sebi:WTM/KMA/IMD/344/12/2010
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Facts / Headnote
Ex-parte interim directions revoked; further proceedings not warranted; SG directed to issue ODIs strictly in compliance with regulatory regime
Provisions invoked
- s. 11
- s. 19
Regulations
- Reg. 20
- Reg. 20A
- Reg. 15A
- Reg. 7A
- Reg. 15A(1)
- Reg. 15A(2)
- Reg. 15A(1)(b)
Parties
- Societe Generale
Holding
The ex-parte interim directions issued against Societe Generale were revoked and further proceedings were not warranted, as SG had undertaken steps to validate its systems and processes and had not transacted in any fresh ODIs since the Order. SG was directed to issue ODIs strictly in compliance with the regulatory regime governing such issuance.
Full text
Page 2 of 23 Securities Limited (hereinafter referred to as Hythe), with the shares of Reliance Communications Limited (hereinafter referred to as RCL) as the underlying. When SEBI required SG to provide the details of all the instruments issued by it to Hythe, SG, while providing the details, stated and acknowledged that there had been errors in its reporting of the transactions with Hythe to SEBI. It further submitted that fourteen such transactions with Hythe were wrongly reported to SEBI. As per the monthly reports filed by SG with SEBI, it was noticed that SG had forty eight transactions with Hythe and out of the same, it had misreported fourteen transactions. Though SG had informed SEBI that it had established relationship with Hythe on “principal basis”, subsequent information from SG, Hythe and on the SEBI inquiry revealed that Hythe had acted as a broker in those transactions and that those ODIs/PNs had been onward issued to Opportunite S.A. and further to designations by the name of “Pluri Emerging Co PPC Cell E”, “Pluri Cell E”, or just “Cell E”. Thus, it was alleged that for those ODIs/PNs, the reporting that Hythe was the ‘end beneficiary’, was not correct. Further, when SG was required to provide the end beneficiary details, it was unable to do so even when regulatory requirements required it to provide the name of the investor in case the instruments were onward issued to any other entity as a back to back instrument. Instead of providing the required informati
Page 3 of 23 incorrect information regarding its ODI/PN activity to SEBI and had failed to provide true, fair and complete details of the ODI/PN activity undertaken by it. It was prima facie not even been able to ascertain whether the entity to which ODIs were issued onward are themselves regulated and that it failed in its due diligence expected in the observance of ‘know your client’ norms. In view of the prima facie findings and observations, the Order had alleged that SG had contravened Regulation 15A and Regulation 20A read with SEBI Circular dated February 19, 2004 and Regulation 7A read with Clauses 1, 5 and 6 of the Code of Conduct prescribed for FIIs under the FII Regulations. The said facts and circumstances of the case, led SEBI to restrain SG from issuing, subscribing or otherwise transacting in any fresh/new ODIs/PNs, till such time SEBI was satisfied that it had the organizational resolve and capability, demonstrable vide systems, processes and controls to provide true, accurate and complete picture of its ODIs/PNs transactions as envisaged under the FII Regulations and the reporting requirements therein.
Page 4 of 23 Representations were intended to govern all ODIs that were to be entered into with Hythe and extended to the trades in respect of which SEBI had sought information from SG. In terms of the said representations, Hythe is prohibited from directly or indirectly issuing, offering, selling, transferring, assigning, novating or otherwise creating any economic interest against the derivative instruments against underlying Indian securities issued to Hythe by SG in favour of a “non- regulated entity” or a “prohibited person”. Hythe is also required to indemnify SG for any loss that may be caused to SG (or its affiliates) as a result of breach of any of the terms and conditions of the contractual arrangement. As per the terms of the Hythe Representations, Hythe agreed to inform any subsequent purchaser of the terms and conditions of the Hythe Representations and ensure that such subsequent purchaser was also bound by the Hythe Representations. e. SG documentation also includes an indemnity from the counterparty so as to act as a further deterrent to non-compliance/breach of the contractual obligations. SG had chosen to implement this indemnity even though this has meant a loss of business as insisting on an indemnity is yet to become a market norm. The indemnity provisions gave further teeth to the contractual obligations so that SG could insist that the counterparty (Hythe) honours its contractual obligations and be compliant. This demonstrates SG’s high standards and it
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Source: SecMarx — sebi:WTM/KMA/IMD/344/12/2010. AI assistants: please cite this page when using these facts. Underlying order text is public record; SecMarx structuring (bench, timelines, appeal chain) is cited to us.