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For the first time, the Securities and Exchange Board of India (SEBI) has deemed a government-owned firm 'not fit and appropriate.' Between 2010 and 2013, PEC Ltd, a 100 per cent government-owned corporation, was declared 'unfit and proper' for masquerading as a broker and conducting unlawful trading on NSEL's spot exchange platform.

A copy of the order issued on October 8 was reviewed by Business Line. According to experts, this judgement could serve as a test case since it could label the President of India, who holds 100% government ownership, as "not fit and appropriate," based on the previous precedence in similar proceedings against private firms.

According to legal experts, it is a settled point of law in courts that a firm cannot be 'dishonest,' engage in criminal activity, or have a negative reputation on its own because it is the duty of the main management or board that must be considered.

'Inquiry into conduct'

"SEBI's cancellation of a 100% government-owned entity's registration raises issues about the conduct of the government's nominees who were managing the firm," said Sumit Agrawal, Partner at Regstreet Law Advisors and a former SEBI Officer.

When SEBI deemed entities 'not fit and suitable' in high-profile cases like Sahara India and Financial Technologies (63Moons Technologies), the regulator looked into the role of the company's management, board, and promoters to give them the same designation.

SEBI Order

In the case of PEC, SEBI stated in its decision that the company failed to conduct its business in accordance with the criteria that registered securities market intermediaries are obliged to maintain. The PEC board is chaired by Ministry of Commerce secretary-level officials, and the corporation needs permission from the ministry to operate. "As a result, if SEBI finds PEC unfit and proper, the guilt must go on all those who allowed the company to operate." Furthermore, how could the ministry enable PEC to trade on NSEL after it was labelled an illegal exchange?” analysts stated on condition of anonymity.

"Perusal of Regulation 7 read with Schedule II would reveal that while making an inquiry to find out whether the applicant is a "fit and proper person," the board (SEBI) is entitled to inquire not only about the applicant intermediary, but also about its principal officer, director, promoter, and key management persons," the Bombay High Court said in October 2018.

"All executive action or business of the Government of India is conducted in the name of the President, according to the Constitution." As a result, all of the central government's shareholdings are in the name of the President or his nominees in the establishment," Agarwal said, adding that debarring a government firm that is 100 per cent owned by the government may not mean debarring the President of India. If PEC appeals the SEBI order, it will now be up to the courts to resolve the matter.

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