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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.
NCJ SHARE AND STOCK BROKERS LIMITED BACKGROUND: 1.������ M/s. NCJ Share and Stock Brokers Limited
(for brevity�s sake, hereinafter referred to as NCJ) is
registered with the Securities and Exchange Board of India, 1992 (for brevity�s
sake, hereinafter referred to as the SEBI) as a broker of the Stock Exchange,
Mumbai. The SEBI Regn. No.
of NCJ as a broker is INB011192037. 2.������ An inspection of the books of account,
documents and other records of NCJ was conducted by SEBI for the period from
April 2002 to March 2004. During the inspection, certain irregularities and
violations of the SEBI (Stockbrokers and Sub-Brokers) Regulations, 1992 (Broker
Regulations) alleged to have been committed by NCJ, were noted. While
communicating the findings of inspection to NCJ vide letter dated NOTICE/
REPLY/ PERSONAL HEARING: 3.���� Accordingly, I issued a notice dated May
31, 2005 to NCJ 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 NCJ 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. NCJ 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 receipt of the notice and also indicate whether they were desirous of a
personal hearing. NCJ were 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.
NCJ replied to the said notice vide their letter
dated APPRECIATION OF EVIDENCE 5.������ I have considered the facts and
circumstances of the case, the material available on record including the
findings of the inspection report and have analyzed the contentions advanced by
NCJ along with the documents submitted by them in support thereof. 6.������ My
findings on the charges leveled against NCJ for which the present proceedings
have been initiated, the submissions, if any, made by them in this regard in
their defense, are elaborated herein below: -
a)� Failure to maintain documents register 7.������ NCJ contended that they
had maintained proper books of accounts as per the requirements of the Broker
Regulations and Securities Contract (Regulation) Rules, 1957. With regard to
the issue of maintenance of documents register, NCJ clarified that in a
compulsory demat system of delivery of shares, there
were hardly any transactions involving physical delivery of documents involving
transfer form and share certificates. NCJ contended that despite the same, they
had maintained a document register for a few transactions in trade to trade
segment to keep records of inward / outward delivery of such trades and had
been providing direct credit facility to the client�s demat
account which also obviated the need for recording entries in documents
register. NCJ contended that they were preserving the statement of demat account wherein all the details of inward and outward
delivery of shares were recorded as prescribed in the documents register. 8.������ As per Regulation 17(1)(g) of the Broker
Regulations, every stock broker is required to keep and maintain documents
register containing, inter alia, particulars of
securities received and delivered in physical form and the statement of account
and other records relating to receipt and delivery of securities provided by
the depository participants in respect of the dematerailised
securities. 9.������ Rule 15(1)(g) of SC(R)R, 1957 provides
that every member of a recognized stock exchange should maintain and preserve
for a period of 5 years among other books of account and documents,� the documents register showing full
particulars of shares and securities received and delivered. 10.���� It is thus observed that a documents register
should contain the details regarding securities bought and sold, for both demat and physical shares. It is a basic document which interalia contains client wise, security wise details such
as date of delivery / receipt, quantity delivered, party from / to whom
delivered/ received, purpose of receipt/ delivery. 11.���� Prior to the amendment of the Broker
Regulations, on 12.���� In the instant case, the inspection of
books of accounts and other records were carried out during the month of August
i.e., prior to the date of amendment.�
Hence, NCJ were required to maintain the documents register containing
details for both the demat
and physical shares, delivered and bought. During inspection, NCJ informed that
with all the scrips having been dematerialized, the
need for maintaining the documents register was not felt. However, having made
such a submission without the necessary documentary evidence to corroborate the
contention raised by them, it is difficult to accept that NCJ had been
maintaining the documents register as required under the Rules and Regulations.� In view thereof, the violation on this count
stands established. b)
Failure to
maintain the record of the time of the placement of order� on the contract notes 13.���� Regarding the issue of the
record of time of placement of order on the contract notes, NCJ submitted that
they had been issuing the contract notes in the format as prescribed by BSE
which do not provide for the time when the clients have placed the order and
