BEFORE THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Appeal No.   7/2003

Date of Hearing

28.4.2004

Date of Decision

21.5.2004 

In the matter of:

D.B. (India) Securities Ltd.

Appellant – Represented by

 

D.K. Gupta & S.R. Bhuwalka, Authorised Representatives

 

Versus

 

 

Securities & Exchange Board

Respondent – Represented by

of India

Kumar L. Desai & A.D. Patel, Advocates

 

Coram:

            Justice Shri Kumar Rajaratnam, Presiding Officer

            Dr. B. Samal, Member

            N.L. Lakhanpal, Member

 

Per:  N.L. Lakhanpal, Member

 

 

   1.            This is an appeal against the order dated 31.10.2002 passed by the respondent suspending the registration of the appellant, D.B. (India) Securities Ltd., (DBISL) for a period of 2 years on the charge of violation of clause A(2), A(3) and A(4) of the code of conduct as provided in Schedule II read with Regulation 7,and Regulation 26(1)(i), 26(1)(ii), 26(1)(iv) and 26(1)(vi)  of the SEBI (Stock Broker & Sub-broker) Regulations, 1992.  The facts leading to the passing of the impugned order can be briefly summarized as below.

   2.            M/s. Manu Finlease Ltd. (MFL) had come out with a public issue of 21,00,000 shares of Rs. 10 each for cash at par.  The issue opened for public subscription from 14.10.1995 to 18.10.1995.  As per the 3 day report filed by the Merchant Bankers that SEBI on 21.10.1995 the issue was oversubscribed 2.81 times.  However, as per 78 days report filed on 5.1.1996 the issue was seen to have been over-subscribed 50.43 times.  A scrutiny of the basis of the allotment showed that the issue had been over-subscribed to mainly by way of stock invests, a company applications for very large number of shares.  The scrip open for trading at the Delhi Stock Exchange (DSE) in January 1996 at Rs. 48 and showed unusually high fluctuations touching Rs. 72 in March 1996.  Since this revealed of over subscription and the opening price of the scrip was not warranted by the earning per share ratio for the period immediately preceding the public issue or any sound track record of profitability, the Securities & Exchange Board of India (SEBI)  ordered formal investigation into the affairs relating to buying, selling and dealing in shares of this scrip.  Investigations revealed serious manipulations by the promoters of MFL and the facilitating role played by the appellant in these manipulations.  For instance, there were 12 applications a company by stock invests issued by Sangli bank, Karol Bagh, New Delhi at Rs. 1 lakh each which were increased to Rs. 1 crore each which means that stock invests of Rs. 12 lakhs were used for making applications of Rs. 12 crore.  All these stock invests were issued to one Sri Prem Gupta, Director of Glory Securities Ltd. (GSL) which in turn was an associate concern of MFL.  The same GSL purchased huge quantities of shares of this scrip amounting to 27.7 % of the total purchase of DSE, when it opened up for trading through the appellant broker at an average price of Rs. 48.50.  Similarly, it was found that the State Bank of Indore, Mumbai had issued this stock invests of Rs. 1 crore each used in the public issue of MFL to various individuals against the deposit of M/s. Krishna Texport and Capital Markets Ltd. (KTCML).  In terms of an agreement dated 7.10.1995, KTCML had provided these stock invests with each application for 10 lakh shares in the name of its nominees to another financer namely Sri Gopal Kadaria to M/s. Nathji Enterprises P. Ltd., and associate concern of MFL.  Gopal was introduced to the director of MFL for the purpose of financing the public issue of MFL by the appellant DBISL.  To further establish the nexus between DBISL and MFL, the investigations found that 3 associate concerns of MFL namely M/s. Nathji Enterprises, M/s. Swami Enterprises and M/s. Swami Foods P. Ltd. had subscribed to the public issue of DB Merchant Bank Services Ltd. (DBMBSL) a concern promoted by DBISL through promoter quota.  On the basis of these investigations an enquiry officer was appointed.  The enquiry officer held some of the charges as proved and recommended the suspension of the appellant’s registration for a period of 6 months.  A show cause notice enclosing the enquiry officers’ report was issued and after granting a personal hearing, the respondent passed the impugned order.  Being aggrieved, the appellant has filed the present appeal.

