Disposal of the representation of Neer Ocean Multitrade Private Limited

1. Securities and Exchange Board of India (“SEBI”) undertook a preliminary examination in respect of trading in Castor Seed Contracts on the platform of National Commodity & Derivatives Exchange Ltd. (hereinafter referred to as “NCDEX / the exchange”) for the period January 01, 2016 to January 27, 2016 (hereinafter referred to as the “examination period”). The preliminary examination was conducted after NCDEX, under the provisions of its Rules, Bye-laws and Regulations, suspended the trading in Castor Seed Contracts at the close of business hours, vide its circular (NCDEX/TRADING- 007/2016/012) dated January 27, 2016.

2. Pursuant to the preliminary examination, SEBI vide an ad interim ex parte order dated March 2, 2016 (hereinafter referred to as the “interim order”) restrained certain Commodities Trading Members [including Neer Ocean Multitrade Private Limited (“NOMPL”), the applicant herein] and their defaulting clients from buying, selling or dealing in the securities market, either directly or indirectly, in any manner whatsoever, till further directions. It was noted in the interim order that NOMPL had prima facie violated section 12A (a) (b) and (c) of the Securities and Exchange Board of India Act, 1992 and regulation 3(d) and regulation 4(1) and 4(2) (a) and (g) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and clauses A(1), A(2) and A(4) of Code of Conduct for Brokers as specified in Schedule II under regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The interim order was passed, inter alia, on the basis of the following findings and observations:

“Based on … facts and analysis, I prima facie find that:  Few clients had taken huge long positions beyond their ability to fulfil the commitment.  There was huge concentration and lack of liquidity in the contract.  There was failure on the part of clients and as well as trading members to assess and anticipate the risk associated with the trading activity in Castor Seed Contract. Disposal of representation of Neer Ocean Multitrade Private Limited

 The abovementioned defaulting clients had taken exposure beyond their known financial means causing systemic risk.

Considering the … facts and circumstances, I, prima facie, find that the acts and omissions of the defaulting clients, not only disturbed market equilibrium but also indicate manipulative and fraudulent design to maintain the price and/or to benefit the position they were having in physical market. I further, prima facie find that the Commodities Trading Members have actively facilitated and helped these defaulting clients in such dubious plan, device and artifice as they have not only failed to assess the financial capacity of such clients but allowed them in such manipulative transactions in high magnitude which have potential to disturb the market equilibrium and harm market integrity.”

3. NOMPL filed its reply to the interim order and also availed an opportunity of personal hearing before SEBI. NOMPL, besides making submissions in respect of the prima facie findings of the interim order, also sought certain interim reliefs. Considering the request for interim reliefs made by NOMPL and other entities restrained by SEBI in the matter of Castor Seed Contracts, SEBI vide a relaxation order dated December 23, 2016, directed the following:

“I, therefore, in exercise of the powers under sections 11(1), 11(4) and 11B of the SEBI Act, hereby, relax the interim orders dated March 2, 2016 and May 24, 2016 passed against the noticees to the limited extent to enable them to protect their portfolio from market volatility, as indicated hereunder:

(a) The noticees may sell the securities lying in their demat accounts as on the date of the interim order, other than the shares of the companies which are suspended from trading by the concerned stock exchange, in an orderly manner under the supervision of the stock exchanges so as not to disturb the market equilibrium and deposit the sale proceeds in an interest bearing escrow account with a nationalized bank; (b) the noticees may tender the shares lying in their demat account in any open offer / delisting offer / buyback offer under the relevant regulations of SEBI and deposit the sale proceeds in an interest bearing escrow account with a nationalized bank; (c) the noticees shall avail the benefits of corporate actions like rights issue, bonus issue, stock split, dividend etc. (d) the aforementioned window for sale of shares lying in respective portfolio shall stand withdrawn if any entity is found to execute any trade in breach of the above conditions.”

4. Subsequently, after consideration of replies filed by NOMPL and other entities, vide an order dated March 8, 2017 (hereinafter referred to as the “confirmatory order”), pending detailed investigation in the matter, the directions issued by the interim order against NOMPL and others entities were confirmed by SEBI.

5. Thereafter, NOMPL filed an appeal before the Hon’ble Securities Appellate tribunal (“SAT”) submitting, inter alia, that the confirmatory order was passed by SEBI without considering the specific request with regard to permission to liquidate the stock lying in its demat account and to utilize the sale proceeds to repay the outstanding loan amount to Kotak Mahindra Investment Limited (“KMIL”). Hon’ble SAT disposed of the said appeal vide an order dated September 11, 2017, inter alia, observing as under:

“2. By the present appeal, the appellant seeks limited relief i.e. during the pendency of the investigation the appellant be permitted to liquidate some of the shares lying in the demat account of the appellant as more particularly set out in the representations made by the appellant to SEBI during the period from April 04, 2016 till date. 3. Counsel for SEBI on instruction states that the WTM of SEBI would hear the appellant and pass appropriate order on the above representations as early as possible and in any event within six weeks from the date of the appellant furnishing all the relevant documents referred in para 35 of the affidavit in reply filed by SEBI. Statement made by counsel for SEBI is accepted. In view of the above statement, nothing survives in the appeal.”

