First Overseas Capital Barred from Acting as Lead Manager for New Issues

Moneylife Digital Team 24 October 2024

Investor Interest

Market regulator Securities and Exchange Board of India (SEBI) barred First Overseas Capital Ltd (FOCL) from taking any new mandate as a lead manager for any public issue of debt securities until further orders for allegedly violating merchant bankers rules.

In an order, Ashwani Bhatia, whole-time member (WTM) of SEBI, says, "...FOCL acted as a registered merchant banker (MB) without meeting the capital adequacy requirement (net worth of Rs5 crore), as mandated under the provisions of the MB Regulations, 1992. The MB, through its investments in a joint venture for the 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 26 September 2023. Further, the total underwriting obligations of the MB at various points of time exceeded 20 times its net worth. Apart from the above, the MB is prima facie found to have made false and misleading submissions..."

"I, hereby debar the noticee (FOCL) from taking any new mandate in relation to the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management, until further order," Mr Bhatia says in the order.

The market regulator also issued a show-cause notice (SCN) to First Overseas Capital for alleged violations of the provision of Merchant Bankers (MB) Regulations.

After the SEBI inspection, FOCL claimed that it did not utilise Rs7 crore as an advance towards a construction project, but it was given as a loan to Boisar Realty Pvt Ltd and Falcon Recreational Activities Pvt Ltd.

"On the other hand, the MB had issued letters to the two companies expressing interest in investing a sum of Rs3.50 crore each towards a joint development to acquire a land parcel at Boisar. The MB had denied that it had utilised the funds for carrying any business other than in the securities market. In view of the above, it is apparent that the MB had knowingly submitted false and misleading statement to SEBI," the market regulator says.

After analysing the data submitted by FOCL for the underwriting obligations of the issues that were open during the inspection period, SEBI observed that during FY21-22 and FY22-23, the MB had underwritten issues of securities beyond the prescribed limits, i.e., 20 times the reported net worth, calculated by taking into account the provision for doubtful debts of Rs3 crore, in a routine manner.

"Since the MB (FOCL) is non-compliant 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 the securities market," the SEBI WTM says, while barring FOCL from taking any new mandate about the business of issue management till further orders.

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