BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO-12/2006-07]

In respect of

CITIGROUP GLOBAL MARKETS (MAURITIUS) LTD. �

1.0 During the course of examination and scrutiny of the declaration furnished in the fortnightly statement on issue of Offshore Derivatives Instruments (ODI) by Citigroup Global Markets (Mauritius) Ltd. a sub-account (hereinafter referred as �CGMML or the noticee�), certain violations of SEBI circular and SEBI (Foreign Institutional Investors) Regulations, 1995 (hereinafter referred as 'FII Regulations'), were allegedly noticed by Securities and Exchange Board of India (SEBI).� Pursuant to this, SEBI appointed the undersigned as the Adjudicating Officer under Section 15 I of SEBI Act, 1992, vide its Order dated December 20, 2005, to inquire into and adjudge under Section 15HB of Securities and Exchange Board of India Act, 1992 for the alleged violation of SEBI Circular dated August 8, 2003 and Regulation 13(1) of the FII Regulations.��

2.0 It may be mentioned here that initially Mr. KRCV Seshachalam, Dy. Legal Advisor (SEBI) was appointed as Adjudicating Officer by SEBI and later Mr. A Chandrasekhar Rao took over from Mr. Seshachalam.� The terms of reference of these proceedings may be seen from the order dated March 29, 2004 issued by Mr. C S Kahlon (Executive Director- SEBI).

3.0 A show cause notice (SCN) dated March 21, 2006, under Rule 4(1) of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as �Adjudication Rules�) was issued to CGMML, communicating the allegations levelled against it and calling upon it as to why an inquiry in terms of the said Rules should not be conducted against it. CGMML through its advocates M/s AZB & Partners responded to the said show cause and sought time till April 28, 2006 to file the reply.� In this regard, a reply dated April 28, 2006 was filed by CGMML.

4.0 Under the aforesaid circumstances, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, a notice of inquiry dated may 23, 2006 was issued to CGMML, fixing June 16, 2006 as the date for inquiry. In response, Mr. Michael J Dunn, Managing Director Citigroup Global Markets Asia Ltd duly represented through Mr. Darius Khambatta, Sr. Advocate briefed by AZB & Partners, Advocates & Solicitors appeared for the inquiry and reiterated the submissions already made vide their reply letter dated April 28, 2006.� Pursuant to this inquiry CGMML also filed written submissions vide letter June 30, 2006, in respect of the SCN dated March 21, 2006.� ��

5.0 Having carefully perused the material on record I proceed to record my finding as follows, but before that, it is important to at least briefly understand the background under which the impugned declaration was furnished by CGMML.

5.1 It prima-facie appeared that Citigroup Global Markets Holdings Inc. (CGMH), an affiliate of Citigroup Global Markets (Mauritius) Ltd., (Noticee) a sub�account registered with SEBI issued off-shore derivative instruments to an Overseas Corporate Body (OCB) namely Magnus Capital Corporation Ltd. (MCCL), and thereby violated the declaration furnished in the fortnightly statement on issue of off-shore derivative instruments (ODIs) submitted to SEBI (as on August 15, 2003).� The aforesaid declaration was furnished by CGMML�� pursuant�� to�� SEBI Circular dated August 8, 2003 which and circular was issued in exercise of the powers conferred by Regulation 20 of FII Regulations.�

5.2 It was alleged that CGMML violated SEBI circular dated August 8, 2003 read with Regulation 20 of FII Regulations and Regulation 13 (1) of FII Regulations and for which adjudication penalty is imposable in terms of Section 15HB of Securities and Exchange Board of India Act, 1992.�� The Section 15HB of SEBI Act, 1992, reads as under:-

"Penalty for contravention where no separate penalty has been provided.

15HB. Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.)"

5.3 It is also necessary to understand the provisions of Regulation 20 of FII Regulation which inter-alia provides as under:

"Information to the Board.

20. Every Foreign Institutional Investor shall, as and when required by the Board or the Reserve Bank of India, submit to the Board or the Reserve Bank of India, as the case may be, any information, record or documents in relation to his activities as a foreign Institutional Investor as the Board or as the Reserve Bank of India may require."

Now since in terms of Regulation 13 (3), sub accounts are deemed FII, the provisions of Regulation 20 are also applicable to sub account in the same sense as to FII.

