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ORDER UNDER RULE 5(1) OF SEBI (PROCEDURE
FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
IN THE MATTER OF M/S CONSORTIUM SECURITIES (P) LTD. The
undersigned had been appointed as the Adjudicating Officer by the
Securities�� ������and Exchange Board of India (hereinafter
referred to as SEBI) in terms of an order no. MIRSD/DPS-1/ADJ/06/04-05 dated
September 27, 2004 to enquire into and adjudge under Section 15-I of Securities
and Exchange Board of India Act, 1992 (hereinafter referred to as �the said
Act�) the alleged contravention of 15-A (c), 15B, 15-F (a) and 15-F (b) of the
said Act against M/s. Consortium Securities (P) Ltd (hereinafter referred to as
CSL/the member) for failure to maintain statutory books of accounts and records,
failure to obtain/maintain client registration forms/agreements/ database,� failure to issue contract notes in the form
and manner prescribed and for delay in delivery of securities and payments to �clients. Brief History: An inspection of the books
of accounts and other records of CSL was conducted by G. Jai & Associates,
CA from 29.09.2002 to 15.11.2002. The period covered under the inspection was
01.04.2000 to 31.08.2002 (hereinafter referred to as �inspection period�).
During the inspection it was found that CSL had violated the aforesaid provisions
of the said Act. A copy of the inspection report was furnished to CSL and it
was asked to submit its comments on the findings. The replies furnished by CSL
were considered and not found satisfactory and as such the undersigned was
appointed as an Adjudicating Officer for conducting the present proceedings. Before I proceed to deal with the case, it would be pertinent to make a reference to the relevant provisions of the said Act: The
provisions of the said Act as alleged to have been contravened by CSL are as
under: Section 15 A �������� If
any person, who is required under this Act or any rules or regulations made thereunder: c) to maintain books of account or
records, fails to maintain the same, he shall be liable to a penalty of one
lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. Section 15 B��������� If
any person, who is registered as an intermediary and is required under this Act
or any rules or regulations made thereunder to enter
into an agreement with his client, fails to enter into such agreement, he shall
be liable to a penalty of one lakh rupees for each day during which such
failure continues or one crore rupees, whichever is
less. Section 15 F ��������� If any
person, who is registered as a stock broker under this Act, (a) � fails to issue contract notes
in the form and manner specified by the stock exchange of which such broker is
a you, he shall be liable to a penalty not exceeding five times the amount for
which the contract note was required to be issued by that broker; (b) �fails to deliver any security or fails to make
payment of the amount due to the investor in the manner within the period
specified in the regulations, he shall be liable to a penalty of one lakh rupees
for each day during which such failure continues or one crore
rupees, whichever is less. Show Cause Notice A Show Cause Notice
(hereinafter referred to as �SCN�) dated Submissions of CSL: CSL filed its
reply vide their letter dated Preliminary Submissions: CSL has
raised a preliminary submission in respect of the maintainability of the
present Adjudication proceedings on the ground that separate enquiry proceeding
are already being conducted by the undersigned against CSL on the charges which
were also the subject matter of the present Adjudication proceedings. CSL has
contended that institution of two separate proceedings on the same charges is
bad in law and tantamounts to double jeopardy. It was
further contended that since one and the same person has been appointed as the
Enquiry Officer and Adjudicating Officer, the findings will be biased and in
effect these independent proceedings have become interrelated. Findings on preliminary submissions: Before
recording findings on merit it would be pertinent to examine the preliminary
submissions of CSL in respect of non-sustainability of the present Adjudication
Proceedings on the ground of double jeopardy. Technically speaking, Adjudication
proceedings under the SEBI Act and the Enquiry Proceedings under SEBI (Stock
Brokers and Sub Brokers) Regulations (hereinafter referred to as �Broker
