BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. AP/AO- 27/2006-07]
In the matter of investigations in the trading at
Magadh Stock Exchange Association (MSEA)
AND
In respect of
DLF Commercial Developers Ltd AND
Promoters/Sellers of BFSL
1. Magadh Stock Exchange Association (MSEA) was recognized as a Stock Exchange under Section 4 of the Securities Contracts (Regulation) Act, 1956 (SCRA) by the Central Government vide Notification No. SO 899(E) dated December 05, 1986 for a period of 5 years commencing on December 11, 1986. The said recognition was renewed from time to time under Rule 7 of the Securities Contracts (Regulation) Rules, 1957 (SCRR).
2. However, due to breakdown in the internal administration of the exchange and persistent malfunction of the Council of Management (CoM) of MSEA, the CoM was superseded by Securities and Exchange Board of India (SEBI) on December 05, 1997 under Section 11 of SCRA. The same remained superseded till its restoration on June 07, 2000.
3. The recognition of MSEA was renewed for a period of 3 years, vide SEBI Notification dated December 09, 2000 and the same was again renewed, vide Notification dated February 19, 2004, subject to certain conditions specified therein. Thereafter, vide Gazette Notification No. SO 1354 (E) dated December 06, 2004, SEBI granted renewal of recognition to MSEA for a period of one year commencing from December 11, 2004 and ending on December 10, 2005 subject to the conditions stated below:
(i) The Exchange shall set up Settlement Guarantee Fund in compliance with SEBI Circular SMD/POLICY/SUB BROKER /Cir-12/97 dated June 09, 1997, after final approval by SEBI.
(ii) Trading shall commence only after setting up of Settlement Guarantee Fund, duly approved by SEBI.
(iii) The Exchange shall repay the balance amount of Rs. 7,50,000/- (Seven Lakhs fifty thousand only) towards refundable financial support extended by SEBI to the Exchange.
4. MSEA had forwarded its proposal for setting-up of SGF to SEBI vide its letter dated August 08, 2004. As the said proposal was not found to be satisfactory, SEBI advised MSEA to submit its revised proposal in conformity with SEBI Circular SMD/POLICY/SGF/CIR-13/97 dated June 09, 1997. While the aforesaid issue of setting up of SGF was being examined by SEBI, it came to the notice that trading had commenced in MSEA from August 01, 2005, apparently in violation of the provisions of Securities Contracts (Regulations) Act, 1956 (SCRA). As the said trading had commenced apparently in violation of the conditions of renewal of recognition of MSEA, the officiating Executive Director (OED) of MSEA was advised to immediately stop such trading. It was later observed that MSEA had allowed trading on its trading platform from August 01, 2005 to August 12, 2005. On scrutiny of the trading details submitted by MSEA, it was noted that although MSEA had “NIL” turnover in 2004-05 and negligible turnover in earlier years, there was unusually high trading turnover of approximately Rs. 90.06 crore during the period August 01, 2005 to August 12, 2005. From the details of trading, it was further noticed that trading was concentrated mainly in the scrip of Bhoruka Financial Services Limited (hereinafter referred to as ‘BFSL’). Out of total trading turnover of Rs 90.06 crore during the trading period, approximately Rs 89.28 crore was in scrip BFSL, which accounted for nearly 99% of the total trading turnover.
5. In the above background, I was appointed as Adjudicating Officer, vide order dated September 19, 2006, of the Securities and Exchange Board of India (SEBI), to inquire into and adjudge under Section 23H of Securities Contracts (Regulations) Act, 1956 (SCRA), the transactions in the shares of Bhoruka Financial Services Ltd. (BFSL) in the Magadh Stock Exchange Association (MSEA), which are allegedly prohibited under Section 19 of SCRA. The aforesaid appointment was conveyed vide the proceedings before the Whole Time Member, dated September 20, 2006 and the proceedings were directed against the following noticees :
i. Mr. Satyanarayan Agarwal
Promoter/Seller of BFSL
ii. Mr. Viveek Agarwal
Promoter/Seller of BFSL
iii. Ms. Umah Agarwal
Promoter/Seller of BFSL
iv. Mr. Siddhartha Agarwal
Promoter/Seller of BFSL
v. Mr. Satyanarayan Vivek Kumar (HUF)
Promoter/Seller of BFSL
vi. M/s Prabhu Securities Limited
Promoter/Seller of BFSL
vii. M/s Bhoruka Engineering Ind. Ltd
Promoter/Seller of BFSL
viii. M/s Pragya Enterprises
ix. Ms. Umah Agarwal
Partner of Pragya Enterprises
x. Mr. Viveek Agarwal
Partner of Pragya Enterprises
xi. Mr. Satyanarayan Agarwal
Partner of Pragya Enterprises
xii. DLF Commercial Developers Ltd
6. Pursuant to the above, Show Cause Noticees (SCN) all dated November 09, 2006, were issued to the above noticees under Rule 4(1) of Securities Contracts (Regulation) (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 2005( hereinafter referred to as Adjudication Rules) communicating the charges leveled against each of the noticees. At the request of the noticees certain additional documents were also provided. In response the noticees filed their respective replies to the SCNs.
7. Under the aforesaid circumstances, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, notices of inquiry were issued to noticees as under :
|
Sl. No.
|
Name of noticee
|
Date of inquiry
|
Remark
|
|
1.
|
Noticees no. 1 to 11(Promoter/Seller of BFSL)
|
21.02.07
|
Inquiry pre-poned to 15.02.07 at the request of the noticees
|
|
2.
|
DLF Commercial Developers Ltd(DLF)- Acquirer
|
15.02.07
|
Inquiry pre-poned to 14.02.07 at the request of the noticee
|
8. The inquiry was attended by the Advocate Mr. Vinay Chauhan on behalf of noticees no.1 to 11 and by the authorized person Mr. T.V. Ganesan on behalf of DLF. Having carefully perused the material on record and after hearing the noticees in person, I now proceed to record my finding as follows. I observe that it would be in the interest of the case that the matter be disposed of by a single order because there are common set of persons namely promoters of BFSL on one side and DLF being acquirer of BFSL on the other side and the charges have arisen out of the same set of facts. The violations alleged in the SCNs are also common arising out of a joint conduct of the noticees.
9. Before recording my findings on merits, it is important to deal with a legal submission made by Noticees 1 to 11. In their replies the noticees have challenged the authority of Whole Time Member of SEBI to appoint me as Adjudicating Officer. The noticees have stated that as the instant proceedings are initiated for the violations of the provisions of SCRA, the Whole Time Member had no authority to appoint Adjudicating Officer in the matter. It is contended by the noticees that delegation of powers of SEBI in terms of Section 19 of the SEBI Act, 1992 is available to SEBI for exercising its powers and functions under the SEBI Act and the same delegation is not available for exercising powers under the SCRA. In this regard, I refer to the provision of Section 23–I of SCRA which provides that SEBI shall appoint any officer not below the rank of a Division Chief of SEBI to be an Adjudicating Officer. It is a specific power given to SEBI and the Chairman of SEBI in exercise of the powers conferred upon him under Section 4(3) of the SEBI Act, can exercise the same on behalf of the Board. Further, as per section 19 of SEBI Act, the said powers can also be delegated to any member, officer of the Board or any other person by the Chairman. SEBI is a creation of SEBI Act and therefore it would be wrong to hold that delegation of powers given under Section 19 of the SEBI Act cannot be exercised for dealing with provisions which empowers SEBI for taking any action. Section 4(3) gives powers of general superintendence and direction of the affairs of the Board and empowers him to exercise all powers and do all acts and things which may be exercised or done by the Board. In very clear terms the power of Chairman has been defined and in this context it is important to give attention to the above underlined provision. It is also noted that SEBI’s function are not Act’s specific but deals with various Acts such as SCRA, Depositories Act and Company’s Act. Under these Acts, various powers have been assigned to SEBI and the same are exercised by the Board/Chairman either directly or through delegating them in exercise of the powers under Section 19 of the SEBI Act. I, therefore, do not find any merit in the legal submission of the noticees that the whole time member had no authority to appoint Adjudicating Officer. In regard to another objection regarding construction of the Appointment Order dated September 20, 2006, it is submitted by the noticee that my appointment is made in terms of 15(I) of the SEBI Act and Rule 3 of SEBI Adjudication Rule 1995 and as such SCRA violations cannot be dealt in these adjudication proceedings. In this context, I note that the substantive provision of the alleged violations i.e Section 19 of SCRA and also the penal provision i.e. Section 23 (H) of the SCRA have been clearly mentioned in my appointment order. Further, in very un-ambiguous terms, I have been mandated to conduct adjudication proceedings in respect of the noticees. I, therefore, do not see any reason for which the proceedings become invalidated on account of non mentioning of the procedural provisions of the rules i.e. Securities Contracts (Regulation) (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 2005. As long as the substantive legal powers are there to deal with a provision, non or wrong mentioning/quoting of the enabling procedural provision will not vitiate the proceedings. This is the position which has been confirmed on a regular basis by the higher courts. In this regard, I would like to rely upon a ruling of Hon’ble Supreme Court in the matter of State of Sikkim Vs. Dorjee Tsheing Bhutia & ors. (1991, 4 SCC, 243). It was held by the Hon’ble Supremet Court that “If source of power is traceable, exercise of such power cannot be set aside merely because it was done under a different provision.” The legal submission is disposed of accordingly. I now move forward to deal with the merits of the case.
10. In the light of the above background formal investigation u/s 11C of the SEBI Act, 1992 was initiated vide order dated 05th December, 2005 by SEBI into the matter of buying, selling or dealing in the shares on MSEA, Patna during the period August 01-12, 2005.
11. As observed above, SEBI vide Gazette Notification No. SO1354 (E) dated 6.12.04 granted renewal of the recognition to MSEA as a Stock Exchange, for a period of one year, ending December 10, 2005, subject to MSEA fulfilling certain conditions. MSEA forwarded its revised proposal to fulfill the aforesaid pre conditions, as its previous proposals were rejected by the Board for being incomplete. Investigations revealed that even before this proposal was approved, trading in equities took place in MSEA during the period August 01, 2005 to August 12, 2005. Since MSEA did not have the statutory recognition as a Stock Exchange, it was alleged that the trades executed in MSEA during the aforesaid period were prohibited under Section 19 of SCRA.
12. During the period August 01-12, 2005, twenty scrips were traded in MSEA aggregating to a value of Rs. 90.06 crores, out of which the traded value in the scrip of Bhoruka Financial Services Ltd (BFSL) alone accounted for Rs. 89.28 crores or 99.13% of the traded value. The traded value of the remaining 19 scrips was Rs. 0.78 crores or 0.87% of the traded value.
13. BFSL is an NBFC incorporated in 1971 and did not have any activity. It held land admeasuring 15 acres at Whitefield Road, Bangalore, which it ‘purchased’ from its sick group company, Bhoruka Steel Ltd. (BSL) in December 2002 at Rs. 4.21 crores. The land was registered in BFSL’s name in June 2004. The promoters of BFSL (noticees) wanted to sell off this land and DLF Commercial Developers Ltd. (DLF) was agreeable to the purchase. Since sale of this land, took place in 2004 and the period of 3 years did not elapse, it was alleged that sale of this land to DLF would have attracted short term capital gains on the seller, and as stamp duty was also payable by the buyer. The real sale of this land would have involved payment of taxes and duties to the Government. Now as sale of shares, held for more than a year, through a recognized exchange, is exempt from capital gains tax, the transaction was structured as transaction in securities to evade statutory payments. In this regard the noticees have submitted that it is erroneous to contend that transactions were structured as transactions in securities to evade statutory payments. It was submitted that the sale of shares of the company instead of land was part of tax planning and not tax evasion as alleged. I find merit in the submissions of the noticees and observe that any tax planning to save tax is legal and justified as long it is done without violating a law. If one has two options to chose, he can chose the one which has a lesser tax implication. Further the issues of tax/duty evasion can not be adjudicated upon in the present proceedings as being outside the purview and scope of powers of SEBI.
14. During investigations it was found that the promoters (noticees) of BFSL held 198,850 shares in BFSL, constituting 98.73% of BSFL’s equity as under:
|
Sl No.
|
Name of Promoter
|
No. of Shares
|
|
1
|
Shri S N Agarwal
|
100
|
|
2
|
Ms. Umah Agarwal
|
100
|
|
3
|
Shri Viveek Agarwal
|
250
|
|
4
|
Shri Siddhartha Agarwal
|
100
|
|
5
|
Srhi Vivek Agarwal, Partner, Pragya Enterprises
|
91450
|
|
6
|
Shri S N Agarwal, Partner, Pragya Enterprises
|
2,050
|
|
7
|
Ms Umah Agarwal, Partner, Pragya Enterprises
|
18000
|
|
8
|
Shri S N Agarwal, Karta, Shri Satyanarayan Vivek Kumar (HUF)
|
22100
|
|
9
|
Prabhu Securities Ltd
|
19350
|
|
10
|
Bhoruka Engineering Industries Ltd
|
45,350
|
|
Total
|
198,850
|
15. It was also observed that BFSL scrip is listed only in the Bangalore Stock Exchange (BgSE). However, it was ‘traded’ in MSEA under the ‘permitted category’ based on application dated August 01, 2005 from Member-Broker Rajat Share and Stock Brokers Pvt Ltd. (Rajat), who acted as broker to both the sellers and the buyer. The promoters of BSFL sold their entire holding in BFSL @ Rs. 4,490 per share, to DLF as under:
|
Date
|
Buyer
|
Seller
|
No of Shares
|
Price
|
Purchase/Sale Consideration
|
|
01-Aug-2005
|
DCDL
|
Promoters/Sellers of BFSL
|
2,260
|
4490/-
|
1,01,47,400
|
|
02-Aug-2005
|
DCDL
|
Promoters/Sellers of BFSL
|
23,640
|
4490/-
|
10,61,43,600
|
|
03-Aug-2005
|
DCDL
|
Promoters/Sellers of BFSL
|
21,550
|
4490/-
|
9,67,59,500
|
|
04-Aug-2005
|
DCDL
|
Promoters/Sellers of BFSL
|
21,550
|
4490/-
|
9,67,59,500
|
|
09-Aug-2005
|
DCDL
|
Promoters/Sellers of BFSL
|
43,100
|
4490/-
|
19,35,19,000
|
|
10-Aug-2005
|
DCDL
|
Promoters/Sellers of BFSL
|
21,550
|
4490/-
|
9,67,59,500
|
|
11-Aug-2005
|
DCDL
|
Promoters/Sellers of BFSL
|
21,550
|
4490/-
|
9,67,59,500
|
|
12-Aug-2005
|
DCDL
|
Promoters/Sellers of BFSL
|
43,650
|
4490/-
|
19,59,88,500
|
|
Total
|
1,98,850
|
|
89,28,36,500
|
16. The Officiating Executive Director (OED) of MSEA, O.M. Pandey has also played a role in perpetuating the aforesaid alleged irregularity as follows. Siddhartha Agarwal, promoter of BFSL approached Bimal Kumar Agrawal (Bimal), Director of Rajat and a cousin of the former, in June 2005. Besides, Bimal was also a member of Council of Management (CoM) of MSEA (October 2004 - September 2005) and therefore aware that MSEA did not have the statutory recognition as a Stock exchange. Nevertheless, Bimal sought permission from OED of MSEA to sell and buy BSFL shares on behalf of his clients vide letters dated 18th and 25th July 2005 respectively. On July 27, 2005 OED of MSEA issued a ‘notification’ that trading in MSEA would commence shortly, without mentioning any date. This ‘notification’ was faxed to the Siddhartha Agarwal the same day and on July 28, 2005 the sellers and DLF entered a share purchase agreement (SPA) for transacting in BFSL shares at MSEA through Rajat. Accordingly, the sellers transferred the first lot of demat shares to Rajat’s account and on August 01, 2005 DLF transferred corresponding funds to Rajat’s account. Rajat applied to OED on August 01, 2005 to permit trading in the scrip of BSFL in MSEA. It was observed that at the instance of OED, permission was granted on the same day to trade BSFL scrip in MSEA under the ‘permitted category’. Accordingly, the ‘transactions’ in the scrip of BFSL was ‘executed’ at MSEA by member Rajat, as detailed above and continuously from August 01, 2005 to August 12, 2005.
17. It is argued on behalf of the noticees and especially DLF that the violation of Section 19 of SCRA can not be alleged in respect of the noticees as it pertains to the persons who are either brokers or the persons who organizes the activities of stock exchanges. In order to examine the issue of applicability of section 19 of SCRA, I need to take a close look at the construction of the said provision as under :
Section 19 of SCRA: Stock Exchange other than recognized stock exchange prohibited.
1. “No person shall, except with the permission of the Central Government, organize or assist in organizing or be a member of any stock exchange 9other than a recognized stock exchange) for the purpose of assisting in, entering into or performing any contracts in securities.
2. This section shall come into force in any state or area on such date as the Central Government may, by notification in the Official Gazette, appoint.”
18. The word used in the above provision is ‘ No person’ and it nowhere refers to only the broker or the persons who organizes the activities of stock exchanges, as stated by the noticees. Every person who has organized or assisted in organizing for entering into or performing contracts in securities, without the permission of Central Govt. is guilty of violation of the provisions of section 19 of SCRA. In the instant case the noticees by participating in the trades have been found as organizing and assisting and no matter whether they were members of stock exchange or not.
19. In regard to the above the noticees submitted that at the relevant time, they acted in good faith in normal course of business and traded on the exchange only after MSEA issued the notification dated July 27, 2005 and the assurance given by the broker that the trades can be carried out as per the approval obtained by him from MSEA for carrying out the trades under permitted category. It is stated by the notices that they had no reason to suspect that MSEA had issued notification for commencement of trading without complying with the condition as stipulated by SEBI. A notification issued by an authority unless otherwise disposed, is a valid notification, as far the user/clients are concerned said the noticees. In this regard, I refer to the SEBI Gazette Notification No. S01354 (E) dated 6.12.2004 which granted renewal of the recognition to MSEA as a Stock Exchange for a period of one year; ending December 10, 2005, subject to MSEA fulfilling certain conditions. It was, therefore, not an absolute recognition to MSEA and only once the conditions prescribed are complied with by MSEA, it could have got recognition. The said notification was issued by SEBI in exercise of the powers under the provision of SCRA and was published in the official gazette in terms of Section 4(3) of SCRA, which inter-alia provides as under:
Section 4 Grant of recognition to Stock Exchange
(1) ....................
(2) .....................
(3) Every grant of recognition to a stock exchange under this section shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office as of the stock exchange is situate, and such recognition shall have effect as from the date of its publication in the gazette of India.
It is therefore clear from the above that from the date of its publication in the Official Gazette, the notification becomes effective and law of the land. The noticees have not disputed the said notification and on the other hand has sought to rely on notification dated 27.7.2005 issued by MSEA without any authority under the law. Moreover from the perusal of the said MSEA notification, which is rather an intimation to its members, it is in clear terms observed that MSEA had no where stated that they are recognized exchange and the trading has begun, nor any specific date of trading was given. It was only stated that the trading shall begin shortly. So, why the noticees have not bothered to confirm whether trading has begun legally and without doing so they traded in shares involving Rs.90 crores. Another reliance is being made by the noticees on the fact that SEBI website was showing MSEA in a list of stock exchanges of India and therefore they had no reason to believe that it is not a recognized exchange. Ignorance of law, I am afraid will not come to rescue the noticees because from the date SEBI notification got published in Official Gazette, it becomes a law and ignorance of same is no excuse. Further, SEBI website has a disclaimer clause and for any authentication of the information on the site, relevant documents/records are to be referred to.
20. During investigation, on a specific query, when put to the promoters of BFSL, as to why the BFSL shares were not traded at Bangalore Stock Exchange (BgSE), it was submitted by Mr. Siddhartha Agarwal, that they had approached BgSE and their request for trading was orally turned down by Mr. Anand Kumar, ED of BgSE on 18.1.2005. In support of this the noticees (promoters of BFSL) could not file any documentary proof to support and substantiate their submission. SEBI when confronted BgSE with respect to the refusal of BgSE, it was vide letter dated December 12, 2005 informed that the trading in the securities of BFSL was open and was never suspended during the relevant period. In the entire discussion, I find it strange as to why the trading in the shares of BFSL could not take place in BgSE, which was the only exchange where the scrip/company was listed. In the universe who can be a better person than the existing promoters/sellers/(owners of the company) of BFSL , who will be the best aware about the stock exchange where the shares of their company is listed. If the shares of the company are legally listed on a recognized exchange, I believe that the stock exchanges are under the obligation to allow trading and which will be in their benefit as well because they will be earning turnover fees etc arising out of the said trading. Moreover, if the stock exchange refuses trading despite the shares being listed and the seller and buyer are available, then there is a case of violation of the law on the part of the stock exchange, but the question arises, as to why the promoters of the company (BFSL) or the buyer of BFSL i.e. DLF did not take up the issue with the regulator and failed to enforce their legal rights of trading in the shares. Instead to resolve the issue they went upto MSEA and indulged in the illegal trading.
21. From the aforesaid, it is established that the transaction(s) of noticees in the scrip of BFSL in MSEA were prohibited u/s 19 of SCRA, 1956, as MSEA did not have the statutory recognition as a stock exchange. The aforesaid, makes noticees liable for penalty u/s 23H of SCRA, which reads as under:
"Penalty for contravention where no separate penalty has been provided
23H. Whoever fails to comply with any provision of this Act, the rules or articles or bye-laws or the regulations of the recognized stock exchange or directions issued by the Securities and Exchange Board of India for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees."
22. The violation thus being established, the undersigned considered the following factors as provided in the section 23J of SCRA to determine the quantum of penalty that can be imposed under Section 15HB of SEBI Act, 1992 viz. (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 and; (c) the repetitive nature of the default. The violation in this particular case needs to be seen from investor’s perspective. Legally speaking the trading observed in MSEA can be regarded as illegal trading and if stretched little further can also be fitted in a category of dabba trading. The alleged transactions in MSEA have been structured by the noticees in a manner which has circumvented the provisions of law. If this type of trading is allowed the general individual investors or corporate who are not big corporate bodies like noticees and have lesser knowledge of the internal affairs of a stock exchange, will be lured to participate in the trading of the shares without the protection of law. It is in this context the violation needs to be looked seriously which is repetitive and lasted for several days till the shares worth Rs. 90 crores were traded by the noticees on the stock exchange which was not recognised. In the eye of law this sort of trading in shares is illegal and can not be given any effect. The very foundation of SPA which was entered into by the noticees is contrary to the law as on the date of the SPA i.e. on July 28, 2005, MSEA was not a recognised exchange. Definitely the noticees have gained in huge terms on account of violating the law of the land.
23. It is the case of noticees that they wanted these shares to be traded on the screen of the stock exchange. The purpose of having a stock exchange is to provide equal opportunity to the general public to invest or trade in the shares listed or allowed to be traded in that exchange. The said purpose has got defeated from the fact that MSEA not being recognized to conduct trading and the general public being aware of the same, have not participated in the entire trading of the shares of BFSL and the said trading took place only between the noticees as part of a well designed strategy. It therefore means that in the entire episode the public is prevented from participating in the trading in the shares of BFSL and it goes against the submissions of noticees that as a part of transparency they wanted it on the screen of the stock exchange. This trading was certainly not transparent which could only be noticed once the entire trading in BFSL was over.
24. Now on the question of amount of penalty it is required to be seen if there is any distinction in the roles played by the noticees 1 to 11 on the one side being promoters/sellers and the noticee no. 12 i.e. DLF on the other side being the acquirer/buyers. It is observed that both have played the role and in the absence of one of the party the other could not have participated in the illegal trading at MSEA resulting in violation of section 19 of SCRA. It is noted that the promoters/sellers of BFSL and DLF entered into a Share Purchase Agreement (SPA) on 28.07.2005 in Bangalore with BFSL as the confirming party for the transfer of 1,98,850 shares of BFSL from the promoters/sellers of BFSL to DLF through Rajat, Member, MSEA, Patna. As per the SPA the transaction was to be done at Rs 4490 per share. Shri G. Kannan was the authorized signatory on behalf of DLF and Shri Siddhartha Agarwal was the authorized signatory on behalf of BFSL, while the promoters/sellers of BFSL individually signed the agreement. While entering into agreement, DLF was aware that the shares of BFSL are listed on BgSE and not on MSEA. It is surprising that when Shri Siddhartha Agarwal, promoter, BFSL informed DLF that the shares of BFSL could not be traded on BgSE and insisted on selling the shares through Rajat on MSEA, DLF did not do any due-diligence as to why BFSL shares could not be traded at BgSE even though Shri Siddhartha Agarwal produced no evidence for the same and whether the shares were allowed to be traded at MSEA, Patna, where they were not even listed. The agreement was entered into on 28.07.2005, just a day after the issue of MSEA notification on 27.07.2005. Although, there was no date mentioned in the MSEA notification for starting of trading, but in the SPA, the date of 19.08.2005 was specified as the closing date of agreement without any basis. Shri G. Kannan is stated to have visited Patna to do the necessary due-diligence about the broker and to discuss the modalities of trading at MSEA. But it is strange that he did not do any due-diligence about the functioning of the Exchange. It is pertinent to mention that although as per the SPA, the sellers and the confirming party undertook that all required governmental consents, approvals, orders or authorizations under relevant applicable laws will have been obtained, they chose to ignore the SEBI Gazette notification dated 06.12.2005 relating to conditional recognition of MSEA and bar on trading unless the conditions stipulated therein are fulfilled. Further, even though as per the SPA the parties to the agreement undertook to comply with all the provisions of SEBI Act and all other applicable laws, rules and regulations made thereunder, they did not comply with the abovementioned Gazette Notification issued by SEBI in exercise of the powers under SCRA.
25. The violation of the nature like above, involving corporate entity like DLF, who is slated to bring a largest IPO in the history of Indian capital market and the entities like the promoters of BFSL, which is selling their own company shares involving Rs. 90 crores, it is expected that the compliances and due diligence level should have been of very high standard and which is found completely lacking and as such violation needs to be dealt firmly. This is required to ensure that law of the land, especially when the defaults are in complete defiance of statutory provisions, is enforced to the maximum and a message is given to the other market players that they need to be cautious in their dealings in the securities market. In view of the seriousness of the violation, I am of the view that it is a fit case for imposition of maximum penalty as prescribed under Section 23H of SCRA.
26. Therefore, in exercise of the powers conferred under section 23-I (2) of the SCRA, read with Rule 5 of Adjudication Rules, I hereby impose penalties of adjudication as under :
(i) Rs. 1,00,000,00/- (Rs. One Crore only) on Noticees no. 1 to 11, i.e. promoters and sellers of BFSL, for violation of section 19 read with section 23H of SCRA collectively, and,
(ii) Rs. 1,00,000,00/- (Rs. One Crore only) on Noticee no. 12, i.e. DLF Commercial Developers Ltd., for violation of section 19 read with section 23H of SCRA.
27. The noticees shall pay the said 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 Mr. Sanjiv Dutt, Chief General Manager, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra Kurla Complex, Mumbai 400 051.
28. This order of adjudication is made and passed on 20th day of February 2007 at Mumbai.
AMIT PRADHAN
ADJUDICATING OFFICER