SEBI Vs. SHRIKANT G MANTRI
LAWS(SB)-2003-7-6
SECURITIES APPELLATE TRIBUNAL
Decided on July 14,2003

Appellant
VERSUS
Respondents

JUDGEMENT

G.N.Bajpai, - (1.) SEBI had conducted investigations into the alleged violations of the provisions of SEBI Act, Rules and Regulations made there under, Securities Contract (Regulation) Act, 1956 as well as the Rules, Regulations and Byelaws of the Exchanges by Shrikant G. Mantri (herein after referred to as 'SGM') along with its associate brokers namely First Custodian Fund India Ltd. (herein after referred to as 'FCFL') and Harvest Deal Securities Ltd. (herein after referred to as 'HDSL') in its dealings with Nedungadi Bank Ltd. during the period September, 1999 to March, 2000.
(2.) Subsequent to the investigation, a show cause notice dated March 11, 2003 was issued by SEBI to SGM asking them to show cause as to why directions under Section 11B of SEBI Act, 1992 read with Regulation 11 and 12 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995 should not be issued pending enquiries. SGM was alleged to have indulged in the acts mentioned below : issued bogus contract notes; did not account for the contract notes which have been issued; delayed payments to the bank; entered into one sided transactions; made late delivery of securities; and did not obtain written agreement from the client, which were in violation of regulation 6 (a), (c) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995 and clauses A (1), (2) and (5) and clause B (1) of Schedule II of the Code of Conduct for Stock Brokers read with regulation 7 of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992. A letter dated March 17, 2003 from SGM was received by SEBI whereby they had asked for change in the date for inspection of documents, which was duly granted for March 27 and March 28, 2003 vide our letter dated March 26, 2003 and received by them on the same day. The opportunity for inspection was availed by SGM on March 27, 2003. Accordingly, the documents were inspected by their representative, Mr. Prakash Shah, their Chartered Accountant. During inspection, the representative of SGM had requested for copies of certain documents available with SEBI. The same were furnished to them vide letter no. IES/ID5/RM/7134/2003 dated April 09, 2003. On April 10, 2003, SEBI received a further communication from SGM in which it had been mentioned that they may be granted further time to file a detailed reply to the show cause notice. In such letter, they had also denied all the charges / contentions/ allegations made out against them in the show cause notice.
(3.) AN opportunity of hearing was granted to SGM on April 10, 2003 vide our letter dated April 09, 2003. Shri Shrikant G. Mantri, proprietor of the broking firm along with Shri Prakash Shah, their Chartered Accountant appeared during the hearing. 4.1 The reply dated April 25, 2003 was sent by SGM. In its reply, SGM denied all the allegations / contentions made in the Show Cause Notice. That SGM had engaged in arbitrage transactions on behalf of NBL was also denied. According to him, arbitrage transactions can only be entered into by an entity who is a member of more than one exchange. SGM was only a member broker of Mumbai Stock Exchange and hence, it submitted, that it could not have carried out arbitrage transactions. It also stated that the allegation w.r.t. arbitrage transactions was based on the statements by officials of NBL, which it was sent had been made to cover up the acts of omission / commission of theirs. It was also submitted that all the transactions done by SGM on behalf of NBL was under their instructions. It also denied of ever being informed that NBL had proposed to do arbitrage as per the scheme approved by their Board, nor had it been given copy of the approved scheme. 4.2 The fact that NBL had approached SGM in September 1999 asking whether it was interested in acting as their broker at BSE was admitted by SGM in their reply, which was agreed and acted upon. However, it was specifically stated that the purchase and sale of securities at BSE on behalf of NBL was done under instructions from the investment department of NBL although no reasons were given for having selected it as a broker to NBL. 4.3 According to SGM, the procedure adopted for the share transactions for NBL was as follows : (i) Telephonic instructions to buy / sell given by NBL. (ii) Transaction for buy/sell put through BOLT. (iii) Contract note for executed transaction issued, and delivered to the NBL. (iv) Invoice for the transactions in a Settlement Period issued. (v) Payment made or payment received to / from the NBL at the end of the Settlement i.e. after pay out date. (vi) Delivery of shares is mostly by debit/credit to respective demat a/c or by physical deliveries in respect of such shares not dematerialized. The delivery of shares was to be made before the pay in / payout date. 4.4 SGM submitted that when it was appointed as a broker to NBL, it was not aware that NBL had been doing transactions through HDSL and FCFL or any other broker. The allegation that SGM was an associate of HDSL and FCFL was denied on the basis of the following: a) SGM was a sole proprietary concern active since 1991 and the sole decision maker for the same had been Shri. Shrikant G. Mantri, who had signed the reply on behalf of SGM. It was also submitted that his firm shares office facility such as fax, EPBX, etc. due to reasons of economy. However, it was said that they did not share the common office space. The tenant for the office premises occupied by SGM was Shri Mantri himself and the rent for telephone bills and electricity had been paid by him. According to SGM it was a common practice in Mumbai, and also between brokers who had their office in the BSE building to share the facilities as in the instant case since space is the major constraint, and hence it cannot be said that they were associates. b) Shri Shrikant G. Mantri also admitted that Sushil Mantri, was his brother and also one of the directors of FCFL. Further, it was said that Sushil Mantri was the director in his own right and carried out his business activity independently whereas Shri Shrikant G. Mantri had no financial / beneficial interest in FCFL. c) Shri Shrikant G. Mantri was not a shareholder of HDSL, neither was he related to any of its directors and hence, HDSL was not an associate concern of SGM. d) FCFL and /or HDSL had no connection with the business of SGM. e) SGM had a distinct SEBI Registration, Service Tax Registration, Professional Tax and Shop and Establishment Registration, having own BOLT terminal, the access to which has been restricted to its authorized employees. f) SGM was separately assessed for Income Tax. 4.5 SGM submitted that it was not aware of the total volume of shares transacted by NBL as also that dealt through HDSL, FCFL and SGM altogether etc. According to SGM, the reasons for having dealt through the above brokers compared with others, could only be explained by NBL. 4.6 SGM had stated that during the period September 1999 to March 2000, the total volume of transactions done by it on behalf of NBL was Rs. 624.70 crores, which was under their specific instructions and there had been no default in payment and so far as the delay in payment is concerned, there was only one instance. It was said that the said delay had taken place in settlement no 51 of 1999 for Rs. 7.07 crores, which it explained due to pressing commitments of SGM where it had requested NBL authorities whether it was possible to make the payment in May. According to SGM, verbal sanction had been obtained from the higher authorities and it was said that the payment should be made latest by May 31, 2000. The payment had been made on May 16, 2000 and May 17, 2000. It was also said that the payment had been accepted by NBL without any objection and it had not even asked for any interest at the time of payment. 4.7 Further, SGM submitted that during the period April 01, 2000 to March 31, 2001, it had carried out transactions for NBL for Rs. 38.93 crores and the payments were made also. It was stated that SGM had no knowledge of the dues of Rs. 94.61 crores of NBLas on March 31, 2000 and subsequent payment of Rs. 73.42 crores made in 2000 to 2001 etc. 4.8 The fact that R.K. Banthia, Managing director of HDSL was one of the directors of NBL during the period December 26, 2000 to May 07, 2001 was admitted by SGM. However, the extent of Banthia's shareholding etc. was not within its knowledge, SGM said. The holding of SGM in NBL was admitted to be 10.51%. However, it reiterated that SGM cannot be an associate of Banthia, it being an independent entity carrying out business with the sole proprietor, Shri Shrikant G. Mantri. Shri Mantri also said that he had never been a director of NBL and was only an investor / shareholder and also that he had never been in a position to be privy to the corporate details and business decisions of NBL. 4.9 SGM stated that it was not aware whether Mr. M.G. Damani and Mr. Suresh Vaidya had represented Banthia group on the Board of NBL, nor had he the knowledge whether Mr. M.G. Damani and Mr. A.R. Moorthy had suggested to the Board for engaging the services of SGM, HDSL and FCFL. SGM had bank accounts at NBL since 1997 and had been enjoying OD facility and bank guarantee limit of Rs. 5 crores each. SGM submitted that Shri Ganesh, the Senior Manager, Investment, NBL, Mumbai had approached him in September 1999 and stated that NBL has decided to transact in shares and whether SGM would be interested to act as a broker. Thereafter, approval was obtained from their Head Office and orders were placed for purchase in sale of securities. 4.10 SGM also submitted in their reply that all the decisions regarding purchase and sale of shares including scrip, quantities, etc. had been given to him by the Senior Manager, Investment. At the end of each trading day, contract notes in respect of the orders executed for NBL had been prepared and sent to the same person, who after verifying the correctness of the transactions acknowledged the contract note. 4.11 Regarding the allegation of having not obtained the client registration form, it was submitted that the spirit behind the same was to ensure the bonafides before commencing business. It was said that, since NBL was a schedule I bank and SGM had been its constituent for more than 5 years, the bonafides of NBL was well established and SGM felt embarrassing to ask for the bonafides of NBL and therefore the same was not obtained. Further, it was also said that it was a general practice in the market not to obtain such forms in the case of institutional clients. This, SGM submitted was a technical lapse and that the same be pardoned. 4.12 SGM, vide their reply, also denied having any free hand in the buying and selling of scrips on behalf of NBL and also that the details of the deals such as name of the scrip, purchase order, sale order, quantity, rate, etc. had been decided by it. It also denied the allegation of Shri Banthia having any role in the buying and selling of shares of SGM on behalf of NBL. Further, SGM submitted that although regular reporting of the details of the share transactions by NBL was done to the Board at an interval of about 15 days, there had been no report imputing any wrong doing by SGM. Neither had it been reported that the transactions by SGM on behalf of NBL were unauthorized. etc. Also, in the Agenda for the trading transactions carried out in the equity shares at Mumbai during the month of December 1999 an amount of profit (Net of brokerage) of Rs. 20341120.00 was noted and it was also said that the said purchase was approved in December 1999 and the same could not be sold earlier since the price of the shares moved adversely. According to SGM, this would clearly prove the investment activity of NBL and also taking of position in the shares by NBL and that there was no arbitrage activity. 4.13 Shri Mantri also stated that he had not been privy to the purported discussions of Shri Banthi which the Chairman / Board of NBL and also it was said that he was not present during any of those meetings and hence, cannot reply to the allegation that Shri Banthia had exercised pressure on the Chairman / Board of NBL for the purchase and sale of shares. Also, he denied any knowledge about the investment of Rs. 30 crores in shares by NBL during the tenure of Shri Banthia as its director. 4.14 Regarding the purchase of 6,500 shares of Lupin on November 26, 1999, sale of 1,500 shares on November 26, 1999 by NBL, SGM submitted that the same can only be explained by the officials of the investment department of NBL. It was also said that his role as a broker was strictly confined to executing the transactions as per the instructions from NBL. 4.15 It was also submitted by SGM in their reply that the factors for NBL taking position can only be explained by its official since all the transactions through SGM of delivery or receipt of shares were done through the demat account for which payments were also made. Moreover the transactions were executed for BOLT and delivery based. It was also stated that there had been no off market/negotiated deals done by SGM. With respect to the sale transactions done in the last week of March 2000, SGM submitted that proforma note were issued at the specific request of NBL and SGM were forced to accept the same, since it knew that had it not accepted the request, NBL would be recalling the credit facilities extended to SGM and also stop their further business with SGM. It was said by SGM that as the value of the securities pledged by SGM with NBL had fallen due to the crashing stock market prices, it would not be in a position to liquidate his overdraft amount by selling the pledged securities and hence, it had acceded to the request of NBL. It was also said that SGM had made it clear that the proforma notes were not to be acted upon and also originals of such notes were retained with SGM, photocopies of which had been given to NBL. It was submitted by SGM that they had destroyed the originals since the same was not to be acted upon. The fact that the originals were never handed over to NBL, according to SGM, could easily be established by asking them to produce the originals. 4.16 According to SGM, NBL continued to possess the actual unsold shares out of those mentioned in the Proforma Notes. As and when actual transactions were entered into, contracts dated August 23, 2000, August 24, 2000, August 25, 2000, August 29, 2000 and August 31, 2000 and December 12, 2000, January 22, 2001, February 08, 2001 and February 09, 2001 were issued. In fact, the shares had already been sold in terms of the subsequent sale, deliveries received from NBL and payments tendered to NBL. SGM also submitted that this arrangements was known to all levels of the management of NBL and no claim, demand or protest was ever raised against SGM which was inconsistent with the arrangement till May 2001 i.e. 14 months after the alleged transactions. It was also stated that this would be evidenced by the BSE trade file that the proforma note had not been entered into on the trading platform of the exchange. It was also submitted that SGM was forced to file a suit in Bombay High Court for inter alia declaring the said contract notes, a nullity, being pressurized by NBL to make the payments as per the note. NBL had not filed their written statement also in the said suit. Instead initiated arbitration proceedings before BSE on the same subject matter. It was reiterated by SGM that as and when the sale of the scrips covered by the said proforma notes had taken place, contract and sales notes were issued by SGM and shares had been delivered by NBL. Therefore, according to SGM, NBL did not account the sales as and when it had actually taken place and in contravention of all the accounting norms and standard, accounted transactions on the basis of the proforma. 4.17 It was also submitted by SGM that in the first week of March 2001, his overdraft account with NBL had become irregular pursuant to the decline in the value of securities pledged. NBL was told to have pressurized SGM to regularize the overdrawing. Subsequently, SGM stated, that it offered certain shares as additional securities to cover the shortfall in drawing power. It was also said that there had been no occasion to discuss about the bank account of SGM with Mr. Banthia as he had not been concerned/associated with the business of SGM. 4.18 SGM also denied any nexus with NBL for hiding the factual position. It was also said that while giving the photocopy of the proforma contract note, they had no knowledge that the same could later be used by NBL against SGM and had they known, they would not have given such copies. 4.19 SGM also denied the allegation of delayed payments to NBL. He also repeated that during the entire period of his acting as a broker to NBL, there was only one instance of delay in payment, that to for a sale of shares on March 06, 2000 amounting to Rs. 7.07 crores, which was repaid by May 16 and May 17, 2000 as per the time schedule sanctioned. Regarding the claim of Rs. 60 crores, SGM submitted that the same was fictitious since the same was due to the accounting of the proforma note by NBL which was not intended to be acted upon. Therefore, SGM has stated that the claim of NBL for an amount of Rs. 21.19 crores due from him was false. 4.20 SGM also admitted certain delays that had come forth in the delivery of shares to NBL which was due to factors beyond his control. He also submitted that it was NBL who actually owed money to SGM, for which repeated reminders were sent and subsequently, a suit had to be filed before the High Court of Bombay. It was also said that NBL had not submitted their reply, again having filed arbitration proceedings at BSE. 4.21 It was SGM's view that NBL and its official were making a lame attempt to pass their acts of omission and commission in respect of the share transaction to SGM, which SGM said was apparent from the following records: i) Minutes of the Board meeting of NBL from September 1999 to March 2000, during which period NBL admitted that apart from arbitrage they used to take position in various scrips. It has not been mentioned in the minutes that the same had been done at the instance of the brokers. ii) The Board minutes for the meeting held on March 23, 2000 specifically states that NBL had sold their entire quantity of shares on March 18, 2000 and deliveries for all these had been made except for Ranbaxy. NBL had admitted, therefore, that they did not have the stock as per the sale in the proforma note dated March 27, 2000 issued by SGM. iii) NBL had deliberately refrained from providing their Board the details in respect of the share transactions after the meeting held on March 18, 2000. Thus the officials of NBL had decided upon the strategy to hide their wrong doings from the Board members. iv) NBL had tried to camouflage the acts of omission and commission which is evidenced from the ledger account of NBL recording the share transactions, having innumerous overwriting, erasures, corrections, etc. The entries also were not recorded chronologically, there had been no narration in support of the same. v) NBL had been claiming an amount of Rs. 21 crores from SGM although they do not have any account in their ledger showing such dues, which establishes that the claim is false. vi) In February 2001, NBL had used the services of SGM as brokers and had purchased shares worth Rs. 3 crores. vii) The audited and approved balance sheet for March 31, 2000 (approved by RBI) do not show any amount due from SGM to NBL. 4.22 Therefore, according to SGM, the wrong doings by NBL had come to light during the course of inspection by Reserve Bank of India, subsequent to which they had tried to hide their wrong doings. It was also said by SGM that the complaint to SEBI by NBL was an after thought, which is corroborated by the fact that the ANnual Report for the year 1999-2000 does not show dues from SGM. SGM emphatically denied any wrong doing on his part which warrants action under SEBI Act or Regulations.;


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