The SEBI order against First Overseas Capital Limited (FOCL), a merchant banker registered with SEBI, highlights multiple serious regulatory violations spanning financial non-compliance, misuse of capital, misleading disclosures, and procedural lapses. The order, issued under SEBI Act Sections 11, 11B and 15HB, covers inspections conducted during 2021-2023 and details findings as well as legal and penalty measures. Below is a comprehensive analysis of the case based on the order:
Background and Inspections
SEBI inspected FOCL initially in August 2022 for the period April 2021 to March 2022. They found that FOCL failed to maintain the minimum net worth of Rs 5 crore required under SEBI Merchant Bankers Regulations. A fresh inspection in February 2024 covering April 2022 to October 2023 revealed further violations such as business activities outside securities market, underwriting obligations exceeding 20 times net worth, and acceptance of public deposits.
SEBI passed an interim order debarring FOCL from taking new mandates in issue management due to these violations. FOCL challenged this and partly succeeded in SAT, which allowed continuation subject to meeting capital adequacy by infusion of Rs 3 crore. FOCL complied and submitted written responses, but SEBI proceedings continued.
Key Violations Established
Non-maintenance of Minimum Net Worth
FOCL consistently reported net worth below Rs 5 crore from FY 2018-19 to FY 2021-22. Even for FY 2022-23 and 2023, SEBI recalculated net worth after provisioning Rs 3 crore as doubtful loan and Rs 1.28 crore as diminution in investments, finding net worth still below mandated levels. FOCL’s contention that the Rs 3 crore loan was recoverable was undermined by legal actions against the debtor and contradictory submissions to SEBI.
Engaging in Non-securities Business Activities
FOCL invested Rs 7.5 crore in property development projects via related entities, allegedly in violation of regulations restricting merchant bankers to securities market business. Though FOCL claimed these were loans, documentary evidence proved these were advances for joint development projects. SEBI ruled that such investments were beyond permitted unquoted securities investments and thus improper.
Excessive Underwriting Obligations
FOCL exceeded underwriting limits over 20 times its net worth at multiple instances from FY 2021-22 to 2022-23, adopting a risky approach assuming no devolvement of IPOs, exposing investors to risks. SEBI found the arguments on market conditions and double counting of devolved amounts as unconvincing.
Acceptance of Public Deposits
FOCL accepted unsecured loans from the public to fulfill underwriting obligations, which SEBI viewed as acceptance of public deposits not permitted for merchant bankers. FOCL’s claim these loans were for short-term bridging was rejected because loans increase both assets and liabilities without improving net worth.
Submission of False and Misleading Information
FOCL was found to have submitted false information regarding auditor availability, loan recoverability, compliance officer details, net worth figures, and disclosures related to managed IPOs. Contradictions and timings of letters and reports indicated misleading submissions to SEBI.
Procedural Non-compliances
- Non-submission or delayed filing of half-yearly reports.
- Failure to intimate SEBI timely about acquisition of securities pursuant to underwriting obligations.
- Non-compliance with mandatory certification requirements for key managerial personnel.
- Incomplete and improper disclosure of track record on the website.
SEBI’s Observations on FOCL’s Conduct
SEBI noted repeated pattern of non-cooperation, contradictory responses, and technical violations by FOCL. It emphasized that net worth compliance is fundamental to ensure financial soundness of merchant bankers, enabling them to meet underwriting commitments and protect investors. FOCL’s attempts to camouflage use of funds for non-securities business by issuing preference shares were rejected. The complacency in underwriting beyond limits betrayed regulatory trust.
Penalties and Directions
SEBI ordered:
- Prohibition of FOCL from accessing securities market and debarment from taking any new issue management mandates, for a period of 2 years.
- Monetary penalties for violations including non-submission of acquisition details (Rs 7 lakh) and delay in filing reports.
- FOCL to close or square off any open derivative positions within 3 months.
- Compliance measures for pending obligations.
SEBI’s adjudicating officer invoked SEBI’s powers under various sections of the SEBI Act, Merchant Bankers Regulations, and SEBI Master Circulars to impose these penalties.
Conclusion
The SEBI order against First Overseas Capital Limited is a rare and decisive crackdown on serious regulatory failings by a merchant banker. It underscores the importance of maintaining mandated financial criteria, transparency, and compliance in intermediaries managing public issues. FOCL’s transgressions—ranging from inadequate net worth, misuse of funds outside securities market, excessive underwriting, acceptance of public money, and misleading disclosures—constitute breach of trust with investors and regulators. The penalties imposed aim to protect investor interests and uphold integrity in India’s capital markets.
This case serves as a stark reminder that merchant bankers must rigorously comply with SEBI regulations, maintain robust financial health, and act transparently to build sustained investor confidence. The comprehensive SEBI order also clarifies enforcement priorities in safeguarding public capital market participants against intermediaries who stray from regulatory norms.
