IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No: 97 of 2005
Date of Hearing / 09/08/2005Date of Decision / 09/09/2005
Appellant – Represented by:
UBS Securities Asia Ltd. / Mr. C.A. Sundaram, Mr. J.J. Bhatt, Mrs. Zia Mody and Mr. P.N. Mody, Sr. Advocates along with Mr. Shuva Mandal, Advocate
Versus
Securities & Exchange Board of India / Respondent- Represented by
Mr.Rafique Dada, Sr. Advocate along with Mr. Cherag Balsara, Mr. Bhavik Narasana, and Mr. Jayesh Ashar, Advocates
CORAM
C. Bhattacharya, Member
R.N. Bhardwaj, Member
Per: R.N.Bhardwaj, Member
1. The appeal has been taken up for final disposal with the consent of both parties.
2. The appeal has been filed by UBS Securities Asia Limited, (‘UBS’ for short) against the impugned order dated 17/05/2005 issued by the Whole Time Member, SEBI, the operative portion of which reads as under:
“11.1 The findings in this case have highlighted serious regulatory concerns in that the PN/ODI route and its cover of anonymity is being used by certain entities without there being any real time check, control and due diligence on their credentials. Such a lapse has very grim portents as far as the market integrity and interest of investors are concerned. The mechanism of opening up the Indian securities market through PN /ODI route to entities outside India imposes a commensurate onus on the registered intermediaries (FIIs) of maintaining high standards of regulatory compliance, exercise of high due diligence and independent professional judgment and therefore any gaps in measuring up to the onus may be fraught with critical repercussions in the market.
“11.2. In the light of the above and in exercise of the powers conferred on me in terms of Section 19 of the SEBI Act, 1992, read with Section 11(4) and 11B of SEBI Act, 1992, I hereby prohibit UBS / its affiliates / agents from issuing off-shore derivative instruments with underlying Indian securities against the positions held by UBS in the Indian securities market for a period of one year. I also prohibit UBS / its affiliates / agents from renewing or rolling over any of the ODIs already issued against the positions held by it in the Indian securities market for a period of one year.
“11.3. I further direct UBS to establish highest standards of Customer Due Diligence process in line with the requirements of FII Regulations of SEBI.
“11.4. This is without prejudice to any other action taken or to be taken by SEBI against UBS in accordance with the provisions of SEBI Act, 1992, the Regulations made thereunder or any other law as may be applicable.
“This order shall come into force with immediate effect.”
3. UBS Securities Asia Limited, i.e., the appellant, is a licensed securities company in Hong Kong and is part of UBS Investment Bank which is Headquartered in New York and London. The appellant is a Foreign Institutional Investor (FII) registered with SEBI. Swiss Finance Corporation (Mauritius) Limited (‘SFCML’ for short) is registered as a proprietary sub-account of the appellant. UBS AG London issues Offshore Derivative Instruments (‘ODI’ for short) to its clients located outside India in accordance with FII Regulations and simultaneously hedges its risk on such ODIs with SFCML on the basis of a swap transaction under an ISDA Master Agreement. SFCML in turn invest in the Indian securities market. Investors in ODIs are clients of UBS London and not of the appellant.
4. SEBI investigated a steep fall in the Indian stock market on 17th May, 2004 with sensex falling by 567.74 points and NIFTY fell by 196.90 points. It resulted in temporary stoppage of trading twice on major stock exchanges i.e., BSE and NSE during the day. Such a fall in the market was unprecedented in the history of Indian stock market. SEBI rightly wanted to find out the reasons of such a crash in the market on 17/05/2004 and they found from their enquiry that UBS Securities Asia Limited was a major participant which sold securities to the extent of Rs. 188.35 crores in the cash market segment on 17th May, 2004. It was also a significant participant in the derivative segment (F&O) of the Indian securities market during May, 2004. It had built up NIFTY Futures Short positions to the extent of Rs. 434/- crores and Stock Futures short positions to the tune of Rs. 292/- crores. SEBI found from its investigations that UBS had also sold large quantity of securities on May 17, 2004 on behalf of various entities to which UBS AG, London, had issued Offshore Derivative Instruments. SEBI suspected that sudden fall in the market on 17/05/2004 could have been triggered by UBS playing “ducks and drakes with the market”. It put selling pressure in the market which was not related to fundamentals of the scrip. SEBI wanted to investigate whether the conduct of UBS and other players on 17/05/2004 was in violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
5. SEBI therefore called for information from UBS relating to its major ODI clients in terms of their addresses, the names of their Directors, Fund Managers, Major Shareholders, Top 5 Investors, etc. It wanted to ascertain the details of the ultimate beneficiaries as to whom the ODIs were issued by UBS AG, London. There was a protracted correspondence between UBS and SEBI for obtaining the above mentioned information. UBS informed that this information was not readily available with them and they would have to get it from the clients of UBS AG, London because even UBS AG, London also did not have this information. It also informed SEBI that some of the clients might not give the information to UBS due to confidentiality reasons but they would prefer to give directly to SEBI which is a regulator. It was also because some of the clients were dealing with other FIIs also, therefore, they would feel more comfortable in giving this information to a Central Regulatory Authority, i.e., SEBI. SEBI felt that the flow of information from UBS was delayed and tardy and in some crucial cases the information was not forthcoming even after numerous exchange of e-mails and personal meetings by UBS representatives with SEBI officials. Therefore a detailed show cause notice dated 24/11/2004 was issued to UBS. The show cause notice was issued under Section 11(4) and 11B of the SEBI Act, 1992 read with Regulations 15A, 20 and 20A of Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 (“FII Regulations” for short) and Clauses 1, 2, 5 and 6 of the Code of Conduct as specified in Regulation 7A of the FII Regulations. The show cause notice required from UBS inter alia the names and addresses of major shareholders and names of 5 top investors in respect of the major clients of UBS. They were also advised to confirm that none of the investors of their clients were Indian nationals, persons of Indian origin, or overseas corporate bodies “which are majority owned or controlled by Non-Indian resident”.
6. The show cause notice contains details of the information called for and received about various clients of UBS up to the date of issue of show cause notice i.e., 24/11/2004. It finally said that UBS did not give the required information in respect of the following six clients which are mentioned in the show cause notice:
S.No / Name of Client / Information Not Provided by the Appellant1. / Caxton International Limited / Specified details of the shareholders
2. / Indus Asia Pacific Fund Ltd. / Expressed inability to disclose the name and addresses of the top five investors for investments in Indian securities during May, 2004, directors and major shareholders pursuant to the fund’s organizational documents.
3. / ROHATYN / Did not release the names of top five investors to SEBI shareholding
4. / Indea Capital Pte. Ltd. / Declined to reveal information on the investors and shareholding
5. / PMA Prospect Fund / Declined to furnish the names and addresses of top five largest investors in the funds citing reasons of confidentiality
6. / Satva Asia Opportunities Master Fund / Declined to provide the names of investors of the fund.
7. The show cause notice further said that UBS has failed to furnish complete information in respect of their clients as sought by SEBI. It says:
“Thus UBS has failed to furnish complete information in respect of their clients as sought by SEBI. The information so far furnished by UBS was obtained after repeated follow ups resulting in delay in investigations. Thus UBS has failed to comply with the Regulation 20 and 20A of SEBI (Foreign Institutional Investors) Regulation, 1995. UBS has also violated clauses 1, 2, 5 and 6 of Code of Conduct as specified in Regulation 7A of SEBI (Foreign Institutional Investors) Regulation 1995.”
8. The show cause notice stated that UBS failed to comply with the KYC (Know Your Clients) requirements as specified in Regulation 15A of the FII Regulations read with Circular No. IMD/Cust/8/2003 dated 08/08/2003. The show cause notice further stated that for not furnishing the information reasons were not satisfactory as Regulation 20A of FII Regulations clearly stated that FIIs are required to fully disclose information about “terms of and parties to” ODIs relating to any securities listed in stock exchanges in India as and when SEBI may need.
9. In view of what is stated above the show cause notice finally asked UBS to show as to why directions under Section 11(4) and 11B of SEBI Act, 1992 including directions to prohibit UBS from “dealing in securities on behalf of and/or its clients in respect of whom it does not have information on their underlying investors” should not be issued against it. UBS was asked to submit their reply within 15 days from the date of receipt of the notice.
10. UBS replied to the show cause notice on 22/12/2004 wherein they submitted that they have not violated any of the FII Regulations mentioned in the show cause notice, neither have they violated the Code of Conduct under Regulation 7A of the FII Regulations. They further submitted that they had been cooperating with SEBI in furnishing the required information which they were not obliged to maintain in terms of FII Regulations. They submitted that whatever information was available with them was submitted to SEBI promptly and whatever additional information which SEBI wanted but which was not required to be maintained by them in terms of FII Regulations was promptly conveyed to their UBS, London clients in London. It followed up with them to give the necessary information to SEBI. They have been advising and persuading their clients to submit the required information and getting the same from their London and New York offices to comply with the investigation requirements of SEBI. They further submitted that they had not violated the provisions of Know Your Client (KYC) requirement of Regulation 15A(1) of FII Regulations. UBS provided additional information to SEBI on 14/01/2005 and through a confidential letter of 13/05/2005.
11. SEBI passed the impugned order of 17th May, 2005 after taking into account all the submissions, documents, reply to the show cause notice, information supplied by UBS after the issuance of show cause notice and the personal hearing on 1st February, 2005, and May 5, 2005. The order says:
“11.2. In the light of the above and in exercise of the powers conferred on me in terms of Section 19 of the SEBI Act, 1992, read with Section 11(4) and 11B of SEBI Act, 1992, I hereby prohibit UBS / its affiliates / agents from issuing off-shore derivative instruments with underlying Indian securities against the positions held by UBS in the Indian securities market for a period of one year. I also prohibit UBS / its affiliates / agents from renewing or rolling over any of the ODIs already issued against the positions held by it in the Indian securities market for a period of one year.
“11.3. I further direct UBS to establish highest standards of Customer Due Diligence process in line with the requirements of FII Regulations of SEBI.
12. The findings of SEBI in the impugned order are based on the investigations, show cause notice, reply to the show cause notice, oral and written submissions by UBS and its Advocates including the written submission on 13th May, 2005 which was after the conclusion of the personal hearing on 05/05/2005. The order brings out following issues for consideration:
i. UBS failed to comply with Know Your Client (KYC) requirement as laid down in Regulation15A of the FII Regulations.
ii. UBS failed to furnish complete information about names and addresses of top five shareholders / investors of its clients on 17/05/2004 which was sought by SEBI during the course of investigation.
iii. The flow of information from UBS to SEBI was tardy and came after repeated follow up by SEBI which scuttled the investigation by SEBI
iv. In the process, UBS also violated the Code of Conduct as prescribed under the third schedule of Regulation 7A of the FII Regulations.
v. UBS by its various acts of omission and commission was found guilty of non-compliance of Regulation 15A which required compliance of Know Your Client and Regulation 20 and 20A of FII Regulations i.e., non-submissions of information pertaining to top five investors / shareholders, fund manager and Directors of Fund as requested by SEBI.
vi. These acts of non-compliance of FII Regulations by UBS were detrimental to the integrity and orderly development of securities market and therefore directions under Section 11B and Section 11(4) of SEBI Act, 1992 were required to be issued.
13. UBS has failed to Comply with Regulation 15A of FII Regulations: The impugned order goes on explaining and detailing how UBS violated Regulation 15A of FII Regulations which reads as under: