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    SECURITIES AND EXCHANGE BOARD OF INDIA

    A. O. NO: ACR/ 15 /2005

     

    ADJUDICATION ORDER IN THE MATTER OF GEOGIT FINANCIAL SERVICES LTD., UNDER SECTION 15 I OF THE SEBI ACT READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995

    1. Securities and Exchange Board of India (SEBI) conducted inspection of the books of accounts and other records of Geogit Securities Limited, (hereinafter referred to as �Geogit� for the sake of brevity and convenience) having its registered office at Kochi. Geogit is a member of the Stock Exchange, Mumbai and is holding certificate of registration as a stock broker issued by SEBI bearing no. INB 010806736. The inspection report submitted to SEBI alleged,�� interalia that Geojit failed to issue contract notes in the form and manner prescribed and also delayed the deliveries of securities and payments to clients. From the records made available to the undersigned by SEBI, it is noticed that vide letter dated February 17, 2003; a copy of the inspection report was furnished to Geojit by SEBI.

     

    1. Pursuant to the aforesaid inspection, SEBI appointed, vide order dated November 05, 2003, the undersigned as the Adjudicating Officer under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 read with Sec. 15 I of Securities and Exchange Board of India Act, 1992 to inquire into and adjudge the aforesaid violations which are liable for penalty in terms of section 15F(a) and 15F (b) of Securities and Exchange Board of India Act, 1992. �The aforesaid appointment was communicated to the undersigned vide proceedings of the Whole Time Member, SEBI, dated November 18, 2003.

     

    1. The undersigned issued notice dated November 23, 2004 under Rule 4(1) of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 to Geojit communicating the allegations levelled against it and calling up on it as to why an inquiry in terms of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 should not be conducted against it. Since, SEBI already furnished a copy of the inspection report to Geojit vide letter dated February 17, 2003, the undersigned did not forward copy of the inspection report to Geojit along with the aforesaid notice.

     

    1. Vide letter dated December 7, 2004, Geojit� issued a detailed reply together with copies of supporting documents in response to the aforesaid notice dated November 23, 2004 issued by the undersigned.

     

    1. In the following paragraphs , the undersigned discusses each of the allegation leveled by the inspection team of SEBI and �the reply submitted by Geojit thereto for which the instant proceedings of adjudication have been initiated.

     

    1. The inspection report alleged that Geojit failed to issue contract notes in the form and manner prescribed. Section 15F (a) provides that if any person who is registered as a stock broker fails to issue contract notes in the form and manner specified by the stock exchange of which such broker is a member, 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. �As per the inspection report, in terms of the relevant provisions of the bye-laws of the Stock Exchange , Mumbai and the provisions of SEBI circular no SMD/MDP/CIR/043/96 dated August 5, 1996 , the contract notes issued by a member should contain pre-printed serial numbers.� However, as per the inspection report, Geojit, in contravention of the aforesaid provisions of law, was not maintaining the contract notes with pre-printed serial numbers till December 26, 2002. �The inspection report also alleged that the serial numbers of the contract notes were generated only on daily basis. Further, as per the inspection report, the aforesaid contravention was pointed out to Geojit by the Stock Exchange, Mumbai during its inspection of its books of accounts of Geojit in December 2001 and inspite of the observation of the Stock Exchange, Mumbai, Geojit did not rectify the position till December 2002 and continued to issue contract notes with serial numbers generated on daily basis. �The inspection report observed that� non-compliance of the requirements for more than one year inspite of the observation of the stock exchange assumes serious proposition considering the wide network and volume of business of Geojit.� In its reply dated December 7, 2004, Geojit interalia submitted that at the relevant time, it was having more than �ninety branches in India and approximately nineteen thousand active clients. �As per Geojit, the contract notes, till November 2002 were system generated with a daily running serial number for each of the branches of Geojit and since each branch issued contract notes from its office, generation of a single running serial number would require the entire file to be processed at the head office and then downloaded to each of the branches and the same was difficult since there was no online connectivity between its head office and the branches. �As per Geojit, subsequent to the inspection of BSE, Geojit was working on a system so as to introduce online connectivity which would automatically ensure running serial number of contracts. �The said process of online connectivity, as per Geojit, was successfully implemented in December 2002 and contract notes were generated with a running serial number since then.� In support of its contention, Geojit annexed copies of documents evidencing the steps �taken by it for ensuring system generated serial numbers for the contract notes on annual basis after the BSE inspection. �The undersigned perused the said �documentary evidence furnished by Geojit and found that the said documents were the copies of inter office memos of Geojit containing notings of the executives of Geojit with respect to the installing on-line connectivity between branches and head office for generating unique running serial number for contract notes. Geojit further submitted that it was a sheer coincidence that the system was finally put in place in December 2002 and no malafide intention should be attributed to the delayed implementation of the system as advised by BSE. �Geojit also submitted that the delay had to be appreciated from the gigantic nature of its network and operations perspective. �As per Geojit, by not having pre-printed serial numbers on the contract notes but a system generated daily numbering, the integrity of the system and the investor interest was not compromised� or affected in any manner. �Geogit also further submitted, in response to the observation of the inspection team that the member was not prompt in issuing the contract notes to its clients and in several cases, the issue of contract notes was delayed beyond 24 hours, that it had a system of generating contract notes on the same day and dispatching the same through courier /post to various clients. �As per Geojit, for a few contract notes not delivered in 24 hours referred to in the inspection report, most of them pertain to regular clients who normally collect the contract notes from its offices on the next day and gave an authorization to Geojit to retain the same till they collect the same. ��The inspection report pointed out 60 instances where the contract notes were not delivered within 24 hours of issuance. �In support of its contention, Geojit enclosed copies of written consents from 45 of the clients whose names were mentioned in the inspection report. �All the said clients issued an instruction to Geojit not to send the contract notes to their addresses but to collect the same from the offices of Geojit.
    2. Another charge leveled against Geojit by the inspection team of SEBI for which the instant adjudication was ordered was that it delayed the deliveries of securities and payments to clients. In terms of section 15F (b) of Securities and Exchange Board of India Act, 1992, if any person, who is registered as a stock broker fails to deliver any security or fails to make payment of the amount due to 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. �As per the inspection report submitted to SEBI, Geojit did not transfer the scrips to the clients� account with the stipulated period of 48 hours from the relevant delivery out date and instead the same were retained in the member�s account. As per the inspection report several instances of Geojit retaining huge credit balances of the clients for more than one month period was observed and Geojit did not have any consent letter from the clients for retention of money. �In response, Geojit submitted that in respect of �the clients where delay in payments was �observed, it had necessary letters and agreements from the clients� to the effect that the credit balance/ shares lying in their account be retained by Geojit as margin for future purchases to be made� by them. Geojit further submitted that� in almost all the cases in Annexure I of the SEBI report, the reason column clearly stated that the shares were not delivered since there was a debit in the account of the client and in the fully automated system, which delivers the shares, works on the principle to retain 150 % value of scrips as margin for non payment. As per Geojit, in some cases, the value of the scrips was higher than the debit balance, as it was not practically possible to make part delivery of shares to the client. Geojit also submitted that in the balance cases, the delay was due to non receipt of RBI permission. Hence, Geojit submitted that it was incorrect to state that it had not delivered the shares on time and there was no contravention of the bye laws of the stock exchange or the SEBI circular stipulating payment/ delivery to clients within two working days of the relevant pay-out.

     

    1. �With regard to the observation in the inspection report that several instances of Geojit retaining the huge credit balances of the clients for more than one month period were observed and Geojit did not have any consent letter from the clients for retention of the money etc.,� Geojit� submitted that the aforesaid �clients had been trading through it for a long time on regular basis.� Geojit also furnished at Annexure 5� of its reply consent letters from the clients. With respect to the observation contained in the inspection report that there were instances of the credit balances of less than Rs.10,000/- lying with the member for a period beyond 48 hours from the pay out date and less than one month, Geojit submitted that it had oral consent from the clients for retaining their credit balances with it.� It was also submitted by Geojit that the said clients had been trading through it for a long time on regular basis.� In support of its contention, it annexed at Annexure 5 to the written reply, consent letters from 152 clients.� Geojit further submitted that the clients found it convenient to park their surplus funds so as to facilitate the future transactions. As per Geojit the �retention was made at the instance of the clients. �In this context, Geojit further submitted �that it had a practice of sending introductory letters to each one of the� clients , when they start their relationship with it. As per Geojit, in the said introductory letter it, interalia, clearly informed the clients that they were entitled to receive the following in the time stipulated by the regulatory authorities (i) Contract Notes: within 24 hours of trades; (ii) Pay-out of funds: within 24hours of pay out of funds from the Exchange; and (iii) Pay out of shares : within 24 hours of pay out of shares from the �Exchange.� In support of its contention, Geojit submitted a copy of introductory letter as Annexure 5A to the written submissions filed before the undersigned.� Geojit also stated that it had been sending half yearly statements pertaining to the accounts of the various clients to them for their information and records, which provide details about their credit or debit balances with it in their various accounts.� Therefore, as per Geojit,� despite having the upfront notice of their rights with regard to� time frame for receipt of payments and securities from it and having the knowledge of the credit balances lying with it and not asking for the same on the part of clients , was �indicative of the fact that they had given their consent to us to retain their credit balances so that they can use it for further trading on running basis and the same also gets reinforced by the fact that there are no complaints against Geojit from the clients in this regard. �Geojit further submitted that it might be noted that if it retained the funds without authorization for the same from the clients there would have been complaints against �it �and the fact that there was not even a single complaint proves its contention that the credit balances were retained with it at the request of the clients. A copy of the aforesaid said half yearly statement sent to some of the clients was enclosed as Annexure 5B to the written submissions. In view of the above submissions,� it was submitted by Geojit that to all intents and purposes, it had complied with tone and tenor of the statute in spirit and therefore there was no question of� violation of Sec 15F(a) or 15F(b).

