BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: DR.T.C.NAIR, WHOLE TIME MEMBER
IN THE MATTER OF
M/s.S.K. JAIN,
MEMBER - CALCUTTA STOCK EXCHANGE,
SEBI REGISTRATION NO. INB030951610
WTM/TCN/MIRSD/58/11/06
DATE OF HEARING: 27.04.2006
APPEARANCES:
FOR NOTICEE : S.K. Jain
FOR SEBI : Shri P.K.Kuriachan, General Manager
ORDER
(UNDER REGULATION 13(4) OF SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002)
1.1 M/s. S.K. Jain (hereinafter referred to as the ‘broker’) is a member of Calcutta Stock Exchange, (hereinafter referred to as ‘CSE’) and is registered with the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) as a Stock broker under Section 12 of SEBI Act, 1992 with Registration Number INB030951610.
1.2 Shri S.K.Jain was Director and Vice Chairman of CRB Capital Markets Ltd., (CRB CML) a non banking finance company (NBFC) which raised deposits from the public and defaulted in repayments. CRB CML was also a merchant banker and had sponsored CRB Mutual Fund (CRB MF).
2.1 An order under Section 11(4) (b) of the SEBI Act, 1992 was passed against the broker on April 3, 2003 restraining him from accessing the securities market and prohibiting him from buying, selling and dealing in securities till completion of enquiry. Accordingly, an Enquiry Officer (hereinafter referred to as “EO”) was appointed under Regulation 5(1) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred as the ‘said regulations’) to enquire into the alleged contraventions committed by the broker of (i) Clause (e) of Regulation 5 read with Clause (a) of Regulation 25 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as “Stock Broker Regulations”) and (ii) Bye-laws, Rules and Regulations of the Calcutta Stock Exchange.
2.2 A Notice dated 10.11.03 was issued to the broker under Regulation 6 (1) of the said regulations. The broker replied vide letter dated 14.1.04. After considering the said reply and the submissions made by the broker during the personal hearing, the EO submitted his report dated June 21, 2005 recommending a major penalty of cancellation of the certificate of registration of the broker.
3.1 A copy of the Enquiry Report was sent to the broker along with a show cause notice dated June 28, 2005, in terms of Regulation 13(2) of the said Regulations calling upon it to show cause as to why appropriate penalty including the penalty as recommended by the Enquiry Officer should not be imposed on it. The broker replied to the said notice vide letter dated July 13, 2005.
4.1 An opportunity of personal hearing before me was granted to the broker on April 27, 2006. Shri SK Jain, Proprietor appeared before me on the said date and made his submissions.
5.1 I have carefully considered the findings of the Inspection, Enquiry and the submissions made by the broker and my observations are as under :
5.2 I have noted that the affairs of CRB CML and other CRB Group Companies were conducted in a manner detrimental to the interests of the investors and as the broker was a Director and Vice Chairman of CRB CML when various irregularities in the operations of CRB CML and other CRB Group Companies came to light, an interim order dated 3.4.03 was passed on the basis of a prima facie finding that the broker was not a “fit and proper person” to act as stock broker in terms of Regulation 5(e) read with Regulation 25(a) of Stock Brokers Regulations and an enquiry was ordered simultaneously.
5.3 The EO found that i) CRB CML which raised deposits from the public had defaulted in meeting its repayment obligations thereby causing financial difficulties to many depositors as they lost their hard earned money and the broker was the Vice Chairman and Director of CRB CML at the relevant time when the financial irregularities took place. ii) Merely for the reasons that there was no restraint order against the broker for disposing of his properties as claimed, will not absolve the broker of his responsibility for the acts of omissions and commissions of CRB CML which defaulted in meeting its financial obligations to the public. iii) A person who was associated with CRBCML as its Director and Vice Chairman at the relevant time cannot be treated as a “fit and proper” person in terms of Regulation 5(e) read with Regulation 25(a) of Stock Brokers Regulations. iv) Having regard to the gravity and nature of financial irregularities committed by CRB CML in the matter of repayment of deposits raised from the public and the broker being the Director and Vice Chairman in the said CRB CML, it would be neither in public interest to allow him to continue to trade in securities nor can it be said that he is a “fit and proper” person in terms of Regulation 5(e) read with Regulation 25(a) of Stock Brokers Regulations and v) For the acts of omissions and commissions that are attributable to him, he continues to be liable notwithstanding his resignation.
5.4 The broker vide his reply dated July 13, 2005 stated that :
· there was no order subsisting or otherwise from any court in India which restrains him in any manner from carrying out/pursuing any business. Further, there is no order from Court in India against him in the matter of financial irregularities allegedly committed by CRB CML.
· no presumption of guilt could be made against him by virtue of his being Non-Executive Professional Director on the Board of CRB CML.
· he was a Non-Executive Professional Director designated as Vice-Chairman of CRB CML and was not looking after the day to day affairs of the company.
· Except sitting fees for attending Board Meetings, he did not receive any remuneration of any nature howsoever and whatsoever from CRB CML.
· He was not authorized to operate any Bank Accounts of CRB CML nor signed any cheques or other instruments on behalf of CRB CML.
· He was not a promoter of CRB CML.
· He held only 300 shares of CRB CML.
· He was not authorized to enter into any financial transactions of CRB CML.
· He earned income from Professional Consultancy Services rendered to various Corporates which was fully disclosed in his income tax returns.
5.5 I find from the submissions of the broker that he resigned from the Board of CRB CML on 1.3.97 and his resignation was accepted on 6.3.97. The sequence of various regulatory actions passed against the broker therefore need to be examined in the light of the above submissions of the broker to ascertain the extent of his involvement in the activities of CRB CML.
(1) Vide SEBI Order dated 21.5.97 under Section 11B of SEBI Act, 1992, CRB MF (CRB CML) being one of the sponsors and CRB Asset Management Company were directed not to launch any further schemes and not to deal in securities till further orders. It was also directed that CRB CML shall not undertake any activities as a merchant banker till further orders. The broker has stated that this order was not served on him and hence does not concern him. I find that the said order issued to the CRB group of companies refraining it from undertaking various activities in its capacity as merchant banker, stock broker etc. and had no relevance to the broker in his individual capacity and hence it does not directly concern him. In view of this, there was no stigma attached to the broker consequent to issuance of the order cited supra.
(2) A provisional liquidator was appointed by Delhi High Court on 22.5.97 on the petition filed by RBI under Section 45 MC of RBI Act, 1934 for winding up of CRB CML. The broker stated that a copy of the said order was received by him from the EO for the first time and it did not concern him since he had ceased to be Director of CRB CML with effect from 6.3.97. I find that the order of the Delhi High Court dated 22.5.97 directed the respondent (in this case CRB CML) and its directors, servants and agents from disposing of, alienating and/or parting with possession of any of the assets of the company. I find that as the broker had resigned from the Board of CRB CML in March 1997and as his resignation was accepted, the said order of the High Court issued in May 1997 would not bear upon the broker.
(3) Vide Order dated 13.6.97 as modified on 23.6.97 by the Hon’ble Delhi High Court, the Directors of CRB Group Companies including the broker were restrained from disposing of the properties. I find that the said order dated 13.6.97 was vacated by the Hon’ble Delhi High Court vide its order dated 7.9.01.
(4) Vide SEBI Circular No.SMD/POLICY/CIR-15/97 dated 1.7.97, following entities of CRB Group Companies were restrained from transacting in securities market.
(a) Directors/Employees of CRB CML or any CRB group Companies if they are members of the Exchange.
(b) CRB CML and any CRB group Companies if they are the members of the Exchange.
(c) All broking firms of the stock exchange where any of the Director/Employees of CRB CML or any CRB group Companies is a Director/Promoter/Shareholder or Proprietor/Partner.
The broker stated that the said circular was never served on him and he received a copy of the same for the first time from the EO vide letter dated January 5, 2004 i.e. after passing of the order dated 23.4.03 by SEBI. The broker submitted that in July 1997, the Calcutta Stock Exchange arbitrarily suspended his membership without assigning any reason and verbally told him that his operations were suspended on the basis of the Circular received by the CSE from SEBI without providing him with a copy of the same. The broker stated that he was not afforded any opportunity of hearing for 6 years and his Membership card was suspended during this period in violation of the principles of natural justice. I find that the basis for issuing the said circular was the order of the Hon’ble Delhi High Court dated 13.6.97 appointing a provisional liquidator. However, since the said order of the court was vacated and held infructuous by an order dated 7.9.01, the directions of the said circular automatically becomes inapplicable to the broker.
(5) Vide Order dated 7.9.01, the Hon’ble Delhi High Court directed that the accounts of 133 companies/firm of CRB would remain frozen. I find from a perusal of the said order that 133 companies were listed by name and the name of the broker did not appear in the list of 133 companies. I, therefore, find that the said order does not apply to the broker.
(6) Vide Order dated 3.4.03, Chairman, SEBI, passed an Interim Order directing the broker to restrain from accessing the securities market and prohibiting him from buying, selling or dealing in securities till the completion of enquiry against the broker on the ground that he may not be a “fit and proper” person.
(7) Vide Order dated 5.5.04, SEBI confirmed the Interim Order dated 3.4.03 restraining the broker from accessing the securities market and prohibited him from buying, selling and dealing in securities till the passing of final Order by Chairman/Member in the enquiry proceedings pending against him.
(8) Vide Enquiry Report dated 21.6.05, the EO recommended a major penalty of cancellation of the certificate of registration of the broker on the following grounds :
(i) During the personal hearing before Chairman, SEBI, the broker pleaded that no court case was pending against him, but when asked to furnish a declaration to this effect in the form of an affidavit and also issue a public notice in this regard, he backtracked.
(ii) The broker was the Vice Chairman and Director of CRB CML at the relevant time when the financial irregularities took place. Merely because there was no restraint order against the broker for disposing of his properties as claimed, will not absolve the broker of his responsibility for the acts of omissions and commissions of CRB CML which defaulted in meeting its financial obligations to the public.
(iii) A person who was associated with CRBCML as its Director and Vice Chairman at the relevant time cannot be treated as a “fit and proper” person in terms of Regulation 5(e) read with Regulation 25(a) of Stock Brokers Regulations.
5.6 I find that the criteria for determining whether a person is “fit and proper” is as stipulated under Regulation 3(1) and (2) of the SEBI (Criteria for Fit and Proper Person) Regulations, 2004 (hereinafter referred to as “Fit and Proper Regulations”.
3. (1) "For the purpose of determining as to whether an applicant or the intermediary seeking registration under any one or more of the relevant regulations is a ‘fit and proper person’, the Board may take account of any consideration as it deems fit, including but not limited to the following criteria –
(a) financial integrity;
(b) absence of convictions or civil liabilities;
(c) competence;
(d) good reputation and character;
(e) efficiency and honesty; and
(f) absence of any disqualification to act as an intermediary as stipulated in these regulations.
3.(2) A person shall not be considered as a" fit and proper person" for the purpose of grant or renewal of certificate to act as an intermediary or to continue to act as an intermediary under any one or more of the relevant regulations, if he incurs any of the following disqualifications -
(a) the applicant or the intermediary, as the case may be or its whole time director or managing partner has been convicted by a Court for any offence involving moral turpitude, economic offence, securities laws or fraud;
(b) an order for winding up has been passed against the applicant or the intermediary;
(c) the applicant or the intermediary, or its whole time director, or managing partner has been declared insolvent and has not been discharged;
(d) an order, other than an order of suspension of certificate of registration as an intermediary, restraining, prohibiting or debarring the applicant or the intermediary, or its whole time director or managing partner from dealing in securities in the capital market or from accessing the capital market has been passed by the Board or any other regulatory authority and a period of three years from the date of the expiry of the period specified in the order has not elapsed;
(e) an order canceling the certificate of registration of the applicant or the intermediary has been passed by the Board on the ground of its indulging in insider trading, fraudulent and unfair trade practices or market manipulation and a period of three years from the date of the order has not elapsed;
(f) an order withdrawing or refusing to grant any license / approval to the applicant or the intermediary, or its whole time director or managing partner which has a bearing on the capital market, has been passed by the Board or any other regulatory authority and a period of three years from the date of the order has not elapsed;
Provided that the Board may for reasons to be recorded in writing, allow the applicant or the intermediary, to seek registration before the lapse of three years as specified in clauses (d), (e) and (f).
