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ORDER
UNDER
RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING
PENALTIES BY ADJUDICATING OFFICER) RULES, 1995. Against M/s Shantanu S. Dhamankar
Broker, Pune Stock Exchange Ltd. (INB 110245815)
Sub Broker, PSE Securities Ltd. (INS 010911415,
INS 230912110)
Sub Broker, Kaynet Capital Ltd. ( INS 010924210) 1.0 Background
1.1 M/s Shantanu S. Dhamankar is registered with Securities and
Exchange Board of India (hereinafter referred to as “SEBI”) as a stock broker being a member of Pune Stock Exchange Ltd.
(hereinafter referred to as “PSE /
exchange”) and as a sub broker affiliated to M/s PSE Securities Ltd., broker,
Bombay Stock Exchange (BSE) and
National Stock Exchange. M/s Shantanu S.
Dhamankar is also registered as sub-broker with M/s Kaynet Capital Ltd., broker,
BSE. The proprietor of M/s Shantanu S. Dhamankar is Shri Shantanu S. Dhamankar
and its office is located at 40, Budhwar Peth, “Vishweshwar”,
Jogeshwari Lane, Pune – 411 002. 1.2 An inspection of M/s Shantanu S. Dhamankar (hereinafter
referred to as “SD”) was conducted between
2.0 Notice / Reply / Personal Hearing 2.1 Accordingly, I issued a show cause notice dated June 19, 2006
to SD under Rule 4 of SEBI (Procedure for Holding Enquiry and Imposing Penalty
by the Adjudicating Officer) Rules, 1995 to show cause as to why an enquiry
should not be initiated against it and penalty be not imposed on it for its
failure to comply with the various SEBI circulars, SEBI Regulations etc. as
mentioned in the inspection report and the show cause notice. SD was advised to
make its submissions, if any, along with supporting documents, within 14 days
from the date of receipt of notice. It
was also advised to note that in case it failed to reply within the stipulated
time, it would be presumed that it has no suitable explanation / reply and that
the matter would be further proceeded with on the basis of evidence on record. SD
was also asked to indicate whether it would also like to have a personal
hearing in this regard. 2.2 The
show cause notice was duly delivered to SD and a reply dated 2.3
On 3.0 Appreciation of Evidence 3.1
I now proceed to
discuss in detail the charges that have been levied against SD for being
adjudicated in the present proceedings, the submissions made by SD in this
regard and my findings on the same. 3.2
Charge Entered into off-the-floor transactions and also not
conveyed to the Exchange in violation of regulations 26(xv), (xvi) and (xx) of
Broker Regulations. Reply In its reply dated In the hearing held on Findings The inspection team observed several instances of
transactions having taken place between 2 clients of SD. It is mentioned that these transactions were
executed directly by SD between the 2 clients and not passed / executed through
exchange trading mechanism. The numerous instances of these transactions
executed by SD have been mentioned in Annexure Nos. 12 & 13 of the
inspection report which was forwarded to SD along with the show cause notice
and are hence not repeated here.
Further, these transactions were also not reported to the stock
exchange. SD has expressly admitted that it had conducted
off-the-floor transactions for its clients.
A perusal of the transaction details as mentioned in Annexure 12 and 13
to the inspection report reveals that SD had executed numerous off-the-floor
transactions amounting to many crore rupees. Off-the-floor transactions have
been prohibited by SEBI as they are not transparent and also there is no
assurance that they have been executed at the prevailing market price. It was thus felt that they were not in the
best interest of investors. Therefore
SEBI, vide its circular no. SMDRP/Policy/32/99 dated 3.3 Charge : Non-segregation
of clients securities and own securities
in violation of regulation 26 (xiii) of Broker Regulations. Reply SD submitted that its software provided detailed
information about its holding and the clients holding. It was also submitted that the software
provides detailed information about client’s sale / purchase in a particular settlement, delivery
ledger of each client and balance sheet of deliveries. During the hearing SD drew reference to the
cases mentioned in his reply to the inspection report. He further mentioned that at the time of
inspection this feature was under implementation as the software had been
purchased very recently. It was also
submitted that subsequently the holding statement of DP account and positions
in his account tallied with each other.
In his reply dated June 29, 2005, SD has submitted
certain reasons for having excess shares in his account / suspense account such
as:- a.
Client directly
depositing shares to his demat account without informing SD. b.
After depositing
shares, clients give a limit order to sell the shares. If the order is not executed, client may
forget the order and shares may lie in SD account. c.
Due to heavy
demat charges, some clients transferred shares to SD’s DP account without
informing him and closed their DP account. SD also gave certain instances in this regard viz. “Mrs. Meena Godbole transferred
Bayer Crops on 19.01.2001 her partial order executed and 25 shares still lying
in my demat account. Mr. S.V. Shitole deposited 20
shares of Bharat Bijlee on or about September 2003 out of that 6 shares sold @ Rs.
