A merchant banker (MB) who had found a 'novel' way to comply with networth norms has been banned from managing public issues until further orders.
On October 23, the Securities and Exchange Board of India (SEBI) banned First Overseas Capital Ltd (FOCL) from managing public issues for not maintaining its capital adequacy (or networth of Rs 5 crore) for six consecutive years, from FY19 to FY24.
The market regulator's investigations showed that FOCL, which was falling short of networth requirements, was used as a "pass through investment vehicle" to advance funds to two other entities, and then converting the loans into redeemable preference shares of one borrower entity.
In FY23, FOCL raised Rs 7.5 crore through the issue of preference shares to Satyen Dalal, the Chairman & Managing Director of FOCL and its holding company Chasam Investments & Leasing Pvt. Ltd.
The regulator asked the statutory auditor and the latter said that during the audit period, FOCL's management had said that the amount was intended for the acquisition of land to further a joint development project.
No merchant banker other than a bank or a public financial institution can do business outside the securities market, as per Regulation 13A of the SEBI (Merchant Banker) Regulations, 1992.
In FY24, there was another infusion of equity share capital of Rs 2.62 crore. With this, FOCL's networth that year rose to more than Rs 9.63 crore (Rs 7 crore from preference shares, plus the Rs 2.62 crore).
The Rs 7 crore that FOCL had given as a loan had been converted into redeemable preference shares in Falcon in FY24, valued at Rs 11.37 crore. That would seem more than adequate than what is needed (Rs 5 crore), except the capital really didn't seem to be with the merchant bank.