ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 12 OF THE SEBI ACT, 1992.
AGAINST M/s O[X] US INVESTMENTS PRIVATE LIMITED, AND ITS DIRECTORS; Dr SURJIT S. BHALLA AND RAVINDER KAUR
BACKGROUND:
1. M/s O[x]us Investments Private Limited (hereinafter referred to as OIPL) is registered as a portfolio manager with the Securities and Exchange Board of India, 1992 (hereinafter referred to as the SEBI) with effect from July 16, 2004 for a period of three years with registration number IN000001017. Dr Surjit S. Bhalla and Ms. Ravinder Kaur are the Directors of OIPL.
2. The brief facts leading to the present proceedings against OIPL and
its two directors are as follows:
An application dated September 2, 2003 was submitted by Dr Bhalla, Director, OIPL with the SEBI, seeking the renewal of the registration of portfolio manager license number INP00000233, (earlier granted to Quantum Securities Private Limited, for brevity’s sake hereinafter referred to as QSPL). The renewal of the said license was however sought in the name of OIPL, inter alia on the ground that the portfolio management services which were being offered by Oxus Fund Management, (OFM) a division of QSPL was now a division of OIPL and that the Director responsible for OFM at QSPL, was continuing to head the fund management business and was also the Director of OIPL.
2. As the registration granted to QSPL was found to have expired on September 15, 2001, OIPL was advised by SEBI to apply afresh for registration as a portfolio manager in terms of the SEBI (Portfolio Managers) Regulations, 1993 (hereinafter referred to as the Regulations)
3. However, Dr Bhalla acting on behalf of OIPL sent an application under cover of letter dated September 16, 2003, seeking a certificate of registration of portfolio management in the name of OFM, wherein it stated its experience in portfolio management as ‘nil’. Thereafter SEBI sought for further clarifications from OIPL. Upon perusal of the responses, it was noted that during the year 2002-2003, OIPL had carried out the business of portfolio management without being registered with SEBI as a portfolio manager. Although the said fact was found to have been certified by their auditors in the books of accounts, the same was not revealed in their revised application dated September 16, 2003, made to SEBI. It was further noted that despite not being granted any registration by SEBI, OFM was claiming to be a SEBI registered portfolio manager on their website www.oxusresearch.com.
4. In view of the same, SEBI vide letter dated March 19, 2004, while advising OIPL not to further act as a portfolio manager without obtaining the due registration from SEBI and also not to accept any money for the portfolio management activity pending further decision by SEBI on the issue of grant of registration, further directed OIPL to show cause as to why appropriate action under the provisions of the SEBI Act, 1992 (hereinafter referred to as the Act) including adjudication proceedings should not be initiated against them. OIPL was advised to reply to the said notice within 21 days from the date of receipt of the said notice.
5. As the response of OIPL, made vide their letter dated April 07, 2004 was found to be unsatisfactory, Shri S.V.Krishnamohan was appointed as the Adjudicating Officer, vide order dated June 04, 2004 to inquire into and adjudge the alleged violation of the provisions of Section 12(1) of the Act and Rule 3 of the SEBI (Portfolio Manager) Rules, 1993 by OIPL and its Directors.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
7. The adjudicating officer issued a show cause notice dated July 27, 2004 to OIPL and its two Directors; Dr Surjit S. Bhalla and Ms. Ravinder Kaur calling upon them to show cause as to why enquiry proceedings should not be initiated against them in terms of Rule 4 of the SEBI (Procedure for holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 and penalty should not be imposed upon them under Section 15HB of the Act for the violations mentioned therein. The said entities were advised to make their submissions, if any, along with supporting documents that they wished to rely upon, within 14 days from the date of the receipt of the notice, and were also advised to note that in case they failed to reply within the stipulated period, it would be presumed that they have no adequate explanation to offer.
Dr Bhalla replied to the said notice vide his letter dated August 9, 2004 in which he inter alia made the following submissions :-
- OFM was a division of QSPL, the entity which had been granted a certificate of registration by SEBI in the year 1998.
- The application made by QSPL seeking registration as a portfolio manager explicitly stated that a new division of QSPL was being created, to be called OFM.
- Dr Bhalla, the President of OIPL was designated to be the officer in-charge of OFM. Hence OIPL, was directly associated with OFM.
- However the partnership between OIPL and QSPL ended and the same took about 2 years i.e. between 2001 and 2003.
- During this interim period, the clients of OFM were being managed by OIPL and Dr Bhalla.
- Thereafter OFM filed a renewal application dated September 2, 2003 seeking registration for portfolio management.
- However, upon being advised by SEBI, they filed a fresh application seeking registration as portfolio manager on September 16, 2003.
- There was delinquency on their part in the renewal of the registration for which they had admitted their willingness to pay interest on the renewal fee.
On the basis of the above, Dr Bhalla denied the charge that OIPL and its Directors had acted as a portfolio manager without a valid certificate of registration.
9. In the interim period, I was appointed as the Adjudicating Officer by the Chairman, SEBI; vide order dated September 30, 2004 to enquire into the above mentioned acts of omission and commission by OIPL and its Directors.
10. Accordingly in terms of rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, (Rules) I issued a notice of hearing dated October 7, 2004 to OIPL and its Directors advising them to attend the hearing proceedings to be held on November 22, 2004. However on the request of Dr Bhalla, the hearing proceedings were rescheduled to December 01, 2004.
11. On the said date, Dr Bhalla President, OIPL, appeared before me and contended that he was authorized to represent OIPL as well as Ms Kaur, the other Director of OIPL. Subsequently Ms Ravinder Kaur send a letter dated December 01, 2004, duly authorizing Dr Bhalla to represent her in the case. While reiterating the contentions made earlier, Dr Bhalla further brought to my notice that SEBI had granted OIPL a conditional registration as portfolio manager for a period of 3 years effective from July 16, 2004 to July 15, 2007.
CONSIDERATION OF ISSUES:
12. I have taken into consideration the facts and circumstances of the case, the submissions advanced on behalf of OIPL and the material available on record including the findings of the inspection report and also the relevant regulatory provisions.
13. I have noted that OIPL and its Directors have been primarily charged on the ground of carrying on portfolio management activities during the year 2002-2003 without obtaining a valid certificate of registration to carry out portfolio management activities from SEBI. It has however been contended on behalf of OIPL consistently, and also by Dr Bhalla during the hearing proceedings held on December 01, 2004 that OFM, a division of QSPL was a SEBI registered entity carrying out portfolio management activities and was operational in India since 1998 and that the certificate of registration granted to OFM expired on September 2001.
14. In this context, I have examined the copy of the certificate of registration, stated to have been granted to OFM in the year 1998. From a perusal of the same, it is clearly evident that the certificate of registration was granted to QSPL and not to OFM. Upon further examining the application dated September 16, 2003, I have also noted that OIPL have stated their experience in portfolio management to be ‘nil’ allegedly on the ground that all the clients were that of OFM and not OIPL. From a perusal of the organizational structure of OIPL, it is seen that OFM is a division of OIPL. Consequently going by their own admission, if OFM undertook portfolio management activity, then OIPL carried out the said portfolio management activity through one of its divisions and admittedly also paid taxes on its revenues. The same is also evident from the notes to the auditors report dated November 10, 2003 to the accounts of OIPL for the six month period April 01, 2003 to October 31, 2003 which states that “the company has managed the portfolio services during the period for which license was not renewed.. ..However the company has filed afresh application and approval is awaited. The entire fee accrued on this account has been shown in profit and loss account, under the head ‘professional receipts’. Even the notes to the auditors report dated September 4, 2003, to the OIPL accounts for the year ended March 31, 2003 states that “the company has managed the portfolio services during the period for which license was not renewed…...However the company has filed afresh application and approval is awaited. The entire fee accrued on this account has been shown in profit and loss account, under the head ‘professional receipts’. Similarly the notes to the auditors report dated August 31, 2002 to the accounts of OIPL for the year ended March 31, 2002 states that “the company has entered into an agreement for portfolio advisory services with QSPL for the portfolio managed by QSPL and that the entire fee accrued on this account has been shown in profit and loss account, under the head ‘professional receipts’.
15. Considering that neither OIPL nor OFM were ever granted the necessary registration from SEBI to carry out these portfolio management activities, it is apparent that the extensive portfolio management work already undertaken by OIPL or for that matter OFM, was done so without the necessary registration from SEBI.
16. OIPL has also been charged for claiming to be a SEBI licensed portfolio manager operational in India since September 1998 on their website www.oxusresearch.com. On behalf of OIPL, it has been contended that the said website became inoperational in September 2001 and became operational again only in March 2004 and that in any case, a very small part of the website has a reference to portfolio management activities while the remaining 95% of the website refers only to research publications. It is clear that contained in the response of OIPL, is a tacit acceptance of the fact that their website did indeed contain a reference, stated to be small, to portfolio management activities. I have studied the disputed page on the website advertised on May 6, 2004 which is reproduced herein below for ready reference;
OXUS FUND MANAGEMNET
PERFORMANCE APPLICATION FORM
OFM has been operational in India since September 1998 as a SEBI licensed portfolio manager. It is a research and advisory firm which manages assets for both corporate clients and high net worth individuals and domestic debt, equities and foreign currencies.
17. Thus upon reading the page of the web site reproduced above dated April 16, 2004 it is apparent that the website of OIPL had misleadingly advertised that OFM was a SEBI licensed portfolio manager offering related services. What is more relevant to note is the fact that such a claim was advertised even prior to OIPL being granted a certificate of registration.
18. From the facts detailed above, it can be clearly inferred that the certificate of registration to undertake portfolio management activities was never granted by SEBI to OFM as contended by Dr Bhalla and hence there was no question of delinquency on their part in the matter of renewal of the registration as contended by them. The fact is that, the said certificate of registration was granted to QSPL and changes, if any in its constitution ought to have been brought to the notice of SEBI. I have noted that SEBI in its letter issued to QSPL along with the original certificate of registration that was valid from September 16, 1998 to September 05, 2001 had inter alia advised that “You shall in case of any change in your status and constitution obtain our prior permission to carry on activities as a portfolio manager”. It is evident that QSPL and OIPL are two separate entities. However upon the partnership between QSPL and OIPL being severed, the said activities were continued by OIPL, through OFM, one of its divisions and Dr. Bhalla continued to manage the portfolio of clients as a Director of OIPL, without obtaining the requisite registration for the same. The said inference is substantiated even from the admission made by Dr. Bhalla, during the hearing proceedings, to the effect that subsequent to his dissociation with QSPL, OFM continued its previous activities without renewing its registration with SEBI. On the contrary, it has been maintained that the carrying out of portfolio management activities by a division of the registered entity would not amount to any irregularity. Such a contention besides being unacceptable is quite disconcerting to note considering the experience of Dr. Bhalla in the securities markets.
19. I have noted that during the year 2002-03, OIPL had undertaken portfolio management amounting to Rs.237.81 lakhs with a clientele of 31 clients, without a valid registration from SEBI. This activity is to be viewed very seriously, especially after considering that the said fact despite being certified by their Auditors was also concealed by OIPL in the revised application. More misleading is the advertisement issued by OIPL on its website claiming OFM to be a SEBI registered entity.
20.It is apparent that OIPL and its Directors have not acted in a bonafide manner not only by virtue of them having provided inaccurate information on their website and thereby misleading genuine investors merely for the purpose of generating business and revenues as well as by failing to provide the correct information to the Regulator. Such a lapse cannot be termed as unintentional. On the contrary, from the facts detailed above, an inference can easily be drawn that OIPL could not have been unaware of the compliance requirements and yet disregarded the legal obligations cast upon them. Any evasion of the compliance requirements issued by the regulator is bound to affect the interest of the investors. Although such a loss cannot be specifically computed in monetary terms, the fact remains that all regulatory provisions have a specific purpose behind their enactment. The very purpose of enacting any legislation is due adherence to the procedures laid down there under to ensure the sound and smooth functioning of the capital market. If no cognizance were to be taken of any breach of these provisions and no liability fixed there upon, the entire purpose of incorporating the provisions in the said enactments would become redundant. Persons, who operate in the market, are required to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings. People, who operate in a manner otherwise, should be suitably penalized.
21. Section 12(1) of the Act, inter alia, provides that no portfolio manager associated with the securities market shall buy, sell or deal in securities except under and in accordance with the conditions of a certificate of registrations obtained from the Board in accordance with the regulations made under this Act.
Rule 3 of the Rules, provides that No person shall carry any activity as a portfolio manager unless he holds certificate granted by the Board under these Regulations.
22. Thus no entity associated with the securities market is permitted to undertake any activities without seeking the necessary certificate of registration from the Board and hence any activity undertaken without the said certificate would be liable to be viewed seriously.
23.In the instant case, as the portfolio management business was undertaken by OIPL and its directors without the necessary registration from SEBI, OIPL and its directors have violated the provisions of Section 12(1) of the Act and Rule 3 of the Rules and are liable for penalty under the provisions of the Act.
24. Section 15HB of the SEBI Act, 1992, reads as follows:
“Whoever fails to comply with any provisions of the Act, the rules or Regulations made or the directions issued by the Board thereunder for which no separate penalty has been provided shall be liable to a penalty which may extend to Rs.1 crore”
25. However, while adjudging the quantum of penalty, the adjudicating officer is required to have due regard to the factors laid down in Section 15 J of the Act which are as under:-
a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
b) the amount of loss caused to an investor or group of investors as a result of the default;
c) the repetitive nature of the default
26. These provisions also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995.
27. Thus, the commensurate penalty to be levied in the instant case by the adjudicating officer should have due regard to the factors mentioned above. The same is a direction and not an option, which is however to be exercised with due regard to his discretion. This discretion is to be exercised judiciously, depending upon the facts and circumstances of each case as well as after analysing all the relevant material available on record especially in the case of failure to perform statutory obligations.
28. The pre-requisites enumerated in (a) and (b) of Section 15 J of the Act are applicable in the present case. However, I have noted the fact that, pending the adjudication proceedings, the application made by OIPL seeking registration as a portfolio manager was duly processed by SEBI for grant of registration and that OIPL was vide letter dated July 14, 2004 granted a conditional certificate of registration valid for a period of 3 years.
29. Bearing these factors in mind, I am inclined to hold that although the penalty need not be imposed to the extent specified in Section 15HB of the Act, the imposition of penalty is very much necessitated.
ORDER:
30. In view of the foregoing, in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, and in the interest of justice, equity and good conscience I think it appropriate to levy a penalty of Rs. 2, 00,000/- collectively payable by OIPL and its Directors; Dr Surjit S. Bhalla and Ms. Ravinder Kaur .
31. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India’ and payable at Mumbai which may be sent to Shri Suresh Gupta, General Manager, Securities and Exchange Board of India, Exchange Plaza, Wing II, 4th Floor, Bandra Kurla Complex, Bandra (East) Mumbai – 400051.
| Date: DECEMBER 30, 2004 |
G. BABITA RAYUDU |
| Place: Mumbai |
ADJUDICATING OFFICER |