ORDER
G.N. Bajpai, Chairman
1. Background
1. M/s. Harvest Deal Securities (hereinafter referred to as “the said broker”) is a member of The Stock Exchange, Mumbai (hereinafter referred to as “BSE”) and a stock broker registered with SEBI under certificate of registration bearing No. INB 010985237.
2. The Reserve Bank of India (hereinafter referred to as RBI) vide their letter dated 27.4.2001 informed the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI”) that M/s. Nedungadi Bank Ltd. (hereinafter referred to as “NBL”) had approved in September, 1999, a scheme for arbitrage dealings through three stock brokers viz. The said broker, Shrikant G. Mantri and The First Custodian Fund (India) Ltd.
3. Based on the complaint from RBI, SEBI conducted an investigation into the matter. The findings of the investigation are as under :
1. Shri Rajendra K Banthia (hereinafter referred to as “R K Banthia”), Managing Director of the said broker and persons associated with them held 8.41%, M/s. First Custodian Fund (India) Ltd. held 3.28% and Shrikant G. Mantri held 10.51% of the equity shareholding of NBL
2. the Board of Directors of NBL in its meeting held on 26.6.1999 took the following decisions :
i. To allow purchase and sale of shares in various markets and stock exchanges.
ii. To vest to Chairman and General Manager (P&D), powers to the extent of Rs.5.00 crore and Rs.2.00 crore respectively to purchase and sell shares to the stock brokers namely First Custodian Fund (I) Ltd. Shrikant G. Mantri and Harvest Deal Securities Ltd. and other recognized brokers and pay brokerage.
iii. To permit Chairman to ratify loss, if any, in any transactions upto a maximum of 5% of the price.
iv. To permit the bank to open DP accounts with Standard Chartered Bank and Global Trust Bank, Mumbai.
3. Even prior to the aforesaid decision of the Board of NBL, the bank had allowed the said three stock brokers to undertake the following transactions:
Date Purchase in Rs. Sales in Rs. Gross Income in Rs. 14.09.99 1,90,17,389 1,92,03,740 1,86,351 20.9.99 4,45,15,443 4,48,51,270 3,35,827 21.9.99 2,15,67,8665 2,17,94,508 2,26,643
4. As per the decision taken by the Board of NBL in its meeting held on 26.6.1999, the following reporting system was decided to be followed in respect of the arbitrage transactions:
Sr.No.
Particulars
By whom
To whom
Periodicity
1.
Statement of purchase and sale
Senior Manager, nvestment Dept., Mumbai
Assistant General Manager (F&A)
Daily
2.
-do-
Assistant General Manager(F&A)
The Chairman through General Manager(P&D)
-do-
3.
Purchase and sale statement
Chairman
The Board
Monthly
4.
Brokerage paid at Mumbai
Senior Manager, Fort, Mumbai Branch
Assistant General Manager(F&A)
Monthly
5.
Statement of brokerage
Chairman
The Board
Quarterly
6.
Sale or purchase ended in loss
Senior Manager, Fort, Mumbai Branch
Assistant General Manager (F&A)
On the date of occurrence
7.
-do-
Assistant General
The Chairman
-do-
Manager(F&A)
Through General Manager (P&D)
8.
-do-
Chairman
The Board
Monthly
5. However, it was observed that this reporting system was not observed in practice and the Chairman and other officers of NBL who were mandated to decide on the scrips to be purchased or sold, had delegated these decisions to the three stock brokers.
6. An analysis of the transactions entered into by NBL through the above brokers till 31.3.2001, revealed that:
i. Most of the transactions were not executed as arbitrage transactions i.e. purchases / sales of equal quantity of the particular shares were not executed simultaneously through different exchanges.
ii. The purchases and sales had been effected in different exchanges through these brokers’ mutual co-ordination.
iii. The bank had made purchases in shares of InfoTech companies such as HFCL, DSQ, Global Tele etc during first week of March, 2000 to an extent of Rs.84.9 crores through these brokers. But during this time the prices of shares of all these companies were at their highest levels. Further, the sales during the last week of March, 2000 mostly in the above scrips amounted to Rs.58.7 crores. The above purchases and sales were well in excess of the approved limits of the bank.
