singh has substance and cannot be brushed aside. The certificate actually provided by the Chartered Accountants is as under:-
“NET WORTH CERTIFICATE
We certify that for previous five years continuous Net worth of M/s. Coment (Mauritius) Limited, Les Cascade Building, Edith Cavell Street, Port Louis, Mauritius is over Rs.100 crores (Rupees One Hundred Crores).
The above information is given in strictest confidence at the request of our client for the purpose of filing application before Securities and Exchange Board of India.
Certified True Copy Sd/- (PARTNER) Place : New Delhi Membership No. 081180 Date: 29.05.2009”
27.We are satisfied that the aforesaid certificate did not conform to the provisions contained in the regulations which requires that the certificate of the Chartered Accountant should be in confirmation of the Audited Accounts of the promoters/applicant for the five years preceding the date of the application. We are unable to approve the observations made by SAT that “neither the regulations nor the eligibility criteria in Form A requires the applicant to produce the annual accounts of the promoter.” We are also unable to approve the observations of SAT that “it is doubtful whether the Board could have asked for this information without doubting the veracity or the correctness of the certificate of the Chartered Accountant that accompanied the application.” The certificate of the Chartered Accountant is evidence of the required net worth of the promoter. Therefore, it has to be in strict conformity with Regulation 4(e). Since the certificate issued by the Chartered Accountants did not categorically state that it is based on the audited accounts for the 5 years preceding the date of application, the Board certainly had the power to direct the respondent to produce the audited accounts. That being so, under Regulation 6, it was the duty of the Board to have rejected the application of the respondent.
28.Surprisingly, however, the Board continued to grant further time to the respondent to remove the objections even beyond the maximum sixty days permissible under the proviso to Regulation 6. It appears that the enquiries continued from 20th August, 2009 till March 1, 2011 when the show cause notice was issued to the respondent. The application of the respondent is not rejected till 21st July, 2011. The delay in the rejection of the application of the respondent was wholly unwarranted. It allowed the respondent a latitude not permissible under the regulations. Taking advantage of this latitude, the respondent has provided the Audited Accounts for the five years preceding the date of application. Not only this, we are informed that by now the respondent has even produced before this Court in a sealed cover the Audited Accounts of M/s. Coment (Mauritius) Limited for the subsequent two years upto 31stDecember, 2010 also.
29.Since the Board had extended the time to the respondent, even though not permissible in law, we are not inclined to modify the directions issued by the SAT. Especially in view of the submission of Mr. Suri that respondent is willing at this stage to produce the Audited Accounts of the promoter even for the subsequent two years.
30.In view of the above, we see no merit in the appeal and the same is hereby dismissed with no order as to costs.
[Surinder Singh Nijjar] [M.Y.Eqbal] New Delhi; February 19, 2013.