Securities Appellate Tribunal
In Re: Tulsi D. Bhayana vs Unknown on 6 December, 2005
ORDER
G. Anantharaman, Member
1. BACKGROUND 1.1 In exercise of powers under Section 6(3) of the Securities Contract (Regulation) Act, 1956 (hereinafter referred to as "SC(R)A"), on 28.9.2001, The Securities and Exchange Board of India (hereinafter referred to as "SEBI") instituted an inquiry into the affairs of the Bhubaneshwar Stock Exchange (hereinafter referred to "the Exchange" or "BhSE") in relation to the alleged siphoning of funds out of the exchange to the tune of Rs. 1.30 crore including interest through the Bhubaneshwar Stock Exchange Members Welfare Trust (hereinafter referred to as "the Trust" or "MWT") by the members of the Exchange.
1.2 The Inquiring Authority appointed vide order dated 28th September 2001, conducted inquiry in the manner laid down in Rule 11 of the Securities Contracts (Regulation) Rules, 1957 (hereinafter referred to as "SC(R)R") and submitted his report to SEBI on 22.10.2001. In his report the Inquiring Authority inter alia found that: -
1.2.1 The exchange established MWT in the year 1996. The Exchange had neither sought permission nor sent any intimation to SEBI regarding the formation of the Trust.
1.2.2 As per the Trust Deed, the number of trustees of that trust shall not be less than three and more than five. It was observed that the trustees have always been from among the elected members of the exchange. The President and the Treasurer of the exchange are also the Chairman and Treasurer of the Trust respectively. No Public Representative and SEBI nominee Director was made a Trustee. The Executive Director of the exchange was present in meetings of the Trust as a special invitee without having any say in the decision for grant of loan by the trust to the members of the exchange.
1.2.3 Thereafter, the Council of Management of the exchange at its meeting held on November 29, 1997 amended the Rules of the Trust to provide that "in case of temporary financial difficulty in making payment of dues to the Clearing House of the Exchange, a loan upto Rs. 5 lacs or if the circumstances so warrant, such other higher amount as may be decided by the Trustees may be sanctioned which shall be ordinarily recovered within a period of two months along with the simple interest of 24% per annum. The trustees, however, may extend the aforesaid period of two months in appropriate cases from time to time as may be deemed fit."
1.2.4 As on the date of inquiry approx 98% of the total outstanding loans was due from members who were either office bearers of the exchange or the trustee of the Trust. Further, out of the total loan outstanding (excluding interest), one Shri Babulal Sharma's outstanding loan amount (excluding interest) constitutes 92.5% of the total. Further, it was also observed that in some cases, it was observed that loans were sanctioned without proper security. Without observing the condition for sanctioning of fresh loan, Shri Babulal Sharma and Shri Arun Kumar Girdhar were granted loans from the Trust.
1.2.5 It was observed Shri Babulal Sharma used major portion of the loan amount to make payments to Indian Finance Guaranty Ltd. (IFGL), member of the National Stock Exchange. It was further observed that Shri Tulsi D. Bhayana (hereinafter referred to as "the member") and Shri Ashok K. Sardana, the Directors of IFGL, were elected President and Vice President respectively of the exchange in the Annual General Meeting of the members of the exchange held on September 29, 2001.
1.3 SEBI also came to know from newspaper reports that the member was allegedly involved in the murder of a stock broker and that he has been arrested and lodged in prison. It was also noted that the High Court of Orissa had refused to grant him bail.
1.4 In view of the above, in the interest of investors and in the interest of the securities market, vide order dated 29.10.2002, the member was prohibited from buying, selling or otherwise dealing in the securities market till further orders.
1.5 In the mean time, the exchange vide order dated 16.1.2003 had expelled the broker from the membership of the exchange. The expulsion by the exchange was on the ground of his involvement in the irregularities in the affairs of the trust and dereliction of duty as president of the exchange.
1.6 Subsequently, after complying with the principles of natural justice the above interim order of SEBI against the broker was confirmed vide SEBI order dated 8th September 2003.
1.7 On the basis of the said expulsion, an Officer was appointed to take up summary proceedings under the SEBI (Procedure for Holding Enquiry and Imposing Penalty) Regulations, 2002, who submitted a report dated 9th October 2004 recommending a penalty of cancellation of the Certification of Registration of the broker. During the pendency of the above proceedings, the broker obtained an order from the Hon'ble Orissa High Court quashing his expulsion from the exchange. The same was communicated to SEBI and as a result, further action on the summary proceedings against the broker were kept in abeyance.
