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. OMMSAKTHI SECURITIES PVT LTD.
BACKGROUND:
1. M/s. Ommsakthi Securities Pvt Ltd. (hereinafter referred to as OSPL) is registered with the Securities and Exchange Board of India, 1992 (for brevity’s sake, hereinafter referred to as the SEBI) as a broker and is the member of National Stock Exchange, (for brevity’s sake hereinafter referred to as the NSE), with SEBI registration no. INB230921930.
2. An inspection of the books of account, documents and other records of OSPL was conducted by SEBI for the period from April 1, 2000 to September 30, 2002. 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 OSPL were noted. While communicating the findings of the inspection to OSPL, SEBI advised them to submit their comments, if any to the same. As the submissions made by OSPL were found to be unsatisfactory, Shri S.V.Krishnamohan was appointed as the Adjudicating Officer, vide order dated December 16, 2003 to enquire into the alleged acts of omissions and commissions of OSPL. Subsequently, I was appointed as the Adjudicating Officer by the Chairman, SEBI vide Order dated 30.09.2004 to enquire into the alleged acts of omissions and commissions of OSPL.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
3. Accordingly, a show cause notice dated January 27, 2005 was issued to OSPL under Rule 4 of SEBI (Procedure for holding inquiry and imposing penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the ‘Rules’) whereby OSPL 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. OSPL 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. OSPL 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.
- A reply dated February 7, 2005 was received from OSPL in which they clarified their position vis-à-vis the charges leveled against them and also forwarded copies of certain documents relied upon by them to support their contentions.
- Thereafter, a notice of hearing dated February 10, 2005 was issued to OSPL to appear before me on March 21, 2005. Shri R Saravanan, Administrative Executive, OSPL appeared for the personal hearing. While reiterating the submissions made earlier by them, he undertook to submit certain documents to support his contentions which were then forwarded vide letter dated March 28, 2005.
APPRECIATION OF EVIDENCE
8. I have taken into consideration the facts and circumstances of the case, the material available on record including the findings of the inspection report and the reply as well as the documents submitted by OSPL in support of their contentions.
9. The charges leveled against OSPL for which the present proceedings have been initiated, the submissions, if any, made by them in this regard in their defense and my findings in this regard, are elaborated herein below: -
Failure to maintain client registration forms
10. OSPL was found to have not maintained the client registration forms for almost all the clients, resulting in the violation of SEBI Circular Nos. SMD/POLICY/IECG/1-97 dated 11.02.1997 and SMD/POLICY/Circulars/5-97 dated 11.04.1997.
11. In their defense, OSPL contended that most of the columns were filled by their clients who were new to the business and did not have any portfolio, and hence, some of the columns relating to the Annual income in the last three years and the market value of portfolio were left incomplete. However, in the subsequent years, the same has been rectified and presently, the said forms were being maintained properly. A sample of the completed KYC form was forwarded for perusal by OSPL vide their letter dated March 28, 2005 as proof of the contentions made by them.
12. SEBI vide its Circular no. SMD/POLICY/IECG/1-97 dated February 11, 1997 had advised all the stock exchanges to introduce the concept of “know your client” and asked the member-brokers to maintain the data base of their clients. In continuation with the same, vide Circular No.SMD/POLICY/CIR /5-1997 dated April 11,1997, SEBI forwarded the clients’ registration form and broker-client agreement form to the stock exchange. In terms of the said circular, it was the responsibility of the broker to provide for the clients’ details as and when the need arose.
13. In the instant case, it is clear that there were admitted instances of failure on the part of OSPL in the maintenance of the client registration forms for some of the clients.
14. However due note has to be made as regards the very purpose of issuing the relevant circulars of SEBI as well as the rationale behind their issuance. Obtaining the details of the clients is in fact the first and foremost step towards entering into the broker/subroker-client relationship. The fact that OSPL has defaulted in this aspect indicates failure on his part in exercising due care and diligence while executing trades for the clients. The essence of obtaining the client details in the ‘Know your client’ form is a step towards ensuring the safety in the dealings by the brokers on behalf of the clients, such that even if the clients become defaulters in making payments on the trades executed on their behalf, they become easily traceable on account of the details available with the broker. In terms of the circular, it is thus the responsibility of the broker to provide for the clients’ details as and when the need arises. However by admittedly failing to comply with the scheme as formulated by SEBI, it is clear that there has been a certain amount of failure to exercise due diligence by OSPL, while carrying out its functions resulting in the violation of the provisions of the above mentioned circulars.
15. The fact that steps have been taken by OSPL in rectifying these anomalies may perhaps be considered as a mitigating factor.
Improper maintenance of the member client agreements
16. The following violations as regards the improper maintenance of member client agreements were noted :-
(a) The following provision relating to Clause 7 of the member client agreement which reads as under was not incorporated in the said agreements:
“ The member hereby undertakes to maintain the details of the client as mentioned in the client registration form or any other information pertaining to the client, in confidence and that he shall not disclose the same to any person / entity except as required under the law, with prior intimation to SEBI”
(b) OSPL was also found to have executed the agreements, on a date preceding the stamp paper date in the following 3 cases, resulting in the violation of Regulation 26(xii) of the Broker Regulations read with SEBI Circulars Nos. SMD/POLICY/IECG/1-97 dated 11.02.1997, SMD/POLICY/CIRCULAR/5-97 dated 11.04.1997 and SMD/POLCY/CCIRCULAR/11-97 dated 21.05.1997.
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S.No.
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Client name
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Agreement date
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Stamp paper date
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1.
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Ashok Umma
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07.03.00
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02.05.00
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|
2.
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Selvarajan
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07.01.00
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11.02.00
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3.
