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ORDER
UNDER RULE 5 OF SEBI
(PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY
ADJUDICATING OFFICER) RULES, 1995. READ WITH SECTION
15-I OF SECURITIES AND EXCHANGE BOARD OF Against M/s Arihant Securities
(Proprietor, Shri Bipin Vora)
Sub Broker
(SEBI registration no. INS 011410714)
Mumbai
1.0 Background 1.1 M/s Arihant Securities (proprietor, Shri Bipin Vora) is
registered with Securities and Exchange Board of India (hereinafter referred to
as “SEBI”) as a sub broker (SEBI registration
no. INS 011410714) affiliated to M/s Wellworth Share & Stock Broking
Limited, member-broker of Bombay Stock Exchange Ltd., Mumbai (hereinafter
referred to as “BSE / exchange”)
with registration no. INB 011055739. Its registered office is presently located
at 7, Shirin Shorab Palace, Nariman Road, Vile Parle (East), Mumbai – 400 057
and correspondence office is at C-311, Shyam Kamal, Aggarwal Market, Near Railway Station, Vile Parle (East),
Mumbai – 400 057. Shri Bipin Vora – proprietor of M/s Arihant
Securities is holding Income Tax Permanent Account Number AANPV7035M. 1.2 An
inspection of books of account, documents and other records of M/s Arihant Securities (hereinafter referred to as ‘AS ‘) was conducted by SEBI officials
during February 2005. The inspection covered the period of financial years 2003-04
and 2004- 2005 (till date of inspection). It is alleged that during the
inspection certain violations of SEBI Act 1992, SEBI (Portfolio Managers) Rules,1993, SEBI (Stock-Brokers and Sub-Brokers) Rules, 1992, SEBI
(Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as “Broker Regulations”) and SEBI circulars
were observed. The findings of
inspection were communicated to AS vide SEBI letter no. MIRSD/DPS-1/Post-Insp./RRM/Sub
Brk-/108/2005/39470 dated 2.0 Notice / Reply / Personal Hearing 2.1 Accordingly, I issued a show cause notice dated April 12, 2007
to AS under Rule 4 of SEBI (Procedure for Holding Enquiry and Imposing Penalty
by the Adjudicating Officer) Rules, 1995 to show cause as to why an enquiry should
not be initiated against it and penalty be not imposed on it for the violations
of SEBI Act 1992, SEBI (Portfolio Managers) Rules, 1993, SEBI (Stock-Brokers
and Sub-Brokers) Rules, 1992, Broker Regulations and SEBI circulars as observed
during the inspection. AS was advised to
make its submissions, if any, along with supporting documents within 14 days
from the date of receipt of notice. AS was
also advised to note that in case it failed to reply within the stipulated
time, it would be presumed that it has no suitable explanation / reply and that
the matter would be further proceeded with on the basis of evidence on record. 2.2
The show cause
notice was delivered to AS as evidenced by the signed
A.D. card received. AS vide its letter
dated 2.3
Mr. Bipin Vora,
proprietor – AS and Mr. Deepak Shah, Advocate appeared before me on “The oral submissions which are been made
now are in addition to all the written submissions already made in this matter
by us. Basically there are only 2
allegations against us. 1.
Acting as
unregistered sub broker. 2.
Acting
as unregistered portfolio manager. I will deal with the 2nd allegation first. I am a person who is not well educated and
not fluent in English. Therefore, I made
a submission before the inspecting officer that I am “managing a portfolio”
without understanding the implication of the word “managing a portfolio”. My intension was to convey when I used the
words “managing a portfolio” in a very general sense as a sub broker and should
by no stretch of imagination be treated as a “portfolio manager” as defined
under the Portfolio Manager Rules, 1993.
My humble submission is that to be classified as the portfolio manager,
the attributes of the portfolio manager have to be present which would
include:- a) A large number of
clients. b) A contractual agreements
with the clients. c) A discretion to decide as
to when and where to invest the funds of the clients. d) A receipt of fee as a
portfolio manager. e)
The funds and the scrips to be in my
possession as a trustee for my clients. None of these attributes are present in the given matter. One Oza family comprising of 4 to 5 members
who hailed from my native place and residing at Ahmedabad whom I knew since
school days would seek my advise on the general trends in the market which I
would give them without any specific recommendation to buy or sell a particular
scrip. It would mean like providing
research without giving advise. The
delivery volume of the Oza family would generally not exceed 20 laks a year. For
this general advise on market trends I was not been paid any compensation
whatsoever and therefore I cannot be classified as an “adviser” to fall within
the definition of a portfolio manager.
