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PEC woes. SEBI declares govt-owned firm PEC as ‘not fit & proper’

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‘As NSEL was declared an illegal exchange, how was PEC allowed to trade on it?’

The Securities and Exchange Board of India (SEBI) has declared a government-owned company as ‘not fit & proper’ for the first time. PEC Ltd, a 100 per cent government-owned company, has been declared ‘as not fit and proper’ for acting as a broker and carrying out illegal trades on NSEL’s spot exchange platform between 2010 and 2013.
Business Line has reviewed a copy of the order issued on October 8. Experts say that this order may become a test case as it could tag the President of India, under whom all government ownership is held, as ‘not fit and proper’ going by the precedent in similar actions against private entities.
Legal experts told BusinessLine that it was a settled question of law in courts that a company on its own may not be ‘dishonest,’ indulge in illegality or carry an adverse reputation because it is the responsibility of the key management or board that needs to be assessed.

‘Conduct in question’

“Cancelling the registration of a 100 per cent government owned entity by SEBI questions
the conduct of the nominees of the government who were managing the company,” said
Sumit Agrawal, Partner, Regstreet Law Advisors and former SEBI Officer.

In the past, when SEBI declared entities ‘not fit and proper’ in high-profile cases involving
Sahara India and Financial Technologies (63Moons Technologies), the regulator studied the
role of its management, board and promoters to accord them a similar tag.

SEBI order

In the case of PEC, SEBI has said in its order that the company failed in conducting its business in conformity with the standards expected to be maintained by registered securities market intermediaries. The PEC board was helmed by secretary-level officials from the Ministry of Commerce and the company requires ministry permission to conduct its business. “Therefore, if SEBI is holding PEC not fit and proper, then the blame lies on all those who permitted the company to conduct its business. Further, since NSEL was declared as an illegal exchange, how did the ministry allow PEC to trade on it,” experts said on conditions of anonymity..
In October 2018, the Bombay High Court said, “Perusal of Regulation 7 read with Schedule II would reveal that while making an inquiry to find as to whether the applicant is “fit and proper person”, the board (SEBI) is entitled to conduct an inquiry not only about the applicant intermediary, but also its principal officer, director, promoter and the key management persons.
“The Constitution provides for all the executive action or the conduct of the business of the Government of India to be taken in the name of the President. Accordingly, all the shareholdings of the central government are in the name of the President or his nominees in the establishment,” Agarwal said adding that debarring a 100 per cent held government company may not mean debarment on the President of India. It will now be up to the courts to throw light on the issue if PEC challenges the SEBI order.