2018 (12) TMI 1979 - Board - SEBI

Non executive director liability on omissions or commissions by a company - Noticees had failed to exercise reasonable care and had failed to act diligently - ad-interim ex-parte order could be passed by SEBI in the interests of investors or the securities market - Noticee no. 4, 6, 7 8 have contended that they were past non executive directors of the company, and hence they cannot be held liable for the violations committed by the company - HELD THAT - It is pertinent to note that the interim order in the present case was passed under the provisions of sections 11(1), 11(4) and 11B of the SEBI Act. The second proviso to section 11(4) clearly provides that Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned . Further, various courts while considering the aforesaid sections of the SEBI Act have also held that principles of natural justice will not be violated if an interim order is passed and a post-decisional hearing is provided to the affected entity. Noticees by their own admission, have stated that they became directors of the company to recover the loans (loan details recorded in paras 7 (A) (ii) and 7 (B) (xii) of this order) provided by them to Mr. Pankaj Goel. They have not adduced any evidence to show that they have taken any corrective measures as regards the violations committed by F6 Finserve. It is only in 2018, after SEBI started examining the affairs of F6 Finserve and its other directors namely, Mr. Pankaj Goel and Ms. Meenu Goel i.e. after the inspections of F6 Finserve conducted by NSE and SEBI that the Noticees have taken steps against Noticee nos. 1, 2, 3 and 5 as stated in their reply and additional submissions which are recorded in para 7 and 9 of this order. All the directors of the company including Noticee nos. 4, 6, 7, 8, 9 and 10 who are non- executive directors had provided their personal properties as security for the loan availed by F6 Finserve and had also given personal guarantee. These properties were also used as security for the overdraft facility limit of Rs. 2 Crore to F6 Commodities. From the aforesaid, it is difficult to conclude being directors of the company, having mortgaged their personal properties and acting as guarantors for the company, the Noticees were not aware of the way the affairs of the company were being conducted and the violations committed by the company as stated in para 2 and 3 of this order. As in exercise of the powers conferred u/s 19 of the SEBI Act, read with Sections 11(1), 11(4) and 11D thereof, hereby confirm that the directions issued vide ad interim ex parte order as against the Noticees shall continue until further orders. In the matter of Amrapali Aadya Trading Investment Pvt. Ltd. decided on October 31, 2018 wherein similar circumstances existed, to protect the interest of clients/ investors it was directed that a separate demat account and separate interest bearing bank account shall be opened wherein the securities and funds belonging to the Noticee therein would be transferred. In the extant matter, the interim order dated May 29, 2018 directed the depositories, Registrar and Transfer Agents and banks that no debits/ transfer is made from the accounts of the Noticees. I, therefore, direct as under a. Since the claim value is higher at NSE, NSE Defaulters Committee shall, as expeditiously as possible, open and operate a dedicated demat account where all the securities lying in the demat accounts of F6 Finserve shall be transferred. b. The NSE Defaulters Committee shall open and operate a dedicated interest bearing bank account with a Nationalized Bank where all the funds lying in various bank accounts held in the name of F6 Finserve, Mr. Pankaj Goel and Ms. Meenu Goel, shall be transferred. c. Since the claim value is higher at MCX, the MCX s Defaulters Committee shall, as expeditiously as possible, open and operate a dedicated demat account where all the securities lying in the demat accounts of F6 Commodities shall be transferred. d. The MCX s Defaulters Committee shall open and operate a dedicated interest bearing bank account with a Nationalized Bank where all the funds lying in various bank accounts held in the name of F6 Commodities shall be transferred.

Summary

Issues Involved:
1. Non-maintenance of segregation between own and clients' securities.
2. Utilization of client securities to meet obligations of other clients.
3. Discrepancies in the Register of Securities and holding statement of beneficiary accounts.
4. Availing overdraft facilities by pledging client securities.
5. Mis-utilization of client funds.
6. Failure to carry out actual settlement of client funds and securities.
7. Incorrect reporting of margin collected from clients trading in Futures & Options segment.
8. Use of client beneficiary demat accounts for unauthorized purposes.
9. Failure to provide complete information to the inspection team.

Detailed Analysis:

Non-maintenance of segregation between own and clients' securities:
The broker, F6 Finserve, failed to maintain segregation between its own and clients' securities, using client securities to meet its proprietary pay-in obligations. This is a direct violation of SEBI regulations which mandate clear segregation to protect client interests.

Utilization of client securities to meet obligations of other clients:
The broker utilized securities belonging to other clients to meet the pay-in obligations of a specific client, K.K. Advisor Pvt. Ltd., on multiple instances. This was facilitated by employees acting in collusion with the client, leading to mis-utilization of client securities due to the broker's failure to exercise due diligence.

Discrepancies in the Register of Securities and holding statement of beneficiary accounts:
There were noted discrepancies between the quantity of securities in the Register of Securities (RoS) and the holding statement of beneficiary accounts, indicating potential mismanagement or misappropriation of client assets.

Availing overdraft facilities by pledging client securities:
The broker availed overdraft facilities by pledging client securities, which is a misuse of client assets and a breach of trust and regulations.

Mis-utilization of client funds:
Client funds were mis-utilized by transferring them to an overdraft account of the broker to reduce interest burden. Funds from clients with credit balances were used to allow exposure to clients with debit balances, further indicating financial mismanagement.

Failure to carry out actual settlement of client funds and securities:
The broker failed to carry out the actual settlement of client funds and securities, violating SEBI regulations that require timely settlement to ensure client protection and market integrity.

Incorrect reporting of margin collected from clients trading in Futures & Options segment:
The broker incorrectly reported the margin collected from clients trading in the Futures & Options segment, which is a serious compliance issue as it affects the risk management framework of the market.

Use of client beneficiary demat accounts for unauthorized purposes:
Client beneficiary demat accounts were used for unauthorized purposes, such as receiving shares from individuals who were not registered clients of the broker, which is against regulatory norms.

Failure to provide complete information to the inspection team:
The broker failed to provide complete information and data to the inspection team during the inspection, obstructing the regulatory process and investigation.

Consideration of Replies and Submissions:
The Noticees (directors and other associated individuals) provided various defenses, including claims of non-involvement in day-to-day operations, resignation from directorships, and lack of knowledge of the violations. However, SEBI noted that the directors failed to exercise due diligence and were involved in significant financial decisions, such as mortgaging personal properties for company loans, indicating their awareness and involvement in the company's operations.

Order:
The SEBI confirmed the continuation of the ad interim ex parte order dated May 29, 2018, restraining the Noticees from accessing the securities market and prohibiting them from buying, selling, or dealing in securities until further orders. The SEBI also directed the NSE and MCX Defaulters Committees to open dedicated demat and interest-bearing bank accounts to hold the securities and funds of F6 Finserve and F6 Commodities to protect the interests of clients and investors.

Conclusion:
The SEBI's order emphasizes the importance of regulatory compliance, due diligence by directors, and the protection of client assets in the securities market. The interim order remains in force pending further investigation and potential enforcement actions.