Confirmatory Order in the matter of Market Maniuplation using GDR issues against European American Investment Bank AG

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) had, pending investigation and passing of further orders, vide an interim ex-parte Order dated September 21, 2011 (hereinafter referred to as the Order), amongst others directed European American Investment Bank Ag (hereinafter referred to as Euram Bank), not to deal in securities or instruments with Indian securities as the underlying, in any manner whatsoever, until further orders. Euram Bank filed written submissions dated October 10, 2011. Thereafter, an opportunity of hearing was afforded to Euram Bank on November 18, 2011, when Mr. Somasekhar Sunderesan, Advocate, along with Mr. Viktor Popovic from Euram Bank AG appeared on behalf of Euram Bank and made submissions.

2. I have considered the submissions made by the learned counsel on behalf of Euram Bank during the course of hearing, the written submissions dated October 10, 2011 and other material available on record. The limited issue to be considered at this stage is whether on a consideration of the submissions and documents submitted by Euram Bank, the interim ex-parte directions issued vide the Order against it should be confirmed, vacated or modified in any manner.

3. Before proceeding further, it would be necessary to note the background of the matter. SEBI was alerted by its surveillance systems of the large scale off-market transactions in certain scrips, namely, IKF Technologies Limited, Avon Corporation Limited, CAT Technologies Limited, Asahi Infrastructure Limited, K Sera Sera Limited and Maars Software International Limited and a revelation in the preliminary examination that Foreign Institutional Investors (hereinafter referred to as FIIs), namely, India Focus Cardinal Fund (India Focus), KII Limited (KII), Mavi Investment Fund (Mavi) and Sophia Growth (Sophia), were converting the Global Depository Receipts (hereinafter referred to as GDRs) underlying the shares of the aforesaid companies held by them into equity shares to sell in the Indian markets and that most cancellations happened within a short period of time of their issue and on noticing that a few entities were repeatedly appearing as counterparties to the 33% to 75% of those shares sold by FIIs in the scrips, had conducted an examination into the same. The prima facie findings of the said examination pointed out to the various aspects of the GDR issues like the large size of the issue vis-à-vis the existing size of the issuing company, unimpressive financials of the company, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of FII/Sub-Accounts, sale in Indian stock exchanges and a major portion being bought by a constant group of clients, the trading amongst the said clients and subsequent off-loading by them. The preliminary findings had pointed that India Focus is registered as a sub-account with the FII, Euram Bank. No other sub-account other than India Focus was found to be registered with Euram Bank during the relevant period. In view of the prima facie findings, it was alleged that Euram Bank had violated Regulation 13A (1) and Regulation 7A read with Clauses 1,2,8 and 10(a)) of the Code of Conduct as specified under the Third Schedule) of the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995.

4. On November 18, 2011, Mr. Somasekhar Sunderesan, Advocate reiterated the submissions of Euram Bank (filed vide letter dated October 10, 2011), which are given below:

i. Merely because a sub-account of Euram Bank is suspected of wrong doing (which SEBI is fully entitled to investigate), it is wholly unfair, inappropriate and baseless to suggest that the only purpose for Euram Bank to get registered as an FII was to get India Focus registered as a sub account. ii. The registration of India Focus as a sub-account was granted by SEBI pursuant to a thorough review and application of SEBI’s processes. The trading by the entities would have been subject to the same scrutiny and with the same caution by SEBI. The allegation in the Order that Euram Bank and India Focus having ‘created the façade’ of registration as FII and sub-account is misplaced. iii. In any event that the decision to undertake trading in Indian securities is a commercial decision taken by a FII. Such decisions are based on various factors including the FII’s policies, trading capacity, investment strategy, market conditions etc. Euram Bank had not yet considered an opportunity to trade in Indian securities i.e. its own trading in Indian shares remained dormant. However, such a position does not mean that Euram Bank can be alleged to have been actively interested only in getting India Focus access to the Indian market. iv.

There is no question of Euram Bank having ‘violated’ the provisions of Regulation 13A of the FII Regulations. The provisions of Regulation 13A(1) of the FII Regulations, read in its correct perspective merely fastens on FIIs the (reasonable) responsibility and liability of acts and omissions of its sub accounts. It cannot be alleged that merely because of an alleged infraction by a sub-account, the provision of Regulation 13A(1) of the FII Regulation is ‘violated’ by the FII. This position assumes great relevance in light of the fact that Euram Bank has itself not violated any provision of Indian law. Euram Bank has not undertaken any trading in Indian securities. There is no allegation in the Order or otherwise of Euram Bank directly having undertaken any activity that would violate any provision of law. v. The provisions of Regulation 13A of the FII Regulations do not impose any direct obligation or right upon the FII to ‘control or monitor’ its sub-accounts. Such a provision only makes the FII responsible for any breach i.e. it would give the FII a back to back right to take action against the sub-account in question.

FIIs, being independent commercial entities, cannot exercise ‘control’ over ‘third party’ sub accounts i.e. sub accounts that, although registered under an FII are not in any manner controlled by FIIs, as in the present case. There is no provision of law that requires FIIs to exercise such control over such sub accounts. As independent entities, such sub accounts undertake their transactions based on their own decisions. The FIIs in most cases have no role to play in the decision making by such sub accounts. vi. In any event, based on a perusal of the allegations against India Focus in the Order, it appears that it is the cancellation or conversion of the GDRs issued to it has been alleged to have been found objectionable. Such an act of conversion of GDRs and selling of underlying shares are legitimate activities that occur in due course. vii. Apart from the fact that Euram Bank has no control over or cannot monitor the activities of India Focus, it is also in no position to monitor the transactions with third parties executed over stock exchanges. viii. With respect to Regulation 7A of the FII Regulations, Euram Bank has always abided by the Code of Conduct prescribed pursuant to Regulation 7 of the FII Regulations (“Code of Conduct”).

There is absolutely no instance of any violation in this regard, including in the facts of the present case (as demonstrated here). ix. With regard to the alleged violations of Clauses 1 and 2 of the Code of Conduct, Euram Bank cannot be alleged to have violated the same in any manner. The Order itself records the fact that Euram Bank has had no dealings in Indian securities ever since its registration with SEBI. The provisions of Clauses 1 and 2 of the Code of Conuct cannot be alleged to have been violated by Euram Bank.

x. Further, with regards to the alleged violation of Clauses 8 and 10 of the Code of Conduct, Euram Bank, on account of not having any dealing in Indian securities, cannot be alleged to have violated the same. Further, it is submitted that there is nothing in the Order that alleges or demonstrated any act or omission by Euram Bank that could be alleged to be manipulative or fraudulent. xi. The fact that proceeds of payments were deposited in the banking system of Euram Bank cannot lead to any conclusion. Further, Mr. Arun Pancharia has no connection or influence over Euram Bank. The only connection with Mr. Pancharia on account of Pan Asia’s minority shareholding in Euram Bank Asia. However, Euram Bank Asia has had no role to play in relation to the facts of the present case. Euram Bank has no connection or links with any of the other entities named in the ‘Group’ in Order. xii. Euram Bank has procured an agreement with Pan Asia to exercise Euram Bank’s right to acquire shares of Pan Asia in Euram Bank Asia. Euram Bank will require approvals from the Dubai International Financial Center (DFSA) and the Austrian regulator for the agreement to be concluded.

However, the DFSA has withheld its approval on account of the pendency of the proceedings pursuant to the Order. Such a situation is undesirable especially since there is no wrongdoing attributed to Euram Bank even by the Order. Further, the pendency of the proceedings pursuant to the Order is also preventing the closure of another unrelated transaction which is other several million dollars. In view of the above the same the Order against Euram Bank Bank be set aside. 5. I have considered the aforesaid submissions and other material available on record. I note that one of the contentions of Euram Bank is that it has not facilitated India Focus to trade in India as a sub-account by getting registered itself as an FII. However, I am unable to accept this contention in the light of the trading activity of India Focus during the period January 1, 2009 to May 31, 2010 (as per Para 68, Page 40 of the Order). The only sub-account of Euram Bank is India Focus. The trading pattern of India Focus suggests that it had traded shares worth `3,000 million in 22 stocks on the Bombay Stock Exchange Limited (BSE)/National Stock Exchange of India Limited (NSE) during the period, out of which nearly `2980 million in 18 stocks consisted of sale of shares from GDR cancellation; only 20 million or 0.67% of total transactions during the relevant period pertained to four non–GDR scrips.

In total, India Focus cancelled GDRs worth `3,633 million (calculated on the basis of closing price of the scrip on the day of cancellation) during the aforesaid period. This behavior of India Focus and Euram Bank prima facie indicates that the sole objective of the registration of India Focus as a Sub-account was to sell GDRs and take funds out of the country and not to invest in Indian Companies, which is contrary to the observed trading pattern of FIIs/Sub-accounts in general. Euram Bank has prima facie facilitated India Focus by getting registered as an FII and contrary to other FIIs it has not done any trading in the stock market. I further note that Euram Bank has denied having any connection with Mr. Arun Panchariya. However, I note that Euram Bank has a joint venture with Mr. Arun Panchariya led Panasia known as Euram Bank Asia Limited that is located in Dubai. The Sub-Account, India Focus, is registered under the FII, Euram Bank. Mr Arun Panchariya was the director of India Focus until October 28, 2010. Both Euram and India Focus got registered with SEBI in November 2008 and December 2008, respectively.

It is also observed that Mr. Viktor Popovic and Mr. Arun Panchariya were among the directors of Euram Bank Asia Limited during the period of examination.

6. At this stage, the findings points out to a case where a group of Sub-accounts have sold considerable quantities of shares on conversion of the GDRs of the respective companies, the counterparties were seen to be another set of entities whose presence as counterparties was regular in the identified scrips when the said sub-accounts sold those shares. The companies which had issued such GDRs had financials which could not readily attract investors. Such companies have come out with GDR issue of size considerably larger than their existing equity capital size. Further, GDRs were issued by such companies on the advice/arrangement from Pan Asia whose founder was none other than Mr. Arun Panchariya. Considering the facts that, a common entity (Pan Asia) and Mr. Arun Panchariya of Pan Asia advised the companies in their GDR issuances, Mr. Arun Panchariya’s alleged relationship with Euram Bank, Alka India Limited (another entity forming part of the alleged group) and India Focus, the pattern of trading by the Sub-accounts and the Group entities especially Alka India Limited, Oudh Finance and Investment Private Limited and Basmati Securities Private Limited and the Groups inter-se trading, as outlined in the Order and the prima facie findings of the preliminary examination which pointed to the various suspicious aspects of the GDR issues like the size of the issue being multiple times the existing capital of issuing company, unimpressive financials of the company, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of FII/Sub-Accounts, sale in Indian stock exchanges by them and a major portion being bought by common set of clients, the inter-se trading amongst the said clients and subsequent off-loading by them, when seen in totality, do not convince me at this stage to vacate the interim directions issued against Euram Bank.

Given this chain of events and circumstances, the preponderance of probability at this stage suggests the involvement of Euram Bank in the alleged scheme of things. Though, Euram Bank has submitted that it had no role to play in the alleged manipulation, I am unable to consider the said submission and its case on merits, at this stage, since the investigation in the matter is not yet completed. Considering the facts and circumstances and also the submissions made, SEBI shall expeditiously complete the investigation in the matter, in the interest of justice and thereafter shall immediately take appropriate actions in accordance with law.

7. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11(1), 11(4) and 11B thereof, hereby confirm the directions issued vide the ad interim ex-parte Order dated September 21, 2011 in the matter of market manipulation using GDR issues, against European American Investment Bank AG.

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: JANUARY 25, 2012