WTM/GA/41/IVD/1/06
SECURITIES AND EXCHANGE BOARD OF INDIA
DIRECTIONS UNDER SECTION 11 AND 11B READ WITH REGULATION 11 OF SEBI (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO THE SECURITIES MARKET) REGULATIONS, 2003, AGAINST KALLAR KAHAR, SUB-ACCOUNT OF FII –CSFB (NOW KNOWN AS CREDIT SUISSE FIRST BOSTON (MAURITIUS) LTD)
1.0 BACKGROUND
1.1 Credit Suisse First Boston (Mauritius) Ltd (formerly known as Kallar Kahar Investments Ltd) was a Sub Account of Credit Suisse First Boston, an FII registered with SEBI.
1.2 The scrip of Global Trust Bank (hereinafter referred to as GTB) witnessed significant price rise accompanied with rise in volumes during the financial year 2000-2001. It was noticed that the price had actually gone up from a low of Rs.57.00/- on October 11, 2000 to Rs.114.70/- on November 20, 2000 (on BSE), i.e., an increase of more than 100% in just 29 trading sessions. During the same period the prices on NSE had gone up from a low of Rs.57.05/- to a high of Rs.114./-. For the period from September 1, 2000 to October 10, 2000 the average daily volumes on BSE were below 38,000 while the same had increased to more than 7,70,000 during the period of October 25, 2000 to November 23, 2000. For the same periods the average daily volumes on NSE were 4,20,000 and 12,96,000 respectively.
1.3 An investigation was ordered by SEBI into the buying, selling and dealing in the scrip of GTB under the provisions of the SEBI Act, 1992 read with SEBI ( Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 and other SEBI Regulations.
1.4 During the course of Investigations, it was observed that there was significant concentration of trading among a few brokers and common clients associated with Ketan Parekh ("KP"). An analysis of the trading of the clients of the top trading members revealed that the clients were related to each other and belonged to the same group. These factors indicated that there was no genuine interest of trading in the GTB scrip and a small group of brokers and investors had created artificial volumes and price manipulation in the scrip.
1.5 It was further observed that KP entities had purchased shares from the promoter group in synchronized manner and later parked it with some FIIs and OCBs thereby creating the artificial volume in the scrip. OCBs and certain sub-account including Sub account of Credit Suisse First Boston("CSFB")- Kallar Kahar Investments Limited (hereinafter referred to as "KKIL) were used by KP entities for circular trading, parking of shares, creation of artificial market and volumes, building up of concentration in select scrips, circumvention of Takeover Regulations, etc.
1.6 Therefore, SEBI vide interim order dated 31.12.2002 prohibited 50 entities including the KKIL from trading in the shares of GTB till the completion of investigations. After affording a post decisional hearing on February 03, 2003, the interim directions were revoked on 12/6/2004 for the reasons stated therein.
2.0 SHOW CAUSE NOTICE AND KALLAR KAHAR’S REPLY
2.1 Subsequently, a show cause notice dated 30.6.04 under Section 11 and 11B of SEBI Act , 1992 read with Regulation 11 of SEBI(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)Regulations, 2003 was issued to KKIL advising it to show cause as to why suitable directions be not issued to it for the allegations detailed therein.
2.2 KKIL replied to the said show cause notice vide its letter dated 21.07.04 and stated as under:
2.2.1 that it was not related to or associated in any manner with Ketan Parekh or entities related to him.
2.2.2 that there is no evidence to suggest that the impugned transactions were financing transactions. On the other hand it was contended that the transactions were genuine transactions and were settled for delivery versus payment. It purchased shares from CSFB India and paid the purchase consideration to CSFB India or to the Clearing House (depending on the nature of settlement i.e. Delivery versus Payment or Clearing House Trade) and similarly sold shares through CSFB India and received the sale proceeds from CSFB India or from the Clearing House (depending on the nature of settlement i.e. Delivery versus Payment or Clearing House Trade)/ it did not make any payment to, or deal in any way with, KP entities or Overseas Corporate Bodies ("OCBs") for the transactions referred to in the SCN and, therefore, there is no basis for the allegation that these transactions were financing transactions.
2.2.3 that it executed each of the transactions listed in the show cause notice in order to hedge participatory notes issued to its offshore clients. None of the clients were related to KP or the OCBs named in the show cause notice. During the relevant period nine participatory notes were issued. Eight were purchased by BNP Hong Kong branch and one was purchased by Indocam, Himalayan Fund.
