Order against Mr. Ashok Sardana

SECURITIES AND EXCHANGE BOARD OF INDIA 

ORDER  

 

CO/36/MIRSD/09/2004

1.0             Background

1.1             Shri Ashok K Sardana (hereinafter referred to as “the said broker”) is a member of the Bhubaneshwar Stock Exchange (BhSE) and a stock broker registered with SEBI under certificate of registration no. INB170265714. The said broker is also a director of Indian Finance Guaranty Ltd. (IFGL), a member of The National Stock Exchange of India Ltd. (NSE).

 

2.0             An inquiry  conducted into the affairs of the Members Welfare Trust of Bhubaneshwar Stock Exchange, found interalia that the Council of Management of BhSE at its meeting held on 07.08.96 had established a Trust called ‘Bhubaneshwar Stock Exchange Members Welfare Trust’ (MWT). A trust deed executed between BhSE and the trustees of MWT was registered on 23.09.96. As per the terms of the trust, every member of BhSE contributed a sum of Rs.3,000/- per annum to the corpus of the fund. One of the objectives of MWT was to sanction loans to members to tide over temporary financial difficulties on their part in payment of dues to the clearing house of the Exchange. It was observed that BhSE neither sought the permission of nor sent any intimation to SEBI regarding the formation of the said Trust.

 

2.0 Inquiry

 

2.1             SEBI, on 28.09.01 ordered for a statutory inquiry under Section 6 of Securities Contract (Regulations) Act, 1956 into the allegations of financial irregularities in the MWT’s Funds by the Trustees of the MWT to the extent of Rs.1.30 crores.

 

2.2             The Inquiring Authority submitted his report on October 22, 2001, making the following findings :-

 

(a) It was observed that MWT had granted loans amounting to Rs.88,25,000/- between 07.06.99 and 13.01.00 to one Mr. Babulal Sharma, Vice President of BhSE and a trustee of MWT. Out of the said loan amount, Rs 25 lakhs was used by Shri Babulal Sharma to repay the outstanding dues of Shri Anjani Kumar Singh, a client of IFGL, on 7.6.1999. Further, a sum of Rs 15 lakhs was used by Shri Babulal Sharma to repay the dues of Shri Anjani Kumar Singh to IFGL on 29.9.1999.

 

 Further, an examination of the bank statement in the name of Shri Babulal Sharma, Account No.1003, maintained   with Canara Bank, Exchange Branch, Bhubaneshwar showed that a major portion of the loans sanctioned to him  were used for making payments to IFGL.

 

(b)  It was noted from the statement of accounts of MWT that an amount of Rs. 35 lakhs was credited by MWT to the account of one M/s Pradeep Investments on 7.6.1999 and on the same day an amount of Rs. 25 lakhs was transferred from the latter’s account to the account of IFGL. It was further observed that out of the sum of Rs. 22 lakhs credited to the account of M/s Pradeep Investments on 29.9.1999, an amount of Rs. 15 lakhs was transferred to the account of IFGL on the same day.

(c) The said broker was elected Vice President of BhSE in the Annual General Meeting of the members of the BhSE  held on September 29, 2001 and that he permitted Shri  Anjani Kumar Singh to transact business in NSE settlement Nos. 9920, 9922 and 9938.  As mentioned above, loans sanctioned to Shri Babulal Sharma were used by him to settle the pay-in liability of Shri Anjani Kumar Singh, a client of IFGL (in which the said broker  was a director).

 

(d) In view of the above, it was alleged that IFGL and the  said broker among others were the actual beneficiaries of  the loans sanctioned to various members by the Trust.

 

3.0 Interim Orders

 

3.1 in view of the observation that the said broker was involved in and had derived benefit from the irregularities relating to loans extended by MWT, SEBI, in the interest of investors and in the interest of the securities market, vide order dated 29.10.02, prohibited him from buying, selling or otherwise dealing in the securities market till further orders.

 

3.2 A post decisional hearing was granted to the said broker on 23.11.2002 and thereafter earlier order was confirmed vide order dated 16.01.04.

 

4.0 Enquiry proceedings

 

4.1 In view of the findings of the inquiry, an Enquiry Officer was appointed vide order dated 07.07.03 to enquire into the alleged violations. The Enquiry Officer after conducting an enquiry as per the provisions of the Enquiry Regulations submitted his report to SEBI on 11.08.04.

 

4.2 In his report, the enquiry officer made the following findings:

 

(a) That Shri Babulal Sharma was sanctioned a loan for Rs.35 lakhs on 7.6.1999 and a further loan of Rs.22 lakhs on 29.9.1999 by MWT and the loan amounts were credited to his account on the same day. Shri Babulal Sharma issued cheques favouring IFGL on 7.6.1999 and 29.9.1999 for Rs.25 lakhs and 15 lakhs respectively. He also addressed letters on the said dates to the said broker requesting them to credit the amounts of the cheques into the accounts of Shri Anjani Kumar Singh.

 

(b) That a civil suit No.TMS 444 of 2001 was filed by the MWT before the Civil Judge, Senior Division, Bhubaneshwar to recover Rs.1.30 crores from Shri Babulal Sharma and Shri Anjani Kumar Singh. In the plaint, it was observed that Shri Anjani Kumar Singh had mortgaged immovable properties in his name for the loans sanctioned to Shri Babulal Sharma. Thus, the cheques were issued by Shri Babulal Sharma to clear his dues to Shri Anjani Kumar Singh; there is no reasonable ground to believe that the said broker knew about the arrangements between the parties.

