Order in the matter of Offer for Sale of NMDC Limited in respect of Bombay Stock Exchange

WTM/PS/35/MRD/DSA/SEPT/2014 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: PRASANTH SARAN, WHOLE TIME MEMBER Order Under Section 12A of the Securities Contracts (Regulations) Act, 1956 read with Section 11 of Securities and Exchange Board of India Act 1992 IN THE MATTER OF OFFER FOR SALE OF NMDC LIMITED In respect of Bombay Stock Exchange Limited Date of hearing: September 23, 2013 Appearances: For Noticee: Mr. Ashish Chauhan, M.D. & C.E.O., BSE Mr. Nehal Vora, C.R.O., BSE Mr. Khushro Bulsara, General Manager, BSE Mr. Shailesh Jain, A.G.M., BSE Mr. Pesi Modi, Senior Counsel Mr. Essaji Vahanavati, Partner, AZB Partners Ms. Sonali Mathur, Associate, AZB Partners Ms. Divij Kishore, Associate, AZB Partners For SEBI: Mr. Sunil Kadam, General Manager Ms. Maninder Cheema, Deputy General Manager Ms. Anitha Anoop, Deputy Legal Adviser Mr. Pradeep Kumar, Assistant Legal Adviser Mr. Suraj Mohan M., Assistant General Manager

1. NMDC Limited (hereinafter referred to as 'NMDC') is a company incorporated under the Companies Act, 1956. The promoters of NMDC offered to sell 39,64,71,600 equity shares of the company through the Offer for Sale (hereinafter referred to as the 'OFS') mechanism of the Bombay Stock Exchange Limited (hereinafter referred to as 'BSE') and the National Stock Exchange of India Limited (hereinafter referred to as 'NSE') on December 12, 2012. After the closure of the issue, Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) in order to ascertain the final cumulative bids, sought the bid data from BSE and NSE. BSE vide its e-mail (received by SEBI at 5:57 PM on December 12, 2012) stated that the final cumulative bids received at BSE were 29,91,10,449 shares. BSE vide its another e-mail received by SEBI at 07:04 PM on December 12, 2012, revised the figures and informed that the final cumulative bids received by BSE were 34,46,72,625 shares i.e. an increase of about 4.55 crore shares.

Upon noticing the difference of about 4.55 crore shares between the two figures, SEBI vide its letter dated December 13, 2012, sought clarification from BSE.

2. BSE vide its letter dated December 24, 2012, submitted that all the bids had come in before the cut off time of 03:30 PM on December 12, 2012. It was also said that BSE had received a facsimile request from one of its authorized Clearing Bank viz. Citibank on behalf of the Custodian, Citibank N.A at 03:55 PM in respect of updation of collateral of approximately 902 crore with respect to the bid for 4.55 crore shares. However, due to high volumes of bids received prior to the expiry of the issue closure, the collateral deposit request of Citibank N.A could not be uploaded on the exchange system in time. Consequently, Citibank N.A was not in a position to confirm the bids received for the 4.55 crore shares. Therefore, the data relating to the bid for 4.55 crore shares could not be communicated to SEBI at 05:57 PM. Citibank had legitimate expectation to participate in the NMDC OFS and BSE had decided to accept their request. After updating the collateral received in the system, Citibank N.A. was allowed by BSE to confirm the bid from the system at 06:22 p.m. to 06:31 p.m. It has been said that the collateral deposit had been received prior to the respective cut-off time and at no time the bid was uncovered by margins. In view of the revised final figures, intimation was again sent to SEBI by email at 07:04 PM, based on the final available data of bids received.

3. Pursuant to the examination of the details submitted by BSE vide its letter and emails, SEBI issued a Show Cause Notice (hereinafter referred to as ‘SCN’) dated April 18, 2013 under Section 12A of the Securities Contracts (Regulation) Act, 1956 read with Section 11 of the Securities Exchange Board of India Act, 1992 (hereinafter referred to as 'SEBI Act') to BSE, wherein it was alleged that the BSE has failed to comply with the clause 5(d) (ii) and (iii) of the operational guidelines on OFS issued vide SEBI Circular bearing no. CIR/MRD/DP/18/2012 dated July 18, 2012. Further, the SCN also alleged that even though the bid was made by the Custodian, Citibank N.A. within the cut-off time, the transfer of funds to the clearing corporation had taken place only at 05:09 PM on December 12, 2012 and the bid was confirmed much later between 06:22 PM and 06:31 PM. The SCN also alleged that the fund transfer as well as the confirmation of bids of the custodian, Citibank N.A. appears to have occurred after the permitted cut off time.

