Order in the matter of Illiquid Stock Options in respect of Shri Umang Nemani

WTM/ISD/105/2016 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER IN RESPECT OF SHRI UMANG NEMANI – IN THE MATTER OF ILLIQUID STOCK OPTIONS 1. Securities and Exchange Board of India ("SEBI"), vide an ad interim ex-parte order dated August 20, 2015 (hereinafter referred to as “interim order”), restrained 59 entities, including Shri Umang Nemani (PAN – ABOPN7213K), (hereinafter referred to as “debarred client”), from buying, selling or dealing in securities, either directly or indirectly, in any manner, till further directions. 2. Towards implementation of the said direction, the demat account number 1202060000927945 held by Shri Umang Nemani, has been frozen by the depositories for credit and debit of securities therein. The said demat account is a Mantra Account. 3. In respect of “Mantra Account”, the Operating Instructions issued by CDSL to its depository participants, provides the following: “Mantra accounts can be opened by member-brokers to provide margin trading and stock lending facility to their clients in the cash segment. Only corporate brokers with the prescribed net worth would be eligible for offering margin trading facility to their clients.

For holding securities purchased through margin trading, brokers would be required to maintain separate client wise demat accounts. For this purpose, DPs should note the following: a. For holding securities purchased through Margin Trading separate demat accounts, called as “MANTRA accounts” (MArgiN TRAding accounts), would have to be opened. b. The MANTRA accounts should be opened in the name of the “CLIENT” and not the Broker Member. c. The MANTRA accounts can be operated by the broker under a POA issued by the client. d. In order to enable DPs to identify ‘MANTRA’ accounts, CDSL has allotted separate sub-status codes under which these accounts have to be opened.” 4. Further, SEBI vide circular no. SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004 w.r.t. Margin trading Facility inter-alia provides the following: “Only corporate brokers with a "net worth" of at least Rs.3.00 crores would be eligible to offer margin trading facility to their clients. For the purpose of providing the margin trading facility, a broker may use his own funds or borrow from scheduled commercial banks and/or NBFCs regulated by RBI.

A broker shall not be permitted to borrow funds from any other source. Order in the matter of Shri Umang Nemani

5. While the proceedings pursuant to the interim order are still in progress, the debarred client’s stock broker, M/s. Globe Capital Markets Limited (hereinafter referred to as Globe Capital), vide letters dated September 7, 2015, September 21, 2015 and multiple emails, inter-alia, requested for de-freezing of the aforesaid Mantra Account number 1202060000927945 in view of the following submissions: a. The client availed Margin Trading Facility (MTF) from Globe Capital and accordingly, opened a demat account called “Mantra Account” no. 1202060000927945 in CDSL and gave the power of attorney for operating the said demat account to Globe Capital. b. Globe Capital provided its own funds to the debarred client for trading under the MTF facility. c. During the course of trading, the client purchased 4,54,000 shares of Central Bank of India, an approved security for margin trading, prior to the date of the interim order dated August 20, 2015. d. The debarred client has a debit balance of approximately Rs. 2.4 crores with Globe Capital, as on March 31, 2016. e. On account of the interim order, the Mantra Account of the debarred client was frozen and hence, Globe Capital or the debarred client are not able to sell the shares kept in the Mantra Account to clear the debarred client’s debit balance with Globe Capital. f. Globe Capital wrote to the debarred client vide letters dated August 24, 2015 and August 31, 2015 for alternative arrangements for making the payments but the debarred client failed to reply to the same or clear the debit balance.

6. In support of aforesaid claims, Globe Capital made the following submissions: a. Statement of funds ledger for the client for the period March 30, 2015 to March 31, 2016; b. Contract notes for the purchase of shares of Central Bank of India by the client; and c. Statement of holdings as on August 20, 2015 and September 19, 2015. 7. The debarred client’s stock broker, M/s. IndiaNivesh Securities Limited (hereinafter referred to as IndiaNivesh), vide letter dated September 1, 2015, inter-alia, requested for permission to sell the shares of the debarred client lying as margin with it, in view of the following submissions: a. The debarred client has debit balance amounting to approx. Rs. 1.14 crores with IndiaNivesh as on the date of the said interim order dated August 20, 2015. b. 1,25,000 shares of Central Bank of India of the client are lying with IndiaNivesh as margin. c. IndiaNivesh wrote to the client for clearing the debit balance but to no avail. d. The debit balance of the debarred client with IndiaNivesh is increasing on account of auction debit for non-delivery of shares sold on August 20, 2015 and delayed payment charges levied for debit balance in the ledger account.

8. In support of aforesaid claims, IndiaNivesh made the following submissions:

d. Copy of the KYC of the debarred client along with enclosures for proof of identity - PAN, proof of address, bank account and demat account; e. Statement of funds ledger for the time period April 1, 2015 to August 31, 2015; and f. Client demat confirmation statement for the time period April 1, 2015 to August 31, 2015. 9. SEBI vide letters dated February 8, 2016 to debarred client granted interim relief(s), as mentioned herein below: a. to subscribe to units of the mutual funds including through SIP and redeem the units of the mutual funds so subscribed; b. to avail the benefits of corporate actions like rights issue, bonus issue, stock split, dividend, etc. c. to sell the securities lying in your 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 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. d. the sale proceeds lying in the aforesaid escrow account shall be dealt with and utilised under the supervision of the concerned stock exchange as provided hereunder:-  the sale proceeds may be kept in a fixed deposit with a nationalized bank or may be utilised for subscription to units of the mutual funds which shall always be held in the demat form and if such units are redeemed the proceeds thereof shall be credited to the aforesaid escrow account or may be utilised for subscription to the units of mutual funds; Explanation: For the purposes of determining the portfolio value of the entities, the value of portfolio of securities lying in the demat account/s (individual and joint both) on the date of the interim order after excluding the value of shares that have been suspended from trading as on the date of the communication shall be considered.

For NBFCs and stock brokers the value of portfolio shall exclude the value of clients' securities lying in their demat accounts. e. The aforementioned window for sale of shares lying in respective portfolio shall be withdrawn if you execute any trade beyond those mentioned in point (3) above. The aforesaid reliefs shall be subject to the supervision of exchanges and depositories. The concerned depositories / exchanges may be contacted in this regard.” 10. However, Globe Capital vide its letter dated July 11, 2016, submitted that the aforesaid interim relief is not adequate and sought appropriate directions from SEBI to unfreeze the Mantra Account (1202060000927945) or permission to sell the shares to the extent of recovering the debarred client’s debit balance. 11. Upon enquiry, CDSL confirmed vide email dated August 16, 2016 that the value of the portfolio of securities (i.e. only Central Bank of India), as on August 12, 2016 is approx. Rs. 4.16 crores. 12. IndiaNivesh vide emails dated August 19, 2016, submitted that the debarred client’s shares are lying in IndiaNivesh’s Client Margin account, no. 1204940000000322. 13. In view of the submissions, I note that the broker, M/s. Globe Capital Markets Limited has not been restrained by the aforesaid interim order.

The Mantra Account operated by the debarred client or transactions therein are not part of the scheme alleged in the interim order. Similarly, M/s. IndiaNivesh Securities Limited has not been restrained by the aforesaid interim order. The trading members through whom the debarred client had traded (i.e. the transactions which form the substance matter of the interim order), were Harish Kumar Singhania and The Calcutta Stock Exchange Ltd. (Shubh Stock Broking Private Limited). 14. I also note that: a. In the matter of M/s. Kunvarji Finstock P Ltd. (Appeal no 161 of 2012) in the scrip of Tijaria Polypipes Limited, the Hon’ble SAT vide order dated August 6, 2012, inter-alia provided the following: “Therefore, in the peculiar facts and circumstances of the case, we are of the considered view that no prejudice will be caused to the ongoing investigations of the Board into the IPO manipulation of Tijaria Polypipes Ltd. if the appellant is allowed to square off the position by selling the shares of M and B Switchgears Ltd. in the account of the appellant to the extent it is required to realize its dues from the client.

The shares, if any, that remain after recovering its dues shall be transferred to the demat account of the client. The appellant is directed to inform the Board and the client soon after the sale. The details of the adjustments so made shall also be furnished. The appellant has also undertaken that in the event it is called upon by the Board or by this Tribunal to bring back the money which it would have realised by the sale of shares, it shall do so forthwith. The undertaking is recorded. It is, however, made clear that if and when the appellant is called upon to bring back the money, it shall be open to it to challenge the said directions and avail of such remedy, as may be available in accordance with law.” b. In accordance with the instructions of the Hon’ble SAT, in the appeal of Shaswat Stock Brokers Private Limited in respect to the Interim Order in the matter of SMS Techsoft (India) Ltd., SEBI had permitted the broker to square off the position by selling shares pertaining to the debarred client lying in its Account, to the extent required for realizing its dues from the client.

The remaining shares, if any, after recovering the dues was to be transferred to the demat account of the client. 15. Considering the aforesaid submissions and evidences brought on record and the precedents, I am of the view that the balance of convenience is in favour of the brokers, M/s. Globe Capital Markets Limited and M/s. IndiaNivesh Securities Limited. Accordingly, I allow the M/s. Globe Capital Markets Limited to sell the shares pertaining to the debarred client, lying in the Mantra Account – 1202060000927945, to the extent required for realizing its dues from the debarred client. The remaining shares, if any, after recovering its dues shall be transferred to the said demat account of the debarred client. 16. I also allow, M/s. IndiaNivesh Securities Limited to sell the shares lying in its Client Margin account, no. 1204940000000322 to the extent required for realizing its dues from the debarred client. The remaining shares, if any, after recovering its dues shall be transferred to the said demat account of the debarred client. The brokers may also be advised to inform SEBI and the client soon after the sale.

17. Each broker shall also provide an undertaking that in the event it is called upon by the Board to bring back the money which it would have realised by the sale of shares, it shall do so forthwith. 18. The aforesaid shall be subject to the supervision of exchanges and depositories and shall be without prejudice to the findings of pending investigation in the matter. 19. Accordingly, the representations of the client and his brokers, M/s. Globe Capital Markets Limited and M/s. IndiaNivesh Securities Limited in this regard are disposed of.

Sd/- DATE: August 22nd, 2016 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA