Order against Mr. Swaminathan Mahalingam in the matter of M/S Mega Millennium Securities Private Limited and M/S Mega Millenium Investment Private Limited

Date of hearing: August 21, 2008. Appearance: For Mr. Swaminathan Mahalingam: Mr. Anil Shah, Advocate Mr. Swaminathan Mahalingam For Securities and Exchange Board of India:Mr. Suresh B. Menon, General Manager Mr.Vijayakrishnan G, Asst.Legal Advisor Mr. Sanjay Singh Bhati, Manager 1. Securities and Exchange Board of India (for short SEBI), vide an ad-interim ex-parte order dated September 3, 2007 inter alia directed M/s. Mega Millennium Investment Private Limited, M/s Mega Millennium Securities Private Limited and their directors namely Mr. Swaminathan Mahalingam and Mr. Pradipta Chatterjee not to buy, sell or deal in securities in any manner. M/s. Mega Millennium Investment Private Limited is registered with SEBI as a stock broker (trading member, Inter-connected Stock Exchange of India Ltd.) and also as a sub-broker affiliated to ISE Securities & Services Limited. M/s Mega Millennium Securities Private Limited was registered with SEBI as a sub-broker. The demat accounts of the said entities were also frozen till completion of the enquiry proceedings and passing of the final order by SEBI, thereon.

SEBI passed the said order pursuant to the receipt of complaint dated July 16, 2007 from one T.S. Nilkanthan and his wife Lakshmi Nilkanthan (collectively referred to as the complainants). They alleged that they had given shares (including shares belonging to their daughter) of various listed companies to M/s Mega Millennium Securities Private Limited on August 24, 2003 and August 01, 2005. They further stated that M/s Mega Millennium Securities Private Limited had also issued receipt (signed by Mr. Swaminathan Mahalingam as an authorized signatory) for the shares received by it. According to them, the shares were given with the understanding that M/s Mega Millennium Securities Private Limited would give periodical returns in the nature of interest / yield under the Securities Lending Scheme. Further, they stated that they were getting the returns including the dividends and bonus shares declared by the respective companies till November 2006. They contended that, neither interest/yield nor shares was received from M/s Mega Millennium Securities Private Limited, thereafter. Pursuant to the receipt of the aforesaid complaint and after conducting a preliminary inquiry, SEBI observed that inter alia M/s Mega Millennium Securities Private Limited (during its tenure as a registered sub broker) had misrepresented the investors claiming it to be a registered approved intermediary under the Securities Lending Scheme, 1997 of SEBI and conducted the lending and borrowing transactions, thereby prima facie violated the provisions of the aforesaid Scheme.

The ex parte ad interim order dated September 3, 2007 was passed in the above facts and circumstances and for the reasons stated therein. Subsequently, SEBI, after giving an opportunity of hearing to Mr. Pradipta Chatterjee, vide order dated June 3, 2008, on grounds as stated therein, revoked the interim order dated September 3, 2007, in so far as it related to him.

2. Pursuant to the order dated June 3, 2008, Juris Matrix, Advocates vide letter dated July 17, 2008 forwarded its letter dated June 27, 2008 (submissions on behalf of Mr. Swaminathan Mahalingam) to SEBI. Mr. Swaminathan Mahalingam is hereinafter referred to as the noticee for the sake of brevity. The noticee stated that all the securities of the complainants (valued about Rs.52,41,000/-) were transferred to his personal demat account in the year 2005, for which he had already paid an interest of approximately Rs.7,00,000/-. The noticeee stated that, the transactions had been amicably settled by entering into an agreement with the complainants whereby, the noticee agreed to pay an amount of Rs.15,53,630/- in 54 monthly installments of Rs.28,771/- from March 2008 to August 2012. According to the noticee, he is regularly making the payments as per the said agreement. The noticee further requested to revoke the directions passed by SEBI, vide order dated September 3, 2007. SEBI granted an opportunity of hearing to the noticee on August 21, 2008. Mr. Anil Shah, advocate and the noticee appeared before me on the said date and made submissions. During the course of hearing, the noticee undertook to sell the shares held by him in his demat accounts, if SEBI lifts the ban, and pass on the sale proceeds to the complainants on account of the balance amount payable to them as advance payments due from October 2008. Thereafter, the noticee, vide letter dated September 29, 2008 forwarded an undertaking dated September 29, 2008 signed by him, copy of his letter dated September 5, 2008 and copy of the letter of the complainants dated September 18, 2008 addressed to SEBI.

3. I have considered the oral as well as written submissions made on behalf of the noticee and other materials available on record. In the facts and circumstances of the case, the issue for consideration is whether the directions issued by SEBI vide ad interim ex parte order dated September 3, 2007 needs to be continued, revoked or modified in any manner in so far as it relates to the noticee. I note that the details of shares given by the complainants to the noticee are mentioned in detail in the interim order dated September 3, 2007. I further note that the complainants vide letter dated December 18, 2007 informed SEBI that they (including their daughter) had given shares to M/s Mega Millennium Securities Private Limited (on August 1, 2005) for which the noticee had given the acknowledgment on the letter head of the said M/s Mega Millennium Securities Private Limited. The noticee admitted, in his reply dated June 27, 2008 that the shares received from the complainants were transferred to his personal demat accounts in the year 2005. According to the noticee, the value of the said shares at the time of transfer was Rs.52,41,000/- and that he had paid Rs.7,00,000/- as interest to the complainant. Though, the certificate of registration of M/s Mega Millennium Securities Private Limited was surrendered in June 2006, the noticee continued to issue contract notes of M/s Mega Millennium Securities Private Limited due to oversight. The noticee during the course of hearing stated that he had agreed to make monthly installments to the complainants towards the dues, in terms of an agreement. I also note that the complainants vide letter dated September 18, 2008 have admitted the execution of the above mentioned agreement. Prima facie, on a perusal of the materials available on record, inter alia the following details merit reproduction.

