Securities Appellate Tribunal
In Re: Bhoruka Financial Services ... vs Unknown on 6 December, 2005
JUDGMENT
G. Anantharaman, Member
1. BACKGROUND
(ii) Trading shall commence only after setting up of Settlement Guarantee Fund or Trade Guarantee Fund, duly approved by SEBI.
(iii) Payment of balance amount of Rs. 11,31,768 on or before December 1, 2004 towards refundable financial support extended by SEBI to the Exchange.
1.4 It was observed that some trades were executed on the stock exchange with a turnover of Rs.13.26 lakhs in year 2003-04 without complying with the aforesaid conditions . Since the turnover was very negligible, though the exchange was not legally permitted to conduct such trades on the exchange without complying with the conditions of renewal of recognition, MSEA was counseled and renewal of recognition was granted for a period of one year vide Gazette Notification No. SO 1354 (E) dated December 6, 2004 commencing from 11th day of December 2004 and ending on 10th day of December 2005 subject to the conditions stated below:
(i) The Exchange shall set up Settlement Guarantee Fund in compliance with SEBI Circular SMD/POLICY/SUB BROKER /Cir-12/97 dated June 09, 1997, after final approval by SEBI.
(II) Trading shall commence only after setting up of Settlement Guarantee Fund, duly approved by SEBI.
(iii) The Exchange shall repay the balance amount of RS 7, 50,000/-(Seven Lakhs fifty thousand only) towards refundable financial support extended by SEBI to the Exchange.
1.5 It is abundantly clear from the above conditions imposed while renewing the recognition of MSEA that it could not have commenced /allowed any trading on its trading platform without setting up of Settlement Guarantee Fund (SGF) / Trade Guarantee Fund (TGF) duly approved by SEBI.
1.6 Thus by granting the renewal of recognition to MSEA, even though MSEA had violated the conditions of renewal of recognition of 2003-04, SEBI gave one more opportunity to the MSEA to rectify themselves and comply with the conditions especially taking into account the interest of investors in that region. Indeed MSEA itself had while seeking renewal of recognition vide letter dated December 05, 2003 had given a categorical undertaking to SEBI to be fully compliant with all requirements of SEBI.
1.7 Pursuant to the said condition of renewal of recognition, MSEA forwarded its proposal for setting up of SGF to SEBI vide its letter dt. August 08, 2004. As the said proposal was not satisfactory, MSEA was advised to submit its revised proposal in conformity of SEBI Circular SMD/POLICY/SGF/CIR-13/97 dated June 09, 1997. The revised proposal submitted by MSEA vide its letter dt. February 14, 2005 was also found to be incomplete and sketchy and therefore MSEA was again advised to furnish complete details. Consequently, MSEA submitted further details vide e-mail dt. July 11, 2005.
1.8 While the aforesaid proposal of MSEA for setting up of SGF was being examined, Shri C M Pandey the Officiating Executive Director (OED) of MSEA on August 10, 2005 in the course of a telephonic conversation with a junior officer of SEBI, very casually mentioned that trading has commenced in MSEA from August 01, 2005. As the said trading had commenced in violation of the conditions of renewal of recognition, OED was advised over phone in the morning of August 11, 2005 to immediately stop such trading. It was also observed that MSEA had allowed this trading on its trading platform from August 01, 2005 to August 12, 2005 (trading period). This trading was thus in blatant disregard to the conditions of renewal of recognition of MSEA as well as against the undertaking of MSEA referred to in para no. 1.6 above and in complete defiance to the advice and instructions from SEBI. On scrutiny of the details of this trading conducted in blatant violation of conditions for renewal of recognition submitted by MSEA it was noted that though MSEA had "NIL" volume in 2004-05 and negligible volume in earlier years, there was a unusually high trading volume 1.1 Magadh Stock Exchange Association (MSEA) was recognized as a Stock Exchange under Section 4 of Securities Contracts (Regulation) Act, 1956 (SCRA) by Central Government vide notification no. SO 899(E) dated December 05, 1986 for a period of 5 years commencing on December 11, 1986.
The said recognition was being renewed from time to time under Rule 7 of Securities Contracts (Regulation) Rules, 1957 (SCRR).
However, due to breakdown in internal administration of the 1.2 exchange and persistent malfunction of the Council of Management (COM) of MSEA, the COM was superseded by Securities and Exchange Board of India (SEBI) on December 05, 1997 under Section 11 of SCRA. The same remained superseded till its restoration on June 7, 2000.
1.3 Thereafter, the recognition of MSEA was renewed for a period of 3 years vide Notification dated December 09, 2000 which was again renewed vide notification dated February 19, 2004 subject to the following conditions:
(i) Setting of Trade Guarantee Fund /Settlement Guarantee Fund by the Exchange after final approval by SEBI.
of approximately Rs. 109.71 crore in just 10 trading days in August 2005. Subsequently, MSEA vide their letter dated September 13, 2005 has revised the trading volume to Rs. 90.06 crore for the aforesaid period.
1.9 From the details of this trading conducted in blatant violation of conditions of renewal of recognition furnished by MSEA, it was observed that trading was concentrated mainly in the scrip of Bhoruka Financial Services Limited (hereinafter referred to as 'BFSL'). Out of trading volume of Rs 90.06 crore during the trading period, approximately Rs 89.28 crore was in scrip BFSL, which accounted for nearly 99% of the trading volume.
1.10 It was further noted that BFSL was not listed on MSEA and as such it was listed only on Bangalore Stock Exchange Ltd. (hereinafter referred to as 'BgSE'). The last trading in the scrip on BgSE was in year 1988 and the last traded price was Rs.5.00. On enquires it was revealed that the trading of BFSL was allowed by MSEA in the permitted category only on August 01, 2005, upon the application made by the broker namely M/s Rajat Share and Stock Broker Pvt. Ltd (hereinafter referred to as 'broker') on the very same day.
1.11 On examination of the details of trading conducted in blatant violation of conditions of renewal of recognition, it was observed that the entire volume of trades in BFSL were done through the aforementioned broker of MSEA at Patna who was a common broker for both the buy and sale side. It was further observed from the details of trading conducted in total violation of conditions of renewal of recognition that one DLF Commercial Developers Limited (hereinafter referred to as 'DLF') of Delhi was the sole buyer of all the shares of BFSL and the sellers were the promoters of BFSL namely, Shri Satyanarayan Agarwal, Shri Viveek Agarwal, Umah Agarwal, Siddhartha Agarwal, Satyanarayanan Vivek Kumar HUF, M/s Prabhu Securities Limited, M/s. Bhoruka Engineering Ind. Ltd., M/s. Pragya Enterprises and its partners namely Smt. Umah Agarwal, Shri Viveek Agarwal and Shri Satyanarayan Agarwal (hereinafter collectively referred to as 'promoters/sellers') who sold their entire holding of 98.73% to DLF at a fixed price of Rs. 4490/-per share during the said trading period.