4. In the meantime, BSE sought inspection of documents/ information relied upon by SEBI for the purposes of the SCN. The inspection was undertaken by the representatives of BSE on June 05, 2013. Thereafter, BSE replied to the SCN vide its letter dated July 02,

2013 and requested for an opportunity of personal hearing. Accordingly, an opportunity of personal hearing was granted to the BSE on September 06, 2013. However, BSE vide its letter dated August 21, 2013, sought for an adjournment. The request of BSE was considered and the hearing was rescheduled to September 23, 2013. On this date, Mr. Ashish Chauhan, M.D. & C.E.O., Mr. Nehal Vora, C.R.O., Mr. Khushro Bulsara, General Manager and Mr. Shailesh Jain, A.G.M. appeared along with Mr. Pesi Modi, Senior Counsel, Mr. Essaji Vahanavati, Partner, AZB Partners, Ms. Sonali Mathur, Associate, AZB Partners and Ms. Divij Kishore, Associate, AZB Partners and made submissions on behalf of BSE. They also filed written submissions which were taken on record.

5. The submissions of BSE, made vide letter dated July 02, 2013 as well as during the personal hearing and the written submissions, are summarized in brief as under:

a. During the OFS process of NMDC, several bids were placed with BSE, inter alia, by Citigroup Global Markets India Pvt. Limited, DSP Merrill Lynch Limited, Axis Capital Limited and Antique Stock Broking Limited aggregating to 4.55 crore shares of NMDC for confirmation by the Custodian, Citibank N.A. b. All the bids in respect of which the data was furnished to SEBI as on December 12, 2012, had been placed before 03.30 PM on the OFS platform of BSE. At around 3.55 pm, prior to the expiry of the half an hour post close session, BSE had received a facsimile from one of its authorized Clearing Bank viz. Citibank on behalf of the Custodian, Citibank N.A. informing that at the request of the Custodian, the collateral of approximately 905 crores in respect of the 4.55 crore shares bid has been received for the credit of bank account of the Indian Clearing Corporation Limited (hereinafter referred to as 'ICCL') held with Citibank. c. The collateral deposit request of the Custodian, Citibank N.A. could not be uploaded on the exchange system in time, on account of an inadvertent human error and due to large volume of bids received in the last half an hour before the close of trading i.e. prior to 03.30 PM.

Therefore, Citibank was permitted to formally confirm the bid for 4.55 crore shares in the system between 06.22 PM to 06:30 PM. d. The bid of Custodian, Citibank N.A. was received before the cut-off time of 03.30 PM and the request for updating the collateral submitted before 04.00 PM shows that it had the legitimate expectation to participate in the OFS. e. While responding to the email received from SEBI at 05.57 PM, BSE had submitted that it had received the final cumulative bids for 29,91,10,449 shares of NMDC. This did not contain the bids for 4.55 crore shares received from the Custodian, Citibank N.A. due to the inadvertent human error of failure to input the collateral details, by the reason of heavy volume of bids received towards the end of the trading day. Thereafter, BSE had sent another email at 07:04 PM to SEBI informing thereby that the final cumulative bids by it were 34,46,72,625 shares which included the confirmed bid for 4.55 crore equity shares. f. BSE had considered that the submitted bids of Custodian, Citibank N.A. were not, at any time, uncovered by margins and hence there was no compromise on the risk management.