7. It was observed from the statement of account of the dealings of the bank and the broker’s books of accounts with regard to their dealings with NBL that the three brokers including the said broker failed to make payments towards the sale of shares by the Bank in time on several instances. These three brokers withheld the payments due to the bank for considerable period of time and thereby delayed the payments to the clients.
8. There were some instances of delay in delivery of securities by the brokers to the bank towards their purchases. Similarly it was noticed that the bank had not delivered the shares of HFCL which were sold in March 2000 to the brokers in time. The reason for the late delivery on part of the bank was explained as the subsequent delay in payment of funds by the brokers after the sale of securities.
9. The transactions which were said to have taken place in the last week of March 2000 were bogus transactions. The contract notes issued by the said broker and others in respect of the said transactions did not contain the time of transaction and these transactions were not done through the stock exchanges. Further on investigating into the dealings of March, 2001 it is observed that these transactions were effected not through the exchange but through off market one sided deals wherein there were no selling clients. From an examination into the statements of the broker it is observed that these brokers i.e. HDSL, SGM, FCFIL had these stocks in their portfolio which they had offloaded to the bank in order to mobilize funds from these purchasers.
2. Enquiry Proceedings
1. In view of above findings, as an emergent measure vide an interim order dated 14.07.03 prohibited Harvestdeal Securities Ltd., SGM and FCFL from dealing in securities till further order vide order dated 14.07.03. Vide Order dated 5.12.2002 an Enquiry Officer was appointed to enquire into the irregularities by the said broker in his dealings in securities on behalf of NBL. The Enquiry Officer issued notice to the said broker on 8.7.2003 to which he replied vide letter dated 13.8.2003. Thereafter, personal hearings were held by the Enquiry Officer on 26.8.2003, 10.10.2003, 10.11.2003 and 28.12.2003. Shri R K Banthia, Managing Director of the said broker appeared before the Enquiry Officer and made submissions:
2. The Enquiry Officer after considering the facts of the matter and reply and submissions of the said broker submitted his report to SEBI on 12.1.2004 recommending that a major penalty of suspension of certificate of registration of the broker for a period of 12 months may be imposed on the said broker.
3. Show cause notice and personal hearing
1. Pursuant to the submission of report by the Enquiry Officer, show cause notice was issued to the said broker on 22.1.2004 forwarding a copy of the Enquiry Officer’s report and also advising him to show cause in terms of Regulation 13(2) of the Enquiry Regulations as to why the penalty recommended by the Enquiry Officer should not be imposed on him. The said broker submitted his reply to the show cause notice vide letter dated 5.2.2004. In the said letter, the said broker replied as under and the said broker also sought for a personal hearing:
3.1.1 Broker contended that show cause notice under Regulation 13(2) of SEBI (Procedure for Holding Inquiry by the Enquiry officer and Imposing Penalty) regulations, 2002 can only be issued by a Chairman or Member of the Board. Broker argued that the power of issuing show cause notice has been delegated to the Chairman and / or Member of the Board. The show cause notice has been issued by the Division Chief, Integrated Surveillance Dept. The said show cause notice is bad in law as it is against the delegatus non potest delegare. Broker argued that on the very ground alone, the instant show cause notice should be discharged forthwith.
3.1.2 Broker submitted that the finding of the Ld. Enquiry officer was that the client registration form was not obtained and that there was a delay in making the payments. They contended that other violations as contained in the order of the Chairman were held against the notice by the Ld. Enquiry Officer. Hence the order u/s 11(4) was passed in haste without considering the full facts.
i. They submitted that the finding of the Ld. Enquiry Officer that Mr. Shrikant G. Mantri and First Custodian Fund (India) Ltd. are associates of the Noticee, is erroneous. Since he overlooked the written and oral submissions made by them. Broker submitted that SEBI had earlier alleged that these 3 entities were one entity which allegation had been denied and controverted by the notice in CWP NO.2381/98 in the Hon’ble Bombay High Court and that SEBI was a respondent in the said writ petition and that SEBI had not controverted the same in the said Writ Petition. Broker therefore contended that SEBI themselves by their own admissions having accepted the fact that these 3 entities are separate entities and as such cannot today resile from their stand in the matter.