     

    1. On perusal of the reply submitted by Geojit, the undersigned was of the view that an inquiry should be held in the matter and accordingly a notice of inquiry dated December 9, 2004 was issued to Geogit in terms of Rule 4(3) of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 and December 16, 2004 was fixed as the date of inquiry. On the date of inquiry, Shri Satish Menon, CEO of Geojit appeared before the undersigned and apart from reiterating its submissions made vide the written reply, submitted, interalia that in the last several years of its business operations, there were no investor complaints or any disciplinary action against it.� Geojit also cited the decisions of the Hon�ble Securities Appellate Tribunal in the matter of Reliance Industries Ltd. Vs. SEBI(Appeal No. 39/ 2002), wherein it was held that role of a regulator is to rehabilitate and bring an end to litigation� which may not cast a stigma on the appellant. The authorised representative of Geojit also filed copies of the adjudication orders passed by an Adjudicating Officer of SEBI in the matters of Chandrakala Money and Capital Management Ltd., Member, NSE (Order dated December 13, 2004) and Lotus Investments & Securities (Order dated December 14, 2004).

     

    1. The undersigned has carefully perused the observations of the inspection report submitted to SEBI, and considered the written and oral submissions made by Geogit The undersigned also perused the case law cites by Geojit and the findings of the undersigned are as follows:

     

    1. With respect to the charge that Geojit failed to issue contract notes in the form and manner prescribed, it is noticed that the inspection report found that the serial numbers were not pre printed on annual basis but were system generated on daily basis. �In the opinion of the undersigned, the reasons assigned by Geojit for its failure to pre-print the serial numbers on the contract notes are justified and there is no reason or record to disbelieve the contentions of Geojit. With respect to the allegations that Geojit failed to deliver the contract notes within 24 hours of the transaction, in the opinion of the undersigned, Geojit is in possession of sufficient documentary evidence to show that contract notes were not delivered only at the instructions of the clients.�

     

    1. With respect to the charge that Geojit delayed the payments and delivery of security to clients,� the reasons for such delay assigned by� Geojit are satisfactory.� Further, Geojit is in possession of the letters of authority issued by the substantial number of clients whose names are mentioned in the inspection report, to retain the payments and securities by Geojit. �In terms of Regulation 26(vi) of SEBI(Stock Broker and Sub Brokers) Regulations, 1992 failure to deliver any security or make payment by a broker due to the investor within 48 hours of settlement of trades, is not liable for any monetary penalty if the client agrees to it in writing.� In the instant case, Geojit is in possession of written confirmations/ consents from a majority of clients.� Further, Geojit undertook to furnish the consent letters from the balance if the clients if SEBI demands for it. �However, it appears that Geojit obtained the consent letters post facto from the clients subsequent to the inspection.� ��However, Regulation 26 (vi) of SEBI(Stock Brokers and Sub Brokers) Regulations, 1992 do not stipulate that the agreement of the client in writing should be prior to the retention of payment or withholding of the delivery of securities. �In the absence of the reason to dispute the genuineness of the documentary evidence furnished by Geojit and in view of the fact that the clients ratified the action of Geojit, the undersigned is not inclined to find Geojit guilty of violating the aforesaid provision of law. ��Further, in this connection, the undersigned took into the consideration the observation contained at page 30 of the inspection report that there were no investor complaints, bad delivery or disciplinary action pending against Geojit.� ��

     

    1. In view of the above, the undersigned is of the opinion that it is not just and proper to impose any monetary penalty on Geojit in terms of Section 15F (a) and 15F (b) of Securities and Exchange Board of India Act, 1992.

     

    1. In terms of Rule 6 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, copies of this order are sent to Geojit and also to SEBI.��

     

     

    Date:�� January 27, 2005����� ��������� ����� A. Chandra Sekhar Rao

    Place: Mumbai��������������������������� Adjudicating Officer



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