BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. AP/AO- 30 /2006-07]
In the matter of investigations in the trading at
Magadh Stock Exchange Association (MSEA)
AND
In respect of
Siddhartha Agarwal
Promoter 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administration of the exchange and persistent malfunction of the Council of Management (CoM) of MSEA, the CoM was superseded by Securities and Exchange Board of India (SEBI) on December 05, 1997 under Section 11 of SCRA. The same remained superseded till its restoration on June 07, 2000.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 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.
6. In the course of the investigation in this matter, the statement of Mr. Sidharth Agarwal (A promoter of BFSL and hereinafter referred to as ‘Noticee’), was recorded on 7th and 11th of July 2006 and it is alleged that in reply to (query 6 of 7th July) on why the impugned transactions were not done in BgSE, where the scrip is listed, the noticee replied that he met Anand Kumar, Director of BgSE on January 18, 2005 to trade in BFSL, who informed him that trading at BgSE is not possible, as the Indo-next platform was to be launched shortly. It is also alleged that the noticee was not able to substantiate his aforesaid statement with any documentary evidence. It was therefore alleged that noticee’s aforesaid statement was false and misleading as the BgSE’s vide its letter dated December 12, 2005 confirmed that BSFL scrip was never suspended for trading at BgSE, prior to August 22, 2005 and that BFSL’s representatives never approached it. It is alleged that the noticee gave false and misleading information during investigation and also at the time of hearing before the Whole Time Member of the Board.
7. In the above background, I was appointed as Adjudicating Officer, vide order of the Securities and Exchange Board of India (SEBI) dated September 19, 2006, to inquire into and adjudge under Sections 15A and 15HB of SEBI Act, 1992, the matter of furnishing of false information in the investigation in the matter of Magadh Stock Exchange Association (MSEA), by the noticee. The aforesaid appointment was conveyed vide the proceedings before the Whole Time Member, dated September 20, 2006
8. Pursuant to the above, Show Cause Notice (SCN) dated November 16, 2006, was issued to the above noticee under Rule 4(1) of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995( hereinafter referred to as Adjudication Rules) communicating the charges leveled against the noticee. At the request of the noticees certain additional documents were also provided. In response the noticees filed his reply to the SCN.
9. Under the aforesaid circumstances, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, notice of inquiry was issued to noticee fixing the date of inquiry as under :
|
Name of noticee
|
Date of inquiry
|
Remark
|
|
Siddharth Agarwal (Promoter/Seller of BFSL)
|
21.02.07
|
Inquiry pre-poned to 15.02.07 at the request of the noticee
|
10. The inquiry was attended by the Advocate Mr. Vinay Chauhan on behalf of noticee. Having carefully perused the material on record and after hearing the noticee in person, I now proceed to record my finding as follows.
11. Before recording my findings on merits, it is important to deal with a legal submission made by Noticee. In his reply the noticee has challenged my appointment as Adjudicating Officer. It is stated that in the instant proceedings my appointment preceded the proceedings dated September 20, 2006 of the Whole Time Member (WTM) in which the decision to adjudicate the violation was taken. I do not find any substance in the objection by the noticee and observe that WTM of SEBI has appointed me as adjudicating officer in exercise of the powers conferred upon him under section 19 r.w. section 15-I of the SEBI Act, 1992. The objection of noticee appears to have been taken from the fact that in the order of appointment dated September 20, 2006 (annx. A of SCN), it is mentioned in para (iii) that WTM has appointed me as adjudicating officer vide order dated September 19, 2006. In this regard, mentioning of my appointment on September 19, 2006 in the order of appointment dated September 20, 2006 , it is observed that it is the practice that in the file notings of the departments of SEBI the necessary approvals of the competent authorities are taken for initiating any action or appointing Adjudicating Officer, and pursuant to the approved actions the appointments are conveyed vide separate proceedings to be signed by the competent authorities. Therefore even if, I am appointed on September 19, 2006, in the internal notings of the file, the conveyance of the said appointment on September 20, 2006 is a perfectly valid practice. In other words it is just a re-iteration of the decision of the competent authority. Another point which is raised as part of legal submission by the noticee is that violation under section 11C of SEBI Act can not be adjudicated as the section itself provides for penalty of prosecution under Section 11 C(6). In this regard I note that violations of section 11C(3) and (5) of SEBI Act are quoted in the SCN in order to prove noticee’s obligation under the Act that he was required to submit document, return or report. This is so because penalty under section 15A(a) is attracted only if a person was required under the Act to furnish the details. At the same time I also note that the noticee is also under an obligation to furnish information under Regulation 8(1)(a) of SEBI (PFUTP) Regulations 2003. In the absence of any merit, the legal submission of the noticee is disposed of accordingly. I now move forward to deal with the merits of the case.