549.00 then Mr. S.V. Shitole forgot about the shares. I contacted him and remaining 14 share I sold
as per his order @ Rs. 2356.00 on 21.01.2005. Mr. Vilas Patankar deposited 100
Tata SSL on 08.01.2002 without informing me, afterwards it converted into 20
Tisco about in July 2003, 10 shares of bonus I credited to his account (in my
software) and after contacting him he got surprised and his shares were sold on
09.02.2005 finally. I can give many examples like this. I always safeguard interest of my client”. SD has also submitted that he has checked detailed
records of the suspense account and has finally been able to reduce the number
of scrips in this account to 11. Findings The inspection report mentions that SD has kept
clients securities in the beneficiary accounts, the actual scrip balance as per
system does not match with the DP account balance and that SD is having some
securities in suspense account. Based on above it was alleged that SD does not
have segregation between client and own securities. The inspection report itself mentions that SD has
taken “running account” letters from its clients permitting it to retain the
securities in the beneficiary account. SD has also submitted copies of some of
these letters vide its reply dated It has also been submitted that some of the scrips in
his DP account are belonging to the clients which were either deposited without
his knowledge or are balance shares left after execution of part order. From the instances provided by him it appears
that he has reasonable control over the securities held in his account. Further he has also taken steps to reduce the
number of shares in the suspense account.
During the hearing, SD submitted that the holding statement of DP
account and positions in his account are tallied. On taking a practical view of the brokerage
operations in the current environment, I am of the opinion that SD has
reasonable control over its securities as well as clients’ securities which is
indicative of segregation of the same. 3.3
Charge Acted as un-registered sub broker in violation of
regulation 26(xiv) of the Regulations. Reply In his reply SD has stated that:- “ Regarding dealing as
un-registered sub broker, I would like to submit that there are only 5
transactions done through Kaynet Finance Ltd. This is against more than 50,000
transactions in a year. I was dealing with Kaynet Finance Ltd. from 1995 that
time sub broker concept was not introduced on NSE. I started dealing through PSE Securities Ltd.
on NSE from November 2001. That time T2T
transactions were not possible through PSE Securities Ltd. due to software
problem. There are no transactions with
Kaynet Finance Ltd. except 5 transactions mentioned in the report. In January
2004, price of Essar Oil share was suddenly increased and tired investors gave
me order to sell. The scrip was in T2T
segment and the transaction was not possible through PSE Securities Ltd. To safeguard the interest of my clients only
5 transactions done through Kaynet Finance Ltd.
Please consider how can I say to my client that you find another broker
for this transaction when he is my regular client. Trading room of Kaynet Capital Ltd. and
Kaynet Finance Ltd. is one and the same and due to mistake of operator, my
order was executed by Kaynet Finance Ltd. instead of Kaynet Capital Ltd. (I was sub broker of Kaynet Capital Ltd.). I
placed order only with Kaynet Capital Ltd. “ With regard to the F&O transactions, SD has stated
that only 2 or 3 transactions were done to educate the clients about futures
and options and that there was no other reason or intention about doing the
transaction. Findings The inspection report mentions that during the
inspection period few transactions have been executed on NSE through Kaynet
Finance Ltd., trading member, NSE although there was no broker-sub broker
agreement with them. Inspection report
also mentions that transactions in Futures and Options segment have also been
executed for SD’s clients through M/s Kaynet Finance Ltd. on NSE. Some of the clients on whose behalf F&O
transactions have been executed are Sagarika Dhamankar, Tilwe Sujata, Manas
Invest (Prop. Kulkarni P.P.), Motlag Ajay, Dhamankar Mukta etc. The statement of account of Kaynet Finance
Ltd. in the books of SD in this regard have been enclosed as Annexure 7 to the
inspection report. As per records, SD is a member-broker of Pune Stock
Exchange and a registered sub-broker of BSE and NSE through PSE Securities Ltd. It is observed that he is also a registered
sub broker of Kaynet Capital Ltd. member, BSE, under registration no. INS
010924210. It appears from the records
that SD was not registered with Kaynet Finance Ltd. SD submitted that T2T transactions were not
possible through PSE Securities Ltd. and on a certain occasion he was required
to do certain transactions for some clients in the shares of Essar Oil Ltd. which
was being traded in T2T segment and that to help the clients he had placed this
order. SD states that he had placed the
order with Kaynet Capital Ltd. as the scrip of Essar Oil Ltd. which was trading
in T2T (trade for trade) segment could not have been traded through PSE
Securities Ltd. It is further submitted
that as the dealing room of Kaynet Capital Ltd. & Kaynet Finance Ltd. was
same, the orders got executed through Kaynet Finance Ltd. Considering the
circumstances of the case and the fact that there have been only 5 transactions
through Kaynet Finance Ltd. in the cash market out of about 50,000 transactions
in a year (as submitted by SD), I am of the opinion that benefit of doubt can
be given to SD in this regard. However with regard to transactions in F&O segment,
the explanation of SD is not satisfactory.
