Against

 

M/s Pilot Credit Capital Ltd.

Broker- Bombay Stock Exchange Ltd,

SEBI registration no. INB 011184935.

 

1.0 Background

1.1 M/s Pilot Credit Capital Ltd. is registered with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) as a broker of Bombay Stock Exchange Ltd, Mumbai (hereinafter referred to as “BSE / exchange”) with SEBI registration no. INB 011184935. Its office is located at 802, P.J. Towers, Dalal Street, Mumbai 400023.

 

1.2             The present proceedings emanate from an investigation which is being conducted by SEBI to look into the sudden spurt in trading volumes and market price of shares of IFSL Ltd. (hereinafter referred to as “IFSL”) which was formerly known as Interlink Financial Services Ltd. Based on the preliminary findings of the investigation, SEBI vide its order no. WTM/GA/14/ISD/9/05 dated September 28, 2005 (hereinafter referred to as “ SEBI order ” restrained the promoters, directors, certain clients and certain brokers from dealing in the shares of IFSL. The SEBI order was posted on the SEBI website on the same day and also despatched to the various persons / entities against whom directions were issued. As per para. 4.3 of the SEBI order, inter-alia, Shri Jay Shah (resident of 1134, Girdharlal No Khancho, Lalabhat’s Pole, Manek Chowk, Ahmedabad – 380 001) was directed not to buy, sell or deal in securities of IFSL, directly or indirectly, till further directions in this regard. The SEBI order was also communicated by BSE to its members vide its notice no 20050930-25 dated September 30, 2005. It was observed that M/s Pilot Credit Capital Ltd. (hereinafter referred to as ‘ PCCL’) permitted Shri Jay Shah to trade in the shares of IFSL while the restraint order was in force. The details of trades are as under:-

 

Date	Client Name	IFSL Shares Bought	IFSL Shares Sold
11.10.2005	Jay Shah	1,92,993	1,62,993
14.10.2005	Jay Shah	Nil	30,000
	Total	1,92,993	1,92,993

 

SEBI has initiated adjudication proceedings under Chapter VI A of SEBI Act, 1992 against PCCL alleging that by allowing a debarred entity to conduct dealings in the script of IFSL it has not exercised due skill, care and diligence as required in the conduct of business as a stock broker and has thus violated para A (2) of Code of Conduct for stock brokers under schedule II of regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations 1992. The undersigned has been appointed as Adjudicating Officer vide Securities and Exchange Board of India order dated November 24, 2005 in this regard.

 

2.0 Notice / Reply / Personal Hearing

 

2.1 Accordingly, I issued a show cause notice dated February 2, 2006 to PCCL 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 inquiry should not be initiated against it and penalty be not imposed on it for having not exercised due skill, care and diligence. PCCL was advised to make submissions, if any, along with supporting documents, within 14 days from the date of receipt of notice. PCCL 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.

 

2.2             PCCL submitted its reply to the show cause notice vide its letter no. SEBI/PCCL/2005-2006 dated February 10, 2006. Along with its reply, it attached copies of its previous letters dated October 20, 2005 and October 21, 2005 submitted to SEBI. (The date of the letter dated October 20, 2005 and marked as ‘ Exhibit A ‘ has been wrongly quoted as October 18, 2005 ). In the letter dated October 20, 2005, PCCL stated as under:

 

“Your presumption and allegation that we have allowed a debarred entity to conduct dealings in the scrip of IFSL Limited as well as that we have not exercised due skill and care is totally misconceived, tortuous, illegal and devoid of merits. As a broker of the Stock Exchange, Mumbai (BSE), we conducted the due diligence as prescribed by BSE. Hereto annexed and marked ‘Exhibit – A (Colly)’ is the copy of due diligence documents obtained by us from Mr. Jay Shah, the client.

 

You may, kindly, appreciate the fact that for us there was no fun to deal with any client who had been debarred by SEBI to deal in certain scrips. Further, we hereby confirm that we had only a broker – client relationship Mr. Jay Shah. He is not connected with us as relative, friend, associate, partner or in any other manner whatsoever except as our client.

 

Now we have taken note of your order against Mr. Jay Shah debarring him to conduct dealings in the scrip of IFSL Limited, and, in future we shall be taking necessary precautions in the matter”.

 

2.3 In its letter no. PCCL/SEBI/S020/13/2005-06 dated October 21, 2005, PCCL has mentioned the particulars of transactions executed for its clients in IFSL shares after September 28, 2005.

 

2.4 In its letter dated February 10, 2006, PCCL has reiterated its submissions made vide its letter dated October 20, 2005. PCCL has also mentioned that SEBI has passed a further order dated October 24, 2005 directing it not to buy, sell or deal in the scrip of IFSL on behalf of Jay Shah or any other client as mentioned in SEBI order dated September 28, 2005. In para 4 to 8 of this letter, PCCL has submitted as under:-

 

“4. We hereby submit that the SEBI Order No. WTM/GA/14/ISD/9/2005 dated September 28, 2005 neither came into our knowledge before the receipt of your notice dated October 18, 2005 nor the same was served to us by Bombay Stock Exchange Limited and/or SEBI, otherwise there was no fun for us to act for any client who had been debarred by SEBI to deal in scrips of IFSL Limited.. So far as the purported notice dated 20050903-25 dated September 30, 2005 enclosed as Annexure ‘B’ to your above notice is concerned , the same can not be considered to be a notice duly and legally served on us. We confirm that we were neither aware nor went through the notice as enclosed in Annexure ‘B’ to your notice and, hence, your assumptions as alleged in your above notice are false even to your own knowledge.

 

5. After receipt of SEBI notice dated October 18, 2005, we also inquired with Mr. Jay Shah about the receipt of SEBI order dated September 28, 2005. In response to my query, Mr. Jay Shah informed me in writing that he was neither in receipt of any SEBI order debarring him to trade / deal in scrip of IFSL Limited, nor he was aware of SEBI having issued order dated September 28, 2005 in his name. The said letter dated October 21, 2005 issued by Mr. Jay Shah is available in our records and can be produced before you as and when required by you.

 

6. We deny that we have not exercised due skill, care and diligence as required in the conduct of our business as stock broker and have violated para A(2) of Schedule II of Code of Conduct for stock brokers as stipulated in Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 as alleged. I vehemently deny your presumptions and allegations that we have allowed the debarred entity to conduct dealings in the scrip of IFSL Limited as alleged. We hereby reiterate that we were not aware of order dated September 28, 2005 passed against Mr. Jay Shah prior to the receipt of your notice dated October 18, 2005. We further deny that the alleged violations on our part make us liable for penalty under section 15HB of SEBI Act, 1992 as purported in your above notice.

 

 7. In view of the above, we hereby submit that there arises no reason to

hold any inquiry against us in terms of Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 and impose penalty under section 15HB of Securities and Exchange Board of India Act, 1992 on us”.

 

8.                  For the reasons as stated hereinabove, your above notice is notional, illogical, coercive, unjustified and devoid of merits”.

 

2.5             A notice of inquiry dated September 22, 2006 was issued fixing a hearing in the matter on September 29, 2006. At the request of PCCL, the hearing was postponed and subsequently held on October 05, 2006. Mr. Praful A. Shah, Chairman and Managing Director – PCCL and Dr. Rajnish K. Pandey, authorized representative, appeared before me for personal hearing and made submissions. PCCL also made written submissions vide letter dated September 30, 2006 which was submitted on October 05, 2006. In its letter dated September 30, 2006, PCCL reiterated that the BSE notice no. 20050930-25 dated September 30, 2005 with which the SEBI order dated September 28, 2005 was enclosed cannot be considered to be a notice duly and legally served on it.

 

2.6             During the hearing, PCCL submitted that the notices issued by BSE are brought to the notice of member-brokers by putting on the BSE website as well as through daily bulletins.

 

 

 

 

 

3.0 Consideration of issues and findings:

 

3.1 I now propose to discuss in detail the charge that has been leveled against PCCL for being adjudicated in the present proceedings, the submissions made by it in this regard and my findings on the same.

3.2 The charge against PCCL is that by allowing a debarred entity to conduct dealings in the scrip of IFSL, it has not exercised due skill, care and diligence as required in the conduct of business as a stock broker and has thus violated para A (2) of Code of Conduct for stock brokers as stipulated in Schedule II read with regulation 7 of SEBI (Stock Broker and Sub Brokers) Regulation, 1992. The aforesaid regulations state as under:-

 “Stock Brokers to abide by Code of Conduct.

7.      The stock broker holding a certificate shall at all times abide by the Code of Conduct as specified in Schedule II”.

Para A (2) of Code of Conduct for Stock Brokers in Schedule II reads:

“A General

1.      …..

2.      Exercise of due skill and care: A stock-broker shall act with due skill, care and diligence in the conduct of all his business.

3.      ….

4.      …..

5.      …..”.

3.3             Vide its various letters and personal submission as detailed above, PCCL has contended that the SEBI order no. WTM/GA/14/ISD/9/05 dated September 28, 2005 was not in its knowledge, the same was not served on it by BSE / SEBI and that the BSE notice 20050903-25 dated September 30, 2005 forwarding the above order cannot be considered to be a notice duly and legally served on it. Its further contention is that it had conducted the desired due diligence.

3.4 As mentioned above, the SEBI order relating to irregularities in trading in IFSL shares was issued on September 28, 2005. As per para 4.3 of the SEBI order, inter-alia, Shri Jay Shah was directed not to buy, sell or deal in securities of IFSL Ltd. directly or indirectly till further directions in this regard. The said order was posted on SEBI website on September 28, 2005 and also communicated to the media through press release no. PR-125/2005 issued on the same day. The SEBI order was immediately covered by the print media (newspapers etc.) and electronic media (television channels, internet etc.) and disseminated to the general public. The extensive coverage given by the media to the SEBI order could not have been overlooked by any person / entity associated regularly with the capital markets. Further a person / entity whose main business activity is to conduct brokerage business in stock markets cannot plead ignorance about headline grabbing events relating to stock markets. The importance is all the more enhanced as the SEBI order related to irregularities in trading in the stock market. If such a person / entity claims ignorance about events directly related to its activity, then this in itself is an evidence of negligence or lack of due diligence. Such relevant event which was extensively covered by both electronic and print media should have been in the active knowledge of PCCL.