ii. Broker submitted that Enquiry Officer relied on the statements of Mr. A R Moorthy and Mr. H Ganesh and which did not form the part of the documents by him in support of the allegations made in the show cause notice. Broker contended that Enquiry Officer is estopped from relying upon documents which form the part of the earlier concluded proceedings as they were totally distinct and different from the present proceedings. He argued that reliance on the same would be against natural justice and norms of jurisprudence and is therefore bad in law.
iii. It is further submitted that enquiry Officer should not have sought reliance on the said purported statement and that too belatedly towards the fag end of the enquiry proceedings. Broker argued that Enquiry Officer was aware that the Hon’ble SAT had fixed a time bound schedule for completion of the enquiry proceedings and the only opportunity available to the noticee is to rebut the purported statement be would by cross examining the said individuals. They further submitted that as the noticee was not given a reasonable opportunity to rebut the purported statements the enquiry report should be considered as if there were no statements made by Mr. A R Moorthy and Mr. H. Ganesh.
iv. Broker contended that the noticee was not given a fair and reasonable opportunity to defend itself and to explain the circumstances appearing against the noticee. Hence, non furnishing of statement s along with show cause notice vitiated the proceedings. Broker submitted that the Ld. Enquiry Office had chosen to rely upon the statements which purportedly went against the noitcee and ignored the statement which were in favour of the noticee. Therefore the enquiry report suffers from the vice of bias.
v. They further submitted that Enquiry Officer erred in concluding that the noticee, First Custodian Fund (India) Ltd. and Mr. Shrikant G Mantri constitute one group and overlooked that the said companies were not associate companies within the definition of Sec. 370(1B) of the Companies Act, 1956 and that there merely being common Directors in the companies, does not qualify the said Companies as Associate Companies. Broker further submitted that in Enquiry Officer lifted the Corporate Veil although these transactions which are the subject matter of the enquiry, are not a fit and proper case requiring the lifting up of Corporate Veil. It is pertinent to mention here that, the purpose of lifting of the Corporate Veil is to determine the persons who are in actual management and control of the company. They argued that Enquiry Officer had not come to the conclusion that the management and control of the said three companies vests in persons other than duly construed Board of Directors and the concerned Managing Director of the respective company or that the said entities have acted in a fraudulent manner. They further submitted that the Enquiry Officer on his own admissions, stated that there are 3 distinct groups.
vi. Broker denied that Shri R K Banthia was involved in the conceptualization of the scheme as erroneously found by Enquiry Officer. Broker argued that while coming to this conclusion Enquiry officer has relied upon the statement of Mr. AR Moorthy in which he merely stated that the proposal was discussed and that he had not alleged that Shri R K Banthia was involved in the conceptualization as erroneously inferred.
3. As regards the statement of the investment proposal that the Chairman and General Manager (P&D) are to be permitted to delegate their powers to purchase or sale to three brokers above mentioned. Broker stated that no such delegation of powers was done and NBL be put to strict proof of the same.
4. Broker further submitted that Enquiry Officer erroneously presumed that FCFL, SGM and the noticee are one and the same entity. They contended that the fact that these are distinct entities had been brought to the notice of Enquiry Officer by the noticee in its written submissions as well as oral submissions during the course of enquiry proceedings. Broker submitted that SGM is a sole proprietary concern and that the share holding pattern of FCFL and the noticee are distinct. They stated that FCL shares were widely held and listed on the BSE, while Harvestdeal Securities is a closely held unlisted company. Broker stated that, the Board of Directors of the noticee at the relevant period between Sept. 99 and March 2001 comprised of 3 members and in the same period the Board of FCFL comprised of 5 members, none of whom were nominees of the noticee. SGM was never a Director of FCFL and / or the noticee. Broker pointed out that during the relevant period there was only one common Director between FCFL and the noticee and that too a non Executive Director. Broker contended that it was not in a position to control FCFL and / or SGM a sole proprietary concern, by management participation or otherwise. Broker submitted that FCFL and SGM are totally distinct from it and that FCFL and / or SGM are not front companies and / or dummies of it. Hence, there is not question of piercing the corporate veil. They contended that in the said companies, Enquiry Officer’s proposition that Shri RK Banthia was exercising his controlling mind in respect of the transactions executed by FCFL and the noticee so long remained unestablished, the noticee and / or its managing director cannot be held responsible for the actions of the FCFL and / or SGM.
i. With regard to findings against them by Enquiry Officer they submitted as under:
ii Client registration and agreement not obtained.
The Enquiry Officer did not agree that non obtaining of the client registration form and no formal agreement entered into was a mere clerical and venial lapse in as much as the main purpose of the same has been fulfilled since the client is a reputed commercial bank. Enquiry Officer stated that the member client agreement throws light on the terms and conditions that binds the parties to the contract, the rights and liabilities of the parties and the consequences of breach. A perusal of proforma client agreement and client registration form as prescribed by SEBI’s Circular No.SMDRP/Policy/Cir-5/97 dated 11.04.97the same, it could be seen that the main purpose is to determine the credit worthiness of the client. Broker further submitted that due diligence is required to be exercised qua somebody that even a failure to do so, cannot be a case to impose penalty unless it is established that somebody has been adversely effected. It submitted that as a result of the alleged failure to exercise due diligence the client did not suffer, the stock exchange did not suffer and even the counter party did not suffer. Broker submitted that in the circumstances, a penalty of suspension should not have been recommended by the Enquiry Officer for a trivial matter of no consequences even it is admitted for argument sake that there was a failure as alleged.
3. Transactions other than arbitrage:
a. They submitted that Enquiry Officer had not even cited a single instance that the noticee carried out transactions other than arbitrage. They further stated that the Enquiry Officer erred in findings that the Managing Director of the noticee Shri R K Banthia was co-ordinating the transactions.
b. Broker stated that not since no delegation of authority had been given by NBL and in the absence of the same, it cannot be said that Shri R K Banthia was co-ordinating the transactions Broker therefore argued that Enquiry Officer erred in holding the noticee responsible for the transaction executed by FCFL and / or SGM and that the Enquiry Officer had not cited a single instance in support of his contentions that the noticee has violated the code of conduct. Broker contended that they had always conducted their business both in letter and in spirit of the code of conduct. Hence the broker submitted that the noticee has not violated the code of conduct.
Broker further submitted that Enquiry Officer erred in concluding that there were transactions other than arbitrage and thereby acted beyond the mandate of the client and violate Clause A(1)(2)(3) & (5) and B(1) of the Code of Conduct as specified in Schedule 2 read with Regulation 7 of SEBI (Stock Broker and sub Broker) Regulation 1992 besides acting beyond the scope of authority.
3.1.6 As regards the allegation of delay in payment, broker submitted that the payment was made as per the agreed understanding with the client. Broker argued that there was no delay since it had been made as per mutual understanding regarding the time schedule for payment. This is evident from the fact that no interest for the delayed payment was charged by NBL till date. Broker contended that reference to balance sheet of 31.03.2001 of NBL would show how no payment or claim for interest for the alleged late payment has been made.
Broker therefore submitted that the payment has been made in accordance with the agreed time schedule. There has been no delay and therefore the noticee has not violated Clause B(1) of Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (SB & SB) Regulations, 1992 read with SEBI Circular No. SMD/SED/CIR/93/23321 dated 18.11.1993.
3.2 As requested by the broker personal hearing was given to it on 12.02.2004. Broker made oral submission through Counsel Shri Shyam Diwan. He further filed a written submission vide vide letter dated 16.02.2004. In the said written submissions, he reiterated what was stated in the reply and stated that
1) Broker argued that no person other than the Chairman or a Member can issue show cause notice under Regulation 13(20 of the SEBI ((Procedure for Holding Inquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. The subject show cause notice had been issued by the Div. Chief and not by the Chairman / Member of the Board. Thus, the same is bad in law and therefore is non-est. This is a well settled law as laid down in the following cases that “where a power is given to do a certain thing in a manner, the thing must be done in that way or not at all”.
Ref:
1) Dhanjaya Reddy v/s State of Karnataka (2001) 4 Supreme Court cases 9 – Para 23
2) K. Prasad & Ors. v/s Union of India & Ors. 1988 (Supp) Supreme Court Cases 269 – Para 23
3) Commissioner of Income Tax, Mumbai v/s Anjum M H. Ghaswala & Ors (2002) 1 Supreme Court 633 – Para 27
4) Bhavnagar University v/s Palitana Sugar Mills (P) Ltd. (2003) 2 Supreme Court Cases 111 – Para 40
Broker had during the course of personal hearing submitted affidavit dated 12.02.2004 denying all the allegations made in the subject show cause notice and specifically denying the allegations that the noticee, The First Custodian Fund (India) Ltd. and Shrikant G Mantri constitute one group and that they are associate companies for the following reasons:
a) Harvestdeal Securities Ltd. is a closely held company.
