IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No: 53/2003
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Date of Hearing
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09/08/2004
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Date of Decision
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31/08/2004
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In the matter of
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Appellant – Represented by:
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Samkit Share & Stock Brokers Pvt. Ltd.
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Mr. J.J. Bhatt, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Mumbai
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Mr. Kumar Desai, Advocate
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CORAM
Justice Shri Kumar Rajaratnam, Presiding Officer
Dr. B. Samal, Member
Shri N.L. Lakhanpal, Member
Per: Dr. B. Samal, Member
1. The appeal is taken up with the consent of both parties.
2. The appellant is a member of the Ahmedabad Stock Exchange (ASE) w.e.f. February, 1999 with clearing No. 02-0345-9. The appellant is also registered with SEBI under registration No. INB-021050332. The appellant is a professionally managed company headed by Shri H.N. Shah, a qualified Chartered Accountant.
3. The respondent, SEBI, carried out an inspection of books of accounts of the appellant for the financial year 1999-2000 and 2000-2001 during January, 2001. During the inspection of the books of accounts, records and other documents of the appellant during January, 2001 under Regulation 19(1) of the SEBI (Stock Brokers and Sub-Brokers) Regulation, 1992, certain violations were observed. Findings of inspections were forwarded to the appellant for its comments.
4. After considering the inspection reports and the comments of the appellant, the respondent conducted an enquiry into the contraventions by the appellant of the provisions of Rule 4(b) and (d) of the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992 and Regulation 10(1) and Clause A(5) and B(1) of the Code of Conduct as specified in Schedule II read with Regulation 7 of the said regulations, directives issued by SEBI as mentioned in the said order and Bye-laws, Rules and Regulations of ASE and directives issued by ASE from time to time.
5. The respondent found that the appellant has violated the condition of registration under Rule 4(b) of the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992 and therefore in exercise of the powers conferred on them by virtue of Sub-section (3) of Section 4 of the Securities and Exchange Board of India Act, 1992 read with Regulations 13(4) and 13(6) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 ordered that the certificate of the appellant is suspended for a period of six months. This appeal is against this order of the respondent.
6. The issues which attracted the penalties are as under:
i. Delay in delivery of securities from the account to the beneficiaries account: There are delay in delivery of securities from pool account to beneficiaries account which was ranging from 16 days to 5 months in 15 cases. Hence there is violation of Clause B(1) of the Code of Conduct as specified in Schedule II read with Regulation (7) of the said regulations read with SEBI Circular No. DM/DRP/POLICY/CIR/11-1999 dated 07/05/1999. The appellant has justified that this has been done as authorized by the clients. A member is required to deliver the shares to beneficiaries account immediately after pay out and make the balance in the pool account nil within 15 days of pay out. The appellant has clarified that the 15 instances observed during the inspection pertains to four clients out of which the written authority by one client to keep the shares in pool account was found to be unsigned. Subsequently the said authority letter was signed.
ii. Non-segregation of clients’ account and own account and depositing of clients’ funds into the general accounts: During inspection it was found that the appellant has paid its own expenses from clients’ accounts., e.g., the appellant had paid Rs. 1,000/- towards office expenses on 03/05/2000 and Rs. 832/- towards the petrol expenses on 15/11/2000 from the clients account No. 938 maintained with Central Bank. The appellant has also deposited money received from clients directly in the O/D account No. 120 maintained with Central Bank as General account. The appellant has submitted that the rules were violated in ignorance as they are new to this business. The segregation has been done when it was pointed as violation. The appellant also submitted that its own fund was lying in the clients account at the relevant time to the extent of Rs. 85,880/- as on 03/05/2000 and Rs. 5,32,700/- on 05/11/2000 being brokerage earned during the year up to relevant date.
iii. Indulging in off the market transactions / cross-deals: The appellant has conducted off the market deals in 11 transactions. The appellant submitted that it has stopped such transactions after the same was pointed out as violation. The appellant submitted that after the SEBI inspection, further inspections were carried by the Ahmedabad Stock Exchange in the year 2002 and no such lapses were observed.
iv. Dealing with unregistered sub-brokers: The appellant had done transactions with M/s. Vora Consultancy before the registration was granted. The application of M/s. Vora Consultancy was sent to SEBI on 10/01/2001 and registration was granted on 23/03/2001. The appellant clarified that M/s. Vora Consultancy is a proprietary concern of Hetal Shah HUF. Mr. Hetal Shah is one of the Directors of the appellant. The transactions executed for Vora Consultancy included business of family members of Hetal Shah. Hence eventually Vora Consultancy was an in-house extended arm of the appellant and hence the appellant was primarily liable for business done by Vora Consultancy. Registration of the sub-brokership being a technical requirement which was complied with subsequently no harm, injury or loss was suffered to by anyone on account of delay in registration. The appellant further submit that the delay in obtaining sub-brokership certificate should not attract any drastic and extreme consequences like suspension.
7. Heard both sides. The appellant submitted that suspension will result in considerable loss to the appellant in recovering the dues from the clients. The lone lapse, if any, is of technical, operational and administrative nature which may not attract such extreme and drastic action of six months suspension. The appellant also submitted that he got registration in February, 1999 and the respondent carried out inspection of books of accounts of the appellant for the years 1999-2000 and 2000-2001. This was such first inspection, that too, its initial period of activity. Hence the Senior Counsel for appellant pleaded that the period of suspension of six month is too harsh and it will kill the initiative of the young man in his initial years of business.