It had rejected several institutional bids which were received from brokers prior to 03.30 PM (normal trading cut-off time) on account of non-availability of collateral in time from the custodians. g. The bid in question is an institutional bid and clause 5(d)(iii) of the SEBI OFS circular bearing number CIR/MRD/DP/18/2012 dated July 18, 2012 would apply. The SEBI OFS circular does not expressly prohibit the deposit of funds in the clearing corporation within the permitted cut-off time and therefore the deposit of funds at 05:09PM (after the permitted cut-off time) is also permissible. h. In the case of institutional bids in an OFS, members/custodian make requests for updation of collateral (cash) to their respective clearing bank. The member’s/custodian’s clearing bank blocks the amount in the member’s/custodian’s bank account and confirms the same to the stock exchange/ clearing corporation by inter alia sending a confirmation through fax/ email/ through the system, to the clearing corporation for the specific amount. Based on the amount of collateral confirmed by the clearing bank, the amount is updated in the OFS system.

The bank account statement of ICCL with Citibank shows the credit of `1393,82,70,543. The said amount included the amount of `905,00,00,000 which was paid for the bid of 4.55 crore NMDC shares. i. The bid for 4.55 crore shares of NMDC was placed with BSE during the trading hours, and Citibank had placed the request for updation of collateral for `905 crores in respect of 4.55 crore shares at 03.55 PM which is prior to the expiry of the permitted cut off time as required under the SEBI OFS Circular. When Custodian, Citibank N.A. requested its bank namely Citibank to block the amount in favour of the exchange/clearing corporation for bids submitted in NMDC OFS before the cut-off time, it had for all practical purposes, “concluded the confirmation of the bid with the available funds”. After the request for updation of collateral, the transfer of funds and formal confirmation of bid were mere formal steps which were delayed due to an inadvertent human error at the end of BSE.

j. By accepting the bid for 4.55 crore shares, BSE has ensured that a market participant did not suffer unnecessarily due to an inadvertent human error at BSE. The Custodian had, for all practical purposes, confirmed its bid when it submitted the request for updation of collateral at 03.55 PM. BSE has ensured a level playing field for all market participants without compromising on risk management and has ensured that no trading members or investors’ interests are harmed or adversely affected due to normal innocent human error due to heavy bids being submitted towards the end of the trading day. k. BSE has complied with the provisions of the SEBI OFS Circular in spirit, without any risk to the interests of the investors or the securities market, which is the primary objective of the SEBI OFS Circular.

6. Having considered the above, I now proceed to the issue that arise for my consideration: Whether the confirmation of bids for 4.55 crore shares received from Citibank N.A. with available funds was concluded before 04:00 PM as per the SEBI Circular?

7. Whether the confirmation of bids for 4.55 crore shares received from Citibank N.A. with available funds was concluded before 04:00 PM as per the SEBI Circular?

a. I note that while responding to the email dated December 12, 2012 of SEBI, BSE at 05:57 PM sent an email stating that it had received the final cumulative bids for 29,91,10,449 shares in NMDC OFS. BSE vide its another email at 07:04 PM to SEBI revised the figures and submitted that the final cumulative bids are for 34,46,72,625 shares. The difference in these two figures is of 4.55 crore shares.

b. I note that during the OFS of NMDC, the Custodian, Citibank N.A. had placed bids for 4.55 crore shares for five members namely Citigroup Global Markets India Pvt. Limited, DSP Merrill Lynch Limited, Axis Capital Limited and Antique Stock Broking Limited with BSE during the trading hours. The details thereof are as under: Table A Bid Bid Entry Custodian Date Member BSE bid Bid Bid Value ID Time Approval Time Name Qty. Price (` Cr.) (`) 24738 02:40 PM 06:22 PM 12/12/2012 Citigroup Global 39,342,214 149.10 586.592 Markets India Pvt. Limited 22643 01:53 PM 06:24 PM 12/12/2012DSP Merrill 430,000 155 6.665 Lynch Limited 25409 02:48 PM 12/12/2012Citigroup Global 2,685,919 155.20 41.685 Markets India

Pvt. Limited 26000 03:00 PM 06:26 PM 12/12/2012Antique Stock 1,600,000 151.25 24.200 Broking Limited 22585 01:52 PM 06:27 PM 12/12/2012DSP Merrill 444,000 150 6.660 Lynch Limited 28185 03:24 PM 06:30 PM 12/12/2012Axis Capital 1,060,043 154 16.325 Limited Total 45,562,176 682.128 From the above, I note that all the bids from Custodian Citibank N.A. were entered before 03:30 PM (the cut-off time).

