ORDER
UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF CREDIT SUISSE FIRST BOSTON (MAURITIUS) LIMITED (FORMERLY KNOWN AS KALLAR KAHAR INVESTMENTS LIMITED)
1.0 Back ground:
1.1 Credit Suisse First Boston (Mauritius) Limited (hereinafter referred to as CSFB) was registered as a Foreign Institutional Investor, Code No 1998102, with Securities and Exchange Board of India (hereinafter referred to as SEBI). Kallar Kahar Investments Limited (for the sake of brevity, hereinafter referred to as KKIL) was registered as its sub-account. Credit Suisse First Boston (India) securities Private Limited, is an entity in which CSFB held 75% stake, was registered with SEBI as a Stock Broker. The registration of Credit Suisse First Boston (India) Securities Private Limited as a stock broker was suspended by SEBI for a period of 2 years with effect from April 18, 2001 for violation of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade practices relating to Securities Market) Regulations, 1995.
1.2 In the meantime, CSFB’s certificate of registration as FII was about to expire. Hence, CSFB applied for renewal of registration as FII and KKIL applied for renewal of registration as its sub account. The applications of the FII and its above said sub account were rejected by SEBI vide order dated November 27, 2002. Therefore, KKIL was directed to disinvest the securities held by it as on the date of expiry of its registration, within a period of 6 months from the date of SEBI’s order. Subsequently, the period of time for disinvestment of the shares was extended for another period of 6 months vide SEBI’s communication dated March 20, 2003.
1.3 It is alleged that at the time of disinvestment, KKIL had sold 14,78,170 shares of Reliance Industries Ltd. on December 16, 2002 when its actual holding as on the trade date was 13,51,270 shares thus resulting in a short sale of securities to the extent of 1,26,900 shares.
2.0 Appointment of Adjudicating Officer:
2.1 I was appointed as an Adjudicating Officer under Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred to as Adjudication Rules) by SEBI vide order dated November 25, 2004 in place of Shri. J. Ranganayakulu (since proceeded on study leave) to enquire into and adjudge the alleged contraventions of the provisions of law as mentioned in the original order dated January 02, 2004
3.0 Show cause Notice, Reply and Personal Hearing:
3.1 A Show cause notice dated July 12, 2004 was issued to KKIL, presently known as Credit Suisse First Boston (Mauritius) Limited (hereinafter referred to as ‘Noticee’) alleging violation of Regulation 15(3) (a) of SEBI (Foreign Institutional Investors) Regulations, 1995 (hereinafter referred to as the said Regulations) which prevents short selling by Foreign Institutional Investors. By virtue of show cause notice, the Noticee was called upon to explain as to why penalty under Section 15 HB of the SEBI Act, 1992 cannot be imposed for non compliance of the said Regulation.
3.2 The Noticee submitted its reply vide letter dated 9th August, 2004 and contended that it had received SEBI and RBI approvals to disinvest its holdings of KKIL after expiry of its registration. On 11th December, 2002, KKIL was holding 14,78,170 shares of RIL. Out of which 1,26,900 shares were sold on 12th December, 2002. On 16th December, 2002, KKIL inadvertently sold 14,78,170 shares of RIL instead of 13,51,270 shares . The shares sold on 12th December, 2002 were inadvertently not deducted from the holding of RIL on 16th December, 2002, which resulted in an excess sale of the equal number of shares that were sold on 12th December, 2002. The Noticee enclosed the copies of contract notes entered into with its broker on the said dates in support of its contentions.
3.3 The Noticee further submitted that short selling was due to genuine trading error on the part of the trader of KKIL and was a human error without any malafide intention or motive and submitted that this has been already explained to SEBI vide its letter dated 16th January, 2003 which was annexed along with the reply dated 9th August, 2004.
3.4 The Noticee submitted that the excess shares sold (1,26,900 in number) were auctioned by BSE and as a result, KKIL suffered a loss of Rs. 3,67,312.05 since the shares were sold at Rs. 295.51 on 16th December, 2002 and were auctioned at Rs. 295.45 and an auction commission of Rs. 3,74,927/- was paid. The Noticee annexed the money statement for Auction No. D181/202 issued by the BSE, Mumbai. The Noticee also submitted that the sale did not cause any loss to any investor.
3.5 The Noticee further submitted that this is the only instance of short sales reported and the RIL shares are highly liquid in the market and the daily turnover of the shares is very high. On 16th December, 2002 when the stock broker of KKIL sold 1,26,900 RIL shares, 46,60,024 shares of RIL were traded on BSE and 66,77,302 shares of RIL were traded in NSE. Hence the quantity of shares short sold did not affect the price or volume of the shares of RIL.
3.6 On August 24, 2005, the Noticee availed of the opportunity of personal hearing before me through its authorized representative, Shri. Paramodprakash Singh. He reiterated the submissions earlier made in their reply dated 9th August, 2004.
4.0 Issues for consideration:
4.1 On consideration of the reply and other materials on record, the following issues were framed which are as follows:
A) Whether the Noticee has indulged in short selling of 1,26,900 shares of RIL on December 16, 2002 in violation of Regulation 15(3) (a) of the said Regulations.
B) If so, whether imposition of monetary penalty u/s 15HB of SEBI Act is warranted in this case?
Now, I shall proceed to examine the issues based on the material available on record and my findings thereof are as follows:
5.0 Findings:
5.1 Whether the Noticee has indulged in short selling of 1,26,900 shares of RIL on December 16, 2002 in violation of Regulation 15(3)(a) of the said Regulations.
5.2 The Noticee submitted annexure 1 contract note issued by its broker Salmon Smith Barney for the sale of 1,26,900 of shares of RIL on 12th December 2002. In its reply, the Noticee submitted that on the date of this sale, the Noticee had an outstanding balance of 14,78,170 shares of RIL in its account. Hence, sale of 1,26,900 of shares of RIL on 12th December 2002 cannot be considered to be short sale.
5.3 The Noticee further submitted annexure 2 contract note issued by its broker Salmon Smith Barney for the sale of 14,78,170 shares of RIL on 16th December 2002. Since the Noticee has already sold 1,26,900 of shares of RIL on 12th December, 2002 itself, only 13,51,270 could be sold by the Noticee on 16th December 2002. But an excess quantity of 1,26,900 of shares of RIL was sold on 16th December, 2002 by the Noticee without being able to deliver these number of shares. Hence I find that noticee has entered in short selling of 1,26,900 shares of RIL on December 16, 2002, and the same has been admitted by the noticee. However, the Noticee submitted that the short selling was due to genuine error or without any motive to influence the price or volume of the trading of RIL shares. The Noticee’s submission that RBI has approved the disinvestment cannot be considered to have lent legality to short selling. The argument of the Noticee that the short selling did not influence the volume or price of RIL is also misplaced inasmuch as the same cannot be a ground for violating the provisions of said Regulations. Moreover, the contention of the Noticee that the short selling was without any malafide intention is also not acceptable in view of the ratio laid down by Bombay High Court in SEBI vs. Cabot International (2004) 2 Comp LJ 363 (Bom) wherein it was held that proof of existence of mens rea is not a sine qua non for the Adjudication Proceedings under Chapter VI A of SEBI Act, 1992. Now, I shall proceed to examine the second issue as under.
5.4 I note that Regulation 15(3) (a) of said Regulations reads as follows:
15(3): In respect of investments in the secondary market, the following additional conditions shall apply:-
(a) the Foreign Institutional Investors 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;
[Provided that nothing contained in clause (a) shall apply in respect of transactions in derivatives traded on a stock exchange]
5.5 Further, a plain reading of the above provision indicates that Foreign Institutional Investors can transact business only on the basis of taking and giving deliveries of securities bought and sold. In the instant case, the Noticee was not in a position to deliver 1,26,900 shares of RIL sold on December 16, 2002. Hence, I am convinced that the Noticee has violated the provisions of Regulation 15 (3) (a) of the said Regulations.
5.6 The Noticee submitted that the short selling was done inadvertently. No proof in furtherance of such a claim leading towards the conclusion that the short selling was, in fact, inadvertently made, was shown or pointed out before me. Mere averment does not hold water unless it is supported by some documentary evidence. Had the Noticee entered into a series of transactions on a prolonged time scale, there could be a possibility of human error. Here there are only two transactions and that too was within a gap of only four days. Hence, the argument that short selling was due to human error does not stand to reason.
6.0 If so, whether imposition of monetary penalty u/s 15HB of SEBI Act is warranted in the present case.
6.1 I have already held the first issue against the noticee. At this juncture, I note that section 15HB of SEBI Act reads as under;
“Penalty for contraventions where no separate penalty has been provided 15HB: 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.”
I also note that the Section 15J of SEBI Act reads as follows:
Factors to be taken into account by the adjudicating officer.
While adjudging quantum of penalty under section 15J, the adjudicating officer shall have due regard to the following factors, namely:
(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.
6.2 I do not find any material on record indicating the repetition of default on the part of the Noticee. I also do not find from the records that the Noticee has expropriated any amount of disproportionate gain or any unfair advantage made as a result of the default. The Noticee submitted that the excess shares sold (1,26,900 in number) were auctioned by BSE and as a result KKIL suffered loss to the tune of Rs.3,67,312.05. In support of this contention, the Noticee enclosed annexure V vide its reply which is the money statement for the settlement No.181. One of the factors to be taken into account in imposing the penalty under Section 15J is the amount of loss caused to the investors as a result of default. In order to determine the applicability of this factor, there must be two separate parties, one being the defaulter and the other being the investor. Here the Noticee being an investor itself cannot take advantage of the loss caused on account of its own default. The maxim “Nullus commodum capere potest de injuria sua propria” (No man can take advantage of his own wrong) is one of the salient tenets of equity as laid down by the Hon’ble Supreme Court in Ashok Kapil v. Sana Ullah, (1996) 6 SCC 342. Hence I hold that the factor of loss to the Noticee due to auction conducted by BSE cannot be taken into account as a mitigating factor, as it would amount to giving benefit to the Noticee of its own wrong.
6.3 Therefore, in exercise of the powers conferred under section 15-I read with Section 15 HB of the Securities and Exchange Board of India Act, 1992 and Rule 5 of the Adjudication Rules, I hereby impose a penalty of Rs.10,00,000 (Rupees Ten Lakhs only) on Credit Suisse First Boston (Mauritius) Limited (formerly known as Kallar Kahar Investments Limited). In my view, the above penalty is commensurate with the defaults of the Noticee in the facts and circumstances of the case.
6.4 The Noticee should pay the amount of penalty by way of demand draft in favour of “SEBI - Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to the Shri Dulal Chanda - CGM, Investment Management Department, SEBI, Mittal court, ‘B’ Wing, 224, Nariman Point, Mumbai- 400 021.
In terms of Rule 6 of the Adjudication Rules, copies of the order are sent to the Noticee and also to SEBI.
Date : December 5, 2005 D. Sura Reddy
Place : Mumbai Adjudicating Officer