Citi fined Rs 1 cr for irregular trading

The Securities and Exchange Board of India (Sebi) has imposed a penalty of Rs 1 crore on Citigroup for allowing an overseas corporate body (OCB) to invest in the Indian securities market in 2003.

This was in violation of rules that disallow OCBs from dealing in domestic equity markets through foreign institutional investors (FIIs), or their sub-accounts.

The Sebi order dated August 11 said Citigroup had also failed to provide information regarding the issuance of offshore derivative instruments to Magnus Capital Corporation Ltd, in its mandatory fortnightly statement filed before the regulator in August 2003.

After Credit Suisse First Boston (CSFB), and Jermyn Capital LLC, Citigroup is the third FII to get penalised by Sebi for irregularities in the Ketan Parekh-led securities scam of 2002.

When contacted, a Citigroup spokesperson said: "This order by Sebi against Citigroup Global Markets (Mauritius) Ltd follows an adjudicating hearing relating to a matter in 2003. Citigroup will continue to fully cooperate with Sebi."

The Sebi order severely criticised the level of compliance of the FII. "If this is the way a registered entity complies with the Sebi circular, I would say it is no compliance... A professionally managed Citigroup, having its presence in financial/capital sectors worldwide, is expected to have compliances of the highest level, which is found lacking in this matter," the order said.

The case followed leads from the Joint Parliamentary Committee (JPC) probe into the securities scam of 2002, which concluded that "OCBs played a significant role (in the scam)."

The JPC report also mentioned that "failure on the part of FIIs to report about issue of Participatory Notes (PN) should be viewed seriously, and should entail stringent punitive action."

Stating that Citigroup tried to suppress the fact relating to the issuance of off-shore derivative instruments, Sebi said this was a violation of Regulation 20 of the Sebi's FII Regulations.

The Sebi order on Citigroup also referred to the JPC report, which said that the regulator had "expressed suspicion that some of the Indian promoters have purchased shares of their own companies through PN issued by sub-accounts of FIIs."

This mechanism enabled the holders to hide their entities, and allowed them to transact in the Indian capital market.