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ORDER
UNDER RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR
HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN
THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST M/S INTEGRATED MASTER SECURITIES
PVT. LTD., MEMBER NSE FACTS
OF THE CASE 1.
Securities &
Exchange Board of SHOW
CAUSE NOTICE 2.
A notice dated June
17, 2004 was issued to the noticee in terms of Rule 4 of Securities and
Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties
by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the
Adjudication Rules) seeking the reply of the noticee as to why an inquiry
should not be held against it for the violations alleged to have been committed
by it. SUBMISSIONS OF THE NOTICEE 3.
In response to
the said notice, the noticee vide its letter dated 4.
The charges
leveled against the noticee, its submissions and findings of the inquiry are
mentioned below: CHARGE:
FAILURE TO MAINTAIN DOCUMENT REGISTER AND ORDER BOOK 5.
The allegation
against the noticee is that it failed to maintain the document register and the
order book in the proper form and hence it is liable for penalty under
Regulation 26(iii) of Brokers Regulations which provides for monetary penalty
for failure to maintain books of accounts or records as per the Act and Rules
and Regulations framed thereunder. In this regard Section 15A(c) of SEBI Act stipulates
that any person who is required under the Act or any Rules or Regulations made
thereunder to maintain books of accounts 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. 6.
In this regard
it was noted during the inspection of the noticee that the noticee was not
maintaining document register containing the number of securities received,
delivered and the balance securities remaining available etc. Further, the
noticee was not maintaining Order Book for recording time when the client
placed an order. SUBMISSIONS: 7.
Regarding the
said allegation, the noticee has submitted that it had been maintaining
Document Register in electronic form. The noticee also submitted that realizing the redundancy and
practical aspects in relation to maintenance of the order book, NSE made it
optional for trading members to maintain order book vide their circular no.
NSEIL/LEGAL/3686 dated FINDINGS: 8.
It is noted that
the noticee was maintaining document register in electronic form. Though, it is
submitted that NSE made it optional to maintain order book since CHARGE:
FAILURE TO ISSUE CONTRACT NOTES IN THE SPECIFIED FORMAT 9.
It is further
alleged that the noticee was not issuing contract notes in accordance with the
requirements and hence is liable for penalty under Regulation 26(v) of Brokers Regulations
which provides for monetary penalty for failure to issue contract notes in the
form and manner specified by the stock exchange of which such broker is a
member. In this regard Section 15F (a) of the SEBI Act stipulates that if any
person, who is registered as a stock broker under the Act 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. 10. In this regard it was noted during the inspection of
the noticee that the contract notes were not issued to the clients in the
format prescribed by the exchange. Few discrepancies such as name of the
authorised signatory not mentioned, contract notes not serially numbered,
acknowledgement not obtained for contract notes etc were observed. SUBMISSIONS: 11. Regarding the said allegation, the noticee has
submitted the following a)
Jurisdiction: In
relation to arbitration clause for resolving disputes, the contract note
correctly states the venue as b)
Authorized
Signatory: As we have authorized more than one person to sign the contract
notes, the name of authorized signatory is rubber stamped on the first copy of
the contract notes at the time of signing of contract notes. c)
Value of stamp
affixed on 1st copy of contract notes: Stamps of proper value are
duly affixed and the value is mentioned on the first copy of the contract notes
without any option. d)
Name of the person
signing the contract note: Name of the person signing the contract note is
rubber stamped on the first copy of the contract notes. e)
Format of
contents on the back page of the contract notes: The contents required to be
printed on the reverse of the contract note were changed by the exchange during
the relevant time. Such change could not have been reflected on the already
printed contract notes used for a short period till the receiving of newly
printed contract notes. However, we had brought the changed contents to the
notice of the clients. Presently, the contents on the back page of the contract
notes used by us are in prescribed format. f)
The contract
notes are generated through computer system containing serial numbers on an
annual basis starting from the calendar year. g)
The serial
number on the contract notes were self generated on daily basis by the computer
system. For initialization of serial numbers from the beginning of the year, it
was required to make a change in the back office software. Realizing the
practical difficulty in this regard, the stock exchange was also not insisting
on the pre printed serial numbers and directed the trading members to follow
the same from h)
We had issued
contract notes to all the clients for all the trades. As already submitted,
before making the necessary changes in the computer system, the serial number
on the contract notes were self generated on daily basis by the computer
system. The inspection officer has totally disregarded this fact and reached a
wrong conclusion solely based on the numbers printed on the contract notes.