1.12 On verification of the records, it was observed that DLF had filed an application dated October 30, 2004 under Regulation 4(2) of SEBI (Substantial Acquisition of Shares and Takeovers Regulations) 1997 (hereinafter referred to as 'Takeover Regulations') with SEBI seeking exemption from making public announcement and from complying with other formalities under Chapter III of Takeover Regulations in respect of an open offer to be made under Section 10 & 12 of Takeover Regulations to the balance public shareholders pursuant to the proposed acquisition of 1,98,850 equity shares / voting rights (98.73%) from the promoters of BFSL @ Rs. 2400 per equity share. The remaining 2550 shares amounting to 1.27 % shares of BFSL were held only by 26 public shareholders.
1.13 As recommended by the Takeover Panel under Regulation 4 of Takeover Regulations, by an order dated June 29, 2005, SEBI exempted the acquirer DLF from complying with the provisions of Regulation 14, 15,16 and 18 of Takeover Regulations with regard to the proposed offer to 26 public shareholders for the acquisition of 2550 shares.
1.14 On scrutiny of the trading history of the shares of BFSL listed on BgSE, it was observed that the shares were highly illiquid and was last traded 17 years back in 1988 @ Rs. 5/- per share on BgSE. DLF, acquired 98.73% of the shares of BFSL from the promoters of BFSL by executing the transactions not on BgSE on which the shares were listed, but on MSEA, where the shares were not listed but was hurriedly allowed to be traded in permitted category using the services of a broker of MSEA.
1.15 It was also observed that the shares was allowed to be traded in the permitted category on the platform of the exchange by OED of MSEA in contravention of the conditions of renewal of recognition and also without approval of the COM in violation of the relevant Bye-Laws of MSEA and therefore it was considered to be illegal trading 1.16 The concatenation of events when seen together suggested deviousness in the whole set of transactions and led to the prima facie conclusion that the acquirer DLF and the sellers/promoters consciously and with pre meditated design chose to execute the trades on MSEA, with a view to avoiding regulatory attention and scrutiny. It also appeared that there was a tacit understanding between the acquirer, the promoters and the broker to facilitate the trades on the stock exchange illegally. From the facts available, it was also observed that but for the active connivance of the OED of MSEA the trading in question would not have been possible.
2. AD INTERIM EX-PARTE ORDER 2.1 In view of the aforesaid facts and circumstances an ad-interim ex-parte order dated August 19, 2005 was passed under Section 12A of Securities Contract Regulations Act (SCRA), 11(4) and Section 11B read with Section 19 of SEBI Act of SEBI Act and Section 19 of Depositories Act, 1996 to the following effect:-
i) The shares of BFSL lying with Central Depositories Services (I) Limited (CDSL) in demat form were impounded till further orders. CDSL was also directed not to permit any transfers in the shares of BFSL till further orders.
ii) The transactions in the scrip of BFSL were suspended on BgSE and any other stock exchange until further orders.
iii) The acquirer (DLF) was prohibited from dealing in the scrip of BFSL so long as the above directions are in force.
iv) The sellers i.e. promoters in this case namely Shri Satyanarayan Agarwa, Shri Viveek Agrawal, Smt. Umah Agrawal, Shri Siddhartha Agrawal, Shri Satyanarayana Vivek Kumar HUF, M/s. Prabhu Securities Ltd., M/s. Bhoruka Engineering Ind. Ltd. were directed to deposit the proceeds of these transactions in an escrow account with a nationalized bank opened exclusively for this purpose. They were further directed to take prior approval of SEBI for dealing in this account.
v) OED was suspended from acting as an OED or in any capacity in MSEA or in any institution related with the securities market, till further orders.
vi) MSEA was directed not to assist, regulate or control the dealings in securities in any manner whatsoever until further directions or pending completion of final proceedings whichever is earlier.
2.2 As it was subsequently noticed that one more promoter/seller of BFSL M/s Pragya Enterprises, a partnership firm and part of the promoter group of BFSL and its partners namely Smt. Umah Agarwal, Shri Vivek Agarewal and Shri Satyanarayan Agarwal were not covered under order dt. August 19, 2005, vide another ex-parte interim order dated August 24, 2005 passed under Section 11B read with 11(4) of SEBI Act, 1992 they were also directed to deposit the proceeds of these transactions in the scrip of BFSL in an escrow account with a nationalized bank opened exclusively for this purpose and they were further directed to take prior approval of SEBI for dealing in this account.
2.3 In the interim orders, it was mentioned that any person aggrieved by these interim ex-parte orders may approach SEBI within 30 days from the orders showing cause for reconsideration of the directions.
3. RESPONSE OF THE ENTITIES PURSUANT TO THE INTERIM ORDER:
3.1 Pursuant to the interim orders dated August 19, 2005 & August 24, 2005, the entities i.e. DLF (acquirers), promoters/sellers of BFSL, BFSL, broker and OED submitted their responses vide their letters dated September 3, 2005, September 9, 2005, September 12, 2005, September 14, 2005 and September 16, 2005 respectively.
4. PERSONAL HEARING:
4.1 As requested by the entities and in adherence to the principles of natural justice, personal hearing was granted to the promoters/sellers of BFSL, BFSL and DLF on October 18, 2005. Personal hearing was also granted to the broker and OED on October 19, 2005. In the course of hearing all of them made oral submissions and as requested by them, they were given time to file their written submissions also.
5. SUBMISSIONS:
5.1 The gist of the submissions made by the entities pursuant to the interim orders, during the personal hearing and in their written submission can be broadly summarized as under :
5.1.1 DLF Commercial Developers Ltd. (Acquirer) During the oral submissions as well as vide its pre and post hearing written submissions dt. September 03, 2005 and October 24, 2005 respectively, while denying all the allegations made against them in the interim order dt. August 19, 2005, DLF interalia submitted as under:
a) Pursuant to DLF's proposal to acquire 98.73% equity shares of BFSL, DLF had made an application dt October 30, 2004 to SEBI seeking exemption under Regulation 3(1)(i) read with Regulation 4(2) of SEBI (Substantial Acquisition Of Shares and Takeovers) Regulations 1997 (Takeover Regulations) from compliance of the provisions of the Regulations of 10 and 12 of the Takeover Regulations and other formalities required to be complied with respect to making public announcement etc. As per the negotiations with the promoters of BFSL the price per share was fixed @ Rs 2400/-per share. It was also mentioned in the said application that as BFSL has only 26 public shareholders, they can be reached individually by way of issuing registered acknowledgement letters and no purpose would be served by making a public announcement/public offer.
b) SEBI eventually granted exemption to DLF under Takeover Regulations vide its order dt. June 29, 2005. Since a period of eight months had elapsed from the date of the exemption application which followed the earlier negotiations between DLF and the Sellers, the promoters of BFSL were no longer willing to sell the shares of BFSL at the same price and wanted to negotiate at a higher price. In the interest of not losing the transaction, DLF's Board of Directors in their meeting held on July 11, 2005 inter alia decided to acquire the shares from the promoters of BFSL @ Rs.4490/- per equity share. The said proposal was also placed before the shareholders in the Extra Ordinary General Meeting of the company held on July 18, 2005, which was approved by them by passing a special resolution.