b) Harvestdeal Securities had 4 Director during the relevant period i.e. Sept. 1999 to March 2009 and that there was only one common Director in Harvestdeal Securities Ltd. and The First Custodian Fund (India) Ltd. Shrikant G. Mantri was never a Director of Harvestdeal Securities Ltd.
c) Harvest deal Securities Ltd. has separate office premises and only certain infrastructure facilities were shares for reasons of economy. Harvestdeal Securities Ltd is a member of the Bombay Stock Exchange having Regn. No.INB 010985237 and is separately assessed for turnover tax by SEBI and SEBI does not aggregate the turnover of Harvestdeal Securities Ltd. with that of any other entity much less The First Custodian Fund (India) Ltd. and Shri Shrikant G. Mantri.
d) Harvestdeal Securities Ltd. is separately assessed to Income Tax and has its PAN no. AAACH 8152R. Harevestdeal Securities Ltd. is separately registered under the Shop & Establishment Act and has its Regn. No. AII 21826.
Broker during the course of personal hearing had also offered the deponent to the said affidavit for cross examination.
3.3 Broker during the course of personal hearing the Noticee submitted an application requesting for cross examination of Shri A R Moorthy and Shri H. Ganesh. Broker contended that persons whose statements are relied upon, have to be offered for cross examination which is in well settled law. It is further submitted that the cross examination of Shri A R Moorthy and Shri H. Ganesh are all the more necessary, since they are not only in total variance with the affidavit of the deponent who has offered himself for cross examination, but also contrary to the statements of Shri T R Narayanan, Dy. Gen. Mgr. of Nedungadi Bank (NBL). This is well settled law and it has been held that “testimony of witness is not legal evidence unless it is subject to cross examination”. Following were the cases relied upon:
Ref.
1. Ramkumar v/s King Emperor AIR (1936) 12 Lucknow 535
2. Manganlal v/s King Emperor AIR 1946 Nagpur 173
3 Neminath Appayya v/s Jamburao AIR 1966 Mysore 154
4. Pyarelal Sakseria v/s Devi Shankar Parashar AIR 1994 MP 155
3.4 A personal hearing was granted to the said broker on 12.2.2004 which was attended by Shri R K Banthia, Managing Director of the said broker and also by Advocates authorized by them. In the course of the said hearing, the said broker also submitted a request to summon Shri A.R.Murthy, and Shri H. Ganesh, Former Chairman and Manager of NBL and also requested for an opportunity to cross examine the said officials. They also submitted an affidavit in this regard. Thereafter, vide letter dated 16.2.2004, the said broker made further submissions.
1. Consideration of issues:
I have considered the investigation report, the report submitted by the Enquiry Officer, the replies and submissions of the said broker and other material on record. I find that the following issues arise for consideration:
i. Whether the said broker had acted beyond the mandate given to him by NBL.
ii. Whether the said broker had acted in concert with M/s. First Custodian Fund (I) Ltd. and Shrikant G. Mantri
iii. Whether the said broker had failed to obtain client registration and to enter into broker client agreement with NBL.
iv. Whether the said broker had delayed making payment to NBL.
v. Other issues.
The above issues are dealt with as under:
1. Whether the said broker had acted beyond the mandate given to him by NBL.
1. I note that as per the minutes of the meeting of the Board of Directors of NBL held on 26.9.1999, the bank had approved arbitrage transactions in securities through 3 brokers including the said broker. However, I also note that the said brokers have executed transactions on behalf of the bank even prior to the mandate issued to them vide the Board meeting dated 26.9.1999. In this regard, I specifically note that the said broker had sold 1000 shares of Pentafour Software Ltd. on behalf of the bank on 20.9.1999 and the contract note issued by the said broker has been duly acknowledged by NBL.
2. I note that he Enquiry Officer in his report has noted that in case these transactions had been done in an unauthorized manner, NBL would not have given an acknowledgement in the contract notes issued by them. Further, as noted by the Enquiry Officer, NBL, in its investment policy dated 25.9.1999 had noted that some brokers were allowed to make purchases and sale on an experimental basis. It further acknowledges that these experimental transactions were carried out through 3 stock brokers including the said broker.
