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ORDER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF KOTAK SECURITIES LTD. 1.
Facts of
the case 2.
�Securities
and Exchange Board of India (hereinafter referred to as SEBI) conducted an
inspection of books of accounts and other records of M/s. Kotak Securities Ltd.
(hereinafter referred to as �Noticee� or �KSL�) through Jain and Jain,
Chartered Accountants covering the period from April, 2001 to March, 2003. A
copy of the inspection report was forwarded to KSL vide letter dated 3.
Appointment
of Adjudicating Officer: 4.
I was appointed as an Adjudicating Officer under
Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties by Adjudicating
Officer)Rules,1995 (hereinafter referred to as Adjudication Rules) by SEBI� vide order�
dated November 25, 2004 in place of Shri. J. Ranganayakulu (since
proceeded on study leave) to enquire into and adjudge the contraventions of the
provisions of law as mentioned in the original order dated March 22, 2004 alleged
to have been committed by the� Noticee. 5.
Show Cause
Notice (SCN), reply and hearing: 6.
A show cause notice dated 7.
Allegation
No.1: Whether the Noticee granted trading terminals at places other than
those specified in SEBI Circular SMDRP/Policy/CIR-49/2001 dated October 22, 2001
and also to persons other than authorized persons in violation of Regulation 26
of (XIX) and (XVI) of the said Regulations. 8.
Reply: 9.
The
Noticee denied the allegation and replied that it has granted NEAT trading
terminals at the registered office, branch office or registered sub broker
offices only. It was also submitted that the Noticee followed the guidelines
for location of CTCL terminals issued by NSE, vide its circular No. 282 dated SEBI Circular
SMDRP/Policy/CIR-49/2001 dated October 22, 2001 mandates that trading terminals can be granted only
at the members� registered office, branch offices and their registered
sub-brokers� offices and trading terminals granted earlier in places other than
those mentioned should be withdrawn immediately. The stock exchanges shall
amend their bye-laws accordingly to take action against the brokers who
mis-utilises or lets mis-utilisation of their trading terminals for unregistered
sub-broking activities.� SEBI�s
inspection report (at page no.12) says that the Noticee has 37 branch offices
and one sub-broker and in compliance to SEBI circular, NSE / BSE has to grant
trading terminals only at 38 (37+1) locations whereas, it is observed from
SEBI�s inspection report (at page no.13) that out of 299 NSE cash CTCL
terminals, 70 terminals are operated by authorized persons and the remaining
229 trading terminals are operated by persons other than authorized persons.� The Noticee vide its letter dated 24-05-2004,
while denying the allegation, contended that SEBI has not detailed the
particulars of the alleged unauthorized places and persons, where, and to whom,
they have located and granted access to, trading terminals. The Noticee
vide its letter dated 31-08-2005 further contended that NSE�s Circular dated
29-08-2002 extends the scope and facilitates the achievement of the purpose
underlying SEBI circular dated 22-10-2001 and the grant of CTCL terminals
pursuant to the NSE circular is essentially a facility provided to the trading
member to facilitate the business expansion needs and helps in achieving the
objectives of improving access to the market. The Noticee further submitted
that the NSE circular no.282 dated � �
The member broker must obtain necessary prior
approval of the exchange �
The approved persons operating the CTCL terminals
granted must be duly qualified �
The member broker is required to inform the stock
exchange of the grant of the CTCL terminal and obtain the approval of the stock
exchange for the same by uploading a file with the required data, and also
submitting hard copies of the documentation to the stock exchange. If the data
and documentation are in order and acceptable to the NSE, the member broker
receives a �code 99� response confirming that the NSE approved the grant of the
CTCL terminal to the approved person concerned.�
The Noticee also contended that they had�
provided information to the exchange giving details of the approved
persons as also CTCL network details, mode of connectivity and sought its prior
approval in all cases involving the grant and operation of CTCL terminals to
and by approved persons and therefore, they did not violate the provisions of
SEBI circular dated 22-10-2001. 10.
Finding: In view
of the submissions made by the Noticee and also in view of the fact that a detailed
examination is required to be carried out as regards SEBI�s circular dated
22-10-2001 and NSE�s circulars dated 29-08-2002 and 25-09-2002, I, therefore, �refrain from giving any finding on this
allegation and SEBI may examine the matter in detail and take appropriate
action as deemed fit in the matter. 11.
Allegation No 2: Whether the Noticee has committed
irregularities in the maintenance of client database in violation of Regulation
26(xii) of the said Regulations read with circular No.SMD/Policy/Cir/5-97 dated
12.
Reply: 13.
The
Noticee vide reply dated 14.
Finding: 15.
The SEBI�s Circular no.
SMD/Policy/CIR/5-97 dated 16.
In
the inspection report, table no. 13 discloses the instances of incomplete
client registration forms. In those instances, the fact of annual income and
whether the client is registered with any other member are not mentioned.� In the case of client Mr. Parag Mehta, the
detail of annual income is not mentioned, despite the client�s turnover is
around Rs. 471 crores. In the case of another client Shri. Sharad Shah, annual
income of the client is not mentioned even though the annual turn over of the
client is around Rs. 186 crores. 17.
The
inspection report further discloses the discrepancies in maintaining the client
data base in Annexure IX.� It includes
non signing of photograph by the clients, non providing of annual income by the
client, portfolio value being not stated, non obtaining of bankers certificate,
non providing of witness from clients side, common stamp paper for �NSE and BSE, date of member client agreement� being before stamping date and absence of
date in stamp paper. I am therefore, convinced that the Noticee is guilty of
violating the circular no. SMD/Policy/CIR/5-97 dated 18.
Reply
as to non inclusion of Income tax and portfolio value: 19.
The
Noticee contended that the SEBI Circular no. SMD/Policy/CIR/10-97 mandates that
in cases where the client�s gross turn-over is more than Rs. 5 lakh, member broker
has to obtain the client�s details. It further submitted that this requirement
can be waived by the member if it is satisfied with the client�s risk profile. 20.
Findings: 21.
Since
the said SEBI�s circular provides for the waiver of requirements such as annual
income, income tax no. and market value of portfolio details by the broker, I
hold the Noticee� not guilty of this
charge. 22.
Reply
as to omission to obtain witness signatures: 23.
The
Noticee submitted that the omission to obtain witness signatures has occurred
in only few cases and the omission was by way of inadvertent oversight. Since
the client has not contested the execution of the member-client agreement, and
no person including SEBI has not impugned the client agreement, the lapse is
only procedural and worthy of condonation. 24.
Finding: 25.
The
regulatory requirement of obtaining witness signature cannot be considered to
be merely procedural lapse and therefore, I hold the Noticee guilty of violating
SEBI circular no. SMD/Policy/CIR/5-97 dated 26.
Reply
as to banker�s certificate: 27.
In
so far as the banker�s certificate is concerned, the Noticee submitted that the
clients find it difficult to produce it and they� produced the Bank pass book or bank
statements instead.� The Noticee submitted
SEBI�s circular dated 28.
Finding: 29.
The
financial standing of the client is evidenced by bankers statement. The circular
dated 30.
Reply
as to proof of designated directors: 31.
In
so far as the allegation that the Noticee has obtained proof of identity of only
designated directors/partners of corporate/partnership firm clients, it was
submitted that the client registration form attached to the SEBI circular dated
32.
Finding: 33.
I
find that in the corporate client Registration form, submitted by the Noticee
as Annexure 1, in the checklist of Enclosures for corporate clients, it is very
clearly stated that proof of residence, copy of income tax return, salary
certificate and letter from the Banker certifying the Account number of the directors / promoters, have to be
enclosed. Hence the contention of the Noticee that only proof of designated
directors is sufficient compliance of the Regulation, does not hold good and
therefore I hold the Noticee guilty of violating SEBI circular no.
SMD/Policy/CIR/5-97 dated 34.
Reply
as to execution of agreements after trades: 35.
The
Noticee denied that agreements were executed after trades were executed for the
4 clients listed in the Jain and Jain Inspection Report.� The Noticee contended that the original
client agreements were entered prior to the date of the trades, but were
misplaced while the Noticee shifted its office.�
The Noticee enclosed the written confirmations of M/s Kanazawa Holdings
Pvt. Limited, M/s Dhruvi Investment and M/s FMI Investments Pvt. Ltd. annexures
6, 7 and 8 in substantiation of its claim that the client agreements were
executed prior to the trades being executed. 36.
Finding: 37.
I have examined the letters from M/s Kanazawa Holdings Pvt. Limited, M/s Dhruvi Investment
and M/s FMI Investments Pvt. Ltd. and I accept the reply of the Noticee on this
score. 38.
Allegation
No 3: Whether the Noticee failed to maintain proper segregation between NSE
and BSE clients accounts in violation of Regulation 26(xv) of the said �Regulations. 39.
Reply: 40.
The Noticee disputed its obligation of segregating
the bank accounts for client trades on the NSE and BSE and submitted that the
requirement of segregation is applicable only to the money held by the member
on his own behalf and the money held by the member on behalf of its clients. In
substantiation of this claim, it enclosed with its reply dated 41.
Finding: 42.
It is found that as on the date of this alleged violation,
there is no such legal obligation on the part of the Member in allowing the
clients to open single bank account for the trades in BSE and NSE for a single
client. The circulars submitted by the Noticee only mandates it to segregate
the money held by the member on his own behalf and the money held by the member
on behalf of its clients. Hence, it cannot be said that the Noticee has
violated Regulation 26(xv) said Regulations and the allegation stands
disproved. 43.
Allegation
No. 4: Whether the Noticee failed to collect upfront margins from clients in
violation of Regulation 26(xvi) and (xvi) of SEBI (Stock Brokers and Sub Brokers)
Regulations, 1992 r/w SEBI circular SMD/SED/CIR/93/23321 dated 18.11.1993,
SMDRPD/Policy/Cir-6/2001 dated February 1, 2001 and SMDRP/Policy/CIR-3/2001
dated July 18, 2001 and thus failed to exercise due skill, care and diligence
while dealing with clients and thus failed to exercise due skill, care and
diligence while dealing with clients. 44.
Reply: 45.
Vide
reply dated 46.
The
Noticee enclosed vide its reply 47.
Findings: 48.
It is brought out from Jain and Jain report that upfront margin has been maintained at 10% of
the net open position at the end of the day in majority of the instances
checked. But Net open position of clients at any point of time has not been considered.
But details of shortfall in upfront margin were detected by the Inspection team,
which is enclosed as annexure XX. SEBI circular SMD/SED/CIR/93/23321
dated 18.11.1993 mandates that� Member
Brokers can� purchase securities on
behalf of client only on receipt of margin of minimum 20 percent on the price of
the securities proposed to be purchased, unless the client already has an
equivalent credit with the broker. The Member need not, if it so desires,
collect such a margin from Financial Institutions, Mutual Funds and FII�s.� In the same way, Member brokers can sell
securities on behalf of client only on receipt of a minimum margin of 20
percent on the price of securities proposed to be sold, unless the member has
received the securities to be sold with valid transfer documents to his
satisfaction prior to such sale. Member need not, if it desires, collect such a
margin from Financial Institutions, Mutual Funds and FII�s. 49.
�Vide
circular no SMDRP/POLICY/CIR-33/2000 dated July 27, 2000, it was directed that
all the clients, excluding FIs, FIIs, MFs shall maintain a deposit with the
broker in the form of cash, bank guarantees, FDRs or approved securities which
shall not be less than 10% of the net open positions of the client at any point
of time. Actual delivery of shares sold or actual payment made for shares
bought should be excluded from the net position. 50.
The
inspection team does not verify every contract executed within the inspection
period.� Only a sample of the total
contracts executed�� during the
inspection period is verified.� Hence the
percentage of default cannot be accepted as the true reflection of the quantum
of violations. For the above said reasons, the argument of the Noticee that the
violation is only meager cannot be accepted. Moreover complying with the
requirement of margin is a risk management measure for the healthy and
efficient development of the securities market.�
As per Circular No. SMD/
Policy/Cir-12/2002 dated 51.
The
argument of the Noticee, on the basis of reliance of the Circular of SEBI dated
52.
Allegation No. 5: Whether the Noticee did not
adhere to unique client code directives by transferring the trades of clients
subsequently and also as a result has effected off the floor transaction in
violation of Regulation 26(xv) of said Regulations, read with
SMFRO/Policy/Cir-39/2001 dated July 18, 2001. 53.
Reply: 54.
The
Noticee vide letter dated August 31, 2005 denied the allegations and submitted that
the wrong punching of key is due to dealing room pressures of the staff
resulting in the error. Further the Noticee submitted that occasionally clients
provide an incorrect client code at the time of placing orders, and due to the
structure of the settlement system, it is not possible to correct such errors
without reversing the erroneous trade and booking the correct trade when the
error is discovered. The Noticee reiterated that these are not off market
transactions but are merely necessary rectifications of the inadvertent errors.
The Noticee further enclosed NSE circular dated 55.
Finding: 56.
The circular referred to by the Noticee is not
applicable to the present case of adjudication, since the circular of NSE does
not and can not impose any duty on the Adjudicating Officer appointed under the
SEBI Act, 1992. The penalty referred to in the circular of NSE is the penalty
imposable by NSE and not by SEBI. The Jain and Jain Inspection report at para
18 mentions that in some cases the Client ID is different and the cases of
differences are mentioned in Annex 22.�
It does not elaborate further.�
The Jain Report at page 15 clearly states that no negotiated deals have
been entered into by the Noticee. Hence it appears that the off market
transactions are only rectifications as stated by the Noticee. The Jain report
further elaborates that the errors of wrong punching is rectified further in
the back office system after the respective dealers make a request to change
the code through code request change form. The report states this process has
been verified by the Inspection Team. Moreover the instances of wrong punching
of the client code is only 1% of the total contracts. �I find merit in the contention and accept the
reply of the Noticee on this count. 57.
Allegation No. 6: Whether the notice failed to
obtain prior approval of SEBI for change in status and constitution in
violation of Regulation 26(xvii) of the said Regulations? 58.
Reply: 59.
Vide
reply dated 60.
Finding: 61.
In
the Jain and Jain Report, it has been found that the Noticee has not obtained prior
permission from SEBI for change in directorship but has subsequently informed
the Exchange. Annexure XXIV of the report gives the details of such non compliance.
The Noticee has maintained that the approval was obtained from Exchanges.� The question to be determined is whether the
approval from the exchange is sufficient regulatory compliance. In this context,
I note that Rule 4 (c) of Securities
and Exchange Board Of India (Stock
Brokers and Sub-Brokers) Rules, 1992 (hereinafter referred to as �Rules�) reads
as under; 62.
Rule
4. The Board may grant a certificate to a stock-broker subject to the following
conditions namely: (a)�
------------------------------ (b -------------------------------; (c) in case of any change in the status and constitution, the stock
broker shall obtain prior permission of the Board to continue to buy, sell or
deal in securities in any stock exchange; (d)�
----------------------------- 72.���� The rule requires that the approval has to
be obtained from the Board, i.e., Securities and Exchange Board of India.� It is not the case of the Noticee that
approval was obtained from SEBI.� The
argument of Noticee is that, since it is continuing as the joint venture
between Goldman Sachs and Kotak Mahindra Bank, there is no change in the status
does not stand legal scrutiny, because change of director in itself is the
change of status, irrespective of the fact that those directors were appointed
under the Joint Venture Management agreement.�
Hence I hold the Noticee guilty of the violation of the regulatory
requirement and I am convinced that the Noticee has violated the provisions of Rule
4 (c) of the said Rules. 73.���� Consideration
of Section 15J of SEBI Act: 74.���� 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. 75.���� I note that the Noticee has repetitively
committed 112 times the default of not maintaining the proper margin
requirements. Likewise, inspection report at table no.13 discloses the
instances of incomplete client registration forms. These can also be considered
to be repetitive in nature. In view of this, I hold that the Noticee is guilty
of committing defaults repetitively.� I
do not find any material on record to indicate the amount of disproportionate
gain or unfair advantage made as a result of defaults committed by the
Noticee.� �I also find that there is no data available on
record to indicate the amount of loss caused to an investor or group of
investors as a result of defaults committed by the Noticee.� 76.���� At
this juncture, I note that the Hon�ble Supreme Court, while dealing with the
penalty levied under Chapter VIA of SEBI Act, in SEBI vs. Shriram Mutual Fund
(2006) 68 SCL 216(SC) held that penalty is attracted as soon as the
contravention of the statutory obligation is established and hence, the
intention of the parties committing such violation becomes wholly irrelevant
since the penalties are imposed for breach of the civil obligations under SEBI
Act. The Hon�ble court further held that the ratio laid down by Supreme Court
in Hindustan Steels Ltd. vs. State of 77.���� In
view of the findings mentioned hereinabove, and also in view of the judgments
cited hereinabove, I am convinced that it is a fit case to impose monetary
penalty under Section 15HB of SEBI Act, which reads as under: ��������� �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.� 77.���� ORDER: 78.���� Therefore
in exercise of the powers conferred under section 15-I read with 15 HB of the
Securities and Exchange Board of India Act, 1992 and Rule 5 of the Adjudication
Rules, I hereby impose a penalty of Rs.10 lacs on KOTAK SECURITIES LTD.�� In my view, the above penalty is
commensurate with the defaults of the Noticee, in the facts and circumstances
of the case. 79.���� The
Noticee shall pay the amount of penalty by way of demand draft drawn in favour
of �SEBI- Penalties Remittable to Government of India�, payable at
Mumbai within 45 days of receipt of this order. The said demand draft should be
forwarded to Shri M S Ray, Executive Director, Securities and Exchange Board of
India, SEBI Bhawan, Plot No. C-4A, G-Block, Bandra Kurla Complex, Mumbai- 400 051.
In terms of Rule 6 of the Adjudication Rules, copy of this order is sent to the
Noticee and also to Securities and Exchange Board of India.�� Place: Date: 18.12.2006����������������������������������������������������� Adjudicating
Officer ������� |
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