Sebi bans merchant banker First Overseas Capital from managing public issues until further notice

The regulator's prima facie observations and findings show that FOCL had violated various regulations including not maintaining the minimum networth requirement for six consecutive years

The market regulator has banned merchant banker First Overseas Capital Ltd (FOCL) from managing any public issue until further orders.

The regulator's prima facie observations and findings show that FOCL had violated various regulations including not maintaining the minimum networth requirement for six consecutive years, knowingly submitted false statement to Sebi, venturing into business other than the that in the securities market and not disclosing its track record in according with the Sebi circular.

In an interim cum showcause notice on October 23, the Securities and Exchange Board of India's Whole-time Member Ashwani Bhatia noted that the merchant banker "remains non-compliant on the networth requirements".

He explained the need for acting urgently in the matter, "An entity functioning as a merchant banker without having prescribed minimum net-worth poses a systemic risk to the securities market. Since the MB is noncompliant with net-worth requirements, the continuation of merchant banking business by the MB is likely to affect the stability of the securities market and is likely to prejudice the interests of investors in securities market."

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The regulator had first carried out an inspection of the merchant banker (MB) on August 24 and 25, 2022. The period under investigation then was between  April 01, 2021 and March 31, 2022. Then the officials had noted that the MB had failed to maintain capital adequacy requirement (networth of Rs 5 crore) at all times. Thus enquiry proceedings were initiated against the MB.

Another inspection was again done on February 14 and 15, 2024 and the period under investigation this time was between April 01, 2022 and October 31, 2023. This examination too revealed the the MB had not complied with the capital adequacy requirement. The inspection indicated other violations too.

What are the violations?
In the order Bhatia succintly summed up the various violations, "the MB (merchant banker) acted as a registered merchant Banker without meeting the capital adequacy requirement (net worth of Rs. 5 Crore), as mandated under the provisions of the MB Regulations, 1992. The MB, though its investments in a joint venture for development of a property, ventured into business other than the securities market. Further, the MB accepted public deposits to meet its underwriting obligations in violation of the provisions of the Companies Act, 2013 and SEBI Master Circular dated September 26, 2023."

Bhatia noted, "Further, the total underwriting obligations of the MB at various points of time exceeded twenty times its net worth. Apart from the above, the MB is prima facie found to have made false and misleading submissions, as detailed in above paragraphs."