3. In view of the above, I agree with the findings of the enquiry officer and hold that the said broker had not acted beyond the mandate given to him.
2. Whether the said broker had acted in concert with M/s. First Custodian Fund (I) Ltd. and Shrikant G. Mantri
1. I note that in the instant case, R K Banthia along with his wife, held 8.08%; First Custodian Fund (India) Ltd held 3.28% and Shrikant G Mantri held 10.51% equity shares in NBL. Further, Shri Surinder K Banthia, the brother of R K Banthia is the Chairman of First Custodian Fund (India) Ltd and Manish Banthia the son of R K Banthia is a director. Shri Sushil Mantri, brother of Shrikant G Mantri is the Executive Director of First Custodian Fund (India) Ltd. I also note that the First Custodian Fund (India) Ltd, Shrikant G Mantri and the said broker functioned out of the same premises and had common fax and telephone connections.
2. I also note that in his statement to SEBI on 30.09.2002, Shri H Ganesh, Senior Manager of the Investment Cell of NBL had mentioned that:
“There was a blanket permission given by the Chairman and GM of NBL to Shri Banthia who was well known to them to decide and execute the transactions. To my knowledge, selection of securities, orders and the timing were decided by Shri Banthia. Mr. Banthia was the sole representative of all the 3 broking firms viz. HDSL, FCIL and Shrikant G Mantri for all these transactions of the bank… All the contracts /communications of these of these 3 brokers were delivered by a common messenger”
4.2.3 In this regard, the said broker, in their reply have stated that the companies are not associated companies within the definition of S. 370(1B) of the Companies Act, 1956 and merely because there are common directors, it cannot be said that they are associated companies. The said broker has also submitted that Shrikant G Mantri is a sole proprietorship concern and that the shareholding of First Custodian Fund (India) Ltd and the said broker are distinct. Further, the said broker is a closely held company. The said broker has also submitted that during the relevant period, none of the members of the Board of Directors of First Custodian Fund (India) Ltd were nominees of the said broker. Therefore, the said broker had submitted that it cannot be said that the three brokers have acted in concert and upon the directions of RK Banthia.
4.2.4 I find that there is sufficient evidence to suggest that the three broker including the said broker have acted together in carrying out transactions on behalf of and with NBL. The fact that all the three share office space and even fax and telephone lines only reinforces this finding. The statement of Shri H Ganesh, the Senior Manager of NBL corroborates the finding. In this regard, the said broker has submitted that the statement of Shri H Ganesh should not be relied upon; this has been separately dealt with.
4.3 Whether the said broker had failed to obtain client registration and to enter into broker client agreement with NBL.
1. I note from the investigation report that the said broker did not obtain client registration forms and Broker client agreement duly filled in by NBL. In this regard, the said broker in their reply have submitted that the lapse was merely clerical in nature and that the purpose of taking the client registration form i.e. to determine the credit worthiness is fulfilled since the client in this case was a Scheduled Commercial Bank. They further submitted that as a result of the alleged failure to exercise due diligence, neither the client nor the stock exchange nor the counter party has suffered any damage and since there was no deliberate defiance of the law, the penalty of suspension is harsh and disproportionate and hence not liable to be imposed.
2. I find that the said broker has admitted to the lapse of not obtaining the client registration form and entering into the broker-client agreement with NBL. The said broker has therefore, violated the directive of SEBI vide Circular No. SMDRP/Policy/Cir/5-97 dated 11.4.1997. I note the reply of the broker that there was no complaints from the clients. I further note that an arbitration has already been commenced and non obtaining of the registration form is not an issue agitated in the arbitration proceeding. However, it is an isolated incident and there is no general charge that the broker is not obtaining registration form from and or many of their clients. A lenient view can therefore be taken on this issue.
