BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA �[ADJUDICATION ORDER NO. AP/AO-16 /2006-07]

UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995

��

In respect of

GOLDMAN SACHS INVESTMENT (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 Goldman Sachs Investment (Mauritius) Ltd. a sub-account (hereinafter referred as �GSIML 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 18, 2004 issued by Mr. C S Kahlon (Executive Director- SEBI).

3.0 A show cause notice (SCN) dated June 06, 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 GSIML, 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. The SCN was delivered through courier on June 12, 2006, to the noticee.� Despite the delivery of SCN no reply was filed by GSIML.� Pursuant to this, I thought it fit to hold an inquiry in the matter and accordingly issued a notice dated August 4, 2006 and fixed August 25, 2006 for personal appearance of GSIML.� In response, GSIML vide its fax dated August 10, 2006, submitted that their company secretarial service provider in Mauritius failed to deliver them the SCN, and sought time till September 30, 2006 to file its reply.� Accordingly vide letter dated August 11, 2006, GSIML was advised to file its submissions by August 28, 2006.� In this regard a reply dated August 28, 2006 (received on August 31, 2006) was filed by GSIML.�

4.0 In its reply, GSIML waived their right of personal hearing as provided under Rule 4(5) of the Adjudication Rules.� Considering the request of GSIML and in terms of proviso to Rule 4 (5), I do not think it necessary to fix date for a personal hearing of GSIML.

5.0 Having carefully perused the material on record I now 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 GSIML.

5.1 It prima-facie appeared that Goldman Sachs International Ltd. (GSIL), an affiliate of GSIML, (Noticee) a sub�account registered with SEBI issued off-shore derivative instruments to an Overseas Corporate Body (OCB) namely Magnus Capital Corporation Ltd. (MCCL), a Mauritius based entity, 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 the noticee ��pursuant�� to�� SEBI Circular dated August 8, 2003 and which was issued in exercise of the powers conferred by Regulation 20 of FII Regulations.�

5.2 It was alleged that the noticee GSIML 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 In compliance of the aforesaid circular, GSIML filed a statement vide letter dated August 20, 2003, which did not contain the Clause of the undertaking as prescribed in Annexure A of the said circular.� However, later in continuation of the said statement another statement followed and it is alleged that despite issuance of ODIs to an OCB namely Magnus Capital Corporation Ltd (MCCL), noticee gave an undertaking and declaration which was not true.� Following was the undertaking/declaration in Annexure 'A' of the statement:

"Goldman Sachs Investment (Mauritius) International Ltd., undertake on behalf of itself and its affiliates (Goldman Sachs) that as far as it is aware, Goldman Sachs has not entered into any offshore derivatives on Indian Underlyers directly with Indian Residents, NRIs or OCB's (each as defined under relevant Indian laws and regulations) during the statement period.� As agreed with SEBI, this undertaking does not extends to persons of Indian Origin, whether comprising part of the above categories of persons or otherwise."

5.6 In the aforesaid background, the GSIML 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 OCB's was examined by JPC and it was pointed out that certain OCB's 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.

5.8 Before proceeding further in the matter, I would like to deal with a preliminary objection raised by GSIML in paragraph 4 of its reply dated August 28, 2006.� It is stated by GSIML that prior to the issue of SCN in the present adjudication proceedings, SEBI had earlier issued a SCN dated 30.10.2003 under Section 11B of SEBI Act, 1992 to GSIML.� It is submitted that one of the issues raised in that notice was identical to the main issue in the present proceedings, and since no adverse findings or penalty is heard by them, no adverse finding should be made in this case.� In this context, I refer to my appointment as Adjudicating Officer vide SEBI order December 20, 2005 in the present matter and find that the date of my appointment is subsequent to the date of SCN i.e. 30.10.2003 issued by SEBI under Section 11B of SEBI Act, 1992.� So, had there be a decision of SEBI in favour of GSIML on the identical issue, as claimed by noticee, I would not have ever appointed to adjudicate this case.� I, therefore, do not find any merit in the objection of GSIML.�

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

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

6.2 �� Whether GSIML 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, GSIL which is a SEBI registered FII vide its letter dated August 20, 2003 furnished a statement detailing the ODIs issued against its positions in Indian Securities (ODI Report).� The said statement did not contain the undertaking as prescribed in the SEBI circular, to which noticee submits that they were not clear about the reasons for providing such undertaking and in this connection they had sought clarifications from SEBI.� It is claimed by the noticee that a declaration in a form acceptable to SEBI was submitted once it received such clarification.�� However, in support of its submission no confirmation/approval of SEBI changing the format of undertaking as prescribed under the said circular, is filed by the noticee before me.� Therefore, I am not inclined to accept the claim of the noticee that �a declaration in a form acceptable to SEBI� was submitted.� �

9.0 It is submitted by the noticee that as the prescribed declaration was not included in the first statement dated August 20, 2003, the noticee can not be adjudged to have given an incorrect declaration, as alleged in the notice.� In this regard I observe that firstly the noticee did not at all include the clause of undertaking in its first statement and sought to know the reasons for providing this undertaking.� On the face of it, questioning the requirement of a provision, from the regulator who is exercising its lawful powers under the Takeover Regulations is something inconceivable.� Whatever it may be, the noticee filed the statement again along with a declaration.� I am in no doubt that the said ODI statement is nothing but an extension of the previous statement by the noticee and there can not be a defence of noticee that as the prescribed declaration was not included in the first statement, GSIML can not be adjudged to have given an incorrect declaration, as alleged in the notice.�

10.0 Now I need to examine the undertaking which was actually filed by the noticee and which inter-alia is as under:

From the bare perusal of the aforesaid undertaking given by the noticee it is made out that the undertaking was not at all in the format prescribed by the SEBI in its circular dated August 8, 2003.� At many places in the reply of the noticee, I find a mention about noticee seeking clarification from SEBI and also their ignorance of law about prohibition on dealing with OCB�s, because of which they did not include the undertaking in the first statement but later it was included in a statement filed in continuation of the first statement.� I can understand that the noticee was consciously aware of the importance of the declaration and that is why firstly it avoided filing declaration.� So according to me, this is an occasion when the noticee first violated the SEBI circular by not providing the declaration and later when after all of its so called discussions/clarifications from SEBI (the details of the outcome of which is not furnished by the noticee), the noticee claims to have complied with SEBI circular by filing a declaration entirely different from the prescribed format. 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 D of the SCN) that Magnus Capital Corporation, Mauritius is an Oversees Corporate Body (OCB). The noticee can not be allowed to plead an ignorance of this fact. The noticee that is Goldman Sachs, 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 OCB's. �It is a common knowledge and fact that OCB's 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 at paras 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 ODI's submitted to SEBI (As on August 15, 2003).� ��

11.0 As regards issue no. 6.3 above, the noticee has submitted that Regulation 13(1) of the FII Regulations does not contain any obligation in relation to the provision of the prescribed declaration required under the ODI reporting circular, nor does it clearly prohibit the issue of ODIs to OCB�s and any interpretation to this effect would be contrary to established law on statutory interpretation. It stated that any construction that affects vested rights should never be adopted if the words are open to another construction and it is a settled position of law that if the language of the provision is unclear it can not be interpreted to the disadvantage of a party (case laws relied -1976,1SCC 560, and AIR 1954 SC 496). �In addition to the submission made by the noticee regarding the interpretation of a statute, I would like to examine this further in the light of the precedents of the Courts.� The hon�ble Supreme Court has, while interpreting a statute, given lot of emphasis on the legislative intent of the entire statute.� Since it is a spirit of the statute which should govern over the literal meaning, the meaning of some words in a statute may be enlarged or restricted so as to harmonise them with the legislative intent of the entire statute (1979, 4 SCC 93 at p. 98).�� The expression used in a statute should ordinarily be understood in a sense in which they harmonised with the object of the statute and which effectuate the object of legislatures (AIR 1963 SC 1207).� 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 that the violation of Regulation 13(1) has been alleged in the SCN. However, I find that this proviso prohibits 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 i.e. (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 OCB's to invest as sub-account or as FII in Indian securities market, can only be met with, if OCB�s are also denied making investments as clients of sub-account or FII, otherwise the legislative intent and the object of the provision would get defeated.� �In the instant matter the noticee has defeated the purpose of the proviso to Regulation 13 (1) (b) by issuing ODI�s to OCB's. In this regard, I also do not find any merit in the submissions of the noticee vide paragraph 26.3 of the reply dated August 28, 2006 that any interpretation of the proviso to Regulation 13 (1) (b) which prohibits issuance of ODI�s to OCB�s, should not result in noticee being held liable retrospectively on the basis of that interpretation.� The law which prohibits OCB's 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, whereas the alleged transactions of MCCL relates to a period in November 2002. ��The main charge under the SCN in the instant proceedings is furnishing of false declaration and thereby violating the SEBI circular dated August 8, 2003, which was issued in exercise of powers conferred by Regulation 20 of FII Regulations.�� Therefore, the charge under Regulation 13(1) (b) is only an incidental charge to the main charge.�

12.0 The conduct of GSIML 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.

13.0 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:

13.1 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 OCB's 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."

13.2 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 satisfied that it is a fit case for imposition of maximum penalty as prescribed under Section 15HB of the SEBI Act, 1992.

14.0 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. 100,00,000/- (Rs. One Crore only) on Goldman Sachs Investment (Mauritius) Ltd. under section 15HB of SEBI Act, 1992 for the violations established in above paragraphs of the order.

15.0 Goldman Sachs Investment (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.

16.0 This order of adjudication is made and passed on 8^th day of September �2006 at Mumbai.

AMIT PRADHAN

ADJUDICATING OFFICER