My only earning from the trades of the Oza family was normal
brokerage. SEBI has just recently come
out with an consultative paper on Regulation of Investment Advisers which
clearly states that “Portfolio Managers Regulation in particular cover
investment advisers who had discretion over and whole custody of clients
assets”. I humbly submit that I have no
control over the assets of the Oza family or discretion over the decisions of
the Oza family in deciding what and when to buy or sell. Neither did I have the custody of their
assets i.e. shares or funds. I would
like to give few examples to show that my acts donot
fall under the provisions of the Portfolio Managers Rules. 1.
If a person gives me a loan of Rs.
10,000/- and then he declares that “I am your banker” would it tantamount to
having violated the RBI Regulation of doing banking business without a license? 2.
If I slap my son for misbehaving and
make a statement that I “hit” him would that amount to violation under the
Indian Penal Code? 3.
If I as a stockbroker manage the
fund and my wife who is illiterate and does not understand the stock market
tantamount to make me a portfolio manager? All these examples are being quoted just to make a point that a trivial
matter is being blown up out of proportion only for the purpose of holding me
guilty of violating the provisions of Portfolio Manager, Rules, 1993. Now I would like to make my submissions regarding the allegations of my
having acted as a sub broker. It has been alleged that I have violated the following:- 1.
Circular dated May 21, 1997 which is
addressed to stock exchange by SEBI while in a passing remark is made in the
first para saying that you are aware sub brokers are
required to obtain a certificate of registration from SEBI without which they
are not permitted to buy or sell securities.
This paragraph is only a background paragraph and I can not be charged
of violating this circular only because the 1st para
contains this background. To hold me guilty or responsible of violations there
has to be substantive provision in a circular which I should have
violated. Besides, this circular has
been addressed to the stock exchanges. 2.
Circular dated 3.
Circular dated 4.
Section 12 of SEBI Act, 1992 clearly
says that no sub broker shall buy or sell or deal in securities except in
accordance with the condition of a certificate of registration obtained
from the Board. The Section has to be
correctly interpreted which has been done so by the Delhi High Court in their
order (2005) 58 scl (Delhi) where they have state
that only one registration is necessary which I already had. 5.
Regulation 26 (xiv) of Sub Brokers,
Regulations, 1992 also thus mentions that a sub broker should be liable for
monetary penalty if he acts as an unregistered sub broker. My humble submission is that this is not a
substantive provision which determines a violation but only a procedural provision
which says that a sub broker will be liable to monetary penalty. I can not be alleged to have violated this
provision. 6.
Similarly, Rule 3 of the Stock
Brokers, Rules, 1992 also is a procedural provision which prescribes that an
application by a stock broker for a certificate of registration may be made in
form ‘A’. My humble submission is that
this Rule is applicable only for stock brokers and not sub brokers and since it
is also a procedural rule I can not be charged with a violation of any substantive
provision of law. 7.
I would also like to highlight the
background of the matter to show that the violations alleged if at all
committed by me were unintentional and never in defiance of any law. I had applied for a certificate to act as sub
broker somewhere in August 2002 through the broker Chandrakala. It was only after this application I started
operating as a sub broker under a genuine belief that once an application is
made it was in order to start operations as a sub broker. I was also informed by Chandrakala
that this was a correct interpretation of the existing provision of law. It was only because of this that I was
allowed to put in trades of my clients through Chandrakala. My volume as unregistered sub broker was very nominal which was only 81
crores in the year 2002-2003, only 14 crores in the year 2003-2004 and only
0.42 crores in the year 2004-2005. Such nominal volumes without any of these
trades having violated any provisions of PFUTP Regulations or the Insider
Trading Regulations or the Takeover
Regulations can not be taken as serious violation. At the most the same has to be treated as
technical violation only. Besides there
are no investors complaint pending against me for these trades. I would request the Learned Adjudicating Officer to consider the
following mitigating factors. a.
I have earned only a nominal /
normal brokerage. b.
No harm or loss has been caused to
any investors because of these trades. c.
My offence, if at all, is not
repetitive in nature since I have subsequently obtained the SEBI registration
as a sub broker for NSE. 3.0 Consideration of issues: 3.1 I now propose to discuss in detail the charges that have been
leveled against AS for being adjudicated in the present proceedings, the
submissions made by it in this regard and my findings on the same. 3.2 Charge 1 - Dealing as unregistered
sub-broker It has been alleged that AS has been acting as an unregistered
sub-broker in violation of Section 12 of SEBI Act, 1992, Rule 3 of SEBI (Stock Brokers
and Sub Brokers) Rules,1992, SEBI Regulations, SEBI
circulars SMD/POLICY/CIRCULAR/11-97 dated May 21, 1997, sub-brok/Cir/02/2001
dated January 15, 2001, and SEBI/MIRSD/Cir-06/2004 dated January 13, 2004. 1.
In its reply
dated I observe that AS is an existing
sub-broker of M/s Wellworth
Share and Stock Broking Ltd. and is holding SEBI registration no. INS 011410714
since 2. While on one hand admitting its knowledge of
Section 12 of SEBI Act, 1992, AS has also contended that a sub-broker is
required to have only one registration with SEBI as held by the Hon’ble High
Court of Delhi in the case of National Stock Exchange Member vs. Union of India
and Others ( case no. LPA 327/2005) in
its order dated A perusal of the abovementioned order
dated In this connection, it is also understood
that SEBI has filed an appeal in the Hon’ble Supreme Court against the above order
which has been admitted. The Hon’ble
Supreme Court has also ordered status quo in the matter vide Order dated
10.03.2006. I am therefore of the view
that this judgement of Hon’ble High Court is presently not binding. 3. AS in its submissions made during the hearing
held on A reading of paragraph 1 and 2 of the above
circular dated “1. The registered sub-broker can transact
only through the member broker who had recommended his application for
registration by signing form C. If the Sub-broker is desirous of doing business
with more than one broker, he will have to obtain separate registration in each
case.” The above aspects make it clear that
there is a need for registration of a sub-broker with each of the brokers
through whom he wants to transact. The circular should be read in its
entirety. Further in view of the large number
of brokers and sub-brokers, SEBI has always been following the practice of
addressing its circulars relating to brokers and sub-brokers to the stock
exchanges with an instruction that the stock exchange should bring the contents
of the same to the notice of its members i.e. brokers. Members would in turn bring the same to the
notice of sub-brokers. SEBI has followed
this practice since 1992 and it is inappropriate to raise a defense that the
circular is addressed to stock exchanges and not directly to the sub-broker. 4.
In the
submission dated The crux of the contention appears to be
that the circular is addressed to the stock exchanges and not to the
sub-brokers. The aspect of addressing circulars to stock exchanges has already
been covered above. Further, a sub-broker has to always deal through a broker
who has to take full responsibility for the activities and conduct of the
sub-broker. It automatically follows
that the broker cannot deal with an unregistered sub-broker. The objection raised by AS is merely
technical and not substantive. The
captioned circular clearly mentions that as per section 12(1) of SEBI Act, 1992
read with rule 3 of Broker Regulations, no sub broker shall buy, sell or deal
in securities unless he holds a certificate of registration. The circular clearly states that the
sub-brokers are permitted to start business only after clearance of application
and receipt of registration certificate from SEBI. The contention of AS that it
was of the genuine belief that having submitted the application for
registration as Sub- broker of CMCM in August 2002 is not tenable and I hold
that AS has violated the provisions of the SEBI circular no.
SUB-BROK/CIR/02/2001 dated 15.01.2001. 5.
As regards SEBI
circular no SEBI/MIRSD/CIR 06/2004 dated 6.
AS has also
contended that Rule 3 of SEBI (Stock Brokers and Sub Brokers) Rules, 1992 is
also a procedural provision which prescribes that an application by a stock
broker for a certificate of registration may be made in form ‘A’ and that this
rule is applicable only for stock-brokers and not for sub-brokers. AS has
further contended that since this is a procedural rule, AS cannot be charged
with violation of any substantive provision of law. I have perused Rule 3 of SEBI (Stock
Brokers and Sub Brokers) Rules, 1992 which states as under:- “Not to act as stock-broker or sub-broker without registration. 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: ………”. The above rule clearly states that no
stock-broker or sub-broker could buy, sell or deal in securities unless he
holds a registration certificate from SEBI.
This rule expressly covers the compliance requirements by sub-brokers
unlike the contention made by AS.
Further this rule stipulates a prior
holding of registration certificate by the stock-brokers or sub-brokers
before they can buy, sell or deal in securities. In view of above, I do not accept the
contention of AS and hold that AS has violated the provisions of Rule 3 of SEBI
(Stock Brokers and Sub Brokers) Rules, 1992. 7. Section 12 of SEBI Act, 1992 stipulates that,
inter-alia, no stock-broker or sub-broker shall buy, sell or deal in securities
except under, and in accordance with, the conditions of certificate of
registration obtained from SEBI. Further
Rule 3 of SEBI (Stock Brokers and Sub Brokers) Rules, 1992 also stipulates the
same requirement in respect of stock-brokers and sub-brokers. By trading
through CMCM before receipt of registration of SEBI as sub-broker of 3.3
Charge 2 - Dealing
as unregistered portfolio manager 1. It has been alleged that AS has been
dealing as an unregistered portfolio manager in violation of Section 12 of SEBI
Act, 1992 and Rule 3 of SEBI (Portfolio Managers) Rules, 1993. AS, in its replies submitted to SEBI and
submission made during the hearing held on a) A large number of clients. b) A contractual agreement with the clients. c)
A discretion to
decide as to when and where to invest the funds of the clients. d) A receipt of fee as a portfolio manager. e) The funds and the scrips to be in AS’s
possession as a trustee for
clients. It is further been
submitted that AS was also not having custody of the shares or funds of Oza
family. In view of above it has been submitted that this activity may not be
considered as portfolio management activity. I have perused the material available on
record and submissions made by AS on different occasions. I find that the only evidence of portfolio
management is the statement of Mr. Bipin Vora, proprietor of AS recorded on 3.4 I am of the view that raising technical objections
would not obviate a statutory obligation. All the more so when the previous
conduct itself proves knowledge of the statutory obligation. Therefore AS is
estopped from denying knowledge of the requirement of registration with each
broker or starting business only after receipt of registration. Similarly,
stating that there are no pending investor complaints with regard to these
trades is also not relevant. Absence, if
any, of investor complaints would not make the sub brokerage activity of AS
through CMCM legal. 3.5 In
view of above I am of the view that AS has acted as unregistered sub-broker of Chandrakala Money and Capital Management Ltd. in violation of section 12 of SEBI Act, 1992, rule 3 of SEBI (Stock Brokers
and Sub Brokers) Rules, 1992, SEBI circulars SMD/POLICY/CIRCULAR/11-97 dated
May 21, 1997 and sub-brok/Cir/02/2001 dated January 15, 2001. Regulation 26
(xiv) of Broker Regulations states that a sub-broker acting as an unregistered
sub-broker shall be liable to monetary penalty. Thus AS is liable for penalty
under section 15HB of SEBI Act, 1992 which states as
under: “Penalty for contravention where no separate penalty has been provided 15HB. Whoever
fails to comply with any provision of this Act, the rules or the regulations
made or directions issued by the Board thereunder for which no separate penalty
has been provided, shall be liable to a penalty which may extend to one crore
rupees.”. 3.6 While imposing penalty it is important to
consider the factors stipulated in section 15J of SEBI Act, 1992 which states
as under : “15J - Factors to be taken into account by the adjudicating officer While adjudging quantum of penalty
under section 15-I, the adjudicating officer shall have due regard to the
following factors, namely:- (a)
the amount of disproportionate gain or unfair advantage, wherever
quantifiable, made as a result of the default; (b)
the amount of loss caused to an investor or group of investors as a result
of the default; (c)
the repetitive nature of the default.” It has been established that AS should have taken
registration from SEBI prior to conducting trades in securities on behalf of
its clients through CMCM. As per
inspection report, AS did trades worth Rs. 81.06 crores in 2002-2003, Rs. 14.01
crores in 2003-2004 and Rs. 0.42 crores from April 2004 till date of inspection
through CMCM. Thus AS held out as a
sub-broker of CMCM and executed trades on NSE right from 2002 onwards although
it was not entitled to do so as it did not have SEBI registration in this
regard. All the sub-brokerage earned by
AS in respect of trades executed through CMCM. during
the period that it was not registered with SEBI in this regard becomes the disproportionate
gain by AS. However, the exact amount in
this regard is not quantifiable for want of availability of the specific
figures. The investors who have thus
traded through an un-registered intermediary (AS) have been deprived of the redressal mechanism through the stock exchanges. The
quantum of trading volume indicates that numerous transactions would have taken
place over this period between 2002 to 2005. Thus this offence can be
considered to be repetitive. As the violation of statutory obligations has been
established, AS is liable for penalty. Hon’ble Supreme Court of India in its
order dated 4.0 Penalty 4.1 Considering the material available on record, the submissions
made by AS and upon a judicious exercise of powers conferred upon me under Rule
5 of SEBI (Procedure for Holding Enquiry and Imposing Penalties by the
Adjudicating Officer) Rules 1995, I impose a penalty of Rs.1,00,000/- (Rupees One
lakh only) on M/s Arihant Securities (proprietor-
Shri Bipin Vora, PAN - AANPV7035M) sub-broker having office at C-311, Shyam Kamal, Aggarwal Market, Near Railway
Station, Vile Parle (East), Mumbai – 400 057under section 15HB of SEBI Act,
1992. I think this amount would be appropriate in view of the facts of the
case. 4.2 The penalty amount shall be paid within a
period of 45 days from the date of receipt of this order through a cross demand
draft drawn in favour of “SEBI- Penalties remittable to the Government of India
“ and payable at Mumbai which may be sent to Mr. P.K. Kuriachen, Chief General
Manager, (MIRSD), Securities and Exchange Board of India, SEBI Bhavan, C – 4 A, “G” Block, Bandra Kurla Complex, Bandra
(E), Mumbai – 400 051. PLACE: MUMBAI PIYOOSH GUPTA DATE: | |