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ORDER UNDER THE SEBI (PROCEDURE
FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY THE ADJUDICATING OFFICER) RULES,
1995 IN THE MATTER OF VIOLATION OF THE PROVISIONS OF THE SEBI (SUB BROKERS AND
BROKERS) REGULATIONS, 1992 AGAINST M/s. JAI SHAREFIN LTD. BACKGROUND: 1. M/s. Jai Sharefin
Ltd. (for brevity’s sake hereinafter referred to as JSL) is registered with the
Securities and Exchange Board of India, 1992 (for brevity’s sake, hereinafter
referred to as the SEBI) as a broker and is the member of Ahmedabad
Stock Exchange (for brevity’s sake hereinafter referred to as the ASE), with SEBI registration no.INB020919133. 2. An inspection of the books of account,
documents and other records of JSL was conducted on by SEBI for the period from
April 2001 till the date of inspection. During the inspection, certain
irregularities and violations of the SEBI (Stockbrokers and Sub-Brokers)
Regulations, 1992 (hereinafter referred to as the Broker Regulations) alleged
to have been committed by JSL, were noted. Shri S.V.Krishnamohan was appointed as the Adjudicating Officer;
vide order dated SHOW
CAUSE NOTICE/ REPLY/ PERSONAL HEARING: 3. Accordingly a show cause notice dated January 11,
2005 was issued to JSL
under Rule 4 of the SEBI (Procedure for holding inquiry and imposing penalties
by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the ‘Rules’)
whereby JSL was called upon to show cause as to why action should not be
initiated against them for the violations referred to in the said notice. JSL was also advised to make their
submissions, if any, along with supporting documents that they wished to rely
upon, within 14 days from the date of the receipt of the notice, and also
indicate whether they were desirous of a personal hearing. JSL was further
advised to note that in case they failed to reply within the stipulated period,
it would be presumed that they had no adequate explanation to offer and that
the matter would be decided solely on the basis of the material available on
record. 4.
A reply vide letter dated 5.
Thereafter
a notice of hearing dated APPRECIATION OF EVIDENCE 6. In view of the absence of the complete
documents on record, I have considered the facts and circumstances of the case
on the terms of the material available on record including the findings of the
inspection report and the documents submitted by JSL in support of their
contentions for the purpose of analysing all the submissions
made on behalf of JSL. 7. The charges leveled against JSL for which
the present proceedings have been initiated, the submissions, if any, made by
them in this regard in their defense and my finding on the same are elaborated
herein below: - A. Failure to maintain client registration
forms 8. JSL was found to have not maintained the
client registration forms for almost all their 1500 clients. Instead client
registration forms were maintained for only 150 out of these 1500 clients and
even in these forms, several discrepancies such as absence of photographs of
the clients, the identity proof of the clients, the net worth statement /
Income proof, bankers verification and the details of the introducer were noted.
These irregularities amounted to a violation
of the SEBI Circular No. SMD/POLICY/IECG/1-97 dated 11.02.1997 and SMD/POLICY/Circular/5-97
dated 11.04.1997 read with Regulation 26(xii) of the Broker Regulations. 9.
JSL contended that although there had been certain
procedural lapses on their part, the same had been rectified by them subsequently.
During the course of the hearing, they
undertook to submit the copies of all the 1500 client registration forms, net
worth statement, income proof, bankers verification and the details of the introducer
evidencing their having made necessary rectification in all the client
registration forms. However, vide a
handwritten letter dated March 7, 2005, JSL submitted copies of around 300 client
registration forms only and contended that they had only 310 clients dealing
through them and that the number of 1500 clients as pointed out by the
Inspecting Authority was incorrect. 10.
I have examined a sample of the said documents and have
noted that although JSL has been charged for not enclosing the photographs in
case of the following clients namely: Shri Motilal Manaklal Maloo (client code 1505), Sushila
Lekhraj Maloo and Ridhi Sidhi Securities (client code 255) their reply dated
January 17, 2005, however enclosed the copies of the photographs of these clients. 11.
As regards the allegation that the identification
proof was not available in the cases mentioned below, necessary proof regarding
the said clients was submitted vide their letter dated a) Chiraj Investment (client code 666)– copy of the PAN
letter of the Proprietor Shri Rameshchandra
Ambalal Shah b) Bharti Enterprise (client code 6) – copy of the PAN Card
of Bhartiben Dipakkumar Thakkar. c) Shushila Lekhraj Maloo – copy of the PAN Card d) Om Investment (client code 649) – Driving Licence
of Patel Pravin Lavjibhai. e) Anupama N Amin (client code 719)
– Pan card f) Yogeshbhai J Shah (client code 596) – Pan Card g) Ajitsingh Banvet (client code
1520) – Driving licence. 12. However, I have also noted
that there continue to remain several discrepancies in the client introduction
forms which ought to have been included for the proper maintenance of the
client registration form in the format provided by SEBI. Some
of these are mentioned below: a. There was a
failure to provide the bank account details in the client registration forms of
the following clients: Cash
Credit Consultancy Sinik Investment. Asha
Mittal Rajesh Agrawal S K Mittal Phool
Chand Agrwal Madhoo
Agrawal etc. b. The bankers
certificate certifying the account number and the period from which the account
was in operation, was not furnished for most of the clients, some of who are Prashant Shantilal Kataria(HUF) Prakash Shantilal Kataria (HUF) Subahash Dhanraj Jain (HUF) : c. The signatures of the witnesses i.e. the introducer were not there in
most of the client introduction forms. d. Photographs
of the following clients not available : Shri Kavita Jain Shri Paras
Jain etc. e. The proof of
identity was not provided in case of the clients mentioned below: Taruna Madanlal Kothari Madan Sardarmal Kothari Shilpadevi Goyal Ashadevi Gpoyal Sangeeta Pirodia Amit Bhandari Dilip Paandir Neena Chowdhary Jacquart Properties
P Ltd. etc. 13. It would be very relevant
to note that these are however as mentioned earlier, only the discrepancies noted
upon examining some of the forms submitted by JSL and not all the forms
submitted for my perusal. It is evident that JSL has not exercised adequate due
care and diligence while dealing with these clients. 14. The Client registration
form is devised to obtain certain useful information about the client to enable
the stock broker to know about the credibility of the client before dealing
with him. Client identification is also important
since it makes it easier for the audit trail to identify the clients with the
assistance of details like PAN number, introduction or any other identity proof
etc. These provide inputs as regards the credentials of the clients and hence
improper maintenance of client registration forms, amounts to a contravention
of the SEBI Circulars dated 11.2.1997 and 11.4.1997. 15.
SEBI
vide its Circular no. SMD/POLICY/IECG/1-97 dated 16.
However, as brought out earlier in the instant
case, although attempts were made by JSL to rectify these discrepancies,
several continue to remain as is evident from an examination of the documentary
evidence submitted by them. Due note has to be made as regards the very purpose
of issuing the relevant circulars of SEBI as well as the rationale behind their
issuance. As brought out earlier, obtaining the details of the clients is in
fact the first and foremost step towards entering into the broker/sub broker-client
relationship. The fact that JSL has clearly defaulted is indicative of their
failure in not exercising necessary care and diligence while executing trades
for the clients. 17.
I
also find it difficult to accept that even the Whole time Director, and the
Ex-Director of JSL who appeared for the hearing do not appear to be aware of the
number of clients on whose behalf they were trading. During the course of the hearing
they committed to furnish the client registration forms of all 1500 clients.