The comprehensive guidelines on OFS issued vide SEBI Circular bearing number CIR/MRD/DP/18/2012 dated July 18, 2012, requires that:

"5(d) Timelines (i) The duration of the offer for sale shall be as per the trading hours of the secondary market and shall not exceed one trading day. (ii) The placing of orders and funds on the exchange system shall take place only during trading hours. (iii) In case of institutional trades, the custodians shall conclude the confirmation of bids with the available funds not later than the end of half an hour post close session." From the above, it is clear that the placing of orders and funds on the exchange system in an OFS should take place during the trading hours only. In the case of institutional trades, the custodians vide the said SEBI circular have been given additional half an hour time post the close of trading session for confirmation of the bids with the available funds.

c. Let us examine, when the funds were made available by the Custodian, Citibank N.A for the said bids of 4.55 crore shares. In this regard, BSE in its reply has submitted that at 03:55 PM (i.e. prior to the expiry of the half an hour post close session) it had received a facsimile request from the one of its authorized Clearing Bank viz. Citibank on behalf of the Custodian, Citibank N.A for updation of the collateral of 905 crores in respect of the said bids. It is the case of BSE that due to the unexpected high volume of bids received immediately prior to the last half an hour before the close of OFS, the collateral deposit request of Custodian, Citibank N.A. could not be uploaded on the exchange system in time, on account of an inadvertent human error. Therefore, BSE has stated that, Custodian, Citibank N.A. was not in a position to confirm the bids prior to 04:15 PM (i.e. the extended time for confirmation of institutional trades jointly agreed upon between the exchanges and also intimated to SEBI).

BSE has also said that it had received 2,846 bids (i.e. 22.67% of the total bids) during the period from 02.00 PM to 03.00 PM, whereas it received 3,136 bids (i.e. 24.99% of the total bids) in the last half an hour before the close of trading (i.e. between 03.00 PM to 03.30 PM), thereby aggregating to 47.66% of the total 12,549 bids.

d. I have seen the copy of the facsimile request of the Citibank on behalf of the Custodian, Citibank N.A. received by BSE at 03:55 PM which reads under: 'As per the undermentioned details have been transferred by the bank to the Exchange A/c No.: xxx towards Base Minimum & Additional Capital (Total Liquid Assets)' From a reading of the facsimile, I note that the funds are said to have been transferred to the bank account of the exchange by the Custodian, Citibank N.A. BSE in its reply has submitted that the collateral deposit request of Citibank N.A. was a manual updation request and the same could not be uploaded in time in the collateral module of ICCL before the closure of bid confirmation module at 04:00 PM due to unexpected high volume of bids. BSE has submitted that the manual updation of collateral is time consuming and is done on maker - checker basis so that the name is cross checked and verified. Further, it has also been said that the process involves confirmation with the banks in case of large amounts. The relevant extract of the process note for acceptance and updation of collateral (cash) for OFS at BSE as submitted by it during the preliminary examination is as under: '1.

Members make requests for updation of collateral to their respective clearing bank through the online module provided by the exchange or by way of written communication (fax/ email etc.). 2. The member's clearing bank blocks the amount in the member's bank account and confirms the same at BSE/ clearing corporation either: a. By approving the same in the exchange's online module provided by the exchange, directly or b. By sending a confirmation through fax (email, etc.) to the clearing corporation. 3. Based on the amount of collateral confirmed by the bank, the amount is updated in the OFS system. 4. The cash collateral deposits confirmed as above, by the respective clearing banks to the clearing corporation during the day, are either posted to the credit of the clearing corporation's bank account singly or in case of certain banks, transferred in a lump sum to the exchange's bank account maintained with them, as per the internal practice followed by the respective banks.' From the above, it is observed that as per the procedure for updation of cash collateral, the clearing bank of the members blocks the amount in the bank account and confirms the same to the clearing corporation through online module or through written communication, clearing corporation in turn updates the same in the system.

e. Having considered the above, I note that the facsimile request received by BSE was from one of its authorized Clearing Bank viz. Citibank, on behalf of the Custodian, Citibank N.A. and the account number as stated in the facsimile is of ICCL's own bank account maintained with Citibank.

