Order against M/s. Shrikant G Mantri in the matter of dealing with M/s. Nedungadi Bank Ltd

 
1. M/s. Shrikant G Mantri (hereinafter referred to as "the said broker") is a member of The Stock Exchange, Mumbai (hereinafter referred to as "BSE") and a stock broker registered with SEBI under certificate of registration bearing No. INB010028216.
   
   
    
2. The Reserve Bank of India (hereinafter referred to as RBI) vide their letter dated 27.4.2001 informed the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI") that M/s. Nedungadi Bank Ltd. (hereinafter referred to as "NBL") had approved in September, 1999, a scheme for arbitrage dealings through three stock brokers viz. Harvest Deal Securities Limited, First Custodian Find (India) Limited and the said broker.

 

 

3. Based on the complaint from RBI, SEBI conducted an investigation into the matter. The findings of the investigation are as under :

 

 

1. Shri Rajendra K Banthia (hereinafter referred to as "R K Banthia"), Managing Director of Harvest Deal Securities Limited and persons associated with him held 8.41%, First Custodian Fund (I) Ltd held 3.28% and Shrikant G. Mantri, proprietor of the said broker held 10.51% of the equity shareholding of NBL

 

 

2. the Board of Directors of NBL in its meeting held on 26.6.1999 took the following decisions :

    

    

   1. To allow purchase and sale of shares in various markets and stock exchanges.

    

    

   2. To vest to Chairman and General Manager (P&D), powers to the extent of Rs.5.00 crore and Rs.2.00 crore respectively to purchase and sell shares to the stock brokers namely Harvest Deal Securities Ltd., First Custodian (I) Ltd, the said broker and other recognized brokers and pay brokerage.

    

    

   3. To permit Chairman to ratify loss, if any, in any transactions upto a maximum of 5% of the price.

    

    

   4. To permit the bank to open DP accounts with Standard Chartered Bank and Global Trust Bank, Mumbai.

    

    

3. Even prior to the aforesaid decision of the Board of NBL, the bank had allowed the said three stock brokers to undertake the following transactions:

 

Date	Purchase in Rs.	Sales in Rs.	Gross Income in Rs.
14.09.99	1,90,17,389	1,92,03,740	1,86,351
20.9.99	4,45,15,443	4,48,51,270	3,35,827
21.9.99	2,15,67,8665	2,17,94,508	2,26,643

 

4. As per the decision taken by the Board of NBL in its meeting held on 26.6.1999, the following reporting system was decided to be followed in respect of the arbitrage transactions:

 

Sr.No.	Particulars	By whom	To whom	Periodicity
1.	Statement of purchase and sale	Senior Manager, Investment Dept., Mumbai	Assistant General Manager (F&A)	Daily
2.	-do-	Assistant General Manager(F&A)	The Chairman through General Manager(P&D)	-do-
3.	Purchase and sale statement	Chairman	The Board	Monthly
4.	Brokerage paid at Mumbai	Senior Manager, Fort, Mumbai Branch	Assistant General Manager(F&A)	Monthly
5.	Statement of brokerage	Chairman	The Board	Quarterly
6.	Sale or purchase ended in loss	Senior Manager, Fort, Mumbai Branch	Assistant General Manager (F&A)	On the date of occurrence
7.	-do-	Assistant General Manager(F&A)	The Chairman Through General Manager (P&D)	-do-
8.	-do-	Chairman	The Board	Monthly

 

However, it was observed that this reporting system was not observed in practice and the Chairman and other officers of NBL who were mandated to decide on the scrips to be purchased or sold, had delegated these decisions to the three stock brokers.

 

5. An analysis of the transactions entered into by NBL through the above brokers till 31.3.2001, prima facie revealed that:

 

 

1. In view of the irregularities noted in the course of investigation, an enquiry officer was appointed vide Order dated 5.12.2002 to enquire into the irregularities by the said broker in his dealings in securities on behalf of NBL. The Enquiry Officer issued notice to the said broker on 8.7.2003 to which he replied vide letter dated 25.8.2003. Thereafter, personal hearings were held by the Enquiry Officer on 6.11.2003, 18.11.2003, 27.11.2003 and 1.12.2003. Shri Shrikant G Mantri, Proprietor of the said broker appeared before the Enquiry Officer and made submissions:

 

 

 
2. The Enquiry Officer after considering the facts of the matter and reply and submissions of the said broker submitted his report on 12.1.2004 recommending that a major penalty of suspension of certificate of registration for a period of 12 months may be imposed on the said broker.

  

 

1. Pursuant to the submission of report by the Enquiry Officer, a show cause notice was issued to the said broker on 22.1.2004 forwarding a copy of the Enquiry Officer’s report and also advising him to show cause, in terms of Regulation 13(2) of the Enquiry Regulations, as to why the penalty recommended by the Enquiry Officer should not be imposed on him. The said broker submitted his reply to the show cause notice vide letter dated 6.2.2004.