 

(c) That the said broker was neither a Trustee of MWT nor a office bearer of BhSE during the time when the MWT had sanctioned the loan to Babulal Sharma. Further, he was also not a sanctioning authority during the relevant time. Under the circumstances, it would not be fair to conclude that the said broker was associated with or the beneficiary of the loans granted by MWT to Babulal Sharma.

 

4.4 In view of the above findings, the enquiry officer recommended that no further penalty may be imposed on Shri Ashok Kumar Sardana. In this regard, he has also made a mention of the direction of the Securities Appellate Tribunal in an appeal filed by the said broker wherein the Tribunal has directed that the punishment already undergone should be taken into consideration.

 

4.5 I note that the said broker filed an appeal before the Hon’ble Securities Appellate Tribunal (SAT) against the order dated 16.01.04. SAT vide its order dated 30.06.04 directed SEBI to complete the enquiry and pass appropriate orders with respect to the Appellants within two months from the date of receipt of the order of SAT.

5.0 Consideration of issues

 

5.1 I have considered the facts of the matter, the Enquiry Report and other material on record.

 

5.2 I note that Shri Ashok Sardana was neither a trustee of MWT nor an office bearer of BhSE at the relevant time when the aforesaid loans were sanctioned by MWT to Shri Babulal Sharma who was Vice President of the BhSE and also a Trustee of MWT. Also, at the relevant time, Shri Ashok Sardana was neither the sanctioning nor the disbursing authority for loans from MWT. As such, he had no control over the affairs of either BhSE or MWT.

 

5.3 From the material on record I observe that Mr. Babulal Sharma was sanctioned a loan for Rs.35 lakhs on 7/6/1999 and another loan of Rs.22 lakhs on 29/9/1999 by MWT of BhSE and that the loan amounts were credited to his account on the same day. Thereafter, on the same day, Mr. Babulal Sharma had issued a cheque No.245755 for Rs.25 lakhs favouring IFGL and forwarded the same through Anjani Kumar Singh, client of the said broker vide letter dated 7/6/1999. In the said letter, Babulal Sharma also requested that the said amount may be credited to the account of Anjani Kumar Singh.

 

5.4 I further observe that another loan of Rs.22 lakhs was sanctioned to Mr. Babulal Sharma on 29/9/1999 and that the loan amount was credited to his account vide cheque No. 2112057 dated 29/9/1999. On the same day, Shri Babulal Sharma issued a cheque No.245766 for Rs.15 lakhs favouring IGFL. This cheque was submitted to the said broker by A K Singh, client of IFGL vide letter dated 29/9/1999 to clear his outstanding dues to IFGL.

 

5.5 I further observe that a civil suit TMS 444/2001 was  filed by MWT in the court of civil judge (Sr.Division) Bhubaneshwar, to recover Rs.1.30 crores from Babulal Sharma and Mr. Anjani Kumar Singh. From the plaint / other records I note that  Mr. Anjani Kumar Singh who was defendant No.2 in the said Suit had mortgaged his immovable properties as securities for the loans sanctioned to Mr.Babulal Sharma.

 

 From the above, I note that there were bilateral financial transactions between Shri Anjani Kumar Singh and Shri Babulal Sharma because of which the latter issued cheques to the said broker to clear the dues of the former with IFGL. I further note that Anjani Kumar Singh had mortgaged his immovable properties to secure the above loans granted to Babulal Sharma. There is no material on record to show that the said broker knew about the arrangements between M/s. Anjani Kumar Singh and Babulal Sharma.

 

 Even the SEBI circular directing that a broker shall accept cheques drawn only by the clients was issued on 27/8/2003. Therefore, at the relevant time i.e. during June and September 1999 when Shri Ashok K Sardana had accepted 2 cheques not drawn by the clients, cannot be said that he violated any of the SEBI circulars / regulations on the subject.

 

5.6 I agree with the submission of the said broker that it was not the case that MWT has directly issued the cheque favoring IFGL. When the loan proceeds are credited to the account of the borrower and the borrower thereafter issues a cheque favouring IFGL there is no means for IFGL or its directors to know that the cheque represents the underlying loan amount sanctioned by MWT.

 

5.7 In view of the above, I find that there is no material on record or  other evidence to conclusively prove that the said broker was  aware of or involved in the irregularities at the MWT.  Therefore, I give the benefit of doubt to the said broker.

 

5.8 I note that a letter dated 31.8.2004 was received from Shri J.P. Verma, Administrator of Bh SE stating that the said broker along with Tulsi D. Bhayana being directors of IFGL must share the criminal and grave procedural liabilities since IFGL was one of the focal points in siphoning the funds from the MWP to meet the pay-in liability of Anjani Kumar Singh. In the said letter, Shri Verma has referred to his earlier letters dated 16.5.2003 and 23.7.2003. I note that the letter dated 16.5.2003 has been considered by the enquiry officer. In so far as the letter dated 31.8.2004 is concerned, I find Shri Ashok Sardana was neither a trustee of MWT nor an office bearer of BhSE at the relevant time or the sanctioning or the disbursing authority for loans from MWT. 

6.0 Order

 

6.1 Therefore, I, in exercise of powers conferred on me under Section 4(3) of the SEBI Act and Regulation 13(4) of the Enquiry Regulations do hereby direct that the proceedings against Ashok Sardhana under the enquiry regulations shall stand terminated. I also vacate the prohibition imposed on Ashok Sardhana vide orders dated 29.10.2002 and 16.1.2004.

 

	G N Bajpai
Date: 22th September. 2004	Chairman
Place:MUMBAI	SECURITIES AND EXCHANGE BOARD OF INDIA