that as their clients normally placed their orders, during the market hours
either in person or over telephone, the time of placement of order got
automatically recorded in the BOLT system. It was stated that with the
introduction of screen based trading system, most of the orders were received
during the market hours over telephone from the clients themselves in the
dealing room who insisted on immediate execution of the trades online.� It was emphasized that only upon the receipt
of the order, did NCJ punch the order into the system and on that basis it was
stated that for all practical purposes, the order time recorded in the BOLT
system is the same as the time of placement of the orders by their clients in
that the trade and log file of the BOLT system stored the relevant information
which is available and accessible to them and to the concerned authorities as
and when required. NCJ stated that none of their clients had any complaints
with regard to their dealings with them which had always been fair, transparent
and equitable. 14. ��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. 15.���� The importance of this issue was also
brought out in case of Radar Securities Ltd. Vs. SEBI
in Appeal No. 22/2003.� 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. ��� c) Failure to maintain separate register
for sub brokers i.e. sub brokers were treated as normal clients. ������ 16.���� Regarding the failure to maintain a
separate register for the sub broker, NCJ stated that they were using a �Comtek� brand, back office software approved by the BSE,
wherein the ledger accounts were segregated into two groups i.e., a general
ledger and a clients ledger, which provided for maintaining all accounts
related to trading of shares while all the entries pertaining to clients� and
sub brokers were maintained together NCJ stated that from the title of the
ledger accounts, sub brokers account had been identified and during the
financial year 2003-04 as neither of their two sub brokers had done
transactions with them, �there were
no entries in the register of accounts of sub brokers as required under
Regulation 17(1) of the Broker Regulations. 17.���� The contentions raised by
NCJ are not sustainable. A sub broker cannot be treated as a client, as their
share of brokerage will always be a part of sub broker ship even after the
amendment to the said Regulations on September 23, 2003,� the requirements of the Broker Regulations of
Regulation 17(1)(l) requires a stock broker to always maintain a register of
accounts of sub brokers. The contention of NCJ that sub brokers were included
in the clients ledger and thereafter distinguished
name wise would not help in making any distinction between the two categories
i.e. the sub broker and the client. In any case, NCJ in their reply have
clearly admitted that they were maintaining only the general ledger and the
client ledger as per the requirement under Rule 15(1)(b) and (c) of the SC(R)R,
1957 and Regulation 17(1)b) and (c) of the Broker Regulations respectively.
However, maintenance of a separate register of accounts for the sub brokers is
an additional requirement, mandated under Regulation 17(1)(l)
of the Broker Regulations and the same cannot be clubbed with the clients
ledger. Despite its irrelevance to the issue under consideration, the
contention of the broker that during the year 2003-04, none of their registered
sub brokers had any transactions with them cannot be accepted especially in the
absence of any records / documents furnished by them in support of their
contention. 18.���� I have also examined the
contention of NCJ that post amendment to the Broker Regulations on September
23, 2003, since the brokers were required to deal only with the clients
directly, in their books, sub brokers became their clients and were also shown
as their clients as they needed to share only the brokerage with the sub
brokers in their books, NCJ have also contended that they maintained sub
broker-wise, register of such client accounts. In this context, I consider it
relevant to extract the role of sub brokers, after the amendment to the
regulations which is reproduced below: 19.���� Subsequently,
SEBI Circular No.SEBI/MIRSD/DPS-1/Cir-31/2004 dated �The stock broker shall issue, individually for
each client of his sub broker, contract notes in the format prescribed by the
relevant stock exchange.� The sub-broker
shall render necessary assistance to his client in obtaining the contract note
from the stock broker.� 20.
From the above, it is clear that the role of sub
broker has become that of an agent to help the client to obtain the contract
note and share the requisite sub brokerage. Even after the amendment, there is
a requirement to retain separate register of accounts for the sub brokers.� In fact, the register of accounts of a sub
broker would help and distinguish clients from sub brokers and enable in
identifying the ultimate clients of sub brokers. It would also help in
identifying the sub brokership / brokerage charged
from different clients under the normal market practice and as required under
the Broker Regulations. 21.