 

 

 
2. In his reply the said broker submitted as under:

 

 

3.2.1 The said broker submitted that the Enquiry Officer has erred in relying upon the statements of M/s. A.R.Moorthy and H. Ganesh while preparing the Enquiry Report. The said broker further submitted that the aforesaid statements could not be relied upon since the Enquiry Officer had become functus officio on conclusion of the enquiry proceedings, since they had, on receipt of the Show Cause Notice dated 8.7.2003, requested the Enquiry Officer vide letter dated 24.7.2003, to furnish copies of the documents being relied upon by SEBI in support of the allegations and / or contentions made in the said Show Cause Notice. He stated that the Enquiry Officer vide his letter dated 5.8.2003 intimated that, apart from the Investigation Report, the Enquiry Officer would be relying upon the following documents only:

 

 

1. Copy of Board Resolutions of NBL and its annexures (9 pages)

 

 

2. Details of trade done by NBL through FCFL (30 pages)

 

 

3. Details of deliveries made by NBL and deliveries to NBL (9 pages)

 

 

 

 

4. Details of payments between NBL & FCFL (2 pages)

 

 

 

 

5. Copy of Ledger of NBL(10 pages)

 

 

3.2.2 The broker submitted that vide their letter dated 9.8.2003 they had acknowledged receipt of the relied upon documents referred to in letter dated 5.8.2003 and further submitted that, it would prepare its reply to the Show Cause Notice on the premise that no other documents, save and except those mentioned in the letter dated 5.8.2003, were being relied upon by SEBI. He therefore contended that the said statements of A.R. Moorthy and H. Ganesh did not form part of the documents that were relied upon by the Enquiry Officer. The said broker admitted that the said statements form part of the documents forwarded by the Investigating Officer under cover of his letter dated 9.4.2003. He however contended that there were 155 number of documents forwarded by the Investigating Officer under cover of his letter dated 9.4.2003. Out of the said number of documents, the Enquiry Officer specified in his letter dated 5.8.2003 that only 5 documents would be relied upon. Broker argued that since the said statements did not form part of the documents that were being relied upon by the Enquiry Officer, it would be against natural justice to thereafter, and that too after conclusion of the enquiry proceedings, seek reliance upon the said documents. He therefore contended that no reliance on the said statements could be made and no inference adverse or otherwise could be drawn for the said statements as the same would be against natural justice.

3.2.3 The said broker submitted that, the statements of M/s. A.R. Moorthy and H. Ganesh were furnished in completely different proceedings. The said proceedings stand concluded by the passing of the Order by the Chairman on 14.7.2003. Broker submitted that in the said circumstances, Enquiry Officer cannot rely upon the documents furnished in the said concluded proceedings and that relying upon the said documents admittedly after the conclusion of hearing, is against natural justice and therefore, bad in law.

3.2.4 The said broker further submitted that the Enquiry Officer was aware of the fact that the Hon’ble SAT vide its Order dated 27.10.2003, had fixed time bound schedule within which the enquiry proceedings should be concluded. The belated reliance on the documents by Enquiry Officer after the conclusion of the enquiry proceedings deprived the Noticee of a reasonable opportunity to rebut the contents of the same, in view of orders of SAT. Broker therefore contended that the Enquiry Report should be considered as if there were no statements given by M/s. A.R. Moorthy and H. Ganesh.

3.2.5 The said broker also submitted that they were not given a fair and reasonable opportunity to defend themselves and to explain the circumstances appearing against them hence, non-furnishing of statements along with Show Cause Notice vitiated the proceedings.

3.2.6 The said broker further submitted that the Enquiry Officer erred in coming to the conclusion that the they, Harvest Deal Securities Ltd and First Custodian Fund (India) Ltd constitute one group and overlooked that the said Companies are not associate companies within the definition of Sec 370 (1B) of the Companies Act, 1956 and that there merely being common Directors in companies, does not qualify the said Companies as Associate Companies. The said broker further submitted that the present case is not a fit and proper case requiring the lifting of the Corporate Veil. The said broker submitted that the purpose of lifting of the Corporate Veil is to determine the persons who are in actual management and control of the Company. The said broker further submitted that Enquiry Officer had not come to conclusion that the management and control of the said three companies vests in persons other than the duly construed Board of Directors and the concerned Managing Director of the respective company, or that the said entities have acted in a fraudulent manner. The said broker further submitted that, the Enquiry Officer on his own admission, recorded that there are 3 distinct groups

3.2.7 The said broker also submitted that, even assuming without admitting that the said entities are indeed one group, that does not constitute any violation of the SEBI Act, Rules and Regulations and contended that, Enquiry Officer did not hold that the said entities, by acting in concert have violated the SEBI Act or any of the rules and regulations framed there under.

3.2.8 The said broker has mentioned that in extract from the statement of M/s. A.R. Moorthy quoted by the Enquiry Officer details of the alleged earlier meetings in which the investment proposals were discussed were mentioned and nor were not any questions asked by the Investigation Officer to Shri A.R. Moorthy. Broker further submitted that the Enquiry Officer has mistakenly chosen to rely upon the purported statements of M/s. A.R. Moorthy and H. Ganesh in support of his findings that "Mr.R.K. Banthia was choosing the various shares, timing the trades, putting it through the Brokers etc." Broker contended that Enquiry Officer had totally overlooked the statements given by Shri T.R. Narayanan, Dy. Gen. Mngr of Nedungadi Bank Ltd. (NBL) to SEBI on 23.10.2002. Broker submitted that in the said statement, Shri T.R. Narayanan has very categorically stated the then Chairman, Shri Moorthy was placing orders with the Brokers on behalf of the Bank. The broker has therefore, contended that the said statements of Shri T.R. Narayanan were in total variance of the statement of Shri A.R.Moorthy available with the Enquiry Officer and which formed a part of the documents of the Investigation Report. The broker had therefore contended that Enquiry Officer had not considered all the facts of the case.

