1. M/s D Agarwal & Co. is registered with SEBI as a stock broker (hereinafter referred to as ‘the member’) bearing SEBI registration no. INB 120318311 and is a member of Ludhiana Stock Exchange (LSE). The member is a proprietary concern and Smt. Deepti Agarwal is the proprietor of the said member. An inspection of books of accounts, documents and other records of the member was conducted on 16.01.2001. During the inspection, several irregularities were found committed by the member.
2. The findings of the inspection were forwarded to the member vide letter dated 05.03.2001 advising the member to give its comments, if any. The member vide letter dated 20.04.01 replied to the said findings of the inspection report. On not being satisfied with the reply filed by the member an Enquiry officer was appointed vide order dated 22.01.2003 to enquire into allegations of violations against the member, inter alia, of:

(a) Violation of section 12 of Securities and Exchange Board of India Act, 1992

(b) Violation of Rule 3 & 4 (b) of the SEBI (Stock Brokers and Sub-Brokers) Rules 1992.

(c) Violation of Clause A (5) & B (1) of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers & Sub brokers) Regulations, 1992

(d) Violation of the Directives issued by SEBI vide circular nos. SMD/MDP/CIR/043/96 dated 05/08/96, SMD/POLICY/IECG/1-97 dated 11/02/97, SMD/POLICY/CIR/5-97 dated 11/04/97, SMD/(B)/104/22775/93 dated 29/10/93, SMD/SED/CIR/93/23321 dated 18/11/93, SMD/POLICY/CIR-3/98 dated 16/01/98, SMDRP/POLICY/CIR/32-99 dated 14/09/99, SMD/RCG/CIR/(BKG)/293/95 dated 14/03/95, SMDRP/POLICY/CIR-11/99 dated 07/05/99;

(e) Rules, regulations, bye-laws and directives of LSE as amended from time to time.

3. The Enquiry Officer submitted her report on 18.07.2003. The Enquiry Officer taking into account the irregularities that have been established recommended suspension of certificate of registration of the member for a period of 1 month. The Enquiry Officer held the member guilty of the following violations:

(a) Irregularities in issuance of Contract Notes. The Contract Notes did not contain pre-printed serial number. Order time not mentioned on Contract Notes.

(b) Non-segregation of own funds vis-à-vis clients funds

(c) Dealing as unregistered sub-broker

(d) Non-maintenance of client database

(e) Transaction with clients on principal to principal basis

(f) Non-reporting of off the floor transactions

4. Consequent upon above, in terms of regulation 13(2) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as ‘the said regulations’) a show cause notice dated 29.07.2003 was issued to the member to show cause as to why the penalty as recommended by the enquiry officer should not be imposed on them. The member was advised to submit his reply, if any, within 15 days of the receipt of the show cause notice failing which it would be presumed that the member has no explanation to offer. The member was also asked to intimate along with the reply whether it desired a personal hearing. The member vide letter dated 19.08.2003 replied to the show cause notice dated 29.07.2003. The member made the following submissions:

(a) That as per the guidelines of SEBI, a Stock Broker cannot do any other business other than securities business. In case registration is suspended for one month, it would be left with no source of Income during the said period and would be deprived off its right to cash.

(b) That since it has already started complying with all the violations observed by SEBI Inspection team, the member requested to take a lenient view.

The member did not seek any personal hearing while submitting as above.

5. Subsequently, on not being satisfied with the reply, another show cause notice dated 29.10.03 was issued to the member advising it that in terms of the provisions contained in Regulation 13(2), Chairman or Member of SEBI Board is not bound by the recommendation of the Enquiry Officer and he may enhance the penalty if so warranted on merits of the case. The member replied vide letter dated 20.11.2003 reiterating its earlier submissions that "as per the guidelines of SEBI, a Stock Broker cannot do any other business other than securities business. In case registration is suspended for one month, it would be left with no source of Income during the said period and would be deprived off its right to earn".
6. I have carefully examined the facts and circumstances of the case. I have also carefully considered the Enquiry Report, the submissions made by the member vide letter dated 19.08.2003 and 20.11.2003. I find that adequate opportunities were given to the member to put forward its case in adherence to the principles of natural justice. On appreciating the facts and circumstances of the case the findings are as under:

Rule 4 stipulates conditions for grant of certificate to stock-broker. Clause (b) of the said rule states that the stock broker shall abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which he is a member

3. Regarding dealing as unregistered sub broker, the member admitted that they did not seek registration as a sub broker of the members of other stock exchanges to whom it had dealt and have now stopped doing transactions through members of other exchanges after getting the firm registered with SEBI as sub broker of LSE Securities Ltd. Therefore, I find that the member by not registering as sub broker violated provisions of Section 12 of SEBI Act, Rule 3 of SEBI (Stock brokers and sub brokers) Rules, 1992 and directives of SEBI issued vide Circular No.SMD/POLICY/Cir-3/98 dated 16.1.98 as well as provisions of Clause C(4) of Code of Conduct of sub brokers specified in Schedule II read with Regulation 15 of SEBI (Stock brokers & sub brokers ) Regulations, 1992 and Clause A(5) of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock brokers & sub brokers ) Regulations, 1992.

12. (1) No stock-broker, sub- broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act.

3. No stock-broker or sub-broker shall buy, sell, deal in securities, unless he holds a certificate granted by the Board under the regulations:

Provided that such person may continue to buy, sell or deal in securities if he has made an application for such registration till the disposal of such application.

Circular No.SMD/POLICY/Cir-3/98 dated 16.1.98 stipulates, inter-alia, that "it is necessary for any person who acts as sub-broker to hold Certificate of Registration as a sub-broker granted by SEBI and accordingly the members of Stock Exchanges who also act as sub-brokers should hold a separate registration with SEBI as a sub-broker. However, presently some of the members of exchanges who are acting as sub-brokers through the members of other exchanges have not obtained separate registration from SEBI to act as sub-brokers. In view of the above It is advised that the members of the stock exchanges who are acting as sub-brokers through the members of other exchanges should obtain Certificate of Registration from SEBI to act as a sub-broker under SEBI (Stock Brokers and Sub-Brokers) Rules & Regulations, 1992".

Clause C (4) of the code of conduct for sub-brokers stipulates that "a sub-broker shall execute an agreement or contract with his affiliating brokers which would clearly specify the rights and obligations of the sub-broker and the principal broker’

Clause A(5) of the code of conduct for the stock brokers specifies that a stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the stock exchange from time to time as may be applicable to him.