BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO-16/2005-06]

In the matter of Investigations in

T. SPIRITUAL WORLD LTD

AND

In respect of

HFCL TRADE INVEST LTD

____

01.          Securities and Exchange Board of India (SEBI) conducted investigation into suspected unfair trade practices in the scrip of T. Spiritual World Ltd. (hereinafter referred as 'TSW'). Pursuant to the aforesaid investigation, SEBI appointed the undersigned as the Adjudicating Officer under Section 15 I of SEBI Act, 1992, vide order dated July 05, 2005, to inquire into and adjudge the alleged failure of HFCL Trade Invest Ltd. (hereinafter referred as 'HFCL-T') to comply with the summons issued by the Investigating Officer, SEBI. It was alleged that HFCL-T violated the provisions of Section 11(3) and 11C (5) of the SEBI Act, for which penalty can be imposed under Sec. 15HB of SEBI Act, 1992. The aforesaid appointment was communicated vide proceedings of the Whole Time Member, SEBI, dated August 05, 2005.

02.          The undersigned issued a show cause notice (SCN) dated August 26, 2005 under Rule 4(1) of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter, Adjudication Rules) to HFCL-T, communicating the allegations levelled against it and calling upon it as to why an inquiry in terms of the said Rules should not be conducted against it. HFCL-T responded vide letter September 09, 2005, seeking four weeks additional time to file its reply. It was also mentioned that HFCL-T is merged with Himachal Futuristic Communications Ltd. (HFCL).

03.          Under the aforesaid circumstances, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, a notice of inquiry dated September 20, 2005 was issued to HFCL, fixing October 05, 2005 as the date for inquiry. Further, HFCL was allowed seven more days to file its reply to the SCN. HFCL filed its reply vide letter dated September 28, 2005 where it denied the allegation. Details in this regard are discussed in the relevant portion in the findings.

04.          Shri C K Goushal of M/s C K Goushal & Co. and Mr. Joby Mathew, Sr. Advocate from J Sagar & Associates appeared on behalf of HFCL for the inquiry on October 5, 2005 and reiterated the submission made vide letter September 28, 2005 and pleaded for dropping of the proceedings.

05.          Having carefully perused the material on record I proceed to record my findings as follows:

a)      SEBI launched investigation into the dealings in the scrip of TSW for the period of January 01, 2003 to July 11, 2003, as there were unfair trade practices. The total volume of shares bought and sold during the said period by the top 5 members of BSE were 425,064 and 420,719 respectively. Investigation further revealed that there were artificial volumes, synchronized trades, concentration of trading volumes among three members, reversal trades and interconnection between clients of these members etc. HFCL-T bought 150,000 and sold the same quantity of shares of TSW through broker member SPS Share Brokers Pvt. Ltd., who is not one of the three members, who were identified as perpetuators of unfair trade practices. In this background Shri Vinay Maloo, Director of HFCL-T was summoned under section 11 (3) and 11 (C) of SEBI Act, 1992 by the Investigating Officer (IO) vide summons dated April 8, 2005 to appear in person on April 15, 2005 and also furnish relevant information/documents, including those pertaining to their trading in the shares of TSW during period January 1, 2003 to July 11, 2003.

b)     It is undisputed that Mr. Vinay Maloo did not appear before the Investigating Officer (IO) in response to summons. The circumstances under which this summons went un-responded was explained in HFCL’s reply dated September 28, 2005 to the SCN; it was submitted that HFCL-T was merged with HFCL with effect from April 23, 2003 and hence the relevant information sought by the IO was not readily available. Therefore, it was pleaded on behalf of HFCL-T that the non-response to summons should not be treated as wilful disobedience, as subsequently Mr. Maloo co-operated with the IO and was ready to appear before him.

c)      Second summon was issued to Shri Vinay Maloo, Ex-Director of HFCL-T under section 11 (3) and 11 (C) of SEBI Act, 1992 by the IO vide summons dated April 27, 2005 to appear in person on April 29, 2005 and also furnish details pertaining to their trading in the shares of TSW during period January 1, 2003 to July 11, 2003. Further, the following details were also sought vide annexure, to the said summons:

i.                    Details of acquisition of above shares (Date of Purchase, Rate of purchase, name of seller, etc.) which were later sold by HFCL-T on March 25 and 26, 2003.

ii.                 The Demat Account no. through which the above shares were delivered to the broker SPS Share Brokers Pvt. Ltd.

d)     In response to the said summons Mr. Maloo sought 3-4 weeks additional time to furnish the required details, vide his letter dated April 29, 2005. Further, it was stated in this letter that the delay was on account of merger and subsequent dissolution of HFCL-T with effect from April 23, 2003, as per the High Court of Himachal Pradesh Order filed with the, filed with ROC, Jalander.

e)      Third summons was issued to the Principle Officer of HFCL-T (since merged with HFCL) under section 11 (3) and 11 (C) of SEBI Act, 1992 by the Investigating Officer (IO) vide summons dated April 29, 2005 to appear in person on May 17, 2005 and also furnish relevant information/documents as specified in the annexure and also furnish details pertaining to their trading in the shares of TSW during period January 1, 2003 to July 11, 2003 and also the details listed in the annexure to the summons. It is undisputed that there was no response to this summons. However, it is also undisputed that HFCL-T vide letter dated May 12, 2005 had already furnished details/information to the IO in response to the summons dated April 27, 2005, the details of which are as under:

i.  Details of transactions during the period January 1, 2003 to July 11, 2003

ii.     Shares sold as above were purchased as under:

f)       Apart from the aforesaid information, HFCL-T also stated in this letter that all these transactions were routed through demat account # 28331110 with Stock Holding Corporation of India. It is also on record that subsequently vide letter dated June 03, 2005 Shri Maloo, Ex-Director of HFCL-T expressed his willingness to appear in person before the IO, if required. It was reiterated once again that the delay in furnishing the information sought by summons was on account of logistic constrains and lack of coordination on their part. In the reply to the SCN, it was argued that this letter reflects the intention on the part of Mr. Maloo to cooprate with the IO.

g)     The contents of the letter dated May 12, 2005 have details of date of purchase, average rate of purchase and the name of the broker through whom TSW shares were purchased on March 25 and 26, 2003. In the demat environment the identity of the seller is not available to the buyer, hence it is not possible to furnish this information, sought in the annexure to the summons. Further, the demat account details were also furnished as sought. By furnishing the above information/details Mr. Vinay Maloo, Director of HFCL-T has partly complied with the summons. However, in none of the three dates did Mr. maloo or anybody representing HFCL-T/HFCL appeared before the IO in response to the summons.

h)     The summons clearly states that personal appearance is required to answer all questions in relation to investigation in the case of TSW, in particular the questions relating to their trades in TSW during the period January 1, 2003 to July 11, 2003. The details sought vide the annexure to the summons were in addition to personal appearance. Section 11(3) (ii) and 11 (C) (5) and (7) of SEBI Act, 1992 empowers SEBI to enforce attendance of persons and examining them on oath. Therefore, it can be said that HFCL-T has technically contravened the provisions of Section 11 (3) (ii) and 11 (C) (5) and (7) of SEBI Act, 1992, as neither HFCL-T nor its authorised representative appeared in person before the IO on any of the three dates on which it was summoned. For the personal appearance on April 15, 2005 and April 29, 2005 the explanation offered by HFCL-T is plausible. The subsequent conduct of HFCL-T in furnishing the details sought in the annexure, only strengthens the above finding. However, there is no proper explanation as to why nobody representing HFCL-T appeared before the IO on May 17, 2005. During the personal hearing HFCL-T referred to its letter dated April 29, 2005 addressed to IO wherein they had sought 4 weeks time to respond to the summons. It was told during the hearing that they were under an impression that on their request SEBI would give them another opportunity after May 17, 2005. It is true that HFCL-T requested for 4 weeks time vide their letter dated April 29, 2005, but at the same time IO never extended the date of the summons. I am not able to understand as to what prevented HFCL-T from appearing before the IO on May 17, 2005, despite the fact that HFCL-T were ready with information as sought from them and which they indeed sent vide letter dated May 12, 2005 to IO.

06.          The violation thus being established, the undersigned considered the following factors as provided in the section 15J of SEBI Act to determine the quantum of penalty that can be imposed under Section 15HB of SEBI Act, 1992 viz.(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default ; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default.

07.          Nothing can be gathered from the investigation report about any unfair advantage that has accrued to Mr. Maloo / HFCL-T on account of non-appearance before the IO. Further, there is no information pertaining to loss caused to any investors on account of Mr. Maloo’s/ HFCL-T’s non appearance and also it can not be called as repetitive in nature since HFCL-T were regularly responding to the summons. Further the investigation report finds no link between manipulation in the scrip of TSW and HFCL-T’s trades. Also whatsoever information sought for, has already been filed by HFCL-T vide its letter dated May 12, 2005. Given this background and given HFCL-T’s willingness vide letter dated June 3, 2005 to subsequently appear before the IO, makes me to conclude that the violation of HFCL-T for not appearing before the IO on May 17, 2005 is nothing but a default of technical in nature.

08.          While deciding on the penalty, I also place reliance on SAT order dated May 04, 2001 in the matter of Yogi Sungwon (India) Ltd. Vs SEBI, in which it was stated that penalty need not be imposed just because penalty can be imposed. It needs to be established that the violation is deliberate or willful in nature. The relevant portion of the SAT order is given below:

"On a perusal of section 15I it could be seen that imposition of penalty is linked to the subjective satisfaction of the Adjudicating Officer. The words in the section that "he may impose such penalty" is of considerable significance, especially in view of the guidelines provided by the legislature in section 15J. "The Adjudicating Officer shall have due regard to the factors" stated in the section is a direction and not an option. It is not incumbent on the part of the Adjudicating Officer, even if it is established that the person has failed to comply with the provisions of any of the sections specified in sub section (1) of section 15I, to impose penalty. It is left to the discretion of the Adjudicating Officer, depending on the facts and circumstances of each case."

09.          In this context, it is also relevant to have a look at the clear-cut guidelines provided by the Supreme Court in Hindustan Steel’s case no. AIR 1970 SC 253. Para 7 from the judgment considered relevant in this context is extracted below:

" Under the Act penalty may be imposed for failure to register as a dealer: Section 9 (1) read with Section 25 (1) (a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An Order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by the statute".

10.          In view of the discussions based on facts, rulings of Hon'ble SAT & Supreme Court, and based on the findings arrived at above, I do not find it to be a fit case for imposition of adjudication penalty under Section 15I read with Section 15HB of SEBI Act, 1992 for non-compliance of summons.

11.          This Order of Adjudication is made and passed on 25^th day of October 2005 at Mumbai.

(AMIT PRADHAN)

ADJUDICATING OFFICER