ORDER
UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF HSBC INVESTMENT SERVICES (NETHERLANDS) N.V FORMERLY KNOWN AS HSBC INVESTMENT BANK (NETHERLANDS NV)
1. Facts of the Case:
2. HSBC Investment Bank (Netherlands) NV (hereinafter to be referred to as HSBC NV) is a Foreign Institutional Investor (hereinafter to be referred to as FII) registered with Securities and Exchange Board of India (herinafter to be referred to as SEBI). On September 9, 2002, the price of scrip of Bharat Petroleum Corporation Limited (hereinafter to be referred to as BPCL) fell from around Rs. 253 to Rs. 202. The reason for the fall was attributed to the decision of the Cabinet Committee on Disinvestment, which met on September 7, 2002 to postponing disinvestment in this company by three months. On October 5, 2002, a letter was received by SEBI from the Ministry of Disinvestment, Government of India forwarding a copy of a news article which appeared in “The Asian Age” regarding bear operation in the shares of Hindustan Petroleum Corporation Ltd (hereinafter referred to as HPCL) and BPCL. A preliminary enquiry was taken up by SEBI in the case of BPCL on October 29, 2002. Based on the preliminary enquiry, formal investigation was taken up to ascertain the possible violation of the provisions of SEBI (Prohibition of Insider Trading Regulations), 1992 in the trading in the scrip of BPCL during the period i.e. August 01, 2002 to October 18, 2002. It was found that HSBC NV sold 1217700 BPCL shares during August 16 to August 22 of 2002. While another 2,00,000 shares were purchased from the market during September 16 to 18 of 2002. It was further found the HSBC NV issued participatory notes to its clients UBS Global Management and Union Invest.
3. SEBI sent a letter dated September 01,2003 to HSBC N.V. seeking information and also to provide copy of participatory notes issued to its clients UBS Global Management and Union Invest and the location where these participatory notes were designed and the point at which its broker, HSBC Securities comes to know the issuance of participatory notes. Further, the particulars such as name, address, Telephone No., Client registration forms of all the entities in the chain of participatory notes up to the level of ultimate investor of all the transactions done by HSBC (NV) during the period July to October 2002 and the sequence of events which led to issuance of participatory notes to UBS Global Management and Union Invest.
4. Appointment of Adjudicating Officer:
5. 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 December 23, 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 May 24, 2004.
6. Show cause Notice:
7. A show cause notice dated 16.07.2004 was issued to HSBC NV, the name of which has been changed to HSBC Investment Services (Netherlands) NV. It was alleged that HSBC NV issued participatory notes against the purchase/ sale of BPCL shares during the period i.e. August to September, 2002 to UBS Global Management and Union Invest. It was further alleged that the issuance of participatory notes was not reported to SEBI thereby violating the provisions of Section 15A of SEBI Act, 1992, Regulation 20 of the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 (hereinafter to be referred to as FII Regulations) & Circular No. FITTC/CUST/14/2001 dated October 31, 2001 issued by SEBI.
8. REPLY
9. HSBC NV submitted two replies vide letters dated 5th August 2004 and 5th December, 2005 and inter-alia, contended that it had vide its letter dated July 14, 2003 informed SEBI that HSBC NV was undergoing extensive restructuring and was no longer actively conducting any business in India. HSBC NV further submitted a copy of the extract of the Registration of The Amsterdam Chamber of Commerce along with the reply in support of its argument that it was in the process of liquidation. Hence, HSBC applied for cancellation of the Registration as foreign institutional Investor (FII) vide the said letter. HSBC NV also annexed a copy of the letter dated July 14, 2003 along with its reply. Further, HSBC NV submitted that the Registration Certificate as FII was cancelled vide letter dated November 17, 2003 and the same was also annexed along with its reply. HSBC NV submitted that SEBI was aware of non-reporting of issuance of participatory notes even as on November 17, 2003.
10. The HSBC NV further contended that the FII regulations relates to the activities of FII’s investment in Indian market only and does not extend to information regarding off shore derivative instruments. It submitted that the obligation to provide information with respect to off shore derivative instruments such as participatory notes, equity linked notes or any other instrument was imposed only by Regulation 20A which was inserted in FII Regulations with effect from August 20, 2003.
11. HSBC NV also contended that it had already furnished the required information vide letter dated September 12, 2003, while, inter-alia, stating that it had obtained consents from respective clients and provided the information to SEBI. It also submitted that HSBC NV changed its name to HSBC Investment Services (Netherlands) N.V on 22nd April, 2003.
12. It further submitted that SEBI vide order dated October 18, 2005, had appointed Mr. A. Chandra Sekhar Rao as an Adjudicating Officer to adjudicate on the violation of engaging in short selling by HSBC NV and the Adjudicating Officer did not impose any penalty since the number of shares short sold were just 102 in number. HSBC NV submitted that SEBI was well aware before canceling the certificate of registration as FII on 17.11.03 that participatory notes were issued by HSBC against the purchase/sale of BPCL shares during August-September, 2002 and the same was reported to SEBI as early as November 17, 2003. However, SEBI referred only the violation of short selling to the Adjudicating Officer for Adjudication. Hence, it submitted that the present Show cause notice after the cancellation of Registration Certificate is not warranted. It further stated HSBC was registered as a Bank under the laws of The Netherlands, in addition to being registered as FII in India. Though the purchase and sale of BPCL shares in India were executed in the capacity as FII in the Indian Securities Market, the participatory notes were issued by HSBC NV in its capacity as a Bank in The Netherlands. As a Bank HSBC NV was bound by client confidentiality obligations under the laws of The Netherlands.
13. PERSONAL HEARING
14. HSBC NV was granted an opportunity of personal hearing on November 11, 2005 vide letter dated October 19, 2005 which was attended by the representatives of the HSBC NV namely; Shri. Suresh N. Talwar, Shri. Abadaan Viccaji, Ms. Jasmine Batliwalla. While reiterating the submissions already made vide letter dated 05.08.04, they submitted that they would be filing a detailed reply before 07.12.2005 and accordingly submitted reply dated 05.12.05.
15. Consideration of Issues and findings: I have considered the facts of the case and replies submitted by HSBC NV. At this juncture, I feel it appropriate to reproduce the relevant provisions of the FII Regulations hereunder:
16. Regulation 20 of FII Regulations reads as follows:
Every Foreign Institutional Investor shall, as and when required by the Board or the Reserve Bank of India, submit to the Board or the Reserve Bank of India, as the case may be, any information, record or documents in relation to his activities as a Foreign Institutional Investor as the Board or as the Reserve Bank of India may require.
17. Hence the issue arises for consideration is whether issuance of participatory notes can be considered to be an activity of FII. Issuance of Participatory notes by FII was not prohibited by FII Regulations. Instead, Regulation 15 A of FII Regulations, with effect from 3.02.2004, provides that participatory notes can be issued only by FIIs to the those entities regulated by any Regulatory authority in the country of their incorporation. Even those participatory notes issued by FIIs before the above said date are not illegal but the period of maturity of those notes is restricted by a period of five years beginning from 3rd February 2004 provided they did not mature before that period. Hence, it is clear that the act of issuance of the Participatory notes is an activity of the FII and the argument of HSBC NV that the participatory notes in question were issued by HSBC in its capacity as a Bank in The Netherlands is untenable.
18. The argument of HSBC NV that any information record or documents can be sought by SEBI only with respect to FII activities in the Indian securities market is also untenable in as much as the power to seek the information flows from Regulation 20 of FII Regulations itself.
19. The argument of HSBC NV, that in the letter dated November 17, 2003, the fact of short selling alone has been mentioned despite SEBI was aware of issuance of participatory notes, is not acceptable inasmuch as HSBC NV has never been absolved from the violation alleged against it under the present show cause notice dated 16.07.2004.
20. I note that a letter dated September 01, 2003 was sent by SEBI to HSBC NV seeking the following information.
( a ) Copy of participatory notes issued to clients UBS Global Management and Union Invest. I note that the copies of the details relating to participatory note, confirmation from HSBC Investment Bank PLC to their clients was enclosed.
(b ) The location where these participatory notes were designed.
(c) The point at which its broker, HSBC Securities comes to know the issuance of participatory notes.
(d) The particulars such as name, address Telephone No. Client registration forms of all the entities in the chain of PNS up to the level of ultimate investor of all the transactions done by HSBC (NV) during the period July to Oct 2002 and the sequence of events which led to issuance of participatory issues to UBS Global Management and Union Invest.
I note that HSBC (NV) has submitted copies relating to participatory note, confirmation from HSBC Investment Bank plc to their clients. However, it failed to submit the information mentioned under b,c & d herein above.
Further the FII’s are required to submit the report of issuance of participatory notes on a monthly basis within a week of the end of the month, duly signed / approved by the compliance officer as per Circular No. FITTC/CUST/14/2001 dated October 31, 2001 issued by SEBI. No documentary evidence has been produced before me to prove that HSBC NV sent the relevant report to SEBI in the required format for the relevant period as per the above circular. Hence, on this score also I find the HSBC NV guilty of violating the provisions of Section 15A of SEBI Act, 1992, Regulation 20 of the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 (hereinafter to be referred to as FII Regulations) & Circular No. FITTC/CUST/14/2001 dated October 31, 2001 issued by SEBI.
21. At this juncture, I reproduce the Section 15A of SEBI Act, 1992 hereunder
Penalty for failure to furnish information, return, etc. 15A. If any person, who is required under this Act or any rules or regulations made thereunder,-
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less
(b) ………………..
(c) ………………..
22. Consideration of Section 15J of SEBI Act,1992: 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.
23. I do not find any material on record to indicate the amount of disproportionate gain or unfair advantage made as a result of defaults committed by the Noticee. I also find that there is no data available on record to indicate the amount of loss caused to an investor or group of investors as a result of defaults committed by the Noticee. I also do not find any material on record as to the repetitive nature of the default. However, it is clear that there is a deliberate non-compliance of the provisions of law on the part of HSBC NV in the matter.
24. At this juncture, I note that the Hon’ble Supreme Court, while dealing with the penalty levied under Chapter VIA of SEBI Act, in SEBI vs. Shriram Mutual Fund (2006) 68 SCL 216(SC) held that penalty is attracted as soon as the contravention of the statutory obligation is established and hence, the intention of the parties committing such violation becomes wholly irrelevant since the penalties are imposed for breach of the civil obligations under SEBI Act. The Hon’ble court further held that the ratio laid down by Supreme Court in Hindustan Steels Ltd. vs. State of Orissa AIR 1970 SC 253 is not applicable to the imposition of civil liabilities under SEBI Act and the Regulations made there under.
In view of the findings mentioned hereinabove, and also in view of the judgment cited hereinabove, I am convinced that it is a fit case to impose monetary penalty under Section 15A of SEBI Act.
25. Order:
26. Therefore, in exercise of the powers conferred under section 15-I read with Sec. 15A 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/- (Rs. Ten lacs only) on HSBC Investment Services (Netherlands) N.V formerly known as HSBC Investment Bank (Netherlands NV). In my view, the above penalty is commensurate with the defaults committed by HSBC NV, in the facts and circumstances of the case.
27. HSBC Investment Services (Netherlands) N.V 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 Shri Ravichandran – (OSD), Integrated Surveillance Department, SEBI Bhawan, Plot No. C-4A, G-Block, Bandra Kurla Complex, Mumbai- 400 051. In terms of Rule 6 of the Adjudication Rules, copies of the order are sent to HSBC Investment Services (Netherlands) N.V and also to SEBI.
| Date: 22.12.06 |
D. Sura Reddy |
| New Delhi |
Adjudicating Officer. |