2.2.4 that there was no evidence whatsoever of any parking arrangement entered into by it with KP entities. The shares were purchased and sold through CSFB India, the broker, and the ownership of shares so purchased was transferred in its favour. When the clients requested redemption of Participatory Notes ("PN"), it instructed its broker to sell the shares that constituted the hedge for the relevant PN.
2.2.5 that it was not party to any synchronisaton of transactions. It was the broker who executed the transactions and who was party to synchronization and / or crossing. Further, it did not know and was not required to know whether or not the transactions were synchronized. Its objective was to carry out its investments in Indian Securities Market in accordance with applicable rules and regulations viz. through a recognized stockbroker and through exchanges. It was not interested to know and was not required to know as to how these transactions were executed by the broker so long as they were executed on the exchanges and settled in accordance with the rules and regulations of the exchanges and as well as the settlement mechanism prescribed by the exchanges. It placed orders and sold the GTB shares only through CSFB India, its broker. It did not place any orders for purchase or sale of GTB shares with KP entities nor did it purchase or sell GTB shares from/ to KP entities and/or OCBs as alleged. In respect of the shares it was buying or selling, at no point did it know the identity of the other party’s broker or the beneficial owner of the shares from or to whom it was buying/selling. It is, therefore, incorrect to conclude that it purchased shares from KP entities or OCBs. It purchased shares only through CSFB India, its broker via BSE and NSE.
2.2.6 that its transactions were genuine purchase and sale transactions, which were settled for delivery and payment by its Custodian, Citibank N. A., Mumbai Branch. The transactions were entered into for the purpose of hedging exposure under the PNs. The PNs were issued as a consequence of demand made by BNP, Hong Kong branch and Indocam, Himalayan Fund. The ownership of shares so purchased was transferred in its favour. There was no evidence submitted to the contrary. Merely by entering into a few large genuine transactions, it did not create artificial volumes. Being an FII sub-account, it is subject to stringent settlement procedures and hence cannot and did not enter into non-genuine transactions. The volume of transactions created by entering into genuine transactions is a natural volume and is not an artificial volume.
2.2.7 Further, it is represented that having regard to the order dated June 12, 2004, no fresh interim directions under Section 11 and 11B of SEBI Act could be passed. Also, no final directions under section 11 and 11B of the SEBI Act read with regulations 11 and 12 of the SEBI (Prohibition of Fraudulent & Unfair Trade Practices Relating to Securities Market) Regulations, 2003 could be made.
2.2.8 Also it is submitted that its FII sub-account registration expired in June 2002 and the application for renewal of FII sub-account together with the application for renewal of FII license of CSFB was rejected in November 2002. It does not hold GTB shares and has no ability to sell or purchase securities in the Indian capital market. The subject matter of the present show cause notice i.e. synchronized transactions in GTB scrip with KP entities and OCBs by CSFB India and assisting in the creation of artificial volumes had already been the subject of rigorous investigations which culminated in the issue of the report and show cause notice based thereon to interalia CSFB India and concluded with the suspension of CSFB India’s stock broking business for a period of 2 years. More than half of the show cause notice relate to the activity of CSFB India.
2.2.9 That there has been no violation, as alleged, by it of any SEBI Regulations and it neither interfered with the fair and smooth functioning of the market nor indulged in any calculated act to facilitate price manipulation in GTB shares by KP entities nor did it aid and assist KP Group for the same as alleged in the show cause notice.
2.2.10 Also it is represented that there was no violation of Regulation 4(b) of the SEBI (Prohibition of Fraudulent & Unfair Trade Practices Relating to Securities Market) Regulations, 2003 read with SEBI Act, 1992 as alleged or at all by it and no directions are warranted against it under Section 11 & 11B of the SEBI Act read with Regulations 11 & 12 of SEBI (Prohibition of Fraudulent & Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
2.2.11 that SEBI had already barred it from dealing in GTB scrip for a period of nearly 1-1/2 years and then consequently by the order of June 12, 2004 revoked the bar on it. Further, its FII’s sub account registration had expired in 2002 and its application for renewal of the registration was refused by SEBI by its order dated 27.11.2002. Effectively, it was forced out of the market for more than 2 years. Hence, any further action is unjustified, unwarranted and excessive.
| DATE :10-1-2006 |
G.ANANTHARAMAN |
| PLACE : MUMBAI |
WHOLE TIME MEMBER |
| |
SECURITIES AND EXCHANGE BOARD OF INDIA |