IN RE : TAIB BANK E C Vs. STATE
SECURITIES APPELLATE TRIBUNAL
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T.M. Nagarajan, Whole Time Member -
(1.) 0 M/s Taib Bank E.C. (hereinafter referred to as "FII"), a public company incorporated in Bahrain and listed on the Bahrain Stock Exchange, is registered with the Securities and Exchange Board of India (hereinafter referred to as "SEBI") as a Foreign Institutional Investor under Registration No. IN-UE-FE-119-93 under SEBI (Foreign Institutional Investors) Regulations, 1995 (hereinafter referred to as "FII Regulations"). The 'Everest Fund (Mauritius) Ltd' is one of their sub accounts registered with SEBI.
(2.) 0 During an investigation by SEBI of ANZ Grindlays Bank (presently Standard Chartered Grindlays Bank), Custodian, in October, 2000, certain apparently short sales were observed in respect of trades conducted by the FII on behalf of their sub-account, The Everest Fund as under:
2.1 Sale of 15000 equity shares of SSI Ltd on 5.5.1999 without adequate stock balance and subsequent purchase of 5800 equity shares of SSI Ltd on 7.5.1999 (balance auctioned by the Stock Exchange).
2.2 Sale of 5000 shares of TELCO on 22.11.1999 for settlement on 24.11.1999. 350 shares were debited from the Depository Account of the Bank on 29.11.1999 towards partial delivery for the above trade and shortfall of 4650 shares were auctioned by the Stock Exchange.
2.3 Sale of 4000 shares of Hindustan Petroleum on 29.11.1999 for settlement on 1.12.1999, when the balance on 30.11.1999 was nil. The shares were auctioned by the Stock Exchange on 8.12.1999.
2.4 sale of 3000 equity shares of Vikas WSP Ltd on 2.5.2000 and 2000 equity shares of Vikas WSP Ltd on 3.5.2000 without adequate stock balance and subsequently squaring up the entire 5000 shares on 14.5.2000.
2.5 Sale of 5000 equity shares of Wipro Ltd on 31.8.2000 @ Rs. 3265.81 whereas the stock available with the sub-account was only 4000 shares. Thereafter, 1000 shares were purchased @ Rs. 3394.86 on spot basis and the same were credited to the demat account on 5.9.2000 in order to meet obligations to the clearing house.
2.6 Sale of 10000 equity shares of DSQ Ltd on 14.10.2000 while deliverable stock was only 9500 equity shares. 500 shares were purchased later to offset the short sale.
Show cause notice was issued to the FII on 6.8.2001 to which FII submitted its reply on 20.8.2001. In respect of specific instances, the FII's reply was to the following effect:
3.1.1 The sale of shares of SSI Ltd in question was part of the bonus shares issued by the company for which the ex-bonus date was 22nd March 1999 on the BSE and 24th March 1999 on NSE. The FII was informed by the company that the shares would be sent in the first week of May; however, the FII sold the shares on 5th May 1999, due to an oversight, without verifying the receipt of the 17500 bonus shares. Eventually, the bonus shares were received on 13th May, 1999, but in physical form and were then sent for demat and they got the credit for demat only on 7th June, 1999.
3.1.2 The fund bought a total of 45, 000 shares of TELCO during 15th to 23rd July, 1999 and were gradually sold from 24th August 1999. As on 29th November 1999 there were 30, 000 shares to be sold. Through oversight, they sold 35, 000 shares on 22nd November in 3 lots (20000 through DSP Merrill, 10000 through Mafatlal and again 5000 through DSP Merrill). The last sale of 5000 shares was due to human error.
3.1.3 Based on the stock statement which Showed 11, 500 shares of Hindustan Petroleum as on 29th November, 1999, the 4, 000 shares were erroneously sold, without taking into account pending sale. "The period was also quite confusing" as HPCL issued bonus shares during the period in question. While the ex-bonus date was 13th October, 1999, the bonus shares were received on 25th December, 1999.
3.1.4 The FII had given orders for sale of shares of Vikas WSP Ltd) by oversight to two brokers simultaneously. While 5000 shares were sold through one broker on 2nd and 3rd May 2000 , 6000 shares were sold on 3rd and 4th May, 2000 through another broker. This happened due to over-sight and on realization of the mistake, the FII immediately placed the order to square up the erroneous sale of 5000 shares.
3.1.5 The short sale of shares of Wipro also was due to oversight as the concerned person was traveling and his replacement erroneously ignored the sale of 1000 shares on 25th August 2000. This was a genuine mistake for just 1000 shares.
3.1.6 The 'short sale' of the shares of DSQ Software was due to genuine human error, involving just 500 shares out of 10, 000.
3.2 The FII submitted that the fund has undertaken thousands of transactions during the period in question, instances of selling without checking stock were few and far between and that all such cases were genuine mistakes which mainly occurred due to a bonafide human error. The Bank further stated that there was never any intention to short sell in any of the cases cited.
3.3 The FII also contended that in all the above cases, the quantity involved was too insignificant to have any impact on the market price of the shares in question or on the market sentiment in general.
(3.) 0 On considering the reply, an Enquiry Officer was appointed vide order dated 15.11.2002 in terms of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as "enquiry regulations") to hold an enquiry into the alleged contravention of Regulation 15 (3) (a) of the FII Regulations
4.1 The Enquiry Officer submitted his report to SEBI on 27.2.2003. In his report, the Enquiry Officer has found that the instances of short sales have not been disputed and observed that six instances of short selling showed that the fund acted negligently and failed to exercise due diligence. He also stated that the fund had sold the securities without verifying the stock availability. The Enquiry Officer also noted that fund had since strengthened the internal check and control mechanism. After taking into consideration the submissions of the fund, the Enquiry officer recommended suspension of the certificate of registration of the FII for a period of three months.
4.2 Pursuant to the Enquiry Report, Show cause notice dated 23.4.2003 was issued to the FII in terms of Regulation 13 (2) of the enquiry regulations. The FII submitted a reply to the same through M/s Borkar and Muzumdar, Chartered Accountants vide letter dated 9.5.2003.;
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