|
BEFORE THE SECURITIES
APPELLATE TRIBUNAL, MUMBAI Appeal No.408/04 ��� ������������������������������������������������������������������� �Date of Hearing� :�
4.5.2005 ����������������������������������������������������������������������� �Date of Decision :� 11.5.2005 In the matter of: Appellants��
:� JM Financial Asset Management Pvt.
Ltd. ����������������������� ��� formerly known as
JM Capital Management Pvt. Ltd., ����������������������� ��� Mumbai Respondent� :� Securities and Exchange Board of ����������������������� Appellant
by����� :�
S/Shri Shyam Divan, Abhijeet Marathe, ����������������������������������������������� ��������� Vijay Manjrekar,
Nihir Kamdar and ����������������������������������������������� ��������� Ms. Madhavi
Divan, Advocates ����������������������� Respondent
by�� :�
Shri Dipan Merchant,
Advocate Coram: ����������� �Justice Kumar Rajaratnam,
Presiding Officer ����������� ����������� Per:� Justice
Kumar Rajaratnam, Presiding Officer ����������� The appeal is taken up with consent
of both the parties for final disposal. 2.�������� This appeal is against the order of the
Adjudicating Officer dated 31st August 2004 under the Securities and
Exchange Board of India (Procedure for Holding Enquiry and Imposing Penalty by
Adjudicating Officer) Rules, 1995(the Enquiry Rules).� 3.�������� The operative part of the impugned
order reads as under: �Taking into consideration
the above and I in exercise of powers conferred under section 15 I read with
section 15 e, 15HB and section 15 J of SEBI Act, I hereby impose a penalty of Rs. Five lakhs on the
notices.� The notice JMCM should pay the
said amount to the SEBI within 45 days of this order.� Any direction on notice JMMF to pay the said
penalty amount will be detrimental to the unit holders of the scheme of JMMF.� The penalty should therefore be paid by
notice JMCM through a Pay Order or Demand Draft in favour
of SEBI and the same should be forwarded to Shri Rajagopal Rao, DGM � IVD.� 4
.������� The
appellant appealed to this Tribunal for stay of the impugned orders.� This Tribunal, after hearing both the
parties, had stated that �In the facts and circumstances since no violation of
any Regulation has been pointed out by the respondent, it would be appropriate
to stay the impugned order considering that this is a statutory appeal�. 5.�������� The brief facts of the case are that the
appellant is an asset management company (AMC) of the JM Financial Mutual
Fund(formerly known as JM Mutual Fund)(JMMF) and has been approved by SEBI
under Regulation 21(2) of SEBI (Mutual Funds) Regulations, 1996.� The role of the appellant is to manage and
invest the monies of JMMF to achieve the objective of various schemes launched
by JMMF in the best interest of the unit-holders.� The appellant has stated that it has been
awarded the CNBC India � BNP Paribas Mutual Fund Award 2000 as ranked by
Standard and Poor as the Best Performing Mutual Fund House for a five year
period. 6.�������� By letter dated 7.�������� The appellant vide its letter dated �(a)� RBI�s Observation:� The UCB�s are not
getting the best execution in the sense that the securities sold by them are
resold at much higher rates immediately thereafter. By dealing in this segment
we had reasons to believe that the UCB�s were
seriously considering to liquidate such holdings
because of liquidity constraints and we were in fact providing them an exit and
generating marginal returns for scheme.�
As a corollary, question of JM Mututal Fund
not providing best execution to the UCB�s does not arise
& we strongly deny any suggestion that we did so. (b)� RBI�s Observation:� Either knowingly or unknowingly they appear
to be at one end of a chain of �Structured Transactions� that is immensely
profitable to the two intermediaries. We had brought those old
lot/illiquid securities from the UCB�s in our
cash/money market funds which has been characteristics
of low market risk exposure.� These
trades in the odd lot G-Sec were carried out to take advantage of the trading
opportunity available in these securities rather than holding these securities
for long-term.� These were done purely to
enhance the total return on the portfolio.�
As a general policy the schemes normally do not add illiquid/odd lot
securities to its portfolio for holding on long-term basis.� We were completely unaware of these
activities of our counter parties or for that matter the second leg of the
transaction was not known to us.�
Therefore, we strongly deny any association of JM Mutual Fund with any
structured transaction. �� RBI�s Observation:� The trades are mostly in the less liquid GOI
segment as also the State Development Loans.�
This may be deliberate as the market focus is usually not on such
papers. The odd lot segment of the G-Sec are predominantly less liquid.� It is this very nature of this segment due to
which the fund manager�s preference was not to hold these securities on
long-term basis.� As explained earlier,
the fund managers had seen this segment as one of the opportunities for the
schemes, and did a small part of our overall G-Sec trading in such
securities.� However, we deny that this
decision was based on the lack of focus of market on such paper. (d) RBI�s Observation:� The transaction pattern and activity level of
Senior Capital Services and Tipsons Classic Finance
is not suggestive of an ordinary investor. ����������������������������������� ����������� As mentioned earlier, we
were not having any information on the activities and intention of these two
parties and therefore we are not in a position to comment upon, whether the
above parties are ordinary investors or traders on odd-lot G-Sec Papers.� 8.�������� The appellant further stated that all
investments of the funds were invariably made in accordance with investment
policy and investment limits prescribed and approved by the trustees of
JMMF.� The effort of the fund managers of
JMMF was directed towards insulating the investors from market risks.� The trading in the illiquid G-Sec segment was
about 1% of the total trading of JMMF during the relevant period. 9.�������� The appellant further submitted that
JMMF executed the transactions with TCF and SCS in a wholly transparent manner,
i.e. through SGL and sub-SGL accounts held by JMMF and TCF/SCS
respectively.� Under the regulations
framed under the Act neither TCF nor SCS can in any manner be regarded as
associates of JMMF nor can the dealings of JMMF with TCF and SCS can be
considered as structure transactions.�
JMMF was not aware and had no means of finding out and were not
concerned with the price at which TCF/SCS sold the G-Secs
purchased from JMMF or the price at which they had purchased the G-Secs they sold to JMMF. 10.������ The appellant has also submitted that
JMMF has obtained an AAA rating from CRISIL, which is mainly given to funds
perceived to be well managed and fully protective of investor interest. 11.������ According to the appellant, it had kept
the interest of unit-holders of JMMF paramount.�
This is evident from the fact that in respect of the transactions
specified in investigation report, JMMF earned a profit of Rs.15,60,000/- with regard to trades in illiquid G-Sec segment. 12.������ The appellant also stated that �due
diligence� means the standard of care and prudence usually exercised by persons
of common or average care and prudence.�
The decision of the appellant to invest and trade in G-Sec was based upon
a detailed study undertaken by the research team of JMMF and approved by the
Chief Executive Officer entitled �Interest Rate Outlook� wherein the appellant
weighed and considered trading in such securities by taking extremely safe
risks. 13.������ The appellant also submitted that the
transactions mentioned in the RBI letter were reported by the funds on the
negotiated dealing system (NDS) and were cleared either through the Clearing
Corporation of India (CCIL) and the settlement of every transaction was guaranteed
by CCIL and consequently there was no settlement risk.� The appellant, who is a seller of odd lots G-Secs using the NDS, was not in a position to ascertain or
verify the price at which a counter party to the trade has sold the odd lot
securities purchased from it.� The NDS
system only records the details of trades executed already over the telephone
by traders in accordance with the prevalent G-Sec market structure.� The seller of G Sec records the trade on the
NDS and the purchaser confirms the same.�
After the purchaser makes the confirmation, the trade is settled through
CCIL.� The appellant had therefore no
means of ascertaining the price at which a counter party further sold the G Sec
securities bought from him.� Further the
illiquid G-Sec segment was largely an unstructured market and an unorganized
segment and not a market as is understood in its common parlance.� The prices in respect of illiquid odd lot
G-Sec segment are not published and are not available to the market.� 14.������ The appellant stated that in respect of
the transactions executed between the appellant and TCF/SCS, JMMF made a profit
of Rs.15,60,000/- during the relevant period, i.e.
September 2002 to January 2003. 15.������ The appellant stated that the respondent�s
view that TCF and SCS were associated with the appellant as the two entities had
been purchasing substantial units in the schemes of the appellant is erroneous.� The term �associate� is defined in regulation
2� of MF Regulations and includes a person - �(i)����� who directly
or indirectly, by himself, or in combination with relatives, exercises control
over the asset management company or the trustee as the case may be, or (ii)������ in respect of
whom the asset management company or the trustee, directly or indirectly, by
itself, or in combination with other persons exercises a control or (iii)���� whose director,
officer or employee is a director, officer or employee of the asset management
company;� The
appellant submitted that, as mentioned in the above paragraph, the TCF and SCS
could not, by any stretch of imagination, be considered in any manner to have
been associates of JMMF. 16.������ The appellant also submitted that all the
transactions between JMMF and TCF/SCS were at a principal to principal basis
and at no point of time the appellant had acted as an agent of either the UCBs or TCF/SCS. 17.������ The appellant further submitted that not
a single statement was recorded and relied upon by SEBI of the Officers of UCBs., which showed a direct nexus between the UCBs. and TCF/SCS.� In the absence of any evidence and clear
finding relating to this direct nexus, the question of holding that the
appellant was interposed was unjustified. 18.������ The senior counsel for respondent
submitted that the investigation had been conducted only on the basis of the
letter received by it from Reserve Bank of 19.������ Reliance has also been placed by Mr.
Divan on the judgment of Bombay High Court in SEBI vs. Cabot International
Capital Corporation, (2004) 51 SCL 307 (BOM), for the proposition of law that
there was no animus or willful negligence on the part of the appellant in
disposing of the securities, which are the subject matter of enquiry.� It cannot be denied that the decision was
based on professional advice and it is the job of the trustees to exercise
independent discretion as to when to exit and not to exit.� It is possible in retrospect to say that a
mutual fund could have made more profit if it had waited for some more
time.� It could equally be said that the
mutual fund could have incurred a loss if it did not exit in time.� It is always better to leave these matters to
the trustees and the analysts unless, of course, there was lack of due
diligence in exercise of independent professional judgment as set out in
regulation 9 of the 1996 Regulation, which deals with the code of conduct. 20.������ On a perusal of the documents submitted
to me, I do not find any nexus between the appellant and UCBs.
& TCF/SCS.� 21.������ In this connection, I reproduce below the
observations of this Tribunal in appeal No.56/2003 in the case of Imperial
Corporate Finance and Services Pvt. Ltd.: �A Lead Manager is required
to employ reasonable skill and care but he is not required to begin with
suspicion and to proceed in a manner of trying to detect a fraud or lie unless
such information excites his suspicion or ought to excite his suspicion as a
professional man of reasonable competence. ����������� The Supreme Court with reference to disciplinary
proceedings of the Bar Council of India and the State Bar council pronounced
that disciplinary proceedings must be sustained by higher degree of proof than
that required in a civil suit, yet falling short of the proof required to
sustain a conviction in criminal prosecution.�
There should be convincing preponderance of evidence. A reference was also made
to the judgment of the Delhi High Court reported in AIR 1968 22.������ I took into account Regulation 9 of the
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 � Code
of Conduct � reads as under: �9. Trustees and the asset
management company shall render at all times high standard of service, exercise
due diligence, ensure proper care and exercise independent professional
judgment.� 23������� I also took into account the factors
contained in section 15J of Securities and Exchange Board of India Act, 1992 �concerning
imposition of penalty, which are as under: ����������� (1) the
amount of disproportionate gain; ����������� (2) the
loss caused to the investor; and ����������� (3) repetitive
nature of default. 24.������ Taking all the facts and circumstances of
the case and the factors contained in section 15J of SEBI Act, 1992 into
account, I do not find sufficient evidence to prove beyond reasonable doubt
that the appellant has committed any irregularity to attract the penalty as
imposed by the respondent, though the respondent has necessary authority.� 25.������ In the facts and circumstances of the
case, I set aside the impugned order.�
The appeal is disposed of accordingly. 26.������ No order as to costs. ����������������������������������������������������������������������������������� Sd/- ����������� ����������������������������������� ����������� Justice
Kumar Rajaratnam ����������� ����������������������������������������������������������� �Presiding Officer ����������������������������������������������������������������������������������� Place: Mumbai Date: - Avm � |