SEBI bars merchant banker First Overseas Capital from managing public issues

Market regulator Securities and Exchange Board of India (SEBI) has prohibited First Overseas Capital Ltd (FOCL), a merchant banker, from managing any public issues until further orders following its violation of certain merchant banking rules.

The regulator found the company in violation of its norms on various fronts -- it acted as a registered merchant banker without meeting the capital adequacy requirement; through its investments in a JV for the development of a property, it ventured into business other than the securities market; it accepted public deposits to meet its underwriting obligations; its underwriting obligations at various points of time exceeded 20 times its net worth; and it made "false and misleading submissions" on many occasions.

The regulator says First Overseas Capital failed to maintain the required capital adequacy (net worth of ₹5 crore) at all times. SEBI also conducted another probe in February 2024 for the April 01, 2022-October 31, 2023, period, during which it found that FOCL still had not complied with capital adequacy rules.

The SEBI observed that the merchant banker submitted false and misleading information on various instances.

SEBI's probe found that securities of three companies (QMS Medical Allied Services Ltd., SVJ Enterprises Ltd. and Veerkrupa Jewellers Ltd.) whose issues were being managed by the merchant banker were acquired by it in July 2022, October 2022 and March 2023. Information regarding transactions of such nature was not shared with the market regulator.

During the previous inspection as well, it was found to have not submitted the quarterly information and upon finding its comments unsatisfactory, adjudication proceedings were initiated in 2023. "The MB (merchant banker) is found to have repetitively defaulted in submitting the quarterly reports to SEBI. Accordingly, the MB is alleged to have violated Regulation 27 of the MB Regulations, 1992."

A merchant banker is required to ensure at least two key managerial personnel or KMPs have certification from the National Institute of Securities Markets (NISM) for the “NISM-Series-IX: Merchant Banking Certification Examination”. However, it was found that none had the requisite certification between April 01, 2022, and August 05, 2023. "The MB provided valid certificates of “NISM-Series-IX: Merchant Banking Certification Examination” of 2 individuals – Ms. Mala Soneji and Ms. Shreya Jhawar. It was observed that Ms. Jhawar was not a KMP and Ms. Soneji’s certification was valid w.e.f. August 06, 2023."

In its decision, the regulator has prohibited the merchant banker from taking any new mandate regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service until further order.

SEBI has issued a show-cause notice as to why its licence should not be cancelled for the alleged violations. It has been asked as to why an inquiry should not be held against. The company has been asked to reply within 21 days from the date of receipt of the order.