ORDER OF THE ADJUDICATING OFFICER UNDER SECTION 15- I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF TEMPLETON ASSET MANAGEMENT LTD.

 

1.      Vide order dated December 28, 2004, issued by Securities and Exchange Board of India (hereinafter referred to as �SEBI�), I was appointed as the Adjudicating Officer under Rule 3 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 to enquire into and to adjudge under Sec.15-I of Securities and Exchange Board of India Act, 1992 for the alleged violation of Reg. 15 (3) (a) of Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 against Templeton Asset Management Ltd., a foreign institutional investor registered with SEBI under� Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995. The address of Templeton Asset Management Ltd., is 7 Temasec Boulevard # 38-03, Suntec Tower One, Singapore 038987.� For the sake of convenience, the said Templeton Asset Management Ltd., will be referred hereinafter in this order as �the noticee�.�

 

2.      �Initially vide order dated February 18, 2003, Shri K.R.C.V. Seshachalam, Deputy Legal Adviser, SEBI was appointed to conduct adjudication in the instant matter.� Subsequently, vide order dated December 28, 2004, I was appointed as the Adjudicating Officer in place of the aforesaid Shri K.R.C.V. Seshachalam (hereinafter referred to as �the then Adjudicating Officer�).� In terms of the said order dated December 28, 2004, I was directed to proceed to deal with the instant case from such stage which was reached as on the date of my appointment as the Adjudicating Officer.

 

3.      �Notice dated November 25, 2004 under� Rule 4 (1) of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995 was issued by the then Adjudicating Officer to the noticee.� In the following in paragraphs bearing numbers 4 to 7, I summarized the contents of the said show cause notice:

 

4.      The noticee has the following entities as its sub accounts: (i) Templeton Emerging Markets Fund, Luxembourg (Code: 2001202) (ii) Templeton Emerging Markets Fund (Code:1997216) (iii) Templeton Emerging Markets Fund (Code:1997022) (iv) Templeton International Emerging Markets Fund (Code: 1997308) (v) Templeton Developing Markets Trust (Code:1997215) (vi) Templeton Markets Securities Fund (a series of Frankline Templeton Variable Insurance Products Trust) (Code: 1997866) and (vii) Templeton Emerging Markets Series ( a series of Templeton Institutional Funds Inc.) (Code: 1997868).

 

5.      SEBI received a letter dated December 12, 2002 from Hong Kong Shanghai Banking Corporation Ltd.,� stating that it received a contract note from the counterparty namely UBS Warburg Securities India Pvt. Ltd.,� with respect to a few trades executed by the aforesaid sub accounts of the noticee. As per the said letter the details of the trade are as follows:

Sl.No.	Name of Sub account	Deal No.	Quantity of trade	Settlement amount (in Indian Rupees)
1.	Templeton Emerging Markets Fund	200234803	700	131,777.77
2.	Templeton Emerging Markets Fund	200234806	4500	847,142.82
3.	Templeton Emerging Markets Fund Inc.	200234805	4500	847,142.82
4.	Templeton International Emerging Markets Fund Inc.	200234807	4500	847,142.82
5.	Templeton Developing Markets Trust.	200234808	26777	5,040,876.29
6.	Templeton Developing Markets Securities Fund.	200234804	6000	1,129,523.76
7.	Templeton Emerging Markets Series.	200234812	23301	4,386,505.52

 

6.      The aforesaid trades �were executed when the noticee did not hold sufficient shares of HCL Technologies Ltd., in its portfolio and thus the noticee indulged in �short selling� which was in violation of Reg. 15 (3) (a) of Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995. A copy of the aforesaid letter dated December 12, 2002 was enclosed to the show cause notice.

 

7.      In view of the above, the then Adjudicating Officer communicated the noticee vide the aforesaid show cause notice that the noticee was liable to pay penalty under Sec. 15HB of Securities and Exchange Board of India Act, 1992 which interalia provides that �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�� and called upon the noticee to show cause as to why an inquiry should not be held and penalty as prescribed under Sec. 15HB should not be imposed against the noticee. In terms of the said show cause notice, the noticee was required to issue its reply within 15 days of receipt of notice.�

 

8.      The noticee vide its letter dated December 16, 2004 filed reply to the aforesaid show cause notice issued to the then Adjudicating Officer. The following is the summary of the submissions made by the noticee vide its reply dated December 20, 2004: (a) the noticee has been investing in India under FII route since 1990 and so far never involved in or alleged with any material violation of any of its obligations under law; (b) the trading desk of the noticee in Hong Kong placed an order to purchase the shares of HCL Technologies Ltd., (hereinafter referred to as �HCL� ) on December 10, 2002 and the trades were executed on the same day and the settlement date for the said trade was December 13, 2002 on which date the noticee was expecting to receive the delivery of the shares purchased; (c) on December 11, 2002 confirmation was sought from JPM Chase, the global custodian of the aforesaid sub accounts as to whether sufficient number of HCL shares were available in the respective accounts of the funds to effect a sale of a specified number of HCL shares and both the internal systems of the noticee as well as JPM Chase confirmed that a sufficient number of HCL shares were available in place to permit the sale of the number of HCL shares. Based on the said confirmation, a sale order was executed by its trading desk on the same date i.e., December 11, 2002. However, it was later discovered that this was a mistaken confirmation and that actually the HCL shares purchased through the trade executed on December 10, 2002 were only likely to be credited to the respective sub accounts on December 13, 2002. By the time the noticee discovered the mistake, the sale order was placed on December 11, 2002 was executed and subsequently the noticee was informed by its custodian that since the initial purchase of HCL shares was not settled at the time of sale order was placed, the relevant funds were deemed to have engaged in short sale of securities under the interpretation of Reg. 15 (3) (a) of Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995; (d) following the receipt of the said information from the custodian, the noticee corresponded with SEBI and provided a written explanation that the impugned sales were undertaken inadvertently and as a result of human error and it was not intended to conduct any transaction in violation of any regulations; (e) SEBI acceded to the request of the noticee to square off the positions and informed vide its letter dated May 22, 2003 that it had no objection to the settlement of the aforementioned trade and to the repatriation of the sale proceeds out of India subject to any action that SEBI might take for short selling in securities; (f) the impugned transactions were due to inadvertent administrative error on part of a staff member following bonafide confirmations made with third party custodian; (g) after the impugned event, the noticee conducted an internal review in to the cause of the error and took necessary action to strengthen its procedures so to avoid any recurrence of such trades including additional training of all trading and operational staff as well as ensuring that staff checks confirmed positions in an Indian security specifically in conformity with the regulations before placing any order; (h) the impugned event was an isolated event and the noticee did not indulge in any short selling; (i) the quantity of HCL securities sold by the noticee was inadequate in numbers to have any significant impact on the market in relation to the volume of the same securities transacted and the sub accounts of the noticee did not undertake the transaction to take advantage of falling prices in the securities, a strategy commonly associated with short selling; (j) the total gains from the impugned transactions were US$ 1611.38 and the same was very insignificant amount compared with the scope of the activities of the noticee; (k) the sale was executed under bonafide belief that delivery of the HCL shares was complete and the same was a mistaken belief without any intention of selling the securities which were not in the possession of the noticee; (l) a valid purchase order was indeed placed and that negligently effecting the sale of the same should not be a naked short sale in disregard of the regulations; (m) the noticee has a long record of legitimate and highly compliant investments in India and it never received any notice of breach of the regulations in its long association with the Indian markets; (n) the noticee regrets any confusion or misunderstanding that is caused due to the error on its part and ; (o) any penalty levied by SEBI for the aforesaid bonafide error would be considered as a sanction by most of the foreign regulators and such penalty would have a significant impact on its ability to apply for licenses and establish new funds both in India and in other jurisdictions and such penalty would be disproportionate to the level and the severity of the error.

�

9.      I have considered the above reply of the noticee to the show cause notice and I noted as follows: �

 

10.         The amount of shares sold of HCL by the noticee for its sub accounts were only 70278 which was very negligible. There is no reason to disbelieve the contention of the noticee that the total amount of gain which was made out of the impugned transaction was only USD 1611 which amounts to approximately INR 75000. Further, from the beginning, it has been the contention of the noticee that the impugned transactions were only due to inadvertence. However, there is nothing on record as to why the submissions of the noticee were not accepted by SEBI. Further, from the reply of the noticee, I found that vide letter dated May 22, 2003 SEBI conveyed its no objection to the settlement of the impugned trades and also to the repatriation of the sale proceeds out of India, albeit, with a condition of any regulatory action by SEBI. It is pertinent to note in this connection that on December 10, 2002 the noticee placed an order for purchase of shares of HCL Technologies. In the absence of any information on record as to the previous conduct of the noticee, I accept the submission of the noticee that previously there were no allegations of any violation of regulations etc., against the noticee in the course of its transactions in India. Also, there is no reason to disbelieve the submission of the noticee that after the impugned event the noticee conducted an internal review in to the cause of the error and took necessary action to strengthen its procedures so as to avoid any recurrence of such trades including additional training for operational staff etc., �

 

11.         In the instant case, I have taken in to consideration all the submissions made by the noticee and in the absence of any reason or record to disbelieve or nullify the contentions of the noticee, I accept all of them. Even though technically there was a violation of Reg. 15 (3) (a) of Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, there is nothing on record to prove that the consequences of the impugned transactions were undesirable. Generally, short selling constitutes selling of securities by a person without being in possession thereof, in expectation of or for causing fall in prices, with an intention to buy securities at a resultant lower price and thereby to make a profit. However, in the instant case, there is nothing on record to show that the noticee sold the shares of HCL Technologies Ltd. with an intention to buy securities at a lower price subsequently nor the noticee gained any profit out of the impugned transactions. Therefore, I consider the impugned transactions resulted in a venial violation. It is an undisputed fact that technically there was a violation of Reg. 15(3) (a) of Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 and the same is liable for adjudication under Chapter VIA of Securities and Exchange Board of India Act, 1992. However, mere violation of law does not attract penalty. In Hindustan Steel Ltd., v. State of Orissa, AIR 1970 SC 253, the Hon�ble Supreme Court held that �An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceeding and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances� Even if a minimum penalty is prescribed, the authority competent to impose the penalty will� be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the act or where the breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by the statute�.� In� the matter of Cabot International Capital Corporation v. Adjudicating Officer, SEBI, it was held by the Hon�ble Securities Appellate Tribunal that it is not that penalty is attracted per se violation and the Adjudicating Officer has to satisfy that the violation deserved punishment.

 

12.         In view of the above, I do not consider the instant case as fit for conducting any inquiry. Therefore, I am inclined to drop the proceedings against the noticee after considering the causes shown by the noticee in response to the notice dated November 25, 2004.

 

13.         �In terms of Rule 6 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, copies of this order are sent to the noticee �and also to SEBI.��

 

 

Place: Mumbai	A. Chandra Sekhar Rao
Date: August 29, 2005	Adjudicating Officer