c) DLF entered into a Share Purchase Agreement (SPA) dated July 28, 2005 with the promoters of BFSL for the purchase of 98.73% shares at the re-negotiated price @ Rs 4,490/- per share.
d) With regard to the issue of recognition and breakdown of internal administration of MSEA, it was submitted on behalf of DLF that these matters are between MSEA and SEBI and DLF being third party was entitled to assume that MSEA was acting within its authority and cannot be held liable for disputes between MSEA and SEBI particularly when SEBI's official website continues to carry MSEA's name with a list of other recognized stock exchanges. DLF carried out the transactions through a SEBI registered broker and at no point of time did MSEA bring to DLF's notice that it had not complied with the conditions of renewal of recognition as imposed by SEBI.
e) It was further submitted that they were informed by the promoters/sellers of BFSL that the BgSE was not operating and that the shares of BFSL could not be traded on BgSE. Therefore, on the insistence of the sellers it was decided to execute the trades on MSEA through a designated broker. It was further submitted that the acquirers were totally unaware of the alleged irregularities committed by MSEA and under these circumstances acquirers cannot be penalized. With regard to the transactions taking place at MSEA and not at BgSE, it was submitted that there is no legal bar in carrying out the transactions in the securities market from a place other than the registered office of the transacting entity so long as the stock exchange permits the transaction to take place on its platform. It was further submitted that at the insistence of the promoters of BFSL one of the conditions that was included in the SPA was that the consideration for the shares should be paid through a designated broker of MSEA. DLF submitted that as they were interested in acquiring the shares they bought the shares through a broker identified by the sellers in terms of SPA.
f) It was further denied that DLF was in any way acting in concert to effectuate the transfer of shares using the exchange mechanism with a view to artificially inflate the price as alleged. It was submitted that DLF had offered the renegotiated price of Rs 4,490/-per share to all the residual 26 public shareholders. Since BFSL may be delisted following the acquisition by DLF, the question of DLF using the stock exchange to inflate the price for collateral ends as alleged does not arise. Further, there is nothing in the Exemption Order that prohibits the Acquirer from offering an even higher price to the seller provided the public shareholders should have been offered the same price which has been done in the instant case. DLF further pleaded that it was unnecessarily being dragged in the controversy for no fault of its own and as such it had not gained anything from the transactions in question.
5.1.2 PROMOTERS / SELLERS OF BFSL:
During the oral submissions as well as vide their pre and post hearing written submissions dt. September 09 2005 and October 26, 2005 respectively, while denying all the allegations made against them in the interim orders dt. August 19, 2005 and August 24, 2005, erstwhile promoters/sellers of BFSL interalia submitted as under:
a) The transaction in question is the sale of shares by the promoters of BFSL to DLF. No member of the public is concerned with these transactions and nobody has made any grievance with regard to these transactions. If at all any person can lay a claim to the sale proceeds, it is DLF. However DLF is not interested in making any such claim and on the contrary has no objection to the promoters retaining and appropriating the said amount. The sale proceeds are not required for any other purpose as no other member of the public has been affected by the transaction. There is no power in SEBI to forfeit the sale proceeds and therefore, in the circumstances the directions to the promoters to deposit the sale proceeds in an escrow account is wholly unwarranted.
b) With regard to the trading on the MSEA, it was submitted that the promoters of BFSL cannot be penalized for alleged default of MSEA if it had permitted trading contrary to the terms and conditions of its recognition. It was further submitted that the promoters believed the representation of the broker that MSEA was likely to resume operation in the near future and that transactions could be executed on MSEA. On July 27, 2005 MSEA had issued a notification stating that it was intended to resume trading activities in a few days. It was further submitted that MSEA is shown as a recognized stock exchange on the SEBI website. In these circumstances the promoters cannot be blamed for being unaware of the alleged violations by MSEA.
c) It was also submitted that in past SEBI itself had considered trading on MSEA not a very serious matter even though MSEA did not comply with the conditions of renewal of recognition. They further submitted that it appears that MSEA allowed the instant transactions on the basis that SEBI, as in the past, would condone the action and not resort to any punitive measure.
d) It was further submitted that as the trading was not possible on the BgSE and since the scrip of BFSL was not listed on any other stock exchange, on the representation of the broker to the effect that it was possible to trade on MSEA in the permitted category, it was decided to execute the trades on MSEA. It was further submitted that the promoters were totally unaware of the alleged irregularities committed by MSEA and under these circumstances promoters cannot be penalized.
e) Regarding price difference, it was submitted that due to enormous time lag between the earlier discussions on the sale price and the passing of the Exemption Order by SEBI, the price was renegotiated and was increased from Rs.2,400/- to Rs.4,490/- per share which was agreed to by the seller and the acquirer. The public shareholders were also offered the same price and as such no prejudice was caused to any person/investor. It was further submitted that once SEBI approved a price of Rs.2,400/-per share there could be no objection to selling the shares at a higher price. Even the Takeover Regulations provide for a minimum price and not the maximum so long as the public shareholders are offered the same price. In the circumstances this is merely technicality which does not warrant any action whatsoever particularly because this is beneficial to the public shareholders.
5.1.3 BHORUKA FINANCIAL SERVICES LTD. (BFSL) Pursuant to the interim order dated August 19, 2005, SEBI received a reply dated September 12, 2005 from BFSL, the target company. During the course of personal hearing BFSL was represented by the representatives of DLF which has now become the holding company of BFSL. After the personal hearing a common written submission dated October 24, 2005 was filed on behalf of BFSL and DLF wherein without adding anything further, the written submissions vide letter dt. September 12, 2005 were reiterated on behalf of BFSL. The submissions on behalf of BFSL may be summarized as under:
a) The impugned order was passed by SEBI without giving any finding against the company and the trading in the scrip has been suspended without alleging any charge or allegation against it.
b) The securities of the company were admitted and dematerialized on July 19, 2005 as applied for on September 23, 2004 and not on July 13, 2005 as stated in the impugned order. Further it was submitted that dematerialization by CDSL had got nothing to do with the passing of the exemption order on June 29, 2005 by SEBI since dematerialization was done by CDSL pursuant to the application dated September 23, 2004 and execution of Tripartite Agreement entered into between CDSL, Kirloskar Computers Services Ltd. (RTA) and them on February 8, 2005 and after following its procedure. It is not SEBI's case that the dematerialization was improper in any manner to hold the company liable to face adverse action.
c) As per the conditions stipulated by SEBI in its exemption order dated June 29, 2005 "that a special resolution shall be passed by the shareholders of the target company approving change in control and management of the target company", the Company had issued Notice dated July 18, 2005 to its shareholders setting out in detail, interalia, the factual position pertaining to the proposed acquisition of 98.73% shares by DLF from the promoters of the company. Further the copy of the said Notice with Explanatory statement was forwarded to BgSE also.
d) In terms of the impugned order, the shares to the extent of 98.73% have already been impounded. In such a case, the direction of suspending of trading in the scrip of the company at this juncture become meaningless since the balance 26 public shareholders are holding 1.27% shares and it is the finding in the order that their scrip has not been traded for past 17 years. Therefore, 98.73% shares have already been impounded and for the remaining 1.27% shares, lying with the 26 public shareholders of the company, letters of offer have already been sent by DLF. It was further submitted that pursuant to the exemption order dated June 29, 2005, no shares remained to be traded on the stock exchange and therefore the impugned order needs to be withdrawn forthwith.
5.1.4 RAJAT SHARES AND STOCK BROKERS PVT. LTD. (Broker) 5.1.4.1 The broker submitted its response to the interim order dt. August 19, 2005 vide letter dated September 14, 2005. Pursuant to the personal hearing dt. October 19, 2005 the broker submitted its written submissions as well vide its letter dt. November 05, 2005. The gist of the submissions made by the broker is as under :
a) SEBI suo motto passed the impugned ex-parte order even though there was no complaint from any shareholders, investor or public against the trading in BFSL which took place after meeting all the legal requirements and procedures as required by SEBI. Further, SEBI had not issued any Public Notice declaring that MSEA cannot commence trading. During the financial year 2001-02 the trading was to the tune of Rs.1.12 lacs and in 2002-03 to the tune of Rs.18.27 lacs and in the year 2003-04 to the tune of Rs.13.26 lacs. SEBI never declared these trading to be illegal although according to SEBI, MSEA failed to fulfill the conditions which were essential for effecting the renewal of recognition granted by SEBI from time to time. The trading of MSEA during the trading period in the year 2005-06 was to the tune of Rs.109.71 crore in which trading by the broker was to the tune of Rs.89 crore (approx.) and not Rs.108.87 crore as alleged. SEBI did not choose to declare any other trading conducted during the said period as illegal except the trading done by it.
b) In the absence of any such notice from SEBI and Notification dated July 27, 2005 issued by the OED of MSEA communicating that MSEA was likely to resume trading shortly, it was presumed that MSEA is acting legally. Even on the website of SEBI, MSEA has not been shown to be a disqualified exchange and people are bound to believe MSEA to be a stock exchange duly recognized by SEBI.
c) The earlier negotiated price informed to SEBI in October 2004 was renegotiated in view of time lapse and change in valuation of the target company and the new price of Rs.4,490 was agreed to by both the parties. In this case the minority shareholders were also offered the increased negotiated price of Rs.4,490/- instead of Rs.2,400/- and this is in strict compliance of Takeover Regulations rather than violation thereof as alleged in the order.
d) Regarding allegations of not following KYC criteria, it was claimed that the said charge is false and it was submitted that during the inspections conducted by SEBI officials on August 19, 2005 no such query regarding KYC was raised. The impugned order did not take note of the fact that the inspecting team of SEBI inspected the books of accounts and documents of it only on August 19, 2005. The very same day the ex-parte order was passed without even referring to such inspection.
e) It had requested the OED of MSEA vide letter dated August 1, 2005 to permit trading in the scrip of BFSL as per the re-negotiated price of Rs.4,490/- per share and OED permitted trading in the said scrip w.e.f. August 1, 2005 in the permitted category. It was admitted by Shri Bimal Kumar Agarwal during the said hearing that he is one of the member of COM of MSEA.
5.1.4.2 During the course of personal hearing dt. October 19, 2005 the statement of Shri Bimal Kumar Agarwal, the director of the broker was recorded wherein he submitted as under :
a) Trading was actually executed on MSEA and it was not the case of reported transactions to the exchange. It has paid connectivity, activating charges etc. and also paid BMC as well as additional BMC to start trading in MSEA and the exchange activated its terminal on August 1, 2005.
b) The representatives of both sellers and buyers namely Shri Siddhartha Agarwal from seller group and Shri G Kannan from the buyer group visited their office in the first week of July, 2005. Shri Kannan the representative of DLF, the buyer was introduced to broker by Shri Siddhartha Agarwal from the seller group.
c) Shri Siddartha Agarwal is the son of Shri S.N. Agarwal who is the co-brother of his maternal uncle and is known to him for last 20 years.
d) It was admitted that only one seller i.e. Shri. Siddhartha Agarwal met him and signed the KYC form and the agreement in Patna whereas the remaining sellers executed the forms and agreements in Bangalore where the broker was not present. Nonetheless the broker was satisfied with the proof submitted by them and executed the trades as per their instructions.
5.1.4.3 As directed during the hearing, The broker subsequently submitted Daily Transaction Report/Sauda Book, Pay-in/Pay-out obligation (furnished by MSEA), and other documents in support of his contention that trading in the scrip of BFSL was executed on the trading system of MSEA.
5.1.5 Officiating Executive Director (OED) OF MSEA The OED submitted his response to the interim order dt. August 19, 2005 vide letter dated September 16, 2005. The submissions made in his aforesaid reply as well as personal hearing are summarized as under :
a) The renewal of recognition of MSEA was for a period of 3 years from 11.12.2000 without any condition and the trading was allowed to continue in MSEA without creation of Settlement Guarantee Fund (SGF). After completion of 3 year period it was again renewed for a period of one year from December 11, 2003 with three conditions. Even during this renewed period without setting of SGF the trading was allowed to be conducted in MSEA. In the similar situation with similar conditions the renewal of recognition was granted again from December 11, 2004 to December 10, 2005. Trading was also done in the exchange during December 11, 2003 to December 10, 2004 in the full knowledge and tacit approval of SEBI even without receiving any formal proposal for setting up of SGF from MSEA. With concerted effort during the current period of renewal a concrete proposal for setting up of SGF was made and all queries raised by SEBI from time to time regarding the same were answered promptly and with presumption of approval and in good faith trading was allowed in the larger interest of investors.
b) A scrip which is listed in any other stock exchange can be allowed to be traded in MSEA in the permitted category and as such there was nothing wrong in allowing trading of BFSL in the permitted category. Further the share was being traded by a member stock broker who has fulfilled all the required criteria and the said buy and sale between the sellers and acquirers was in conformity with the order dated June 29, 2005 of SEBI as well as Regulation 25 and 26 of the Takeover Regulations.
c) There was no direction or mention for stopping of trading of shares in the communication from SEBI. In fact, after COM Meeting in the late evening on August 12, 2005 intimation to this effect was received and trading was suspended vide Notification dated August 16, 2005, August 13, 14, 15 of 2005 being holidays.
d) As all the requirements for setting up of SGF were complied with and the members/stock brokers and investors were anxious to commence trading, which was also in the interest of MSEA to address its financial needs, he had sent a letter to General Manager, SEBI on 7.7.2005 requesting SEBI to allow the trading in the exchange. SEBI was also assured that there will be no default in pay out pursuant to the said trading. It was submitted that as no response to this letter was received form SEBI, it was presumed that the proposal of MSEA for setting up of SGF would be considered favorably.
e) Though a formal meeting of COM was not held, but the proposal to commence trading was duly considered by the members of the COM. The notice circulated in this regard dated July 27, 2005 for commencement of trading bears signature of four members of the COM. Transactions in BFSL were pre-negotiated deals between the acquirers and the sellers/promote rs which were internalized inhouse by the broker. The stock exchange or its clearing house was not concerned and involved in settlement obligations. No clearing and settlement of money and shares were routed through the stock exchange. The broker used the Exchange's computer system for the purpose of reporting and not for trading. Therefore, by no stretch of imagination it can be said that trading took place on the system of the exchange.
6. CONSIDERATION OF ISSUES AND FINDINGS:
6.1 I have carefully considered the facts of the case, the responses received pursuant to the interim orders, oral as well as written submissions made on behalf of the entities mentioned above. The issues for consideration that arise are whether the sellers who are also the promoters of BFSL, DLF the acquirer, the broker and OED acted in cahoots in order to avoid the scrutiny of SEBI for some immediate or collateral ends in the transaction of shares of BFSL, and whether the trading of the shares of BFSL on MSEA was illegal or not and whether the due processes necessary for transacting business on MSEA were followed in full compliance with the conditions of renewal of recognition.
6.2 I note that nobody has denied that the trading in the shares of BFSL, listed on BgSE took place through a common broker at MSEA in the permitted category at a price of Rs. 4490 per share. However, the entities contest that there has been no violation of SEBI Act, Takeover Regulations or SCRA.
6.3 In order to address various issues raised by different parties, it would be appropriate to appraise the basic tell tale strands of the case on the basis of an analysis of the facts of the case coming into reckoning so far in the course of post ex-parte interim order dt. August 19, 2005 and August 24, 2005.
a) I note that almost all the entities have contended that MSEA did not inform them regarding their non-compliance of the condition of renewal of registration and therefore they were entitled to assume that MSEA is authorized for trading. In this regard it is pertinent to mention here that the Notification granting conditional renewal of the recognition to MSEA was published in the Gazette of India on December 10, 2004, which is a public document and therefore plea of ignorance of knowledge available in public domain is of no avail.
b) As regards submissions that earlier also the recognition of MSEA was renewed and trading had taken place without the establishment of SGF, I note that renewal in the year 2000 was for a period of 3 years and was without any condition. Therefore, the trading during the said period can not be said to be in violation of condition of recognition. The said recognition was renewed with effect from December 11, 2003 interalia with the specific condition that the trading shall commence only after setting up of the Settlement Guarantee Fund, duly approved by SEBI. In-spite of this specific condition, trading to the tune of Rs.13.26 lakhs took place in MSEA during 2003-2004, in violation of the condition of renewal of recognition. As stated earlier, though MSEA was not legally permitted to conduct such trades, it was counseled and SEBI gave one more opportunity to MSEA to rectify themselves and comply with the conditions of the recognition especially taking into account the interest of investors in that region. Therefore, it is incorrect to suggest that trading done in previous years was with tacit approval of SEBI. In any case, it is well settled that illegality can not be allowed to be perpetuated on the strength of precedents and no equal treatment can be claimed for the violation of the law.
c) Similarly, both the sellers as well as buyers tried to justify the trades done illegally and in violation of the conditions of renewal of recognition of MSEA by claiming that the trading was not possible at BgSE where the scrip is listed. In this regard I have noted that on specific enquires made by SEBI, BgSE vide its letter dated August 19, 2005 has informed that the trading platform of BgSE is kept open for trading by the members of the exchange and as such no enquiry regarding trading of the shares of BFSL was made by any person including the buyer or seller herein and as such the exchange has not refused resumption of trading in this scrip. This clarification supports my observation made in the order dt. August 19, 2005 that it is beyond anybody's comprehension as to why persons of Bangalore and Delhi go all the way to Patna to execute trades in a scrip which is not listed on MSEA and that there was apparently a tacit understanding between the acquirer, the promoters and a member of MSEA to hurriedly facilitate the trades on MSEA illegally. It further confirms SEBI's apprehension that the acquirer DLF and the seller, the promoters of BFSL consciously and with pre mediated design chose to execute the collusive transactions on MSEA in Patna through a broker of MSEA who happen to be a relative of sellers, with a view to avoiding regulatory attention and scrutiny.
d) Further COM of MSEA vide its letter dt. October 05, 2005 and November 03, 2005 clarified in no uncertain terms that the trades were conducted in violation of the relevant bye-law of MSEA, without its approval and authorization.
e) As regards the contention that SEBI did not declare other trading conducted during the said period as illegal, I wish to put the record straight by mentioning that SEBI is indeed looking into the matter and after preliminary investigations and enquiries, it has decided to conduct a full fledged investigation and vide its order dated December 05, 2005 has initiated formal investigations into the affairs of the illegal trading conducted on MSEA between August 01, 2005 and August 12, 2005 in violation of the provisions of SCRA, and conditions of renewal of recognition as notified in official Gazatte Notification No. SO1354(E) dated December 06, 2004.
Now I shall deal with other issues as under :
6.3.1 Validity of the trades
a) One of the key issues that needs to be settled is whether the trades done on the system of MSEA in violation of the conditions of renewal of recognition could be considered as legal or not. Considering the fact that the trades could have been executed on the system of MSEA only after the system has been opened for trading after complying with the conditions of renewal of recognition, it was not open to MSEA, under the SEBI notification for renewal of recognition, to commence trading without complying with the conditions of renewal of recognition. The presumption of approval as claimed by OED is highly objectionable in as much as no presumption can be drawn in this regard in view of the specific condition in the renewal that the trading shall commence only after setting up of SGF. The proposal of MSEA was in active consideration of SEBI and in the absence of categorical approval, it was not open of MSEA or its OED to presume the approval which was never granted. In any case it is obvious that the stock exchange mechanism of MSEA has been illegally used and that the stock exchange had facilitated the trading in the scrip of BFSL illegally in violation of Sections 13 and 19 of Securities Contracts (Regulation) Act, 1956. It is also in violation of the Notification dated December 06, 2004 granting renewal subject to conditions. Further, BFSL was allowed to be traded in permitted category without approval of COM. Therefore, MSEA has acted illegally as a stock exchange without having proper recognition. Hence the trades of BFSL on MSEA cannot be construed as transactions on a recognized stock exchange or through members of recognized stock exchange with all attendant consequences under various laws of the country.
6.3.2 DLF Commercial Developers Ltd. (Acquirer):
a) As stated above, DLF in an air of injured innocence has sought to make out a case as if it was unnecessarily being dragged in the controversy for none of their fault. In this regard I wish to state that the manner of easy acquiescence on the part of DLF as brought out supra and hereinunder, in going about the transactions as a cosy deal clearly indicates their complicity.
b) Applying the widely quoted legal maxim " res ipsa loquitur" which means the thing speaks for itself, it can be well demonstrated that DLF was as much involved in whole set of transactions as anybody else. It taxes one's credence to believe that a big company belonging to a large corporate group of DLF dealing in property business, did not even exercise basic due diligence before going ahead with the trades in question. They are neither the laity nor the greenhorns and being a substantially big player in the property business, they, as their normal wont must be doing the basic exercise of verifying the title of the property and must be confirming, before entering into the deals as to whether a property is free from all encumbrances or not. Therefore, it is but natural to expect of them to do a thorough "due diligence" about the manner in which the transaction was going to be effectuated. It cannot be accepted that a group like DLF would be naïve and credulous enough to blindly comply with the wishes of the sellers without doing their own due diligence and in any way it does not make commercial sense.
c) Further, as DLF was supposed to acquire as much as 98.73% of shares of BFSL, it was a privy to contract with the promoters of BFSL and was aware of the modalities of execution of the contract ad-idem as the seller. In that view, they cannot therefore distance themselves from the gamut of the course of the contract in the vicissitudes of its execution by performing an ostrich trick coupled Hon'ble apex court while dealing with the burden of proof on the custom department who was pressing the charge of smuggling, observed as under :
with the protestation that MSEA did not inform them about their non compliance of the conditions of the renewal of recognition.
d) As noted earlier, no enquiry of any sort was made with the BgSE by either of the parties at its platform. Also, it is a matter of record that the exchange has not refused resumption of trading in this scrip. Therefore, the argument of DLF that it was not possible to trade the said shares on BgSE does not hold water, besides being misleading. It was very much open to the buyer and sellers to execute the trades on the trading platform of BgSE. Besides they could have also traded on spot basis.
e) Equally, their plea that they were not aware about the conditions of renewal of recognition of the exchange smacks of a feint in the attendant circumstances of the case especially in view of the order of renewal of recognition notified in the Official Gazette of India, ignorance of which is of no avail.
f) Though it is submitted on behalf of DLF that at the insistence of the promoters of BFSL, the conditions for paying consideration for the shares through a designated broker of MSEA was included in SPA, as the sequence of events have later unfolded, it is noted that though SPA was entered into on July 28, 2005, the representative of DLF Shri Kannan had already visited the office of the broker in the first week of July 2005 along with Shri Siddhartha Agarwal from the seller group. This establishes that at every stage, DLF was not only aware of modalities of the proposed trades but was active party to the said transactions.
g) Though as per the settled legal position normally the burden of proof so far as their acquaintance in the whole set of illegal transactions is on who alleges.
However it has been held by different courts time and again that it is not always possible to prove the guilt with mathematical precision and therefore probability plays a great role. It would be pertinent to refer to the decision of the Hon'ble Supreme Court in CIT v. D Bhoormull , wherein the " ...the burden of proving that the goods are smuggled goods, is on the Department. This is a fundamental rule relating to proof in all criminal and quasi-criminal proceedings, where there is no statutory provision to the contrary. But in appreciating its scope and the nature of the onus cast by it, we must pay due regard to other kindred principles, no less fundamental, of universal application. One of them is that the prosecution or the Department is not required to prove its case with mathematical precision to a demonstrable degree; for, in all human affairs absolute certainty is a myth, and as Prof. Brett felicitously puts it- "attexactness is a fake". El Dorado of absolute proof being unattainable, the law, accepts for it, probability as a working substitute in this work-a-day world. The law does not require the prosecution to prove the impossible. All that it requires is the establishment of such a degree of probability that a prudent man, on its basis, believe in the existence of the fact in issue. This legal proof is not necessarily perfect proof often it is nothing more than a prudent man's estimate as to the probabilities of the case....
...It will only alleviate that burden to discharge which very slight evidence may suffice."
h) Applying the aforesaid observations made in criminal proceedings, to the present quasi judicial proceedings which admittedly do not require to prove the case with as much precision as is required in criminal case, I, in the facts and circumstances of the case as discussed hereinabove, am of the view that the assertion of DLF that they did not know anything and agreed to trade in MSEA only on the insistence of the sellers is merely a pretence which can not be brooked and in fact and accordingly hold that DLF acted in cahoots with sellers, broker and OED of the exchange to execute the illegal trades at MSEA with full knowledge.
6.3.3 Bhoruka Financial Services Ltd. (BFSL)
a) From the reply of BFSL, I note that the company has complied with the conditions of the exemption order of SEBI and had issued notice to its shareholders setting out in detail, interalia, the factual position pertaining to the proposed acquisition of 98.73% shares by DLF. I also accept the factual submission of the company that it had applied for dematerialization on September 23, 2004 and not on July 13, 2005 as mentioned in the impugned order. However, the submission of BFSL that the direction of suspension of trading at this juncture has become meaningless, is not acceptable in as much as the trades executed in MSEA are illegal and therefore it is in the interest of justice to continue the interim order dt. August 19, 2005 till the completion of the investigations.
6.3.4 Promoters/sellers of BFSL
a) Regarding submission of promoters of BFSL that because MSEA did not bring to their notice that it had not complied with the conditions of renewal of recognition they were entitled to assume that MSEA is authorized for trading, at the cost of repetition, it is reiterated that plea of ignorance of knowledge available in public domain is of no avail. Further, there is enough material on record to show that they had access to all the inside information of MSEA through their chosen broker who was not only a member of COM of MSEA but their relative as well.
It is because of this contact, the entire modus operandi as planned could be executed on MSEA on a very mendacious plea that no trades was possible on BgSE.
b) It is again a misconception that SEBI had condoned the similar violation in past. In fact, as stated hereinabove, SEBI instead had taken serious note of the violation by MSEA but on the categorical undertaking given by MSEA to fully comply with all the requirements of SEBI and keeping in view the needs of the investors in that region, had decided to give one more opportunity to MSEA to comply with the conditions of renewal of recognition before renewing the recognition of the exchange. Again it is reiterated that even otherwise, illegality can not be allowed to be perpetuated on the strength of precedents and no equal treatment can be claimed for violation of law.
c) As observed earlier, by cleverly paltering with the facts, they submitted in their written reply as well as during the personal hearing dated October 18, 2005, that trading was conducted on MSEA as the same was not possible on BgSE. This is purely a self serving assertion devoid of any truth as in light of the letter dt. August 19, 2005 of BgSE, it is crystal clear that they could have, if chosen, traded on BgSE. They could have also traded on spot basis. Shifting of trades to MSEA reflects their undisclosed devious intent for putting through the entire scheme of operation in a far flung exchange wherein the trading was not allowed, definitely for collateral purposes sought to be kept under the wraps.
d) The catena of facts and circumstances under which the sellers chose to sell the shares on the trading system of MSEA, where the shares were unauthorizedly allowed in the permitted category and that too only on August 01, 2005 when trading purportedly commenced even when the shares continued to remain listed on BgSE, compounded with the fact that the trading was executed on MSEA when the buyers and sellers hailing from Delhi and Bangalore respectively had the freedom of entering into spot transactions shows that there was an element of premeditated design and deliberation in the scheme devised meticulously by the parties. It takes abject naïveté and total suspension of disbelief to accept the contention of the seller that they were not aware of the status of MSEA at that point of time. I also observe from the facts of the case that the sellers were interested to route the whole transactions at the trading platform of MSEA through a common broker of MSEA who happened to be a relative of the sellers, besides being a member of COM with all the access to inside information or development for leveraging the trades, on the sly.
e) I, further note that the promoters/sellers of BFSL had chosen not to comply deliberately with the directions issued vide interim orders dt. August 19, 2005 and August 24, 2005 and not to deposit the proceeds of the transactions in an escrow account with a nationalized bank opened exclusively for this purpose, as directed by SEBI. Indeed they even failed to inform SEBI about their non compliance and did nothing except for forwarding their reply dated September 09, 2005. The noncompliance of the order was not informed even during the hearing. It is only towards the end of their submissions, and only upon enquiry by me it was submitted by their representatives that they were yet to comply with the interim orders. To cover-up their non-compliance, the sellers subsequent to the hearing vide their letter dt. October 24, 2005 sought certain clarification from SEBI purportedly to comply with the interim orders dt. August 19, 2005 and August 24, 2005. Even at this stage they have cussedly and egregiously defaulted in complying with the directions passed by a regulator and in their letter dated October 24, 2005, instead of promising to deposit the whole proceeds of the transactions in question to the tune of approximately Rs.89 crore, they offered to deposit only the amount that was in balance in the bank accounts on the date of receipt of the order (Rs 6.15 crore), out of the consideration amount of approximately Rs. 89 crore received from DLF. By not complying with the directions of SEBI so long and by not making a clean breast of the same in the written submissions had there been certain genuine difficulty in compliance, their belated query is purely an after thought and a specious ploy to beguile their non compliance.
f) It is pertinent to mention here that under Section 11(4) of SEBI Act, SEBI is empowered to take any of the measures mentioned therein, either pending investigation or inquiry or on completion of such investigation or inquiry. As per Section 11(4) (d), these measures also include impounding and retaining of proceeds or securities in respect of any transaction which is under investigation. When SEBI was alerted on the unauthorized trades being conducted on the system of MSEA, it immediately started enquiring and investigating as to the correct facts and immediately dispatched its inspection team to MSEA at Patna which inspected the books of accounts, other relevant documents and also recorded the statement of the concerned broker. As the entire gamut of transactions gave a prima-facie belief of deviousness, SEBI passed the interim order to ensure that no irreparable loss or injury be caused to the investors and securities market pending further enquiry/investigation.
g) The directions issued to the sellers were interim in nature and would have caused no prejudice to them. They however chose not to comply with the said directions in clear defiance and disrespect to the securities market regulator. In case, they desired certain clarifications, as the case has been sought to be made out subsequently, they could have immediately approached SEBI for the clarifications instead of waiting till October 24, 2005 when the issue of non compliance was raised by me before their lawyers who were representing them. The letter dt. October 24, 2005 is a last ditch effort to shore up their tenuous position and ensure that their case does no go by default on the very critical ground of "compliance".
h) In view of the aforesaid I hold the sellers/erstwhile promoters' conduct highly objectionable and one of obdurate defiance. By their aforesaid conduct they have failed to comply with the directions of SEBI issued vide interim orders dt. August 19, 2005 and August 24, 2005 and are liable to be punished interalia under Section 15HB of the SEBI Act which provides as under:
"Penalty for contravention where no separate penalty has been provided.
15HB - Whoever fails to comply with ay provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees."
6.3. 5 Broker (M/s Rajat Shares and Stock Brokers Pvt. Ltd.)
a) At the outset, I do not accept the submission of broker that MSEA did not bring to their notice that it had not complied with the conditions of renewal of recognitions and therefore it was not entitled to permit trading on its floor. It may be noted that the Notification granting renewal of the recognition to MSEA was published in the Gazette of India on December 10, 2004, which is in the public domain and ignorance of such knowledge is of no avail. As regards earlier trades in MSEA, at the cost of repetition I wish to state that illegality can not be perpetuated on the strength of precedents.
b) I wish to mention that the broker being an intermediary in the securities market ought to have exercised due care and diligence in dealing with the transactions of BFSL. Further, Shri Bimal Kumar Agarwal, director of the broker entity is also one of the members of the COM of MSEA and thus is privy to all the developments and is fully aware of the conditions imposed by SEBI while renewing the recognition of MSEA. One of the conditions clearly set out in the notification was that trading shall commence only after setting of SGF, duly approved by SEBI. Besides, Shri Bimal Kumar Agarwal is a signatory of the resolution dealing with the matter of setting up of SGF and explanation sought by SEBI as to why exchange allowed trading without setting up its SGF/TGF. This amply testifies his definite knowledge that the exchange could not have commenced trading before setting up of SGF, duly approved by SEBI. Further he being on the COM was aware that as per Byelaw -25 of MSEA, it is the COM and not the OED who is authorized to allow any share to be traded in the permitted category. Further, he was also aware that COM had not authorized the trading in question.
c) Therefore there cannot be a case of the broker that he was not aware about the conditions of renewal of recognition of MSEA or that MSEA commenced trading after complying with the said conditions. Being on the COM, he was very much aware that the proposal of setting of SGF by MSEA was under consideration of SEBI and as such was not approved by SEBI. The presumption of approval of SGF by SEBI as claimed by OED is not available to the broker also because SEBI had not given formal approval and COM had not deliberated or authorized the trading which took place on MSEA.
d) In the aforesaid circumstances, I am left with no option but to hold that the broker who also happens to be a member on COM of MSEA and a relative of seller was hand in glove with the OED who unauthorizedly allowed the illegal trades to be conducted on the exchange in violation of the conditions of renewal of the recognition. To that extent the broker, who is also a SEBI registered intermediary, expected more than anybody else to follow the rules of the game, was found to be facilitating the said trading which was not only in violation of section 13 and 19 of SCRA but was also in violation of the notification of SEBI renewing the recognition of the exchange. The conduct of the broker is highly egregious and his composed levity with a pose of innocence in catalyzing collusive deals on the floor is something abhorrent as it militates against the conduct expected o f him.
e) During the hearing, the Shri Bimal Kumar Agarwal, the director of the broking entity in his recorded statement, admitted that Shri S.N. Agarwal one of the seller of BFSL is the co-brother of his maternal uncle and is known to him since last 20 years. Except for Shri Siddharth Agarwal no other seller was present at Patna at the time of execution of the KYC Forms and as such all the forms were signed in Bangalore. This prima-facie does not appear to be the adequate compliance of the KYC norms. From this it appears that in addition to the aforesaid, the broker has also failed to comply with the Code of Conduct for brokers as specified in SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992 (Broker Regulations).
6.3.6 Officiating Executive Director Shri C.M. Pandey:
a) The role of the OED in allowing trading of the scrip in MSEA in unseemly haste and in total disregard of the SEBI's conditions for renewal of recognition and in complete breach of the undertaking dated December 05, 2003 signed by him is extremely material in this case. The gravity of the part played by him is further exacerbated by the fact that the resumption of trading was allowed by the OED without obtaining the mandate of the COM of MSEA as required under the byelaws of the MSEA. Though he made submissions to the effect that the notification dated July 27, 2005 of MSEA bears signatures of four members of COM to mislead SEBI as if the same was approved by them, it was seen that they, like so many other members of MSEA had merely acknowledged the receipt of the notifications circulated among the members of MSEA and it was OED who had issued said notification and thus had exceeded his powers and stepped into the shoes of the COM of MSEA without their approval. Thus, the transactions in the scrip of BFSL at MSEA would not have been possible but for the reckless, unseemly and dubious conduct on the part of OED of MSEA.
b) As stated earlier, trades in previous years can be of no help to OED to legalise his unauthorized action. With regard to the contention that the trades were not executed on the system of the exchange but were only reported to the exchange, I have perused the documents submitted by the broker including the Daily Transaction Reports/Sauda Book, Pay-in/Pay-out obligations furnished by MSEA, Daily official quotation of MSEA and other documents which clearly show that the trades in the scrip of BFSL were indeed executed on the trading system of MSEA and it was not a case of reported transaction as claimed by OED. No transaction on a stock exchange can be executed without taking recourse to the trading system of the stock exchange. Hence the plea of the OED constitutes an extravagant fib. He is a person unworthy of credence and hence totally unreliable.
c) Even while SEBI had evidences of the execution of the trades on the system of MSEA, the OED in response to a query during the hearing continued to harp on his earlier false submissions/stand. This contention is further corroborated by MSEA, which vide its letter dt. October 05, 2005 interalia submitted that the transactions took place at the floor of MSEA but the Council of Management of MSEA was not concerned (consulted) in this case. It was further stated by COM that the action of OED appears to be in undue haste and with ulterior motive as he gave the approval for trading of BFSL in the permitted category on the date of application itself and the trading also started on the same day (August 1, 2005) without any knowledge of the COM. His secretive and highly unedifying conduct is of a piece with the others in the transactions who sought to put up an elaborate edifice of make believe.
d) During the personal hearing held on October 19, 2005, OED when asked to furnish documents interalia in support of his claim that the trades were only reported and not routed through the exchange, expressed his inability and submitted that MSEA may not furnish the required documents as he was under suspension. Accordingly, SEBI sought the information/documents from MSEA. MSEA vide letter dated November 3, 2005 submitted the requisite information/documents. On the perusal of these documents, I note the relevant Bye-law 25 providing as under:
"Dealings in securities dealt in on other stock exchanges The Council of Management may in its discretion and subject to such conditions as it may deem proper permit dealings in any security or securities admitted to dealings on other stock exchanges or regularly dealt in on such stock exchanges."
e) It is clear from the above that it was only the COM and not the OED who was authorized to permit the trading in permitted category. MSEA in the said letter has categorically stated that without having any approval of the COM, the OED Shri CM Pandey had permitted trading in the scrip of BFSL. It was also submitted that in the last one year Shri Pandey had permitted trading in other scrips also without the approval of the COM. As a matter of fact COM has confirmed in no uncertain terms in their letter dated October 05, 2005 and November 03, 2005 that Shri CM Pandey had acted in undue haste and with ulterior motives to allow the trading on the exchange in violation of Sec. 13 & 19 of SCRA & SEBI notification published in Official Gazette on December 06, 2004 granting renewal of recognition. Also it emerges clearly from the above said letters that OED bypassed the COM and acted beyond his powers by issuing the notification dt. July 27, 2005 and by allowing trades on the exchange on the same day when the application was made for trading of BFSL without approval of COM of MSEA. This was a grave misconduct on the part of Shri C M Pandey. Considering the sensitivity of the securities market transactions and the possible impact of such activities of OED on the investors in general and market in particular, it is imperative and in the interest of justice to prevent him from causing any further loss to the market as well as the confidence of the small investors in the system. By his aforesaid misconduct, Shri Pandey does not deserve to hold any responsible position in the market place to jeopardise the interest of investors, less, to continue as OED of an exchange.
6.3.76 Magadh Stock Exchange Association (MSEA):
In view of the facts and circumstances mentioned above, I conclude that MSEA failed to ensure that no trading takes place without complying with the condition of renewal of recognition. The illegal trading in violation of Sections 13 and 19 of SCRA has taken place at MSEA with the approval of its OED who was not competent to approve such trading. To that extent I find that MSEA was not vigilant enough to avoid such occurrence and it is highly unfortunate.
7. ORDER 7.1 Thus, on the conspectus of the facts and the material attendant circumstances, I, in exercise of powers conferred upon me under Section 12A of SCRA, Section 11, 11 (4), 11B read with Section 15HB and 19 of SEBI Act issue further directions as under :
(A) The ex-parte interim orders dated August 19, 2005 and August 24, 2005 so far as they relate to the acquirers/buyers M/s DLF commercial Developers Ltd.; the target company M/s Bhoruka Financial Services Ltd.; sellers/promoters of BFSL namely Shri Satyanarayan Agarwa l, Shri Viveek Agrawal, Smt. Umah Agrawal, Shri Siddhartha Agrawal, Shri Satyanarayana-Vivek Kumar HUF, M/s. Prabhu Securities Ltd., M/s. Bhoruka Engineering Ind. Ltd., M/s Pragya Enterprises and its partners namely Smt. Umah Agarwal, Shri Vivek Agarwal & Shri Satyanarayan Agarwal; the depository M/s Central Depositories Services (I) Limited, the broker M/s Rajat Share & Stock Brokers Pvt. Ltd and Magadh Stock Exchange Association shall remain in force till further orders which SEBI may pass on conclusion of the investigation proceedings referred hereinabove.
(B) In light of the serious findings against Shri C M Pandey, Officiating Executive Director as recorded hereinabove, MSEA is directed to initiate disciplinary proceedings against Shri C.M. Pandey as per the applicable laws for imposing major penalty. MSEA is further directed that till the completion of the disciplinary proceedings of MSEA and pending SEBI investigations, Shri C.M. Pandey shall not be allowed to perform any function which has any bearing on the securities market, or with any institution connected with the securities market.
(C) In view of non-compliance of the interim orders dt. August 19, 2005 and August 24, 2005 by the sellers/promoters of BFSL, Adjudication Proceedings u/s-15HB of SEBI Act, 1992 be initiated against the sellers namely, Shri Satyanarayan Agarwal, Shri Viveek Agarwal, Smt. Umah Agarwal, Shri Siddhartha Agarwal, Satyanarayanan-Vivek Kumar HUF, M/s. Prabhu Securities Ltd., M/s. Bhorukha Engineering Ind. Ltd., M/s. Pragya Enterprises and its partners viz. Smt. Umah Agarwal, Shri Viveek Agarwal and Shri Satyanarayan Agarwal.
The order appointing Adjudicating Officer is being passed separately advising Adjudicating Officer to proceed in the matter independently without getting influenced with the observations/findings made hereinabove.
7.2 These directions shall come into force with immediate effect.