12. 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.
13. 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.
14. 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.
15. 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.
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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
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2,050
|
|
7
|
Ms Umah Agarwal, Partner, Pragya Enterprises
|
18000
|
|
8
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Shri S N Agarwal, Karta, Shri Satyanarayan Vivek Kumar (HUF)
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22100
|
|
9
|
Prabhu Securities Ltd
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19350
|
|
10
|
Bhoruka Engineering Industries Ltd
|
45,350
|
|
Total
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198,850
|
16. 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
|
17. 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 (Noticee), 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.
18. 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 noticee that there was 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 and commence trading. Any way this is not an issue for determination here, but it has got a bearing on the conduct of the noticee in the present proceedings.
19. In course of the investigation in this matter, noticee’s statements on oath were recorded on 7th and 11th of July 2006. During such recording of statements, on a specific query, when put to the Notice, who is a promoter 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, as the indo-next platform was to be launched shortly. It is observed that noticee gave the same information also at the time of hearing before the Whole Time Member of the Board. In support of this the noticee could not file any documentary proof to support and substantiate his submission, except relying on certain circumstantial factors. It was stated by the noticee that the fact that no trading was taking place on BgSE was also reflected in the Annual Reports for the years 2004 & 2005, copies of which was filed alongwith the reply by the noticee. An affidavit is also filed by the noticee to the effect that he never made any false statement to SEBI and whatever he submitted during the investigation was true. Copies of news items appearing in electronic media reporting the news of nil trading at BgSE, were also filed. From the material relied upon by the noticee no where it is demonstrated that BgSE had stopped or closed trading at its own. It may be because of many reasons namely, investors are not available, shares are not available, BOLT facility for trading on BSE available to the investors and BgSE having a subsidiary and a member of BSE; even members of BgSE would also be trading on the BOLT, investors themselves might be pursing their trading on the BOLT, etc.
20. 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 noticee who was one of the director/promoters/sellers/(owners of the company) of BFSL , who could be the best aware about the stock exchange where the shares of his company are listed. They must be paying listing fees and complying with several disclosure and regulatory requirements of BgSE. If the shares of the company are legally listed on a recognized exchange, I believe that the stock exchanges are under an 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 noticee and promoters of the company (BFSL) did not take up the issue with the regulator to enforce their legal right of trading in the shares on a recognized stock exchange. Instead to resolve the issue they went upto MSEA and indulged in the illegal trading.
21. Sections 11C (3) and 11C (5) of SEBI Act, 1992 empowers the Investigating Officer to obtain records, documents, information etc and to record statement from any person in pursuance of investigation. Regulation 8(1)(a) of FUTP, 2003 casts obligation on a person to provide books, accounts and other documents and records in his custody or control and to furnish such statements and information as required by the IO for conducting investigation. It is also noted that the statements were recorded on oath in compliance of summon issued u/section 11(3) of the SEBI Act, 1992. In view of the aforesaid provisions the noticee was required to co-operate with IO of SEBI and submit the information as desired which should not be misleading, or false. In my view filing of misleading and false information is as good as filing no information because it serves no good purpose from the investigation point of view.
22. It is, therefore, found that by misrepresenting before the IO and giving false information as aforesaid, the noticee has tried to mislead the investigation and failed to discharge his statuatory obligatoin, as aforesaid, which makes him liable for penalty under Section 15A(a) and 15HB of SEBI Act, and which read as under:
15A (a) of SEBI Act, 1992
Penalty for failure to furnish information, return, etc.