5.4 In exercise of powers under Regulation 20, of FII Regulations, SEBI issued circular dated August 8, 2003 with a view to monitor the investment by FII's and revised the format for reporting the investment /redemption details.� The revised format had two annexure i.e. 'A' and 'B'. �In the instant case we are basically concern with Annexure �A of the said circular.� Annexure A was a one time report and to be submitted only once and indicates the outstanding offshore derivatives as on August 15, 2003.� As per Annexure A an undertaking was to be given by FII/sub account to the following effect:- "We undertake that we/associates/clients have not issued/subscribed/purchased any of the offshore derivative instruments directly or indirectly to/from Indian residents/NRIs/PIOs/OCBs".

5.5 With regard to the above, CGMML filed a statement and it is alleged that despite issuance of ODIs to an OCB namely Magnus Capital Corporation Ltd (MCCL), they gave an undertaking and declaration which was not true.� Following was the undertaking/declaration in Annexure 'A' of the statement:

"In relation to the instruments above which constitute bilateral contracts, we represent that, to the best of our knowledge none of the counterparties are Indian residents/NRIs/PIO's/OCB's."

5.6 In the aforesaid background, the CGMML is charged with violating the declaration/undertaking given vide above statement to SEBI.

5.7 In order to further analyse the seriousness of the matter, the importance attached to the said declaration/circular dated August 8, 2003 needs to be examined.� In this context, the Joint Parliamentary Committee report dated December 12, 2002 on the securities market scam has made various observations with respect to the role of FII/sub accounts vis-�-vis the investment made by OCB's. In the securities scam in 2001, the role played by OCBs was examined by JPC and it was pointed out that certain OCBs and sub-accounts had aided, assisted and abetted in creation of artificial market and volumes, circular trading and building up concentrated positions in a few scrips.� Some of the findings of JPC are discussed in the later part of the order.

6.0 In order to adjudicate the matter, I, now frame following issues:-

6.1 �� Whether the undertaking given by CGMML is false/OR, CGMML violated the declaration regarding issuance of ODIs;

6.2 �� Whether CGMML violated the provisions of Regulation 20 of FII Regulations; and

6.3 �� Whether Regulation 13(1) of FII Regulation is attracted in the instant matter.

7.0 The issues framed at sub paragraphs 6.1 and 6.2 of paragraph 6 above may be discussed together since it is the Regulation 20 of FII Regulations which makes it obligatory for FII/Sub accounts, to submit information, records or documents in relation to its activities, to the Board, and in exercise of the powers under the said Regulation, SEBI had issued circular no. IMD/CUSD/8/2003 dated August 8, 2003 requiring FIIs/Sub accounts to report outstanding ODIs as on August 15, 2003.� The said reporting consists of �an undertaking (Annexure A of the Circular) to the following effect:

�We undertake that we/associates/clients have not issued/subscribed/purchased any of the offshore derivative instruments directly or indirectly to/from Indian residents/NRIs/PIOs/OCBs".

8.0 �� In response to the above circular, CGML which is a SEBI registered FII by its letter dated August 20, 2003 furnished a statement detailing the ODIs issued against its positions in Indian Securities (ODI Report).�� On this basis it is the defence of the noticee that the ODIs, issued to MCCL which is an OCB, were not issued by CGML (FII) or CGMML (Sub account/noticee) and therefore the ODIs issued to MCCL did not form part in ODI report.� It is also submitted by the noticee that the undertaking provided by CGML in the ODI report was stated �to the best of our knowledge�. �Further to this,� the noticee in paragraph 4 (e) of the written submissions dated June 30, 2006 has stated that ODI information which was furnished by Citigroup vide its letter dated September 3, 2003, was in response to a list� of points submitted by SEBI to the officials of Citigroup.� A list of Luxemburg listed warrants issued by the CGMH was attached to the said letter.� The noticee has given name to the said list of warrants issued by CGMH as �Affiliate ODI Statement �.� It was argued with great emphasis that the Affiliate ODI Statement did not contain any undertaking as such there is no violation of the undertaking as alleged in the SCN attributed to Citigroup.� In other words I can smell that an attempt is being made by the noticee to disown the said �Affiliate ODI Statement� which is filed by none other than but one of their group entity, as admitted in paragraph 2 of the written submissions dated June 30, 2006 which inter-alia provides as under:

�Citigroup Global Markets Holdings Inc. (CGMH) is an affiliate of CGMML. CGMML, CGMH and Citigroup Global Markets Limited (�CGML�) (the registered Foreign Institutional Investor (�FII�) through whom CGMML maintains its registered sub-account) are entities forming part of Citigroup Inc. (CGMML, CGMH and CGML are collectively referred to herein as �Citigroup�) �

8.1 So it is an established fact that Citigroup necessarily consists of CGML (FII), CGMML (sub account/noticee) and CGMH (affiliate of noticee). �The said finding is crucial to deal with the issues 6.1 and 6.2 framed above.�� As per the requirement under the SEBI�s circular dated August 8, 2003, the details of the undertaking should have covered the ODI statement of the noticee, its associates and its clients.� I can conclude here that the details of ODIs (Luxemburg listed warrants, i.e. the nomenclature used in Singapore) issued by CGMH, a Citigroup entity and an affiliate of CGMML, should have formed part of the declaration furnished by the noticee in the fortnightly statement on issue of ODI.�� In the light of above, I find no merits in the submissions of the noticee that the undertaking provided in annexure A of the SEBI circular dated August 8, 2003 would not apply to the Affiliate ODI Statement.� I would further add that the said Affiliate ODI statement is nothing but an extension of the undertaking by the notice and where they omitted to include details of ODI�s issued by CGMH a Citigroup entity and an affiliate of CGMML.

8.2 Another submission which is made by the noticee is that the undertaking in respect of ODI issuances was provided to its �best of knowledge� and they were under bonafide believe/impression that MCCL was not an OCB.�� In this connection, I would like to strongly object to the move of the noticee to amend/change the prescribed format of the undertaking as per the SEBI circular, to suit to its liking.� At the outset, if this is the way a registered entity complies with the SEBI circular, I would say it is no compliance.�� Secondly, on the issue of MCCL being an OCB it is clearly observed from the communication from the Reserve Bank of India (RBI) dated December 26, 2003 addressed to SEBI (Annexure F of the SCN) that Magnus Capital Corporation, Mauritius is an Oversees Corporate Body (OCB). A group like Citi can not be allowed to plead an ignorance of this fact. A professionally managed Citigroup, having its presence in the financial/capital sectors world wide, is expected to have compliances of highest level, and which is found lacking in the instant matter. It seems that the noticee has failed to give any significance to the information to be given to the Regulator, on the ODI�s issued to OCBs. It is a common knowledge and fact that OCBs had mis-utilised ODI route to park their illegal money and to manipulate Indian securities market without the fear of their identity getting detected. So the issues framed 6.1 and 6.2 above are decided to the effect that the noticee has violated the declaration furnished in the fortnightly statement on issue of ODIs submitted to SEBI (As on August 15, 2003).� ��

9.0 �� As regards issue no. 6.3 above, the noticee has submitted that SCN is not indicative of the vital aspect of the exact provision of Regulation 13(1) alleged to have been violated by Citigroup. In this regard I observe that proviso to Regulation 13 (1) (b) of FII Regulation provides that �a non-resident Indian or an overseas corporate body registered with RBI shall not be eligible to invest as sub-account or as FII�. It is in this context the violation of Regulation 13(1) has been alleged in the SCN. Further, it can not be a case of anybody that the sub-clauses or the clauses of a particular regulation will not form part of that main regulation.� It is an established position that clauses; or sub-clauses are the part and parcel of the main regulation. However, I find that this proviso is to prohibit an OCB from investing as sub-account or as FII and whereas MCCL in the instant matter has acted as client to the affiliate of the sub-account CGMML (noticee) and invested / or has been allowed by the noticee to invest in Indian securities market. I am of the view that the purpose of this proviso, baring OCBs to invest as sub-account or as FII in Indian securities market, can only be met if OCB�s are also denied investments as clients of sub-account or FII. �In the instant matter the noticee has defeated the purpose of the proviso to Regulation 13 (1) (b) by issuing ODI�s to OCBs. In this regard, I also do not find any merit in the submissions of the noticee vide paragraph 4 (a) of the reply dated April 28, 2006 that SEBI circular dated August 8, 2003 or any undertaking contained therein can not be applied to ODIs issued prior to August 15, 2003 and thereby retrospectively given effect to. It is so because the alleged circular did not create any law of substantive nature and it only prescribes for reporting of ODI transactions and an undertaking to the effect that OCBs are not issued ODIs by the noticee. Considering the nature of the circular as procedural, it is an established position of law that procedural laws can be applied retrospectively.� The law which prohibits OCBs to invest in Indian securities as sub-account / FII was in force w.e.f. February 29, 2000, since proviso to Regulation 13(1) (b) of FII Regulations was inserted by the SEBI (FII) (Amendment) Regulations, 2000 on February 29, 2000. �

10.0 The conduct of CGMML has thus been in violations of SEBI circular dated August 8, 2003 read with Regulation 20 of FII Regulations and Regulation 13 (1) of FII Regulations and for which adjudication penalty is imposable in terms of Section 15HB of Securities and Exchange Board of India Act, 1992.�� The Section 15HB of SEBI Act, 1992, reads as under:-

"Penalty for contravention where no separate penalty has been provided.