Regulations�) read with the SEBI (Procedure for Holding Enquiry by Enquiry
Officer) Regulations, 2002 (hereinafter referred to as �Enquiry Regulations�)
are two separate proceedings and can be proceeded with independently and
concurrently with each other. The objection of double jeopardy is not
applicable to the civil proceedings as aforesaid and imposition of civil
penalties under the SEBI Act. For this proposition, I would like to rely on
some cases. Supreme Court in Shiv Dutt Rai Fateh Chand vs. UOI reported in 1983(3) SCC529, observed that the
word �penalty� used in Article 20(1) can not be construed as including a
�penalty� levied under the sales tax laws by the departmental authorities for
violation of statutory provisions. A penalty imposed by the Sales Tax
Authorities is only a civil liability though penal in character (emphasis
added). Division Bench of Bombay
High Court of R M Lodha and Anoop
V. Mota, JJ in their decision dated 03.03.04 in the
case of SEBI vs. Cabot International Capital Corporation observed ����..The
scheme of the SEBI Act of imposing monetary penalty is very clear. This chapter
nowhere deals with criminal offence. These defaults or failures are nothing but
failure or default of summary civil obligations provided under the Act and the
Regulations made thereunder���..� These cases go to show that
the SEBI Act and the Regulations made thereunder are
not penal statutes but are regulatory and remedial in nature. Proceedings under
Chapter VI-A of the Act relating to levy of penalties are adjudicatory in
nature and are not criminal proceedings. The Adjudication officer performs
quasi judicial functions and does not act as a Court but acts for the purpose
of determining the liability for the breach of civil obligations imposed by the
SEBI Act and the regulations. Further, for the bar of Double
Jeopardy to operate it is essential that there must have been previous
proceeding of prosecution and punishment before a Court of Law or a judicial
tribunal of competent jurisdiction. The subsequent proceeding must be a fresh
proceeding where he is for the second time sought to be prosecuted and punished
for the same offence. Article 20(2) does not
prohibit a provision for two penalties for the same offence. Article 20(2) is
not attracted if the proceedings do not constitute a �prosecution� as held by Hon�ble
Supreme Court in the case of Thomas Dave vs. �Prosecution� means an
initiation or starting of proceedings of a criminal nature before a court of
law or a judicial tribunal in accordance with the procedure prescribed in the
statute which creates the offence and regulates the punishment � as again held
by Supreme Court �in Maqbool
vs. State of Bombay (1953) SCR 730. Whether
monetary penalty needs to be imposed concurrently with penalty of cancellation
or suspension, has to be decided according to the facts and circumstances of
each case and due to this reason, the undersigned had clarified during the
personal hearing held on February 23, 2005 that the intent behind two separate show
cause notices was to examine the imposition of monetary penalty, where provided
under Chapter VI-A of the Act and to consider penalties under the Brokers
Regulations read with the Enquiry Regulations for the remaining offences. In
the facts and circumstances of the present case, the undersigned would not be
making any recommendation of penalty in the Enquiry proceedings in respect of
the common charges. Having dealt
with the preliminary submissions, I now proceed to examine the charges against
CSL, one by one: Charge: Non- Maintenance of Margin
Deposit Book and Order Book: It was alleged that CSL was
not maintaining a margin deposit book and order book and by non-maintenance of
the aforesaid books it has made itself liable for penalty u/s 15A(c) of the
said Act. Submissions
�4 Legal
recognition of electronic records Where any law provides that
information or any other matter shall be in writing or in the typewritten or
printed form, then, notwithstanding anything contained in such law, such
requirement shall be deemed to have satisfied if such information or matter is
� (a)������� rendered or made available in an
electronic form; and (b)������� accessible so as to be usable for a
subsequent reference.� It was submitted that the said section
overrides the provisions of any other law, and therefore maintenance of the
margin deposit book by them in electronic form constitutes adequate compliance.