1.8 During the pendency of the Enquiry Proceedings the broker had filed an Appeal before the Honourable Securities Appellate Tribunal (hereinafter referred to as "Hon'ble Tribunal") as Appeal No 91/2005 whereby the Hon'ble Tribunal vide order dated July 6, 2005 directed SEBI to pass final orders within the specified time limit as stated in the said Order, which was subsequently extended by another four weeks by order dated November 14, 2005. SAT while disposing off the appeal stated that "we are sure that all relevant factors will be taken into account with respect to persons similarly placed and in conformity with earlier orders as against other similarly placed and we have no doubt that the final order against the appellant would be in conformity with principles of natural justice and in accordance with Article 14 of the Constitution of India and in accordance with law."
2. 0 HEARING AND SUBMISSIONS
2.1 Pursuant to the above, an opportunity of hearing was granted to the broker on November 29, 2005. The broker appeared for the said hearing and made the following submissions.
2.1.1 At the request of BhSE, first Enquiry was conducted by SEBI u/s 6 of the SCRA, 1956 in October 2001. The broker being a director of IFGL at that time, he appeared before the Enquiry Authority and explained that the amount in question was received by IFGL by two account payee Cheques against the trade dues of a client, towards settlement obligations duly accompanied by letters of confirmation. Broker's reply to the Inquiry Authority dated 12.10.2001 was considered by the Inquiry Authority which forms part of the Enquiry Report. The enquiry conducted into the affairs of BhSE does not contain an adverse remark against the broker.
2.1.2 The broker was neither a member of the Council of the Management, nor a Trustee of the Members Welfare Trust (MWT) from September 1998 to September 2001. The alleged loans were granted by MWT during 1999-2000. He never had any knowledge of the loans. He did not sanction or disburse any such loan and played any role therein. According to the said Enquiry Report, the Council of Management of the Trust was not informed about these loans, hence, unlikely that the broker had any information about these loans.
2.1.3 The alleged amount of Rs. 40 lacs was not received by the broker in his personal capacity. The amount was received by IFGL, against established trade dues of a client, the complete documentary evidence whereof was provided to the Enquiry Authority in October 2001. Inquiry Report confirms the receipt of evidence at page 12 of the said report. The Inquiry Authority verified the details regarding receipt of Rs. 40 lacs by IFGL and only after complete verification, the Authority arrived at its conclusions. A team of SEBI officers conducted a detailed inspection of the Books of Account of IFGL in September 2002 wherein the receipt of Rs. 40 lacs was also verified in depth. The inspection report did not attribute any motive or fraud to IFGL or any of its directors and observed that the amount received by the company was duly accounted for by IFGL in its books of account. In the concluding para at page 13, of the Inquiry Report it says that the Trustees misutilised the Trust fund by using the same for meeting their trading liability with a member of NSE. Further, the inspection of books of accounts of IFGL found that the company is innocent of the charges of siphoning of funds of the MWT.
2.1.4 The Inquiry Report names the persons involved in the irregularities. Based on this Inquiry, the Authority recommended action against the errant members. No action was recommended against the broker.
2.1.5 SEBI accepted the findings of the Inquiry Report and conveyed its decision to BhSE for taking action against errant members vide SEBI's letter dated 30.4.2002 . No action was proposed against the broker.
2.1.6 An FIR was filed by BhSE on 26th March 2002 for investigation into siphoning of funds originating from BhSE which was registered by the police on 31.5.2002, whereafter Crime Branch Orissa Police took up the investigation. After completing the investigation, the Crime Branch Orissa police filed a charge sheet on 3.1.2003 against 6 persons in the Court of Law. The broker was found innocent in this investigation by the Crime Branch.
2.1.7 The broker was acquitted by the criminal court from the murder charges leveled against him.
2.1.8 Honorable High Court of Orissa has quashed the expulsion Order passed by BhSE against the Broker.
The broker further submitted that members who were found guilty by SEBI in the inquiry relating to the misappropriation of funds were merely suspended for 1-2 years from membership of BhSE whereas he had already undergone a grater punishment of denial to access the capital market for a period of 3 years.
3. 0 CONSIDERATION OF THE ISSUES 3.1 I have carefully considered the material on record including the interim order dated September 8, 2003 and the developments that took place in the case of the broker subsequent to the said interim prohibitory order and the submissions made by the broker.
3.2 I find that that the broker was alleged to have been involved in the siphoning of funds by the acceptance of two cheques by IFGL from the client. The broker is the promoter director in IFGL. In this regard an enquiry was conducted against IFGL. In his report the enquiry officer found that though, the funds from MWT had come to IFGL by two account payee Cheques against the trade dues of a client, the same were to be credited in respect of two settlement obligations duly accompanied by letters of confirmation. The broker had no means to know that the funds are coming out of MWT where the cheques were drawn by his client. Similarly, the broker had no means to know whether the MWT had sanctioned the loan to Shri Babulal Sharma i.e. his client. Hence, in this regard there is no sustainable evidence against the broker to hold that the broker had involved in the alleged transactions.
3.3 I note that the circumstances prevailing at the time of passing the interim order dated 29.10 2002 had led to an apprehension that the said broker had been in grave irregularities and in the interest of investors and integrity of the securities market it was necessary to prohibit him from associating with the securities market pending further enquiry. The said order was passed in the light of material available on record at that point of time and keeping in view the emergent situation. In the final order dated September 22, 2004 against IFGL the period of prohibition already undergone has been considered and found that no penalty needs to be imposed. Accordingly, the enquiry proceedings were terminated.
3.4 From the list of dates submitted by the broker, it is evident that he was neither a member of the Council of the Management, nor a Trustee of the Members Welfare Trust (MWT) from 19th September 1998 to 28th September 2001 when the alleged loans were granted by MWT during 1999-2000.
3.5 I find that IFGL received the amount of Rs. 40 lacs against established trade dues of a client and the same was duly accounted for by IFGL in its books of account. And it is also evident from the Inquiry conducted by SEBI under Section 6 (1) of SCR Act that the Trustees misutilised the Trust fund by using the same for meeting their trading liability with a member of NSE. In this context there is no evidence against the company IFGL or its directors including the broker herein for the charges of siphoning of funds of the MWT. I further note that CID, Crime Branch, Cuttack, which investigated into the charges of siphoning of funds of MWT did not find fault with the broker.
3.6 It is noted that the Hon'ble Orissa High Court has quashed the expulsion of the broker vide its order dated 27.04.2005. It is also noted that the order of the Hon'ble Orissa High Court was not an ex-parte order and the BhSE has not challenged the same. In accordance with the Hon'ble Orissa High Court order, BhSE has already revoked the expulsion of the broker vide letter dated 27th June 2005. The broker has also resigned from the membership of BhSE vide his letter dated 28th April 2005 to the Exchange. The resignation has been accepted by the BhSE subject to the acceptance of surrender of registration by SEBI.
3.7 One of the findings in the earlier Order was the charge of murder against the broker. On perusal of the order dated 31.01.2003 by the learned Additional Sessions Judge, Bubaneshwar, it is found that the broker was not charged under Section 302 read with 34, rather he was charged under Section 506(II) of IPC, 1860 i.e. punishment of criminal intimidation where the offence is non-compoundable and non-cognizable. The honourable Sessions Court, Bubaneshwar has already acquitted him from the said charge. The Honourable Sessions Court in its judgement observed that the witnesses who had implicated the accused persons in some way or other though remotely, had some personal reasons to be aggrieved against them. With regard to one of the witnesses the court observed that as he was not getting security deposit back from BhSE, it is not unlikely that he would have a motive to falsely implicate accused Tulsi Das (the broker) seven years after the incident.
3.8 SEBI has revoked similar interim order passed against IFGL as well as one of its directors who were charged along with the broker herein vide final orders dated 22.9.2004. In view of the later developments referred above, it is obvious that there is no further evidence against the broker and there is no necessity to continue the prohibition imposed on the broker. Therefore, it is just and proper to vacate the ad interim prohibitory order against the broker, which was in force for a period of 3 years due to the circumstances steeped in a welter of allegations and legal proceedings clouding the issue relating to the conduct of the broker, which came out of obfuscation with a clarity in the final denouement of tangled skein in the exculpatory proceedings of 2004-2005.
4. ORDER 4.1 In view of the subsequent developments in this case and taking into account the Judgment of Hon'ble High Court of Orissa in WP No 2595/2004, the directions of Hon'ble Securities Appellate Tribunal in Appeal No. 91/2005 and findings of learned Additional Sessions Judge, Bubaneshwar in S.T. Case No 2/30 of 2003 and the fact that CID Crime Branch has not charge sheeted the broker in relation to the alleged siphoning of funds, I, in exercise of powers conferred in terms of Section 19 read with Section 11 and 11 B of SEBI Act, 1992, hereby direct that the proceedings against Shri Tulsi D Bhayana shall stand terminated and vacate the ad-interim order dated September 8, 2003.
4.2 This order shall come into force with immediate effect.