In view of the above, the charge of non maintenance
of a separate register of accounts for sub-broker stands established. � DELAY
IN DELIVERY OF FUNDS AND SECURITIES 22.���� NCJ was found to have delayed in making the
payments of funds and securities to their clients for the securities bought and
sold, within the stipulated period of 48 hours of the relevant payout which
amounted to a violation of Regulation 26(vi) of the Broker Regulations. a) Delay in delivery of securities: As regards
the same, in settlement No. T2T/020316, the following
entry was observed in the scrip of Raghunath
International : On On 23.���� NCJ submitted that they had been availing
direct payout facility to the clients� demat accounts
and hence there was no question of delay in delivery of shares to their
clients. It was clarified that one of their sub brokers; M/s Safe Hands
Securities had requested them to withhold the delivery and submitted a letter
from the sub broker in this regard as proof of the request so made.� On the said basis, NCJ submitted that they
had delivered the securities to their clients within 48 hours of the settlement
of trades, except in case of a request made by the client in writing. 24. ��I have
perused the contents of the letter dated b) Delay in delivery of Funds; As regards the same, NCJ was found to have maintained
running accounts with all the clients. In fact, at the time of account opening
form, NCJ was found to have obtained a letter of authority from all the
clients, to maintain running accounts with them without any obligation to
receive the payment / delivery strictly within the stipulated 48 hours. However
on scrutiny of the client ledger and other records I have observed that there
were: i) No instances of dishonouring
the cheques ii) No instances where the client was
charged rates different from the prevailing market rate. iii) No instances of delay, beyond a month
from the date of receipt of the complaint in redressing the grievances of
investors. iv) No instances of default in passing any
dividend or interest of securities, received for the clients. v) No instances of default in passing any
bonus or rights shares received on the securities of the clients. In view of the above and
the absence of any specific instances bought out on record as regards default
on this count on the part of NCJ and in the absence of any complaints of
clients pending against them with regards to their payment default to any of
their clients, a lenient view may be taken on this count. c.
Failure to collect margins from clients;�
As regards the same, NCJ was found to have failed to collect margins
from their clients on settlement basis, which act amounted to a violation of
Regulations 26(xv) and 26(xvi) of the Broker Regulations read with the
provision of the SEBI Circular Nos. SMDRP/POLICY/Cir-07/2000 dated 25.���� NCJ contended that they
have collected margins from their clients wherever applicable and even followed
an accounting system of maintaining client�s deposit account separately from
their regular trading account, which facilitated in knowing exactly the quantum
of the clients� margin amount, lying with them at any point of time. They
contended that in any settlement, they did not provide exposure to the client
beyond their adequate margin amount that was lying with them in their margin
deposit account and submitted that the quarterly margin certificate were sent
to the BSE on time. 26.���� SEBI vide
its Circular no. SMDRP/POLICY/Cir-07/2000 dated 27.���� Collection of margins is a
risk containment measure in that in case of default by the client in making the
payments on the settlement of the trades, the same is met with the security
deposit, collected in the form of margins. Upfront margins are required to be
collected, keeping in mind the exposure provided to the clients. The more the
exposure, the more the margin collected which acts as a safe deposit for the
brokers, for settlement of trades. 28.���� Although no specific
instances have been cited on record, I have noted findings in the inspection
report to the effect that NCJ followed the practice of collecting margin in
advance, at the time of opening the accounts, which was maintained separately
in the name of the client deposit account. 29.���� The same has been contended
by NCJ without furnishing the documentary evidence to this effect. 30.���� Thus, while the inspection
report has stated default on the part of NCJ but failed to point out any
instances on the alleged default,� NCJ on
their part have maintained due compliance of the same without furnishing any
documentary proof to substantiate the same. As the instant charge cannot be
generalized for all the clients of NCJ as the trades cannot exceed Rs. 5 lakhs at all times for all
the clients,�� NCJ may be given the
benefit of doubt on this charge. ���� d. Turnover prescribed by NCJ different
from BSE records: 31.���� NCJ was charged for
recording a higher turnover in their books of accounts, as opposed to that
appearing in the BSE turnover certificate. In the year 2002-03, the turnover
recorded by them was allegedly Rs. 9084.38 crores which was higher by 41 lakhs
than that recorded by BSE and for the year 2003-04, the turnover recorded by
them was Rs.5714.57 crores, which was higher by 24 lakhs than that recorded by the BSE. In the absence of NCJ
explaining the reason for the variation, the difference in turnover was
attributed to the possible �off the floor transactions� entered into by NCJ.
This act amounted to a violation of Regulations 26(xv), 26(xvi) and 26(xx) of
the Broker Regulations read with SEBI Circular No. SMDRP/Policy/Cir-32/99 dated
32.
I
have also observed that in their letter dated
In the said reply, NCJ have
in the column meant for �Turnover data� as per the BSE certificate mentioned Rs. 9043.38 crores as the
turnover for the year 2002-03 and Rs.5690.57 crores
as the turnover for the year 2003-2004 (marked in bold in the above table).
However, the true figures of the BSE turnover certificates were Rs. 9083.97 crores for the year
2002-03 and Rs.5714.33 crores for the year 2003-04. 33.
Had
the calculation been done on the basis of turnover data provided by them in
their reply dated October 4, 2004, the variation in the figures would have been
considerably large with the difference running into crores
of rupees i.e., 41 crores and 24 crores
instead of 41 lakhs and 24 lakhs
for the years 2002-03 and 2003-04 respectively as has been brought out in the
table below:
34.���� Besides this fact, NCJ also confirmed in
their letter dated 35.���� In their defense during the hearing proceedings
held before me, NCJ enclosed the turnover certificates stated to have been
issued by the BSE for the years 2002-03 and 2003-04 and also their day-wise
turnover chart for the years 2002-03 and 2003-04 and claimed that on a
comparison of the same, it was apparent that their turnover was the same as
that revealed in the BSE turnover certificate and that the difference in
figures noted at the time of inspection was due to a mistake. I have perused
the letters produced by NCJ stated to have been issued by the BSE dated 36.���� In order to verify the authenticity of the
figures furnished by NCJ on their letter heads, which appeared to tally exactly
with the figures furnished by BSE. I sought the turnover data from BSE directly
vide email dated
37.
Upon
a cumulative analysis of the facts above mentioned, it would appear that when
presenting their case before me, NCJ had furnished turnover data as per their
records i.e., 9083.97 crores which did not tally with
what they had submitted in their earlier letter dated October 4, 2005 i.e.,
9084.38 crores, when infact,
if the actual figures were to be compared the difference would to be 41 lakhs (i.e.9084.38crores � 9083.97crores) for the year
2002-03 and 24 lakhs (5714.57crores � 5714.33 crores) for the year 2003-04.� 38.
It
appears that, all traces of the off market trades which constituted the
difference of 41 lakhs and 24 lakhs
respectively were erased from their records which were then presented before me
to ensure that their turnover (as per their records) matched exactly with that
noted by the BSE, thereby nullifying the finding of variance in figures of
turnover before their records and that of BSE noted during the inspection.� � 39.
While
discussing the merits of the variance in turnover figures, though the
difference may seem quite less considering the heavy turnover figures for the
years 2002-03 and 2003-04, had the broker actually traded through the BOLT
system of BSE only and actually relied upon the downloaded statements of BSE,
such a difference in the figures would not have actually and practically arisen,
as the brokers normally download the data regarding their daily turnovers on a
daily basis. Had the discrepancy arisen because of any unusual factors, viz data mismatching with the BSE on actual figures, the
broker would have tallied / matched the same with the Exchange and would have
brought the same to the notice of the Exchange. There is no material to suggest
that the same was done by NCJ.� On the
contrary, NCJ had in their reply dated October 4, 2004 accepted the difference
but stated that the same was negligible. While the difference in turnover may
seem less in terms of the percentage as compared to the actual turnover, the
same should not and need not be taken as a mitigating factor.� It thus appears as if NCJ hampered with their
records, merely to convey that they had complied with the Regulations.� In view of the violation being established
and although there are no details of off market trades having been executed by
NCJ on record, the overall conduct of NCJ needs to be looked into.� 40.���� On
this count, I conclude as under: a) There were some �off market trades�
executed by NCJ on the screen of the exchange b) NCJ has furnished wrong information to
SEBI at the time of adjudication proceedings as compared to the figures
conveyed vide their reply to the inspection report dated c) NCJ has in effect tampered their
records, to submit wrong information to prove that they were not guilty of an
offence. ��� When viewed in its entirety, this conduct
of NCJ calls for a stringent penalty. 41.
In view of charges levied upon NCJ being
established, penalty as prescribed needs to be levied upon them.� In this regard, the relevant provisions of
the Act may be perused which read as under: Section 15A (c): Penalty for Failure to furnish
information, return, etc:�� If any
person, who is required under this Act or any rules or regulations made thereunder- (c ) to maintain books
of account 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. Section 15F(b):� Penalty for default in case of stock brokers:
if any person, who is registered as a stock broker under this 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. �� ��
Section 15HB: Penalty for contraventions, where no
separate penalty has been provided: 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. 42. ��� Since most of the charges framed against NCJ
are established, they would be liable for a penalty as provided under the
provisions of law quoted above.� However
before fixing the quantum of penalty that is commensurate with all the charges
leveled and established against NCJ, it would be necessary to refer to 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. ��������� PENALTY 43.��� All the factors mentioned
above go against the broker. Hence, on
judicious exercise of the powers conferred upon me and on analyzing the
material available on record especially the conduct of NCJ,� in 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, I consider it appropriate
to impose a penalty of Rs. 1,50,000/- (Rupees One Lakh Fifty Thousand) on M/s NCJ Share & Stock Broker
Ltd. bearing SEBI Regn No. INB011192037. 44.���� 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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