i) Complainants had given shares of various companies to M/s Mega Millennium Securities Private Limited. ii) The shares were transferred to the personal demat accounts of the noticee in the year 2005.

iii) Though the certificate of registration of M/s Mega Millennium Securities Private Limited was surrendered in June 2006, its contract notes were used to be issued by the noticee. iv) The complainants received the returns (including the dividends and bonus shares) till November 2006. v) The noticee claimed to have entered into an agreement with the complainants whereby, he agreed to pay the amount in equal monthly installments.

4. The facts and circumstances and the method under which the shares were collected/returns given to the complainants would prima facie indicate that the same was done under the guise of Securities Lending Scheme 1997 (Scheme). However, in terms of the said guidelines, the transactions should be made through an approved intermediary registered with SEBI. Further, there shall be an agreement between the lender/borrower and the approved intermediary for depositing/borrowing the securities (as the case may be) in addition to various conditions stipulated under the Scheme. The said Scheme prohibits direct agreement between the lender and the borrower for lending or borrowing of securities. Prima facie, there is no evidence to show that, in the present case, the transactions took place in the method and manner specified under the Scheme. Further, admittedly, the noticee made use of the contract notes of M/s Mega Millennium Securities Private Limited, though its (M/s Mega Millennium Securities Private Limited) certificate of registration was surrendered prior to the said act of the noticee. Prima facie, inter alia, the noticee violated the provisions of the Scheme. The noticee chose not to give any submissions in this regard. On the other hand, the noticee submitted that he is making payments to the complainants as per the terms of an agreement. The complainants also, vide letter dated February 11, 2008 withdrew their complaint against the noticee. The noticee vide letter dated September 29, 2008, undertook to sell the shares held by him in his demat accounts, if SEBI lifts the ban, and pass on the sale proceeds to the complainants on account of the balance amount payable to them as advance payments due from October 2008. In the said undertaking, the noticee has given the details of the shares held by him in two demat accounts, as stated therein.

“ STOCK HOLDING CORPN- A/C 16016984- S. Mahalingam BILT- 900 TISCO-25 UNITECH-300 L&T- 20 TULIP-6 CRISIL-2 RUFILLA INTL-764 LAKSHMI VILAS- 196. STOCK WITH KOTAK SECURITIES DEMAT A/C LAKSHMI VILAS- 196 CREDIT WITH KOTAK- 1.53 LACS. “

5. I note that the noticee desires to sell the aforesaid shares and to act accordingly, in order to meet his commitments towards the complainants. The noticee further stated that SEBI could reopen the matter as and when more than three installments to the complainants are in default. I note that the complainants are aged about 80 years. In one of their letters (dated September 18, 2008), the complainants welcomed the move, if any, of the noticee to settle the balance amount earlier than the terms of the agreement. SEBI passed the ad-interim order dated September 3, 2007 inter alia against the noticee as the allegations against him and the other entities demanded immediate action. However subsequently, SEBI vide order dated June 3, 2008 revoked the directions imposed on Mr. Pradipta Chatterjee, as stated therein. Considering the totality of the facts and circumstances of the present case and considering the undertaking of the noticee, I am of the view that the circumstances under which the directions under the ad interim ex parte order dated September 3, 2007 (against the noticee) were passed no longer exists in so far as they relate to the noticee preventing him from accessing the securities market and freezing his demat account. Accordingly, ad interim ex parte order dated September 3, 2007 (against the noticee) is modified as ordered herein below.

6. Taking into account, the facts and circumstances of the case as stated above, I, in exercise of the powers conferred on me in terms of Section 19 read with Section 11 and 11B of the Securities and Exchange Board of India Act, 1992, hereby revoke the directions in so far as they relate to Mr. Swaminathan Mahalingam (Permanent Account No. AAFPM6917K) prohibiting him from accessing the securities market and freezing his demat accounts, imposed by Securities and Exchange Board of India, vide ad interim ex parte order dated September 3, 2007. However, the prohibition imposed on Mr. Swaminathan Mahalingam, from engaging in the activity of borrowing and lending of securities without obtaining registration from Securities and Exchange Board of India as an approved intermediary under the Securities Lending Scheme, 1997, would continue to operate.

7. The directions imposed, vide ad interim ex parte order of Securities and Exchange Board of India dated September 03, 2007 would continue to operate against M/s. Mega Millennium Investment Private Limited, M/s Mega Millennium Securities Private Limited, as ordered therein.

8. Mr. Swaminathan Mahalingam is further directed to submit a compliance report to Securities and Exchange Board of India in respect of his undertaking dated September 29, 2008 to sell the shares lying in his demat accounts and to pass on the sale proceeds to the complainants namely, Mr. T.S. Nilkanthan and his wife Ms. Lakshmi Nilkanthan towards settlement of the outstanding payable to the aforesaid complainants.

K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Place: Mumbai Date: November 21, 2008