Settlement wise list of contract notes was available in the computer system but
inspection officer did not bother to verify the same. i)
In case of hand
delivered contract notes, there were only a few instances where due to
oversight / indifferent behaviour / forgetfulness / carelessness / negligence
on the part of the clients to put the date while acknowledging, some contract
notes were acknowledged but not dated. Further, the numbers of contract notes
sent by post / courier are very few. j)
The contract
notes were time stamped strictly as per NSE regulations. k)
We have fully
complied with the provisions of Indian Stamp Act as extended to FINDINGS: 12. The noticee has submitted that it had issued contract
notes to all the clients for all the trades. The noticee further submitted that
there are few instances where due to oversight, acknowledgment from the clients
were not dated. It is noted that the noticee has admitted deficiencies in the
format of contract notes issued by it. In view of the same, it is concluded
that the deficiencies in the contract
notes issued by the noticee as observed in the inspection report has been
admitted by the noticee, it is found that the noticee has not adhered to the
requirements of the contract notes and hence liable to the penalty under
section 15 F(a) of the SEBI Act, 1992. CHARGE:
DELAY IN DELIVERY OF SECURITY OR PAYMENT TO THE CLIENT: 13. It is alleged that the noticee is liable for penalty under Regulation 26(vi) of
Brokers Regulations which provides for monetary penalty for failure to deliver
any security or make payment of the amount due to the investor within 48 hours
of the settlement of trade read with Section 15F(b) of the SEBI Act which
stipulates that if any person, who is registered as a stock broker under the
Act 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. 14. In this regard during the inspection it was noted that there were 12 instances of delay in
payment to M/s Competent Professionals Ltd., 9 instances of delay in payment to
M/s Integrated Financial Services Pvt. Ltd., 1 instance of delay in payment to
Integrated Mer Exp. (P) Ltd., 6 instances of delay in payment to Manoj Dua, 4
instances of delay in payment to Raj Kumar Lohia, 2 instances of delay in
payment to Int. Financial Services Ltd., 4 instances of delay in payment to
Money Makers and 4 instances of delay in payment to Integrated Scrip Dealers
(P) Ltd. There is one instance of delay in delivery of scrip to Unique
Investment. SUBMISSIONS: 15. Regarding the said allegation, the noticee has
submitted that it makes payments to clients within the stipulated time.
However, certain clients who are doing business on daily basis have
specifically authorized the noticee by giving authority letters to keep their
accounts in running form instead of issuing cheques settlement wise and
retaining their money for future Pay-in / Margin obligations. The accounts with
these clients are reconciled at frequent intervals. The noticee further
submitted that there has never been any complaint from the clients regarding delay
in payment by the noticee. The noticee further submitted that out of several
thousand transactions, there was only a single instance pointed out in the
inspection report where the delivery was delayed by 6 days. In this case, the
noticee had issued a delivery instruction for 200 shares of Vidiocon Leasing on
the pay out day itself but due to short delivery of 100 shares from the
exchange, this delivery instruction slip was failed / rejected at DP level. On
receipt of the auction settlement delivery for the shortfall of 100 shares, the
entire quantity of 200 shares was delivered to the client. FINDINGS: 16. It is noted from the submissions made by the noticee
that it had obtained authority letters from the clients for retaining the fund
and securities. In terms of the provisions of Regulation 26(vi) of the SEBI
(Stock Brokers and Sub brokers) Regulations, 1992 failure to deliver any security or make
payment due to the investor within 48 hours of the settlement of the trades
attracts monetary penalty except in cases where the client has agreed in
writing otherwise. With regard to the delay in the delivery of securities in
the instance cited, the noticee submitted that the same had arisen on account
of the delivery slip being rejected at DP level which was subsequently
rectified. It is noted that the noticee
failed to deliver securities in respect of the instance stated above which is
also admitted by the noticee. Hence, it is concluded that the noticee has
contravened the provision of Regulation 26(vi) in respect of instance cited
above and hence liable to penalty under section 15F(b) of the SEBI Act, 1992. CHARGE:
NON MAINTENANCE OF AGREEMENT WITH THE CLIENTS IN THE PROPER FORM 17. It is alleged that the noticee failed to maintain the
agreements with the clients in the form and manner required by the Regulations and
