AGAINST

M/s. JHAVERI SECURITIES

(SEBI REGISTRATION NO. INS 021139113),

Proprietor-Shri Tushar Jhaveri

 

1.0    BACKGROUND: 

1.1    M/s Jhaveri Securities (hereinafter referred to as “JS”) is registered with  Securities and Exchange Board of India, 1992 (hereinafter referred to as SEBI) as a sub broker affiliated to M/s Rajesh Jhaveri Stock Brokers Pvt. Ltd., member-Ahmedabad Stock Exchange Ltd. Shri Tushar Jhaveri is the proprietor of JS and its  SEBI Registration No. is INS 021139113.

1.2    An inspection of the books of account, documents and other records of JS was conducted by the SEBI appointed inspecting authority, M/s Singhvi & Mehta, Chartered Accountants on various dates between September 24, 2004 to November 18, 2004. The inspection covered the period of financial years 2002-03 and 2003-04. It was alleged that during the inspection certain violations of the SEBI (Stockbrokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as “Broker Regulations”) were observed.  The findings of inspection were communicated to JS vide SEBI letter no. MIRSD/DPS 1/Post Insp./RRM/S Brk-15/29229 dated December 24, 2004.  JS was also advised to submit its comments on the findings of inspection within 14 days of receipt of the letter.  As JS did not respond to the said notice, a reminder dated February 01, 2005 was sent to JS with an advice to submit its para-wise comments to the findings of inspection within 10 days failing which it would be presumed that JS had no comments to offer and further appropriate action would be initiated by SEBI.  As no response was received from JS, I was appointed as the Adjudicating Officer, vide order of SEBI dated September 13, 2005 to inquire into and adjudge the alleged violations by JS.

2.0   NOTICE/ REPLY/ PERSONAL HEARING:

2.1       Accordingly, I issued a notice dated April 07, 2006 to JS 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 JS was asked to show cause as to why action should not be initiated against them for the violations referred to in the said notice. JS was also advised to make their submissions, if any, within 14 days from the date of the receipt of the notice.  There were also asked to indicate whether they were desirous of a personal hearing in the matter. JS were further advised to note that in case they failed to reply within the stipulated period, it would be presumed that they had no submissions / explanation in this regard and that the matter would be further proceeded with on the basis of the material available on record.   This notice was returned undelivered to my office.  Thereafter a fresh show cause notice was issued on April 24, 2006 and was delivered to JS through Ahmedabad Stock Exchange Ltd. (ASE) on April 25, 2006. 

 

 

 

2.2       As no reply was received from JS, I decided to conduct an inquiry in the matter and accordingly, vide reference no.  EAD/EAD-5/PG/69647/2006 dated June 19, 2006, issued a notice of inquiry to JS fixing July 03, 2006 as the date of hearing.  The notice mentioned that JS or any authorized representative could appear on the said date and make necessary submissions along with supporting documents.  The notice also mentioned that if no one appeared before me on the said date, the inquiry would be conducted ex-parte and the matter would be decided on the basis of documents available on record.  This notice was delivered on June 20, 2006.  On the said date i.e. July 03, 2006, neither JS nor any representative appeared before me.

 

2.3       Vide letter no. EAD/EAD-5/PG/71535/2006 dated July 14, 2006, another opportunity of hearing was provided on July 21, 2006.  This notice was delivered on July 17, 2006.  However, neither JS nor any authorized representative appeared before me on the said date. 

 

2.4       As neither any reply has been received from JS and nor Shri Tushar Jhaveri, proprietor of JS or any authorized representative has appeared before me despite numerous opportunities being provided, I am constrained to proceed with the adjudication proceedings on the basis of material / evidence available on record.

3.0    CONSIDERATION OF EVIDENCE

3.1    During the inspection of JS for the period 01.04.2002 to 31.03.2004, the following shortcomings / violations were observed by the inspection team:-

 

a.      Non-maintenance of ‘know-your-client’ forms in violation of Regulation 26(xii) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.

 

 

b.      Non-maintenance of counter-foils / duplicates of confirmation memos in violation of regulation 17(h) read with regulation 26(iii) of Broker Regulations.

 

3.2       SEBI vide Circular No. SMD/POLICY/IECG/1-97 dated February 11, 1997 had stipulated that the brokers would be required to maintain a database of clients.  Thereafter, vide Circular No. SMD/POLICY/CIRCULARS/5-97 dated April 11, 1997, SEBI had also forwarded the formats for client registration form and broker client agreement.  It was also stipulated that the client registration by brokers should be completed before May 31, 1997.  Subsequently, vide Circular No. SMD/POLICY/CIR-11/97 dated May 21, 1997 SEBI had stipulated that sub-brokers would also be required to maintain database of their clients as well as enter into agreement with clients. 

 

3.3       The Know-Your-Client (KYC) requirement has been stipulated by SEBI wherein the broker / sub broker would procure and maintain details of client background, address, bank account details and portfolio size etc. This would enable them to ensure genuineness of clients as also assess their financial standing  so that they may decide about the level of trading to be permitted to the client.   Genuineness of clients is an important step in ensuring integrity of trades and thereby of the market as a whole. 

 

3.4       By not maintaining the KYC forms, JS has violated the above mentioned circulars (viz. Circular No. SMD/POLICY/IECG/1-97 dated February 11, 1997, SMD/POLICY/CIRCULARS/5-97 dated April 11, 1997 and SMD/POLICY/CIR-11/97 dated May 21, 1997) and regulation 26(xii) of Broker Regulations which make them liable for imposition of monetary penalty. 

 

3.5       SEBI vide Circular No. SMD/SED/CIR/93/23321 dated November 18, 1993 had stipulated that the stock brokers would issue contract notes to clients within 24 hours of the execution of transaction.  The affiliated sub brokers who execute transactions through their stock brokers are required to issue confirmation memos to their clients in respect of the trades done by them and maintain duplicate copies of the same duly signed by the clients as proof of acknowledgement.  The acknowledgements on the duplicate copies of the confirmation memos would evidence whether the same have been issued within 24 hours of execution of the transaction.  Clauses B (2) and B (6) of Code of Conduct for sub brokers as mentioned in Schedule II of regulation 15 of Broker Regulations as they existed before September 23, 2003 are quoted below:-

“B.  Duty to the Investor

(1)….

(2)  Issue of Purchase or Sale Notes :

(a) A sub-broker shall issue promptly to his clients purchase or sale notes for all the transactions entered into by him with his clients.

(b) A sub-broker shall issue promptly to his clients scripwise split purchase or sale notes and similarly bills and receipts showing the brokerage separately in respect of all transactions in the specified form.

(3)…..

 

(4)…..

 

(5) …..

 

(6). Fairness to Clients :

A sub-broker, when dealing with a client, shall disclose that he is acting as an agent and shall issue appropriate purchase / sale note ensuring at the same time, that no conflict of interest arises between him and the client. In the event of a conflict of interest, he shall inform the client accordingly and shall not seek to gain a direct or indirect personal advantage from the situation and shall not consider clients' interest inferior to his own.”

 

Subsequently, SEBI vide Circular No. SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004 has stipulated that the brokers would issue the contract notes directly in the name of the clients and that the sub broker would assist his clients in procuring the contract notes from the stock broker. It was also stipulated that there would be a tripartite agreement between the broker, sub broker and the clients.      

The requirement relating to tripartite agreement which was to come into effect from December 01, 2004, was, through various circulars, eventually extended till April 01, 2005 for sub brokers attached to general brokers and till June 01, 2005 for sub brokers of stock exchange subsidiaries. As the revised norms had not been implemented, it is evident that during the period covered under inspection, i.e. 2002-2003 and 2003-2004,  it was mandatory for sub brokers to issue confirmation memos promptly and to maintain duplicate copies of the same.   By not doing so, JS has violated the requirements stipulated in regulation 17(h) and regulation 26(iii) of Brokers Regulations and is thus liable for imposition of monetary penalty. 

3.6       Regulation 16 of Brokers Regulations states that the provisions of Chapters IV, V and VI of the Brokers Regulations would apply to a sub broker as they apply in the case of a stock broker.  These Chapters cover the following aspects vis-à-vis stock brokers:-

 

Chapter IV – General obligations and responsibilities (Regulation 17 and 18).

Chapter V – Procedure for inspection (Regulation 19 – 24).

Chapter VI – Procedure for action in case of default (Regulation 25 – 28).

 

It is thus clear that violations of regulation 17(h) and 26(iii) and 26(xii) of Broker Regulations by a sub broker are also covered under the said Regulations. 

 

3.7       I have also examined the records in respect of opportunities provided to JS to make his submissions in respect of the violations observed during the course of inspection.  The inspection report was initially forwarded by the operational department of SEBI to JS vide Letter no. MIRSD/DPS-1/Post-Insp/RRM/S Brk-151/29227/2004 dated December 24, 2004 wherein he was asked to submit his comments within 14 days of receipt of the same.  This letter was delivered to JS on December 28, 2004.  On not receiving any reply, a reminder was sent vide letter no. MIRSD/DPS-1/Post-Insp/RD/S Brk-151/32449/2004 dated February 01, 2005 which was duly delivered on February 02, 2005.

 

3.8       A copy of the inspection report was also sent along with the SCN issued by me vide reference no. EAD/PG/64738/2006 dated April 07, 2006 wherein JS was again advised to make his submissions within 14 days of receipt of the same.  This letter was received back undelivered.  Thereafter another SCN along with inspection report was sent vide reference no. EAD/EAD-5/PG/65420/2006 dated April 24, 2006.  This SCN which gave 14 days time for making submissions was duly delivered on April 25, 2006 through Ahmedabad Stock Exchange Ltd.

 

3.9       On not receiving any reply, I decided to conduct an inquiry and accordingly sent a notice of inquiry vide reference no. EAD/EAD-5/PG/69647/2006 dated June 19, 2006 fixing July 03, 2006 as date of hearing.  This letter was delivered through Ahmedabad Stock Exchange Ltd. on June 20, 2006.   However, neither JS nor any other authorized person appeared before me on the said date.  As a matter of abundant caution, another opportunity of hearing was provided vide notice sent vide reference no. EAD/EAD-5/PG/71535/2006 dated July 14, 2006 which was also duly delivered on July 17, 2006 through Ahmedabad Stock Exchange Ltd.  However neither Shri Tushar Jhaveri, proprietor JS, nor any other authorized person appeared before me for the hearing scheduled on July 21, 2006. 

 

The detail of opportunities provided to JS to make submissions in respect of the alleged charges is given below:-

 

Sl. No.	Issued by	Particulars	Delivery details	Response
1	Operational Department	Letter no. MIRSD/DPS-1/Post-Insp/RRM/S Brk-151/29227 /2004 dated December 24, 2004	Delivered on December 28, 2004.	No response
2	Operational Department	MIRSD/DPS-1/Post-Insp/RD/S Brk-151/32449/2004 dated February 01, 2005	Delivered on February 02, 2005	No response
3	Adjudicating Officer	Show Cause notice vide reference No. EAD/PG / 64738/ 2006 dated April 07, 2006	Received back undelivered	Not Applicable
4	Adjudicating Officer	Show Cause Notice vide reference No EAD/EAD-5/PG/65420/ 2006 dated April 24, 2006.	Delivered on April 25, 2006 through Ahmedabad Stock Exchange Ltd.	No response
5	Adjudicating Officer	Notice of  Inquiry vide reference No. EAD/EAD-5/PG/ 69647 /2006 dated June 19, 2006 fixing July 03, 2006 as date of hearing.	Delivered through Ahmedabad Stock Exchange Ltd. on June 20, 2006.	No response
6	Adjudicating Officer	Notice of  Inquiry vide reference No. EAD/EAD-5/PG/71535/ 2006 dated July 14, 2006 fixing July 21, 2006 as date of hearing	Delivered on July 17, 2006 through Ahmedabad Stock Exchange Ltd.	No response

 

3.10   On analysis of the above, I observe that five opportunities have been provided to JS over a period of more than 18 months.  The fact that JS has not responded even once leads me to conclude that JS is deliberately avoiding making any submissions as he has no grounds of defence and  the violations of the following SEBI Circulars and Broker Regulations stand proven:-

 

a.      Circular No. SMD/POLICY/IECG/1-97 dated February 11, 1997

b.      Circular No. SMD/POLICY/CIRCULARS/5-97 dated April 11, 1997

c.      Circular No. SMD/POLICY/CIR-11/97 dated May 21, 1997

d.      Circular No. SMD/SED/CIR/93/23321 dated November 18, 1993

e.      Regulation 17(h) of Broker Regulations

f.        Regulation  26(iii) of Broker Regulations, and

g.      Regulation 26 (xii) of Broker Regulations

 

3.11   The above violations make JS liable for imposition of monetary penalty under Section 15B and 15HB of SEBI Act, 1992 which read as follows:-

“Penalty for failure by any person to enter into an agreement with clients

 

15B.     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”.

 

“Penalty for contravention  where no separate penalty has been provided

 

15HB. Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.”.

 

3.12   While considering the penalty to be imposed, I am also required to give  due regard to the provisions of Section 15J of SEBI Act, 2002 which read as under:-

“Factors to be taken into account by the adjudicating officer

15J. While adjudging quantum of penalty under section 15J, 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.”

3.13   As regards the disproportionate gain or unfair advantage there are no quantifiable figures available on record with respect to the default of JS. There are also no figures or data on record to quantify the amount of loss caused to an investor or group of investors as a result of the default.  In absence of any submission from JS (despite adequate opportunities being provided), I am inclined to uphold the finding that JS has not complied with KYC requirements in respect of most of his clients and that he does not have duplicate copies of confirmation memos in respect of most of his trades which is indicative of repetitive nature of the defaults.

4.0    PENALTY

4.1    Therefore in exercise of the powers conferred under section 15 I (2) read with section 15 B and section 15 HB of the Securities and Exchange Board of India Act, 1992 and Rule 5 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, I hereby impose a penalty of Rs. 1,00,000/- (Rupees One lac only) on M/s Jhaveri Securities, Proprietor- Shri Tushar Jhaveri, sub-broker having SEBI Registration No. INS 021139113. In my view, the quantum of the above penalty is proportionate to the default of M/s Jhaveri Securities, in the facts and circumstances of the case.

 

The penalty amount shall be paid through a cross demand draft drawn in favour of “SEBI - Penalties remittable to the Government of India” and payable at Mumbai within a period of 45 days from the date of receipt of this order. The draft may be sent to Shri P.K. Kuriachen, General Manager (MIRSD), Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai – 400021.

 

 

PLACE: MUMBAI                                                    PIYOOSH GUPTA

DATE: AUGUST 03, 2006                                     ADJUDICATING OFFICER