(g) the applicant or the intermediary, is financially not sound;
(h) any other reason, to be recorded in writing by the Board, which in the opinion of the Board, renders such applicant or the intermediary, or its whole time director or managing partner unfit to operate in the capital market.”
5.7 Ex-facie, I agree with the EO that the broker being the Director and Vice Chairman of CRB CML at the time when serious financial irregularities were committed, cannot be said to be a fit and proper person to trade in securities. However, since he was a professional non-executive Director, the irregularities committed by CRBCML cannot be attributed to the broker without material evidence to prove his involvement. I find that no such evidence has been adduced and instead a presumption has been drawn of the broker’s involvement merely by virtue of his position and he has not been found to be a fit and proper person. Based on the material available on record, it is difficult to conclusively say that the broker is not meeting any of the criteria listed at 3(1) above or has incurred any of the disqualifications listed at 3(2) of the Fit and Proper Regulations. There is also no material on record to suggest that the broker, as a Director of CRB CML was involved in the irregularities committed by CRB CML as he was only a Non-Executive Professional Director designated as Vice-Chairman of CRB CML. However, the broker’s association with CRB CML even as a non-executive professional director at the time when the defaults occurred has certainly put a question mark on his reputation and character. The broker further stated that except sitting fees for attending Board Meetings, he did not receive any remuneration of any nature and he was not authorized to operate any Bank Accounts of CRB CML nor sign any cheques or other instruments on behalf of CRB CML. He further stated that he was not authorized to enter into any financial transactions of CRB CML and that he was not a promoter of CRB CML, either. I find that as the broker was not authorized to handle any kind of financial transactions or day to day business of CRBCML, it would be difficult to conclude that the broker was responsible for the financial irregularities committed by CRB CML in the matter of repayment of deposits raised from the public. Further, sufficient evidence was not there to establish that the broker had colluded with or aided and assisted the CRBCML’s management in committing the financial irregularities and defaults to investors.
5.8 I find that to ascertain the vicarious liability of the Director for the defaults committed by the company, it has to be satisfied that the person was (at the time of the contravention) in charge of and responsible to the company for the conduct of the business. Section 27 of the SEBI Act, 1992 states that a person would be deemed to be guilty of offence only when he was in charge and was responsible to the company during the relevant period. In this regard, Hon’ble Securities Appellate Tribunal in Rahul H Shah’s case (2004) 55 SCL 416 (SAT) observed that “it is not possible for us to lay down any hard and fast rule as to when a director will be vicariously responsible for the acts of the directors in charge of the day today affairs of the company.”
5.9 However, even non-executive directors shall be made liable where they are appointed so as to watch and keep a check on the whole time directors, to provide a view of an impartial outsider to bring the benefit of their experience to the company, to act as a figure head (particularly in the case of a non-executive chairman), to add credibility to the company with the public and shareholders , though the inference has to be drawn from the facts and circumstances surrounding each case. Thus, the vicarious liability turns on the merits of each case and has to be determined accordingly. In any event, there has to be a modicum of evidence linking the said director with the charge and in its absence, complicity cannot be presumed.
5.10 Similarly, in the State of Haryana v Bril Lal Mittal (1998) 5 SCC 343, Supreme Court has observed as under :
“It is thus seen that the vicarious liability of a person for being prosecuted for an offence committed under the Act by a company arises if at the material time he was in charge of and was also responsible to the company for the conduct of its business. Simply because a person is a director of the company it does not necessarily mean that he fulfills both the above requirements so as to make him liable. Conversely, without being a director, a person can be in charge of and responsible to the company for the conduct of its business. From the complaint in question we, however, find that except a bald statement that the respondents were directors of the manufacturers, there is no other allegation to indicate, even prima facie, that they were in charge of the company and also responsible to the company for the conduct of its business.”
5.11 The above judgment was adhered by Supreme Court in its recent judgment in S.M.S. Pharmaceuticals (AIR 2005 SC 3512) where it was held that merely being a director in a company is not sufficient to make a person liable under section 141 of Negotiable Instruments Act , 1881. Director in a company cannot be deemed to be in charge and responsible for conduct of its business at the relevant time, requirement of section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant period.
5.12 In Mr.Homi Phiroz Ranina and others Vs. The State of Maharashtra and others, the Hon’ble High Court of Bombay observed that “unless the complaint disclosed a prima-facie case against the applicants/accused of their liability and obligation as Principal Officers in the day-to-day affairs of the Company as Directors of the Company under Section 278(b) the applicants cannot be prosecuted for the offences committed by the Company. In the absence of any material in the complaint itself prima-facie disclosing responsibility of the accused for the running of the day-to-day affairs of the Company process could not have been issued against them. The applicants cannot be made to undergo the ordinal of a trial unless it could be prima-facie showed that they are legally liable for the failure of the Company in paying the amount deducted to the credit of the Company. Otherwise, it would be a travesty of justice to prosecute them and ask them to prove that the offence is committed without their knowledge.”
5.13 The Supreme Court in the case of Shyam Sundar v. State of Haryana reported in A.I.R. 1984 page 53 held as follows :
“It would be a travesty of justice to prosecute all partners and ask them to prove under the proviso to sub-section (1) that the offence was committed without their knowledge. It is significant to note that the obligation for the accused to prove under the proviso that the offence took place without his knowledge or that he exercised all due diligence to prevent such offence arises only when the prosecution establishes that the requisite condition mentioned in sub-section (1) is established. The requisite condition is that the partner was responsible for carrying on the business and was during the relevant time in charge of the business. In the absence of any such proof no partner could be convicted.”
5.14 Though the above cases are primarily applicable to criminal proceedings, the principles laid down therein may be relevant in the instant case, where the broker was put under the cap of grave consequences because of his association with CRBCML. Further the broker has not explained as to how such irregularities were committed when he was a Director and Vice Chairman of CRB CML but merely contended that he was only the non-executive professional director designated as Vice Chairman and not concerned with and responsible for the day to day management of CRB CML. As the broker did not make any attempt to convince that the defaults have occurred without his knowledge and he exercised due diligence to prevent the commission of such defaults. There would be a serious suspicion on the role of the broker and one could have concluded that the broker was aware of the murky developments in CRBCML. However, I do not find any specific evidence against the broker to prove that he was involved and responsible for the defaults committed by CRBCML. In the absence of corroborative evidence of his involvement in the misdeeds of CRBCML, I am inclined to give him a benefit of doubt.
5.15 I find from the submissions of the broker that his broking business had been suspended in July 1997. His savings in the form of shares, deposits etc. are blocked with CSE. Further, his Interest Free Refundable Deposit of Rs.5.00 Lakhs is also lying with CSE though it became due for refund on 12.7.2001. I find that the broker has already been put to considerable hardship for the past 9 years i.e. since his suspension in 1997. Even if the Certificate of Registration was cancelled on the grounds of indulging in insider trading, fraudulent and unfair trade practices or market manipulation, the broker would not be a fit and proper person for a period of three years only from the date of such cancellation in terms of “Fit and Proper Regulations”. It also appears that the broker was not interested in continuing with stock broking.
5.16 In the facts and circumstances of the case and considering that the broker has already undergone the prohibition for a period of nine years, I am of the view that no further action needs to be taken in the matter.
6.1 Now, therefore, in exercise of powers conferred upon me in terms of Section 19 of SEBI Act, 1992 read with Regulation 13(4) of the said Regulations, I hereby dispose of the proceedings against Shri S. K. Jain, Member - Calcutta Stock Exchange, with Registration Number INB030951610, on the terms as above.
6.2 This order shall come into force with immediate effect.
| Place: Mumbai |
T.C.NAIR |
| Date: 3.11.2006 |
Whole Time Member |
| |
Securities and Exchange Board of India |