Order in the matter Of Citigroup Global Markets 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 Citigroup Global Markets Ltd.  a foreign institutional investor registered with SEBI under Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995. The address of Citigroup Global Markets Ltd. is Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, UK. For the sake of convenience, the said Citigroup Global Markets 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.      Citigroup Global Markets Mauritius Pvt. Ltd.  (hereinafter referred to as CGMM) is a sub account of the noticee.

 

6.      SEBI received a letter dated December 31, 2002 from Citibank N.A. stating that the following trades were executed by CGMM:

Broker	Salomon Smith Barney
Scrip	United Breweries (Ex-UB Beer)
ISIN	INE686A01017
Qty	1201
Client Holding as on Trade Date	0
Qty short	1201
Quantity Due from Market	100000 (Trade dt 26.12.02)
Rate	INR114.45
Total Value	INR137454.31
Trade date	December 30, 2002
Exchange	BSE
Txn-Ref-No of contract note	395288

 

 

Broker	Salomon Smith Barney
Scrip	United Breweries (Ex-Kingfisher)
ISIN	INE696A01025
Qty	150000
Client Holding as on Trade date	0
Qty short	150000
Quantity Due from market	150000 (Trade Date: December 26, 2002)
Rate	INR29.92
Total Value	INR4487999.81
Trade date	December 30, 2002
Exchange	BSE
Txn-Ref-No of contract note	395289

 

7.      The aforesaid trades were executed by CGMM when it did not hold sufficient shares of United Breweries  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 15, 2004 filed its 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 December 26, 2002 CGMM bought 100000 shares of United Breweries Ltd. at a price of INR120 on BSE for which the settlement date was December 31, 2002. On December 30, 2002 CGMM sold 1201 shares at a price of INR114.75 on BSE for which the settlement date was January 2, 2003. The shares were auctioned by BSE at price of INR118.40 on January 3, 2003; (b) CGMM bought 150000 shares of United Breweries Holdings Ltd. at a price of INR29.95 on December 26, 2002 on BSE for which the settlement date was December 31, 2002. On December 30, 2002, CGMM sold 150000 shares of United Breweries Holdings Ltd. at a price of INR30 on BSE for which the settlement date was January 2, 2003. The said shares were auctioned by BSE at a price of INR30.50 on January 3, 2003; (c) there was no intention to short sell the shares and the sales took place as a result of an inadvertent oversight in the mistaken belief that settlement of the shares purchased on December 26, 2002 occurred. Given that a contractual right to receive shares was created by the December 26, 2002 purchases, no ‘naked’ or ‘real’ short sales occurred; (d) there was no gain or advantage to CGMM as a result of the aforesaid sales and in fact resulted in a cost to CGMM amounting to INR91739.13 including the costs of auction. The above sale transactions were not short sales as these transactions were covered sales against the outstanding purchases made and the purchases were settled before the scheduled settlement date of the sale transactions; (e) there was no willful or intentional violation of any provisions of law and the above inadvertent mistake was neither an act of defiance or disregard of the laws nor it carried out dishonestly; (f) therefore, the Adjudicating Officer may drop the proceedings.

 

 

10.         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 United Breweries Ltd. and United Breweries Holding 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.

 

 

11.         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.

 

12.          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