8. The learned Senior Counsel Shri Kumar Desai for the respondent submitted that the appellant has violated Rule 4(b) of the SEBI (Stock Brokers & Sub-Brokers) Rules, 1992. The learned Senior Counsel for the respondent denied that the appellant was held guilty on alleged lapses which are not based on correct appreciation of facts. He further submitted that in terms of Regulation 13(1)(b)(ii) of the Enquiry Proceedings Regulations, the certificate of registration may be suspended for a period exceeding three months as a major penalty. In terms of Regulation 13(6) of the Enquiry Proceedings Regulations, the major penalty may be imposed inter alia on the ground that the intermediary is guilty of violation of the conditions of registration. One of the said condition as provided in Rule 4(b) of SEBI (Stock Brokers and Sub-brokers) Rules, 1992 is that the stock broker shall abide by the rules, regulations and bye-laws of the stock exchange of which he is a member. In this case the appellant has violated bye-laws 226(d) of ASE Bye-Laws read with Rule 4(b) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992. Thus the appellant has violated conditions of registration and is liable for major penalty.
9. The appellant submitted a few cases as under, where the respondent had issued letter of warning although irregularities were found to be similar nature during inspection.
WARNING TO BROKERS BY SEBI – INSPECTION OF BOOKS OF ACCOUNTS
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Name of Party
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Irregularities.
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1
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M/s. Ratanbai Capital Markets Ltd.
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1.
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Non-Maintenance of Books of Accounts
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2
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Contract Notes
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3
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Non-Collection of margins from clients
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4.
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Misuse of client’s funds
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5.
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Share lending/borrowing
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6.
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Non-segregation of clients accounts with own account and for not reporting off-the-floor transactions to Stock Exchange
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2.
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M/s. Twenty First Century Shares & Securities Ltd.
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1.
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Non-Maintenance of books of accounts
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2.
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Delay in payment to clients.
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3
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Misuse of client’s funds.
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4
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Non-segregation of clients account with own account and for not reporting off-the-floor transactions to Stock Exchange.
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5
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Booking payment in different clients account
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6
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Loan against shares of holding company and loan transaction in clients accounts.
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3
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M/s. 8 Brokers of ASC Capital Market Ltd.,
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1.
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Acting a sub-broker without obtaining registration certificate
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4.
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M/s. Sanjay C. Bakshi
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1.
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Not maintaining margin registers.
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2.
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Dealing unregistered sub-brokers.
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3.
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Not entering into agreement with few clients.
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4.
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Non-segregation of clients funds with own funds.
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5.
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Dealing with broker of other Stock Exchange without getting registered as sub-broker
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6.
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Irregularities in respect of contract notes.
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7.
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Delay in payment / delivery of funds / shares.
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5
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M/s. Mahesh Kothari, Share & Stock Brokers Pvt. Ltd.
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1
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Non-Maintenance of books of accounts
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2.
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Dealing with unregistered sub-brokers
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3.
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Irregularities in issuance of contract notes.
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4.
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Non-segregation of clients accounts with own account, misuse of client’s funds.
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5.
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Delay in delivery of securities and not reporting off the floor transactions.
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6
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M/s. Mukesh Sawhany,
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1.
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Non-Maintenance of Document registers.
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2.
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Irregularities in issuance of contract notes.
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3.
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Non-maintenance of separate clients account.
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4.
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Non-segregation of clients accounts with own account.
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5.
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Not reporting off the floor transactions.
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6.
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Non-redressal of investor complaints.
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7.
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M/s. IFB Securities Ltd.
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1.
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Non-Maintenance of proper books of accounts and other records.
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2.
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Irregularities in respect of contract notes.
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3.
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Irregularities in regarding dealing with clients and registration of clients.
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4.
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Delay in payment and delivery of securities to clients.
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5.
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Non-segregation of clients account with own account.
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10. We have perused all the facts and relevant documents placed before us. We have also perused a few orders of warning passed by the respondent as mentioned earlier which has not been disputed by the respondent. The respondent was of the view that it cannot be contended that Chairman is bound to impose the same penalty imposed by him in all similar cases.
11. We have now to decide on three issues, namely, (i) whether there were irregularities; and if it is in affirmative, (ii) whether they were merely of technical nature or were of serious irregularities; and (iii) the nature of penalty is to be imposed. In our view the irregularities observed in the inspection cannot be treated as a very serious irregularity. It cannot also be said that the nature of punishment should be so harsh that the appellant would have to cease working for a period of six months. The consequences are of far reaching not only to the appellant but also to its clients and employees.
12. Taking into account more or less similar cases where respondent rightly issued the warning rather than close the business, we feel it appropriate to modify the penalty from six months to a warning to the appellant. In this view of the matter the impugned order is modified accordingly. No order as to costs.
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(Justice Kumar Rajaratnam)
Presiding Officer
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(Dr. B. Samal)
Member
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(N.L. Lakhanpal)
Member
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Place: Mumbai
Date:31.8.2004
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