   3.            The appellant has challenged the impugned order on technical as well as substantive grounds.    On the technical aspects the appellant has argued that the show cause notice issued by the respondent had specifically asked him to show cause why the penalty recommended by the enquiry officer should not be imposed upon him and that it was further not open to the respondent to exceed the quantum of penalty imposed in the show cause notice.  The appellant has also argued that the impugned order does not make any mention about the quantum of punishment recommended by enquiry officer and does not mention any reasons why the respondent has thought it fit to disregard the recommendation of the enquiry officer which had been tentatively accepted by the respondent at the time of issue of show cause notice.  The appellant has also argued on violation of Regulation 29(3) of SEBI (Stock Brokers and Sub-Brokers) Regulation, 1992 which provided at the relevant time that the order was required to be passed by the respondent not later than 30 days after the receipt of the reply to the show cause notice.  On the first of these issues, the learned counsel for the respondent argued at the time of hearing that the respondent had specifically told the representatives of the appellant during the hearing that they should make submissions even in respect of allegations whether benefit of doubt had been given to the appellant by the enquiry officer. The learned counsel further argued that the respondent had the powers to disagree with the recommendation of the enquiry officer and the respondent had exercised this prerogative.  We are however not in a position to accept this contention of the learned counsel for the respondent.  We do not find any reasoning in the impugned order showing why the respondent is going beyond the quantum of punishment mentioned in the show cause notice.  Regarding the second contention in relation to Regulation 29(3), the learned counsel for the respondent argued, citing an earlier order by this Tribunal in Doogar & Associates Ltd. vs. SEBI reported in (2001) 32 CSL 9 (SAT-MUM) that the scope of expression “reply” in sub-regulation (3) of Regulation 40 cannot be restricted only to written reply to the show cause notice and that oral submissions were also to be treated as replies.  According to the learned counsel the oral submissions were concluded on 1.10.2002 and the impugned order passed within the stipulated 30 days on 31.10.2002.  The learned counsel for the appellant however argued that their reply to the show cause notice had been received by SEBI on 26.12.00 and the order should have been passed before 25.1.2001. instead of passing the appropriate orders, SEBI asked them to appear before the Chairman no 31.1.2001 and again on 3.4.2001 and again on 28.6.2002 after a gap of 15 months.  Here again we are not particularly happy with these long gaps which remain unexplained though we would like to hold on to the earlier view of this Tribunal that oral submissions are also required to be treated as replies for the purpose of Regulation 29(3).

   4.            On the  substantive issue of having facilitated market manipulation activities of MFL, the appellant’s case is that of the irregularities established during investigations point to the culpability of MFL, some banks or S.K. Gupta or Ashok Chawla or Gopal Khadaria and that there is no specific allegation against the appellants themselves beyond the fact that they merely carried out the instructions of GSL for buying the shares at the price of Rs. 48.50.  We find this explanation rather simplistic because the investigations, the enquiry proceedings as well as the impugned order reveal sufficient material to establish beyond doubt the nexus between DBISL and MFL.  It cannot therefore be said that the purchase of shares on behalf of a single client namely GSL who admittedly was known to the appellant as an associate concern of MFL had said a high price of Rs 48.50 was a mere formality executed by a broker on behalf of his client.  WE therefore find that the suspension of the certificate of registration of the appellant for a period of 2 years as per the impugned order is well merited.  We however find serious lacuna in the proceedings conducted by the respondent.  It is a fundamental requirement of all such proceedings that the punishment imposed cannot exceed that specified in the show cause notice.  However, at this point of time, there is nothing that can be done in the matter because the period of almost 18 months is already over.  The best that we can do in the circumstances is to waive the balance period.  The learned counsel for the appellant also pleaded during the hearing that he had already applied for surrendering his certificate of registration and that SEBI had not taken a decision and the same possibly because of pendency of these proceedings.  In the light of what has been stated here, we pass the following order.

Order

   5.            We uphold the impugned order, accept to the extent that the period for suspension of the certificate of registration is hereby modified to the period of suspension already undergone as on the date of this order.  We also direct SEBI to take an early decision on the request of the appellant for surrendering his registration as expediously as possible and in any case within a period of 30 days.

 

                                 Justice Kumar Rajaratnam

                                     Presiding Officer

N.L. Lakhanpal

Member

B. Samal

Member

Place: Mumbai

Date:21.5.2004 

 

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