hence is liable for penalty under Regulation 26(xii) of Brokers Regulations which
provides for monetary penalty for execution of trade without entering into
agreement with the client under the SEBI Act, Rules and Regulations framed
thereunder or for failure to maintain client registration form or commission of
any irregularities in client agreement. In this regard Section 15B of the SEBI Act
stipulate that if any person who is registered as an intermediary and is
required under this Act or any Rules and Regulations made thereunder to enter into
agreement with his client, fails to enter 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. SUBMISSIONS: 18. Regarding the said allegation, the noticee has
submitted that it had entered into agreement with all the clients. Further,
necessary proof of residence as well as personal identity in respect of the
clients was obtained. The noticee further submitted that the few shortcomings /
deficiencies in the client registration form as pointed out in the inspection
report have been rectified. FINDINGS:
19. The noticee has submitted that it has maintained
necessary data pertaining to the client such as photograph, PAN, identity and
residence proof etc. as the said documents constitute proof of residence and
identity of the client. The noticee also submitted that minor deficiencies with
regard to the maintenance of registration form as pointed out in the inspection
report have been rectified subsequently. It is noted that the noticee could not
produce the information sought by the inspection authority on the basis of
certain client registration forms. In this regard the noticee stated that the
same were inactive clients in respect of whom the additional information sought
by the inspecting authority could not be provided immediately. As it found in
the inspection that the noticee could not provide certain information in
respect of few clients, it is concluded that the noticee failed to maintain to
client registration forms as required in terms of the provisions of SEBI
circular SMD/Policy/IECG/1-97 dated February 11, 1997 and also the provisions
of Regulation 26(xii) of Brokers Regulations. However, the same can not be
termed as failure to enter into agreement with the clients as required under
Section 15 B of the SEBI Act. 20. It is noted from the above, that there were certain
deficiencies in the manner and form of contract notes issued by the noticee.
Further, one instance of delay in delivery of securities to the client was also
observed The said violations attract penalty under 15F(a) and 15F(b) of the
SEBI Act. 21. In this regard, the provisions of Section 15J of the
SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of
penalty, 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 In this regard, the noticee has submitted
that there has never been any complaint against it from any investor or client.
The noticee further submitted that the lapses / deficiencies pointed out in the
inspection report are too technical and procedural in nature. None of these
venial breaches suggest the remote possibility of deriving any disproportionate
gain or unfair advantage by the noticee. The noticee also submitted that no
harm, injury, loss or damage is alleged to have been caused or suffered by any
investor or client on account of these lapses. In this regard, it is noted that
no quantifiable data is available in respect of the loss caused to the
investors. Further, the amount of loss
caused to an investor or group of investors also cannot be quantified on the
basis of the available facts and data. In this regard, it is pertinent to note
that no investor complaint has been observed in the inspection report. It is
noted from the submissions of the noticee that though there was an instance of
delay in delivery of securities to one client, the same has not arisen on
account of the fault of the noticee and further, the shortfall in the securities were rectified
immediately by delivery of the securities to the client. Further, it is noted
from the submissions of the noticee that it has rectified the lapses /
irregularities/ deficiencies pointed out in the inspection report in respect of
issuance of contract notes which eliminates the possibility of their repetition
in future. In view of the facts and circumstances of the case and taking into
account the submissions made by the noticee that it has rectified the
deficiencies pointed out in the inspection report, I am of the view that no monetary
penalty needs to be imposed on Integrated Master Securities Pvt. Ltd. in terms
of the provisions of Section 15F(a) and 15F(b) of the SEBI Act, 1992. 22. In terms of the provisions 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 M/s Integrated Master Securities
Pvt. Ltd. and to SEBI. Place: Mumbai Biju.
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