3.2.9 The said broker contended that the Enquiry Officer had chosen to rely upon the statements which purportedly went against them and ignored statements which were in favour of them. Therefore, the Enquiry Report suffers from the vice of bias.

3.2.10 The said broker has made the following detailed submissions in respect of the charges mentioned in the show cause notice:

With regard to the charge that client registration and agreement were not obtained, broker had stated that non-obtaining of the Client Registration Form and no formal Agreement entered into, was a mere clerical and venial lapse in as much as the main purpose of the same has been fulfilled since the client is a reputed commercial Bank. Broker contended that Enquiry Officer stated that the member client agreement throws light on the terms and conditions that bind the parties to the contract, the rights and liabilities of the parties and the consequences of breach. Broker contended that on a perusal of a pro forma Client Agreement and Client Registration, it could be seen that the main purpose is to determine the credit worthiness of the client. It is further submitted that due diligence is required to be exercised qua somebody and that even a failure to do so, cannot be a case to impose penalty unless it is established that somebody has been adversely effected. Broker contended that, as a result of the alleged failure to exercise due diligence, the client did not suffer, the Stock Exchange did not suffer and even the counter party did not suffer. He contended that "an Order imposing penalty for failure to carry out statutory obligation is a result of quasi criminal proceedings and penalty will not be ordinarily imposed, unless the party obliged either acted in deliberate defiance of law or was guilty of conduct, contumacious or dishonest or acted in contumacious disregard of its obligations." Broker further submitted that in the circumstances, a penalty of suspension should not have been recommended by the Enquiry Officer for a trivial matter of no consequences even if it is admitted for argument sake that there was a failure as alleged.

Broker further submitted that Enquiry Officer erred in coming to the conclusion that there were some instances when the Noticee carried out transactions other than arbitrage and thereby acted beyond the mandate of the client and violated Clause A (1) (2)(3) & (5) and B(1) of the Code of Conduct as specified in Schedule 2 read with Regulations 7 of SEBI Stock Broker and Sub-Broker Regulations 1992 besides acting beyond the scope of authority, broker has also submitted that the Enquiry Officer has not found single instance in support of his conclusion that the Noticee has violated the Code of Conduct and hence submitted that the conclusion arrived at by the Enquiry officer is erroneous in as much as it is not supported by any facts. Broker submitted that he was member only of BSE and could not have done arbitrage transactions. He contended that they executed transactions, either purchase and/or sale on the BSE as and when instructed to do so by NBL and that all transactions executed by them were duly paid for and shares delivered either in physical form or in demat form to NBL and payments received and shares credited/debited to their demat account in the case of purchase and sales respectively. Broker contended that all transactions executed by them on behalf of NBL were mandated. He further contended that even the statement of the erstwhile Chairman and the Board Resolutions confirmed that NBL also took position in shares for the reasons specified in the various Board memoranda. Broker therefore submitted that no adverse inference could be drawn.

3.3 Broker also sought a personal hearing which was granted to him on 12.2.2004.The said broker and advocates authorized by him attended the hearing. In the course of the said hearing, broker submitted a request to summon Shri A.R.Murthy, and Shri H. Ganesh, Former Chairman and Manager of NBL and also requested for an opportunity to cross examine the said officials. He also submitted an affidavit in this regard. Broker further submitted the following in respect of the charges against them:

1.  
   1.  

       

       

      1. In respect of the allegation that he had issued fictitious contract notes, the said broker submitted that there can be no such thing as Fictitious Contract Notes. In respect of the Contract Notes dated 27th March and 28th March 2000, he submitted that the said Notes were for purposes of comfort and were not to be acted upon. The said broker submitted that he had perforce to issue the said notes under economic duress as he was threatened by NBL that his failure to provide the comfort would result not only in cessation of business from NBL but would also result in recalling of his credit facilities. However the said broker submitted that he had categorically made it clear that the said comfort notes were not to be acted upon. Accordingly the originals were destroyed. Unfortunately NBL reneged from the understanding. It was further submitted that the subject matter of these Contract Notes was before arbitration by the Arbitral Tribunal of the Bombay Stock Exchange and was also subject of Suit no. 1947 of 2001 in which both NBL and they are parties. In the said arbitration proceedings detailed evidences have been led by NBL and the them, witnesses examined and cross examined. The arguments have been concluded and the Hon’ble Arbitrators are in the process of framing the award and the award is expected shortly. The said broker submitted that in the said circumstances, any reference to the said Notes dated 27^th March and 28th March 2000 would have a bearing on the arbitral proceedings. It would therefore be just, equitable and proper if the matters arising out of the disputed notes dated 27th March and 28^th March 2000 be reserved till the date of arbitral award is pronounced.

As regards to the notes dated 14.03.2001, the said broker submitted that as explained to the Enquiry Officer, it was only an offer made to NBL in order to regularize/comfort the Bank for the temporary overdrawing in their cash credit account. Since the Bank declined the same, nothing thereafter survived and no gain or loss caused to either party or at all. This was strictly a private accommodation offer made by them to the Bank and no impact or effect on the market would have entailed. It was also submitted that they have accepted the contention of the Ld. Enquiry Officer that it would have been the correct procedure to have mooted a proposal to this effect rather than issuing contract notes. The said broker assured that in future if such a circumstance should occur, it would follow the suggestion of the Ld. Enquiry Officer. In the said circumstances, the said broker submitted that the offer for sale given in the form of a contract note, could at best be termed as a venial defect. It was further submitted that, even the Ld. Enquiry Officer has not attributed any malafides for issuing the said contract notes and in the said circumstances, a lenient view of the matter should be taken.