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Veena B.Jain
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22.09.00
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01.11.00
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17. As regards the omission of Clause 7 in the said agreement, it was submitted by OSPL that the same was brought to their notice by the NSE on September 9, 2002 and that the said clause was subsequently incorporated in all the existing client agreements after the inspection and for the new clients as well. The broker also furnished a sample copy of the new client agreement containing the aforesaid Clause 7 of the said agreement vide letter dated March 28, 2002.
18. As regards executing the agreements on a date preceding the stamp paper date in the 3 cases mentioned above, while admitting the mistake on their part, OSPL contended that the incorrect date had been entered due to oversight/ or a typographical error by their clerical staff which had been duly rectified after inspection. The broker also forwarded the copies of the altered agreements duly initialized by the clients.
19. I am of the considered view that the member client agreements play an important role for the smooth and proper functioning of various entities in the securities in that they provide for provisions relating to keeping the money of the clients separately to protect the interest of the investors. The investors in turn come to know of such rights, inter alia, by executing such agreements. Entering into member client agreement after obtaining the client details is thus the first aspect of any broker client relationship. Only after entering into such contractual agreement can a broker trade on behalf of the client.
20. OSPL have admitted to the lapses mentioned above as regards Clause 7 of the said agreement, which however have been stated to have subsequently been incorporated in the said agreements as it appears from the documentary evidence so furnished. However, as regards the cases of agreements executed on a date preceding the stamp paper date the contentions advanced by OSPL are untenable. Such errors can not arise due to typographical errors by the clerical staff and are more likely to have happened to facilitate the trading on behalf of the clients prior to the date of the stamp paper. However In the absence of any details of the trades executed by OSPL on behalf of these clients (in the inspection report) prior to the stamp paper date, serious cognizance may not be taken of the present lapse. However, a minor penalty is definitely called for.
Delay in delivery of securities to clients
22. OSPL was found to have defaulted in the matter of transferring the securities to the clients within the mandatory period of 48 hours from the date of receipt of the same in the instances mentioned below, thereby violating Regulation 26(vi) of the Broker Regulations read with SEBI Circular No. SMD/SED/CIR/93/23321 dated 18.11.1993.
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Sett No.
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Client name
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Scrip
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Demat/Physical
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Qty.
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Due Date
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Date of delivery
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Delay in days
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2002088
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C P Jain
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Hughes Tele
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Demat
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3000
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15.05.02
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23.05.02
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8
|
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2002088
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C P Jain
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Essar Guj
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demat
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5000
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15.05.02
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23.05.02
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8
|
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2002088
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C P Jain
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Silverline
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demat
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1000
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15.05.02
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23.05.02
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8
|
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2002030
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Gatraj Jain
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Lupin
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demat
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200
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1405.02
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25.02.02
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9
|
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2002169
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Omm Shakti
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Global Trust Bank
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demat
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624
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09.09.02
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20.09.02
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11
|
23. Regarding Ommsakthi, the member contended that the delivery was delayed by 11 days since the instruction for the demat was omitted by oversight while giving the transfer instruction to the bank and that only after the verification of the bank statement, the delivery was completed. As regards the other two entities namely Gatraj Jain and C P Jain, OSPL submitted that the securities were retained at their end on specific requests from their clients. The following letters from the said clients were enclosed vide their letter dated March 28, 2005 :
a) A letter dated May 10, 2002 from client C P Jain requesting the member to withhold the securities at OSPL’s end since he was on some summer tour.
b) A letter dated February 11, 2002 from Shri Gatraj Jain for withholding the shares at member’s end since he planned to square off the position in the next settlement.
24. I have perused the relevant details against the various entities. In the cases of Shri C P Jain and Shri Gatraj Jain, I have noted that the scrips were actually retained by OSPL at the specific request made by these two clients. Considering the fact that although there was a delay of around 8-9 days for these two cases due to the necessary authorization issued by the said clients OSPL is exonerated on this count. In the case of Omm Shakti, there appears to be a delay of 11 days. However as this is a proprietary account, serious cognizance may not be taken for the said lapse although a minor penalty is called for.
25. The provisions of law for the purpose of imposition of penalty that are applicable in the present case are Sections 15B, 15F(b) and 15HB of the Act which are detailed herein below :
Section 15B: Penalty for failure by any person to enter into an agreement with clients
If any person, who is registered as an intermediary and is required under this Act or any rules or regulations made thereunder, to enter into an agreement with his client, fails to enter into such agreement, 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 15 F(b):-Penalty for failure 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 or 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 thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
25. Notwithstanding the above, Parliament in its wisdom has specified 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.
From the facts on record, it is not clear as to OSPL would have enjoyed any gain or unfair advantage as a result of their defaults. However it cannot be denied that the same would have certainly caused a certain amount of disadvantage to the investor class as a whole considering that a healthy market is a necessary ingredient to ensure the interests of the investors as a whole. However I have duly noted that the irregularities as pointed out by the SEBI in the inspection report although admitted by OSPL appears to have been rectified by them subsequent to the inspection as is evident from a sample of the documentary evidences furnished by OSPL.
26.. Thus bearing in mind the facts and circumstances of the present case, and also the factors enumerated in Section 15J of the Act and on analysing the material on record alongwith the necessary documentary evidences furnished by OSPL, on a judicious exercise of the powers conferred upon me, I am of the view that since the charges against OSPL were not serious, a token penalty needs to be imposed.
In view of the above, 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 token penalty of Rs.10,000/- (Rupees ten thousand only) as penalty on Ommsakthi Securities Pvt Ltd. Member NSE, bearing SEBI Regn No. INB 230921930.
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 : April 29, 2005 ADJUDICATING OFFICER