Order in respect of JHP Securities Pvt. Ltd.

WTM/PS/36/IVD/ID-10/MAY /2012 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER In the matter of Insider Trading by Shri J.E. Talaulicar in the Shares of Tata Finance Ltd. In respect of JHP Securities Pvt. Ltd (SEBI Reg No. INB 010990036)

ORDER Under Regulation 28(2) read with Regulations 38(2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008

1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigation into the insider trading by Shri J. E. Talaulicar in the shares of Tata Finance Ltd. (since merged with Tata Motors Ltd, hereinafter referred to as ‘TFL’), for the period September, 2000 to March, 2001. Shri J.E. Talaulicar was the director of TFL and the chairman of Niskalp Investments and Trading Company Limited (hereinafter referred to as ‘NITCL’), a subsidiary of TFL.

2. Investigations revealed that Jaivant E. Talaulicar was a director of TFL from January 3, 1995 to August 17, 2001 and a director of NITCL from March 15, 1991. Talaulicar became the chairman of NITCL in May, 1995 and continued till September 21, 2001. The shares of TFL were listed on the Bombay Stock Exchange (BSE) as well as on the National Stock Exchange (NSE). Investigations further revealed that JHP Securities Pvt. Ltd (hereinafter referred to as ‘JHP’/ ‘the noticee’/ ‘the broker’), an empanelled broker of NITCL, and its sub broker JIP Investment Share & Stock Sub-Broker (hereinafter referred to as ‘JIP’) acted as a conduit for the transfer of funds from NITCL to Talaulicar and thus facilitated the siphoning off of funds from NITCL.

3. Based on the findings of the investigation, SEBI initiated enquiry proceedings against the noticee in terms of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as ‘Enquiry Regulations’), and appointed an Enquiry Officer under Regulation 28(1) of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 to inquire into the dealings of JIP in the scrip of Tata Finance Ltd. (TFL). The Enquiry Officer submitted his Report dated October 20, 2004 in terms of Regulation 13 (1)(b)(ii) of the Enquiry Regulations recommending a penalty of suspension of the certificate of registration of the noticee for a period of four months for violating the provisions of Clauses A(1), (3) & (5) and B(1) & (2) of Schedule II of the Code of Conduct for Stock Brokers under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 read with Regulation 4 of SEBI (Insider Trading) Regulations, 1992 and Regulation 4(c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995.

4. Subsequently, a notice dated November 5, 2004 (hereinafter referred to as SCN), under Regulation 13(2) of the Enquiry Regulations was issued to the noticee asking it to show-cause as to why appropriate action as recommended by the Enquiry Officer, should not be taken against it. The noticee was advised to reply to the SCN within twenty-one days of the receipt thereof. The noticee was also informed that in case of failure to reply, it would be presumed that the noticee had no explanation to offer and that SEBI shall be free to take such action in the manner as it deemed fit. A copy of the Enquiry Report was also forwarded to the noticee along with the SCN.

5. The noticee replied to the SCN vide its letter dated January 27, 2005.

6. I note that the noticee has been given various opportunities of personal hearing. However, he went on seeking adjournments under one pretext or the other. The first such hearing was scheduled on March 11, 2005, which had to be postponed at the request of the noticee. The second hearing was scheduled on March 2, 2006, which was also adjourned. The third hearing was fixed on October 4, 2007 and at this point of time, the noticee submitted that he wanted to settle the matter through consent in terms of the SEBI Circular dated April 20, 2007, and therefore the matter was kept in abeyance. However, the consent proposal of the noticee was rejected by the High Powered Action Committee, in its meeting dated December 01, 2008. The noticee was, therefore, given another opportunity of personal hearing on March 31, 2009. Meanwhile, the noticee, vide a fax-letter dated

March 31, 2009 requested for rescheduling the date of hearing. The noticee was then given an opportunity of personal hearing before me on June 3, 2011. However, the noticee failed to appear for the hearing and requested a month’s time to enable him to prepare for the case. Accordingly, the next date for personal hearing before me was fixed on July 15, 2011. The noticee, vide its letter dated July 8, 2011, again requested for postponement of the scheduled hearing.

7. In the interest of natural justice, the noticee was given final opportunity to appear in person before me on August 29, 2011 and it was communicated, vide letter dated July 18, 2011, to the noticee that this was the final opportunity and no further opportunities would be given to him. The noticee was intimated about the aforesaid date of personal hearing vide letter dated July 18, 2011, which was received by the noticee on July 20, 2011 at its office. Vide its letter dated August 27, 2011, the noticee again sought adjournment of the hearing. I note that the noticee, on all the previous occasions, did not appear for personal hearing, despite various opportunities given to him. I am of the considered view that the matter can be proceeded on the basis of the replies already filed by the noticee, having granted the noticee sufficient opportunities to defend its case in compliance with the principles of natural justice.

8. Thereafter, vide letter dated December 27, 2011, the noticee made an application to settle the matter in terms of the SEBI Circular dated April 20, 2007. However, the consent proposal of the noticee was rejected and the same was communicated to him vide letter dated March 30, 2012. Subsequently, the noticee filed further written submissions vide its letter dated April 4, 2012, reiterating its submissions filed vide various letters, including a letter dated October 3, 2011. The noticee, in its replies, has, inter alia, submitted that:

a. The noticee has requested, on several occasions, various documents, which have not been provided to them till date by SEBI. b. The noticee had requested that it be allowed to cross examine persons whose statements have been recorded by SEBI with regard to the matter at hand, but SEBI has not granted the same.

c. The noticee has an impeccable track record and there is nothing on record to doubt its integrity. d. The noticee had not indulged in any manipulative activity. e. NITCL had transferred Rs.70,00,000 to the noticee by way of adhoc margin since NITCL was contemplating heavy investments in the market. f. The noticee transferred Rs.69,00,000 to JIP as the financial year was ending and there was a credit balance in the account of JIP. The noticee was not concerned with what JIP did, with the amount so transferred. g. Though the proprietor of JIP is related to a director of the noticee, it cannot lead to the inference that they were acting in concert. h. The payment received from NITCL was deposited in the noticee’s capital account as a matter of operational convenience as at the relevant time an excess amount of Rs.5,57,00,000 was lying in the account of NITCL maintained by JHP, which in fact was the noticee’s capital amount. i. The noticee did not have any dealing with JE Talaulicar. j. The amount paid to NITCL in June 2001 was towards its credit lying with the noticee as margin. k. Inadequacies in the client registration forms were a technical lapse. l. The noticee did not delay in making payments to NITCL, and in fact, it was to receive money from NITCL. m. Payments to Superior Financial Consultancy were made at the behest of NITCL. Further, adjustment of debit and credit balances between holding and subsidiary companies by the brokers is a commonly accepted market practice.

9. I have carefully considered the SCN and the other relevant material on record. The issues that arise for my consideration are: a. Whether the noticee broker acted as a conduit for the transfer of funds from NITCL to Talaulicar and later for the refund of the amount by Talaulicar to NITCL in violation of the provisions of Clauses A(1), (3) and (5) of Schedule II of the Code of Conduct for Stock Brokers under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 read with Regulation 4 of SEBI (Insider Trading)

Regulations, 1992 and Regulation 4(c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995? b. Whether there were deficiencies in client registration and client agreement maintained by the noticee, in violation of SEBI Circular SMDRP/POLICY/CIR/5-97 dated April 11, 1997? c. Whether the noticee broker delayed making payments to NITCL, in violation of Clause B (1) of the Code of Conduct as specified in Schedule II, read with Regulation 7 of SEBI(SB&SB) Regulations, 1992 and SEBI Circular SMD/SED/CIR/93/23321 dated November 18, 1993?

Whether the noticee broker acted as a conduit for the transfer of funds from NITCL to Talaulicar and later for the refund of the amount by Talaulicar to NITCL in violation of the provisions of Clauses A(1), (3) and (5) of Schedule II of the Code of Conduct for Stock Brokers under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 read with Regulation 4 of SEBI (Insider Trading) Regulations, 1992 and Regulation 4(c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995? i. At the outset, I note that the noticee has been provided all documents that have been relied upon in this investigation. Further, I note that there are no statements being relied upon, and so the request for cross-examination cannot be granted.

ii. I note that the broker member JHP, being an empanelled broker of NITCL, received an amount of Rs. 70 lakh on March 30, 2001 from NITCL. This, I note, was despite the fact that the account reflected a credit balance of Rs. 83 lakh. On the very next day of this transaction, JHP transferred Rs. 69 lakh to its sub-broker, JIP. I note that Jignesh Patel, proprietor of JIP, is a relative of Pankaj Patel, director of JHP Securities. JIP, in turn, issued cheques dated March 30, 2001 in favour of Talaulicar and his family members purporting to be a sale transaction of one lakh shares of TFL by them on September 6, 2000 at the rate of Rs. 69 per share. The details of the transactions are given below:

Bill No. Bill Date Shares Rate Seller Amount Corporation Bank cheque sold (Rs) (Rs.) details FST/165 06.09.00 10,000 69 Anant Talulikar 690000 106293, dtd.30/03/01 FST/166 06.09.00 22,500 69 Aparna Talulikar 1552000 106292, dtd.30/03/01 FST/167 06.09.00 35,000 69 J. E. Talulikar 2415000 106289, dtd.30/03/01 FST/18 06.09.00 10,000 69 Sandeep Talaulicar 690000 106290, dtd.30/03/01 FST/169 06.09.00 22,500 69 Usha Talaulicar 1552000 106291, dtd.30/03/01 Total 100,000 69,00,000 iii. JIP’s account was debited on April 4, 2001 and April 7, 2001. Further, Talaulicar had given instructions to the depository for transfer of 1 lakh shares to JIP’s DP account and the shares were actually transferred to JIP’s account on April 4, 2001. Thus, while the cheques were dated March 30, 2001 and the shares were transferred on April 4, 2001, the bills were dated September 9, 2000. I note that the price of the shares of TFL on March 30, 2001 was only Rs.40 per share, whereas on September 6, 2000 it was Rs.69 a share.

iv. I also note that there was a sale of 1,00,000 shares by JIP through JHP and Prashant J. Patel, Member of NSE between May 18, 2001 and May 29, 2001 for a total of Rs. 34.21 lakh. Thus, it appears that, while the actual sale of shares had taken place in May, 2001 for Rs. 34.21 lakh, Talaulicar and his family members received a consideration of Rs. 69 lakh on March 30, 2001. Thus, Talaulicar and his family members seemed to have received an excess amount of sale consideration of Rs. 34.79 lakh, i.e. the difference between Rs. 69 lakh and Rs. 34.21 lakh.

v. I note that on April 30, 2001, TFL made disclosures, whereby it was announced that there had been a substantial erosion in the value of NITCL and that NITCL had incurred a provisional loss of Rs. 79.37 crore for the year ended March 31, 2001 as against the disclosed profit of Rs. 11.46 crore for the six months ending on September 30, 2000. Thereafter, Talaulicar transferred Rs. 34.79 lakh, an amount equal to the excess sale consideration to JIP between May 25, 2001 and June 6, 2001. JIP transferred Rs.69 lakhs (the amount of excess sale consideration of Rs. 34.79 lakh along with the actual sale proceeds of Rs. 34.21 lakh held by it as proceeds from the sale of 1,00,000 shares in May, 2001) to JHP in June 2001. JHP in turn returned that credit balance of Rs. 83 lakh together with Rs. 70 lakh that it had received on March 30, 2001 to NITCL in May-June 2001 as no major purchase of securities was made. Thus, overall, a sum of Rs. 153 lakh was returned by JHP in May-June, 2001 to NITCL as NITCL decided not to invest in securities.