6. Pursuant to the directions of Hon’ble SAT, NOMPL filed its representation dated October 5, 2017. Further, vide e-mail dated October 26, 2017, NOMPL filed certain supporting documents in relation to its representation. Vide the said representation, NOMPL, inter alia, submitted the following:

“… During 2011 we had opened a trading account with Kotak Securities Limited ("KSL"), a SEBI registered Stock Broker, for the purpose of trading in securities market. Further, we had also opened a demat account bearing number 15238220 for the purpose of trading. As on date the value of securities lying in the said demat account is Rs 16,26,716 /-(taking the closing price as on 20/09/2017)

(ii) Sometime in 2011, we wanted to raise loan for the purpose of trading in securities market. Accordingly, we had executed Loan Agreement with KMIL, an NBFC registered with Reserve Bank of India. Further, we had also opened a separate demat account bearing number 15894689 for the purpose of keeping securities bought by raising of loan from KMIL. The shares lying in the said demat account are encumbered as said shares are kept as security by KMIL against loan. As on date the value of securities lying in the said demat account is Rs 1,09,37,147/- taking the closing price as on 20/09/2017)

(iii) As on September 22 2017, there is an outstanding loan of Rs 25,45,551/- (Loan amount- Rs.20,50,816 & Interest- Rs. 4,94,735/-) which we have to repay to KMIL. The copy of the statement dated 22/09/2017 regarding loan outstanding issued by KMIL is enclosed …

4. In consonance with the directions of the Hon'ble SAT we are enclosing herewith all the relevant documents pertaining to loan raised by us from KMIL including the documents as referred in Para 35 of the Affidavit in Reply dated July 07, 2017 filed by SEBI in appeal:

(i) The material particulars/ document pertinent to loan obtained by us from KMIL (a) Loan Agreement dated January 29, 2011 … (b) Copy of Power of Attorney dated April 09, 2011… (c) Copy of various reminders received from KMIL seeking repayment of loan dated July22, 2016 … (ii) Details of securities involved in the transaction (a) Copy of demat statement pertaining to demat account number 15894689, which is specifically opened for keeping the securities bought out of the loan raised from KMIL is enclosed … All the securities lying in the said demat account are encumbered as said shares are kept as security by KMIL against the outstanding loan.

5. Further, we are also enclosing all the material particulars/ documents sought … SEBI vide his email dated September 22, 2017 inter alia requesting us to submit all the relevant document pertaining to the loan obtained by us from KMIL: a. Copy of the Master loan Agreement is enclosed … b. Copy of the Sanction Letter is enclosed … c. Copy of the Power of Attorney is enclosed … d. Copy of the Personal Guarantee is enclosed … e. Copy of the Demat Holding Statement is enclosed … f. Copy of the Loan statement is enclosed … 6 … 7. Through this letter we reiterate our request that we be permitted to liquidate the stocks lying in our demat account number 15894689 to the extent of outstanding loan of KMIL (which stands at Rs 25,45,551/- as on 22/09/2017) and to utilize the proceeds to repay the loan of KMIL and avoid interest burden. Further, we confirm that the sale proceeds over and above the outstanding loan amount would be parked by us in an escrow account.

8. Significantly, we may point out that vide Order dated December 23, 2016 SEBI had already permitted us to liquidate the securities lying in the demat account and to park the sale proceeds in an interest bearing escrow account with a nationalized bank. In the matter under reference we are seeking additional limited permission to utilize the sale proceeds arising from the liquidation of securities for repaying the outstanding loan amount of Rs 25,45,551/- (as on 22/09/2017) to KMIL.

9. While considering our aforesaid request following be also taken into consideration:

(i) The National Commodity and Derivatives Exchange Ltd ("NCDEX / the Exchange") vide its letter dated May 10, 2017 announced that it has appropriated an amount of Rs. 2,84,56,589/- attributable to the Appellant out of the collaterals available with the Exchange for satisfaction of claims arising out of the close out. The Exchange, again, vide its letter dated May 16, 2016, further clarified that the said amount of Rs. 2,84,56,589/- is a provisional amount and the Exchange may appropriate further amounts as may be required during the settlement of the claims in the close out process in case of any shortfall in satisfaction of claims due to change in open interest which is backed by physical stocks in Exchange approved warehouses. Till date no other appropriation apart from Rs. 2,84,56,589/-has been done and the sellers have been compensated for their purported loss at the close out rate. The copy of the NCDEX letter dated May 10, 2016 and May 16, 2016 is enclosed … Thus, the sellers whose interest were allegedly adversely affected, have already been compensated by the Exchange out of the funds lying with the Exchange.

(ii) The value of securities lying in our demat account bearing number 15238220 is around Rs16,26,716/- (taking the closing price as on 20/09/2017)

(iii) The Exchange vide letter dated August 17, 2017 inter alia informed us that the Disciplinary Action Committee (DAC) in its meeting held on August 09, 2017, passed an Order imposing a penalty of Rs. 10 lakhs for alleged violation of Exchange Rules. Further, vide the said letter it was informed us that the adjudication proceedings in the matter are declared closed. We have already paid the said penalty amount to the Exchange. The copy of the Order dated August 17, 2017 is enclosed …

10. From the aforesaid it is clear, as on date around Rs 83,91,596/-belonging to us is lying locked with the Exchange or locked in our demat account 15894689. Therefore, the permission to clear the outstanding loan from the sale proceeds arising from liquidation of securities lying in our demat account no 15894689 will not affect anybody. Additionally, it may be noted that the alleged investors who have suffered have already been compensated and we have already suffered the debarment directions for a period of 17 months with no end in sight.

11. We request that the copy of the SAT Appeal (115 of 2017) may be read as the part and parcel of our Application.

12. In the premises as aforesaid, we reiterate our request that we be permitted to liquidate the stocks lying in our demat account number 15894689 to the extent of outstanding loan of KMIL (which stands at Rs 25,45,551/- as on 22/09/2017) and to utilize the proceeds to repay the loan of KMIL and avoid interest burden ...”

7. NOMPL was granted an opportunity of hearing before SEBI on November 01, 2017. However, NOMPL, waived its opportunity of hearing. Therefore, as informed by NOMPL, its submissions dated October 5, 2017 and October 26, 2017 are being treated as its final replies for the purpose of these proceedings.

8. I have considered the replies submitted by NOMPL, its requests for reliefs, the documents submitted in support thereof and other material available on record. In consideration of the above, I find that the following factors are relevant for the purpose of examination of the request made by NOMPL: i) In the matter relating to Castor Seed Contracts, NCDEX has already compensated the sellers whose interests were adversely affected, out of funds appropriated by it from NOMPL. ii) NCDEX has confirmed that it has closed the proceedings in the matter against NOMPL as its DAC has imposed a penalty of Rs. 10 lakh on NOMPL for the violations done by it. NOMPL has already paid the said penalty. iii) The restraint imposed upon NOMPL vide the interim order dated March 2, 2016 is continuing. iv) SEBI’s order dated December 23, 2016 has already permitted NOMPL for the sale of securities (excluding the securities of the companies which are suspended from trading by the concerned stock exchange) lying in its demat accounts as on the date of the interim order and deposit the sale proceeds in an interest bearing escrow account with a nationalized bank. There is no case in the interim order dated March 02, 2016 that NOMPL has made unlawful gains so that the sale proceeds may attract disgorgement proceedings. v) As confirmed by NSDL, portfolio value of demat account no 15894689 (for which KMIL has a PoA) is Rs. 1.19 crore and portfolio value of another demat account no. 15238220 held by NOMPL is Rs. 16.73 lakhs (taking closing price of November 2, 2017 as per statement provided by NSDL. Thus, the total value of securities held by NOMPL in its two demat accounts is around Rs 1.36 crore. vi) NOMPL’s outstanding loan obligation towards KMIL is Rs 25.45 lakhs as on September 22, 2017, as per loan statement issued by KMIL. vii) The allegations levelled against NOMPL in the interim order are in respect of transactions of its clients in the commodities derivatives market for whom it acted as a trading member. The aforesaid demat accounts operated by NOMPL or transactions therein relate to NOMPL as a client in the equity-cash segment and are not connected with any of the allegations levelled against NOMPL in the interim order.

9. Considering the aforesaid facts, circumstances and the documents brought on record, I am of the view that the balance of convenience is in favour of NOMPL. Accordingly, I allow NOMPL to utilize sale proceeds of securities lying in his demat account only to clear the outstanding loan (along with accrued interest) from KMIL for the value as it stands on the date of this order. As already permitted by the order dated December 23, 2016, NOMPL may sell the remaining securities lying in its demat accounts as on the date of the interim order, other than the securities of the companies which are suspended from trading by the concerned stock exchange, in an orderly manner under the supervision of the stock exchanges so as not to disturb the market equilibrium and deposit the sale proceeds in an interest bearing escrow account with a nationalized bank.

10. NOMPL has made a submission that all the securities lying in the demat account no. 15894689, which was opened by NOMPL specifically for keeping the securities bought out of the loan raised from KMIL, are encumbered as the same are kept as security by KMIL against the outstanding loan. Further, NOMPL had also executed a Power of Attorney in favour of KMIL for operating the said demat account. In this regard, I find that the said arrangement between NOMPL and KMIL (i.e. opening of a specific demat account for keeping the securities bought out of the loan amount and execution of a Power of Attorney in favour of KMIL for operating the said account) cannot be recognized as creation of a valid pledge on the shares lying in the demat account since the same is not in accordance with the provisions of SEBI (Depositories and Participants) Regulations, 1996. It is hereby clarified that the present order is being passed only in view of the factors mentioned in paragraph 8 above.

11. The representation filed by NOMPL dated October 5, 2017 read with the letter dated October 26, 2017 is accordingly disposed of.

Sd/- DATE: November 16, 2017 MADHABI PURI BUCH PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA