ORDER
G.N. Bajpai, Chairman
1.0 Background
M/s. First Custodian Fund (India) Ltd (hereinafter referred to as “the said broker”) is a member of National Stock Exchange (hereinafter referred to as “NSE”) and a stock broker registered with SEBI under certificate of registration bearing No. INB230638130. Shri Manish Banthia (hereinafter referred to as “M. Banthia”) is one of the directors of the said broker.
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 and also that receivables from the aforesaid brokers to NBL as on 31.3.2000 amounted to Rs.94.52 Crores. They also informed that of the said amount, Rs.73.42 Crores had been recovered leaving an amount of Rs. 21.10 Crores to be recovered thus adversely affecting the Bank’s Balance Sheet. Therefore, RBI requested that SEBI investigate the matter.
Based on the complaint from RBI, SEBI conducted an investigation into the matter. The findings of the investigation are as under:
Manish Banthia 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
The Board of Directors of NBL in its meeting held on 26.9.1999 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 the said broker 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.
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
As per the decision taken by the Board of NBL in its meeting held on 26.9.1999, 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, Investment 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 Manager(F&A)
The
Chairman Through General Manager (P&D)
-do
8.
-do-
Chairman
The
Board
Monthly
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.
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
cores.
The
above purchases and sales were well in excess of the
approved
limits of the bank.
(iv)
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.
(v)
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.
(vi) 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 the said three brokers had these stocks in their portfolio which they had offloaded the same to NBL in order to mobilize funds from these purchasers.
2.0 Action taken against the said broker
Pursuant to the said investigation, an enquiry was conducted against the said broker and the Enquiry Officer in his report dated 12.1.2004 recommended 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. Thereafter, show cause notice dated 22.1.2004 was issued to the said broker to which he submitted their reply on 5.2.2004. Upon their request, the said broker was also given an opportunity of personal hearing on 12.2.2004. After considering the reply of the said broker and their submissions and other material on record it was found that the said broker had acted beyond the mandate given to him by NBL, that the said broker had failed to obtain client registration and to enter into broker client agreement with NBL, that the said broker had delayed making payment to NBL and in doing so Whether the said broker had acted in concert with M/s. First Custodian Fund (I) Ltd. and Shrikant G. Mantri. In view of the above, vide order dated 5.3.2004 the certificate of registration granted to the said broker was suspended for a period of 9 months w.e.f.14.7.2003.
3.0 Show cause notice and personal hearing to Manish Banthia
Show cause notice was also issued to Manish Banthia on 16.12.2003 in his capacity as Director of the said broker. Shri Banthia submitted his reply to the said show cause notice vide his letter dated 26.12.2003. In his reply, Manish Banthia made the following submissions:
(a) M. Banthia denied each and every allegations and contentions made in the subject show cause notice and nothing therein admitted or should be deemed to have been admitted by him, save and except to the extent specifically admitted by him thereunder.
(b) M. Banthia contended that the aforesaid show cause notice is bad in law and against natural justice in as much as action taken against him six month prior to the issue of show cause notice without giving him any opportunity of pre decisional or post decisional hearing. He stated that Chairman, SEBI vide his order dated 14.07.2003 passed under Section 11(4) of the SEBI Act 1992 directed him not to deal in securities in any manner till further orders. It is therefore clear that the Chairman’s order debarring him from accessing the securities market was passed without giving any opportunity to represent his case either pre decisional or post decisional hearing. On this ground alone, the order passed by Chairman is bad in law and against the basic principles of natural justice, equity and fair play and should be set aside forthwith and that he had assailed Chairman’s order on this ground alone.
(c) M. Banthia further submitted that in the said show cause notice SEBI had reserved the right to initiate the prosecution under
Section 24 of the SEBI Act or any other action as SEBI may deem fit. It is submitted that prosecution under Section 24 of SEBI Act has already been initiated against him on 31.03.2003 i.e. 9 months prior to the issue of show cause notice. This itself evidences that SEBI has prejuduged him without giving him any chance or any opportunity to present his case. Such act of SEBI is itself bad in law and against all norms of justice, equity and fair play.
(d) M. Banthia further submitted that he was 29 years of age and an MBA from UK and was working as Marketing Director of Nutan Advertising Agencies Pvt. Ltd. having its office at Hind Mata Bldg., Dadar, Mumbai. The said company is a leading outdoor advertising company providing outdoor solutions across India. He also is a non Executive Director of Harvest Deal Securities Ltd. (HSL) but is not involved in the day to day function and / or working of HSL. He does not sign any invoice, documents and / or letter on behalf of HSL. He further stated that he doesnot play any role in the decision making process of HSL. The day to day management and functioning of HSL are the responsibility of the Managing Director. He is only a part time director of HSL an dhis functions were only to attend Board Meetings and to ensure requisite quorum. A perusal of the minutes of the Board Meeting reveals that only routine business is transacted.
(e) M. Banthia further stated that he is not in day to day working or management of HSL. He ascertained from HSL vide his letter dated 18.12.2003 their explanation on various allegations and contentions raised by SEBI in the subject show cause notice. HSL has denied having violated any of the provisions of SEBI Act, Rules and Regulations and have forwarded a copy of their reply dated 10.04.2003 to SEBI to him. The said reply of FCFL should be treated as part and parcel of his reply to the show cause notice.
An opportunity of personal hearing was also granted to Shri Banthia on 9.3.2004 on which date representative of Shri Banthia appeared before me and made submissions.
4.0 Consideration of issues
I have considered the reply of Manish Banthia, submissions made by his representative before me and other material on record.
I have vide order dated 5.3.2004 found that the said broker had committed several irregularities including acting beyond the mandate given to them by clients, delay in making payments, issuing of fictitious contract notes etc. Accordingly, I had vide the said order suspended the registration granted to the said broker for a period of 12 months.
I note that in his reply Manish Banthia has stated that he is a non-executive director of the said broker and not in charge of the day to day functioning of the said broker and or that she was ignorant of the irregularities committed by the said broker. I am unable to accept the explanation submitted by Shri Banthia. Being a director, Shri Banthia is liable for all the acts of omission and commission by the said broker.
I note that Shri Banthia has submitted that the enquiry proceedings have exonerated the said broker. In this regard, I have vide order dated 5.3.2004 already found the said broker to guilty and suspended their certificate of registration for a period of 12 months.
In view of the above, I find that Manish Banthia is liable for all the irregularities / violations committed by the said broker.
5.0 Order
I find that Manish Banthia as Director of the said broker has acted in such a manner that has placed the interest of investors at risk and also jeopardized the trust of investors in the safety and integrity of the securities market. I find that it is necessary in the interest of investors in the securities market to restrain persons such as Manish Banthia form being associated with the securities market.
Therefore, I, in exercise of powers conferred on me by Sections 11(4) (b) and 11B read with Section 4(3) of the SEBI Act do hereby direct that Shri Manish Banthia shall disassociate himself from the securities market and that he shall not buy, sell or otherwise deal in securities in any manner for a period of 12 months w.e.f 14.7.2003 i.e. the original date from which he was prohibited from buying, selling or dealing in securities vide my earlier order dated 14.7.2003.
This order shall come into effect immediately.