WTM/VKC/ ID5/ 116 /07
THE SECURITIES AND EXCHANGE BOARD OF
Coram: SHRI V.K. CHOPRA, WHOLE TIME MEMBER
Date of hearing: 05.10.2007
For Noticees : Shri V.M. Singh, Advocate
Shri D.S. Pendse
For SEBI : Shri P.K. Bindlish, Chief General Manager
Shri Chandrakanta Mitra, Manager
Shri Mohamed Rahaz, Legal Officer
UNDER SECTIONS 11
AND 11B OF Securities and Exchange Board
1. Shri D.S. Pendse (hereinafter referred to as ‘Shri Pendse’) is the former Managing Director of Tata Finance Limited (hereinafter referred to as ‘TFL’) and one of the Directors of Khuda Gawah Investments Pvt. Ltd. (hereinafter referred to as ‘KGIPL’). Smt. Anuradha Pendse, wife of Shri Pendse is one of the Directors of Nalini Properties Pvt. Ltd. (hereinafter referred to as ‘NPPL’).
2. On receiving a complaint from TFL regarding illegal carry forward transactions in the shares of Global Telesystems Ltd (hereinafter referred to as ‘GTL’) by Shri Pendse, NPPL and KGIPL (hereinafter referred to as ‘Shri. Pendse Group’), SEBI initiated an investigation into the affairs relating to the alleged unauthorized carry forward transactions. The investigation revealed that during September 2000 to February 2001, Shri Pendse on behalf of his front entities NPPL and KGIPL entered into off-market transactions for sale of GTL shares against their purchase positions, through Jhunjhunwala Stock Brokers Pvt Ltd (hereinafter referred to as ‘JSBPL’). JSBPL in turn, entered into off-market transactions for the sale of these shares to M/s Niskalp Investments & Trading Company Ltd (hereinafter referred to as ‘Niskalp’), the then subsidiary of TFL, and another company M/s. Inshaallah Investments Ltd (hereinafter referred to as ‘Inshaallah’), in which Niskalp had a significant financial interest.
3. It was observed that as the prices of shares of GTL were falling from September 2000 onwards, Shri. Pendse Group resorted to passing the losses of its purchase position to Inshaallah and Niskalp through off-market carry forward transactions which were in violation of Section 13 of Securities Contract (Regulations) Act (hereinafter referred to as ‘SCRA’) read with Regulations 11 and 12 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market), Regulations, 1995 (hereinafter referred to as ‘PFUTP Regulations’) and also the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’).
the basis of the Investigation Report, SEBI issued three show cause notices all
Noticees replied to the show cause
notices vide letters dated
6. As regards the violations under PFUTP Regulations, the Noticees submitted that, in the light of PFUTP Regulations, 1995 being repealed by PFUTP Regulations, 2003, Regulation 13 of PFUTP Regulations, 2003 would apply only if an allegation of violation of Regulations 3, 4, 5 or 6 of PFUTP Regulations, 1995 had been alleged. But as the said show cause notice alleges violation of Regulations 11 and 12 of the PFUTP Regulations, 1995 which do not fall within the savings clause of Regulation 13 of the PFUTP Regulations, 2003, the same cannot be invoked against them.
7. The Noticees further submitted that a principal to principal transaction is permitted between a member of the Stock Exchange and a non-member provided the conditions as contained in Section 15 of SCRA are complied with. The Noticees stated that on the basis of the available records, the provisions of Section 15 have been complied with.
8. The Noticees also submitted that the BSE Rules, Bye-laws and Regulations do not restrict the issuance of a Form-B Contract Note merely to a transaction on a principal to principal basis which is on a spot delivery basis. They submitted that, it may also be issued to a transaction on a principal to principal basis which relates to a Carry-over/ Carry-forward position, as Regulation 14 of BSE Rules, Bye-laws and Regulations specifically permits/recognizes the same.
10. I have carefully examined the investigation report, show cause notice, reply of Noticees and submissions made at the time of hearing as well as post hearing written submissions.
11. I observed that 25,000 shares of GTL were
purchased by JSBPL on
12. It would be pertinent to reproduce the text of Section 13 of the SCRA, which is as under-
Section 13- “Contracts in notified areas illegal in certain circumstances.- If the Central Government is satisfied, having regard to the nature or the volume of transactions in securities in any State or area, that is necessary so to do, it may, by notification in the Official Gazette, declare this section to apply to such State or area, and thereupon every contract in such State or area which is entered into after the date of the notification otherwise than between members of a recognised stock exchange in such State or area or though or with such member shall be illegal.”