If a client wanted to be educated about F&O transactions, it could
have learnt the same from the brochures issued by NSE or other educative
material. If still any client wanted to
enter into an F&O transaction, it could have done so through any other NSE
member who was authorized in this regard.
I am therefore constrained to hold that SD deliberately acted as
unregistered sub broker of Kaynet Finance Ltd. in violation of Section 12 of
SEBI Act, 1992, rule 3 of Broker Rules, regulation 26(xiv) of Broker
Regulations and SEBI Circular No. SMD/POLICY/CIRCULAR/3-97 dated 3.5 Charge Failed to comply with directions issued by the Board
in violation of regulation 26 (xv) of Brokers Regulations. Not exercised due skill, care and diligence in
violation of clause A(2) of code of conduct for stock brokers under schedule II
of regulation 7 and regulation 26 (xvi) of the Regulations. Reply SD in his reply dated Findings As discussed above, numerous instances of failure to
comply with Board directions have been observed in the conduct of SD. SD conducted numerous off-the-floor
transactions even after SEBI had directed discontinuation of the same vide SEBI
Circular No. SMDRP/Policy 32/99 dated 3.6 As
violation of regulations 26(xiv), (xv), (xvi) and (xx) of Brokers Regulations
have been established as discussed above, SD is liable for penalty under section 15HB of
SEBI Act, 1992 which states as under: “Penalty for contravention where no separate penalty has been provided 15HB. Whoever
fails to comply with any provision of this Act, the rules or the regulations
made or directions issued by the Board thereunder for which no separate penalty
has been provided, shall be liable to a penalty which may extend to one crore
rupees.”. 3.7 While imposing penalty it is important to
consider the factors stipulated in section 15J of SEBI Act, 1992 which states
as under : “15J - Factors to be taken into account by the
adjudicating officer While adjudging quantum of penalty
under section 15-I, the adjudicating officer shall have due regard to the
following factors, namely:- (a)
the amount of disproportionate gain or unfair advantage, wherever
quantifiable, made as a result of the default; (b)
the amount of loss caused to an investor or group of investors as a result
of the default; (c)
the repetitive nature of the default.” 3.8 SD has submitted that it has been serving retail investors for
over 20 years without any complaints from the clients and is so trustworthy
that even 3 generations of a family are dealing through him. He has also
submitted that he has been handling the transactions for senior army officers,
bureaucrats etc. which is again a measure of his reliability and good service. It has been proved that SD executed numerous
off-the-floor transactions on behalf of its clients and also did not report the
same to the exchange. Thus the exchange
was not aware of the exact exposure of SD and could not take steps for
safeguarding the interest of its clients such as increase in capital adequacy,
additional margin etc. In other words it
can be said that SD gained the use of amount which otherwise it would have to
deposit with its stock exchange in respect of its off-the floor trading. As
this trading was not permissible, the amount gained therefrom also becomes
unlawful. Similarly the income earned from acting as an unregistered broker is
also unlawful. While some disproportionate gain or advantage has definitely
accrued to SD through the above modes, it is not possible to quantify the same
in monetary terms. There is no data / figures on record to quantify the loss
suffered by investors. Further SD has conducted numerous off-the-floor
transactions and also acted as unregistered sub broker of Kaynet Finance Ltd.
on many occasions for conducting F&O transactions. Thus, the default of SD can be considered as
repetitive in nature. As the violation of statutory obligations has been
established, SD is liable for penalty. Hon’ble Supreme Court of India in its
order dated 4.0 Penalty 4.1 Considering the material available on record, and upon a
judicious exercise of powers conferred upon me under Rule 5 of SEBI (Procedure
for Holding Enquiry and Imposing Penalties by the Adjudicating Officer) Rules
1995, I impose a penalty of Rs.2,00,000/- ( Rupees two lacs only) on M/s
Shantanu S. Dhamankar (proprietor- Mr Shantanu S Dhamankar), Broker, Pune Stock
Exchange Ltd. (INB 110245815), Sub
Broker, PSE Securities Ltd. (INS 010911415, INS 230912110) & Sub Broker,
Kaynet Capital Ltd. ( INS 010924210) under section 15HB of SEBI Act, 1992. I
think this amount would be appropriate in view of the facts of the case.
4.2 The penalty amount shall be paid within a
period of 45 days from the date of receipt of this order through a crossed
demand draft drawn in favour of “SEBI- Penalties remittable to the Government
of India and payable at Mumbai which may be sent to Mr. P. K. Kuriachen,
General Manager, SEBI, C – 4 A, “G” Block, Bandra Kurla Complex, Bandra (E),
Mumbai – 400 051. PLACE: MUMBAI PIYOOSH GUPTA DATE:
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