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 LAZARD ASSET MANAGEMENT LLC.
ADJ.ORDER No: ACR/84 OF 2005
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 Lazard Asset Management LLC. a foreign institutional investor registered with SEBI under Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995. The address of Lazard Asset Management LLC is 30, Rockfeller Plaza, New York, NY 10112 – 6300, USA. For the sake of convenience, the said Lazard Asset Management LLC 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 have been 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 is a foreign institutional investor registered under Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995. Reg. 15 (3) (a) of the said regulations provides that a foreign institutional investor shall transact business only on the basis of taking and giving deliveries of securities bought and sold and shall not engage in short selling in securities.
5. Lazard Pacific and Emerging Opportunities LP (hereinafter referred to as LPEO) is a sub account of the noticee.
6. SEBI received a letter dated December 9, 2002 from the noticee stating that LPEO inadvertently executed a sale trade for 70900 shares of Satyam Computers Ltd. on December 5, 2002 with settlement date on December 10, 2002. As on the trade date LPEO was not holding enough saleable position in its account. As per the show cause notice, “the sub account reflected a purchase
trade settling for value on December 9th 2002. Settlement of the purchase trade, the sale trade will be honored which is due for settlement on December 10th 2002”.
7. The aforesaid trade was executed when LPEO did not hold sufficient shares of Satyam Computers 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.
8. 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.
9. The noticee vide its letter dated December 10, 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: (a) on October 18, 2002 LPEO had a settled position of 62000 shares of Satyam Computers Services Ltd. and on December 4, 2002, LPEO purchased 89000 additional shares to settle on December 9, 2002; (b) on December 5, 2002 LPEO sold 70900 shares. And because the sale on December 5, 2002 took place (i) before the purchase on December 4, 2002 was settled and (ii) was for 8900 shares more than was held in the sub account on December 5, 2002, there was a short sale of 8900 shares; (c) this was confirmed in a letter dated December 9, 2002 by the noticee to SEBI and (d) the short sale was not deliberate but was an error that occurred because of the timing of the settlement of the transactions and the noticee implemented procedure to ensure that such a short sale does not reoccur.
10. I have considered the above reply of the noticee to the show cause notice and I noted as follows: The noticee submitted that the short sale took place due to the timing of the settlements of the transactions. On December 9, 2002, the noticee itself informed SEBI with respect to the short sale.
11. In the instant case, I have taken in to consideration 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 them. Even though 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 Satyam Computers 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. I have also taken into consideration of the fact that the noticee was penalized by the stock exchange for the impugned transactions.
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 30, 2005 Adjudicating Officer