11.0 The violation thus being established, the undersigned considered the following factors as provided in the section 15J of SEBI Act to determine the quantum of penalty that can be imposed under Section 15HB of SEBI Act, 1992 viz. (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default. In the absence of any data in the records, the disproportionate gain or unfair advantage, or loss to the investors may not be quantified in the instant case but the seriousness attached to the violation may be seen from the following factors :

11.1 In order to analyse the seriousness of the matter, the importance attached to the said declaration/circular dated August 8, 2003 needs to be examined.� In this context, the Joint Parliamentary Committee's report dated December 12, 2002 on the securities market scam has made various observations with respect to the role of FII/sub accounts vis-�-vis the investment made by OCB's. The extract of some of the relevant paras is as under:

Paragraph 8.76

SEBI's investigations have brought out several instances of violations by OCBs such as non-delivery of shares, purchase of shares on adjustment basis, booking purchase order without sufficient balances in their accounts, exceeding the prescribed ceiling of 5 per cent for individual OCBs and violations of 10 per cent aggregate ceiling, etc. Certain OCBs and sub-accounts of FIIs also violated the SEBI (Substantial Acquisition of Shares and Take over) Regulations.� SEBI has mentioned five OCBs and two sub-accounts of FIIs which have aided, assisted and abetted in creation of artificial market and volumes, circular trading and building up concentrated positions in a few scrips. �� ".

Paragraph 8.80

�In the Committee's view, there is a need to have a fresh look at OCBs' operations after an in-depth study of inflows and outflows on a holistic basis covering their PIS and non-PIS transactions.� The exercise should also include identification and plugging of loop holes and possible establishment of a proper regulatory set up with stringent penal provisions for violations.� The regulatory provisions should inter-alia enable detection of cases where same set of individuals have formed more than one OCB and have their investment spread across the OCBs to escape provisions of SEBI
Take Over Code.� The Committee feel that the suggestions made by RBI for stipulation of a minimum paid up capital for OCBs and adoption of same registration procedure as applicable to FIIs deserve careful consideration by the Government.� The Committee would like the Government to review the ban imposed on OCBs in the light of the above and clearly lay down the responsibility to a particular agency to oversee the OCB operations."

Paragraph 8.81

"SEBI has expressed suspicion that some of the Indian promoters have purchased shares of their own companies through Participatory Notes issued by sub-accounts of FIIs.� This mechanism enables the holders to hide their identities and enables them to transact in Indian Capital Market.� The Committee note that SEBI has since directed FIIs to report about details of the Participatory Notes as and when issued by them.� The Committee suggest that failure on the part of FIIs to report about issue of PNs should be viewed seriously and should entail stringent punitive action.� It should also be ensured that this instrument is not misused in any way to manipulate the Indian Securities Market."

11.2 From the aforesaid JPC observations, the importance of monitoring OCB's investment can be gauged. OCBs had played a significant role in securities market scam; as per JPC.� So, it was a national level policy issue and to address the same, SEBI came out with the circular dated August 8, 2003 with a view to monitor the investment by FIIs/sub accounts. The violation of the same where registered intermediaries, like noticee having presence in securities/financial markets world over, are involved should be dealt firmly. This is required to ensure that law of the land, especially when the efficacy of Indian Securities market is at stake, is enforced to the maximum and a message is given to the other market players that they need to be cautious in their dealings in the securities market. In this regard, I also take a guidance from the JPC Report that "failure on the part of FIIs to report about issue of PNs should be viewed seriously and should entail stringent punitive action".� In view of the seriousness of the violation, I am consciously of the view that it is a fit case for imposition of maximum penalty as prescribed under Section 15HB of the SEBI Act, 1992.

12.0 Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 1,00,000,00/- (Rs. One Crore only) on Citigroup Global Markets (Mauritius) Ltd. under section 15HB of SEBI Act, 1992 for the violations established in paragraph no. 10.0 of the order.

13.0 Citigroup Global Markets (Mauritius) Ltd shall pay the said amount of penalty by way of demand draft in favour of �SEBI- Penalties Remittable to Government of India�, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to Mr. R Ravichandran, Chief General Manager, ISD, Mittal Court, 1^st floor, B- Wing, 224, Nariman Point, Mumbai 400 021.

14.0 This order of adjudication is made and passed on 11^th day of August 2006 at Mumbai.

AMIT PRADHAN

ADJUDICATING OFFICER