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 BNP PARIBAS SOUTH ASIA INVESTMENT COMPANY LTD.
ADJ.ORDER No: ACR/82 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 BNP Paribas South Asia Investment Company Ltd., a foreign institutional investor registered with SEBI under Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995. The address of BNP Paribas South Asia Investment Company Ltd. is 3rd Floor, LES Cascades, Edith Cavell Street, Port Louis, Mauritius. For the sake of convenience, the said BNP Paribas South Asia Investment Company 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 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. BNP Paribas South Asia Investment Company Ltd – South Asia Access Fund is the sub account of the noticee. SEBI received a letter dated December 13, 2002 from Deutsche Bank stating that trading for the sale of 52600 shares of HDFC Bank Ltd. on December 12, 2002 on the National Stock Exchange of India Ltd. was executed by the aforesaid sub account. Broker for the said trade was Kotak Securities Ltd. The said sale was executed when the sub account was holding 52571 shares, thus falling short of 29 shares to settle the above sale trade. In these circumstances, it was alleged that the sub account of the noticee indulged in short selling 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 13, 2002 received from Deutsche Bank Ltd. was enclosed to the show cause notice.
6. 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.
7. The noticee vide its letter dated December 23, 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) In early 2000, the BNP Paribas South Asia Access Fund (hereinafter referred to as ‘the Fund’) held 1,000,000 shares in Times Bank Ltd. In or around June 2000, Times Bank was amalgamated with HDFC Bank Ltd. The share exchange ratio for the amalgamation was 5.75:1 i.e., for every 5.75 shares held in Times Bank, a shareholder was entitled to receive 1 share of HDFC Bank and accordingly, the Fund was entitled to receive 173,913.04 HDFC Bank shares; (b) the Fund was therefore managed in the belief that it owned 173,913 HDFC Bank shares. The HDFC Bank shares were sold off on different dates as follows. On May 9, 2002, 73884 shares and on December 12, 2002, 47429 shares. On December 12, 2002 after selling a total of 121313 shares, the Fund was under the belief that 52600 shares of HDFC Bank still remained in the Fund’s demat account and on that day, it was decided to sell all 52600 remaining shares and a trade to that effect was sought to be executed. Accordingly, the broker of the noticee issued a contract note showing sale of 52600 shares for a total amount of Rs.10179152/- and a copy of the said contract note was delivered to the custodian; (c) on December 13, 2002, the noticee was informed by Deutsche Bank AG in its capacity as the Fund’s custodian that only 52571 shares of HDFC Bank remained in the Fund’s portfolio which was a shortfall of 29 shares and accordingly the noticee instructed the broker that the quantity was only 52571 shares and not 52600 shares. As the error was quickly brought to light, the Fund’s broker settled the trade for the accurate figure of 52571 shares and not for 52600 shares and in effect there was no short sale as the trade was executed only for 52571 shares. Vide its letter dated December 13, 2002, the broker informed the custodian that the quantity of shares sold was 52571 and not 52600 shares and requested the custodian to treat the contract for 52600 shares as cancelled and to acknowledge instead the contract for 52571 shares; (d) no further intimation was provided to SEBI by the custodian with respect to the broker’s letter dated December 13, 2002 and the cancellation of the contract note of 52600 shares and the issuance of the amended contract note for 52571 shares. After the said sale of shares there was no further transaction in the scrip of HDFC Bank by the noticee; (e) it was a genuine bonafide belief of the Fund’s management that following the merger of Times Bank with HDFC Bank, the Fund received its full entitlement of 173913 shares and in fact there was a shortfall of 29 shares; (f) the reason for the shortfall was caused by three factors viz., (i) the HDFC Bank shares in demat form were allotted to the demat account of the noticee in bits and pieces on various dates from June 21, 2002 to January 15, 2001 (ii) the custodian received payments from the company and various brokers representing the cash equivalent of 25.49 fractional shares due to the reasons beyond the control or knowledge of the noticee (iii) the custodian wrote off 3.55 fractional shares on June 4, 2001; (g) as the Fund’s management did not appreciate that the portfolio contained 29.04 shares less than expected it was a logical consequence that when the Fund sold all the remaining shares there was a shortfall of 29 shares; (h) in the facts and circumstances of the case, it is evident that the trade was settled for the amount of shares lying in the demat account of the fund for 52571 shares and therefore there was no incidence of short selling.
8. Apart from the above submissions, the noticee also submitted that a fundamental element of short selling is the intention to repurchase the securities involved at a later time for a lower price and by extension to create a profit, however, it was never the intention of the Fund’s management to dispose off the entirety of its remaining shares, yet through human administrative error, miscalculated the precise quantity of remaining shares and attempted to sell slightly more shares than it in fact owned. In view of the above submissions, the noticee requested to drop the proceedings. In support of its contentions, the noticee filed copies of the following documents (i) letter dated December 13, 2002 issued by Kotak Securities to Deutsche Bank (ii) cancelled contract note dated December 12, 2002 which shows that 52600 shares of HDFC Bank Ltd., were sold by the noticee (iii) copy of contract note dated December 12, 2002 which shows that the quantity of shares of HDFC Bank Ltd., that were sold were 52571 and (iv) transaction statement with request to National Securities Depository Ltd.
9. I have considered the above reply of the noticee to the show cause notice dated November 25, 2004 and I noted as follows:
10. The letter dated December 13, 2002 issued by Kotak Securities Ltd. addressed to Deutsche Bank clearly shows that on the said day, the broker informed the custodian that the quantity of HDFC shares were amended from 52600 to 52571. From the said letter it is also noted that the custodian viz., Deutsche Bank acknowledged the letter issued by Kotak Securities Ltd. From the copies of contract notes, I noted that the initial contract note showing the sale of 52600 HDFC Bank Ltd. shares was cancelled and a fresh contract note for 52571 shares was issued. From the copies of the said contract notes, it appears that the custodian Deutsche Bank received them. In the instant matter, the quantity of the alleged short sale was only 29 shares which is trivial and negligible comparing to the shares traded by the noticee on December 12, 2002. The reply of the noticee giving reasons for the initial sale of 29 shares in excess of its holding is quite convincing and there is nothing on record to nullify the submissions of the noticee. In view of the submissions made by the noticee and the supporting documentary evidence furnished by it, I am of the view that there was no deliberate attempt on part of the noticee to short sell the securities of HDFC Bank Ltd.
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 if it is assumed that 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.
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