The facsimile clearly mentions that the funds have been transferred to the exchange (BSE). It is now relevant to see the bank account statement in order to see the credit of the funds. I have perused the bank account statement of the relevant bank account of ICCL and find no separate credit entry for the amount of ` 905 crores. The only large amount credit entry visible from the said bank statement is of ` 1393,82,70,543 at 05:09:36 PM, which as per the communication from BSE is for a total of 11 entries and ` 905 crores is one of these 11 entries. Such credit entry at 05:09:36 PM is clearly well after the permitted time of half an hour after the closure of bidding session i.e. 04:00 PM (or 04:15 PM as argued by BSE).

f. Before concluding, let me also consider the volume theory of BSE. It has been argued by BSE that it had received 3,136 bids (i.e. 24.99% of the total bids) in the last half an hour before the close of trading (i.e. between 03.00 PM to 03.30 PM). Due to such high volume of bids received half an hour before the close of trading, the collateral deposit request of Custodian, Citibank N.A. could not be uploaded on the exchange system in time on account of an inadvertent human error. In this regard, I note that BSE during the period of 03:30 PM to 04:00 PM had updated only three (3) collateral requests received from the custodians in respect of the institutional bids. The amount involved in such bids was only ` 30,17,97,030, whereas the collateral request of the Custodian, Citibank N.A was of about ` 905 crore.

g. I also note from the submission of BSE that in addition to the bids for 4.55 crore shares there were other fifty four (54) Institutional bids which were received by BSE prior to the cut-off time. From the available records, it is observed that these bids were not accepted by BSE, due to non-availability of collateral in time from the respective custodians.

h. From the SCN, I note that the bids for 4.55 crore shares were confirmed between 06:22 PM and 06:30 PM. BSE has submitted that when Custodian, Citibank N.A. requested its bank to block the amount in favour of the exchange/ clearing corporation for bids submitted in NMDC OFS before the cut-off time, it had for all practical purposes, 'concluded the confirmation of the bid with the available funds'. It has also been said that after the request for updation of collateral, the transfer of funds and formal confirmation of bid were mere formal steps which were delayed due to an inadvertent human error at the end of BSE. Consequently, Citibank was unable to confirm the bids with collateral in the online confirmation system of BSE until the collateral was updated in the system by BSE/ ICCL, since the online confirmation system of the BSE would not have permitted the confirmation of the bid by Citibank without the updation of the collateral. BSE has also argued that as the SEBI circular on OFS guidelines does not expressly prohibit the deposit of funds in the clearing corporation within the permitted cut-off time, the deposit of funds at 05:09 PM is permissible.

The submission of BSE that when Custodian, Citibank N.A. had requested its bank to block the amount in favour of the exchange/ clearing corporation for the bids submitted, it had for all practical purposes, 'concluded the confirmation of the bid with the available funds' is against the SEBI Circular. I note that the SEBI Circular dated July 18, 2012 requires that the order placement and fund transfer to the exchange system must happen only during the trading hours. The circular then gives additional half an hour time to the Custodians in the case of institutional trades for necessary compliance. From the facts of the present matter, it is seen that that the funds were made available in the bank account of clearing corporation only at 05:09 PM, i.e. much after the cut off time of 04:00 PM as given by the SEBI Circular. In view of the same, I find no merit in the submission of BSE that after the request for updation of collateral, the transfer of funds and formal confirmation of bid were mere formal steps as the same is not in line with the SEBI Circular.

i. I note from the submission of BSE filed during the personal hearing that the tripartite agreement dated September 25, 2005 (as amended on October 03, 2011), between BSE, BOI Shareholding Limited and Citibank N.A., in clause 4(xiv) inter alia stipulates that, "the clearing bank shall not after having given confirmation (verbal/ written) regarding a member having cleared his obligations to the BSE and/ or the clearing house make any alteration/ modification/ reversal in respect of such confirmation". It has been argued that once Citibank gave its fax confirmation at 03:55 PM, Citibank was bound to honour the same and BSE was bound to accept the same.

This submission of BSE, has no relevance to the present proceedings as the SEBI circular clearly states about the timelines to be followed in the cases of OFS.

BSE has also submitted that there was no risk to ICCL and it has taken steps to avoid such problems recurring in future. I note that BSE has taken certain corrective steps and made the system of updating of collateral automated and the manual entry system of collateral is no longer used.

j. While concluding, I note that the exchange has not intimated SEBI about the admitted error, rather on noticing the difference in figures while reviewing the revised cumulative bid data as received from BSE at 07:04 PM, SEBI had sought for an explanation from BSE. I note that the funds reflected in the account of ICCL at 05:09:36 PM only. I am unable to appreciate as to what was the 'inadvertent human error' in the present case, as claimed by BSE.

k. From the above discussion relating to the said bid, it is clear that: - the bids were entered before the 03:30 PM (i.e. the cut off time), - the funds reflected in the bank account of ICCL at 05:09:36, and - the bids were confirmed between 06:22 PM and 06:30 PM. Therefore, it can be said the confirmation of bids for 4.55 crore shares received from Citibank N.A. with available funds was clearly not concluded within the stipulated time of half an hour after post close session. All these were clearly in violation of the SEBI Circular on OFS issued vide SEBI Circular bearing number CIR/MRD/DP/18/2012 dated July 18, 2012.

8. I find that the case laws referred by BSE i.e. Harinarayan G. Bajaj Vs. SEBI ([2008] 83 SCL 561) is not relevant in the circumstances as mentioned above. The SEBI Circular dated July 18, 2012 is quite clear that for the institutional trades the rule is 'confirmation of bids with the available funds not later than the end of half an hour post close session' and not as argued by BSE that there is no explicit prohibition. Further, I note that the violation as noted above is not a 'technical and venial breach' as argued by BSE while relying on the orders of Hindustan Steel Vs. State of Orissa [AIR 1970 SC 253] and Dr. (Mrs.) Renuka Datla Vs. SEBI [MANU/SB/0192/2006].

BSE while relying on the order of Hon'ble Supreme Court in the matter of Seksaria Cotton Mills Vs. State of Bombay [1953 SCR 825] has also argued that the interpretation of the OFS circular should be purposive in nature and as long as the intent and object sought to be achieved thereby is firmly complied with, it ought not to be held liable for the violation of the circular. I note that the facts of the present case are different from the case law cited, as in the present case, BSE has admittedly rejected the bids of 54 Institutional clients which were received by it prior to the cut-off time, for the reasons that the collaterals were not received in time from the respective custodians. As noted earlier the violation proved as against BSE cannot be said to be technical breach of law and therefore, in such circumstance, the case laws are not applicable.

9. Now, I have to decide on the appropriate penalty to be awarded to BSE.

10. In view of the discussions in earlier paragraphs about the violation of the SEBI Circular bearing number CIR/MRD/DP/18/2012 dated July 18, 2012 committed by BSE, I, in exercise of the powers conferred upon me in terms of Sections 11(2)(j) and Section 19 of the Securities and Exchange Board of India Act, 1992 read with Section 12A of Securities Contracts (Regulation) Act, 1956, hereby issue the following directions:

a. I hereby censure BSE for its conduct as observed in this Order and direct it to be careful and cautious in its dealings in the securities market and comply with all the legal requirements that govern its functions as a stock exchange.

b. BSE is hereby directed to engage one or more independent consultants (the 'Consultant') to review the entire sequence of events in the matter, the process followed, checks in place, systems employed while accepting the OFS bids by BSE. The Consultant should bring out the shortcomings, if any, and suggest remedial measures within a period of three (3) months. BSE shall then fix the responsibility internally, both in terms of processes and personnel, and take appropriate action.

c. BSE shall make a report to its Board, under intimation to SEBI within a further period of three (3) months as to how the recommendations of the Consultant have been implemented including the action as directed in sub-paragraph 'b' above.

d. Securities and Exchange Board of India is advised to conduct a detailed probe into the confirmation of bids by Citibank N.A.

DATE: September 11th, 2014 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA