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ORDER UNDER
THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY THE
ADJUDICATING OFFICER) RULES, 1995 AGAINST M/S.
MANOJ SARNA & CO. BACKGROUND: 1. M/s. Manoj Sarna & Co. (for brevity’s
sake, hereinafter referred to as MSC) is registered with the Securities and
Exchange Board of India, 1992 (for brevity’s sake, hereinafter referred to as
the SEBI) as a sub- broker and is affiliated to the LSE Securities Ltd. The
SEBI Regn. No. of MSC is INS010786015 and INS231306619. 2. An inspection of the books of account,
documents and other records of MSC was conducted by SEBI for the financial
years 2002-03 and 2003-04. 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 MSC,
were noted. While communicating the findings of inspection to MSC vide letter
dated
NOTICE/ REPLY/ PERSONAL HEARING: 3. Accordingly, I issued a notice dated June
17, 2005 to MSC 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 MSC 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. MSC 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. MSC 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.
As no reply was received from them, a notice of hearing dated 5.
However,
Shri Sarna did not either reply to the notice or send any of the documents that
he had undertaken to forward. Till date there is no communication from his
side. I have noted that during the course of the proceedings, Shri Sarna was
clearly advised that if need be, another opportunity of hearing would be
granted to him. However he declined and instead undertook to forward the
necessary documents within a stipulated period which however were not sent. In
the absence of any reply from Shri Sarna till date and as a reasonable opportunity
has been granted to him to make his submissions, the matter is proceeded with based
on the material available on record. APPRECIATION OF EVIDENCE 6. I have accordingly considered the facts
and circumstances of the case on the basis of the material available on record
including the findings of the inspection report and have also analysed all the
submissions made on behalf of MSC in response to the findings of inspection. 7.
My findings on the charges
leveled against MSC 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.
Non
maintenance of the copies of the purchase and sale notes in the form and the
order prescribed. a) MSC was
found to have not maintained the purchase and the sale notes in the form and
the order prescribed which amounted to a violation of Regulations 26(xv) and
26(xvi) of the Broker Regulations. No
submissions were advanced on behalf of MSC to counter this charge and neither
was any documentary
evidence submitted in this regard. In this context, Clause B(1) of
Regulation 15 as specified in Schedule II of the Broker Regulations may be
referred to which reads as under : Duty
to the investor: A sub broker, in his dealings with the clients and the general
investing public, shall faithfully execute the orders for buying and selling of
securities at the best available market price.
Clause B(6)
of Regulation 15 as specified in Schedule II of the Broker Regulations, as it
is existed prior to its
amendment on “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 client’s interest inferior to his own.” 8. Thus, after 9. Annexure 3 of 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”. 10. Vide
circular dated August 26,
2004, SEBI had inter alia prescribed a
model format of the tripartite agreement between the broker, sub-broker and
client. The requirement relating to tripartite agreement was to come into
effect from December 01, 2004, which was extended upto
January 01, 2005 vide SEBI circular reference number SEBI/MRD/DOPS/Cir-41/2004
dated November 25, 2004 and further extended to April 01, 2005 vide Circular
No. SEBI/MRD/DOPS/CIR-44/2004 dated 11. Further, vide SEBI Circular No. SEBI/MRD/DOPS/CIR-11/2005
dated 12. Thus,
effective from the date of issuance of the Circular dated 13. Thus,
after the issuance of the said circulars the obligation of issuing the
purchase/sale notes by the sub brokers was undone w.e.f. 14. Notwithstanding these developments, it is thus apparent that as
on the date of commission of the offence, there was a mandate to issue the
necessary sale and purchase notes, which MSC failed to, do. The period of inspection encompassed April 2002 to
March 2004. Thus for the period between B. Entering into Off the Floor
Transactions 15. MSC was found to have
indulged in several spot transactions for their clients and were also found to
be accepting cash for settling these transactions, as have been detailed below.
a) Manbir Singh :- Different shares were purchased
and sold on the same dates resulting in the loss in all the transactions
amounting to an aggregate of Rs.1,21,640.00 and same was received by the sub
broker in cash from the client on different dates. The daily transaction
register (DTR) showed all these entries as on a client to client basis. b) Rajinder Singh :- Different shares were
purchased and sold on the same dates resulting in the loss in all the
transactions amounting to an aggregate of Rs.121982.50 and same was received by the sub broker in
cash from the client on different dates. The daily transaction register (DTR)
showed all these entries as on a client to client basis. c) Shekhar Gupta :- Different shares were
purchased and sold on the same dates resulting in the loss in all the
transactions amounting to an aggregate of Rs.85940.00 and same was received by the sub broker in
cash from the client on different dates. The daily transaction register (DTR)
showed all these entries as on a client to client basis. d) Ram Lal Sharma:- Different shares were purchased and sold on
the same dates resulting in the loss in all the transactions amounting to an
aggregate of 129437.50 and same was received by the sub broker in cash from the
client on different dates. The daily transaction register (DTR) showed all
these entries as on a client to client basis.. e) Inder Mohan Sharma :- Different shares
were purchased and sold on the same dates resulting in the loss in all the
transactions amounting to an aggregate of Rs.81902.50 and same was received by
the sub broker in cash from the client on different dates. The daily
transaction register (DTR) showed all these entries as on a client to client
basis. f) Onkar Jit Singh :- Different shares were purchased and sold
on the same dates resulting in the loss in all the transactions amounting to an
aggregate of Rs.45715.00 and same was
received by the sub broker in cash from the client on different dates. The
daily transaction register (DTR) showed all these entries as on a client to
client basis. g) Neeraj Aggarwal :- Different shares
were purchased and sold on the same dates resulting in the loss in all the
transactions amounting to an aggregate of Rs.101707.50 and same was received by the sub broker in
cash from the client on different dates. The daily transaction register (DTR)
showed all these entries as on a client to client basis. h) Inder Kumar :- Different shares were
purchased and sold on the same dates resulting in the loss in all the
transactions amounting to an aggregate of Rs.62740.00 and same was received by the sub broker in
cash from the client on different dates. The daily transaction register (DTR)
showed all these entries as on a client to client basis. i) Jagtar Singh :- Different shares were
purchased and sold on the same dates resulting in the loss in all the
transactions amounting to an aggregate of Rs.51320.00 and same was received by
the sub broker in cash from the client on different dates. The daily
transaction register (DTR) showed all these entries as on a client to client
basis. j) Vikas Singla :- Different shares were
purchased and sold on the same dates resulting in the loss in all the
transactions amounting to an aggregate of Rs.91486.25 and the same was received
by the sub broker in cash from the client on different dates. The daily
transaction register (DTR) showed all these entries as on a client to client
basis. k) Parkash
Singh :- Different shares were purchased and sold on the same dates resulting
in the loss in all the transactions amounting to an aggregate of
Rs.87270.00 and same was received by the
sub broker in cash from the client on different dates. The daily transaction register
(DTR) showed all these entries as on a client to client basis. l) Davinder Pal Bansal :- Different shares
were purchased and sold on the same dates resulting in the loss in all the
transactions amounting to an aggregate of Rs.89850.00 and same was received by
the sub broker in cash from the client on different dates. The daily
transaction register (DTR) showed all these entries as on a client to client
basis. m) Neelam
Aggarwal :- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs.100250.00
and the same was paid to the client by cheque. DTR showed all these entries on
a client to client basis and not routed through the Principal Broker Account. n) Uma Chopra : - Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs.125235.00 and
the same was paid to the client by cheque. DTR showed all these entries on a
client to client basis and not routed through the Principal Broker Account. o) Kanta
Devi :- Different Shares were purchased and sold on the same dates resulting in
a net profit of Rs. 81655.50 and the same was paid to the client by cheque. DTR
showed all these entries on a client to client basis and not routed through the
Principal Broker Account. p) Madhu Aggarwal:- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs. 99752.50 and
the same was paid to the client by cheque. DTR showed all these entries on a
client to client basis and not routed through the Principal Broker Account. q) Mandeep Kohli HUF;- Different Shares
were purchased and sold on the same dates resulting in a net profit of Rs.
95561.25 and the same was paid to the client by cheque. DTR showed all these
entries on a client to client basis and not routed through the Principal Broker
Account. r) Ritu Jain:- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs. 55087.50
and the same was paid to the client by cheque. DTR showed all these entries on
a client to client basis and not routed through the Principal Broker Account. s) Kavita Rani :- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs 78470.00 and the same was paid to the client by cheque.
DTR showed all these entries on a client to client basis and not routed through
the Principal Broker Account. t) Kanta Malhotra :- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs.118515.00 and the same was paid to the client by cheque.
DTR showed all these entries on a client to client basis and not routed through
the Principal Broker Account. u) Sinil Malhotra (HUF) :- Different
Shares were purchased and sold on the same dates resulting in a net profit of Rs.120567.50
and the same was paid to the client by cheque. DTR showed all these entries on
a client to client basis and not routed through the Principal Broker Account. v) Harpreet Kaur :- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs.125870.00
and the same was paid to the client by cheque. DTR showed all these entries on
a client to client basis and not routed through the Principal Broker Account. w) Jyoti Verma ;- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs.64640.00 and
the same was paid to the client by cheque. DTR showed all these entries on a
client to client basis and not routed through the Principal Broker Account. x) R.S.Kohli (HUF) :- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs.120635.00
and the same was paid to the client by cheque. DTR showed all these entries on
a client to client basis and not routed through the Principal Broker Account. y) Mandeep
Kohli (HUF):- Different Shares were purchased and sold on the same dates
resulting in a net profit of Rs.120502.50 and the same was paid to the client
by cheque. DTR showed all these entries on a client to client basis and not
routed through the Principal Broker Account. z) Ritu Kohli :- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs. 120442.00
and the same was paid to the client by cheque. DTR showed all these entries on
a client to client basis and not routed through the Principal Broker Account. aa) Naresh Chander Talwar(HUF) :- Different
Shares were purchased and sold on the same dates resulting in a net profit of
Rs 85490.00 and the same was paid to the
client by cheque. DTR showed all these entries on a client to client basis and
not routed through the Principal Broker Account. bb)
Vishal
Vig :- Different Shares were purchased and sold on the same dates resulting in
a net profit of Rs.99912.00 and the same was paid to the client by cheque. DTR
showed all these entries on a client to client basis and not routed through the
Principal Broker Account. cc) Rakesh Vig :- Different Shares were purchased
and sold on the same dates resulting in a net profit of Rs.99912.00 and the same was paid to the client by
cheque. DTR showed all these entries on a client to client basis and not routed
through the Principal Broker Account. dd)
Narinder
Kumar & Sons :-- Different Shares were purchased and sold on the same dates
resulting in a net profit of Rs.142150.00 and the same was paid to the client
by cheque. DTR showed all these entries on a client to client basis and not
routed through the Principal Broker Account. ee) Ranju Suri :- Different Shares were
purchased and sold on the same dates resulting in a net profit of Rs.72525.00
and the same was paid to the client by cheque. DTR showed all these entries on
a client to client basis and not routed through the Principal Broker Account. ff) Rakesh Batra (HUF) :- Different Shares
were purchased and sold on the same dates resulting in a net profit of
Rs.125870.00 and the same was paid to the client by cheque. DTR showed all
these entries on a client to client basis and not routed through the Principal
Broker Account. From the details provided above, MSC
had executed 36 transactions which were not routed through the exchange
mechanism of either the NSE or BSE and off the floor trading was observed, as
the DTR examined on computer, showed client to client trading. On their part
MSC have not made any submissions to refute the charge. 16. These transactions clearly indicate a lack
of exercise of due diligence on the part of MSC due to their having failed to
adhere to the directions issued by SEBI from time to time in this regard and
thus liable for action under Regulations 26(xv) and 26(xvi) of the Broker
Regulations. One such direction issued by SEBI is contained in SEBI Circular
No. SMDRP/POLCIY/CIR-32/99 dated 17. The essence of this rule is that such transactions
do not impart transparency and fairness and the price formation in such
transactions are not through the stock exchange price and order matching
mechanism since they deprive the investors of the best possible price. Clause B(1) of Regulation
15 as specified in Schedule II of the Broker Regulations may also be referred
to which reads as under : Duty
to the investor : A
sub broker, in his dealings with the clients and the general investing public,
shall faithfully execute the orders for buying and selling of securities at the best available market price. In the absence of any explanation for
this lapse, it is established that MSC are guilty of not having reported any of
these transactions and hence need to be adequately penalized for the same. C. Acceptance
of cash instead of cheques/ demand drafts 18. MSC was found to have made
payments in cash and accepted cash from five clients for the period between a) JPM: - Payments and receipts in cash were
made on various dates during the period 2003-004 amounting to Rs.5,00,000,
Rs.4,00,000, Rs.2,00,000 and many more. b) Raman Kumar Vij :- Cash amounting to
Rs.8,50,000 was paid on various dates in the year 2003-04. c) R.K.Vig :- :- Cash amounting to
Rs.9,00,000 (approx) was received and
Rs.4,00,000 was paid in cash on various dates in the year 2003-04. d) R.Sehgal :- Huge transactions of cash
receipt and payments were made on various dates in 2003-04 in this client
account. e) KPS :-
Cash amounting to Rs.7,00,000 was
received and an amount of Rs.1,93,000 was paid during the period 2003-04. 19. I have noted that MSC have admitted to the
fact that these cash payments had been made during the financial years 2003-04
and have given an undertaking not to accept or make payments in cash in future.
20. SEBI has from time to time issued strict
directions that no payments and receipts should be made only through cheques or
demand draft but no
through cash. The essence
of this restriction is that cash receipts and payments against the settlement
of trades, lack audit trail and give a way for settling fictitious / dummy
transactions or can be used for illegal / off market transactions as well. 21. These payments and receipts
made by MSC in cash instead of cheques or demand draft indicated a lack of exercise of due
diligence on the part of MSC due to their having failed to adhere to the
directions issued by SEBI from time to time in this regard and thus makes them
liable for action under Regulations 26(xv) and 26(xvi) of the Broker
Regulations. One such direction issued by SEBI is contained SEBI
Circular No. SMD/SED/CIR/93/23321 dated 22.
SEBI Circular dated November 18, 1993 categorically
specifies that members should not accept cash for purchases of securities and /
or give cash against sales of securities and that all the payments received /
made should be strictly by “crossed – Payee A/c” cheques. Further vide its
Circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003, it was
reiterated that brokers and sub-brokers should not accept cash from the client
whether against obligations or as margin for purchase of securities and / or
give cash against sale of securities to the clients and that all payments shall
be received / made by the brokers or sub-broker from / to the clients strictly
by account payee crossed cheques / demand drafts or
by way of direct credit into the bank account through EFT, or any other mode
allowed by RBI. The brokers or sub-broker shall accept cheques
drawn only by the clients and also issue cheques in favour of the clients only, for their transactions.
However, in exceptional circumstances the broker or sub-broker may receive the
amount in cash, to the extent not in violation of the Income Tax requirement as
may be in force from time to time. 23. In the present case, the amounts involved
are quite substantial although the instances of default have not been listed
out. However although MSC have stated that they would not be accepting or
making payments in cash, no proof of documents were submitted to evidence that
they have started accepting only cheques or DDs. Wherever a specific mode of transacting
with clients has been specified, the same is required to be strictly adhered to
and there should not be any deviation from the same . In view thereof the present cases of default calls
for a penalty. D. Failure to make payments or delaying the
payments 24. MSC was found to have
failed to make the payments or delayed the payments in the instances detailed
below to four clients, thereby making them liable under the provisions of
Regulation 26(vi) of the Broker Regulations read with SEBI Circular No.
SMD/SED/CIR/93/23321 dated a) Smt. Beena:- The last dealing with this
client was made on b)
Attar Singh :- The last dealing with this
client was made on c) Harbhajan Singh Parmar :-The last
dealing with this client was made on d) KPS :- The last dealing with this
client was made on 25. I have noted from the
findings of the inspection that though there were no transactions between MSC
and the clients for a long period of time, MSC did not settle the respective
amounts of the above mentioned clients. Furthermore, no explanation for the
said lapses has been provided by MSC. 26. Regulation 26(vi) of the
Broker Regulations inter alia provides for imposition of monetary payment in
case of a failure on the part of the sub broker to deliver any security or make
payment of the amount due to the investor within 48 hours of the settlement of
trade unless the client has agreed in writing otherwise. The mandate to deliver
any security or make payment of the amount due to the investor within 48 hours
of the settlement of trade unless the client has agreed in writing otherwise is
also provided for in terms of SEBI Circular No. SMD/SED/CIR/93/23321 dated 27. It
is also to be noted that one of the conditions for grant of certificate of
registration to a sub broker is that the said entity 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 of the Broker Regulations, a
stock broker/sub-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, MSC failed to adhere
to the system of payment of outstanding to their clients within 48 hours of
payout which thus amounts to a violation of the above referred to provisions of
the Broker Regulations. In the absence of any documentary evidence submitted by
SSC to arrive at a contrary finding, warrants a penalty. E. Non segregation of clients’ funds and
securities from own funds and securities: 28. MSC were found to have failed to segregate the
clients’ funds and securities from their own funds and
securities and instead all the transactions were found to have been routed
through various accounts without any distinction, thereby making them liable for action
under Regulation 26(xiii) of the Broker Regulations read with
SEBI Circular SMD/SED/CIR/93/23321 dated November 18, 1993. 29. On their part MSC contended that they had
opened a client account with HDFC Bank before inspection of their books in
order to have segregation in their bank accounts. This contention made by MSC
amounts to a clear admission of lapse on their part in having failed to
maintain a segregation /clear cut distinction between their funds/securities and
the clients funds/securities. 30. The provisions of Regulation 26(xiii) of the
Broker Regulations, inter- alia provides for imposition of monetary penalty for failure on
the part of a broker/sub-broker to segregate his own funds or securities from
the clients’ funds or securities or using the securities or funds of the client
for his own purpose or for purposes of any other client. Thus it is compulsory for all members to keep
the money of their clients and their own money in separate accounts. The monies that can be paid into the clients
accounts include monies held or received from the clients, such as money
belonging to the member as may be necessary for the purpose of opening or
maintaining their account, a cheque or draft received by the member
representing in part, the money belonging to the client and in part money due
to the member etc. However no money is to be withdrawn from the clients account
other than the money required for payment to or on behalf of the client, money
belonging to the member as may have been paid into the client account in
respect of the previously mentioned payments into the account etc. There is
also a SEBI circular dated November 18, 1993 which makes it compulsory for all
members to keep the money of their clients and their own money in separate
accounts and directs member hold or receive money on account of a client to
forthwith pay such money to the current or deposit account at the bank to be
kept in the name of the member, in the title of which the word “clients” should
appear. All members are permitted to keep one consolidated clients account for all
clients or accounts in the name of each client, as they think fit. 31. 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. Taking into consideration the admission of lapse by MSC on this
count as also their failure to submit the necessary documents evidencing
separate accounts presently being maintained by them for their own and the
clients’ funds, a stringent penalty needs to be imposed on MSC on this
count. F. Transferring
of funds from one client account to another client account : 32. MSC was found to have
transferred funds from one client account to another client account. In one
instance, a credit balance of Shri Kumar Vij, amounting to Rs.6,62,302.56 was
transferred to another client, which amounted to a violation of the Code of
Conduct prescribed for sub brokers thereby making MSC liable for action under Regulations
(xv), 26(xvi) and 26(xx) of the Broker Regulations. 33. MSC have not advanced any submissions on
this charge also nor brought out any specific reason as to why this account to
account transfer was made. There is also no evidence on record of any written
instruction, made by the client from whose account, the money was debited. This
being the case, it would not be wrong to infer that the said transfer was made
without the knowledge of Shri Vij. However, I have noted that there is not even
a single case of investor complaint against MSC or even a complaint made by the
client; Shri Kumar Vij regarding this transaction. It could be a case where this aberration was
unknown to the client and only brought to light by virtue of the inspection
conducted by SEBI. Although in the present case, the amount involved is not
substantial nor the instances of default, Either way, the conduct of MSC on
this ground is questionable. 34. One
of the conditions for grant of certificate of registration to a sub broker is
that the said entity should abide by the requirements of the SEBI Act and the
rules and regulations framed there under. In terms of Clause A (2) of the Code
of Conduct of the Broker Regulations, a sub-broker is required to act with due
skill, care and diligence in the conduct of all investment business. Having so
failed to exercise this diligence and the violation being established , MSC
would be liable for action under
Regulations (xv), 26(xvi) and 26(xx) of the Broker Regulations. G. Indulged
in funds lending and borrowing activities 35. MSC was found to have
indulged in funds lending and borrowing activities in the instances mentioned
below : a) JPM :-
Inspite of a credit balance of Rs.7,93,071 on b) T.S.Thapar
& Co:-There was give and take of cheques on various dates and only few
transactions of shares trading were noted. c) Shiv Puri
& Co: - Cheque amounting to Rs.115704.00 was given to the client on d) Harbans
Singh : Cheque amounting to Rs.95250.00 was given on e) A:- Cheque amounting to Rs.65460.00 was
given to this client named ‘A’ on f) Ravinder Singh Kalra (HUF) :- Cheque
amounting to Rs.95610.00 was given on g) Ashish Wahi ;- Cheque amounting to
Rs.1,00,000.00 was given on h) Gulshan
Kapoor :- Cheque amounting to Rs.1,50,000.00 was given on i) Daljit Singh :- Cheque amounting to
Rs.125000.00 was received on j) Bombay Jewellers ;- Cheque amounting to
Rs.230500.00 was received on k) Baljinder Kaur ;-Inspite of credit
balance of Rs.23779.20 on 36. In all, I have noted 13 instances of
lending and borrowing. In all these cases, despite adequate credit balances remaining
in the said accounts, funds were seen to have been borrowed. It is also
apparent that there were certain instances where money was given and received,
unaccompanied by any share transactions. This activity of MSC amounts to a violation
of Regulation 26(xv) of the Broker Regulations read with Rule 8(1)(f)
and 8(3)(f) of the Securities Contract (Regulation) Rules, 1957 37. No submissions were advanced on behalf
of MSC, to counter the said charge. Rule 8(1)(f) and 8(3)(f) of the Securities Contract
(Regulation) Rules, 1957 inter alia provides that no person shall be eligible
to be elected as a member or eligible to continue as such, if already elected,
if he is engaged as a principal or employee in any business other than that of
securities or so engages, except as a broker or an agent, not involving any
personal financial liability. Thus every member is barred from involving in any
fund lending/borrowing activity with the exception of those in connection with
or incidental to or consequential upon the securities business. 38. I have in this context also referred
to the SEBI Circular SMD/POLICY/CIR-6//97
dated May 07, 1997 which inter alia provides that borrowing and
lending of funds, by a trading member, in connection with or incidental
to or consequential upon the securities business, would however not be
disqualified under Rule 8(1)(f) and 8(3)(f) of the Securities Contract
(Regulation) Rules, 1957. In all the instances cited above, the borrowings/
lendings were not found to have been made in connection with or incidental to or
consequential upon the securities business
or even justified to be so, considering that there were certain instances where
money was given and received, unaccompanied by any share transactions. It is
apparent that there were other motives for the said transactions. In view of the above, it is clear that MSC is
liable for action under Regulation
26(xv) of the Broker Regulations. 39. Upon a cumulative analysis of the facts and
circumstances of the case and the fact that all charges levied against MSC have
been established, penalty as prescribed needs to be levied upon them. 40. The relevant provision of the SEBI Act that
is to be invoked for levying penalty on MSC may be perused which reads as
under: 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 thereunder for which no
separate penalty has been provided, shall be liable to a penalty which may
extend to one crore rupees. 41. In this regard, it would also be necessary
to refer to certain factors as enumerated under Section 15J of the SEBI 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. 42. From
the facts on record, it is not clear as to whether MSC had enjoyed any gain or unfair advantage as a result
of their defaults. However it cannot be denied that any evasion of the regulatory provisions
issued by the regulator in the interests of the investors or non adherence to
the same for any reasons whatsoever is bound to affect the interests of such
investors and deprive the general public and the investor class as a whole, of
a fair and regulated market. Although such a loss cannot be specifically
computed in monetary terms, the fact remains that all regulatory provisions
have a specific purpose behind their enactment.
The very purpose of enacting any legislation is due adherence to the
procedures laid down there under to ensure the sound and smooth functioning of
the capital market. If no cognizance were to be taken of any breach of these
provisions and no liability fixed there upon, the entire purpose of incorporating
the provisions in the said enactments would become redundant. 43. 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. 44. 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. 45. 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. 46. 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. 47. 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. 48. Bearing in mind the facts and circumstances
of the present case as also the factors enumerated in Section 15J of the SEBI
Act, 1992 and the fact that all the charges leveled against MSC stand
established on a
judicious exercise of the discretion conferred upon me, considering the
offences in its entirety, I am inclined to hold that most of the charges
against MSC are quite serious, and hence
a stringent penalty is warranted. 49. Accordingly, 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 hereby impose a penalty of Rs. 1,50,000 /-
(Rupees One Lakh and Fifty Thousand only)
as penalty on M/s. Manoj Sarna & Co. bearing SEBI
Registration No. INS010786015 and INS231306619. PENALTY 50. 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, World Trade Centre, 29th
Floor, Cuffe Parade, Mumbai 400005. PLACE: MUMBAI G.
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