However, in their letter dated March 7, 2005, they have stated that they dealt
for 310 clients only and not 1500 clients as alleged. The number of clients were
brought down to one fifth of the total clients and the fact that even the rough
figures in terms of the number of clients as per the finding of inspection is
not known to them, while trading on the clients’ behalf appears to be
questionable. There is a strong probability that JSL did not possess the client
registration forms for many of their clients. In fact, considering the variance
in the figures mentioned, had they served only 300 odd clients, the same would
have been contended before me at the time of the personal hearing when they undertook to submit the copies of
all the 1500 ( and not 300)
clients. 18. Even assuming otherwise, in most of these
cases of the 310 client registration forms, a number of deficiencies as pointed
out earlier were noted. Hence failure on the part of JSL in not obtaining/
maintaining, proper client registration forms, calls for a penalty. B. Non
segregation between the clients account and own account. 19. JSL was found to have failed to segregate
the clients money from their own funds and was found to have regularly transferred
the funds from the client account at 198, Central Bank of India to their
Current account O/d 300 050 Central Bank of India and vice versa and from the
BSE client account to the ASE client account and vice versa, thereby violating Regulation
26(xiii) the Broker Regulation read with SEBI Circular No. SMD/SED/Cir/93/23321
dated 18.11.1993. 20. JSL contended
that they had been maintaining their client funds and their own funds
separately and that they were maintaining a separate client account with their
banker that was used for the purpose of making pay in and payout to the
clients. JSL undertook to submit proof
of the same, However in the information submitted by them vide letter dated
March 7, 2005, although they have stated
that they were enclosing the copy of the bank statement which incidentally shows
that the brokerage amount was transferred from the client account to the JSL’s account, the same was however not enclosed. 21. In terms of the SEBI circular dated 22. Further,
every member who holds or receives money on account of a client shall forthwith
pay such money to the current or deposit account at bank to be kept in the name
of the member in the title of which the word “clients” shall appear.
They may keep one consolidated clients account for all clients or accounts in
the name of each client, as he thinks fit. 23.
As JSL did not submit the necessary documents
evidencing separate accounts being maintained by them on their own and the clients’
funds till date, it is clear that despite the contentions advanced by JSL in
their reply to the show cause notice and also in their submissions made during
the course of the proceedings, they have not maintained separate segregation in
their client account and their own account.
24.
In view of the same, a stringent penalty needs to
be imposed on JSL on this count. Any broker
who fails to maintain the segregation of accounts and utilizes the clients funds in a improper manner for their own benefit
needs to be suitably penalized. As has
been pointed out in the inspection report, the funds were regularly transferred
by JSL from the clients’ account to the Current account at the Central Bank of
India and from the BSE client account to the ASE client account clearly
suggesting that they had been regularly practicing the act of withdrawing the
funds from the clients account or transferring the same from one client account
to other client account and was frequently utilizing/ withdrawing the clients’
money for purposes other than trading or for settlement of trades of totally
different clients or for any other purpose. C. Contract
note not issued as specified by the stock exchange 25. JSL was not found to
maintain / issue contract notes in the form and manner specified by the stock
exchange, in as much as the order no. and the time of execution of the orders
were not mentioned therein and the preprinted serial numbers were not indicated
on the said contract notes. These
discrepancies amount to a violation of Regulation 26(v) of Broker Regulations,
1992 read with SEBI Circulars No. SMD/MDP/CIR/043/96 dated 05.08.1996 and
SMD/POLICY/IECG/1-97 dated 11.02.1997. 26. JSL however submitted that
the contract notes were issued to all their clients in the manner as specified
by the exchange and that all the contract notes were generated by computer and therefore
the serial numbers were generated automatically. JSL also submitted that the ASE
Regulations did not specifically mention the provision of the Order Time on the
contract notes, although the SEBI Regulations and the relevant SEBI Circular
did call for the maintenance of these memos in the manner specified. JSL further
submitted that the software provided by the exchange did not have the provision
for mentioning the same and undertook to submit necessary proof in support of
their contentions. Although JSL in their letter dated 27. As per SEBI Circular
No. SMD/POLICY/IECG/1-97 dated February
11, 1997, all the stock exchanges were advised to initiate immediate action on some
of the points mentioned in that Circular and one among them was that “the
broker member should maintain the record of time when the client has placed the
order” and reflect the same in the contract note along with the time of
execution of the order. Hence,
notwithstanding the prevalent standard maintained as per the ASE Regulations, the
time of execution of order is specifically required to be mentioned for all the
contract notes issued to all the clients. 28. The importance of this issue was also
brought out in case of Radar Securities Ltd. Vs. SEBI in
Appeal No. 22/2003 where the Hon’ble Tribunal observed
as under: “…………..
Contract Note is a very important document in the transaction and its relevance
is all the more when dispute arises between the broker and the client………………… ………………The
Contract Note provides space for recording “Trade time”. This “Trade time” is the one which refers to
execution of the trade. Not the
placement of the order by the client.
However, according to the Respondent, its circular dated 11.2.97 requires
every stock broker to maintain record of time of placing the order with it. According to the said circular (it is
addressed to the Stock exchanges) “the broker member should maintain record of
time when the client has placed the order and reflect the same in contract note along with the
time of execution of the orders”. By the
said circular the stock exchanges were directed to initiate action in this
regard. The Appellant’s submission that
NSE had not circulated the said circular is not convincing. Failure to carry out the Respondent’s direction
by NSE would have attracted consequences.
In any case the said circular was displayed on the Respondent’s
Website. The receipt of the order from
the client and execution of order by broker are not one and the same. Stamping the receipt time is important from
the investor protection angle as it has a bearing on the transaction rate. Failure to do so is a matter of concern. It is noted from the NSE Regulation (6.1.3)
that a stock broker is required to maintain order book reflecting therein
amongst other details, the date and time of orders received from clients. Therefore it is not that there is no other
source to locate order receipt time, in the event of any dispute. But this
information is not readily available to the client. The Appellant’s argument that the format of
the Contract Note was not amended and therefore it was not required to do time
stamping has no basis. It is well
settled that an administrative circular is effective as an interim measure till
the regulations are amended incorporating the requirement of the circular. In my view the Respondent’s charge of the
default on the part of the Appellant in complying with the requirements of
retaining counterfoil/duplicate of the contract note, stamping time of receipt
of the order and affixing stamps, as per
the Indian Stamp Act stand established.”
(Italics supplied) Keeping these views in mind, it is clear that
not maintenance of the contract notes in terms of the said SEBI Circular warrants
a penalty. D. Dealing with unregistered sub broker 29. JSL was found to have
traded with an unregistered sub broker M/s Ram Securities resulting in the
violation of Regulation 26(xiv) of the Broker Regulations read with SEBI
Circular No. SMD/POLICY/CIRCULAR/3-97 dated 31.03.1997. 30. JSL submitted that M/s Ram
Securities had traded as their client and that Ram Securities had not dealt for
anybody else except themselves. It was further submitted that Ram Securities
was not a registered broker or sub broker of any exchange. 31. In this regard, I have noted that there is
no supporting evidence in the inspection report to establish that M/s Ram Securities
was acting as sub broker. There are also
no details as regards the trades done on behalf of the said entity, the volume
of trades executed on behalf of the client.
The evidence on record only shows that Ram Securities was trading with
JSL as client proper and not as a sub broker. 32. Dealing
with an unregistered broker amounts to a violation of the regulation. But then the charge has to be reasonably
proved. Size of the transaction by
itself is not a clincher. The evidence
is required to show that the client was acting as a sub broker. In light of the paucity of evidence on
record to substantiate this charge against JSL and in the absence of reasonable
evidence to even come to such a finding, I find it impossible to subscribe to
the findings of the inspection report holding JSL guilty of trading with an
unregistered sub broker. Hence, no
penalty is called for on this charge. E. Payments
made within the prescribed time 33. JSL was found to have not made
payments to their clients within the prescribed time of 48 hours of the payout,
amounting to a violation of Regulation 26(vi) of the Broker regulations read
with SEBI Circular No. SMD/SED/CIR/93/23321 dated 18.11.1993. 34. JSL in their submissions
denied the said allegation and stated that the cheques
regarding payouts to the clients were issued on time and that if the same were not
collected by the clients on time, JSL should not be charged on this count. The
broker undertook to submit proof regarding the clients’ own instructions for
subsequent purchases, delayed payments etc. However, JSL failed to submit even
a single authorization letter from any of their clients in support of the
contentions advanced by them. 35. One of the conditions for grant of
certificate of registration to the Appellant is that the broker should abide by
the requirements of the SEBI Act and the rules and regulations framed there
under. In terms of clause B (1) of the Code of Conduct, forming part of the Broker
Regulations, a stock broker is required to make prompt payment in respect of
securities sold and also arrange for the prompt delivery of securities purchased
by the clients. As pointed out in the inspection report JSL did not maintain
any system of payment of outstanding to their clients within 48 hours of payout
and therefore no such instances were recorded. Even during inspection, records
of the latest outstanding positions of the clients were not found. This act of the broker in the absence of any
documentary evidences to arrive at a contrary finding warrants a penalty. 36. The provisions of the SEBI Act that are to
be invoked for levying penalties on a broker are specified below: Section 15F 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 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; (b) fails to
deliver any security or fails to make payment of the amount due to the investor
in the manner or 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. Section 15HB Whoever fails to comply with any provision
of this Act, the rules or the regulations made or directions issued by the
Board there under for which no separate penalty has been provided, shall be
liable to a penalty which may extend to one crore
rupees. 37. Notwithstanding
the above, Parliament in its wisdom has specified certain factors as enumerated
under Section 15J of the Act that need to be taken into account while adjudging
the quantum of penalty and these include the amount of disproportionate gain or
unfair advantage made as a result of the said default, the amount of loss caused
to the investors and the repetitive nature of default. 38. Apart
from the facts on record, I have also noted certain other observations made by
the inspecting authorities in the inspection report to the effect that the
proportion of internal trades of JSL was higher when compared to the actual
trades on the exchange and that JSL was not supportive and not cooperative in
providing the information to the inspecting authorities and also that JSL destroyed
the documents relating to internal trades and fake transactions. These issues relating to JSL
throws light on the manner of their
functioning as also their stance towards
a regulatory agency. It appears that JSL had made disproportionate gains or enjoyed
unfair advantage which is difficult to quantify and as evident from the
documents submitted by them, most of the discrepancies remain unrecitified by them till date. 39. In
view of the foregoing, I am of the considered opinion that a penalty is to be
levied upon JSL and for the determination of the quantum of penalty to be
levied, I have considered at length, the plethora of orders referred to by the Hon’ble Tribunal in the case of Chona
Financial Services Private Limited, apparently passed by the SEBI/SAT, wherein
the Hon’ble Tribunal has detailed the nature of
penalties levied upon various entities for the offences committed by them. 40. I have dwelt with at length on the relevant
portion of the said order and I am of the considered opinion that it would be
necessary to distinguish the nature of the proceedings initiated against the various
entities mentioned therein, from the entity presently under consideration, for the
purpose of consideration of the penalty to be imposed in the present case. 41. In terms
of the relevant provisions of the SEBI Act and the Regulations framed there
under, read in conjunction with the relevant proceedings of the Enquiry
Regulations, it is apparent that enquiry proceedings result in the issuance of
a minor or major penalty in the nature of warning/suspension/cancellation, in
cases where the entity is found to have violated the provisions of the relevant
regulations. The repercussions that
arise thereafter makes it aptly clear that an order of suspension or
cancellation of certificate of registration granted to the broker/sub broker to
carry on broking business is not a matter to be treated lightly, considering
the degree of loss suffered by the entities in such a case. 42. As
opposed to that, adjudication proceedings culminate in the imposition of a monetary penalty, if at all, the
quantum of which varies from the facts and circumstances of each case. Hence a penalty imposed under the enquiry
proceedings i.e., suspension/cancellation/warning
cannot be likened to a penalty in the nature of a monetary penalty. 43. As is apparent from the nature of the orders
passed against the said entities in the orders referred to by the Hon’ble Tribunal, the same were passed under the Enquiry
Regulations, whereafter the SEBI/SAT after taking
into consideration the peculiar facts and circumstances of each case, in its
wisdom, levied a penalty of warning. 44. Hence, on judicious exercise of the powers
conferred upon me in terms of Rule 5 of SEBI (Procedure for holding inquiry and
Imposing penalties by the Adjudicating Officer ) Rules,
1995, on analyzing the material
available on record alongwith the documentary
evidences furnished by JSL, I am of the considered view that it would be
appropriate to impose a penalty of Rs. 75,000/-
(Rupees Seventy Five Thousand only) on M/s Jaisharefin
Ltd. bearing SEBI Registration No. INB 020919133, Member Ahmedabad
Stock Exchange. 45.
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 Smt Usha Narayanan, Chief General Manager, Securities
and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai –
400021. PLACE: MUMBAI
G. BABITA RAYUDU DATE : |
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