SEBI Intermediaries
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This article is written by Ravi Karan, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here he discusses “SEBI Intermediaries”.

An Intermediary is a person who acts as a mediator between people with an intent to bring about an agreement or reconciliation.

Similarly, SEBI Intermediaries acts as a link between investor and SEBI/Stock exchanges. 

By definition, an Intermediary means a person as mentioned in sub-sections of section 11 and section 12 of SEBI Act. Broadly, these are the persons such as stockbrokers, sub-broker, investment advisers, merchant banker, underwriter, portfolio manager, share transfer agent, registrar to an issue, depositories, custodians of securities, foreign institutional investors, credit rating agencies, asset management companies, venture capital funds, mutual funds and such other intermediaries who may be associated with securities market in any manner.

Intermediaries are regulated under securities and exchange board of India (Intermediaries) regulations, 2008.  The regulations cover important milestones in the journey of intermediaries such as registration of intermediaries, their obligations, any disciplinary actions/inspections, suspension/cancellation of their license, code of conduct and best corporate governance practices to be followed by them. 

Timeline

  1. Submission of details as per format of FORM A of Schedule 1 of SEBI (Intermediaries) regulations, 2008 
  2. Upon successful disclosure & verification of information, SEBI board will grant a certificate to the applicant as a SEBI registered intermediary. 
  3. Any application may get rejected by SEBI board on grounds of furnishing incomplete information, incorrect or false information, non-compliant as per eligibility requirement and any other reason that gives sufficient evidence that the application is not a fit and proper person as stated in schedule II of the regulations. 
  4. Upon successful registration, the intermediary should provide a certificate of its compliance officer to the board on 1st April of each year certifying that they comply with all the requirements and obligations as required by law. 
  5. The intermediaries should maintain records of investor grievances received by them and should try to resolve them within 45 days of the receipt of the complaint. 
  6. Apart from obligations covered under SEBI (Intermediaries) Regulations 2008, SEBI issues circulars from time to time adding other obligations to abide by. Some of these are

    Brokers and sub-brokers should not accept cash from the client for the purchase of securities and/or give cash against the sale of securities to the clients.

    Further, it has been mandated that all payments shall be received/made by the stockbrokers from/to the clients strictly by account payee crossed cheques/ demand drafts or by way of direct credit into the bank account through electronic fund transfer, or any other mode permitted by the Reserve Bank of India.

    In the case of securities also, giving/taking delivery of securities in “Demat mode” should be direct to/from the “beneficiary accounts” of the clients except for delivery of securities to a recognized entity under the approved scheme of the stock exchange and/or SEBI.

    Further, SEBI, vide circular dated June 6, 2018, SEBI, has, inter alia:

    brought to the notice of SEBI registered market intermediaries the various notifications issued by the Government of India on Prevention of Money Laundering Rules, relating to making Aadhaar number issued by the Unique Identification Authority of India (UIDAI) and Permanent Account Number (PAN) or Form No. 60, as defined in Income Tax Rules, 1962 mandatory for both new and existing accounts with financial market intermediaries including securities market intermediaries.

    SEBI has further clarified in the above mentioned circular that in case PAN is not submitted by any client at the time of opening of account-based relationship, one certified copy of an“officially valid document” (OVD) shall be submitted. However, for the securities market, in terms of SEBI circular dated April 27, 2007, the requirement of PAN would continue to be mandatory for completing the KYC process.

  7. intermediary or their /employees/directors/key management personnel should not render investment advice directly or indirectly, or if they are into the business of rendering such service, then it should be handled very carefully; thereby disclosing their interest, interest of their family members and of the employer as well.
  8. At all times, intermediaries and their employees/directors/officers/key management personnel should abide by code of conduct as detailed in schedule III of SEBI (Intermediaries) Regulations, 2008.
  9. Sebi has defined some activities that cannot be outsourced to third parties by stock-market intermediaries. 

