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SECURITIES AND
EXCHANGE BOARD OF [Order of Adjudicating Officer under Rule 3 of SEBI
(Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer)
Rules, 1995 against M S Consultancy �in
the matter of Sawaca Business Machines Ltd.] 1.1
Sawaca Business Machines Ltd., earlier known as Sawaca
Finance Ltd. (hereinafter called Sawaca) was incorporated on 1.2
SEBI ordered an investigation to investigate into the
affairs relating to buying, selling and dealing in shares of Sawaca Business
Machines Ltd. 1.3���� The said investigation was ordered to find
out : a.
Whether there are any circumstances which would render any
person guilty of having contravened any of the regulations of SEBI (Prohibition
of Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 1995. b.
Whether any person / entity is guilty of having
contravened the provisions of SEBI (Stock Broker and Sub Broker) Rules and
Regulations, 1992. 1.4������ Chairman,
SEBI in exercise of powers under section 4(3) of the SEBI Act, 1992
appointed� Shri Suresh B. Menon, Deputy
General Manager, to investigate into the affairs relating to buying, selling
and dealing shares of the Sawaca� vide
order dated October 22, 2001. 2.0��� M
S Consultancy� (hereinafter referred to
as �the sub broker�) was issued summons to appeared before the Investigating
Authority on 10.05.2002� however, they
failed to appear before the Investigating Authority on the stipulated date and
time. 2.1� �Since the sub broker failed to comply with the
aforementioned summons, ����� it was
alleged that they failed to furnish the documents as required under the
summons.� This alleged violation attracts
monetary penalty under Section 15A of SEBI Act, 1992.� ��������� 3.0���� The undersigned was
appointed as an Adjudicating Officer�
under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing
Penalties by Adjudicating Officer) Rules, 1995 to enquire and adjudge into the
alleged violation of Section 15 A of the SEBI Act, 1992 by the sub broker, vide
order of Chairman dated 14.05.2003. 3.1
The undersigned issued a show cause notice dated 26.05.2003
under Section 15-A(a) of the SEBI Act, 1992 read with Rule 4(1) of SEBI
(Procedure� for Holding Inquiry and
Imposing Penalties by Adjudicating Officer) Rules, 1995 to M S Consultancy.� The contents of the notice are as under: 3.2
The investigating officer issued summons to the sub broker
on 10.06.02 requiring them to appear on 21.06.02 before the investigating
officer along with certain information.�
However, the sub broker failed to appear before the investigating
officer till date and furnish information as required. 3.3
As per Section 15A(a) of SEBI Act, 1992 � 15A Penalty for
failure to furnish information , return etc. If any person who is required under
this Act or any rules or regulations made thereunder :- (a)
to furnish any document, return or report to the Board,
fails to furnish the same, he shall be liable to a penalty of one lakh rupees
for each day during which such failure continues or one crore rupees whichever
is less. 3.4
From the above, it is observed that the sub broker despite
being called for information and issued summons to appear before the
investigating authority, they neglected and failed to furnish the information
sought and comply with the summons issued. 4.0
The sub broker replied to the show cause notice vide
letter dated 18.06.2004, the contents of which are as under : 4.1 ���The sub
broker submitted that they are affiliated to BSE�s main member Acme Shares
& Stock Pvt. Ltd. having their number INB 010991838 who had provided them
BOLT TWS for carrying out investors� transaction on BSE trading platform.� They serve retail clients in Khambhat city,
which is small one and contribute in spreading equity cult and investors
awareness programmes� relating to capital
market.� Their clients and main brokers
Acme have found their dealings fair and equitable and they have an impeccable
track record� since they became sub
broker.� According to them, they are rule
compliant entity. 4.2
The sub broker further stated that the show cause notice
suffers from great delay and therefore barred by limitation.� The trades in Sawaca Business Machines Ltd.
