Sebi Prohibits First Overseas Capital from Acting as Lead Manager for New Debt Securities Mandates

The Securities and Exchange Board of India (Sebi) has prohibited First Overseas Capital from taking on new roles as a lead manager for public debt securities issues. This decision is due to alleged breaches of merchant banker regulations. Sebi has also issued a show cause notice to the firm for these purported violations.

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In its interim order, Sebi highlighted that First Overseas Capital acted as a registered merchant banker without maintaining the required net worth of Rs 5 crore, as stipulated by MB norms. The company also allegedly accepted public deposits to fulfil underwriting obligations, contravening the Companies Act, 2013, and other Sebi rules.

Sebi's Concerns Over Regulatory Compliance

Sebi's whole-time member Ashwani Bhatia stated in the order, "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."

The regulator observed that First Overseas Capital's underwriting obligations often exceeded twenty times its net worth. Additionally, the firm is accused of making false and misleading submissions. Sebi emphasised that compliance with statutory requirements is mandatory for merchant bankers without any exceptions.

Impact on Market Stability and Investor Interests

Sebi noted that First Overseas Capital's non-compliance with net worth requirements poses a systemic risk to the securities market. The continuation of its merchant banking activities could potentially destabilise the market and harm investor interests.

The order followed an inspection conducted by Sebi in August 2022, covering April 2021 to March 2022. During this inspection, it was discovered that First Overseas Capital did not maintain the necessary capital adequacy at all times as per MB rules.

Repeated Non-Compliance Issues

Another inspection took place in February 2024 for the period from April 2022 to October 2023. Once again, it was found that First Overseas Capital failed to meet capital adequacy requirements and allegedly violated MB rules.

Sebi stressed that non-compliance with MB regulations and various circulars compromises the regulatory framework. The regulator reiterated that merchant bankers must adhere strictly to these obligations.

The ongoing non-compliance by First Overseas Capital highlights significant concerns about its ability to operate within regulatory boundaries. This situation underscores the importance of maintaining financial stability and protecting investor interests in the securities market.