| Home | Back |
|
SECURITIES AND EXCHANGE BOARD OF ADJUDICATION ORDER IN RESPECT OF M/s. BHUPENDRA & CO.,
TRADING MEMBER, DSE (SEBI REGN. NO. INB 050082918) Order under sub-section (1) of Rule 5 of Securities and Exchange Board of
1.0. BACKGROUND 1.1. Bhupendra &
Co. (hereinafter referred to as the “trading member”) is a member of DSE with
Securities and Exchange Board of India (hereinafter referred to as the “SEBI”)
registration no. INB050082918. An inspection of the books of accounts, other
records and documents maintained by the trading member for the period 2.0. ADJUDICATION PROCEEDINGS 2.1.
Based on the alleged violations observed during the inspection and
pursuant to the clarifications given by the trading member for the alleged
violations, the Whole Time Member, SEBI
has, in exercise of the powers conferred upon him under Section 19 of the SEBI
Act, 1992 (hereinafter referred to as “the Act”) read with Section 15-I of the
Act and Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by
Adjudicating Officer) Rules, 1995 has appointed the undersigned as the
Adjudicating Officer vide order dated March 31, 2004, to enquire into and
adjudge the violations allegedly committed by the trading member. 2.2.
The alleged violations are as follows:
3.0. SHOW CAUSE NOTICE AND
HEARING: 3.1. A show-cause
notice under Rule 4 (1) of SEBI (Procedure for Holding Inquiry and Imposing
Penalties by Adjudicating Officer) Rules, 1995 was issued on July 05, 2004 to
the trading member to show cause as to why penalty under the provisions of the
Act read with Rule 5 of SEBI (Procedure for Holding Inquiry and Imposing
Penalty by Adjudicating Officer) Rules, 1995 should not be imposed upon it in
view of the alleged violations committed by it. A copy of the aforesaid show-cause
notice was served on the trading member vide letter dated 4.0. ANALYSIS AND FINDINGS The facts and circumstances of the
case, the material available on record, the reply of the trading member to the
show cause notice and the oral submissions made during the personal hearing
have been considered. The findings in respect of the allegations against the
trading member are as follows: 4.1.
Failure to maintain books of account As per the inspection report, the
broker did not maintain Order book and record of time when the client has
placed the order which is stated to be in violation of SEBI Circular No. SMD/POLICY/IECG/I–97
dated The inspection report stated that the
broker explained that it was not practical to maintain the order book as the
clients gave orders verbally on telephone or were physically present in front
of the terminal, which were then executed by the terminal operator. Orders from
the clients were executed on verbal instructions hence no order book is
maintained. The trading member in its reply stated that the software used by it
did not have any provision where the record of order placement time by the
clients is reflected. The trading member stated that it had taken up this
shortfall in the software with M/s Shilpi Computers Limited, the makers of the
software. The fact that the order book has not
been maintained is in violation of the SEBI Circular No. SMD/POLICY/IECG/I–97
dated 4.2
NON – ADHERENCE TO THE UNIQUE CLIENT
CODE From the inspection report, it
appears that the trading member has not violated any provision pertaining to the
unique client code. Hence, the trading member is not liable to penalty for the
aforesaid violation under Section 15HB of the Act. 4.3
THE MEMBER HAS INDULGED IN OFF THE
FLOOR TRANSACTIONS As per the inspection report, the trading
member has indulged in trading on NSE and BSE, through the brokers SMC Global
Securities Ltd and TCP Stock Broking Ltd respectively, on behalf of its
clients, without getting itself registered with SEBI as a sub-broker to the
aforementioned brokers. The trading member clocked a turnover of Rs.74.31 Lakhs
with SMC Global Securities Ltd and of Rs.112.25 Lakhs with TCP Stock Broking Ltd.
The above act of trading member is stated to be in contravention of SEBI
Circular No. SMD/Policy/Cir-3/98 dated The trading member in its reply
stated that it regret its complete ignorance of the fact that as member of the
DSE, it was to get itself registered as sub-broker with SEBI for conducting
business on NSE/BSE. It also informed that it had informed and taken permission
from DSE regarding its trading through TCP Stock Broker Private Ltd. However,
no letter of permission from the DSE has been submitted by the trading member. It
added that it approached SMC Global Securities Ltd for being affiliated as a
sub-broker with it for its trading on NSE on being informed of the SEBI
Guideline and Rule. In its reply dated From the above, it is seen that the
trading member made an attempt to comply with the provisions of the SEBI
Circular. Although, trading on behalf of clients through brokers of the
exchange without being registered as a sub-broker is in contravention of the
SEBI Circular No. SMD/Policy/Cir-3/98 dated 4.3.1.1 OFF THE 4.4
APPOINTMENT OF COMPLIANCE OFFICER As per the inspection report, the
trading member has not appointed a Compliance Officer, responsible for
monitoring the compliance of the Act, Rules and Regulations, Notifications etc
issued by SEBI or the Central Government. This is stated to be in contravention
of Regulation 18A of the Regulations and Section 15HB of the Act read with
Regulation 26(xv) and 26(xvi) of the Regulations. The trading member in his reply
stated that their firm is running at a loss and that they do not have the
earning capacity to employ a compliance officer. They added that owing to their
low turnover and insufficient earning, they are not in a position to appoint a
Compliance Officer. However, the Regulations state that a Compliance Officer
should be appointed irrespective of the turnover or the earning capacity of the
trading member. Hence, it is a violation on the part of the trading member not
to have appointed a Compliance Officer. Further, the defence taken by the
trading member of the low earning capacity is not acceptable. However, the
alleged violation occurred in the financial year 2001-2002 while Section 15HB
was inserted in the Act vide SEBI (Amendment) Act, 2002 with effect from
October 29, 2002 and regulations 26(xv) and 26(xvi) of the Regulations were
inserted vide SEBI (Stock Brokers and Sub-brokers) (Second Amendment)
Regulations, 2003 with effect from November 20, 2003. Therefore, the above
provisions are not applicable in this case and hence the trading member is not
liable to penalty for the aforesaid violation under Section 15HB of the Act. 4.5.
TRADING MEMBER HAS INDULGED IN CARRY
FORWARD TRANSACTIONS From the inspection report, it
appears that the trading member has not indulged in any carry forward
transactions. Hence, the trading member is not liable to penalty for the
aforesaid violation in terms of Section 15HB of the Act. 4.6.
DELAYED PAYMENT OF MONIES / DELIVERY
OF SECURITIES TO CLIENTS As per the inspection report, there
were nine instances of delay in payments to clients. Further, the inspection
report also points out instances in which cheques were received from the client
even though the clients had credit balances in their accounts. This is stated
to be in contravention of Section 15HB of the Act read with Regulation 26(vi)
of the Regulations. The trading member in its reply
stated that the payment to the clients was withheld on the advice of its
clients. It stated that it would obtain a statement from its clients that the
payments were withheld on their request. It stated that the cheques received by
it from clients who had credit balances were credited to the respective clients’
accounts. It stated that these amounts were received in the margin account. It may be mentioned here that the
trading member has not produced any statement from the clients stating that the
payments were withheld on their request. Moreover, the trading member is
required to obtain written consent from the clients at the time of withholding
such payment. The inspection report observed that there were total nine
instances of delay in the payment of monies to the clients. It is noted that in
six of the aforesaid nine instances, the delay was less than 10 days and in one
instance, the delay was nearly 5 months as on 4.7.
FAILURE TO ISSUE CONTRACT NOTES IN
THE FORM AND MANNER PRESCRIBED As per the inspection report, the contract
note issued by the trading member did not reflect the time at which the client
has placed the order. This is contravention of the SEBI Circular No. SMD/POLICY/IECG/1-97
dated The trading member has submitted that
the time of execution of trade is indicated in the contract note. However, the
time of placing the order by the client is not reflected in the contracts on
account of a limitation in the software supplied by Shilpi Computers Limited.
The trading member confirmed that they had taken up this shortfall with the
vendor Shilpi Computers Ltd. The trading member submitted that they were
affixing brokers note on contracts in respect of actual deliveries and not on
adjustment transactions. As regards generation of serial numbers on the
contracts, the trading member submitted that their software does not have the
provision of numbering the contracts serially in continuity but numbers them in
serial starting afresh on each trading day. As regards the fact that contract
notes were not acknowledged by the clients in many cases, the trading member
stated that out of over 1500 contracts, only about 10 contracts remained
unconfirmed. It was added that they are in daily contact with their clients
when they deliver and receive their acknowledgement on the concerned contract.