scrip that were carried out during the period October 1999 to January 2000� and for which summons dated 10.06.2002 were
issued show that summons itself were issued after about two and half years from
the date of execution of trades.� They
had given / obtained proper discharge from their main broker in respect of
their dealings.� Even the settlement in
SBML scrip were completed as per rules and regulations of BSE.� Hence, this is clearly a case of great delay
for initiation of any proceedings against them and on this ground alone the
show cause notice is liable to be dismissed. 4.3
They had received contract notes / bills from their broker
in respect of their trades in SBML scrip at the relevant time.� They in turn issued confirmation memos to
their constituents ultimately for whom trades in SBML scrip were done.� These were commercial transactions and
contractual obligations inter-se were fulfilled as required.� It is not open to initiate an inquiry on the
cause of action (i.e. underlying trades) that was completed (as the shares /
money obligations of the contract notes were duly settled at the relevant time
by and between the parties). 4.4
They stated that the summons, inquiry and adjudication
against them are clearly influenced by subsequent events.��� Hence as far as they are concerned the
inquiry proceedings appear to be an afterthought and same are vitiated and uncalled
for. 4.5
The sub broker further stated that : (i)
In para 2 of SCN it has been stated as : �Whereas
Chairman, SEBI in exercise of powers under Section 4(3) of SEBI Act, 1992
appointed Shri Suresh Menon, Deputy General Manager to investigate into the
affairs relating to buying, selling and dealing in shares of your company vide
order dated 22.10.2001 (emphasis supplied). (ii)� SEBI, Executive Director�s order was in
respect of the company Sawaca Business Machines Ltd. while the SCN is in
respect of �shares of your company� i.e. shares of M S Consultancy.� There appears to be some mix up or cut and
paste approach has been adopted.� There
seems to be non application of mind. (iii)� Statutory notice dated 26.05.2004 suffers
from Legal defects and technical infirmities and therefore devoid of legal
authority and hence not tenable in law. 4.6
The sub broker further submitted that in SEBI�s summons
dated 10.06.2002, they already filed their replies through their broker Acme
Shares & Stocks Pvt. Ltd., BSE member from time to time.� They submitted the relevant information /
data regarding their dealings in SCL and SFL scrips to SEBI through Acme. These
replies reflect transactions in mostly physical form of SCL and SFL shares for
the period October 1999 to January 2001.�
SCL and SFL shares were received from clients were sold for and
delivered on behalf of their clients and received bill thereof directly from
Acme.� The contractual obligations
thereof were settled at the relevant time. 4.7
The sub broker contended that since they had filed their
replies through their broker with SEBI as required, they were under the
impression that the requirements of the summons were duly complied with by
Acme.� Thus it is evident from various
replies filed through Acme to SEBI that they were not recalcitrant in filing
their reply and furnishing the data required by them.� They stated that there was some confusion and
could have been caused on account� of
their furnishing data / information / details through their main broker and
covering letter being on Acme�s letter head.�
They had therefore met the requirements�
of summons in time.� They stated
that the fact could be verified from the SEBI files as their replied through
Acme were hand delivered at SEBI Office. 4.8
�They further
submitted that their dealings in SCL and SFL scrip were as a sub broker and as
aforesaid all the details required were submitted to SEBI.� In addition, they were under the bonafide
impression that SEBI had collected all the relevant information and data
relating to transactions in SCL� and SFL
scrip from BSE� members and BSE�s
mainframe central computer also. ��In
this circumstances, there was no question of failure to respond to the summons
by them. 4.9
They further contended that they had not violated any
substantive provision of law.� The SCN
does not specify the manner and circumstances under which they have allegedly violated
the requirements of the summons. 4.10
Considering the stock market dynamics and operating
realities of the relevant time, they had acted well within their financial
capabilities.� Their clients�
transactions were on the market through BOLT system which was a price and other
matching mechanism of the exchange having anonymous algorithm.� They acted in good faith and there was no
default to anybody by anyone concerned in the trades of SCL and SFL scrip. 4.11
The transactions in SCL and SFL scrips were delivery
backed and delivery obligations to / fro were honoured.� They further stated that BSE accepted prices
of SCL and SFL scrips in its daily official quotation list, acted upon and
settled the trades in its settlement system at the relevant time.� BSE did not find it appropriate to take
regulatory measures such as expunging price quotations of SCL and SFL shares or
annulling the trades in SCL and SFL scrips (had there been any irregularity in
the matter).� Hence after over three
years failure to respond to the summons and treat it as a big issue for the
purpose of slapping huge monetary fine on them is improper, irrelevant and
infructuous and hence not an acceptable. There is no intentional fault or wrong
doing on their part.� The alleged
violations against them mentioned in the show cause notice, when considered in
the light of objections, explanations, facts and circumstances of the case not
being correct are refuted and denied. 4.12
The sub broker further submitted that they complied with the
requirements of SEBI�s summons in letter and spirit.� They further submitted that SEBI�s seeking
information, issuing of summons and consequential proceedings appear to be a
case of some confusion / communication gap.�
They regret and apologize for filing the information / data / details /
documents through Acme and under cover of their letterhead.� Therefore,�
no case exists for show cause notice and hence no enquiry need to be
held against them and no penalty as prescribed under Section 15A be imposed
against them.�� They further submitted
that the monetary penalty of Rs. one lakh for each day or one crore rupees or
any monetary penalty is not leviable and hence be not imposed on them.� As per the principles of show cause notice
expanding / widening / deviating the contents and scope of show cause in any
manner and applying any other provisions not mentioned in the show cause notice
is permissible in law. 4.13 i.
The show cause notice does not disclose that they have
violated provisions of Section� 15-A of
SEBI Act.� Nowhere in the show cause it
has been categorically and specifically mentioned that they have failed to
comply with the provisions of Sec. 15A(a).�
On a careful reading of show cause notice, it is evident that though the
provision of Section 15A(a) has been stated nowhere its violation by them has
been mentioned / alleged. ii.
There appears to be some inconsistency in names of
companies, in SEBI�s different communications as stated below, that however
cannot operate to their prejudice adversely.
iii.
It appears that the show cause notice suffers from fatal
legal and technical defects some which are pointed above. iv.
In the circumstances, Section 15A(a)� of SEBI Act is not applicable, they have not
violated the provisions of SEBI Act. The Show Cause Notice appears to be
invalid, void and bad in law. v.
In the light of the above, they request to withdraw the
summons / show cause notice and relieve them from the alleged violations and
drop the proceedings in the matter and discharge them at the earliest. 5.0
Based on the above written submissions a personal hearing
was granted to the sub broker on 21.07.04. Mr. JJ Bhat, Counsel and Mahendra
Thakkar, Proprietor appeared before the undersigned on the said date and made
following submissions: ���
6.0�����
�I have considered the replies to
the show cause notice and the oral submissions made by the sub broker during
the hearing.� The issue which arises for
consideration is : 6.1�������
Whether there was failure on the
part of the sub broker in furnishing documents / information and whether the
sub broker failed to obey summons? From the material available on record, I find that the
Enquiry Officer had issued a summons to the sub-broker on 10.06.2002.� The sub-broker, during the course of hearing
admitted to having received the summons and further stated that they had sent
the information sought for by the investigating authority through their broker
Acme Shares and Stocks. The sub-broker further stated that he would
substantiate with the appropriate documentary proof that the information called
for was in fact furnished.� However, I
find that the sub broker, failed to produce any proof to substantiate his stand
that the information was actually furnished.�
Thus, in the absence of any documentary proof for having submitted the
required information, it is not possible to accept the sub broker�s
argument.� I further find that the
sub-broker furnished a letter dated 22.07.04 from Acme Shares & Stock
stating that they had delivered the sub-broker replies to SEBI�s communications
in the last four years.� Acme Shares
& Stock� stated in their aforesaid
letter that they had at times delivered the replies at SEBI, at the counter,
without taking any acknowledgement. The authenticity of any ordinary letter
procured from Acme Shares stating that they had delivered the sub-brokers reply
is questionable in the absence of SEBI�s stamp or acknowledgement on it. �In any case the contents of ACME�s letter is
vague. Since the sub-broker has not been able to substantiate his stand with
any authentic documents, I am constrained to conclude that the sub-broker
failed to furnish the information. Therefore, the violation of the sub broker
attracts penalty under Section 15A of SEBI (Act), 1992 which reads as under: �Penalty for
failure to furnish information, return etc. 15A� If any person,
who is required under this Act or any rules or regulations made thereunder: (a)
to furnish any document, return or report to the Board,
fails to furnish the same, he shall be liable to [a penalty of one lakh for
each day during which such failure continues or one crore, whichever is less] (b)
to file any return or furnish any information, books or
other documents within the time specified therefor in the regulations, fails to
file return or furnish the same within the time specified therefor in the
regulations, he shall be liable to [a penalty of one lakh rupees for each day
during which such failure continues or one crore rupees, whichever is less] (c)
to maintain books of accounts or records, fails to
maintain the same, he shall be liable to [a penalty of one lakh rupees for each
day during which such failure continues or one crore rupees, whichever is
less]; 6.2
It is therefore, clear that the penalty that is envisaged
under this provision was for each day during which the failure continued. In
this case, the failure to furnish information continued for a period of 2
years, �1 month and 12 days (i.e. 772days). 6.3
The next issue that should be adjudicated is the quantum
of penalty that can be imposed. The maximum penalty that can be imposed on the
noticee in the present case would be applied as per the provisions of Section
15A of SEBI Act, 1992.� Hence, the
maximum penalty that sub broker �is
liable to pay is Rs.1 crore. 6.4
However, the quantum of penalty has to be decided based on
the criteria laid down in Section 15J of SEBI Act, 1992.� The Hon�ble Securities Appellate Tribunal
rightly called the said provision a benevolent provision, (Appeal no.164/03 in
the matter of Vijit Krishna Pillai v/s SEBI) and the same should be given due
regard. 6.5
I have duly considered the said factors enumerated u/s 15J
of SEBI Act and Rule 5(2) of (Procedure for Holding Inquiry and Imposing
Penalty by the Adjudicating Officer) Rules, 1995. It is difficult to give a finding as to the amount of
disproportionate gain and unfair advantage the sub-broker got by not furnishing
the information to Investigating Authority.��
It can only be stated that by doing so they could effectively stall the
investigation proceedings for a long period. I also find it difficult to give a finding as to the
quantum of loss caused to any investor or investor group on account of this
failure.� However, when a regulatory
action was effectively stalled for a period of 772 days and when an
investigation to find out the market misdemeanor, if any, cannot be completed
within the time, it is theoretically possible to hold in general terms that a
loss is caused to the investors at large. Applying the statutory criteria mentioned in Section 15J,
I find that the non-submission of information was with ulterior motive, �without any reasonable cause and can be termed
as willful default. It is a blameworthy conduct and a clear breach of civil
obligation imposed by a statute. The Hon�ble Bombay High Court on examining Chapter VI of
SEBI Act in the case of SEBI v/s Cabot International Capital (OOCJ Appeal No.7
of 2001 in SEBI Appeal no.24 of 2000), inter alia, held that the Adjudication
Proceedings are not quasi criminal and �Men rea� is not relevant. The Hon�ble
High Court� was pleased to hold as under: � 30.� Therefore,
for respective default� or failure,
penalty is provided under the Act. The scheme of the SEBI Act of imposing
monetary penalty is very clear. This Chapter nowhere deals with criminal
offences. These defaults or failures are nothing, but failure or default of
statutory civil obligations provided under the Act and the Regulations made
thereunder. It is pertinent to note that Section 24 of SEBI Act deals with the criminal
offences under the Act and its punishment. The adjudication for imposing penalty by Adjudicating
Officer, after due inquiry, is neither a criminal nor a quasi criminal
proceeding.� The penalty leviable under
this Chapter or under these Sections, is penalty in cases of default or failure
of statutory obligation or in other words breach of civil obligation.� The provisions and scheme of penalty under
SEBI Act and the Regulations, there is no element of any criminal offence or
punishment as contemplated under criminal proceedings.� Therefore, there is no question of proof of
any mens rea by the Appellants and it is not essential element for imposing
penalty under SEBI Act and the Regulations. The penalty imposeable under the SEBI Act and the Regulations
under the Section 15I and 15J, is deterrent in nature to see that the parties
or person concerned complies with the Regulations strictly.� The imposition of the penalty under SEBI Act
and Regulations is civil in nature and cannot be equated with penal in
character as referred and submitted by the respondents and / or observed by the
Appellate Authority.� It is also clear
that the word �penalty� has different colour and shades and facets and that has
to be interpreted and imposed on the basis of particular act and policies or
scheme. It is also clear that there can be two distinct liabilities under the
same Act i.e. civil and /� or criminal.
The Authorities or Regulatory Authority have ample power to initiate, both� proceedings, if case is made out, within the
framework of SEBI Act or the Regulations. 32.� The SEBI Act
and the Regulations, are intended to regulate the securities market and the
related aspects, the imposition of penalty, in the given facts and
circumstances of the case, cannot be tested on the ground of �no mens rea, no
penalty�.� For breaches of provisions of
SEBI Act and Regulations, according to us, which are civil in nature, mens rea
is not essential.� On particular facts
and circumstances of the case, proper exercise of judicial discretion is must,
but not a foundation that mens rea is essential to impose penalty in each and
every breach of provisions of the SEBI Act�.� 6.6
In this matter, I find that the sub broker failed to
furnish the information as required by IA. Hence giving due respect to the
judgments of Hon�ble Bombay High Court and also the criteria laid down by
Hon�ble SAT and taking into account all other facts, I hold that the
sub-broker, who was required under SEBI Act to furnish the same and that the
failure continued for a period of 772 days (i.e. from 10.06.2002 till the date
of hearing i.e. 21.07.2004) and therefore, a maximum penalty of Rs.1 crore can
be imposed.� I am satisfied that the
sub-broker has become liable to pay penalty under Section 15A(a) and in a view
of the factors considered by me upon consideration of all the evidence, I think
it fit to imposed penalty of Rs.25,000/-. 6.7
M. S. Consultancy Services is directed to pay a penalty of
Rs. Twenty Five Thousand by way of a crossed Demand Draft drawn in favour of �SEBI
� PENALTIES REMITABLE TO GOVERNMENT OF INDIA� and forward the same to Shri P K
Bindlish, GM, SEBI, 224, Mittal Court, B Wing, Nariman Point, Mumbai 400
021.� M. S. Consultancy Services shall
pay the penalty within 45 days of the receipt of this order. As required under Rule 6 of the said Rules, a copy of the
instant order is being sent to M. S. Consultancy Services and also to SEBI. Place : Mumbai������������������������������������������ KRCV
Seshachalam Date : 24.11.2005������������������������������������ Adjudicating
Officer |
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