A copy of the margin
deposit book for� the
period from �
It was submitted that the Broker Regulations merely mandate
that a margin deposit book must be maintained. No particular form, however, has
been specified for the same. Accordingly, maintaining such books of accounts
and documents in the electronic form was sufficient compliance of the Broker
Regulations. Reference was made to the case of J M Morgan Stanley Retail Services Pvt. Ltd.(�the
JMM Case�)� where maintenance of prescribed documents in
electronic form was considered as being sufficient compliance of the Broker
Regulations. �
The Broker Regulations also do not prescribe the
contents of an �Order Book�. Regulation 17(1)(a) of
the Broker Regulations does make a reference to a �sauda
book� but does not prescribe any format for maintenance of the same.� On the other hand, Regulation 6.1.3(B) of the National Stock Exchange (�NSE�)
makes the maintenance of an Order Book optional at the sole discretion of the
trading member of the NSE.� The contents
of such optionally maintainable Order Book have also been set out in the said Regulation.� �
In view of the large numbers of retail investors maintenance
of order book in the format required was cumbersome and the fact that most of
the orders were being received either telephonically or in person in order to
ensure efficient and timely execution of trades, they were unable to maintain
the order book. Online confirmation were given to
clients during trading hours, confirmation memo/contract notes were being sent
to clients at the end of day.� In
addition they were maintaining order log files received from Exchange on a
daily basis. �
Attention was drawn to Pages 2 and 3 of the Inspection
Report by M/s. G. Jai Associates, Chartered Accountants. It was stated that the
Inspection Report categorically records that the Order Book has been maintained
in the form of a download of the order log from the NEAT system (the
screen-based computer system of the NSE) on a daily basis.� Similarly, a download of the margin report
from the NEAT system has been maintained on a daily basis.� A report of the margin of the individual
clients has also been maintained and can be generated from the CSL�s computer system indicating the gross exposure of each
client.� Consequently, both the Order
Book and the Margin Deposit Book have indeed been maintained in electronic
form.� �
It was further submitted that in identical
circumstances, vide an order dated November 30, 2004, passed by an Adjudication
Officer of SEBI in the case of M/s. Pace Financial Services Private Limited,
SEBI has accepted the reply of the broker.�
Consequently, in terms of Article 14 of the Constitution of India, SEBI
as a State ought to ensure equality before the law and equal protection of the
law. �Attention was also drawn to the ruling of the Hon�ble Securities Appellate Tribunal (�SAT�) in the case of Radar Securities Limited versus SEBI, in connection with the maintenance of such books in electronic form.� In view of the foregoing, it
was submitted that no penalty whatsoever was leviable
against CSL in connection with any alleged violation of Section 15A(c) of the
SEBI Act. Findings: Though the
member has not maintained a separate margin deposit book, it appears it has
been downloading the margin reports from the NEAT system on a daily basis. The
auditors who conducted the inspection have also observed that report of margins
of clients could also be generated from the system indicating the gross
exposure of each client. CSL has contended that it
had been maintaining the order log files as downloaded from the exchange. A
soft copy of the order log files along with the print outs was also submitted
during the course of the present adjudication proceedings. The contention of
CSL was that order log files as downloaded from the exchange was sufficient for
the purpose of maintaining order book as required by the Brokers Regulation. It
has been further contended that maintaining of order book other than the order
log files as downloaded from the exchange in an environment of automated
trading system was not required. It has been further submitted that NSE has
made maintenance of order book optional for the members. CSL has relied on the
findings of the Adjudicating Officer in the matter of Pace Financials Services
Ltd. wherein the Adjudicating Officer had accepted similar submissions made by
the member. The explanation
of the member appears to be acceptable and I am inclined to take a lenient view
on this charge. Charge: Deficiency in contract notes It was alleged
that Contract Notes issued by CSL had the following deficiencies:
On the basis of
the aforesaid deficiencies, it was alleged that CSL had become liable for
penalty u/s 15 F (a) of the said Act. Submissions: CSL was not
bound to submit the names of authorized signatories to the contract notes to
NSE. CSL has neither been informed of any such requirement in the past nor has
NSE issued any circular in this regard. Reporting of the names of authorized
signatories is not a statutory requirement. Certified copies of the resolutions
passed by CSL on 13.08.2001 & 13.03.2002 were enclosed as documentary
evidence of the persons stated as authorized signatory in the contract notes. Contract notes were
dispatched by CSL to its clients through courier and the acknowledgements
issued by the courier agencies were preserved as a confirmation of receipt of
contract notes by the clients. This fact was acknowledged by the Auditors in
the Report. Moreover, the circular in question merely highlights irregularities
as observed by SEBI, which included non-dispatch of contract notes within the