3.5 PCCL in its reply dated February 14, 2006 and September 30, 2006 has submitted that the said SEBI order was not served upon them either by BSE and / or SEBI nor it was within their knowledge. It is true that the said Order was not served directly upon PCCL by SEBI. However the SEBI order was circulated by BSE to all its member-brokers through notice no. 20050930-25 dated September 30, 2005 mentioning that the trading members were advised to comply with the same. During the hearing held on October 05, 2006, PCCL was asked to clarify the issue relating to the practice in respect of issuance of notices by BSE. PCCL confirmed that notices are issued by BSE and brought to the notice of members by way of daily bulletin and also put on the website. At no point has PCCL mentioned that it is not acting on notices served / brought to its notice in the regular course by BSE through the bulletin / website. It appears that PCCL is raising the issue of direct delivery of notices in this case only. PCCL was bound to take cognizance of this notice dated September 30, 2005  also and comply with the same. In view of the SEBI order, PCCL could have exercised its diligence by scanning / verifying its clients list to ascertain whether any of the persons / entities restrained by SEBI were its clients and if so, take appropriate steps for compliance of the directions contained in the SEBI order. PCCL’s not taking cognizance of the notice shows that it acted negligently and did not exercise due skill, care and diligence as was required from it. This lack of due diligence on the part of PCCL has facilitated and enabled JS to violate the SEBI order.

3.6 Another contention of PCCL is that the SEBI order was not directly served on it by SEBI / BSE. The SEBI order was specifically sent to all the entities / persons against whom directions were issued. The SEBI order, per se, did not have a direction against PCCL. If PCCL’s contention regarding order delivery is accepted, it would require SEBI to serve all its orders on all intermediaries. This would cast too onerous a duty on SEBI which would make implementation impossible and is therefore an impractical point of view.

  

3.7 Further, the SEBI order was sent to PCCL by BSE in the normal manner i.e. through a notice communicated through bulletin and BSE website. If PCCL has been taking cognizance of, and complying with all other notices delivered in this manner, it should have done so in this case also. Hence its contention of direct delivery by BSE is devoid of merit.

 

3.8              PCCL has also contended that it had already conducted due diligence in respect of JS and has submitted a copy of client registration form along with its letter dated October 20, 2005. JS has been allotted client code no. 7837 by PCCL. A perusal of the registration form reveals that Shri Jay Shah’s address in the form is same as that mentioned in the SEBI order restraining him from trading in shares of IFSL. While PCCL may have conducted the due diligence at the time of account opening, it has failed to do so when JS approached it for trading in the shares of IFSL.

 

3.9 In view of above, I conclude that PCCL has failed to exercise due skill, care and diligence in violation of para A(2) of Code of Conduct for brokers as given in Schedule II of regulation 7 read with regulation 26 (xvi) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 and is thereby liable for monetary 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 provisions of this Act, the rules or 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.”

3.10 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. “

3.11 PCCL has submitted that it has only earned brokerage in respect of this trading done by JS in the shares of IFSL as a client. The available records do not indicate any unfair advantage to have accrued to PCCL in monetary terms. While considering the imposition of penalty, I would like to refer to PCCL’s letter dated October 20, 2005 wherein, inter alia, it has stated as under:-

 

“You may, kindly, appreciate the fact that for us there was no fun to deal with any client who had been debarred by SEBI to deal in certain scrips”

 

3.12         The same words have been repeated in PCCL’s reply dated September 30, 2006. I note an undertone of arrogance in the reply of PCCL. Instead of feeling regret for having unwittingly become a party to violation of the SEBI order by JS, PCCL appears to be arrogant and almost declines any obligation for implementation of a regulatory directive. Such attitude of an intermediary towards compliance of regulatory directions is detrimental to the overall market discipline and cannot be appreciated. If certain market participants have a confrontationist attitude towards regulatory directions, it is going to send a wrong message to the other market participants. Even investors are going to feel uncomfortable if the market regulator’s actions against persons indulging in fraudulent and unfair trade practices are objected to by raising frivolous objections. I am therefore of the view that while there is no direct loss to the investors, such incidents are likely to impact the fairness and integrity of the markets and thereby cause immense loss to investors. Further as JS has traded in IFSL shares through PCCL on October 11 and 14, 2005, the trades can be considered as repetitive and thereby PCCL can be considered to have failed in exercising due diligence on these occasions.

 

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. 5,00,000/- (Rupees Five Lakhs only) on M/s Pilot Credit Capital Ltd., broker BSE (SEBI registration no. INB 011184935) under section 15 HB 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 cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India and payable at Mumbai which may be sent to Mr. Sunil Kadam, Deputy General Manager, SEBI, C – 4 A, “G” Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.

 

PLACE: MUMBAI                                                                   PIYOOSH GUPTA

DATE: APRIL 05, 2007                             ADJUDICATING OFFICER