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    ORDER UNDER RULE 5(1) OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF M/S. HINDUSTAN HOLDINGS LTD. (NOW KNOWN AS SACHDEV SECURITIES LTD.)

    1.0  The undersigned had been appointed as the Adjudicating Officer by the Securities and Exchange Board of India (hereinafter referred to SEBI/Board) in terms of an order No.MIRSD/ADJ/04 and 05 dated September 24, 2004 to enquire into and adjudge under Section 15-I of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as �the said Act�) the alleged contravention of Section 15HB of the said Act read with Regulations 26 (xv) (xvi) and (xvii) of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as �the said Regulations�) by Hindustan Holdings Ltd. (now known as Sachdev Securities Ltd.) (hereinafter also referred to as noticee) for not seeking prior approval of SEBI for the change in the constitution and status of the company resulting in non-exercise of due skill, care and diligence as well as non-compliance with the directions issued by the Board issued under the said Act and the said Regulations.

    2.0  Before I proceed to deal with the case, it would be pertinent to make a reference to the relevant provisions of Law / the said Regulations:

    Rule 4 (c) of SEBI (Stock Broker and Sub Broker) Rules, 1995

    Rule 4������������������ The Board may grant a certificate to a stock-broker subject to the following conditions namely:

    c)      in case of any change in the status and constitution, the stock broker shall obtain prior permission of the Board to continue to buy, sell or deal in securities in any stock exchange;

    Regulation 26������� A stock broker or a sub-broker shall be liable for monetary penalty in respect of the following violations namely-

    xv)               Failure to comply with directions issued by the Board under the Act or the regulations framed thereunder.

     

    xvi)             Failure to exercise due skill, care and diligence.

    xvii)            Failure to seek prior permission of the Board in case of any change in its status and constitution.

    2.2.�� Non-compliance of the above regulations attracts penalty prescribed under section 15A (b) of the said Act which 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.}

    3.0.        Brief facts :

    It was stated that NSE had applied to SEBI for surrender of registration certificate of M/s. Hindustan Holdings Ltd. While examining the said application it appeared that M/s. Sachdev Securities Ltd. had become trading member of NSE and that M/s. Hindustan Holdings Ltd. had merged with M/s. Sachdev Securities Ltd. However, the merger of Hindustan Holdings Ltd. with M/s. Sachdev Securities Ltd. took place without the knowledge and prior approval of SEBI in violation of Rule 4(c) of the SEBI (Stock Brokers and Sub Brokers) Rules, 1992 (hereinafter referred to as the �said Rules�) and Regulation 26(xv), (xvi) and (xvii) of the said Regulations.

    The said fact of merger without prior approval of SEBI also amounted to failure to comply with directions issued by the Board as well as non-exercise of due skill, care and diligence.

    4.0.���� Show Cause Notice

    After being so appointed as the Adjudicating Officer, as per the procedure laid down in the SEBI (Procedure of Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as �SEBI Rules�) a notice in accordance with Rule 4 of the SEBI Rules was served on Hindustan Holdings Ltd. vide letter no. Adj/33/RRB/2003-NRO-21490 dated October 12, 2004 to show cause, within 14 days as to why an enquiry should not be held against them for the alleged violations punishable under Section 15HB of the said Act. The said notice provided the details of the provisions of law and the violations alleged to have been committed by them. Also calling upon them to explain why the penalty for the abovesaid violations as prescribed in 15HB of the said Act read with Regulation 26 (xv) (xvi) and (xvii) of the said Regulations should not be imposed upon them. They were also advised that if they desired personal hearing, the same should be indicated.

    M/s. Sachdev Securities Ltd., vide letter dated 28 October, 2004 sought extra time for filing a reply to the said show cause notice. However, no reply was received till December 09, 2004 when an opportunity of personal hearing was granted to them. In view of the merger, the entire correspondence, representation etc. was made by M/s. Sachdev Securities Ltd. I would like to use the word �noticee� for the sake of convenience Vide letter dated December 09, 2004 date of hearing was fixed for December 16, 2004 and they were also advised that they may appear for a personal hearing, either personally or through their lawyer or other authorized representative before the Adjudicating Officer at Block No.1, Rajendra Bhawan, Rajendra Place, New Delhi-110008. They were also advised that if they wished to produce any documents or evidence which they considered relevant to the enquiry they should bring the same with them on the said date of hearing. However, subsequently letter dated December 04, 2004 was received on December 10, 2004 from the noticee, expressing inability to file a reply to the show cause notice on merits for want of relevant correspondence made with National Stock Exchange (NSE). Request was made to Adjudicating Officer to instruct NSE to provide them the required documentation. Thereafter, another letter dated December 11, 2004 was received reiterating the same request and stating that due information has been sent by them to NSE in 1997 for the intended merger and that all the documents required by the NSE were also submitted by them but actual merger procedure had taken place in 1999.

    5.0.����� Reply and personal hearing

    On the said date of hearing i.e. December 16, 2004, Shri Girish Narang and Shri Pritam Singh duly authorized by the company appeared for personal hearing. It was reiterated that the company had initiated the proposal to merge with M/s. Sachdev Securities Ltd. in the year 1997. They had applied to NSE for the proposed merger. They had also provided the documents required by NSE for such approval. The company initiated the merger process in the year 1997. After the merger was approved by the High Court the company submitted information to NSE.

     

    It was further submitted that when they applied to SEBI for surrender of membership they received the show cause notice from SEBI. �Also, that their office had been shifted and the business had been closed since 2001 and that they had misplaced the relevant documents and correspondence exchanged with NSE related to the merger between Hindustan Holdings Ltd. and Sachdev Securities Ltd. They had applied to NSE to provide them copies of the documents exchanged between them.

    It was assured that they would be finding out all the documents relevant to the said merger, which they could avail from other authorities like ROC as soon as possible and would submit the documents in the Adjudication proceedings. Another letter dated December 16, 2004 was also submitted reiterating the earlier requests.

    To confirm the steps taken for approval by the noticee regarding the merger with Sachdev Securities Ltd., the undersigned requested NSE for the information. NSE has informed vide letter no. NSE/MEM/345/11406-R dated March 11, 2005 that the said merger was carried out without the prior approval of the Exchange/SEBI and the matter was referred to the Disciplinary Action Committee of the Exchange. The said Committee on consideration of the matter had advised the trading member not to repeat the violation. NSE had also forwarded copy of the intimation dated March 16, 2001 sent by the merged entity i.e. Sachdev Securities Ltd. It was also informed by NSE that they had sent a copy of the correspondence to the noticee as per their request.

    Since noticee had asked for certain documents from NSE and had also requested for another opportunity for further reply and personal hearing, it was thought fit to give them one more opportunity for personal hearing which was communicated to noticee vide letter dated �April 12, 2005. The date of hearing fixed was April 18, 2005. On the said date nobody appeared, however, a reply dated April 25, 2005 was received, contents of which are as follows:

    �This is in continuation of our reply dated 16.12.04 to your above referred notice and personal hearing by our authorized representative before you in same date. In the said hearing we had requested you to advise NSE to provide us with relevant documents related to correspondence with them in the matter of merger of M/s. Hindustan Holdings Ltd. with M/s. Sachdev Securities Ltd., since we had lost the documents pertaining to said correspondence due to closure of business and shifting of office. You had kindly acceded to our request and had consented to advise NSE to act accordingly. We have recently received certain documents from NSE and based on the available documents, we are presenting our submission and reply in the said matter.

    Before proceeding with our submissions, we would like to bring to your notice the applicability of Regulation 26 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 on the present case. The entire process of merger was completed in the year 2002 while the Regulation 26 was incorporated in the SEBI Regulation w.e.f. 20th November, 2003. Therefore, it becomes legally established that the said Regulation and its clauses are inapplicable to the present case.

    Further, since the reference to Sec. 15HB has been taken from Regulation 26 only, the imposition of monetary penalty under section 15HB for alleged violation of Regulation 26 is also not tenable. This view has been confirmed in various decisions of Adjudicating Officers of SEBI, some of which are listed below:

    a.                     Order of Adjudicating Officer dated 1st December, 2004 in the matter of M/s. Dynamic Stock Broking (India) Pvt. Ltd.

    b.                     Order of Adjudicating Officer dated 2nd December, 2004 in the matter of M/s. Saurashtra Capital Services Pvt. Ltd.

    c.                      Order of Adjudicating Officer dated 31st December, 2004 in the matter of M/s. United Share Brokers Ltd.

    Copies of above orders are enclosed for your reference.

    Further, SAT has also confirmed in the matter of Rameshchandra Mansukhani NRI vs. Adjudicating Officer, SEBI (Appeal No. 151/2004) that �penalties unless specifically made retrospective must inevitably be only from the date of amendment�. Therefore, there is no question of imposition of monetary penalty on us in the said matter.

    Without prejudice to the above analysis of applicability of legal provisions stated in the show cause notice, we are confirming our submissions that the merger took place with the prior knowledge of NSE. Our submission is being corroborated here-in-below:

    1.                                       Brief about the Company and facts of the present case

    M/s. Hindustan Holdings Ltd. was doing the business of stock broking under membership of NSE. The management considered to merge the Company with another group Company, M/s. Sachdev Securities Ltd., to consolidate the group�s financial position and to bring similar business in one company. The Company forwarded the proposal to NSE to seek its prior permission to the merger. NSE granted its in-principal approval to the merger subject to certain conditions. The company complied with the conditions stipulated by NSE and submitted the documents to NSE. NSE later approved the merger between the companies.

    Due to adverse market position, the Company closed the business of stock broking and applied to NSE for refund of its security deposit. NSE forwarded the application to SEBI. After that, we have received the above referred show cause notice from SEBI.

    It has been alleged in the show cause notice that the merger of Hindustan Holdings Ltd. with Sachdev Securities Ltd. took place without the knowledge and prior approval of SEBI. It has been further stated that said act amounts to failure to comply with directions issued by the Board as well as non-exercise of due skill, care and diligence.

     

     

     

    2.         Issues raised in the show cause notice

    The company has been alleged of the following acts:

    i.        Merger of erstwhile Hindustan Holdings Ltd. without prior knowledge and approval of SEBI and thereby violation of following provision of SEBI (Stock Broker and Sub Broker) (Regulations 1992, left incomplete by typo error by the noticee).

    ii.      Consequent to the above alleged violations, the Company has been made liable to monetary penalty under Section 15HB of SEBI Act, 1992.

    3.                                       Merger without prior knowledge and approval of SEBI

    First of all, we vehemently deny the charges made against us. We have never acted in violation of any rules and directions issued by SEBI or NSE in the said matter and neither had we had any intention to do so. The merger took place with the prior and full knowledge and consent of NSE, and it is the prevalent practice that for such approvals, the trading member has to approach the NSE and not directly SEBI. Further, NSE has also given its approval to the change in constitution after the merger took place.

    For better understanding of the process, we are detailing the procedure being followed by NSE in case of merger of trading member with any other company. It is to be noted here that there is no direct correspondence of the Trading member with SEBI and all the communication in this regard are sent to NSE only.

    a.                  The trading member to send the proposal of merger to the NSE for its comments thereon;

    b.                  The NSE shall give its approval to the scheme subject to member consent to comply with relevant conditions, viz. dominant holding;

    c.                   The Trading member shall then comply the conditions stipulated in this regard and will proceed with the merger;

    d.                  After the completion of the merger exercise, the trading member shall submit the Court order and other relevant documents to the NSE who in turn will send the documents to SEBI for its prior permission to continue to buy, sell or deal in securities;

    e.                   After getting approval of SEBI, the new entity shall be granted a fresh/amended certificate of registration to continue trading in its name.

    We have adequately followed the procedure applicable for merger and have never violated any directions of SEBI or NSE in this regard.�

    A table giving the correspondence exchanged with NSE as well as filings with High Court and the ROC was given in the reply, however, it is not being reproduced here since the gist of contents of the said correspondence is given subsequently in the submissions by noticee.

    As per NSE�s letter dated 18th November, 1997 (Annexure-D), the NSE specifically allowed the merger subject to the conditions stipulated therein. The very first condition of the NSE was that merger is to be effected in accordance with the relevant statutory approvals and copies of the General Body resolutions approving the proposed merger and copy of relevant High Court orders sanctioning the merger should be submitted. By this letter, NSE accorded its in-principal approval to the merger and directly the Company to conform with the conditions stipulated in the said letter and submit the details after the merger process is complete. We further replied to this letter confirming our willingness to merger (of) M/s. Hindustan Holding Ltd. with M/s. Sachdev Securities Ltd. in confirmation with relevant circulars in this regard (Annexure E). We also confirmed that relevant statutory approvals would be submitted in due course.

    After the above correspondence and confirmation from NSE, we proceeded with the proposed merger and received sanction of High Court and the order was registered with Registrar of Companies. Afterwards, the Company informed the NSE about the completion of merger process and asked for further requirements, if any.

    The above sequence of events makes it clear that the company had complied with all the conditions to give effect to the merger of the two entities. The NSE was properly informed about the decision of merger being taken and it specifically allowed the said merger.

     

    The Company had complied with other conditions stipulated by the NSE in this regard. Likewise, M/s. Hindustan Financial Management Ltd., the dominant shareholder of Hindustan Holdings Ltd. continued to hold more than 40% of the emerging entity (being a listed entity), Sachdev Securities Ltd. The emerging Company also complied with the networth and other requirements applicable to corporate trading members of the NSE.

    The details of shareholding pattern are as follows:

    �� Sr. No.

    Name of Shareholder

    Pre-Merger shareholding (Hindustan Holdings Ltd.)

    Post-Merger Shareholding (Sachdev Securities Ltd.) (%)

    � 1.

    Hindustan Financial Management Ltd.

    74.11

    42.11

     

    Total of dominant group

    74.11.

    42.11

    2.

    Directors and relatives

    8.64

    16.85

    3.

    Others/Public

    17.25

    41.04

     

    Total

    100.00

    100.00

     

    It is evident that the Company acted as per the applicable guidelines, instructions and prior knowledge of the NSE.

    By the above submissions, it is clear that we have complied with the directions issued by the Board in this regard and have exercised due skill, care and diligence in the said matter.

    Contravention of SEBI Regulations

    As per the show-cause notice, it has been alleged that the Company has contravened the sub-clauses (xv), (xvi) and (xvii) of Regulation 26 of SEBI(Stock Brokers and Sub-Brokers) Regulations, 1992. It is considerable to note here that the said regulation came into effect on 20th November, 2003 only. At the time when the company did the merger process, these sub-clauses never existed. Since the said law never existed as on the date of occurrence of event, the allegations against the Company are not tenable under the law. This argument is with savings to our continued emphasis that the Company has never violated the provisions of law and has done all compliances on its part to obtain permission of NSE before initiating the merger process.

    A reference to Section 15HB, in the show cause notice, has been derived from opening lines of Regulation 26 of SEBI (Stock Brokers and Sub-Brokers) Regulations. The Regulation 26 states �A Stock Broker or a sub-broker shall be liable for monetary penalty in respect of the following violations namely���.� Since Regulation 26 never existed at the time of merger, it has no applicability on this matter and thereby reference to Section 15HB is also not sustainable.

    It has been settled by SAT in the matter of Rameshchandra Mansukhani NRI vs. Adjudicating Officer, SEBI (Appeal No. 151/2004) that �penalties unless specifically made retrospective must inevitably be only from the date of amendment:. Therefore, these is no question of imposition of monetary penalty on us in the said matter.

    5.                     Conclusion

    Keeping in mind our above explanations, we proceed to conclude our position as follows:

    a.                  The show cause notice sent to us is not tenable since it proceeds to implicate us on a law which was not applicable as on the date of alleged violation of law. For this very reason, the show cause notice need to be withdrawn.

    b.                  Even though the allegations referred to in show-cause notice are invalid as per law, we have proved beyond doubt that we had proceeded with the merger scheme only after approval of NSE. As per the general prevalent procedure, the trading members never approach SEBI in this matter and the matter is referred to SEBI by NSE only after the merger process is complete. The in-principal approval to the merger process is always given by NSE and we had obtained such in-principle approval from NSE.

    Considering the above submissions, and our clear intentions to abide by the law, we request you to drop the show-cause notice against us.

    Another hearing was granted to them on 24.05.05 as per their request when they made the following submissions:

    �We are of the view that before coming into effect of Regulation 26 of SEBI (Stock Brokers and Sub-Brokers) Regulations, Rule 4(c) of SEBI (Stock Brokers and Sub-Brokers) Rules governed the process of approval from SEBI in case of change in constitution of broker entities. We interpreted the rule 4(c) in such a manner that it requires prior approval of SEBI for trading and not for change in constitution. Considering National Stock Exchange as our mentor we wholly relied on the instructions given by the exchange and believed that exchange shall forward the application to the Board.

    We undertake to give further submissions regarding approval from Stock Exchange vis.-a -vis approval from SEBI in case of change in constitution. By the in principle approval from Stock Exchange vide their letter dated November 18, 1997 we considered compliance of SEBI Regulations in this regard and proceeded with the merger application.�

    Subsequently, another request for one more hearing was received vide letter dated 28.06.05 and accordingly one more opportunity was granted to them to make submissions in view of the principles of natural justice. On 05.07.05 Mr. Girish Narang, Company Secretary represented the company along with Ms. Harpreet Kaur also Company Secretary. The following submissions were made on 05.07.05 and �written submissions dated June 18, 2005 were also requested to be taken on record:

    �Role of trading member in taking approval under Rule 4 (c) is very limited to provide information required by the Exchange. During the period when merger was done i.e. 1997-98 there was total confusion in the system regarding approval of 4 (c ) and to clarify that SEBI came up with a circular dated July 9, 2003 and thereby fixed all the liability on stock exchange for obtaining approval. Thus stock exchange was to obtain approval from the SEBI after being satisfied of the compliances by the trading member.

    There was no intention on the part of the trading member to hide or conceal any information and the spirit of the Rule 4 (c) requiring that any change in status or constitution be known to the SEBI was duly complied by the trading member.

    Further, clause xv, xvi and xvii of Regulation 26 SEBI (Stock Brokers and Sub Brokers) Regulations under which the present contravention has been brought into notice, came into effect on November 20, 2003 which was much after the merger took place. So we humbly request the officer not to impose any kind of penalty in the interest of justice.�

    Submissions made vide letter dated June 18, 2005 are as follows:

     

    �This is with reference to the personal hearing provided by your goodself in the matter captioned above. We would like to present this additional submission regarding the same to clarify the legal position during the time of merger i.e. 1997-1998:

    The present matter has been evoked for imposing penalties under section 15HB of SEBI Act, 1992 for alleged violation of the sub clause (xv), (xvi) (xvii) of the Regulation 26 of SEBI (Stockbroker & Sub Broker) Regulations, 1992 for not seeking prior approval under Rule 4(c) of the SEBI (Stock Brokers & Sub Brokers) Rules. At the outset it is submitted that we do not accept or admit anything stated in your notice except where the same is exprenoticeey admitted by us in this reply.

    Before we bring out the details regarding the same we would like to throw some light on the procedure adopted by the exchange for merger of stock broking company during that period.

    A Stockbroker is governed by exchange with which it is registered as a member.� All the circulars/ information /conditions /for trading members are transmitted through Stock Exchange. All the information meant for intermediaries are first forwarded to the exchanges who in turn are required to inform their members either through by byelaws, circulars or press releases or any other means. Likewise trading members while approaching SEBI, move through Stock Exchanges. Nowhere does SEBI entertains the trading members application directly. If this would had been the condition, all 9,000 trading members would have approached SEBI for every minor clarification they require. But instead every stockbroker is required to move through exchange for the matters requiring approval from SEBI.

    �

    In a proposed merger also it�s the stock exchange who instructs and guides the trading member about the steps involved, approves the scheme and acts as a mediator between the trading member and the SEBI. In the whole process the trading member approaches stock exchange, who in turn monitors whole of the procedure, vets all the documents and if is satisfied grants approval and also obtains the approval from the SEBI and intimates the trading member about its amended registration certificate. Thus in this whole procedure of merger all the requisite approvals and registration certificates are obtained by Stock Exchange for the trading member.

    In order to go for a merger, a stock broking company follows the below given steps in coordination with the exchange:

    1.      The trading member forwards the tentative proposal of the merger to exchange;

    2.      The exchange on vetting of the proposal and satisfies itself that all the requirements have been complied by the trading member.

    3.      Where exchange finds any deficiency in the process, it intimates the trading member and requires the particular deficiency to be rectified.

    4.      Trading member complies with the stipulations of the exchange;

    5.      On being satisfied with the procedure followed and the documents submitted by the company, exchange grants approval and requires trading member to file the court order of merger with it.

    6.      After completion of the merger, trading member submits the court order and necessary documents to the stock exchange.

    1. Exchange on being itself satisfied that there is no change in constitution, forwards the same to the SEBI and thus obtains the approval of merger.
    2. SEBI on satisfaction of the documents submitted amends the registration certificate and forwards it to exchange who in turn grants the fresh / amended certificate of registration to the trading member.�

    Perusal of the above steps clearly provide that trading member�s obligation are limited to compliance of the conditions stipulated by the exchange and with regard to the approvals from SEBI, it�s the Stock Exchange who approach the SEBI after being itself satisfied that trading member has complied with all the legal procedure of the merger.

    Once all the procedural formalities are over, trading member obtains the court order of merger and files the same with exchange, who in turn applies to the SEBI for further approval and finally the amended registration certificate is issued to the company. Thus here also the trading member does not approaches SEBI but instead it�s the Exchange who acts as a mentor and leads all the activities and trading member simply follows all the instruction as have been issued to it.

    During the hearing granted to us, it was contended that� �as the merger process required prior approval from the SEBI, it was trading members obligation to approach SEBI for obtaining the said approval and obtain the approval before proceeding ahead with the merger process� and since this has not been done so the trading member has contravened Rule 4(c) the SEBI (Stock brokers and Sub brokers) Rules, 1992..

    In order to analyze the situation that prevailed during the period of merger, we bring certain facts for your consideration.

    During the period from 1997-2003 there was no clarity in the system regarding the approval of Rule 4(c) from SEBI and different stock exchanges followed different approaches, while some stock exchanges sought the approval while others did not and instead only a general approval from SEBI was obtained, after the merger was complete. The general practice followed by the stock exchanges were that it didnot even intimate member that prior approval was required to be obtained by the member. SEBI has also accepted this in its circular dated July 09, 2003 (mentioned below) that there was no specific advice to the stock exchanges regarding prior approval. And by bringing out this circular, SEBI has set aside at rest the prevailing uncertainty.�

    By bringing out Circular No: MIRSD/MSS/Cir-30/13289/03 dated July 09, 2003, which has been annexed herewith, SEBI has settled the issue regarding obtaining prior approval and obligation of obtaining the prior approval has been fixed on that of stock exchange who would be forwarding the application to the SEBI and thus making it even more explicit that trading member had no role to take the matters to the SEBI.

    The exact statement of the said circular has been reproduced herein below:

    �Rule 4 of the SEBI (Stock-brokers and Sub-brokers) Rules, 1992 prescribes the conditions for grant of certificate of registration to a stock-broker. Rule 4 (c) of the said Rules prescribes that in case of any change in the status and constitution, the stock-broker shall obtain prior approval of the SEBI to continue to buy, sell or deal in securities in any stock exchange. In the absence of any general advice to stock exchanges about the circumstances requiring prior approval, it is observed that different exchanges follow different practices. For a particular type of change, some exchanges seek approval while some others do not. In order to clarify the circumstances which require prior approval and streamline the process of such approvals, this circular is being issued.�

    Thus its amply clear that prior to the issuance this circular, and inspite of the wordings of the Rule 4(c) �in case of any change in the status and constitution, the stock-broker shall obtain prior approval of the SEBI� in general practice the obligation to forward the application for the approval was on the exchange, who followed different practices, sometimes obtained prior approval and sometimes did not. This circular even defined the person who would be forwarding the application to the SEBI. Had it been the intention of the SEBI that approval had to be obtained by the trading member, it would have clarified through this clarificatory circular, mentioned on the trading member rather than on exchange. And since this has not been done thus making it more explicit that trading member�s role in obtaining the approval was limited to comply with the instructions of the exchange.

    The said circular even clarifies the time period within which the application has to be forwarded to the SEBI. Para 3 of the said circular clarifying the stand has been reproduced herein for your ready reference:

    �3. In all the above cases (Para 2), the exchange must approve the application of the broker and forward the same, within a week of its approval, to SEBI for prior approval along with a confirmation (if otherwise, the details of the same) on the following:

    a)��  the broker is not connected with any of the defaulting brokers of any exchange,

    b)��  no complaint / arbitration /disciplinary proceeding is pending against the broker,

    c)��  no investigation / inquiry by any exchange is pending against the broker,

    d) � as on date of application, the broker, as a broker of the concerned exchange, has paid fees, as applicable, to SEBI,

    e)��  the turnover details necessary to assess the fee liability of the broker have been provided to SEBI in the prescribed manner,

    f)�� in case of approvals at Sl. C, D, and E, the outgoing broker has submitted an undertaking to the exchange that it / he would be liable for the fees that may accrue from the date of application for prior approval till the date of change in status,

    g)��  in case of approvals at Sl. C, D, E and F, the outgoing broker has submitted an undertaking to the exchange that it / he would be liable for all liabilities/obligations (including monetary penalties, if any) for violations, if any, of the provisions of the SEBI Act and the SEBI (Stock-brokers and Sub-brokers) Rules and Regulations, 1992 that have taken place before this change in status and constitution,

    ����������� h) �� in case of approvals at Sl. C, D, E and F, the outgoing broker has submitted an undertaking to the exchange that it / he has no sub-brokers on the concerned exchange and he / it is not a sub-broker of the subsidiary of the concerned exchange,

    i)���  the incoming designated / whole time director is eligible to be appointed as director under the Securities Contracts (Regulation) Act, 1956, and

    j)�� in case of approval at Sl. No. F, the surrendering broker has been disabled from trading and the application for surrender is accompanied by the original certificate of registration (or indemnity) for cancellation.�

    Thus its was clear that even prior to the issuance of this circular, it was a general practice� that exchange advised the trading member about all the procedural formalities and trading member followed it and exchange used to forward the application for approval to SEBI. Then till the issuance of the circular, it was a total matter of indoor management of the exchange, where exchange was to decided about how it obtains the approval and broker was never involved in the procedure of obtaining the prior approval from SEBI.

    But after the issuance of the mentioned circular, the procedure followed was that exchange satisfies itself about the statutory requirements and then forwards the application to the SEBI for approval under Rule 4 (c); and no obligation on the trading member to apply for the approval of SEBI Rule 4 (c), it�s solely the responsibility of the exchange to forward the approval papers to the Exchange. Thus there is no role of the trading member to forward the application.

    Thus the circular has clarified two major aspects:

    �         An prior approval has to be obtained within a weak (week)of stock exchanges granting its approval;

    �         Secondly the obligation of obtaining the said approval has been set on Stock exchange and not on the trading member;

    Procedure of merger followed by Hindustan Holding Ltd.

    In order to carry out the planned merging of Hindustan Holding Ltd with its group company, the company sought all guidance/instruction for the so-called procedure from the Exchange and relied wholly on the information/ guidance provided by NSE in this regard. On receiving the instruction from the exchange it followed all the procedural aspects as had been prescribed by the exchange.

     

     

     

    Comparison of the steps involved in the merger and those undertaken by the M/s Hindustan Holding Ltd.

     

    Requisite steps involved in Merger of broking Company.

    Date of correspondences

    Steps undertaken by trading member in the preset case

    Step 1

    The trading member forwards the tentative proposal of the merger to exchange;

    Oct 18, 1997

    Company intimated the Stock Exchange its decision to merger with its group companies; namely Hindustan Holding Limited (HHL); with Sachdev Securities Limited. A copy of this letter has been attached as Exhibited as Annexure 2

     

    Step 2

    �          The Exchange on vetting of the proposal and satisfies itself that all the requirements have been complied by the broker.

     

    �          Where exchange finds any deficiency in the process, it intimates the company and requires the particular deficiency to be rectified

    Oct 22, 1997

    �� NSE required the company to furnish certain details about their�� current shareholding pattern; A copy of this letter has been attached as Exhibited as Annexure 3

    Step 3

    Trading member complies with the stipulations of the exchange;

    Nov 3, 1997

    �         the company provided the details of the shareholding pattern of the said three companies to the Exchange as required in the above stated letter;

    �         Tentative shareholding pattern if HHL merger with

    a.       Sachdev Securities Limited

    b.                                  Hindustan Financial Management Limited

    c.                                  A copy of this letter has been attached as Exhibited as Annexure 4

     

     

    Step 4

    On being satisfied with the procedure followed and the documents submitted by the company, Exchange grants approval and requires it to file the court order� of merger with it.

    Nov 18, 1997

    NSE in response the above letter required company to conform to all the provisions of the circular NSE/ Legal /00330 dated August 06, 1997 and the circular No. 78 dated September 30, 1997.

     

    Further NSE itself by its letter dated November 18, 1997 stated that *Exchange would grant the approval if the stated conditions were satisfied.

    A copy of this letter has been attached as Exhibited as Annexure 5

    -

    �

    Nov 28, 1997

    Company informed exchange about its compliance with all the conditions specified by the exchange. In compliance to the same the company forwarded all the documents required showing all relating to net worth and the shareholding pattern of the company. A copy of this letter has been attached as Exhibited as Annexure 6

    -

     

     

    Company in order to carry on the said merger followed following procedure:

    �         Board resolution for merger passed;

    �         Applied in high court for calling of meetings of the affected parties;

    �         Held EGM on appointed dates;

    �         The matter was finally approved in High Court of Delhi;

    �         High court Order filed with ROC.

    �

     

    Step 5

    �          After completion of the merger, the trading member submits the court order and the necessary documents to the stock exchange.

    �          Exchange obtains the approval of merger and from SEBI, new entity is granted a fresh / amended certificate of registration to continue trading in its name.�

    Mar 16, 2001.

    Moreover, the company informed NSE about the approved merger (By High Court of India). A copy of this letter has been attached as Exhibited as Annexure7

     

    The facts given herein clearly provide that letter of Stock Exchange dated November 18, 1997 stated certain conditions to be met by the company for getting the approval and company complied with all the conditions specified in the letter and it was deemed that merger approval was granted by the exchange. Thus the company considering exchange to be its mentor and instructor, kept on following its instructions. And with all bonafide intention carried out the merger procedure. Further, during the merger procedures all the legal compliance were followed very diligently as required, meeting of concerned parties being called for, all disclosure being made and finally the scheme was approved by the High Court of Delhi.

    Thus on going through the above procedure its amply clear that stock broker complied with all the requirements with regard to the merger and there was no lapse on the part of the broking company. Thus the discussions and the provisions of the above said circular have explicitly set at rest the issue that arose in the present case:

    That inspite of the wordings of the rule 4(c) that prior approval has to be obtained by the trading member, its stock exchange to approach the SEBI after it is satisfied about the compliance by the trading member. And trading member had no role in:

    i)                    �approaching SEBI for obtaining the prior approval or

    ii)                  to obtain� the prior approval itself.

    In the present case, company has been implicated for an omission where it had no obligation to comply with, so its requested that the Company should not be held liable for a non compliance for which is was neither responsible nor did it had any intention to evade the approval procedure.

    Further, before deciding the matter on this fact, it must be borne in mind that due to dwindling business, the company has already closed its business, and company would be highly grateful where regulator considering the circumstances shall decide the matter accordingly.

    It is further submitted that there was no conscious violation of the applicable provisions of law as NSE had complete knowledge of the said merger and trading member complied with all the legal formalities for the said merger.

    The show cause notice received by the company, alleges that the company has violated sub clause (xv), (xvi) (xvii) of the Regulation 26 of SEBI (Stock broker & Sub Broker) Regulations, 1992. We would like to bring to your kind notice that the Regulation 26 came into effect only on November 20, 2003 while we had initiated the merger process way back in 1997 and merger process had been completed by the year 2001.

    Its further submitted that provisions of Regulation 26 of the SEBI (Stock broker & Sub Broker) Regulations, 1992 has been invoked, though the said regulations came into force with effective from November 20, 2003, and that the provisions of these sections cannot be invoked retrospective to take action for an alleged omission done in the year 1999.

    Even Article 20(1) of the Constitution of India provides penalties with retrospective effect cannot be applied:

    �No person shall be convicted of any offence except for violation of law in force at the time of the commission of the act charged as an offence nor be subject to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence.�

    As it has been settled by SAT in the matter of Rameshchandra Manshukani NRI vs Adjudicating Officer, SEBI (Appeal No. 151/2004) that� �penalties unless specifically made retrospective must inevitably be from the date of amendment�. Therefore relying on the said judgment its requested that no penalties should be applicable on the present case.

    In light of the above discussions that the obligation to obtain the prior approval from the SEBI is a whole-sole obligation of the exchange, and not that of trading member its therefore clear that Hindustan Holding Ltd never violated rule 4(c) and also after considering the non-applicability of the sub clause (xv), (xvi) (xvii) of the regulation 26 of SEBI (Stock broker & Sub Broker) Regulations, 1992, the penalties under the section 15HB of the SEBI Act, 1992 ought not be applicable on to the present case.

    We therefore request you to kindly relieve us of the adjudicating proceedings without imposing any penalties, as would be justified action on the part of the regulator.�

    6.0.����� Appreciation of evidence and findings:

    A perusal of the intimation dated March 16, 2001 of the noticee to NSE, written reply dated April 25, 2005, June 18, 2005 as well as submissions made in the two personal hearings on 24.05.05 and 05.07.05 reveals that the merged entity has informed NSE of its merger with the erstwhile Hindustan Holdings Ltd., only after completion of the merger. The said intimation can not in any manner be read as to be in compliance of Rule 4 (c) of the said Rules and Regulation no. 26(xvii) which has been extracted in the earlier portion of the order.

    The said violation also amounts to violation of Regulation 26(xv) & (xvi) which require the stock-brokers to comply with the directions of the Board under the Act and the Regulations made there under as well as to exercise due skill, care and diligence. The requirement is of prior permission of the Board i.e. Securities and Exchange Board of India and not of the Stock Exchange.

    However, it appears that during the period when merger was done there was some confusion regarding compliances to be made of Rule 4 (c ) of the said Rules and the stock exchanges were following different practices. SEBI issued a circular in the year 2003 to clarify the circumstances which required prior approval of the Board and also to streamline the process of such approvals. It was clarified that in certain instances, including merger as one of them, the stock exchange was required to approve the application of the broker and forward the same, within a week of its approval, to SEBI for prior approval along with a confirmation of the details. (emphasis supplied) The stock exchanges were further directed to obtain fee clearance from SEBI before taking on record / approving certain changes in the constitution of their members.

    I agree with the contention of the noticee that the obligation to forward the application for approval was on the Stock Exchanges which followed different practices, sometimes obtaining prior approval and sometimes not. It appears that the stock broker was never involved directly in the procedure of obtaining such prior approval from SEBI.

    In the present case, however, it appears that Hindustan Holdings Ltd. had not followed up the matter with the stock exchange for compliance with the legal formalities for the said merger. There might have been some fault on the part of the stock exchange in not forwarding the application to SEBI for its prior permission but the laxity on the part of the noticee also can not be ignored. The action which has been taken or ought to be taken against the stock exchange for its negligence is not the subject matter of the present adjudication proceedings and I am only examining the liability of the noticee.

    Contention of the noticee regarding misinterpretation of the provisions of Rule 4(c) to mean �prior permission was required to continue to buy, sell or deal in securities� is baseless. However, prior approval from the Board under Rule 4 (c) would always entail permission to continue to buy/sell or deal in securities as a natural outcome.

    It is clear that not only did the noticee not obtain prior approval of the Board for change in constitution, it had also not taken the prior approval of the stock exchange before such change took place. From the communication received from NSE it appears that NSE also had taken note of this irregularity and consequently referred the matter to Disciplinary Action Committee of the exchange which in turn advised the noticee not to repeat the violation.

    There has undoubtedly been a violation of Rule 4 (c) of the said rules. The legal matrix regarding the changes in the said regulations for violation of Rule 4 (c ) is as follows:

    The Brokers Regulations vide Regulation 25(1) (b) provided that a stock broker who contravened any of the provision of the Act,� rules or regulations shall be liable to any of the penalties specified in sub-regulation (2), which in turn, provided for suspension of registration for a specified period or cancellation thereof.

    This was the position from 1992 to 27.09.02. However, this Regulation no. 25 was later substituted by the Enquiry Regulations, w.e.f. 27.09.02 to read as follows:

    For regulation 25, the following regulation shall be substituted namely:-

    A stock-broker who �

    (a) fails to comply with any conditions subject to which registration has been granted;

    (b) contravenes any of the provisions of the Act, rules or regulations;

    (c) contravenes the provisions of the Securities Contracts (Regulation) Act or the rules made thereunder;

    (d) contravenes the provisions of the Depositories Act, 1996 or the rules made thereunder;

    (e) contravenes the rules, regulations or bye-laws of the stock exchange,
       

    shall be dealt with in the manner provided under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002�

    Subsequently, Regulation 25 of the Brokers Regulations was again substituted by Regulations 25 to 28, w.e.f. 20.11.03, now containing the Regulations 26 (xv), (xvi) and (xvii) for the violations as alleged in the show cause notice.

    I agree with the submissions made by the noticee that it can not be penalized for violation of Regulation 26 (xv) (xvi) and (xvii) of the said Regulations which came into effect only on November 20, 2003 since their merger process which started in 1997 was already completed by the year 2001. This is in view of the fact that provisions of these Regulations have not been given any retrospective effect specifically and being penal in nature retrospectivity can not be presumed to the detriment of the noticee. The noticee had relied upon Hon�ble SAT�s judgement in the matter of Ramesh Chandra Mansukhani NRI vs. Adjudicating Officer, SEBI (Appeal no. 151/2004) and I also agree with the Hon�ble SAT�s decision on this issue.

    Earlier, there was no monetary penalty prescribed in the said Act or the Regulations issued thereunder, for the offence of violation of Rule 4 (c) of the said Rules. The said violation was punishable, at the time of the violation, by either suspension or cancellation of the certificate, firstly under the Brokers Regulations and subsequently according to the procedure of the Enquiry Regulations. It was only in the year 2003 that Regulation 25 has been substituted by Regulation 25 to 28, leading for the first time to imposition of the monetary penalty. Now the position is that the noticee can not be punished under the Regulations 26 (xv), (xvi) and (xvii) of the Brokers Regulations and by the same reasoning it also can not be punished under Section 15HB of the Act which again has been inserted in the Act only w.e.f. 29.10.02. The noticee is discharged from the present adjudication proceedings.

    However, it can not be contended that there is no violation or that the violation should go unpunished. All the more so when the violation goes to the very root of the registration, prior approval from the Board for change in constitution, being one of the conditions subject to which the registration certificate was granted by the Board. In view of the proposition that violation of the basic condition of the registration should not go unpunished, I am of the view that the Department may consider any other suitable action.

    In terms of Regulation 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, a copy of this order is served on the noticee and a copy is submitted to the Board.

     

    (RAJ RANI BHALLA)

    (AJUDICATING OFFICER)

     

    DATE: 29.07.05

    PLACE: NEW DELHI

     

     

     



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