mandatory time period of 24 hours. There was nothing in the said circular which
mandates the manner in which the contract notes were dispatched or which
mandates that acknowledgment of receipt of contract notes by the constituents
must be maintained by a broker, let alone in any particular form. The Inspection
Report categorically records that contract notes have been issued to clients
within 24 hours of the execution of trades. CSL has therefore complied with all
applicable requirements in connection with dispatch of contract notes and by
maintaining acknowledgment receipts issued by the courier agencies, CSL has maintained
adequate records of receipt of contract notes by the constituents also. �
CSL was bound to maintain contract notes as per the
prescribed format of NSE which requirement has been complied with as recorded
by the Auditors in paragraph 8.01(1) of the Report. The said format does not
provide for order time as such and accordingly the same was not specified by
CSL in its contract notes. The order no., trade no., trade time of the trades were duly mentioned by CSL on its contract notes as recorded
by the Auditors in the Report. The Report also acknowledges the fact that the
order time was not specified in the contract notes since the format of the
contract note prescribed by NSE does not provide for the same. (Paragraph
8.02(3) of the Report). �
Clause 3.5 of the NSE Regulations in this regards was
reproduced for reference; which is extracted below: �
� Every Trading Member shall issue a contract note to
his constituents for trades executed in such format as may be prescribed by
the Exchange from time to time with all relevant details as required
therein to be filled in and issued in such manner and within such time as
prescribed by the Exchange.� [Emphasis supplied] �
As regard the running serial number of contract notes it was
submitted that their back office software did not supplement generation of
running serial numbered contract notes. It was submitted that this problem was
continuously faced by majority of the brokers due to non availability of good
branded softwares. Moreover, they had repeatedly
requested their vendor to change the program logic to incorporate the running
serial number concept.� However vendor
was not able to modify the program till the month of January 2002. It was
submitted that they had immediately started generation of running serial
numbered contract notes after the modification of the program logic by their
vendor. The Report itself states that the irregularity was
observed only from 1st April 2000 upto 31st
January 2002 after which all contract notes have been numbered serially initialized
at the beginning of each calendar year. Even during the period from 1.4.2000 to
31.1.2002 all contract notes were numbered serially, the only difference being
that the serial numbers were initialized on a daily basis instead of at the
beginning of the year. This irregularity was merely technical. Findings: Regarding the deficiency as to the names of the authorized
signatories in contract notes being not reported to the exchange, I do not find
such a requirement in the SEBI Act or Regulations nor any
such requirement has been brought to my notice from the NSE Bye laws or
circulars issued by NSE. In view of observation of the inspection team that the
contract notes have been signed by the employees of the company who are
authorized to sign on the contract notes by way of a board resolution as well
as the submissions of CSL, in my opinion, the irregularity of non-reporting of
such names of the authorized signatories to the stock exchange, if any, is
merely a technical irregularity and I am inclined to take a lenient view of the
same. Regarding the non-maintaining of acknowledgements from the
constituents on the contract notes, I am of the view that the objective behind maintaining
such records is to ensure that the contracts notes have been dispatched within
the stipulated time. The purpose can be served if the dispatch receipts were
maintained and produced at the time of inspection. The auditors in this case
have observed that courier slips acknowledged by the courier agencies have been
considered as the prima facie evidence of delivery to customers. In view of
such an observation, I agree with the explanation offered by CSL. Regarding the requirement of order time to be specified in the contract notes, it appears that the format of the contract notes prescribed by the exchange does not have a provision for order time as such I can not hold the member liable for this fault. However, CSL has admitted that till Charge:
Non-obtaining of Member-Constituent Agreements It was alleged
that the inspection team had observed that out of 320 clients who were selected
for verification on sample checking basis, in case of 25 clients, member
constituent agreements had not been entered into and client registration
application forms had not been obtained, making CSL liable to be penalized
under section 15B of the SEBI Act. Submissions:
�
It was
submitted that CSL activated a client account only after a client registration
application form was obtained along with necessary identification documents and
a Member-constituent agreement was entered into. However during the course of
inspection 25 client registration application forms and member-constituent
agreements were not traceable and could not be produced for verification of inspecting
agency. It was submitted that they had shifted their administrative &
registered office from 8, Sant Nagar,
East of Kailash,
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