13. The object of Section 13 is to make a transaction in securities in an area other than between the members of a recognized stock exchange or through or with such member, illegal after Section 13 has been made applicable in the said area. The effect of this provision is that if a transaction in securities has to be validly entered into, such a transaction has to be either between the members of a recognised stock exchange or through a member of a stock exchange or with a member of a recognised stock exchange. This view has been upheld by the Hon’ble Bombay High Court in the case of Dahiben Umedbhai Patel and Others v Norman James Hamilton and Others.
14. By a notification dated
Section 2(i)- “Spot delivery contract means a contract which provides for- (a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality;
15. A contract for sale of shares, in order to qualify as a “spot delivery contract” must provide for actual delivery of shares and the payment of price either on the same day as the date of the contract or on the next day, etc. This view was reiterated by the Hon’ble Bomaby High Court in a similar situation in the case of Norman J. Hamilton v Umedbhai S. Patel and Others. It is, therefore, clear that as the said transactions did not result in delivery of shares or in payment of price consideration, they cannot be termed as spot delivery contracts. These transactions were, therefore, not exempted under Section 18 of the Act from being governed by Section 13 of the SCRA and thus were illegal contracts by virtue of the provisions of the SCRA.
16. I also note that the contention put forth by the Noticees that Regulation 14 of the BSE Rules, Bye-laws and Regulations specifically permits/ recognizes that Contract Notes may be issued in ‘Form-B’ for a transaction on a principal to principal basis which can be a Carry Forward position, does not hold good. This is so because, the language of Regulation 14 is amply clear and unambiguous, and the interpretation sought to be given by Noticees cannot be derived from the plain reading of Regulation 14 of the BSE Rules, Bye-laws and Regulations , which reads as follows-
14.2 Contract Notes issued by members to constituents when acting for them as agents and when dealing with them as principals shall either be in physical and/or electronic form in accordance with Form A and Form B respectively prescribed in Appendix B to this Regulation or in such other form or forms as the Governing Board and/or the Executive Director and Chief Executive Officer may from time to time prescribe in addition thereto or in modification or in substitution thereof.
The mechanism of record keeping of electronic contract notes in a soft non tamperable form shall be prescribed by the Executive Director & Chief Executive Officer, from time to time, in compliance with the provisions of the IT Act, 2000.
14.2.1 Members shall, while issuing contract notes in accordance with Regulation 14.2 to their constituents when acting for them as agents and when dealing with them as principals, be entitled to and may add such relevant details as they so deem fit to make it a contract note cum bill. Provided, however, that the content of the contract note as so prescribed by the Governing Board from time to time shall not be diluted.”
17. In addition to this, it cannot be derived from the language of Section 15 of SCRA that, it does not require settlements/completion of transactions in respect of principal to principal contracts in Carry-over segment within 48 hours. The section merely provides for the conditions which need to be satisfied by a member of a recognised stock exchange while entering into any contract as a principal with any person other than a member of a recognised stock exchange. Thus it cannot be regarded as an exception to Section 13. Section 15 of the SCRA reads as under-
“Section 15- Members may not act as principals in certain circumstances.- No member of a recognised stock exchange shall in respect of any securities enter into any contract as a principal with any person other than a member of a recognised stock exchange, unless he has secured the consent or authority of such person and discloses in the note, memorandum or agreement of sale or purchase that he is acting as a principal;
Provided that where the member has secured the consent or authority of such person otherwise than in writing he shall secure written confirmation by such persons of such consent or authority within three days from the date of the contract;
Provided further that no such written consent or authority of such person shall be necessary for closing out any outstanding contract entered into by such person in accordance with the bye-laws, if the member discloses in the note, memorandum or agreement of sale or purchase in respect of such closing that he is acting as a principal.”
18. In addition to the above, the contention put forth by the Noticees that Regulation 11 and 12 of the PFUTP Regulations, 1995 cannot be invoked against them in light of the repeal of PFUTP Regulations, 1995 by PFUTP Regulations, 2003, is unacceptable. This is so because, the provisions under Chapter III of the PFUTP Regulations, 2003 being procedural provisions, shall apply without any qualification, also to an investigation that was pending at the date of repeal of the PFUTP Regulations, 1995.
19. I find that provisions in clauses (e) to (h) of Regulation 11(1) of the new Regulations are nothing but improved versions of the old provisions in clauses (a) to (d) of Regulation 12 of the repealed Regulations. The new regulations, in fact, do not enlarge the scope of power of the Board as regards those mentioned in clauses (a) to (d) of its Regulation 11(1). The measures indicated in clauses (a) to (d) of Regulation 11(1) are, in substance, identical with the already existing ones mentioned in clauses (a) to (d) of Section 11(4) of the SEBI Act. In these clauses, some powers of the Board which are explanatory in nature were enumerated specifically, without prejudice to the general power given to it by Sections 11 and 11B of the Act. It has been held by various courts that, Section 11B of the SEBI Act is an enabling provision and must be construed to confer widest possible powers on the Board to carry out the object of the Act. This was further reiterated in the case of Anand Rathi v SEBI. As regards the powers available to the Board under Section 11B, Hon’ble SAT had recently clarified vide its judgment in the case of Karvy Stock Broking Ltd. v SEBI by saying that,
“It is clear that a common thread runs through various provisions of the Act and that is to empower the Board to take preventive as well as punitive measures so as to protect the investor and to promote the securities market.”
20. Actions taken and directions issued under Regulation
11 of the new Regulations are only to advance the purposes of the SEBI Act,
which undoubtedly conferred very extensive and wide power on the Board by its
21. Regulation 11 of the new Regulations being a piece of procedural law shall apply to the investigation started against the Noticees under the old Regulations. Regulation 11 of the new Regulations prescribes the manner in which the Board shall take the interim measures till the time it takes the final decision under Sections 11 and 11B of the SEBI Act.
22. The said issue was already examined by the Hon’ble High Court of Calcutta in the case of Raj Kumar Kishorepuria v SEBI. While examining a similar issue the Hon’ble HC observed that,
“It seams to me that actions taken
and directions issued under regulation 11 of the New Regulations are only to
advance the purposes of the Securities and Exchange Board of
India Act, 1992, which conferred very extensive and wide
power on the Board by its section 11B, which is-
To my mind, a provision of law of this nature, usable both at post and pending stages of an investigation, since provides only the means and instruments to achieve the end product of the administration of justice, must be regarded as procedural, irrespective of the consequences it produces as to curtailment or extinguishment of any existing right or freedom of the person likely to be affected by it. It provides one of the stages through which the investigation attains finality, and thus through the prescribed procedure sets the stage ready for the substantive law to play its role.”
23. Therefore, in my view the changes effected to the situation in this case are nothing but mere procedural changes, and that they shall apply with full force to the case of the petitioner in view of specific provisions of Regulation 13 of the PFUTP Regulations, 2003. Regulation 13 of the PFUTP Regulations, 2003 reads as under-
“The Securities and Exchange Board of
24. Moreover, it is apparent from the post
investigation show cause notice that the Board contemplated actions against the
Noticees under section 11B, which empowers it to
issue all or any of the directions specified in Regulation 11 of the new
Regulations. This is so, because Section 11B confers power on the Board to
issue such directions as may be appropriate in the interests of investors in
securities and securities market. Therefore, to my mind, in any case, the Noticees cannot say that the measures mentioned in Regulation
11 cannot be taken against them, if there are good and sufficient reasons for initiating
any of them, which are existing in the present case as clearly demonstrated
above. Thus the judicial pronouncements relied upon by the Noticees
in this regard, vide letter dated
25. In light of the above reasoning and judicial pronouncements, I am of the view that in the present case, the violation of the provisions of Regulation 6(a) and (d) of PFUTP Regulations, 1995 read with corresponding provisions of PFUTP Regulations, 2003 has clearly been established against the Noticees. Further, it is established that the Noticees, by indulging in these unfair trade practices, had entered into illegal carry forward transactions in violation of Section 13 of the SCRA.
26. Therefore, taking into consideration all the facts, circumstances and other materials available on record, in exercise of the powers conferred upon me under Section 11 and 11B read with Section 19 of the SEBI Act read with corresponding provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, I hereby, restrain M/s Nalini Properties Pvt. Ltd. (PAN No: AAACN9514F), M/s Khuda Gawah Investments Pvt. Ltd. and its Director Shri D.S. Pendse (PAN No: AALPP9719M), from accessing the securities market and also prohibit them from buying, selling or otherwise dealing or associating with the securities market, for a period of two years.
27. This order shall come into force with immediate effect.
Place: Mumbai V.K. CHOPRA
SECURITIES AND EXCHANGE