3.3.2 With regard to delay in making payment the said Broker submitted that as explained to the Ld. Enquiry Officer during the course of both, written and oral submissions they had requested time for payment of bill dated 6.3.2000. Only on receipt of the approval of the client did he make the payment in accordance with the agreed time schedule and as such, there was no delay for making such payment. As regards the other claim of Rs.21.19 cr by NBL and as rightly held by the Ld. Enquiry Officer, it is neither desirable nor appropriate to give any finding in this regard on the disputed question of facts, in the face of claims and counter claims by the broker and his client when the same is subject matter of arbitration proceedings before the Stock Exchange, Mumbai and also in Civil Suit No.1947/2001 before the Hon’ble High Court of Mumbai, more so when the client i.e. NBL is not a party in the present proceedings. The arbitrator has jurisdiction to interpret the contract having regard to the terms and conditions of the contract, conduct of the parties, circumstances of the case, and pleadings of the parties and pass an Award

3.4 Thereafter, vide letter dated 16.2.2004, the said broker made further written submissions. The submissions of the said broker were as under:

3.4.1 Broker contended that the subject Show Cause Notice is bad in law in as much as it is violative of the provisions of Regulation 13(2) of Regulations, 2002 which makes it mandatory that the Chairman or the member of the Board shall issue Show Cause Notice to the intermediary only after a consideration of the Report of the Enquiry Officer. He argued that it enjoins that the application of mind on the Enquiry Report has necessarily to be made by the Chairman or Member of the Board before a Show Cause Notice can be issued. He therefore contended that no person other than the Chairman or a Member can issue Show Cause as above. Show Cause Notice was issued by the Div. Chief and not by the Chairman and/or Member of the Board and hence bad in law and therefore is non est. He argued that following cases that "where a power is given to do a certain thing in a certain manner, the thing must be done in that way or not at all

Ref :

1) Dhanajaya Reddy v/s State of Karnataka (2001) 4 Supreme Court cases 9 – Para 23

2) K.Prasad and Ors v/s union of India and Ors 1988(Supp) Supreme Court Cases 269 – Para 23

3) Commissioner of Income Tax, Mumbai v/s Anjum M.H. Ghaswala & Ors (2002) 1 Supreme Court Cases 633 – Para 27

4) Bhavnagar University v/s Palitana Sugar Mill (P) Ltd (2003) 2 Supreme Court Cases 111 – Para 40

Broker argued that the Ld. Enquiry Officer in his Enquiry Report relied heavily on the statements of Shri A.R. Moorthy and Shri H. Ganesh. The same cannot be relied upon for the reasons stated above.

3.4.2 Broker reiterated his demand for cross examination of Shri A.R. Moorthy and Shri H. Ganesh since they are not only in total variance with the Affidavit of the Deponent who has offered himself for corss examination, but also contrary to the statements of Shri T.R.Narayanan, Dy. Gen. Mngr of Nedungadi Bank Ltd(NBL). He argued that it is a well settled law that persons whose statements are relied upon, have to be offered for cross examination. He stated it to be a well settled law and it has been held that "testimony of witness is not legalevidence unless it is subject to cross examination".

Ref :

1) Ramkumar v/s King Emperor AIR (1936) 12 Lucknow 553

2) Manganlal v/s King Emperor AIR 1946 Nagpur 173

3) Neminath Appayya v/s Jamburao AIR 1966 Mysore 154

4) Pyarelal Sakseria v/s Devi Shankar Parashar AIR 1994 MP 155

3.4.3 With regard to the finding of non-obtaining client registration form Broker submitted that the Enquiry Officer has cited only one solitary instance of non-obtaining Client Registration Form and that too of Scheduled Bank listed on the Bombay Stock Exchange while recommending major penalty. Broker argued that the entire purpose and spirit of the Client Registration Form is to ascertain the bonafides and credit worthiness of an investor and protect the securities market from being assessed by fly-by-night operators. He further submitted that due diligence is required to be exercised qua somebody and that even a failure to do so cannot be a case to impose penalty unless it is established that somebody has been adversely effected.

3.4.4 Broker has further contended that Enquiry Officer did not hold that he was a habitual offender in not obtaining Client Registration Form. As such, the harsh penalty recommended by the Ld. Enquiry Officer is not justified since there has been only one instance cited of not obtaining Client Registration Form and that too from a Schedule One Bank.

3.4.5 With regard to charge that Broker had acted beyond the mandate by undertaking transactions other than arbitrage, Broker submitted that, if he had acted beyond mandate, there would have been a complaint made by the client NBL and that no such complaint was made by NBL. This conclusion of Enquiry officer is perverse and contrary to the actual position.

