�ADJUDICATION RELATING TO

M/S. KAMLESH JAIN & Co., SUB-BROKER, �

AFFLIATED TO LSE SECURITIES LTD.

ORDER UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995.

1.   BACKGROUND

M/s. Kamlesh Jain & Co., (herein referred to as �member broker�) having SEBI Registration no.INS230953817, is a member of Ludhiana Stock Exchange and a sub-broker affiliated to LSE Securities Ltd., member of the Stock Exchange, Mumbai (BSE) having SEBI registration no.INB231087033 .The Securities and Exchange Board of India (SEBI) carried out an inspection of the books of accounts, documents and other records maintained by member broker during the period 01/04/2001 to 31/04/2003. The findings of inspection containing details of irregularities and violations of various provisions of SEBI Act, the rules and regulations made there under and directives issued by SEBI from time to time, were communicated to the member broker. They replied to findings of inspection vide their letter dated September 11, 2003.

 

2.      ADJUDICATION PROCEEDINGS

 

Based on the violations observed during the inspection and pursuant to the member broker�s reply, the Whole Time Member, SEBI has in exercise of the powers conferred upon him under Section19 of the SEBI Act 1992 (hereinafter referred to as the �Act�) read with Section 15-I of the Act and Rule 3 of SEBI (Procedure for holding Inquiry and imposing Penalties by Adjudicating Officer) Rules, 1995 has appointed the undersigned as the Adjudicating officer vide Order dated March 22, 2004, to enquire into and adjudge the alleged violations committed by the member broker.

 

� 3.� �SHOW CAUSE NOTICE AND HEARING

 

A show cause notice dated April 16, 2004, Ref. No.-IVD/ ID1/PKN/SRP/7471/04, based on Order of the Whole Time Member, was issued by the undersigned to the member broker to show cause as to why penalty under the provisions of the Act read with Rule 5 of SEBI (Procedure for holding Inquiry and Imposing Penalty by Adjudicating Officer) Rules, 1995 should not be imposed upon them in view of the alleged violations. It was also mentioned in the show cause notice that their earlier reply of September 11, 2003 on the findings of inspection had been taken on record.

 

The member broker replied to the show cause notice vide letter dated May 22, 2004. As requested by them, an opportunity of personal hearing was granted on October 29, 2004 at Northern Regional Office, SEBI, New Delhi. Ms. Kamlesh Jain appeared for hearing. During the hearing, she clarified various issues raised in the show cause notice

 

4.� �FINDINGS AND CONCLUSIONS

 

The undersigned has taken into consideration the facts and circumstances of the case and the material available on record. The findings and conclusions in respect of each of the alleged violation committed by the member broker as per show cause notice are as follows:

 

a.   �Not maintained Order book, Margin Deposit Book in violation of Section 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the �Act�) read with Regulation 26(iii), 26(xv) and 26(xvi) of the SEBI (Stock-brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as the �Regulations�).

 

According to the inspection report the member broker has not maintained Order Book and Margin Deposit Book.

 

The member broker has submitted vide their reply dated May 22, 2004 that the clients place orders telephonically which are instantly entered into the trading system and after orders are executed, the clients are informed immediately. Since most of the clients are local, they are in constant touch with the member broker. No complaint of any client on this account has ever been made against them. Moreover in an online trading environment, the status of order is always available on the trading computer screen.�

 

With respect to the margin deposit book, according to inspection report, separate margin accounts are maintained in the General ledger namely.

a.         Margin deposited with LSE Securities Ltd.

b.         Margin received from clients

 

The member broker has stated that inspection report also states that these two accounts clearly show date wise collection from clients and deposit of margin with LSE Securities Ltd. All margins paid to LSE Securities Ltd. are in form of cheques or FDR.� They have further submitted that the clients have advised them to keep credit balances/securities and treat these as margins.

 

Considering the above as well as the provisions of Regulation 15 (2) of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 which prescribes the books and records to be maintained by the sub brokers, the explanation of the member broker is accepted.

 

 

b. Failed to issue confirmation memos in the form and manner prescribed in violation of Section 15F (a) of the Act read with Regulation 26(v), 26(xv) and 26(xvi) of the Regulations.

 

According to the inspection report, the sale and purchase notes were hand written and were not pre-numbered which is a violation of SEBI Circular SMD/MDP/Cir/03/96. On applying test check it was observed that generally the Sale/Purchase notes were duly signed by the clients except in some cases. The report gives 6 such instances.

 

The member broker submitted vide their reply dated May 22, 2004 that the sale/ purchase notes issued by them and received and accepted by the clients contained all the relevant particulars of transactions, executed by them on behalf of their clients, though these were not pre-numbered. As regards to the sale purchase notes being hand written the member broker has stated that these were hand written as their software, printer and pre printed sale/ purchase notes were not compatible with each other. With regard to few instances of not signing of the sale/purchase notes by the clients, the member broker has stated that they were duly accepted, received and retained by the clients. However, the clients have since signed them for their records as well and they enclosed copies thereof.

 

The above shows that the sale / purchase notes were not pre-numbered.

 

c.   �Delayed payment of monies/delivery of securities to clients in violation of Section 15HB of the Act read with the Regulation 26(vi) of the Regulations.

 

According to the inspection report the member broker has running accounts with a majority of their clients. Sale / purchase transactions were undertaken frequently in accounts of these clients hence the shares/payments were not given within 48 hours. It was also observed than in certain instances credit balances were standing in the accounts of the investors for long time and no transaction was made.

 

The member broker has submitted in their reply that the clients maintain their accounts on a running basis. The credit balances in a few accounts, which were lying with the consent of the clients were because of different consideration such as the credit balance to be treated as margin, expected purchases, internal set-off, etc. In any case, there was no complaint from anyone. Further written consents were obtained from clients, copies of which have been enclosed.�

 

Regarding alleged violation of delayed payments of monies / delivery of securities to clients, they had followed the clients� instructions in this regard who had instructed them to keep the monies/securities with them only as margins/otherwise so that they can purchase/sell securities in future as per their own convenience. They also enclosed copies of standing instructions given by their clients for retaining the monies/securities with the member broker. They also enclosed copies of confirmations from the clients whose names appeared in inspection report wherein they have stated that there was no delay on the part of the member broker in payment of monies and delivery of securities and the same were retained by them on their instructions only.

 

Considering the above facts and explanations of the member broker, the undersigned has given benefit of doubt to the member broker.

 

d. Failed to maintain proper segregation of clients funds and own funds in violation of Section 15HB of the Act read with Regulation 26(xiii) of the Regulations

 

According to the inspection report, the member broker is maintaining 3 bank accounts viz. i) HDFC Bank A/c. Ludhiana� �ii) HDFC Bank A/c. Chandigarh and Canara bank. All the major transactions have been routed through HDFC Bank.� Payments were made to clients from this account. However, segregation of account for clients� fund and broker�s funds has not been made and all the transactions have been routed through various accounts without any distinction.� This is non-compliance of SEBI circular no. SMD/SED/Cir/93/23321 dated November 18, 1993.

 

The member broker has submitted that no separate bank A/c (marked as clients account) for clients� money was opened. However, account with HDFC Bank was for clients i.e. for monies of clients and account with Canara Bank was for own funds with a few exceptions keeping in view the exigencies of the situation. They further stated that this was a genuine lapse. While they are required to make payment toward pay-in / obligation of LSE Securities immediately, they have facility of getting credit of clients� cheques deposited on the same day at Canara Bank. Hence, some clients� cheque were deposited in Canara Bank to obtain immediate credit from the bank to meet pay-in obligations.

 

They have further stated that there has not been a single case of client�s complaint/ arbitration case against them. They have secured and safeguarded clients� money in their account. The objective of maintaining client�s money in a separate account was achieved by them by making timely payments to the clients as per their instructions regularly and by not utilizing clients� money. Even the inspecting CA team has not observed and pointed out a single case of improper utilization of client�s money by them. �They have further stated that they have now opened a separate bank account for clients� monies.

 

While the undersigned has noted the contentions of the member broker, the fact remains that there was no proper segregation of accounts of clients� funds and their own funds. ���

 

e. Made payment to clients in cash in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations;

 

According to the inspection report, the member broker made cash payments to the clients. This is in contravention to the provisions of the code of conduct prescribed by SEBI under Schedule II of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, according to which all statutory requirements are to be complied with. Five instances of cash payment have been given in the report.

 

The member broker has submitted that with regard to certain payments made in cash, there were few payments as per the request of clients for which receipts have been obtained from them (copies enclosed). The debits for payments made have been recorded in the ledger account of the clients on the respective dates. Herein they would also like to confirm that they have stopped making cash payments to their clients for future dealings even in case of specific requests made by them.

 

It is clear from the above that the member broker could not comply with statutory requirements strictly. However, the undersigned has noted that there are only a few instances and also that in one instance the client requested for cash payment for the purpose of medical treatment. �

 

f. Involved in fund lending and borrowing activities in violation of Section 15HB of the Act read with Regulation 26(xv) of the Regulations;

 

According to the inspection report, the member broker has been involved in the fund lending and borrowing activities. Report gives 10 such instances where there was exchange of funds without any securities transactions. This may be in violation of Regulation 8(1) (f) and 8 (3) (f) of SC (R) Rules, 1957.

 

The member broker has clarified that they had not carried out any such activity in the account of parties whose names have been mentioned. No interest has been paid or earned on the entries recorded in the respective accounts and it is evident from the accounts of the parties. To and fro payments were made to meet business requirements. They also explained reasons for each of 10 instances given in the report, which are � (i) payment between two sister concerns, (ii) accounting error where two separate accounts opened for the same entity - one showed debit balance and the other credit and inspecting CA has considered only one account and at the year end both the accounts were merged after audit and reconciliation (iii) the funds were given on personal account to make some investments (iv) money paid to close relatives (v) transfer of funds from one client to another on instructions of clients (vi) loan taken from friends for personal purposes which were not in the nature of borrowings for the purpose of lending out the same (vii) discounting of cheques. �

 

In view of the above explanations of the member broker and no other material available in inspection report, benefit of doubt is given to the member broker.

 

g. Failed to comply with the directions issued by the Board in violation of Section 15HB of the Act read with Regulation 26(xv) of the Regulations;

 

�h. Not exercised due skill, care and diligence in violation of Section 15HB ���of the Act read with Regulation 26(xvi) of the Regulations.

 

�The above (a to f) indicates that the member broker failed to strictly comply with all directions issued by the Board from time to time and did not exercise adequate due skill care and diligence in their operations.

 

 

5.      IMPOSITION OF PENALTY

 

Keeping all above in view, the undersigned finds that there were certain deficiencies and irregularities in the systems and procedures of the member broker who has failed to strictly comply with the provisions of the Act, Regulations and directions issued by the Board from time to time and has not exercised adequate due skill, care and diligence in their operations. However, the member broker also reported that they initiated corrective steps after the inspection.

 

Considering all above facts and circumstances, the undersigned is of the view that the member broker has become liable to penalty and some amount of penalty should be imposed upon them for certain violations as described in detail earlier. While deciding the quantum of the penalty, the undersigned has taken into account the factors under Section 15J of SEBI Act, 1992, 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 accordance with the provisions of Section 15HB of the SEBI Act, 1992 read with Rule 5 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, I hereby impose a penalty of Rs. 40,000 (Rs. Forty Thousand only) upon the member broker, M/s Kamlesh Jain.���������������� .

 

They shall pay the amount of penalty by way of demand draft / pay order drawn in favour of �SEBI penalties remittable to Government of India� and the demand draft/ pay order shall be sent to Mrs. Usha Narayanan, CGM, (MIRSD), Securities and Exchange Board of India, World Trade center, 29^th Floor, Cuffe Parade, Mumbai-400 005., within 45 days of receipt of this order.

 

In terms of Regulation 6 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, a copy of this order is served on the member broker and a copy is submitted to the Board.

 

 

 

 

 

P K NAGPAL������������������������������������������ Place: Mumbai

Adjudicating Officer����������������������������� �Date : November 2, 2004