vi. JIP had issued bills dated September 6, 2000 reflecting sale of one lakh shares of TFL by Talaulicar and his family members. It appears that no such transactions had ever taken place and the aforesaid bills were created with a back date to enable Talaulicar to get a higher price for the shares of TFL prevailing on September 6, 2000 which was between Rs. 65.10 to Rs. 74.05 at BSE as against the then ruling market price of Rs. 40 on March 30, 2001.

vii. On examination of the facts of the case and the explanations offered by the noticee broker, I find it unlikely that the chain of transfer of funds, to and from NITCL to JHP to JIP and then to Talaulicar is a sequence that occurred by chance. The amounts received by the noticee from NITCL and the amount transferred by it to JIP are almost the same. The transfer also took place merely a day apart. On the other hand, the subsequent receipt of money by the noticee from JIP and payment to NITCL was again closely matched. It is highly unlikely that both tranches of the transactions, if independent of each other, could be so closely linked in terms of amount and dates. The contentions of the noticee seem to be a belated attempt to cover up the transgression.

viii. In view of the foregoing, it appears that the noticee broker acted as a conduit for the transfer of funds from NITCL to Talaulicar and later for the refund of the amount by Talaulicar to NITCL. The conduct of the broker is highly irregular and in violation of the provisions of Clauses A(1), (3) and (5) of Schedule II of the Code of Conduct for Stock Brokers under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.

Whether there were deficiencies in client registration and client agreement maintained by the noticee, in violation of SEBI Circular SMDRP/POLICY/CIR/5-97 dated April 11, 1997?

i. The noticee has admitted that there were deficiencies in the client registration form of NITCL, for example, the details with regard to banker certification of account number, market value of portfolio, registration with any other broker, authorized signatory were absent.

ii. In view of the same, I find that the noticee violated the SEBI Circular SMDRP/POLICY/CIR/5-97 dated April 11, 1997.

Whether the noticee broker delayed making payments to NITCL, in violation of Clause B (1) of the Code of Conduct as specified in Schedule II, read with Regulation 7 of SEBI(SB&SB) Regulations, 1992 and SEBI Circular SMD/SED/CIR/93/23321 dated November 18, 1993?

i. I note that on September 30, 2000 sale transaction(s) to the tune of Rs.11.55 crores were entered into by NITCL, wherein the payment to be made to NITCL by the broker was adjusted against receivables from TFL. Further, the securities representing sales made by NITCL were not credited to broker’s pool account but were directly delivered to TFL, the purchaser of shares. I note that the noticee has submitted that adjustment of debit and credit balances between holding and subsidiary companies by the brokers is a commonly accepted market practice However, the noticee has not provided anything to prove that it had been authorized by NITCL to adjust the amount due to it against the payments which the broker was due to get from TFL.

ii. Similarly for a transaction of sale on November 29, 2000 by NITCL, the proceeds of Rs. 53 lacs was credited to the account of one Superior Financial Consultancy, which has a common director with the noticee.

iii. In view of the above, I am of the opinion that the conduct of the noticee is not in conformity with SEBI Circular SMD/SED/CIR/93/23321 dated November 19, 1993.

10. I note that pursuant to the notification of the Intermediaries Regulations, the Enquiry Regulations have been repealed and in terms of Regulation 38(2) of the Intermediaries Regulations, notwithstanding such repeal, any enquiry commenced under the Enquiry

Regulations, shall be deemed to have been commenced under the corresponding provisions of intermediaries Regulations.

11. Accordingly, I, in exercise of the powers conferred upon me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulations 28(2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby suspend the certificate of registration of JHP Securities Pvt. Ltd (SEBI Reg No. INB 010990036), member- BSE, for a period of 1 (one) month.

12. This order shall come into force on expiry of twenty one days from the date of this order.

DATE: May 11, 2012 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA