Market regulator Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs20 lakh on First Overseas Capital Ltd (FOCL) and barred the company from accessing the securities market for two years, citing persistent and serious violations of the SEBI Merchant Bankers Regulations, 1992 and related norms.
SEBI’s action follows two inspections of FOCL, the first conducted on 24th August to 25 August 2022, covering the FY21–22 and a follow-up inspection on 14th February to 15 February 2024, covering the period up to 31 October 2023.
Both inspections revealed multiple regulatory breaches, including the failure to maintain the minimum required net worth of Rs5 crore, engagement in non-securities business, acceptance of public deposits and submission of false and misleading information to the regulator.
SEBI inspections showed that FOCL’s net worth had fallen below the mandatory Rs5 crore threshold since FY18–19, declining to just Rs13.90 lakh by FY21–22. Although the firm later claimed compliance, SEBI review found inflated figures, with the adjusted net worth standing at only Rs3.40 crore in March 2023 and Rs4.31 crore in September 2023 after accounting for doubtful loans and investment losses.
SEBI also noted that Rs7 crore raised through preference shares had been diverted into real estate ventures at Boisar and Falcon, violating rules against engaging in non-securities business. After excluding these funds, FOCL’s effective net worth turned negative, further weakening its financial capacity.
FOCL exceeded underwriting limits by taking on obligations more than twenty times its net worth, in violation of Regulation 22B(2). The company argued that pandemic-related disruptions led to deviations in several SME IPOs, but SEBI rejected this defence, pointing to a systemic disregard for risk management and compliance.
In addition, FOCL accepted over Rs10 crore in deposits during FY22–23 from entities unrelated to its directors to meet underwriting obligations. SEBI deemed this a clear violation of regulations prohibiting merchant bankers from borrowing funds to acquire securities, as such deposits cannot substitute for net worth.
The investigation also revealed that FOCL repeatedly made false and misleading submissions, including contradictory statements about loans, auditor confirmations and compliance officers. The company failed to maintain proper records, delayed statutory filings by up to 596 days and neglected mandatory National Institute of Securities Markets (NISM) certifications for key personnel. It also failed to disclose its management of open offers and did not maintain an updated public issue track record on its website.
SEBI observed that FOCL’s repeated misrepresentations and disregard for regulatory directions reflected a pattern of willful and serious non-compliance. Maintaining adequate net worth and transparency is essential to ensure merchant bankers’ financial soundness and protect investor confidence, principles that FOCL repeatedly ignored.
Last year in October, SEBI barred 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.
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. (Read:
First Overseas Capital Barred from Acting as Lead Manager for New Issues)