3.4.6 The said broker contended that Enquiry Officer completely ignored the facts that in respect of all purchase of shares made for NBL, payment had been tendered by them to NBL. The converse was true in respect of shares sold by them Noticee on behalf of NBL. He contended that it is not possible if he had acted beyond mandate as concluded by Enquiry Officer. Broker argued that out of the 13 instances cited in the Show Cause Notice, Enquiry Officer absolved him of any wrong doings in 7 instances by stating that from the implied conduct of NBL of making the payment, it was evident that he had not acted beyond mandate. Broker contended that the very same logic should have been applied to the other 6 instances. Broker further submitted that Enquiry Officer in his Report stated that it has been recorded in the Agenda paper to the Board that NBL used to take position in shares and the outstanding position in the shares at the end of each month have been reported and ratified by the Board. The conclusion of Enquiry Officer that since these 13 instances specified in the Show Cause Notice were not reported to the Board, the same were not ratified by NBL’s Board.

3.4.7 Broker stated that the 13 instances during a particular month and the shares were not in stock as at the end of the month and hence they could not have been reported to the Board as stock of shares were held at the end of the month.

3.4.8 The said broker has submitted that the Enquiry Officer has ignored the facts that vide Resolution No.479/99-2000 the Board of NBL held a meeting on 9/10 December 1999 and passed the following Resolution:

"To note the trading transactions carried out in equity shares and the profit earned in the transactions during the months of September, October and November, 1999.

Noted the purchase and sale transactions in equity shares carried out during the months of September, October and November, 1999 and the profits carried in the trading transactions".

3.4.9 Broker further submitted that the purchase and sale transactions in December 1999, January 2000 for the period 1 st Feb.2000 to 18 th March 2000 were approved by the Board of NBL vide their Resolution no.666/99-2000 dated 23/24th March 2000.

Broker also contended that Enquiry officer ignored the fact that in the Agenda papers, the Board meeting held on 23.03.2000 specifically recorded that "The entire transactions carried out during the current financial year with particulars of scripwise purchase, sales, profit and transactions are carried through the two brokers, brokerage paid, etc. will be placed before the Board in the month of April 2000."

Broker therefore argued that the Board of NBL by specific Resolutions approved all the share transactions done during the period Sept. 1999 to March 2000, it cannot be said that the Noticee has acted beyond mandate.

3.4.10 In respect of the allegation that he had issued fictitious contract notes, the said broker submitted that there can be no such thing as Fictitious Contract Notes. In respect of the Contract Notes dated 27th March and 28th March 2000, he submitted that the said Notes were for purposes of comfort and were not to be acted upon. The said broker submitted that he had perforce to issue the said notes under economic duress as he was threatened by NBL that his failure to provide the comfort would result not only in cessation of business from NBL but would also result in recalling of his credit facilities. However the said broker submitted that he had categorically made it clear that the said comfort notes were not to be acted upon. Accordingly the originals were destroyed. Unfortunately NBL reneged from the understanding. It was further submitted that the subject matter of these Contract Notes was before arbitration by the Arbitral Tribunal of the Bombay Stock Exchange and was also subject of Suit no. 1947 of 2001 in which both NBL and they are parties. In the said arbitration proceedings detailed evidences have been led by NBL and the them, witnesses examined and cross examined. The arguments have been concluded and the Hon’ble Arbitrators are in the process of framing the award and the award is expected shortly. The said broker submitted that in the said circumstances, any reference to the said Notes dated 27^th March and 28th March 2000 would have a bearing on the arbitral proceedings. It would therefore be just, equitable and proper if the matters arising out of the disputed notes dated 27th March and 28^th March 2000 be reserved till the date of arbitral award is pronounced.

As regards to the notes dated 14.03.2001, the said broker submitted that as explained to the Enquiry Officer, it was only an offer made to NBL in order to regularize/comfort the Bank for the temporary overdrawing in their cash credit account. Since the Bank declined the same, nothing thereafter survived and no gain or loss caused to either party or at all. This was strictly a private accommodation offer made by them to the Bank and no impact or effect on the market would have entailed. It was also submitted that they have accepted the contention of the Ld. Enquiry Officer that it would have been the correct procedure to have mooted a proposal to this effect rather than issuing contract notes. The said broker assured that in future if such a circumstance should occur, it would follow the suggestion of the Ld. Enquiry Officer. In the said circumstances, the said broker submitted that the offer for sale given in the form of a contract note, could at best be termed as a venial defect. It was further submitted that, even the Ld. Enquiry Officer has not attributed any malafides for issuing the said contract notes and in the said circumstance; a lenient view of the matter should be taken.

3.4.11 With regard to delay in making payment the said Broker submitted that as explained to the Ld. Enquiry Officer during the course of both, written and oral submissions they had requested time for payment of bill dated 6.3.2000. Only on receipt of the approval of the client did he make the payment in accordance with the agreed time schedule and as such, there was no delay for making such payment. As regards the other claim of Rs.21.19 cr by NBL and as rightly held by the Ld. Enquiry Officer, it is neither desirable nor appropriate to give any finding in this regard on the disputed question of facts, in the face of claims and counter claims by the broker and his client when the same is subject matter of arbitration proceedings before the Stock Exchange, Mumbai and also in Civil Suit No.1947/2001 before the Hon’ble High Court of Mumbai, more so when the client i.e. NBL is not a party in the present proceedings. The arbitrator has jurisdiction to interpret the contract having regard to the terms and conditions of the contract, conduct of the parties, circumstances of the case, and pleadings of the parties and pass an Award

3.4.12 With regard to lifting the corporate viel, broker stated that the finding in this regard had given no bearing or relevance in the instant case, especially as no wrong doings much less fraudulent action concluded/reported from such action.

4.0 Consideration of issues:

4.1 I have considered the investigation report, the report submitted by the Enquiry Officer, the replies and submissions of the said broker and other material on record. I find that the following issues arise for consideration:

1.  

    

    

   1. Whether the said broker had acted beyond the mandate given to him by NBL.

    

    

    

    

   2. Whether the said broker had engaged in transactions other than arbitrage transactions.

    

    

    

    

   3. Whether the said broker had acted in concert with M/s. Harvest Deal Securities Limited and First Custodian Fund (India) Limited

    

    

    

    

   4. Whether the said broker had failed to obtain client registration and to enter into broker client agreement with NBL.

    

    

    

    

   5. Whether the said broker had delayed making payment to NBL.

    

    

    

    

   6. Whether the said broker had issued fictitious contract notes

    

    

    

    

   7. Other issues.

    

    

The above issues are dealt with as under:

1.  
   1. Whether the said broker had acted beyond the mandate given to him by NBL.
       

       

       

      1. I note that as per the minutes of the meeting of the Board of Directors of NBL held on 26.9.1999, the bank had approved arbitrage transactions in securities through 3 brokers including the said broker. I also note that the said brokers had executed transactions on behalf of the bank even prior to the mandate issued to them vide the Board meeting dated 26.9.1999.

       

       

      2. I note that the Enquiry Officer in his report has noted that in case these transactions had been done in an unauthorized manner, NBL would not have given an acknowledgement in the contract notes issued by them. Further, as noted by the Enquiry Officer, NBL, in its investment policy dated 25.9.1999 had noted that some brokers were allowed to make purchases and sale on an experimental basis. It further acknowledged that these experimental transactions were carried out through 3 stock brokers including the said broker.

       

       

      3. In view of the above, I agree with the findings of the enquiry officer and hold that the said broker had not acted beyond the mandate given to him.

    

    

    

    

    

   2. Whether the said broker had engaged in transactions other than arbitrage transactions.
    

    

    

   1. I note that the specific transactions that were alleged to be other than arbitrage transactions are as under:

    

   Scrip name	Quantity Purchased	Purchase Date	Broker	Quantity Sold	Sale Date	Broker
   Lupin Labs	6500	26.11.99	SGM	1500	26.11.99	FCF
   				5000	29.11.99	FCF
   NIIT	2450	01.11.99	FCF	950	01.11.99	SGM
   	710	02.11.99	FCF	700	02.11.99	SGM
   				1510	03.11.99	SGM
   Silverline	22400	09.11.99	FCF	12400	09.11.99	FCF
   				10000	10.11.99	FCF
   Reliance	11000	07.11.99	FCF	11000	11.11.99	FCF
   DSQ	20900	07.11.99	FCF	20300	07.11.99	SGM
   	22000	09.11.99	FCF	22600	09.11.99	SGM
   Dig. Equipment	32500	11.11.99	SGM	12390	11.11.99	FCF
   				12110	24.11.99	SGM
   				8000	25.11.99	SGM
   	9207	07.12.99	FCF	6207	07.12.99	SGM
   				3000	08.12.99	SGM
   Infosys	1007	11.11.99	SGM	1007	18.11.99	SGM
   Zee	94	11.11.99	SGM	52	11.11.99	FCF
   				42	12.11.99	FCF
   Pentafour	55000	15.11.99	FCF	50000	15.11.99	SGM
   				5000	26.11.99	SGM

    

    

   2. An examination of the transactions carried out by the said broker on behalf of NBL reveals that the sale and purchase are not simultaneous across exchanges for the same quantity on the same date.

    

   3. In his reply the said broker has submitted that he was a member only of the BSE and therefore could not have done arbitrage transactions. He further submitted that they had executed transactions either purchase or sale as and when instructed to do so by NBL.

    

   4. In this regard, I note that the sale and purchase of shares was not simultaneous across exchanges and for the sale of the same quantity purchased. Arbitrage transactions seek to take advantage of price differential between two exchanges and as such need to be executed almost simultaneously and in same quantities. Therefore, the transactions mentioned in Para 4.3.1 above are not arbitrage transactions.

    

   5. The Enquiry Officer has in his report made a detailed examination of the transactions in respect of each of the shares mentioned above and come to a finding that the said transactions were not arbitrage transaction and that therefore the said broker had acted beyond the mandate given to him by NBL. I agree with the findings of the Enquiry Officer and find that the said brokers had entered into transactions that were not arbitrage transactions and had therefore failed to faithfully execute the orders of their client viz. NBL. Therefore, I find that the said broker has violated Clause B (1) of the Code of Conduct for Stock Brokers that is laid down in Schedule II to the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as "the broker regulations") 

    

    

   3. Whether the said broker had acted in concert with M/s. First Custodian Fund (I) Ltd. and Harvest Deal Securities Limited
    

    

    

   1. I note that in the instant case, R K Banthia along with his wife, held 8.08%; First Custodian Fund (India) Ltd held 3.28% and the said broker held 10.51% equity shares in NBL. Further, Shri Surinder K Banthia, the brother of R K Banthia is the Chairman of First Custodian Fund (India) Ltd and Manish Banthia, the son of R K Banthia is a director. Shri Sushil Mantri, brother of Shrikant G Mantri is the Executive Director of First Custodian Fund (India) Ltd. I also note that the First Custodian Fund (India) Ltd, Harvest Deal Securities Limited and the said broker functioned out of the same premises and had common fax and telephone connections.
      