    Few of these activities are:-

  1. Depository participants should not outsource their checker activities.
  2. RTA’s (Registrar and transfer agents) should do record-keeping and PMLA obligations internally.
  3. Brokers should manage client orders. Pay-in/pay-out of funds/securities.
  4. Banks should clear financial instruments on their own. 
  5. Merchant bankers cannot sub-contract due diligence, issue pricing, and supervision of other intermediaries to other parties.

What happens when a default is detected?

An inspecting authority is appointed by the SEBI board to protect the interest of investors with an intent to keep a check on intermediaries’ books of account, internal control systems, and action being taken on investors complaints. 

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Inspecting authority has been conferred with power under regulation 19 of the SEBI (Intermediaries) Regulations, 2008 to inspect-

directors/proprietor/partner/trustee/officer/employee and any agent of the intermediary. In this process of inspection, the inspecting authority can ask for any records/documents for their detailed examination.  Any expense incurred while hiring an auditor or valuer in course of inspection by the inspecting authority should be bear by the intermediary.

Upon inspecting the report submitted by inspecting authority, the board may appoint a designated authority who after careful investigation would give his/her recommendation to the board.  Based on recommendations/findings of inspecting authority and designated authority, the board can cancel or suspend the certificate of registration/ prohibit the defaulter to take new assignments for a period specified/ debar a principal officer from being employed.

A fair and reasonable opportunity will be given to the intermediary to explain as to why disciplinary action should not be taken against them. The procedure to lay down a fair ground involves issuing show-cause notices to the notice and asking for a revert within a stipulated time period. Upon hearing the arguments by the notice in detail, an order is passed by the designated authority. The order can be challenged by the aggrieved person in Securities Appellate Tribunal. 

Special mention of Schedule II – Intermediaries regulations 

There is a need to explain Schedule II in detail because of grave precedents being set by the SEBI board before, thereby taking undue advantage of the powers being conferred to them under this law. 

Schedule II elaborates on regulation 7 (2) (e) of Intermediaries regulations (2008) which states that an application for certificate of registration by an intermediary can be rejected by the board if the board is of the opinion that the applicant is not a fit and proper person. 

The Board may take the following factors into account.

An applicant or the intermediary, the principal officer, the director, the promoter and the key management persons – 

(a) integrity, reputation and character; 

(b) absence of convictions and restraint orders; 

(c) competence including financial solvency and net-worth

(d) absence of categorization as a wilful defaulter. 

Sahara Asset Management Company P. Ltd. & Ors. Vs. SEBI

SEBI had cancelled the certificate of registration of Sahara Asset Management company by declaring that their sponsor company, Sahara India Financial Corporation Ltd is not a fit and proper person to carry on business activities due to its relationship with unfit promoter-director Mr. Subrata Roy Sahara (Mr. Subrata was convicted of flouting rules during public issue of securities).

Sahara Group contested that Mr. Subrata was a mere shareholder and not a director of the company whose registration has been cancelled.  However, SAT while upholding the order of SEBI relied on Hon’ble Supreme Court order that has clearly started that Mr. Subrata has absolute control over the matter of his company..

 Almondz Global Securities Ltd. Vs. SEBI

In this case, SAT overturned SEBI’s Order and stipulated certain limitations on SEBI with regard to the test of fit and proper person. SEBI by its order, after holding that the appellant company as being not fit and proper for continuing the business of a Merchant Banker owing to the fact that there was a restraint order against the Appellant, by the Board which had been appealed against separately by the Appellant. 

SAT rejected SEBI order stating that offence committed by the appellant is not serious enough to declare them unfit and improper person. 

Thus it was brought to the notice of general public by the tribunal that there were severa instances where the board under the test of fit and proper person have cancelled the certificate of registration of intermediaries. In their process to reach this conclusion, the board has taken decisions based on offences that seem to be not so grave as per the tribunal. 

Conclusion

The discussion above clearly illustrates that there is a huge difference in terms of intent of law makes and law executors. While these regulations were put in place to give a fair and just platform to intermediaries keeping in view the interest of investors. However, there are cases where the power of law is being used blatantly to cancel registration certificates.  There is a need to amend some of these regulations so as to empower all the stakeholders and not to create unnecessary hindrances.


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