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 rupees for each day during which such failure continues or one crore rupees, whichever is less;]
15HB of SEBI Act, 1992
"Penalty for contravention 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.]"
23. It is clarified that provision of section 15A(a) of the SEBI Act, 1992, are invoked as a result of noticee’s failure to furnish information as he was required to do so under Section 11(3), 11C(3) and (5) of the SEBI Act. It is also observed that the word used in section 15A(a) are document, return, or report and it is a common sense that whatever words used, the document, return, or report should necessarily include information. Had the noticee not examined in person by the IO and instead asked to submit the information through letter then the false statement would have been the document. Moreover, I find that the statement of the noticee was recorded in writing on oath and was subsequently signed by the noticee and it can be fairly treated as a document. As regards the objection of noticee that Section 15A (a) can be invoked if they fail to furnish documents, etc. to the ‘Board’ and not to the ‘I.O.’, it is observed that in an investigation to be carried out by the Board i.e. SEBI, the SEBI Act U/sec 11C empowers it to appoint any person as Investigation Authority to conduct investigations. In other words it is the investigation conducted by SEBI through its officers. It would therefore be wrong to say that I.O. is different from SEBI. At the same time, it is also observed that the noticee has also misled the Board while appearing before WTM of SEBI in a personal hearing. This fact has not been denied by the noticee and as such I do not find any merit in the said objection of noticee
24. The provisions of Section 15HB are invoked on account of independent violations of the provisions of Section 11(3), 11C(3) and (5) because the Act does not provides for separate penalties for these violations.
25. The violation thus being established, the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992, 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 the angle of illegal trading, which transpired in MSEA of which noticee was a beneficiary. Legally speaking, the trading which held in MSEA was illegal and in complete defiance of statutory provisions. The said illegal transactions lasted for several days till the shares worth Rs. 90 crores were traded by the noticee on the stock exchange which was not recognised. Definitely the noticee alongwith the other promoters has gained in huge terms on account of violating the law of the land.
26. It is the case of noticee 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 noticee 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.
27. Disproportionate gain, unfair advantage, etc. are not sine quo none for imposing a penalty when the statutory obligations contemplated in the SEBI Act and the regulations made thereunder are contravened. The Hon’ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund [2006] 68SCL216(SC) has held that once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant. In the present case it is also worth mentioning that, although intention/motive is irrelevant, there is a clear cut motive and well planned strategy to indulge in trading of shares worth Rs. 90 crores on a stock exchange which is not recognised and where the BFSL shares are not listed. Another fact which is worth mentioning is that in the illegal trading held at MSEA, there was involvement of one Mr. Bimal Kumar Agarwal, who happens to be Noticee’s cousin. The said Bimal (Director of Rajat – stock broker) was member of Council of Management of MSEA and therefore aware about the internal affairs of MSEA. It is also important to note that the related broking entity i.e. Rajat, has acted as broker for both the sellers and buyers. To sum up the justification of the penalty in the instant matter, I view the violation in the present case as serious which warrants stringent penalty so as to give a clear message that regulator’s authority should not be taken casually and the market players in the securities market should co-operate with SEBI and never make an attempt to misled or misrepresent before it in its investigation process. I have also considered the submissions of the noticee about a ruling (Order no.-ACR/96 dated 25.10.06) of Adjudicating Officer, the facts of which are not before me. This was required because I needed to examine the similarity of the ruling with the present case. Penalty in the instant case is being imposed under the two enabling provisions, i.e., Section 15A(a) and 15 HB of the SEBI, Act. It may be possible that the ruling relied upon by the noticee was delivered in respect of only Section 15A(a). I wish to add here that the said ruling is not binding upon me as not passed under authoritative jurisdiction.
28. Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, read with Rule 5 of Adjudication Rules, I hereby impose a consolidated penalty of Rs. 25,00,000/- (Rs. Twenty Five Lakhs only) on the Noticee under section 15A(a) and section 15 HB of the SEBI Act, 1992.
29. 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.
30. This order of adjudication is made and passed on 26th day of February 2007 at Mumbai.
AMIT PRADHAN
ADJUDICATING OFFICER