   2. I also note that in his statement to SEBI on 30.9.2002, Shri H Ganesh, Senior Manager of the Investment Cell of NBL had mentioned that:

    

    

   "There was a blanket permission given by the Chairman and GM of NBL to Shri Banthia who was well known to them to decide and execute the transactions. To my knowledge, selection of securities, orders and the timing were decided by Shri Banthia. Mr. Banthia was the sole representative of all the 3 broking firms viz. HDSL, FCIL and Shrikant G Mantri for all these transactions of the bank… All the contracts /communications of these 3 brokers were delivered by a common messenger"

    

    

    

   3. In this regard, the said broker, in their reply have stated that the companies are not associated companies within the definition of S. 370(1B) of the Companies Act, 1956 and merely because there are common directors, it cannot be said that they are associated companies. The said broker has also submitted that Shrikant G Mantri is a sole proprietorship concern and that the shareholding of First Custodian Fund (India) Ltd and the said broker are distinct. Further, the said broker is a proprietary firm. Therefore, the said broker had submitted that it cannot be said that the three brokers have acted in concert and upon the directions of RK Banthia.

    

    

   4. I find that there is sufficient evidence to suggest that the three brokers including the said broker have acted together in carrying out transactions on behalf of and with NBL. The fact that all the three share office space and even fax and telephone lines only reinforces this finding. The statement of Shri H Ganesh, corroborates the finding. In this regard, the said broker contended that the statement of Shri H Ganesh should not be relied upon; this has been separately dealt with.

4.5 Whether the said broker had failed to obtain client registration and to enter into broker client agreement with NBL.

1.  
   1.  
      1. I note from the investigation report that the said broker did not obtain client registration forms and Broker client agreement duly filled in by NBL. In this regard, the said broker in their reply have submitted that the lapse was merely clerical in nature and that the purpose of taking the client registration form i.e. to determine the credit worthiness is fulfilled since the client in this case was a Scheduled Commercial Bank. They further submitted that as a result of the alleged failure to exercise due diligence, neither the client nor the stock exchange nor the counter party has suffered any damage and since there was no deliberate defiance of the law, the penalty of suspension is harsh and disproportionate and hence not liable to be imposed.

       

       

       

       

      2. I find that the said broker has admitted to the lapse of not obtaining the client registration form and entering into the broker-client agreement with NBL. I also note the submission of the Broker tht this is an isolated incident and there was no allegation of Broker habitually not obtaining such registration forms. Therefore, I hold that a lenient view can be taken.

        

       

1.  
   1. Whether the said broker had delayed making payment to NBL.

4.6.1 I note that there has been a delay on the part of the said broker in making payments to the Bank. This delay which extended from 2 to 6 months was for a total amount of Rs.65.79 crores. Details of the amounts due to NBL are as under :

1.  
   1.  
      1. I note that in his reply the said broker denied that there was any delay in making payment to the bank. He has further submitted that NBL had approved his request for time to make payment and that he had thereafter made the payment in accordance with the agreed time schedule and as such there was no delay in making the payment. The said broker has also submitted that the amounts due to the Bank are subject matter of arbitration proceedings before the BSE and also Civil Suit before the High Court of Mumbai. In this regard, the Enquiry Officer has come to a finding that in view of the arbitration proceeding and the Civil Suit, it would not be appropriate to give any findings in this regard.

       

       

      2. I am unable to accept the explanation of the said broker that NBL had agreed to a schedule of payment wherein substantial amounts of money were paid to them more than 3 months after the date of contract and that too without any interest. No documentary proof has been submitted by the said broker in this regard.

       

       

      3. With regard to the contention the amounts due are a subject matter of arbitration proceedings and a Civil Suit, I find that in the present proceedings before me, neither the quantum of amounts due nor the interest due are being decided or commented upon. What is being determined is whether there has been a delay on the part of the said broker in making payments to NBL. Admittedly, the said broker has failed to make payments to NBL within 2 days as required under the code of conduct for stock brokers. As found earlier, the said broker has not submitted any documentary proof regarding arrangements entered into between him and NBL for rescheduling the payments due.

       

      4. In the light of the above, I find that the said broker has delayed making payments to NBL and has therefore violated Clause B (1) of the Code of conduct for stock brokers laid down in Schedule II to the Broker Regulations which provides that a stock broker shall make prompt payments in respect of securities sold.

       

   2. Whether the said broker had issued fictitious contract notes

    

   1. I find that the said broker had issued contract notes in favour of NBL without there being actual sale of any shares by the bank. These contract notes dated 27.3.2000 and 28.3.2000 were for a total value of Rs.58.72 crores. I further note that the said contract notes did not contain the trade and order time and these so called sales were one sided without any buyer. Further, there was no transfer of securities from the bank or credit of any sales proceeds to the bank corresponding to these contract notes on the aforesaid dates. The details of these contract notes are as under :

    

   Scrip	Date	Quantity	Average Price	Value	Broker
   Digital Equipment	27.03.2000	5125	1404.00	7184737.50	Shrikant G. Mantri
   HCL Info	27.03.2000	553	913.25	504280.40	Shrikant G. Mantri
   Himachal Futuristic	27.03.2000	197590	2200	434045953.00	Shrikant G. Mantri
   Indian Petro	27.03.2000	5000	109.30	545750.00	Shrikant G. Mantri
   ACC	27.03.2000	41586	149.10	6191323.68	Shrikant G. Mantri
   Pentafour	27.03.2000	23091	1807.65	41678100.45	Shrikant G. Mantri
   Ranbaxy	27.03.2000	72364	955.00	69004139.48	Shrikant G. Mantri
   Hind Sani	28.03.2000	200	386.20	77120.00	Shrikant G. Mantri
   Zee	28.03.2000	10000	1307.75	13058000.00	Shrikant G. Mantri
   Jayant Agro	28.03.2000	100	423.65	42300.00	Shrikant G. Mantri
   Kale Consultants	28.03.2000	550	496.60	272717.50	Shrikant G. Mantri
   L&T	28.03.2000	1003	441.95	442623.90	Shrikant G. Mantri
   NIIT	28.03.2000	837	2731.05	2282465.52	Shrikant G. Mantri
   Videocon	28.03.2000	125930	94.30	11856309.50	Shrikant G. Mantri

    

   2. I further note that the price of the scrips mentioned in the fictitious contract notes had no bearing with the relevant market price of the scrips. Details of the prices are as under:

    

   Scrip	Price at NSE	Price at BSE	Price quoted on contract note
   Pentafour Software	Rs.1356.53	Rs.1311.50	Rs.1807.65
   HFCL	2147.20	2140.10	2200.00
   Zee	1039.70	1039.00	1307.75
   ACC	131.50	131.85	149.10
   Videocon	63.35	63.00	94.30
   Ranbaxy	703.15	705.00	955.00

    

   3. I also note that NBL had accounted for the above transactions in its books of accounts for the year ended 31.3.2000. I find that these contract notes which did not reflect actual transactions and prices of the scrips mentioned therein were issued by the said broker merely to facilitate the bank to show profits which were not real. As mentioned by the said broker in his reply there was an explicit understanding that these contract notes would not be acted upon. In so far as the contention of the said broker that he was forced by NBL to issue the notes under threat to discontinue business and also recall of credit facilities, these run contrary to the statement of Shri Ganesh that his Senior Officer had instructed him not to transfer any shares towards the contract until further instructions 

    

   4. In view of the above, I find that the said broker has issued fictitious contract notes and thereby violated Clauses A (1), (3) and (5) of the Code of Conduct for Stock Brokers and Regulation 6 (a) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995.

     

   3. Other issues.
     
   1. Whether the show cause notice issued to the said broker was non est in law since it was not issued by either the Chairman or Member

       

      1. In their reply dated 5.2.2004 and in the course of oral submissions and vide their letter dated 16.2.2004, the said broker has contended that Show Cause Notice under Regulation 13 (2) of the Enquiry Regulations can be issued only by The Chairman or Member of SEBI. They have submitted that since, in the instant case, the Show Cause Notice has been issued by the Division Chief, Integrated Surveillance Department and not by the Chairman or Member, the notice is bad.

       

      2. In this regard, I note that although Regulation 13 (2) of the Enquiry Regulations do provide that the Chairman or Member shall issue the show cause notice, as a measure of administrative convenience, the Board of SEBI, vide order dated 21.4.2003 had delegated the power to affix signature on show cause notices to officers of rank Deputy General Manager and above. I note that this is not a delegation of the power to issue a show cause notice to intermediaries, but rather a delegation of the procedural function of signing the show cause notice. Thus, while the show cause notice is signed by the Division Chief, the decision to issue the show cause notice after considering the enquiry report having been taken by me, the show cause notice is valid and there has not been any delegation of powers in violation of the principle of "Delegatus non potest Delegare".

    

   2. Whether the request of the said broker for cross examination of Shri A R Moorthy and H Ramesh needs to be acceded to
    
   1. It is contended by the said broker in their reply that the Enquiry Officer has placed great reliance on the statements of Shri A R Moorthy and H Ramesh, Former Chairman and Manager, Investment Cell of NBL respectively. They have also submitted that the said statements did not form part of the documents furnished to them by the Enquiry Officer and rather formed part of a separate proceeding pursuant to show cause notice dated 11.3.2003; reliance should not be placed on the same. They have also submitted that they were not given a reasonable opportunity to rebut the purported statements.

    

   2. In this regard, I find that although the statements of Shri Moorthy and Shri Ramesh were not given to the said broker in the course of enquiry proceedings, it is an undeniable fact that they had notice of them. Further, although the said statements could not be rebutted by them before the Enquiry Officer, it was open to them to make suitable rebuttals before me. As for their request for cross examination of Shri Moorthy and Shri Ganesh, I find that the same is neither specifically provided for under the Enquiry Regulations nor do the facts of the case call for it and therefore, I decline the said request.

 5.0 Order

1.  
   1. In the light of the above, I find that besides violation of the code of conduct, the said broker had indulged in grave irregularities such as issuing fictitious notes and therefore violated the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 seeking to mislead investors in securities has been established and therefore, the recommendation of the enquiry officer that the certificate of registration granted to the said broker for a period of 12 months is appropriate. However, I note that the Broker has already been debarred from dealing in securities vide order dated 14.7.03.

    

5.2 In view of the above, I in exercise of powers conferred on me under Section 4(3) of the SEBI Act read with Regulation 13(4) of the Enquiry Regulations hereby suspend the certificate of registration bearing No.INB010028216 granted to Shrikant G Mantri for a period of 12 months from 14.7.03.