3. Whether the said broker had delayed making payment to NBL.
1. I note that the said broker has delayed in making payments to NBL and that as on 31.3.2000, an amount of Rs.94.61 Crores was outstanding to the bank. Details of the delay in payment are as under:
Date of Contract Amount due Date of payment and amount paid
6.3.2000 162,40,00,996.00 13.6.2000,
8,00,00,000.00
7.3.2000 3,58,44,527.00 18.6.2000 - 2,00,00,000.00
22.6.2000 - 9,82,45,523.00
2. In their reply, the said broker has submitted that the payment was made as per the agreed understanding with the client. The said broker also submitted that there was no delay since the payment was made as per the mutual understanding regarding the schedule for payment. The said broker further submitted that NBL had not charged any interest on the payment which would not have been the case had the payment been delayed. The said broker has also stated that in case such large amounts were outstanding from them to the Bank, R K Banthia, the Managing Director of the said broker would not have been made Director. In their written submissions submitted subsequent to the hearing, the said broker had also stated that in case any amounts were due from them to NBL (which amounts would have been substantial), the same would be reflected in the balance sheet of the bank.
3. I am unable to accept the explanation of the said broker that NBL had agreed to a schedule of payment wherein substantial amounts of money were paid to them more than 3 months after the date of contract and that too without any interest. No documentary proof has been submitted by the said broker in this regard. Secondly, the contention that these amounts would have been reflected in the balance sheets or that R K Banthia would not have been made Director in the face of large outstanding amounts also are not acceptable.
4. In the light of the above, I find that the said broker has delayed making payments to NBL and has therefore violated Clause B (1) of the Code of conduct for stock brokers laid down in Schedule II to the Broker Regulations which provides that a stock broker shall make prompt payments in respect of securities sold.
4. Other issues.
1. Whether the show cause notice issued to the said broker was non est in law since it was not issued by either the Chairman or Member?
1. In their reply dated 5.2.2004 and in the course of oral submissions and vide their letter dated 16.2.2004, the said broker has contended that Show Cause Notice under Regulation 13 (2) of the Enquiry Regulations can be issued only by The Chairman or Member of SEBI. They have submitted that since, in the instant case, the Show Cause Notice has been issued by the Division Chief, Integrated Surveillance Department and not by the Chairman or Member, the notice is bad.
2. In this regard, I note that although Regulation 13 (2) of the Enquiry Regulations do provide that the Chairman or Member shall issue the show cause notice, as a measure of administrative convenience, the Board of SEBI, vide order dated 21.4.2003 had delegated the power to affix signature on show cause notices to officers of rank Deputy General Manager and above. I note that this is not a delegation of the power to issue a show cause notice to intermediaries, but rather a delegation of the procedural function of signing the show cause notice. Thus, while the show cause notice is signed by the Division Chief, the decision to issue the show cause notice having been taken by the me, the show cause notice is valid and there has not been any delegation of powers in violation of the principle of “Delegatus non potest Delegare”.
2. Whether the request of the said broker for cross examination of Shri A R Moorthy and H Ramesh needs to be acceded to?
1. It is contended by the said broker in their reply that the Enquiry Officer has placed great reliance on the statements of Shri A R Moorthy and H Ramesh, Former Chairman and Manager, Investment Cell of NBL respectively. They have also submitted that the said statements did not form part of the documents furnished to them by the Enquiry Officer and rather formed part of a separate proceeding pursuant to show cause notice dated 11.3.2003; reliance should not be placed on the same. They have also submitted that they were not given a reasonable opportunity to rebut the purported statements.
2. In this regard, I find that although the statements of Shri Moorthy and Shri Ramesh were not given to the said broker in the course of enquiry proceedings, it is an undeniable fact that they had notice of them. Further, although the said statements could not be rebutted by them before the Enquiry Officer, it was open to them to make suitable rebuttals before me. As for their request for cross examination of Shri Moorthy and Shri Ramesh, I find that the same is not provided for under the Enquiry Regulations and therefore, I decline the said request.
5. Order
1. In the light of the above, I find that the present case is a fit one for imposition of a major penalty. In this regard, I note that the enquiry officer, in his report has recommended that the certificate of registration granted to the said broker be suspended for a period of 12 months. I also note that the said broker has already been prohibited from dealing in securities for a period of 8 months vide the interim order dated 14.7.2003. In view of the above, I find that a suspension for a period of 12 months is appropriate in the facts of the matter.
2. Therefore, I in exercise of powers conferred on me under Section 4(3) of the SEBI Act read with Regulation 13(4) of the Enquiry Regulations hereby suspend the certificate of registration bearing No. INB 010985237 granted to M/s. Harvest Deal Securities Ltd. for a period of 12 months from 14.07.03 i.e. the date on which the interim order was passed.