The trading member further added that it is not possible to mention the
settlement number and settlement period on the face of the contract note
because of certain technical flaw in the software. It was added that their
software company was approached to rectify this. The trading member has further
submitted that they are issuing contract notes as per the form prescribed by
DSE and hence there is no violation any provision of Rules, Regulations and
Policies. The trading member in his written submission has stated that the
mistakes pointed out in the inspection report are unintentional and may be due
to oversight. I have considered the submissions of
the trading member regarding issue of contract notes and also noted that they
have approached the software supplier for the purpose of ensuring that the time
of placement of order, settlement number and settlement period are reflected on
the contract note. As regards the non-acknowledgment of contract notes by the
clients, it is observed that these instances are very few. The trading member’s
explanation for not affixing stamps on the contract notes involving speculative
transactions is not acceptable as the stamps are required to be affixed on all
the contract notes irrespective of the nature of trades. Although, the findings
of the inspection have not revealed any instances of manipulation or loss to
investors on account of this lapse, in view of the discussion above, it appears
that the trading member has violated Section 15F(a) of the Act by not issuing
the contract notes in the form and manner specified by the stock exchange of
which the such broker is a member. In view of above, I am of the opinion that
the trading member is liable to penalty under Section 15F(a) of the Act. 4.8.
MEMBER FAILED TO COMPLY WITH
DIRECTIONS ISSUED BY THE BOARD AND HAS NOT EXERCISED DUE SKILL, CARE AND
DILIGENCE The aforesaid actions as enumerated
in the proceeding paragraphs are stated to be in violation of Section 15HB of the Act read
with Regulation 26(xv) and (xvi) of the regulations. In the course of the personal
hearing, the trading member stated that there is no complaint against him from
any investor or exchange or SEBI. He added that he had never been penalized or
fined by DSE or SEBI throughout his career starting in 1955. I am of the view that the
alleged violations of not exercising due skill, care and diligence which have
not been documented seem too general in nature. Further, the alleged violations are
for the financial year 2001-2002 (i.e. 4.9 The
trading member submitted in the course of personal hearing that DSE deactivated
its terminals since May, 2002 and that its business is closed since March, 2004.
It was further submitted that there is no pending complaint of grievance from
any investor or exchange or SEBI and that no penalty was levied on it at any
point of time. It was added that the mistakes pointed out in this inspection
are mostly technical in nature and are purely unintentional and may be due to
oversight. 5.0.
IMPOSITION OF PENALTY Keeping
all above in view, I find that there were certain deficiencies and
irregularities in the systems and procedures of the trading member. However,
these deficiencies in the systems and procedures do not appear to have resulted
in any manipulation or loss to the investors or disproportionate gain to the
trading member. In order to adjudge the quantum of penalty, I have considered
the following factors as provided in the Section 15J of Securities and Exchange
Board of India Act, 1992: 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,
and; c) The repetitive nature of the default. Considering all the above facts and
circumstances, I am of the view that the trading member has not made any
disproportionate gain or unfair advantage as a result of the aforesaid
discrepancies in systems and procedures and no investor or investors group
appear to have suffered a loss on this count. Further, the discrepancies in the
systems and procedures are few and far between. Moreover, the business of the
trading member has since been closed and their terminals deactivated. But since
the trading member has
violated Section 15F(a) of the Act by not issuing the contract notes in the
form and manner specified by the stock exchange of which the such broker is a
member, I am satisfied that the trading member M/s Bhupendra & Co. has
become liable to pay penalty under Section 15F(a) of the Act and upon
consideration of the evidence, I think it fit to impose penalty of Rs.10,000/-. 5.1 ORDER: M/s Bhupendra & Co. is directed
to pay a penalty of Rs.10,000/- (Rs. Ten Thousand only) by way of a crossed
Demand Draft drawn in favour of “SEBI – PENALTIES REMITABLE TO GOVERNMENT OF
INDIA” and forward the same to Smt. Usha Narayanan, Chief General Manager,
SEBI, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai – 400
005. M/s Bhupendra & Co. shall pay the penalty within 45 days of the
receipt of this order. As required under Rule 6 of the Securities
and Exchange Board of India (Procedure for Holding Inquiry and Imposing
Penalties by Adjudicating Officer) Rules, 1995 a copy of the instant order is
being sent to M/s Bhupendra & Co. and also to SEBI. Place: Mumbai (M S RAY) Date: |
|