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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 5.0.����� Reply
and personal hearing On
the said date of hearing i.e. 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 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 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 �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.
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 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 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:
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 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 �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 Submissions made vide letter
dated �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.
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 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.
�3. In all the above cases ( 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.
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 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 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: |
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